PRESENTATION BY GRANT KING, MANAGING DIRECTOR, AND FRANK CALABRIA, CHIEF FINANCIAL OFFICER, OF ORIGIN ENERGY LIMITED (ORG)

“ORG - Full Year Results 2008”

http://www.brr.com.au/event/49789

 

THURSDAY, AUGUST 28, 2008, 10:00 AM.

 

            ORG    Thanks, ladies and gentlemen for attending our 2008 results presentation, and in stark contrast to last week. Those of you who are on the phones can

10                    also hear us as well. What I’ll be doing today is take you to our 2008 results in that presentation. Just by way of anticipation on my part, we don’t have any particular data coming through on the proposal from BG and I don’t plan to talk about specifically that. But obviously there will be questions at the end and happy to answer any questions that you might have.

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                        If I could just begin by introducing my colleagues and then move into the presentation, and I’ll start from the right here. Andrew Stock, who is the Executive General Manager and Major Development, too.  I think he’s got about 4 billion worth of projects to play with at the moment that keeps him

20                    going; Karen Moses, Chief Operating Officer; Frank Calabria, our Chief Financial Officer, and Frank will join me in giving the presentation this morning. Carl McAmish, our GM for Corporate Development; Company Secretary, Bill Hundy; and I’m in on the second row, Melanie Lane, our GM of HR, and I think Rob Willing should be on the phone if there’s any questions

25                    that involves seismic lines.

 

                        Now, what I’d like to do, hopefully, is move into this presentation and what I’ll do is as usual is give you a bit an overview, a snapshot as to how I see the results having been for the year. Frank will give you a more detailed run

30                    through of financial results.  I’ll come back and to talk about operations and how I think we’ve performed during the year, and hopefully, good explanation for the results being the way are and clearly make some comments about outlook for the coming year.

 

35                    So if we move straight into a snapshot for the year, I’d like to, first of all….yeah, Carl’s back to this time six months ago at our half year results presentation when from memory we reported the results from about S200 million. Historically, in our business we have tended to have a stronger first half than a second half, but that time we felt that with respect to the second

40                    half of this year, we’re expecting a much stronger second half, and hence,  the guidance we gave at that time and is particularly pleasing, but we’ve been able to deliver, and I think in relation to the guidance we gave at the end of the first half exceeds that guidance in delivering an overall result of $443 million.  But I think in addition to that, a very, very strong second half. I think

45                    particularly pleasing is being the continued development of the business, and we can see on this page, what I think is the number that are quite significant achievements, milestones, initiatives. We’d like to quote on that that show how Origins, our business, is a fuel generator retailer is continuing to develop, and I think in many ways, yes flowering to a very, very strong business and a very, very strong competitive position. Quite clearly, front and centre is a significant upgrade in reserves, particularly our CSG reserves, and again, we’ll talk a bit about more that later on.

 

5                      Talk about small acquisitions, the Swift acquisition in New Zealand is strategically very important because of its storage potential or potential of some of assets to be used as storage by Contact Energy.  A number of major developments in establishing the company’s generation position, and some of you will recall…for those of you who have been patient attendees at Origin

10                    briefings, you’ll know that we’ve contended that if you look at the company in a historical sense, a lot of our early growth has driven off retail acquisition. You’ll see in our results, of course, the impact that has on our earnings so with a strong increase in contribution from retail, we then say we’re now in a phase where upstream assets have been through a lot of capital investment.

15                    We’re now seeing that turn into record production, revenues, and that is starting to contribute to increase growth. We’ll talk about that but we then contended that generation would be the next major focus for investment and that would drive the continued growth of the company beyond that current growth phase in upstream. Clearly that’s the case with the progress on the

20                    Darling Downs Power Station. The first of the wind projects were built, it’s not the first of the wind projects we buy from, but it’s the first that we built.  Other expansions we have are projects are Quarantine and Mt. Stuart.  the purchase of Uranquinty and the commitment  to Mortlake as you’ll see later in the presentation. Our evidence is now our very substantial growth in our

25                    generation position and of course, some retail. That acquisition was now made over year ago, but it has now clearly contributed to the full to our results have been a major driver of increase in profits that we’re reporting this year.

 

                        As always, I’m pleased… well, much should I always say, I’m pleased, but it

30                    is pleasing on this occasion to say that certain performances has improved dramatically across the year, and I’ll say quite consistently, no doubt boring you every year, that all the other achievements are for naught  if we can’t make sure our people can work safely. So we’re very pleased with the improvement….our safety performance as well.  So in short, how do I think

35                    about the year?  I think our ability to make a call in the middle year that we will deliver a very strong second half and has done so in spades is very pleasing, but I think even more so the why the business is continuing to develop and round up. Whilst this particular chart is not new to you within the target statement released last week, I think it evidences visually as much as

40                    anything how that development and deepening of integration the company is occurring. You can see a strong growth in our reserves position, a very strong growth in generation committed around the development and  in the course over next two years that will turn into actual generation contributing to the business and continued growth in our NG sales if you like the retail end of the

45                    business.  So it is time, we’ve become the largest holder improvement and probable gas reserves in eastern Australia, we’re the largest owner and developer of gas-fired generation,  and we think as we look to a more carbon constrained well that’s very important, and we certainly feel that Origin has a leading position as a wholesaler and retail of energy and the leading position as Australia’s largest green energy retailer.  So an out view of the proposition that Origin continues to deepen and roundup and I think provides a tremendous platform that is underpinned or created the basis for a strong performance, I think across the year and particularly in the second half and

5                      more importantly, as a platform for continuing growth of the company. That’s reflected in the numbers.  Frank will talk in more detail, but clearly we can see revenue growth moving through into growth in earnings EBITDAF, and Frank will explain to you the mysteries of EBITDAF.

 

10                    At that level, earnings up 12%, underlying profit up 20%, and statutory profits, I guess, is there as a matter of interest, and Frank will give us some reconciliations back to underlying profit.

 

                        Our EPS on underlying basis up 14% to 50.6 cents per share, our cash flow

15                    remains strong, and clearly, in a period where we still have major capital investment that’s important cost in order to fund growth and increasing dividends to shareholders. Across the year, dividends of 25 cents per share across the year, fully franked up 19% effectively much in the growth in profit of 20%.  Now much of that was delivered in the second half and as I say, I’m

20                    very pleased and to be able to make that call in the middle of the year and have sufficient confidence in our capacity to deliver that call and put that result before you today.

 

                        We think that adds to a nice suite of numbers over the eight or so years that

25                    we’ve been playing around here at Origin and the proposition that we put to you that some eight years ago when Origin demerged from Boral. It was a company that intended to grow around 10% to 15% a year on average on an EPS level; a company that’s earnings were going to be reasonably predictable and reliable, and we think particularly in terms of what the last 12

30                    months have shown us in the business world at large, that proposition is even more robust and is one that we have to live it on and continue to deliver on and contend to continue to deliver on in the years ahead.  So we think there’s a very strong set of numbers there to support the proposition we’ve always put to you as investors in Origin.

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                        Now having said that, as usual, I’d like to hand over to Frank. Our CFO, Frank Calabria and Frank will take you through the financial results in a little bit more detail then I’ll come back and give you an overview of our operating performance and of course, we’ll talk a little bit about the outlook and go to

40                    questions.  Frank, over to you.

 

            ORG    Okay. Thanks, Grant. I’ll just take you through the financial results for the year.  As Grant mentioned, we recorded a statutory profit of $578 million, that represents a 13% increase over the prior year.  That does contain some

45                    significant items that are contained within the appendix and I’ll talk to you through those in a moment.  But just to draw a couple of things on this slide, firstly, the revenue growth. Revenue is up 29, very significantly associated with the Sun Retail operation, full year contribution from that.  We’ve also had tariff increases that occurred in Victoria particularly from the beginning of this calendar year, starts from January 1, and we’ve also had revenues rising in the ENP segment.

