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Energy Developments 2008 AGM
6 Nov 2008
My remarks today will cover the year as a whole, the West Kimberley Power Project, the continuing Strategic Review process, and the regulatory environment in which the Company works in Australia.
Our Managing Director, Mr Greg Prichard, will then follow to discuss the Company’s 2008 performance and outlook for the current financial year.
From a Company perspective, 2008 has been a mixed year. On the one hand, early in 2008, problems on the start-up of the West Kimberley Power Project, following the earlier construction cost overruns, falls in green credit prices, and temporary gas supply shortages at the German Creek project, were the cause of considerable frustration. As the year progressed, these events came to be reflected in the Company’s earnings and share price performance.
However, the year also witnessed numerous positive aspects, particularly the completion of the West Kimberley Power Project. This extraordinary development is now in full commercial operation under the 20-year agreement with Horizon Power. German Creek gas supply has been restored and the power station is operating near capacity, delivering predictable and stable cash flows. And good progress has been made in completing the Company’s newest coal mine methane project at Moranbah North in Central Queensland.
EDL, under the leadership of our new chief executive, Greg Pritchard, is pursuing a range of new opportunities to exploit the diverse asset and skill base of the Company.
I would expect that all of you are aware that the Company has embarked on a comprehensive Strategic Review of the entire business.
Several months ago, the Company received feedback from its major shareholders, signalling a view the market wanted to see what steps could be taken to have EDL’s undoubted inherent value more immediately reflected in the share price prevailing at that time.
Consequently, the Company announced on 4 July that it would undertake a Strategic Review and engaged various financial and legal advisors to assist in the process.
This Review is continuing to consider a variety of options, which include the potential sale of the Company as a whole, or the sale of some of its businesses, or some other strategic arrangement, all with the objective of maximising value for all of the Company’s shareholders.
It is a big exercise. We now operate in five countries across three continents, and have a broad and complex mix of operating activities, customer arrangements and financial facilities. We foreshadowed that the process would take significant time to put it all together, and that is proving to be the case.
Nevertheless, good progress has been made, with strong initial interest expressed in all of the Company’s businesses from a range of financial sponsors and trade partners. Qualifying parties were provided with confidential information memoranda in early September and a select list of shortlisted parties is conducting detailed due diligence on the various businesses at the current time.
A note of caution is relevant here. When we started the Strategic Review in July the world was a different place. The unprecedented recent volatility in global financial markets may, in time, adversely impact the outcome of the Strategic Review process. However, at this stage the Strategic Review is progressing satisfactorily and we expect to complete the process before the end of the calendar year, in line with our original expectations.
The Company can say no more at this stage. We will keep shareholders apprised of developments as quickly as is appropriate. However, I think it is worth noting here that the Energy Developments’ share price has held up remarkably well amid the dramatic equities sell off around the world.
While the announcement of the Strategic Review proved timely in response to a view that the market was not fully recognising the value of the Company’s assets, the stable, long term cash flows they are generating now appear to be better appreciated as investors search for certainty.
Returning to the past year, our net profit after tax and specific items of $21.3 million was a significant improvement on last year’s net loss of $16.6 million (which was impacted by net provisions of $43.7 million against West Kimberley and other assets). However, after excluding specific items, 2008 net profit of $18 million was down $9.1 million on the prior year. Greg will address the 2008 financial result in his remarks.
Importantly in these difficult times, EDL is in a healthy financial position. We retain the continued strong support of the Company’s bankers, as demonstrated in the $300 million refinancing and debt upsizing of our Australian debt facilities in June 2008. It is important to note that the Company has no refinancing obligation until 2013. This highlights the underlying quality and value of the Company’s asset portfolio with its long term offtake agreements with strong counterparties, which in turn provide a notable degree of immunity from the current negative economic cycle.
This position was also reflected in the decision to increase the final unfranked dividend, paid in October 2008 to 6 cents per share, taking the full year dividend paid up 33 per cent from 7.5 cents to 10 cents per share.
While the Strategic Review is absorbing significant time for the senior management team, we are continuing to pursue new growth prospects for the Company, as well as, of course, actively manage the ongoing enterprise, cognisant of course of the longer term ramifications of the poor global financial climate.
The 45 MW Moranbah North Coal Mine Methane project is on track for ramped up commercial operations to commence later this year and has in fact been selling power into the national electricity grid during the commissioning phase.
Gas conditioning equipment is also being installed on a trial basis at Lorain County, one of our US LFG operations with the objective of significantly improving gas quality and engine operation. Extensions and expansions of existing landfill and remote power sites are being pursued around the world. We are seeking opportunities to use our hard-won knowledge of LNG and CNG production and distribution, by expansion into stationary power and heavy duty vehicle applications.
In the broader business environment, EDL is fully supportive of the initiatives of the Australian Federal Government to reduce carbon emissions, and believes that these efforts will provide long term opportunities for the Company.
However, the proposed approach to carbon emissions reduction taken by the Federal Government is quite different to the existing state based schemes under which EDL has been operating for the past seven years and on which long dated carbon abatement power projects have been built.
It is essential that early movers in the carbon abatement arena, such as power generators from landfill gas and coal mine methane like EDL, are treated fairly under the proposed Carbon Pollution Reduction Scheme, and are not unreasonably, or unintentionally, penalised by the new rules. This can be achieved by appropriate grandfathering or transitioning of existing operations into the new CPRS scheme, providing equity and investment certainty.
The continuing weakness in the value of NSW Gas Abatement Certificates or NGACs is directly attributable to the ongoing uncertainty over the timing and nature of the proposed new scheme and needs to be addressed expeditiously.
While the recent Federal Government’s Carbon Pollution Reduction Scheme Green Paper issued in July 2008 supports working with the NSW government on transitional arrangements for State based schemes, it contained no details.
EDL has made extensive representations to both the Federal and State governments (primarily NSW), and been given good hearings. We believe both the Federal and NSW Governments now fully understand the potential perverse economic and environmental outcomes of the failure to provide transition arrangements for early mover carbon abatement companies and we will continue to work with all parties to ensure these are delivered. Our efforts will continue.
There was one change to the Board over the past 12 months. Mr Chris Laurie retired as Managing Director in December 2007 to pursue other interests in the United States. Chris joined EDL in 2002 and provided EDL with a needed period of stable leadership in his five years as Managing Director.
The Company was pleased to be able to appoint Mr Greg Pritchard, our former Finance Director, to the position of Managing Director. Greg is bringing renewed vigour to the direction of the Company.
The Company is in compliance with the ASX Corporate Governance Council’s principles of Good Corporate Governance and Best Practice Recommendations. We are well placed to comply with the new revised principles which will take effect during the coming financial year.
I would like to thank all employees for all their efforts in the ongoing safe operation of the enterprise, and in successfully and safely delivering key projects such as West Kimberley during the course of the year in very difficult circumstances.
Finally, let me thank shareholders for your support and for your frank feedback during the course of the year as to the future direction and plans for the Company, and I look forward to presenting you with the outcomes of the Strategic Review in due course. This will be an obvious watershed for the future of the Company as a whole.
Greg will now bring you up to date on the operations of the Company.
Thank you. Greg Pritchard, Managing Director Address and Presentation