Cold shoulder for Snowy Hydro with credit rating downgrade
A weak trading environment is expected to crimp earnings and heavy spending on its Snowy 2.0 expansion underline a tight balance sheet.
The federal government-owned Snowy Hydro has had its credit rating downgraded by agency Standard & Poor’s, with a weak trading environment expected to crimp earnings and heavy spending on its Snowy 2.0 expansion underlining a tight balance sheet.
Snowy’s long-term issuer rating was lowered to BBB+ from A-, while its stand-alone credit profile fell to BB+ from BBB-.
Among concerns raised by the ratings agency was a weak operating environment over the next few years. Generation is expected to fall due to weak hydrological conditions over the near term, while the economic slowdown from COVID-19 and lower oil and gas prices have cut wholesale future prices in Australia’s national electricity market.
Snowy’s earnings before interest, tax, depreciation and amortisation would fall to the $520m-$620m range for the next two years from S&P’s prior forecasts of more than $650m. Still, the sale of capacity and firming contracts, and retail growth, will continue to support earnings.
The energy operator in April secured $3.5bn in debt from Australian and international banks to finance its 2.0 expansion scheme, with the renewables operator on track to start bringing the project online by late 2024 to early 2025.
It’s expected to spend between $1.2bn and $1.5bn each year over the next two to three years, after already investing $800m, according to S&P. It expects the tougher earnings environment and peak capital spending would increase debt to EBITDA to between 4.7x and 4.9x over the next two years.
“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 remains very limited,” S&P said.
“We believe 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.”
It said Snowy may need to be flexible on dividend payouts.
“The management’s flexibility on its historical dividend levels, presently targeting 70 per cent of net profit after tax, or continued support from its shareholders, remains vital in the event of a prolonged weak operating environment,” the agency said
The Morrison government shocked investors earlier this month after revealing Snowy was developing options to build a gas generator in the Hunter Valley at Kurri Kurri if private investors failed to step up and build new supplies before AGL Energy’s Liddell coal unit closes.
Still, S&P said it was wary of any additional investment plans that would ratchet up pressure on its balance sheet.
“We expect 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,” the ratings agency said.