$1.86b pipeline sale tops list

THE $1.86 billion sale of the Dampier to Bunbury natural gas pipeline has been judged by WA Business News to be the top business deal in Western Australia in 2004.

The transaction was distinguished by its size, complexity, strategic importance to the State and unusual blend of politics and commerce.

It was a big win for the companies in the successful consortium – Alinta, which is also operator of the pipeline, Alcoa, which is the pipeline’s biggest customer, and listed investment trust DUET – and Alinta’s key advisers, Macquarie Bank and Blake Dawson Waldron.

The receivers and managers, KordaMentha partners Martin Madden and Brian McMaster, also get a tick, having successfully managed Australia’s largest receivership in a relatively short period of time.

Illustrating the scale of the task, Mr McMaster said each of the bidders lodged about 3,000 questions during the formal sale process.

Arguably the most surprising ‘winners’ were the 28 banks that financed Epic Energy’s $2.4 billion purchase of the pipeline in 1998.

Led by National Australia Bank and Deutsche Bank, the banking syndicate emerged unscathed, with its debt fully serviced and its loan principal repaid in full.

The biggest losers were the equity investors in Epic, who lost everything.

Western Australian taxpayers also paid a price, in the form of financial concessions worth $88 million granted to the winning consortium.

The sale of the pipeline, completed in October, brought to an end a long-running and highly charged saga and came as a relief to many of the people directly involved.

The new owners plan to start work this year on a much-needed $400 million capacity expansion, which should ensure there are no repeats of last February’s power crisis and will clear the way for new industrial projects in the State’s South West, with Alcoa and Alinta among the major beneficiaries.

They have recently announced the go-ahead for a second cogeneration power station and Alcoa is also assessing a major expansion of its Worsley alumina refinery.

Alinta managing director Bob Browning makes no secret of the pipeline’s strategic importance.

“It was the lifeline to our gas retailing here in WA and it underpinned the ability to put in more cogeneration units on the Alcoa sites, so it was particularly important strategically for us,” he told WA Business News.

Mr Browning said that, early in the sale process, Alinta had considered being just a shipper, leaving others to bid for ownership of the pipeline.

“But what we immediately found was that the other bidders were looking to extract value from Alinta and its shareholders in order to pay a higher price for their bid,” he said.

“So we said, ‘hang on, why should we lose value and transfer it to some other bidder when we could sit right in the middle and control this process’.”

Freehills partner Justin Mannolini said the pipeline sale was clearly the deal of the year.

“Not only are the strategic issues of note for WA, but the transaction typifies the increasing interest on the part of investors in infrastructure assets,” he said. “I think we will continue to see increased ‘securitisation’ of those assets and the emergence of specialised players.”

The bidding for the pipeline was akin to a poker game between the banks and potential buyers, with a nervous government siting in the middle.

The 28 banks were in the fortunate position of having their debt fully serviced, so potentially they could have remained as long-term owners of the pipeline.

Alinta saw this as a real risk.

“There was a risk the whole process could fall over and what was effec-tively a capital strike would continue,” Alinta general manager business development Chris Indermaur said.

“They [the banks] would just lock it up and there would be no expansion, possibly for years.”

Given both Alinta’s and Alcoa’s desire to expand their business operations in the South West, there were strong incentives to buy and expand the pipeline.

Alcoa had a further incentive.

The ‘shipping’ tariff it pays for most of its gas covers both capital and operating costs, but on July 1 2005 (when the contract rolls past 20 years) the tariff will drop to a lower price that reflects operating costs.

If the pipeline was put into liquidation, the liquidator could challenge existing contracts, creating a significant business risk for Alcoa.

KordaMentha partner Brian McMaster said the winning consortium’s success in the bidding was based on a combination of factors.

“Their bid contained acceptable conditions and we were confidemt they could be satisfied in our timeframe,” he said.

Mr Browning believes the membership of the winning consortium was critical to its final success, since Alcoa and Alinta account for about 75 per cent of the gas shipped through the pipeline.

“We knew we were going to have pretty good success negotiating with ourselves on shipper contracts so that was three quarters of the way there,” Mr Browning said.

“Once we got that consortium together, along with DUET who brought 60 per cent of the equity, we knew we were in a pretty strong position.”

Blake Dawson Waldron partner Jon Carson played a lead role in minimising the conditions in the winning consortium’s bid.

He said a key step was the decision to base shipper contracts on the old ‘T1’ contracts that applied before Epic took control of the pipeline.

“I think that was a big help because it was a familiar form of terms and conditions that the shippers were comfortable with,” Mr Carson said.

The consortium also offered long-term contracts, running for 15 years with two five-year extensions, and resolved a range of contractual disputes with various shippers.

“What caught people unawares was the comprehensive nature of the indicative bid,” Mr Carson said.