20 February 2014
Half Year Results 2014
Origin reports $322 million Statutory Profit and Underlying Profit of $381 million for the first half.
Origin Energy Limited (Origin) today announced a Statutory Profit of $322 million for the half year ended 31 December 2013, down from $524 million1, and a 5 per cent increase in Underlying Profit to $381 million for the period.
The primary factors contributing to a decrease in Statutory Profit include the gain on dilution of Origin's interest in Australia Pacific LNG in the prior corresponding period not recurring in the current period, higher LNG-related funding expense and higher impairments. This was partially offset by the net gain on settlement of the GenTrader arrangements and the benefit from the changed tax treatment of unbilled income.
Underlying Profit increased by 5 per cent to $381 million. A reduced contribution from Energy Markets was more than offset by increased contributions from all other segments.
Group Operating Cash Flow After Tax was up 125 per cent from $461 million to $1.04 billion due mainly to operational improvements resulting in a $485 million improvement in working capital.
|Financial Highlights||1H 14||1H 2013||Change|
|Statutory Profit||$322 million||$378 million||up 40%|
|Underlying Profit||$381 million||$362 million||up 5%|
|Underlying EBIT||$694 million||$698 million||down 1%|
|Underlying EBITDA||$1,082 million||$1,055 million||up 3%|
|Underlying EPS||34.6 cps||33.2 cps||up 4%|
|Group Operating Cash Flow After Tax||$1,038 million||$461 million||up 125%|
|Free Cash Flow||$793 million||$527 million||up 50%|
|Interim dividend||25 cps (unfranked)||25 cps (franked)|
|Capital expenditure||$460 million||$720 million||down 36%|
|Origin Cash contribution to Australia Pacific LNG2||$1,437 million||$119 million||up 1108%|
Origin Chairman, Mr Gordon Cairns said, "The half year result reflects the focus we have on improving the performance of our existing businesses. We are pleased to see that there have been substantial improvements in operational performance which is reflected in the strong increase in operating cash flow in the first half.
"The delivery of Australia Pacific LNG's project is one of Origin's key priorities and good progress continues to be made with the Upstream component 58 per cent complete and the Downstream component 62 per cent complete.
"During the half, Origin completed a number of funding initiatives to extend its debt maturity profile and improve its liquidity position. Origin has $6.5 billion3 in existing liquidity comprising committed undrawn debt facilities and cash. This strong liquidity position is substantially more than that required to satisfy Origin's remaining funding requirements for its 37.5 per cent shareholding in Australia Pacific LNG.
"The Board has determined to pay an unfranked interim dividend of 25 cents per share," Mr Cairns said.
As a result of utilisation of available tax losses and the impact of development projects, including Australia Pacific LNG, Origin does not expect to have sufficient franking credits to frank the interim dividend.
Underlying business performance
Origin Managing Director, Mr Grant King added, "The result highlights continued progress on our four key priorities of improving the performance of existing businesses, delivering Australia Pacific LNG, managing our funding and balance sheet position, and creating growth opportunities.
"We have started to see tangible improvements across our Energy Markets business as the investment in our Retail Transformation program is delivering operational and cash flow improvements. Despite continued competitive conditions, we have achieved a net gain in customers.
"The migration of retail customers across to our new billing system was completed one year ahead of schedule, and we have improved our billing and collection performance.
"We have also successfully completed the acquisition of the Eraring Energy assets and secured fuel contracts, which have strengthened the scale and diversity of Origin's gas and coal supply portfolio. Through our new gas sales agreements, we have secured pathways for Origin to monetise its gas position in line with international oil-linked pricing.
"Investment and reliability improvements in upstream assets have delivered increased availability and production as demonstrated by higher production volumes at BassGas, Otway and Kupe basins.
"As expected, Origin's cash contribution to Australia Pacific LNG increased to $1.4 billion. The project remains on track, with delivery of first LNG in mid-2015, which will deliver a step change in Origin's earnings and cash flow in the 2016 financial year when the project is delivering LNG under its existing long-term contracts," Mr King said.
