Origin’s integrated strategy, history of delivering earnings growth and balance sheet capacity provides strong foundations for the future.
A MESSAGE FROM yOUR CHAIRMAN AND MANAGING DIRECTOR
The past 12 months have seen almost unprecedented turmoil and volatility in global financial markets. In turn, this led to the Global Financial Crisis (GFC) and a severe recession in the United States of America, Japan and most of the developed economies of Europe.
Accompanying the GFC was severe unemployment. While Australia has avoided recession, it is experiencing high and increasing rates of unemployment. The GFC also led to a liquidity crisis, with Australian corporates facing difficulty in refinancing existing lines of credit and where this was possible, it was at high margins and on much more stringent covenant terms.
The year was also characterised by a number of equity raisings as Australian companies sought to pay down debt and reduce gearing levels.
Particularly in Australia, further uncertainty was caused through substantive policy debate on the Renewable Energy Target (RET) and the Carbon Pollution Reduction Scheme (CPRS). While the RET was passed by the federal parliament after the close of the financial year, therefore creating a more certain investment environment for renewable technologies such as wind, solar and geothermal, the future of the CPRS is less clear.
The CPRS is the government’s proposed mechanism for introducing an economy-wide price on carbon. Without a carbon price there is no incentive for electricity generators to shift over time from carbon-intensive coal to lower-emission fuels such as gas for baseload electricity. Without such a shift, there is no chance of Australia meeting its emission reduction goals.
Record profit in uncertain times
Against this background, we are pleased to report that Origin has again delivered record profits combined with unprecedented balance sheet strength.
Our Statutory Profit was $6.9 billion which includes a gain of $6.7 billion from the investment by ConocoPhillips in the Australia Pacific LNG joint venture1. This compares with Statutory Profit of $517 million in the prior year.
More importantly, we reported a record Underlying Profit2 of $530 million for the year ended 30 June 2009, up 20 per cent on the prior year, highlighting the continued strength of our existing business.
Basic earnings per share, calculated from the Underlying Profit, increased 19 per cent to 60.4 cents on a weighted average capital base of 877 million shares.
We have declared a final fully franked dividend of 25 cents per share, almost double last year’s final dividend paid in October 2008. Following the Australia Pacific LNG transaction, an additional fully franked dividend of 25 cents per share was paid on 21 November 2008 to rebase the 2008 financial year dividend to 50 cents per share. It is our intention to target the higher annual dividend of at least 50 cents per share on a dividend payout ratio of at least 60 per cent of Underlying Profit. The 2009 full year dividend is therefore in line with the dividend attributable to the prior year.
“ Looking ahead, we expect to build on the steps already taken to continue to grow the business”
Solid underlying performance
Origin’s EBITDAF3 for the year was $1.2 billion compared with $1.3 billion for the prior year. The challenging circumstances faced by Contact in New Zealand was the primary driver of this reduction with the full consolidation of Contact’s EBITDAF of $369 million compared with the prior year of $494 million, a reduction of $125 million.
EBITDAF from Origin’s integrated business, excluding Contact, increased by $20 million. This was achieved despite the dilution of Origin’s interests in its CSG assets as part of the Australia Pacific LNG transaction, lower oil prices and margin foregone in the Retail business as a result of the initial 2008/09 tariff decision by the Queensland Competition Authority.
Exploration and Production EBITDAF was $264 million for full year 2009 compared with $266 million in 2008 despite the 50 per cent dilution of Origin’s CSG interest following completion of the Australia Pacific LNG transaction as well as lower oil and condensate prices.
Generation EBITDAF increased $42 million or 65 per cent from $65 million to $107 million due mainly to the initial contributions from the new Uranquinty Power Station and the expansion of the Quarantine Power Station.
Retail EBITDAF was $479 million compared with $499 million for the prior year. This was primarily due to margin foregone resulting from an initial adverse 2008/09 tariff decision by the Queensland Competition Authority that was only rectified in June 2009.
Contact Energy contributed $369 million to overall EBITDAF – a 25 per cent reduction on the previous year of $494 million. Contact’s business remains sound notwithstanding the combination of extreme weather and transmission constraints which adversely affected Contact’s wholesale costs and generating revenue.
Following completion of the Australia Pacific LNG transaction, Origin repaid a substantial portion of its debt facilities and retains a strong cash balance to fund future investments and acquisitions. Interest earned on deposits and interest saved on loans repaid more than offset the total reduction in EBITDAF from Origin’s business segments. Origin’s net underlying finance cost reduced from $220 million in 2008 to $32 million in 2009, a year on year benefit of $188 million. This interest benefit represents a part of the overall benefit and value created by the transaction.
Balance sheet strength
We have also finished the year with a strong balance sheet. Origin has no net debt, cash reserves and undrawn committed debt facilities of $5.3 billion. While many Australian companies facing liquidity management issues have been forced to raise capital, our strong financial position provides the foundations for Origin to continue to grow by increasing our confidence to fund new projects and identify and develop new opportunities.
