AGL is facing pressure on two fronts in its core gas business as producers seek to raise prices at the same time it is facing heavy losses after losing access to prime gas reserves in NSW.
The energy utility disclosed on Wednesday it may write down up to $250 million on its exploration acreage 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 2 kilometres of urban areas.
AGL is also in arbitration with its gas suppliers, seeking to prevent price increases before the expiry of long-term supply contracts in 2016 and 2017.
The group posted a record December-half net profit of $364.7 million, a sharp rise from the $117 million earned a year earlier, thanks to the inclusion of earnings from the Loy Yang A power station that it acquired last year.
Revenue rose to $4.97 billion from $3.6 billion, with earnings per share reaching 66.5¢ from 24.5¢.
The company said underlying earnings rose 20 per cent to $279.4 million 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 rise in profit, with the shares gaining 68¢ to $15.87.
AGL said it was spending "millions on arbitration" in an attempt to resolve the gas supply issues. It sources a large part of its supplies from Esso-BHP in the Bass Strait. Its initial contracts are set to expire from 2016 and the rest 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, which is at risk following 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 project at Gloucester, north of Newcastle.
"There is likely to be a significant charge in the second half," the AGL chief executive, Michael Fraser, said 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 declined to comment on talks under way for AGL to buy government-owned power generators for sale in NSW.