Australia-based energy infrastructure company DUET Group (ASX: DUE, OTC: DUETF) announced this week that its pipeline development unit DBP Development Group (DDG) has formed a joint venture with Canada-based TransAlta Corp (TSX: TA, NYSE: TAC) subsidiary TEC Pilbara Pty Ltd to build, own and operate the Fortescue River natural gas transmission pipeline.

The JV has reached a 20-year, 100 percent take-or-pay supply deal with Fortescue Metals Group Ltd (ASX: FMG, OTC: FSUMF, ADR: FSUGY) subsidiary FMG Pilbara Pty Ltd, the foundation shipper on the pipeline. Fortescue will switch from diesel fuel to gas at its Solomon iron ore mine in the Pilbara region of Western Australia.

The project is expected to be completed by Dec. 31, 2014, at an estimated total cost of AUD178 million. DDG’s share of the cost, based on its 57 percent JV interest, is AUD101.4 million. Management forecasts an un-geared project internal rate of return of 10.3 percent.

DUET created DDG in 2011 to leverage the engineering and operating skills of the Dampier-Bunbury Pipeline management team to provide opportunities just like this. It’s the second major project announcement from the unit in the last six months.

On Sept. 2, 2013, DBP reached agreement with Chevron Corp (NYSE: CVX) Chevron Australia unit to build, own and operate the Wheatstone Ashburton West Pipeline for the Wheatstone Project in Western Australia, the first project for DDG.

Wheatstone is one of Australia’s largest resource projects, including both liquefied natural gas (LNG) and domestic gas production capabilities.

DDG management expects this project, which is budgeted at AUD94.9 million and scheduled for completion by the end of calendar 2014, to generate AUD13 million of distributable cash in calendar 2015.

When completed, the Ashburton West pipeline will provide the Wheatstone Project with a route to market for its domestic gas sales. The Wheatstone deal is a 30-year contract on a 100 percent take-or-pay basis, backed by Chevron Australia.

The Wheatstone deal was a key milestone for DDG and DUET, as it demonstrated that DDG has the technical capability and development skills to meet the high standards of a global company such as Chevron. And DDG is now in discussions with a number of other parties, apart from Fortescue, to assess whether it can assist them with their gas transport requirements.

DUET also has investment interests in three major Australian gas and electric assets, which make it a solid de facto replacement for Conservative Holding Envestra Ltd (ASX: ENV, OTC: EVSRF), which has agreed to be acquired by fellow Conservative Holding APA Group (ASX: APA, OTC: APAJF) for approximately AUD1.17 per share. We have more on this deal in this month’s Portfolio Update.

DUET Group, well positioned to explore new growth opportunities while still delivering a stable and predictable yield, is a new addition to the AE Portfolio Conservative Holdings as a buy under USD2.20.

The Dampier-Bunbury Natural Gas Pipeline, in which DUET holds an 80 percent interest, is Western Australia’s principal gas transmission pipeline. It’s the only pipeline connecting the natural gas reserves of the Carnarvon and Browse basins on Western Australia’s North West Shelf with industrial, commercial and residential customers in Perth and the surrounding regions. Natural gas supplies approximately 50 percent of total primary energy consumption in Western Australia.

Almost all of Dampier-Dunbury’s revenue is derived from contracted gas transportation tariffs, charged to wholesale customers for shipping gas along the pipeline. Cash flows are backed by long-term contracts with the major shippers using the pipeline.

More than 80 percent of the tariff is paid on a capacity reservation (or “take-or-pay”) basis, with the remaining 20 percent depending on the shipper’s actual throughput. Contracts are in place until at least 2019 with all of the shippers on the pipeline, ensuring stable and predictable revenues.

The Dampier-Bunbury is essential infrastructure, with no direct competition from other pipelines or a material risk of bypass by other pipelines, and substantial barriers to entry for a competing pipeline to be built. It has an expected remaining useful operating life of over 50 years and has a strong track record of 26 years of reliable operation.

Though Dampier-Bunbury is basically under contract with private shippers until at least 2019, it’s a requirement under the Western Australian gas regulatory regime that proposed access arrangement revisions are lodged with the Economic Regulatory Authority (ERA) for its approval at least every five years.

On Jan. 17, 2012, application was made to the Australian Competition Tribunal (ACT) for a merits review of the ERA of Western Australia’s decision for the 2011 to 2015 regulatory period. This process is still ongoing, though it’s important to note that the tariffs under existing shipper contracts are set under commercially negotiated agreements and won’t be affected by the access arrangement until 2016.

Tariffs to apply under contracts from January 2016 will be determined after the next decision of the ERA, expected during 2015.

DUET also owns 100 percent of Multinet Gas, which distributes in Victoria over a network covering 1,860 square kilometers of the eastern and southeastern suburbs of Melbourne and the Yarra Ranges.

Approximately 96 percent of Multinet’s total revenue is regulated and is primarily from distribution tariffs charged to customers for connection to and use of Multinet’s distribution system.

Growth in distribution revenue is driven by regulated tariff charges and volume growth. Multinet’s top 250 gas users collectively account for only around 1 percent of total distribution revenue. As a result, the potential for a negative impact on revenue from the loss of a major user is very low.

In March 2012 Multinet filed its Gas Access Arrangement Review (GAAR) submission for the period 2013 to 2017 with the AER. This process is ongoing, with a rate reset due sometime in 2013. 

Finally, DUET holds a 66 percent interest in United Energy Distribution (UE), which provides electricity to about 25 percent of Victoria’s population. The distribution network transports electricity from the high voltage transmission network to residential, commercial and industrial electricity users.

