AGL Energy Limited

Thank you for standing by and welcome to the Agile Energy 2023 Half Year Results Briefing Conference. All participants will be in listen only mode. There will be a presentation followed by a question and answer session. I'd now like to hand over the conference to Managing Director and Chief Executive Officer, Mr. Damien Nix. Please go ahead.

Good morning, everyone. Damien Nix speaking. Thank you for joining us for the webcast of Agile's first half result for the financial year 2023. I'd like to begin by acknowledging the traditional custodians of this land where I'm presenting from today 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 are 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. Before we commence, I'd like to say that I'm truly honoured to have been appointed as the Managing Director and CEO of this incredible organisation, which has a vast history spanning over 185 years. This is certainly an exciting time to lead AGL as we strive to deliver upon our refresh strategy and accelerate the decarbonisation of our customer and generation portfolios, supported by a highly experienced board and management team now in place. I'd also like to congratulate Gary on his confirmation as CFO. Today's results reflect a challenge first half performance, driven by the impact of plant outages during unprecedented energy market conditions in July, when our resulting short position was exposed to high pool prices, together with prolonged outage of Luoyang Unit 2, which was caused by a generator rotor defect. Earnings were also impacted by the closure of Liddell Unit 3 in April 2022, reducing generation volumes, as we indicated in our FY23 financial guidance update in late September. The first half also saw another disruptive period for the energy markets through the implementation of domestic commodity price caps and a mandatory code of conduct for gas producers. And I'll speak to the impact for energy markets and our business later in the presentation.

Overall, our half-year underlying... Welcome to the Conference Centre. Please enter your passcode followed by the hash key or press star then zero to speak with an operator. Please enter your PIN number followed by the hash key. Your passcode has been confirmed. If at any time you need assistance, please press the star key then zero to speak to an operator. The conference is now being recorded.

