Aspiring always to lead strategy performance growth

Transcription

1 Aspiring always to lead strategy performance growth Annual Report 2011

2 contents 1. A message from your Chairman and Managing Director 1 2. Management Discussion and Analysis 4 3. Directors Report Lead Auditor s Independence Declaration Remuneration Report Board of Directors Executive Management Team Corporate Governance Statement Financial Statements Directors Declaration Independent Auditor s Report Share and Shareholder Information Exploration and Production Permits and Data Five Year Financial History Glossary of Terms 139

3 A message from your chairman and managing director Fellow shareholder We are pleased to report that 2011 has been a year in which Origin has continued to take major steps in the development of its business and delivered strong underlying business performance. We successfully secured two major opportunities to consolidate market leading positions, which are already having a significant impact on Origin s business. These opportunities will underpin further growth in the short, medium and long-term. In December 2010, we announced the acquisition of a portfolio of NSW energy businesses, making Origin Australia s leading energy retailer with one of the country s largest and most flexible portfolios of owned and contracted generation. The acquisition has provided strong initial contributions to underlying earnings and cash flows. In July 2011 following the close of the reporting period, Australia Pacific LNG made a Final Investment Decision in respect of a one train 4.5 million tonnes per annum Coal Seam Gas (CSG) to Liquefied Natural Gas (LNG) project with infrastructure to support a second LNG train. Origin s 42.5 per cent share of the first phase of the project requires investment of around US$6 billion over the next four years. Financially, we face a challenging external environment. While economic conditions were strong in developing countries and Australia, financial markets in developed countries exhibited extreme volatility and uncertainty. In the policy sphere, we have witnessed a rigorous and high profile debate over the potential introduction of a carbon price in Australia. We were also faced with extreme weather and natural conditions, with tragic consequences for communities, from record floods in Queensland to earthquakes in Christchurch. 15 per cent growth in Underlying Profit Origin delivered a strong financial performance for the 2011 financial year. We reported 15 per cent growth in Underlying Profit to $673 million, driven by significant contributions from the newly acquired NSW energy businesses as well as from investments Origin has made in its Generation and Exploration and Production businesses during the past two years. The growth in Underlying Profit is accompanied by a 32 per cent increase in Underlying EBITDA to $1.78 billion and a 64 per cent increase in Operating Cash Flow After Tax to $1.59 billion, demonstrating the strength of Origin s underlying business. Origin reported Statutory Profit for the year of $186 million, down from $612 million in the prior year. A number of items including transition and transaction costs, impairments and a decrease in the fair value of financial instruments resulted in the decrease in Statutory Profit (1). Underlying earnings per share, calculated from Underlying Profit, increased 10 per cent to 71.0 cents per share on a weighted average capital base of 948 million shares. The Board has declared a final fully franked dividend of 25 cents per share, taking total dividends for the year to 50 cents per share, in line with the 2010 financial year. We also provided a Dividend Reinvestment Plan at a 2.5 per cent discount. Origin s full year dividend of 50 cents per share represents a payout ratio of 70 per cent of Underlying earnings per share. We remain committed to a dividend policy of the higher of 50 cents per share or a 60 per cent payout of Underlying Profit. The dividend will be paid on 29 September 2011 to shareholders of record on 2 September Prudent capital management As a consequence of the opportunities completed during the year, Origin undertook a number of major capital raising activities in both debt and equity markets. During March and April, $2.3 billion was raised through equity markets via a 1 for 5 pro rata entitlement offer to partly fund the NSW acquisition. Syndication of a $2.15 billion and US$350 million bank debt facility was completed in April 2011, and a further 500 million (approximately $675 million) of hybrid capital securities was raised in June (1) A full reconciliation from Statutory Profit to Underlying Profit is provided in the MD&A available at ht tp://reports.originenergy.com.au. Managing Director, Grant King and Chairman, Kevin McCann 1

4 A message from your chairman and managing director (continued) The funds raised will meet ongoing capital expenditure requirements of the business and strengthen Origin s balance sheet ahead of the company s contribution to the Australia Pacific LNG project. Debt and equity markets showed strong support for these initiatives. Origin has an active capital management program designed to hold sufficient liquidity to cover forward contributions to Australia Pacific LNG, and the growth and capital requirements of the balance of Origin s business. Origin has also underwritten up to 100 per cent of the interim and final dividends up to and including the period ending 31 December Strong underlying business performance Growth in Origin s Underlying EBITDA and Operating Cash Flow After Tax demonstrates strong performance from the existing business and benefits flowing through initial or increased contributions from a number of new developments and acquisitions. Exploration and Production Underlying EBITDA increased 30 per cent or $75 million to $325 due to higher average commodity prices together with a full year contribution from Kupe, a larger share of Otway and higher production from BassGas and Australia Pacific LNG, which was partially offset by lower production from onshore assets and higher exploration expense. Generation Underlying EBITDA increased 80 per cent or $145 million to $327 million reflecting the increase in Origin s owned and contracted generation capacity from 1,710 MW to 5,310 MW, including a full year contribution from the Darling Downs Power Station and four months contribution from the GenTrader arrangements for Eraring and Shoalhaven power stations. Retail Underlying EBITDA increased 38 per cent or $217 million to $785 million. This was primarily due to the first four months contribution from the acquired Integral Energy and Country Energy retail businesses in NSW, effective management of the energy portfolio and growth in non-commodity sales, predominantly solar. Contact Energy Underlying EBITDA decreased $1 million to $345 million. Higher generation volumes and increased wholesale electricity prices in New Zealand resulted in a NZ$14 million increase in Underlying EBITDA reported by Contact. The foreign exchange impact of a strengthening Australian Dollar against the New Zealand Dollar resulted in a marginal decrease in the Australian Dollar Underlying EBITDA. Developments in carbon policy In July 2011, the Australian Government released its Clean Energy Future plan and the details of its proposed carbon pricing mechanism. The proposed scheme is due to commence from 1 July 2012 with an interim three-year, fixed-price period of $23 per tonne of CO2, then moving to a market-based floating price on 1 July Around 500 of Australia s largest emitters, including Origin, will be liable under the scheme. The proposed scheme strikes a reasonable balance between a carbon price high enough to bring about real progress in reducing carbon emissions and provide adequate safeguards for households who will pay the increases in costs necessary to bring about this change. Origin has positioned its business over many years to provide flexibility to respond to a carbon pricing regime. We will remain engaged with policy makers and regulators to ensure Origin remains well positioned to respond to the proposed carbon price. Outlook Origin has funded a number of projects and acquisitions in recent years which will contribute to Underlying EBITDA performance in the coming year, including: a full year contribution from the acquisition of the Integral Energy and Country Energy retail businesses; a full year contribution from the GenTrader arrangements covering the Eraring and Shoalhaven power stations and a contribution from the Mortlake Power Station which is expected to commence commercial operations during the first half of FY2012; increased contribution from the Exploration and Production business due to lower levels of planned exploration expense versus the prior year; and improved profitability of Contact in New Zealand as the Stratford Power Station and the Ahuroa Gas Storage project deliver flexibility to the company s energy supply portfolio. Depreciation and amortisation expense will continue to increase as capital intensive assets come on line or provide a full year s contribution. Underlying net financing costs will also increase due to funding for the NSW acquisition and completed developments. As Australia Pacific LNG is a development project, interest expense associated with its funding is excluded from the guidance of Underlying Profit. Origin s Underlying effective tax rate is expected to remain above 30 per cent due to the non-deductibility for tax purposes of amortisation associated with the Eraring GenTrader arrangements. Based on the current assessment of operations and prevailing market conditions, Origin anticipates Underlying EBITDA to increase by around 35 per cent and Underlying Profit to increase by around 30 per cent for FY2012 when compared with the prior year. 2

5 A message from your chairman and managing director (continued) Growth opportunities In July 2011, Origin committed to fund its 42.5 per cent share of the US$14 billion of estimated capital expenditure for the first phase of the Australia Pacific LNG project incorporating one train of 4.5 million tonnes per annum capacity and infrastructure of a second train. Capital has also been committed to develop the Te Mihi geothermal project in New Zealand through Origin s shareholding in Contact, and Origin will fund the continued upgrade of capacity at Eraring Power Station. These commitments will continue to drive growth in the medium term. Origin is also pursuing a number of opportunities which will expand the scale and diversity of the business and provide earnings growth in the medium to long-term. Origin s options to expand its generation capacity, include the development of Australia s largest wind farm at Stockyard Hill in Victoria and options to convert some open cycle gas turbine sites to highly efficient combined cycle gas turbines. In addition, Origin is pursuing a range of low carbon emission and renewable energy opportunities in growing offshore markets. These include exploration and development of geothermal resources, in Chile and Indonesia, assessment and development of hydro resources such as the potential Purari Hydro Project in Papua New Guinea and exploration for gas in the Canterbury Basin in New Zealand, in South East Asia and Kenya. Since first listing in 2000, Origin has demonstrated the ability to deliver sustained growth in earnings which has resulted in long-term growth in shareholder value. Based on the opportunities available to the company, Origin continues to target long-term growth in Underlying Earnings Per Share of 10 to 15 per cent per annum on average. Board and people The health and safety of our people and contractors is Origin s first priority. This year, we reported a company-wide Total Recordable Incident Frequency Rate (TRIFR) (1) of 6.0, an increase from 5.6 in the prior year. Many of Origin s business units showed a positive change reflecting their commitment to improving safety, however a number of our colleagues still sustained injuries while at work. We continue to focus on the challenge of improving safety performance. Consistent with the ongoing growth of our business, the Origin team has also grown. At the end of the financial year, Origin had a total of 5,213 (2) employees, an increase of 821 people on the prior year, reflecting expanded operations and project activities. We would like to extend our gratitude to fellow Directors. In the past 12 months, your Board met 11 times and held several workshops to consider operational and strategic matters of relevance to Origin. The Board also visited some of our key projects and operations which will play an important role in Origin s future growth. On a final note, we would also like to thank the people and businesses associated with Origin from our customers and partners, to our employees and investors, to the communities in which we live and work. In a year of so many achievements for Origin, you have all played a role in the company s continued growth and success. Communities We are interested in new ways to create benefits for communities, and last year, to celebrate the 10th anniversary of Origin s listing on the ASX, we established the philanthropic Origin Foundation. With a focus on education, the Foundation made 12 grants to the value of $4 million in its inaugural year, as well as taking steps to improve our employee giving program, Give2. The Foundation will develop further community partnerships in the coming year. We acknowledge that the development of the CSG industry has attracted community and media attention in Australia. Our operations are heavily regulated by the Queensland and Australian governments and we are committed to operating in an environmentally responsible manner. Origin has CSG operations only in Queensland, where we are experienced in extracting gas from coal seams. For 15 years we have been working with local communities to develop these resources sustainably. Our approach is based on genuine consultation and open communication with landowners and local communities. CSG is a clean and efficient resource which fuels low carbon power generation in Australia and LNG for customers in Asia. LNG also contributes to reducing carbon emissions globally. In the year ahead we will proactively address misinformation about drilling practices and the impact of our operations on water resources. In these areas, we are committed to protecting the environment and the activities of communities. H Kevin McCann Chairman Grant King Managing Director (1) TRIFR measures the total number of recordable injuries that occur per million hours worked on a rolling 12-month basis. Recordable injuries include lost time cases, restricted work cases and medical treatment cases. (2) Excludes Contact Energy employees. Origin Energy Annual Report

6 Management Discussion and Analysis for the year ended 30 June 2011 All figures in this report relate to businesses of the Origin Energy Group, being Origin Energy Limited (Company or Origin) and its controlled entities, for the year ended 30 June 2011 (this year or the current year) compared with the year ended 30 June 2010 (the prior year), except where otherwise stated. A reference to Contact is a reference to Origin s subsidiary (52.6 per cent ownership) Contact Energy Limited in New Zealand. In accordance with Australian Accounting Standards, Origin consolidates 100 per cent of Contact Energy within its result. A reference to Australia Pacific LNG or APLNG is a reference to Australia Pacific LNG Pty Limited in which Origin had a 50 per cent equity interest as at 30 June A reference to the NSW acquisition or NSW energy assets is a reference to the Integral Energy and Country Energy retail businesses and the Eraring GenTrader arrangements. All reference to $ is a reference to Australian Dollars unless specifically marked otherwise. All references to debt are a reference to interest bearing debt only. Individual items and totals are rounded to the nearest appropriate number or decimal. Some totals may not add down the page due to rounding of individual components. Origin s Statutory Profit contains a number of items in this year and the prior year that do not portray the ongoing performance of the business. Underlying Profit excludes the impact of these items to better illustrate the business performance of the Company. Each Underlying measure discussed has been adjusted to remove these items from both this year and the prior year. A detailed reconciliation and description of the items that contribute to the difference between Statutory Profit and Underlying Profit is provided in Appendix Profit and Dividend Declaration 1.1 Statutory Profit $186 million, down from $612 million Origin reported a Net Profit After Tax and Non-controlling interests (Statutory Profit) of $186 million for the year ended 30 June 2011, a decrease of 70 per cent compared with $612 million reported in the prior year. The key factors contributing to the year-on-year change in the Statutory Profit from $612 million to $186 million included a positive contribution from higher Underlying Profit (+$88 million) offset by a higher impairment of assets (-$137 million), a decrease in the fair value of financial instruments (-$150 million) and higher transition and transaction costs related to the acquisition of the Integral Energy and Country Energy retail businesses as part of the NSW privatisation process (-$215 million). Further details are provided in Section 1.6 Reconciliation of Underlying Profit and Statutory Profit. 1.2 Earnings per share 19.6 cps, down from 67.7 cps (1) Basic earnings per share (EPS) calculated based on Statutory Profit decreased by 71 per cent to 19.6 cents per share (cps) from 67.7 cps (1) in the prior year. The weighted average capital base of 948 million shares increased 44 million shares on the prior year (2), mainly due to the $2.3 billion share issuance related to the pro rata equity offering completed in April Final dividend 25 cps fully franked A final fully franked dividend of 25 cps will be paid on 29 September 2011 to shareholders of record on 2 September Origin shares will trade ex-dividend from 29 August This will bring the total dividend attributable to FY2011 to 50 cps and is in line with the prior year. The Dividend Reinvestment Plan (DRP) will apply to this dividend. Origin will apply a discount of 2.5 per cent to the price of shares issued under the DRP in respect of the dividend for the period ending 30 June Origin has entered an agreement to underwrite up to 100 per cent of the interim and final dividends up to and including the period ending 31 December The final dividend for the period ending 30 June 2011 will be fully underwritten. 1.4 Underlying Profit $673 million, up 15 per cent Underlying Profit for the year increased 15 per cent or $88 million to $673 million from $585 million. The result primarily reflects a 32 per cent increase in Underlying Earnings Before Interest, Tax, Depreciation and Amortisation (Underlying EBITDA) ($436 million) resulting from higher commodity prices and initial contributions from the acquisition of the Integral Energy and Country Energy retail businesses and the GenTrader arrangements, the Kupe development and the increased share in the Otway Gas Project; and offset by higher exploration expense from an expanded greenfield exploration program. Increased Underlying EBITDA was partially offset by higher Underlying depreciation and amortisation charges predominantly from the Generation and Exploration and Production business segments ($122 million); an increase in Underlying net financing costs due to higher net debt from acquisitions and capital expenditure ($130 million) and a higher tax expense from higher Underlying profits and a higher Underlying effective tax rate ($84 million). Further details are provided in Section Underlying EPS 71.0 cps, up 10 per cent Underlying EPS calculated on the Underlying Profit increased by 10 per cent to 71.0 cps from 64.8 cps (3) on a weighted average capital base of 948 million shares. Origin s full year dividend of 50 cps represents a payout ratio of 70 per cent based on Underlying EPS. 1.6 Reconciliation of Underlying Profit and Statutory Profit Statutory Profit for this year and the prior year contain the impact of a number of items, as shown in the table below, that do not portray the ongoing performance of the business. In the year to 30 June 2011, these items amounted to an expense of $487 million. This compared with the year to 30 June 2010 in which these items had a benefit of $27 million. (1) FY2010 Statutory EPS of 69.7 cps restated to 67.7 cps for the bonus element of the rights issue completed in April (2) 877,972,404 shares as at 30 June 2010 restated to 903,353,998 for the bonus element of the rights issue completed in April (3) FY2010 Underlying EPS of 66.6 cps restated to 64.8 cps for the bonus element of the rights issue completed in April

7 Management Discussion and Analysis for the year ended 30 June 2011 (continued) Reconciliation of Statutory and Underlying Profit Impact After Tax & Noncontrolling Interests June 2011 June 2010 NPAT Impact After Tax & Noncontrolling Interests NPAT Change Change ($m) (%) Statutory Profit (426) (70) Items excluded from Underlying Profit Impairment of assets (160) (23) (137) 596 Gain on dilution of Origin s interest in subsidiaries 27 (27) (100) Increase/(decrease) in fair value of financial instruments (140) 10 (150) (1,500) Unwinding of discounts resulting from APLNG receivables and payables (27) (69) Transition and transaction costs (235) (20) (215) 1,075 Other 36 (6) Less total excluded items (487) 27 (514) (1,904) Underlying Profit A more detailed reconciliation of Statutory Profit to Underlying Profit is provided in Appendix Operating Cash flow After Tax (OCAT) $1,585 million, up 64 per cent Group OCAT increased by 64 per cent or $620 million to $1,585 million. This was primarily due to higher Underlying EBITDA. Further details are provided in Section Capital expenditure and divestments $4,954 million, up 64 per cent Total capital expenditure including acquisitions was $4,954 million compared with $3,027 million in the prior year. This includes $1,829 million stay-in-business and growth capital expenditure and $3,125 million of capital expenditure on acquisitions, net of transaction costs. Further details are provided in Section Outlook During 2011, Origin invested $5.0 billion in developing and growing its business. This included $3.1 billion on the acquisition of the Integral Energy and Country Energy retail businesses and entry into the Eraring GenTrader arrangements. In addition, in July 2011, Origin committed US$6.0 billion for the first phase of the Australia Pacific LNG project. This will drive short, medium and longer term growth for Origin. In the coming year, Origin s Underlying EBITDA will benefit from: a full year contribution from the acquisition of the Integral Energy and Country Energy retail businesses; a full year contribution from the GenTrader arrangements covering the Eraring and Shoalhaven power stations and contributions from the Mortlake Power Station which is expected to commence commercial operations during the first half of the financial year; increased contribution from the Exploration and Production business due to lower levels of planned exploration expense versus the prior year; and improved profitability in Contact in New Zealand as the Stratford Power Station and the Ahuroa Gas Storage project deliver flexibility to Contact s energy supply portfolio. Depreciation and amortisation expense will continue to increase as capital intensive assets come on line or provide a full year s contribution. Underlying net financing costs will increase associated with the funding of the NSW acquisition and completed developments. As Australia Pacific LNG is a development project, interest expense associated with its funding is excluded from the guidance of Underlying Profit. Origin s Underlying effective tax rate is expected to remain above 30 per cent due to the non-deductibility for tax purposes of amortisation associated with the GenTrader arrangements. Based on Origin s current assessment of operations and prevailing market conditions, Origin anticipates Underlying EBITDA to increase by around 35 per cent and Underlying Profit to increase by around 30 per cent for FY2012 when compared with the prior year. In July 2011, Origin committed to fund its 42.5 per cent share of the US$14 billion of estimated capital expenditure for the first phase of the Australia Pacific LNG project, with the option of progressing to a full two-train development. Capital has also been committed to develop the Te Mihi geothermal project via Origin s shareholding in Contact and Origin will fund the continued upgrade of capacity of the Eraring Power Station. These commitments will continue to drive growth in the medium term. Origin is also pursuing a number of opportunities, which will expand the scale and diversity of its business and provide earnings growth in the medium to long term. Origin has several options available to expand its generation capacity. These include the development of Australia s largest wind farm at Stockyard Hill and the option to convert some open cycle gas turbine sites to highly efficient combined cycle gas turbines. In addition, Origin is pursuing a range of low carbon emission and renewable energy opportunities in growing offshore markets. These include exploration and development of geothermal resources, particularly in Chile and Indonesia, assessment and development of hydro resources such as the potential Purari Hydro Project in Papua New Guinea and the exploration for gas particularly in the Canterbury Basin in New Zealand, in South East Asia and Kenya. Since first listing in 2000, Origin has demonstrated the ability to deliver sustained growth in earnings which has resulted in long-term growth in shareholder value. Based on the opportunities available to the Company, Origin continues to target long term growth in Underlying EPS of 10 to 15 per cent per annum on average. Origin Energy Annual Report

8 Management Discussion and Analysis for the year ended 30 June 2011 (continued) 3. Review of Financial Performance Year ended 30 June Change ($m) ($m) (%) Total external revenue 10,344 8, Underlying EBITDA 1,782 1, Underlying depreciation and amortisation (539) (408) 32 Underlying share of interest, tax, depreciation and amortisation of equity accounted investees (49) (42) 17 Underlying EBIT 1, Underlying net financing costs (143) (13) 1,000 Underlying Profit before income tax 1, Income tax expense on Underlying Profit (316) (232) 36 Underlying net profit after tax before elimination of Non-controlling Interests Non-controlling Interests share of Underlying Profit (62) (66) (6) Underlying Profit Items excluded from Underlying Profit (487) 27 (1,904) Statutory Profit (70) EPS Underlying (1) 10 EPS Statutory (2) (71) (1) FY2010 Underlying EPS of 66.6 cps restated to 64.8 cps for the bonus element of the rights issue completed in April (2) FY2010 Statutory EPS of 69.7 cps restated to 67.7 cps for the bonus element of the rights issue completed in April External revenue $10,344 million, up 21 per cent Total external revenue increased by 21 per cent or $1,810 million to $10,344 million. This reflected an increase in external revenues from the Retail business segment ($1,679 million) predominantly associated with the acquisition of the Integral Energy and Country Energy retail businesses and entry into the Eraring GenTrader arrangements, together with increased revenues from the Exploration and Production business segment ($145 million). Further details are available in Section Underlying EBITDA $1,782 million, up 32 per cent For the year ended 30 June 2011, Underlying EBITDA increased 32 per cent or $436 million to $1,782 million. The Underlying EBITDA contributions by business segment are presented in the following table: Underlying EBITDA by business segment Year ended 30 June Change ($m) ($m) (%) Exploration & Production Generation Retail Contact Underlying EBITDA 1,782 1, Exploration & Production Underlying EBITDA increased by 30 per cent or $75 million to $325 million. This was driven by higher average commodity prices together with a full year contribution from the Kupe development compared with six months in the prior year, a full year contribution of an additional 36 per cent interest in the Otway Gas Project compared with three and a half months in the prior year, higher production from BassGas and a higher contribution from Australia Pacific LNG; partially offset by significantly higher exploration expense of $118 million in the current year from an expanded greenfield exploration program compared with $45 million in the prior year and a lower contribution from onshore producing assets. Further details are available in Section 8.1. Generation Underlying EBITDA increased 80 per cent or $145 million to $327 million. This reflected the increase in Origin s owned and contracted generation capacity from 1,710 MW to 5,310 MW, including a full year contribution from the Darling Downs Power Station and four months contribution from the GenTrader arrangements for Eraring and Shoalhaven power stations ($43 million). Further details are available in Section 8.2. Retail Underlying EBITDA increased 38 per cent or $217 million to $785 million. This was primarily due to the first four months contribution from the acquired Integral Energy and Country Energy retail businesses in NSW ($183 million), effective management of the energy portfolio and growth in non-commodity sales, predominantly solar. Further details are available in Section 8.3. Contact Underlying EBITDA decreased $1 million to $345 million. Higher generation volumes and increased wholesale electricity prices in New Zealand resulted in a NZ$14 million increase in Underlying EBITDA as reported by Contact. However, the foreign exchange impact of a strengthening Australian Dollar against the New Zealand Dollar resulted in a marginal decrease in the Australian Dollar Underlying EBITDA. Further details are available in Section

9 Management Discussion and Analysis for the year ended 30 June 2011 (continued) 3.3 Underlying depreciation and amortisation $539 million, up 32 per cent Underlying depreciation and amortisation increased by 32 per cent or $131 million to $539 million. This was primarily due to the higher asset base and increased production associated with the Darling Downs, Eraring and Shoalhaven power stations and the Kupe and Otway gas developments. 3.4 Underlying share of interest, tax, depreciation and amortisation of equity accounted investees $49 million, up 17 per cent The share of Underlying interest, tax, depreciation and amortisation (ITDA) attributable to equity accounted investees increased 17 per cent or $7 million to $49 million. This was primarily due to an increase of $10 million associated with Origin s interest in Australia Pacific LNG, which had increased due to additional assets becoming operational during the period and an increase in production in the current year. 3.5 Underlying EBIT $1,194 million, up 33 per cent For the year ended 30 June 2011, Underlying earnings before interest and tax (Underlying EBIT) increased 33 per cent or $298 million to $1,194 million. The Underlying EBIT contributions by business segment are presented in the following table: Underlying EBIT by business segment Year ended 30 June Change ($m) ($m) (%) Exploration & Production Generation Retail Contact Underlying EBIT 1, Underlying net financing costs $143 million, up $130 million The net financing costs for the full year comprise an interest expense of $179 million and interest revenue of $36 million compared with interest expense of $126 million and interest revenue of $113 million in the prior year. Capitalised interest was $153 million compared with $156 million in the prior year. 3.7 Income tax expense on Underlying Profit $316 million, up 36 per cent Underlying income tax expense for the full year increased 36 per cent or $84 million to $316 million reflecting higher Underlying profit before income tax and a higher Underlying effective tax rate of 30 per cent compared with 26 per cent in the prior year. The Underlying effective tax rate was higher than the prior year mainly due to tax benefits in the prior year arising from recognition of previously unbooked capital losses. 3.8 Non-controlling interests share of Underlying Profit $62 million, down 6 per cent Underlying Profit attributable to Non-controlling Interests decreased 6 per cent to $62 million from $66 million. 3.9 Underlying Profit $673 million, up 15 per cent Underlying Profit for the year increased 15 per cent or $88 million to $673 million from $585 million. 4. Operating Cash flow After Tax (OCAT) $1,585 million, up 64 per cent Year ended 30 June Change Change ($m) ($m) ($m) (%) Underlying EBITDA 1,782 1, Change in working capital (37) (179) 142 (79) Stay-in-business capex (203) (179) (24) 13 Share of APLNG OCAT less EBITDA (7) (39) Exploration expense NSW acquisition related liabilities (128) (128) Other (1) Tax paid 3 (102) Group OCAT 1, Net interest paid (269) (165) (104) 63 Free cash flow 1, Productive Capital 11,571 8,423 3, Group OCAT Ratio (2) 13.0% 10.9% 2.1% 19 (1) The add-back of non-cash equity accounted profits excluding Australia Pacific LNG and movements in provision balances are included within the Other line item. (2) Group OCAT Ratio = (OCAT interest tax shield)/productive Capital. One of Origin s internal measures of performance is its Group OCAT Ratio, which is an indicator of the cash returns the Company is generating from productive funds employed within its operations. The Group OCAT Ratio increased from 10.9 per cent in the prior year to 13.0 per cent due to significant returns from new acquisitions, higher cash generation from existing assets and lower working capital. Details of the contributing factors to this increase are provided following. Origin Energy Annual Report

10 Management Discussion and Analysis for the year ended 30 June 2011 (continued) Group OCAT increased by 64 per cent or $620 million to $1,585 million. The key drivers of the increase in Group OCAT were: $436 million increase in Underlying EBITDA; an improvement in working capital which increased by only $37 million compared to a $179 million increase in FY2010. This was primarily due to the timing of creditor payments in Exploration and Production ($62 million) and timing of network creditors in Retail ($130 million). This has been partly offset by higher debtors in Retail due to increased solar sales; an increase in exploration expense of $73 million which is added back to cash flows; changes in other items of $23 million mainly due to higher employee-related provisions; and a net tax refund of $3 million in FY2011 compared with tax paid of $102 million in FY2010. This was partly offset by: an increase of $24 million in stay-in-business capex, primarily in the Contact and Generation business segments; and a total of $128 million for the unwinding of non-cash provisions relating to the NSW acquisition. This includes the utilisation of the provision for the onerous Transitional Services Agreements (TSAs) of $35 million and the unwinding of the liability in respect of the acquired power purchase agreements, hedge contracts and green rights contracts ($93 million). Net interest paid was $104 million higher than the prior year, reflecting higher average net debt balances and higher average interest rates. Free cash flow available for funding growth and distributions to shareholders increased by 64 per cent from $800 million to $1,316 million. Productive Capital in the business, calculated on a 12 month weighted average basis, increased by 37 per cent to $11,571 million. Major assets contributing to this increase were a full year inclusion of Darling Downs Power Station, which commenced commercial operation on 1 July 2010; a four month inclusion of the Integral Energy and Country Energy retail businesses, and Eraring and Shoalhaven power stations; a full year inclusion of Kupe compared with six months in the prior year; and a full year inclusion of an additional 36 per cent interest in the Otway Gas Project compared with three and a half months in the prior year. The combined impact of the increased Group OCAT and Productive Capital resulted in a Group OCAT ratio for the year ended 30 June 2011 of 13.0 per cent compared with 10.9 per cent in the prior year. 5. capital expenditure (1) $4,954 million, up 64 per cent Capital expenditure on stay-in-business and growth projects was $1,829 million for the year to 30 June Stay-in-business capital expenditure was $203 million compared with $179 million in the prior year, primarily due to increases in the Generation and Contact business segments reflecting their larger asset bases. Growth capital expenditure (including capitalised interest) was $1,626 million, 2 per cent lower than in the prior year. This included expenditure of $35 million or more in the following areas: Retail $497 million in total, including: Environmental product certificates $291 million; and Retail Transformation $118 million. Generation $464 million in total, including: Mortlake Power Station $230 million; Eraring Power Station $56 million; and Transform Solar joint venture $38 million. Exploration and Production $324 million in total, including: Ironbark CSG $78 million (including $57 million of capitalised interest); Australia and New Zealand Offshore Exploration $58 million; Australia and New Zealand Offshore Production $57 million; Australia onshore Exploration and Production $45 million; and South East Asia $35 million. Contact $341 million in total, including: Te Mihi Geothermal Development $71 million; Wairakei (steam field works and drilling) $68 million; Inventory gas at Ahuroa Gas Storage Facility $41 million; and Enterprise Transformation Project $38 million. Capital expenditure on acquisitions totalled $3,125 million for the acquisition of the Integral Energy and Country Energy retail businesses and entering the Eraring GenTrader arrangements, net of transaction costs. Total capital expenditure including acquisitions was $4,954 million compared with $3,027 million (2) in the prior year. Following completion of a transaction in late 2008 in which ConocoPhillips became a 50 per cent shareholder in Australia Pacific LNG, ConocoPhillips is funding expenditure by Australia Pacific LNG to a cumulative total of $2.3 billion. As at 30 June 2011, $284 million of the $2.3 billion remained to be spent. Origin will start contributing to capital expenditure within Australia Pacific LNG following completion of ConocoPhillips remaining $284 million commitment and utilisation of Sinopec s $1.8 billion equity contribution. On current estimates, Origin will commence contributing its share of capital expenditure to Australia Pacific LNG in the December quarter of FY Funding and capital management 6.1 Capital management initiatives During the year, Origin has undertaken a number of capital management initiatives to fund acquisitions and the ongoing capital expenditure requirements of the business while preserving balance sheet strength. Origin raised $3.3 billion of funding to support the transaction to acquire the Integral Energy and Country Energy retail businesses, and to enter into the GenTrader arrangements with Eraring Energy as announced on 15 December The funding facilities included a $2.2 billion bridge facility and a three to five year syndicated bank facility. The bridge facility was subsequently refinanced through a number of transactions, including a $2.3 billion pro rata equity entitlement offer completed in April In addition, Origin expanded the three to five year syndicated bank facility to refinance $900 million of existing bank debt and also accepted oversubscriptions which resulted in the syndication of a $2.15 billion and US$350 million three to five year bank facility in April Origin also refinanced a number of small bilateral facilities during the year. In June 2011, Origin undertook a 500 million ($675 million) hybrid issue, which was hedged into US Dollars. This instrument obtained 100 per cent equity credit from Standard & Poor s and 50 per cent equity credit from Moody s. In June 2011, Origin contributed NZ$202 million to Contact s NZ$351 million pro rata entitlement offer, increasing its shareholding in Contact to 52.6 per cent. (1) The capital expenditure below is based on cash flow amounts rather than accrual accounting amounts and includes capitalised interest. (2) FY2010 capital expenditure is restated to conform with the current year s classification. 8

11 Management Discussion and Analysis for the year ended 30 June 2011 (continued) Post 30 June 2011, Origin announced that Australia Pacific LNG would proceed with the first phase of a two-train CSG to LNG development. The first phase development will cost approximately US$14 billion and Origin s funding for its contributions will be covered by a range of sources including: existing committed undrawn debt facilities and cash totalling around $3.9 billion at 30 June 2011; cash flows from Origin s underlying business; new debt facilities, which may include the consideration of project financing at the Australia Pacific LNG level; and up to $1 billion from the underwritten DRP covering the next four dividend payments. The underwritten DRP will commence with the final dividend for the financial year ended 30 June 2011 and will apply a 2.5 per cent discount. Origin will actively manage its existing debt facilities and, as required from time to time, will add further debt facilities to ensure sufficient liquidity exists to cover its expected forward contributions to Australia Pacific LNG and other capital expenditure required for the balance of Origin s business. Origin currently holds BBB+ (stable outlook) and Baa1 (negative outlook) long-term credit ratings with Standard & Poor s and Moody s respectively. 6.2 Share capital During the year, Origin issued an additional 183,838,387 shares raising a total of $2.3 billion. This included 177,100,055 shares issued under the pro rata equity entitlement offer which raised $2.3 billion; 3,929,332 shares issued under the DRP which raised $61 million; and 2,809,000 shares issued as the result of the exercise of long-term incentives which raised $18 million. As a consequence, the total number of shares on issue at 30 June 2011 increased by 183,838,387 shares to 1,064,507,259 from 880,668,872 at 30 June The weighted average number of shares used to calculate basic EPS at 30 June 2011 increased by 44,387,901 to 947,741,899 from 903,353,998 (1) as at 30 June Net debt and equity Net debt The net debt (2) for the consolidated entity increased to $4,060 million at 30 June 2011 from $2,663 million at 30 June 2010, a net movement of $1,397 million. The calculation of this debt amount includes a favourable mark-to-market adjustment of $223 million as at 30 June 2011 compared with a favourable adjustment of $172 million as at 30 June Favourable adjustments act to decrease the net debt quoted. Excluding these mark-to-market adjustments, the adjusted net debt for the consolidated entity was $4,283 million at 30 June 2011 compared with a $2,835 million adjusted net debt balance at 30 June 2010, a net movement of $1,448 million. The movement in the adjusted net debt of $1,448 million is primarily attributable to Origin s funding requirements for the purchase of the Integral Energy and Country Energy retail businesses and the Eraring GenTrader arrangements and for Origin s ongoing capital expenditure program Equity Shareholders equity increased 18 per cent or $2,078 million from $11,438 million at 30 June 2010 to $13,516 million at 30 June The increase of $2,078 million is predominantly due to $2,267 million (net of transaction costs) raised through the pro rata equity entitlement offer undertaken in March and April A total of $1,112 million related to the institutional offer and $1,155 million related to the retail offer. Other factors contributing to the increase are Statutory Profit after tax and before Non-controlling Interests of $248 million, $61 million of share issuance (DRP) and $18 million from share-based payments. These amounts are partially offset by $408 million of dividends paid for the full year. Excluding the mark-to-market adjustment for the consolidated entity s financial instruments, adjusted shareholder s equity increased 18 per cent from $11,552 million at 30 June 2010 to $13,639 million at 30 June Gearing ratios (2) The following two tables provide different calculations of the Net Debt to Net Debt plus Equity ratio based on unadjusted and adjusted positions discussed in Sections Using adjusted values to calculate the Net debt to Net debt plus equity ratio removes any short-term volatility caused by changes in fair value of financial instruments and is a better long-term measure of the strength of Origin s capital structure. Calculation of Net debt to Net debt plus equity: ($m) ($m) Net debt as reported 4,060 2,663 Equity as reported 13,516 11,438 Net debt to (Net debt + equity) 23.1% 18.9% Calculation of Adjusted Net debt to (Net debt plus equity) excluding movements in fair value of financial instruments: ($m) ($m) Adjusted Net debt 4,283 2,835 Adjusted equity 13,639 11,552 Adjusted Net debt to (Net debt + equity) 23.9% 19.7% Net debt and gearing ratio excluding Contact Origin owns 52.6 per cent of the ordinary shares of Contact and is therefore required under the accounting standards to consolidate all of Contact s assets and liabilities in Origin s Statement of Financial Position. This includes consolidating 100 per cent of Contact s outstanding debt obligations. However, under the terms of those debt obligations Origin has no liability associated with Contact s debt. Excluding Contact s debt obligations, Origin has an adjusted net debt position as at 30 June 2011 of $3,365 million compared with an adjusted net debt position of $1,747 million as at 30 June 2010, a change of $1,618 million. 7. Risk management Origin manages its risk exposure in energy markets through a combination of natural hedges in the business, contracts and financial hedges. Policy limits have been approved by the Origin Board for products or financial variables for which there is a material risk exposure. Regular reporting is provided to the Board to review exposures and compliance with these limits. Consistent with this policy framework, Origin undertakes hedging of its exposure to electricity and natural gas prices, environmental products, oil prices, foreign currency exchange rates and interest rates. Reaching a FID on Australia Pacific LNG introduces additional exposure to interest rate and foreign currency risk in the short term and oil prices in the longer term. (1) 877,972,404 shares restated as 903,353,998 increased by the bonus element of the rights issue completed in April (2) The reported numbers for net debt include interest bearing debt obligations only. Origin Energy Annual Report

12 Management Discussion and Analysis for the year ended 30 June 2011 (continued) 7.1 Electricity and gas In the electricity and gas markets, Origin assesses its policy limits against a combination of profit at risk and extreme events. Origin has arrangements in place to cover extreme price and demand events as well as average forecast demand for the near to mid-term. 7.2 Environmental products Origin is exposed to liabilities from State and Federal based government environmental schemes. These liabilities accrue during a set of annual compliance periods and are typically related to electricity supply and demand. An inventory of certificates is accrued during the period in order to meet the expected liability at the end of each compliance period. Origin is aware of the intention of the Federal Government to introduce the Clean Energy Future Policy Package that places a value on carbon. Origin has positioned its business over many years to provide flexibility to respond to the imposition of a carbon pricing regime. Origin will remain engaged with policy makers and regulators to ensure the business remains well positioned to respond to the proposed carbon price. 7.3 Oil and condensate On an ongoing basis, Origin assesses its anticipated medium-term production volumes, current forward oil prices and risk exposure to movement in oil prices. For the financial year ended 30 June 2011, Origin held hedge contracts for 600 thousand barrels in total, of which 180 thousand barrels of oil hedges related to production from the Kupe asset. Given Kupe reports its earnings in US Dollars, Origin did not have associated foreign currency hedges for these volumes. Origin currently has 990 thousand barrels of its anticipated production hedged for the year to June Of these hedged barrels, a portion is allocated against Australian production and has associated foreign currency hedges. The remaining portion does not have associated foreign currency hedges, as this relates to production from the Kupe asset, which reports its earnings in US Dollars. 7.4 Foreign currency exchange rates Origin prudently manages its foreign exchange exposure through external hedging arrangements where appropriate. Origin is primarily exposed to US Dollar exchange rate risk through the sale of commodities, the translation of Origin s US Dollar denominated Exploration and Production activities in New Zealand, the translation of US Dollar denominated debt obligations and future committed US Dollar-denominated capital expenditure primarily associated with Origin s interest in Australia Pacific LNG. New Zealand Dollar exchange rate risk arises through the translation of Contact s earnings to Australia Dollars. 7.5 Interest rates Origin s consolidated average interest rate paid on debt for the full year was 7.1 per cent. This includes Contact s New Zealand Dollar denominated debt and Origin s Australian Dollar, US Dollar and New Zealand Dollar debt obligations. Origin s average annual interest rate paid excluding Contact was 7.1 per cent. As at 30 June 2011, Origin held cash on deposit and cash equivalents of approximately $728 million compared with $823 million at 30 June 2010, including Contact. This cash was invested at an average rate of 5.1 per cent for FY2011. Approximately 55 per cent of Origin s consolidated debt obligations are hedged to 30 June 2012 at an average rate of 6.2 per cent including margin. Excluding Contact, Origin has 47 per cent of its debt obligations hedged at an average rate of 6 per cent including margin. This hedge percentage gradually reduces over the following five plus years. 8. Operational Review 8.1 Exploration & Production Financial performance Year ended 30 June Change ($m) ($m) (%) Total revenue Underlying EBITDA before exploration expense Underlying EBITDA Underlying EBIT Operational performance Year ended 30 June Change (%) Total Production (PJe) Total Sales (PJe) Commodity Sales Revenue ($m) (1) Proved plus Probable (2P) Reserves (PJe) (2) 7,041 6, (1) Includes Australia Pacific LNG. (2) Includes Origin 50 per cent share of Australia Pacific LNG reserves as at 30 June Origin s share post-sinopec completion on 9 August 2011 is 42.5 per cent diluting Origin s 2P reserves by 883 PJe. Origin s Exploration and Production business segment reported record annual sales volumes and commodity revenues during the year. Underlying EBITDA for the Exploration and Production business segment increased by 30 per cent or $75 million to $325 million from $250 million in the prior year. This was driven by higher average commodity prices together with a full year contribution from the Kupe development compared with six months in the prior year; a full year contribution of an additional 36 per cent interest in the Otway Gas Project compared with three and a half months in the prior year; higher production from BassGas following an extended maintenance shutdown in the prior year; and a higher contribution from Australia Pacific LNG. These increases were partially offset by a significantly higher exploration expense of $118 million in the current year from an expanded greenfield exploration program compared with $45 million in the prior year and lower contributions from onshore producing assets. 10

13 Management Discussion and Analysis for the year ended 30 June 2011 (continued) The Australia Pacific LNG joint venture continued to make substantial progress in both development of the domestic gas supply business and its CSG to LNG export project. Progress on the CSG to LNG project included signing of a binding equity subscription and LNG sales agreements with Sinopec in April 2011 and a FID on the first phase of a two-train CSG to LNG project in late July In addition, Origin continued to grow its reserves base, with 2P reserves up by 834 PJe or 13 per cent to 7,041 PJe as of 30 June During the course of the year, production and sales are reported to the market on a consolidated basis, which includes Origin s 50 per cent share of Australia Pacific LNG. In the financial statements, the financial performance of Australia Pacific LNG is equity accounted. Consequently, revenue and expenses from Australia Pacific LNG do not appear explicitly in the Exploration and Production business segment results. Origin s 50 per cent share of Australia Pacific LNG s Underlying EBITDA is included in the Underlying EBITDA of the Exploration and Production business segment. Australia Pacific LNG s Underlying depreciation, amortisation, interest and tax expense are accounted for between Underlying EBITDA and Underlying EBIT in the line item Share of interest, tax, depreciation and amortisation of equity accounted investees. A summary of Australia Pacific LNG s accounts is provided in Appendix Production, Sales and Revenues Year ended 30 June 2011 APLNG (50%) Origin Upstream excluding APLNG Total Consolidated Production, Sales and Commodity Revenue Production (PJe) Sales (PJe) Commodity Revenue ($m) Statutory Revenue Commodity Sales Revenue ($m) Other Revenue ($m) Total Revenue ($m) Year ended 30 June 2010 APLNG (50%) Origin Upstream excluding APLNG Total Consolidated Production, Sales and Commodity Revenue Production (PJe) Sales (PJe) Commodity Revenue ($m) Statutory Revenue Commodity Sales Revenue ($m) Other Revenue ($m) Total Revenue ($m) Production Origin s share of total production was up 31 PJe or 30 per cent to 135 PJe for the full year. Significant contributors to this result included a 36 per cent increase in Origin s share of production from Australia Pacific LNG (+12.8 PJe), Origin s increased share of the Otway Gas Project production (+12.3 PJe), a full year from the Kupe Gas Project compared with six months in the prior year (+7.1 PJe), and higher production from BassGas due to greater plant availability (+2.7 PJe). These increases were partially offset by lower production from Origin s onshore assets in the Cooper, Surat, Perth and Taranaki basins (-4.1 PJe). Excluding Australia Pacific LNG, production increased by 19 PJe or 28 per cent. Further information regarding production, sales volumes and revenues is provided in Origin s Quarterly Production Report and, in particular, the report for the June Quarter and year to 30 June 2011, available at Origin s website w w w.originenergy.com.au. Underlying Revenue and Expenses excluding Australia Pacific LNG Total Revenue excluding Australia Pacific LNG increased by 34 per cent from $522 million in the prior year to a record $701 million for the current year. This reflected an increase in sales volumes of 17 PJe or 22 per cent from 79 PJe in the prior year to 96 PJe this year, together with higher average prices across all commodities. Expenses relating to sales and operations excluding Australia Pacific LNG increased by 18 per cent to $321 million from $273 million in the prior year. This increase in expenses was substantially lower than the increase in sales volumes and revenues of 22 per cent and 34 per cent respectively. Year ended 30 June Change ($m) ($m) (%) Cost of Goods Sold Stock movement 1 8 (88) Royalties, tariffs and freight General operating costs Sub-total Exploration Total Expenses Origin Energy Annual Report

14 Management Discussion and Analysis for the year ended 30 June 2011 (continued) For the current year, Cost of Goods Sold was $70 million compared with $58 million in the prior year, reflecting an increase in the volume of third party purchases, predominantly in the Cooper Basin. Stock movement expense was $1 million compared with $8 million in the prior year. Royalties, tariffs and freight increased by $17 million from $40 million to $57 million. This increase is primarily due to an increase in royalties paid by Kupe, which increased production substantially this year and was no longer able to claim construction deductibles against royalty expenses as it had in the prior year. General operating costs increased by 16 per cent or $26 million to $193 million. This compared with a 28 per cent increase in corresponding production volumes. Consequently, Origin s general costs per unit of production reduced by 10 per cent to $2.22 per GJe. During the year, Origin continued an expanded greenfield exploration program, both domestically and internationally. This included three offshore wells in Australia and New Zealand, four wells in South East Asia and a substantial seismic exploration program. Origin has actively managed its exposure across a number of its exploration areas and recovered back costs in two areas through farmout arrangements in Kenya and in the Canterbury Basin in New Zealand. Expanded exploration activity has led to an increase in exploration expense net of farmout receipts to $118 million before tax, compared with $45 million in the prior year Earnings Year ended 30 June Change ($m) ($m) (%) Total Revenue less expenses (439) (318) 38 add Share of Underlying EBITDA of Australia Pacific LNG Underlying EBITDA less Depreciation & Amortisation (221) (170) 30 less ITDA Share of Equity Accounted Entities (1) (42) (32) 31 Underlying EBIT (1) Includes Australia Pacific LNG. Underlying EBITDA Underlying EBITDA increased 30 per cent or $75 million to $325 million. This was driven by higher average commodity prices, a full year contribution from the Kupe Gas Project, Origin s increased share of the Otway Gas Project, higher production from BassGas due to greater plant availability and a 36 per cent increase in production from Australia Pacific LNG. These increases were partially offset by lower contributions from Origin s onshore production assets and significantly higher exploration expense. Underlying Depreciation and Amortisation Underlying depreciation and amortisation charges excluding Australia Pacific LNG increased 30 per cent or $51 million to $221 million primarily due to a full year of production from Kupe and an increased share in the Otway project. Underlying share of ITDA Share of Equity Accounted Entities Origin s share of Underlying ITDA of Australia Pacific LNG is equity accounted and included in a single line item between Underlying EBITDA and Underlying EBIT. Origin s share of Australia Pacific LNG s Underlying ITDA expense increased by 31 per cent from $32 million to $42 million, driven by an increase in Underlying depreciation and amortisation due to additional assets becoming operational during the period and an increase in production in the current year. Underlying EBIT As a consequence of the changes noted above, Underlying EBIT for the year increased 29 per cent or $14 million to $62 million Reserves The 2P reserves attributable to Origin across its areas of interest at 30 June 2011 totalled 7,041 petajoules equivalent (PJe) (1), an increase of 834 PJe or 13 per cent from 30 June The overall increase of 834 PJe included additions, revisions and corrections totalling 968 PJe together with production of 135 PJe. Origin undertakes a full assessment of its reserves on an annual basis at the end of the financial year. A full statement of reserves attributable to Origin at 30 June 2011 is included in Origin s Annual Reserves Report released to the ASX on 28 July 2011 and available on Origin s website at w w w.originenergy.com.au/news/article/asxmedia-releases/ Exploration and Production Operations Australia excluding Australia Pacific LNG Origin s Australian operations include producing assets in the Bass and Otway basins off the south coast of Victoria, the Cooper Basin in central Australia, the Surat Basin in Queensland and the Perth Basin in Western Australia. Collectively, these assets produced 70 PJe net to Origin during the year, an increase of 12 PJe or 21 per cent on the prior year. Production for the year included 58 PJ of sales gas, 1.3 million barrels of crude oil and condensate and 66 ktonnes of LPG. Offshore Australia Production from Origin s offshore Australian assets in the Otway and Bass basins was 49 per cent higher than the prior year. This reflected an increase in Origin s equity interest in the Otway Basin from 31 per cent to 67 per cent and a return to higher levels of production in the Bass Basin following an extended shutdown in the prior year. In the coming year, production from these assets is expected to be 10 per cent to 15 per cent lower due to an extended shutdown of the BassGas facilities as phase 1 of the Mid-Life Enhancement project is implemented and a 30 day planned maintenance shutdown of the Otway facilities. In the Otway Basin, work has continued on the inlet compression project, which is expected to be commissioned in the first half of FY (1) The statements in this Management Discussion & Analysis relating to reserves and resources for other assets have been compiled by Andrew Mayers, a full-time employee of Origin. Andrew Mayers is qualified in accordance with ASX Listing Rule 5.11 and has consented to the form and context in which these statements appear. Origin s interests in exploration and production tenements (held directly or indirectly) may change from time to time and some of APLNG s CSG tenements are subject to commercial arrangements under which, after the recovery of acquisition, royalty, development and operating costs, plus an uplift on development and operating costs, a portion of some of the interests may revert to previous holders of the tenements. Origin has assessed the potential impact of reversionary rights associated with such interests based on the economic tests consistent with these CSG reserves and based on that assessment does not consider that reversion will impact the reserves quoted within this report.

