Warm winter, discounting strikes AGL’s half-year profits

The fading impact of discounting and surging wholesale gas prices are expected to help energy group AGL offset the effect of subdued demand after a soft December-half profit.
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AGL has maintained its year-to-June net profit guidance at $560 million-$610 million following a weak December-half net profit of $261 million, which was down 27.1 per cent year on year.

Earnings were hit by a warm winter and heavy discounting although stripping out the impact of futures contract valuations, the underlying net profit declined a more modest 11.4 per cent to $242 million.

Earnings a share dropped 28.2 per cent to 46.9¢, with the interim dividend held steady at 30¢.

”We expect subdued demand conditions to continue,” AGL’s chief executive, Michael Fraser, told analysts on Wednesday.

In the December half, excluding the purchase of Australian Power and Gas, AGL saw electricity consumption fall 8 per cent with gas usage down 9 per cent. Margins on electricity sold to commercial and industrial customers have also fallen to 2 per cent from 3 per cent.

Mr Fraser pointed to ”fierce competition” from ERM Power, which has been ”writing very low margin business” and has affected all suppliers in the sector.

More recently, heatwave conditions in South Australia and Victoria have helped to lift demand, notwithstanding the loss of output from Loy Yang A and the Torrens Island power stations for a time in January.

These higher volumes have ”given confidence” in meeting the profit guidance, Mr Fraser said, especially with a decline in discounting and customer churn outside of Victoria.

AGL is waiting for NSW government approval for a gas development project at Gloucester, north of Newcastle, which ”is absolutely essential for security of supply for NSW gas”, he said.

AGL is also seeking approval to carry out hydraulic fracturing at a pilot gas project and, even if it is able to proceed soon, AGL is unlikely to be in a position to make final investment decisions until 2015, which may threaten the chances of bringing this project on by late 2016, as anticipated.

The delays in pursuing the Gloucester project comes as the wholesale gas price in Queensland has reached $10 a gigajoule, against the backdrop of strong gas demand as a number of gas export projects are being completed. ”There is upward pressure on prices – right up and down the east coast,” he said.

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