? Some relief on the balance sheet — S&P today released its ratings review and has reduced the amount required to be capitalised for the payment streams in relation to the company’s wind farm PPAs. Previously, S&P added back 100% of the payment streams effectively as off balance sheet debt. This has now been reduced to 50%, effectively immediately. This has provided AGK with an additional c.$375m of balance sheet capacity for FY10 (refer Figure 1).
? Short-term capital concerns lifted — AGK currently has c.$900m of balance sheet capacity, enabling the company to proceed with over 360MW of new wind development fully debt funded. With the 365MW Macarthur (50%) wind farm conditionally committed, this allows for a further c.175MW of development.
? Legislation of RET amendments key — Nevertheless, key to AGK’s strategy is the legislation of the amendments to the Renewable Energy Target (RET) splitting the target to large scale and small scale technologies. Certainty would be required for AGK to pursue their wind strategy. The delay in CPRS will likely see higher REC prices earlier in order to provide investment signals to satisfy the RET.
? Implications from the Henry Tax Review — The higher effective tax rate imposed on CSG to LNG projects under the Henry Tax Review at the very least creates uncertainty on the economics of these projects. This may impact any negotiations that AGK may have with Shell & PetroChina with regards to potentially selling their 50% stake in Moranbah. Furthermore, higher domestic gas prices will likely also translate to higher electricity prices. The relative positioning of AGK in the longer term will depend on the implications of this to pricing peak periods in the system.
? Retain Buy / Medium Risk rating — Our target price of $16.60 and Buy / Medium Risk recommendation remains unchanged. Our valuation incorporates a 55% probability that a sale of AGK’s stake in Moranbah will be pursued.
AGK Price at posting:
$13.61 Sentiment: Buy Disclosure: Held
