APA Group Subordinated Notes (AQHHA): Piping hot margin but be comfortable with the risk!

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1 14 August 2012 APA Group Subordinated Notes (AQHHA): Piping hot margin but be comfortable with the risk! Special Report Recommendation: Subscribe Overview APA Group (APA) using its borrowing entity APT Pipelines Ltd (APTPL) will raise $350m via an ASX-listed security issue, APA Group Subordinated Notes (AQHHA). AQHHA are long-dated, unsecured, subordinated debt securities, which rank above APA stapled securities and below other APA debt. The notes mature in 60 years unless the issuer exercises an option to redeem at the first call date in March 2018, on any subsequent interest payment date or following a trigger event (see key terms). The notes pay quarterly interest based on the 90-day BBSW rate plus a margin, expected to be in an indicative range of 4.50% to 4.70% p.a. Based on the 90-day BBSW rate as at 13 August 2012 this would equate to an interest rate between 8.15% %p.a. If the notes are not redeemed on the March 2038 step-up date the margin steps up once by 1.00% p.a. Interest payments are cumulative and deferrable but there are no mandatory deferral conditions. Being interest payments they are not franked. Summary and recommendation We recommend investors Subscribe and suggest a small portfolio allocation. We remind investors to seek independent professional advice before making an investment decision. AQHHA is similar to the subordinated note issues (CTXHA, ORGHA and AGKHA) of Caltex Australia, Origin Energy and AGL Energy. It is closest to ORGHA given its long dated term and similar first call and step-up terms. We think AQHHA has a similar risk profile to ORGHA and AGKHA but lower than CTXHA. The 4.50% margin looks attractive and is above our fair margin of 4.00%. On a risk-adjusted basis this compares favourably to the margins being paid by CTXHA (4.50%), ORGHA (4.00%) and AGKHA (3.80%). ORGHA and AGKHA were trading on market at margins of 4.13% and 3.79% as at 13 August CTXHA is not trading yet and lists in early September. We expect the margin to be set at 4.50%. Apart from the margin, we like AQHHA as it is a pure debt issue with no conversion into equity or mandatory deferral of interest payments. From a risk perspective we would prefer a higher ranking security with mandatory interest payments, a shorter term and a step-up in the margin at the first call date, but this would be offset by a lower margin being offered. Given the treatment of 50% of this issue as equity by some rating agencies, some of our preferred terms may not have been viable. APA is using the proceeds to fund investments in infrastructure assets and the cash component of the proposed acquisition of Hastings Diversified Utilities Fund (HDF), if it proceeds. Potential investors need to appreciate AQHHA is an unsecured, subordinated investment, which ranks just above ordinary equity and is therefore riskier than a bank deposit. Investors should also be aware AQHHA is a floating rate note which reprices quarterly, so interest rate changes will affect interest payments. APA owns Australia s largest natural gas infrastructure network, constituting mainly gas transmission and distribution, mostly servicing power generation, industrial, and commercial customers. APA has a relatively high degree of secure and stable revenues. It owns significant monopoly-type assets with a large portion of revenues being generated from regulated or contracted assets. On a pro forma basis, in FY11 around 45% of revenues were derived from regulated assets, though some revenues from these assets such as storage, operate under contracts and are not regulated. Around 54% of revenues came from sources subject to light or no regulation. Regulated assets effectively provide APA a guaranteed rate of return on those assets. In the contracted space, 80% of contracts are take or pay. This means clients pay for access to capacity, rather than paying for volume throughput. Take-or-pay contracts provide more earnings stability than volume based contracts. APA has exposure to a growth sector, gas. There are large and increasing gas reserves in Australia and more supply is coming on stream. Demand for gas, Ravi Reddy Credit Analyst Contact Details Australia Helpdesk: helpdesk.au@morningstar.com New Zealand Helpdesk: helpdesk.nz@morningstar.com 2012 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd (ABN: , AFSL: ) and/or Morningstar Research Limited, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant Product Disclosure Statement (in respect of Australian products) or Investment Statement (in respect of New Zealand products) before making any decision to invest. Neither Morningstar, nor Morningstar s subsidiaries, nor Morningstar s employees can provide you with personalised financial advice. To obtain advice tailored to your particular circumstances, please contact a professional financial adviser. DISCLOSURE: Morningstar employees may have an interest in the securities discussed in this report. Please refer to Morningstar s Financial Services Guide (FSG) for more information pdf. Note: Some material is copyright and published under licence from ASX Operations Pty Limited ACN ("ASXO").

