CLEANER ENERGY SMARTER FUTURE ANNUAL REPORT 2016 CONTENTS 01 ................. MESSAGE FROM THE CHAIRMAN AND MANAGING DIRECTOR 04 ................. DIRECTORS’ REPORT 09 ................. OPERATING AND FINANCIAL REVIEW 34 ................. REMUNERATION REPORT 57 ................. LEAD AUDITOR’S INDEPENDENCE DECLARATION 58 ................. BOARD OF DIRECTORS 60 ................. EXECUTIVE MANAGEMENT TEAM 61 ................. CORPORATE GOVERNANCE STATEMENT 67 ................. FINANCIAL STATEMENTS 117 .............. DIRECTORS’ DECLARATION 118 .............. INDEPENDENT AUDITOR’S REPORT 120 ............. SHARE AND SHAREHOLDER INFORMATION 122 ............. EXPLORATION AND PRODUCTION PERMITS AND DATA 124 .............. ANNUAL RESERVES REPORT 129 ............. FIVE YEAR FINANCIAL HISTORY 130 ............. GLOSSARY AND INTERPRETATION MESSAGE FROM THE CHAIRMAN AND MANAGING DIRECTOR Fellow shareholder The past 12 months was a challenging period financially for Origin and its shareholders. While we have celebrated a major achievement in bringing Australia Pacific LNG into operation – a milestone eight years in the making – this has coincided with sustained low oil prices and as a result the company entered the year with an unsustainably high level of debt. In response, we made significant progress to build resilience across our business. Through our capital initiatives and asset sale program, we have materially reduced debt, preserved cash by reducing operating and capital expenditure, and reduced risk through the purchase of oil put options. At an operational level, Origin has performed well. The Energy Markets business has significantly increased cash from operating and investing activities and improved operational outcomes across many key indicators of performance. Australia Pacific LNG commenced LNG production from Train 1 and Train 2 is on track to commence production this year. Origin’s strategy of investing in gas and renewables sees the company well placed to lead the transition to less carbon intensive energy not only domestically through the Energy Markets business but also in regional markets through investment in Australia Pacific LNG and its growing LNG production. MESSAGE FROM THE CHAIRMAN AND MANAGING DIRECTOR 01 ORIGIN ENERGY ANNUAL REPORT 2016 THROUGH ORIGIN’S SUITE OF CAPITAL INITIATIVES THE COMPANY HAS SIGNIFICANTLY REDUCED DEBT AND PRESERVED CASH BY REDUCING OPERATING AND CAPITAL EXPENDITURE. THE YEAR IN REVIEW Underlying EBITDA from continuing operations of $1.6 billion was slightly below the prior year reflecting a strong operational performance from Energy Markets and the commencement of LNG production from Australia Pacific LNG. Underlying profit from continuing operations of $354 million was down 41 per cent on the previous year. The increased contribution from LNG at current low oil prices did not fully offset the increase in interest and depreciation which was the main driver of the decline in underlying profit from continuing operations of $249 million to $354 million. The statutory loss from total operations was $589 million, an improvement of 10 per cent on the prior year. The main drivers of this result include a lower underlying profit from continuing operations ($249 million), the sale of Origin’s entire interest in Contact Energy ($55 million) and a reduction ($386 million) in items excluded from underlying profit. Items excluded from underlying profit include non-cash after-tax impairments of $515 million. This includes an impairment charge of $271 million taken in the second half, driven primarily by downward revisions to reserves disclosed in the company’s Annual Reserves Report in July 2016. Net cash from operating and investing activities improved $3.3 billion to $1.2 billion driven by asset sales and improving cash flow as capital expenditure and operating costs were reduced. As a consequence of improved cash flows, asset sales and the Entitlement Offer in October 2015, Origin’s adjusted net debt decreased by $4 billion. Statutory and underlying Earnings Per Share have reduced to (37.3) cents per share and 23.2 cents per share respectively reflecting the increase in the number of shares on issue and lower underlying profit. STRONG OPERATIONAL PERFORMANCE Energy Markets delivered a strong operational performance with an increased EBITDA contribution of $70 million to $1.3 billion. Gross profit contributions from the Natural Gas and Electricity businesses were preserved in a market that has changed significantly in the past year while costs were reduced. Importantly, net cash from operating and investing activities increased by $522 million to $1.3 billion. A major milestone was the commencement of exports by Australia Pacific LNG in January 2016. Train 1 production has ramped up quickly to above nameplate capacity and to date, the project has shipped 36 cargoes(1), primarily to its two major customers, Sinopec and Kansai. The maiden contribution from the commencement of LNG production by Australia Pacific LNG has in part offset the impact of lower oil prices on the Integrated Gas business which decreased by $112 million to $386 million. As the investment in Australia Pacific LNG nears completion and cash flows from production begin, cash flow from operating and investing activities improved by $1.4 billion to ($1.6) billion. DELIVERING ON OUR COMMITMENTS During the past 12 months, we have taken decisive action to stabilise the business in the face of low oil prices, not least repaying $4 billion of debt to reduce our adjusted net debt to $9.1 billion. Asset sales totalling $484 million were announced during the period, in addition to the sale of Origin’s interest in Contact Energy for proceeds of $1.6 billion. The sale of additional assets remains on track to meet the $800 million target by the end of FY2017. In the 18 months to the end of FY2016, we reduced our workforce by 28 per cent, or 2,500 people, as capital projects were completed or stopped, some activities such as overseas exploration and development discontinued and operational efficiency improved. This will support a continued reduction in cash costs into FY2017. Our Energy Markets business achieved a $100 million operating cost reduction target from financial year 2014 levels, and also reduced capital expenditure by $50 million in FY2016, driving an improvement in Underlying Return on Capital Employed (ROCE) from 9.6 per cent to 10.1 per cent. As the upstream operator of Australia Pacific LNG, Integrated Gas delivered more than $1 billion per annum in recurring upstream cost reductions. We have also taken action to reduce exposure to low oil prices through the purchase of put options over 15 million barrels of oil for FY2017 at prices of US$40 per barrel and A$55 per barrel. 02 MESSAGE FROM THE CHAIRMAN AND MANAGING DIRECTOR In FY2018 and beyond, as Australia Pacific LNG completes the transition from development to production of its LNG project, we expect to see significant growth in earnings and returns, strong cash flow and continuing reduction in debt. We are on track to be well below our target of $9 billion adjusted net debt by the end of FY2017. In concluding, we would like to thank our people for their extraordinary efforts. While this year has presented enormous challenges, we can look to the future with increasing optimism and confidence. Finally, we would like to recognise and thank our other key stakeholders – our customers, the communities in which we operate, our business partners and particularly you, our shareholders for your ongoing support. Gordon Cairns Chairman Grant King Managing Director DIVIDEND Given the important task of continued debt reduction and the fact that in the current lower oil price environment Origin is not generating franking credits sufficient to frank any dividends, the Board has determined to not pay a dividend in respect of earnings for the second half of the financial year. While the Board will review each dividend decision in light of the prevailing circumstances, the Board’s view is that suspension of the dividend is in the best overall interest of shareholders. BOARD AND EXECUTIVE CHANGES During the period, there were changes to the Origin Board. In September 2015, Scott Perkins joined the Board as an Independent Non-executive Director and member of the Audit and Remuneration committees. At the 2015 Annual General Meeting last October, Karen Moses advised of her intention to retire in 2016 to pursue opportunities as a Non-executive director. Karen stepped down from the Board at that time and from her role as Executive Director, Finance and Strategy in May 2016. Karen has made an invaluable contribution to the growth and development of Origin for more than 20 years and we wish her well for the future. Origin’s Group Financial Controller, Gary Mallett, is currently acting in the role of Chief Financial Officer. LOOKING AHEAD In FY2017, Origin expects a 45 to 60 per cent increase in Underlying EBITDA when compared to FY2016 Underlying EBITDA from our continuing operations(2). Origin’s remaining contribution to Australia Pacific LNG is expected to be approximately $600 million(3), in line with previous guidance. Elsewhere in the business, Origin’s capital expenditure will continue to reduce. (1) As announced at Origin’s full year 2016 results. (2) This guidance is based on an average oil price of US$52.90/bbl and a AUD/USD exchange rate of $0.74 and is dependent on the timing of production from Train 2. For Australia Pacific LNG, the effective oil price for oil-linked LNG sales will incorporate the lag in oil prices associated with LNG Sale and Purchase Agreements. (3) As announced in February 2013, based on December 2012 exchange rates. MESSAGE FROM THE CHAIRMAN AND MANAGING DIRECTOR 03 ORIGIN ENERGY ANNUAL REPORT 2016 In accordance with the Corporations Act 2001 (Cth), 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 2016. The Operating and Financial Review and Remuneration Report form part of this Directors’ Report. 1 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; — wholesale and retail sale of electricity and gas; and — sale of liquefied natural gas. There were no other significant changes in the nature of these activities during the year. 2 REVIEW OF OPERATIONS & FUTURE DEVELOPMENTS A review of the operations and results of operations of Origin during the year, the financial position of Origin and the business strategies and prospects for future financial years, is set out in the Operating and Financial Review, which forms part of this Directors’ Report. 3 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 Almost eight years after the establishment of Australia Pacific LNG in October 2008, the first train of the two train (nine million tonnes per annum nameplate capacity) CSG to LNG project was commissioned and LNG production and export is well underway. Since January 2016 Australia Pacific LNG has shipped 36 cargoes, the majority under long term Sale and Purchase Agreements with Sinopec and Kansai. The second train is expected to commence production in the second quarter of the 2017 financial year. Actions taken to strengthen the Balance Sheet Sale of Contact – On 10 August 2015 Origin completed the sale of its 53.09 per cent shareholding in Contact Energy. The transaction was underwritten at a fixed price of NZ$4.65 per share providing NZ$1.8 billion (A$1.6 billion) in net proceeds. Entitlement Offer – In October 2015 Origin completed an Entitlement Offer, raising $2,496 million net cash proceeds and issuing 636 million new shares. Dividends – As part of the Entitlement Offer in October 2015 Origin announced the reduction of the dividend to 20 cents per share on the expanded capital base, with an unfranked interim dividend of 10 cents per share paid on 31 March 2016. The Board has determined not to pay a dividend in respect of earnings for the second half of the financial year. Asset sales – The sale of infrastructure, wind and geothermal assets sales totalling $476 million(1) were announced, with $118 million completed as at 30 June 2016. The program is on track to achieve sales totalling at least $800 million by the end of the 2017 financial year. Exit from certain activities – The decision to exit from geothermal activities and international exploration to focus on two strong businesses, Energy Markets and Integrated Gas. As acquisition and development activities diminished and the Australia Pacific LNG project nears completion, headcount across operational and functional roles reduced by more than 2,500 over the last 18 months. Developments Development activities were limited to capital expenditure to completing projects that have commenced and utilise existing infrastructure. In the Bass Basin, the Yolla-5 and Yolla-6 production wells were commissioned and production commenced during the year. In the Otway Basin the Halladale and Speculant wells were connected to the Otway Gas Plant and first gas is expected in late August 2016. In the Perth Basin, execution phase of the Stage 1a Waitsia Gas Project is nearing completion, with the commencement of flows expected by the end of August. The events described above and those disclosed in the Financial Statements represent the significant changes in the state of affairs of Origin for the year ended 30 June 2016. 4 EVENTS SUBSEQUENT TO BALANCE DATE Other than the items described below, no matters or circumstances have arisen since 30 June 2016, which have significantly affected, or may significantly affect: — the Company’s operations in future financial years; — results of those operations in future financial years; or — the Company’s state of affairs in future financial years. Completion of Cullerin Range Wind Farm Sale On 17 June 2016 Origin entered into a Share Sale Agreement with EDL Holdings (Australia) Pty Ltd for the sale of its wholly owned subsidiary Cullerin Range Wind Farm Pty Ltd for cash consideration of $72 million. Completion of the transaction occurred on 13 July 2016. The expected gain on sale before tax and transaction costs is approximately $12 million. Simultaneously, Origin Energy Electricity Limited entered into an Offtake Agreement with Cullerin Range Wind Farm Pty Ltd. Completion of OTP Geothermal Pte Ltd Sale On 8 April 2016, Origin announced that it had entered into a Sale Agreement with KS Orka Renewables Pte Ltd for the sale of its 50 per cent interest in OTP Geothermal Pte Ltd (OTP) for cash consideration of approximately US$30 million (Origin share). Settlement of the transaction occurred on 16 August 2016. Origin’s investment in OTP is recorded at its recoverable amount at 30 June 2016 therefore there will be no significant profit or loss realised on divestment in the year ending 30 June 2017. Australia Pacific LNG Functional Currency Australia Pacific LNG has changed its functional currency from AUD to USD from 1 July 2016 for accounting and reporting purposes. On 30 June 2016 Australia Pacific LNG elected to change its functional currency for Petroleum Resource Rent Tax to USD from 1 July 2016 and intends to change its functional currency for income tax purposes to USD with effect from 1 July 2016. Funding of Australia Pacific LNG On 1 July 2016 Australia Pacific LNG undertook a capital reduction and cancellation of all existing 14,000 AUD denominated Mandatory Redeemable Preference Shares (MRCPS) (Origin’s share, A$4.8 billion). The capital reduction was funded by issue of USD denominated MRCPS to a value of US$7.4 billion (Origin’s share US$2.8 billion or A$3.7 billion) and a non-cash shareholder capital contribution of US$2.2 billion (Origin’s share US$0.8 billion or A$1.1 billion). (1) Includes proceeds from OTP sale of US$30 million converted at an exchange rate of AUD/USD of 0.73. 04 DIRECTORS’ REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2016 5 DIVIDENDS a) Dividends paid during the year by the Company were as follows: 25 cents per ordinary share, unfranked, for the year ended 30 June 2015, paid 28 September 2015. 10 cents per ordinary share, unfranked, for the half year ended 31 December 2015, paid 31 March 2016. $million 277 175 b) In respect of the current financial year, the Directors have determined that no final dividend will be payable for the year ended 30 June 2016. 6 DIRECTORS The Directors of the Company at any time during or since the end of the financial year are: Gordon Cairns (Chairman) Grant King (Managing Director) John Akehurst Maxine Brenner Bruce Morgan Karen Moses (retired 21 October 2015) Ralph Norris (retired 16 September 2015) Helen Nugent Scott Perkins (appointed 1 September 2015) Steve Sargent INFORMATION ON DIRECTORS AND COMPANY SECRETARIES 7 Information relating to current Directors’ qualifications, experience and special responsibilities is set out on pages 58 and 59. The qualifications and experience of the Company Secretaries are also set out below. Andrew Clarke Group General Counsel and Company Secretary Andrew Clarke joined Origin in May 2009 and is responsible for the company secretarial and legal functions. He was a partner of a national law firm for 15 years and was Managing Director of a global investment bank for more than two years prior to joining Origin. Andrew has a Bachelor of Laws (Hons) and a Bachelor of Economics from the University of Sydney, and is a member of the AICD. Helen Hardy Company Secretary Helen Hardy joined Origin in March 2010. 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 and a Graduate Member of the AICD. She holds a Bachelor of Laws and a Bachelor of Commerce from the University of Melbourne, and is admitted to practice in New South Wales and Victoria. 8 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: Board Meetings Committee Meetings Scheduled Additional Audit Health, Safety and Environment (HSE) Nomination Remuneration Risk H 10 10 10 10 4 10 2 10 9 10 A 10 10 9 10 4 10 2 10 9 10 H 3 3 3 3 1 3 – 3 3 3 A 3 3 2 3 1 3 – 3 3 3 H 5 – – 5 – 5 2 5 3 – A 5 – – 5 – 5 2 5 3 – H 4 4 4 – – 4 – – – 4 A 4 4 4 – – 4 – – – 4 H 1 – 1 1 – 1 – 1 – – A 1 – 1 1 – 1 – 1 – – H 5 – – – – – 2 5 2 5 A 5 – – – – – 2 5 2 5 H 4 – 4 4 – 4 – 4 – – Directors G Cairns G King J Akehurst M Brenner K Moses(1) B Morgan R Norris(2) H Nugent S Perkins(3) S Sargent (1) Up to the date of retirement on 21 October 2015. (2) Up to the date of retirement on 16 September 2015. (3) From the date of appointment on 1 September 2015. H Number of scheduled 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 10 scheduled meetings, including a two-day strategic planning meeting and three additional meetings to deal with urgent matters. The Board also had six separate scheduled workshops to consider matters of particular relevance. In addition, the Board conducted visits of Company operations at various sites and met with operational management during the year. A 4 – 2 4 – 4 – 4 – – 05 DIRECTORS’ REPORTORIGIN ENERGY ANNUAL REPORT 2016DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2016 9 DIRECTORS’ INTERESTS IN SHARES, OPTIONS AND RIGHTS The relevant interests of each Director as at 30 June 2016 in the shares, subordinated notes and Options or Rights 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 G King J Akehurst M Brenner G Cairns B Morgan H Nugent S Sargent S Perkins Ordinary shares held directly and indirectly 1,601,657 71,200 22,117 163,660 47,143 61,026 31,429 30,000 Subordinated Notes held directly and indirectly 2,000 – – – 1,000 300 – – Options over ordinary shares 3,018,530(1) Deferred Share Rights (DSR) over ordinary shares Performance Share Rights (PSR) over ordinary shares 31,984(2) 307,838(2) – – – – – – – – – – – – – – – – – – – – – Exercise price for Options and Rights: (1) 728,506: $13.01, 1,293,104: $11.78, 171,232: $13.97, 825,688: $15.65. (2) Nil. Only the Managing Director participates in the Company’s Equity Incentive Plan. Options and rights granted by Origin Non-executive Directors do not receive Options or Rights as part of their remuneration. The following Options and Rights were granted to the Managing Director and the five most highly remunerated officers (other than Directors) of the Company during the year ended 30 June 2016: G King D Baldwin F Calabria A Clarke C McCamish G Mallett K Moses Options – 690,000 570,150 271,500 252,375 85,650 – DSRs – 62,220 64,560 28,212 26,550 20,861 – PSRs – 69,876 57,739 27,495 25,558 26,022 – Each of these awards was made in accordance with the Company’s Equity Incentive Plan as part of the relevant executive’s remuneration. Further details on options and rights granted during the financial year, and unissued shares under Options and Rights, are included in Appendix 3 of the Remuneration 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 1 October 2011 1 October 2012 1 October 2013 1 October 2014 1 October 2015 Expiry Date 30 November 2016 30 November 2017 30 November 2018 30 November 2019 30 November 2020 Exercise price NZ$5.4019 NZ$5.2186 NZ$5.3254 NZ$5.9351 NZ$4.9024 No Contact Energy Options have been granted since the end of the financial year. PSRs Grant Date 1 October 2011 1 October 2012 1 October 2013 1 October 2014 1 October 2015 06 Expiry Date 30 November 2016 30 November 2017 30 November 2018 30 November 2019 30 November 2020 Exercise price NZ$0.00 NZ$0.00 NZ$0.00 NZ$0.00 NZ$0.00 Balance at 30 June 2016 2,214,815 3,682,544 2,951,009 1,180,374 972,245 Balance at 30 June 2016 – – – – 294,316 DIRECTORS’ REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2016 DSRs Grant Date 1 October 2014 1 October 2015 Expiry Date 30 November 2016 30 November 2017 Exercise price NZ$0.00 NZ$0.00 Balance at 30 June 2016 – 314,170 2,871,844 Contact Energy ordinary shares were issued by Contact Energy in respect to their equity scheme during the financial year. No amount was payable on the issue of those shares as all 2,871,844 were rights with an exercise price of $0. Accordingly no amount remains unpaid on any of those shares. During the financial year Dennis Barnes, who was an Origin employee until 12 August 2015 and was one of Origin’s top 5 most highly remunerated officers also received 532,746 Options, 102,841 PSRs, 31,225 DSRs and 1,000 restricted shares through the employee share ownership scheme in Contact Energy as part of his remuneration. No Contact Energy rights have been granted since the end of the financial year. Origin Shares issued on the exercise of Options and Rights Options No Options granted under the Equity Incentive Plan were exercised during or since the year ended 30 June 2016, so no ordinary shares in Origin were issued as a result. Rights 1,136,313 ordinary shares of Origin were issued during the year ended 30 June 2016 on the vesting and exercise of DSRs granted under the Equity Incentive Plan. No amount is payable on the vesting of those DSRs and, accordingly, no amounts remain unpaid in respect of any of those shares. Since 30 June 2016, 56,333 ordinary shares were issued on the vesting of DSRs granted under the Equity Incentive Plan. No amount is payable on the vesting of those DSRs and, accordingly, no amounts remain unpaid in respect of any of those shares. Contact Energy Shares issued on the exercise of Options and Rights Since 30 June 2016, no Ordinary shares were issued by Contact Energy on the exercise of Contact Options or Rights. 10 ENVIRONMENTAL REGULATION AND PERFORMANCE The Company’s operations are subject to environmental regulation under Commonwealth, State and Territory legislation. For the year ended 30 June 2016, the Company’s Australian operations recorded a number of environmental incidents arising from Origin’s activities including those where Origin was the operator of a joint venture. These incidents resulted in environmental impacts of a minor and/or temporary nature. Regulators were notified of reportable environmental incidents. The Company received ten notices, one of which was for an incident occurring in the previous reporting period. These notices included requests for further information, official warnings and/or enforcement actions. Appropriate remedial actions have been taken or are being undertaken in association with the relevant regulators, in response to each notice and reportable environmental incident. In addition, the company entered into an Enforceable Undertaking with Safework NSW in relation to an LPG plant fire that occurred at the Minto LPG site, further details are set out on page 121 of the Annual Report. INDEMNITIES AND INSURANCE FOR DIRECTORS AND OFFICERS 11 Under its Constitution, the Company may indemnify current and past Directors and Officers for losses or liabilities incurred by them 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, and subject to the limits set by, the Constitution. The agreements stipulate that the Company will meet the full amount of any such liability, including costs and expenses to the extent allowed under law. The Company is not aware of any liability having arisen, and no claim has been made against the Company during or since the year ended 30 June 2016 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 2016. 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. 12 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 2016 an officer of the Origin Energy Group. The auditor’s independence declaration for the financial year (made under section 307C of the Corporations Act (Cth)) is attached to and forms part of this Report. 07 DIRECTORS’ REPORTORIGIN ENERGY ANNUAL REPORT 2016DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2016 13 NON-AUDIT SERVICES The amounts paid or payable to KPMG for non-audit services provided during the year was $381,000 (shown to nearest thousand dollar). Amounts paid to KPMG are included in F7 to the full financial statements. Based on written advice received from the Audit Committee Chairman pursuant to a resolution passed by the Audit Committee, the Board has formed the view that the provision of those non-audit services by KPMG is compatible with, and did not compromise, the general standards of independence for auditors imposed by the Corporations Act 2001 (Cth). The Board’s reasons for concluding that the non-audit services provided by KPMG did not compromise its independence are: — all non-audit services provided were subjected to the Company’s corporate governance procedures and, on each occasion, were below the pre-approved limits imposed by the Audit Committee; — all non-audit services provided did not, and do 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 the Company, acting as an advocate for the Company or jointly sharing risks and rewards; and — there were no known conflict of interest situations nor any other circumstance arising out of a relationship between Origin (including its Directors and officers) and KPMG which may impact on auditor independence. 14 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 2001 (Cth). 15 ROUNDING OF AMOUNTS The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 dated 24 March 2016 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. 16 REMUNERATION The Remuneration Report forms part of this Directors’ Report. 08 DIRECTORS’ REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2016 Petroleum reserves and contingent resources are typically prepared by deterministic methods with support from probabilistic methods. Petroleum reserves and contingent resources are aggregated by arithmetic summation by category and as a result, proved reserves (1P reserves) may be a conservative estimate due to the portfolio effects of the arithmetic summation. Proved plus probable plus possible (3P reserves) may be an optimistic estimate due to the same aforementioned reasons. Some of Australia Pacific LNG’s CSG interests are subject to reversionary rights to transfer back to Tri-Star a 45 per cent interest in Australia Pacific LNG’s share of those CSG interests that were acquired from Tri-Star in 2002 if certain conditions are met. Please refer to section 6 for further information. On 10 August 2015, Origin divested its entire 53.09 per cent interest in Contact Energy. Information in this report referencing total operations includes Contact Energy and references to continuing operations exclude Contact Energy. Key financial items on a total operations and continuing operations basis are included in Appendix 2. IMPORTANT INFORMATION This Operating and Financial Review (OFR) contains forward looking statements, including statements of current intention, statements of opinion and predictions as to possible future events and future financial prospects. 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. 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, and the outcomes are not all within the control of Origin. Statements about past performance are not necessarily indicative of future performance. Neither the Company nor any of its 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 statement. The forward looking statements in this OFR reflect views held only at the date of this report and except as required by applicable law or the ASX Listing Rules, the Relevant Persons disclaim any obligation or undertaking to publicly update any forward looking statements, or discussion of future financial prospects, whether as a result of new information or future events. This OFR and Directors’ Report refer to Origin’s financial results, including Origin’s Statutory Profit and Underlying Profit. 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 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 reconciliation and description of the items that contribute to the difference between Statutory Profit and Underlying Profit is provided in Appendix 1 of this OFR. Certain other non-IFRS financial measures are also included in this OFR. 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 is included in the Glossary in Appendix 6 of this OFR. Non-IFRS measures have not been subject to audit or review. Certain comparative amounts from the prior corresponding period have been re-presented to conform to the current period’s presentation. Disclosures of Origin and Australia Pacific LNG’s reserves and resources are as at 30 June 2016. These reserves and resources were announced on 29 July 2016 in Origin’s Annual Reserves Report for the year ended 30 June 2016 (Annual Reserves Report). Origin confirms that it is not aware of any new information or data that materially affects the information included in the Annual Reserves Report and that all the material assumptions and technical parameters underpinning the estimates in the Annual Reserves Report continue to apply and have not materially changed. 09 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 1 REVIEW OF TOTAL OPERATIONS Financial information in this section, unless otherwise stated, references total operations including Contact Energy which is presented as a discontinued operation in the income statement. On 10 August 2015, Origin divested its entire 53.09 per cent interest in Contact Energy. Key financial items for total operations, continuing operations and discontinued operations are included in Appendix 2. 1.1 Results Overview Year ended 30 June Statutory Results(1): Statutory (Loss) Statutory earnings per share Items excluded from Underlying Profit Underlying Results(1): Underlying Profit Underlying earnings per share Final dividend per share – unfranked 2016 ($m) (589) (37.3¢) (954) 365 23.2¢ Nil 2015 ($m) Change (%) (658) (52.1¢) (1,340) 682 54.0¢(2) 25¢ (10) (28) (29) (46) (57) Almost eight years after the establishment of Australia Pacific LNG, Origin recorded a major milestone with the commencement of LNG production by Australia Pacific LNG. This has occurred at a time when oil prices have fallen to the lowest level in many years. As a consequence Origin began the financial year with an unsustainably high level of debt. Origin has responded to these circumstances through a series of initiatives to reduce debt and build resilience in a low oil price environment. These include: — The sale of its 53.09 per cent interest in Contact Energy for NZ$1.8 billion; — The Entitlement Offer to raise $2.5 billion of equity (Entitlement Offer); — Commencement of asset sales program to deliver at least $800 million of proceeds by end of financial year 2017 with $484 million announced to date; — The continued delivery of capital and operating cost reduction targets across Origin, with a head count reduction in excess of 2,500 over the last 18 months; — The decision to exit from geothermal activities and international exploration to focus on two strong businesses, Energy Markets and Integrated Gas; and — The purchase of put options over 15 million barrels of oil for the 2017 financial year with a strike price of A$55/bbl (75 per cent of the volume) and US$40/bbl (25 per cent of the volume) and forward sale of LNG cargoes. These circumstances and Origin’s response to them have driven the results for the 2016 financial year. Statutory loss of $589 million decreased $69 million from the prior year driven by lower Underlying Profit ($317 million) with Items excluded from Underlying Profit of $954 million, $386 million lower than the prior year. Items excluded from Underlying Profit included impairments of $515 million reflecting costs related to the decision to cease development activities ($171 million) and Upstream impairments ($344 million) due primarily to downward revisions to reserves in the Otway, Bass and Cooper basins. Refer to Appendix 1 for additional detail. Origin’s Underlying Profit of $365 million is down $317 million on the prior year including a lower contribution from discontinued operations, reflecting the sale of Contact Energy ($68 million). Underlying EBITDA from continuing operations decreased $27 million reflecting a strong contribution from Energy Markets and maiden contribution from the sale of LNG by Australia Pacific LNG, offset by the impact of lower oil prices. Underlying Profit from continuing operations decreased $249 million primarily due to increased share of Australia Pacific LNG Interest, Tax, Depreciation and Amortisation (ITDA) ($231 million) associated with recognition of increased sales of natural gas and LNG. Revenue from increased sales given the low oil price environment have been insufficient to offset the increase in ITDA. The higher ITDA also includes a disproportionate share of costs associated with infrastructure assets related to the LNG export project. Movements in Underlying and Statutory earnings per share reflect lower earnings and the effect of a higher weighted average number of shares following the issue of new shares under the entitlement offer completed during October 2015. The Board has determined to not pay a dividend in respect of earnings for the second half of the financial year. (1) Refer to Glossary in Appendix 6 for definitions of terms set out in the table. (2) Prior period adjusted for the bonus element (discount to market price) of the September 2015 rights issue. 10 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 1.2 Statement of cash flows Year ended 30 June Cash flow from operating activities Continuing operations Discontinued operations Total cash flow from operating activities Cash flow from investing activities Capital expenditure – continuing operations APLNG net contribution Net disposals/(acquisitions) Capital expenditure – discontinued operations Total cash flow used in investing activities Net cash flow from operating and investing activities Cash flow from financing activities Net proceeds/(repayment) of debt Interest paid Dividends paid Proceeds from share issue Total cash flow from financing activities 2016 ($m) 1,333 71 1,404 (693) (1,206) 1,718 (8) (189) 1,215 (2,690) (611) (418) 2,496 (1,223) 2015 ($m) 1,378 455 1,833 (970) (2,166) (667) (112) (3,914) (2,081) 3,265 (547) (722) – 1,996 Change ($m) Change (%) (45) (384) (429) 277 960 2,385 104 3,725 3,296 (5,955) (64) 304 2,496 (3,219) (3) (84) (23) (29) (44) (358) (93) (95) (158) (182) 12 (42) N/A (161) Cash flows from operating activities decreased $429 million to $1,404 million due to lower operating cash flow from discontinued operations ($384 million) following the sale of Contact Energy. Cash flows from continuing operations decreased $45 million or 3 per cent to $1,333 million including the impact of actions taken to reduce costs and risks in response to low oil prices (-$395 million). Cash flow used in investing activities decreased $3,725 million to $189 million: — Lower capital expenditure from continuing operations ($277 million) reflecting delivery on Origin’s commitment to reduce capital expenditure in Energy Markets, reduction in capital expenditure related to the Exploration and Production (E&P) operations as growth projects complete, and the decision taken to cease international growth activities(1). — Lower net contribution to Australia Pacific LNG ($960 million) as construction of the LNG export project nears completion. — Lower net acquisitions/disposals ($2,385 million): — sale of assets to reduce debt ($1,718 million), including Origin’s interest in Contact Energy ($1,599 million) and sale of the Mortlake Terminal Station ($110 million); and — prior period acquisition of Poseidon ($686 million). Net cash from operating and investing activities (NCOIA) improved $3,296 million to $1,215 million reflecting a reduction in capital expenditure as growth projects near completion and other actions taken by Origin to reduce debt. 1.3 Financial Position and Return on Capital As at Net Assets including: Investment in Australia Pacific LNG MRCPS(2) issued by Australia Pacific LNG Non-cash fair value uplift Adjusted net assets Origin net debt(3) Net derivative liabilities Origin’s share of APLNG project finance Capital employed Origin’s adjusted EBIT Origin’s equity share of APLNG interest and tax Adjusted EBIT Average capital employed Underlying ROCE(4) (1) Excluding New Zealand. (2) Mandatory Redeemable Preference Shares (MRCPS). (3) 30 June 2015 balance is inclusive of Contact Energy. Refer to Section 2.3 (Adjusted Net Debt) for additional detail. (4) Underlying ROCE is calculated as Adjusted EBIT / Average Capital Employed. Refer to definition in Appendix 6. 30 June 2016 ($m) 14,530 30 June 2015 ($m) 14,159 5,945 4,848 (1,923) 12,607 9,470 (319) 4,163 25,921 798 31 829 27,913 3.0% 6,231 3,304 (1,945) 12,214 13,273 463 3,954 29,904 1,280 (2) 1,278 27,926 4.6% 11 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 As at 30 June 2016, Origin’s capital employed of $25,921 million includes capital related to Australia Pacific LNG of $13,033 million, comprising the carrying value of its equity accounted investment ($5,945 million), the balance of MRCPS ($4,848 million) and Origin’s share of Australia Pacific LNG project finance ($4,163 million) less the non-cash fair value uplift(1) ($1,923 million) recorded on the creation of Australia Pacific LNG and subsequent share issues to Sinopec. Australia Pacific LNG has been in the project development phase and is ramping up to full operations, and as a result, is yet to deliver a return on capital. Adjusted EBIT decreased $449 million to $829 million including the impact of Origin’s sale of its interest in Contact Energy (-$257 million), lower E&P EBIT and disproportionate depreciation & amortisation from Origin’s investment in Australia Pacific LNG until the project reaches full operations. Capital employed decreased $3,983 million to $25,921 million reflecting actions taken by Origin to reduce debt, with average capital employed steady. Underlying ROCE of 3.0 per cent for the 2016 financial year is 1.6 per cent lower than the prior year reflecting lower adjusted EBIT. Underlying ROCE continues to be impacted until the returns from the capital invested for Australia Pacific LNG starts to be realised as Australia Pacific LNG moves towards full production. 2 REVIEW OF CONTINUING OPERATIONS Financial information in the following section refers to underlying performance from continuing operations, unless otherwise stated. Underlying performance from continuing operations is derived from underlying performance from total operations and excludes Contact Energy as Origin divested its entire 53.09 per cent interest in August 2015. 2.1 Underlying financial performance(2) Year ended 30 June Continuing operations Energy Markets Underlying EBITDA Integrated Gas Underlying EBITDA Corporate Underlying EBITDA Underlying EBITDA Underlying depreciation and amortisation Underlying share of ITDA Underlying EBIT Underlying net financing costs(3) Underlying Profit before income tax and non-controlling interests Underlying income tax expense Non-controlling interests’ share of Underlying Profit Underlying Profit Underlying earnings per share Cash flows from operating activities Capital expenditure (excluding acquisitions) Origin’s net cash contribution to APLNG(5) Adjusted Net Debt 2016 ($m) 1,330 386 (81) 1,635 (604) (296) 735 (100) 635 (275) (6) 354 22.4¢ 1,333 693 1,206 9,131 2015 ($m) 1,260 498 (96) 1,662 (618) (62) 982 (78) 904 (291) (10) 603 47.7¢(4) 1,378 970 2,166 13,102 Change (%) 6 (22) (16) (2) (2) 377 (25) 28 (30) (5) (40) (41) (53) (3) (29) (44) (30) — A strong operational performance from Origin’s Energy Markets business and significant increase in Australia Pacific LNG production was offset by the impacts of lower liquids prices. Underlying EBITDA decreased $27 million or 2 per cent to $1,635 million. — Energy Markets Underlying EBITDA increased $70 million to $1,330 million, reflecting the achievement of targeted operating cost reductions. The integrated portfolio performed well, with stable Electricity and Natural Gas gross profit in a higher and more volatile wholesale energy price environment. — Integrated Gas Underlying EBITDA decreased $112 million to $386 million due to: — An increased contribution from LNG operations ($18 million) reflecting the commencement of LNG production ($119 million) (including a disproportionate share of operating costs related to infrastructure assets), offset by the impact of lower oil prices on Australia Pacific LNG’s domestic gas sales ($63 million) and lower LNG net recovery as Australia Pacific LNG upstream capital expenditure declines ($38 million); and — Lower contribution from Origin’s E&P operations ($130 million) primarily reflecting lower liquids prices and volumes ($90 million), and increased exploration expense ($34 million). — Origin’s share of ITDA increased $234 million to $296 million primarily reflecting Australia Pacific LNG’s ITDA as LNG production commenced. This includes a disproportionate share of costs associated with infrastructure assets related to the LNG export project and MRCPS interest expense paid by Australia Pacific LNG to shareholders, which is offset by the recognition of MRCPS interest income in Origin’s underlying net finance costs. — Underlying net financing costs increased $22 million to $100 million reflecting the partial movement into underlying earnings (from Items excluded from Underlying Profit in FY2015) of net financing costs (interest expense and MRCPS interest income) associated with the funding of Origin’s investment in Australia Pacific LNG following recognition of Train 1 LNG sales, previously capitalised interest moving into underlying net financing costs, partly offset by the impact of lower debt following proceeds received from the sale of Origin’s interest in Contact Energy. Refer to Appendix 4 for additional detail. (1) Refer to definition in Appendix 6. (2) Refer to Glossary in Appendix 6 for definitions of terms in the table. (3) Refer to Appendix 4 for additional detail. (4) Prior period adjusted for the bonus element (discount to market price) of the September 2015 rights issue. (5) Origin’s cash contribution to Australia Pacific LNG for the current year is net of $338 million of interest income ($165 million in the prior period) received on MRCPS. Interest on the MRCPS is paid to shareholders twice per annum based on a fixed interest rate. 12 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 — While Underlying tax expense was $16 million lower at $275 million, the tax rate increased from 32 per cent to 43 per cent reflecting a higher Australia Pacific LNG loss. — As a consequence, Underlying Profit decreased $249 million or 41 per cent to $354 million. — Cash flows from operating activities decreased 3 per cent or $45 million to $1,333 million including the impact of actions taken to reduce costs and risks in response to low oil prices (-$395 million). — Capital expenditure (excluding acquisitions) decreased $277 million to $693 million reflecting delivery on Origin’s commitment to reduce capital expenditure in Energy Markets, reducing capital expenditure related to the E&P operations as growth projects complete, and the decision taken to cease international growth activities. — Origin’s net cash contribution to Australia Pacific LNG decreased to $1,206 million (compared to $2,166 million in the prior period) as construction of the LNG export project nears completion. A detailed analysis of the underlying performance of the business by operating segment is provided in Section 5. Appendix 3 provides further segment detail for Underlying EBITDA and Underlying EBIT. 2.2 Cash flows from operating activities reconciliation The following table reconciles Underlying EBITDA from continuing operations to Cash Flows from operating activities – continuing operations. Year ended 30 June Underlying EBITDA – continuing operations Origin’s share of APLNG EBITDA Exploration expense Change in working capital Oil Puts premium paid Insurance relating to completion of APLNG Re-structuring costs Oil Forward Sale Other Tax paid Cash flows from operating activities – continuing operations 2016 ($m) 1,635 (111) 63 161 (117) (37) (102) (139) (54) 34 1,333 2015 ($m) 1,662 (55) 29 (204) – – – – 14 (68) 1,378 Change ($m) Change (%) (27) (56) 34 365 (117) (37) (102) (139) (68) 102 (45) (2) 102 117 (179) N/A N/A N/A N/A N/A (150) (3) Cash flows from operating activities – continuing operations decreased 3 per cent or $45 million to $1,333 million: — Movement in EBITDA adjusted for the non-cash impacts of exploration expense and contribution from the equity accounted Australia Pacific LNG operations (-$49 million) — Reduction in working capital ($365 million), including: — No repeat of financial year 2015 payments related to the ending of the carbon scheme ($192 million); and — Impact of actions taken to improve cash flow and reduce debt in response to low oil prices ($222 million) including sale of renewable certificates to take advantage of high prices and continued focus on reducing working capital through introduction of monthly billing and vendor management. — Impacts of actions taken to reduce costs and risks in response to low oil prices (-$395 million): — the payment of oil put option premium (-$117 million); — insurance increase relating to the completion of the Australia Pacific LNG project (-$37 million); — restructuring costs associated with Origin’s cost reduction programs (-$102 million); and — reduction in cash received from the sale of oil and condensate as a large proportion of production was sold under the forward sale agreement(1) (-$139 million), for which Origin received an upfront payment at the time of the transaction (Oil Forward Sale Agreements). — Other cash flow movements (-$68 million) relating to a reduction in employee provisions. — Reduction in tax paid ($102 million) primarily reflecting a tax refund received during financial year 2016 following finalisation of the 2015 financial year income tax return. 2.3 Funding and capital management Liquidity As at 30 June 2016, Origin held cash and cash equivalents of $146 million compared with $151 million at 30 June 2015. As at 30 June 2016, Origin has $6.7 billion of committed undrawn debt facilities and cash (excluding bank guarantees). Adjusted Net Debt Between 2011 and 2015, Origin raised foreign currency denominated debt in the US and Euro markets. This foreign currency debt was hedged into either AUD or USD using cross currency interest rate swap (CCIRS) derivatives. Accounting standards require the foreign currency debt and the linked CCIRS derivatives to be disclosed in different lines on the Statement of Financial Position (Balance Sheet). Foreign currency debt is translated at the current market spot rate and classified as interest-bearing liabilities, whilst the associated CCIRS derivatives are measured at current market rates (fair value) and are classified as either derivative assets or derivative liabilities on the Statement of Financial Position. It is the combination of the interest-bearing liabilities and the derivative assets or derivative liabilities that reflect the Company’s adjusted net debt position or the quantum of funds the Company is required to repay upon maturity of the debt. As at 30 June 2016, Origin’s interest bearing liabilities on the Statement of Financial Position were $9,616 million. The associated CCIRS was a net derivative asset of $339 million on the Statement of Financial Position. The net amount reflects the quantum of debt Origin is required to repay upon maturity. (1) In the 2013 financial year, Origin entered into agreements to sell the majority of its future oil and condensate over a 72 month period commencing 1 July 2015. Upon entry into the agreements, Origin received A$482 million reflecting the prevailing average oil forward price at the time of the transaction of US$89/bbl, discounted to US$62.40/bbl to reflect the receipt of the sales proceeds upfront. Delivery of oil and condensate production into the forward sale agreement commenced during the current period for which revenue is recognised at US$62.40/bbl, but for which there is no associated cash flow as proceeds were received upfront. 13 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 Adjusted Net Debt decreased $3,971 million to $9,131 million including the impact of Origin’s $2,500 million rights issue and sale of Origin’s share of Contact Energy. As at Total interest bearing liabilities Less: cash and cash equivalents Net Debt Fair value adjustments on FX hedging transactions Adjusted Net Debt 30 June 2016 ($m) 9,616 (146) 9,470 (339) 9,131 30 June 2015(1) ($m)(1) 13,428 (155) 13,273 (171) 13,102 Interest rates Origin’s underlying average interest rate incurred on debt for the current period was 5.9 per cent, compared with 5.1 per cent in the prior period. The increase is primarily due to the: — recognition in Underlying Profit of interest at a higher interest rate (primarily driven by hybrid debt) on debt used to fund Origin’s investment related to Australia Pacific LNG Train 1 and infrastructure assets from 1 March 2016; and — repayment of drawn bank debt from the proceeds from debt reduction actions. The interest rate associated with bank debt is lower than capital market and hybrid debt. Underlying net financing costs used to calculate the Underlying average interest rate include interest on Origin’s Australian Dollar, US Dollar and New Zealand Dollar debt obligations. Origin’s New Zealand Dollar debt obligations were converted to Australian Dollar obligations following the sale of Contact Energy in August 2015. Approximately 62 per cent of Origin’s consolidated debt obligations are fixed to 30 June 2017 at an average rate of 6.3 per cent including margin. Australia Pacific LNG Debt The total amount drawn down by Australia Pacific LNG from its project finance facility during the period was US$157 million and at 30 June 2016, US$8,462 million of the total US$8,500 million project finance facility had been drawn. Origin’s 37.5 per cent share of Australia Pacific LNG drawn Project Finance is US$3,173 million. Australia Pacific LNG Funding On 1 July 2016 Australia Pacific LNG adopted US dollar functional currency for reporting purposes, and Australia Pacific LNG’s existing MRCPS facility of A$12.9 billion (A$4.8 billion Origin share) was repaid and cancelled. This was funded by the issue of a new US dollar denominated MRCPS and ordinary equity. Origin’s MRCPS receivable in the 2017 financial year will total US$2.8 billion. The USD MRCPS earn an effective interest rate of 6.37 per cent per annum. All future contributions by shareholders to Australia Pacific LNG will be ordinary equity contributions. Origin plans to manage the income statement impact of foreign exchange rate gains or losses related to its US dollar denominated MRCPS receivable against exposure to its existing US dollar denominated debt portfolio. Any residual foreign exchange impact will be disclosed outside of underlying earnings. Share capital During the current period, Origin issued an additional 644 million shares (including 636 million shares under the entitlement offer completed during October 2015, one million shares under incentive plans and six million shares under Origin’s dividend re-investment plan), raising a total of $2,538 million ($2,496 million net cash proceeds of the entitlement offer and $42 million from the dividend reinvestment plan). The total number of shares on issue was 1,753 million at 30 June 2016. The weighted average number of shares used to calculate basic EPS at 30 June 2016 increased by 314 million to 1,578 million from 1,264 million at 30 June 2015. 2.4 Final dividend – Nil The Board has determined not to pay a dividend in respect of earnings for the second half of the financial year. While the Board will review each dividend decision in light of the prevailing circumstances, the Board’s view is that suspension of the dividend is in the best overall interest of shareholders. 3 ORIGIN’S BUSINESS STRATEGY In the short term, in light of the significant fall in oil prices, Origin has taken steps to increase business resilience to low oil prices as described in Section 1. Origin has also made adjustments to its strategy to focus on two strong businesses, Energy Markets and Integrated Gas, including the decision to: — pursue its renewable energy strategy through Energy Markets; and — discontinue international exploration (excluding New Zealand) and geothermal activities. Origin currently supplies energy to wholesale and retail energy markets primarily in Australia, and to the Asia Pacific region via its 37.5 per cent interest in Australia Pacific LNG. Origin believes that a renewed global commitment in 2016 to reduce carbon emissions will accelerate the transition from more carbon intensive to less carbon intensive fuels. It is widely believed that the resources that will most benefit from this transition are natural gas and renewable energy – particularly wind and solar. The increased impact of intermittency that arises with a growing use of renewable energy requires firming to provide communities with reliable and affordable energy on a more sustainable basis. For the medium to longer term natural gas will have a critical role to play in providing a less carbon intensive fuel and reliability both locally and globally, resulting in a growing demand for natural gas. Origin intends to lead this transition in local markets through its Energy Markets business and in regional markets through its investment in Australia Pacific LNG and its growing LNG production. (1) Inclusive of Contact Energy. 14 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 3.2 Regionally significant position in natural gas and LNG production The Integrated Gas business comprises Origin’s 37.5 per cent shareholding in Australia Pacific LNG and E&P operations. Integrated Gas’ strategy is to lower the cost of Australia’s vast onshore and near-shore resources and connect them to high value markets. Australia Pacific LNG owns extensive CSG reserves, predominantly in the Surat and Bowen basins in Queensland. Australia Pacific LNG has the largest 2P CSG reserves position(2) in Australia of 13,529 PJe(3) and is in the completion stages of a large-scale CSG-to-LNG project on Curtis Island in Queensland that has a design nameplate capacity of 9 million tonnes per annum. Train 1 of the facility is already operating, with Train 2 expected to be completed in Q2 of FY17. Australia Pacific LNG is delivering LNG under its long term supply contracts with customers in China and Japan. Origin is the upstream operator of the Australia Pacific LNG project, responsible for the development of the CSG resources and the processing and transportation of gas to the LNG facility on Curtis Island. Origin also has E&P operations in Australia and New Zealand, with exploration and production interests in the Otway, Bass and Cooper Basins in eastern and southern Australia, the Browse and Perth basins in Western Australia, the Bonaparte basin in north-western Australia, the Beetaloo Basin in the Northern Territory and the Taranaki and Canterbury Basins in New Zealand. As the upstream operator of the Australia Pacific LNG project, together with Origin’s own existing gas operations, Origin has significant capabilities in natural gas production and has a substantial reserves position including 6,277 PJe of 2P reserves(4). Origin expects that from the early 2020’s the global LNG market will shift from being long to short, the Australian East Coast gas market will trend towards export parity pricing, that a tightening East Coast gas supply creates opportunity and that Origin believes that Australian gas resources are globally competitive when exported through existing infrastructure and that connecting these gas resources to export markets enhances value. To deliver shareholder value through this strategy requires a focus on: — continued execution and technology innovation to reduce find and develop costs in Australia Pacific LNG’s upstream operations, Origin’s other gas resources and prospective opportunities; — maintaining access to resources and prudently manage the existing portfolio of onshore and near-shore assets and prospective opportunities; and — leveraging proven gas and LNG marketing capability to access high value emerging export and existing domestic markets. In supplying these markets, Origin’s strategy is to invest in the contestable segments of energy production, power generation and energy wholesaling and retailing. This strategy is designed to provide opportunities to grow the value of the Company and deliver a return on capital employed in excess of the Company’s cost of capital by connecting energy resources to customers, while allowing for the more effective management of the risks that arise across an increasingly competitive energy supply chain. Origin intends to focus its interests on natural gas resources in Australia with paths to monetise resources both domestically through Energy Markets and internationally through LNG exports, particularly to the Asia Pacific region where demand for energy is expected to increase over the medium to longer term. Origin also intends to continue growing its position in renewable energy to meet its obligations under the Renewable Energy Target in Australia and build capability for the increasing role that renewable energy is expected to play in the future. Origin believes the successful pursuit of this strategy will lead to Origin: — being a leader in the Australian energy market; and — having a regionally significant position in natural gas and LNG production. 