AGL Energy cuts profit guidance after coal breakdown
Victoria’s largest power station, Loy Yang A, which provides 30 per cent of Victoria’s power needs, has been without a quarter of its capacity.
AGL Energy will take a $73m hit to its profit and has lowered its earnings guidance after the breakdown of a major coal unit at its Loy Yang A power station in Victoria’s Latrobe Valley.
The state’s largest power station, which provides 30 per cent of Victoria’s power needs, has been without a quarter of its capacity since an electrical fault knocked out Unit 2, while it also lost supplies from a second unit late last week.
The company said the impact would be $73m pre-tax or $50m after tax for the 2022 financial year, based on the unit returning to service on August 1. However, it also cautioned that engineering assessments were continuing and it will keep the market updated on any material changes to the time frame. Underlying profit after tax for 2022 is now forecast at a $220-$270m range compared with the previous $260m-$340m band.
AGL said underlying earnings for 2022 have also been lowered to between $1.23bn-$1.3bn from the prior $1.275bn to $1.4bn estimate.
Some $60m of the $73m charge will be recorded in the 2022 financial year, which equates to $41m after tax, with $13m or $9m after tax expected in 2023. The cost slug was higher than expected, according to Morgans, and did raise issues over the reliability of its coal fleet should fossil fuel generation be hived off into Accel Energy as part of its demerger.
“What will be interesting is how this changes AGL’s approach to hedging with the company, prior to the incident, indicating that it would not hedge as much of its generation output to avoid unexpected shortfalls,” Morgans analyst Adrian Prendergast told The Australian. “Energy prices are in AGL’s favour but there could be more volatility in Accel’s earnings from the ongoing reliability issues in its fleet.
The power retailer confirmed it did not hold insurance benefits to cover the outage. AGL suffered a similar problem at Loy Yang A in 2019 with a seven month breakdown. While it recovered $100m in lost earnings from business interruption insurance, it has now forgone those benefits.
AGL also confirmed a date of June 15 for investors to vote on its planned demerger and told shareholders it was critical they made their voice heard on the proposed split.
The deal needs 75 per cent approval to get over the line and AGL stepped up its pitch on Monday, sending letters to shareholders ahead of the publication of the demerger scheme booklet by mid-May and meeting on June 15.
AGL chairman Peter Botten said the success of the split was in the hands of the company‘s retail heavy shareholder base.
“It‘s really important that you vote,” Mr Botten said in a video presentation.
The power giant plans to split off AGL Australia, with its 4.5 million customer base, into a newly listed retail-focused company with the current AGL to be rebadged as a coal-dominated generator called Accel. Both companies will be listed on the ASX. Investors will receive one share in AGL Australia for every AGL Energy share they own. Existing AGL Energy shares will be retained in Accel Energy.
The coal plant breakdown represents a missed opportunity for an earnings bounce given spiralling wholesale electricity prices, analysts have said.
Wholesale futures spot prices have tripled to $176 per megawatt hour for the second quarter of 2022 from an average of $57MWh for the fourth quarter of 2021.
Coal outages contributed to wholesale power prices surging by two-thirds in the first quarter of 2022, with the steep rise sparking calls for the default market offer to be raised to accommodate cost inflation. There are worries the huge wholesale price bump, if prolonged, will filter through to higher household bills.
AGL is nearing a major shareholder vote in June on a controversial plan to split the company in two, just months after the company rejected two takeover bids from the Mike Cannon-Brookes and Brookfield consortium saying shareholders would grab more value from the demerger.
The 180-year old power giant has also announced a plan to close the doors of the Bayswater coal plant in NSW’s Hunter Valley up to five years early by 2030 while Victoria’s Loy Yang A facility faces the axe from 2040 from its expected retirement in 2048.
A plan released in December by the Australian Energy Market Operator found coal was set to be extinguished from Australia’s electricity system up to a decade earlier than planned, exiting three times faster than expected, with a nine-fold increase in wind and solar capacity needed by 2050 to meet net zero emissions targets.
AGL shares last closed at $8.68 on the ASX with a market capitalisation of $5.84bn.
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