18 September 2013
Shareholder Review & Annual Report 2013
In our 2013 Annual Report and Shareholder Review we detail some of the challenges that have faced the business during the past year, the underlying business performance and the future prospects of the business.
A MESSAGE FROM yOUR CHAIRMAN AND MANAGING DIRECTOR
As foreshadowed in February, the 2013 financial year was a more challenging one for Origin, and this is evident in our financial results. Origin’s performance was impacted by a very competitive environment in our Energy Markets business and the impact of past regulatory decisions related topricing, particularly in Queensland.
In the past decade we have established the leading Australian integrated energy company and the fundamentals of the business remain strong. In addition, actions which we have taken over the past year make us optimistic about our future prospects.
In Energy Markets, we have stemmed the customer losses experienced in past periods, our investment in new billing systems is starting to drive improved operational performance, and our gas portfolio is positioned to capitalise on rising demand for natural gas. At the same time, the Australia Pacific LNG project continues to make significant progress and is on track to deliver first LNG in two years.
In this report we explain in more detail some of the challenges that have faced the business during the past year, the underlying business performance and the future prospects of the business.
Full year profit $378 million and Underlying Profit $760 million
For the 2013 financial year, Origin reported Statutory Profit of $378 million, down from $980 million in the prior year. The primary factors contributing to a decrease in Statutory Profit included a loss on the movement in the fair value of financial instruments, increased expenditure on Retail Transformation, transaction costs relating to the acquired New South Wales energy assets and a lower contribution from the Energy Markets business.
Underlying Profit of $760 million decreased from $893 million in the prior year, a reduction of 15 per cent year-on-year, a result which was at the lower end of the guidance range provided in February 2013. This reflects a lower contribution from Energy Markets, higher Underlying depreciation and amortisation charges and an increase in Underlying net financing costs.
Underlying EBITDA decreased three per cent to $2.18 billion, and Operating Cash Flow After Tax decreased 36 per cent to $1.14 billion. Basic Earnings Per Share (EPS) based on Statutory Profit declined 62 per cent to 34.6 cents per share (cps). Underlying EPS decreased 16 per cent to 69.5 cps.
The Board has determined a final unfranked dividend of 25 cps, taking the total dividend for the 2013 financial year to 50 cps, in line with the 2012 financial year. As the interim dividend of 25 cps was franked, this brings the franking level for the year to 50 per cent, compared with 100 per cent in the prior year.
As a result of utilisation of available tax losses and the impact from development projects, including Australia Pacific LNG, the Company does not expect to have sufficient franking credits to frank the final dividend.
The dividend will be paid on 27 September 2013 to shareholders of record on 2 September 2013. The Dividend Reinvestment Plan (DRP) will apply to this dividend. No discount will be applied in the calculation of the DRP price.
Sufficient liquidity to fund Australia Pacific LNG requirements
To support the funding of Origin’s commitments to Australia Pacific LNG, the Company undertook a number of funding initiatives during the year. More than $5 billion was raised through new facilities and capital markets issuances, to lengthen debt maturities and improve Origin’s liquidity position.
In August 2013, Origin entered into a new $7.4 billion bank loan facility, which is more than sufficient to establish the Company’s funding position post Australia Pacific LNG. The new bank facility better reflects the current scope and size of the business, providing financing flexibility for the long-term and further extending the Company’s debt maturity profile.
The Company’s remaining peak funding requirement for its 37.5 per cent shareholding in Australia Pacific LNG for the period from 1 July 2013 to first production, is approximately $4.1 billion. This funding requirement will be met from Origin’s free cash flow and $5.3 billion1 of existing committed undrawn debt facilities and cash as at 30 June 2013.
Underlying business performance
A number of external factors and challenges impacted performance of the Energy Markets business during the period, however Origin reported stronger contributions from all other parts of the business, evidencing the Company’s strong fundamentals.
Energy Markets Underlying EBITDA decreased by 15 per cent to $1.33 billion as a result of lower electricity gross profit, partially offset by increased contributions from natural gas, non-commodity and LPG.
Exploration & Production Underlying EBITDA increased 23 per cent or $73 million to $395 million primarily due to lower operating costs.
LNG Underlying EBITDA increased by 11 per cent, or $6 million to $60 million2. Contact Energy Underlying EBITDA increased by nine per cent or $35 million to $435 million, primarily due to the increased contribution from lower cost generation.
Corporate expenses decreased by 48 per cent or $39 million resulting in an Underlying EBITDA loss of $42 million. Part of improving the performance of the existing businesses has been a restructuring program that has closed, sold or discontinued a number of activities and resulted in a reduction in headcount of around 900 people by June 2013, six months ahead of schedule.
Operating effectiveness improving in Energy Markets
This year, both market conditions and operational challenges resulted in a reduction in the contribution from our Energy Markets business. Electricity demand remained subdued as a result of lower industrial consumption, increased solar PV penetration and the consumer response to higher power prices and energy efficiency initiatives.
The energy market remained highly competitive with increased churn and discounting which, combined with regulatory constraints particularly in Queensland, restricted Origin’s ability to recover increased wholesale energy costs and resulted in reduced electricity margins.
