Could the APA Group (ASX: APA) share price offer investors defensive earnings and reliability?
With a market capitalisation of $11.7 billion, APA is one of the larger businesses in the S&P/ASX 200 Index (ASX: XJO).
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What does APA do?
It is the operator of 15,000km of natural gas pipelines that connect sources of supply and markets across mainland Australia. APA operates and maintains networks connecting 1.4 million Australian homes and businesses. It supplies half of Australia's natural gas usage.
But it owns more than just gas pipelines. It owns, or has interests in, gas storage facilities, gas-fired power stations and renewable energy generation. Those renewable energy sources are wind and solar farms.
Does it generate reliable cash flow?
If a business' cash flow is consistent then it may be able to offer lower volatility with the APA share price and also reliable distributions.
Not only can APA claim to have stable cash flow, but it can also point to growing cash flow. In a recent presentation, APA said that it has "stable business operations, solid cashflow with positive leverage to increasing inflation."
APA's policy when it comes to the distribution is to have a payout ratio of between 60% to 70% of free cash flow, whilst fully funding maintenance capital expenditure. This also supports the appropriate level of funding for organic growth capital expenditure.
But APA isn't just waiting on its existing assets to deliver growth. It's regularly investing in new projects, which can help grow the cash flow and distribution.
Growth projects
APA says that it has a growing organic pipeline of $1.3 billion over the next three years, which could be a boost for the APA share price.
For example, on the gas side of things, it's investing up to $270 million on the East Coast grid expansion, increasing the winter peak capacity by up to 25% through a two-staged expansion. Another investment is the Northern Goldfields Interconnect, costing up to $460 million, which is a new 580km pipeline that increases capacity to the Goldfields region.
But it's also investing in the energy transition. For example, it's working on the Mica Creek Solar Farm in Mount Isa. The investment is around $150 million. Stage two of the project comprises 44MW of additional solar power generation, for a cost of around $70 million.
APA also recently acquired an interest in the Basslink debt. Basslink is the business that operates the 370km high voltage electricity connector between Victoria and Tasmania. It's the only one connecting Tasmania and mainland Australia. It provides two-way access to 500MW of electricity. It's "critical" for the export of Tasmania renewable energy to the Australian mainland.
The business is looking across Australia and the US for opportunities to invest in electricity generation and transmission opportunities.
Another thing that could impact the APA share price in the coming years is if APA is able to convert some of its pipelines to carrying hydrogen. The Parmelia hydrogen project is exploring the viability of the pipeline to transport hydrogen.
APA distribution
APA is planning to pay a distribution of $0.53 per unit in FY22, translating into a yield of 5.3% at the current APA share price.
