Remuneration Report

The Directors present the Remuneration Report for Origin Energy Limited (the Company) for FY2011.

Amongst the key issues to highlight for the current year is the comprehensive review undertaken of the Company’s Long Term Incentive Plan (LTI Plan) and its operation, discussed in sections 5.4 and 5.8. This resulted in an expanded participating population and the confirmation of a continuing central role for Options within the LTI Plan, notwithstanding the significantly changed regulatory environment for equity arrangements.

The Remuneration Committee has again been active during the year in the public discussion on executive remuneration matters. The Board considers that the Government should discuss principles relating to proposed regulation of remuneration with the relevant stakeholders before preparing detailed draft legislation. In the past five years legislation has been introduced, in some cases with little consultation, adding to complexity and administrative costs. Where consultation has occurred, some of the issues raised by the Company have been accepted and in some cases contributed to improving the drafting of the original government proposals. The Board was pleased to see an attribution from its 2010 Remuneration Report quoted in a ‘best practice’ example recently distributed by the Australian Securities and Investment Commission (ASIC) on remuneration reporting. However, the Board remains concerned that the Federal Government has rejected recommendations from both the Productivity Commission and the Australian Prudential Regulatory Authority to remove cessation of employment as a taxing point for employee share plans.

The Board agrees with the Productivity Commission’s observations that there is “little rationale for ceasing tax deferral at termination of employment” and that the provision “is contrary to best practice governance promoted in Australia by the prudential regulator and overseas”⁽¹⁾. As noted by the Australian Securities Exchange (ASX), “a taxation policy that drives remuneration design and practices that are inconsistent with corporate governance policy is both inappropriate and counterproductive”⁽²⁾. The Board will continue to urge change on this matter.

Whilst new laws concerning remuneration consultants and remuneration advice do not take effect until the Company’s next reporting period, the Board has chosen to become an ‘early adopter’ and this year’s Report contains relevant disclosures in section 3.2 Advisors to the Committee.

The Board’s assessment is that the remuneration framework that is in place is robust and appropriate to the Company’s circumstances and industry setting, such that adjustments during the year, despite extensive review, constitute fine tuning and enhancement rather than significant change.

Throughout this Report, the following terms have the meaning indicated below:

Key management personnel
Key management personnel (KMP) is defined by AASB 124 Related Party Disclosures as all directors and those persons having authority and responsibility for planning, directing and controlling the activities of the Company and the consolidated entity. For the Company, these are the individuals listed in section 3.3 of this Report.

Directors
Executive Directors and Non-executive Directors.

Executive Management Team (EMT)
The Managing Director and managers who report to the Managing Director.

Executives
The EMT plus all those senior employees who have been invited to participate in the Company’s LTI arrangements.

OCAT/PC (OCAT Ratio)
Operating Cash Flow After Tax (less interest tax shield) divided by Productive Capital. OCAT/PC is one of two performance metrics usedto determine short-term incentive (STI) outcomes, the other being Underlying EPS (see below). Productive Capital excludes capital work-in-progress.

Underlying EPS
Underlying profit (year-end Statutory Net Profit after excluded items) divided by the weighted average number of shares on issue.

3.1 Remuneration Committee

The Remuneration Committee (the Committee) is responsible for making recommendations to the Board on director and executive remuneration pay, policy and structure. The composition and functions of the Remuneration Committee are set out in the Remuneration Committee Charter which can be viewed or downloaded from the Company’s website w w w.originenergy.com.au.

The Remuneration Committee comprises five Non-executive Directors with significant remuneration experience working within other board remuneration committees, and considerable experience with the Company’s operations. The members are:

3.2 Advisors to the Committee

The Committee seeks advice from external advisors from time to time to assist in its deliberations. The table below summarises the advisors used during the reporting period. Those advisors who provided advice directly related to remuneration decisions for KMP during the period have been deemed by the Company to be “Remuneration Consultants” for the purpose of the recently approved executive remuneration legislation, and are listed below.

