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Higher prices power AGL profit

Anthony Fensom  |  10 Feb 2017Text size  Decrease  Increase  |  

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Higher wholesale electricity prices and cost cuts have powered AGL Energy (ASX: AGL) to a $325-million statutory profit after tax for the half year to 31 December, a $774-million turnaround following its $449 million loss in the previous half year.

The profit gain was helped by the removal of $656 million of impairments and restructuring costs in the previous half year in relation to its natural gas assets, along with a change in the value of financial instruments.

Underlying profit after tax was $389 million, up 3.7 per cent from the prior corresponding period on the back of higher wholesale electricity and green certificate prices, along with cost reductions.

Offsetting the gain was a decline in consumer electricity and gas volumes, reflecting unfavourable weather in high consumption months, higher gas supply costs, and lower electricity generation volumes due to planned outages.

The Sydney-based energy company grew revenue to more than $6 billion, up 7.7 per cent on the previous half's $5.6 billion.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased to $924 million from $885 million in the previous half, helped by higher wholesale gas prices.

Shareholders were rewarded with an interim dividend for 2017 of 41 cents a share, franked to 80 per cent, up 9 cents on its previous interim dividend and reflecting its targeted payout ratio of 75 per cent of annual underlying profit after tax.

AGL chief executive Andy Vesey said: "AGL has achieved a strong financial result for the first half and our projected transformation, productivity and performance improvement initiatives are on track. We continue to work hard to reduce key areas of uncertainty and to address key long-term strategic imperatives in relation to prospering in a carbon-constrained world, building customer advocacy, and driving growth."

AGL expects its underlying profit after tax for fiscal 2017 to be "within the upper half" of its previously disclosed guidance range of $720 million to $800 million, "subject to normal trading conditions for the remainder of the year".

Vesey said the company would continue to benefit from rising wholesale prices, although he warned of the impact of "competition, customer affordability considerations and the timing of rollover of our contracted positions".

"Our guidance continues to take into account the headwinds in our gas portfolio that we have previously flagged, including lower margins on the rollover of Queensland wholesale contracts, supply curtailment and disruption issues experienced in the first quarter, and the impacts of mild July/August weather".

Morningstar senior equities analyst Adrian Atkins described the result as "basically in line with expectations--profit was up 4 per cent but the outlook is pretty good, with the company increasing its guidance for the full year to the top half of the prior guidance range".

"Wholesale electricity prices doubled over the last year, and the futures curve is suggesting it will go higher when [Victorian power station] Hazelwood closes, so the market is factoring in that they will continue to increase prices for retail and business customers, and that will drive their profits higher."

However, Atkins pointed to longer-term headwinds for the narrow moat-rated company.

"Higher wholesale prices and renewable energy credit prices will encourage more generation supply, while increased retail prices will encourage more consumers to install solar and batteries and improve the energy efficiency of their homes," he said.

"The regulator could also step in with measures to improve affordability. The market is pricing in that the good times will continue, but these risks could impact over the longer term."

AGL shares closed on Thursday up $1 to $24, a gain of 4.3 per cent and continuing their strong gains since late 2016.

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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.

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