The repeated breakdowns at the ageing Yallourn coal generator in Victoria and the coal supply shortages at the Mt Piper coal generator in Victoria have led to a significant downgrade of EnergyAustralia by the international ratings agency S&P Global Ratings.
The downgrade to BBB- from BBB+, and its negative watch, will lead to a bigger bill for borrowings, and comes as analysts take stock of depleted earnings, margin calls, and the possibility that EnergyAustralia – one of the country’s big three “gen-tailers” – may breach its debt covenants and go its parent for more funds.
EnergyAustralia and other big coal generators should be rolling in windfall profits given the high wholesale electricity prices in Australia, but the fact that many have suffered multiple outages and have also had to buy coal supplies on the spot market has led to big losses instead.
S&P says EnergyAustralia is facing a $200 million hit to its earnings this calendar year, a $1 billion liquidity crunch on the margin calls, and its ability to cash in on high prices in coming years is in doubt because its coal generators are not reliable.
“EA has faced several unplanned outages at its coal plants, mainly at the ageing Yallourn plant, along with coal supply shortages at Mount Piper. Management actions have not yet materially improved operational performance over the past few years,” it noted.
“Exacerbating this are volatile wholesale market conditions. Several baseload coal plant outages, extreme weather, low output from renewables, and high demand have forced up electricity prices.”
It says EA faces potential liquidity issues, despite a cash balance of around $490 million, and will have to use its parent company CLP as a “backstop” for any further liquidity needs “over the next 12 months at least.”
The issue is further complicated by the uncertainties created by the age of Yallourn plant, questions about resumption of adequate coal to Mount Piper, and the future course of coal prices.
EA also needs to spend on transitioning its portfolio to replace its retiring fleet, including in at least one big battery project in Victoria, and potentially some pumped hydro projects in NSW.
“We believe EA may be at risk of breaching one of its debt covenants, being the interest coverage ratio. The interest coverage ratio threshold is required to be greater than 1.45x and is calculated on a rolling 12-month basis as of end of June and December.
“We believe that the management will be proactive in managing any potential breaches, if required. We will monitor the progress; and this risk is incorporated into the negative outlook.
S&P notes that EA’s dependence on fossil fuels (54 per cent coal and 30 per cent gas) that are subject to more frequent outages and other operational issues leave it exposed to climate transition risk, like its other big peers who have also failed to keep up with the switch to renewables.
“Exposure to flooding and end-of-life asset retirement costs and associated waste management also increase medium-term environmental risks.”
Meanwhile, Origin Energy, which has made similar profit warnings because of coal supply problems for its Eraring coal generator, has confirmed one of the four units at what is the country’s biggest coal generator remains out of action.
“A fault caused unit 1 at Eraring to come offline on Tuesday evening, and our onsite team is currently working to diagnose the cause and the actions we need to take to rectify it over coming days. Eraring’s other units are not affected,” a spokesperson said.
