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Writedowns: Are AGL (ASX:AGL) shares a defensive idea?

AGL Energy Limited (ASX: AGL) has just revealed a painful writedown, 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 to $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 them, and other energy generation generation coming online is good too, but these types of things are hurting AGL’s long term profit prospects and market strength. I don’t think it’s that defensive. For starters, in the energy space something like APA Group (ASX: APA) seems like a better idea to me.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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