18 September 2014
Shareholder Review & Annual Report 2014
Take a look at our recent performance, and review our strategy and growth options in our 2014 Shareholder Review.
A MESSAGE FROM OUR
CHAIRMAN AND MANAGING DIRECTOR
During the 2014 financial year Origin took significant steps to improve the performance of its operational business while at the same time securing opportunities to drive the Company's future growth.
In the financial year, our Statutory Profit increased by 40 per cent to $530 million, while Underlying Profit1 decreased by 6 per cent to $713 million, reflecting a lower contribution from the Energy Markets business, which was partially offset by higher contributions from all other business units.
Group Operating Cash Flow After Tax was up 79 per cent from $1.14 billion to $2.04 billion, primarily due to a positive change in working capital from an improved billing and collections performance in Energy Markets, and a reduction in taxes paid.
Basic earnings per share (EPS) based on Statutory Profit increased by 39 per cent to 48.1 cents per share (cps), and Underlying EPS decreased by 7 per cent to 64.8 cps.
In line with our dividend policy, the Board has determined to pay an unfranked final dividend of 25 cps, taking the total dividend for the 2014 financial year to 50 cps.
As a result of utilisation of available tax losses and the impact from development projects, including Australia Pacific LNG, Origin does not expect to have sufficient franking credits to frank the final dividend.
The dividend will be paid on 26 September 2014 to shareholders of record on 28 August 2014. The Dividend Reinvestment Plan (DRP) will apply to this dividend.
The year in review
As foreshadowed at the beginning of the year, our Energy Markets business has faced challenging market conditions. We saw a reduction in volumes which stemmed primarily from a decrease in electricity sales to our domestic Mass Market customers, reflecting a reduction in average consumption and an historically mild year. Despite this, we saw some improvement in margins in the second half of the year.
Energy Markets also strengthened its gas portfolio by entering into a gas purchase agreement with Esso Australia and BHP Billiton during the year. This part of our business remains well positioned to capture the benefits of rising gas prices through oil price-linked gas sales agreements with Queensland LNG projects, as well as the increasing penetration of Mass Market gas customers.
The Australia Pacific LNG project remains on track to deliver first LNG in mid-2015, achieving key milestones in the period. At the year end, the Upstream component of the project was 76 per cent complete and the Downstream component was 75 per cent complete. We are well placed to fund our commitments through to completion of this project, with $5.1 billion of existing liquidity comprising undrawn debt facilities and cash at 30 June 2014.2
The performance of our Exploration & Production business reflected record production and higher average commodity prices.
During the period, we announced the acquisition of a 40 per cent interest in the Poseidon exploration permits in Western Australia's prospective Browse Basin. We believe that acquiring these resources, when compared with greenfield exploration, substantially reduces the risk of securing opportunities to drive Origin's long term growth.
Given the Company's strong cash flow during the past financial year and good progress on Australia Pacific LNG, we intend to refinance the debt facilities used for this acquisition through the issue of a new Euro hybrid security as an alternative to ordinary equity.
Underlying business performance
Underlying EBITDA decreased 2 per cent to $2.14 billion, reflecting a reduced contribution from Energy Markets of $280 million, partially offset by higher contributions from Exploration & Production, LNG and Contact Energy.
Underlying EBITDA decreased 21 per cent to $1.05 billion, reflecting reduced volumes and higher operating costs.
While we saw a reduction in volumes within the Energy Markets business, our operational performance improved as demonstrated by the uplift in cash flows, stabilisation of customer numbers, enhanced customer experience and reduced rates of churn.
Our customer accounts marginally declined by 0.05 per cent or 3,000 accounts. The net position includes a reduction of 41,000 electricity customer accounts and an increase of 38,000 natural gas accounts, building on our strong gas position. Origin also maintained a churn rate that is 6 per cent lower than the market rate.
We saw an improvement in customer satisfaction and an increased number of customers taking up new product offerings and payment options. The cash cost of serving our customers reduced, reflecting the completion of the Retail Transformation Program. Our focus on improving the performance of our existing businesses is starting to deliver results, as reflected in the improvement in margins in the second half.
Exploration & Production
Underlying EBITDA increased by 23 per cent to $487 million.
The strong performance of our Exploration & Production business reflects the high level of availability from our main operating assets at Otway, Bass and Kupe basins. Investments made in prior periods to position the business have successfully delivered higher production volumes.
Underlying EBITDA increased by 38 per cent to $83 million, primarily reflecting higher domestic gas sales and production.
Origin's contribution to Australia Pacific LNG increased from $561 million to $2.8 billion during the year. The Australia Pacific LNG project remains on track to deliver first LNG in mid-2015.
Underlying EBITDA increased by 9 per cent to NZ$587 million, primarily due to an increased proportion of energy produced from hydro generation displacing more expensive thermal generation, and the receipt of NZ$43 million of compensation relating to delays in the start-up of the Te Mihi Power Station.
Underlying EBITDA in Australian dollars increased by 23 per cent to $533 million, reflecting the impact of a strengthening NZ dollar.
Creating growth opportunities for the medium to longer term
Consistent with our focus to be a regionally significant player in natural gas and LNG, and create growth opportunities for the medium term, Origin expanded its gas exploration acreage opportunities within Australia.
