Corporate Accounting Report: AGL Acquisition of Macquarie Generation

This report provides a detailed analysis of AGL's acquisition of Macquarie Generation. It begins with an overview of the acquisition, including the date, purchase price, and key assets involved, such as the Bayswater and Liddell power stations. The report examines the background of Macquarie Generation, highlighting its role as a major electricity producer in New South Wales. It then explores the rationale behind AGL's acquisition, emphasizing the strategic benefits such as increased generation capacity and market share. The implications of the acquisition are discussed, including the positive impact on AGL's gross margin and business volumes. Finally, the report addresses the accounting treatment for the acquisition, concluding that the equity method should be used to incorporate the assets and liabilities of Macquarie Generation into AGL's financial statements. The report highlights the importance of proper accounting treatment in compliance with accounting standards.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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1CORPORATE ACCOUNTING
Table of Contents
The new acquisition of Macquarie Generation..............................................................2
Background of MG........................................................................................................3
Reason of acquisition of MG.........................................................................................3
Implication of acquisition of MG...................................................................................4
Accounting Treatment for Acquisition of MacGen:.......................................................5
Conclusion:....................................................................................................................5

2CORPORATE ACCOUNTING
The new acquisition of Macquarie Generation
On 20 August 2014, AGL executed a Sale and Purchase Agreement with the New
South Wales Government to acquire the MacquarieGeneration assets for consideration
of $1,505 million including stamp duty.
The acquisition was completed on 2 September 2014, on which date AGL obtained
control of the assets. The final purchase considerationcomprised cash of $1,401
million including stamp duty of $93 million. The purchase price also included
working capital and other settlement adjustments of $104 million.
Source: AGL Energy Limited Annual Report 2015 - Notes to the Consolidated
Financial Statements, P85

3CORPORATE ACCOUNTING
Background of MG
MacGen is the largest producer of electricity in New South Wales. The assets include
the Bayswater (2,640 MW) and Liddell (2,000 MW) black coal fired power stations,
Hunter Valley Gas Turbines (50 MW), Bayswater B and Tomago development sites,
Liddell solar farm, extensive coal handling infrastructure comprising rail unloaders
and conveyor systems, 110 million tonnes of contracted coal and approximately 3.5
million tonne coal stockpile. MacGen employs approximately 660 people (full time
equivalent).
(source: https://www.agl.com.au/about-agl/media-centre/asx-and-media-releases/
2014/june/agl-given-green-light-on-macquarie-generation)
Reason of acquisition of MG
“The acquisition of Macquarie Generation is consistent with our integrated strategy
and will enable AGL to remain a robust competitor to the major electricity retailers in
New South Wales. It will also mean that the State’s largest generation assets are
owned by a company with the financial capacity and operating experience to maintain
reliability of supply, provide certainty for Macgen’s employees and provide
confidence to current and future contract counterparties.”
The MacGen power stations would give AGL ownership of the lowest cost, large-
scale baseload generators in New South Wales and would increase AGL’s registered
generation capacity by approximately 79 percent to more than 10,600 MW. This
would bring AGL’s share of generating capacity in the National Electricity Market to
approximately 21 percent and add to AGL’s diverse portfolio of renewable and
thermal generation assets.
Source: https://www.agl.com.au/about-agl/media-centre/asx-and-media-releases/
2014/feb/agl-acquire-macquarie-generation-subject-to-accc-approval

4CORPORATE ACCOUNTING
Implication of acquisition of MG
Source: AGL Energy Limited Annual Report 2015 - Notes to the Consolidated
Financial Statements, P38
According to annual report 2015, an 25.2% increase in gross margin was largely due
to the acquisition of the Macquarie Generation assets on 2 September 2014
whichprovided an additional 19 TWh of generation and margin of $407 million. The
additional generation has resulted in AGL being able to meetthe demand of its entire
customer base.
Source: AGL Energy Limited Annual Report 2016 - Notes to the Consolidated
Financial Statements, P32
In annual report 2016, Business Customers and Wholesale Markets volumes increased
5.4% due to the additional two months of large wholesale contracts from the
Macquarie Generation acquisition.

5CORPORATE ACCOUNTING
The acquisition was on a condition to win the approval from the Australia competition
and consumer commission. Moreover, the purchase was considered to give AGL a
better evade against the rising wholesale electricity prices in the market. At a time, gas
power was becoming more expensive since gas suppliers are set to be pulled into
liquefied natural gas plants. Therefore, from a competition standpoint, purchase
consideration is a good deal for AGL limited company.
Accounting Treatment for Acquisition of MacGen:
From the above discussion it can be cited that the AGL Electricity Company acquired
Macquarie Generation in 2015 for a net purchase consideration of $1308. All the
assets of the Macquarie Generation was acquired and hence it needs to be
incorporated in the books of accounts of AGL Electricity. It can also be observed that,
there is no gain or goodwill on acquisition as only the net fair value of identifiable
assets were paid as purchase consideration. Hence, the equity method of accounting
should be used, and all the assets and liabilities of the Macquarie Generation should
be incorporated in the books of accounts of AGL Electricity. It must be reported in the
consolidated financial statement along with proper notes and disclosures.
Conclusion:
From the above analysis and discussion, it can be concluded that, the acquisition of
Macquarie Generation by the AGL Electricity helped them to increase their business
operations and to improve their business volume. They have acquired all of the net
identifiable assets of the company and proper accounting treatment should be made in
the books of accounts of AGL for such acquisition in compliance with the respective
accounting standards.