Know your NEM: All eyes on bond rate and utility earnings

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All eyes on bond rates and the results from the country’s biggest utilities, including AGL.

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Know your NEM: What’s interesting this week: Reporting season and interest rates

USA 10 year interest rates moved up another 11 bps during the week and are 50 bps higher than a year ago. Nearly all that move has happened since Xmas and it’s feeding right into equity markets.

There are many commentators who note that the outlook for corporate profits in the USA is good and will be helped by the tax cuts. From this they conclude that the fall in the equity market is temporary.

Our suggestion is to keep watching interest rates. Until they have clearly settled down, few conclusions can be drawn.

The second interesting thing this week was the AGL results.

First we note that consensus estimates actually fell a touch following the result.

Figure 1: AGL consensus EPS $ per share. Source: Factset

What’s interesting is that analysts expect Fy19 EPS to be 13% higher than FY18. AGL’s volumes are unlikely to change much over the next 12 months, and other than maybe some tiny contribution from the Silverton wind farm, there is not much new investment coming on-line in that time.

So it’s only cost cutting, or further price growth that can drive that.

The price growth can come as the last of the old style contracts roll off and are replaced with new contracts at market. However, given that the NSW futures curve is downwards sloping, but coal prices remain high, the FY19 outlook doesn’t seem to us to be completely locked in.

Looking at the result itself, the key table, for us, is taken from the MD&A Electricity portfolio review.

Figure 2 AGL Electricity portfolio performance. Source: Company, red boxes ITK

There are lots of numbers, but the top three rows show the prices and increases in $MWh that AGL customers saw. For instance, households paid $298.7 MWh in the Dec half compared to $270 MWh a year ago.

That’s an increase of $29/MWh or 10.6%, which is far from a disaster when you consider that AGL’s pool revenue has gone from $59 MWh last year to $90.5 MWh this year, a 46% increase. Even though AGL’s pool price went up 46% over the year household and business customers paid “just” 13% more.

You can also see the increase in unit costs. Gas was higher for sure, but most of that is probably coal.

Despite what AGL says about endless reserves of brown coal (otherwise known as mud) in Victoria we think the unit cost of extracting that has continued to increase. Margin or profit was up $6/MWh – a respectable but not world-changing performance.

Market action – cool weather sees consumption fall back

Last year at this time the grid was in danger of failing. This year weather in QLD and NSW was cooler with the result that electricity volumes were dramatically lower, down 13 per cent in each of NSW and QLD and the QLD pool price averaged just $69 MWh compared with $322 MWh this time a year ago.

In Victoria though prices and volumes are higher than a year ago and the weather also about the same. As pool prices in Victoria were just $104 MWh for the week, I consider that a good performance. If the system hangs together for another couple of weeks we can start to breathe a little easier.

Elsewhere, lower spot prices in QLD, also because of lower power demand have meant that spot gas prices through the system are running below last year although they should still be expected to increase due to seasonal impacts.

There was no material electricity futures or REC action. Despite the belief of many that REC prices will collapse towards zero post 2020 the 2021 futures indication remains over $50 a certificate.

I’d be interested to know how much volume you could forward sell at that price, because it’s surprising that renewable generators aren’t out there testing the water.

Figure 3: Summary

Bond yields rose further with the USA 10 year yield up to 2.83%, the fall in the A$ counterbalanced, for Australian commodity producers, the fall in US$ coal and oil prices (down 7.6%).

Figure 4: Commodity prices. Source: Factset

Share prices

Share prices were hard hit with most utilities exposed to either interest rates or oil prices. Origin, Orecobre and Redflow were all down more than 10% on the week and AGL was down 8% after results were no better than expectations.

AGL shares are now down 13% on this time last year. Genex has been a poor performer over the past month down 18% even though up 49% on last year.

Its market cap is still very small relative to its proposed pumped hydro project and the rise in interest rates, and the fall in QLD electricity futures has probably not made financing any easier.

The worst performer in the past 12 months has been Infigen, down 42%. There’s no obvious reason for such a big fall, but it’s coincided with changes in the management team and the emergence of alternatives such as Windlab and Tilt.

Figure 5 Selected utility share prices


Figure 6: Weekly and monthly share price performance


Figure 7: electricity volumes

Base Load Futures, $MWH

Gas Prices

Figure 13: STTM gas prices


Figure 14: Thirty day moving average of Adelaide, Brisbane, Sydney STTM price. Source: AEMO


David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.

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