15 Management Discussion and Analysis for the year ended 30 June 2011 (continued) Planning activities have also continued for development of the Geographe field and for the potential development of the Halladale and Blackwatch discoveries. Evaluation studies have resulted in a downward revision of approximately 65 PJe in Origin s reserves position across the Thylacine and Geographe fields net of production. In the Bass Basin, preparations for the Mid-Life Enhancement project continued. In addition, the Silvereye-1 exploration well was drilled to the south of the BassGas facilities but failed to encounter commercial hydrocarbons. Evaluation studies are continuing in relation to discoveries at Trefoil and Rockhopper. Onshore Australia Production from Origin s onshore assets declined marginally due to the impact of flooding in central Australia and Queensland combined with natural field decline across all three regions. Flooding in the Cooper Basin region in late 2010/early 2011 restricted Origin s net production of 19 PJe, 7 per cent lower than the prior year, and Origin participated in the drilling of only 18 wells compared with 26 wells in the prior year. Origin s reserves in the Cooper Basin increased by 49 PJe net of production. It is anticipated that production levels will decline in the Cooper Basin in FY2012 as a result of the lower drilling activity in the current year. During the year, the Operator of the Cooper Basin assets executed an agreement to supply 750 PJ of gas from the Cooper Basin to the GLNG LNG export project over a number of years. Origin has elected to participate in the capital expenditure required to develop supply for this agreement and has reserved the right to take its share of gas for its own use. Production from Origin s conventional fields in the Perth and Surat basins decreased by 31 per cent to 5 PJe predominantly due to natural field decline and the non-repeat of gas sales from storage in the Surat Basin. Evaluation of Origin s 100 per cent owned CSG acreage at Ironbark in the eastern Surat Basin has resulted in the booking of 118 PJe of 2P reserves. Australia Pacific LNG The Australia Pacific LNG joint venture has continued to make substantial progress in both development of the domestic gas supply business and its CSG to LNG export project. Domestic gas supply increased to 97 PJe for the financial year (Origin share 48 PJe). This represented an increase of 36 per cent on the prior year as supply was ramped up to Origin s Darling Downs Power Station and supply commenced to the expansion of the Yarwun alumina refinery in Gladstone. Well deliverability continues to exceed expectations with well enhancement activities delivering a record flow rate of 10 terajoules per day from one well in Spring Gully, and average rates of 1.7 terajoules per day being achieved at the Talinga development. The CSG to LNG export project achieved several major milestones during the year, culminating in the FID on the first phase of a two-train CSG to LNG project in late July This followed the receipt of State and Federal approvals of the Environmental Impact Statement; the signing of agreements with subsidiaries of Sinopec for both a 15 per cent equity stake in Australia Pacific LNG and the sale of 4.3 million tonnes of LNG per annum from 2015; the completion of front end engineering and design studies; and completion of all major construction and procurement contracts required to underpin the development. Following the FID and completion of the Sinopec equity subscription, Origin s interest in Australia Pacific LNG has been diluted to 42.5 per cent. The first phase FID has initiated development of the first LNG train and infrastructure to support a second train. This will include further development of Australia Pacific LNG s CSG fields in regional Queensland, the construction of a major gas transmission pipeline to Curtis Island, the construction of LNG facilities and development of associated port infrastructure at an estimated capital cost of approximately US$14 billion. The first phase provides an economically attractive project and allows all the synergies of a two-train project to be captured once further off-take agreements are finalised. Australia Pacific LNG is well positioned to progress to a full two-train project, and marketing discussions for the second LNG train are well advanced with a number of parties. The full two-train LNG development will have a capacity of 9 million tonnes per annum at an estimated capital cost of US$20 billion, inclusive of phase one expenditure. Australia Pacific LNG also increased 2P reserves from 10,143 PJe at 30 June 2010 to 11,775 PJe at 30 June 2011, with 3P reserves increasing from 14,598 PJe to 14,742 PJe. Following completion of the subscription agreement between Australia Pacific LNG and Sinopec, Origin s share of these reserves has been diluted from 50 per cent to 42.5 per cent. New Zealand In New Zealand, Origin participates in production from both offshore and onshore assets in the Taranaki Basin. Origin s share of production from the offshore Kupe field for the year increased by 7 PJe or 84 per cent to 16 PJe, reflecting a full year of production compared with a six month contribution in the prior year. This included over one million barrels of light oil (condensate) and LPG. Production was constrained due to compressor issues over a part of the year and a scheduled maintenance shutdown in November A shutdown for statutory inspection purposes is also scheduled for December Production from Origin s onshore Taranaki Basin assets in New Zealand was 1.3 PJe for the year compared with 1.7 PJe in the prior year. This is expected to be supplemented in the coming year by production from the successful completion of three horizontal development wells on the Manutahi field. During the year, two offshore wells were drilled in the Northland Basin off the North Island of New Zealand to assess the prospectivity of this region. These wells failed to encounter hydrocarbons and were plugged and abandoned. Looking ahead, planning is continuing for the drilling of a deepwater offshore well in the Canterbury Basin off the east coast of the South Island of New Zealand, currently expected in the 2012 calendar year. In addition, Origin and Anadarko renegotiated the terms of their existing farmin agreement in relation to the Canterbury Basin such that Anadarko has paid US$15 million of Origin s historical costs. International exploration ventures Origin is pursuing exploration activities in a number of international regions where the combination of geological prospectivity and market opportunities provides incentive to explore. Efforts to date have focused on a number of countries in South East Asia as well as Kenya on the prospective east coast of Africa. During the year, Origin drilled four exploration or appraisal wells as part of farmin arrangements for a portfolio of five exploration blocks across north-east Thailand, Lao PDR and Vietnam. None of these wells encountered commercial hydrocarbons and all wells were plugged and abandoned. Origin also operates Block 121 in the Song Hong Basin in Vietnam where additional seismic data was recorded and evaluation continued. Planning for a well in 2012 is continuing, and Origin is seeking to farmout some of its interest in this permit. In Kenya, Origin entered into a farmin agreement with Apache Corporation whereby Apache reimbursed Origin s historical costs amounting to US$13 million, and will meet a component of Origin s cost of the first well to be drilled in the area. Apache has also assumed operatorship of the permit. A well is due to be drilled in the permit prior to January Origin Energy Annual Report

16 Management Discussion and Analysis for the year ended 30 June 2011 (continued) 8.2 Generation Year ended 30 June Change ($m) ($m) (%) Internally Contracted Plant Revenue Externally Contracted Plant Revenue (12) Total Revenue Underlying EBITDA Underlying EBIT Generation volumes Year ended 30 June Change (%) Internally Contracted Sales Volume (TWh) Externally Contracted Sales Volume (TWh) (17) Total Sales Volume (TWh) Externally Contracted Steam Sold (PJ) (12) During the year Origin increased its portfolio of owned and contracted generation from 1,710 MW (1) to 5,310 MW. This followed the commencement of commercial operations at the 630 MW Darling Downs Power Station and entry into the GenTrader arrangements with the Eraring and Shoalhaven power stations (+2,970 MW). These assets were integrated into the business successfully and provided the Retail business segment with added flexibility in managing its energy portfolio. The generation fleet will be further enhanced by the completion of the Mortlake Power Station in the first half of FY2012. This will increase Origin s available generation capacity by a further 550 MW to 5,860 MW. Completion of upgrades to the Eraring Power Station in 2012 will further increase capacity to around 5,930 MW. Revenue and earnings in the Generation business segment are derived through capacity payments from the Retail business segment for the internally contracted power stations and the sale of electricity and steam from the externally contracted cogeneration plants. Capacity payments are also received from the Retail segment for the GenTrader arrangements at Eraring and Shoalhaven. For the internally contracted power stations, pool revenue of $354 million generated from the sale of electricity to the National Electricity Market is captured in the Retail business segment. Of Origin s three externally contracted plants only one, Worsley, contributes to revenues reported in this segment, with the other two plants, Bulwer Island and Osborne, being equity accounted. Total Revenue increased 103 per cent or $240 million to $474 million as a result of the increased capacity from Darling Downs Power Station and the Eraring GenTrader arrangements. This included $132 million from Darling Downs and $97 million representing four months contribution from Eraring and Shoalhaven from 1 March Underlying EBITDA increased 80 per cent or $145 million to $327 million reflecting the increased generation capacity payments. Underlying depreciation expense increased by 161 per cent or $71 million to $115 million reflecting the increased asset base. Underlying EBIT increased by 59 per cent or $77 million to $208 million. The four month contribution from the Eraring and Shoalhaven power stations was $27 million Operational performance Details of the year s operational performance of Origin s power generation plants are set out below. Availability and reliability for Origin owned generation was impacted by flood related outage and remedial work under warranty of the steam turbine at Darling Downs. Of the contracted plants, a change to the timing of a major overhaul at Worsley from November to June resulted in a lower than expected equivalent reliability factor of 93 per cent. Generation Plant Nameplate Plant Capacity Origin Equity Interest Type Equivalent Reliability Factor (2) Capacity Factor (MW) (%) (%) (%) Cullerin Range Internal Ladbroke Grove Internal Mt Stuart Internal Quarantine Internal Roma Internal Uranquinty Internal 99 4 Darling Downs Internal Bulwer Island (3) External Osborne (3) External Worsley (3) External Eraring 2,730 N/A Contracted Shoalhaven 240 N/A Contracted Osborne 90 N/A Contracted (1) Includes 90 MW of contracted capacity from Osborne and equity interests in 1,620 MW of installed capacity. (2) Equivalent reliability factor is the availability of the plant after scheduled outages. (3) Origin holds a 50% equity share.

17 Management Discussion and Analysis for the year ended 30 June 2011 (continued) The 630 MW Darling Downs Power Station in Queensland successfully commenced commercial operations on 1 July 2010 and generated 2,828 GWh for the year at a capacity factor of 51 per cent. In December 2010, it was announced that Origin had acquired the contractual rights to the generation dispatched from both the Eraring and Shoalhaven power stations under the GenTrader arrangements, as part of the NSW energy privatisation process. The transaction was completed on 1 March 2011 and both plants have been performing well under the GenTrader arrangement since that time. Optimal running regimes for the Eraring and Shoalhaven power stations have been determined and effectively implemented. Electricity generation from the Eraring Power Station has exceeded 5,000 GWh. A four week planned refurbishment was undertaken at Shoalhaven Power Station reducing availability. Shoalhaven has operated as a peaking power station and generated around 18 GWh of electricity Thermal generation developments and opportunities First fire testing of the 550 MW open cycle power station at Mortlake in south-western Victoria was completed during July The Mortlake Power Station is expected to commence operations in the first half of FY2012. Once completed and commissioned, the open cycle power station will supply peaking power to Victoria in times of high electricity demand. Origin s pipeline of gas fired power plant developments includes 3,670 MW of options covering expansions at existing sites or the development of new plants. This includes sites at Mortlake in Victoria, Spring Gully and Darling Downs in Queensland, Kerrawary in NSW and Quarantine in South Australia. These options provide flexibility to continue to enhance Origin s electricity supply portfolio Renewable energy development opportunities Wind Origin is continuing to mature a number of potential wind development projects in Eastern Australia. This portfolio of sites includes up to 587 MW for which Development Applications have been approved, over 300 MW that are in the advanced planning and permitting stage, 1,200 MW in the planning and permitting stage and around 1,300 MW undergoing feasibility studies. During the year, Origin received planning approval from State and Federal authorities for the construction of 157 wind turbines at Stockyard Hill located near Ballarat. The project has a capacity of 300 to 450 MW and an expected capacity factor of 43 per cent. Origin continues to work actively on permitting and community engagement on the Stockyard Hill and other wind farm opportunities. The wind farm design for Stockyard Hill is currently being optimised within the constraints of the planning permit. Geothermal Origin is investigating geothermal development options both within Australia and internationally. Contact is also actively pursuing geothermal development opportunities in New Zealand to add to its existing capability. Within Australia, Origin s primary investment in geothermal exploration and development opportunities is through the Deeps and Shallows joint ventures with Geodynamics. Origin has a 30 per cent interest in the Innamincka Deeps Joint Venture with Geodynamics and an equity interest of approximately 6 per cent in the listed company. During the year, Geodynamics completed the hydraulic fracture stimulation program at Jolokia 1 within the deep granite target. The suitability of these fractures for further enhancement for use as an underground heat exchanges is still being assessed. Origin has a 50 per cent interest in, and operates, the Innamincka Shallows Joint Venture targeting sedimentary rocks above the granite targeted by the Innamincka Deeps Joint Venture. During the year, the Celcius 1 exploration well was drilled to assess the potential of this system. The well results indicated higher temperatures (145 degrees Celsius) than anticipated but reservoir permeability was below target. Results for the well are being evaluated and will help determine the extent of any further program. Internationally, Origin has targeted opportunities in countries on the Pacific Ring of Fire that have high geothermal potential and a growing demand for energy. In September 2010, Origin and The Tata Power Company Limited of India, in consortium with PT Supraco Indonesia, were awarded the Sorik Marapi geothermal concession in Northern Sumatra, Indonesia. Origin has a 47.5 per cent effective interest in the concession. The concession is estimated to support the development of MW of geothermal power generation. If the exploration and appraisal processes are successful and appropriate commercial agreements have been secured, development is expected to begin in late In May 2011, Origin acquired a 40 per cent interest in Energia Andina S.A. (EASA), Chile s leading geothermal exploration company. EASA has a portfolio of eight geothermal exploration projects in the northern and central regions of Chile. Chile has significant and growing energy demand from local industrial and power distribution companies and is estimated to contain up to 60 per cent of the total Latin American geothermal resource potential. Origin will work in a collaborative manner with the other joint venture owner of EASA, Antofagasta Minerals S.A., to further develop the geothermal potential of the region. Solar In December 2009, Origin and Micron Technology, Inc (Micron) formed a 50:50 joint venture, Transform Solar, with a focus on the development of photovoltaic energy based on Origin s SLIVER technology. Micron is a US listed company and one of the world s leading providers of advanced semiconductor solutions. The commissioning of the first 20 MW production line, which is being developed in Micron s US production facilities, is in progress. Work continues towards an expansion decision to increase production to 50 MW or more expected to occur in FY2012. Hydro PNG Energy Developments Limited (PNG EDL) is a 50:50 joint venture between Origin and PNG Sustainable Development Program (PNG SDP). PNG EDL is evaluating the hydro-electric potential of the Purari Hydro resource at Wabo, in the Gulf Province of Papua New Guinea. Capturing the power of the existing river flows, the project would have the capacity to generate approximately 1,800 MW of renewable baseload electricity. PNG EDL, PNG SDP and Origin are in continuing discussions with key stakeholders including the Papua New Guinean, Australian and Queensland governments. These discussions follow the Memorandum of Cooperation signed in September 2010 between the governments of Papua New Guinea and Queensland, PNG EDL and Origin to support the project. A comprehensive review of environmental, sociological and engineering aspects is expected to be completed in 2012 with a final investment decision on the project expected to be made in PNG EDL will be guided by international environmental and social standards, including those endorsed by the Papua New Guinean and Australian governments, the International Finance Corporation, the World Commission on Dams and the International Hydropower Association. Origin Energy Annual Report

18 Management Discussion and Analysis for the year ended 30 June 2011 (continued) 8.3 Retail Year ended 30 June Change ($m) ($m) (%) Total revenue 8,072 6, Underlying EBITDA Underlying EBIT Through the acquisition of the Integral Energy and Country Energy retail businesses on 1 March 2011, Retail increased its customer accounts from 2.9 million to 4.5 million which established Origin as Australia s leading energy retailer. The GenTrader arrangements for the dispatch of power from Eraring and Shoalhaven power stations also added to Origin s controlled generation capacity, providing a significant increase in the flexibility of the electricity supply portfolio servicing the Retail business segment. Together with an increase in the contribution from new businesses such as solar rooftop installations, the NSW acquisition has helped drive a 26 per cent increase in total revenue, a 38 per cent increase in Underlying EBITDA and a 41 per cent increase in Underlying EBIT. Within this result, the NSW acquisition contributed revenues of $1,269 million, Underlying EBITDA of $183 million and Underlying EBIT of $175 million. Organically, the Retail business increased revenue by $410 million or 6 per cent and Underlying EBITDA by $34 million or 6 per cent. Further details are provided throughout this section. In addition, the Retail business segment has been implementing a major transformation of its billing systems. A significant milestone in the Retail Transformation Program was achieved in June 2011, with 300,000 South Australian customers transitioned onto the SAP billing platform. Performance has exceeded expectations with call centre average handle times in the new SAP system already consistent with, and in some cases less than, legacy systems. Further migration activities are planned for other States in the coming months. Performance metrics by commodity and variance from prior year Year ended 30 June 2011 Electricity Natural Gas LPG Retail Solutions Revenue ($m) 5,349 (+27%) 1,180 (+13%) 670 (+6%) 445 (+128%) Gross Profit ($m) 929 (+43%) 205 (+10%) 166 (+8%) 64 (+21%) Underlying EBITDA ($m) 710 (+42%) 50 (+0%) 25 (+47%) Underlying EBIT ($m) 662 (+43%) 26 (+5%) 22 (+57%) Sales (TWh) 34 (+14%) Sales (PJ) 142 (+5%) Sales (ktonnes) 476 (-3%) Total Sales (PJe) 123 (+14%) 142 (+5%) 24 (-3%) Customer accounts ( 000) 3,214 (+87%) 923 (+6%) 365 (+5%) The Electricity and Natural Gas businesses benefited from four months contribution from the Integral Energy and Country Energy retail businesses. Origin was also able to benefit from sustained periods of low wholesale energy prices particularly in the first half. Further details are provided in Section LPG increased Underlying EBIT by 5 per cent to $26 million, mainly due to higher LPG prices and lower depreciation. Further details are provided in Section Origin s Retail Solutions business increased its contribution substantially, with Revenue more than doubling to $445 million and Underlying EBIT increasing 57 per cent to $22 million. Within Retail Solutions, Origin s solar business continues to grow, increasing installations from 6,449 in the prior year to 36,840 in the current year. Further details are provided in Section In addition to the revenue reported in the above table, the external revenue reported in the Retail business segment includes pool revenue from the sale of electricity when Origin s internal generation plant is dispatched, as well as the pass through of revenue received from sales of gas swaps. Overall, there was an increase in this revenue of $118 million or 38 per cent to $427 million. The net result of pool revenues less capacity payments to the Generation segment and fuel costs is included in the cost of goods sold, together with the cost of procuring other electricity supplies from third parties. Further details are provided in Section

19 Management Discussion and Analysis for the year ended 30 June 2011 (continued) Electricity and Natural Gas performance Electricity and Natural Gas margins Year ended 30 June Excludes acquisition contract liability unwind 2010 Change Commodity Revenue ($m) 6,529 6,529 5,254 1,275 Gross Profit ($m) 1,134 1, Underlying EBITDA ($m) Underlying EBIT ($m) Customer Numbers ( 000) 4,137 4,137 2,589 1,548 Underlying EBITDA/Sales 10.9% 9.5% 9.5% Underlying EBIT/Sales 10.1% 8.7% 8.8% (0.1%) $/Customer (1) Gross Profit/Customer Opex/Customer (136) (130) (6) Underlying EBITDA/Customer (1) For the per customer metrics, customers acquired through the NSW privatisation process have been apportioned to align with only four months of financial contribution. At the date of completion of the NSW acquisition, Origin recognised a fair value liability associated with the mark-to-market of acquired power purchase agreements, hedge contracts and green rights contracts. Subsequently, as these contracts are utilised, Origin receives a benefit from the unwind of the liability ( acquisition contract liability ). This appears as a reduction in the cost of goods sold. In the four months to 30 June 2011, this amounted to a benefit of $93 million. Excluding the benefit from unwinding the acquisition contract liability, Electricity and Natural Gas margins were broadly in line with Origin s Retail business segment in the prior year. On this basis, Origin s Underlying EBIT to sales margin was 8.7 per cent across its combined businesses, compared with 8.8 per cent in the prior year. Underlying EBITDA per customer increased 3 per cent or $5 to $198 per customer. Electricity Electricity gross profit increased 43 per cent or $277 million to $929 million. The NSW acquisition contributed $250 million of the increase, inclusive of the $93 million benefit described above. The pre-acquisition Electricity business grew gross profit by 4 per cent or $27 million. Mild weather in the summer months and a change in customer mix resulted in an 8 per cent reduction in sales volumes in the pre-acquisition Electricity business. Tariffs increased across all markets, primarily reflecting increased network charges. However, tariffs in NSW and Queensland did not reflect the costs associated with the Small-Scale Renewable Energy Scheme. Effective management of the wholesale electricity portfolio enabled the Electricity business to benefit from sustained periods of low energy prices, particularly in the first half, while protecting against periods of high price volatility. Natural Gas Natural Gas gross profit increased in the year by 10 per cent or $19 million to $205 million. Sales volumes increased 5 per cent or 7 PJ to 142 PJ, driven by higher mass market consumption as a result of colder weather and an increase in customer numbers. Residential tariffs and commercial and industrial prices also increased largely reflecting energy cost increase. The NSW acquisition contributed $2 million to Natural Gas gross profit. Electricity and Natural Gas customer accounts and churn Inclusive of the acquired businesses, Origin s net customer accounts for Electricity and Natural Gas increased from million to million (excluding LPG customers), an increase of million customers from the prior year. At the time of announcing the acquisition of the Integral Energy and Country Energy retail businesses, customer accounts were quoted based on balances at 30 June 2010 of million electricity and gas accounts. Churn within the businesses from 30 June 2010 to 28 February 2011 reduced this number by 51 thousand accounts. On 1 March 2011, Origin therefore added million Electricity and Natural Gas customer accounts from the Integral Energy and Country Energy retail businesses. This included 1.4 million accounts in NSW with the balance in Queensland, Victoria and South Australia. Over the course of the year, Origin won an additional 567 thousand accounts across its Electricity and Natural Gas businesses, up from 482 thousand wins in the prior year. However, increased levels of churn resulted in the loss of 604 thousand accounts or a net loss of 37 thousand customer accounts over the year. Market churn in NSW has increased from an average of 12 per cent in the eight months prior to 1 March 2011, to 14 per cent in the four months post completion of the NSW privatisation process. It is anticipated that market churn will continue to increase to levels experienced in other competitive markets, such as Victoria and Queensland. Origin Energy Annual Report

20 Management Discussion and Analysis for the year ended 30 June 2011 (continued) Customer account movement from 30 June 2010 to 30 June 2011 ( 000) Electricity & Natural Gas Customer accounts 30 June ,589 Integral Energy & Country Energy 30 June ,636 Churn prior to acquisition (51) Net customers acquired 1,585 Total wins 567 Total losses (604) Net customer wins/(losses) (37) Customer accounts 30 June ,137 Customer accounts by state at 30 June 2011 ( 000) Electricity & Natural Gas Electricity Natural Gas Total 2011 Total 2010 Change Victoria ,156 1,150 6 South Australia Queensland NSW 1, , ,400 Customer accounts 30 June , ,137 2,589 1,548 Origin s customer account numbers at 30 June 2011 include approximately 503 thousand signed green energy accounts. This comprises approximately 373 thousand GreenPower electricity and 130 thousand green gas customer accounts, reflecting Origin s strong market leadership position in this area. Cost-to-serve Electricity and Natural Gas Origin includes within its Retail cost-to-serve all costs associated with servicing and maintaining customers, all churn and customer acquisition and retention costs and an allocation of corporate costs. The year has seen significant growth and increased business activity in the Retail business. Origin s cost-to-serve increased substantially with the addition of customers associated with the Integral Energy and Country Energy retail businesses. In addition, Origin continued to invest in people and processes to ensure service levels could be maintained while delivering smooth and successful cut-over of core systems to the SAP billing system. Increased market activity led to higher customer acquisitions and increased call centre activity, while bad debts expense also increased. At the time of the NSW acquisition, Origin entered into TSAs with the NSW distribution network businesses to continue to provide services such as customer billing, collections, debtor management, call centre and other customer services. The services under the TSAs are at a cost which is higher than the incremental cost Origin would have incurred had they been provided internally. Consequently, a provision was raised on acquisition and is being unwound to offset this effect. The unwinding of this provision provided a net benefit of $35 million for the four months, proportionately allocated across Origin s entire Electricity and Natural Gas customer base. Taking all of the above factors into account, the average cost-to-serve, inclusive of the benefit of the TSAs, increased from $130 per customer to $136 per customer Electricity and Natural Gas NSW acquisition 2011 Year ended 30 June 2011 Excludes acquisition contract liability unwind Commodity Revenue ($m) 1,121 1,121 Gross Profit ($m) Underlying EBITDA ($m) Underlying EBIT ($m) Customer numbers ( 000) 1,538 1,538 Underlying EBITDA/Sales 16.3% 8.0% Underlying EBIT/Sales 15.6% 7.3% $/Customer (1) Gross Profit/Customer Opex/Customer (129) (129) Underlying EBITDA/Customer (1) For the per customer metrics, customers acquired through the NSW privatisation process have been apportioned to align with only four months of financial contribution, being approximately 520,000 customer accounts. 18 Commodity revenue for the four months was $1.1 billion representing 7 TWh of sold volume. Gross Profit was $250 million, which includes the $93 million unwinding of the acquisition contract liability. Underlying EBITDA was $183 million while Underlying EBIT was $175 million. This included a benefit of $6 million from the unwinding of the onerous contract provision relating to the TSAs. Underlying EBIT margins of 7.3 per cent are in line with expectations. Origin anticipates margins in the coming year to be between 8 per cent and 9 per cent, in line with current performance including the recent tariff determination, which recognises the recovery of costs associated with the Small-Scale Renewable Energy Scheme.

21 Management Discussion and Analysis for the year ended 30 June 2011 (continued) LPG Sales revenue increased 6 per cent or $36 million to $670 million. This was driven by an increase in volumes and average prices charged to customers as a result of strategic price management and higher international benchmark LPG prices. Despite higher prices, retail volumes increased 12 ktonnes, predominantly in the Australian residential sector. The reduced demand for New Zealand wholesale supply volumes due to Kupe coming on line has contributed to the overall 3 per cent decrease in volumes from 492 ktonnes to 476 ktonnes. Higher international benchmark LPG prices resulted in Origin s average unit product cost increasing by 8 per cent when compared to the prior year. As a result, gross profit for the LPG business increased by $13 million to $166 million. Operating costs increased $12 million due to investment in people capability across Australia and Asia Pacific and the impact of natural disasters which resulted in higher logistics costs necessary to maintain customer supply during this difficult period. Consequently, LPG increased Underlying EBIT by 5 per cent to $26 million. LPG customer accounts increased by approximately 16,000 during the year, which includes 5,000 won following the acquisition of Country Energy and Integral Energy. As of 30 June 2011, LPG customer accounts totalled approximately 365, Retail Solutions Origin has continued to progressively invest in creating and developing new business lines to provide a greater range of customer offerings and solutions. The current portfolio includes products such as solar photovoltaic rooftop systems, solar hot water, serviced bulk hot water systems, heat pumps and tri-generation systems for application in the commercial and industrial sector. Revenue for the non-commodity businesses grew by 128 per cent or $250 million to $445 million. The business generated Underlying EBITDA of $25 million, an increase of 47 per cent on the prior year. Underlying EBIT grew to $22 million, an increase of 57 per cent. Origin s solar business was the key contributor to this growth in revenue and earnings, with 36,840 installations in the year. Since 2009, Origin has installed approximately 47,000 systems, with total installed capacity of more than 70 MW. Despite regulatory uncertainty surrounding the industry, the increasingly competitive cost of solar compared to grid power will ensure strong ongoing contribution from this business. Remaining at the forefront of market and industry trends, Origin is trialling several of the first electric vehicles to arrive in Australia, and in November 2010 sold its first electric vehicle ChargePoint to Google. Origin was also successful at delivering tri-generation solutions to the University of NSW and a commercial property in Victoria, and continues to assess opportunities in the market Pool and other revenue The External revenue reported in the Retail business segment includes pool revenue from the sale of electricity when Origin s internal generation plant is dispatched, as well as the pass through of revenue received from sales of gas swaps. This year, the Retail business segment earned pool revenue of $354 million from the sale of 8.6 TWh of electricity. This is a 59 per cent increase in revenue compared with the prior year. The introduction of baseload power from Darling Downs and Eraring was the key contributor to the 7.4 TWh increase in electricity sold. Revenue generated from Darling Downs and Eraring was at an average rate of $31/MWh. The peaking portfolio generated 0.8 TWh of electricity at an average rate of $139/MWh compared with 1.2 TWh at an average rate of $179/MWh in the prior year. Pass through of revenue received from the sales of gas swaps to other retailers decreased by $14 million or 16 per cent to $73 million Retail Transformation Program Origin continues to transform all aspects of its Retail business. This will result in simplified operating processes and a single integrated SAP billing and customer management system. The infrastructure will enable improved data quality, improved customer insights and better use of technology to engage with customers. This will enable Origin to deliver innovative energy solutions that the changing energy market will require while optimising its cost-to-serve. The first release of the SAP billing system into operation occurred for 300,000 South Australian customers in June The migration went as planned, with data integrity and financial reconciliations exceeding expectations. Call centre average handle times in the new SAP system are already consistent with, and in some cases less than, legacy systems. A strong platform has been built for further releases across the customer base and planning is well advanced for migration of Victorian and Queensland customers through the remainder of this calendar year. Acquired NSW customers will be migrated in subsequent years in line with Transition Agreements. Plans are underway for implementation of commercial and industrial (C&I) customers, as well as for an ongoing upgrade program. Origin Energy Annual Report

22 Management Discussion and Analysis for the year ended 30 June 2011 (continued) 8.4 Contact Energy Financial Performance Year ended 30 June Change ($m) ($m) (%) Total revenue 1,708 1,717 (1) Underlying EBITDA Underlying EBIT Operational Performance Year ended 30 June Change (%) Electricity Generated (GWh) 9,843 9,691 2 Customer Electricity Sales (GWh) 8,254 7,674 (1) 8 Gas Sales (retail and wholesale) (PJ) (29) LPG Sales (Tonnes) 65,201 70,327 (7) Electricity Customers 447, ,000 (6) Gas Customers 60,000 64,000 (6) LPG Customers (including franchisees) 59,000 58,000 2 Total Customers 566, ,000 (6) (1) FY2010 Customer Electricity Sales are restated to conform with Contact s current classification. Origin owns a 52.6 per cent interest in Contact of New Zealand and consolidates 100 per cent of Contact in accordance with Australian accounting standards. The interests attributable to minority shareholders are recognised as Non-controlling Interest in the Financial Statements. A financial report entitled Management discussion of financial results for the year ended 30 June 2011 was issued by Contact to the New Zealand Stock Exchange (NZX) on 22 August 2011 and is available on Origin s website w w w.originenergy.com.au. That document contains details regarding Contact s financial and operating performance during the period, including comparisons to the performance of Contact in the prior year. In consolidating Contact s results, Origin has used an average exchange rate for the period of NZ$1.30 to the Australian Dollar, compared with NZ$1.26 to the Australian Dollar for the prior year. Movements in Contact s Revenue, Underlying EBITDA and Underlying EBIT between the reporting periods were all positive, however, the strengthening of the Australian Dollar against the New Zealand Dollar has resulted in flat or negative movements in Australian Dollar terms. The commentary below relates to Contact s performance in New Zealand Dollar terms. Contact s Underlying EBITDA increased NZ$14 million (3 per cent) in a continued low wholesale price environment and high hydrology. This was primarily due to an increased contribution by the Electricity business segment which was partially offset by a lower contribution from the Other (retail gas, wholesale gas, LPG and meters) business segment. The Electricity business segment Underlying EBITDA was NZ$23 million (6 per cent) higher than the prior period. Increased retail revenue, due to an 8 per cent increase in sales volumes and a 4 per cent increase in sales price, was partially offset by increased network and gas costs and the introduction of carbon taxes through New Zealand s Emissions Trading Scheme. Increased flexibility due to the commissioning of Ahuroa Gas Storage and Stratford Peaker Power Station and a lower contracted minimum gas take or pay level helped to increase Electricity earnings in the second half of FY2011 by 8 per cent on the second half of FY2010. The Underlying EBITDA contribution from the Other business segment partially offset the Electricity business segment, primarily due to decreased sales and the introduction of carbon taxes. Further details on how these market dynamics have impacted the financial performance of Contact are available in the reports it has lodged with the New Zealand Stock Exchange. Underlying EBITDA reported in Origin s accounts in Australian Dollars has decreased by $1 million to $345 million, while Underlying EBIT is in line with the prior year at $214 million. H Kevin McCann Chairman Sydney, 23 August

23 Management Discussion and Analysis for the year ended 30 June 2011 (continued) 9. Origin Energy Key Financials Year ended 30 June Change ($m) ($m) (%) Total external revenue 10,344 8, Underlying EBITDA 1,782 1, Underlying depreciation and amortisation (539) (408) 32 Underlying share of interest, tax, depreciation and amortisation of equity accounted investees (49) (42) 17 Underlying EBIT 1, Underlying net financing income/(costs) (143) (13) 1,000 Underlying Profit before income tax 1, Income tax expense on Underlying Profit (316) (232) 36 Underlying net profit after tax before elimination of Non-controlling Interests Non-controlling Interests share of Underlying Profit (62) (66) (6) Underlying Profit Items excluded from Underlying Profit (487) 27 (1,904) Statutory Profit (70) Free cash flow 1, Group OCAT Ratio (year to 30 June) (1) 13.0% 10.9% 19 Productive capital (year to 30 June) (2) 11,571 8, Capital expenditure (including acquisitions) 4,954 3,027 (3) 64 Total assets 26,640 21, Adjusted total assets (4) 25,569 21, Net debt/(cash) (5) 4,060 2, Adjusted net debt/(cash) (4) 4,283 2, Shareholders equity 13,516 11, Adjusted shareholders equity (4) 13,639 11, Earnings per share Statutory (6) (71) Earnings per share Underlying (6) 10 Free cash flow per share Interim dividend per share Final dividend per share Total dividend per share Net asset backing per share $12.70 $12.99 (2) Adjusted net asset backing per share (4) $12.81 $13.12 (2) Net debt to net debt plus equity 23.1% 18.9% 22 Adjusted net debt to net debt plus equity (4) 23.9% 19.7% 21 Origin Cash (excluding Contact) (16) Origin Debt (excluding Contact) (3,949) (2,443) 62 Contact Net Debt (802) (1,042) (23) Total employees (numbers) 5,213 4, Total Recordable Injury Frequency Rate (TRIFR) (1) Group OCAT Ratio = (OCAT interest tax shield)/productive Capital. (2) Productive Capital is 12 months average funds employed excluding capital work in progress and including 50 per cent of Australia Pacific LNG. (3) FY2010 capital expenditure is restated to conform with the current year s classification. (4) Adjusted to exclude the impact of financial instruments. (5) The reported numbers for net debt include interest-bearing debt obligations only. (6) Restated for the bonus element of the rights issue completed in April Origin Energy Annual Report

24 Management Discussion and Analysis for the year ended 30 June 2011 (continued) 10. Appendix 1 Reconciliation of Statutory to Underlying Profit Before Tax Impact Tax Non-controlling Interests After Tax & Non-controlling Interests Impact NPAT Reconciliation year ended 30 June 2011 ($m) ($m) ($m) ($m) ($m) Statutory Profit 186 Impairment of assets (214) 54 (160) Increase/(decrease) in fair value of financial instruments (201) 60 1 (140) Unwinding of discounted loan payable to APLNG (12) 4 (8) Share of unwinding of discounted receivables within APLNG Transition and transaction costs (253) 18 (235) Change in New Zealand corporate income tax legislation 2 (1) 1 Tax expense on translation of foreign denominated tax balances Share of tax expense on translation of foreign denominated tax balances within APLNG (equity accounted) 4 4 Less total excluded items (656) 169 (487) Underlying Profit 673 Underlying Basic EPS (cps) 71.0 A number of items are excluded from the Underlying Profit for the year to 30 June Together these items provided an after-tax and Non-controlling Interests cost of $487 million in the year to 30 June They are excluded from Underlying Profit to better illustrate the business performance of the Company. The after tax and Non-controlling Interest impacts of these items are described in more detail below. Impairment of assets (expense of $160 million) As advised at the half-year, a review of the carrying amount of the Company s assets led to the recognition of an impairment loss of $154 million after tax in relation to Origin s 6 per cent direct shareholding in Geodynamics and Origin s investment in the Innamincka Deeps Joint Venture. A further impairment loss of $6 million after tax was recognised at 30 June Decrease in fair value of financial instruments (expense of $140 million) During the period, a decrease in the fair value of financial instruments, primarily relating to the change in fair value of financial instruments not qualifying for hedge accounting, resulted in an expense of $140 million. Unwinding of discounted loan payable to Australia Pacific LNG (expense $8 million) A non-cash expense of $8 million being the unwinding of the discounted loan payable to Australia Pacific LNG was recorded for the year. The amount reflects the nominal interest benefit required to be attributed to the payables, reflective of the unwinding of the original present value discount over the relevant period of the payables. Share of unwinding of discounted receivables within Australia Pacific LNG (benefit of $20 million) A non-cash benefit of $20 million, being Origin s share of the unwinding of the discounted receivables within Australia Pacific LNG, was recorded for the year. The amount reflects the nominal interest benefit required to be attributed to the receivables reflective of the unwinding of the original present value discount over the relevant period of the receivables. Transition and transaction costs (expense of $235 million) Origin recorded a $235 million expense for the year in relation to transition and transaction costs associated with corporate acquisitions and integration activities. The expense was driven by costs associated with the acquisition of the Integral Energy and Country Energy retail businesses from the NSW Government. Change in New Zealand corporate income tax legislation ($1 million benefit) As a result of the change in the New Zealand corporate tax legislation from 30 per cent to 28 per cent effective from the year ending 30 June 2012, Origin has recognised a benefit of $1 million. Tax expense on translation of foreign denominated tax balances (benefit of $31 million) During the period, a benefit of $31 million was recognised for the foreign currency translation to US Dollars of the long-term tax assets recorded in Origin s Exploration and Production activities in New Zealand which have a US Dollar functional currency. Share of tax expense on translation of foreign denominated tax balances within Australia Pacific LNG (benefit of $4 million) During the period, a benefit of $4 million was recognised for the share of the foreign currency translation to US Dollars of the long-term tax assets within Australia Pacific LNG associated with its downstream activities. As a result of these factors, items excluded from Underlying Profit for the year provided an expense of $656 million before tax and an expense of $487 million after tax and Non-controlling Interests. This compares with a $7 million expense before tax and a $27 million benefit after tax and Non-controlling Interests in the prior year as detailed on the following page. Please refer to the Management Discussion and Analysis report for the year ended 30 June 2010 for more details. 22

