Origin Energy Annual Profit Hit by Weather

   By Ross Kelly 
 

SYDNEY--Origin Energy Ltd. (ORG.AU), Australia's biggest electricity retailer by customers, posted weaker annual earnings after unseasonably mild weather crimped household energy use and intensifying competition eroded margins.

Net profit for the year through June rose 40% to 530 million Australian dollars (US$492 million), but was supported up by an accounting gain on the market value of derivatives used for hedging purposes.

Underlying profit, which more closely gauges the company's operating performance, fell 6% to A$713 million, in line with the A$711 million average of six analysts' forecasts compiled by The Wall Street Journal.

Demand for electricity in Australia has fallen in recent years after expensive network upgrades pushed up costs for consumers already reining in spending as the country's long mining boom fades.

Greater use of energy-efficient appliances and roof-top solar panels is also curbing demand, while sharper competition for customers, particularly with rival AGL Energy Ltd. (AGK.AU) in Australia's New South Wales state, has forced Origin to discount contracts.

Origin outbid AGL in 2010 to acquire electricity retailers being sold by the New South Wales government. AGL has since pursued an aggressive organic growth strategy to win back market share.

"Electricity discounts are costing Origin about A$200 million in the 2014 financial year, but it may be premature to expect an improvement in 2015," analysts at Bank of America Merrill Lynch said in a note last week.

"Whilst New South Wales advertised discounts eased to about 10% in the second half, anecdotal evidence suggests discounts as wide as 15-20% are still on offer," the analysts said.

Adding to the pressure, Australia experienced an uncharacteristically warm start to winter, sapping demand for energy-intensive heating appliances. Australia's winter runs from June through to August.

Tough conditions in electricity generation and retailing markets were partly offset by an improved performance from Origin's oil and gas business.

The company said its A$24.7 billion liquefied natural gas, or LNG, joint venture with ConocoPhillips (COP), due to ship its first cargoes to Asian buyers next year, remains on schedule and budget despite recent strikes by construction workers.

"The LNG project will deliver a step change in Origin's earnings and cash flow from the 2016 financial year when the project begins to deliver LNG under its existing long-term contracts," Grant King, Origin's chief executive, said in a statement.

Write to Ross Kelly at [e-mail]

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