AGL Energy (ASX:AGK) is Australia’s leading energy provider and the only energy producer with a full offering of renewable generation, providing natural gas and electricity to more than six million Australians.

AGK is Australia’s largest operator and developer of renewable energy generation, and is among the biggest companies (by market cap) in the stock market.

It has major investments in the supply of gas and electricity, as well as a substantial base of customers across Australia.

In line with one of the world’s hot topics, AGK is committed to leading Australia in minimising the effects of climate change by investing in sustainable energy businesses such as wind farms and environmentally friendly projects, including the underground Bogong hydroelectric power station in Victoria.

AGK’s organic growth strategy continues to deliver success with 95,959 new NSW electricity customers contracted in the second half of FY11.

Changing environment

The company has been busy since swapping assets with Alinta in 2006, a move that saw it acquire the retail business of both companies.

AGK now has a diverse power generation portfolio including base, peaking and intermediate generation plants, spread across traditional thermal generation (coal and gas) as well as renewable sources, including hydro, wind, landfill gas and biogas.

AGK’s power generation assets are predominantly located within the regions where its retail customers are generally located, and their renewable energy generation assets comprise around 40% of their portfolio.

AGK is well positioned for a low carbon environment with a pipeline of low-emission gas and renewable power development projects.

The company has grown from strength to strength with some key acquisitions made along the way.

It completed the acquisition of Mosaic Oil NL in October 2010 after Mosaic urged its shareholders to accept AGK’s $123 million bid.

The move has helped AGK gain access to MOS’ gas storage facilities in Queensland.

Earnings full of energy

AGK this week reported a 57% rise in annual net profit to $558.7 million boosted by a gain in the value of derivatives.

Underlying earnings for the period edged 0.5% higher to $431.1 million (from $428.9 million).

The marginal improvement was due to severe weather events and a much lower contribution from Loy Yang A (LYA).

The results were in line with AGK’s guidance provided in February. AGK had warned that expected earnings would be around $30 million to $35 million lower than initially thought.

AGK declared a final fully franked dividend of 31 cents bringing the full year dividend to 60 cents.

It has also been one of the hot stocks in recent weeks, having surged more than 20% from this month’s low of $12.50.

Looking ahead

Its core business remains strong with a solid FY operational cashflow. For the year, operating cashflow before tax rose more than 7% to $676 million.

Its retail energy division continues to grow with earnings rising 17% to $373 million on year.

AGK expects strong growth from its merchant energy business on the assumption that there will not be a recurrence of the cost incurred in connection with the severe weather events from earlier this year.

The company is looking to further expand its position by exploring a suite of low emission and renewable energy generation development opportunities.

AGK has long been focused on reaching the government’s 2020 renewable energy goal.

We find the company’s defensive qualities particularly attractive in the current economic climate.

It is likely to make some bolt on acquisitions locally to boost its strong hold on the Australian market.

With a strong balance sheet and defensive earnings, AGK is well equipped to weather current volatile times.

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APA Group (APA) is Australia’s largest natural gas infrastructure business, owning and/or operating more than $8 billion of gas transmission and distribution assets.

Its pipelines span every state and territory in mainland Australia, delivering more than 50% of the nation’s gas usage. Unique among its peers, APA has direct management and operational control over its assets and investments.

APA also holds minority interests in energy infrastructure enterprises including Envestra, SEA Gas Pipeline and Energy Infrastructure Investments (EII).

Gas volumes are growing at an average annual rate of 3.4% (compared with 1.4% for primary energy sources), driven by population growth, GDP growth and government policies encouraging lower carbon emissions.

The high level of mining activity operating in Australia is also a driver of increased gas demand and thus a boon for APA.

Investing in wind

APA shares fell heavily last week after completing a capital raising and going ex-dividend.

The company raised $300 million at $3.85 to help pay for a wind farm acquisition.

While the raising was only about 1.5% dilutive, the stock dropped as it went ex-dividend for a juicy 17.9 cents per unit.

APA closed the Friday session down 9.6% at $3.95.

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Origin Energy (ORG), APA Group (APA) and Japan-based Marubeni Corp, have reportedly bid for former Babcock & Brown satellite, Alinta Energy Corp (AEJ).

AEJ is a power generation business, which happens to operate the largest private gas electricity retailer in WA.

AEJ has come under significant financial pressure recently, and is close to breaching a number of its loan covenants.

Its troubles have seen its market capitalisation plunge to just over $50 million, making it one the smaller stocks in the Australian share market.

Of most interest to ORG would be AEJ’s power stations and, given the group’s healthy balance sheet, it would be well placed to make an offer.

The takeover rumours meant AEJ was one of the hot stocks yesterday, with its share price surging over 40%.

Stock of the Week APA Group

APA Group (APA) is Australia’s largest natural gas infrastructure business, owning and/or operating more than $8 billion of gas transmission and distribution assets, and can be considered as one of the shares to buy in the Australian stock market.