25 Management Discussion and Analysis for the year ended 30 June 2011 (continued) Before Tax Impact Tax Non-controlling Interests After Tax & Non-controlling Interests Impact NPAT Reconciliation year ended 30 June 2010 ($m) ($m) ($m) ($m) ($m) Statutory Profit 612 Impairment of assets (33) 10 (23) Increase/(decrease) in fair value of financial instruments 15 (4) (1) 10 Gain on dilution of Origin s interest in subsidiaries 38 (11) 27 Unwinding of discounted loan payable to APLNG (111) 33 (78) Share of unwinding of discounted receivables within APLNG Transition and transaction costs (29) 8 1 (20) New Plymouth asbestos removal/related costs (4) 1 1 (2) Change in New Zealand corporate income tax legislation 8 (3) 5 Tax expense on translation of foreign denominated tax balances (9) (9) Less total excluded items (7) 36 (2) 27 Underlying Profit 585 Underlying Basic EPS (cps) 64.8 (1) (1) FY2010 Underlying EPS of 66.6 cps restated as 64.8 cps reduced by the bonus element of the rights issue completed in April Appendix 2 Movements in fair value of financial instruments Summary of movements in financial instruments Net Assets ($m) Change in Net Assets Balance Sheet June 2011 June 2010 ($m) Commodity Risk Management (74) 115 (189) Contact (60) (23) (37) Treasury and Other (161) (165) 4 Total (295) (73) (222) Reconciliation of Statement of Financial Position and Income Statement items associated with movements in financial instruments ($m) Recognition of effective instruments in the Statement of Financial Position (21) Recognised in Equity (Hedge Reserve post tax) (20) Recognised in Deferred Tax Liability (1) Recognition of ineffective instruments in the Income Statement (201) Change in net assets (as above) (222) The fair value of financial instruments as measured against market prices is recorded in the Statement of Financial Position in the financial asset and liability balances. The total decrease in the fair value of financial instruments for the year ended 30 June 2011 was $222 million of which an amount of $21 million qualified for hedge accounting and is recognised in Equity (Hedge Reserve). The balance of $201 million is recognised as an expense in the Income Statement and is attributable to: Commodity risk management instruments (expense of $214 million) predominantly electricity caps and the decrease in market prices of carbon instruments during the period. Of the total of $214 million, $1 million is attributable to Contact and $213 million is attributable to Origin (excluding Contact); and Foreign exchange and interest rate risk management instruments (benefit of $13 million) predominantly due to the appreciation of the Australian and New Zealand Dollars against the US Dollar and Euro during the period partially offset by lower forward interest rates in New Zealand. Of the total benefit of $13 million, a $4 million expense is attributable to Contact and a $17 million benefit is attributable to Origin (excluding Contact). The expense in the Income Statement of $201 million this year compares with a benefit of $15 million in the prior year, which was predominantly attributable to commodity risk management instruments. Origin Energy Annual Report

26 Management Discussion and Analysis for the year ended 30 June 2011 (continued) 12. Appendix 3 Investment in Australia Pacific LNG The following table is included in the notes to the statutory accounts and is extended to provide a reconciliation to Australia Pacific LNG s Statutory Profit. Financial performance Total Origin s Total Origin s APLNG 50% interest APLNG 50% interest ($m) ($m) ($m) ($m) June 2011 June 2010 Operating revenue Operating expenses (210) (159) Underlying EBITDA Depreciation and amortisation expense (77) (47) Net financing costs (4) (2) Underlying operating profit before income tax Income tax expense (3) (15) Underlying operating profit after tax Operating Performance Total Origin s 50% Total Origin s 50% APLNG interest APLNG Interest (PJe) (PJe) (PJe) (PJe) June 2011 June 2010 Production Volumes Sales Volume The Australia Pacific LNG joint venture increased its production by 36 per cent or 25.6 PJe, from 71.0 PJe to 96.6 PJe. This was primarily due to commencement of commercial operations of new fields and the commencement of supply to the Rio Tinto Alumina contract and ramp up of supply to Darling Downs Power Station. Revenue increased by 34 per cent or $86 million, from $250 million to $336 million, reflecting increased production. Operating expenses increased 32 per cent or $51 million, from $159 million to $210 million, reflecting increased activity in ramping up operation for delivery to domestic contracts. Depreciation and amortisation expenses increased by 64 per cent or $30 million from $47 million to $77 million due to additional assets becoming operational during the period and an increase in production in the current year. Income tax expense decreased as a result of higher expenditure on items qualifying for tax concessions compared to the prior year. Underlying profit after tax increased by 56 per cent or $15 million from $27 million to $42 million. 24

27 Directors Report for the year ended 30 June 2011 In accordance with the Corporations Act 2001, the Directors of Origin Energy Limited (Company) report on the Company and the consolidated entity Origin Energy Group (Origin), being the Company and its controlled entities for the year ended 30 June Principal activities During the year, the principal activity of Origin was the operation of energy businesses including: exploration and production of oil and gas; electricity generation; and wholesale and retail sale of electricity and gas. 2. Result Statutory Profit $186 million, down from $612 million Origin reported a Net Profit After Tax and Non-controlling Interests (Statutory Profit) of $186 million for the year ended 30 June 2011, a decrease of 70 per cent compared with $612 million reported in the prior year. The key factors contributing to the year-on-year change in the Statutory Profit from $612 million to $186 million included a positive contribution from higher Underlying Profit (+$88 million) offset by a higher impairment of assets (-$137 million), a decrease in the fair value of financial instruments (-$150 million) and higher transition and transaction costs related to the acquisition of the Integral Energy and Country Energy retail businesses as part of the NSW privatisation process (-$215 million) Change Year ended 30 June ($m) ($m) (%) Total external revenue 10,344 8, Underlying EBITDA 1,782 1, Underlying depreciation and amortisation (539) (408) 32 Underlying share of interest, tax, depreciation and amortisation of equity accounted investees (49) (42) 17 Underlying EBIT 1, Underlying net financing costs (143) (13) 1,000 Underlying Profit before income tax 1, Income tax expense on Underlying Profit (316) (232) 36 Underlying net profit after tax before elimination of Non-controlling Interests Non-controlling Interests share of Underlying Profit (62) (66) (6) Underlying Profit Items excluded from Underlying Profit (487) 27 (1,904) Statutory Profit (70) Earnings per share Underlying (1) 10 Earnings per share Statutory (2) (71) (1) FY2010 Underlying EPS of 66.6 cps restated to 64.8 cps for the bonus element of the rights issue completed in April (2) FY2010 Statutory EPS of 69.7 cps restated to 67.7 cps for the bonus element of the rights issue completed in April Reconciliation of Underlying Profit and Statutory Profit Statutory Profit for this year and the prior year contain the impact of a number of items, as shown in the table below, that do not portray the ongoing performance of the business. In the year to 30 June 2011, these items amounted to an expense of $487 million. This compared with the year to 30 June 2010 in which these items had a benefit of $27 million. Reconciliation of Statutory and Underlying Profit June 2011 June 2010 Impact After Tax & Noncontrolling Impact After Tax & Noncontrolling Change Change ($millions) Interests NPAT Interests NPAT ($m) (%) Statutory Profit (426) (70) Items excluded from Underlying Profit Impairment of assets (160) (23) (137) 596 Gain on dilution of Origin s interest in subsidiaries 27 (27) (100) Increase/(decrease) in fair value of financial instruments (140) 10 (150) (1,500) Unwinding of discounts resulting from APLNG receivables and payables (27) (69) Transition and transaction costs (235) (20) (215) 1,075 Other 36 (6) Less total excluded items (487) 27 (514) (1,904) Underlying Profit Origin Energy Annual Report

28 Directors Report for the year ended 30 June 2011 (continued) 3. Review of operations External revenue $10,344 million, up 21 per cent Total external revenue increased by 21 per cent or $1,810 million to $10,344 million. This reflected an increase in external revenues from the Retail business segment ($1,679 million) predominantly associated with the acquisition of the Integral Energy and Country Energy retail businesses and entry into the Eraring GenTrader arrangements, together with increased revenues from the Exploration and Production business segment ($145 million). Underlying EBITDA $1,782 million, up 32 per cent For the year ended 30 June 2011, Underlying EBITDA increased 32 per cent or $436 million to $1,782 million. The Underlying EBITDA contributions by business segment are presented in the following table: Underlying EBITDA by business segment Year ended 30 June Change ($m) ($m) (%) Exploration & Production Generation Retail Contact Underlying EBITDA 1,782 1, Exploration & Production Underlying EBITDA increased by 30 per cent or $75 million to $325 million. This was driven by higher average commodity prices together with a full year contribution from the Kupe development compared with six months in the prior year; a full year contribution of an additional 36 per cent interest in the Otway Gas Project compared with three and a half months in the prior year; higher production from BassGas; and a higher contribution from Australia Pacific LNG; partially offset by significantly higher exploration expense of $118 million in the current year from an expanded Greenfield exploration program compared with $45 million in the prior year and a lower contribution from onshore producing assets. Generation Underlying EBITDA increased 80 per cent or $145 million to $327 million. This reflected the increase in Origin s owned and contracted generation capacity from 1,710 MW to 5,310 MW, including a full year contribution from the Darling Downs Power Station and four months contribution from the GenTrader arrangements for Eraring and Shoalhaven power stations ($43 million). Retail Underlying EBITDA increased 38 per cent or $217 million to $785 million. This was primarily due to the first four months contribution from the acquired Integral Energy and Country Energy retail businesses in NSW ($183 million), effective management of the energy portfolio and growth in non-commodity sales, predominantly solar. Contact Underlying EBITDA decreased $1 million to $345 million. Higher generation volumes and increased wholesale electricity prices in New Zealand resulted in a NZ$14 million increase in Underlying EBITDA as reported by Contact. However, the foreign exchange impact of a strengthening Australian Dollar against the New Zealand Dollar resulted in a marginal decrease in the Australian Dollar Underlying EBITDA. Underlying depreciation and amortisation $539 million, up 32 per cent Underlying depreciation and amortisation increased by 32 per cent or $131 million to $539 million. This was primarily due to the higher asset base and increased production associated with the Darling Downs, Eraring and Shoalhaven power stations and the Kupe and Otway gas developments. Underlying share of interest, tax, depreciation and amortisation of equity accounted investees $49 million, up 17 per cent The share of Underlying ITDA attributable to equity accounted investees increased 17 per cent or $7 million to $49 million. This was primarily due to an increase of $10 million associated with Origin s interest in Australia Pacific LNG, which had increased due to additional assets becoming operational during the period and an increase in production in the current year. Underlying EBIT $1,194 million, up 33 per cent For the year ended 30 June 2011, Underlying EBIT increased 33 per cent or $298 million to $1,194 million. The Underlying EBIT contributions by business segment are presented in the following table: Underlying EBIT by business segment Year ended 30 June Change ($m) ($m) (%) Exploration & Production Generation Retail Contact Underlying EBIT 1,

29 Directors Report for the year ended 30 June 2011 (continued) Underlying net financing costs $143 million, up $130 million The net financing costs for the full year comprise an interest expense of $179 million and interest revenue of $36 million compared with interest expense of $126 million and interest revenue of $113 million in the prior year. Capitalised interest was $153 million compared with $156 million in the prior year. Income tax expense on Underlying Profit $316 million, up 36 per cent Underlying income tax expense for the full year increased 36 per cent or $84 million to $316 million, reflecting higher Underlying Profit before income tax and a higher Underlying effective tax rate of 30 per cent compared with 26 per cent in the prior year. The Underlying effective tax rate was higher than the prior year mainly due to tax benefits in the prior year arising from recognition of previously unbooked capital losses. Non-controlling interests share of Underlying Profit $62 million, down 6 per cent Underlying Profit attributable to Non-controlling Interests decreased 6 per cent to $62 million from $66 million. Underlying Profit $673 million, up 15 per cent Underlying Profit for the year increased 15 per cent or $88 million to $673 million from $585 million. 4. significant changes in the state of affairs The following significant changes in the state of affairs of the Company occurred during the year: Acquisitions On 1 March 2011, Origin completed Sale and Purchase Agreements with the NSW Government to acquire the retail businesses of Integral Energy and Country Energy, and entered into GenTrader arrangements with Eraring Energy for a combined purchase consideration of $3,259 million. Included in the purchase consideration is the estimated NSW stamp duty payable of $134 million. Funding During the year, Origin strengthened its balance sheet, lengthened its debt maturity profile and increased its funding options in preparation for ongoing investment in the Australia Pacific LNG CSG to LNG project through the following initiatives. Syndication of $2.15 billion and US$350 million bank debt facility On 11 April 2011, Origin completed the syndication of a $2.15 billion and US$350 million bank debt facility with terms of between three and five years. Renounceable equity entitlement offer On 19 April 2011, Origin completed the 1 for 5 pro rata renounceable equity entitlement offer issuing 177,100,055 new shares and raising $2.3 billion. Hybrid instrument issue On 10 June 2011, Origin completed a 500 million ($675 million) hybrid issue. The hybrid has been recorded as debt in the financial statements and has received 100 per cent equity credit from Standard & Poor s and 50 per cent equity credit from Moody s. Commenced operations Darling Downs Power Station On 1 July 2010, Darling Downs commenced commercial operations. Darling Downs Power Station is the largest gas-fired combined cycle power station in the National Electricity Market with a capacity of 630 MW. Developments Retail Transformation Project In June 2011, the Retail business successfully implemented the first phase of the Retail Transformation program, with 300,000 South Australian customer accounts transferred to the new billing system. Further account migration activities are ongoing. The events described above and those as disclosed in the financial statements represent the significant changes in the state of affairs of Origin for the year ended 30 June Events subsequent to balance date Other than the items described below, no matters or circumstances have arisen since 30 June 2011, which have significantly affected, or may significantly affect: The Company s operations in future financial years; Results of those operations in future financial years; or The Company s state of affairs in future financial years. Events in respect of the Australia Pacific LNG joint venture On 28 July 2011, Australia Pacific LNG announced that a FID had been approved initiating development of the first phase of a two-train CSG to LNG project. The first phase is the development of the first train and infrastructure to support the second train. The project has a construction period over the next 4 years and total capital expenditure to first gas for the first phase is estimated to be US$14 billion (US$6 billion Origin s share), some of which has been committed. Additionally, under an agreement reached between Origin and ConocoPhillips, the contingent FID payment of US$1 billion to be made by ConocoPhillips to Australia Pacific LNG in connection with the first LNG train has been deferred and the payment will be made when the project pays out an agreed economic return on the total investment by ConocoPhillips in Australia Pacific LNG. On 9 August 2011, Australia Pacific LNG issued new shares to China Petroleum and Chemical Corporation (Sinopec), resulting in Sinopec holding a 15 per cent interest in the issued capital of Australia Pacific LNG. As a result of this new share issue, Origin s interest in Australia Pacific LNG has been diluted from 50 per cent to 42.5 per cent. Under the terms of the subscription agreement, Sinopec paid an upfront subscription amount of US$1,765 million and committed to fund an additional amount of $1,262 million when called by Australia Pacific LNG. The completion of the share issue from Australia Pacific LNG to Sinopec results in a dilution gain recorded in statutory profit for the consolidated entity of approximately $0.5 billion for the year ended 30 June At 30 June 2011, the consolidated entity recorded a loan payable to Australia Pacific LNG of $3,576 million. This loan is expected to be utilised by the consolidated entity in funding expenditure for the FID approved Australia Pacific LNG development project; some of this expenditure has been committed by Australia Pacific LNG and is also subject to guarantees provided by Origin Energy Limited, as per below. Following FID and subsequent to 30 June 2011, Origin Energy Limited (the Parent Company of the consolidated entity) provided a guarantee for Origin s share of certain contractual commitments of Australia Pacific LNG associated with the construction project, amounting to approximately $3 billion (Origin s share). Origin Energy Limited also provided a guarantee of $125 million (Origin s share) in respect of a bank guarantee facility obtained by Australia Pacific LNG to support the first phase of the development project. At the date of this report, no guarantees have been issued under this facility. Following the issue of shares to Sinopec, Origin s share of the commitments and guarantees of the Australia Pacific LNG joint venture recorded at 30 June 2011, is diluted from 50 per cent to 42.5 per cent, resulting in commitments as at 30 June 2011 reducing by $277 million. Origin Energy Annual Report

30 Directors Report for the year ended 30 June 2011 (continued) Final Dividend On 28 July 2011, the Board announced that Origin has entered an agreement to underwrite up to 100 per cent of the interim and final dividends up to and including the period ending 31 December Origin intends to underwrite 100 per cent of the final dividend for the period ending 30 June On 23 August 2011, the Board declared a final fully franked dividend of 25 cents per share. Refer to section 6 below for further details. 6. Dividends Dividends paid during the year by the Company were as follows: $million Final dividend of 25 cents per ordinary share, fully franked at 30%, for the year ended 30 June 2010, paid 28 September Interim dividend of 25 cents per ordinary share, fully franked at 30%, for the half year ended 31 December 2010, paid 1 April In respect of the current financial year, the Directors have declared a final dividend as follows: $million Final dividend of 25 cents per ordinary share, fully franked at 30%, for the year ended 30 June 2011, payable 29 September The DRP will apply to this final dividend at a discount of 2.5 per cent. 7. business strategies, future developments and expected results During 2011, Origin invested $5.0 billion in developing and growing its business. This included $3.1 billion on the acquisition of the Integral Energy and Country Energy retail businesses and entry into the Eraring GenTrader arrangements. In addition, in July 2011, Origin committed US$6.0 billion for the first phase of the Australia Pacific LNG project. This will drive short, medium and longer term growth for Origin. In the coming year, Origin s Underlying EBITDA will benefit from: a full year contribution from the acquisition of the Integral Energy and Country Energy retail businesses; a full year contribution from the GenTrader arrangements covering the Eraring and Shoalhaven power stations and contributions from the Mortlake Power Station which is expected to commence commercial operations during the first half of the financial year; increased contribution from the Exploration and Production business due to lower levels of planned exploration expense versus the prior year; and improved profitability in Contact in New Zealand as the Stratford Peaker Power Station and the Ahuroa Gas Storage project deliver flexibility to Contact s energy supply portfolio. Depreciation and amortisation expense will continue to increase as capital intensive assets come on line or provide a full year s contribution. Underlying net financing costs will increase associated with the funding of the NSW acquisition and completed developments. As Australia Pacific LNG is a development project, interest expense associated with its funding is excluded from the guidance of Underlying Profit. Origin s Underlying effective tax rate is expected to remain above 30 per cent due to the non-deductibility for tax purposes of amortisation associated with the GenTrader arrangements. Based on Origin s current assessment of operations and prevailing market conditions, Origin anticipates Underlying EBITDA to increase by around 35 per cent and Underlying Profit to increase by around 30 per cent for FY2012 when compared with the prior year. In July 2011, Origin committed to fund its 42.5 per cent share of the US$14 billion of estimated capital expenditure for the first phase of the Australia Pacific LNG project, with the option of progressing to a full two-train development. Capital has also been committed to develop the Te Mihi Geothermal project via Origin s shareholding in Contact and Origin will fund the continued upgrade of capacity of the Eraring Power Station. These commitments will continue to drive growth in the medium term. Origin is also pursuing a number of opportunities, which will expand the scale and diversity of its business and provide earnings growth in the medium to long term. Origin has several options available to expand its generation capacity. This includes the development of Australia s largest wind farm at Stockyard Hill and the option to convert some open cycle gas turbine sites to highly efficient combine cycle gas turbines. In addition, Origin is pursuing a range of low carbon emission and renewable energy opportunities in growing offshore markets. These include exploration and development of geothermal resources particularly in Chile and Indonesia, assessment and development of hydro resources such as the potential Purari Hydro Project in Papua New Guinea and the exploration for gas particularly in the Canterbury Basin in New Zealand, in South East Asia and Kenya. Since first listing in 2000, Origin has demonstrated the ability to deliver sustained growth in earnings which has resulted in long-term growth in shareholder value. Based on the opportunities available to the Company, Origin continues to target long term growth in Underlying EPS of 10 to 15 per cent per annum on average. 8. Directors The Directors of the Company at any time during or since the end of the financial year are: H Kevin McCann (Chairman) Grant A King (Managing Director) John H Akehurst Bruce G Beeren Trevor Bourne Gordon M Cairns Karen A Moses Helen M Nugent J Roland Williams (retired 29 October 2010) 9. information on Directors and Company Secretaries Information relating to current Directors qualifications, experience and special responsibilities is set out on pages 54 and 55. The qualifications and experience of the Company Secretaries is set out below. Andrew Clarke Group General Counsel and Company Secretary Andrew Clarke joined Origin in May 2009 and is responsible for the company secretarial and legal functions. He was a partner of a national law firm for 15 years and was Managing Director of a global investment bank for more than two years prior to joining Origin. Andrew has a Bachelor of Laws (Hons) and a Bachelor of Economics from Sydney University. He is admitted to practice in New South Wales and New York. Helen Hardy Company Secretary Helen Hardy joined Origin in March She was previously General Manager, Company Secretariat of a large ASX listed company, and has advised on governance, financial reporting and corporate law at a Big 4 accounting firm and a national law firm. Helen is a Chartered Accountant and Chartered Secretary. She holds a Bachelor of Laws and a Bachelor of Commerce from Melbourne University, and is admitted to practice in New South Wales and Victoria. 28

31 Directors Report for the year ended 30 June 2011 (continued) 10. Directors meetings The number of Directors meetings, including Board Committee meetings, and the number of meetings attended by each Director during the financial year are shown in the table below: Directors Meetings of Board Committees Scheduled Board Meetings Unscheduled Board Meetings Audit Remuneration HSE Nomination Risk H H A A H A H A H A H A H A H K McCann G A King J H Akehurst B G Beeren T Bourne G M Cairns K A Moses H M Nugent J R Williams (1) (1) Up to date of retirement 29 October H: Number of meetings held during the time that the Director held office or was a member of the committee during the year. A: Number of meetings attended. The Board held three workshops during the year to consider operational and strategic matters of relevance to the Origin Group. The Board has also visited Company operations in Victoria and New South Wales and met with operational management during the year. 11. Directors interests in shares, options and rights of Origin Energy Limited The relevant interests of each Director in the shares and rights or options over such instruments issued by the companies within the consolidated entity and other related bodies corporate at the date of this report are as follows: Director Ordinary shares held directly and indirectly Options over ordinary shares Performance Share Rights over ordinary shares Ordinary shares in Contact Energy Limited H K McCann 349,012 G A King 1,106,611 1,368,212 (1) 399,750 (2) 28,438 J H Akehurst 71,200 B G Beeren 1,360,015 31,762 T Bourne 53,504 G M Cairns 83,360 K A Moses 221, ,202 (3) 183,779 (3) 14,947 H M Nugent 38,204 Exercise price for share options and performance share rights: (1) 300,000: $9.86, 400,000: $15.84, 297,000: $15.47, 371,212: $14.91 (2) Nil (3) 211,000: $6.04, 140,000: $9.86, 89,000: $15.84, 115,000: $15.47, 145,202: $ Environmental regulation and performance The Company s operations are subject to significant environmental regulation under Commonwealth, State and Territory legislation. In the year ended 30 June 2011, the Company recorded 30 incidents involving either water discharge criteria, air emissions or noise levels that exceeded licence conditions and resulted in regulators being notified. None of the reported environmental incidents resulted in fines or penalties being issued. Of these incidents, three involved high levels of response and interaction with regulators. 13. Indemnities and insurance for Directors and officers Under the Company s Constitution, it must indemnify the current and past Directors, secretaries and senior managers against all liabilities to other persons (other than the Company or a related body corporate) that may arise from their positions as Directors, secretaries or officers of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The Company has entered into agreements with current Directors and certain former Directors whereby it will indemnify those Directors from all liability in accordance with the terms of the Constitution for a period of seven years after they cease to be Directors. The agreements stipulate that the Company will meet the full amount of any such liabilities, including costs and expenses. Since the end of the previous financial year, the Company has paid insurance premiums in respect of Directors and officers liability, and legal expense insurance contracts for current and former Directors and officers, including executive officers and Directors of the Company and executive officers and secretaries of its controlled entities. Origin Energy Annual Report

32 Directors Report for the year ended 30 June 2011 (continued) 14. Auditor independence There is no former partner or director of KPMG, the Company s auditors, who is or was at any time during the year ended 30 June 2011 an officer of the Origin Energy Group. The auditor s independence declaration (made under section 307C of the Corporations Act) is attached to and forms part of this report. 15. Non-audit services The amounts paid or payable to the Origin Energy Group auditor KPMG for non-audit services provided by that firm during the year are as follows (shown to nearest thousand dollar): 1. Accounting advice $243, Taxation services $173, Equity and debt transactional services $569, Other services $146,000 Further details of amounts paid to the Company s Auditors are included in Note 24 to the full financial statements. In accordance with advice provided by the Audit Committee, the Board has formed the view that the provision of those non-audit services by the auditors is compatible with, and did not compromise, the general standards of independence for auditors imposed by the Corporations Act. The Board s reasons for concluding that the non-audit services provided did not compromise the auditor s independence are: All non-audit services were subject to the corporate governance procedures that had been adopted by Origin and were below the pre-approved limits imposed by the Audit Committee; All non-audit services provided did not undermine the general principles relating to auditor independence as they did not involve reviewing or auditing the auditor s own work, acting in a management or decision making capacity for Origin, acting as an advocate for Origin or jointly sharing risks and rewards; and There were no known conflict of interest situations nor any circumstance arising out of a relationship between Origin (including its Directors and officers) and the auditor which may impact on auditor independence. 16. Rounding of amounts The Company is a company of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that class order, amounts in the financial report and Directors Report have been rounded off to the nearest million dollars unless otherwise stated. 17. Remuneration The Remuneration Report is attached and forms part of this Directors Report. Signed in accordance with a resolution of Directors: Kevin McCann Chairman Sydney, 23 August

33 Lead auditor s independence declaration Origin Energy Annual Report

34 Remuneration Report for the year ended 30 June 2011 This Report is presented in the following sections: 1. Introduction; 2. Key terms; 3. Governance; 4. Corporate performance; 5. Remuneration framework; 6. Employee retention plan; 7. Employee share plan (ESP); 8. Non-executive Director remuneration; and 9. Remuneration tables and additional remuneration disclosures. 1. Introduction The Directors present the Remuneration Report for Origin Energy Limited (the Company) for FY2011. Amongst the key issues to highlight for the current year is the comprehensive review undertaken of the Company s Long Term Incentive Plan (LTI Plan) and its operation, discussed in sections 5.4 and 5.8. This resulted in an expanded participating population and the confirmation of a continuing central role for Options within the LTI Plan, notwithstanding the significantly changed regulatory environment for equity arrangements. The Remuneration Committee has again been active during the year in the public discussion on executive remuneration matters. The Board considers that the Government should discuss principles relating to proposed regulation of remuneration with the relevant stakeholders before preparing detailed draft legislation. In the past five years legislation has been introduced, in some cases with little consultation, adding to complexity and administrative costs. Where consultation has occurred, some of the issues raised by the Company have been accepted and in some cases contributed to improving the drafting of the original government proposals. The Board was pleased to see an attribution from its 2010 Remuneration Report quoted in a best practice example recently distributed by the Australian Securities and Investment Commission (ASIC) on remuneration reporting. However, the Board remains concerned that the Federal Government has rejected recommendations from both the Productivity Commission and the Australian Prudential Regulatory Authority to remove cessation of employment as a taxing point for employee share plans. The Board agrees with the Productivity Commission s observations that there is little rationale for ceasing tax deferral at termination of employment and that the provision is contrary to best practice governance promoted in Australia by the prudential regulator and overseas (1). As noted by the Australian Securities Exchange (ASX), a taxation policy that drives remuneration design and practices that are inconsistent with corporate governance policy is both inappropriate and counterproductive (2). The Board will continue to urge change on this matter. Whilst new laws concerning remuneration consultants and remuneration advice do not take effect until the Company s next reporting period, the Board has chosen to become an early adopter and this year s Report contains relevant disclosures in section 3.2 Advisors to the Committee. The Board s assessment is that the remuneration framework that is in place is robust and appropriate to the Company s circumstances and industry setting, such that adjustments during the year, despite extensive review, constitute fine tuning and enhancement rather than significant change. 2. Key terms Throughout this Report, the following terms have the meaning indicated below: Key management personnel Key management personnel (KMP) is defined by AASB 124 Related Party Disclosures as all directors and those persons having authority and responsibility for planning, directing and controlling the activities of the Company and the consolidated entity. For the Company, these are the individuals listed in section 3.3 of this Report. Directors Executive Directors and Non-executive Directors. Executive Management Team (EMT) The Managing Director and managers who report to the Managing Director. Executives The EMT plus all those senior employees who have been invited to participate in the Company s LTI arrangements. OCAT/PC (OCAT Ratio) Operating Cash Flow After Tax (less interest tax shield) divided by Productive Capital. OCAT/PC is one of two performance metrics used to determine short-term incentive (STI) outcomes, the other being Underlying EPS (see below). Productive Capital excludes capital work-in-progress. Underlying EPS Underlying profit (year-end Statutory Net Profit after excluded items) divided by the weighted average number of shares on issue. (1) Productivity Commission Inquiry Report No. 49 (Executive Remuneration in Australia) 19 December 2009, pages 339 and 341. (2) Australian Securities Exchange (ASX), submission DD142 to the Productivity Commission s 2009 Inquiry into Executive Remuneration in Australia, page 9. 32

35 Remuneration Report for the year ended 30 June 2011 (continued) 3. Governance 3.1 Remuneration Committee The Remuneration Committee (the Committee) is responsible for making recommendations to the Board on director and executive remuneration pay, policy and structure. The composition and functions of the Remuneration Committee are set out in the Remuneration Committee Charter which can be viewed or downloaded from the Company s website w w w.originenergy.com.au. The Remuneration Committee comprises five Non-executive Directors with significant remuneration experience working within other board remuneration committees, and considerable experience with the Company s operations. The members are: Remuneration Committee Trevor Bourne Bruce Beeren Gordon Cairns Kevin McCann Helen Nugent Independent Chairman Non-executive Independent Independent Independent 3.2 Advisors to the Committee The Committee seeks advice from external advisors from time to time to assist in its deliberations. The table below summarises the advisors used during the reporting period. Those advisors who provided advice directly related to remuneration decisions for KMP during the period have been deemed by the Company to be Remuneration Consultants for the purpose of the recently approved executive remuneration legislation, and are listed below. The Remuneration Consultants were selected by resolution of the Committee, and were commissioned and instructed by the Chairman of the Committee. The appointment terms identify that all output be sent directly to the Committee through its Chairman, and prohibit the Consultant from providing such material or other information directly to management. The terms also require that any dialogue with management be limited to the provision or validation of factual and policy data, for example contractual provisions, entitlements, salary history and incentive eligibility. The terms also provide that no dialogue would be permitted between KMP and the Remuneration Consultant without written approval of the Chairman of the Committee. The appointment terms also require that the Remuneration Consultants provide, with their report, both a declaration of their independence from the KMPs to whom their recommendations relate, and also confirmation that the Committee s conditions for contact and dialogue had been observed. In this way, the Committee and Board have been assured and are satisfied that the Remuneration Consultant s remuneration advice and recommendations were made free from undue influence from management generally and from KMP executives specifically. All work undertaken by Guerdon Associates on behalf of the Company related to remuneration was also performed on behalf of the Committee, including work not deemed to be a remuneration recommendation under new legislation. Consultant Guerdon Associates Hewitt Associates Australia Remuneration recommendations and fees Market analysis and remuneration review material for Managing Director and EMT, and analysis and fees review for Non-executive Directors ($84,662). Market analysis and remuneration review material for Managing Director and EMT ($40,810). Other advice and fees to the Company Remuneration Report preparation assistance, LTI plan design issues and market practice, research on retention and STI deferral, data mining services, paymix analysis and general benchmarking ($78,754). Benchmarking of selected non-kmp roles and non-remuneration related human resources services ($21,105). 3.3 Individuals covered by the Report The detailed disclosures of the Report relate to the KMP of the Company as defined in section 2 and as listed below: Non-executive Directors Kevin McCann John Akehurst Bruce Beeren (1) Trevor Bourne Gordon Cairns Helen Nugent Independent Chairman Independent Non-executive Independent Independent Independent Non-executive Director former Roland Williams (2) Independent Executive Directors Grant King Karen Moses Managing Director Executive Director, Finance & Strategy Other KMP current David Baldwin Chief Development Officer (from 1 April 2011) Managing Director, Contact Energy (until 31 March 2011) Dennis Barnes Chief Executive Officer, Contact Energy (from 1 April 2011) (3) Frank Calabria Chief Executive Officer, Energy Markets Paul Zealand Chief Executive Officer, Upstream Other KMP former Andrew Stock Robbert Willink Executive General Manager, Major Development Projects (until 31 March 2011) (4) Executive General Manager, Geoscience & New Ventures (until 30 June 2011) (5) (1) Mr Beeren was an Executive Director from March 2000 to January (2) Retired 29 October (3) Prior to 1 April 2011, Mr Barnes held the role of General Manager, Energy Risk Management, a non-kmp role. (4) From 1 April 2011, Mr Stock holds the role of Director, Executive Projects, a non-kmp role. (5) From 1 July 2011, Mr Willink holds the role of Director, Exploration Projects, a non-kmp role. More broadly, the Report also describes the remuneration arrangements applying to Executives and all EMT as defined in section 2. Origin Energy Annual Report

36 Remuneration Report for the year ended 30 June 2011 (continued) 4. Corporate performance Origin reported a Net Profit after Tax and Non-controlling Interests (Statutory Profit) of $186 million for the year ended 30 June 2011, a decrease of 70 per cent compared with $612 million reported in the prior year. The key drivers for the change in Statutory Profit were impairments, a decrease in the fair value of financial instruments and transition and transaction costs primarily relating to the acquisition of Integral Energy and Country Energy retail businesses as part of the NSW privatisation process. These items contributed to charges to Statutory Profit of $487 million and more than offset a 15 per cent increase in profits associated with the underlying business from $585 million in the prior year to $673 million. At an underlying level, the Company continued to build on the strong performance of the business in the prior year. Underlying EBITDA increased by 32 per cent or $436 million to $1,782 million during the year, and operating cash flow after tax increased 64 per cent to $1,585 million. The Company has invested in valuable assets both through acquisitions (such as the NSW retail businesses of Country Energy and Integral Energy, and entering into the Eraring and Shoalhaven GenTrader Agreements) and through the development of internally generated projects (such as the Kupe Gas project in New Zealand, the Darling Downs Power Station and the Mortlake Power Station). The Kupe Gas project and the Darling Downs Power Station made full year contributions in FY2011, while the NSW retail businesses and GenTrader agreements contributed for the four months from March Mortlake Power Station will contribute in the 2012 financial year. The Company also continued a substantial exploration program including seven offshore and international wells, and a substantial seismic exploration program. Origin has actively managed its exposure across a number of these areas and recovered back costs in two areas through farmout arrangements. This contributed to a before tax exploration expense net of farmout receipts of $118 million, compared with $45 million in the prior year. The following table outlines the Company s performance over a number of key performance indicators: Performance Indicator Compound Annual Increase % (1) EARNINGS Revenue $6,436m $8,275m $8,042m $8,534m $10,344m 13 Statutory Profit $457m $517m $6,941m $612m $186m -20 Statutory EPS basic (2) 53.1c 57.4c 768.8c 67.7c 19.6c -22 Underlying Profit $370m $443m $530m $585m $673m 16 Underlying EPS basic (2) 43.0c 49.2c 58.7c 64.8c 71.0c 13 OCAT Ratio 13.7% 12.3% 10.4% 10.9% 13.0% TSR Dividends 21.0c 50.0c (3) 50.0c 50.0c 50.0c 24 Share Price 30 June (2) $9.51 $15.43 $14.23 $14.52 $ Annual shareholder return 38% 66% -5% 5% 12% 17 (1) Compound average growth rate between 30 June 2007 and 30 June (2) Share Price and EPS have been restated for the bonus element of the Rights Issue completed in April (3) Includes additional dividend paid in November

37 Remuneration Report for the year ended 30 June 2011 (continued) From 30 June 2007 to 30 June 2011, the Company s compound Total Shareholder Return (TSR) was 16.8 per cent per annum. This was significantly above the ASX 100 Accumulation Index, which decreased by 2.9 per cent average annual compound over the same period. 1,800 1,600 1,400 1,200 Index Level 1, Jun Jun 30 Jun Origin Total Shareholder Return 30 Jun Jun Jun 2005 S&P/ASX 100 Index Total Return 30 Jun Jun Jun Jun Jun Jun 2011 Origin Energy Total Shareholder Returns vs ASX 100 Total Return (indexed to 100 from 21/02/2000) Source: Guerdon Associates. TSR is defined as the growth in Company share price over the relevant performance period with dividends notionally reinvested on the ex-dividend date during the period. The share price is measured on a volume weighted basis for the three months preceding the relevant date. 5. Remuneration framework 5.1 Principles The Company s remuneration strategy and policy are set by the Board and overseen by the Remuneration Committee. The Committee s focus is to bring strong governance and risk management principles to remuneration practice that: has the appropriate mix of fixed pay and at-risk reward; measures performance in both financial and non-financial terms; and has a significant deferred element that aligns the interests of management with shareholders in terms of long-term and sustainable performance. Origin Energy Annual Report

38 Remuneration Report for the year ended 30 June 2011 (continued) 5.2 Policy The purpose of the remuneration policy is to manage an overall framework for rewards that is geared to achieve the following objectives: Attract and retain talent Recognises and develops internal talent; and Builds and develops the capabilities and competencies of its people through opportunities for growth, development and promotion. Motivate to achieve superior performance Rewards those who deliver outstanding performance. Align executives and shareholders interests Links reward to long-term and sustainable value creation while managing risk; and Transacts business consistently in ways that are aligned with the Company s purpose, principles, commitments and values. To achieve these objectives the Board has set a remuneration policy that has a fixed component benchmarked to the median of the relevant market, guaranteeing fair pay for the role itself, and, through the addition of variable pay, the opportunity for aggregate remuneration (fixed plus variable) to be at the top quartile of the market if and when performance is outstanding. The policy for variable pay is to have a mix of STIs (cash) and LTIs (deferred pay in the form of equity). The details are described in sections 5.7 and 5.8. The diagram below provides a schematic representation of the policy implementation and remuneration arrangements as they apply to EMT: Attract and retain talent Motivate to achieve superior performance Align with shareholder interests Recognise and develop internal talent Build and develop people capabilities through opportunities for growth and development Reward outstanding performance Have a substantial deferred pay element linked to the creation of sustainable value Conduct business in line with the Company s purpose, principles, values and commitments Fixed remuneration At-risk remuneration The proportion of guaranteed or fixed pay decreases with seniority The proportion of at-risk pay increases with seniority. The maximum at-risk component varies from 57% of total package for EMT to 73% of total package for the Managing Director STI LTI Comprises cash salary, superannuation and packaged benefits Benchmarked to the median of the relevant market Cash paid annually after release of corporate results Performance measured by: Group measures Divisional measures 60-67% Individual measures 33-40% Deferred share-based remuneration Performance measures based on relative TSR against ASX 100 companies Has value only when TSR is in top half, maximum value only if TSR reaches top quartile Options bring in a combination of absolute and relative hurdles (Options have no value unless absolute share price improves, irrespective of relative TSR) 36

39 Remuneration Report for the year ended 30 June 2011 (continued) 5.3 Benchmarks In addition to market data sourced through the Remuneration Consultants listed in section 3.2, the Company subscribes to published survey data and participates in industry forums. Through these multiple channels the Company maintains an ongoing monitor of trends and developments within broad and specific markets. The Company attracts new staff from all major industry sectors, and exit analyses show that staff attrition is not industry specific. Therefore a benchmark representative of all industries is appropriate. The primary reference group is currently the Hay Group s all organisations benchmark. The Company s analysis shows that the market is currently differentiated with some job sectors and specialist skills areas in high demand, and attracting a premium to the general market. For these roles, which include geosciences and some subsurface engineering and professional specialists, smaller peer group benchmarks are used. For the most senior roles, external advice is sought at least annually to provide independent determinations of market positioning and relevant trends, as outlined in section 3.2. Pay element Fixed remuneration Aggregate remuneration Benchmarks The majority of roles are benchmarked to Hay Group s all organisations reference of over 400 companies. Approximately 11% of roles are benchmarked to specialist markets. In all cases the benchmark is the median of the relevant market. The reference point for aggregate remuneration (fixed plus variable), when expressed at the maximum opportunity level, is the 75th percentile of the relevant market. Accordingly, top performance is rewarded at levels reaching top market quartile. 5.4 Package summary Aggregate remuneration is made up of four elements as summarised below: Element Description Fixed remuneration Executives are paid a fixed package amount which includes the minimum regulatory Company superannuation contribution. Executives may salary sacrifice from this package additional superannuation and/or benefits such as novated vehicle lease. Benefits Benefits include salary continuance insurance, total and permanent disablement and death cover, parking and fringe benefits. Some benefits are available through salary sacrifice from the fixed package and others are paid in addition to fixed package but counted towards aggregate. STI Cash-based, non-deferred, subject to four types of performance measures. Detailed in section 5.7. LTI Deferred pay, equity based, relative TSR hurdle (implicit absolute hurdle where Options used). Detailed in section Remuneration mix Having regard to the nature of the Company s business, the Board has determined that it is appropriate to have a significant portion of executive remuneration deferred. Accordingly, within the benchmark for aggregate remuneration, executive remuneration is weighted relatively highly to market in LTI, and packages comprise long-term equity elements at levels that go relatively deep into the organisation. Approximately 11 per cent of the Company s employee base (excluding Contact Energy) participate in LTI arrangements (which are described in more detail in section 5.8). The mix between the STI and LTI components is determined with reference to risk focus and time focus. The risk focus is measured as the ratio of (maximum) variable pay to fixed pay. It reflects an increasing proportion of pay at risk with increasing levels of responsibility. The time focus is measured as the ratio of LTI to STI; the higher the ratio the longer the time horizon and the higher the level of deferral. The graph below shows relationships effective from 1 July 2011: Risk vs time focus of remuneration package 2.8 Managing Director Risk focus (ratio of variable/fixed pay) Range for other Executives Other EMT KMP Executive Director Finance & Strategy Time focus (ratio of LTI/STI) Origin Energy Annual Report

