Eco Investor September 2016

Pre-Dividend Securities

Infigen Returns to Profit

The takeover inquiry that helped fire Infigen Energy's share price earlier this year is no longer live, but Infigen Energy's managing director, Miles George, said the company remains open to proposals that can add value to shareholders. He said the earlier potential takeover discussions were deemed to not add as much value as other options such as the improving operating conditions and pursuing the company's development portfolio.

However, Infigen's annual results for 2015-16 did contain a welcome return to profitability after six years of consecutive losses.

The net profit of $4.5 million was a huge reversal on the 2014-15 loss of $303 million. On a continuing operations basis, the net profit of $7 million was $25.4 million higher. This was due mainly to higher Large-scale Generation Certificate (LGC) and higher wholesale electricity prices. Revenue rose 29 per cent from $133 million to $173 million. There was also a 1 per cent increase in electricity generation.

Operating costs were down slightly and there were reduced borrowings as $51 million of Global Facility borrowings was repaid, as was $5.5 million of the Woodlawn facility. Net debt at 30 June was $594.9 million. Gearing fell to 68 per cent.

Mr George said there were better wind conditions in NSW, improved turbine availability at the Capital and Woodlawn wind farms, and improved network availability at the Alinta and Lake Bonney wind farms were counterbalanced by lower wind conditions in SA and WA.

Mr George expects wind conditions to improve this financial year, primarily because the wind conditions in FY15 and FY16 were below the historical long-term average. If wind conditions improve, production should also improve.

FY17 futures electricity prices for South Australia and New South Wales currently are 78 and 18 per cent respectively higher than the realized average FY16 prices. The LGC spot price has been above $80 for the last two months and he expects this to continue throughout the financial year.

Mr George said "The outlook for LGC and electricity market prices remains substantially higher than recently reported power purchase agreement prices. This price spread continues to widen, implying larger value transfers from developers to off-takers. Attractive merchant opportunities now exist for projects with a low cost of energy."

On the cash front, Infigen has $137 million, of which a substantial portion is available for investment in growth.

Wind power is still cheaper than large scale solar power but large solar is rising and could be 20 per cent of new builds by 2020. Infigen has both wind and solar projects in its development pipeline.

Mr George said Infigen continues to participate in opportunities to secure power purchase agreements from formal tender processes and bilateral negotiations. It will also continue to assess corporate activity opportunities that might arise within the current fragmented renewable energy sector in Australia. New greenfield solar PV development initiatives to meet the expected increased demand for solar projects will also be pursued.

The regulatory environment is also favorable. The Queensland and Victorian state governments' proposed renewable energy targets could see those states increase their renewable energy ambitions beyond the Federal targets. This will provide further opportunities for Infigen's development pipeline. And the Federal Government announced that in 2017 it will commence consideration of the emissions reduction policies to meet increased national targets under the Paris Agreement to reduce emissions by 26 to 28 per cent on 2005 levels by 2030. (ASX: IFN)

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