Basslink for sale?

 

By any measure 2020 was annus horribilis for Basslink P/L, the owner of the existing Bass Strait interconnector, currently operated by Hydro Tasmania.

Basslink’s recently released annual financial report for the calendar year 2020 revealed its battle-scarred balance sheet after unsuccessful legal battles arising from the 2015/16 cable outage.

In December 2020 Basslink was forced to write off $30.8m which it claimed Hydro owed. The debt write-off related to whether the cable outage was a force majeure event. After taking six months to repair the cable, Hydro maintained because it was unavailable for half the year, the agreed monthly fee upon resumption should be reduced by the availability adjustment factor. Basslink argued the cable fault was an Act of God, a force majeure event, and hence the adjustment factor didn’t apply, and the full fee was payable. The arbitrator didn’t accept God was involved and found in Hydro’s favour. 

The arbitrator was also needed to resolve other disputes between Basslink and Hydro and between Basslink and the State government in respect of the cable failure. In the latter case the arbitrator awarded the State government $46.7 m including costs and interest. In the former case Hydro was awarded $26m, with costs yet to be decided. Basslink has raised a provision account which suggest another $30.9m may become payable. That’s a total of $103.6m Basslink will have to pay Hydro and the government.

For the year ended December 2020, Basslink’s revenue, almost all from the Basslink service fee paid by Hydro was $84m. The $30.8m debt write off, plus finance and legal costs took the 2020 loss for the Basslink Group to almost $100m. The yet to be decided legal costs will be extra.

Basslink is yet to hand over any money. It needs assistance from financiers or associated companies. The Basslink Group, part of the much larger Keppel Infrastructure Trust, listed on the Singapore Stock Exchange is literally under water. Liabilities now exceed assets. Until the arbitrator’s adverse findings the Basslink Group had managed to weather the costs of the outage. Its major borrowing, which currently stands at $631m, was supposed to mature in 2019 but financiers have been granting extensions awaiting finalisation of the legal dispute. The 27^th  day of August 2021 was supposed to be D Day for a new loan arrangement. The Australian Financial Review (AFR) has reported a deal is yet to be finalised.

Financiers are taking a long hard look at the value of the interconnector because the loan to the Basslink Group is on a non-recourse basis, meaning the cable itself is the only security backing the loan. The value of the cable is dependent on future income. Hydro is contracted to pay the facility fee for another 10 years but if the option for a further 15 years is not exercised what then? An asset without income quickly loses value. Basslink’s bankers are understandably cautious. They want to see a capital injection from Keppel.

Basslink’s cash earnings before finance costs are normally about $50 m pa, so with only another 10 years of guaranteed income from Hydro it will be valued on that basis rather what may happen after 2031.

It was also reported that listed infrastructure provider APA with a $21b portfolio of gas, electricity, solar and wind assets around Australia is interested in acquiring Basslink. But  they will need to do a deal with Hydro. No-one will acquire Basslink without knowing what Hydro’s intentions are. Which puts Hydro in the box seat. Why doesn’t it buy Basslink? It could easily pay for it, and have money left over using the 10 years of service fees it would otherwise pay.

That would certainly introduce another factor into the Marinus business case pushed by TasNetworks. No-one knows who’s paying for Marinus but TasNetworks is pencilled in to run it and earn income from it. TasNetworks certainly needs a boost to help service its existing $2 billion pile of debt. Recent budget papers show a further downward revision of future returns to government.

At a recent meeting of the Public Accounts Committee looking at the Fiscal Sustainability Report 2021 the Treasury Secretary was asked if Treasury had done any modelling as to how much income Marinus will bring into the coffers of government businesses. His answer was no there was yet to be any assessment as to how Marinus will make government businesses more profitable.

With changes occurring in the renewable energy space with very passing day do we just sit around and pretend that Marinus is going to lift us to a new level of prosperity while letting other possibilities pass by. Whatever happens the Basslink interconnector will remain an important part of the landscape. We need an informed public discussion, not another stitch up as occurred with Basslink P/L 20 years ago.