Public

APA Group (APA) 2016 Annual Meeting Voting Intentions

Company/ASX Code : APA Group (APA)
Registry : Link Market Services
Poll/Show of Hands : Poll on all items
Webcast : Yes
Venue :
10.30am City Recital Hall, Angel Place Sydney, New South Wales
Monitor : Mr Stephen Mayne
AGM Details / NoM : Thursday 27th October, 2016

Support for rem committee chair contingent on commitment to rem report vote

The company monitor had a meeting with Chairman Len Bleasel and Company Secretary Navenka Codevelle.

ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

Australia’s biggest gas pipeline owner and manager continues to deliver steady growth in distributions and shareholder returns, although post balance date the stock has dipped from a record high of $9.85 on July 25 to $8.11 on October 20, a decline of 17.7%. (The LTI grants for 2015-16 were based on a VWAP price of $9.46) 

Still, those who bought in at the float price of $2.00 in 2000 have still done very well backing what is now an ASX30 company, albeit with an unusual trust structure.

Statutory profit was down 68% to $179.5 million, but APA still managed to service its $9 billion debt and distribute a record 41.5c to unitholders as operating cash flow rose from $562.2 million to $862.4 million, primarily on the back of the $US4.6 billion acquisition of the LNG pipeline servicing the Curtis Island GLNG plant near Gladstone in December 2014. 

This acquisition, and the accompanying $1.84 billion 1-for-3 renounceable entitlement offer at $6.60, catapulted APA into the ASX30 and perhaps signalled it was time to modernise its governance arrangements.

Net interest costs are expected to exceed $510 million in 2016-17, but APA has Australia’s largest portfolio of gas pipelines totalling 15,134 km, which dwarfs nearest rival DUET with 2468 kms of pipelines.

The assets are strong and deliver secure cash flows courtesy of long term contracts with a wide portfolio of blue-chip clients. Investors seem comfortable with the level of debt and ASA supports the current gearing and distribution policies. 

Voting on the Remuneration Report

APA comprises two stapled trusts which, under Australian law, is not even required to hold AGMs. The APA Board chooses to voluntarily convene an annual meeting of securityholders each year and rotates directors on the normal 3 yearly cycle, but to date they have yet to give unitholders a vote on the remuneration report.

Dexus Property Group is the only comparably structured company in the ASX100, but it chooses to give investors a vote on its remuneration report. ASA expressed its desire for a remuneration report vote at the pre-AGM meeting with Chairman Len Bleasel and will re-iterate this position at the AGM.

Succession planning

The combination of Chairman Len Bleasel and CEO Mick McCormack have formed a successful duo at the top of APA for almost 10 years. The scoreboard performance has been strong, but the time is coming for renewal and ASA has informed the chairman that we would prefer to see a chairman succession first before the end of Mr Bleasel’s current term in 2018, so the new chairman can lead the CEO succession process.

Remuneration

Mr McCormack is a highly regarded Australian CEO who continues to be well remunerated, with gross actual pay reportedly rising from $4.8 million to $5.1 million.

He received 91% of his potential STI ($1.81m in total) and collected $1.47 million of LTIs (74.1% of the maximum available) whilst forfeiting the balance of $514,000. The STI is 100% cash, albeit with some clawback provisions. There is also an STI gateway (operating cash flow per share) which must be satisfied before any STIs are realised. 

Vesting under the LTI plan occurs in three tranches over the three financial years following allocation. Awards are delivered in cash by reference to the performance of APA securities. ASA prefers equity awards although we note that from FY16, APA has introduced a minimum shareholding guideline for the CEO (100% of TFR) and other executives (50% of TFR). 

TSR remains one of the two benchmarks for the LTI scheme which has arguably influenced APA’s policy of relatively high debt levels to maintain strong distribution growth. The other hurdle is EBITDA/FE.  The actual target is not disclosed. 

The disclosure of how APA determines the STI outcomes for executives could be much improved. At present, shareholders must simply rely of the Board to make a reasonable assessment. 

Unusually, the board is more heavily invested in APA securities than the management team, but this is being remedied with a policy of minimum equity holdings for the senior executives.

Summary


ASA Position
For
Item 1: Re-election of Mr Steven Crane as a Director

An investment banker who was formerly CEO of BZW Australia and ABN Amro and was first appointed to the APA board in January 2011, having a previous association through a board seat at offshoot APA Ethane Ltd. He currently chairs NIB Holdings but has previously served on several other listed boards, giving him broad experience.

With $9 billion in debt to service and a long history of corporate activity through acquisitions, APA definitely needs an experienced financial markets professional on its board and Mr Crane currently chairs the audit committee.

He currently owns 130,000 units worth just over $1 million so is well invested in the stock, providing good alignment with unitholders.

CEO and chair succession management is arguably the most important issue facing APA over the next two years. Mr Crane is a potential successor to Mr Bleasel as chairman and ASA considers him worthy to be given serious consideration when the time comes.


ASA Position
Undecided
Item 2: Re-election of Mr John Fletcher as a Director

Mr Fletcher is a former CFO of AGL where he served under then CEO Len Bleasel, the current chairman of APA. Through this position he served on the APA board representing then 30% shareholder AGL from 2000 until 2005 and then returned to the board as an independent director in 2008. 

Given that APA appointed another former AGL CEO Michael Fraser to the board last year, there was some media commentary about the operation of an AGL boys clubs at APA. However, the scoreboard neutralises such criticism and investors do want industry experts managing their capital.

ASA has no problems with supporting Mr Fletcher’s re-election based on the skills and experience that he brings to the table. 

However, we do intend to attempt to leverage our proxy position and the public prominence around the AGM to secure a governance win.

Therefore, given that Mr Fletcher chairs the Remuneration Committee, we will only vote undirected proxies in favour of his election if APA publically commits to a shareholder vote on its remuneration policies at next year’s AGM.

This is not a big ask given that it already presents a remuneration reports in its annual report and every other ASX30 company runs the gauntlet of an annual AGM vote on its remuneration policies. Frankly, this should have happened many years ago.



The individual involved in the preparation of this voting intention has no shareholding in this company. 


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