Investor attention is set to refocus on the strength of Origin Energy’s balance sheet after the company ditched a plan to find a partner for a wind farm project in Victoria as it tries to sell down its stake in its $23?billion Queensland liquefied natural gas venture.
Origin had said that selling or joint venturing the Stockyard Hill wind farm would have allowed it to focus more keenly on delivering the $23 billion Australia Pacific LNG project, The Australian Financial Review reports.
While some observers suggested the wind farm process had been scrapped because bids were too low, Origin pointed to “significant” interest from the market.
Some sources suggest an outright sale would have raised tens of millions of dollars, although the project is expected to cost about $1 billion to build.
Origin managing director Grant King is due to update the market this quarter on progress to sell another 7 per cent to 9 per cent of APLNG, taking its holding below 30 per cent.
Origin is working with partner ConocoPhillips, which also wants to reduce its stake through a process being run by JPMorgan.
The outcome of the APLNG sell-down will be critical to Origin’s ability to hold its BBB+ credit rating, or even the notch below, analysts said.
The process is made more difficult by the lack of any LNG for sale from its initial phase, because it is all committed to Sinopec and Kansai Electric.
Origin yesterday reiterated its view that it had sufficient funds to meet its share of APLNG funding to the start of production in 2015, and also support the needs of the business.
But few analysts believe the company will avoid a downgrade in its credit rating.
“APLNG is the big elephant in the room,” Goldman Sachs’s Mark Wiseman said. He calculates that in the absence of a sell-down in APLNG, the ratio between Origin’s funds from operations (FFO) and its debt, a key ratio examined by credit ratings agencies, would fall below 20 per cent in the 2015 financial year.
That ratio is well below the 30 per cent threshold for a BBB rating and could force Origin into a dilutive capital raising.
Mr Wiseman described the abandonment of the Stockyard Hill process as “disappointing at the margin”. But he noted that financially the impact was less material than Origin’s $US300 million deal last month to sell part of its future oil production, which Goldman calculates improves Origin’s FFO:debt ratio by about 1 per cent.
CLSA analyst Baden Moore said the sale of the wind farm wasn’t critical to Origin’s funding position.
“At this early stage in APLNG development, while funding is finely poised, there is little evidence Origin is in a position that it needs to sell assets to meet its funding obligations prior to first gas on APLNG,” Mr Moore said.
The partnering process for Stockyard Hill, which is expected to cost $900 million to $1 billion to build, was well advanced, with three consortia short-listed, including China Three Gorges and its affiliate Hong Kong-listed turbine manufacturer Goldwind.
GE and Downer EDI, India-owned REpower and local player Leighton were also understood to be on the shortlist of potential partners, who had yet to submit final bids to provide either equity or help build the plant near Ballarat.
Expectations that the 2020 renewable energy target will be kept unchanged are expected to trigger a flood of new proposals for wind farms, which are the lowest-cost way to meet the target.
Origin, Australia’s biggest energy retailer, will need to ramp up its purchase commitments for renewable power to meet its legislative liabilities, but may believe it can do that more economically short term by buying power from other ventures and keeping Stockyard Hill in reserve, a source said.
An Origin spokeswoman said that a review into the best way to develop the project “confirmed that Stockyard Hill is one of Australia’s premier wind farm sites, and Origin has elected to retain the right to commercialise it at the best time for its portfolio”.
She said Origin would do development work this year, including securing easements for a transmission line.
“This work will inform Stockyard Hill’s final technical design as well as the timing of any final investment decision on the project,” she said.
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