We completed a farm-in agreement in the Cooper basin during the year. In July 2014, we were awarded new exploration acreage in the Bonaparte Basin. In August 2014, we completed the acquisition of interests in the Poseidon gas field and a farm-in agreement in the Beetaloo Basin.
Further afield, our strategic intent is to continue a modest level of investment in renewable energy opportunities in Chile and Indonesia.
Future priorities and outlook
Origin's position in the market as the leading Australian integrated energy company reflects our strategy to develop our business and deliver value to shareholders. Today, we employ more than 6,7003 people, operate one of the largest generation portfolios and service the energy needs of more than 4.3 million customers. We continue to focus on becoming a regional leader in energy markets and, in addition, we have made good progress on delivering the Australia Pacific LNG project, further underpinning our strategic goal of taking a regionally strategic position in natural gas and LNG production.
Furthermore, we believe the 2015 and 2016 financial years will be a transitional period for Origin with the commencement of LNG production by Australia Pacific LNG in mid-2015 after a seven-year development phase. Increasing LNG production will result in expanding gas margins and an improving supply/demand balance in electricity markets. Origin's energy markets businesses are maturing and operating in a consolidated, lower growth and more competitive environment. Investment in generation and retail systems is complete.
During the next few years, Origin's key priorities are to:
- Improve returns in the energy markets businesses;
- Deliver growth in the natural gas and LNG businesses;
- Grow capabilities and increase investment in renewables; and
- Increase distributions to shareholders, manage capital allocation and funding.
In the next two years, Origin expects:
- An increased contribution from the Energy Markets business in Australia, particularly reflecting improved margins in natural gas in the 2015 financial year, and improved contributions from electricity in the 2016 financial year as competitive conditions in the wholesale market moderate;
- An improved contribution from Contact Energy will reflect the benefits of its investment in geothermal generation and retail transformation. The 2015 financial year will include a full year of Te Mihi generation with a full year of associated depreciation and interest costs;
- A reduced contribution from the Exploration & Production business in 2015 as some assets will have extended shut-downs (BassGas and Otway) to invest in sustaining production capacity for 2016 and beyond;
- Prior period investments in Origin's existing businesses will result in an increase in depreciation and amortisation; and
- First LNG from Australia Pacific LNG's Train 1 to commence in mid calendar year 2015 and from Train 2 in late calendar year 2015. It is not expected that LNG sales from Australia Pacific LNG will contribute to earnings in fiscal 2015, with production from both trains at planned capacity occurring before the end of the 2016 financial year, with first full year contribution from both trains expected in the 2017 financial year.
It is an exciting time for Origin as we enter this next phase of our development.
With average annual distributable cash flow from two LNG trains of around US$1 billion,4 this step change in earnings and cash flow will allow Origin to increase distributions to shareholders, maintain an investment grade credit rating and reinvest in growing businesses at returns exceeding cost of capital.
Dividends are expected to increase in line with Origin's targeted payout ratio of at least 60 per cent of Underlying EPS as Australia Pacific LNG contributes to earnings and cash flow.
Our industry remains at the forefront of economic, social and political debate, especially as it relates to energy policy. Each and every day our challenge is to deliver reliable, affordable and cleaner energy to millions of Australasian households. In so doing, we often face complex choices around how to manage our business, deliver for our customers and address the most pressing concerns of our stakeholders. In Australia, we are currently witnessing a substantial change in energy policy settings occurring at both the State and Federal level. As the leading Australian integrated energy company, we continue to advocate that policy should be centred on the imperatives of reliability, cost and environmental sustainability.
Throughout the year our focus has remained on safety. Pleasingly, during the period we recorded a much improved safety result, evidenced by the 23 per cent reduction in the total recordable injury frequency rate from 6.55 to 5.0. This measure demonstrates progress towards our ultimate aspiration of conducting our operations in a way that causes no harm to people.
During the 2014 financial year, we appointed Maxine Brenner to our Board as an Independent Non-executive Director and member of the Audit and Risk committees. In addition to bringing strong skills and experience, Ms Brenner's appointment increases the representation of women on Origin's board to 33 per cent, closer to our stated intention of 40 per cent by 2020.
We are committed to workplace diversity and providing equality of opportunity and a rewarding workplace for all employees. Increasing gender diversity, especially in senior roles, remains an ongoing priority for your Company.
We would like to thank our people who have worked tirelessly throughout the year to improve the performance of the existing businesses, and we will continue to focus on delivering value to our shareholders.
In addition, we would like to recognise and thank our other key stakeholders – our customers, the communities in which we operate, our business partners and particularly you, our shareholders for your continuing support.
- Refer to Glossary on page 7.
- Excluding Contact Energy and bank guarantees.
- Excluding Contact Energy.
- Distributable cash flow after Australia Pacific LNG revenues, operational expenditure, ongoing capital expenditure, project finance interest and repayments, and taxation, as expected in the 2017 financial year. Based on current market conditions.
- TRIFR for the rolling 12 months to 30 June 2013 has been revised from the previously reported 6.7 to 6.5 due to retrospective data updates