The substantial part of APA's revenue is generated from assets that carry natural gas, linking natural gas production fields to the major demand centres across mainland Australia.

APA's extensive high pressure pipeline network carries the gas from the natural gas production fields to large customers along the pipeline route as well as delivering gas to the lower pressure distribution systems found in the suburban regions that service the smaller commercial, industrial and residential users.

APA's revenue is secure and predictable, a benefit that has been highlighted in this difficult economic environment. The security of these cash flows reflects the nature of the industry in which APA operates.

APA's assets can be divided into two types - those assets that are price regulated due to their natural monopoly characteristics, and those assets where revenues are set by commercial negotiation between APA and its customers.

For the former, the Australian Energy Regulator or State equivalent determines the level of revenue that is sufficient to provide an appropriate rate of return to APA as owner of the infrastructure. The major assets that fall into this category are APA's high pressure Victorian Transmission System, the south-east Queensland gas distribution network, the Roma Brisbane Pipeline in Queensland and part of the Goldfields Gas Pipeline in Western Australia.

IMAGE: Dandenong LNG facility, Victoria, Tony Verde and Doug Dennis.

Revenues from APA's other major assets are set by commercial negotiations between APA and its customers. These typically are medium to long term contracts providing cash flow to support APA's investment in the relevant asset. In addition, most of the contracts have minimum payment amounts, so that the customer will continue to pay at least between 80-90% of the total commitment to support the initial investment by APA.

APA is fortunate to earn most of its revenue from large, credit worthy customers, such as AGL Energy, Origin Energy, TruEnergy and Santos. As well, our pipelines that are focused on the mineral provinces in Western Australia and Queensland also benefit from dealing with organisations such as BHP Billiton, Newmont, Xstrata and Rio Tinto. While we also deal with some smaller companies in the mining sector, we are cautious to ensure that we seek appropriate security arrangements for their payment obligations. A highlight of this year was the growth in EBITDA from our Goldfields Gas Pipeline, despite the significant downturn in the mining sector.

APA grows its revenue through continued investment in expanding existing pipeline capacity as well as extending its pipeline footprint through building and acquiring new pipeline infrastructure.

Typically, capacity on a pipeline can be expanded by increasing the pressure of the gas within the pipeline through the addition of new compression facilities. Alternatively, the pipeline can be duplicated, commonly referred to as looping. Pipelines such as the Roma Brisbane Pipeline, have been duplicated to ensure there is sufficient capacity to meet demand.

APA has benefitted from completing the construction of three new compressor facilities - two on the Goldfields Gas Pipeline and one on the Carpentaria Gas Pipeline.

IMAGES: (from top) Goldfields Gas Pipeline scraper station, Western Australia; Michael Mann and Attila Csizmadia at Brooklyn city gate, Victoria

Given the large investment required in expanding a pipeline, APA targets to contract a significant portion of the revenue required to support the investment prior to construction of the expanded capacity. This allows APA to price this new capacity competitively and to minimise the investment risk for our securityholders.

APA is set to benefit from the increased competition amongst gas producers to supply the major market centres, particularly on the east coast. In recent years, major new supplies of gas have been introduced to Australia's supply options. APA's network of assets is well placed to carry these new sources of gas, and to provide major customers with the ability to take a portfolio approach to their gas purchasing commitments. No longer does a major customer need to contract with just one producer group, as the increased interconnectedness of Australia's pipeline grid provides more choice and increases the market's security of supply.

Evidence of this can be seen in the increasing gas flows between APA's Victorian and New South Wales pipeline systems, and the recent completion of the connection to allow Queensland's coal seam gas to be transported to Moomba and into APA's Moomba Sydney Pipeline.

The Moomba Sydney Pipeline system achieved an excellent result this financial year, driven by increased gas throughput, the first tariff increase in a number of years, and the increased use of newer services such as gas storage and parking.

This is an early indicator to the changing nature of the services APA provides in its pipelines. As a result of the shift to gas fired power generation, APA is less influenced by the actual volume of gas flowing through the pipelines but by how much gas can be stored in the system and delivered at any one time. The gas fired generators currently being constructed are designed to run when electricity prices are high and therefore may only run for a limited time. Nevertheless, APA's customers need to ensure there is enough gas stored to be able to run their generators as and when required and are prepared to contract with APA for their storage requirements. Demand for APA's pipeline infrastructure is expected to continue to grow to provide transportation and storage services for the expected construction of new gas fired power generation as a result of the planned Carbon Pollution Reduction Scheme.

APA's infrastructure is well positioned across Australia to deliver this new, incremental demand.

IMAGE: Gas delivery to Uranquinty Power Station, New South Wales.

Establishment of Energy Infrastructure Investments

One of the landmark corporate transactions of the year was the establishment of Energy Infrastructure Investments (EII) - APA's unlisted infrastructure investment vehicle created jointly with two of Japan's leading organisations, Marubeni Corporation and Osaka Gas Company.

The $703 million of assets sold to EII included assets APA developed or acquired within the last three years. Given that these assets were relatively recent additions to APA, it was confirmation of our investment strategy that despite very difficult economic conditions, we were able to achieve book value for these assets, prior to transaction costs.

The assets selected for inclusion in the EII sale were not closely linked with our core gas infrastructure pipeline and distribution networks. The cornerstone assets in EII are the Murraylink and Directlink electricity transmission cables, as well as the Telfer/Nifty Gas Pipeline, the Bonaparte Gas Pipeline and the Wickham Point Pipeline, which are remote pipelines in Western Australia and the Northern Territory.

Two small gas fired power generation plants and two gas processing facilities in Queensland were also included in EII.

IMAGES: Some of the assets sold to Energy Infrastructure Investments
(from top left) Murraylink, X41 Power Station, Bonaparte Gas Pipeline, Kogan North gas processing facility.

The key benefits to APA from the establishment of EII are two-fold. Firstly, APA improved its balance sheet flexibility through redirecting the $647m proceeds from the sale of the assets to reduce debt. This was an essential part of our strategy to steer APA through the global financial crisis at that time.

Secondly, the strategic benefit of having a vehicle such as EII is that it provides APA with more flexibility in funding future growth opportunities. EII houses very secure but low growth energy infrastructure assets.

The returns from APA's 19.9% interest in EII are supplemented with a fee for operating the assets under a long term agreement negotiated between APA and EII. The combined cash flow stream from our equity investment and our operating services provides APA with attractive and stable returns.

Given the significant investment funds required in the energy infrastructure sector in future years, APA is well positioned to capture additional opportunities to pursue growth through its involvement with EII, Marubeni Corporation and Osaka Gas Company.

IMAGE: Sam Pearce and Rob Wheals, part of APA's Commercial team.