Public

Origin Energy (ORG) 2015 AGM Voting Intentions

Company/ASX Code : Origin Energy Limited (ORG)
Registry : Computershare Services
Poll/Show of Hands : Proposed poll on all items
Webcast : Yes
Venue :
10.30am Westin Hotel
1 Martin Place
Sydney, New South Wales
Monitor : Mr Geoffrey Orrock
AGM Details / NoM : Wednesday 21st October, 2015

This company is monitored by Mr Geoffrey Orrock, assisted by Ms Kerrie Tarrant.

ASA Position
Not Applicable
Item 1: Consideration of accounts and reports

During FY15, Origin made good progress on its key priorities but the precipitous decline in oil prices impacted the company’s balance sheet. In the 2015 financial year (FY15), revenues declined again due to a range of factors, by 5% to $13.8 billion, following a decline of 2% in 2014.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased slightly (by $10m) to $2.15 billion in 2015 due to higher contribution from energy markets ($207m), but offset by lower contribution from Exploration and Production (-$88m), Contact Energy (-$46m) and Corporate (-$52m).

Underlying profit was $682 million, down $31 million from 2014.

However, statutory profit saw a reversal from $530 million in 2014 to a loss of $658 million after significant items were included. The significant items, which dragged statutory profit into the red totalled $1.34 billion, and included a $454 million decrease in the value of financial instruments due mainly to impact of AUD depreciation, $303 million for disposals, dilutions and impairments, $242 million for LNG related items, and $278 million related to the sale of Contact Energy. Statutory earnings per share (EPS) were -59.5 cents per share (cps), down from 48.1cps in 2014.

Group operating cash flow after tax (OCAT) decreased 23% to a more typical level of $1.58 billion due to higher working capital of $345 million, reflecting final carbon tax payment of $300 million and a higher tax of $92 million due to timing differences in payment of tax instalments. Free cash flow available for dividends and funding growth decreased by 25% to $406 million.

Against these results, management reported delivery on the four key priorities, as follows:

1. Improving returns in energy markets (EBITDA up 20%).

2. Delivering growth in integrated gas — the Australia Pacific LNG is Upstream 97% and Downstream 92% complete, with planned sustained LNG production from Train 1 from Q2 FY2016 (EBITDA down 13%).

3. Growing capabilities and increased investment in renewables in Australia and Chile and shareholding in Energia Andina increased to 49%.

4. Capital management and funding impacted by sale of Contact Energy which added $1.4 billion of liquidity and reduced net debt by $3 billion.

Given that gas prices have more than halved since late 2014 and it is not known when or whether they will return to past prices on which financial modelling was based for the APLNG project, we will ask the company at the AGM its view on the status of APLNG project break even and what contribution it will make at present prices. Most local LNG for export to Asia is in long-term contracts indexed to oil prices. With demand from China forecasted to be softer for some time, we will also ask if prices can be renegotiated in line with lower spot prices.

There was no change to the full year dividend of 50 cps (100% unfranked) despite Origin making a statutory loss.

At the start of FY15, Origin’s share price was $14.62, but by balance date it had dropped to $10.47, caught by the oil price drop in October 2014 from global oversupply of oil which impacted natural gas prices. Annual total shareholder return (TSR) was negative 25%. The three-year TSR compound average growth rate (CAGR) was flat.

Subsequent to balance date the share price has fallen to around $6.00 due to concerns over the balance sheet, particularly debt which stood at $10.3 billion at year’s end. The company has moved quickly to support the balance sheet with a $4.7 billion suite of capital initiatives including a $2.5 billion four-for-seven fully underwritten PAITREO capital raising, the new shares priced at $4.00. While the issue price has attracted some criticism, the ASA applauds the use of a PAITREO structured offer which treats all shareholders equally.


ASA Position
For
Item 2: Election of Mr Scott Perkins as a Director

Mr Perkins joined the Board in September 2015 and is a member of the Remuneration and Audit committees.

Mr Perkins is a non-executive director of Woolworths and Brambles. He is Chairman of Sweet Louise, a director of the Museum of Contemporary Art in Sydney, Uniservices, the New Zealand Initiative, and a member of the NSW Ministerial Advisory Committee on Social Housing Policy. He was recently a director of Meridian Energy.

Mr Perkins was 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. He was also a member of the Asia Pacific Corporate and Investment Bank Management Committee. Prior to that, he was Chief Executive Officer of Deutsche Bank New Zealand and Deputy CEO of Bankers Trust New Zealand. Mr Perkins holds a Bachelor of Commerce and a Bachelor of Laws (with Honours) from Auckland University.


ASA Position
For
Item 3: Election of Mr Steven Sargent as a Director

Mr Sargent joined the Board in May 2015 and is Chairman of the Origin Foundation and a member of the Health, Safety and Environment and Remuneration committees.

Mr Sargent is a non-executive director of Veda Group, Bond University Limited and the Great Barrier Reef Foundation. Mr Sargent was also a member of the Australian Treasurer’s Financial Sector Advisory Council, President of the American Chamber of Commerce and a director of the Business Council of Australia. Mr Sargent was the 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.