...35 will reshape AGL's generation portfolio and represents a major step forward in Australia's decarbonisation journey, ultimately connecting our customers to a sustainable future. Pleasingly, our inaugural Climate Transition Action Plan was endorsed by shareholders at the 2022 Annual General Meeting in November. Good progress was also made in advancing our 3.2 gigawatt development pipeline and the transformation of our thermal sites to low carbon industrial energy hubs. Both the Torrens Island and Broken Hill batteries are on track to commence operations mid 2023, and I'm pleased to say that the Liddell battery will be backed by ARENA, with funding negotiations underway for the first 250 megawatt phase. A feasibility study is also well underway with Idemitsu for the Musselbrook pumped hydro project. In terms of guidance and outlook, we have narrowed FY23 financial guidance, and I'll discuss this further at the end of the presentation. Although forward wholesale electricity pricing has lowered from historically high levels over the past six months, these prices remain elevated compared to FY20 and 21 levels, which we expect to see reflected in strong earnings growth for FY24. Moving now to safety and customer metrics, which both remain very strong. Our total injury frequency rate continues to trend lower, reflecting a disciplined and sustained focus on safety culture and performance over three years in a row. And as mentioned before, we achieved a record strategic NPS score of plus 12, an excellent result given the sheer volatility in Australian energy retailing of recent months. Turning now to a more detailed discussion on customer markets performance, which was underscored by strong growth and improved customer experience. Total services to customers increased 61,000 to 4.3 million, delivered through both energy and telecommunications services growth. Pleasingly disciplined margin management and scaling of growth business areas delivered an $11 million improvement to gross margin. Looking forward, we will continue to responsibly grow our customer base while prudently managing margin. We also delivered improved retention with our churn spread improving to almost six percentage points, an excellent result reflecting both our improved service quality as well as heightened market activity as selected retailers withdrew or lowered discounting to regulated pricing. AGL continues to have the least consumer electricity complaints of any Tier 1 retailer, and ombudsman complaints have also reduced by 15%. Encouragingly, net operating costs per service have continued to trend lower, driven by digitisation, reduction in net bad debt expense and labour savings. However, we do expect an increase in the second half driven by net bad debt seasonality, as well as higher technology spend and growth investment as we scale our energy solutions businesses to drive distributed energy under orchestration. Significant process has also been made in customer markets' key priority areas. We continue to have the highest brand awareness in energy and now have over 50% of customers interacting solely through digital channels. Pleasingly, consumer EBIT per service also continues to grow, increasing 9% compared to the first half of FY22. Good momentum is also being achieved in accessing future value pools. Customer markets green revenue now accounts for over 20% of total revenue, and our virtual power plant has grown 44% to 199 megawatts of decentralized assets under orchestration, underpinned by the NEO platform. Strong commercial behind-the-meter revenue growth has been recorded, as well as significant increase in commercial solar assets under monitoring and management. We're also excited to have secured new strategic partnerships which will make the transition to electric vehicles simpler and easier for our customers. And finally, our partnership with OVO Energy Australia and Colusa continues to grow, with over 40% of customers now migrated to the Colusa platform, a strong increase on the 30% migrated at the end of the period. Moving now to fleet performance and operations. Commercial availability of the coal fleet was weighed down by a particularly challenging period in July, with high levels of forced outages at Liddell and Luoyang Unit 2 coinciding with the planned outage at Bayswater. On a positive note, we've completed testing to lower minimum generation levels at both Luoyang A and Bayswater. We are now able to ramp down Bayswater Unit 4 to 200 megawatts and are awaiting AEMO's approval for the remaining units. Additional work is underway to further lower these to between 130 and 150 megawatts. The ability to flex our coal-fired plant is increasingly important as new renewable generation enters the system. Volatility captured through trading was also lower. Whilst we saw significant market disruption with severe weather events driving forced outages in the NEM, the trading team was able to manage this using a combination of financial and firming assets. particular the Kiowa hydroelectric scheme in Victoria, which provided greater flexibility during this period. Lower generation volumes overall were primarily driven by the closure of Liddell Unit 3 and the unplanned outages, marginally offset by stronger renewal generation volumes, which are 13% higher than the prior corresponding period. Despite a challenge start to the half, we've seen a strong uptick in availability from November, illustrated by the dark blue line. Overall, whilst we had lower unplanned outages compared to the second half of FY22, the confluence of the Liddell and prolonged Loyang Unit 2 outages, combined with the planned outage of Bayswater Unit 4, as well as summer readiness activities, resulted in an overall outage factor higher than we were targeting. Looking forward, we have less days of planned unit outages in the second half, giving us a higher availability base to work from and reduce the overall impact of any unplanned outages that may arise. We will also continue to run Liddell at its sweet spot to manage operations and reduce D rates and outages through the end of its life in April. This slide shows the key areas we've been focusing on to improve thermal fleet availability and reliability as we responsibly transition to a low carbon portfolio. Our main priority is minimising equipment failures that may result in future unplanned outages and D-rates. This includes additional preventative maintenance on mills, precipitators and chemical cleans of boilers to reduce known failure modes such as tube leaks. We're also bolstering preventative maintenance through stronger inventory management to ensure that, where appropriate, critical spares are held onsite or accessed with a reasonable timeframe. Repairing Luoyang A Unit 2 spare rotor and stator is an example that provide a shorter return to service time if such an incident were to reoccur. As mentioned, sizeable CAPEX investments have also been made to increase the reliability and efficiency of our fleet, with upgrades to the turbine and generators of the basewater units, as well as further investment in digital control systems, which enables to flex each basewater unit by nearly 500 megawatts. A quick update on our decarbonisation pathway, growth pipeline and energy hubs. The planned closure of Liddell Power Station is on track for April 2023 and will be the first key milestone of our accelerated decarbonisation pathway, reducing AGL's annual greenhouse gas emissions by approximately 8 million tonnes per annum. Importantly, by closing and transitioning the Liddell Power Station and site to a clean energy hub, we are undertaking one of the largest decarbonisation initiatives in Australia in 2023. We look forward to both expected commencement of operations of both the Torrens Island and Broken Hill batteries in mid 2023. Numerous feasibility studies are also underway to bring strong opportunities to commercialisation, and we're progressing initiatives to rationalise our upstream and midstream gas portfolios. Now, a quick recap and update on our strategy before I hand over to Gary. I'm very proud to say that AGL is leading Australia's energy transition. backed by a bold and accelerated plan to connect our customers to a sustainable future and transition our energy portfolio. We'll drive this transition by ensuring a strong foundation across our business, placing ESG at the forefront of everything we do, continuing to inspire and empower our dedicated workforce, and importantly, leveraging technology, digitization, and artificial intelligence to enhance customer experience, as well as strengthen our trading, operation, and risk management capabilities. Our focus on both leading and emerging technologies will underpin the future energy relationship with customers, unlocking the value of electrification and decentralised energy. We have a defined strategy to deliver an accelerated low-carbon future, and this slide, which you may be familiar with from our announcement in late September, provides a good summary of the key targets along a 12-year decarbonisation roadmap. We will deliver this strategy whilst maintaining a relentless focus on our valued customer base, and importantly, work closely with our people to explore opportunities for career transition as we progress towards a low-carbon energy portfolio. Our ongoing priority is to strengthen and drive value from our core business, providing a strong platform for growth in the medium to longer term to realise opportunities through the energy transition, which you can see on the right-hand side. As mentioned, one of our core priorities will focus on how we help customers decarbonise the way they live, work and move. We'll drive electrification through propositions we offer and prevail growth in e-mobility, starting with in-home charging. We'll continue to accelerate growth in decentralised assets, helping our customers electrify and decarbonise and positioning AGL as leading in energy solutions. Our market leading position in commercial solar is evidence of the strong progress achieved in this area. Additionally, our Retail Transformation Program, which Jo spoke to at our full-year result in August, not only simplifies our core but extends to new energy technology, which will enhance capability to remotely manage distributed energy resources in a flexible and digital led way. This slide provides a good summary on how we're tracking today in terms of delivering our strategy as well as our near-term focus areas. I've already spoken to many of these points for our customer portfolio, including our desire to accelerate decentralised assets under orchestration, drive growth in e-mobility and expand our commercial and industrial energy solutions portfolio. Our energy portfolio will focus on progressing the feasibility studies mentioned on the bottom left-hand side, accelerating the development of the Dell battery, and importantly, advancing and accelerating our project pipeline to meet our five gigawatt target of renewable generation and firming in place by the end of 2030. Importantly, we look forward to sharing details on our business strategies at an investor day targeted for mid-2023. I'll now hand you over to Gary to take you through the financial result in more detail.

