A Liddell bit greener

RESULTS ANALYSIS

Need To Know

• Stronger wholesale electricity and gas prices delivered EBITDA $1,361m +12%, mid-guidance.
• FY24 EBITDA guidance unchanged at $1,875-2,175m, underlying net profit guidance $580-780m.
• Replacing coal with renewables remains a formidable financial and operational challenge, in our view.

Investment Implications

Rising wholesale electricity prices and some better plant performance have delivered the guided result for AGL. While the company is enjoying the heightened earnings environment, the bigger background story of its transition to a renewable generation portfolio is gathering pace, marked vividly by the closure of Liddell in April. The question that goes with that strategy is how AGL will fund the financial challenge. The direction of wholesale electricity prices will have much to do with the answer, and the uncertainty factor here is large.

FY23 result. Revenue $14.1bn, underlying EBITDA $1,361m (market $1,352m) about mid-range of its upgraded $1,330-1,375m guidance. Net profit $281m (market $267m) and dividend 31cps (market 29cps).

Following the closure of the Liddell thermal coal plant in April this year, the workforce has trudged (literally) across the New England highway to the Bayswater plant (scheduled to close 2033). Liddell itself is facing up to $1bn of capex over the next two years to rejig it with a 500MW battery ($200m capex in FY24) that will have a two hour duration. This is still subject to a Final Investment Decision.

AGL’s generation portfolio is beginning to change shape as the transition to renewables begins in earnest. Portfolio generation capacity declined -15.3% from 10.4MW in FY22 to 8.8MW in FY23 following the closure of the Liddell coal plant. Pool generation volume also fell to 36,937 GWh in FY23 from 40,755 GWh in FY22 (-9.4%). Of the total generation volume, coal contributed 82% compared to 84% in FY22 while renewables (wind, solar, hydro) contributed 14.5% in FY23. Electricity sales volumes fell -2% while gas sales volumes fell -14%. AGL has almost 4m customers.

AGL will continue to spend around $400-500m pa on its thermal fleet mainly to improve availability and flexibility. The latter point involves dialling down electricity output at times of low customer demand (in the daytime as solar generation peaks) then dialling it up as the sun goes down. Bayswater (NSW) can be lowered from its nameplate capacity of 680MW to 200MW while Loy Yang A units can be lowered from 550MW to 300MW (further capex will reduce this to 250MW in FY24). Flexibility initiatives at Bayswater in FY23 delivered $7m of gross margin due to lower coal usage. Importantly, these lower production outputs are within the original plant design parameters.

AGL’s strategy requires $3-4bn of capex pa to be spent by 2030 with a further $5-6bn by FY36. AGL’s cash flow must also cater for several years of unquantified rehabilitation costs from the decommissioning of the thermal fleet as it occurs. The balance sheet is carrying net debt of $2.7bn (gearing 35%) with a weighted average debt maturity of 4.3 years. The company does have significant headroom to its debt covenants (gearing 50%, FFO/interest cover >2.5x currently 10.6x). Additionally, after tweaking the dividend payout policy to 50-75% of net profit (FY23 payout 75%), the balance sheet will begin to retain more earnings.

Outlook. AGL said forward wholesale electricity curves currently observable in the market for FY25 are broadly in line with FY24 pricing levels, noting that forward curves are subject to market conditions and can change.

Realised average wholesale electricity prices for AGL’s portfolio are expected to be significantly higher in FY24 than the prior two years. This augurs well for AGL’s revenue line but will be accompanied by a much higher bad debt outcome in its customer base – something AGL is preparing for.

Earnings growth will be supported by the improved plant availability, subject to a non-recurrence of the forced outages and market volatility which cost it $130m pre-tax this year. AGL has highlighted the prospect of higher operating costs that could partially offset the gains. Depreciation will also be higher as will maintenance spend on improving fleet availability and reliability.

AGL notes that its Bayswater and Loy Yang A power stations are the lowest cost baseload generation assets in NSW and Victoria.

Investment View

AGL is Australia’s largest emitter of greenhouse gases accounting for 8% of the country’s Scope 1 and 2 emissions prior to the closure of the Liddell coal-fired power station. With Liddell now inactive, AGL has reduced its emissions by 12% compared to FY22 to 35.2 MtCO2e and down 18.5% against its FY19 baseline. When Bayswater is closed in 2033, AGL will achieve a 52% emissions reduction compared to the FY19 base and effectively achieve net zero on the closure of Loy Yang A two years later.

The strategy to replace what is now 56% (coal) of its total generation capacity with 12GW of renewable and firming capacity by the end of 2035 remains a formidable financial and operational challenge. Not all of that capacity will be funded by AGL which adds to the complexity and risk.

Figure 1: Australian Wholesale Electricity Prices