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1 To Company Announcements Office Company ASX Limited Date 23 August 2012 From Helen Hardy Pages 241 Subject RESULTS FOR ANNOUNCEMENT TO THE MARKET We attach the following documents relating to Origin Energy s Results for the full-year ended 30 June 2012: 1. ASX Appendix 4E 2. Financial Statements 3. Management Discussion and Analysis 4. Directors Report and Remuneration Report 5. Corporate Governance Statement Regards Helen Hardy Company Secretary helen.hardy@originenergy.com.au Origin Energy Limited ACN Level 45 Australia Square, George Street, Sydney NSW 2000 GPO Box 5376, Sydney NSW 2001 Telephone (02) Facsimile (02) /1

2 Origin Energy Limited and Controlled Entities Appendix 4E 30 June 2012 Origin Energy Limited ABN

3 Origin Energy Limited and Controlled Entities Appendix 4E Results for announcement to the market 30 June $million $million Revenue up 25% to 12,935 10,344 Net profit for the period attributable to members of the parent entity up 427% to Basic earnings per share up 362% to Diluted earnings per share up 361% to Net tangible asset backing per ordinary security up 7% to $6.54 $6.14 Dividends Amount per security Franked amount per security at 30 per cent tax Final dividend declared subsequent to 30 June cents 25 cents Previous corresponding period (30 June 2011) 25 cents 25 cents Record date for determining entitlements to the dividend Dividend payment date 31 August September 2012 Brief explanation of any of the figures reported above or other item(s) of importance not previously released to the market. Refer to the attached Directors' Report, Remuneration Report and Management Discussion and Analysis for explanations. Discussion and Analysis of the results for the year ended 30 June Refer to the attached Directors' Report, Remuneration Report and Management Discussion and Analysis for commentary.

4 Origin Energy Limited and Controlled Entities Financial Statements 30 June 2012 Origin Energy Limited ABN

5 Origin Energy Limited and Controlled Entities Financial Statements Contents Income statement Statement of comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to the financial statements 1 Statement of significant accounting policies 2 Segments 3 Profit 4 Income tax expense 5 Dividends 6 Trade and other receivables 7 Inventories 8 Other assets 9 Other financial assets, including derivatives 10 Assets and liabilities classified as held for sale 11 Investments accounted for using the equity method 12 Property, plant and equipment 13 Exploration, evaluation and development assets 14 Intangible assets 15 Tax assets 16 Trade and other payables 17 Interest-bearing liabilities 18 Other financial liabilities, including derivatives 19 Tax liabilities 20 Provisions 21 Employee benefits 22 Share capital 23 Reserves 24 Other comprehensive income 25 Notes to the statement of cash flows 26 Auditors' remuneration 27 Contingent liabilities and assets 28 Commitments 29 Financial instruments 30 Acquisition and disposal of controlled entities 31 Controlled entities 32 Interest in joint venture operations 33 Share-based payments 34 Related party disclosures 35 Key management personnel disclosures 36 Deed of cross guarantee 37 Earnings per share 38 Parent entity disclosures 39 Subsequent events Directors' Declaration Independent auditor's report 2

6 Origin Energy Limited and Controlled Entities Income statement for the year ended 30 June Note $million $million Revenue 12,935 10,344 Other income 3(a) Expenses 3(b) (11,829) (9,857) Share of results of equity accounted investees 11(a) Interest income 3(c) Interest expense 3(c) (326) (191) Profit before income tax 1, Income tax expense 4 (302) (147) Profit for the period 1, Profit for the period attributable to: Non-controlling interests Members of the parent entity Profit for the period 1, Earnings per share Basic earnings per share cents 19.6 cents Diluted earnings per share cents 19.6 cents The income statement should be read in conjunction with the accompanying notes set out on pages 8 to

7 Origin Energy Limited and Controlled Entities Statement of comprehensive income for the year ended 30 June $million $million Profit for the period 1, Other comprehensive income Available for sale financial assets (Gains)/losses transferred to income statement (8) 9 Cash flow hedges Losses transferred to income statement Transferred to carrying amount of assets 4 2 Foreign currency translation gain 6 2 Valuation loss taken to equity (65) (168) Net (loss)/gain on hedge of net investment in foreign operations (37) 73 Foreign currency translation differences for foreign operations 129 (245) Actuarial (loss)/gain on defined benefit superannuation plan (13) 4 Other comprehensive income/(loss) for the period 125 (182) Income tax (expense)/benefit on other comprehensive income (8) 3 Other comprehensive income/(loss) for the period, net of income tax 117 (179) Total comprehensive income for the period 1, Total comprehensive income attributable to: Non-controlling interests Members of the parent entity 1, Total comprehensive income for the period 1, The statement of comprehensive income should be read in conjunction with the accompanying notes set out on pages 8 to

8 Origin Energy Limited and Controlled Entities Statement of financial position as at 30 June Note $million $million Current assets Cash and cash equivalents Trade and other receivables 6 2,306 2,159 Inventories Other financial assets, including derivatives Tax assets 15-2 Assets classified as held for sale Other assets Total current assets 3,939 3,849 Non-current assets Trade and other receivables Other financial assets, including derivatives Investments accounted for using the equity method 11 5,962 5,470 Property, plant and equipment 12 10,895 10,313 Exploration and evaluation assets Intangible assets 14 5,966 5,693 Other assets Total non-current assets 24,042 23,051 Total assets 27,981 26,900 Current liabilities Trade and other payables 16 2,063 2,020 Interest-bearing liabilities Other financial liabilities, including derivatives 18 1,684 2,217 Tax liabilities Provisions Liabilities classified as held for sale Total current liabilities 4,294 5,109 Non-current liabilities Trade and other payables Interest-bearing liabilities 17 5,734 4,193 Other financial liabilities, including derivatives 18 1,482 2,282 Tax liabilities 19 1, Provisions Total non-current liabilities 9,229 8,275 Total liabilities 13,523 13,384 Net assets 14,458 13,516 Equity Share capital 22 4,345 4,029 Reserves 23 (186) (301) Retained earnings 8,935 8,504 Total parent entity interest 13,094 12,232 Non-controlling interests 1,364 1,284 Total equity 14,458 13,516 The statement of financial position should be read in conjunction with the accompanying notes set out on pages 8 to

9 Origin Energy Limited and Controlled Entities Statement of changes in equity $million Share capital Sharebased payments reserve Foreign currency translation reserve Hedging reserve Availablefor-sale reserve Retained earnings Noncontrolling interests Total equity Balance as at 1 July , (239) (123) - 8,504 1,284 13,516 Total other comprehensive income (refer note 24) (5) (11) Profit ,058 Total comprehensive income/(expense) for the period (5) ,175 Dividends paid (refer note 5) (538) (65) (603) Movement in share capital (refer note 22) Movement in share-based payments reserve Total transactions with owners recorded directly in equity (538) (32) (233) Balance as at 30 June , (171) (92) (5) 8,935 1,364 14,458 Balance as at 1 July , (132) (107) (7) 8,765 1,189 11,438 Total other comprehensive income (refer note 24) - - (107) (16) 7 (5) (58) (179) Profit Total comprehensive income/(expense) for the period - - (107) (16) Dividends paid (refer note 5) (442) (62) (504) Movement in share capital (refer note 22) 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 The statement of changes in equity should be read in conjunction with the accompanying notes set out on pages 8 to

10 Origin Energy Limited and Controlled Entities Statement of cash flows for the year ended 30 June Note $million $million Cash flows from operating activities Cash receipts from customers 13,991 10,362 Cash paid to suppliers (12,115) (8,768) Cash generated from operations 1,876 1,594 Dividends/distributions received from equity accounted investees 4 9 Income taxes (paid)/received (39) 3 Acquisition transaction costs (19) (205) Net cash from operating activities 25(c) 1,822 1,401 Cash flows from investing activities Acquisition of property, plant and equipment (1,203) (1,055) Acquisition of exploration and development assets (127) (150) Acquisition of other assets (173) (422) Acquisition of businesses, net of cash acquired 25(d) 75 (3,125) Investment in joint ventures/associates (109) (49) Interest received Net proceeds from sale of non-current assets 41 4 Repayment of loans to equity accounted investees (1,167) - Net cash used in investing activities (2,626) (4,758) Cash flows from financing activities Proceeds from borrowings 7,423 9,788 Repayment of borrowings (6,330) (8,191) Interest paid (403) (308) Proceeds from issue of share capital - senior executive options Proceeds from issue of share capital - underwritten dividend reinvestment plan Dividends paid by the parent entity (377) (381) Dividends paid to non-controlling interests (34) (27) Proceeds from share rights issues - 2,252 Proceeds from shares issued by Contact Energy, a controlled entity of the consolidated entity Net cash from financing activities 434 3,266 Net decrease in cash and cash equivalents (370) (91) Cash and cash equivalents at the beginning of the period Effect of exchange rate changes on cash 3 (4) Cash and cash equivalents at the end of the period 25(a) The statement of cash flows should be read in conjunction with the accompanying notes set out on pages 8 to

11 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies Origin Energy Limited (the company) is a company domiciled in Australia. The address of the Company s registered office is Level 45, Australia Square, George Street, Sydney NSW The financial statements of the company for the year ended 30 June 2012 comprise the company, its controlled entities and the consolidated entity's interest in associates and joint ventures (together referred to as the consolidated entity). The consolidated financial statements were approved by the Board of Directors on 23 August The consolidated entity is a for-profit entity and primarily is involved in the operation of energy businesses including the exploration and production of oil and gas; electricity generation; wholesale and retail sale of electricity and gas; and renewable energy development opportunities in Australia and overseas. (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 controlled entities in the consolidated entity. Unless otherwise stated all reference to '$' refers to Australian dollars. 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. 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; 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. Certain comparative amounts have been reclassified to conform to the current year's presentation. 8

12 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (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(AM) for accounting estimates and judgements. (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 noncontrolling interests are based on a proportionate amount of the net assets of the controlled entity. Controlled entities 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 during the year. 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 equity and the profit or loss 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 incorporated joint ventures, 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. 9

13 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (D) Principles of consolidation (continued) 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. 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 twelve months. Any changes to the fair value of the contingent consideration after the measurement period are recognised in the income statement. 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 s equity. Any cash paid for the acquisition is recognised directly in equity. 10

14 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (D) Principles of consolidation (continued) 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 segment result and underlying consolidated 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 segment result and underlying consolidated profit. The segment result and underlying consolidated profit information is provided to the Managing Director to assess the performance of the consolidated entity s business. The nature of items adjusted for in the measurement of segment result and underlying consolidated profit include gains and losses on the movement in fair value of financial instruments not qualifying for hedge accounting; impairment of non-current assets; Australia Pacific LNG related items such as gains on dilution of the consolidated entity s interests in Australia Pacific LNG; and other items such as transition and transaction costs that would distort the comparability of the results of the performance of the consolidated entity. A reconciliation between statutory profit attributable to members of the parent entity and underlying consolidated profit, including further details of the items excluded from segment results and underlying consolidated profit, is included in note 2(b). 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. Bank overdrafts are disclosed in note 17. (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. 11

15 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (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. Inventories are presented as a current asset as the consolidated entity expects to utilise the inventories within its normal operating cycle. (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). 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. 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. 12

16 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (K) Calculation of recoverable amount (continued) 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 nonsignificant 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 bi-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 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 assets are ready for use, over the estimated useful lives of the assets. 13

17 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (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 expensed as incurred. 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 at the reporting date, with any resulting 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 at the reporting date, with any resulting 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 14

18 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (O) Investments in debt and equity securities (continued) 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. 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/derecognised 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. 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 including an estimate of the costs to restore the site. 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 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 sub-surface 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. 15

19 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (P) Property, plant and equipment (continued) 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. Subsequent to initial recognition, lease liabilities are reduced by the repayments of principal with the interest components of the lease payments expensed in profit or 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. (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 ended 30 June 2012 was performed on 13 July

20 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (U) Defined benefit superannuation plan (continued) 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 expenses in the income statement as incurred. (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 other employee benefits Liabilities for employee benefits for wages, salaries, annual leave and other employee benefits 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 Long Term Incentive (LTI) Plan and the Employee Share Plan. The LTI Plan covers options and share rights (collectively securities ). Share rights are in the form of Performance Share Rights (PSRs) and Deferred Share Rights (DSRs). The accounting policies regarding each of these plans are as follows: 17

21 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (Y) Equity-based compensation (continued) Senior Executive Options, Performance Share Rights and Deferred Share Rights The fair value of the securities granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date using a Black-Scholes methodology with a Monte Carlo simulation model, taking into account market performance conditions (except for DSRs which have a service and personal performance hurdle rather than market hurdle) and is recognised over the vesting period during which the employees become unconditionally entitled to the securities. The amount recognised as an expense is adjusted to reflect the actual number of securities that vest except where forfeiture of options and PSRs 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 dividends 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. 18

22 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (Z) Provisions (continued) 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 factored in 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. 19

23 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (AB) Revenue recognition Revenue Revenue comprises revenue earned (net of returns, discounts and allowances) from the provision of products or services to parties 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. 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 & Production and Australia Pacific LNG operating segments is recognised when the commodities have been loaded for shipment and title passes to the customer. Revenue from electricity and gas supplied by the Energy Markets and Contact Energy operating segments is recognised once the electricity and gas have 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. 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 controlled entites, 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 in the income statement 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. 20

24 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (AC) Net financing costs (continued) 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 an 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 substantively 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 controlled entities and equity accounted investees 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. The consolidated entity s Exploration & 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 the reporting date when performing the tax effect accounting calculation, with the foreign exchange movement recorded in the income statement through income tax expense. Petroleum Resource Rent Tax (PRRT) Petroleum Resource Rent Tax (PRRT) is considered, for accounting purposes, to be a tax based on income under AASB 112 Income Taxes. Accordingly, any current and deferred PRRT expense is measured and disclosed on the same basis as income tax. 21

25 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (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. (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 the consolidated entity participates in buying and selling activities. If there is no active market, the certificates continue to be recorded at cost. 22

26 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (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 the gain or loss in the income statement 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 29 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. 23

27 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (AK) Hedging (continued) 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 Financial Instruments: Recognition and Measurement. 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) Assets and liabilities classified as held for sale Assets and liabilities that are expected to be recovered or settled primarily through sale rather than through continuing use, are classified as held for sale and recognised as current assets or current liabilities. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the consolidated entity s accounting policy for that asset or liability. Thereafter the assets or liabilities are measured at the lower of their carrying amount and fair value less cost to sell. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement at the end of each reporting period are recognised in the income statement. Once classified as held for sale, property, plant and equipment and intangible assets are no longer depreciated or amortised. 24

28 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (AM) 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. Estimating the quantity and/or grade of reserves requires the size, shape and depth of reserve 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 11, 12 and 13) 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 20) 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 and tax liabilities (notes 15 and 19) 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 20 for the carrying value of these provisions. 25

29 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (AM) Accounting estimates and judgements (continued) Impairment of assets In accordance with AASB 136 Impairment of assets, the recoverable amount of assets is the greater of its value in use and its fair value less costs to sell. An assets value in use is determined, in the absence of quoted market prices, through estimating the present value of future cash flows using asset specific discount rates. The value in use 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 are shown in note 14. 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 14. The consolidated entity owns assets in Australia that are impacted by the Australian Government s Clean Energy Legislative package which included the Clean Energy Act, passed in the Federal Parliament on 8 November A key component of the legislative package is the Carbon Pricing Mechanism which is effective 1 July The introduction of a carbon framework will impact the value in use calculations applied for impairment reviews of the consolidated entity s Australian assets. The impact of the emissions legislation program has been included in the consolidated entity s asset recoverability testing at the reporting date. Exploration and evaluation assets The consolidated entity's accounting policy for exploration and evaluation assets is set out in note 1(M). The application of this policy 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 the consolidated entity 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 13 for the carrying value of exploration and evaluation assets. 26

30 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (AM) Accounting estimates and judgements (continued) 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 12 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 28 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 are 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 29 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 21. 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. Taxation The consolidated entity is subject to income taxes in Australia and jurisdictions where it has foreign operations. 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. 27

31 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (AM) Accounting estimates and judgements (continued) 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 15 and 19 for the carrying value of tax assets and liabilities. Petroleum Resource Rent Tax (PRRT) From 1 July 2012, the Petroleum Resource Rent Tax (PRRT) applies to all Australian onshore oil and gas projects, including coal seam gas projects. In addition to the taxation estimates and judgements above, implementation of PRRT legislation involves judgement around the application of the PRRT legislation including, definition and grouping of PRRT projects, the taxing point of projects, the transfer price used for determining PRRT income, and the measurement of the Starting Base for transition of existing permits, production licences and retention leases into the PRRT regime. In assessing the recoverability of deferred tax assets, estimates are required in respect of future augmentation (escalation) of expenditure, the sequence in which current and future deductible amounts are expected to be utilised, and the probable cash flows used in determining the recoverability of deferred tax assets. 28

32 Origin Energy Limited and Controlled Entities Notes to the financial statements 1. Statement of significant accounting policies (continued) (AN) 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 2012, but have not been applied in preparing the financial statements: AASB 9 Financial Instruments AASB 10 Consolidated Financial Statements AASB 11 Joint Arrangements AASB 12 Disclosures of Interests in Other Entities AASB 13 Fair Value Measurement AASB 119 Employee Benefits AASB 127 Separate Financial Statements AASB 128 Investments in Associates and Joint Ventures AASB 1053 Application of Tiers of Australian Accounting Standards AASB Amendments to Australian Accounting Standards arising from AASB 9 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 Australia Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements AASB Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangement Standards AASB Amendments to Australian Accounting Standards arising from AASB 13 AASB Amendments to Australian Accounting Standards Presentation of Other Comprehensive Income AASB Amendments to Australian Accounting Standards arising from AASB 119 (September 2011) AASB Amendments to Australian Accounting Standards Disclosures Offsetting Financial Assets and Financial Liabilities AASB Amendments to Australian Accounting Standards Offsetting Financial Assets and Financial Liabilities AASB Amendments to Australian Accounting Standards arising from Annual Improvements Cycle The consolidated entity is currently in the process of assessing the impact of the adoption of these standards. 29

33 Origin Energy Limited and Controlled Entities Notes to the financial statements for the year ended 30 June 2. Segments (a) Operating segments 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 consolidated entity's operating segments have been updated from those presented at 30 June 2011 to reflect the Final Investment Decision (FID) on the first phase of the Australia Pacific LNG export project, the deepening integration within the Energy Markets business between retail and generation activities, and increased development opportunities outside of existing operations. The comparative balances have been restated to conform to the current period presentation. The segments are: Energy Markets - Australian energy retailing, associated products and services; power generation in Australia; and LPG operations in Australia, the Pacific, Papua New Guinea and Vietnam. Exploration & Production - Gas and oil exploration and production in Australia, New Zealand and International areas of interest. Australia Pacific LNG - The consolidated entity's 42.5 per cent investment in Australia Pacific LNG (50 per cent at 30 June 2011) including current domestic operations and the Australia Pacific LNG coal seam gas to LNG export project. Contact Energy - The consolidated entity's investment in its 53.0 per cent owned New Zealand controlled entity (52.6 per cent at 30 June 2011) Contact Energy Limited, is involved in energy retailing, associated products and services, and power generation in New Zealand. Corporate - Corporate activities that are not allocated to other operating segments and business development activities outside of the consolidated entity s existing operations. The Managing Director receives financial information on the segment result of each operating segment so as to assess the performance of each segment. Segment result represents underlying earnings before interest and tax (EBIT) for the Energy Markets and Exploration and Production segments. Net financing costs and tax expense/(benefit) are allocated to Australia Pacific LNG, Contact Energy and the Corporate segments in measuring segment result. The Managing Director also receives a listing of the items excluded from segment result and underlying consolidated profit by segment, and a reconciliation of the consolidated statutory profit to the underlying consolidated profit. 30

34 Origin Energy Limited and Controlled Entities Notes to the financial statements 2. Segments (continued) (a) Operating segments (continued) for the year ended 30 June Segment results: Exploration & Australia Pacific Energy Markets Production LNG (1) Contact Energy Corporate Consolidated $million Revenue Total segment revenue 10,250 8, ,102 1, ,087 10,518 Intersegment sales elimination (2) - - (152) (174) (152) (174) Total revenues from external customers 10,250 8, ,102 1, ,935 10,344 Underlying Earnings before interest, tax, depreciation and amortisation (EBITDA) (3) 1,562 1, (81) (68) 2,257 1,782 Depreciation and amortisation expense (237) (189) (224) (221) - - (151) (128) (2) (1) (614) (539) Share of interest, tax, depreciation and amortisation of equity accounted investees (8) (7) - - (33) (42) (1) (3) (3) 3 (45) (49) Underlying Earnings before interest and tax (EBIT) 1, (86) (66) 1,598 1,194 Net financing costs - - (67) (60) (150) (83) (217) (143) Income tax expense - - (51) (47) (364) (269) (415) (316) Non-controlling interests (70) (61) (3) (1) (73) (62) Segment result and Underlying consolidated profit 1, (603) (419) Items excluded from segment result and Underlying consolidated profit for the period (refer note 2(b)): Increase/(decrease) in fair value of financial instruments 175 (214) (9) (5) (2) (201) Impairment of assets (87) - (225) (3) - (197) (214) (512) (214) Australia Pacific LNG related items Other (108) (251) (8) (2) (96) (253) Tax and non-controlling interests on items excluded from segment result 9 4 (2) Impact of items excluded from segment result and Underlying consolidated profit net of tax (20) (465) (223) (1) (106) (38) 87 (487) Statutory profit attributable to members of the parent entity (1) (2) (3) The consolidated entity owns a 42.5 per cent share of Australia Pacific LNG at 30 June 2012 (30 June 2011: 50 per cent). Refer to note 11(b) for further details. Intersegment pricing is determined on an arm's length basis. Intersegment sales are eliminated on consolidation. The Exploration & Production segment sells gas and LPG to the Energy Markets segment. Underlying EBITDA includes the consolidated entity's share of underlying EBITDA of equity accounted investees of $73 million (2011: $79 million). Refer to note 11(a) for further details. 31

35 Origin Energy Limited and Controlled Entities Notes to the financial statements 2. Segments (continued) (a) Operating segments (continued) as at 30 June Other segment information: Exploration & Australia Pacific Energy Markets Production LNG (1) Contact Energy Corporate Consolidated $million Assets Segment assets 12,833 12,504 3,617 3, ,072 4, ,662 20,695 Investments accounted for using the equity method (refer note 11(a)) ,769 5, ,962 5,470 Cash and interest rate derivatives and current and deferred tax assets Total assets 12,904 12,568 3,622 3,460 5,769 5,258 5,077 4, ,981 26,900 Liabilities Segment liabilities (2,384) (2,839) (693) (467) - - (380) (353) (275) (186) (3,732) (3,845) Other financial liabilities, interestbearing liabilities and related derivatives and tax liabilities (3,576) (3,576) (2,064) (1,835) (4,151) (4,128) (9,791) (9,539) Total liabilities (2,384) (2,839) (693) (467) (3,576) (3,576) (2,444) (2,188) (4,426) (4,314) (13,523) (13,384) Acquisitions of non-current assets (includes capital expenditure) 567 3, ,580 4,771 (1) Origin owns a 42.5 per cent share of Australia Pacific LNG at 30 June 2012 (30 June 2011: 50 per cent). Refer to note 11(b) for further details. 32

36 Origin Energy Limited and Controlled Entities Notes to the financial statements 2. Segments (continued) (b) Reconciliation of underlying consolidated profit to statutory profit for the year ended 30 June $million Gross Noncontrollincontrolling Non- Tax interests Net Gross Tax interests Net Profit attributable to members of the parent entity Items excluded from segment result and underlying consolidated profit attributable to members of the parent entity: Increase/(decrease) in fair value of financial instruments 166 (50) (201) 60 2 (139) Impairment of assets (512) (407) (214) 54 - (160) Australia Pacific LNG related items Other (96) 50 (9) (55) (253) 51 (2) (204) Total items excluded from segment result and underlying consolidated profit (21) 113 (5) 87 (656) (487) Underlying consolidated profit Refer to note 2(c) for explanatory notes. 33

37 Origin Energy Limited and Controlled Entities Notes to the financial statements 2. Segments (continued) (c) Explanatory notes to the reconciliation of underlying consolidated profit to statutory profit Increase/(decrease) in fair value of financial instruments Change in fair value of financial instruments primarily relates to instruments that are effective economic hedges but do not qualify for hedge accounting. Impairment of assets During the year ended 30 June 2012 the consolidated entity reviewed the carrying amount of its noncurrent assets. The review led to the recognition of an impairment loss of $512 million which has been recorded in the line item 'expenses' (refer note 3(b)) in relation to property, plant and equipment, exploration assets, intangibles assets and investments in equity accounted investees; and comprises the following: 2012 $million Gross Tax Transform Solar 153 (18) Geothermal development opportunities 44 (11) Wind development opportunities 65 (5) Gas fired development site in central NSW 5 (2) Worsley Generation Plant 17 - Ironbark 198 (59) Surat assets 27 (8) Clutha Hydro site (Contact Energy Limited) 3 (1) 512 (104) - $153 million: in respect of the consolidated entity's 50 per cent equity accounted investment in the Transform Solar Joint Venture arising from a scale back of operations and challenging economic conditions impacting the commercialisation benefits of the Sliver technology; - $44 million: in respect of the Australian Geothermal development opportunities which have not met expectations for a timely and commercial development of the geothermal resources; - $65 million: in respect of the consolidated entity s portfolio of wind development opportunities following the de-prioritisation of certain sites; - $5 million: following the de-prioritisation of a prospective gas fired generation development site in central NSW; - $17 million: in respect of the consolidated entity s 50 per cent interest in the Worsley Generation plant, reflecting a revised view of the plant's future contracted capacity; - $198 million: relates to the Ironbark CSG permit area in respect of the realisation of an upfront tax deduction for the permit acquisition; - $27 million: from the unlikelihood of realising value from the Surat assets with neglible reserves at 30 June 2012; and - $3 million: recorded by Contact Energy Limited (a 53.0 per cent owned controlled entity of the consolidated entity) as a result of the decision not to proceed with any of the options being investigated for hydro generation development on the Clutha Hydro site for the foreseeable future. 34

38 Origin Energy Limited and Controlled Entities Notes to the financial statements 2. Segments (continued) (c) Explanatory notes to the reconciliation of underlying consolidated profit to statutory profit (continued) Australia Pacific LNG related items 2012 $million Gross Tax Dilution gain on Australia Pacific LNG investment Financing costs not able to be capitalised (72) 22 Share of unwinding of discounted receivables within Australia Pacific LNG 21 - Share of tax expense on translation of foreign denominated long term tax balances (5) - Foreign currency gain 40 (13) $437 million: net gain on dilution of the consolidated entity's investment in Australia Pacific LNG arising on Australia Pacific LNG issuing new shares to China Petroleum and Chemical Corporation (Sinopec), resulting in Sinopec holding a 15 per cent interest in Australia Pacific LNG and the consolidated entity's interest in Australia Pacific LNG diluting from 50 per cent to 42.5 per cent; $72 million: net financing costs incurred by the consolidated entity in funding the Australia Pacific LNG project. The interest would otherwise be capitalised except for the investment being held via an equity accounted investment. If the development project was completed by the consolidated entity, the interest would be capitalised; $21 million: the consolidated entity's share of the unwinding of discounted receivables within Australia Pacific LNG, refer note 11(b); $5 million: share of tax expense on translation of foreign denominated long term tax balances recorded in the equity accounted investment in Australia Pacific LNG; and $40 million: foreign currency gain incurred by the consolidated entity and Australia Pacific LNG in relation to the funding and development of Australia Pacific LNG. Other 2012 $million Gross Tax Retail business transformation and transition costs and NSW Energy assets transition costs 111 (36) Transaction costs for acquisition activity 8 - Gain on Contact Energy's exiting of investment in Oakey Power Holdings Pty Ltd (23) 1 Tax expense on translation of foreign denominated long term tax balances - 7 Recognition of tax benefits not previously brought to account relating to Powercor Trading Contracts - (6) Recognition of deferred tax benefit in respect of the Petroleum Resource Rent Tax (PRRT) legislation - (16) 96 (50) 35

39 Origin Energy Limited and Controlled Entities Notes to the financial statements 2. Segments (continued) (d) Geographical information for the year ended 30 June $million $million Revenue Australia 10,533 8,377 New Zealand 2,291 1,876 Other (1) Total revenue from external customers 12,935 10,344 Non-current assets Australia 18,280 17,526 New Zealand 5,266 4,904 Other (1) Total segment non-current assets 23,705 22,489 (1) The other geographic segment includes operations in the Pacific, South East Asia, Papua New Guinea, Chile, Indonesia, Kenya and Botswana. 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. 36

40 Origin Energy Limited and Controlled Entities Notes to the financial statements 3. Profit Note $million $million (a) Other income Net gain on dilution of Origin's interest in equity accounted investees 2(b) Net gain on sale of other assets 27 - Net foreign exchange gain 34 5 Government grants/subsidies 1 2 Other 5 2 Total other income (b) Expenses Raw materials and consumables used, and changes in finished goods and work in progress Labour related expenses Exploration expense Depreciation and amortisation expense Impairment of assets Increase/(decrease) in fair value of financial instruments Transition and transaction costs Other expenses Expenses (c) Net financing costs Interest income Other parties Interest expense Other parties Impact of discounting on long term provisions Unwinding of discounted liability payable to Australia Pacific LNG Interest expense related to Australia Pacific LNG funding Net financing costs Net financing costs excluding unwinding of discounted liability payable to Australia Pacific LNG and interest expense related to Australia Pacific LNG funding (1) Financing costs capitalised (2) (9,255) (7,379) 21 (708) (540) (49) (118) (614) (539) 2(b) (512) (214) 2(b) 166 (201) 2(b) (119) (253) (738) (613) (11,829) (9,857) (217) (157) (37) (22) - (12) (72) - (326) (191) (289) (155) (217) (143) (1) Disclosure is provided to enable reconciliation to net financing costs included in the segment analysis in note 2(a). (2) Capitalised interest is calculated at an average rate based on the general borrowings of the consolidated entity (2012: 7.53 per cent; 2011: 7.18 per cent). 37

41 Origin Energy Limited and Controlled Entities Notes to the financial statements 4. Income tax expense $million $million Income tax Current tax expense Deferred tax expense Over provided in prior years (2) (8) Petroleum resource rent tax deferred tax benefit (16) - Total income tax expense in the income statement Reconciliation between tax expense and pre-tax net profit Profit before income tax 1, Income tax using the domestic corporation tax rate of 30 per cent (2011: 30 per cent) Prima facie income tax expense on pre-tax accounting profit: - at Australian tax rate of 30 per cent adjustment for difference between Australian and overseas tax rates (3) 7 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 recoverable Share of results of equity accounted investees (11) (15) Gain on dilution of equity accounted investees (131) - Recognition of change in net tax loss position 2 (2) Recognition of tax benefits relating to Powercor Trading Contracts not previously brought to account (6) - Tax expense on translation of foreign denominated tax balances 7 (31) Other 4 8 (85) 29 Over provided in prior years - current and deferred (2) (8) Income tax expense on pre-tax net profit Petroleum resources rent tax (16) - Total income tax expense Deferred tax movements recognised directly in equity (including foreign currency translation) Fair value of available-for-sale financial assets - 2 Financial instruments at fair value 12 (6) Property, plant and equipment 13 (43) Provisions (1) 5 Other items (5) (2) 19 (44) 38

42 Origin Energy Limited and Controlled Entities Notes to the financial statements 4. Income tax expense (continued) $million Gross Tax Net Gross Tax Net Income tax expense recognised in other comprehensive income Available for sale assets: (Gains)/losses transferred to income statement (8) 3 (5) 9 (2) 7 Cash flow hedges: Losses transferred to income statement 109 (31) (42) 99 Transferred to carrying amount of assets 4 (2) 2 2 (1) 1 Foreign currency translation gain Valuation loss taken to equity (65) 18 (47) (168) 49 (119) Net (loss)/gain on hedge of net investment in foreign operations (37) - (37) Foreign currency translation differences for foreign operations (245) - (245) Actuarial (loss)/gain on defined benefit superannuation plan (13) 4 (9) 4 (1) 3 Other comprehensive income/(loss) for the period 125 (8) 117 (182) 3 (179) 39

43 Origin Energy Limited and Controlled Entities Notes to the financial statements 5. Dividends (a) Dividend reconciliation Final dividend of 25 cents per share, fully franked at 30 per cent, paid 29 September 2011 (2011: Final dividend of 25 cents per share, fully franked at 30 per cent, paid 28 September 2010) Interim dividend of 25 cents per share, fully franked at 30 per cent, paid 30 March 2012 (2011: Interim dividend of 25 cents per share, fully franked at 30 per cent, paid 1 April 2011) $million $million (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 per cent, payable 27 September The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2012 and will be recognised in subsequent financial statements. (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 Franking credits available to shareholders of Origin Energy Limited for subsequent financial years are: Australian franking credits available at 30 per cent New Zealand franking credits available at 28 per cent (in NZD) The ability to utilise the franking credits is dependent upon the ability to declare dividends. 40

44 Origin Energy Limited and Controlled Entities Notes to the financial statements 6. Trade and other receivables $million $million Current Trade receivables net of allowance for doubtful debts Unbilled revenue 1,317 1,201 Other debtors ,306 2,159 Non-current Trade receivables Trade receivables of the consolidated entity's operations denominated in currencies other than the functional currency of the operations comprise $8 million denominated in US dollars (2011: $6 million) and $2 million denominated in New Zealand dollars (2011: $13 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 the date of the 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 (2011: 22 days). The movement in the allowance for doubtful debts in respect of trade receivables during the year is as follows: Balance as at 1 July Acquired impairment losses recognised for the NSW acquisition - 31 Impairment losses recognised Amounts written off (66) (56) Balance as at 30 June 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 599 (1) 665 (1) days 126 (2) 95 (2) days 45 (1) 38 (1) More than 90 days 186 (62) 131 (58) 956 (66) 929 (62) 41

45 Origin Energy Limited and Controlled Entities Notes to the financial statements 7. Inventories Note $million $million Raw materials and stores Finished goods Inventory gas Other assets Current Prepayments Deposits Non-current Prepayments Other financial assets, including derivatives Current Derivative financial instruments Available-for-sale financial assets Environmental scheme certificates Non-current Derivative financial instruments Environmental scheme certificates Available-for-sale financial assets: Listed shares Investments held in other corporations Other available-for-sale financial assets

46 Origin Energy Limited and Controlled Entities Notes to the financial statements 10. Assets and liabilities classified as held for sale At 30 June 2012 the following assets and liabilities were classified as held for sale: $million $million Assets classified as held for sale Producing areas of interest (1) 13 - Exploration asset (2) 5 - Generation property, plant and equipment (3) 6 - Other plant and equipment (1) 10 - Inventories (1) Liabilities classified as held for sale Restoration, rehabilitation and dismantling provision (1) Cumulative income or expenses recognised in other comprehensive income There are no cumulative income or expenses recognised in other comprehensive income relating to the assets and liabilities held for sale. (1) The Tariki, Ahuroa, Waihapa and Ngaere (TAWN) fields along with the Waihapa Production Station and associated infrastructure assets have been classified as held for sale following the consolidated entity entering into an agreement on 31 May 2012 to sell the TAWN assets. The sale is expected to complete in the year ending 30 June (2) The exploration asset relates to the consolidated entity's interest in a drilling rig held by the Innamincka Deeps joint venture with Geodynamics; the drilling rig is subject to a sale agreement, with the sale expected to complete in the year ending 30 June (3) Certain land assets have been classified as held for sale as they are being actively marketed by Contact Energy, a 53.0 per cent owned controlled entity of the consolidated entity, following Board approval to dispose of the land. These land assets are expected to be sold within the year ending 30 June

47 Origin Energy Limited and Controlled Entities Notes to the financial statements 11. Investments accounted for using the equity method (a) Investments summary 2012 Note Associates BIEP Pty Ltd Cogeneration Vic 30 June BIEP Security Pty Ltd Cogeneration Vic 30 June CUBE Pty Ltd (1) Cogeneration SA 30 June (8) 7 38 Energia Andina S.A. (2) Geothermal activities Chile 31 Dec Gas Industry Superannuation Pty Ltd Principal activity Superannuation trustee Place of Reporting incorporation date Share of Equity interest, tax, accounted depreciation investment Ownership Share of and Share of net carrying interest EBITDA amortisation profit amount per cent $million $million $million $million SA 30 June Oakey Power Holdings Pty Ltd (3) Electricity generation NSW 30 June - 3 (1) 2 - Rockgas Timaru Ltd (4) LPG distributor NZ 31 Mar (9) 9 61 Joint venture entities Australia Pacific LNG Pty Ltd 11(b) Coal seam gas (CSG) NSW 30 June (15) 25 5,769 Bulwer Island Energy Partnership Cogeneration Qld 30 June Energia Austral S.A. (5) Hydro development Chile 31 Dec 20.7 (5) KUBU Energy Resources (Pty) Limited (6) CSG exploration Botswana 30 June OTP Geothermal Pte Ltd (7) Geothermal activities Singapore 31 Dec 50.0 (2) 1 (1) 15 PNG Energy Developments Limited (8) Hydro development PNG 31 Dec 50.0 (1) - (1) 36 Transform Solar Pty Ltd (9) Solar technology NSW 30 June (4) 3-48 (18) 30 5,901 Total 66 (27) 39 5,962 Consolidated entity's share of items recorded in Australia Pacific LNG treated as items excluded from underlying consolidated profit (11) Total excluding the consolidated entity's share of items recorded in Australia Pacific LNG treated as items excluded from underlying consolidated profit (12) Refer to page 46 for footnotes. 7 (18) (11) 73 (45) 28 44

48 Origin Energy Limited and Controlled Entities Notes to the financial statements 11. Investments accounted for using the equity method (continued) (a) Investments summary (continued) 2011 Note Associates Principal activity Place of Reporting incorporation date Share of Equity interest, tax, accounted depreciation investment Ownership Share of and Share of net carrying interest EBITDA amortisation profit amount per cent $million $million $million $million BIEP Pty Ltd Cogeneration Vic 30 June BIEP Security Pty Ltd Cogeneration Vic 30 June CUBE Pty Ltd (1) Cogeneration SA 30 June (7) 5 33 Energia Andina S.A. (2) Geothermal activities Chile 31 Dec Gas Industry Superannuation Pty Ltd Superannuation trustee SA 30 June Oakey Power Holdings Pty Ltd (3) Electricity generation NSW 30 June (3) 3 9 Rockgas Timaru Ltd (4) LPG distributor NZ 31 Mar Vitalgas Pty Ltd (10) Autogas distributor NSW 31 Dec (10) 8 55 Joint venture entities Australia Pacific LNG Pty Ltd 11(b) Coal seam gas (CSG) NSW 30 June (18) 45 5,258 Bulwer Island Energy Partnership Cogeneration Qld 30 June OTP Geothermal Pte Ltd (7) Geothermal activities Singapore 31 Dec 50.0 (2) 1 (1) 6 PNG Energy Developments Limited (8) Hydro development PNG 31 Dec Transform Solar Pty Ltd (9) Solar technology NSW 30 June 50.0 (5) 2 (3) (15) 46 5,415 Total 79 (25) 54 5,470 Consolidated entity's share of items recorded in Australia Pacific LNG treated as items excluded from underlying consolidated profit Total excluding the consolidated entity's share of items recorded in Australia Pacific LNG treated as items excluded from underlying consolidated profit (12) - (24) (24) 79 (49) 30 Refer to page 46 for footnotes. 45

