Origin Energy : Annual General Meeting 2016

Last year, I discussed the impact the sharp drop in the oil price had on our stock price.

As you can see from the slide, this impact unfortunately has continued in FY16.

Last year, we committed to decisive action to face up to these issues. We laid out a plan based on three priorities: significantly cutting debt; optimising cash flow and reducing risk. I am pleased to report that the plan is working despite the challenging impact from the oil price in our industry globally.

At the end of FY16 we had reduced adjusted net debt by $4 billion to $9.1 billion, already in line with our target for FY17. As you can see this came primarily from the sale of Contact contributing $2.9 billion, the $2.5 billion equity raising, and cash flow from the business contributing $1.3 billion. During the year we also reduced the number of employees at Origin by 24 per cent. We have announced asset sales of $484 million to date, and continue to target in excess of $800 million.

We are firmly committed to cutting debt again and can reconfirm guidance that adjusted net debt will be well below $9 billion by the end of the 2017 financial year.

Our second priority was to optimise cash flow by becoming more disciplined with the use of capital. As this slide clearly demonstrates, by focusing on both capital and operating expenditure, and exiting non-core businesses, we improved net cash by $3.3 billion this year. As this is one of our key priorities, we have made it one of the ongoing key performance measures in the Short Term Incentive program for management.

Our third priority was to reduce risk and we have already advised that we implemented a US$40 per barrel floor on the oil price in FY17.

We have now also hedged around 15 million barrels progressively into the 2018 financial year. These hedges will help to protect the Company's ability to repay debt by further reducing downside oil price risk whilst maintaining substantial upside oil price participation.

We have cut debt, we have optimised cash flow and we have reduced risk.

At the same time as addressing the key financial issues, we remain intensely focused on profitably growing our two core businesses, Energy Markets and Integrated Gas.

Our Energy Markets business had a good year. EBITDA grew by 6 per cent, we reduced the cost to serve our customers, our underlying EBIT margin improved to 10.1 per cent, our customer count was stable, and most importantly, we improved our customer satisfaction scores. This enabled us to deliver $522 million more in cash flow.

Our Integrated Gas business also had a good year. Having completed train 1 at APLNG and with sales from January 2016, we are focused on continuing to drive productivity and reduce the project breakeven cost. We are operating at above nameplate capacity on train 1 and have produced and loaded 50 cargoes to date.

This progress on both businesses will continue into this year. Energy Markets will increase its underlying EBITDA by somewhere between $100 to $200 million.

The team will achieve this by lowering the cost to serve our customers, by improving customer service (38 per cent of customers are now on e-billing) by introducing innovative products such as our guaranteed fixed price energy bill, and by establishing a leading position in utility scale renewables, where we now have over 800MW under contract.

Our Integrated Gas business will more than double its underlying EBITDA to over $1 billion this financial year.

On the 10 October this year, we announced two significant milestones: firstly the completion of the 120-day operational test on Train 1.This represents a major milestone towards satisfying project finance completion agreements on train 1 which will release US$5.1 billion of project finance guarantees. The second important milestone was the completion of the first cargo from train 2. This means APLNG is one of the largest energy projects ever to be undertaken in eastern Australia and represents billions of dollars of investment in local jobs, regional communities and Queensland as a whole.

This is a fitting testament to the management of David Baldwin and his team, but also to the vision and strategy of Grant King.

As a result of the resilience of our Energy Markets business and the optimistic outlook for our Integrated Gas business, we are comfortable to reconfirm previous guidance that our underlying EBITDA will grow by between 45 and 60 per cent in FY17.

NPAT guidance has not been provided whilst APLNG transitions from development to operation due to potential variability in non-cash items below EBITDA. We will provide a further update at the half year results.

I would now like to turn to the equally important topic of Sustainability and to our commitments.

Copies of our 2016 Sustainability Report are available in the foyer outside.

Let me take you through some of the highlights.