2 14 August both domestic and offshore, is also growing. Gas is cleaner than coal and also fits better with green energy production. Green energy s lower reliability means backup is needed for base load power. Gas is preferable as a gas fired power plant can be brought online much faster than a coal fired plant. APA is expanding capacity to capture this growth. APA s reliable and stable revenue stream suits debt investors. As a debt investor, it is preferable for the debt issuer to have cashflows that exhibit a high degree of certainty and stability. The business carries a large amount of debt, but offsetting this are the relatively stable earnings secured by major monopoly-type assets. The current capital structure is reasonable and sustainable. Leverage is broadly in line with other energy infrastructure owners and should remain fairly stable with the distribution reinvestment plan and retained earnings contributing meaningfully to capex. The capital structure could be too aggressive if another major credit crisis eventuates but APA rode out the last global financial crisis with slightly higher leverage than it has now, though it was helped by asset sales. APA has made a cash and scrip takeover bid for HDF, which owns 100% of Epic Energy (Epic), an Australian gas transmission business. APA currently holds a 20.7% stake in HDF. The takeover offer expires on 4 September 2012 unless it is withdrawn or extended. The deal has strategic merits for APA. If APA acquires the remaining interest in HDF the transaction would be valued at $1.055b, including $260.5m in cash. If APA acquires HDF the total debt burden will increase but remains manageable. The Australian Competition and Consumer commission requires APA to divest the Moomba-Adelaide Pipeline (one of HDF s assets) which could attract bids near $500m. Given APA s relatively stable and secure revenues a question for investors is, do you invest in APA equity or debt? On current interest rates, the yield on AQHHA ranges between 8.15% 8.35%p.a. Morningstar forecasts a FY13 yield of 7.7% (unfranked) on APA equity. While the share price is trading near Morningstar's fair value estimate, holding the equity offers more opportunities for capital growth but carries more risk as share prices can be more volatile than debt. Valuation We assign AHQHA a fair margin of 4.00% comprising a 3.50% credit spread, an illiquidity cost of 0.25% and 0.25% for other features such as no holder call rights and deferrable interest payments. We would expect these notes to be redeemed at the first call date, particularly given their treatment as partial equity by one rating agency will likely lapse after that date. This will depend of APA s financial position and the state of debt markets near that date. Key dates 33Margin announced: 17 August Offer opens: 17 August Closing date for APA securityholder and general offer: 10 September Closing date for broker firm offer: 17 September Issue date: 18 September Commencement of trading: 19 September First interest payment date: 31 December First Call Date: 31 March Step-up Date: 31 March Maturity date: 30 September Key terms 33ASX code is expected to be AQHHA. 33Face value: $100 per security. 33Minimum subscription amount: $5000 (50 units). 33Amount to be raised: $350m, with the ability to raise more or less. 33Interest rate: 90-day BBSW + margin. 33Indicative margin range: 4.50% to 4.70% p.a. to be set via a bookbuild process. 33Interest payments: Interest payments are deferrable at the issuer s option but there are no mandatory deferral conditions. Deferred interest payments are cumulative and compounding. If an interest payment is not made in full within 20 business days after the relevant payment date, then subject to conditions, a number of capital and dividend restrictions are imposed upon APA until all outstanding payments are made in full. The restrictions are: 33APA cannot declare or pay any distributions on any equal ranking obligations or ordinary shares or units issued by APA. Essentially a dividend stopper comes into effect so APA won t be able to pay dividend on its stapled securities. 33APA cannot redeem, reduce, cancel, purchase or buy-back on any equal ranking obligations or ordinary shares or units issued by APA. 33Interest payments are payable quarterly in arrears, on the 31 March, 30 June, 30 September and 31 December. 33Term: 60 years. 33Early redemption: The issuer has the right to redeem early: 33On the first call date of 31 March 2018; 33on any subsequent interest payment date after the first call date; or