Mr Sargent holds a Bachelor of Business from Charles Sturt University in New South Wales and is a Fellow with the Australian Academy of Technological Sciences and Engineering. Mr Sargent brings extensive operational and leadership capabilities, a global corporate perspective, and a deep understanding of the drivers of strong and engaged organisational cultures which the Board believes will also be a welcome addition to the Board.


ASA Position
For
Item 4: Re-election of John Akehurst as a Director

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. He has extensive experience in the upstream oil and gas and LNG industries, including as Chief Executive Officer of Woodside Petroleum Limited.

Mr Akehurst is currently a member of the Board of the Reserve Bank of Australia and a Director of CSL Limited and Transform Exploration Pty Limited. He is a former chairman of Alinta Limited and Coogee Resources Limited, and a former director of Oil Search Limited and Securency Limited. Mr Akehurst holds a Masters in Engineering Science from Oxford University.

The Board believes Mr Akehurst has been a high performing director and continues to make valuable contributions to the Board. Mr Akehurst is considered an independent Director by the Board. He holds 71,200 shares.


ASA Position
For
Item 5: Re-election of Ms Karen Moses as a Director

Ms Moses joined the Board in March 2009. She has over 30 years’ experience in the energy industry spanning oil, gas, electricity and coal commodities and upstream, production, supply and downstream marketing operations. Ms Moses is a Director of SAS Trustee Corporation and Sydney Dance Company. She is a former Director of Contact Energy Limited, Energia Andina S.A., Australian Energy Market Operator Limited, Energy and Water Ombudsman (Victoria) Limited, Australian Energy Market Operation (Transitional) Limited and VENCorp.

Ms Moses holds a Bachelor of Economics and a Diploma of Education from the University of Sydney. The Board considers that Ms Moses has been a high performing director and continues to make valuable contributions to the Board. Ms Moses is the company’s Executive Director, Finance and Strategy.


ASA Position
For
Item 6: Re-election of Ms Helen Nugent as a Director

Dr Helen Nugent joined the Board in March 2003. She is Chair of the Remuneration Committee and a member of the Audit, Risk and Nomination committees. Dr Nugent has significant experience in the financial services and resources sectors. She is Chair of Veda Group and Funds SA (the $26 billion investment fund of the South Australian Government).

While a partner at McKinsey & Company, she worked extensively in financial services and resources, including for a leading Australian resources company. She gives back to society in education and the arts.

The Board considers that Dr Nugent has been a high performing director and continues to make valuable contributions to the Board. ASA meets regularly with Dr Nugent and is of the same view. ASA is of the view that after 12 years on a board, a director is no longer considered independent. She holds 38,834 shares.


ASA Position
For
Item 7: Adoption of Remuneration Report

Shareholders look to remuneration policy for alignment of executive rewards with shareholder interests. ASA’s voting guidelines seek to ensure that incentive payments also strongly relate to performance which in turn will be reflected in returns to shareholders.

Overview

In FY14, Origin implemented significant changes to remuneration policy, changes which included deferral of one third of STI for up to three years (DSRs), a rebalancing between LTI and STI to bring increased focus to annual operational outcomes, extending the vesting period of both rights to free performance shares (PSRs) and (market priced) options granted as LTI to four years, and altering the ratio of options/PSRs granted from 50%/50% to 75%/25% to increase exposure to share price. These changes, particularly deferral of part of the STI, extension of the vesting period to four years, and the reduced effect of the use of fair value in calculating LTI grants and retrospective approvals, which the ASA had sought at meetings with the company over a number of years, in our view, should promote much more alignment between executive reward and shareholder return. Dividends are not paid on DSRs or PSRs.

Fixed remuneration

According to ASA’s voting guidelines, companies should pay a reasonable fixed salary and expect “normal” performance. Properly structured short-term and long-term incentive schemes, ie, pay at risk, should be used to promote outstanding performance over the long term. In practice, most companies incentivise executives to achieve the target business plan and most often more than 60% of the maximum incentive opportunity is paid if target performance is reached. Origin says its fixed remuneration is “middle of the pack” for an ASX top 20 company, In FY15, the MD’s fixed remuneration was $2.5 million, last increased in FY11. In comparison, the median fixed remuneration for the ASX top 100 was $1.81 million, down 2%, the highest was $5.4 million. At the next level, fixed remuneration again ranged from $770,000 to $1.08 million, up around 3% on FY14 after a one year salary freeze.

Short term incentives

Origin’s metrics of good performance include both financial and non-financial metrics and it says only outstanding performance will attract substantial incentive payments. The company is quite transparent about the metrics used; for example, the MD’s STI is based on underlying EPS, group OCAT ratio (a broad measure of ratio of cash generated to productive capital employed), group safety performance and a number of operational measures. STI for KMPs is determined by the operational performance of their businesses and the impact they have on EPS and OCAT ratio. If target performance has been achieved, an STI payment of 60% of maximum opportunity will be paid, ie, 90% of fixed remuneration for the MD and 78% of fixed remuneration for other KMPs.

The maximum STI opportunity is capped at 150% of fixed remuneration for the MD and 130% of fixed remuneration for other KMPs, and to achieve this amount Origin says the recipient’s targets must be significantly exceeded.

