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The first part is the industry analysis, which is through Porters 5 Forces to analyse the AGL’s position in its industry. The second part is the company analysis which concludes the introduction of main business of AGL and its financial performance. In addition, we compare the disclosure of PPE, intangible asset and leased assets & liabilities in the annual report 2008 with the AASB. After the analysis, it is clear to discover that the rules followed by the AGL comply with the AASB framework.
Introduction AGL Energy Limited (AGK) began trading in the Australian Stock Exchange on the 12th of October 2006, and is the second largest provider in the gas, electricity and water supply in Australia holding a market share of 8. 3% in 2008 behind Origin Energy with a 12. 6% market share. (IBISWorld 2008) Supplying over 3. 2 million customer accounts with diversity across geography, fuel type and generation mix providing AGL with a substantial integrated generation portfolio.
Key business segments include the ‘Retail Division’ handling the purchase, sale and marketing of gas and electricity, as well as the ‘Merchant Business Division’ which is responsible for operating and maintaining AGL’s power generation assets. These include Gas Development, involved in upstream gas developments; Wholesale Gas, purchasing gas supplies for AGL’s retail business and wholesale customers; and Energy Services, managing small-scale renewable power generation.
AGL also owns and operates the largest renewable generation portfolio with a focus on hydro and wind power which includes the Hallett Group wind farms, Bogong Hydro Development hydro-electricity. Industry analysis AGL operates in two major industry categories, the Retail Division would operate in the Electricity, Gas and Water Supply industry where as the Merchant Business Division may be classified best fit into the operating in Oil, Gas Production in Australia. This report will focus on the Electricity, Gas and Water Supply industry as it is the best-fit industry available. . 1 Porters 5 Forces The use of Porter’s 5 Forces will be implemented to analysis and determine the key external forces which impact the industry. 2. 1. 1 Potential entrants The industry over the past 5 years in the years 2004 to 2009 the average growth in revenue has been in between 3. 4% to 5. 3 % per annum. (IBISWorld 2008) New entrants into the market are determined to gain market share and the seriousness of a threat from a new entrant depends on the barriers placed in that market and the expected reactions from existing competitors o the upstarts (Porter, M. E 1979). Newcomers to the market face such things as economies of scale, product differentiation, capital requirements, cost disadvantages, access to distribution and government policy. Due to the deregulation in the late 1990’s, this has caused a large increase in competitors in this industry. However the industry in its mature life cycle and due to high barriers of entry due to capital intensive start up costs and high level of expertise and experience needed to operate in this field has deterred the level of new entrants. . 1. 2. Industry competitors Competition in the industry is made more intense by several factors; whether the competitors are numerous or are equally balanced in terms of size and power, if the industry growth is slow, if the products or services available lack differentiation or substitution costs, when the fixed costs are high or the product is of a perishable nature, when exit barriers are high and when the rivals in the market are diverse in their strategies and nature (Porter, M. E 1979).
For AGL the industry is fairly competitive, with the top 5 companies owning approximately 30% of the market share, being Origin Energy Limited, AGL Energy Limited, Energy Australia, Sydney Water Corporation, ENERGEX Limited and other with a respective market share of 12. 6%, 8. 3%, 4. 7%, 2. 6%, 2. 1& and 69. 7% respectively in the year 2008. The largest direct competitor for AGL would be Origin Energy as listed above, with similar business structure which operates in a number of energy market sectors including exploration and production, retailing gas and electricity, power generation and the operation of gas networks. . 1. 3. Substitutes The price elasticity of demand for the goods and services supplied by the Electricity, Gas and Water division is low, as the feature of this division reflects the fact that electricity, gas and water are regarded as essentials in both business and households. 2. 1. 4. Bargaining power of Customers Customers hold the power to drive down prices, demand higher quality or more services, and play competitors off against each other (Porter M.
E, 1979). Due to the fact that water, gas and electricity is a homogenous product with very little or no point of differentiation and that the goods are regarded as essential these allow very little bargaining power by the customers. 2. 1. 5. Bargaining Power of Suppliers When suppliers are powerful, they can squeeze the profitability out of an industry that it unable to meet increases in costs by its own product prices (Porter M. E, 1979).
AGL controls both its power generation as well as distribution therefore the bargaining power of the suppliers is negligent for this company. 3. 0 Company Analysis 3. 1. 1 Business & operating activities AGL’s business comprises the following four main business segments according to the annual report 2008. The primary business segments format is based on the consolidated entity’s management and internal reporting structure. (Figure1 showed) • Retail Energy – Buying and selling of gas and electricity. Merchant Energy – Buying and selling of gas and electricity; operating and maintaining of power generation infrastructure; and extraction and sale of liquid petroleum gas. • Gas and Power Development – Exploration, extraction, production and sale of coal seam methane gas; construction of power generation infrastructure; and extraction and sale of crude oil. • Energy Investments – Investments in energy entities. The Gas and Power Development segment is now reported as a new segment.
