19 September 2012
Shareholder Review & Annual Report 2012
Origin has again delivered strong growth across our operating businesses in the 2012 financial year, largely driven by the first full year contribution from the New South Wales energy assets acquired in March 2011.
A MESSAGE FROM yOUR CHAIRMAN AND MANAGING DIRECTOR
Origin has again delivered strong growth across our operating businesses in the 2012 financial year, largely driven by the first full year contribution from the New South Wales energy assets1 acquired in March 2011. For the past two years, Origin has delivered growth in Underlying Profit2,3 of more than 50 per cent and growth in Underlying EBITDA of more than 65 per cent.
At the same time, your company has laid the foundations that will ensure the business continues to grow over the medium to long term. In particular, we continue to progress the Australia PacificLNG project, the most significant project we have undertaken to date and which stands to deliver significant shareholder value as it is completed. In order to support the funding of our interest in Australia Pacific LNG, we have reduced capital expenditure outside of our interest in Australia Pacific LNG and also ceased to pursue other activities not considered a priority for the Company at this time. We discuss these activities later in this year’s report.
Full year profit $980m and Underlying Profit up 33 per cent to $893m
Statutory Profit2 for the year was $980 million, up from $186 million in the prior year. The primary factors contributing to the increase in Statutory Profit included a higher Underlying Profit, a gain on dilution of Origin’s shareholding in Australia Pacific LNG and a substantial increase in the fair value of financial instruments, partially offset by a larger impairment of assets when compared to the prior year.
Underlying Profit increased 33 per cent or $220 million to $893 million, when compared with the prior year, driven by a full year contribution from the NSW energy assets, a lower exploration expense and higher commodity prices.
The increase in Underlying Profit was matched by 27 per cent growth in Underlying EBITDA to $2.3 billion and a 12 per cent rise in Group Operating Cash Flow After Tax2 to $1.8 billion, demonstrating the ongoing strength of Origin’s underlying business.
Basic earnings per share (EPS) based on Statutory Profit increased by 71.0 cps to 90.6 cps from 19.6 cps last year.
Underlying EPS2 rose 16 per cent to 82.6 cps compared with 71.0 cents per share cps last year.
The Board has declared a final fully franked dividend of 25 cps, taking total dividends for the year to 50 cps, in line with the 2011 financial year. The full year dividend of 50 cps represents a payout ratio of 61 per cent of Underlying EPS.
The final dividend will be paid on 27 September 2012 to shareholders of record on 3 September 2012.
Origin’s Dividend Reinvestment Plan (DRP) will apply to this dividend. No discount will be applied in the calculation of the DRPprice and the final dividend will not be underwritten.
Prudent capital management
Australia Pacific LNG has signed US$8.5 billion of project financing agreements. This, together with Origin’s strong operating cash flow after tax and $4.2 billion4 in cash and undrawn facilities, provides sufficient liquidity for Origin’s remaining funding requirement for Australia Pacific LNG of approximately $3.6 billion to first LNG for both trains, as well as the ongoing needs of Origin’s business.
If we achieve the planned dilution in Australia Pacific LNG below Origin’s current shareholding of 37.5 per cent, our funding position will further improve.
Continuing strength in the underlying business
The growth in Origin’s Underlying Profit and Underlying EBITDA reflects the continuing strength of Origin’s underlying businesses.
Energy Markets Underlying EBITDA increased by 33 per cent or $388 million to $1,562 million, an increase which was largely attributable to a full year contribution from the acquired NSW energy assets.
Exploration and Production Underlying EBITDA increased by 23 per cent or $61 million to $329 million, primarily due to a lower exploration expense and higher commodity prices, partially offset by higher operating costs.
Australia Pacific LNG Underlying EBITDA decreased by 25 per cent or $16 million to $47 million, primarily due to the dilution of Origin’s shareholding in Australia Pacific LNG from 50 per cent to 42.5 per cent following the first Sinopec subscription in July 2011, together with higher operating costs to support the expanded operations and meet increased regulatory requirements.
