25 Feb 2009
Half year highlights
• Sales revenue up 28% to $118.9 million
• EBITDA before specific items up 36% to $60.4 million
• WKPP operating well and Moranbah North 45 MW power project completed below budget and ahead of schedule
• Interim dividend increased by 25% to 5.0 cents per share, unfranked
• Discussions continuing with Commonwealth and NSW Governments on CPRS transitional arrangements
International clean energy company Energy Developments Limited (ASX Code: ENE) today announced earnings before interest, tax, depreciation and amortisation and specific items (EBITDA) of $60.4 million for the six months to 31 December 2008 (2007 $44.5 million). This improvement in underlying earnings was achieved on revenues of $118.9 million (2007: $92.9 million) reflecting a robust operating performance from the Company’s businesses.
The net profit after tax (before specific items) was $9.9 million, up 6% on the prior corresponding half reflecting the contributions from the West Kimberley Power Project (WKPP) completed in June 2008 and the early ramp up of the 45MW Moranbah North Power Coal Mine Methane (CMM) project. Cost reduction initiatives largely offset the adverse impact of lower Australian NGAC prices during the half.
Net profit after tax and specific items was $0.2 million for the half year, compared to $14.5 million in the corresponding 2008 half year.
Specific items of $9.7 million (loss) after tax (2007 $5.1 million gain) were recognised in the half year comprising an impairment adjustment of NGAC inventory on hand ($5.2 million), Strategic Review costs ($5.0 million) and additional WKPP gas costs associated with the June 2008 Apache Varanus Island incident ($1.0 million). These losses were partially offset by the recognition of the remaining $1.5 million deferred consideration on the sale of the King County (USA) landfill gas rights sold in the previous financial year.
The unfranked interim dividend has been increased by 25% to 5 cents per share (cps) and will be paid on 2 April 2009 to shareholders on the register at 19 March 2009. The Company’s dividend reinvestment plan will apply to the interim dividend, with a 2.5% discount factor.
Managing Director, Greg Pritchard, said: “The underlying performance of the Company’s operating businesses has been very solid and in line with expectations. Our new projects are delivering well and cost reduction initiatives have helped offset the material decline in NGAC prices suffered during the half”.
“During the period we successfully commissioned the 45MW Moranbah North CMM power project below budget and ahead of schedule, providing clear evidence of the success of our revised project development methodology”.
“The WKPP is running well, delivering power to the five West Kimberley towns of Broome, Derby, Fitzroy Crossing, Halls Creek and Looma. We are pleased with the performance of the project at this early stage of the twenty year contract”.
In July 2008 the Company embarked upon a strategic review to evaluate options to maximise value for all of the Company’s shareholders.
In December 2008 the Company announced that, despite positive expressions of interest received in September for the purchase of the Company and/or its various businesses in UK/Europe and the US, the global financial turmoil resulted in no offer being received for the Company as a whole.
Mr Pritchard noted that the Company remains in discussions in respect to its UK/European business although given the continuing poor state of global financial and debt markets it was not possible to predict the outcome of those discussions at this stage. Mr Pritchard added that discussions with interested parties with respect to the Company’s US business had been suspended and would be re-evaluated later in the current half.
Mr Pritchard noted that the ongoing Strategic Review process made earnings guidance for FY09 challenging. On a ‘business as usual basis’ the Company expects FY09 EBITDA to be in the range of $115 -$120 million prior to specific items compared to the prior guidance of in excess of $120 million. The primary driver is forecast lower NGAC prices for the second half.
Mr Pritchard noted that the revised guidance assumed an NGAC price for the second half of $3.00/NGAC, with previous guidance assuming a price of $8.00/NGAC for FY09.
Mr Pritchard added that the Strategic Review process is ongoing and the extent of further costs to be incurred will depend on the outcome and timing of the process. If, for example, the process is terminated at 31 March 2009 without a transaction occurring, the likely internal and external costs to be incurred, including contractual termination fees, are estimated at $9 million after tax which will be booked as a specific item. Of this amount, $5 million after tax has been booked in the first half.
ENE’s Australian operating EDITDA increased by 46% to $45.0 million largely reflecting the half year contribution from WKPP ($8.3 million) and the Moranbah North Power CMM Project ($1.4 million), commissioned in October 2008.
On a like for like basis (excluding the contribution from WKPP and Moranbah North), EBITDA increased 15% to $35.3 million with higher generation and costs savings offsetting a material decline in NGAC revenue of $3.2 million compared with the corresponding prior period. Cost savings were delivered across all aspects of the business including operations and maintenance, corporate and business development costs, and remain well ahead of the targeted $4 million reduction for FY2009.
EBIT increased 55% to $24.5 million taking account of higher depreciation charges associated with the WKPP.
Mr Pritchard noted that the second half contribution from the Moranbah North Power station would be muted as a result of lower gas supply from Anglo Coal and the Company was working with Anglo Coal to return to full uninterrupted gas supply.
