AGL says its 2023 earnings will hit the top end of its guidance

AGL, under pressure to fund a $20bn green energy transition without damaging its balance sheet, has posted a significant turnaround from its sour first-half result.

AGL Energy expects to post its biggest annual profit in three years in 2024, which the near 200-year-old company said would fund both lucrative returns to shareholders and facilitate its transition away from fossil fuels, but is also likely to intensify public anger amid a cost of living squeeze.

AGL is Australia’s largest carbon emitter but has committed to exiting coal by 2035, stoking some concern from investors about whether it could simultaneously achieve profitability and wean from fossil fuels.

In a result that will buoy market confidence, AGL said it expects to record profits during the 2023 financial year of between $255m-$285m, up from its previous forecast of between $200m and $280m.

AGL said 2024 will be even stronger, and it expects to post profits of between $580m and $780m. If it reaches that guidance, it would be the largest annual profit since the 2021 financial year.

The guidance sent shares up more than 14 per cent to hit a more than two-year high during the session. They closed 9.7 per cent higher at $10.60 on Friday.

AGL chief executive officer Damien Nicks said the company has enjoyed a strong past six months, and he expected momentum to continue throughout the next 18 months.

AGL chief executive Damien Nicks. Picture: Daniel Sommer

In February, AGL reported annual profits during the first six months of just $87m after it endured a tumultuous period of high wholesale electricity prices and a spate of outages across its generation fleet.

Mr Nicks said the company had worked hard and invested significant funds in improving both the reliability and flexibility of its fleet of coal power stations.

The improved reliability of generators has allowed AGL to earn strong returns as Australia’s wholesale electricity price remains elevated. AGL did not reveal specifics but acknowledged this impact as it revealed customer margins were a key driver in its improved financial performance.

“It is really important to see those plant performances really stepping up to where they need to be because early in the year through that market suspension, we took a big hit as a result of planned and unplanned outages,” Mr Nicks told The Australian.

“We’re also providing financial year ’24 guidance as well and that is a step up between ’23 and ’24. We don’t anticipate those outages from last year to occur again in 2024. So that’s some of that driver and also higher wholesale prices that roll through our book.”

AGL had not previously issued any 2024 financial guidance, but had stressed it expected an earnings recovery.

The increased profitability of AGL, however, is likely to stoke public anger as they face higher power bills.

The Australian Energy Regulator last month approved increases to household and business bills of about 25 per cent – the second consecutive year when prices have risen by more than 20 per cent.

Retailers have begun to send letters to customers outlining price increases. EnergyAustralia on Friday became the latest, revealing that prices would rise for customers between 15 per cent to 24 per cent.

The increase in bills has been attributed to soaring costs of generating electricity, driven by a global energy crunch that sent prices for coal and gas to near record highs.

Those energy companies, however, with generation assets like AGL, will profit from the higher costs of electricity.

AGL has promised to work with any customers experiencing financial difficulty, including the use of analytic tools to identify customers who need help with their bills.

The federal Labor government in its May budget said about five millions households would receive rebates on their bills, but soaring inflation and rising interest rates has intensified pressure.

As many households struggle, renewable energy proponents worry about a shift in public support for the energy transition.

Mr Nicks acknowledged the impact on households, but said the transition away from fossil fuels is baked in.

“These assets are coming to the end of their lives so the market will need to replace them. We need to find a way to do it in as efficient and effective a way as we can. The quicker renewables come in, then you will see prices come off to a degree,” Mr Nicks told investors on Friday.

Capital flexibility

The turnaround of the company’s financials are being closely monitored as its rapidly transitions away from coal.

AGL in 2022 pledged to spend $20 billion to develop 12 gigawatts worth of zero emission generation capacity after bowing to mounting pressure from shareholders and activists such as billionaire Mike Cannon-Brookes.

While investors have welcomed the plan, AGL is under pressure to fund the transition without damaging its balance sheet.

To achieve its aims, AGL said it will adjust its dividend policy and will now target dividend payments of between 50-75 per cent on profits. AGL previously targeted a dividend ratio of 75 per cent.

“Our refreshed capital allocation framework and updated dividend policy are focused on striking the balance between investing in the opportunities of the transition, while maintaining a healthy balance sheet and providing appropriate shareholder returns,” said Mr Nicks.

Mr Nicks said AGL has made progress in developing its renewable energy pipeline, but it will take significant capital injections. AGL expects to spend between $8 billion and $10 billion on transition projects over the next 12 years. Some $4 billion is expected to be deployed by 2029-30.

Mr Nicks said AGL’s development pipeline now stands at 5.3 gigawatts now, an increase on the 3.2 gigawatts that the company said it had scoped last year.

Investors are anxious about how AGL will fund the significant renewable energy pipeline needed. AGL said it expects about 5.5 gigawatts of its targeted 12 gigawatts to be funded on its balance sheet, with the rest provided through joint ventures, alliances and power purchase agreements.

Originally published as AGL says its 2023 earnings will hit the top end of its guidance