49 Origin Energy Limited and Controlled Entities Notes to the financial statements 11. Investments accounted for using the equity method (continued) (a) Investments summary (continued) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Osborne Cogeneration Pty Ltd, a company incorporated in SA, is a wholly-owned controlled entity of CUBE Pty Ltd. 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. Oakey Power Holdings Pty Ltd was an associate of Contact Energy Limited, a 53.0 per cent owned controlled entity of the consolidated entity. Contact Energy Limited held a 25 per cent interest in Oakey Power Holdings Pty Ltd. Contact exited its investment in Oakey Power Holdings Pty Ltd on 18 January 2012 for proceeds of $31 million. A gain of $22 million post tax has been recognised in the income statement for the year ended 30 June 2012 and has been excluded from underlying consolidated profit (refer note 2(b)). Rockgas Timaru Ltd is an associate of Contact Energy Limited, a 53.0 per cent owned controlled entity of the consolidated entity. Contact Energy Limited has a 50 per cent interest in Rockgas Timaru Ltd. On 3 April 2012, the consolidated entity acquired a 51 per cent voting interest in Energia Austral SpA through being issued 150,000,000 partly paid ordinary shares in Energia Austral SpA. As at 30 June 2012, the consolidated entity has fully paid US$37,510,000 of these ordinary shares, giving it an economic interest of 20.7 per cent in Energia Austral SpA. The consolidated entity expects to pay the remaining unpaid shares in accordance with specific development milestones up to a total amount of US$150 million. The consolidated entity does not control Energia Austral as the Shareholders Agreement provides for joint control between the consolidated entity and Xstrata over the key strategic financial and operating decisions of the entity. Kubu Energy Resources (Pty) Limited is a joint venture established in November 2011 and owned 50 per cent by the consolidated entity and 50 per cent by Sasol Petroleum International (Pty) Limited. OTP Geothermal Pte Ltd is a joint venture established during the year ended 30 June 2011 and owned 50 per cent by the consolidated entity and 50 per cent by Trust Energy Resources Pte Ltd. OTP Geothermal Pte Ltd owns 95 per cent of the Sorik Marapi geothermal concession. The consolidated entity has a 50 per cent interest in PNG Energy Developments Limited, a joint venture focussed on hydro generation development opportunities in Papua New Guinea. Transform Solar Pty Ltd is owned 50 per cent by the consolidated entity. Refer to note 2(b) for details on the impairment loss of $153 million recognised against the consolidated entity's investment in the Transform Solar joint venture recorded at 30 June Vitalgas Pty Limited, a 50:50 joint venture between the consolidated entity and Caltex was divested on 1 November (11) The consolidated entity's share of items recorded in Australia Pacific LNG treated as items excluded from underlying consolidated profit include the consolidated entity's share of the unwinding of discounted receivables (EBITDA $Nil, ITDA $21 million gain); share of tax expense on foreign denominated long term tax balances (EBITDA $Nil, ITDA $5 million expense) and share of foreign currency loss incurred by Australia Pacific LNG in relation to the funding and development of Australia Pacific LNG (EBITDA $7 million loss, ITDA $2 million benefit). (12) Disclosure is provided to enable the reconciliation to share of interest, tax, depreciation and amortisation of equity accounted investees included in the segment analysis in note 2(a). 46

50 Origin Energy Limited and Controlled Entities Notes to the financial statements 11. Investments accounted for using the equity method (continued) (b) Investment in Australia Pacific LNG Pty Ltd The consolidated entity entered into a joint venture with ConocoPhillips to develop a CSG to LNG project using the consolidated entity's CSG reserves and resources in Queensland through Australia Pacific LNG. From the period of inception of the joint venture in October 2008 up to 9 August 2011, the consolidated entity's interest in the joint venture was 50 per cent. 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 the new share issue, the consolidated entity's interest in Australia Pacific LNG was diluted from 50 per cent to 42.5 per cent, and from 9 August 2011, the consolidated entity holds a 42.5 per cent interest. This transaction gave rise to a gain on dilution of the consolidated entity's investment in Australia Pacific LNG of $437 million (refer note 2(b)). Origin's interest in the results of Australia Pacific LNG are presented in the operating segment "Australia Pacific LNG" (refer note 2). A summary of Australia Pacific LNG's financial performance for the periods ended 30 June 2012 and 30 June 2011 including a reconciliation to the segment result disclosed in note 2(a), and its financial position as at 30 June 2012 and 30 June 2011 follows: $million $million $million $million Origin 42.5 Origin 50 Total per cent Total per cent APLNG interest (1) APLNG interest Operating revenue Operating expenses (251) (210) EBITDA Depreciation and amortisation expense (93) (77) Net financing income/(costs) 6 (4) Income tax benefit/(expense) 10 (3) Segment result for the period Items excluded from segment result: Net unwinding of discounted receivables from shareholders Net foreign exchange loss (12) (5) - - Tax (expense)/benefit on translation of foreign denominated tax balances (13) (5) 9 4 Total items excluded from segment result Net profit for the period (1) The consolidated entity's interest in Australia Pacific LNG for the period was 50 per cent from 1 July 2011 until 8 August 2011, and 42.5 per cent from 9 August 2011 to 30 June

51 Origin Energy Limited and Controlled Entities Notes to the financial statements 11. Investments accounted for using the equity method (continued) (b) Investment in Australia Pacific LNG Pty Ltd (continued) $million $million Summary statement of financial position of Australia Pacific LNG Receivables from shareholders 2,969 3,746 Other current assets Current assets 3,736 4,092 Receivables from shareholders 2,682 3,690 Property, plant and equipment and exploration and evaluation and development assets 8,656 3,273 Other non-current assets Non-current assets 11,390 7,013 Total assets 15,126 11,105 Current liabilities 1, Non-current liabilities Total liabilities 1, Net assets 13,546 10,500 Consolidated entity's interest of 42.5 per cent at 30 June 2012 (2011: 50 per cent) 5,757 5,250 Consolidated entity's own costs ,769 5,258 Australia Pacific LNG has an unrecognised deferred tax asset of $2,426 million (100 per cent Australia Pacific LNG) relating to the expanded Petroleum Resource Rent Tax. This has not been recognised by Australia Pacific LNG as it is not currently probable that future taxable profits will be available against which the assets can be utilised. (c) Investments in associates Results of associates 100 per cent of associates' revenues per cent 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

52 Origin Energy Limited and Controlled Entities Notes to the financial statements 11. Investments accounted for using the equity method (continued) (d) Investments in joint venture entities 2012 $million 2011 $million Results of joint venture entities 100 per cent of joint venture entities' revenues per cent of joint venture entities' net (loss)/profit (145) (1) 93 (1) Included in the $145 million loss is $207 million relating to an impairment recognised by Transform Solar following a decision to scale back operations of the joint venture. Concurrently the consolidated entity reviewed the carrying value of its investment resulting in an impairment being recognised of $153 million (refer note 2(b)). As the consolidated entity has fully impaired its investment, it ceases to equity account the results of Transform Solar. Therefore the loss recorded by Transform Solar is not reflected in the equity accounted results shown in note 11(a). 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 3,840 4,113 Non-current assets 11,727 7,272 Total assets 15,567 11,385 Current liabilities 1, Non-current liabilities Total liabilities 1, Net assets 13,914 10,736 (e) 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 the consolidated entity supplies gas to Osborne and purchases electricity from Osborne. Australia Pacific LNG Pty Ltd Joint Venture The consolidated entity 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 including activities related to the development and operation of Australia Pacific LNG's natural gas assets and coal seam gas (CSG) marketing related services. The consolidated entity incurs costs in providing these services and charges Australia Pacific LNG in accordance with the terms of the contractual arrangements. The consolidated entity has entered agreements with Australia Pacific LNG where the consolidated entity purchases gas from Australia Pacific LNG (2012: $255 million; 2011: $140 million) and the consolidated entity sells gas to Australia Pacific LNG (2012: $59 million; 2011: $19 million). At 30 June 2012, the consolidated entity's outstanding payable balance for purchases from Australia Pacific LNG is $40 million (2011: $6 million) and outstanding receivable balance for sales to Australia Pacific LNG is $Nil (2011: $1 million). 49

53 Origin Energy Limited and Controlled Entities Notes to the financial statements 12. Property, plant and equipment $million $million Generation property, plant and equipment At cost 8,985 8,190 Less: Accumulated depreciation 1, ,817 7,262 Other land and buildings At cost Less: Accumulated depreciation and amortisation Other plant and equipment At cost 3,522 3,357 Less: Accumulated depreciation 1,330 1,171 2,192 2,186 Producing areas of interest At cost 1,656 1,542 Less: Accumulated amortisation ,895 10,313 Included in property, plant and equipment is an amount of $1,926 million (2011: $1,309 million) relating to capital work in progress. 50

54 Origin Energy Limited and Controlled Entities Notes to the financial statements 12. Property, plant and equipment (continued) $million Generation property, plant and equipment Other land and buildings Other plant and equipment Producing areas of interest Total 2012 Balance as at 1 July , , ,313 Additions ,360 Depreciation/amortisation expense (269) (4) (160) (103) (536) Impairment loss (1) (3) (13) (23) (11) (50) Transfers within PP&E and to intangibles - - (258) - (258) Transfers to held for sale (6) - (10) (13) (29) Effect of movements in foreign exchange rates Balance as at 30 June , , , Balance as at 1 July , , ,168 Additions ,075 Additions through acquisition of entities/operations (2) Disposals (1) - (3) - (4) Depreciation/amortisation expense (218) (2) (158) (110) (488) Transfers (to)/from development assets and intangibles Effect of movements in foreign exchange rates (169) (6) (128) (30) (333) Balance as at 30 June , , ,313 (1) Impairment losses of $15 million in respect of the consolidated entity's portfolio of wind development opportunities; $5 million following the de-prioritisation of a prospective gas fired generation development site; $3 million in respect of Contact Energy Limited's impairment of the Clutha Hydro site; and $27 million in respect of the Surat Basin recorded against other land and buildings and producing areas of interest have been recognised at 30 June Refer to note 2(b) for details. (2) Generation property, plant and equipment in relation to the GenTrader arrangements entered as part of the NSW energy asset transaction over the Eraring and Shoalhaven power stations. The GenTrader arrangements expire in 2032 for Eraring and 2038 for Shoalhaven. 51

55 Origin Energy Limited and Controlled Entities Notes to the financial statements 13. 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 Development assets Net costs carried forward in respect of areas of interest in the development phase - - Reconciliations Reconciliations of the carrying amounts of exploration and evaluation assets and development assets are set out below: $million Exploration and evaluation Development assets 2012 Balance as at 1 July Additions Impairment loss (1) (242) - Exploration expense (49) - Transfers to assets held for sale (5) - Balance as at 30 June Balance as at 1 July , Additions Impairment loss (2) (202) - Exploration expense (118) - Transfers including to property, plant and equipment and intangibles - (75) Effect of movements in foreign exchange rates (8) (4) Balance as at 30 June (1) Impairment losses of $198 million in respect of the Ironbark CSG permit area and $44 million in respect to the consolidated entity's Geothermal development opportunities in Australia have been recognised at 30 June Refer to note 2(b) for details. (2) An impairment loss of $202 million was recognised at 30 June 2011 in relation to the consolidated entity's 30 per cent interest in the Innamincka Joint Venture with Geodynamics focussed on deep geothermal generation technology in northern South Australia. 52

56 Origin Energy Limited and Controlled Entities Notes to the financial statements 14. Intangible assets $million $million Goodwill at cost 5,341 5,398 Customer related and other intangible assets at cost Less: Accumulated amortisation ,966 5,693 Average Class of asset amortisation rate Customer related and other intangible assets at cost 13% 13% Reconciliations Reconciliations of the carrying amounts of each class of intangible asset are set out below: Customer related and other $million Goodwill intangibles Total 2012 Balance as at 1 July , ,693 NSW acquisition settlement adjustment (49) - (49) Other additions Transfers from development assets and property, plant and equipment Impairment loss (1) (17) (50) (67) Amortisation expense - (78) (78) Effect of movements in foreign exchange rates Balance as at 30 June , , Balance as at 1 July , ,796 Additions through business combinations (2) 2, ,874 Other additions Transfers from development assets and property, plant and equipment Amortisation expense - (51) (51) Effect of movements in foreign exchange rates (23) (2) (25) Balance as at 30 June , ,693 (1) Impairment losses of $50 million in respect of the consolidated entity's portfolio of wind development opportunities and $17 million in respect of the consolidated entity's 50 per cent interest in the Worsley Generation plant have been recognised at 30 June Refer to note 2(b) for details. (2) Restated on finalisation of acquisition accounting relating to NSW Government energy assets (refer note 25(d)). 53

57 Origin Energy Limited and Controlled Entities Notes to the financial statements 14. Intangible assets (continued) $million $million Impairment tests for cash-generating units containing goodwill The following cash-generating units have carrying amounts of goodwill: Retail 4,735 4,783 Contact Energy Generation Other 3 3 5,341 5,398 Retail cash-generating unit The impairment test for the Retail cash-generating 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 the consolidated entity's five-year business plan for the Retail cashgenerating unit 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. The consolidated entity'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 shortterm and long-term customer churn. The cash flow projections are discounted using a pre-tax discount rate of 12.2 per cent (2011: 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 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. Gross margin per customer Other operating costs per customer 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. Generation cash-generating unit The impairment test for the Generation 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 the consolidated entity's five-year business plan for the Generation cash-generation unit 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 (2011: 12.2 per cent). Contact Energy cash-generating unit The Contact Energy goodwill relates to Origin Energy's acquired 53.0 per cent ownership interest in Contact Energy Limited. The impairment test for the Contact Energy goodwill is based on the value in use of the Contact Energy business, applying a discounted cash flow methodology. The cash flow projections are discounted using a pre-tax discount rate of 12.5 per cent (2011: 12.5 per cent). The valuation considers the longer-term value in use for the Contact Energy cash-generating unit. 54

58 Origin Energy Limited and Controlled Entities Notes to the financial statements 15. Tax assets Note $million $million Current Income tax receivable - 2 Non-current Recognised deferred tax assets Deferred tax assets are attributable to the following: Accrued expenses not incurred for tax Employee benefits Acquired environmental scheme certificate purchase obligations Acquired energy purchase obligations Provisions Financial instruments at fair value Available-for-sale financial assets 4 4 Inventories 5 5 Tax value of carry-forward tax losses recognised Petroleum resource rent tax 16 - Other items Tax assets Set-off of tax 19 (669) (731) Net tax assets - - Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items: Revenue losses Capital losses Petroleum resource rent tax (net of income tax) 1,027 - GenTrader finance lease asset 61 5 Acquisition transaction costs Investment in joint venture 28 - Intangible assets 19-1, Australia Pacific LNG Australia Pacific LNG (Origin s 42.5 per cent joint venture) is also subject to the Petroleum Resource Rent Tax legislation and has an unrecognised deferred tax asset balance of $2,426 million (100 per cent Australia Pacific LNG) at 30 June Any future recognition of this balance by Australia Pacific LNG will result in an increase in the consolidated entity s equity accounted investment in Australia Pacific LNG shown in note 11, rather than a deferred tax asset, as the consolidated entity equity accounts its 42.5 per cent interest. 55

59 Origin Energy Limited and Controlled Entities Notes to the financial statements 15. Tax assets (continued) Movement in temporary differences during the year Acquisition of Recognised in Recognised controlled $million Opening income in equity entities Closing 2012 Accrued expenses not incurred for tax 17 (5) Employee benefits Acquired environmental scheme certificate purchase obligations 32 (7) Acquired energy purchase obligations 118 (17) Provisions Financial instruments at fair value 121 (121) Available-for-sale financial assets Inventories Tax value of carry-forward tax losses recognised Petroleum resource rent tax Other items 48 (16) 5-37 Tax assets 731 (72) Set-off of tax (731) (669) Net tax assets Accrued expenses not incurred for tax Employee benefits Acquired environmental scheme certificate purchase obligations 23 (5) Acquired energy purchase obligations - (6) Provisions 119 (3) (5) Financial instruments at fair value Available-for-sale financial assets 3 3 (2) - 4 Inventories Tax value of carry-forward tax losses recognised 193 (35) (15) Other items Tax assets (2) Set-off of tax (326) (731) Net tax assets 88-56

60 Origin Energy Limited and Controlled Entities Notes to the financial statements 16. Trade and other payables $million $million Current Trade payables and accrued expenses 2,006 1,931 Acquired energy purchase obligations Acquired environmental certificate purchase obligations ,063 2,020 Non-current Acquired energy purchase obligations Acquired environmental certificate purchase obligations Other payables Interest-bearing liabilities Trade payables of the consolidated entity's operations denominated in currencies other than the functional currency of the operations comprise $9 million of trade payables denominated in Australian dollars (2011: $2 million), $3 million of trade payables denominated in Euros (2011: $3 million) and $24 million of trade payables denominated in US dollars (2011: $19 million). Interest-bearing liabilities Current Bank overdrafts - unsecured - 4 Bank loans - secured Bank loans - unsecured Capital market borrowings - unsecured Lease liabilities - secured Non-current Bank loans - secured Bank loans - unsecured 2,022 1,857 Capital market borrowings - unsecured 3,430 2,036 Lease liabilities - secured 5 5 5,734 4,193 Refer to note 29 for further information regarding interest-bearing liabilities. Interest rates 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 5.81 per cent per annum (2011: 1.20 per cent to 7.67 per cent per annum at a weighted average of 5.80 per cent per annum). Refer to note 29(c)(iv) Financial risk factors - interest rate risk (cash flow and fair value), for a summary of interest rate risks. 57

61 Origin Energy Limited and Controlled Entities Notes to the financial statements 18. Other financial liabilities, including derivatives Note $million $million Current Derivative financial instruments Loan from Australia Pacific LNG joint venture associated entity 1,262 1,731 Environmental scheme surrender obligations Other financial liabilities 5 2 1,684 2,217 Non-current Derivative financial instruments Loan from Australia Pacific LNG joint venture associated entity 1,147 1, Tax liabilities 1,482 2,282 Current Provision for income tax 71 2 Non-current Recognised deferred tax liabilities Deferred tax liabilities are attributable to the following: Property, plant and equipment (1) 1, Exploration, evaluation and development assets Financial instruments at fair value 44 - Investments in associates 6 19 Unbilled receivables Other items Tax liabilities 1,743 1,586 Set-off of tax 15 (669) (731) Net tax liabilities 1, At 30 June 2012 a deferred tax liability balance of $1,723 million (2011: $1,569 million) for temporary differences of $5,741 million (2011: $5,230 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. (1) Restated on finalisation of acquisition accounting relating to NSW Government energy assets (refer note 25(d)). 58

62 Origin Energy Limited and Controlled Entities Notes to the financial statements 19. Tax liabilities (continued) Movement in temporary differences during the year Recognised Acquisition of in income Recognised controlled $million Opening statement in equity entities Closing 2012 Property, plant and equipment ,089 Exploration, evaluation and development assets 353 (9) Financial instruments at fair value Investments in associates 19 (16) 3-6 Unbilled receivables Other items 16 (6) Deferred tax liabilities 1, ,743 Set-off of tax (731) (669) Net deferred tax liabilities 855 1, Property, plant and equipment (43) Exploration, evaluation and development assets 401 (48) Financial instruments at fair value 9 (9) Investments in associates 23 (1) (3) - 19 Unbilled receivables Discounted receivables 4 (4) Other items 43 (32) Deferred tax liabilities 1, (46) 265 1,586 Set-off of tax (326) (731) Net deferred tax liabilities

63 Origin Energy Limited and Controlled Entities Notes to the financial statements 20. Provisions Note $million $million Current Employee benefits Restoration, rehabilitation and dismantling Onerous contracts 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: Restoration rehabilitation Onerous and $million contracts dismantling Other Balance as at 1 July Provisions recognised Provisions released - (14) (8) Payments/utilisation (98) (1) (6) Impact of discounting expense Transfer to held for sale 10 - (16) - Effect of movements in foreign exchange rates Balance as at 30 June Nature and purpose of provisions Employee benefits The provision for employee benefits predominantly 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 Transitional Services Agreement (TSA) covering customer related services in respect of the acquired NSW retail businesses; onerous property leases for premises held by the consolidated entity; and other onerous contract arrangements. 60

64 Origin Energy Limited and Controlled Entities Notes to the financial statements 21. Employee benefits Note $million $million Labour related expenses Wages and salaries (575) (440) Annual leave expense (46) (37) Long service leave expense (11) (9) Employee share plan (refer note 33) (3) (4) Executive share-based payments expense (refer note 33) (22) (14) Net gain on defined benefit superannuation fund assets 21(f) 1 1 Contributions to defined contribution superannuation funds (52) (37) (708) (540) (a) Employee superannuation funds At 30 June 2012, 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. Defined benefits superannuation plan 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 (14) (2) Net liability in the statement of financial position 20 (14) (2) (c) Reconciliations Reconciliation of the present value of the defined benefit obligation Balance at 1 July Current service cost 2 2 Interest cost 2 2 Actuarial losses/(gains) 10 (2) Benefits paid (6) (4) Balance at 30 June

65 Origin Energy Limited and Controlled Entities Notes to the financial statements 21. Employee benefits (continued) $million $million (c) Reconciliations (continued) Reconciliation of the fair value of plan assets Balance at 1 July Expected return on plan assets 3 3 Actuarial (losses)/gains (2) 2 Contributions by Origin Energy companies 1 1 Benefits paid (6) (4) Balance at 30 June (d) Categories of plan assets The percentage invested in each class of asset at reporting date is as follows: per cent per cent Australian equities International equities Fixed income Property Growth alternatives 8 8 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 2 Expected return on plan assets - gain (3) (3) 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 Losses/(gains) recognised during the period 13 (4) 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 the correlations of the investment returns between asset classes. The returns used for each asset class are net of investment tax and investment fees. The expected return on assets assumption for pension assets has not been reduced for investment tax, as earnings on the assets supporting the pension liability are tax free. 62

66 Origin Energy Limited and Controlled Entities Notes to the financial statements 21. Employee benefits (continued) (i) Actual return on plan assets $million $million - 5 (j) Principal actuarial assumptions per cent p.a. per cent p.a. 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 (14) (2) (6) (3) 7 Experience adjustments loss/(gain) - plan liabilities 1-2 (8) (6) Experience adjustments loss/(gain) - plan assets 3 (2) (1) The consolidated entity expects $1 million in contributions to be paid to the defined benefit plan during the year ended 30 June

67 Origin Energy Limited and Controlled Entities Notes to the financial statements 22. Share capital Note $million $million Issued and paid-up capital 1,089,564,638 (2011: 1,064,507,259) ordinary shares, fully paid 4,345 4,029 Ordinary share capital at the beginning of the period 4,029 1,683 Shares issued: 23,664,131 (2011: 3,929,332) shares in accordance with the Dividend Reinvestment Plan ,393,248 (2011: 2,809,000) shares in accordance with the Long Term Incentive Plan Nil (2011: 86,875,125) shares under an institutional rights issue (1) - 1,112 Nil (2011: 90,224,930) shares under a retail rights issue (1) - 1,155 Total movements in ordinary share capital 316 2,346 Ordinary share capital at the end of the period 4,345 4,029 (1) The terms of the prior year 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 were adjusted for the bonus element of the rights issues being 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. 64

68 Origin Energy Limited and Controlled Entities Notes to the financial statements 23. Reserves $million $million Share-based payments Foreign currency translation (171) (239) Hedging (92) (123) Available-for-sale (5) - (186) (301) 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 33). 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 or loss when the associated hedged transactions affect profit or loss or as part of the cost of an asset if nonmonetary. 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 or loss when the associated investments/settlement residue agreements are sold/settled or impaired. 65

69 Origin Energy Limited and Controlled Entities Notes to the financial statements 24. Other comprehensive income 2012 $million Foreign currency translation reserve Hedging reserve Available-forsale reserve Retained earnings Non-controlling interests Total other comprehensive income Gain on translation of assets and liabilities of overseas controlled entities Net loss on hedge of net investment in foreign operations taken to equity (37) (37) Cash flow hedges - effective component recognised in equity, net of tax (52) (47) 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)/gain, net of tax (6) Fair value adjustment on available-for-sale financial assets - - (5) - (5) Actuarial loss on defined benefit superannuation plan, net of tax (9) - (9) (Loss)/gain on transfer of interest in entities under common control (2) 2 - Other comprehensive income (5) (11)

70 Origin Energy Limited and Controlled Entities Notes to the financial statements 24. Other comprehensive income (continued) 2011 $million Foreign currency translation reserve Hedging reserve Available-forsale reserve Retained earnings Non-controlling interests Total other comprehensive income Loss on translation of assets and liabilities of overseas controlled entities (178) (65) (243) Net gain on hedge of net investment in foreign subsidiaries 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 Cash flow hedges - foreign currency translation (loss)/gain, net of tax (2) Fair value adjustment on available-for-sale financial assets Actuarial gain on defined benefit superannuation plan, net of tax (Loss)/gain on transfer of interest in entities under common control (8) 8 - Other comprehensive income (107) (16) 7 (5) (58) (179) 67

71 Origin Energy Limited and Controlled Entities Notes to the financial statements 25. Notes to the statement of cash flows Note $million $million (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: Cash and cash equivalents Bank overdrafts 17 - (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 1, 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 (Increase)/decrease in fair value of financial instruments (166) 201 Net financing costs Increase in tax balances Gain on dilution of the consolidated entity's interest in equity accounted investees and sale of assets (464) - Non-cash share of net profits of equity accounted investees (39) (45) Unrealised foreign exchange gain (23) - Changes in assets and liabilities, net of effects from acquisitions/disposals: Receivables (222) (283) Inventories 7 20 Payables Provisions (54) 2 Other (141) (205) Total adjustments 764 1,153 Net cash provided by operating activities 1,822 1,401 68

72 Origin Energy Limited and Controlled Entities Notes to the financial statements 25. Notes to the statement of cash flows (continued) (d) Business combinations 2012 There were no business combinations during the year ending 30 June During the year the consolidated entity received a working capital settlement amount of $75 million in respect of the acquisition of the retail businesses of Integral Energy and Country Energy. The acquisition accounting for the acquisition of the NSW Government energy assets is now completed and has resulted in an adjustment to the 2011 statement of financial position and corresponding notes. The changes were to goodwill (note 14) and deferred tax liability (note 19) for $260 million 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 was 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) were recognised within expenses in the income statement and were recorded as an item excluded from segment result and underlying consolidated profit (refer note 2(b)). 69

73 Origin Energy Limited and Controlled Entities Notes to the financial statements 26. Auditors' remuneration $'000 $'000 Audit and review services by: Auditors of the company (KPMG) Audit and review of the financial reports 3,212 3,338 3,212 3,338 Other auditors (1) Audit and review of the financial reports ,278 3,412 Other services by: Auditors of the company (KPMG) In relation to other assurance, taxation and due diligence services 929 1,131 Other auditors (2) In relation to other assurance services 3,857 5,303 4,786 6,434 8,064 9,846 (1) Other auditors audit financial reports of certain controlled entities located in various Pacific Island countries. (2) Includes amounts for internal audit, taxation, advice on acquisition transactions, information technology, risk and quality assurance advice and accounting advice. 27. Contingent liabilities and assets Details of contingent liabilities where the probability of future payments is not considered remote are set out below. 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. Details of contingent liabilities and contingent assets, which the directors consider should be disclosed, have also been included $million $million Bank guarantees - unsecured Letters of credit - unsecured The bank guarantees and letters of credit disclosed have primarily been provided by the consolidated entity in favour of the Australian Electricity Market Operator Limited to support its obligations to purchase electricity from the National Electricity Market. 70

74 Origin Energy Limited and Controlled Entities Notes to the financial statements 27. Contingent liabilities and assets (continued) At 30 June 2012, the consolidated entity holds a 42.5 per cent interest in Australia Pacific LNG, which has bank guarantees of $178 million (the consolidated entity's 42.5 per cent share $76 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. A process has commenced amongst ConocoPhillips, Sinopec, Australia Pacific LNG and the consolidated entity to amend each Sponsor s share in the guarantees to reflect Sinopec s 25 per cent holding in Australia Pacific LNG. These are outlined in note 39. 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 as well as audits and reviews by government or regulatory bodies. Any liabilities arising from such lawsuits and claims, or potential claims arising from audits or reviews, are not expected to have a material adverse effect on the consolidated financial statements. The consolidated entity, as a participant in certain joint ventures, is liable for a share of all liabilities incurred by these joint ventures in proportion to its equity interest in them. In some circumstances, the consolidated entity may incur more than its proportionate share of such liabilities, but will have the right to recover the excess liability from the other joint venture participants. The consolidated entity has provided guarantees for certain contractual commitments of its joint ventures associated with capital projects. The consolidated entity has disclosed its share of these contractual commitments in note 28. The consolidated entity is party to deferred contingent consideration payments relating to past business combinations contingent on future events and performance related triggers. Current assessment of these triggers and future events indicates that any payment is considered remote. 71

75 Origin Energy Limited and Controlled Entities Notes to the financial statements 27. Contingent liabilities and assets (continued) The company has outstanding claims in respect of availability liquidated damages including those arising from the fires at the Eraring Power Station in October 2011 and March The company has not recorded an asset in respect of these matters as the claims are currently in progress. Deed of cross guarantee Under the terms of ASIC Class Order (CO) 98/1418 (as amended by CO 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 crossguarantee of liabilities with those controlled entities (refer note 31). 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 2012, are set out in note

76 Origin Energy Limited and Controlled Entities Notes to the financial statements 28. 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 ,099 1,541 Joint venture commitments (2) Share of exploration, development and capital expenditure commitments not provided for and payable: Not later than one year 2,841 1,019 Later than one year but not later than five years 2,868 1,167 Later than five years 6 8 5,715 2,194 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 1,859 1,912 2,808 2,731 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. (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 in (2) Included in the joint venture commitments above is an amount of $5,251 million (2011: $1,844 million) relating to the consolidated entity's 42.5 per cent (2011: 50 per cent) share of Australia Pacific LNG s commitments. The consolidated entity has recorded a $2,409 million (2011: $3,576 million) loan payable to Australia Pacific LNG (refer to note 18) which may be called upon by Australia Pacific LNG to fund its commitments. 73

77 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. 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 held for trading and include derivative instruments which are not designated as hedges for accounting purposes with the exception of environmental scheme certificates, which are not required to be surrendered within 12 months from balance date. 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. 74

78 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (a) Financial assets and liabilities (continued) 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-forsale 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 'expenses' 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 within 'expenses'. 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 1. 75

79 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. 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 18. Movements of the hedging reserve in shareholders equity are shown in the statement of changes in equity and note 24. 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 expenses. 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 'expenses'. 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 immeditately in the income statement within 'expenses'. 76

80 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (b) Derivative financial instruments and hedging activities (continued) Cash flow hedges (continued) Amounts accumulated in equity are transferred to 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 transferred to 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 expenses and disclosed in the 'increase/(decrease) in fair value of financial instruments' (note 3(b)). (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. 77

81 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (c) Financial risk management (continued) (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 controlled entity 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 per cent 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 Financial Instruments: Recognition and Measurement requirements and trade receivables and payables denominated in foreign currencies. In addition to the impact on 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

82 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (c) Financial risk management (continued) Price risk The consolidated entity is exposed to carbon, equity securities and 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 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. The following table summarises the impact of a 10 per cent increase/decrease of the relevant forward prices (for commodities and carbon) 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 Equity securities quoted price 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. 79

83 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (c) Financial risk management (continued) (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 International Swaps and Derivative Association (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 2012 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 2012 and 30 June 2011: $million $million Less than one month One to three months Three to 12 months 1,619 2,285 One to five years 5,704 5,818 Over five years 3,073 1,583 80

84 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (c) Financial risk management (continued) (iii) Liquidity risk (continued) Included in the balances from the previous table is the $2,409 million (2011: $3,576 million) loan from Australia Pacific LNG ($1,262 million current within three to twelve months and $1,147 million non-current within one to five years; 2011: $1,731 million current within three to twelve months and $1,845 million non-current within one to five years). The consolidated entity has $4,189 million (2011: $3,562 million) of undrawn facilities (refer note 29(e)) which is immediately available. (iv) Interest rate risk (cash flow and fair value) The consolidated entity s income and operating cash flows are substantially independent of changes in market interest rates. The consolidated entity s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the consolidated entity to cash flow interest rate risk. Borrowings issued at fixed rates expose the consolidated entity to fair value interest rate risk. The consolidated entity s risk management policy is to manage interest rate exposures using Profit at Risk and Value at Risk methodologies using 95% statistical confidence levels. Exposure limits are set to ensure that the consolidated entity is not exposed to excess risk from interest rate volatility. The consolidated entity manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Under the interest rate swaps, the consolidated entity agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts. The following table summarises the impact of a 100 basis point increase/decrease of the relevant interest rates at the reporting date on the consolidated entity s post-tax profit for the year and on other components of equity. All variables other than the relevant primary risk variable identified are held constant in the analysis. Impact on post-tax profit Impact on equity / - ($million) + / - ($million) Interest rates (16) (12) At 30 June 2012, if interest rates at that date had been higher/lower by 100 basis points 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 previous table. 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 on 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. 81

85 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (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. The consolidated entity anticipates meeting future financing requirements through operating cash flows, periodically raising long-term and short-term bank and capital markets debt, and utilising the dividend reinvestment plan and other capital management tools, including equity offerings as may be required from time to time. The consolidated entity aims to maintain a diversified debt portfolio that enables access to a range of debt markets and specific instruments to meet on-going business requirements and investment opportunities. To date, the consolidated entity has financed operations and developments primarily through cash flows from operations, borrowings from banks and proceeds from issuances of equity and debt securities. The consolidated entity intends to continue to fund business operations, future acquisitions and developments from existing financial resources and may also raise additional funds through debt or equity offerings or sales or other dispositions of assets in the future to finance all or a portion of future developments or for other purposes. The consolidated entity assesses the capital structure and gearing policies on an on-going basis in light of overall business objectives and prevailing local and global economic conditions. The consolidated entity's objective is to maintain an appropriate capital structure with sufficient financial headroom to allow the business to absorb any short term shocks to business performance. The consolidated entity seeks to retain the flexibility to access a range of debt and equity markets to ensure sufficient liquid funds are available to meet financial commitments as required. Key factors considered in determining our capital structure and funding strategy at any point in time include expected operating cash flows, capital expenditure plans, maturity profile of existing debt facilities, dividend policy and the ability to access funding from banks, capital markets, and other sources. 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. 82

86 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (d) Capital risk management (continued) 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 5,879 4,788 Fair value adjustments on borrowings in hedge relationships Less: Cash and cash equivalents (357) (728) Adjusted net debt 5,738 4,283 Total equity 14,458 13,516 Less: Reserves (1) Total capital (excluding reserves (1) ) 20,293 17,922 Total capital (including reserves (1) ) 20,196 17,799 Gearing ratio (excluding reserves (1) ) 28% 24% Gearing ratio (including reserves (1) ) 28% 24% (1) Represents reserves attributable to fair value adjustments on financial instruments. (e) Interest-bearing liabilities Bank loans - unsecured 2,071 2,185 Bank loans - secured Capital markets borrowings - unsecured 3,507 2,282 Bank overdrafts - unsecured - 4 Total borrowings 5,872 4,781 Lease liabilities 7 7 Total interest-bearing borrowings 5,879 4,788 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 1,749 2,644 Six to twelve months One to five years 2,505 1,171 Over five years 1, ,872 4,781 The remaining contractual maturity of non-current borrowings is as follows: One to two years Two to five years 2,443 2,659 Over five years 2,522 1,321 Total non-current borrowings 5,729 4,188 Lease liabilities 5 5 Total interest-bearing borrowings 5,734 4,193 The carrying amounts and fair values of the non-current borrowings are as follows: Carrying value Fair value $million $million $million $million Bank loans - unsecured 2,022 1,857 2,022 1,857 Bank loans - secured Capital markets borrowings - unsecured 3,430 2,036 3,484 2,092 5,729 4,188 5,783 4,244 83

87 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (e) Interest-bearing liabilities (continued) The carrying amounts of the consolidated entity s borrowings are exposed to the following currencies: $million $million Australian dollar 2,861 2,509 New Zealand dollar 1,353 1,162 US dollar 1, Euro ,872 4,781 The consolidated entity has the following committed undrawn floating rate borrowing facilities: Expiring within one year Expiring beyond one year 3,450 3,518 4,189 3,562 On 24 May 2012, the consolidated entity announced that Australia Pacific LNG (an equity accounted joint venture of the consolidated entity) had secured US$8.5 billion through a project finance facility. At 30 June 2012 the project finance facility was undrawn and subject to the completion of certain conditions precedent. Once the conditions precedent are satisfied and the project finance facility is in place, the consolidated entity will guarantee its proportionate share of amounts drawn down under the facility during the construction phase of the project and it will also reduce funding required from the consolidated entity for the project. At 30 June 2012 the facility was undrawn and no amounts had been guaranteed by the consolidated entity in respect of the project finance facility. (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: Gain/(loss) on the hedging instruments 30 (110) (Loss)/gain on the hedged item attributable to the hedge risk (28) (1) Cash flow hedges The effective portion of the losses on cash flow hedges recognised in the cash flow hedge reserve (pre tax) (65) (168) The losses transferred from the cash flow hedge reserve to sales 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 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 (3) (1) 84

88 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (f) Hedge accounting (continued) 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 2012 totalled $37 million loss (2011: $73 million gain). The ineffectiveness recognised in the income statement from net investment hedges for the year to 30 June 2012 totalled $Nil (2011: $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 2012 totalled $123 million gain (2011: $134 million loss). Fair value of financial instruments designated as hedging instruments Assets Liabilities $million $million $million $million Fair value hedges (1) - 1 (170) (200) Cash flow hedges (2) (311) (403) Net investment hedges (3) - - (1,363) (736) (1) (2) (3) The consolidated entity designates certain cross currency interest rate swaps in fair value hedge relationships. 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. The consolidated entity designates certain foreign denominated borrowings in net investment hedge relationships. (g) Derivative financial instruments Assets Liabilities Notes $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 Other commodity derivatives , Total