40 Remuneration Report for the year ended 30 June 2011 (continued) The mixes are assigned such that there is a consistent relationship between the level of risk and time horizon, and that the time horizon is longer for higher levels of risk. Position Maximum STI as % of Fixed Maximum LTI as % of Fixed Ratio LTI / STI Ratio Variable / Fixed Variable as % of Total Managing Director FY % 150% % Managing Director FY % 140% % Executive Director Finance & Strategy FY % 120% % Executive Director Finance & Strategy FY % 100% % Other KMP average FY % 100% % Other KMP average FY % 74% % Other EMT FY % 63% % Other EMT FY % 56% % Other Executives (FY2011 & FY2012) 25-55% 15-45% avg 41% The relatively high weighting of LTIs means that there is a significant level of deferred pay within the Company s executive remuneration packages. The Board considers that the Company s deferral is at an appropriate level that is competitive and aligned with value creation. 5.6 Link to strategic objectives and performance The diagram below illustrates how the at-risk component of the Company s executive remuneration framework is structured to align with its strategic objectives. There are five different types of performance measures applied, and maximum outcomes therefore require performance against a variety of measures. As noted in section 5.2, the use of Options for the more senior roles means that there is effectively a combination of relative and absolute hurdles within the LTI component. The relative hurdle is provided through relative TSR, and there is an absolute hurdle in the sense that the share price must grow in absolute terms if the Options are to have any value. The performance assessment commentaries in sections 5.7 and 5.8 provide further details of how the incentive plans are linked to performance outcomes. Component Delivery Performance measure Strategic objective STI Cash Company Measure 1: Underlying EPS Drive real annual earnings growth (widely used and understood metric) Company Measure 2: OCAT/PC Measure of cash flow required to exceed risk adjusted cost of capital, reflecting the long-term nature of many of the Company s projects (appropriate for the Company s business) Divisional Measure: (e.g. financial measures such as EBITDA, capital and opex management) Reward achievement of specific divisional performance goals Individual Measure: (e.g. safety, project delivery, culture-engagement) Rewards achievement of specific individual performance goals LTI Options/ PSRs Personal performance and development potential Rewards creation of shareholder wealth (through outperformance of TSR relative to reference group) (3 5 year period) Total at-risk remuneration 38

41 Remuneration Report for the year ended 30 June 2011 (continued) 5.7 Variable remuneration STI Details of the operation of STI arrangements are provided below: Parameter Performance Period Opportunity Level Details Annual Payment is generally during September, after the performance reviews described below are completed and after the release of annual results. The maximum opportunity level is expressed as a percentage of fixed remuneration, and is determined by the Executive s relative influence on Company performance as described in section 4. Position Maximum STI as % of Fixed Target STI as % of Fixed Managing Director 120% 72% Other KMP 100% 60% Other EMT (average) 72% 43% Other executives 25-55% 15-33% Target performance outcomes represent 60% of the maximum level. This will remain unchanged in FY2012. Payment Vehicle Performance Measures Cash. Three levels of performance measure are linked to strategic objectives as described in section 5.6, with relative weightings as shown below: Managing Director EMT (average of operational roles) Group Financial Targets OCAT/PC (see section 1) Growth in Underlying EPS 60% 33⅓% Business Unit Targets Non-Financial e.g. safety performance, project delivery Financial e.g. opex and capex management, cash flow, EBIT and EBITDA, margin and efficiency measures 33⅓% Individual Targets Personal Key Performance Indicators, which may be financial or non-financial and may include risk management, safety plans, culture and engagement and people measures 40% 33⅓% The STI can be reduced if safety targets are not achieved, or it may be increased or decreased in exceptional circumstances with Board approval. Performance Assessment Company goals and outcomes are approved by the Board. Division goals are set by the Managing Director and reviewed by the Remuneration Committee. EMT performance is assessed by the Managing Director, reviewed by the Remuneration Committee and approved by the Board. The Managing Director s performance is assessed and approved by the Board. For the period(s) during which Mr Baldwin or Mr Barnes were or are on secondment to Contact Energy, their STI was or is assessed by its board. Origin Energy Annual Report

42 Remuneration Report for the year ended 30 June 2011 (continued) Maximum STI as % of Fixed Remuneration Actual STI as % of Maximum STI (1) % of Maximum STI Payment Forfeited (2) Actual STI Payment (3) KMP Current (excluding Non-executive Directors) Grant King ,100, ,820,000 Karen Moses ,140, ,000 David Baldwin (4) , ,376 Dennis Barnes (5) (6) , Frank Calabria , ,000 Paul Zealand , ,000 KMP former Andrew Stock , ,000 Robbert Willink , ,000 TOTAL ,115, ,886,376 (1) In exceptional circumstances the Board may award more than the maximum to an individual provided that the maximum overall is not exceeded. (2) Where the actual STI payment is less than maximum potential, the difference is forfeited. It does not become payable in subsequent years. (3) 2011 STI constitutes a cash bonus granted for the year ended 30 June 2011, determined following the close of 2011 results and paid in September STI constitutes a cash bonus granted for the year ended 30 June 2010, determined following the close of 2010 results and paid in September (4) NZD/AUD annual average exchange rate July 2010 to 31st March 2011 (2010 full year ). (5) NZD/AUD annual average exchange rate April to 30 June (6) For the period as a KMP. 5.8 Variable remuneration LTI As disclosed in the 2010 Report, the Board determined to extend the operation of the LTI Plan from approximately 4 per cent to 11 per cent of the (non-contact Energy) employee base in FY2012. This followed a review of market practices to ensure that the Company s remuneration remained competitive, and noting the retention effect observed where the LTI Plan operated. The graph below shows the difference in voluntary turnover levels for FY2011 for resigning employees holding unvested LTI equity (less than 5 per cent) compared with those forfeiting annual STI awards (almost 13 per cent). Voluntary turnover with STI and LTI forfeit 15% 10% 5% 0 STI LTI 40

43 Remuneration Report for the year ended 30 June 2011 (continued) In early 2011, the Board undertook a comprehensive review and updating of the LTI Plan which, until that time, had remained largely in the form of the 1994 plan developed by Boral Limited prior to the demerger creating the Company. This review modernised the administration and articulation of the Plan, reflecting recent regulatory changes and bringing the separate Options Plan and Performance Share Rights (PSR) Plan under a single umbrella set of rules. The updated arrangements apply prospectively to new awards and do not impact on prior grants. The LTI vehicles continue to be: (a) PSRs, which are the right to a fully paid share in the Company at no cost; and/or (b) Options, which are the right to a fully paid share in the Company upon payment of an exercise price determined by the volume weighted average market price for the Company s shares in the five business days leading up to and including the date of grant (i.e. the market price at issue). The Board recognises that general market practice favours PSRs and similar instruments rather than Options. Tax changes in recent years make the advantages of Options more difficult to communicate to participants. Nevertheless, the Board considers that Options continue to serve a useful role in the Company s LTI mix, especially in the way they reward outperformance and provide additional shareholder alignment provided through the inherent absolute price hurdle in conjunction with the relative TSR hurdle. Balancing these considerations, the Board concluded that Options currently remain appropriate for the most senior LTI participants (approximately one third of those who participate in the LTI plan) when used in combination with PSRs, but that the rollout to the next level of participation is more appropriate wholly in the form of PSRs. Where a combination of Options and PSRs is used, the split is approximately half (by fair value). In addition, the Board determined that PSRs would be exercised automatically on achieving vesting hurdles. While Options will remain exercisable between vesting and expiry, subject to the Company s Dealing in Securities Policy, the Board also determined that additional trading restrictions would apply to shares resulting from the exercise of Options through to the end of the next full blackout period (Closed Period) following exercise. During its review, the Board deliberated on the most appropriate reference group on which to base the performance hurdle. After consideration of a variety of comparator groups, the Board concluded that the ASX 100 group of companies remains the most appropriate comparator for alternative investment choice for the majority of the Company s stakeholders. The question of re-testing was also reviewed. In 2007 the Board changed the Plan from continuous testing to one test at the end of Year 3 followed by two re-tests at the end of years 4 and 5. In confirming that two re-tests provided the right balance for the Company, the Board noted that reductions in the level of testing result in lower fair valuation of the rights involved, and therefore result in a corresponding increase in the number of rights that must be issued to maintain a given allocation value. For FY2011, the maximum allocation value for 525 executives (including two Executive Directors) is $34 million for all LTI awards. Actual awards are expected to be determined during September/October In terms of potential share issuance, this equates to a maximum of approximately 0.78 per cent of issued shares. Currently, the total number of shares held by all KMP (including Non-executive Directors) is set out in Table 9.6 and equates to approximately 0.45 per cent of issued shares. As disclosed in the 2010 Report, a Deferred Share Rights (DSR) Plan was introduced in early 2010 under the Employee Retention Plan. The governing rules for the DSR Plan have been incorporated into the new Plan rules. Further information regarding the operation of the Employee Retention Plan is discussed in section 6. Details of the operation of the LTI Plan are provided below, and details of the grants made to the Executive Directors and Executives during the FY2011 are set out in section 9.4. Origin Energy Annual Report

44 Remuneration Report for the year ended 30 June 2011 (continued) Parameter Performance period Opportunity level Details 3 to 5¼ years. Grants are made annually after the performance reviews described below. The maximum opportunity level is expressed as a percentage of fixed remuneration, and is determined by the executive s relative influence on Company performance and risk versus time-focus as described in section 5.5. Position Maximum LTI as % of Fixed Target LTI as % of Fixed Managing Director 150% 90% Executive Director Finance & Strategy 120% 72% Other KMP 100% 60% Other EMT (average) 63% 38% Other Executives 15-45% 9-27% Target performance outcomes represent 60% of the maximum level. Payment vehicle Performance measures, testing and vesting For approximately one-third of participants (those occupying the most senior roles in the Company), the payment vehicle is in the form of a 50/50 mix of PSRs and Options (half each by fair value). For the remainder, the payment vehicle is in the form of PSRs. While under secondment to Contact Energy during FY2011, Mr Baldwin and Mr Barnes participated in Contact Energy s long term incentive arrangements for the period they were seconded (refer to Contact Energy s website w w w.contactenergy.co.nz), in addition to their participation under the Company s LTI Plan. Their combined participation elements for any year remain within their individual overall maximum opportunity level. The hurdle is relative TSR assessed at the end of the performance period against the ASX 100 group of companies (as at the date of grant). The degree to which the award vests is determined by the Company s percentile ranking against the following scale: TSR Percentile Ranking % of Award Vesting <50th 0% 50th 50% 75th or higher 100% Between the 50th and 75th percentiles the percentage of award vesting increases proportionately on a straight line basis. Independent testing of TSR is undertaken at the third anniversary of the grant and awards vest according to the ranking achieved. Any balance not vested at this test is carried forward and re-tested at the fourth anniversary (based on four years of performance). Vesting from the re-test occurs only to the extent that a higher percentile ranking than the first test is achieved. Similarly with a second re-test at the fifth anniversary (based on five years of performance), vesting again occurs only where a higher ranking is achieved. The total amount vested corresponds to the highest ranking achieved. Allocation and performance assessment Equity grants Although LTI grants are subject to a performance hurdle in order to vest, the original allocation is also subject to a performance gateway. The annual LTI allocation is based on an assessment of the employee s actual and potential contribution and overall performance, which determines the proportion (if any) of the maximum potential grant. Tools such as the Company s performance management system and talent management system provide input to this process. The Managing Director s performance is assessed by the Board. The EMT is assessed by the Managing Director, reviewed by the Remuneration Committee and approved by the Board. In exceptional circumstances the Board may award more than the maximum to an individual. If the relevant performance conditions are satisfied at the end of the performance period, then the awards will vest and, in respect of: (a) the PSRs that vest, the executive will be allocated shares in the Company at no cost to the Executive; and (b) the Options that vest, those Options will become exercised upon payment of the exercise price, and the Executive will then be allocated shares in the Company. The number of Options and/or PSRs for each Executive is calculated by dividing the allocation value of the LTI award for that Executive by the independently-determined fair market value of the unit Option and/or PSR estimated at the date of grant. The fair value is calculated using a Black-Scholes methodology with a Monte Carlo simulation model that takes into account market conditions and performance hurdles. Because the Options and the PSRs have different values, an Executive receiving a 50/50 mix by value will receive a different number of each. The recommended number of equity units for Executive Directors is recommended by the Board for approval by shareholders. 42

45 Remuneration Report for the year ended 30 June 2011 (continued) Parameter Exercise period and forfeiture Early vesting Hedging policy Details Options and PSRs may only be exercised where the performance hurdle has been met, to the extent set out in the vesting table previously. Generally, unvested Options and PSRs lapse on cessation of employment or 5¼ years after grant. The Board has discretion to hold unexercised Options and PSRs on foot subject to their normal performance hurdles and other Plan conditions in exceptional circumstances (such as death, disability, genuine retirement, redundancy, Company-initiated transfer of employment, or other termination by the Company without cause). Unvested or unexercised Options and PSRs lapse 5¼ years after grant. Early vesting may occur in limited circumstances, subject to the performance hurdle being achieved: On a person/entity acquiring 20% or more of the relevant interest in the Company pursuant to a takeover bid that has become unconditional, or on a person otherwise acquiring 20% or more of a relevant interest in the issued capital of the Company; On termination of employment due to death or permanent disability; In other circumstances where the Board determines appropriate (note: such discretion has not been exercised by the Board to date and would require exceptional circumstances). The Company s policy has long required that employees not trade instruments or other financial products which operate to limit the economic risk of any securities held under any equity-based incentive schemes, while those holdings are subject to performance hurdles or are otherwise unvested. The Company Secretary monitors adherence to this policy. Non-compliance may result in summary dismissal. 5.9 Managing Director s remuneration details Details regarding the Managing Director s remuneration arrangements are tabulated below: Element Details Fixed remuneration The Managing Director s fixed remuneration for FY2011 was $2,300,000. The Board commissioned two external reports on chief executive remuneration which provided detailed benchmarks across a range of domestic and international peer groups. The Board concluded from the analysis that it was appropriate to increase the Managing Director s fixed remuneration to $2,500,000 for FY2012. STI LTI The Managing Director s maximum STI opportunity level is 120% of fixed remuneration (72% at target). This level will remain unchanged for FY % of the Managing Director s STI is determined on the Company performance measure and 40% on individual measures. Company performance for FY2011 was determined against two equally weighted measures, OCAT Ratio and growth in Underlying EPS (see section 4). The Managing Director s maximum LTI opportunity level for FY2011 was 140% of fixed remuneration. Using the methodologies described at section 5.5, the Board has adjusted this opportunity level to 150% for FY2012. The Managing Director maintains a significant shareholding in the Company, as reflected in Table 9.6 of this Report and equivalent tables in prior Reports. Origin Energy Annual Report

46 Remuneration Report for the year ended 30 June 2011 (continued) 5.10 Contractual arrangements The table below sets out the main terms and conditions of the employment contracts of the Managing Director and EMT. Name Contract Duration Notice Period Grant King To 30 June months either party Immediate for misconduct, breach of contract or bankruptcy 6 months extended illness EMT Ongoing (no fixed term) Up to 3 months either party Immediate for misconduct, breach of contract or bankruptcy Termination Payments (subject to termination benefits legislation) Statutory entitlements only for termination with cause Payment in lieu of notice at Company discretion For Company termination without cause, pro rata STI is payable Statutory entitlements only for termination with cause Payment in lieu of notice at Company discretion For Company termination without cause, pro rata STI is payable For Company termination without cause, payment equivalent to 3 weeks fixed remuneration per year of service capped at 74 weeks; a minimum may also apply (generally weeks) The above includes arrangements agreed prior to the amendments to the Corporations Act 2001 (Cth) regarding termination payments which came into effect on 24 November Entitlements under pre-existing contracts are generally not subject to the new limits on termination payments. The new legislative provisions apply to KMP contract variations after 24 November 2009 and to agreements with KMPs appointed after 24 November Gender pay equity The Company pays particular attention to delivering a policy of equal pay for equal work. During its annual salary review processes it employs a number of checks and balances to detect persistent gaps or systemic bias. For some years it has maintained gender variation by grade within margins of plus or minus 2 per cent with variation in both directions. A detailed study early in the year detected that the variation in new hires was less favourable. Accordingly, special focus has been paid to salary decisions during the early phases of hiring to eliminate such potential gaps. Although pay equity exists on an equal pay for equal work basis, the Company has a structural imbalance in terms of gender distribution. This is a characteristic of the energy industry generally, manifested in a skew where females are over represented in lower-graded jobs and under-represented in higher-graded jobs. Targets established under the Company s diversity agenda include the maintenance of grade pay equity, and seek to improve the Company s gender distribution profile. The targets address the lowering of female turnover overall, and increasing the proportion of women in senior roles, especially those with operational accountabilities. 6. Employee Retention Plan As part of the Company s ongoing operations, from time to time, the Board has approved deferred pay retention arrangements used primarily to reduce the risk of loss of employees who manage critical activities, occupy roles that are key to the delivery of operating or strategic objectives, or undertake functions requiring skills that are in short supply and actively sought in the market. The arrangements allow for the key employees to be provided with deferred equity (DSR) or deferred cash payment provided that they remain in employment to a nominated date (generally two to four years in the future) and achieve personal performance targets. The DSRs Plan was approved by the Board in early 2010 to provide an equity grant as an alternative to cash. The governing rules for the DSR Plan have been incorporated into the new umbrella LTI Plan rules. The period of deferral is four years and the equity would be time vested in equal amounts at the ends of the second, third and fourth year. As at 30 June 2011, no DSRs had been issued, and the number of employees with deferred cash arrangements stood at 39 (2010: 31). It is expected, however, that the first DSRs will be issued early in FY2012 in a measured and targeted manner. 7. Employee Share Plan (ESP) All permanent employees of the Company in Australia and New Zealand (other than Executive Directors) with more than one year of service are eligible to participate in the ESP. The Plan provides for an award of up to $1,000 of shares in the Company if the Company meets specified financial and/or safety targets set by the Board. To be eligible to receive shares, annual performance measures which relate to targeted areas of Company-wide performance must be achieved. Shares awarded under the ESP must be held for at least three years following the award or until the employee ceases employment. For the FY2011, a safety target was set for combined employee and contractor performance. The target was not met and therefore no shares will be awarded in respect of the year. Other arrangements may apply for employees in operations outside Australia and New Zealand. 44

47 Remuneration Report for the year ended 30 June 2011 (continued) 8. Non-executive Director remuneration 8.1 Policy The Board s policy objectives with respect to Non-executive Director fees are summarised below: Policy Objective Promote independence and objectivity Attract and retain Directors who have the skills required by the Board and with a reputation for directorial skill and ability Methodology Non-executive Directors are paid fixed fees and are not dependent on the financial results of the Company for their remuneration. This principle allows independent and objective assessment of executive and Company performance Fees take into account the workload of the director on the Board and the Committees on which they serve. Fees are reviewed against companies of comparable market capitalisation to the Company 8.3 Non-executive Director Share Plan The Non-executive Director Share Plan requires Non-executive Directors to hold a minimum of 10,000 shares in the Company within three years of appointment, and allows them to salary sacrifice up to $5,000 of fees per annum toward the acquisition of shares. Shares are acquired on-market by the Trustee of the Plan to be held for participating Non-executive Directors. The Trustee of the Plan may transfer to a Non-Executive Director a share acquired under the Plan after five years or upon retirement from office or death of the Non-executive Director. No allocations were made under the Non-executive Director Share Plan during the reporting period. Participants with existing holdings under the Non-executive Director Share Plan took up their pro-rata entitlements in the Rights Issue during the year, these are included in the disclosures made in Table 9.6. Non-executive Directors are remunerated by way of base fees and Committee fees (inclusive of superannuation). Directors can elect to receive this in the form of participation in the shareholder-approved Non-executive Director Share Plan. The level of fees paid is based on the scope of director responsibilities and the size and the complexity of the Company. Non-executive Directors fees are not subject to performance. The Remuneration Committee considers the level of remuneration required to attract and retain Directors with the necessary skills and experience for the Board. 8.2 Non-executive Director fee structure The table below shows the structure and level of Non-executive Director fees for the current year and as approved for FY2012. The increase in fees to operate for FY2012 was determined following an external benchmarking review by Guerdon Associates. The Board s review of the report indicated that a market adjustment of 5 per cent per annum should apply to base fees for the Chairman and Non-executive Directors, but that the Committee fees remained at an appropriate level and remain unchanged. Year ending 30 June Board fees Chairman (1) $620,000 $651,000 Director $180,000 $189,000 Committee fees Audit Chairman $55,000 $55,000 Member $28,000 $28,000 Remuneration Chairman $45,000 $45,000 Member $20,000 $20,000 Health, Safety & Environment Chairman $40,000 $40,000 Member $20,000 $20,000 Risk Chairman & members Nomination Chairman & members (1) The Chairman of the Board attends all Committee meetings but receives no additional fees for such attendance. Origin Energy Annual Report

48 Remuneration Report for the year ended 30 June 2011 (continued) 9. Remuneration tables and additional remuneration disclosures 9.1 Remuneration Table for FY2011 and FY2010 Short Term Benefits Year Base Salary / Fees Contact Energy Fees (1) Variable Remuneration (2) Non-Monetary Benefits (3) Insurance Premiums Total Executive Directors Grant King ,255, ,343 2,100,000 34,857 17,487 4,510, ,059, ,857 1,820,000 12,200 13,592 4,012,697 Karen Moses ,166,584 71,640 1,140,000 13,110 9,771 2,401, ,108,802 72, ,000 13,398 8,329 2,103,333 Executives David Baldwin (6, 7) ,879 21, ,000 3,050 5,573 1,261, , ,376 3,682 1,078,635 Dennis Barnes (6) , ,000 6,258 5, , Frank Calabria , ,000 17,211 5,142 1,719, , ,000 12,200 6,137 1,348,341 Andrew Stock , ,000 19,101 28,492 1,307, , ,000 4,333 30,320 1,277,693 Robbert Willink , ,000 22,166 25, , , ,000 4,800 9, ,156 Paul Zealand , ,000 14,455 8,380 1,139, , ,000 6,133 7, ,809 Non-executive Directors Kevin McCann ,451 1, , , ,638 John Akehurst (9) , , , ,878 Bruce Beeren ,451 84,689 1, , ,528 86,556 1, ,318 Trevor Bourne , , , ,709 Gordon Cairns , , , ,688 Helen Nugent , , ,008 2, ,855 Roland Williams , , , ,773 Totals (10) ,245, ,912 6,115, , ,436 15,880, ,978, ,217 4,886,376 57,712 80,289 13,270,523 (1) Mr King, Mr Baldwin, Mr Beeren and Ms Moses are the Company s nominees on the Board of Contact Energy. Remuneration is converted to Australian dollars using an annual (1 July June 2011) average exchange rate of $ (2010 $1.2362). (2) Variable remuneration includes the STI in respect of the reporting period based on achieving personal goals and satisfying specified performance criteria plus any discretionary amounts awarded for exceptional contributions. FY2011 STI constitutes a cash bonus granted for the year ended 30 June 2011, determined following the close of FY2011 results and paid in September FY2010 STI constitutes a cash bonus granted for the year ended 30 June 2010, determined following the close of 2010 results and paid in September (3) Non-monetary benefits include fringe benefits such as car parking and reportable fringe benefits. (4) Benefits under the Non-Executive Director s Share Plan (refer to section 8.3) or the fees sacrificed for application toward the purchase of such shares where ultimately the sacrifice has been returned as cash. (5) Includes restricted shares for Contact Energy fees; retention payments as set out in section 5; and the fair value of equity rights awarded. The fair value of the Options and PSRs is calculated at the date of grant using a Black-Scholes methodology with a Monte Carlo simulation model that takes into account hurdles. The fair value is allocated to each reporting period evenly over the period from date of grant to the first vesting test date. The value disclosed is the portion of the fair value of the Options/PSRs allocated to this reporting period. In valuing the Options/PSRs, market conditions have been taken into account. 46

49 Remuneration Report for the year ended 30 June 2011 (continued) Superannuation Post Employment Benefits Other Long Term Benefits NED Share Plan Benefits (4) Total Accrued LSL Long Term Payments Retention, Options & Rights (5) Total Remuneration % of Total Remuneration At Risk % of Remuneration in Options and PSRs 44,336 44, ,454 2,975,141 7,660,282 66% 39% 40,952 40,952 52,500 1,915,458 6,021,607 62% 32% 32,506 32,506 47, ,493 3,434,943 61% 28% 40,000 40,000 28,750 1,523,000 3,695,083 66% 41% 3,804 3,804 2, ,781 (8) 1,689,914 52% 25% 554,238 (8) 1,632,873 58% 34% 21,000 21,000 5, ,972 (8) 984,896 45% 16% 21,084 21,084 25, ,874 2,428,744 62% 27% 24,996 24,996 9, ,972 1,844,679 58% 25% 23,412 23,412 38, ,434 1,823,362 53% 25% 31,960 31,960 18, ,766 1,706,169 53% 22% 85,738 85,738 26, ,928 1,222,274 42% 18% 82,701 82,701 (45,750) 189,246 1,107,353 48% 17% 43,902 43,902 11, ,951 1,462,682 52% 18% 49,896 49,896 7, ,418 1,158,869 45% 19% 15,216 15, ,089 14,472 14, ,110 25,216 25, ,220 12,232 26,767 38, ,877 15,216 15, ,909 14,472 14,472 28, ,103 15,216 15, ,269 14,472 14, ,181 15,216 15, ,220 13,346 32,565 45, ,599 15,216 15, ,887 14,573 40,102 54, ,530 5,072 5,072 82,917 14,573 39,186 53, , , , ,470 6,116,574 22,667, , , ,265 71,366 5,270,410 19,119,564 (6) During employment with Contact Energy, Mr Baldwin and Mr Barnes were paid in New Zealand currency. Remuneration is converted to Australian dollars using an annual average exchange rate of $ (1 July 2010 to 31 March 2011) and $ (1 April 2011 to 30 June 2011) (2010 $1.2362). Base salary includes holiday pay rate adjustments. Fixed remuneration and all or part of their variable remuneration is reimbursed by Contact Energy. (7) As Managing Director (up to and including 31 March 2011), Mr Baldwin did not receive any fees in his capacity as a director of Contact Energy nor was he a participant in the Contact Energy Directors Share Scheme. Fees received have been in Mr Baldwin s capacity as Director of Contact Energy subsequent to 1 April (8) Includes Options and restricted shares issued by Contact Energy, and Options and PSRs issued by the Company. (9) Mr Akehurst was appointed as a Non-executive Director on 29 April (10) All named KMP and Executive Directors are employed and remunerated by the Company and its controlled entities. All Non-executive Directors are remunerated by the Company. Note: Fixed remuneration (as defined in section 5.4) is the sum of base salary, non-monetary benefits, and superannuation. Where an Executive s Fixed Remuneration was frozen during the reporting period, some variation may occur due to changes in the valuation of non-monetary benefits such as car parking, or changes in the package make-up (for example, cash to superannuation or vice versa). Origin Energy Annual Report

50 Remuneration Report for the year ended 30 June 2011 (continued) 9.2 Details of equity grants The table below lists the position of all current grants of equity-based incentive grants made to Directors and Executives. No terms of equity-settled share-based transactions (including Options and PSRs granted as compensation to a KMP) have been altered or modified by the issuing entity during the reporting period or the prior period except as footnoted below. No. of Options and PSRs Outstanding Exercise Price (1) First Exercise Date Expiry Date Vested Number Exercisable (2) Percentage Exercisable (3) 922,000 $ Sept 2009 (4) 11 Sept 2011 Yes 922, ,000 $ June 2010 (4) 26 June 2012 Yes 50, ,000 $ Sept 2010 (4) 28 Sept 2012 Yes 300, ,000 Nil 28 Sept Dec 2012 Yes 169, ,085,000 $ Sept Dec 2012 Yes 1,085, ,660 Nil 30 Sept Dec 2013 No 90 1,233,500 $ Sept Dec 2013 No ,510 Nil 28 Sept Dec 2014 No 69 1,177,000 $ Sept Dec 2014 No ,370 Nil 6 Nov Feb 2015 No ,000 $ Nov Feb 2015 No 79 4,322 Nil 10 May Aug 2015 No 58 11,600 $ May Aug 2015 No ,731 Nil 1 Oct Dec 2015 No 77 2,191,027 $ Oct Dec 2015 No 77 (1) Adjustments to the exercise price of Options (in accordance with ASX Listing Rule 6.22) and to the number of unvested PSRs granted in FY2011 and for prior years were made during the reporting period as a result of the Rights Issue allotment. (2) The performance conditions are described in section 5.8. (3) The number of equity instruments exercisable is indicative. The number has been calculated by comparing the Company s TSR to the relevant performance group and applying the performance conditions noted in section 5.8 as at 30 June The number of Options and PSRs that become exercisable will be determined at the test date and may be different from that indicated here. (4) Under the previous LTI Plan rules that applied to these awards early vesting occurred as a result of the announcement on 30 April 2008 by the BG Group that it proposed to acquire more than 20 per cent of the Company s shares. 48

51 Remuneration Report for the year ended 30 June 2011 (continued) 9.3 Analysis of movements in Options and PSRs A summary of the movement in FY2011, by value, of Options and PSRs over ordinary shares in the Company (and Options and Restricted Shares in Contact Energy in the case of Mr Baldwin) held by the KMP is provided in the table below. Value of Options and PSRs Granted (1) Exercised (2) Lapsed (3) $ $ $ Non-executive Directors Kevin McCann John Akehurst Bruce Beeren Trevor Bourne Gordon Cairns Helen Nugent Executive Directors Grant King Options 1,570,227 3,945,000 PSRs 1,501,295 1,539,000 Karen Moses Options 614,204 1,278,180 PSRs 587,240 Other KMP current Dennis Barnes (4) Options 101, ,100 PSRs 97, ,390 Contact Options 59,161 Contact PSRs 59,161 David Baldwin (5,6,7) Options 500,701 PSRs 475,892 Contact Options 269,175 Contact PSRs 269,175 Frank Calabria Options 440,662 1,692,290 PSRs 421, ,245 Paul Zealand Options 154, ,520 PSRs 148, ,400 Other KMP former Andrew Stock Options 238,339 1,322,680 PSRs 227, ,300 Robbert Willink Options 134,387 PSRs 128, ,100 (1) The allocated value of Options and PSRs granted in the year is the fair value calculated at grant date using a binominal option-pricing model which has been independently calculated by Mercer. The value disclosed is the total value of the Options and PSRs. This amount is allocated to remuneration (See section 9.1) over the vesting period (i.e. from 1 October 2010 to 1 October 2013). (2) The value of Options and PSRs exercised during the year is calculated as the market price of the Company s shares on the ASX as at the close of trading on the date the Options and PSRs were exercised, after deducting the price paid to exercise the Option or PSR. (3) No Options or PSRs lapsed during the year. (4) Based on an exchange rate of (5) Based on an exchange rate of (6) Mr Baldwin s securities were issued under the Contact Energy Employee Long-term Incentive Scheme when he was Managing Director of Contact Energy. Mr Baldwin also received director s fees from Contact Energy in his capacity as a director, subsequent to 1 April 2011 (following the end of his secondment to Contact Energy). Mr Baldwin will not be granted any further securities in Contact Energy under the employee Long-term Incentive Scheme but will retain existing securities subject to exercise hurdles and vesting requirements. (7) Mr Baldwin s participation in the Employee Long-term Incentive Scheme: Mr Baldwin has participated in Contact Energy s Long-term Incentive Scheme since its inception in Following the completion of his secondment to the role of Managing Director on 31 March 2011, Mr Baldwin will not be issued any further securities under the Contact Energy Scheme but will retain existing securities subject to exercise hurdles and vesting requirements (this is permitted under the Restricted Share Plan Rules and Share Option Scheme Rules). Contact Energy relied on NZSX Listing Rule to allow Mr Baldwin to continue to participate in the Long-term Incentive Scheme following his appointment as Managing Director. On 23 July 2009, NZX Regulation granted a waiver in respect of NZSX Listing Rule 7.6.4(b)(iii) to allow Mr Baldwin to continue to receive financial assistance under the Long-term Incentive Scheme. The full version of the waiver can be found on Contact Energy s website. Origin Energy Annual Report

52 Remuneration Report for the year ended 30 June 2011 (continued) 9.4 Numbers of Options and PSRs granted, vested and lapsed and associated fair value Options and PSRs over ordinary shares of the Company (and Options and PSRs in Contact Energy in the case of Mr Baldwin and Mr Barnes) granted or vested to the KMP are set out below. KMP Type No Granted during the year Grant Date Fair Value (1) Exercise Price (3) Vesting Date (4) Expiry Date (4) % Vested in Year % Forfeited in Year (5) No of Options & PSRs Vested in year to 30 June 2011 Non-executive Directors Kevin McCann John Akehurst Bruce Beeren Trevor Bourne Gordon Cairns Helen Nugent Roland Williams Executive Directors Grant King Options 371,212 28/10/10 $4.23 $ /10/13 31/12/15 300,000 PSRs 130,434 28/10/10 $11.51 Nil 1/10/13 31/12/15 100,000 PSRs (2) 11,316 17/06/11 Nil (2) Nil Various Various Karen Moses Options 145,202 28/10/10 $4.23 $ /10/13 31/12/15 140,000 PSRs 51,020 28/10/10 $11.51 Nil 1/10/13 31/12/15 51,000 PSRs (2) 3,759 17/06/11 Nil (2) Nil Various Various Other KMP current Dennis Barnes Options 23,990 28/10/10 $4.23 $ /10/13 31/12/15 30,000 PSRs 8,430 28/10/10 $11.51 Nil 1/10/13 31/12/15 11,000 PSRs (2) /06/11 Nil (2) Nil Various Various Contact Options 106,082 1/10/10 $0.56 $4.31 1/10/13 30/11/15 Contact PSRs 23,574 1/10/10 $2.51 Nil 1/10/13 30/11/15 David Baldwin Options 118,369 28/10/10 (6) $4.23 $ /10/13 31/12/15 PSRs 42,424 28/10/10 (6) $11.51 Nil 1/10/13 31/12/15 PSRs (2) /06/11 Nil (2) Nil Various Various Contact Options 470,946 1/10/10 $0.57 $4.41 1/10/13 30/11/15 Contact PSRs 104,655 1/10/10 $2.57 Nil 1/10/13 30/11/15 Frank Calabria Options 104,166 28/10/10 $4.23 $ /10/13 31/12/15 64,000 PSRs 36,602 28/10/10 $11.51 Nil 1/10/13 31/12/15 23,500 PSRs (2) 2,669 17/06/11 Nil (2) Nil Various Various Paul Zealand Options 36,599 28/10/10 $4.23 $ /10/13 31/12/15 44,000 PSRs 12,859 28/10/10 $11.51 Nil 1/10/13 31/12/15 16,000 PSRs (2) 1,031 17/06/11 Nil (2) Nil Various Various Other KMP former Andrew Stock Options 56,345 28/10/10 $4.23 $ /10/13 31/12/15 64,000 PSRs 19,798 28/10/10 $11.51 Nil 1/10/13 31/12/15 23,500 PSRs (2) 1,772 17/06/11 Nil (2) Nil Various Various Robbert Willink Options 31,770 28/10/10 $4.23 $ /10/13 31/12/15 40,000 PSRs 11,164 28/10/10 $11.51 Nil 1/10/13 31/12/15 14,500 PSRs (2) /06/11 Nil (2) Nil Various Various (1) All values in Australian currency. (2) Adjustment grants made during the reporting period to adjust for dilution to the number of unvested PSRs granted in FY2011 and for prior years as a result of the Rights Issue allotment and intended to maintain original allocation value. (3) Post-adjustment exercise price of Options in accordance with ASX Listing Rule 6.22 as a result of the Rights Issue. (4) The adjustment PSRs granted as a result of the Rights Issue have the same Vesting Dates and Expiry Dates as their corresponding original allocations of the same tranche. For example, adjustment PSRs for the FY2011 grant have a Vesting Date of 1 October 2013 and an expiry date of 31 December (5) The percentage forfeited in the year represents the reduction from the maximum number of Options available to vest due to the highest level performance criteria not being achieved. (6) Inclusive of 106,000 Options and 38,078 PSRs issued 22 June 2011 on the same terms and conditions as granted 28 October No Options or PSRs have been granted since the end of the reporting period. Options and PSRs were provided at no cost to the recipients. Options and PSRs expire on the earlier of their expiry date or within six months of notice of resignation of employment. The Options and PSRs are exercisable no earlier than three years after grant date. In addition to a continuing employment service condition, the ability to exercise Options and PSRs is conditional on the consolidated entity achieving certain performance hurdles. Details of the performance criteria are included in the LTI information in section 5.8 (and, for Contact Energy, refer to Contact Energy s website w w w.contactenergy.co.nz). For Options and PSRs granted in the current year, the earliest exercise date is 1 October

53 Remuneration Report for the year ended 30 June 2011 (continued) 9.5 Options and PSRs holdings and transactions Movement during the reporting period in the number of Options and PSRs over ordinary shares in the Company (and, for Mr Baldwin and Mr Barnes, Options and PSRs over and restricted shares in ordinary shares in Contact Energy) held directly, indirectly or beneficially by the KMP including their related parties are set out in the table below: Year Type (1) Year Start Held at Granted during the year (2) Vested and Exercised Lapsed Held at Year End Vested During Year Vested & Exercisable at Year End Non-executive Directors Kevin McCann John Akehurst Bruce Beeren Options 275, ,000 Trevor Bourne Gordon Cairns Helen Nugent Executive Directors Grant King 2011 Options 1,497, , ,000 1,368, , ,000 PSRs 358, , , , , Options 1,700, , ,000 1,497, ,000 PSRs 250, , ,000 Karen Moses 2011 Options 717, , , , , ,000 PSRs 129,000 54, ,779 51,000 51, Options 822, , , , ,000 PSRs 87,000 42, ,000 Other KMP current Dennis Barnes 2011 Options 63,000 23,990 30,000 56,990 30,000 PSRs 23,500 9,040 11,000 21,540 11,000 Contact Options 106, ,082 Contact PSRs 23,574 23,574 Contact Restricted Shares 2010 Options 45,000 18,000 63,000 PSRs 17,000 6,500 23,500 Contact Options Contact PSRs Contact Restricted Shares David Baldwin 2011 Options 60, , ,369 PSRs 23,000 43,221 66,221 Contact Options 779, ,946 1,250,102 Contact PSRs 104, ,655 Contact Restricted Shares 133, , Options 60,000 60,000 PSRs 23,000 23,000 Contact Options 525, , ,156 Contact Restricted Shares 88,342 44, ,070 Frank Calabria 2011 Options 401, , , ,166 64,000 64,000 PSRs 78,500 39,271 23,500 94,271 23, Options 399,000 92,000 90, , ,000 PSRs 43,500 35,000 78,500 Paul Zealand 2011 Options 103,000 36,599 44,000 95,599 44,000 PSRs 38,500 13,890 16,000 36,390 16, Options 65,000 38, ,000 PSRs 24,500 14,000 38,500 Origin Energy Annual Report

54 Remuneration Report for the year ended 30 June 2011 (continued) Year Type (1) Year Start Held at Granted during the year (2) Vested and Exercised Lapsed Held at Year End Vested During Year Vested & Exercisable at Year End Other KMP former Andrew Stock 2011 Options 448,000 56, , ,345 64, ,000 PSRs 64,500 21,570 23,500 62,570 23, Options 393,000 55, , ,000 PSRs 43,500 21,000 64,500 Robbert Willink 2011 Options 87,000 31, ,770 40,000 40,000 PSRs 33,000 12,028 14,500 30,528 14, Options 62,000 25,000 87,000 PSRs 23,500 9,500 33,000 (1) Contact Energy offers a combination of share options and performance share rights under its current LTI Scheme to ensure incentives align participating employees performance with shareholders interests in both favourable and unfavourable share market conditions. Following a review of the Contact Energy Employee Long-term Incentive Scheme in 2010, no further restricted shares have been issued since the 1 October 2009 grant date. Performance share rights (issued under the Contact Energy Share Option Scheme) replaced restricted shares from October The Restricted Share Plan is now grand-parented but restricted shares issued prior to October 2010 are still held by participants and remain subject to exercise hurdles and vesting criteria. Contact Energy s LTI Scheme for participating employees now consists of a Share Option Scheme under which both share options and performance share rights are issued. Details of the Scheme are set out following (along with historical details of restricted shares that remain on issue under the now grand-parented Restricted Share Plan). (2) PSRs granted during the year include the 2011 LTI grants as well as those granted as adjustment for dilution from the Rights Issue. 52

55 Remuneration Report for the year ended 30 June 2011 (continued) 9.6 Equity holdings and transactions The table below represents the movement during the reporting period in the number of ordinary shares of the Company (and, in the case of Mr Baldwin and Mr Barnes, Contact Energy) held directly, or indirectly or beneficially by the KMP, including their related parties: Year Held at Year Start Purchases (1) Received on Exercise of Options Received on Exercise of PSRs (3) Sales Held at Year End Non-executive Directors (2) Kevin McCann ,245 62, , ,382 8, ,245 John Akehurst ,750 56,450 71, ,000 12,750 14,750 Bruce Beeren ,235, ,995 1,360, , ,000 1,235,020 Trevor Bourne ,822 6,682 53, ,372 1,450 46,822 Gordon Cairns ,939 29,421 83, ,089 11,850 6,000 53,939 Helen Nugent ,059 7,145 38, ,953 5,106 31,059 Executive Directors Grant King , , ,000 (4) 100,000 1,000,000 1,106, ,958 29, , , ,939 Karen Moses ,000 4, ,000 (4) 165, , , , , ,000 Other KMP current Dennis Barnes ,794 13,005 30,000 (5) 11,000 17,131 59, David Baldwin ,000 10, Frank Calabria ,993 44, ,000 (6) 23, , , , ,000 90,000 90,993 Paul Zealand ,140 31,788 44,000 (5) 16, , , ,140 Other KMP former Andrew Stock ,068 56, ,000 (7) 23, , , , ,068 Robbert Willink ,470 85,402 14, , , ,693 1, ,470 (1) All existing participants in the plan took up their entitlements during the reporting period. (2) Includes shares acquired by participants of the Non-executive Director Share Plan as a result of their take-up of the pro-rata entitlements under the Rights Issue during the reporting period. There were no allocations under the Plan. (3) No amount was paid for the shares acquired on exercise of vested PSRs. (4) Exercise price per share of $7.21. (5) Exercise price per share of $ (6) 86,000 shares had an exercise price per share of $7.21, 110,000 shares had an exercise price per share of $6.50. (7) 123,000 shares had an exercise price per share of $7.21, 64,000 shares had an exercise price per share of $9.86. Origin Energy Annual Report

