Basslink for Sale Chapter Two

 

The Basslink sale saga continues.

Since the Basslink for Sale post back in September the mooted sale to APA has been abandoned, and Basslink P/L (BL) is now under the control of Receivers and Managers (KPMG) appointed by BL’s banks.

Back in late October BL still hadn’t managed to refinance its existing bank loans as required. The sale to APA had fallen through. The final straw was when Hydro Tasmania (HT) and the State government finally ran out of patience with BL for non-payment of amounts awarded against them following legal action in the wake of 2016 interconnector outage and announced they were going to start legal action to recover amounts owed.

It was a Mexican standoff. The banks wanted their money. Creditors were getting impatient. BL’s owners didn’t want to contribute any more. BL was insolvent.

Shortly thereafter BL’s directors appointed a Voluntary Administrator to buy a bit of breathing space to restructure the business. The banks immediately appointed Receivers and Managers so they could better look after their own interests

It’s likely the Receivers will ty to restructure the business so it can continue. Liquidation is unlikely. They will be talking to the interested parties:

·        Hydro Tasmania HT which has a contract with BL for the Basslink interconnector until 2031 with an option for a further 15 years. HT is possibly still owed money from the arbitration process if it had been unable to offset amounts due against monthly facility fee payments.

·        A consortium of banks owed $630 million by BL.

·        The Tasmanian government owed $70 million following arbitrated claims arising from the 2016 cable outage.

·        Keppel Infrastructure Trust KIT the Singapore listed owner of BL

When KIT bought BL from the original owners National Grid in 2008 it took over the existing BL Group of companies, comprising all the assets and liabilities. The BL Group had a reported enterprise value of $1.175 billion at the time. KIT didn’t hand over $1.175 billion in cash. Instead, it agreed to take over all assets and liabilities and just handed over cash representing the difference. The same will occur again. But if the net assets are negative as is currently the case with the BL Group, things will play out differently.

BL’s liability to banks has always been on a non-recourse basis. The only security for the loan is the cable itself. There is no back up security from KIT. KIT could walk away if it wished. If there’s a shortfall it doesn’t have to cough up if it doesn’t want to. That’s the dilemma for interested parties at this stage. BL’s liabilities exceed its assets, and its parent company KIT is reluctant to put in more.

BL’s asset is the cable. A cable is only worth what it’s likely to earn. Currently it’s earning about $90 million per year, almost all from HT. There’s a little revenue from the associated telecommunications cable received from other parties. After expenses and depreciation, but before interest and tax, the net earnings or EBITDA, are about $50 million.  APA is known to pay about 12 times earnings for an infrastructure asset which would give Basslink a value of $600 million.  But with revenue only guaranteed until 2031, APA wouldn’t pay that much.

Whoever takes over BL will get saddled with BL’s debts. The next step for APA therefore was to reduce the amounts owing.

The AFR reported on 22^nd November 2021 APA had purchased $99 million of the banks’ BL debt confirming its interest in acquiring BL. As a debtor it now has a seat at the table. APA would’ve paid a lot less than face value for the debt on the likely proviso the debt would rank after the remainder of what was owing, of around $530 million. This amount is likely to be the agreed value of the interconnector.

The banks have therefore agreed to a haircut of $99 million less whatever APA paid then for the $99 million worth of debt. They’ll be happy with that.

What about APA? What next? It has outlaid unknown $s for a seat at the table. It wasn’t just to eavesdrop. It wouldn’t have agreed to value the cable at around $530 million without knowing what HT planned to do after 2031. It wouldn’t make enough money by 2031 based on the current contract and would face the prospect of owning an asset without income. It likely would have secured assurances as to what will, or is likely, to happen after that date.

As it stands, HT has an option to renew its cable contract for a further 15 years. Originally the facility fee applicable during the extension term was to be reduced to 80 per cent of the current fee. But HT and Paul Lennon were desperate to get BL across the line back in 2002. The fee based on the agreed price to build Basslink was getting larger by the month, and they needed to reduce it in order to make the project appear viable so that HT’s Board could approve the deal, which they finally did in November 2002. There was lots of cutting and shutting. Reducing the discount applicable to the 15-year extension period, in other words increasing the fee for that period, and reducing the fee for the first 25 years was one of the ploys. That helped improve the wafer-thin margin.  The Basslink Service Agreement determines the discount applicable to the facility fee for the extension period. It is believed to be 10 per cent or maybe even zero. HT wouldn’t want to be paying that much.  It hasn’t been a money spinner. What’s been paid since 2006 has drained more out of HT coffers than the original business plan suggested. But a different deal might work.

The AFR also reported APA’s CEO Rob Weals as saying APA would now have the opportunity to work with the receivers and managers to put Basslink on a sustainable footing and would work with Hydro Tasmania, the Tasmanian government and the Australian Energy Regulator (AER) to convert it into a regulated asset.

At this stage the interconnector is an unregulated asset. It’s a private deal between HT and BL. TasNetworks (TN) transmission and distribution assets, on the other hand, are regulated assets. Every 5 years it submits details to AER seeking a determination as to the maximum amounts they can charge customers. AER values the assets and works out the maximum it can charge. The value of the assets thus determined is adopted by TN as the value of the assets on its books, its Regulated Asset Base (RAB).