The Remuneration Consultants were selected by resolution of the Committee, and were commissioned and instructed by the Chairman of the Committee.

The appointment terms identify that all output be sent directly to the Committee through its Chairman, and prohibit the Consultant from providing such material or other information directly to management. The terms also require that any dialogue with management be limited to the provision or validation of factual and policy data, for example contractual provisions, entitlements, salary history and incentive eligibility. The terms also provide that no dialogue would be permitted between KMP and the Remuneration Consultant without written approval of the Chairman of the Committee. The appointment terms also require that the Remuneration Consultants provide, with their report, both a declaration of their independence from the KMPs to whom their recommendations relate, and also confirmation that the Committee’s conditions for contact and dialogue had been observed. In this way, the Committee and Board have been assured and are satisfied that the Remuneration Consultant’s remuneration advice and recommendations were made free from undue influence from management generally and from KMP executives specifically.

All work undertaken by Guerdon Associates on behalf of the Company related to remuneration was also performed on behalf of the Committee, including work not deemed to be a remuneration recommendation under new legislation.

3.3 Individuals covered by the Report

The detailed disclosures of the Report relate to the KMP of the Company as defined in section 2 and as listed below:

1. Mr Beeren was an Executive Director from March 2000 to January 2005.
2. Retired 29 October 2010.
3. Prior to 1 April 2011, Mr Barnes held the role of General Manager, Energy Risk Management, a non-KMP role.
4. From 1 April 2011, Mr Stock holds the role of Director, Executive Projects, a non-KMP role.
5. From 1 July 2011, Mr Willink holds the role of Director, Exploration Projects, a non-KMP role.

More broadly, the Report also describes the remuneration arrangements applying to Executives and all EMT as defined in section 2.

Origin reported a Net Profit after Tax and Non-controlling Interests (Statutory Profit) of $186 million for the year ended 30 June 2011, a decrease of 70 per cent compared with $612 million reported in the prior year. The key drivers for the change in Statutory Profit were impairments, a decrease in the fair value of financial instruments and transition and transaction costs primarily relating to the acquisition of Integral Energy and Country Energy retail businesses as part of the NSW privatisation process. These items contributed to charges to Statutory Profit of $487 million and more than offset a 15 per cent increase in profits associated with the underlying business from $585 million in the prior year to $673 million.

At an underlying level, the Company continued to build on the strong performance of the business in the prior year. Underlying EBITDA increased by 32 per cent or $436 million to $1,782 million during the year, and operating cash flow after tax increased 64 per cent to $1,585 million. The Company has invested in valuable assets both through acquisitions (such as the NSW retail businesses of Country Energy and Integral Energy, and entering into the Eraring and Shoalhaven GenTrader Agreements) and through the development of internally generated projects (such as the Kupe Gas project in New Zealand, the Darling Downs Power Station and the Mortlake Power Station).

The Kupe Gas project and the Darling Downs Power Station made full year contributions in FY2011, while the NSW retail businesses and GenTrader agreements contributed for the four months from March 2011. Mortlake Power Station will contribute in the 2012 financial year.

The Company also continued a substantial exploration program including seven offshore and international wells, and a substantial seismic exploration program. Origin has actively managed its exposure across a number of these areas and recovered back costs in two areas through farmout arrangements. This contributed to a before tax exploration expense net of farmout receipts of $118 million, compared with $45 million in the prior year.

1. Compound average growth rate between 30 June 2007 and 30 June 2011.
2. Share Price and EPS have been restated for the bonus element of the Rights Issue completed in April 2011.
3. Includes additional dividend paid in November 2008.

From 30 June 2007 to 30 June 2011, the Company’s compound Total Shareholder Return (TSR) was 16.8 per cent per annum. This was significantly above the ASX 100 Accumulation Index, which decreased by 2.9 per cent average annual compound over the same period.

