Origin Energy Limited (“Origin”) today announced it has executed Sale and Purchase Agreements with the NSW Government to acquire the retail businesses of Integral Energy and Country Energy, and enter into GenTrader arrangements with Eraring Energy for a consideration of $3,250 million¹. In addition, under the GenTrader arrangements, there is a conditional amount of up to $198 million which will be payable if certain payments are ruled to be tax deductible².

Transaction highlights

• Acquisition price of $3,250 million¹
• Expected to be materially accretive to underlying EPS³ at completion
• Funded by new debt facilities which are expected to be partly refinanced with a pro-rata equity offering to be conducted within 12 months
• The transaction is currently scheduled for completion on 1 March 2011

Origin Chairman, Mr 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.

“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 5,800 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.

“On completion, this transaction is expected to be materially accretive to underlying earnings per share³, delivering immediate benefits to shareholders.

“Origin will fund the transaction with new debt facilities, which are expected to be partly refinanced with a pro-rata equity offering to be conducted within 12 months.

“These facilities will provide Origin with the financial flexibility to pursue additional growth projects,” Mr McCann said.

Assets to be acquired

Integral Energy and Country Energy retail businesses

The acquisition price of $2,300 million for the Integral Energy and Country Energy retail businesses includes the wholesale portfolio and NSW stamp duty. 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.

Following completion of the transaction, Origin’s total customer base will increase by more than 50 per cent, from 3 million customer accounts to 4.6 million. Origin’s share of electricity and natural gas mass market customer accounts in the National Electricity Market (NEM) region will increase from 20 per cent to 33 per cent.

Combined, Integral Energy and Country Energy have more than 1.6 million electricity customer accounts, 33,000 natural gas customer accounts and 9,000 LPG customer accounts.

Integral Energy has NSW’s second largest electricity customer base with an incumbent position in growth corridors in the State, along with customers across the NEM.

Country Energy has an incumbent market position in regional NSW and electricity and natural gas customer accounts in six states and territories.

In the 2010 financial year, Integral Energy and Country Energy customers combined consumed 27 TWh of electricity and 4.5 PJ of natural gas, with total revenues of $3.8 billion.

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.

Retail prices have been set in NSW for the next three years by the regulator, the Independent Pricing and Regulatory Tribunal. As a result, this transaction will not have any effect on regulated tariffs that apply to mass market customers in NSW.

Eraring GenTrader arrangements

The Eraring GenTrader arrangements will be acquired for $950⁴ million representing $313/kW and provide 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 (2,800 MW⁵ available capacity) 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 (240 MW available capacity) 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.

Benefits of the transaction

Origin Managing Director, Mr Grant King, “On completion of this acquisition, Origin will have substantial incumbent retail positions in every mainland state of the NEM which ensures Origin will be in a strong competitive position across these natural gas and electricity markets. We look forward to serving our new customers in NSW.

“Origin believes this is the last opportunity to significantly expand its domestic retail business through acquisition.

“This acquisition increases the scale and incumbency of our business, enabling the most competitive cost to serve in the market.

“The geographic diversity of Origin’s electricity supply is also expected to provide the most competitive cost of energy with a lower cost of risk management.

“To cover increased sales that arise from the retail acquisition, additional electricity would need to be obtained either from assets owned by Origin or from third parties. Origin has also entered into the Eraring GenTrader arrangements which will, in substantial part, cover these additional sales to provide long-term competitive cost of energy.

“The increases in sales that arise from this acquisition also create additional opportunities in the medium term to invest in further generation, especially for renewable energy, given the requirement of the existing Mandatory Renewable Energy Target (MRET) legislation. These opportunities add significantly to Origin’s existing portfolio of renewable generation opportunities such as wind, geothermal and hydro.

“This transaction will also create additional opportunities for growth across the Origin business,” Mr King said.

Business integration

Commenting on the integration, Origin’s Executive General Manager Energy Markets, Mr Frank Calabria said, “Origin has a successful track record in acquiring and effectively integrating retail energy businesses and new contractual arrangements.

“We welcome Integral Energy and Country Energy customers to Origin and look forward to playing a much bigger part in the NSW energy market.

“We will work closely with Integral Energy and Country Energy to ensure we effectively manage the transition of our newly-acquired customers. Under Transition Services Agreements, Integral Energy and Country Energy will continue to provide customer services, including call centre and billing services, in line with current arrangements. This means there is no immediate change for customers or employees of Integral Energy and Country Energy.

“Origin is excited about this opportunity and extending our range of products and services to NSW customers in the future.

“We are committed to delivering a high standard of service for both our new and existing customers,” Mr Calabria said.

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