AGL Energy Limited | Corporate Accounting Group Assignment

Company- Introduction, Business & operating activities, Finances and Financial performance

Core business of the AGL and Its Business segments

The core business activity of AGL are the activity of energy enterprises and investments including electricity generation, gas storage and the sale of gas and electricity to residential, wholesale customer and industrial. There were no major changes in the key business activities of AGL for the annual year 2019.

AGL operates its business in four main operating segments: Wholesale Markets, Customer Markets, Group Operations and Investments.

Wholesale markets

It comprises of wholesale of electricity and gas. And it also comprises Eco markets. Wholesale markets are responsible for administering the associated price risk with gas and electricity so that it would supply to customers and to handle AGL’s responsibilities with respect to renewable energy schemes. Wholesale markets also monitor the dispatch of the generation assets owned and contracted by AGL, and the related portfolio of energy hedging goods.

Customers markets

It comprises of the portfolios of consumers and large business clients and its other function is to retail electricity, gas, solar and any other energy efficient products or services to its large or small business customers and residentials. Customer markets generate their energy from wholesale markets at a transfer price based on methodologies that reflect the prevailing conditions of the wholesale market and other energy costs in each state. It also includes the function of product innovation, sales distribution, marketing, brand and the operational activities.

Group operations

It consists of portfolio of AGL’s power generation and the operational activities in its key sites across the Thermal, Renewable, Natural gas and other business unit.

 Investments

Investments comprises AGL’s interests in the ActewAGL Retail Partnership, Powering Australian Renewables Fund (PARF), Advanced Microgrid Solutions Inc, Energy Impact Partners’ Fund, Activate Capital Partners, Solar Analytics Pty Limited, Sunverge Energy Inc and Ecobee Inc.

(AGL Annual Report , 2019)

Industry outlook

AGL is operating in the industry of utilities and it is the second largest company in terms of costumer accounts (3.7 million) and market share (21.2%) in the utilities industry. Its main competitors are Origin energy, Energy Australia and Ergon energy. Currently, Origin energy is leading with the market share of 28.1 %. (The largest energy companies in Australia, 2020)

Internal and external sources of finances

The internal sources of finances for AGL are cash in hand, disposal of assets and cash it generates when it receives payments from its customers.

The external sources of finance for AGL are equity and debts. It generates equity investments through individual shareholders. It had 114,217 individual shareholders which include both primary and ordinary shareholders. Most of the shareholders had super funds or they invest through largest pension funds. AGL usually generate debt investments or loans from banks. It also establishes bond issuance program in both the US Private Placement and Australian Medium-Term Note markets which allow them to fund from long term or competitive market. (AGL Annual Report , 2019)

Key elements of Financial Performance reported by the AGL in the annual report

The key elements of financial performance for this annual year:

• AGL retained a healthy balance sheet aligned with a Moody’s Baa2 credit rating, with a gearing of 23.5 percent at 30 June 2019 and enough headroom entering FY20.
• AGL is consistent with its dividend policy as it maintains dividend of 2 cents per share just like last year. Moreover, AGL ‘s dividend policy is to set a payout ratio of 75% of the underlying annual income after tax and an 80% franking minimum. Total dividends declared at $781 million for the year were 1.8 per cent higher than in the previous year, in line with AGL ‘s growth in profit.
• In Fiscal year 2019 AGL divested non-core assets completing the sale of a small-generation portfolio and compressed natural gas refueling assets, known as the portfolio of AGL’s National Assets. The gain on this divestment for AGL was $37 million.
• AGL has continued to ensure that all the projects it undertakes as part of their investment plans are incrementally positive for shareholder value. That included investments of $388 million for growth and transformation expenditure. This included investing in the Barker Inlet power station, upgrading to Loy Yang A and Bayswater power stations, completing our Customer Experience Transformation program and upgrading to our enterprise resource planning (PT3) system.
• AGL has redeemed subordinated notes worth $650 million for 11 June 2019 making use of cash reserves and current debt settlements. A buy-back of on-market shares was announced for FY20.

(AGL Annual Report , 2019)

Changes in accounting policies disclosed in the annual report

AGL introduced AASB 9 Financial Instruments and AASB 16 Leases and reaffirmed comparative figures for 2018 to reflect the incorporation of these new standards. Moreover, AGL also introduced AASB 15 Revenue from Contracts with Customers which did not have such material impact in books of accounting. (AGL Annual Report , 2019)

Assets – PPE and Intangibles

Property, Plant and Equipment

The total net carrying amount of PPE is $ 6,588 million which consist of four items plant and equipment of $ 6,295, Right-of-use plant and equipment of $5 million, other items (land, buildings and leasehold improvements) of $92 million and right of use other of $196 million.

The accounting policy (AASB 116 or IAS 16) used for property, plant and equipment is based on cost less accumulated depreciation and accumulated impairment loss. Costs include expenses directly attributable to acquiring or constructing the asset. Finance costs associated with purchasing or building eligible properties are capitalized. Cost also include those gain or loss which arises when plant and equipment are transferred through cash flow hedges of foreign currency purchases. The straight-line depreciation method had been used for property, plant and equipment so as to write off the cost of each asset over its expected life to its estimated scrap value. The approximate useful lives, residual value and depreciation method is checked where it is appropriate, and it is adjusted at the end the reporting period.

The following estimated useful life have been used for assets in property, plant and equipment while calculating depreciation:

• The estimated life of freehold building was up to 50 years.
• Lesser of lease period was considered or up to 50 years.
• The estimated life of plant and equipment was up to 50 years.

