Chairman Jerry Maycock said this underlying profit – which excludes the “mark to market” impact of the large hedging positions held by AGL in the wholesale energy market – was due to an overall reduction in demand for electricity and gas.
He put this drop in demand down to a combination of an “unusually mild winter” in New South Wales and Victoria, energy efficiency measures adopted by consumers, rooftop solar installations and reductions in output from the manufacturing sector.
“One consequence of the lower profit, together with a modest increase in the funds employed in the business, was that we made no headway this year in improving the returns on funds employed in the business,” he said.
“Our ratio of EBIT to funds employed was 10%, still below the level we seek to fairly compensate our shareholders for the level of risk in our industry”.
Looking on the brighter side, Maycock said AGL's energy business performed better than its peers, and recent trends suggested the rate of demand reduction seen in the last few years may be slowing.
Encouraged by the strong cash flow result, he said the board decided to hold dividends at the same level as the prior year.
AGL announced earnings guidance between $575 million and $635 million for the year ending June 30 2015 ahead of its AGM today.
This is down slightly from this time last year, when it declared its expected FY14 earnings to be in the range of $560 million to $610 million.
The company named the repeal of the carbon tax, closure of its LPG extraction plant at Kurnell, growth in wholesale gas margins, return to more normal winter weather in July and August, continued softness in customer demand and the sale of its Moranbah gas assets as the factors affecting FY15 underlying profit.
Maycock added that the falling demand and a rapid uptake of rooftop solar, these were reflected in the price AGL paid for the assets that has caused an oversupply of generation capacity in the national electricity market was “fully reflected” in the price AGL paid for the Macquarie Generation assets last month.
While AGL’s valuation model assumed the Liddell power station would close in 2017 as one of Macquarie Generation’s major customers – the Tomago aluminium smelter – may close within that timeframe, “there is every chance that this won’t happen”, he said.
“The Tomago plant is one of the more cost-efficient aluminium smelters around the world, while aluminium prices have been strengthening in global commodity markets,” Maycock said.
“The weakening of the Australian dollar should also help. If the Tomago smelter remains open, then Liddell will continue to operate and will provide incremental profits to AGL over and above that assumed in our base case valuation for Macquarie Generation.”
The funding of the acquisition price was heavily skewed toward equity rather than debt to make sure AGL preserved our investment grade credit rating, he added.
In an expected lengthy address on NSW’s impending gas shortage in 2017 and the state’s freeze on CSG exploration licences, Maycock said “industry could doubtless have done a better job of making the case for gas field development”
AGL is currently undertaking a pilot program to frac four wells drilled over two years ago, which will meet the strict environmental conditions and provide data on the quality and quantity of gas flows from reserves near Gloucester, which is about 265km north of Sydney.
The company hopes this will give it enough confidence to commit to major investment to do larger scale activities to help NSW’s self-sufficiency – though he said AGL did not foresee large amounts of gas from that project being available until 2017, and the state would continue to face higher gas prices due the domestic market being linked to international pricing unless additional projects come on stream.
He said that while retail gas sellers like AGL had been able to secure gas under very long term contracts with producers in other states to buy large volumes of gas at what are, by today’s standards, very low prices, these contracts would expire within three years
“The major producers are no longer prepared to sell gas to energy retailers on the same terms as those that applied in the past. Instead, massive volumes of gas are soon to be diverted to large scale LNG projects in Queensland and shipped to Asian buyers at prices much higher than the producers were previously getting from selling in the domestic markets in Australia,” he said.
The consequences of the subsequent gas shortage would be felt most directly in the industrial sectors of the economy, he said, although the flow-on effects in terms of higher prices and higher unemployment would be felt more broadly across the state.
