AGL Energy slashes earnings forecast after fire at Liddell coal plant
AGL Energy has slashed its profit forecast and warned of a potentially bleaker outlook for 2022.
AGL Energy has slashed its profit forecast and warned of a potentially bleaker outlook for 2022 with an earnings hit from a fire at its Liddell coal plant and broader slump in its mainstay electricity business.
The Liddell accident, which has increased the potential for power blackouts during heatwaves this summer, and low wholesale power prices have combined to cut underlying profit after tax for the 2021 financial year to $500m-$580m, a sharp fall from the previous guidance range of $560m-$660m.
The profit downgrade represents a $70m or 11.5 per cent cut to existing guidance based on the midpoint figure of $540m.
AGL has also warned of a deteriorating outlook for the 2022 financial year with a “material step down” in wholesale electricity earnings.
That could mean net profit in 2022 falls by as much as a third to the mid-$300m range, according to RBC, sparking fears the power giant’s earnings base is set to go into freefall.
AGL shares fell 5.14 per cent to $12.54.
“Of greater concern for us is the potential fall in net profit in 2022 with AGL again highlighting the headwinds from electricity markets to be faced,” RBC analyst James Nevin said.
“With electricity wholesale prices pointing to further falls in 2022, we anticipate market estimates for earnings have much further to fall.”
While households can expect to be paying about $120, or 9 per cent, less for electricity in 2023 than they do today thanks to falling gas prices and cheaper renewable power, that same trend is crimping earnings for the nation’s big power players as sharply declining prices for energy and large scale generation certificates translate to lower customer revenue.
AGL boss Brett Redman has already endured a tough year after recording a sharp drop in 2020 underlying profit from $1.04bn to $816m due to an outage at its Loy Yang coal plant in Victoria, declining gas sales volumes and lower power prices.
It had already forecast profit could fall by as much as 31 per cent to $560m-$660m for the 2021 financial year, but even hitting the bottom end of that estimate now looks tough given the market malaise and blow to its Liddell supplies.
Still, the big fall in wholesale prices is now viewed by some as unsustainable, with predictions baseload coal plants may need to further cut production to survive, tightening the market and leading to prices rising again.
“We view the current market environment as unsustainable,” JPMorgan analyst Mark Busuttil said on Monday.
“While the news today was clearly disappointing, we have not changed our recommendation.
“We believe sustained low wholesale prices will likely bring forward baseload capacity closures which will ultimately tighten market conditions.
“Furthermore, the incident at Liddell ultimately shows the unreliability of most coal-fired plants in the national electricity market.
“We note 70 per cent of generation still comes from these plants.”
AGL estimates the financial damage from the Liddell outage is $25m after tax which includes the trading hit taken on the day and the cost of replacing the transformer.
The company said it was also suffering from “increasing earnings pressure” due to its recent trading performance and a continued deterioration in the market and wholesale electricity operating conditions.
“AGL anticipates a further material step-down in wholesale electricity earnings in the 2022 financial year as hedging positions established when wholesale prices were materially higher progressively roll off, and are re-contracted at lower levels reflecting the deterioration in wholesale prices,” AGL told the ASX.
The Sydney-based retailer and generator revealed it will also lose insurance benefits from the Liddell and Loy Yang A power plants, hitting the bottom line in 2022.
The financial impact from the Liddell incident will not be recoverable via insurance in future years and a contribution to its 2021 profit of $80m to $100m over insurance proceeds from a Loy Yang A outage will also not be repeated in 2022.
AGL said a fire at its Liddell plant on Thursday caused the accident, which left a worker seriously injured.
“A fire occurred in the generator transformer of Liddell Unit 3 during a change of an oil cooler filter, causing the transformer to be damaged and the unit to be shut down. Replacement of the affected transformer is expected to be completed using a spare transformer within AGL’s inventory.”
AGL expects the Liddell unit will not return until early March.
The power operator now faces its own share price headwinds after releasing its trading update.
“We had previously flagged that consensus forecasts looked optimistic, albeit they have been lowered in recent weeks,” Mr Busuttil said.
“This news will likely act as a headwind to the stock.”
AGL remains Australia’s biggest coal generator but output of the fossil fuel for power generation plummeted earlier this year to its lowest level since the national electricity market was created in 1998, signalling a transition to renewables is picking up pace.
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