Origin Energy Advanced Corporate Finance Analysis - Essay Example

?3210AFE Advanced Corporate Finance Origin Energy Executive Summary Origin Energy is engaged in producing Oil, Gas and Electri and the company isspecially recognized because of the special emphasis given by it for the renewable form of energy. Company has been well appreciated by the environmentalists because of its policy of investing capital into the fields of Solar Cell, Natural Oil, and Wind Mills i.e. renewable energy production. The financial year of 2010 has been a little fuzzy for the Origin Energy. Its underlying EBITDA increased 10% or $1.25 billion to $1.36 billion. The highest EBITDA increase was witnesses in Generation sector of the company as a 70% growth was witnessed. Origin made it generation capacity more than doubled by expanding or adding power plants in 2010. The capacity was 704 MW in the financial year of 2009; it was increased to 1620 MW in 2010. The company’s performance improved even its retail sector where a profit of $90 million to $565 million was achieved. The sale of company’s solar systems provided further profit to the company. Despite all above factors company reported a substantial decrease in Net Profit after tax as it was calculated 91% lower than the previous fiscal year, i.e. in 2009. The statuary profit was decreased to $612 million in comparison with $6941 million of the previous year. In this loss the dilution of Origin’s interest in Australia Pacific LNG alone comprised of $6411 million to that period while the net benefit in this number of items being only $27 in this year. The earnings per share for the period hence decreased to a nominal 69 cps (cents per share) from the 791 cps of last year. A final dividend of 25 cents per share was paid to its shareholders in the month of September, 2010. The company expanded its presence in south East Asia to the portfolio of oil and gas drilling. This exercise has been totally unprofitable for the company as excluding this exercise company’s underlying profit would have been up by 15% or 609 million. Apart from that Underlying Earning per Share noticed a growth of 10% as it increased to 66.6 cent per share from 60.5 cent per share, the average weighted capital base being 878 million. The main cause of such loss in company’s account will definitely be amounted because of the dilution exercise processed with the Australia Pacific LNG which definitely was a bad decision in favour of the company. (Origin Energy, 2011, Annual report) Introduction In February 2000 the Australian Conglomerate Boral Limited was demerged and its energy segment was removed from it to form a new company Origin Energy. This was done to separate the energy business from building and construction business. In the year 200 and 2001 the companied grew to a substantial size by acquiring Electricity retailers Powercor and Citypower. Till 2004 the company has further acquired 50% holding in Kupe Gas Field and 51.4% holding in Edison Mission Energy. By The month of March this year the company has bought the retail division of Country Energy and Integral Energy in $3250 million from the Govt. of New South Wales The principal activities of Origin Energy are in the fields of Oil, Gas and Electricity. The company owns Oil and Gas reserves in South Australia and Queensland. Outside the Australia also the company is intended to develop Kupe Gas Field in New Zealand. In Retail sector the company serves over three million customers’ gas or electricity in New Zealand, Australia and in the south pacific. In generation business the company generates electricity mainly natural gas. None of the coal fired power plant is owned by the company. In fields of Gas transportation and distributing Origin Energy had shareholding of 17% in Envesta Limited and 33% in SEAGas pipeline and these shareholdings were sold to APA group in 2007. The company policy of producing energy from renewable sources is well appreciated. The company is highly active in this field and have spent years of research in this field. The company does not own any equity in wind farms directly but few partially owned companies by Origin have equities in wind farms. The company has though purchased contracts for the purchase of electricity in South Australia from wind farms and in turn it is the largest buyer of the wind energy in Australia. The company is conducting research in the field of solar cell technology and is manufacturing more elegant technologies for Australian Market. The company is even active in geothermal power a bit as it owns minority stake holding in Geodynamics. Firm Structure and Corporate Governance The organization is structured very firmly against established rules. The primary governing body Board holds eleven meetings per year among them are a two day planning meeting for strategies. Additional workshops and meetings are also held for looking over the matters of particular importance. During each meeting the directors seek reports from the executives about various segments of the company including financial, operational, health, safety and environmental reports. The size of the board is decided by the directors in accordance of the company constitution which can vary from five to twelve presently. For the end of last financial year the board had nine directors among them two are executive directors and seven are non-executive directors. Among the non-independent directors six are considered independent. For determining independence of the director ASX Principles are used by the board with the operational business characteristics and relevant thresholds. Each director is reviewed by the board every year. The list of current directors comprising board along with their responsibilities is mentioned below in the table. To help the board in various activities five executive committees are formed as-. 