Home / Leaders / Is AGL Energy (ASX:AGL) still defensive?

AGL Energy Limited (ASX: AGL) has just revealed a painful writedown; so is it a defensive ASX share idea?

The AGL writedowns

AGL announced today that it intends to recognise accounting charges of almost $2.7 billion after tax for its December 2020 result.

The energy business explained that these charges reflect $1.92 billion in provisions for onerous contracts related primarily to legacy wind for offtake agreements (from contracts between 2006 and 2012 to support a developing renewables sector at the time at much higher prices than today); increases to environmental restoration provisions of $1.1 billion; and further impairments of $532 million across AGL’s generation fleet and natural gas assets, net of a positive tax effect of $878 million.

Why did this happen?

AGL said that there were both long-term and short-term reasons for these charges.

There has been an 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 now indicates a “sustained and material reduction in prices.”

AGL also said that there has been a sharp reduction in the near-term price of wholesale energy as a result of the current economic conditions, and the outcomes of AGL’s three-yearly review of environmental restoration provisions completed in recent weeks.

AGL management comments

AGL Managing Director and CEO Brett Redman said: “As Australia’s largest energy retailer and largest generator of electricity, we continue to see material opportunities for AGL to participate in the energy transition as customer needs, community expectations and technology evolve. Notwithstanding these charges, our broad and diverse portfolio of electricity generation assets will continue to have a vital role to play in enabling the transition of the energy system.”

Summary thoughts

AGL is still expecting underlying net profit after tax of $500 million-$580 million for FY21. Also, the above changes will boost underlying profit after tax in FY22 and FY23 by $50 million to $80 million, due to a decrease in cost in goods, a decrease in depreciation and a net increase in interest costs.

With how the energy market is changing, I don’t think AGL has the same strong market position that it used to. Households installing their own solar panels is good for it, and other energy generation coming online is good too, but these types of things are hurting AGL’s long-term profit prospects and market strength.

Information warning: The information in this article was originally published by The Rask Group Pty Ltd (ABN: 36 622 810 995) and is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.