56 Board of directors H Kevin McCann AM Independent Non-executive Chairman Kevin McCann joined the Board of the Company as Chairman in February He is Chairman of the Nomination and Risk committees and a member of the Audit, Remuneration, and Health, Safety and Environment committees. Kevin is Chairman of Macquarie Group Ltd and Macquarie Bank Ltd and a director of BlueScope Steel Ltd and of the Australian Institute of Company Directors (AICD). He is a Council Member of the National Library of Australia, a member of the Corporate Governance Committee of the AICD and a Fellow of the Senate of the University of Sydney. Kevin s community activities include Chairmanship of the Development Council of the National Library of Australia and membership of the Law Foundation, University of Sydney. Kevin practiced as a commercial lawyer as a partner of Allens Arthur Robinson (and its predecessor firm Allen Allen & Hemsley) from 1970 to 2004 and was Chairman of Partners from 1995 to He was previously Chairman of Healthscope Ltd and ING Management Limited, a director of Pioneer International Ltd (building materials and products), Ampol Ltd (refiner and retailer of petroleum products), a member of the Takeovers Panel, the State Rail Authority of New South Wales and served on the Defence Procurement Advisory Board. He was also previously the Chairman of the Sydney Harbour Federation Trust, a Commonwealth agency. Kevin has a Bachelor of Arts and Law (Honours) from Sydney University and a Master of Law from Harvard University. He is a Fellow of the AICD. Grant A King Managing Director Grant King was appointed Managing Director of the Company at the time of its demerger from Boral Ltd, in February 2000, and was Managing Director of Boral Energy from Grant is a member of the Company s Risk and Health, Safety and Environment committees. Prior to joining Boral, he was General Manager, AGL Gas Companies. Grant is Chairman of Contact Energy Ltd (since October 2004), a councillor of the Australian Petroleum Production and Exploration Association, a former director of Envestra Ltd ( ) and former Chairman of the Energy Supply Association of Australia Ltd. Grant has a Civil Engineering degree from the University of New South Wales and a Master of Management from the University of Wollongong. Gordon M Cairns Independent Non-executive Director Gordon Cairns joined the Board of the Company on 1 June He is a member of the Remuneration, Risk, Nomination and Health, Safety and Environment committees and is Chairman of the Origin Foundation. He has extensive Australian and international experience as a senior executive, most recently as Chief Executive Officer of Lion Nathan Ltd, and has held senior management positions in marketing and finance with Pepsico, Cadbury Schweppes and Nestlé. Gordon is currently the Chairman of Rebel Group (since November 2010), and a director of Westpac Banking Corporation (since July 2004) and World Education Australia. He is also a senior advisor to McKinsey & Company and Caliburn Partnership. Gordon holds a Master of Arts (Honours) from the University of Edinburgh. John H Akehurst Independent Non-executive Director John Akehurst joined the Board of the Company in April 2009 and is Chairman of the Health, Safety and Environment Committee and a member of the Nomination and Risk committees. His executive career was in the upstream oil and gas and LNG industries, initially with Royal Dutch Shell and then as Chief Executive of Woodside Petroleum Ltd. John is currently a member of the Board of the Reserve Bank of Australia and a director of CSL Ltd, Securency Ltd and the University of Western Australia Business School. He is Chairman of the National Centre for Asbestos Related Diseases and of the Fortitude Foundation, a former Chairman of Alinta Ltd and Coogee Resources Ltd and a former director of Oil Search Ltd. John holds a Masters in Engineering Science from Oxford University and is a Fellow of the Institution of Mechanical Engineering. Karen Moses Executive Director, Finance and Strategy Karen Moses joined the Board of the Company in March 2009 and is a member of the Risk Committee. She is responsible for the finance, tax and accounting functions, interactions with capital markets and for information technology. In addition to corporate strategy and transactional activity, she has oversight of overall risk including health, safety and environment, commodity risk, compliance and insurance. Karen oversees the Australia Pacific LNG project for Origin. Prior to Origin, Karen held development and trading roles with Exxon Group ( ). Karen is a director of Australian Energy Market Operator Limited (since July 2009) and Contact Energy Ltd (since October 2004). Karen is a former director of Energy and Water Ombudsman (Victoria) Ltd (October 2005-November 2010), VENCorp ( ) and the Australian Energy Market Operator (Transitional) Ltd (September 2008-July 2009). Karen holds a Bachelor of Economics and a Diploma of Education from the University of Sydney. 54

57 Board of directors (continued) Bruce G Beeren Non-executive Director Bruce Beeren joined the Board of the Company as an Executive Director in March He retired from this position on 31 January 2005 and continues on the Board as a Non-executive Director. He is a member of the Audit, Remuneration, Risk and Nomination committees. With over 30 year s experience in the energy industry, Bruce was Chief Executive Officer of VENCorp, the Victorian gas system operator, and held several senior management positions at AGL, including Chief Financial Officer. He is a director of Contact Energy Ltd (since October 2004), Equipsuper Pty Ltd (since August 2002), ConnectEast Group (since March 2009) and The Hunger Project Australia Pty Limited (since August 2008). He is a former director of Coal & Allied Industries Ltd ( ), Envestra Ltd ( ) and Veda Advantage Ltd ( ). Bruce has degrees in Science (from ANU) and Commerce and a Master of Business Administration (both from the University of New South Wales). He is a Fellow of CPA Australia and the AICD. Trevor Bourne Independent Non-executive Director Trevor Bourne joined the Board of the Company in February He is Chairman of the Remuneration Committee and a member of the Risk, Audit, Nomination and Health, Safety & Environment committees. Trevor retired in December 2003 as Chief Executive Officer of Tenix Investments Pty Ltd, prior to which he was Managing Director of Brambles Australia Ltd. Trevor is Chairman of Hastie Group Ltd (since November 2004) and a director of Caltex Australia Ltd (since March 2006). He is a former director of Coates Hire Ltd ( ) and Lighting Corporation Ltd ( ). Trevor has a Mechanical Engineering degree from the University of New South Wales and a Master of Business Administration from Newcastle University. He is a fellow of the AICD. Helen M Nugent AO Independent Non-executive Director Helen Nugent joined the Board of the Company in March 2003 and is Chairman of the Audit Committee and a member of the Remuneration, Risk and Nomination committees. An experienced professional non-executive director, she is currently Chairman of Funds SA. She is also a director of Macquarie Group Ltd (since August 2007), Macquarie Bank Ltd (since June 1999) and Freehills. She is Chancellor of Bond University, President of Cranbrook School and Deputy Chairman of the National Portrait Gallery. Previously, Helen was Chairman of Swiss Re Life and Health (Australia) ( ) and a non-executive director of UNiTAB ( ), Director of Strategy at Westpac Banking Corporation and a partner with McKinsey & Company, specialising in financial services and mining. Helen has a Bachelor of Arts (Honours); a Doctorate of Philosophy; and an Honorary Doctorate in Business from the University of Queensland. She also holds a Master of Business Administration (with Distinction) from the Harvard Business School. She is a Fellow of the AICD. Origin Energy Annual Report

58 executive management team David Baldwin Chief Development Officer David is responsible for the development of Origin s major projects and initiatives to drive Origin s continued growth. Prior to this year, David was Managing Director of Contact Energy, of which Origin owns 52.6 per cent. Contact is one of New Zealand s largest listed companies. In this role he successfully led Contact through a period of substantial change, and established Contact as a geothermal leader in New Zealand. Key initiatives such as the Ahuroa gas storage facility, the Stratford Peaking Power Station, the Te Huka geothermal power station, and the transformation of Contact s business systems were developed and executed during David s assignment at Contact. Before that, David was based in Asia and the United States overseeing the energy asset interests of a US-based investment fund. He has also held senior development and operational roles in Asia and the US with MidAmerican Energy Holdings Company, a US-based global energy company, and Shell in New Zealand and the Netherlands. David holds a Master of Business Administration from Victoria University and a Bachelor of Engineering (Chemical) from Canterbury University. Dennis Barnes Chief Executive Officer Contact Energy, New Zealand In January 2011, the Contact Energy Board announced that Dennis Barnes, then General Manager Energy Risk Management at Origin, would become Chief Executive Officer of Contact Energy from April Dennis has been with Origin since 1998 and has led sales, systems development, gas trading and generation operations departments. Dennis is a senior energy leader in Australia and has guided Origin s significant and expanding operations in wholesale markets. In addition to his experience with Origin, Dennis brings considerable skills and expertise gained through many years operating in international energy markets; including managerial roles at Scottish and English electricity companies. Carl McCamish Executive General Manager Corporate Affairs Carl McCamish joined Origin in March 2008 and is responsible for corporate brand, sustainability, public policy, corporate communications, and government and media relations. Before joining Origin, Carl was head of strategic development at the private equity firm, Terra Firma. From , he was Senior Energy Advisor in the UK Prime Minister s Strategy Unit and was deputy head of the 2006 UK Energy Review. Before that he worked at McKinsey & Co management consultants. Carl has a Bachelor of Arts and Law from the University of Melbourne and a Masters in Industrial Relations and Labour Economics from Oxford University where he was a Rhodes Scholar. Frank Calabria Chief Executive Officer, Energy Markets Frank Calabria joined Origin as Chief Financial Officer in November 2001 and was appointed to his current role of Chief Executive Officer, Energy Markets in March In this role, Frank is responsible for the integrated operations within Australia including power generation and natural gas, electricity and LPG trading and retailing. Prior to joining Origin, Frank held senior finance roles with Pioneer International Limited, Hanson plc and Hutchison Telecommunications. Frank has a Bachelor of Economics from Macquarie University and a Masters of Business Administration (Executive) from the Australian Graduate School of Management. He is a Fellow of the Institute of Chartered Accountants of Australia and a Fellow of the Financial Services Institute of Australasia. Andrew Stock Director, Executive Projects Andrew Stock joined the company (now Origin) in 1984 and is responsible for Origin s major capital development projects in upstream petroleum and power generation and the low-emissions technology businesses. With over 30 years of experience, he has previously held senior management roles in petroleum and petrochemical industries in Australia and overseas. Andrew is a director of Geodynamics Limited where he chairs the Remuneration & Nominations Committee, Australia Pacific LNG Pty Limited and The Climate Group, and is a member of the Advisory Board of the faculty of Engineering, Computer and Mathematical Sciences at the University of Adelaide. He has a Bachelor of Engineering (Chemical Honours) from the University of Adelaide, is a Fellow of the Institution of Engineers Australia, a Graduate Member of the AICD and a member of the Australian Institute of Energy. 56

59 executive management team (continued) Andrew Clarke Group General Counsel and Company Secretary Andrew Clarke joined Origin in May 2009 and is responsible for the legal and company secretarial functions. He was a partner of a national law firm and a managing director of a global investment bank prior to joining Origin. Andrew has a Bachelor of Laws (Hons) and a Bachelor of Economics from Sydney University. Melanie Laing Executive General Manager People and Culture Melanie Laing joined Origin in November 2007 and is responsible for driving the human resources strategy. Prior to joining Origin, Melanie was Regional Human Resources Director for Unisys Asia Pacific where she built a human resources function that supported the business through major growth and change. She has also held senior HR roles with Vodafone Asia Pacific and General Re Corporation. Melanie has a Bachelor of Arts from the University of the Witwatersrand in South Africa and several qualifications in human resources management. She is a Fellow of the AICD and a member of the Australian Human Resources Institute. Robbert Willink Director, Exploration Projects Rob Willink joined Sagasco Resources (now Origin) in 1988 and is responsible for oil and gas exploration. He is also responsible for the provision of functional (geotechnical) support and ensuring technical excellence in the development of Origin s existing conventional and CSG fields. Prior to joining Origin, Rob spent nine years with Shell as a petroleum geologist in Australia, Oman and Turkey, and was a lecturer in petroleum geology at the National Centre for Petroleum Geology and Geophysics in Adelaide. Rob has a Bachelor of Science (Honours) from the University of Tasmania and a PhD from the Australian National University. Paul Zealand Chief Executive Officer, Upstream Paul joined Origin in 2005 and manages the company s portfolio of oil and gas exploration and production assets in Australia and New Zealand, including the operation of the Upstream part of Origin s joint venture with ConocoPhillips and Sinopec: Australia Pacific LNG. Prior to joining Origin, Paul was Chairman and General Manager of Shell in New Zealand. His extensive experience in the oil and gas industry includes upstream, refining and strategy assignments with Shell at various locations in Europe and Australasia. Paul holds a Masters of Business Administration and Bachelor of Science (Mechanical Honours), is a non-executive director Queensland Resources Council, a Fellow of the Institution of Engineers Australia and a member of the AICD. Origin Energy Annual Report

60 corporate governance statement Origin Energy s Board and management are committed to the creation of shareholder value and meeting the expectations of stakeholders to practice sound corporate governance. To achieve this, every employee and contractor is required to act in accordance with the highest standards of personal safety and environmental performance, governance and business conduct across its operations in Australia and internationally. Compliance with ASX Corporate Governance Council s Corporate Governance Principles and Recommendations (ASX Principles) This statement summarises the Company s corporate governance practices which were in place throughout FY2011. The Company is pleased to report that, during the financial year and to the date of this Report, it complied with all of the ASX Principles. The ASX Principles were revised on 30 June 2010 and the new provisions began to apply to the Company on 1 July However, the Company reviewed its practices and complied with the new recommendations before that date. Principle 1: Lay solid foundations for management and oversight The Board s roles and responsibilities are formalised in a Board Charter, which is available on the Company s website. The Charter sets out those functions that are delegated to management and those that are reserved to the Board. At the time of joining the Company, Directors and senior executives are provided with letters of appointment, together with key Company documents and information setting out their term of office, duties, rights and responsibilities, and entitlements on termination. The performance of all key executives, including the Managing Director, is reviewed annually against: (a) a set of personal financial and non-financial goals; (b) Company goals; and (c) adherence to the Company s Purpose, Principles, Values and Commitments. The Remuneration Committee considers the performance of the Managing Director and all members of the Executive Management Team when awarding performance-related remuneration through short-term and long-term incentives for the year completed and when assessing fixed remuneration for future periods. Further information on executive remuneration is set out in the Remuneration Report. Principle 2: Structure the Board to add value The Board is structured to facilitate the effective discharge of its duties and to add value through its deliberations. In 2010/11 the Board had 11 scheduled meetings, including a two-day strategic planning meeting. The Board also had three separate scheduled workshops to consider matters of particular relevance. In addition, the full Board met on five other occasions to deal with urgent matters and conducted visits of Company operations and met with operational management during the year. From time to time, the Board delegates its authority to non-standing committees of Directors to deal with transactional or other urgent matters. In the 12 months to 30 June 2011, there were 10 such additional Board Committee meetings held. At each scheduled Board meeting, Directors receive reports from executive management, financial and operational reports, a health, safety and environment report and reports on all major projects in which the Company is involved. In addition, the Directors receive reports from Board Committees and, as appropriate, presentations on opportunities and challenges for the Company. Non-executive Directors also meet without the Executive Directors or management to address such matters as succession planning, key strategic issues, and Board operation and effectiveness. All Directors have access to Company employees, advisers and records. In carrying out their duties and responsibilities, Directors have access to advice and counsel from the Chairman, the Company Secretary and the Group General Counsel, and are able to seek independent professional advice at the Company s expense, after consultation with the Chairman. The Board s size and composition is determined by the Directors, within limits set by the Company s Constitution, which requires a Board of between five and 12 Directors. As at 30 June 2011, the Board comprised eight Directors, including two Executive Directors and six Non-executive Directors, five of whom are considered independent by the Board. Directors profiles, duration of office and details of their skills, experience and special expertise are set out in the Directors Report. The Board seeks to have an appropriate mix of skills, experience, expertise and diversity to enable it to discharge its responsibilities and add value to the Company. The skills, experience and expertise which are relevant include those in the areas of finance, legal, governance, management, retail, marketing, engineering and energy industry-related. The Board values diversity in all respects, including gender and differences in background and life experience, communication styles, interpersonal skills, education, functional expertise and problem solving skills. The Board has an appropriate mix of relevant skills, experience, expertise and diversity. The Company s Independence of Directors Policy requires that the Board comprises a majority of independent Directors. In defining the characteristics of an independent Director, the Board uses the ASX Principles, together with its own consideration of the Company s operations and businesses and appropriate materiality thresholds. Further details of the matters considered by the Board in assessing independence are contained in the Independence of Directors Policy which is available on the Company s website. The Board reviews each Director s independence annually. At its review for the 2010/11 reporting period, the Board formed the view that Mr Kevin McCann, Chairman, and Directors Mr John Akehurst, Mr Trevor Bourne, Mr Gordon Cairns and Dr Helen Nugent were independent. The Board selects and appoints the Chairman from the independent Directors. The Chairman, Mr McCann, is independent and his role and responsibilities are separate from those of the Managing Director. Five Committees assist the Board in executing its duties relating to audit, remuneration, health, safety and environment, nomination and risk. Each Committee has its own Charter which sets out its roles and responsibilities, composition, structure, membership requirements and operation. These are available on the Company s website. Committee meeting minutes are tabled at the following Board meeting, with additional and specific reporting requirements to the Board addressed in the Committee Charters. Additional information about the Audit Committee, Risk Committee and Remuneration Committee is provided in response to Principles 4, 7 and 8 respectively. The Nomination Committee, which has met three times during 2010/11, provides support and advice to the Board by: assessing the range of skills and experience required on the Board and of Directors; reviewing the performance of Directors and the Board; establishing processes to identify suitable Directors, including the use of professional intermediaries; and recommending Directors appointments and re-elections. A list of the members of each Board Committee is set out below and their attendance at Committee meetings is set out in the Directors Report. 58

61 corporate governance statement (continued) Current Board Committee membership Audit Remuneration Health, Safety & Environment Nomination Risk Non-executive Directors Kevin McCann Member Member Member Chairman Chairman John Akehurst Chairman Member Member Bruce Beeren Member Member Member Member Trevor Bourne Member Chairman Member Member Member Gordon Cairns Member Member Member Member Helen Nugent Chairman Member Member Member Executive Directors Grant King Member Member Karen Moses Member Each year the performance of the Directors retiring by rotation and seeking re-election under the Constitution is reviewed by the Nomination Committee (other than the relevant Director), the results of which form the basis of the Board s recommendation to shareholders. The review considers a Director s expertise, skill and experience, along with his/her understanding of the Company s business, preparation for meetings, relationships with other Directors and management, awareness of ethical and governance issues, and overall contribution. The Board reviewed the performance of Mr McCann and Mr Beeren who are standing for re-election at the Annual General Meeting in October The Board found that Mr McCann and Mr Beeren have been high performing Directors and concluded that they should be proposed for re-election. Mr McCann and Mr Beeren abstained from deliberations for their respective reviews. The Board s recommendation on the re-election of Mr McCann and Mr Beeren will be included in the Notice convening the Annual General Meeting. Every second year, the Directors review the performance of the whole Board and Board Committees. A full review was undertaken during FY2011 covering the Board s activities and work program, time commitments, meeting efficiency and Board contribution to Company strategy, monitoring, compliance and governance. Principle 3: Promote ethical and responsible decision making All Directors and employees are expected to comply with the law and act with a high level of integrity. The Company has a Code of Conduct and a number of policies governing conduct in pursuit of Company objectives. The Code of Conduct is consistent with the Company s Statement of Purpose, Principles, Values and Commitments. A summary of the Code of Conduct is available on the Company s website. The Company also encourages employees to report known or suspected instances of inappropriate conduct, including Code of Conduct breaches. There are policies in place to protect employees from any reprisal, discrimination or being personally disadvantaged as a result of their reporting of a concern. The Company has established a policy which governs dealings in its securities. This precludes any Origin personnel from dealing in the Company s securities from 1 July until after the announcement of the full year financial results, and from 1 January until after the announcement of the half-yearly results. In addition, all Origin personnel are prohibited from trading in the Company s securities at any time if they possess price-sensitive information not available to the market and which could reasonably be expected to have an effect on the price or value of the Company s securities. Origin personnel may not engage in short-term dealings in the Company s securities and margin loans should not be entered into if they could cause a dealing that is in breach of the Policy. Executives are prohibited from entering into hedging transactions that limit the downside risk of any of their unvested equity-based incentives. The Dealing in Securities Policy is available on the Company s website. The Company is focusing on increasing gender diversity across all levels of its workforce. The Company s actions will be guided by maintaining its current high standards of competence and performance. The Company has developed a Diversity and Inclusion Policy which aims to create an environment in which individuals are involved, supported, respected and connected. We know that partnering with, and employing, a diverse range of people will give us access to a range of perspectives to make the best decisions today to create value for the future. A diverse range of people will also have a positive sustainable impact on, and minimise risks to, employees, customers, shareholders and the communities in which we work. As part of the Company s continued efforts to increase gender diversity across the business, the Company has introduced targets to improve gender equity in under-represented roles and address pay equity. Our targets will cover key areas of focus and measurement including: increasing representation of women in management roles; increasing representation of women in under-represented roles such as trades and engineering; remuneration equity; and increasing retention of women. We regularly track and report on representation of women across the Company. At present, women represent 25 per cent of the Company Board; 20 per cent of the Executive Management Team; 26 per cent of women in management roles; and 37 per cent of all employees. In addition, we have identified the following areas of focus to continue to support our efforts to improve gender equity: established a Diversity Council, chaired by the Managing Director, that has responsibility, among other tasks, for recommending the targets and to assist in monitoring performance against them; implemented targeted initiatives to support women s development and career progression; introduced selection panels to its recruitment processes so as to identify and reduce unconscious gender bias in its succession planning, talent review, recruitment and performance management processes; and promoted inclusive behaviours that recognise, and manage, unconscious bias in core people processes. The Board is responsible for overseeing the Company s strategies on gender diversity, including monitoring of the Company s achievements against any gender targets set by the Board. Origin Energy Annual Report

62 corporate governance statement (continued) Principle 4: Safeguard integrity in financial reporting The Board has an Audit Committee which comprises four Non-executive Directors, of whom three are independent. The Chairman of the Board cannot chair the Audit Committee. The Chairman of the Audit Committee, Dr Helen Nugent, is an independent Director. All members of the Committee are financially literate and the Committee possesses sufficient financial expertise and knowledge of the industry in which the Company operates. The Audit Committee oversees the structure and management systems that are designed to protect the integrity of the Company s financial reporting. The Audit Committee reviews the Company s half and full year financial reports and makes recommendations to the Board on adopting financial statements. The Committee provides additional assurance to the Board with regard to the quality and reliability of financial information. The Committee has the authority to seek information from any employee or external party. The internal and external auditors have direct access to the Audit Committee Chairman and, following each scheduled meeting, meet separately with the Committee without Executive Directors or management present. The Committee reviews the independence of the external auditor, including the nature and level of non-audit services provided, and reports its findings to the Board every six months. The names of the members of the Audit Committee are set out in the table under Principle 2 and their attendance at meetings of the Committee is set out in the Directors Report. Principle 5: Make timely and balanced disclosure The Company has adopted policies and procedures to ensure compliance with its continuous disclosure obligations, and to ensure accountability of senior management for that compliance. The Company is committed to providing timely, full and accurate disclosure and to keeping the market informed with quarterly releases detailing exploration, development and production, and annual and half-year reports to shareholders. All material matters are disclosed to the ASX immediately (and subsequently to the media, where relevant), as required by the ASX Listing Rules. All material investor presentations are released to the ASX and are posted on the Company s website, along with other reports that are not material enough to be an ASX announcement. Shareholders can subscribe to a free notification service and receive notice of any announcements released by the Company. The Continuous Disclosure Policy and the Communications with Shareholders Policy are available on the Company s website. Principle 6: Respect the rights of shareholders The Company respects the rights of its shareholders and has adopted policies to facilitate the effective exercise of those rights through participation at general meetings and providing them with information about the Company and its operations. The Company is committed to providing a high standard of communication to shareholders and other stakeholders so that they have all available information reasonably required to make informed assessments of the Company s value and prospects. The Company provides shareholders with a choice of receiving an annual Shareholder Review, a full Annual Report or no report at all. Shareholders who make no election receive a Shareholder Review. Shareholders may also elect to receive their reports electronically or in printed form. The Company s website contains a list of upcoming events, all recent announcements, presentations, past and current reports to shareholders, notices of meeting and archived webcasts of general meetings and results announcements. The Company also keeps an internal record of briefings given to investors and analysts, including those present and the main issues discussed. The Communications with Shareholders Policy is available on the Company s website. Principle 7: Recognise and manage risk The Board has an overarching policy governing the Company s approach to risk oversight and management and internal control systems. The Risk Committee oversees the Company s policies and procedures in relation to risk management and internal control systems. The Company s policies are designed to identify, assess, address and monitor strategic, operational, legal, reputational, commodity and financial risks to achieve business objectives. Certain specific risks are covered by insurance and the Board has also approved policies for hedging of interest rates, foreign exchange rates and commodities. Management is responsible for the design and implementation of the risk management and internal control systems to manage the Company s material business risks. Management reports to the Risk Committee on whether those risks are being managed effectively. Top risks are reported to the Risk Committee and the Board, along with associated controls and risk mitigation plans. Management has reported to the Risk Committee and the Board that, as at 30 June 2011, its material business risks are being managed effectively. In addition to reports from the Risk Committee, the Board receives monthly reports on key risk areas such as health and safety, project development, commodity exposures and exchange rates. A general Company-wide review of major risks is undertaken for corporate, operational and development activities. When presenting financial statements for Board approval, the Managing Director and Executive Director, Finance and Strategy provide a formal statement in accordance with s295a of the Corporations Act with an assurance that the statement is founded upon a sound system of risk management and internal control that is operating effectively in all material respects. The names of the members of the Risk Committee are set out in the table under Principle 2 and their attendance at meetings of the Committee is set out in the Directors Report. The Risk Management Policy and information on Origin Energy s policies on risk oversight and management of material business risks are available on the Company s website. The Risk Committee Charter is available on the Company s website. Principle 8: Remunerate fairly and responsibly The Remuneration Report sets out details of the Company s policies and practices for remunerating Directors, key management personnel and employees. The Board has a Remuneration Committee, which comprises five Non-executive Directors, of whom four are independent. The Chairman, Mr Trevor Bourne, is an independent Director. The names of the members of the Remuneration Committee are set out under Principle 2 and their attendance at meetings of the Committee is set out in the Directors Report. Further information about the Remuneration Committee s activities is provided in the Remuneration Report. The remuneration of Non-executive Directors is structured separately from that of the Executive Directors and senior executives. Information on remuneration for Non-executive Directors is in the Remuneration Report. All information referred to in this Corporate Governance Statement as being on the Company s website may be found at the web address: w w w.originenergy.com.au under the section Investor Centre Corporate Governance. 60

63 financial statements contents Income statement 62 Statement of comprehensive income 63 Statement of financial position 64 Statement of changes in equity 65 Statement of cash flows 66 Notes to the financial statements 1 Statement of significant accounting policies 67 2 Segments 76 3 Profit 78 4 Income tax expense 79 5 Dividends 80 6 Trade and other receivables 81 7 Inventories 82 8 Other assets 82 9 Other financial assets, including derivatives Investments accounted for using the equity method Property, plant and equipment Exploration, evaluation and development assets Intangible assets Tax assets Trade and other payables Interest-bearing liabilities Other financial liabilities, including derivatives Tax liabilities Provisions Employee benefits Share capital Reserves and other comprehensive income Notes to the statement of cash flows Auditors remuneration Contingent liabilities and assets Commitments Financial instruments Acquisition, disposal and deconsolidation of controlled entities Controlled entities Interest in joint venture operations Share-based payments Related party disclosures Key management personnel disclosures Deed of cross guarantee Earnings per share Parent entity disclosures Subsequent events 128 Directors declaration 129 Independent auditor s report 130 Origin Energy Annual Report

64 Income statement for the year ended 30 June Note $million $million Revenue 10,344 8,534 Other income 3(a) 9 56 Total expenses, excluding net financing costs 3(b) (9,857) (7,734) Share of results of equity accounted investees 10(a) Net financing costs 3(c) (155) (124) Profit before income tax Income tax expense 4 (147) (196) Profit for the period Non-controlling interests (62) (68) Profit attributable to members of the parent entity Earnings per share: Basic earnings per share cents 67.7 cents (1) Diluted earnings per share cents 67.4 cents (1) (1) Restated to reflect the impact of the bonus element component of the 2011 rights issue, refer to note 35 for further details. The income statement should be read in conjunction with the accompanying notes set out on pages 67 to 128. Operational business segment performance and underlying profit of the consolidated entity is presented in note 2(a) and a reconciliation between statutory profit attributable to members of the parent entity and underlying profit is included in note 2(b). 62

65 statement of comprehensive income for the year ended 30 June $million $million Profit for the period Other comprehensive income Available for sale assets: Valuation loss taken to equity (11) Losses transferred to income statement 9 Cash flow hedges: Losses transferred to income statement Transferred to carrying amount of assets 2 8 Foreign currency translation gain 2 2 Valuation loss taken to equity (168) (194) Net gain/(loss) on hedge of net investment in foreign operations 73 (3) Foreign currency translation differences for foreign operations (245) Actuarial gain/(loss) on defined benefit superannuation plan 4 (3) Income tax expense on other comprehensive income 3 Other comprehensive loss for the period, net of income tax (179) (2) Total comprehensive income for the period Total comprehensive income attributable to: Non-controlling interests 4 83 Members of the parent entity Total comprehensive income for the period The statement of comprehensive income should be read in conjunction with the accompanying notes set out on pages 67 to 128. Origin Energy Annual Report

66 Statement of financial position as at 30 June Note $million $million Current assets Cash and cash equivalents Trade and other receivables 6 2,159 1,371 Inventories Other financial assets, including derivatives Tax assets Other assets Total current assets 3,861 3,028 Non-current assets Trade and other receivables Other financial assets, including derivatives Investments accounted for using the equity method 10 5,470 5,395 Property, plant and equipment 11 10,313 9,168 Exploration and evaluation assets ,039 Development assets Intangible assets 13 5,433 2,796 Tax assets Other assets Total non-current assets 22,779 18,806 Total assets 26,640 21,834 Current liabilities Trade and other payables 15 2,020 1,205 Interest-bearing liabilities Other financial liabilities, including derivatives 17 2, Tax liabilities Provisions Total current liabilities 5,109 1,884 Non-current liabilities Trade and other payables Interest-bearing liabilities 16 4,193 3,373 Other financial liabilities, including derivatives 17 2,282 3,813 Tax liabilities Provisions Total non-current liabilities 8,015 8,512 Total liabilities 13,124 10,396 Net assets 13,516 11,438 Equity Share capital 21 4,029 1,683 Reserves 22 (301) (199) Retained earnings 8,504 8,765 Total parent entity interest 12,232 10,249 Non-controlling interests 1,284 1,189 Total equity 13,516 11,438 The statement of financial position should be read in conjunction with the accompanying notes set out on pages 67 to

67 Statement of changes in equity for the year ended 30 June Share capital Sharebased payments reserve Foreign currency translation reserve Hedging reserve Availablefor-sale reserve Retained earnings Noncontrolling interests Total equity $million $million $million $million $million $million $million $million Opening balance as at 1 July , (132) (107) (7) 8,765 1,189 11,438 Other comprehensive income (refer note 22(b)) (107) (16) 7 (5) (58) (179) Profit after tax expense for the period Total comprehensive income/(expense) for the period (107) (16) Dividends paid (refer note 5) (442) (62) (504) Movement in share capital (refer note 21) 2, ,499 Movement in share-based payments reserve Total transactions with owners recorded directly in equity 2, (442) 91 2,009 Balance as at 30 June , (239) (123) 8,504 1,284 13,516 Opening balance as at 1 July , (121) (114) 1 8,597 1,141 11,144 Other comprehensive income (refer note 22(b)) (11) 7 (8) (5) 15 (2) Profit after tax expense for the period Total comprehensive income/(expense) for the period (11) 7 (8) Dividends paid (refer note 5) (439) (72) (511) Movement in share capital (refer note 21) Movement in share-based payments reserve Total transactions with owners recorded directly in equity (439) (35) (384) Balance as at 30 June , (132) (107) (7) 8,765 1,189 11,438 The statement of changes in equity should be read in conjunction with the accompanying notes set out on pages 67 to 128. Origin Energy Annual Report

68 Statement of cash flows for the year ended 30 June Note $million $million Cash flows from operating activities Cash receipts from customers 10,362 9,052 Cash paid to suppliers (8,768) (7,883) Cash generated from operations 1,594 1,169 Dividends/distributions received from equity accounted investees 9 13 Other dividends received 1 Income taxes received/(paid) 3 (102) Acquisition transaction costs (205) (7) Net cash from operating activities 23(c) 1,401 1,074 Cash flows from investing activities Acquisition of property, plant and equipment (1,102) (1,788) Exploration and development assets (150) (898) Acquisition of other assets (424) (190) Acquisition of businesses, net of cash acquired 23(d) (3,125) (8) Interest received Net proceeds from sale of non-current assets 4 7 Costs associated with dilution of Origin s interest in Australia Pacific LNG (16) Tax paid on dilution of Origin s interest in Australia Pacific LNG (548) Net cash used in investing activities (4,758) (3,321) Cash flows from financing activities Proceeds from borrowings 9,788 2,698 Repayment of borrowings (8,191) (2,841) Interest paid (308) (285) Proceeds from issue of share capital senior executive option plan Proceeds from share rights issues 2,252 Proceeds from shares issued by Contact Energy, a subsidiary of the consolidated entity 115 Dividends paid by the parent entity (381) (374) Dividends paid to non-controlling interests (27) (35) Net cash from/(used in) financing activities 3,266 (824) Net decrease in cash and cash equivalents (91) (3,071) Cash and cash equivalents at the beginning of the period 819 3,891 Effect of exchange rate changes on cash (4) (1) Cash and cash equivalents at the end of the period 23(a) The statement of cash flows should be read in conjunction with the accompanying notes set out on pages 67 to

69 notes to the financial statements 1. statement of significant accounting policies Origin Energy Limited (the company) is a company domiciled in Australia. The financial statements of the company for the year ended 30 June 2011 comprise the company and its subsidiaries (together referred to as the consolidated entity) and the consolidated entity s interest in associates and jointly controlled entities. The consolidated financial statements were approved by the Board of Directors on 23 August (A) Statement of compliance The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act The financial statements of the consolidated entity comply with International Financial Reporting Standards adopted by the International Accounting Standards Board. (B) Basis of preparation The consolidated financial statements are presented in Australian dollars, which is the functional currency of the company and the majority of the subsidiaries in the consolidated entity. Unless otherwise stated, all reference to $ refer to Australian dollars. The entity has not elected to early adopt any accounting standards and amendments. The financial statements are prepared on the historical cost basis except for the following material items in the statement of financial position: derivative financial instruments and financial assets classified as available-for-sale that are measured at their fair value; the defined benefit liability is measured as the net total of the plan assets, plus unrecognised past service cost and unrecognised actuarial losses, less unrecognised actuarial gains and the present value of the defined benefit obligation; and environmental scheme certificates which can be traded in an active market are measured at their fair value. The company is of a kind referred to in Australian Securities and Investments Commission (ASIC) Class Order (CO) 98/100 dated 10 July 1998 (updated by CO 05/641 effective 28 July 2005 and CO 06/51 effective 31 January 2006) and in accordance with that Class Order, amounts in the financial statements and Directors Report have been rounded off to the nearest million dollars, unless otherwise stated. (C) Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Refer to note 1(AL) for accounting estimates and judgements. The accounting policies set out below have been applied consistently to all periods presented in the financial statements. The accounting policies have been applied consistently by all entities in the consolidated entity. Certain comparative amounts have been reclassified to conform to the current year s presentation. (D) Principles of consolidation Accounting for acquisitions of non-controlling interests Acquisitions of non-controlling interests are accounted for as transactions with equity holders in their capacity as equity holders and therefore no goodwill is recognised. The adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. Subsidiaries The financial statements of the consolidated entity include the financial statements of Origin Energy Limited and all entities in which it had a controlling interest. Where control of entities commenced or ceased during the year, the profits or losses are included only from the date control commenced or up to the date control ceased. Non-controlling interests in the equity and results of entities that are under the control of Origin Energy Limited are shown as a separate item in the financial statements. Associates and joint ventures (equity accounted investees) Associates are those entities over which the consolidated entity exercises significant influence, but not control, over the financial and operating policies and which are not intended for sale in the near future. Significant influence is presumed to exist when the consolidated entity holds between 20 and 50 per cent of the voting power of another entity. Joint ventures are those entities over whose activities the consolidated entity has joint control, established by contractual agreement and requiring unanimous consent for strategic, financial and operating decisions. In the financial statements, investments in associates and investments in jointly controlled entities, including partnerships, are accounted for using equity accounting principles. The financial statements include the consolidated entity s share of the income and expenses and equity movements of the equity accounted investees, after adjusting to align the accounting policies with those of the consolidated entity, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When the consolidated entity s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the consolidated entity has an obligation or has made payments on behalf of the investee. The equity accounted results are disclosed in the income statement as share of results of equity accounted investees. Jointly controlled operations and assets The consolidated entity s interests in unincorporated joint ventures are brought to account by including the assets that it controls and the liabilities that it incurs in the course of pursuing the joint operation, and the expenses that it incurs and its share of the income that it earns from the joint operation on a line-by-line basis, from the date joint control commences to the date joint control ceases. Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the consolidated entity. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the consolidated entity takes into consideration potential voting rights that are currently exercisable. Origin Energy Annual Report

70 notes to the financial statements (continued) 1. statement of significant accounting policies (continued) (D) Principles of consolidation (continued) Any contingent consideration arising from a business combination is recognised at fair value at the acquisition date. Changes to the fair value that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained subsequent to the acquisition date about facts and circumstances that existed at the acquisition date. The measurement period ends as soon as all information is received but is no longer than 12 months. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the consolidated entity reports provisional amounts for the items for which the accounting is incomplete. The provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognised to reflect the new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the consolidated entity incurs in connection with a business combination, are expensed as incurred. Business combinations from entities under common control Business combinations arising from transfers of interests in entities that are under the control of the shareholder that controls the consolidated entity are accounted for by recognising the assets and liabilities acquired at the carrying amounts recognised previously in the consolidated entity s controlling shareholder s consolidated financial statements. The components of equity of the acquired entities are added to the same components within the consolidated entity equity. Any cash paid for the acquisition is recognised directly in equity. Transactions eliminated on consolidation The effects of transactions between entities consolidated in the financial statements and any unrealised income and expenses arising from these transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the consolidated entity s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (E) Segment reporting The consolidated entity determines and presents operating segments based on the information that is internally provided to the Managing Director who is the chief operating decision maker. The Managing Director regularly receives financial information on the underlying profit of each operating segment and the statutory profit. A reconciliation is also received to show the financial impact of the individual items that are excluded from statutory profit in the measurement of underlying profit. The underlying profit information is provided to the Managing Director to assess the performance of Origin s ongoing business. The nature of items adjusted for in the measurement of underlying profit include losses or reversals on impairment of assets, gains on dilution of Origin s interests in subsidiaries, gains and losses on the movement in fair value of financial instruments not qualifying for hedge accounting, net interest expense arising on the unwinding of discounted receivables and payables associated with Origin s investment in Australia Pacific LNG, transition and transaction costs, the tax impact on translation of foreign denominated tax balances, one-off tax items and other items that would distort the comparability of the results of the ongoing operations. A segment is a distinguishable component of the consolidated entity that is engaged in providing business activities that are regularly reviewed by the Managing Director. (F) Cash and cash equivalents Cash and cash equivalents comprise cash balances, call deposits and term deposits. Bank overdrafts that are repayable on demand and form an integral part of the consolidated entity s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (G) Trade and other receivables Trade and other receivables are initially recognised at fair value. Subsequent to initial recognition they are measured at amortised cost less accumulated impairment losses. Unbilled revenue represents estimated gas and electricity services supplied to customers but unbilled at the end of the reporting period. (H) Inventories Inventories are valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Cost is determined predominantly on the first-in-first-out basis of valuation. The cost of coal and gas storage inventory is determined on a weighted average basis. (I) Deferred expenses Expenditure is deferred to the extent that it is probable that future economic benefits embodied in the expenditure will eventuate and can be reliably measured. Deferred expenses are amortised on a straight-line basis over the period in which the related benefits are expected to be realised. (J) Impairment The carrying amounts of assets, other than inventories, derivatives, environmental scheme certificates and deferred tax assets, are reviewed at each reporting date to determine if there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated, as discussed below for all assets except exploration and evaluation assets which is discussed in note 1(M). For goodwill, the recoverable amount is estimated bi-annually. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the cash-generating unit on a pro-rata basis. When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity is recognised in the income statement even though the financial asset has not been derecognised. The amount of the cumulative loss that is recognised in the income statement is the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in the income statement. An impairment loss with respect to an available-for-sale financial asset is not reversed. 68

71 notes to the financial statements (continued) 1. statement of significant accounting policies (continued) (J) Impairment (continued) With the exception of available-for-sale financial assets any impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed. An impairment loss in respect of assets other than goodwill is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment had been recognised. (K) Calculation of recoverable amount The recoverable amount of receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. Impairment of receivables is not recognised until objective evidence is available that a loss event has occurred. Significant receivables are individually assessed for impairment. Non-significant receivables are not individually assessed. Instead, impairment testing is performed by placing non-significant receivables into portfolios of similar risk profiles, based on objective evidence from historical experience adjusted for any effects of conditions existing at each reporting date. The recoverable amount of other assets is the greater of their fair value less costs to sell, and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. (L) Intangible assets Goodwill All business combinations are accounted for by applying the acquisition method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets, liabilities and contingent liabilities acquired. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. In respect of equity accounted entities, the carrying amount of goodwill is included in the carrying amount of the investment in the equity accounted entity. Negative goodwill arising on an acquisition is recognised directly in the income statement. Other intangible assets Other intangible assets that are acquired outside of a business combination are stated at cost less accumulated amortisation and impairment losses. Amortisation is recognised as an expense on a straight-line basis over the estimated useful lives of the assets. Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically and commercially feasible and the consolidated entity has sufficient resources to complete development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. Amortisation is recognised as an expense on a straight-line basis once the asset is ready for use, over the estimated useful lives of the assets. (M) Exploration and evaluation assets Exploration and evaluation assets are accounted for in accordance with the area of interest method. The application of this method is based on a partial capitalisation model closely aligned to the successful efforts approach. All exploration and evaluation costs, including directly attributable overheads, general permit activity, geological and geophysical costs are expensed as incurred except the cost of drilling exploration wells and the cost of acquiring new interests. The costs of drilling exploration wells are initially capitalised pending the determination of the success of the well. Costs are expensed where the well does not result in a successful discovery. Costs incurred before the consolidated entity has obtained the legal rights to explore an area are recognised in the income statement. Exploration and evaluation assets are partially or fully capitalised where the rights of the area of interest are current and either (i) the expenditure is expected to be recouped through successful development and exploitation of the area of interest (or alternatively, by its sale) or (ii) exploration and evaluation activities in the area of interest have not at the reporting date reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in, or in relation to, the area of interest are continuing, or where both conditions are met. Upon approval for the commercial development of a project, the accumulated expenditure is transferred to development assets. Exploration and evaluation assets are reviewed at each reporting date to determine if there is any indication of impairment. Impairment indicators include (i) expiration of the right to explore in the specific area during the period or in the near future that is not expected to be renewed or (ii) substantive expenditure on further exploration for and evaluation of resources is not planned or budgeted for or (iii) a decision to discontinue activity in a specific area due to exploration for and evaluation of resources not leading to the discovery of commercially viable quantities or (iv) data indicating that although a development in a specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale. (N) Development assets The costs of oil and gas assets in the development phase are separately accounted for and include costs transferred from exploration and evaluation assets once technical feasibility and commercial viability of an area of interest are demonstrable, and all development drilling and other subsurface expenditure. When production commences, the accumulated costs are transferred to producing areas of interest except for land and buildings and surface plant and equipment associated with development assets which are recorded in the other land and buildings and other plant and equipment categories respectively. (O) investments in debt and equity securities Financial instruments held for trading are classified as current assets and are stated at fair value, with any resultant gain or loss recognised in the income statement. Other financial assets held by the consolidated entity are classified as being available-for-sale and are stated at fair value, with any resultant gain or loss recognised in other comprehensive income and presented directly in equity, except for impairment losses and, in the case of monetary items such as foreign exchange gains and losses. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in profit or loss. Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in profit or loss. Origin Energy Annual Report