Origin Energy Total Shareholder Returns vs ASX 100 Total Return (indexed to 100 from 21/02/2000)
Source: Guerdon Associates.

TSR is defined as the growth in Company share price over the relevant performance period with dividends notionally reinvested on the ex-dividend date during the period. The share price is measured on a volume weighted basis for the three months preceding the relevant date.

5.1 Principles

The Company’s remuneration strategy and policy are set by the Board and overseen by the Remuneration Committee.

The Committee’s focus is to bring strong governance and risk management principles to remuneration practice that:

• has the appropriate mix of fixed pay and ‘at-risk’ reward;
• measures performance in both financial and non-financial terms; and
• has a significant deferred element that aligns the interests of management with shareholders in terms of long-term and sustainable performance.

5.2 Policy

The purpose of the remuneration policy is to manage an overall framework for rewards that is geared to achieve the following objectives:

Attract and retain talent

• Recognises and develops internal talent; and
• Builds and develops the capabilities and competencies of its people through opportunities for growth, development and promotion.

Motivate to achieve superior performance

• Rewards those who deliver outstanding performance.

Align executives’ and shareholders’ interests

• Links reward to long-term and sustainable value creation while managing risk; and
• Transacts business consistently in ways that are aligned with the Company’s purpose, principles, commitments and values.

To achieve these objectives the Board has set a remuneration policy 
that has a fixed component benchmarked to the median of the relevant market, guaranteeing fair pay for the role itself, and, through the addition of variable pay, the opportunity for aggregate remuneration (fixed plus variable) to be at the top quartile of the market if and when performance is outstanding.

The policy for variable pay is to have a mix of STIs (cash) and LTIs (deferred pay in the form of equity). The details are described in sections 5.7 and 5.8.

The diagram below provides a schematic representation of the policy implementation and remuneration arrangements as they apply to EMT:

5.3 Benchmarks

In addition to market data sourced through the Remuneration Consultants listed in section 3.2, the Company subscribes to published survey data 
and participates in industry forums. Through these multiple channels the Company maintains an ongoing monitor of trends and developments within broad and specific markets.

The Company attracts new staff from all major industry sectors, and exit analyses show that staff attrition is not industry specific. Therefore a benchmark representative of all industries is appropriate. The primary reference group is currently the Hay Group’s ‘all organisations’ benchmark.

The Company’s analysis shows that the market is currently differentiated with some job sectors and specialist skills areas in high demand, and attracting a premium to the general market. For these roles, which include geosciences and some subsurface engineering and professional specialists, smaller “peer group” benchmarks are used.

For the most senior roles, external advice is sought at least annually to provide independent determinations of market positioning and relevant trends, as outlined in section 3.2.

5.4 Package summary

Aggregate remuneration is made up of four elements as summarised below:

5.5 Remuneration mix

Having regard to the nature of the Company’s business, the Board has determined that it is appropriate to have a significant portion of executive remuneration deferred.

Accordingly, within the benchmark for aggregate remuneration, executive remuneration is weighted relatively highly to market in LTI, and packages comprise long-term equity elements at levels that go relatively deep into the organisation. Approximately 11 per cent of the Company’s employee base (excluding Contact Energy) participate in LTI arrangements (which are described in more detail in section 5.8).

The mix between the STI and LTI components is determined with reference to risk focus and time focus. The risk focus is measured as the ratio 
of (maximum) variable pay to fixed pay. It reflects an increasing proportion of pay at risk with increasing levels of responsibility. The time focus 
is measured as the ratio of LTI to STI; the higher the ratio the longer the time horizon and the higher the level of deferral. The graph below shows relationships effective from 1 July 2011:

Risk vs time focus of remuneration package

The mixes are assigned such that there is a consistent relationship between the level of risk and time horizon, and that the time horizon is longer for higher levels of risk.

The relatively high weighting of LTIs means that there is a significant level of deferred pay within the Company’s executive remuneration packages. The Board considers that the Company’s deferral is at an appropriate level that is competitive and aligned with value creation.