3.1 Leader in energy markets Origin, through its Energy Markets business, has leading integrated operations in the energy supply, power generation and retail sectors of the Australian energy supply chain. The Energy Markets business comprises: — the leading energy retailing position in Australia by customer accounts with approximately 29 per cent(1) share of natural gas and electricity retail customer accounts in Australia’s eastern and southern states, servicing approximately 4.2 million gas, electricity and LPG customers with a broad range of energy products and solutions; — a large and diverse gas portfolio which, together with flexible gas transport arrangements and coal supply agreements, support a strong domestic power generation and retail business; — a significant power generation portfolio of approximately 6,000 MW providing flexibility and diversity across fuel, generation type and geography; and — a substantial renewable energy portfolio that provides flexibility for Origin to develop or support the development of additional renewable energy and fulfil its aspiration to be one of Australia’s leading renewable energy companies. With the vision to be Australia’s most trusted energy solutions provider leading a transition to a more renewable future and offering products and services across both grid supply and distributed generation, Energy Markets is extending its reach beyond the meter. The energy landscape is rapidly empowering consumers, with technology enabling consumers to generate electricity from roof tops, storing electricity for use in peak periods and managing energy requirements using connected devices. Combining capability in retail and wholesale markets with deeper knowledge of customers, Energy Markets is embracing this change to provide differentiated solutions and services to help the empowered consumer manage their energy needs. Energy Markets is implementing the following strategies to move closer to the customer and improve returns: — integrated wholesale portfolio pivoting to utility scale renewables, supported by flexible fuel, generation and transport capacity to benefit from changing market dynamics; — customer strategy delivering service excellence and innovative products to consumers, while improving customer lifetime value and continuing to reduce costs; and — new energy solutions, including solar and battery storage solutions, serviced hot water and embedded electrical networks, while continuing to build digital metering capability. (1) Based on Origin natural gas and electricity customer accounts as at 30 June 2016 and estimated market customer accounts as at 30 June 2015. (2) EnergyQuest, May 2016. (3) At 30 June 2016. For further information refer to Origin’s Annual Reserves Report for the year ended 30 June 2016, announced on 29 July 2016. Also refer to the Important Information on reserves and resources disclosures prior to Section 1. (4) At 30 June 2016. Including hydrocarbon liquids. Includes Origin’s 37.5 per cent share of Australia Pacific LNG. 15 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 4 PROSPECTS AND OUTLOOK FOR FUTURE FINANCIAL YEARS 4.1 Prospects In the 2017 financial year Australia Pacific LNG expects to commence production from Train 2, ending a long period of significant capital expenditure. The commencement of LNG production by Australia Pacific LNG has happened at a time when oil prices are at their lowest level for many years and these circumstances resulted in an unsustainably high level of debt. Origin’s priorities for the next few years are continuing to reduce debt and lift returns. To achieve these priorities Origin will: — Complete the Australia Pacific LNG project The Australia Pacific LNG project is nearing completion with Train 1 exporting cargoes since January 2016, and Train 2 expected to do so in the second quarter of the 2017 financial year. The remaining funding contribution is forecast to be $0.6 billion from 1 July 2016 until Australia Pacific Australia Pacific LNG is self-funding. — Limit capital spend Capital expenditure (excluding Australia Pacific LNG) is limited to maintaining existing assets, completing projects that have commenced and meeting joint venture and permit commitments. — Continue to deliver on the asset sales program The sale of infrastructure, wind and geothermal assets sales totalling $484 million(1) have been announced to date, and on track to contribute a total of $800 million to debt reduction by the end of the 2017 financial year. — Maximise earnings and operating cash flow Continue the strong performance in the Energy Markets business with increasing production in Integrated Gas, and ongoing benefits of cost out programs lowering costs. — Maintain adequate liquidity Maintain adequate debt and capital markets facilities to cover all foreseeable funding requirements. Growing contributions from Energy Markets As the gas and electricity wholesale markets experience significant change from the impact of LNG exports and increased renewables, Origin’s integrated portfolio has proven resilient and profitable. Origin will continue to utilise this flexible energy portfolio, leading customer experience and product innovation to maintain strong Natural Gas contributions, drive growth in Electricity margins and pivot to a renewable future. The three Gladstone LNG projects are expected to come into full production in the 2017 financial year. Origin will continue to utilise its flexible gas supply and transport arrangements, along with its flexible generation portfolio, to manage the swings in the gas market. Origin expects to maintain Natural Gas contributions in the absence of low cost ramp gas in future years. In the medium term, there is upside exposure in Natural Gas to higher oil prices. Origin’s flexible electricity portfolio is structured to maintain a competitive cost of energy and support further margin expansion as higher wholesale market prices are reflected in customer tariffs in the 2017 financial year. To meet the national 33 TWh renewable energy target, a further 14 TWh of renewable generation is required to come into the system by 2020. Origin is well placed to benefit from additional renewable energy in its portfolio. An overall short energy and long capacity position, combined with a short renewable portfolio, means that Origin’s existing generation assets will not be stranded and the peaking fleet in particular will benefit from price volatility. Finally, the development cost of renewable energy, especially utility-scale solar, is rapidly decreasing and is expected to continue to provide Origin with a competitive cost of electricity and Renewable Energy Certificates (RECs). For customers, product and service innovations like Solar-as-a-Service, Predictable Plan, batteries and metering services will be a priority. The development of Origin’s digital and innovation capabilities also underpins the continued evolution of cost reductions, ensuring Origin can provide excellent customer experience through simplified customer journeys at the most efficient cost for customers. The continued success and growth of the LPG, Solar, Centralised Energy Services and Acumen businesses underpin Origin’s aspiration to expand the multi-product holdings of customers and increase customer life time value. These trends of increasing wholesale prices, volatility and REC prices are expected to improve Origin’s competitive position compared to retailers with less integrated and flexible portfolios. Origin will focus on managing margins and continuing to build customer loyalty and trust with leading customer experience. Growing production and reducing cost in Integrated Gas In the current low oil price environment, Origin has implemented actions to build resilience to low oil prices. In light of these actions and the objectives of growing production and reducing breakeven cost, key priorities are: — Continuing execution momentum, including completing the Australia Pacific LNG project and fulfilling the project finance lenders’ tests with parent guarantees falling away, and completing the Halladale/Speculant project; — Continuing to reduce development and production costs while building flexibility, with opportunity to lower Australia Pacific LNG’s breakeven costs and reducing controllable costs across E&P operations; — Securing new high value markets to support future growth; — Managing the portfolio with discipline by investing in backfill opportunities only when a clear route to market exists; and — Building the capability and culture to deliver with a particular focus on increasing indigenous and female participation. Australia Pacific LNG The Australia Pacific LNG project is being increasingly derisked, with the commencement of production from Train 1 with 36 cargoes loaded to date, the majority under long term Sale and Purchase Agreements with Sinopec and Kansai. First cargo from Train 2 is expected in the second quarter of the 2017 financial year. Upstream operated production is exceeding 1,200 TJ/d, and Train 1 production is exceeding design nameplate capacity. The Train 1 project finance operational lenders test(2) has commenced and the release of the first tranche (60 per cent) of shareholder guarantees is on track for the second quarter of the 2017 financial year, with the balance of shareholder guarantees of Australia Pacific LNG’s US$8.5 billion project finance facility expected to be completed in calendar year 2017. The Project Cost of Australia Pacific LNG’s CSG-to-LNG Project is forecast to be $25.9 billion and Origin’s remaining contribution to Australia Pacific LNG is expected to be $0.6 billion, both in line with previous guidance(3). Origin has previously announced a cost reduction program to Australia Pacific LNG’s Upstream operator cash cost base by $1 billion per annum from Phase 1 levels. As at 30 June 2016, in excess of $1 billion of initiatives had been implemented, with these savings expected to be realised on a recurring basis from the 2017 financial year. This cost reduction program is on-track to deliver a reduction of around 50 per cent in Australia Pacific LNG’s cost per well relative to Phase 1 well costs. In addition, Origin has the flexibility to take advantage of opportunities to sell additional gas and/or LNG when opportunities arise. In the short to medium term, Origin remains focused on potential reductions to Australia Pacific LNG’s breakeven cost by a further US$2-3/boe through taking advantage of additional sales when opportunities arise, further cost reductions through technology and innovation and cost compression in periods of low oil price. Includes proceeds from OTP sale of approximately US$30 million converted at an exchange rate of AUD/USD of 0.73. (1) (2) The 120 day train operational test is expected to be completed in calendar year 2016 and the 90 day two train operational test is expected to be completed in calendar year 2017. (3) Project cost guidance as announced in February 2013, based on December 2012 exchange rates. APLNG net contribution guidance as announced at Origin’s half year 2016 result. 16 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 Exploration and Production Production in the E&P operations in the 2017 financial year is expected to be higher than the prior year as Halladale/Speculant comes online, partly offset by lower deliverability from the existing Otway wells and lower observed reservoir performance in the Bass Basin. Origin is focused on continuing to limit capital expenditure in E&P to completing projects that have commenced, including the Halladale/ Speculant project expected to be online in late August 2016, the Yolla MLE compression project, and meeting joint venture and permit commitments, including in the Beetaloo and Cooper basins. 4.2 Outlook FY2016 and FY2017 are transitional years for Origin as LNG production commences and ramps up to full production over this period. In FY2017 Origin expects(1) a 45-60 per cent increase in Underlying EBITDA when compared to FY2016 Underlying EBITDA from continuing operations: — Energy Markets Underlying EBITDA to increase to $1.44-$1.54 billion, driven by Electricity margin expansion, maintaining the increased Natural Gas contribution, continued improvement in cost to serve and an increased contribution from LPG and Solar & Energy Services. This includes additional annual costs of approximately $32 million from new agreements entered into as part of asset sales to date. — Integrated Gas Underlying EBITDA to increase to $1-$1.15 billion, comprising — E&P Underlying EBITDA to increase to $350-$400 million, driven by increased production to approximately 90 PJe (from 75 PJe in FY2015) from Halladale/Speculant coming online, albeit about two months later than previously scheduled, partly offset by lower production across other basins — LNG Underlying EBITDA to increase to $650-$750 million as LNG production continues to ramp up and revenue recognition for Train 2 begins in Q3 FY2017. The negative contribution from Australia Pacific LNG oil-linked domestic contracts is forecast to have a diminishing impact as the initial ramp period of selling gas to QGC(2) is expected to come to an end during H1 FY2017, with volumes reducing in FY2017 to approximately 65 PJ(3) (from approximately 100 PJ23(3) in FY2016), and thereafter averaging 25 PJ23(3) over the medium term. — Corporate costs to reduce as benefits from the functional cost reduction program are realised. Underlying Depreciation and Amortisation (ex-Australia Pacific LNG) will increase driven by Halladale/Speculant coming online. Underlying Australia Pacific LNG ITDA will increase significantly as Australia Pacific LNG comes into full production. Disproportionate costs associated with Australia Pacific LNG shared infrastructure will continue to have an impact until Train 2 revenue recognition commences. Following Train 2 revenue recognition, all LNG related items previously excluded from Underlying Profit will be recognised within Underlying Profit. Origin’s remaining contribution to Australia Pacific LNG is expected to be $0.6 billion from 1 July 2016 until Australia Pacific LNG is self-funding, in line with previous guidance. Capital expenditure (excluding Australia Pacific LNG) for FY2017 is expected to be approximately $550 million, limited to maintaining existing assets, IT spend in Energy Markets, completing projects that have commenced and meeting joint venture and permit commitments. This is higher than previous guidance due to the timing of asset sales and the completion of the Halladale/Speculant project, additional spend associated with appraisal testing on the Waitsia resource and additional maintenance spend in the Otway Basin and the Darling Downs Power Station. Origin continues to target further debt reduction and expects adjusted net debt to be well below its target of $9 billion at the end of the 2017 financial year. In FY2018 and beyond, as Australia Pacific LNG completes the transition from development to full production of its LNG project, Origin expects to see significant growth in earnings and returns, strong cash flow and continuing reduction in debt. 5 REVIEW OF SEGMENT OPERATIONS 5.1 Energy Markets Origin’s Energy Markets business is an integrated provider of energy solutions to retail and wholesale markets in Australia and in the Pacific. As Australia’s leading electricity, gas and LPG retailer, Energy Markets continues to increase product and service offerings to customers, has a diverse portfolio of gas and coal supply contracts, and operates one of Australia’s largest, most flexible and diverse generation portfolios. Year ended 30 June Total Segment Revenue(4) Underlying EBITDA Segment Result Underlying EBIT margin Cash flow from operating activities Capital expenditure Net cash flow from operating and investing activities 2016 ($m) 11,423 1,330 1,004 10.1% 1,388 236 1,262 2015 ($m) 11,269 1,260 956 9.6% 1,023 298 740 Change (%) 1 6 5 5 36 (21) 71 — Underlying EBITDA up 6 per cent or $70 million to $1,330 million with stable contributions in Natural Gas and Electricity, a reduction in Cost to Serve ($53 million) and growing contributions from LPG and Solar & Energy Services ($16 million). — Segment Result up 5 per cent or $48 million to $1,004 million driven by the increase in underlying EBITDA. The segment result includes a depreciation expense of $326 million (up 7 per cent from the prior corresponding period) primarily reflecting investment in digital capability. — Returns increased with Underlying EBIT margin rising from 9.6 per cent to 10.1 per cent and commitments to reduce operating costs by $100 million from financial year 2014 level and capital expenditure reduction of $50 million in financial year 2016 were achieved. Announcement of the sales of Mortlake Terminal Station, Mortlake Pipeline and Cullerin Range Wind Farm at attractive earnings multiples. — Net cash flow from operating and investing activities increased 71 per cent or $522 million to $1,262 million reflecting higher underlying EBITDA performance, improved working capital management, lower capital expenditure and proceeds from asset sales. (1) This guidance is based on an average oil price US$52.90/bbl and a AUD/USD exchange rate of $0.74 and is dependent on the timing of production from Train 2. For APLNG the effective oil price for oil linked LNG sales will incorporate the lag in oil prices associated with LNG Sale and Purchase Agreements. (2) Under agreements that Australia Pacific LNG entered into with QGC in 2010, Australia Pacific LNG will sell to QGC its entire share of gas production from the ATP620/648 fields for an initial ramp period. (3) 100 per cent Australia Pacific LNG. (4) Refer to Glossary in Appendix 6. 17 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 — Natural Gas Gross Profit was stable with higher sales volumes in all segments offset by the impact of higher Energy Procurement Costs, lower oil-linked revenues and reduced demand for capacity services as Queensland LNG projects are commissioned. — Electricity Gross Profit was stable reflecting improved margin management in all segments offset by lower retail volumes from prior period customer losses and the moderating impacts of solar and energy efficiency. — Electricity and Natural Gas Cost to Serve decreased by $11 per customer ($53 million) reflecting continued improvements in customer experience and the operations of the retail business through digitisation and back office automation. — Customer experience rose with Interactive NPS increasing by 6 points to +12.3 and customer accounts stable in a highly competitive retail environment. Completion of Origin’s online digital platform has improved functionality helping customers interact with Origin when and where they want, along with further product and service innovations including Predictable Plan, Solar as a Service and a simplified bill. — Growing LPG and Solar & Energy Services and renewable energy capacity increased 156 MW (23 per cent). 5.1.1 Natural Gas Year ended 30 June Volumes Sold (PJ) Retail (Consumer & SME) Business Total external volumes Internal Sales (Generation) Revenue ($m) Retail (Consumer & SME) Business Cost of goods sold ($m) Network Costs Energy Procurement Costs Gross Profit ($m) Gross Margin % Period-end customer accounts (’000) Average customer accounts (’000) $ Gross profit per customer 2016 228.2 42.1 124.9 167.1 61.1 1,946 995 951 (1,425) (696) (729) 522 26.8% 1,089 1,080 483 $/GJ 2015(1) $/GJ Change (%) Change ($/GJ) 11.7 23.6 7.6 (8.5) (4.2) (4.4) 3.1 207.4 41.7 93 134.7 72.7 1,679 978 701 (1,158) (640) (518) 521 31.0% 1,068(2) 1,051(2) 496 12.5 23.5 7.5 (8.6) (4.7) (3.8) 3.9 10 1 34 24 (16) 16 2 36 23 9 41 0 (14) 2 3 (2) (0.8) 0.2 0.1 0.1 0.6 (0.5) (0.7) Natural Gas sales volumes increased 10 per cent or 21 PJ to 228 PJ. Business customer volumes increased 32 PJ or 34 per cent, driven by the sale of an additional 30 PJ to LNG producers sourced primarily from increased contract volumes. Retail volumes increased 0.4 PJ reflecting higher customer numbers partly offset by milder weather. Volumes supplied for internal generation reduced 11.6 PJ. Gross Profit was stable with increased volumes offset by the impact of higher energy procurement costs reflecting low cost ramp gas leaving the market, reduced sales of gas capacity services as Queensland LNG projects conclude commissioning and lower oil-linked sales revenues from LNG customers. Gross Profit unit margin decreased $0.70/GJ to $3.10/GJ primarily due to a higher proportion of lower margin sales to LNG producers. Retail Natural Gas volumes sold (PJ) Year ended 30 June NSW Victoria Queensland South Australia Total Retail volumes 2016 8.2 25.6 3.0 5.3 42.1 2015 7.1 26.1 2.8 5.8 41.7 Change (PJ) 1.0 (0.5) 0.2 (0.5) 0.4 Change (%) 15 (2) 8 (8) 1 (1) Osborne gas sales re-classified as internal due to new operational agreement. As a result prior period external sales volumes, revenues and costs have been revised with no impact on gross profit. Refer to Appendix 5 for re-stated financial year 2014 figures. (2) Revised customer accounts methodology to exclude customers in the process of transferring to or away from Origin in order to reflect active customers. Refer to Appendix 5 for re-stated financial year 2014 figures. 18 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 5.1.2 Electricity Year ended 30 June Volumes Sold (TWh) Retail (Consumer & SME) Business Revenue ($m) Retail (Consumer & SME) Business Externally Contracted Generation Cost of goods sold ($m) Network Costs Wholesale Energy Costs Generation Operating costs Energy Procurement Costs Gross Profit ($m) Gross Margin (%) Period-end customer accounts (’000) Average customer accounts (’000) $ Gross profit per customer 2016 38.1 18.4 19.6 7,300 4,790 2,463 47 (6,012) (3,674) (2,093) (244) (2,337) 1,289 17.7 2,741 2,758 467 $/MWh 2015(1) $/MWh Change (%) Change ($/MWh) 191.7 259.8 125.4 (157.9) (96.5) (55.0) (6.4) (61.4) 33.8 37.3 18.9 18.4 7,560 5,245 2,238 77 (6,272) (4,019) (1,975) (278) (2,253) 1,289 17.0 2,768(2) 2,804(2) 460 202.9 278.2 121.6 (168.3) (107.9) (53.0) (7.5) (60.5) 34.6 2 (2) 7 (3) (9) 10 (39) (4) (9) 6 (12) 4 0 4 (1) (2) 2 (11.2) (18.4) 3.8 10.5 11.4 (2.0) 1.0 (0.9) (0.7) Electricity volumes increased by 0.8 TWh or 2 per cent to 38.1 TWh. Business volumes increased 1.2 TWh as access to competitively priced energy in a rising wholesale price environment and improved customer experience allowed Origin to increase market share. Retail volumes decreased by 0.4 TWh largely reflecting customer losses in the prior year (0.2 TWh), and the moderating impacts of energy efficiency and solar penetration (0.2 TWh). Origin’s Energy Procurement Costs increased $0.9/MWh reflecting a $2.0/MWh increase in Wholesale Energy Costs, partly offset by a $1.0/MWh improvement in Generation Operating Costs. Wholesale Energy Costs increased, primarily reflecting higher gas fuel costs in the second half of the 2016 financial year as the departure of ramp gas put upward pressure on wholesale gas prices and unplanned outages at Eraring resulting in increased use of higher cost gas-fired generation and pool purchases. Generation Operating Costs decreased $34 million reflecting the end of the Bulwer Island and Worsley Joint Ventures ($18 million) and underlying cost reductions through operational efficiencies ($17 million). Electricity Gross Profit was stable reflecting improved margin management in Retail and Business segments as a result of Origin’s wholesale energy costs increasing less than market rate ($21 million), offset by lower Retail volumes ($21 million). Gross Profit unit margin decreased $0.70/MWh to $33.80/MWh reflecting a higher proportion of lower margin Business volumes which more than offset the impact of an increase in Business and Retail customer margins. Gross Profit per customer increased $7 to $467 per customer with margin expansion partly offset by lower average Retail customer usage. Retail Electricity volumes sold (TWh) Year ended 30 June NSW Victoria Queensland South Australia Total Retail volumes 2016 8.9 3.4 5.2 1.0 18.4 2015 9.2 3.4 5.3 0.9 18.9 Change (TWh) (0.4) 0.0 (0.1) 0.1 (0.4) Change (%) (4) 1 (3) 11 (2) (1) Prior period restated to better reflect the recognition of volumes, revenues and costs associated with feed-in volumes from solar customers with no impact on gross profit. Refer to Appendix 5 for re-stated financial year 2014 figures. (2) Revised customer accounts methodology to exclude customers in the process of transferring to or away from Origin in order to reflect active customers. Refer to Appendix 5 for re-stated financial year 2014 figures. 19 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 Generation portfolio Performance of the generation portfolio, including contracted plant is summarised below: Year ended 30 June 2016 Eraring Darling Downs Osborne(3) OCGT plant Shoalhaven Cullerin Range Internal Generation Renewable PPA’s Worsley – Externally Contracted (50% share)(4) Nameplate Capacity (MW) Type(1) 2,880 Black coal 644 CCGT 180 CCGT 2,037 OCGT 240 Pump/Hydro 30 Wind 6,011 745 Solar/Wind 60 Cogen. Equivalent Reliability Factor (%) 88.1(2) 99.5 99.7 97.6 93.3 97.9 93.2 n.a. 99.1 Capacity Factor (%) 54 62 71 9 7 37 34 97 Electricity Output (GWh) 13,546 3,487 1,129 1,662 148 97 20,069 2,204 381 Pool Revenue ($m) 724 219 81 169 16 5 Pool Revenue ($/MWh) 53 63 72 102 106 51 1,133 56 Origin generated 20.1 TWh of electricity from its internal generation portfolio (20.6 TWh in the prior period) representing 53 per cent (55 per cent in the prior period) of Origin’s 38.1 TWh of Electricity volumes sold. Output from Origin’s gas-fired generation fleet decreased by 0.9 TWh to 6.3 TWh reflecting decreased availability of low cost ramp gas. During the year Origin contracted 2.2 TWh from renewable energy power purchase agreements. New agreements have also been signed during the year with Fotowatio Renewable Ventures for the proposed 100 MW (with option for an additional 35 MW) Clare Solar Farm and the operating 56 MW Moree Solar Farm, pivoting the portfolio to a renewable future with new sources of energy and competitively priced renewable energy certificates. 5.1.3 Electricity and Natural Gas Operating Costs Year ended 30 June Cost to maintain(5) ($ per average customer(6)) Cost to acquire/retain ($ per average customer(6)) Elec & Natural Gas Cost to Serve ($ per average customer(6)) Maintenance Costs ($m) Acquisition & Retention Costs(6) ($m) Elec & Natural Gas Operating Cost ($m) 2016 (119) (29) (148) (443) (107) (550) 2015 (134) (26) (159) (506) (98) (603) Change 16 (3) 11 63 (9) 53 Change (%) (11) 12 (7) (12) 9 (9) Electricity and Natural Gas Operating Costs decreased by $53 million driven by a $63 million decrease in Maintenance Costs offset by a $9 million increase in Acquisition and Retention costs. The reduction in maintenance costs reflects continued improvements in the operations of the retail business through digitisation and automation of back office processes and vendor management. These improvements have also led to a reduction in Ombudsmen complaints from 4.9 to 3.4 (per 1,000 customers), and Interactive Net Promoter Score (NPS)(7) improving from 6.3(8) to 12.3. Back office processing operations were successfully transferred from Wipro to Accenture during the year, which will continue to deliver cost savings through further automation and optimisation. Bad debt expense as a percentage of Total Natural Gas and Electricity Revenue has been steady at 0.61 per cent. Acquisition and retention costs increased $9 million, or 9 per cent due to a 12 per cent increase in sales activity. This increase reflects higher inbound call volumes driven by the popular ‘Origin Voucher’ and Predictable Plan campaigns while Origin continues to drive sales activity toward internal channels. ‘Predictable Plan’ allows customers to pay fixed amounts regardless of how much energy they use. Customer experience and product innovation Successful completion of the online digital platform has improved functionality, helping customers interact when they want, and how they like. Customers can see when and where their energy is being used, review their bills and pay them online, switch to e-services and predict the cost of their next bill. During the year Origin also increased paperless billing, with around 1.6 million customer accounts having taken up e-billing (72 per cent increase) and 0.8 million customers are paying by direct debit (19 per cent increase). Extended call centre hours continued to offer customers more freedom to get in touch when it suits them. Origin also redesigned energy bills, making them easier to read and understand focusing on the key information and charges customers want to know. Origin’s social and digital media activity increased during the year allowing Origin to engage key customers and audiences, provide broader communication and respond to issues. Origin have also brought innovative products to customers like Predictable Plan which provides customers the peace of mind to pay the same amount each month for 12 months, regardless of how much they use, and Solar as a Service which gives the customer the benefit of solar without the upfront capital cost. (1) OCGT = Open cycle gas turbine; CCGT = Combined cycle gas turbine. (2) Availability for Eraring = Equivalent Availability Factor (which takes into account de-ratings). (3) Origin has 50 per cent interest in the 180 MW plant and contracts 100 per cent of the output. (4) Worsley ceased operations in March 2016. (5) Origin includes within its Cost to Serve all costs associated with servicing and maintaining customers, all customer acquisition and retention costs. Maintenance costs include billing, credit and collections. (6) Customer wins (FY16: 544; prior period: 518) and retains (FY16: 1,531; prior period: 1,340) and represents Cost to Serve per average customer account, excluding serviced hot water accounts. (7) Refer to Glossary in Appendix 6. (8) NPS measure as at September 2015, when Origin transitioned from Customer Satisfaction to NPS. 20 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 5.1.4 LPG Year ended 30 June Revenue ($m) Cost of Goods Sold ($m) Gross Profit ($m) Operating Costs ($m) Underlying EBITDA ($m) 2016 593 (385) 208 (135) 73 2015 648 (450) 198 (139) 59 Change (%) (8) (14) 5 (3) 24 LPG Gross Profit increased by 5 per cent or $10 million to $208 million reflecting improved margin management and energy procurement cost reductions. Operating costs decreased $4 million reflecting improved logistics performance resulting in an Underlying EBITDA increase of $14 million or 24 per cent. 5.1.5 Solar & Energy Services Year ended 30 June Revenue ($m) Cost of Goods Sold ($m) Gross Profit ($m) Operating Costs ($m) Underlying EBITDA ($m) 2016 138 (83) 55 (59) (4) 2015 97 (60) 42 (47) (5) Change (%) 42 38 31 26 (20) Solar & Energy Services Gross Profit increased by 31 per cent or $13 million to $55 million driven by an increase in Solar sales and Centralised Energy Services (CES) customers as Origin extends the energy solutions and services beyond grid based energy supply: — Solar sales grew by 95 per cent to 21 MW, including significant growth of Origin’s Solar as a Service product (8 MW of 21 MW), where Origin owns, installs and maintains the solar system. Origin has collaborated with Tesla in bringing a battery solution to market so customers can optimise the use of solar in their home. Origin has also introduced Origin Solar Repairs, offering end-to-end solutions through service and repair of solar PV systems. — The CES business, where multi-tenanted buildings are supplied through a single point and energy then metered and on-sold to residents, is growing rapidly. In June Origin announced its largest CES partnership with Lend Lease in Melbourne’s Victoria Harbour precinct. — Origin’s Acumen metering business is a metering, data management and energy intelligence service provider. Initially focussed on business customers, this year Origin has expanded into the residential electricity market, and now have a total of more than 62,000 meters under management. Operating costs increased $12 million reflecting business growth. 5.1.6 Natural Gas, Electricity and LPG customer accounts Closing Electricity and Natural Gas customer accounts decreased by 7,000 (0.2 per cent) with a reduction of 28,000 Electricity customer accounts partly offset by an increase of 21,000 Natural Gas accounts. Customer account movement 30 June 2016 30 June 2015(1) Customer Accounts (’000) NSW(2) Victoria Queensland South Australia(3) Total Electricity 1,240 566 761 174 2,741 Natural Gas 252 478 160 199 1,089 Total 1,492 1,044 921 372 3,830 Electricity 1,268 576 758 166 2,768 Natural Gas 239 475 154 201 1,068 Total 1,507 1,051 912 367 3,836 Change (15) (7) 9 6 (7) As at 30 June 2016, Origin’s penetration of dual fuel (Electricity and Natural Gas) customer accounts was 34.9 per cent, increasing from 33.3 per cent at 30 June 2015 reflecting Origin’s continued focus on high value dual fuel customers. As at 30 June 2016, Origin had 387,000 LPG customer accounts, an increase of 5,000 accounts. 5.1.7 Capital Expenditure Capital expenditure of $236 million (decrease of $62 million compared to the prior period) included expenditure related to customers systems and digital investments ($81 million), generation ($92 million), LPG ($30 million) and Solar & Energy Services ($19 million). (1) Revised customer accounts methodology to exclude customers in the process of transferring to or away from Origin in order to reflect active customers. (2) Australian Capital Territory (ACT) customer accounts are included in New South Wales. (3) Northern Territory customers are included in South Australia. 21 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 5.2 Integrated Gas Integrated Gas was formed as of 1 July 2015, following the combination of the previous E&P and LNG segments. LNG includes Origin’s 37.5 per cent equity accounted share of the results of Australia Pacific LNG and Origin’s activities and transactions arising from its operatorship of the Australia Pacific LNG upstream operations and management of Origin’s exposure to LNG pricing risk. 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 on a line by line basis in the Integrated Gas segment result. Origin’s share of Australia Pacific LNG’s Underlying EBITDA is included in the Underlying EBITDA of the Integrated Gas segment. Origin’s share of 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 and Segment Result lines. E&P includes exploration and production interests located in eastern and southern Australia, the Browse and Perth basins in Western Australia, the Bonaparte Basin in north-western Australia, the Beetaloo Basin in Northern Territory and in New Zealand. Year ended 30 June Underlying EBITDA Segment Result Cash flow from operating activities Exploration expense Capital expenditure Contribution to APLNG Net cash flow from operating and investing activities 2016 2015 E&P ($m) 269 7 142 (63) 412 – LNG ($m) 117 (222) (116) – 20 1,206 Integrated Gas ($m) 386 (215) 26 (63) 432 1,206 (1,605) E&P ($m) 399 102 401 (29) 561 – LNG ($m) 99 20 34 – 42 2,166 Integrated Gas ($m) 498 122 435 (29) 603 2,166 (3,018) Change (%) (23) N/A (94) 117 (28) (44) (47) — Integrated Gas Underlying EBITDA decreased 23 per cent or $112 million to $386 million with an increased contribution from LNG operations ($18 million); reflecting the commencement of LNG production ($119 million) (including a disproportionate share of operating costs related to infrastructure assets), offset by the impact of lower oil prices on Australia Pacific LNG’s domestic gas sales ($63 million) and lower LNG net recovery as Australia Pacific LNG upstream capital expenditure declines ($38 million), and lower contribution from Origin’s E&P operations ($130 million) primarily reflecting lower liquids prices and volumes ($90 million), and increased exploration expense ($34 million). — Integrated Gas segment result decreased $337 million to -$215 million driven by lower EBITDA ($112 million) and increased share of Australia Pacific LNG ITDA ($231 million) associated with recognition of increased sales of natural gas and LNG. Revenue from increased sales given the low oil price environment, have been insufficient to offset the increase in ITDA. The higher ITDA also includes a disproportionate share of costs associated with infrastructure assets related to the LNG export project and MRCPS interest expense paid by Australia Pacific LNG to shareholders. — Cash flow from operating activities decreased $409 million to $26 million due to lower EBITDA after adjusting for the non-cash impacts of exploration expense and equity accounted share of Australia Pacific LNG EBITDA (-$134 million) and the impact of actions taken to reduce risk in response to low oil prices (-$293 million). — Capital expenditure ($171 million) and contribution to Australia Pacific LNG ($960 million) decreased as growth projects near completion. — Net cash flow from operating and investing activities improved by $1,413 million to -$1,605 the result of lower capital expenditure and Australia Pacific LNG contribution and the Poseidon acquisition in the prior year ($686 million), partly offset by lower operating cash flow. — The Train 1 facility is now fully operational and is performing as expected with daily production rates having achieved and exceeded design nameplate capacity. 36 cargoes have been shipped to date, the majority under the terms of the Sale and Purchase Agreements with Sinopec and Kansai. — Construction of the Train 2 facility continues to progress, with Train 2 first cargo expected in the second quarter of the 2017 financial year. — Halladale and Speculant construction works at well site and at the reception facilities in Otway Gas Plant have completed in readiness for commissioning. First gas is expected late August 2016. — In the Perth Basin, the execution phase of the Stage 1a Waitsia Gas Project is nearing completion, with the commencement of flows expected by end of August. 22 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 5.2.1 LNG LNG financial performance Year ended 30 June APLNG Underlying EBITDA (Origin share) LNG net recovery LNG Underlying EBITDA APLNG Underlying ITDA (Origin share) LNG D&A expense Origin’s net financing costs LNG Segment Result Cash flow from operating activities 2016 ($m) 111 6 117 (293) (16) (30) (222) (116) 2015 ($m) 55 44 99 (62) (17) – 20 34 Change ($m) 56 (38) 18 (231) 1 (30) (242) (150) Underlying LNG EBITDA increased $18 million reflecting the commencement of LNG production ($119 million) (including a disproportionate share of operating costs related to infrastructure assets), offset by the impact of lower oil prices on Australia Pacific LNG’s domestic gas sales ($63 million) and lower LNG net recovery as Australia Pacific LNG upstream capital expenditure declines ($38 million). The LNG segment result decreased $242 million. Australia Pacific LNG ITDA increased $231 million with the recognition of increased sales of natural gas and LNG, a disproportionate share of costs associated with infrastructure assets related to the LNG export project, and MRCPS interest expense paid by Australia Pacific LNG to shareholders (-$58 million). Revenue from increased sales given the low oil price environment, have been insufficient to offset the increase in ITDA. Origin’s net financing costs of $30 million reflect the partial movement into underlying earnings (from Items excluded from Underlying Profit in FY2015) of net financing costs associated with the funding of Origin’s investment in Australia Pacific LNG following recognition of Train 1 LNG sales, inclusive of MRCPS income received from Australia Pacific LNG (+$58 million). Cash flow from operating activities decreased $150 million to ($116 million) due to lower LNG net recovery as Australia Pacific LNG upstream capital expenditure declines, and the impact of actions taken to reduce risk in response to low oil prices, including the payment of oil put premium ($117 million) to reduce exposure to low oil prices in financial year 2017 and insurance related to the completion of the Australia Pacific LNG Project ($37 million). Australia Pacific LNG Production, Sales and Revenue Operating Performance Production Volumes Natural Gas (domestic) Natural Gas (LNG feed gas) Sales Volumes Natural Gas LNG Sales Volumes Net(1) Natural Gas LNG Year ended 30 Jun 2016 Year ended 30 Jun 2015 Total APLNG (PJe) Origin share (PJe) Total APLNG (PJe) Origin share (PJe) 418 296 122 388 291 98 295 225 72 157 111 46 146 109 37 111 84 27 174 174 0 174 174 0 125 125 0 65 65 0 65 65 0 47 47 0 Total Australia Pacific LNG production increased by 244 PJe or 140 per cent to 418 PJe, reflecting commencement of LNG production from Train 1 and increased volumes sold under the QGC contract. The first shipment of LNG departed the Australia Pacific LNG facility on Curtis Island on 9 January 2016, with 27 LNG cargoes equating to 98 PJ sold during the period and 36 cargoes to date. LNG revenues and expenses related to 72 PJ were recognised in earnings from 1 March, 2016. During the period approximately 100 PJ were delivered into the QGC contract. Further information regarding production, sales volumes and revenues is provided in Origin’s June 2016 Quarterly Production Report, available at www.originenergy.com.au. Australia Pacific LNG underlying financial performance Australia Pacific LNG’s financial performance during the period reflected earnings associated with domestic contracts and the commencement of Train 1 LNG sales. LNG sales and costs were included in earnings from 1 March 2016. Financial performance ($m) Operating revenue Operating expenses Underlying EBITDA D&A expense Net financing expense Income tax benefit Underlying ITDA Underlying Result (1) Sales volumes are net of 93 PJe of capitalised sales (30 Jun 2015: 49 PJe). 30 June 2016 30 June 2015 Origin share 100% APLNG 880 (585) 100% APLNG 408 (263) Origin share 295 (700) (291) 209 (782) (487) 111 (293) (182) 145 (168) (27) 32 (163) (18) 55 (62) (7) 23 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 Reserves and Resources(1) The overall decrease in 2P Reserves of 249 PJe includes 418 PJe of production. Origin’s share of 2P reserves decreased by 94 PJe including 157 PJe of production. Origin share of reserves and resources (37.5% share in Australia Pacific LNG) Reserves (PJe) 1P 2P 3P Resources (PJe) 2C 30/06/15 Reserves 2,272 5,167 6,065 Resources 1,035 Acquisition/ Divestment – – – New Booking / Discoveries – – – Revisions/ Extensions 543 63 (308) Production (157) (157) (157) – – 100 – 30/06/16 Reserves 2,659 5,073 5,601 Resources 1,135 Australia Pacific LNG Project The Australia Pacific LNG export project is a two train project with a design nameplate capacity of 9 million tonnes per annum of LNG. Australia Pacific LNG has committed LNG offtake agreements for approximately 20 years with Sinopec for approximately 7.6 million tonnes per annum and with Kansai Electric for approximately 1 million tonnes per annum. Project performance and key milestones The Downstream project was 98 per cent complete at 30 June 2016. During the period, production from operated fields was increased to meet LNG train demand. Average production from operated assets increased to 1,047 TJ/d in the June 2016 Quarter from 405 TJ/d in the June 2015 Quarter, reflecting ongoing commissioning, de-watering and production ramp-up of wells to meet LNG Train 1 feed gas requirements. When combined with the volumes from non-operated assets, Australia Pacific LNG is expected to produce more than enough to supply domestic contracts and Australia Pacific LNG’s contractual requirements under its long term supply contracts with customers in China and Japan. As at 30 June 2016, a total of 27 cargoes were loaded and shipped to customers, including to Sinopec and Kansai in accordance with their respective long term Sales and Purchase Agreements. The Train 1 facility is now fully operational and is performing as expected with daily production rates achieved in excess of design nameplate capacity. The Bechtel Performance Test was completed in April 2016 and the Train 1 facility has been handed over to the Downstream Operator, ConocoPhillips. The Australia Pacific LNG Train 1 operational lenders’ test has commenced and the release of the first tranche of shareholder guarantees is on track for the second quarter of the 2017 financial year. Construction of the Train 2 facility continues to progress. In July 2016, first fire of the last two of seven Gas Turbine Generators occurred, and in August 2016 high pressure fuel gas was introduced into the facility. The Upstream business continues to ramp up in readiness for Train 2 first cargo, expected in the second quarter of the 2017 financial year. The Train 2 lenders’ test requirements are expected to be met and the remaining shareholder guarantees released during the 2017 calendar year. Key Accomplishments/Milestones The following table reports progress against the key goals and milestones Origin outlined in its interim 2016 financial year Operating and Financial Review: Goals Completion of Bechtel Performance Test Train 1 (Bechtel Performance Date) Plan Q4 FY16 Actual Progress Accomplished Key Project goals and milestones for the 2017 financial year The following table reports key goals and milestones in the near term. Key Goals and Milestones Train 1 project finance lenders’ tests met and 60% of shareholder guarantees released First Cargo from Train 2 Train 2 revenue recognition Train 2 project finance lenders’ tests met and remaining shareholder guarantees released FY17 Plan Q2 FY17 Q2 FY17 Q3 FY17 CY17 Capital expenditure and funding Origin’s net contribution to Australia Pacific LNG during the period was $1,206 million. The total amount drawn down by Australia Pacific LNG from its project finance facility during the period was US$157 million. Project finance facility interest of US$305 million was incurred during the period of which US$229 million was capitalised. At 30 June 2016, US$8,462 million of the project finance facility had been drawn. (1) Refer to the Important Information on reserves and resources disclosures prior to Section 1. 24 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 5.2.2 Exploration and Production Production, Sales and Revenue Year ended 30 June Total Production (PJe) Total Sales (PJe) Commodity Sales Revenue ($m)(1) Underlying EBITDA Cash flow from operating activities Proved plus Probable (2P) reserves ex-APLNG (PJe) 2016 74.6 82.6 592 269 142 1,204 2015 82.2 88.9 741 399 401 1,093 Change (%) (9) (7) (20) (33) (65) 10 Origin’s share of total production decreased 7.6 PJe or 9 per cent to 74.6 PJe due to lower well deliverability, natural field decline and lower plant availability from planned statutory compliance shutdown at Otway (9.4 PJe), partly offset by higher Bass Basin production (3.7 PJe) due to Yolla-5 and Yolla-6 coming on-line during the current year. Sales volumes decreased 6.3 PJe or 7 per cent to 82.6 PJe in line with decreased production. Commodity Sales Revenue decreased by $149 million or 20 per cent to $592 million, predominantly driven by lower production and lower average realised liquid prices (including impact of forward sales and hedging). During the year Origin commenced delivering oil and condensate production under the Oil Forward Sale Agreements. Revenue on these volumes is recognised at US$62.40/bbl. E&P EBITDA decreased $130 million to $269 million due to increased exploration expense ($34 million) driven by the $53 million write-off of exploration expenditure in Vietnam, lower liquids prices ($60 million), and lower production ($48 million), primarily at Otway due to lower well deliverability and lower plant availability from a planned statutory compliance shutdown, partly offset by lower general operating costs ($7 million). Cash flow from operating activities decreased $259 million to $142 million due to lower EBITDA adjusted for non-cash exploration expense (-$96 million), and the commencement of oil and condensate production deliveries into the Oil Forward Sale Agreements (-$139 million)(2). Costs of goods sold and Stock movement Year ended 30 June Cost of goods sold Stock movement 2016 ($m) (77) (3) 2015 ($m) (125) 7 Change (%) (39) N/A Cost of goods sold decreased by $48 million or 39 per cent to $77 million primarily due to lower average prices of crude purchases and a decrease in third party volumes within the Cooper Basin. Expenses Year ended 30 June Royalties, tariffs and freight General operating costs Exploration expense Total expenses 2016 ($m) (43) (200) (63) (306) 2015 ($m) (50) (207) (29) (286) Change (%) (13) (3) (117) 7 Total expenses increased by $20 million or 7 per cent to $306 million primarily reflecting increased exploration expense ($34 million) driven by the $53 million write-off of exploration expenditure in Vietnam, partly offset by a decrease in royalties, tariffs and freight ($7 million) due to lower sales volumes and revenue and lower general operating costs ($7 million). Further information regarding production, sales volumes and revenues is provided in Origin’s June 2016 Quarterly Production Report, available at www.originenergy.com.au. Capital Expenditure Capital expenditure decreased $149 million from the prior period as growth projects start to complete. Capital expenditure for the period of $412 million included: — Halladale/Speculant – $146 million; — Bass Basin – $66 million; — Cooper Basin – $85 million; — Beetaloo and Cooper Basin farm-ins – $43 million; — Perth Basin – $18 million, primarily Senecio/Waitsia; and — Other assets $54 million. Reserves Origin’s proved plus probable (2P) reserves increased by 111 PJe (after production of 74 PJe) to a total of 1,204 PJe excluding Origin’s share of Australia Pacific LNG reserves, compared with 30 June 2015. 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 2016 is included in Origin’s Annual Reserves Report released to ASX on 29 July 2016 and available on Origin’s website at www.originenergy.com.au. Includes gain/(loss) – forward sale and hedging of $43 million in current year ($37 million prior year). (1) (2) Delivery of oil and condensate production into the Oil Forward Sale Agreements commenced during the period for which revenue is recognised at US$62.40/bbl, but for which there is no associated cash flow as proceeds were received upfront. 25 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 Operations Production and Development Origin’s producing operations include assets in the Bass and Otway Basins off the south coast of Victoria, the Cooper Basin in central Australia the Perth Basin in Western Australia and the Taranaki Basin in New Zealand. Origin’s development activities during the year reflected actions taken by Origin to limit capital expenditure to completing projects that have commenced and utilise existing infrastructure. In the Bass Basin, the Yolla-5 and Yolla-6 production wells were commissioned and production commenced during the year. The tie-in and commissioning of the compression and condensate modules onto the Yolla platform commenced during the current year with the modules planned to be online late in the 2017 financial year. Progress continued on the development of the Halladale/Speculant project in the Otway Basin. Installation of the Halladale and Speculant pipeline from the well site to Otway Gas Plant and the construction works at the well site and at the reception facilities have completed in readiness for commissioning. First gas is expected late August 2016. Execution phase of the Stage 1a Waitsia Gas Project is nearing completion, with the commencement of flows expected by end of August 2016. Exploration and Appraisal Development and appraisal activities within Australia and New Zealand during the period were confined to joint venture and permit commitments. In the Beetaloo Basin drilling operations recommenced during the period with the re-entry and casing of the Amungee NW-1H well drilled in 2015. Subsequent to the end of the period, Beetaloo W-1 was spudded on 22 July, with civil works ongoing as part of the 2016 calendar year campaign which includes the drilling of two vertical wells. As part of Origin’s obligations under the CBOS Farmin Agreements entered into in 2014, Origin committed to a multi well work programme in the Cooper Basin. In fulfilment of the farm-in obligations, the hydraulic fracture stimulation of the Ethereal-1 exploration well in PEL 637 commenced during the year and extended production testing is scheduled for early in the 2017 financial year. Also in fulfilment of CBOS farm-in obligations, planning continued for the drilling of two wells in PEL 638 scheduled for the 2017 financial year. Origin’s interest in these permits provides the opportunity to participate in technology trials and further develop learnings which may be applicable in the Beetaloo and marginal and low permeability CSG acreage. 5.3 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. In particular, Origin’s existing investments in Chile and Indonesia’s energy sectors including interests in discontinued geothermal development. Origin’s net financing costs (excluding costs relating to LNG operations) and tax are recorded in the Corporate segment. Financial Performance Year ended 30 June Underlying EBITDA Segment Result Capital expenditure Net cash flow from operating and investing activities 2016 ($m) (81) (434) 25 1,495 2015 ($m) (96) (461) 63 (146) Change (%) (16) (6) (60) N/A — Lower Underlying EBITDA loss due to functional cost savings. — Segment Result includes Underlying net financing costs of $64 million and Underlying income tax expense of $282 million. — Net cash flow from operating and investing activities improved by $1,641 million due to the sale of Origin’s interest in Contact Energy to reduce debt ($1,599 million) and a reduction in capital expenditure ($38 million) reflecting lower IT expenditure and the decision taken to cease international growth activities. 6 RISKS RELATED TO ORIGIN’S FUTURE FINANCIAL PROSPECTS The scope of operations and activities means that Origin is exposed to risks that can have a material impact on its financial prospects and reputation. Material risks, and the Company’s approach to managing them, are summarised below. Risk Management Framework Origin has a risk management framework overseen by the Board Risk Committee. Origin’s approach to risk management aims to embed a risk-aware culture in all decision-making and to manage risk in a proactive and effective manner. This includes identifying, evaluating, managing and monitoring risks, and mitigating their impact should they materialise. If a risk, such as natural disasters, cannot be managed using internal controls, it is transferred to third parties via insurance where commercially possible. Material Risks The material risks in this section have been categorised as Strategic, Operational, Financial or Project. Should any of the risks identified be realised, these risks could materially affect Origin’s ability to meet its objectives and impact on future financial performance, either directly or by triggering a succession of events that, in aggregate, becomes material. 26 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 Strategic Strategic risks arise from uncertainties that may emerge in the medium to longer term and, while they may not necessarily impact on short term profits, can have immediate impact on the value of the Company. These risks are managed through ongoing planning and the allocation of resources and attention from management and the Board. Climate change Origin is exposed to changes in regulatory policy as a result of climate change. Origin’s strategy for transitioning into a carbon constrained future comprises balancing our position to remain flexible in decarbonisation scenarios. We aim for a leading renewable position to meet our Renewable Energy Target. Culture Origin’s Purpose, Principles, Values and Commitments are set out in Origin’s Compass, which guides how things are done at Origin and defines Origin’s culture. It guides good decision making in a way that is common across Origin. Origin relies on its people to reflect the Compass in all things that they do. Failure to comply with the Compass may affect Origin’s risk profile, business operations and financial prospects. Competition Origin operates in a highly competitive environment, which can result in downward pressure on margins, customer losses and higher costs to serve. Origin’s strategy to build customer loyalty and trust by improving customer experience and creating differentiated product offerings to move the customer conversation away from price helps to mitigate this risk. Origin’s strategy is to be competitive on cost of energy and cost to serve. Competition for generation capacity and sources of fuel can impact the cost of energy. Development of competing generation technologies can displace our existing generation assets. The potential discovery or commissioning of significant new gas resources in eastern Australia could have a significant impact on the gas supply and demand dynamics and therefore gas prices in eastern Australia. LNG production in Queensland competes with domestic gas demand and could result in material changes to the domestic gas price. Origin is able to partially mitigate its exposure by altering how it manages its wholesale and generation portfolio. Technological developments/disruption Energy demand through the grid is impacted by the growth in distributed generation, appliance efficiency, closures across energy intensive industries and smaller average dwelling size. Technology also has the potential to disrupt by enabling competition to provide new energy solutions which adopt lower cost or new business models (e.g. using Cloud technology). Origin’s strategy is to meet this change by growing our distributed generation and home energy services business in the consumer and business markets and, where appropriate, monitoring, reviewing and trialling new technology. Oil and gas reserves and resources Origin is involved in oil and gas exploration and there is no assurance that resources will be discovered through these activities or that any particular undeveloped reserves will proceed to development or will be ultimately recovered. There is a risk that actual production may vary from that predicted. Origin employs established industry procedures to identify and consider areas for potential exploration. Origin monitors reservoir performance and adjusts development plans accordingly. Demand for energy The volume of electricity, gas and LPG the Company sells is dependent on our customer’s energy usage. Reductions in energy demand from price changes, consumer perception of energy affordability, consumer behaviour, operational closures across energy intensive industries, technological advancement, mandatory energy efficiency schemes, weather and other factors, can reduce Origin’s revenues and adversely affect Origin’s future financial performance. Origin constantly monitors and reviews consumption patterns and trends to identify changes in energy demand. Regulatory policy Origin operates in highly regulated environments and is exposed to changes in regulatory policy. Origin manages its exposure to industry wide regulatory risk through active engagement with policy makers and preparing for regulatory and legislative changes. In the medium term, increasing levels of renewables driven by Renewable Energy Targets will have an effect on baseload fossil fuel generation. Origin invests directly or indirectly in utility scale renewables and leverage its peaking generation capacity to manage the intermittency of renewables will help to mitigate this risk. Financial Financial risks are the risks that directly impact the financial performance and resilience of Origin. The Board manages these risks by setting limits on the overall financial exposure that Origin is prepared to take, and has commodity and treasury risk management systems to monitor and report performance against these limits. Origin manages commodity price risk through a combination of physical positions and derivatives contracts. Commodity — Oil prices – Origin has a material long term exposure to the international oil price through the sale of gas, oil, LPG and its investment in Australia Pacific LNG. Pricing can be volatile and downward price movements can impact on our cash flow, financial performance, recoverable reserves and asset carrying values. — Wholesale electricity prices and volumes – Prices for electricity Origin sources to on-sell to customers are volatile and are influenced by many factors that are difficult to predict, including operating constraints at Origin’s power stations. Customer volumes also vary on a daily basis and over time. — Other commodity prices – Origin is exposed to price fluctuations in respect of coal and gas purchases for electricity generation and gas, renewable energy and LPG for on-sale to customers. Higher prices erode our margins if we are unable to pass on additional costs to customers. Lower prices impact our margins and asset carrying value for gas producing assets. Foreign exchange and interest rates – Origin is exposed to interest rate movements and foreign exchange rate fluctuations. This impacts the Australian dollar value of foreign currency denominated assets and liabilities, revenues, dividends received and expenses. Credit/counterparty – Some counterparties may fail to fulfil their obligations (in whole or in part), under major hedge and sales contracts. Australia Pacific LNG has long term off take agreements with Sinopec and Kansai, who account for the majority of its LNG revenues. There is a risk Origin is unable to effectively bill and or collect outstanding debt from customers. Insurance – Losses and liabilities from uninsured or underinsured events could reduce Origin’s revenue or increase costs. Tax – Any change in, or change in the interpretation, application or enforcement of, applicable tax laws regulations, royalty regimes or any actual or alleged failure to comply could significantly increase Origin’s tax liability and expose Origin to legal, regulatory and other actions that could adversely affect Origin’s financial performance and prospects. Australia Pacific LNG is required to pay royalties on its production to the Queensland government. Australia Pacific LNG has disputed in the Queensland courts the petroleum royalty decision received from the Queensland Treasurer. There is a risk Australia Pacific LNG may not be successful in this dispute and this may impact the quantum of royalties Australia Pacific LNG is required to pay. Access to capital markets – Origin considers that it has sufficient liquidity through currently committed credit facilities. However, if it fails to appropriately manage its liquidity position, or if markets are not available to Origin at the time of any financing or refinancing that it requires, due to general market conditions or matters specific to Origin such as a credit rating downgrade, there is a risk that Origin’s business, prospects and financial flexibility will be adversely affected. 