Thursday, 30 June 2022

Basslink for Sale Chapter Three


The Basslink sale process has picked up speed.

We’re likely to see a new owner for Basslink in the next three months.

How the dust settles will affect Tasmania’s plans for the future shape of Tasmania’s electricity industry.

After protracted arbitration found in favour of Hydro and the State of Tasmania in their actions against BL following the 2015 cable outage, all parties agreed to a standstill arrangement to try to work out a future path for BL. This was abandoned in October 2021 when it became clear both BL’s bankers and owners weren’t prepared to stump up any more cash. BL was therefore insolvent.

The appointment of Receivers and Managers quickly followed. At that point, BL’s owners, its parent company Keppel Infrastructure Fund, part owned by the Singapore Government and listed on the Singapore Stock Exchange lost control of the BL group.

This led to BL and its associated companies being derecognised in Keppel’s financials. Keppel’s financials for the calendar year ended 31st December 2021, issued late March 2022, show BL’s assets and liabilities being removed from the consolidated group.

At the time BL’s assets were basically the BL interconnector with a book value of $726 million.  A goodwill figure of $50 million recorded in Keppel’s books when it overpaid National Grid for all the shares in BL in 2008 which enabled it to take over BL, was written off by BL in the 2021 financials.

BL’s liabilities essentially were bank loans of $635 million, amounts owing to Hydro and the State of Tasmania which totalled somewhere between $150 million and $200 million depending on who you believe, a provision of about $20 million for decommissioning the cable at the end of its life, and a liability resulting from an interest swap arrangement designed to hedge interest costs on bank loans, which had soared to $170 million or so ‘cos interest rates went down instead of up.

So not only was BL unable to pay its debts as and when they fell due, its liabilities exceeded its assets.

There’s a cast iron certainty when insolvency practitioners begin a job, assets will be smaller and liabilities larger than initially indicated in the insolvent entity’s financials.

Hence BL was well and truly under water.

The cable outage and the alleged failures by BL to rectify matters as required by the arbitrator gave Hydro a trigger to withdraw from the Basslink Service Agreement (BSA) with BL in Feb 2022.

Consequently, BL lost its regular government-guaranteed income stream.

Under the BSA BL received a regular monthly payment from Hydro. In return, Hydro received the inter-regional revenue from importing and exporting electricity to Tasmania via the BL cable.

Under National Electricity Market (NEM) rules the BL cable was an unregulated asset. It still is, although this will probably change at some stage in the future. However, the absence of a guaranteed income means it's a riskier proposition now that BSA has been abandoned. The value of the cable has taken a big hit.

When Keppel derecognised BL’s liabilities it was able to wash its hands of all of them except for the interest swap liability. Keppel’s cash flow statement for the year ended 31st December 2021 showed Keppel Group paying out $170 million to settle the interest swap arrangement.   

Up till then BL had been largely independent of its parent. Even when the major outage occurred in 2015 it didn’t cost the parent much. Mind you Keppel didn’t receive much cash from BL over time either. It was allowed to tick over and try to repay as much debt as possible before 2031 when the BSA was due to expire. That was the plan. Which has now come unstuck.

As for the rest of BL’s liabilities, they are liabilities of the BL group for which the parent is not responsible. Even BL’s bank loans are on a non-recourse basis, meaning there is no additional security from outside the BL group. The cable itself is the only security.

BL’s bankers could see the writing on the wall. They were facing big losses.  They decided to dispose of their asset (loans due from BL) to APA an ASX listed infrastructure company with ownership and operating interests in the two major electricity interconnectors on the mainland, Murraylink and Directlink. Although the debt may have a face value of $635 million, APA would have paid much less. A figure of $200 to $250 million would not surprise given all the risks in the current climate.

APA is now sitting at the Receiver’s table alongside Hydro/State of Tasmania whose debts are also believed to be secured. Both are trying to protect their stakes which are probably fairly similar in size. Maybe $400 to $500 million in total, much more than the cable is worth.