5.6 Link to strategic objectives and performance

The diagram below illustrates how the at-risk component of the Company’s executive remuneration framework is structured to align with its strategic objectives.

There are five different types of performance measures applied, and maximum outcomes therefore require performance against a variety of measures.

As noted in section 5.2, the use of Options for the more senior roles means that there is effectively a combination of relative and absolute hurdles within the LTI component. The relative hurdle is provided through relative TSR, and there is an absolute hurdle in the sense that the share price must grow in absolute terms if the Options are to have any value.

The performance assessment commentaries in sections 5.7 and 5.8 provide further details of how the incentive plans are linked to performance outcomes.

5.7 Variable remuneration – STI

Details of the operation of STI arrangements are provided below:

1. In exceptional circumstances the Board may award more than the maximum to an individual provided that the maximum overall is not exceeded.
2. Where the actual STI payment is less than maximum potential, the difference is forfeited. It does not become payable in subsequent years.
3. 2011 STI constitutes a cash bonus granted for the year ended 30 June 2011, determined following the close of 2011 results and paid in September 2011. 2010 STI constitutes a cash bonus granted for the year ended 30 June 2010, determined following the close of 2010 results and paid in September 2010.
4. NZD/AUD annual average exchange rate 1.2947 – 1 July 2010 to 31st March 2011 (2010 full year 1.2362).
5. NZD/AUD annual average exchange rate 1.3269 – 1 April to 30 June 2011.
6. For the period as a KMP.

5.8 Variable remuneration – LTI

As disclosed in the 2010 Report, the Board determined to extend the operation of the LTI Plan from approximately 4 per cent to 11 per cent of the (non-Contact Energy) employee base in FY2012. This followed a review of market practices to ensure that the Company’s remuneration remained competitive, and noting the retention effect observed where the LTI Plan operated.

The graph below shows the difference in voluntary turnover levels for FY2011 for resigning employees holding unvested LTI equity (less than 
5 per cent) compared with those forfeiting annual STI awards (almost 13 per cent).

Voluntary turnover with STI and LTI forfeit

In early 2011, the Board undertook a comprehensive review and updating of the LTI Plan which, until that time, had remained largely in the form of the 1994 plan developed by Boral Limited prior to the demerger creating the Company. This review modernised the administration and articulation of the Plan, reflecting recent regulatory changes and bringing the separate Options Plan and Performance Share Rights (PSR) Plan under a single ‘umbrella’ set of rules. The updated arrangements apply prospectively to new awards and do not impact on prior grants.

The LTI vehicles continue to be:
(a)  
PSRs, which are the right to a fully paid share in the Company at no cost; and/or
(b) 
Options, which are the right to a fully paid share in the Company upon payment of an exercise price determined by the volume weighted average market price for the Company’s shares in the five business days leading up to and including the date of grant (i.e. the market price at issue).

The Board recognises that general market practice favours PSRs and similar instruments rather than Options. Tax changes in recent years make the advantages of Options more difficult to communicate to participants.

Nevertheless, the Board considers that Options continue to serve a useful role in the Company’s LTI mix, especially in the way they reward outperformance and provide additional shareholder alignment provided through the inherent absolute price hurdle in conjunction with the relative TSR hurdle.

Balancing these considerations, the Board concluded that Options currently remain appropriate for the most senior LTI participants (approximately one third of those who participate in the LTI plan) when used in combination with PSRs, but that the rollout to the next level of participation is more appropriate wholly in the form of PSRs. Where a combination of Options and PSRs is used, the split is approximately half (by fair value).

In addition, the Board determined that PSRs would be exercised automatically on achieving vesting hurdles. While Options will remain exercisable between vesting and expiry, subject to the Company’s Dealing in Securities Policy, the Board also determined that additional trading restrictions would apply to shares resulting from the exercise of Options through to the end of the next full “blackout” period (Closed Period) following exercise.

