Power shock: AGL finally gets on with it

AGL Energy CEO Damien Nicks. Picture: Britta Campion

What a difference a year has made for Damien Nicks.

Some 12 months ago the newly-minted AGL boss had his work cut out. Profits were being pounded by government intervention like gas price caps and his fleet of creaky coal-fired generators were failing to fire.

He was also trying to convince investors they should back his expensive green renewables bet and rightly many investors had their doubts. AGL had a massive credibility problem after spending much of 2022 tearing itself apart and at war with major shareholder, tech billionaire Mike Cannon-Brookes.

Surging wholesale power prices are backing AGL’s recovery. Picture: Aaron Francis

Over the past year however there’s been barely a sound from Nicks and his executives as they set about diligently filling out AGL’s much-hyped green energy pipeline.

Indeed, while AGL went unusually quiet, all the corporate drama was taking place across town at rival Origin Energy.

In an electric twist, Origin’s board and executives have spent the past year deeply distracted on a botched $20bn takeover that ultimately failed to win over shareholders.

Now it’s AGL that’s minting cash. It broke the $1bn earnings barrier for the December half and delivered higher-than-expected revenue. And in very rare territory for AGL, Nicks is still confident of easily hitting profit targets for the full year.

Nicks had substantial help with surging power prices underpinning profit. But stability also counts. A commitment by the new CEO to spend more on his ageing coal-fired plants has improved their reliability through the tail end of winter and into summer and this helped AGL’s bottom line. The power generator also managed to boost customer numbers amid a high rate of industry switching, potentially at the expense of Origin. (Origin’s interim numbers are out next week).

Even so, AGL becomes the latest high-profile corporate to deliver a windfall profit and like supermarkets and toll road operators, this will raise tension with Canberra as the Albanese government accuses big business of making hay in a cost of living crisis.

The billionaire Cannon-Brookes, who took an 11.3 per cent stake in AGL to force it to move faster on its transition, is another big beneficiary of AGL’s bumper coal-powered profit. At the current rate he is on track to see more than $40m in dividends for the full year.

With fewer corporate missiles coming AGL’s way and stable management, Nicks was able to charge ahead and actually start building out green energy that has so far only been talked about by the old-world energy generator.

Atlassian co-founder Mike Cannon-Brooks. Picture: NCA NewsWire

Nicks tells The Australian a lot of effort was put in getting the coal generators “running incredibly well” last year and building the technology needed that allows the slow moving generators to power down when solar and wind are flooding the grid. A more reliable fleet of AGL coal generators and better responsiveness to pricing “ultimately goes to helping the transition”, he says. By this he means running AGL for cash to reinvest.

Still, the profit jump – up 78 per cent to $1.07bn – sees AGL facing accusations of cashing in on the inflation bubble. Nicks says AGL, like all generators, was seeing the delayed effect of the previous year’s higher market-driven pricing and having his generators selling more electricity into the market around the clock compared to previous year.

He wouldn’t comment on electricity prices until AGL issues its price determination in March, but says a mild summer and increased reliability were feeding into “a softening” of wholesale prices for the coming year.

With billions still to be spent on renewables, Nicks and his team have also done a good job managing investor expectations around capex.

The December half dividend of 24 cents a share was at the very bottom of AGL’s preferred payout ratio of 50 per cent. Companies holding back dividends get badly punished, but AGL’s bumper numbers still saw its shares surge 10.2 per cent on Thursday.

Nicks plans to spend $950m on capex this year, mostly on big batteries, and this is up sharply from $650m last year. The CEO has almost doubled his green energy pipeline under development to 5.8 gigawatts from 3.2 this time last year with most of the boost coming from batteries. AGL’s target is to have 12GW in place in the coming decade.

Nicks acknowledges the next phase of the build out will be harder than the first, particularly in getting large-scale wind and solar generation assets which need land to be linked to the grid through costly transmission lines. The firming part of the equation is easier with batteries slotting in on the sites where AGL’s coal power plants are being retired – like in Liddell in NSW’s Hunter Valley. However Nicks wants to keep going about the build and quietly too.

“Remember, we’ve been doing this for 187 years, we’ve done many, many big projects over many years and we will continue to do this exceptionally well.”

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