Underlying EBITDA increased 3 per cent to $1.08 billion reflecting increased contributions from Exploration & Production, Contact Energy and Corporate segments, partially offset by lower contribution from the Energy Markets business.
Energy Markets Underlying EBITDA decreased by 23 per cent to $505 million reflecting a reduction in sales volumes due to the impact of warmer winter weather, prior year customer losses, higher solar PV usage, lower underlying energy consumption due to energy efficiency and the impact of discounts written in the 2013 financial year.
Exploration & Production Underlying EBITDA increased by 57 per cent to $302 million driven by higher production volumes at BassGas, Otway and Kupe basins, and higher commodity prices.
LNG Underlying EBITDA increased by 30 per cent to $35 million reflecting higher domestic gas sales and production.
Contact Energy Underlying EBITDA increased by 17 per cent to $232 million primarily due to the strengthening of the NZ dollar and a lower cost of generation. Contact Energy's reported underlying EBITDA increased by 4 per cent to NZ$264 million primarily due to its lower cost of generation, with hydro displacing more expensive thermal generation.
Origin is now servicing all of its Mass Market customers on its new SAP system following the final migration of customers from the NSW acquisition, one year ahead of schedule. Operational improvements including reduced late bills, shorter billing cycles and cost rationalisation benefits from reduced headcount, have led to reduced working capital requirements and improved cash flow.
Improved acquisition and retention activity has increased Electricity and Gas customer accounts by 14,000 compared with the prior period.
As Origin continues to build on its strong gas position, Natural Gas customer accounts increased by 25,000 compared with the prior period, primarily in NSW and Victoria. While Electricity customer accounts reduced by 11,000, primarily in Queensland, this was an improvement on the prior period.
Energy Markets has strengthened its gas position through a new gas purchase agreement with Esso and BHP Billiton and is continuing to secure benefits of rising gas prices through oil-price linked gas sale agreements with QCLNG and GLNG.
The acquisition of Eraring Energy, including the cancellation of the Cobbora Coal Contract and entering a new coal supply agreement with Centennial Coal, provides additional generation and fuel flexibility to Origin's wholesale portfolio.
Australia Pacific LNG
The Upstream component was 58 per cent complete at 31 December 2013. Drilling and completions, and gathering are progressing ahead of schedule. The main pipeline is nearing completion and commissioning continues on the Condabri Central gas plant and the water treatment facility.
Downstream was 62 per cent complete at 31 December 2013. All LNG refrigeration compressors for Train 1 have been set. The 2,600 bed accommodation camp is complete. The compressor table tops for Train 2 are complete. The methane and ethylene cold boxes were delivered and set in January 2014. The last Train 1 module is expected to be set in May 2014.
In looking ahead, Mr King said, "Origin continues to focus on four key priorities in the short to medium term. These are improving the performance of the existing businesses; delivering first LNG through Australia Pacific LNG in mid-2015; managing the funding and balance sheet position; and creating growth opportunities for the medium and longer term."
Improving performance of the existing businesses
The key drivers of Energy Markets' future performance are the impact on volumes from downward underlying trends in energy consumption and the potential recovery in margins from improvements in the competitive environment.
The gradual uptake of more efficient energy appliances is continuing to reduce the rate of household energy consumption. However, this impact on electricity demand, is expected to moderate and be largely offset by the rate of household growth, which adds additional demand for energy.
Despite operational improvements and the moderating of intense discounting in NSW, the impact of discounting in prior and current periods will continue to affect margin recovery in the short term.
Origin's gas margins continue to expand, evidencing the benefit of the Company's gas supply portfolio. Origin is capturing the benefit of rising gas prices through increasing penetration of Mass Market gas customers, particularly in NSW, and realising significant value through gas sales agreements signed with other LNG projects in Queensland at oil-linked prices.
