Who exactly is Basslink Pty Ltd (BPL)? Given there’s a distinct possibility that its undersea cable problems will take a lot longer and be more costly to fix, is BPL in a position to weather the storm?
BPL owns and operates the Bass Strait interconnector. It is the main player in the Basslink group which in turn is owned by a Singapore listed infrastructure business.
The Basslink group doesn’t make any money.
In the latest year 2015 for which full audited figures are available, it lost $22 million after losing $25 million in the previous year. Interest payments on borrowings, are the major cause of the losses. Without the monthly facility fee from Hydro, its only source of income, it’s likely to soon need funds from somewhere else to service borrowings and fix the cable fault.
BPL was set up by UK company National Grid. It reportedly cost $875 million to build the interconnector which starting operating in 2006.
In 2007 when BPL was sold by National Grid to the Singapore based CitySpring Infrastructure Trust, the Basslink business had a value of $1,175 million. Since then CitySpring has morphed into the Keppel Infrastructure Trust which is listed on the Singapore Stock Exchange, two thirds owned by the public and one third by Temasek Holdings, the $350 billion sovereign wealth fund of the Singapore government.
Keppel owns or part owns a number of infrastructure businesses. All apart from Basslink are in Singapore and include gas production and retail, gas fired power generation and desalination.
There are about twenty companies in the Keppel stable including ten in the Basslink group.
Investment bankers’ fingerprints are evident with the predictable assortment of operating companies, holding companies and limited liability partnerships.
BPL’s ultimate holding company surprisingly is domiciled in the Cayman Islands. There are reasons for such complicated structures apart from generating fees for investment bankers. One is to minimise tax and another is to frustrate claims and limit liability. BPL and Hydro already have had one protracted commercial disagreement which resulted in a $6 million win to Hydro. Another is likely given the current problems.
Keppel’s purchase of BPL was financed by bank borrowings and intra group loans.
In 2014, intra group loans were written back by $140 million as uncollectable because falls in future expected revenue from the interconnector had reduced the value of the Basslink investment.
The latest events mean the value of the Basslink investment will be adjusted downwards once again. Its value at this stage is unlikely to exceed bank borrowings implying all equity contributed via intra group loans has been wiped out. In short the Basslink group is likely to be currently underwater. Liabilities exceed assets and there’s no money coming in the door.
That doesn’t mean the overall Keppel group is insolvent. Not by any means.
Its latest gearing, in other words net borrowings as a percentage of total assets is only 34%. This figure was calculated before any adjustments caused by the cable outage, and has probably deteriorated since. Keppel has just changed its financial year to end on the 31st December (it was previously 31st March) so we might see full audited accounts plus an annual report in a few weeks time, by the end of March 2016 hopefully which may show the effects of Basslink’s problems?
To what extent will Keppel come to the rescue of the Basslink subsidiaries if the going gets really tough is the crucial question?
There may come a point if repairs are too costly and all the additional outlays don’t add much value to an asset that has just suffered a large drop in value, when commercial prudence might suggest abandoning ship.
Keppel in its latest annual report indicated Basslink borrowings are secured by the interconnector asset itself. The impression was given that other infrastructure assets in the wider Keppel group are not exposed to Basslink’s borrowings. Hence it may be an option for Keppel to walk away from Basslink’s problems. Just call in the undertakers and walk away.
Certainly the corporate structure is in place to quarantine Basslink from the rest of the Keppel group should the need arise.
Premier Hodgman in his interview with Mercury state political editor Matt Smith published here certainly gave the impression that he is prepared for the unexpected.
To date all we’ve heard is a few media releases from BPL nothing at all from Keppel, the listed entity. The Keppel unit price has dropped about 10% since the outage, which has wiped about $200 million off its market value.
If the worst case scenario eventuated, Hydro would find itself in an even worse position than existed at the time Basslink started in 2006, after which the breaking of the drought together with net imports of electricity from the mainland for four years gradually restored dam levels.
Hydro might free itself of the monthly Basslink facility fee, roughly $70 million in total every year, but it would be stuck with a separate liability resulting from its decision to insure against interest rate fluctuations that form part of the facility fee until 2031. The latest assessment of the amount needed to opt out of this additional agreement was $342 million. It’s an inescapable liability no matter what may happen to Basslink.
Hydro has also paid a deposit of $50 million to BPL intended to offset against facility fees in the last three years of the Basslink supply agreement from 2028 onwards.
BPL is holding all the cards, that’s for sure.
The additional costs of gas and diesel generation are far in excess of any savings from temporary cessation of the facility fee, hence it is clearly in Hydro’s best short term interests if the fault can be fixed, even if no compensation is forthcoming from BPL.
However that may not coincide with BPL interests should the fault be serious and costly, which with every passing day, is looking increasingly likely.
(Published in The Mercury 8th March 2016)