AGL Energy. Leverage to policy failure A$15.07 AUSTRALIA. Event. Impact. Earnings and target price revision. Price catalyst. Action and recommendation

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1 AUSTRALIA AGL AU Price (at 5:1, 4 Mar 215 GMT) Neutral A$15.7 Valuation A$ - DCF (WACC 7.9%, beta.9, ERP 5.%, RFR 5.%) month target A$ month TSR % +4.7 Volatility Index Low GICS sector Utilities Market cap A$m 1,145 3-day avg turnover A$m 3.5 Number shares on issue m Investment fundamentals Year end 3 Jun 214A 215E 216E 217E Revenue m 1,49 9,475 8,71 9,338 EBIT m 1,4 1,81 1,187 1,314 Reported profit m Adjusted profit m Gross cashflow m 892 1,1 1,164 1,249 CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x AGL AU vs ASX 1, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 215 (all figures in AUD unless noted) 5 March 215 Macquarie Securities (Australia) Limited Leverage to policy failure Event The RET scheme remains in limbo with a final resolution to be reached between government and opposition. A range of between 31-38TWh is mooted as a net target by 22. Impact In the absence of a material step-down in black energy price, a policy failure, as described by ORG around the LRET market is likely to enhance AGL s profitability by as much as $21m pre-tax as either a settlement or no agreement points to a shortage in FY18 onwards. The limited life of LREC to 23 means that without a carbon tax, the subsidy for wind farms is not high enough to justify investment. Moreover, with AGL and ORG internally generating LRECs to supply for mass-market demand, there is a limited PPA market (EA and possibly Snowy Hydro). The upside for investors is as much as $1.2ps. At the very least, the recent strength in LREC prices adds ~$43m to FY16 and FY17 earnings as this higher pricing is pass-through. The renewed RoFE focus raises the spectra that AGL may actually seek to realise some of the latent value in the non-producing gas assets ($.5-.8bn) and the infrastructure type assets (Newcastle Gas Storage, Macarthur WF and Diamantina, $1.-1.2bn) to lift RoFE by 1% to ~11%. It would also lower ongoing capex, providing significant flexibility to balance sheet to pursue other opportunities like New Energy. For every positive in utilities, there seems to be a counter-balancing negative, which comes in the form of demand data, with Feb demand down 1-15% in every state other than Qld, where it dropped 6%. This follows a bad January and highlights AGL and ORG caution in the outlook as summer seems to be milder. Whilst retail will hurt from the lower demand, at this stage AGL s generation is unaffected, and more importantly base load prices are slight above the 5-month ex-carbon average. Earnings and target price revision No change. Price catalyst 12-month price target: A$15.15 based on a DCF methodology. Catalyst: Bipartisan approach to REC policy. Action and recommendation Settlement between government and opposition around REC policy is a positive for AGL as it has 3.4TWh of REC, and $5-6/MWh upside to the REC price, in an environment of flat black energy price. This is highlighted with industry discipline in Feb to ensure stable prices despite weak demand. AGL has some attraction for investors at 1.1x book value, albeit government policy certainty and refinement of the strategy will be key catalysts. We maintain the Neutral recommendation. Please refer to page 11 for important disclosures and analyst certification, or on our website