Thank you, Damien, and good morning, everyone. It's my pleasure to address you in my first result as Chief Financial Officer. This slide shows an overall summary of our financial results, which I'll cover in more detail on the following slides. Let me first take you through our group underlying profit in more detail. The stronger customer markets performance was largely driven by growth in our commercial and industrial business, a reduction in net bad debt expense, as well as labour savings and efficiencies being realised through ongoing digitisation. Turning now to integrated energy, where there were some material movements. As indicated previously, July was a particularly challenging month for AGL, with the confluence of planned and forced outages across our cold-fired fleet, resulting in a short generation position. Compounding this short position, AGL experienced significantly higher pool prices which were driven by heightened winter energy demand, as well as elevated fuel input costs due to the spike in global commodity prices. The $73 million movement primarily related to lost generation earnings caused by the prolonged Luoyang Unit 2 outage, as well as the closure of Liddell Unit 3 in April 2022. This was partially offset by the positive impact as higher forward electricity prices started to reset through our customer book, hedging and trading gains, as well as stronger hydro generation. Higher global commodity pricing has also increased both the revenue and costs for our gas portfolio. Pleasingly, however, AGL's competitively priced gas portfolio, coupled with prudent trading performance, drove the strong margin contribution you can see in the trading and operations gas bar. Please note that AGL's gas portfolio is well positioned to meet customer demand. having taken appropriate measures to support future supply, including a short extension of our Camden gas field and the filling of Newcastle gas storage facility to cover upcoming winter demand. Finally, a higher depreciation and amortisation charges, primarily related to the accelerated closure of the Bayswater and Loyang A power stations, whilst lower income tax paid reflected the reduction in earnings. Let's take a quick look at the reconciliation between underlying profit and statutory profit, which we've included due to three material movements. Items on the left were largely driven by external and market factors, whereas those on the right represent structural or operational decisions made by AGL. Starting from the left, the onerous contracts gain was driven by an increase in the price of large scale generation certificates. partly offset by lower forward electricity pricing in relation to AGL's long-term renewable power purchase agreements, as well as an updated discount rates used to value the liability. The negative movement in the fair value of financial instruments primarily reflects the impact of a drop in forward prices for electricity on a net bought position, noting that we had an increase in this number in the prior period when forward prices were much higher. And finally, the impairment charges relating to the carrying value of our generation fleet cash generating unit. This is a result of our accelerated decarbonisation plan and decision to bring forward the targeted closure of AGL's thermal generation assets by the end of FY35, as we announced in September 2022. In August, we did indicate a step up in forecasted operating costs for FY23 to be roughly in line with CPI. Pleasingly, during a period of significant inflationary pressure, operating costs continue to be well managed across the business, consistent with CPI increases once adjusted for the non-recurring items identified at the full year result. A portion of this increase is a small yet prudent uplift in cybersecurity spend to further bolster protection of our operations and customers. Turning now to cash and debt. Net cash from operating activities of $37 million was 94% lower compared to the first half.

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...to the high payable position at the full year, driven by high prices, and then a significant reduction in electricity pool prices across the period and the resultant cash outflows. Notably, the impact of government intervention contributed to a sharp decline in forward electricity prices, resulting in $119 million of variation margin outflows at the end of the half. As you can see, Whilst these working capital outflows did result in a reduction in AGL's credit metrics, we forecast this reduction will be temporary as cash conversion rates recover to historical levels in line with the stabilising wholesale pricing environment and improved generation performance. Encouragingly, Moody's have retained their BAA2 rating and upgraded their outlook to stable. The process to finance maturing debt is also well underway. Now briefly touching on CapEx. As noted last August, growth CapEx for this year will focus on the completion of the Torrens and Broken Hill batteries. You will also note a marginal uptick in thermal sustaining CapEx compared to the forecast we provided last August. This is primarily due to additional spend to strengthen the reliability of our thermal fleet as they transition to closure, which Damien discussed earlier. Before I hand back to Damien, I'd like to take a few moments to discuss how we intend to fund and deliver our future target portfolio. This slide shows the indicative ranges for the primary channels AGL will leverage to deliver its 12 gigawatt ambition as announced in late September. Damien has already spoken to decentralised assets and orchestration, which is a growth area for AGL and key component of our targeted energy portfolio. Assets developed on AGL's balance sheet will comprise the largest component and will focus on firming assets, building upon AGL's existing development pipeline of grid-scale batteries and pumped hydro projects. These assets will be funded through a mix of operating cash flow, capital recycling via the potential sell-down of developed and operating assets, as well as project and corporate-level funding. Importantly, we have an excellent track record of raising capital for clean energy projects having raised over $3.5 billion of equity and debt funding into renewable assets since 2008, and are confident in our ability to access a growing pool of global capital dedicated to fund the energy transition. Partnerships will be the second largest component and includes the 3.5 gigawatt development pipeline via Tilt Renewables. We will partner with renowned renewable asset developers, which will deliver additional capital and expertise and help accelerate our development options. The main focus of partnerships will be in renewables, such as wind. The balance is expected to be delivered by our offtakes, and we intend to leverage the scale and diversity of AGL's customer base to achieve the most favourable supply mix and terms. Importantly, our strategic asset base and extensive renewable development capabilities position us well to generate excess returns from the transition of our generation portfolio. As an integrated player, AGO will seek to maximise investment returns through additional development, management, trading and ongoing services that typically would not all be available to a pure play energy company. The returns and regions shown are for observable comparative companies and projects and are provided as an indication of the types of returns that we would expect to see. Now handing back to you, Damien.

