澳大利亚公用事业：零售折扣调查与市场更新

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　Equity Research Asia Pacific | Australia

　 Sharp fall in electricity futures since October, not reflected in AGL/ORG share price: While one could argue (as we have) that a fall in wholesale electricity prices was inevitable with prices above new entrant long run, the A$15/MWh (15-20%) fall breaks a trend, and firms a negative underlying earnings outlook post FY20. We attribute the fall in spot/futures prices to fuel prices and a related change in bid-stacks, steady increases in renewables output, and a lack of price volatility in early-summer peak demand events.

　 Retail discount survey - competition creeping back, AGL/ORG follow VDO, a ST positive, but effectively regulating themselves and locking in 2021 reversal: Our survey shows that competition is creeping back, with AGL increasing discounts in October, and Alinta reinstating discounts in the last month. However, prices for the majors remain 3- 5% higher than pre VDO/DMO, and we retain the view that retail gross margins have bottomed. AGL/ORG have mirrored the 8% VDO increase for VIC customers 1 Jan, an A$50-60mn uplift vs forecast, half in FY20. In our view, by following the VDO price, they have given it weight, effectively regulating themselves, locking in an equal reversal in 2021.

　 Downgrade AGL to UNDERPERFORM (from NEUTRAL), target price A$18.00/sh (from A$18.40/sh): Futures are converging to our LT price of A$70/MWh, with risk of a fall to A$55/MWh should an oversupply emerge. In the short term, we remain of the view that FY20 earnings will hit the top end of guidance due to strong MacGen output, however, the 30-day delay to Loy Yang unit 2 is a risk should we get a peak price event in Jan.

　 Downgrade Origin to NEUTRAL (from OUTPERFORM), target price A$8.90/sh (from A$8.40/sh): We retain a preference for Origin over AGL despite 30% 12M outperformance, of which half can be attributed to Brent. We see Origin’s utility business as higher quality, with a better performing retail business and less downside from wholesale price and supply. APLNG is performing well, with FY20 breakeven guidance implying upside to our forecast (we model US$34.0/bbl breakeven, vs guidance US$31-34/bbl).

　Figure 1: AGL and ORG have outperformed a fall in electricity futures since October

　Indexed 140

　Research Analysts Peter Wilson 61 2 8205 4107

　peter.wilson.2@credit-suisse.com

　Chloe Lim 61 2 8205 4739

　chloe.lim.2@credit-suisse.com

　130

　 120

　 110

　 100

　 90

　 80

　Jan-19 Apr-19 Jul-19 Oct-19 Jan-20

　ORG.AX AGL.AX Weighted Electricity Price Index Brent

　Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

　DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does

　and

　seeks

　to

　do

　business Australian Utilities

　Retail discount survey and market update: Downgrade AGL and ORG

　Multi Utilities | Quarterly

　with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could

　 Downgrade AGL to UNDERPERFORM, Origin to NEUTRAL Electricity futures have fallen sharply, not reflected in AGL and ORG share price Discussed further below, electricity futures have fallen sharply since the end of October, as weak spot price outcomes have reset forward expectations. In particular, the market has failed to produce price spikes in the first peak events of the summer, suggesting incremental supply and preparedness has relieved some of the market tightness. Shown below, the AGL and Origin share prices have both strengthened since the end of October when forward prices peaked. Origin has similarly outperformed both the electricity futures and AGL, partially explained by the strengthening Brent price (sensitivity approximately 1:1, Figure 4).

　Figure 2: AGL vs electricity futures (2 nd year strip, Indexed) Figure 3: ORG vs AGL vs electricity futures vs Brent (Indexed)

　 170 160 150 140 130 120 110 100 90 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 140

　130

　120

　110

　100

　90

　80 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Weighted Electricity Price Index (2nd year) AGL.AX (Indexed)

　 ORG.AX AGL.AX Weighted Electricity Price Index Brent

　Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates Source:

　the BLOOMBERG PROFESSIONAL™ service, Credit

　Suisse estimates

　Earnings and value implications Electricity futures converging to our forecast, affirming outlook for post-FY20 earnings declines We currently model a realised wholesale price of A$78.8/MWh in FY20, declining to a long- term price of A$70/MWh ($2022) from FY22. For much of the last 12 months, the year ahead futures price has been comfortably above this; Victorian CY2020 baseload futures traded between A$100-105/MWh from July to October, NSW futures A$85-90/MWh. This opened

