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Energy Developments 2008 Financial Results

26 Aug 2008

• Underlying revenue up 12% to $204.2 million
• EBITDA $97.7 million (2007 $96.2 million)
• One-off gas supply issues at German Creek, lower NGAC prices and WKPP supply interruptions at Broome impact Reported Profit before specific items - FY2008 $18.0 million after tax (2007 $27.1 million)
• Final dividend up 1cps to 6cps (Full year dividend up 33% to 10cps)
• Company well placed for uplift in earnings in FY2009

International low emission power company Energy Developments Limited (ASX Code: ENE) today announced a net profit after tax and specific items of $21.3 million for the 2008 financial year (2007 net loss of $16.6 million).

The Board has declared an unfranked final dividend of 6 cents per share (2007: 5 cps), taking the full year dividend up 33% to 10cps (2007: 7.5cps).

Earnings before interest, tax, depreciation and amortisation and specific items (EBITDA) were $97.7 million (2007 $96.2 million) on revenues of $204.2 million (2007: $183.0 million).

The net profit after tax (before specific items) was $18.0 million, down $9.1 million on the prior year due largely to the fall in price of NSW Greenhouse Gas Abatement Certificates (NGACs) over the year, the previously reported gas supply issues at the 32MW German Creek Coal Mine Methane (CMM) project and the delays in the commercial operation of the WKPP in the second half of FY08.

Specific items of $3.3 million (gain) after tax comprised the profit on the sale of US landfill gas rights at King County of $5.1 million in the first half offset by executive termination payments of $1.2 million and additional West Kimberley Power Project (WKPP) gas costs due to the Apache Varanus Island incident of $0.6 million.

Managing Director, Greg Pritchard, said: “The key operational causes of the lower FY08 result have been addressed and combined with cost reduction initiatives taken in the second half, the Company can look forward to improved financial results in FY09.”

“The WKPP is now in commercial operation and running well, delivering power to the five West Kimberley towns of Broome, Derby, Fitzroy Crossing, Halls Creek and Looma. We are satisfied with all aspects of the project at this early stage of the twenty year contract”.

Mr Pritchard said that the success of funding initiatives throughout the year, capped by the execution of a new $300 million Australian syndicated debt facility in June 2008, had highlighted the blue chip quality of the Company’s asset portfolio especially in Australia and the United Kingdom.

“The Company has the cash resources and strong operating cashflow from existing business to allow prudent growth in key markets and/or consideration of capital management initiatives,” he said.

The final dividend of 6cps increases the total payout ratio for the year to 70% and is commensurate
with the Company’s strong cash position which is expected to increase with a full year of WKPP operation, the commencement of the Moranbah North CMM project and other initiatives.

Shareholders on the register at 12 September 2008 will be paid the final dividend on 3 October 2008. The Company’s dividend reinvestment plan will apply to the final dividend.

Strategic Review

The Strategic Review announced on 4 July 2008 is progressing well, with information memoranda expected to be dispatched to qualifying third parties in the next two weeks.

The Review is considering a variety of options with the aim of maximising value for all of the Company’s shareholders.

Mr. Pritchard noted that the extent of interest received to date from international financial sponsors, infrastructure funds and energy companies was consistent with the quality of Energy Developments’ portfolio of diversified and low risk renewable and clean energy assets spanning Australia, Europe and the US, including power generation from landfill gas, coal mine methane, natural gas and liquefied and compressed natural gas.

Outlook

Mr Pritchard said the Company expected FY09 EBITDA to be in excess of $120 million, beforetaking account of the potential costs associated with the Company’s Strategic Review.

Despite the interest received to date, should the Strategic Review be terminated at 30 November 2008 without a transaction occurring, the likely internal and external costs to be incurred, including contractual termination fees, are estimated at $8.0 million. The total costs of the Strategic Review will ultimately depend on its outcome which cannot be accurately determined at this stage.

External costs incurred to date on the Strategic Review, including legal, financial and other advisory costs, are estimated at $1.5 million.

