AGL Energy Ltd. (AGK.AU) on Thursday reported an expected 13% improvement in annual profit after it added over 45,000 new retail electricity customers amid rising regulated tariffs, offsetting a fall in demand caused by milder weather.

Australia's biggest energy retailer has its eye on power assets being privatized by New South Wales state, with bids due Nov. 1, and reiterated that it may raise new equity to fund related deals.

AGL competes with Origin Energy Ltd. (ORG.AU) and a host of state-backed electricity retailers for customers, but it recently attempted to gain the upper hand by investing in a new billing system dubbed Project Phoenix.

Bottom line net profit for the year to June 30 fell 78% to A$356.1 million from the previous year's A$1.60 billion, when profits were boosted by asset sales.

Excluding one-off gains, underlying profit rose to A$428.9 million from A$378.8 million, in line with the company's A$420 million-A$430 million guidance and the A$427 million average of eight analysts' forecasts compiled by Dow Jones Newswires.

AGL said it expects underlying earnings in the current financial year to continue to grow, but won't provide more specific guidance until October.

"The last two years we've delivered double-digit growth and we expect to see solid profit growth this year," Chief Executive Michael Fraser told Dow Jones Newswires in an interview.

In a positive development, AGL said the weather at the start of the financial year has been colder than usual, suggesting it's experiencing higher demand for electricity and gas heating than the start of last year, when the weather was less extreme.

AGL's balance sheet is already strong, with A$1 billion at its disposal, after the company executed a string of asset sales in the last few years, including its stake in a Papua New Guinean gas export project.

Since then it's decided to begin construction on what will be the southern hemisphere's biggest wind farm and snapped up some gas fields to hedge against potential rises in gas prices.

The NSW government has said it expects its privatization process to be completed by the end of 2010 and analysts have said it could raise up to A$10 billion. The government's offering three retailing companies, and, instead of selling its generators, is offering wholesale generating trading rights in separate "gentrader" packages. Origin Energy has openly expressed its interest in the assets, which are likely to be divvied up between different bidders.

Fraser declined to speculate on whether the company intends to sell its interest in the Moranbah coal seam gas field in Queensland state to joint owner Royal Dutch Shell Plc (RDSB.LN).

"We think there's a lot of upside in terms of the reserves to be proved up there, so we're certainly in no hurry to make a decision about it because we want to see how that plays out," he said.

He was also coy on AGL's level of interest in generator assets being sold by distressed power company Alinta Energy Ltd. (AEJ.AU).

"I think it would be fair to say that we've got a watching brief on what's happening in Western Australia," he said.

Sydney-based AGL's retail business boosted operating earnings before interest and tax 19.5% to A$318.7 million despite relatively flat electricity volumes and lower gas volumes. The improvement was driven by a higher gross margin reflecting improved regulatory pricing outcomes. Customer accounts jumped by 45,317, or 1.4%, to 3.24 million.

"We invested significantly in the retail business over the last couple of years," Fraser said. "We had big reductions in the level of customer complaints. We had big reductions in the level of bad debts."

At the merchant energy business, operating EBIT fell 4.1% to A$386.1 million largely due to milder weather, including an absence of the extreme summer temperatures experienced in Victoria and South Australia states in the previous year.

AGL declared a final dividend of 30 cents per share, up from 28 cents in previous year.

Revenue rose 9.2% to A$6.61 billion from A$5.97 billion.

Macquarie is currently forecasting AGL's underlying profit this year to rise to A$459 million from A$428.9 million and says the consensus analysts' forecast is A$464 million.

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; Ross.Kelly@dowjones.com
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