AGL Energy Ltd
ASX:AGL
Earnings Call Analysis
Q4-2023 Analysis
AGL Energy Ltd
Damien Nicks, the CEO of AGL, has laid out a strategic plan aimed at connecting customers to a sustainable future by helping them and the company itself to decarbonize. AGL is engaging in substantial renewable energy initiatives, aiming to supply 12 gigawatts of new generation and firming capacity by the end of 2035 to reshape its energy portfolio.
During a period marked by cost of living pressures, AGL has increased customer support funding to at least $70 million for the next two years, also providing up to $400 million through the Staying Connected hardship program. The company is employing advanced analytics to proactively engage with customers in hardship, improving the effectiveness of communication and support.
AGL reported an underlying profit after tax of $281 million, up by 25% compared to the prior year, with high wholesale electricity and gas prices driving financial gains. However, a statutory loss of $1.264 billion was recorded, influenced by impairments and adverse movements in fair value financial instruments.
Reflecting the positive financial outcomes, AGL declared a final ordinary dividend of $0.23 per share, totaling $0.31 for the 2023 financial year, which is a 19% increase from the previous year.
AGL recorded strong organic growth across energy and telecommunications despite challenges, with the equivalent availability factor for AGL's generation portfolio indicating an improvement in plant availability.
AGL completed a partial refinancing of debt and introduced a $500 million green CapEx loan to fund new and existing low-carbon initiatives. The company is investing in its development pipeline, PPA agreements, and e-mobility partnerships to enhance customers' sustainability outcomes.
Despite a rise in low-impact injuries, AGL is reinforcing its safety measures and encouraging reporting to prevent injuries, while continuing to invest in customer and employee satisfaction.
AGL has managed to retain its top brand awareness position in energy and aims to grow its customer base and offer services that support electrification and decarbonization, also expanding Australia's largest demand response program.
The investment in decentralized assets and artificial intelligence has grown significantly, with green revenue from customer markets forming over 20% of total revenue. The plan includes enhancing the commercial availability of AGL's thermal fleet and maintaining earnings guidance for FY2024.
AGL has experienced a beneficial effect from higher global gas prices, contributing to positive financial shifts. An anticipated uplift in operating costs for FY2024 is expected to correlate with CPI adjustments, competition, and investment in the business transformation.
AGL is allocating capital towards business transformation while maintaining core operations. Investments in the transformation are expected to drive higher depreciation and amortization over the medium-term, with strong cash flow generation signaling a stable financial standing. FY2024 earnings guidance has been maintained with an anticipated material uplift.
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Thank you for standing by, and welcome to the AGL Energy 2023 Full Year Results Briefing Conference Call. All participants will be in listen-only mode. There will be a presentation followed by a question-and-answer session.
I would now like to hand over the conference to Managing Director and Chief Executive Officer, Mr. Damien Nicks. Please go ahead.
Good morning, everyone, Damien Nicks speaking. Thank you for joining us for the webcast of AGL's full year results for the financial year 2023. I'd like to begin by acknowledging the traditional owners of the land I'm on today, the Gadigal people of the Eora Nation and pay my respects to their elders past, present and emerging. I'd also like to acknowledge the traditional owners of the various lands from which you're all joining from and any people of aboriginal and Torres Strait Islander origin on the webcast.
Today, I'm joined by Gary Brown, Chief Financial Officer; Jo Egan, Chief Customer Officer; and Markus Brokhof, Chief Operating Officer. I'll get us started, and we'll have time for questions at the end.
Before I cover the results, I wanted to recap our refresh strategy and our accelerated decarbonization plan, which we announced last September and discussed in greater detail at the Investor Day in mid-June, which has collectively reset market confidence and the outlook for AGL. We have a clear strategic plan to connect our customers to a sustainable future, helping them to decarbonize the way they live, move and work as well as to transition to a lower carbon energy portfolio, underpinned by an ambition to add approximately 12 gigawatts of new generation and firming by the end of 2035.
AGL has a leading and trusted brand and our customer markets business is positioned well to navigate, grow and thrive in a complex energy retailing market, pursuing the focus areas outlined on the left-hand side of the screen. Importantly, the delivery of our 12 gigawatt ambition of new renewable and firming assets is underpinned by strong development optionality and the near-term focus for integrated energy will be the execution of our expanded 5.3 gigawatt development pipeline, all while delivering operational and trading excellence and maintaining safe operations.
This is all supported by robust financial stewardship, most notably a refreshed capital allocation framework to prudently allocate capital to the transformation of our business, strengthen core operations and drive shareholder returns.
First and foremost, I'd like to talk about our customers and address how we are supporting them through the current period of cost of living pressures. As Jo Egan, our Chief Customer Officer, mentioned at the Investor Day, we've committed to increasing our customer support funding to at least $70 million for the next two years. This is in addition to the government energy bill relief fund and includes up to $400 million of bill relief for our most vulnerable customers on the Staying Connected hardship program. We are using advanced analytics to identify and proactively engaged with our customers, who maybe facing financial hardship, offering them guidance and support at an early stage, as well as referrals to relevant government and consumer assistance programs.
We are also investing in specialized training for our contact center agents, to improve the effectiveness of communications with customers facing financial hardship. Our strong collections performance in recent years, should position us well to manage this challenging period, and we are drawing on learnings from the past, where we are seeing high energy prices to ensure that we can support our customers and carefully manage our costs.
Turning now to our full year results, which overall reflect the materially improved second half due to increased plant availability as we forecast at the half year. Underlying profit after tax was $281 million, 25% higher than the prior year. The stronger financial result reflects higher wholesale electricity and gas pricing realized in earnings, partly offset by increased operating costs and lower generation volumes due to the prolonged outage of Loy Yang A Unit 2, which was caused by a generator rotor defect and also the closure of the Liddell Power Station in April 2023.
Our statutory loss of $1.264 billion was impacted by $680 million of impairment charges due to the targeted early closure dates of our thermal assets and a negative movement in fair value financial instruments of $890 million.
A final ordinary dividend of $0.23 per share has been declared, unfranked, bringing the total dividend for the 2023 financial year to $0.31 per share, an increase of 19% on the prior year. Pleasingly, customer markets recorded strong organic growth across both energy and telecommunications in a challenging year for the energy retailers. Up 56,000 in customer services, with our strategic Net Promoter score remaining in a healthy position of plus five.