72 notes to the financial statements (continued) 1. statement of significant accounting policies (continued) (O) investments in debt and equity securities (continued) The fair value of financial assets classified as available-for-sale is their quoted bid price at the reporting date. Financial assets classified as available-for-sale investments are recognised/de-recognised by the consolidated entity on the date it commits to purchase/sell the investments. (P) Property, plant and equipment Items of property, plant and equipment are recorded at cost less accumulated depreciation and impairment losses. Subsequent to initial recognition, lease liabilities are reduced by the repayments of principal with the interest components of the lease payments expensed in profit and loss. The asset is accounted for in accordance with the accounting policy applicable to assets in note 1(P). (R) Operating leases Payments made under operating leases are expensed on a straight-line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property. Lease incentives are recognised in the income statement as part of total lease expense spread over the lease term. Producing areas of interest The costs of oil and gas assets in production are separately accounted for and include costs transferred from exploration and evaluation assets, transferred development assets and the ongoing costs of continuing to develop reserves for production. Land and buildings and surface plant and equipment associated with producing areas of interest are recorded in the other land and buildings and other plant and equipment categories respectively. Leased plant and equipment Leases of plant and equipment which are classified as finance leases (where the consolidated entity assumes substantially all the risks and rewards of ownership of the assets) are capitalised and amortised over the period during which benefits are anticipated. Other leases are classified as operating leases and the lease costs are expensed on a straight-line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased assets. Self-constructed assets These assets are carried at cost less accumulated depreciation and tested for impairment. The cost of self-constructed assets includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, an appropriate proportion of production overheads and capitalised interest. Depreciation and amortisation With the exception of producing areas of interest off-shore assets and land, depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The carrying values of producing areas of interest sub-surface assets are amortised on a units of production basis using the proved and probable reserves to which they relate, together with the estimated future development expenditure required to develop those reserves. Land is not depreciated. The range of depreciation rates for the current and comparative period for each class of asset are: Generation property, plant and equipment 1% 33% Other land and buildings 1% 18% Other plant and equipment 1% 50% Producing areas of interest 2% 25% (Q) Finance leases Leases where substantially all the risks and rewards of ownership are assumed by the consolidated entity are classified as finance leases. Upon initial recognition a lease asset and a lease liability are recognised at the lower of the fair value and the present value of the minimum lease payments. (S) Trade and other payables Liabilities are recognised for amounts to be paid in the future for goods and services received and are recorded at amortised cost. (T) Interest-bearing liabilities Interest-bearing liabilities are initially recognised at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing liabilities are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of borrowings on an effective interest basis. Interest expense is recognised in the income statement as a component of net financing costs. (U) Defined benefit superannuation plan The consolidated entity s net obligation in respect of the defined benefit superannuation plan is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. The benefit is discounted to determine its present value, and the fair value of the plan assets is deducted. The discount rate is the yield at the reporting date on Commonwealth Government bonds that have maturity dates approximating the terms of the consolidated entity s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. The calculation for the financial year ending 30 June 2011 was performed on 14 July When the benefits of the plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement. When the calculation results in plan assets exceeding liabilities to the consolidated entity, the recognised asset is limited to the total of any unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. Past service cost is the increase in the present value of the defined benefit obligation for employee services in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service costs may either be positive (where benefits are introduced or improved) or negative (where existing benefits are reduced). Actuarial gains and losses are recognised directly in retained earnings in the period in which they occur and are presented in the statement of comprehensive income. (V) Defined contribution superannuation funds The consolidated entity makes contributions to defined contribution superannuation funds. All contributions made by the consolidated entity are recognised as a labour related expense within total expenses, excluding net financing costs in the income statement as incurred. 70

73 notes to the financial statements (continued) 1. statement of significant accounting policies (continued) (W) Long-term service benefits The consolidated entity s net obligation in respect of long-term service benefits, other than superannuation plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates, and is discounted using the rates attached to the Commonwealth Government bonds at the reporting date which have maturity dates approximating the terms of the consolidated entity s obligations. (X) wages, salaries, annual leave and sick leave Liabilities for employee benefits for wages, salaries, annual leave and sick leave that are expected and due to be settled within 12 months of the reporting date represent present obligations resulting from employees services provided up to the reporting date calculated at undiscounted amounts based on remuneration wage and salary rates that the company expects to pay as at the reporting date including related on-costs, such as workers compensation insurance and payroll tax. (Y) Equity-based compensation Equity-based compensation benefits are provided to employees via the Senior Executive Option Plan, Senior Executive Performance Share Rights Plan and the Employee Share Plan. The accounting policies regarding each of these plans are as follows: Senior Executive Option Plan and Performance Share Rights Plan The fair value of the options and performance share rights granted is recognised as an employee benefits expense with a corresponding increase in equity. The fair value is measured at grant date using a binomial model, taking into account market performance conditions only, and recognised over the vesting period during which the employees become unconditionally entitled to the options and performance share rights. The amount recognised as an expense is adjusted to reflect the actual number of options and performance share rights that vest except where forfeiture is due to market related conditions. Employee Share Plan Where shares allocated to the benefit of employees are purchased by the company on market, the fair value of the shares is recognised as a liability in the statement of financial position until paid and included in the income statement. (Z) Provisions A provision is recognised in the statement of financial position when there is a legal, equitable or constructive obligation as a result of a past event and it is probable that a future sacrifice of economic benefits will be required to settle the obligation, the timing or amount of which is uncertain. Provisions are determined by discounting the expected future cash flows required to settle the obligation at a pre-tax rate that reflects current market assessments of the time value of money and the risk free rate, being the rates on Commonwealth Government bonds most closely matching the expected future payments, except where noted below. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the recovery receivable is recognised as an asset when it is virtually certain that the recovery will be received and is measured on a basis consistent with the measurement of the related provision. In the income statement, the expense recognised in respect of a provision is presented net of the recovery. The unwinding of the discount on the provision is recognised in the income statement within net financing costs. In the statement of financial position, the provision is recognised net of the recovery receivable only when the entity has a legally recognised right to set off the recovery receivable and the provision, and intends to settle on a net basis, or to realise the asset and settle the provision simultaneously. Dividends A provision for dividend payable is recognised in the reporting period in which the dividend is declared, for the entire undistributed amount, regardless of the extent to which it will be paid in cash. Restoration, rehabilitation and dismantling Provisions for the estimated costs relating to current environmental restoration, rehabilitation and dismantling are recognised as liabilities when a legal or constructive obligation arises as a result of exploration, development and production activities having been undertaken, and it is probable that an outflow of economic benefits will be required to settle the obligation. Where the obligation arises as a result of the construction or installation of an asset or assets, an amount equal to the initial liability is capitalised as a component of the asset. At each reporting date, the restoration liability is remeasured in line with changes in discount rates, and timing or amount of the costs to be incurred. Any changes in the liability in future periods are added or deducted from the related asset, other than the unwinding of the discount which is recognised as interest expense in the income statement as it occurs. The costs, which include field site rehabilitation and restoration, remediation of soil, groundwater and untreated waste and dismantling and removal of infrastructure, are determined on the basis of current legal requirements and current technology. Changes in estimates are dealt with on a prospective basis. Uncertainties exist as to the amount of the restoration obligations that will be incurred due to uncertainty as to the remaining life of existing operating sites and the impact of changes in environmental legislation. Onerous contracts An onerous contract provision is recognised when the unavoidable cost of meeting the obligation under the contract exceeds the economic benefits expected to be received under the contract. A provision is recognised at the present value of the obligation and is the lower of the cost of terminating the contract and the net cost of continuing with the contract. (AA) Share capital Ordinary shares Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any related income tax benefit. Dividends Dividends are recognised as a liability in the period in which they are declared. (AB) Revenue recognition Revenue Revenue comprises revenue earned, (net of returns, discounts and allowances) from the provision of products or services to entities outside the consolidated entity, including estimated amounts for customers unread meters and is measured at the fair value of consideration received or receivable. Sales revenue is recognised in accordance with the contractual arrangements where applicable and only once the significant risks and rewards of ownership of the goods passes from the consolidated entity to the customer or when services have been rendered to the customer, collectability is reasonably assured and revenue can be measured reliably. Origin Energy Annual Report

74 notes to the financial statements (continued) 1. statement of significant accounting policies (continued) (AB) Revenue recognition (continued) In practice, the above revenue recognition approach is applied to the consolidated entity s operating segments as follows: Revenue from the sale of oil and gas in the Exploration and Production operating segment is recognised when the commodities have been loaded for shipment and title passes to the customer; Revenue from electricity and gas supplied by the Retail business segment is recognised once the electricity and gas has been delivered and is measured through a regular review of usage meters. Revenue from the sale of solar panels is recognised once installation is complete; and The Generation business segment recognises revenues from the generation of electricity when the electricity has been supplied to customers. A tolling arrangement is in place at commercial rates between the Retail and Generation operating segments in relation to the consolidated entity s merchant power stations. The external revenue generated by the merchant power stations is recognised in Retail s revenue while Generation receives a tolling fee from Retail for the capacity provided and costs incurred by these power stations. Government grants Government grants are recognised in the statement of financial position initially as deferred income when there is reasonable assurance that they will be received and that the consolidated entity will comply with the conditions attaching to them. Grants that compensate the consolidated entity for expenses incurred are recognised as revenue in the income statement on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the consolidated entity for the cost of an asset are deferred as unearned income until the asset is ready for use at which time they are recognised in the income statement as other income on a systematic basis over the useful life of the asset. Dividends All dividends received from subsidiaries, jointly controlled entities and associates are recognised as income in the entity s stand alone accounts when the right to receive the dividend is established. Revenue from dividends from other investments is recognised when dividends are declared. Interest income Interest income is recognised as it accrues. (AC) Net financing costs Net financing costs comprise interest payable on borrowings, dividends on redeemable preference shares recorded as debt, unwinding of discounts and interest receivable on funds invested. Borrowing costs are expensed as incurred and included in net financing costs in the income statement. Financing costs incurred for the construction of a qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. (AD) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authorities, in these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the tax authorities is included as a current asset or liability in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the taxation authorities are classified as operating cash flows. (AE) Income tax Income tax on the profit and loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax receivable/payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill, the initial recognition of assets or liabilities that affect neither accounting, nor taxable profit, and differences relating to investments in subsidiaries and joint ventures to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Origin s Exploration and Production operations in New Zealand have an accounting functional currency other than the New Zealand dollar (NZD). New Zealand tax legislation dictates that these operations have a NZD currency for the purposes of submitting their tax returns. Origin is required to translate the NZD tax bases using the spot rate at balance date when performing the tax effect accounting calculation, with the foreign exchange movement recorded in the income statement through income tax expense. (AF) Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the relevant entity s functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement except for differences arising on a financial liability designated as a hedge of a net investment in foreign operations that is effective or are qualifying cash flow hedges, which are recognised in other comprehensive income and presented in equity. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined. (AG) financial statements of foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation are translated to Australian dollars at foreign exchange rates in effect at the reporting date. The revenues and expenses of foreign operations are translated to Australian dollars at rates approximating the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised in other comprehensive income, and presented in the foreign currency translation reserve within equity. 72

75 notes to the financial statements (continued) 1. statement of significant accounting policies (continued) (AH) net investment and hedge of net investment in foreign operations Exchange differences arising from the translation of the net investment in foreign operations, and of related hedges that are deemed effective are recognised in other comprehensive income and presented in the foreign currency translation reserve within equity. They are released to the income statement upon disposal. The consolidated entity applies hedge accounting to foreign currency differences arising between the functional currency of the foreign operation and the parent entity s functional currency, regardless of whether the net investment is held directly or through an immediate parent entity. (AI) Environmental scheme certificates The consolidated entity holds environmental scheme certificates in order to meet the consolidated entity s regulatory surrender obligations under various schemes in Australia and overseas. Both the environmental certificate assets and the surrender obligations are initially recorded at cost. Subsequent to initial recognition, they are recorded at fair value (being the market price for certificates at the reporting date) where there is an active market in which Origin participates in buying and selling activities. If there is no active market, the certificates continue to be recorded at cost. (AJ) Derivative financial instruments The consolidated entity uses derivative financial instruments to hedge its exposure to foreign exchange, interest rate, electricity price and commodity price risks arising from operating, financing and investing activities. In accordance with its treasury and energy risk management policies, the consolidated entity does not hold or issue derivative financial instruments for speculative or trading purposes. However, derivatives that do not qualify for hedge accounting are required to be accounted for as trading instruments. Derivative financial instruments are recognised initially at fair value on the date the instrument is entered into. Where a valuation technique results in a gain or loss at the execution date of an instrument, the day one gain or loss is not recognised at the date of execution and the impact of the day one gain or loss is excluded from the changes in fair value of the instrument recognised each period over the life of the instrument. Subsequent to initial recognition, derivative financial instruments are re-measured to fair value. The gain or loss on re-measurement to fair value is recognised immediately in the income statement unless the derivative is designated and effective as a hedging instrument, in which event, the timing of the recognition of profit or loss depends on the nature of the hedging relationship. The consolidated entity designates certain derivatives as either hedges of the exposure to fair value changes in recognised assets or liabilities or firm commitments (fair value hedges); hedges of the exposure to variability in cash flows attributable to a recognised asset or liability or highly probable forecast transactions (cash flow hedges); or hedges of net investments in foreign operations. Refer to note 27 for further details. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. (AK) Hedging Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction, the effective part of any gain or loss on the derivative financial instrument is recognised in other comprehensive income and presented in the hedging reserve directly in equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or liability. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains and losses that were recognised directly in equity are reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. For cash flow hedges, other than described above, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the income statement. When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to occur, the cumulative unrealised gain or loss recognised in equity is recognised immediately in the income statement. Economic hedges The consolidated entity holds a number of derivative instruments for economic hedging purposes under the board approved risk management policies, which are prohibited from being designated as hedges under AASB 139. These derivatives are therefore required to be categorised as held for trading with changes in the fair value being recognised in the income statement. Fair value hedges Where a derivative financial instrument is designated as a hedge of exposure to changes in fair value of a recognised asset or liability, the changes in fair value of the derivative are recognised in the income statement, together with the changes in fair value of the hedged asset or liability attributable to the hedged risk. Hedge of net investment in foreign operations The portion of the gain or loss on an instrument used to hedge a net investment in a foreign operation that is determined to be an effective hedge is recognised in other comprehensive income and presented directly in equity in the foreign currency translation reserve. The ineffective portion is recognised immediately in the income statement. (AL) Accounting estimates and judgements Estimates of reserve quantities Reserves are estimates of the amount of product that can be economically and legally extracted from the consolidated entity s properties. In order to estimate economically recoverable reserves, assumptions are required about a range of geological, technical, legal and economic factors, including quantities, grades, production techniques, reversion rights, recovery rates, production costs, transport costs, commodity demand, commodity prices and exchange rates. Origin Energy Annual Report

76 notes to the financial statements (continued) 1. statement of significant accounting policies (continued) (AL) Accounting estimates and judgements (continued) Estimating the quantity and/or grade of reserves requires the size, shape and depth of orebodies or fields to be determined by analysing geological data such as drilling samples. This process may require complex and difficult geological judgements to interpret the data. Because the economic assumptions used to estimate economically recoverable reserves change from period to period, and because additional geological data is generated during the course of operations, estimates of reserves may change from period to period. Changes in reported reserves may affect the consolidated entity s financial results and financial position in a number of ways, including the following: asset carrying values (notes 10, 11 and 12) may be affected due to changes in estimated future cash flows depreciation, depletion and amortisation charged in the income statement (note 3(b)) may change where such charges are determined by the units of production basis, or where the useful economic lives of assets change restoration, rehabilitation and dismantling provisions (note 19) may change where changes in estimated reserves affect expectations about the timing or the cost of the activities the carrying value of deferred tax assets (note 14) may change due to changes in the estimates of the likely recovery of the tax benefits Restoration, rehabilitation and dismantling The consolidated entity estimates the future removal costs of off-shore oil and gas platforms, production facilities, wells, pipelines, LPG tankers and tanks and generation plants at the time of installation or construction of the assets. In most instances, removal of the assets occurs many years into the future. This requires judgemental assumptions regarding removal date, future environmental legislation, the extent of restoration and rehabilitation activities required, the methodology for estimating cost, future removal technologies in determining the removal cost, and the risk free rate to determine the present value of these cash flows. Refer to note 19 for the carrying value of these provisions. Impairment of assets In accordance with AASB 136 Impairment of assets, the recoverable amount of assets is determined, in the absence of quoted market prices, through estimating the present value of future cash flows using asset specific discount rates. The recoverable amount calculations are based on financial forecasts covering periods which reflect the long term nature of the assets. The forecasts include assumptions related to the growth in revenue, operating expenditure and capital expenditure. The growth assumptions are largely determined by contractual parameters and the projected Australian Consumer Price Index or equivalent. Expenditure growth for all assets is largely indexed to the projected Australian Consumer Price Index. Assumptions used for oil and gas properties also include reserves levels, future production profiles and commodity prices. The estimated future cash flows are discounted to their present value using a pre tax discount rate based on the weighted average cost of capital (WACC). The WACC takes into account the average rates of return required by providers of debt and equity (weighted to the market) to compensate them for the time value of money and the inherent risk or uncertainty in achieving the cash flow returns for that outlay of capital. The discount rates applied in determining the recoverable amounts of the cash generating units (CGU) with significant carrying amounts of goodwill referred to in note 13 are 12.2 per cent for Retail and Generation, and 8-10 per cent for Contact Energy. The impairment assessment, performed at a CGU level is inclusive of the allocation of corporate assets. CGU s have been identified for the purpose of assessing impairment, on the grounds that these are the smallest identifiable groups of assets that generate cash inflows largely independent of the cash inflows from other assets or groups of assets. For further detail around key assumptions refer to note 13. Origin owns assets in Australia that are expected to be impacted by the Australian Government s proposed carbon plan announced on 10 July The introduction of a carbon price framework has the potential to impact the value in use calculations applied for impairment reviews of Origin s Australian assets. Origin has included estimates of the impact of carbon on its asset valuations but uncertainties exist as to the impact of any carbon pricing mechanism on the consolidated entity as legislation has yet to be drafted, and must be passed by Parliament, and the likely impact of the carbon pricing regime to the markets in which Origin s assets operate continues to be assessed. Exploration and evaluation assets The consolidated entity s accounting policy for exploration and evaluation assets is set out in 1(M) above. The application of this policy necessarily requires management to make certain estimates and assumptions as to future events and circumstances, in particular, the assessment of whether economic quantities of reserves have been found. Any such estimates and assumptions may change as new information becomes available. If, after having capitalised expenditure under this policy it is concluded that it is unlikely to recover the expenditure by future exploitation or sale, then the relevant capitalised amount will be written off to the income statement. Refer to note 12 for the carrying value of exploration and evaluation assets. Amortisation of producing areas of interest The carrying values of producing areas of interest sub-surface assets are amortised on a units of production basis using the proved and probable reserves to which they relate, together with the estimated future development expenditure required to develop those reserves. Certain estimates and assumptions are used in determining these reserves and development cost estimates such as the assessment as to technical feasibility and commercial viability of an area and quantities of reserves. Refer above for further reserves assumptions and to note 11 for the carrying values of producing areas of interest. Commitments Commitments are estimated based on information and expectations as at the reporting date. Assumptions are made for expected performance and charges to be incurred in respect of committed arrangements including: delivery volumes, service levels, exchange rates and delivery timeframes. Refer to note 26 for further details. Fair value of financial instruments The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The consolidated entity uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Refer to note 27 for further details. Defined benefit superannuation plan obligations Various actuarial assumptions are utilised in the determination of the consolidated entity s defined benefit superannuation plan obligations. These assumptions are discussed in note 20. Unbilled revenue Unbilled revenue for unread gas and electricity meters, is estimated at the end of the reporting period. This involves an estimate of consumption for each unread meter based on the customer s past consumption history or an estimate of unbilled days at an average billed rate over the billing cycle. Refer to note 6 for the carrying value of unbilled revenue. 74

77 notes to the financial statements (continued) 1. statement of significant accounting policies (continued) (AL) Accounting estimates and judgements (continued) Taxation The consolidated entity is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgement is required in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable profits are available to utilise those temporary differences and losses, and the tax losses continue to be available, having regard to the nature and timing of their origination and compliance with the relevant tax legislation associated with their recoupment. Assumptions are made about the application of income tax legislation. These assumptions are subject to risk and uncertainty and there is a possibility that changes in circumstances will alter expectations which may impact the amount of deferred tax assets and deferred tax liabilities recorded in the statement of financial position and the amount of tax losses and timing differences not yet recognised. In these circumstances, the carrying amount of deferred tax assets and liabilities may change impacting the profit or loss of the consolidated entity. Refer to notes 14 and 18 for the carrying value of tax assets and liabilities. (AM) new standards and interpretations not yet adopted The following standards, amendments to standards and interpretations have been identified as those which may impact the consolidated entity in the period of initial application. They are available for early adoption at 30 June 2011, but have not been applied in preparing the financial statements: AASB 9 Financial Instruments AASB 124 Related Party Disclosures AASB 1053 Application of Tiers of Australian Accounting Standards AASB 1054 Australian Additional Disclosures AASB Amendments to Australian Accounting Standards arising from AASB 9 AASB Amendments to Australian Accounting Standards AASB Amendments to Australian Interpretation Prepayments of a Minimum Funding Requirement AASB Interpretations 14 AASB Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements AASB Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project AASB Amendments to Australian Accounting Standards Disclosures on Transfers of Financial Assets AASB Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) AASB Amendments to Australian Accounting Standards Deferred Tax Recovery of Underlying Assets AASB Amendments to Australian Accounting Standards Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters AASB Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project AASB Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project Reduced Disclosure Requirements The consolidated entity is currently in the process of assessing the impact of the adoption of these standards. Origin Energy Annual Report

78 notes to the financial statements (continued) 2. Segments (a) Operating segments for the year ended 30 June The operating segments have been presented on a basis consistent with the information that is internally provided to the Managing Director who is the chief operating decision maker for the consolidated entity. The Managing Director regularly receives financial information on the underlying earnings before interest and tax (EBIT) of each operating segment, so as to assess the ongoing performance of each segment and to enable a relevant comparison to the prior period ongoing operating results. The Managing Director also receives a reconciliation of the statutory profit to the underlying profit detailing the financial impact of each individual item that is excluded from statutory profit in the measurement of underlying profit. To assist users in understanding the financial results of the Origin business and the performance of its operating segments, this information has been disclosed in this note. Exploration & Production Generation Retail Contact Energy Consolidated $million $million $million $million $million $million $million $million $million $million Underlying results: Revenue Total segment revenue ,072 6,393 1,708 1,717 10,955 8,866 Intersegment sales elimination (1) (174) (140) (437) (192) (611) (332) Total revenues from external customers ,072 6,393 1,708 1,717 10,344 8,534 Earnings before interest, tax, depreciation and amortisation (EBITDA) (2) ,782 1,346 Depreciation and amortisation expense (221) (170) (115) (44) (75) (65) (128) (129) (539) (408) Share of interest, tax, depreciation and amortisation of equity accounted investees (42) (32) (4) (7) (3) (3) (49) (42) Earnings before interest and tax (EBIT) , Net financing costs (143) (13) Profit before income tax 1, Income tax expense (316) (232) Profit for the period Non-controlling interests in profit (62) (66) Underlying profit attributable to members of the parent entity Impact of items excluded from underlying profit (refer note 2(b)) (487) 27 Profit attributable to members of the parent entity Earnings per share based on underlying profit: Basic earnings per share (4) Diluted earnings per share (4) Other material non-cash items (3) Acquisitions of non-current assets (includes capital expenditure) 304 1,609 1, , ,771 3,062 (1) Intersegment pricing is determined on an arm s length basis. Intersegment sales are eliminated on consolidation. A tolling arrangement operates between the Retail and Generation segments in relation to the consolidated entity s Australian merchant power stations. The external revenue from the merchant power stations is recognised in Retail s revenue while Generation receives a tolling fee from Retail for the capacity provided and costs incurred by these power stations. The Exploration and Production segment sells gas and LPG to the Retail segment. (2) EBITDA includes the consolidated entity s share of EBITDA of equity accounted investees of $79 million (2010: $69 million). Refer to note 10(a) for further details. (3) Other material non-cash items include: impairment expense in Generation $214 million (2010: Exploration and Production $29 million, Retail $4 million), change in fair value of non-financing cost related financial instruments in Generation $1 million, Retail $214 million and Contact $1 million (2010: Generation $5 million, Retail $17 million gain and Contact $2 million) and other non-cash items. (4) Restated to reflect the impact of the bonus element component of the 2011 rights issue. Australian corporate revenue and expenses are allocated across all business segments based on segment results, excluding Contact Energy. The following summary describes the operations in each of the consolidated entity s reportable segments: Business segments Exploration & Production Generation Retail Contact Energy Products and services Natural gas and oil exploration and production in Australia, New Zealand and South East Asia. Natural gas-fired co-generation and power generation in Australia. Natural gas, electricity, LPG and energy related products and services in Australia, the Pacific and Papua New Guinea. Natural gas, electricity, LPG and energy related products and services and power generation in New Zealand. 76

79 notes to the financial statements (continued) 2. Segments (continued) (b) Reconciliation of underlying profit $million $million $million $million $million $million Gross Tax Net Gross Tax Net Profit attributable to members of the parent entity Impact of items excluded from underlying profit attributable to members of the parent entity: Impairment of assets (1) (214) 54 (160) (33) 10 (23) (Decrease)/increase in fair value of financial instruments (2) (201) 60 (141) 15 (4) 11 Unwinding of discounted liability payable to APLNG (refer note 3(c)) (12) 4 (8) (111) 33 (78) Share of unwinding of discounted receivables within APLNG (refer note 10(b)) Transition and transaction costs (3) (253) 18 (235) (29) 8 (21) Change in New Zealand corporate income tax legislation (4) Tax benefit/(expense) on translation of foreign denominated tax balances (5) (9) (9) Share of tax benefit on translation of foreign denominated tax balances within APLNG (6) 4 4 Gain on dilution of Origin s interest in subsidiaries (refer note 28) 38 (11) 27 New Plymouth asbestos removal and related costs (4) 1 (3) Items excluded from underlying profit for the period (656) 169 (487) (7) Non-controlling interests (2) Impact of items excluded from underlying profit attributable to members of the parent entity (487) 27 Underlying profit attributable to members of the parent entity (1) During the year ended 30 June 2011 the consolidated entity reviewed the carrying amount of its non-current assets. The review led to the recognition of an impairment loss of $214 million in relation to Origin s 30 per cent interest in the Innamincka Joint Venture with Geodynamics focused on deep geothermal generation technology in northern South Australia and the Group s investment in Geodynamics Limited listed securities. This amount has been included in the income statement in the line item total expenses, excluding net financing costs (refer note 3(b)). The asset impairments were measured using a fair value less costs to sell methodology. (2) Change in fair value of financial instruments primarily relates to instruments that are effective economic hedges but do not qualify for hedge accounting. (3) Transaction costs of $215 million (2010: $7 million) represent the costs incurred by the consolidated entity relating to successful and unsuccessful acquisition activity. The expense recorded in the current year includes the transaction costs incurred for the acquisition of the NSW Government energy retail assets and entering into the GenTrader arrangements of $213 million (including estimated stamp duty payable on the transaction of $150 million). Transition costs of $38 million (2010: $22 million) relate to the transition of the acquired NSW Government energy business into Origin s existing business and the Retail transformation and transition project. (4) Reduction in New Zealand corporate income tax rate from 30 per cent to 28 per cent commencing in the income tax year ending 30 June 2012 and a change in New Zealand tax depreciation deductions allowed on buildings. (5) Tax benefit/(expense) arising on the foreign currency translation of the long term tax bases recorded in Origin s Exploration and Production activities in New Zealand. (6) Share of tax benefit arising on the foreign currency translation of the long term tax bases recorded in the equity accounted investment in Australia Pacific LNG. (c) Geographical information $million $million Revenue Australia 8,377 6,647 New Zealand 1,876 1,806 Other (1) Total revenue from external customers 10,344 8,534 Non-current assets Australia 17,683 13,580 New Zealand 4,905 4,996 Other (1) Total non-current assets 22,647 18,665 (1) The other geographic segment includes operations in the Pacific, South East Asia, Papua New Guinea, Chile, Indonesia and Kenya. In presenting geographical information revenue is based on the geographical location of customers. Non-current assets, which exclude financial instruments and deferred tax assets, are based on the geographical location of the assets. Origin Energy Annual Report

80 notes to the financial statements (continued) 3. Profit Note $million $million (a) Other income Dividends received from other parties 1 Net gain on sale of other assets 4 Net foreign exchange gain 5 4 Government grants/subsidies 2 1 Gain on dilution of Origin s interest in subsidiaries 38 Other 2 8 Total other income 9 56 (b) Total expenses, excluding net financing costs Raw materials and consumables used, and changes in finished goods and work in progress (7,379) (6,340) Labour related expenses 20 (540) (449) Exploration expense (118) (45) Depreciation and amortisation expense (539) (408) Impairment of assets (refer note 2(b)) (214) (33) (Decrease)/increase in fair value of financial instruments (refer note 2(b)) (201) 15 Transition and transaction costs (refer note 2(b)) (253) (29) Other expenses (613) (445) Total expenses, excluding net financing costs (9,857) (7,734) (c) Net financing costs Interest income Other parties Interest expense Other parties (157) (108) Unwinding of discount on restoration provisions (22) (18) Unwinding of discounted liability payable to Australia Pacific LNG (12) (111) (191) (237) Net financing costs (155) (124) Net financing costs excluding unwinding of discounted liability payable to APLNG (143) (13) Financing costs capitalised (1) (1) Capitalised interest is calculated at an average rate based on the general borrowings of the consolidated entity (2011: 7.18 per cent, 2010: 5.75 per cent). 78

81 notes to the financial statements (continued) 4. Income tax expense $million $million Current tax expense/(benefit) 40 (71) Deferred tax expense Over provided in prior years (8) (12) Total income tax expense in the income statement Reconciliation between tax expense and pre-tax net profit Profit before income tax Income tax using the domestic corporation tax rate of 30% (2010: 30%) Prima facie income tax expense on pre-tax accounting profit: at Australian tax rate of 30% adjustment for difference between Australian and overseas tax rates 7 3 Income tax expense on pre-tax accounting profit at standard rates Increase/(decrease) in income tax expense due to: Tax benefit not recognised for acquisition transaction costs 58 Impairment expense not deductible 11 Share of results of equity accounted investees (15) (41) Recognition of change in net tax loss position (2) (23) Tax expense on translation of foreign denominated tax balances (31) 9 Other 8 (3) 29 (58) Over provided in prior years current and deferred (8) (12) Income tax expense on pre-tax net profit Deferred tax movements recognised directly in equity (including foreign currency translation) Fair value of available-for-sale financial assets 2 (3) Financial instruments at fair value (6) 2 Property, plant and equipment (43) 5 Provisions 5 Other items (2) 3 (44) $million $million $million $million $million $million Gross Tax Net Gross Tax Net Income tax expense recognised in other comprehensive income Available for sale assets: Valuation loss taken to equity (11) 3 (8) Losses transferred to income statement 9 (2) 7 Cash flow hedges: Losses transferred to income statement 141 (42) (60) 139 Transferred to carrying amount of assets 2 (1) 1 8 (2) 6 Foreign currency translation gain Valuation loss taken to equity (168) 49 (119) (194) 58 (136) Net gain/(loss) on hedge of net investment in foreign operations (3) (3) Foreign currency translation differences for foreign operations (245) (245) Actuarial gain/(loss) on defined benefit superannuation plan 4 (1) 3 (3) 1 (2) Other comprehensive income for the period (182) 3 (179) (2) (2) Origin Energy Annual Report

82 notes to the financial statements (continued) 5. Dividends $million $million (a) Dividend reconciliation Final dividend of 25 cents per share, fully franked at 30%, paid 28 September 2010 (2010: Final dividend of 25 cents per share, fully franked at 30%, paid 23 September 2009) Interim dividend of 25 cents per share, fully franked at 30%, paid 1 April 2011 (2010: Interim dividend of 25 cents per share, fully franked at 30%, paid 1 April 2010) (b) Subsequent event Since the end of the financial year, the directors have declared a final dividend of 25 cents per share, fully franked at 30%, payable 29 September The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2011 and will be recognised in subsequent financial statements. The declaration and subsequent payment of dividends has no income tax consequences. An underwritten dividend reinvestment plan covering the next four dividend payments will commence with the final dividend for the financial year ending 30 June 2011, a 2.5 per cent discount will apply. (c) Dividends per share Dividends paid or provided for during the reporting period Current year interim franked dividend per share 25 cents 25 cents Previous year final franked dividend per share 25 cents 25 cents Dividends proposed and not recognised as a liability Franked dividend per share 25 cents (d) Dividend franking account 30 per cent franking credits available to shareholders of Origin Energy Limited for subsequent financial years amount to $213 million (2010: $433 million). The above available amount is based on the balance of the dividend franking account at year end adjusted for: (a) franking credits that will arise from the payment of current income tax liabilities; (b) franking debits that will arise from the payment of dividends provided at year end; (c) franking credits that will arise from the receipt of dividends recognised as receivables by the tax-consolidated group at year end; and (d) franking credits that the entity may be prevented from distributing in subsequent years. The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The impact on the franking account balance of the final dividend declared after 30 June 2011 but not brought to account in the financial statements for the year ended 30 June 2011 will be to reduce the balance by $114 million (2010: $95 million). 80

83 notes to the financial statements (continued) 6. Trade and other receivables $million $million Current Trade receivables net of allowance for doubtful debts Unbilled revenue 1, Other debtors (including joint venture debtors) ,159 1,371 Non-current Trade receivables Trade receivables of the consolidated entity s operations denominated in currencies other than the functional currency of the operations comprise $6 million denominated in US dollars (2010: $7 million) and $13 million denominated in New Zealand dollars (2010: $16 million). The consolidated entity s policy requires trade debtors to pay in accordance with agreed payment terms. Depending on the customer segment, the settlement terms are generally 14 to 30 days from date of invoice. All credit and recovery risk associated with trade debtors has been provided for in the statement of financial position. The average age of trade receivables is 22 days (2010: 22 days). The movement in the allowance for doubtful debts in respect of trade receivables during the year is as follows: Balance at the beginning of the year Acquired impairment losses recognised for the NSW acquisition 31 Impairment losses recognised Amounts written off (56) (37) Balance at the end of the year The aging of the consolidated entity s trade receivables at the reporting date is detailed below: $million $million $million $million Total Allowance Total Allowance Current 678 (1) 417 (2) days 100 (2) 74 (2) days 41 (1) 25 (1) More than 90 days 110 (58) 53 (22) 929 (62) 569 (27) Origin Energy Annual Report

84 notes to the financial statements (continued) 7. Inventories Note $million $million Raw materials and stores Finished goods Inventory gas Other assets Current Prepayments Deposits Other Non-current Prepayments Other Other financial assets, including derivatives Current Derivative financial instruments Available-for-sale financial assets 27 5 Environmental scheme certificates Other financial assets Non-current Derivative financial instruments Environmental scheme certificates Available-for-sale financial assets: Listed shares 4 7 Investments held in other corporations

85 notes to the financial statements (continued) 10. Investments accounted for using the equity method (a) Investments summary 2011 Note Principal activity Place of incorporation Reporting date Share of Ownership interest Share of EBITDA interest, tax, depreciation and amortisation Share of net profit Equity accounted investment carrying amount % $million $million $million $million Associates BIEP Pty Ltd Cogeneration Vic 30 June 50.0 BIEP Security Pty Ltd Cogeneration Vic 30 June 50.0 CUBE Pty Ltd (1) Cogeneration SA 30 June (7) 5 33 Gas Industry Superannuation Pty Ltd Superannuation trustee SA 30 June 50.0 Oakey Power Holdings Pty Ltd (2) Electricity generation NSW 30 June (3) 3 9 Rockgas Timaru Ltd (2) LPG distributor NZ 31 Mar 50.0 Vitalgas Pty Ltd Autogas distributor NSW 31 Dec 50.0 Energia Andina S.A. (3) Geothermal activities Chile 30 June (10) 8 55 Joint venture entities Australia Pacific LNG Pty Ltd (APLNG) 10(b) CSG NSW 30 June (18) 45 5,258 Bulwer Island Energy Partnership Cogeneration Qld 30 June PNG Energy Developments Limited (4) Electricity generation PNG 30 June Transform Solar Pty Ltd (5) Solar technology NSW 30 June 50.0 (5) 2 (3) 112 OTP Geothermal Pte Ltd (6) Geothermal activities Singapore 30 June 50.0 (2) 1 (1) 6 61 (15) 46 5,415 Total 79 (25) 54 5, Associates BIEP Pty Ltd Cogeneration Vic 30 June 50.0 BIEP Security Pty Ltd Cogeneration Vic 30 June 50.0 CUBE Pty Ltd (1) Cogeneration SA 30 June (8) 6 31 Gas Industry Superannuation Pty Ltd Superannuation trustee SA 30 June 50.0 Oakey Power Holdings Pty Ltd (2) Electricity generation NSW 30 June (3) 3 7 Rockgas Timaru Ltd (2) LPG distributor NZ 31 Mar 50.0 Vitalgas Pty Ltd Autogas distributor NSW 31 Dec (11) 9 38 Joint venture entities Australia Pacific LNG Pty Ltd (APLNG) 10(b) CSG NSW 30 June ,223 Bulwer Island Energy Partnership Cogeneration Qld 30 June PNG Energy Developments Limited (4) Electricity generation PNG 30 June Transform Solar Pty Ltd (5) Solar technology NSW 30 June 50.0 (1) ,357 Total ,395 (1) Osborne Cogeneration Pty Ltd, a company incorporated in SA, is a wholly-owned controlled entity of CUBE Pty Ltd. (2) Oakey Power Holdings Pty Ltd and Rockgas Timaru Ltd are associates of Contact Energy Limited, a 52.6 per cent owned subsidiary of the consolidated entity. Contact Energy Limited has a 25 per cent interest in Oakey Power Holdings Pty Ltd and a 50 per cent interest in Rockgas Timaru Ltd. (3) Origin Energy Geothermal Chile Limitada acquired 40 per cent of the shares in Energia Andina S.A. in May 2011, forming a joint venture with Antofagasta Minerals S.A. (4) Origin Energy PNG Holdings Ltd has a 50 per cent interest in PNG Energy Developments Limited. (5) Transform Solar Pty Ltd (formerly Origin Energy Solar Pty Ltd) is owned 50 per cent by Origin (refer note 28). (6) OTP Geothermal Pte Ltd is a joint venture established during the year owned 50 per cent by Origin and 50 per cent by Trust Energy Resources Pte Ltd. OTP Geothermal Pte Ltd owns 95 per cent of the Sorik Marapi geothermal concession. Origin Energy Annual Report

86 notes to the financial statements (continued) 10. investments accounted for using the equity method (continued) (a) Investments summary (continued) Transactions between Origin and equity accounted investees Osborne Cogeneration Pty Ltd The consolidated entity is party to a Gas Supply Agreement and a Power Purchase Agreement with its associated entity Osborne Cogeneration Pty Ltd (Osborne). Under these agreements Origin supplies gas to Osborne and purchases electricity from Osborne. Australia Pacific LNG Pty Ltd (Australia Pacific LNG) Joint Venture Origin provides services to Australia Pacific LNG. The services are provided in accordance with contractual arrangements. The services provided under these arrangements include the provision of corporate related services, Upstream operating services and CSG marketing related services. The Upstream operating services include activities related to the development and operation of Australia Pacific LNG s natural gas assets. Origin incurs costs in providing these services and charges Australia Pacific LNG in accordance with the terms of the contractual arrangements. Origin has entered agreements with Australia Pacific LNG where Origin purchases gas from Australia Pacific LNG (2011: $140 million; 2010: $18 million) and Origin sells gas to Australia Pacific LNG (2011: $19 million; 2010: $51 million). At 30 June 2011, Origin s outstanding payable balance for purchases from Australia Pacific LNG is $6 million (2010: $22 million) and outstanding receivable balance for sales to Australia Pacific LNG is $1 million (2010: nil). (b) Investment in Australia Pacific LNG Pty Ltd Origin entered into a 50:50 joint venture with ConocoPhillips (COP) to develop a CSG to LNG project using Origin s CSG reserves and resources in Queensland through Australia Pacific LNG. A summary of Australia Pacific LNG s financial performance for the periods ended 30 June 2011 and 30 June 2010, and its financial position as at 30 June 2011 and 30 June 2010 is provided below: Total APLNG Origin 50% interest Total APLNG Origin 50% interest $million $million $million $million Operating revenue Operating expenses (210) (159) EBITDA Depreciation and amortisation expense (77) (47) Net financing costs (4) (2) Operating profit before income tax Income tax expense (3) (15) Underlying operating profit after tax for the period Items excluded from underlying profit: Unwinding of discounted receivables from shareholders Income tax expense on unwinding of discounted receivables (7) (44) Net profit from discounted receivables Tax benefit on translation of foreign denominated tax balances 9 4 Total items excluded from underlying profit Net profit for the period Summary statement of financial position of Australia Pacific LNG $million $million Receivables from shareholders 3,746 1,400 Other current assets Current assets 4,092 1,562 Receivables from shareholders 3,690 7,128 Property, plant and equipment and exploration and evaluation and development assets 3,273 2,085 Other non-current assets Non-current assets 7,013 9,266 Total assets 11,105 10,828 Current liabilities Non-current liabilities Total liabilities Net assets 10,500 10,445 Origin s 50% interest 5,250 5,222 Origin s own costs 8 1 5,258 5,223 84

87 notes to the financial statements (continued) 10. investments accounted for using the equity method (continued) (c) Investments in associates $million $million Results of associates 100% of associates revenues % of associates net profit Summary of statement of financial position of associates Assets and liabilities of associates, not adjusted for percentage ownership held by the consolidated entity are as follows: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets (d) Investments in joint venture entities Results of joint venture entities 100% of joint venture entities revenues % of joint venture entities net profit Summary of statement of financial position of joint venture entities Assets and liabilities of joint venture entities, not adjusted for percentage ownership held by the consolidated entity are as follows: Current assets 4,113 1,594 Non-current assets 7,272 9,473 Total assets 11,385 11,067 Current liabilities Non-current liabilities Total liabilities Net assets 10,736 10,643 Origin Energy Annual Report

88 notes to the financial statements (continued) 11. Property, plant and equipment $million $million Generation property, plant and equipment At cost 8,190 6,851 Less: Accumulated depreciation ,262 6,064 Other land and buildings At cost Less: Accumulated depreciation and amortisation Other plant and equipment At cost 3,357 3,220 Less: Accumulated depreciation 1,171 1,069 2,186 2,151 Producing areas of interest At cost 1,542 1,477 Less: Accumulated amortisation ,313 9,168 Reconciliations Reconciliations of the carrying amounts of each class of property, plant and equipment are set out below: 2011 Generation property, plant and equipment $million Other land and buildings $million Other plant and equipment $million Producing areas of interest $million Total $million Carrying amount at the beginning of the period 6, , ,168 Additions ,075 Additions through acquisition of entities/operations (1) Disposals (1) (3) (4) Depreciation/amortisation expense (218) (2) (178) (110) (508) Transfers (to)/from development assets and intangibles Effect of movements in foreign exchange rates (169) (6) (128) (30) (333) Carrying amount at the end of the period 7, , , Carrying amount at the beginning of the period 5, , ,018 Additions ,296 Additions through acquisition of entities/operations Disposals (3) (3) Depreciation/amortisation expense (144) (3) (149) (93) (389) Impairment loss (refer note 2(b)) (4) (4) (25) (33) Transfers (to)/from development assets and intangibles (6) Dilution resulting from Transform Solar transaction (1) (2) (3) Effect of movements in foreign exchange rates 29 (1) 28 (3) 53 Carrying amount at the end of the period 6, , ,168 (1) Generation property, plant and equipment in relation to the GenTrader arrangements entered as part of the NSW energy asset transaction (refer to note 23(d)) over the Eraring and Shoalhaven power stations. The GenTrader arrangements expire in 2032 for Eraring and 2038 for Shoalhaven. 86

89 notes to the financial statements (continued) 12. Exploration, evaluation and development assets $million $million Exploration and evaluation assets Net costs carried forward in respect of areas of interest in the exploration and evaluation phase 965 1,039 Development assets Net costs carried forward in respect of areas of interest in the development phase 76 Reconciliations Reconciliations of the carrying amounts of exploration and evaluation assets and development assets are set out below: Exploration and evaluation assets 2011 $million Development assets Carrying amount at the beginning of the period 1, Additions Impairment loss (202) Exploration expense (118) Transfers including to property, plant and equipment and intangibles (75) Effect of movements in foreign exchange rates (8) (4) Carrying amount at the end of the period 965 Carrying amount at the beginning of the period Additions Additions through acquisition of entities/operations 661 Exploration expense (45) Transfers including to property, plant and equipment and intangibles (683) Effect of movements in foreign exchange rates (51) Carrying amount at the end of the period 1, Origin Energy Annual Report