89 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (g) Derivative financial instruments (continued) Interest rate swaps The aggregate notional principal amounts of the outstanding interest rate swap contracts at 30 June 2012 were $1,968 million (2011: $1,768 million). At 30 June 2012, the fixed interest rates vary from 1.20 per cent to 8.00 per cent (2011: 1.20 per cent to 7.67 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 and are fair valued through the income statement. The hedged anticipated interest payment transactions are expected to occur at various dates between one month and 12 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 2012 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 2012 and the year to 30 June 2011 no interest rate swaps were dedesignated. Cross currency interest rate swaps The aggregate notional principal amounts of the outstanding cross currency interest rate swap contracts at 30 June 2012 were $1,470 million (2011: $1,497 million). At 30 June 2012, the fixed interest rates vary from 6.25 per cent to 7.49 per cent (2011: 6.25 per cent to 7.49 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, or remain non-designated and are fair valued through the income statement. The hedged anticipated interest payment transactions are expected to occur at various dates between one month and 6 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 2012 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. Forward foreign exchange contracts The aggregate notional principal amounts of the outstanding forward foreign exchange contracts at 30 June 2012 were $78 million (2011: $258 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 3 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 2012 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 2012 and the year to 30 June 2011, no forward foreign exchange contracts were de-designated and all underlying forecast transactions remain highly probable to occur as originally forecast. 86

90 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (g) Derivative financial instruments (continued) Electricity derivatives The aggregate notional volumes of the outstanding electricity derivatives at 30 June 2012 were 232 million MWhs (2011: 224 million MWhs). Electricity derivatives are either designated in cash flow hedge relationships or remain non-designated and are fair valued through the income statement within 'increase/(decrease) in fair value of financial instruments' (note 3(b)). The hedged anticipated electricity purchase and sale transactions are expected to occur continuously for each half hour period throughout the next 17 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 2012 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 2012 and the year to 30 June 2011, 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 and dispatched from generators in any half hour period means that the actual purchase requirements and sales volume 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 or sale 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 2012 were 0.77 Mbbl (2011: 1.16 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 2012 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 2012 and the year to 30 June 2011, no hedges were de-designated and all underlying forecast transactions remain highly probable to occur as originally forecast. 87

91 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (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, overthe-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 these 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. 88

92 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. 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 2012 Note $million $million $million $million Available-for-sale financial assets Derivative financial assets Environmental scheme certificates Derivative financial liabilities 18 - (588) (4) (592) Environmental scheme certificates surrender obligations - 18 (160) - - (160) 412 (469) Available-for-sale financial assets Derivative financial assets Environmental scheme certificates Derivative financial liabilities 18 - (776) (17) (793) Environmental scheme certificates surrender obligations 18 (128) - - (128) 536 (486) 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: Balance as at 1 July 2011 Net gain from financial instruments at fair value through profit or loss Balance as at 30 June 2012 Financial assets held for trading Financial liabilities held for trading 152 (17) (4) 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. 89

93 Origin Energy Limited and Controlled Entities Notes to the financial statements 29. Financial instruments (continued) (h) Fair value estimation (continued) 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 Effect on profit or loss Favourable (Un-favourable) Favourable (Un-favourable) Derivative assets 254 (254) 142 (142) Derivative liabilities 3 (3) 2 (2) 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 2012 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. 90

94 Origin Energy Limited and Controlled Entities Notes to the financial statements 30. Acquisition and disposal of controlled entities 2012 Date of Interest acquisition acquired Carrying amount $million Net consideration paid $million Beneficial ownership South American Energy (Bermuda) Limited 3 Apr % 100% - - Energy Hydro Chile SpA 3 Apr % 100% The following entities were incorporated/registered during the period: No entities were registered during the year ended 30 June The following entities were deregistered during the period: No entities were deregistered during the year ended 30 June 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 Feb 2011 Origin Energy Chile Holdings Pty Limited 21 Feb 2011 Origin Energy Power Development Pty Ltd 10 Nov 2010 The following entities were deregistered during the period: No entities were deregistered during the year ended 30 June Controlled entities Name changes during the financial year: OCA Holdings Pty Ltd to Origin Energy Southern Africa Holdings Pty Ltd South American Energy (Bermuda) Limited to Origin Energy Hydro Bermuda Limited Energy Hydro Chile SpA to Origin Energy Hydro Chile SpA Name changes during the previous 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 91

95 Origin Energy Limited and Controlled Entities Notes to the financial statements 31. Controlled entities (continued) Incorporated in Ownership interest per cent Ownership interest per cent Origin Energy Limited NSW Origin Energy Finance Ltd Vic 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 Ltd Vic 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 Ltd NSW Origin Energy WA Pty Ltd < WA Origin Energy Services Ltd < SA OEL US Inc. USA

96 Origin Energy Limited and Controlled Entities Notes to the financial statements 31. Controlled entities (continued) Incorporated in Ownership interest per cent Ownership interest per cent 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 Republic of Origin LPG (Vietnam) LLC Vietnam Solomon Origin Energy Solomons Ltd Islands Origin Energy Cook Islands Ltd Cook Islands Origin Energy Vanuatu Ltd Vanuatu Origin Energy Leasing Ltd Vanuatu Western Origin Energy Samoa Ltd Samoa American Origin Energy American Samoa Inc Samoa 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 Origin Energy Southern Africa 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 Ltd Partnership NSW Origin Energy Vietnam Pty Ltd Vic

97 Origin Energy Limited and Controlled Entities Notes to the financial statements 31. Controlled entities (continued) Incorporated in Ownership interest per cent Ownership interest per cent 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 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 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 Ltd NSW Origin Energy Chile S.A. Chile Origin Energy Geothermal Chile Limitada Chile Origin Energy Geothermal Singapore Pte Ltd Singapore

98 Origin Energy Limited and Controlled Entities Notes to the financial statements 31. Controlled entities (continued) Incorporated in Ownership interest per cent Ownership interest per cent Origin Renewable Energy Pty Ltd (continued) Vic 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 Origin Energy Hydro Bermuda Limited Bermuda Origin Energy Hydro Chile SpA Chile < 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 27 and 36). 32. Interest in joint venture operations The consolidated entity holds interests in a number of unincorporated joint ventures covering the following major assets: Cooper Basin Bass Basin Kupe Otway Basin Surat Basin Perth Basin Worsley Power Plant Geodynamics South East Asia joint ventures The principal activities of these joint ventures are oil and/or gas exploration, development and production, power generation, and geothermal power technology. 95

99 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments Origin Energy Limited Long Term Incentive Plan The company's Long Term Incentive (LTI) Plan was approved by the Board on 23 May 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 Plan covers Options and Share Rights (collectively 'securities'). Share Rights are currently in the form of Performance Share Rights (PSRs) and Deferred Share Rights (DSRs). The fair value of the securities granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date using a Black-Scholes methodology with a Monte Carlo simulation model, taking into account market performance conditions (except for DSRs which have a service and personal performance hurdle rather than market hurdle) and is recognised over the vesting period during which the employees become unconditionally entitled to the securities. The amount recognised as an expense is adjusted to reflect the actual number of securities that vest except where forfeiture of options and PSRs is due to market related conditions. (a) Senior Executive Options 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 over a period of at least five but no more than fifteen trading days 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 note 33(f). Options granted under the plan do not carry any dividend or voting rights. During the year, the company issued 4,969,944 options (2011: 2,230,143 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 company has recognised $8,354,365 (2011: $6,334,538) 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 33(f). 96

100 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments (continued) (b) Senior Executive 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 LTI 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 PSR table in note 33(g). PSRs granted under the plan do not carry any dividend or voting rights. During the year, the company issued 2,118,256 PSRs (2011: 838,116). The company has recognised $10,171,657 (2011: $6,218,317) as an expense during the year. Details of PSRs outstanding at the beginning and the end of the financial year and movements during the year are provided in the Senior Executive Performance Share Rights table in note 33(g). (c) Senior Executive Deferred Share Rights DSRs granted under the plan entitle the holder to subscribe for one fully paid ordinary share per DSR, or such other number as adjusted in accordance with the terms of the LTI Plan. The DSRs are unlisted. The exercise price of the DSRs is nil unless otherwise determined by the Board. DSRs vest in independent equal thirds on satisfaction of the vesting conditions at each vesting date. Any DSRs that have not vested on their specific vesting date will lapse. The vesting conditions that must be met prior to a DSR becoming exercisable may vary by DSR tranche and are discussed in the footnotes to the Deferred Share Rights table in note 33(h). DSRs granted under the plan do not carry any dividend or voting rights. During the year, the company issued 161,448 DSRs (2011: nil). The fair value of the DSRs is recognised as an employee expense with a corresponding increase in equity. The company has recognised $574,995 (2011: $nil) as an expense during the year. 97

101 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments (continued) (d) Employee Share Plan The Board approved the Origin Energy Employee Share Plan (Origin ESP) on 20 March All fulltime and permanent part-time employees of the consolidated entity 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 the consolidated entity, based on performance hurdles established each year. 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 employees of the consolidated entity 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 the consolidated entity 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. 98

102 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments (continued) (d) Employee Share Plan (continued) No shares were awarded under the employee share plan during the year ended 30 June The following table details the shares awarded under the employee share plans for the year ended 30 June 2011: 2011 Date shares granted Number of shares granted Cost per share (2) Total cost $' September ,412 $ , September 2010 (1) 7,272 $ ,684 2,736 (1) (2) 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. The cost per share represents the weighted average market price of the company's shares. The number of shares held in trust at 30 June 2012 is 14,784 (2011: 14,844) of which 3,252 (2011: 3,312) is allocated to employees and 11,532 (2011: 11,532) is held in trust under the New Zealand ESP. During the year ended 30 June 2012, 60 shares vested to employees (2011: 60 shares) and nil shares (2011: nil shares) vested to the trust. (e) Contact Energy Share Based payments The company's 53.0 per cent controlled entity, Contact Energy Limited, has an Employee Long Term Incentive Scheme for participating employees whereby the value of the long-term incentive award is allocated as a mix of share options and PSRs (options with an exercise price of zero), under the Share Option Scheme. Contact also previously issued restricted shares under a Restricted Share Plan. Under the Share Option Scheme the share options and PSRs will only be exercisable to the extent that the relevant performance hurdles are met (the hurdle is a comparison of Contact's total shareholder return (TSR) relative to the TSR of a reference group comprising companies in the NZX50 index over the relevant period, commencing on the effective grant date). The consolidated entity has recognised $2,668,415 (2011: $2,236,913) as an expense during the year. 99

103 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments (continued) (f) Summary of senior executive options 2012 Exercise Fair value of Hurdle price options at price First exercise per measurement per Balance as at Grant date date Expiry date option date share 1 July 2011 Issued Exercised (2) Forfeited Balance as at 30 June 2012 Vested as at 30 June 2012 (1) 11 Sep Sep Sep 2011 $6.04 (3) $ , , Jun Jun Jun 2012 $8.51 (3) $2.25 (1) 50,000-50, Sep Sep Dec 2012 $9.86 (3) $2.51 (1) 1,085, , , , Sep Sep Sep 2012 $9.86 (3) $2.57 (1) 300, , , Sep Sep Dec 2013 $15.84 (3) $4.49 (1) 1,233, ,000 1,161, , Sep Sep Dec 2014 $14.58 (3) $4.48 (1) 1,177, ,500 1,056,500-6 Nov Nov Feb 2015 $15.47 (3) $4.30 (1) 412, , May May Aug 2015 $14.89 (3) $4.38 (1) 11, , Oct Oct Dec 2015 $14.91 (3) $4.23 (1) 2,085, ,128 1,933, Jun Oct Dec 2015 $14.91 $4.23 (1) 106, , Oct Apr Jun 2016 $13.01 $2.97 (4) (1) - 174, , Oct Oct Jan 2017 $13.01 $3.04 (5) (1) - 4,433, ,595 4,287, Apr Apr Jul 2017 $12.91 $2.00 (6) (1) - 362, ,570-7,382,127 4,969,944 1,241, ,223 10,621,448 2,074,534 Key management personnel (7) 2,708,538 1,471, ,000-3,968, ,894 Non-key management personnel 4,673,589 3,498,785 1,030, ,223 6,652,751 1,096,640 7,382,127 4,969,944 1,241, ,223 10,621,448 2,074,534 Refer to page 102 for footnotes. 100

104 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments (continued) (f) Summary of senior executive options (continued) 2011 Exercise Fair value of Hurdle price options at price First exercise per measurement per Balance as at Grant date date Expiry date option date share 1 July 2010 Issued Exercised (2) Forfeited Balance as at 30 June 2011 Vested as at 30 June Sep Sep Sep 2010 $7.21 $ Sep Sep Sep 2011 $6.04 (3) $ Jun Jun Jun 2012 $8.51 (3) $ Sep Sep Dec 2012 $9.86 (3) $ Sep Sep Sep 2012 $9.86 (3) $ Sep Sep Dec 2013 $15.84 (3) $ Sep Sep Dec 2014 $14.58 (3) $ Nov Nov Feb 2015 $15.47 (3) $ May May Aug 2015 $14.89 (3) $ Oct Oct Dec 2015 $14.91 (3) $ Jun Oct Dec 2015 $14.91 $4.23 (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) 1,433,000-1,386,000 47, ,370, , , ,000 50, ,000 50,000 1,649, ,000 46,000 1,085,000 1,085, , , ,000 1,274, ,000 1,233,500-1,213, ,000 1,177, , ,000-11, , ,124,143-39,116 2,085, , ,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 2,357,000 Refer to page 102 for footnotes. 101

105 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments (continued) (f) Summary of senior executive options (continued) (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 (2) The weighted average share price during the year ended 30 June 2012 was $13.67 (2011: $15.97). (3) Exercise prices have been adjusted to reflect the impact of the rights issue in March and April (4) The inputs used to measure the fair value of options granted during the year ended 30 June 2012 were a weighted average share price of $14.28, an exercise price of $13.01, expected volatility of 26.4 per cent, dividend yield of 3.50 per cent and a risk free rate of 3.96 per cent derived from the yield on Australian Government Bonds of appropriate term. (5) The inputs used to measure the fair value of options granted during the year ended 30 June 2012 were a weighted average share price of $14.28, an exercise price of $13.01, expected volatility of 26.4 per cent, dividend yield of 3.50 per cent and a risk free rate of 4.03 per cent derived from the yield on Australian Government Bonds of appropriate term. (6) The inputs used to measure the fair value of options granted during the year ended 30 June 2012 were a weighted average share price of $13.09, an exercise price of $12.91, expected volatility of 24.0 per cent, dividend yield of 3.82 per cent and a risk free rate of 3.40 per cent derived from the yield on Australian Government Bonds of appropriate term. (7) Opening balances restated to reflect changes to key management personnel for the year ended 30 June

106 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments (continued) (g) Summary of Senior Executive Performance Share Rights (PSR) 2012 Exercise Fair value of Hurdle price PSRs at price First exercise per measurement per Balance as at Grant date date Expiry date PSR date share 1 July 2011 Issued Exercised Forfeited Balance as at 30 June 2012 Vested as at 30 June 2012 (1) 28 Sep Sep Dec 2012 Nil $ ,000-38, , , Sep Sep Dec 2013 Nil $11.38 (1) 503, ,848 1, , , Sep Sep Dec 2014 Nil $11.62 (1) 452, , ,295-6 Nov Nov Feb 2015 Nil $11.62 (1) 154, , May May Aug 2015 Nil $11.75 (1) 4, , Oct Oct Dec 2015 Nil $11.51 (1) 753, , , Jun Oct Dec 2015 Nil $11.51 (1) 38, , Oct Apr Apr 2016 Nil $10.39 (3) (1) - 42, , Oct Oct Oct 2016 Nil $10.31 (4) (1) - 1,976,961-54,706 1,922, Apr Apr Apr 2017 Nil $8.35 (5) (1) - 98, ,409-2,075,593 2,118, , ,900 3,926, ,421 Key management personnel (6) 801, , ,170, ,349 Non-key management personnel 1,273,642 1,750, , ,900 2,755, ,072 2,075,593 2,118, , ,900 3,926, ,421 Refer to page 105 for footnotes. 103

107 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments (continued) (g) Summary of Senior Executive Performance Share Rights (PSR) (continued) 2011 Exercise Fair value of Hurdle price PSRs at price First exercise per measurement per Balance as at Grant date date Expiry date PSR date share 1 July 2010 Issued Exercised Forfeited Balance as at 30 June 2011 Vested as at 30 June Sep Sep Dec 2012 Nil $ Nov Nov Feb 2013 Nil $ Sep Sep Dec 2013 Nil $ Sep Sep Dec 2014 Nil $ Nov Nov Feb 2015 Nil $ May May Aug 2015 Nil $ Oct Oct Dec 2015 Nil $ Jun Oct Dec 2015 Nil $11.51 (1) (1) (1) (1) (1) (1) (1) (1) 544, ,000 18, , , , , ,900 14,608 (2) - 16, , ,200 13,145 (2) - 13, , ,000 4,370 (2) ,370-4, (2) - - 4, ,793 (2) - 14, , , ,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, ,000 Refer to page 105 for footnotes. 104

108 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments (continued) (g) Summary of Senior Executive Performance Share Rights (PSR) (continued) (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 (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 2012 were a weighted average share price of $14.28, expected volatility of 26.4 per cent, dividend yield of 3.50 per cent and a risk free rate of 3.96 per cent derived from the yield on Australian Government Bonds of appropriate term. (4) The inputs used to measure the fair value of performance share rights granted during the year ended 30 June 2012 were a weighted average share price of $14.28, expected volatility of 26.4 per cent, dividend yield of 3.50 per cent and a risk free rate of 4.03 per cent derived from the yield on Australian Government Bonds of appropriate term. (5) The inputs used to measure the fair value of performance share rights granted during the year ended 30 June 2012 were a weighted average share price of $13.09, expected volatility of 24.0 per cent, dividend yield of 3.82 per cent and a risk free rate of 3.37 per cent derived from the yield on Australian Government Bonds of appropriate term. (6) Opening balances restated to reflect changes to key management personnel for the year ended 30 June

109 Origin Energy Limited and Controlled Entities Notes to the financial statements 33. Share-based payments (continued) (h) Summary of Senior Executive Deferred Share Rights (DSR) 2012 Grant date First exercise date Exercise Fair value of Hurdle price DSRs at price per measurement per Balance as at Expiry date DSR date share 1 July 2011 Issued Exercised Forfeited Balance as at 30 June 2012 Vested as at 30 June Oct Apr Apr 2013 Nil $13.56 (2) (1) - 11, , Oct Apr Apr 2014 Nil $13.10 (2) (1) - 11, , Oct Apr Apr 2015 Nil $12.60 (2) (1) - 11, , Oct Oct Oct 2013 Nil $13.33 (2) (1) - 35, , Oct Oct Oct 2014 Nil $12.85 (2) (1) - 35, , Oct Oct Oct 2015 Nil $12.33 (2) (1) - 35, , Apr Feb Feb 2014 Nil $12.36 (3) (1) - 7, , Apr Feb Feb 2015 Nil $11.90 (3) (1) - 7, , Apr Feb Feb 2016 Nil $11.42 (3) (1) - 7, , , ,448 - Key management personnel Non-key management personnel - 161, , , ,448 - (1) Deferred share rights (DSRs) vest in equal thirds (tranches) on satisfaction of the vesting conditions as detailed below: - Tranche 1 - continued employment until end of year 2 - Tranche 2 - continued employment until end of year 3 - Tranche 3 - continued employment until end of year 4 Vesting of DSRs is also subject to satisfactory performance during the period in which the DSRs are held. Satisfactory performance is defined in the company's performance management system as reviewed by line management and the Managing Director from time to time. (2) The inputs used to measure the fair value of performance share rights granted during the year ended 30 June 2012 were a weighted average share price of $14.28, expected volatility of 26.4 per cent and dividend yield of 3.50 per cent. (3) The inputs used to measure the fair value of performance share rights granted during the year ended 30 June 2012 were a weighted average share price of $13.09, expected volatility of 24.0 per cent and dividend yield of 3.82 per cent. 106

110 Origin Energy Limited and Controlled Entities Notes to the financial statements 34. Related party disclosures Associated entities Interests held in equity accounted entities are set out in note 11. 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 to note 11 for further information regarding these transactions. Refer to note 35 for key management personnel disclosures. 35. 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 There were no loans with key management personnel during the year. (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 and the Long Term Incentive 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 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. 107

111 Origin Energy Limited and Controlled Entities Notes to the financial statements 36. 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 27 and 31), after eliminating all transactions between parties to the Deed for the year ended 30 June $million $million Summarised consolidated statement of comprehensive income and retained profits Profit before income tax expense 1, Income tax expense Profit for the period 1, Other comprehensive income (9) (5) Total comprehensive income for the period 1, Retained earnings at the beginning of the period 8,342 8,473 Dividends paid (538) (442) Retained earnings at the end of the period 8,930 8,

112 Origin Energy Limited and Controlled Entities Notes to the financial statements 36. 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 4,152 3,876 Inventories Other financial assets, including derivatives Other assets Total current assets 5,347 5,274 Non-current assets Trade and other receivables Other financial assets, including derivatives 3,952 4,091 Investments accounted for using the equity method 5,816 5,402 Property, plant and equipment 5,176 4,934 Exploration and evaluation assets Intangible assets 5,186 4,895 Other assets Total non-current assets 20,337 19,547 Total assets 25,684 24,821 Current liabilities Trade and other payables 2,621 2,598 Interest-bearing liabilities Other financial liabilities, including derivatives 1,596 2,161 Tax liabilities 46 7 Provisions Total current liabilities 4,659 5,553 Non-current liabilities Trade and other payables 2,321 1,954 Interest-bearing liabilities 3,307 2,371 Other financial liabilities, including derivatives 1,339 2,127 Tax liabilities Provisions Total non-current liabilities 7,724 6,966 Total liabilities 12,383 12,519 Net assets 13,301 12,302 Equity Share capital 4,345 4,029 Reserves 26 (69) Retained earnings 8,930 8,342 Total equity 13,301 12,

113 Origin Energy Limited and Controlled Entities Notes to the financial statements 37. Earnings per share Earnings per share based on statutory profit Basic earnings per share 90.6 cents 19.6 cents Diluted earnings per share 90.4 cents 19.6 cents Earnings per share based on underlying consolidated profit Underlying basic earnings per share 82.6 cents 71.0 cents Underlying diluted earnings per share 82.4 cents 70.8 cents Weighted average number of shares used as the denominator Number Number Number of ordinary shares for basic earnings per share calculation pre adjusting for bonus element of the rights issue 1,081,691, ,201,286 Bonus element of rights issue - 25,540,613 Number of ordinary shares for basic earnings per share calculation 1,081,691, ,741,899 Effect of executive share options, performance share rights and deferred share rights on issue 2,408,440 2,880,456 Number of ordinary shares for diluted earnings per share calculation 1,084,100, ,622,355 Reconciliation of earnings used in calculating basic and diluted earnings per share based on statutory profit $million $million Profit for the period 1, Less: Profit attributable to non-controlling interests (78) (62) Earnings used in calculating earnings per share Refer to note 2(b) for a reconciliation of underlying consolidated profit used in calculating earnings per share based on underlying consolidated profit. 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, performance share rights and deferred share rights Share options, performance share rights and deferred share rights issued under the Long Term Incentive 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 Earnings per share During the year 1,998,371 (2011: 3,080,939) 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 33. There were 68,515 (2011: 292,000) shares issued as a result of the exercise of options and performance share rights between the reporting date and the completion of the financial report. 110

114 Origin Energy Limited and Controlled Entities Notes to the financial statements 38. Parent entity disclosures As at, and throughout the financial year ended 30 June 2012, the parent entity company of the consolidated entity was Origin Energy Limited. Origin Energy Limited $million $million Results of the parent entity Profit for the period Other comprehensive income, net of income tax 4 (23) Total comprehensive income for the period Financial position of the parent entity at period end Current assets 29,202 28,371 Non-current assets 1,436 1,541 Total assets 30,638 29,912 Current liabilities 20,565 20,122 Non-current liabilities 4,671 4,347 Total liabilities 25,236 24,469 Total equity of the parent entity comprising: Share capital 4,345 4,029 Share-based payments reserve Hedging reserve (31) (44) Retained earnings 1,011 1,400 Total equity 5,402 5,443 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 provided guarantees for certain contractual commitments of its joint ventures associated with capital projects. 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 controlled entities. Further details of the Deed of Cross Guarantee and the controlled entities subject to the deed, are disclosed in note 31 and note

115 Origin Energy Limited and Controlled Entities Notes to the financial statements 39. Subsequent events Final Investment Decision on the second train of the two train Australia Pacific LNG Pty Limited Incorporated Joint Venture CSG to LNG project and issue of shares to China Petroleum and Chemical Corporation On 4 July 2012 Australia Pacific LNG Pty Limited a 42.5 per cent owned and equity accounted incorporated joint venture of the consolidated entity, announced that a Final Investment Decision ('FID') on the second train of the two train CSG to LNG project had been approved. LNG from the previously announced first train is expected to be delivered in mid-2015, with LNG from the second train expected in early The total capital expenditure for the FID approved two train project (100 per cent Australia Pacific LNG) is estimated to be A$23 billion, including contingencies. This excludes expected expenditure on non-project costs associated with the domestic operations, pre-lng operating and maintenance costs and costs associated with the supply of gas to third party LNG projects. On 12 July 2012 Australia Pacific LNG issued new shares to China Petroleum and Chemical Corporation ( Sinopec ) resulting in Sinopec s equity holding increasing from 15 percent to 25 per cent. As a result of this new share issue, Origin's interest in Australia Pacific LNG has been diluted from 42.5 per cent to 37.5 per cent. Under the terms of the subscription agreement Sinopec paid net consideration to Australia Pacific LNG of US$1.4 billion. The completion of the share issue from Australia Pacific LNG to Sinopec will result in a dilution gain recorded in statutory profit for the consolidated entity of approximately A$0.4 billion for the year ended 30 June Commitments at 30 June 2012 will reduce by $618 million as Origin's share of the commitments and guarantees of the Australia Pacific LNG joint venture (refer notes 27 and 28) will be diluted from 42.5 per cent to 37.5 per cent following the issue of shares to Sinopec to increase Sinopec s interest in Australia Pacific LNG to 25 per cent. 112

116 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 2012 and of its performance, for the year ended on that date; and (ii) (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 1 in the consolidated financial statements. (c) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001 (Cth). 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 3 There are reasonable grounds to believe that the Company and the controlled entities identified in note 31 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 98/1418. 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: Kevin McCann, Chairman Director Sydney, 23 August

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119 Origin Energy Results for the year ended 30 June 2012 Management Discussion and Analysis Certain statements in this report are in the nature of forward looking statements, including statements of current intention, statements of opinion and predictions as to possible future events. Such statements are not statements of fact and there can be no certainty of outcome in relation to the matters to which the statements relate. These forward looking statements involve known and unknown risks, uncertainties, assumptions and other important factors that could cause the actual outcomes to be materially different from the events or results expressed or implied by such statements. Those risks, uncertainties, assumptions and other important factors are not all within the control of Origin and cannot be predicted by Origin and include changes in circumstances or events that may cause objectives to change as well as risks, circumstances and events specific to the industry, countries and markets in which Origin and its related bodies corporate, joint ventures and associated undertakings operate. They also include general economic conditions, exchange rates, interest rates, the regulatory environment, competitive pressures, selling price, market demand and conditions in the financial markets which may cause objectives to change or may cause outcomes not to be realised. None of Origin or any of its respective subsidiaries, affiliates and associated companies (or any of their respective officers, employees or agents) (the Relevant Persons) makes any representation, assurance or guarantee as to the accuracy or likelihood of fulfilment of any forward looking statement or any outcomes expressed or implied in any forward looking statements. The forward looking statements in this report reflect views held only at the date of this report. In addition, statements about past performance are not necessarily indicative of future performance. Subject to any continuing obligations under law or the ASX Listing Rules, Origin and the Relevant Persons disclaim any obligation or undertaking to disseminate after the date of this report any updates or revisions to any forward looking statements to reflect any change in expectations in relation to any forward looking statements or any change in events, conditions or circumstances on which such statements are based. All figures in this report relate to businesses of the Origin Energy Group (Origin, or the Company), being Origin Energy Limited and its controlled entities, for the year ended 30 June 2012 (this year or the current year) compared with the year ended 30 June 2011 (the prior year), except where otherwise stated. Origin s Full Year Financial Statements for the year ended 30 June 2012 are presented in accordance with Australian Accounting Standards. The Segment results, which are used to measure segment performance, are disclosed in Note 2 of the 2012 Full Year Financial Statements and are disclosed on a basis consistent with the information provided internally to the Managing Director. Origin s Statutory Profit contains a number of items that when excluded provide a different perspective on the financial and operational performance of the business. Income Statement amounts presented on an underlying basis such as Underlying Consolidated Profit, are non-ifrs financial measures, and exclude the impact of these items consistent with the manner in which the Managing Director reviews the financial and operating performance of the business. Each underlying measure disclosed has been adjusted to remove the impact of these items on a consistent basis. A detailed reconciliation and description of the items that contribute to the difference between Statutory Profit and Underlying Consolidated Profit is provided in Section 3.1. This report also includes certain other non-ifrs financial measures. These non-ifrs financial measures are used internally by management to assess the performance of Origin s business and make decisions on allocation of resources. Further information regarding the non-ifrs financial measures and other key terms used in this presentation is included in the Glossary in Appendix 6 (footnotes reference the first time a term is used). Non-IFRS measures have not been subject to audit or review. Origin Energy Limited ABN /60

120 A reference to Contact Energy is a reference to Origin s controlled entity (53.0% ownership) Contact Energy Limited in New Zealand. In accordance with Australian accounting standards, Origin consolidates Contact Energy within its result. A reference to Australia Pacific LNG or APLNG is a reference to Australia Pacific LNG Pty Ltd in which Origin had a 50% shareholding in until 9 August 2011, when completion of a share subscription agreement between Australia Pacific LNG and Sinopec resulted in a dilution in Origin s shareholding to 42.5%. Origin s shareholding in Australia Pacific LNG, which is equity accounted in line with Origin s shareholding, was 42.5% as at 30 June This shareholding subsequently reduced to 37.5% upon completion of Sinopec s increased share subscription in Australia Pacific LNG on 12 July 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 acquired by Origin in March A reference to $ is a reference to Australian dollars unless specifically marked otherwise. All references to debt are a reference to interest bearing debt only (excludes Australia Pacific LNG shareholder loans). 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. When calculating a percentage change, a positive or negative percentage change denotes the mathematical movement in the underlying metric, rather than a positive or a detrimental impact. Measures for which the underlying numbers change from negative to positive are labelled as not applicable. Origin Energy Limited ABN /60

121 Contents Changes to reporting of Operating segments Financial performance summary Statutory Profit $980 million profit, up from $186 million Statutory earnings per share 90.6 cps, up from 19.6 cps Final dividend 25 cps fully franked Reconciliation of Statutory Profit to Underlying Profit Underlying Profit - $893 million, up 33% Underlying EPS 82.6 cps, up 16% Operating Cash Flow After Tax (OCAT) - $1,781 million, up 12% Capital expenditure and Origin cash contributions to Australia Pacific LNG - $2,847 million Outlook Review of Financial Performance Reconciliation of Statutory Profit to Underlying Profit External revenue EBITDA Depreciation and amortisation Share of interest, tax, depreciation and amortisation of equity accounted investees (ITDA) EBIT Net financing costs Income tax expense Non-controlling interests share of profit Underlying Profit Review of cash flows Statement of Cash Flows Operating Cash Flow After Tax Capital expenditure and Origin s cash contributions to Australia Pacific LNG Funding and capital management Interest rates Review of Segment Operations Energy Markets Exploration & Production Australia Pacific LNG Contact Energy Corporate Appendix 1 Origin Energy Key Financials Appendix Reconciliation of Statutory Profit to Underlying Profit Appendix 3 Movements in fair value of financial instruments Appendix 4 Reconciliation of segment reporting as at 30 June Appendix 5 Energy Markets table 30 June Appendix 6 Glossary Origin Energy Limited ABN /60

122 Changes to reporting of Operating segments Origin revised its operating segments in February 2012 for the half year ended 31 December 2011, to reflect changes in Origin s business. Origin s results for the year ended 30 June 2012 are consistent with these new operating segments. A description of the new operating segments is provided below. Comparative segment balances for the year ended 30 June 2011 have been restated, with key reconciliations provided in Appendix 4. Energy Markets This segment includes Australian energy retail operations (including energy related products and services), power generation activities in Australia, and Liquefied Petroleum Gas (LPG) operations in Australia, the Pacific, Papua New Guinea (PNG) and Vietnam. Previously, retail and generation operations were disclosed as separate segments. The previous Retail segment has been incorporated into the Energy Markets segment almost in its entirety, with the exclusion of some costs previously allocated to Retail which are now in the Corporate segment. The Generation segment previously included Origin s major generation activities and power station developments in Australia, including wind, (now in the Energy Markets segment) together with development activities in geothermal, hydro and solar and some corporate costs (now in the Corporate segment). Exploration & Production This segment records Origin s gas and oil exploration and production activities in Australia, New Zealand and other international areas of interest. The results of Australia Pacific LNG were previously included in this segment. Australia Pacific LNG This segment covers Origin s equity accounted investment in Australia Pacific LNG. Contact Energy This segment reports the results of Origin s investment in its 53.0% owned controlled entity, Contact Energy, involved in energy retailing, associated products and services and power generation in New Zealand. Corporate This segment reports corporate activities that are not allocated to other operating segments and business development activities outside of Origin s existing operations. Historically, all corporate costs were allocated to other segments. Business development activities principally include Origin s Australian geothermal activities and overseas generation development opportunities such as geothermal opportunities in Chile and Indonesia, hydro opportunities in PNG and Chile and the Transform Solar joint venture. Net financing costs and tax specifically associated with the Australia Pacific LNG and Contact Energy segments are recorded in those segments. All other net financing costs and tax are recorded in the Corporate segment. Origin Energy Limited ABN /60

123 Report for the year ended 30 June 2012 Management Discussion and Analysis 1. Financial performance summary 1.1 Statutory Profit 1 $980 million profit, up from $186 million Origin reported a Net Profit After Tax (NPAT) and Non-controlling interests 1 (Statutory Profit) of $980 million for the year ended 30 June 2012, an increase of $794 million, compared with $186 million reported in the prior year. The key factors contributing to the increase in the Statutory Profit include: higher Underlying Profit 1 driven by the NSW acquisition, a lower exploration expense and higher wholesale energy prices for Contact Energy (+$220 million); net gains on items related to Australia Pacific LNG, primarily a gain on dilution of Origin s shareholding (+$414 million); an increase in the fair value of financial instruments (+$258 million); and a lower net expense from other items including transition and transaction costs relating to the NSW acquisition (+$149 million); partially offset by: a larger impairment of assets (-$247 million). Further details are provided in Section Reconciliation of Statutory Profit to Underlying Profit and in Section Statutory earnings per share 90.6 cps, up from 19.6 cps Basic earnings per share (EPS) based on Statutory Profit increased by 71.0 cents per share (cps) to 90.6 cps from 19.6 cps in the prior year. The weighted average capital base of 1,082 million shares increased 14% on the prior year, mainly due to the full year impact of the $2.3 billion 1 for 5 pro rata equity offering completed in April 2011 and the $266 million share issuance resulting from the underwritten Dividend Reinvestment Plan (DRP) completed in September Final dividend 25 cps fully franked A final fully franked dividend of 25 cps will be paid on 27 September 2012 to shareholders of record on 31 August Origin shares will trade ex-dividend from 27 August This will bring the total dividend attributable to the 2012 financial year to 50 cps in line with the prior year. The DRP will apply to this dividend. No discount will be applied in the calculation of the DRP price. The final DRP for the period ended 30 June 2012 will not be underwritten. 1.4 Reconciliation of Statutory Profit to Underlying Profit Statutory Profit for this year and the prior year contains the impact of a number of items which, when excluded, provide a different perspective on the financial and operating performance of the Origin business, consistent with the manner in which the Managing Director reviews the business. Underlying Profit excludes these items and is used internally by the Managing Director to assess the performance of Origin s business and make decisions on the allocation of resources. 1 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

124 In the year to 30 June 2012, items excluded in the measurement of Underlying Profit amounted to a benefit of $87 million. This compares with the year ended 30 June 2011 in which these items had an overall cost of $487 million. Reconciliation of Statutory Profit to Underlying Profit Year ended 30 June ($ million) Excluded Excluded items NPAT items NPAT Change ($m) Statutory Profit APLNG related items Increase/(decrease) in fair value of financial instruments 119 (139) 258 Impairment of assets (407) (160) (247) Other (55) (204) 149 Less total excluded items 87 (487) 574 Underlying Profit A more detailed reconciliation of Statutory Profit to Underlying Profit is provided in Section Underlying Profit - $893 million, up 33% Underlying Profit for the year increased 33% or $220 million to $893 million, from $673 million in the prior year. The result primarily reflects a 27% or $475 million increase in Underlying Earnings Before Interest, Tax, Depreciation and Amortisation (Underlying EBITDA 2 ) due in part to contributions from the NSW energy assets, a lower exploration expense and higher wholesale energy prices in the Contact Energy segment. The increase in Underlying EBITDA was partially offset at the Underlying Profit level by higher depreciation and amortisation charges primarily in the Energy Markets segment (primarily due to a full year of operations at the Eraring and Shoalhaven power stations) and in the Contact Energy segment (-$75 million), and an increase in Underlying net financing costs 2 (-$74 million). Further details are provided in Section Underlying EPS 82.6 cps, up 16% Underlying EPS 2 calculated on Underlying Profit was 82.6 cps on a weighted average capital base of 1,082 million shares. This represents a 16% increase from 71.0 cps on a weighted average capital base of 948 million shares in the prior year. The lower increase in Underlying EPS of 16% compared with the increase in Underlying Profit of 33% reflects the increase in the weighted average capital base, due predominantly to the full year impact of the $2.3 billion 1 for 5 pro rata equity offering completed in April 2011 to support the NSW acquisition and the $266 million share issuance from the underwritten DRP for the 2011 financial year final dividend, completed in September Origin s total dividend of 50 cps attributable to the 2012 financial year represents a payout ratio of 61% based on Underlying EPS. 2 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