UK / Europe
The Company’s United Kingdom (UK) business continued its strong trend of profit growth with EDITDA up 9% to $12.9 million and EBIT up 14% to $9.8 million. The result was achieved despite adverse movement in the exchange rate which reduced earnings by $0.4 million. Mr Pritchard said “We expect profit growth in the United Kingdom and Europe to continue in the second half from recently completed site optimisation and expansions”.
The Company’s 50% share of net profit from associates (joint ventures in France and Greece) was up 13% to $1.8 million. On a pro forma basis the Company’s share of EBITDA from associates increased by 41% to $5.4 million.
Mr Pritchard stated “The strong performance from our European JVs is expected to continue in the second half of FY09 due to further site expansions in France and the continued good performance from the Ano Liossia LFG site in Greece.”
The Company’s US LFG business achieved an EBITDA of $0.8 million during the period (2007: $0.3 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, some of which expire in 2011.
“As previously reported, the Company has significant contracted LFG reserves which offer considerable expansion potential of up to 40MW subject to higher power pricing, improving gas quality at certain sites and planning and permitting,” Mr Pritchard said.
Mr Pritchard said that the new gas conditioning system at the Company’s 10MW Lorain LFG project in Ohio was completed on time in late 2008, and preliminary early results have been positive, with improved engine performance and generation experienced in the first two months of operation.
Improved gas quality combined with an expected uplift in US “green” power pricing and the continued emergence of State and Federal based green credit schemes, is expected to underpin the case for future expansion of the Company’s US LFG sites.
Cash on hand at 31 December 2008 was $63.6 million (30 June 2008 $90.2 million) while undrawn lines totalled $108 million with the reduction in cash reflecting the repayment of debt.
Net debt was $457 million, up $34 million since 30 June 2008 reflecting debt funding of the Moranbah North CMM project during the period. Gearing (net debt/net debt plus equity) increased to 62% (30 June 2008: 58%), while cash interest cover was 3.2 times.
Mr Pritchard noted that, on a business as usual basis, the Company does not have a material debt facility rollover due until June 2013.
In the past half year the Company captured and utilised greenhouse gases estimated at 4.8 million tonnes of carbon dioxide equivalent from its LFG and CMM projects around the world, equivalent to removing 1.6 million cars from the road.
The Company continues to work closely with State and Federal Governments in relation to the proposed CPRS to mitigate any perverse or unintended consequences for the Company that could place these abatement activities at risk.
Mr Pritchard said it remained difficult to imagine how any government would produce CPRS legislation that actively penalises and discourages low emission, renewable energy power generation such as that developed and operated by early movers in the carbon abatement sector such as the Company.
Mr Pritchard noted that a precise assessment of the potential impact of the proposed CPRS on the Company was not possible, adding that the ongoing uncertainty was adversely impacting the Company’s ability to develop further clean power generation opportunities in Australia.
Areas of the proposed CPRS which may have potential negative implications for the Company and other clean power companies include:
• the termination of the NSW Greenhouse Gas Abatement Scheme (GGAS) and associated loss of NGAC (NSW Greenhouse Gas Abatement Certificate) revenue; and
• CPRS liability for non-landfill gas power generation emissions (ie from the Company’s Australian CMM, natural gas and diesel power generation operations), to the extent such costs cannot be passed through to counterparties under existing medium to long term contractual arrangements.
These potential negative implications may in part be offset by:
• the nature, timing and extent of any compensation and/or other financial assistance available to the Company from the Federal Government as part of its CPRS package, and/or the NSW Government as part of the termination of the current GGAS scheme upon commencement of the CPRS; and
• any positive outcomes achieved through subsequent commercial negotiations with the Company’s key counterparties including waste methane gas suppliers, electricity retailers and other offtakers necessary to ameliorate any adverse financial impact from the introduction of the CPRS in its final legislative form.
As previously announced, the enactment of the final CPRS legislation, currently expected to take place mid-2009, will trigger a “review event” under ENE’s A$300m Australian Syndicated Facility (ASF). The review event involves a re-assessment process to resize and if necessary, reduce the maximum ASF debt facility limits currently in place. The outcome of the CPRS legislation review event on the ASF facility limits, if any, will be based upon an assessment of the net impact on the Company of the matters referred to above.
At 31 December 2008 the Company’s installed operating capacity was 600MW reflecting completion of the 45MW Moranbah Power CMM project during the half year. While the Company remains focussed on the completion of the current Strategic Review process, key development opportunities under review include:
• incremental expansion of existing sites and gas reserves especially in Europe, the United Kingdom and the United States following further confirmation of the success of the recently commissioned gas conditioning system; and
• identification and implementation of opportunities to apply the Company’s waste methane abatement and other technologies to reduce customers’ potential CPRS liabilities.
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