AGL Energy has emerged as the nation’s equal largest electricity company – by capacity – after its takeover of the coal fired Loy Yang power station was approved.
It has also inherited arguably the nation’s biggest polluter and its accompanying $2.5 billion debt.
The Australian Competition and Consumer Commission (ACCC) said on Thursday it would not oppose AGL’s acquisition of what is Australia’s third largest coal fired power station.
AGL has started raising $1.55 billion to help pay off the debt, including a $565 million bullet payment due in a couple of months.
Analysts have applauded the deal for hedging AGL’s exposure to electricity prices.
By producing more of its own energy using the power station and adjacent coal mine, in Victoria’s south-east, it will have to buy less power in a volatile wholesale market.
“We get to acquire one of the lowest cost generators in the national electricity market,” chief executive Michael Fraser told reporters in a teleconference.
Despite the introduction of a $23/tonne price on carbon on July 1 the investment stood on its own two feet – it is Australia’S cheapest coal-fired generator – and met rate of return requirements, Mr Fraser said.
If the coalition won the next federal election and repealed the carbon price policy, Loy Yang will be worth even more.
AGL says the transaction will be earnings accretive from the 2013 fiscal year.
Energy analysts including Deutsche Bank’s John Hirjee and Morningstar’s Gareth James disagreed, saying they thought it would be earnings neutral.
They cited falls in electricity prices of 5.6 per cent last year and wanted to wait and see how the assets performed under the new ownership structure.
However, Mr James praised the move in acquiring a rare strategically advantageous asset.
AGL also launched a $900 million share sale on Thursday, following a successful $650 million subordinated hybrid offer to help fund the $448 million deal and pay down some debt.
It will also receive a $240 million carbon compensation payment before June 30 and permits worth $1 billion over the next decade.
Mr Fraser, who is also chairman of the Clean Energy Council, defended himself against suggestions he could not claim to be committed to be renewables by buying such a major carbon emitter in Loy Yang.
He said he was committed to an emissions trading scheme and AGL would invest cashflow from Loy Yang into its own $5 billion investment in renewables.
The debt problems have largely arisen because of falling wholesale electricity prices.
AGL already had a 32.54 per cent stake as part of Great Energy Alliance Corporation (GEAC), owners of Loy Yang.
The ACCC said on Thursday that after consulting industry participants it did not think the acquisition would lessen competition in the electricity market.
Loy Yang provides a third of Victoria’s power, and its adjacent open cut mine contains an estimated 2.1 billion tonnes of coal.
The company has also confirmed its guidance of an underlying profit of $470 million to $500 million in the 2011/12 financial year.