27 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 Litigation and dispute resolution – The nature of Origin’s business means we are exposed to litigation, regulatory actions or dispute resolution processes, investigations, inquiries, disputes or claims. — Reversion – The CSG interests that Australia Pacific LNG acquired from Tri-Star in 2002 are subject to reversionary rights. If triggered, these rights will require Australia Pacific LNG to transfer back to Tri-Star a 45 per cent interest in those CSG interests for no additional consideration. The reversion trigger will occur when Australia Pacific LNG has recovered from its revenue derived from the acquired CSG interests its expenditure relating to the acquired CSG interests plus interest on that expenditure, its royalty payments and the original acquisition price. Approximately 21 per cent of Australia Pacific LNG’s 3P CSG reserves as of 30 June 2016 are subject to these reversionary rights. — Tri-Star has commenced proceedings against Australia Pacific LNG claiming that reversion has occurred. Australia Pacific LNG denies that claim and is defending it. If Tri-Star’s claim is not successfully defended, Tri-Star may be entitled to an order that reversion occurred as early as 1 November 2008 and the reserves and resources that are subject to reversion may not be available for Australia Pacific LNG to sell or use. These events may have a material adverse impact on the financial performance of Australia Pacific LNG and therefore significantly affect the amount and timing of cash flows from Australia Pacific LNG to its shareholders, including Origin. Project Origin undertakes investments in a variety of major projects including gas and oil projects, electricity generation and operational systems. These major projects are exposed to the effectiveness of Origin’s project management and events outside of Origin’s control, such as weather events or natural disasters, which may result in adverse cost and schedule implications and, in turn, Origin’s financial prospects. Origin manages major projects in accordance with well-established project management processes. Environmental and social regulatory obligations are maintained and managed for projects, including the Australia Pacific LNG’s CSG-to- LNG project. Origin and Australia Pacific LNG’s processes and internal compliance monitoring are designed to ensure activities are conducted in accordance with all approval obligations. The construction phase of the Australia Pacific LNG Project is nearing completion. The first cargo from Train 2 of Australia Pacific LNG is expected in the second quarter of the 2017 financial year. Delay in the start-up of Train 2 would delay cash flow, the recognition of revenue and costs in underlying earnings and may also affect Australia Pacific LNG’s ability to satisfy the project finance completion tests and subsequent removal of Origin’s several guarantee of its share of the project finance facility. Australia Pacific LNG’s project finance facility (US$8.5 billion) – The facility is severally guaranteed by each Australia Pacific LNG shareholder (including Origin) in its respective shareholding proportions during the project construction phase. These guarantees will be released if the project satisfies customary completion tests. A delay in satisfying the requirements will mean Origin’s guarantee remains in place for longer, and failure to pass the completion tests could result in a requirement for early repayment of debt. The project finance facility contains restrictions on Australia Pacific LNG making shareholder distributions if specified financial metrics are not satisfied. Operational Operational Risks arise from inadequate or failed internal processes, people or systems or from external events. This could impact the environment, the health and safety of our people and members of the public or the sustainability of our operations and assets and in turn adversely affect Origin’s financial prospects. Origin’s risk management framework operates to identify, manage, monitor and mitigate operational risk. It sets out the minimum standards that Origin expects for all operated assets. Origin management systems operate to see that our assets are well designed, safely operated and properly maintained. Core operations are subject to periodic audits and assurance. Origin maintains an extensive insurance program to mitigate consequences by transferring financial risk exposure to third parties where commercially possible. Health and safety – The complexity, scale and geography of Origin’s operations give rise to a range of health, safety and security risks, including air, land or marine transport and other work related safety exposures. Cyber security – A cyber security incident could lead to a breach of privacy, disruption of critical business processes, loss of or corruption of data or theft of commercially sensitive information. Production – Operating activities include oil and gas projects, power generation, LPG facilities and CSG to LNG processing, through Australia Pacific LNG. These activities are exposed to outages and the potential to damage, both directly and as a result of a natural disaster, plant failure, interruptions to fuel supply required to operate the assets or failure or unavailability of third party infrastructure, including transmission, distribution and pipeline infrastructure. Process safety – Production assets are exposed to process safety and loss of containment risks. Environment – The complexity, scale and geography of projects and operations give rise to a range of potential effects on the environment, including Origin’s carbon emissions, water use, waste management, and impacts on biodiversity. Social – Origin’s activities give rise to potential disturbance or harm to communities and a range of risks including land access, impacts on people, and social and economic impacts on communities. Joint ventures – Origin participates in a number of joint ventures which, in some cases, are operated by a third party. That partner may have economic or other business interests that are inconsistent with our own and may take actions contrary to the objectives or interests of Origin. There is also a risk that joint venture partners may become bankrupt, default on or fail to fulfil their obligations as required or expected thereby impacting the performance of the joint venture and adversely affecting Origin or its interest in the joint venture. 28 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 APPENDIX 1 – ITEMS EXCLUDED FROM UNDERLYING PROFIT(1) Underlying Profit is derived from Statutory Profit and excludes certain items to provide a more representative view of the ongoing performance of the business. Year ended 30 June Statutory (Loss) – total operations Items Excluded from Underlying Profit Fair value and foreign exchange movements(2) LNG items pre revenue recognition(2) Disposals, impairments and business restructuring(2) Total Items Excluded from Underlying Profit Underlying Profit – total operations Underlying Profit – discontinued operations Underlying Profit – continuing operations 2016 ($m) (589) (195) (222) (537) (954) 365 11 354 2015 ($m) (658) (577) (162) (601) (1,340) 682 79 603 Change (%) (10) (66) 37 (11) (29) (46) (86) (41) Fair value and foreign exchange movements (-$195 million post-tax): — non-cash loss due to the appreciation of the forward oil price following the purchase of oil put options to reduce exposure to low oil prices(3) (-$60 million); — financial instruments impacting Energy Markets including environmental certificates (-$39 million); — foreign exchange movements relating to LNG (-$30 million); and — loss on termination of interest rate swaps following the early repayment of Uranquinty project finance (-$29 million) replaced with lower interest rate facilities; and — non-cash loss due to the depreciation of the Australian dollar (-$20 million). LNG related items pre revenue recognition(4) (-$222 million post-tax): — -$167 million net financing costs(5) interest expense on the average debt balance relating to the funding of Australia Pacific LNG and interest income received on Mandatorily Redeemable Cumulative Preference Shares (MRCPS). The net financing costs would otherwise be capitalised if the development project was held directly by Origin rather than via an equity accounted investment; and — -$55 million pre-production costs not able to be capitalised. Disposals, impairments and business restructuring (-$537 million post-tax): — Impairment ($515 million) relating to: — Origin’s Upstream assets (-$386 million) resulting from Otway Basin (-$166 million), BassGas (-$143 million) and Cooper Basin (-$77 million) due to recent reserves revisions, as reported in Origin’s Annual Reserves Report and revised development plans; — International Development geothermal assets in Chile (-$86 million) and Indonesia (-$20 million); — Deferral of large scale IT projects (-$65 million); partially offset by — The reversal of prior impairments of Surat Basin (+$21 million) as a result of the sale of these assets and New Zealand onshore assets (+$21 million) as a result of the classification of these assets as held for sale. — Business restructuring costs ($81 million) associated with Origin’s cost reduction programs; and — Gains associated with the asset sales programme ($59 million). (1) Refer to Appendix 6 for definitions of fair value and foreign exchange movements, LNG related items pre revenue recognition and disposals, impairments and business restructuring categories. (2) Aggregation of items excluded from Underlying Profit has changed from the prior period. (3) On 22 December, 2015 Origin announced the purchase of put options over 15 million barrels of oil for the 2017 financial year. (4) Train 1 costs (including net financing costs) and disproportionate share of costs related to infrastructure assets, were included in Underlying Profit from 1 March, 2016 following Train 1 revenue recognition. The remaining costs will be recognised in Underlying Profit from the time APLNG recognises revenue from Train 2. (5) A further $21 million after tax ($30 million pre tax) is included in Underlying earnings representing four months of net financing costs related to Train 1 and infrastructure assets. See Appendix 4 for further details. 29 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 APPENDIX 2 – ORIGIN’S KEY FINANCIALS Full year ended 30 June Total operations – income statement External revenue Underlying EBITDA Underlying EBIT Underlying Profit Items excluded from Underlying Profit Statutory (Loss)/Profit Statutory Earnings per share Underlying Earnings per share Total operations – statement of cash flows Cash flows from operating activities Cash flows used in investing activities Cash flows used in financing activities Continuing operations – income statement External revenue Underlying EBITDA Underlying depreciation and amortisation Underlying share of interest, tax, depreciation and amortisation of equity accounted investees Underlying EBIT Underlying net financing costs Underlying Profit before income tax and non-controlling interests Underlying income tax expense Underlying net profit after tax before elimination of Non-controlling interests Non-controlling interests’ share of Underlying Profit Underlying Profit Items excluded from Underlying Profit Underlying earnings per share Continuing operations – statement of cash flows Cash flows from operating activities Cash flows used in investing activities Cash flows used in financing activities Discontinued operations – income statement External revenue Underlying EBITDA Underlying EBIT Underlying Profit Items excluded from Underlying Profit Discontinued operations – statement of cash flows Cash flows from operating activities Cash flows used in investing activities Cash flows used in financing activities Other items Weighted average shares in basic EPS (million shares) Final dividend per share (unfranked) Total employees (numbers)(2) Total Recordable Injury Frequency Rate (TRIFR)(3) 2016 ($m) 12,174 1,696 776 365 (954) (589) (37.3¢) 23.2¢ 1,404 (189) (1,223) 11,923 1,635 (604) (296) 735 (100) 635 (275) 360 (6) 354 (964) 22.4¢ 1,333 (181) (1,160) 251 61 41 11 10 71 (8) (63) 1,578 0¢ 5,811 4.2 2015 ($m) Change (%) 14,147 2,149 1,280 682 (1,340) (658) (52.1¢)(1) 54.0¢(1) 1,833 (3,914) 1,996 11,893 1,662 (618) (62) 982 (78) 904 (291) 613 (10) 603 (1,062) 47.7¢(1) 1,378 (3,802) 2,355 2,254 487 298 79 (278) 455 (112) (359) 1,264 25¢ 6,922 3.8 (14) (21) (39) (46) (29) 11 (28) (57) (23) N/A N/A 0 (2) (2) 377 (25) 28 (30) (5) (41) 40 (41) (9) (53) (3) N/A N/A (89) (87) (86) (86) N/A (84) (93) (82) 25 (100) (16) 11 (1) Prior period adjusted for the bonus element (discount to market price) of the September 2015 rights issue. (2) Excludes employees from Contact Energy. (3) Reported on a rolling 12 month basis. 30 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 APPENDIX 3 – UNDERLYING SEGMENT EBITDA AND EBIT Underlying EBITDA Underlying EBIT Full year ended 30 June Energy Markets Integrated Gas Corporate Total continuing operations Contact Energy Total operations 2016 ($m) 1,330 386 (81) 1,635 61 1,696 2015 ($m) 1,260 498 (96) 1,662 487 2,149 Change (%) 6 (22) (16) (2) (87) (21) APPENDIX 4 – NET FINANCING COSTS Year ended 30 June Statutory Net Financing Cost – continuing operations Total interest charged by other parties (excluding benefit of MOCCS) Benefit of MOCCS(1) Total interest charged by other parties Impact of discounting on long term provisions Capitalised interest Total interest expense MRCPS interest income Other interest income Statutory Net financing costs Average interest rate(2) Items excluded from Underlying Net Financing Costs relating to funding of APLNG Total interest charged by other parties (excluding benefit of MOCCS) Benefit of MOCCS Total interest expense MRCPS interest income Net financing costs relating to funding of APLNG Average interest rate(2) Underlying Net Financing Cost – continuing operations Total interest charged by other parties (excluding costs associated with funding of APLNG) Total interest charged by other parties (costs associated with funding of APLNG) Impact of discounting on long term provisions Capitalised interest Total interest expense MRCPS interest income (in Underlying) Other interest income Underlying Net financing costs Average interest(2) Underlying Net Financing Cost – discontinued operations Underlying Net financing costs Average interest rate(2) 2016 ($m) 1,004 (185) (84) 735 41 776 2016 ($m) (634) – (634) (16) 90 (560) 220 2 (338) 6.5% (400) – (400) 162 (238) 6.9% (146) (88) (16) 90 (160) 58 2 (100) 5.9% (9) 6.9% 2015 ($m) 956 122 (96) 982 298 1,280 2015 ($m) (646) 154 (492) (15) 118 (389) 112 0 (277) 4.9% (465) 154 (311) 112 (199) 4.5% (181) – (15) 118 (78) – 0 (78) 5.1% (91) 6.5% Change (%) 5 (252) (13) (25) (86) (39) Change ($m) 12 (154) (142) (1) (28) (171) 108 2 (61) 1.6% 65 (154) (89) 50 (39) 2.4% 35 (88) (1) (28) (82) 58 2 (22) 0.8% 82 0.4% (1) The Monetisation of Cross Currency Swaps (MOCCS) provided a benefit in financial year 2015 reflecting the bringing forward of the positive fair value as the swaps were reset to the market rates in March 2014. (2) Average interest rate calculated using total interest charged by other parties. 31 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 APPENDIX 5 – ELECTRICITY, NATURAL GAS & CUSTOMER DATA At Origin’s half year result a number of items were re-stated without impacting gross profit, to better reflect the operations of the Energy Markets business. The following tables show restated figures for the 2014 and 2015 financial years in addition to the current year. Natural Gas Osborne gas sales re-classified as internal due to new operational agreement. As a result prior period external sales volumes, revenues and costs have been revised with no impact on gross profit. Year ended 30 June Volumes Sold (PJ) Retail (Consumer & SME) Business Total external volumes Internal Sales (Generation) Revenue ($m) Retail (Consumer & SME) Business Cost of goods sold ($m) Network Costs Energy Procurement Costs Gross Profit ($m) Gross Margin % Period-end customer accounts (’000) Average customer accounts (’000) $ Gross profit per customer 2016 228.2 42.1 124.9 167.1 61.1 1,946 995 951 (1,425) (696) (729) 522 26.8% 1,089 1,080 483 $/GJ 11.7 23.6 7.6 (8.5) (4.2) (4.4) 3.1 2015 207.4 41.7 93 134.7 72.7 1,679 978 701 (1,158) (640) (518) 521 31.0% 1,068 1,051 496 $/GJ 12.5 23.5 7.5 (8.6) (4.7) (3.8) 3.9 2014 162.8 37.1 59.2 96.3 66.5 1,242 803 440 (968) (582) (386) 275 22.1% 1,022 999 275 $/GJ 12.9 21.6 7.4 (10.0) (6.0) (4.0) 2.9 Electricity Prior period restated to better reflect the recognition of volumes, revenues and costs associated with feed-in volumes from solar customers with no impact on gross profit. Year ended 30 June Volumes Sold (TWh) Retail (Consumer & SME) Business Revenue ($m) Retail (Consumer & SME) Business Externally Contracted Generation Cost of goods sold ($m) Network Costs Wholesale Energy Costs Generation Operating costs Energy Procurement Costs Gross Profit ($m) Gross Margin % Period-end customer accounts (’000) Average customer accounts (’000) $ Gross profit per customer $/MWh 191.7 259.8 125.4 (157.9) (96.5) (55.0) (6.4) (61.4) 33.8 2016 38.1 18.4 19.6 7,300 4,790 2,463 47 (6,012) (3,674) (2,093) (244) (2,337) 1,289 17.7% 2,741 2,758 467 $/MWh 202.9 278.2 121.6 (168.3) (107.9) (53.0) (7.5) (60.5) 34.6 2015 37.3 18.9 18.4 7,560 5,245 2,238 77 (6,272) (4,019) (1,975) (278) (2,253) 1,289 17.0% 2,768 2,804 460 $/MWh 194.8 273.3 117.4 (160.6) (100.4) (53.1) (7.2) (60.2) 34.2 2014 39.1 18.8 20.3 7,617 5,137 2,384 96 (6,280) (3,926) (2,074) (280) (2,354) 1,337 17.6% 2,850 2,879 464 32 OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 Retail Electricity Volumes (TWh) Year ended 30 June NSW Victoria Queensland South Australia Total Retail volumes 2016 8.9 3.4 5.2 1.0 18.4 2015 9.2 3.4 5.3 0.9 18.8 2014 9.2 3.4 5.3 0.9 18.8 Customer Accounts Revised customer accounts methodology to exclude customers in the process of transferring to or away from Origin in order to reflect active customers. Customer Accounts (’000) NSW(1) Victoria Queensland South Australia(2) Total 30 June 2016 30 June 2015 30 June 2014 Electricity 1,240 566 761 174 2,741 Natural Gas 252 478 160 199 1,089 Electricity 1,268 576 758 166 2,768 Natural Gas 239 475 154 201 1,068 Electricity 1,320 598 767 165 2,850 Natural Gas 208 467 146 200 1,022 (1) Australian Capital Territory (ACT) customer accounts are included in New South Wales. (2) Northern Territory customers are included in South Australia. 33 OPERATING AND FINANCIAL REVIEWORIGIN ENERGY ANNUAL REPORT 2016OPERATING AND FINANCIAL REVIEW FOR THE YEAR ENDED 30 JUNE 2016 EXECUTIVE SUMMARY Each year the Non-executive Directors (NEDs) undertake a review of Origin’s remuneration practices to ensure the current approach remains appropriate. In so doing the NEDs: — Consider feedback from shareholders; — Examine emerging market practice; and — Test remuneration outcomes against company performance. Last year the Board engaged remuneration advisor Pay Governance to undertake a comprehensive review of executive remuneration and structure. The review confirmed that, while the basic structure of the remuneration system was appropriate, changes could be made that would strengthen alignment between executive and shareholder interests, particularly in relation to the use of capital and cash. Those changes were implemented during FY2016, following communication with shareholders through last year’s Remuneration Report. More specifically, the following changes have been made. — Overall – More specific peer groups were adopted for the overall At Target and Maximum remuneration benchmarks for executive remuneration, namely the 10 ASX-listed companies that were larger and the 10 companies that were smaller than Origin plus AGL, Woodside, Santos and Oil Search (if they are not already in that group). — Short Term Incentive (STI) – Operating Cash Flow After Tax (OCAT Ratio) was replaced with a Net Cash from Operating and Investing Activities (NCOIA) performance metric in the STI plan; and – Vesting periods for Deferred STI for senior executives were lengthened from an average of two years to an average of three years. Vesting for grants of Deferred Share Rights (DSRs) relating to FY2016 will occur over two, three and four years to better align outcomes with the Company’s investment cycle, rather than one, two and three years as was previously the case. — Long Term Incentive (LTI) – A second hurdle was introduced based on Return on Average Capital Employed (ROCE). This measure applies to the Performance Share Rights (PSRs) component of LTI, while the relative Total Shareholder Return (TSR) hurdle will apply to the Options component; – The allocation methodology for PSRs has been changed and is now based on face value (previously fair value discounted for performance hurdles was used); – The ratio of Options to PSRs in the LTI mix was changed from 75:25 to 50:50; – A more specific comparator group was adopted for the TSR hurdle than the S&P/ASX 100 companies that were previously used. The revised group is defined at the commencement of the performance period as those 10 ASX-listed companies that are larger than and 10 that are smaller than Origin plus AGL, Woodside, Santos and Oil Search (if they are not already in that group). – The average vesting period for senior executives has been lengthened such that the Options tranche is now subject to a five-year vesting period, while retaining the vesting period for PSRs at four years. These changes have been made to: — Align overall remuneration outcomes to companies of comparable size, given the changes in Origin’s market capitalisation and its near term performance. The Board has exercised discretion downwards for STI and LTI to achieve these outcomes; — Strengthen the linkage to capital management; — Strengthen the linkage between the STI plan hurdles and short term profitability; — Better align the length of vesting periods for both Deferred STI and LTI arrangements to Origin’s investment cycle; and — Set the mix of Options and PSRs to an appropriate level and review the allocation process for PSRs in response to market feedback. Directors consider that the changes made will further strengthen the alignment with the interests of shareholders. Directors recommend that shareholders read the full Remuneration Report to understand the nature of that alignment. INTRODUCTION 1 Following enhancements to Origin’s remuneration approach that were implemented during FY2016, Directors consider that: — The remuneration system is focused on delivering shareholder value over the long term (Section 2); — Remuneration outcomes for executives reflect returns to shareholders (Section 3); and — Appropriate governance and remuneration arrangements for NEDs provide a strong focus on shareholders’ interests (Section 4). This report is focused on executives who are Key Management Personnel (KMP). It also provides a broader perspective on other employees of the Group(1) whose remuneration includes awards under the LTI arrangements (which at June 2016 included another approximately 80 executives). 2 ORIGIN’S EXISTING REMUNERATION SYSTEM IS FOCUSED ON DELIVERING SHAREHOLDER VALUE OVER THE LONG TERM The overriding objective of Origin’s remuneration system is to align the interests of staff and shareholders, while attracting and retaining valuable staff. Origin strives to do this by: — Aligning the interests of executives and shareholders by providing rewards that support shareholder value creation; and — Attracting and retaining high calibre executives from diverse backgrounds through a fair and competitive remuneration structure that appropriately rewards and incentivises superior performance over the longer term. Origin’s senior management remuneration, including for KMP, consists of three main elements, namely Fixed Remuneration, STI and LTI. Origin’s remuneration policy is designed so that each of these elements supports the overall objectives. In addition, the policy works to reward superior executive performance by paying in the top quartile of the market when superior outcomes are delivered for shareholders. For KMP roles, Origin’s position in the market is benchmarked against industry peers and comparably sized S&P/ASX companies. Directors have exercised discretion to ensure that overall remuneration is held within the overall limits of those benchmarks, recognising the change in the company’s overall market capitalisation. As the Group employs staff across a broad spectrum of roles and disciplines, the Hay Group’s All Organisations’ benchmark, representing approximately 430 organisations, is used as the major reference for non-KMP roles(2). The way Fixed Remuneration, STI and LTI operate together is described in greater detail in Sections 2.1 to 2.6. 2.1 Fixed Remuneration is benchmarked to the midpoint of the external market to attract quality people who can deliver value for shareholders Fixed Remuneration takes into account the size and complexity of a recipient’s role and the skills required to succeed in such a position. It includes cash salary, employer contributions to superannuation and salary sacrifice benefits. It is regularly reviewed against the median of comparably sized companies, while recognising the difficulties of reducing Fixed Remuneration when a market discontinuity occurs such as has happened in the past 12 months, largely in response to the fall in oil prices. (1) Origin Energy Limited and its controlled entities. (2) For job families in skill shortage areas (such as geosciences and some professional specialists) the relevant market has been determined by reference to smaller peer groups such as those sourced from commissioned surveys and industry forums, including National Rewards Group. 34 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 2.2 STI awards are designed to reward superior achievement for shareholders in relation to key operational measures STI plays a key role in aligning superior operational outcomes for shareholders with remuneration outcomes for management. STI opportunity levels vary according to the Business Unit served by the executive and according to their role. The amount at risk increases with job size and the capacity to influence the overall performance of the business (Tables 1 and 2). The amount of STI awarded reflects overall corporate performance as well as Business Unit financial and operational outcomes over the course of the year. Table 1: STI opportunity as a percentage of Fixed Remuneration, FY2016 Position Managing Director Other Executive KMP (average) Other Executive Management Team (EMT) (average) Other Executives(1) (average) Minimum 0% 0% 0% 0% Target 90% 77% 60% 44% Maximum 150% 129% 100% 74% To achieve the maximum award, the recipient’s relevant operational targets must be significantly exceeded. Delivering targeted operational outcomes results in an award of 60 per cent of maximum STI. If targeted outcomes are not achieved, the award of STI is reduced proportionally below 60 per cent (to zero where threshold outcomes are not achieved). The Board retains discretion to adjust outcomes, upwards or downwards, where it considers it appropriate to do so. Such discretion has been regularly used by the Board. The Managing Director’s STI is determined by reference to the Group’s financial and safety performance for the year; the Company’s overall Employee Engagement Score; and a number of personal measures that reflect strategic and people priorities, including delivering value for shareholders and succession planning. STI for other executives is determined by reference to Group performance as well as Business Unit and personal operational measures. Examples of Business Unit measures include safety outcomes; engagement scores; project delivery milestones; production metrics (especially in the Integrated Gas Business Unit) or customer satisfaction and profitability (especially in the Energy Markets’ Business Unit). All STI recipients have exposure to the Group’s financial performance. For FY2016 two Group financial metrics applied with equal weighting: — Net cash from operating and investing activities (‘NCOIA’). This measure was adopted for the first time this year; and — Underlying earnings per share (EPS). These two measures have been adopted in response to shareholder feedback and reflect the importance of earnings per share and cash generation after investment as key drivers of returns to shareholders. The degree of exposure to Group and Division financial metrics increases with increasing job size, as shown in Table 2. Table 2: STI performance measures and weights by role, FY2016 Business KPIs Position Managing Director Other Executive KMP (Operational) Other Executive EMT (Corporate) Other Executives (Operational) Other Executives (Corporate) NCOIA; Underlying EPS 60% 30% 60% 12.5% 40% Division Financial measures 30% 25% Group Safety 15% 10% 10% Group Engagement 5% 5% 5% Division Safety 10% 12.5% Sub Total 80% 75% 75% 50% 50% Personal measures 20% 25% 25% 50% 50% Total weights 100% 100% 100% 100% 100% Group measures and outcomes are approved by the Board. Business Unit goals are set by the Managing Director and reviewed by the Remuneration Committee and the Board. Performance of direct reports to the Managing Director is assessed by the Managing Director, reviewed by the Remuneration Committee and approved by the Board. The Managing Director’s performance is assessed and his STI approved by the Board. Outcomes for KMP and other EMT are subject to the exercise of discretion by the Board. In assessing whether to exercise discretion, the Board pays particular attention to items in the accounts below Underlying Profit, but particularly impairments. One-third of the potential STI is awarded in the form of DSRs (see Table 3) and the remaining two-thirds in cash(2). Table 3 provides more information. ‘Other Executives’ covers multiple role levels and therefore a range of opportunity levels. (1) (2) Except where an award is to be made to an executive who is unable to serve a tenure requirement by virtue of death, disability, redundancy, genuine retirement, or other exceptional circumstances as approved by the Board. In those limited circumstances no amount of the STI is deferred and the STI will be awarded wholly in cash. 35 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Table 3: Deferred STI Profile Parameter Instrument Number of instruments, minimum and maximum value Service and Personal Performance Conditions Vesting and exercise Adjustments Anti Hedging policy FY2016 details Deferred STI is awarded in the form of DSRs. A DSR is the right to a fully paid share in the Company at no cost. Unvested DSRs carry no entitlement to dividends and no voting rights. As no dividends are paid on DSRs, their maximum value is the Face Value(1) less the discounted value of any dividends foregone(2). The number of DSRs to be awarded is calculated as the dollar allocation value (one-third of the total STI award) divided by the maximum value. The minimum value of the DSRs is nil, which will be the case if the ongoing service and personal performance conditions are not met. For the Managing Director, awards recommended by the Board are submitted for approval by shareholders at the Annual General Meeting held immediately after the year to which they relate. DSRs vest over two, three and four years, subject to continuing service and satisfactory personal performance(3) obligations(4,5). The DSRs awarded in respect of the financial year are divided into three tranches, equal in number, with corresponding deferral (vesting) periods. In the case of ‘Other Executives’, where smaller DSR parcels are allocated, all DSRs have a two year service and personal performance obligation (and corresponding two year deferral.) DSRs vest on meeting the service and personal performance conditions. Exercise of DSRs is automatic on vesting and the exercise price is nil. DSRs that do not vest on the service condition date lapse immediately. DSRs are subject to clawback (Section 2.5). On a capital reorganisation, the number of unvested DSRs to which each participant is entitled may be adjusted in a manner determined by the Board to minimise or eliminate any material advantage or disadvantage to the participant(6). DSRs are forfeited if the service and performance conditions are not met, except in exceptional circumstances(7). In those circumstances, the DSRs, which represent a portion of ‘earned’ STI, will vest at cessation, unless the Board determines otherwise. If a Change of Control(8) occurs prior to the vesting of DSRs the Board has discretion to bring forward vesting dates. The Company’s policy requires that employees cannot trade instruments or other financial products which limit the economic risk of any securities held under any equity-based incentive schemes so long as those holdings are unvested. Non-compliance may result in summary dismissal. 2.3 LTI awards are designed to align executive remuneration with financial outcomes for shareholders over the longer term LTI arrangements provide executives with a deferred equity interest in Origin, the value of which depends on the extent to which the performance hurdle is met and exceeded; and by the extent of share price appreciation in the case of PSRs, or in the case of Options, the amount by which the share price has appreciated above the exercise price. Fundamentally, this means that if shareholders do well, the Executive does well. Conversely, if shareholders do not do well, the Executive does not do well. This creates alignment between shareholders and the Executive. A grant of LTI is considered for Executive KMP and approximately 80 other executives, who, in the view of the Directors, are involved in long-term strategic decisions that are company transformational with significant strategic implications. The Target Value of an Executive’s LTI allocation is determined by the position held and the executive’s influence on the long-term performance of the Company, as summarised in Table 4. Table 4: LTI allocation as a percentage of Fixed Remuneration, FY2016 Position Managing Director Other Executive KMP (average) Other EMT (average) Other Executives (average) % of Fixed Remuneration Minimum 0% 0% 0% 0% Target Value 120% 76% 50% 35% As a general principle, Origin’s LTI scheme is designed so that high performing executives, over time, come close to the Target Value in their LTI allocation. Nonetheless, LTI allocations are made having regard to: — Benchmark levels of unvested equity relative to market to meet incentive and retention objectives and to build potential equity stakes that will appropriately align executive and shareholder interests; — The performance and potential of each executive; and — The overall impact of LTI on overall remuneration, having regard to benchmark comparables. (1) Face value is the present day market value of an Origin share. For awards subject to shareholder approval, the Face value is referenced to the Dividend Reinvestment Plan (DRP) 10-day pricing period if the DRP is in operation, otherwise it is a 10-day Volume Weighted Average Price to a date in mid-September. For general awards, it is measured as a 30-day Volume Weighted Average Price over the 15 trading days prior to and including 30 June of the financial year to which the STI award relates and the 15 following trading days. If no dividends are recommended to be paid to shareholders during the performance period, no discount is applied and the maximum value is Face value. (2) (3) Satisfactory personal performance is assessed under Origin’s standard performance and development cycle. (4) For FY2015 and prior, the tranches were one, two and three years respectively. (5) Deferred STI awards are awarded in respect of the current year’s performance to 30 June, but granted in the following financial year. The accounting expense for these grants is recognised from the commencement (1 July) of the current financial year, i.e. the beginning of the STI earning performance period. In the following financial year the accumulated expense recognised is ‘trued-up’ according to the number of instruments expected to vest. This valuation is then used to recognise the expense over the remaining expensing periods. (6) If new awards are granted, they will, unless the Board determines otherwise, be subject to the same terms and conditions as the original awards. (7) The circumstances are defined as death, disability, redundancy, genuine retirement, or other exceptional circumstance approved by the Board. (8) On a person/entity acquiring 20 per cent 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 per cent or more of a relevant interest in the issued capital of the Company. 36 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 The actual allocation to be made to an Executive in any year may vary below the Target Value (including to zero) depending on the level of unvested equity held relative to benchmark, as well as the performance and potential of the Executive. In exceptional, but limited circumstances, the Board may determine that an LTI allocation that is higher than the Target Value is warranted. In all cases, the LTI allocation is subject to Board discretion, and in the case of the Managing Director, to shareholder approval. Table 5 summarises the future potential value of LTI allocations granted as equity in the form of Options and PSRs, subject to varying outcomes. Table 5: Potential future value of LTI granted PSRs Options Minimum Nil (This will be the value if the performance condition is not met.) Expected Indeterminate. The value would be somewhere between the minimum and maximum but it cannot be quantified. Nil (This will be the value if the performance condition is not met OR if it is met, but the share price does not exceed the exercise price.) The expected value is determined through a Black Scholes model with a Monte Carlo simulation methodology. Maximum The future value of a PSR cannot be calculated because it will reflect the share price at the time. The maximum present-day value, assuming full vesting, is the current Face Value of a share less the discounted value of dividends foregone (if any) over the vesting period, multiplied by the number of PSRs granted. It is not possible to determine a maximum value for an Option. The exercise price payable for an Option is set as the current market value of an Origin share. Therefore, the present day value of an Option (Face Value less the exercise price to pay) is zero. The attribution of any value to a vested Option requires an assumption about the amount by which the future share price at vesting will exceed the exercise price, less the value of any dividends foregone (if any) over the five year vesting period. The performance conditions (hurdles) are described in Table 6. As it is not possible to determine a maximum potential value (assuming full vesting) for the Options component, there is no “maximum value” that can be specified for the overall future potential LTI. The number of PSRs that are awarded is calculated by taking half of the dollar value of the LTI award (determined with reference to the Target Value in Table 4) and dividing it by the Face Value of a share. The number of Options that are awarded is calculated by taking the remaining half of the dollar value of the LTI award and dividing it by the expected value of an Option from Table 5. The performance period for Options is five years and for PSRs it is four years. This represents a lengthening of the vesting period from its previously being four years for both Options and PSRs. Table 6 summarises the key features of the LTI arrangements. Table 6: LTI Profile Parameter Instruments Number of instruments Exercise price FY2016 details LTI is awarded in the form of: (a) PSRs, which are the right to a fully paid share in the Company at no cost; and (b) Options, which are the right to a fully paid share in the Company upon payment of an exercise price (see below). For Executive KMP, Other Executive Management Team and more senior Other Executives, the LTI award is split half as PSRs and half as Options. The grant for the remaining Other Executives is wholly in PSRs. PSRs and Options carry no voting rights or entitlements to dividends. For the Managing Director, awards recommended by the Board are submitted for approval by shareholders at the AGM held immediately after the year to which they relate. The number of PSRs allocated for each Executive is calculated by reference to the Face Value. The number of Options allocated for each Executive is calculated by reference to their expected value (Table 5). As identified in Table 5, the Face Value of an Option is zero and, therefore, cannot be used for allocation purposes. As the performance condition for Options (Relative TSR) is a market-based hurdle, the expected value is determined using the same methodology as is used to determine the accounting fair value used for expensing purposes. The expected value for Options takes into account the fact that dividends are not paid on Options; some or all of the Options might not vest; an exercise price must be paid on vesting; and even if vesting occurs, the share price at the vesting date might or might not be above the exercise price of the Option. The exercise price for PSRs is nil. The exercise price for Options that are subject to shareholder approval at the Annual General Meeting (namely, those for the Managing Director) is referenced to the Dividend Reinvestment Plan (DRP) 10 day pricing period if the DRP is in operation, otherwise it is a 10-day Volume Weighted Average Price to the date in September that the DRP would have otherwise applied. For general awards, it is measured as a 30-day Volume Weighted Average Price over the 15 trading days prior to and including 30 June of the financial year to which the LTI award relates and the following 15 trading days. 37 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Table 6: LTI Profile (continued) Parameter Performance Conditions (Hurdles) Performance Period Targets, Vesting and Exercise Adjustments and early vesting Anti Hedging policy FY2016 details Vesting of PSRs and Options are subject to performance conditions. For PSRs, the hurdle is a ROCE measure, more specifically a statutory Origin EBIT divided by a Funds Employed measure(1). For Options, the hurdle is TSR relative to a Reference Group of companies. The Reference Group is determined at the beginning of the performance period and comprises the 10 ASX-listed companies that are larger than and the 10 that are smaller than Origin plus AGL, Woodside, Santos and Oil Search (if they are not already in that group)(2). The TSRs are measured over the five year performance period. Relative TSR is a transparent and robust forward-looking measure which represents an assessment of the Company’s ability to invest and achieve a return on capital relative to other companies. Options have no value unless the share price rises above the exercise price, therefore, the hurdle combines both absolute and relative share price performance conditions. There is no retesting. Any unvested Options and/or PSRs after the test at the end of the relevant performance period lapse immediately. For PSRs, the ROCE performance condition is measured over each of four financial years (FY2017-FY2020 for the 2016 grants), beginning on 1 July prior to grant and ending on 30 June of the fourth year. ROCE performance for the period is determined by the simple arithmetic average of the four annual returns. Targets are set with respect to both ROCE for the period and the achievement relative to the Company’s pre-tax Weighted Average Cost of Capital (WACC) as described below. For Options, the Relative TSR performance condition is measured over a period of five financial years, beginning on 1 July of the grant year and ending on 30 June of the fifth year. The TSR for Origin and for each company in the Reference Group is measured on the basis of a three month weighted average prior to the first and last dates of the performance period. For 2016 PSRs, the ROCE target is defined as the simple average of the four year Board approved targets (in advance) for each of FY2017, FY2018, FY2019 and FY2020. Subject to the ROCE target being met, half of the PSRs will vest if pre-tax WACC is achieved in FY2019 and/or FY2020, and all of the PSRs will vest if the pre-tax WACC is exceeded by at least two percentage points in FY2019 and/or FY2020, with proportional vesting on a straight-line basis between those two outcomes. The exercise price for PSRs is nil. PSRs are exercised automatically on vest, and lapse immediately if they fail to vest on the test date. Vesting of Options occurs if Origin’s TSR exceeds the 50th percentile of the Reference Group of companies over the performance period. Half of the Options vest if Origin’s TSR exceeds the 50th percentile, and the full Options award vests at the 75th percentile, with proportionate vesting on a straight-line basis for outcomes between the 50th and 75th percentiles. Options that vest must be exercised together with payment of the exercise price (as detailed above) upon which shares are then allotted. Unexercised Options lapse up to a maximum of 10 years after grant. PSRs and Options are subject to Clawback (Section 2.5). Unvested Options and PSRs lapse on cessation of employment other than in circumstances of death, disability, redundancy, genuine retirement, or other exceptional circumstance as approved by the Board(3). In those circumstances, the unvested Options or PSRs may be held “on foot” subject to the specified performance hurdles and other Plan conditions being met, or dealt with in an appropriate manner determined by the Board(4). If a Change of Control(5) occurs prior to the vesting of Options and/or PSRs, the Board has discretion to bring forward testing against the Performance Conditions as at the date of the Change of Control, and vesting will occur to the extent that the relevant Performance Conditions have been met. On a capital reorganisation, the number of unvested Options and/or PSRs to which each participant is entitled, or the exercise price (if any) or both, may be adjusted in a manner determined by the Board to minimise or eliminate any material advantage or disadvantage to the participant(6). The Company’s policy requires that employees cannot trade instruments or other financial products which limit the economic risk of any securities held under any equity-based incentive schemes so long as those holdings are subject to performance hurdles or are otherwise unvested. Non-compliance may result in summary dismissal. (1) The numerator in the calculation will be Origin’s EBIT and Origin’s share of APLNG EBIT plus the Dilution Adjustment. Origin’s EBIT and Origin’s share of APLNG EBIT is Statutory Origin EBIT adjusted to remove the following items: a. Origin’s share of APLNG interest and tax (which is included in Origin’s reported EBIT); b. Items excluded from underlying earnings in the (decrease)/increase in fair value of financial instruments and LNG items category (with the LNG items category expected to cease once Train 2 commences operations). It should be noted that gains and losses on disposals and impairments will only be excluded subject to Board discretion. The denominator of Average Capital Employed equals Shareholders Equity plus Origin Debt plus Origin’s Share of APLNG Project Finance plus the non-cash fair value uplift in Origin’s investment in APLNG plus net derivative liabilities. The adjustment to Average Capital Employed reflects the impact of the accounting uplift in the asset base of APLNG of $1.9 billion which was recorded on the creation of the APLNG Joint Venture. This balance will be depreciated in APLNG’s income statement on an ongoing basis and, therefore, a dilution adjustment is made to remove this depreciation. From Origin’s perspective, cash was received for this amount up-front at the time of the creation of the Joint Venture. The non-cash fair value adjustments are disclosed and explained in Note E1.2 in the financial statements. Average Capital Employed is a simple average of opening and closing capital employed in any one year. (2) For 2016 grants, the TSR Reference Group comprises the following 22 companies which were the relevant companies on 30 June 2016: AGL Energy Ltd, APA Group, ASX Ltd, Aristocrat Leisure Ltd, Aurizon Holdings Limited, Caltex Australia Ltd, CIMIC Group Ltd, Crown Resorts Ltd, Dexus Property Group, Goodman Group, GPT Group, Fortescue Metals Group Ltd, Insurance Australia Group Ltd, James Hardie Industries PLC, Oil Search Ltd, ResMed Inc, Santos Limited, Sonic Healthcare Ltd, South32 Ltd, Stockland Corp Ltd, TPG Telecom Ltd, and Woodside Petroleum Ltd. Asciano was excluded because it will be de-listed and, as a result, South32 was included. Companies that subsequently cease to be listed (for example through merger, acquisition or de-listing) are not replaced, unless the Board determines otherwise. In addition, vested but unexercised Options that are not exercised within 60 days of cessation of employment lapse immediately. In rare circumstances, the Board might use its discretion to cash settle PSRs and/or Options that stay on foot and vest where an executive leaves due to death, disability, redundancy or genuine retirement. (3) (4) (5) On a person/entity acquiring 20 per cent 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 per cent or more of a relevant interest in the issued capital of the Company. (6) If new awards are granted, they will, unless the Board determines otherwise, be subject to the same terms and conditions as the original awards. 38 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 2.4 Executive shareholding It has been agreed with the Managing Director that he will maintain a substantial shareholding in the Company. Over the last six years he has held in excess of a million shares. At 30 June 2016, the value of his shareholding was the equivalent of approximately 3.6 times his Fixed Remuneration. 2.5 Malus and Clawback The Short and Long Term Incentive arrangements include malus and clawback provisions to enable the Company to reduce or clawback awards where it is required. Where the Board is not satisfied that an award determination is appropriate and warranted, it has the discretion to apply malus to vary the award downward, including to zero. Clawback provisions provide the Board with the ability to cancel unvested equity awards or to demand the return of shares or the realised cash value of those shares where the Board determines that the benefit obtained was inappropriate as a result of fraud, dishonesty or breach of employment obligations by either the recipient or any employee of the Group. There have been no circumstances during the current or prior reporting periods requiring the application of clawback provisions. 2.6 Senior executives receive a greater percentage of their total remuneration in the form of STI and LTI Fixed Remuneration, STI (both cash and deferred) and LTI work together to generate alignment with the interests of shareholders. The relative mix of these components for different roles is summarised in Table 7. Table 7: Remuneration Mix by Role (At Target) Fixed STI Deferred STI LTI Managing Director 32% 19% 10% 39% Other Executive KMP 40% 20% 10% 30% Other Executive Management Team Other Executives 48% 56% 19% 9% 24% 17% 8% 19% 0% 25% 50% 75% 100% In the case of the Managing Director, at the At Target levels in Tables 1 and 4, almost half of his remuneration is deferred, and more than two-thirds is at-risk(1). As job size diminishes, the proportions deferred and at-risk fall (and the proportion of Fixed Remuneration increases). 2.7 To assist with preserving shareholder value, retention plans are selectively used to retain key staff The Board Remuneration Committee regularly assesses the risk of the Group losing key staff in areas of intense market activity. Typically, they are critical technical operational staff or senior executives who manage core activities or have skills that are being actively solicited in the market. In such circumstances, the Board Remuneration Committee may consider putting in place deferred payment arrangements to reduce the risk of losing such staff. More specifically, such staff may be offered DSRs or deferred cash payments if they remain in ongoing employment at a nominated date and achieve personal performance targets. The DSRs are the same equity vehicle as described in Section 2.2 for Deferred STI, but the purpose is strictly retention and the deferral period (up to four years) may vary according to the specific circumstances. For accounting purposes expensing for retention DSRs differs from DSRs awarded under Deferred STI arrangements(2). At 30 June 2016, there were 106,621 retention DSRs on issue for 9 recipients (154,408 at 30 June 2015, 19 recipients). No deferred cash or retention DSRs were granted to KMP during the current or prior period. 2.8 The Employee Share Plan focuses all staff on safety Operational excellence and safety performance are tightly linked. For this reason, the Board has determined that staff should have an incentive to focus on safety. The Board has the ability to make an annual award of up to $1,000 worth of shares to all permanent employees in Australia and New Zealand (other than Executive Directors) with more than one year of service. Such an award is valued by staff, and for this reason the Board has determined that its allocation should be made subject to company-wide targets relating to safety being met during the year. Shares awarded under the Employee Share Plan must be held for at least three years following the award or until cessation of employment, whichever occurs first. For FY2016, a target was set for 85 per cent of actions to be closed out within 14 days in the Company’s Health Safety and Environment Management System by the relevant manager or safety adviser. This target was exceeded (87.3 per cent). As a result, the Company will award up to $1,000 worth of shares to approximately 4,800 eligible employees. The Company will acquire the requisite shares on-market for transfer to employees during late August 2016, subject to compliance with applicable regulations. (1) At maximum outcomes, 46 per cent of his remuneration is deferred and 73 per cent is at risk. (2) The expensing for DSRs awarded under the Retention Plan is recognised from the date of grant because this is the commencement of the service period. This differs from expensing of DSRs under Deferred STI arrangements (Section 2.2) where the service period commences at the beginning of the STI performance year. 39 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 2.9 Shareholder interests are served by focusing on gender pay equity which aims to make the most of the talents of all staff Origin’s policy is to deliver equal pay for equal work(1), with a view to attracting and retaining quality staff regardless of gender. Research has shown that organisations that make the most of the talents of women are superior performers over time. Each year, a central review of proposed pay arrangements for the coming 12 months is conducted for all divisions of the Company at all job grade levels. If the proposed pay arrangements diverge by plus or minus 1 per cent between males and females at a Business Unit or Company level, managers are required to review and revise recommendations to bring any variation within 1 per cent. A more detailed description of gender equity is provided in the Company’s Corporate Governance Statement. While equal work is recognised with equal pay, females are over represented in lower-graded jobs and under-represented in higher-graded jobs. The Corporate Governance Statement describes the Company’s initiatives and publicly stated goals that aim to improve the Company’s gender distribution profile and increase the proportion of women in senior roles. 3 REMUNERATION OUTCOMES FOR EXECUTIVES REFLECT RETURNS TO SHAREHOLDERS Aligning the interests of executives and shareholders is integral to Origin’s remuneration policy. This section of the Remuneration Report outlines the extent to which that has been achieved. 3.1 Origin’s recent financial outcomes have been challenging and disappointing for shareholders FY2016 was a challenging year financially for Origin and its shareholders. More specifically, the collapse in the global oil price from over US$100 per barrel in the prior financial year to $26 per barrel in January 2016, before recovering to US$48 per barrel on 30 June 2016 has had a material impact on Origin and its shareholders. As a result, Origin entered the 2016 Financial Year with an unsustainably high level of debt. Market expectations of returns from Origin’s investment in the Australian Pacific LNG project (APLNG) materially reduced, translating into a fall in the Company’s share price of 45 per cent (adjusted for the 2015 rights issue) in FY2016. Table 8 shows Origin’s TSR relative to the S&P/ASX 100 index, noting its recent underperformance relative to prior periods of outperformance. Table 9 graphs the fall in Origin’s share price relative to declining oil prices. Table 8: 10 year TSR versus S&P/ASX 100 (indexed to 100 from 30 June 2007 to 30 June 2016) 300 200 100 0 30 Jun 2007 Origin Total Shareholder Return Out-performance relative to index S&P/ASX 100 Index Total Return Under-performance relative to index 30 Jun 2008 30 Jun 2009 30 Jun 2010 30 Jun 2011 30 Jun 2012 30 Jun 2013 30 Jun 2014 30 Jun 2015 30 Jun 2016 Table 9: 10 year Origin share price (historic prices re-stated for Rights issues) versus Brent Oil crude price $16 $14 $12 $10 $8 $6 $4 $2 30 Jun 2007 $150 $125 $100 $75 $50 $25 $0 Origin share price AUD Brent oil price USD 30 Jun 2008 30 Jun 2009 30 Jun 2010 30 Jun 2011 30 Jun 2012 30 Jun 2013 30 Jun 2014 30 Jun 2015 30 Jun 2016 (1) Equal work is defined by reference to Hay Group’s standard job grades. 