125 1.7 Operating Cash Flow After Tax (OCAT) - $1,781 million, up 12% Group OCAT 3 increased by 12% or $196 million to $1,781 million. This was primarily due to the $475 million increase in Underlying EBITDA partially offset by the utilisation of $235 million of provisions relating to the NSW acquisition, including $98 million for the Transitional Services Agreements (TSAs, discussed in further detail in Section 5.1.6) and $137 million for onerous hedge contracts, and by higher working capital requirements. Further details are provided in Section Capital expenditure and Origin cash contributions to Australia Pacific LNG - $2,847 million 4 Capital expenditure for the year (including capitalised interest and cash received on settlement of the NSW acquisition of $75 million) was $1,680 million. This was down 66% from $4,954 million in the prior year, which included $3,125 million relating to the NSW energy assets acquired in March In addition, Origin contributed $1,167 million to Australia Pacific LNG via loan repayments to fund its share of Australia Pacific LNG capital expenditure not otherwise met by cash available to Australia Pacific LNG. Further details are provided in Section Outlook A key focus for the Company over the next few years is on delivering the Australia Pacific LNG project on schedule and on budget. To fund Origin s share of that investment the Company has been significantly reducing its committed capital expenditure on other projects, will be focusing on maximising cash flow from the existing business and managing the maturity of its existing debt facilities. The outlook for the coming year is more challenging than in prior years with less growth coming from new capital investments, regulatory uncertainty, particularly related to pricing decisions made by the Queensland Competition Authority for which the Company has initiated a judicial review, as well as more uncertainty in forecasting earnings, driven by volatile global commodity prices and changing patterns in the demand for energy in Australia. In Energy Markets, Origin will respond to the uncertainties by focusing on reducing costs, winning and retaining customers, realising benefits from the new SAP billing and customer relationship management system, and continuing to capture the benefits from Origin s integrated portfolio. In this segment, Origin s intention is to maintain customer numbers throughout the coming year, and it is targeting an Underlying EBIT margin 3 of around 11%. In Exploration & Production, production is forecast to increase with BassGas expected to recommence production in the September 2012 Quarter, partially offset by reduced production at Otway due to a scheduled shutdown. Contact Energy is expected to see an increased earnings contribution as it continues to benefit from greater flexibility in its generation portfolio and its gas purchasing position. Depreciation and amortisation costs will increase in line with the increased asset base, following completion of the Mortlake Power Station, upgrades to the Eraring Power Station, implementation of the new SAP billing and customer relationship management system, depreciation of Phase 1 of the BassGas Mid-Life Enhancement project and increased production. 3 Refer to Glossary in Appendix 6. 4 Includes a benefit of $75 million in the 2012 financial year relating to a working capital settlement for the NSW acquisition. Origin Energy Limited ABN /60

126 Underlying net financing costs are expected to increase substantially in the 2013 financial year compared with the prior year due to interest on completed projects and the Ironbark development no longer being capitalised. Interest associated with Origin s cash contributions to Australia Pacific LNG will continue to be excluded from Underlying Profit. Origin s Underlying effective tax rate 5 is expected to remain around 30% for the coming year. Taking all these factors into account, and based on prevailing market conditions, Origin anticipates Underlying EBITDA for the 2013 financial year to increase by around 10% and Underlying Profit to be in line with the 2012 financial year. While Origin intends to reduce its shareholding in Australia Pacific LNG to below 37.5%, this guidance does not include any impact of a change in Origin s shareholding. Future growth opportunities Origin continues to pursue a number of opportunities in Australia and internationally that will drive growth in the medium to longer term. Origin is well positioned to capitalise on the expected rise in domestic gas prices, with a diverse and flexible portfolio of physical and contracted fuel resources, as evidenced by the recent gas sale to the GLNG project at international oil-linked pricing. Gas demand in eastern Australia is expected to triple over the next five years, and Origin continues to invest in a targeted number of exploration opportunities in and around existing permits in anticipation of this growth. Origin is also exploring for resources in attractive international markets including New Zealand, South East Asia, Kenya and Botswana, providing access to both potential resources and growing demand. Origin continues to develop a portfolio of high quality, large-scale renewable energy opportunities in offshore markets which offer strong growth prospects. This includes a potential hydro project and geothermal exploration in Chile, geothermal exploration in Indonesia and a potential hydro project in PNG. Based on the opportunities available to the Company, Origin continues to target long term growth in Underlying EPS of 10% to 15% per annum on average. 5 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

127 3. Review of Financial Performance Income Statement Change Section Year ended 30 June ($m) ($m) (%) reference External revenue 12,935 10, EBITDA 2,290 1, Depreciation and amortisation (614) (539) Share of interest, tax, depreciation and amortisation of equity accounted investees (27) (25) EBIT 1, Net financing costs (289) (155) Profit before income tax 1, Income tax expense (302) (147) Net profit after tax before Non-controlling interests 1, Non-controlling interests share of Statutory Profit (78) (62) Statutory Profit Statutory earnings per share The above table is derived from the Income Statement and Notes to the Financial Statements. The Company excludes certain items (described in detail below) from Statutory Profit in order to calculate Underlying Profit, which the Managing Director uses to assess the financial and operational performance of the business. 3.1 Reconciliation of Statutory Profit to Underlying Profit Reconciliation year ended 30 June 2012 ($ millions) EBITDA EBIT Net financing costs Tax Noncontrolling Interests NPAT Statutory measure 2,290 1,649 (289) (302) (78) 980 Gain on dilution of Origin s shareholding in APLNG Interest expense related to APLNG funding - - (72) 22 - (50) Unwinding of discount on APLNG receivable balances APLNG foreign currency impacts (13) - 27 Share of tax expense on translation of foreign denominated tax balances within - (5) (5) APLNG (equity accounted) APLNG related items (72) Increase/(decrease) in fair value of financial instruments (50) Impairment of assets (512) (512) (407) Other Transition and transaction costs (119) (119) (82) Contact Energy's exiting of investment in Oakey Power Holdings Pty Ltd (1) (10) 12 Petroleum Resource Rent tax Other (1) - (1) Less total excluded items (72) 113 (5) 87 Underlying measure 2,257 1,598 (217) (415) (73) 893 Underlying Basic EPS (cps) 82.6 Origin Energy Limited ABN /60

128 Australia Pacific LNG related items (+$430 million) Gain on dilution of Origin s shareholding in Australia Pacific LNG (+$437 million) As a result of Australia Pacific LNG issuing shares to Sinopec in August 2011 (15% equity interest) causing Origin s ownership percentage to decrease 7.5% from 50% to 42.5%, Origin has recorded a gain on diluting its shareholding in Australia Pacific LNG. Interest expense related to Australia Pacific LNG (-$50 million) Origin recorded an after-tax interest expense relating to Australia Pacific LNG funding of $50 million. This interest would otherwise be capitalised except for Origin s investment in Australia Pacific LNG being an equity accounted investment. If the project was directly held by Origin, the interest would be capitalised. Unwinding of discount on Australia Pacific LNG receivable balances (+$21 million) A non cash benefit of $21 million was recorded for the year attributable to Origin s share of the unwinding of the discounted loans receivable within Australia Pacific LNG. Australia Pacific LNG foreign currency (+$27 million) Foreign currency gain incurred by Origin and Australia Pacific LNG in relation to funding and development of Australia Pacific LNG. The gain was attributable to appreciation of the Australian dollar against the Euro and depreciation of the Australian dollar against the US dollar. Share of tax expense on foreign currency translation (-$5 million) An expense of $5 million was recognised for Origin s share of the foreign currency translation to US dollars of the long-term tax balances within Australia Pacific LNG associated with its downstream activities. Increase in fair value of financial instruments (+$119 million) Although the fair value movements in Origin s financial instruments are included every financial period, the quantum of the movements is subject to significant volatility. During the period, an increase in the fair value of financial instruments, primarily relating to those not qualifying for hedge accounting, resulted in a post-tax benefit of $119 million. Impairment of assets (-$407 million) A review of the carrying amount of the Company s assets led to a recognition of an impairment loss of $407 million after tax compared with $160 million in the prior year. The Company has determined that continued investment in certain activities is not warranted in the near term, particularly given the requirement to fund Origin s share of its investment in Australia Pacific LNG. The details of this impairment are set out below: $ million Gross Tax Non-controlling interests Net Transform Solar (153) 18 - (135) Geothermal development opportunities (44) 11 - (33) Wind development opportunities (65) 5 - (60) Gas fired development site in central NSW (5) 2 - (3) Worsley generation plant (17) - - (17) Ironbark (198) 59 - (139) Surat assets (27) 8 - (19) Clutha hydro site (Contact Energy) (3) 1 1 (1) Total (512) (407) $153 million: Origin s 50% investment in the Transform Solar joint venture following a scaleback of operations; $44 million: Innamincka joint ventures with Geodynamics and other South Australian geothermal tenements; $65 million: Origin s wind development opportunities following the de-prioritisation of certain sites; Origin Energy Limited ABN /60

129 $5 million: following the de-prioritisation of a prospective gas fired generation development site in central NSW; $17 million: Origin s 50% interest in the Worsley generation plant reflecting a revised view of the plant s future contracted capacity; $198 million: Origin s Ironbark permit areas with the realisation of an upfront tax deduction for the permit acquisition; $27 million: resulting from the unlikelihood of realising value from the Surat assets with negligible reserves at 30 June 2012; and $3 million: recorded by Contact Energy relating to a potential hydro generation development on the Clutha Hydro site. Transition and transaction costs (-$82 million) Origin recorded a $74 million expense for the year relating to transition and integration costs primarily relating to the Retail Transformation Program and the transition of the acquired NSW energy assets. Origin recorded an $8 million expense for the year relating to transaction costs for acquisition activity. Contact Energy s exiting of its investment in Oakey Power Holdings Pty Ltd (+$12 million) Origin recorded a $12 million net gain for the year resulting from Contact Energy exiting its 25% interest in Oakey Power Holdings Pty Ltd. Petroleum Resource Rent Tax (+$16 million) Origin recorded a $16 million deferred tax benefit resulting from the extension of the Petroleum Resource Rent Tax (PRRT) legislation which took effect on 1 July In accordance with the legislation, Origin has adopted tax starting bases for existing projects that are deductible against future assessable receipts. A deferred tax asset of $16 million has been recorded in the Financial Statements based on the estimated utilisation of the tax starting bases considering future deductible amounts. As a result of the above factors, items excluded from Underlying Profit for the year provided a benefit of $87 million after tax and Non-controlling interests, compared with an expense of $487 million in the prior year. Refer to Appendix 2 of this document and the Management Discussion and Analysis report for the 2011 financial year for more details. Origin Energy Limited ABN /60

130 Underlying performance The following table provides an alternate reconciliation of Underlying Profit and Statutory Profit Change Section Year ended 30 June ($m) ($m) (%) reference External revenue 12,935 10, Underlying EBITDA 2,257 1, Underlying depreciation and amortisation (614) (539) Underlying share of interest, tax, depreciation and amortisation of equity accounted investees (45) (49) (8) 3.5 Underlying EBIT 6 1,598 1, Underlying net financing costs (217) (143) Underlying Profit before tax 1,381 1, Underlying income tax expense 6 (415) (316) Underlying Profit before Non-controlling interests Non-controlling interests share of Underlying Profit (73) (62) Underlying Profit Items excluded from Underlying Profit 87 (487) N/A 3.1 Statutory Profit Underlying earnings per share The key line items are explained below. 3.2 External revenue External revenue increased by 25% or $2,591 million to $12,935 million. This increase primarily reflects the impact of revenues from the NSW energy assets acquired in March 2011 in the Energy Markets segment, together with higher commodity prices in the Exploration & Production segment and higher wholesale electricity prices in the Contact Energy segment. Further details are available in Section 5. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Energy Markets 10,250 8, Exploration & Production Australia Pacific LNG Contact Energy 2,102 1, Corporate Revenue 12,935 10, EBITDA Statutory EBITDA 6 increased 106% or $1,176 million to $2,290 million from $1,114 million. Underlying EBITDA increased 27% or $475 million to $2,257 million from $1,782 million. 6 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

131 The Underlying EBITDA contributions by business segment are presented in the following table: Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Energy Markets 1,562 1, Exploration & Production Australia Pacific LNG (25) Contact Energy Corporate (81) (68) 19 Underlying EBITDA 2,257 1, Items excluded from Underlying EBITDA 33 (668) N/A EBITDA 2,290 1, Energy Markets: Underlying EBITDA increased by 33% or $388 million to $1,562 million. This was largely attributable to a full year contribution from the acquired NSW energy assets. Increased energy sales were partially offset by a reduction in both electricity customers and usage per customer. Further details are available in Section 5.1. Exploration & Production: Underlying EBITDA increased by 23% or $61 million to $329 million, primarily due to a lower exploration expense (+$69 million) and higher commodity prices, partially offset by higher operating costs and lower production. Further details are available in Section 5.2. Australia Pacific LNG: Underlying EBITDA decreased by 25% or $16 million to $47 million. This was primarily due to the dilution of Origin s shareholding in Australia Pacific LNG from 50% to 42.5% following the first Sinopec subscription in August 2011, together with higher operating costs to support the expanded operations and meet increased regulatory requirements. Further details are available in Section 5.3. Contact Energy: Underlying EBITDA increased by 16% or $55 million to $400 million. This was primarily due to reductions in gas and carbon unit costs and improved commercial and industrial margins. While higher South Island hydro storage levels resulted in higher wholesale electricity prices, this was largely offset by a 25% decrease in hydro generation being covered by the use of more expensive thermal generation. Further details are available in Section 5.4. Corporate: Underlying EBITDA loss increased 19% or $13 million resulting in an Underlying EBITDA loss of $81 million. The largest contributor to this variance was increased expenditure on development opportunities in Chile, Indonesia and PNG. Further details are available in Section Depreciation and amortisation Depreciation and amortisation (Statutory and Underlying) increased by 14% or $75 million to $614 million. This was primarily due to a full year of operations from the Eraring and Shoalhaven power stations and the growth of the Contact Energy asset base with the inclusion of the Stratford peaker plant and Ahuroa gas storage facility. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Energy Markets (237) (189) 25 Exploration & Production (224) (221) 1 Australia Pacific LNG Contact Energy (151) (128) 18 Corporate (2) (1) 100 Depreciation and amortisation (614) (539) 14 Origin Energy Limited ABN /60

132 3.5 Share of interest, tax, depreciation and amortisation of equity accounted investees (ITDA) The Statutory share of ITDA 7 expense of $27 million for the year was $2 million higher than a $25 million expense in the prior year. Origin s Underlying share of ITDA 7 attributable to equity accounted investees decreased 8% or $4 million to $45 million due to dilution of Origin s shareholding in Australia Pacific LNG. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Energy Markets (8) (7) 14 Exploration & Production Australia Pacific LNG (33) (42) (21) Contact Energy (1) (3) (67) Corporate (3) 3 (200) Underlying share of ITDA (45) (49) (8) Items excluded from Underlying share of ITDA Statutory Share of ITDA (27) (25) EBIT Statutory EBIT 7 increased by $1,099 million or 200% from $550 million to $1,649 million. Underlying EBIT 7 increased 34% or $404 million to $1,598 million primarily due to the increase in Underlying EBITDA described in Section 3.3 above. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Energy Markets 1, Exploration & Production Australia Pacific LNG (33) Contact Energy Corporate (86) (66) 30 Underlying EBIT 1,598 1, Items excluded from EBIT 51 (644) N/A EBIT 1, Net financing costs Statutory net financing costs 7 increased by 86% or $134 million to $289 million from $155 million in the prior year. Underlying net financing costs increased by 52% or $74 million to $217 million in the current year. The increase in Underlying net financing costs was predominantly due to a higher average Net Debt 7 balance for the year as a result of increased debt used to partially fund the NSW acquisition and for capital expenditure incurred during the period. 7 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

133 Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Australia Pacific LNG Contact Energy (67) (60) (12) Corporate (150) (83) 81 Underlying net financing costs (217) (143) 52 Items excluded from Underlying net financing costs (72) (12) 500 Statutory net financing costs (289) (155) 86 Capitalised interest for the year was $142 million compared with $153 million in the prior year and is not included in the calculation of net financing costs. 3.8 Income tax expense The current year Statutory income tax expense 8 of $302 million results in an effective tax rate of 22%, which is lower than the company tax rate of 30%, mainly due to the non tax-assessable gain arising on dilution of Origin's shareholding in Australia Pacific LNG, partially offset by nondeductible impairment losses. The prior year Statutory income tax expense of $147 million resulted in an effective tax rate of 37%, which was higher than the company tax rate of 30%, due to non-deductible costs associated with stamp duty for the acquired NSW energy assets and the impairment of Origin's 30% interest in the Innamincka geothermal joint venture, partially offset by a tax benefit arising on the translation of foreign denominated tax balances. Underlying income tax expense for the year increased 31% or $99 million to $415 million, in line with an increase in Underlying profit before tax. The Underlying effective tax rate was 30% in the current and the prior year. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Australia Pacific LNG Contact Energy (51) (47) 9 Corporate (364) (269) 35 Underlying income tax expense (415) (316) 31 Items excluded from Underlying income tax expense (33) Statutory income tax expense (302) (147) 105 Origin recorded a $16 million deferred tax benefit resulting from the extension of the PRRT legislation which took effect on 1 July This benefit has been excluded from Underlying income tax expense. In accordance with the legislation, Origin has adopted tax starting bases for existing projects that are deductible against future assessable receipts. A deferred tax asset of $16 million has been recorded in the Financial Statements based on the estimated utilisation of the tax starting bases considering future deductible amounts. Origin also has an unrecorded deferred tax benefit of $1,027 million referable to the extended PRRT legislation which, considering estimated future assessable and deductible amounts, has not been recognised as an asset in Origin s 30 June 2012 Consolidated Financial Statements. Australia Pacific LNG is also subject to the extended PRRT legislation and has an unrecorded deferred tax benefit balance of $2,426 million (100% Australia Pacific LNG). The deferred tax amounts referable to the extended PRRT legislation are disclosed in Notes 4 and 15 of Origin s Consolidated Financial Statements. 8 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

134 3.9 Non-controlling interests share of profit Statutory Profit attributable to Non-controlling interests increased by $16 million, or 26% to $78 million primarily relating to Contact Energy exiting its investment in Oakey Power Holdings Pty Ltd, which increased Contact Energy s earnings but is excluded from Underlying Profit. Underlying Profit attributable to Non-controlling interests increased 18% to $73 million due to an increased contribution from the Contact Energy segment. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Contact Energy (70) (61) 15 Corporate (3) (1) 200 Underlying Profit attributable to Non-controlling interests (73) (62) 18 Items excluded from Non-controlling interests (5) - N/A Statutory Profit attributable to Non-controlling interests (78) (62) Underlying Profit Statutory Profit for the year increased by 427%, or $794 million to $980 million. Underlying Profit for the year increased 33% or $220 million to $893 million. The segment contribution to Underlying Profit is set out below and commented on in detail in Section 5. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Energy Markets 1, Exploration & Production Australia Pacific LNG (33) Contact Energy Corporate (603) (419) 44 Underlying Profit Items excluded from Underlying Profit 87 (487) N/A Statutory Profit Origin Energy Limited ABN /60

135 4. Review of cash flows 4.1 Statement of Cash Flows Year ended 30 June 2012 ($m) 2011 ($m) Change ($m) Change (%) Cash and cash equivalents at the start of the period (95) (12) Cash flows from operating activities 1,822 1, Cash flows used in investing activities (2,626) (4,758) 2,132 (45) Cash flows from financing activities 434 3,266 (2,832) (87) Net decrease in cash and equivalents (370) (91) (279) 307 Effect of foreign exchange rates on cash 3 (4) 7 N/A Cash and cash equivalents at end of the period (367) (51) The above table is an extract from the Statement of Cash Flows in Origin s Financial Statements. Cash flows from operating activities reflect the cash generated from Origin s operations and excludes investing and financing activities. Cash flows from operating activities increased 30% or $421 million to $1,822 million in the year. For more detail, see Section 4.2. Cash flows used in investing activities were down 45% or $2,132 million at $2,626 million. Cash flows used in investing activities primarily relate to capital and investment expenditure, which is discussed in more detail in Section 4.3. Cash flows from financing activities include net cash flows relating to Origin s funding activities, including the payment of interest and dividends. This amounted to a net cash flow of $434 million for the year. Section 4.4 provides more details on Origin s funding initiatives during the period. Origin Energy Limited ABN /60

136 4.2 Operating Cash Flow After Tax Year ended 30 June 2012 ($m) 2011 ($m) Change ($m) Change (%) Underlying EBITDA 2,257 1, Change in working capital (120) (37) (83) 224 Stay-in-business capex (194) (203) 9 (4) Share of APLNG OCAT less EBITDA 7 11 (4) (36) Exploration expense (69) (58) NSW acquisition-related liabilities (235) (128) (107) 84 Other Tax (paid) / received (39) 3 (42) N/A Group OCAT (including share of APLNG) 1,781 1, Net interest paid (366) (269) (97) 36 Free cash flow 10 1,415 1, Productive Capital 10 14,523 11,571 2, Group OCAT Ratio % 13.0% (1.5%) (12) 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 Capital. Group OCAT, Productive Capital, and the Group OCAT Ratio are discussed below. The key difference between Group OCAT and statutory cash flows from operating activities is that Group OCAT includes stay-in-business capital expenditure and Origin s share of Australia Pacific LNG s OCAT, and excludes transition and transaction costs. Group OCAT increased by 12% or $196 million to $1,781 million. This increase was largely attributable to an increase in Underlying EBITDA of $475 million and was partially offset by: A $107 million increase in the utilisation of non-cash provisions for transitional services agreements and onerous hedge contracts relating to the NSW acquisition; An $83 million increase in working capital requirements compared with the prior year due to a reversal of the temporary increase in network creditors in the prior year, higher wholesale electricity prices and increased gas storage inventory at Contact Energy; partially offset by a benefit from the small-scale and large-scale renewable energy schemes; and A $69 million reduction in exploration expense reflecting reduced exploration activity. Net interest paid was $97 million higher than the prior year reflecting higher average Net Debt balances in the underlying business and higher funding costs associated with the Australia Pacific LNG segment, including a full 12 months of interest paid on the 500 million hybrid issue and six months interest paid on the $900 million retail subordinated notes. Free cash flow available for funding growth and distributions to shareholders increased by 8% from $1,316 million to $1,415 million. Productive Capital in the business, calculated on a 12 month weighted average basis, increased by 26% to $14,523 million. Major assets contributing to this increase were the full year inclusion of the NSW energy assets, and the full year inclusion of the Stratford Peaker and Ahuroa gas storage which commenced operations for Contact Energy in the March Quarter of the 2011 financial year. 9 The add-back of non cash equity accounted profits excluding Australia Pacific LNG and movements in other provision balances are included within the Other line item. 10 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

137 The benefit of the higher Group OCAT is outweighed by higher Productive Capital resulting in a lower Group OCAT Ratio for the twelve months ended 30 June 2012 of 11.5% compared with 13.0% in the twelve months ended 30 June Capital expenditure and Origin s cash contributions to Australia Pacific LNG Capital expenditure Total capital expenditure for the year (including capitalised interest of $142 million and cash received on settlement of NSW acquisition of $75 million) was $1,680 million. This was 66% down from $4,954 million in the prior year, which included $3,125 million relating to the NSW energy assets acquired in March Stay-in-business capital expenditure was $194 million, compared with $203 million in the prior year. Growth capital expenditure (including capitalised interest) was $1,561 million compared with $1,626 million in the prior year. This included expenditure of $35 million or more in the following areas: Energy Markets $592 million in total, including: o Mortlake Power Station $165 million; o Eraring Power Station $176 million; o Retail Transformation Program $71 million; Exploration & Production $421 million in total, including: o Ironbark $75 million; o BassGas $115 million; o Otway Project $103 million; Contact Energy $402 million in total, including: o Te Mihi geothermal development $308 million; and Corporate $146 million in total, including: o Energía Austral $40 million. Capitalised interest of $142 million, disclosed in Note 3(c) of the Financial Statements, is primarily associated with the Mortlake Power Station, Ironbark and Contact Energy projects Origin s cash contributions to Australia Pacific LNG 11 Origin is required to contribute cash to Australia Pacific LNG (in proportion to its equity holding) where Australia Pacific LNG has insufficient cash from other sources to fund its activities. In previous periods, Australia Pacific LNG has had sufficient cash from the proceeds of the issue of equity to other shareholders and from operating cash flows to fund its activities, and Origin has made no cash contributions as all expenditure was met through these sources. During the 2012 financial year, Origin contributed $1,167 million to Australia Pacific LNG via loan repayments to fund its activities. 4.4 Funding and capital management Capital management initiatives During the 2012 financial year, Origin undertook a number of capital management initiatives to strengthen its balance sheet and ensure that it has sufficient liquidity to fund future capital expenditure requirements, including its expected cash contributions to Australia Pacific LNG. 11 The capital expenditure above is based on cash flow amounts rather than accrual accounting amounts, and includes growth and stay-in-business capital expenditure, capitalised interest and Origin s cash contributions (via loan repayments) to Australia Pacific LNG. Origin Energy Limited ABN /60

138 In September 2011, Origin fully underwrote its final dividend for the 2011 financial year raising $266 million of equity finance. In October 2011, Origin undertook a US$500 million ($492 million) Senior Unsecured Notes issuance in the 144A market in the United States. In December 2011, Origin issued $900 million of Origin Energy Subordinated Notes in the Australian retail bond market. Origin also raised an additional $750 million of debt facilities 12 during the twelve month period, and repaid $566 million of debt and capital market facilities which matured during the period. These initiatives assisted in diversifying Origin s funding portfolio in terms of currency, market and tenor, and strengthened Origin s liquidity position. Australia Pacific LNG signed project finance agreements during the second quarter of 2012, which are subject to certain conditions precedent. Following completion of the US$8.5 billion project finance facility, which Australia Pacific LNG expects to begin drawing on in the December Quarter of 2012, and the payment of Sinopec s equity subscription amount associated with its increased shareholding in Australia Pacific LNG from 12 July 2012, Origin s remaining funding requirement for its 37.5% shareholding in Australia Pacific LNG for the period from 1 July 2012 to first production from both LNG trains is approximately $3.6 billion based on current estimates. This funding requirement will be met from Origin s existing committed undrawn debt facilities and cash, which totals $4.2 billion (excluding Contact Energy) as at 30 June A portion of these existing committed undrawn debt facilities mature within the period to first production from both LNG trains and will be refinanced as required. In addition, Origin s Free Cash Flow ($1.4 billion for the 2012 financial year) provides a further funding source for Origin s Australia Pacific LNG obligations, the payment of Origin s dividends and other growth opportunities. Origin currently holds BBB+ (negative outlook) and Baa1 (negative outlook) long-term credit ratings with Standard & Poor s and Moody s respectively Share capital During the 2012 financial year, Origin issued an additional 25.1 million shares, raising a total of $316 million. This included 23.7 million shares issued under the DRP which raised $306 million ($266 million from the DRP underwrite of the 2011 financial year final dividend and $40 million from the 2012 financial year interim DRP), and 1.4 million shares issued as the result of the exercise of long-term employee incentives which raised $10 million. As a consequence, the total number of shares on issue increased from 1,065 million at 30 June 2011 to 1,090 million at 30 June The weighted average number of shares used to calculate basic EPS at 30 June 2012 increased by 134 million to 1,082 million from 948 million as at 30 June This increase of 134 million shares from the prior year primarily reflects a full year of the $2.3 billion 1 for 5 pro rata equity entitlement offer completed in April 2011 and $266 million share issuance from the underwritten DRP for the 2011 financial year final dividend completed in September Net Debt 13 and equity Net Debt The Net Debt for the consolidated entity increased by 36% or $1,462 million to $5,522 million from $4,060 million at 30 June Equity Shareholders Equity 14 increased by 7% or $942 million from $13,516 million at 30 June 2011 to $14,458 million at 30 June Excludes debt facilities raised by Contact Energy during the 2012 financial year. 13 The reported numbers for Net Debt include interest-bearing debt obligations only. 14 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

139 The increase of $942 million is predominantly due to the Statutory Profit before Non-controlling interests of $1,058 million and $316 million of share issuance, partially offset by $538 million of dividends paid. Gearing Ratio 15 The following table provides the calculation of the Gearing ratio based on the reported Net Debt and the reported Shareholders Equity: As at 30 June June 2011 Net Debt as reported ($m) 5,522 4,060 Shareholders Equity as reported ($m) 14,458 13,516 Net Debt to (Net Debt + Shareholders Equity) 28% 23% Adjusted Net Debt 15 calculations The calculation of Net Debt above includes a favourable mark-to-market adjustment of $216 million as at 30 June 2012 compared with a favourable adjustment of $223 million as at 30 June Favourable adjustments act to decrease the net debt quoted. Excluding these mark-tomarket adjustments, the Adjusted Net Debt for the consolidated entity was $5,738 million at 30 June 2012 compared with a $4,283 million Adjusted Net Debt balance at 30 June 2011, a net increase of $1,455 million. Origin owns 53.0% of the ordinary shares of Contact Energy and is therefore required under Australian accounting standards to consolidate all of Contact Energy s assets and liabilities in Origin's Statement of Financial Position. This includes consolidating 100% of Contact Energy's outstanding debt obligations. However, under the terms of those debt obligations Origin has no liability associated with Contact Energy's debt. Excluding Contact Energy s Adjusted Net Debt obligations, Origin had an Adjusted Net Debt position as at 30 June 2012 of $4,617 million compared with $3,365 million as at 30 June 2011, a change of $1,252 million. 4.5 Interest rates Origin s Underlying average interest rate 15 incurred on debt for the current year was 7.4% compared with 7.1% for the prior year. The higher Underlying average interest rate is primarily due to amortisation of up-front costs associated with additional debt facilities raised during the year and higher funding costs in Contact Energy. Underlying net financing costs used to calculate the Underlying average interest rate includes interest on Contact Energy s New Zealand dollar denominated debt, Origin s Australian dollar, US dollar and New Zealand dollar debt obligations and includes commitment fees incurred on undrawn committed debt facilities associated with Origin s underlying business. Origin s Underlying average interest rate incurred excluding Contact Energy and funding costs related to Australia Pacific LNG was 7.3%. Drawn debt and commitment fees paid on undrawn committed debt facilities, which act to support Origin s future funding commitments to Australia Pacific LNG, are excluded from Underlying net financing costs (Section 3.7) and from the interest rate quoted above. These excluded amounts would otherwise be capitalised except for Origin s investment in Australia Pacific LNG being equity accounted. As at 30 June 2012, Origin held cash and cash equivalents of $357 million compared with $728 million at 30 June 2011, including Contact Energy. This cash was invested at an average rate of 5.4% for the year ended 30 June Excluding Contact Energy, Origin held cash on deposit and cash equivalents of $352 million compared with $692 million at 30 June Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

140 Approximately 51% of Origin s consolidated debt obligations are fixed to 30 June 2013 at an average rate of 6.3% including margin. Excluding Contact Energy, Origin has 41% of its debt obligations fixed at an average rate of 5.8% including margin. Origin Energy Limited ABN /60

141 5. Review of Segment Operations The Review of Segment Operations is a discussion on the underlying performance of each of Origin s business segments. The financial performance metrics and segmental discussion reflect the results of Origin s underlying business and therefore exclude a number of items to provide a different perspective of the financial and operating performance of the Origin business, consistent with the manner in which the Managing Director reviews the financial and operational performance of the business. A detailed reconciliation between Statutory Profit and Underlying Profit is provided in Section 3.1. Further non-ifrs measures, such as Gross Profit 16, are utilised to explain segment performance. These measures are a component of the Segment Result and are defined in the Glossary in Appendix Energy Markets Origin s Energy Markets business is an integrated provider of energy solutions to consumer and business markets in Australia and the Pacific. As well as being Australia s leading electricity, gas and LPG retailer, with 4.4 million customer accounts, Energy Markets also operates a flexible and diverse, owned and contracted generation portfolio and continues to increase its product and service offerings to customers. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Total Segment Revenue 16 10,250 8, Underlying EBITDA 1,562 1, Underlying EBIT 1, Segment Result 17 1, Items excluded from Underlying EBIT and Segment Result (20) (465) (96) Growth capital expenditure (31) Underlying EBITDA up 33% to $1,562 million Electricity volumes up 26% to 42.7 TWh 16 following the NSW acquisition Underlying EBIT margin improved from 12.7% to 13.6% 2.6 million customers migrated to the new billing and customer relationship management system Net loss of 160,000 customer accounts with improved customer win and retention performance in the second half of the year Integration of Country Energy and Integral Energy proceeding in line with expectations 16 Refer to Glossary in Appendix Segment Result for Energy Markets does not include the impact of taxation and financing costs, which are included in the Corporate segment. Origin Energy Limited ABN /60

142 Segment financial performance Year ended 30 June 2012 Natural Gas Electricity Noncommodity LPG Revenue ($m) 18,19 1,203 (+2%) 7,566 (+40%) 213 (-50%) 706 (+5%) Cost of goods sold ($m) (970) (-1%) (5,769) (+39%) (178) (-50%) (528) (+6%) Gross Profit ($m) 233 (+14%) 1,797 (+41%) 35 (-45%) 178 (+3%) Total operating costs ($m) (682) (+27%) Underlying EBITDA ($m) 1,562 (+33%) Underlying EBIT ($m) 1,317 (+35%) Underlying EBIT Margin (%) 13.6% (June 2011: 12.7%) Volumes sold PJ (-8%) 43 TWh (+26%) N/A 502 kt 21 (+5%) Year-end customer accounts ( 000) Average customer accounts 22 ( 000) Gross Profit per customer (average accounts, $) Underlying EBITDA per customer (average accounts, $) Underlying EBIT per customer (average accounts, $) 963 (+4%) 3,014 (-6%) N/A 382 (+5%) 943 (+6%) 3,114 (+40%) N/A 368 (+4%) 509 (+3%) 484 (-1%) 373 (+4%) 129 (-12%) 319 (+5%) 60 (-24%) Energy Markets Underlying EBITDA increased 33% or $388 million to $1,562 million. This growth was largely attributable to the full year contribution from the acquired Integral Energy and Country Energy retail businesses and the Eraring GenTrader arrangements. Electricity volumes grew by 8.7 TWh or 26% to 42.7 TWh in the year, primarily due to the acquired volumes gained through the NSW acquisition. Mass market electricity usage declined at a customer level due to the increased penetration of solar photovoltaic (PV) installations, consumer responses to rising electricity prices, mild summer temperatures and responses to the changed economic outlook. Gas volumes declined by 8% to 130 PJ despite a 6% increase in average customer accounts due to a 13 PJ reduction in wholesale trading volumes. Energy Markets Underlying EBIT margin was 13.6% for the year, higher than the prior year of 12.7% due to a full year s contribution from the NSW acquisition. Origin lost 160,000 customers during the 2012 financial year, of which 112,000 were in the first half of the year. This was due to restricted customer win and retention activities as a result of the migration of customer accounts to the new SAP billing and customer relationship management system (SAP system) in the first half of the year. Customer losses were expected following the purchase of the large incumbency position in NSW. Origin s customer churn rates improved in the second half of the year following the completion of the SAP system migration as the business was able to return its focus to customer win and retention activities. Retail Transformation continues to be a key priority as Origin is committed to delivering an improved customer experience and creating a more efficient and flexible operating model, delivering lower cost to serve. 18 Energy Markets Total Segment Revenue includes pool revenue from the sale of electricity when Origin s internal generation portfolio, including Eraring and Shoalhaven power stations, is dispatched. These pool revenues, along with the associated fuel costs, are netted off in Electricity cost of goods sold. 19 Energy Markets Total Segment Revenue includes revenue from the sale of gas swaps to major customers at no margin. These revenues are netted off with the associated cost in Natural Gas cost of goods sold. 20 Does not include internal sales for Origin s gas-fired generation portfolio (2012: 31 PJ, 2011: 31 PJ). 21 Refer to Glossary in Appendix Average Customer Accounts is calculated as the average of the month-end customer numbers for each month of the year. Origin Energy Limited ABN /60

143 The new SAP system was implemented and 2.6 million customers were migrated onto this new platform during the year. Normal post go-live stabilisation activities associated with this new system are now well underway with a focus on improving billing, exception management and contact centre processes to take advantage of the new system capabilities. A number of legacy systems have now been decommissioned. The rollout of the new online functionality has also commenced and will continue over the coming months. Concurrently cost reduction initiatives are also underway. Integration of the acquired NSW energy assets is progressing well. The Integral Energy customer base is expected to migrate over in the second half of the 2013 financial year, with Country Energy to follow. Mass market sales volumes in NSW have declined since Origin s acquisition of the NSW retail businesses. This reduction is due to lower usage per customer as a result of trends seen across the NEM, including the high level of rooftop solar PV installations during 2010 and 2011, and a reduction in mass market customer numbers. The Eraring GenTrader Arrangements have performed better than expectations, providing increased portfolio benefits and delivering improvements in Origin s energy procurement costs. Origin successfully prepared and implemented systems and processes to comply with the requirements of the introduction of the Clean Energy Future package. Segment operating cash flows Year ended 30 June Change (%) Operating Cash Flow 23 ($m) 1, Productive Capital ($m) 8,651 6, OCFR 23 (%) 13.2% 14.1% (6) Energy Markets operating cash flow increased by 28% or $249 million to $1,141 million, primarily due to an increase in Underlying EBITDA associated with the NSW acquisition. While operating cash flow increased by 28% on the prior year, it was reduced by $235 million of noncash provision movements related to the NSW acquisition in the current year, comprising $137 million of onerous hedge contracts and $98 million of TSAs, together with a temporary increase in network-related creditors arising from the NSW acquisition in the prior year. Operating cash flow return 23 (OCFR) declined from 14.1% to 13.2% during the year, due to a full year impact of the NSW acquisition-related non-cash provision adjustments in the current year compared to a four month impact in the prior year, as well as an increased negative working capital movement. 23 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

144 5.1.1 Natural gas Year ended 30 June 2012 $/GJ $/GJ Change (%) Volumes sold (PJ) (7) C&I (7) Mass Market (11) Total external volumes (8) Internal sales (0) Change ($/GJ) Revenue ($m) 1, , C&I Mass Market Cost of goods sold 26 ($m): (970) (7.5) (975) (6.9) (1) (0.6) Network costs (513) (4.0) (462) (3.3) 11 (0.7) Energy procurement costs (457) (3.5) (513) (3.6) (11) 0.1 Gross Profit ($m) Gross Margin (%) 19.4% 17.4% 2.0% Year-end customer accounts ( 000) Average customer accounts ( 000) Gross Profit per customer (average accounts, $) Natural gas volume and revenue Origin sold 130 PJ of natural gas to customers in the year, while an additional 31 PJ was used as fuel in Origin s generation portfolio, primarily at the Darling Downs Power Station in south east Queensland. External sales of natural gas reduced by 8% or 12 PJ compared with the prior year. The decline of 5 PJ in Mass Market volumes was primarily due to milder winter temperatures in Victoria and South Australia compared with the prior year. A 7 PJ decline in C&I volumes was attributable to a reduction in wholesale trading volumes of 13 PJ, with core C&I customer volumes increasing during the period. Despite a decline in volumes, natural gas revenue increased by $23 million or 2% to $1,203 million due to higher tariffs including the pass through of increased network costs. Natural gas customers increased by 4% or 40,000 accounts to 963,000 customer accounts as at 30 June 2012, supported by strong growth in NSW dual fuel customers. 24 Refer to Glossary in Appendix Internal sales represent volume used in Origin s gas-fired generation portfolio. The cost of the gas is included at cost in the electricity cost of goods sold. 26 For the period ending December 2011, the cost of goods sold for natural gas was $498m of which $256m related to network costs and $242m procurement costs. Origin Energy Limited ABN /60

