AUDITOR-GENERAL’S REPORT FINANCIAL AUDITS Volume Three 2009 focusing on Electricity _part3 pptx

Peak and Average Demand Growth Rates The Australian Energy Market Operator AEMO projects the following peak and average demand growth rates per year for electricity in New South Wales.

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Auditor-General’s Report to Parliament 2009 Volume Three _ 13

The projected LRC point does not necessarily mean generating capacity will be insufficient to meet expected demand at this time, but it provides investors with an indication of the opportunities that may exist for future investment

Peak and Average Demand Growth Rates

The Australian Energy Market Operator (AEMO) projects the following peak and average demand

growth rates per year for electricity in New South Wales

Demand growth rate per year 2009 2008 2007

Source: AEMO Electricity Statement of Opportunities for the National Electricity Market 2009, and NEMMCO Statement of Opportunities 2007 energy and demand projections for 2008 and 2009

The reduction in peak demand and energy growth rates in 2009 is due to:

 a poorer economic outlook

 additional efficiency allowances, including tightened Minimum Energy Performance Standards

on appliance efficiency and accelerated uptake of solar hot water and small-scale

photovoltaic generation

 a revision of non-scheduled energy projections

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14 _ Auditor-General’s Report to Parliament 2009 Volume Three

Existing Capacity in New South Wales

The table below provides a list of major existing New South Wales power stations with an installed

capacity equivalent to or larger than 30 megawatts:

Power station Location Owner Technology Capacity

(MW)

Major Existing NSW Government Power Stations

Mount Piper Central West Delta Electricity Steam/Coal 1,400

Vales Point Central Coast Delta Electricity Steam/Coal 1,320

Wallerawang Central West Delta Electricity Steam/Coal 1,000

Munmorah Central Coast Delta Electricity Steam/Coal 600

(1) Joint venture between Delta Electricity Australia Pty Ltd and Sunshine Renewable Energy Pty Ltd

Non NSW Government Owned

Total - Major existing NSW power stations 15,881

Source: Department of Industry and Investment NSW.

(a) CCGT = Combined Cycle Gas Turbine

(b) OCGT = Open Cycle Gas Turbine

(c) CSM = Coal Seam Methane

* Partly owned by New South Wales Government.

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Committed and Proposed Additional Capacity

Allocated and installed capacity increases as significant, new, committed and scheduled generation

capacity enters the NEM The table below provides a list of major New South Wales power stations

that are either under construction or proposed and have an installed capacity of more than

30 megawatts

The Department of Industry and Investment NSW has reported that new power plants with a

capacity of more than 16,000 megawatts (including over 3,800 megawatts from renewable sources)

are at various stages of development from concept to construction

Power station Location Owner Technology Capacity

(MW)

Projects under construction

NSW Government Owned

Non NSW Government Owned (1 project by 1 proponent) 141

Total - Projects under construction 809

Projects with development approval

NSW Government Owned

Bamarang Stage 2 Nowra Delta Electricity conversion to

CCGT

Non NSW Government Owned (11 projects by 8 proponent) 3,180

Total - Projects with development approval 4,730

* Amendment being sought for 450MW, subject to transmission connection amendment

Projects in the planning system

NSW Government Owned

Mount Piper Power

Station Extension

Mount Piper Power Station

Delta Electricity CCGT or

Ultra-supercritical Coal 2,000 Munmorah Power

Station

Rehabilitation

Munmorah Power Station

Delta Electricity Coal and/or

Gas

700 Bayswater B Bayswater Power

Station

Macquarie Generation CCGT or

Ultra-supercritical Coal 2,000

Non NSW Government Owned (22 projects by 15 proponent) 4,110

Total - Projects in the planning system 9,610

Source: Department of Industry and Investment NSW; it is a summary of information contained in the AEMO 2009

‘Electricity Statement of Opportunities for the National Electricity Market’ where a full list of current New South

Wales generators registered with the AEMO can be found on the AEMO website

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PERFORMANCE INFORMATION

Financial Performance

Revenue for the New South Wales electricity industry increased by $552 million to $11.3 billion for 2009 Expenses, including tax, also increased, resulting in a $472 million decrease in profit after tax

The New South Wales electricity industry’s returns on equity and assets have fallen from the previous year and are below the latest national electricity industry figures Debt levels have increased ahead of national figures