Thanks, Gary. As mentioned, I'd like a moment to discuss the impacts of recent federal government interventions in energy markets. Whilst we do support certain measures, namely the customer bill rebates, as well as the role of a safeguard mechanism, we're concerned that the commodity price intervention has created regulatory uncertainty for coal and gas suppliers, undermining their business and investment confidence. I must emphasise that policy certainty and clarity is key to encourage new investment in clean energy generation and supply to ensure the pace of Australia's energy transition. Importantly, our core business fundamentals remain strong despite market interventions. Our robust risk management has ensured retail strength and stability amid significant volatility in Australian energy markets. Additionally, our coal-fired generation portfolio is well supported by a combination of wholly owned and production cost-linked fuel supply, minimising exposure to rising global commodity prices and the impacts of the commodity price caps. Taking a closer look at market conditions, you can clearly see the reduction in spot and forward pricing from historically high levels, partly driven by the introduction of the commodity price caps, milder weather and additional plant availability. The shaded area on the right-hand side shows the downward pressure on FY24 forward pricing, illustrated by the difference between the dotted and solid lines, which represent FY24 forward pricing snapshots taken in September 2022 and January 2023, respectively. Encouragingly, As we've indicated by the data point call-outs on the graph, FY20 forward pricing still remains elevated compared to FY20 and FY21 levels, which we expect to see reflected in strong earnings growth in FY24. I'll now conclude by talking to FY23 guidance and our outlook. As I mentioned earlier, we've narrowed our underlying earnings guidance range for FY23. Our full-year guidance reflects an improved second half as expected, largely driven by an anticipated increase in generation, with improved plant availability and a reduction in outages partly offset by lower forward electricity prices. Customer margin is expected to improve due to growth in customer services. Operating costs are forecast to increase half on half due to the seasonal net bad debt expense and inflation. Encouragingly, the outlook beyond FY23 remains positive. Wholesale electricity pricing remains elevated compared to the prior periods, with AGL expected to benefit as historical contract positions reset in FY24 and FY25. Additionally, sustained periods of higher wholesale electricity prices are expected to flow through to resale pricing outcomes, and the Torrens Island and Broken Hill batteries are also anticipated to commence operations in mid-2023. This will be partly offset by lower earnings due to the closure of the remaining three units of the Liddell Power Station. Thank you for your time and we'll now open to questions.

We'll now open for questions. In the room, in addition to Damien and Gary, we have our Chief Customer Officer, Joe Egan, and Chief Operating Officer, Marcus Brockhoff. If you've been watching the webcast and would now like to ask a question, please refresh the page and you'll see a link to register for the conference call. To ask a question, press the star key followed by the number one. Can I please ask you to mute any other devices before asking questions over the conference line? We'll take one question at a time, and if time permits, we will circle back for any further questions. The first question comes from Dale Kernders from Baron Joey.

Morning, guys. Thank you very much. There's just a lot going on in the market in terms of government intervention and cost inflation. Just wondering if you could provide some comments as to how you're thinking about what's going on in retail competition at this point in time. the outlook for bad debts and churn. I know we've obviously got the data for the half just passed, but sort of more on a going-forward basis. And the labour cost pressures, when you combine it all together, is cost plus CPI sustainable going forward.

Yeah, thanks, Dale. Good morning all. I'll take that one. Look, let me first start. I'll start on net bad debt expense. We were really pleased with the result for the half. It came in lower than the previous half, and that sort of represents, you know, some of the strength of the work we're doing around collections and so forth. We anticipated it probably higher than it otherwise would have come through and something we'll continue to watch closely, but that's another reason why we continue to support the government customer bill relief. We think that's important in this sort of environment. From an inflationary perspective, We are, like others, seeing inflationary impacts through the organisation, but we continue to manage that very strongly. You see we've put a forecast out there for the full year to manage within CPI, and we'll continue to do that through sort of digitisation of much of what we do, but also continue to drive efficiency through our generation units as well. Gail, anything further?

That was my one question. So thank you. I can jump back in the queue.

Thanks, Dale. Next up, we've got Anthony Mulder from Jefferies.

Managing inflation.

Sorry, Anthony, you cut out there. Can you repeat the question?

Sure. So I appreciate your managing inflation. your inflation costs well, and there could be some higher bad debts in the second half. But just interested as to what were the key changes to your view on guidance, given that's been lowered at EBITDA as well as MPAT, please?

Yeah, so what you've seen is a tightening of the range, a narrowing of the range. The rationale behind that is what we saw, obviously we run a long position, let's call it two to three terawatts of energy, Because that curve came off around December, January, you're just seeing some of that length with ordinary sell. We're selling that at obviously lower prices into the market. And that length we have typically relates to those firming assets and renewable type assets in the marketplace. So that's the key driver there.