40 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Origin has responded to this challenge by focusing on debt reduction through asset sales (including selling the Company’s interest in Contact Energy); a $2.5 billion pro-rata capital raising; and ongoing reductions in capital expenditure and operating costs. These circumstances and Origin’s response to them have driven results for the 2016 financial year. As can be seen in Table 10, the Company reported a statutory loss of $589 million and an Underlying Profit of $365 million. Non-cash post-tax impairments were $515 million of the $954 million Excluded from Underlying Profit. These impairments related to the discontinuation of exiting activities ($171 million) and the write down of reserves in certain producing assets ($344 million). The balance comprised fair value and foreign exchange movements ($195 million) as well as APLNG related items ($222 million). Table 10: Ten Year Performance History Earnings And Cash Flow Revenue $m Revenue $m (without Contact) Statutory Profit $m Statutory EPS – basic(1) cents per share Underlying Profit $m Underlying Profit $m (without Contact) Underlying EPS – basic(1) cents per share Underlying EPS – basic(1) cents per share (without Contact) Net cash from/(used in) operating and investing activities (NCOIA) Total Shareholder Return (TSR) Share Price 30 June ($)(1) Dividends (cents)(2) TSR Index (Table 8) 10 Year TSR %(3) Annual TSR % 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 6,436 4,696 457 46.5 370 8,275 5,927 517 50.2 443 8,042 6,245 6,941 673.0 530 8,534 6,817 612 59.3 585 10,344 8,636 186 12,935 10,833 980 14,747 12,728 378 14,518 12,363 530 14,147 11,893 (658) 12,174 11,923 (589) 17.2 673 79.3 893 30.3 760 42.1 713 (52.1) 682 (37.3) 365 270 337 463 523 612 820 674 604 603 354 37.7 43.1 51.4 56.7 62.2 72.3 60.8 56.7 54.0 23.2 27.5 32.8 44.9 50.7 56.5 66.4 53.9 48.0 47.7 22.4 (859) 38 5,418 (2,247) (3,357) (804) 127 (1,087) (2,081) 1,215 8.32 21.0 100.0 13.49 50.0 166.2 12.44 50.0 157.4 12.70 50.0 165.7 13.81 50.0 186.1 10.67 50.0 149.0 11.00 50.0 160.1 12.79 50.0 193.1 10.47 50.0 164.1 38.4 66.2 (5.3) 5.3 12.2 (19.9) 7.4 20.6 (15.0) 5.75 10.0 95.2 31.8 (42.0) Underlying EBITDA from continuing operations decreased $27 million, reflecting a strong contribution from Energy Markets and maiden contribution from the sale of LNG by APLNG, offset by the impact of lower oil prices. Underlying Profit from continuing operations decreased $249 million primarily due to Origin’s having to recognising an increased share of APLNG’s Interest, Tax, Depreciation and Amortisation (ITDA) ($231 million). This occurred because the sale of natural gas and LNG revenue in a low oil price environment was insufficient to offset the increase in ITDA. The higher ITDA also includes, because of the accounting standards, a disproportionate share of costs associated with shared infrastructure assets related to Train 1 of LNG export project coming on stream. Movements in Underlying and Statutory earnings per share reflect lower earnings and the effect of a higher weighted average number of shares following the issue of new shares under the Entitlement Offer, completed in October 2015. A strong operational performance from Energy Markets resulted in an increased contribution of $70 million to $1,330 million. Gross profit contributions from the Natural Gas and Electricity businesses were preserved in a market that has changed significantly in the past year. At the same time costs were reduced. Energy Market’s net cash from operating and investing activities increased by $522 million to $1,262 million. A major milestone in the development of Origin was achieved with the commencement of LNG production by APLNG in January 2016. Production has ramped up quickly to be above nameplate capacity with to date APLNG shipping 36 cargoes, primarily to its two major customers, Sinopec and Kansai. The maiden contribution from the commencement of LNG production by APLNG has in part offset the impact of lower oil prices on contribution from the Integrated Gas business, which decreased by $112 million to $386 million. As the investment in APLNG nears completion and cash flows from production begin, cash flow after operating and investing activities has improved by $1,413 million to ($1,605) million. In building resilience to a lower oil price environment, the Company has made good progress during the year on assets sales and cost reduction. Action during the year was also taken to reduce exposure to low oil prices through the purchase for FY2017 of put options over 15 million barrels of oil at prices of US$40 per barrel and A$55 per barrel. As a result of actions taken to reduce debt and to strongly improve operational performance, importantly from a shareholder’s perspective, net cash from operating and investing activities has improved by $3,296 million to $1,215 million. As a consequence of this improvement and the equity raising, Origin’s adjusted net debt decreased by $3,971 million to $9,131 million at year end. (1) EPS and Share Price have been restated for the bonus element of the Rights Issues completed in April 2011 and October 2015. (2) (3) The 10 year TSR% includes the full period of FY2007 and represents the period from 30 June 2006 to 30 June 2016. Includes additional dividend paid in November 2008. 41 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 3.2 Outcomes for shareholders have been reflected in those for executives Origin is committed to aligning outcomes for shareholders with those of Executives. As a consequence, NEDs – with the support of management – have exercised discretion in relation to both STI and LTI in the past two years. In FY2015, after the publication of the Remuneration Report, but before the Annual General Meeting and in response to the declining share price and the decision to proceed with the rights issue, Mr King and Ms Moses agreed to forego their Deferred STI as well as the proposed LTI awards (see Tables 11 and 13 for the reported and revised outcomes for FY2015). Outcomes in relation to STI, LTI and overall remuneration are outlined in the following sections. 3.2.1 STI outcomes For FY2016, with the Managing Director’s agreement, the Board exercised discretion in relation to his STI payment, reducing it to zero. Downward discretion has also been exercised in relation to some, but not all, KMP reflecting their relative performance and that of their business. These outcomes can be seen in Table 11. Table 11 also summarises the STI award in terms of the cash element and the deferred component. For FY2016, the period over which deferred rights vest is two, three and four years (versus one, two and three years in 2015), thereby creating additional alignment with returns to shareholders. Table 11: STI awarded for FY2015 and FY2016 ($) Name Executive Director – current G King(5) 2016 revised 2015 reported 2015 Other Executive KMP – current D Baldwin F Calabria G Mallett(6) 2016 2015 2016 2015 2016 2015 Executive Director – former K Moses(5,7) 2016 revised 2015 reported 2015 Total 2016 revised 2015 reported 2015 Fixed(1) Remuneration(1) STI maximum (% of Fixed Remuneration) STI award (% of maximum(2)) STI cash(3) STI deferred(4,5) STI total(5) 150 150 150 130 130 130 130 75 – 135 135 135 2,500,000 2,500,000 2,500,000 1,150,000 1,150,000 1,086,000 1,086,000 86,733 – 1,202,434 1,371,000 1,371,000 6,025,167 6,107,000 6,107,000 0 36 53 55 71 69 79 70 – 22 43 64 0 1,333,333 1,333,333 546,667 709,333 649,428 745,333 25,994 – 238,069 788,667 788,667 1,460,158 3,576,666 3,576,666 0 0 666,667 273,333 354,667 324,714 372,667 12,997 – 119,034 0 394,333 730,078 727,334 1,788,334 0 1,333,333 2,000,000 820,000 1,064,000 974,142 1,118,000 38,991 – 357,103 788,667 1,183,000 2,190,236 4,304,000 5,365,000 STI decisions were made having regard to corporate, business unit and individual performance targets. Table 12 outlines the benchmark corporate financial, safety and engagement targets against which discretion was exercised. Additional operational targets were set for the Chief Executives of the two operating Business Units as well as their having personal performance targets. This Table (and Tables 13, 15 and 16) exclude former Other Executive KMPs P Zealand and D Barnes. P Zealand ceased being KMP on 30 April 2015 and had no KMP remuneration for FY2016. D Barnes ceased being KMP on 10 August 2015, and during the period 1 July 2015 to 10 August 2015 received $93,791 in Fixed Remuneration; no incentive awards were attributable to this period and no Origin equity was granted in relation to FY2015 or FY2016. (1) Fixed Remuneration here represents the actual Fixed Remuneration taken home during the period. It does not include Contact Energy Board fees earned by G King, K Moses and D Baldwin (these are detailed in Table 24). For D Baldwin in FY2015 the Remuneration shown is the reference for STI calculation which was the annualised Fixed Remuneration for the role to which he was appointed during the year. (2) Where the actual STI payment is less than maximum potential, the difference is foregone. (3) STI cash represents two-thirds of the STI awarded in respect of the relevant year, the balance is STI deferred. (4) STI deferred represents one-third of the STI awarded in respect of the relevant year, the balance is STI cash. This component is awarded in DSRs that will vest in three equal tranches after two, three and four years (for FY2016) and after one, two and three years (FY2015). The grant of equity relating to the FY2016 Deferred STI allocation for G King will be subject to shareholder approval to be obtained at the 2016 Annual General Meeting (AGM). (5) FY2015 Deferred STI allocations (and the STI Awarded per cent of maximum) for G King and K Moses have been re-stated because the equity grant that was proposed to be put to shareholders at the 2015 AGM was withdrawn prior to the AGM and no STI deferred equity grants were made. (6) As Acting CFO, G Mallett was appointed to KMP on 16 May 2016. FY2016 STI amounts are pro-rated for the period 16 May to 30 June 2016. The calculation of STI is based on annual Fixed Remuneration of $590,000 and excludes an Acting allowance that is included in the pro-rated Fixed Remuneration in this Table. (7) K Moses ceased being KMP on 16 May 2016. FY2016 STI amounts are pro-rated for the period 1 July 2015 to 16 May 2016. 42 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Table 12: STI Corporate Performance Metrics Underlying EPS – basic cents per share(1) Group OCAT Ratio %(2) Net cash from/(used in) operating and investing activities (NCOIA) Corporate STI Financial Performance Metric Outcome (%)(2) Origin safety metric (TRIFR(3)) Origin safety metric (SIFR(3)) Origin safety metric outcome (%) Origin engagement metric (score) Origin engagement metric outcome (%) 2015 54.0 8.4 (2,081) 65.3 3.8 – 100.0 52 60.0 2016 23.2 – 1,215 76.3 4.2 0.3 20.0 53 20.0 The financial metrics were finalised after, and taking into account, the rights issue and reflected the increased emphasis on cash generation following the fall in the oil price. Against those targets, a 76.3 percent target was achieved. Origin’s total recordable injury frequency rate (TRIFR) was set against the backdrop of the prior year’s performance. The outcome fell below a year-on-year reduction, with no award being made. The Serious Injury Frequency rate (SIFR), which was introduced as a second target in FY2016, was significantly better than target. Taken together, the combined measures yielded an overall 20 per cent outcome for the safety metric. The Employee engagement measure, set annually, aimed for a significant improvement. Against the backdrop of a major redundancy program, the marginally improved FY2016 result versus the prior year resulted in a 20 percent outcome. These results were measured in May 2016 through an annual voluntary employee survey conducted externally by AON Hewitt using its methodology. In exercising its discretion, the Board took into account these results; the remuneration outcomes for comparably sized companies; and the impact of Impairments on the statutory results. Due regard was also had to the decline in share price experienced by shareholders, the worst of which occurred prior to last year’s Annual General Meeting and after the revised remuneration decisions were made in relation to Mr King and Ms Moses. 3.2.2 LTI outcomes Discretion has also been exercised by the Board over the past two years in relation to LTI, as can be seen in Table 13, which shows the actual LTI allocations (conditional pay) made during the period relative to the Target Values defined in Section 2.3. More specifically, Mr King and Ms Moses received no LTI allocation under the revised remuneration arrangements announced prior to the FY2015 Annual General Meeting. Ms Moses, who has announced her intention to retire to pursue a career as a NED, has also not received an LTI allocation for FY2016. Table 13: LTI awarded for FY2015 and FY2016 ($) Name Executive Director – current G King(6,7) Other Executive KMP – current D Baldwin F Calabria G Mallett(8) Executive Director – former K Moses(7,9) Total Fixed(1) Remuneration(4) LTI opportunity (as % of Fixed Remuneration) LTI award(2) (as% of(2) opportunity)(5) 2016 revised 2015 reported 2015 2016 2015 2016 2015 2016 2015 2016 revised 2015 reported 2015 2016 revised 2015 reported 2015 2,500,000 2,500,000 2,500,000 1,150,000 1,150,000 1,086,000 1,086,000 86,733 – 1,202,434 1,371,000 1,371,000 6,025,167 6,107,000 6,107,000 120 120 120 80 80 70 70 40 – 85 85 85 45 0 83 83 100 100 100 100 – 0 0 100 LTI allocation 1,350,000 0 2,500,000 760,000 920,000 760,000 760,000 29,665 – 0 0 1,165,350 2,899,665 1,680,000 5,345,350 (1) Re-stated for Rights Issue in October 2015. (2) For FY2015 the two performance indicators Underlying EPS and OCAT Ratio were combined in equal weights to form the Group STI Financial Performance Metric (see Table 2). For FY2016 NCOIA replaced the OCAT Ratio component. (3) Total Recordable Injury Frequency Rate (TRIFR), a standard industry measure of recordable injuries per million work hours. In FY2015 TRIFR was the sole safety measure; in FY2016 a gateway of Serious Injury Frequency Rate (SIFR) was added. (4) Fixed Remuneration here represents the actual Fixed Remuneration taken home during the period. It does not include Contact Energy Board fees earned by G King, K Moses and D Baldwin (these are detailed in Table 24). For D Baldwin in FY2015 the Remuneration shown is the reference for LTI calculation which was the annualised amount for the role to which he was appointed during the year. (5) The FY2016 LTI award allocation is subject to performance hurdles over five years for Options and four years for PSRs (FY2015: four years in both cases) and may vest (partially or fully) or lapse in a future period. (6) The grant of equity relating to the FY2016 LTI allocation for G King will be subject to shareholder approval to be obtained at the 2016 AGM. (7) FY2015 LTI allocation (and LTI allocated as a per cent of opportunity) has been re-stated for G King and K Moses because the equity grant that was proposed to be put to shareholders at the 2015 AGM was withdrawn prior to the AGM and no equity grants were made. (8) G Mallett was appointed KMP on 16 May 2016. The FY2016 LTI allocation has been pro-rated for the period 16 May to 30 June 2016. The calculation of the LTI allocation excludes an Acting allowance that is included in Fixed Remuneration. (9) K Moses ceased being KMP on 16 May 2016. No LTI allocation was made in respect of either FY2015 or FY2016. 43 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 LTI allocations are subject to meeting performance conditions over periods of four years (PSRs) and five years (Options). If those performance conditions are not met, the awards will be forfeited without having generated any value to the executive. The equity grant relating to the FY2016 allocation for the Managing Director will be subject to shareholder approval. In other words, Directors consider it is appropriate for the Managing Director and other KMP members to receive an LTI award for FY2016 because they will only vest over five and four years if both the returns to shareholders outperform comparable sized companies (TSR vesting condition for Options) and if the returns on funds employed significantly improve and exceed Origin’s weighted average cost of capital (ROCE vesting condition on PSRs). The alignment of LTI awards with the interests of shareholders has been powerfully demonstrated over the past four years, where no vesting has occurred. This can be seen in Table 14. Table 14: Four Year LTI Performance History Vesting period TSR(1) (CAGR % pa) LTI Vesting %(2) 2013 0.4 0 2014 3.9 0 2015 (3.1) 0 2016 (10.6) 0 3.2.3 Overall remuneration outcomes Directors consider that the overall pay outcomes for FY2015 and FY2016 are aligned with the interests of shareholders. Table 15 shows that even though the total allocation is slightly higher in FY2016 for the Managing Director, the cash component has decreased by 35 percent from the FY2015 revised amount. LTI payments will only be made if the vesting conditions are met and shareholders do well. Table 15: Total pay awarded for the year ($) Name Executive Director – current G King(7) 2016 revised 2015 reported 2015 Other Executive KMP – current D Baldwin F Calabria G Mallett(8) 2016 2015 2016 2015 2016 2015 Executive Director – former K Moses(6,9) Total 2016 revised 2015 reported 2015 2016 revised 2015 reported 2015 Fixed(3) Remuneration(3) STI cash(4) Total cash remuneration Conditional pay STI deferred(5) LTI allocation(6) Total cash and conditional pay 2,500,000 2,500,000 2,500,000 1,150,000 1,078,833 1,086,000 1,086,000 86,733 – 1,202,434 1,371,000 1,371,000 6,025,167 6,035,833 6,035,833 0 1,333,333 1,333,333 546,667 709,333 649,428 745,333 25,994 – 238,069 788,667 788,667 1,460,158 3,576,666 3,576,666 2,500,000 3,833,333 3,833,333 1,696,667 1,788,166 1,735,428 1,831,333 112,727 – 1,440,503 2,159,667 2,159,667 7,485,325 9,612,499 9,612,499 0 0 666,667 273,333 354,667 324,714 372,667 12,997 – 119,034 0 394,333 730,078 727,334 1,788,334 1,350,000 0 2,500,000 760,000 920,000 760,000 760,000 29,665 – 0 0 1,165,350 2,899,665 1,680,000 5,345,350 3,850,000 3,833,333 7,000,000 2,730,000 3,062,833 2,820,142 2,964,000 155,389 – 1,559,537 2,159,667 3,719,350 11,115,068 12,019,833 16,746,183 More specifically, the way such alignment occurs can be seen in Table 16 which summarises the actual pay received by KMP in FY2015 and 2016 as well as the impact of LTI from prior years that did not meet vesting conditions. Details in this table supplement the statutory requirements in Appendix 3. Unlike the statutory table in Appendix 3, which represents remuneration outcomes prepared in accordance with Australian Accounting Standards (AAS), this table shows the actual remuneration value received by executives. (1) The period most representative of the vesting cycle for LTI awards that were tested during the periods was four years. Accordingly the TSR data shown here is a 4-year rolling CAGR measured at each 30 June. (2) The LTI vesting represents the level of LTI vesting achieved as a proportion of LTI tested during the period. (3) Fixed Remuneration here represents the actual Fixed Remuneration taken home during the period. It does not include Contact Energy Board fees earned by G King, K Moses and D Baldwin (these are detailed in Table 24). For D Baldwin, the FY2015 amount is made up of 7 months at $1,028,000pa and 5 months in the changed role of CEO Integrated Gas at $1,150,000pa. (4) STI cash represents two-thirds of the STI awarded in respect of the relevant year, the balance is STI deferred. (5) STI deferred represents one-third of the STI awarded in respect of the relevant year, the balance is STI cash. This component is awarded in DSRs that will vest in three equal tranches after two, three and four years (for FY2016) and after one, two and three years (FY2015). The grant of equity relating to the FY2016 Deferred STI allocation for G King will be subject to shareholder approval to be obtained at the 2016 Annual General Meeting (AGM). (6) The FY2016 LTI award allocation is subject to performance hurdles over five years for Options and four years for PSRs (FY2015: four years in both cases) and may vest (partially or fully) or lapse in a future period. The grant of equity relating to the FY2016 LTI allocations for G King will be subject to shareholder approval to be obtained at the 2016 AGM. (7) FY2015 Deferred STI and Deferred LTI allocations have been re-stated because the equity that was proposed to be put to shareholders at the 2015 AGM was withdrawn prior to the AGM. Accordingly no equity grants were made in relation to FY2015 for G King or for K Moses. (8) G Mallett was appointed KMP on 16 May 2016. FY2016 amounts are pro-rated for the period 16 May to 30 June 2016. (9) K Moses ceased being KMP on 16 May 2016. FY2016 amounts are pro-rated for the period 1 July 2015 to 16 May 2016. 44 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Table 16: Total pay received FY2015 and FY2016 ($) Name Executive Director – current G King Other Executive KMP – current D Baldwin F Calabria G Mallett(7) Executive Director – former K Moses(8) Total Fixed(1) Remuneration(1) cash(1) STI(2) cash(2) Deferred(3 STI(3) vested(3) LTI(4) vested(4) Total(5) Received(5) Equity(6) Forfeited(6) Implicit(5) Outcome(5) 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2,500,000 2,500,000 0 1,333,333 1,150,000 1,078,833 1,086,000 1,086,000 86,733 – 546,667 709,333 649,428 745,333 25,994 – 94,673 0 56,394 0 46,354 0 0 – 1,202,434 1,371,000 6,025,167 6,035,833 238,069 788,667 1,460,158 3,576,666 57,933 0 255,354 0 0 0 0 0 0 0 0 – 0 0 0 0 2,594,673 3,833,333 (4,889,809) (2,532,060) (2,295,136) 1,301,273 1,753,061 1,788,166 1,781,782 1,831,333 112,727 – (1,403,286) (858,438) (1,346,788) (818,860) 0 – 349,775 929,728 434,994 1,012,473 112,727 – 1,498,436 2,159,667 (1,940,395) (982,540) (441,959) 1,177,127 7,740,679 (9,580,278) 9,612,499 (5,191,898) (1,839,599) 4,420,601 During the year the first tranche of Deferred STI (awarded for FY2014) vested, while over $9 million of previously reported statutory remuneration was forfeited. During the last 3 years the Managing Director has forfeited more than $9.5m of LTI equity that was previously reported as statutory remuneration. The potential for future vesting of existing Options and PSRs (from prior LTI awards) will depend on Origin’s TSR performance through to the end of the relevant performance period. However, based on performance to date it is unlikely that Executives will see any vesting of prior LTI awards for at least the next three years. 4 APPROPRIATE GOVERNANCE AND REMUNERATION ARRANGEMENTS FOR NEDs HAVE ENSURED A STRONG FOCUS ON SHAREHOLDERS’ INTERESTS Effective governance is central to Origin’s remuneration approach. It is achieved through a clear definition of responsibilities, appropriate composition of the Board Remuneration Committee, and adherence to processes that ensure independent decision-making. It is also supported by appropriate remuneration arrangements for NEDs. 4.1 Governance responsibilities are clearly defined The full Board has oversight of Origin’s remuneration arrangements. It is accountable for executive and NEDs remuneration and the policies and process governing both. 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 NEDs. All current members of the Committee, including its Chairman, are independent. There is a standing invitation to all Board members to attend the Committee’s meetings. The main responsibilities of the Board and Remuneration Committee are described in Table 17. (1) Fixed Remuneration here represents the actual Fixed Remuneration taken home during the period. It does not include Contact Energy Board fees earned by G King, K Moses and D Baldwin (these are detailed in Table 24). (2) STI cash represents two-thirds of the STI awarded in respect of the relevant year, the balance deferred. (3) Deferred STI vested represents one-third of the component of the 2014 STI award that was deferred. This tranche vested in October 2015, with the remaining two tranches deferred until October 2016 and October 2017 respectively. The vested value is calculated as the number of vested securities multiplied by the closing price of Origin ordinary shares on the day they vested. (4) LTI vested represents prior year Origin LTI awards vesting wholly or partially during the year. None vested during FY2016. The table does not include vesting for Contact Energy LTI awarded in respect of D Baldwin’s prior employment with that company (FY2015 nil, FY2016 $498,886). (5) The total is the sum of Fixed Remuneration cash, STI cash, Deferred STI vested, LTI vested less Equity Awards Forfeited. (6) Equity Forfeited includes any prior year Origin equity allocations that were forfeited during the year (i.e. the relevant grants realised no benefit). For FY2016 this represents Options and PSRs that were granted in 2010, and PSRs that were granted in 2012. The table does not include D Baldwin’s Contact Energy equity forfeits that related to prior employment with Contact Energy Ltd (FY2015 nil, FY2016 $269,175). The forfeited value represents the grant date value that was disclosed and attributed to remuneration at the time of the grant. See Table 26. (7) G Mallett was appointed KMP on 16 May 2016. FY2016 amounts are pro-rated for the period 16 May to 30 June 2016. (8) K Moses ceased being KMP on 16 May 2016. FY2016 amounts are pro-rated for the period 1 July 2015 to 16 May 2016. 45 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Table 17: Responsibilities of the Board and Remuneration Committee Executive Remuneration Structure Approved by the Board (on recommendation of the Remuneration Committee) — The remuneration strategy, policy and structure and compliance with legal and regulatory requirements — Levels of delegated responsibility to the Remuneration Committee and management for remuneration-related decisions Approved by the Remuneration Committee — Identification of the employee population that receives deferred at-risk remuneration — Remuneration recommendations in relation to non-KMP and non-EMT employees — Specific remuneration related matters as delegated — Individual remuneration for KMP and other members by the Board of the EMT — Allocations made under all equity based remuneration plans Non-executive Director Remuneration — The Remuneration structure for NEDs — Remuneration for NED fees (subject to the maximum aggregate amount being approved by shareholders) 4.2 The Remuneration Committee is composed of NEDs with an appropriate level of independence and expertise The Board Remuneration Committee is comprised of four independent NEDs, as shown in Table 18. Each Director has remuneration experience either as a member of board remuneration committees at other major companies or in their prior role as an executive. Table 18: Remuneration Committee FY2016 Role Status Other Origin Committees Members – current H Nugent (Chairman) G Cairns S Perkins (from 1 September 2015) S Sargent Independent NED Independent NED; Chairman of the Board Independent NED Independent NED Member – former R Norris (until 16 September 2015) NED The Committee met four times during FY2016. Audit; Risk; Nomination Audit; Health, Safety & Environment; Risk; Nomination (Chairman) Audit Health, Safety & Environment; Origin Foundation (Chairman) 4.3 Board and Remuneration Committee processes ensure independence The Remuneration Committee operates under a Charter published on the Company’s website at www.originenergy.com.au. In particular, the Charter identifies the processes for dealing with conflicts of interest. The Charter and all associated processes are followed assiduously by the Board and Remuneration Committee. The Committee has established protocols for engaging and dealing with external advisors, including those defined as Remuneration Consultants for the purpose of the Corporations Act 2001 (Cth). 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. In 2015 the Committee appointed Pay Governance under the protocols(1) to assist with examining its remuneration structure. Given the comprehensive nature of that review the Committee did not appoint an advisor during FY2016. Table 19 summarises the sources of general remuneration benchmarking data used during FY2016. Table 19: Sources of Remuneration Data, FY2016 Advisor/ Consultant FY2016 AON Hewitt Ernst & Young Hay Group Mercer Consulting KMP benchmarking and market data used by Committee to formulate its own recommendations to Board No No Remuneration Consultant for the purposes of the Corporations Act No No No No No No Comments General role benchmarking General role benchmarking Hay PayNet® database access to remuneration survey data General role benchmarking, fair valuation of equity instruments, actuarial assessment of superannuation Analysis of companies that were of a similar size was undertaken internally during 2016. (1) Pay Governance did not act as a Remuneration Consultant for the purposes of the Corporations Act 2001 (Cth). 46 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 4.4 Origin’s remuneration approach is to ensure NEDs are remunerated in ways that maintain their independence Appropriate remuneration for NEDs is achieved by: — Setting Board and Committee fees taking into account market rates for relevant Australian organisations for the time commitment and responsibilities involved; and — Delivering those fees in a form that is not contingent on Origin’s performance. As a result, remuneration arrangements for NEDs are different from those in place for Executives. NED remuneration is not performance-based or dependent on the Company’s results. Fees are fixed to allow for independent and objective assessment of executive and Company performance. No Executive KMP is remunerated for acting as a Director of Origin. Prior to the sale of Origin’s interest in Contact Energy in August 2015, G King, K Moses and D Baldwin were, however, remunerated for serving as directors of its Board (as shown in Table 24). 4.5 NED fees have not been increased and are within the aggregate cap Board and Committee fees are reviewed regularly having regard to the level of fees paid to NEDs at Australian companies of comparable size and complexity. This approach reflects the responsibilities and time commitment necessary for the role. Per diem fees may also be paid on occasions where approved special work is undertaken outside of the expected commitments. None were paid during FY2016. The Board has determined that no increase be made to NED fees for FY2017. NED fees have remained unchanged since FY2013, apart from the introduction of fees for the Risk Committee which were introduced in FY2016. This decision has been taken recognising the returns to shareholders in recent years. The Origin Chairman receives a single fee that is inclusive of Committee activities, while other NEDs receive a base Board fee and separate fees for their role on specific Committees, other than the Nomination Committee, which is considered within the base fee. All fees are inclusive of superannuation contributions. The aggregate cap for NED remuneration ($2,700,000) was last approved by shareholders at the 2010 Annual General Meeting. The Board does not propose a change to this cap for FY2017. Table 20 shows the structure and level of NED fees for FY2016 and for those proposed for FY2017: Table 20: Non-executive Directors’ Fee Structure ($) Fees Board fees Chairman (inclusive of all Committee work) NED base fee Committee fees (except for the Chairman of the Board) Audit Chairman Member Remuneration Chairman Member Health, Safety & Environment Chairman Member Risk Chairman Member Nomination Chairman & members FY2016 FY2017 677,000 196,000 677,000 196,000 57,000 29,000 47,000 21,000 42,000 21,000 42,000 21,000 57,000 29,000 47,000 21,000 42,000 21,000 42,000 21,000 – – 4.6 NEDs are required to acquire and hold shares in the Company To more closely align the interests of the Board and shareholders, NEDs are required to hold a minimum of 20,000 shares in the Company within three years of appointment. Details on the Directors’ holdings in shares are set out in Table 29. 47 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 APPENDICES: KMP DISCLOSURES Appendix 1: KMP KMP include Executive Directors and executives with authority and responsibility for planning, directing and controlling the activities of Origin Energy and its controlled entities (together making Executive KMP) and NEDs. NEDs are required by the Corporations Act 2001 (Cth) to be included as KMP for the purpose of disclosure in the Remuneration Report. However, Origin’s NEDs do not consider themselves to be part of ‘management’. Table 21: Key Management Personnel, FY2016 Notes NEDs – current J Akehurst G Cairns M Brenner B Morgan H Nugent S Perkins S Sargent Executive Director – current G King Other Executive KMP – current D Baldwin F Calabria G Mallett NEDs – former R Norris Executive Director – former K Moses Independent Independent Chairman Independent Independent Independent Independent Independent Managing Director Joined the Board 1 September 2015 Joined the Board 29 May 2015 Chief Executive Officer, Integrated Gas Chief Executive Officer, Energy Markets Acting Chief Financial Officer Appointed to KMP role on 16 May 2016 Independent Retired 16 September 2015 Executive Director, Finance & Strategy Other Executive KMP – former D Barnes Chief Executive Officer, Contact Energy Stepped down from the Board on 21 October 2015, and from the KMP role of Executive Director, Finance & Strategy on 16 May 2016 Ceased to be KMP following the sale of Origin’s interests in Contact Energy on 10 August 2015 Except as otherwise noted, the remuneration and other related party disclosures included in the Remuneration Report have been prepared in accordance with the requirements of the Corporations Act 2001 (Cth) and in compliance with AASB 124 Related Party Disclosures. For the purpose of these disclosures, all individuals listed above have been determined to be KMP, as defined by AASB 124 Related Party Disclosures. 48 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Appendix 2: Contractual Arrangements for Executive KMP The table below sets out the main terms and conditions of the employment contracts of the Managing Director and Executive KMP (excluding NEDs) as at 30 June 2016. As noted in Section 2, the contractual terms were determined with reference to the size and complexity of the job roles, benchmarked against the external market. They reflect the principles of reward for performance and alignment with the interests of shareholders. Table 22: Contractual Details for Executive KMP Role Managing Director Other Executive KMP(1) Contract Expiry Notice Period Ongoing (no fixed term) — 12 months by either party or shorter notice by agreement — Immediate for misconduct, breach of contract or bankruptcy Ongoing (no fixed term) — Up to 3 months by either party — Immediate for misconduct, breach of contract or bankruptcy Termination Payments (subject to termination benefits legislation) — Statutory entitlements only for termination with cause — In the event of termination other than for cause, or by the Managing Director giving 12 months notice, an STI can be paid that reflects the extent of achievement against the objectives set for the year having regard to the part of the year that has elapsed prior to termination. In such a case, the STI payment will be made in cash. — DSRs, Options and/or PSRs lapse on termination other than in cases of death, disability, bona fide redundancy or genuine retirement. — 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 18-22 weeks) — DSRs, Options and/or PSRs lapse on termination other than in cases of death, disability, bona fide redundancy or genuine retirement. 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. Table 23: Managing Director’s Remuneration Element Fixed Remuneration STI LTI FY2016 details $2,500,000 No change for FY2017 At-Target: 90% of Fixed Remuneration Maximum 150% of Fixed Remuneration 80% of the outcome determined by Group financial, safety and engagement metrics, 20% by individual measures Target Value Allocation: 120% of Fixed Remuneration LTI awarded half (by allocation value) as Options and half as PSRs Options have a relative TSR hurdle and five year vesting; PSRs have a ROCE hurdle and four year vesting The Managing Director maintains a substantial shareholding in the Company as reflected in Table 29 of this Report (and equivalent tables in prior Reports). At 30 June 2016 the value of his shareholding was the equivalent of approximately 3.6 times his Fixed Remuneration (Section 2.4). (1) The table includes arrangements agreed prior to amendments to the Corporations Act 2001 (Cth) regarding termination payments which came into effect on 24 November 2009. The amended provisions apply to KMP contract variations, and to KMP appointments after that date. Entitlements under pre existing contracts are generally not subject to the amended legislative provisions. 49 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Appendix 3: Statutory Remuneration Disclosures Table 24: Remuneration Table for FY2015 and FY2016 ($ except where otherwise indicated) Short-term benefits Post-employment benefits Accounting value of long-term benefits Base salary/fees Contact Energy(1) Fees(1) Cash STI(2) Non-monetary(3) benefits(3) Superannuation Deferred STI(4) LTI (Options(5) & PSRs)(5) Movement in accrued leave Termination Benefits Total Remuneration % of Remuneration Remuneration “At Risk” that is share based Executive Director – current G King Other Executive KMP D Baldwin(6) F Calabria G Mallett(7) Executive Director – former K Moses(8) Other Executive KMP – former D Barnes(9) P Zealand(10) Non-executive Directors – current J Akehurst M Brenner G Cairns B Morgan H Nugent S Perkins(11) S Sargent(12) Non-executive Directors – former B Beeren(13) R Norris(14) Totals(15) 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2,478,168 2,478,696 1,118,480 1,047,841 1,046,655 1,047,183 84,327 – 1,169,595 1,336,203 89,094 831,966 – 605,581 239,679 219,207 247,680 206,208 657,680 658,208 275,679 255,207 273,680 253,208 188,900 – 218,679 19,137 – 61,042 56,670 238,503 8,144,966 9,258,190 22,389 213,417 14,602 139,185 – – – – 14,650 139,649 – – – – – – – – – – – – – – – – – – – 157,743 – – 51,641 649,994 0 1,333,333 546,667 709,333 649,428 745,333 25,994 – 238,069 788,667 – 261,339 – 379,792 – – – – – – – – – – – – – – – – – – 53,597 59,364 32,867 41,740 33,284 22,108 2,722 – 34,367 34,337 29 4,072 – 40,842 180 7,210 180 187 33,406 187 10,983 187 180 187 180 – 180 16 – 61 38 187 1,460,158 4,217,797 202,193 210,685 21,832 21,304 19,320 18,792 27,144 26,616 3,184 – 30,030 34,797 4,697 29,650 – 29,165 19,320 18,792 19,320 18,792 19,320 18,792 19,320 18,792 19,320 18,792 16,100 – 19,320 1,641 – 5,787 4,830 18,792 243,057 280,504 (1) G King, D Baldwin, and K Moses were the Company’s nominees on the Board of Contact Energy, and resigned as directors on 10 August 2015 on completion of the sale of the Company’s interest in Contact. FY2016 Contact Energy fees relate to the period 1 July 2015 to 10 August 2015. FY2016 remuneration is converted to Australian dollars using an exchange rate of $1.1166 for the period 1 July 2015 to 10 August 2015 (FY2015 – $1.0777). (2) Cash STI in respect of the relevant reporting period represents two-thirds of STI award. The Cash STI is granted for the respective year ended 30 June, determined following the close of the respective financial year and paid during September. (3) Non-monetary benefits include insurance premiums and fringe benefits such as car parking and expenses associated with travel. (4) The Deferred STI represents the accounting value of equity to be granted for the current year in addition to grants made in this and prior periods. It relates to the balance (one-third) of the STI award that was made for the relevant year as referred to in Note 2 above. The valuation uses a discounted cash flow methodology that recognises that dividends are not paid on DSRs. Deferred STI in respect of the current year will be granted as DSRs in the following financial year. The expense is recognised beginning on 1 July of the financial year to which the STI award relates. In following reporting periods the accumulated expense is adjusted for the number of instruments then expected to vest. The share based expense for Deferred STI for FY2015 for G King and for K Moses included intended equity grants that were proposed to shareholders but were subsequently withdrawn prior to the 2015 Annual General Meeting. As no equity was granted, the expense attributable to the intended grant has been reversed in the FY2016 expense ($214,321 for G King and $126,722 for K Moses). (5) The LTI value for Options and PSRs represents the accounting value of equity granted in relation to prior periods that is attributable to the relevant reporting period. All LTI equity granted in prior periods is subject to market-based performance hurdles, accordingly the accounting fair value is determined using a Monte Carlo simulation methodology that takes into account market hurdles, and is allocated to each reporting period from the date of grant and spread evenly over the service period. Commencing in FY2017 LTI grants will include non-market hurdles with different methodology for allocating the share based remuneration expense. (6) The accounting value of LTI for D Baldwin includes equity issued by Contact Energy in relation to his earlier employment by Contact Energy prior to 1 April 2011. 50 (71,677) 422,622 249,188 222,651 254,243 209,092 12,248 – 113,763 254,238 43,000 125,084 1,304,780 1,989,402 705,161 736,054 491,259 567,174 18,390 – 565,359 907,082 172,697 726,035 66,468 355,821 10,804 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 62,515 62,500 160,438 30,282 27,178 38,415 1,814 – 34,320 55,286 1,537 26,654 – – – – – – – – – – – – – – – – – – – Totals % of Total 32% 57% 53% 57% 55% 57% 38% – 42% 55% 69% 55% – 54% – – – – – – – – – – – – – – – – – – – – 3,871,604 6,580,638 2,846,723 2,945,878 2,529,191 2,655,921 148,679 – 2,200,153 3,550,259 311,054 2,004,800 – 1,488,473 259,179 245,209 267,180 225,187 710,406 677,187 305,982 274,186 293,180 272,187 205,180 238,179 20,794 – – 224,633 61,538 257,482 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 32% 37% 34% 33% 29% 29% 21% – 31% 33% 69% 42% – 28% – – – – – – – – – – – – – – – – – – – – 600,765 1,300,155 3,257,646 5,281,568 287,802 223,941 14,248,228 21,422,834 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Appendix 3: Statutory Remuneration Disclosures Table 24: Remuneration Table for FY2015 and FY2016 ($ except where otherwise indicated) Executive Director – current G King Other Executive KMP D Baldwin(6) Executive Director – former K Moses(8) Other Executive KMP – former Non-executive Directors – current F Calabria G Mallett(7) D Barnes(9) P Zealand(10) J Akehurst M Brenner G Cairns B Morgan H Nugent S Perkins(11) S Sargent(12) B Beeren(13) R Norris(14) Totals(15) 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2,478,168 2,478,696 1,118,480 1,047,841 1,046,655 1,047,183 84,327 – 1,169,595 1,336,203 89,094 831,966 – 605,581 239,679 219,207 247,680 206,208 657,680 658,208 275,679 255,207 273,680 253,208 188,900 218,679 19,137 – – 61,042 56,670 238,503 8,144,966 9,258,190 Non-executive Directors – former 157,743 14,650 139,649 238,069 788,667 22,389 213,417 14,602 139,185 – – – – – – – – – – – – – – – – – – – – – – – – – 0 1,333,333 546,667 709,333 649,428 745,333 25,994 261,339 379,792 – – – – – – – – – – – – – – – – – – – – – 53,597 59,364 32,867 41,740 33,284 22,108 2,722 – 34,367 34,337 29 4,072 – 40,842 180 7,210 180 187 33,406 187 10,983 187 180 187 180 – 180 16 – 61 38 187 21,832 21,304 19,320 18,792 27,144 26,616 3,184 – 30,030 34,797 4,697 29,650 – 29,165 19,320 18,792 19,320 18,792 19,320 18,792 19,320 18,792 19,320 18,792 16,100 – 19,320 1,641 – 5,787 4,830 18,792 243,057 280,504 Short-term benefits Post-employment benefits Accounting value of long-term benefits Base salary/fees Fees(1) Cash STI(2) benefits(3) Superannuation Contact Energy(1) Non-monetary(3) Deferred STI(4) LTI (Options(5) & PSRs)(5) Movement in accrued leave Termination Benefits Total Remuneration Totals % of Total Remuneration “At Risk” % of Remuneration that is share based (71,677) 422,622 249,188 222,651 254,243 209,092 12,248 – 113,763 254,238 43,000 125,084 – 66,468 – – – – – – – – – – – – – – – – – – 1,304,780 1,989,402 705,161 736,054 491,259 567,174 18,390 – 565,359 907,082 172,697 726,035 – 355,821 – – – – – – – – – – – – – – – – – – 62,515 62,500 160,438 30,282 27,178 38,415 1,814 – 34,320 55,286 1,537 26,654 – 10,804 – – – – – – – – – – – – – – – – – – 51,641 649,994 1,460,158 4,217,797 202,193 210,685 600,765 1,300,155 3,257,646 5,281,568 287,802 223,941 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 3,871,604 6,580,638 2,846,723 2,945,878 2,529,191 2,655,921 148,679 – 2,200,153 3,550,259 311,054 2,004,800 – 1,488,473 259,179 245,209 267,180 225,187 710,406 677,187 305,982 274,186 293,180 272,187 205,180 – 238,179 20,794 – 224,633 61,538 257,482 14,248,228 21,422,834 32% 57% 53% 57% 55% 57% 38% – 42% 55% 69% 55% – 54% – – – – – – – – – – – – – – – – – – – – 32% 37% 34% 33% 29% 29% 21% – 31% 33% 69% 42% – 28% – – – – – – – – – – – – – – – – – – – – (7) G Mallett was appointed to the KMP role of Acting Chief Financial Officer on 16 May 2016, FY2016 remuneration represents the period 16 May 2016 to 30 June 2016. (8) K Moses ceased being KMP on 16 May 2016, FY2016 remuneration represents the period 1 July 2015 to 16 May 2016. Untested share based instruments that were awarded in respect of prior years’ awards may remain on foot or become forfeited upon retirement. If they remain on foot any unvested expense is accelerated. If forfeited, previously booked expense is reversed. The status of Ms Moses’ outstanding share based instruments at retirement is unknown and no accounting adjustment has been made. (9) D Barnes ceased being KMP on 10 August 2015 upon completion of the sale of the Company’s interest in Contact Energy. FY2016 remuneration represents the period 1 July 2015 to 10 August 2015. During employment with Contact Energy, D Barnes was paid in New Zealand currency. FY2016 short term benefits are converted to Australian dollars using an exchange rate of $1.1166 for the period 1 July 2015 to 10 August 2015 (FY2015 – $1.0777). Post-employment superannuation benefits were remitted monthly in Australian dollars using the month-end exchange rate. Fixed Remuneration (base salary plus superannuation) and all or part of Contact Energy’s variable remuneration for the period of employment with Contact Energy was reimbursed by Contact Energy. The accounting value of Deferred STI and of LTI includes equity issued by Contact Energy in relation to his employment by Contact between 1 April 2011 and 10 August 2015. (10) P Zealand ceased being KMP on 30 April 2015. FY2015 remuneration represents the period 1 July 2014 to 30 April 2015. (11) S Perkins was appointed as Non-executive Director on 1 September 2015, remuneration represents the period 1 September 2015 to 30 June 2016. (12) S Sargent was appointed as Non-executive Director on 29 May 2015. FY2015 remuneration represents the period 29 May 2015 to 30 June 2015. (13) B Beeren retired as Non-executive Director on 22 October 2014. FY2015 remuneration represents the period 1 July 2014 to 22 October 2014. (14) R Norris retired as Non-executive Director on 16 September 2015. FY2016 remuneration represents the period 1 July 2015 to 16 September 2015. (15) All named Executive KMP and Executive Directors are employed and remunerated by the Company and its controlled entities. All NEDs are remunerated by the Company. 51 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Table 25: Details of Equity Grants The table below lists all equity-based incentive grants current at 30 June 2016 made to Directors and to 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. Number Outstanding Exercise Price Expiry Date 3,386,253 142,185 5,815,157 17,242 3,088,717 2,263,462 86,010 3,223,208 1,368,464 41,565 1,939,457 537,833 7,679 1,584,635 4,240 4,240 23,169 946,273 53,480 9,937 3,899 132,881 57,300 603 2,822,299 57,300 24,288 13,830 16,069 19,152 10,068 $13.01 $12.91 $11.78 $11.78 $13.97 $15.65 $12.78 $6.78 – – – – – – – – – – – – – – – – – – – – – – – 15 Jan 2017 11 Jul 2017 15 Oct 2019 15 Oct 2019 14 Oct 2020 22 Oct 2021 22 Oct 2021 21 Oct 2025 15 Oct 2016 11 Apr 2017 14 Oct 2016 22 Oct 2018 22 Oct 2018 21 Oct 2019 14 Oct 2016 14 Oct 2017 14 Oct 2016 24 Oct 2016 23 Oct 2017 24 Oct 2016 14 Oct 2016 24 Oct 2016 21 Oct 2016 14 Oct 2017 23 Oct 2017 22 Oct 2018 23 Oct 2017 22 Oct 2018 15 Jan 2017 15 Jan 2018 15 Jan 2019 Granted Options 15 Oct 2011 11 Apr 2012 15 Oct 2012 24 Dec 2012 14 Oct 2013 22 Oct 2014 1 Jul 2015 22 Oct 2015 Performance Share Rights 15 Oct 2011 11 Apr 2012 14 Oct 2013 22 Oct 2014 1 Jul 2015 22 Oct 2015 Deferred Share Rights 14 Oct 2013 14 Oct 2013 25 Aug 2014 22 Oct 2014 22 Oct 2014 31 Mar 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 7 Dec 2015 7 Dec 2015 7 Dec 2015 7 Dec 2015 7 Dec 2015 52 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Table 26: Analysis of Movements in Options, PSRs, and DSRs A summary of the movement in FY2016, by value, of rights (Options, PSRs, and DSRs) to equity in the Company (or in the case of D Baldwin and D Barnes in Contact Energy) held by KMP is provided in the table below. No NEDs hold Options, PSRs or DSRs. Executive Director – current G King Other Executive KMP – current D Baldwin(3) F Calabria G Mallett(4) Executive Director – former K Moses(5) Other Executive KMP – former D Barnes(3,6) Type Options PSRs DSRs Options PSRs DSRs Contact Options Contact PSRs Options PSRs DSRs Options PSRs DSRs Options PSRs DSRs Options PSRs Contact Options Contact PSRs Contact DSRs Value of Options, PSRs, and DSRs ($) Granted(1) Exercised(2) Forfeited 0 0 0 579,600 181,678 326,161 – – 478,926 150,121 342,691 0 0 0 0 0 0 0 0 0 0 0 0 0 94,673 0 0 56,394 0 503,186 0 0 46,354 0 0 0 0 0 57,933 0 0 0 0 0 (1,570,227) (3,319,582) 0 (500,701) (902,585) 0 (269,175) 0 (440,622) (906,166) 0 0 0 0 (614,204) (1,326,191) – 0 0 0 0 0 (1) The value of Options awarded in relation to FY2015 (granted in early FY2016) is the fair value calculated at grant date using a Black Scholes model with a Monte Carlo simulation methodology to account for hurdles; and the value of PSRs granted in the year is the fair value calculated at grant date using a Monte Carlo simulation methodology to account for hurdles. The value of DSRs granted in the year is the fair value calculated at grant date using a discounted cashflow technique. The fair value of each instrument has been calculated independently by Mercer Consulting. The value disclosed for each instrument (Options, PSRs, and DSRs) is the total value for each instrument over the period. This amount is allocated to remuneration (Table 24) over the vesting period. Refer Note F3 of the financial statements for further detail of the assumptions used in determining grant date fair value of Options and PSRs. (2) The value of rights (Options, PSRs, and DSRs) 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 rights were exercised, after deducting any exercise price. The exercise price for PSRs and DSRs is nil. (3) D Barnes and D Baldwin’s Contact securities were issued under the Contact Energy Employee LTI Scheme as Chief Executive Officer or Managing Director (respectively) of Contact Energy. Contact Energy relied on NZSX Listing Rule 7.3.9 to allow participation of the CEO/Managing Director in the LTI Scheme. D Baldwin received 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 and until Origin sold its interest in Contact Energy on 10 August 2015, but did not receive further securities in Contact Energy under its LTI Scheme. D Barnes and D Baldwin retain Contact Energy securities subject to their corresponding exercise hurdles and vesting requirements. (4) G Mallett was appointed KMP on 16 May 2016. (5) K Moses ceased being KMP on 16 May 2016. (6) D Barnes ceased being KMP on 10 August 2015. 53 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Table 27: Details of Options, PSRs, and DSRs Granted in FY2016 Rights (Options, PSRs, and DSRs) to equity in the Company granted to KMP during the period are listed below. No NEDs hold Options, PSRs or DSRs. No Options, PSRs, or DSRs have been granted since the end of the reporting period. Options, PSRs, and DSRs 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. 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. Subject to achieving the performance hurdles, Options and PSRs granted in the period will be exercisable four years after the Grant Date. Details of the performance hurdles are included in the LTI information in section 2.3. KMP Executive Director – current G King Other Executive KMP – current D Baldwin F Calabria G Mallett(2) Executive Director – former K Moses(3) Other Executive KMP – former D Barnes(4) Number Granted during FY2016 Grant Date Accounting(1) Fair Value(1) Exercise Price Vesting Date Expiry Date Nil – – – – – 690,000 69,876 19,554 19,554 19,554 1,186 1,186 1,186 570,150 57,739 20,545 20,545 20,545 975 975 975 Nil Nil Nil 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 22 Oct 2015 – – – $0.84 $2.60 $5.75 $5.57 $5.36 $5.92 $5.74 $5.57 $0.84 $2.60 $5.75 $5.57 $5.36 $5.92 $5.74 $5.57 – – – $6.78 – – – – – – – $6.78 – – – – – – – – – – 21 Oct 2019 21 Oct 2019 21 Oct 2016 23 Oct 2017 22 Oct 2018 22 Oct 2015 24 Oct 2016 23 Oct 2017 21 Oct 2019 21 Oct 2019 21 Oct 2016 23 Oct 2017 22 Oct 2018 22 Oct 2015 24 Oct 2016 23 Oct 2017 – 21 Oct 2025 21 Oct 2019 21 Oct 2016 23 Oct 2017 22 Oct 2018 22 Oct 2015 24 Oct 2016 23 Oct 2017 21 Oct 2025 21 Oct 2019 21 Oct 2016 23 Oct 2017 22 Oct 2018 22 Oct 2015 24 Oct 2016 23 Oct 2017 – – – – – Type – Options PSRs DSRs DSRs DSRs DSRs DSRs DSRs Options PSRs DSRs DSRs DSRs DSRs DSRs DSRs – – – (1) Fair values are at the date of grant. (2) G Mallett was appointed KMP on 16 May 2016, grants relate to the period 16 May 2016 to 30 June 2016. (3) K Moses ceased being KMP on 16 May 2016, grants relate to the period 1 July 2015 to 16 May 2016. (4) D Barnes ceased being KMP on 10 August 2015, grants relate to the period 1 July 2015 to 10 August 2015. 54 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Table 28: Options, PSRs and DSRs movement in holdings and transactions during FY2016 Movement during the reporting period in the number of rights (Options, PSRs, and DSRs) to equity in the Company (and, for D Baldwin and D Barnes, in Contact Energy) held directly, indirectly or beneficially by the KMP including their related parties are listed below. No NEDs hold Options, PSRs, or DSRs. Held at period start Granted during the period Exercised during the period Lapsed(1) during the(1) period(1) Held at end period Vested during period Vested &(2) exercisable(2) at end(2) period(2) Executive Director – current G King Other Executive KMP D Baldwin F Calabria G Mallett(3) Executive Director – former K Moses(4) Other Executive KMP – former D Barnes(5) Type Options PSRs DSRs Options PSRs DSRs Contact Options Contact PSRs Options PSRs DSRs Options PSRs DSRs 3,389,742 796,514 47,976 1,061,016 258,175 25,020 470,946 106,104 943,907 222,999 20,565 263,663 56,820 28,585 Options PSRs DSRs 1,434,895 339,443 29,358 Options PSRs Contact Options Contact PSRs Contact DSRs 169,297 40,525 2,522,607 366,850 51,390 0 0 0 690,000 69,876 62,220 – – 570,150 57,739 64,560 0 0 0 0 0 0 0 0 – – – 0 0 15,992 0 0 9,526 0 106,104 0 0 7,830 0 0 0 371,212 488,676 0 3,018,530 307,838 31,984 118,369 125,727 0 1,632,647 202,324 77,714 470,946 0 104,166 132,186 0 0 0 0 0 0 1,409,891 148,552 77,295 263,663 56,820 28,585 0 0 9,786 145,202 196,551 0 1,289,693 142,892 19,572 0 0 15,992 0 0 9,526 0 106,104 0 0 7,830 0 0 0 0 0 9,786 0 0 0 0 0 0 0 0 0 – 0 0 0 0 0 0 0 0 0 0 0 169,297 40,525 0 0 0 0 0 0 0 0 0 0 2,522,607 366,850 51,390 2,522,607 366,850 51,390 0 366,850 51,390 (1) All lapsed Options (including Contact Options) were granted during FY2011 and all lapsed PSRs were granted during FY2011 and/or FY2013. (2) No Options or rights vested at the end of the period. With the exception of D Barnes in relation to Contact Options, there were no vested but unexercisable rights at the end of the period. (3) G Mallett was appointed KMP on 16 May 2016. Period start is 16 May 2016 and period end 30 June 2016. (4) K Moses ceased being KMP on 16 May 2016. Period start is 1 July 2015 and period end 16 May 2016. (5) D Barnes ceased being KMP on 10 August 2015. Period start is 1 July 2015 and period end 10 August 2015. 55 REMUNERATION REPORTORIGIN ENERGY ANNUAL REPORT 2016REMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 Table 29: Equity Holdings and Transactions Movements during FY2016 in the number of ordinary shares of the Company and in Contact Energy held directly, or indirectly or beneficially by KMP, including their related parties. Shares held in Origin Energy Limited Non-executive Directors – current(3) J Akehurst M Brenner G Cairns B Morgan H Nugent S Perkins(4) S Sargent Executive Director – current G King Other Executive KMP – current D Baldwin(5) F Calabria(5) G Mallett(6) Non-executive Directors – former(3) R Norris(7) Executive Director – former K Moses(8) Other Executive KMP – former D Barnes(9) Shares held in Contact Energy Limited Executive Director – current G King Other Executive KMP – current D Baldwin Executive Director – former K Moses(8) Other Executive KMP – former D Barnes(9) Held at start period Transferred In/Purchased Received on(1) exercise of(1) Options(1) Received(1 on exercise(1 of PSRs(1) Received(1 on exercise(1 of DSRs(1) Transferred Out/ Disposed Held at end(2) period(2) 71,200 21,000 104,480 30,000 38,834 0 0 0 1,117 59,180 17,143 22,192 30,000 31,429 1,009,059 576,606 1,469 80,770 34,278 40,000 1,166 46,374 0 0 133,374 76,214 20,220 11,555 33,886 1,000 21,038 0 0 0 0 0 – – – – – – – – – – – – – – – – – 0 – – – – – – – – – – – – – – – 106,104 – 0 – – – – – – – 15,992 9,526 7,830 – – 9,786 – – – – 0 0 0 0 0 0 0 0 0 0 0 0 0 0 71,200 22,117 163,660 47,143 61,026 30,000 31,429 1,601,657 12,161 134,974 34,278 40,000 219,374 21,775 10,000 33,886 107,104 0 0 0 0 21,038 0 Table 30: Loans and Other Transactions with KMP There were no loans with key management personnel during the year. Transactions entered into during the year with key management personnel are normal employee, customer or supplier relationships and have terms and conditions which are no more favourable than dealings in the same circumstances on an arm’s length basis. These transactions include: — the receipt of dividends from Origin Energy Limited or participation in the Dividend Reinvestment Plan; — participation in the Employee Share Plan, Equity Incentive Plan and Non-executive Director Share Plan; — participation in the October 2015 rights issue as a shareholder; — terms and conditions of employment or directorship appointment; — reimbursement of expenses incurred in the normal course of employment; — purchases of goods and services; and — receipt of interest on Retail Notes. 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. Signed in accordance with a resolution of Directors Gordon Cairns, Chairman Sydney, 18 August 2016 (1) After vesting and after payment of the exercise price (the exercise price for PSRs and for DSRs is nil). (2) Other than options and rights disclosed elsewhere in this Report, no other equity instruments including shares in the Company or in Contact Energy were granted to KMP during the period. (3) NEDs purchased shares on-market, or participated in the Company’s Dividend Reinvestment Plan or the September 2015 Entitlement Offer, and were not issued shares under any incentive or equity plans. Includes allotment of 139 fully-paid ordinary shares by the Company under the general Employee Share Plan. (4) S Perkins was appointed as NED on 1 September 2015, movements relate to the period 1 September 2015 to 30 June 2016. (5) (6) G Mallett was appointed KMP on 16 May 2016, movements relate to the period 16 May 2016 to 30 June 2016. (7) R Norris retired as NED on 16 September 2015, movements relate to the period 1 July 2015 to 16 September 2015. (8) K Moses ceased being KMP on 16 May 2016, movements relate to the period 1 July 2015 to 16 May 2016. (9) D Barnes ceased being KMP on 10 August 2015, movements relate to the period 1 July 2015 to 10 August 2015. 