 

                        Grant mentioned the mysteries of EBITDAF, that’s the one line of this

5                      particular slide that gives you a line of sight into underlying cash earnings and EBITDAF represents the EBITDA in the business after we remove the impact of significant items and also remove the impact of movements in value of derivatives and financial instruments, and is consistent with how we’ve reported that over the last capital reporting periods, and I’ll take you through

10                    that.  You can see that’s up 12% and we’re go through the drivers of that growth.  Also, that gives you the statutory results. Then to unpeel that into an underlying result, you can see that we benefited from significant items that contributed to an after tax profit of $74 million. There’s a detailed appendix attached to the slides which I want to go through each of those items, but just

15                    to draw out to the most significant one, profit on sale on the network business that occurred, I think on the second of July, have these financial years arrive at the commencement of the financial year, and the other significant item which we’ll touch on further in the next slide is the movement in those value of derivatives.  When you remove that profit from our statutory profit we arrive

20                    at an underlying profit of $443 million, and that $443 million is the 20% growth on last year that drives a return on equity by 11% and translates into a EPS growth of 14%.  The reason in the EPS growth is larger than the 20 is, you now recall, in the middle of the last financial year, we had a placement to support the Sun Retail acquisition and the weighted average number of

25                    shares is clearly greater this year. That’s the only real material difference between why there’s a 14% growth compared to the 20%.

 

                        I mentioned one of those significant items was the movement in fair value of financial instruments.  We’ve talked through in the previous presentations,

30                    you may recall at our results in June ‘07 as a result of the state bids in electricity prices we had a very significant increase in the net assets, and also we recorded a significant item profit, and that’s where, shadowed at that time, we anticipated that there would be a decline in those net assets, and that’s what’s transpired in the last 12 months as electricity prices have returned, let

35                    me say back to more normal levels.  What you can see is therefore is that there has been a reduction in our net asset position by about $3 billion. $2.9 of that actually flows through equity, $90 million flows through the P&L as a result of commodity movements, and just to remind people why we get that feature, one of the main instruments that electricity retail is used to many

40                    (inaudible) (00:11:32) electricity caps for price events, electricity caps don’t qualify for hedge accounting because you can’t sufficiently determine with certainty when those price perks will occur, so we get movement through the profit and loss account and as over bit as we expected  when we reported this last year.

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                        To touch on the EBITDAF raising by 12% and you can see there that the driver of this growth is largely occurred in retail, and we got a full year contribution to Sun Retail business and we will peel away the margin drivers of that in the operational review. We’re also seeing the growth now in P business as CSG sales rises as we get a full  year contribution of BassGas and we got an initial contribution of Otway and that’s more than offsetting as a decline in some of our mature assets such as the Perth Basin.

 

5                      Now, Stuart, we’ve reported this over the last couple of times that we concluded the arrangement with Enertrade at the end of the last financial year and recorded some payments, associated capacity payments associated with that. So you see that decline there essentially represents that there is no longer that capacity payment and really we look that segment now as

10                    providing capacity in terms of our retail business, in terms of generation capacity associated with that.  That’s how we now have them internally contracted largely. In the case of Contact, we’ve had raising volumes in tariffs that’s contributed to a rise in our EBITDAF and then when you bring that all together you can see a 12% increase.  We just note there that corporate cost

15                    at a similar level to last year are allocated, fully allocated across each of the Australian segments  so all segments except for Contact have got those corporate costs included.

 

                        Depreciation and amortization hasn’t moved much and with the amount of

20                    capital spend that may surprise some of you, the reason for that is clearly the big capital spend that’s occurred over the last 12 to 18 months is the Sun Retail acquisition which is largely goodwill. Secondly,  as we develop a lot of these major projects, they don’t depreciate until we bring them online so we’re not seeing a large increase in D&A this year.

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                        Interest, we’ll take to the next slide. You can see the interest as an expense is actually similar to last year, but you’ll note that we’ve actually capitalized more interest this year and that’s not surprising given the number of those development projects. That 55 million largely represents Tiltway Cooper (?) at

30                    probably around 20 million each and about 10 million in respect to volume down that will give you a broad breakdown, and then there’s one or two other minor smaller projects that contribute to that.

 

                        Weighted average interest rates for Origin have continued or they’ve risen

35                    obviously in the accordance with the market rise in interest rates.  But as the weighted average off to taking to account all of our interest rates swaps and we do get some benefits because we do have a proportion of our funding in US, so we don’t have some offsetting impact recognizing the Cooper Project is funded in US dollars. So interest overall is in line to an expense level

40                    compared to last year.

 

                        Our net interest covered that EBIT. That’s a statutory EBIT that you can see a 4.2. I just point out that if you’re looking at an underlying EBIT we still have interest coverage of about 3.8 over the course of the year.  So we still have

45                    good interest coverage.

 

                        Tax reconciliation, we continue to report an effective tax rate that sits somewhere between 27% and 28%. I might just point out a couple of features. You can see there that we have not recognized as many losses this year. The recognition of losses is a balancing act between the capacity to fully frank a growing dividend, and you can see in the slides it’s growing quite strongly. We obviously get deductions through a lot of our front explorations so we don’t have any recognized… enough losses in order to actually

5                      manage that tax payment and we still do have losses to be recognized in the coming year. The over provision in the prior period really relates to a favourable determination of the matter with the ATO, and  then that’s the material reason for that over provision.

 

10                    The net gain on the disposal of capital assets is largely associated with the sale of an asset in New Zealand which is not subject to capital gains tax.  Our expectation is that with loss recognition over the next year, we would expect this to continue having effective rate of between 27% and 28% again,  and you can see that tax paid is somewhat lower than last year.

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                        Change of growth in CAPEX, you can see that the across business we’ve spent $1.7 billion….$700 million in EMP, and that really is almost….largely Cooper and the Colson gas developments, generation, and the most material item sitting in there is the Darling Downs Power Station that’s in construction,

20                    and Contact is really the war rocky assets that they’ve reported… that they’ve been spending over the last year.  New acquisitions got two things. We got Halladale likewise in Swift, but Swift is the majority of those acquisition proceeds there of about $90 million.

 

25                    In terms of cash flow return, we’re reporting…. and consistently we continue to report an operating cash flow across our segments. You can there a comparison of our cash flow on a pre-tax basis compared to last year.  The first point, I’ve noticed that Wall Street got rising EBITDAF coming out of the EMP business. We’ve also got a raising funds employed that’s offsetting that,

30                    and we’ve also had some… we’ve got an increased working capital requirement associated with our business. In terms of generation, the difference between the two cash flow rates really is that capacity payment I referred to earlier, and in relation to retail, what we got is that we’ve got that strong rising EBITDAF that you saw from the full contribution with Sun Retail,

35                    but with that rising revenue in tax, we’ve got that partially offset by raising working capital requirements. If I take you to the way we then dissect that to the drivers and I’ll touch on this, you can see the rising EBITDAF, but if you look at that changing working capital of $125 million, that’s really largely driven by those retail revenues raising and also EMP vitals  but the further

40                    factor is that for those of you that follow Contact, you would have seen there was a large raise in wholesale electricity prices over the second half of that financial year and that actually contributed materially to working capital somewhere in the vicinity of about $40 million. As prices come down, we would expect that working capital requirement to reduce.

