Merchant Energy

Merchant Energy	09 $m	08 $m
Operating EBITDA	502.0	388.8
Operating EBIT
Energy Portfolio Management	447.9	356.3
Merchant Operations (excluding Loy Yang)	(97.0)	(88.3)
Loy Yang	30.8	12.4
Energy Services	22.4	28.6
Power Development	51.1	36.8
Sundry	(7.9)	(8.2)
Total Operating EBIT	447.3	337.6

Financial result

The Merchant Energy businesses continued to be a strong growth engine for AGL.

Merchant Energy delivered an operating EBIT result of $447.3 million, up 32.5% on the prior corresponding period. This result reflects the growing diversity of AGL’s generation portfolio and the depth of the development portfolio the Company is bringing to market.

During 2008/2009, AGL’s Power Development business was separated from the Upstream Gas business and integrated into Merchant Energy. The other Merchant businesses are Energy Portfolio Management, Merchant Operations and Energy Services.

All business units performed well during the year. The main reasons for the increase in Operating EBIT were:

• effective portfolio management to achieve a lower cost of procuring electricity, gas and renewable energy certificates;
• higher revenue, mainly from increases in regulated tariffs;
• higher energy sales volumes;
• a contribution of $27.0 million as a result of the sale of excess gas capacity in November 2008;
• an increased contribution from AGL’s investment in Loy Yang A Power Station; and
• an increase of $14.6 million in fees from the development of wind farm projects.

Energy Portfolio Management

Energy Portfolio Management is responsible for managing the risks associated with procuring gas and electricity. The integrated nature of the portfolio allows AGL to manage and balance the relative price differentials between the gas and electricity markets as well as the costs of different fuels. This gives AGL the ability to run gas fired generation when electricity price is greater than gas cost, or to switch stations to the alternate distillate fuel when gas price is high.

With the easing of drought conditions and the installation of new generation capacity in Queensland and New South Wales in 2008/2009, pool prices returned to more typical patterns with low underlying prices prevailing, accompanied by occasional periods of volatility.

The flexibility of AGL’s electricity portfolio was demonstrated when temperatures exceeded 45 degrees in Adelaide and Melbourne in late January/early February, causing load shedding and extreme pool prices before price administration was invoked under the National Electricity Rules. AGL responded to these conditions as the peaking hydro and gas fired generation assets were deployed in response to the volatility.

In more typical conditions, AGL’s integrated portfolio benefited from periods of very low underlying pool prices as the efficient gas fired generators, backed by AGL’s flexible gas portfolio, were run for extended periods as required.

The flexibility of the gas portfolio provides the option of transporting low cost gas to high value markets. The value of this flexibility was highlighted in November 2008 when the Victorian spot gas market reached $800/GJ as a result of unseasonable cold weather coinciding with supply constraints. AGL was able to benefit by selling some of its excess gas capacity into the Victorian market.

The completion of the QSN gas pipeline link (which connects Queensland with South Australia and New South Wales) and the Berwyndale to Wallumbilla gas pipeline (BWP) provides AGL with further options to bring Queensland gas to the southern states. The first AGL gas flowed from Queensland to Moomba in May 2009, allowing AGL to benefit from competitively priced Queensland gas in time for the peak winter period in the southern markets.

Power Development

AGL’s Power Development group is responsible for delivering all upstream electricity generation development projects and for creating a pipeline of development opportunities. Power Development takes projects through the planning and construction stages before delivering the completed asset to Merchant Operations.

AGL continued to develop its suite of renewable energy generation assets with a number of key projects nearing completion at the end of 2008/2009.

The 140 MW Bogong Hydro-Electric Power Station in the Victorian Alps was on track for completion and commissioning on time and on budget in November 2009. During the year, construction of the 6km main headrace tunnel was completed, which will return the Pretty Valley branch of the East Kiewa River to natural water flows. The head pond drop shaft from the McKay Creek Power Station to the Bogong tunnel was also built.