56 REMUNERATION REPORTREMUNERATION REPORT FOR THE YEAR ENDED 30 JUNE 2016 LEAD AUDITOR’S INDEPENDENCE DECLARATION LEAD AUDITOR’S INDEPENDENCE DECLARATION 57 ABCDLead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To: the directors of Origin Energy LimitedI declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2015there have been:(i)no contraventions of the auditor independence requirements as set out in the Corporations Act 2001in relation to the audit; and(ii)no contraventions of any applicable code of professional conduct in relation to the audit. KPMGAlison KitchenPartnerSydney 20 August 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. ORIGIN ENERGY ANNUAL REPORT 2016 BOARD OF DIRECTORS Gordon Cairns INDEPENDENT NON-EXECUTIVE CHAIRMAN John Akehurst INDEPENDENT NON-EXECUTIVE DIRECTOR Bruce Morgan INDEPENDENT NON-EXECUTIVE DIRECTOR Bruce Morgan joined the Board in November 2012 and is Chairman of the Audit Committee and a member of the Health, Safety and Environment, Nomination and Risk committees. Bruce served as Chairman of the Board of PricewaterhouseCoopers (PwC) Australia between 2005 and 2012. In 2009, he was elected as a member of the PwC International Board, serving a four year term. He was previously Managing Partner of PwC’s Sydney and Brisbane offices. An audit partner of the firm for over 25 years, he was focused on the financial services and energy and mining sectors leading some of the firm’s most significant clients in Australia and internationally. He is Chairman of Sydney Water Corporation (since October 2013), a Director of Caltex Australia Ltd (since June 2013), Chairman of Redkite (since April 2015), a Director of the University of NSW Foundation and the European Australian Business Council. Bruce has a Bachelor of Commerce (Accounting and Finance) from the University of NSW. Bruce is a Fellow of Chartered Accountants Australia and New Zealand and of the AICD. Gordon Cairns joined the Board on 1 June 2007 and became Chairman in October 2013. He is Chairman of the Nomination Committee and a member of the Risk, Remuneration, Audit and Health, Safety and Environment committees. He has extensive Australian and international experience as a senior executive, as Chief Executive Officer of Lion Nathan Ltd, and has held senior management positions in marketing, operations and finance with PepsiCo, Cadbury Ltd and Nestlé. Gordon is Chairman of Woolworths Ltd (since September 2015), Director of Macquarie Group Limited and Macquarie Bank Limited (since November 2014), Director of Quick Service Restaurant Group (since October 2011) and Non-executive Director of World Education Australia (since November 2007). He was previously Chairman of the Origin Foundation (2010-2015), David Jones Ltd (March 2014 – August 2014), Rebel Group (2010-2012), Director of The Centre for Independent Studies (May 2006 – August 2011) and Director of Westpac Banking Corporation (July 2004 – December 2013). He was a senior advisor to McKinsey & Company. Gordon holds a Master of Arts (Honours) from the University of Edinburgh. Grant 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 1994. Grant is a member of the Company’s Health, Safety and Environment Committee. Prior to joining Boral, he was General Manager, AGL Gas Companies. Grant is 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 Chairman of Contact Energy Limited (2004-2015), a former Director of Envestra Ltd (1997-2007) and former Chairman of the Energy Supply Association of Australia Ltd. Grant is a Fellow of the AICD. Grant has a Civil Engineering degree from the University of NSW and a Master of Management from the University of Wollongong. John Akehurst joined the Board in April 2009. He 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 (since August 2003), and Chairman of Transform Exploration Pty Ltd. 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, Securency Ltd, Murdoch Film Studios Pty Ltd and the University of Western Australia Business School. John holds a Masters in Engineering Science from Oxford University and is a Fellow of the Institution of Mechanical Engineers. Maxine Brenner INDEPENDENT NON-EXECUTIVE DIRECTOR Maxine Brenner joined the Board in November 2013. She is Chairman of the Risk Committee and a member of the Audit and Nomination committees. Maxine is a Non-executive Director of Orica Ltd (since April 2013) and Qantas Airways Ltd (since August 2013). She is also an Independent Director and Chairman of the Audit and Risk Committee for Growthpoint Properties Australia and a member of the University of NSW Council. Maxine was formerly a Managing Director of Investment Banking at Investec Bank (Australia) Ltd. Prior to Investec, Maxine was a Lecturer in Law at the University of NSW and a lawyer at Freehills, specialising in corporate law. Her former directorships include Treasury Corporation of NSW, Neverfail Springwater Ltd, Federal Airports Corporation, where she was Deputy Chair, and Bulmer Australia Ltd. In addition, Maxine has served as a Council Member of the State Library of NSW and as a member of the Takeovers Panel. Maxine holds a Bachelor of Arts and a Bachelor of Laws from the University of NSW. 58 BOARD OF DIRECTORS BOARD OF DIRECTORS Dr Helen Nugent AO INDEPENDENT NON-EXECUTIVE DIRECTOR Scott Perkins INDEPENDENT NON-EXECUTIVE DIRECTOR Steve Sargent INDEPENDENT NON-EXECUTIVE DIRECTOR Scott Perkins joined the Board in September 2015 and is a member of the Audit and Remuneration committees. Scott is a Non-executive Director of Woolworths Limited and Brambles Limited. He is Chairman of Sweet Louise, a Director of the Museum of Contemporary Art in Sydney and the New Zealand Initiative. Scott was previously a Non-executive Director of Meridian Energy. Scott has extensive Australian and international experience as a leading corporate adviser. He was formerly Head of Corporate Finance for Deutsche Bank Australia and New Zealand, and a member of the Executive Committee with overall responsibility for the Bank’s activities in this region. Prior to that he was Chief Executive Officer of Deutsche Bank New Zealand and Deputy CEO of Bankers Trust New Zealand. He has a longstanding commitment to breast cancer causes, the visual arts and public policy development. Scott holds a Bachelor of Commerce and a Bachelor of Laws (Hons) from Auckland University. Steve Sargent joined the Board in May 2015. He is Chairman of the Origin Foundation and a member of the Health, Safety and Environment and Remuneration committees. Steve is a Non-executive Director of OzForex Group Limited and will take over as Chairman of the Board in mid-November 2016. He is a Non-executive Director of Nanosonics Limited and the Great Barrier Reef Foundation. Over recent years, Steve has been a Non-executive Director of Veda Group Limited and Bond University Limited. Steve was also a member of the Australian Treasurer’s Financial Sector Advisory Council, President of the American Chamber of Commerce and a Director on the Board of the Business Council of Australia. Steve’s most recent executive role was President and Chief Executive Officer of GE Mining, GE’s global mining technology and services business. He joined GE Capital in 1993 and held a number of global leadership positions with the company, spanning the US, Europe and Asia. He was a member of the Australian B20 Leadership Group and Coordinating Chair of the B20 Human Capital Taskforce. Steve holds a Bachelor of Business from Charles Sturt University in New South Wales. Steve is a Fellow with the Australian Institute of Company Directors and Fellow with the Australian Academy of Technological Sciences and Engineering. Dr Helen Nugent joined the Board in March 2003. She is Chairman of the Remuneration Committee and a member of the Audit, Risk and Nomination committees. Previously, she was Chairman of the Audit Committee. Helen is currently Chairman of the Australian Rail Track Corporation, and Chairman of the National Portrait Gallery and the National Opera Review. She has significant experience in the financial services sector. She has been Chairman of Funds SA and Veda Group Limited (resigned following takeover in February 2016), as well as Swiss Re Life and Health (Australia) and Swiss Re (Australia). She has also been a Non-executive Director of Macquarie Group (1999-2014), Mercantile Mutual and the State Bank of NSW. As an executive, she was Director of Strategy at Westpac Banking Corporation, reporting to the CEO, and as a Partner at McKinsey & Company, worked extensively in the financial services sector. Helen’s other major clients while she was at McKinsey were in the resources sector, including working for eight years for CRA (Rio Tinto). Subsequently, she has served on the Boards of United Energy and Carter Holt Harvey. Helen gives back to society in the arts, education and the health sector, and is a Non-executive Director of the Garvan Institute. Currently, she is Chairman of the National Portrait Gallery and the National Opera Review. In education, she has recently retired as Chancellor of Bond University and as President of Cranbrook School. She is also a Non-executive Director of the Garvan Institute. Dr Nugent holds a Bachelor of Arts (Hons), a Doctorate of Philosophy in Indian History 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. In 2004, she was made an Officer of the Order of Australia. BOARD OF DIRECTORS 59 ORIGIN ENERGY ANNUAL REPORT 2016 EXECUTIVE MANAGEMENT TEAM David Baldwin CHIEF EXECUTIVE OFFICER INTEGRATED GAS Andrew Clarke GROUP GENERAL COUNSEL AND COMPANY SECRETARY David Baldwin joined Origin in May 2006 and is responsible for its Integrated Gas business, which manages the Company’s portfolio of natural gas and LNG interests across Australia, New Zealand and internationally, as well as exploration and development activities focused on the growth of the gas and LNG businesses. Integrated Gas includes Origin’s interests in Australia Pacific LNG, as operator of the upstream and pipeline components of the joint venture and as gas marketing agent. Prior to this role, David was Chief Executive Officer of Origin’s LNG business and was also previously the Company’s Chief Development Officer. Until April 2011, David was Managing Director of integrated energy company Contact Energy in New Zealand, in which Origin had a 53.1 per cent interest. He continues to serve on the Board of Australia Pacific LNG and is a former Director of Contact Energy Limited (2009 – 2015). Before joining Origin, David held senior roles with MidAmerican Energy Holdings Company (now Berkshire Hathaway Energy) in Asia and the United States, and with Shell in New Zealand and the Netherlands. David holds a Master of Business Administration from Victoria University and a Bachelor of Engineering (Chemical) from Canterbury University. Frank Calabria CHIEF EXECUTIVE OFFICER ENERGY MARKETS Frank Calabria joined Origin as Chief Financial Officer in November 2001 and was appointed Chief Executive Officer Energy Markets in March 2009. In this role, Frank is responsible for the integrated business within Australia including retailing and trading of natural gas, electricity and LPG, power generation and the solar and emerging business. Frank is Chairman of the Energy Supply Association of Australia (ESAA) and a Director of the Australian Energy Market Operator (AEMO). Prior to joining Origin, Frank held roles with Pioneer International Ltd, Hanson plc and Hutchison Telecommunications. Frank has a Bachelor of Economics from Macquarie University and a Master of Business Administration (Executive) from the Australian Graduate School of Management. Frank is a Fellow of Chartered Accountants Australia and New Zealand and a Fellow of the Financial Services Institute of Australasia. Andrew Clarke joined Origin in May 2009 and is responsible for the company secretarial and legal functions. He was a partner of a national law firm for 15 years and was Managing Director of a global investment bank for more than two years prior to joining Origin. Andrew has a Bachelor of Laws (Hons) and a Bachelor of Economics from the University of Sydney and is a member of the AICD. Carl McCamish EXECUTIVE GENERAL MANAGER PROPERTY AND TECHNOLOGY Carl McCamish joined Origin in March 2008 and is responsible for the People & Culture, Information Technology and Property and Travel functions, and for the operations of the Origin Foundation. Carl was previously Executive General Manager Corporate Development and subsequently Executive General Manager Corporate Affairs, and more recently Executive General Manager, People & Culture. Before joining Origin, Carl was head of strategic development at the private equity firm, Terra Firma. He was previously Senior Energy Advisor in the United Kingdom Prime Minister’s Strategy Unit. Before that he worked at McKinsey & Company management consultants. Carl has a Bachelor of Arts and Laws from the University of Melbourne and a Masters in Industrial Relations and Labour Economics from Oxford University where he was a Rhodes Scholar. Gary Mallett ACTING CHIEF FINANCIAL OFFICER Gary brings 30 years’ experience as a finance executive having worked across a diverse range of sectors both domestically and internationally. He has been with Origin Energy since 2005 and was appointed as the Acting Chief Financial Officer in May 2016. Gary is responsible for finance, taxation, internal and external communication, and capital markets. Before joining Origin, Gary held senior finance roles with Brambles Limited, North Limited and KPMG. Gary is a Chartered Accountant and holds a Bachelor of Business from RMIT University. In 2012, Gary completed the Advanced Management Programme at INSEAD. 60 EXECUTIVE MANAGEMENT TEAM Origin is committed to the creation of shareholder value and meeting the expectations of stakeholders to practice sound corporate governance. Origin aspires to the highest standards of integrity, personal safety and environmental performance. To achieve this, every employee and contractor is required to act in accordance with Origin’s governance and business conduct standards across its operations in Australia and internationally. — prevent and eliminate unlawful discrimination and harassment; — promote a culture, through communication and visible leadership, where managers and employees proactively apply the Company’s diversity policies and program; — maintain workplace flexibility policies suitable for a leading Australian company; and — maintain a process to deliver gender pay equity at all job levels across the Company. Compliance with the 3rd edition ASX Corporate Governance Principles and Recommendations (ASX Principles) This statement has been approved by the Board and summarises the Company’s governance practices which were in place throughout the financial year ended 30 June 2016. During the financial year and to the date of this Report, Origin has complied with all of the ASX Principles. PRINCIPLE 1: LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT The Board’s roles and responsibilities are formalised in a Board Charter, which is available on the Company’s website. The Charter sets out those functions that are delegated to management and those that are reserved for the Board. The Company Secretary is accountable directly to the Board, through the Chairman, on all matters to do with the proper functioning of the Board. Before a Director is appointed, Origin undertakes appropriate evaluations. These include independent checks of a candidate’s character, experience, education, criminal record, bankruptcy history, and any other factors which would affect the Company’s or the individual’s reputation. Where a candidate is standing for election or re-election as Director, the notice of meeting will set out information on the candidate including biographical details, qualifications and experience, independence status, outside interests and the recommendation of the rest of the Board on the resolution. At the time of joining Origin, Directors and senior executives are provided with letters of appointment, together with key Company documents and information, setting out their term of office, duties, rights and responsibilities, and entitlements on termination. The performance of all key executives, including the Managing Director, is reviewed annually against: — a set of personal financial and non-financial goals; — Company and Business-Unit specific goals; and — adherence to the Company’s Compass, which reflects the role that Origin’s Purpose, Principles, Values and Commitments play in everyday decision making. The Remuneration Committee and the Board consider the performance of the Managing Director and all members of the Executive Management Team (EMT) when deciding whether to award performance-related remuneration through short-term and long-term incentives for the year completed and when assessing fixed remuneration for future periods. Further information on the outcomes of the FY2016 assessment of executive remuneration is set out in the Remuneration Report. Each year, the Directors review the performance of the whole Board, Board committees and individual Directors. This year, a full review was undertaken with assistance from an independent external consultant, covering individual Director performance, the Board and Committees’ activities and work program, time commitments, meeting efficiency and Board contribution to strategy, monitoring, compliance and governance. The results of the review were discussed by the whole Board, and initiatives to improve or enhance Board performance and effectiveness were considered and recommended. Diversity Origin encourages diversity and the expression of ideas and opinions, while also requiring alignment with Origin’s Principles, Values and Commitments and the policies established to implement them. Origin is committed to providing equality of opportunity and a rewarding workplace for all employees, and has policies and procedures in place designed to: Gender Diversity Increasing gender diversity, especially in senior roles, is an ongoing policy priority. Accordingly, in FY2016 Origin committed to: — continue to deliver equal average pay for men and women at each job grade; — increase the number of women in senior roles, with a target to improve the rate of appointment of women to senior roles by 15 per cent; and — improve the retention of women in senior roles, with a target to reduce the gap between male and female turnover to zero. Progress against these targets is reported internally on a quarterly basis to the Diversity Council, comprising the EMT and chaired by the Managing Director. Performance against the targets in FY2016 is described below. Definition of seniority For the purpose of gender diversity targets, ‘senior roles’ includes all people in Hay Pay Scale job grades that pay approximately $150,000 per year or more in total remuneration(1). As at 30 June 2016 there were 1,574 people in senior roles, of which 27.4 per cent were women. We define seniority by reference to standard Hay Pay Scale job grades, rather than reporting relationship to the CEO, for two reasons: — to make genuine comparisons of seniority. In recent years executives leading four support functions have reported to the CEO. A large number of people in corporate support areas such as legal, company secretary, human resources, strategy and communications are therefore only two or three levels below the CEO, while in the operating businesses there are many roles with significant line management responsibility that are more than three levels below; and — to make analysis comparable over time. Any restructure that changes EMT roles also changes the reporting relationship of hundreds of people at lower levels, making it less valid to accurately compare progress on gender pay equality at those levels before and after the restructure. While Origin does not use reporting relationship to the CEO to define Origin’s gender diversity targets, the gender profile of these cohorts is of interest to some external stakeholders and is presented in the following table. Cohorts by gender, 30 June 2016 Cohort Board CEO-1 CEO-2 CEO-3 Senior roles(3) Origin Group No. people 8 9(2) 36 143 1,861 5,811 Proportion female 25% 22% 25% 34% 28% 35% (1) The number can only be approximate because exact remuneration varies by individual by year according to their assessed performance under the Short Term Incentive Scheme. (2) Karen Moses, Executive Director, Finance and Strategy, retired from her role on the Board in the first half of the period and moved out of her associated line management responsibilities into a role working on special projects for the Managing Director. As a result, Gary Mallett moved into the role of Acting Chief Financial Officer, and three executives who previously reported to Karen Moses reported to the Managing Director on an interim basis. The numbers in the table represent the situation after the interim arrangements came into place. (3) Definitions for CEO-1, CEO-2 and CEO-3 are as per Workplace Gender Equality Agency guidelines (i.e. excluding clerical, administration and other staff that do not themselves manage people). With all staff included, CEO-3 at Origin was 46 per cent female (cohort 219). 61 CORPORATE GOVERNANCE STATEMENTORIGIN ENERGY ANNUAL REPORT 2016CORPORATE GOVERNANCE STATEMENTFOR THE YEAR ENDED 30 JUNE 2016 Performance versus targets 3. Target to reduce the gap between male and female turnover to zero 1. Target to deliver equal average pay for men and women at each job grade Average pay for men and women at each job grade fluctuates during the year as the population in each grade cohort changes with turnover, recruitment and promotions. As part of the appointment process and also annually in September when the majority of the workforce has remuneration reviewed to market, pay decisions are monitored for their impact on gender positioning. Over time, as seen in the following chart, these processes have driven a long-term improvement in gender pay balance. Origin defines ‘equal work’ by the industry standard of Hay job grades. At the end of FY2016, average female pay was higher at some grades than average male pay and lower at others. The average difference between male and female pay across all job grades was just below 1 per cent. Due to large-scale downsizing programs executed during the year, turnover for both men and women was much higher than in previous years. Overall, 25.5 per cent of men in senior roles and 31 per cent of women in senior roles left Origin during the year. The Fit for the Future program reduced the number of people in functional support roles in Origin by approximately half. Those roles were held, both before and after the reductions, by approximately 50 per cent women, 50 per cent men. This compares to the overall Company split, in senior roles, of 28.6 per cent female, 71.4 per cent male. We knew therefore that a large-scale reduction in the functional areas, even if gender neutral, would disproportionately affect the gender split across Origin, which it did in the final result. The gap of 5.5 percentage points between male and female turnover in senior roles means we did not achieve our target. Gender pay gap (graded population weighted average) to 30 Jun 2016 Targets for FY2017 Origin’s public diversity targets for FY2017 will be: 8% 6% 4% 2% 0% i s t n o p e g a t n e c r e P -2% Dec 1999 Dec 2005 Dec 2010 Jun 2016 2. Target to improve the rate of appointment of women to senior roles by 15 per cent versus the prior year The percentage of women recruited into senior roles (28.6 per cent) was down, after three years of significant improvement, as shown in the following chart. The key policies and actions introduced four years ago to drive that improvement were still in place in FY2016, namely, every interview panel for a senior role must be made up of both men and women; where possible(1) every shortlist must have at least one woman; and progress versus target for each Business Unit is reported to and reviewed by the Diversity Council each quarter. During the year very significant effort went into the fair and orderly downsizing of Origin’s workforce, and senior appointments were relatively few compared to previous years. Nevertheless, the FY2016 result on appointments was disappointing in light of the recent progress. . % 3 1 % 4 9 5 3 . % 6 8 2 . % 8 2 2 . % 4 3 2 . % 2 4 2 . % 8 5 2 . % 7 5 2 . % 5 4 2 . % 5 2 3 . s e r i h r o n e s i l a t o T / s e r i h e a m e f l i r o n e S FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 TARGET FY2016 FY2016 External appointment to senior roles (per cent females) — continue to deliver equal average pay for men and women at each job grade; — increase the number of women in senior roles, with a target that 36 per cent of such appointments be female; and — improve the retention of women in senior roles, with a target to reduce the gap between male and female turnover to zero. If female appointments to senior roles were to be 36 per cent, this would represent a 25 per cent improvement on our performance in FY2016. Thirty six per cent has been targeted because it would constitute our best ever performance on this measure. The Board oversees Origin’s strategies on gender diversity, including monitoring achievements against gender targets set by the Board. The Board has set itself a target of females being at least 40 per cent of the Board by 2020. PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE The Board is structured to facilitate the effective discharge of its duties and to add value through its deliberations. In FY2016, the Board had 10 scheduled meetings, including a two-day strategic planning meeting. The Board also had six separate scheduled workshops to consider matters of particular relevance. Outside of scheduled meetings, the full Board met on three other occasions to consider significant matters. In addition, the Board conducted visits of Company operations and met with operational management during the year. From time to time, the Board delegates its authority to non-standing committees of Directors to consider transactional or other matters. In the 12 months to 30 June 2016, five such additional Board Committee meetings were held. In addition, the Board established a Due Diligence Committee as part of the pro-rata accelerated renounceable entitlement offer which took place in 2015. This Committee met nine times. At Board meetings, Directors receive reports from executive management on financial and operational performance, risk, strategy, people, HSE, and major projects or initiatives in which Origin is involved. In addition, the Directors receive reports from Board Committees and, as appropriate, presentations on opportunities and risks for the Company. Non-executive Directors also meet without the presence of management (including the Managing Director) to address such matters as succession planning, key strategic issues, and Board operation and effectiveness. All Directors have access to Company employees, advisers and records. In carrying out their duties and responsibilities, Directors have access to advice and counsel from the Chairman, the Company Secretary and the Group General Counsel, and are able to seek independent professional advice at the Company’s expense, after consultation with the Chairman. (1) Some senior roles, mainly engineering and technical, receive no female applicants or no candidates are able to be identified. 62 CORPORATE GOVERNANCE STATEMENTCORPORATE GOVERNANCE STATEMENTFOR THE YEAR ENDED 30 JUNE 2016 New Directors undergo an induction program which includes sessions with members of management, Chairman of the Board, and Chairmen of each relevant Board Committee, and visits to key operations to familiarise them with Origin’s business and administration. Directors also receive continuing education through ongoing briefings and workshops on industry, regulatory or other relevant topics and attendance at industry or governance conferences. The Board’s size and composition is determined by the Directors, within limits set by Origin’s Constitution, which requires a Board of between five and 12 Directors. As at 30 June 2016, the Board comprised eight Directors, including seven Non-executive Directors, all of whom are considered independent by the Board, and the Managing Director. Of the eight Directors, two are women. Directors’ profiles, duration of office and details of their skills, experience and special expertise are set out in the Directors’ Report. The Board seeks to have an appropriate mix of skills, experience, expertise and diversity to enable it to discharge its responsibilities and add value to the Company. The Board values diversity in all respects, including gender and differences in background and life experience, communication styles, interpersonal skills, education, functional expertise and problem solving skills. Together, the Directors contribute the following key skills and experience: Skills and experience Diversity Diversity in gender, background, geographic origin, experience (industry and public, private and non-profit sectors). Executive and strategic leadership Senior executive and directorship experience. Financial and risk management Senior executive experience in financial accounting and reporting, corporate finance, risk and internal controls. Governance and Board Prior experience as a Board member or membership of governance bodies. HSE and sustainability Experience related to health, safety, environment, social responsibility and sustainability. Industry (oil and gas, exploration) Experience in the oil and gas industry, or upstream or integrated exploration and production company. International Experience working in an organisation with global operations, or understanding of different cultural, political, regulatory and business requirements. Regulatory and public policy Legal background or experience in regulatory and public policy. Remuneration Remuneration Committee membership or experience in relation to remuneration, including incentive programs. Retail and marketing Experience in retail or marketing industry. Board representation (out of 8 Directors) 7 8 6 8 5 3 8 5 7 5 The Company’s policy on the Independence of Directors requires that the Board is comprised of a majority of independent Directors. In defining the characteristics of an independent Director, the Board uses the ASX Principles, together with its own considerations of the Company’s operations and businesses and appropriate materiality thresholds. Further details of the matters considered by the Board in assessing independence are contained in the Independence of Directors Policy which is part of the Board Charter and is available on the Company’s website. The Board reviews each Director’s independence annually. At its review for the FY2016 reporting period, the Board formed the view that all Non-executive Directors were independent. The Board selects and appoints the Chairman from the independent Directors. The Chairman, Mr Cairns, is independent and his role and responsibilities are separate from those of the Managing Director. Five Committees assist the Board in executing its duties relating to audit, remuneration, health, safety and environment (HSE), nomination and risk. Each Committee has its own Charter which sets out its role, responsibilities, composition, structure, membership requirements and operation. These are available on the Company’s website. Each Committee’s Chairman reports to the Board on the Committee’s deliberations at the following Board meeting where the Committee meeting minutes are also tabled. Additional and specific reporting requirements to the Board by each Committee are addressed in the respective Committee Charters. Additional information about the Audit Committee, Risk Committee, HSE Committee and Remuneration Committee is provided in response to Principles 4, 7 and 8 respectively. A list of the members of each Board Committee as at 30 June 2016 is set out on the following page and their attendance at Committee meetings during FY2016 is set out in the Directors’ Report. 63 CORPORATE GOVERNANCE STATEMENTORIGIN ENERGY ANNUAL REPORT 2016CORPORATE GOVERNANCE STATEMENTFOR THE YEAR ENDED 30 JUNE 2016 Board Committee membership as at 30 June 2016 and Tenure Independent Non-executive Directors John Akehurst Maxine Brenner Gordon Cairns Bruce Morgan Helen Nugent Scott Perkins Steve Sargent(1) Managing Director Grant King Audit Remuneration Member Member Chairman Member Member Member Chairman Member Member The Nomination Committee is comprised of the Chairman of the Board and the Chairman of each other Board Committee, and is chaired by Mr Cairns. The Nomination Committee met once during FY2016, and provides support and advice to the Board by: — assessing the range of skills and experience required on the Board and of Directors as part of the Company’s continued consideration of Board renewal and succession planning; — reviewing the performance of Directors and the Board; — establishing processes to identify suitable Directors, including the use of professional intermediaries; — recommending Directors’ appointments and re-elections; and — considering the appropriate induction and continuing education provided for Directors. When identifying potential candidates, the Nomination Committee considers the current and future needs of Origin and desired attributes and skill sets for a new Director. Where a candidate is recommended by the Nomination Committee, the Board will assess that candidate against a range of criteria including background, experience, professional qualifications and the potential for the candidate’s skills to augment the existing Board and his/her availability to commit to the Board’s activities. If these criteria are met and the Board appoints the candidate as a Director, that Director will stand for election by shareholders at the following Annual General Meeting (AGM). Each year the performance of the Directors retiring by rotation and seeking re-election under the Constitution is reviewed by the Nomination Committee (other than the relevant Director), the results of which form the basis of the Board’s recommendation to shareholders. The review considers a Director’s expertise, skill and experience, along with his/her understanding of the Company’s business, preparation for meetings, relationships with other Directors and management, awareness of ethical and governance issues, independence of thought and overall contribution. The Board reviewed the performance of Mr Cairns and Mr Morgan, who are standing for re-election at the AGM in October 2016. Neither Mr Cairns nor Mr Morgan were present for his own review. The Board found that each of the Directors seeking re-election had been high performing Directors and concluded that each of them should be proposed for re-election. PRINCIPLE 3: ACT ETHICALLY AND RESPONSIBLY All Directors and employees are expected to comply with the law and act with a high level of integrity. Origin has a Code of Conduct and a number of policies governing conduct in pursuit of Company objectives in dealing with shareholders, employees, customers, communities, business partners, suppliers, contractors and other stakeholders. The Code of Conduct is based on the Company’s Statement of Purpose, Principles, Values and Commitments (Origin Compass), which serves as a guide to Origin’s decision making, behaviours and actions for its employees. (1) Mr Sargent also chairs the Origin Foundation. 64 Committee Health, Safety and Environment Committees Chairman Member Member Member Member Nomination Risk Member Member Chairman Member Member Member Chairman Member Member Member Tenure on Board 7 years 4 months 2 years 9 months 9 years 2 months 3 years 9 months 13 years 5 months 11 months 1 year 3 months 16 years 6 months The Origin Compass and a summary of the Code of Conduct is available on Origin’s website. Origin prohibits the offer, payment, solicitation or acceptance of bribes and facilitation payments in any form. It also prohibits the provision of gifts and gratuities, both directly and indirectly, to public officials or relatives or associates of public officials. The giving or receiving of gifts or hospitality is prohibited in all circumstances that influence, create obligations or conflicts of interest, indicate favouritism or do not align with Origin’s Code of Conduct. Origin encourages individuals to report known or suspected instances of inappropriate conduct, including breaches of the Code of Conduct and other policies and directives. There are policies in place designed to protect employees and contractors from any reprisal, discrimination or being personally disadvantaged as a result of their reporting a concern. PRINCIPLE 4: SAFEGUARD INTEGRITY IN CORPORATE REPORTING The Board has an Audit Committee which comprises five Non-executive Directors, all of whom are independent. The Chairman of the Board cannot chair the Audit Committee. The Chairman of the Audit Committee, Mr Morgan, is an independent Director with significant financial expertise. All members of the Committee are financially literate and the Committee possesses sufficient accounting and financial expertise and knowledge of the industry in which Origin operates. Prior to approval of the Company’s financial statements for each financial period, the Managing Director and the Acting Chief Financial Officer give the Board a declaration that, in their opinion, the financial records have been properly maintained, that the financial statements complied with the accounting standards and gave a true and fair view, and that their opinion had been formed on the basis of a sound system of risk management and internal compliance and control which was operating effectively. The Audit Committee oversees the structure and management systems that are designed to protect the integrity of the Company’s corporate reporting. The Audit Committee reviews the Company’s half and full year financial reports and makes recommendations to the Board on adopting the financial statements. The Committee provides additional assurance to the Board with regard to the quality and reliability of financial information. The Committee has the authority to seek information from any employee or external party. The internal and external auditors have direct access to the Audit Committee Chairman and, at each scheduled Committee meeting, meet separately with the Committee without management present. The Committee reviews the independence of the external auditor, including the nature and level of non-audit services provided, and reports its findings to the Board every six months. CORPORATE GOVERNANCE STATEMENTCORPORATE GOVERNANCE STATEMENTFOR THE YEAR ENDED 30 JUNE 2016 The names of the members of the Audit Committee are set out in the table under Principle 2 and their attendance at meetings of the Committee is set out in the Directors’ Report. Origin has a wide stakeholder engagement program and a dedicated investor relations function to facilitate effective two-way communication with investors. The external auditor attends the Company’s AGM and is available to answer questions from shareholders relevant to the audit. The Communications with Shareholders Policy is available on the Company’s website. PRINCIPLE 5: MAKE TIMELY AND BALANCED DISCLOSURE Origin has adopted policies and procedures designed to ensure compliance with its continuous disclosure obligations and make senior management accountable for that compliance. Origin is committed to providing timely, full and accurate disclosure and to keeping the market informed with quarterly releases detailing exploration, development and production, and half and full year reports to shareholders including in digital format on the Company’s website. All material matters are disclosed immediately to the stock exchanges on which Origin’s securities are listed (and subsequently to the media, where relevant), as required by the relevant listing rules. All material investor presentations are released to the stock exchanges and are posted on the Company’s website. Other reports or media statements that do not contain price sensitive information are included on the Company’s website. Shareholders can subscribe to an email notification service and receive notice of any announcements released by the Company. Both the Continuous Disclosure Policy and the Communications with Shareholders Policy are available on the Company’s website. PRINCIPLE 6: RESPECT THE RIGHTS OF SHAREHOLDERS Origin respects the rights of its shareholders and has adopted policies to facilitate the effective exercise of those rights through participation at general meetings and with the provision of information about Origin and its operations. Origin is committed to providing a high standard of communication to shareholders and other stakeholders so that they have all available information reasonably required to make informed assessments of the Company’s business value and prospects. Shareholders are able to review the financial and non-financial performance of Origin via a half year report, shareholder review, Annual Report, Sustainability Report and annual general meeting materials. These reports are also available on the ASX and in online digital format via Origin’s website. Shareholders may also request these in hardcopy. Sustainability reporting is guided by the Global Reporting Initiative and includes disclosures of material environmental, social and governance (ESG) aspects of the Company’s business activities. Origin also discloses other ESG information via regulated National Greenhouse Emissions Reporting, as well as voluntary disclosure platforms such as the Carbon Disclosure Project. Origin regularly engages with and provides requested information to research firms. Origin was again included in the FSTE4Good Index and the Dow Jones Sustainability Australia Index during the period. All communications from, and the majority of communications to, the Company’s share registry are available electronically, including the publication of company reports, and shareholders are encouraged to take up the option of e-communications. Origin’s website contains a list of key dates and all recent announcements, presentations, past and current company reports and notices of meetings. Shareholder meetings and results announcements are webcast and an archive of these meetings is published on the Company’s website. Origin welcomes and encourages shareholders to attend and participate at its AGM, either in person, by proxy or attorney, or by other means adopted by the Board. At each AGM, the Chairman allows a reasonable opportunity for shareholders to ask questions of the Board and the external auditors. Shareholders who are unable to attend the AGM are able to view a webcast of the meeting (and certain past general meetings) on the Company’s website. In addition to shareholders, the Company’s projects and operations necessitate interaction with a range of stakeholders including local communities, business partners, government, industry, media, suppliers and NGOs. Origin has a program to support these stakeholder interactions and facilitate constructive relationships. These include: — dedicated community advisors to help facilitate and implement the Company’s engagement with local communities and regular dialogue with the communities in which Origin operates; — a government relations team which regularly interacts with policy makers within the jurisdictions of Origin’s operations, particularly to help develop sound and stable policy to ensure business certainty; — dedicated external affairs team with regular interaction with media and NGOs to create a better understanding of Origin’s business; and — making a contribution to the formulation of energy and carbon policy through public submissions to various enquiries (public submissions Origin has made in these areas are available on the government or the Company’s website). Further information on the Company’s stakeholder engagement program can be found in the Sustainability Report under Engaging with Stakeholders. Customers are a central part of Origin’s engagement, innovation and value creation. Origin continues to adapt processes, introduce new products and invest in technology to provide customers with greater choice and an improved customer experience. The Sustainability Report provides further information on Origin’s interaction with its customers. PRINCIPLE 7: RECOGNISE AND MANAGE RISK Origin’s approach to risk management aims to embed a risk-aware culture in all decision-making and to manage risk in a proactive and effective manner. The Board has an overarching policy governing the Company’s approach to risk oversight and management and internal control systems. This policy and further information on Origin’s approach to managing its material risks is available on the Company’s website. Origin has established a Risk Committee to oversee its policies and procedures in relation to risk management and internal control systems. The Risk Committee is comprised of the Chairman of the Board and the Chairman of each other Board Committee, and is chaired by independent Non-executive Director Ms Brenner. The Risk Committee Charter is available on the Company’s website. The names of the members of the Risk Committee are set out in the table under Principle 2 and a record of their attendance at meetings of the Committee is set out in the Directors’ Report. The Chief Risk Officer has unfettered access to the Chairman of the Risk Committee. The Company’s risk policies are designed to identify, assess, manage and monitor strategic, operational, financial and project risks and mitigate the impact in the event that they materialise. The Board has also approved policies for hedging interest rates, foreign exchange rates and commodities. Certain specific risks are covered by insurance. Management is responsible for the design and implementation of the risk management and internal control systems to manage the Company’s risks. Management reports to the Risk Committee on how material risks are being managed and the effectiveness of controls in place to mitigate those risks. The Risk Committee has an annual calendar that includes regular detailed risk profile reviews. The Risk Committee reviews the Company’s risk management framework annually to satisfy itself that it continues to be sound. An independent review of the design of the risk management framework was completed during the financial year and it found the framework 65 CORPORATE GOVERNANCE STATEMENTORIGIN ENERGY ANNUAL REPORT 2016CORPORATE GOVERNANCE STATEMENTFOR THE YEAR ENDED 30 JUNE 2016 In addition to stakeholder measurement through RepTrak, Origin also engages a number of bespoke advisors to provide real-time monitoring of mainstream and social media to evaluate the external operating environment and ensure emerging risks, issues and shifting public and policy debates are identified and addressed accordingly. Quarterly quantitative and qualitative mainstream media analysis is undertaken to better understand external trends, sentiment and key public influencers. These insights influence and inform Origin’s external affairs and stakeholder engagement strategies, as well as customer facing positioning and community engagement approaches. PRINCIPLE 8: REMUNERATE FAIRLY AND RESPONSIBLY The Remuneration Report sets out details of the Company’s policies and practices for remunerating Directors, key management personnel and employees. The Board has a Remuneration Committee which comprises four Non-executive Directors, all of whom are independent. The Chairman, Dr Nugent, is an independent Director. The names of the members of the Remuneration Committee are set out under Principle 2 and a record of their attendance at meetings of the Committee is set out in the Directors’ Report. Further information about the Remuneration Committee’s activities is provided in the Remuneration Report. The remuneration of Non-executive Directors is structured separately from that of the Managing Director and senior executives. Information on remuneration for Non-executive Directors is in the Remuneration Report. Origin has established a policy which governs dealings in its securities. This precludes any Origin personnel from engaging in short-term dealings in the Company’s securities and margin loans should not be entered into if they could cause a dealing that is in breach of the general insider trading provisions of the Corporations Act or the Policy. Origin personnel are prohibited from entering into hedging transactions which operate to limit the economic risk of any of their unvested equity-based incentives. The Dealing in Securities Policy is available on the Company’s website. The Code of Conduct, Dealings in Securities Policy and other relevant policies are supported by appropriate training programs and regular updates. Information referred to in this Corporate Governance Statement as being on the Company’s website may be found at the web address: www.originenergy.com.au under the section ‘About – Investors & Media – Governance’. to be sound. Management has reported to the Risk Committee and the Board that, as at 30 June 2016, the framework is sound. Origin also has an internal audit function which utilises both internal and external resources to provide an independent appraisal of the adequacy and effectiveness of the Company’s risk management and internal control systems. The internal audit function has direct access to the Chairmen of the Audit and HSE Committees and management, and has the right to seek information. A risk-based approach is used to develop the annual internal audit plan, aligning planned internal audit activities to the Company’s material risks. The internal audit plan is approved by the Audit and HSE Committees annually and reviewed quarterly. In addition to internal audit activities, second line assurance activity is undertaken across the business in the management of risk. The findings of this activity are reported through to the relevant executive and, where appropriate, Board Committee. Origin’s approach to the management of risks and controls reflects the ‘three lines of defence’ model. The first line of defence comprises operational business managers that own and manage risks. The second line of defence comprises the corporate functions that oversee/ monitor/challenge risks. The third line of defence comprises the Origin group internal audit function that assures compliance with policies and standards. The Board’s HSE Committee supports and advises the Board on HSE matters and HSE related risks arising out of the activities and operations of Origin and its related companies. The HSE Committee comprises the Managing Director and four independent Non-executive Directors. The Chairman, Mr Akehurst, is an independent Director. The Board considers that the direct impact the deliberations of the HSE Committee can have on the day-to-day operations of Origin makes it appropriate for the Managing Director to be a member of that Committee. The names of the members of the HSE Committee are set out under Principle 2 and a record of their attendance at meetings of the Committee is set out in the Directors’ Report. Beyond the financial results, Origin is witnessing changes in community attitudes and increased focus on local and global environmental challenges. Origin recognises the need for disclosure and transparency of decision making to help investors assess both short term and long term risks and prospects. Origin assesses the environmental and social risks associated with all projects and operations. Projects are developed with precautionary engineering and management measures in place to mitigate or manage key environmental and social risks, and operations are managed using policies and procedures to control remaining environmental and social risks. Environmental and social risk management is subject to periodic audits and assurance. As one of Australia’s largest power generators, Origin closely measures, manages and reports on the greenhouse gas emissions associated with its generation operations. These emissions are governed by laws and regulations. Management of emissions extends to the development of a low carbon power generation portfolio including natural gas, wind and solar. Further information on Origin’s management and performance in the social, environmental and economic aspects in operating its business is contained in the Sustainability Report(1). Origin measures its reputation, that is, how Origin is perceived by Australians (including shareholders) using RepTrak® methodology. Origin’s reputation performance and reputation risk issues are periodically reported to the Board. (1) This was under the Energy Developments section in the 2015 Sustainability Report. 66 CORPORATE GOVERNANCE STATEMENTCORPORATE GOVERNANCE STATEMENTFOR THE YEAR ENDED 30 JUNE 2016 FINANCIAL STATEMENTS CONTENTS INCOME STATEMENT ............................................................................................................................................................................... 68 STATEMENT OF COMPREHENSIVE INCOME .......................................................................................................... 69 STATEMENT OF FINANCIAL POSITION ........................................................................................................................... 70 STATEMENT OF CHANGES IN EQUITY ............................................................................................................................. 71 STATEMENT OF CASH FLOWS ................................................................................................................................................... 72 OVERVIEW ............................................................................................................................................................................................................. 73 A RESULTS FOR THE YEAR .............................................................................................................................................................. 74 A1 SEGMENTS ................................................................................................................................................................................................. 74 A2 INCOME ......................................................................................................................................................................................................... 77 A3 EXPENSES .................................................................................................................................................................................................. 77 A4 RESULTS OF EQUITY ACCOUNTED INVESTEES ................................................................................... 78 A5 EARNINGS PER SHARE ............................................................................................................................................................ 78 A6 DIVIDENDS ................................................................................................................................................................................................ 79 B OPERATING ASSETS AND LIABILITIES ..................................................................................................................... 80 B1 TRADE AND OTHER RECEIVABLES ........................................................................................................................ 80 B2 EXPLORATION, EVALUATION AND DEVELOPMENT ASSETS ............................................. 81 B3 PROPERTY, PLANT AND EQUIPMENT ............................................................................................................... 82 B4 INTANGIBLE ASSETS ................................................................................................................................................................... 84 B5 PROVISIONS ............................................................................................................................................................................................ 85 B6 OTHER FINANCIAL ASSETS AND LIABILITIES ........................................................................................... 85 C CAPITAL, FUNDING AND RISK MANAGEMENT ........................................................................................... 86 C1 INTEREST-BEARING LIABILITIES ................................................................................................................................. 86 C2 RISK MANAGEMENT ..................................................................................................................................................................... 87 C3 CAPITAL MANAGEMENT ........................................................................................................................................................ 90 C4 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES .................................................................. 90 C5 HEDGING AND DERIVATIVES ........................................................................................................................................... 93 C6 SHARE CAPITAL AND RESERVES ............................................................................................................................... 95 C7 OTHER COMPREHENSIVE INCOME ....................................................................................................................... 96 D TAXATION ......................................................................................................................................................................................................... 97 D1 INCOME TAX EXPENSE ........................................................................................................................................................... 97 D2 DEFERRED TAX ................................................................................................................................................................................... 98 E GROUP STRUCTURE ..................................................................................................................................................................... 100 E1 JOINT ARRANGEMENTS ................................................................................................................................................... 100 E2 BUSINESS COMBINATIONS ............................................................................................................................................. 102 E3 CONTROLLED ENTITIES ..................................................................................................................................................... 103 E4 DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE .................................... 106 F OTHER INFORMATION ................................................................................................................................................................. 108 F1 CONTINGENT LIABILITIES ................................................................................................................................................. 108 F2 COMMITMENTS ............................................................................................................................................................................... 109 F3 SHARE-BASED PAYMENTS .............................................................................................................................................. 109 F4 RELATED PARTY DISCLOSURES .............................................................................................................................. 110 F5 KEY MANAGEMENT PERSONNEL ......................................................................................................................... 111 F6 NOTES TO THE STATEMENT OF CASH FLOWS .................................................................................. 111 F7 AUDITORS’ REMUNERATION ....................................................................................................................................... 112 F8 MASTER NETTING OR SIMILAR AGREEMENTS .................................................................................. 112 F9 DEED OF CROSS GUARANTEE .................................................................................................................................. 113 F10 PARENT ENTITY DISCLOSURES ................................................................................................................................ 115 F11 NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED .......................... 115 F12 SUBSEQUENT EVENTS ......................................................................................................................................................... 116 DIRECTORS’ DECLARATION ....................................................................................................................................................... 117 INDEPENDENT AUDITOR’S REPORT .............................................................................................................................. 118 FINANCIAL STATEMENTS 67 ORIGIN ENERGY ANNUAL REPORT 2016 INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE Continuing operations Revenue Other income Expenses Results of equity accounted investees Interest income Interest expense Loss before income tax Income tax benefit Loss for the period from continuing operations Discontinued operations Profit/(loss) from discontinued operations Loss for the period (Loss)/profit for the period attributable to: Members of the parent entity Non-controlling interests Loss for the period Earnings per share Basic earnings per share Diluted earnings per share (Loss)/profit for the period from continuing operations attributable to: Members of the parent entity Non-controlling interests Loss for the period Earnings per share from continuing operations Basic earnings per share Diluted earnings per share Note 2016 $million 2015 $million A2 A2 A3 A4 A2 A3 D1 E4 11,923 33 (12,127) (228) 222 (560) (737) 133 (604) 11,893 197 (12,260) (87) 112 (389) (534) 85 (449) 28 (141) (576) (590) (589) 13 (576) (658) 68 (590) A5 A5 (37.3) cents (37.3) cents (52.1) cents (52.1) cents (610) 6 (604) (459) 10 (449) A5 A5 (38.7) cents (38.7) cents (36.3) cents (36.3) cents The income statement should be read in conjunction with the accompanying notes set out on pages 73 to 116. 