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                        We also note that we’ve have shown you here that the OCAT ratio is a 12.3% and you can see there that the funds employed as we bring assets online such as Otway, full year of BassGas. You can see the raising funds employed and you can see therefore that we’ve got an OCAT ratio well in excess of what we have as a target, but that raising funds employed has got that contributing to a lower cash flow ratio than last year.  But we do note on the bottom dot point there that you can see the amount of capital left. In additional to that, they were actually putting into future projects that are not

5                      online in terms of earnings. That’s actually also were contributed.  If we were looking at our OCAT ratio after we included all of that capital, it would be around the 10%, so still in excess of our target, but nevertheless represents assets that are not yet contributing earnings.

 

10                    In terms of balance sheet and gearing, we made several adjustments really to take out a little bit fair value adjustment accounting. So you can also see along that side into our gearing and our debt-to-debt plus equity basis, you can see with CAPEX consisted around 42%.  At 30 June, we had committed undrawn debt capacity of about $1.75 billion. We obviously completed

15                    Uranquinty days after that but even after Uranquinty our undrawn capacity is around about $1.35  to $1.4 billion.  That brings us to the final slide on the financial section which shows our dividend growth, which is up strongly, it’s up to 25% per share, fully franked. That’s obviously 98% increase on last year and at 25 cents, that shifts around 50% now although underlying

20                    earnings per share, and that dividend will be fully franked. Okay.  Thank you very much.

 

            ORG    Okay. Thanks, Frank. Now, we move on to the segments in the business, and hopefully, I can give you some understanding of what’s been driving

25                    performance and nature of these businesses, but firstly we’ll go to the upstream business and EBITDAF there up 4% $264 million.  As you know, we’ve reported record revenues and production in sales in the upstream segment. Why isn’t the earnings up more than that?  I think it’s a feasible question. Two parts of the answer is, of course, we’ve got some decline

30                    coming through from the material, particularly the material assets in the Perth base and we’ll show you a picture on that.  Secondly, while this is not in a chart in this presentation there’s a commentary in the MD&A in relation to our cost. In the upstream business given the growth we expect, we’ve added I think quite significantly in terms of employees to make sure we have the

35                    capability to deliver on that growth. Now having done that and particularly in the top market or resources people in upstream business, we think it’s prudent to have done that and make sure we got the resources and capability to deliver the growth that we expect to do over the next few years.

 

40                    Our reserves position’s up substantially. We’ll make a few commentaries on BassGas in our way as we through this presentation.  Clearly, whilst our overall  reserves are up, it’s been underneath that this increase and report of CSG reserves and our reserves release which went out with our quarterly report.  It’s at a 2P level, and so the 2P CSG reserves reports 751 PJe is up

45                    92% and that’s what really driving the underline growth in the overall reserves position of Origin.  I don’t plan to dwell particularly on CSG reserves. We’ve seen enough of that in prior presentations other than to state the obvious that there’s been a very, very substantial increase in the company’s proven reserves position, and a much better understanding of that contingent resource position which is also available to Origin.

 

                        I say our cheap production is one of the drivers of growth, and you can see

5                      here at… now what’s becoming almost exponential growth in production.  I recall many years ago when we started to invest in CSG, we used to show other people charts particularly the US to show how CSG or reserves in production have grown and it’s now nice to show our charts to show how CSG reserves and production has grown. There really is an extraordinary

10                    story and whilst CSG is obviously a…even broader terms in the industry, quite a hot story in Australia at the moment. It is a story that sits on top of a lot of development effort and a substantial reserves position.  It is an area where we’ve been very happy with the way we’ve been able to develop that position, both through our drilling activity in  proven up reserves and

15                    particularly our development activity in lifting production.  As you can see that the production for 2008, a bit less than 40 PJe, and as you know from previous presentations, we’re expecting to more than double that over the next few years, through to 2011 and that links back to why we pooled resources and people into the business to make sure that we can effectively

20                    deliver on that growth.

 

                        The two other projects, BassGas and Otway, that made a difference over contribution of this year’s earnings, BassGas, of course, has had a full year and was commissioned in the year prior to the year that we’re reporting on.  I

25                    think the key, as you hear, is in the course of the year we’ve been able to resolve some constraints that have limited production and that did limit production in the current year, particularly in the last quarter. We’ve been seeing some very reliable and steady production out of BassGas so together with resolution of all the other contractual issues with the contract on that

30                    project, I think we’re now starting to see a phase of steady production and delivery, certainly delivery consistent with our expectations in relation to the BassGas project.  Otway, again, commissioning was delayed. This time last year we were hopeful that we would see this project commissioned around October last year, and really it only began commissioning around April/May,

35                    and I think we only got one month’s full contribution I think on this year’s results from Otway.  But that project is also upgrading on a very stable basis, and yeah, hitting that mark at around 205 PJe a day. So you can see they are expected contribution of around 30 PJe, we’re not feeling very comfortable we’ll achieve in the current financial year. So those two projects are now

40                    delivering a very robust way.  You get to see that’s what’s driving trends in the gas part of the business, so….and remember that primarily our reserves are natural gas. This is what’s driving our upstream production. You can see that in the case of gas, we’ve got……when we say the more mature assets we have Cooper Basin in particular. We’ll continue that steady fight as

45                    production occurs to match its contract position clearly in decline, and you can see some other (inaudible) (00:24:45) way which was actually sold is no longer making a contribution.  Quite clearly, we’re starting to see that growth and see its cheap production come through, and you see the line of the BassGas and Otway projects. So the outlook for our gas production is to continue to grow, and we expect that growth now will come through and drive growth in an EBITDA level, you know, upstream business.  You can just say that first contribution effectively in month in Otway with other three months but most of it occurred in last month. Again in the full year, that will step up

5                      significantly, and whilst it won’t make a contribution in the coming year, one year after, of course, Kupe will also add to our production.

 

                        So the outlook for gas production is very strong, and we think that a little bit of capital that’s gone into that business will now generate the sorts of earnings

10                    that we would expect…we will expect from that investment.

 

                        On the oil side, this is the other reason that’s partly held back the growth in earnings because of course the Perth Basin deemed a more mature asset again in terms of oil production.  We will continue to decline in terms of its

15                    contribution. You can see that quite clearly in that chart for the year we’ve labelled Perth Basin.  You can see the liquids contribution from BassGas and again, the initial contribution from Otway, and again with reference to Kupe when it comes online in a very liquid-rich project, that will add substantially to liquids production as well.  So, we feel that whilst across the last couple of

20                    years we’ve had a net decline in liquids production, nonetheless, in our view that will stabilize and therefore will no longer, if you like,  offset the growth that’s coming out of the strong growth in production in our gas business.

 

                        In relation to average price received, you can see there  numbers is 96 in

25                    Australian dollars, A$96 a barrel, and in our MD&A we make some observations.  I think we have A$690,000 hedge.  It’s something like US$64.82 exchange rate, so you can see information in the MD&A on the full-hedge position.  Suffice it to say,  we’re not…yeah, we produced our hedging levels and in some senses the delay in production meant we were over

30                    hedged through the prior period,  but of course,  we do expect now to start to see and pick up again in our liquids production relative to that hedge position.

 

                        In New Zealand, the Swift acquisition wasn’t large. In total it was at $90 million on our part, but that is add into production and most of that, of course,

35                    amount production was liquids-based. Quite clearly the opportunity worked with Contact to develop a storage project in New Zealand is going to be important for both companies in terms of managing particularly on the medium to long term the way natural gas comes into the market in New Zealand particularly with the quite -- what I say “picking in a daily sense”

40                    but seasonality in gas demand in New Zealand will parallel generation.

 

                        The Kupe project is still staying on time.  It’s a challenge to deliver mid-year but we still think that’s achievable. We have reforecast at the end of the offshore phase and do believe in relation to prior announcements that we’ll

45                    see a further 10% increase. In cost on that project, we’ve included some commentary in the MD&A over that same timeframe.  We think we’ve seen about a 50% increase in expected revenue from that project. So Andrew and the team have a challenge but we still think targeting commencement of production middle of next year is reasonable but we have….certainly there should be no expectation on making any material contributions to results in this coming financial year.