90 notes to the financial statements (continued) 13. Intangible assets $million $million Goodwill at cost 5,138 2,599 Customer related and other intangible assets at cost Less: Accumulated amortisation ,433 2,796 Average amortisation Class of asset rate Customer related and other intangible assets at cost 13% 15% Reconciliations Reconciliations of the carrying amounts of each class of intangible asset are set out below: 2011 Goodwill $million Customer related and other intangibles $million Total $million Carrying amount at the beginning of the period 2, ,796 Additions through business combinations 2, ,614 Other additions Transfers from development assets Amortisation expense (31) (31) Effect of movements in foreign exchange rates (23) (2) (25) Carrying amount at the end of the period 5, , Carrying amount at the beginning of the period 2, ,737 Additions through business combinations Other additions Amortisation expense (17) (17) Dilution resulting from Transform Solar transaction (16) (16) Effect of movements in foreign exchange rates 5 5 Carrying amount at the end of the period 2, ,796 88

91 notes to the financial statements (continued) 13. Intangible assets (continued) Impairment tests for cash-generating units containing goodwill The following cash-generating units have carrying amounts of goodwill: $million $million Retail 4,523 1,961 Contact Energy Generation Other 3 3 5,138 2,599 Retail cash-generating unit The impairment test for the Retail unit s goodwill is based on a value in use methodology. The value in use calculations apply a discounted cash flow methodology. Cash flow projections are based on Origin Energy s five-year business plan for the underlying Retail business and cash flows for a further 35-year period are determined based on expected market trends and the expected impact of the key assumptions (discussed below) of the change in customer numbers and customer churn, gross margin per customer and other operating costs per customer. Origin Energy s electricity and gas business is considered a long-term business and the cash flow projections allow for the risk of increased competition for customers and short-term and long-term customer churn. The cash flow projections are discounted using a pre-tax discount rate of 12.2 per cent (2010: 12.2 per cent). Key assumptions in the value in use calculation for the Retail cash-generating unit and the approach to determining the value in the current and previous period are: Assumptions Customer numbers and customer churn Gross margin per customer Other operating costs per customer Method of determination Review of actual customer numbers and historical data regarding movements in customer numbers and levels of customer churn. The historical analysis is considered against current and expected market trends and competition for customers. Review of actual gross margins per customer and consideration of current and expected market movements and impacts. Review of actual operating costs per customer and consideration of current and expected market movements and impacts. Contact Energy cash-generating unit The Contact Energy goodwill relates to Origin Energy s acquired 52.6 per cent ownership interest in Contact Energy Limited. The impairment test for the Contact Energy goodwill is based on a fair value less costs to sell methodology. Contact Energy is listed on the New Zealand Stock Exchange and Origin Energy uses the share price of Contact Energy shares to determine the recoverable amount of its investment in Contact Energy and the Contact Energy goodwill. Generation cash-generating unit The impairment test for the Generation unit s goodwill is based on value in use methodology. The value in use calculations apply a discounted cash flow methodology. Cash flow projections are based on Origin Energy s five-year business plan for the underlying Generation business and cash flows out to the expected life of each asset. The cash flow projections are discounted using a pre-tax discount rate of 12.2 per cent (2010: 12.2 per cent). Origin Energy Annual Report

92 notes to the financial statements (continued) 14. Tax assets Note $million $million Current Income tax receivable 2 47 Non-current Recognised deferred tax assets Deferred tax assets are attributable to the following: Accrued expenses not incurred for tax 17 4 Employee benefits Acquired environmental scheme certificate purchase obligations Provisions Financial instruments at fair value 252 Available-for-sale financial assets 4 3 Inventories 5 1 Other items Tax value of carry-forward tax losses recognised Tax assets Set-off of tax 18 (731) (326) Net tax assets 88 Unrecognised deferred tax assets (1) Deferred tax assets have not been recognised in respect of the following items: Revenue losses Capital losses Depreciation of the GenTrader finance lease asset 5 Acquisition transaction costs (1) The above deferred tax assets have not been recognised as they are either subject to confirmation by revenue authorities or it is not currently probable that future taxable profits will be available against which the assets can be utilised. 90

93 notes to the financial statements (continued) 14. Tax assets (continued) Movement in temporary differences during the year 2011 $million Opening balance Recognised in income statement Recognised in equity Deconsolidation/ acquisition of controlled entities Closing balance Accrued expenses not incurred for tax Employee benefits Acquired environmental scheme certificate purchase obligations 23 (4) 19 Provisions 119 (3) (5) Financial instruments at fair value Available-for-sale financial assets 3 3 (2) 4 Inventories Other items Tax value of carry-forward tax losses recognised 193 (35) (15) 143 Tax assets (2) Set-off of tax (326) (731) Net tax assets $million Opening balance Recognised in income statement Recognised in equity Deconsolidation/ acquisition of controlled entities Closing balance Accrued expenses not incurred for tax Employee benefits Acquired environmental scheme certificate purchase obligations 26 (3) 23 Provisions Financial instruments at fair value 27 (25) (2) Available-for-sale financial assets 3 3 Inventories 4 (3) 1 Other items 48 (14) (2) 32 Tax value of carry-forward tax losses recognised (2) 193 Tax assets (1) (2) 414 Set-off of tax (287) (326) Net tax assets Origin Energy Annual Report

94 notes to the financial statements (continued) 15. Trade and other payables $million $million Current Trade payables and accrued expenses 1,931 1,193 Acquired energy purchase obligations 56 Acquired environmental certificate purchase obligations ,020 1,205 Non-current Other payables 2 2 Acquired energy purchase obligations 337 Acquired environmental certificate purchase obligations Trade payables of the consolidated entity s operations denominated in currencies other than the functional currency of the operations comprise $nil trade payables denominated in New Zealand dollars (2010: $1 million), $3 million of trade payables denominated in Euros (2010: $2 million) and $19 million of trade payables denominated in US dollars (2010: $9 million). 16. Interest-bearing liabilities Interest-bearing liabilities Current Bank overdrafts unsecured 4 4 Bank loans secured Bank loans unsecured 328 Capital market borrowings unsecured Lease liabilities secured Non-current Bank loans secured Bank loans unsecured 1,857 1,293 Capital market borrowings unsecured 2,036 1,764 Lease liabilities secured 5 6 4,193 3,373 Refer to note 27 for further information regarding interest-bearing liabilities. Interest rates applicable to: The consolidated entity has entered into interest rate swap contracts to manage the exposure to interest rates at 1.20 per cent to 7.67 per cent per annum at a weighted average of 5.80 per cent per annum (2010: 2.75 per cent to 7.80 per cent per annum at a weighted average of 6.30 per cent per annum). Refer to note 27(c)(iv) Financial risk factors interest rate risk (cash flow and fair value), for a summary of interest rate risks. 92

95 notes to the financial statements (continued) 17. Other financial liabilities, including derivatives Note $million $million Current Derivative financial instruments Loan from APLNG joint venture associated entity 1,731 Environmental scheme surrender obligations Other financial liabilities 2 2, Non-current Derivative financial instruments Loan from APLNG joint venture associated entity 1,845 3,564 2,282 3, Tax liabilities Current Provision for income tax 2 7 Non-current Recognised deferred tax liabilities Deferred tax liabilities are attributable to the following: Property, plant and equipment Exploration, evaluation and development assets Financial instruments at fair value 9 Investments in associates Unbilled receivables Discounted receivables 4 Other items Tax liabilities 1,326 1,227 Set-off of tax 14 (731) (326) Net tax liabilities At 30 June 2011 a deferred tax liability balance of $1,569 million (2010: $1,558 million) for temporary differences of $5,230 million (2010: $5,195 million) in respect of Origin s investment in the Australia Pacific LNG joint venture has not been recognised as Origin is able to control the timing of the reversal of the temporary difference through voting rights prescribed in the shareholders agreement and it is not expected that the temporary difference will reverse in the foreseeable future. Origin Energy Annual Report

96 notes to the financial statements (continued) 18. Tax liabilities (continued) Movement in temporary differences during the year 2011 $million Opening balance Recognised in income statement Recognised in equity Deconsolidation/ acquisition of controlled entities Closing balance Property, plant and equipment (43) 701 Exploration, evaluation and development assets 401 (48) 353 Financial instruments at fair value 9 (9) Investments in associates 23 (1) (3) 19 Unbilled receivables Discounted receivables 4 (4) Other items 43 (32) 5 16 Deferred tax liabilities 1, (46) 5 1,326 Set-off of tax (326) (731) Net deferred tax liabilities $million Opening balance Recognised in income statement Recognised in equity Deconsolidation/ acquisition of controlled entities Closing balance Property, plant and equipment 619 (11) Exploration, evaluation and development assets Financial instruments at fair value 9 9 Investments in associates Unbilled receivables Discounted receivables 37 (33) 4 Other items Deferred tax liabilities ,227 Set-off of tax (287) (326) Net deferred tax liabilities

97 notes to the financial statements (continued) 19. Provisions Note $million $million Current Employee benefits Restoration, rehabilitation and dismantling Onerous contracts 90 2 Other Non-current Employee benefits Restoration, rehabilitation and dismantling Onerous contracts Defined benefit superannuation plan deficit Other Reconciliations Reconciliations of the carrying amounts of each class of provision, except employee benefits and defined benefit superannuation plan deficit are set out below: Onerous Contracts 2011 $million Restoration, rehabilitation and dismantling Other Carrying amount at beginning of the period Provisions recognised Provisions released (7) (24) Payments/utilisation (35) (4) (7) Effect of movements in foreign exchange rates (7) (1) Carrying amount at end of the period Nature and purpose of provisions: Employee benefits The provision for employee benefits predominately represents accrued annual leave, vested long service leave, other employee benefits and related on-costs. Restoration, rehabilitation and dismantling The restoration, rehabilitation and dismantling provision represents estimates of future expenditure for site rehabilitation and restoration of oil and gas fields and infrastructure sites, including the future costs of dismantling and removing infrastructure. Onerous contracts Onerous provisions represent the onerous portion of the TSA entered in respect of the acquired NSW retail businesses, covering customer related services and onerous property leases for premises vacated by Origin. Origin Energy Annual Report

98 notes to the financial statements (continued) 20. Employee benefits $million $million Labour related expenses Wages and salaries (440) (367) Annual leave expense (37) (29) Long service leave expense (9) (6) Employee share plan (refer note 31) (4) (5) Executive share-based payments expense (refer note 31) (14) (11) Defined benefit superannuation funds 1 1 Contributions to defined contribution superannuation funds (37) (32) (540) (449) Defined benefits superannuation plan (A) Employee superannuation funds At 30 June 2011, there were in existence a number of superannuation plans in which the consolidated entity participates for the benefit of its employees in Australia and overseas. The major plans are managed through Equipsuper. The principal types of benefit provided for under the plans are lump sums payable on retirement, termination, death or total disability. Contributions to the plans by both employees and entities in the consolidated entity are predominantly based on percentages of the salaries or wages of employees. Entities in the consolidated entity contribute to the plans in accordance with the governing Trust Deeds subject to certain rights to vary. Defined benefit members receive lump sum benefits on retirement, death, disablement and withdrawal. Some defined benefit members are also eligible for pension benefits in certain circumstances. The defined benefit section of the plan is closed to new members. All new members receive accumulation only benefits. The following sets out details in respect of the Equipsuper defined benefit section only: (B) Statement of financial position amounts The amounts recognised in the statement of financial position are determined as follows: Present value of the defined benefit obligation Fair value of the plan assets Deficit (2) (6) Net liability in the statement of financial position (2) (6) (C) Reconciliations Reconciliation of the present value of the defined benefit obligation Balance at the beginning of the period Current service cost 2 3 Interest cost 2 2 Actuarial (gains)/losses (2) 4 Benefits paid (4) (5) Settlements (8) Balance at the end of the period Reconciliation of the fair value of plan assets Balance at the beginning of the period Expected return on plan assets 3 4 Actuarial gains 2 1 Contributions by Origin Energy companies 1 1 Benefits paid (4) (5) Settlements (8) Balance at the end of the period

99 notes to the financial statements (continued) 20. Employee benefits (continued) (D) Categories of plan assets The percentage invested in each class of asset at reporting date is as follows: % % Australian equities International equities Fixed income Property Growth alternatives 8 9 Defensive alternatives 2 2 Cash (E) Recognising actuarial gains and losses There is immediate recognition of actuarial gains and losses through retained earnings. (F) Amounts recognised in income statement The amounts recognised in the income statement are as follows: $million $million Current service cost 2 3 Expected return on plan assets - gain (3) (4) Total gain recognised in employee benefits expense (1) (1) Interest expense 2 2 Total loss recognised in income statement 1 1 (G) Actuarial gains and losses recognised directly in equity Cumulative loss at the beginning of the period (Gains)/losses recognised during the period (4) 3 Cumulative loss at the end of the period (H) Expected rate of return on plan assets The expected return on assets assumption is determined by weighting the expected long-term return for each asset class by the target allocation of assets to each class and allowing for correlations of the investment returns between asset classes. The returns used for each class are net of investment tax and investment fees. The allowance for administration expenses has been deducted from the expected return. (I) Actual return on plan assets Actual return on plan assets 5 5 Origin Energy Annual Report

100 notes to the financial statements (continued) 20. Employee benefits (continued) (j) Principal actuarial assumptions % pa % pa Discount rate (active members) Discount rate (pensioners) Expected salary increase rate Expected pension increase rate Expected rate of return on assets: supporting lump sum liabilities supporting pension liabilities (k) Historical information $million $million $million $million $million Present value of defined benefit obligation Fair value of plan assets (Deficit)/surplus in plan (2) (6) (3) 7 10 Experience adjustments loss/(gain) - plan liabilities 2 (8) (6) 16 Experience adjustments (gain)/loss - plan assets (2) (1) (13) The consolidated entity expects $1,198,000 in contributions to be paid to the defined benefit plan during the year ended 30 June

101 notes to the financial statements (continued) 21. Share capital Note $million $million Issued and paid-up capital 1,064,507,259 (2010: 880,668,872) ordinary shares, fully paid 4,029 1,683 Ordinary share capital at the beginning of the period 1,683 1,604 Shares issued: 2,809,000 (2010: 2,113,200) shares in accordance with the Senior Executive Option Plan and Performance Share Rights Plan ,875,125 (2010: Nil) shares under an institutional rights issue (1) 1,112 90,224,930 (2010: Nil) shares under a retail rights issue (1) 1,155 3,929,332 (2010: 4,106,271) shares in accordance with the Dividend Reinvestment Plan Nil (2010: 67,320) shares in accordance with the Employee Share Plan 1 Total movements in ordinary share capital 2, Ordinary share capital at the end of the period 4,029 1,683 (1) The terms of the rights issue was 1 new Origin Energy Limited share offered for every 5 existing shares at $13 per share. The rights issues were fully underwritten and were completed on 29 March 2011 (Institutional rights offer) and 28 April 2011 (Retail rights offer). The net proceeds from the rights issues of $2.27 billion were used to pay down Group borrowings. The rights issues were at a discount to the then market price. Accordingly, earnings per share for all periods up to the date on which the shares were issued have been adjusted for the bonus element of the rights issues being The 2010 comparative for earnings per share has been restated accordingly (refer note 35). Terms and conditions Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders meetings. In the event of the winding up of the company, ordinary shareholders rank after creditors, and are fully entitled to any proceeds of liquidation. The company does not have authorised capital or par value in respect of its issued shares. 22. Reserves and other comprehensive income (a) Reserves summary Share-based payments Foreign currency translation (239) (132) Hedging (123) (107) Available-for-sale (7) (301) (199) Nature and purpose of reserves: Share-based payments reserve The share-based payments reserve is used to recognise the fair value of options and performance share rights over their vesting period (refer note 31). Foreign currency translation reserve The foreign currency translation reserve records the foreign currency differences arising from the translation of foreign operations, and the translation of transactions that hedge the company s net investments in foreign operations. Hedging reserve The hedging reserve is used to record the effective portion of the gains or losses on hedging instruments in cash flow hedges that have not yet settled. Amounts are recognised in profit and loss when the associated hedged transactions affect profit and loss or as part of the cost of an asset if non-monetary. Available-for-sale reserve Changes in fair value and exchange differences arising on translation of investments and settlement residue agreements are taken to the available-for-sale reserve. Amounts are recognised in profit and loss when the associated investments/settlement residue agreements are sold/settled or impaired. Origin Energy Annual Report

102 notes to the financial statements (continued) 22. Reserves and other comprehensive income (continued) (b) Other comprehensive income Foreign currency translation reserve Total other comprehensive income Hedging reserve Availablefor-sale reserve Retained earnings Noncontrolling interests 2011 $million $million $million $million $million $million Loss on translation of assets and liabilities of overseas controlled entities (178) (65) (243) Net gain on hedge of net investment in foreign subsidiary taken to equity Cash flow hedges effective component recognised in equity, net of tax (116) (3) (119) Cash flow hedges amount removed from equity and transferred to profit, net of tax Cash flow hedges amount transferred to the initial carrying value of non-financial assets, net of tax 1 1 Cash flow hedges foreign currency translation loss, net of tax (2) 1 1 Fair value adjustment on available-for-sale financial assets 7 7 Actuarial gain on defined benefit superannuation plan, net of tax 3 3 (Loss)/gain on transfer of interest in entities under common control (8) 8 Other comprehensive income (107) (16) 7 (5) (58) (179) 2010 Loss on translation of assets and liabilities of overseas controlled entities (6) 8 2 Net loss on hedge of net investment in foreign subsidiary taken to equity (3) (3) Cash flow hedges effective component recognised in equity, net of tax (137) 1 (136) Cash flow hedges amount removed from equity and transferred to profit, net of tax Cash flow hedges amount transferred to the initial carrying value of non-financial assets, net of tax Cash flow hedges foreign currency translation loss, net of tax (2) 1 1 Fair value adjustment on available-for-sale financial assets (8) (8) Actuarial loss on defined benefit superannuation plan, net of tax (2) (2) (Loss)/gain on transfer of interest in entities under common control (3) 3 Other comprehensive income (11) 7 (8) (5) 15 (2) 100

103 notes to the financial statements (continued) 23. Notes to the statement of cash flows (a) Reconciliation of cash and cash equivalents Cash includes cash on hand, at bank and short-term deposits, net of outstanding bank overdrafts. Cash as at the end of the period as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows: Note $million $million Cash and cash equivalents Bank overdrafts 16 (4) (4) (b) the following non-cash financing and investing activities have not been included in the statement of cash flows: Issue of shares in respect of the Dividend Reinvestment Plan (c) Reconciliation of profit to net cash provided by operating activities: Profit for the period Adjustments to reconcile profit to net cash provided by operating activities: Depreciation and amortisation Executive share-based payment expense Bad debts expense Exploration expense Impairment of assets Decrease/(increase) in fair value of financial instruments 201 (15) Net financing costs Increase in tax balances Gain on dilution of Origin s interest in subsidiaries (38) Gain on sale of assets (4) Non-cash share of net profits of equity accounted investees (45) (131) Changes in assets and liabilities, net of effects from acquisitions/disposals: Receivables (283) (133) Inventories Payables Provisions 2 28 Other (205) (95) Total adjustments 1, Net cash provided by operating activities 1,401 1,074 Origin Energy Annual Report

104 notes to the financial statements (continued) 23. Notes to the statement of cash flows (continued) (d) Business combinations 2011 Acquisition of NSW Government energy assets On 1 March 2011, Origin completed Sale and Purchase Agreements with the NSW Government to acquire the retail businesses of Integral Energy and Country Energy, and entered into GenTrader arrangements with Eraring Energy for a combined consideration of $3,259 million. Included in the purchase consideration is the estimated NSW stamp duty payable of $134 million. In addition to the $3,259 million consideration paid, an amount of up to $198 million may become payable if certain payments under the GenTrader arrangements are ruled to be tax deductible. Transaction costs incurred on the acquisition of $213 million (including estimated stamp duty payable in NSW and other states) have been recognised within total expenses, excluding net finance costs in the income statement and are recorded as an Item Excluded from Underlying Profit (refer note 2(b)). The acquired NSW Retail businesses and GenTrader arrangements contributed revenue of $1,269 million and earnings before interest and tax (EBIT) loss of $31 million to the consolidated entity for the period 1 March 2011 to 30 June Excluding the impact of fair value changes in financial derivatives and transition and transaction costs related to the acquisition and integration of the acquired businesses that have been recorded as items excluded from Underlying Profit, the acquired businesses contributed an underlying EBIT gain of $202 million. It was not practicable to disclose the expected annualised performance of the acquired businesses as if they were owned by Origin Energy for the full financial year ended 30 June 2011, because the required historical financial information for the specific assets acquired was not available as part of the acquisition transaction. The NSW Premier announced a special commission of inquiry into the recent sale of NSW energy assets including the GenTrader contracts and the sale of the retail businesses of Country Energy and Integral Energy acquired by the consolidated entity. The inquiry was announced in May 2011 and is required to deliver its report in September Cogent Energy Pty Ltd On 24 July 2009 the consolidated entity acquired 100 per cent of Cogent Energy Pty Ltd (Cogent). Cogent s business relates to the installation and operation of co-generation facilities. The purchase consideration at completion (net of cash acquired) was $8 million. A further amount of $6 million was recorded as contingent consideration. 102

105 notes to the financial statements (continued) 23. Notes to the statement of cash flows (continued) (d) Business combinations (continued) The fair value of the net assets acquired as part of business combinations are detailed below $million $million Fair value Current assets Cash and cash equivalents 1 Trade and other receivables 636 Inventories 70 Other financial assets, including derivatives 219 Total current assets Non-current assets Other financial assets, including derivatives 95 Property, plant and equipment Intangible assets 52 8 Deferred tax assets 286 Total non-current assets 1, Total assets 2, Current liabilities Trade and other payables Interest-bearing liabilities 3 Other financial liabilities, including derivatives 309 Provisions 95 Total current liabilities Non-current liabilities Trade and other payables 356 Interest-bearing liabilities 5 Other financial liabilities, including derivatives 161 Tax liabilities 5 Provisions 183 Total non-current liabilities Total liabilities 1, Net assets Goodwill on acquisition 2,562 8 Fair value of net assets acquired 3, Total consideration 3, Non-cash consideration (6) Cash acquired (1) Net cash outflow for business combinations 3,125 8 In accordance with the consolidated entity s accounting policies the fair value of assets and liabilities acquired are provisional as the information provided by the vendors and required for acquisition accounting purposes was not complete at 30 June 2011, and is subject to further review for a period of up to 12 months from the date of acquisition. Origin Energy Annual Report

106 notes to the financial statements (continued) 24. Auditors remuneration $ 000 $ 000 Audit services by: Auditors of the Company (KPMG) Australia Audit and review of the financial reports 2,610 1,440 Overseas Audit and review of the financial reports ,338 1,993 Other auditors (primarily PWC) (1) Other services by: Auditors of the Company (KPMG) Australia Accounting advice Taxation services Equity and debt transactional services 569 Other services Overseas Accounting advice 65 Taxation services , Other auditors (PWC) (2) 5,303 3,416 9,846 5,941 (1) Other auditors, primarily PricewaterhouseCoopers (PWC), audit financial reports of certain controlled entities located in various Pacific Island countries and Chile. (2) Includes amounts for internal audit, taxation, advice on acquisition transactions, information technology, risk and quality assurance advice and accounting advice. 25. Contingent liabilities and assets Details of contingent liabilities and contingent assets where the probability of future payments/receipts is not considered remote are set out below, as well as details of contingent liabilities and contingent assets, which although considered remote, the directors consider should be disclosed. Provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement $million $million Bank guarantees unsecured Letters of credit unsecured The bank guarantees and letters of credit disclosed have primarily been provided in favour of the Australian Electricity Market Operator Limited to support its obligations to purchase electricity from the National Electricity Market. At 30 June 2011, the consolidated entity holds a 50 per cent interest in Australia Pacific LNG, which has bank guarantees of $62 million (Origin s 50 per cent share $31 million). The Australia Pacific LNG bank guarantees have primarily been provided in favour of the State of Queensland to support its environmental obligations relating to CSG exploration and production. Events subsequent to the reporting date change Origin s share of Australia Pacific LNG s contingent liabilities from 50 per cent to 42.5 per cent. These are outlined in note 37. The consolidated entity has given to its bankers letters of responsibility in respect of accommodation provided from time to time by the banks to Origin Energy Limited s wholly or partly-owned controlled entities. Warranties and indemnities have been given by entities in the consolidated entity in relation to environmental liabilities for certain properties as part of the terms and conditions of divestments. A number of sites within the consolidated entity have been identified as contaminated, all of which are subject to ongoing environmental management programs to ensure appropriate controls are in place and clean-up requirements are implemented. The contaminating activities ceased in the 1970s when manufactured gas was replaced with natural gas from oil and gas fields. For sites where the requirements can be assessed and costs estimated, the estimated cost of remediation has been expensed or provided for. Certain entities within the consolidated entity are subject to various lawsuits and claims. Any liabilities arising from such lawsuits and claims are not expected to have a material adverse effect on the consolidated financial statements. 104

107 notes to the financial statements (continued) 25. Contingent liabilities and assets (continued) A Demerger Deed was entered into in the 2000 year containing certain indemnities and other agreements between Origin Energy Limited and Boral Limited and their respective controlled entities covering the transfer of the businesses, investments, tax, other liabilities, debt and assets of Boral Limited and some temporary shared arrangements. There are no known amounts subject to this agreement that have not been adequately provided for in the consolidated financial statements. The company, as a venturer in certain joint ventures, is severally liable for 100 per cent of all liabilities incurred by these joint ventures. Deed of cross guarantee Under the terms of ASIC Class Order 98/1418 (as amended by Class Order 98/2017) certain wholly-owned controlled entities have been granted relief from the requirement to prepare audited financial reports. Origin Energy Limited has entered into an approved deed of indemnity for the cross-guarantee of liabilities with those controlled entities (refer note 29). Transform Solar Pty Ltd was released from its obligations under the Deed of Cross Guarantee by executing a Revocation Deed on 18 November A consolidated income statement and a consolidated statement of financial position, comprising the company and controlled entities which are a party to the Deed of Cross Guarantee, after eliminating all transactions between parties to the Deed, at 30 June 2011 are set out in note Commitments $million $million Capital expenditure commitments (1) Contracted but not provided for and payable: not later than one year later than one year but not later than five years later than five years 653 1, Joint venture commitments (2) Share of exploration, development and capital expenditure commitments not provided for and payable: not later than one year 1, later than one year but not later than five years 1, later than five years 8 1 2, Other commitments (1) Other commitments include contracts for ongoing maintenance and services provided in respect of the consolidated entity s assets and operations, but not provided for and payable: not later than one year later than one year but not later than five years later than five years 1, , (1) Included in the capital expenditure and other commitments above are fixed charges to be paid in respect of the GenTrader arrangements over the Eraring and Shoalhaven power stations entered as part of the NSW energy asset transaction, classified in accordance with the accounting for the arrangement. (2) Included in the joint venture commitments above is an amount of $1,844 relating to Origin s 50 per cent share of Australia Pacific LNG s commitments. The consolidated entity has recorded a $3,576 million loan payable to Australia Pacific LNG (refer to note 17) which may be called upon by Australia Pacific LNG to fund its commitments. Events subsequent to the reporting date change Origin s share of Australia Pacific LNG s commitments from 50 per cent to 42.5 per cent, refer note 37. Operating leases Lease commitments in respect of operating leases are payable as follows: Not later than one year Later than one year but not later than five years Later than five years Operating lease rental expense The consolidated entity leases property, plant and equipment under operating leases with terms of one to ten years. Origin Energy Annual Report

108 notes to the financial statements (continued) 27. Financial instruments (a) Financial assets and liabilities The consolidated entity classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables and available-for-sale financial assets. The classification depends on the purpose for which the financial assets were acquired or executed. The consolidated entity classifies its financial liabilities into the following categories: at fair value through profit or loss and other financial liabilities. Management determines the classification of its financial assets and liabilities at initial recognition and re-evaluates this designation at every reporting date. Financial assets and liabilities at fair value through profit or loss This category has two sub-categories: financial assets or liabilities held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivative instruments (assets and liabilities) are also categorised as held for trading unless they are designated as hedges for accounting purposes. The consolidated entity holds a number of derivative instruments for economic hedging purposes under the Board-approved risk management policies, which are prohibited from being designated as hedges under Australian Accounting Standards. These derivative assets and liabilities are therefore required to be categorised as held for trading. Assets and liabilities in this category are classified as current assets or current liabilities if they are either held for trading or are derivative instruments which are not designated as hedges for accounting purposes. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the reporting date, which are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the statement of financial position (note 6). Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of, or otherwise realise, the asset within 12 months of the reporting date. Other financial liabilities Other financial liabilities are non-derivatives that are either designated into this category or not designated as fair value through profit or loss. They are included in current liabilities, except where the obligation matures greater than 12 months after the reporting date. Recognition Regular purchases and sales of investments are recognised on trade-date, the date on which the consolidated entity commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the consolidated entity has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective interest method. Financial liabilities carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the income statement. Other financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest rate method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss and financial liabilities at fair value through profit or loss categories are presented in the income statement within total expenses, excluding net financing costs in the period in which they arise. The consolidated entity does not recognise day one gains or losses arising from valuation techniques used to estimate the fair value of structured commodity derivatives for which no observable market prices exist. The effect of any day one gains and losses is excluded from recognition both initially and in all subsequent periods during the life of the instrument. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as total expenses, excluding net financing costs. Dividends on available-for-sale equity instruments are recognised in the income statement when the consolidated entity s right to receive payments is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the consolidated entity establishes fair value by using valuation techniques. These include the use of recent arm s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs. The consolidated entity assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the securities are impaired. If available-for-sale financial assets are deemed to be impaired, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described in note

109 notes to the financial statements (continued) 27. Financial instruments (continued) (b) Derivative financial instruments and hedging activities The consolidated entity uses a range of derivative financial instruments to hedge the risk exposures arising from its operational, financing and investment activities. Derivatives are initially recognised at fair value on the date they are entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The consolidated entity designates certain derivatives as either: (1) hedges of the fair value of recognised assets, liabilities or firm commitments (fair value hedge); (2) hedges of a particular cash flow risk associated with a recognised asset, liability or highly probable forecast transaction (cash flow hedge); or (3) hedges of a net investment in a foreign operation (net investment hedge). The consolidated entity documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The consolidated entity also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative instruments used for hedging purposes are disclosed in note 9 and note 17. Movements of the hedging reserve in shareholders equity are shown in the statement of changes in equity. The fair value of hedging derivatives is classified as either current or non-current based on the timing of the underlying cash flows of the instrument. Cash flows due within 12 months of the reporting date are classified as current and cash flows due after 12 months of the reporting date are classified as non-current. Derivatives which are valid economic hedges, but which do not qualify for hedge accounting, are classified as a current asset or liability. Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss relating to the cross currency interest rate swaps hedging fixed rate foreign currency borrowings is recognised in the income statement within total expenses, excluding net financing costs. Changes in the fair value of the hedged fixed rate borrowings attributable to interest rate and foreign exchange rate risk are recognised in the income statement within total expenses, excluding net financing costs. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the period to maturity. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement within total expenses, excluding net financing costs. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects profit or loss (for instance when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement within net financing costs. The gain or loss relating to the effective portion of commodity derivatives hedging floating price forecast purchases is recognised in note 3(b) within raw materials and consumables used, and changes in finished goods and work in progress. The gain or loss relating to the effective portion of commodity derivatives hedging floating price forecast sales is recognised in the income statement within revenue. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging export sales is recognised in the income statement within revenue. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging purchases of non-financial assets (such as capital equipment) is recognised in the initial carrying value of the non-financial asset. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting, despite being valid economic hedges of the relevant risk(s). Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement within total expenses, excluding net financing costs. Origin Energy Annual Report

110 notes to the financial statements (continued) 27. Financial instruments (continued) (c) Financial risk management Financial risk factors The consolidated entity s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, interest rate risk and commodity price risk), credit risk and liquidity risk. The consolidated entity s overall risk management program focuses on the unpredictability of financial and commodity markets and seeks to minimise potential adverse effects on the consolidated entity s financial performance. The consolidated entity uses a range of derivative financial instruments to hedge these risk exposures. Risk management is carried out under policies approved by the Board of Directors. Financial risks are identified, evaluated and hedged in close co-operation with the consolidated entity s operating units. The consolidated entity has written policies covering specific areas, such as foreign exchange risk, interest rate risk, electricity price risk, oil price risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and the investment of excess liquidity. (i) Market risk Foreign exchange risk The consolidated entity operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the New Zealand dollar, US dollar and Euro. Foreign exchange risk arises from future commercial transactions (including interest payments on long-term borrowings, the sale of oil, the sale and purchase of LPG and the purchase of capital equipment), recognised assets and liabilities (including foreign receivables and borrowings) and net investments in foreign operations. To manage the foreign exchange risk arising from future commercial transactions, the consolidated entity uses forward foreign exchange contracts. To manage the foreign exchange risk arising from the future principal and interest payments required on foreign currency denominated long-term borrowings, the consolidated entity uses cross currency interest rate swaps (both fixed to fixed and fixed to floating) which convert the foreign currency denominated future principal and interest payments into the functional currency for the relevant entity for the full term of the underlying borrowings. In certain circumstances borrowings are left in the foreign currencies, or hedged from one foreign currency to another to match payments of interest and principal against expected future business cash flows in that foreign currency. Each subsidiary designates internal derivatives as fair value hedges or cash flow hedges, as appropriate with the relevant underlying transaction. External derivative contracts are designated at the consolidated entity level as hedges of foreign exchange risk on specific assets, liabilities or future transactions on a gross basis. The consolidated entity has certain investments in foreign operations whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of the consolidated entity s foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies. The following table summarises the impact of a 10 per cent strengthening/weakening of the Australian dollar against the relevant foreign currencies on the consolidated entity s post-tax profit for the year and on other components of equity. All variables other than the relevant primary risk variable identified are held constant in the analysis. Foreign exchange rate change + / - 10 % Impact on post-tax profit Impact on equity / - ($million) + / - ($million) USD NZD EUR Post-tax profit for the year would increase/decrease as a result of certain financial instruments which do not qualify for hedge accounting under AASB 139 requirements and trade receivables and payables denominated in foreign currencies. In addition to the impact from retained earnings arising from the impact on post-tax profit, equity would increase/decrease as a result of the hedging instruments which do qualify for cash flow hedge accounting under AASB 139. Price risk The consolidated entity is exposed to commodity price risk from a number of commodities, including electricity, oil, gas and related commodities associated with the purchase and/or sale of these commodities. To manage its commodity price risks in respect to electricity and oil, the consolidated entity utilises a range of derivative instruments including fixed priced swaps, options and futures. The consolidated entity s equity investments subject to price risk are all publicly traded. The consolidated entity s risk management policy for commodity price risk is to hedge forecast future transactions for up to 18 years into the future. The consolidated entity has a risk management policy framework that manages the exposure arising from its commodity-based activities. The policy permits the active hedging of price and volume exposure arising from the retailing, generation and portfolio management activities, within prescribed risk capacity limits. The policy prescribes the maximum risk exposures permissible over prescribed periods for each commodity within the portfolio, under defined worse case scenarios. The full portfolio is subject to ongoing testing against these limits at prescribed intervals, and reported monthly to management. The consolidated entity is also exposed to equity securities price risk because of investments held by the consolidated entity and classified on the statement of financial position as available-for-sale and fair value through profit or loss. 108

111 notes to the financial statements (continued) 27. Financial instruments (continued) (c) Financial risk management (continued) The following table summarises the impact of a 10 per cent increase/decrease of the relevant forward prices (for commodities) and equity prices (for equity investments) on the consolidated entity s post-tax profit for the year and on other components of equity. All variables other than the relevant primary risk variable identified are held constant in the analysis. Impact on post-tax profit Impact on equity / - ($million) + / - ($million) Electricity forward price Oil forward prices 27 6 Equity securities quoted price 1 1 Carbon and renewable energy price Post-tax profit for the year would increase/decrease as a result of the inherent ineffectiveness in some commodity hedging relationships and some financial instruments which are valid economic hedges of these commodity price risks which do not qualify for cash flow hedge accounting under AASB 139 requirements. In addition to the impact from retained earnings arising from the impact on post-tax profit, equity would increase/decrease as a result of the hedging instruments which do qualify for cash flow hedge accounting under AASB 139 and gains on equity securities classified as available-for-sale. (ii) Credit risk The consolidated entity manages its exposure to credit risk via credit risk management policies which allocate credit limits based on the overall financial and competitive strength of the counterparty. Publicly available credit information from recognised providers is utilised for this purpose where available. Credit policies cover exposures generated from the sale of products and the use of derivative instruments. Derivative counterparties are limited to high-credit-quality financial institutions and other organisations in the relevant industry. The consolidated entity has Board approved policies that limit the amount of credit exposure to each financial institution and derivative counterparty. The consolidated entity also utilises ISDA agreements with all derivative counterparties in order to limit exposure to credit risk through the netting of amounts receivable from and amounts payable to individual counterparties. The carrying amounts of financial assets recognised in the statement of financial position, and disclosed in more detail in notes 6 and 9 best represents the consolidated entity s maximum exposure to credit risk at the reporting date. In respect of those financial assets and the credit risk embodied within them, the consolidated entity holds no significant collateral as security and there are no other significant credit enhancements in respect of these assets. The credit quality of all financial assets that are neither past due nor impaired is appropriate and is constantly monitored in order to identify any potential adverse changes in the credit quality. There are no significant financial assets that have had renegotiated terms that would otherwise, without that renegotiation, have been past due or impaired. (iii) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the consolidated entity aims to maintain flexibility in funding by keeping committed credit lines available. Certain of the consolidated entity s interest-bearing liability obligations are subject to change in control provisions under the agreements with third-party lenders. As at 30 June 2011 these provisions were not triggered. The following summarises the contractual timing of cash flows of the borrowings including interest and related derivative instruments at 30 June 2011 and 30 June 2010: $million $million Less than one month One to three months Three to 12 months 2, One to five years 5,818 6,888 Over five years 1, Included in the balances above is the $3,576 million loan from Australia Pacific LNG ($1,731 million current within three to twelve months and $1,845 million non-current within one to five years). The consolidated entity has $3.6 billion of undrawn facilities (refer note 27(e)) which is immediately available. In addition, as set out in note 5(b), the Company has announced an underwritten dividend reinvestment plan which provides further flexibility in respect of the consolidated entity s funding arrangements. Origin Energy Annual Report

112 notes to the financial statements (continued) 27. Financial instruments (continued) (c) Financial risk management (continued) (iv) Interest rate risk (cash flow and fair value) The consolidated entity s income and operating cash flows are substantially independent of changes in market interest rates. The consolidated entity s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the consolidated entity to cash flow interest rate risk. Borrowings issued at fixed rates expose the consolidated entity to fair value interest rate risk. The consolidated entity s risk management policy is to manage interest rate exposures using Profit at Risk and Value at Risk methodologies using 95 per cent statistical confidence levels. Exposure limits are set to ensure that the consolidated entity is not exposed to excess risk from interest rate volatility. The consolidated entity manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Under the interest rate swaps, the consolidated entity agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts. The following table summarises the impact of a 100 basis point increase/decrease of the relevant interest rates on the consolidated entity s post-tax profit for the year and on other components of equity. All variables other than the relevant primary risk variable identified are held constant in the analysis. Impact on post-tax profit Impact on equity / - ($million) + / - ($million) Interest rates (12) (7) At 30 June 2011, if interest rates at that date had been higher/lower by 10 per cent with all other variables held constant, post-tax profit and other components of equity of the consolidated entity would have been higher/lower by the amounts as set out in the table above. Profit would have been affected mainly as a result of the ineffective portion of cash flow and fair value hedge transactions and the fair value change in derivatives which are valid economic hedges but which do not qualify for hedge accounting. In addition to the impact from retained earnings arising from the impact on post-tax profit, equity would have been affected mainly as a result of an increase/decrease in the fair value of interest rate swaps which qualify for cash flow hedge accounting. (d) Capital risk management The consolidated entity s objectives when managing capital are to safeguard the consolidated entity s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the consolidated entity monitors its current and future funding requirements for at least the next five years and regularly assesses a range of funding alternatives to meet these funding requirements in advance of when the funds are required. As part of the funding options considered the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, raise external debt, or sell assets to reduce debt. Consistent with others in the industry, the consolidated entity monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total interest-bearing borrowings less cash and cash equivalents and fair value adjustments to borrowings in hedge relationships. Total capital is calculated as equity as shown in the statement of financial position plus net debt less reserves attributable to fair value adjustments on financial instruments. In addition, Origin monitors various other credit metrics, principally funds from operations (FFO) to gross debt. The consolidated entity maintains a gearing ratio designed to optimise the cost of capital whilst providing flexibility to fund growth opportunities. The gearing ratios were as follows: $million $million Total interest-bearing borrowings 4,788 3,486 Fair value adjustments on borrowings in hedge relationships Less: Cash and cash equivalents (728) (823) Net debt 4,283 2,835 Total equity 13,516 11,438 Less: Reserves (1) Total capital (excluding reserves (1) ) 17,922 14,387 Total capital (including reserves (1) ) 17,799 14,273 Gearing ratio (excluding reserves (1) ) 24% 20% Gearing ratio (including reserves (1) ) 24% 20% (1) Represents reserves attributable to fair value adjustments on financial instruments. 110

113 notes to the financial statements (continued) 27. Financial instruments (continued) (e) Interest-bearing liabilities $million $million Bank loans unsecured 2,185 1,293 Bank loans secured Capital markets borrowings unsecured 2,282 1,858 Bank overdrafts unsecured 4 4 4,781 3,478 The exposure of the consolidated entity s borrowings to interest rate changes and the contractual repricing dates at the reporting date are as follows: Six months or less 3,024 2,157 Six to twelve months 47 One to five years 791 1,036 Over five years ,781 3,478 The remaining contractual maturity of non-current borrowings is as follows: One to two years 208 1,247 Two to five years 2,659 1,399 Over five years 1, ,188 3,367 The carrying amounts and fair values of the non-current interest-bearing liabilities are as follows: Carrying value Fair value $million $million $million $million Bank loans unsecured 1,857 1,293 1,857 1,293 Bank loans secured Capital markets borrowings unsecured 2,036 1,764 2,092 1,848 4,188 3,367 4,244 3,451 The carrying amounts of the consolidated entity s borrowings are denominated in the following currencies: $million $million Australian dollar 2,509 1,490 New Zealand dollar US dollar 774 1,036 Euro 675 4,781 3,478 The consolidated entity has the following committed undrawn floating rate borrowing facilities: Expiring within one year Expiring beyond one year 3,518 2,799 3,562 2,949 Origin Energy Annual Report

114 notes to the financial statements (continued) 27. Financial instruments (continued) (f) Hedge accounting Fair value hedges The changes in the fair values of the hedged items and hedging instruments recognised in the income statement for the year are disclosed in the following table: $million $million (Loss)/Gain on the hedging instruments (110) 5 Gain/(loss) on the hedged item attributable to the hedge risk 109 (5) (1) Cash flow hedges The effective portion of the losses on cash flow hedges recognised in the cash flow hedge reserve (pre tax) (168) (194) The losses transferred from the cash flow hedge reserve to sales 3 3 The losses transferred from the cash flow hedge reserve to cost of sales The losses transferred from the cash flow hedge reserve to finance cost 5 12 The losses transferred from the cash flow hedge reserve to the initial carrying value of non-financial assets The ineffectiveness losses recognised in the income statement from cash flow hedges (1) (2) Net investment hedges The effective portion of the gains/(losses) on net investment hedges recognised in the foreign currency translation reserve for the year to 30 June 2011 totalled $73 million gain (2010: $3 million loss). The ineffectiveness recognised in the income statement from net investment hedges for the year to 30 June 2011 totalled $Nil (2010: $Nil). Derivatives that do not qualify for hedge accounting The net change in fair value of derivatives which do not qualify for hedge accounting (and are therefore required to be classified as held for trading), which has been recognised in the income statement for the year to 30 June 2011 totalled $134 million loss (2010: $45 million gain). Fair value of financial instruments designated as hedging instruments Assets Liabilities $million $million $million $million Fair value hedges (1) 1 1 (200) (98) Cash flow hedges (2) (403) (398) Net investment hedges (3) (736) (529) (1) The consolidated entity designates certain cross currency interest rate swaps in fair value hedge relationships. (2) The consolidated entity designates certain foreign exchange contracts, electricity derivatives, interest rate swaps, cross currency interest rate swaps and oil derivatives in cash flow hedge relationships. (3) The consolidated entity designates certain foreign denominated borrowings in net investment hedge relationships. 112