Despite the challenging start to the year in terms of fleet performance, we've certainly had a much stronger performance across the portfolio for the remainder of the year, recording an equivalent availability factor of 76.8%, which is higher than the previous two financial years and the benefit of the investment and flexibility in our fleet is now clearly evident.
At our Investor Day in June, we announced an expected uplift in earnings. We've maintained FY2024 earnings guidance and I'll discuss this further at the end of the presentation. I'll also touch on market conditions in my closing remarks.
As I mentioned at Investor Day, we are certainly building positive momentum across the business and the market, as we forge ahead with the transformation of AGL. And this slide demonstrates key highlights and achievements since we announced the outcomes of our review of strategic direction in September last year. I won't speak to all of these, but we'll highlight some key milestones.
Starting from the left, last September, we announced a refresh strategy in one of the most significant decarbonization initiatives in Australia. This included the accelerated closure of Loy Yang A, together with our ambition to supply 12 gigawatts of new generation and firming capacity by the end of 2035, which will reshape AGL's generation portfolio.
Our inaugural Climate Transition Action Plan was endorsed by shareholders at the 2022 Annual General Meeting and the board renewal process was completed following the election of four new highly experienced non-executive directors. Our executive team is also settled and all permanent appointments finalized following the appointment of Suzanne Falvi as Executive General Manager of Corporate Affairs in May.
In April, we successfully completed a partial refinancing of our existing debt facilities and priced new long-term debt in the U.S. private placement market. A key point to note is that these facilities included a $500 million green CapEx loan with five and seven-year maturities, which will be used to fund existing and future low-carbon projects. Our weighted average tenor of debt increased materially, and we expanded our lending group of both domestic and offshore banks.
Late April also marked the first key milestone of our key decarbonization pathway, with the safe and the respectful closure of the Liddell Power Station after almost 52 years of operation. This is expected to deliver an average annual emissions reduction of eight million tonnes of greenhouse gas emissions from FY2024.
And finally, at our Investor Day in mid-June, we had the privilege of sharing further detail on our business strategies and our accelerated decarbonization plan, driving market confidence in AGL's direction through the transition. We also announced an over 60% increase in our development pipeline to 5.3 gigawatts, a new 15-year power purchase agreement with Tilt for almost 180 megawatts from the Rye Park wind farm, as well as competitive gas agreements with Cooper Energy, Senex and ExxonMobil.
In line with our ambition to help customers decarbonize, we were excited to share a new e-mobility partnership with bp pulse, providing EV customers with a convenient and integrated smart charging experience at home and when they're on the road. We also discussed how our leading position in commercial energy solutions is enabling us to capture value through energy-as-a-service at scale in a rapidly growing market.
The Kerarbury Almond Farm in New South Wales is a great example where AGL designed a low-carbon microgrid, and once constructed will help lower the customers' energy costs, provide price certainty and help improve their reliability and their sustainability outcomes. Overall, we're in a strong position to deliver on our long-term ambitions for AGL, supported by the strength of our underlying business, defined business strategies and decarbonization plan, and highly experienced board and management teams in place.
Moving now to our safety, customer and employee metrics. Disappointingly, our total injury frequency rate increased to 2.8 per million hours worked, reversing a downward trend since FY2020. This was largely driven by an increase in low-impact injuries. As always, the safety of our people and the safe and reliable operation of our assets is our number one priority and in response to this increase, we've bolstered our focus on preventing common injuries before they occur and continue to encourage our employees and contractors to report all events that have the potential to cause an injury.
I've already spoken to our strategic NPS score, which remains in a strong position at plus five. Encouragingly, we've had a material improvement in our employee engagement score across the business, as we pursue a refreshed strategic objectives and improved operational performance.
Turning now to a more detailed discussion on customer markets performance, which was underscored by services growth, a focus on value and improved customer experience. Total services to customers increased 56,000 to 4.3 million, delivered through both energy and telecommunications services growth. Pleasingly, discipline management and scaling of growth business areas, including telecommunications and business energy solutions, delivered a $96 million improvement to gross margin. We've also maintained our number one brand awareness position in energy and launched our new brand platform, Join the Change.
Looking forward, we'll continue to responsibly grow our customer base, whilst prudently managing margin and carefully responding to anticipated increase in customer activity in a high inflationary environment as customers respond to cost of living pressures. We also delivered improved retention with a churn spread improving to almost 4.5 percentage points, an excellent result supported by our continued focus on customer experience, evidenced by the lowest market complaint volumes and a leading digital app. Encouragingly, underlying operating costs are broadly stable, excluding the impact of net bad debt expense.
Looking forward, as Gary will discuss, we do expect an increase in overall operating costs associated with higher revenue and its impact on net bad debt expense and the transformation of our business as well as the impacts of inflation.
One of our key ambitions is to be a partner of choice for customers, as they electrify and decarbonize. Significant progress has been made in our priority areas, with good momentum achieved in accessing future value pools. We are already a leader in energy solutions for our residential customers and continue to build out our offerings. We've seen a material increase in carbon neutral services and continue to scale Peak Energy Rewards Program, Australia's largest demand response program.
Moving to the next pillar, AGL is actively unlocking access to e-mobility. I've already mentioned our partnership with bp pulse, which will provide charging solutions for our customers, whether they are at home or on the go. Our EV subscription service is currently the largest of its kind in Australia, and we are facilitating smart charging trials to learn more about the flexibility management and capture home charging consumption.
We're also driving commercial decarbonization at scale. AGL has maintained market leadership in the commercial solar space, delivering 3x more solar than the nearest competitor. Beyond solar, we've seen a material increase in our commercial assets under monitoring and management. We've also executed multiple energy-as-a-service arrangements, entered into long-term renewable supply deals and commissioned a two megawatt hour battery for essential energy.
Underpinning this, we continue to invest in our customer base, our operations and our decarbonization objectives to build a future ready business. Decentralized assets' under orchestration is 47% higher, and the power of technology in automation is being harnessed with over five million transactions managed by artificial intelligence. Additionally, we continue to grow our decarbonization portfolio, with customer markets green revenue now representing just over 20% of total customer markets revenue.
