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Energy Developments Interim Results
27 Feb 2008
Energy Developments Limited (ASX Code: ENE) today reported a net profit after tax and specific items of $14.5 million for the half year ended 31 December 2007, up $4.2 million on the $10.3 million profit after tax and specific items achieved in the previous corresponding period.
The result reflects a gain of $5.1 million on the sale of the King County landfill gas (LFG) rights in the United States during the first half.
The net profit after tax before specific items was down $2.6 million to $9.4 million for the half year from $12.0 million previously, due largely to the fall in the price of NSW Greenhouse Gas Abatement Credits (NGACs) over the period.
The unfranked interim dividend has been increased by 60% to 4 cents per share (cps) and will be paid on 3 April 2008 to shareholders on the register at 20 March 2008. The Company’s dividend reinvestment plan will apply to the interim dividend.
Sales revenue was up 10% to $97.1 million, while earnings before interest, tax, depreciation and amortisation (EBITDA) before specific items was down 1% to $44.5 million.
Earnings per share before specific items was 6.4 cps (2006 8.2 cps) and 9.8 cps after specific items.
Managing Director Greg Pritchard said the first half results included only a nominal contribution (EBITDA $0.1 million) from the Company’s West Kimberley Power Project (WKPP).
“We are very pleased with the recent progress of the WKPP with four of the five power stations now in commercial operation and at various stages of final 60 day reliable operations tests required under the Horizon Power Power Purchase Agreement (PPA),” he said. “Subject to completing these final tests over the next two months, the WKPP will contribute to our second half results.”
Mr Pritchard said the Karratha LNG plant, which supplies fuel to the power stations at Broome, Derby, Halls Creek and Fitzroy Crossing, and the logistics chain to deliver and store fuel at the power stations were both working well.
“The first half result was disappointing though, with the fall in NGAC pricing together with other factors such as timing of operations and maintenance costs at certain Australian sites, higher net interest costs and one off executive termination payments made ($1.4 million), combining to reduce the first half result, ” Mr Pritchard said.
“The current regulatory uncertainty over the transition of the GGAS scheme into the proposed Federally mandated Emissions Trading Scheme (ETS) and the terms of the ETS itself have resulted in significant volatility in electricity and green credit markets over the first half. We strongly encourage both State and Federal Governments to move quickly to reduce this uncertainty which will assist with ongoing investment decisions and returns.”
The overall result masked the continued strong performance of the Company’s United Kingdom (UK) LFG business with EBITDA up 17% to $11.8 million, reflecting ongoing optimisation activities and stronger electricity and green credit pricing.
“This trend is expected to continue in the second half,” Mr Pritchard said.
On the development front Mr Pritchard said the move to full commercial operation of the WKPP project remained the key focus over the next three months.
“Construction of the new 45MW Moranbah North CMM project is progressing well and remains on target for full commercial operation in the fourth quarter of calendar 2008, notwithstanding the recent wet weather conditions in Central Queensland,” he said.
The $60 million project is being constructed under a turnkey contract by Clarke Energy.
Mr Pritchard said that the Company had, over the past three years, invested more than $450 million in growth opportunities around the world and it was timely to consolidate and lift the returns from projects such as WKPP that will be derived over the next 20 years.
While Energy Developments continued to evaluate major new opportunities and acquisitions, Mr Pritchard said the Company’s likely short term focus would be on incremental opportunities for growth in its core business fields, especially with existing customers, and potential capital management opportunities.
Mr Pritchard said that the Company expected FY08 EBITDA to be in the range of $100 million to $105 million, slightly lower than market guidance of $105-$110 million provided in November 2007, due to timing of the WKPP ramp up and lower than anticipated NGAC green credit revenues.
ENE’s Australian operating business was relatively stable in the half with EBITDA down 9% to $30.8 million reflecting lower NGAC pricing and higher operating costs offsetting the full half contributions from the 32MW German Creek CMM and Yulara CNG projects.
Green credit prices have improved with NGAC spot pricing increasing to $8.00 in February compared to an average of $7.10 in the first half. Renewable Energy Certificate (REC) prices have remained strong, underpinned by the new Federal Governments’ commitment to a Mandatory Renewable Energy Target (MRET) of 20% by 2020.
Mr Pritchard noted that the contribution from the 32MW German Creek CMM project was adversely impacted by lower NGAC pricing and the timing of gas payments which are determined on a calendar year, tiered pricing structure.
As expected, the remote power and Tower Appin CMM business segments performed well with earnings largely underpinned by capacity charge revenue offset by higher maintenance charges at certain sites which had been carried over from prior periods.
The Company’s US LFG business achieved an EBITDA result of $0.3 million (2006 $0.7 million) with the operating results reflecting ongoing Deutz engine issues and certain low priced PPAs which expire in 2011. Mr Pritchard said good progress had been made on the three key areas essential to lift the operational performance of the US LFG portfolio in the medium term as follows:
• Deutz engine reliability and operational support at the larger US LFG sites – Deutz service continues to improve from a low base with the commitment of further resources by Deutz.
