Ratings agency worried about cost blowouts at Snowy pumped hydro and gas projects

One of the world’s leading ratings agencies, S&P Global, has raised concerns about cost blowouts and delays at the controversial Snowy 2.0 pumped hydro and Kurri Kurri gas projects, and slapped a “negative outlook” on its parent company Snowy Hydro.

The new assessment comes just days after the main contractor to the delayed and over budget Snowy 2.0 project, We Build, bought out key projects from its failed partner, the Australian engineering company Clough, for a bargain price.

Clough and its parent company, the South Africa based Murray & Roberts, ran into severe cash flow problems due to delays and cost overruns caused by the Covid19 pandemic, rising costs and supply constraints.

“We note that Clough Ltd. has entered voluntary administration, but this is unlikely to materially affect the contractor or the Snowy 2.0 project, given that all JV partners are jointly and severally liable for all obligations of the contract,” it says.

However, S&P Global fears Snowy Hydro, despite being wholly owned by the federal government, could also face a potential cashflow squeeze, and an earnings crunch due to its greater reliance on gas generation to meet its portfolio obligations.

“We also anticipate cost escalations and delays at Snowy Hydro’s Hunter Valley gas project and Snowy 2.0 project owing to inflation and global supply chain issues,” it says.

The true extent of the Snowy 2.0 cost over-runs and delays is hard to gauge, given the different messaging coming from its owner, the company itself, and the market operator. There are reports it could be 18 months delays and $2 billion over its already inflated budget, but no final figure is confirmed.

“Although the project is under a fixed-priced EPC contract …. we understand the contractor has applied to Snowy Hydro for cost escalations,” it says.

“At this stage, the management has indicated that it is too early to determine what entitlements the contractor will be awarded or the extent of delay that Snowy 2.0 project may face.”

It says the 660MW Kurri Kurri project will also face costs overruns, and commissioning may be delayed due to wet weather.

S&P Global says Snowy Hydro’s earnings could fall by half this financial year, because of its greater reliance on gas generation, and its inability to use hydro reserves already depleted in the last year.

It expects Snowy Hydro’s EBITDA (earnings before interest, tax and depreciation) could fall to A$240 million-A$300 million in fiscal 2023, down from from A$440 million-A$570 million over the past two fiscal years.

“The negative outlook indicates that we could lower the ratings over the next 12-24 months if earnings remain depressed,” it said.

The ratings could also be cut if costs escalate to keep the ratio of debt to EBITDA well above inflated 5.0 times level with no visibility of dropping to less than 5.0x, and if the operating cash flow-to-debt ratio approaches 10%, with no offsetting factors.

“Wholesale electricity prices have fallen over the past couple months from the highs seen in April-July 2022,” it says. “They could reduce further due to the recent government caps on coal and gas prices.

“Yet, poor reliability of coal generation, low renewables output, and scheduled closure of the Liddell coal-fired plant in April 2023 may see periods of elevated prices.

“Snowy Hydro may then have to resort to increased gas generation, amid elevated gas supply prices, to meet requirements under its capacity and firming contracts, as well as to meet its retail load.

“To that extent, water used toward additional 1,500 gigawatt hour of hydro generation during the market suspension phase in fiscal 2022 would have otherwise been available in fiscal 2023 to meet the company’s portfolio obligations.”