22 September 2011

Shareholder Review & Annual Report 2011

We are pleased to report that 2011 has been a year in which Origin has continued to take major steps in the development of its business and delivered strong underlying business performance.



A MESSAGE FROM yOUR CHAIRMAN AND MANAGING DIRECTOR

We are pleased to report that 2011 has been a year in which Origin has continued to take major steps in the development of its business and delivered strong underlying business performance.

We successfully secured two major opportunities to consolidate market leading positions, which are already having a significant impact on Origin’s business. These opportunities will underpin further growth in the short, medium and long-term.

In December 2010, we announced the acquisition of a portfolio of NSW energy businesses, making Origin Australia’s leading energy retailer with one of the country’s largest and most flexible portfolios of owned and contracted generation. The acquisition has provided strong initial contributions to underlying earnings and cash flows.

In July 2011 following the close of the reporting period, Australia Pacific LNG made a Final Investment Decision (FID) in respect of a one train 4.5 million tonnes per annum Coal Seam Gas (CSG) to Liquefied Natural Gas (LNG) project with infrastructure to support a second LNG train. Origin’s 42.5 per cent share of the first phase of the project requires investment of around US$6 billion over the next four years.

Financially, we face a challenging external environment. While economic conditions were strong in developing countries and Australia, financial markets in developed countries exhibited extreme volatility and uncertainty. In the policy sphere, we have witnessed a rigorous and high profile debate over the potential introduction of a carbon price in Australia. We were also faced with extreme weather and natural conditions, with tragic consequences for communities, from record floods in Queensland to earthquakes in Christchurch.

15 per cent growth in Underlying Profit

Origin delivered a strong financial performance for the 2011 financial year.

We reported 15 per cent growth in Underlying Profit to $673 million, driven by significant contributions from the newly acquired NSW energy businesses as well as from investments Origin has made in its Generation and Exploration and Production businesses during the past two years.

The growth in Underlying Profit is accompanied by a 32 per cent increase in Underlying EBITDA to $1.78 billion and a 64 per cent increase in Operating Cash Flow After Tax to $1.59 billion, demonstrating the strength of Origin’s underlying business.

Origin reported Statutory Profit for the year of $186 million, down from $612 million in the prior year. A number of items including transition and transaction costs, impairments and a decrease in the fair value of financial instruments resulted in the decrease in Statutory Profit1.

Underlying earnings per share, calculated from Underlying Profit, increased 10 per cent to 71.0 cents per share on a weighted average capital base of 948 million shares.

The Board has declared a final fully franked dividend of 25 cents per share, taking total dividends for the year to 50 cents per share, in line with the 2010 financial year. We also provided a Dividend Reinvestment Plan at a 2.5 per cent discount. Origin’s full year dividend of 50 cents per share represents a payout ratio of 70 per cent of Underlying earnings per share. We remain committed to a dividend policy of the higher of 50 cents per share or a 60 per cent payout of Underlying Profit.

The dividend will be paid on 29 September 2011 to shareholders of record on 2 September 2011.

Prudent capital management

As a consequence of the opportunities completed during the year, Origin undertook a number of major capital raising activities in both debt and equity markets.

During March and April, $2.3 billion was raised through equity markets via a 1 for 5 pro rata entitlement offer to partly fund the NSW acquisition. Syndication of a $2.15 billion and US$350 million bank debt facility was completed in April 2011, and a further €500 million (approximately $675 million) of hybrid capital securities was raised in June 2011.

The funds raised will meet ongoing capital expenditure requirements of the business and strengthen Origin’s balance sheet ahead of the company’s contribution to the Australia Pacific LNG project. Debt and equity markets showed strong support for these initiatives.

Origin has an active capital management program designed to hold sufficient liquidity to cover forward contributions to Australia Pacific LNG, and the growth and capital requirements of the balance of Origin’s business.

Origin has also underwritten up to 100 per cent of the interim and final dividends up to and including the period ending 31 December 2012.

Strong underlying business performance

Growth in Origin’s Underlying EBITDA and Operating Cash Flow After Tax demonstrates strong performance from the existing business and benefits flowing through initial or increased contributions from a number of new developments and acquisitions.

Exploration and Production

Underlying EBITDA increased 30 per cent or $75 million to $325 due to higher average commodity prices together with a full year contribution from Kupe, a larger share of Otway and higher production from BassGas and Australia Pacific LNG, which was partially offset by lower production from onshore assets and higher exploration expense.

Generation

Underlying EBITDA increased 80 per cent or $145 million to $327 million reflecting the increase in Origin’s owned and contracted generation capacity from 1,710 MW to 5,310 MW, including a full year contribution from the Darling Downs Power Station and four months’ contribution from the GenTrader arrangements for Eraring and Shoalhaven power stations.

Retail

Underlying EBITDA increased 38 per cent or $217 million to $785 million. This was primarily due to the first four months’ contribution from the acquired Integral Energy and Country Energy retail businesses in NSW, effective management of the energy portfolio and growth in non-commodity sales, predominantly solar.

Contact Energy

Underlying EBITDA decreased $1 million to $345 million. Higher generation volumes and increased wholesale electricity prices in New Zealand resulted in a NZ$14 million increase in Underlying EBITDA reported by Contact. The foreign exchange impact of a strengthening Australian Dollar against the New Zealand Dollar resulted in a marginal decrease in the Australian Dollar Underlying EBITDA.

Developments in carbon policy

In July 2011, the Australian Government released its Clean Energy Future plan and the details of its proposed carbon pricing mechanism.

The proposed scheme is due to commence from 1 July 2012 with an interim three-year, fixed-price period of $23 per tonne of CO2, then moving to a market-based floating price on 1 July 2015. Around 500 of Australia’s largest emitters, including Origin, will be liable under the scheme.

