2011 interim profit in line with guidance

AGL Energy Limited (AGL) today reported an underlying net profit after tax (Underlying Profit) of $226.2 million for the half-year ended 31 December 2010. This compares with $234.8 million in the prior corresponding period.

The result is in line with previous earnings guidance. Contributions from AGL's core Retail and Merchant businesses were, in aggregate, up slightly on the results for the prior corresponding period, but a much lower than expected contribution from the investment in the Loy Yang A power station brought the overall result down 3.7 per cent on that for the prior corresponding period.

The interim dividend has been maintained at 29 cents per share unfranked.

AGL remains on track to deliver full year results in line with previous guidance for Underlying Profit of between $415 million and $440 million.

Result Overview

• Revenue $3,488.0 million, up 9.0%
• Statutory NPAT $239.6 million, up 30.4%
• Underlying NPAT $226.2 million, down 3.7%
• Underlying Earnings 49.9 cents per share, down 4.8%
• Interim dividend of 29.0 cents per share (unfranked), flat

Commenting on the half year results, AGL Managing Director, Michael Fraser, said: "Our Retail business continued to perform strongly, increasing its customer base and improving customer service levels. The growth in electricity customer numbers in New South Wales is especially pleasing as we look to expand our electricity customer base in that State over the next three years.

"We are disappointed in the poor contribution from Loy Yang. Unfortunately, this is not expected to improve in the second half but we are forecasting further strong growth from our Retail business and an improvement in our wholesale electricity business despite the costs associated with the weather events of late January and early February."

Operational Highlights

Retail Energy

Operating EBIT for Retail Energy was $193.8 million, up 5.6% on the prior corresponding period, reflecting an increase in the gas and electricity gross margin.

Mass market gross margin increases were primarily due to improved regulatory and contract outcomes in all States. Electricity volumes were in line with the prior corresponding period, as the benefit of higher customer numbers was offset by a mild start to summer. Gas volumes were higher driven by a colder winter in 2010. Offsetting the higher gas volumes was an increase in haulage costs.

Operating expenses to gross margin improved to 45.4% compared with 46.4% for the prior corresponding period. Net operating costs increased by 1.8% mainly due to higher bad debts, labour and contractor services charges.

Customer accounts increased by 32,700 to 3.27 million (+1.0%). Retail Energy continued to pursue its dual fuel strategy with AGL now servicing 1.43 million dual fuel customer accounts, compared with 1.36 million as at 30 June 2010, a 5.1% increase.

Market rates of customer churn continued to be at high levels. In the six months to 31 December 2010, industry market churn increased by 1.7 percentage points (ppts), from 18.7% to 20.4%. AGL's customer churn across all markets was 15.9% (14.7% in the prior corresponding period), 4.5 ppts below the industry average. Victoria continued to lead in customer switching, having been confirmed as the most competitive energy market in the world for the third consecutive year¹.

Merchant Energy

AGL's Merchant Energy business delivered an Operating EBIT of $186.1 million, down 4.6% on the prior corresponding period.

Wholesale Electricity gross margin decreased 16.6% to $149.9 million. In prior periods AGL hedged a portion of its anticipated electricity spot price exposure in compliance with AGL's risk management policy, including some electricity hedging contracts purchased on the Australian Securities Exchange. These contracts were standardised and were struck at prices which implicitly included the then anticipated impact of the cost of carbon on electricity costs. The delay in the introduction of a carbon price meant that when these contracts matured, during the current period, the increased cost was not offset by an increase in revenue from sales to customers.

Generally lower electricity prices and price volatility, compared with the prior corresponding period, reduced the contribution from Torrens Island Power Station. Lower than anticipated sales volumes, due to the mild start to summer, limited the opportunity to benefit from the low pool prices.

Wholesale Gas gross margin increased 32.5% to $64.0 million. Weather conditions in July, August and September were colder than in the corresponding months in 2009 resulting in increased demand, particularly from residential customers.

Power Development Operating EBIT increased 77.6% to $26.1 million. Development profits of $27.0 million were recognised in the half year compared with $16.0 million in the prior corresponding period. Development profits for both periods related to the Hallett 4 wind farm in South Australia. Construction of the Hallett 4, Oaklands Hill and Hallett 5 wind farm projects continued. On 12 August 2010, AGL announced the development of the Macarthur wind farm (420 MW) in a joint venture with Meridian Energy.

Merchant Operations operating expenses increased 14.2% to $57.1 million due to increased labour costs, the impact of new plant coming on line and an increase in maintenance costs following the expiration of the warranty periods for the Hallett 1 wind farm.

