AGL Energy Limited

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 Nix. Please go ahead.

Good morning everyone, Damien Nix 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 merging. 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, Joe Egan, Chief Customer Officer and Marcus Brockhoff, 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 a refreshed strategy and our accelerated decarbonisation 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 decarbonise 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 Joe 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 of bill relief for our most vulnerable customers on the Staying Connected Hardship Program. We're using advanced analytics to identify and proactively engage with our customers who may be 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 specialised training for our contact centre 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. We have seen high energy prices to ensure that we can both support our customers and carefully manage our costs. Turning now to our full year results, which overall reflect a 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 realised in earnings, partly offset by increased operating costs and lower generation volumes due to the prolonged outage of Luoyang A Unit 2, which was caused by a generator rotor defect and also the closure of the Liddell Power Station in April 23. 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 23 cents per share has been declared, unfranked, bringing the total dividend for the 2023 financial year to 31 cents 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 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 FY24 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 refreshed strategy in one of the most significant decarbonisation initiatives in Australia. This included the accelerated closure of Luoyang 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 finalised following the appointment of Suzanne Falvey 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 US 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 decarbonisation pathway, with the safe and respectful closure of the Liddell Power Station after almost 52 years of operation. This is expected to deliver an average annual emissions reduction of 8 million tonnes of greenhouse gas emissions from FY24. And finally, at our investor day in mid-June, we had the privilege of sharing further detail on our business strategies and our accelerated decarbonisation 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, Cenex and ExxonMobil. In line with our ambition to help customers decarbonise, we were excited to share our 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 Corabri Almond Farm in New South Wales is a great example where AGL designed a low carbon microgrid and once constructed will help lower the customer's 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 decarbonisation 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 FY20. 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 our 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 decarbonise. 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 decarbonisation at scale. AGL has maintained market leadership in the commercial solar space, delivering three times 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 decarbonisation objectives to build a future ready business. Decentralised assets under orchestration is 47% higher, and the power of technology in automation is being harnessed with over 5 million transactions managed by artificial intelligence. Additionally, we continue to grow our decarbonisation 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 Luoyang 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 Loyang 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. Normalised for the 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 FY22, a good achievement overall considering the impact of the prolonged Luoyang A Unit 2 outage. As you can see on the right-hand side of the graph, our stronger EAF was driven primarily by a reduction in thermal unplanned outages in FY23, 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 Luoyang 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 Loyang-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 Loyang-A units by a further 50 megawatts each in FY24. Flexibility upgrades at Bayswater delivered approximately $7 million of gross margin benefit in FY23 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 Loyang 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 targets ending in FY27, which we shared at our investor day. Starting with the top row, I've already spoken to our strategic MPS 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 23. Similarly, the cumulative customer assets installed metric covers installations from FY24 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 Tyrens Island Battery, 50 megawatt Broken Hill Battery and the 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 FY24. 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 23 cents per share has been declared, unfranked, bringing the total dividend for the 2023 financial year to 31 cents 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 early closure dates of thermal assets in line with our accelerated decarbonisation plan, as announced in 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 market's 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 predominantly 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 was 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 Luoyang Unit 2. This resulted in short generation position compounded by significantly higher pool prices. Both FY22 and 23 were impacted by generation outages during market volatility with additional investment in availability and reliability expected to restore this loss 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 OPEC 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 five terawatt hours generated in FY23. 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 amortisation 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 FY23, 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 cybersecurity spend to further bolster protection for our operations and customers in an ever-involving cyber environment. Looking forward, we expect an uplift in operating costs in FY24 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 FY18 and FY19. 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 low carbon industrial energy hubs and the implementation of phase two 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 FY24 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 gray shaded bar, we're forecasting to spend approximately $200 million in FY24. Please note that this forecasted growth spend is contingent on a targeted final investment decision in FY24. As indicated on the right-hand side, medium-term sustaining capital spend on our thermal assets is forecasted between $400 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 forecast to include $40 to $50 million per annum of ongoing spend on customer markets 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 FY23 was $11 million higher due to the increased investment in our thermal assets and the earlier closure of the Bayswater and Loyang A power stations in line with our accelerated decarbonisation plan, partly offset by the impairment impact resulting from this earlier closure date. In FY24, we expect an uplift in depreciation and amortisation by approximately $40 to $50 million, and overall high depreciation and amortisation expense over the medium term, driven by the accelerated closures of Luoyang 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 FY24, as well as the retail transformation program. Encouragingly, we had strong cash flow generation in the second half of this 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 FY24 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 FY23. Please note that this will be the key metric that we will be monitoring and reporting going forward. It is normalised for 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 US private placement market. In the coming months, our focus will turn to refinancing our FY25 and FY26 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 a 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 availability, flexibility and reliability. Overall, our balance sheet is in a strong and robust position as we head into FY24. 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 FY23 final dividend is based off 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.