The key drivers for the improved FY09 performance include a full year contribution from the WKPP, the expected operation of the 45MW Moranbah North CMM project in December 2008 and reduced overheads.

Mr Pritchard noted that the FY09 market guidance was based on an assumed NGAC price for FY09
generation of $8.00 per certificate, with EBITDA sensitivity to every $1 movement in the NGAC price estimated at $1.6 million after tax, prior to any potential impairment adjustment of NGACs on hand.

Operating Performance

Australia ENE’s Australian operating EDITDA was steady at $69.1 million, impacted by lower NGAC pricing achieved (FY08 $8.25 compared to FY07 $13.14), the German Creek gas supply issues ($2 million) and the delayed startup of the WKPP (H2 revenue foregone at Broome of $4.6 million).

EBIT declined 17% to $35.2 million reflecting higher depreciation charges associated with WKPP ($4 million) and other projects.

Cost reduction initiatives taken in the second half mitigated the effect of lower NGAC prices and are expected to deliver full year savings of approximately $4 million in FY09.

Overall the Australian business enjoyed stable operating conditions reflecting the low risk, contracted and diversified nature of the Company’s Australian operating base and blue chip customers such as BHP Billiton, Xstrata, Oz Minerals, Horizon Power, Power and Water Corporation and Anglo Coal.

UK / Europe

The Company’s United Kingdom (UK) business continued its strong trend of profit growth with EDITDA up 8% to $24.0 million and EBIT up 10% to $17.9 million. In local currency terms EBITDA growth increased by 17% with the higher A$ impacting on financial results,” Mr Pritchard said.

“We expect profit growth to continue in FY09 with the UK business well positioned to benefit from upward trends in electricity tariffs and via new optimisation activities and expansions already underway,” Mr Pritchard said.

The Company’s 50% share of EBITDA from associates (joint ventures in France and Greece) was
$8.6 million (2007: $6.3 million) with the higher contribution from the Greek JV reflecting the 10MW expansion completed in FY07.

Mr Pritchard noted that the French JV commissioned six new 1MW projects in Q4 FY08 which will
contribute to earnings in FY09 with further incremental growth planned.

“We expect the EBITDA contribution from our European JVs to increase strongly in FY09 as a result of ongoing optimisation, cost reductions and higher power pricing”.

United States

The Company’s US LFG business achieved an EBITDA of $1.1 million (2007: $2.1 million) with the operating results again impacted by Deutz engine reliability and ongoing support issues, higher maintenance costs and a predominance of low priced PPAs which expire in 2011.

“As previously reported, the Company has significant contracted LFG reserves which offer considerable current expansion potential of up to 30MW subject to higher power pricing, improving gas quality at certain sites and planning and permitting, “ Mr Pritchard said.

The first installation of gas conditioning equipment at the Company’s Lorain site is scheduled to be commissioned in December 2008 and is expected to improve gas quality and reduce engine downtime and maintenance costs.

The Company intends to roll out the gas conditioning equipment to certain other key US LFG sites assuming successful testing, which, combined with the expected uplift in US power pricing and the continued emergence of State based green credit schemes, is expected to underpin the expansion of these sites.

Cash and Financing

Cash on hand at 30 June 2008 was $90.2 million (2007 $98.6 million) while undrawn lines totalled
$138 million.

Net debt was $423 million, up $72 million since 30 June 2007 reflecting debt funding of the WKPP and the $60 million Moranbah North CMM project during the year. While gearing (net debt/net debt plus equity) increased to 58% (2007: 55%), cash interest cover was 3.7 times.

Notwithstanding volatile global debt markets over the past year the Company achieved a number of key funding initiatives including:

• Execution of a new $300 million Australian syndicated debt facility covering the Company’s existing Australian operating base, with the exception of the WKPP and the Moranbah North CMM project which have separate facilities;

• Upsizing of the 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 of he UK LFG 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 in March 2008.

Mr Pritchard said the success of the funding initiatives further underlines the blue chip quality of the Company’s asset portfolio especially in Australia and the United Kingdom.

