AGL READY TO GO ON ACQUISITION TRAIL
2 February 2009The energy company has overcome its problems and has the capacity to borrow to expand, writes Glenda Korporaal
AGL chief executive Michael Fraser is not holding his breath for the long-debated privatisation of the NSW Government's energy assets.
But if Nathan Rees' Government does announce the timetable for the sale of the retail arms of its electricity distribution network, which could come as early as this month, AGL, Australia's largest energy company, is there ready, and able to borrow as much as $2 billion if needs be -- if the deal is right.
In just over a year in the job, the 51-year-old accountant, who took over a demoralised AGL in October 2007, has streamlined the company, slashed its debt with sales of non-core assets worth $3.2 billion, revamped its customer billing system, boosted its morale and expanded into the hydro, wind and coal seam gas business, positioning the company to take advantage of the Rudd Government's renewable energy targets.
``Like everybody, we are waiting to see (what is going to happen with the NSW electricity privatisation process),'' he says from AGL's energy-efficient head office in North Sydney.
``Before Christmas they said they would start to talk about details in February. But it has been such a long drawn-out process, we'll only believe it is happening if somebody hands over a cheque and gets the keys.''
NSW Finance and Infrastructure Minister Joe Tripodi is not giving any date for the next step in the process.
His office told The Australian on Friday ``The Government is currently working with key banking and economic advisers to bring the electricity reform package to the market as soon as possible.''
Having eliminated AGL's debt and cleaned up its balance sheet, Fraser estimates that the company could borrow some $1.5billion to $2 billion worth of debt for new acquisitions, which could include NSW energy assets, without affecting the company's BBB credit rating, which Fraser is determined to maintain. ``We have done a lot of the hard work in terms of getting the balance sheet sorted out,'' he says.
While other companies have contracted in recent months in the face of the global economic crisis, Fraser has upgraded AGL's net profit outlook by $10 million in December to a range of $370-400 million and gone on a mini-spending spree.
It is just mopping up its successful $171 million bid launched in December for coal seam methane company Sydney Gas, after spending $370 million on buying coal seam gas assets in the Gloucester Basin in NSW and $14 million on a portfolio of wind farms in Queensland and Victoria from Investec.
``There is plenty of balance-sheet capacity left for NSW,'' Fraser says.
As well as raising debt, he says, for the right deal, he is confident that the company could also seek to raise more money on the share market.
``If we needed to raise equity, we would be well supported in the market, as long as we were running the business well and delivering results,'' he says.
That said, Fraser says he is not going to stop looking at other assets for AGL as part of its continued expansion into the renewable energy area, waiting for the NSW Government, which has wrestled for years with the debate about selling off its electricity assets, to come out with any specific plans.
``Until they are crystal clear about the timetable and what assets (are up for sale), in which configuration they are going to sell them, you can't stop making what might be otherwise sensible business decisions, waiting to see whether it is going to play out or not,'' he says.
Fraser notes that there is a ``pretty limited field'' of potential buyers for the assets and predicts that the world economic crisis will limit any offshore interest to those foreign players that are already operating in Australia.
``NSW has left their run very late and I think there will be limited competition for those assets,'' Fraser says.
For Fraser, a soccer lover, AGL's strong balance sheet, expanded portfolio of renewable assets and much improved morale is particularly sweet.
An AGL veteran, he was reported to have been passed over twice for the job of chief executive. The last time was in favour of Welsh born ``change agent'' Paul Anthony, who was sacked by the board in October 2007 after a tumultuous 17 months in the job that saw angry shareholders speak out against management after a shock profit downgrade.
AGL chairman Mark Johnson, who was on the receiving end of critical comments from shareholders at the company's annual general meeting that year, admitted that the company needed to restore its credibility.
After Fraser took over, ratings agency Standard & Poor's put AGL on a negative credit watch.
``After the (shock) earnings downgrade (in 2007), our credibility was in tatters,'' he recalls.
``We were on a negative credit outlook. Employee engagement was rock bottom and our safety record wasn't what it should be.''
But with the company under huge market pressure, Fraser says he came into the job determined to get its debt down.
Almost 18 months later, ``we have restored a lot of credibility for the company in the market''.
``We have got all of those things well and truly sorted out atthe moment,'' he adds.
There has been some good fortune in the turnaround, thanks to the $5.4 billion bid by British gas company BG for Queensland Gas late last year when world energy prices were a lot higher than they are now.