2 Analysis Since change of government in 213, the Renewable Energy policy has been under review. The current 41TWh target by 22 is seen as unacceptable by government and black energy industry. The government s original review suggested closure of the scheme, or alternatively a real 2% increase by 22. The latter approach saw the effective target drop to 17-25TWhr with growing solar and shrinking industrial demand impacting the range. At the same time, the opposition and cross-benches rejected the outcome and with the parliamentary numbers would block any reform. They argued for a minimum of 38TWh with some exception for export-facing industries like Aluminium. Fig 1 LREC - Spot $55. $5. $45. $4. $35. $3. $25. Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Source: AFMA, Macquarie Research, March 215 As a result of government policy uncertainty, investment in renewals has all but stopped, with the REC price dropping from ~$35-4/MWh to a low of $25/MWhr before rebounding to a $3-35/MWh price. Without carbon, AGL s wind portfolio in the last 2 quarters generated ~$6/MWh compared to PPAs struck at $9-11/MWh and our estimate of wind development costs at ~$92-98/MWh inclusive of return. The latter is supported by ACT s recent awarding of 2MW at FITs of $87-92/MWh. Fig 2 Wind energy generation by ORG and AGL AGLWind GWhr "ORG Wind" $ 1, Wind VWAP Ave spot Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Source: Company data, Macquarie Research, March 215 However, commentary by ORG, AGL, IFN and ENE all indicate the recent strength in the REC market pricing is indicative of growing confidence that some sort of compromise can be reached between government and opposition of a LRET target between 31,-38, and a promise to leave the scheme for 5-1 years instead of the current 2-year review. 5 March 215 2

3 Fig 3 LRET market Current LRET market Lower LRET target 5, "LRET Target" LRET Surplus Actual LRET hurdle % of volume 25.% 5, "LRET Target" LRET Surplus Actual LRET hurdle % of volume 25.% 4, 2.% 4, 2.% 3, 15.% 3, 15.% 2, 2, 1, 1.% 1, 1.% 5.% ,.% -1, %.% Source: Company data, Macquarie Research, March 215 As the table above highlights, the problem with the current market is the significant surplus generated by the combined scheme in the early days and generous solar multipliers. None of the initiatives by government have addressed the surplus yet, with any new capacity in the market potentially prolonging the surplus. Three years ago in 212 the expectation was the surplus would be cleared by 215, but this has now shifted to 218 (MRE expectation, Green Energy Markets). The delay reflects new renewable plants approved in anticipation of carbon tax and the voluntary surrenders (ie desalination plants) being lower than expected. So is this a policy failure as ORG claims? Under a lower REC target of 35TWh, there is no impact on the timing of surplus being cleared, as the targets for CY16, CY17 and CY18 are unchanged. With all of the major utility companies having inventories of REC credits, there is limited impetus for the REC price to increase, except on anticipation of a shortage emerging in 218. With that surplus being only 4TWh, the risk is that will be pushed out until CY19. The problem with the current policy and any new policy that has been speculated is that clearing of the surplus creates a one-year swing of ~9-1TWh of production being required in 219. Such a build seems challenging. The table below sets out the currently committed projects in the coming 2 years. At this stage, there is 1TW ie ~3.8TWhr of production. Thus, over 219 and 22 ~14-15TWh of production ie TW of renewable capacity some $9.9bn of investment needs to be delivered. Such an investment hurdle will take at least 3-4 years to develop. Fig 4 Committed renewable projects Project State Unit ID Fuel type Unit status Nameplate capacity (MW) Commissioning start date Bald Hills p1 Victoria 1-52 Wind Com 16.6 May-15 Portland Stage 4 Victoria 1-27 Wind Com May-15 Ararat Victoria 1-75 Wind Pub An 24 Oct-15 Coonooer Bridge Victoria 19.5 Jan-16 Boco Rock Wind Farm NSW 1-67 Wind Com 113 Jan-15 Broken Hill Solar Plant NSW Units 1-4 Solar Com 53 Aug-15 Moree Solar Farm NSW 1 Solar Com 56 Feb-16 Nyngan NSW 1-77 Solar Com 12 Jul-15 Royalla Solar Farm NSW 1-2 Solar Com 2 Feb-15 Taralga NSW 1-51 Wind Com 16.7 May-15 Kogan Creek Qld 1 Solar Com 44 Jul-15 Hornsdale Wind Farm SA A Wind Pub An 27 Nov-17 Source: AEMO Dec, ACT Government, Macquarie Research, March 215 In such an environment, it would seem plausible that the REC price will go to the penalty level, namely $92.9/MWh (adjusted for $65/MWh penalty post tax). On current REC pricing, this implies a pre-tax 21-28% pa return an attractive investment return. Pricing is not higher, demonstrating the lack of confidence in policy outcomes. Oddly, no policy outcome means a target of 41TWh, unless a party gains control of the Federal lower house and senate and a swing of 16TWhr. 5 March 215 3