145 Natural gas volumes by state and by segment are detailed in the table below: Year ended 30 June Variance % NSW Victoria (4.8) (15) Queensland (0) (0) South Australia (0.8) (11) Mass Market (4.3) (10) C&I (7.5) (8) External volumes (11.8) (8) Internal generation (0.1) (0) Total Natural Gas Volume (PJ) (11.9) (7) Natural gas cost of goods sold Natural gas cost of goods sold increased by $0.60/GJ, primarily due to higher network and transmission costs relating to the Queensland - South Australia - New South Wales pipeline link (QSN). Spot market gas prices reduced during winter 2011 reflecting low seasonal demand, and then increased in the second half of the financial year as coal-fired generation outages led to higher gas demand, leading to a net increase in spot prices over the year. Despite these market price increases, Origin was able to marginally reduce gas procurement costs by $0.10/GJ to $3.50/GJ due to its integrated fuel procurement strategy. Natural gas Gross Profit Despite lower volumes, Natural gas Gross Profit improved 14% or by $28 million to $233 million, an improvement of $0.40/GJ. This was attributable to increased tariffs in line with market prices, including the recovery of network cost increases, while gas purchase costs remained steady due to Origin s integrated fuel procurement strategy. GLNG gas supply agreement During the year, Origin announced a gas supply agreement with GLNG for the supply of 365 PJ of gas over 10 years at international oil-linked prices, commencing in Origin Energy Limited ABN /60

146 5.1.2 Electricity performance Year ended 30 June 2012 $/MWh $/MWh Change % Volumes sold (TWh) C&I Mass Market Change $/MWh Revenue ($m) 7, , C&I 2, , Mass Market 5, , Other income (12) Externally contracted generation Cost of goods sold ($m): (5,769) (135) (4,138) (122) 39 (13) Network costs (3,453) (81) (2,339) (69) 48 (12) Wholesale energy costs (2,063) (48) (1,653) (49) 25 1 Generation operating costs (252) (6) (146) (4) 73 (2) Energy procurement costs (2,316) (54) (1,799) (53) 29 (1) Gross Profit ($m) 1, , Gross Margin (%) 23.8% 23.5% 0.3% Average customer accounts ( 000) Gross Profit per customer (average accounts, $) 3,114 2, Electricity volumes and revenue Origin s electricity volumes increased by 26% or 8.7 TWh to 42.7 TWh, primarily due to the acquired customer load from Integral Energy and Country Energy. Energy consumption in the National Electricity Market was down on the prior year. Reduced market demand is primarily attributable to a slowing in economic activity in the business market and lower household usage. Mass market electricity volumes by state and by segment are detailed in the table below: Year ended 30 June Variance Change (%) NSW Victoria (0.4) (9) Queensland (0.5) (7) South Australia (0.1) (10) Mass Market C&I Total Electricity Volumes (TWh) Electricity revenue increased 40% or $2.2 billion to $7.6 billion. This was primarily due to increased volumes on the back of the NSW acquisition, together with higher tariffs owing to the pass through of increased network charges and the recovery of costs associated with various environmental schemes. 27 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

147 Electricity cost of goods sold Electricity cost of goods sold comprises three main elements: network costs, wholesale energy costs, and generation operating costs. Network costs reflect the pass through of charges for the transportation and distribution of electricity to the end customer. Wholesale energy costs relate to the mix of physical and financial instruments used in procuring electricity, including fuel (gas and coal) used in Origin s generation portfolio. Generation operating costs relate to the operating and maintenance costs of Origin s generation portfolio, including the costs associated with the GenTrader arrangements. In combination, wholesale energy costs and generation operating costs determine the procurement cost of energy. Overall, Electricity cost of goods sold increased by $13/MWh, primarily owing to increases in network costs of $12/MWh. Energy procurement costs, increased by $1/MWh to $54/MWh. Wholesale energy costs were relatively stable, decreasing by $1/MWh on the prior year from $49/MWh to $48/MWh. Origin achieved this slight reduction in wholesale energy costs compared with the prior year despite an increase in the energy component of wholesale prices and a decrease in volatility. Generation operating costs increased by $2/MWh from $4/MWh to $6/MWh due to a full year of costs for the Eraring GenTrader arrangements. Included within wholesale energy costs are costs associated with the onerous hedge contracts and green rights contracts relating to the NSW acquisition. A benefit of $137 million from the unwind of these liabilities was recorded within wholesale energy costs (prior year $93 million). The unwind ensures that the earnings impact in the Income Statement reflects market prices at the acquisition date. Electricity cost of goods sold excludes any capital charge for Origin s investment of $3.3 billion in its generation portfolio. Refer Section for information on the performance of Origin s internal generation portfolio. Electricity Gross Profit Electricity Gross Profit increased by 41% or $525 million to $1,797 million. This was primarily due to a full year of earnings contribution from the NSW acquisition, as well as effective management of energy procurement costs. Gross Profit per megawatt hour increased $5/MWh from $37/MWh to $42/MWh Non-commodity sales Revenue for the non-commodity businesses reduced by 50% or $209 million to $213 million, reflecting fewer installations of rooftop solar PV systems in comparison with the prior year. Policy changes, including changes to the Renewable Energy Certificate multiplier and feed-in tariff schemes across all states, had a significant impact on demand over the period. Consequently, Origin completed 16,009 installations during the year compared with 36,840 in the prior year. The substantial reduction in solar PV installations led to a 45% reduction in Non-commodity Gross Profit from $64 million to $35 million. Energy Markets other product offerings such as solar hot water, serviced bulk hot water systems and heat pumps performed well and continue to complement the core Electricity and Natural gas businesses. Origin is playing a leading role in supporting the adoption of electric vehicles in Australia and is the preferred charging provider for the Nissan LEAF. Origin ChargePoints have been installed at Nissan LEAF dealerships across Australia, and Origin has a range of fully installed residential and commercial charging packages to support electric vehicle owners. The trigeneration business continues to pursue a number of key contracts and, in particular, announced a Heads of Agreement with the City of Sydney in April Under the Heads of Origin Energy Limited ABN /60

148 Agreement, four trigeneration precincts will be built across central Sydney with Origin to invest $100 million over a ten-year period (through its 100% owned controlled entity, Cogent) LPG LPG sales volumes increased 5% to 502 kt compared to the prior year and customer accounts increased by 5% to 382,000. This growth was largely driven by the Autogas segment with Origin s expansion into the NSW market, and increased wholesale volumes following the unwind of Origin s share in the Vitalgas joint venture with Caltex in November LPG Gross Profit growth of 3% or $6 million to $178 million, with active sales price management more than offsetting the fluctuations in the procurement cost of LPG. An increase in operating costs and depreciation saw Underlying EBIT decline $6 million or 23% to $22 million compared to the previous year Internal generation portfolio Energy Markets generation portfolio continued to achieve high levels of availability and reliability during the period, with availability of 95% versus 90% in the prior year, unplanned outages of 2.0% down from 3.3% in the prior year, and an equivalent reliability factor 28 (ERF) of at least 97% was achieved for all peaking sites for the year. The ERF for Eraring Power Station was 90.2% during the year, primarily due to a fire in the 2B transformer of Unit 2 in October Unit 2 returned to service in February 2012 and became unavailable again in March 2012 due to a failure within the 2A transformer. The transformer was replaced and Unit 2 returned to service at a reduced capacity of 540 MW in March It is expected that Unit 2 will return to full load of 720 MW by the end of the 2012 calendar year. Liquidated damages in relation to the fire are continuing to be pursued from Eraring Energy and have not been recognised in Origin s Consolidated Financial Statements. 28 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

149 Performance of the internal generation portfolio and externally contracted plant is summarised in the following table: Year ended 30 June 2012 Base Load Nameplate Plant Capacity (MW) Equivalent Reliability Factor Capacity Factor Electricity Output (MWh) Pool revenue ($m) Pool revenue ($/MWh) Eraring (Contracted) 2, % 46% 11, Darling Downs % 54% 3, Peaking Mt Stuart % 0% 6-64 Uranquinty % 3% Roma % 2% Ladbroke Grove % 11% Quarantine % 3% Mortlake (1) % 7% Renewable Cullerin Range % 36% Shoalhaven (Contracted) % 3% Internal Generation 5,644 14, Externally Contracted Bulwer Island (2) % 40% Osborne (2,3) % 37% Worsley (2) % 45% TOTAL (equity %) 5,900 (1) Mortlake Power Station commenced commercial operation on 21 August Generation statistics are for one unit during commissioning testing. (2) Origin holds a 50% share. (3) For Osborne, Origin holds a 50% share and contracts 100% of the output. On 3 January 2012, the first of two units at the 550 MW gas-fired Mortlake Power Station was available for dispatch into the Victorian electricity market. The second unit was available for dispatch on 21 August 2012, signalling the formal completion of the 550 MW development and representing an investment by Origin of $810 million (excluding $160 million of capitalised interest). Origin has 30 MW of operating wind capacity at Cullerin Range and a number of contractual wind off-take power purchase agreements to support the Company s renewable energy obligations under the Federal Government s Large-Scale Renewable Energy Target, as well as provide GreenPower to retail customers. While Origin s wind development strategy has been to maintain the option to build wind generation by holding development sites, recent contracting activity has led to the de-prioritisation of certain sites for development, amounting to a gross impairment loss of $65 million. Origin s most advanced wind development project is Stockyard Hill in western Victoria, which was granted conditional wind farm planning permits during the year. The 154 wind turbine project has a forecast capacity of around 300 to 500 MW and an expected average capacity factor of 36%. Origin recently commenced a process to assess a range of options to ensure the optimal development at Stockyard Hill, including third party proposals for engineering, procurement and construction of the wind farm on Origin s behalf or providing equity for the wind farm s development while Origin supports it through a power purchase agreement. Origin Energy Limited ABN /60

150 5.1.6 Operating costs, customer accounts and churn Year ended 30 June ($ million) Natural gas, Electricity & non-commodity operating costs Change % (551) (419) 32 LPG operating costs (131) (120) 9 Total operating costs (682) (539) 27 Natural gas, Electricity and Non-commodity operating costs Energy Markets includes within its Electricity, Natural gas and Non-commodity operating costs, all costs associated with servicing and maintaining customers, all customer acquisition and retention costs, and all costs associated with delivering new product lines within the Noncommodity business. Natural gas, Electricity and Non-commodity operating costs increased by 32% or $132 million to $551 million, largely reflecting costs associated with the increased scale of the business following the NSW acquisition in the prior year. 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. As these services are at a cost which is higher than the incremental cost Origin would have incurred internally, a provision was raised on acquisition. The unwind of this provision for the year to 30 June 2012 was $98 million ($35 million in the prior year), which is shown as a reduction in Natural gas, Electricity and Noncommodity cost-to-serve. Year ended 30 June Change Change % Natural Gas, Electricity & non-commodity cost to serve (excl. TSA unwind) ($m) (649) (454) (195) 43 TSA provision unwind ($m) Total Electricity, Natural gas & Non-commodity operating costs ($m) (551) (419) (132) 32 Maintenance costs ($m) (465) (351) (114) 32 Acquisition & retention costs ($m) (86) (68) (18) 26 Average customer accounts ( 000) 4,057 3, Cost to serve ($ per customer) (136) (134) (2) 1 Cost to maintain ($ per average customer) Cost to acquire/retain ($ per average customer) (115) (21) (112) (22) (3) 1 3 (5) Cost per acquisition / retention 29 ($ per win/retain) (70) (64) (6) 9 Cost to maintain increased by 32% or $114 million to $465 million, after the unwind of the TSAs, primarily due to a full year of servicing the expanded customer base following the NSW acquisition. On a per customer basis, cost to maintain increased by $3 per customer, from $112 to $115 per customer. Cost per customer increases were driven primarily by the establishment of systems, functionality and processes to comply with carbon-related requirements and investment in capability to service C&I customers. 29 Cost per acquisition/retention = Acquisition and Retention Costs divided by the sum of customer wins (545,000; 567,000 prior year) and retains (679,000; 494,000 prior year). Origin Energy Limited ABN /60

151 Origin s acquisition and retention costs increased by 26% or $18 million to $86 million. Gross cost increases were primarily driven by a full year of acquisition and retention costs relating to the newly-acquired NSW customer base. The increase in annual acquisition and retention costs included the launch of new products and promotions, including price discounts, flexible payment options and rate freezes, focused on customer retention. Increased costs were also experienced in the door-to-door acquisition channel with competition among retailers for resources increasing sales commission rates. Notwithstanding the gross increase in cost to acquire and retain, on a per customer level it reduced by $1 per customer from $22 to $21 per customer. This reflects the benefit of a higher proportion of low-churning customers from the acquired NSW retail businesses. LPG operating costs LPG operating costs increased by 9% or $11 million to $131 million, driven principally by an investment in labour and other operating costs to support the Country Energy acquisition and temporary service related distribution costs in Queensland and Victoria Customer accounts and churn Natural gas, Electricity and LPG customer accounts and churn The net impact of wins and losses resulted in a 160,000 decrease in Origin s total electricity and natural gas customer accounts from 4,137,000 at 30 June 2011 to 3,977,000 at 30 June The full year net customer loss of 160,000 was split 112,000 in the first half and 48,000 in the second half. Following the SAP migration, win activities increased in the second half of the financial year. Win rates improved and customer losses reduced against the first half as new campaigns were launched to focus on customer retention. Overall, competitive activity has been consistently high over the last two years, with national market churn stable at 20.4%. Origin s churn is lower than the market, and improved during the period from 18.5% to 17.1%. The improvement in Origin churn levels was attributable to the incumbency benefits of the NSW acquisition and a strong retention focus. NSW market churn increased to 16.7% from 12.8% in the prior year. This increase is typical for a recently privatised market, with Queensland experiencing a similar trend following the privatisation of Sun Retail in Customer account movement from 30 June 2011 to 30 June 2012 ( 000) Year ended June Electricity Natural Gas Total Electricity Natural Gas Total Change NSW 1, ,582 1, ,652 (70) Victoria , ,156 (40) Queensland (38) South Australia (12) Customer accounts 3, ,977 3, ,137 (160) As at 30 June 2012, Origin held 942,000 dual fuel (electricity and gas) customer accounts. Dual fuel accounts increased by 11,000 accounts in the second half of the year from 931,000 accounts at 31 December 2011, however year-on-year the balance was down 15,000 accounts from 957,000 customer accounts. As at 30 June 2012, Origin held 382,000 LPG customer accounts. This was an increase of 17,000 or 5% on the prior year. Origin Energy Limited ABN /60

152 5.1.8 Retail Transformation Program Retail Transformation continues to be a key priority as Origin is committed to delivering an improved customer experience and creating a more efficient and flexible operating model, delivering lower cost to serve. The new SAP billing and customer relationship management system was introduced and 2.6 million customers were migrated onto this new platform during the year. Normal post go-live stabilisation activities associated with this new system are now well underway with a focus on improving billing, exception management and contact centre processes to take advantage of the new system capabilities. A number of legacy systems have now been decommissioned. The rollout of the new online functionality has commenced and will continue over the coming months. Concurrently cost reduction initiatives are also underway. Capital spend for the life of the Retail Transformation Program to 30 June 2012, including capitalised interest, was $241 million. Energy Markets is well placed for the future, with industry leading core billing and customer management technology, new online functionality and continued investment in developing innovative energy solutions Segment Result The Energy Markets Segment Result was up 35% or $339 million to $1,317 million on the prior year from $978 million. Items excluded from the Energy Markets Segment Result totalled an expense of $20 million during the year, which included an increase in the fair value of financial instruments, offset by an impairment loss relating to Origin s portfolio of wind and gas fired generation development opportunities and its 50% equity interest in the Worsley generation plant, and transition and transaction costs associated with the Retail Transformation Program and the integration of the acquired NSW energy assets. This compares with an expense of $465 million in the prior year, which was primarily due to transition and transaction costs relating to the NSW acquisition and a decrease in the fair value of financial instruments. Growth capital expenditure, including capitalised interest, was $592 million, down 31% from $864 million in the prior year, primarily comprised of spending on Mortlake Power Station, upgrades to the Eraring Power Station and the Retail Transformation Program. Origin Energy Limited ABN /60

153 5.2 Exploration & Production Origin has exploration and production interests in eastern and southern Australia, the Perth Basin in Western Australia and in New Zealand. Origin also has international exploration interests in South East Asia, Kenya and Botswana. These activities are reported within the Exploration & Production segment. Australia Pacific LNG activities are reported separately and discussed in Section 5.3. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Total Segment Revenue Underlying EBITDA before exploration expense (2) Underlying EBITDA Underlying EBIT Segment Result Items excluded from Segment result (223) 1 N/A Growth capital expenditure Underlying EBITDA up 23% or $61 million to $329 million Higher revenue driven by a 12% increase in commodity unit prices (mainly crude oil and condensate) Production volumes from most fields steady with the exception of BassGas due to extended shutdown from Yolla MLE project; overall production volumes lower by 4% Lower exploration expense Higher non-routine general operating costs Origin s 2P Reserves 31 (excluding Origin s share of Australia Pacific LNG) increased by 7% or 81 PJe to 1,235 PJe Financial Performance Production, Sales and Revenue Year ended 30 June Change (%) Total Production (PJe 31 ) (3) Total Sales (PJe) (6) Commodity Sales Revenue ($m) Proved plus Probable (2P) Reserves (PJe) 32 1,235 1,154 7 Origin s share of total production in the Exploration & Production segment was down 3 PJe or 3% to 83 PJe. This was mainly due to the extended shutdown of the BassGas plant arising from Phase 1 of the Yolla MLE project. Sales volumes were also lower reflecting lower production together with lower sales from third party purchases. Of the total sales of 90 PJe, 28 PJe was sold internally to Origin, a 4 PJe decline from the prior year of 32 PJe. 30 Segment result for Exploration & Production does not include the impact of taxation and financing costs, which are included in the Corporate segment. 31 Refer to Glossary in Appendix Excludes Origin s share of Australia Pacific LNG reserves. Including Origin s share of Australia Pacific LNG s reserves, Origin s 2P Reserves decreased from 7,041 PJe to 6,807 PJe, or 3%, which includes Origin s dilution in Australia Pacific LNG from 50% to 42.5%. Origin Energy Limited ABN /60

154 Total revenue increased by 5% from $701 million in the prior year to $735 million. Commodity sales revenues increased by 5% compared to the prior year from $667 million to $700 million. Higher commodity prices more than offset 4% lower production volumes and 6% lower sales volumes. Further information regarding production, sales volumes and revenues is provided in Origin s June 2012 Quarterly Production Report, available at Operating costs Total operating costs including exploration expense reduced by 6% from the prior year. Expenses excluding exploration costs increased by 15% to $359 million from $313 million in the prior year, as detailed in the table below. Year ended 30 June 2012 ($m) 2011 ($m) Change % Cost of goods sold (100) (70) 43 Stock movement 5 (1) N/A Royalties, tariffs and freight (62) (57) 9 General operating costs (202) (185) 9 Expenses (359) (313) 15 Exploration (49) (118) (58) Total operating costs (407) (431) (6) For the current year, cost of goods sold was $100 million compared with $70 million in the prior year. This reflects an increase in the proportion of crude oil to total product purchases (from 38% to 51% of total product purchases) combined with an increase in the average product purchase cost (in particular, crude oil which increased by 18%) for product purchases from the Cooper Basin. Stock movement expense reduced by $6 million from the prior year reflecting an increase in inventory volumes held and inventory value due to the higher cost of third party purchases. Royalties, tariffs and freight increased by $5 million, or 9%. This increase is primarily due to an increase in royalties paid by Kupe (+$6 million) due to the exhaustion of the benefit from royalty deductions for construction deductibles in the prior year. General operating costs increased by 9% or $17 million to $202 million in the current year. Routine general operating costs increased by $1 million. However, non-routine general operating costs were $16 million higher than the prior year primarily due to an increase in planned shutdown activity at Kupe, Otway and BassGas ($5 million), one-off repairs to the Kupe offshore umbilical cable ($5 million), increased costs at non-operated Cooper Basin assets predominantly due to increased flood recovery costs ($4 million) and contract costs to accelerate production from Manutahi ($2 million). Origin s general operating costs per unit of production increased by $0.28 per GJe, or 13%, compared with the prior year to $2.43 per GJe, mainly due to lower production volumes. Exploration expenses For the current year, exploration expenses were $49 million, comprised primarily of a $27 million expense for Thistle-1 in Bass Basin, compared with $118 million in the prior year. The significant decrease relates to lower exploration activity domestically and internationally, reduced expense for unsuccessful wells compared with the prior year, and dilutions in several offshore tenements in Kenya providing farmin income and thereby reducing exploration expense. During the year, there was a focus on reducing Origin s risk exposure across a number of its exploration areas with farmout agreements. Origin Energy Limited ABN /60

155 Segment Result For the reasons set out above, Underlying EBITDA increased by 23% or $61 million to $329 million in the current year. Underlying depreciation and amortisation charges were slightly higher than the prior year at $224 million, primarily due to an increase in the capital value of the Cooper Basin assets and higher depreciation for the Perth Basin and New Zealand Onshore assets compared with the prior year. Reduced production resulted in a 5% increase to $2.69 per GJe on a unit of production basis on the prior year. Underlying EBIT increased by $58 million from $47 million to $105 million for the current year. This represents the Segment Result for the Exploration & Production segment. Items excluded from the Exploration & Production Segment Result include an expense of $223 million in the current year, of which $198 million relates to a gross impairment loss on the Ironbark CSG permit area reflecting the realisation of an upfront tax deduction for the permit acquisition, $27 million relates to a gross impairment loss recorded against property, plant and equipment resulting from the unlikelihood of realising value for the Surat Basin conventional assets, partially offset by a $2 million financial instrument gain on revaluation. Capital expenditure Growth capital expenditure (which included capitalised interest for the Ironbark CSG project in the first half of the year) increased 26% or $86 million to $421 million in the current year. This primarily reflected expenditure in the Otway, Bass and Cooper basins the Ironbark CSG project, and ongoing exploration and evaluation activities Reserves The 2P Reserves attributable to Origin across its areas of interest (excluding its shareholding in Australia Pacific LNG) increased by 7% or 81 PJe to 1,235 PJe 33 at 30 June Significant changes in 2P Reserves net of production were recorded for Ironbark (+61 PJe), Cooper Basin (+57 PJe), Conventional Surat Basin (-15 PJe) and Offshore Taranaki Basin (Kupe, +14 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 2012 is included in Origin s Annual Reserves Report released to ASX on 31 July 2012 and available on Origin s website at Operations Australia 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 65 PJe net to Origin during the current year, a decrease of 4 PJe or 6% on the prior year, due mainly to an extended shutdown of BassGas for Phase 1 of the Yolla MLE project. Production for the year included 55 PJ of sales gas, 1,129,000 barrels of crude oil and condensate and 79 kt of LPG. 33 The statements in this Management Discussion & Analysis relating to reserves and resources as at 30 June 2012 for the Ironbark asset are based on information in the Netherland, Sewell & Associates, Inc. (NSAI) report dated 23 July 2012, compiled by Mr. John G. Hattner, a full-time employee of NSAI. Mr. John G. Hattner has consented to the statements based on this information, and to the form and context in which these statements appear. The statements in this document 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 Energy Limited ABN /60

156 Offshore Australia Production from Origin s offshore Australian assets in the Otway and Bass basins of 40 PJe was 12% lower than in the prior year primarily as a result of the extended shutdown due to the Yolla MLE project. BassGas production was shutdown from December 2011 and is expected to return to a free flow production mode during the September Quarter In October 2011, joint venture approval was obtained for development of the Geographe field as part of the Otway Gas Project. The development consists of two subsea horizontal wells and a subsea production system to link the wells to existing Thylacine production facilities. Drilling commenced in the Geographe field in late May The Thistle-1 exploration well in VIC/P43 permit area was plugged and abandoned during the year after no significant hydrocarbons were encountered. Evaluation studies of the Speculant Transition Zone 3D seismic survey over the near-shore waters of VIC/RL2 (V) and the adjacent onshore areas are continuing. Onshore Australia Production from Origin s onshore assets increased 5% to 25 PJe on the prior year due to marginally higher production in the Cooper and Perth basins. In the Cooper Basin, production increased marginally as lower gas production was more than offset by an increase in crude oil production. Origin participated in drilling 41 development wells in the Cooper Basin compared with only 20 wells in the prior year which was floodaffected. Production in the Perth Basin was 4 PJe or 46% higher than the prior year mainly due to a full year contribution from Redback South at Beharra Springs. Production in the Surat Basin was 2 PJe or 12% lower than the prior year due to natural field decline. Evaluation activities continued across all areas including seismic acquisition, reprocessing and interpretation. In the Ironbark permit surface facilities are being installed together with gathering networks and pond construction to support the pilot well production facilities. This programme will continue into the 2013 financial year. New Zealand In New Zealand, Origin participates in production from both offshore and onshore assets in the Taranaki Basin, and has interests in exploration permits in the Canterbury and Northland basins. Origin s share of production from these assets was 18 PJe, an increase of 5% on the prior year. Production for the year included 10 PJ of sales gas, 1,050,500 barrels of crude oil and condensate and 42 kt of LPG. Higher gas and LPG production was partially offset by lower liquid yields. The Kupe field remaining 2P Reserves have been revised upwards to 408 PJe (Origin share 204 PJe) following further evaluation of well and field production and pressure data. Production testing and 3D seismic analysis of three Manutahi oil wells drilled in 2011 continued during the year. Construction of the Manutahi surface production and water injection facilities has commenced. In May 2012, Origin agreed to sell its interests in the Tariki, Ahuroa, Waihapa and Ngere (TAWN) fields together with the Waihapa Production Station for $42 million Canadian dollars (with adjustments) and a 5% overriding royalty payable to Origin on future production from the TAWN fields. The transaction is expected to complete in October Origin is seeking to farm down its interest in the Canterbury Basin with the expectation of drilling a well during the 2014 financial year. Origin Energy Limited ABN /60

157 International oil and gas exploration 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 focussed on conventional gas exploration in a number of countries in South East Asia and in the highly prospective east coast of Africa in Kenya, and for CSG in Botswana. In Vietnam, planning is in progress for the drilling of a well in the Song Hong Basin in the first half of the 2013 financial year. Farmout negotiations have been concluded with two farminees for a 55% equity share in Block 121 subject to government and other approvals. In Kenya, drilling at the offshore Mbawa-1 well in Block L8 commenced in August In Botswana, Origin entered into a 50:50 incorporated joint venture in November 2011 with Sasol Limited to explore for CSG. An aero-magnetic survey began in June 2012, the first part of a three year exploration program that will also include an extensive drilling and coring program. Origin Energy Limited ABN /60

158 5.3 Australia Pacific LNG The Australia Pacific LNG segment includes Origin s equity accounted share of the results of Australia Pacific LNG Pty Ltd, and the financing costs, foreign exchange gains and losses and tax associated with Australia Pacific LNG. Origin s shareholding in Australia Pacific LNG at 30 June 2011 was 50%. On 9 August 2011 completion of an equity subscription agreement between Australia Pacific LNG and Sinopec resulted in a dilution of Origin s shareholding to 42.5%. Origin recorded a $437 million gain on diluting its shareholding in Australia Pacific LNG as a result of the issue of shares to Sinopec. Origin s shareholding at 30 June 2012 was at 42.5%. A second subscription agreement between Australia Pacific LNG and Sinopec was signed on 20 January Following the taking of FID on the second train of the Australia Pacific LNG project in July 2012, Origin s shareholding in Australia Pacific LNG was diluted on 12 July 2012 to 37.5% with completion of Sinopec s increased share subscription in Australia Pacific LNG from 15% to 25%. In Origin s Financial Statements, the financial performance of Australia Pacific LNG is equity accounted. Consequently, revenue and expenses from Australia Pacific LNG do not appear explicitly in the Australia Pacific LNG Segment Result. Origin s share of Australia Pacific LNG s Underlying EBITDA is included in the Underlying EBITDA of the Australia Pacific LNG segment. Australia Pacific LNG s Underlying interest, tax, depreciation and amortisation expense is accounted for between Underlying EBITDA and Underlying EBIT in the line item Share of interest, tax, depreciation and amortisation of equity accounted investees. As a result, Origin s share of Australia Pacific LNG s Underlying net profit after tax is included in the Underlying EBIT line and Segment Result line below. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Total Segment Revenue Underlying EBITDA (25) Underlying EBIT (33) Segment result (33) Items excluded from Underlying EBIT and Segment result N/A Origin cash contribution to Australia Pacific LNG 34 1,167 - N/A Underlying EBITDA of $47 million in the year, 25% lower than in the prior year reflecting Origin s reduced shareholding in Australia Pacific LNG and increased expenditure associated with meeting LNG regulatory and operating requirements for the export project Marketing agreements are in place with Kansai and Sinopec for two LNG trains FID taken on the first LNG train in July 2011 and the second LNG train in July 2012 Australia Pacific LNG reserves increased to 13,111 PJe 2P Reserves and 16,047 PJe 3P Reserves 35 (100% basis) at 30 June 2012 The Australia Pacific LNG project is progressing on schedule and budget to deliver first LNG in mid Via loan repayments 35 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

159 5.3.1 Australia Pacific LNG financial performance (100% basis) Production, Sales and Revenue Total APLNG (PJe) Origin s interest (PJe) Total APLNG (PJe) Origin s Interest (PJe) Operating Performance June 2012 June 2011 Production Volumes Sales Volumes Australia Pacific LNG s domestic production increased 11 PJe or 11% from 97 PJe to 108 PJe for the current year. This was despite limited average production in the Spring Gully area as it recovers from water capacity restrictions during the 2010/2011 flooding events and a temporary shutdown of the Northern Denison field to carry out upgrade activities. Sales volumes increased by 6 PJe or 6% to 115 PJe for the current year (prior year 109 PJe) due to increased customer demand. Average gas prices were also marginally higher, and consequently revenue increased in line with sales volumes to $362 million compared with $336 million in the prior year, an increase of 8%. Financial performance The following information is derived from Note 11(b) to Origin s Financial Statements. Financial Performance ($m) Total APLNG Origin s interest 36 Total APLNG June 2012 June 2011 Operating revenue Operating expenses (251) (210) Origin s interest 37 Underlying EBITDA Depreciation and amortisation expense (93) (77) Net financing income/ (costs) 6 (4) Income tax benefit/(expense) 10 (3) Underlying Share of ITDA (77) (33) (84) (42) Segment Result Items excluded from Segment Result Statutory Profit Australia Pacific LNG s operating expenses increased by 20% or $41 million to $251 million, compared with $210 million in the prior year. This reflected an increase in the costs associated with meeting the LNG-related regulatory and operating requirements in both operated and nonoperated fields. Increased expenses relating to the LNG project office, LNG marketing, repairs and maintenance following the 2011 floods and additional preventative maintenance on key production and compression equipment were also incurred during the year. As a result, Underlying EBITDA decreased by 12% or $15 million, from $126 million to $111 million. Depreciation and amortisation expenses increased by 21% or $16 million from $77 million to $93 million due to an increase in assets in operation compared to the prior year. 36 Reflects Origin s 50% share in Australia Pacific LNG until 9 August 2011 at which time this was diluted to a 42.5% share, and remained at that level at 30 June Reflects Origin s 50% share in Australia Pacific LNG during the prior year. Origin Energy Limited ABN /60

160 Underlying net financing income increased $10 million from an expense of $4 million to income of $6 million during the current year, due to interest earned on the proceeds received under the subscription agreement with Sinopec. Underlying income tax benefit increased $13 million from an expense of $3 million to a benefit of $10 million compared to the prior year due to the reduction in Underlying profit before tax compared to the prior year and increased research and development deductions. Items excluded from the Segment Result decreased 49% or $24 million from $49 million to $25 million in the current year. This was primarily due to a net foreign exchange loss ($12 million) and a foreign exchange loss on the deferred tax balances of subsidiaries in the Australia Pacific LNG consolidated group with US dollar functional currencies ($13 million), offset by higher unwinding of discounts recognised on shareholder receivables (-$10 million). Consequently, Statutory Profit for Australia Pacific LNG decreased 35% or $32 million from $91 million to $59 million Segment Result The Australia Pacific LNG segment recorded an Underlying EBITDA of $47 million compared with $63 million in the prior year, a decrease of 25%. This reflected higher operating costs within Australia Pacific LNG as described above, together with the dilution of Origin s shareholding in Australia Pacific LNG from 50% to 42.5% in July Origin s Underlying share of ITDA for Australia Pacific LNG decreased from $42 million in the prior year to $33 million in the current year. Origin s share of the Underlying Profit of Australia Pacific LNG decreased from $21 million in the prior year to $14 million in the current year. This is recorded as the Segment Result for the Australia Pacific LNG segment in Origin s Financial Statements. Items excluded from the Australia Pacific LNG Segment Result amount to $430 million (post-tax) in the current year, as described in Section Reserves Australia Pacific LNG increased 2P Reserves from 11,775 PJe at 30 June 2011 to 13,111 PJe at 30 June 2012, with 3P Reserves increasing from 14,742 PJe to 16,047 PJe 38. The overall increase in 2P Reserves of 1,336 PJe included additions, revisions and corrections totalling 1,444 PJe, together with production of 108 PJe. Origin s shareholding in Australia Pacific LNG was 50% at 30 June 2011 and was diluted to 42.5% on 9 August The tables below shows Origin s net share of reserves and resources reflective of this change. At a 2P Reserves level Origin s share of reserves has therefore decreased by 315 PJe net of production to 5,572 PJe. 38 The June 2012 assessment of Australia Pacific LNG s CSG reserves and resources has been prepared by internationally recognised petroleum consultant Netherland, Sewell & Associates, Inc. (NSAI) as per their report dated 26 July 2012, compiled by Mr John G. Hattner, a full-time employee of NSAI. Mr John G. Hattner is qualified in accordance with ASX listing rule 5.11 and has consented to the statements made based on this information, and to the form and context in which these statements appear. The Reserves Statement has been prepared to be consistent with the Petroleum Resources Management System 2007 published by Society of Petroleum Engineers (SPE). This document may be found at the SPE website spe.org/spe-app/spe/industry/reserves/prms.htm A factor of petajoules per billion cubic feet of gas was used in the conversion of volumetric petroleum product measures to the energy measure of petajoules. Origin s interests in exploration and production tenements (held directly or indirectly) may change from time to time and some of Australia Pacific LNG s CSG tenements are subject to commercial arrangements under which, after the recovery of acquisition, royalty, exploration, development and operating costs, plus an uplift on exploration, 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 economic tests consistent with these reserves and based on that assessment does not consider that reversion will impact the reserves quoted within this report. Origin Energy Limited ABN /60

161 APLNG Reserves (PJe) Proved and Probable (2P) Proved, Probable and Possible (3P) Reserves June 2011 Additions/R evisions Production Reserves June 2012 Origin net Jun 2011 (50%) Origin net June 2012 (42.5%) 11,775 1,444 (108) 13,111 5,887 5,572 14,742 1,413 (108) 16,047 7,371 6,820 APLNG Resources (PJe) 2C Contingent Resources 3C Contingent Resources Resources June 2011 Net Increase/ (Decrease) Resources June 2012 Origin net Jun 2011 (50%) Origin net June 2012 (42.5%) 4,041 (216) 3,825 2,020 1,626 10,050 (221) 9,829 5,025 4,177 Australia Pacific LNG s reserves have been assessed against existing contractual arrangements, additional domestic sales and a forward price scenario based on the monetisation of the reserves through Australia Pacific LNG s CSG to LNG export project. Gas prices for the CSG to LNG export project are calculated using the Residual Pricing Method (RPM) which is described in Origin s Annual Reserves Report. 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 2012 is included in Origin s Annual Reserves Report released to the ASX on 31 July 2012 and available on Origin s website at Australia Pacific LNG export project The Australia Pacific LNG export project was sanctioned in July 2011 for an initial 4.5 million tonnes per annum LNG production train and infrastructure to support a second LNG train of the same size. The second LNG train was sanctioned in July On 20 January 2012, Sinopec agreed to purchase an additional 3.3 million tonnes per annum of LNG through to 2035 under its existing sale and purchase agreement with Australia Pacific LNG. On 29 June 2012, Australia Pacific LNG and The Kansai Electric Power Company signed a binding agreement for the sale and purchase of approximately 1 million tonnes of LNG per year for 20 years. The above Sinopec and Kansai agreements complete the marketing of Australia Pacific LNG s two train project Capital expenditure and funding The two train CSG to LNG project is estimated to cost $23 billion from the taking of the first FID in July 2011 to first LNG from the second train. Since July 2011, there has been no significant change in the estimated US$20 billion project costs other than as a result of movements in foreign exchange rates, which at the time converted to $23 billion. The project is on schedule and budget to deliver first LNG in mid Over two thirds of this estimated capital cost is denominated in Australian dollars with the balance predominantly in US dollars. Origin Energy Limited ABN /60

162 The table below details Australia Pacific LNG capital expenditure (100% basis) for the 2012 financial year. Year ended 30 June 2012 A$ million Project costs plus capitalised O&M costs 4,710 Domestic costs 504 Exploration costs 85 Total 39 5,299 Project costs plus capitalised O&M costs include all operated and non-operated costs associated with the LNG project plus all operating and maintenance costs associated with the LNG project which have been capitalised. These operating and maintenance costs are excluded from the LNG export project cost estimates. The operating and maintenance spend will grow with progress in the upstream project. The capitalisation of operating and maintenance costs prior to LNG start up will continue to be assessed. Domestic costs include those from Australia Pacific LNG s domestic operations, upstream nonoperated costs associated with the supply of gas to third party LNG projects and costs associated with head office and system assets. Exploration costs relate to exploration not expected to be applied to Phase 1 of the project (pre-lng start-up). During the 2012 financial year, Origin contributed $1,167 million to Australia Pacific LNG via loan repayments to meet its share of Australia Pacific LNG capital expenditure not otherwise met by cash available to Australia Pacific LNG. Origin has made no cash contributions in previous periods as all expenditure was met through the proceeds from the issue of equity to other shareholders and from operating cash flows. The non-operated joint venture operations remain on track to deliver gas when needed by Australia Pacific LNG in order to deliver LNG from mid There have been cost increases announced by third party LNG projects in which Australia Pacific LNG is a non-operating joint venture participant in specific upstream gas fields. Australia Pacific LNG s cost estimates announced in July 2011 already allowed some headroom for cost increases of this type in the period to first LNG. The impact of the other projects cost increases on Australia Pacific LNG s existing cost estimates for its two-train project will be further assessed when more information becomes available from these projects Project performance and key milestones The CSG to LNG project is on budget and on schedule to achieve key project milestones: Milestone First gas field facility complete Pipeline complete First LNG from Train One First LNG from Train Two Date Mid-2013 Early-2014 Mid-2015 Early-2016 The Upstream Project is 14% complete and the Downstream Project is 17% complete, based on overall progress of work completed to date. 39 Australia Pacific LNG capital expenditure is shown on an accruals basis. No revenue has been capitalised. Origin Energy Limited ABN /60

