AGL Energy, Australia's largest energy retailer, cut its 2008 profit forecast by as much as 17% due to higher costs and lower margins, sending its shares to an all-time low and wiping more than A$1 billion (US$905 million) from its market value.
AGL also said on Monday it will review its earnings capabilities and earnings per share (EPS) growth targets after announcing that 2008 net profit profit would be between A$330-$360 million (US$298-$325 million), down from a forecast of between A$380-A$400 million.
The profit downgrade was in part caused by an overly-aggressive hedging strategy, analysts said.
"They are not just talking about a 2008 issue but also for future years. That is really what's driving the share price down," said Paul Johnston, an analyst at Commsec Ltd.
"The revision to longer-term outlook suggests that something is monumentally wrong. It seems very likely that it's a hedging strategy gone horribly wrong."
AGL's shares fell as much as 17.9% but managed to close down 16.6% at A$13.03 -- the lowest since the company was relisted in October last year following a A$6.3 billion asset and debt swap with Perth-based utility Alinta.
Recent market conditions, including reduced retail energy margins, a strengthening Australian dollar and increased wholesale gas costs, were reasons behind the revision, AGL said. An update of the review will be announced on Nov. 8 at its annual general meeting.
Based on the revised 2008 earnings outlook, AGL said it now expected earnings per share (EPS) growth to be in a range of negative 4% to plus 4% for 2008. It had previously said it targeted EPS growth of 15% a year over the medium term.
Dividends for 2008 would not be affected and would remain in the range of 52-55 cents per share, AGL said.
Spotlight on Origin
Analysts said the AGL's profit downgrade has also put the spotlight on rival Origin Energy's hedging positions.
"Origin could well be facing losses on their hedging positions too. But Origin has always given an impression that the management is very conservative and prudent in their investments so they could be unaffected," Johnston said. Origin's shares fell 3% to A$9.58.
The wholesale cost of electricity in Australia has jumped by up to 200% from a year ago as a long drought has forced hydroelectric plants to slash output due to insufficient water and coal-fired power plants have also cut capacity to cope with government-imposed water restrictions.
Natural gas prices have also risen as the water shortage resulted in increased use of gas-fired power plants. But regulations on electricity tariffs in most Australian states means retailers were not be able to pass on the increased costs to buyers.
"We are in reasonably turbulent times. You only need to look back on the energy markets and you'll see what has happened to energy prices, both in terms of electricity and gas, to see that we are operating in a different climate," AGL Chief Executive Officer Paul Anthony told reporters in a teleconference.
AGL said reduced retail energy margins, in part due to lower-than-expected revenues from small to medium enterprises and large commercial customers, were expected to cut forecast net profit by about A$35 million.
Higher wholesale gas costs and lower oil profits from Papua New Guinea due to a strong Australian dollar would reduce estimated net profit by A$5 million and A$6 million respectively.
Projected 2008 net profit was also dented by a higher depreciation charge at the Torrens Island power station in South Australia. AGL said the liabilities to acquire the station increased by approximately A$100 million, which will result in a A$7 million increase in depreciation charge each year.
In a bid to reduce the cost of selling electricity, AGL has bought gas-fired power stations to add generating capacity and to help reduce its need to buy power on the wholesale market or to buy hedging contracts. It has also been aggressively boosting stakes in gas fields to reduce its purchases of wholesale gas.