The businesses within this segment were previously included as part of the Merchant Energy segment. The discontinued operations are separated from continuing operations as well. (AGL annual report 2008) [pic] Figure 1 3. 1. 2 Changes in Operational Activities In the director’s report, it is known that AGL still maintains their Principal Activities, which has been discussed above. There were no significant changes to the nature of AGL’s activities during the year. 1. 2. 4. 0 Finances and Finances performance 4. 1. 1 Funding and capital structure 1.
Through selling the 33% interest in AlintaAGL and the disposal of GasValpo in Chile, and announced the Company’s intention to sell our PNG oil, gas and LNG project assets by the end of the calendar year, AGL reduced our debt by approximately $700 million from its peak in December 2007 and successfully re-financed in excess of $500 million in debt facilities. 2. (a) On 16 April 2008, 2,633,758 ordinary shares were issued at $11. 31 per share to participating shareholders under the AGL Dividend Reinvestment Plan. (b) On 16 April 2008, 7,164,872 ordinary shares were issued at $11. 0 per share to Citigroup Global Markets Australia Pty Limited as underwriter of the AGL Dividend Reinvestment Plan. 3. The short-term borrowing has no change and the long-term borrowing has increased by $60. 3m during the year of 2008. Because the profit after income tax decrease and the dividend paid had no change, so the retained earnings for the company had decreased to $507m compared with $521. 2m at the beginning of the financial year. According to the balance sheet, it is straight forward to discover the total equity is $4979. m and the total liability is $4473. 0m, so the financial leverage D/E is 4473/4979. 9=0. 898. AGL’s capital structure shows that the risk of the company is not high; there are more than 50% of asset is equity. 6 1. 4. 1. 2 Key elements of Financial Performance As the director’s report shown, during the year of 2008, AGL has focused on three key areas: improving core operations, staff engagement and positioning the Company strategically for a carbon constrained future. Their results demonstrate that they have made good progress in each of these areas.
The consolidated profit after income tax attributable to shareholders was $229. 0 million (2006/2007 $410. 5 million). The underlying net profit after tax was $355. 5 million (2006/2007 $330. 4 million). Dividends as the figure showed, which is stably paid for the shareholder each year. Final dividend of 26. 0 cents per share (100% franked) referred to in the previous Directors’ Report and paid on 28 September 2007. Interim dividend of 26. 0 cents per share (100% franked) for the six months ended 31 December 2007 paid on 16 April 2008. Final dividend of 27. cents per share (100% franked) for the year ended 30 June 2008 payable on 26 September 2008. (AGK director report 2008) All the key indicators of the profitability of AGL shows the company operation capability is still good in tough time, although the profit after income tax decreased from $410. 5m to $229. 0m. And the value given to the shareholders keeps stable. 5. 0 Elements of Property, Plant and Equipment Key elements within ‘Property, plant and Equipments’ Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. . 1. 1 Depreciation In the Note1(s), it tells the method of depreciation of PPE, and the criteria of useful life of the PPE, which complies with the AASB 116(par43-49). AGL uses the straight line method to calculate the depreciation and the related estimated useful life as follow. • Freehold buildings 50 years • Leasehold improvements lesser of lease period or 20 years • Plant and equipment 3 to 25 years 5. 1. 2 Cost In Note1(s), cost includes expenditure that is directly attributable to the acquisition or construction of the asset.
Finance costs related to the acquisition or construction of qualifying assets are capitalised. Cost may also include transfers from equity of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the consolidated entity and the cost of the item can be measured reliably. All other repairs and maintenance are recognised in profit or loss as incurred.
The standards of above which the AGL used to calculate the cost comply with the AASB 116(par11-14). 5. 1. 3 Impairment loss At each reporting date, the consolidated entity reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any) (Note1 (v)). The above rule followed by the AGL complies with AASB 136(par58-64). 5. 1. 4 Disposal groups held for sale
The rule in Note1 (p) comply with the AASB 116(par67-72). Non-current assets and disposal groups classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell. Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet. [pic] Figure 2 The elements data of above of AGL has been listed in the Figure2.
Through calculating the related items, it is easy to find the PPE Carrying Amount of the 2008 is $1821. 2m, which is the PPE book value in balance sheet. 6. 0 Intangible asset recorded 6. 1 intangible asset There are four major intangible assets reported by AGL in its annual report. They are Goodwill, Licenses, Customer relationships and contracts, and other intangible assets. 6. 1. 1 Goodwill Goodwill existed as a result of purchasing existing businesses. As this year, AGL successfully integrated the Powerdirect and SunGas retail businesses in Queensland and the Torrens Island Power Station business in South Australia.
Torrens Island Power Station’s value in supporting their integrated energy strategy was demonstrated when power demand in South Australia reached historically high levels during extreme heat conditions in February and March this year. 6. 1. 2 Licenses Licenses are carried at cost less any accumulated impairment losses. AGL have taken its first step into the geothermal energy sector with a cornerstone investment in Torrens Energy Limited, which has extensive geothermal exploration licenses in South Australia well located near established electricity transmission infrastructure.
