History has a wonderful habit of repeating itself - just ask Alinta owner Babcock & Brown Power as it tries to crawl out from a $3 billion debt mountain as a crippling increase in its cost base looms.
History has a wonderful habit of repeating itself - just ask Alinta owner Babcock & Brown Power as it tries to crawl out from a $3 billion debt mountain as a crippling increase in its cost base looms.
Two years ago, BBP parent Babcock and Brown was popping champagne corks when it and Singapore Power finally succeeded with their complex $8 billion takeover offer for WA-based energy utility Alinta at the peak of the market boom.
Having beaten off a rival offer from a Macquarie-backed consortium headed by former Alinta executives, Babcock & Brown and Singapore Power set about carving up Alinta's assets between them.
SingPower took most of Alinta's east coast assets, while Babcock divided the rest among its BBP and BB Infrastructure subsidiaries.
BBI coughed up $1.6 billion for Alinta's WA and Tasmanian gas pipeline assets while BBP forked out $1.2 billion for Alinta's WA retail business which supplies gas to 600,000 small customers, and several small power plants in remote WA, Tasmania and New Zealand.
BBP also assumed more than $2.1 billion in debt, but given this was era of free and easy credit, it was comfortable with the hike in its gearing to almost 70 per cent. Regardless, it said it had until 2009 to refinance the Alinta debt load, so everything was apples.
Fast forward to today and the Alinta takeover is looking more and more a Pyrrhic victory for BBP.
When the GFC hit last year, it significantly hampered BBP's efforts to refinance $3 billion owed under its two major debt facilities.
The smallest, a $399 million loan from failed parent Babcock & Brown falls due at the end of March next year. The second, a $2.5 billion facility owed to a syndicate of banks, could be called in in the event BBP was unable to execute a restructure by the end of last month.
Against this backdrop of attempted refinancing and tightening credit markets over the last year, the BBP-owned Alinta retail business was also required to renegotiate gas prices under supply contracts with the Woodside-operated North West Shelf.
With gas prices rising sharply, Alinta is believed to have been politely asked to pay up to four times more for gas from the Shelf. With neither side willing to budge, the matter entered formal arbitration late last year.
The arbitrator handed down his decision on Tuesday, though it remains a tightly guarded commercial secret. With trading in BBP now suspended, having previously warned that an adverse ruling would put its financial stability at risk, there is little doubt which way the arbitrator has leaned.
And clearly, BBP's bankers are now even more nervous about agreeing to any debt restructure when there is significant uncertainty about one of BBP's core businesses.
So a sale of Alinta for a third time (including its privatisation and float in 2000) is looking increasingly likely, as the banks look to get back whatever cash they can.
Here is where the lessons of history come to bear.
In 1997, the WA government scored a coup when it sold the Dampier-Bunbury pipeline to US-backed Epic Energy for $2.4 billion, hundreds of millions more than the nearest offer. According to Epic, the price was struck on the understanding it would be able to charge a certain tariff to transport gas on the pipeline.
But Epic's debt-funded business model collapsed when the state's gas regulator allowed a significantly reduced gas tariff, leaving Epic unable to either expand the pipeline or service the huge debt obligations it had taken on to complete the purchase.
Consequently, by early 2004 Epic's banks had had enough, and on the brink of insolvency, it sold the pipeline to the Macquarie-backed DUET consortium, which ironically included Alinta for $1.6 billion. (Alinta's 20 per cent stake in the pipeline is still owned by BB Infrastructure).
It was a classic case of a company using mountains of debt to pay over the odds for an asset at the top of the market, only to be brought down when changed market conditions and a dispute over a key input - in Epic's case the gas shipping tariff - make it impossible to service or refinance its debt obligations.
Sound familiar?
As baseball great Yogi Berra would no doubt say to BBP chief Ross Rolfe if he had the chance: it's déjà vu all over again.
