Shares in AGL Energy (AGK) jumped sharply yesterday after the new CEO revealed the results of a review of the company – with around $1 billion in asset sales on a wishlist and $200 million in cost cuts by 2017.
The shares jumped 6.2% to end the day at $16.47 as investors punted on a capital return, share buyback or higher dividend flowing from the money generated from the asset sales and cost cuts.
The price of $16.47 was an eight year closing high for the company. Investors were also encouraged by the news that second half earnings would be better than expected.
AGL said it was looking for underlying profit this financial year to be towards the top of its previous $575 million-$635 million guidance.
The improved profit guidance was driven by higher than expected electricity generation volumes, some improvements in wholesale prices and a better than anticipated performance from Macquarie Generation (which owns power stations in the Hunter Valley), according to AGL’s statement.
AGL also warned of a $30 million pre-tax charge for restructuring costs, to be taken in the 2014-15 accounts.
New chief executive Andy Vesey, who was appointed in February, also revealed plans to grow the company’s use of smart metering, rooftop solar and storage.
In it AGL said while it had its upstream gas business under review, it is also assessing its controversial Gloucester coal seam gas project in the NSW to evaluate costs and expected gas production.
The sale of AGL’s 50% stake in the large Macarthur wind farm is already under way, with net proceeds of about $500 million expected, AGL indicated yesterday.
AGL revealed these moves at an investor day in the Hunter Valley. It made it clear the new strategy to be adopted is intended to deliver “sustainable” growth in earnings.
“The strategy will increase business productivity, drive retail profit growth and position AGL for success as the energy industry transforms," AGL said in a statement.
“It recognises that an organisation transformation will be required, including the creation of an anticipatory culture and a commitment to an orderly transition to a carbon constrained future."
AGL has already revealed a commitment to move away from coal-fired power generation by 2050.
AGL’s presentation yesterday didn’t specifically point to other assets that would be sold, other than signalling the review of the Gloucester project.
It said that proposals from potential suppliers for the Gloucester CSG project were being reviewed, and that once a pilot production plant had been restarted, six months of testing would be required before a final decision is made on the venture. So any decision won’t come until well into 2016.
AGL said the asset divestments will involve “non-strategic and under-performing ventures” and would mostly occur in 2015-16, to be completed by the end of the following financial year.
They would contribute to a one-off boost to free cash flow of about $1.2 billion targeted for the 2016 and 2017 fiscal years.
A reduction in working capital of about $200 million is also targeted by the end of fiscal 2017 through running down AGL’s surplus of large-scale renewable generation certificates, using up stored gas, and "optimising" coal stockpiles at the Macquarie Generation power plant in the Hunter Valley, as well as through credit and billing initiatives.
A $170 million real reduction in normalised operating costs is targeted through improvements in operational efficiency, plus about a $100 million reduction in sustaining capital expenditure. The total cash benefit would be about $200 million after taking into account increases in costs from power purchase contracts linked to some asset divestments such as Macarthur, according to yesterday’s statement.
An interesting part of the briefing was the ambitious ideas for the company’s “new energy” business which will spearhead the push in solar and metering, with a target of one million “smart” connections to consumers and businesses targeted by 2020.
AGL said it intended to become a leading provider of metering services, rooftop solar, energy storage and electric vehicle services.
AGL was upbeat about the outlook for the future of electricity demand, despite the current glut in supply that is depressing wholesale power prices, and possible retail price cuts in coming years.
It said that while average consumption per household was seen continuing to fall, population growth would help offset that. And the new LNG projects in Queensland will create a significant boost in demand, and the profitability of aluminium smelters is improving.
On gas, demand is increasing dramatically because of the LNG projects, which is pushing up prices and reducing the volume of gas being burned in power stations.
AGL has moved to set up new supplies of gas from Victoria in coming years.
“AGL is committed to competing in retail gas markets which requires the company to secure cost-competitive gas supplies,” the company said yesterday.
"This includes the company’s recent Esso/BHP contract, its investment in gas storage and gas exploration and development. The review of the asset portfolio overlaps with the previously announced operational review of the Upstream Gas business.
“Preliminary recommendations from this review are currently being appraised and expected to be announced shortly,” directors added.
