AGL Energy Limited (OTCPK:AGLNF) Q2 2023 Earnings Conference Call February 8, 2023 6:45 PM ET
Company Participants
Damien Nicks – CEO, MD
Gary Brown – CFO
Markus Brokhof – COO
Jo Egan – Chief Customer Officer
Conference Call Participants
Dale Koenders – Barrenjoey
Anthony Moulder – Jefferies
Max Vickerson – Morgans
Ian Myles – Macquarie
Mark Samter – MST Marquee
Pete Wilson – Credit Suisse
Rob Koh – Morgan Stanley
Reinhardt van der Walt – Bank of America Merrill Lynch
Dan Butcher – CLSA
Gordon Ramsay – RBC Capital Markets
Operator
Thank you for standing by. And welcome to the AGL Energy 2023 Half Year Results Briefing Conference Call. All participants will be in listen-only mode. There will be a presentation followed by a question-and-answer session.
I’d now like to hand over the conference to Managing Director and Chief Executive Officer Mr. Damien Nicks, please go ahead.
Damien Nicks
Good morning, everyone. Damian Nicks speaking. Thank you for joining us for the webcast of AGL’s first half results for the financial year 2023. I’d like to begin by acknowledging the traditional custodians of this land that we I’m presenting from today, and pay my respects to their elders past, present and emerging.
I’d also like to acknowledge the traditional owners of the various lands from which you’re all joining from and any people of Aboriginal and Torres Strait Islander origin on the webcast.
Today I’m joined by Gary Brown, Chief Financial Officer. Before we commence, I would like to say that I am truly honored to have been appointed as the Managing Director and CEO of this incredible organization, which has a vast history spanning over 185 years.
This is certainly an exciting time to lead AGL as we strive to deliver upon our refreshed strategy and accelerate the decarbonization of our customer and generation portfolios, supported by a highly experienced board and management team now in place. I would also like to congratulate Gary on his confirmation as CFO.
Today’s result reflects a challenged first half performance, driven by the impact of plant outages during unprecedented energy market conditions in July, when our resulting short position was exposed to high coal prices, together with the prolonged outage of Loy Yang Unit 2, which was caused by a generator rotor defect.
Earnings were also impacted by the closure of Liddell Unit 3 in April 2022, reducing generation volumes, as we indicated in our FY’23 financial guidance update in late-September. The first half also saw another disruptive period for energy markets through the implementation of domestic commodity price caps and a Mandatory Code of Conduct for gas producers. And I’ll speak to the impact for energy markets and our business later in the presentation.
[Technical Difficulty]
…will reshape AGL’s generation portfolio and represents a major step forward in Australia’s decarbonization journey, ultimately connecting our customers to a sustainable future.
Pleasingly, our inaugural Climate Transition Action Plan was endorsed by shareholders at the 2022 Annual General Meeting in November. Good progress was also made in advancing our 3.2 gigawatt development pipeline, and the transformation of our thermal sites to low carbon industrial energy hubs.
Both the Torrens Island and Broken Hill batteries are on track to commence operations mid-2023, and I am pleased to say that the Liddell battery will be backed by ARENA, with funding negotiations underway for the first 250-megawatt phase. A feasibility study is also well underway with Idemitsu for the Muswellbrook Pumped Hydro Project.
In terms of guidance and outlook, we have narrowed FY23 financial guidance, and I’ll discuss this further at the end of the presentation. Although forward wholesale electricity pricing has lowered from historically high levels over the past six months, these prices remain elevated compared to FY’20 and FY’21 levels, which we expect to see reflected in strong earnings growth for FY’24.
Moving now to safety and customer metrics which both remain very strong. Our Total Injury Frequency Rate continues to trend lower reflecting a disciplined and sustained focus on safety culture and performance over three years in a row And as mentioned before, we achieved a record Strategic NPS score of plus 12, an excellent result given the sheer volatility in Australian energy retailing of recent months.
Turning now to a more detailed discussion on Customer Markets performance which was underscored by strong growth and improved customer experience. Total services to customers increased AUD61,000 to AUD4.3 million, delivered through both energy and telecommunication services growth. Pleasingly, disciplined margin management and scaling of growth business areas delivered an AUD11 million-dollar improvement to gross margin.
Looking forward, we will continue to responsibly grow our customer base whilst prudently managing margin. We also delivered improved retention with our churn spread improving to almost 6 percentage points, an excellent result, reflecting both our improved service quality as well as heightened market activity as selected retailers withdrew or lowered discounting to regulated pricing.
AGL continues to have the least consumer electricity complaints of any Tier 1 retailer, and Ombudsman complaints also reduced by 15%. Encouragingly, net operating costs per service have continued to trend lower, driven by digitization, reduction in net bad debt expense and labor savings. However, we do expect an increase in the second half driven by net bad debt seasonality, as well as higher technology spend and growth investment as we scale our energy solutions businesses to drive distributed energy under orchestration.
Significant progress has also been made in Customer Markets key priority areas. We continue to have the highest brand awareness in energy and now have over 50% of customers interacting solely through digital channels. Pleasingly, Consumer EBIT per service also continues to grow, increasing 9% compared to the first half of FY’22. Good momentum is also being achieved in accessing future value pools. Customer Markets green revenue now accounts for over 20% of total revenue, and our virtual power plant has grown 44% to 199 megawatts of decentralized assets under orchestration, underpinned by the NEO platform.
Strong commercial behind-the-meter revenue growth has been recorded, as well as a significant increase in commercial solar assets under monitoring and management. We are also excited to have secured new strategic partnerships, which will make the transition to electric vehicles simpler and easier for our customers.
