Shares in AGL Energy Ltd (ASX: AGL) were hit with the proverbial sledgehammer on Thursday as hopes of a profitable half were slashed.
The company's share price powered down 10.33% to finish the day at $7.12 in reaction to the energy retailer's first-half figures for FY23. Today's disappointing performance was the worst for AGL shares in more than a year and seven months.
There's a good chance shareholders were shocked by the staggering after-tax loss of $1.075 billion. A loss that big makes you wonder how?
Blowing out the bottom line by a billion
Once upon a time, Australia's largest electricity generator was pumping out profits in excess of a billion dollars.
In 2018, AGL delivered revenue of $12.7 billion and net profit after tax (NPAT) of $1.26 billion. Today, the company posted $7.81 billion in revenue ($15.6 billion annualised). Despite achieving greater revenue years later, the energy giant is bleeding money — why is that?
For the most part, it comes down to standard accounting principles. This basically means financial statements need to recognise non-cash items on the profit and loss statement to provide a more accurate reflection of the business. And, oh boy, was the first half a pearler for non-cash items at AGL…
What wreaked havoc on the company's statutory earnings — sending AGL shares downwards — was one ugly asset impairment.
AGL wrote down the carrying value of its Energy Generation Fleet cash-generating unit — in other words, its coal-fired power station assets — as it plans to bring forward their closure dates.
The magnitude of the impairment was a ground-shaking $706 million post-tax.
Secondly, the company recognised a $622 million reduction in the value of its financial instruments. Large companies, such as AGL, often make use of various instruments to hedge their exposure to the underlying commodity — for example, oil and gas futures contracts.
When combined, the two blew a $1,328 million hole in AGL's earnings.
Where to for AGL shares from here?
Experts seemed to be split on the outlook for AGL following its first-half result.
On one hand, analysts at Barrenjoey considered it a 'less positive' foreshadowing for FY24. Whereas, Sarah Xie of Moody's indicated that higher earnings could be on the cards from FY24 to FY25 as old hedges expire and wholesale power prices strengthen.
One thing is for sure — shareholders will be hoping there are fewer days like today for AGL shares.
