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AGL chief accuses gas suppliers of trying to push up prices early

by:Matt Chambers
From: Dow Jones Newswires
February 27, 20133:34PM

AGL Energy has gone into arbitration over gas pricing with suppliers such as Santos, ExxonMobil and BHP Billiton, who chief executive Michael Fraser says are trying to push up prices in New South Wales and Victoria well before $70 billion of Queensland export plants that were expected to cause a supply squeeze begin production.

Mr Fraser said the company was spending millions of dollars in formal arbitration to fight price rises from the gas suppliers in NSW and Victorian markets, and that about 80 per cent of AGL's contracts were under dispute.

He said the prices rises demanded by the suppliers would apply from this calendar year, despite the Queensland projects, which are expected to triple east coast gas demand, not coming on until 2014 and 2015.

Domestic prices are also set to soar as local buyers compete with Asian gas buyers willing to pay much higher prices.

AGL is arguing that NSW and Victoria, which are supplied with gas from Moomba, which Santos operates, and Bass Strait, which is operated mainly by Exxon and BHP, currently have enough gas.

"We would argue right now and for the next two to three years, those markets are well supplied with gas and there is no reason for prices to step up," Mr Fraser said.

Santos this week said it had inked prices for gas supply from 2015 at the high end of a $6 to $9 per gigajoule range, up from $3 to $4 prices now.

Mr Fraser revealed the disputes as he warned NSW Premier Barry O'Farrell that the state's coal seam gas restrictions would force up energy prices, as AGL braced for write-downs of its NSW assets as a result.

The power and gas supplier said NSW gas policy risked the company having to take substantial writedowns on its Camden and Hunter gas projects, which have a book value of $325 million.

NSW last year announced some of the toughest CSG regulations in the country, then last week banned coal seam gas drilling entirely within 2km of residential areas and said bans would also apply to land containing vineyards and horse studs.

"The proposed policy will put significant upward pressure on future energy prices," Mr Fraser said.

AGL said the full impact would not be able to be determined until the new rules were set but that "there is an impairment risk to the existing book value of both projects".

Speaking after the company released its first-half profit report, Mr Fraser said that he discussed the issue with Mr O'Farrell yesterday and that the premier was engaged and listened to AGL's concerns.

These concerns include sovereign risk, soaring energy prices and the arbitrary nature of the restrictions, Mr Fraser said.

The electricity and gas retailer's net profit for the six months to December 31 more than tripled to $364.7 million after it boosted customer numbers and benefited from a large increase in the market value of derivatives used to hedge against swings in wholesale power prices and interest rates.

AGL's first-half underlying net profit, which stripes out the hedging gains, rose 20 per cent to $279.4 million, slightly beating expectations. Shares in the company rose 59 cents, or 3.9 per cent, to $15.78 this morning.

It maintained its full-year underlying earnings guidance of $590m to $640m, despite noting that volatile wholesale electricity prices in Queensland state in January and February reduced its pre-tax earnings by about A$10 million, while price deregulation in South Australia state cost it $15m.

These factors, combined with continued low electricity demand, will "slightly constrain" profit growth in the second half, it said.

During the first half, AGL grew customer accounts by 56,700, or 1.6 per cent on year.

Additional reporting: Dow Jones Newswires