AGL Energy Limited

James Hall - General Manager Capital Markets Andrew Vesey - MD and CEO Brett Redman - CFO Stephen Mikkelsen - Executive General Manager Energy Markets Doug Jackson - Executive General Manager Group Operations

Mike Dargue - Citi Investment Simon Chan - Bank of America Merrill Lynch Ian Myles - Macquarie Group David Lewis - Milford Asset Management Peter Wilson - Credit Suisse John Hirjee - Deutsche Bank Robert Koh - Morgan Stanley Mark Busuttil - JP Morgan Baden Moore - CLSA Paul Johnston - RBC Capital Markets Nik Burns - UBS Alex Turnbull - Keshik Capital

Well good morning everyone, this is AGL's General Manager of Capital Markets, James Hall speaking. Thank you for joining us this morning for the presentation of our results for the financial year ended June 30, 2016.

Our Managing Director and CEO, Andy Vesey, will shortly discuss the highlights of the results, as well as providing a strategy update and discussing today's other announcements. Our CFO, Brett Redman, will then discuss the financial results in more detail, before handing back to Andy to provide a more detailed operational review and discuss our outlook.

Andy and Brett are joined by our head of energy markets, Stephen Mikkelsen, our head of operations, Doug Jackson and other members of the executive team. The team looks forward to taking your questions at the end of the presentation.

Supplementary information to the presentation is available at the back of the pack. I will now hand over to Andy.

Thank you James and good morning everyone. Our financial year 2016 results illustrate that we are delivering on our strategy amid evolving energy markets.

Slide 4 sets out six key aspects of the result. First, our statutory result.

Although we recorded an accounting loss after tax of AUD408 million, statutory operating cash flow after tax was up 14% to almost AUD1.2 billion. The accounting loss primarily reflects the natural gas impairments we announced in February, as well as charges in the fair value of financial instruments taken in December and in June.

Second, underlying profit after tax was up 11% to AUD701 million. This reflects the strength of our underlying business, as well as focused margin and cost discipline throughout AGL.

Third, our cash conversion performance, with operating cash flows of AUD1.6 billion reflecting an EBITDA to cash conversion of 94%, this provides us with considerable flexibility to deploy capital to growth opportunities, as well as invest in the transformation of our business and of our customers' experience. Fourth, in line with that emphasis, we are announcing an indicative AUD300 million investment over the next three years in digital transformation, which I will talk about in more detail shortly.

Fifth, our outlook at it stands today, which I will discuss in more detail at the end of the presentation, reflects our confidence in the execution of our strategy. Finally, we are declaring a solid dividend.

Our final dividend declared today of AUD0.36 per share, fully franked, translates to an increase in total dividends declared for the year of 6% and a payout ratio of 65%. We will continue to assess the appropriate management of our capital in the context of our ongoing analysis of growth options that will enable AGL to create sustainable shareholder value over the long term.

Moving to Slide 5, I will now provide a more detailed update on strategy. In May 2015 we set out a strategic framework comprising three priorities: embracing transformation, driving productivity and unlocking growth.

The digital transformation program we have announced today is a vital part of delivering on all three of these priorities. The program is critical to our efforts to transform our customers' energy experience, to improve efficiency in the way we serve customers and to provide new ways to deliver profitable offerings to our customers.

Looking at other focus areas of the transformation priority, our work in scenario planning is extremely important as we strive to develop an anticipatory mindset throughout AGL. Scenario planning is a structured process for exploring possible futures.

The premise is that if we are aware of what may happen, we will be better able to deal with what does happen. We are currently rolling out the results of a comprehensive exercise undertaken in financial year 2016 as we look to position AGL to meet the uncertainties of the future energy landscape.

Another key area of focus is the embedding of lean and Agile work processes throughout the organisation. Our emphasis in financial year 2017 is on ensuring all key work processes are defined, measured and continuously improved, using the lean and Agile methodologies developed and rolled out in 2016.

The modernisation of our enterprise bargaining agreements is also essential to provide the flexibility we need to compete and innovate in an evolving sector. You will be aware that after drawn-out negotiations, we have made an application to the Fair Work Commission to terminate the current EBA at Loy Yang.

We are trying genuinely to reach an agreement that recognises the changing nature of our industry. Negotiations for a new EBA at Macquarie commenced in June.

We believe we will get an agreement at Macquarie before the expiration of the current EBA in December 2016. EBA modernisation is also essential to productivity, in which we are making strong progress.

In financial year 2016 we delivered AUD691 million of asset sales, AUD122 million of OpEx savings and AUD72 million reduction in working capital as we drive improvements in capital allocation and operational efficiency. Brett will cover these achievements in more detail.

Our emphasis in financial 2017 will be on delivering our targeted AUD100 million sustaining CapEx reduction, completing the current asset divestment program and delivering the remainder of our OpEx and working capital targets. In the unlocking growth priority, our objective is to grow retail energy's share of value and to develop and invest in new business models that exploit new technology.

