Completion of Acquisition: New England - New York Cross Sound Cable2 March 2006
Babcock & Brown Infrastructure (ASX: BBI) today announced the completion of the acquisition of the Cross Sound Cable, which links the electricity grids of New England and New York.
As announced by BBI on 9 November 2005, BBI entered into a purchase agreement with TransEnergie HQ Inc and UIL Holdings to acquire the membership interests in the Cross Sound Cable Company LLC for approximately US$213 million and an equity requirement of US$25.7 million excluding cash reserves. The Cross Sound Cable Company has 100% ownership of the Cross Sound Cable Project.
The acquisition was subject to a number of regulatory approvals, all of which have now been satisfied and the transaction was completed yesterday.
The Cross Sound Cable was commissioned in 2002 and is a High Voltage Direct Current (HVDC) transmission interconnector, linking the New England and New York electricity grids. It consists of 39km of 150kV under sea cable, terminating in two on-shore converter stations utilising AC/DC conversion technology designed, built and supported by ABB Power T&D Inc ("ABB"). The interconnector can transmit up to 330MW continuously, and can flow electrical current in either direction. The cable entered into continuous operation early in 2005.
The entire transmission capacity of the cable is contracted to the Long Island Power Authority (LIPA) until June 2032. LIPA is an A3/A- rated municipal power authority. Payments by LIPA to the cable owner are based on availability of the cable, which is expected to be in excess of 98%. Contracted revenues escalate by a fixed percentage per annum over the life of the contract (subject to achieving availability criteria). There is also a one-off material increase in base contracted revenue, which will occur by no later than 1 July 2008.
The Cross Sound Cable is an essential component of the growing but capacity-constrained New York and New England electricity markets. The importance of the cable to the region is therefore expected to increase over time.
The acquisition cost reflects an EV/EBITDA multiple of less than 13.7 times (excluding transaction costs), by 1 July 2008. The majority of operating costs are stable and there is a comprehensive inventory of spare components held on both sides of the cable at the converter stations. The asset is also early in its engineering life, having been commissioned in 2002. Ongoing capex requirements are low with this type of long-life electricity asset.
All key members of the existing operations team have been retained and will continue in their current roles. This is an important benefit as the team has extensive knowledge of the asset, having been involved in its development and commissioning.
BBI will fund the acquisition through a ring-fenced, secured, 5-year project financing of US$193.1 million and equity. Project gearing is approximately 90% due to the secure and predictable nature of the cash flows of the project and the long life of the asset. The underlying base interest rate has been fixed for the duration of the contract with LIPA (i.e. until June 2032). The project has a post-tax equity IRR in excess of 12%. BBI may elect to partly fund the equity requirement with BBI corporate debt (drawn in USD) to cost-effectively hedge currency risk.
Chief Executive Officer of BBI, Mr Steven Boulton, said of the completion of the acquisition: "Now that we are the owners and managers of Cross Sound Cable, we can utilise our skills in integrating the asset into the BBI portfolio to maximise the returns to BBI security holders generated by this asset. The investment should also provide us with a springboard into the United States infrastructure market and allow us to better take advantage of future opportunities there as they arise."
Further detail on the Cross Sound Cable Project and the transaction is contained in the ASX Release at http://www.asx.com.au/asx/research/CompanyInfoSearchResults.jsp?searchBy=asxCo de&allinfo=on&asxCode=BBI#headlines
Other BBI portfolio highlights
Recently there have been a number of other additional positive developments in the BBI portfolio.
-- The PD Ports transaction in the United Kingdom was successfully
completed on 10 February 2006, with BBI receiving in excess of 90%
acceptances of both shares and convertible bonds and commencing the
process of compulsorily acquiring the balance. Integration of the
business into BBI's portfolio is well underway and is progressing to
the target completion date. The rigorous analysis and thorough due
diligence undertaken prior to BBI's bid for PD Ports appears to be well
founded as further analysis of the business and detailed discussions
with PD Ports management following the acquisition confirm the
assumptions made in the acquisition of PD Ports.
Following the acquisition, the ASDA/Walmart distribution centre at
Teesport is now complete and about to commence operation. This
important development will be the main distribution centre for
ASDA/Walmart in the UK and is expected to provide additional container
traffic, conservancy and property rental revenue to PD Ports.
Discussions are underway with a number of other parties interested in a
similar opportunity to replicate this development. PD Ports has
sufficient land to support five additional developments of this type at
the Teesport site.
Agreement with Corus (Teesside steel manufacturer) to export the
majority of its output through Teesport is also close to completion.
The export of the majority of the output of the Corus facility will
also result in strong increases in conservancy and container handling
revenue for PD Ports. Ramp up to full volume for the export of the
Corus facility volumes is expected to occur over the next 12-18 months.
-- BBI's other Europe-based asset IEG operates in the UK gas distribution
market. The regulator in the UK, OFGEM, has recently confirmed the
regulation of the Independent Electricity Transmission (IET) market in
the UK with IEG actively pursuing entry into this market. The IET
market has similar investment characteristics as the Independent Gas
Transmission (IGT) market. IEG has approximately a 35% share of the IGT
market in the UK and has established strong relationships with property
developers that service both the IGT and IET markets. The IET market
is the 'last mile' connection for electricity to new developments and
the total market is estimated at approximately 170,000 new connections
per annum. IEG is aiming to become active in the IET market within the
next 6 months thereby generating additional revenue for BBI.
-- Moody's rating service recently issued a rating for BBI's senior
secured corporate level debt. Moody's assigned the investment grade
rating of Baa3.
-- Following the conclusion of the current non-renounceable entitlement
issue, BBI will have sufficient market capitalisation where it is
likely to be considered for inclusion in the S&P ASX 100 index, when
the composition of that index is next reviewed.
David Parquet
Babcock & Brown, San Francisco
415-512-1515
Elizabeth Hawke
Babcock & Brown
Phone: +61-2-9229-1800
Steve Boulton
Chief Executive
Babcock & Brown Infrastructure
Phone: +61-2-9229-1800
Source: prnewswire
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