23 September 2010
Shareholder Review & Annual Report 2010
Since listing on the ASX in February 2000, Origin has been committed to delivering results, while also identifying opportunities to deliver value in the future. It is this focus on strategy and performance that has enabled Origin to deliver 10 years of growth to shareholders.
A MESSAGE FROM yOUR CHAIRMAN AND MANAGING DIRECTOR
On 21 February 2000, Origin Energy was first listed on the Australian Securities Exchange (ASX), and so began a decade of growth – a decade which has seen market capitalisation increase more than twenty fold; from $600 million to more than $13 billion. During that time, your company has been one of the top performing companies on the ASX with Total Shareholder Returns of 28 per cent1 per annum.
As we enter our second decade, Origin’s performance will continue to be driven by a clear strategy, that delivers ongoing opportunities for growth, which is to be:
- positioned in the competitive segments of the energy chain;
- integrated across key segments, so as to better manage risk, and enhance the range of growth opportunities; and
- focused on the pursuit of opportunities that leverage the existing business, skills and knowledge.
In the past two years we have deployed approximately $5 billion in balance sheet capacity to grow and develop the business. As a result, a number of projects and acquisitions have made initial or increased contributions to Origin’s financial performance this year.
For the financial year ended 30 June 2010, we are pleased to report that Origin is in a strong financial position. We have delivered growth in Underlying Profit. Our Operating Cash flow After Tax approached $1 billion per annum. This enabled us to fund significant growth while keeping gearing at a low 20 per cent, which provides considerable financial flexibility and enables investment in the continued growth of the Company.
Origin reported Statutory Net Profit After Tax of $612 million for the 2010 financial year, compared with $6.9 billion for the prior year. The Statutory Profit for both years contains a number of items that do not reflect the underlying performance of the business. For instance, in the prior year it included a benefit from the gain on the dilution of Origin’s interest in Australia Pacific LNG of $6.7 billion. Some of the benefits of the Australia Pacific LNG transaction have been used to fund the development of operating assets.
Excluding the impact of this and similar items, the Underlying Profit was $585 million for the financial year, a 10 per cent increase on an Underlying Profit of $530 million in the prior year. Underlying earnings per share, calculated from Underlying Profit, increased 10 per cent to 66.6 cents per share on a weighted average capital base of 878 million shares. The Board has declared a final fully franked dividend of 25 cents per share, to be paid on 28 September 2010 to shareholders of record on 6 September 2010. This takes the full year dividend attributable to the 2010 financial year to 50 cents per share, representing 75 per cent of underlying earnings.
Origin’s Underlying EBITDA for the 2010 financial year increased 10 per cent or $127 million to $1.35 billion.
Underlying EBITDA for each of Origin’s businesses was as follows.
Exploration and Production Underlying EBITDA was $250 million compared with $264 million in the prior year. The contribution from the recently commissioned Kupe Gas Project and Origin’s increased equity interest in the Otway Gas Project was more than offset by the dilution of Origin’s CSG interests in Australia Pacific LNG, production constraints in the Bass and Cooper basins, production decline in the Perth Basin and expenses relating to the expanded offshore and international exploration program undertaken during the year.
Generation Underlying EBITDA increased 70 per cent to $182 million. Origin increased its generation fleet from 704 MW to 1,620 MW over the course of the 2009 calendar year through the addition of four new or expanded generation plants. The increased EBITDA reflected higher capacity payments from the Retail segment to Generation for this increased capacity.
Retail Underlying EBITDA increased 19 per cent or $89 million to $568 million, achieved through increased gross profit in electricity and gas while maintaining cost to serve. There was also substantial growth in sales of the Company’s retail solar systems which provided an increased contribution to earnings.
Contact Energy contributed $346 million to Underlying EBITDA, a 6 per cent reduction on the prior year. Higher than normal rainfall during the year resulted in lower wholesale electricity prices which made it harder for Contact to recover higher gas costs and network charges.
Changing policy environment
Origin’s strong financial performance has been achieved amid continuing uncertainty in global financial markets and in Australia a high level of policy uncertainty. During the course of the year, the Federal Government announced potential changes to the taxation of resource projects and its climate change policy.
Towards the end of the financial year, the Federal Government sought to introduce its Resources Super Profits Tax, which would have had a material adverse impact on a number of Origin’s projects and specifically, the Australia Pacific LNG project. Following significant public debate and industry consultation, the Government’s decision was to apply the existing Petroleum Resource Rent Tax to onshore oil and gas projects. While this represents an additional impost on industry, if passed, it provides greater certainty than the proposed Resources Super Profits Tax and better balances the risks and rewards of investing in resource projects.
