By Emma Koehn
Slumping wholesale power prices have forced energy giant AGL to book a hefty $2.69 billion writedown in its first-half result to account for onerous wind farm contracts and the falling value of its power generation assets.
Australia’s largest energy retailer - and the nation’s largest generator of electricity - warned investors on Thursday it expects “a sustained and material reduction in prices” for wholesale energy and renewable energy certificates. The price slump was a result of “policy measures to underwrite new build of electricity generation and lower technology costs, leading to expectations of increased supply”, it said.
AGL’s energy generation business has been hit by lower wholesale power prices.Credit: Jessica Shapiro
To account for the expected long-term lower returns, the company booked a $1.9 billion impairment against contracts related primarily to old wind farm offtake deals, while increasing environmental restoration provisions by $1.1 billion. AGL made further impairments of $532 million on its generation fleet and natural gas assets.
AGL’s writedowns came as rival Origin Energy also lowered its profit forecasts on Thursday, telling investors it now expects earnings of between $1 billion and $1.14 billion for the 2021 financial year, down from a previous estimate of up to $1.3 billion, due to reduced energy demand in the pandemic and this summer’s mild temperatures.
Both energy giants’ shares were sold off on the news. AGL shares closed 3.6 per cent lower to $11.42, while Origin ended Thursday’s session down 6.9 per cent, to $4.62.
AGL’s $1.9 billion impairment for “onerous” contracts relates to wind farm offtake agreements that AGL had signed with renewable energy providers between 2006 and 2012, when prices for electricity and renewable energy contracts were much higher than today’s spot and forecast prices.
Wholesale electricity prices are about 48 per cent lower than the same time last year at about $50 a megawatt hour.
Chief executive Brett Redman said the company still continues to see “material opportunities” to participate in Australia’s energy transition. “Notwithstanding these charges, our broad and diverse portfolio of electricity generation assets will continue to have a vital role to play in enabling the transition of the energy system,” he said.
Morningstar senior equities analyst Adrian Atkins said the writedowns spoke to tough conditions as wholesale prices fall. “These are basically non-cash writedowns - but on the other hand, it does reflect how difficult the situation is for AGL and they expect it to continue,” he said.
“[With wind farms], what looked to be a fair deal at the time turned about to be a bad deal. I don’t judge them for that.”
RBC Capital Markets analyst James Nevin said his team had an “underperform” rating on AGL due “to these exact headwinds” in the energy market.
Mr Nevin said that while the writedowns didn’t have a big impact on AGL’s cash earnings, they did show the company acknowledging for the first time that reductions in wholesale energy prices were a long-term trend.
“What was noticeable was AGL’s view that the outlook for wholesale electricity and renewable energy certificates indicated a sustained and material reduction to prices.”
The writedowns will have an immaterial impact on FY21 underlying profit after tax - which excludes significant items - allowing the company to keep the forecast for this financial year unchanged from the $500 million to $580 million it flagged in December. AGL anticipates a positive impact to underlying profit after tax in FY22 and FY23 of about $50 million to $80 million.
- with Alex Druce
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