AGL Energy boss Andy Vesey is enjoying the best of both worlds.
On one hand, he has taken the high moral ground by outlining a strategy to wean AGL off coal-based electricity and invest more in renewables. His contribution to Australia's energy debate has been valuable and raised his profile, even if it is at odds with the shifting political climate under Trump and Turnbull.
On the other hand, he continues to reap the benefits of the company's existing coal-fired power stations established by his predecessors. AGL's shift in focus away from coal to renewables is still decades away. Shareholders looking at the company's earnings profile for the next three years have little to worry about.
Soaring wholesale power prices have underpinned a 40 per cent rise in AGL's share price over the last six months. Demand has been helped by the closure of Hazelwood coal-fired power station in Victoria and last month's deal to keep Alcoa Portland's aluminium smelter open for another four years.
AGL shares jumped another 3.3 per cent on Thursday after Vesey posted a solid first-half result, as expected, and guided the market towards the upper end of the company's $720 million to $800 million forecast earnings range. Some analysts had questioned whether the result would be enough to justify the company's current valuation, but the market was lapping it up on Thursday.
The solid result was overshadowed by latest blackout in South Australia, which re-ignited the debate around whether the state has gone too far in pursuing renewable energy policies. Unlike the South Australian government, Vesey has the luxury of time on his side as he pursues alternatives to clean coal to address the country's energy shortages. He says support is building for plans to spend up to $300 million building a terminal to import cheap gas into New South Wales, Victoria and South Australia.
Push for low-carbon energy
Vesey, an outspoken American who is championing the push into the "new energy" business, is not a fan of Prime Minister Malcolm Turnbull's clean coal push. He also believes it is important to continue the move to low-carbon energy regardless of whether Donald Trump pulls out of the Paris climate change deal.
As the debate around energy supply rages, AGL is benefiting from higher wholesale electricity prices and cost cuts that have offset lower wholesale gas earnings. This will not last forever as competition and customer affordability factors kick in but Vesey says rising wholesale prices will continue to help for now.
AGL's net profit rose $773 million to $325 million for the first-half. This was in contrast to a year earlier, when restructuring charges pushed the company to a first-half loss at the same time it announced a $3 billion renewable energy fund.
Core underlying earnings after stripping out one-off items and the value of derivative contracts was 4 per cent higher at $389 million.
RBC analysts noted cash flow generation was weaker than expected, with a negative working capital impact mostly from futures margin calls of $100 million.
AGL declared an interim dividend of 41¢ as it targets a dividend payout ratio of 75 per cent of annual underlying profit.
Vesey says rising wholesale prices will continue to help its electricity portfolio. He warns this will be phased out over time due to competition and other factors. The downside is lower margins on the rollover of Queensland wholesale contracts and the impact of a mild winter.
michael.smith@fairfaxmedia.com.au