Until early 2010, the Federal Government’s policy response to climate change had been following a dual pathway of an expanded Renewable Energy Target (RET), combined with an emissions trading scheme known as the Carbon Pollution Reduction Scheme (CPRS). The expanded RET has been implemented, providing industry with a more certain environment with respect to investment in wind, solar and geothermal. However, the CPRS has been delayed until at least 2013 and its future remains unclear. Without a price on carbon it is difficult to determine which generation technology we should invest in. In particular, investment in combined cycle gas generation is likely to be delayed until the future of the CPRS is determined, or the Government announces other broad based reduction policies.
Origin will continue to work with the Government on this major policy issue.
Well positioned for future growth
Origin has funded a number of projects and acquisitions during the past two years which will contribute to the Company’s financial performance in 2011. These include:
- full year contributions from the Kupe and Otway Gas projects and the continued expansion of Australia Pacific LNG’s domestic CSG production which is expected to reach more than 100 PJ per annum;
- a full year contribution from the Darling Downs Power Station and a contribution from the Mortlake Power Station for approximately three months; and
- increased contribution by Contact Energy from new investments in the Stratford peaking plant and the Ahuroa gas storage facility which will reduce Contact’s exposure to periods of high rainfall.
We expect these major capital projects will provide substantial additional cash flows and contribution to EBITDA, and will result in a commensurate increase in depreciation and amortisation expense.
Origin also continues to invest in projects which will contribute to the growth of the Company over the long term. This will include a continuation of the high level of total exploration and appraisal expenditure incurred in 2010.
Total expenditure on gas and oil exploration activities is expected to be around $170 million, with the majority of expenditure in the first half of the 2011 financial year. Embedded in the profit guidance is an assumption that some elements of our exploration program may be unsuccessful and will therefore be expensed as part of the underlying performance of the business in the 2011 financial year.
Taking all these factors into account and based on current market conditions, we expect that Underlying EBITDA will increase by approximately 35 per cent in the 2011 financial year when compared with the prior year.
As a consequence, Underlying Profit for the 2011 financial year is expected to be around 15 per cent higher than the prior year.
Capitalising on the growing demand for energy
Looking forward, Origin is well-placed to benefit from the growing demand for energy both domestically and overseas.
Over the next year, Origin will address a number of opportunities with the potential to create significant additional value for shareholders. These include:
- a final investment decision by Australia Pacific LNG on its LNG project;
- the NSW Government’s energy asset sales process;
- pursuit of a substantial portfolio of renewable energy opportunities including:
- an extensive pipeline of wind development options,
- geothermal opportunities in Australia and overseas,
- further development of solar photovoltaic technology through Transform Solar, in joint venture with Micron Technology Inc;
- gas and oil exploration opportunities including prospects in Australia, New Zealand, South East Asia and Kenya;
- implementation of the Retail Transformation program; and
- expansion of Contact’s geothermal and peaking generation.
Board and employees
The health and safety of our people and contractors continues to be our first priority. Encouragingly, we achieved a 38 per cent improvement in our Total Recordable Incident Frequency Rate to 5.6 at 30 June 2010. Despite this progress, we recognise we have much more to do. During the year, several employees and contractors were injured and we were deeply saddened by the death of one of our Queensland-based contractors. These facts are a sobering reminder of the risks we face, and of the importance of continuous improvement in safety.
As we pursue a number of opportunities to further grow and develop the business, we look to strengthen the skills and capabilities of our people. This year, our total employee numbers increased to 4,3922, primarily through the growth of our Exploration and Production business.
We appreciate the contribution all of our employees have made to the growth and development of the business throughout the year.
Over the past 12 months, your Board has been active. It met 11 times and in addition, held several planning and review workshops.
It inspected first-hand the progress at some of Origin’s major development projects, including the official opening of the Kupe Gas Project in New Zealand. Members of the Board also visited the Otway Gas Project and Mortlake Power Station in Victoria. In addition, several meetings were held with operational management throughout the year.
Gender diversity on Boards and in the executive ranks has received focus from the community during the year. Origin has two women on its Board, or 22 per cent of its composition. Director Karen Moses is a member of the Executive Committee of Management and we are developing programs to improve participation rates of women in the executive group. We will be an early adopter of the ASX Governance Recommendations on Diversity on Boards and the workplace.
We would like to express our appreciation to our fellow directors for the commitment and dedication they bring to the Origin Board.
Finally, we would like to take this opportunity to thank all those associated with our business – our investors, customers, communities and employees – for their continued support. The strength of these relationships has been a major contributor to the growth of Origin over the past decade, and positions us well to continue delivering strong results in the future.