And finally, our partnership with Ovo Energy Australia and Kaluza continues to grow, with over 40% of customers now migrated to the Kaluza platform, a strong increase on the 30% migrated at the end of the period.
Moving now to fleet performance and operations. Commercial availability of the coal fleet was weighed down by a particularly challenging period in July, with high levels of forced outages at Liddell and Loy Yang A Unit 2, coinciding with the planned outage at Bayswater. On a positive note, we have completed testing to lower minimum generation levels at both Loy Yang A and Bayswater. We are now able to ramp down Bayswater Unit 4 to 200 megawatts, and are awaiting AEMO’s approval for the remaining units. Additional work is underway to further lower these to between 130 and 150 megawatts. The ability to flex our coal-fired plant is increasingly important as new renewable generation enters the system.
Volatility captured through trading was also lower. Whilst we saw significant market disruption with severe weather events driving forced outages in the NEM, the trading team was able to manage this using a combination of financial and firming assets, particularly the Kiewa Hydroelectric Scheme in Victoria, which provided greater flexibility during this period.
Lower generation volumes overall were primarily driven by the closure of Liddell Unit 3 and the unplanned outages, marginally offset by stronger renewable generation volumes which were 13% higher than the prior corresponding period.
Despite a challenged start to the half, we’ve seen a strong uptick in availability from November, illustrated by the dark blue line. Overall, whilst we had lower unplanned outages compared to the second half of FY22, the confluence of the Liddell and prolonged Loy Yang Unit 2 outages, combined with the planned outage of Bayswater Unit 4 as well as summer readiness activities, resulted in an overall outage factor higher than we were targeting.
Looking forward, we have less days of planned unit outages in the second half, giving us a higher availability base to work from and reduce the overall impact of any unplanned outages that may arise. We will also continue to run Liddell at its sweet spot to manage operations and reduce derates and outages through to its end of life in April.
This slide shows the key areas we have been focusing on to improve thermal fleet availability and reliability as we responsibly transition to a low carbon portfolio. Our main priority is minimizing equipment failures that may result in future unplanned outages and derates. This includes additional preventative maintenance on mills, precipitators and chemical cleans of boilers to reduce known failure modes such as tube leaks.
We are also bolstering preventative maintenance through stronger inventory management to ensure that, where appropriate, critical spares are held on site or accessed within a reasonable timeframe. Repairing Loy Yang A Unit 2’s spare rotor and stator is an example that would provide a shorter return to service time if such an incident were to reoccur.
As mentioned, sizable CapEx investments have also been made to increase the reliability and efficiency of our fleet, with upgrades to the turbine and generators of the Bayswater units, as well as further investment in Digital Control Systems, which enables us to flex each Bayswater unit by nearly 500 megawatts.
A quick update on our decarbonization pathway, growth pipeline and Energy Hubs. The planned closure of Liddell Power Station is on track for April 2023 and will be the first key milestone of our accelerated decarbonization pathway, reducing AGL’s annual greenhouse gas emissions by approximately 8 million tonnes per annum. Importantly, by closing and transitioning the Liddell Power Station and site to a clean Energy Hub, we are undertaking one of the largest decarbonization initiatives in Australia in 2023. We look forward to both the expected commencement of operations of both the Torrens Island and Broken Hill batteries in mid-2023.
Numerous feasibility studies are also underway to bring strong opportunities to commercialization, and we are progressing initiatives to rationalize our upstream and midstream gas portfolios.
Now a quick recap and update on a strategy before I hand over to Gary. I am very proud to say that AGL is leading Australia’s energy transition, backed by a bold and accelerated plan to connect our customers to a sustainable future and transition our energy portfolio. We will drive this transformation by ensuring a strong foundation across our business placing ESG at the forefront of everything we do, continuing to inspire and empower our dedicated workforce, and importantly, leveraging technology, digitization and artificial intelligence to enhance customer experience, as well as strengthen our trading, operation and risk management capabilities.
Our focus on both leading and emerging technology will underpin the future energy relationship with customers, unlocking the value of electrification and decentralized energy.
We have a defined strategy to deliver an accelerated low carbon future. And this slide, which you may be familiar with from our announcement in late-September, provides a good summary of the key targets along our 12-year decarbonization roadmap. We will deliver this strategy whilst maintaining our relentless focus on our valued customer base, and importantly, work closely with our people to explore opportunities for career transition as we progress towards a low carbon energy portfolio.
Our ongoing priority is to strengthen and drive value from our core business, providing a strong platform for growth in the medium to longer term to realize opportunities through the energy transition, which you can see on the right-hand side. As mentioned, one of our core priorities will focus on how we help customers decarbonize the way they live, work and move. We will drive electrification through the propositions we offer and propel growth in e-mobility, starting with in-home charging.
We will continue to accelerate growth in decentralized assets, helping our customers electrify and decarbonize, and positioning AGL as leading in energy solutions. Our market leading position in Commercial Solar is evidence of the strong progress achieved in this area.
Additionally, our retail transformation program which Jo spoke to at our full year result in August not only simplifies our core, but extends to new energy technology, which will enhance capability to remotely manage distributed energy resources in a flexible and digital-led way.
This slide provides a good summary on how we are tracking today in terms of delivering our strategy as well as near-term focus areas. I’ve already spoken to many of these points for our customer portfolio – including our desire to accelerate decentralized assets under orchestration, drive growth in e-mobility and expand our Commercial and Industrial energy solutions portfolio.
