18 OCTOBER 2017
Annual general meeting 2017
The 2017 Annual General Meeting took place at the Westin Hotel, 1 Martin Place, Sydney on Wednesday 18 October 2017 at 10 am AEDT. Gordon Cairns' and Frank Calabria's addresses to shareholders can be viewed on this page. You will also find links to the full list of 2017 AGM reports and other documents.
Good morning Ladies and Gentlemen. I am delighted to be able to speak with you again today. Let me outline how I propose to conduct today’s meeting.
I will kick off with a discussion of some key areas the board is focused on – including Strategy, Safety and Financial Returns. I will then provide some comments about our operating environment and finally, how we are tackling climate change.
This will allow Frank, as the CEO, to focus on the performance of the business and outlook.
Starting with our strategy. At Origin, we are leading the transition to a cleaner, smarter and more customer-centric energy future. To ensure the business is well positioned to achieve this objective, we are focused on three key priorities.
These are to:
- reduce debt and improve financial returns;
- lead in our Energy Markets business with a focus on energy supply from renewables, gas and coal and smarter customer solutions, and;
- lead in our Integrated Gas business with a focus on opportunities in unconventional gas development and improving productivity and reducing costs at Australia Pacific LNG.
Underpinning these priorities is our focus on adapting and transforming our culture to ensure Origin is strongly positioned to meet the challenges of a rapidly changing and constantly evolving energy market, and this includes being more customer centric.
Now to safety, which is a matter of primary importance to the Board. For a number of years now management, supported by the Board Health, Safety and Environment committee, has worked to develop a learning culture which provides our people with the confidence to identify and respond quickly to risks and with the support necessary to improve the running of our operations.
Our results to date have reinforced this approach, with our primary measure of personal safety performance, the TRIFR – or Total Recordable Injury Frequency Rate – reducing from 6.5 in 2013 to 3.2 in 2017. This is our best result to date, and we are proud of the progress. Looking forward there is still more to do to continue this momentum towards our ultimate objective of zero harm to our people at work.
I’m sure that everyone in the audience is interested in our financial performance.
We committed to decisive action to improve financial performance and laid out a plan. While there is more to achieve, this year we recorded meaningful progress against our key priorities to reduce debt and improve operational performance.
Improving our capital allocation and Return on Capital Employed (ROCE) are firm priorities. ROCE is a key performance measure in the Long-Term Incentive Program for management. This year, our Underlying ROCE doubled to 6.0 per cent which is positive progress, but we still must look to further improve in this area.
Given our focus on reducing debt, the board determined not to pay a dividend in 2017. We are acutely aware and fully understand the importance of dividends to many of our shareholders. This decision was not taken lightly, but it was considered in the best overall interests of shareholders at this time. A decision on the dividend will be considered each six months by the Board.
I will now turn to the operating environment.
In Australia, blackouts and rising energy prices have made energy a major issue.
This has created increased regulatory risk as governments seek to respond. Australia still lacks a stable long-term energy policy, and the risk has increased of governments interfering in markets to regulate supply, or worse to set pricing.
On electricity prices, I would like to start by acknowledging that since 2010, energy expenditure has increased by more than total household expenditure and the CPI. This is putting pressure on both households and businesses.
The preliminary report to the Retail Electricity Pricing Inquiry by the ACCC outlined the drivers behind increasing energy prices from 2007/8 to 2016/17:
- 41 per cent of the increase came from network charges, the poles and wires needed to get electricity to the houses;
- 22 per cent came from rising wholesale prices, as power generation supply was crimped from plants closing and from a lack of long term policy settings;
- 17 per cent was retail and other costs, and retail margins accounted for 7 per cent; and finally,
- 13 per cent was federal and state green energy policies.
This demonstrates that retailers are only one part of energy supply chain. We cannot solve the pricing challenge alone. We need a whole of industry solution with networks, generators, retailers and governments all working together if we are to deliver a genuine and lasting reduction in energy prices for customers.
Encouraging investment in new supply is a critical piece of the puzzle, and we have urged governments to resist intervening with short-term policy and instead focus on getting the long-term energy and climate change settings right.
Over the past decade, there have been many attempts but we have not been able to agree on a genuine, coordinated and bipartisan national approach to the challenge of transitioning to a more modern and cleaner energy system.
In his comprehensive and scientific review of the national energy market this year, Dr Alan Finkel made 50 recommendations which Origin supported. The government has endorsed 49 of the recommendations and yesterday set out its preferred means of tackling emissions reduction.
We believe the National Energy Guarantee announced yesterday has the potential to address the objectives of ensuring security, affordability and facilitating the transition to a modern, cleaner energy future by unlocking investment in more supply.
We look forward to working with governments and energy market bodies to work through the detail of the policy.
