In the news there's a lot about the energy market and LNG exportation, and how gas production will rise significantly, yet our own access to cheap energy may not occur because much of the LNG gas will be exported to higher priced foreign markets. One utility company stands to benefit and grow from the increased capacity and energy demand, that is APA Group (ASX: APA).
The $5.5 billion utility company is the largest gas pipeline operator in the country, transporting about half of the annual gas used domestically along its network of 14,000km of transmission pipelines it has interests in. It manages 25,000km of distribution networks for Envestra Limited (ASX: ENV) and GDI.
Financial Performance
Over the past 10 years it has raised its underlying net profit uninterrupted, and since 2008 it has grown by a compound annual 16.4%, from $82.2 million to $175.9 million. It has a net profit margin of 14.8%, and its return on equity has been 9.3%-11% over the past two years, an improvement on earlier years.
Extensive network of pipelines
Its pipelines connect supply to NSW and VIC, and traverse the Cooper Basin onto QLD where the Surat Basin is linked with the port of Brisbane.
By other gas lines its network can also run gas out to Gladstone where three LNG processing facilities are being developed. Separately, it has lines in WA and NT that can service north to south in the state and territory.
In total, just like a train line, it transports gas throughout its whole system, and it profits more as more gas producers use its lines.
Acquisition of Envestra
In late 2013, it made a takeover offer for Envestra, the $2 billion gas distribution and transmission operator which works as a regulated monopoly in key population areas in SA, VIC, NSW, QLD and NT. The board of Envestra backed the takeover, and the final shareholder vote remains to approve the scheme completely.
The market capitalisation of the combined companies would make it the second-largest utility after AGL Energy (ASX: AGK). Envestra's 2013 underlying net profit was $107.8 million on revenue of $507 million for a net profit margin in excess of 20%.
Foolish takeaway
Once the acquisition is complete, it will have an even more extensive pipeline network, making it more attractive in my view because it will have healthy, protective moats around its business to maintain growth and stability of earnings.
