ceo interview:eps down 10% dividend low
Date of lodgement: 08-Feb-2005 Title: Open Briefing. Pacific Hydro. MD on Outlook Record of interview: corporatefile.com.au Pacific Hydro Limited today reported net profit after tax (NPAT) of $21.3 million for the half year ended December 2004, up 5 percent from $20.3 million in the previous corresponding period. How does this compare with your expectations? MD Jeff Harding We’re pleased to have reported another record result, and we remain on track to exceed last year’s full-year NPAT of $31.2 million, excluding the one-off benefit we got from tax consolidation. In the first half we had a better than expected performance from our newly acquired Coya and Pangal hydro assets in Chile. But on the negative side, the unexpected El Nino lead to an early onset of the dry season in the Philippines, which impacted revenues from the Bakun hydro joint venture. And of course the weaker US dollar had an impact on us in both the Philippines and Chile. corporatefile.com.au Given the relative importance of the Bakun project to your earnings, to what extent is it possible to offset this type of local climatic risk? MD Jeff Harding Our exposure to the local conditions in the Philippines is progressively being mitigated by our investments in other geographic areas, particularly in Chile, which has very different climatic conditions. Our Chilean hydros, which are located at the base of the Andes mountains, have very regular river flows, with 2 water from glacier and snow melt as well as rainfall. It’s also the case that an El Nino in one region, say the eastern Pacific, is generally offset by an El Nina in the western Pacific. Over time, our earnings base will grow substantially in Chile, whereas the proportion of our earnings from the Philippines will decline, so in the long term we’ll have a much more predictable and stable earnings base than we do at the moment. corporatefile.com.au The US dollar averaged US$0.73 to the Australian dollar in the first half, compared with US$0.69 in the previous corresponding period. Can you quantify the impact of the weaker US dollar on your first-half results? MD Jeff Harding There was a negative impact of around $1 million after tax. On the positive side, the Australian dollar equivalent of our US dollar debt reduced by around $9 million over the period. corporatefile.com.au Analysts’ earnings forecasts for the current year range from $33 million to $35 million. In light of the first-half result, what is your level of comfort with these forecasts? MD Jeff Harding We generally don’t comment on analysts’ forecasts. But in light of the first-half results, and our projections for the remainder of the year, we’re quite confident we’ll exceed last year’s NPAT result of $31.2 million before the one-off benefit from tax consolidation. Of course, as our business has an element of weather dependence, accurate projections are difficult. corporatefile.com.au Pacific Hydro’s first-half financial statements included a contingent liability relating to the Bakun arbitration. What further steps are involved in the arbitration process and why has it not been necessary to bring a provision onto the balance sheet? MD Jeff Harding I’d refer you to the detailed contingency note – note 11 – in our half-year accounts. That explains the status of the legal proceedings, which will continue during 2005. corporatefile.com.au What’s been your progress in realising cost savings from the Coya and Pangal hydro projects in Chile and how do you reconcile the first-half result with your forecast, at the time of the acquisition, of a $12.3 million EBITDA contribution from the projects in 2005? MD Jeff Harding EBITDA from Coya and Pangal hydros totalled $8.9 million in the half year. We’re confident we’re on track to exceed the EBITDA projection provided at the time of acquiring these plants. The better than expected profit was due to savings 3 in operational and maintenance expenses as a result of the efforts of a focused management team. We’ve identified a number of upgrades that could potentially double the output from these projects. Detailed engineering design work is under way on these upgrades and we expect to commence construction within the next six to nine months. corporatefile.com.au What’s the outlook for Pacific Hydro’s operations in Chile? MD Jeff Harding The outlook is very positive. We are strongly positioned for growth here, not only because Chile is one of the strongest growing emerging markets in the world, but also due to shortages of gas supply in the region that are driving the development of hydro power generation. The uncertainty in gas supply makes it difficult for investors to