Babcock & Brown Power 26 November 2008 Proceeds of $130m net of $570m project debt for Kwinana and Neerabup
BBP has sold its 70% interest in Kwinana and 50% interest Neerabup power stations for $130m of gross proceeds, after paying down a $44m LC in favour of BNB interests, the net proceeds of $86m have been applied with operating cash flow to extinguish the BBPH debt. In addition, 100% of Kwinana’s project debt (consolidated on balance sheet estimated at $370m) and 50% of Neerabup’s project debt $150m on BBP balance sheet is devolved.
Cash reserves are also likely to have fallen as assets are sold and construction guarantees no longer required. We estimate net debt at around A$3.2bn although it continues to be an area of uncertainty.
The remaining project debt is against Redbank and Oakey. Redbank has had a chequered earnings history, with numerous unplanned outages, whereas Oakey appears to be a strong performer.
Estimates
Neerabup was not expected to contribute in fiscal 2009, whereas we allowed 50% contribution from Kwinanan. We also note that fiscal 2009 EBITDA is negatively impacted in H1 from Varanus Island.
Management were forecasting EBITDA of $350m for the year, and for the time being we continue to use that estimate, although power prices have been lower than last year. Earnings will be partly dependent on the weather-driven March quarter.
Other impacts on earnings include the obvious reduction in the interest expense. Most of the interest on the construction debt was capitalised and so it’s really the net cash proceeds that impact on fiscal 2009 earnings.
At June 30 the interest rate was 8.5%. On $3.2bn of net debt that suggests an interest expense of $262m.
UBS estimates
2010 earnings and the valuation will be impacted by the Federal Government’s Pollution Reduction Scheme. The main negative impacts are well known. Firstly it provides a review event for the secured debt package, which in any event requires a second (and unlikely to be achieved) rating. Secondly Flinders, over time, is likely to see costs increase faster than revenue.
However the positive impact that could have the most impact is the amount of cash compensation that Flinders receives. That should all be clearer in the next 8 weeks as the Federal Government reveals further details of the specifics of the scheme.
The infamous EBITDA multiple could be around 8X in 2010.
EBITDA multiples are not comparable across the market. However they are a common benchmark in this industry.
If the BBP security price was $1, our 2010 EBITDA multiple would be 9.9x,which we think could still represent fair value. That multiple carries the risks of carbon, but nothing for the cash compensation benefit. We estimate every $100m of cash compensation is of itself worth $0.14 per share.
BBP Price at posting:
5.2¢ Sentiment: LT Buy Disclosure: Held