 

                        The offshore phase access is going particularly well.  Having said that,  there

5                      were some delays experienced by weather and I think particularly pleasing if my recollection is correct, there’s no single LTI, I think, in the offshore phase of the project.  So, I’m very pleased with the way that’s progressing, all things considered.

 

10                    Now generation business,  obviously it’s total contributions still remains small, you know, 56 million relative to the rest of Origin and Frank has touched briefly on the reason why it’s down in last year, simply because of the year-on-year comparisons we still dwell on the fact that the …when we bought the contracts out from the Queensland government and internally contracted it,

15                    that caused the change,  particularly in this capacity payment that now sits in our wholesale business, and that’s the reason for reduction in that segment.

 

                        In general, the plant operated very lively and that’s important because it’s obviously a hedge to our retail business, and a value that will level operations

20                    sits in our retail business because effectively the plant as we’ve said here is contracted into our retail business as a sort of tolling plant, and therefore the value is captured in the retail business.

 

                        To this date….basically a touch on this slide let’s just talked about the Mount

25                    Stuart and the change in its contracting structure. The only other point is that Mount Stuart’s  one of the number of projects which has been expanded from 126 to 400+ megawatts on this occasion, and that’s in development, and scheduled to come online next year.

 

30                    If we look across the portfolio at large, and you can see here, and the way we categorize this. the externally contracted plants plans whose income is generally secured against third parties were obviously Boral and Osborne, and then effectively, the internally contractive plants or the merchant plants for whom the value primarily ends up in a retail business through our

35                    wholesale/retail business. You can see the Quarantined lead broke maps (inaudible) (00:30:01) and the plants that we’ve owned there for quite some time, and then quite a list of substantial developments. Our expansion on some of those plants, as you can see were Quarantine and Mount Stuart, the construction of Darling Downs 630 MW project, the acquisition of Uranquinty

40                    which we are aware of, of course, over the last month or so bringing in another 640MW in nets, started commissioning, I think the first machine is fired up and, hopefully between now and December that will be largely operational, and Mortlake was the other major project we’ve committed to and that will be completed sometime in 2010.

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                        Cullerin Range is small but it is the first wind project that has actually been developed by Origin. As I said earlier, we did contract quite a bit of wind to meet our renewable obligations. That’s the first project that we will be bought by Origin and that’s part of the pipeline of opportunities, particularly in wind generation. The company has access to quite how much we develop that pipeline, and how much we invest our capital, remains to be seen. Others is contracting from third parties.

 

5                      So we then put it together, you can see that Origin has….. we see that 700 MW of existing plant are very substantial pipeline of committed projects,  1,850 MW, expansion is another 246 MW, and sometimes overlooked, but importantly, the 825 MW you see there as contracted with the (inaudible) (00:31:19) are against it. That kind is owned by a third party. Just

10                    interestingly,  it’s like cutted (?) over the road from our Darling Downs Power Station site so there’s quite a cluster of projects there.  Effectively, we own, one way or the other, a lot of the capacity in that region either by contracting, or via developing Darling Downs Power Station.  The benefit to us is that apart from providing the hedge for our retail business, we do have rights to

15                    toll gas with that plant so we still contract capacity as well as build capacity. That particular opportunity came through us with the acquisition of some retail. We’ve already written the first contracts that underlie our projects. We effectively doubled at the start of that commitment.

 

20                    And then looking further ahead, we have a number of determinate sites both in generation and a number of opportunities in wind which we’ll obviously consider on merit for further expansion.  So I touched on earlier on in the presentation, if we think about Origin  development through time has been driven by retail acquisitions, substantial capital going into upstream and

25                    beginning to now deliver earnings growth.  Now you can now see capital standing to go into the generation business and that will drive substantial growth in earnings as well over the next few years.

 

                        Much discussion has occurred, of course, in the Australian community around

30                    the Carbon Pollution Reduction Scheme as is now called and for some time we’ve been developing options in anticipation of that sort of development. The final shape of that scheme and the level of cuts with the target, of course, is not yet known, will there more?  I guess will be revealed over the next few weeks but suffice to say we think that we’re quite well positioned with our

35                    pipeline of opportunities in wind, and also albeit over the long term, in our view, an investment in the best of the geothermal resources, which we think, in terms of how carbon cost come on will ultimately provide valuable opportunities for the company.

 

40                    Turn to retail, and clearly in terms with the contribution, retail, has what has driven a substantial part of the increase, EBITDAF up to effectively nearly $500 million, $499 million dollars, and primarily due to this Sun Retail acquisition, so this is the result of half the first full year contribution from Sun Retail.

45

                        You’re seeing relates to that next comment. I’ll draw it after the slides that our EBITDAF level, that is by taking out the movements in financial instruments, as we think would be quite confusing, so if you like to think about an EBIT as size level, margin expansion from 8.4% to 9.2%.  At a point, hopefully, I can illustrate in subsequent slides, as well as, is that quite a contribute to that has been the fact that we did receive tariff increases in the second half.  The post tariff increases were reflective of underlying cost increases in generation, in the wholesale market. That sitting in our retail business is of course our

5                      wholesale and effectively our generation business.  When I say generation business, the assets sit the generation that we pay capacity charge  to generation. The benefit of those assets sits in the retail business, and effectively, it’s the management of those electricity purchased contracts our hedge book in those physical positions that is the real story in retail.  That’s

10                    where the value is being created and we think that’s evident in the results, and hopefully, we can show that to you in the next few slides.

 

                        Certainly, it’s been a challenging year for in a competitive sense in the market, 482 thousand new accounts acquired for small net decline across the

15                    business.  That’s less than a 1% net decline, so that has a significant impact  on cost, but for anybody who’s wondering whether the retail markets are competitive, that hopefully, we can forward or at least answer that question.

 

                        So we talked specifically about contribution to the business, you can see it

20                    through the segments there, natural gas electricity in LPG.  In gas, think about it as a slight change in mix whilst overall sales were up 1%, our gross profit down 2%, slight change in mix, slightly lower average volumes in the retail segment and in normal part are mainly due to just weather reasons that’s primarily driven by high gas purchasing cost in the first half.  That’s one

25                    of the issues that contributed to the first half of the year and you’ll see that in the subsequent slide and the second half of the year as gas purchasing cost to the extent we purchase gas are more stable and more predictable than they were at the beginning of the financial year.

 

30                    Electricity is clearly showing the benefit of the Sun Retail acquisition with the very big increase in gross contribution and a very big increase in sales and that’s effectively the Sun Retail acquisition. 

 

                        In LPG, a substantial reduction at 27% reduction in contribution to $34 million.

35                    Again as you’ll see in the subsequent shot, primarily reflecting the high cost of purchasing LPG. In the total aggregate of Origin, you can think of that LPG as also acting like a hedge in the oil business because, of course, as the underlying oil prices in propane prices goes up, we have a challenge to  chase that through in our LPG business. Conversely, as priced as full, we

40                    would expect to recover that and see some margin expansion in our LPG business but in the last year, a very challenging year in the LPG business could run up in oil and of course propane prices.

 

                        To just perhaps…. to try and illustrate the obvious, if we go to this time last

45                    year, thinking about the year June ended ’07, you can see we had that large run up in wholesale electricity prices which is evident through the June ’07, and then of course, that dropped almost precipitously at the beginning of  the financial year. Again, I’ll show you in the subsequent shot, not only did the process drop, they dropped just to acquire the historically high level but also quite a stable level.  Little volatility and we’ve explained to you at a half year have had an impacted our margins in the first half.

