Pacific Energy (PEA)

Transcription

1 11 August 2016 INTERNAL ONLY RECOMMENDATIONS Rating BUY Risk High Price Target $0.73 Share Price $0.64 SNAPSHOT Monthly Turnover $2.1mn Market Cap $235mn Shares Issued 370.2mn 52-Week High $ Week Low $0.36 Sector Utilities BUSINESS DESCRIPTION Pacific Energy builds, owns, operates and maintains remote power stations and generation-related infrastructure, primarily serving the mining sector. The vast majority of its assets are gas, diesel and dual fuel generators, with hydro facilities making up the remainder. The company is now looking to expand its activities into Africa and the renewable energy space. 12-MONTH PRICE & VOLUME RESEARCH ANALYST Luke Macnab, CFA lmacnab@baillieuholst.com.au Nicolas Burgess, CFA nburgess@baillieuholst.com.au Josh Kannourakis jkannourakis@baillieuholst.com.au Disclosure The author owns no shares in PEA. Pacific Energy (PEA) INITIATION OF COVERAGE Powering up We initiate coverage of PEA with a BUY rating: Pacific Energy (PEA) has a significant presence in the remote power generation market in Australia and a good track record of delivering steady earnings growth. Management is looking to leverage its decades of experience in the sector by pursuing growth offshore and in the broader energy infrastructure market. If it succeeds, we believe that there is strong potential upside to our current 12-month target price of $0.73. Delivering solid long-term growth: PEA has been a leading player in the market since 1981, being involved in the construction and operation of 40 power stations. Revenue is generated under long-term contracts of 5-15 years, delivering good earnings visibility and steady growth, with bonuses for outperformance. Since 2009, PEA has grown its generation capacity from 100MW to 239MW, with EBITDA growing from $17m to $35m. Pursuing multi-faceted expansion strategy: PEA is seeking to leverage its strong operating base into adjacent areas in search of additional growth. Its strategy includes: 1) expanding offshore into African projects with ASX-listed owners; 2) increasing its presence in renewable energy, by partnering with suitable companies; and 3) reviewing opportunities for investment or acquisition in the broader energy infrastructure market. Remote, renewable power expanding rapidly: Industry research suggests that the remote power market will double by 2024, implying a 10% CAGR. Most of the growth will be in Asia-Pacific and Africa/Middle East and PEA is moving to capitalise on this. Similarly, renewable energy investment in the mining sector is forecast to grow by a 20% CAGR in Asia-Pacific to PEA recently signed an alliance with a German wind and solar power specialist to participate in this expansion. Good 1H16 result; 2H16 to be better: PEA reported 1H16 revenue up 6% to $24.4m, Adjusted EBITDA up 17% to $17.6m and Adjusted NPAT up 24% to $8.7m. The result was driven primarily by cost reductions, but PEA is expecting a stronger 2H16 due to a number of additional projects coming online and we are forecasting it to beat guidance of $35m. Investment view: Our 12-month price target is in line with our valuation of $0.73. This is based on the average of valuations calculated using a DCF analysis ($0.71) and a P/E multiple ($0.75). We believe PEA is a solid growth stock with a decent yield of 4.8% (fully franked) and significant upside potential if its growth strategy is successful. INVESTMENT SUMMARY Year End: 30 June 2014A 2015A 2016E 2017E 2018E Revenue $mn EBITDA $mn EBIT $mn Reported Profit $mn Adjusted Profit $mn EPS (Reported) EPS (Adjusted) EPS Growth % PER (Reported) x PER (Adjusted) x Dividend Yield % Franking % Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 1