consider building new gas-fired generation plants to meet the growing demand for electricity in Chile. Electricity demand in the Interconnected Central System (SIC) market, where our operations and projects are located, grew by 7.7 percent last year. Chile’s national energy commission, CNE, increased electricity node prices in the SIC market by 10 percent. There’s growing support from the Chilean Government for renewable energy to mitigate the gas supply risk. Our lower cost hydro projects are ideally placed to satisfy the growing demand for electricity. As well as the upside potential of our Coya and Pangal hydros, our projects in Chile include two larger projects on the Tinguiririca River, La Higuera and La Confluencia, which will have a total capacity of 300 megawatts. In addition, we are progressing the 40 megawatt Las Damas and 30 megawatt Portillo hydro projects on the Tinguiririca River. We’ve secured water rights and identified specific projects totalling about 600 megawatts on the upper Cachapoal River, including the 200 megawatt Chacayas project and the 180 megawatt Nido de Aguila project. We have the benefit with those rivers of water flows coming from glacier and snow melt, as well as rainfall. The hydrology is very reliable. corporatefile.com.au You’ve previously indicated you’ll bring on stream the first stage of the Portland wind farm project at Yambuk in the current year, together with the Vaturu project in Fiji. Can you provide an update on your progress in developing these projects? MD Jeff Harding We’re pleased to have recently received final development approval for Yambuk from both the state and federal governments. Geotechnical work on the site is complete and physical construction has commenced. The nacelles and blades are being shipped, tower fabrication is underway in Portland and the grid connection work is well progressed. We’re expecting to start commissioning Yambuk in June and we’re confident we’ll have full generation from the site within a few months of commissioning. We’re currently finalising negotiations on the Portland three capes sites with a number of parties, including network operators and financiers. We’re on schedule to commence construction on those sites by the middle of this calendar year. 4 Generation from Wainikasou in Fiji started in May 2004 and we’re expecting to complete commissioning the Vaturu project this month. corporatefile.com.au Pacific Hydro booked net operating cash flow of $16.3 million in the first half, compared with $18.1 million in the previous corresponding period. Capex was $8.2 million. What’s the outlook for operating cash flow for the full year? MD Jeff Harding We have substantial cash on hand of $46.6 million plus undrawn debt facilities and we have other financing arrangements in place. We continue to enjoy strong operating cash flows in Australia, Chile and the Philippines. Forecast capex over the remainder of the year will include the completion of both Yambuk and the Bakun supplementary project, which is also under construction, commencement of Portland and Clements Gap wind farms, and the upgrade of the Pangal hydro station in Chile. corporatefile.com.au Pacific Hydro had net debt of $110 million and gearing (net debt/shareholders’ equity plus debt) of 24.5 percent at the end of December, compared with $112.1 million and 24.8 percent at the end of June 2004. Given your capital requirements over the next two years, with the later stages of the Portland wind project and investment in La Higuera in Chile, what’s the outlook for gearing levels? MD Jeff Harding We’ll be project financing the Portland three capes and Clements Gap wind farms, and La Higuera hydro project. We’re well advanced in finalising our funding arrangements for these projects. While the new debt will significantly increase our overall gearing levels, the recourse of these financings will be limited to the actual projects, with no recourse to the company. corporatefile.com.au First-half EPS was 14.0 cents compared with 15.6 cents previously and you’ve announced an unchanged interim dividend of 2.5 cents. Given your near-term capital requirements for project development, what’s the outlook for the full-year payment? MD Jeff Harding EPS was lower than the previous period due to more shares being issued as a result of the successful capital raising in February and March 2004. The capital raisings are funding future cash flow and EPS growth from the Coya and Pangal acquisition and the Yambuk wind farm. We’re expecting no change from the dividend policy announced by the chairman at the 2003 AGM. corporatefile.com.au Recent press reports have suggested there’s strong interest in Pacific Hydro and/or its assets from a number of parties in response to the current corporate review. To what extent has this been driven by the potential value of Pacific Hydro’s carbon credits? 