February 6, 2019 / 10:05 PM / 8 months ago

UPDATE 2-Australia's AGL Energy reports profit jump, but coal plant costs to rise

* H1 profit up 10 pct on higher wholesale power prices

* But expects FY19 profit to be flat on year earlier

* Says maintaining ageing coal plants is getting more expensive

* Shares drop nearly 5 pct, broader market up around 1 pct (Adds comment, share price)

By Sonali Paul

MELBOURNE, Feb 7 (Reuters) - AGL Energy, Australia’s top power producer, reported a 10-percent rise in half-year underlying profit, but warned that profits would be weaker in the next six months as it steps up spending on maintaining its ageing coal-fired plants.

Earnings in the second-half of the financial year that started in July will also be hit by lower gas sales to large business clients, a continued price war for customers and retail electricity price cuts in the state of Victoria, new Chief Executive Brett Redman said on Thursday.

AGL, which has the nation’s biggest fleet of coal-fired power plants, said it would hold off from buying back shares.

Shares in the company fell nearly 5 percent in a broader market that was up 1 percent.

The firm on Thursday abandoned its three-year cost-saving target to 2021 and halved its target for the year to June 2019 to A$60 million ($43 million) taking into account the extra spending on its coal fleet.

That spending comes after breakdowns at a number of coal-fired plants, including AGL’s Loy Yang, recently led to blackouts as supply was unable to meet soaring cooling demand amid a brutal heatwave in southeastern Australia.

“We’ve made some active decisions this year to really focus on our plant availability and ensure we’ve got the generation there when we need it,” acting Chief Financial Officer Damien Nicks told analysts on a conference call.

“As a result, we have additional costs.”

AGL’s underlying profit for the six months to Dec. 31, which excludes one-off items, rose to A$537 million from A$487 million at the same time last year, boosted by strong wholesale power prices.

AGL said it was on track to hit the midpoint of its forecast range for underlying profit of between A$970 million and A$1.07 billion in the year to June, roughly flat on last year.

Revenue slipped 1.8 percent to A$6.34 billion.

FLATTER FUTURE?

The company said last August that average wholesale power prices, which had jumped over the previous two years following the closure of two coal-fired power plants by two of its rivals, likely peaked in 2018.

“As we look into the future, some of the lead indicators of profitability, like the wholesale electricity prices, are pointing to a flatter to slightly lower future,” Redman told analysts.

AGL and its rivals, including Origin Energy and EnergyAustralia, owned by Hong Kong’s CLP Holdings, have come under pressure from the government to cut power prices to homes and businesses as rocketing energy costs have become a hot political issue.

But Redman said the government’s proposed “big stick” legislation designed to lower prices and the lack of a broader energy policy was deterring it from going ahead with A$1.5 billion in new generation investments.

“There is no question that policy and regulatory uncertainty is contributing to delays in both executing and approving projects,” he said.

$1 = 1.4081 Australian dollars Reporting by Sonali Paul, additional reporting by Aby Jose Koilparambil and Ambar Warrick in Bengaluru; Editing by Leslie Adler and Joseph Radford

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