AGL works to counteract twin hits
The energy utility disclosed on Wednesday it may write off up to $250 million on its exploration reserves in NSW following a decision by the state government to restrict exploration for coal seam gas, which could "sterilise" the extensive reserves it holds. The state government has banned coal seam gas drilling within two kilometres of urban areas.
AGL is in arbitration with its gas suppliers, seeking to prevent price rises before the expiry of long-term contracts in 2016 and 2017.
The disclosures came as the group posted a record December half net profit of $364.7 million, well up from $117 million a year earlier, thanks to the inclusion of earnings from the Loy Yang A power station it acquired last year.
Revenue rose to $4.97 billion from $3.6 billion, with earnings per share reaching 66.5¢ from 24.5¢. Underlying earnings rose 20 per cent to $279.4 million, it said, after booking a loss on the change in value of financial instruments.
The interim dividend has been raised to 30¢ a share from 29¢. Investors reacted positively to the profit lift, with its shares rallying 68¢ to $15.87.
AGL said it was spending "millions on arbitration" in a bid to resolve the gas supply issues. It sources a large part of its supplies from Esso-BHP in Bass Strait, with its initial contracts to expire from 2016 and the balance the following year.
The company sought to deflect the pressures by pointing to the continued growth in retail customer numbers in NSW in particular, which more than offset weakness in other markets. Customer numbers rose by more than 60,000 in NSW.
AGL has spent $325 million on coal seam gas exploration in the Hunter Valley and at Camden, south-west of Sydney, which is at risk with the government's decision. At the same time, the prospect of higher gas prices that will flow from this decision could lift the worth of the company's prospects around Gloucester, north of Newcastle.
"There is likely to be a significant charge in the second half," said AGL chief executive Michael Fraser, of the government's abrupt policy shift.
"There are a lot of grey areas to the government's announcement", which will make it difficult to decide sooner on the extent of the write-downs. Mr Fraser refused to be drawn on talks under way for AGL to buy government-owned power generators in NSW, which are for sale.
Frequently Asked Questions about this Article…
AGL is facing two main pressures: gas producers are trying to push up prices, and the NSW government’s new restrictions on coal seam gas exploration risk cutting off access to important reserves — a double hit that could mean heavy losses for its gas business.
AGL warned it may need to write off up to $250 million of its NSW exploration reserves after the state government restricted coal seam gas exploration. The company has already spent about $325 million on exploration in the Hunter Valley and Camden, which are at risk from the policy change.
The NSW government has banned coal seam gas drilling within two kilometres of urban areas and restricted exploration more broadly. AGL says this could 'sterilise' extensive reserves and that there are still many 'grey areas' in the announcement, making it hard to decide the exact extent of write‑downs.
AGL is in arbitration with its gas suppliers and spending 'millions on arbitration' to try to prevent price increases before long‑term supply contracts expire (initial contracts due to expire from 2016 and the remainder in 2017). A large portion of its supply comes from Esso‑BHP in Bass Strait.
AGL reported a record December half net profit of $364.7 million (up from $117 million a year earlier). Revenue rose to $4.97 billion from $3.6 billion, earnings per share were 66.5¢ (up from 24.5¢), and underlying earnings increased 20% to $279.4 million. The company also raised its interim dividend to 30¢ a share.
Investors reacted positively to the profit lift — AGL’s shares rallied 68¢ to $15.87 — and the interim dividend was increased to 30¢ from 29¢. However, AGL’s CEO warned there is likely to be a significant charge in the second half because of the NSW policy change, which investors should monitor.
AGL pointed to continued retail customer growth, particularly in NSW where customer numbers rose by more than 60,000, saying this growth more than offset weakness in other markets and helps cushion the business against gas‑side pressures.
The article notes the prospect of higher gas prices resulting from the NSW decision could increase the value of AGL’s prospects around Gloucester (north of Newcastle). So while some exploration assets face write‑downs, elevated gas prices could lift the worth of other holdings in the region.
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