163 Key accomplishments since project commencement Upstream Project Drilling: 68 Phase 1 40 operated wells have been drilled and Australia Pacific LNG participated in 262 non-operated wells during the 2012 financial year. Improvements to land access have been made and the project has 340 operated wells in the land bank (wells ready for pad preparation and drilling). A third Savanna hybrid coil-tubing rig was mobilised in July 2012 and now drilling in Condabri. Additional drilling capacity is expected to be added in the coming months. Gathering: 595 of the 1,100 (operated) wells which are required for trains 1 and 2 have been scouted (land surveys, environmental studies, flow-line routes etc.) and construction drawings and work packs issued have been issued for approximately 300 of these wells. East Coast Pipelines are undertaking gathering works in the Spring Gully area, and Leighton Contractors are undertaking gathering works in the Condabri area. A third contractor is expected to be engaged shortly to install gathering lines in the Combabula area. A 400- person camp has been constructed and is operational in Condabri to house gathering construction teams. Facilities: The second set of compressor trains was shipped to Brisbane from Germany and the first two gas plant pre-assembled units were shipped from Thailand to Brisbane on schedule during June and July Site preparation works are largely complete for the first gas and water facilities at Condabri. Laing O Rourke and Leighton Contractors are mobilising for site construction activities. Pipeline: Construction of the pipeline commenced in July 2012, following receipt of required environmental permits. Pipeline stringing commenced in August 2012, with welding on track to start in September As at 30 June 2012, 166 pipeline easements, corresponding to 240 kilometres of pipeline, had been secured. The acquisition of easements is continuing ahead of pipeline construction. The main pipeline is on track to be completed in early-2014, consistent with the project schedule and the Narrows Crossing is on track to be complete by mid Electrification: Australia Pacific LNG has contracted Powerlink to undertake the electrification sub-project. All aspects of electrification are progressing on schedule. Downstream Project Curtis Island: Early works, including clearing, rock delivery and placement were impacted by heavier than typical rainfall during the wet season resulting in lower than anticipated productivity at the site. Notwithstanding this impact, key critical path activities are all on schedule: (i) works associated with the LNG compressors (fabrication in Italy and site works on Curtis Island); (ii) the construction of the Material Offloading Facility (MOF), which will receive the deliveries of LNG plant items in early 2013; and (iii) the construction of the LNG tanks. Pouring of concrete foundations for Train 1 commenced in June Construction of the first phase of the accommodation village on Curtis Island is on track to support initial occupancy in the September Quarter 2012, slightly behind schedule. The Curtis Island transport infrastructure is slightly behind plan, however, will not adversely impact the Australia Pacific LNG overall schedule. Mainland facilities: Key infrastructure including Roll-On Roll-Off facilities on Fishermans Landing and Curtis Island sites, which supports the delivery of people and materials from the mainland to Curtis Island, is complete and operational. Dredging: Dredging works have progressed more slowly than anticipated due to a combination of early turbidity issues, seasonal tides and lower than anticipated productivity of dredging vessels. However, Australia Pacific LNG has worked with the other proponents 40 Phase 1 includes Australia Pacific LNG operated wells required to be online to deliver first gas to both trains of the CSG to LNG export project (in conjunction with gas from non-operated areas). Origin Energy Limited ABN /60

164 and Gladstone Port Corporation to ensure that all critical aspects of dredging are completed on time to support construction activities. All construction relating to dredging works is complete, with MOF and LNG jetty shipping channels progressing to plan following the introduction of a second suction cutter dredge. Module yard: Site works have been completed in preparation for the receipt of material and assembly of modules in Batam, Indonesia. Bechtel and Australia Pacific LNG personnel have commenced mobilisation to the module yard, and first deliveries of bulk materials have arrived on schedule. Module assembly is expected to commence in September 2012 and first module delivery is expected early in the second half of the 2013 financial year. Project performance to 30 June 2012 Upstream Result Downstream Result Overall progress of work completed to date Drilling Access approvals Operated wells drilled 14% Overall progress of work completed to date 340 Site civil construction 68 Material Offloading Facility Curtis Island construction dock Curtis Island Roll on Roll off ramp Curtis Island causeway Curtis Island 17% 65% On track On track On track Gathering Gathering wells scouted Gathering well sites ready for construction Early works Gathering camp Gathering construction contracts awarded to Leighton Contractors and East Cost Pipelines On track Occupied Complete Mainland Facilities Fisherman s Landing Northern Extension roll on /roll off facility and ferry terminal Complete Facilities Fabrication of pre-assembled units for Train One Delivery of the first two units Delivery of the second set of compressor trains 76% Shipped Shipped Dredging Marine facilities Dredging works 71% 34% Site preparation at Condabri Central Complete Construction contracts awarded to Lang O Rourke (gas facilities) and Leighton Contractors (water treatment facilities) Complete Pipeline Pipeline easements Pipeline engineering completion Pipeline delivered Pipeline construction contracts awarded to McConnell Dowell, Consolidated Contracting Co. joint venture (MCJV) and NACAP Construction of Narrows Crossing (performed by QCLNG) % 30% Complete On track LNG Plant Compressor manufacturing Compressor foundations LNG tanks On track On track Ahead of plan Origin Energy Limited ABN /60

165 Upstream Result Downstream Result For personal use only Electrification Eastern electrification Train 2 electrification On track On track Key project goals and milestone for the 2013 financial year Upstream FY2013 Plan Downstream FY2013 Plan 200 wells drilled Q2 Module assembly underway Q1 100 wells with gathering lines installed Q2 Mechanical erection begins Q2 Condabri Central gas plant 50% complete Q2 Material Offloading Facility complete Q3 150km pipeline installed Q2 First compressors shipped to site Q3 Origin Energy Limited ABN /60

166 5.4 Contact Energy This segment reports the results of Origin s 53.0% owned controlled entity, Contact Energy, which is a natural gas, electricity, LPG and energy related products and services provider and power generator in New Zealand. Origin held a 52.6% interest in Contact Energy at 30 June The segment also includes Origin s interest and tax relating to borrowings for the investment in Contact Energy. Financial Performance Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Total Segment Revenue 2,102 1, Underlying EBITDA Underlying EBIT Segment Result Items excluded from Segment Result 42 6 (1) N/A Growth capital expenditure Underlying EBITDA up 16% to $400 million Higher wholesale electricity prices offset by reduced hydro generation volumes Improvement in generation unit costs and Commercial and Industrial margins Improved portfolio flexibility from the Ahuroa gas storage facility and the Stratford and Whirinaki peaker plants Te Mihi on track, Enterprise Transformation now focused on retail program Operational Performance Year ended 30 June Change (%) Total generation volume (GWh) 10,653 10,259 4 Retail electricity sales (GWh) 8,280 8,254 0 Gas sales (retail and wholesale) (PJ) (52) LPG sales (tonnes) 65,715 65,201 1 Electricity customers ( 000s) 443, ,000 (1) Gas customers ( 000s) 62,500 60,000 4 LPG customers (including franchisees) ( 000s) 61,700 59,300 4 Total customers ( 000s) 567, ,300 0 Origin owns a 53.0% interest in and consolidates 100% of Contact Energy in accordance with the Australian accounting standards. The interests attributable to minority shareholders are recognised as Non-controlling interests in the Financial Statements. A financial report entitled Management discussion of financial results for the year ended 30 June 2012 was issued by Contact Energy to the New Zealand Stock Exchange (NZX) on 14 August 2012 and is available on Origin s website That document contains details regarding Contact Energy s financial and operating performance during the period, including comparisons to the performance of Contact Energy in the prior year. 41 Segment Result represents Underlying EBIT less interest, tax and non-controlling interests. 42 Items excluded from Segment Result are net of tax and non-controlling interests. Origin Energy Limited ABN /60

167 In consolidating Contact Energy s results, Origin used an average exchange rate of NZ$1.28 to the Australia dollar, compared with NZ$1.30 to the Australian dollar in the prior year. Contact Energy s Underlying EBITDA reported in Origin s accounts in Australian dollars increased 16% or $55 million to $400 million from $345 million, while Underlying EBIT increased in line with Underlying EBITDA to $248 million with higher depreciation and amortisation costs due to the growth of the Contact Energy asset base with the inclusion of the Stratford peaker plant and Ahuroa gas storage facility. The Contact Energy Segment Result increased by 30% or $14 million to $60 million in the year. Improved earnings were partially offset by higher net financing costs, an increase in income tax (at a lower rate due to a decrease in the New Zealand company tax rate from 30% to 28%) and non-taxable gains on the divestment of Oakey Power Holdings Pty Ltd and the sale of Clutha land. Items excluded from the Segment Result are net of tax and non-controlling interests and include adjustments for the removal of a gain on exit of Contact Energy s investment in Oakey Power Holdings Pty Ltd, the change in fair value of financial instruments, transition costs arising on implementation of Contact Energy s IT transformation program and associated activities in the retail business, and the net cost of not proceeding with the Clutha development. Growth capital expenditure of $402 million (including capitalised interest) increased 18% from $341 million in the prior year primarily due to $308 million of expenditure for the Wairakei Investment Program, which includes the Te Mihi Power Station. The commentary below relates to Contact Energy s performance in New Zealand dollar terms. Contact Energy s Underlying EBITDA increased 15% or by NZ$67 million to NZ$509 million. Contact Energy s Electricity business segment grew strongly, with Underlying EBITDA up 16% or NZ$63 million to NZ$468 million. The benefits of Contact Energy s diverse generation portfolio were realised during the year with higher wholesale electricity prices due to lower hydro generation (due to record low inflows in the South Island), which increased thermal generation, including 356 GWh from Contact Energy s Stratford Peakers. The gains from higher prices were offset by an unfavourable fuel mix with Contact Energy s hydro volumes down 25% on the prior year. Improvements in the flexibility of Contact Energy s portfolio were evidenced by take-or-pay savings, lower average gas costs and increased revenue from providing more capacity to the ancillary services market. Lower international carbon prices also assisted in lowering the thermal unit generation cost. Total electricity retail sales were in line with the prior year with continued sales growth in the C&I market offset by the impact of mass market customer losses up until August As part of a competitive focus on retaining and gaining customers, the introduction in July 2011 of a higher prompt payment discount for residential customers who receive and pay their bills online (from 12% to 22%) has been successful with a net gain of 5,000 customers since its introduction. Underlying EBITDA from Contact Energy s Other business segment (retail and wholesale gas, LPG and meters) was up 12% or NZ$4 million to NZ$41 million, primarily due to improved LPG margins and a reduction in carbon costs for the retail, wholesale gas and LPG businesses. Contact Energy strengthened its financial position during the year with capital initiatives including the issue of NZ$200 million of subordinated capital bonds in December 2011 and a long-term NEXI/ANZ NZ$105 million export credit agency facility for the 166 MW Te Mihi geothermal project, which has not yet been drawn down. Origin Energy Limited ABN /60

168 5.5 Corporate This segment reports corporate activities that have not been allocated to other operating segments together with business development activities outside Origin s existing operations. Corporate activities consist of Origin s corporate office costs including executive management, finance, strategy, legal and company secretarial costs. Business development activities are those that do not relate directly to Origin s existing business operations, principally Origin s overseas generation development opportunities such as geothermal opportunities in Chile and Indonesia, hydro opportunities in PNG and Chile and the Transform Solar joint venture. Origin s Australian geothermal activities with Geodynamics have also been included in this segment. With the exception of net financing costs and tax specifically associated with the Australia Pacific LNG and Contact Energy segments which are recorded in those segments, all other net financing costs and tax are recorded in the Corporate segment. Financial Performance Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Total Segment Revenue Underlying EBITDA (81) (68) 19 Underlying EBIT (86) (66) 30 Segment Result (603) (419) 44 Items excluded from Segment Result (106) (38) 179 Growth capital expenditure Lower EBITDA largely resulting from increased expenditure relating to new international developments in PNG, Chile and Indonesia Underlying net financing costs were higher reflecting a higher average net debt balance for the period to 30 June 2012 as a result of debt financing for the NSW acquisition and capital expenditure incurred, and a higher average interest rate paid on debt Underlying income tax expense is higher reflecting higher Underlying profit before tax from the Energy Markets and Exploration & Production segments Currently, no revenues are generated within the Corporate segment. Underlying EBITDA loss increased by 19% or $13 million from a loss of $68 million to a loss of $81 million. The largest contributor to this variance was expenditure relating to new international developments in PNG, Chile and Indonesia. Underlying EBIT loss was 30% or $20 million higher at a loss of $86 million, driven by the lower Underlying EBITDA. The Segment Result was 44% or $184 million lower at a loss of $603 million. This incorporates the impact of $150 million in net financing costs and $364 million of taxation expense reflecting higher earnings in other segments. Items excluded from the segment result totalled an expense of $106 million compared with an expense of $38 million in the prior year. See Section 3 for more detail. Growth capital expenditure increased 70% or $60 million to $146 million with the increase over the prior year being primarily due to initial cash contributions by Origin to the Energía Austral hydro joint venture in Chile. Origin Energy Limited ABN /60

169 5.5.1 Business development activities Geothermal Over the year, Origin has been investigating geothermal development options within Australia and internationally. Chile Origin holds a 40% interest in Energía Andina S.A. (EASA), Chile s leading geothermal exploration company. EASA has a portfolio of 12 geothermal exploration projects across northern and central Chile. Over the past 18 months, EASA has successfully confirmed the presence of a geothermal system at its Tinguiririca project, near Santiago, and has successfully completed one water well and three shallow temperature gradient wells to a depth of 300 metres that can be deepened later at Pampa Lirima in northern Chile. EASA has also concluded several geophysical surveys across its other projects with positive results. In the next 18 months, EASA will commence drilling deeper slim hole wells across its projects to confirm resource presence and will progress to drilling full-size exploration wells in areas where a geothermal system has been demonstrated. Indonesia A consortium between OTP Geothermal Pte (a 50:50 joint venture between Origin and The Tata Power Company Limited of India) and PT Supraco Indonesia, hold the Sorik Marapi geothermal concession in Northern Sumatra, Indonesia. Origin has a 47.5% effective interest in the concession. Over the past 12 months, activities continued to focus on surface exploration in the concession, gaining necessary regulatory approvals and preparing for exploration well drilling. Construction of roads and other associated infrastructure is expected to commence in the first half of the 2013 financial year and drilling of the first exploration well is expected to commence in the second half of the same period. Negotiations for the sale of power from this project have commenced with the Indonesian State owned utility. Australia Within Australia, Origin s investments in geothermal opportunities are through the Innamincka Deeps and Shallows incorporated joint ventures with Geodynamics, an equity interest of approximately 4.5% in the Geodynamics ASX-listed company and a 100% interest in a geothermal exploration licence (GEL 185) adjacent to the joint venture acreage. During the year, the Deeps joint venture (30% Origin share) completed the sale of the Rig 100 asset ($17 million, Origin share $5 million), received an insurance payout relating to the Habanero 3 well failure ($11 million, Origin share $3 million) and reached agreement with the government to bring forward the drawdown of the $90 million Renewable Energy Demonstration Program grant. In addition, a sale and purchase agreement for Rig 200 was executed, with settlement expected in September 2012 ($21 million, Origin share $6 million). The drilling of Habanero 4 well is nearing completion. Origin does not intend to contribute further to the cost of the well but retains the right to elect to resume paying its full cost contribution and return to full participation in the well at any stage. During the year, Origin as Operator of the Shallows joint venture (50% Origin share) conducted further desktop studies to determine whether to proceed and drill a second Shallows well. The joint venture did not identify a target with a high enough chance of success and therefore Origin has ceased activity in the Shallows project and in GEL 185. The carrying value of Origin s share of the Deeps (30%), Shallows (50%) and GEL 185 (100%) interests was fully impaired as at 30 June 2012 (net $33 million) as joint venture activities have not met expectations for a timely and commercial development of the geothermal resources. Origin Energy Limited ABN /60

170 Solar Transform Solar, a 50:50 incorporated joint venture between Micron Technology Inc. and Origin, decided to discontinue production of its SLIVER photovoltaic modules in Idaho, United States, in May This was in light of challenging market conditions given the global oversupply of solar photovoltaic capacity and the significant funding required to take the investment to a commercial scale. Having demonstrated SLIVER s investment proposition through its 20 MW production facility, Transform Solar will retain SLIVER s intellectual property and currently expects to continue its development at a laboratory scale. Origin s fully impaired the carrying value of its interest at 30 June 2012 (net $135 million). Hydro Papua New Guinea Origin is evaluating the potential for a hydroelectric development in PNG through PNG Energy Developments Limited (PNG EDL), a 50:50 joint venture between Origin and PNG Sustainable Development Program Limited. PNG EDL has engaged a consortium led by AECOM to undertake the project feasibility studies and social and environmental impact assessments. To date, the project feasibility work has continued to build on previous studies and to validate existing assumptions. This work has continued to bear positive results, including increasing the anticipated installed capacity of the hydroelectric scheme to 2,500 MW. The initial feasibility report will be reviewed during the first quarter of the 2013 financial year before proceeding to the next phase. Following this review, field investigations and community consultations will continue through the 2013 financial year in PNG and northern Queensland. Feasibility studies and front-end engineering and social and environmental impact assessments are expected to continue through to the 2014 financial year. Chile In April 2012, Origin announced the acquisition of a 51% voting interest in one of Chile s leading hydroelectric development companies, Energía Austral (EA), from Xstrata Copper. EA is currently developing a hydroelectric project of approximately 1,000 MW in the Aysén region in southern Chile. Once completed, it will comprise up to three hydroelectric plants and a transmission system connecting the project to Chile s national central electricity grid. Origin is taking the lead role in developing EA s hydroelectric project with Xstrata Copper retaining a 49% voting stake in the company. Origin has agreed to progressively invest project development costs of US$75 million during the next three years to complete a detailed project feasibility study, and, if the project is deemed feasible, an additional US$75 million towards a final investment decision. As at 30 June 2012, Origin had invested US$37.5 million in EA. The project is mid way through its feasibility stage. The main hydro project (the 640 MW Cuervo project) has achieved a significant level of engineering design and permitting progress, with final environmental approval expected to be granted in the 2013 calendar year. Significant progress has also been made with the engineering design, and environmental impact assessment for the 375 MW Blanco project. Grant King Managing Director Sydney, 23 August 2012 Origin Energy Limited ABN /60

171 Appendix 1 Origin Energy Key Financials Change Year ended 30 June ($m) ($m) (%) External revenue 12,935 10, Underlying EBITDA 2,257 1, Underlying depreciation and amortisation (614) (539) 14 Underlying share of interest, tax, depreciation and amortisation of equity accounted investees (45) (49) (8) Underlying EBIT 1,598 1, Underlying net financing costs (217) (143) 52 Underlying Profit before income tax and non-controlling interests 1,381 1, Income tax expense on Underlying Profit (415) (316) 31 Underlying net profit after tax before elimination of Noncontrolling interests Non-controlling interests share of Underlying Profit (73) (62) 18 Underlying Profit Items excluded from Underlying Profit 87 (487) N/A Statutory Profit Free cash flow 1,415 1,316 8 Group OCAT Ratio (12 months to 30 June) 11.5% 13.0% (12) Productive capital (12 months to 30 June) 14,523 11, Capital expenditure (including acquisitions) 43 1,680 4,954 (66) Total assets 44 27,981 26,900 4 Net Debt 45 5,522 4, Adjusted Net Debt 5,738 4, Shareholders Equity 14,458 13,516 7 Earnings per share Statutory Earnings per share Underlying Free cash flow per share Interim dividend per share Final dividend per share Net asset backing per share $13.27 $ Net debt to net debt plus equity 28% 23% 22 Origin Cash (excluding Contact Energy) (49) Origin Debt (excluding Contact Energy) (4,855) (3,949) 23 Contact Energy Net Debt (1,019) (802) 27 Total employees (numbers) 5,941 5, Total Recordable Injury Frequency Rate (TRIFR) Includes a benefit of $75 million in the 2012 financial year relating to a working capital settlement for the NSW acquisition. 44 Restated for the 2011 financial year for NSW acquisition adjustments. 45 The reported numbers for Net Debt include interest bearing debt obligations only. 46 Refer to Glossary in Appendix 6. Origin Energy Limited ABN /60

172 Appendix Reconciliation of Statutory Profit to Underlying Profit Reconciliation year ended 30 June 2011 ($ millions) EBITDA EBIT Net financing costs Tax Noncontrolling interests NPAT Statutory Loss 186 Unwinding of discount liability payable to APLNG - - (12) 4 - (8) Share of unwinding of discounted receivables within APLNG Share of tax benefit on translation of foreign denominated tax balances within APLNG (equity accounted) APLNG related items - 24 (12) 4-16 Decrease in fair value of financial instruments (201) (201) (139) Impairment of assets (214) (214) (160) Transition and transaction costs (253) (253) - 18 (2) (237) Tax benefit on translation of foreign denominated tax balances Other Less total excluded items (668) (644) (12) (487) Underlying Profit 673 Underlying Basic EPS (cps) 71.0 Origin Energy Limited ABN /60

173 Appendix 3 Movements in fair value of financial instruments Summary of movements in financial instruments Net Assets ($m) Change in Net Statement of Financial Position June 2012 June 2011 Assets ($m) Commodity Risk Management 140 (74) 214 Contact Energy (54) (60) 6 Treasury and Other (174) (161) (13) Total (88) (295) 207 Reconciliation of Statement of Financial Position and Income Statement items associated with movements in financial instruments Recognition of effective instruments in the Statement of Financial Position 41 Recognised in Equity (Hedge Reserve post tax) 31 Recognised in Deferred Tax Liability 10 Recognition of ineffective instruments in the Income Statement 166 Change in net assets (as above) 207 ($m) The fair value of financial instruments as measured against the relevant market prices is recorded in the Statement of Financial Position in the financial asset and liability balances. The total increase in the fair value of financial instruments for the 2012 financial year was $207 million, of which an amount of $41 million qualified for hedge accounting and is recognised in Equity (Hedge Reserve). The balance of $166 million is recognised as a gain in the Income Statement and is attributable to: Commodity risk management instruments (gain of $177 million) predominantly structured energy derivatives which do not qualify for hedge accounting including electricity caps and carbon instruments. Of the total gain of $177 million, $1 million expense is attributable to Contact Energy and $178 million gain is attributable to Origin (excluding Contact Energy); Foreign exchange and interest rate risk management instruments (expense of $11 million) - predominantly due to the lower forward interest rates in Australia and New Zealand and the depreciation of the Australian and New Zealand dollars against the US dollar during the period. Of the total expense of $11 million, a $8 million expense is attributable to Contact Energy and a $3 million expense is attributable to Origin (excluding Contact Energy). The gross gain in the Income Statement of $166 million this year compares with an expense of $201 million in the prior year, which was predominantly attributable to commodity risk management instruments. Origin Energy Limited ABN /60

174 Appendix 4 Reconciliation of segment reporting as at 30 June 2011 A reconciliation between the new segments and those previously reported is shown below. Origin Energy Limited ABN /60

175 Appendix 5 Energy Markets table 30 June 2011 Year ended 30 June 2011 Natural Gas Electricity Noncommodity Revenue 47,48 ($m) 1,180 5, Total COGS ($m) (975) (4,138) (358) (498) Gross Profit ($m) 205 1, LPG Total operating costs ($m) (539) Underlying EBITDA ($m) 1,174 Underlying EBIT ($m) 978 Underlying EBIT Margin (%) 12.7% Volumes sold 142 PJ 34 TWh N/A 476 kt Year-end customer accounts ( 000) 923 3,214 N/A 365 Average customer accounts ( 000) 889 2,228 N/A 353 Gross Profit per customer (average accounts, $) Underlying EBITDA per customer (average accounts, $) Underlying EBIT per customer (average accounts, $) Energy Markets revenue includes pool revenue from the sale of electricity when Origin s internal generation portfolio, including Eraring and Shoalhaven power stations, is dispatched. These pool revenues, along with the associated fuel costs, are netted off in wholesale energy costs within Electricity cost of goods sold. 48 Energy Markets revenue includes revenue from the sale of gas swaps to major customers at no margin. These revenues are netted off with the associated cost in Natural Gas cost of goods sold. Origin Energy Limited ABN /60

176 Appendix 6 Glossary Financial Measures Statutory Financial Measures Statutory Financial Measures are measures included in the Statutory Financial Statements for the Origin Consolidated Group, which are measured and disclosed in accordance with applicable Australian Accounting Standards. Statutory Financial Measures also include measures that have been directly calculated from, or disaggregated directly from financial information included in the Financial Statements for the Origin Consolidated Group. Term Net Debt Non-controlling interest Statutory EBIT Statutory EBITDA Statutory effective tax rate Meaning Total current and non-current interest bearing liabilities only less cash and cash equivalents. Economic interest in a subsidiary of the Consolidated Entity that is not held by the Parent entity or a controlled entity of the Consolidated Entity. Earnings before interest and tax as calculated from the Origin Consolidated Financial Statements. Earnings before interest, tax, depreciation and amortisation as calculated from the Origin Consolidated Financial Statements. Statutory income tax expense divided by Statutory Profit before Tax. Statutory EPS Statutory profit divided by weighted average number of shares. Statutory income tax expense Income tax expense as disclosed in the Income Statement of the Origin Consolidated Financial Statements. Statutory net financing costs Interest expense net of interest revenue as disclosed in the Origin Consolidated Financial Statements. Statutory Profit Net profit after tax and non-controlling interests as disclosed in the Income Statement of the Origin Consolidated Financial Statements. Statutory profit before tax Statutory share of ITDA Non-IFRS Financial Measures Profit before tax as disclosed in the Income Statement of the Origin Consolidated Financial Statements. The Consolidated Entity s share of interest, tax, depreciation and amortisation of equity accounted investees as disclosed in the Origin Consolidated Financial Statements. This document includes certain non-ifrs Financial measures. Non-IFRS Financial measures are defined as financial measures that are presented other than in accordance with all relevant Accounting Standards. Non-IFRS Financial measures are used internally by management to assess the performance of Origin s business, and to make decisions on allocation of resources. The non-ifrs Financial measures have been derived from Statutory Financial measures included in the Origin Consolidated Financial Statements, and are provided in this report, along with the Statutory Financial measures to enable further insight and a different perspective into the financial performance, including profit and loss and cash flow outcomes, of the Origin business. The principle non-ifrs profit and loss measure of Underlying Consolidated Profit has been reconciled to Statutory Profit in Section 3. The key non-ifrs financial measures included in this report are defined below. Term Adjusted Net Debt Free cash flow Free cash flow per share Meaning Net Debt adjusted to remove fair value adjustments on borrowings in hedge relationships. Cash available to fund distributions to shareholders and growth capital expenditure. Free cash flow divided by the closing number of shares on issue. Origin Energy Limited ABN /60

177 Term Gearing Ratio Gross Margin Gross Profit Group OCAT Group OCAT ratio Interest tax shield Operating cash flow Operating cash flow return (OCFR) Productive Capital Shareholders Equity Segment result Total Segment Revenue Underlying average interest rate Underlying profit and loss measures: EBIT EBIT margin EBITDA Effective tax rate Share of ITDA Net financing costs/income EPS Consolidated Profit Profit before tax Income tax expense / benefit Non-controlling interests Meaning Net Debt divided by Net Debt plus Shareholders Equity. Gross profit divided by Revenue. Revenue less cost of goods sold. Group Operating cash flow after tax of the Consolidated Entity (including Origin s share of Australia Pacific LNG). (Group OCAT - interest tax shield)/ Productive Capital. The tax deduction for interest paid. Operating cash flow before tax. Operating cash flow / Productive Capital excluding tax balances. Funds employed including Origin s share of Australia Pacific LNG and excluding capital works in progress for projects under development which are not yet contributing to earnings. Shareholders residual interest in the assets of the consolidated entity after deducting all liabilities, including non-controlling interests. Underlying EBIT for the Energy Markets, Exploration & Production, Australia Pacific LNG, Contact Energy and Corporate segments. Net financing costs and tax expense/(benefit) are allocated to Australia Pacific LNG, Contact Energy and the Corporate segments in measuring segment result. As disclosed in note 2 of the Origin Consolidated Financial Statements. Total revenue for the Energy Markets, Exploration & Production, Australia Pacific LNG, Contact Energy and Corporate segments, including intersegment sales, as disclosed in note 2 of the Origin Consolidated Financial Statements. Underlying interest expense for the full year divided by Origin s average drawn debt during the year Underlying measures are measures used internally by management to assess the profitability of the Origin business. The Underlying profit and loss measures are derived from the equivalent Statutory profit measures disclosed in the Origin Consolidated Financial Statements and exclude the impact of certain items that do not align with the manner in which the Managing Director reviews the financial and operating performance of the business. Underlying EBIT, Underlying EBITDA and Underlying Consolidated Profit are disclosed in note 2 of the Origin Consolidated Financial Statements. Underlying EPS is disclosed in note 37 of the Origin Consolidated Financial Statements. Non-Financial Terms Term 2P reserves 3P reserves Meaning The sum of Proved plus Probable Reserves. Probable Reserves are those reserves which analysis of geological and engineering data indicate are less likely to be recovered than Proved Reserves but more certain than Possible Reserves. It is equally likely that the actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves (2P). Proved plus Probable plus Possible Reserves. Possible Reserves are those additional Reserves which analysis of geological and engineering data suggest are less likely to be recoverable than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible (3P), which is equivalent to the high estimate scenario. Origin Energy Limited ABN /60

178 Term Equivalent reliability factor GJ kt MW MW h PJe TW h Meaning Equivalent reliability factor is the availability of the plant after scheduled outages. Gigajoule kilo tonnes = 1,000 tonnes Megawatt (10 6 Watts) Megawatt hours Petajoules equivalent Terawatt hours Origin Energy Limited ABN /60

179 Directors' Report for the year ended 30 June 2012 Origin Energy Limited ABN /18

180 Contents 1. Principal activities Result Review of operations Significant changes in the state of affairs Events subsequent to balance date Dividends Business strategies, future developments and expected results Directors Information on Directors and Company Secretaries Directors meetings Directors interests in shares, options and rights of Origin Energy Limited Environmental regulation and performance Indemnities and insurance for Directors and officers Auditor independence Non-audit services Proceedings on behalf of the Company Rounding of amounts Remuneration Origin Energy Limited ABN /18

181 23 August 2012 Directors Report for the year ended 30 June 2012 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. There had been no significant changes in the nature of these activities during the year. 2. Result Statutory Profit $980 million profit, up from $186 million Origin reported a Net Profit After Tax (NPAT) and Non-controlling interests (Statutory Profit) of $980 million for the year ended 30 June 2012, an increase of $794 million, compared with $186 million reported in the prior year. The key factors contributing to the increase in the Statutory Profit include: higher Underlying Profit driven by the NSW acquisition, a lower exploration expense and higher wholesale energy prices for Contact Energy (+$220 million); net gains on items related to Australia Pacific LNG, primarily a gain on dilution of Origin s shareholding (+$414 million); an increase in the fair value of financial instruments (+$258 million); and a lower net expense from other items including transition and transaction costs relating to the NSW acquisition (+$149 million); partially offset by: a larger impairment of assets (-$247 million). Statutory Profit for this year and the prior year contains the impact of a number of items which, when excluded, provide a different perspective on the financial and operating performance of the Origin business, consistent with the manner in which the Managing Director reviews the business. Underlying Profit excludes these items and is used internally by the Managing Director to assess the performance of Origin s business and make decisions on the allocation of resources. Origin Energy Limited ABN /18

182 The following table sets out the calculation of Underlying Profit Change Year ended 30 June ($m) ($m) (%) External revenue 12,935 10, Underlying EBITDA 2,257 1, Underlying depreciation and amortisation (614) (539) 14 Underlying share of interest, tax, depreciation and amortisation of equity accounted investees (45) (49) (8) Underlying EBIT 1,598 1, Underlying net financing costs (217) (143) 52 Underlying Profit before tax 1,381 1, Underlying income tax expense (415) (316) 31 Underlying Profit before Non-controlling interests Non-controlling interests share of Underlying Profit (73) (62) 18 Underlying Profit Items excluded from Underlying Profit 87 (487) N/A Statutory Profit Underlying earnings per share Reconciliation of Statutory Profit to Underlying Profit In the year to 30 June 2012, items excluded in the measurement of Underlying Profit amounted to a benefit of $87 million. This compares with the year ended 30 June 2011 in which these items had an overall cost of $487 million Year ended 30 June Excluded Excluded Change ($ million) items NPAT items NPAT ($m) Statutory Profit APLNG related items Increase/(decrease) in fair value of financial instruments 119 (139) 258 Impairment of assets (407) (160) (247) Other (55) (204) 149 Less total excluded items 87 (487) 574 Underlying Profit Review of operations External revenue External revenue increased by 25% or $2,591 million to $12,935 million. This increase primarily reflects the impact of revenues from the NSW energy assets acquired in March 2011 in the Energy Markets segment, together with higher commodity prices in the Exploration & Production segment and higher wholesale electricity prices in the Contact Energy segment. EBITDA Statutory EBITDA increased 106% or $1,176 million to $2,290 million from $1,114 million. Underlying EBITDA increased 27% or $475 million to $2,257 million from $1,782 million. Origin Energy Limited ABN /18

183 The Underlying EBITDA contributions by business segment are presented in the following table: Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Energy Markets 1,562 1, Exploration & Production Australia Pacific LNG (25) Contact Energy Corporate (81) (68) 19 Underlying EBITDA 2,257 1, Items excluded from Underlying EBITDA 33 (668) N/A EBITDA 2,290 1, Energy Markets: Underlying EBITDA increased by 33% or $388 million to $1,562 million. This was largely attributable to a full year contribution from the acquired NSW energy assets. Increased energy sales were partially offset by a reduction in both electricity customers and usage per customer. Exploration & Production: Underlying EBITDA increased by 23% or $61 million to $329 million, primarily due to a lower exploration expense (+$69 million) and higher commodity prices, partially offset by higher operating costs and lower production. Australia Pacific LNG: Underlying EBITDA decreased by 25% or $16 million to $47 million. This was primarily due to the dilution of Origin s shareholding in Australia Pacific LNG from 50% to 42.5% following the first Sinopec subscription in August 2011, together with higher operating costs to support the expanded operations and meet increased regulatory requirements. Contact Energy: Underlying EBITDA increased by 16% or $55 million to $400 million. This was primarily due to reductions in gas and carbon unit costs and improved commercial and industrial margins. While higher South Island hydro storage levels resulted in higher wholesale electricity prices, this was largely offset by a 25% decrease in hydro generation being covered by the use of more expensive thermal generation. Corporate: Underlying EBITDA loss increased 19% or $13 million resulting in an Underlying EBITDA loss of $81 million. The largest contributor to this variance was increased expenditure on development opportunities in Chile, Indonesia and PNG. EBIT Statutory EBIT increased by $1,099 million or 200% from $550 million to $1,649 million. Underlying EBIT increased 34% or $404 million to $1,598 million primarily due to the increase in Underlying EBITDA described above. Year ended 30 June 2012 ($m) 2011 ($m) Change (%) Energy Markets 1, Exploration & Production Australia Pacific LNG (33) Contact Energy Corporate (86) (66) 30 Underlying EBIT 1,598 1, Items excluded from EBIT 51 (644) N/A EBIT 1, Origin Energy Limited ABN /18

184 Net financing costs Statutory net financing costs increased by 86% or $134 million to $289 million from $155 million in the prior year. Underlying net financing costs increased by 52% or $74 million to $217 million in the current year. The increase in Underlying net financing costs was predominantly due to a higher average Net Debt balance for the year as a result of increased debt used to partially fund the NSW acquisition and for capital expenditure incurred during the period. Capitalised interest for the year was $142 million compared with $153 million in the prior year and is not included in the calculation of net financing costs. Income tax expense The current year Statutory income tax expense of $302 million results in an effective tax rate of 22%, which is lower than the company tax rate of 30%, mainly due to the non taxassessable gain arising on dilution of Origin's shareholding in Australia Pacific LNG, partially offset by non-deductible impairment losses. The prior year Statutory income tax expense of $147 million resulted in an effective tax rate of 37%, which was higher than the company tax rate of 30%, due to non-deductible costs associated with stamp duty for the acquired NSW energy assets and the impairment of Origin's 30% interest in the Innamincka geothermal joint venture, partially offset by a tax benefit arising on the translation of foreign denominated tax balances. Underlying income tax expense for the year increased 31% or $99 million to $415 million, in line with an increase in Underlying profit before tax. The Underlying effective tax rate was 30% in the current and the prior year. Origin recorded a $16 million deferred tax benefit resulting from the extension of the PRRT legislation which took effect on 1 July This benefit has been excluded from Underlying income tax expense. In accordance with the legislation, Origin has adopted tax starting bases for existing projects that are deductible against future assessable receipts. A deferred tax asset of $16 million has been recorded in the Financial Statements based on the estimated utilisation of the tax starting bases considering future deductible amounts. Origin also has an unrecorded deferred tax benefit of $1,027 million referable to the extended PRRT legislation which, considering estimated future assessable and deductible amounts, has not been recognised as an asset in Origin s 30 June 2012 Consolidated Financial Statements. Australia Pacific LNG is also subject to the extended PRRT legislation and has an unrecorded deferred tax benefit balance of $2,426 million (100% Australia Pacific LNG). The deferred tax amounts referable to the extended PRRT legislation are disclosed in Notes 4 and 15 of Origin s Consolidated Financial Statements. Non-controlling interests share of profit Statutory Profit attributable to Non-controlling interests increased by $16 million, or 26% to $78 million primarily relating to Contact Energy exiting its investment in Oakey Power Holdings Pty Ltd, which increased Contact Energy s earnings but is excluded from Underlying Profit. Underlying Profit attributable to Non-controlling interests increased 18% to $73 million due to an increased contribution from the Contact Energy segment. Underlying Profit Statutory Profit for the year increased by 427%, or $794 million to $980 million. Underlying Profit for the year increased 33% or $220 million to $893 million. Origin Energy Limited ABN /18

185 4. Significant changes in the state of affairs The following significant changes in the state of affairs of the Company occurred during the year: Australia Pacific LNG On 28 July 2011 the Australia Pacific LNG export project was sanctioned for an initial 4.5 million tonnes per annum (mtpa) LNG production train and infrastructure to support a second LNG train. On 9 August 2011, following this final investment decision, completion of an equity subscription agreement between Australia Pacific LNG and Sinopec resulted in the dilution of Origin s shareholding to 42.5%, and the completion of a marketing agreement with Sinopec for the sale of 4.3 mtpa of LNG. A second subscription agreement between Australia Pacific LNG and Sinopec was signed on 20 January 2012 for Sinopec to increase its shareholding by 10% to 25%. This agreement was completed when Australia Pacific LNG s second train was sanctioned in July 2012, resulting in Origin s and ConocoPhillips respective shareholdings in Australia Pacific reducing to 37.5%. On 20 January 2012, Sinopec agreed to purchase an additional 3.3 mtpa of LNG through to 2035 under its existing sale and purchase agreement with Australia Pacific LNG. On 29 June 2012, Australia Pacific LNG and The Kansai Electric Power Company signed a binding agreement for the sale and purchase of approximately 1 mtpa of LNG for 20 years. The above Sinopec and Kansai agreements completed the marketing of Australia Pacific LNG s second LNG train. Funding During the year, Origin continued to strengthen its balance sheet, and increase its funding options to ensure that it has sufficient liquidity to fund future capital expenditure requirements, including expected cash contributions via loan repayments to Australia Pacific LNG. Underwritten dividend investment plan - In September 2011, Origin fully underwrote its dividend for the June 2011 period raising $266 million of equity finance. Senior unsecured notes - In October 2011, Origin undertook a US$500 million ($492 million) Senior Unsecured Notes issuance in the 144A market in the United States. Subordinated notes In December 2011, Origin issued $900 million of Origin Energy Subordinated Notes in the Australian retail bond market. The hybrid has been recorded as debt in the financial statements and has received 100% equity credit from Standard & Poor s and 50% equity credit from Moody s. Project Finance In May 2012, Australia Pacific LNG signed agreements with a syndicate of domestic and international commercial banks and export credit agencies for an US$8.5 billion project finance facility subject to conditions precedent. Developments Retail Transformation Program During the year, Energy Markets successfully migrated 2.6 million mass market natural gas and electricity customers not under the NSW acquisitionrelated TSAs to SAP via four large-scale migrations. Mortlake Power Station In January 2012, the first of two units at the 550 MW gas-fired Mortlake Power Station was available for dispatch into the Victorian electricity market. The second unit reached the final stages of commissioning at the end of the period. 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 Origin Energy Limited ABN /18

