AGL bags $1 billion profit, but faces headwinds on coal outages and retail margins

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AGL posts $1 billion profit for the year, but expects falling energy prices, rising fuel costs and the impact of retail regulation to dampen future earnings.

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Electricity giant AGL Energy has recorded an underlying after tax profit of $1,040 million for the 2018/19 financial year, but the company anticipates lower profits in future years as ‘operating headwinds’ start to take a toll on company earnings going forward.

AGL shares were trading down almost 6 per cent after the results announcement, even though it appeared to beat expectations, and this may be because AGL warned of falling wholesale electricity and renewable energy certificate prices, as well as rising fuel costs (coal and gas) and the introduction of default market offers that will reduce margins in its retail business.

The outlook is an almost identical story to that of another of the big-three electricity retailers, EnergyAustralia, which also revealed its own pressures on generation revenues and retailer margins earlier this week, although in the case of EnergyAustralia, its profits slumped by two thirds and it was forced to take a billion-dollar write-down on its retail business.

Over the 2018/19 financial year, AGL’s business performance were remarkably stable. AGL recorded little change in customer numbers, they actually grew slightly, with improved electricity retail margins being offset by increased generator maintainence costs.

There was a similar story in AGL’s gas business, where improved sales to wholesale gas customers offset falls in sales to the company’s large business customers. The combined result saw AGL’s underlying profits increase just 2% over the last financial year.

However, AGL indicated that it is likely to deliver a smaller profit for the 2019/20 financial year which reflects the combined impacts of the harder market environment.

An electrical short at the Loy Yang power station rendered one of its four units out of service in May. While AGL is currently working on getting the unit back up an running, it is no expected to be operational again until December 2019. AGL expects the six-month outage will cause a reduction in company profits of between $80 and $100 million.

While they may not be beneficial to AGL’s bottom line, expected falls in wholesale electricity prices and the ongoing falls in large-scale renewable energy certificates, which have halved in price since 2017, should flow through to consumers through lower electricity prices.

With a growing portion of AGL’s customer base anticipated to shift to ‘competitive’ market offers will also impact on AGL margins, as customers who have previously paid higher default offers are moved to cheaper ‘re-regulated’ tariffs, AGL expects is retail margins to be squashed.

AGL has also announced that it has acquired retailer Perth Energy in a deal worth $93 million. Perth Energy currently has around 1,500 business customers in its electricity retail business and operates the 120MW Kwinana Swift gas-fired power station. AGL sees the acquisition as accelerating the company’s expansion into the WA energy market.

“AGL entered the WA energy market in July 2017 and now has 43,000 residential gas customers. Perth Energy, as WA’s third-largest electricity retailer and a gas retailer to business customers, is a strong strategic fit for us as we seek to expand WA and will provide greater flexibility for our management of our WA gas position,” AGL CEO Brett Redman said.

“We believe there is a great opportunity for the Kwinana Swift plant to provide firming services as the electricity market moves towards higher renewables penetration.”

New Zealand based Infratil acquired Perth Energy in 2007, but struggled in a difficult WA energy market, particularly after the merger of two state-owned energy companies, Verve and Synergy, which changed the market landscape. Infratil will book a loss of around $33 million.

AGL sees substantial investment opportunities being created by the energy transition underway in the Australian energy sector, estimating that up to $200 billion in new investment will be needed through to 2050, to adequately deal with the exit of coal-generation and to support the emergence of new, low emission, energy technologies.

The company estimates that up to $70 billion of the required investment will be focused on behind-the-meter technologies and the growing need for orchestration of distributed energy resources, including solar and battery storage. AGL confirmed that it was still examining the possibility of investments in large-scale battery storage at a repurposed Liddell power station site.

Up to $2 billion in projects currently sit in AGL’s development pipeline, which includes ongoing investment in the company’s renewable energy portfolio, and the prospect of new pumped hydro storage facilities emerging in the mid-2020’s

AGL has been actively seeking ways to expand and diversify its business offerings and align its energy services with other customer needs, including an abandoned bid to acquire telecommunications company Vocus earlier in the year.

AGL recently announced that it would delay the decommissioning of the Liddell power station, a decision the company says will help sure-up electricity supplies during upcoming summer months. The ageing coal-fired power station was expected to commence closure in 2022, but Liddell has pushed this timeline back a year.

However, the company believes that it has sufficient cash reserves going forward, announcing that it would also undertake a buy-back of up to 5 per cent of the outstanding shares in the company, delivering $650 million back to shareholders who opt to participate in the share buy-back.

There was no commentary on the court action taken against AGL and three other wind farm owners by the Australian Energy Regulator in regards to the company’s Hallett wind farm and its role in the South Australia state-wide blackout in 2016.

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