Year ended 30 June NSW

2009

NSW

2008

National Industry*

NSW

2007

* Latest available July 2008 Productivity Commission Report, whole of electricity sector performance indicators

Calculated as:

(a) profit after income tax expense divided by average equity

(b) profit before tax and interest expense divided by average assets

(c) operating profit plus interest and tax expense divided by interest expense

(d) external debt divided by equity (net assets)

Profit in 2008 and 2009 does not include superannuation actuarial adjustments due to a change in accounting policy

Targets for these key ratios are not set for the New South Wales electricity industry However, targets for individual agencies are detailed in the comment for each agency elsewhere in this report

The change in ratios from 2008 to 2009 reflects reduced earnings and increases in asset values There were significant unrealised losses associated with movements in the fair value of electricity derivatives

Generators and Distributors

Pre-tax profits of the distributors decreased marginally from $663 million in 2008 to $661 million in the current year Pre-tax profits from generators decreased from $977 million to $307 million for the same period

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The following table shows key financial ratios for generators and distributors:

2009 2008 2007 2009 2008 2007

Return on average equity (%) (a) 5.6 29.7 30.5 12.4 14.5 13.6

Debt to equity ratio (%) (d) 68.3 48.8 342.8 287.8 218.7 147.5

Calculated as:

(a) profit after income tax expense divided by average equity

(b) profit before tax and interest expense divided by average assets

(c) profit plus interest and tax expense divided by interest expense

(d) external debt divided by equity (net assets)

Profit in 2008 and 2009 does not include superannuation actuarial adjustments due to a change in accounting policy

Generation

Financial performance achieved during the year was generally lower than the previous year The

major factors affecting financial performance were:

 increases in generating costs without equivalent increases in the average spot price for

electricity sales

 significant unrealised losses associated with movements in the fair value of electricity

derivatives (unrealised gains were recorded in the previous year)

 increases in employee entitlement provisions brought about by unrealised superannuation

actuarial losses for superannuation

Overall debt levels for generators increased to finance construction activity Delta Electricity

reported asset additions for the year of $484 million, largely representing construction costs

associated with the Colongra open cycle gas turbine and gas pipeline

Distributors/Retailers

Overall financial performance for the year met or exceeded all financial performance targets This

was largely due to lower than expected electricity purchase prices

The increase in total assets was primarily due to increased capital expenditure programs for

distribution networks Debt levels increased significantly to finance capital expenditure programs

Profits after taxes while similar to the previous year, were affected by unrealised losses from the

fair value movements in electricity forward price contracts as well as increases in employee

entitlement provisions brought about by unrealised actuarial losses from superannuation The

amounts paid as dividends by the distributors were lower than previous years

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Transmission

TransGrid has generally performed well against its targets It made a profit before tax of

$217 million in 2009 ($190 million in 2008) enabling it to return contributions to Government

totalling $187 million These comprised a dividend of $120 million and taxation of $67.1 million

Capital expenditure increased significantly on the completion of major capital projects including

the Western 500kV Development Project and the Wollar-Wellington 330kV Transmission Line

projects

FINANCIAL INFORMATION

Distribution to Government

Electricity entities’ accrued distributions to the Government were $1.0 billion ($1.5 billion),

comprising $351 million ($524 million) of tax and $696 million ($972 million) of dividends

After the restructure of the electricity industry, dividends and tax equivalents will continue to be

received from the Government owned entities

Industry Debt

Borrowing costs for the year were $844 million compared to $789 million in the previous year The

industry’s debt at 30 June 2009 was $14.8 billion ($12.1 billion at 30 June 2008) The table below

highlights the trend of debt levels, which have increased in line with the significant capital works

projects being undertaken

2009

$m

2008

$m

2007

$m

Generators

Distributors

TransGrid

TOTAL EXTERNAL DEBT 14,790 12,114 10,695

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OTHER INFORMATION

Asset Acquisition

In the 2008-09 State Budget, the electricity industry’s asset acquisition program was allocated

$3.5 billion ($2.9 billion), $660 million or 23 per cent above the 2007-08 budget The focus has been to replace or refurbish assets reaching the end of their economic life, to meet demand growth and ensure network reliability and security Upgrades to the high voltage electricity network across New South Wales are also being undertaken to meet the growing demand for electricity

Actual expenditure for 2009 was $3.6 billion, of which $3.0 billion or 82.4 per cent was spent on the State’s distribution and transmission networks

