AGL stands by drought-hit hydro plants

Sydney Morning Herald
Monday 11/5/2009 Page: 19

AGL Energy is standing by the assets it bought in the controversial $1.425 billion takeover of Southern Hydro, despite the worst drought on record severely constraining output from hydroelectric plants at the centre of the 2005 deal. A key assumption in the takeover was that normal rainfall would resume by this year but the two main dams dependent on rainfall are parched.

After the worst-ever flows into the Murray system in the March quarter, the 135 MW Lake Eildon is just 12% full and its output is believed to be minimal. The 180 MW Dartmouth Dam - Australia's largest - stopped generating electricity in 2007 and is unlikely to restart before 2011. Industry sources said the $1.425 billion price tag was well ahead of rival bids from Origin Energy and Babcock and Brown, which were less than $1.1 billion.

Electricity supply from the Snowy region has fallen sharply since 2007, though AGL does not disclose individual plant production levels. A company spokesman denied the assets had been impaired and pointed to a 20% pre-tax rise in wholesale electricity earnings at the latest half-year results.

We do not run the business on an asset by asset basis. Rather, we look at all of the generation across our portfolio and that is how the auditors sign off on the business, as a single cash generating unit," he said. Several analysts, who think AGL overpaid for Southern Hydro, have lowered their valuations on the dams. AGL's hydro assets contributed just $3.4 million to earnings before interest and tax in the 2008 financial year.

Despite the drought, the company aims this year to complete a 140 MW expansion of the Bogong hydro-power plant, which will use water from snowfields in Victoria. It says the move will mean half its hydro capacity is effectively drought-proof. AGL's managing director, Michael Fraser. has said the company was also considering an expansion of the Dartmouth Dam, but a spokesman said this was now a low priority because of expected prices.

"There are other more attractive development opportunities for AGL at this time, although that option remains in our wider development portfolio," be said. Amid the prolonged drought, the company says the carbon pollution reduction scheme and a government mandate to increase renewable energy use will raise the value of hydro assets. At the time of the Southern Hydro deal, AGL's then managing director, Greg Martin, stressed the company's cautious rainfall assumptions.

"Higher dam levels at Dartmouth Dam and Lake Eildon are important, and they're currently well on their way to recovery from the lows experienced in the recent drought," he said in 2005. AGL's low dam levels are just one example of the headaches the drought is causing companies that depend on plentiful or cheap water. New Zealand's Contact Energy, half owned by Origin Energy, also suffered a similar problem when drought contributed to a 23% fall in earnings forecast for this financial year.

A consultant for sustainable water management at Energetics, Dr Peter Holt, said climate change science suggested water shortages would lead to increases in hydro dam shortages. "What we're seeing from the macro weather trends is that we'll see more and more droughts and less rainfall availability, so we're expecting that to increase." he said.