Our energy portfolio will focus on progressing the feasibility studies mentioned on the bottom left hand side, accelerating the development of the Liddell battery and importantly, advancing and accelerating our project pipeline to meet our 5-gigawatt target of new renewable generation and firming in place by the end of 2030. Importantly, we look forward to sharing further details on our business strategies at an Investor Day, targeted for mid-2023.
I’ll now hand you over to Gary to take you through the financial result in more detail.
Gary Brown
Thank you, Damien and good morning, everyone. It is my pleasure to address you in my first result as Chief Financial Officer. This slide shows an overall summary of our financial result, which I’ll cover in more detail on the following slides.
Let me first take you through group Underlying Profit in more detail. The stronger Customer Markets performance was largely driven by growth in our Commercial and Industrial business, a reduction in net bad debt expense, as well as labor savings and efficiencies being realized through ongoing digitization.
Turning now to Integrated Energy where there were some material movements. As indicated previously, July was a particularly challenging month for AGL, with the confluence of planned and forced outages across our coal-fired fleet resulting in a short generation position. Compounding this short position, AGL experienced significantly higher pool prices which were driven by heightened winter energy demand, as well as elevated fuel input costs due to the spike in global commodity prices.
The AUD73 million movement primarily related to lost generation earnings caused by the prolonged Loy Yang Unit 2 outage, as well as the closure of Liddell Unit 3 in April 2022. This was partially offset by the positive impact as higher forward electricity prices started to reset through our customer book, hedging and trading gains, as well as stronger hydro generation.
Higher global commodity pricing has also increased both the revenue and costs for our gas portfolio. Pleasingly however, AGL’s competitively priced gas portfolio coupled with prudent trading performance drove the strong margin contribution you can see in the Trading and Operations gas bar. Please note that AGL’s gas portfolio is well positioned to meet customer demand, having taken appropriate measures to support future supply, including a short extension of our Camden gas field and the filling of Newcastle Gas Storage Facility to cover upcoming winter demand.
Finally, the higher depreciation and amortization charges primarily related to the accelerated closure of the Bayswater and Loy Yang A power stations, whilst lower income tax paid reflected the reduction in earnings.
Let’s take a quick look at the reconciliation between underlying profit and statutory profit, which we’ve included due to three materials movements. Items on the left were largely driven by external and market factors, whereas those on the right represent structural or operational decisions made by AGL.
Starting from the left. The onerous contracts gain was driven by an increase in the price of largescale generation certificates, partly offset by lower forward electricity pricing in relation to AGL’s long-term renewable power purchase agreements, as well as updated discount rates used to value the liability. The negative movement in the fair value of financial instruments primarily reflects the impact of a drop in forward prices for electricity on a net bought position, noting that we had an increase in this number in the prior period when forward prices were much higher.
And finally, the impairment charges related to the carrying value of our Generation Fleet cash generating unit. This as a result of our accelerated decarbonization plan and decision to bring forward the targeted closure date of AGL’s thermal generation assets by the end of FY35, as we announced in September 2022.
In August, we did indicate a step up in forecasted operating costs for FY23 to be roughly in line with CPI. Pleasingly, during a period of significant inflationary pressure, operating costs continue to be well managed across the business, consistent with CPI increases once adjusted for the non-recurring items identified at the full year result. A portion of this increase is a small yet prudent uplift in cyber security spend to further bolster protection for our operations and customers.
Turning now to cash and debt. Net cash from operating activities of AUD37 million was 94% lower compared to the first half…
Operator
Pardon me, this is the operator. [Operator Instructions].
Gary Brown
…due to the high payable position at the full year driven by high prices, and then the significant reduction in electricity pool prices across the period and the resultant cash outflows.
Notably, the impact of government intervention contributed to a sharp decline in forward electricity prices, resulting in AUD119 dollars of variation margin outflows at the end of the half. As you can see, whilst these working capital outflows did result in a reduction in AGL’s credit metrics, we forecast this reduction will be temporary as cash conversion rates recover to historical levels in line with a stabilizing wholesale pricing environment and improved generation performance.
Encouragingly, Moody’s have retained their Baa2 rating and upgraded their outlook to stable. The process to finance maturing debt is also well underway.
Now briefly touching on CapEx. As noted last August, growth CapEx for this year will focus on the completion of the Torrens and Broken Hill batteries. You will also notice a marginal uptick in thermal sustaining capex compared to the forecast we provided last August. This is primarily due to additional spend to strengthen the reliability of our thermal fleet as they transition to closure, which Damien discussed earlier.
Before I hand back to Damien, I’d like to take a few moments to discuss how we intend to fund and deliver our future target portfolio. This slide shows the indicative ranges for the primary channels AGL will leverage to deliver its 12-gigawatt ambition as announced in late-September.
Damien has already spoken to decentralized assets under orchestration – which is a growth area for AGL and key component of our targeted energy portfolio. Assets developed on AGL’s balance sheet will comprise the largest component and will focus on firming assets, building upon AGL’s existing development pipeline of grid-scale batteries and pumped hydro projects. These assets will be funded through a mix of operating cash flow, capital recycling via the potential sell-down of developed and operating assets, as well as project and corporate level funding.
Importantly, we have an excellent track record of raising capital for clean energy projects, having raised over AUD3.5 billion of equity and debt funding into renewable assets since 2008 and are confident in our ability to access a growing pool of global capital dedicated to fund the energy transition.
