APA Group (ASX: APA) is an S&P/ASX 200 Index (ASX: XJO) share that is one of Australia's largest energy infrastructure businesses. It could be a smart buy for investors wanting exposure to the energy transition and passive income.
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What is APA Group?
The business is best known for owning a large portfolio of gas energy assets, including a huge gas pipeline network, gas storage, gas processing, and a gas power station. With its mega pipelines, it transports half of the natural gas used in Australia, making it an essential part of Australia's infrastructure.
Over the last few years, the business has been steadily investing in wind and solar farms. The latest two moves by the business have catapulted APA towards the energy transition.
Basslink
Towards the end of last year, APA announced it was going to acquire Basslink for $773 million.
Basslink owns and operates a 370km high voltage direct current electricity interconnector between Victoria and Tasmania. It began operations in 2006 and had a construction cost of approximately $877 million.
This cable can export excess hydropower energy generated in Tasmania to the mainland. A revenue contract is in place with Hydro Tasmania until 30 June 2025 and by then, the ASX 200 share is expecting that Basslink will become a regulated asset.
Alinta Energy Pilbara
The big news from reporting season is that APA has entered into an agreement with Alinta to buy 100% of Alinta Energy Pilbara for an enterprise value of $1.7 billion.
APA described this acquisition as an energy infrastructure business that has contracted operational assets and an extensive development of projects in Western Australia's Pilbara region.
The operational assets include gas and solar power generation, gas transmission, battery energy storage systems (BESS), and electricity transmission. In total, it has 543MW of operating generation and storage assets and more than 200km of operating electricity transmission lines.
The pipeline of development projects includes wind, solar, gas reciprocating engines, BESS, and associated electricity transmission. This includes 82MW of solar and BESS projects under construction and around 1GW of renewables-focused developments, largely focused on wind.
Alinta Energy Pilbara has existing long-term power purchase agreements (PPA) with "a number of Australia's most significant resources companies". The weighted average contract life of the existing PPAs is approximately seven years.
The acquisition has an implied enterprise value multiple of 12.9 times the forecast FY24 earnings before interest, tax, depreciation and amortisation (EBITDA).
This deal will suddenly make the ASX 200 share a very sizeable player in the energy transition space. If it can modify some (or a lot) of its gas pipeline to transport hydrogen, then it can play an even greater part in helping Australia transition away from fossil fuels in the coming years.
Passive income potential
The business has grown its distribution every year for approximately two decades, which is one of the longest growth records on the ASX.
We don't know what the APA share price is going to do month to month or year to year, but we can hold an ASX 200 share like this throughout the energy transition journey and continue to get the passive income payments.
APA has provided guidance that suggests the business will pay a distribution per security of 56 cents in FY24, which would be a distribution yield of 6.4%. This is a solid yield in the current environment, in my opinion.
