Origin Energy has slashed the value of its assets, including Australia’s biggest coal-fired power plant, by more than $1.5bn as cheap power from renewables floods the national grid.
Company shares tumbled as much as 10% on Friday morning after Origin announced the writedown and lower expected earnings next year to the Australian Securities Exchange, before recovering slightly to be down about 7.85% about 12.45pm.
Origin owns Eraring power station in New South Wales. It is the company’s and the nation’s biggest coal-fired power plant, supplying NSW with about 25% of its electricity.
In a statement to the ASX, the company said it had cut the value of its power stations by $583m due to lower power prices “driven by new supply expected to come online, including both renewable and dispatchable capacity, impacting the valuation of the generation fleet, particularly Eraring power station”.
Eraring’s financial performance has also been hurt by a spike in coal prices, which came despite long-term decline in the industry.
Origin also cut the value of power purchase agreements by $995m due to lower electricity prices – which have hurt its profit margins on renewable energy – and lower domestic gas prices.
In December the Japanese company Sumitomo wrote the value of Australia’s newest coal-fired power plant, Bluewaters, down to zero and in June the Queensland government warned that its state-owned plants would be unable to pay dividends within two years due to competition from cheap renewable power.
On the supply side, the mining giant BHP is trying to sell its energy coalmine at Mount Arthur in the Hunter Valley of NSW after slashing its book value down to almost nothing.
Origin is also set to pay $669m in previously deferred tax on its investment in Australia Pacific LNG, which operates coal seam gas tenements in Queensland’s Bowen Basin, with a 550km pipeline to port at Gladstone.
The company owns 37.5% of APLNG, with the US fossil fuel group ConocoPhillips also owning 37.5% and the remaining 25% held by China’s Sinopec.
The multibillion-dollar project has become profitable earlier than expected, meaning that Origin will have to begin paying tax on dividends reaped from its share.
Origin’s swingeing writedowns point to a tough year ahead for the company, which will reveal its 2021 financial results on 19 August.
The company’s chief executive, Frank Calabria, said next financial year’s earnings from its electricity and gas businesses would be almost a quarter lower than it previously expected.
Origin now expects earnings from electricity and gas of between $450m and $600m, compared with previous market estimates of about $710m.
“This is at least the third downgrade this year,” a Macquarie analyst, Ian Myles, said in a note to clients.
He said the company’s writedowns would provide a pathway to profit for the energy business “or at least an offset to lower APLNG returns if oil prices soften”.
Calabria said the 2022 financial year “presents challenges for the energy markets business, and we are responding by targeting significant capital and operating cost savings, including from the introduction of the Kraken [customer service] platform and new low cost and more efficient retail operating model, with customer migrations to the new platform continuing to progress very well”.
“The outlook for the business improves from next year, with Origin expecting to see a material rebound in energy markets earnings, based on the commodity price outlook and supported by disciplined cost management,” he said.