Thank you.

Thanks, Anthony. Next question comes from Max Dickerson at Morgan's.

Good morning. Can I just ask a question about your forecast rates of return on those two types of assets? Just on the renewables, 6% to 8.5%, I have to admit, if that's an ungeared return, it sounds a little bit high. Can you just clarify, does that suggest a change in gearing or is that an actual arm's length wholesale electricity market return or is there some customer margin potentially captured in that benchmark?

Hi, it's Gary Brown here. Look, just to sort of answer that question, so we've obviously provided this as sort of some indicative ranges to try and give some clarity to the market. I guess from an AGL perspective, we do see ourselves as being able to extract additional returns from the traditional pure players. So you're looking at things like, you know, the ability to be able to participate in things like development and orchestration and those sorts of things both. You know, we do see ourselves as, again, being able to, I guess, move up in that in terms of where the returns are. But again, these are observable returns that we're seeing in the market as well.

Excellent. If I can just ask one quick follow-on, then, is given the higher returns you see in the firming assets, is there a limit to how quickly you can deploy those and you can hint at it that that's where you want to have your on-balance sheet assets? How quickly can you deploy those from a market perspective? How big is the market for storage? Do the returns degrade if you pump too much capital in there too quickly?

Thanks, Max. I think, look, what you're seeing today, we've got the Torrens Island battery coming on mid this year. That really demonstrates the strength of our infrastructure and our assets, if you like. We took EFI down that battery only 18 months ago. You know, the ability to deploy the right batteries in the right locations and using our infrastructure is incredibly valuable. So, obviously, we've got the Torrens Island battery, but also Liddell. We continue to work with Arena on funding in that phase, and we'll continue to drive that as quickly as we can. But you can imagine those sites have the capability and capacity for us to go very, very quickly when we see the market there available for us. That will be a big part of what we put on our balance sheet because we can do it quickly. We can also do it when the market needs it and we have the infrastructure and grid connection.

Thank you very much.

Thanks, Max. Next up, we have Ian Miles from Macquarie.

Good morning, guys. Maybe you can give us a little colour on how your strategy has changed as a result of the coal caps and the gas caps and whether that's going to have an impact on the profitability of those businesses.

Yeah, morning, Ian. Look, I'll take that one, and I might even just hand over to Marcus as well, just from a broader hedging and risk management perspective. But, you know, we are, from a coal perspective, you're aware we own all our own coal down in Luoyang and contract out for the Hunter, for Macquarie. So we're not part of that cap, if you like. We're well underneath that cap, and that provides us sort of the breadth to manage, you know, risk management and profitability in that space. What you're seeing, however, is obviously, you know, that's having an impact of bringing down the curve. From a gas perspective, and I'll get Mark to talk on where some of those conversations are at the moment, what we've seen since that intervention come in is a lot of those conversations and negotiations have dried up. So we're just, we're wanting to see them come live again so we can bring more gas into the market and help our C&I customer base. But maybe, Marcus, do you want to comment on maybe first gas and then back to coal?

On the gas side, I think our book is very much covered until FY25, end of FY25. We are still in negotiations with one of the large, with a few large producers here in the local market. For sure, there is at the moment a resistance to enter into a contract with us because due to the fact that there's quite some uncertainty about pricing, but in particular, I think the tenor of market intervention, and that is applying also for the coal side. At the moment, I would say there's no change in our strategy overall when it comes to contracting our gas and our coal. But the big question mark How long is the governmental intervention taking place? I think there are a lot of discussions. Is it only for one year or will it continue to be? And this will somehow influence any strategic decision about change in our strategy.

I know this sounds very un-PC, but could we expect to see the coal-fired plant actually all turn up as a result of this $125 a tonne cap? Because they will be profitable running much harder now than ever before.

That's true. Maybe some people which have not done proper risk management are running now much more harder. That's most probably true. I think we will most probably still study the terms on condition very carefully because I think between the lines you can read that there are some obligations. That's not a free lunch, the 125, because there are some obligations.

um that you can be directed and there's a must run and we are not happy about this so um so we will most probably anyhow not participate in this scheme and i think even just the other thing to call out is through the work that we've done on this plant over the last number of years i mean macquarie now we're able to turn down to 200 megawatts from 685 you know and loyang well below that 40% as well. So that flexibility is going to be incredibly important in this market going forward, particularly in the middle of the day. And we'll continue to see how far we can drive that down so we've got the flexibility we need.

That's great. Just as a side of that, does that create a capex in POS because these machines aren't really originally designed to turn up and down with the thermal heat going through the metals?

So we've spent, you know, over the last number of years when we've done a number of the upgrades, a lot of that spend has been incurred. I mean, what we're obviously then just trying to manage carefully is any additional ongoing maintenance of the fleet as a result. We're not seeing any of it today, but things such around the mills and so forth, that's where the work takes place. But the value in doing that would far exceed some of that cost. I don't know, Marcus, do you want to comment? No, I think that's good. Okay. Okay, that's great. Thanks, guys.

Thanks, Ian. Next up, we have Mark Samter from MST Marquis.