 

                        Prices have settled down a bit further and if you would then look at the

5                      forward curve, we’re back into a more traditional shape where the forward curve is now increasing versus a year ago where we’re coming up a very high level in reducing.  Again, as clearly to that forward curve that we look as the indicator, our forward prices and we might have generation investment  decisions against that forward curve.

10

                        To use a chart that we used at the half year for first time to try and feel a little bit more what’s happening in markets…and if I turn the first to where we were in December ’07 in the first half, you can say that that solid blue in line in that  half is a sort of, if you think about that has been the average price across the

15                    period. You can see that that was quite a bit high than the prior corresponding period to December half  ’06 and that number under the dollars also showed that there was not much volatility. In that situation where we had what we call high flat prices, we have margin contraction and that’s what influenced our  first half. Instead of saying that if you compare the half to December 07, with

20                    the half to June ’07, we illustrated at that time, the worst prices on average were high. They were also much more volatile and we were therefore getting payoffs against all capital effectively left to think about as a catch to paying out. Therefore that actually surprisingly wasn’t a challenging period for us compared to the December half.

25

                        So we then look at the June half, what we have seen is perhaps more. Prices have come back a bit and not return to the low historically where they were quite low levels through to the end of ’06 a little bit more volatility, more normal conditions for us and importantly, half to June ’08 compared to half to

30                    June ’07, we can see our electricity purchasing cost would have been substantially lower.  Now, bear in mind, we run a large hedge position.  We contract most of our position, most of our requirements one to two years out. We were able to benefit quite substantially across that half in June ’08 to at half in June ’07. So tariff increases together with effective management of

35                    that purchase imposition and better conditions in wholesale market is one of the key drivers of an increase in retail. That’s in addition to for Sun Retail acquisition and in turn retail was one of the, if not, big contributor to the overall profit result for Origin.

 

40                    This gas picture, on  most sides historical. Historical in the sense that when I was describing earlier what was driving gas margins I referred to some higher prices in the first half, but was at July, August, September quarter of this financial year and you can see that on the chart. You can see that as we ran  into June. Year-end this year, gas prices have been very stable and whilst

45                    many things contribute to this, essentially, one could say that the market was expecting, we were expecting projects like Otway or there is new capacity and new supply that came in the market last year but didn’t that grows some of  the volatility this year as we run through the last half in the last quarter. New supply came on, new capacity in the market prices were quite stable and predictable, and therefore, better conditions for us. All of those are reasons why our second half was much stronger.

 

                        We are now determined to change this chart, one of these reporting periods

5                      because I’m sure the scribbles are totally unintelligible, but if nothing else, they do tell you that it remains very active in retail markets.  Competition is very active in retail markets, and particularly in Queensland and the reason, if I can go on the other way, I’m sorry… the reason we have left this chart here is as you can see, Queensland Gas and Queensland Electricity ought to be

10                    somewhere there, black….that these markets have only just opened to competition and you know, the return rates there are quite high you know, 20%, 25%. But I said overall, 282,000 new accounts for net reduction in customer numbers are 22,000 and that, amongst other things, impacts our cross reserves.  As I’ve said to you every year, in broad terms, we do not

15                    intend to allow customer base to waste. It is down 1%, that’s not all that material, but at the end of the day, in broad terms, we are active in the market in order to preserve our overall customer base, on this occasion nearly 500,000 customers needed to be acquired in order to that.  That occurred  substantially in Victoria and Queensland, and in the case of Queensland it’s a

20                    new market for us. We feel ….we did see quite a bit of churn in that market, but generally our observation is a churn does tend to track the more profitable segments in the market, and somewhat ironically, the high churn does tend to go with high profitability in those segments. That must be the case if our margins are as they are inclusive of those high levels of churn. So if we just

25                    take these numbers and cover the EBIT, if I can use that term, the EBIT to sales level, overall margins increased 8.4% to 9.2% and we’re very pleased about that result. As I was illustrating earlier, I think you should describe that result not just to….what you might think of as the purely retail part of the business that is driven by top line tariff increases. I think you also ought to

30                    attribute that result to what we think as the wholesale business that sits underneath retail and has the benefit of our generation position and manages that position with our Contract position, our hedge’s position, and those two things, are the key contributors of good results, you know, when you think of it on EBIT good sales basis.

35

                        Particularly pleasing as well is gross margin per customer which is actually up over the period, our OPEX is stable.  We would have had an underlying reduction in what we think of as the cost to maintain, but our cost to acquire was high because of the levels of churn, and therefore…well as we did

40                    achieve in broad terms the sort of synergies that we are targeting through the acquisition of some retail nonetheless that’s disguised by the affected high levels of churn does introduce high costs to the business and that’s the point we said constantly that you need to think about cost to acquire and cost to maintain as being the two drivers of costs in the retail business. 

45                    Notwithstanding at that level of cost, we have been able to maintain a strong contribution to our customers and a growing contribution to our customer, which is again as we say, a brief reason.  We’ve included under there that normal note that all those costs include allocation of corporate cost as well and part of that flat cost is that we had a slightly high allocation of corporate cost in the retail segment as well.  We will, I’m sure, if not in the next or the next after results presentation be talking about steps we’ll be taking to change, invest, contract our new systems environment.  That’s the decision we expect to make in our retail business in the next six months or so.

5

                        I mentioned before that it’s very typical to talk about the impact of the Carbon Pollution Reduction Scheme certainly from our positioning perspective, both in terms of brand and in term of assets, we feel very well placed and urgent continues to have a leading position in what we call the CO2 greenhouse, but

10                    that is in my view, one of the reasons why you’re seeing stronger margins in our business and perhaps you might seeing others, because we have worked hard on that position and we have worked hard on developing those products for our customers and obviously it does create a strong, more loyal customer base and might otherwise be the case.  It’s such been a very good results for  

15                    us.

 

                        I mentioned LPG and I think I probably already made the key that there’s no mysteries in LPG business. Cost went up dramatically and the guys did a good job of chasing as much of that through in the market as they could, but

20                    with that quite rapid escalation in oil prices, very difficult to trace it all through without some lag and that’s effectively what’s driven the overall result in LPG.  If the total contribution of course, is affected by the year-on-year comparison having so the business to forecast having both the LPG business in some retails, but in broad terms, it’s still at underlying effective high purchase cost

25                    that’s driven the overall results.

 

                        Our Contact, as you know, report separately and reported on Monday and you may have had the opportunity to review their results, but in broad terms, their contribution was up a little bit. I think the key factors in Contact, just we

30                    maintain the historical narrative is,  of course, Contact did have a period of very strongly expanding margins as it left off its office legacy gas contracts in a rising energy price environment. Those legacy gas contracts are now peeling away and Contact is chasing large gas cost increases through its business.  through its wholesale regeneration business into the retail market,

35                    and that increase in energy prices is one of the drivers of high revenue and high profit in Contact. In broad terms, that’s a quite a challenge facing through those high gas cost.  The second overlay is that, again in other cycle, a very dry weather has caused high generation prices so you got an underlying fuel price drop but you’ve also got effectively a constraint on water….dry

40                    conditions, of course, which is hydro generation and that also reflects in higher prices in wholesale market, because, of course, there’s more gas-fired generation being used.  So Contact did a great job of managing all of those circumstances as an increase in its contribution. Looking forward, Contact made some comments on Tuesday that said that in the first quarter

45                    conditions still remained challenging and very dry conditions still (inaudible) (00:46:37) in the South Ireland. For those of you, the followers of hydro, there’s good snow pack, the water would come, but when it comes and when it rains before end, will probably determine when those current conditions ease.  So at the moment, the conditions are a little bit challenging in New Zealand across the whole year.  It’s too early to say how it would play out, but generally, I’m very happy with the contribution from Contact.