The AGL Hallett 2 Wind Farm in South Australia proceeded on budget and ahead of schedule, with full commissioning expected before the end of the 2009 calendar year. Construction also began on AGL Hallett 4 Wind Farm.

AGL acquired wind farm development opportunities from the portfolios of Allco, Investec and Transfield Services. These acquisitions provide further strategic depth and optionality to AGL’s wind energy growth pipeline, with development sites across South Australia, Queensland, Victoria and New South Wales.

Merchant Operations

Merchant Operations is responsible for the physical operation and maintenance of AGL’s growing portfolio of wind, water and gas fired electricity generation plants. Merchant Operations also includes the results of AGL’s 32.5% investment in the Loy Yang A Power Station.

Ensuring that AGL’s generation assets are available when required is the key objective of the business unit.

This was highlighted during the heatwave in Victoria and South Australia when excellent results were achieved despite record demand and with bushfires threatening availability of the hydro assets and water resources.

To increase the flexibility of its workforce, Merchant Operations provided various trades and administrative personnel with the opportunity to work at different sites in support of outages and other works during the year. A major recruitment program has commenced at Torrens Island Power Station (TIPS) to recruit approximately 40 new employees over the next few months as a part of a long-term succession plan.

The 150 MW Somerton gas fired peaking plant achieved 99% commercial start reliability, an outstanding level of performance that exceeds international benchmarks for similar plant. AGL’s hydro assets continued to provide reliable fast-start generating capacity with 99% start reliability. The second year of a four-year generator refurbishment program for the West Kiewa Power Station (61.6 MW and commissioned in 1956) saw the renovation of Generator 4 completed, and work starting on Generator 1.

Despite drought conditions, the Kiewa scheme, which has the highest generation capacity and full water release discretion, was not significantly affected with storage levels (65% full at year end) higher than in the previous year. Dartmouth and Eildon experienced a slight increase in storage levels and were 22% and 14% full at year end.

AGL Hallett 1 Wind Farm was handed over to Merchant Operations from Power Development and AGL Hallett 2 Wind Farm produced its first energy in May, while Wattle Point Wind Farm met its production and availability targets.

The Board approved a $40 million upgrade of control systems at TIPS which will result in a single point of control for both A and B stations.

TIPS achieved its ninth year without a Lost Time Injury (LTI). Overall, Merchant Operations recorded two LTIs for the year as a result of soft tissue injuries. Over the year the Lost Time Injury Frequency Rate (LTIFR) reduced from 3.4 to 2.0.

Loy Yang A Power Station

Operating EBIT from AGL’s Loy Yang A investment increased to $30.8 million from $12.4 million. Revenue grew by 9% largely as a result of an improvement in the sold contract position offset by lower generation and a reduction in the pool price achieved from $46.79/MWh in 2008 to $41.82/MWh. Other revenue grew 46.0%, mainly driven by an insurance claim resulting from a dredger breakdown. Loy Yang’s operating costs and depreciation expense both increased by 7%, offset by a 5% reduction in interest expenses.

Energy Services

Energy Services is responsible for assisting customers to make their businesses more sustainable and energy efficient. It also manages the HC Extractions LPG facility. The Energy Services business continued to build upon its expertise in program maintenance, gas combustion, customer energy infrastructure, customer based asset development and energy efficiency related carbon benefits.

HC Extractions produces LPG and naptha by processing refinery off-gases supplied by the adjacent Caltex oil refinery in Kurnell, Sydney, with all production sold back to Caltex.

During the year, construction of the Brisbane City Council Compressed Natural Gas (CNG) bus facility at Willawong commenced in addition to the expansion of the CNG refuelling facility at Leichhardt in New South Wales. Two landfill projects were successfully completed during the year at Woy Woy and Kincumber in New South Wales.

Late in the financial year, AGL signed a variation to the existing contract with Melbourne Water for the installation of an additional two x 1 MW gas engines, bringing the total generation capacity to 10 MW. It is expected to be fully operational by the end of June 2010.

The decline in earnings arose from lower contracted electricity prices, a turbine failure at one of the plants and lower LPG prices.