A pilot plant could be operational within three years. 6. 1. 3 Customer relationship and contracts Customer relationships and contracts acquired in a business combination are carried at cost less accumulated amortization and any accumulated impairment losses. Amortization is recognized as an expense on a straight-line basis over the period during which economic benefits are expected to be received. Customer relationships and contracts are directly related the company’s market share in the current competitive market. 6. Intangible assets subject to impairment test Another important thing is the useful lives of intangible assets are assessed to be either finite or indefinite. Goodwill, Licenses and customers relationship and contracts are subject to impairment. 6. 3 Accounting policies relating to intangible assets According to AASB 138: – Numerous disclosures are required. Financial statements are to disclose the following for each class of intangible assets, distinguishing between internally generated and other intangible assets. Whether the useful lives are indefinite or finite and, if finite the useful lives or the amortization rates used – The amortization methods used for intangible assets with finite useful lives – The line items of the income statement in which any amortization of intangible assets is included AGL has disclosed above information of its intangible assets in its annual report. In note (24) it detailed that what the intangible assets composition and whether it generate internally or acquisitions through business combinations.
Note (24) also showed that Goodwill and other intangible assets deemed to have indefinite lives that are significant in comparison to the consolidated entity’s total carrying amount of indefinite lived intangibles have been allocated to cash-generating units (CGUs) for the purpose of impairment testing. For example, the licenses $301. 2 million (2007: $301. 2 million) to operate hydro electric power stations within the Retail and Merchant Energy CGU have been assessed as having indefinite lives.
The factors considered in determining the useful lives of these licenses are the long-term nature of the initial licenses, the expectation that the licenses will be renewed, the insignificant cost of renewal, and compliance with licensing obligations. This disclosure from note 24 is related to both (a) and (b) of AASB 138. 7. 0 Leased assets and liabilities 7. 1 Leased assets Leased assets of AGL is that the net carrying amount of plant and equipment disclosed in note (23) includes plant and equipment held under finance leases of $142. 9 million (2007: $144. million) for the consolidated entity and $nil (2007: $nil) for the Parent Entity. 7. 2 Leased liabilities Minimum future lease payments($178. 4m) includes the aggregate of all lease payments and any guaranteed residual. Also, information disclosed in note (43) the Parent Entity has no finance lease liabilities. Finance leases comprise leases of property, plant and equipment. There are no contingent rental payments due or payable and no renewal or purchase options, escalation clauses or restrictions imposed by lease arrangements concerning dividends, additional debt and further leasing.
The consolidated entity has entered into commercial non-cancellable operating leases on certain properties and other plant and equipment. Leases vary in contract period depending on the asset involved. Renewal terms are included in certain contracts, whereby renewal is at the option of the specific entity that holds the lease. There are no restrictions placed upon the lessee by entering into these leases. 8. 0 Auditor’s Information In the year ending June 2008, the independent auditing company for which AGL hired to conduct an independent auditing report was Deloitte which Partner G. Couttas signed and approved on the 2nd of September 2008.
Under s 307 of the Corporations Act the auditor’s must form an opinion, in this instance the opinion given by Deloitte was an unqualified opinion, also known as a ‘clean’ opinion. This implies that: – The financial statements are in accordance with the law, comply with accounting standards and give a fair view. – That all information, explanations and assistance necessary for the conduct of the audit have been provided. – The Financial records have been kept to enable the preparation and audit of the financial statements. – The records and registers have been kept as required by the law.
Also that this states that the independent auditing opinion presents a true and fair view in accordance with the applicable financial reporting framework and that the financial statements as a whole is consistent with the auditor’s intimate knowledge of the entity and financial condition. Conclusion As the information and figures above, it is clear that AGL Energy Limited (AGL) has followed applicable disclosure requirements of AASB standard which includes the financial statements, notes and the additional disclosures in accordance with the Corporation Act 2001,giving a true and specific view of the financial position as at 30 June 2008.
From the explanation above,it can be seem that AGL experienced a stable increase with regards to the net profit and value given to shareholers. Moreover, provided by the information with regards to the policies of PPE and the discussion between intangible asset and leased assets and liabilities,AGL can be considered to a stable and loyalty company for outsiders to invest and trust. Reference 1.
Australian Accounting Standards Board, 2008, Property, Plant and Equipment-AASB 116, Melbourne. 2. Australian Accounting Standards Board, 2007, Impairment of Assets-AASB 136, Melbourne. 3. Australian Accounting Standards Board, 2007, Intangible Assets-AASB 138, Melbourne. 4. AGL Energy Limited, 2008, Annual Report, Sydney. Appendix [pic] [pic] [pic] ———————– ACCT1110 – Accounting for Corporations – Company Analysis Page 17