115 notes to the financial statements (continued) 27. Financial instruments (continued) (g) Derivative financial instruments Assets Liabilities Note $million $million $million $million Current Interest rate swaps Cross currency interest rate swaps Forward foreign exchange contracts Electricity derivatives Oil derivatives , Non-current Interest rate swaps Cross currency interest rate swaps Forward foreign exchange contracts Electricity derivatives Oil derivatives 1 4 Other commodity derivatives 8 9, Total Interest rate swaps The aggregate notional principal amounts of the outstanding interest rate swap contracts at 30 June 2011 were $1,768 million (2010: $1,671 million). At 30 June 2011, the fixed interest rates vary from 1.20 per cent to 7.67 per cent (2010: 2.75 per cent to 7.80 per cent) and the main floating rates are BBSW, US LIBOR and BKBM. Interest rate swaps are either designated in cash flow hedge relationships or remain non-designated. The hedged anticipated interest payment transactions are expected to occur at various dates between one month and 13 years from the reporting date as a result of the maturities of the underlying borrowings. Gains and losses recognised in the cash flow hedge reserve in equity (statement of comprehensive income) on interest rate swap contracts as of 30 June 2011 will be continuously released to the income statement in each period in which interest payments are recognised in the income statement until the maturities of the swaps and underlying borrowings. During the year to 30 June 2011 and the year to 30 June 2010 no interest rate swaps were de-designated. Cross currency interest rate swaps The aggregate notional principal amounts of the outstanding cross currency interest rate swap contracts at 30 June 2011 were $1,497 million (2010: $966 million). At 30 June 2011, the fixed interest rates vary from 6.25 per cent to 7.49 per cent (2010: 4.75 per cent to 6.25 per cent) and the main floating rates are BBSW and BKBM. Cross currency interest rate swaps are designated in either cash flow hedge relationships or fair value hedge relationships. The hedged anticipated interest payment transactions are expected to occur at various dates between one month and 13 years from the reporting date as a result of the maturities of the underlying borrowings. Gains and losses recognised in the cash flow hedge reserve in equity (statement of comprehensive income) on interest rate swap contracts as of 30 June 2011 will be continuously released to the income statement in each period in which interest payments are recognised in the income statement until the maturities of the swaps and underlying borrowings. During the year to 30 June 2011 and the year to 30 June 2010 no interest rate swaps were de-designated and all underlying forecast transactions remain highly probable to occur as originally forecast. Forward foreign exchange contracts The aggregate notional principal amounts of the outstanding forward foreign exchange contracts at 30 June 2011 were $258 million (2010: $90 million). Forward foreign exchange contracts are designated in cash flow hedge relationships. The hedged anticipated transactions denominated in foreign currency are expected to occur at various dates between one month and four years from the reporting date. Gains and losses recognised in the cash flow hedge reserve in equity (statement of comprehensive income) on forward foreign exchange contracts as of 30 June 2011 will be released to the income statement when the underlying anticipated transactions affect the income statement or included in the carrying value of assets or liabilities acquired. During the year to 30 June 2011 and the year to 30 June 2010, no hedges were de-designated and all underlying forecast transactions remain highly probable to occur as originally forecast. Origin Energy Annual Report

116 notes to the financial statements (continued) 27. Financial instruments (continued) (g) Derivative financial instruments (continued) Electricity derivatives The aggregate notional volumes of the outstanding electricity derivatives at 30 June 2011 were 224 million MWhs (2010: 164 million MWhs). Electricity derivatives are either designated in cash flow hedge relationships or remain non-designated and are fair valued through the income statement. The hedged anticipated electricity purchase and sale transactions are expected to occur continuously for each half hour period throughout the next eighteen years from the reporting date consistent with the forecast demand from customers over this period. Gains and losses recognised in the cash flow hedge reserve in equity (statement of comprehensive income) on electricity derivatives as of 30 June 2011 will be continuously released to the income statement in each period in which the underlying purchase or sale transactions are recognised in the income statement. During the year to 30 June 2011 and the year to 30 June 2010, no hedges were de-designated and all underlying forecast transactions remain highly probable to occur as originally forecast. The inherent variability in the volume of electricity purchased by customers in any half hour period means that the actual purchase requirements can vary from the forecasts. The forecasts are updated for significant changes in underlying conditions and where this leads to a reduction in the forecast below the aggregate notional volume of hedging instruments in the relevant half hour periods impacted, the affected hedging instruments are de-designated and the accumulated gain or loss which had been recognised in the cash flow hedge reserve is recognised directly in the income statement as the underlying forecast purchase transactions for those half hours are no longer expected to occur. Oil derivatives The aggregate notional volumes of the outstanding oil and related derivatives at 30 June 2011 were 1.16 Mbbl (2010: 0.93 Mbbl). Oil derivatives are designated in cash flow hedge relationships. The hedged anticipated oil sale and purchase transactions are expected to occur continuously throughout the next two years from the reporting date consistent with the forecast production and demand from customers over this period. Gains and losses recognised in the cash flow hedge reserve in equity (statement of comprehensive income) on oil derivatives as of 30 June 2011 will be continuously released to the income statement in each period in which the underlying sale or purchase transactions are recognised in the income statement. During the year to 30 June 2011 and the year to 30 June 2010, no hedges were de-designated and all underlying forecast transactions remain highly probable to occur as originally forecast. (h) Fair value estimation The fair values of financial instruments traded in active markets (such as available-for-sale securities) are based on quoted market prices at the reporting date. The quoted market prices used for financial assets held by the consolidated entity are the current bid prices for the assets. The fair values of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) are determined by using valuation techniques. The consolidated entity uses valuation techniques consistent with the established valuation methodology and general market practice applicable to each instrument/market. Quoted market prices or dealer quotes for similar instruments are used for long-term debt. The fair values of interest rate swaps and cross currency interest rate swaps are calculated using the present value of the estimated future cash flows of these instruments. The fair values of forward foreign exchange contracts are determined using quoted forward exchange rates at the reporting date. The fair values of commodity swaps and futures are calculated using the present value of the estimated future cash flows using available market forward prices. The fair values of commodity option contracts which are regularly traded are determined based on the most recent available transaction prices for the same instruments. Certain commodity derivative instruments utilised by the consolidated entity are not regularly traded and there is no observable market prices or transactions for equivalent or substantially similar instruments. Valuation techniques are required in order to estimate the fair value of such instruments. The valuation technique estimates the fair value of the avoided cost of physical assets at the valuation date required to achieve an equivalent risk management outcome for the consolidated entity, taking into account all relevant variables including capital costs, fixed and variable operating costs, efficiency factors and asset lives. Valuation techniques require the use of a range of variables and assumptions. Maximum use is made of all relevant independent and observable market data when selecting variables and developing assumptions for valuation techniques. Each instrument is discounted at the market interest rate appropriate to the instrument. Where the fair value of a derivative is calculated as the present value of the estimated future cash flows of the instrument, there are two key variables used: appropriate market pricing data (for the relevant underlying interest rates, foreign exchange rates or commodity prices); and discount rates. For derivative instruments, both of these variables are taken from observed market pricing data at the valuation date and therefore these variables represent those which would be used by market participants to execute and value the instruments. The nominal value of trade receivables (less impairment allowance) and payables approximate their fair values. 114

117 notes to the financial statements (continued) 27. Financial instruments (continued) (h) Fair value estimation (continued) Fair value hierarchy The table below summarises the financial instruments carried at fair value by valuation method. The different levels in the hierarchy are defined as follows: Level 1: quoted prices (unadjusted) in active markets for identical instruments. Level 2: inputs other than quoted prices included within Level 1 that are observable for the instrument, either directly (as prices) or indirectly (derived from prices). Level 3: one or more key inputs for the instrument are not based on observable market data (unobservable inputs). Level 1 Level 2 Level 3 Total Note $million $million $million $million 2011 Available-for-sale financial assets Derivative financial assets Environmental scheme certificates Derivative financial liabilities 17 (776) (17) (793) Environmental scheme certificates surrender obligations 17 (128) (128) 536 (486) Available-for-sale financial assets Derivative financial assets Environmental scheme certificates Derivative financial liabilities 17 (550) (29) (579) Environmental scheme certificates surrender obligations 17 (68) (68) 173 (284) The following table shows a reconciliation from the beginning balances to the ending balances for the fair value measurements in Level 3 of the fair value hierarchy: Financial assets held for trading Financial liabilities held for trading Balance as at 1 July (29) Net gain from financial instruments at fair value through profit or loss 4 12 Balance as at 30 June (17) The consolidated entity does not hold any financial assets or financial liabilities for trading purposes. The consolidated entity has a number of valid economic hedging instruments which are unable to be designated as hedges for accounting purposes and are therefore deemed by accounting standards to be held for trading. Although the consolidated entity believes that the estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value. For fair value measurements in Level 3, changing one or more of the assumptions used to reasonably possible alternative assumptions would have the following effects: Effect on profit or loss Favourable (Unfavourable) Derivative assets 142 (142) Derivative liabilities 2 (1) The favourable and unfavourable effects of using reasonably possible alternative assumptions have been calculated by recalibrating the model values using expected cash flows and risk-adjusted discount rates based on the probability weighted average of the consolidated entity s ranges of possible outcomes. Key inputs and assumptions used in the models at 30 June 2011 include: Discount rate The discount rates applied to the cash flows of the consolidated entity are based on the observable market rates for risk-free interest rate instruments for the appropriate term. Forward electricity prices The consolidated entity uses both observable external market data and internally derived forecast data for forward electricity prices in the valuations of certain Level 3 instruments. Physical generation plant variables The consolidated entity uses relevant variables from the valuation of physical generation assets with equivalent risk management outcomes as inputs to the valuation of certain Level 3 instruments. The key variables are new build capital costs, operating costs and plant efficiency factors. Origin Energy Annual Report

118 notes to the financial statements (continued) 28. Acquisition, disposal and deconsolidation of controlled entities Date of acquisition/ disposal/ deconsolidation Interest acquired Carrying amount $million Net consideration paid $million Beneficial ownership 2011 No entities were acquired or ceased to be controlled during the year ended 30 June The following entities were incorporated/registered during the period: Origin Energy Finance Limited 19 May 2011 Origin Energy Geothermal Chile Limitada 28 February 2011 Origin Energy Chile Holdings Pty Limited 21 February 2011 Origin Energy Power Development Pty Ltd 10 November 2010 The following entities were deregistered during the period: No entities were deregistered during the year ended 30 June The following entities were acquired during the period: Cogent Energy Pty Ltd 24 July % % Origin Energy ATP 788P Pty Ltd 7 August % % Origin Energy ATP 788P Unit Trust 7 August % 100% The following entities were incorporated/registered during the period: Origin Energy Chile S.A. (Chile) 8 July 2009 Origin Foundation Pty Ltd 9 December 2009 Yass Valley Wind Farm Pty Ltd 8 December 2009 Origin Energy (Block 31) Pte Ltd 11 December 2009 Origin Energy (Block 01) Pte Ltd 11 December 2009 Origin Energy (L15/50) Pte Ltd 11 December 2009 Origin Energy (L26/50) Pte Ltd 11 December 2009 Origin Energy (Savannahket) Pte Ltd 11 December 2009 Origin Tata Geothermal Pte Ltd 19 April 2010 OTP Geothermal Pte Ltd 19 April 2010 OEL US Inc. 21 April 2010 Origin Energy Mortlake Terminal Station No. 1 Pty Ltd 5 May 2010 Origin Energy Mortlake Terminal Station No. 2 Pty Ltd 5 May 2010 The following entity was deregistered during the period: Origin Energy ATP 788P Unit Trust 24 December 2009 The following entities ceased to be controlled during the period: Transform Solar Pty Ltd 18 December 2009 On 18 December 2009 Origin entered into a joint venture with Micron Technology (Micron) with a focus on the development of photovoltaic solar technology. On completion, Transform Solar Pty Ltd (formerly Origin Energy Solar Pty Ltd) issued shares to Micron, providing Micron with a 50 per cent interest in Transform Solar Pty Ltd. Transform Solar Pty Ltd was deconsolidated from the Origin consolidated entity resulting in a pre-tax gain of $38 million. From the inception date of the joint venture, Origin equity accounts for its retained 50 per cent interest in Transform Solar Pty Ltd. 29. Controlled entities Name changes during the financial year: Collaby Hill Wind Farm Pty Ltd to Crystal Brook Wind Farm Pty Ltd Origin Energy Power Development Pty Ltd to Eraring Gentrader Depositor Pty Ltd Name changes during the previous financial year: Wind Power Development Services Pty Ltd to Dundas Tablelands Wind Farm Pty Ltd Snowy Plains Wind Farm Pty Ltd to Collaby Hill Wind Farm Pty Ltd Origin Energy Solar Pty Ltd to Transform Solar Pty Ltd 116

119 notes to the financial statements (continued) 29. Controlled entities (continued) Incorporated in Ownership interest % Ownership interest % Origin Energy Limited NSW Origin Energy Finance Limited Vic 100 Huddart Parker Pty Ltd < Vic Origin Energy NZ Share Plan Ltd NZ FRL Pty Ltd < WA BTS Pty Ltd < WA Origin Energy Power Ltd < SA Origin Energy SWC Ltd < WA BESP Pty Ltd Vic Origin Energy Pinjar Security Pty Ltd Vic Origin Energy Pinjar Holdings No. 1 Pty Ltd Vic Origin Energy Pinjar No. 1 Pty Ltd Vic Origin Energy Pinjar Holdings No. 2 Pty Ltd Vic Origin Energy Pinjar No. 2 Pty Ltd Vic Origin Energy Walloons Transmissions Pty Ltd Vic Origin Energy Holdings Pty Ltd < Vic Origin Energy Retail Ltd < SA Origin Energy (Vic) Pty Ltd < Vic Gasmart (Vic) Pty Ltd < Vic Origin Energy (TM) Pty Ltd Vic Cogent Energy Pty Ltd Vic Origin Energy Electricity Ltd < Vic Eraring Gentrader Depositor Pty Limited Vic 100 Sun Retail Pty Ltd < Qld OE Power Pty Ltd < Vic Origin Energy Uranquinty Power Pty Ltd Vic Origin Energy Mortlake Terminal Station No. 1 Pty Ltd Vic Origin Energy Mortlake Terminal Station No. 2 Pty Ltd Vic Origin Energy PNG Ltd PNG Origin Energy PNG Holdings Ltd PNG Origin Energy Tasmania Pty Ltd < Tas The Fiji Gas Co Ltd Fiji Tonga Gas Ltd Tonga Origin Energy Contracting Ltd < Qld Origin Energy LPG Ltd < NSW Origin (LGC) (Aust) Pty Ltd < NSW Origin Energy SA Pty Ltd < SA Hylemit Pty Ltd Vic Speed-E-Gas (NSW) Pty Limited NSW Origin Energy WA Pty Ltd < WA Origin Energy Services Ltd < SA OEL US Inc. USA Origin Energy NSW Pty Ltd < NSW Origin Energy Asset Management Ltd < SA Origin Energy Pipelines Pty Ltd < NT Origin Energy Pipelines (SESA) Pty Ltd Vic Origin Energy Pipelines (Vic) Holdings Pty Ltd < Vic Origin Energy Pipelines (Vic) Pty Ltd < Vic Origin LPG (Vietnam) LLC Republic of Vietnam Origin Energy Solomons Ltd Solomon Islands Origin Energy Cook Islands Ltd Cook Islands Origin Energy Vanuatu Ltd Vanuatu Origin Energy Leasing Ltd Vanuatu Origin Energy Samoa Ltd Western Samoa Origin Energy American Samoa Inc American Samoa Origin Energy Annual Report

120 notes to the financial statements (continued) 29. Controlled entities (continued) Incorporated in Ownership interest % Ownership interest % Origin Energy Resources Ltd < SA Origin Energy CSG 2 Pty Ltd Vic Origin Energy ATP 788P Pty Ltd Qld Angari Pty Ltd < SA Oil Investments Pty Ltd < SA OCA Holdings Pty Ltd Qld Origin Energy Wallumbilla Transmissions Pty Ltd Vic Oil Company of Australia (Moura) Transmissions Pty Ltd < WA Origin Energy Kenya Pty Ltd Vic Origin Energy Bonaparte Pty Ltd < SA Origin Energy Developments Pty Ltd < ACT Origin Energy Zoca Pty Ltd < SA Origin Energy Petroleum Pty Ltd < Qld Origin Energy Northwest Ltd UK Sagasco Southeast Inc Panama Origin Energy Resources NZ Ltd NZ Kupe Development Ltd NZ Kupe Mining (No.1) Ltd NZ Origin Energy Resources (Kupe) Ltd NZ Origin Energy Resources NZ (Rimu) Ltd NZ Origin Energy Resources NZ (TAWN) Ltd NZ Sagasco NT Pty Ltd < SA Sagasco Amadeus Pty Ltd < SA Origin Energy Amadeus Pty Ltd < Qld Amadeus United States Pty Ltd < Qld OE Resources Limited Partnership NSW Origin Energy Vietnam Pty Ltd Vic Origin Energy Singapore Holdings Pte Ltd Singapore Origin Energy (Song Hong) Pte Ltd Singapore Origin Energy (Block 31) Pte Limited Singapore Origin Energy (Block 01) Pte Limited Singapore Origin Energy (L15/50) Pte Limited Singapore Origin Energy (L26/50) Pte Limited Singapore Origin Energy (Savannahket) Pte Limited Singapore Origin Energy Fairview Transmissions Pty Ltd Vic Origin Energy VIC Holdings Pty Ltd < Vic Origin Energy New Zealand Ltd NZ Origin Energy Universal Holdings Ltd NZ Origin Energy Five Star Holdings Ltd NZ Origin Energy Contact Finance Ltd NZ Origin Energy Contact Finance No.2 Ltd NZ Origin Energy Pacific Holdings Ltd NZ Contact Energy Ltd NZ Contact Australia Pty Ltd Vic Contact Aria Ltd NZ Contact Operations Australia Pty Ltd Vic Contact Wind Ltd NZ Empower Ltd NZ Stratford Power Ltd NZ Rockgas Holdings Ltd NZ Rockgas Ltd NZ Origin Energy Capital Ltd < Vic Origin Energy Finance Company Pty Ltd < Vic OE JV Co Pty Ltd < Vic OE JV Holdings Pty Ltd Vic

121 notes to the financial statements (continued) 29. Controlled entities (continued) Incorporated in Ownership interest % Ownership interest % Origin Energy Australia Holding BV Netherlands Origin Energy Mt Stuart BV Netherlands Parbond Pty Ltd NSW Origin Foundation Pty Ltd Vic Origin Renewable Energy Investments No 1 Pty Ltd Vic Origin Renewable Energy Investments No 2 Pty Ltd Vic Origin Renewable Energy Pty Ltd Vic Origin Energy Geothermal Holdings Pty Ltd Vic Origin Energy Geothermal Pty Ltd Vic Origin Energy Chile Holdings Pty Limited NSW 100 Origin Energy Chile S.A. Chile Origin Energy Geothermal Chile Limitada Chile 100 Origin Energy Geothermal Singapore Pte Ltd Singapore Origin Energy Wind Holdings Pty Ltd Vic Cullerin Range Wind Farm Pty Ltd NSW Yass Valley Wind Farm Pty Ltd Vic Conroy s Gap Wind Farm Pty Ltd NSW Crystal Brook Wind Farm Pty Ltd NSW Wind Power Pty Ltd Vic Wind Power Management Pty Ltd Vic Lexton Wind Farm Pty Ltd Vic Stockyard Hill Wind Farm Pty Ltd Vic Tuki Wind Farm Pty Ltd Vic Dundas Tablelands Wind Farm Pty Ltd Vic < Entered into a class order 98/1418 and related deed of cross guarantee with Origin Energy Limited removing the requirement for the preparation of separate financial statements (refer note 25 and 34). 30. Interest in joint venture operations The consolidated entity holds interests in a number of unincorporated joint ventures covering the following major assets: Cooper Basin Perth Basin Bass Basin Worsley Power Plant Kupe Geodynamics Otway Basin South East Asia joint ventures Surat Basin The principal activities of these joint ventures are oil and/or gas exploration, development and production, power generation, and geothermal power technology. Origin Energy Annual Report

122 notes to the financial statements (continued) 31. Share-based payments (a) Senior Executive Option Plan The company s Senior Executive Option Plan was approved at the Annual General Meeting on 13 November Staff eligible to participate in the plan are those senior executives invited by the Board, with the invitation based on performance and the role the individual plays in guiding the future success of the company. Options granted under the plan entitle the holder to subscribe for one fully paid ordinary share per option. The exercise price of the options is based on the weighted average price of the company s shares during a five day period determined by the Board to be representative of the company s position at the time. Except in certain circumstances applicable to specific option tranches, the options are exercisable at any time after the third anniversary of the grant, provided that relevant performance hurdles are met. The performance hurdles that must be met prior to an option becoming exercisable vary by option tranche and are discussed in the footnotes to the Senior Executive Options table in this note. Options granted under the plan do not carry any dividend or voting rights. During the year, the company issued 2,230,143 options (2010: 1,636,600 options). The exercise prices of the options issued during the year are included in the Senior Executives Option table in this note. The fair value of the options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date using a binomial model, taking into account market performance conditions and is recognised over the vesting period during which the employees become unconditionally entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of options that vest except where forfeiture is due to market related conditions. The company has recognised $6,334,538 (2010: $5,079,000) as an expense during the year. The amount recognised in issued capital in the financial statements of the company for the financial year representing the proceeds received from exercise of options, is as follows: Note $million $million Issued ordinary share capital Details of options outstanding at the beginning and the end of the financial year and movements during the year are provided in the Senior Executives Options table in note 31(d). (b) Origin Energy Senior Executive Performance Share Rights Plan The Board approved the Senior Executive Performance Share Rights Plan (PSR Plan) on 17 September Staff eligible to participate in the plan are those senior executives invited by the Board, with the invitation based on performance and the role the individual plays in guiding the future success of the company. The Performance Share Rights (PSRs) granted under the plan entitle the holder to subscribe for one fully paid ordinary share per PSR, or such other number as adjusted in accordance with the terms of the PSR Plan. The PSRs are unlisted. The exercise price of the PSRs is nil unless otherwise determined by the Board. Except in certain circumstances applicable to specific PSR tranches, the PSRs are exercisable at any time after the third anniversary of the grant, provided that relevant performance hurdles are met. The performance hurdles that must be met prior to a PSR becoming exercisable may vary by PSR tranche and are discussed in the footnotes to the Performance Share Rights table in note 31(e). PSRs granted under the plan do not carry any dividend or voting rights. During the year, the company issued 838,116 PSRs (2010: 607,400). The fair value of the PSRs is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date using a binomial model, taking into account market performance conditions and is recognised over the vesting period during which the employees become unconditionally entitled to the PSRs. The amount recognised as an expense is adjusted to reflect the actual number of PSRs that vest except where forfeiture is due to market related conditions. The company has recognised $6,218,317 (2010: $5,052,000) as an expense during the year. Details of performance share rights outstanding at the beginning and the end of the financial year and movements during the year are provided in the Senior Executives Performance Share Rights table in note 31(e). 120

123 notes to the financial statements (continued) 31. Share-based payments (continued) (c) Employee Share Plan The Board approved the Origin Energy Employee Share Plan (Origin ESP) on 20 March All Origin Energy full-time and permanent part-time employees based in Australia with at least one year of service qualify for participation in the Origin ESP. Under the Origin ESP, up to $1,000 worth of fully paid shares are offered to all qualifying employees, in each year in which the Origin ESP is in effect, for no consideration. Shares are awarded under the terms of the Origin ESP in recognition of the contribution employees make to the overall success of Origin Energy, based on performance hurdles established each year. In addition, in the year ending 30 June 2010 under the same terms as the Origin ESP, all qualifying employees received 20 shares for no consideration for the 10th anniversary of the company. The Origin ESP is a Taxed Up Front Employee Share Scheme (eligible for $1,000 concession) under amendments to the Income Tax Assessment Act 1997 (Cth). Origin Energy Limited shares awarded under the Origin ESP to Australian-based employees are registered as restricted shares which cannot be sold for three years from the date of award unless the employee ceases employment. The shares awarded in the name of the qualifying employee, are not subject to forfeiture and vest at the date of award to the employee. Shares awarded under the Origin ESP rank equally with other fully paid ordinary shares on issue and carry full voting and dividend rights. To enable Origin Energy employees based in New Zealand to receive benefits similar to those of Australian-based employees, the Board has approved the Origin Energy New Zealand Employee Share Plan (New Zealand ESP). The terms and benefits awarded under the New Zealand ESP are similar to those of the Origin ESP and all full-time and permanent part-time employees with at least one year of service qualify for participation in the plan. Under the New Zealand ESP, up to $1,000 worth of fully paid shares are offered to all qualifying employees, in each year in which the New Zealand ESP is in effect, for no consideration. Shares awarded under the New Zealand ESP are restricted shares which cannot be sold for three years from the date of award and employees may elect to either receive the shares in their name at the time of award or have the shares placed into trust. Shares received by employees in their name at the date of award are not subject to forfeiture and vest at the date of award. Shares held in trust are subject to a three year vesting period before being allocated to employees and may be forfeited if employees do not remain employees of Origin Energy for the full three year vesting period. Separate plans and procedures, adapting for local laws, have also been implemented to enable employees not based in Australia or New Zealand to receive benefits similar to those awarded under the Origin ESP and the New Zealand ESP. The following table details the shares awarded under the employee share plans for the years ended 30 June 2011 and 30 June 2010: Date shares granted 2011 Number of shares granted Cost per share (2) Total cost $ September ,412 $ , September 2010 (1) 7,272 $ ,684 2, March ,320 $ , March 2010 (1) 2,380 $ ,700 1,129 (1) Shares awarded to New Zealand-based employees at no cost as the shares were granted from forfeited shares acquired at market prices in prior periods. (2) The cost per share represents the weighted average market price of the company s shares Under the New Zealand ESP, employees may elect to either receive the shares awarded to them in their name or have the shares placed in trust at the date of award. Shares placed in trust have a three year vesting period. During the year ended 30 June 2011, nil shares (2010: 20 shares) were vested to the trust under the New Zealand ESP. During the year ended 30 June 2011, 60 shares (2010: Nil) held in trust vested to employees. The number of shares held in trust under the New Zealand ESP as at 30 June 2011 is 11,532 (2010: 18,804). Origin Energy Annual Report

124 notes to the financial statements (continued) 31. Share-based payments (continued) (d) Summary of senior executive options 2011 Grant date First exercise date Expiry date Exercise price per option Fair value of options at measurement date Hurdle price per share Balance at start of the year Issued Exercised (3) Forfeited Balance at end of the year Vested at end of the year 7 Sep Sep Sep 2010 $7.21 $1.69 (1) 1,433,000 1,386,000 47, Sep Sep Sep 2011 $6.04 (4) $1.43 (1) 1,370, , , , Jun Jun Jun 2012 $8.51 (4) $2.25 (1) 50,000 50,000 50, Sep Sep Dec 2012 $9.86 (4) $2.51 (1) 1,649, ,000 46,000 1,085,000 1,085, Sep Sep Sep 2012 $9.86 (4) $2.57 (1) 300, , , Sep Sep Dec 2013 $15.84 (4) $4.49 (1) 1,274,500 41,000 1,233, Sep Sep Dec 2014 $14.58 (4) $4.48 (1) 1,213,000 36,000 1,177,000 6 Nov Nov Feb 2015 $15.47 (4) $4.30 (1) 412, , May May Aug 2015 $14.89 (4) $4.38 (1) 11,600 11, Oct Oct Dec 2015 $14.91 (4) $4.23 (5) (1) 2,124,143 39,116 2,085, Jun Oct Dec 2015 $14.91 $4.23 (5) (1) 106, ,000 7,713,100 2,230,143 2,352, ,116 7,382,127 2,357,000 Key management personnel 3,313, ,653 1,119,000 3,081, ,000 Non-key management personnel 4,400,100 1,342,490 1,233, ,116 4,300,474 1,444,000 7,713,100 2,230,143 2,352, ,116 7,382,127 2,357, Aug Aug Aug 2009 $5.98 (2) $1.59 (1) (2) 275, , Nov Nov Nov 2009 $5.72 (2) $2.27 (1) (2) 698, ,900 7 Sep Sep Sep 2010 $7.21 $1.69 (1) 1,811, ,000 1,433,000 1,433, Sep Sep Sep 2011 $6.50 $1.43 (1) 2,131, ,300 1,370,000 1,370, Jun Jun Jun 2012 $8.97 $2.25 (1) 50,000 50,000 50, Sep Sep Dec 2012 $10.32 $2.51 (1) 1,649,000 1,649, Sep Sep Sep 2012 $10.32 $2.57 (1) 300, , , Sep Sep Dec 2013 $16.30 $4.49 (1) 1,274,500 1,274, Sep Sep Dec 2014 $15.04 $4.48 (1) 1,213,000 1,213,000 6 Nov Nov Feb 2015 $15.93 $4.30 (1) 412, , May May Aug 2015 $15.35 $4.38 (1) 11,600 11,600 8,189,700 1,636,600 2,113,200 7,713,100 3,153,000 Key management personnel 3,716, ,000 1,085,000 3,313,000 1,650,000 Non-key management personnel 4,473, ,600 1,028,200 4,400,100 1,503,000 8,189,700 1,636,600 2,113,200 7,713,100 3,153,000 (1) The performance hurdle for these options is based on the Total Shareholder Return (TSR) index, i.e. the index measuring total shareholder returns maintained by the Australian Securities Exchange that calculates the share price movement of ordinary shares after notional reinvestment of dividends. Whether the exercise hurdle is satisfied within the exercise period is determined by comparing the TSR index of the company with the TSR index of a predetermined reference group of Australian listed companies. The percentage of options that may be exercised is calculated on a sliding scale dependent upon the company s performance against the reference group of companies. If the Origin Energy TSR exceeds the 50th percentile, 50 per cent of the options may be exercised and if it reaches the 75th percentile, 100 per cent of the options may be exercised. The reference group of companies is available to shareholders and may be accessed via the company s website. In certain circumstances the options may be exercised prior to the first exercise date. More details of the performance hurdles are included in the Remuneration Report in section 5.8. (2) Exercise prices have been adjusted to reflect the impact of the rights issue in February (3) The weighted average share price during the year ended 30 June 2011 was $15.97 (2010: $15.79). (4) Exercise prices have been adjusted to reflect the impact of the rights issue in March and April (5) The inputs used to measure the fair value of options granted during the year ended 30 June 2011 were a weighted average share price of $15.84, an exercise price of $15.37, expected volatility of 33 per cent, dividend yield of 3.1 per cent and a risk free rate of 4.95 per cent derived from the yield on Australian Government Bonds of appropriate term. 122

125 notes to the financial statements (continued) 31. Share-based payments (continued) (e) Summary of Senior Executive Performance Share Rights (PSR) 2011 Grant date First exercise date Expiry date Exercise price per PSR Fair value of PSR s at measurement date Hurdle price per share Balance at start of the year Issued Exercised Forfeited Balance at end of the year Vested at end of the year 28 Sep Sep Dec 2012 Nil $6.78 (1) 544, ,000 18, , , Nov Nov Feb 2013 Nil $5.98 (1) 100, , Sep Sep Dec 2013 Nil $11.38 (1) 505,900 14,608 (2) 16, , Sep Sep Dec 2014 Nil $11.62 (1) 453,200 13,145 (2) 13, ,510 6 Nov Nov Feb 2015 Nil $11.62 (1) 150,000 4,370 (2) 154, May May Aug 2015 Nil $11.75 (1) 4, (2) 4, Oct Oct Dec 2015 Nil $11.51 (3) (1) 767,793 (2) 14, , Jun Oct Dec 2015 Nil $11.51 (3) (1) 38,078 38,078 1,757, , ,000 62,823 2,075, ,000 Key management personnel 724, , , ,549 Non-key management personnel 1,032, , ,500 62,823 1,204, ,000 1,757, , ,000 62,823 2,075, , Sep Sep Dec 2012 Nil $6.78 (1) 544, , Nov Nov Feb 2013 Nil $5.98 (1) 100, , Sep Sep Dec 2013 Nil $11.38 (1) 505, , Sep Sep Dec 2014 Nil $11.62 (1) 453, ,200 6 Nov Nov Feb 2015 Nil $11.62 (1) 150, , May May Aug 2015 Nil $11.75 (1) 4,200 4,200 1,149, ,400 1,757,300 Key management personnel 472, , ,500 Non-key management personnel 677, ,900 1,032,800 1,149, ,400 1,757,300 (1) The performance hurdle which must be met for the PSRs to be exercised is based on the Total Shareholder Return (TSR) index, i.e. the index measuring total shareholder returns maintained by the Australian Securities Exchange that calculates the share price movement of ordinary shares after notional reinvestment of dividends. Whether the exercise hurdle is satisfied within the exercise period is determined by comparing the TSR index of the company with the TSR index of a predetermined reference group of top 100 Australian listed companies. The percentage of PSRs that may be exercised is calculated on a sliding scale dependent upon the company s performance against the reference group of companies. If the Origin Energy TSR exceeds the 50th percentile, 50 per cent of the PSRs may be exercised and if it reaches the 75th percentile, 100 per cent of the PSRs may be exercised. The reference group of companies is available to shareholders and may be accessed via the company s website. In certain circumstances the PSRs may be exercised prior to the first exercise date. More details of the performance hurdles are included in the Remuneration Report in section 5.8. (2) PSR issuances have been adjusted to reflect the impact of the rights issue in March and April (3) The inputs used to measure the fair value of performance share rights granted during the year ended 30 June 2011 were a weighted average share price of $15.84, expected volatility of 33 per cent, dividend yield of 3.1 per cent and a risk free rate of 4.95 per cent derived from the yield on Australian Government Bonds of appropriate term. Origin Energy Annual Report

126 notes to the financial statements (continued) 32. Related party disclosures Associated entities Interests held in equity accounted entities are set out in note 10. The business activities of a number of these entities are conducted under joint venture arrangements. The equity accounted entities conduct business transactions with various controlled entities. Such transactions include purchases and sales of certain products, provision of services and dividends. Refer note 10 for further information regarding these transactions. Refer to note 33 for key management personnel disclosures. 33. Key management personnel disclosures (a) Key management personnel compensation tables Refer to the Remuneration Report in the Directors Report. (b) Equity instruments Refer to the Remuneration Report in the Directors Report for details of the following: (i) Options over equity instruments granted as compensation; (ii) Exercise of options granted as compensation; and (iii) Equity holdings and transactions. (c) Loans and other transactions with key management personnel (i) Loans Refer to the Remuneration Report in the Directors Report. (ii) Other transactions with the company or its controlled entities Transactions entered into during the year with key management personnel which are within normal employee, customer or supplier relationships on terms and conditions no more favourable than dealings in the same circumstances on an arm s length basis include: the receipt of dividends from Origin Energy Limited; participation in the Employee Share Plan, the Senior Executive Option Plan and the Senior Executive Performance Share Rights Plan; terms and conditions of employment; reimbursement of expenses; and purchases of goods and services. Certain directors of Origin Energy Limited are also directors of other companies which supply Origin Energy Limited with goods and services or acquire goods or services from Origin Energy Limited. Those transactions are made on an arm s length basis and are approved by management within delegated limits of authority and the directors do not participate in the decisions to enter into such transactions. If the decision to enter into those transactions should require approval of the Board, the director concerned will not vote upon that decision nor take part in the consideration of it. 34. Deed of cross guarantee The following summarised consolidated income statement comprises the company and its controlled entities which are party to the Deed of Cross Guarantee (refer notes 25 and 29), after eliminating all transactions between parties to the Deed for year ended 30 June $million $million Summarised consolidated income statement and retained profits Profit before income tax expense Income tax expense Profit for the period Other comprehensive income (5) Total comprehensive income for the period Retained earnings at the beginning of the period 8,473 8,274 Adjustment for entities leaving Deed of Cross Guarantee 50 Retained earnings at the beginning of the period 8,473 8,324 Dividends paid (442) (439) Retained earnings at the end of the period 8,342 8,

127 notes to the financial statements (continued) 34. Deed of cross guarantee (continued) as at 30 June $million $million Statement of financial position Current assets Cash and cash equivalents Trade and other receivables 3,876 2,828 Inventories Other financial assets, including derivatives Tax assets 50 Other assets Total current assets 5,274 4,299 Non-current assets Trade and other receivables Investments accounted for using the equity method 5,402 5,347 Other financial assets, including derivatives 4,091 2,567 Property, plant and equipment 4,934 3,741 Exploration and evaluation and development assets Development expenditure 16 Intangible assets 4,635 2,044 Deferred tax assets 157 Other assets Total non-current assets 19,444 13,887 Total assets 24,718 18,186 Current liabilities Trade and other payables 4,142 1,793 Interest-bearing liabilities Other financial liabilities, including derivatives 2, Tax liabilities 7 Provisions Total current liabilities 7,097 2,358 Non-current liabilities Trade and other payables Interest-bearing liabilities 2,371 1,635 Other financial liabilities, including derivatives 2,127 3,704 Tax liabilities 25 Provisions Total non-current liabilities 5,319 5,675 Total liabilities 12,416 8,033 Net assets 12,302 10,153 Equity Share capital 4,029 1,683 Reserves (69) (3) Retained earnings 8,342 8,473 Total equity 12,302 10,153 Origin Energy Annual Report

128 notes to the financial statements (continued) 35. Earnings per share Restated (1) Basic earnings per share 19.6 cents 67.7 cents Diluted earnings per share 19.6 cents 67.4 cents Weighted average number of shares used as the denominator Restated (1) Number Number Number of ordinary shares for basic earnings per share calculation pre adjusting for bonus element of the rights issue 922,201, ,972,404 Bonus element of rights issue 25,540,613 25,381,594 Number of ordinary shares for basic earnings per share calculation 947,741, ,353,998 Effect of executive share options and performance share rights on issue 2,880,456 4,355,825 Number of ordinary shares for diluted earnings per share calculation 950,622, ,709,823 Reconciliation of earnings used in calculating basic and diluted earnings per share $million $million Profit for the period Less: Profit attributable to non-controlling interests (62) (68) Earnings used in calculating earnings per share (1) In April 2011 Origin completed a rights issue at $13.00 per share reflecting a discount of 15 per cent to the market price. Accordingly, earnings per share for all periods up to the date on which the shares were issued (including the 2010 comparative) have been adjusted for the bonus element of the issue. The bonus element was 1 share for every 35 shares owned (as a factor of ). The 2010 comparatives have been restated accordingly. Other information relating to the rights issue is included in note 21. Information concerning the classification of securities (A) Fully paid ordinary shares Fully paid ordinary shares are classified as ordinary shares for the purposes of calculating basic and diluted earnings per share. (B) Share options and performance share rights Share options granted under the Senior Executive Option Plan and the performance share rights issued under the Senior Executive Performance Share Rights Plan have been classified as potential ordinary shares and have been included in the determination of diluted earnings per share. The options and rights have not been included in the determination of basic earnings per share. Information about basic and diluted EPS During the year 3,080,939 (2010: 2,113,200) options and performance share rights were exercised, forfeited or lapsed. Full details of these share options and performance share rights are set out in note 31. There were 292,000 (2010: 245,000) shares issued as a result of the exercise of options between the reporting date and the completion of the financial report. 126

129 notes to the financial statements (continued) 36. Parent entity disclosures As at, and throughout the financial year ended 30 June 2011 the parent entity company of the group was Origin Energy Limited. Results of the parent entity Origin Energy Limited $million $million Profit for the period Other comprehensive income, net of income tax (23) (5) Total comprehensive income for the period Financial position of the parent entity at period end Current assets 28,371 19,501 Non-current assets 1,541 1,529 Total assets 29,912 21,030 Current liabilities 20,122 12,334 Non-current liabilities 4,347 5,290 Total liabilities 24,469 17,624 Total equity of the parent entity comprising: Share capital 4,029 1,683 Share-based payments reserve Hedging reserve (44) (10) Available-for-sale reserve (7) Retained earnings 1,400 1,694 Total equity 5,443 3,406 Parent entity contingencies The directors are of the opinion that provisions are not required in respect of contingencies, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. Contingent liabilities Bank guarantees unsecured The parent entity has entered into a Deed of Cross Guarantee with the effect that the company guarantees debts in respect of certain of its subsidiaries. Further details of the Deed of Cross Guarantee and the subsidiaries subject to the deed, are disclosed in note 34 and note 29. Origin Energy Annual Report

130 notes to the financial statements (continued) 37. Subsequent events On 28 July 2011 Australia Pacific LNG a 50 per cent owned and equity accounted joint venture of the consolidated entity, announced that a FID had been approved initiating development of the first phase of a two-train CSG to LNG project. The first phase is the development of the first train and infrastructure to support the second train. The project has a construction period over the next four years and total capital expenditure to first gas for the first phase is estimated to be US$14 billion (US$6 billion Origin s share), some of which has been committed. Additionally, under an agreement reached between Origin and ConocoPhillips, the contingent FID payment of US$1 billion to be made by ConocoPhillips to Australia Pacific LNG in connection with the first LNG train has been deferred and the payment will be made when the project pays out an agreed economic return on the total investment by ConocoPhillips in Australia Pacific LNG. On 9 August 2011 Australia Pacific LNG issued new shares to China Petroleum and Chemical Corporation ( Sinopec ) resulting in Sinopec holding a 15 per cent interest in the issued capital of Australia Pacific LNG. As a result of this new share issue, Origin s interest in Australia Pacific LNG has been diluted from 50 per cent to 42.5 per cent. Under the terms of the subscription agreement Sinopec paid an upfront subscription amount of US$1,765 million and committed to fund an additional amount of $1,262 million when called by Australia Pacific LNG. The completion of the share issue from Australia Pacific LNG to Sinopec results in a dilution gain recorded in statutory profit for the consolidated entity of approximately $0.5 billion for the year ended 30 June At 30 June 2011 the consolidated entity recorded a loan payable to Australia Pacific LNG of $3,576 million (refer note 17). This loan is expected to be utilised by the consolidated entity in funding expenditure for the FID approved Australia Pacific LNG development project; some of this expenditure has been committed by Australia Pacific LNG and is also subject to guarantees provided by Origin Energy Limited, as per below. Following FID and subsequent to 30 June 2011, Origin Energy Limited (the Parent Company of the consolidated entity) provided a guarantee for Origin s share of certain contractual commitments of Australia Pacific LNG associated with the construction project, amounting to approximately $3 billion (Origin s share). Origin Energy Limited also provided a guarantee of $125 million (Origin s share) in respect of a bank guarantee facility obtained by Australia Pacific LNG to support the first phase of the development project. At the date of this report, no guarantees have been issued under this facility. Following the issue of shares to Sinopec, Origin s share of the commitments and guarantees of the Australia Pacific LNG joint venture recorded at 30 June 2011 (refer note 26), is diluted from 50 per cent to 42.5 per cent, resulting in commitments as at 30 June 2011 reducing by $277 million. Dividends Refer note 5 for dividends declared subsequent to 30 June

131 directors declaration 1 In the opinion of the directors of Origin Energy Limited (the Company): (a) the financial statements and notes, and the Remuneration Report in the Directors Report, are in accordance with the Corporations Act 2001 (Cth), including: (i) giving a true and fair view of the financial position of the consolidated entity as at 30 June 2011 and of its performance, for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001 (Cth); (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 1 in the consolidated financial statements. (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2 There are reasonable grounds to believe that the Company and the controlled entities identified in note 29 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the company and those controlled entities pursuant to ASIC Class Order 98/ The directors have been given the declarations required by Section 295A of the Corporations Act 2001 (Cth) from the Managing Director and the Executive Director, Finance and Strategy for the financial year ended 30 June Signed in accordance with a resolution of the directors: H Kevin McCann, Chairman Director Sydney, 23 August 2011 Origin Energy Annual Report

132 130 independent auditor s report