The Babcock and Brown empire has an almost infinite capacity to shoot itself in the foot, repeatedly.
There the group was with two of its satellites, Babcock and Brown Wind (BBW) and Babcock and Brown Infrastructure (BBI) with good news for investors about distributions and encouraging talk about the future.
Both groups released their statements around 9.40 am, around 20 minutes after Transurban released its shock news of a big cut in its distribution and a change in the basis for paying its shareholders.
At 3.58 pm the weaker of the satellites, Babcock and Brown Power (BBP) released its statement on distributions and the news was all bad.
No payout for the June half and the 2009 payout slashed by almost 50%. Ouch and a big ouch to be made public with two minutes before trading finished.
Even though the company says the WA gas crisis won’t be ‘material’ as it did last week, the lowered expectations for 2009 give the impression that it will. In fact 2009 pre tax earnings look like falling into the low end of existing analysts forecasts.
Therefore there is every opportunity that the 2009 earnings will end up around $440 million, or lower.
BBP securities slumped 18C in that time (and into the after 4 pm ‘settlement’) to 72C, a fall above 20%. Ouch, indeed. They had been down 3.5c at 86.5c before the late update.
BBP directors talked about paying distributions from operating cash flow in February when 13c per security was paid out, now there seems to be a need for operating cash flow because there’s no distribution for the June half and the 2009 payout will be lower.
Perhaps it was Transurban’s influence, but more likely it was the realisation that BBP couldn’t continue paying out securities holders from borrowed cash when the group itself needs something like $660 million (give or take a few million) over the next year for capital spending and debt reasons.
The group has still to nail down the $2.7 billion in refinancing for most of its assets. That is crucial to the continued existence of the group. Making a 13c a security distribution wouldn’t look good, given the problematic nature of the refinancing.
Image is everything, especially when a company is on the nose and credit is tight.
In its late statement the group said.
"BBP believes that it is prudent to strengthen and degear the balance sheet from current levels of approximately 68% towards the lower end of the previously stated target range of 60-65%.
"Given the refinancing of the BBPH corporate facility which is targeted for completion by the end of August as well as the previously announced capital expenditure commitments, the Board has decided the most appropriate course of action is to not make a 2H08 distribution.
"It is the Board’s view that it is in the best interests of securityholders that future distributions per security ("DPS") be fully covered by operating cashflows. For 2009F, DPS is therefore expected to be in the range of 13 to 18 cents per security based on the current portfolio of assets.
"BBP continues to monitor the impact of gas supply disruption from the Varanus Island incident on the Alinta retail business.
"Whilst there is not absolute clarity regarding the timing of restoration to gas supplies, it is possible this could ultimately take longer than the two months advised by Apache Energy. Taking this into account and given current trading conditions BBP currently anticipates:
"2008F EBITDA to be in the range of $330 million to $340 million which is slightly below Alinta Scheme guidance taking into account pro-rata ownership of Alinta assets.
"2009F EBITDA is likely to be at the lower end of the known analyst forecast range of $439 million to $528 million.
"BBP continues to advance a range of capital management initiatives and continues to progress the asset sale programme and the refinancing of the BBPH3 debt facility of up to $360 million which will further strengthen the capital structure."
On February 27, BBP said this about the interim payout and the full year payment:
"Babcock & Brown Power (ASX:BBP) today announced 1H2008 EBITDA of $154 million, in line with Alinta Scheme Booklet forecasts.
"A fully tax deferred distribution of 13 cents per security is payable on 17 March 2008. The distribution is fully covered by operating cash flows.
"Paul Simshauser, CEO said "We are pleased with the performance of the BBP portfolio and the excellent progress achieved with integrating the Alinta assets.
"Overall, the portfolio is delivering in line with expectations with strong power generation performance being offset by slightly lower that expected results in the Alinta retail business. BBP re-affirms FY08 DPS guidance of 26.1cps reflecting the benefits of a diversified portfolio.
"BBP is positioned to generate good growth for Securityholders from the portfolio of generation assets in Australia and New Zealand and the Alinta retail business in WA and cashflow available for distribution in 09F is expected to exceed 08F."
