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

______________________________________________________________________ Electricity Industry Overview 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 Peak increase/(decrease) (%) (1.3) 2.3 2.5 Average increase/(decrease) (%) (4.3) 0.8 1.6 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. This is trial version www.adultpdf.com Electricity Industry Overview ______________________________________________________________________ 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 Broadwater North Coast Delta Electricity (1) BaGasse 30 Condong North Coast Delta Electricity (1) BaGasse 30 Eraring Lower Hunter Eraring Energy Steam/Coal 2,640 Shoalhaven Nowra Eraring Energy Hydro 240 Warragamba Sydney Eraring Energy Hydro 50 Bayswater Hunter Macquarie Generation Steam/Coal 2,720 Liddell Hunter Macquarie Generation Steam/Coal 2,080 12,110 (1) Joint venture between Delta Electricity Australia Pty Ltd and Sunshine Renewable Energy Pty Ltd Non NSW Government Owned Tallawarra Wollongong TRUenergy CCGT (a) 435 Tumut Snowy Snowy Hydro* Hydro 2,116 Blowering Snowy Snowy Hydro* Hydro 80 Guthega Snowy Snowy Hydro* Hydro 60 Redbank Hunter Redbank Project Coal Tailings 145 Uranquinty Wagga Wagga Origin Energy OCGT (b) 648 Cullerin Upper Lachlan Origin Energy Wind 30 Smithfield Smithfield Marubeni Gas Cogen 160 Appin Mine Illawarra EDL Group CSM (c) 56 Tower Mine Illawarra EDL Group CSM (c) 41 3,771 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. This is trial version www.adultpdf.com ______________________________________________________________________ Electricity Industry Overview Auditor-General’s Report to Parliament 2009 Volume Three _________________________________________ 15 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 Colongra Central Coast Delta Electricity OCGT 668 Non NSW Government Owned (1 project by 1 proponent) 141 Total - Projects under construction 809 Projects with development approval NSW Government Owned Bamarang Stage 1* Nowra Delta Electricity OCGT 400 Bamarang Stage 2 Nowra Delta Electricity conversion to CCGT Eraring Upgrade Lower Hunter Eraring Energy Coal 360 Tomago Newcastle Macquarie Generation OCGT/CCGT 790 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 Marulan Marulan Delta Electricity OCGT/CCGT 450 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 Marulan Marulan EnergyAustralia OCGT/CCGT 350 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. This is trial version www.adultpdf.com Electricity Industry Overview ______________________________________________________________________ 16 _________________________________________ Auditor-General’s Report to Parliament 2009 Volume Three 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 Return on average equity (%) (a) 8.7 17.6 16.1 15.7 Return on average assets (%) (b) 6.0 9.4 11.5 8.7 Interest cover (times) (c) 2.4 3.3 4.3 3.5 Debt to equity ratio (d) 1.6 1.3 0.9 1.5 * 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. This is trial version www.adultpdf.com ______________________________________________________________________ Electricity Industry Overview Auditor-General’s Report to Parliament 2009 Volume Three _________________________________________ 17 The following table shows key financial ratios for generators and distributors: Generators Distributors/Retailers 2009 2008 2007 2009 2008 2007 Return on average equity (%) (a) 5.6 29.7 30.5 12.4 14.5 13.6 Return on average assets (%) (b) 4.6 11.2 9.8 6.5 8.7 8.5 Interest cover times (c) 3.5 8.8 6.5 2.1 2.2 2.8 Debt to equity ratio (%) (d) 68.3 48.8 342.8 287.8 218.7 147.5 Net assets $m 3,850 4,036 538 3,533 3,937 5,003 Pre-tax net profit $m 307 977 484 661 663 844 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. This is trial version www.adultpdf.com Electricity Industry Overview ______________________________________________________________________ 18 _________________________________________ Auditor-General’s Report to Parliament 2009 Volume Three 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 Borrowing costs 123 125 125 External debt 2,631 1,971 1,864 Distributors Borrowing costs 616 562 470 External debt 10,170 8,611 7,377 TransGrid Borrowing costs 105 102 101 External debt 1,989 1,532 1,454 TOTAL BORROWING COSTS 844 789 696 TOTAL EXTERNAL DEBT 14,790 12,114 10,695 This is trial version www.adultpdf.com ______________________________________________________________________ Electricity Industry Overview Auditor-General’s Report to Parliament 2009 Volume Three _________________________________________ 19 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 Into the Fund 136 92 271 161 From the Fund 197 151 152 102 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. This is trial version www.adultpdf.com Electricity Industry Overview ______________________________________________________________________ 20 _________________________________________ Auditor-General’s Report to Parliament 2009 Volume Three 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. This is trial version www.adultpdf.com ______________________________________________________________________ Electricity Industry Overview Auditor-General’s Report to Parliament 2009 Volume Three _________________________________________ 21 GENERATORS Delta Electricity Macquarie 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 equity (%) 7.9 20.4 4.5 51.5 5.4 13.6 5.6 29.7 Return on average assets (%) 4.9 7.1 4.0 16.9 5.3 7.0 4.5 11.2 Debt/equity 1.3 0.9 0.4 0.5 0.5 0.3 0.7 0.5 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 This is trial version www.adultpdf.com . concept to construction. Power station Location Owner Technology Capacity (MW) Projects under construction NSW Government Owned Colongra Central Coast Delta Electricity OCGT 668 Non. Parliament 2009 Volume Three 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. 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