3 14 August following specific trigger events: capital, tax or change of control event. A capital event will occur if AQHHA are no longer eligible for the same or higher category equity credit from a rating agency as was initially attributed to the notes as a result of a change in the rating agency s assessment criteria. Equity credit means that part of the amount raised will be treated as equity by ratings agencies for their assessment of APA s credit profile. APA expects AQHHA to be treated as 50% equity for quantitative purposes from one rating agency until the first call date and for 50 years by another agency. A tax event will occur for example if any interest payment would not be deductible for tax purposes as a result of a change in law or A change of control event will occur if: APT Pipelines Ltd (APTPL) is no longer a subsidiary of Australian Pipeline Ltd (APL), the responsible entity of APT. A takeover bid for APA becomes unconditional expect where the bidder already had a greater than 50% relevant interest in APA before the offer period. A relevant scheme where a person attains a greater than 50% relevant interest in APA when the scheme is implemented except where the person already had a greater than 50% relevant interest in APA when the scheme was proposed. Where there is a destapling of any of the entities that comprise APA. If AQHHA are not redeemed following a change of control event the margin steps up by 3.00% p.a. 33Ranking in wind-up: 33Ahead of APA stapled securities. 33Equally with other equal ranking obligations (if any); and 33Behind all other creditors and other classes of securities including all debt currently on issue. 33Redemption amount: $100 face value plus accrued interest expect following a capital trigger event, holders will receive $101 plus accrued interest. 33There is no conversion into APA stapled securities. 33Step-up margin: If the AQHHA are not redeemed on the step-up date the margin steps up once by 1.00% p.a Table 1: Comparison to other issues by Industrials AQHHA CTXHA ORGHA AGKHA Name APA Group Subordinated Notes Caltex Subordinated Notes Origin Energy Subordinated AGL Subordinated Notes Notes Type Unsecured Subordinated Note Unsecured Subordinated Note Unsecured Subordinated Note Unsecured Subordinated Note Issuer APT Pipelines Ltd (APTPL), the Caltex Australia (CTX) Origin Energy (ORG) AGL Energy (AGK) borrowing entity of APA Group (APA) Issue Size $350m, but can raise more or less. At least $525m $900m $650m Issue Date 18-Sep Sep Dec Apr-2012 Margin above Base Rate Indicative range 4.50% to 4.70% p.a. 4.50% p.a. 4.00% p.a. 3.80% p.a. Base Rate 90-Day BBSW 90-Day BBSW 90-Day BBSW 90-Day BBSW First Call Date 31-Mar Sep Dec Jun-2019 Maturity Date 30-Sep Sep Dec Jun-2039 Step-Up Once off 1.00% p.a. in year Once off 0.25% p.a. in year 5. Once off 1.00% p.a. in year 25. Once off 0.25% p.a. in year 7. Interest/Dividend Payments Interest Deferral Unfranked, floating rate quarterly cash payments in arrears. Optional deferral subject to a dividend stopper. Cumulative. Unfranked, floating rate quarterly cash payments in arrears. Optional deferral subject to a dividend stopper. Cumulative but can be deferred up to 5 years. Unfranked, floating rate quarterly cash payments in arrears. Optional deferral subject to a dividend stopper. Mandatory deferral on breach of interest coverage or leverage ratio. Cumulative but can be deferred up to 5 years. Unfranked, floating rate quarterly cash payments in arrears. Mandatory deferral on breach of interest coverage or leverage ratio. Cumulative but can be deferred up to 5 years. Conversion into No No No No ordinary shares Ranking Above APA stapled securities. Above CTX ordinary equity. Above ORG ordinary equity. Above AGK ordinary equity. Risk Medium Medium Medium Medium Source: Morningstar/Issuer prospectus

4 14 August Figure 1: APA Ownership Structure Australian Pipeline Trust (APT) 100% APT Pipelines Limited APT Investment Trust (APTIT) About the issuer Business overview APA is listed on the ASX as a stapled security with a market capitalisation around $3.1bn. APA, comprising the Australian Pipeline Trust and APT Investment Trust, owns Australia s largest natural gas infrastructure network, constituting mainly gas transmission and distribution, mostly servicing power generation, industrial, and commercial customers. 100% 100% Australian Pipelines Limited (Responsibe Entity) Infrastructure Assets and Investments 33Holder call rights: Holders cannot request the notes be redeemed. We have only presented a summary of material terms. Investors should examine the prospectus in detail. Risks specific to AQHHA include The issuer may default on the payment of interest or face value. AQHHA holders are unsecured, subordinated creditors and rank just above APA stapled security holders so in a wind-up scenario could lose all their investment. There is no restriction on the issuer issuing more senior or equal ranking securities, which may reduce the ability of AQHHA holders to recover their investment in a wind-up scenario. Interest payments may be deferred at the option of the issuer. This could make the price of these securities more volatile than those not subject to interest payment deferral. AQHHA have a 60-year term and could remain on issue well