New arrangements for putting a value on Snowy Hydro

By Stephen Easton

December 21, 2016

The federal government has moved to simplify the annual valuation process for the iconic Snowy Hydro Limited power generation company, but asset market enthusiasts ever keen on a privatisation may need to content themselves with a just simpler set of books rather than any looming sell-off.

Tender documents released this week reveal that the iconic power company has gone to market to buy a better ruler to run over its multiple sets of books (Snowy Hydro is a jointly owned Commonwealth and state asset), a move certain to rekindle interest in its ultimate ownership and potential capitalisation.

While the generator is visibly keen to get its complex numbers in order, tender documents say the plan is just about cutting the cost of complying with accounting standards.

Speculation that Snowy Hydro is being primed to hit the market has been flowing for more than a decade since the Howard government first proposed selling off the company but swiftly abandoned the proposal when it became politically volatile in the bellwether seat of Eden-Monaro.

Midway through this year, speculation again intensified sharply after the Australian Financial Review reported the federal Department of Finance was looking at a Snowy Hydro divestment to bolster budget repair — sentiment at least in part fuelled by the NSW Baird government’s pursuit of asset recycling that delivered the state $16 billion through the sale of Ausgrid in October.

As the rumours continued to swirl, official spokespeople for all three governments denied plans for a sell-off. A major influencing factor remains the position of The Nationals, where strong concerns remain as to how a privatised entity would control the flow of water downstream.

The Department of Environment and Energy is now managing a tender process for valuation services, with the expectation of starting a new contract from February to deliver yearly valuations to all three SHL shareholders — the New South Wales, Victorian and Commonwealth governments — at the end of the 2016-17 and 2017-18 financial years.

Previously, there were two separate annual valuation processes using different methodologies: one for the Victorian and NSW governments, which own 58% and 29% respectively, and one for the Commonwealth, which owns a 13% share. The tender document says these “are becoming increasingly time and resource intensive” for Snowy Hydro because they are “run at almost the same time” and the respective governments change valuation firms regularly, thus requiring the company to “educate” each new valuer. Accordingly:

“The three shareholders have agreed to use a single valuation firm to value SHL for future financial reporting, and the Commonwealth is to coordinate the procurement process and contract the valuation service on behalf of all SHL shareholders. The Department has undertaken the procurement process on behalf of all three governments to contract a suitable and appropriate valuation service.”

Under present reporting rules the federal government has to publish the value of its stake in Snowy Hydro every year as an “available for sale financial asset” under its financial reporting rules, and the two state governments have similar obligations.

The idea of selling off Snowy Hydro has certainly remained popular among potential market investors; the Australian Australian Financial Review enthused it would be a “prize asset” for any potential buyer, and SHL chief executive Paul Broad was head of Infrastructure Australia in 2012 when the body recommended privatising the company — although he poured cold water on the newspaper’s story this year.

The 2012 New South Wales Commission of Audit also recommended selling Snowy Hydro and in 2014, Australian Competition and Consumer Commission chair Rod Sims argued it would compete more strongly in the market if privatised. More recently, the proposal appeared again in the Abbott government’s National Commission of Audit but was rejected yet again.

With more renewable energy sources like solar coming on tap, the issue of managing Snowy Hydro’s water flows are also likely to resurface as an issue, especially its capacity to hold back water to maximise its market advantage of being able to spin up power almost instantly at times of peak demand.

This month, it emerged the company prefers to stockpile the extra water its massive dams collect for business reasons instead of letting it flow into rivers.

— with Julian Bajkowski.

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