Contact Energy Underlying EBITDA increased by 16 per cent or $55 million to $400 million, primarily due to reductions in gas and carbon unit costs and improved commercial and industrial margins.
Corporate expenses increased by 19 per cent or $13 million resulting in an UnderlyingEBITDA loss of $81 million. The largest contributor was increased expenditure on development opportunities in Chile, Indonesia and Papua New Guinea.
Retail Transformation delivering immediate improvements
Origin’s Energy Markets business continued to make good progress on the integration of the NSW energy assets, as well as successfully completing a major SAP billing and customer relationship management system implementation. This new system will increase the efficiency of our operations, improve competitiveness and allow us to respond more effectively to customer needs.
While a range of factors constrained Origin’s ability to attract and retain customers in the first half of the financial year, primarily a freeze on new product development and call centre system availability, these were released after completion of the system implementation. As a result, second half net customer losses were 48,000, a 57 per cent improvement on the first half.
With the help of new rate freeze and easy payment products and new technology supporting self service, electronic billing and smart energy management, our intention is to maintain customer numbers throughout the coming year.
Australia Pacific LNG progressing on schedule and on budget
The Australia Pacific LNG project is a key focus for Origin for the near term. The $23 billion, two train LNG project has been sanctioned and significant progress has been made towards firstLNG in 2015, both in terms of continued growth of reserves and in construction.
Australia Pacific LNG increased 2P reserves from 11,775 PJe at 30 June 2011 to 13,111 PJe at 30 June 2012, with 3P reserves increasing from 14,742 PJe to 16,047 PJe.
The overall progress of work completed to date is 14 per cent for the Upstream part of the project and 17 per cent for the Downstream part of the project. There has been no increase to the $23 billion estimated project costs, and the high ratio of fixed versus variable costs provides improved project cost certainty and enables risks to be appropriately managed. More than two thirds of the total project cost is fixed or unit rate, with the remainder variable and already largely agreed with contractors.
When we announced the final investment decision (FID) for the second train in July 2012, we announced a joint process with ConocoPhillips to further dilute our interest in Australia Pacific LNGbelow 37.5 per cent. Origin’s intention is to retain around a 30 per cent stake in Australia Pacific LNG over the longer term.
To support our major focus of delivering first production from Australia Pacific LNGon schedule and budget, we have been significantly reducing our committed capital expenditure on other projects and we will be focusing on maximising cash flow from the existing businesses and managing the maturity of our existing debt facilities.
When announcing our full year results in August, we launched a $625 million four and five year syndicated bank loan to refinance debt maturing in the 2013 financial year.
The outlook for the coming year is more challenging than in prior years with less growth coming from new capital investments, regulatory uncertainty particularly related to pricing decisions made by the Queensland Competition Authority for which we have initiated a judicial review, as well as more uncertainty in forecasting earnings driven by volatile global commodity prices and changing patterns in the demand for energy in Australia.
In the Energy Markets segment, we will respond to the uncertainties by focusing on reducing costs, winning and retaining customers, realising benefits of the new SAP billing and customer relationship management system and continuing to capture benefits from Origin’s integrated portfolio. In this segment, we are targeting an Underlying EBIT margin2 of around 11 per cent.
We expect a higher contribution from our Exploration and Production business with BassGas expected to recommence production in the September Quarter 2012. We are scheduling a shutdown for Otway to allow for the tie-in of the Geographe project. We are also expecting a higher contribution from Contact Energy as it continues to benefit from greater flexibility in its generation portfolio and its gas purchasing position.
Depreciation and amortisation costs will increase in line with the increased asset base, following the completion of Mortlake Power Station, upgrades to Eraring Power Station, implementation of the new SAP billing and customer relationship management system, a return to production at BassGas and increased production.
Underlying net financing costs2 are expected to increase substantially in the 2013 financial year compared with the prior year due to interest on completed projects and the Ironbark development no longer being capitalised. Interest associated with Origin’s cash contributions via shareholder loan repayments to Australia Pacific LNGwill continue to be excluded from Underlying Profit.