 

                        So just to finish off with some few comments looking forward, we talked about

5                      this year obviously. what’s coming up in the coming year, the current financial year, what we expect to full year contribution from the Otway project, full year contribution from Swift. I bet that’s smaller of course than the Otway project.  We’ll see continuing increases in CSG production and that’s growing very strongly for us and very profitably, I have to say, initial contribution from

10                    Uranquinty, sort of perhaps the half year contribution from Uranquinty Power Station and perhaps about a half year contribution from Quarantine Power Station.  Now these clearly will add to earnings. We still have that trend particularly of declining liquids production out of the Perth Basin so that will partly offset those positive impacts on our business.

15

                        The other factor that I haven’t mentioned in EBIT comes from Frank’s earlier observations. If you look at funds employed excluding and including cap rate, quite clearly, there’s a lot of capital work in progress.  We capitalized $55 million of interest last year, included some of that capitalized interest was

20                    started in the P&L, so the other factor that will influence our results for the year would be that increase in interest charges, those capitalized interest, or that capitalized interest starts to coming through in the P&L.

 

                        So at the moment, I take into account all of those, sort of, influences on the

25                    business from Contact through its projects through our continued investment in the business and the way that investment cycles through to draw us earnings also brings for the interest expense.  We begin the year feeling very comfortable by at least 10% growth in earnings, of course, as the year plays out of the playout, and we’ll keep people informed if we see reason to change

30                    that view.  So that’s the outlook for the coming year.  It will be an interesting year for us in many ways, clearly, not to mention the slide but in some ways show performed BG’s bid for us will play out. That will make an interesting year on shareholders as well. So many of you will have some, you know, potentially some interesting choices to make.  But as we look at our business

35                    from our perspective, clearly we’re committed to the CSG monetization process.  We’ve talked about that last week and in other forms. That process is continuing, and we’d expect sometimes to the latter part of September that that process will have a result such that we can put that before shareholders as we’re committed to do in our target statement.  It is an interesting time.

40                    More broadly, Origin’s business is very well positioned in relation to the introduction of the Carbon Pollution Reduction scheme, that is a very typical discussion, it’s not going to hit this year per se, but it’s already influencing investment decisions. It’s already influencing the pattern of generation, and it’s already influencing the value of assets particularly gas, in our opinion.

45                    There’s one thing about the value of business like Origin going forward so the continued fleshing out of the detail and the trajectories under that scheme are, in my view, very important to thinking about the value of Origin. As we say, each of those could add substantially to the longer term growth of Origin.  I was really bold enough to put onto slide that we also are looking forward to some outcome on the New South Wales government privatization of generation in retail assets, but clearly I thought that’s entirely unwise to, you know, pre-empt Parliament, and, you know, it’s what’s going to happen today but that still continues to be a tortuous process, I suspect. We will have to

5                      say, as a matter of public record that, for whatever reason, the outcome occurs to not sell those retail businesses in at least would be a substantial detriment to their value, so we don’t know what the outcome will be but if that transpires as well then we see further opportunities for Origin. If we take a more forward-looking view that is beyond the current year I thought before

10                    about the amount of capital going into the business, the Kupe project will complete through the next 12 months. Clearly, quite a bit of capital going to our upstream in particular CSG business to more than double production growth through the 2011, and then quite a substantial amount of current investment going to power projects which will come online through the end of

15                    calendar 2009 and it’s not this financial year, the next financial year and into 2010. So we can see quite a pipeline of projects delivering into that 2-, 3-, or 4-year forward view, and of course contacts similarly are going through a substantial period of investment, particularly in its geothermal assets and potentially, in it’s wind assets or so for the next 3 to 5 years.

20

                        Clearly, sitting beyond that is the outcome, I must say the outcome of our CSG amortization process. We will accelerate the development of our CSG resources clearly into our domestic channels to market. Whether or not there’s an LMG project there as well, somebody will have a better view over

25                    the next month of two, which when that occur that will obviously transform Origin business from an earnings perspective.  For those reasons, we are happy to contend as we always have contended to our investors. For on average, we are targeting and expect to continue underlying growth in EPS around 10 to 15% per annum.  We have done that today.  It’s not the same

30                    every year, it’s more some years, it’s less some years but on average we’ve more than delivered on that proposition and it’s our intention to continue to do so. That intention, of course, is found on real projects and real assets  operating the environment where we can see the drivers for increasing value on the company’s core assets in this generation. It’s fuel but it’s upstream

35                    business and it’s retail business.

 

                        So hopefully, ladies and gentlemen, that’s a view of Origin and how we’ve travelled over the last 12 months and our prospects for the year had in particular, and of course further out and delighted now to answer any

40                    questions you might have.

 

      Operator    We will now begin the question and answer session. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced.

45

            ORG    We can solicit one from the room here. We’ll take a few here to start with and then we’ll give those on the phone an opportunity as well.

 

      Operator    Certainly.

 

            Q         Hi Grant. I’m Matt Spence from Merrill’s. Maybe one for Frank quickly. Frank, you said you’ve got headroom of 1.3 to 1.4 billion at the moment. How do you plan to allocate that forwardly?

5

            ORG    Allocate as in how we do utilize it? The utilization, largely those proceeds will go under the growth capital program over the course of the year so that’s how we would anticipate to utilize. That will depend on the rate of spend on capital expenditure over that course of year. We don’t have any refinancing until, I

10                    think, we have some banks facilities in May 2009 or June. So we have a syndicated facility and I think we have $450 million of refinancing in May 2009, so they’re available, all of them except for those facilities, over the course of the year. Anything not more specific.

 

15        Q         Have you got plans for the whole 1.3-1.4?

 

            ORG    We will utilize a large proportion of those facilities over the next 12 months based on the capital program, and it will depend on the timing of that spend but I think the better view would be that we would be utilizing a significant

20                    proportion of those over the next 12 months.

 

            Q         And then maybe one for Karen, if I can. Karen, can you give us an idea on what EBIT margins in the retail business would’ve been if you exclude Sun just so we can get some like-for-like comparison.

25

            ORG    No, we could not answer that question. I mean, we actually don’t really think about it that way. I could probably (inaudible) (00:55:01) that growth margin difference is across the state. Because when we think about the wholesale we actually think about is across the whole Eastern position. So we sort of

30                    pull it out when we think about cost as part of (inaudible) (00:55:15) full acquisition. As I closely observe, we don’t pull out by stake either. But margins have been better Queensland than we had anticipated they would be. The challenge moving forward in Queensland is continuing to get good cost recovery recognizing sort of both risks and costs in the business and the

35                    longer-term cost of bringing forward new generation, as all of the costs are certainly added in bringing in the cover cost, etc. So it is forward issues in claims (inaudible) (00:55:49) half this year.

 

            Q         Okay, thanks.

40

            ORG    Any other? Yes?

 

            Q         Grant, a couple of numbers issues, just on the slow ramp-up of Otway and also interruptions on BassGas, what was the cumulative cost of those two

45                    supply interruptions to EBITDA during the year? Also, in the Sun gas business, there probably would’ve been some residual cost from the old businesses in there, are they coming out in the current year and to what extent?

 

            ORG    So when you said Sun gas, you meant Sun electricity retail, Sun Retail?

 

            Q         Sorry, Sun Retail or the Sun Retail business.

 

5          ORG    We’d indicated… I’d go backwards on those answers. In relation to Sun Retail, when we bought it, we indicated about a two-year period to integrate that business and there was a transitional services agreement for lack of a better term in place with the Queensland (inaudible) (00:56:53), I think, to provide back office support through that transition period. I think that ended in

10                    March this year, was it? So at the end of March, we got that fixed price agreement out of the system and we started then to ran on Origin’s cost reserve across the entire business. So, if you’d like to think of the integration benefits, they should’ve started to emerge in the last quarter of this year. That’s on sort of cost to maintain type basis, you got to overlie on that. To

15                    acquire cost is going to the business because of the churn that exists in the business. So does that, in a timeframe sense, answer that question about those costs?