1. Audit 2. Remuneration 3. Health 4. Safety and environment 5. Nomination and risk Each committee among these has its own charter which define its duties, responsibilities, composition, structure, operation and membership requirement Every year one third of the existing directors in the board other than the MD retire according to the constitution of the company and new directors are chosen during the general meeting by all the stakeholders. Company is been trying to constitute a new council diversity council to equalize the gender diversity in the company on both executive and non-executive label. Each Committee holds its separate operations and help maximize the profit and function most profitable as possible in terms of man power or finance (Bloomberg, 2011). Remuneration The company has an operating committee remunerating committee for looking over the issue. The pay-out is decided based upon various factors including performance measures and the overall profit earned by the company. The company also have a plan of sharing profit with its employees. The total shareholders return from the early 2000 (year) is represented in the graph. The salaries paid to the boards member is listed below in the salary along with the salaries of previous year The company follows same work same wage policy for all its employees. This holds true gender wise and with different same gender employees. The company take a good care of it work force to prevent the loss of the loss of employees who perform critical operations in the company. The remuneration policy id thus been formed accordingly. The remuneration committee provides various options to its employees to make them best utilize their work pay outs. Origin has a plan of sharing profit as well as issuing equities in turn of the cash to the employees. In the occurrence of change of control over the company there are no important changes are made usually to this wage policy. The company do not have any retention plan on the basis of the salary to defer the salary for a later time (WotNews, 2011). Apart from above mentioned usual exercise the company has an Employee share plan which enables the permanent employee of the company in the region of Australia and New Zealand to enable a win of the shares having the value of $1000 on the condition of meeting performance and output guidelines. CAPM beta and factor model analysis The company in the fiscal year of 2010 observed a uprising in the EBITDA by 10 to 15 per cent while the Net profit after taxation was severely affected because of the merger of the Australia Pacific LNG which alone comprised the ninety five per cent loss suffered by the company. The loss was further increased by the heavy rainfall which made the hydro power further cheaper thus barring the sale of energy produced by other means. Still the strong structure and policies saved the company from the complete loss and the company observed increase in its capitalization. The Capital flow, shares and changes are displayed in the table below. The cash after each financial period is shown in the table below which demonstrates the reconciliation of cash and cash equities. The cash intake and outtake analysis is presented in the table below with calculations which represents the financial status of the company with credit and debit situation with the model analysis. The sheet demonstrates a slight profit in cash intake thus some profit previous to the taxation but overall as per the audit conditions the company suffers a significant loss. The condition of the company might be termed as marginally stable on progressive grounds. The calculations show that the beta should be higher than one and should have a value from 1 to 1.2 for the calculation of WACC analysis. WACC Analysis The present WACC analysis is been presented on the basis of these parameters along with retail margin and LMRC calculations. 