Origin is now Australia's leading clean energy company.

Last year we reinforced our commitment to help address climate change, to Australia's 2030 target of a 26 to 28 per cent decrease on 2005 levels as a minimum. And we committed to all seven initiatives set out by the We Mean Business Coalition. We were the first energy company in the world to do so.

We are planning to build or contract between 1,000-1,500MW of large scale renewables by 2020, with over 800MW already contracted. We have over 400,000 electricity customers with rooftop solar installations, and we grew our solar sales by 95 per cent. We are the largest green energy retailer in Australia with nearly 200,000 customers.

We also believe in the role of gas as an ongoing complementary fuel supporting the intermittency of renewables and as a displacement for coal. Origin's strategy of investing in gas and renewables means the company is well placed to lead the transition to less carbon intensive energy - not only through the Energy Markets business domestically but also in regional markets through its investment in Australia Pacific LNG

I would also like to comment here on our commitment to safety. Origin is committed to zero harm in the workplace. Safety is our first priority. Origin's primary measure of safety performance is the Total Recordable Injury Frequency Rate (TRIFR), which measures our company wide work related injuries per million hours worked. As the chart demonstrates our progress since 2012 has been good. The increase in FY16 was as a result of worked hours being reduced. The actual number of injuries fell from 120 in FY15 to 79 in FY16.

Finally let me comment on three very important changes that the Board took. The first is that after a great deal of deliberation, we took the decision to suspend the dividend in the second half of last year.

We know how important these dividends are to you, and we would not have done so unless it was absolutely necessary. As I said earlier we need to reduce debt to an acceptable level, and this together with the other initiatives I mentioned, (selling assets, reducing capex, optimising cash flow, and a 24 per cent reduction in the number of Origin employees) will enable us to do so and take more risk out of the business.

The second important change is that Grant King announced his retirement as CEO and Managing Director at the close of the AGM. I know you will want to join me in thanking him, and acknowledging his enormous contribution to Origin over the last 16 years.

When Origin was first spun out of Boral we had a market cap of around $700 million. Today that is almost $10 billion. Grant was the genius who saw the strategic benefits of combining the contestable parts of the Energy Value chain, allowing us to link energy sources with the end user. He was the visionary who realised that the fuels of the future were gas and renewables. They combine the certainty of supply of baseload generation with lower carbon emissions from renewables, at an acceptable price. And he has been the strongest advocate that Australia will benefit most from this focus on energy security, carbon reduction, and affordability. Origin is well positioned as a result of his strategic insight.

But as important, he has been a great leader for our company combining huge intellect with modesty and absolute integrity. I have never worked with better.

The third important change I want to comment on is the appointment of Frank Calabria as the new CEO.

We started the process of developing internal succession three years ago, with the help of a consulting firm from New York. The process involved both internal and external leadership development for the candidates. Six months ago we tested the external market to benchmark our internal candidates.

We found some outstanding candidates who shared our vision for Origin. After extensive interviewing, we agreed that Frank was the best of the best. It is also a tribute to Grant and the opportunities that he has afforded Frank, first as CFO and most recently as CEO of Energy Markets, that we were able to appoint from within. I know you will join me in wishing Frank every success in his new role.

In conclusion, ladies and gentlemen let me thank you for coming today and for supporting us. The year has been one of good progress in the business, overshadowed by a continued low oil price, and the resultant impact on our share price.

But we are well positioned for the medium term, reducing debt further, re-focusing on our two core businesses and driving productivity harder. We are mindful of our social license to operate, and the actions we will continue to take on climate change and safety and the environment.

I wanted to conclude by thanking my colleagues on the Board, the Executive Team and all the staff at Origin who have worked tirelessly over the last 12 months in your interests.

I want to thank you for your understanding and your patience, and assure you of our commitment to realising a great future for the company.

Gordon Cairns

Based on average oil price of US$52.90/bbl and AUD/USD exchange rate of 0.74