AGL Energy: Pressure mounting but tailwinds are strong

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Author name:

By Max Vickerson

Job title:

Analyst

Date posted:

14 June 2022, 8:30 AM

Sectors Covered:

Industrials, New Energy

• AGL Energy (ASX:AGL) now expects its unit outage at Loy Yang A to extend until the second half of September and a number of units in NSW are also out for short durations.
• We have therefore allowed for a greater impact from Loy Yang in FY23 as well as some impact from the short duration outages in FY22.
• Despite the challenges facing the company we still see potential for strong earnings growth supported by the legacy assets and retain our ADD rating.

AGL sailing close to the wind in a turbulent wholesale market

AGL announced today that it has extended its expected duration of the Loy Yang A unit 2 outage out to mid-September which will now be ~5 months in total. The company previously guided to a $50m after tax impact based on a return to service by 1 August 2022 and expects to update this number at release of the FY23 result.

There are also an number of units out on short duration maintenance events at its two black coal plants in NSW. Some of this may be due to planned maintenance but we imagine the recent outages will cause a short duration exposure to spot.

We also note that AGL has acquired additional gas customers as part of being the Retailer Of Last Resort (ROLR) for some of Weston Energy’s industrial customer base.

Weston is no longer able to act as a retailer and under the ROLR provisions AGL has acquired some of its customers in QLD and NSW. It’s not clear what the immediate exposure is for AGL but we expect a small impact on FY22 and FY23.

We think the additional outage impact is outweighed by the tail winds

Based on the baseload futures pricing for August and September we think the after tax impact of the extended outage could be as much as an additional $70m in FY23. We note though that this is difficult to forecast precisely given the lack of information available on AGL’s hedging contracts.

We think this is outweighed though by the strong increases to come in higher customer contracts in FY23 and FY24.

For perspective, one unit at Loy Yang would generate ~4.8TWh running flat out for a year whereas almost 15TWh of retail contracts will roll into higher pricing next year as well as a portion of the 10TWh of commercial load.

Forecast and valuation update

We have lowered our FY22 underlying NPAT forecast to $219m (-7%) and our FY23 forecast to $610m (-12%). In FY23 this is mostly driven by Loy Yang but in FY22 it is a combination of the unit outages in NSW and potentially additional gas exposure from the Weston energy customers. 

This lowers our valuation and target price to (login to view).

Investment view

We maintain our ADD rating given the strong tailwinds we see as higher prices flow through customer contracts. There are still uncertainties in how AGL can navigate the energy market de-carbonising.

Undoubtedly conditions remain supportive of the legacy assets in the short to medium term.

Price catalysts

• Guidance for FY23 released at the FY22 earnings result in early August.
• Completion of the strategy review in September.
• No further extensions to the LYA unit 2 return to service date.

Risks

• Performance of the generation fleet.
• Resolution of the leadership roles on the board and the CEO.
• Realistic investment program for renewables and storage including a partnership with lower capital cost investors.
• Commodity prices (coal, gas, electricity and carbon).
• Interest rates and securing debt replacement in medium term.
• Changing market regulation, particularly while wholesale markets are tight.
• Self-insurance of the generation fleet.

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