4 The net outcome is, according to ORG, the policy will fail, as penalty pricing is high probably from 218, when the residual surplus is satisfied until the market can reach a balance point. This is where things get complicated. LREC scheme has a residual life of 15 years. Post construction, new wind farms or solar will only obtain years of LRECs compared to an asset life of 25 years. Thus, any investment is also reliant upon the black energy price and structural oversupply that is currently present and likely to persist with the REC policy (adds 5-6% of current demand). The table below sets out a scenario based on our forecast NSW black energy price, which has a bump reflecting coal costs increasing and the LREC at the penalty, the post-tax project IRR is only 8.1%, which is hardly compelling. The recent ACT auction had 2-yr PPA at $87-92/MWhr, implying project returns of 6-7% pre-tax based on ACIL Tasman cost assumption. Fig 5 Wind farm returns Generation Black LREC Price Revenue Op cost EBITDA Tax Capital cost 255 TWh $/MWh $/MWh $/MWh $ m $ m Post tax project cashflow IRR 11.7% 8.1% Source: ACIL Tasman June 14, Macquarie Research, March 215 The returns do not look compelling and explain why ORG and AGL are not participating. However the other issue is the longer it takes for 3 rd parties to build renewable capacity, the less time they have to enjoy the scheme, with a one year delay to CY19 reducing the post tax project return by.5%, a 2 year delay 1.1% to 7.%. There is value in the policy failure for AGL and ORG The table below sets out AGL current renewable portfolio. It has steadily grown over the last five years with the most recent step changes being the commissioning of Macarthur WF and recently the Silverton Solar farm. This brings renewable production up to ~2.-3.3TWh pa. The range reflects the desalination plants in South Australian, Victoria where the energy was 1% green. When these plants are operational, AGL s available REC will be at the lower end of the range, albeit the price realised is a premium. As both are idle, AGL s REC generation is at the upper end number ~3.3TWh. 5 March 215 4

5 Fig 6 AGL RET generation Merchant Exposure Type Interest Fuel AGK Capacity MW New South Wales Source: Company data, Macquarie Research, March 215 Average Capacity Factor % Pow er Generated Production GWh Low er Low er Hydro Peak 1% Water 62 2% Ngynan/Silverton Unscheduled 1% Solar % South Australia Wind Farms Unscheduled PPA Wind 441 4% 1,434 1,43 1,531 1,454 1,531 Victoria Hydro Peak 1% Water % , ,35 Oaklands Hill Unscheduled PPA Wind 63 36% Associates Macarthur WF Unscheduled 5%/PPA Wind 42 38% 578 1,45 1,398 1,472 Greenpower forward sold Hydro baseline Melbourne Water (211) 1% Green 1% % Vic Desal (213) 1% Green 1% % SA Desal (213) 1% Green 1% % Sub Total 1,394 1,748 2,33 2,818 2,51 3,29 For AGL the LREC generation is in excess of the retail load such that AGL can service a large proportion of the C&I load with internally generated REC, with the residual bought in the market place. ORG s position is not as strong, with a material short emerging by 219 (see below), albeit this can be met by its existing surplus LREC on balance sheet. Thus ORG short position is likely to emerge on post 221 in its mass market customers. Fig 7 AGL and ORG renewable obligation vs retail load AGL Retail Electricity % of LREC 5.8% 7.4% 9.9% 1.3% 1.5% 11.8% 13.8% 16.3% 18.7% 21.7% LREC Requirements Production (ex 65 Hydro base line) Surplus AGL C&I load Net position ORG Retail Electricity % 5.8% 7.4% 9.9% 1.3% 1.5% 11.8% 13.8% 16.3% 18.7% 21.7% Rec requirements Production Surplus Source: Company data, Macquarie Research, March 215 AGL with 3.4TWh