During its review, the Board deliberated on the most appropriate reference group on which to base the performance hurdle. After consideration of a variety of comparator groups, the Board concluded that the ASX 100 group of companies remains the most appropriate comparator for alternative investment choice for the majority of the Company’s stakeholders.

The question of re-testing was also reviewed. In 2007 the Board changed the Plan from continuous testing to one test at the end of Year 3 followed by two re-tests at the end of years 4 and 5. In confirming that two re-tests provided the right balance for the Company, the Board noted that reductions in the level of testing result in lower fair valuation of the rights involved, and therefore result in a corresponding increase in the number of rights that must be issued to maintain a given allocation value.

For FY2011, the maximum allocation value for 525 executives (including two Executive Directors) is $34 million for all LTI awards. Actual awards are expected to be determined during September/October 2011. In terms of potential share issuance, this equates to a maximum of approximately 
0.78 per cent of issued shares. Currently, the total number of shares held by all KMP (including Non-executive Directors) is set out in Table 9.6 and equates to approximately 0.45 per cent of issued shares.

As disclosed in the 2010 Report, a Deferred Share Rights (DSR) Plan was introduced in early 2010 under the Employee Retention Plan. The governing rules for the DSR Plan have been incorporated into the new Plan rules. Further information regarding the operation of the Employee Retention Plan 
is discussed in section 6.

Details of the operation of the LTI Plan are provided below, and details of the grants made to the Executive Directors and Executives during the FY2011 are set out in section 9.4.

5.9 Managing Director’s remuneration details

Details regarding the Managing Director’s remuneration arrangements are tabulated below:

5.10 Contractual arrangements

The table below sets out the main terms and conditions of the employment contracts of the Managing Director and EMT.

The above includes arrangements agreed prior to the amendments to the Corporations Act 2001 (Cth) regarding termination payments which came into effect on 24 November 2009. Entitlements under pre-existing contracts are generally not subject to the new limits on termination payments. The new legislative provisions apply to KMP contract variations after 24 November 2009 and to agreements with KMPs appointed after 24 November 2009.

5.11 Gender pay equity

The Company pays particular attention to delivering a policy of equal pay for equal work. During its annual salary review processes it employs a number of checks and balances to detect persistent gaps or systemic bias. For some years it has maintained gender variation by grade within margins of plus or minus 2 per cent with variation in both directions.

A detailed study early in the year detected that the variation in new hires was less favourable. Accordingly, special focus has been paid to salary decisions during the early phases of hiring to eliminate such potential gaps.

Although pay equity exists on an equal pay for equal work basis, the Company has a structural imbalance in terms of gender distribution. This is a characteristic of the energy industry generally, manifested in a skew where females are over represented in lower-graded jobs and under-represented in higher-graded jobs.

Targets established under the Company’s diversity agenda include the maintenance of grade pay equity, and seek to improve the Company’s gender distribution profile. The targets address the lowering of female turnover overall, and increasing the proportion of women in senior roles, especially those with operational accountabilities.

As part of the Company’s ongoing operations, from time to time, the Board has approved deferred pay retention arrangements used primarily to reduce the risk of loss of employees who manage critical activities, occupy roles that are key to the delivery of operating or strategic objectives, or undertake functions requiring skills that are in short supply and actively sought in the market. The arrangements allow for the key employees to be provided with deferred equity (DSR) or deferred cash payment provided that they remain in employment to a nominated date (generally two to four years in the future) and achieve personal performance targets.

The DSRs Plan was approved by the Board in early 2010 to provide an equity grant as an alternative to cash. The governing rules for the DSR Plan have been incorporated into the new ‘umbrella’ LTI Plan rules.The period of deferral is four years and the equity would be time vested in equal amounts at the ends of the second, third and fourth year.

As at 30 June 2011, no DSRs had been issued, and the number of employees with deferred cash arrangements stood at 39 (2010: 31). It is expected, however, that the first DSRs will be issued early in FY2012 in a measured and targeted manner.