2 Financial summary PACIFIC ENERGY Code: PEA Rating: BUY Analyst: Luke Macnab Price Target: $0.73 Date: 11 August, 2016 Upside/downside: 15% Share Price: $0.64 Valuation: $0.73 Market Capitalisation: $237m Valuation method: DCF/Multiple Financial Year End: June Risk: High PROFIT & LOSS (A$m) FY14A FY15A FY16E FY17E FY18E EARNINGS FY14A FY15A FY16E FY17E FY18E Operating revenue EPS - Underlying (cps) COGS EPS Growth - Underlying 11% -19% 21% 16% 10% Gross profit EPS - Reported (cps) Expenses Diluted shares (m) EBITDA DPS (cps) Depreciation Dividend Yield 3.9% 3.9% 3.9% 4.8% 5.2% EBITA Payout Ratio 62% 77% 50% 50% 50% Amortisation Franking 100% 100% 100% 100% 100% EBIT Net Interest expense VALUATION FY14A FY15A FY16E FY17E FY18E Minorities P/E - Underlying (x) Underlying PBT EV/EBIT (x) Tax EV/EBITA (x) Underlying NPAT EV/EBITDA (x) Underlying NPATA Price/Book (x) Price/NTA (x) Significant items (net of tax) Price/FCF Reported profit GROWTH FY14A FY15A FY16E FY17E FY18E BALANCE SHEET (A$m) FY14A FY15A FY16E FY17E FY18E Revenue growth 10% -4% 10% 10% 6% Assets COGS growth 0% 29% 8% 6% 6% Cash Expenses growth -16% 6% -6% 7% 4% Receivables EBITDA growth 23% -10% 17% 11% 7% PPE PBT growth 45% -19% 24% 13% 8% Goodwill & Intangibles Underlying NPAT growth 12% -19% 24% 18% 11% Investments Reported NPAT growth 12% -19% 24% 18% 11% Other assets Total Assets MARGINS & RETURNS FY14A FY15A FY16E FY17E FY18E Liabilities EBITDA Margin 71.7% 67.3% 71.2% 71.9% 72.3% Payables EBITA Margin 53.9% 47.3% 51.6% 52.3% 51.9% Debt NPBT Margin 44.2% 37.5% 42.1% 43.4% 44.2% Provisions ROIC 11.7% 9.9% 11.3% 11.9% 12.5% Tax payable ROE 23.4% 9.3% 11.2% 12.8% 13.5% Deferred Revenue ROA 28.5% 12.0% 13.9% 14.8% 15.5% Other liabilities Effective Tax Rate 30.0% 30.0% 30.0% 30.0% 30.0% Total Liabilities Equity GEARING FY14A FY15A FY16E FY17E FY18E Share capital Net Debt Retained earnings Enterprise value Other equity Net Debt/EV (%) 10.4% 7.9% 13.3% 11.4% 9.3% Total shareholders equity Net Debt/EBITDA (x) EBITDA/Net Interest (x) BV per share (cps) NTA per share (cps) SEGMENT REVENUES (A$m) FY14A FY15A FY16E FY17E FY18E Kalgoorlie Power Systems CASH FLOW (A$m) FY14A FY15A FY16E FY17E FY18E Other Cash at Start Cash from operations Capex Free cash flow Cash flow from investing Cash flow from financing Cash at end Free cash flow per share (cps) GOCF / EBITDA 114% 106% 101% 108% 108% FCF / Underlying cash NPAT 70% 129% -42% 93% 96% Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 2

3 Investment view We initiate coverage of PEA with a BUY rating: Pacific Energy (PEA) has a significant presence in the remote power generation market in Australia and a good track record of delivering steady earnings growth since the acquisition of Kalgoorlie Power Systems (KPS) in Management is now looking to leverage its decades of experience in the sector by pursuing additional growth offshore and in the broader energy infrastructure market. Long term contracts deliver steady growth: PEA has been a leading player in the market since 1981, being involved in the construction and operation of 40 power stations. Revenue is generated under contracts of 5-15 years in length, delivering good earnings visibility and steady growth, with bonuses for outperformance. Since 2009, it has grown its generation capacity from 100MW to 239MW, with EBITDA growing from $17m to $35m. Expansion strategy looking to adjacent markets: PEA is seeking to leverage its strong operating base and management experience into adjacent areas in search of additional growth. Its strategy includes: 1) expanding offshore into African projects, which often have common owners and similar climatic conditions to Australian mines; 2) increasing its presence in the renewable energy sector, by partnering with suitable companies such as Juwi; and (3) reviewing opportunities for investment or acquisition in the broader energy infrastructure market. Remote and renewable power expanding rapidly: Industry research suggests that the remote power market will double by 2024, implying a 10% CAGR. Most of this growth will occur in the Asia-Pacific and African/Middle Eastern regions and PEA is moving to capitalise on this. Similarly, renewable energy investment in the mining sector is forecast to grow by a 20% CAGR in Asia-Pacific to PEA recently signed an alliance with a German wind and solar power specialist to participate in this expansion. Valuation and target price: Our 12-month price target is in line with our valuation of $0.73. This is based on the average of valuations calculated using a DCF analysis ($0.71) and a P/E multiple ($0.75). Our DCF analysis uses a beta of 1.1, averaging the observed betas of engineering/construction (1.3) and power generation (0.8). Other variables include risk free rate of 5.0%, market risk premium of 6.0%, terminal growth rate of 3.0%, debt cost of 6.5% and debt/equity ratio of 30/70. These give a WACC of 9.5%. The P/E multiple valuation is based on a FY17 multiple of 16.0x, in line with the average small cap multiple. Investment view: We believe PEA is a steady growth stock with defensive characteristics, having a decent yield of 4.8% (fully franked) and high earnings visibility. The startup of new projects in 2H16 should lead to good earnings growth in FY17 and if PEA s growth strategy bears fruit, there should be significant upside to our current forecasts. We initiate coverage with a BUY rating and a 12-month price target of $0.73. We initiate coverage with a BUY rating and 12-month price target of $0.73 Steady growth since 2009, with minor impact from mining slowdown in 2014 Leveraging its experience into new growth areas offshore and renewables Remote power market forecast 10% CAGR. Renewable investment in mining forecast 20% CAGR Significant upside to our valuation of $0.73 if growth initiatives are successful FIG.1: PEA REMOTE POWER STATION FIG.2: PEA DIESEL GENERATORS Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 3

4 Company overview Pacific Energy (PEA) builds, owns, operates and maintains power stations and generationrelated infrastructure. The majority of PEA s customers are mining companies in remote, off-grid locations, which require a reliable and cost-effective power supply to maximise production. PEA also has a small hydro-electric power business in Victoria, which sells electricity into the national power market. PEA s head office is located in Perth and it currently operates 22 power stations, with a total generation capacity of 239MW. PEA s 20 off-grid facilities use gas, diesel or dual fuel generators and provide 233MW of this capacity; the hydro facilities make up the remainder. Power supply agreements are usually long-term, between five and 15 years in length. PEA s listed life began as a nickel exploration company (Arboyne NL), which had its IPO in It subsequently changed its name to Pacific Nickel in 1997 to reflect the acquisition of some offshore exploration assets. The Company then acquired the Blue Rock Dam and Cardinia Reservoir hydro-electric power plants from the Kvaerner Group and changed its name to Pacific Energy in Main business is to build, own and operate remote mine site power stations under long term contracts FIG.3: LOCATION OF PEA ASSETS FIG.4: PEA GAS GENERATOR After failed merger attempts with Energy Equity Corporation and Energy World Corporation (EWC), in 2002 PEA made the decision to focus on its energy assets. Consequently, shareholders received an in-specie distribution of EWC shares and SMC (an exploration company) shares. Remaining non-core assets, including resource exploration projects and offshore infrastructure assets were divested over time. In 2009, the current PEA began to take shape with the purchase of Kalgoorlie Power Systems (KPS). KPS was established in 1981 by Ken Hall and had a strong historical presence in the WA Goldfields. At the time of acquisition, the company had around 100MW of generation capacity, consisting of 11 natural gas, diesel and dual fuelled power stations at mine sites across Western Australia (WA) and the Northern Territory (NT). Acquisition of Perth-based KPS was transformative. Clients are medium-large listed mining companies Kalgoorlie Power Stations The KPS Head Office, storage facilities and main workshop are located at Kalgoorlie in WA. KPS currently operates generators in three Australian states, having developed a project in South Australia (SA) since acquisition. These generators are typically located near and provide energy to mine sites, usually with a capacity of 2MW to 45MW. KPS clients are generally medium to large public companies and include Newmont, Iluka Resources, AngloGold Ashanti, Sandfire Resources and Regis Resources. The weighted average remaining contract duration is around four years, giving good earnings visibility in Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 4

5 the medium term. KPS s customers are mostly engaged in gold production (around 75-80% of revenue), with the remainder in other precious metals and mineral sands. The KPS model provides 100% of the funding for the power station s construction, which frees up mine owner capital to fund other mine-related investment. KPS then charges a fixed monthly tariff under a long term contract, commencing after mine commissioning. Once in operation, the mining company supplies the fuel and KPS generates and distributes electricity to the mine site. There are also incentives in the contract whereby KPS participates in any efficiency gains but is also penalised for not meeting performance hurdles for efficiency or uptime. A key selling point for KPS in the market is that it provides a single point of connection between the mine owner and the power supplier throughout the entire life of mine. This can significantly reduce the risk, cost and time involved when compared to dealing with multiple parties being responsible for the power supply. KPS has a significant amount of in-house expertise in power station construction and project management. A key differentiator for KPS is that it modifies and ruggedises equipment purchased from the original manufacturer, customising the build for harsh Australian outback conditions. There are also a number of established sub-contractor partners which contribute to the activities of the company. KPS model and in-house expertise is a strong competitive advantage FIG.5: PEA REVENUE SPLIT BY COMMODITY FIG.6: EXISTING PEA CONTRACTS Contract Client Mine life 11% Tropicana AngloGold to % Garden Well Regis Moolart Well Regis to 2020 to % Gold DBS* Newmont to 2022 Copper Thunderbox Saracen to 2020 Mineral sands Jacinth Iluka to 2019 Other DeGrussa Sandfire to 2022 Carosue Saracen to % Gwalia St Barbara to 2024 Other Other to 2022 Long term contracts Mine life * Assumes current contract extended This expertise has been tapped to develop and commercialise a new waste heat recovery technology for its diesel and dual fuel power stations, under an exclusive arrangement with Bowman Energy Recovery. This process recycles the heat energy available from exhaust gases to achieve a fuel consumption reduction of around 8% relative to standard equipment performance, and 6-7% relative to KPS solutions. As part of its offering, KPS itself provides a guaranteed level of fuel efficiency (diesel or gas), rather than simply passing on the guarantee of the original equipment manufacturer. KPS manages and mitigates its fuel efficiency risk with the following processes: - Selecting equipment based on demonstrated in field efficiency performance in similar ambient temperate conditions and geographical location; KPS offers guaranteed fuel performance levels and participates in the upside from efficiency gains - Securing expert personnel to manage and develop performance enhancement innovations; and - Continuous evaluation of new technology opportunities including: low temperature waste heat recovery and intake cooling; and development of low cost dual fuel conversion technology on standard diesel solutions. KPS s uptime benchmarks of 99.9% are achieved by: - Installing minimum redundancy capability at each power station; - Developing equipment and technology to extend component life and reduce maintenance costs; and Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 5

6 - Managing oil and maintenance monitoring programs to ensure preventative action is undertaken prior to breakdown/outage. Having secured the initial contract to build and operate a remote power station for a certain number of years (typically 5-15), it is obvious that the incumbent supplier has a significant advantage when it comes to renewing that contract. This is because any new supplier would have to build its own, new power plant and KPS could be in a position to offer a lower price going forward, having presumably recouped its capital cost and an appropriate return on the initial contract. Incumbency is a key advantage when contracts are up for renewal Victorian Hydro Victorian Hydro operates two power stations in Victoria, with a combined capacity of 6MW, located in South East Victoria at Cardinia Reservoir and Blue Rock Dam. These facilities have been in operation since 1992 and the electricity generated is purchased by Energy Australia. Blue Rock is a 22kV 2.6MW facility, located approximately 130km east of Melbourne in the Latrobe Valley. Cardinia is a 22kV 3.5MW facility, located 40km east of Melbourne. Both were developed, designed and are operated by PEA personnel, with the turbines and generators supplied by Kvaerner. Cardinia and Blue Rock both have long term power purchase agreements, though Blue Rock s is able to be terminated by either party with six months' notice. As a contingency plan, Blue Rock is also a registered Small Aggregated Generator under the NEM rules and will be able to sell renewable electricity at NEM spot prices if the contract is terminated. Victorian Hydro plants contribute 6MW of capacity Other growth initiatives The KPS Africa division was established in June 2016 and seeks to replicate the success of the Australian remote mine-site generation business offshore. PEA will look to leverage its existing relationships with Australian miners into its African projects there are 190 ASXlisted companies with almost 600 mining projects in 38 African countries. This is even before taking into account other non-australian owned projects. KPS Africa looking to replicate Australian success overseas in similar conditions FIG.7: ASX-LISTED MINING PROJECTS IN AFRICA LOCATIONS FIG.8: ASX-LISTED EXPLORATION IN AFRICA BY RESOURCE Source: Australia-Africa Minerals & Energy Group Source: Australia-Africa Minerals & Energy Group PEA also recently announced an alliance with Juwi, a specialist in wind and solar energy projects, headquartered in Germany. Together, they will focus on projects seeking to integrate solar and battery energy with traditional diesel or gas fuelled power stations in remote areas. Previously, they collaborated on Sandfire s successful DeGrussa hybrid power station, where the existing KPS 20MW power station was integrated with a 20 hectare 11MW solar and 6MW battery system. This project is the largest integrated off-grid solar and battery storage facility in Australia and reportedly, one of the largest in the world. Alliance with Juwi looking to expand PEA s presence in the fast-growing renewables space Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 6

7 Industry Background The remote power market services a need for the provision of reliable, cost-effective power to off-grid locations. As an example, mining operations often run around the clock to maximise capital efficiency and energy providers have to meet these demands. Industry researcher Navigant estimates that the overall value of the market for remote power systems is around US$13bn this year and is forecast to double by Renewable energy will have an increasing role in this market, but existing thermal technology will still have a large part to play. Remote power station market forecast to grow by 10% CAGR globally FIG.9: ANNUAL REMOTE MARKET CAPACITY 1 AND REVENUE 2 FIG.10: SUBSTITUTION VS LOAD TRADEOFF FOR DUAL FUEL 1 Bars, LHS. 2 Line, RHS. Source: Navigant Research Source: Drilling Contractor Magazine Diesel-fuelled power generation dominates the remote mine power market in Australia. This is mainly due to the absence of gas and electricity transmission infrastructure in mine locations. The use of natural gas has increased in recent years, with lower fuel costs and a reduced carbon footprint driving this increase, in markets where the gas supply is suitable. Dual-fuel power stations are able to substitute up to 80% of the diesel fuel with cheaper gas, offering additional flexibility for customers to manage their fuel input costs. Many factors (including engine speed and load) affect the substitution, but rates of 50% to 70% are typical. Having this flexibility has increased in importance in markets where fuel suppliers have a dominant position and the potential for gas interruption risk exists. Electricity generation typically accounts for 15-25% of total operating costs for remote mining projects. The cost of electricity generation is comprised of fuel (80-85%) and power station costs (15-20%). As such, fuel efficiency and availability of generation capacity is paramount in minimising the overall cost of power supplies. Fuel is 80% of total power cost need for efficiency is paramount. Dual fuel can also reduce costs FIG.11: DEGRUSSA COPPER MINE AND HYBRID POWER PLANT FIG.12: RENEWABLE INVESTMENT IN THE MINING INDUSTRY 1 1,400 1, E 2022E 1, Europe North America Middle East/Africa Latin America Asia- Pacific Source: Juwi 1 Base case in US$m Source: Navigant Research Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 7

8 In the past few years, off-grid industries suffered as the cost of diesel fuel increased significantly. Whilst it has reduced recently, volatility remains high and forecasting fuel costs is difficult. Diesel plants are also costly to maintain, are heavy polluters and miners have to manage the transport of fuel over extreme distances to feed on-site generators. For the above reasons, many mining companies are moving to hybrid power generation, which incorporates a component of renewable energy to reduce the reliance on diesel. As a consequence, remote thermal generators (like KPS) are increasingly partnering with experts in renewable generation (like Juwi) on new projects, such as the DeGrussa project. This type of integration requires development of sophisticated control systems in order to manage load swings and ensure uninterrupted power supply. We expect this to be a strong growth driver for the remote power industry. It is expected that the value of renewable energy consumed by the mining industry will more than double by Wind power hybrids have become commonplace in areas where they can be supported (eg South America), although solar power is expected to eventually command a greater market share as solar cell and battery technology improves. Renewables is a key growth area for the remote market, providing low emissions and flexibility FIG.13: PEA ASSET LOCATIONS FIG.14: PEA CUSTOMER REVENUE SPLIT AND MILESTONES 6% 8% 3% 5% 9% 8% AngloGold 18% Newmont 10% 15% 18% Regis Saracen Sandfire St Barbara Metals X Millennium Iluka Other Recent customer milestones Thunderbox Tropicana Deflector Carosue Dam Moolart Well Bluebird New 14MW gas-fuelled power station Conversion of existing 44MW dieselfuelled power station to gas-fuelled New 7MW power station Conversion and expansion of existing 10MW diesel-fuelled power station to 11MW dual-fuelled Rollout of waste heat recovery units Restart of 8MW power station Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 8

9 Financial position and outlook PEA reported a solid 1H16 result, with revenue up 6% to $24.4m and Adjusted EBITDA up 17% to $17.6m. This was driven primarily by a reduction in corporate costs and general overheads. Adjusted NPAT was up 24% to $8.7m. During the period, an additional 18.6MW of new contracts and expansions to existing contracts were secured, representing an 8% increase on the previous installed capacity. Earnings growth in 1H16 result underpinned by cost reduction program FIG.15: PEA REVENUE ($M) FIG.16: PEA EBITDA ($M) FY14A FY15A FY16E FY17E FY18E 0 FY14A FY15A FY16E FY17E FY18E, Baillieu Holst forecasts, Baillieu Holst forecasts Although the slowdown in the resource sector has had an impact on earnings (notably in FY15), it has been relatively small. PEA had no exposure to iron ore miners, who have been hit hard (commodity price down by c.50% from its 2012 peak in AUD terms) and significant exposure to gold miners, who have held up well (commodity price up slightly from its 2012 peak in AUD terms). PEA is expecting a strong 2H16 due to a number of additional projects coming online during the period and we are forecasting it to beat guidance of $35m. Gearing was elevated at the end of 1H16 due to increased investment in equipment during the period and is expected to reduce in 2H16 as capex slows. The Net Debt/Adjusted EBITDA ratio stood at 1.1x as at 30 June 2016, compared with historical levels of x. Earnings expected to be stronger in 2H16 and FY17 as new projects start up FIG.17: PEA CONTRACTED CAPACITY (MW) FIG.18: SPOT GOLD PRICE (IN AUD) 300 1, ,800 1,700 1, , ,400 1,300 1,200 0 FY11A FY12A FY13A FY14A FY15A Current Aug 11 Dec 11 Apr 12 Aug 12 Dec 12 Apr 13 Aug 13 Dec 13 Apr 14 Aug 14 Dec 14 Apr 15 Aug 15 Dec 15 Apr 16 Aug 16 Source: IRESS Outlook We are forecasting PEA to achieve solid organic growth from expanding its business with existing customers and winning new domestic business. The continuing focus on costs by the mining sector is a positive for PEA as the company is very focused on maximising the efficiency of their power generators and minimising costs. PEA is working on a number of new tenders, primarily in the gold, lithium and nickel sectors. On top of this, management has outlined an aggressive expansion strategy which includes the KPS Africa initiative, the partnership with Juwi and reviewing opportunities for acquisition in the wider energy infrastructure market in general. If these initiatives are successful, there is significant upside to our current forecasts. Solid underlying business with significant upside if growth strategy bears fruit Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 9

10 Additional information Key management personnel James Cullen (CEO & Managing Director) Appointed June 2015, was previously CEO of Resource Equipment Ltd ( ), which grew from $5m to $115m market cap before being acquired. Prior to that, was CEO of PCH Group ( ), which grew from $1m to $260m market cap before being acquired. Other director roles include A1 Consolidated Gold (2015-) and Chesapeake Capital (2015-). Has extensive experience in the mining and engineering sectors. Kenneth Hall (Executive Director) Appointed May 2009, he is an electrician by trade and founded Kalgoorlie Power Systems in He has been involved in the mining industry for 50 years and the contract power generation business for 30 years. Mr Hall owns 49.9% of PEA. Cliff Lawrenson (Independent Non-Executive Chairman) Appointed August 2010, he is also currently CEO and MD of Avenira (ticker: AEV), a phosphate mining company. Prior to this, he was CEO of FerrAus until 2011 and CEO of mining engineering and development company GRD (from ), where he was also Finance Director from Also worked at CMS Energy in the US and has led the development and financing of numerous major power and infrastructure projects. Louis Rozman (Non-Executive Director) Appointed May 2009, he is a founding partner of Pacific Road Capital, a private equity mining investment fund. He has over 30 years' experience in mining operations, joint ventures and corporate management internationally. Prior roles include CEO of CH4 Gas and COO of Delta Gold and Aurion Gold. Other director roles include Kula Gold (2007-), Carbon Energy (2010-), Mawson West (2009-) and Timmins Gold ( ). Pacific Road owns 22.9% of PEA. David Manning (General Manager of KPS) Appointed in 2014, he has 25 years of experience in the mining and power generation industry. His previous role was GM of Powerwest ( ), which designs, constructs and operates remote power stations. Prior to that, he spent time as Regional Manager at KONE elevators ( ) and Operations Manager for Westral Group in Atlanta ( ), where the business grew substantially during his tenure. Very experienced management team Key risks Customer risk A number of PEA s customers operate projects that may be shut down temporarily or permanently due to falls in commodity prices or other factors. This could result in early termination of long term agreements or payments that are lower than expected. Risk mitigation is achieved by active monitoring of both commodity prices and customers financial health, and having a wide spread of customers. Re-contracting risk The majority of PEA s revenues are under long-term contracts. As these approach expiry, PEA will be required to renegotiate the contracts with its counterparties. In the event that PEA is unable to secure the renewal of these contracts, or can only secure renewal on terms which are less attractive than the previous terms, PEA s financial performance may be adversely affected. The advantage of incumbency is a big mitigating factor against this risk. Key personnel risk A number of staff in PEA s management team and in key positions in operational divisions have significant industry experience and expertise. If one or more of these key personnel were to depart, it may be difficult to replace them adequately, in which case there could be an adverse effect on PEA s ability to execute its strategic plans. Industry risk The power generation industry is developing rapidly, with renewable and battery technology improving and regulation around carbon emissions remaining uncertain. PEA s success will depend on its ability to anticipate and adapt to these developments and the potentially changing requirements of customers. A strong management team and customer focus will mitigate this risk. Competition risk The remote energy supply market is subject to strong competition and competitors may have greater financial, technical and marketing resources than PEA. This is mitigated somewhat by PEA s size (it is significantly larger than many of the companies in the domestic market) and management experience (key personnel have been in the sector for over 30 years). Key risks are around customers, key personnel and industry developments Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 10

11 Appendix FIG.1: LONG TERM MOMENTUM INDICATORS Source: Iress FIG.2: SHORT TERM MOMENTUM INDICATORS Source: Iress Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 11

12 This document has been prepared and issued by: Baillieu Holst Ltd ABN Australian Financial Service Licence No Participant of ASX Group Participant of NSX Ltd Analysts stock ratings are defined as follows: Buy: The stock s total return is expected to increase by at least percent from the current share price over the next 12 months. Hold: The stock s total return is expected to trade within a range of ±10-15 percent from the current share price over the next 12 months. Sell: The stock s total return is expected to decrease by at least percent from the current share price over the next 12 months. Baillieu Holst Analysts stock ratings distribution as of June 30, 2016: Buy: 63% Hold: 35% Sell: 2% Disclosure of potential interest and disclaimer: Baillieu Holst Ltd (Baillieu Holst) and/or its associates may receive commissions, calculated at normal client rates, from transactions involving securities of the companies mentioned herein and may hold interests in securities of the companies mentioned herein from time to time. Your adviser will earn a commission of up to 55% of any brokerage resulting from any transactions you may undertake as a result of this advice. When we provide advice to you, it is based on the information you have provided to us about your personal circumstances, financial objectives and needs. If you wish to rely on our advice, it is important that you inform us of any changes to your personal investment needs, objectives and financial circumstances. If you do not provide us with the relevant information (including updated information) regarding your investment needs, objectives and financial circumstances, our advice may be based on inaccurate information, and you will need to consider whether the advice is suitable to you given your personal investment needs, objectives and financial circumstances. Please do not hesitate to contact our offices if you need to update your information held with us. Please be assured that we keep your information strictly confidential. No representation, warranty or undertaking is given or made in relation to the accuracy of information contained in this advice, such advice being based solely on public information which has not been verified by Baillieu Holst Ltd. Save for any statutory liability that cannot be excluded, Baillieu Holst Ltd and its employees and agents shall not be liable (whether in negligence or otherwise) for any error or inaccuracy in, or omission from, this advice or any resulting loss suffered by the recipient or any other person. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Baillieu Holst Ltd assumes no obligation to update this advice or correct any inaccuracy which may become apparent after it is given. Baillieu Holst Ltd ABN Australian Financial Service Licence No Participant of ASX Group Participant of NSX Ltd Melbourne (Head Office) Address Level 26, 360 Collins Street Melbourne, VIC 3000 Australia Postal PO Box 48, Collins Street West Melbourne, VIC 8007 Australia Phone Facsimile melbourne@baillieuholst.com.au Adelaide Office Address 1, 341 Payneham Road Marden, SA 5070 Australia Phone Facsimile adelaide@baillieuholst.com.au Bendigo Office Address Cnr Bridge & Baxter Streets Bendigo, VIC 3550 Australia Postal PO Box 40 North Bendigo VIC 3550 Australia Phone Facsimile bendigo@baillieuholst.com.au Brisbane Office Address Level 18, 333 Ann Street Brisbane, QLD 4000 Australia Phone brisbane@baillieuholst.com.au Geelong Office Address 16 Aberdeen Street Geelong West Vic 3218 Postal PO Box 364 Geelong Vic 3220 Australia Phone Facsimile geelong@baillieuholst.com.au Newcastle Office Address Level 1, 120 Darby Street Cooks Hill, NSW 2300 Australia Postal PO Box 111 The Junction, NSW 2291 Australia Phone Facsimile newcastle@baillieuholst.com.au Perth Office Address Level 10, 191 St Georges Terrace Perth WA 6000 Australia Postal PO Box 7662, Cloisters Square Perth, WA 6850 Australia Phone Facsimile perth@baillieuholst.com.au Sydney Office Address Level 18, 1 Alfred Street Sydney, NSW 2000 Australia Postal PO Box R1797 Royal Exchange, NSW 1225 Australia Phone Facsimile sydney@baillieuholst.com.au Baillieu Holst Ltd ABN Page 12