The execution of our customer value strategy is delivering for shareholders, as I will discuss on the next slide. Meanwhile, our efforts to deliver large scale, renewable investments have resulted in the Powering Australian Renewables Fund.

Our efforts to trial and develop distributor energy offerings are reflected in our announcement last week of the 5 megawatt solar peaking virtual power plant project in South Australia, leveraging our Sunverge investment. Facilitation of the appropriate market design and regulatory reform to enable innovative energy projects such as these is a critical focus for AGL.

Moving to Slide 6, I want to take a moment to emphasise that our focus on operational execution within our key generating assets and driving value in our retail portfolio is helping to deliver our strong performance. Some highlights are total generation across the portfolio was up 14% to 45 terawatt hours, reflecting solid performance of the operating fleet as well as the commissioning of our solar flagship assets at Nyngan and Broken Hill.

Process improvements we are undertaking as part of our organisational transformation program have driven operating efficiencies across AGL. We are ahead of target with our operational cost savings.

EBIT per customer is up 25% to AUD108, reflecting reduced costs to serve as the customer value strategy drives effective margin management. I am particularly pleased that we've seen an increase in customer satisfaction accompanying these set of financial results.

Customer satisfaction is up 4.3% to 7.3 out of 10 and we are seeing a 25% reduction in ombudsman complaints. Moving to Slide 7, I would like to talk about the digital transformation program in more detail.

This is a three-year program with an indicative capital expenditure of AUD300 million. It is about delivering an industry-leading digital experience to drive value for customers and ultimately change the quality of their relationship with AGL.

There are three major components to the program: foundational capability, digital adoption and signature moments. The foundational capability component relates to the significant investment in core technologies, processes and people to create the digital platform.

Bear in mind, much of our IT architecture predates the smartphone age. We are now in a period where customer expectations are being set broadly in a digital world and we must invest now to keep pace.

Much of the capability we are seeking to build relates to the personalisation of service, based on data-driven decision making. The digital adoption component relates to the digital enablement of all key customer interactions, such as signing up to AGL, billing, issue resolution and moving house.

The signature moment component is the part of the transformation that relates to delivering digital experiences that charm and delight the customer in unmatched ways. We anticipate improved customer acquisition and retention, improved front office efficiency and accelerated take up of new, profitable digital offerings.

Moving to Slide 8, last week we announced AUD20 million demonstration project in South Australia, utilising the Sunverge platform to develop a virtual solar peaking power plant. The objectives of the project are to confirm how controllable distributed energy and storage systems can improve network stability, support renewable generation and an ultimately reduced energy bill for customers.

The project aims to deploy 1000 controllable batteries to homes and small businesses in South Australia with installed solar PV. The virtual power plant will act as the equivalent of a solar peaking plant, with a total capacity of 5 megawatts.

The five-year demonstration project will take 18 months to fully deploy. This concept has considerable potential throughout the AGL network, as battery technology develops and becomes increasingly more affordable.

Moving to Slide 9, let me now touch on the PARF. We have created AUD2 billion to AUD3 billion vehicle to develop and own more than 1000 megawatts of large-scale renewable energy projects.

The PARF will deliver some 20% of the requirement of the Government's renewable energy target. On July 27 we announced that QIC and the Future Fund were providing AUD800 million in equity.

We intend to vend the Nyngan and Broken Hill solar projects into the PARF as seed assets no later than December of this year. The first new build is expected to be approved by March 2017, when our Silverton and Coopers Gap wind farms will be ready for funding consideration.

The calibre of our equity partners and the level of debt funding interest highlights the continuing support for investments of this type in Australia. This brings me to the importance of market and policy reform on Slide 10.

This is an increasing priority for me as CEO and for AGL as a Company. We are continuing to work with federal and state governments, regulators, welfare agencies and other stakeholders on a long term, integrated approach to energy and environmental policy with three key focus areas.

The first of these is reforming the national energy market to facilitate efficient investments in renewables, rapid response generation, advanced storage and demand response. The second is an environmental policy that enables the orderly replacement of generation capital stock, including in relation to emissions reductions and the closure of old, inefficient, carbon-intensive thermal generating plant.

The third key focus area is reforming the regulatory framework to facilitate the development of distributed energy resources. Robust ring fencing of monopoly network business is a start.

But distributed energy resource deployment will require the widespread adoption of cost-reflective pricing. Moving to Slide 11, I am delighted to announce that we have appointed Elisabeth Brinton as our new Executive General Manager in New Energy.

Elisabeth was most recently corporate strategy officer at the PG&E Corporation in San Francisco, California. She has a proven record of successful innovation and execution across multiple industries over a 25 year career.

Her contribution will add to the depth in talent and skill at the executive level and be an advantage to AGL as AGL is faced with the challenges we see in the industry. I'd like to take this opportunity to thank Dr.

Alistair Preston for managing this part of the business, along with his organisational transformation mandate while we completed this appointment. Today, we are one of the largest competitive meter installers in Australia, having installed meter number 50,000 in July 2016 following the launch of Active Stream in South Australia, New South Wales and Queensland.