All permanent employees of the Company in Australia and New Zealand (other than Executive Directors) with more than one year of service are eligible to participate in the ESP. The Plan provides for an award of up 
to $1,000 of shares in the Company if the Company meets specified financial and/or safety targets set by the Board. To be eligible to receive shares, annual performance measures which relate to targeted areas of Company-wide performance must be achieved. Shares awarded under the ESP must be held for at least three years following the award or until the employee ceases employment.

For the FY2011, a safety target was set for combined employee and contractor performance. The target was not met and therefore no shares will be awarded in respect of the year.

Other arrangements may apply for employees in operations outside Australia and New Zealand.

8.1 Policy

The Board’s policy objectives with respect to Non-executive Director fees are summarised below:

Non-executive Directors are remunerated by way of base fees and Committee fees (inclusive of superannuation). Directors can elect to receive this in the form of participation in the shareholder-approved Non-executive Director Share Plan.

The level of fees paid is based on the scope of director responsibilities and the size and the complexity of the Company. Non-executive Directors’ fees are not subject to performance. The Remuneration Committee considers the level of remuneration required to attract and retain Directors with the necessary skills and experience for the Board.

8.2 Non-executive Director fee structure

The table below shows the structure and level of Non-executive Director fees for the current year and as approved for FY2012. The increase in fees to operate for FY2012 was determined following an external benchmarking review by Guerdon Associates. The Board’s review of the report indicated that a market adjustment of 5 per cent per annum should apply to base fees for the Chairman and Non-executive Directors, but that the Committee fees remained at an appropriate level and remain unchanged.

1. The Chairman of the Board attends all Committee meetings but receives no additional fees for such attendance.

8.3 Non-executive Director Share Plan

The Non-executive Director Share Plan requires Non-executive Directors to hold a minimum of 10,000 shares in the Company within three years of appointment, and allows them to salary sacrifice up to $5,000 of fees per annum toward the acquisition of shares. Shares are acquired on-market by the Trustee of the Plan to be held for participating Non-executive Directors. The Trustee of the Plan may transfer to a Non-Executive Director a share acquired under the Plan after five years or upon retirement from office or death of the Non-executive Director.

No allocations were made under the Non-executive Director Share Plan during the reporting period. Participants with existing holdings under the Non-executive Director Share Plan took up their pro-rata entitlements in the Rights Issue during the year, these are included in the disclosures made in Table 9.6.

9.1 Remuneration Table for FY2011 and FY2010

1. Mr King, Mr Baldwin, Mr Beeren and Ms Moses are the Company's nominees on the Board of Contact Energy. Remuneration is converted to Australian dollars using an annual (1 July 2010 - 30 June 2011) average exchange rate of $1.3028 (2010 - $1.2362).
2. Variable remuneration includes the STI in respect of the reporting period based on achieving personal goals and satisfying specified performance criteria plus any discretionary amounts awarded for exceptional contributions. FY2011 STI constitutes a cash bonus granted for the year ended 30 June 2011, determined following the close of FY2011 results and paid in September 2011. FY2010 STI constitutes a cash bonus granted for the year ended 30 June 2010, determined following the close of 2010 results and paid in September 2010.
3. Non-monetary benefits include fringe benefits such as car parking and reportable fringe benefits.
4. Benefits under the Non-Executive Director's Share Plan (refer to section 8.3) or the fees sacrificed for application toward the purchase of such shares where ultimately the sacrifice has been returned as cash.
5. Includes restricted shares for Contact Energy fees; retention payments as set out in section 5; and the fair value of equity rights awarded. The fair value of the Options and PSRs is calculated at the date of grant using a Black-Scholes methodology with a Monte Carlo simulation model that takes into account hurdles. The fair value is allocated to each reporting period evenly over the period from date of grant to the first vesting test date. The value disclosed is the portion of the fair value of the Options/PSRs allocated to this reporting period. In valuing the Options/PSRs, market conditions have been taken into account.
6. During employment with Contact Energy, Mr Baldwin and Mr Barnes were paid in New Zealand currency. Remuneration is converted to Australian dollars using an annual average exchange rate of $1.2947 (1 July 2010 to 31 March 2011) and $1.3269 (1 April 2011 to 30 June 2011) (2010 - $1.2362). Base salary includes holiday pay rate adjustments. Fixed remuneration and all or part of their variable remuneration is reimbursed by Contact Energy.
7. As Managing Director (up to and including 31 March 2011), Mr Baldwin did not receive any fees in his capacity as a director of Contact Energy nor was he a participant in the Contact Energy Directors' Share Scheme. Fees received have been in Mr Baldwin's capacity as Director of Contact Energy subsequent to 1 April 2011.
8. Includes Options and restricted shares issued by Contact Energy, and Options and PSRs issued by the Company.
9. Mr Akehurst was appointed as a Non-executive Director on 29 April 2009.
10. All named KMP and Executive Directors are employed and remunerated by the Company and its controlled entities. All Non-executive Directors are remunerated by the Company.