We can clearly see the impact of new supply on wholesale prices.
Over the past 18 months, there has been a commitment to more than 4,000 MW of new renewable energy projects by the industry which will come online by 2020 and forward wholesale electricity prices are starting to fall in response to this new supply.
An investment signal beyond 2020 when the RET ends, will maintain downwards pressure on prices. We believe doing nothing will see prices again move in an upwards direction.
We have committed to 1,200 MW of new large scale solar and wind generation since March 2016 to help meet the Renewable Energy Target, we are running Eraring power station harder than we have ever run it before and we have worked with Engie to supply gas to bring 240 MW at its Pelican Point power station back online.
Now let me turn to gas and again acknowledge that gas prices have risen above CPI contributing to increasing cost pressures for many customers. In particular, this impacts large businesses that rely on gas. Gas supply has also been tight in the market.
Now there are a number of reasons for the gas market challenges. Australia has exhausted lower cost gas supply that delivered historically lower prices for customers and we are now accessing resources with a much higher cost of production. We have also created an east coast LNG export market, which connected domestic prices to global gas prices.
We believe encouraging supply is again the critical solution to security of supply and a reduction in prices. Yet the market has been unable to develop new gas supply due to drilling bans in various states on the east coast.
We have recently seen more supply diverted to the domestic market by LNG projects and this has contributed to a rapid decline in prices from a peak of around $16/GJ in April to below $10/GJ at Wallumbilla and getting close to export parity.
Further domestic supply commitments recently made by LNG projects for 2018 and 2019 should provide further downward pressure on prices, however new supply is critical and we must also stop creating the expectation that gas prices will return to historically low levels.
Now let me explain what Origin is doing to ameliorate the situation in the gas market, both with its partners in Australia Pacific LNG in which Origin has a 37.5 per cent shareholding, and through our retail business and future gas development opportunities.
Australia Pacific LNG has been a net contributor to the east coast gas maket since its inception in 2008 and today it meets approximately 20 per cent of total annual demand on the east coast. In the near-term, Australia Pacific LNG will contribute to the solution by diverting more gas from export to the domestic market, ensuring Australian customers have access to gas supply at competitive prices.
In addition to Australia Pacific LNG’s contribution, Origin is one of the largest gas suppliers to customers on the east coast of Australia. We are actively working to bring on more gas supply to offer customers for 2018, and we will continue to pursue future development opportunities including Ironbark and Beetaloo.
Responding to Climate change
Now to how we are responding to climate change, which is an important topic and that is why I would like to spend a little time on it.
Let me reiterate our position. We support the Paris Climate Accord. We endorse Australia’s commitment to a 26-28 per cent reduction on emissions on 2005 levels by 2030, as a minimum. We believe the electricity sector should do more than its proportionate share of achieving this and any future target because we have the means and can also facilitate other sectors to do the same.
This morning we released analysis on the potential impact of a number of emission reduction scenarios on our wholesale electricity generation portfolio. This analysis shows that not only is our portfolio resilient, but it prospers, in a low carbon economy.
This is not by happenstance or good luck; we have carefully built our portfolio with an eye on a low carbon future.
Our commitment goes further. We will adopt a company-wide, science-based, emissions reduction target by December 2017, a key component of the seven “We Mean Business” commitments we signed up to in 2015. And, we will continue to publicly support a policy that targets net zero emissions from Australia’s electricity sector by 2050, or earlier.
We fundamentally believe the transition to a low carbon future presents opportunities to create value for Origin. This is because of our strategy to focus on renewables and gas.
Our pathway to the decarbonisation of our business has five pillars:
- the closure of Eraring at the end of its operational life in the early 2030s;
- growing renewables with recent commitments putting us on track to increase our supply to renewables to more than 25 per cent of Origin’s generation mix by 2020;
- a strong position in gas as a lower emissions firming fuel to ensure security of supply;
- a focus on the customers’ needs for cleaner smarter solutions for their energy use; and finally,
- to continue advocating for climate change and energy policy solutions.
I hope you can see from this our serious and planned approach to reducing emissions and securing a better future.
To conclude, I would like to reiterate our concern about rising energy prices and our determination to be part of the solution and work collaboratively with governments to make sure we can deliver better outcomes to energy customers.
We supply 4.2 million customers with reliable energy to fulfil their lives. We are at the forefront of growing renewables in Australia and adopting new technology that will change the way customers interact with energy in the homes. The Prime Minister has backed an innovation economy and we at Origin are responding to that call.
But we urgently need policy certainty. We cannot wait until 2020 for investment decisions to be made if we are to meet Australia’s 2030 emissions reduction target. We look forward to working with governments and energy market bodies to progress the new National Energy Guarantee announced yesterday, as we continue to focus on the objectives of delivering security of supply, affordable pricing and the necessary reduction in emissions over time.