beyond the first call date in March Holders have no call rights for early redemption. The issuer may redeem the notes early following a trigger event. Once listed, the price of AQHHA may fluctuate and may therefore trade below face value. These are floating rates notes which will reprice quarterly, so interest rate changes will affect interest payments and may affect the price of the security. There is a risk that liquidity of the notes will be low, which will impact the bid/ask spread. APA Group Subordinated Notes are being issued by APT Pipelines Ltd (APTPL), a fully-owned subsidiary of Australian Pipeline Trust (APT). APTPL is the borrowing entity of APA Group (APA). Australian Pipeline Ltd (APL) is the responsible entity of APT and APT Investment Trust (APTIT). The APA Group comprises APT, APTIT, APL and the entities controlled by APL. APA is a listed on the ASX as a stapled security whereby holders have an equal interest in APT and APTIT. AQHHA are guaranteed on an unsecured and subordinated basis by APT and APTIT. APTPL is the issuer but not the operating entity so our issuer analysis will focus upon the APA. Issuer thesis APA is Australia s premier gas infrastructure company. Limited regulation, scale and a superior skills base help it capitalise on robust gas demand growth and generate competitive advantages that warrant a narrow moat. APA's narrow moat stems from its unparalleled network of gas transmission and distribution assets. The operating environment is stable with limited competition and strong barriers to entry. Internal management and direct operational control over assets avoids conflicts of interest and fee leakage. Our Business Risk rating is medium as secure revenues are balanced by relatively high gearing and limited transparency over customer contracts. On the whole, APA is a worthy income investment. Infrastructure primarily gas transmission and distribution is the core business and generates over 85% of group EBITDA. The Investments division owns stakes in smaller gas infrastructure companies including ASX-listed Envestra (ENV) and Hastings Diversified Utilities Fund (HDF), providing good returns and giving some influence over operational performance. HDF is particularly important being the only link between Queensland s massive coal seam gas fields and APA s main network. The Asset Management division provides management, operating and maintenance services to most of its part-owned companies, leveraging APA s skills base to generate good returns outside the regulatory framework. Around half the assets within

5 14 August Figure 2: APA/HDF Network Figure 3: APA Proforma FY11 Revenue Mix Regulated Revenue 28% Contracted Revenue 17% Light Regulation or Non-price regulated assets 54% Other 1% Pilbara Pipeline System Figure 4: APA 1H12 EBITDA Mix APA energy infrastructure assets APA energy investments HDF gas transmission pipelines Other gas pipelines Subject to price regulation 45% Energy Investments 8% Infrastructure QLD 21% Infrastructure NSW 21% Infrastructure Vic & SA 23% Infrastructure WA & NT 22% Asset Management 5% Moomba Adelaide Pipeline System South West QLD Pipeline the core infrastructure business are regulated, being all distribution assets and some monopoly transmission pipelines. Revenues are determined under a building block approach with returns and cost allowances set by the relevant regulator. The regulatory process is broadly fair and transparent, balancing sufficient returns for investors against acceptable utility costs for consumers. Regulatory resets generally occur every five years and are evenly spread for APA s major regulated assets. Other assets and auxiliary services like storage are unregulated and operate under long term contracts with energy retailers and major industrial/mining companies. In total, around two-thirds of revenue is unregulated. Returns are typically basis points above regulatory returns to compensate for higher demand risk. Returns can be significantly higher for organic expansion which increases use of existing assets. Demand risk is managed by locking customers into long term, take-or-pay contracts. The average contract length is currently around 10 years. Falling demand over the longer term would be an issue but we think the domestic gas outlook is good with ABARES forecasting gas volumes to double over the next 20 years. The core strategy over the past decade has been to create an integrated east coast gas transmission grid connecting multiple gas sources to multiple markets. Expansion creates economies of scale and synergies from linking pipes together into a network with one manager. Around $200m is usually spent each year expanding the network though capex is running well above this level at present on upgrades to several core assets. In addition to numerous organic growth opportunities, acquisitions are possible. Takeover offer for Hastings Diversified Utilities Fund (HDF) APA