Sunday, 30 April 2017

Hydro vs Basslink episode 23

Little is publicly disclosed about the latest dispute between Hydro Tasmania (HT) and Basslink Pty Ltd (BL) following the six month cable outage from December 2015 to June 2016. BL has just revealed a little more with the lodgement of its 2016 Financial Statements and Report with Australian Securities and Investment Commission (ASIC).

We knew HT has not been paying the monthly facility fee to BL  since September 2016 but that it has been making good faith payments. However these are considerably less than the facility fees otherwise payable. The amount in dispute between the parties could get out of hand?

BL is part of the Keppel Infrastructure Trust which owns other infrastructure assets in Singapore and is listed on the Singapore Stock Exchange. BL as an Australian registered company is required to report to ASIC. Keppel has reported earlier but the consolidated figures make it harder to figure out exactly what happened with BL. The BL figures lodged with ASIC include only BL which owns and operates the electricity interconnector and its wholly owned subsidiary Basslink Telecoms Pty Ltd which operates the associated telecommunications link.

BL’s trade receivables (the amounts owed by HT and the telecommunication customers) have blown out from $4.1 million to $26.6 million during the year ended 31st December 2016. It would be safe to assume most of this is owed by HT, let’s say $25 million. Of this almost $18 million is in arrears (more than 30 days overdue). This is presumably the difference between the facility fee and the good faith payments made by HT in the period Sept to December 2016.

Another four months has elapsed since, so what is the current amount in dispute? Twice that? Say $50 million. Serious biccies? The last dispute between the two parties dragged on for years until finally settled following conciliation by ex Chief Justice Murray Gleeson in 2012 with HT getting $6 million. The stakes are now much larger.

BL seems to have weathered the storm ok. Having insurance in place helped. $40 million was received in July/August 2016 and another $8.7 million is expected. This latter amount will take the cost of the interconnector repairs to $22.1 million.  BL wasn’t out of pocket with the cable repairs. The insurance company paid or hopefully will pay everything. The rest of the insurance money received of $23 million was included as other income being compensation for business interruption. BL is still talking to its bankers because the BL Group is in breach of loan covenants due to the outage. BL is not in arrears with its loan, just in breach of loan covenants. BL’s bankers are waiting for the dispute with HT to be resolved.

Lots of talking it seems. Little visible action. BL acknowledges a contingent liability in the notes to the financial statements but no sign of legal claims from HT as yet. Yet the dispute has caused the directors of BL to disclose the “material uncertainty that may cast significant doubt on the ability of the Company to continue as a going concern and, therefore, whether it will realise its assets and discharge its liabilities in the normal course of business.”

The full note is reproduced below:

Note 2.20: Going Concern

Basslink Interconnector Cable

The financial report has been prepared on the going concern basis, which assumes that the Company will be able to realise its assets and discharge its liabilities in the normal course of business.

For the reasons described below, there is material uncertainty whether the Company will continue as a going concern:

·       On 20 December 2015, the Basslink interconnector asset experienced a fault that disabled the cable that allows the transfer of electricity between Tasmania and Victoria (“Incident”). The fault was rectified on 13 June 2016 and energy transfer between the states was restored.

·       As a result of the fault, a related entity to the Company, Nexus Australia Management Pty Ltd (the “Trustee”) in its capacity as trustee of the Premier Finance Trust Australia (the “Trust”) ( Note: Nexus is a company in the Basslink Group which borrows on behalf of the Group) breached its bank covenant for the March 2016 quarter in relation to its financing facilities which has not been waived by the Trust’s banking syndicate at the date of signing this report. The breach resulted in an ‘event of default’ in accordance with the financing agreement with the Trust’s banking syndicate. As a condition of waiver of this event of default, the Trust was required to agree with the banking syndicate a Long Term Financing Plan.

·       There is in place project financing for the interconnector asset between a syndicate of commercial bank financiers and the Trust comprising of a loan of $707.7m at the balance date that has a repayment date of November 2019. The Trust on lent these funds to Coral Holdings Australia Pty Ltd and its subsidiaries (including the Company). (Note: Coral is an entity in the Basslink Group). These funds were used to fund the assets of the Company, primarily the interconnector asset. The assets of the Company are secured property under the external financing facilities between the Trust and the banking syndicate.

·       At the date of this report, the Trust and the Company are in discussions with the banking syndicate and have not agreed the Long Term Financing Plan, and the Trust therefore has not received a waiver for the covenant breach, due to the banking syndicate requiring greater certainty in relation to:

o   The total payout by the Company’s insurers in relation to the Incident.

o    The Company’s potential legal obligations and exposures, if any, in relation to the Incident.

At the date of signing this report and having considered the above factors, the Directors are of the view that the Company will be able to continue as a going concern after having regard to the following factors:

·       The Company has been trading with positive operating cashflows and the Borrower is current on its debt payments subsequent to the rectification of the fault on 13 June 2016.

·       The Company has received advance payments from its insurers in June and August 2016 that substantially recover the costs of repairing the interconnector asset and the loss of income for the period the asset was out of service. The Company has recognised a receivable for the remaining costs incurred but not yet received from the Insurer at 31 December 2016.

·       The Trust, the Company and the banking syndicate are still in discussions to work towards agreeing the Long Term Financing Plan.

·        An independent investigation of the cable fault was completed by Cable Consulting International (CCI) in December 2016. CCI concluded that the cause of the fault is unknown, which supports the Company’s position that it is a force majeure event.

·       Hydro Tasmania has not made payment to the Company for the facility fees since September 2016 as Hydro Tasmania does not agree that the outage is a force majeure event. The Company continues to engage with Hydro Tasmania to resolve this matter and for Hydro Tasmania to recommence meeting its contractual obligations to the Company. The Company has recognised a receivable for the amounts outstanding from Hydro Tasmania at 31 December 2016. Hydro Tasmania made good faith payments whilst this matter is finalised.

The above conditions give rise to a material uncertainty that may cast significant doubt on the ability of the Company to continue as a going concern and, therefore, whether it will realise its assets and discharge its liabilities in the normal course of business.

The financial report does not include adjustments relating to the recoverability and classification of recorded asset amounts, or to the amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.

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