equity value, page-9

Fitnfam,

Just read your post and I think you may be optimistic as to what free cash AEJ has available. The FY2010 result also has $345 million of abnormal gains from the settlement with Babcock & Brown which also needs to be taken into account in your analysis. A quick calculation of their underlying position is:

Revenue from sales = $1,428 million
Operating costs & wages = $1,261 million

Leaving an operating margin of $142 million

EBITDA is stated at $319 million - so there are obviously some one-off items in those operating costs.

Interest paid was $231 million at a concessional interest rate - leaving only $88 million. From this, you need to deduct "stay in business" capital expenditure such as turbine overhauls and the like.

The number that we always need to come back to in terms of cashflow and cash availability is the generated EBITDA - this is currently around the $310 to $320 million mark. As shown above, when you deduct interest payments and any necessary capital expenditure, this is the free cash left for amortisation of debt.

At the moment, AEJ is enjoying a concessionary interest rate - this will change in March 2011. If the lenders were charging their full risk margins on this company, interest rate on debt would be about 10% or 11% - this would absorb almost ALL free cash and leave nothing to amortise debt, and most likely would lead to the appointment of Administrators. They certainly do not have the capacity to repay $300 million of debt per annum as suggested.

So management do not have any real options at the moment other than to find asset sale or recapitalisation solutions. Yes they are probably going to have improved trading revenue performance into the future, but also must account for increased operating costs and also (now) the possibility of a carbon tax. AEJ's starting point is that it has no capacity to make any meaningful reductions in debt from cashflow and the banks will not sit around waiting for some future improved position to kick in.