Note: Fixed remuneration (as defined in section 5.4) is the sum of base salary, non-monetary benefits, and superannuation. Where an Executive's Fixed Remuneration was frozen during the reporting period, some variation may occur due to changes in the valuation of non-monetary benefits such as car parking, or changes in the package make-up (for example, cash to superannuation or vice versa).

9.2 Details of equity grants

The table below lists the position of all current grants of equity-based incentive grants made to Directors and Executives. No terms of equity-settled share-based transactions (including Options and PSRs granted as compensation to a KMP) have been altered or modified by the issuing entity during the reporting period or the prior period except as footnoted below.

1. Adjustments to the exercise price of Options (in accordance with ASX Listing Rule 6.22) and to the number of unvested PSRs granted in FY2011 and for prior years were made during the reporting period as a result of the Rights Issue allotment.
2. The performance conditions are described in section 5.8.
3. The number of equity instruments exercisable is indicative. The number has been calculated by comparing the Company's TSR to the relevant performance group and applying the performance conditions noted in section 5.8 as at 30 June 2011. The number of Options and PSRs that become exercisable will be determined at the test date and may be different from that indicated here.
4. Under the previous LTI Plan rules that applied to these awards early vesting occurred as a result of the announcement on 30 April 2008 by the BG Group that it proposed to acquire more than 20 per cent of the Company's shares.

9.3 Analysis of movements in Options and PSRs

A summary of the movement in FY2011, by value, of Options and PSRs over ordinary shares in the Company (and Options and Restricted Shares in Contact Energy in the case of Mr Baldwin) held by the KMP is provided in the table below.

1. The allocated value of Options and PSRs granted in the year is the fair value calculated at grant date using a binominal option-pricing model which has been independently calculated by Mercer. The value disclosed is the total value of the Options and PSRs. This amount is allocated to remuneration (See section 9.1) over the vesting period (i.e. from 1 October 2010 to 1 October 2013).
2. The value of Options and PSRs exercised during the year is calculated as the market price of the Company's shares on the ASX as at the close of trading on the date the Options and PSRs were exercised, after deducting the price paid to exercise the Option or PSR.
3. No Options or PSRs lapsed during the year.
4. Based on an exchange rate of 1.3269.
5. Based on an exchange rate of 1.2947.
6. Mr Baldwin's securities were issued under the Contact Energy Employee Long-term Incentive Scheme when he was Managing Director of Contact Energy. Mr Baldwin also received director's fees from Contact Energy in his capacity as a director, subsequent to 1 April 2011 (following the end of his secondment to Contact Energy). Mr Baldwin will not be granted any further securities in Contact Energy under the employee Long-term Incentive Scheme but will retain existing securities subject to exercise hurdles and vesting requirements.
7. Mr Baldwin's participation in the Employee Long-term Incentive Scheme: Mr Baldwin has participated in Contact Energy's Long-term Incentive Scheme since its inception in 2006. Following the completion of his secondment to the role of Managing Director on 31 March 2011, Mr Baldwin will not be issued any further securities under the Contact Energy Scheme but will retain existing securities subject to exercise hurdles and vesting requirements (this is permitted under the Restricted Share Plan Rules and Share Option Scheme Rules). Contact Energy relied on NZSX Listing Rule 7.3.9 to allow Mr Baldwin to continue to participate in the Long-term Incentive Scheme following his appointment as Managing Director. On 23 July 2009, NZX Regulation granted a waiver in respect of NZSX Listing Rule 7.6.4(b)(iii) to allow Mr Baldwin to continue to receive financial assistance under the Long-term Incentive Scheme. The full version of the waiver can be found on Contact Energy's website.