68 INCOME STATEMENT STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE Loss for the period Other comprehensive income Items that will not be reclassified to the income statement Actuarial gain on defined benefit superannuation plan Items that may be reclassified to the income statement Foreign currency translation differences for foreign operations Available for sale financial assets Valuation gain taken to equity Cash flow hedges Changes in fair value of cash flow hedges Net loss on hedge of net investment in foreign operations Total items that may be reclassified to the income statement Total other comprehensive income for the period, net of tax C7 Total comprehensive income for the period Total comprehensive income attributable to: Items that will not be reclassified to the income statement Members of the parent entity Non-controlling interests Items that may be reclassified to the income statement Members of the parent entity Non-controlling interests Total comprehensive income for the period Total comprehensive income for the period attributable to members of the parent entity arising from: Continuing operations Discontinued operations Note 2016 $million (576) 2015 $million (590) – 5 80 180 6 20 247 (18) 315 315 (261) – – – (272) 11 (261) (261) (324) 52 173 (71) 302 307 (283) 5 – 5 (284) (4) (288) (283) (10) (269) The statement of comprehensive income should be read in conjunction with the accompanying notes set out on pages 73 to 116. STATEMENT OF COMPREHENSIVE INCOME 69 ORIGIN ENERGY ANNUAL REPORT 2016 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE Current assets Cash and cash equivalents Trade and other receivables Inventories Derivatives Other financial assets Income tax receivable Assets classified as held for sale Other assets Total current assets Non-current assets Trade and other receivables Derivatives Other financial assets Investments accounted for using the equity method Property, plant and equipment Exploration and evaluation assets Development assets Intangible assets Other assets Total non-current assets Total assets Current liabilities Trade and other payables Interest-bearing liabilities Derivatives Other financial liabilities Provision for income tax Employee benefits Provisions Liabilities classified as held for sale Total current liabilities Non-current liabilities Trade and other payables Interest-bearing liabilities Derivatives Deferred tax liabilities Employee benefits Provisions Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total parent entity interest Non-controlling interests – Contact Energy Non-controlling interests – other Total equity Note 2016 $million 2015 $million B1 C5 B6 E4 B1 C5 B6 A4 B3 B2 B2 B4 C1 C5 B6 B5 E4 C1 C5 D2 B5 C6 146 1,945 248 253 312 59 471 137 3,571 3 1,134 4,943 5,945 5,685 1,932 292 5,366 27 151 2,085 239 15 207 79 5,441 104 8,321 5 859 3,553 6,467 6,505 1,894 239 5,481 43 25,327 28,898 25,046 33,367 2,048 110 18 375 6 215 71 46 2,889 68 9,506 1,050 110 35 710 11,479 14,368 14,530 7,150 857 6,502 14,509 – 21 14,530 2,037 38 31 156 4 260 74 2,575 5,175 89 11,839 1,309 147 35 614 14,033 19,208 14,159 4,599 576 7,548 12,723 1,244 192 14,159 The statement of financial position should be read in conjunction with the accompanying notes set out on pages 73 to 116. 70 STATEMENT OF FINANCIAL POSITION STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE $million Balance as at 1 July 2015 Other comprehensive income (refer to note C7) (Loss)/profit Total comprehensive income for the period Dividends paid (refer to note A6) Movement in share capital (refer to note C6) Share-based payments Sale of Contact Energy Transfer within reserves Total transactions with owners recorded directly in equity Balance as at 30 June 2016 Share-based payments reserve Foreign currency translation reserve 171 315 Share capital 4,599 Hedging reserve 71 Available- for-sale reserve 19 Retained earnings 7,548 Non- controlling interests Total equity 1,436 14,159 – – – – 2,551 – – – 2,551 7,150 – – – – – 32 (6) – 64 – 64 – – – (65) – 247 – 247 – – – 3 – 6 – 6 – – – – – – (589) (589) (452) – – – (5) (2) 13 11 (8) – – (1,423) 5 315 (576) (261) (460) 2,551 32 (1,491) – 26 197 (65) 314 3 321 – 25 (457) 6,502 (1,426) 21 632 14,530 Balance as at 1 July 2014 4,520 139 132 (100) (1) 8,754 1,685 15,129 Other comprehensive income (refer to note C7) (Loss)/profit Total comprehensive income for the period Dividends paid (refer to note A6) Movement in share capital (refer to note C6) Share-based payments – – – – 79 – Total transactions with owners recorded directly in equity Balance as at 30 June 2015 79 4,599 – – – – – 32 32 171 183 – 171 – 183 171 – – – – 315 – – – – 71 20 – 20 – – – – 19 5 (658) (653) (553) – – (72) 68 (4) (248) – 3 307 (590) (283) (801) 79 35 (553) 7,548 (245) 1,436 (687) 14,159 The statement of changes in equity should be read in conjunction with the accompanying notes set out on pages 73 to 116. STATEMENT OF CHANGES IN EQUITY 71 ORIGIN ENERGY ANNUAL REPORT 2016 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE Cash flows from operating activities Cash receipts from customers Cash paid to suppliers Cash generated from operations Income taxes paid, net of refunds received Net cash from operating activities Cash flows from investing activities Acquisition of property, plant and equipment Acquisition of exploration and development assets Acquisition of other assets Investment in joint ventures Interest received from equity accounted investees Interest received from other parties Net proceeds from sale of investment in Contact Energy Net proceeds from sale of non-current assets Loans to equity accounted investees Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Proceeds from share rights issue Interest paid Dividends paid by the parent entity Dividends paid to non-controlling interests Net cash (used in)/from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the period(1) Effect of exchange rate changes on cash Cash and cash equivalents at the end of the period Note 2016 $million 2015 $million F6 14,040 (12,688) 1,352 52 1,404 (460) (112) (119) (10) 338 1 1,599 118 (1,544) (189) 9,102 (11,792) 2,496 (611) (410) (8) (1,223) (8) 155 (1) 146 15,875 (13,933) 1,942 (109) 1,833 (564) (920) (250) (34) 165 – – 19 (2,330) (3,914) 16,021 (12,756) – (547) (474) (248) 1,996 (85) 228 12 155 (1) Cash and cash equivalents at the beginning of the period of $155 million includes $4 million of cash and cash equivalents which are classified as held for sale. Refer to note E4. The statement of cash flows should be read in conjunction with the accompanying notes set out on pages 73 to 116. 72 STATEMENT OF CASH FLOWS OVERVIEW Origin Energy Limited (the Company) is a for profit company domiciled in Australia. The address of the Company’s registered office is Level 45, Australia Square, 264-278 George Street, Sydney NSW 2000. The nature of the operations and principal activities of the Company and its controlled entities (the Group) are described in the Segment information. The consolidated general purpose financial statements of the Group for the year ended 30 June 2016 were authorised for issue in accordance with a resolution of the directors on 18 August 2016. The financial statements: — have been prepared in accordance with the requirements of the Corporations Act 2001 (Cth), Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board (AASB) and International Financial Reporting Standards as issued by the International Accounting Standards Board; — have been prepared on a historical cost basis, except for derivative financial instruments, environmental scheme certificates, surrender obligations, available for sale financial assets and assets and liabilities classified as held for sale that are carried at their fair value; and trade and other receivables that are initially recognised at fair value, and subsequently measured at amortised cost less accumulated impairment losses; — are presented in Australian dollars; — present reclassified comparative information where required for consistency with the current year’s presentation; — adopt all new and amended Accounting Standards and Interpretations issued by the AASB that are relevant to the operations of the Group and effective for reporting periods beginning on or after 1 July 2015; and — do not early adopt any Accounting Standards and Interpretations that have been issued or amended but are not yet effective. Refer to note F11 for further details. KEY JUDGEMENTS AND ESTIMATES In the process of applying the Group’s accounting policies, a number of judgements and estimates have been made. Judgements and estimates which are material to the financial statements are found in the following notes: — Income (note A2) — Trade and other receivables (note B1) — Exploration, evaluation and development assets (note B2) — Property, plant and equipment (note B3) — Intangible assets (note B4) — Provisions (note B5) — Fair value of financial assets and liabilities (note C4) — Income tax expense (note D1) Estimates of recoverable amounts are based on an asset’s value in use or fair value less costs to sell, using a discounted cash flow method. This requires estimates and assumptions to be made about highly uncertain external factors such as future commodity prices, foreign exchange rates, discount rates, the effects of inflation, climate change policies, supply-and-demand conditions, reserves, future operating profiles and production costs. The recoverable amounts of non-current assets have been assessed at 30 June 2016 based on the types of judgements and estimates described above. Where required, any impairment has been recognised in the income statement. 73 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES A RESULTS FOR THE YEAR This section highlights the performance of the Group for the year, including results by operating segment, income and expenses, results of equity accounted investments, earnings per share and dividends. The Group’s operating segments have been updated since 30 June 2015 to reflect the shift in focus from project delivery to the ongoing operations of integrated exploration and production activities of Australia Pacific LNG. The comparative balances have been restated to conform to current period presentation. A1 SEGMENTS The Group’s Managing Director monitors the operating results of the business using operating segments which are organised according to the nature and/or geography of the activities undertaken. This section includes the results by operating segment (A1.1), segment assets and liabilities (A1.2) and geographical information for revenue and non-current assets (A1.3). A1.1 Segment result for the year ended 30 June $million Revenue Segment revenue Eliminations External revenue Underlying EBITDA Depreciation and amortisation Share of ITDA of equity accounted investees Underlying EBIT Net financing costs(5) Income tax expense(6) Non-controlling interests (NCI) Segment result and underlying profit(7) Energy Markets(1) Integrated Gas(2) Contact Energy(3) Corporate(4) Consolidated Ref. 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 11,423 – 11,269 – 11,423 11,269 1,330 (326) 1,260 (304) – – 1,004 956 (a) (b) (c) 674 (174) 500 386 (278) (293) (185) (30) 796 (172) 624 498 (314) (62) 122 – 251 – 251 2,257 (3) 2,254 61 (20) – 41 (15) (4) (12) 487 (189) – 298 (101) (55) (77) – – – (81) – (3) (84) (64) (282) (4) – – – 12,348 (174) 14,322 (175) 12,174 14,147 (96) – 1,696 (624) 2,149 (807) – (96) (68) (294) (3) (296) 776 (109) (286) (16) (62) 1,280 (169) (349) (80) 1,004 956 (215) 122 10 65 (434) (461) 365 682 Items excluded from underlying profit Fair value and foreign exchange movements LNG related items pre revenue recognition Disposals, impairments and business restructuring Tax and NCI on items excluded from underlying profit (d) (e) (f) (55) (22) (167) (702) (10) (34) (53) (16) (285) (774) – (4) – (304) (222) – – – – (304) (222) 177 (505) (554) 14 (287) (286) (99) (781) (763) Items excluded from underlying profit Statutory loss attributable to members of the parent entity(8) 155 (59) (976) 6 43 410 376 416 419 (1,478) 10 (278) 71 261 (954) (589) (1,340) (658) (1) Energy retailing, power generation and LPG operations predominantly in Australia. (2) Gas and oil exploration and production in Australia and New Zealand and the Group’s investment in Australia Pacific LNG and the results of the Group’s activities as Australia Pacific LNG Upstream Operator. Costs incurred in relation to the Group’s role as the Australia Pacific LNG Upstream Operator are recharged to Australia Pacific LNG in accordance with the Shareholder Agreement. Includes the Group’s 53.09 per cent controlling interest in Contact Energy Limited (Contact Energy), which is involved in energy retailing and power generation in New Zealand, up to the date of sale of the Group’s interest in Contact Energy on 10 August 2015. The results of Contact Energy are classified as a discontinued operation in the period to 30 June 2016 (refer to note E4). It also includes $6 million (2015: $10 million) of net financing costs and $5 million of income tax benefit and NCI (2015: $4 million of income tax expense and NCI) relating to the Group’s funding of its investment which are classified as continuing operations and are now recorded in the Corporate segment. (3) (4) Various business development and support activities that are not allocated to operating segments. (5) Net financing costs have been allocated to the Integrated Gas segment relating to the LNG business and also to the Contact Energy segment (until disposal on 10 August 2015). (6) Income tax expense for entities in the Origin tax consolidated group is allocated to the Corporate segment. (7) Underlying profit includes $354 million (2015: $603 million) from continuing operations and $11 million (2015: $79 million) from discontinued operations. Discontinued operations comprise the Contact Energy segment result adjusted for Group funding costs of $1 million (2015:$14 million). (8) Includes $610 million loss (2015: $459 million loss) from continuing operations and $21 million profit from discontinued operations (2015: $199 million loss). Discontinued operations comprise the Contact Energy segment result adjusted for Group funding costs of $1 million (2015:$14 million). 74 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES A1 SEGMENTS (CONTINUED) Explanatory notes to segment results for the year ended 30 June (a) Segment revenue eliminations Sales between segments occur on an arm’s length basis. The Integrated Gas segment sells gas and LPG to the Energy Markets segment and previously LPG to Contact Energy. Contact Energy previously sold electricity to the Integrated Gas segment. (b) Underlying EBITDA Represents underlying earnings before interest, tax, depreciation and amortisation (EBITDA). Includes the Group’s share of underlying EBITDA from equity accounted investees of $111 million (2015: $53 million). (c) Net financing costs Net financing costs is the aggregation of interest income of $222 million (2015:$112 million), interest expense of $560 million (2015:$389 million) from continuing operations, net interest expense of $9 million relating to discontinued operations (2015:$91 million), less net interest expense relating to Australia Pacific LNG funding of $238 million (2015:$199 million). (d) Fair value and foreign exchange movements $million Decrease in fair value of financial instruments LNG foreign currency loss LNG translation of foreign denominated long-term tax balances Tax benefit/(expense) on translation of foreign denominated long-term tax balances (e) LNG related items pre revenue recognition Net financing costs incurred in funding the Australia Pacific LNG project LNG pre-production costs not able to be capitalised (f) Disposals, impairments and business restructuring Gain on sale of Contact Energy Gain on sale of Mortlake Terminal Station Capital tax loss recognition Release of unfavourable contract liability on renegotiation of the Smithfield PPA Disposals Integrated Gas New Zealand onshore assets Cooper Basin BassGas Otway Basin Surat Basin Contact Energy Goodwill Corporate IT transformation Investment in Energia Andina S.A. Investment in OTP Geothermal Pte Ltd Other Impairments Integration and transformation costs Restructure costs Contact Energy’s retail transformation costs Corporate transaction costs Uplift in tax cost base/tax depreciation reinstatement Business restructuring 2016 2015 Gross (234) (42) (9) – (285) (238) (66) (304) 14 24 – – 38 30 (111) (204) (236) 30 Tax and NCI 73 12 – 5 90 71 11 82 – (7) 28 – 21 (9) 34 61 70 (9) Gross (683) (40) (51) – (774) (199) (23) (222) – – – 193 193 (73) (257) (174) (50) – – – (265) (94) (86) (20) – (691) (5) (111) – (12) – (128) 29 – – – 176 2 33 – 3 9 47 (72) – – 2 (889) (36) – (22) (9) – (67) Tax and NCI 216 11 – (30) 197 60 – 60 – – – (58) (58) 20 77 52 15 – – 22 – – – 186 11 – 6 2 15 34 Total disposals, impairments and business restructuring (781) 244 (763) 162 75 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES A1 SEGMENTS (CONTINUED) Explanatory notes to segment results for the year ended 30 June (continued) A1.2 Segment assets and liabilities as at 30 June $million 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Energy Markets Integrated Gas Contact Energy(2) Corporate Consolidated 12,349 12,398 4,527 4,889 – 5,362 277 159 17,153 22,808 Assets Segment assets Investments accounted for using the equity method (refer to note A4) Cash, funding related derivatives and tax assets Total assets Liabilities Segment liabilities Financial liabilities, interest-bearing liabilities, funding related derivatives and tax liabilities(3) – – 5,945 6,231 12,349 12,398 15,320 14,424 4,848 3,304 (2,250) (2,015) (1,336) (1,479) (6,905) (7,579) – – – – – – – – 236 5,945 6,467 79 952 709 5,800 4,092 5,441 1,229 1,104 28,898 33,367 (264) (380) (438) (3,966) (4,196) (2,532) (3,497) (4,901) (10,402) (15,012) (2,796) (3,877) (5,339) (14,368) (19,208) Total liabilities (2,250) (2,015) (8,241) (9,058) Acquisitions of non- current assets (includes capital expenditure)(1) 223 307 405 1,333 7 98 18 127 653 1,865 (1) Cash contributions of $1,544 million (2015:$2,330 million) to Australia Pacific LNG are not treated as acquisitions as they are accounted for as loans rather than an increase in the Group’s investment. Includes amounts which are classified as held for sale at 30 June 2015 and liabilities of $221 million relating to funding of Contact Energy. (2) (3) The net cash proceeds from the equity rights issue of $2,496 million have been applied to the Integrated Gas interest-bearing liabilities and the proceeds from the sale of Contact Energy of $1,599 million have been applied to the Corporate interest-bearing liabilities. A1.3 Geographical information Detailed below is revenue based on the location of the customer and non-current assets (excluding derivatives and other financial assets) based on the location of the assets. Revenue for the year ended 30 June Australia New Zealand Other Revenue from continuing operations New Zealand Revenue from discontinued operations Total external revenue Non-current assets as at 30 June Australia New Zealand Other Total non-current assets(1) (1) Excludes amounts which are classified as held for sale at 30 June 2015 and 30 June 2016. Refer to note E4. 2016 $million 2015 $million 11,635 132 156 11,607 152 134 11,923 11,893 251 251 2,254 2,254 12,174 14,147 18,712 495 43 19,524 798 312 19,250 20,634 76 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES A2 INCOME Income from continuing operations Revenue(2) Net gain on sale of assets Release of unfavourable contract liability Other Other income Interest earned from other parties Interest earned on Australia Pacific LNG MRCPS (refer to note E1) Interest income(3) 2016 $million(1) 2015 $million(1) 11,923 25 – 8 33 2 220 222 11,893 2 193 2 197 – 112 112 (1) Excludes amounts classified as discontinued operations at 30 June 2015 and 30 June 2016. Refer to note E4. (2) Revenue from the sale of oil and gas by the Integrated Gas segment is recognised when title to the commodity passes to the customer. Revenue from the sale of electricity and gas by the Energy Markets segment is recognised on delivery of the product. Amount excludes revenue from discontinued operations of $251 million (2015: $2,254 million). Note A1 provides segment revenue. Interest income is recognised as it accrues. (3) Key estimate: unbilled revenue At the end of each period, the volume of energy supplied since a customer’s last bill is estimated in determining the unbilled revenue included in income. This estimation requires judgement and is based on historical customer consumption patterns. Related to this are unbilled network expenses for unread gas and electricity meters which are estimated based on historical customer consumption patterns and accrued at the end of the reporting period. This is recorded within Trade and other payables in the Statement of Financial Position. A3 EXPENSES Expenses from continuing operations Raw materials and consumables used Labour(2) Exploration Depreciation and amortisation Impairment of assets Decrease in fair value of financial instruments Net foreign exchange loss Other(3) Expenses Interest charged by other parties Impact of discounting on long-term provisions Interest expense related to Australia Pacific LNG funding Interest expense Financing costs capitalised(4) 2016 $million(1) 2015 $million(1) 8,964 737 63 603 691 224 41 804 12,127 56 16 488 560 90 8,749 770 29 620 624 649 36 783 12,260 63 15 311 389 118 (1) Excludes amounts classified as discontinued operations at 30 June 2015 and 30 June 2016. Refer to note E4. (2) (3) (4) Financing costs incurred for the construction of a qualifying asset are capitalised whilst the asset is being constructed or prepared for use at the rate applicable to the borrowings. Includes contributions to defined contribution superannuation funds from continuing operations of $47 million (2015: $66 million). Includes operating lease rental expense of $79 million (2015: $93 million) from continuing operations. Where borrowings are not specific to an asset, financing costs are calculated at an average rate based on the general borrowings of the Group (2016: 4.40 per cent; 2015: 4.90 per cent). 77 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES A4 RESULTS OF EQUITY ACCOUNTED INVESTEES $million 2016 Australia Pacific LNG(1) Other joint venture entities Total Group’s share of Australia Pacific LNG’s items excluded from underlying consolidated profit(2) Total excluding Group’s share of Australia Pacific LNG’s items excluded from underlying consolidated profit(3) 2015 Australia Pacific LNG(1) Other joint venture entities Total Group’s share of Australia Pacific LNG’s items excluded from underlying consolidated profit(2) Total excluding Group’s share of Australia Pacific LNG’s items excluded from underlying consolidated profit(3) $million as at Australia Pacific LNG(1) Other joint venture entities(4) Share of interest, tax, depreciation and amortisation (ITDA) Share of EBITDA Share of net (loss)/profit 62 – 62 49 111 16 (2) 14 39 53 (287) (3) (290) (6) (296) (101) – (101) 39 (62) (225) (3) (228) 43 (185) (85) (2) (87) 78 (9) Equity accounted investment carrying amount 2016 5,945 – 5,945 2015 6,231 236 6,467 (1) Australia Pacific LNG’s summary financial information is separately disclosed in note E1. (2) Detailed further in note E1. (3) 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 A1. (4) Reflects the impairment of Energia Andina S.A. and the transfer to held for sale of OTP Geothermal Pte Ltd and Energia Austral SpA. A5 EARNINGS PER SHARE Earnings per share based on statutory consolidated loss Basic earnings per share Diluted earnings per share Basic earnings per share from continuing operations Diluted earnings per share from continuing operations Basic earnings per share from discontinued operations Diluted earnings per share from discontinued operations Earnings per share based on underlying consolidated profit(1) Underlying basic earnings per share Underlying diluted earnings per share (1) Refer to note A1 for a reconciliation of underlying consolidated profit to statutory loss. 2016 Restated 2015 (37.3) cents (37.3) cents (52.1) cents (52.1) cents (38.7) cents (38.7) cents (36.3) cents (36.3) cents 1.3 cents 1.3 cents (15.8) cents (15.8) cents 23.2 cents 23.2 cents 54.0 cents 54.0 cents 78 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES A5 EARNINGS PER SHARE (CONTINUED) Restatement of weighted average number of shares used as the denominator During the period, Origin completed a rights issue of 636,086,881 shares at $4.00 per share. The price was at a 34.4 per cent discount to the market price and therefore a bonus was received by shareholders who participated in the rights issue. Accordingly, earnings per share for the 2015 comparative period have been adjusted for the bonus element of the issue by multiplying the average weighted number of shares prior to the rights issue by 1.14 (i.e. a 14 per cent bonus element). Average weighted number of shares pre adjustment for rights issue Bonus element of rights issue Average weighted number of shares adjusted for rights issue 2015 1,106,483,636 157,477,072 1,263,960,708 Calculation of earnings per share Basic earnings per share is calculated as profit for the period attributable to the parent entity (2016: $589 million loss; 2015: $658 million loss) divided by the average weighted number of shares. Basic earnings per share from continuing operations is calculated as profit for the period from continuing operations attributable to the parent entity (2016: $610 million loss; 2015: $459 million loss) divided by the average weighted number of shares (2016: 1,578,213,157; 2015: 1,263,960,708). Diluted underlying earnings per share represents profit for the period attributable to the parent entity divided by an average weighted number of shares (2016: 1,580,493,399; 2015; 1,264,413,970) which has been adjusted to reflect the number of shares which would be issued if outstanding options, performance share rights and deferred shares rights were to be exercised (2016: 2,280,242; 2015: 453,262). Due to the statutory loss attributable to the parent entity for the year ended 30 June 2016, the effect of these instruments and the impact of the share rights issue on these instruments has been excluded in the 30 June 2016 calculation of diluted earnings per share and diluted earnings per share from continuing operations as they would reduce the loss per share. A6 DIVIDENDS The Directors have determined not to pay a final dividend for the year ended 30 June 2016. The following dividends were paid during the year ended 30 June: Final dividend of 25 cents per share, unfranked, paid 28 September 2015 (2015: Final dividend of 25 cents per share, unfranked, paid 26 September 2014) Interim dividend of 10 cents per share, unfranked, paid 31 March 2016 (2015: Interim dividend of 25 cents per share, unfranked, paid 31 March 2015) 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) Franking credits can only be used when the Group is able to declare franked dividends. 2016 $million 2015 $million 277 175 452 – 304 276 277 553 – 305 79 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES B OPERATING ASSETS AND LIABILITIES This section provides information on the assets used to generate the Group’s trading performance and the liabilities incurred as a result. B1 TRADE AND OTHER RECEIVABLES The following balances are amounts which are due from the Group’s customers. Current Trade receivables net of allowance for impairment Unbilled revenue net of allowance for impairment Other receivables Non-current Trade receivables 2016 $million 2015 $million 632 992 321 1,945 3 3 716 1,135 234 2,085 5 5 Trade and other receivables are initially recorded at the amount billed to customers. Unbilled receivables represent estimated gas and electricity services supplied to customers since their previous bill was issued. Trade and other receivables (including unbilled revenue) reflect the amount anticipated to be collected. The collectability of these balances is assessed on an ongoing basis. When there is evidence that an amount will not be collected, it is provided for and then written off. If receivables are subsequently recovered, the amounts are credited against other expenses in the income statement when collected. The Group’s customers are required to pay in accordance with agreed payment terms. Depending on the customer segment, settlement terms are generally 14 to 30 days from the date of the invoice. Credit approval processes are in place for large customers. All credit and recovery risk associated with trade receivables has been provided for in the statement of financial position. Key judgements and estimates Recoverability of trade receivables: Judgement is required in determining the level of provisioning for customer debts. Impairment allowances take into account the age of the debt, prevailing economic conditions and historic collection trends. Unbilled revenue: Unbilled gas and electricity revenue is not collectable until customers’ meters are read and invoices issued. Refer to note A2 for judgement applied in determining the amount of unbilled gas and electricity revenue to recognise. The average age of trade receivables is 18 days (2015: 22 days). At 30 June, the ageing of trade receivables that were not impaired was as follows: Not yet due 1-30 days past due 31-60 days past due 61-90 days past due 91 days past due The movement in the allowance for impairment in respect of trade receivables and unbilled revenue during the year is as follows: Balance as at 1 July Impairment losses recognised Transfers to held for sale Amounts written off Balance as at 30 June 2016 $million 419 99 32 21 61 632 97 67 (2) (75) 87 2015 $million 447 88 65 31 85 716 117 83 (9) (94) 97 80 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES B2 EXPLORATION, EVALUATION AND DEVELOPMENT ASSETS Balance as at 1 July Additions Exploration expense Transfers to held for sale Transfers Effect of movements in foreign exchange rates Balance as at 30 June Exploration and evaluation assets Development assets 2016 $million 1,894 107 (63) (9) – 3 1,932 2015 $million 1,120 940 (29) – (145) 8 1,894 2016 $million 2015 $million 239 53 – – – – 292 – 94 – – 145 – 239 The Group holds a number of exploration permits which are grouped into areas of interest according to geographical and geological attributes. Expenditure incurred in each area of interest is accounted for using the successful efforts method. Under this method all general exploration and evaluation costs are expensed as incurred except the direct costs of acquiring the rights to explore, drilling exploratory wells and evaluating the results of drilling. These direct costs are capitalised as exploration and evaluation assets pending the determination of the success of the well. If a well does not result in a successful discovery, the previously capitalised costs are immediately expensed. The carrying amounts of exploration and evaluation assets are reviewed at each reporting date to determine whether any of the following indicators of impairment are present: — the right to explore has expired, or will expire in the near future, and is not expected to be renewed; — further exploration for and evaluation of resources in the specific area is not budgeted or planned; — the Group has decided to discontinue activities in the area; or — there is sufficient data to indicate the carrying value is unlikely to be recovered in full from successful development or by sale. Where an indicator of impairment exists, the asset’s recoverable amount is estimated and an impairment is recognised in the income statement if required. Key judgement: recoverability of exploration and evaluation assets Assessment of the recoverability of capitalised exploration and evaluation expenditure requires certain estimates and assumptions to be made as to future events and circumstances, particularly in relation to whether economic quantities of reserves have been discovered. Such estimates and assumptions may change as new information becomes available. If it is concluded that the carrying value of an exploration and evaluation asset is unlikely to be recovered by future exploitation or sale, the relevant amount will be written off to the income statement. Upon approval of the commercial development of a project, the exploration and evaluation asset is classified as a development asset. Once production commences, development assets are transferred to property, plant and equipment. Acquisition of exploration permits in the Browse Basin In August 2014, the Group acquired a 40 per cent interest in two offshore exploration permits in the Browse Basin in Western Australia. Origin paid US$600 million cash consideration with additional payments of US$75 million payable upon a project Final Investment Decision (FID) and US$75 million payable upon first production. A further payment of up to US$50 million will be payable on first production if Proved plus Probable (2P) reserves at the time of FID reach certain thresholds. 81 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES Generation property, plant and equipment Other land and buildings Other plant and equipment Producing areas of interest Capital work in progress B3 PROPERTY, PLANT AND EQUIPMENT $million 2016 Cost Accumulated depreciation Balance as at 1 July 2015 Additions Disposals Depreciation/amortisation – continuing operations Net impairment loss(1) Transfers within PP&E Transfers to held for sale Effect of movements in foreign exchange rates 4,327 (1,000) 3,327 3,715 92 (85) (184) – – (211) – 118 (40) 78 69 15 – (7) – 1 – – 2,944 (1,670) 1,274 1,659 37 – (157) (354) 86 (7) 10 Balance as at 30 June 2016 3,327 78 1,274 2015 Cost Accumulated depreciation Balance as at 1 July 2014 Additions Disposals Depreciation/amortisation – continuing operations Depreciation/amortisation – discontinued operations Impairment loss(2) Transfers within PP&E Transfers to held for sale Effect of movements in foreign exchange rates Balance as at 30 June 2015 4,604 (889) 3,715 8,201 32 – (182) (154) – 197 (4,178) (201) 3,715 102 (33) 69 79 13 – (5) (2) – – (17) 1 69 3,284 (1,625) 1,659 1,963 43 – (182) (9) (234) 92 (76) 62 1,659 Total 9,686 (4,001) 5,685 6,505 518 (86) (481) (491) – (294) 14 447 – 447 324 219 – – – (87) (9) – 447 5,685 324 – 324 563 351 – – – – (350) (224) (16) 324 10,320 (3,815) 6,505 11,742 628 (2) (525) (165) (554) – (4,495) (124) 6,505 1,850 (1,291) 559 738 155 (1) (133) (137) – (67) 4 559 2,006 (1,268) 738 936 189 (2) (156) – (320) 61 – 30 738 (1) Reflects impairments of $204 million (tax benefit $61 million) relating to BassGas assets, impairment of $111 million (tax benefit $34 million) relating to the Cooper Basin and impairment of $236 million (tax benefit $70 million) relating to the Otway Basin offset by a reversal of prior impairment on the sale of Surat Basin assets of $30 million (tax expense $9 million); a reversal of prior impairment on New Zealand onshore assets of $30 million (tax expense $9 million). (2) Reflects impairments of $73 million (tax benefit $20 million) of New Zealand onshore assets, $257 million of Cooper Basin assets (tax benefit $77 million), $174 million of BassGas assets (tax benefit $52 million) and $50 million of Otway Basin assets (tax benefit $15 million). Property, plant and equipment is recorded at cost less accumulated depreciation, depletion, amortisation and impairment charges. Cost includes the estimated future cost of required closure and rehabilitation. The carrying amounts of assets are reviewed to determine if there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated and if required, an impairment is recognised in the income statement. 82 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES B3 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Several different depreciation methodologies are used by the Group. Sub-surface assets relating to producing areas of interest are amortised on a units of production basis. This method applies an average unit depletion cost to current period reserve production. The proved and probable reserves (2P) expenditure to date and an estimate of future development expenditure required to develop those reserves are used to derive the unit depletion cost. Land and capital work in progress are not depreciated. All other assets are depreciated on a straight-line basis over their useful lives. The range of depreciation rates for the current and comparative period for each class of asset are: Generation property, plant and equipment Other land and buildings Other plant and equipment Producing areas of interest % 1 – 33 0 – 18 1 – 50 2 – 25 At 30 June 2016, the Group reassessed the carrying amounts of its non-current assets for indicators of impairment. Estimates of recoverable amount are based on an asset’s value in use or fair value less costs to sell (level 3 fair value hierarchy), using a discounted cash flow method. The recoverable amount of these assets is most sensitive to those assumptions highlighted in the key judgements and estimates below. Key judgements and estimates Recoverability of carrying values: Assets are grouped together into the smallest group of assets that generate largely independent cash inflows (cash generating unit). A Cash Generating Unit’s (“CGU”) recoverable amount comprises the present value of the future cash flows which will arise from use of the assets. Assessment of a CGU’s recoverable amount requires estimates and assumptions to be made about highly uncertain external factors such as future commodity prices, foreign exchange rates, discount rates, the effects of inflation, climate change policies and the outlook for global or regional market supply-and-demand conditions. In addition, the Group makes estimates and assumptions about reserves, future operating profiles and production costs. Such estimates and assumptions may change as new information becomes available. If it is concluded that the carrying value of a CGU is not likely to be recovered by use or sale, the relevant amount will be written off to the income statement. Estimation of reserves: Reserves are estimates of the amount of product that can be extracted from an area of interest. A range of assumptions are used to estimate economically recoverable 2P reserves. As the economic assumptions change from period to period, and because additional geological information becomes available during the course of operations, estimates of 2P reserves may change from period to period. These changes could impact the asset carrying values, unit of production depletion calculations, restoration provisions and deferred tax balances. Estimation of commodity prices: The Group’s best estimate of future commodity prices is made with reference to internally derived forecast data, current spot prices, external market analysts’ forecasts and forward curves. Where volumes are contracted, future prices reflect the contracted price. Future commodity price assumptions impact the recoverability of carrying values and are reviewed at least annually. Estimation of useful economic lives: A technical assessment of the operating life of an asset requires significant judgement. Useful lives are amended prospectively when a change in those assessments occurs. Restoration provisions: An asset’s carrying value includes the estimated future cost of required closure and rehabilitation activities. Refer to note B5 for key judgement related to restoration provisions. Future downhole costs: The depletion and amortisation calculation for producing areas of interest is dependent in part on the estimated future downhole expenditure required to develop and extract 2P undeveloped reserves. Changes in future downhole expenditure can therefore impact amortisation recognised. Future expenditure estimates have been based on the proposed development profiles for the fields. Recoverable amounts and resulting impairment write-downs recognised in the year ended 30 June 2016 are: Area of interest/CGU New Zealand onshore assets Surat Basin Cooper Basin BassGas assets Otway Basin Segment Integrated Gas Integrated Gas Integrated Gas Integrated Gas Integrated Gas Impairment $million 30 30 (111) (204) (236) Recoverable amount $million 30 30 207 93 865 (491) 1,225 In assessing recoverable amount, an asset’s 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. The pre-tax discount rates that have been applied to the above non-current assets in the current and prior measurement of recoverable amount range between 8.5 per cent and 9.7 per cent (2015: between 9.3 per cent and 10.3 per cent). During the prior year, the Halladale Black Watch Speculant exploration asset was reclassified to development assets and is included within the Otway Basin CGU. The impairment charges noted above primarily resulted from a reduction in the reported reserves in the case of BassGas, Cooper and Otway Basin CGUs. 83 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES B4 INTANGIBLE ASSETS Goodwill at cost – Energy Markets Software and other intangible assets at cost less impairment losses Less: Accumulated amortisation Reconciliations of the carrying amounts of each class of intangible asset are set out below: $million Balance as at 1 July 2015 Additions Impairment loss(1) Amortisation expense – continuing operations Effect of movements in foreign exchange rates Transfers to held for sale(3) Balance as at 30 June 2016 Balance as at 1 July 2014 Additions Impairment loss(1)(2) Amortisation expense – continuing operations Amortisation expense – discontinued operations Effect of movements in foreign exchange rates Transfers to held for sale Balance as at 30 June 2015 2016 $million 4,827 1,123 (584) 5,366 Software and other intangibles 666 95 (94) (122) – (6) 539 882 261 (72) (95) (24) (12) (274) 666 2015 $million 4,815 1,134 (468) 5,481 Total 5,481 107 (94) (122) – (6) 5,366 6,203 261 (337) (95) (24) (35) (492) 5,481 Goodwill 4,815 12 – – – – 4,827 5,321 – (265) – – (23) (218) 4,815 (1) During the period a decision was made to write-off an organisation wide IT implementation. As a consequence, an impairment charge of $94 million (2015: $72 million) was recognised in the financial statements which reflects the write-off of the intangible asset relating to this project. The intangible asset relating to this project is allocated across the reportable segments. The impairment is recorded in the Corporate Segment. (2) During the prior period the Group’s investment in Contact Energy was classified as held for sale and was remeasured to the lower of its carrying amount and fair value less costs to sell at the time of reclassification resulting in an impairment loss of $265 million being recognised. Refer to note E4. (3) Relates to amounts classified as held for sale. Refer to note E4. Goodwill is stated at cost less any accumulated impairment losses and is not amortised. Software and 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 intangible assets. The average amortisation rate for software and other intangibles (excluding capital work in progress) was 12 per cent (2015: 12 per cent). Key judgement Carrying values of assets: Refer to note B3 for key judgement relating to carrying values of assets. Impairment testing The recoverable amount of the Energy Markets goodwill has been determined using a value in use model which includes an appropriate terminal value. The key inputs and assumptions in the calculation of value in use are: Key input/assumptions Period of cash flow projections Either 40 years, or the life of each Generation asset, based on the Group’s five-year business plan. Energy Markets Customer numbers and customer churn Gross margin and other operating costs per customer Discount rate The Energy Markets business is considered a long-term business and as such projection of long-term cash flows is appropriate for a more accurate forecast. Based on 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. Based on review of actual gross margins and cost per customer and consideration of current and expected market movements and impacts. Pre-tax discount rate of 8.5 per cent (2015: 9.1 per cent). 84 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES B5 PROVISIONS $million Balance as at 1 July 2015 Provisions recognised Provisions released Payments/utilisation Impact of discounting Effect of movements in foreign exchange rates Transfers to held for sale(1) Balance as at 30 June 2016 Current Non-current Restoration Other 608 135 (32) (5) 14 10 (37) 693 21 672 693 80 39 (3) (28) – – – 88 50 38 88 Total 688 174 (35) (33) 14 10 (37) 781 71 710 781 (1) Relates to amounts classified as held for sale at 30 June 2016. Refer to note E4. Restoration provisions are initially recognised at the best estimate of the costs to be incurred in settling the obligation. Where restoration activities are expected to occur more than 12 months from the reporting period the provision is discounted using a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. At each reporting date, the restoration provision is remeasured in line with changes in discount rates, and changes to the timing or amount of the costs to be incurred based on current legal requirements and technology. Any changes in the estimated liability in future periods are added to or deducted from the related asset. The unwinding of the discount is recognised in each period as interest expense. Key estimate: restoration, rehabilitation and dismantling costs The Group estimates the cost of future site restoration activities at the time of installation or construction of an asset, or when an obligation arises. Restoration often does not occur for many years and thus significant judgement is required as to the extent of work, cost and timing of future activities. B6 OTHER FINANCIAL ASSETS AND LIABILITIES Other financial assets Current Environmental scheme certificates Available-for-sale financial assets Non-current Environmental scheme certificates Available-for-sale financial assets Mandatorily Redeemable Cumulative Preference Shares issued by Australia Pacific LNG (refer to note E1)(1) 2016 $million 2015 $million 261 51 312 – 95 4,848 4,943 168 39 207 154 95 3,304 3,553 (1) The Mandatorily Redeemable Cumulative Preference Shares (MRCPS) were cancelled on 1 July 2016 and replaced with US$2.8 billion of MRCPS and US$0.8 billion capital contribution. Refer note F12. Other financial liabilities Current Environmental scheme surrender obligations Other financial liabilities 270 105 375 156 – 156 Financial assets are recognised (or derecognised) on the date on which the Group commits to purchase (or sell) the asset. The environmental scheme certificates and surrender obligations are initially recorded at cost. Subsequently, they are recorded at their market price (i.e. fair value) where there is an active market. If there is no active market, certificates continue to be recorded at cost. Investments are designated as available-for-sale financial assets if they do not have fixed maturities and fixed or determinable payments and are intended to be held for the medium to long term. The Group’s available-for-sale assets are primarily Settlement Residual Agreements. 85 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C CAPITAL, FUNDING AND RISK MANAGEMENT This section focuses on the Group’s capital structure, and related financing costs. Information is also presented about how the Group manages capital and the various financial risks to which the Group is exposed through its operating and financing activities. C1 INTEREST-BEARING LIABILITIES Current Bank loans – secured Bank loans – unsecured Capital market borrowings – unsecured Total current borrowings Lease liabilities – secured Total current interest-bearing liabilities Non-current Bank loans – secured Bank loans – unsecured Capital market borrowings – unsecured Total non-current borrowings Lease liabilities – secured Total non-current interest-bearing liabilities 2016 $million 2015 $million – 8 101 109 1 110 – 726 8,772 9,498 8 9,506 25 12 – 37 1 38 212 3,061 8,559 11,832 7 11,839 Interest-bearing liabilities are initially recorded at the amount of proceeds received (fair value) less transaction costs. After that date the liability is amortised to face value at maturity using an effective interest rate method with any gains or losses recognised in the income statement. The contractual maturities of non-current borrowings are as follows: One to two years Two to five years Over five years Total non-current borrowings Lease liabilities Total non-current interest-bearing liabilities 2016 $million 137 3,935 5,426 9,498 8 9,506 2015 $million 309 5,082 6,441 11,832 7 11,839 Some of the Group’s borrowings are subject to terms which allow the lender to call on the debt should there be a change in control of the Group. As at 30 June 2016 these terms had not been triggered. Significant funding transactions In October 2015, the Group completed a rights issue of 636,086,881 shares at $4.00 per share. The rights issue was fully underwritten and was completed on 2 October 2015 (Institutional rights offer) and 28 October 2015 (Retail rights offer). The net proceeds from the rights issue of $2.5 billion were used to pay down Group borrowings. In December 2014, the Group amended $6.6 billion of syndicated loan facilities to reduce the interest rate margin, extend the maturities and increase the limit of the facilities by $750 million to $7.4 billion. The terms of the bank loan facilities were extended by 16 months to December 2018 and December 2019 respectively. In September 2014, the Group issued €1 billion hybrid capital securities on the Luxembourg Exchange which were swapped into A$1.4 billion. After hedging to Australian dollars, the cost to the Group is 7.9 per cent per annum for the first 5 years and thereafter at reset rates. The hybrid securities mature after 60 years and can be redeemed at years 5 and 10 or on any interest payment date thereafter. C2 RISK MANAGEMENT The Group holds or issues financial instruments for the following purposes: — Funding: to finance the Group’s operating activities. The principal types of instruments include syndicated bank loans, bank guarantee facilities, senior notes, hybrid securities, cash and short term deposits; — Operating: the Group’s day to day business activities generate financial instruments such as cash, trade receivables and trade payables; and — Risk management: to reduce risks arising from the financial instruments described above, the Group holds derivatives such as forward exchange contracts and interest rate swaps (including cross currency). In addition, a range of standard and bespoke financial instruments are held to manage the Group’s exposure to fluctuations in commodity prices. A number of these financial instruments are recorded at the value which reflects current market conditions, i.e. at fair value. The Group’s methodology for calculating fair value can be found in note C4. Management of these risks is carried out under policies approved by the Board of Directors. The key financial risks to which the Group is exposed are explained further in the following sections: — Credit risk — Liquidity risk — Market risk (including foreign exchange and price risk) — Interest rate risk 86 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C2 RISK MANAGEMENT (CONTINUED) C2.1 Credit risk Credit risk is the risk that a counterparty will not fulfil its financial obligations under a contract or other arrangement. In order to manage credit risk the Group has credit limits which determine the level of exposure that it is prepared to accept with respect to counterparties. The Group is exposed to credit risk through its normal operating activities primarily through customer contracts, financing activities (including Mandatorily Redeemable Cumulative Preference Shares), deposits and the collection risk from arrangements entered into to manage financial risk. The Group has Board approved credit risk management policies which allocate credit limits to counterparties based on publicly available credit information from recognised providers where available. Credit policies cover exposures generated from the sale of products and the use of derivative instruments. The Group 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. Refer note F8. The carrying amounts of financial assets, which are disclosed in more detail in notes B1, B6 and C5, best represents the Group’s maximum exposure to credit risk at the reporting date. The Group holds no significant collateral as security and there are no other significant credit enhancements in respect of these assets. All financial assets are monitored in order to identify any potential changes in the credit quality. C2.2 Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group is exposed to liquidity risk through its ongoing business obligations and its strategy to take advantage of new investment opportunities as they arise. The Group has a capital structure which allows it to support these activities. A key element of this structure is the use of committed undrawn debt facilities. The tables below set out the contractual timing of cash flows on derivative and non-derivative financial assets and liabilities at reporting date and includes borrowings drawn at reporting date, including interest, and all financial instruments and drawn guarantees: Derivative financial instruments $million Less than one month One to three months Three to 12 months One to five years Over five years Non-derivative financial instruments(1) $million Less than one month One to three months Three to 12 months One to five years Over five years 2016 Derivative financial assets 34 18 135 1,037 354 Net derivative financial (liabilities)/ assets 22 (16) (15) 70 273 2015 Derivative financial assets 11 (5) (7) 496 710 Net derivative financial (liabilities)/ assets 8 (86) (181) (519) 360 Derivative financial liabilities (3) (81) (174) (1,015) (350) 2016 2015 Other financial assets 519 1,044 978 3,728 2,521 Net other financial (liabilities)/ assets (509) 191 (1,253) (3,037) 343 Other financial liabilities (1,038) (966) (1,253) (9,690) (3,644) Other financial assets 600 1,135 788 3,971 – Net other financial (liabilities)/ assets (438) 169 (465) (5,719) (3,644) Derivative financial liabilities (12) (34) (150) (967) (81) Other financial liabilities (1,028) (853) (2,231) (6,765) (2,178) The Group manages liquidity risk centrally by monitoring operating cash flow forecasts and the degree of access to debt and equity capital markets. The Group holds a number of debt instruments with varying maturities. The debt portfolio is periodically reviewed to ensure there is funding flexibility and an appropriate repayment profile. The Group has the following committed undrawn floating rate borrowing facilities: Expiring within one year Expiring beyond one year (1) All facilities are deemed to be repaid at the earlier of their contractual maturity date or first call/intended repayment date. 2016 $million – 6,581 6,581 2015 $million – 4,226 4,226 87 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C2 RISK MANAGEMENT (CONTINUED) C2.3 Foreign exchange (FX) risk FX risk is the risk that fluctuations in exchange rates will impact the Group’s result. FX risk arises from future commercial transactions (including interest payments and principal debt repayments on foreign currency long-term borrowings, the sale and purchase of oil and gas, LPG, LNG and the purchase of capital equipment), the recognition of assets and liabilities (including foreign receivables and borrowings) and net investments in foreign operations. The Group is mainly exposed to fluctuations in US dollar and New Zealand dollar through its operations (both overseas and in Australia), its financing facilities and through arrangements put in place to manage risk. As at 30 June 2016, after hedging, the Group is exposed to FX risk on borrowings of US$2,247 million (A$3,021 million). As at 30 June 2015, after hedging and excluding Contact Energy’s New Zealand dollar debt, the Group is exposed to FX risk on borrowings of US$2,247 million (A$2,929 million). To manage FX risk the Group uses forward foreign exchange contracts and cross currency interest rate swaps (both fixed-to-fixed and fixed-to-floating). In certain circumstances borrowings are left in the foreign currency, or hedged from one currency to another, to match payments of interest and principal against expected future business cash flows in that currency. The Group has certain investments in foreign operations whose net assets are exposed to FX translation risk. This currency exposure is managed primarily by borrowing in the currency to which the foreign operation is exposed. Significant transactions undertaken in the normal course of operations which are denominated in a foreign currency are managed on a case by case basis. The table below shows the impact of a 10 per cent change in FX rates (holding all other things constant) on profit and equity based solely on the Group’s borrowings and related financial instruments (excluding debt designated as a net investment hedge) existing at the reporting date but does not take into account any mitigating actions that management might undertake if the rate change occurred. $million 2016 US dollar Euro(2) 2015(1) US dollar Euro(2) Impact on post-tax profit Impact on equity Increase Decrease Increase Decrease 189 (5) 167 (11) (184) 5 (167) 10 156 (12) 157 (26) (151) 12 (157) 25 Includes impact of amounts classified as held for sale at 30 June 2015. (1) (2) Exposure to Euro is a result of ineffectiveness of some fair value hedges that are swapped in AUD. C2.4 Price risk Price risk is the risk that fluctuations in commodity prices will impact the Group’s result. The Group is exposed to fluctuations in prices of electricity, oil, gas and environmental scheme certificates. To manage its price risks the Group utilises a range of financial and derivative instruments including fixed price swaps, options, futures and fixed price forward purchase contracts. Refer to note C5. The policy for managing price risk permits the active hedging of price and volume exposures within prescribed limits. The full hedge portfolio is tested on an ongoing basis against these limits. The table below shows the impact of a 10 per cent change in observable prices (holding all other things constant) on profit and equity based solely on the Group’s price exposures existing at the reporting date but does not take into account any mitigating actions that management might undertake if the price change occurred. $million 2016 Electricity forward price Oil forward prices Environmental scheme certificate prices 2015(1) Electricity forward price Oil forward prices Environmental scheme certificate prices (1) Includes impact of amounts classified as held for sale at 30 June 2015. Impact on post-tax profit Impact on equity Increase Decrease Increase Decrease 27 – 32 (16) – 17 (27) – (32) 16 – (17) 45 28 32 – (57) 17 (45) (28) (32) – 57 (17) 88 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C2 RISK MANAGEMENT (CONTINUED) C2.5 Interest rate risk Interest rate risk is the risk that fluctuations in interest rates affect the Group’s results. Borrowings issued at variable interest rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The exposure of the Group’s borrowings (excluding lease liabilities), after hedging, to interest rate changes and the contractual repricing periods at the reporting date are set out below: Variable rate borrowings Fixed interest rate – repricing dates: Six months or less Six to twelve months One to five years Over five years 2016 $million 3,403 900 – 4,298 1,006 9,607 2015 $million 3,778 991 1,193 4,849 1,058 11,869 The Group’s risk management policy is to manage interest rate exposures using Profit at Risk and Value at Risk methodologies. Exposure limits are set to ensure that the Group is not exposed to excess risk from interest rate volatility. The Group manages its cash flow interest rate risk by entering into fixed rate interest rate swap contracts and fixed rate debt securities, with rates ranging between 2.25 per cent to 7.91 per cent per annum, at