has made a takeover bid for HDF. It currently holds 20.7%. The takeover offer expires on 4 September 2012 unless it is withdrawn or extended. HDF owns 100% of Epic Energy (Epic), an Australian gas transmission business. The deal has strategic merits for APA. Epic is attractive due to its highly strategic South West Queensland Pipeline (SWQP) which joins huge coal seam gas fields in Queensland to markets in southern states via the Moomba hub. The SWQP will be reversible, allowing transport of gas from Moomba to Gladstone for LNG export. Epic s pipelines run from Adelaide to Southern Queensland via the Moomba hub, which also feeds gas into APA s Moomba Sydney Pipeline. Epic s pipes form a key piece of Australia s gas transmission network, linking vast gas reserves in the Cooper Basin and the massive coal seam gas fields of southern Queensland directly with South Australia and indirectly with Victoria and New South Wales. It also owns a small pipeline in the Pilbara in Western Australia linking gas reserves in the Carnarvon Basin to the Port Headland power station and a couple of nearby mines. The Australian competitor commission, the ACCC, announced it would not oppose the proposed takeover on the basis that APA sells the Moomba to Adelaide Pipelines System (MAPS). APA has made cash and scrip offer comprising 0.39 APA securities plus $0.62 cash for each HDF security. Based on the price of APA securities as at 8 August 2012, the offer is valued at $2.51 per HDF security. If APA acquires the remaining interest in HDF the transaction would be valued at $1.055b, including $260.5m in cash. There is an alternative all cash offer from another bidder on the table for $2.325 per security. Issuer risk Underlying assets generate highly secure revenues underpinned by regulation or long term contracts. Regulated assets are lowest risk with the generally fair and transparent regulatory process determining returns. Volume risk is immaterial and rising costs including interest rates are passed through to consumers. Recent rhetoric from some politicians and

6 14 August Figure 5: APA Operating Cashflow vs. Distributions Distributions per share cps Operating cashflow per share the regulator in response to rapidly increasing household energy bills suggest risk to regulatory returns. Long term contracts minimise risk for unregulated assets. Most are take-or-pay, limiting volume risk for the duration of the contract. There is risk to revenues on contract expiry if gas demand falls but we think the domestic gas outlook is bright. Unregulated assets are exposed to operating cost blowouts and rising interest rates, though hedging FY07A FY08A FY09A FY10A FY11A 1H12A helps. Gas networks are highly capital intensive, requiring substantial debt funding. High leverage is acceptable considering the stability of revenues but could be a risk if credit markets collapse. Fortunately, APA has no refinancing requirements until September Construction and acquisition risk are minor concerns. Overall, we consider risk to be medium. Management Management is internal, astute and conservative. Mick McCormack, CEO since mid 2005, has over 25 years experience in energy infrastructure in Australia with particular focus on the development, construction and operation of gas pipelines and networks. He has been instrumental in driving APA's strategy of building a large, integrated network through acquisitions and organic growth to better meet customer needs. This highly successful strategy generated good securityholder returns without relying on excessive financial leverage. APA has substantially outperformed the broader market and most peers since listing in We would like to see McCormack continue expansion through organic growth and bolt-on acquisitions without straying too far from APA's core competencies in gas transmission. Leonard Table 2: APA Debt Metrics Part 1 APA Group Proforma ($m) 30-Jun Dec Jun Dec-11 Net Debt 2,603 2,683 2,673 2,751 Net Worth 1,335 1,349 1,611 1,585 Gearing (%) 66.1% 66.5% 62.4% 63.4% APA & HDF Combined asumming 100% stake in HDF ($m) 30-Jun Dec Jun Dec-11 Net Debt 3,159 3,489 3,638 4,131 Net Worth 2,172 2,214 2,469 2,478 Gearing (%) 59.3% 61.2% 59.6% 62.5% APA Group Proforma, twelve months ended ($m) 30-Jun Dec Jun Dec-11 Cashflow available for Debt Service Interest Paid Interest Received Net Interest Expense Interest Cover (x) APA & HDF Combined asumming 100% stake in HDF, twelve months ended ($m) 30-Jun Dec Jun Dec-11 Cashflow available for Debt Service Interest Paid Interest Received Net Interest Expense Interest Cover (x)