The proposed scheme strikes a reasonable balance between a carbon price high enough to bring about real progress in reducing carbon emissions and provide adequate safeguards for households who will pay the increases in costs necessary to bring about this change.

Origin has positioned its business over many years to provide flexibility to respond to a carbon pricing regime. We will remain engaged with policy makers and regulators to ensure Origin remains well positioned to respond to the proposed carbon price.

Outlook

Origin has funded a number of projects and acquisitions in recent years which will contribute to Underlying EBITDA performance in the coming year, including:

  • a full year contribution from the acquisition of the Integral Energy and Country Energy retail businesses;
  • a full year contribution from the GenTrader arrangements covering the Eraring and Shoalhaven power stations and a contribution from the Mortlake Power Station which is expected to commence commercial operations during the first half of the 2012 financial year;
  • increased contribution from the Exploration and Production business due to lower levels of planned exploration expense versus the prior year; and
  • improved profitability of Contact in New Zealand as the Stratford Power Station and the Ahuroa Gas Storage project deliver flexibility to the company’s energy supply portfolio.

Depreciation and amortisation expense will continue to increase as capital intensive assets come on line or provide a full year’s contribution.

Underlying net financing costs will also increase due to funding for the NSW acquisition and completed developments. As Australia Pacific LNG is a development project, interest expense associated with its funding is excluded from the guidance of Underlying Profit.

Origin’s Underlying effective tax rate is expected to remain above 30 per cent due to the non-deductibility for tax purposes of amortisation associated with the Eraring GenTrader arrangements.

Based on the current assessment of operations and prevailing market conditions, Origin anticipates Underlying EBITDA to increase by around 35 per cent and Underlying Profit to increase by around 30 per cent for the 2012 financial year when compared with the prior year.

Growth opportunities

In July 2011, Origin committed to fund its 42.5 per cent share of the US$14 billion of estimated capital expenditure for the first phase of the Australia Pacific LNG project incorporating one train of 4.5 million tonnes per annum capacity and infrastructure of a second train.

Capital has also been committed to develop the Te Mihi geothermal project in New Zealand through Origin’s shareholding in Contact, and Origin will fund the continued upgrade of capacity at Eraring Power Station. These commitments will continue to drive growth in the medium term.

Origin is also pursuing a number of opportunities which will expand the scale and diversity of the business and provide earnings growth in the medium to long-term.

Origin’s options to expand its generation capacity, include the development of Australia’s largest wind farm at Stockyard Hill in Victoria and options to convert some open cycle gas turbine sites to highly efficient combined cycle gas turbines.

In addition, Origin is pursuing a range of low carbon emission and renewable energy opportunities in growing offshore markets. These include exploration and development of geothermal resources, in Chile and Indonesia, assessment and development of hydro resources such as the potential Purari Hydro Project in Papua New Guinea and exploration for gas in the Canterbury Basin in New Zealand, in South East Asia and Kenya.

Since first listing in 2000, Origin has demonstrated the ability to deliver sustained growth in earnings which has resulted in long-term growth in shareholder value. Based on the opportunities available to the company, Origin continues to target long-term growth in Underlying Earnings Per Share of 10 to 15 per cent per annum on average.

Communities

We are interested in new ways to create benefits for communities, and last year, to celebrate the 10th anniversary of Origin’s listing on the ASX, we established the philanthropic Origin Foundation. With a focus on education, the Foundation made 12 grants to the value of $4 million in its inaugural year, as well as taking steps to improve our employee giving program, Give2. The Foundation will develop further community partnerships in the coming year.

We acknowledge that the development of the CSG industry has attracted community and media attention in Australia. Our operations are heavily regulated by the Queensland and Australian governments and we are committed to operating in an environmentally responsible manner.

Origin has CSG operations only in Queensland, where we are experienced in extracting gas from coal seams. For 15 years we have been working with local communities to develop these resources sustainably. Our approach is based on genuine consultation and open communication with landowners and local communities.

CSG is a clean and efficient resource which fuels low carbon power generation in Australia and LNG for customers in Asia. LNG also contributes to reducing carbon emissions globally.

In the year ahead we will proactively address misinformation about drilling practices and the impact of our operations on water resources. In these areas, we are committed to protecting the environment and the activities of communities.

Board and people

The health and safety of our people and contractors is Origin’s first priority. This year, we reported a company-wide Total Recordable Incident Frequency Rate (TRIFR)2 of 6.0, an increase from 5.6 in the prior year. Many of Origin’s business units showed a positive change reflecting their commitment to improving safety, however a number of our colleagues still sustained injuries while at work. We continue to focus on the challenge of improving safety performance.

Consistent with the ongoing growth of our business, the Origin team has also grown. At the end of the financial year, Origin had a total of 5,2133 employees, an increase of 821 people on the prior year, reflecting expanded operations and project activities.

We would like to extend our gratitude to fellow Directors. In the past 12 months, your Board met 11 times and held several workshops to consider operational and strategic matters of relevance to Origin. The Board also visited some of our key projects and operations which will play an important role in Origin’s future growth.

On a final note, we would also like to thank the people and businesses associated with Origin – from our customers and partners, to our employees and investors, to the communities in which we live and work. In a year of so many achievements for Origin, you have all played a role in the company’s continued growth and success.

Kevin McCann
Chairman
Grant King
Managing Director


  1. A full reconciliation from Statutory Profit to Underlying Profit is provided in the MD&A.
  2. TRIFR measures the total number of recordable injuries that occur per million hours worked on a rolling 12-month basis. Recordable injuries include lost time cases, restricted work cases and medical treatment cases.
  3. Excludes Contact Energy employees.