of generation, the potential is for $62.5/MWh increase from FY14 average price to the penalty price. The gain for AGL is: The price increase is worth pre-tax $21m ie 2-25% uplift price. There is obviously a corresponding decline in electricity prices, albeit the additional volume of 9-1TWh is likely to replace the 2TWh that will appear as a result of gas being redirected for export. Thus, the electricity market will remain in oversupply, but prices would need to fall by $6/MWh to offset the RET benefit. We expect a flat pricing outcome, thus there is leverage to the upside. For ORG the impact is not as significant. It has 2.4TWh of PPA, with the commencement of Snowtown II PPA in December 214. Thus the loss on the Snowtown PPA will be ~$3m pa (based on AGL pricing). Offsetting this is the potential upside of $15m, thus the net leverage is ~$12m. For ORG, they are not as badly impacted by falling electricity prices, with ~$-9-1/MWh fall required to net out the benefit. 5 March 215 5

6 A RoFE Focus At the interim result, AGL introduced MD, Andrew Vesey to investors. The themes coming from Andrew: a focus on lifting the RoFE of the business to an acceptable level; driving harder on costs; and shift away from a tactical strategy to a longer term strategy. Much of the latter will be released in May with the strategy presentation, but there are some obvious opportunities: Gas portfolio. AGL has already earmarked the Qld gas assets Moranbah and North Queensland Project for sale, with a book value of ~$35m. However, it is questionable whether any of the AGL s gas portfolio is strategic in either NSW or Qld. Moreover, the development of Gloucester potentially damages the retail brand given the controversy it has created. At this stage, the portfolio loses $13m EBIT yet has ~$872m of asset under management. This divestment of the portfolio generates an RoFE improvement of.7% to 1.4% in FY16 9.8%. Fig 8 AGL RoFE pre and post upstream AGL ROFE 1.4% 9.7% 7.4% 8.8% 9.8% 1.9% 11.5% 12.3% 13.9% ROFE (ex upstream) 12.2% 1.9% 7.7% 9.2% 1.4% 11.7% 12.5% 13.9% 16.5% Source: Company data, Macquarie Research, March 215 The question is the approach to divestment. Whilst the Qld assets have a value, the oil price movement changes the time line to development, which is likely to impact pricing; moreover the obvious buyers GLNG or QCLNG will only do so if they have agreement of the Arrow stake and development timetable. Likewise in NSW, its Hunter Valley resources are just an option and the Gloucester development value only emerges once FID has been reached. This makes a straight divestment challenging. One alternative for AGL is in species distribution of the Gas asset. With an initial cash injection to aid funding for Gloucester along with contracts to acquire the gas at fair market value, AGL can ensure its gas security, and not have to sacrifice the longer-term value around the gas assets, which are most likely not going to get recognised in the current market. Gas storage. AGL gas storage development is exciting; however infrastructure investors will pay a premium to own an asset like this. ANZ Terminals recently sold for 13x EBITDA, APA trades at 13.9x EBITDA (FY16). Whilst having operating control of the assets is important, as AGL can generate value through strategic trading of gas, a third party could adopt a more aggressive financial structure than AGL 3:7. Like with wind farms, this unlocks capital immediately which can use tax loses, but does not create the same price risk, as it will be more of a rental payment. Again this should enhance the return. Macarthur WF and Diamantina PS. Meridian divested its 5% interest in the WF for $659m in June 213 to Malakoff. Since then interest rates have fallen ~1bps, however carbon tax has been removed. Ignoring the desalination contract on spot pricing, the WF profitability is zero. Yet if the REC policy fails, this can increase the profitability to ~$25-3m, which is still only a 5% return. Like with the other WF PPA, AGL can use third-party leverage to