Origin Energy (ORG) 2016 AGM Voting Intentions

Company/ASX Code : Origin Energy Limited (ORG)
Registry : Boardroom Pty Ltd
Poll/Show of Hands : Poll on all items
Webcast : Yes
Venue :
10.30am Four Seasons Hotel
199 George St
Sydney, New South Wales
Monitor : Ms Kerrie Tarrant
AGM Details / NoM : Wednesday 19th October, 2016

Good progress on APLNG but a while yet before shareholders see a profit

This company is monitored by Kerrie Tarrant, assisted by David Jackson. The company monitors had a pre-AGM meeting with Chairman Gordon Cairns, Director Helen Nugent, the Company Secretary and Investor Relations.

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

Financial performance

Low oil prices continued to affect the financial performance of Origin in FY16, largely due to its $7.9b investment (37.5% share) in the Australia Pacific Liquid Natural Gas (APLNG) joint venture, which finally became operational in third quarter of FY16 with the first train of gas exports after eight years of development (the second train is due to be operational 2nd quarter FY17). A further $0.6b investment in FY17 will take Origin’s total contribution to $8.5b.

Group revenues declined by 14% on 2015 to $12.174b, and underlying EBITDA declined 21% to $1.69b, partly due to the sale of Contact Energy, while underlying EBITDA for energy markets improved by 5%. 

Underlying EBIT also declined to $776m from $1280m in 2015.

Significant items of $954m included impairments ($515m), ceasing development activities and upstream impairments on reserves in the Otway, Bass and Cooper basins.

Underlying EPS of 23.2c was down from 54c.

There was a reduction in CAPEX as growth projects near completion. Cash flow used in investing activities reduced to $189m from $3.725b, and net operating cash flow was $1.404b, down from $1.83b the previous year

Dividends have been suspended for the FY17 year.

The four key priorities for the FY2016 were in the main met — debt reduction (by $3.971b to $9,131b), capital management, delivery on APLNG, and becoming a leader in solar energy investment and renewables (with 745MW of contracted renewable energy through PPAs at the end of FY16, and large-scale renewable generation between 2015 and 2020).

FY17 guidance is for underlying EBITDA to increase by 45-60% based on an average oil price of USD52.90/BBL and a AUD/USD exchange rate of $0.74, and is dependent on the timing of production from Train 2 of APLNG.

Key Board or senior management changes

The Managing Director, Grant King, has resigned after 17 years. He will be replaced by Frank Calabria, the CEO of Energy Markets since 2009, and Chief Financial Officer between 2001–2009. ASA applauds the new fixed salary for Mr Calabria of $1.7m, down from $2.5m for the outgoing MD.


ASA Position
Item 2: Re-election of Mr Gordon Cairns as Chairman

While ASA appreciates the experience of the Chairman (outlined below), we are concerned about his ability to manage the complexities of two chairmanships of companies undergoing extensive restructuring and turnaround (Origin and Woolworths). ASA’s guidance is for a maximum of five directorships, where the position of chairman is considered equal to two directorships. Mr Cairns’ positions and board commitments puts him at the upper end of ASA guidelines. 

Following discussions with Mr Cairns and Ms Nugent and being provided with information as to Mr Cairns’ contribution to the Origin board, we have no reason to continue with the concerns of his workload and will support his re-election. Nonetheless, ASA intends to ask Mr Cairns’ at the AGM as to ongoing time constraints in managing his entire workload.

Mr 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.

Mr Cairns is also Chairman of Woolworths (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 formerly CEO of Lion Nathan and has held senior management positions in marketing, operations and finance with PepsiCo, Cadbury Ltd and Nestlé.

Mr Cairns joined the board in 2007, which ASA guidelines still consider independent, 12 years being the limit.

Mr Cairns owns 163,660 shares.

ASA Position
Item 3: Re-election of Mr Bruce Morgan as a Director

Mr Morgan is within the ASA guidelines of five directorships (one chair = two directorships) and is also considered independent by ASA.

Mr 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.

Mr Morgan is Chairman of Sydney Water Corporation (since October 2013), a director of Caltex Australia (since June 2013), Chairman of Redkite (since April 2015), a Director of the University of NSW Foundation and the European Australian Business Council. Mr Morgan has a Bachelor of Commerce (Accounting and Finance) from the University of NSW.

