Plenty Of Good Developments In Energy
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Energy Developments dates from 1988, when the company’s founders built the Pine Creek 28 MW gas-powered power station in Australia’s Northern Territory, to supply electricity to the Territory’s Power & Water Corporation.
Integrated energy company Energy Developments Limited (ENE) had a solid FY14, lifting revenue by 5% to $422.8 million, and net operating cash flow by 4%, to $136.4 million, up 4%. Net profit fell 17.4% to $45.4 million.
After resuming paying dividends in FY13, the fully franked dividend was lifted one-and-a-half times, from 11 cents to 28 cents.
Installed capacity rose 19% over the year, to 883 MW, while generation was up 5%, to 3,727 gigawatt hours (GWh).
Energy Developments specialises in the production of electricity that has low levels of greenhouse gas emissions, from sources of energy as diverse as landfill gas and coal seam methane, as well as more conventional sources, including liquefied natural gas (LNG) and compressed natural gas (CNG). The company has 883 MW of capacity spread across four countries – Australia, the USA, United Kingdom and Greece – operating in four main areas: remote energy, natural gas and diesel, landfill gas and waste coal mine gas.
• Remote (off-grid) energy: it has 368 MW of capacity, fired by gas, diesel and liquefied natural gas (LNG), installed across 31 locations in Australia.
• Landfill gas, generated by decomposing organic matter in rubbish tips: it has 261 MW of capacity installed, across 13 locations in Australia, the USA, Britain and Greece.
• Waste coal-mine gas (WCMG): it has 254 MW of capacity installed, across eight locations in Australia. During the year ENE added 43 MW to its portfolio with the acquisition of the Envirogen WMCG power stations, which added two new customers, Vale and Glencore.
The fuel source for the landfill and waste coal mine gas power stations is methane – which would otherwise end up in the atmosphere, in the former, and needs to be removed from underground coalmines, as a dangerous by-product of mining, in the latter. The company’s strategy is to secure, long-term and low-risk power supply agreements (PSA) and power purchase agreements (PPA) with low-credit-risk counter-parties, to create stable and predictable revenue streams.
The company says its operations worldwide produce about 3.5 million MW of energy – enough to power 550,000 homes, while its landfill and coal gas plants abate 12 million tonnes a year of carbon dioxide emissions, equivalent to taking more than 3 million cars off the road.
Energy Developments dates from 1988, when the company’s founders built the Pine Creek 28 MW gas-powered power station in Australia’s Northern Territory, to supply electricity to the Territory’s Power & Water Corporation. ENE then moved into the infant Australian renewable energy market, generating electricity from waste methane emissions at landfills. The first project, at Berwick in Victoria, was a success, and led to a rapid expansion of landfill-gas-to-energy projects throughout the 1990s.
ENE listed on the Australian Stock Exchange (ASX) in 1993, and expanded into its next area, WCMG, with its first project, a 97 MW project completed in 1996 at the Appin and Tower coal mines in New South Wales. One of the world’s largest WMCG power generation projects, Appin established ENE as a world leader in WCMG power generation.
Coal mining liberates methane gas trapped in coal seams: WCMG is a safety hazard in underground coal mines, and must be extracted by mine ventilation and coal seam drainage. Using extracted methane as a power generation fuel is a major saving in fuel costs and carbon dioxide emissions.
ENE strengthened its standing in WMCG with a 32MW power plant it built at Anglo American’s German Creek mine in Central Queensland in 2006. The company’s relationship with Anglo American has grown, with the development of a 45MW WCMG power project at Moranbah North in Queensland in 2008, the 13MW expansion of German Creek in 2013 and the recently announced 25-year gas supply extension and 18MW expansion of Moranbah North.
In 2008, ENE developed a process that enabled towns in the remote West Kimberley region of Western Australia to use LNG instead of diesel for their power supply, greatly reducing the region’s energy costs and greenhouse gas emissions. Known as the West Kimberley Power Project, this LNG power solution for Horizon Power is supported by a 200-tonnes-a-day LNG production facility built and operated by ENE in Karratha.
Recognising the long-term growth in the remote energy market, in September 2011 ENE bought the enGen remote energy business from Wesfarmers in Western Australia, becoming the market leader in the sub-100MW Australian remote energy market.
Earlier this year, ENE cemented its position in the remote energy market when it secured the 53MW expansion of the McArthur River Mine Power Station in the Northern Territory for Glencore, to support Glencore’s mine expansion, which will double output and increase mine life to 2039. ENE commissioned the 53 MW McArthur River Mine expansion project in January 2014: the company has a 20-year power supply contract and McArthur River is now ENE’s largest remote power station.
ENE is a clean energy business, and as such, is buffeted by carbon politics. Under the former Labor government, the Clean Energy Finance Corporation (CEFC) agreed to stump up $75 million for the company to enable it to develop new waste-to-energy projects. That was on top of $445 million under a syndicated loan facility provided by banks including Babson Capital Australia, Bank of America and ING. The Abbott government took a promise into the election to abolish the CEFC, but has not done so: in any case, it was not going to renege on previous deals the corporation had made.
Under the previous government, ENE’s German Creek and Moranbah North Power Projects were accredited under the Renewable Energy Target (RET) and were producing valuable Large Scale Generation Certificates (LGCs). Also, 37MW of ENE’s Australian landfill gas projects were eligible under the Carbon Farming Initiative (CFI) to create Australian Carbon Credit Units (ACCUs).
ENE created and sold its first tranche of ACCUs in June 2013 and has entered into forward contracts for the sale of ACCUs in 2014 and 2015 to liable parties under the Carbon Pricing scheme. While the Abbott government has confirmed its commitment to the RET and the CFI, and to a 5% reduction of Australia’s 2000 emissions levels by 2020, it has also stated an intention to abolish the Carbon Pricing scheme and replace it with a Direct Action scheme, which creates an incentive to reduce greenhouse gas emissions.
The government’s Direct Action plan has not yet passed the Senate, and ENE shareholders cannot be certain of the extent to which this policy would restore ENE’s carbon-credit revenue.
However, ENE does not depend on carbon-credit income: it pays its way well and truly before that. The solid growth in energy generation capacity in FY14 will translate into stronger earnings in the current financial year. On an earnings before interest, tax, depreciation and amortisation (EBITDA) basis, ENE has issued guidance for FY15 to come in at between $192 million–$202 million, compared to $182.2 million in FY14. In the meantime, at $5.07, ENE trades on an attractive 5.5% fully franked historical yield, and an 18% discount to its analysts’ consensus price target, of $6.18.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au