Moving now to fleet performance and operations, headlined by stronger overall availability across a generation fleet. Starting on the left-hand side, commercial availability of our thermal fleet was up over five percentage points, despite the impact of the prolonged Loy Yang A Unit 2 forced outage. This was driven by a reduction in forced thermal outages compared to the prior year, a testament to the ongoing investment to improving thermal fleet availability and reliability, particularly enhanced by preventative maintenance on mills, precipitators and boilers. We've also completed minimum load testing at Bayswater and Loy Yang A, which I'll speak to shortly.
Volatility captured through trading was broadly flat in the prior year. As discussed in February, the first half was impacted by significant market disruptions and weather events driving forced thermal outages across the NEM. Volatility captured in the second half was 14 percentage points higher than the first, supported by improved coal fleet availability.
Normalized for Liddell Power Station, which closed in April, generation volumes were down 4.5% due to forced outages across the remainder of the generation fleet, marginally offset by high solar and hydro generation volumes. As mentioned at the beginning, we achieved an equivalent availability factor across the fleet of 76.8%, 2.3 percentage points higher than FY2022, a good achievement overall considering the impact of the prolonged Loy Yang A Unit 2 outage.
As you can see on the right-hand side of the graph, a stronger EAF was driven primarily by a reduction in thermal unplanned outages in FY2023, particularly in the second half, denoted by the purple shaded bars.
I'll now take a moment to discuss our flexibility upgrades at Bayswater and Loy Yang A, which are delivering operational, environmental and financial benefits for AGL. As intermittent renewable generation progressively enters the NEM, the ability to flex our thermal fleet enables us to manage the impacts of lower customer demand or negative pool pricing during daytime periods of peak solar generation. This is illustrated by the graph on the right-hand side, which shows a duck curve from a typical mild summer's day in New South Wales with high solar generation during daytime hours.
Importantly, our Bayswater and Loy Yang A units can be flexed down approximately 70% and 45% respectively of their nameplate capacities and we have plans to lower the minimum generation levels of the Loy Yang A units by a further 50 megawatts each in FY2024.
Flexibility upgrades at Bayswater, delivered approximately $7 million of gross margin benefit in FY2023. Through lower coal usage and by avoiding uneconomic running, approximately 60 kilotons of carbon emissions were also abated. A key point I'd like to highlight here is that we are not flexing the Bayswater and Loy Yang A units beyond their original design parameters, but rather investing in the technology and the assets we have to operate more efficiently as a response to the transition and renewables entering the market.
Before I hand to Gary, I'll discuss where we stand today in relation to our four-year target ending in FY2027, which we shared at our investor day. Starting with the top row, I've already spoken to our strategic NPS score, which remains in a strong position, and we are progressing well to achieve our digital-only customers and our green revenue targets. Please note that the speed to market metric is measured against a May 2023 baseline, and hence we didn't report a performance outcome for this metric for 2023. Similarly, the cumulative customer assets installed metric, covers installations from FY2024 onwards.
Turning to the bottom row, I've already discussed our strong EAF result, and we’ll be aiming to step this up to 88%. The 478 megawatts reported for the next metric comprises the 250-megawatt Torrens Island battery, 50-megawatt Broken Hill battery and 178-megawatt Rye Park Wind Farm PPA. Commissioning has commenced for the Torrens battery and the Broken Hill battery is also to be expected to be operational soon, and we look forward to both batteries coming online and contributing to earnings in FY2024.
And finally, the 1.1 gigawatts of reported decentralised assets under orchestration includes our contracts with the Portland and Tomago Aluminium smelters, which both have demand response mechanisms and provisions attached.
Now, over to Gary.
Thank you, Damien and good morning, everyone. This slide shows an overall summary of our financial result, which I’ll cover in more detail on the following slides. However, we are pleased to announce underlying profit after tax of $281 million, 25% higher than the prior year. In addition, we are announcing that a final ordinary dividend of $0.23 per share has been declared, unfranked, bringing the total dividend for the 2023 financial year to $0.31 per share, an increase of 19% on the prior year.
The statutory loss of $1.264 billion included $680 million of impairment charges due to the targeted earlier closure dates of thermal assets in line with our accelerated decarbonisation plan, as announced in the September 2022; and a negative movement in the fair value of financial instruments of $890 million, primarily reflecting the impact of a drop in the forward prices for electricity on a net buy position.
Let me first take you through group underlying profit in more detail. The stronger customer markets performance was largely driven by improved margin across our consumer and commercial and industrial portfolios. The increase in consumer margin was a result of focused customer value management, increased margin from growth businesses, and higher demand for gas customers.
The improved C&I performance, which includes large business customers and sustainable business energy solutions, reflects growth in this business segment and an improvement in project delivery. The increase in operating costs was predominately due to increased net bad debt expense, which I will talk about in more detail on the next slide.
Turning now to Integrated Energy, where there were some material movements across both our electricity and gas portfolios. As discussed, at the half year, we had a challenging start to the year, with the confluence of planned and forced outages across our coal-fired fleet, including the prolonged outage of Loy Yang Unit 2. This resulted in a short generation position, compounded by significantly higher pool prices. Both FY2022 and FY2023 were impacted by generation outages during market volatility with additional investment in availability and reliability expected to restore this lost margin in future years.
We have also highlighted the earnings impact of the staggered closure of the Liddell power station with the first unit closing in April 2022 and the remaining three closing in April 2023, leading to a 2.3 terawatt hour reduction in generation and approximately $70 million worth of net reduction in margin and OpEx savings.
Looking forward, once Liddell’s workforce has been fully integrated with Bayswater, broadly speaking, we are expecting to see a similar dollar per megawatt reduction to earnings on the remaining 5 terawatt hours generated in FY2023.
Turning to the net electricity portfolio management bar, the improved availability of our generation fleet in the second half of the year, along with hedging and trading gains was a key driver of our materially improved earnings compared to the first half.
The strong performance of our gas portfolio, consistent with the first half, reflected higher global commodity pricing which increased the revenue for our gas portfolio. Additionally, AGL’s prudent trading performance during this period of high oil prices and AGL’s net long position, combined with gas haulage optimisation, is reflected in the $92 million positive movement. I will address the movements in operating costs and depreciation and amortization in more detail on the following slides.
Finally, higher finance costs were largely driven by a combination of an increase in rehabilitation provision interest costs and an increase in borrowing costs due to interest rates and more specifically the impact of the increase in base rates, partially offset by a reduction in onerous liabilities.
