AGL Energy Limited 2011 Annual Report 27 Rocky Valley Dam powering AGL’s  hydro operations in Victoria > record electricity demand in New South Wales and South  Australia, coupled with extended periods of high and volatile  wholesale electricity prices; > the shut down, ahead of Cyclone Yasi, of the Yabulu Power  Station over which AGL has dispatch rights; and > disruption of gas supplies to, and the imposition of transmission  constraints on, the Oakey Power Station over which AGL has  dispatch rights. AGL was exposed to underlying electricity pool prices of up to  $12,500 per MW hour during periods of high customer demand.  In normal circumstances, electricity pool prices are around $40  per MW hour. The effect was to increase AGL’s electricity wholesale  costs by $43.7 million. But for the effects of the unusual summer weather events  described above, EPM’s performance for the year was otherwise  very satisfying in a number of respects. Generation output from  hydro assets was up due mainly to the benefits of higher water  storage levels at the Eildon and Dartmouth dams. Electricity  generation from wind assets was also higher than obtained in the  previous year. Effective management of the wholesale electricity  portfolio also allowed AGL to benefit from overall lower electricity  pool prices that prevailed for most of the year.  The higher generation output from hydro and wind assets increased  AGL’s eco-markets gross margins. Wholesale gas margins increased mainly as a result of higher  residential demand during July, August and September 2010 when  temperatures were generally lower than they were the previous  year. Effective management of AGL’s gas contracts reduced  overall gas procurement costs, although this was partly offset by  higher gas haulage costs, a tightening in margins from commercial  and industrial customers, and costs associated with the newly  introduced short-term gas trading market. Power Development generates earnings from the development of  wind farms. Development profits are recognised on a percentage  of completion basis. Development profits of $61.0 million were recognised in the year,  mainly from the AGL Hallett 4 Wind Farm (which was commissioned  and became operational in May 2011) and from the Oaklands Hill  Wind Farm. Construction of the Oaklands Hill Wind Farm is expected  to be completed in December 2011, which will result in recognition  of a further $8.0 million of development profits in FY2012. On 27 June 2011, AGL announced the sale of the Oaklands Hill Wind  Farm. Although the physical asset has been sold, AGL will continue  to construct, operate and maintain the facility, and will retain the  rights to all electricity output and the resulting renewable energy  certifi cates. Work continued on construction of the AGL Hallett 5 Wind Farm,  and is on schedule for completion in December 2011. Construction of the Macarthur Wind Farm in western Victoria  commenced during the year. When completed in April 2013, it  will be the largest wind farm in the southern hemisphere with a  generation capacity of 420 MW. Merchant Operations is responsible for managing and maintaining  AGL’s growing portfolio of wind, water and gas-fired electricity  generation plants. AGL’s thermal and renewable generation portfolio  includes the 1,280 MW gas-fired Torrens Island Power Station in  South Australia, the 150 MW gas-fired Somerton Power Station  in Victoria, and 796 MW of hydro generation in Victoria and New  South Wales. AGL also operates and controls 389 MW of wind  generation from the Wattle Point and the AGL Hallett 1, Hallett  2 and Hallett 4 Wind Farms in South Australia. The AGL 132 MW  Hallett 4 Wind Farm is a new addition to the portfolio following its  commissioning in May this year. Merchant Operations is largely a cost centre. All generation revenue  and variable operating expenditure is included in the results  for Energy Portfolio Management. Merchant Operations costs  increased this year due mainly to higher labour charges, the effect  of additional new plant coming on line, and higher maintenance  costs now that warranty periods for some assets constructed  several years ago have expired. Depreciation charges for some  Power Development Merchant Operations Merchant Energy 2011 $m 2010 $m Operating EBITDA 447.3 449.8 Operating EBIT Energy Portfolio Management 430.1 426.1 Merchant Operations (114.7) (103.8) Energy Services 17.8 17.3 Power Development 56.3 56.9 Sundry Expenses (11.3) (10.4) Total Operating EBIT 378.2 386.1 In relation to wholesale electricity, the result for the year was  most affected by the consequences of the severe weather events  experienced across the National Electricity Market in late January  and early February 2011. These events resulted in: