Eco Investor Update

A Weekly News Update for Environmental Investors

8 November 2010 - No 8

ASX 100

DUET Group has welcomed a final decision by the Australian Energy Regulator that allows its 66 per cent owned subsidiary United Energy Distribution to increase its prices for the period from 2011 to 2015.

The decision allows for increases of 0.4 per cent above CPI in 2011 and an average increase of 3.7 per cent per annum above the CPI for the following four years. These are 1 per cent in 2012, 2 per cent in 2013, and 6 per cent each in 2014 and 2015.

This should increase total regulated revenue by 18 per cent to $1.674.9 billion over the period compared to the draft decision.

UED said the increases will allow it to upgrade its infrastructure in an efficient and sustainable way. (ASX: DUE)

Origin Energy
The Qld premier Anna Bligh has opened Origin Energy's Darling Downs Power Station 40 kilometres west of Dalby. The 630 megawatt combined cycle station is powered by coal seam gas. A new 205 kilometre pipeline will provide up to 44 petajoules of gas per year.

Managing director Grant king said Origin is increasing its installed generation capacity to 2,800 megawatts, making it the largest developer and owner of gas-fired generation in Australia.

The power station is a $1 billion investment by Origin. It is Australia's largest combined cycle gas power station, capable of powering over 400,000 homes each day, and one of the most efficient baseload gas power stations with less than half the greenhouse gas emissions, and only 3 per cent of the water usage, of an equivalent coal fired power station.

Half owned NZ subsidiary Contact Energy has received draft approval for its proposed Tauhara II geothermal development. A final decision is expected before the end of the year.

Contact's managing director, David Baldwin, said the decision was good news for the company. The Tauhara II geothermal development will be built on farmland about 5.5 kilometres north-east of the town of Taupo and provide about 250 megawatts of electricity. (ASX: ORG)

ASX 200

Eastern Star Gas
Eastern Star Gas said that in recent weeks its Narrabri CSG Project has achieved outstanding rates of gas production from pilot production wells in the Bibblewindi area of northern NSW.

Since early October, when water processing constraints were resolved and full-time pilot production operations resumed, gas production from the Bibblewindi pilot reached a new high of over 900 Mscfd (Thousand Standard Cubic Feet Per Day) and gas production from the Bibblewindi West pilot was again over 2,000 Mscfd.

In both cases, gas production continues to climb, said the company.

Eastern Star is waiting on Government approvals to install larger pumps in the wells.

The company also said that preliminary production testing of the Dewhurst pilot is now underway to determine on-site water handling requirements.

"The outstanding performance of the Bibblewindi pilots, along with the 2010 corehole and seismic programs, will result in strong reserve additions. However, the overall 2010 reserves upgrade program is behind schedule," it said.

This is because wet weather has prevented completion of the infrastructure and operation of the Tintsfield pilot, which is targeting the Hoskissons coal seam that has not previously been included in its gas reserves assessments.

"The results from this pilot are the major component of the 2010 gas reserves upgrade program. Based on current forecasts and weather permitting it is anticipated that the Tintsfield pilot will now be brought on line by the end of December, following completion of water storage and processing facilities," it said.

In order to include production data from the Tintsfield pilot, Eastern Star Gas will delay its year end independent gas reserves review until early 2011. (ASX: ESG)

Envestra has forecast an improved profit after tax for 2010-11 of around $40 million. The 2009-10 profit was $37.2 million.

The forecast is based on anticipated higher revenue due to annual tariff increases and new consumers offset in part by higher borrowing costs. The forecast is subject to weather.

The 2010-11 dividend is expected to be maintained at 5.5 cents. "The forthcoming regulatory decisions will determine whether or not we can consider increasing dividends in the near term," said chairman John Allpass.

The company expects to maintain annual connections to new consumers at about 24,000. "Capital expenditure will be around $125 million, up substantially on recent years, with $30 million to be spent on mains replacement and network enhancements and $95 million on growth projects," he said.

On the regulatory front and the revised Access Arrangements for South Australia and Queensland, the Draft Decisions are due to be handed down in December with the Final Decisions expected by April, 2011.

"The outcome will, to a large extent, determine the rate of growth in our regulatory asset base and the resultant revenue generated by the business," said Mr Allpass. (ASX: ENV)

Transpacific Industries
Transpacific Industries made newspaper headlines when two of its directors failed to be re- elected at the company's annual general meeting. Graham Mulligan and Bruce Allan, who joined the board in 2004 and 2006 respectively, both received 424 million votes against and 375 million for their re-election.

Transpacific is now searching for three directors.

During the past year the company re-organized itself into three segments: Transpacific Cleanaway and Transpacific Waste Management for solid wastes; Transpacific Industrials for liquid waste, organics, energy and industrial services; and Commercial Vehicles and Manufacturing.

Chairman Gene Tilbrook said the company is seeing a recovery in its mining market but demand from the manufacturing, construction and demolition markets remains flat.

Chief executive Trevor Coonan said the company has identified a new treatment process to extract unnamed heavy metal contaminants now going to landfill, and to re-use the liquid wastes from which the metals are extracted. The Victorian government is helping to fund the project.

Writing in the investment newsletter Eureka Report, commentator Roger Montgomery has criticized Transpacific's return on equity.

"Transpacific Industries (TPI) is not one of my extraordinary businesses and in fact achieves the second lowest Montgomery Quality Rating (MQR) of C4.

"Over the next three years the company is forecast to generate a return on equity of between 4 per cent and 6 per cent, thanks largely to the fact that it raised $1 billion in 2007. If the company purchases WSN [the NSW Government owned WSN Environmental Services), one suspects WSN will make a profit but I cannot imagine how a $200 million business generating even 10 per cent returns on equity will have an impact on the returns of 4–6 per cent being generated on $2 billion of equity currently contributed by [TPI] owners.

"Don't be distracted by the noise. The returns from dealing with our rubbish are rubbish. And they will remain so for as long as consumers continue to be charged too little for dealing with that which we don't want to," he concludes. (ASX: TPI)

Emerging Companies

CBD Energy
Solar energy installer CBD Energy said the effects of the NSW government reduction in the feed-in-tariff for solar energy on its business will be "negligible".

The NSW government has reduced the amount it will pay households for solar power from 60 cents to 20 cents per kWh. CBD said that by comparison, the government is charging 30 cents a kWh for coal generated electricity, which undervalues the free solar resource in Australia and ranks NSW below sun-deprived Germany in solar panels per household.

CBD supports the Clean Energy Council's call for the feed-in-tariff to be set at 45 cent per kWh.

CBD believes the NSW government has undervalued the benefits of solar energy, and feels a responsibility to speak on behalf of the industry in putting forward an alternative view.

Likely rises in electricity costs are more from years of poor management and under investment rather than costs from the solar bonus scheme, it said. On average household electricity usage, CBD calculates a minimum increase in electricity cost from higher solar take up of about 84 cents per quarterly bill.

At a time when Australians clearly support greater use of renewable energy and the opportunity it provides to reduce infrastructure spending, the change to the solar scheme is clearly unproductive, said CBD.

Meanwhile, one fund manager has said that while at first glance CBD's first quarter cashflow report looks very disappointing, a closer look is more encouraging.

CBD's reported net operating cashflow of negative $80,000, compared to the full year 2009- 10 figure of positive $5.6 million. However, the numbers do not include Renewable Energy Certificates (RECs). The company has applied to the Regulator to have $3.2 million of RECs "cashed out", which should appear in the second quarter cash flow, says the analysis.

As RECs are said to be currently cheap, it is possible for companies to store RECs and wait for a better price. Origin Energy, for example, is said to be hoarding its RECs, presumably for a better price environment.

CBD's $28 million first quarter Receipts from Customers compares well with the $40 million for 2009-10. The analysis said the money was almost all spent on new solar insulation stock costing $25.4 million, compared to $45 million for all of 2009-10. The $28 million is more than the $17 million trade receivables listed on 30 June 2010, a positive sign that customers are paying within three months.

The fund manager says the company is continuing to expand sales, but it is taking time for customer payments to catch up with these. While this expansion is good, at some time the company has to take a breather and catch up with some positive cashflow. It would be good to see some positive cashflow literally "in the bank". (ASX: CBD)

CMA Corporation
CMA Corporation may come out of voluntary administration at the end of March next year if a restructuring proposal now under consideration is implemented. The proposal is subject to negotiations and due diligence. Any firm announcement is likely to be in February next year. (ASX: CMV)

With the company well into Phase Two of its Strategic Plan, Greencap is looking ahead to Phase 3 - to grow its market capitalisation, currently $25 million, to over $100 million.
"We believe this is achievable over the period 2012 to 2014 and will be done by a combination of internal growth and careful acquisition," said the company.

"The objective is to have a vibrant group of potentially 1000+ staff with greater international presence and projects but still preserving the ethos of the group in terms of cultures, values and being an employer of choice for staff."

Phase Two, which runs to 31 December 2011, is to strengthen the operational management base across the group and achieve greater group service delivery. (ASX: GCG)

Novarise Renewable Resources International
Novarise is to pay an annual dividend of 1 cent per share unfranked on 13 December. The dividend reinvestment plan will be available. (ASX: NOE)

Micro Cap Companies

Advanced Energy Systems
Advanced Energy Systems says the commencement of revenue from its Fushan project in China is "imminent".

The statement was in response to an ASX inquiry about is very low cash position for the September quarter.

AES also said it is expecting to receive a refund from the tax office, and has enough cash for the next two quarters.

The company has developed renewable energy products for the building industry. (ASX: AES)

Biodegradable nappy commercializer EcoQuest is speeding up plans to launch the nappies in New Zealand, saying it is in advanced discussions with distributors and sales agents.

The company said maiden sales in Australia are ahead of expectations. It is now looking to larger retailers in Australia as well as its international roll-out. (ASX: ECQ)

Enerji has secured funding for up to $25 million through a redeemable zero coupon convertible bond facility that will fund its expected capital expenditure for future installations of its Opcon Powerbox recovered heat units.

The bond facility is with Fortensa Special Opportunities Fund Limited and is subject to shareholder approval. Enerji said Fortensa is a multi-strategy investment fund and an alternative provider of capital to businesses in the Asia-Pacific region.

Enerji's managing director Greg Pennefather said the funding facility will enable Enerji to actively pursue growth.

"We are seeking to create a sustainable profitable earnings stream from multiple installations of Opcon Powerboxes at customer sites. Our business model requires up front capital to fund these installations."

The bond facility mitigates the effect on shareholders by the drawing of money for the purchase of income producing assets based on sales to customers, he said.

Fortensa's due diligence included interviews with Opcon's Powerbox customers in Europe, Opcon's management, a review of the commercial arrangements in place and examination and testing of the business model and the market potential.

The $25 million will be provided in $1 million tranches.

Gabrielsson Invest AB, the company that heads a Swedish investor consortium led by Opcon's chairman Mats Gabrielsson, has agreed to loan Fortensa shares as required by the Subscription Agreement. The requirement is for an Enerji shareholder to loan ERJ shares to the value of 50 per cent of the first tranche of funds for a period of about 12 months.

Enerji will issue Fortensa a minimum of $12 million and maximum of $25 million in bonds. The bonds have a five year term and if not converted prior to maturity are redeemable by Enerji at face value. The bonds are convertible into Enerji shares at Fortensa's election at a price based on the average trading price at the time of issue of bonds and the time of conversion.

All bonds must be converted to shares before another tranche can be issued, limiting the company's debt to bondholders to $1 million unless otherwise agreed.

Enerji recently entered a Memorandum of Understanding with Horizon Power to install an Opcon Powerbox at the Carnarvon power station in 2011 and says it is in advanced negotiations with other potential customers. (ASX: ERJ)

Geothermal Resources
Geothermal Resources is to sell its 100 per cent interest in the onshore Otway Basin petroleum exploration permit, PEL 186, in South Australia to Somerton Energy Ltd for $200,000 in cash.

The company said the sale will allow it to maintain its geothermal exploration interests.

The agreement allows Geothermal Resources to re-acquire a 10 per cent interest at a premium to maintain exposure to any upside in the event of a discovery.

Geothermal Resources purchased Neo Oil Pty Ltd and PEL's 186 and 187 for the issue of 50,000 shares two years ago. However the company decided to sell PEL 186 to a group that had the funding and expertise to properly explore it for a hydrocarbon discovery.

Some of the funds raised by the sale will be used to look for other exploration opportunities that utilize the company's expertise. (ASX: GHT)

Greenearth Energy
Greenearth Energy has commenced a magneto-telluric (MT) ground geophysical survey in the Latrobe Valley and onshore Gippsland Basin areas (GEP 12 and 13) as part of its search for potential hot sedimentary aquifer geothermal systems in the Valley.

The MT survey consists of about 40 survey points at one kilometre intervals across the Valley between Glengarry North and Willung South. The work has been contracted to Perth based Moombarriga Geoscience Pty Ltd.

Green Earth said the MT geophysical method is a passive technique that uses a series of coils and electrodes buried at shallow depths to record naturally occurring electric (telluric) currents that are induced by natural variations in the earth's magnetic field and flow through the earth.

These variations can be used to calculate the resistivity of the ground, which may vary depending on the local geology. At each site measuring equipment is installed for about 24 hours and then removed and the site fully rehabilitated.

Greenearth Energy said interpretation of the MT results may enable it to better understand the geology of the Latrobe Valley and to define the depth of older basement rocks beneath the sediments that fill the Valley.

Knowledge of the basement depth and structure may be an indirect method for determining the location of potential hot sedimentary aquifer geothermal systems, for which the Latrobe Valley is thought to be highly prospective.