Partnerships will be the second largest component and includes the 3.5-gigawatt development pipeline via Tilt Renewables. We will partner with renowned renewable asset developers which will deliver additional capital and expertise and help accelerate our development options. The main focus of partnerships will be in renewables such as wind. The balance is expected to be delivered via offtakes, and we intend to leverage the scale and diversity of AGL’s customer base to achieve the most favorable supply mix and terms.
Importantly, our strategic asset base and extensive renewable development capabilities position us well to generate excess returns from the transition of our generation portfolio. As an integrated player, AGL will seek to maximize investment returns through additional development, management, trading, and ongoing services that typically would not all be available to a pure-play energy company. The returns and ranges shown are for observable comparative companies and projects and are provided as an indication of the types of returns that we would expect to see.
Now handing back to Damien.
Damien Nicks
Thanks Gary. As mentioned, I’d like to take a moment discuss the impacts of recent federal government interventions in energy markets. Whilst we do support certain measures, namely the customer bill rebates as well as the role of the safeguard mechanism, we are concerned that the commodity price intervention has created regulatory uncertainty for coal and gas suppliers, undermining their business and investment confidence.
I must emphasize that policy certainty and clarity is key to encourage new investment in clean energy generation and supply to ensure the pace of Australia’s energy transition.
Importantly, our core business fundamentals remain strong despite market interventions, our robust risk management has ensured retail strength and stability amid significant volatility in Australian energy markets. Additionally, our coal-fired generation portfolio is well supported via a combination of wholly owned and production-cost linked fuel supply, minimizing exposure to rising global commodity prices and the impacts of the commodity price caps.
Taking a closer look at market conditions – you can clearly see the reduction in spot and forward pricing from historically high levels, partly driven by the introduction of the commodity price caps, milder weather and additional plant availability. The shaded area on the right-hand side shows the downward pressure on FY’24 forward pricing, illustrated by the difference between the dotted and solid lines — which represent FY’24 forward pricing snapshots taken in September 2022 and January 2023, respectively.
Encouragingly, as we’ve indicated via the data point callouts on the graph, FY’24 forward pricing still remains elevated compared to FY’20 and FY’21 levels, which we expect to see reflected in strong earnings growth for FY’24.
I’ll now conclude by talking to FY’23 guidance and our outlook. As I mentioned earlier, we have narrowed our underlying earnings guidance ranges for FY23. Our full year guidance reflects an improved second half as expected, largely driven by an anticipated increase in generation, with improved plant availability and a reduction in outages, partly offset by lower forward electricity prices. Customer margin is expected to improve due to growth in customer services.
Operating costs are forecast to increase half-on-half due to seasonal net bad debt expense and inflation. Encouragingly, the outlook beyond FY’23 remains positive. Wholesale electricity pricing remains elevated compared to prior periods, with AGL expected to benefit as historical contract positions reset in FY’24 and FY’25. Additionally, sustained periods of higher wholesale electricity prices are expected to flow through to retail pricing outcomes, and the Torrens Island and Broken Hill batteries are also anticipated to commence operations in mid-2023. This will be partly offset by lower earnings due to the closure of the remaining three units of the Liddell Power Station.
Thank you for your time and we’ll now open to any questions.
Question-and-Answer Session
Operator
We’ll now open for questions. In the room, in addition to Damien and Gary, we have our Chief Customer Officer, Jo Egan and Chief Operating Officer, Markus Brokhof. [Operator Instructions] First question comes from Dale Koenders from Barrenjoey.
Dale Koenders
Hi, good morning, guys. Thank you very much. Just a lot going on in the market in terms of government intervention and cost inflation. Just wondering if you could provide some comments as to how you’re thinking about what’s going on and retail competition at this point in time, the outlook for bad debts and churn? I know we’ve obviously got the data for the half to the past, but sort of more on a going forward basis. And the labor cost pressures when you combine it all together is cost plus CPI sustainable going forward?
Damien Nicks
Thanks, Dale. Good morning, all I’ll take that one. Look, let me first start off so on net bad debt expense, we’re really pleased with the results of the half came in lower than the previous half. And that sort of represents some of the strength of the work we’re doing around rent collections and so forth.
Yeah, we anticipated it probably higher than it otherwise would have come through and something we’ll watch, we’ll continue to watch closely. But that’s another reason why we continue to support the government customer bill relief. We think that’s important in this sort of environment.
From an inflationary perspective, we are like other seeing inflationary impacts through the organization but we continue to manage that very strongly. You see, we put a forecast I see out there for the full year to manage within CPI. And we’ll continue to do that through sort of digitalization of much of what we do. But also continue to drive efficiency through our generation units as well.
Dale, anything further?
Dale Koenders
That was my one question. So thank you, I can jump back in the queue.
Operator
Thanks, Dale. Next up, we’ve got Anthony Moulder from Jefferies. So Anthony coming out there. Can you repeat the question?
Anthony Moulder
Sure. So appreciate your managing your inflation costs well, and that could be high some high bad debts in the second half. But just interested as to what were the key changes to your view on guidance, given that’s been lowered EBITDA as well as [Indiscernible] please.
Gary Brown
Yeah, so what you’ve seen is a tightening of the range and narrowing of the range. The rationale behind that is what we saw, obviously, we run a long position, let’s call it 2 to 3 terawatts of energy, because that curve came off around December, January, you’re just seeing some of that length of ordinary cell, we’re selling that at obscene lower prices into the market. And that length we have typically relates to those thermal assets and renewable type assets in the marketplace. So that’s the key driver there.
Anthony Moulder
Thank you.
Operator
Thanks, Anthony. Next question comes from Max Vickerson at Morgans.