9.4 Numbers of Options and PSRs granted, vested and lapsed and associated fair value

Options and PSRs over ordinary shares of the Company (and Options and PSRs in Contact Energy in the case of Mr Baldwin and Mr Barnes) granted or vested to the KMP are set out below.

1. All values in Australian currency.
2. Adjustment grants made during the reporting period to adjust for dilution to the number of unvested PSRs granted in FY2011 and for prior years as a result of the Rights Issue allotment and intended to maintain original allocation value.
3. Post-adjustment exercise price of Options in accordance with ASX Listing Rule 6.22 as a result of the Rights Issue.
4. The adjustment PSRs granted as a result of the Rights Issue have the same Vesting Dates and Expiry Dates as their corresponding original allocations of the same tranche. For example, adjustment PSRs for the FY2011 grant have a Vesting Date of 1 October 2013 and an expiry date of 31 December 2015.
5. The percentage forfeited in the year represents the reduction from the maximum number of Options available to vest due to the highest level performance criteria not being achieved.
6. Inclusive of 106,000 Options and 38,078 PSRs issued 22 June 2011 on the same terms and conditions as granted 28 October 2010.

No Options or PSRs have been granted since the end of the reporting period. Options and PSRs were provided at no cost to the recipients.

Options and PSRs expire on the earlier of their expiry date or within six months of notice of resignation of employment. The Options and PSRs are exercisable no earlier than three years after grant date. In addition to a continuing employment service condition, the ability to exercise Options and PSRs is conditional on the consolidated entity achieving certain performance hurdles. Details of the performance criteria are included in the LTI information in section 5.8 (and, for Contact Energy, refer to Contact Energy's website - w w w.contactenergy.co.nz). For Options and PSRs granted in the current year, the earliest exercise date is 1 October 2013.

9.5 Options and PSRs holdings and transactions

Movement during the reporting period in the number of Options and PSRs over ordinary shares in the Company (and, for Mr Baldwin and Mr Barnes, Options and PSRs over and restricted shares in ordinary shares in Contact Energy) held directly, indirectly or beneficially by the KMP including their related parties are set out in the table below:

9.6 Equity holdings and transactions

The table below represents the movement during the reporting period in the number of ordinary shares of the Company (and, in the case of Mr Baldwin and Mr Barnes, Contact Energy) held directly, or indirectly or beneficially by the KMP, including their related parties:

1. All existing participants in the plan took up their entitlements during the reporting period.
2. Includes shares acquired by participants of the Non-executive Director Share Plan as a result of their take-up of the pro-rata entitlements under the Rights Issue during the reporting period. There were no allocations under the Plan.
3. No amount was paid for the shares acquired on exercise of vested PSRs.
4. Exercise price per share of $7.21.
5. Exercise price per share of $10.32.
6. 86,000 shares had an exercise price per share of $7.21, 110,000 shares had an exercise price per share of $6.50.
7. 123,000 shares had an exercise price per share of $7.21, 64,000 shares had an exercise price per share of $9.86.