Approximately 91 percent of UE’s total revenue is regulated and includes network tariffs charged for the use of UE’s distribution network and metering revenue. The tariffs are levied on electricity retailers, who pass these costs on to their customers. Growth in network tariff revenue is driven by volume growth and regulated network tariff charges.

Other revenue comes from services that UE provides to its customers, such as relocating assets at the request of our customers, extending existing distribution networks, providing public lighting to local council areas, and access charges for the use of electricity distribution poles to telecommunication companies.

The next regulatory reset date for UE’s access arrangement is Jan. 1, 2016.

DUET’s proportionate revenue and EBITDA were up in fiscal 2013 compared to fiscal 2012, while inflation-linked pricing and tariff structures provide revenue certainty. Reductions in operating costs following the transition to in-house operations at each of its businesses will drive continuing improvement in EBITDA margins.

During fiscal 2013 DUET raised and refinanced over AUD1.2 billion of term debt facilities, and management noted that it’s made “significant progress in planning the refinancing” calendar 2014 maturities.

United Energy posted revenue growth of 6 percent and EBITDA growth of 15 percent, benefitting from a consumer price index (CPI) plus 4.3 percent increase in tariffs in January 2013. UE’s regulated asset base grew by 9 percent during the year on the back of an extensive CAPEX program.

Regulator-approved CAPEX will see UE’s asset base grow on average by 6 percent per annum until the end of 2015.

Multinet Gas revenue was up 2 percent, though EBITDA declined by 3 percent due to costs related to the internalization of management functions. Multinet’s regulated asset base grew by 6 percent during the year on the replacement and upgrade of critical IT infrastructure.

Multinet recently prevailed on its appeal of the calculation of its 2013 opening regulated asset base and has been awarded an additional AUD45 million of revenue for the remainder of the current regulatory period.

And a revised tariff profile for the remaining four years of the current regulatory period has now been agreed with the regulator. Multinet’s tariffs will increase by CPI plus 1.5 percent in January 2014 and will see further price increases averaging CPI plus 2 percent each year until 2017.

With all material transition costs now behind it and revenue stepping up next year, Multinet’s EBITDA margin is expected to recover over the coming years.

The renewal and upgrade of UE’s network will be supplemented by Multinet’s proposed acceleration of its pipeworks replacement program.

Regulators have approved 65 percent of Multinet’s original CAPEX proposal and have invited the business to reapply for an additional allowance within this regulatory period, once it’s completed the majority of its currently approved program early.

Dampier-Bunbury revenue was 1 percent lower, while EBITDA increased 1 percent as management continued to reduce costs. The pipeline experienced a 3 percent reduction in throughput due to the increased dispatch of renewable generation capacity into the electricity grid.

Despite reduced volumes, revenues and earnings remained stable. The 80 percent take-or-pay tariff structure on its standard shipper contracts continues to mitigate the impact of volatility in throughput.

Dampier-Bunbury’s contracted tariffs are scheduled to move to the regulated tariff in January 2016. Over the next year management will seek to re-contract with its shippers, to establish long-term volumes and prices from 2016.

Multinet Gas and the Dampier-Bunbury Pipeline both have stable regulated asset bases and growth outlooks, making them steady, cash-generating businesses. United Energy is expected to deliver strong growth in revenue and asset base. And DBP Development Group provides a new avenue to pursue accretive growth opportunities.

Management’s growth focus is on businesses with regulated or long-term contracted revenue as well as tariff structures that limit exposure to changes in volumes. DUET also prioritizes businesses with limited exposure to volatility in energy and commodity prices.

Hedging programs at each of its operating businesses limit interest-rate exposure across the group.

DUET met its fiscal 2013 distribution guidance of AUD0.165 per security and recently reaffirmed distribution guidance for fiscal 2014 of AUD0.17 per security. As of this writing, based on a Jan. 15, 2014, close of AUD2.06 on the Australian Securities Exchange (ASX), DUET is yielding 8.1 percent.

Buy DUET Group on the ASX under the symbol DUE or on the US over-the-counter (OTC) market under the symbol DUETF below USD2.20.

DUET Group closed at AUD2.06 on the ASX and USD1.84 on the US OTC market on Jan. 15.

DUET’s fiscal year runs from Jul. 1 to Jun. 30.

The company reports full financial and operating results twice a year; it typically posts first-half results in mid-February, with full fiscal year numbers out in mid-August.

Interim dividends are usually declared in mid-December, along with, with payment typically made in late February. Final dividends are usually declared in mid-June, with payment made in mid-August.

DUET’s final dividend in respect of fiscal 2013 of AUD0.0825 was declared on June 14, 2013, and paid on Aug. 13, 2013, to shareholders of record as of June 28. Shares traded ex-dividend on this declaration as of June 24.

A fiscal 2014 interim dividend of AUD0.085 per share was declared Dec. 10, 2013. It will be paid Feb. 20, 2014, to shareholders of record as of Dec. 31, 2013. Shares traded ex-dividend on this declaration as of Dec. 23, 2013.

Management will declare the final dividend for fiscal 2014 on or about June 16, 2014.

Dividends paid by DUET are “qualified” for US tax purposes. Based on the “fiscal cliff” compromise reached in Washington, DC, in early January 2013 dividends will be taxed at Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.

The Australian government withholds 5 percent to 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends paid in respect of shares held in a US IRA, as have the US and Canada.

Among the analysts who cover the stock six rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology, while five rate it a “hold.” Two brokerages that cover DUET rate the stock a “sell.”

The average 12-month target price between the eight analysts that provide a figure is AUD2.21, with a high of AUD2.35 and a low of AUD1.75.  Based on a Jan. 15, 2014, closing price of AUD2.06 on the ASX, the implied one-year total return, including the present annualized dividend rate of AUD0.17 per share, is 15.5 percent.