a weighted average rate of 5.14 per cent per annum (2015: 2.20 per cent to 7.91 per cent per annum, at a weighted average rate of 4.81 per cent per annum). Such interest rate swaps have the economic effect of converting borrowings from floating to fixed rates. The Group manages its fair value interest rate risk by using fixed-to-floating interest rate swaps. Where possible these are designated to hedge the interest rate costs associated with underlying debt obligations. The table below shows the effect on profit and equity if interest rates had been 100 basis points higher or lower based on the relevant interest rate yield curve applicable to the underlying currency of the Group’s interest-bearing assets and liabilities. All other variables have been held constant and the impact of any mitigating actions that management might undertake if the rate change occurred have not been taken into account. $million 2016 Interest rates $million 2015(1) Interest rates (1) Includes impact of balances classified as held for sale at 30 June 2015. Impact on post-tax profit Impact on equity Increase Decrease Increase Decrease 15 (20) 14 (19) Impact on equity Increase Decrease Increase Decrease 60 (67) 59 (69) 89 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C3 CAPITAL MANAGEMENT The Group’s objectives when managing capital are to safeguard the 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 Group 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 requirements in advance of when the funds are required. Key factors considered in determining the Group’s 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. The group monitors its capital requirements principally through the gearing ratio. This ratio is calculated as adjusted net debt divided by total capital. Net debt is adjusted to take into account the effect of FX hedging transactions on the Group’s foreign currency debt obligations. The Group maintains a gearing ratio designed to optimise the cost of capital while providing flexibility to fund growth opportunities. Total interest-bearing liabilities Less: Cash and cash equivalents Net debt Fair value adjustments on FX hedging transactions Adjusted net debt Total equity Total capital Gearing ratio 2016 $million 9,616 (146) 9,470 (339) 9,131 14,530 23,661 39% 2015(1) $million(1) 11,877 (151) 11,726 (120) 11,606 14,159 25,765 45% (1) Excludes amounts which are classified as held for sale at 30 June 2015. If Contact Energy’s balances were included within the gearing ratio calculation, the adjusted net debt would be $13,102 million with a gearing ratio of 48 per cent. C4 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The following is a summary of the methods that are used to estimate the fair value of the Group’s financial instruments: Instrument Financial instruments traded in active markets Forward foreign exchange Commodity option contract Financial instruments not traded in active markets Long-term debt and other financial assets Interest rate swaps and cross currency interest rate swaps Commodity swaps and non-exchange traded futures Electricity derivatives which are not regularly traded with no observable market price Oil forward structured derivative instrument Oil put option Fair Value Methodology Quoted market prices at reporting date. Present value of estimated future cash flows using quoted forward exchange rates. Most recent available transaction prices for same or similar instruments. Established valuation methodologies which are general market practice applicable to each instrument. Quoted market prices, dealer quotes for similar instruments, or present value of estimated future cash flows. Present value of estimated future cash flows of these instruments. Key variables include market pricing data, discount rates and credit risk of the Group or counterparty where relevant. Variables reflect those which would be used by market participants to execute and value the instruments. Present value of estimated future cash flows using market forward prices. The valuation models for long term electricity derivatives reflect the fair value of the avoided costs of construction of the physical assets which would be required to achieve an equivalent risk management outcome for the Group. The methodology takes into account all relevant variables including forward commodity prices, physical generation plant variables, the risk-free discount rate and related credit adjustments, and asset lives. The valuation models for short-term electricity derivatives include premiums for lack of volume in the market relative to the size of the instruments being valued. Valued with reference to the observable market oil forward prices, foreign exchange rates and discount rates. As a result of the structured nature of the instrument, certain risk premium and credit variables utilised in the valuation model are unobservable. The oil put options are referenced to the Japan Customs-cleared Crude (JCC) index with strike prices in both US$ and A$. The put option instruments are valued using a Monte Carlo simulation model which generates potential future oil and foreign exchange price outcomes over the period covered by the oil put option. To the maximum extent possible, valuations are based on assumptions which are supported by independent and observable market data. Where valuation models are used, instruments are discounted at the market interest rate applicable to the instrument. Valuation methodologies are determined based on the nature of the underlying instrument. The Group monitors changes in fair value measurements on a monthly basis. Key estimate: fair value In order to estimate the fair value of financial assets and financial liabilities, the Group uses a variety of methods (outlined in the table above) and makes assumptions based on market conditions which exist at each reporting date. 90 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C4 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) The following table provides information about the reliability of the inputs used in determining the fair value of financial assets and liabilities carried at fair value. The 3 levels in the hierarchy reflect the level of independent observable market data used in determining the fair values and are defined as follows: — Level 1: quoted prices (unadjusted) in active markets for identical instruments. — Level 2: other valuation methods for which all inputs that have a significant impact on fair value are observable, 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). $million 2016 Derivative financial assets Environmental scheme certificates Available-for-sale financial assets Total financial assets carried at fair value Derivative financial liabilities Environmental scheme surrender obligations Total financial liabilities carried at fair value $million 2015 Derivative financial assets Environmental scheme certificates Available-for-sale financial assets Financial assets held for sale Total financial assets carried at fair value Derivative financial liabilities Environmental scheme surrender obligations Financial liabilities held for sale Total financial liabilities carried at fair value Note Level 1 Level 2 Level 3 Total C5 B6 B6 C5 B6 115 261 146 522 (3) (270) (273) 1,022 – – 1,022 (717) – (717) 250 – – 250 (348) – (348) 1,387 261 146 1,794 (1,068) (270) (1,338) Note Level 1 Level 2 Level 3 Total C5 B6 B6 C5 B6 16 322 134 21 493 (5) (156) (8) (169) 519 – – 68 587 (830) – (62) (892) 339 – – – 339 (505) – – (505) 874 322 134 89 1,419 (1,340) (156) (70) (1,566) With the tightening of the electricity market in the current period, it was considered appropriate to add a liquidity premium to certain electricity instruments resulting in the transfer of a Level 2 derivative to Level 3. The consolidated entity recognises transfers between levels of the fair value hierarchy as of the beginning of the reporting period during which the transfer occurred. The following table shows a reconciliation of movements in value of instruments included in Level 3 of the fair value hierarchy: Balance as at 1 July 2015 Cash paid for new instruments in the period Net gain recognised in other comprehensive income Net loss realised in revenue line Net loss realised in cost of sales Net loss from financial instruments at fair value Cash settlements on existing instruments Transfers into Level 3 Balance as at 30 June 2016 $million (166) 117 177 (66) (130) (254) 330 (106) (98) The main inputs and assumptions used by the Group in measuring the fair value of level 3 financial instruments are as follows: Forward commodity prices: Both observable external market data and internally derived forecast data are used which impact the expected cash flows. Physical generation plant variables: Variables which would be used in the valuation of physical generation assets with equivalent risk management outcomes impact the expected cash flows. These include new build capital costs, operating costs and plant efficiency factors. Liquidity premium: A premium was applied to allow for the lack of volume in the market relative to the size of the instruments being valued. Lower strike premium: A premium was applied to allow for instances where instruments have lower strike prices compared to strike prices associated with the observable market prices. Risk-free discount rate: The discount rates applied to the cash flows of the Group are based on the observable market rates for risk-free interest rate instruments for the appropriate term. Credit adjustment: An observable entity or counterparty discount or credit spread curve is applied to the discount rate depending on the asset/ liability position of a financial instrument. Where a counterparty specific credit curve is not observable, an estimated curve is applied which takes into consideration the credit rating of the counterparty and its industry. Oil put inputs: Both observable external market data and internally derived forecast data are used in the valuation. Observable external market data includes foreign exchange movements, risk free interest rates, and Brent oil prices. Internally derived data principally includes the forward price path for Japanese Customs-cleared Crude (JCC) which is not readily observable in the market. The forward curve for JCC is inferred from the Brent oil forward curve. 91 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C4 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) The use of different methodologies or assumptions could lead to different measurements of fair value. For fair value measurements in Level 3, a 10 per cent increase or decrease in the unobservable assumptions would have the following effects: $million Long term electricity derivative assets Long term electricity derivative liabilities Short term electricity derivative assets Short term electricity derivative liabilities Oil derivative assets 2016 Effect on profit or loss 2015 Effect on profit or loss Increase 73 59 6 4 (5) Decrease (73) (59) (6) (4) 14 Increase 28 59 – – – Decrease (28) (59) – – – Gains/(losses) on initial recognition of financial instruments Any differences between the fair value at initial recognition (transaction price) and the amount that would be determined at that date using the relevant valuation technique are deferred in the statement of financial position and recognised in the income statement over the life of the instrument. The following has been recognised in the income statement during the year: Derivative assets Opening balance – gain New instruments in the period Recognised in the income statement Closing balance – gain Derivative liabilities Opening balance – gain Recognised in the income statement Closing balance – gain 2016 $million 100 (7) (21) 72 31 3 34 Except as noted below the carrying amounts of financial assets and liabilities are reasonable approximations of their fair values. The Group has the following non-current financial instruments which are not measured at fair value in the statement of financial position: Assets Other financial assets Liabilities Bank loans – secured Bank loans – unsecured(1) Capital markets borrowings – unsecured Carrying value Fair value Fair value hierarchy level 2016 $million 2015 $million 2016 $million 2015 $million 2 2 2 2 4,848 3,304 5,128 3,220 – 726 8,772 9,498 212 3,061 8,559 11,832 – 764 8,642 9,406 216 3,110 8,842 12,168 (1) The proceeds from the sale of Contact Energy $1,599 million and from the equity rights issue $2,496 million were used to repay interest-bearing liabilities. The fair value of these financial instruments reflect the present value of estimated future cash flows of the instrument. The following key variables are used to determine the present value: — market pricing data (for the relevant underlying interest rates, foreign exchange rates or commodity prices); — discount rates; and — credit risk of the Group or counterparty where appropriate. For these instruments, each of these variables is 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. 92 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C5 HEDGING AND DERIVATIVES The Group is exposed to risk from movements in foreign exchange and interest rates, and electricity and oil prices. As part of the risk management strategy set out in note C2, the Group holds the following types of derivative instruments. 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 Assets Liabilities 2016 $million 2015 $million 2016 $million 2015 $million – 7 – 201 45 253 – 738 – 386 9 1 1,134 1,387 – – – 12 3 15 – 480 – 378 1 – 859 874 (2) – (1) (10) (5) (18) (35) (347) (286) (101) (281) – (14) – – (15) (2) (31) (76) (326) (255) (185) (467) – (1,050) (1,068) (1,309) (1,340) 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. Gains or losses on derivatives which are not designated as hedging instruments are recognised in the income statement and resulted in a $198 million loss in the year ended 30 June 2016 (2015: $587 million loss). This includes a $10 million loss relating to discontinued operations (2015: $27 million loss). The Group designates certain derivatives as either: — hedges of the fair value of recognised assets, liabilities or firm commitments (fair value hedge); — hedges of a particular cash flow risk associated with a recognised asset, liability or highly probable forecast transaction (cash flow hedge); or — hedges of a net investment in a foreign operation (net investment hedge). The Group documents at the inception of these transactions the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. The Group 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 following table shows the fair value of instruments which have been designated as hedging instruments: Fair value hedges Cash flow hedges Net investment hedges Assets Liabilities Ref. (a) (b) (c) 2016 $million 620 358 – 2015 $million 431 67 – 2016 $million 25 298 1,264 2015 $million 24 539 1,481 Analysis of financial instruments which have been designated as hedging instruments (a) Fair value hedges The Group designates certain cross currency interest rate swaps in fair value hedge relationships. Changes in the fair value of these interest swaps are recorded in the income statement, together with any changes in the fair value of the hedged item. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of the hedged item for which the effective interest method is used is amortised to profit and loss over the remaining life using a recalculated effective interest rate. 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 on the hedging instruments Loss on the hedged item attributable to the hedge risk 2016 $million 189 (172) 17 2015 $million 319 (286) 33 93 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C5 HEDGING AND DERIVATIVES (CONTINUED) (b) Cash flow hedges The Group designates certain foreign exchange contracts, electricity derivatives, interest rate swaps, cross currency interest rate swaps and oil derivatives in cash flow hedge relationships. The effective portion of changes in the fair value of these derivatives are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement within expenses. 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). 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. The following sets out the amounts recognised in the income statement and equity arising from the Group’s cash flow hedges: Effective portion of the gains on cash flow hedges recognised in the cash flow hedge reserve (pre-tax) (Losses)/gains transferred from the cash flow hedge reserve to sales (Losses)/gains transferred from the cash flow hedge reserve to cost of sales Gains transferred from the cash flow hedge reserve to decrease in fair value of financial instruments Gains/(losses) transferred from the cash flow hedge reserve to finance cost Ineffectiveness gains/(losses) recognised in the income statement from cash flow hedges 550 (151) (136) 30 60 (197) 4 246 33 21 7 (64) (3) (2) (c) Net investment and hedge of net investment in foreign operations The Group designates certain foreign denominated borrowings in net investment hedge relationships. 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 (2016: $36 million loss; 2015: $130 million loss). They are released to the income statement upon disposal of the foreign operation. The ineffectiveness recognised in the income statement from net investment hedges for the year to 30 June 2016 totalled $nil (2015: $nil). Set out below are the different types of derivatives used by the Group and details of their key attributes. (d) Types of derivatives Interest rate swaps At 30 June 2016, the fixed interest rates varied from 2.25 per cent to 3.33 per cent (2015: 2.20 per cent to 6.95 per cent) and the main floating rate was the Bank Bill Swap Benchmark (BBSW). The hedged interest payment transactions are expected to impact profit at various dates between one and seven years from the reporting date. Cross currency interest rate swaps At 30 June 2016, the fixed interest rates varied from 2.50 per cent to 7.91 per cent (2015: 2.50 per cent to 7.91 per cent) and the main floating rates were BBSW and US LIBOR. The hedged interest payment transactions are expected to impact profit at various dates between one month and seven years from the reporting date. Forward foreign exchange contracts The hedged foreign currency denominated transactions are expected to impact profit at various dates between one month and seven years from the reporting date. Electricity derivatives The hedged electricity purchase and sale transactions are expected to impact profit continuously for each half hour period throughout the next 12 years from the reporting date. Oil derivatives The hedged oil sale and purchase transactions are expected to impact profit continuously throughout the next five years from the reporting date. 94 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C6 SHARE CAPITAL AND RESERVES Issued and paid-up capital 1,753,335,764 (2015: 1,109,628,904) ordinary shares, fully paid Ordinary share capital at the beginning of the period Shares issued: — 636,086,881 (2015: Nil) shares under a rights issue(1) — 6,483,666 (2015: 5,867,435) shares in accordance with the Dividend Reinvestment Plan — 1,136,313 (2015: 115,716) shares in accordance with the Long Term Incentive Plans Total movements in ordinary share capital Ordinary share capital at the end of the period (1) Refer to note A5 for the terms of the rights issue. 2016 $million 2015 $million 7,150 4,599 2,509 42 – 2,551 7,150 4,599 4,520 – 79 – 79 4,599 Terms and conditions Holders of ordinary shares are entitled to receive dividends as determined from time to time and are entitled to one vote per share at shareholders’ meetings. In the event of the winding up of the Group, ordinary shareholders rank after creditors, and are fully entitled to any proceeds of liquidation. The Group does not have authorised capital or par value in respect of its issued shares. Nature and purpose of reserves Share-based payments reserve The share-based payments reserve is used to recognise the fair value of options, performance share rights and deferred share rights over their vesting period. Refer to note F3. 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 Group’s net investments in foreign operations. Hedging reserve The hedging reserve is used to record the effective portion of the gains or losses on cash flow hedging instruments 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 non-monetary. Available-for-sale reserve Changes in fair value and exchange differences arising on translation of investments are taken to the available-for-sale reserve. Amounts are recognised in profit or loss when the associated investments are sold/settled or impaired. 95 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES C7 OTHER COMPREHENSIVE INCOME $million 2016 Items that will not be reclassified to the income statement Actuarial gain on defined benefit superannuation plan, net of tax Items that may be reclassified to the income statement Foreign currency translation differences for foreign operations Net loss on hedge of net investment in foreign operations Cash flow hedges – effective portion of changes in fair value, net of tax Cash flow hedges – reclassified to income statement, net of tax Cash flow hedges – foreign currency translation gain, net of tax Available for sale financial assets – valuation gain taken to equity, net of tax Total other comprehensive income $million 2015 Items that will not be reclassified to the income statement Actuarial gain on defined benefit superannuation plan, net of tax Items that may be reclassified to the income statement Foreign currency translation differences for foreign operations Net loss on hedge of net investment in foreign operations Cash flow hedges – effective portion of changes in fair value, net of tax Cash flow hedges – reclassified to income statement, net of tax Cash flow hedges – foreign currency translation gain, net of tax Available for sale financial assets – valuation gain taken to equity, net of tax Total other comprehensive income Foreign currency translation reserve Hedging reserve Available- for-sale reserve Retained earnings Non- controlling interests Total other comprehensive income – – 82 (18) – – – – 64 64 – – 254 (71) – – – – 183 183 – – – – 385 (138) – – 247 247 – – – – 169 1 1 – 171 171 – – – – – – – 6 6 6 – – – – – – – 20 20 20 – – – – – – – – – – 5 5 – – – – – – – 5 – – (2) – – – – – (2) (2) – – (75) – 2 1 – – (72) (72) – – 80 (18) 385 (138) – 6 315 315 5 5 179 (71) 171 2 1 20 302 307 96 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES D TAXATION This section provides details of the Group’s income tax expense, current tax provision and deferred tax balances and the Group’s tax accounting policies. D1 INCOME TAX EXPENSE Income tax Current tax benefit Deferred tax benefit Under provided in prior years Total income tax benefit Income tax benefit attributable to: Loss from continuing operations Profit from discontinued operations Reconciliation between tax expense and pre-tax net profit Loss from continuing operations before income tax Profit/(loss) from discontinued operations before income tax Income tax using the domestic corporation tax rate of 30 per cent (2015: 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 Income tax benefit on pre-tax accounting profit at standard rates Increase/(decrease) in income tax expense due to: Impairment expense not recoverable Write-off exploration expense Sale of Contact Energy Capital loss re-recognition Reset of tax bases on consolidation of Uranquinty into tax group Share of results of equity accounted investees Tax (benefit)/expense on translation of foreign denominated tax balances Reinstatement of tax depreciation on Contact Energy’s powerhouses Recognition of change in net tax loss position Other Under provided in prior years Total income tax benefit Deferred tax movements recognised directly in other comprehensive income (including foreign currency translation) Financial instruments at fair value Property, plant and equipment Provisions Other items 2016 $million 2015 $million (13) (116) 3 (126) (133) 7 (126) (737) 35 (702) (211) 15 (196) 23 13 (3) (30) (9) 65 (3) – – 11 67 3 (126) 98 (28) – 8 78 (20) (38) – (58) (85) 27 (58) (534) (114) (648) (194) (1) (195) 80 – – – – 10 46 (15) 7 9 137 – (58) 26 (20) (7) 4 3 97 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES INCOME TAX EXPENSE (CONTINUED) D1 The Company and its wholly-owned Australian resident entities, which met the membership requirements, formed a tax-consolidated group with effect from 1 July 2003. The head entity within the tax-consolidated group is Origin Energy Limited. Tax funding arrangement amounts are recognised as inter-entity amounts. Income tax expense is made up of current tax expense and deferred tax expense. Current tax expense represents the expected tax payable on the taxable income for the year, using current tax rates and any adjustment to tax payable in respect of previous years. Deferred tax expense represents changes in temporary differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Key judgements Tax balances: Tax balances reflect a current understanding and interpretation of existing tax laws. Uncertainty arises due to the possibility of changes in tax law or other future circumstances to impact the tax balances recognised in the financial statements. Ultimate outcomes may vary based on circumstances. Deferred taxes: The recognition of deferred tax balances requires judgement as to whether it is probable such balances will be utilised and/or reversed in the foreseeable future. Petroleum Resource Rent Tax (PRRT): The PRRT applies to all Australian onshore oil and gas projects, including coal seam gas projects. The application of PRRT legislation involves significant judgement around the taxing point of projects, the transfer price used for determining PRRT income, and the measurement of the Starting Base on transition of existing permits, production licenses 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. Income tax expense recognised in other comprehensive income $million Available for sale assets: Valuation gain taken to equity Cash flow hedges: Reclassified to income statement Effective portion of change in fair value Net loss on hedge of net investment in foreign operations Foreign currency translation differences for foreign operations Actuarial gain on defined benefit superannuation plan Other comprehensive income for the period 2016 2015 Gross Tax Net Gross 9 (3) 6 30 (197) 550 (29) 80 – 413 59 (165) 11 – – (98) (138) 385 (18) 80 – 315 2 246 (130) 180 8 336 Tax (10) – (75) 59 – (3) (29) Net 20 2 171 (71) 180 5 307 D2 DEFERRED TAX Deferred tax balances arise when there are temporary differences between accounting carrying amounts and the tax bases of assets and liabilities, other than for the following: — where the difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and affects neither the accounting profit nor taxable profit or loss; — where temporary differences relate to investments in subsidiaries, associates and interests in joint arrangements to the extent the Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future; and — where temporary differences arise on initial recognition of goodwill. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet 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 if it is no longer probable that the related tax benefit will be realised. 98 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES 1 July 2014 Recognised in income Recognised in equity Transfers(1) to held(1) for sale(1) 30 June 2015 Recognised in income Recognised in equity Transfers(1) to held(1) for sale(1) 30 June 2016 D2 DEFERRED TAX (CONTINUED) Movement in temporary differences during the year Asset/(liability) $million Accrued expenses not incurred for tax Employee benefits Acquired environmental scheme certificate purchase obligations Acquired energy purchase obligations Provisions Available-for-sale financial assets Inventories Tax value of carry-forward tax losses recognised Property, plant and equipment Exploration and evaluation assets Financial instruments at fair value APLNG MRCPS elimination (refer note E1.2) Other items 115 71 10 84 217 3 (3) 62 (1,277) (305) 96 1 43 (110) 12 (2) (67) 28 1 (5) 79 63 (51) 105 21 (36) 38 – – – – 7 – – (3) 20 – (26) – (1) (3) – (4) – – (13) – 1 – 5 79 8 17 239 4 (7) 138 727 (467) 2 (9) (2) (8) 30 – 4 25 89 – (13) – 3 701 (356) (102) 162 22 9 (147) 4 28 55 116 – – – – – – – 1 28 – (98) – (9) (78) Net deferred tax liabilities (883) (1) Relates to amounts classified as held for sale at 30 June 2015 and 30 June 2016. Refer to note E4. Unrecognised deferred tax assets and liabilities 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) Acquisition transaction costs Investment in joint ventures Intangible assets Deferred tax liabilities have not been recognised in respect of the following items: Investment in Australia Pacific LNG(2) – – – – (5) – – – (11) 15 – – – (1) 7 70 6 9 264 4 (3) 164 (361) (443) 68 50 55 (110) 2016 $million 2015 $million 33 33 2,083 57 39 24 2,269 32 26 1,744 57 43 33 1,935 (1,817) (1,817) (1,875) (1,875) (1) 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. The application of PRRT legislation relies on a forecast of future years expenditure in order to determine whether the utilisation of the PRRT base will be required. As the forecast indicates that no utilisation is required, no deferred tax asset has been recognised with respect to PRRT in these financial statements. (2) A deferred tax liability has not been recorded in respect of the investment in Australia Pacific LNG as the Group is able to control the timing of the reversal of the temporary difference through its voting rights and it is not expected that the temporary difference will reverse in the foreseeable future. 99 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES E GROUP STRUCTURE The following section provides information on the Group’s structure and how this impacts the results of the Group as a whole, including details of joint arrangements, controlled entities, transactions with non-controlling interests and changes made to the Group structure during the year. E1 JOINT ARRANGEMENTS Joint arrangements are those entities over whose activities the Group has joint control, established by contractual agreement and require consent of two or more parties for strategic, financial and operating decisions. The Group classifies its interests in joint arrangements as either joint operations or joint ventures depending on its rights to the assets and obligations for the liabilities of the arrangements. E1.1 Interests in joint ventures Interests in joint ventures are initially recognised at cost and are subsequently adjusted for changes in the Group’s share of the joint venture’s net assets. Joint venture entity Australia Pacific LNG Pty Ltd(1) Energia Andina S.A.(2) Energia Austral SpA(3) KUBU Energy Resources (Pty) Limited OTP Geothermal Pte Ltd PNG Energy Developments Limited Rockgas Timaru Ltd(4) Transform Solar Pty Ltd(5) Venn Energy Trading Pte Limited Reporting date 30 June 31 December 31 December 30 June 31 December 31 December 31 March 30 June 31 March Country of incorporation Australia Chile Chile Botswana Singapore PNG New Zealand Australia Singapore Ownership interest (%) 2016 37.5 49.9 34.0 50.0 50.0 50.0 – – 50.0 2015 37.5 49.9 34.0 50.0 50.0 50.0 50.0 50.0 50.0 (1) Australia Pacific LNG is a separate legal entity. Operating, management and funding decisions require the unanimous support of the Foundation Shareholders, which includes the Group and ConocoPhillips. Accordingly, joint control exists and the Group has classified the investment in Australia Pacific LNG as a joint venture. (2) Energia Andina S.A. is a separate legal entity. Key decisions require super majority (four directors) approval, with the Group entitled to appoint two of the five directors. As a consequence joint control exists and the Group has classified the investment as a joint venture. (3) Energia Austral SpA is a separate legal entity. Key decisions require super majority (four directors) approval, with the Group entitled to appoint two of the five directors. As a consequence joint control exists and the Group has classified the investment as a joint venture. The Group’s ownership interest can change between reporting periods when equity contributions are made to the joint venture. (4) The Group sold its 53.09 per cent shareholding in Contact Energy Ltd, which held the investment in Rockgas Timaru Ltd. (5) Transform Solar Pty Ltd was deregistered during the year ended 30 June 2016. E1.2 Investment in Australia Pacific LNG Pty Ltd A summary of Australia Pacific LNG’s financial performance for the periods ended 30 June 2016 and 30 June 2015, and its financial position as at those dates follows: 2016 2015 Total APLNG Origin interest Total APLNG Origin interest 880 (585) 295 (700) 5 (296) 209 (487) (7) (23) (75) (9) (114) (601) 95 (506) 111 (182) (3) (9) (28) (3) (43) (225) 36 (189) 408 (263) 145 (168) 7 (34) 32 (18) (11) (136) (61) – (208) (226) 608 382 55 (7) (4) (51) (23) – (78) (85) 228 143 $million Operating revenue Operating expenses EBITDA Depreciation and amortisation expense Interest income Interest expense Income tax benefit Underlying Result for the period Items excluded from segment result: Net foreign exchange loss Tax expense on translation of foreign denominated tax balances Pre-production costs not able to be capitalised Restructure costs Total items excluded from segment result Net loss for the period Other comprehensive income Total comprehensive income 100 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES E1 JOINT ARRANGEMENTS (CONTINUED) E1.2 Investment in Australia Pacific LNG Pty Ltd (continued) Summary statement of financial position of Australia Pacific LNG $million Cash and cash equivalents Other current assets Current assets Property, plant and equipment Exploration, evaluation and development assets Other non-current assets Non-current assets Total assets Bank loans – secured Other current liabilities Current liabilities Bank loans – secured Payable to shareholders Other non-current liabilities Non-current liabilities Total liabilities Net assets Group’s interest of 37.5 per cent of APLNG net assets Group’s own costs Mandatorily Redeemable Cumulative Preference Shares elimination(1) Investment in Australia Pacific LNG Pty Ltd 2016 Total APLNG 286 584 2015 Total APLNG 155 408 870 563 40,011 1,354 379 41,744 42,614 360 890 1,250 10,742 12,927 1,463 25,132 26,382 36,061 1,896 175 38,132 38,695 – 1,492 1,492 10,544 8,811 1,110 20,465 21,957 16,232 16,738 2016 $million 6,087 25 (167) 5,945 2015 $million 6,277 25 (71) 6,231 (1) The Mandatorily Redeemable Cumulative Preference Shares (MRCPS) are recognised as a financial asset by the Group and the MRCPS dividend is recognised as interest revenue in the Group’s income statement. The proportion attributable to the Group’s own interest (37.5 per cent) is eliminated through the equity accounted investment balance as Australia Pacific LNG capitalises a portion of interest expense associated with the MRCPS. In calculating Origin’s return on capital employed, an adjustment is made to the carrying value of the Australia Pacific LNG equity accounted investment as noted below. Investment in Australia Pacific LNG Pty Ltd Less: Non-cash fair value uplift(1) Adjusted investment in Australia Pacific LNG Pty Ltd 2016 $million 5,945 (1,923) 4,022 2015 $million 6,231 (1,945) 4,286 (1) Non-cash fair value uplift represents the increase in Origin’s equity accounted investment in Australia Pacific LNG arising from the partly paid shares issued to ConocoPhillips (CoP) in October 2009 and the dilution impact of subsequent share issues to Sinopec (August 2011 and July 2012). In the initial years, Origin was not required to make an equivalent contribution and instead recorded a non-cash fair value uplift to its investment in Australia Pacific LNG. The equity contributions made by CoP and Sinopec to Australia Pacific LNG were used to fund construction of the LNG Project assets, which will be depreciated over their useful lives (approximately 30 years). In each period Origin’s equity accounted share of Australia Pacific LNG’s earnings will include a depreciation charge referable to the non-cash fair value uplift. When these earnings are reflected in Origin’s investment balance this depreciation amount will reduce the remaining balance of the non-cash fair value uplift. The 30 June 2016 balance includes an estimated depreciation charge of $22 million associated with the non-cash fair value uplift described above. Australia Pacific LNG is subject to the Petroleum Resource Rent Tax legislation and has an unrecognised deferred tax asset balance of $3,747 million (100 per cent Australia Pacific LNG) at 30 June 2016 (30 June 2015: $3,151 million). Any future recognition of this balance by Australia Pacific LNG will result in an increase in the Group’s equity accounted investment in Australia Pacific LNG, rather than a deferred tax asset, as the Group equity accounts its 37.5 per cent interest. 101 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES E1 JOINT ARRANGEMENTS (CONTINUED) E1.3 Transactions between the Group and Australia Pacific LNG Pty Ltd The Group provides services to Australia Pacific LNG including corporate services, Upstream operating services related to the development and operation of Australia Pacific LNG’s natural gas assets, and marketing services relating to coal seam gas (CSG). The Group incurs costs in providing these services and charges Australia Pacific LNG for them in accordance with the terms of the contract governing those services. Separately, the Group has entered agreements with Australia Pacific LNG to purchase gas (2016: $296 million; 2015: $253 million) and the Group sells gas to Australia Pacific LNG (2016: $41 million; 2015: $75 million). At 30 June 2016, the Group’s outstanding payable balance for purchases from Australia Pacific LNG is $27 million (2015: $22 million) and outstanding receivable balance for sales to Australia Pacific LNG is $1 million (2015: $12 million). The Group has invested in Mandatorily Redeemable Cumulative Preference Shares (MRCPS) issued by Australia Pacific LNG by way of subscription up to an amount of $5.25 billion. The MRCPS are the mechanism by which the funding for the CSG to LNG Project has been provided by the shareholders of Australia Pacific LNG in proportion to their ordinary equity interests. The MRCPS have a fixed rate dividend obligation based on the relevant observable market interest rates and estimated credit margin at the date of issue. The dividend is paid twice per annum. The mandatory redemption dates for the MRCPS are 31 December 2022 ($3.75 billion) and 31 December 2024 ($1.5 billion). The financial asset (loan) reflecting these MRCPS was $4,848 million as at 30 June 2016 (2015: $3,304 million). Dividends received are recognised as interest. Refer to note A2. The carrying value of the financial asset at 30 June 2016, as disclosed in note B6, reflects the Group’s view that Australia Pacific LNG will utilise cash flows generated from their export operations to redeem the MRCPS for their full issue price prior to their mandatory redemption date. There are no conditions existing at the reporting date which indicate that Australia Pacific LNG will be unable to repay the full carrying value. Accordingly the financial asset/(loan) is valued at amortised cost and reflects the cash provided to Australia Pacific LNG. The MRCPS were cancelled on 1 July 2016 and replaced with US$2.8 billion of MRCPS, with a mandatory redemption date of 30 June 2026, and US$0.8 billion capital contribution (refer note F12). E1.4 Interests in unincorporated joint operations The Group’s interests in unincorporated joint operations are brought to account on a line-by-line basis in the income statement and statement of financial position. These interests are held on the following assets whose principal activities are oil and/or gas exploration, development and production, power generation and geothermal power technology: — Cooper Basin — Bass Basin — Bonaparte Basin — Browse Basin — Canterbury Basin — Beetaloo Basin Otway Basin — Perth Basin — Surat Basin — — Taranaki Basin — Worsley Power Plant Geodynamics — E2 BUSINESS COMBINATIONS There were no significant business combinations during the years ended 30 June 2016 and 30 June 2015. 102 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES E3 CONTROLLED ENTITIES The financial statements of the Group include the consolidation of Origin Energy Limited and controlled entities. Controlled entities are the following entities controlled by the parent entity (Origin Energy Limited): Origin Energy Limited Origin Energy Finance Limited Huddart Parker Pty Limited < Origin Energy NZ Share Plan Limited FRL Pty Ltd < BTS Pty Ltd < Origin Energy Power Limited < Origin Energy SWC Limited < BESP Pty Ltd Origin Energy Pinjar Security Pty Limited Origin Energy Pinjar Holdings No. 1 Pty Limited Origin Energy Pinjar No. 1 Pty Limited Origin Energy Pinjar Holdings No. 2 Pty Limited Origin Energy Pinjar No. 2 Pty Limited Origin Energy Walloons Transmissions Pty Limited Origin Energy Eraring Pty Limited < Origin Energy Eraring Services Pty Limited < Origin Energy Darling Downs Solar Farm Pty Ltd Origin Energy Holdings Pty Limited < Origin Energy Retail Limited < Origin Energy (Vic) Pty Limited < Gasmart (Vic) Pty Ltd < Origin Energy (TM) Pty Limited < Cogent Energy Pty Ltd Origin Energy Retail No. 1 Pty Limited Origin Energy Retail No. 2 Pty Limited Horan & Bird Energy Pty Limited Origin Energy Electricity Limited < Eraring Gentrader Depositor Pty Limited Sun Retail Pty Ltd < OE Power Pty Limited < Origin Energy Uranquinty Power Pty Ltd < Origin Energy Mortlake Terminal Station No. 1 Pty Limited Origin Energy Mortlake Terminal Station No. 2 Pty Limited Origin Energy PNG Ltd # Origin Energy PNG Holdings Limited # Origin Energy Tasmania Pty Limited < The Fiji Gas Co Ltd Origin Energy Contracting Limited < Origin Energy LPG Limited < Origin (LGC) (Aust) Pty Limited < Origin Energy SA Pty Limited < Hylemit Pty Limited Origin Energy LPG Retail (NSW) Pty Limited Origin Energy WA Pty Limited < Origin Energy Services Limited < OEL US Inc. Origin Energy NSW Pty Limited < Origin Energy Asset Management Limited < Origin Energy Pipelines Pty Limited < Origin Energy Pipelines (SESA) Pty Limited Origin Energy Pipelines (Vic) Holdings Pty Limited < Origin Energy Pipelines (Vic) Pty Limited < Incorporated in NSW Vic Vic NZ WA WA SA WA Vic Vic Vic Vic Vic Vic Vic NSW NSW NSW Vic SA Vic Vic Vic Vic Vic Vic Qld Vic Vic Qld Vic Vic Vic Vic PNG PNG Tas Fiji Qld NSW NSW SA Vic NSW WA SA USA NSW SA NT Vic Vic Vic 2016 Ownership interest % 2015 Ownership interest % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 66.7 100 100 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 66.7 100 100 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 103 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES E3 CONTROLLED ENTITIES (CONTINUED) Origin LPG (Vietnam) LLC Origin Energy Solomons Ltd Origin Energy Cook Islands Ltd Origin Energy Vanuatu Ltd Origin Energy Samoa Ltd Origin Energy American Samoa Inc Origin Energy Insurance Singapore Pte Ltd Origin Energy Resources Limited < Origin Energy CSG 2 Pty Limited Origin Energy ATP 788P Pty Limited Angari Pty Limited < Oil Investments Pty Limited < Origin Energy Southern Africa Holdings Pty Limited Origin Energy Wallumbilla Transmissions Pty Limited Oil Company of Australia (Moura) Transmissions Pty Limited < Origin Energy Kenya Pty Limited Origin Energy Bonaparte Pty Limited < Origin Energy Developments Pty Limited < Origin Energy Zoca 91-08 Pty Limited < Origin Energy Petroleum Pty Limited < Origin Energy Browse Pty Ltd Origin Energy Northwest Limited Sagasco South East Inc Origin Energy Resources NZ Limited Kupe Development Limited Kupe Mining (No.1) Limited Origin Energy Resources (Kupe) Limited Origin Energy Resources NZ (Rimu) Limited Origin Energy Resources NZ (TAWN) Limited Sagasco NT Pty Ltd < Sagasco Amadeus Pty Ltd < Origin Energy Amadeus Pty Limited < Amadeus United States Pty Limited < OE Resources Limited Partnership Origin Energy Vietnam Pty Limited Origin Energy Singapore Holdings Pte Limited Origin Energy (Song Hong) Pte Limited Origin Energy (Block 31) Pte Limited Origin Energy (Block 01) Pte Limited Origin Energy (L15/50) Pte Limited Origin Energy (L26/50) Pte Limited Origin Energy (Savannahket) Pte Limited Origin Energy Fairview Transmissions Pty Limited Origin Energy VIC Holdings Pty Limited < Origin Energy New Zealand Limited Origin Energy Universal Holdings Limited Origin Energy Five Star Holdings Limited Origin Energy Contact Finance Limited Origin Energy Contact Finance No.2 Limited Origin Energy Pacific Holdings Limited Contact Energy Limited* Contact Aria Ltd* Contact Wind Limited* Rockgas Limited* Origin Energy Capital Ltd < 104 Incorporated in Vietnam Solomon Islands Cook Islands Vanuatu Western Samoa American Samoa Singapore SA Vic Qld SA SA Qld Vic WA Vic SA ACT SA Qld Vic UK Panama NZ NZ NZ NZ NZ NZ SA SA Qld Qld NSW Vic Singapore Singapore Singapore Singapore Singapore Singapore Singapore Vic Vic NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ Vic 2016 Ownership interest % 51 80 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – – – – 100 100 100 100 100 100 100 100 – – – – 100 2015 Ownership interest % 51 80 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 53.09 53.09 53.09 53.09 100 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES E3 CONTROLLED ENTITIES (CONTINUED) Origin Energy Finance Company Pty Limited < OE JV Co Pty Limited < OE JV Holdings Pty Limited Origin Energy LNG Holdings Pte Limited Origin Energy LNG Portfolio Pty Limited Origin Energy Australia Holding BV # Origin Energy Mt Stuart BV # OE Mt Stuart General Partnership # Parbond Pty Limited Origin Foundation Pty Limited Origin Renewable Energy Investments No 1 Pty Ltd Origin Renewable Energy Investments No 2 Pty Ltd Origin Renewable Energy Pty Ltd Origin Energy Geothermal Holdings Pty Ltd Origin Energy Geothermal Pty Ltd Origin Energy Chile Holdings Pty Limited Origin Energy Chile S.A. # Origin Energy Geothermal Chile Limitada # Nido Energy SpA # Pleiades S.A. Origin Energy Geothermal Singapore Pte Limited Origin Energy Wind Holdings Pty Ltd Cullerin Range Wind Farm Pty Ltd Crystal Brook Wind Farm Pty Limited Wind Power Pty Ltd Wind Power Management Pty Ltd Lexton Wind Farm Pty Ltd Stockyard Hill Wind Farm Pty Ltd Tuki Wind Farm Pty Ltd Dundas Tablelands Wind Farm Pty Limited Origin Energy Hydro Bermuda Limited Origin Energy Hydro Chile SpA # 2016 Ownership interest % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2015 Ownership interest % 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Incorporated in Vic Vic Vic Singapore Victoria Netherlands Netherlands Netherlands NSW Vic Vic Vic Vic Vic Vic Vic Chile Chile Chile Chile Singapore Vic NSW NSW Vic Vic Vic Vic Vic Vic Bermuda Chile < Entered into a Class Order 98/1418 and related deed of cross guarantee with Origin Energy Limited. # Controlled entity has a financial reporting period ending 31 December. * Contact Energy Limited and its subsidiaries were classified as held for sale at 30 June 2015. Changes in controlled entities 2016 On 10 August 2015 Contact Energy Limited ceased to be controlled by the Group (refer note E4). On 2 November 2015 the Group acquired 100 per cent of Horan & Bird Energy Pty Ltd. On 18 February 2016 the Group registered Origin Energy LNG Portfolio Pty Ltd. On 15 March 2016 the Group registered Origin Energy Darling Downs Solar Farm Pty Ltd. Origin Energy Generacion Chile SpA changed its name to Nido Energy SpA on 23 February 2016. Origin Energy (Block 31) Pte Limited, Origin Energy (Block 01) Pte Limited, Origin Energy (L15/50) Pte Limited, Origin Energy (L26/50) Pte Limited and Origin Energy (Savannahket) Pte Limited were struck off. 2015 On 25 June 2015 the Group acquired 100 per cent of Pleiades S.A. Origin Energy Retail No. 1 Pty Limited and Origin Energy Retail No. 2 Pty Limited were incorporated/registered and Speed-E-Gas (NSW) Pty Ltd changed its name to Origin Energy LPG Retail (NSW) Pty Limited during the year ended 30 June 2015. Tonga Gas Limited ceased to be controlled and was sold during the year ended 30 June 2015. 105 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES E4 DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE E4.1 Sale of Contact Energy On 10 August 2015, the Group completed the sale of its investment in Contact Energy. The associated earnings, for the current and comparative periods, have been classified as discontinued operations in the Income Statement and all related note disclosures. Results of discontinued operations Revenue Net gain on sale of discontinued operations Other income Expenses Impairment of goodwill relating to investment in Contact Energy (refer to note B4) Net financing costs Profit/(loss) before income tax Income tax expense Profit/(loss) after tax from discontinued operations Attributable to: Members of the parent entity Non-controlling interest Cash flows of discontinued operations Cash flows from operating activities Cash flows used in investing activities Cash flows used in financing activities Net decrease in cash and cash equivalents Reconciliation of gain on sale Consideration (net of transaction costs) Net assets disposed Reserves reclassified to profit and loss on sale Non-controlling interest disposed Gain on sale before income tax expense Carrying value of net assets disposed Cash and cash equivalents Trade and other receivables Inventories Derivatives and other financial assets Property, plant and equipment Intangible assets Other assets Trade and other payables Interest-bearing liabilities Income tax liabilities Other financial liabilities Provisions and employee benefits Deferred tax liabilities Net assets disposed 106 2016 $million 2015 $million 251 14 – (221) – (9) 35 (7) 28 21 7 28 2,254 – 9 (2,021) (265) (91) (114) (27) (141) (199) 58 (141) 2016 $million 2015 $million 71 (8) (63) – 455 (112) (359) (16) 10 August 2015 $million 1,603 (2,928) 69 1,270 14 10 August 2015 $million 4 199 146 35 4,583 487 10 (198) (1,542) (3) (6) (71) (716) 2,928 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES E4 DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE (CONTINUED) Reconciliation of cash consideration Consideration Less: Transaction costs Consideration (net of transaction costs) Less: Cash and cash equivalents disposed Consideration (net of cash disposed) 10 August 2015 $million 1,621 (18) 1,603 (4) 1,599 E4.2 Other asset sales The assets and liabilities relating to the following assets have been classified as held for sale at 30 June 2016: — Mortlake Pipeline; — Cullerin Range Wind Farm; — New Zealand on-shore assets; — Waitsia, Senecio, Beharra; — Energia Austral SpA; — OTP Geothermal Pte Ltd; and — Javiera solar project. These assets form part of the broader asset sale program announced during the rights issue in September 2015 which also includes other assets being progressively prepared for sale but which have not yet met all the criteria to be classified as held for sale at 30 June 2016. Assets and liabilities classified as held for sale Trade and other receivables Inventories Other financial assets Investments accounted for using the equity method Property, plant and equipment Exploration and evaluation assets Intangible assets Deferred tax assets Assets classified as held for sale Trade and other payables Provisions Liabilities classified as held for sale Net assets 2016 $million 2 2 5 152 294 9 6 1 471 9 37 46 425 Sale of Mortlake Terminal Station On 12 February 2016 Origin entered into a Sale Agreement with AusNet Transmission Group Pty Ltd for the sale of Mortlake Terminal Station. Completion of the transaction occurred on 23 June 2016 for cash proceeds of $110 million. Assets disposed of comprised property, plant and equipment of $85 million, resulting in a pre-tax gain on sale of $24 million, net of transaction costs. 107 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES F OTHER INFORMATION This section includes other information to assist in understanding the financial performance and position of the Group, or items required to be disclosed to comply with accounting standards and other pronouncements. F1 CONTINGENT LIABILITIES Discussed below are items where either it is not probable that the Group will have to make future payments or the amount of the future payments are not able to be measured reliably. Guarantees Bank guarantees and letters of credit have been provided mainly to Australian Energy Market Operator Limited to support the Group’s obligations to purchase electricity from the National Electricity Market. Bank guarantees – unsecured Letters of credit – unsecured 2016 $million 398 2 2015(1) $million(1) 250 25 (1) Includes unsecured bank guarantees of $9 million and letters of credit of $25 million related to discontinued operations. The Group’s share of guarantees for certain contractual commitments of its joint ventures is shown at note F2. The Group has also given letters of comfort to its bankers in respect of financial arrangements provided by the banks to certain partly-owned controlled entities. Joint arrangements As a participant in certain joint arrangements, the Group is liable for its share of liabilities incurred by these arrangements. In some circumstances the Group may incur more than its proportionate share of such liabilities, but will have the right to recover the excess liability from the other joint arrangement participants. Australia Pacific LNG has secured US$8.5 billion in funding through a project finance facility. As of 30 June 2016, Australia Pacific LNG has drawn down US$8.5 billion under the facility for capital expenditure, fees and interest. The Group guarantees its share of amounts drawn under the facility during the construction phase of the project (37.5 per cent share at 30 June 2016 being US$3.2 billion). The Group continues to provide parent company guarantees in excess of its 37.5 per cent shareholding in Australia Pacific LNG in respect of certain domestic contracts. Legal and regulatory Certain entities within the Group (and joint venture entities, such as Australia Pacific LNG) are subject to various lawsuits and claims as well as audits and reviews by government or regulatory bodies. In most instances it is not possible to reasonably predict the outcome of these matters or their impact on the Group. Where outcomes can be reasonably predicted, provisions are recorded. A number of sites owned/operated (or previously owned/operated) by the Group have been identified as contaminated. These properties are subject to ongoing environmental management programs. For sites where the requirements can be assessed and remediation costs can be estimated, such costs have been expensed or provided for. Warranties and indemnities have also been given and/or received by entities in the Group in relation to environmental liabilities for certain properties divested and/or acquired. Capital expenditure As part of the acquisition of Browse Basin exploration permits, the Group agreed to pay cash consideration of US$75 million contingent upon a project Final Investment Decision (FID) and US$75 million contingent upon first production. The Group will pay further contingent consideration of up to US$50 million upon first production if 2P reserves, at the time of FID, reach certain thresholds. These obligations have not been provided for at the reporting date as they are dependent upon uncertain future events not wholly within the Group’s control. F2 COMMITMENTS Detailed below are the Group’s contractual commitments which are not recognised as liabilities as the relevant assets have not yet been received. Capital expenditure commitments Joint venture commitments(2) Operating lease commitments 2016 $million 81 993 296 2015(1) $million(1) 228 885 388 (1) (2) Includes $28 million of capital expenditure commitments and $25 million of operating lease commitments relating to discontinued operations. Includes $822 million (2015: $690 million) in relation to the Group’s share of Australia Pacific LNG’s capital, joint venture and operating lease commitments. 108 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES F2 COMMITMENTS (CONTINUED) The Group leases property, plant and equipment under operating leases with terms of one to ten years. The future minimum lease payments under non-cancellable operating leases are as follows: Less than one year Between one and five years More than five years 2016 $million 67 161 68 296 2015 $million 74 202 112 388 F3 SHARE-BASED PAYMENTS This section sets out details of the Group’s share-based remuneration arrangements including details of the Company’s equity incentive plan, employee share plan and Contact Energy’s long term incentive scheme. The following share-based remuneration expense was recognised during the year: Continuing operations Origin Equity Incentive Plan Origin Employee Share Plan Discontinued operations Contact Energy Long Term Incentive Scheme Ref. (a) (b) 2016 $million 2015 $million 32 5 37 – 31 5 36 4 Explanatory notes to share-based payments for the year ended 30 June (a) Equity Incentive Plan Eligible employees are granted share-based remuneration under the Origin Energy Limited Equity Incentive Plan. Participation in the plan is at the Board’s discretion and no individual has a contractual right to participate or to receive any guaranteed benefits. Equity incentives are offered in the form of Options and share rights. (i) Long Term Incentive (LTI) LTI includes the award of Options and Performance Share Rights (PSRs) which do not carry dividend or voting entitlements and will only vest if certain performance standards are met. The number of awards that will vest depends on Origin’s Total Shareholder Return (TSR) ranking relative to the group of companies comprising the S&P/ASX 100 index at grant date. No awards vest if Origin’s TSR ranks at or below the 50th percentile. Testing of the TSR market performance condition occurs four years after the grant date and there is no re-testing. Vested Options may be exercised up to a maximum of 10 years after grant date. The exercise price of Options is based on the weighted average price of the Company’s shares over a period of at least 10 trading days determined by the Board prior to the grant date. As there is no exercise price for PSRs, once vested they are exercised automatically. When exercised, either automatically or upon payment of the exercise price, a vested award is converted into one fully paid ordinary share that carries voting and dividend entitlements. The fair value of the awards granted is recognised as an employee expense, with a corresponding increase in equity, over the vesting period. In exceptional circumstances(1) unvested Options or PSRs may be held ‘on foot’ subject to the specified performance hurdles and other plan conditions being met, or dealt with in an appropriate manner determined by the Board. Fair value is measured at grant date using a Monte Carlo simulation model that takes into account the exercise price, share price at grant date, price volatility, dividend yield, risk-free interest rate for the term of the security and the likelihood of meeting the TSR market condition. The amount recognised as an expense is adjusted to reflect the actual number of awards that vest except where due to non-achievement of the TSR market condition. Set out below are the inputs used to determine the fair value of the options and PSRs granted during the year: Grant date Grant date share price Exercise price Volatility (per cent) Dividend yield (per cent) Risk-free rate (per cent) Grant date fair value (per award) 1-Jul-15 $11.92 $12.78 24% 3.5% 2.28% $1.00 Options 22-Oct-15 $5.92 $6.78 30% 3.5% 2.30% $0.84 1-Jul-15 $11.92 $Nil 24% 3.5% 2.07% $3.17 PSRs 22-Oct-15 $5.92 $Nil 30% 3.5% 1.96% $2.60 (1) The Equity Incentive Plan Rules set out the circumstances as death, disability, redundancy, genuine retirement, or other exceptional circumstances approved by the Board. 