Snowy credit downgraded, would need new federal funds for any gas play

Leading credit ratings agency S&P has downgraded the government owned energy utility Snowy Hydro, saying that its debt would be rated as “junk” without the backing of the federal government, and that any plans for a new gas generator would be dependent on more government funding.

The decision by S&P to downgrade the credit rating of Snowy Hydro is not unexpected, given its huge investment in the proposed Snowy 2.0 pumped hydro scheme, concerns about potential cost blowouts of the project, and concern about the company’s earnings given falling wholesale prices and current hydro levels.

But it also highlights the extraordinary situation where the federal government is repeatedly using Snowy Hydro to intervene in the market to try and obtain certain outcomes, and the perilous nature of the company’s finances without its backing.

S&P said on Monday that it had lowered its long-term issuer credit rating on Snowy Hydro to BBB+ from A-. It had also revised downward the “stand-alone” credit profile (the one it would have were it not for government backing) to bb+ from bbb-. Any level below bbb is considered to have “junk status”.

“We have lowered the rating on Snowy Hydro based on our expectation of a weakening in the operating environment over the next one to two years,” it says. It points to “weak hydrological conditions”, meaning not much water in its dams, which will restrict its ability to generate power, and in any case wholesale prices are down. So much so, that S&P has downgraded its profit forecasts by between 5 and 20 per cent.

And then there’s the money to be spent on Snowy 2.0, now estimated to cost $5.7 billion to $6.2 billion, not including transmission costs, and will mean spending of between $1.2 billion to $1.5 billion a year once the final notice to proceed with the main works is issued.

“The government’s upfront equity injection of A$780 million will support Snowy Hydro’s metrics over the next 12 months at least,” S&P says. This injection forms part of the government’s total A$1.38 billion commitment in the year ending June 30, 2021. As construction for Snowy 2.0 ramps up, the pressure on leverage and operating metrics is likely to increase.

“The headroom at the current rating levels remain very limited. We believe that proactive steps by the management and timely and adequate support from the Commonwealth will be critical in maintaining the financial metrics within our expectations for the rating.”

Numerous concerns have been raised about the Snowy 2.0 project, both on its long term economic viability and its environmental impact. Most analysis say that its vast storage will be rarely used, but supporters say when it is used it will be crucial for the reliability of the grid.

S&P says Snowy Hydro’s credit quality “incorporates our expectation of a high likelihood of extraordinary government support” that reflects the importance of Snowy 2.0 project (to the government) and its role to support the energy market as it transitions away from coal.

But it assumes that Snowy will not undertake any other major projects (such as additional gas fired generation) in a manner that would place pressure on the balance sheet of the company, or without appropriate support from the shareholders.

This comes, of course, just a week after the federal government barged into the energy market and threatened to use Snowy to build a 1GW gas fired generator, and then a 250MW gas generator, if the private sector did not come to the party and replace the ageing coal generator with kit the government likes.

Most analysts thought the idea barking mad – both for the potential to dissuade other investments that would likely go ahead in the absence of heavy handed government intervention, and over the economics and price impact of such a plant. Turns out it would likely have to be heavily taxpayer funded too.