Last August, we indicated there would be an increase in operating costs for FY2023 roughly in line with CPI. Pleasingly, we have managed operating costs across the business broadly consistent with CPI increases, adjusted for the two non-recurring items on the left-hand side.
As I did at the half year result, I’d like to call out the small yet prudent uplift in cyber security spend to further bolster protection for our operations and customers in an ever-evolving cyber environment.
Looking forward, we expect an uplift in operating costs in FY2024, in line with CPI plus the three key items highlighted on the right-hand side. Firstly, we anticipate that the impact of increased competition and higher revenue from pricing outcomes will increase variable costs such as net bad debt expense as well as channel and marketing spend, coupled with additional costs associated with our customer support program.
I’d like to emphasise however that our bad debt management and anticipated increases to retail market activity is broadly in line with FY2018 and FY2019, affordability challenges arose, and as Damien mentioned, our strong collections performance in recent years should position us well to manage this challenging period.
The second item relates to the ongoing transformation of our business. More specifically, bolstering capability to deliver upon our ambition to add 12 gigawatts of new renewable and firming capacity, the transformation of our coal-fired power sites into lower carbon industrial energy hubs, and the implementation of Phase 2 of the retail transformation program, which is expected to be approved later in the year.
The last item relates to our continued investment to maintain the reliability, flexibility and availability of our thermal generation fleet and renewable assets including hydro. It is imperative that we continue to invest in our cash generating fleet to ensure we are available when the market and our customers need us most.
Now turning to CapEx, focusing on our FY2024 CapEx forecast. You will notice a marginal uplift in our thermal sustaining CapEx forecast. This is primarily driven by additional spend to strengthen the flexibility, availability and reliability of our thermal asset fleet to support the energy transition. Approximately $70 million is also forecasted for the commissioning of the Torrens Island and Broken Hill batteries.
As I mentioned at the Investor Day in June, in the near-term, AGL expects to deploy up to $1 billion over the next two financial years focused on the development of the 500-megawatt Liddell battery, and as you can see from the grey shaded bar, we’re forecasting to spend approximately $200 million in FY2024.
Please note that this forecasted growth spend is contingent on a targeted final investment decision in FY2024. As indicated on the right-hand side, medium-term sustaining capital spend on our thermal assets is forecasted between $400 million and $500 million per annum, which will fluctuate each year subject to asset management plans. This will improve the availability and flexibility of the fleet.
Additionally, Customer sustaining CapEx over the medium term is forecasted to include $40 million to $50 million per annum of ongoing spend on customer market’s technology, plus one-off technology and transformation programs. Overall, we are prudently deploying capital towards the transformation of our business, while also maintaining the strength of our core operations in line with our refreshed capital allocation principles.
This investment in the transformation of our business is expected to drive higher depreciation and amortisation over the medium-term. On the left-hand side of the graph, you can see that depreciation and amortisation for FY2023 was $11 million higher, due to the increased investment in our thermal assets and the earlier closure of the Bayswater and Loy Yang A Power Stations in line with our accelerated decarbonisation plan, partly offset by the impairment impact resulting from this earlier closure date.
In FY2024, we expect an uplift in depreciation and amortization by approximately $40 million to $50 million, and overall, higher depreciation and amortization expense over the medium-term, driven by the accelerated closures of Loy Yang A and Bayswater resulting in the shortening of the useful lives of these assets, combined with recent flexibility and reliability upgrades.
As expected, there will be additional depreciation from the investment in the Torrens Island and Broken Hill batteries which are expected to come online in FY2024, as well as the retail transformation program.
Encouragingly, we had strong cash flow generation in the second half of the year, which lifted the full year cash conversion rate excluding margin calls above 80% reflecting an improvement to 118% in the second half compared with 37% in the first half pleasingly, we saw stability in the second half.
Overall, net cash from operating activities of $912 million was 26% lower than the prior year, driven by working capital outflows, particularly in payables and margin calls, due to significant volatility and market price movements in the first half. Looking forward we will continue to monitor cash conversion closely.
Cash conversion will be impacted as our rehabilitation programs broaden over the next two to three years, and as we enter a period where revenue uplift and affordability pressures impact the market. In particular, we call out that the revenue uplift will require an increase in working capital to support higher receivables, which is effectively a timing difference. We also note that rehabilitation spend is expected to increase in FY2024 following the closure of the Liddell Power Station in April, as well as decommissioning, well plug and abandonment works at Camden.
As shown on the bottom left-hand side of this slide, our cash conversion rate excluding margin calls and rehabilitation was 86% for FY2023. Please note that this will be the key metric that we will be monitoring and reporting going forward as it is normalised for the lumpy nature of rehabilitation spend.
As mentioned in June, we completed the successful partial refinancing of our existing debt, and priced new long-term debt in the U.S. private placement market. In the coming months, our focus will turn to refinancing our FY2025 and FY2026 maturities and targeting additional green capital.
In terms of rating and headroom, we have maintained our Baa2 stable investment grade Moody’s rating and hold significant headroom to covenants. Additionally, our weighted average tenor of debt increased materially from 2.9 years to 4.3 years, following the refinancing process.
As at 30 June, we have a healthy liquidity position of over $1.2 billion of cash and undrawn committed debt facilities available, and our net debt was marginally higher, driven by the movement of margin call obligations. The borrowings component of net debt was broadly flat, which was a good result considering the reduction in operating cash flow and higher capital spend on improving generation asset fleet flexibility, availability and reliability. Overall, our balance sheet is in a strong and robust position as we head into FY2024.
Before I hand back to Damien, I’d like to reiterate our refreshed capital allocation framework which we announced at the Investor Day in June, and which includes a more flexible and sustainable dividend policy of 50% to 75% of underlying NPAT, noting that our FY2023 final dividend is based on the 75% of underlying NPAT policy.
We believe this framework will help maintain our strong credit profile, and enable us to continue to invest in our existing business, whilst allowing prudent capital allocation to lead the energy transition as we connect our customers to a sustainable future and transition our generation portfolios, and importantly drive strong future returns for our shareholders.
Thank you for your time and I’ll now hand back to Damien.