enhance the RoFE of the existing business. Diamantina is already a JV on a tolling contract with ~$12-14m of capital tied up. It was developed to allow the sale of surplus gas. With it no completed it a logical divestment, with minimal impact on earnings. The outcome is AGL has ~$1.5-2.bn of projects that can potentially be realised over the coming 12 months without the loss of the strategic value behind these assets and minimal impact on the broader earnings growth of the business. At the simplest level, successful divestment of spin adds 1-15bps to the RoFE Fig 9 AGL potential asset sales FY16 Current Gas Assets Storage WF/Diamentina Total Net Debt 3, ,175 Equity 9, ,579 EBIT 1, ,173 RoFE 9.8% 1.9% Source: Macquarie Research, March March 215 6

7 The lack in volume in Electricity The challenge for the sector remains demand. January demand was 6% below the eight-year average and February was even worse, at 1% below the average. The causes were a milder summer, ongoing impacts of solar, and the withdrawal of Point Henry in Victoria. But even in markets like NSW, demand was materially softer. The impact is more prevalent in retail where sale of electricity will be down against pcp. At a GM of ~$3/MWh, the impact of the lower volume we expect will be in order of $12m of AGL. Fig 1 NEM average volume movements Demand growth 15% 1% NSW QLD SA VIC 5% % -5% -1% -15% -2% Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Source: AEMO, Macquarie Research, March 215 At the merchant level, the picture is a little blurrier as AGL has significant hedging in place. But more interesting is that neither AGL s volume nor average pricing has collapsed despite the terrible NEM volumes. The swing factor has been hydro, along with some capacity withdrawals. Specifically for AGL: Mac Gen production is down 2% on pcp (Jan +.9%), but consistent with Oct and Nov production. Average realised NEM price of $34.17/MWh (ex Tomago) is ~$1/MWh below the five month average. The NEM pricing assumption is consistent with our 2H15 expectation. LYA production surprisingly was up 1.5% (Jan + in a market where demand dropped 15%). There continues to be a rotation from hydro to brown coal reflecting the end of the carbon tax. Going forward we expect as gas prices increase the rotation will be from gas to coal as well. Pricing at $28/MWh is running below expectation, albeit hedging will mitigate most of this Gas generation had dropped 13% reflective of a lack of summer. The spark spread has normalised back to $5.79 across AGL assets. Torrens Island turn down is starting to annualise, with the next step down no before mid year when LNG demand starts to accelerate. Wind: Whilst the LREC is an opportunity, the wind production remains horrible down 16% in Feb in pcp, continuing the trend over the last two months, that wind production has disappointed. The lower wind production has possibly had a positive influence on base load energy prices Overall there is some pressure near term on earnings, mainly from retail and limited opportunity to sell unhedged volume in Merchant. Moreover, elements like MacGen attempting to uplift generation as originally planned have yet to emerge. 5 March 215 7

8 It is interesting to extend this to management commentary; electricity markets forwards are increasing. This is somewhat mixed across the states as shown in the charts below. Queensland pricing has increased, however with both AGL and ORG being short electricity in the market, there is limited benefit from the shift up as both need to acquire base load hedges. Victoria is arguably more traditional and highlight the challenges with very weak demand resulting in structural over supply, thus forward prices continue to slip. At the moment, Victoria is benefiting from lower wind production and Hydro Tasmania import electricity. Neither of these two elements will be lasting, which has risk to the downside or LYA. Fig 11 Forward Electricity curves overtime $/MWh 46 NSW Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 FY15 FY16 FY17 