The virtual power plant demonstrates our leadership in distributor technologies, while our AUD1 per day electric vehicle charging initiative is an example of an innovative retail product. At the same time, we continue to evolve our solar offerings, including the new residential products such as solar maximiser and pursuing growth in the commercial and small business market.

Elisabeth's appointment will give us fresh impetus as we invest in the future of our Company. I will now hand over to Brett.

Thanks Andy and let me add my good morning to today's call. Slide 13 summarises the key metrics across the business.

I won't spend much time on these, but you can see that most are favourable, reflecting a strong year. I note that while a statutory loss of AUD408 million was recorded, statutory operating cash flow was AUD1.186 billion, up 14%.

Turning to Slide 14, consistent with past years, we've calculated underlying profit by removing from statutory profit the effect of significant items and changes in financial instruments. The change in financial instruments represents fair value movements in energy hedges, which are used to manage risk but are not considered effective hedges under accounting standard AASB 139.

This year's fair value change reflects a view that both the Portland and Tomago smelters will continue to operate. However, we have reduced the fair value of a material long-term electricity supply contract by AUD187 million post tax reflecting our view that this may be cancelled.

Looking ahead commercially, the outlook for wholesale electricity prices should largely mitigate the impact of any cancellation. Significant items mostly relate to the natural gas review, as detailed in February, and restructuring costs.

Removing this volatility from operating profit, we believe, provides a better measure of AGL's performance. Turning to Slide 15 provides a summary of the result by business unit.

I will turn to the next slide to talk in more detail about the result. Slide 16 shows the key drivers of NPAT during the year.

There were three big thematic, price discipline, strong wholesale markets and cost discipline. Consumer market EBIT was up A$78 million, driven by disciplined and effective price management across both electricity and gas, and tight cost control.

Wholesale electricity margin was up A$83 million, benefitting from strong wholesale market prices while at the same time selling higher generation volumes including the two additional months of Macquarie. Macquarie continues to outperform its acquisition model.

The higher wholesale electricity margin should be looked at in conjunction with the additional A$43 million of cost that sits in group operations, which includes the full year of Macquarie and the higher cost from solar coming on line during the year. Wholesale gas was up A$23 million, as the market impact of LNG coming on line drives higher prices in the market, together with opportunities to sell large volumes into the Queensland gas market.

Partly offsetting this is the additional cost of the full year of the Newcastle gas storage facility. Eco Market's A$42 million was driven by higher REC prices, which are starting to roll into C&I contracts, together with half the movement coming from creating more certificates at higher prices from hydro and solar generation.

As flagged in previous guidance comments, non cash accounting charges of A$55 million relates to higher depreciation from a review of the key asset lives and the reclassification of Loy Yang overburden from CapEx to OpEx. New Energy was A$23 million lower, in line with previous guidance comments driven by investing in emerging distributed technologies, partly offset by profits from established energy services operations.

Across the whole business, tight cost discipline drove operating drove lower operating costs which meant margin improvement flowed to the bottom line. Overall underlying profit increase A$71 million, or 11% from prior period.

On Slide 17, the consumer market key metrics show the benefit of operational discipline via both price and costs management. A focus on customer value means that, while customer numbers are largely steady, EBIT per customer is rising.

Slide 18 outlines progress on OpEx transformation targets, consistent with the methodology laid out at last year's May investor day. All 100% of the A$170 million of reductions required are identified.

This year includes a lot of quick wins, including renegotiating supplier agreements and the benefits of restructuring. Savings delivered were A$122 million compared to the A$102 million target.

Looking ahead the focus is moving to deep process improvement, concentrating on sustainable savings that do not impair the business's ability to deliver. Slide 19 then gives more granular detail around where the savings have come from.

Initiatives have been deliberately front end loaded to gain early traction. We are on track to achieve A$170 million by the end of FY17.

Turning to Slide 20, sustaining CapEx this year includes a number of major outages. Work is ongoing to reduce both major outage costs and regular spending without impacting reliability.

We are on track to achieve the target A$100 million reduction of sustaining CapEx in FY17. In FY17, growth CapEx is driven by digital transformation, which Andy talked about earlier, and New Energy.

Not included but likely is a decision to be made later in the year to update core IT ERP operational systems, likely to be an indicative spend of AUD50 million to AUD100 million over a number of years. Finally, the asset sale program is on track to achieve AUD1 billion.

Sales of AGL's interests in Diamantina Power Station and Macarthur Wind Farm have delivered approximately two-thirds of the target. Solar projects are expected to be sold into the path by December 2016.

Turning to Slide 21, we've made good progress towards the working capital target during the year, with actual savings achieved of AUD72 million compared to the AUD64 million savings target announced in February. We are on track to meet the AUD200 million target by the end of FY17.

Turning to Slide 22, as always, operating cash flow is a good indicator of the financial strength of the business. Underlying operating cash flow is up AUD71 million driven by higher earnings, representing a cash conversion rate of 94%, a strong result.