 

            ORG    Yes, trying to work out the number.

20

            Q         What was the drag? What was the Sun gas drag over that period? $10 to $15 million, something like that?

 

            ORG    Yes. Karen can make a comment. I’m not sure. We’ll let Karen make a

25                    comment.

 

            ORG    I’m not going to help you pull that number up, but we actually -- even though the services agreement can receive much once you do work full integration, as always ongoing issue which we sort of have been unpeeling, and I have to

30                    say we’ve actually quite a difficult three months after the integration and just in terms of unpeeling some of those system and customers issues. So, we are sort of still seeing some of that being carried internally while we sort of (inaudible) (00:58:11) there was anything through the year that was reflecting them.

35

            ORG    Just to try and provide more help, not in relation to Karen’s answer, but I think when we acquired the business, if my memory is correct, we said we believed the scale of benefit (inaudible) (00:58:27) was about $20 and we believed we would have paid half of that in the purchase price. So, we’re expecting across

40                    the business about a $10 a customer gain now. As Karen has mentioned, we haven’t seen much of that yet for the reasons Karen mentioned, but if you wanted to turn that into a drag, you could probably do that over because that’s what we’re expecting post-integration.

 

45                    Working back through what went in BassGas, firstly in relation to Otway, clearly there were impacts in two areas that -- actually three areas -- clearly there is just the run rate, the loss of the run rate.  Now that’s material to earnings in the year, but not that significant in NPV terms because the earnings will still come. So, there’s a monthly earnings run rate impact. Secondly, in our total business, we have to go out into the market and because of delay, write additional contracts and secure additional supply, so there was an impact in our retail business, and that’s right at first quarter last year when those gas spikes where there. We had to contract some gas at

5                      that time to cover us for the delays, so that impacted maybe millions of dollars if not tens of millions of dollars but it impacted a bit in our wholesale-retail business. The third impact is that arguably because of that delay, we were over-hedged because we had a hedge position based on the certain expected production profile. Now we weren’t over-hedged in relation to more

10                    hedge than production. But clearly, relative to actual oil production, more of it was covered by the existing hedges and would have otherwise been the case. Now, (inaudible) (00:59:56) what the NPV impact is because the earnings will still come in the future, and they will be unhedged. But those are the three impacts of Otway. BassGas…

15

            Q         You would’ve dropped at least $20, $25, $30 million…

 

            ORG    In terms of earnings this year…

 

20        Q         … on that ramp-up being six months or eight months or beyond that?

 

            ORG    Yes, at least.

 

            Q         I just wanted to get a feel for what cost you at least?

25

            ORG    The only slight equivalent is that it cost us in earnings, by foregone earnings, but in value terms it is probably still largely there. But quite clearly, yes, tens of millions of dollars in terms of earnings. In the case of BassGas, my recollection of numbers, and my colleagues can correct me, but the core

30                    issue there was a reliability issue in terms of cost-to-cost year-end production, if you like, less than what we would have expected, maybe there was only petajoule or petajoule-and-a-half in that gas production and (inaudible) (01:00:47) will be around something… it’s not that material, but it was a reliability issue and reliability went to cost. It didn’t go to production or

35                    revenues or volumes as much. So among the wells we’re shutting for quite a period of time so the liquids mix and liquid deal were not quite as optimal as we would have liked. We were producing from lower yielding reservoirs. Now those issues are being fixed and so it is the reliability of operations that are going to improve. I think the cost position, but maybe there’s only some

40                    single-digit millions in relation to BassGas. I think from our point our view, the satisfaction is more as to the reliability than to being material year-on-year in terms of earnings.

 

            ORG    I might just say, as far as gas production goes, we are about 7.5 petajoules of

45                    gas in BassGas. I do believe we could have been about 8 to about 8.5 petajoules, maybe lower there, and associated liquids may be again about a petajoule equivalent. So we could be not as much as that, but half to less than one.

 

            ORG    I am going to take another question here and then give some people on the phone an opportunity. If there are any other questions? Please, Jason. I’ll take two from here and then I’ll….

 

5          Q         I was going to direct the question to Frank. In trying to understand your underlying return on equity, slide 11, you even adjusted shareholders equity and an underlying NPAT, Frank, which gives you an underlying return on equity of 11.5. But on the two numbers above, I get a number of 8.9. First question is what other adjustments have you made to get from 8.9% to 11.5.

10                    The second one is the larger one, maybe fifth graph, when do you see the 8.5 or 11.9% actually growing back to where you were three, four, five years ago?

 

            ORG    Once Frank answers the first question. I think you’ll find that some of the

15                    mysteries of it is part of that answer.

 

            Q         Sure.

 

            ORG    Yes, in broad terms, yes, we’re going through a period of significant capital

20                    gain in the business, and at an entity level, you have those returns include CAPWIP and there’s quite a bit of unproductive capital at an entity level. Now that’s the first part. The second part of the answer is if we look at the returns, we see a fast upstream in retail businesses that are excluding CAPWIP, upstream and generation are running 20% plus and retail is running 14%, and

25                    that 14% in retail I think you could say the underlying rate is higher, but because we had quite substantial tariff increases and the like, there was quite an increase in working capital just reflecting the higher price for billings at balanced state at year end. So those underlying businesses excluding CAPWIP are generating the sorts of returns I think we ought to be happy with.

30                    Then the question is, at a corporate level, at what rate do these new projects comes through and contribute earnings? Those earnings go through in terms of return on funds employed or return on equity. I’d have to say that whilst we do continue this phase of fairly substantial CAPEX, we believe our returns will certainly stay above our cost of capital and our targets, but I’m not sure they

35                    will leap up whilst we are going through this fairly substantial capital phase. Perhaps Frank can still give you a comment on that.

 

            ORG    Sure. Just on page 11, that’s not a particularly helpful shareholders equity line, I should explain. The net profit after tax of $443 million is after

40                    eliminating the minority interest. Unfortunately, the number that you’ve got there on adjusted shareholders equity is inclusive of minority interest, and if it was excluded to make it like-for-like, then that equity number would be about $3.9 billion and that’s where the 11.5%, and you can get that, just to get a comfort around that if you go to page 4, the accounts you can see that our

45                    equity when you exclude those is down around that 4.1 and you take that adjustment, you’re down to 3.9, so we’ll make sure future slides do not mislead.

 

            ORG    I’ll take that question and we will go to the phone.

 

            Q         I just want to ask Grant, I think your average realized gas price here was about $24 million. I just want you to give a comment on where you see that heading over the next year or two and sort of weighing up all the new projects

5                      coming online versus maybe some market openers in some your existing contract?

 

            ORG    The contracts, I think it was a wholesale contract, the contracts we’re written from our upstream business with third parties. Two, if we broke those

10                    contracts into three groups, there are contracts within Origin and so for example, the gas that we’re going to Darling Downs is an internal contract and we will set a price for that. We probably won’t re-open that price. We’ll set that price and we’ll take that value through wholesale and retail business because that’s consistent with the way we treated generation. We will toll the

15                    fuel through the asset and that asset will appear on our segment as earning sort of capitalized return we’d expect for that investment.

 

                        The second, our contracts with third parties essentially, and probably all but one have reopened this. The one that doesn’t is the Rio contract. The others

20                    have periodically opened this. They’re kind of within various premises. They are sort of market top re-openers. If I put it the other way, of around about the 2000 or so petajoules that are contracted from the upstream business, maybe a quarter of that doesn’t have the capacity to attract market prices. So that’s the first answer, something like that.

25

            Q         (Inaudible) (01:06:41).