Thanks Gary. Taking a closer look at market conditions. Forward curves currently observable in the market for FY2025 are broadly in line with FY2024 pricing levels, noting that these are subject to market conditions and may change.
AGL’s generation portfolio is realised through a contract book comprising consumer, large business and wholesale customers, as well as hedging arrangements in place. The two horizontal lines denote our weighted average wholesale realized electricity price across the portfolio for FY2022 and FY2023, and the broken orange line indicates our expected realised price for FY2024.
Through our prudent risk management approach, broadly speaking, the realized wholesale price for a given year should reflect the average of up to 24 months of forward prices preceding the start of the financial year.
Importantly, as an integrated business, we are well positioned to benefit from any sustained periods of strong wholesale pricing, supported by the Bayswater and Loy Yang A power stations, which are the lowest cost baseload generation assets in New South Wales and Victoria, respectively, on a short-run marginal basis.
I’ll now conclude by talking to FY2024 guidance and our outlook. As mentioned at the beginning, we have maintained our FY2024 earnings guidance ranges as announced at the Investor Day on the 16 June, 2023. We expect a material uplift in earnings for FY2024 based on the drivers you can see on the screen.
Firstly, sustained periods of higher wholesale electricity pricing, which have been reflected and recovered in pricing outcomes and reset through contract positions. The second key driver being the expected improvement of planned availability and flexibility of the asset fleet, including the commencement of the Torrens Island and Broken Hill batteries, as well as the non-recurrence of forced outages and market volatility impacts from July 2022, which totalled approximately $130 million, pre-tax.
As Gary discussed, this is expected to be partly offset by the closure of the Liddell Power station and higher operating costs, mainly attributable to four key drivers. Firstly, the impact of increased competition and higher revenue from pricing outcomes increasing variable costs such as net bad debt expense and channel and marketing spend, secondly, ongoing investment and growth and transformation of our business, the third driver being increased maintenance spend to improve asset fleet availability and reliability, and finally, the ongoing impacts of inflation we are seeing.
Broadly speaking, we expect underlying net profitability for FY2024 to be split broadly evenly between the two halves. I’d also like to note that we’ve certainly seen a warmer start to the financial year with milder than expected weather in July, which has contributed to reduced gas consumption and lower spot prices and volatility.
Thank you for your time and we’ll now open to any questions.
[Operator Instructions] The first question comes from Tom Allen with UBS. Please go ahead, Tom.
Good morning, Damien, Gary, and the broader team. Just following your comments at the end on the outlook where you’ve guided that average futures prices over two years will set AGL’s average realized electricity portfolio price. Is it fair to say that there’s little liquidity in the current New South Wales futures for mid-calendar year 2025, which would reflect the potential closure of some capacity from the Eraring power station. But towards the end of this calendar year, as futures move into that 18 month liquidity timeframe, futures should better reflect that possible market event?
Let me try and break that question down a little bit. So I think what we’re trying to do in that chart is demonstrate where we see the forward prices between 2024 and 2025. Clearly what we’re saying right now, they are consistent between the years right now. There’s a long way still to play out over the next year, clearly, huge number of factors whether it be where the plant availability and so forth.
But what we’re trying to do right now is, is say consistent between the years is what that chart’s trying to do and we’ll continue to monitor that as we go. The other thing I’d say is we have seen, as you saw my comments towards the end there, lack of volatility in July, we’ve seen a much warmer start to July and that’s what we’re seeing globally as well.
Okay. And then given AGL’s reported really strong performance of the second half in the gas portfolio, how should we expect the gas portfolio margin to perform into the near future, particularly if you partner with an LNG import terminal as you noted at the June Strategy Day where you’re bringing in higher cost gas to the portfolio?
Yes. So for 2024 there is clearly no LNG in the portfolio for 2024. We’ve recently contracted over 100 PJs of gas with Exxon, Senex, Cooper for that sort of outer years which is going to be important to support our customer base. What we saw through gas for the period just gone is, the team’s done a huge amount of work to improve our haulage, our haulage costs through optimization. We also saw in the retail space higher customer numbers and a colder winter. And then the other thing I would just say is what we saw was we had – we ended up being slightly long in the market where we saw oil prices rising, so we saw a benefit there as well.
Thanks, Damien.
Thanks, Tom. Next up we have Dale Koenders from Barrenjoey. Go ahead, Dale.
Good morning, Damien and team. Just coming back to the electricity price commentary for FY2025. Am I right to assume that if the forward curve doesn’t change and everything else all equal, what you’re inferring is the earnings level of the business should be relatively flat in 2025 on 2024 just purely for electricity prices?
Let me make it really clear on this call, we won’t be giving 2025 guidance. What we’re just trying to show is at the moment what we are seeing is consistency between those forward curves, huge amounts still to play through over the next 12 months.
Okay. Thanks. And then just for – I guess that comment that you’ve said to that the milder start to winter reduced gas consumption, is that a headwind to FY2024 guidance? Or is that really taking away from the top end of the range? How do you think about that impact as to 2024?
Look, it will ultimately depend how the whole year plays out. I mean, what the – the reason I’m calling it as I am now, yes, so had sort of lower gas volume. So yes that is a small headwind. But what you will see then is it depends how plays through summer. If summer becomes a very hot summer as is being predicted, then that could be the upside to it. So again, very early in the year. I wanted to call it, I think we’ve all seen the warmer start to the year and we’ll continue to utilize that gas across our portfolio.
Okay. Thanks so much. I’m back in the queue.
Next up we have Anthony Moulder from Jefferies. Go ahead, Anthony.
Good morning all. I just wanted to ask about retail churn. Obviously second half 2023 that churn remained low relative to the market. But wondered if you’d start to see the retail market becoming a bit more competitive given that wholesale pricing consistency?
Jo, you want to take that one?
Yes, sure. Yes, look, we certainly have seen higher churn and competition over the last few months. And I think particularly in response to recent price increases. But what I would say is that’s not unexpected or unusual. We’ve planned for that. We’ve got strong retention programs in place and we do expect that to stabilize as we move throughout the year.
All right. Thank you. If I can steal one more about coal flexibility, obviously continuing to invest into coal flexibility this year. But I wondered where you’re at as far as whether or not the majority of that benefit is now already in place?
Markus, you want to take that one?