1. Debt Margin 2. Market Risk Premium The current debt margin range around from 2 per cent to 3.5 per cent. The debt margin range is very high so suitable consideration can be made to review the WACC analysis. The gearing ratio for the Origin Energy should be near from 20 to 30 per cent as of being calculated 40 per cent for retail and 50 per cent for the generation sector. The final selection of the beta values for the WACC calculation is also some hectic process as the calculations demonstrates that the average beta should be more than one and should rage between one and 1.2. Thus the picture presents a marginally stable WACC for the Origin Energy. The company have seriously asked questions over its WACC analysis made by various consulting companies and asked in comparison with other company’s clarification for having such a marginal condition though it cannot be refrained that the company does not have a very progressive WACC to account for. But the conditions are definitely favourable and a very positive outcome can be forecasted. Mergers and Acquisitions A well rich list of the mergers and acquisitions by the origin energy can be made as the company have a lot of investment in this field. Some of important activities are showed below 1. The company bought 40 per cent stake in Geothermal Exploration Company of Chile (http://wotnews.com.au/announcement/Origin_Energy_Mergers,_acquisitions,_takeovers/1178775/) 2. Increased stake holding in Kupe Gas Project from 31 per cent to 67 per cent in New Zealand. 3. Acquired Contact Energy Limited 4. Acquired Australia Pacific LNG Apart from the above the company holds a long list of owned entities. A brief list of newly acquired or merged entities is listed below in the table for reference. The main objective of the company behind all these mergers and acquisitions is to invest the capital for getting the maximum return of the profit in near future to maximize the growth of the company. The acquisition of the Australia Pacific LNG alone cost the company 6411 million dollar while the return from the acquired company being as low as $27 million in first year. This was the main reason of the company’s low cent per share increase though a significant increase in EBITDA gains. Previous year the company expanded its presence in south East Asia in the segments of oil and gas drilling. This exercise has been totally unprofitable for the company as excluding this exercise company’s underlying profit would have been up by 15% or 609 million. Apart from that Underlying Earning per Share noticed a growth of 10% as it increased to 66.6 cent per share from 60.5 cent per share, the average weighted capital base being 878 million. The main cause of such loss in company’s account will definitely be amounted because of the dilution exercise processed with the Australia Pacific LNG which definitely was a bad decision in favour of the company (Origin). Risk Management The company comprises of a committee which looks into the matters related to the risk and nomination. This committee is currently chaired by the MD of the organization and hence comprises a very significant part. This committee addresses issues related to safety in terms of legal, operational reputational and interest rates basis. Though certain risks are covered by the insurance but still the risks sometime may be far beyond coverage by the insurance. Its management which is responsible for the designing and implementing new schemes and making sure that they turn out to be profitable for the company. Origin lays a lot of concern in this respect as for handling this issue an entire specific organization is constituted which looks over every tiny matter and makes sure that the profit is maximized and the risk is minimized. Because of this committee operation the risks are regulated very effectively throughout in all the operations. Management reports to the risk committee about the top risks and the committee lays its recommendations in front of the board which further takes action accordingly to make sure that the risk is minimized in effective and optimum manner. The board reviews the activities of the risk committee every month to ensure no flaws have been incorporated in the decisions yet and the profit is not affected anyhow by such inappropriate decisions. Objective of the risk committee include the following areas 1. Accountability 2. Assets 3. Reputation 4. Environment 5. People 6. Customers The appropriate system laid out to assist the committee helps the organization very much to achieve its goals in very effective manner. These policies’ been mentioned in detail in Continuous Disclosure Policy of the company. Accountability – the committee makes sure that no flaws in account books of the company are undertaken which might cause harm of any kind to hinder its growth and increase any type of loss including but not limited to the financial loss. Assets- the company invest a lot of money in form of the assets owned by the organization. They all cause depreciation and in fact are main cause of depreciation along with having a definite regular cost of maintaining them. Careful observations and decisions are necessary to be made to prevent any loss in this area. The organization as well makes a lot of investment to make sure that no harm is done in form of reputation, environment, people or customers. They all are found to be a lot interconnected and thus company invest a lot of money to decrease risk factor in these fields and eventually increase the profit for its growth. (Origin, http://www.originenergy.com.au/1440/Risk-Management) Analysis of balance sheet A brief summary of the trade value of Origin Energy can be presented in following tables. They show the balance of the organization, cash inflow, capital intake and investments. A brief summary can be created based on these facts about the company’s policy, trade and profit. The tables address assets value, investment and