Morning, guys. Just my questions around the balance sheet. This was an enormous amount of talk around it in the presentation. Just keen to get a feel for, firstly, obviously, net debts back up to almost $3 billion, and whilst I know the working capital drag will normalise, I'm just keen to, A, get a feel for how much headroom you think you've have organically over the next couple of years, but also maybe just give us an update on how refinancing is going, your ability to raise debt. At the moment, I'm just cognizant that it's a moot document now, but if we go back to the merger documents, certainly you guys felt that it was going to be much easier for the businesses to raise debt as separate entities than together. Can you give us a feel for how those conversations are going with lenders, but particularly can you also get a feel for what you think you have in headroom over the next couple of years for investments?

So firstly, as we've sort of said in the slides, we've sort of talked through the amount of headroom that we had in terms of liquidity at the end of the half, which was about $485 million. As we've talked about, we saw a significant reduction in working capital as a result of the reduction in prices. We're very confident that those cash conversion rates will return to historical levels throughout the second half, particularly as we see more normalisation of those working capital levels In addition to that, we've obviously spoken to having a strong expectation of a strong 24 and 25 as well. So I think that'll certainly assist the balance sheet. We've also... sort of had a number of discussions with financiers and we're very confident about our ability to refinance the company and certainly set ourselves up for growth in the future. As we all know, there's a lot of demand for renewable projects to deploy capital into those areas as well. So we're very confident going forward.

And is there much of a change in the... Sorry, I don't know what I've interrupted you there.

I can't hear you.

Are you seeing much different in the premiums you're paying for debt?

Yeah, look, I think it depends on which market you tap. I mean, certainly because the risk-free rate's gone up, that obviously has an impact as you move through. But, you know, again, we're pretty confident with the ability to be able to source competitively priced debt going forward.

And, Mark, just the other thing I'd say, I think, you know, having a clearly endorsed strategy now going forward, having a board in place, management team in place, you know, the banks now look at, you know, our transition plan and strongly support that transition plan, you know, and that's a key part of us getting access to that capital. And, you know, the whole team's involved in plenty of these discussions with the banks just to talk about this transition plan and our delivery of it. So, you know, we are confident to be able to deliver on that refinance.

OK. Thanks, Esther. Thanks, Mark. Next up, we have Pete Wilson from Credit Suisse.

Thanks, Morning. Damian, I was interested in your comment looking out to 2024-25 that you said the increased earnings from the Torres Island and Broken Hill batteries will be partly offset by the closure of Liddell. The word partly would imply that Torres and Broken Hill is greater than the earnings lost from Liddell. Could you just please unpack that a little bit, what the uplift you're expecting from the batteries is, what the earnings of Liddell is, and also include what your expectation is around the change in operation of Bayswater once you bring Liddell out. Cheers. Thank you.

Let me try and unpack that one a little bit. So what the intention of that statement is, is obviously when Liddell comes out of the market, clearly we'll have lower generation and lower earnings as a result. It will partly offset it. It won't fully offset it. That was the notion of the words we're trying to use there. Clearly, different revenue streams from a battery than will be from a generation perspective. But what we do see is, particularly in the SA market, that battery playing an important role, you know, in those periods of peak demand and so forth. But the intention wasn't... I think the way you've read it, it's probably the other way around. We don't intend that to, you know, obviously offset Liddell. It will provide some additional revenues and margin into the business going forward, and we anticipate that coming on halfway through the year.

Marcus? Yeah. And maybe... Still, to keep in mind, the results of Lidl are overstated. If you would continue to run Lidl, there's no reason to believe that the margin or the gross margin which we are generating would stay like this because it needed heavy investment. And from base water, if you look then after the Lidl closure, what happens then with base water, most probably base water will then run a bit harder in order to make sure that we have the energy in the portfolio. From an energy point of view, going forward, we are balanced. But for sure, some capacity is missing overall when Lidl is going out. And we have secured already because the closure of Lidl is known for the last seven years. We have already secured the capacity in the market via additional contracts which we have secured via kept contracts and so on that's under control.

Okay, good. Thanks all.

Thanks, Pete. Next up we have Rob Coe from Morgan Stanley.

Good morning and congratulations to all of the team members who have been confirmed in their roles. I guess my first question is just about the slide 18 where you've called out an 82 mil increase in gas gross margin in trading and origination and so that's great. I just wanted to get a sense of if that continues for for the current half and next year, or should we be looking to include, at the very least, the short-term gas price cap as impacting that number, please?

I think there's a few elements to this. On the one hand, we have optimized, and I think I said this to you already in the past, we have optimized our whole-edge and transportation portfolio have optimized the contract and renegotiation and so on in order to cope also with the pressure on the gas portfolio because you are well aware that our legacy contracts over time are running out and we had to successively fill the gas portfolio the shorter term contract so there was some pressure on and we have managed to get some costs out of this. On the other hand, for tour, this rise in gas prices, we were able to increase the profitability of our overall gas book. That most probably will then have also some spillover effects in the second semester. Going forward, with the price caps, It will be most probably, and that's something we will lose some competitive edge when it goes forward, because everybody could theoretically then secure price at $12 per gigajoule. But we believe we have a competitive edge with our portfolio, because at the end of the day, we have quite some flexibility in the portfolio. And this will be our USP going forward, our unique selling proposition. So I think we are well placed. But for sure, if the price caps will not only stay for 12 and go further on, then it will be a very tough market.

