EnergyAustralia flags further write downs, in ‘challenging’ market

EnergyAustralia’s Hong-Kong listed parent company, CLP Group, has flagged further write downs of its Australian generation assets, citing ongoing “challenging conditions” in a market where demand for electricity has fallen for six consecutive years.

In what CLP CEO Richard Lancaster described as a “clear” and “to be expected” supply-side market reaction, EnergyAustralia would continue to take steps to respond to energy market overcapacity, falling demand and suppressed wholesale prices.

“Should oversupply in the wholesale market continue unabated, the value of generation assets may be at risk,” Lancaster said.

This time last year, EnergyAustralia slashed the value of brown coal generator Yallourn by about $300 million, as well as some of its gas-fired generation assets, after slumping to a loss of $350 million for calendar 2013.

And last year, the company also announced plans to permanently close and decommission its Wallerawang Power Station in NSW – in response to ongoing weak wholesale prices and the lack of availability of competitively priced coal supply.

“We also negotiated the early termination of an onerous contract inherited from Ausgrid in NSW and reduced costs in a number of areas, including centralising those functions best managed at the corporate level,” Lancaster said in his CEO’s report, accompanying CLP’s annual results on Friday.

CLP said that while EnergyAustralia’s operating earnings increased in 2014 – from $HK126 million in 2013 to $HK756 million – revenue from electricity generation in Australia had fallen 21.7 per cent over the year due to an unprecedented decline in demand, overcapacity in generation and falling wholesale prices.

The company said the decline in demand was driven by energy efficiency, rooftop solar, and industrial closures; as well as uncertainty and increased market risks caused by regulatory changes – at a time when stiff market competition was putting additional pressure on retail margins.

Interestingly, Lancaster also noted that the Abbott government’s successful repeal of the Clean Energy Future legislation and all related liabilities, including the carbon tax, in July 2014, had led to a reduction of earnings in the second half of 2014, with EnergyAustralia no longer receiving “transitional support” for its Yallourn brown coal power generator in Victoria’s La Trobe Valley.

“These factors have combined to erode the value of our business in Australia over the past few years,”  said CLP vice chairman Betty Yuen So Siu-mai – and both she and Lancaster stressed that these challenging market conditions were expected to continue.

“Our strategy will focus on reducing costs, improving operational performance, managing exposure to generation, realigning the business to the new market paradigm and streamlining retail processes,” said Lancaster.

“Our focus will be on realigning the business with the new market and political paradigms to restore value for our shareholders in the years to come.”

Meanwhile, GDF Suez, the French owner of Victorian coal-fired power station Hazelwood, has reported a return to profit in 2014, but warned that low oil and gas prices will weigh on profitability and cause them to delay billions of Euros of planned investment.

The return to net profit of €2.4 billion comes after the company reported deep losses in 2013 on write downs on European power plants.

To limit any further impact on its bottom line, GDF Suez said it would reduce operating expenditure by around €250 million in 2015 and delay around €2 billion in investment in 2015 and 2016.