It is likely Basslink will continue as an unregulated asset until 2031 because the guaranteed income from HT until 2031 underpins the value of BL.  The payments from HT are far too valuable to contemplate making too many changes to BL at this stage. After 2031 the situation will be different. It is likely BL will become a regulated asset and HT will pay a regulated fee depending on how much they use it, rather than as a regular monthly fee of around $7 million per month. As a regulated asset BL will deal with other customers wishing to use the cable. APA would have figured out the possible value of BL as a regulated asset and negotiated with HT to gauge what is possible or likely to happen after 2031. This is where it gets murky. The Marinus project is also on the drawing board. Few details are available as to who will pay for it and how it will run. TN is the PR front for Marinus. It needs the deal more than HT. But there is no way Marinus will be able to operate as a regulated asset as just another asset in TN’s asset base (RAB). Somehow, they’ve got to figure out a way to get all the other States to help pick up the tab. Given all the developments in the renewable energy and battery storage space it is highly likely most States will prefer projects within their own borders and closer to where electricity is needed rather than via a undersea cable at eight times the cost of a equivalent land based cable. And even if other States agree to share the costs, won’t they then turn round and ask Tasmania to help subsidise their costs.

Furthermore, the BL/Marinus quandary suggests the interests of HT and TN won’t always coincide. The government too has interests which won’t necessarily coincide with those of HT and TN. Recent CEO and executive management turnover at HT also suggest a degree of unease at HT.

The Tasmanian government has a direct interest in any restructure not just an indirect one via HT. It is owed $70 million by BL. If APA is the only likely bidder for BL, the government and HT won’t have a lot of bargaining power when negotiating with APA for the best deal. By forgoing the chance to take over BL any deal will be a second-best arrangement. Just as we had to hand over $50 million in 2006 to help BL get started, which is still owing by BL and won’t be offset against any facility fee until 2028, it wouldn’t surprise if the $70 million owing to the government will be treated in a similar fashion, as a deferred fee arrangement.

Even if the Basslink Service Agreement BSA between HT and BL is torn up if and when APA take control, which is highly unlikely, the side agreements with Macquarie Bank (MBL) will continue until the bitter end. These agreements cover all the hedging which HT has undertaken in relation to the BL deal. There were three different hedging deals. Interest rates and foreign exchange costs were hedged during construction of Basslink. And interest rates which form part of the calculation of the monthly facility fee have also been hedged, for the full 25-year period, until 2031.  HT hedged against possible rate rises when the rate was 8 per cent. The side arrangements with MBL have combined to keep us poor. HT is still coughing up for the hedging costs incurred during construction and any reductions in the facility fee resulting from falling interest rates since 2006 have been handed over to MBL.  HT never discloses exactly what it pays BL and MBL, but it does disclose the estimated future liability. The amounts expected to be discharged in an ensuing 12-month period are listed as current liabilities.  That is the best estimate of the likely cost of Basslink in the following year. HT’s figures suggest the best estimate of Basslink’s costs for 2020/21 was $131 million. BL and its parent company KIT’s publicly available financials statements disclose revenue received from HT. In 20/21 it was about $90 million. The balance of $40 odd million must be what was paid to MBL. These latter amounts are likely to continue until 2031 even if the Basslink Service Agreement is abandoned by mutual agreement and the interconnector became a regulated asset.

The other issue bubbling along in the energy space relates to the imminent end of an onerous contract HT was required to enter into for the purchase of fixed amounts of gas which are a de facto subsidy to the owner of the gas pipeline TGP and to the larger gas users such as Grange Resources. HT wants to slash current contracted volumes by 80 per cent. This would slash the value of TGP as the contract with HT underpins the value of the TGP. Just as the BL’s revenue determines the value of BL, so too does TGP’s contracted gas income determine the value of TGP. It might be a coincidence that APA just happens to be a large pipeline owner currently locked into delicate negotiations with HT about their future relationship. Would it be possible that the issue of the gas contract with TGP has been discussed, a contract if not renewed may lead to a distressed asset coming on to the market?

The gas pipeline has had a troubled past. The original builder Duke Energy went ahead with the pipeline in 2002 thinking the BL project was about to fall over. Paul Lennon had actively encouraged the pipeline. Duke were blindsided when Paul and HT’s Geoff Willis managed to get BL underway.  The pipeline which cost $400 million to build was sold shortly thereafter to TGP for a 50 per cent loss. TGP is now owned by Palisade Partners owner of the Granville Harbour windfarm which was also directed by the government to sign an onerous contract for the purchase of renewable energy certificate so that project could raise the necessary debt finance.  Palisade is run by former Deputy Prime Minister Mark Vaile.   Nothing compares to long term infrastructure contracts with governments. They’re guaranteed roads to riches. It will be interesting to see how the government deals with companies like APA and Palisade when they meet in disputed territory. The likely loser will be the Tasmanian taxpayer.

 Reading between the lines its probable there’s agreement as to what BL is worth, they’ve agreed APA is the preferred acquirer and HT will continue with the current BL contract until 2031.  They’ve probably also agreed  BL will become a regulated asset after 2031 and that HT will use the cable.

So how does this all impact on the Marinus project and Battery of the Nation? There are still plenty of unknowns, hyperbole and dodgy assertions, but clearing up the likely future of BL is a valuable piece in the puzzle.