liabilities on the company which draws the present picture of the company. In the year ended in June 2010 there was an addition of 24 million dollars in the financial instruments of the company among this money 9 million dollars were found suitable for the hedge accountancy. Remaining 15 million dollars are the profit in the areas of commodity risk management and others liable to various contracts. Among this money 18 million dollars can be accounted in favour of Origin Energy among which an expense of 6 million dollars expense is attributed to the Origin Energy. The calculated EBITDA profit, cps value and underlying EBIT for the year ending on mid 2010 is all accounted in the following tables. A clear picture of the organization may be derived out of the following tables. It shows that the company has the stable situation in terms of the profit and soon the blocked investment assets will begin to make significant inflow of cash for the increase of the profit of the company . The financial year of 2010 has been a little fuzzy for the Origin Energy. Its underlying EBITDA increased 10% or $1.25 billion to $1.36 billion. The highest EBITDA increase was witnesses in Generation sector of the company as a 70% growth was witnessed. Origin made it generation capacity more than doubled by expanding or adding power plants in 2010. The capacity was 704 MW in the financial year of 2009; it was increased to 1620 MW in 2010. The company’s performance improved even its retail sector where a profit of $90 million to $565 million was achieved. The sale of company’s solar systems provided further profit to the company (Origin Energy Limited). Despite all above factors company reported a substantial decrease in Net Profit after tax as it was calculated 91% lower than the previous fiscal year, i.e. in 2009. The statuary profit was decreased to $612 million in comparison with $6941 million of the previous year. In this loss the dilution of Origin’s interest in Australia Pacific LNG alone comprised of $6411 million to that period while the net benefit in this number of items being only $27 in this year. The earnings per share for the period hence decreased to a nominal 69 cps (cents per share) from the 791 cps of last year. A final dividend of 25 cents per share was paid to its shareholders in the month of September, 2010. The factors in which the company made investments and caused her immediate loss are about its investments made into Australia Pacific LNG. To acquire this company the company invested a lot of money and the return in first year was very low, though the investment is certainly going to make the company’s profit in future years a very strong and substantial. With current market conditions taken into account a safe assumption can be made that the company is expected to grow by 30 per cent in relatively to its previous year EBITDA. The net debt increase has already been up to 2.8 billion dollar including operational retail and interest charges. Though with all these projects into operation a sound amount of profit will soar in and the capital trapped in construction will start to release. The company is positively interested in making investment for the future progress of the company. by this we can safely assume that the expenditure of the company is likely to grow while the profit will be increasing at a stable rate. As the company start receiving output from its current under progress projects the profit will and capital intake will go high and the earning per share will increase too strongly. The company has announced to make an expenditure of around 170 million dollar in its forth coming projects. Thus it will be mainly expenditure in the first half of the fiscal year. Though the company safely assumes that few investment programs of the company may turn out to be wrong and thus accumulate the profit by all risk factors. These expected losses are calculates in future underlying EBITDA. Outlook Origin Energy has entered into the financial year of 2011 with a promising growth in its Underlying businesses, with a strong financial sheet and continual opportunities in the business to demonstrate. The company has utilized very effectively it’s all the assets and benefits to develop in term of growth and financial stability. A number of development projects been laid out with acquisitions to increase and stabilize Origin Energy’s performance. The contribution includes Kupe Gas Project in as distant as New Zealand while increasing the equities from 31 per cent to 67 per cent in Otway Gas Project by the mid-2010. Throughout the last year contributions from the 630 Megawatt Darling Downs Cycle power plants which commenced operations in mid-2010, along with the 126 megawatt Stuart power station after an extended extension made a great input. The 550 Megawatt Mortlake power stations are currently under development and is anticipated with high hopes. Contact Energy Ltd has increased its earning via investments which in turn will help reduce the loss and exposure due to heavy rainfall An increase is been observed in CSG production which is accounted to reach over 100 PJ per annum in the fiscal year of 2011 which is holed by Australia Pacific LNG. All these projects are sure to provide a