Opinion: It's a huge hit, but it won't sink us

10 May 2016

There has been much said about the impact on Hydro Tasmania's financial position of the unprecedented challenges of record low rainfall combined with an extended Basslink fault.

While there is no argument the response to maintain Tasmania's energy supply will come at a considerable cost, I am keen to ensure that commentary, both political and economic, is accurate and based on the facts.

Firstly and most importantly, Hydro Tasmania’s financial position is sound. Hydro Tasmania’s net debt balance of $826 million, as at 31 March 2016, was less than the balance at the end of each of the previous five financial years. We are projected to have enough liquidity and debt facilities in place to fund the implementation of the Energy Supply Plan without needing to extend our existing borrowing arrangements with the state’s borrowing arm Tascorp.

There will be a negative impact on Hydro Tasmania’s returns to Government. This is not news and has been stated many times. The costs of implementing the Energy Supply Plan will be borne by Hydro Tasmania. The Treasurer also has confirmed the Government does not expect the business to provide dividends for the next three years as we recover from the impact of the Basslink outage and record low rainfall and focus on rebuilding hydro storages.

The original estimated cost of the hire and installation of 200 megawatts (MW) of temporary diesel generators was around $44 million. As a result of the longer than expected Basslink outage, Hydro Tasmania is now looking to install 222MW. The revised estimate for hire and installation is now $50.5 million. The ongoing monthly running cost remains around $11 million per 100 MW.

There was a recent claim made in a national newspaper that the energy security challenge will cost the state $400 million. The claim appeared to be based on assumptions around the wider impact on consumers of increased spot prices. This logic is flawed. As identified by local commentator Marc White in the same article, most of Tasmania’s load is contracted, making the spot market price irrelevant. The financial impact will primarily be on Hydro Tasmania as its cost of supplying energy increases over the shorter term, but almost all customers hold contracts that fix the price that they pay.
  
From a cost of supply perspective, only approximately 20 per cent of Tasmania’s energy supply over the current financial year will need to be replaced with additional gas and diesel generation and agreed load reductions with large industrial customers. Any figures based on an assumption that the higher marginal cost would be realised on all load, or even the majority of load, through either spot market prices or an increased cost of supply, are therefore incorrect and significantly overstated.

The final cost to the business and the State of maintaining energy supply is dependent on a range of unknowns such as rainfall, inflows to storages, how much diesel we actually use and the return to service date of Basslink. These will be partially offset by such things as not paying the Basslink facility fee during the outage. Ultimately, the net costs incurred in the current financial year will be incorporated into our audited and published accounts, and be available for all to see.

The Government has made it clear the cost will not be passed on to consumers through increased power prices. It believes the economic cost to the State of power shortages would amount to a far greater impact on the State’s finances than the costs incurred to ensure energy supply through this current challenging situation.

It has also been claimed that were Hydro Tasmania a private company, administrators would be called in. This is not the case as we are clearly not insolvent. Hydro Tasmania is also not in a position akin to voluntary administration, and Energy Minister Matthew Groom is not engaging with creditors, lenders and shareholders in that context, as has been implied. The Minister is ensuring key stakeholders are well aware of the Government’s response to the energy supply challenge.

It is also worth noting that over the past five years, Hydro Tasmania has achieved an average underlying result before tax of $149 million. For the same period, average cash flows from operations have been $160 million, well in excess of the average core capital expenditure of $108 million during the same period. While I have already noted the current challenges will impact on our returns to government for the next three years, we project significant profits from 2018/19 onwards.

Hydro Tasmania’s gearing ratio, which provides an indication of the amount of debt held by the company, was lower in June 2015 than in 2011, and lower than its peers in the National Electricity Market such as AGL, Snowy Hydro and Origin Energy. As at 30 June 2015, our total equity was $2.06 billion, which represents a strong net asset position.

The current value of Hydro Tasmania’s generation assets is determined in accordance with accounting standards, and will be disclosed in the 15/16 Annual Report to be tabled in Parliament later this year. As in previous years, the valuation will take into account a range of factors, of which the need to rebuild storages is but one. Given the long life of the assets, the valuation will also be impacted by current and forecast energy and large-scale generation certificate prices, and estimates regarding the level of investment required to appropriately maintain the assets. While the reduction of generation to rebuild storages will, in isolation, have a downwards influence on the valuation of the assets, the final valuation figure included in the annual accounts will be the product of a number of factors.

Another issue that has been used to question our financial strength was last year’s debt transfer from Hydro Tasmania of $205 million to TasNetworks. What is not said is that amount counter-balanced what had been transferred to Hydro Tasmania during 2012-13 when we were given responsibility for the Tamar Valley Power Station. Hydro Tasmania had to cover the cost of carrying that debt, along with the other ongoing costs that were transferred to it as part of the energy reform process.

In summary, our financial position is sound and we remain confident we can meet the expectations of our shareholder and the Tasmanian community by continuing to be a valuable strategic asset for the state for a long time to come.

Steve Davy, CEO of Hydro Tasmania

This opinion piece ran in the Mercury newspaper on 11 May 2016.

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