Despite challenging market conditions, Origin achieved a considerable improvement in customer acquisition and retention during the second half, resulting in a net increase of 7,000 customers, compared to a loss of 23,000 customers in the first half. This trend of improved acquisition and retention has continued into the new financial year.
As reported at interim results in February 2013, Origin also experienced challenges in the implementation of a new billing system, which impacted on billing and collections and led to an increase in bad and doubtful debts. We have taken actions to address platform issues and expect a better performance in billing and improved debt collection.
We believe that our investment in new systems, improved competitive capability and a lower cost base will provide the platform for improved contribution from Energy Markets in the future.
Australia Pacific LNG on track to deliver first LNG in mid 2015
Australia Pacific LNG made significant progress during the year, and the project is now approximately 45 per cent complete and on track to deliver first LNG by mid 2015. In the Upstream project, drilling is progressing ahead of schedule as is construction of the main pipeline. In the Downstream project the roof on both LNG tanks was raised ahead of schedule and the first LNG modules, refrigeration compressors and gas turbine generators have been installed.
Our investment in Australia Pacific LNG stands to deliver a step change in earnings and cash flow to support increased distributions to shareholders and future growth opportunities.
Looking ahead, Origin continues to focus on its key priorities:
- improving the performance of the Energy Markets, Exploration & Production and Contact Energy businesses;
- delivering the Australia Pacific LNG project on schedule and budget;
- managing the funding of the Company’s investment in Australia Pacific LNG; and
- creating growth opportunities for the future.
In the existing business, there are many improving trends. In Energy Markets the 2014 financial year Queensland tariff determination recovers some of the adverse impact of wholesale cost increases not recovered in the 2013 financial year. Electricity and gas pricing has been deregulated in South Australia.
In October, Origin expects to complete the migration of all mass market customers to its new SAP-based customer systems, which will allow improvements in efficiency, competitiveness and service to customers. Some of these benefits are already being seen in improved operational performance.
Customer losses experienced in prior periods have been stopped, with increased effectiveness of customer acquisition and retention activity. The investment in prior years in improving the availability and capacity of Exploration & Production assets will result in higher production in the 2014 financial year.
Similarly, the completion of investment in Contact Energy’s program to improve flexibility and lower the cost of generation will result in reduced risk to Contact’s earnings from fluctuations in hydrology.
Restructuring activities across Origin have reduced headcount and will lead to a lower cost base and improved cash flow.
Notwithstanding these improving trends, the highly competitive environment in the Energy Markets business in the 2013 financial year has resulted in a higher level of discounts locked in well into the 2014 financial year. These locked in discounts will delay recovery of earnings in the 2014 financial year.
Given current conditions in the market, Origin will not be providing specific earnings guidance for the 2014 financial year at this time, however an update will be provided at the Annual General Meeting in October.
Looking ahead to the 2015 financial year and beyond, Origin expects that market conditions will improve and we expect to see margins in the Energy Markets business return to more sustainable levels. Origin expects its gas position will deliver improved earnings from the 2015 financial year as demand for gas in Eastern Australia grows when the Queensland LNG industry begins production. When Australia Pacific LNG commences LNG production in mid 2015, Origin expects strong growth in earnings and cash flow.
Origin has an overriding duty to ensure the health and safety of our employees and contractors. Our Total Recordable Injury Frequency Rate at year end was 6.7. While this was an improvement on the prior year, we fell short of our target of 6.0. We have initiated a number of activities, including a set of 11 Life Saving Rules that reinforce safe behaviours, which will help us continue to make improvements towards our ultimate objective of zero harm.
More broadly, the development, use and cost of energy continued to be important issues throughout the year for many in the community. Many customers are coping with the rising cost of living, of which the cost of energy is a factor. Others in the community continue to express concerns about the impacts of certain energy developments, particularly coal seam gas (CSG) and wind farms.
We also continue as a nation to debate the best ways to reduce our carbon emissions, and promote cleaner forms of energy for the future.
These are important social, environmental and economic challenges not only for Origin, but for Australia, and we continue to listen to our stakeholders and work to address their concerns. Our ability to effectively manage these challenges will be important to the ongoing sustainability of our business. We talk in detail about these and other challenges, in our 2013 Sustainability Report.
Board and People
During the past 12 months, there have been some changes to the Origin Board. After 12 years’ service as a Director, Trevor Bourne retired in November 2012. Trevor has been a highly valued colleague from the very start of Origin and we thank him for his counsel and tireless contribution to Origin during a time we have grown to become one of Australia’s largest energy companies.
In November, Origin appointed Bruce Morgan as an Independent Non-executive Director and Chairman of the Audit Committee. Mr Morgan has had a distinguished career as an auditor and leader of PricewaterhouseCoopers, and has a deep knowledge of the Australian energy sector. These changes ensure the Board has the skills required to serve Origin shareholders.
Our people have worked very hard in a difficult year. We are proud of the passion and commitment they bring to Origin each and every day.
Finally, we would like to acknowledge the continued strong support Origin receives from our key stakeholders – our employees, customers, the communities in which we operate, our business partners and you, our shareholders. We will strive to continue growing our business and creating value to share sustainably with all of our stakeholders.
- Excluding Contact Energy and bank guarantees.
- Underlying EBITDA restated from $47 million to $54 million for the 2012 financial year due to the internal change in the composition of the LNG segment.