AGL profit hits two-year high as wholesale costs ease
Falling wholesale electricity costs could feed through to power bills, AGL Energy has said as it defended its 400pc half-year profit bonanza.
AGL Energy has conceded wholesale electricity costs have fallen and it could feed through to electricity bills, offering hope to beleaguered households as the company defended a quadrupling in half-year profits.
Net profit for the six months ended December 31 totalled $399m, up 359 per cent from the $87m reported during the same period one year earlier.
The result was above market forecasts for six-month profits to total around $340m and sent shares up more than 10 per cent.
The earnings momentum will also buoy confidence AGL can fund the transition of its business away from its coal base while maintaining lucrative returns for shareholders.
Even so, the profit bounce will flame public perception of lucrative returns by Australia’s biggest electricity retailers in the face of an ongoing cost of living crisis.
The 187-year old company said it expects full-year profits to hit a high as it narrowed annual profits to between $680m and $780m.
It previously said it expected full-year profits to sit between $580m and $780m.
AGL chief executive Damien Nicks said the result, which comes as households anxiously wait for news on the next round of bills, should be viewed in context of previous results.
“Clearly cost of living and affordability are a big focus for us, and that’s why we announced that $70m package last year that really helped those customers that need it the most. I think when you look at our profit year on year, you have to remember that last year, we had a very, very tough financial year,” Mr Nicks told The Australian.
AGL’s latest financial result comes just weeks ahead of the Australian Energy Regulator announcing its next default market offer. Australian households have endured bill increases of more than 20 per cent for the last two years.
The default market offer is calculated annually, with the Australian Energy Regulator considering the wholesale cost of electricity, the toll of transporting electricity and the cost of compliance with government rules and regulations.
The default market offer is a reference price retailers typically offer discounts against to entice customers, but discounts have fallen steadily as companies moved to recoup recent losses.
Wholesale costs — the cost of generating electricity — are the biggest component of the default market tariff, which Mr Nicks acknowledged had moderated, though he said they remain elevated by historical standards.
RBC Capital Markets analyst Gordon Ramsay said the outlook for the default market offer is tepid at best, and AGL could be squeezed.
“AGL has stated it is too early to comment on the pricing outlook for FY25, although we think it looks weaker and would be flat at best. We believe that 2023/24 summer spot electricity pricing will lead to flat to slightly lower wholesale allowances for the (default market offer) and (Victorian Market Offer), and due to rising costs we continue to forecast FY24 as a peak earnings year,” Mr Ramsay said.
The increase in half-year profits came despite the company reporting a revenue miss.
AGL said revenues for the six months totalled $6.183bn, down 20 per cent from the previous year and behind market forecasts of $7.25bn.
AGL did not provide any forecasts for 2025.
While the market remains anxious, investors cheered the result which came despite a revenue miss.
The company said demand for electricity and gas was lower this year as mild weather and soaring solar generation constrained usage, but revenues from the business rose sharply as it profited from a rolling-over of contracts to reflect higher wholesale electricity prices.
As revenues rose, AGL said its electricity generation costs tumbled. The company said generation costs fell by nearly a third amid a decline in electricity demand and the closure of the Liddell coal power station.
The strong immediate financial result will boost shareholder confidence in the fortunes of the business despite the monumental task of reshaping its business.
AGL must replace the lost coal generation while maintaining profitability, but Mr Nicks said the company is making strong progress.
It plans to develop an expected 12GW of firming and storage capacity after it said it would close Loy Yang A — Australia’s biggest polluting coal power plant — in 2035, which is a decade earlier than previously planned amid unrelenting shareholder pressure.
The company said it has developed a pipeline of 5.8GW, substantially up from the 3.2GW unveiled in September 2022.
Mr Nicks said he expected a continued uptick in AGL’s investment in batteries and would likely look to finance new wind developments to supplement the rapidly growing rooftop solar market.
Analysts said the progress would provide confidence in the transition business, but noted it would need to replace substantial generation capacity when the Loy Yang coal power station and Bayswater coal generator closes. Both are scheduled to be retired within the next 10 years.
AGL shares rose 82c or 10.3 per cent to $8.80.
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