Expanding in renewable energies
Origin is Australia’s largest owner and developer of gas-fired electricity generation. Our generation portfolio includes 1,494 MW of installed capacity and 1,306 MW of capacity under construction.
Origin has also developed a substantial portfolio of renewable energy opportunities, including wind, geothermal and solar photovoltaic energy and expects to make further substantial investment in these areas.
To extend our position in wind power, during the past 12 months Origin acquired Wind Power Pty Ltd, securing 1,460 MW of high quality wind development sites. We achieved the milestone of completing construction of Origin’s first wind farm, at Cullerin Range in New South Wales. Origin also supported the development of Australia’s largest wind farm at Waubra in Victoria, which has a capacity of 192 MW, through a long-term power purchase agreement.
In addition, Origin expanded its leadership position as Australia’s largest retailer of green energy with more than 500,000 green customers. Origin remains committed to providing customers with a range of options, helping our customers reduce their emissions by providing the most innovative and compelling products and services in the market today.
Within our existing businesses, a number of development projects and acquisitions are expected to contribute to Origin’s financial performance during 2010. Origin expects increased contributions from Contact based on the presumption that weather in New Zealand will return to more normal levels. The Retail business will benefit from the final Queensland Competition Authority decision for 2009 financial year which will result in underlying cost increases being appropriately reflected in tariffs for the coming year.
Based on current market conditions, Origin expects the Underlying Profit for the 2010 financial year to be around 15 per cent higher than the prior year.
Looking ahead, we expect to build on the steps already taken to continue to grow the business, including:
- Progressing the Australia Pacific LNG joint venture with ConocoPhillips;
- The new CSG exploration permit acquired and substantial offshore drilling program being undertaken this year;
- The additional flexibility provided to our business through entering into new pipeline and power purchase agreements;
- Further investment in new gas-fired power stations; and
- Further evaluation and development of our renewable energy portfolio of wind, geothermal and solar options.
It is therefore, with a sense of accomplishment, we can say the foundations for future growth have been laid at a time of almost unprecedented financial and business uncertainty and which provides a platform that is sustainable in a carbon constrained environment.
Board and Management
The transformational events of the past 12 months resulted in a very challenging year for your Board. At several Board meetings we reviewed and made a number of significant decisions affecting Origin, including consideration of BG Group’s bid to acquire the Company, acquisitions and major capital projects. The rejection of the BG Group bid was based on a belief that the proposal did not appropriately reflect the true value of the Company’s assets. The Company was pleased with the subsequent transaction with ConocoPhillips, supported by the position your Board took and which resulted in the establishment of the Australia Pacific LNG joint venture.
During the year, the Board visited Origin’s coal seam gas operations in Queensland and the Darling Downs Power Station site to inspect first-hand the progress being made on these significant projects being developed by the Company.
Reflecting the important growth phase of the Company and augmenting the current experience, skill and qualifications of existing members, we have appointed two new directors to the Board. Non-executive director, Mr John Akehurst, brings to the Origin Board a wealth of oil and gas industry experience, particularly in LNG, and this will provide a significant contribution to Origin’s business and future developments in LNG.
Executive Director, Ms Karen Moses, also joins the Board in her new capacity as head of Finance and Strategy, responsible for the finance, tax and accounting functions, our interactions with capital markets, corporate strategy and transactional activity. Her management experience and intricate knowledge of both the business and the energy sector will be a valuable addition to the Board.
We would like to express appreciation to our fellow directors for their ongoing commitment and support and for the contribution they make to the Origin business.
Our People and communities
As Origin continues to experience significant growth, our team grows with it. During the year, Origin’s employee numbers across Australia, New Zealand and the Pacific increased seven per cent to 4,1984.
The health and safety of our people continues to be Origin’s highest priority. Our intention is to provide a safe working environment for all the employees and contractors currently working for Origin or on Origin projects. While we achieved improvements in safety performance among employees during the past year, regrettably the safety performance of our contractors did not match our own performance and consequently our overall safety performance deteriorated. We are committed to improving our safety performance to create a safe and healthy environment for our people and contractors alike.
Across our business we are investing in recruitment and development initiatives to ensure our people have the right skills – and the right opportunities – to support the continued growth and development of the Company. These programs are designed to give our leaders the capabilities to manage and lead change as our business continues to expand, and as we bring new assets and markets on line.
Finally, we would like to take this opportunity to thank our colleagues at Origin. We applaud their dedication to the job and commitment to delivering the best outcomes for the business and for our stakeholders in what has been a transforming 12 months for the Company.
- Origin’s Statutory Profit was $6.9 billion which includes a gain of $6.7 billion resulting from the dilution of Origin’s interest in Australia Pacific LNG following ConocoPhillips subscription for shares to form a 50:50 joint venture.
- Underlying Profit represents profit after tax and minority interests and before significant items.
- Earnings before interest, tax, depreciation, amortisation, financial instruments and significant items. EBITDAF includes the 50 per cent EBITDAF contribution of Australia Pacific LNG from 29 October 2008.
- Excluding Contact Energy