Electricity Tariff Equalisation Fund (the Fund)

The Fund enables retail electricity prices to be regulated without exposing retailers or the Government to unacceptable financial risk

The Fund manages the retailers’ exposure to the variability of wholesale electricity prices only for the load that supplies regulated customers At 30 June 2009, the Fund was $48.9 million in surplus, ($82,000 in 2008) This resulted from lower electricity wholesale prices during the year leading to less reliance on the Fund from retailers

The Fund’s transactions were:

Payments Generators Distributors/Retailers

2009

$m

2008

$m

2009

$m

2008

$m

In the prior year, the New South Wales Government announced that the Fund would be abolished

by 30 June 2010 As part of the restructure of the electricity industry, ETEF will be phased

Regulatory Pricing

The Australian Energy Regulator (AER) is the regulator for electricity distribution under a new national regulatory regime Its regulatory pricing role was previously undertaken by the New South Wales Independent Pricing and Regulatory Tribunal (IPART) On 30 April 2009, AER made a five year determination under the National Electricity Rules, which established the revenue requirements for each electricity distributor from 1 July 2009 until 30 June 2014 The determination is estimated to have increased the average retail customer’s annual electricity bill between $1.41 to $1.50 per week

While no longer responsible for electricity distribution pricing, IPART continues to regulate electricity prices for small retail customers choosing to remain on a regulated tariff in New South Wales The current price determinations were made on 1 July 2007 and affect the regulated retail electricity tariffs and charges that apply from 1 July 2007 to 30 June 2010 The Minister for Energy has IPART to review and determine the regulated retail electricity tariffs and charges that will apply from 1 July 2010 to 30 June 2013

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The AER is responsible for the regulation of transmission network charges A determination for TransGrid’s transmission services was issued on 28 April 2009, allowing a nominal return of four per cent on the weighted average cost of capital This determination covers a five year period from 1 July 2009 to 30 June 2014

The AER regulates the wholesale electricity market and is responsible for the economic regulation

of the electricity transmission and distribution networks in the national electricity market (NEM) The AER is also responsible for the economic regulation of gas transmission and distribution networks and enforcing the national gas law and national gas rules in all jurisdictions except Western Australia

The Australian Energy Market Commission (AEMC) is responsible for developing the Rules and providing policy advice on how best to develop energy markets over time in relation to the NEM and elements of natural gas markets

BACKGROUND

All New South Wales public sector electricity entities are statutory State owned corporations The entities have common objectives of:

 operating a successful business

 protecting the environment

 operating efficient, safe and reliable facilities for generating and distributing electricity and other forms of energy

 participating in the wholesale and retail markets for electricity and other forms of energy (except for TransGrid)

The shareholders of the corporations are the Treasurer and the Minister for Finance

INDUSTRY FINANCIAL TABLES

Following are abridged income statement and balance sheet tables for generators and distributors for 2008–09 and the previous year Comments on each entity and TransGrid follow this section

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GENERATORS

Generation

Eraring Energy Total

2009

$m 2008 $m 2009 $m 2008 $m 2009 $m 2008 $m 2009 $m 2008 $m

Abridged Income

Statements

(year ended 30 June)

Total revenue 1,004.6 1,016.9 1,217.2 1,162.4 644.3 745.2 2,866.1 2,924.5

Profit before income

tax 100.7 169.2 117.5 640.1 89.1 168.1 307.3 977.4 Income tax equivalent 25.4 55.6 35.3 191.7 26.7 50.8 87.4 298.1 Dividends paid and

provided 59.2 124.4 150.0 270.0 60.4 114.6 269.6 509.0

Abridged Balance

Sheets

(at 30 June)

Total assets 3,280.2 2,738.9 4,118.8 4,450.1 1,911.3 2,439.6 9,310.4 9,628.5

Total liabilities 2,280.6 1,841.9 2,233.7 2,650.3 945.3 1,100.4 5,459.6 5,592.6

Net assets/net

liabilities 999.6 897.0 1,885.1 1,799.8 966.0 1,339.2 3,850.8 4,035.9

Retained earnings

(at 30 June) - 48.5 139.2 252.9 5.5 42.4 144.6 343.8

Financial Performance

Indicators*

(year ended 30 June)

Return on average

Interest cover (times) 3.2 4.9 3.3 11.2 4.4 9.6 3.5 8.8

* Indicators calculated in accordance with standard formulas used by the Productivity Commission

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