Why the AGL Energy (ASX:AGL) share price is sinking lower

The AGL Energy Limited (ASX:AGL) share price is under pressure on Thursday after announcing $2.7 billion worth of charges…

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The AGL Energy Limited (ASX: AGL) share price is sinking lower on Thursday morning.

At the time of writing, the energy company’s shares are down 3.5% to $11.45.

Why is the AGL share price sinking lower?

Investors have been selling AGL’s shares following the release of an announcement this morning.

According to the release, the company intends to recognise charges of $2,686 million (post-tax) in its financial statements for the first half of FY 2021.

The release explains that these charges reflect $1,920 million in provisions for onerous contracts relating primarily to legacy wind farm offtake agreements.

In addition to this, charges have been made for increases to environmental restoration provisions of $1,112 million and further impairments of $532 million across AGL’s Generation Fleet and Natural Gas assets. These are net of a positive tax effect of $878 million.

What is driving the charges?

Management advised that these charges follow an accelerated deterioration to long-term wholesale energy market forecasts in recent months. This is reflective of policy measures to underwrite new build of electricity generation and lower technology costs, leading to expectations of increased supply.

As a result of the above, the long-term outlook for wholesale electricity and renewable energy certificates is now pointing to a sustained and material reduction in prices.

Combined with sharp reductions in near-term wholesale energy prices as a result of challenging macroeconomic conditions, and the outcomes of its three-yearly review of environmental restoration provisions, management has reduced the valuation of its Generation Fleet cash generating unit.

While these charges are undoubtedly disappointing, AGL‘s Managing Director and CEO, Brett Redman, remains positive on the future.

He commented: “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.”

Finally, as AGL’s underlying profit after tax excludes significant items, it has maintained its full year guidance of $500 million to $580 million.

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