Eco Investor March 2014

Pre-Dividend Securities

Private Equity Begins Energy Developments Exit

Private equity investor Pacific Equity Partners has begun its exit from Energy Developments (ENE) with a $101 million sell down of equity and a $50 million placement by ENE that reduce PEP's equity from 84 to 69 per cent. The share price for both was $5.55.

Energy Developments has also acquired 21 MW of generation assets from Clarke Energy Australia (CEA) for $21 million. This is funded by the $50 million underwritten institutional placement with the balance for growth opportunities and corporate purposes.

The sell down of 18.25 million shares by the PEP owned Greenspark is a significant move and together with the 9 million placement shares provides much greater liquidity. It should also satisfy the free float criteria of over 30 per cent of issued capital which is a pre requisite for eligibility to the S&P/ ASX 300 Index.

Entering the Index would see an increase in interest from institutional investors and PEP is no doubt hoping for a re-rating that could provide another exit opportunity.

Energy Developments has proven to be a good investment for PEP as its entry price was $2.75 per share in 2010. At the $5.55 it has doubled its money on the shares sold, but its final profit and return will not be known until it fully exits.

The 18.25 million shares are 10.8 per cent of ENE's issued capital after the placement and sell down. At $5.55 per share, ENE has a capitalization of $941 million and PEP's remaining 69 per cent stake is worth around $650 million.

Energy Developments said Greenspark has informed it that it "remains highly committed to ENE and is supportive of the significant growth opportunities available to the Company in the medium term".

In private equity language that means it thinks it can make more money by hanging in, though we don't know for how long.

It doesn't matter. The news is good for environmental investors as ENE is likely to stay listed, profitable, and a much larger company than before the arrival of private equity.

While Energy Developments is not paying an interim dividend due to insufficient franking credits, it said it intends to pay a final dividend of 22 cents per share. It paid a final dividend last year and if it does so this year Eco Investor will re-instate it as a core security.

Energy Developments’ Growth in generation capacity.

The Clarke Energy assets are part of the Island Mode Power Generation project to supply electricity as an off grid and on grid power station for coal seam gas development related purposes. The coal seam gas assets will be acquired by ENE and leased back to CEA for an initial lease back term of 12 to 18 months, with revenue to start in December 2014.

When the lease back ends, ENE will consider new lease arrangements with CEA or using the assets in its future waste coal mine gas (WCMG) project opportunities. ENE's managing director, Greg Pritchard, said the CEA assets are closely adjacent to its existing WCMG assets.

The transaction includes an option for ENE to acquire and lease back a further 36 MW of contracted capacity for other upstream coal seam gas operational needs on similar terms for about $30 million. The option period ends in mid December 2014.

Although ENE's revenue rose by $7 million in the December half, net profit fell by $1.5 million to $20.6 million compared to the December 2012 half. (ASX: ENE)

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