186 5. Events subsequent to balance date Other than the items described below, no matters or circumstances have arisen since 30 June 2012, which have significantly affected, or may significantly affect: i) the Company s operations in future financial years; ii) results of those operations in future financial years; or iii) the Company s state of affairs in future financial years. Final Investment Decision on the second train of the two train Australia Pacific LNG Pty Limited Incorporated Joint Venture CSG to LNG project and issue of shares to China Petroleum and Chemical Corporation On 4 July 2012 Australia Pacific LNG Pty Limited a 42.5 per cent owned and equity accounted incorporated joint venture of the consolidated entity, announced that a Final Investment Decision ('FID') on the second train of the two train CSG to LNG project had been approved. LNG from the previously announced first train is expected to be delivered in mid-2015, with LNG from the second train expected in early The total capital expenditure for the FID approved two train project (100 per cent Australia Pacific LNG) is estimated to be A$23 billion, including contingencies. This excludes expected expenditure on non-project costs associated with the domestic operations, pre- LNG operating and maintenance costs and costs associated with the supply of gas to third party LNG projects. On 12 July 2012 Australia Pacific LNG issued new shares to China Petroleum and Chemical Corporation ( Sinopec ) resulting in Sinopec s equity holding increasing from 15 percent to 25 per cent. As a result of this new share issue, Origin's interest in Australia Pacific LNG has been diluted from 42.5 per cent to 37.5 per cent. Under the terms of the subscription agreement Sinopec paid net consideration to Australia Pacific LNG of US$1.4 billion. The completion of the share issue from Australia Pacific LNG to Sinopec will result in a dilution gain recorded in statutory profit for the consolidated entity of approximately A$0.4 billion for the year ended 30 June Commitments at 30 June 2012 will reduce by $618 million as Origin's share of the commitments and guarantees of the Australia Pacific LNG joint venture will be diluted from 42.5 per cent to 37.5 per cent following the issue of shares to Sinopec to increase Sinopec s interest in Australia Pacific LNG to 25 per cent. 6. Dividends (a) Dividends paid during the year by the Company were as follows: Final dividend of 25 cents per ordinary share, fully franked at 30%, for the year ended 30 June 2011, paid 29 September Interim dividend of 25 cents per ordinary share, fully franked at 30%, for the half year ended 31 December 2011, paid 30 March 2012 $million (b) In respect of the current financial year, the Directors have declared a final dividend as follows: Final dividend of 25 cents per ordinary share, fully franked at 30%, for the year ended 30 June 2012, payable 27 September $million 272 The Dividend Reinvestment Plan ( DRP ) will apply to this final dividend at no discount. Origin Energy Limited ABN /18

187 7. Business strategies, future developments and expected results A key focus for the Company over the next few years is on delivering the Australia Pacific LNG project on schedule and on budget. To fund Origin s share of that investment the Company has been significantly reducing its committed capital expenditure on other projects, will be focusing on maximising cash flow from the existing business and managing the maturity of its existing debt facilities. The outlook for the coming year is more challenging than in prior years with less growth coming from new capital investments, regulatory uncertainty, particularly related to pricing decisions made by the Queensland Competition Authority for which the Company has initiated a judicial review, as well as more uncertainty in forecasting earnings, driven by volatile global commodity prices and changing patterns in the demand for energy in Australia. In Energy Markets, Origin will respond to the uncertainties by focusing on reducing costs, winning and retaining customers, realising benefits from the new SAP billing and customer relationship management system, and continuing to capture the benefits from Origin s integrated portfolio. In this segment, Origin s intention is to maintain customer numbers throughout the coming year, and it is targeting an Underlying EBIT margin of around 11%. In Exploration & Production, production is forecast to increase with BassGas expected to recommence production in the September 2012 Quarter, partially offset by reduced production at Otway due to a scheduled shutdown. Contact Energy is expected to see an increased earnings contribution as it continues to benefit from greater flexibility in its generation portfolio and its gas purchasing position. Depreciation and amortisation costs will increase in line with the increased asset base, following completion of the Mortlake Power Station, upgrades to the Eraring Power Station, implementation of the new SAP billing and customer relationship management system, depreciation of Phase 1 of the BassGas Mid-Life Enhancement project and increased production. Underlying net financing costs are expected to increase substantially in the 2013 financial year compared with the prior year due to interest on completed projects and the Ironbark development no longer being capitalised. Interest associated with Origin s cash contributions to Australia Pacific LNG will continue to be excluded from Underlying Profit. Origin s Underlying effective tax rate is expected to remain around 30% for the coming year. Taking all these factors into account, and based on prevailing market conditions, Origin anticipates Underlying EBITDA for the 2013 financial year to increase by around 10% and Underlying Profit to be in line with the 2012 financial year. While Origin intends to reduce its shareholding in Australia Pacific LNG to below 37.5%, this guidance does not include any impact of a change in Origin s shareholding. Future growth opportunities Origin continues to pursue a number of opportunities in Australia and internationally that will drive growth in the medium to longer term. Origin is well positioned to capitalise on the expected rise in domestic gas prices, with a diverse and flexible portfolio of physical and contracted fuel resources, as evidenced by the recent gas sale to the GLNG project at international oil-linked pricing. Gas demand in eastern Australia is expected to triple over the next five years, and Origin continues to invest in a targeted number of exploration opportunities in and around existing permits in anticipation of this growth. Origin Energy Limited ABN /18

188 Origin is also exploring for resources in attractive international markets including New Zealand, South East Asia, Kenya and Botswana, providing access to both potential resources and growing demand. Origin continues to develop a portfolio of high quality, large-scale renewable energy opportunities in offshore markets which offer strong growth prospects. This includes a potential hydro project and geothermal exploration in Chile, geothermal exploration in Indonesia and a potential hydro project in PNG. Based on the opportunities available to the Company, Origin continues to target long term growth in Underlying EPS of 10% to 15% 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 Ralph J Norris (appointed 18 April 2012) Helen M Nugent 9. Information on Directors and Company Secretaries Information relating to current Directors qualifications, experience and special responsibilities and the qualifications and experience of the Company Secretaries is set out below. 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 the University of Sydney United States Studies Centre. He is a director and President of the NSW Division of the Australian Institute of Company Directors (AICD) and is a member of the AICD Corporate Governance Committee and NSW Advisory Council. Kevin is a Fellow of the Senate of the University of Sydney. Kevin s community activities include Chairmanship of the National Library of Australia Foundation 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 and the Council of the National Library of Australia. 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. Origin Energy Limited ABN /18

189 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 Director of the Business Council of Australia and Chairman of the Business Council of Australia Infrastructure & Sustainability Growth Committee. He is 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. 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, Transform Exploration Pty 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. 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 Nonexecutive Director. He is a member of the Remuneration, Risk and Nomination committees. With over 35 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) and The Hunger Project Australia Pty Limited (since August 2008). He is a former director of ConnectEast Group ( ), 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. Origin Energy Limited ABN /18

190 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 a director of Caltex Australia Ltd (since March 2006). He is former Chairman of Hastie Group Ltd ( ) and 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. 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 Chairman of Quick Service Restaurant Group 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. He was previously Chairman of Rebel Group ( ) and a Director of The Centre for Independent Studies. Gordon holds a Master of Arts (Honours) from the University of Edinburgh. Karen A 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 Contact Energy Ltd (since October 2004), SAS Trustee Corporation (since March 2012) and Sydney Dance Company (since May 2012). Karen is a former director of Australian Energy Market Operator Limited (July 2009-June 2012), 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. Ralph J Norris KNZM Independent Non-executive Director Ralph Norris joined the Board of the Company in April He is a member of the Audit, Nomination and Risk committees. Ralph retired as Managing Director and Chief Executive Officer of the Commonwealth Bank of Australia in November 2011 following a 40 year career in business and the banking sector in Australia and New Zealand. During his career he had a number of senior executive roles including Chief Executive Officer of ASB Bank and Air New Zealand Limited. He is a director of Fonterra Limited and a former Director of Fletcher Building Ltd, Business Council of Australia, the International Monetary Conference, Chairman of Sovereign Insurance Ltd, the New Zealand Bankers' Association, New Zealand Business Roundtable and the Australian Bankers' Association. Origin Energy Limited ABN /18

191 He is a member of the New Zealand Olympic Advisory Committee and the Juvenile Diabetes Research Foundation Advisory Board. Ralph was made a Knight Companion of the New Zealand Order of Merit in 2009 and a Distinguished Companion of the New Zealand Order of Merit for services to business in He is a Fellow of the New Zealand Institute of Management and a Fellow of New Zealand Computer Society. 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 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. Andrew Clarke Group General Counsel and Company Secretary Andrew Clarke joined Origin Energy 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 Energy 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. Origin Energy Limited ABN /18

192 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 Scheduled Board Meetings Unscheduled Board Meetings Meetings of Board Committees Audit Remuneration HSE Nomination Risk H A H 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 R J Norris H M Nugent 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 two workshops during the year to consider operational and strategic matters of relevance to the Origin Group. The Board also visited Company operations in Queensland and met with operational management during the year. Origin Energy Limited ABN /18

193 11. Directors interests in shares, options and rights of Origin Energy Limited The relevant interests of each Director in the shares, subordinated notes 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 Subordinated Notes 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 7, G A King 1,006,611 2,000 2,096,718 (1) 582,083 (2) 32,353 J H Akehurst 71,200 2, B G Beeren 1,381, ,277 T Bourne 55, G M Cairns 83, K A Moses 237,374 1, ,695 (3) 251,729 (2) 20,086 R J Norris 20, H M Nugent 38, 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, 728,506: $13.01 (2) Nil (3) 140,000: $9.86, 89,000: $15.84, 115,000: $15.47, 145,202: $14.91, 271,493: $13.01 Options and Rights granted by Origin Energy Options and Rights granted during the financial year, including to key management personnel, are included in section 8 of the Remuneration Report which forms part of this Directors Report. No Options or Rights were granted since the end of the financial year. Options and Rights granted by Contact Energy The number of options and rights granted by Contact Energy to participants under its own long-term incentive plan during the financial year, and on issue at the end of the financial year is summarised below: Options Grant Date Expiry Date Exercise price per option Balance at 30 June October November 2012 NZ$ ,547 1 February November 2012 NZ$ ,008 1 October November 2013 NZ$ ,738 1 October November 2014 NZ$5.67 1,429,288 1 October November 2015 NZ$5.76 3,727,092 1 October November 2016 NZ$5.40 2,789,389 No Contact Energy options have been granted since the end of the financial year. Origin Energy Limited ABN /18

194 Rights Grant Date Expiry Date Exercise price per right Balance at 30 June October November 2012 NZ$ ,679 1 February November 2012 NZ$0.00 2,846 1 October November 2013 NZ$ ,208 1 October November 2014 NZ$ ,571 1 October November 2015 NZ$ ,750 1 October November 2016 NZ$ ,142 No Contact Energy rights have been granted since the end of the financial year. Origin Energy Shares issued on the exercise of Options and Rights Options The following ordinary shares of Origin were issued during the year ended 30 June 2012 on the exercise of options granted under the Senior Executive Option Plan. No amounts are unpaid on any of the shares. Date options granted Issue price of shares Number of shares issued 11 September 2006 $ , June 2007 $ , September 2007 $ ,400 Since 30 June 2012, the following ordinary shares of Origin have been issued on the exercise of options granted under the Senior Executive Option Plan. No amounts are unpaid on any of the shares. Date options granted Issue price Number of of shares shares issued 28 September 2007 $ ,000 Rights The following ordinary shares of Origin were issued during the year ended 30 June 2012 on the vesting and exercise of rights granted under the Senior Executive Performance Share Rights Plan. No amount is payable on the vesting of rights and accordingly no amounts are unpaid on any of the shares. Date Rights granted Number of shares issued 28 September , September ,848 Since 30 June 2012, the following ordinary shares of Origin have been issued on the vesting and exercise of rights granted under the Senior Executive Performance Share Rights Plan. Date Rights granted Number of shares issued 28 September , September ,515 Contact Energy Shares issued on the exercise of Options and Rights No Contact Energy Options or Rights have vested during or since the end of the financial year and as a result no Contact Energy shares have been issued on the vesting and exercise of Options or Rights granted under the Contact Energy Long-Term Incentive Scheme. Origin Energy Limited ABN /18

195 12. Environmental regulation and performance The Company s operations are subject to significant environmental regulation under Commonwealth, State and Territory legislation. For the year ended 30 June 2012, the Company s Australian operations recorded 67 environmental regulatory incidents, one of which resulted in the NSW EPA issuing a A$1500 fine for a breach of storage related regulations at the Company s Newcastle LPG terminal. Appropriate remedial actions have been, or are being, undertaken in relation to all these incidents. 13. Indemnities and insurance for Directors and officers Under the Constitution, the Company may indemnify current and past directors and officers for losses or liabilities incurred by the person as a director or officer of the Company or its related bodies corporate to the extent allowed under law. The Constitution also permits the Company to purchase and maintain a Directors and Officers insurance policy. No indemnity has been granted to an auditor of the Company in their capacity as auditor of the Company. The Company has entered into agreements with current Directors and certain former Directors whereby it will indemnify those Directors from all losses or liabilities in accordance with the terms of the Constitution. The agreements stipulate that the Company will meet the full amount of any such liabilities, including costs and expenses to the extent allowed under law. The Company is not aware of any liability having arisen, and no claims have been made during or since the year ended 30 June 2012 under these agreements. During the year, the Company has paid insurance premiums in respect of Directors and officers liability, and legal expense insurance contracts for the year ended 30 June The insurance contracts insure against certain liability (subject to exclusions) of persons who are or have been directors or officers of the Company and its controlled entities. A condition of the contracts is that the nature of the liability indemnified and the premium payable not be disclosed. 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 2012 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 $nil 2. Taxation services $113, Equity and debt transactional services $530, Other services $286,000 Further details of amounts paid to the Company s Auditors are included in Note 26 to the full financial statements. In accordance with written advice signed by the Audit Committee Chairman and provided to the Board pursuant to a resolution passed by the Audit Committee, the Board has formed the view that the provision of those non-audit services by the auditor is compatible with, and did not compromise, the general standards of independence for auditors imposed by Origin Energy Limited ABN /18

196 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. Proceedings on behalf of the Company No proceedings have been brought on behalf of the Company, nor have any applications been made in respect of the Company under section 237 of the Corporations Act. 17. 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. 18. 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 2012 Origin Energy Limited ABN /18

197

198 Remuneration Report for the year ended 30 June 2012 (Audited) This Report forms part of the Directors Report for the year ended 30 June 2012 Origin Energy Limited ABN /36

199 Remuneration Report The Directors are pleased to present the Remuneration Report for Origin Energy Limited (Company) which forms part of the Directors Report for the year ended 30 June 2012 (FY2012). The Remuneration Report is structured into nine sections: 1. Executive Summary 2. Key management personnel and report coverage 3. Remuneration governance 4. Remuneration objectives, policy and practice 5. Contractual details 6. Company performance and remuneration outcomes 7. Non-executive director remuneration and fees 8. Remuneration tables and disclosures 9. Abbreviations and key definitions 1. Executive Summary Since our 2011 Remuneration Report and our 2011 Annual General Meeting (AGM) the Board has reviewed its remuneration approach. It has benchmarked its policies against best practice; analysed remuneration trends; and considered specific feedback from shareholders as part of last year s AGM. The Chairman of the Remuneration Committee and the Chairman of the Board have met with major Institutional shareholders and proxy advisers to discuss remuneration and governance issues. From that review, the Board has concluded that the Company s current approach to remuneration remains appropriate, but has proposed two changes to the Long Term Incentive (LTI) arrangements. These changes take effect from 1 July An appropriate remuneration structure The Company s remuneration approach is designed to attract, incentivise and retain a management team that enhances its business, and to do so in a way that aligns executives interests with those of shareholders. The Company is engaged in a diverse range of related activities. Its resource and development businesses make large, long-term investments for which key costs and prices are set in international markets. Its retail and energy trading businesses operate day to day in competitive domestic markets. As an integrated energy company, management seeks to create value from the interactions among these diverse activities. The remuneration structure, therefore, needs to attract, retain and develop a diverse talent pool and group of executives, while exposing them to the breadth of the Company s activities. It needs to incentivise decision-making appropriate to business unit activities and to the Company overall. It must align executives interests with those of shareholders by linking remuneration to long-term value creation. Consistently since the Company s listing on the ASX in 2000, the executive remuneration policy designed to deliver against these objectives has been to: 1. benchmark remuneration such that it is intrinsically fair and competitive, at the same time as rewarding exceptional performance; 2. set a mix of fixed and variable ( at-risk ) pay that is appropriate for the risk profiles and time horizons of different business units, but which also creates an incentive to act in the best interests of the Company overall as well as its shareholders; and 3. incorporate a significant deferred element that aligns the long-term interests of management with those of shareholders. Over that period the Company has attracted an Executive Management Team (EMT) with a wide range of experience and industry backgrounds. Four of the five Key Management Personnel (KMP) have occupied executive positions in more than one business unit, and the average tenure as a direct report to the Origin Energy Limited ABN /36

200 Managing Director is 5.8 years 1. With its longevity and experience across the Company, the EMT is well placed to make decisions in the overall best interests of the Company and its shareholders. Two changes to LTI arrangements While the Board considers the basic structure of its executive remuneration to be appropriate, it has resolved in light of feedback from stakeholders to make two changes to Long Term Incentive (LTI) arrangements. Both changes, which take effect from 1 July 2012, aim to reduce complexity and to increase the alignment of executive and long-term shareholder interests. They are as follows: the two re-tests that currently apply to the Long Term Incentive Plan (LTI Plan) will be removed, and; the performance period for the Options component of the LTI plan (which applies to the most senior LTI recipients, including all executive KMP) will be extended from 3 years to 4 years. Some stakeholders also suggested that the performance hurdle and the associated comparator group for LTI awards should be reviewed. These issues were seriously examined by the Remuneration Committee and the Board. However, the Board has decided that the most appropriate hurdle, in light of the objective of aligning executives and shareholders interests, remains as relative Total Shareholder Return (TSR). The top approximately 150 executives receive LTI partly in the form of Options 2. Two features of Options serve to tie the interests of senior executives to the overall interest of shareholders: they only have value if a relative TSR performance is achieved against a comparator group (the ASX-100) and if the absolute value of the Company s shares increases. Other measures, including Earnings Per Share (EPS), are used in the calculation of Short Term Incentive (STI), as are a range of operational and financial measures appropriate to an executive s specific business unit 3. But the TSR measure best serves the LTI objective of aligning executives long term interests with those of shareholders. In relation to the choice of comparator group (currently the ASX-100) it was proposed by some stakeholders that a selection of Australian and global peers from similar industries be used instead. On review the Board has concluded this would add complexity and reduce transparency. Investors and the award recipients themselves have ready access to information about the ASX-100, both its constituent companies and their combined performance. There is no subjectivity in selection of ASX-100 constituents or the criteria by which they are chosen. The scale of the ASX-100 reduces sensitivity to the performance of a particular competitor or the influence of cyclical industry-specific factors. In addition, the peer group is intended to represent a set of investment options. For these reasons, the Board considers the ASX-100 a more appropriate comparator group than a limited selection of industry competitors. Managing Director pay for FY2013 By mutual agreement, no changes are being made to pay arrangements for the Managing Director for FY2013. Fixed remuneration and the maximum level of both STI and LTI opportunities will be maintained at the same level as applied during FY2012. Reducing complexity During the year the Commonwealth Government responded to the Corporations and Markets Advisory Committee (CAMAC) April 2011 Executive Remuneration Report. CAMAC had been commissioned by the Government to identify ways to simplify legislation and to reduce the complexity of remuneration reports. The Company strongly supports this objective. The Government rejected five of CAMAC s nine recommendations. One rejected recommendation was to repeal the reference to accounting standards in the governing legislation. CAMAC had noted that the application of accounting methodology in a remuneration report can be confusing and misleading to shareholders without providing them with additional useful 1 These figures do not include the Managing Director. Including the time spent by the Managing Director in the Managing Director role, average tenure of the EMT in EMT roles is 7.0 years. 2 Half by value in the form of Options and half in the form of Performance Share Rights (PSRs). 3 See section 4.3 Origin Energy Limited ABN /36

201 information 4. Regrettably, the piecemeal adoption of parts of a set of integrated proposals arising out of detailed and expert review could increase rather than reduce complexity. In particular, the requirement to report accounting standards data for KMP (including the Managing Director), which CAMAC said can be confusing and misleading to shareholders, remains. The rejection of this particular recommendation misses an opportunity for genuine simplification of remuneration reporting. While awaiting the Commonwealth s eventual regulation on the reporting quantification of executive remuneration, we have continued to streamline our Report and focus on succinct summaries of the why and how behind the framework we have adopted. In addition, section 6.4 of the Report presents remuneration outcomes in a form that reflects actual pay delivered, in addition to the accounting view required in the disclosure tables. 2. Key Management Personnel and Report Coverage Key Management Personnel (KMP) during FY2011 and FY2012 are listed below: Non-executive Directors - current Notes H K McCann Independent Chairman J H Akehurst Independent B G Beeren Non-executive Executive Director from March 2000 to January 2005 T Bourne Independent G M Cairns Independent R J Norris Independent Joined the Board 18 April 2012 H M Nugent Independent Non-executive Directors - former Notes R Williams Independent Retired 29 October 2010 Executive Directors G A King Managing Director K A Moses Other KMP - current D A Baldwin D Barnes F G Calabria P A Zealand Other KMP - former A M Stock R J Willink Executive Director, Finance & Strategy Chief Development Officer Chief Executive Officer, Contact Energy Chief Executive Officer, Energy Markets Chief Executive Officer, Upstream Executive General Manager, Major Development Projects (until 31 March 2011) Executive General Manager, Geoscience & New Ventures (until 30 June 2011) Managing Director Contact Energy until 31 March 2011, Chief Development Officer since 1 April 2011, both KMP roles. Assumed KMP role of Chief Executive Officer, Contact Energy on 1 April 2011, prior roles non- KMP. Assumed non-kmp role of Director Executive Projects from 1 April 2011 Assumed non-kmp role of Director Exploration Projects from 1 July 2011 While the remuneration tables and detailed disclosures in this Report relate to the KMP of the Company, more broadly the Report also describes the remuneration arrangements applying to Executives and all Executive Management Team (EMT) as defined in section 9. 4 Section (page 105) of CAMAC s April 2011 Report on Executive Remuneration Origin Energy Limited ABN /36

202 3. Remuneration Governance 3.1 Remuneration Committee The full Board is accountable for Director and executive remuneration and the policy and structure governing it. The Board Remuneration Committee, through its Chairman, reports to the full Board and advises on these matters. The Committee is comprised of a minimum of three members who must be Nonexecutive Directors. The majority of the Committee, and its Chairman, are independent. During FY2012 the Committee members were: Remuneration Committee FY2012 T Bourne (Chair) Independent, Non-executive Director B G Beeren Non-executive Director G M Cairns Independent, Non-executive Director H K McCann Independent, Non-executive Director H M Nugent Independent, Non-executive Director All five Committee members have significant experience with the Company s operations and with remuneration governance through experience with other board remuneration committees. All Nonexecutive Directors have a standing invitation to attend meetings of the Committee. The Committee operates under a Charter which is published on the Company s website at originenergy.com.au. In particular, the Charter identifies the mechanisms to deal with conflicts of interest. 3.2 Remuneration Advisors The Committee has established protocols for the engagement of and dealing with external advisors, including those defined as Remuneration Consultants for the purpose of the Corporations Act The protocols require engagement by the Committee, instruction by the Chairman of the Committee, delivery of reports direct to the Committee through its Chairman, and a prohibition on communication with Company management except as authorised by the Chairman and limited to the provision or validation of factual and policy data. The advisor must furnish a statement confirming the absence of any undue influence from management. The Committee applies these protocols to advisors selected to provide benchmarking data that is used to support decisions for KMP, even where the advisors are not defined as Remuneration Consultants for the purposes of the Corporations Act As shown in the table below, the protocols were applied to Guerdon Associates and AON Hewitt during FY2012, on the basis of the provision of benchmarking data used by the Committee, though neither acted as a Remuneration Consultant for the purposes of the Corporations Act 2001: Advisor/ Consultant FY2012 Guerdon Associates General benchmarking and data applicable outside KMP and across wider organisation Benchmarking of roles outside KMP KMP Benchmarking and data used by Committee to formulate its own recommendations to Board Yes Remuneration Consultant for the purposes of the Corporations Act 2001 No AON Hewitt Benchmarking of roles outside KMP Yes No The Hay Group Hay PayNet database access to remuneration survey data No No Mercer Consulting Fair valuation of LTI instruments, actuarial assessment of superannuation No No Origin Energy Limited ABN /36

203 4. Remuneration Objectives, Policy and Practice 4.1 Remuneration Objectives Five objectives underpin the Company s remuneration framework: 1. Enable the Company to attract executives with a diverse range of backgrounds and experience; 2. Retain the right executives by remunerating fairly and competitively and by rewarding superior performance well (linking remuneration and personal performance); 3. Align executives interests with those of shareholders by linking remuneration to long-term and sustainable value creation (linking remuneration and Company performance); 4. Recognise and reward internal talent, and provide opportunities for growth, development and promotion as an internal source for future executives; and 5. Align remuneration practice with community expectations through strong governance. 4.2 Remuneration Policy In order to deliver against these objectives, our policy is to: 1. benchmark remuneration such that it is intrinsically fair and competitive, at the same time as rewarding exceptional performance; 2. set a mix of fixed and variable ( at-risk ) pay that is appropriate for the risk profiles and time horizons of different business units, but which also creates an incentive to act in the best interests of the Company overall as well as its shareholders; and 3. incorporate a significant deferred element that aligns the long-term interests of management with those of shareholders. The remuneration packages through which this policy is implemented each contain a fixed element and a variable element, in a mix appropriate to the executive s role Total Fixed Remuneration (TFR) This element represents a price for the job taking into account the size and complexity of the role, its problem-solving and decision-making dimensions, and skills utilisation. This element is calibrated against equivalent and similar-size roles internally and externally, and the remuneration is benchmarked to the median of the external market (see 4.3.3). This ensures appropriate pay for the role. TFR (also referred to as fixed or fixed remuneration ) refers to the known or guaranteed ongoing and regular benefits received during the year and includes cash salary, employer contributions to superannuation, and salary sacrifice benefits At-Risk remuneration This element is variable and depends upon business and personal performance. The maximum potential amount a participant can earn through at-risk remuneration is capped and occurs only where all assessment parameters, both business and personal, are each at their stretch or maximum achievable outcomes. There is a range of hurdle and performance measures as shown on the Remuneration framework diagram in Table Origin Energy Limited ABN /36

204 At-risk remuneration is divided into two parts: STI which is assessed on annual performance measures and delivered in cash; and LTI which is assessed on longer term measures and is deferred and currently delivered in the form of equity. Achievement of goals at target represents a payout of 60 per cent of the maximum level. Target may be set at budget or other appropriate levels as considered by the Board. The maximum levels of At-risk remuneration are set out in section 4.3.2, and are achieved only where difficult stretch goals are met Aggregate Reward The total of TFR plus At-risk remuneration is known as Aggregate Reward. Aggregate Reward at maximum is where the At-Risk elements are at maximum, and is benchmarked to reach the upper quartile or 75th percentile of the external market (see 4.3.3). This ensures that executives are appropriately rewarded when superior performance is achieved. 4.3 Remuneration Framework The remuneration framework shows how the remuneration policy is implemented, and how performance is measured and linked to the objectives. Origin Energy Limited ABN /36

205 4.3.1 Remuneration framework For personal use only Remuneration component Delivery vehicle Performance measure Policy weighting section Strategic objective / performance link Objectives reference section 4.1 Not at risk Fixed remuneration Cash, super, benefits Position description FIXED MD 27-38% KMP 31-45% Oth 43-81% Secure resources to execute business plans 1, 2 Corporate Measure 1 Underlying EPS 3 Drive real annual earnings growth 2 AT-RISK REMUNERATION The proportion at risk increases with seniority STI Cash 2 paid annually after release of corporate results Corporate Measure 2 Group OCAT Ratio 3 Divisional Measure (e.g. financial measures such as EBITDA, capital and opex management) Individual measure (e.g. safety, project delivery, cultureengagement) STI AT RISK (% of Aggregate Reward) MD 27-32% KMP 26-33% Oth 12-31% Measure of cash flow required to exceed riskadjusted cost of capital, reflecting the long-term nature of the business Reward achievement of specific divisional goals Reward achievement of specific individual performance goals 2, LTI Deferred and share-based (Options and Performance Share Rights) Allocation measure: Personal performance and development potential Vesting measure: Relative TSR LTI AT RISK (% of Aggregate Reward) MD 34-41% KMP 27-38% Oth 7-27% Reward creation of shareholder wealth (measured by outperformance of TSR relative to the comparator group, tested after 3 or 4 years 4 ) 3, 5 1 The range reflects outcomes expressed between target and maximum incentive outcomes as a percentage of Aggregate Reward. In this diagram, KMP refers to the average of executive KMPs (excluding the Managing Director, but including the Executive Director, Finance & Strategy) and Oth refers to the average of all other Executives. 2 Inclusive of any Superannuation Guarantee obligations. 3 Refer to sections 4.3.4, 6.2 and 9. The key performance indicators of Underlying EPS and Group OCAT Ratio together form the Corporate STI Performance Metric which applies to all STI participants, in addition to Divisional and individual performance hurdles. 4 3 years for PSRs, 4 years for Options Origin Energy Limited ABN /36

206 4.3.2 Remuneration mix As part of the remuneration policy and framework, and with regard to the long-term nature of the Company s business, a significant number of employees (11 per cent) have a portion of their remuneration deferred. For each position, the weighting between STI and LTI is aligned to the risk focus and the time focus of the role. The risk focus is defined as the ratio of at-risk pay to fixed pay (measured at maximum). As shown in the Remuneration Framework diagram (4.3.1), an increasing proportion of pay is placed at risk with increasing levels of responsibility ( risk focus ), and the time horizon also increases with increasing role accountabilities (measured as the ratio of LTI to STI, or the time focus ). The longer the time horizon of the employee s responsibilities and decisions, the higher is the weighting to LTI, and the higher the level of deferral in the package. These relationships are summarised in the table and graph below: Maximum Maximum Ratio At risk Proportion STI as % LTI as % Ratio At risk/ as % of deferred Position of Fixed of Fixed LTI / STI Fixed Total 1 (LTI/Total) 1 Managing Director 120% 150% % 41% Executive Director, Finance & Strategy 100% 120% % 38% Other KMP - current 100% 100% % 33% Other EMT (average) 72% 63% % 27% Other Executives 2 Level A 55% 45% % 23% - Level B 45% 35% % 19% - Level C 40% 30% % 18% - Level D 25-35% 15-25% % 11-16% 1 Total is the Aggregate Reward at maximum incentive outcomes 2 Other Executives are broken down into salary brackets to show the different ranges of STI and LTI opportunity levels applying to the particular bracket. The table below compares the level of deferred pay for the Company s Managing Director with the average of CEOs in ASX-100, showing that the Company s level of deferred pay whether at policy target or at maximum outcomes exceeds the actually awarded ASX-100 average level of deferral. Per cent of package deferred Per cent of package not deferred Managing Director at maximum At- Risk outcomes 41% 59% Managing Director at Target outcomes 34% 66% Average CEOs ASX % 68% Source: Guerdon Associates analysis of 78 full-year CEOs from ASX-100, disclosures to 31 December The percentage that is deferred includes deferred STI, the disclosed amortised fair value of LTI grants and any unhurdled equity grants; the percentage that is not deferred includes base salary, fringe benefits, superannuation and cash STI. Given the significant level of deferral already embedded into the Company s pay structure, and given that the deferral is included in the long term incentive due to the long-term nature of the business, the Board does not consider it appropriate to increase the deferred proportion by deferring part of the STI component. Origin Energy Limited ABN /36

207 Remuneration mix Risk versus time focus relationship RISK FOCUS Ratio At Risk / Fixed Other Execs Other EMT Other KMP Managing Director Exec Director Fin&Strategy With more senior roles there is an increase in the ratio of At-risk to Fixed pay, reflecting the increased risk focus; and also an increase in the ratio of long term incentive to short term incentive, reflecting the increased time horizon. Data is shown at maximum At-risk outcomes TIME FOCUS Ratio LTI/STI Exec Grp D (low) Exec Grp D (high) Proportion of deferred pay Exec Grp C Exec Grp B Exec Grp A Other EMT Other KMP Exec Dir Fin&Strategy Managing Dir 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Proportion of deferred pay (% of Aggregate Reward at maximum incentive outcomes) The level of deferred pay as a proportion of the Aggregate Reward increases with more senior roles. At maximum outcomes, more than 40% of the Managing Director s remuneration package is deferred. Increasingly senior roles Origin Energy Limited ABN /36

208 4.3.3 Remuneration benchmarking In addition to market data sourced through the advisors listed in section 3.2, the Company subscribes to published survey data and participates in industry forums (such as the National Rewards Group or NRG). Through these multiple channels the Company maintains an ongoing monitor of trends and developments within broad and specific markets. The Company attracts people from, and loses people to, all major industry sectors, such that its people resource and competition is not confined narrowly by industry sector. Therefore the Company in FY2012 continued to adopt The Hay Group s all organisations benchmark of over 400 organisations as its prime benchmark reference for the market applicable to most of its employees. For job families in skills shortage areas (such as geosciences, subsurface engineering and some professional specialists) smaller peer groups such as those sourced through commissioned surveys and from industry forums such as NRG have been utilised to determine the relevant market. As identified in section 4.2.3, Aggregate Reward (the total of TFR plus At-risk remuneration) is benchmarked such that, when at-risk outcomes are at their maximum potential, the result will meet the upper quartile (75th percentile) of the external market STI Other details The performance measures for STIs are shown in the framework at section That framework also shows the opportunity levels for all at-risk pay. The opportunity levels, expressed as a percentage of TFR, applying to STI are: Target STI Maximum STI Position as % of Fixed as % of Fixed Managing Director 72% 120% Executive Director, Finance & Strategy 60% 100% Other KMP - current 60% 100% Other EMT (average) 43% 72% Other Executives 15-33% 25-55% The whole of the STI is delivered in cash (including superannuation if required by superannuation regulation) and usually paid in September each year after performance reviews have been completed and after the release of annual results. As identified in section no portion of this STI is deferred as executives already have a significant portion of their remuneration mix in the LTI component, which provides for at least three years deferral. As identified in section 1, the Board has increased deferral for Options to four years from FY2013. The STI can be reduced if safety targets are not achieved. Such reductions were applied in the current and prior year. As noted in section the award of STI is subject to the achievement of a combination of corporate, division, and individual performance measures. Corporate performance outcomes are reviewed by the Remuneration Committee and the full Board. The corporate performance measures are an equally weighted combination of underlying EPS and Group OCAT Ratio, to ensure an appropriate balance in incentive to grow earnings and generate a return on capital. In exceptional circumstances, the Board may adjust the measures or their relative weighting. Individual performance goals are set with and assessed by the relevant manager, and approved by the manager s manager. The Corporate STI Performance Metric (comprising the two key performance indicators, Underlying EPS and Group OCAT Ratio, as shown in the diagram at 4.3.1) is reviewed by and approved by the Board. Division goals are set by the Managing Director at the beginning of each performance cycle and reviewed by the Remuneration Committee. EMT performance is assessed by the Managing Director, reviewed by the Remuneration Committee and approved by the Board. Performance of the Managing Director is assessed and approved by the Board. Origin Energy Limited ABN /36

209 For the period during which Mr Barnes is on secondment to Contact Energy his performance is assessed by the Contact Energy Board LTI Other details The basic features of LTI are shown in the diagram at 4.3.1, and the detail is summarised in the table below. As described in the introduction, two changes have been made to the operation of the LTI Plan and will come into effect on 1 July 2012 the removal of re-testing, and the vesting period for Options will be extended from three years to four years. Those changes have been made following review of external feedback about the Company s LTI arrangements and in the context of changes in prevailing market practices. While this Report discloses the Company s remuneration policy and practice for the year ended 30 June 2012, where relevant, changes applicable from 1 July 2012 are also highlighted. LTI parameter Performance period Opportunity level FY2012 details FY years (for Options and PSRs). Grants are made annually, usually in October, based on the outcomes of the assessment of Pre-allocation Performance conditions as described below. Changes for FY2013 Options Performance period extended to 4 years The maximum opportunity level expressed as a percentage of TFR is determined by the individual s relative influence on Company performance and by the risk versus time-focus as described in section KMP Other Role Target LTI (% Fixed) Max Potential LTI (% Fixed) Managing Director 90% 150% Executive Director, Finance & Strategy 72% 120% Other KMP - current 60% 100% Other EMT 38% 63.3% Other Executives 9-27% 15-45% Opportunity levels are reviewed annually against market benchmarks to align with the objectives as outlined in sections 4.1 and 4.3.3, and set at the beginning of the financial year. Vehicle The LTI vehicles are: (a) Performance Share Rights (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. For the FY2012 allocation, the exercise price was determined as the volume weighted average market price for the Company s shares traded on ASX in the ten trading days leading up to and including the date of grant (26 September 2011). For approximately one-third of eligible participants (those occupying the most senior roles in the Company) the payment vehicle is in the form of a mix of PSRs and Options (half each by fair value). For the remainder of the eligible participant pool, the payment vehicle is wholly in the form of PSRs. While under secondment to Contact Energy (see section 2) Mr Barnes participated in Contact Energy s LTI arrangements (refer to Contact Energy s website contactenergy.co.nz). The maximum opportunity refers to the combined LTI from Origin Energy and/or Contact Energy in any given year. Origin Energy Limited ABN /36

210 LTI parameter Pre-allocation performance condition Valuation FY2012 details The diagram at shows that the extent to which an individual is awarded any part of their maximum opportunity is first subject to an assessment of performance and future development potential. The Company s performance management and talent management systems provide input to this process. The Managing Director s performance is assessed by the Board. The performance of other EMT members including the Executive Director, Finance & Strategy is assessed by the Managing Director, reviewed by the Remuneration Committee and approved by the Board. The pre-allocation process results in grants that are generally between 30% and 100% of the Executive s maximum potential identified in their remuneration package. In exceptional circumstances the Board may award more than the maximum to an individual. Any unallocated portion of an individual s maximum LTI opportunity is forfeited. The actual allocated LTIs will then be subject to a further post-allocation (vesting) performance condition of relative TSR over a further performance period of 3 or 4 years, as described further below. 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. For the Managing Director and the Executive Director, Finance &Strategy, the maximum value of the potential LTI award, as recommended by the Board, is submitted for approval by shareholders at the AGM held in the performance year to which the award relates. The actual number of Options and/or PSRs will be calculated at the time of the decision to make the award, shortly after the release of the financial results of that performance year, based upon the independently-determined fair values at that time. Origin Energy Limited ABN /36