During the period 4 September 2010 to 6 September 2010 the Kiewa, Dartmouth and Eildon catchment areas received torrential rain with falls of up to 180mm resulting in significant additional inflows across all catchments. The additional inflows, in conjunction with continued above average rainfall, have resulted in dam levels at Eildon and Dartmouth increasing from 31% and 30% respectively, as at 1 January 2010, to 68% and 53% respectively as at 31 December 2010. As a result, the Dartmouth Power Station was progressively re-commissioned during the half year. Its current operational capacity is 132 MW.

Upstream Gas

AGL's Upstream Gas's operating EBIT increased by 463.3% to $16.9 million compared with $3.0 million for the prior corresponding period.

AGL completed the acquisition of Mosaic Oil NL (Mosaic) on 20 October 2010. This has enabled AGL to develop the depleted Silver Springs and Renlim gas fields as a gas storage facility and to enter into a long-term gas storage agreement with QGC Pty Limited (a wholly owned subsidiary of British company, BG plc). Income for the half year includes an initial storage fee of $15.0 million. Income from gas storage fees is expected to be approximately $8 million to $10 million per annum over the next three years, although it is unlikely that there will be any additional fee income in the second half of this year.

Total 2P gas reserves increased by 451 PJ since 30 June 2010. AGL's combined 2P gas reserves entitlement for the Moranbah Gas Project (MGP) and ATP 1103 increased by 312 PJ (41.8%) to 1,059 PJ. These gas reserves have been reassessed by independent reserves auditor Netherland Sewell & Associates, Inc. AGL's entitlement to 2P reserves within ATP 1103 increased by 441 PJ (179.3%) as a result of exploration and appraisal activities during the past 12 months. AGL's share of 2P reserves within the MGP area was reduced by 129 PJ (25.7%) following a review based on recent production data. During the half year, AGL also booked its first gas reserves in relation to its interests in the Hunter Valley in New South Wales (NSW).

Energy Investments

Operating EBIT decreased to $20.4 million compared with $43.4 million in the prior corresponding period.

The contribution from Loy Yang declined to $0.4 million from $22.8 million due to the substantially lower electricity pool prices which prevailed over the period.

The ActewAGL retail partnership contributed an equity share of profits of $17.6 million compared with $17.5 million for the prior corresponding period.

Financial Highlights

Financing cost

Net financing costs decreased by $4.7 million to $22.1 million for the half year mainly due to a lower average net interest rate, which decreased from 7.88% to 6.63%.

Net debt as at 31 December 2010 was $757.0 million, an increase of $350.7 million from 30 June 2010.

Significant items

Significant items after tax for the half year were a loss of $16.8 million compared to a loss of $14.7 million for the prior corresponding period.

Costs of $16.1 million before tax ($12.3 million after tax) were incurred in bidding for the privatisation of energy assets in NSW and in relation to the acquisition of Mosaic Oil NL.

Redundancy, termination and restructuring costs of $6.5 million before tax ($4.5 million after tax) related mainly to the transitioning to offshore service providers of Retail Operations back-office functions (mainly non-customer facing billing and sales fulfillment).

Dividends

An interim dividend of 29.0 cents per share for the half year has been
declared, the same as the interim dividend for the prior corresponding period. The dividend will be paid on 14 April 2011. The record date to determine shareholders' entitlements to the dividend is 24 March 2011 and shares will commence trading exdividend on 18 March 2011.

The interim dividend will be unfranked due to the anticipated receipt of a significant taxation refund.

For taxation purposes, the dividend will be taken to be paid entirely from conduit foreign income. This is relevant only for non-resident shareholders. The effect is that the dividend will not be subject to Australian dividend withholding tax.

The AGL Dividend Reinvestment Plan (DRP) will be in operation in relation to the dividend, with shares to be allotted at a 1.5% discount to the simple average of the daily weighted average market price at which AGL's ordinary shares are traded on ASX during each of the 10 trading days commencing on 28 March 2011.

Outlook

AGL expects the Retail Energy business will continue to perform well in the second half. This will be enhanced by the roll-out of the NSW retail growth strategy.

The Wholesale Electricity portfolio is expected to deliver a stronger second half result despite the adverse financial impact of extreme weather events in January and early February 2011.

Loy Yang's contribution is not expected to improve in the second half.

AGL is currently developing 672 MW of renewable generation capacity. The Oaklands Hill (67 MW), Hallett 4 (132 MW), Hallett 5 (53 MW) and Macarthur (420 MW) wind farms will make a significant contribution to AGL meeting its obligations under the renewable energy legislation. AGL is well positioned to satisfy its obligations under this scheme out to 2014/2015 and is unlikely to commit to the construction of additional wind farms until there is an improvement in the prices of renewable energy certificates.

AGL is currently assessing the development of a gas fired peaking power station at Dalton to support the expected additional electricity load in NSW. A final investment decision on Stage 1 (500-750 MW) is expected in the second half of calendar 2011.