looking bad

http://www.businessday.com.au/business/bad-news-piles-up-for-bbp-20091124-jhbt.html


Bad news piles up for BBP
CLANCY YEATES
November 25, 2009

BANKS with $2.6 billion in exposure to Babcock & Brown Power face the growing prospect of bad debts, amid mounting concern over a gas contract that could sink the company.

BBP's Western Australian gas business Alinta is locked in a long- running contract dispute with the North West Shelf joint venture over gas prices, and an arbitrator delivered a ruling two weeks ago.

Neither party has revealed what the ruling was, but Don Voelte, chief executive of the NWS member Woodside, hinted yesterday that it had favoured the gas joint-venture.

And in another blow to the ailing utility, Suncorp Metway, one of its lenders, indicated the possibility of a higher bad debt charge in the December quarter caused by a ''fluid'' situation with one of its big borrowers.

It is believed that Suncorp - one of the 11-member banking syndicate that is owed $2.6 billion by the utility - was referring to the continuing negotiations surrounding BBP's future.

The Commonwealth Bank, National Australia Bank and ANZ are also exposed to BBP, and analysts said they would also be likely to raise their bad debt provisions.

BBP has suspended its shares from trading since the confidential arbitration decision was handed down two weeks ago. Mr Voelte declined to comment specifically on the matter, but talked up the prospects of domestic gas price rises, giving credence to reports the arbitration had delivered a hefty price rise to the North West Shelf.

''Since we've completed our domestic gas obligations at the North West Shelf, the leverage has really now swung to the joint venture on new contracts, new contract re-openers and existing contracts,'' Mr Voelte said in Perth.

BBP's market value has already shrunk by 98 per cent from its peak and its shares last traded at just 7.6c, but investors are bracing for more bad news from the arbitration.

In its annual report BBP said a poor outcome in the Alinta gas contract dispute - which has been running for more than a year - could ''impact BBP's future as a going concern''.

BBP has been in regular talks with its bankers for the past year, during which it has tried to sell off its power stations and retail assets to pay down its debts.

In July BBP's bankers lowered its minimum interest cover ratio to 1.1 times, meaning BBP's pre-tax earnings needed to be just 1.1 times its interest bill. But it is understood that the arbitrator's ruling could apply retrospectively, forcing BBP to pay higher prices for the past year as well as passing on a major cost increase to its customers.

If BBP can remain afloat after the Alinta gas contract dispute, it has developed a debt restructuring proposal it hopes to put to a shareholder vote at its annual general meeting on December 18.

Source: The Sydney Morning Herald