211 LTI parameter Post allocation performance condition and vesting scale Re-testing Early vesting FY2012 details After allocation, the PSRs and Options are subject to a further performance condition in order to vest. This performance condition is Relative TSR against the ASX-100 group of companies (as comprised at the date of grant) measured at the end of the performance period. The degree to which the award vests is determined by the Company s percentile ranking against the following vesting table: TSR percentile rank % Vest <50 th Nil 50 th 50% 75th or higher 100% Between the 50 th and 75 th percentiles the percentage of award vesting increases proportionately on a straight line basis. Prior to vesting and allocation of shares, any unvested and unexercised Options and/or PSRs do not carry any voting rights or entitlements to dividends. On capital reorganisation, the number of unvested awards to which each participant is entitled, or the exercise price (if any) or both, will be adjusted in a manner determined by the Board in order to minimise or eliminate any material advantage or disadvantage to the participant. If new awards are granted, they will, unless the Board determines otherwise, be subject to the same terms and conditions as the original awards. Options that vest must be exercised together with payment of the exercise price, upon which shares are then allotted. PSRs have a zero exercise price and (since 1 July 2011) shares are allocated automatically on vesting. FY2012 Independent testing of TSR is undertaken at the end of the performance period and vesting occurs according to the ranking achieved. At the end of the performance period, if less than 100% vests, a re-test is carried out at the fourth and again, if necessary, at the fifth anniversary of the grant. Any re-test is based on the full 4-year or 5-year TSR outcomes (not on the incremental period). Vesting from a re-test can occur only to the extent that a higher percentile ranking than the prior test is achieved. Changes for FY2013 Re-testing discontinued for all grants after 1 July Any unvested LTI after the test at the end of the performance period lapses immediately (see discussion in section 1). Early vesting may occur in limited circumstances, subject to the performance condition being achieved (i.e. at the end of the truncated performance period): 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/entity otherwise acquiring 20% or more of the a relevant interest in the issued capital of the Company; on termination of employment due to death or permanent disability; or 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). Origin Energy Limited ABN /36

212 LTI parameter Exercise period, expiry and forfeiture Anti Hedging policy FY2012 details FY 2012 Options may be exercised only where the performance condition has been met, to the extent set out in the vesting table. Options that vest must be exercised together with payment of the exercise price. Since 1 July 2011, PSRs that vest are exercised automatically. The LTI Plan Rules provide that unvested or unexercised Options and PSRs lapse on cessation of employment unless the Board exercises discretion in exceptional circumstances (such as death, disability, or genuine redundancy) to hold unvested Options or PSRs on foot subject to their normal performance hurdles and other Plan conditions. In addition, the Plan Rules provide that unvested or unexercised Options and PSRs lapse up to a maximum of 7 years after grant. For FY2012 awards, Options and/or PSRs that have not vested by the 5 th anniversary after grant will lapse. Any vested but unexercised Options will lapse 5¼ years after grant. Changes for FY2013 PSRs or Options that do not vest at the single test date will lapse immediately. 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. Non-compliance may result in summary dismissal Safety and Employee Share Plan (ESP) Safety is a core issue reflected at multiple levels throughout the STI arrangements. At a corporate level, failure to achieve company-wide targets affects the senior population through safety deduct mechanisms that may reduce the Corporate STI Performance Metric (section 6.2), and affects the whole employee workforce through the operation of the Employee Share Plan (ESP), discussed below. In addition, operating businesses utilise business-wide safety measures in STI KPIs (see 4.3.1) affecting senior employees in the particular business, and safety KPIs where appropriate may also be included amongst personal KPIs. 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 specified safety targets set by the Board are met. 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 cessation of employment, whichever occurs first. For FY2012 a safety target was set for the recording of 30,000 safety observations. The target was fully met and the Company is committed to awarding $1,000 of shares to approximately 3,800 eligible employees (or a pro-rata amount for eligible part-time employees). It is proposed that the Company will acquire the requisite shares on market for transfer to employees to meet this commitment during September 2012, subject to compliance with applicable regulations. Other non-equity arrangements may apply for employees in operations outside Australia and New Zealand. Origin Energy Limited ABN /36

213 4.3.7 Retention Plan As part of the Company s ongoing operations, from time to time, the Board has approved deferred payment arrangements to reduce the risk of losing key employees who manage critical activities, or occupy roles that are key to the delivery of operating or strategic objectives, or undertake functions requiring skills that are actively solicited in the market. The arrangements allow for the key employees to be provided with Deferred Share Rights (DSRs) or deferred cash payments provided that they remain in employment to a nominated date (generally two-four years in the future) and achieve personal performance targets. No new deferred cash arrangements under the Plan were implemented during FY2012, and the number of deferred cash arrangements outstanding at 30 June 2012 was nine ( ). None of the arrangements applied to members of the KMP. The DSR Plan was approved by the Board in early 2010 to provide an equity grant as a preferred alternative to cash. The period of deferral is four years and the equity is time vested in equal amounts at the ends of the second, third and fourth year. The first DSRs were issued during FY2012. At 30 June 2012, 161,448 DSRs had been issued to 16 recipients of DSRs under the Plan (2011 nil). None of the recipients were members of the KMP Gender pay equity The Company policy is to deliver equal pay for equal work. During its annual salary review processes it employs a number of checks and balances to maintain an average variation between genders across all grades within plus or minus two per cent with evenly distributed fluctuations. Analysis is also undertaken of point-of-hire salary decisions to eliminate potential gaps arising in hiring decisions. The Company has a structural imbalance in terms of gender distribution (females are over-represented in lower-graded jobs and under-represented in higher-graded jobs) and has implemented monitoring measures focused on increasing the proportion of women in senior roles over time. These include the review of interview panel constitution and the gender balance of shortlists to provide checks against systemic bias in appointment and hire decisions. Origin Energy Limited ABN /36

214 5. Contractual Details The table below sets out the main terms and conditions of the employment contracts of the Managing Director and executive KMP (excluding Non-executive Directors). As noted in section 4.2, the contractual terms were determined with reference to the size and complexity of the job roles, benchmarked against the external market, and reflect the principles of reward for performance and alignment with the interests of shareholders. Role Contract Expiry Notice Period Termination Payments (subject to termination benefits legislation) Managing Director To 30 June months by either party Immediate for misconduct, breach of contract or bankruptcy 6 months for extended illness 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 earned 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) Executive Director, Finance & Strategy and other executive KMP Ongoing (no fixed term) Up to 3 months by either party Immediate for misconduct, breach of contract or bankruptcy 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 Origin Energy Limited ABN /36

215 Details regarding the Managing Director s remuneration arrangements are provided in earlier sections of this Report but are included in the summary below for completeness: Element TFR STI LTI Details The Managing Director s fixed remuneration for FY2012 was $2,500,000. During the period the Board commissioned two external reports on chief executive remuneration providing detailed benchmarks across a range of domestic and international peer groups. No change has been made to the Managing Director s fixed remuneration for FY2013. The Managing Director s maximum STI opportunity level is 120% of TFR (72% at target). 60% of the Managing Director s STI is determined by the Corporate Performance Metrics and 40% on individual measures. Individual measures may include major project deliverables, succession planning and human resource objectives, safety performance, and strategic positioning targets. Company performance for FY2012 was determined against two equally weighted measures, Group OCAT Ratio and growth in Underlying EPS (see section 6.2). No change has been made to the Managing Director s STI opportunity level for FY2013. The Managing Director s maximum LTI opportunity level for FY2012 was 150% of TFR. The Managing Director maintains a significant shareholding in the Company, as reflected in Table 8.6 of this Report (and equivalent tables in prior Reports). No change has been made to the Managing Director s LTI opportunity level for FY2013. Origin Energy Limited ABN /36

216 6. Company Performance and Remuneration Outcomes 6.1 Company Performance Summary The Company reported a Net Profit after Tax and Non-controlling interests ( Statutory Profit ) of $980 million for the year ended 30 June 2012, an increase of 427 per cent compared with $186 million reported in the prior year. The key drivers for the change in Statutory Profit were a 33 per cent or $220 million increase in Underlying Profit from $673 million to $893 million, a gain on the dilution of the Company s interest in Australia Pacific LNG, and an increase in the fair value of financial instruments, partly offset by impairments, and transition and transaction costs primarily relating to the Retail Transformation Project and the NSW acquisition. At an underlying level, the Company delivered a strong increase in earnings with Underlying EBITDA up 27 per cent or $475 million to $2,257 million, underpinned by a full year s contribution from the acquisition of the NSW retail businesses, Country Energy and Integral Energy, and the Eraring and Shoalhaven GenTrader Agreements. Group operating cash flow after tax increased by 12 per cent or $196 million to $1,781 million. In Energy Markets the NSW acquisition, supported by effective wholesale portfolio management drove a 33 per cent in Underlying EBITDA to $1,562 million. Lower exploration expenses of $49 million compared with $118 million in the prior year, and higher commodity prices drove a 23 per cent increase in Underlying EBITDA to $329 million in the Exploration and Production business, while in Contact, higher wholesale prices and lower gas and carbon costs led to a 16 per cent or $55 million increase in Underlying EBITDA to $400 million. Australia Pacific LNG approved a US$14 billion final investment decision on the first phase of its CSG to LNG project in July This investment decision secured a 4.3 million tonne per annum (mtpa) LNG supply agreement with Sinopec, in addition to Sinopec s subscription agreement for a 15 per cent interest in the incorporated joint venture, diluting the Company's interest to 42.5 per cent. During the year, further LNG off take agreements were signed with Kansai Electric for approximately 1 mtpa, and Sinopec for an additional 3.3 mtpa, marking the completion of marketing for both LNG trains. Sinopec also committed to increasing its shareholding in Australia Pacific LNG to 25 per cent, which was finalised following Australia Pacific LNG's A$23 billion final investment decision on the second train in July The finalisation of this further diluted the Company s interest in Australia Pacific LNG to 37.5 per cent, and the Company has signalled its intention to further reduce this interest to around 30 per cent through a joint process with ConocoPhillips. The joint venture also secured US$8.5 billion in project finance facilities during the period (subject to customary conditions precedent, including certain government approvals), significantly strengthening the Company s liquidity position. During the year the Company made substantial progress on its major investments. Energy Markets successfully migrated 2.6 million customer accounts to the new billing and customer relationship management system, providing enhanced capability to optimise processes, reduce costs and improve sales outcomes. Integration of the acquired NSW businesses continued to progress well, and final commissioning of the 550 MW Mortlake Power Station is expected to be completed shortly after the end of the period. Construction of Contact's 166 MW Te Mihi geothermal project continued as planned. The Company raised additional capital during the year, including a $266 million underwritten DRP, a US$500 million issuance of unsecured notes in the US 144a market, $900 million in subordinated notes in the Australian retail bond market, and $800 million of additional debt facilities. This additional capital further strengthens the Company's balance sheet, improving liquidity and diversifying its funding sources. As at 30 June 2012 the Company had committed undrawn debt facilities and cash (excluding Contact and bank guarantees) totalling $4.2 billion. Origin Energy Limited ABN /36

217 6.2 Ten Year Performance History The following table outlines the Company s performance over a number of key performance indicators, with the highlighted rows relating to the performance metrics used in the STI and LTI plans as depicted in the framework at section As shown in the framework, the Corporate STI Performance measure is made up of two corporate measures, Underlying EPS and Group OCAT Ratio. Total Shareholder Return (TSR) is defined as the growth in Company share price over the relevant performance period with dividends notionally re-invested 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. In terms of LTI, awards during the period have had a vesting period of three years from grant to test date; the three-year rolling TSR performance in the table below approximates shareholder returns during those vesting periods. TEN YEAR PERFORMANCE HISTORY TEN YEAR CAGR 6 EARNINGS Revenue $m 3,327 3,522 4,870 5,880 6,436 8,275 8,042 8,534 10,344 12, % Statutory Profit $m , Statutory EPS basic 2 cents per share Underlying Profit $m % STI PERFORMANCE CONDITION Underlying EPS basic 2 cents per share % Group OCAT Ratio % Corporate STI Performance Metric Outcome (%) 3 TOTAL SHAREHOLDER RETURN (TSR) Dividends (cents) % Share Price 30 June 2 $ % Annual TSR % % LTI PERFORMANCE CONDITION TSR (Rolling 3-Year CAGR 5 %pa) Years FY2003, FY2004 and FY2005 are reported under previous AGAAP and have not been re-stated under A-IFRS. 2 Share price and EPS have been restated for the bonus element of the Rights Issues completed in April 2005 and April See and Prior to FY2009 the Corporate STI Performance Metric was Group OCAT Ratio. Since FY2009 it is a combination of Underlying EPS and Group OCAT Ratio, equally weighted. 4 Includes additional dividend paid in November Compound annual growth rate (%pa) for the 3 years ended 30 June. Three years corresponds to the LTI vesting period (but note that LTI hurdles are tested 3 years after actual date of grant). 6 Compound annual growth rate (%pa) over ten years 1 July 2002 to 30 June 2012 Origin Energy Limited ABN /36

218 The detailed TSR performance the 10 years to 30 June 2012 is shown in the graph above. The 10-year compound annual growth rate is shown for key metrics in the right of the table above. While the ASX-100 Accumulation Index increased by 7.0 per cent average annual compound over the period, the Company s compound TSR was 17.6 per cent per annum. The Managing Director s total remuneration during the period has increased at a rate lower than this. Remuneration disclosures were not prepared under A-IFRS prior to FY2006. Using audited A-IFRS remuneration for the period FY2006-FY2012, the CAGR for Managing Director Aggregate Reward was 15 per cent per annum. Origin Energy Limited ABN /36

219 6.3 KMP Actual and Forfeit STI The table below shows the STI opportunity levels, together with actual payout and forfeit proportions for FY2011 and FY2012. KMP Current (excluding Nonexecutive Directors) G A King K A Moses FY Maximum STI as % of Fixed Remuneration Actual STI as % of Maximum STI 1 % of Maximum STI Payment Forfeited 2 Actual STI Payment 3 $ , , , ,140 D A Baldwin D Barnes F G Calabria P A Zealand KMP - former A M Stock R J Willink In exceptional circumstances the Board may award more than the maximum to an individual. 2 Where the actual STI payment is less than maximum potential, the difference is forfeited. It does not become payable in subsequent years. The minimum total value of the STI is nil if no performance conditions are met STI constitutes a cash bonus granted for performance during the year ended 30 June 2012, determined following the close of 2012 results and paid in September STI constitutes a cash bonus granted for performance during the year ended 30 June 2011, determined following the close of 2011 results and paid in September NZD/AUD annual average exchange rate for 1 July March NZD/AUD annual average exchange rate for 1 July June 2012 ( April June 2011). 6 For the period as a KMP (see section 2). Origin Energy Limited ABN /36

220 6.4 Remuneration Outcomes Table FY2012 The following tables summarise the actual pay earned and delivered in respect of FY2012 for executive KMP, and the status of conditional pay awarded in this and prior periods. This presentation is based on recommended amendments to the Corporations Act that were proposed in April 2011 by CAMAC 5 and the information in these tables is different from that which appears in Table 8.1. Table 8.1 is prepared in accordance with the Corporations Act and measured in accordance with accounting standards and includes expense amounts for items such as LTIs awarded in the current and prior years and other amounts which are expensed over the period in which they vest or before the period paid. The three tables in this section, which are not additive, are provided in order to present a clearer view of actual pay outcomes. (a) Crystallised Past Pay (past pay crystallised or forfeited in FY2012) Name Executive Directors Past Pay crystallised in FY Past Pay forfeited in FY G A King 1,677,216 - K A Moses 402,538 - Other Executive KMP D A Baldwin 3-824,845 4 D Barnes 3 67,090 - F G Calabria 223,628 - P A Zealand 95,042-1 Past Pay Crystallised represents the value crystallised in FY2012 of LTI awarded in prior years and vested in FY2012. The value of equity is calculated at the date of vesting (irrespective of exercise). This is the number of Options or Rights vested multiplied by the market closing price of the Company s shares on the day of vesting, less any applicable exercise price. Where the exercise price exceeds the market price, the value is zero. In FY2012, vesting comprised LTI awards granted in September 2008 referable to the performance year FY Past Pay Forfeited represents the Grant Date fair value of LTI awarded in prior years and disclosed as remuneration in prior years, but lapsed and forfeited in FY2012. The original Grant Date fair value has not been adjusted for time value change. In FY2012, lapses for D A Baldwin comprise LTI awards granted by Contact Energy in July NZD/AUD annual average exchange rate of $ (1 July 2011 to 30 June 2012) applied to the New Zealand Dollar denominated elements of pay. 4 Relates to Contact Energy securities. (b) Present Pay (pay earned and delivered in respect of FY2012) Name Fixed remuneration 1 FY2012 STI for performance to 30 June Present Pay FY Executive Directors G A King 2,694,706 2,350,000 5,044,706 4 K A Moses 1,390,341 1,145,540 2,535,881 Other Executive KMP D A Baldwin 988, ,400 1,762,756 D Barnes 5 644, ,000 1,034,951 F G Calabria 1,011, ,000 1,721,373 P A Zealand 730, ,200 1,170,932 1 Fixed remuneration is defined in section and is the sum of base salary, non-monetary benefits, and superannuation. 2 FY2012 STI constitutes a cash bonus granted for the year ended 30 June 2012, determined following the close of FY2012 results and to be paid in September Present Pay is the total of the two previous columns and represents the actual pay delivered in relation to FY2012 performance. 4 Present Pay for G A King for FY2012 was 10.8% higher than for FY NZD/AUD annual average exchange rate of $ (1 July 2011 to 30 June 2012) applied to the New Zealand Dollar denominated elements of pay. 5 Corporations and Markets Advisory Committee, see Executive Summary Origin Energy Limited ABN /36

221 (c) Future Conditional Pay (conditional payments deferred to future periods) Name Executive Directors Past Pay that may crystallise in the future 1 Pay awarded for FY2012 that may crystallise in the future 2 G A King 0 3,750,000 3,4 K A Moses 0 1,524,000 4 Other Executive KMP D A Baldwin 0 880,000 D Barnes 0 650,000 F G Calabria 0 1,000,000 P A Zealand 0 603,500 1 Indicative value at 30 June Includes all Past Pay LTI awarded in prior years that has not vested or lapsed as at 30 June 2012 but may vest (partially or fully) or lapse in a future period. The indicative value is calculated from the TSR ranking and implied vesting measured at 30 June 2012, and is based on the Company s closing share price at 30 June 2012 ($12.20) less any applicable exercise price. Where the exercise price exceeds the share price at 30 June 2012, the indicative value is zero. Awards in this column were granted between 30 September 2008 and October 2011 referable to performance years FY2008, FY2009, FY2010 and FY2011. As at 30 June 2012, all these awards had zero indicative value. 2 Intended fair value of LTI awards determined with respect to performance in FY2012 that may vest (partially or fully) or lapse in a future period. 3 Conditional pay awarded for FY2012 to G A King was 8.4% lower than conditional pay awarded for FY Pursuant to shareholder approval obtained at the 2011 AGM. Origin Energy Limited ABN /36

222 7. Non-Executive Director Remuneration and Fees 7.1 Policy The Board s objectives and policies with respect to Non-executive Director fees are summarised below: 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 Policy 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. The Chairman receives a base fee, and other Non-executive Directors receive base fees and Committee fees (inclusive of superannuation guarantee and salary sacrifice contributions). Directors can elect to receive this in the form of participation in the shareholder-approved Non-executive Director Share Plan (section 7.3). 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 Board considers independently sourced market benchmark data in setting the level of remuneration required to attract and retain Directors with the necessary skills and experience for the Board. 7.2 Non-Executive Fee Structure The aggregate cap for Non-executive Directors remuneration was approved by shareholders at the 2010 Annual General Meeting. The Board does not propose a change to this cap for FY2013, but has approved an increase of four per cent in Board and Committee fees to apply for FY2013. The table below shows the structure and level of Non-executive Director fees for the current year and as approved by the Board for FY2013. $ 000 Year ending 30 June FY2012 FY2013 Board fees Chairman Director Committee fees Audit Chairman Member Remuneration Chairman Member Health, Safety & Environment Chairman Member Risk Chairman & members - - Nomination Chairman & members The Chairman of the Board is a member of all Board Committees but receives no additional fees for such attendance. Origin Energy Limited ABN /36

223 7.3 Non-Executive Director Share Plan Non-executive Directors are required to hold a minimum of 10,000 shares in the Company within three years of appointment. The Non-executive Director Share Plan allows the 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 acquisitions of shares were made under the Non-executive Director Share Plan during the reporting period. Origin Energy Limited ABN /36

224 8. Remuneration Tables and Disclosures 8.1 Remuneration Table for FY2011 and FY2012 Executive Directors Base salary / fees Short-term benefits Contact Energy Fees 1 Variable remuneration 2 Nonmonetary benefits and Other 3 Post-employment benefits Long-term benefits Totals Superannuation Options & Rights 4 Accrued LSL Termination Benefits Total Remuneration G A King ,456, ,743 2,350,000 30,963 43,752 3,162, ,468-8,347,992 66% 38% % of Total Remunera tion At Risk % of Remunera tion in Options and PSRs ,255, ,343 2,100,000 52,344 44,336 2,975, ,454-7,660,282 66% 39% K A Moses ,251, ,292 1,145,540 22,715 15,792 1,169,436 58,515-3,763,832 62% 31% Executive KMP - Current ,166,584 71,640 1,140,000 22,881 32, ,493 47,839-3,434,943 61% 28% D A Baldwin , , , ,463 15,792 1,206,338 65,226-3,330,566 59% 36% ,879 21, ,000 8,623 3, , ,587-2,125, % 7 40% 7 D Barnes , ,000 5,589 21, ,414 62,371-1,422,736 50% 23% , ,000 11,638 21, , ,435-1,015, % 7 19% 7 F G Calabria , ,000 24,088 23, , ,539-2,753,696 58% 32% , ,000 22,353 21, ,874 25,518-2,428,744 62% 27% P A Zealand , ,200 27,021 42, ,092 11,267-1,520,291 51% 22% Executive KMP - Former , ,000 22,835 43, ,951 11,805-1,462,682 52% 18% A M Stock , ,000 47,593 23, ,434 38,668-1,823,362 53% 25% R J Willink , ,000 47,757 85, ,928 26,164-1,222,274 42% 18% Origin Energy Limited ABN /36

225 8.1 Remuneration Table for FY2011 and FY2012 (continued) Base salary / fees Short-term benefits Contact Energy Fees 1 Variable remuneration 2 Nonmonetary benefits and Other 3 Post-employment benefits Long-term benefits Totals Superannuation Options & Rights 4 Accrued LSL Termination Benefits Total Remuneration % of Total Remunera tion At Risk % of Remunera tion in Options and PSRs Non-executive Directors H K McCann J H Akehurst B G Beeren T Bourne G M Cairns , , , , ,422 15, , , , , , , , , ,468-1,515 15, , ,451 84,689-1,553 15, , , , , , , , , , , , , , R J Norris , , , H M Nugent , , , Non-executive Directors (former) , , , R Williams , , , Totals ,647, ,842 5,810, , ,674 7,075, ,386-23,213, ,245, ,912 6,115, , ,150 6,582, ,470-23,133,918 7 Origin Energy Limited ABN /36

226 Footnotes to Table 8.1 (1) GA King, D A Baldwin, BG Beeren and KA Moses are the Company s nominees on the board of Contact Energy. Remuneration is converted to Australian dollars using an annual (1 July June 2012) average exchange rate of $ ( $1.3028). (2) Variable remuneration includes the STI in respect of the relevant reporting period based on achieving personal goals and satisfying specified performance criteria during that period plus any discretionary amounts awarded for exceptional contributions. FY2012 STI constitutes a cash bonus granted for the year ended 30 June 2012, determined following the close of FY2012 results and to be paid in September FY2011 STI constitutes a cash bonus granted for the year ended 30 June 2011, determined following the close of 2011 results and paid in September (3) Non-monetary benefits include insurance premiums and fringe benefits such as car parking and reportable fringe benefits. Other includes monetary benefits of $296,246 associated with D A Baldwin s relocation from New Zealand to Australia is recorded as Other Benefits. (4) Includes restricted shares for Contact Energy fees and the fair value of Options and PSRs 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 test date. The value disclosed is the portion of the fair value of the Options and PSRs allocated to the relevant reporting period. In valuing the Options and PSRs, market conditions have been taken into account. (5) During employment with Contact Energy, D A Baldwin and D Barnes were paid in New Zealand currency. Remuneration is converted to Australian dollars using an annual average exchange rate of $ (1 July 2011 to 30 June 2012). For FY2011 the rates were (1 July 2010 to 31 March 2011 for D A Baldwin) and $ (1 April 2011 to 30 June 2011 for D Barnes). For Contact Energy, base salary includes holiday pay rate adjustments. Fixed remuneration and all or part of their variable remuneration for the period of employment with Contact Energy is reimbursed by Contact Energy. (6) As Managing Director of Contact Energy (up to and including 31 March 2011), D A 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 his capacity as director of Contact Energy subsequent to 1 April (7) Re-stated to include fair values for Options, PSRs and restricted shares issued by Contact Energy. (8) For the period as a KMP (see section 2). (9) RJ Norris was appointed as a Non-executive Director on 18 April (10) All named executive 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 is defined in section and is the sum of base salary, non-monetary benefits, and superannuation. Origin Energy Limited ABN /36

227 8.2 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, PSRs and DSRs 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. Granted Type Number Outstanding Exercise Price 1 First Test Date Expiry Date Vested Number Exercisable 2 Percentage Exercisable Options 300,000 $ Yes 300, PSRs 131,000 Nil Yes 131, Options 815,600 $ Yes 815, PSRs 388,107 Nil Yes 320, Options 1,161,500 $ Yes 958, PSRs 427,295 Nil No Options 1,056,500 $ No PSRs 154,370 Nil No Options 412,000 $ No PSRs 4,322 Nil No Options 11,600 $ No PSRs 757,457 Nil No Options 2,039,899 $ No DSRs 11,292 Nil No ,292 Nil No ,292 Nil No PSRs 42,886 Nil No Options 174,316 $ No DSRs 35,329 Nil No ,329 Nil No ,329 Nil No PSRs 1,922,255 Nil No Options 4,287,463 $ No DSRs 7,195 Nil No - - 7,195 Nil No - - 7,195 Nil No PSRs 98,409 Nil No Options 362,570 $ Jul 2017 No 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 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 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. An indicative number is not provided for Deferred Share Rights as these are subject to tenure and personal performance hurdles rather than a market hurdle. 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% of the Company s shares. Origin Energy Limited ABN /36

228 8.3 Analysis of movements in Options and PSRs A summary of the movement in FY2012, by value, of Options over ordinary shares and PSRs in the Company (and Options, PSRs and Restricted Shares in Contact Energy in the case of D A Baldwin and D Barnes) held by KMP is provided in the table below. Note that no Non-executive Directors hold Options or PSRs. Executive Directors G A King K A Moses Other KMP D Barnes 3,4 D A Baldwin 3,4 F G Calabria P A Zealand Value of Options and PSRs ($) Type Granted 1 Exercised 2 Lapsed Options PSRs Options PSRs 2,214,658 1,879, , , ,510,760 - Options PSRs Contact Options 306, Contact PSRs 306, Options PSRs 577, , Contact Options ,840 Contact PSRs 327, ,653 Contact Restricted Shares - 508,352 Options PSRs Options PSRs 610, , , , (1) The allocated value of Options and PSRs granted in the year is the fair value calculated at grant date using a Black-Scholes algorithm with Monte Carlo simulation to account for hurdles has been independently calculated by Mercer. The value disclosed is the total value of the Options and PSRs. This amount is allocated to remuneration (Table 8.1) over the vesting period (i.e. from October 2011 to October 2014). (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) Based on an exchange rate of (4) D Barnes and D A Baldwin s Contact securities were issued under the Contact Energy Employee Long-term Incentive Scheme as Chief Executive Officer or Managing Director (respectively) of Contact Energy. Contact Energy relies on NZSX Listing Rule to allow participation of the CEO/Managing Director in the Long-term Incentive Scheme. D A Baldwin receives cash director s fees from Contact Energy in his capacity as a director post 1 April 2011 following the end of his secondment to Contact Energy, but will not be granted any further securities in Contact Energy under its Long-term Incentive Scheme. However he will retain existing securities subject to their corresponding exercise hurdles and vesting requirements. (5) Contact PSRs issued in FY2012 to adjust for dilution on previously granted securities as a result of the Contact Energy Entitlement Offer and to replace existing Restricted Shares due to the closure of the Contact Energy Restricted Share Plan. Refer to refer to Contact Energy s website Origin Energy Limited ABN /36

229 8.4 Numbers of Options and PSRs granted, vested and lapsed in FY2012 and associated fair value Options over ordinary shares and PSRs of the Company (and Options and PSRs in Contact Energy in the case of D A Baldwin and D Barnes) granted or vested to KMP are listed below. Note that no Non-executive Directors hold Options or PSRs and no KMPs hold DSRs. KMP Type No Granted during FY2012 Grant Date Fair Value 1 Exercise Price Vesting Date Expiry Date % vested FY2012 % forfeited FY No of options & PSRs vested FY 2012 Executive Directors G A King Options 728,506 15/10/11 $3.04 $ /10/14 15/01/ ,240 PSRs 182,333 15/10/11 $10.31 Nil 15/10/14 15/10/ ,448 K A Moses Options 271,493 15/10/11 $3.04 $ /10/14 15/01/ ,478 PSRs 67,950 15/10/11 $10.31 Nil 15/10/14 15/10/ ,588 Other KMP D Barnes Options ,384 PSRs ,098 Contact Options 490,625 01/10/11 $0.62 $ /10/14 30/11/ Contact PSRs /08/11 $2.60 Nil 01/10/13 30/11/ ,082 01/10/11 $2.88 Nil 01/10/14 30/11/ D A Baldwin Options 190,046 15/10/11 $3.04 $ /10/14 15/01/ PSRs 47,566 15/10/11 $10.31 Nil 15/10/14 15/10/ Contact PSRs 4 3,291 23/08/11 $3.40 Nil Note 3 Note 3-93,017 21/06/12 $3.40 Nil Note 3 Note 3 - F G Calabria Options 200,724 15/10/11 $3.04 $ /10/14 15/01/ ,454 PSRs 50,238 15/10/11 $10.31 Nil 15/10/14 15/10/ ,993 P A Zealand Options 80,390 15/10/11 $3.04 $ /10/14 15/01/ ,338 PSRs 20,121 15/10/11 $10.31 Nil 15/10/14 15/10/ ,222 1 All values in Australian currency; fair values are at the date of grant. 2 The percentage forfeited in FY2012 represents the reduction from the maximum number of Options available to vest due to the highest level performance criteria not being achieved. 3 Contact PSRs issued to adjust for dilution on previously granted securities as a result of the Contact Energy Entitlement Offer. 4 3,291 Contact PSRs issued to adjust for dilution on previously granted securities as a result of the Contact Energy Entitlement Offer; and 93,017 PSRs to replace existing Restricted Shares due to the closure of the Contact Energy Restricted Share Plan. Vesting and expiry dates as per the underlying securities, fair value shown as the weighted average fair value for the various tranches represented. Refer to refer to Contact Energy s website No Options or PSRs have been granted since the end of the reporting period. Options or PSRs were provided at no cost to the recipients. Unvested Options and PSRs expire on the earlier of their expiry date or on cessation of employment. The Options and PSRs are generally 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 (and, for Contact Energy, refer to Contact Energy s website Origin Energy Limited ABN /36

230 8.5 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 D A Baldwin and D Barnes, restricted shares or Options and PSRs over ordinary shares in Contact Energy) held directly, indirectly or beneficially by the KMP including their related parties are listed below. Note that Non-executive Directors do not hold Options or PSRs. Executive Directors Year Type G A King 2012 Options PSRs Held at Year Start 1,368, , Options 1,497,000 PSRs 2 358,000 K A Moses 2012 Options PSRs Other KMP 700, , Options 717,000 PSRs 2 129,000 D Barnes 2012 Options PSRs 56,990 21,540 Granted during the year 728, , , , ,493 67, ,202 54, Vested and Exercised , , , , Lapsed Held at Year End 2,096, ,083 1,368, , , , , ,779 56,990 21,540 Vested During Year 330, , , ,000 73,478 30, ,000 51,000 12,384 5,098 Vested & Exercisable at Year End 630, , , ,478 81, ,000 51,000 12,384 5,098 Contact Options 106, , , Contact PSRs 23, , , Options 63,000 PSRs 2 23,500 D A Baldwin 2012 Options PSRs 23,990 9,040 30,000 11, ,990 21,540 30,000 11,000 Contact Options - 106, , Contact PSRs - 23, , ,369 66, ,046 47, , ,787 Contact Options 1,250, ,410 1,043, Contact PSRs 104,655 96, , Contact Restricted Shares 133, , Options 60,000 PSRs 2 23, ,369 43, ,369 66,221 Contact Options 779, , ,250, Contact PSRs - 104, , Contact Restricted Shares 133, , Origin Energy Limited ABN /36

231 Year Type F G Calabria 2012 Options PSRs Held at Year Start 309,166 94, Options PSRs 2 401,000 78,500 P A Zealand 2012 Options PSRs 95,599 36, Options PSRs 2 103,000 38,500 Granted during the year 200,724 50, ,166 39,271 80,390 20,121 36,599 13,890 Vested and Exercised ,000 23, Lapsed Held at Year End 509, , ,166 94, ,989 56,511 Vested During Year 40,454 16,993 64,000 23,500 17,338 7,222 Vested & Exercisable at Year End A M Stock Options PSRs 2 448,000 64,500 56,345 21,570 R J Willink Options 87,000 PSRs 2 33,000 31,770 12,028 44,000 16, ,000 23,500-14, ,599 36, ,345 62, ,770 30,528 44,000 16,000 64,000 23,500 40,000 14, ,454 16,993 64,000-17,338 7, Performance Share Rights (issued under the Contact Energy Share Option Scheme) replaced restricted shares from October Restricted shares issued prior to October 2010 remain held- by participants and subject to their exercise hurdles and vesting criteria. 2 PSRs granted during FY2011 include adjustment for dilution from the 2011 Rights Issue. 3 Contact PSRs issued in FY2012 to adjust for dilution on previously granted securities as a result of the Contact Energy Entitlement Offer and to replace existing Restricted Shares due to the closure of the Contact Energy Restricted Share Plan. Refer to refer to Contact Energy s website 4 For the period as a KMP (see section 2). Origin Energy Limited ABN /36

232 8.6 Equity holdings and transactions Movements during the reporting periods in the number of ordinary shares of the Company (and, in the case of D A Baldwin and D Barnes, Contact Energy) held directly, or indirectly or beneficially by KMP, including their related parties: Received on exercise of options Received on Exercise of PSRs 2 Year Held at Year Start Purchases 1 Sales Held at Year End Non-executive Directors 3 H K McCann , , ,245 62, ,012 J H Akehurst , , ,750 56, ,200 B G Beeren ,360,015 21, ,381, ,235, , ,360,015 T Bourne ,504 2, , ,822 6, ,504 G M Cairns , , ,939 29, ,360 R J Norris , , H M Nugent , , ,059 7, ,204 Executive Directors G A King ,106, ,000 1,006, , , , ,000 1,000,000 1,106,611 K A Moses , , , , ,000 4, , , ,927 Other KMP D Barnes , , ,794 13,005 30, ,000 17,131 59,668 D A Baldwin , , , ,000 F G Calabria , , ,993 44, , , , ,469 P A Zealand , , ,140 31,788 44, , ,928 A M Stock ,068 56, , , , ,662 R J Willink ,693 1, ,470 1 All existing participants in the plan took up their Rights entitlements during the FY2011 reporting period. 2 No amount was paid for the shares acquired on exercise of vested PSRs. 3 Includes shares acquired by participants of the Non-executive Director Share Plan as a result of their take-up of the prorata entitlements under the Rights Issue during the FY2011 reporting period. There were no allocations under the Plan. 4 Exercise price per share of $7.21. There are no amounts remaining unpaid. 5 Exercise price per share of $6.04. There are no amounts remaining unpaid. 6 Exercise price per share of $ There are no amounts remaining unpaid. 7 86,000 shares had an exercise price of $ ,000 shares had an exercise price of $6.50. There are no amounts remaining unpaid. 8 For the period as a KMP (see section 2) ,000 share had an exercise price per share of $7.21, 64,000 shares had an exercise price of $9.86. There are no amounts remaining unpaid. Origin Energy Limited ABN /36

233 9. Abbreviations and Key Definitions KMP - Key management personnel Directors EMT - Executive Management Team Executives LTI STI TFR TSR Total Shareholder Return Non-IFRS Financial Measures The term Key management personnel 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 consolidated entity. For the consolidated entity, these are the individuals listed in section 2 of this Report. Executive Directors and Non-executive Directors. The Managing Director and managers who report to the Managing Director. The EMT plus those employees who participate in the Company s long term incentive arrangements. Long Term Incentive Short Term Incentive Total Fixed Remuneration The growth in Company share price over a specified 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. This Remuneration Report includes certain Non-IFRS financial measures. Non-IFRS financial measures are financial measures that are presented other than in accordance with all relevant accounting standards. Non-IFRS financial measures are used internally by management to assess the performance of the Company s business and make decisions on allocation of resources. Certain Non- IFRS financial measures are used as performance metrics for remuneration outcomes as detailed in this Remuneration Report. The Non-IFRS financial measures included in this Remuneration Report are defined below. Group OCAT Ratio Underlying Consolidated Profit (Underlying Profit) Underlying EBITDA Underlying earnings per share (Underlying EPS) Operating Cash Flow After Tax (less interest tax shield) divided by Productive Capital. Interest tax shield represents the tax deduction for interest paid. Productive capital represents funds employed including 42.5% of Australia Pacific LNG (as at 30 June 2012) and excludes capital works in progress for projects under development which are not yet contributing to earnings. Statutory Profit for the period (as reported in the Origin Energy Consolidated Group Income Statement for the Full Year Financial Statements), adjusted for items consistent with the manner in which the Managing Director reviews the performance of the business, as disclosed in note 2(b) of the Origin Energy Consolidated Group Full Year Financial Statements. Underlying Earnings before interest, tax, depreciation and amortisation as disclosed in note 2(b) of the Origin Energy Consolidated Full Year Financial Statements. Underlying Consolidated Profit divided by the weighted average number of shares on issue in the year, as disclosed in note 37 of the Full Year Financial Statements for the Origin Consolidated Group. Origin Energy Limited ABN /36

234 Corporate Governance Statement for the year ended 30 June 2012 Origin Energy Limited ABN /8