• The introduction of gas conditioning (GC) at key sites to address gas issues impacting n maintenance costs – capital approved in late 2007 for GC to be installed at a key LFG site; and
• Access to higher electricity pricing upon the expiry of a major unfavourably priced PPA and renegotiation of other existing agreements together with the rapid development of tate-based renewable portfolio standards – good progress made with key counterparties.
Mr Pritchard said that the Company held substantial long dated LFG reserves at its current US sites and would move, over the next two to three years, to fully exploit these reserves by addressing each of the above.
ENE’s share of net profit from associates (joint ventures in the UK, France and Greece) was $1.9 million (2006 $0.9 million) with the higher contributions from the Ano Liossa LFG project (ENE share – 50%) achieved as gasfield access for the new 10MW expansion was progressively resolved during the half.
“We expect further earnings growth in the coming year from our Joint Ventures as growth and optimisation activities in France and Greece continue,” Mr Pritchard said.
Cash and Financing
Cash on hand at 31 December 2007 was $88 million of which $43 million was designated to support capital and other equity commitments to the WKPP.
Net debt was up $54 million to $405 million since 30 June 2007, reflecting debt funding of the WKPP and the $60 million Moranbah North project during the half. Consequently gearing (net debt/net debt plus equity) increased to 58% (30 June 2007 55%). Undrawn lines totalled $89 million at 31 December.
Mr Pritchard noted that the Company had completed three important funding initiatives in the past three months as follows:
• Upsizing of UK project debt facility by £10 million to £70 million in November 2007, underlining the excellent quality of the UK portfolio and the improving fundamentals in this key market;
• Financial close of the $43 million Moranbah North project facility in February 2008; and
• Conversion of the $180 million WKPP construction facility into a $144 million, 10-year term facility following commencement of commercial operations of the Broome and Derby power stations.
Mr Pritchard said these initiatives had been delivered without any material adverse impact from the ongoing global debt market volatility.
The Company has recently commenced the refinancing of its quality 360MW Australian asset portfolio (including the 45MW Moranbah North CMM project) and expects to have this process complete by 30 June 2008. Mr Pritchard said the $200 million debt facility, due to expire in December 2008, was underpinned by long term, blue chip contracted cashflows and could, subject to market conditions, provide additional funding for capital management and other incremental growth options.
Green Credits/Carbon Emissions Trading
Mr Pritchard said the Company was pleased that the critical issue of global climate change was now finally at the centre of the political and economic debate in Australia and overseas with schemes being rapidly developed to address carbon emissions trading and to encourage renewable energy.
“We are pleased that in Australia the Federal Government is aggressively pushing ahead with its plans for a new national Emissions Trading Scheme and a significant increase in the MRET to 20% by 2020,” Mr Pritchard said.
“One of the key considerations for policy makers must be the appropriate grandfathering and transitioning of existing state-based carbon abatement and renewable energy schemes into the National ETS and the expanded MRET schemes. Early participants such as ENE that have made investments of hundreds of millions of dollars in the clean energy and carbon abatement business over the past 15 years should not be adversely penalised for early action.”
Mr Pritchard said he was also pleased with the NSW Government’s ongoing support of the GGAS scheme and its public determination to ensure appropriate grandfathering for this highly uccessful and world leading carbon abatement scheme into the National ETS.
During the December half the Company captured and utilised greenhouse gases estimated at .7 million tonnes of carbon dioxide equivalent from its LFG and CMM projects around the orld. Mr Pritchard said the Company would continue to target the development and/or expansion of projects that avoid or further reduce emissions especially in the area of diesel displacement.
At 31 December 2007, ENE’s installed operating capacity was 487MW. This has now increased to 547MW with the commencement of commercial operations of the WKPP in January/February 2008 and will increase to over 590MW with the completion of the 45MW Moranbah North project in late 2008.
The 45MW Moranbah North CMM project remains on schedule within the capital estimate of $60 million and for completion in Q4 of 2008.
Mr Pritchard said the Company was delighted to finally bring the WKPP into commercial operation and was pleased with progress to date.
“While there is more to do, the project has been de-risked from a development perspective and we look forward to the long term and stable underlying cash flows that will flow from the project,” Mr Pritchard said.
The WKPP remained on track for a final capital cost of $310-320 million, including development, financing and potential delay costs as advised to the market in August 2007.
Mr Pritchard said the Company continued to explore remote and CMM power generation opportunities in Australia, especially in conjunction with its existing customer base, although further opportunities needed to be tempered by the realities of the ongoing boom in construction costs for new greenfields projects and the ability to appropriately mitigate such risks.
“Continued high oil prices support the business case for diesel displacement with LNG or CNG in Australia and the Company is exploring a number of opportunities in the sector in discussions with third parties,” he said.
The Company continues to exploit growth opportunities in its LFG businesses in the United Kingdom and France where further new projects will be commissioned in the second half.