Company Interview / AGL triples profit amid higher electricity prices

Gary Brown, CFO of AGL Energy (ASX: AGL) expresses satisfaction at the robust operational performance exhibited across the entire organisation. The company’s development pipeline has doubled in size to a total of 6.2GW, while significant investments have been made in a $750 million model battery and a retail transformation programme that is estimated to cost $400 million over several years. ASX:AGL has also acquired firm Power and Terrain Solar, bolstering their business by adding an additional 8.1GW of optional manoeuvrability.

Despite facing charges that could negatively affect profit margins, the company has managed to generate net profits amounting to $711 million, overturning losses suffered in the previous financial year. This has primarily been achieved through the outstanding performance of their integrated energy sector, which experienced a 9% increase in availability compared to previous data, indicating a considerable growth in the supply chain. The business has also witnessed an increased growth in their customer market segment to 4.4 million as well as in their Netflix offering.

Gary states that the company is profoundly aware of the financial hardships that clients endure and, as a result, has increased their customer support package to $90 million to assist those most in need. On another note, ASX:AGL plans to reinvest a significant ratio of their profits into clean, sustainable energy sources. Focusing on their future strategy, Gary anticipates a small dip in the projected profits for the financial year 2025. Their efforts will continue to be geared towards transforming their retail business and enhancing the generation sector of the business. Consequently, the firm business is looking to devise capital into firming type assets, which will play a crucial role in Australia’s overall transition moving forward.

Full unedited transcript:

0:00

We're really pleased with our results that we've announced today. It's really been underpinned by very strong operational performance across the entire business. But in addition to that, in this year, we've also doubled the size of our development pipeline to 6.2GW, which is a great result. But not only that, we continue to invest back in the transition. We've recently announced a retail transformation programme, which is a $400,000,250 million spend over several years. But we've also continued to invest in our $750 million model battery. And today we also announced the acquisition of firm Power and Terrain Solar, which will be adding 8.1GW of optionality to us as a business.

0:42

When you look at net profit coming in at 711 million, that reversed a loss from full year 23. Just tell us about some of the charges relating to that and how you managed to get to the black.

0:54

Yes. As I said before, it really has been underpinned by very strong operational performance throughout the entire business. If we look at the integrated energy part of the business, which is our generation business, we had an equivalent availability factor of about 86%, which is about a 9% increase on the prior year. What that means is that fleet was available as and when was required for our customers going forward. So we're able to generate and support the NEM. But in addition to that, our customer markets business, uh, we've got 4.4 million customers of 4.5 million customer services, which is an increase of 211,000 customers on the prior period. Um, and again, we've seen very strong growth across areas like telco and also our latest Netflix offering as well.

1:40

Gary, when people see though the headline number of tripling profit and they're struggling with higher cost of living and higher electricity prices, what do you say to that? And I guess what sort of support do you have in place for your customers?

1:55

We're acutely aware of the cost of living pressures that our customers are facing. And today, we've announced an increase in our customer support package to $90 million to support those customers that are most in need. But not only that, we continue to support our customers through a number of different measures, which includes things like bill smoothing. It also includes things like monthly billing, but also some significant support that the government is giving in terms of fuel relief and those sorts of things as well. What we are seeing are underlying net bad debt expense, as a percentage of revenue has only marginally increased from 1.2 to 1.3%. And what that tells us is the support we're giving to our customers is working. But again, we continue to work with our customers that need us the most.

2:39

And, Gary, how much of your profits are you going to use to push into green, clean energy?

2:48

That's a good question. I think what's important to note is that our dividend payout ratio is between 50 and 75%. So today we've announced the final dividend at 50%, 50%, which is at the lower end of that range. What that allows us to do is to have a lot of flexibility on our balance sheet to redeploy those funds back into the transition. As I said before, we're we're already investing in a $750 million factory at the Liddell site. We're also investing $450 million into our retail transformation program going forward, which will ultimately help support our customers. But not only that, there are a number of other areas that we're looking to continue to to deploy capital in, which includes the recent acquisition of firm power. When you are seeing some strong returns to shareholders, including an increase in dividend, do you think that you can continue to see that going forward?

3:41

Yeah. So we we're very clear that our dividend policy is between 50 and 75% of underlying impact. What that does do is it gives us the flexibility on our balance sheet to look at what our growth requirements and the cash flows required to fund the transition. In the short term, medium term term are. And what we can do is we can effectively, you know, look at what that dividend policy or the dividend payout would be in conjunction with the board. Ultimately, we would do what is in the best interest of shareholders. But as I said before, we've got some, you know, significant capital spend over the next number of years, which really will support the transition going forward.

4:17

And you are forecasting full year 25 underlying profit between 1.8 to $2.1 billion. Just talk us through some of your strategy for the next 12 months.

4:27

So what we're seeing is, is a small step down in projected profits in FY 25 compared to FY 24, and most of that is driven by a reduction in the wholesale curves year on year. But we are very focused on the implementation of our strategy going forward, which is very much about number one in our retail business, really driving transformation in that business. But number two, in our generation, part of the business continuing to deploy capital into those firming type assets, which will ultimately help Australia in relation to the transition going forward.

5:01

Can we talk a little bit more about your decarbonization program, particularly with your 20% equity investment in Kaluza?

5:11

Sure. So in relation to our decarbonization program, there's a number of different elements to that. But really what we're planning to do is exit coal by 2035. Um, and in response to that, we'd be looking to develop 12GW of renewables and firming to ultimately support our customers in the supply that they need. If we don't dive a little bit deeper into, you know, the customer and the customer experience, we think our investment in the Kaluza business, our equity stake, um, you know, we'll also help underpin because there's some significant, um, technology that's within that Kaluza platform that we've already tried and tested in the OVO Energy Australia and business that we already own 100% off. So we've already had a good look at that technology. We're really pleased with it, and we will be deploying it to the rest of our customer base. And that's also a reason why we've decided to take an equity stake in closer going forward.

6:05

Any other intentions to deploy some of the $1.7 billion worth of cash you've got on your books?

6:14

Yes. I think the important thing about the $1.7 billion of net debt that we've got is we've got quite a bit of headroom for our credit rating and our Moody's credit metrics. And we're at the moment where booyah to investment grade credit rating. And we're very committed to that. You know we will continue to deploy capital into the transition. And we've been very public that we plan to spend between 8 and $10 billion between now and 2035, of which 3 to $5 billion of that will be deployed between now and 2030.

6:45

Just another question on the dividend you are intending to begin paying partially franked dividends from full year 25. Is that correct?

6:55

We intend to pay partially frank dividends from the interim FY 25 dividend going forward, and a change at the board as well. We've got a new chair coming in from February.

7:07

You look first. Um, what I'd like to say is, uh, Patricia Mackenzie's been on the board now for about five years. In the last two years. He's been on there as chair. She has done an amazing job in helping, you know, turn that, turn the company around and get us to into the really strong position that we are in today where we're, you know, significantly deploying capital into the business and into the transition going forward. Having said that, um, you know, Myles will be who's also Myles George who's been on the board now for a couple of years. He's a very experienced energy player. And you know we've got a really great working relationship with Miles. And we look forward to working with him in the future.