No, I think we will further test particular the main generation levels of Bayswater and also of Loy Yang. We will check what kind of additional investment we need to do in order to even lower and maybe get another 400 megawatt of flexibility in our coal generation. But it’s also fair to say with the closure of Liddell, I think some of the generation which we are lacking in New South Wales, there will be also a bit stronger running of Bayswater. So we have to see how the market plays out. Today is a typical yesterday and today were typical days where we have all run at main generation, our fleet at Loy Yang and Bayswater.
But it’s fair to say you’ll continue to see that the benefit in us doing that, and that’s why very deliberately we had that slide in there. Bayswater down to 70%, I think Loy Yang 45% and potentially take Loy Yang to another 50 megawatts a unit is the work that we’re doing. But largely the spend has been done. It’s now continuing to optimize in the market.
Understood. Thank you.
Thanks, Anthony. Next up we have Mark Busuttil from JPMorgan. Go ahead, Mark.
Thanks, everyone. This year you provided guidance for 2024 in June. Typically, you haven’t provided guidance until August. It’s sort of three months early. So I’m sort of interested in understanding how conservative or otherwise you’ve been with that guidance provision? And what areas of the business could result in risks to the upside or downside in terms of fiscal 2024 numbers?
Yes, sure. Thanks, Mark. Look, you’re right, we haven’t provided guidance that early in the past we had Investor Day, it was the rationale for doing that. Clearly, we provided a broader range in the guidance to allow for the potential ups and the downs. What I would say is, the key factors for me when I think about performance of this business will be one plant performance and again, we’re seen a real positive step up and we’ve planned for further step up in availability over the course of this year. And then over the next three to four years weather will play a big part Mark in both winter and in summer. So again, there’s lots of commentary around where the weather is and where the weather will be for summer that will be obviously will play a part as well.
And then I would say as – the earlier question just around market competition, we are well placed, as Jo said, we’ve planned for this, we expected this, we’ve seen it in the past. We’ve got a lot of proactive measures underway to manage that. But that’ll be the three key drivers I think that I would think about in terms of the positives and the negatives.
Okay. Specifically, have you allowed for sort of the instances of unplanned outages that you generate off late?
Look, we always have an allowance for unplanned management. I might get Markus to talk to how we think about that across the fleet. But yes, we always have unplanned outages forecast. So Markus, you want to talk to that?
Yes. I think we have always assumed certain outage factors, which we are factoring in our budget and then also in our guidance. I think that’s included. I will not contemplate now the number, but there is a provision in forced outages and this is related to historical performance and I think that’s what we are factoring in.
Okay. And if I could just sneak in a really quick one. How much of your electricity into fiscal 2025 have you already forward sold?
I can – you should assume that maybe around the level of 10 terawatt hours is not sold.
Is not sold. Okay. Thank you.
Thanks, Mark. Next up we have Gordon Ramsay from RBC.
Thank you. Just a question on CapEx outlook. If you go ahead with the Liddell battery, you’ve indicated that you could spend $200 million on FY2024. Does that imply to spend in FY2025 would be $800 million?
So let me just take that question. Will it be $800 million? We haven’t disclosed what the total cost, but it wouldn’t be up to $800 million, no, it wouldn’t be that high. I think $200 million in this year and then a further maybe, $600 million or so would probably be the number we’d be looking at. But again, we haven’t got to FID on that number yet. And then that might spread across the years. So we’ll come back once we hit FID on that battery.
Okay. Because I think in the commentary, you said you expected to deploy up to $1 billion over the next two financial years.
That’s not…
On battery, that’s why I made that assumption.
Yes. Sorry, that’s not just on that battery. It’s across the breadth of what we’re doing in the market in terms of that growth and whether we bring on any other batteries over that period of time as well. But think about the Liddell batteries circa $800 million.
Okay. Thank you. And just lastly, just on variable costs. You’re saying that they will go up on the back of net bad debt expense, channel marketing and the additional customer support. If we looked at those two items, are they kind of evenly split or is one higher than the other just in general terms?
Net bad debt expense would certainly be higher than what we call customer market activity. So if you look back historically at the organization, when we go back to sort of 2018-2019, where we saw market activity on the back of pricing, we saw the debt rise at the same sort of percentage level as revenue. So if you take the same sort of percentage across the revenue, that’s the sort of lift you’ll see. And then from a market activity perspective, in our forecast and in the guidance we’ve got today, we are assuming because of market activity stepping up, we’ll have additional spend to manage that market activity.
Okay, thank you very much.
Thanks, Gordon. Next up we have Rob Koh from Morgan Stanley. Go ahead, Rob.
Good morning. Thank you and congratulations on the result. I’m just looking at your annual report page. I think it’s 31 and just looking at the provided costs for Loy Yang A, which seemed to have gone up about $1.2 billion year-on-year in real terms. Just wondering if you could give us a bit of color on that one please?
Rob, let me take that one to start with and I’ll hand over to Gary. I’m not sure where the $1.2 billion has come from. We did increase the rehabilitation by bringing forward the closure dates at the half year, so that certainly happened. I might need to take on notice unless you’ve got it in front of you, Gary that step up. But certainly the rehabilitation did go up and we did that at the half when we brought forward Loy Yang by that sort of 10 years.
We also saw, back then when we looked at it, we had a look at – because of the change of the way the mine would operate, that also increased the rehabilitation that space as well. But again, that was back at the half. I’ll just take it on note if I can, Rob and come back to you on that number. But Gary?
Yes, I don’t have too much more to add to that. It’s obviously nominal and real dollars in there as well, Rob, but there’s obviously impacts on discount rates as well as the actual cash flows and the shortening of the life of those assets and the impacts on rehabilitation as well.
Yes, yes. Okay. Thank you. All right. And then my second question, I guess, I probably should have asked this back in June when you gave us your new flexible DPS policy. But you have a payout range, 50% to 75%. Just wondering if you could elaborate on what are the kinds of things that would push you to the lower end or to the higher end of that DPS range? And if you’ve got an eye on progressivity and things like that, please.
Yes, so obviously the historical dividend there, Rob was 75% of underlying NPAT. And obviously today we’ve announced an increase on the actual size of that dividend compared to the prior year. It was important as part of the transition that we’re going through where we’ll be deploying between $8 billion and $10 billion between now and 2035 that we retain as much flexibility on our balance sheet as possible.