Moreover, AGL checks the carrying value of property, plant and equipment at the end of each reporting period so that it would decide whether there any remain indication that there was an impairment loss for such assets. If some such evidence occurs the asset’s recoverable amount is estimated for the degree of the impairment loss (if any). Where estimating of the recoverable amount of an individual asset is not possible, AGL estimates the recoverable amount of the cash-generating unit to which the asset belongs. Furthermore, the impairment loss was combinedly accumulated with depreciation so that’s why there is no specific amount given for impairment loss in annual report of AGL. (Australian Accounting Standards Board, 2019)

Intangible assets

The total net carrying amount of overall Intangible assets is $3740 million which consist of four intangible assets namely Goodwill of $2866 million, software of $503 million, licenses of $304 million and others of $67 million. Goodwill and other intangible assets like licenses seem to have indefinite life so their carrying value will be of significant value due to their indefinite life period. AGL allocated these intangible assets in cash generating unit so that impairment would be tested. The accounting policy (AASB 138 or IAS 30) of intangible assets is such that it is measured initially at cost when it is acquired. The cost of an intangible asset acquired in a combination of company is its fair value as of the acquisition date. Intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses following initial recognition. The useful life of intangible can either be finite or infinite. Indefinite intangible assets are evaluated for impairment, at least annually. If there is a possibility of loss of the intangible assets so finite intangible assets are amortized over their expected useful life and are checked for impairment. The method of amortization and expected useful life was reviewed at the end of the reporting period. So, the following useful life are used in calculation of amortization of each intangible asset:

• 3-20 years were allocated for customer relationships and contracts
• 3-7 years were allocated for software
• the lesser of license term and asset useful life for licenses

Furthermore, AGL determines whether, at least semi-annually, goodwill and other intangibles with indefinite useful lives are impaired. This includes an evaluation of signs of impairment and an estimation of the recoverable amount of cash generating units using a discounted model of value in use to which goodwill and intangibles with indefinite useful lives are attributed. The impairment loss was combinedly accumulated with depreciation so that’s why there is no specific amount given for impairment loss in annual report of AGL for intangible assets.

(Australian Accounting Standards Board, 2019)

Research Component 

Communities and relationships

AGL is involved in different activities of public policy development. They want to inform their shareholders that they are following government processes and policies just like they introduced the online channel named “The Hub”. The main purpose of this channel is providing energy knowledge or the information regarding how the energy industry works to Australians. Moreover, AGL also adopted political donations policy which prohibits AGL from making political donations. AGL invests in the communities they work in through local recruitment, local job opportunities, a coordinated network of investments in community   and opportunities to volunteer with charitable or community-based organizations for AGL employees. The community contribution for the FY 2019 was $4.5 million. (AGL Annual Report , 2019)

Environment

AGL acknowledges the scientific consensus on climate change and supports it. They recognize that a gradual decarbonisation of the electricity generation sector is required by 2050 in order to remain at concentrations consistent with two degrees Celsius or less of global warming. Their commitment to moving towards a low-carbon future is set out in the AGL’s Greenhouse Gas Strategy, which provides the framework through which their greenhouse gas mitigation efforts are organized. Due to an increase in renewable energy generation AGL manage to reduce Greenhouse gas emissions in FY 2019. (AGL Annual Report , 2019)

The HUB

It is the online channel introduced by AGL to address the Australians about the energy knowledge, how the energy industry works, how it is affected due to technology advancements, regulation imposed by government and expectations of the customers. The valuable and reliable data will be explained to people which consists of topics like generation, innovation, people etc. through infographics, videos and podcasts. AGL’s main purpose of this channel was to make energy industry future more sustainable in Australia which would help community overall. This channel proves that AGL puts community over its profits and it wants to improve environment and community. (The Hub AGL, n.d.)

Importance of corporate social responsibility and sustainability in modern world

Today, if someone is the owner of the business so he must know that days where business is only operating for profits are gone as most of the businesses are focusing on Corporate social responsibility. CSR is where a business operates in sustainable and ethical way so that it would deal with the environment and community. It means business must give considerations to human rights and to environmental problems. The 2015 Cone Communications/Ebiquity Global CSR study found that 91% of the global consumers expect business to operate in a way so that it would address social and environmental issues. These numbers suggest that the awareness of the importance of social responsibility has been increasing among the consumers. CSR reveals your business that takes an interest in broader social problems, rather than just those that affect the profit margins, attracting consumers who hold the same values. So, it is good if businesses operating in sustainable way and applying ethical practices. (Collier, 2018) , (Why Corporate Social Responsibility Matters in Today’s Society) and (Nafi, 2018)

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References

(2019). AGL Annual Report . AGL.

Australian Accounting Standards Board. (2019). (Australian Government ) Retrieved from Australian Accounting Standards Board: https://www.aasb.gov.au/

Cansster blue. (2020). Retrieved from Canster blue: https://www.canstarblue.com.au/electricity/largest-energy-companies-australia/

Collier, E. (2018). The Importance of Corporate Social Responsibility for Your Business. hub. Retrieved from https://www.highspeedtraining.co.uk/hub/importance-of-corporate-social-responsibility/

Nafi, J. (2018, September 19). Transparent hands. Retrieved from Transparent hands: https://www.transparenthands.org/the-importance-of-corporate-social-responsibility-csr-in-todays-business/

Ohio University. (n.d.). Retrieved from Ohio University: https://onlinemasters.ohio.edu/blog/why-corporate-social-responsibility-matters-in-todays-society/

The Hub AGL. (n.d.). Retrieved from The Hub AGL: https://thehub.agl.com.au/about