Market convergence

Origin Energy executed sale and purchase agreements with the NSW Government worth $2.3 billion to acquire the retail businesses of Integral Energy and Country Energy in December 2010.

Origin also entered into GenTrader arrangements with Eraring Energy for the rights to capacity from the 2800 MW Eraring and 240 MW Shoalhaven power stations for $950 million. Under the GenTrader arrangements a conditional amount of up to $198 million will be payable if certain payments are ruled to be tax deductible.

Origin will acquire the retail businesses of both Integral Energy and Country Energy including customer and supplier contracts, working capital and intellectual property, including brands. The transaction does not include the acquisition of retail legal entities or employees.

Combined, Integral Energy and Country Energy have more than 1.6 million electricity customer accounts, 33,000 natural gas customer accounts and 9000 LPG customer accounts. Following completion of the transaction, Origin’s total customer base will increase from three million customer accounts to 4.6 million.

Origin managing director, Grant King said the transaction secured Origin’s position as Australia’s largest energy retailer with a diverse generation portfolio.

“From our point of view it fits our business very well. It has a substantial overlap with the underlying gas distirbution system, for example, but for a number of reasons Country Energy chose not to compete in the gas space and quite clearly we can bring that competition to the business because Origin is quite clearly capable of competing in the gas market. We find that opportunity very attractive,” Mr King said.

Mr King said it was important to note that the transaction would have no price impact to customers until the next Independent Pricing and Regulatory Tribunal (IPART) determination.

“So there will be no impact, in our view, as a result of this transaction on prices to the extent that those price caps exist, but we do expect that the market for electricity and gas in New South Wales will become more competitive. We think that, of course, will be of substantial benefit to consumers,” Mr King said.

Mr King said it was well known that Origin is still considering a number of other major capital investments and projects.

“We will in the new year (2011) consider an equity raising in that context to what our future capital requirements are and we will advise at that time,” Mr King said.

Mr King said Origin’s journey of consolidation started in 1999 when it purchased a Victorian gas power station and has held its market position while making a series of acquisitions while responding to competition.

“That begun a journey for us which has seen us grow our market share from 4 per cent and (being) maybe sixth or seventh or eight as a market participant, to now having a 33 per cent share of national – without meaning Western Australia – gas and electricity customers and the leading retail position in the market,” he said.

Origin chairman, Kevin McCann said the acquisition is a transformational event in the growth of Origin.

“The acquisition of Integral Energy and Country Energy’s retail businesses and the Eraring Energy GenTrader arrangements secures a leading position for Origin in NSW, the nation’s largest energy market. It also enhances Origin’s position as the leading Australian integrated energy company,” Mr McCann said.

“Following completion of the transaction, Origin will be Australia’s largest energy retailer with 4.6 million customer accounts and will have one of the country’s largest and most diverse generation portfolios with more than 5800 MW of capacity, through either owned generation or contracted rights.

“The businesses and arrangements are complementary to Origin’s existing business, increase the scale and diversity of Origin’s retail customer base and generation capacity and continue to deepen the integration of Origin’s business. The transaction will also provide a strong platform from which to further grow the business.”

Movements in working capital until the completion date will be adjusted in accordance with the sale and purchase agreements. The combined mass-market retail business has been acquired for $1,282 per customer account. The cost of the combined wholesale portfolio is valued at $0.35 per MWh.

The Eraring GenTrader arrangements provide $313/kW flexible baseload and peaking generation capacity at a significant discount to the ‘new entrant’ cost to build.

Eraring Energy’s operations include the Eraring power station on the western shore of Lake Macquarie, 30 km south-west of Newcastle on the NSW Central Coast, and the Shoalhaven Scheme in the NSW Southern Highlands. The Shoalhaven Scheme consists of two pumped storage hydro power stations Bendeela and Kangaroo Valley. Together, the Eraring and Shoalhaven facilities currently supply approximately 7 per cent of annual energy to the NEM.

Under the GenTrader arrangements, Origin will supply the fuel, pay the agreed charges and have the right to dispatch and sell electricity output while Eraring Energy will own, operate and maintain the power stations.