Origin’s Underlying effective tax rate2 is expected to remain at around 30 per cent for the coming year.
Based on these factors and prevailing market conditions, Origin anticipates Underlying EBITDA for the 2013 financial year to increase by approximately 10 per cent and Underlying Profit to be in line with the 2012 financial year result.
While Origin intends to reduce its shareholding in Australia Pacific LNG to below 37.5 per cent, profit guidance does not include any impact of such a change.
Pursuing future growth opportunities
There are a number of opportunities both domestically and internationally that Origin will pursue to drive growth in the medium to long term. We are well positioned to capitalise on the expected rise in domestic gas prices, with a diverse and flexible portfolio of physical and contracted fuel resources. As evidenced by the recent gas sale to the GLNG project at international oil-linked pricing, fuel integration is a key source of Origin’s competitive advantage.
Gas demand in eastern Australia is expected to triple over the next five years and Origin continues to invest in a targeted number of exploration opportunities in and around existing permits in anticipation of this growth. Origin is also exploring for oil and gas resources in attractive international markets including New Zealand, South East Asia, Kenya and Botswana, providing access to both potential resources and growing demand.
We also continue to develop our portfolio of high quality, large-scale renewable energy opportunities in offshore markets which offer strong growth prospects, including a potential hydro project and geothermal exploration in Chile, geothermal exploration in Indonesia and a potential hydro project in Papua New Guinea.
In the 12 years since listing on the Australian Securities Exchange, Origin has consistently demonstrated the ability to deliver sustained growth in earnings which, in turn, has resulted in long-term growth in shareholder value. Based on the opportunities available to the Company and the environment in which we are operating, Origin continues to target growth in Underlying EPS of 10 to 15 per cent per annum on average.
Working with communities
The nature of our business brings us into contact with a large number of communities across Australia, and increasingly other parts of the world, and we continue to focus on opportunities to share and jointly create community value with our stakeholders.
Australia Pacific LNG is making a significant economic contribution to Queensland, currently creating employment for around 4,000 Queenslanders. The project expects to create a maximum of 6,000 construction jobs at its peak.
Independently chaired community consultative committees established in regional centres provide a key channel for communication between Origin, Australia Pacific LNG and the community. We have also developed an innovative program with Skills Queensland, which enables landholders to support CSG infrastructure on their land, providing them with an additional income stream.
Origin’s first priority is the health and safety of our people and contractors. We implemented a new system to target safety observations in an effort to focus on modifying behaviours before incidents occur, preventing unsafe actions and reinforcing safe behaviours. We reached our target of more than 30,000 observations by employees, and as a result, the Company will award $1,000 of shares to eligible employees via the Employee Share Plan.
Regrettably, we continue to be reminded of the risks faced by our people and those who do work on our behalf. In February 2012, an employee was killed in a road accident in the Papua New Guinea Highlands. In August 2012, two employees of Stena Drilling, a contractor operating the Stena Clyde drilling rig drilling a well for Origin in the Bass Strait, died as a result of an incident on the rig. We will continue to focus on strategies and initiatives that will help deliver a zero harm workplace.
Finally, we would like to sincerely 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. As we continue to grow our business and consolidate Origin’s position as Australia’s leading integrated energy company, we take pride in sharing this success with all of our stakeholders, now and into the future.
- Refers to Origin’s acquisition of the Integral Energy and Country Energy retail businesses and the Eraring GenTrader arrangements in March 2011.
- Refer to Glossary on page 17 of this report.
- Refer to Section 3 of the Management Discussion & Analysis on the Company’s website for a reconciliation between Statutory Profit and Underlying Profit.
- Excluding Contact Energy and bank guarantees.
Origin boosts gas supply to southern markets
Origin has secured additional gas supply and transport that will enable it to materially increase gas supply to customers in southern markets, helping to alleviate a potential forecast shortfall in supply identified by the Australian Energy Market Operator (AEMO).