In FY15, the MD’s STI was $2.0 million, which was 53% of his maximum opportunity, similar to last year’s 56%. $1.33 million was paid in cash and $0.66 million will be paid in three tranches of deferred shares: one tranche vesting in October of each year for the next three years. The first tranche of deferred equity from FY14 will vest in October 2015. Other KMP received STI amounts varying from $0.4 million to $1.06 million, of which two-thirds was paid in cash.

Long term incentives

Origin’s KMP LTI opportunity is also subject to business performance, with the allocation set by the Board. The maximum opportunity for the MD is 120% of fixed remuneration. The actual LTI grant for the MD was increased from 80% of maximum opportunity in FY14 to 83% of maximum opportunity in FY15. Other KMP were granted 100% of their maximum opportunity in FY15. LTI grants are made 25% in the form of PSRs and 75% in options. Fair value (nothing to do with fair market value) is used to calculate the number of rights or options awarded, which significantly boosts the number of rights and options granted above that which would be granted if a market value was used. The company argues that this method is used to achieve a target mix of fixed and at risk pay, in the case of the MD a target of 50% at risk.

The ASA opposes the use of fair value and believes that companies who adopt fair value should explain in plain and simple terms to shareholders what target they are trying to achieve and the difference in the size of the award in comparison with an award made using a market value. The use of options, strike priced at market, in conjunction with the relative TSR hurdle, provides a hurdle combination of both absolute and relative share price performance.

FY15 LTI grants will vest after four years if Origin’s relative TSR reaches the 50th percentile of the ASX 100 group. 50% of the award vests at 50th percentile increasing 2% linearly to 75th percentile, when 100% vests. The ASA believes that only 30% of an LTI should be paid for just average performance (ie, a relative TSR at the 50th percentile).

Origin’s four-year TSR did not reach the 50th percentile compared with the comparator group and for the third consecutive year — no LTI vested in FY15. This is in line with subdued shareholder returns over the last four years.

Non-executive director fees

The company says that non-executive directors are remunerated in a way that supports an independent shareholder focus. Board fees have been frozen since FY13 — there was no increase in remuneration in FY15 for any director and the Board will not be seeking an increase in the fee cap which was set at $2.7 million in 2010. Board fees will also remain frozen for FY16.

From August 2013, the minimum equity requirement for NEDs has increased to 20,000 shares to ensure directors have appropriate “skin in the game”. On balance and for the reasons above, will vote FOR the Remuneration Report resolution this year.


ASA Position
Not Applicable
Item 8 and 9: Approval of STI and LTI equity grants for MD Grant King and ED Karen Moses

On 7 October 2015, the company advised that it had decided to withdraw these resolutions from the 2015 AGM Notice of Meeting.  No clear reason is given for the move, but it is noted that the decision follows the company’s announcement of a series of capital initiatives, including the $2.5 billion raising.


ASA Position
Undecided
Item 10: Approval of potential termination benefits

Under the Corporations Act 2001 (Cth), termination benefits cannot be provided to relevant executives unless approved by shareholders, or an exception applies.

Termination benefits are defined to include a range of payments or benefits in connection with a person ceasing to hold an office or position of employment, including termination payments and other benefits such as the acceleration or automatic vesting of share-based payments or entitlements at or due to retirement. There is an exception to the prohibition of certain termination benefits where the value of all termination benefits provided in specified circumstances does not exceed the equivalent of one year’s base salary of the Relevant Executive. The provision of any other benefit requires shareholder approval.

According to Origin, under its remuneration arrangements, the following benefits fall within the type of benefits needing approval:

deferred remuneration in the form of:

— DSRs under the STI Plan;

—options and/or PSRs under the LTI Plan; and

— other awards: superannuation and other forms of retirement saving, leave benefits, some insured benefits, some payments in lieu of notice, some redundancy payments and some cash payments.

In 2012, ASA was opposed to termination benefits resolutions that sought blanket approval to circumvent the spirit of the Corporations Act. If the resolution is not passed, ASA understands that the necessity to seek approval is likely to be rare, in which case it is not an imposition. On the other hand, if it is not a rare occurrence, shareholders need to be informed of the circumstances. Some termination benefits, eg, equity incentive payments, have already been approved by shareholders, and some have not and would not be approved by ASA, eg, golden handshakes.

The ASA will listen carefully to what the company has to say regarding benefits paid which were covered by the 2012 approval before deciding how to vote.


ASA Position
Abstain
Item 11: Amendment to the constitution

The Australian Centre for Corporate Responsibility (ACCR) and others seek to amend the company’s constitution regarding content in the Annual Report. The statement by the ACCR and others expresses views on the use of fossil fuels for power generation and in some circumstances the withdrawal of funding to companies who derive income from coal-fired power generation and who fail to meet certain environmental targets.

ASA members have a wide range of views on environmental issues and we are of the view that it is not appropriate for the ASA to take any particular position for or against.

ASA will abstain on voting on this resolution. 



The individual(s) involved in the preparation of this voting intention have a shareholding in the company.


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