Turning to Slide 23, strong operating cash flows and no drawn facilities requiring refinancing within 18 months means AGL has a strong funding position, with net -- with debt headroom of approximately AUD2 billion. On that note, I'll hand back to Andy for the operational review.

Thanks Brett. Turning to Slide 25, let me begin my closing section by talking about people and safety.

Improvements in safety are a key focus for the executive team in the year ahead. As the chart on the left shows, our total injury frequency rate increased in financial year 2016, to 4.3 per million hours worked.

Including contractors, it increased to 6.2 per million hours. While this safety result is not acceptable, we are encouraged by our focus on a positive reporting culture.

In fact, in the 2016 financial year we have increased our proactive reporting of near-misses and hazard observations by 67%. We are also encouraged by the improving trend in the severity rate of the injuries that did occur.

We also saw 55% reduction in reportable environmental incidents. On the subject of employee engagement, we recorded a decline of 6 points, to 70%, in the year.

I consider this score, which remains above the industry average, to be a relatively good result in light of the significant organizational changes we are driving. That said, I am committed to delivering a stronger result.

Moving to Slide 26, I want to touch on our commitment to community and sustainability. Some of the activities I would like to highlight from the year include our ongoing work on diversity and inclusion, the AGL affordability initiative and our work on domestic violence.

I encourage you to review more details of these initiatives in our Sustainability Report, which is published online today. Now turning to a more detailed review of market conditions, starting with wholesale electricity on Slide 27, the forward curve continues to strengthen, as shown by the chart on the right hand side.

The drivers of higher fuel costs are well-publicized. They include Queensland LNG plants coming online, the resetting of black coal contracts off legacy lows, the closure in South Australia of the Northern Power Station and, notwithstanding our decision to reverse the mothballing of Torrens A, the withdrawal of some gas fire generation.

We believe long term wholesale prices will continue to strengthen across the NEM. However, the trends we have observed recently reflect a rate of increase greater than that which we consider to be sustainable over the long term.

And the curves, at least outside South Australia, are likely to moderate over the medium term. The degree to which we pass through higher wholesale prices to consumers will continue to be driven by market forces.

Among them are the intensity of the competitive environment, the relative infrequency with which consumer price increases can be made, and our hedging profile. Turning to the wholesale gas market on Slide 28, our announcement of 7 July referred to the increased spot price of gas and this is clearly highlighted in the top chart on this slide.

We had to secure more gas in the spot market in late June and early July than planned. On the supply side, this was due to curtailment under a key contract in Queensland, and other supply constraints in the market.

On the demand side, we had significantly increased generation at Torrens Island Power Station, resulting from the combined impact of high electricity demand and an outage in the Victoria to South Australia interconnector. Despite all these challenges, we met our customers' requirements.

As stated in July, the impact has been a AUD35 million increase in the cost of gas over the first quarter of financial year 2017. Over the medium term, our contracted gas portfolio is strong, as shown in the bottom chart.

We continue to explore options to ensure access to secure, flexible and competitively priced gas supply for the longer term. Also, over the medium and long term, our gas storage portfolio will greatly assist us in managing supply and demand volatility.

Turning to the consumer market on Slide 29, we are continuing to see a flattening of electricity demand after several years of decline, with weather patterns and customer mix enabling us to deliver growth. AGL's churn across all consumer market customers was steady at 15.7%, compared with 19.7% for the rest of the market.

We have reduced inactive or negative value sites by 46,000 during the period, which reflects a reduction of 67% in those type of accounts. Our active customer numbers were broadly flat at the end of financial year 2016 at about 3.7 million accounts.

The churn we are experiencing is predominantly in gas as more second tier retailers enter the market. Slide 30 provides an update on our generation portfolio.

The generation increase of 14% in financial year 2016 reflected a full year of operation of AGL Macquarie, combined with enhanced performance at Bayswater, the strong demand conditions affecting AGL Torrens and the commissioning of our solar flagship assets. The outage we experienced at Liddell during the year is now behind us with all units having returned to service following the boiler tube leaks of March.

My last slide discusses our outlook for financial year 2017. We intend to give earnings guidance at our annual general meeting on September 28th.

Our expectation for the year remains one of earnings growth. However, it has been a challenging start to the year.

Weather in July was unseasonably mild. And as we stated in our announcement of July 7th, gas margins will be at least AUD100 million less than in financial year 2016.

We are on track to achieve our targets in relation to operating expenditure, working capital, sustaining capital expenditure and asset sales. As I have discussed, electricity wholesale prices will remain a positive, but any retail price increases are subject to competitive conditions.

We expect that any benefits we do realize will arise over the medium term, given the timing of contracts and our hedging profile. Driving a satisfactory outcome on our ongoing EBA negotiations, especially at Loy Yang, is also a key consideration for the year ahead.

We will continue to focus on delivering on our strategy, including the kick off of the digital transformation program, and our ongoing review of the best ways in which we can manage and deploy our capital to drive value over the long term. With that, I will close my prepared remarks and invite your questions for myself and the team.

Thank you.

Thanks Andy. It's James Hall speaking again.