Yeah, I see. Thank you, Mr. Brockhoff, hence the comments about the intervention. That's clear. If I can sneak in another question to your head of customer who had a really great half maybe just a quick update on number of services per customer. There was a previous target, but that was 1.6, but that was set quite some time ago. So just wondering how we should think about that, please.

I'll pass that one straight to Jo. It's been a great six months for customers, so I won't steal any of her thunder.

Thanks, Damien. And thanks for the question, Rob. And we are incredibly pleased with the result. We've got not only great services growth, but really strong customer experience, which is excellent in a challenging market. So the services per customer are tracking about 1.5 and we've seen really strong churn reduction continue on customers that have multi-product services. So at the end of the year, we updated on that with Energy and Telco and we're continuing to see that performance go really strongly.

Okay, fantastic. Great to hear. Thanks so much.

Thanks, Rob. Next up, we have Reinhard van der Waal from Bank of America.

Good morning, folks. Thanks for taking our questions. I just want to unpack this guidance change a little bit more. So back in September last year, you told us that the extended Loyang outage isn't going to have a material earnings impact. And then the September guidance probably would have had visibility on the July outage costs. So is this $40-odd million step down in EBITDA. Is that predominantly just due to your net long position getting sold in at lower spot prices? Or is there some other incremental change here?

Yeah, no, I think what we made really clear, you know, July was a very challenging month for us because of the outages we had and obviously the incredibly high prices at the time when we were short. The narrowing of the guidance is exactly as you say. You know, we are long energy. Let's call it two to three terawatts in that lot length. you know, when we look to sell into the second half, back into the market at lower wholesale prices because of, you know, the forward curves coming off is what's reduced that bias, you know, let's call it $20-odd million. So there's been no other change from a law end perspective. We've got our plant running incredibly well at the moment. Availability, you know, the last three or four months has been exactly where we want it. And I think hearing from Marcus, you know, the last day or so, I think in January we saw, we've seen record availability over the January month. So again, we'll continue to drive the reliability of our plant particularly hard and we have less outages planned in the second half as well, which also helps from a managing availability over that term.

Okay. So, I mean, given that Liddell is going to come out now in April and you're taking on a bit more load, Let's say if you end up with a net short position in an FY24, I mean, in theory, would the lower forward prices actually be marginally positive for FY24, given that you're going to have to have some spot purchase costs, but now at a lower level?

Yeah, I think that's the story which we tried to convey over the last years. I think most probably 23 was the most challenging year. Most of the hedges which we have entered in a rolling off now on the lower price level. And, yeah, you can assume that the prices, the wholesale market prices, which we have seen over the last couple of months and even here, will flow into this. So that will contribute very much to a higher hedging revenue going forward.

I think that's importantly why we're using the words, you know, we see strong revenue growth or earnings growth into 24. That's the language we're using and quite deliberately. Got it. Thanks a lot.

Thanks, Reinhardt. Next up, we have Dan Butcher from CLSA.

Yeah. Hi, everyone. Just a quick one, really. Your gas margin was an impressive $4.8 a gigajoule this period. I'm just wondering whether you can comment on how sustainable that is given your increase in gas costs likely to come through. And secondly, have you had any interaction with the government about concern they've got that retailers are not bound by the price cap the same way that producers are and that maybe they'll extend the price cap to you? Seeing as you're making some very good money off that gas at the moment.

I think most probably you are right there, Bob. This margin is mainly because, for sure, gas prices have come up very much. If you have seen some length in the portfolio, we could benefit from this. This is for sure not sustainable because gas prices have come down from record levels. If you look at the $40 per gigajoule price range which we had, we were coming down now. I think also what is very important, and maybe Joe can compliment me, We are trying still to get more competitive gas in the market, and we will give this back to our CNI customer, but maybe Jo.

Thank you, Markus. Yeah, absolutely. We're working very closely, particularly with our large commercial and industrial customers, many of which rolled off longer-term contracts onto default rates post the announcement of the interventions. And where we can, we're giving rebates to those customers, shorter-term contracts, while we wait for some more certainty into supply. But we're certainly doing everything we can to support customers because we know it's incredibly challenging for them with this uncertainty.

And just to add to that a little bit, just so in terms of those rebates that are out there, it's where we buy spot gas in the month in question. So if it's the month in question, we've been able to buy some spot gas for that customer who's on a default rate, then we'll give some form of rebate back to them as part of that. But until we can start getting that long-term gas back into the book for those customers, we're having to manage it on that basis.

Maybe I was expecting that. Coming back to your question, then in addition, I think, you know, the margin is not sustainable, to be honest with you. We are still going forward. That will be a tougher market. And you are right. We are not bound by the price gap. But at the end of the day, if you want then to secure additional C&I customers or if you want to start another marketing campaign with our customers, you know, at the end of the day, we have to find additional customers. So still we are then falling back to the $12 per gigajoule, depending what is then the flexibility, how the flexibility and how haulage and so on will be priced in then at a later point of time. I think that, as you are well aware, that's still not clear from a regulatory point of view how this is all put into the overall pricing scheme. All right. Thanks very much, guys.