109 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES F3 SHARE-BASED PAYMENTS (CONTINUED) Explanatory notes to share-based payments for the year ended 30 June (continued) (ii) Short Term Incentive (STI) STI includes the award of Deferred Share Rights (DSRs) which vest where the employee remains employed with satisfactory performance for a set period (generally between two and four years). DSRs do not carry voting or dividend entitlements. Once vested, a DSR entitles the holder to one fully paid ordinary share of the Company. As there is no exercise price for DSRs, they are exercised automatically upon vesting. The fair value of DSRs is recognised as an employee expense over the related service period. DSRs are forfeited if the service and performance conditions are not met. In exceptional circumstances(1) the DSRs, which represent a portion of ‘earned’ STI, will vest at cessation unless the Board determines otherwise (for example they may be held ‘on foot’ until the originally intended vesting date). Fair value is measured at grant date as the market value of an Origin share less the discounted value of dividends foregone. Equity Incentive Plan awards outstanding Set out below is a summary of awards outstanding at the beginning and end of the financial year: Outstanding at 1 July 2015 Granted(2) Exercised Forfeited Expired Outstanding at 30 June 2016 Exercisable at 30 June 2016 Outstanding at 1 July 2014 Granted Exercised Forfeited Expired Outstanding at 30 June 2015 Exercisable at 30 June 2015 Options 19,322,406 3,709,418 – 5,009,590 – 18,022,234 – 18,330,803 2,569,779 – 192,676 1,385,500 19,322,406 – Weighted average exercise price PSRs DSRs $13.30 $6.92 – $13.27 – $11.99 – $13.08 $15.65 – $13.16 $14.84 $13.30 – 8,725,038 1,831,456 – 5,076,861 – 5,479,633 – 8,933,078 635,154 – 843,194 – 8,725,038 – 1,518,469 3,999,436 1,147,690 171,187 – 4,199,028 – 123,811 1,534,064 115,716 23,690 – 1,518,469 – The weighted average share price during 2016 was $5.67 (2015: $12.80). The Options outstanding at 30 June 2016 have an exercise price in the range of $6.78 to $15.65 and a weighted average contractual life of 4.3 years (2015: 3.8 years). (1) The Equity Incentive Plan Rules set out the circumstances as death, disability, redundancy, genuine retirement, or other exceptional circumstances approved by the Board. (2) The number of DSRs issued in 2014 was adjusted for the October 2015 rights issue for all participants except Executive Directors to eliminate any material advantage or disadvantage to participants. (b) Employee Share Plan (ESP) Under the ESP all full-time and permanent part-time employees of the Company who are based in Australia or New Zealand with at least one year of continuous service at 30 June of the performance year are granted up to AUD $1,000 of fully paid Origin shares conditional upon the Company meeting certain safety targets. The shares are granted for no consideration. Shares awarded under the ESP are purchased on-market, registered in the name of the employee, and are restricted for three years, or until cessation of employment, whichever occurs first. Details of the shares awarded under the ESP during the year are as follows: 2016 2015 Grant date Shares granted Cost per(1) share(1) Total cost $’000 25-Sep-15 23-Sep-14 708,647 708,647 315,038 315,038 $7.18 $15.05 5,088 5,088 4,741 4,741 (1) The cost per share represents the weighted average market price of the Company’s shares on the grant date. F4 RELATED PARTY DISCLOSURES The Group’s interests in equity accounted entities and details of transactions with these entities are set out in note E1. 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. 110 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES F5 KEY MANAGEMENT PERSONNEL Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payments 2016 $ 9,858,958 243,057 287,802 3,858,411 2015 $ 14,336,666 280,504 223,941 6,581,723 14,248,228 21,422,834 Loans and other transactions with key management personnel There were no loans with key management personnel during the year. Transactions entered into during the year with key management personnel are normal employee, customer or supplier relationships and have terms and conditions which are no more favourable than dealings in the same circumstances on an arm’s length basis. These transactions include: — the receipt of dividends from Origin Energy Limited or participation in the Dividend Reinvestment Plan; — participation in the Employee Share Plan, Equity Incentive Plan and Non-executive Director Share Plan; — participation in the October 2015 rights issue as a shareholder; — terms and conditions of employment or directorship appointment; — reimbursement of expenses incurred in the normal course of employment; — purchases of goods and services; and — receipt of interest on Retail Notes. F6 NOTES TO THE STATEMENT OF CASH FLOWS Cash includes cash on hand, at bank and short-term deposits, net of outstanding bank overdrafts. The following table reconciles profit to net cash provided by operating activities: Loss for the period Adjustments to reconcile profit to net cash provided by operating activities: Depreciation and amortisation Executive share-based payment expense Impairment losses recognised – trade and other receivables Exploration expense Impairment of assets Decrease in fair value of financial instruments Net financing costs Increase in tax balances Gain on sale of assets Non-cash share of net profits of equity accounted investees Unrealised foreign exchange loss Release of unfavourable contract liability Oil forward sale Oil put option premium Settlement of Energy Markets final carbon liability Changes in assets and liabilities, net of effects from acquisitions/disposals: — Receivables — Inventories — Payables — Provisions — Other Total adjustments(1) Net cash from operating activities Note 2016 $million (576) 2015 $million (590) 623 32 67 63 691 234 347 (75) (39) 228 40 – (139) (117) – 8 (11) 96 (39) (29) 809 35 83 29 889 683 368 (165) (2) 87 36 (193) – – (300) 262 6 (173) 15 (46) 1,980 1,404 2,423 1,833 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 C6 42 79 (1) Adjustments include amounts which are classified as discontinued operations and held for sale at 30 June 2016 and 30 June 2015. Refer to note E4 for details of cash flows relating to discontinued operations. 111 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES F7 AUDITORS’ REMUNERATION During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: Audit and review services of the financial reports by: Auditors of the Group (KPMG) Other auditors Other services by: Auditors of the Group (KPMG) Accounting advice Taxation services Assurance services: – equity and debt transactions – contract compliance – IT controls – other 2016 $’000 2,431 76 2,507 20 17 159 140 – 45 381 2015(1) $’000(1) 3,393 72 3,465 44 52 164 221 150 74 705 2,888 4,170 (1) Includes audit fees of $520,000 and non-audit services of $Nil in relation to Contact Energy Limited. F8 MASTER NETTING OR SIMILAR AGREEMENTS The Group enters into derivative transactions under International Swaps and Derivatives Association (ISDA) master netting agreements. In general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding in the same currency are aggregated into a net amount payable by one party to the other. Financial assets and liabilities are offset, and the net amount reported in the statement of financial position, where the Group has a legally enforceable right to offset recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The Group has also entered into arrangements that do not meet the criteria for offsetting, but still allow for the related amounts to be offset in certain circumstances, such as a loan default or the termination of a contract. The following table presents the recognised financial instruments that are offset, or subject to master netting arrangements but not offset, as at reporting date. The column ‘net amount’ shows the impact on the Group’s statement of financial position if all set-off rights were exercised. 30 June 2016 Derivative financial assets Derivative financial liabilities 30 June 2015 Derivative financial assets Derivative financial liabilities Amount offset in the statement of financial position $million Amount in the statement of financial position $million Related amount not offset $million Net amount $million (372) 372 (315) 315 1,387 (1,068) 874 (1,340) (437) 437 (360) 360 950 (631) 514 (980) Gross amount $million 1,759 (1,440) 1,189 (1,655) 112 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES F9 DEED OF CROSS GUARANTEE The parent entity has entered into a Deed of Cross Guarantee. This means that the Group guarantees the debts of certain controlled entities. The controlled entities which are party to the Deed, are shown in note E3. The following consolidated statement of comprehensive income and retained profits, and statement of financial position comprises the Company and its controlled entities which are party to the Deed of Cross Guarantee after eliminating all transactions between parties to the Deed. Consolidated statement of comprehensive income and retained profits for the year ended 30 June Revenue Other income Expenses Share of results of equity accounted investees Interest income Interest expense Loss before income tax Income tax benefit Loss for the period Other comprehensive income Total comprehensive income for the period Retained earnings at the beginning of the period Adjustments for entities entering the Deed of Cross Guarantee Retained earnings at the beginning of the period Dividends paid Retained earnings at the end of the period 2016 $million 2015 $million 11,526 105 (11,642) (225) 222 (629) (643) (163) (480) – (480) 7,179 57 7,236 (452) 6,304 11,400 152 (12,063) (84) 109 (320) (806) (105) (701) 3 (698) 8,430 – 8,430 (553) 7,179 113 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES F9 DEED OF CROSS GUARANTEE (CONTINUED) Statement of financial position as at 30 June Current assets Cash and cash equivalents Trade and other receivables Inventories Derivatives Other financial assets Income tax receivable Assets classified as held for sale Other assets Total current assets Non-current assets Trade and other receivables Derivatives Other financial assets Investments accounted for using the equity method Property, plant and equipment Exploration and evaluation assets Development assets Intangible assets Deferred tax assets Other assets Total non-current assets Total assets Current liabilities Trade and other payables Interest-bearing liabilities Derivatives Other financial liabilities Employee benefits Provisions Liabilities classified as held for sale Total current liabilities Non-current liabilities Trade and other payables Interest-bearing liabilities Derivatives Employee benefits Provisions Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity 114 2016 $million 2015 $million 49 4,403 231 253 312 56 220 135 5,659 845 1,134 6,041 5,933 4,700 310 292 5,172 255 27 44 3,810 217 34 208 75 – 104 4,492 1,343 859 6,412 6,226 5,041 299 239 5,013 198 44 24,709 30,368 25,674 30,166 2,938 102 18 375 209 49 19 3,710 8,703 2,055 1,050 35 577 12,420 16,130 14,238 7,150 784 6,304 2,781 472 31 157 251 61 – 3,753 8,394 3,920 1,266 35 475 14,090 17,843 12,323 4,599 545 7,179 14,238 12,323 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES F10 PARENT ENTITY DISCLOSURES The following sets out the results and financial position of the parent entity, Origin Energy Limited: Origin Energy Limited (Loss)/profit for the period Other comprehensive income, net of income tax Total comprehensive income for the period Financial position of the parent entity at period end Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Share capital Share-based payments reserve Hedging reserve Retained earnings Total equity Contingent liabilities of the parent entity Bank guarantees – unsecured 2016 $million 2015 $million (30) 3 (27) 1,418 17,949 19,367 994 10,568 11,562 7,150 197 (26) 484 7,805 547 (33) 514 2,242 17,676 19,918 1,363 12,853 14,216 4,599 166 (29) 966 5,702 11 4 The parent entity has entered into a deed of indemnity for the cross-guarantee of liabilities of a number of controlled entities. Refer to note E3. The parent entity has also provided guarantees for certain contractual commitments of its joint ventures associated with capital projects. F11 NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED A number of new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1 July 2016, and have not been applied in preparing these financial statements. The Group has reviewed these standards and interpretations, and with the exception of AASB 9 Financial Instruments, AASB 15 Revenue from Contracts with Customers and AASB 16 Leases, determined none of these standards and interpretations materially impact the Group. AASB 9 Financial Instruments proposes a revised framework for the classification and measurement of financial instruments. AASB 15 Revenue from Contracts with Customers introduces the core principle that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. AASB 16 will primarily affect the accounting by lessees and will result in the recognition of almost all leases on the balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset and a financial liability to pay rentals for almost all lease contracts. The accounting by lessors, however, will not significantly change. The Group is currently assessing the impact of these standards. 115 NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY ANNUAL REPORT 2016NOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES F12 SUBSEQUENT EVENTS Completion of Cullerin Range Wind Farm Sale On 17 June 2016 Origin entered into a Share Sale Agreement with EDL Holdings (Australia) Pty Ltd for the sale of its wholly owned subsidiary Cullerin Range Wind Farm Pty Ltd for cash consideration of $72 million. Completion of the transaction occurred on 13 July 2016. The expected gain on sale before tax and transaction costs is approximately $12 million. Simultaneously, Origin Energy Electricity Limited entered into an Offtake Agreement with Cullerin Range Wind Farm Pty Ltd. Completion of OTP Geothermal Pte Ltd Sale On 8 April 2016 Origin announced that it had entered into a Sale Agreement with KS Orka Renewables Pte Ltd for the sale of its 50 per cent interest in OTP Geothermal Pte Ltd (OTP) for cash consideration of approximately US$30 million (Origin share). Settlement of the transaction occurred on 16 August 2016. Origin’s investment in OTP is recorded at its recoverable amount at 30 June 2016 therefore there will be no significant profit or loss realised on divestment in the year ending 30 June 2017. Australia Pacific LNG Functional Currency Australia Pacific LNG has changed its functional currency from AUD to USD from 1 July 2016 for accounting and reporting purposes. On 30 June 2016 Australia Pacific LNG elected to change its functional currency for PRRT to USD from 1 July 2016 and intends to change its functional currency for income tax purposes to USD with effect from 1 July 2016. Funding of Australia Pacific LNG On 1 July 2016 Australia Pacific LNG undertook a capital reduction and cancellation of all existing 14,000 AUD denominated mandatory redeemable preference shares (MRCPS) (Origin’s share, A$4.8 billion). The capital reduction was funded by issue of USD denominated MRCPS to a value of US$7.4 billion (Origin’s share US$2.8 billion or A$3.7 billion) and a non-cash shareholder capital contribution of US$2.2 billion (Origin’s share US$0.8 billion or A$1.1 billion). Other than the matters described above, no other item, transaction or event of a material nature has arisen since 30 June 2016 that would significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial periods. 116 NOTES TO THE FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTSORIGIN ENERGY LIMITED AND ITS CONTROLLED ENTITIES DIRECTORS’ DECLARATION 1 In the opinion of the Directors of Origin Energy Limited (the Company): (a) the consolidated financial statements and notes are in accordance with the Corporations Act 2001 (Cth), including: (i) (ii) giving a true and fair view of the financial position of the Group as at 30 June 2016 and of its performance, for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001 (Cth). (b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in the Overview of the consolidated financial statements. (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. There are reasonable grounds to believe that the Company and the controlled entities identified in note E3 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 Acting Chief Financial Officer for the financial year ended 30 June 2016. 2 3 Signed in accordance with a resolution of the Directors: Gordon M Cairns, Chairman Director Sydney, 18 August 2016 DIRECTORS’ DECLARATION 117 ORIGIN ENERGY ANNUAL REPORT 2016 INDEPENDENT AUDITOR’S REPORT 118 INDEPENDENT AUDITOR’S REPORT ABCDIndependent auditor’s report to the members of Origin Energy LimitedReport on the financial reportWe have audited the accompanying financial report of Origin Energy Limited (the Company), which comprises the consolidated statement of financial position as at 30 June 2015, and consolidated income statement and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, the notes to the financial statements Overview and A to F12 comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001and for suchinternal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In the notes to the financial statements Overview, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements ofthe consolidated entity comply with International Financial Reporting Standards. Auditor’s responsibilityOur responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures toassess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the consolidated entity’s financial position and of itsperformance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. (continued overleaf)KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. INDEPENDENT AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT 119 ORIGIN ENERGY ANNUAL REPORT 2016 Information set out below was applicable as at 18 August 2016. As at 18 August 2016, there were: — 170,378 holders of ordinary shares in the Company; and — 148 holders of 17,888,554 Options, 453 holders of 5,463,043 Performance Share Rights, and 483 holders of 4,070,794 Deferred Share Rights granted under the Origin Energy Equity Incentive Plan. There is not a current on-market buy-back of Origin shares. During the reporting period 708,647 Origin shares were purchased on-market for the purpose of the Employee Share Plan. The average price per share purchased was $7.18. ANALYSIS OF SHARES Holdings Ranges 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001-99,999,999,999 Totals Holders 67,799 74,809 17,131 10,374 265 Total Units 30,341,697 180,164,829 120,404,205 210,646,418 1,211,848,294 170,378 1,753,405,443 % 1.73 10.28 6.87 12.01 69.11 100.00 9,429 shareholders hold less than a marketable parcel as at 18 August 2016. SUBSTANTIAL SHAREHOLDERS There were no substantial shareholders as disclosed by notices received by the Company as at 18 August 2016. TOP 20 HOLDINGS Shareholder HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited BNP Paribas Noms Pty Ltd (DRP) BNP Paribas Nominees Pty Ltd (Agency Lending DRP A/C) HSBC Custody Nominees (Australia) Limited – A/C 2 Citicorp Nominees Pty Limited (Colonial First State Inv A/C) Argo Investments Limited RBC Investor Services Australia Nominees Pty Limited (Bkcust A/C) HSBC Custody Nominees (Australia) Limited (NT-Comnwlth Super Corp A/C) Australian Foundation Investment Company Limited RBC Investor Services Australia Nominees Pty Limited (Mba A/C) National Nominees Limited (N A/C) The Senior Master Of The Supreme Court (Common Fund No 3 A/C) AMP Life Limited Navigator Australia Ltd (MLC Investment Sett A/C) HSBC Custody Nominees (Australia) Limited-Gsco Eca Forsyth Barr Custodians Ltd (Forsyth Barr Ltd-Nominee A/C) HSBC Custody Nominees (Australia) Limited Number of shares 384,475,144 310,795,950 157,618,440 147,110,565 30,640,187 20,962,122 12,577,222 11,221,875 10,959,203 8,330,277 8,293,772 6,000,000 5,192,943 3,645,981 3,564,687 2,956,625 2,637,255 2,430,138 2,371,368 2,247,436 1,134,031,190 % of issued shares 21.94 17.74 8.99 8.40 1.75 1.20 0.72 0.64 0.63 0.48 0.47 0.34 0.30 0.21 0.20 0.17 0.15 0.14 0.14 0.13 64.71% 120 SHARE AND SHAREHOLDER INFORMATIONSHARE AND SHAREHOLDER INFORMATION SHAREHOLDER ENQUIRIES For information about your shareholding, to notify a change of address, to make changes to your dividend payment instructions or for any other shareholder enquiries, you should contact Origin Energy’s share registry, Boardroom Pty Ltd on 1300 664 446. Please note that broker sponsored holders are required to contact their broker to amend their address. When contacting the share registry, shareholders should quote their security holder reference number, which can be found on the holding or dividend statements. Shareholders with internet access can update and obtain information regarding their shareholding online at https://www.originenergy.com.au/ about/investors-media.html TAX FILE NUMBER For resident shareholders who have not provided the share registry with their Tax File Number (TFN) or exemption category details, tax at the top marginal tax rate (plus Medicare levy) will be deducted from dividends to the extent they are not fully franked. For those shareholders who have not as yet provided their TFN or exemption category details, forms are available from the share registry. Shareholders are not obliged to provide this information if they do not wish to do so. INFORMATION ON ORIGIN The main source of information for shareholders is the Annual Report and the Shareholder Review. Both the Annual Report and Shareholder Review will be provided to shareholders on request and free of charge. Shareholders not wishing to receive the Annual Report should advise the share registry in writing so that their names can be removed from the mailing list. Origin’s website www.originenergy.com.au is another source of information for shareholders. SECURITIES EXCHANGE LISTING Origin shares are traded on the Australian Securities Exchange Limited (ASX). The symbol under which Origin shares are traded is ‘ORG’. Origin’s Subordinated Notes are also traded on the ASX under the symbol ORGHA. VOTING RIGHTS OF MEMBERS At a meeting of members, each member who is entitled to attend and vote may attend and vote in person or by proxy, attorney or representative. On a show of hands, every person present who is a member, proxy, attorney or representative, shall have one vote and on a poll, every member who is present in person or by proxy, attorney or representative shall have one vote for each fully paid share held. NOTICE OF ENFORCEABLE UNDERTAKING In September 2013, an LPG plant fire occurred at our Minto LPG site, injuring two workers. SafeWork NSW investigated the incident and subsequently alleged that Origin breached the Work Health and Safety Act 2011 (NSW). This part of our Annual Report has been included pursuant to the terms of an Enforceable Undertaking Origin has signed with SafeWork NSW in settlement of the alleged contravention. Also under that Undertaking, Origin agreed to take the following actions: — conduct development programs for leaders of the LPG business as well as terminal and driver supervisors; — install new equipment at an LPG terminal; — produce two safety videos with respect to LPG; and — participate in charitable works with the Concord Hospital Burns Unit. Origin regrets the incident, particularly given its on-going commitment to ensure the health and safety of all its workers and those affected by its businesses but is thankful that the two injured workers were able to return to pre-injury duties following receipt of medical support. 121 SHARE AND SHAREHOLDER INFORMATIONORIGIN ENERGY ANNUAL REPORT 2016SHARE AND SHAREHOLDER INFORMATION 122 EXPLORATION AND PRODUCTION PERMITS AND DATAEXPLORATION AND PRODUCTION PERMITS AND DATA Basin/Project Area NEW ZEALAND TARANAKI BASIN PML 38146 PMP 38151 PMP 38155 CANTERBURY BASIN PEP 38264 Notes: Operatorship Interest Notes 50.00% 100.00% 100.00% 45.00% (1) Interest held through 37.5 per cent ownership of APLNG Joint Venture Replacement tenure for parts of ATP 526 Replacement tenure for PL 203 (2) Replacement tenures for T/18P (3) percentage increase due to Toyota Tsusho Gas E&P Otway Limited withdrawal Origin held interests in the following permits at 30 June 2016. Interest Notes Basin/Project Area Interest Notes 37.50% (1) Peat PL 101 Other Bowen Basin ATP 804P ATP 745P and PLs 420, 421 and 440 PLs 219 and 220 Other Surat Basin ATP 606P and PLs 297, 403, 404, 407, 408, 405(A), 406(A), 412(A), 413(A) and 444(A) ATP 631P and PLs 281(A) and 282(A) ATP 663P and PLs 434(A), 435(A), 436(A), 437(A), 438(A) and 439(A) ATP 973P and PLs 265, 266 and 267 ATP 972P and PLs 469(A), 470(A) and 471(A) PL 1011 PPLs 143, 177, 178, 185, 186 and 2000 ONSHORE OTWAY BASIN Victoria PPLs 6,9 and PRL1 PPLs 4, 5, 7, 10 and 12 PPL 2 Ex (Iona Exclusion) PPL 8 OFFSHORE OTWAY BASIN Victoria Vic/P42 (V) Vic/P43 Vic/L23 Vic/P69 Vic/L1(V) Tasmania T/L2 and T/L3 T/30P T/34P Bass Basin (Tasmania) T/L1 T/RL 2, 3, 4 and 5 PERTH BASIN (Western Australia) EP320 and L11 L 14 L1/L2 (Excluding Dongara, Mondarra and Yardarino) 10.99% 8.94% 37.50% 34.77% 6.79% 37.50% 37.50% 34.77% 37.50% 37.50% 90.00% 100.00% 100.00% 100.00% 100.00% 67.23% 67.23% 100.00% 100.00% 67.23% 70.77% 86.63% 42.50% 39.00% 67.00% 49.19% 50.00% (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (3) (2) Basin/Project Area AUSTRALIA COOPER BASIN (South Australia) Patchawarra East Block PPLs SA Unit PPLs Reg Sprigg West Unit (PPL 194/PPL 211 ) PEL 637 and PRL 106 PELs 638 COOPER BASIN (Queensland) SWQ Unit Subleases Aquitaine A & B Blocks of ATP 1189P and associated PLs Aquitaine C Block of ATP 1189P and associated PLs Wareena Block of ATP 1189P and associated PLs GALILEE BASIN (Queensland) ATPs 666P, 667P and 668P SURAT BASIN (Queensland) ATP 647P (Block 2656 only) ATP 788P (Shallows) ATP 788P (Deeps) 10.54% 13.19% 7.90% 40.00% 33.75% 16.74% 25.00% 27.00% 10.00% 37.50% (1) 50.00% 100.00% 25.00% DENISON TROUGH (Queensland) PLs 41, 42, 43, 44, 45, 54, 67, 173, 183 and 218 18.75% ATP 1191 Farm-out (Production) 11.25% ATP 337P (Exploration) and PLs 450(A), 451(A), 457(A) and 1012(A) ATP 1191 ATP 1177P PPLs 10 and 11 LNG (Gladstone) PPLs 162 and 163 PFL 20 CSG (Queensland) Fairview ATP 526P, ATP 2012(A) PLs 90, 91, 92, 99, 100, 232, 233, 234, 235 and 236 and Spring Gully ATP 592P and PLs 195, 203, 414, 415, 416, 417, 418, and 419(A) 268(A) PL 204 PL 200 PPL 180 Talinga/ Orana ATP 692P and PLs 209, 215, 226, 272, 216(A), 225(A), 289(A), 445(A) and 481(A) PPLs 171 and 181 PFL 26 Kenya/Argyle/Lauren/Bellevue PLs 179, 180, 228, 229 and 263 PL 247 ATP 648 and PLs 257, 273, 274, 275, 278, 279, 442, 466, 474 and 503 ATP 1188P PFL 19 PPLs 107, 176 and 2014 (1) (1) (1) (1) (1) (1) (1) (1) 18.75% 18.75% 18.75% 18.75% 37.50% 37.50% 8.97% (1) 35.44% 37.40% 35.89% 37.50% 37.50% 37.50% 37.50% 15.23% 11.02% 11.72% 11.72% 11.72% 15.23% (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) BROWSE BASIN (Western Australia) WA-315-P and WA-398-P 40.00% BONAPARTE BASIN (Western Australia & Northern Territory) WA-454-P 50.00% NT/RL1 and WA-6-R NT/P84 NT/P85 5.00% 50.00% 50.00% BEETALOO BASIN (Northern Territory) EP 76, EP 98 and EP117 35.00% 123 EXPLORATION AND PRODUCTION PERMITS AND DATAORIGIN ENERGY ANNUAL REPORT 2016EXPLORATION AND PRODUCTION PERMITS AND DATA This Annual Reserves Report provides an update on the reserves and resources of Origin Energy Limited (Origin) and its share of Australia Pacific LNG, as at 30 June 2016. The data is compared with and reconciled to the position at 30 June 2015. SUMMARY OF 2P RESERVES Including production, Origin’s proved plus probable (2P) reserves increased by 17 PJe to a total of 6,277 PJe, when compared to 30 June 2015. The key changes in 2P reserves include: — 249 PJe net increase resulting from revisions and extensions with notable increases in the Perth Basin (Waitsia/Senecio field) and offshore NZ (Kupe field), partly offset by decreases in Cooper, Otway and Bass basins. — 231 PJe decrease due to production. Table 1: Origin 2P reserves (by area) 2P Reserves by area (PJe) Australia Pacific LNG Surat/Bowen (Unconventional) Cooper Basin SA Cooper Basin SWQ Cooper Basin Other Onshore Australia Perth Basin Ironbark (Unconventional) Australia Offshore Otway Basin Bass Basin New Zealand Onshore Taranaki Offshore Taranaki (Kupe) Total 2P 30/06/2015 Acquisition/ Divestment New Booking/ Discovery Revisions/ Extensions Production 2P 30/06/2016 5,167 187 53 43 256 313 90 – 151 6,260 – – – – – – – – – – – – – – – – – – – – 63 (26) (12) 216 – (34) (30) 1 71 249 (157) 5,073 (12) (6) (4) – (24) (10) (1) (18) (231) 149 35 255 256 255(1) 50 – 204 6,277 (1) Includes 78 PJe in Halladale and Speculant fields. During the year, changes were recorded in the following areas: — Including 157 PJe of production, Australia Pacific LNG 2P reserves decreased by 94 PJe to 5,073 PJe with 63 PJe of 2P reserves added following successful development drilling. Further detail is provided in Appendix A. — Including 18 PJe of production, Cooper Basin 2P reserves decreased by 56 PJe to 184 PJe with 38 PJe of revisions and extensions due to revised development plans and the impact of lower oil prices. — Including 4 PJe of production, Perth Basin 2P reserves increased by 212 PJe to 255 PJe with 216 PJe of revisions and extensions in Waitsia field as a result of an integrated reservoir study incorporating well results and data. Waitsia is expected to begin production early in the 2017 financial year. — Ironbark 2P reserves remained unchanged at 256 PJe. 3P reserves decreased by 1 PJe to 713 PJe and 2C reserves increased by 3 PJe to 329 PJe. — Including 24 PJe of production, Otway Basin 2P reserves decreased by 58 PJe to 255 PJe with 34 PJe of revisions and extensions due to faster decline in well deliverability resulting in less reserves able to be economically produced. Reservoir studies to identify Otway backfill opportunities are ongoing. — Including 10 PJe of production, Bass Basin 2P reserves decreased by 40 PJe to 50 PJe with 30 PJe of revisions and extensions due to lower observed reservoir performance from Yolla-5 and Yolla-6 since wells have come online. — Including 18 PJe of production, New Zealand Offshore (Kupe) 2P reserves increased by 53 PJe to 204 PJe with 71 PJe of revisions and extensions as a result of an updated reservoir model. Minor revisions to reserves occurred in other areas as additional data and technical studies are incorporated into forward estimates. Around 85 per cent of 2P reserves are unconventional. 124 ANNUAL RESERVES REPORTANNUAL RESERVES REPORT Table 2: Origin 2P reserves (by product and development type) LPG (kT) Condensate (kbbl) Oil (kbbl) Total (PJe) Developed Undeveloped Total (PJe) 2P Reserves by area (PJe) Australia Pacific LNG Surat/Bowen (Unconventional) Cooper Basin SA Cooper Basin SWQ Cooper Basin Other Onshore Australia Perth Basin Ironbark (Unconventional) Australia Offshore Otway Basin Bass Basin New Zealand Onshore Taranaki Offshore Taranaki (Kupe) Total Gas (PJ) 5,073 115 30 255 256 220 38 – 147 – 245 36 – – 393 107 – 613 6,133 1,394 Table 3: Origin 2P reserve changes (by product) 2P Reserves by area (PJe) 2P 30/06/2015 Acquisition/divestment New bookings/discoveries Revisions/extensions Production 2P 30/06/2016 Change Change (percentage) – – 1,969 3,104 5,073 1,834 370 67 – 2,902 1,264 – 4,975 11,411 Gas (PJ) 6,100 – – 248 (215) 6,133 33 1 1,959 321 – – – 6 – – 91 24 81 – 184 48 – 117 57 11 175 256 71 2 – 87 149 35 255 256 255 50 – 204 2,287 2,514 3,763 6,277 LPG (kT) 1,492 – – 30 (129) 1,394 (98) (7) Condensate (kbbl) 13,029 – – (199) (1,419) 11,411 (1,617) (12) Oil (kbbl) 2,631 – – 8 (352) 2,287 (344) (13) Total (PJe) 6,260 – – 249 (231) 6,277 17 0 SUMMARY OF 1P RESERVES Proved (1P) reserves increased by 398 PJe (after production) to a total of 3,160 PJe, when compared to previous reporting period, as stated in Table 4. Around 84 per cent of 1P reserves are unconventional. Table 4: Origin 1P reserves (by area) 1P Reserves by area (PJe) Australia Pacific LNG Surat/Bowen (Unconventional) Cooper Basin SA Cooper Basin SWQ Cooper Basin Other Onshore Australia Perth Basin Ironbark (Unconventional) Australia Offshore Otway Basin Bass Basin New Zealand Onshore Taranaki Offshore Taranaki (Kupe) Total 1P 30/06/2015 Acquisition/ Divestment New Booking/ Discovery Revisions/ Extensions Production 1P 30/06/2016 2,272 82 26 15 – 188 83 – 97 2,763 – – – – – – – – – – – – – – – – – – – – 543 (157) 2,659 (6) (4) 55 – 9 (33) 1 64 629 (12) (6) (4) – (24) (10) (1) (18) (231) 64 16 67 – 173 39 – 143 3,160 125 ANNUAL RESERVES REPORTORIGIN ENERGY ANNUAL REPORT 2016ANNUAL RESERVES REPORT Table 5: Origin 1P reserves (by product and development type) 1P Reserves by area (PJe) Australia Pacific LNG Surat/Bowen (Unconventional) Cooper Basin SA Cooper Basin SWQ Cooper Basin Other Onshore Australia Perth Basin Ironbark (Unconventional) Australia Offshore Otway Basin Bass Basin New Zealand Onshore Taranaki Offshore Taranaki (Kupe) Total Gas (PJ) 2,659 51 13 66 – 149 30 – 100 3,067 Table 6: Origin 1P reserve changes (by product) 1P Reserves by area (PJe) 1P 30/06/2015 Acquisition/divestment New bookings/discoveries Revisions/extensions Production 1P 30/06/2016 Change Change (percentage) LPG (kT) Condensate (kbbl) Oil (kbbl) Total (PJe) Developed Undeveloped Total (PJe) – 99 17 – – 280 84 – 419 899 – 739 175 19 – 2,053 989 – 4,108 8,083 Gas (PJ) 2,666 – – 617 (215) 3,067 402 15 – 1,965 694 2,659 739 137 – – – 1 – – 36 11 67 – 128 38 – 98 28 5 – – 46 1 – 45 64 16 67 – 173 39 – 143 877 2,341 819 3,160 LPG (kT) 940 – – 87 (129) 899 (42) (4) Condensate (kbbl) 8,207 – – 1,295 (1,419) 8,083 (124) (2) Oil (kbbl) 1,070 – – 158 (352) 877 (194) (18) Total (PJe) 2,763 – – 629 (231) 3,160 398 14 AUSTRALIA PACIFIC LNG RESERVES AND RESOURCES Netherland, Sewell & Associates, Inc. (NSAI) has audited and prepared a consolidated report of the reserves and resources held by Australia Pacific LNG. Reserves and resources estimates for each property in this report have either been independently prepared by NSAI or prepared by Origin and audited by NSAI. The reserves and resources data are based on technical, commercial and operational information provided by Origin on behalf of Australia Pacific LNG. Table 7 provides 1P, 2P and 3P reserves and 2C resources for Australia Pacific LNG (100 per cent). Table 8 shows Origin’s 37.5 per cent interest in these Australia Pacific LNG reserves and resources. Table 7: Reserves/resources held by Australia Pacific LNG (100 per cent share) Reserves (PJe) 1P 2P 3P Resources (PJe) 2C 30/06/2015 Reserves 6,059 13,778 16,174 Resources 2,760 Acquisition/ Divestment – – – New Booking/ Discovery – – – Revisions/ Extensions 1,448 169 (820) Production (418) (418) (418) – – 266 – Table 8: Reserves/resources held by Origin (37.5 per cent share in Australia Pacific LNG) Reserves (PJe) 1P 2P 3P Resources (PJe) 2C 126 30/06/2015 Reserves 2,272 5,167 6,065 Resources 1,035 Acquisition/ Divestment – – – New Booking/ Discovery – – – Revisions/ Extensions 543 63 (308) Production (157) (157) (157) – – 100 – 30/06/2016 Reserves 7,089 13,529 14,935 Resources 3,026 30/06/2016 Reserves 2,659 5,073 5,601 Resources 1,135 ANNUAL RESERVES REPORTANNUAL RESERVES REPORT The 1,448 PJe increase in 1P revisions and extensions is due to successful development drilling. The 169 PJe increase in 2P revisions and extensions is also due to successful development drilling and better than expected performance in some fields. The 820 PJe decrease in 3P revisions and extensions is primarily due to re-classification of some 3P reserves to contingent resources due to low permeability and other coal properties after detailed review of future field development plans. The contingent resource range is 774 PJe for 1C to 7,289 PJe for 3C and there are ongoing studies and investigations of all contingent resources to identify future opportunities to progress resources to reserves. The 266 PJe increase in 2C revisions and extensions is largely due to the above mentioned re-classification of some of the 3P reserves to contingent resources. 3C resources also increased in part due to the above reclassification of 3P reserves to 3C resources. NOTES RELATING TO THE REPORT (a) Methodology regarding Reserves and Resources The Reserves Report has been prepared to be consistent with the Petroleum Resources Management System (PRMS) 2007 published by Society of Petroleum Engineers (SPE). This document may be found at the SPE website: spe.org/industry/docs/Petroleum_Resources_Management_ System_2007.pdf. Additionally, this Reserves Report has been prepared to be consistent with the ASX reporting guidelines. The conventional (non-CSG) reserves estimates are prepared by employees who are qualified petroleum reserves and resource evaluators working in each of our assets utilising an Origin approved Reserves and Resources Process. The CSG reserves and resources held within Australia Pacific LNG’s properties have either been independently prepared by NSAI or prepared by Origin and audited by NSAI. An independent assessment of Origin’s CSG reserves and resources within ATP 788 (Ironbark) permit has been independently undertaken by NSAI. For all assets Origin reports reserves and resources consistent with SPE guidelines as follows: proved reserves (1P); proved plus probable reserves (2P); proved plus probable plus possible reserves (3P); low estimate contingent resources (1C); best estimate contingent resources (2C); high estimate contingent resources (3C). Origin does not intend to report Prospective or Undiscovered Resources as defined by the SPE in any of its areas of interest on an ongoing basis. (b) Economic test for reserves The assessment of reserves requires a commercial test to establish that reserves can be economically recovered. Within the commercial test, operating cost and capital cost estimates are combined with fiscal regimes and product pricing to confirm the economic viability of producing the reserves. In the case of oil, condensate and LPG forward estimates of prices are used in line with the forward curves available through various international benchmarking agencies, appropriately adjusted for local market conditions. Gas reserves are assessed against existing contractual arrangements, local market conditions, as appropriate. In the case of gas reserves where contracts are not in place a forward price scenario based on monetisation of the reserves through domestic markets has been used, including power generation opportunities, direct sales to LNG and other end users and utilisation of Origin’s wholesale and retail channels to market. For CSG reserves that are intended to supply the Australia Pacific LNG CSG to LNG project, the economic test is based on gas prices calculated using the Residual Pricing Method (RPM). The RPM mechanism is used within the Petroleum Resource Rent Tax (PRRT) regime to determine an appropriate transfer price for integrated gas to liquids projects. RPM applies the same rate of return to the upstream and downstream businesses of the Australia Pacific LNG project, and divides residual profit equally between the businesses. The residual profit is a function of the upstream ‘cost plus’ and the downstream ‘net back’ prices. The residual price is exposed to changes in the supply/demand balance in the market through the oil price-linked LNG contract, as well as other market forces through the long term bond rate. (c) Reversionary Rights The CSG interests that Australia Pacific LNG acquired from Tri-Star in 2002 are subject to reversionary rights. If triggered, these rights will require Australia Pacific LNG to transfer back to Tri-Star a 45 per cent interest in those CSG interests for no additional consideration. Origin has assessed the potential impact of these reversionary rights based on economic tests consistent with the reserves and resources referable to the CSG interests and based on that assessment does not consider that the existence of these reversionary rights impacts the reserves and resources quoted in this report. Tri-Star has commenced proceedings against Australia Pacific LNG claiming that reversion has occurred. Australia Pacific LNG denies that reversion has occurred and is defending the claim. (d) Information regarding the preparation of this Reserves Report The internationally recognised petroleum consultant NSAI has prepared independent assessments of the reserves and resources for the Ironbark asset. The CSG reserves and resources held within Australia Pacific LNG’s properties have either been independently prepared by NSAI or prepared by Origin and audited by NSAI. All assessments are based on technical, commercial and operational data provided by Origin on behalf of Australia Pacific LNG. The statements in this report relating to reserves and resources as of 30 June 2016 for Australia Pacific LNG and the Ironbark asset are based on information in the NSAI reports dated 27 July 2016 and 11 July 2016, respectively. The data has been compiled by Mr. Dan Paul Smith, a full-time employee of NSAI. Mr. Dan Paul Smith has consented to the statements based on this information, and to the form and context in which these statements appear. The statements in this report relating to reserves and resources for other assets have been compiled by Andrew Mayers, a full-time employee of Origin. Andrew Mayers is a qualified reserves and resources evaluator and has consented to the form and context in which these statements appear. (e) Rounding Information on reserves is quoted in this report rounded to the nearest whole number. Some totals in tables in this report may not add due to rounding. Items that round to zero are represented by the number 0, while items that are actually zero are represented with a dash ‘–’. 127 ANNUAL RESERVES REPORTORIGIN ENERGY ANNUAL REPORT 2016ANNUAL RESERVES REPORT (f) Abbreviations Bbl Bscf CSG kbbls ktonnes Mmboe PJ PJe barrel billion standard cubic feet coal seam gas kilo barrels = 1,000 barrels kilo tonnes = 1,000 tonnes million barrels of oil equivalent petajoule = 1 x 1015 joules petajoule equivalent (g) Conversion Factors for PJe Crude oil Condensate LPG CSG 0.00583 PJ/kbbls = 5.83 PJ/mmboe 0.00541 PJ/kbbls 0.0493 PJ/ktonnes 1.038 PJ/Bscf (h) Reference Point Reference points for Origin’s petroleum reserves and contingent resources are defined points within Origin’s operations where normal exploration and production business ceases, and quantities of the produced product are measured under defined conditions prior to custody transfer. Fuel, flare and vent consumed to the reference points are excluded. (i) Preparing and Aggregating Petroleum Resources Petroleum reserves and contingent resources are typically prepared by deterministic methods with the support from probabilistic methods. Petroleum reserves and contingent resources are aggregated by arithmetic summation by category and as a result, proved reserves may be a conservative estimate due to the portfolio effects of the arithmetic summation. Proved plus probable plus possible may be an optimistic estimate due to the same aforementioned reasons. (j) Methodology and Internal Controls The reserves estimates undergo an assurance process to ensure that they are technically reasonable given the available data and have been prepared according to our reserves and resources process, which includes adherence to the PRMS Guidelines. The assurance process includes peer reviews of the technical and commercial assumptions. The annual reserves report is reviewed by management with the appropriate technical expertise, including the Chief Petroleum Engineer and Integrated Gas general managers. (k) Qualified Petroleum Reserves and Resources Evaluators The material presented in this report is based on, and fairly represents, information and supporting documentation prepared by, or under the supervision of the listed qualified reserves and resources evaluators. These individuals have consented to the statements based on this information, and to the form and context in which these statements appear. Name Andrew Mayers Chung Chen Samantha Phillips Simon Smith Jason Billings Petrina Weatherstone Sarah Bishop Jocelyn Young David MacDougal Alan Mourgues Rowan Wilson Arvo Nagel Nick Allen Graham Sutherland Tim Ogilvie Alistair Jones Employer Origin Energy (Chief Petroleum Engineer) Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Origin Energy Professional Organisation(1) SPE, APEGA, RPEQ SPE, EA, RPEQ APEGA, EA SPE, EA SPE, P.E (Alaska) SPE SPE, EA, RPEQ SPE SPE SPE, EA, RPEQ SPE SPE SPE SPE, EA, RPEQ SPE SPE (1) SPE: Society of Petroleum Engineers; AAPG: American Association of Petroleum Geologists; APEGA: The Association of Professional Engineers and Geoscientists of Alberta; EA: Engineers of Australia; RPEQ: Board of Professional Engineers Queensland. 128 ANNUAL RESERVES REPORTANNUAL RESERVES REPORT FIVE YEAR FINANCIAL HISTORY A reconciliation between Statutory and Underlying profit measures can be found in note A1 of the Origin Consolidated Financial Statements. Income Statement ($m) Total external revenue Underlying: EBITDA Depreciation and amortisation expense Share of interest, tax, depreciation and amortisation of equity accounted investees(2) EBIT Net financing costs Income tax expense Non-controlling interests Segment result and Underlying consolidated profit Impact of items excluded from segment result and Underlying consolidated profit net of tax Statutory: Profit attributable to members of the parent entity Statement of financial position ($m) Total assets Net debt/(cash) Shareholders’ equity – members/parent entity interest Adjusted net debt/(cash)(3) Shareholders’ equity – total Cash flow ($m) Net cash from operating and investing activities Key ratios Statutory basic earnings per share (cents)(4) Underlying basic earnings per share (cents)(4) Total dividend per share (cents) Net debt to net debt plus equity (adjusted) (%) Underlying EBITDA by segment ($m) Energy Markets Integrated Gas(5) Contact Energy Corporate General information Number of employees (excluding Contact Energy) Weighted average number of shares(4) Integrated Gas 2P reserves (PJe)(6) Product sales volumes (PJe) Natural gas and Ethane (PJ) Crude oil (kbbls) Condensate/naphtha (kbbls) LPG (kT) Production volumes (PJe) Energy Markets Generation (MW) – owned and contracted Generation dispatched (TWh) Number of customers (‘000) Electricity Natural gas LPG Electricity (TWh)(7) Natural gas (PJ)(8) LPG (kT) 2016(1) 12,174 2015(1) 14,147 2014 14,518 2013 14,747 2012 12,935 1,696 (624) (296) 776 (109) (286) (16) 365 (954) (589) 28,898 9,470 14,509 9,131 14,530 2,149 (807) (62) 1,280 (169) (349) (80) 682 (1,340) (658) 33,367 13,273 12,723 13,102 14,159 2,139 (732) (54) 1,353 (192) (342) (106) 713 (183) 530 30,941 9,134 13,444 9,146 15,129 1,215 (2,081) (1,087) (37.3) 23.2 10 39 1,330 386 61 (81) (52.1) 54.0 50 48 1,260 498 487 (96) 42.2 56.8 50 38 1,053 570 533 (17) 2,181 (695) (48) 1,438 (255) (339) (84) 760 (382) 378 29,589 6,808 13,283 7,037 14,794 127 30.3 60.9 50 32 1,333 455 435 (42) 2,257 (614) (45) 1,598 (217) (415) (73) 893 87 980 28,071 5,522 13,094 5,738 14,458 (804) 79.5 72.4 50 28 1,562 376 400 (81) 5,811 5,941 1,578,213,157 1,263,960,708 1,255,157,889 1,246,975,013 1,233,128,523 5,658 6,701 6,922 6,277 228 168 1,629 1,403 127 232 6,011 20.10 4,217 2,741 1,089 387 38.1 167.1 458 6,260 154 128 1,754 1,581 147 148 5,994 19.94 4,266 2,801 1,083 382 37.3 134.7 415 6,473 153 123 2,036 1,843 160 142 6,010 17.20 4,295 2,876 1,036 383 39.1 96 386 6,201 133 110 1,462 1,548 113 123 5,930 15.70 4,293 2,917 998 378 – – 437 6,807 140 118 1,286 1,563 119 130 5,900 14.89 4,359 3,014 963 382 – – 502 (1) Includes discontinued operations and assets held for sale unless stated otherwise. (2) Origin discloses its equity accounted results in two lines ‘share of EBITDA of equity accounted investees’ included in EBITDA and ‘share of interest, tax, depreciation and amortisation of equity accounted investees’ included between EBITDA and EBIT. (3) Total current and non-current interest bearing liabilities only, less cash and cash equivalents, less fair value adjustments on foreign exchange hedging transactions. (4) FY2012 to FY2015 have been restated for the impact of the October 2015 share rights issue. (5) The Integrated Gas segment combines the former Exploration & Production and Australia Pacific LNG segments, as announced in August 2015. FY2016 and FY2015 include a reallocation of LNG net recoveries from the Corporate segment to the Integrated Gas segment. (6) Includes Origin’s share of Australia Pacific LNG reserves. Shareholding was 42.5 per cent at 30 June 2012 and post-Sinopec completion on 12 July 2012 is 37.5 per cent (7) FY2015 and FY2014 restated to better reflect the recognition of volumes, revenues and costs associated with feed-in volumes from solar customers with no impact on gross profit. Comparable figures for FY2013 and FY2012 are not available. (8) Osborne gas sales re-classified as internal due to new operational agreement. As a result FY2015 and FY2014 external sales volumes, revenues and costs have been revised with no impact on gross profit. Comparable figures for FY2013 and FY2012 are not available. FIVE YEAR FINANCIAL HISTORY 129 ORIGIN ENERGY ANNUAL REPORT 2016 FINANCIAL MEASURES Statutory Financial Measures Statutory Financial Measures are measures included in the 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 Statutory Profit/Loss Statutory earnings per share Cash flows from operating activities Cash flows used in investing activities Cash flows from financing activities External revenue Net Debt Non-controlling interest Statutory net financing costs Meaning Net profit/loss after tax and non-controlling interests as disclosed in the Income Statement of the Origin Consolidated Financial Statements. Statutory profit divided by weighted average number of shares. Statutory cash flows from operating activities as disclosed in the Cash Flow Statement of the Origin Consolidated Financial Statements. Statutory cash flows used in investing activities as disclosed in the Cash Flow Statement of the Origin Consolidated Financial Statements. Statutory cash flows from financing activities as disclosed in the Cash Flow Statement of the Origin Consolidated Financial Statements Revenue after elimination of intersegment sales on consolidation as disclosed in the Income Statement of the Origin Consolidated Financial Statements Total current and non-current interest bearing liabilities only, less cash and cash equivalents. Economic interest in a controlled entity of the consolidated entity that is not held by the Parent entity or a controlled entity of the consolidated entity. Interest expense net of interest income as disclosed in the Origin Consolidated Financial Statements. Non-IFRS Financial Measures 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. 130 GLOSSARY AND INTERPRETATIONGLOSSARY AND INTERPRETATION The principle non-IFRS profit and loss measure of Underlying Profit has been reconciled to Statutory Profit in note A1 of the Origin Consolidated Financial Statements. Term Current period Prior period Underlying Profit Underlying earnings per share Items excluded from Underlying Profit Total Segment Revenue Underlying average interest rate Underlying EBITDA Underlying depreciation and amortisation Underlying EBIT Underlying income tax expense Underlying net financing costs Underlying profit before tax Underlying share of ITDA Underlying ROCE Gross Profit Adjusted Net Debt Non-cash fair value uplift TRIFR Meaning 12 months ended 30 June 2016. 12 months ended 30 June 2015. Underlying net profit after tax and non-controlling interests as disclosed in note A1 of the Origin Consolidated Financial Statements. Underlying profit/loss divided by weighted average number of shares. Items that do not align with the manner in which the Managing Director reviews the financial and operating performance of the business which are excluded from Underlying Profit. Items excluded from Underlying Profit are categorised as: Fair value and foreign exchange movements – reflecting the impact of mark to market movements on financial assets and liabilities from period to period LNG related items before revenue recognition – primarily comprising net financing costs incurred (but unable to be capitalised) in funding Origin’s investment in APLNG which relate to the period prior to revenue recognition for each of the two LNG Trains. Disposals, impairments and business restructuring – reflecting the impact of actions and decisions to dispose, acquire, revalue or restructure the company’s assets and business operations. Total revenue for the Energy Markets, Integrated Gas, Contact Energy and Corporate segments, including inter-segment sales, as disclosed in note A1 of the Origin Consolidated Financial Statements. Underlying interest expense for the current period divided by Origin’s average drawn debt during the current period (excluding funding related to APLNG). Underlying earnings before underlying interest, underlying tax, underlying depreciation and amortisation (EBITDA) as disclosed in note A1 of the Origin Consolidated Financial Statements. Underlying depreciation and amortisation as disclosed in note A1 of the Origin Consolidated Financial Statements. Underlying earnings before underlying interest and underlying tax (EBIT) as disclosed in note A1 of the Origin Consolidated Financial Statements. Underlying income tax expense as disclosed in note A1 of the Origin Consolidated Financial Statements. Underlying interest expense net of interest income as disclosed in note A1 of the Origin Consolidated Financial Statements. Underlying profit before tax as disclosed in note A1 of the Origin Consolidated Financial Statements. The Group’s share of underlying interest, underlying tax, underlying depreciation and underlying amortisation (ITDA) of equity accounted investees as disclosed in note A1 of the Origin Consolidated Financial Statements. Underlying ROCE is calculated as Adjusted EBIT/Average Capital Employed. — Average Capital Employed = Shareholders Equity + Origin Debt + Origin’s Share of APLNG Project Finance + Non-cash fair value uplift + net derivative liabilities. The average is a simple average of opening and closing in any year. — Adjusted EBIT = Origin Underlying EBIT and Origin’s share of APLNG Underlying EBIT + Dilution Adjustment = Statutory Origin EBIT adjusted to remove the following items: a) Items excluded from underlying earnings; b) Origin’s share of APLNG underlying interest and tax; and c) the depreciation of the Non-cash fair value uplift adjustment. — In contrast, for remuneration purposes Origin’s statutory EBIT is adjusted to remove Origin’s share of APLNG statutory interest and tax (which is included in Origin’s reported EBIT) and certain items excluded from underlying earnings. Gains and losses on disposals and impairments will only be excluded subject to Board discretion. The Remuneration Report provides specific details. Revenue less cost of goods sold. Net Debt adjusted to remove fair value adjustments on hedged borrowings. Reflects the impact of the accounting uplift in the asset base of APLNG of $1.9 billion which was recorded on the creation of APLNG and subsequent share issues to Sinopec. This balance will be depreciated in APLNG’s income statement on an ongoing basis and, therefore, a dilution adjustment is made to remove this depreciation. The non-cash fair value uplift adjustments are disclosed and explained in Note E1.2 of the financial statements. Total Recordable Incident Frequency Rate. 131 GLOSSARY AND INTERPRETATIONORIGIN ENERGY ANNUAL REPORT 2016GLOSSARY AND INTERPRETATION NON-FINANCIAL TERMS Term 1P reserves 2P reserves 3P reserves 2C resources Capacity factor Discounting Equivalent reliability factor GJ GJe Joule kT kW kWh MW MWh NPS Oil Forward Sale Agreements PJ PJe Ramp gas TW TWh Watt Meaning Proved Reserves are those reserves which analysis of geological and engineering data can be estimated with reasonable certainty to be commercially recoverable. There should be at least a 90 per cent probability that the quantities actually recovered will equal or exceed the estimate. The sum of Proved plus Probable Reserves. Probable Reserves are those additional reserves which analysis of geological and engineering data indicate are less likely to be recovered than Proved Reserves but more certain than Possible Reserves. There should be at least a 50 per cent possibility that the quantities actually recovered will equal or exceed the best estimate of 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 at least a 10 per cent probability of exceeding the sum of Proved plus Probable plus Possible (3P), which is equivalent to the high estimate scenario. The best estimate quantity of petroleum estimated to be potentially recoverable from known accumulations by application of development oil and gas projects, but which are not currently considered to be commercially recoverable due to one or more contingencies. The total quantities ultimately recovered from the project have at least a 50 per cent probability to equal or exceed the best estimate for 2C contingent resources. A generation plant’s output over a period compared with the expected maximum output from the plant in the period based on 100 per cent availability at the manufacturer’s operating specifications. For Energy Markets, discounting refers to offers made to customers at a reduced price to the published tariffs. While a customer bill comprises a fixed and a variable portion, Origin’s discounts only apply to the variable portion. In some cases, these discounts are conditional, such as requiring direct debit payment or on-time payments. Equivalent reliability factor is the availability of the plant after scheduled outages. Gigajoule = 109 joules Gigajoules equivalent = 10-6 PJe Primary measure of energy in the metric system. kilo tonnes = 1,000 tonnes Kilowatt = 103 watts Kilowatt hour = standard unit of electrical energy representing consumption of one kilowatt over one hour. Megawatt = 106 watts Megawatt hour = 103 kilowatt hours Net Promoter Score (NPS) is a measure of customers’ propensity to recommend Origin to friends and family Agreements to sell a portion of future oil and condensate production from July 2015 for 72 months at prices linked to the oil forward pricing curve at the agreement date. The cash proceeds were received upfront in the 2013 financial year at a locked-in price of $62.40/bbl. Petajoule = 1015 joules Petajoules equivalent = an energy measurement Origin uses to represent the equivalent energy in different products so the amount of energy contained in these products can be compared. The factors used by Origin to convert to PJe are: 1 million barrels crude oil = 5.8 PJe; 1 million barrels condensate = 5.4 PJe; 1 million tonnes LPG = 49.3 PJe; 1 TWh of electricity = 3.6 PJe. Short term Queensland gas supply as upstream assets associated with CSG-to-LNG projects gradually increase production in advance of first LNG Terawatt = 1012 watts Terawatt hour = 109 kilowatt hours A measure of power when a one ampere of current flows under one volt of pressure. INTERPRETATION All comparable results reflect a comparison between the current period and the prior period ended 30 June 2015, unless specifically stated otherwise. A reference to Contact Energy is a reference to Origin’s controlled entity (53.09 per cent ownership) Contact Energy Limited in New Zealand. In accordance with Australian Accounting Standards, Origin consolidates Contact Energy within its result. On 10 August 2015, Origin divested its entire interest in Contact Energy. A reference to Australia Pacific LNG or APLNG is a reference to Australia Pacific LNG Pty Limited in which Origin holds a 37.5 per cent shareholding. Origin’s shareholding in Australia Pacific LNG is equity accounted. 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 APLNG 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. Percentage changes on measures for which the numbers change from negative to positive, or vice versa, are labelled as not applicable. 132 GLOSSARY AND INTERPRETATIONGLOSSARY AND INTERPRETATION DIRECTORY ORIGIN ENERGY LIMITED Registered office Level 45, Australia Square 264-278 George Street Sydney NSW 2000 GPO Box 5376 Sydney NSW 2001 T (02) 8345 5000 F (02) 9252 9244 www.originenergy.com.au enquiry@originenergy.com.au Secretaries Andrew Clarke Helen Hardy Share register Boardroom Pty Limited Level 12, 225 George Street Sydney NSW 2000 GPO Box 3993 Sydney NSW 2001 T Australia 1300 664 446 T International (+61 2) 8016 2896 F (02) 9279 0664 www.boardroomlimited.com.au origin@boardroomlimited.com.au Auditor KPMG Further information about Origin’s performance can be found on the website: www.originenergy.com.au