The removal of price controls through deregulation in the NSW and Queensland markets is currently being considered by the relevant governments. If implemented, it would remove the risk that regulation has on earnings by enabling the industry to more effectively compete on prices that appropriately reflect the costs and risks of energy retailing.
The focus of the Energy Markets business will be on: realising earnings and cash flow benefits from Retail Transformation and operational improvements; maintaining market share through more effective customer retention and acquisition, and margin management; and building on the Company's strong position in natural gas.
Exploration & Production
Exploration & Production is expected to continue to benefit from the improved availability of its existing assets in the remainder of the 2014 financial year. The focus in the medium term will be on offsetting the natural decline in production from existing upstream assets through near field development such as Yolla 5 and 6 wells in the Bass Basin, Halladale/Black Watch in the Otway Basin and other near field exploration activities.
In New Zealand, Contact Energy will benefit from reduced take-or-pay gas contracts and the completion of the Te Mihi geothermal power station, which will provide additional lower cost generation. The implementation of Contact Energy's retail transformation program is expected to provide new capabilities to offer products and solutions that better meet customer needs.
Delivering first LNG through Australia Pacific LNG in mid-2015
Australia Pacific LNG continues to make good progress on the delivery of the CSG to LNG project and is 58 per cent complete on the Upstream and 62 per cent on the Downstream parts of the project. As at 31 December 2013, $17.2 billion of the $24.7 billion project cost estimates had been spent. The Australia Pacific LNG project remains on track for first LNG in mid-2015 and estimated costs to complete are in line with budget.
Planning is underway for transitioning from the project phase to investing in sustaining production and ongoing operations. With the current good progress in the drilling and completions, and gathering parts of the project, resources will continue to be used, and costs incurred, in advance of first LNG in mid-2015 to sustain production.
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.
Managing funding and balance sheet position
As prior project investments are completed, Origin's growth capital expenditure in the existing businesses excluding Australia Pacific LNG has reduced to $335 million in the current period and is likely to remain around this level into the 2015 financial year.
As the LNG project progresses to completion, estimates of Origin's remaining capital contribution to Australia Pacific LNG in advance of first LNG in mid-2015 will become more dependent on the month of the first LNG shipment, exploration activity and the amount of investment in sustaining production that occurs prior to the first LNG shipment date.
As at 31 December 2013, Origin has $6.5 billion of existing liquidity comprising committed undrawn debt facilities and cash (excluding Contact Energy and bank guarantees). This strong liquidity position is substantially more than that required to satisfy Origin's remaining funding requirement for its 37.5 per cent shareholding in Australia Pacific LNG.
In the past six months, Origin has undertaken a number of funding initiatives to extend its debt maturity profile and improve its liquidity position. As a result, Origin does not have any material refinancing requirements until the 2018 financial year.
Creating growth opportunities for the medium and longer term
"Origin is progressing existing development opportunities to provide ongoing growth following the completion of the Australia Pacific LNG project. This includes preparing existing gas and renewable energy opportunities to be ready for final investment decisions to be taken in the medium term such as Ironbark and the large-scale wind project at Stockyard Hill.
"Origin will continue exploration activities to increase its gas resource position, including the Caravel-1 exploration well, which commenced drilling during February 2014 in the Canterbury Basin in New Zealand. Controlled spend will continue to grow Origin's position in international geothermal and hydro opportunities," Mr King said.
The interim unfranked dividend of 25 cents per share will be paid on 4 April 2014 to shareholders of record on 3 March 2014. Origin shares will trade ex-dividend from 25 February 2014.
Origin's Dividend Reinvestment Plan (DRP) will apply to this dividend. No discount will be applied in the calculation of the DRP price.
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- All comparable results reflect a comparison between the current half year to the prior corresponding period, unless stated otherwise.
- Via loan repayment.
- Excluding Contact Energy and bank guarantees.
- At 31 December 2012 exchange rates.