Company Overview - AGL Energy Limited (AGL) is engaged in buying and selling of gas and electricity; construction and/or operation of power generation and energy processing infrastructure; development of natural gas production and storage facilities, and exploration, extraction, production and sale of coal seam gas (CSG). AGL operates in four segments: Retail Energy, which includes selling natural gas, electricity and energy-related products and services; Merchant Energy, which is engaged in developing, operating and maintaining power generation assets; Upstream Gas, which includes investments and operations in gas exploration and among other activity, and Energy Investments. In April 2014, Torrens Energy Limited announced that AGL Energy Ltd corporate ceased to be a substantial share holder of the Company. In September 2014, AGL Energy Ltd completes the acquisition of Macquarie Generation (MacGen) assets from NSW Government.


Analysis - AGL Energy (AGL) reported for strong operating cash flow reflecting lower working capital and good performance by core operations even in difficult market conditions for the year ended 30 June 2014. However, AGL witnessed reduced revenue and underlying profit owing to competition and lower volumes. For instance, electricity consumer volumes dipped by 2.9%, including APG, and gas consumer volumes were down by 4.9% including APG.


Financial Highlights for FY2014 (Source – Company Reports)

Quite recently, AGL advised that its oil-linked gas sales contracts are fully hedged against the effect of movements in oil prices. In its FY14 full year results presentation, AGL highlighted that it had entered into gas sales contracts with Queensland customers for the period FY15-FY17 with two contracts incorporating oil-linked pricing. Subsequently, the Company fully hedged its exposure to the oil price for the life of the contracts, thereby leading to a lock-down of margins on the contracted sales in FY15, FY16 and FY17 which is not expected to be affected by the fall in oil prices. The average margin on the 57 PJ gas sales expected in FY15 is $3.40/GJ. The Company has also successfully contracted for the supply of 69 PJ of gas from the Otway Basin between 2018 and 2021.


Strong Market Positions (Source – Company Reports)

Other highlights constituted the announcement for the appointment of McCann Melbourne as its new brand and advertising agency. The Company also said that it will commit six million dollars over the next three years as part of a program of improvements to provide greater support for vulnerable energy customers. AGL developed its Affordability Initiative based on engagement with their Customer Council and more than three months of intensive consultation with 35 consumer, financial counselling and community groups across in Australia.  AGL is thus committing to a range of improvements to Queensland Council of Social Service, Public Interest Advocacy Centre, St Vincent de Paul Society, South Australian Council of Social Service, Brotherhood of St Laurence, Kildonan Uniting Care and Financial Counselling Australia. The framework for the expenditure of the fund will be outlined in February 2015.

With regards to the Nyngan Solar Plant tour by the Nyngan Solar Plant Community Consultation Committee, the Company updated that all 138,000 posts for the photovoltaic (PV) modules and almost one quarter of the 1.4 million solar PV modules are in place at the plant in western New South Wales. The construction of the 102 megawatt plant commenced in January 2014 and the project is on track for completion in mid-2015. AGL has also received a go-ahead for commencing the construction at Broken Hill Solar Plant from the NSW Department of Planning and Environment. The Company expects the completion of construction of the solar plant by the end of 2015. The finished solar plant will consist of over 650,000 solar PV modules, covering an area of ~140 hectares. The Company has advised that four generating units (collectively known as ‘A station’ and with an aggregate capacity of ~480 MW) from its Torrens Island power station in Adelaide will be mothballed in 2017. The Company would review the decision depending on any change in market conditions.



Capital Expenditure (Source – Company Reports)

The successful completion of the hydraulic fracturing of four wells as part of the Waukivory Pilot in Gloucester is another interesting update. The final frac was conducted in November 2014. Over the five week work program, 19 zones at depths ranging from 371 to 965 metres were hydraulically fractured and geophone instruments were used to collect data confirming the fracture geometry. The Company decided to start work for removing the water from the wells for allowing the gas to start flowing, and gas and water flows to be evaluated. AGL expects a final investment decision on the 110-well Gloucester Gas Project in Q4 2015. AGL also welcomed the NSW Government’s Gas Plan as it recognises the need to secure local gas supplies for the people of NSW. The Company’s natural gas exploration pilot in Gloucester to test the gas flow from coal seams for a project that could potentially supply an additional 15% of NSW’s gas needs is an important step.


Lowest Cost Position of Scale in NSW (Source – Company Reports)

AGL reported the development of an industry-leading assessment modelling tool to scope energy productivity opportunities relating to gas thermal energy systems in the 150kW to 10MW range. The tool can be used to generate a Gas Productivity Investment Curve and a high level report of the most economically attractive gas productivity measures for a specific site, related to steam boilers, hot water heaters, etc.


Eastern Australia Gas Demand (Source – Company Reports)

The Company has also conveyed its plans to evolve the business to meet changing consumer needs with new energy strategy revolving around disruptive technologies. AGL aims to have a footprint in one million Australian homes and businesses by 2020. Efforts such as launching a digital metering business and expanding its solar business, including offering more flexible methods of financing and paying for solar, are planned. Exploring various ‘in home’ energy services such as energy/battery storage and electric vehicles is also on the cards.


Divisional Highlights (Source – Company Reports)

A new online water portal for water data for greater access to information about water resources across AGL’s coal seam gas projects in NSW has also been launched. This will facilitate checking the levels and quality of surface and groundwater in the areas around Camden, Hunter and Gloucester gas projects by simply visiting the website.

The agreement to acquire Macquarie Generation for a purchase price of $1,505 million concluded in 2014. To partly fund the acquisition, AGL announced the launch of a pro-rata accelerated renounceable entitlement offer to raise ~$1.2 billion. Macquarie Generation’s key assets entailing the two black coal fired power stations in the Hunter Valley, NSW, namely, Bayswater – 2,640 MW and Liddell – 2,000 MW will provide competitive advantages and improve AGL’s risk arrangement capability. AGL Macquarie’s Bayswater power station completed a $13 million outage in November 2014. Enough power for over 500,000 households has been returned to NSW’s electricity network in time for the high demand summer period.

The Company successfully priced $600 million of senior unsecured, seven year fixed rate Medium Term Notes (A$MTN). This is the largest seven year A$MTN transaction in over a decade, and was more than four times oversubscribed from the initial launch volume of A$200 million with interest in excess of A$850 million primarily from Australian and Asian based investors.


AGL Growth Pipeline (Source – Company Reports)

As per the Company’s outlook, carbon tax repeal effective 1 July 2014 gives rise to a net reduction of ~$100 million in EBIT contribution from Loy Yang A due to cessation of transitional assistance arrangements and a reduction of ~$86m in EBIT from AGL’s renewable and gas generation portfolio’s due to anticipated lower wholesale electricity prices. HCE closure is expected to reduce FY15 EBIT by $14 million. Primarily, 2015 underlying profit (after tax) is expected to be between $575 and $635 million. Solar plants commissioning and Macquarie Generation integration is on track.

A point of concern relates to the recent finding by Federal Court that AGL South Australia Pty Ltd, a subsidiary of the company made false or misleading representations regarding the level of discounts offered for the residential customers.


AGL Daily Chart (Source - Thomson Reuters)

Nonetheless, overall aspects such as completion of deregulation of retail markets; operational excellence in retail core operations continuing to improve customer service; diversification of AGL generation portfolio across renewables, gas and coal; and Macquarie Generation compelling value for lowest cost and asset for large scale NSW generator; all are most likely indicative of AGL’s promising future. Accordingly, we put a BUY recommendation for this stock at the current price of  $13.71

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