[Operator Instructions]. If I could we do have a number of questions on the line, so if I could ask everybody, one question please, just so that out of respect to others, so that they get to ask questions too.

The first question is from Mike Dargue at Citi. Please go ahead, Mike.

Hi guys. I just wanted to dig into the guidance around electricity prices a bit further if that's okay.

Is it right to think that your FY17 wholesale price exposure is largely fixed and hedged at this point? So that guidance is might be more looking at the longer term, two or three years that price will feed in, is the first part.

The second part is, how far do you expect oil prices to moderate given recent price increases? Do you think they'll get back to where they were before recent price spikes, or do you have any more color on that?

Thanks Mike. I'm going to hand this over to Stephen who is responsible for energy markets.

But your last comment, I think that fundamentally what we've seen in the recently has been an extreme volatility which has driven a lot of traders to take positions. We think those prices will moderate in the relative near term, although as I said earlier, we continue to see increasing pressure in the fundamentals to keep prices moving forward, just not at the rate of increase that we've seen recently.

But after and let me ask Stephen to comment on your other question.

Yes, Mike, I guess a reasonably short answer to that question. As we go into the new year, under our hedging policy we are largely hedged from a wholesale point of view.

Thanks Mike. The next question comes from Simon Chan at Merrill Lynch.

Please go ahead Simon.

Thanks James, good morning everyone. I've just got a question perhaps for Brett on the fair value of derivatives.

You touched on a change in the material long term electricity supply contract that impacted your books by about 350 million. Can you repeat the commentary you gave around that, and perhaps just give us a bit more color on what this 350 million contract relates to?

Yes, I will do Simon. What I'd suggest is there's a little more of a fulsome comment in the OFR, so I expect that this change will generate a little bit of interest.

Where we talk about the changes in fair value movements in the OFR, we do go into a little bit of extra detail. There was a particular supply contract, which I can't name the counter party so in section 5 in the OFR you'll see the extra commentary.

There was a particular contract that I can't name, but that contract is subject to the normal fair value movements that go up and down through this area, and I would tend to ignore the more natural movement that occurs. So there was a bigger number that we posted through in relation to the contract, which we talk about in the OFR.

But the specific change that relates to an expectation of cancellation, that's the one where it's a post-tax AUD187 million, which is -- what is it -- 267 million pre-tax. That one relates to an expectation of cancellation.

But I guess what we're saying -- and it's a little bit like when we originally purchased Loy Yang we talked about this a lot as well -- when you think about the outlook for wholesale electricity prices and where they both are, and where that's going as reflected in the forward curve, a cancellation of a particular contract we think will be replaced or is likely to be replaced by natural trading in that wholesale market at prices that are not too far away from what we might have been contracted with. So the financial effect going forward is fairly limited, provided you continue to take a view that the large loads in the market, specifically those aluminium smelters, continue to be there in the market, which is the view that we do take in our current outlook.

Thank you, Simon. Ian Myles from Macquarie has the next question.

Morning, Ian.

Good morning guys. Just within that electricity, how much of your book has actually been rolled across into the prevailing wholesale forward curves?

If you think across both your consumer and your business books, you've put price rises through in July and January this year. What -- how far off the curves are you from that in your books?

Ian, it's Stephen here. That's a little bit difficult to answer very specifically, so I'll answer that in general terms.

You've got to split it into the two, our two main customers, the C&I customers and our retail customers. The C&I customers tend to contract on a two to three year basis, and there's two major contracting periods a year with them; that's the June contracting period and the December contracting period.

As you've seen the forward curve rise substantially over the last year -- and if you look back to the slide in the presentation you'll see that the huge movement has come from July 2015 through to July 2016 -- some of that -- if you look at our book and think on average two to three years, some of that happened in December; more happened in June. Then it will be over the next couple of years that that full forward curve gets reflected, but obviously it will be subject to competitive pressures in the C&I market.

You can see from our C&I results, it's been a very competitive market. On the retail side, again I think the predominant influence on the retail side is the competitiveness of the market.

We live in that competitive market. It's probably fair to say, though, that not all of the forward curve rise is currently reflected in those retail prices, but I've just got to reiterate that -- because I understand where your question's coming from -- it will be -- the predominant force over -- I think over-- well, it should be over the next few years will be the competitiveness of the market, and it remains very competitive.

Thanks Ian. The next question now is from David Lewis from Milford Asset Management.

Go ahead, David.

Hi. I've just got a question on your balance sheet, one instrument in particular that's the hybrid.

As I understand it, you're not getting any equity credit from Moody's on that, so it would kind of make it just sort of expensive senior debt arguably. So I'm just wondering what the view is on that I mean are you going to try -- you have the right to call that early I believe, before June 19th.

So are you contemplating that or if not so why not?

Hi David, it's Brett here. You're quite correct that under the Moody's methodology, who are now our primary rater, we don't get an equity credit for the hybrid issue.

So in many respects it now represents expensive debt for us. Fair to say, we're thinking about our position with the hybrid, but too early for me to come out and say anything specific right at this minute.