7 14 August Table 3: APA Debt Metrics Part 2 APA Group Proforma ($m) FY10A FY11A EBITDA Net Debt 2, ,672.7 Net Debt/EBITDA (x) APA & HDF Combined asumming 100% stake in HDF ($m) FY10A FY11A EBITDA Net Debt 3, ,637.8 Net Debt/EBITDA (x) Figure 6: APA: Debt Maturity Profile A$m US Private Placement Bank Borrowings Australian MTN Japanese MTN Canadian MTN Facility FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Table 4: APA/HDF Debt Maturity Details Facility Amount A$m Amount Drawn A$m Tenor US private placement , 12 and 15 year tranches maturing September 2013, 2015 and US private placement , 12 and 15 year tranches maturing May 2017, 2019 and US private placement and 10 year tranches maturing July 2016 and A$ Medium Term Notes year tranche maturing July Bilateral borrowings years maturing July and August years maturing October Syndicated facility 1, , 3 and 4 year equal tranches maturing November 2013, 2014 and JPY Medium Term Notes years maturing June CAD Medium Term Notes years maturing July 2019 Total APA Group Facilities 4,005 2,985 HDUF Syndicated facilities 1,325 1, month, 3 year and 4 year tranches maturing September 2013, March 2015 and March 2016 HDUF Revolving facility years maturing March 2015 Total Available Facilities 5, Amount drawn is based on the drawn debt balances shown in the HDUF Supplementary Target s Statement dated 3 August Bleasel AM is Chairman. He has extensive experience in the energy industry, including as CEO of AGL Energy from 1990 to Earnings APA has a relatively high degree of secure and stable revenues. It owns significant monopoly-type assets with a large portion of revenues being generated from regulated or contracted assets. On a pro forma basis, in FY11 around 45% of revenues were derived from regulated assets, though some revenues from these assets such as storage, operate under contracts and are not regulated. Around 54% of revenues came from sources subject to light or no regulation. Regulated assets effectively provide APA a guaranteed rate of return on those assets. In the contracted space, 80% of contracts are take or pay. This means clients pay for access to capacity, rather than paying for volume throughput. Take-or-pay contracts provide more earnings stability than volume based contracts. APA has exposure to a growth sector, gas. There are large and increasing gas reserves in Australia and more supply is coming on stream. Demand for gas, both domestic and offshore, is also growing. Gas is cleaner than coal and also fits better with green energy production. Green energy s lower reliability means backup is needed for base load power. Gas is preferable as a gas fired power plant can be brought online much faster than a coal fired plant. APA is expanding capacity to capture this growth. Looking at the 1H12 result, underlying EBITDA increased 13.9% to $289m on an 8% increase in revenue to $400m while operating expenses were well controlled. Energy infrastructure is the main part of the business generating the majority of EBITDA. In 1H12 this part of the business contributed $256m to EBITDA, growing 15.6% on 1H11. The respective contributions from asset management and energy investments were $14m and $23m. Operating cash flow per security the key metric fell 20% to 24.7cps mostly due to timing of payments. Distributions increased 3% to 17cps on a higher payout ratio. APA has reaffirmed its FY12 EBITDA guidance of $530m to $540m versus $492m in FY11. Balance Sheet As at 8 August 2012 APA had drawn debt of $2.99bn and $1bn in undrawn capacity. The business carries a large amount of debt, but offsetting this are the relatively stable earnings secured by key monopolytype assets. The current capital structure is reasonable and sustainable. Leverage is broadly in line with other energy infrastructure owners and should remain fairly stable with the distribution reinvestment plan and

8 14 August retained earnings contributing meaningfully to capex. The capital structure could be too aggressive if another major credit crisis eventuates but APA rode out the last global financial crisis with slightly higher leverage than it has now, though it was helped by asset sales. APA has done well over recent years to extend and flatten the debt maturity profile. It has no near-term maturities but has substantial expiries in FY14 and FY15. The next maturity in September 2013 for A$113m in US private placement debt due. Much of this is bank debt which can be paid down early if credit markets improve and APA is able to issue long term bonds at an acceptable price. Maturity profile further out is good with an even spread of expiries over several years. However, we would prefer to see a flatter and longer debt maturity profile. While operating cash flow is strong ($290m in FY11) and maintenance capex is minimal, cash flow after growth capex is negative. Negative free cash flow after growth capex is not a concern as expansion only proceeds if returns are sufficient to cover the cost of funding. If APA acquires HDF the total debt burden will increase but remain manageable. The prospectus provided some proforma historical financials for APA based on APA acquiring 100% of HDF. Proforma adjustments include the Subordinated Note issue and divestments though not the divestment of MAPS. K