Max Vickerson
Good morning, can I just ask a question about your forecast rates of return on those two types of assets? Just on the renewables 6% to 8.5% I have to admit that’s a 9% to 10% [ph], a little bit high? Can you just clarify does that suggest a change in gearing? Or is that an actual arm’s length wholesale electricity market return or is there some customer margin potentially captured net benchmark?
Gary Brown
Hi, it’s Gary Brown here? Look, just to sort of answer that question. So we’ve obviously provided this as sort of some indicative ranges to try and give some clarity to the market. I guess, from an AGL perspective, we do see ourselves as being able to extract additional returns from the traditional pure players. So you’re looking at things like, the ability to be able to be participate in things like development and orchestration and political things.
So, we do see ourselves as a global model to, I guess, move up in that in terms of where the returns are. But again, these are observable returns that we’re seeing in the market as well.
Max Vickerson
If I can just ask one quick follow on then is, given the higher returns, you see in the firming assets, is there a limit to how quickly you can deploy those and you kind of hinted that that’s where you want to have your on balance sheet assets. How quickly can you deploy those is from a market perspective? How much how big is the market, the storage still returns degrade if you pump too much capital in there too quickly.
Damien Nicks
Thanks, Max, I think look, what was what you’re seeing today, we’ve got obviously at the Torrens Island battery coming on mid this year, that’s really demonstrates the strength of our infrastructure and our assets, if you like. We took idea that battery only 18 months ago. So the ability to deploy the right batteries in the right locations, and using our infrastructure is incredibly valuable. So obviously got the Torrens Island battery, but also Liddell.
We continue to work with rain on funding in that phase. And we’ll continue to drive that as quickly as we can. But you can imagine those sites have the capability and capacity for us to go very, very quickly, when we see the market that are available for us. So that will be a big part of what we put on our balance sheet, because we can do it quickly. We can also do it when the market needs it. And we have the infrastructure and grid connection.
Max Vickerson
Thank you very much.
Operator
Thanks, Max. Next up, we have Ian Myles from Macquarie.
Ian Myles
Good morning, guys. Maybe you can give us a little color on how your strategy has changed as a result of the coal caps and the gas caps and whether that’s going to have an impact on the profitability of those businesses.
Damien Nicks
Good morning, Ian. Look, I’ll take that one. And I might even just hand over to Markus as well, just from a broader hedging and risk management perspective. But, we are from it from a coal perspective, you’d be aware we have the own all our in Loy Yang and contract that for — with the hands of [ph] Macquarie. So we like we were not part of our cap if you like we’re well underneath that cap and that provides us sort of the breadth to manage risk management and profitability in that space. What we’re seeing however, is obviously having an impact of bringing down the curve.
From a gas perspective and I’ll get Markus to talk on with some of those conversations at the moment. What we’ve seen since that intervention come in is a lot of those conversations and negotiations have dried up. So we’re just, we’re wanting to see them come live again so we can bring more gas into the market and help our C&I customer base.
But maybe Markus, do you just want to comment on maybe first gas and active coal?
Markus Brokhof
Yeah. On the gas side, I think our book is very much covered in FY’25 end of FY’25. And we are still in negotiations with one of the large, with the few large producers here in the local market. For sure, there is at the moment, a resistance to enter into contract with us, because due to the fact that there’s quite some uncertainty about pricing, but particular I think [Indiscernible] of market intervention, and that is applying also for the coal side.
At the moment I would say, there’s no change in our strategy overall, when it comes to contracting our gas, and our coal. But the big question mark, how long is the governmental intervention taking place? I think there are a lot of discussions, is it only for one year? Or will it continue to be? And this will somehow influence a strategic decision about change in our strategy?
Ian Myles
Could — I know this sounds very unpleasing, but could we expect to see the coal fired plant actually all turn up as a result of this AUD125 return cap, because there will be profitable running much harder now than ever before.
Markus Brokhof
That’s true. Maybe some people which have not done proper risk management are running now much more harder, that’s most probably true. I think we will most probably still study the terms and condition very carefully, because I think it means the line, you can read that there are some obligations, that’s not a free lunch, 125, because there are some obligations, that you can be directed and there is a must run. And we are not happy about this. So they’ll be very most of the NFL not participate in this scheme.
Damien Nicks
And I think just the other thing to call out is in through the work that we’ve done on this point over the last number of years, I mean, requiring now we’re able to burn down to 200 megawatts from 685 and Loy Yang well below that 40% as well. So that flexibility is going to be incredibly important in this market going forward, particularly in the middle of the day. And we’ll continue to see how far we can drive that down so we’ve got the flexibility we need.
Ian Myles
That’s great. Does that — just as a side of that, does that create a CapEx impulse? Because these machines are really originally designed to turn up and down with a thermal heat going through the metals.
Damien Nicks
So we’ve spent, over the last number of years when we’ve done a number of the upgrades, a lot of that’s been — has been incurred? I mean, what we are obviously then just trying to manage carefully is any additional ongoing maintenance of the fleet as a result. We’re not seeing any that way, but things such around the mills and so forth hot spots where the work takes place, but the value in doing that would far exceed some of that cost. I don’t know Markus do you want to comment?
Markus Brokhof
No, I think [Indiscernible].
Ian Myles
Okay. That’s great. Thanks, guys.
Operator
Thanks again. Next up we have Mark Samter with MST Marquee.