Next question is Peter Wilson at Credit Suisse.

Just on Loy Yang and the output there; the output was down 8% in the June half versus the same period last year, and I know that several times both yourselves and your coal customer, Loy Yang B, had to curtail output due to coal supply issues. Can you just comment on what exactly is going on at Loy Yang, how much of that output decrease was due to maintenance, and how much we should expect similar performance going forward?

This is Andy, Peter. Let me answer and then I'm going to hand it over to Doug to see if he wants to add anything.

There shouldn't be any concern with coal supply at Loy Yang. If you've ever been there, we have a very big hole in the ground.

We're digging a lot of coal at the face. We put it through a very complicated set of conveyors.

So you have a lot of machinery from that coalface to the plant, and on occasion things break, whether it's an outage in a conveyor or some unforced outage in the forwarding fuel system that impacts us. What I don't want to leave the view is that there's any systemic problem with coal supply at Loy Yang.

We have a very comprehensive maintenance program there, but on occasion things fail, and then it's a question of speed of recovery, which we have been quite good at. So, my sense is one of the major outages was due to a conveyor failure that we had in the mine, and we don't anticipate that to be a going forward problem.

But with that said, let me ask Doug if you want to put any more detail around that.

Thanks Andy. Peter, there was, I guess, two sort of key events in Loy Yang.

One was the planned outage that went a little bit longer than we had anticipated. I think that's behind us now and not an ongoing concern.

The team have a good handle on outage management and this was to make some repairs to something; that was planned work. So, we don't expect a repeat of that.

And then also we did the first dredger mid-life refit, and while we did a lot of planning to avoid coal losses through that, and were successful during that period, upon return to service we had an event with a conveyor built, which Andy mentioned, and using up most of our reserve coals to manage that large dredger outage, we were under some stress to keep coal supply. So we had to do some offloading of coal.

But don't expect that to be an ongoing issue. But as you know, all mining operations you use your best coal first so we are seeing some increase in blending challenges.

So we do keep a very close eye on it, and looking at plans to manage that in the future.

Next question comes from John Hirjee at Deutsche Bank. Please go ahead John.

Thanks, James. Look, my question relates to this digital transformation that you're undergoing.

I just wanted to understand, the AUD300 million of capital that you've earmarked for the program, does this relate to your current IT platform being changed, or is there enhancements being made to that?

This is Andy. There are a number of things.

Let me start off that number one, the A$300 million is an indicative number for the three year program. This is a large undertaking and we're applying what's called the Agile methodology, which allows us to continue to be responsive to the market in creating value as we go with our expenditure.

It will basically be focused on three areas. One into technology, the processes, and people to actually create that digital platform.

As Brett said earlier, we have other pending projects which will look more specifically at some enhancements to our existing IT infrastructure that is outside this program, but will be closely coordinated. The other component is really the deliverables at the customer interface, which will be on top of the digital platform that we're building.

But initially it is to build that digital platform, so it's an investment in hardware. It's an investment in processes, and it's an investment in people, the bulk of which we anticipate to be capitalized.

There will be other operating expenses above and beyond that A$300 million, but I want to let everybody know that this is currently in our budgets. It is indicative in the first instance, because what we're doing is taking a different approach to this large IT investment, and that's using the Agile methodology.

There will be opportunities to change our going forward investment as we think about how we're delivering value on an ongoing basis. Let me stop there and ask Brett if he'd like to add anything to that.

No, Andy, I think that was a good summary. Maybe just, John, for the absence of doubt, SAP remains our core billing platform.

So we're not going to mess with the billing, if you like. It's very important for the business that we continue stability there.

But we're going to spend a lot of time and effort in the systems that surround that core to really make a step change in the way that we interact with our customers. Some of it is just simply making things as smooth as possible to deal with; the simplest of things to say can be some of the hardest of things to do in systems.

We're going to spend a lot of time getting it a lot better.

Next question comes from Rob Koh at Morgan Stanley.

Hi, good morning guys. Yes, can I also ask a question about the indicative 300 million over three years?

Can you give us a sense of how far down the line of actually tendering for products and the things that you're on, and have you considered, as the New Zealand integrated utilities have, of putting more of it in the cloud and making more of it OpEx rather than CapEx?

Well, let me say how far down the road we are. We have just completed the initial framing.

We've had work done to both define the requirements from a customer's perspective, this is what we call the customer journey, to identify 30 signature moments that we want to deliver on. We also at the same time had a review of if we have to deliver those, how we have to build that up.

That's how we developed our capital budgeting, so that we have an indicative view of what we're going to do. The question about how we're going to deliver it component by component, that's yet to come.

We've only just started the process at this point, so that's why we're taking the Agile methodology on. Those things which should be in the cloud will be in the cloud; those things which will be based on our existing systems will.

So I think, Rob, it's just a little bit too early to give you that answer. What we have done to date is really the initial scoping base on the value we want to deliver into the market, defined as our 30 signature moments, which we won't talk about exactly what those are, and then what it's going to take to deliver those seamlessly throughout the organization.