　the possibility that we would have to upgrade FY21/22 earnings if such prices persisted for much longer. However, given the falls experienced in the last two months, we no longer expect earnings upgrades for wholesale prices in FY21, and the current (illiquid) 2022 futures suggest downside risk to our long-term price assumption too. We have previously outlined an A$50-55/MWh long-term price scenario where centralised planning leads to an oversupply and the return of short-run marginal cost pricing (Big Brother). Realised wholesale prices for AGL and Origin typically reflect a 2-3 year rolling average of futures prices, incorporating the typical three-year contract duration of C&I customers, and the practice of smoothing outcomes for residential consumers (the ESC’s short 12-month approach to setting the VDO is an anomaly). If anything, we understand that contracts have shortened as a response to high prices, thus we use a 2.25 year average weighted by regional output (ex smelters) to guide our modelled price. Shown in Figure 5 below, this points to an A$8/MWh fall in AGL and Origin’s realised price FY20-21 should current prices persist; greater than the A$4/MWh that we currently model.

　Figure 4: Sensitivity table

　Figure 5: Implied realised price- 2.25yr rolling avg approach

　Source: Company data, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

　 AGL

　FY22 EPS DCF Value

　ORG

　FY22 EPS DCF Value

　1% change to Electricity

　+/- 2.4%

　+/- 1.7%

　+/- 1.1%

　+/- 0.9%

　1% change to Brent

　+/- 1.3%

　+/- 0.9%

　$/MWh FY17 FY18 FY19 FY20F FY21F FY22F

　NSW average 42.2 62.5 74.7 78.5 71.2 66.0

　VIC average 36.3 59.3 77.5 83.1 76.4 67.8

　AGL output weighted average 41.9 64.1 78.2 81.3 73.7 66.5

　Origin output weighted average 45.6 67.0 78.3 79.5 71.5 65.0

　CS modelled price input

　 78.8 78.8 75.0 70.0

　 Wholesale market update Low spot prices reset forward expectations Baseload futures have declined approximately A$15/MWh in Victoria and NSW since the end of October, more or less erasing the gains earlier in 2019. These falls were extended in December as the first peak demand events of the summer failed to produce spot price spikes despite outages at Loy Yang A (delayed return), Loy Yang B, and Mortlake. As always, summer provides a test of the market supply/demand balance, and so far it is looking like incremental supply, better fuel price/availability, and better preparedness has resulted in improved market balance. Below, we discuss the increase in variable renewable supply, and the fall in gas and coal fuel prices, which combined with low seasonal demand in November, help to explain the dramatic fall in spot prices in November.

　Figure 6: NEM demand weighted spot prices - dramatic decline Figure 7: CY20 baseload futures - declined in line with spot in Nov/Dec

　 $/MWh

　160

　140

　120

　100

　80

　60

　40

　20

　0 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19

　Above $300 Below $300

　A$/MWh 110

　100

　90

　80

　70

　60

　50 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 VIC NSW QLD SA

　Source: NemSight®, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL™ service

　Observations Despite grid delays, renewables output increasing, another 50% committed in pipeline As discussed previously, transmission capacity related delays and curtailments have certainly been a factor in forestalling the expected decline in electricity futures for much of CY2019, with negative prices also signaling that the full benefits of wind and solar are not being realised. This remains the case despite clear progress on transmission investment on a 2-3 year plus time frame (COAG/NSW Energy Plan Oct/Nov-19, AEMO ISP in Dec-19),

　AGL’s Broken Hill solar

　farm for example remains curtailed by 50%. However, output is still increasing strongly as shown in Figure 8, particularly when the output from rooftop solar is included. Total wind, solar, and rooftop solar supplied 21% of demand in the Dec-qtr, up from 15% pcp. Supported by increased state subsidies, and continued federal rebates (SRES), rooftop solar installations reached approximately 1800MW in CY2019 according to the Clean Energy Regulator, with incremental output that we estimate is equivalent to approximately 1% of gross NEM demand. Further, despite a 50% reduction in project commitments in CY2019 as the RET incentive faded, there remains a pipeline of committed large-scale wind and solar projects equivalent to approximately 50% of the total installed base.

　Newcastle 5500kcal

　 Figure 8: NEM - variable renewables output

　Figure 9: Large-scale Renewable capacity additions GWh 4,000 3,500

　3,000

　2,500

　2,000 1,500 1,000 500 0 Rooftop Solar

　Wind

　Solar

　Source: NemSight® Source: Clean Energy Regulator

　Gas and coal fuel prices eased throughout 2019 Gas and coal prices have eased, which has and will continue to put downwards pressure on electricity prices, increasingly so as short and medium term contracts roll over. Gas prices in particular have historically been strongly correlated with electricity prices since the electricity market tightened following the Wallerawang, Northern and Hazelwood power station closures as shown in Figure 10. The linkage to spot coal prices is less direct due to the predominance of medium- and long-term...

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