Mark Samter
Yeah, good morning, guys. Just my questions around the balance sheet. This was an enormous amount of talk around during the presentation. Just keen to get a feel for something that dates back up to almost AUD3 billion in loss and other working capital drag will normalize. I just came to a get a feel for how much headroom you think you have organically over the next couple of years. But also maybe give us an update on how refinancings go and your ability to raise debt at the moment. I’m just cognizant that it’s a move document now, but if we go back to the demerger documents, so that you guys felt that it was going to be much easier for the businesses to raise that as separate entities?
And together, can you give us a feel for how those conversations are going with vendors, but particularly keen also to get a feel for what you think you’ll have an headroom over the next couple of years for investment?
Gary Brown
Hi. So firstly, as we’ve sort of said in the slides, we’ve sort of talked through the amount of headroom that we had in terms of liquidity at the end of the half, which was about AUD485 million. As we’ve talked about, we saw a significant reduction in working capital as a result of the reduction in prices. And we’re very confident that those cash conversion rates will return to historical levels throughout the second half, particularly as we see more normalization of those working capital levels.
In addition to that, you know, we’ve obviously spoken to having a strong expectation of a strong ’24 and ’25 as well so I think that’ll certainly assist the balance sheet. We’ve also sort of had a number of discussions of discussions with financers. And we’re very confident about our ability to refinance the company and certainly set ourselves up for growth in the future. As we all know, there’s a lot of demand for renewable projects to deploy capital into those areas as well. So we’re very confident going forward.
Mark Samter
And much of a change in the — sorry [Indiscernible]. You’re seeing much different in the rates are rising, but the premiums you’re paying for debt?
Gary Brown
Yeah, look, I think it depends on which market you tap. I mean, certainly, because the risk free rates gone up, that obviously has an impact as you move through. But again, we’re pretty confident with the ability to be able to source competitively priced debt going forward.
Damien Nicks
And not just the other thing, I’d say, I think having a clearly endorsed strategy now going forward, having a board in place management team in place. The banks now look at our transition plan and strongly support that transition plan. And that’s a key part of us getting access to that capital. And the whole team is involved in plenty of these discussions with the banks just to talk about this transition plan and our delivery of it. So we are confident to be able to deliver on that refinance.
Mark Samter
Okay, thanks, guys.
Operator
Thanks, Mark. Next up we have Pete Wilson from Credit Suisse.
Pete Wilson
Thanks, good morning. Gary, as you see in your comment, looking at to ’24-’25 that you said the increased earnings in the Torrens Island and Broken Hill battery will be partly offset by the closure of Liddell. Is that would imply partly — the word partly would imply the times in Broken Hill is greater than the earnings loss in Liddell. So could you just please unpack that a little bit? What the uplift you’re expecting from the batteries is, what the earnings of Liddell is and also include the what your expectation is around the change in operation of Bayswater, once you bring Liddell out.
Damien Nicks
Thank you. I’ll try. I’ll let me try and unpack that one a little bit. So what the intention of that statement is, is obviously when Liddell comes out of the market, clearly will have lower generation and lower earnings as a result. It will partly offset, it went fully offset it that was the notion of the words we’re trying to use there. Clearly different revenue streams from a battery, then will be from a generation perspective. But what we do see is particularly in the SA market, that battery playing an important role in those periods of peak demand and so forth.
But the intention wasn’t, I think you might — the way you’ve read, it’s probably the other way around. We don’t intend that to obviously offset Liddell, it will provide some additional revenues and margin into the business going forward. And we anticipate that coming on halfway through the year.
Markus Brokhof
Maybe to keep in mind, the results of Liddell are overstated. If you would continue to run the Liddell, there is no reason to believe that this would — the margin or the gross margin, which we are generating would stay like this because it needed heavy investment. And from Bayswater, if you look then after the Liddell closure, what happens and this Bayswater, most probably Bayswater will then run a bit harder in order to make sure that we have the energy in the portfolio.
From an energy point of view going forward, we are balanced, but for sure. Some capacity is missing overall when Liddell is going out. And we have secured already because the closure of Liddell is known for the last seven years. We have already secured the capacity in the market via additional contracts, which we have secured via cap contracts and so on that’s under control.
Pete Wilson
Okay, good. Thanks, all.
Operator
Thanks, Pete. Rob Koh from Morgan Stanley.
Rob Koh
Good morning, and congratulations to all the team members who have been confirmed in their roles. I guess my first question is just about the Slide 18, where you’ve called out an AUD82 million increase in gas gross margin in trading and origination, and so that’s great. I just wanted to get a sense of if that continues for the current half and next year, or should we be looking to include at the very least the short term gas price cap has impacting that number please?
Markus Brokhof
I think there’s a few elements to this on the one end we have optimized and I think I said this to you already in the past. Ae have had optimized haulage and transportation portfolio, have optimized the contracts in renegotiation and so on, in order to cope with the pressure on the gas portfolio, because you are well aware that our legacy contracts over time are running out. And we had to successively fit the gas portfolio, the shorter term contract. So there was some pressure on and the heads managed to get some costs out of this.
On the other end, this rise in gas prices, we were able to increase the profitability of our overall gas book that most probably will then have also some spillover effects in the second semester. Going forward, this year price caps, it will be most probably, and that’s something we will lose some competitive edge when it goes forward. Because everybody could theoretically then secure price at AUD5 per gigajoule, but we believe we have a competitive edge with the with our portfolio, because at the end of the day, we have to add some flexibility in the portfolio. And this will be our USP going forward our unique selling proposition. So I think we are very pleased. But for sure, if price caps will not only stay for 12 and so further on, then it will be a very tough market.
