(The following statement was released by the rating agency) Fitch Ratings-Sydney-September 25: Fitch Ratings has affirmed Origin Energy Ltd's Long-Term Foreign-Currency Issuer Default Rating (IDR) and its foreign-currency senior unsecured rating at 'BBB'. The Outlook on the IDR is Stable. The agency has also affirmed the ratings on the senior unsecured bonds issued by Origin Energy Finance Ltd at 'BBB'. The affirmation reflects Origin's improved financial performance, driven by its strong market position in the Australian utilities industry. In addition, the significant dividends from its stake in the Australia Pacific LNG (APLNG) joint venture have improved Origin's financial risk profile to a level commensurate with its 'BBB' rating. Origin's rating is supported by its hybrid profile as Australia's leading electricity and gas retailer, its large and diversified generation assets and long-term fuel-supply agreements. Origin benefits from equity in upstream assets and LNG facilities through its APLNG joint venture. Its business-risk profile remains appropriate for its 'BBB' rating and incorporates exposure to variable oil-linked revenue, with its well-positioned integrated utility business providing some buffer against its increasingly oil-price exposed business. KEY RATING DRIVERS Financial Profile Improved: Origin's financial leverage (as measured by FFO adjusted net leverage, which includes receipts from APLNG) reduced to 2.6x by the end of the financial year on 30 June 2019 (FYE19) (FYE18: 3.6x). Leverage was commensurate with its 'BBB' ratings and was reached ahead of our previous expectations, following strong cash receipts from APLNG. Lower interest expenses and continued receipts from APLNG should further improve its profile, which is also supported by limited capex and a modest dividend policy. High Exposure to Oil Prices: Origin's high exposure to oil and oil price-linked revenue, relative to other utility peers, relates largely to the dividend receipts from APLNG, which operates a gas liquefaction project. With both of the LNG trains running at full production, ongoing receipts will largely reflect LNG prices and management of the cost of production. APLNG benefits from long-term oil-linked contracts with key customers, and Fitch expects continued growth of LNG demand across Asia. However Origin's exposure to oil prices is reflected in the tighter metrics for its 'BBB' rating level compared to international peers. Further Regulatory Risk Limited: Fitch views the regulatory risk for Origin, and the rest of the energy sector, as reduced, following the introduction of the Default Market Offer (DMO) and Victorian Market Offer (VMO), which Origin has guided will reduce EBITDA by around AUD100 million. Fitch expects the reduced distribution of retail prices in the energy market to result in lower retail customer churn, which will benefit Origin, although entry into the Australian energy sector by new overseas players, including Royal Dutch Shell (LON:RDSa) plc (AA-/Stable) poses some medium-term risks. The introduction of the Australian government's 'Big Stick' energy regulations will see the government granted powers to issue fines and force divestment should energy market participants act in an anti-competitive manner. Fitch views the likelihood of the use of these powers as limited and the increased regulatory risk as manageable for Origin. Ongoing Shift to Renewables: Origin is well placed to benefit from the shift towards increased penetration of renewable energy in the National Energy Market. Fitch expects Origin to meet its target of 25% of energy coming from renewables and storage by 2020 following the 530MW Stockyard Hill wind farm coming online in 2020, for which Origin has secured a power-purchase agreement (PPA) through to 2030. Increasing renewable exposure, through contracted PPAs should reduce Origin's average energy procurement costs, which will support margins, while Origin's fast-start gas fleet is well placed to provide flexibility to meet demand during periods of lower renewable generation. Gas Margins Stable: Fitch expects Origin's gas margins to remain stable, supported by Australia's domestic gas prices, which remain above historical levels. Demand from the LNG industry, along with depletion of lower-cost resources, should continue to support domestic prices, while Origin's gas supply benefits from a mixture of long-term fixed price and oil-linked contracts, limiting cost pressures. DERIVATION SUMMARY Origin's rating is well-positioned relative to 'BBB' category European utilities. European peers have a presence across the entire utility value chain, including sizeable but varying presence across regulated networks and quasi-regulated renewable energy; however Origin's strong financial risk profile supports a similar category rating. Origin's is rated at the same level as Fortum Oyj (BBB/Stable), which also has a limited share of regulated earnings. Fortum's rating benefits from its high-quality generation fleet and historically high load factors, while Origin has stronger leverage profile. As a result, they are rated at the same level. Statkraft AS (BBB+/Stable) benefits from its long-term contracts and low-cost hydro asset base as well as a one-notch uplift for sovereign support, placing its rating one notch above Origin. No country ceiling, parent/subsidiary or operating environment aspects has an impact on the rating KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - EBITDA of AUD1.1 billion in FY20, increasing to around AUD1.2 billion per annum thereafter as Origin realises cost savings.
- Contributions from APLNG's liquefaction exports of between AUD650 million and AUD900 million per annum, based on Fitch's brent price deck - Capex, excluding APLNG, of AUD580 million in FY20, reducing to AUD400 million per annum thereafter. - Dividend payments of between 30%-50% of free cash flow a year - Excess cash used towards debt reduction, no major growth projects or additional shareholder returns. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action Rating upside is limited due to the company's business profile. However developments that could lead to positive rating action include sustained cash receipts from APLNG and a conservative financial profile such that the company maintains: - FFO-adjusted net leverage below 2.0x (FYE19: 2.6x) and forecast FFO fixed-charge cover above 6.0x (FYE19: 5.0x), both for a sustained period. Developments that May, Individually or Collectively, Lead to Negative Rating Action - Forecast FFO-adjusted net leverage above 3.0x and forecast FFO fixed-charge cover below 4.5x, both for a sustained period. LIQUIDITY Strong Liquidity Position: Origin had undrawn committed credit facilities of AUD3.8 billion at FYE19 (FYE18: AUD3.5 billion) and cash of AUD1.5 billion (FYE18: AUD0.2 billion), sufficient to cover all debt maturities due in FY20. Contact: Primary Analyst James Hollamby Associate Director +61 2 8256 0347 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Leo Park Associate Director +61 2 8256 0323 Committee Chairperson Ying Wang Managing Director +86 21 6898 7980 ESG CONSIDERATIONS Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg. Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10024585 Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019) https://www.fitchratings.com/site/re/10058988 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10090584 Solicitation Status https://www.fitchratings.com/site/pr/10090584#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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