Hydro CEO's reassurances

It was good to see Hydro’s CEO Steve Davy belatedly addressing a few of the concerns that have been raised about his company’s financial position in today’s opinion piece in The Mercury titled It's a huge hit but it won't sink us. He emphasised a keenness to ensure commentary is accurate and based on facts.

Factual accuracy doesn’t necessarily preclude attempting to lead a reader to erroneous conclusions.

Take this statement:

“Hydro Tasmania’s financial position is sound. Its net debt balance of $826 million, as at March 31, 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 extending existing borrowing arrangements with the state’s borrowing arm Tascorp.”

Factually correct no doubt.  Hydro will cope without extending existing borrowing arrangements. Most readers will think this means debt won’t increase. But what’s actually said is that existing arrangements are adequate. If that’s the case why not say what those arrangements are?  

Hydro’s current arrangement with Tascorp is a borrowing limit of $1.055 billion meaning a further $229 million can be borrowed. Why not say the costs of the outage are not expected to exceed the $229 million extra borrowing facility already in place?  Maybe even say what increase in borrowings is likely

Then we have this statement:

“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. “

To dredge up five year averages covering the carbon tax years is bordering on wilful deception. The only historical figure of any current relevance is the post carbon tax operating cash flow figure of $26 million in 2015. Whilst the latter includes returns to government, it is considerably boosted by income from renewable energy certificates which won’t occur at that level for a while. Why not explain this to the punters instead of attempting a Pollyanna imitation?

The five year averages were used to suggest Hydro was not insolvent. It probably isn’t but past averages are irrelevant to proving the case. Future ability to pay debt is the key as Mr Davy knows, but he’s not about to take punters into his confidence. Yet anyway.

Then we get this:

“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 June 30, 2015, our total equity was $2.06 billion, which represents a strong net asset position.”

The book value of assets at June 2015 is of little relevance, nor is the gearing ratio based on that book value. AGL and Origin aren’t hydro generators after a period of drought so why introduce them into the picture? The crucial question is the interest cover provided by operating cash and whether there’s any left over for annual capex. Why not explain this to the curious instead of a one line assertion about profits resuming in the 2018/19 year? Maybe  include the costs of fixing the interest rate portion of the Basslink facility fee, the Macquarie swap deal, to get a more accurate assessment of interest cover?

The factors that will impact on the revised book value of generation assets are given a good coverage:

“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 assets, the final valuation figure included in the annual accounts will be the product of a number of factors.”

Except there’s no mention of the fact that asset values will have to be written down further if the cause of  the outage remains unknown and the link is not fully restored and capable of fully delivering what was originally intended .

The following would have left a few readers puzzled:

“Another issue that has been used to question our financial strength was last year’s debt transfer to Hydro Tasmania of $205 million from TasNetworks. What is not said is that amount counterbalanced what had been transferred to Hydro Tasmania in 2012-2013 when we were given responsibility for the Tamar Valley Power Station.”

Talk about a debt transfer from TasNetworks and a counter balance to the transfer of the Tamar Valley Power Station (from Aurora Energy incidentally) might make sense to Mr Davy but is pretty confusing for most readers. Sure the amount of $205 million originally came from TasNetworks but from Hydro’s viewpoint it was a cash injection used to pay a $118.5 million dividend to the government with the rest used to fund capex which couldn’t be met from operating cash flow. The transaction didn’t highlight Hydro’s financial weakness, rather the shareholder’s greed. But I guess the CEO can’t say that.

The CEO’s contribution, the first real attempt in five months to accurately and factually describe the financial ramifications of the Basslink outage was more honoured in the breach than the observance.

It was anything but reassuring.