 

            ORG    Yes, but that’s into…. If we think about it at an Origin level, only about a quarter. At a segment level, you might find that there’s not much movement

30                    because we’ve contracted heading to our wholesale and retail business.

 

                        We would expect, and I’ve seen already, some upward movement in gas prices and that is clearly an issue for debate around the rate and extent to which those increases occur, but we are seeing that evidence in smaller

35                    contracts that have been written today, but they are not large contracts at the moment that have been re-written and we would expect to capture the value of that movement one way or the other in some part of the business other than for the contract. The fixed price contract is not a fixed price, it’s just a fixed escalation.

40

            Q         Okay, but not much escalation over the 12 months…?

 

            ORG    I don’t see, no, I don’t see much happening over the next 12 months in particular.

45

            Q         Okay and just one final one for Karen just to clarify what you said on costs. You are still confident that you can get that $10 but it is probably taking you a bit longer. Can you see it over the next one to two years or is that probably not?

 

            ORG    Well, you know that we don’t really focus on cost of service as the primary issue. We focus on are we spending money effectively. So is it floating down to the EBITDA per customer. So I would first say that. So we always think first

5                      about are we adding value when we are looking at whether we’re spending and whether we’re not spending. But having said that, the issues that we have had before are around the integration that certainly disappeared or disappearing, as a better way to describe it. We’ve got our hands around that much more effectively and so we would start to see that impact through.

10                    Much of it will really depend on what happens to New South Wales, what happens to churn rate, what happens to price increases, (inaudible) (01:08:40).

 

            ORG    So I’ll just take a pause and take some questions from telephones to give that

15                    opportunity. Are there any questions there?

 

      Operator    Once again, if you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. Your first question today comes from John Hirjee from Deutsche Bank. Please ask your question, John.

20

            Q         Good morning, Grant. A question on the gearing of the company. Going forward, you’re going to have a lot of capital in the higher risk part of the value chain in your business, i.e. generation and upstream, what sort of a gearing level do you think Origin will tolerate going into this high CAPEX phase in that

25                    riskier part of the chain?

 

            ORG    Good day, John. Historically, we’ve said that we were comfortable around 45%, 40% to 45% was the comfortable range, we’re smacked in that range at the moment. I think, I’ve said previously, I’m sure I said previously that we

30                    would be happy for that to run up, you know 50% maybe, depending on for what reason. Typically, if you have a major project coming through, there is clearly a period of time before we get earnings from those projects. We would also, and did say at the time, if we made major acquisitions we intended to raise equity in association or conjunction with the major acquisition, so that

35                    would go into the mix as well. But at the moment we’re seeing at 42 and that will run up as we go into the coming year. I think I would not be particularly concerned if we ran into 45%-50% range. If it was going to run beyond that for any sustained period in the normal course, we would, I think, much more likely look at whether we would sell some fruitful assets to the extent that was

40                    the case so we would do a number of different things to stay somewhere in that range.

 

            Q         Alright. Then the follow-up question to that is the dividend power ratio approached 50% for online basis, is that something we should use going

45                    forward?

 

            ORG    Historically, we’ve talked about 40%, and the 50, I guess you can say materially is a material step forward. I’ll be reluctant to pre-empt the decision of the Board. That is to say that means that the Board’s not necessarily changed that broad targeting of around 40%, but I’ll be bold enough to say that I’d be surprised if we pull that ratio back having got to that sort of level. Our view is that the cash flows for the company are growing and will grow now some of these projects have come online. So, yes, we took the sort of

5                      medium- to long-term view. I think you could say that we are comfortable if that sort of payout ratio is perhaps becoming more appropriate looking forward.

 

            Q         Cheers, Grant.

10

            ORG    Thanks John.

 

      Operator    Your next question comes from Paul Johnson from ComSec. Please ask your question, Paul.

15

            Q         Thanks. Just a couple of questions on the retail. Can you give us a little bit more information in terms on how the transfer of pricing is done on electricity? You referred to before that your competitors did not have the margin improvement you guys have shown, but they do have a different methodology

20                    so it does make it difficult to compare?

 

            ORG    Yes. I’m happy to be corrected by my colleagues, but the simplest way to think about it is that because the report of our retail segment includes all of our purchasing, there’s no wholesale segment reported separately from retail.

25                    That question only really relates to the generation assets that are reported in the generation segment. Effectively, each of those assets is treated as a tolling asset we would put in place when comes into production, if you like, to put it that way. Our pricing arrangement was received on appropriate return on capital, somewhere near our hurdle rate and then effectively to get the

30                    fuel, if you’d like to think about it that way, followed through in our position we’ve managed in the wholesale-retail business. Now there’s little bits and pieces around maintenance and operation but just think of it as a capital charge, like capacity charge that goes in the generation business that sort of something like a hurdle rate and the fuel. If you think about it, the fuel is

35                    essentially tolled through that asset and is effectively passed through.

 

            Q         So the power generation is treated a bit like the gas side of things where there’s no real re-opener. There is just a per megawatt or per megawatt hour capacity charge between the two business.

40

            ORG    Simplistically, yes, and the reason we said that is to give you guys a reasonable line of sight. We don’t want to keep changing the numbers every year, so we put something in place when it comes into the production and we stick to it, and therefore, that generation segment, we’ll track more like a

45                    segment for which, think about it, hurdle rate on the capital and it shouldn’t swing around a lot, and then all the volatilities managed in the retail business sort of reprocessing.

 

            Q         I guess (inaudible) (01:13:37) do the opposite of those. The other question which is on the Wind Farm and just how you anticipate structuring those. Once again, your competitors’ base structure with developer fees coming through over a couple of years. What’s Origin’s strategy there?

5

            ORG    I think there are several observations there. Cullerin is the first one we’ve developed ourselves, and whether or not we upsize, it is a large piece of work, if I could put it that way, as to whether we keep developing into that pipeline, the (inaudible) (01:14:11) accessed to or contract with others to do

10                    it. So in my own respect, we have no policy or position specifically on that question because at the moment we’re building Cullerin and we’re assuming that will stay with the company. Now to step back from that and going back perhaps to a related question John Hirjee asked, we do need to decide whether that’s the best way to use our capital in our balance sheet. The wind

15                    projects are meeting the mandatory requirement, and at the end of the day, if we’re not…and have to say we’re not convinced that there’s any competitive advantage around signing on those assets. So that’s an example of one the ways we may well manage our forward funding positions that we’ve made. We may contract those assets rather than develop them ourselves. We

20                    haven’t made that decision but that’s at least some insight as to what we’re thinking about at the moment.

 

            Q         Thanks.

 

25        ORG    There is no development profit in our results in anything to do with Wind Farm or anything.

 

            Q         Okay.

 

30        ORG    That’s just to remove any doubt about that.

 

      Operator    There are no further questions on the telephone at this time. Please continue.

 

            ORG    Okay. Can we sort of solicit at least one more question from here? If not, I’ll

35                    take that as a sign of a clean result. Will that be inappropriate? I’ll be delighted to answer any questions that… Perhaps I could just test whether there is any more that has come through on the telephones?

 

      Operator    Once again, if you wish to ask a question over the telephone, please press *1

40                    on your telephone and wait for your name to be announced. You do have a question from Derek Francis from UBS.

 

            ORG    Thank you very much. I’m sure that for those of you here, there might be a cup of tea. I saw them, I’m not quite sure. If any of you would like to stay and

45                    ask any further questions, we’d be delighted to do that. My colleagues will be delighted to do that. But thanks very much for taking the time to attend and to listen, and quite clearly, we’ll see quite a few here over the course of the next two or three days. Particularly through Angus or Frank, if you have questions you’d like to follow up on, please don’t hesitate to call. So again, thank you very much for attending.

 

                        Thanks. Bye-bye.

 

PRESENTATION CONCLUDED

 

 

 

 

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