Snowy Hydro CEO Terry Charlton has finally launched a decent argument
to support the $3 billion float – but it’s about three months too late.

The Age’s
Rod Myer had the story this morning from Charlton who now
claims Snowy won’t be able to implement much of a $1.5 billion investment program
over the next five years. Capital investment in the iconic project will now be withheld, debt
increased, dividends to the three governments possibly suspended and
planned acquisitions shelved.

However, there is a simple solution to all this which John Howard ought
to feel obligated to embrace. Snowy needs a capital injection to reach
its potential and the Federal Government has the strongest budget
position of the three government shareholders.

The valuations have all been done for the float, so the price could
easily be set at the top of the book build range that valued Snowy’s
existing equity at $2.5 billion. This meant the Federal Government’s
13% stake was worth $325 million, Victoria’s 29% stake $725 million and
NSW’s 58% stake $1.45 billion.

A modest $400 million injection from the Commonwealth, possibly even
the Future Fund, would lift its stake to 24.16%, bringing it in line with
Victoria and diluting NSW’s share down to 48.33%.

The other solution would be to return to the situation we had when the
Howard Government first came to office – Commonwealth debt sitting on
the Snowy balance sheet. Peter Costello privatised this $800 million debt and ran the proceeds
through his budget when he was dealing with Paul Keating’s $10 billion
budget black hole, the Asian economic crisis and everything else that
made his first couple of years as Treasurer difficult.

However, Snowy can’t afford to lose the BBB credit rating on its
existing $950 million debt because anything lower would jeopardise its
burgeoning hedging and insurance operations. You can’t offer complex
derivatives contracts without a rock solid investment grade credit
rating from reputable agencies.

The Future Fund currently has $18 billion on deposit with the Reserve
Bank at the official cash rate of 5.75%. Wouldn’t it make more sense to lend $1.3 billion to Snowy
Hydro at 7% and then the good old government guarantee would mean the
business would be AAA rated and could offer derivative contracts with
gay abandon?

John Howard created this mess; his government has an obligation to
contribute to the solution. He’s either got to stump up some fresh
equity or offer support on the debt side.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey