In its half year results released yesterday, AGL Energy (ASX: AGK) confirmed to investors that its FY2014 profit would be in the range of $560-610 million, basically flat on last year's earnings of $598 million.
However management notes that the worst of heavy price competition appears to be behind the company, while the elimination of the carbon tax should make AGL's coal power stations more viable, which should be a pleasant leg up for FY2015. AGL and Origin Energy (ASX: ORG) are also entering into the gas-export business which is expected to contribute substantially to the revenue of both companies.
On the coal-powered front, AGL recently signed an agreement to purchase the NSW government-owned coal power assets, Macquarie Generation, for $1.51 billion. Currently awaiting ACCC approval, this purchase will be funded through a $1.2 billion rights issue and the remainder through bank loans. If the sale is approved, Macquarie Generation will contribute immediately to earnings in FY2015, its first full year of AGL ownership.
Rights issue
AGL's potential acquisition-funding rights issue is, in my opinion, slightly different from your average rights issue. Often company X will issue shares to pay off debt, or raise money that is often used in ways that are opaque or offer nebulous 'in the future' rewards to the average shareholder. AGL will use its rights issue to immediately acquire a huge asset that will effectively increase the size of the company by around 13% by market cap (from ~$8.9 to ~$10.1 billion) and also contribute immediately to earnings from its date of purchase. It is for this reason that I suggest long-term investors consider applying for their rights issue, if and when it is announced. I would also suggest future buyers who miss the rights issue consider increasing the size of their purchase to account for the increased size of AGL.
Foolish takeaway
AGL certainly has potential for strong earnings growth next year, although I am nervous about the size of its coal acquisition. I expect that renewable energy will provide an increasingly greater part of Australia's energy over the coming 20 years, which could add pressure to coal-powered margins.
Dirty coal power sources are also vulnerable to future government legislation or subsidisation of renewable energy. These threats are mostly in the distant future however, and should not prevent an investor from purchasing one of Australia's biggest energy utilities. AGL appears fairly priced, pays a reasonable dividend and has considerable scope to grow earnings. What more could you want?