But I want to be clear here. When we talk about the digital transformation, while it will project into the market place in terms of signature moments, this is a transformation of all our processes to a digital base, so everything we're doing will become digital for us as we do this transformation.

So it's more than just a veneer of applications that our customers will see. This will be a very deep and rich experience that we're getting into and it's why we've adopted the Agile methodology, because we don't know all the answers going forward and we don't want to be flatfooted as we progress into this most important program that we have.

Thank you, next up is Mark Busuttil from JPMorgan. Good morning, Mark.

Good morning everyone. I just had a question regarding something you said on slide 23.

You gave indication that your debt headroom is about AUD2 billion and that gives you considerable flexibility to deploy capital for growth. So I'm kind of interested in what you're referring to when you talk about growth there and I guess more specifically, there's been a lot of press speculation about Alinta assets and I'd be interested in any comments you can make as to whether those assets would be complementary to your business.

This is Andy. Let me start and then I'll ask Brett to add more if he'd like.

First of all, in terms of the speculation and market rumours about Alinta, we have a policy of not commenting on market rumours and speculation, so we'll leave it there. I think the other side -- we've been saying for a long time a few things.

One is that we're setting out some very clear goals in terms of hygiene that we want to accomplish. We should bring those home at the end of financial 2017.

We're on track to do that. That's something we want to get done.

The fact is that we think that having a solid balance sheet is important because sometimes opportunities do present them in the marketplace, especially in one that's evolving and we want to be making sure that we have the flexibility to react when good, solid opportunities come along. That said, what we said on our last call, which is that we're in the process of exploring a number of growth opportunities, informed by our scenario planning analysis, which has now been completed, and our view is as we head through our strategy session with our Board in the next few months, we plan to add much more detail around this in our November investor day.

So with that said, that's sort of the framework. We're doing what we said we were going to do and Brett, I don't know if you want to add anything to that?

No, I think that was a really good summary, Andy. I think maybe the only other contextual comment I'd give would be, we don't comment on M&A, also we bring an enormous amount of discipline when we consider M&A.

So we think very long and hard about value in any process that we might be engaged in.

Next question comes from Baden Moore at CLSA. Please go ahead, Baden.

Morning, guys. I was interested in the impact of the outages that you had at MacGen.

I think previous items was AUD15 million, I was wondering if that's where it ended up over the second half or whether you outperformed there?

Baden, let me hand this one over to Doug.

Thanks Baden. Look, we were able to recover the outages on the plan we had established within the numbers that we had provided the information on.

The work has now been completed. The units are up and running and they've been running full availability and online for 33, 34 days now.

So we think the issues are behind us. As you know, they're ageing assets so we have to stay on top of our game, but I think the teams are committed to doing the right work and the right work was done to repair the issue.

And if I could just add that the event at Liddell, the type of thinning of particular boiler tubes was an absolute unique thing in our experience. We anticipate that somewhere in the history of that plant, either through past maintenance or equipment layup, something happened that resulted in what we saw as not only a near term operational issue but quite clearly a safety issue.

There was an issue with continued operation of those units that we were exposing our people to very, very serious hazard. So what we did was not just repair the events that presented themselves, but we did an extensive and exhaustive review of all the units to ensure that we had that problem under control and did a number of significant replacements of faulty tubes and water walls.

So that is behind us, but it basically led us to the view that we have to be very, very smart about the way we operate these aged assets. And as a result, one of our initiatives coming into this year will be talking about how we optimise the operation of older assets by understanding that there is what we call the sweet spot of operation, and that we will be defining how we will operate the plant to maximise the value of those particular assets based on the constraints that are presented in terms of their age and the amount of capital we're willing to put at risk in them.

Next up is Paul Johnston from RBC. Please go ahead, Paul.

Yes, just a question on the wholesale gas sales to Queensland customers. You've provided an update on slide 36 which is helpful, but just wanted to ask, and I guess I just note versus the last update that the firm sales look a little lower, only marginally, in ’17 and ’18.

But you haven't indicated this time around some potential sales in addition to these over the next three years. So, I was just wondering if you can update us on that but also the margins you might expect from the gas sales in light of your recent announcement on your wholesale gas book.

Thank you.

Thanks for the question Paul. Stephen, maybe you want to address this.

Yes, so Paul I think you're right. I mean maybe they are down marginally but I think it's within the area of what was previously disclosed.

There are contracts falling off over that period. In terms of what we're seeing with prices over that outlook, clearly what we're saying is that the prices in FY'17 are about a dollar a gigajoule lower in there on that 60-odd petajoules, that's how we get the AUD60 million number.

I think out over the medium terms, so what we're showing here through to FY'19, my view is that we will basically see a stabilisation in the wholesale gas book. I'm not expecting any particular surge or fall in the margin that we're making from that wholesale gas book.

So the margin will be somewhat similar to what you're expecting in ’17 over the medium term. But what about the volumes?