5 MD Jeff Harding Pacific Hydro’s future projects, particularly in Chile, and the potential to generate carbon credits, are of significant value. We believe that this potential value has not been previously recognised by the market, although it’s starting to be recognised now. However, we believe that it’s our business model, based on strong historical financial performance, an excellent portfolio of future projects and the expertise within the company, that has generated considerable interest from potential acquirers. corporatefile.com.au Given Pacific Hydro is incorporated in Australia, which isn’t a signatory of the Kyoto protocol, what’s your level of confidence in your ability to get your offshore projects accredited under the Kyoto carbon credits trading mechanism? Would incorporation in Chile or Fiji be an advantage? MD Jeff Harding Gaining approval for international projects is a lengthy process, but we’re working hard and we’re confident of being granted approval. Our main focus at this stage, in relation to gaining Clean Development Mechanism (CDM) status, is our Fiji projects. We expect our Fiji projects to be approved by the end of the financial year, with the Chile projects to follow later in the calendar year. These CDM projects will be registered in Fiji and Chile respectively through our joint venture companies and subsidiaries, which are incorporated in those countries. corporatefile.com.au What would be the value of Pacific Hydro’s Australian assets if the Federal Government changed or softened its attitude on Australia’s participation in the Kyoto Protocol? MD Jeff Harding Our current wind portfolio and future projects in Australia have the potential to offset around 2.7 million tonnes of carbon dioxide emissions per annum. If Australia was to ratify the Kyoto protocol, which enters into force this month, the potential value of these carbon credits during the compliance period would equate to A$32 million per annum, assuming the current price of €7 per tonne. According to a recent report by “evolution markets plc”, this price reflects the lower demand for Emission Allowances as a result of very wet, mild winter weather in Northern Europe, which has resulted in a reduction in coal burn power generation. Obviously there will be seasonal, competing fuel prices and other market factors that will have an impact on pricing of carbon credits. It’s worth pointing out that the first trade on the EU Emissions Trading Scheme on January 4 was between Shell International Trading and BHP Billiton involving 5,000 EU Allowances at €8.4 per tonne. The penalty for non-compliance under the EU Emission Trading Scheme is €40 per tonne for the first phase (2005-2007) increasing to €100/tonne during the Kyoto commitment period (2008-2012). This gives an indication of where the designers of the market expect to the price of carbon to rise. 6 Australia is very rich in renewable energy resources, with substantial wind, solar, geothermal and wave energy, but today this is largely unrecognised. These resources will eventually realise substantial gains when Kyoto or some similar accord is agreed to by the Federal Government. I think it’s going to be increasingly difficult for the Federal Government to ignore the contribution Australia can make to reducing greenhouse gas emissions when there are significant calls to action from other countries concerning this important global issue. Recently, the International Task Force on Climate (G8-Plus Climate Group) recommended that the G8 countries adopt national targets to generate 25 percent of electricity from renewables by 2025. The Australian Federal Government’s Environment Minister, Ian Campbell, has said at various industry conferences and media briefings that Australia needs to cut greenhouse gas emissions by 50 to 60 percent by 2050. corporatefile.com.au What’s the status of the strategic review process and what’s the likely timing of a conclusion? MD Jeff Harding We’ve received a number of indicative bids from local and overseas parties. A number of companies are now undertaking detailed due diligence. That process will be ongoing through the first quarter of 2005. corporatefile.com.au Thank you Jeff. For more information about Pacific Hydro, visit www.pacifichydro.com.au or contact Andrew Gould on (+61 3) 9615 6410, Kevin Sze on (+61 3) 9615 6422 or Clare Laffan on (+61 3) 9615 6440. For previous Open Briefings with Pacific Hydro or to receive future Open Briefings by e-mail, visit www.corporatefile.com.au
