Hydro's shrinking balance sheet

 HYDRO Tasmania’s recently released 2019-2020 annual report revealed a significant write-down of generation assets due to reductions in future expected revenue.

The business case for Marinus, the second Bass Strait interconnector, which is based on estimates of future electricity prices, will need to be revised.

Hydro Tasmania’s overall book value declined by $219m in the 2019-2020 financial year. The $174m of underlying profit disguises the fact that Hydro’s balance sheet, the statement of financial position, suffered a further loss following a $249m decline in 2018-2019.

Hydro has lost $467m, or 23 per cent, of value in two years. Companies lose value in a variety of ways. First, they may make trading losses. This didn’t occur with Hydro.

Second, excessive dividends may be paid. This happened in 2019-2020 when borrowing was required to pay a special dividend to the government to help stabilise the ship of state. The receipt of a dividend from a government business using borrowed funds is better for the government’s bottom line than were it to borrow itself. An excessive dividend is painful for Hydro, but a blessing for the government.

The third way is for the company’s assets to lose value. This happened in 2019-2020. Hydro’s generation assets were marked down by $870m to a figure below cost, to the same level as 15 years ago when Basslink commenced. The value of generation assets is based on expected future earnings, yet the annual report only makes passing reference to an “anticipated lower revenue environment”. More attention was given to the company’s safety record and its $238,000 community support grant.

The fourth way is for a company’s liabilities to increase. Hydro, often at the government’s insistence, agrees to deals, an offtake agreement say, which ends up as an onerous contract because subsequent falls in prices means Hydro pays way above market price at the time. There are offtake agreements covering Woolnorth, Musselroe and Granville Harbour wind farms. A deal with Tasmanian Gas Pipeline which ends up as a subsidy to major gas users is also a significant onerous contract. TGP is now a sister company of Granville Harbour Wind, both owned by Palisade Partners which includes well-connected former deputy prime minister Mark Vaile. The latest value of Hydro’s onerous contracts is $260m.

We mustn’t forget returns by Hydro to government have been significant. The 2019-2020 returns of $202m is third in the all-time rankings after the carbon tax years of 2014 and 2015. But neither should we forget the Hydro has received $678m of equity since Basslink started, thereby boosting its book value. Without it, Hydro’s net position would be the same as 2006.

The high level of dividends demanded by governments have placed unreasonable stresses on Hydro cash flow as it juggles to find enough to spend on updating its hydro assets. Yet it always seems to find enough for IT capital spending, mostly software, with another $17.6m outlaid in 2019-2020. This was less than average which has seen $271m spent over the past 10 years.

Our other public electricity companies, Aurora, TasNetworks and its predecessor Transend, spend just as much. The grand total for IT spending by electricity companies is more than $500m over the past 10 years.

Hydro’s increasing challenges over time have coincided with an increasing reluctance to fully disclose what it’s doing. The annual report gets skinnier every year. Apart from the financials it’s just another media release. Take the ongoing dispute with Basslink following the 2016 cable outage. The only reason we know the fees in dispute are $31.85m is because Basslink’s parent company is bound by the continuous disclosure obligations of the Singapore Stock Exchange to publicly divulge details. Hydro has instead adopted a code of silence. At the 2019 Estimates hearing it refused to confirm or deny the amount in dispute, nor the $100m in damages the government is claiming pursuant to a separate agreement with Basslink.

Hydro’s latest annual report confirms $5.5m was paid to Clayton Utz, lawyers who handle complex contractual matters. This takes the total paid to them over five years to $18m, to settle a $33m dispute whether it was a force majeure event where the full fee was payable upon recommencement or whether an availability adjustment factor should apply to compensate for losses due to the outage.

Hydro is a jewel, but it’s been used by governments as a cash cow. At the very time we need more explanations, less are provided. Its latest annual report is a sober reminder that Project Marinus is highly dependent on future prices. As Robert Burns observed: “The best laid schemes of mice and men, gang aft a-gley, and leave us nought but grief and pain, for promised joy.”

 (Published in The Mercury 28th Oct 2020)