FY18 $/MWh 41 ViC Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 FY15 FY16 FY17 FY18 $/MWh 55 Qld Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 FY15 FY16 FY17 FY18 Source: AFMA, Bloomberg, march 215 NSW is slightly odd, with hedge pricing continuing to increase despite the excess capacity. Part is on anticipation of exporting power, thus improving the balance, but we believe the current spot pricing is not high enough for the likes of Vales Point or Mt Piper to run profitably. This raises the issue whether some capacity from these plants will be mothballed. Unlike in Victoria, NSW does not have the mine remediation costs from mothballing or closer, thus can be far more responsive to lower prices. For AGL the near term is painful, albeit anticipated. But as capacity is withdrawn, the profitability of sector improves and AGL with ~15TWh of non Tomago generation from Macquarie Generation is leveraged to the improvement. Current forward prices of $4/MWh are well ahead of our expectation, albeit these will only be realised if and when more capacity is withdrawn. Mt Piper is EA s last base load power station. To withdraw shifts them back to being a retailer with limited vertical integration (Tellawarra). This is strategically weaker than Snowy, ORG or AGL. Vales Point B. Government-owned asset, after a failed sell-down. Mothballing or closure would potentially have political consequences thus slowing the process. Fig 12 Retail churn signalling more competition 9, Electricity Churn 9, Gas Churn 8, NSW VIC QLD SA 8, NSW / ACT VIC QLD SA 7, 7, 6, 6, 5, 5, 4, 4, 3, 3, 2, 2, 1, 1, Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Source: AEMO, Macquarie, February March 215 8

9 Fig 13 Investment Fundamentals Valuatio n Retail $m 3,462 3,432 3,343 3,216 3,318 3,269 3,155 3,38 2,92 2,747 2,571 M erchant $m 5,261 5,52 9,182 9,323 9,54 1,984 1,794 1,534 1,22 9,743 9,196 Upstream Gas $m ,59 1,17 1,24 1,174 Energy Investments $m Head office $m -1,917-1,93-1,911-1,892-1,879-1,833-1,739-1,631-1,59-1,372-1,218 Net Debt $m ,748-3,67-3,487-3,441-3,52-2,647-2,149-1, Valuatio n $m 6,726 6,988 8,354 8,166 8,329 1,63 1,415 1,78 1,972 11,188 11,35 per share $ P rofit and Loss Total Revenue $ m 6,611 7,74 9,736 1,34 1,49 8,424 8,79 9,338 9,576 9,785 1,455 Growth % 9% 7% 38% 3% 5% -2% 4% 6% 3% 2% 7% EBITDA (operating) Retail $m M erchant $m ,35 1,93 1,317 1,439 1,523 1,583 1,598 1,659 Upstream Gas $m Energy Investments $m Centrally managed expenses $m EBITDA (operating) $m ,335 1,33 1,49 1,66 1,78 1,863 1,942 2,11 EBIT (operating) Retail $m M erchant $m ,24 1,15 1,186 1,236 1,247 1,37 Upstream Gas $m Energy Investments $m Centrally managed expenses $m One offs $m EBIT (operating) $m ,48 1,4 1,81 1,187 1,314 1,384 1,459 1,627 EBIT (statutory) $m ,14 1,187 1,314 1,384 1,459 1,627 Net Interest $m P rofit Before Tax $ m ,115 1,198 1,291 1,479 Tax Expense $m Net P rofit After Tax $ m Attributed Profit $m Underlying profit $ m EPS (Underlying) growth -14.4% -15.1% 8.9% 2.7% -8.9% -5.5% 11.8% 12.6% 7.% 7.2% 13.9% PE x PE (ex upstream value) DPS Franking % 49.2% 51.7% 1.% 1.% 1.% 1.% 1.% 1.% 1.% 1.% 1.% Dividend Yield % 3.9% 4.% 4.% 4.2% 4.2% 4.2% 4.2% 4.4% 4.8% 5.2% 5.6% EV : EBITDA x Net Debt $m ,748 3,67 3,487 3,441 3,52 2,647 2,149 1, Net Debt : EBITDA (ex associa x RoFE % 1.4% 9.7% 7.4% 1.1% 9.1% 8.6% 9.5% 1.6% 11.2% 12.% 13.6% EV/BV x RoE % 6.% 8.8% 1.6% 5.3% 7.5% 6.7% 7.4% 8.% 8.3% 8.5% 9.3% P/BV x C ashflo w Operating Cash Flow EBITDA (inc associates) $m ,335 1,33 1,49 1,66 1,78 1,863 1,942 2,11 Net Interest Paid $m Tax Paid $m Other (dec Working Capital) $m Net Operating Cashflow $ m ,275 1,245 1,36 1,372 1,434 1,534 Net Investing Cashflow $ m , Financing Cashflow Dividends $m Debt Changes $m ,284-1, New Equity $m ,232 Other (inc adj.) $m , Net Financing Casflow $ m ,125-1, Net Cashflow $ m ,6-1, Balance Sheet A ssets Cash $m , ,45 2,88 2,782 Tangible Assets $m 3,222 3,72 6,619 6,363 6,35 8,286 8,322 8,374 8,368 8,218 8,69 Intangible Assets $m 3,149 3,137 3,172 3,149 3,248 3,231 3,195 3,174 3,153 3,132 3,114 Other $m 1,839 2,13 3,134 3,573 4,8 4,66 4,3 4,31 4,37 4,53 4,11 Total Assets $ m 8,691 9,696 14,738 13,366 14,134 16,31 16,134 16,552 17,9 17,491 18,66 Liabilities Debt $m 91 1,171 4,561 3,348 3,943 3,89 3,639 3,62 3,599 3,577 3,554 Creditors $m ,158 1,444 1,417 1,39 1,39 1,39 1,39 1,39 1,39 Provisions $m Tax payable/ditl $m Other $m , ,342 1,386 1,445 1,54 1,564 1,626 Total Liabilities $ m 2,891 3,354 7,66 6,27 6,546 6,949 6,743 6,781 6,82 6,859 6,897 Net Assets $ m 5,8 6,342 7,133 7,339 7,588 9,82 9,391 9,771 1,189 1,633 11,169 Closing shares R atio s Sales Growth % 9.2% 7.