Origin downgrades guidance, AGL takes giant writedown
Origin Energy has downgraded its full year guidance while AGL took a surprise $2.69bn writedown
Australia’s two biggest electricity operators have taken a hit from weaker power prices with Origin Energy slashing annual profit guidance and rival AGL Energy taking a surprise $2.69bn writedown from unprofitable wind farm contracts and cuts to the value of its power stations.
Origin downgraded its full year guidance, citing subdued energy demand due to the impacts of COVID-19 and a mild summer season and higher gas costs amid a jump in Asian LNG prices.
The energy company now expects its energy market full year EBITDA to be in the range of $1-1.14bn, compared to previous guidance of $1.150-$1.3bn, a downgrade of 8.6 per cent.
Electricity gross profit is now expected to fall $250m-$290m year on year, compared to the previous expected fall of $170m-$220m.
The news sent Origin shares down by 7.1 per cent to $4.61 at market open.
AGL will write down $2.686bn in post tax charges in its half year results on February 11 following a recent deterioration in long-term wholesale energy prices and “challenging macro economic conditions.”
AGL shares also dived, shedding 6.7 per cent to $11.07.
While it did not change its earnings guidance like Origin, AGL took a giant write-off hit reflecting $1.9bn in onerous contracts relating to its legacy wind farm offtake agreements, a $1.1bn increase to its environmental restoration provision and $532m in impairments across its coal and gas power stations.
It maintained underlying annual profit guidance of $500m to $580m after slashing its profit forecast just prior to Christmas. It noted the impairment of the natural gas assets is linked to the increase in environmental restoration provisions.
Average electricity spot prices have halved from a year ago to between $40 to $45 a megawatt hour range in most states as a flood of cheap renewables lowered daytime prices along with cheaper gas and coal and softer demand amid COVID-19.
Power prices averaged $44/MWh across most states in the December quarter, 38 per cent less than the same quarter in 2019 and the lowest December quarter wholesale price since 2014 with only NSW bucking the trend.
Electricity futures point to subdued conditions extending through this year and into 2022 with prices in the early $50MwH range, signalling a tough period ahead for the nation‘s big utilities including AGL and Origin.
Still, some analysts question whether the big fall in wholesale prices is sustainable, with predictions baseload coal plants may need to further cut production to survive, tightening the market and leading to prices rising again.
AGL’s message that materially lower wholesale electricity prices may persist for some time in a bearish signal for investors looking to pick the bottom of the market, RBC said.
“What was noticeable was AGL’s view that the outlook for wholesale electricity and renewable energy certificates indicated a sustained and material reduction to prices. This is a change from AGL previously talking to a weak shorter term pricing and an expectation that wholesale electricity prices will have to recover to attract new generation,” RBC analyst James Nevin said.
“For AGL watchers looking to potentially pick the bottom, we think this is bearish. We are of the view that it is hard to see a rebound in prices due to the structural change in wholesale electricity and the continued underwriting of new generation with contracts outside of the spot and futures market in the national electricity market that means additional supply would continue to come online despite low spot and futures prices.”
The accounting charges are non-cash and would mean AGL will recognise lower costs in future years which will flatter future net profit despite underlying cash obligations being little changed, RBC noted.
AGL this week launched a mobile phone division as it seeks to broaden revenue sources amid a crunch on its mainstay electricity business, some 18 months after chief executive Brett Redman walked away from a $3bn takeover of telco Vocus.
Origin upgraded its LNG production and cash distribution breakeven point, and has issued new guidance on expected earnings.
Production through its Australian Pacific LNG business is now forecast to be in the range of 685-705 petajoules, up 0.7 per cent from the previous guidance of 675-705 pj.
The distribution breakeven point is now US$24-$28 per barrel of oil equivalent, down from US$25-$29 per boe.
This means the company is predicting cash earnings of $575m-$675m from its LNG business - but natural gas profit is still projected to fall between $200m-$250m year on year compared to previous expectations of a $100m-$150m decline.
This reflects the roll off of legacy sales contracts, the repricing of tariffs and lower sales volumes to businesses.
Capital expenditure is also now expected to fall 5.6 per cent from $420-$470m to $400-$440m.