And as a result of that, we thought it was prudent to have that 50% to 75%. It really will depend on what we’re looking at that point in time throughout that transition, where our balance sheet is sitting, how our cash flows are looking, how much we’re going to need to deploy in the following few years. So we’ll always make decisions that are in the best interests of our shareholders as well. But obviously having that range gives us flexibility to make sure that we’re looking at both our shareholder returns as well as deploying that capital back into the transition.
Cool. Thanks. Sounds good. Appreciate it.
Thanks Rob. Next up we have Ian Myles from Macquarie. Go ahead, Ian.
Hey guys. One which looking back to FY2022, your CapEx sort of maintenance CapEx levels, particularly in thermal, you sort of flag closure of Loy Yang was going to reduce the expense expenditure. And we now come to FY2023 and it would appear that your CapEx spend is actually that maintenance level is probably $50 million or $100 million higher. I was just wondering if you give us a bit more color on what shifted your thinking over the last 12 months that you’re going to have to spend more on those clients to keep them operating?
Yes. Ian, I’ll just – I’ll come back on your first part of your question. In 2022, we didn’t have any CapEx related to Liddell. That was all through OpEx because of the closure date. So anything we would have spent, would have gone through OpEx there.
In terms of the spend today, and I'll get Markus to sort of go a bit deeper, but we have been spending clearly about $400 million to $500 million around both availability to ensure the plant is up, and Markus spoke to that at Investor Day, but also the flexibility, that's where that spend has been. I think going forward, it will continue to be around ensuring our plant availability is up where we need it to, and therefore, continuing to hit that target by 2027 of 88%. But Markus, maybe just talk to some of the focus areas at the moment around that plant?
Ian, I think we wanted to minimize and I think we were successful to minimize the day rates of our power station because we had quite some issues with mills, with precipitators, and so on. That was one root cause where we said we had to invest more in this space. Then also, I think the supply chain issues, we wanted to have a clear stock on spare parts at our sites. In particular, I think at the moment, we have two rotors in Germany – one in Germany and one in Switzerland for refurbishment. And I think we want to have clear – our clear target and what you see also next year and the years after, we want to increase our equivalent availability factor, and this has led to a decision that we want to invest more, it should generate a positive NPV and that was the main driver.
And as a longer-term perspective, do you see maintenance CapEx across the – or sustaining CapEx across the broader business, as sitting at that sort of $550 million to $600 million? Or are we – like are some of these things just temporary that it goes back down to maybe a lower number?
I think while the key plant is in place, those assets, both Loy Yang and Bayswater – while that key plant is in place, that's the sort of level of spend, that $400 million to $500 million. We'll continue to update the market each year, because the other thing that changes, Ian, is depending which years you're doing the major outages and where those outages are falling. So sometimes it can move between the years. The other thing we've done is, obviously, recently looked deeply at the plant availability, plant maintenance in the run between now and when we close the plant. So again, we'll optimize that, to ensure that those major outages when they're happening, are done at the right time, so that you're not overspending before you actually close the plant as well, as you get closer.
Okay. And on the consumer side, you sort of flagged $40 million to $50 million? Is there any reason that actually starts to go higher in sectors, more technologies being implemented to engage consumers?
I think over time, Ian, we'll probably see more of a shift to OpEx. A lot of the future platforms are more SaaS provided solutions. So yes, over time, I think we'll see more of a shift of that sustaining CapEx come down and an increase to OpEx.
And when that switches, I think we’ll obviously provide an update. So you can see the cash spend, what's happening there. I think the other piece that we're obviously looking at and flag through here is, the next phase of the retail transformation, that's something we'll update the market on over the next 12 months as well.
Okay, that’s great.
Thanks Ian. And next up, we have Reinhardt van der Walt from BAML. Go ahead, Reinhardt.
Good morning, guys. Thanks for taking my question. Just got a question on retail competition and electricity specifically. Is this – you mentioned that it's a challenging or it's a competitive market. Is this just the normal kind of Tier 1 retailer competition that we always see? Or are we talking about smaller retailers maybe becoming more competitive in the market? And I suppose related to that, are you expecting this kind of very limited discounting to DMO to continue into FY2024, 2025?
Yes. Look, it's been quite an interesting competitive market over the last few months, particularly since July 1 price reset. We've seen a really broad spread in discounting across the market, and it's been very dynamic with offers changing across retailers quite substantially. I would say though in the last week or so, it started to stabilize. We're still seeing a couple of outliers, Tier 2 retailers discounting quite heavily. But as we did anticipate, there tends to be a bit more headroom in Victoria than in the DMO states. And yes, as I said earlier, it is really normal at around the time of price change to see a lot of activity. This is very similar to what we saw in 2018, 2019 when retail prices were high. And we have our customer support package in place. We're driving that really hard along with retention programs, and we do expect it to stabilize in the next couple of months.
Got it. Thanks. That's very helpful. And can I just check that big discounting that we're seeing in Victoria? It looks like your pricing, I think, almost about a 20% discount to the video there. And I presume that the likes of EA would also be discounting similarly. Is that just because of the sort of relatively flat generation cost curve in Victoria, or what's driving that increased discounting?
It's really just a competitive market. The Tier 1s are all sitting at that place at the moment, and we see that change throughout the year, depending on competition and what campaigns retailers have in place. But as I said, we did see a little bit more headroom in the video pricing than the DMO.
Perfect. Thanks a lot.
Thanks, Reinhardt. Next up, we have Tom Allen again from UBS. Go ahead, Tom.
Thanks for taking the question. Just thinking about AGL's return on capital employed into the future, can you provide some color on whether reinvesting in those sites of big batteries can materially reduce the liabilities against those sites? And whether there's an opportunity to outperform AGL's current decarbonization path, with the staggered retirement plan that sees individual generation units decommissioned at those sites, as batteries are installed?
First, I would like to say, yes, we try to optimize our rehabilitation, but we will not – that will not be changed fundamentally our rehabilitation obligations. I think a typical example, we are looking to put a solar terminal plant on our [indiscernible] at Liddell. But still, the [indiscernible] at a certain point of time, rehabilitated and so on. Yes, we try to optimize the rehabilitation with new investment. But at the end of the day, there will be slight savings, but not huge savings.
