Green energy deals leave a $2 billion hole in AGL profits

AGL has revealed that wholesale energy prices had fallen so low and there was so much capacity to come on stream that it would be forced to take a $2.68 billion hit to its net profits, relating mostly to renewable energy and environmental provisions.

Feb 04, 2021, updated Feb 04, 2021
Iberdrola has bought the tights to the Mount James wind farm project

Iberdrola has bought the tights to the Mount James wind farm project

The energy company said $1.9 billion of the total related to onerous wind farm offtake agreements which had been struck between 2006 and 2012 at a price far higher than today’s prices. There were also higher site remediation costs.

It coincided with Origin also revealing lower earnings guidance. The shares for both companies fell sharply in morning trade.

AGL said the charges followed accelerated deterioration to long-term wholesale energy market forecasts in recent months, reflecting policy measures to underwrite new-build of electricity generation and lower technology costs, leading to expectations of increased supply.

“As a result, the long term outlook for wholesale electricity and renewable energy certificates now indicates a sustained and material reduction in prices,” the company said.

AGL said it entered into the contracts to underwrite the development of the renewable sector.

It will also take a $1.1 billion hit related to environmental provisions and a further $532 million impairment to its generation fleet and gas assets. There will be a positive tax impact of $878 million.

AGL said that when the sharp reductions in near-term wholesale energy prices as a result of macroeconomic conditions and the outcomes of AGL’s three-yearly review of environmental restoration provisions had reduced the valuation of AGL’s generation fleet.

Much of the $1.1 billion hit for environmental provisions stems from the way the company used its discount rate to find a net present value of its assets.

There were other impairments relating to the carrying value of property plant and equipment and goodwill.

But the company said the impact on its underlying after-tax profit for 2021 would be immaterial and as a result, its guidance for a result between $500 million and $580 million was unchanged.

RBC Capital Markets said most of the accounting charges announced this morning were non-cash impairments and did not change the expected cash flows over the next few years.

“The main change to expected future cash flows indicated by AGL was an increase in the expected future cash rehabilitation costs of $313m. Other than this, the impacts are non-cash and recognising these charges as significant items in full year 2021 would mean that AGL will recognise lower costs in future years which will flatter future net profit despite underlying cash obligations being little changed,” the broker said.

Origin Energy also announced it had slashed its earnings guidance for the APLNG project near Gladstone.

Its full-year 2020 guidance had been for a distribution from APLNG of $1.275 billion. That has been reduced to between $575 million and $675 million for 2021.

Production from APLNG would increase and the distribution breakeven had improved.

Its energy markets division earnings before tax for 2021 would be in the range of $1 billion to $1.14 billion.

Its electricity gross profit was expected to be down between $250 million and $290 million. Natural gas profits were down by up to $250 million.


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