Rob Koh
Thank you, Mr. Brokhof and comments about that the intervention that’s clear. If I can sneak in another question to your head of customer who had a really great half. Maybe just a quick update on number of services per customer, there was a previous target, but that was 1.6. But that was set quite some time ago. So just wondering how we should think about that, please.
Damien Nicks
It’s Jo. It’s been a great six months for customer, so I won’t steal any of her thunder.
Jo Egan
Thanks, Damien. And thanks for the question, Rob. And we are incredibly pleased with the result. We’ve got not only great services growth, but really strong customer experience, which is excellent in a challenging market.
So the services per customer are attracting about 1.5. And we’ve been really strong churn reduction continue on customers that have multiproduct services. So at the end of the year, we updated on that with energy and telco. And we’re continuing to see that performance go really strongly.
Rob Koh
Okay, fantastic. Great to hear. Thanks so much.
Operator
Thanks, Rob. Next up, we have Reinhardt van der Walt from Bank of America.
Reinhardt van der Walt
Good morning, folks. Thanks for taking our questions. I just want to unpack this — excuse me, I just want to unpack this guidance changed a little bit more. So back in September last year, you told us that the extended Loy Yang outages are going to have a material earnings impact. And then the September guidance probably would have had visibility on the July outage costs. So is this AUD40 million odd stepped down in EBITDA is that predominantly just due to your net long position getting sold in at lower spot prices? Or is there some other incremental change here?
Damien Nicks
Yeah, and I think what we made really clear, July was a very challenging month for us because of the outages we had and obviously, the incredibly high prices at the time when we were short. The narrowing of the guidance is exactly as you say. We are long energy, let’s call it 2 to 3 terawatts in that length. When we look to sell into the second half back into the market at lower wholesale prices, because of the forward curve is off is what’s reduced that buys, let’s call it AUD20 million odd.
So there’s been no other change from a Loy Yang perspective. We’ve got a plant running incredibly well at the moment. Availability, last three or four months has been exactly where we want it. And I think hearing from Markus last day, I also think in January, we saw we’ve seen record availability over January month. So it again will continue to drive the reliability on our plant particularly hard and we have less outages planned in the second half as well, which also helps from a managing availability over that term.
Reinhardt van der Walt
Okay, so I mean, given that Liddell is going to come out now in April, and you’re taking on a bit more load. Let’s say if you end up with a net short position and in FY’24, I mean, in theory, would the lower forward prices actually be marginally positive for FY’24 given that you’re going to have to have some spot purchase costs but now at a lower level?
Markus Brokhof
Yeah, I think that’s the story that we tried to convey over the last years, I think the most probably ’23 was the most challenging year the most of the hedges, which we have entered in a holding off now, on the lower price level. And that yeah, you can assume that the prices are auto market prices that you have seen over the last couple of months, and even year will flow into this. So that will contribute very much to a higher hedging revenue going forward.
Damien Nicks
I think that’s important, why we’re using the words, we see strong revenue growth or earnings growth into ’24. That’s the language we’re using and quite deliberately.
Reinhardt van der Walt
Got it? Thanks a lot.
Operator
Thanks, Reinhardt. Next up we have Dan Butcher from CLSA.
Dan Butcher
Yeah, hi, everyone. Just a quick one really, the gas margin was an impressive AUD4.8 a gigajoule this period. Just wondering whether you can comment on how sustainable that is, given your increase in gas costs likely to come through.
And secondly, have you had any impression with the government about concern of how the retailers are not bound by the price cut the same way that producers are and maybe they’ll extend the price cap to you, so that they’re making some very good money of that gas the moment.
Markus Brokhof
Most probably, you’re right. There was this margin is mainly because for sure, gas prices have come up very much where if you have seen some lengths in the portfolio, we could benefit from this is for sure not sustainable, because gas prices have come down from record levels. If you look at the AUD40 per gigajoule price range, which we had. We were coming down now.
I think also what is very important, and maybe Jo can compliment me, we are trying still to get more competitive gas in the market. And we will give this back to our C&I customer. But maybe Jo.
Jo Egan
Thank you, Markus. Yeah, absolutely. We’re working very closely, particularly with our large commercial and industrial customers, many of which rolled off longer term contracts on to default rates, post the announcement of the interventions. And where we can we’re giving rebates to those customers, shorter term contracts, while we wait from some more certainty into supply. But we’re certainly doing everything we can to support customers, because we know it’s incredibly challenging for them with this uncertainty.
Damien Nicks
And just to add to that a little bit, just so in terms of those rebates that are out there, it’s where we buy spot gas in the month in question. So it’s a month in question, we’ve been able to buy some spot gas for that customer who’s on a default rate, then we’ll give some form of rebate back to them as part of that. But until we can start getting that long term gas back into the book for those customers, we’re having to manage on that basis.
Markus Brokhof
Coming back to your question. In addition, I think the margin is not sustainable to be honest with you. We are still going forward that it will be a tougher market. And you are right, we are not bound by the price get but at the end of the day, if you wants then to secure additional C&I customers or if you want to start another marketing campaign is our customers at the end of the day, we have to find the additional gas.
So, still we are then falling back to the AUD12 per gigajoule depending what is in the — how is the flexibility and how haulage and so on will be priced. And then at a later point of time, I think that as you’re well aware that still not clear from a regulatory point of view, how this is all put into the overall pricing scheme.
Dan Butcher
Right, thanks very much, guys.
Operator
Next up, we have Gordon Ramsay from RBC.
Gordon Ramsay
Thank you very much. Markus question for you again on the gas book. Because I correctly hear you say earlier in the presentation that the books now covered up to FY’25? Hello, you hear me?