Are you suggesting that you're now not expecting maybe an uplift in the volumes versus this chart on 36, so versus the last half when you're identifying some extra 5 petajoules, maybe 10 petajoules of service sales? Is there a slight change there?

Paul, it's Brett here. Look I wouldn't read too much into we've dropped off the dotted box of potential sales.

That's just where I guess we've taken a bit of a commercial view that our trading teams are always very nervous when we were signalling that far out, the amount of contracting that we were looking to do and so we just moderated a little bit for disclosure there to stick with the firm what we've done in a firm sense, but to leave off a little bit what's there in the potential sense because it was having a little bit of a commercial impact with that information.

Thanks Paul. The next question is from Nik Burns at UBS.

Please go ahead, Nik.

Yes, thanks James. Just another question on your gas portfolio and supply and just thinking through the recent events in South Australia, understanding that that was probably a result of a confluence of events, but I'm just wondering if it really highlights I guess some lack of flexibility in your gas supply at this point?

I understand you've flagged a longer term you do have your storage arrangements from Iona that kicks in 2021 but between now and then, I'm just wondering what actions you can put in place just to ensure that you have sufficient flexibility in your portfolio to ensure that these sorts of events don't happen again? Thank you.

Thanks, Nik. I'd say your first statement was right.

We're looking at a low probability event times by a low probability event that caused it so at the end of the day we had a large supply disruption at the same time that we had the interconnector between Victoria and South Australia out, and so there was big demands on tips to keep the power on in South Australia, so it was generating at great volumes while at the same time we had a completely independent, unrelated supply curtailment. So, what I would say about that is that to hedge that event would cost significantly more than the probability of that event happening.

So I am very comfortable with our portfolio. I think we've got we've actually got quite a lot of flexibility in it.

We've got a very diverse customer base and we've got both diverse sources of supply and diverse sources of transport and as you said, with Iona coming on in 2021, that adds further to it. So I wouldn't be planning on us doing anything particular between now and 2021, because I think these independent events coinciding together is such a low probability that the cost would be much, much more than the periodic cost of it.

We have one final question which is from Alex Turnbull at Keshik Capital. Please go ahead, Alex.

Hi, thanks for the result. My question I guess is more a scenario analysis.

So I mean there's an operating assumption in the market that Tomago and Portland will stay open. They currently look fairly out of the money as aluminum smelters, especially as the pricing on power has moved up to more market as opposed to subsidized rates.

I mean how would you guys see that affecting the market and more importantly, the recent bump in wholesale power prices? Alcoa has been fairly evasive and let's just say evasive when they've been asked about this.

There's also another question. Sorry, it's currently the proposal to move the interval for payment and dispatch from say 30 minutes and five minutes to five and five.

What are AGL's views on that, especially in light of this push into new energy and virtual power plants that can provide ancillary services?

Stephen, why don't you take the first part?

Yes, I'm happy to do the first part. So I mean generally at a high level, clearly there's between Tomago and Portland there's, what, 1500 odd megawatts of demand in the market there.

About 900 megawatts Tomago, 600 megawatts in Portland from memory, so clearly if both of those plants were to go from the market, that's a significant reduction in demand in the market and as a generator, that -- that's a statement of the obvious that that wouldn't be good for us from a generation point of view. Having said that, where the market has gone, where the market is now, the forward market, contracts are much closer to the forward market, so I can't say much more than that in terms of where we are on those contracts because obviously they are commercial-in-confidence and we're continuing to have an active dialogue with both companies.

Alex, this is Andy. I'm going to have to pause -- could you repeat the other part of your question?

Sure. So one thing that's come out of a lot of the sort of shemozzle that has been the South Australian power market is that you essentially [indiscernible] in a way that seems to be pushing up those prices.

There has been a proposal to move to five minutes for trading and settlement in those markets which would make things like fast response and batteries a lot more viable commercially and I think there's a discussion paper at the AEMC. I was just wondering what your guys' view was on that as people who don't own a lot of gas plants.

Thank you, Alex. I mean our view is very clear.

We don't think we're supportive of that type of change rule and we've been very open about that. We think that broader structural changes need to be made across the NEM, with a focus on everything that needs to be delivered.

We've always been saying that is large scale renewables that is rapid response generation like open cycle gas turbines, large scale batteries, as well as moves to talk about things more towards the distribution level. So for us, we think the framework has to be taken a higher level broadly at the market and the type of issue on bidding and pricing and settlement we think is at a finer level and we're not -- basically that's not part of what we think the future should entail.

So that's where we are on that.

Thank you, Alex. There are no further questions on the line, Andy.

Well, let me thank you all for joining the call. We think delivered a very strong result, especially given the markets that we see and the changes going on.

So we have a lot coming in the new year. We're very proud of the fact that we introduced the PARF, the virtual power plant, the work we're doing in terms of sustainability.

The year has started off a little bit soft for us with a warmer July and some of the gas issues we talked about, but we continue to execute on our strategy. We look forward to giving more details around capital management and our growth opportunities as we approach our investor day in November, and we're looking forward to engage again at that time.

So thank you all.