% 37.6% 3.1% 4.5% -19.7% 4.4% 6.2% 2.5% 2.2% 6.8% Operating Cost Growth % 1.8% 7.6% 4.8% -1.5% 5.3% -24.3% 2.8% 6.% 2.1% 1.7% 6.4% EBITDA Growth % -1.3% 2.6% 12.7% 47.8% -.4% 12.1% 11.4% 7.3% 4.6% 4.3% 8.6% Source: Company data, Macquarie Research, March March 215 9

10 Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a neutral view on. The strongest style exposure is Earnings Momentum, indicating this stock has received earnings upgrades and is well liked by sell side analysts. The weakest style exposure is Profitability, indicating this stock is not efficiently converting its investments to earnings as proxied by ratios such as ROE, ROA etc. 58/118 Global Alpha Model Sector Rank % of BUY recommendations 2% (3/15) Number of Price Target downgrades Number of Price Target upgrades 16 Attractive Quant Rank within Country Rank within Sector Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. The rankings are displayed relative to the sector and country. Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. Spark Infrastructure Grou.5 Spark Infrastructure Grou ERM Power.3 ERM Power DUET Group AusNet Services.2.1. DUET Group AusNet Services % -8% -6% -4% -2% % 2% 4% 6% 8% 1% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. Spark Infrastructure Grou ERM Power..1.2 Spark Infrastructure Grou ERM Power DUET Group -1.1 DUET Group AusNet Services.3 AusNet Services % -5% -3% -1% 1% 3% 5% 7% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Book NTM Price to Book LTM Price to Book FY1 Price to Book FY Momentum 3 Month Momentum 12 Month 3M Price Target Revisions Momentum 6 Month Negatives Positives -25% -29% -32% -24% 37% 49% 46% 46% -6% -4% -2% % 2% 4% 6% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and country Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/118) Percentile relative to country(/24) For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 5 March 215 1

11 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie First South - South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 214 AU/NZ Asia RSA USA CA EUR Outperform 51.8% 58.6% 45.7% 44.42% 6.54% 46.81% (for US coverage by MCUSA, 5.29% of stocks followed are investment banking clients) Neutral 31.8% 27.37% 3.99% 5.1% 35.37% 33.51% (for US coverage by MCUSA, 3.8% of stocks followed are investment banking clients) Underperform 16.39% 14.57% 23.94% 5.48% 4.8% 19.68% (for US coverage by MCUSA,.44% of stocks followed are investment banking clients) AGL AU vs ASX 1, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March month target price methodology AGL AU: A$15.15 based on a DCF methodology Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 12-Feb-215 AGL AU Neutral A$ Oct-214 AGL AU Outperform A$ Oct-214 AGL AU Outperform A$ Sep-214 AGL AU Neutral A$ Aug-214 AGL AU Underperform A$ Jul-214 AGL AU Underperform A$ Jun-214 AGL AU Neutral A$ Feb-214 AGL AU Outperform A$ Jan-214 AGL AU Outperform A$ Sep-213 AGL AU Neutral A$ Aug-213 AGL AU Neutral A$ Jul-213 AGL AU Neutral A$ Jun-213 AGL AU Neutral A$ Jun-213 AGL AU Neutral A$ May-213 AGL AU Neutral A$ Feb-213 AGL AU Neutral A$ Aug-212 AGL AU Neutral A$ May-212 AGL AU Outperform A$ May-212 AGL AU Outperform A$ Apr-212 AGL AU Outperform A$15.12 Target price risk disclosures: 5 March

12 AGL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. 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The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 5 March