Mr Morgan owns 147.143 shares.

ASA is voting in favour of Mr Morgan and believes that his credentials and experience are an asset to the Board.

ASA Position
Item 4: Adoption of Remuneration Report

ASA expects companies to pay a reasonable fixed salary for “normal” performance. Pay at risk, should be used to promote outstanding performance over the long term. 

Short term incentives (STIs) are composed of one third deferred share rights (DSRs), and two thirds cash. ASA’s position is for at least 50% to be deferred in equity.

STI hurdles are 40% non-financial (engagement and safety = 20%, and Personal = 20%) and 60% financial (50% from underlying EPS, and 50% from a new metric — NCOIA (Net Cash from Operating and Investing Activities), which has been introduced this year in the place of group OCAT ratio). ASA is not in favour of underlying measurements as they do not align with shareholders.

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 ranging between 60% and 110% for other KMP. The maximum STI opportunity is 150% of fixed remuneration for the MD and between 100% and 130% for other KMP. 

Long term incentives (LTIs) are paid to the MD and 80 executives. They are composed of 50% performance share rights (PSRs) and 50% Options. Allocations are made retrospectively and are based on the previous years’ performance (see Item 5 below for further commentary on this).

The hurdle for PSRs is ROCE (Return on Average Capital Used), vesting over four years. 

The hurdle for options is Relative TSR, which is using a new comparator group of the 10 companies above and 10 below Origin on the ASX, plus Woodside, Santos and Oil Search. Calculations use Monte Carlo simulation and Black Scholes method, vesting over five years.

Fifty percent of the award vests if relative TSR reaches the 50th percentile, increasing 2% linearly to 75th percentile, when 100% vests. ASA believes that only 30% of an LTI should be paid for just average performance ie. relative TSR at the 51st percentile. 

The maximum opportunity for the MD is 120% of fixed remuneration.

The Board has the discretion to revise amounts paid to KMP and to claw back awards.

Origin has lengthened vesting for deferred STIs to two, three, and four years. For LTIs, PSRs remain at four years, while options have been lengthened to five years and a more closely aligned peer group on the ASX has been introduced, all of which ASA agrees with.

However, ASA would like to see greater transparency in the calculation and award of STI non-financial hurdles for “target” and “exceptional” performance and more alignment with shareholders in the overall STI structure in future years.

There is no increase in Fixed Remuneration for any of the KMP in FY17.

Board fees have been frozen since FY13 — there was no increase in remuneration in FY16 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. However there was an introduction of fees for the Risk Committee in 2016.

Origin’s minimum equity requirement for NED’s is 20,000 shares to ensure directors have appropriate “skin in the game”.

On balance, due to the downward discretion exercised by the Board on bonuses and due to other positive changes made in FY16, the ASA is voting FOR the Remuneration Report resolution this year. However, we will be looking to discuss Origin’s methodology of awarding LTIs with the company.   

ASA Position
Item 5: Approval of LTI grant to the Managing Director, Grant King

This resolution relates to approval of an LTI allocation valued at $1.35 million to the departing Managing Director, in view of his FY15 LTI allocation being reduced to zero. The allocation will be tested and subject to the hurdles described above. 

ASA does not agree with Origin’s methodology of awarding LTIs as we believe that LTI awards should be an incentive for executives to perform well in the future, and not an award based on past performance (as is usually the case for STIs). Given Mr King is leaving the company, and will have minimal impact on the company's performance over the next 4/5 years, we would generally have voted against this allocation. 

The allocation methodology also relies on the board’s judgment on what the allocation should be, subject to a disclosed maximum limit (although we accept that the award, at least in the Managing Director’s case, is subject to shareholder approval).

Nonetheless, as we acknowledge that the board has exercised its discretion to award no STI this year to Mr King and that the LTI allocation is in equity and remains at risk and subject to long term hurdles which are aligned with the interests of shareholders, we will vote in favour of this resolution.  As noted above, we intend to have further discussions with the company regarding its methodology of allocating LTIs.

ASA Position
Item 6: Renewal of proportional takeover provisions

ASA supports this resolution as it is in the interests of retail shareholders.

One of the individuals involved in the preparation of this voting intention has a shareholding in this company. 

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