This means someone else will have to take a loss. Maybe all remaining parties will.

Keppel has realised its losses: the cash needed to acquire BL from National Grid in 2008 , believed to be around $300 million, plus $170 million to discharge BL’s interest swap arrangement.

Bankers have realised their losses: $635 million less what APA paid them to acquire BL’s debt.

The current unknown is whether there will be further losses, and who will bear them….APA and/or Hydro/State of Tasmania. This won’t be known until ownership and future operations of the BL cable are decided.

Any more losses to Hydro will be relatively small compared to the $1.8 billion it has outlaid  over the past 16 years paying BL fees and associated finance dues to Macquarie Bank which are likely to continue until 2031 despite the abandonment of the BSA. Were Hydro to discharge its swap liability with Macquarie Bank with a lump payment it would need to find twice the $170 million amount that Keppel had to pay to rid itself of a similar ongoing commitment in respect of a dumped arrangement.  Total outlays paid since 2006 by Hydro in respect of BL have been far in excess of the revenue earned from the cable in that period.

Right now, APA probably needs Hydro/State of Tas as a partner more than the latter needs APA.

We’ll soon know. Just this week the AFR reported that BL, now under the control of a new Receiver Manager appointed by APA has called for Expression of Interest to acquire BL assets, or capitalise BL, in other words take over BL and inject more cash. The EOI process closes next week. Those accepted will have three weeks to lob a non-binding indicative offer then another month to conduct due diligence and submit a formal proposal.

The tight schedule means there’ll be very few takers. It’s likely to be only APA and/or Hydro/TasNetworks.

AFR quoted from a flyer promoting the sale process as saying “ an incoming owner could take Basslink one of three ways: a merchant trading asset; a recontracted service provider, subject to agreement; or, a regulated asset base, which could be implemented from July 2024, subject to approval.”

The first way is unlikely because of the risks and uncertainties. The third way will take a couple of years at least. Which leaves the second way… BL as a recontracted service provider.

Hence it’s a question of who will own the cable, who will operate it and to whom will the service be provided.

APA is likely to have an ownership interest but not necessarily the full 100 per cent. APA is the likely operator for that is its core business. And Hydro is the most likely candidate to whom the service will be provided.

There are so many unknowns. The recent crisis in the NEM has further clouded the picture.

In the 16 weeks since Hydro abandoned BL in Feb 2022, inter-regional revenues have been $18.5 million compared to $30.5 million in the corresponding period in 2021. Only 680 GWh of electricity was transported (that’s imports and exports) …… in 16 weeks.

For the financial year 21/22 (almost finished) cable use is about the same as the previous year but the $ value is up about $15 million mainly due the wet spring in 2021 which enabled more profitable exports. Current water storages are down 11 per cent compared to this time last year. Whilst no cause for alarm, nor is it a reason to celebrate.

Hydro obviously abandoned the BSA because it figured it would be better off without it. If it is to recontract with BL’s new owners, it will need to be at a much lower rate.

Which makes the cable worth even less?

At least that means that when BL eventually becomes a regulated asset consumers will be slugged less.

But the more Hydro/TasNetworks get involved with a new BL arrangement, the less attractive will be the proposed $3.8 billion Marinus link?

We shouldn’t get too carried away with all the Marinus hype. Marinus spruikers have tried to ignore BL but it’s part of our electricity infrastructure that needs to be considered in any plan.

If BL is only worth $250 million in the current market, it seems hard to believe we’re contemplating spending say, 15 times as much on a new cable that is only 3 times as big.

Especially given the inevitable cost overruns and operating problems experienced already in BL’s short life during which time it has failed to make any money.

There’s nothing like a new toy when someone else is paying.

1 comment:

  1. Nicely written John. I love the closing statement. It's every politicians mantra.

    Tasmanians owe you a great deal for your effort and committment to greater transparency and understanding.

    You must get endless abuse from our politicians!