AGL annual profit falls 22pc, expects earnings to plunge in 2021
AGL says underlying annual profit fell by 22pc and it expects its 2021 earnings could tumble by nearly a third.
AGL Energy has warned the rapid fall in electricity and gas prices could result in an investment strike, after the power giant surprised shareholders with a bleak earnings outlook for the 2021 financial year, accelerated by uncertainty from COVID-19.
Coal output plummeted in the June quarter to its lowest level since the national electricity market was created in 1998, Australian Energy Regulator data to be released on Friday will show, signalling a transition to renewables is picking up pace.
But with huge investments required in both firmed renewables and new gas-fired generation to replace ageing coal generators over the next few years, concern is growing that spending by the power sector’s biggest names could stall amid low prices and the dampening economic effect of the pandemic.
“If gas stays at current low spot prices you will struggle to see new investment in developing fields of gas in this country,” AGL chief executive Brett Redman told investors. “And if electricity prices stay at these sort of levels projected in the forward curves, again we’ll be challenged as a market to see the new investment coming through as well. COVID-19 makes it harder to predict the short term.”
AGL shares tumbled by the most since the global financial crisis after underlying annual profit fell by 22 per cent. Meanwhile the utility warned 2021 earnings could tumble by a further third, as it braces for a pick-up in bad debts from the health crisis along with lower electricity prices.
AGL remains Australia’s biggest coal generator but is weighing investments in a gas power station at Newcastle and an LNG import plant at Victoria’s Crib Point, as it plans for the fuel to help move to a grid eventually dominated by renewables. It also has big ambitions in storage, with a plan outlined on Thursday to install 1200 megawatts of batteries and demand response by 2024.
Still, the electricity chief said sanctioning near-term spending to aid that transition was no sure bet given wholesale prices may have swung too low to incentivise investment.
“As you think about that grand transition that has got to go on through the market as old coal plant continues to retire and firmed renewables need to be built, I think we’re going to need to see a price stronger than what’s sitting right now in spot and in the three-year outlook,” Mr Redman said. “Whereas in past years I might have been a bit more bullish about the timing of when that pricing change might happen — we’ve often seen the market shift in six months — the impact of COVID-19 has clipped volume but it’s also sapped confidence in the market. So we may well see COVID-19 sit on the head of the market for some time and depress prices for a longer period of time than you might have seen in a normal market cycle.”
The Sydney-based company recorded a sharp drop in 2020 underlying profit to $816m, from $1.04bn. That was short of a consensus estimate of $825m, but in line with the $780m-860m guidance.
It blamed an outage at its Loy Yang coal plant in Victoria, less gas sales volumes and lower power prices.
But the bigger worry for shareholders was guidance that profit could fall by as much as 31 per cent, to between $560m-660m, for the 2021 financial year.
AGL expects to take a $150m hit on wholesale gas gross margins as legacy supply contracts mature, while margins on wholesale electricity prices will also be dented as “sharply declining” prices for energy and large scale generation certificates translate to lower customer revenue.
In addition, a $40m bad debt charge looms from customers unable to pay their power bills due to the pandemic, along with charges at its generation sites as it adapts to the pandemic.
RBC said it was surprised at the speed of earnings cuts and questioned if worse may be to come in 2022.
“We think the question from here is if the 2021 financial year is going to be the bottom in terms of the flow through of lower wholesale prices or if there is more to come in FY22,” RBC analyst James Nevin said.
Despite market pressures, Australia’s largest power generator plans to pay a special dividend in the 2021 and 2022 financial years of up to 25 per cent of underlying profit after tax, subject to trading conditions.
AGL declared a final dividend of 51c per share. It shares fell 9.6 per cent, or $1.63, to $15.36.