Finally, I would like to thank our people for their incredible contribution this year. They have worked tirelessly to ensure we can continue to make Origin an even more successful business.
Thank you for your patience, ladies and gentlemen.
Gordon Cairns, Chairman
Good morning ladies and gentleman. Thanks for coming to our AGM, it’s a pleasure to be here today.
Twelve months ago when I addressed the meeting as the CEO designate, I said if we got things right with our people, our customers and our community, we would increase shareholder value.
I set our key priorities – to reduce debt, lift performance and improve returns to give us the flexibility to again pursue growth and be a part of shaping a future where energy is cleaner and smarter.
Against this backdrop, Origin and the broader sector in which we operate has faced an unprecedented level of public scrutiny amid concerns over security of our electricity supply, a potential domestic shortfall of natural gas and rising energy prices.
We see our role as very much part of the solution to these challenges and we have already taken many actions to address them.
Delivering on our commitments
Looking back over the past year, we have made good progress against our priorities, reducing debt by $1 billion to $8.1 billion and improving business performance.
We delivered on our commitment to sell Lattice Energy, our conventional gas business, recently announcing the sale to Beach Energy for $1.585 billion. This included long-term agreements for Lattice to continue supplying gas to Origin. It also puts us on track to achieve a further material reduction in net debt by the end of FY2018.
We have formed a largely new leadership team, as we seek to adapt and transform our culture. We need to continue to attract and retain the best people at Origin – people who are passionate about getting energy right for our customers, communities and the planet. At Origin, we want to be part of the solution and it doesn’t matter whether you work in generation, in renewables, gas production or on the customer frontline – we are all aligned to this objective.
Our people have responded well to our changing culture, with improved employee engagement, safety performance and customer Net Promoter Score – which reflects whether our customers would recommend Origin to friends and families. Across each of these measures we achieved our highest ever scores in FY2017.
Origin is proud to be a leading Australian integrated energy company. We have simplified our business to focus on our key strengths – leadership in energy markets and our expertise in the development of unconventional gas resources. And we now have line of sight to greater financial flexibility, which means we are better positioned to consider the right opportunities to grow our business.
There is clearly more work to do, but we have created some very solid momentum.
FY2017 financial highlights
Now to financial performance.
Our statutory result – a loss of $2.2 billion – was heavily impacted by a non-cash impairment charge of $3.1 billion.
The impairments primarily related to Australia Pacific LNG, a write down in the value of the Browse Basin and a reduction in the carrying value of Lattice Energy.
Operationally we delivered strong increases in earnings and underlying profit. Underlying EBITDA increased by $834 million or 49 per cent to $2.5 billion. Our electricity and natural gas businesses performed well, and production increased by 40 per cent across our upstream operations.
Underlying Profit increased by $185 million or 51 per cent to $550 million.
Net cash flow from operating and investing activities increased by $163 million, or 13 per cent, to $1.4 billion, primarily driven by lower capital expenditure during the year.
I would now like to step through some of the important things we are doing across our business in the areas of Customers, Generation and Gas.
Delivering a cleaner, secure and affordable energy supply
At a time when rising energy prices have created financial pressure for many homes and businesses, we have taken action to assist customers.
We have supported those in financial hardship as a priority. We were the first major energy retailer to make sure customers in our hardship program did not pay the latest price increases. We already had established processes to write to our customers with details of new plans ahead of their current discount expiring. We also committed to writing to customers on lapsed deals again, as well as to our customers on standing offers.
We acknowledge that the many energy offers in the market can be complex, and we have strongly supported the adoption of an industry-wide comparison rate so customers can easily compare offers and make a confident choice in energy provider.
In generation, we are increasing renewable supply in our portfolio, boosting output from Eraring and leveraging our peaking gas portfolio to help put downwards pressure on prices and maintain energy security.
Eraring ran harder over the winter peak and we will continue to run it harder – increasing output by 5-10 per cent this year– to help cover the gap left by the closure of ageing coal fired plant. We have sourced more coal supply and in September, we received record coal deliveries to Eraring by rail to ensure we are ready for summer.
Since March 2016, we have committed to 1,200 MW of new solar and wind generation, including the 200 MW Bungala project located in Port Augusta, South Australia, the 530 MW Stockyard Hill wind farm in Victoria and the 110 MW Darling Downs solar farm in Queensland. By 2020, we are targeting renewables growing to more than 25 per cent of our generation mix – up from 10 per cent today.
I’m proud to say that Origin is backing more than a quarter of the 4,000 MW of renewables coming into the National Electricity Market by 2020 to meet the Renewable Energy Target, which as Gordon has mentioned is already driving down the forward curve for wholesale electricity prices.