Markus Brokhof
Yes, that’s true. We’ve been covered — we are covered at the moment is our current customer portfolio and our current demand, we are covered on the financial year ’25. Thereafter, we have a gap. But we are, as I said in the beginning, we have for sure not waiting on the price gaps and so on. We have started to negotiate already some long term contracts going forward. At the moment the producers are waiting understandable on the detailed terms on condition. And we are still confident that we can fit it and also the gap, which is coming up. And we have shown this in the previous financial years. There is a gap then opening up to 20 petajoules 30 petajoules, we are confident that we cover this gap then going forward.
Gordon Ramsay
Okay, just — sorry, my confusion on this, as I’m looking at the slide that you presented last year, which shows your gas book. And when you’re looking at FY’25, it looked like 50 petajoules were basically uncontracted. So I’m just trying to understand whether that 50 petajoule gap has now been contracted?
Markus Brokhof
We have secured some gas. But the demand has gone down. And that’s something where there was quite some competition in the market. So we have lost also some of our portfolio customers at the same line.
Gordon Ramsay
One is on the [Indiscernible]. Okay. Thank you.
Operator
Thanks, Gordon. Next up, we have another question from Dale from Barrenjoey.
Dale Koenders
Thank you for taking the extra questions. Just wondering about some comments around DMO processes going through. What your expected outcomes are? And is that a risk to retail profitability FY’24.
Jo Egan
Yeah, thanks, Dale? I’ll take that one. So we’re aware that the outcome of the DMO has been pushed back a little bit through to the end of May? I think it is. So ultimately, that’s going to be a decision for the AER. We expect that the methodology will be similar. And certainly when we look at our retail pricing decision, which will be for majority of our customers on market contracts, we will absolutely being applying methodology. So whilst we’ve seen wholesale prices, come off somewhat, we do still expect significant increases because of the 24 month rolling average that still needs to flow through.
Dale Koenders
Okay, is hedging being changed at all or hedging practices to account for potential uncertainty on the DMO?
Markus Brokhof
From a risk management point of view, we are still hedging on a 2.5 years rolling average.
Dale Koenders
Okay.
Jo Egan
Maybe to clarify, though, for our portfolio, the DMO really only applied to about 10% — 10% to 15% of our customers, whereas the majority are market contract pricing. So, based on AGL’s pricing decisions.
Damien Nicks
So based on the base that we don’t see any change in methodology on the DMO. And the way we manage our book, there’s no change to the way we think about hedging and risk management, from a pricing perspective.
Markus Brokhof
Instead pricing mechanism, it’s the loopback mechanism.
Jo Egan
Absolutely.
Dale Koenders
Sure. Okay. And then just as we stare into FY’24, you’ve call out sort of higher electricity prices, better generation reliability, Liddell 2 batteries. What are the other moving pieces that we need to be aware of, if any?
Damien Nicks
I think I mean, they are the key moving pieces that we’re talking about. Clearly, our business is so leave it to where wholesale prices are and the pricing through the customer. The other things to be aware of, which we’ve called out is, from a cost point of view, continuing to manage that incredibly tightly and efficiently in this market. The other one would be net bad debt expense continue to manage that very, very closely. They are probably the things that we’re really focused on. And then from a from an integrated energy perspective, continuing to see both the flexibility in our fleet, but also the availability in our fleet into ’24.
But as I said, what we’re seeing through business performance over the last three to four month, really positive business to strengthen step up into the second half of ’24.
Dale Koenders
Okay, thanks, guys.
Operator
Thanks, Dale. Next up, we have another question from Rob from Morgan Stanley.
Rob Koh
Good day, guys. Thank you for indulging me here again. Just I guess more of a modeling question just for the depth facilities going forward. Should we factoring any amortization in this or just standard corporate revolver for investment grade?
Gary Brown
Yeah, look, I think that’s something we’re still to work through as part of refinancing going forward. So probably —
Damien Nicks
I think on a broader level, I think, think about the corporate revolver but for the time being in terms of your models.
Gary Brown
Yeah, that’s fine.
Rob Koh
Yeah, okay. Thank you. Yep. Okay, that’s great. Thanks so much.
Operator
Thanks, Rob. And we’ve got a last question from Pete Wilson from Credit Suisse.
Pete Wilson
Thank you. I just wanted to ask a question on customer. So that sounds what you’re pretty happy with the first half result with the EBIT increase. Just wondering what your expectations are into the second half and effectively for the full year, in light of the guidance for an increase in OpEx in the second half. Do you expect an increase in gross margin in the second half to to offset that increase in OpEx? Or are you actually expecting like a net margin decrease in the second half? And if you could also, in answering that, maybe explain why consumer electricity gross margin was pressured in the first half?
Jo Egan
Yes. Okay. So yeah, look we’re seeing really strong momentum in the customer business. So I expect a strong second half. I think they’re signaling around OpEx is due to some investment in our growth businesses, timing on technology spend in our retail transformation program. And also there’s a bit of seasonality on net bad debt. But as Damian said, like we’re in a really strong position with our debt portfolio, so we’ll continue to focus on that.
In terms of electricity, I really just was a timing position, not on the impact of the retail price change. So margin compression has really stabilized and we’re seeing really good results with less customer switching in the portfolio.
Damien Nicks
And I think Pete, it broadly on your question, we expect to see a net margin after expenses being positive in the second half and up on the second half is the way to think about it.
Pete Wilson
Excellent. Thanks for that.
Operator
Thanks, Pete. As there are no further questions, this concludes our Q&A session. Thank you, everyone.
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