In November, AGL received $1.1 billion for its 22 per cent stake in Queensland Gas -- a deal negotiated some years ago when QGC appealed to AGL to help it fend off what it saw as a low-ball takeover bid by Santos in 2007.
As group general manager, merchant energy, for AGL at the time, Fraser was actively involved in that deal, which has included negotiating a 20-year gas supply contract with QGC.
The BG bid for QGC was made after the British company was rebuffed in a bid for Origin Energy, after a top-of-the-market offer from US oil giant ConocoPhillips.
After this, Fraser travelled to London to see BG -- knowing that its intentions could then turn to Queensland Gas where AGL was the largest shareholder.
Under that deal, Fraser has until April to look at buying some of QGC's gas acreage assets
In December, the company announced it had raised another $1.127 billion from the sale of its oil and gas interests in Papua New Guinea.
That month provided another boost for the company, with the Rudd Government's confirmation of its mandatory renewable energy target -- that 20 per cent of Australia's energy supplies will have to come from renewable energy by 2020.
AGL is already Australia's largest owner of renewable energy, with about 27 per cent of its total generation capacity in clean energy investments such as wind farms and hydro-electric plants.
Fraser has big plans to boost the company's renewable energy assets to ride the expected long-term growth in the sector, with plans to expand in wind farms, hydro-power and coal seam gas as well as less proven technologies such as geothermal (hot rocks).
``We can see, in the long term, between 40 to 50 per cent of our generation capacity will come from renewables,'' he says,
``We are the only Australian energy company generating from a full suite of proven renewable technologies.
``We are already the largest private owner and operator of renewable energy assets in Australia, with nearly 1000MW of renewable generation capacity.
``We can see the potential for a fourfold increase in our renewable generation capacity over the longer term.''
In October this year, AGL will commission its $234 million, 140MW Bogong hydro-power plant, in the mountains near the skifields of Victoria.
The largest hydro electric generating plant built in Australia in more than 20 years, the Bogong plant will provide electricity into the Victorian electricity grid for peak periods.
It represents a major expansion of the company's Kiewa hydro-scheme, which AGL bought from Southern Hydro in 2005.
Fraser took a group of analysts to see the project -- which involve building a 6.9km tunnel through the rock that will allow ``ultra fast'' electricity generation when it flows down inside the mountain towards the generator -- in December to highlight the company's renewable energy commitment.
He says the federal Government's renewable energy targets will require the equivalent of 45,000GW hours of renewable energy or 10 Snowy Mountain hydro electricity schemes, which he predicts will prompt a new generation of investment in the renewable energy sector in Australia.
By getting in early, he sees AGL will get the cheapest and best-positioned assets. He also sees the prices of these assets going up as the target kicks in, with investors scrambling to pay up for less and less attractive assets.
``We (Australians) are going to rebuild the generation fleet of this country over the next decade (to meet the Government's green energy targets),'' he says.
``It will be a huge ask for the country to meet those renewable energy targets.
``It will require somewhere between $20 billion and $30 billion of investment across the industry over the next decade.''
Fraser says AGL has some $2billion worth of investments in renewable energy, with many more projects on the drawing boards and other assets on its watch list.
``We have another couple of billion worth of projects on our books that will be built at the appropriate time over the next few years,'' he says.
He says there are limited opportunities for more hydro-electricity projects in Australia, which makes the Bogong plant very attractive. ``We've got a couple of other little hydro projects we are looking at,'' he says.
These include the Dartmouth Dam area in northeastern Victoria, where AGL is looking at the feasibility of a smaller, 140MW station. But he sees wind farms as an area of greater potential in Australia.
The company also has an investment in geothermal power in South Australia and is looking at other opportunities in landfill gas, biogas projects -- which take methane gas from sewage ponds -- as well as getting energy from macadamia nut shells.
Solar power, he says, is a long way from being cost-efficient.
As a utility, AGL is in the fortunate position of being relatively immune from the economic downturn affecting other sectors.
Fraser says demand for AGL's electricity and gas is more affected by the extremes of weather, such as the heatwave that has hit Melbourne and Adelaide last week, than the state of the economy.
``People are going to continue to use electricity and gas,'' he says.
``Most of the margin comes out of the mass market, which is probably more influenced by weather.''
But he says there are still large volumes of energy sold to industry and commercial users that could eventually be affected by any major economic downturn.
``Ultimately we are going to see an impact on their output and their level of production that will impact on their energy consumption,'' he says.
Glenda Korporaal
The Australian
19
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