Basslink for Sale Chapter Four

 

The APA Group have long been interested in acquiring the Basslink interconnector.

With the release of APA’s financials for the 21/22 year on Wednesday 24^th August, we now have a rough idea of what APA thinks the cable is worth.

Basslink P/L(BPL) which owns and operates the cable is currently in the hands of Receivers appointed by the banking syndicate who lent money to the Basslink Group. It is still trading electricity via the interconnector, both ways across Bass Strait, but since Hydro Tasmania walked away from the Basslink Service Agreement in February 2022, the Receiver retains the interregional revenue, rather than paying it to Hydro.

APA started buying BPL’s debt in November 2021.It must have liked what it got because it kept buying, ending up with all of the debt, bought in three tranches, for a total of $587 million. The face value of the debt at the time of purchase was $624 million.

Hence BPL’s bankers received most of what was owed to them. They would have heaved a huge sigh of relief, as they would have had to wear any shortfall since there was no additional security from BPL’s parent Keppel who had by that stage disowned its prodigal son.

APA now earns interest on the BPL debt. For the balance of the 2021/22 year it earned interest of $12 million. But none was paid. It simply accrued.  The Receivers probably had other expenses to pay, receivers fees for instance. APA’s investment in BPL’s debt, listed as a loan receivable, was $599 million at 30^th June 2022.

BPL also owes money to Hydro and to the Tasmanian government, somewhere between $150 and $200 million, for compensation awarded following the 2015 cable outage, for repayment of the $50 million deposit paid to BPL over 15 years ago and for other amounts, some of which are in dispute.

Some if not all these amounts are secured. Whether they rank ahead, behind, or equal with APA’s debt is not known.

At this stage APA has spent $600 million.Hydro/Tas government are owed at least $150 million. It’s hard to believe the Basslink cable is worth $750 million given interregional revenues earned by the cable over the past few years.

Infrastructure entities like APA wouldn’t normally be interested in an asset unless it had an earnings value of at least 12 times on an EBITDA basis. For a $750 million asset that $70 million pa. That’s $70 million of net earnings after expenses but before interest, tax depreciation and amortisation. BPL’s expenses for EBITDA are pretty low maybe only $10 to $15 million pa unless repairs are a problem. But revenue is rarely more that $80 million pa. And falling as the more mainland solar, wind and batteries eat away at Tasmania's existing export advantages and more wind in Tasmania lessens the need for imports. Hence it’s a little hard to see why APA are prepared to pay so much for Basslink.

All indications are that the interconnector will become a regulated asset under the jurisdiction of AER, the Australian Energy Regulator. Maybe this will allow APA to make the return it needs.

AER will set prices of the regulated asset which consumers will end up paying via higher transmission charges that form part of retail electricity prices.

Transmission companies each side of Bass Strait will collect additional transmission charges which will be paid to APA to enable it to get a return on its investment.

Half of the additional charges will be paid by Tasmanian consumers.

It’s been a surprise to learn how much APA has been prepared to pay for BPL’s debt. It must think Basslink will make money. But returns can only come from consumers’ pockets. If Hydro couldn’t make money from Basslink, the only way APA will make money is by charging consumers more? And that needs the blessing of AER. How else? For a while this naïve writer thought that BPL’s bankers might have to wear more of the Basslink debacle. Now it seems consumers will have to reach a bit further into their pockets. Once they get used to how much Basslink will cost them it’ll probably be time to break the news about how much Marinus will cost.

The Tasmanian government must have made it clear to APA that it wouldn’t withdraw from the NEM. Otherwise, the Basslink cable would have been worthless.

The renewable energy space is such a moving feast. For instance, part of BPL’s assets is 70 kms of above ground infrastructure which taps into Victoria’s transmission network. Given what’s being mooted in that part of Australia that could well be an asset with some value.

APA itself is obviously undergoing considerable trauma. Long standing CEO Rob Wheals has just resigned. It’s been reviewing the path forward. How to make money out of Basslink is sure to be high on the agenda given it has just paid $600 million for a seat at the table.

The Receivers originally pencilled in August 15 as the closing date for expression of interest to buy Basslink but has recently extended the closing date till August 29. With the Receiver acting for the lenders which now happens to be APA, someone’s going to have to pay a large price to stop APA from getting access to an asset that’s become an obsession.