West Kimberley Power Project

All aspects of the WKPP are fully operational and providing electrical energy to the towns of Broome, Derby, Fitzroy Crossing, Halls Creek and Looma. The final capital cost for the project was $320 million, including all financing, development and capitalised interest costs.

“Completion of the WKPP places Energy Developments in an ideal position to capitalise on the demand for energy and for greenhouse gas emission reduction in Australia especially in the booming Pilbara and Kimberley regions of Western Australia,” Mr Pritchard said.

Mr Pritchard noted that the Company had identified the primary causes of the gas quality related
interruptions experienced at the WKPP power stations and steps were underway to enhance gas quality and process flows at each of the power stations.

The Apache Varanus Island incident on 3 June 2008 interrupted gas supplies to the LNG plant at Karratha and the Company was obliged to seek alternative gas supplies at higher prices. Apache Energy and Santos have now restored partial supply to the Company whilst the balance continues to be sourced from an alternate supply.

“The West Kimberley project has not otherwise been affected by the incident and we expect, with the exception of a 30 day time based deductible, that insurance cover will respond to absorb the Company’s higher gas costs until normal full gas supply is restored,” Mr Pritchard said.

A specific item of $0.6 million after tax has been booked at 30 June 2008 and a similar amount is expected to be incurred in FY09 reflecting the remainder of additional gas costs not otherwise expected to be covered by insurance.

Green Credits/Carbon Emissions Trading

The Company continues to actively participate in the development of mechanisms and policies to address the critical issue of global climate change and the expansion of renewable energy around the world.

“We are pleased that the Federal Government is pushing ahead with its national Carbon Pollution Reduction Scheme (CPRS) and an expansion of the current Mandatory Renewable Energy Target to 20% by 2020,” Mr Pritchard said.

We reiterate, however, that the policy makers should ensure the appropriate grandfathering and transitioning of existing state-based carbon abatement and renewable energy schemes into the CPRS and the expanded MRET schemes. Early participants such as ENE, which have invested 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.

“We are also pleased with the NSW Government’s continued support of the GGAS scheme and its public determination to ensure appropriate grandfathering for this highly successful and world leading carbon abatement scheme into the CPRS.

“We will continue to work with both State and Federal Governments to better define the transitional arrangements and will encourage the Federal Government to provide further details in this aspect so as to remove some of the current uncertainty from existing green credit and energy markets, “ Mr Pritchard said.

During the year the Company captured and utilised greenhouse gases estimated at 8.8 million tonnes of carbon dioxide equivalent from its LFG and CMM projects around the world, equivalent to removing 2.8 million cars from the road.

Energy Developments will continue to target the development and/or expansion of projects that avoid or further reduce emissions, especially in the area of diesel displacement.

Development Activities

At 30 June 2008 the Company’s installed operating capacity was 552MW reflecting completion of the WKPP and a number of incremental expansion projects in the United Kingdom and France during the year.

Development of the 45MW Moranbah North CMM project is progressing well and remains on target for full commercial operation in December 2008 within the initial capital estimate of $60 million. The project has an installed capacity of 45 MW and will utilise CMM supplied by Anglo Coal under a long term gas supply agreement.

Construction of the project under a turnkey contract with Clarke Energy has progressed smoothly to date and demonstrates the success of the Company’s revised project development methodology of outsourcing material project construction risk to third parties.

Mr Pritchard said that while much of the Company’s resources were focussed on the completion of the WKPP during H2 FY08, Energy Developments has significant development opportunities open to it including the following:
• Expansion of existing LFG projects in the United States, the UK and France as the supply of LFG increases at open landfills;

• Expansion of existing and addition of new remote area projects in Australia, driven by increasing global demand for resources;

• Supply of electrical power from the existing power station at the Karratha LNG plant to the growing Pilbara region of Western Australia;

• Substitution of LNG and CNG for diesel in stationary power and heavy duty vehicle applications throughout Australia, leveraging off the learnings from the WKPP; and

• The use of coal seam methane for the production of electrical power and LNG.

www.energydevelopments.com.au 

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