Aspiring always to lead strategy performance growth Annual Report 2011 contents 1. A message from your Chairman and Managing Director 1 2. Management Discussion and Analysis 4 3. Directors’ Report 25 4. Lead Auditor’s Independence Declaration 31 5. Remuneration Report 32 6. Board of Directors 54 7. Executive Management Team 56 8. Corporate Governance Statement 58 9. Financial Statements 61 10. Directors’ Declaration 129 11. Independent Auditor’s Report 130 12. Share and Shareholder Information 132 13. Exploration and Production Permits and Data 134 14. Five Year Financial History 138 15. Glossary of Terms 139 A message from your chairman and managing director Fellow shareholder 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 Underlying earnings per share, calculated from Underlying Profit, energy businesses, making Origin Australia’s leading energy retailer with increased 10 per cent to 71.0 cents per share on a weighted average one of the country’s largest and most flexible portfolios of owned and capital base of 948 million shares. contracted generation. The acquisition has provided strong initial The Board has declared a final fully franked dividend of 25 cents per contributions to underlying earnings and cash flows. share, taking total dividends for the year to 50 cents per share, in line In July 2011 following the close of the reporting period, Australia Pacific with the 2010 financial year. We also provided a Dividend Reinvestment LNG made a Final Investment Decision in respect of a one train Plan at a 2.5 per cent discount. Origin’s full year dividend of 50 cents per 4.5 million tonnes per annum Coal Seam Gas (CSG) to Liquefied Natural share represents a payout ratio of 70 per cent of Underlying earnings Gas (LNG) project with infrastructure to support a second LNG train. per share. We remain committed to a dividend policy of the higher Origin’s 42.5 per cent share of the first phase of the project requires of 50 cents per share or a 60 per cent payout of Underlying Profit. investment of around US$6 billion over the next four years. The dividend will be paid on 29 September 2011 to shareholders Financially, we face a challenging external environment. While economic of record on 2 September 2011. conditions were strong in developing countries and Australia, financial markets in developed countries exhibited extreme volatility and Prudent capital management uncertainty. In the policy sphere, we have witnessed a rigorous and high As a consequence of the opportunities completed during the year, Origin profile debate over the potential introduction of a carbon price in undertook a number of major capital raising activities in both debt and Australia. We were also faced with extreme weather and natural equity markets. conditions, with tragic consequences for communities, from record floods in Queensland to earthquakes in Christchurch. 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 15 per cent growth in Underlying Profit debt facility was completed in April 2011, and a further €500 million Origin delivered a strong financial performance for the 2011 (approximately $675 million) of hybrid capital securities was raised financial year. in June 2011. 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 Profit(1). (1) A full reconciliation from Statutory Profit to Underlying Profit is provided in the MD&A available at ht tp://reports.originenergy.com.au. Managing Director, Grant King and Chairman, Kevin McCann 1 A message from your chairman and managing director (continued) The funds raised will meet ongoing capital expenditure requirements Developments in carbon policy of the business and strengthen Origin’s balance sheet ahead of the In July 2011, the Australian Government released its Clean Energy Future company’s contribution to the Australia Pacific LNG project. Debt and plan and the details of its proposed carbon pricing mechanism. The equity markets showed strong support for these initiatives. proposed scheme is due to commence from 1 July 2012 with an interim Origin has an active capital management program designed to hold three-year, fixed-price period of $23 per tonne of CO2, then moving to sufficient liquidity to cover forward contributions to Australia Pacific a market-based floating price on 1 July 2015. Around 500 of Australia’s LNG, and the growth and capital requirements of the balance of largest emitters, including Origin, will be liable under the scheme. Origin’s business. The proposed scheme strikes a reasonable balance between a carbon Origin has also underwritten up to 100 per cent of the interim and final price high enough to bring about real progress in reducing carbon dividends up to and including the period ending 31 December 2012. emissions and provide adequate safeguards for households who will pay the increases in costs necessary to bring about this change. Strong underlying business performance Origin has positioned its business over many years to provide flexibility Growth in Origin’s Underlying EBITDA and Operating Cash Flow After to respond to a carbon pricing regime. We will remain engaged with Tax demonstrates strong performance from the existing business and policy makers and regulators to ensure Origin remains well positioned benefits flowing through initial or increased contributions from a to respond to the proposed carbon price. number of new developments and acquisitions. Exploration and Production Underlying EBITDA increased 30 per cent Outlook or $75 million to $325 due to higher average commodity prices together Origin has funded a number of projects and acquisitions in recent years with a full year contribution from Kupe, a larger share of Otway and which will contribute to Underlying EBITDA performance in the coming higher production from BassGas and Australia Pacific LNG, which was year, including: partially offset by lower production from onshore assets and higher • a full year contribution from the acquisition of the Integral Energy and exploration expense. Country Energy retail businesses; Generation Underlying EBITDA increased 80 per cent or $145 million to • a full year contribution from the GenTrader arrangements covering $327 million reflecting the increase in Origin’s owned and contracted the Eraring and Shoalhaven power stations and a contribution from generation capacity from 1,710 MW to 5,310 MW, including a full year the Mortlake Power Station which is expected to commence contribution from the Darling Downs Power Station and four months’ commercial operations during the first half of FY2012; contribution from the GenTrader arrangements for Eraring and • increased contribution from the Exploration and Production business Shoalhaven power stations. due to lower levels of planned exploration expense versus the prior Retail Underlying EBITDA increased 38 per cent or $217 million to year; and $785 million. This was primarily due to the first four months’ contribution • improved profitability of Contact in New Zealand as the Stratford from the acquired Integral Energy and Country Energy retail businesses Power Station and the Ahuroa Gas Storage project deliver flexibility in NSW, effective management of the energy portfolio and growth in to the company’s energy supply portfolio. non-commodity sales, predominantly solar. Depreciation and amortisation expense will continue to increase as Contact Energy Underlying EBITDA decreased $1 million to $345 million. capital intensive assets come on line or provide a full year’s contribution. Higher generation volumes and increased wholesale electricity prices in Underlying net financing costs will also increase due to funding for the New Zealand resulted in a NZ$14 million increase in Underlying EBITDA NSW acquisition and completed developments. As Australia Pacific LNG reported by Contact. The foreign exchange impact of a strengthening is a development project, interest expense associated with its funding is Australian Dollar against the New Zealand Dollar resulted in a marginal excluded from the guidance of Underlying Profit. decrease in the Australian Dollar Underlying EBITDA. 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 FY2012 when compared with the prior year. 2 A message from your chairman and managing director (continued) Growth opportunities Board and people In July 2011, Origin committed to fund its 42.5 per cent share of the The health and safety of our people and contractors is Origin’s first US$14 billion of estimated capital expenditure for the first phase of priority.