AGL warns on earnings growth as it taps spot market for gas

AGL has flagged a hit to its margins this quarter as supply issues force it to tap the spot market for wholesale gas.

AGL CEO Andy Vesey. The company says it anticipates tapping the spot market for a higher proportion of wholesale gas in the September quarter.

AGL Energy has forewarned investors about soft earnings growth in the upcoming financial year as it is forced to source more gas from the spot market.

The news pushed AGL shares down as much as 6 per cent in early deals, and at 10.45am (AEST) it had pared losses to trade down 4.3 per cent at $19.45.

The utility said it now anticipated tapping the spot market and other short-term sources for a higher proportion of wholesale gas in the September quarter due to safety issues curtailing output from a key supplier’s projects at a time when demand has increased at its Torrens power station.

The need to tap the spot market will contribute to a $100 million blow to margins in its energy markets division, but the group confirmed it will still be able to meet the requirements of its customers.

“These recent gas market constraints are not expected to have any impact on AGL’s ability to meet customer gas demand,” the group said.

“However, given the unusually high prices prevalent in the spot market arising from strong east coast demand, AGL expects a negative impact on its pre-tax wholesale gas margin in the first quarter of FY17 of approximately $35m.”

The commentary comes after the competition watchdog spent a year analysing the east coast gas market, which has changed rapidly over the past four years as several giant LNG projects in Gladstone create a demand surge.

The ACCC went as far as to warn in April of monopoly pricing among some pipeline operators.

“There are currently very few constraints on monopoly pricing by pipeline operators,” ACCC chairman Rod Sims said.

“Compounding supply tightness and the effects of pipeline pricing, is the effect of an opaque and illiquid east coast gas market.”

AGL had previously cautioned on its need to develop its own gas sources but a move to walk away from the controversial Gloucester coal seam gas project in February hinted it was more comfortable with the state of play in the wake of a fall in energy prices last year.

The $35m hit for the September quarter is an addition to its May warning of lower Queensland wholesale gas margins for FY2017 and comes as heightened competition slightly trims profitability in the consumer market.

The cumulative effect will be a $100m reduction in pre-tax contributions from its energy markets gas portfolio, but AGL said it still expected the current financial year to deliver earnings growth.

It will provide official guidance for FY2017 on September 28 at its AGM, while it reiterated that its yet-to-be-announced FY2016 earnings would come in at the upper end of its $650m-$720m forecast range.