Managing director, Mark Miller, said "The Latrobe Valley is ideally placed to become a significant geothermal production region." Greenearth Energy holds the exclusive rights to explore for and develop geothermal resources in the Latrobe Valley (GEP12) and onshore Gippsland (GEP13) regions of Victoria. (ASX: GER)

Hot Rock
With only $451,000 in cash at the end of September, Hot Rock has announced a $3.2 million capital raising via a placement and fully underwritten rights issue.

The placement is to institutional and sophisticated investors who have committed to subscribe for 13,867,500 shares at 6 cents each to raise $830,000 before costs. The non-renounceable rights issue to shareholders is at 2 new shares for every 5 shares held and will be at 5.5 cents per share to raise $2.34 million before costs.

The placement was managed and underwritten by Bizzell Capital Partners Pty Ltd, an entity associated with Stephen Bizzell, a director of Hot Rock.

Hot Rock has also given Bizzell Capital Partners the right but not the obligation to place up to another 18.2 million shares at 5.5 cents per share after the rights issue to raise another $1 million.

Executive chairman, Mark Elliott said "Funds from the capital raising will be predominately used for exploration at the company's projects in Chile and Peru. Exploration programs including mapping, sampling and magneto-telluric (MT) surveys, which will assist in outlining geothermal reservoirs for drill testing have been planned."

Capital will also be used for exploration and appraisal testing programs for the company's proof of concept" program at the Koroit Project, determining geothermal resources at its Victorian permits, and working capital.
In addition to the raising, the $7 million Federal government grant for the Koroit Proof of Concept well drilling, flow testing and evaluation program is now being drawn down.

Hot Rock has applied for two further grants under programs offered by the Victorian government. These are for $4 million under the SERD2 fund and $5 million under the SEPD fund to assist with flow testing and evaluation of the Koroit Proof of Concept program and a pilot plant installation. (ASX: HRL)

WestSide Corporation
Mitsui E&P Australia Pty Ltd is exercising its farm-in option to acquire a 49 per cent interest in each of WestSide Corporation's Galilee Basin tenements ATP 974P and ATP 978P, while Mitsui's farm-in option to acquire 49 per cent of WestSide's interests in ATP 769P and ATP 688P has been extended to 31 March 2011.

WestSide said preparatory work is well advanced to enable exploration drilling to commence in the Galilee Basin in the second half of this financial year.

WestSide's chief executive, Dr Julie Beeby, welcomed Mitsui's decision to expand the alliance and jointly explore the tenements which cover 14,480 square kilometres in an area said to be acknowledged as Queensland¡|s last coal seam gas (CSG) frontier.

The arrangement is subject to regulatory approvals, and execution of a mutually agreeable farm-in agreement, including the work program and budget to be implemented, and reimbursement of 49 per cent of WestSide's costs to date, said Dr Beeby.

The tenements contain an estimated 21 trillion cubic feet of gas.

WestSide holds 50 per cent interests in ATP 769P and ATP 688P, which contains a number of promising CSG prospects including its Tilbrook and Mount Saint Martin projects.

The farm-ins are conditional on WestSide's existing joint venturer in ATP 769P and ATP 688P, QGC, waiving existing pre-emptive rights over these areas. (ASX: WCL)

Initial Public Offerings

Algae.Tec has extended its IPO to 15 November. The company is raising $7.5 million to commercialize a photobioreactor that can use waste carbon dioxide to more efficiently grow algae for biodiesel and other products.

Unlisted Funds

Two New Venture Capital Funds
Southern Cross Fund No. 2 LP and Start-up Australia Fund are two new venture capital funds that include cleantech and the environment in their sectors of interest.

The two funds are among four that will raise over $160 million in venture capital.

Each will receiving Government funding of $20 million under the Innovation Investment Fund program, and will need to raise funding from private investors that matches or exceeds the government's commitment.

Innovation minister Senator Kim Carr said "The venture capital we are providing these fund managers will help early-stage high-growth Australian companies commercialize their research."

Southern Cross Fund No. 2 LP is managed by Southern Cross Venture Partners Pty Ltd. Its key personnel include Gareth Dando, Bill Bartee, Bob Christiansen, John Scull, Larry Marshall, Tristen Langley and Frank Foster, who are experienced venture capitalists.

The fund will invest in the IT, telecommunications, materials and clean technology sectors.

It has people based in Silicon Valley, Sydney and Brisbane.

The Start-up Australia Fund is managed by Start-up Australia Ventures Pty Ltd. Its key personnel, Dr George Jessup and Stephen Robinson, are very experienced venture capitalists in the bioscience sector and are expanding their interests to include the energy and environmental markets.

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