I think the other thing, Tom, you've probably heard us say before, we'll continue to optimize that. What we saw, Liddell as an example, the scrap value of steel right now, it makes sense for us to go as quickly as we can, because scrap metal prices are almost going to offset some of that demolition cost, as an example. So we'll continue to optimize rehabilitation. It is a big spend for this organization. We have a large team that is working on Liddell, and we'll continue to drive that across the organization.
Thanks. And just on the second part there, about the opportunity to outperform the decarbonization path by taking individual units down as batteries are installed?
I think we are speaking about different things. For me, batteries are providing firming and flexibility. Our thermal generation units are providing baseload energy. Yes, there will be a bit of portfolio effects between these different generation assets, but I don't believe that at the moment, firming capacity, which we are putting into the grid, is replacing our baseload generation.
Thanks, Markus. Appreciate it.
Thanks Tom. Next up, we have Dale again from Barrenjoey. Go ahead, Dale.
Hi, guys. Thanks for second question. Just, I guess, digging into the details on the strong performance on customer margin through the period, which you've called out is around customer management. Just wondering if you could provide more detail on what that specifically means? How sustainable you'd assume it will be into FY2024 guidance and what's the opportunity to sustain that longer term, particularly looking at gas and elect margins?
Yes. Thanks Dale. Look, we were really pleased with that result, and it's a combination of improved margins on the energy side and through our growth businesses. And I would say we were coming off years of quite low retail margins. So we do see this as a more sustainable level. And it's been through a combination of a focus on increasing customer lifetime values, as well as continued growth in customer services. So we do definitely see this as a more sustainable level.
So when you say services bundling in with EVs, demand management or anything else, that's likely to continue going forward or we got some tangible examples there?
Yes. And also just overall growth in Energy Services throughout the year. So we saw an average increase in services throughout the year increase in some demand through gas, as Damien mentioned, and as well just improved value management through the portfolio in our recontracting strategies.
And just to add, maybe to that Dale, is we're really happy about some of the growth businesses continue to improve in that space around telco. The C&I business as well we saw – sorry, commercial and industrial business, we saw that step up through the year. So that's again, where we'll continue to drive the growth through Jo's area also.
Okay, thanks.
Thanks Dale. Next up, we have Max Vickerson from Morgans. Go ahead, Max.
Thank you, guys. Just wanted to ask about electricity prices again. So just curious to know how the volume weighted view might look? I think you gave a time weighted number on that slide. And then just secondly, I appreciate you did well in Victoria, probably the biggest markets and one of the big [indiscernible]. Given you're talking about the summer outlook, how are you positioned in Queensland?
Max, your first part of your question broke up a bit. I didn't quite hear that well, I'm just looking around the room and others didn't also. Could you just repeat the first part and then – I've got your second part of your question?
Yes, sure. So Damien, just curious to know how the volume weighted view on futures would look? I think you gave the time weighted view on your slide there for FY2024, FY2025 outlook. I appreciate 2024, probably it's pretty solid, but just curious I know FY2025, is there a difference between time weighted and volume weighted?
Markus, have you got a view on that one, that you can talk to? And if not, we might take that one offline.
Yes, we take this offline.
We'll take that one away, Max and come back to you. In terms of – just remind me again, your second part of your question, that was...
Just about how your exposure to Queensland and maybe other states, particularly if you're looking at a potentially warmer summer and the stocks up here don't have a great performance history. Just wanted to know how you are covered?
Yes. Look, so we are – if I think about the Queensland as – from a customer point of view, we are well positioned there from a supply perspective. We've obviously got both Coopers, gap up there and other contracts and financial arrangements in place. Queensland, we are comfortable there. On an SA perspective, so I think you mentioned, we've obviously got the portfolio of assets down there with Barker Inlet power station, we're going to have the Torrens Island battery coming online as well, plus obviously, eventually the interconnector will come through.
And then if I think about the volatility, I think over summer, again, it's going to be about making sure our plant is up over that period of time and continuing to drive the availability of plant over that period. But ultimately, it will come down to just how volatile that summer period is and how many days in a row, it's not necessarily one warm day, it's a number of warm days that normally create the issues.
Question, it's a time weighted product.
Did you hear that, Max?
Yes. No, I got that. I was just wondering if the volume weighted number might be different to the time weighted. But that's okay.
Most probably a bit, yes.
Okay.
Thanks Max. Next up, we have Reinhardt again. Go ahead, Reinhardt.
Hi there, folks. Thanks for the second question. Just very quick ones. Just on battery EPC costs. I know six to 12 months ago, we saw those EPC quotes were bouncing around quite a fair bit. Have you seen pricing stabilize little bit in recent months? And then just a quick second question, I know it's a while away, but base water coal recontracting, when do you think you're going to go into the market to start doing the work on recontracting coal?
Maybe let's start with the first one. I think, yes, you are fully right, EPC contracts or EPC pricing for batteries have stabilized. So maybe even slightly decreased compared to the high, which we have seen before. And the second part, for sure, we are already in the market to look for opportunities to recontract, also looking who can offer what is the competition in the market? What is the pricing, what is the flexibility in the contracts? Yes, we are already there.
Thanks Markus.
Thanks Reinhardt. And lastly, we have Rob Koh from Morgan Stanley. Go ahead, Rob.
Hello again. Thank you. I am just looking at the remuneration report and just noticed the long-term incentive, the target includes a 30% weighting to the climate transition metrics, one of which is a gigawatt deployed type metric and which is obviously linked to your installation targets. Just wondering how does that work? Does that – is that based on commissioning of those gigawatts, and how does the return on investment flow through to that, please?
So what you can see there, from an LTI perspective, we increased the component linked to, if you like, the transition to – from 25% to 30% broken down between emissions, between deployment of assets, as you said, and also those assets under management. So when you think about those assets that we deploy, clearly, it won't be anything that doesn't meet the required hurdles of this business. So it will always be hurdle driven. It won't be us simply deploying assets into the marketplace. And obviously, when we come out with FID, we'll be providing an update then at that point, as to those assets.
But what's important is, for us, is about building both our pipeline, a pipeline of assets over the coming years and continue to develop that out, but then actually seeing the reality of that pipeline being delivered into the marketplace.
Basic criteria is FID or being in operation. Thank you.
Okay, great. Thank you very much.
Thank you, Rob. As there are no further questions, this concludes our question-and-answer session. Thank you all for listening.