Origin flags up to $868.3 mln impairment charge

Australia’s power and gas retailer Origin Energy is expecting to take a A$1.16 billion to A$1.24 billion ($812.2 to $868.3 million) hit in its full-year 2020 results.

The non-cash charges relate to updated year-end valuation estimates primarily driven by revised commodity price assumptions, the associated economic impacts of the COVID-19 pandemic, and the progressive transition to a lower carbon energy supply.

In addition, Origin expects to revise its restoration and rehabilitation provisions for generation assets.

Origin CEO Frank Calabria said, “Origin has responded quickly to COVID-19 and the decline in commodity prices, reducing operating costs and capital expenditure, and these actions have improved resilience and helped to mitigate some of the impacts on our business.”

Origin expects no change to FY2020 guidance, including Energy Markets Underlying EBITDA of $1.4 – $1.5 billion.

Origin’s assessment of the carrying value of its equity-accounted investment in Australia Pacific LNG considers a range of macroeconomic and project assumptions, including oil price, AUD/USD exchange rates, discount rates and costs.

The principal change since the last assessment at December 31, 2019, is a reduction in oil price assumptions over the near term and a revised long-term Brent crude oil price assumption of US$60/barrel (real 2020) from FY2026, partially offset by cost reductions from the improved field and operating performance.

As a result, Origin expects to recognise an impairment relating to its share of Australia Pacific LNG of $720 – 770 million ($504.3 – $539.4 million).

The impairment valuation also includes a long-term AUD/USD rate of 0.70 from FY2026 and a discount rate of 7.4 per cent post-tax (10.3 per cent pre-tax). A US$1.00/bbl increase in oil prices in isolation would result in a A$233 million increase in the valuation.

However, the impairment charge is expected to be excluded from FY2020 underlying profit. It is not expected to have any impact on tax expense as the impact will be offset by recognising part of a previously unrecognised deferred tax liability. As a result, there will be no difference between the pre and post-tax impairment charge.

Additionally, Origin expects to recognise a non-cash charge of $440 – $460 million post-tax (US$ 300 – US$315 million) relating to an onerous contract provision associated with Cameron LNG. Since the last assessment on December 31, 2019, the primary changes in assumptions relate to a reduction in JKM LNG prices reflecting weaker medium-term demand and moderately lower long-term prices driven by expected lower US gas liquefaction fees, as well as lower US Treasury bond rates.

As previously disclosed, Origin agreed in 2013 to purchase from Cameron LNG 0.25 million tonnes per annum of LNG (3-4 cargoes per annum) Free-On-Board for 20 years with the first cargo delivered in June 2020. Origin buys the LNG at a Henry Hub-linked price plus a fixed tolling fee and assumes it will sell it at a JKM-linked price.

The provision valuation includes a long-term JKM LNG price of US$7.15/mmbtu (real 2020) from FY2026, a long-term Henry Hub gas price of US$2.60/mmbtu (real 2020) from FY2026, and a range of US Treasury bond rates that average approximately 0.81 per cent over the term of the contract.

The non-cash charge will be excluded from underlying profit in FY2020, with future realised losses or gains accounted for in underlying profit. As a result, over the next 20 years Origin estimates an average annual charge to underlying profit associated with the Cameron contract of approximately A$25 million post-tax, taking into account current forward market prices and the long-term assumptions.

The provision will continue to be assessed at each reporting date, which is expected to result in volatility in the statutory income statement. A US$1.00/mmbtu increase in the spread between Henry Hub and JKM prices results in a A$213 million (US$146 million) post-tax reduction in the charge.