Next up, we have Gordon Ramsey from RBC.

Oh, thank you very much. Marcus, a question for you again on the gas book. Did I correctly hear you say earlier in the presentation that the book's now covered up to FY25? Hello?

You hear me?

Yes, that's true. You know, we are covered. I can just repeat, we are covered. At the moment, with our current customer portfolio and our current demand, we are covered until financial year 25. Thereafter, we have a gap. But we are, as I said in the beginning, we have for sure not waiting on the price caps and so on. We have started to negotiate already some long-term contracts going forward. At the moment, the producers are waiting understandable on the detailed terms and conditions, and we are still confident that we can fill then also the gap which is coming up, and we have shown this in the previous financial years. There is a gap then opening up to 20 petajoules, 30 petajoules. We are confident that we cover this gap then going forward.

Okay, well, sorry, my confusion on this is I'm looking at the slide that you presented last year, which showed your gas book. And when you looked at FY25, it looked like 50 petajoules were basically uncontracted. So I'm just trying to understand whether that 50 petajoule gap has now been contracted.

We have secured some gas, but, you know, also the demand has gone down. There was quite some competition in the market, so we have lost also some of our portfolio customers.

Okay, so winding down the book quicker. Okay, thank you.

Thanks, Gordon. Next up, we have another question from Dale from Baron Joey.

Thank you for taking the extra questions. Just wondering about some comments around DMO. That process is going through. What your expected outcomes are and is that a risk to retail profitability FY24?

Yeah, thanks, Dale. I'll take that one. So we're aware that the outcome of the DMO has been pushed back a little bit through to the end of May, I think it is. So ultimately, that's going to be a decision for the AER. We expect that the methodology will be similar. And certainly when we look at our retail pricing decision, which will be for the majority of our customers on market contracts, we will absolutely be applying a consistent methodology. So whilst we've seen wholesale prices come off somewhat, we do still expect significant increases because of the 24-month rolling average that still needs to flow through.

Okay, is hedging being changed at all, or hedging practices to account for potential uncertainty in the DMO?

From a risk management point of view, we are still hedging on a 2.5 years rolling average. Okay.

Maybe to clarify, Dale, for our portfolio, the DMO really only applies to about 10%, 10% to 15% of our customers. whereas the majority are market contract pricing, so, you know, based on AGL's pricing decisions.

Yeah, and so based on the basis that we don't see any change in methodology on the DMO and the way we manage our books, there's no change to the way we think about hedging and risk management from a pricing perspective.

It's still a pricing mechanism. It's a look-back mechanism. Absolutely.

Sure. Okay. And then just as we stare into FY24, you've called out for the higher electricity prices, better generation reliability, Liddell, two batteries. What are the other moving pieces we need to be aware of, if any?

I think, I mean, they are the key moving pieces that we're talking about. Clearly, you know, our business is so levered to where wholesale prices are and the pricing through to customer. You know, the other things to be aware of, which we've called out, is from a cost point of view, continuing to manage that incredibly tightly and efficiently in this market. The other one would be net bad debt expense, continuing to manage that. that very, very closely. They're probably the things that we're really focused on. And then from an integrated energy perspective, continuing to see both the flexibility in our fleet, but also the availability in our fleet into 2024. But as I said, you know, what we're seeing through business performance over the last three to four months, really positive, gives us the strength and step up into the second half of 2024.

Okay. Thanks, guys. Thanks, Dale. Next up, we have another question from Rob from Morgan Stanley.

G'day, guys. Thank you for indulging me yet again. Just, I guess, more of a modelling question just for the debt facilities going forward. Should we be factoring any amortisation in this or just standard corporate revolver for investment grade?

Yeah, look, I think that's something we're still to work through as part of refinancing going forward. So probably...

But I think, you know, at a broader level, I think, you know, think about it as a corporate model for the time being in terms of your models.

Yeah, that's fine. Yeah, okay.

Yeah, okay. Thank you. Yeah, okay. That's great. Thanks so much.

Thanks, Rob. And we've got our last question from Pete Wilson from Credit Suisse.

Thank you. I just wanted to ask a question on customer. So that sounds like you've pretty happy with the first half result with the EBIT increase. Just wondering what your expectations are into the second half and effectively for the full year in light of the guidance for an increase in OPEX in the second half. Do you expect an increase in gross margin in the second half to offset that increase in OPEX or are you actually expecting like a net margin decrease in the second half? And if you could also in answering that maybe explain why consumer electricity gross margin was pressured in the first half?

Yeah, sure, Pete. So, yeah, look, we're seeing really strong momentum in the customer business, so I expect a strong second half. I think the signalling around OPEX is due to some investment in our growth businesses, timing on technology spend in our retail transformation program, and also there's a bit of seasonality on net bad debt. But as Damien said, we're in a really strong position with our debt portfolio, so we'll continue to focus on that. In terms of electricity, it really just was a timing position on the impact of the retail price change. So margin compression has really stabilised and we're seeing really good results with less customer switching in the portfolio.

And I think, Pete, broadly on your question, we expect to see a net margin after expenses being positive in the second half and up on the second half is the way to think about it. Excellent. Thanks for that.

Thanks, Pete. As there are no further questions, this concludes our Q&A session. Thank you, everyone.