We own the largest portfolio of peaking gas power stations in Australia which means we are well-positioned to support the growth in intermittent renewables to maintain security of electricity supply for Australian homes and businesses.
Earlier this year, we also signed an agreement with Engie to supply gas to get another 240 MW of generation back online at Pelican Point in South Australia, boosting security of electricity supply in that state.
Gas will continue to be a core part of Origin and has always been a key differentiator for our business.
At a time when gas supply has been tight, we have continued to write contracts with large customers such as manufacturers. In FY2017, we increased volumes of gas sold to industrial customers by 12 per cent, with more than 760 supply agreements signed with customers and we are actively looking to bring on more gas supply this year.
We are also looking to future development opportunities to bring more supply to the market, including targeting FEED on Ironbark during FY2018. This work will help us understand what the future development options and timeframes might look like.
In February this year, we announced the discovery of a material contingent shale resource in the Northern Territory’s Beetaloo Basin – the most prospective underdeveloped onshore basin for unconventional gas. We also increased our interest to 70 per cent.
It’s been a watershed year for Australia Pacific LNG. Train 2 was brought online and we completed the two-train Lenders’ Test – running both trains at more than 10 per cent above nameplate capacity for 90 days.
The lenders test is the culmination of many years and thousands of people building a world-class facility and resource. It is a tremendous achievement.
Australia Pacific LNG has both met its export LNG contract commitments and continued to be a major supplier of gas to the domestic market, supplying around 20 per cent of total annual demand on the east coast.
In a low oil price environment, productivity and cost reduction remain the key priority so Australia Pacific LNG can continue to drive value for Origin. We want to drive a major and sustainable reduction in our break-even price and new techniques and technology will facilitate this step change.
As we look a little further towards the future, new technology is changing how we interact with energy. A wave of new technologies primarily behind the meter will fundamentally change the way our energy system operates. We see this as a huge opportunity to help customers use energy smarter and more efficiently.
We are trialling technology by California-based tech start up, Bidgely, that provides customers with an itemised breakdown of where energy is used in the home, similar to the breakdown of what you have spent on your credit card bill. Giving customers visibility of where energy is being used in the home can give them more control over their energy costs.
We’re working with US-based software company People Power, which is at the forefront of using artificial intelligence to interpret real-time data. We have a demand management trial with Tempus for large users in South Australia over summer that will allow them to shift usage to off-peak times or when renewable supply generation is up. We are also doing a desktop trial of peer-to-peer energy trading technology with Power Ledger.
There are some very exciting developments on the horizon, and we’re determined to be at the forefront of rapidly developing, prototyping and trialling new technologies with customers.
I hope I have demonstrated that across Origin, everyone is embracing and adapting to the rapid change underway as we transition to a cleaner, smarter and more customer-centric energy future.
Now to the outlook. For FY2018, we aim to continue our momentum and further reduce debt and improve returns to shareholders.
Notwithstanding continued challenges and uncertainty relating to the regulatory environment in particular, Origin is today [reaffirming Energy Markets Underlying EBITDA guidance for FY2018 to be $1.7 billion to $1.8 billion, provided that market conditions and the regulatory environment do not materially change. This represents a 14 to 21 per cent increase on FY2017.
As part of the sale of Lattice Energy, Origin entered into long-term gas sales agreements to provide certainty of ongoing gas supply for our business. The pricing of these agreements is consistent with the FY2018 Energy Markets guidance range.
Today Origin is also reaffirming production guidance of its share of Australia Pacific LNG of 245 to 265 PJ in FY2018.
Given our continued focus on debt reduction, we have targeted adjusted net debt of below $7 billion by the end of FY2018. As I mentioned earlier, Origin is on track to achieve this, having announced the sale of Lattice Energy.
To conclude, energy markets around the world are in transition as we grapple with the challenge of shifting to a low emissions energy supply while maintaining energy security and affordability for customers. These three objectives are not mutually exclusive, they are best addressed collectively.
We want to be part of the solution.
We believe that by leading the transition to a cleaner and smarter energy future, Origin can help address the challenges of energy affordability and security as well as emissions reduction.
The success of Origin, the broader industry and our governments in achieving the smoothest possible transition for our energy market will ultimately be judged in the outcomes to stakeholders. And the outcomes achieved not just today or tomorrow, but well into the future.
We believe if we succeed in delivering the best outcomes to stakeholders – our people, our customers and the community – we will be best placed to improve returns to you, our shareholders.
I would like to thank you for your continued support of Origin, and reiterate my pride at being able to lead this great company which makes a huge contribution to the Australian community.
I look forward to meeting as many of you as possible following the meeting.
Frank Calabria, CEO