(The following statement was released by the rating agency)
Feb 01 - Fitch Ratings has affirmed Origin Energy Ltd’s (Origin) Long- and Short-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB+’ and ‘F2’ respectively. The Outlook is Stable.
At the same time, the agency has affirmed Origin’s foreign-currency senior unsecured rating at ‘BBB+'. Origin Energy Contact No.2 Ltd’s preference shares have also been affirmed at ‘BBB-'.
Origin’s financial risk profile will remain under some pressure over the medium term from large debt-funded capex and long lead times to revenue generation, in particular that associated with its share of Australia Pacific LNG (APLNG).
Fitch’s analysis of the capex associated with the full two-train development by APLNG is estimated at a total cost of USD20bn. The agency’s expectations are based on the assumption that Origin’s share of the total investment will be funded by internal resources and committed undrawn debt facilities. APLNG’s gas liquefaction project with a capacity of 9 million tonnes per annum (mtpa) benefits from a 20-year binding offtake agreement for 7.6mtpa to China Petroleum & Chemical Corporation (‘A+'/Stable) and for 1mtpa to The Kansai Electric Company.
The agency also notes the confirmation of APLNG’s USD8.5bn project finance facility in November 2012. In Fitch’s view, this reduces the need for funding requirements by project sponsors, including Origin. Fitch’s treatment of Origin’s adjusted debt consolidates Origin’s pro-rata share of APLNG’s project debt facility.
Origin has sought to monetize its attractive upstream acreage to support its sizeable funding commitments and financial profile. In particular the agency notes the long-term gas supply agreement with MMG for supply of up to 22 peta joules (PJ) of future gas over a seven-year period, announced on 20 December 2012 and for the supply of up to 365PJ of future gas to GLNG partners over a 10-year period, announced on 2 May 2012.
In addition, Origin has raised around USD300m from an arrangement to sell a portion of its future oil and condensate production. Fitch treats such amount as debt in the agency’s adjusted debt calculation for Origin. However, this improves Origin’s financial flexibility as the repayments are only due from 2015. Origin has also announced a commitment to further sell down its equity stake in APLNG to 30% (from 37.5%), to support its financial profile.
Origin’s ratings are underpinned by its dominant market position across its integrated generation and retail businesses and its upstream assets. It also reflects a strong liquidity position through undrawn but committed credit facilities and cash balances of AUD4.2bn as at 30 June 2012 and continued access to domestic and offshore capital markets.
The Stable Outlook reflects Fitch’s expectation that Origin can maintain a credit profile appropriate for its current ratings over the medium term. However, any material deviation in the final project equity structure and related funding options or material increases in project costs of APLNG will likely result in a negative rating action given Origin’s limited headroom under its current ratings on a projected basis till FY16.
Origin placed two hybrid issues of EUR500m and AUD900m respectively in 2011. Under Fitch’s hybrid criteria, the EUR hybrid has been assigned a 50% equity credit till 16 June 2016 and the AUD hybrid a 50% equity credit till 22 December 2031.
What could trigger a rating action?
Positive: An upgrade is considered highly unlikely over the medium term. Fitch expects a sizeable portion of additional revenue and cashflows from both organic growth and acquired assets to be used to fund its future capex requirements, in particular, the funding requirements associated with the APLNG project.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- forecast funds flow from operations (FFO) gross interest cover deteriorates to below 4.5x (5.1x in FY12) and forecast FFO adjusted net leverage above 3.0x (FY12: 2.2x), both on a sustained basis;
- In addition, in Fitch’s view a temporary breach in Origin’s forecast FFO interest cover negative guideline during APLNG’s construction phase in itself would not lead to a negative rating action, provided adequate liquidity is maintained.