Its pipelines span every state and territory in mainland Australia, delivering more than 50% of the nation’s gas usage. Unique among its peers, APA has direct management and operational control over its assets and investments.

APA also holds minority interests in energy infrastructure enterprises including Envestra, SEA Gas Pipeline and Energy Infrastructure Investments (EII).

Gas volumes are growing at an average annual rate of 3.4% (compared with 1.4% for primary energy sources), driven by population growth, GDP growth and government policies encouraging lower carbon emissions.

The high level of mining activity operating in Australia is also a driver of increased gas demand and thus a boon for APA.

APA recently reported 1H10 operating profit of $63.6 million, up 28.3% on the previous year as capacity expansions on gas pipelines helped boost earnings.

A Booming Business

APA boasts 12,000 km of transmission pipelines and an interest in 21,000 km of distribution networks.

APA’s infrastructure thus allows transportation of around 70% of natural gas used in east Australia, and around 50% across Australia.

The natural gas APA transports and delivers is from all major production sources to all major markets. Because of this, APA has an unrivalled gas asset footprint and is the largest transporter of natural gas across Australia by pipeline length, capacity and volume.

With natural gas playing a lucrative part in Australia’s international renowned resource sector, APA is well placed. Its integrated portfolio of gas pipeline assets provide revenue and operating synergies as the group’s pipelines serve major growth markets across Australia.

APA’s revenue is contracted and regulated, allowing the group to produce a stable cash flow, and revenue looks set to increase based on an increase demand for natural gas on climate-driven legislation changes.

Taking Care of Business

Last September, APA Group confirmed that it completed a $1.03 billion syndicated bank facility after signing agreements with three domestic and nine offshore banks.

The syndication was oversubscribed, and brought the total amount of facilities finalised since July to $1.37 billion.

The new facility completed the refinancing of all of APA’s debt maturity obligations until July 2011.

Although APA has reduced debt, the company expects an additional $10 to $15 million in net interest costs in FY10.

However, the market was impressed by APA’s update, with the group re-affirming target growth in distributions by at least 5% for 2010.

APA’s distribution yield is approximately 9%.

Major Stakeholding

On 8 April, APA confirmed it had increased its stake in Hastings Diversified Utilities Fund (HDF) from 4.5% to 14.9%, at a cost of $72.3 million.

APA did not rule out upping its stake in HDF if forced to protect the value of its investment.

HDF’s assets include gas transmission pipelines that flow through to APA’s own pipelines, so the acquisition makes sense from a strategic point of view.

The acquisition followed APA’s recent purchase of AGL Energy’s gas pipeline in Queensland.

The market applauded APA’s move to up its stake in HDF, with the latter’s EPIC assets constituting a natural fit for APA. Brokers also noted that the acquisition price was reasonable.

APA advised that the acquisition will not affect its guidance of 5% distribution growth in FY10.

Promising Profits

On 24 February, APA Group released its 1H10 results, impressing the stock market.

The trust reported an operating profit of $63.6 million, up 28.3% on the previous year as capacity expansions on gas pipelines helped boost earnings.

The result was impressive, considering revenue only grew by 1.2% to $495.9 million.

Earnings per share (EPS) of 12.6 cents were up 21%, helped by paying down some interest as well as the previous year’s results being influenced by significant one-off items.

The trust gave core earnings (EBITDA) guidance for its full year of $445-$460 million, and said its distributions should increase by at least 5% this year.

The results pleased the stock market, as the units closed 4.6% higher at $3.42 on the day of the announcement.

Outlook

In terms of stocks to watch, APA is a unique company exposed to Australia’s lucrative natural gas assets. The natural gas APA transports and delivers is from all major production sources to all major markets.

As such, APA has an unrivalled gas asset footprint and is the largest transporter of natural gas across Australia by pipeline length, capacity and volume.

The company has noted that in Western Australia, the delivery of gas for power generation in the mining sector will be key to continued growth, and that the development of the coal seam gas (CSG) reserves in Queensland should also provide longer term opportunities for APA.

APA’s 1H10 results impressed the market, with the group clocking an impressive operating profit increase of 28% on year.

The stock market is also excited to hear that APA intends to increase distributions by 5% this year.

APA is well poised to be a strategic consolidator in the east coast gas network and looks set to benefit from the implementation of renewable energy targets.

Shares to Watch – AGL Energy (AGK) 3 June 2010

AGL Energy (AGK) was second company to list on the Australian stock exchange. It a renewable energy company and is Australia’s largest operator and developer of renewable generation assets.

AGK has upgraded to its FY10 underlying profit guidance to $420 – $430 million, from the previous $390 – $420 million.

AGK based its revised guidance on the improved strength of its underlying business.

Some brokers were largely expecting AGK to post a full year profit in the vicinity of $420 – $430, so today’s announcement didn’t come as a major positive surprise.

AGK shares closed 1.9% higher, to settle at an Australian share price of $14.33 a share.