nice cash flow for the company to increase its profit and capital intake. The underlying EBITDA is accumulating to increase very positively due to these projects. This will help a lot to the company to supress the depreciation and other expenses. The company is positively interested in making investment for the future progress of the company. by this we can safely assume that the expenditure of the company is likely to grow while the profit will be increasing at a stable rate. As the company start receiving output from its current under progress projects the profit will and capital intake will go high and the earning per share will increase too strongly. The company has announced to make an expenditure of around 170 million dollar in its forth coming projects. Thus it will be mainly expenditure in the first half of the fiscal year. Though the company safely assumes that few investment programs of the company may turn out to be wrong and thus accumulate the profit by all risk factors. These expected losses are calculates in future underlying EBITDA. With current market conditions taken into account a safe assumption can be made that the company is expected to grow by 30 per cent in relatively to its previous year EBITDA. The net debt increase has already been up to 2.8 billion dollar including operational retail and interest charges. Though with all these projects into operation a sound amount of profit will soar in and the capital trapped in construction will start to release. Thus the profit will account as high as around 15 per cent in respect to the previous year and a operational cash flow of one billion dollar. The company presents a range of opportunity as far as the profit is concerned in near future though some fuzzy time might be faced because of the huge investments going on over various projects. There might be a significant value addition in the value of the shares for the stakeholders though a careful inspection of the trade is necessary because of the company is highly active profile which might even turn out to be negative as the company itself partially predicts. The company has made a lot of money investment into Australia Pacific LPG which has not yet produced any capital to the company relatively the capital spent though a nice amount will be observed inbounding through this company very soon in time (WotNews, 2011). Origin is trying to improve its retailing system to increase the profit and efficiency which will optimize the cost and profit ratio in favour of the company. With the promise of engaging newest technology for serving the customers the Origin Energy makes a lot of promises to the stakeholders and customers. The company’s assurance of following the steady path of developing the renewable energy in productive manner gives the faith and wins appreciations of the environmentalists too; though with a general assumption of profit the company still have some risky grounds as it is making a lot of investment in buying equities in various companies. This can be referred as the progressive phase of the company and the company might get the advantage of the increasing demand of the energy in both Australia and New Zealand. All these conditions provide the company very progressive and definite grounds to grow and invest boldly into further business activities primarily into the acquisitions of stakes in compatible companies. Conclusion Origin Energy is a profitable business overall but have suffered a great expected EPS. Origin Energy has provided a lot of stock options to its shareholders to maximise their profit and increase the value. Despite the bad decision made for merging some organizations the company observed a significant 10-15% in EBITDA. Because of the substantial loss faced by the organization the increase in the profit per share is barred to a mere 10 cps which while being dissatisfactory is a progressive one. With some calculative measures to apprehend the merger profit, the profit can be hugely maximized. The stakeholders trust in the organization with the faithful dividend policy helps the organization get hold on market condition. The company is definitely trying very hard to increase its profit per share and provide the customers and shareholders a very strong cause to help them make profit. The company had been very successful so far. The brave moves made by the company by investing in various companies to acquire them show the confidence of the managing board in understanding the market and yet further the financial analysis also shows a nice sign of progress and beta is also progressive. WACC is marginal and the executive and remuneration model helps to achieve the company some profitable condition. References WotNews. (2011). Origin Energy Mergers, acquisitions, takeovers. WotNews. Retrieved from http://wotnews.com.au/announcement/Origin_Energy_Mergers,_acquisitions,_takeovers/1178775/ Origin Energy, 2011, Annual report Origin Energy Limited. Electronic. Retrieved from http://www.originenergy.com.au/files/MDAFINAL.pdf Bloomberg. (2011). Bloomberg L.P. Retrieved from http://www.bloomberg.com/apps/quote?ticker=ORG:AU Origin. Risk Management. Origin. Retrieved from http://www.originenergy.com.au/1440/Risk-Management Read More