Infigen’s Miles George: The hazards of operating overseas

Not many listed companies can report that a lack of wind led to a fall in sales. But that’s just part of all that is different for Miles George, CEO of wind generation company, Infigen Energy.

In explaining his company’s results to LeadingCompany today, George says the La Niña weather pattern that brought rains and welcome relief from Australia’s long drought also brought easterly winds. This weather pattern contributed to a falloff across the company’s American operations, which drove Infigen’s Energy production down 3% in 2011-12.

Infigen operates 24 wind farms in Australia and the United States. Infigen’s Australian business commissioned its sixth generator, the Woodlawn Wind Farm, during 2011-12.

The company’s revenue fell slightly – down .6% to $284 million – in 2011-12. The company generated a $55.8 million loss, which is 8.4% better than last year’s loss of $60.9 million.

Infigen is Australia’s only listed wind-generated electricity company, says CleanTech analyst, John O’Brien. “So if you are an investor that wants exposure to wind energy, Infigen is your only choice. AGL and Origin do a bit.”

Understanding the financial position of this kind of new generation energy company takes a bit of analysis – more than most investors are prepared to make, if the share price is anything to go by. The company’s share value has fallen from $1.61 in August 2007 to 29 cents today. This was within the company’s guidance. The share price fell a little after the results were announced.

“Infigen should be one of the shining lights of the CleanTech sector,” says O’Brien, who publishes the CleanTech index comprising about 70 listed companies working in sectors including solar, geothermal, and other environmental areas. Many have no revenue. “Sadly, Infigen  is not far off the overall values on the full CleanTech index, which fell to record lows on the day that the carbon tax came in.” The value of companies on the index has fallen 56.4% in the past three years.

George is expecting the wind to pick up in the next year, and includes that in his company’s revenue forecast. George says he expects the company to break even in the 2015 financial year. “We know the wind conditions because we have long-term records, and if you have lower than the average of a few years, there is a higher probability of coming back to closer to the mean. In the long term that is the case. Of course, you can’t be certain. Then we have had ‘La Niña’ weather pattern and now we look like heading into El Niño, which is more favourable, and the La Niña event is weakening.”

One factor affecting Infigen’s results are the high depreciation and amortisation costs on its new wind farms – this year its D&A expense was $140.1 million, up from $135 million last year. George says: “In businesses like ours, where we are building new plant all the time, you have very high depreciation charges, which is a primary factor in our after-tax result.

“If you look at net operating cash flow, we had an increase of 25%, reflecting better cash management and control of working capital. In particular, controlling operating costs and keeping them in a predictable range.”

An increase in operating costs was due to warranties coming off the new equipment – typically two to five years – which brings up the company’s maintenance costs.

That is set to change following two recent deals Infigen made this year to cover maintenance for 66% of its total operating capacity in Australia and 39% in the US, which removes the risk of equipment failure to the maintenance contractors.

The carbon price represents an opportunity for Infigen’s Australian operations, which generate about half of its total revenue. Because Infigen does not generate carbon emission from its electricity operations, about half of any electricity price rises will go straight to its bottom line. “About 45% of our total generation is ‘uncontracted’, says George, meaning that it has not been presold as set prices. “That means that it is sold on the market at spot prices and if the prices increase, we pick up that additional money.”

It’s another part of the complicated story that Infigen has to sell to investors. The regulatory uncertainty is one of George’s biggest frustrations. “Dealing with regulatory uncertainty in Australian and the US is one of the biggest challenges. You end up spending a lot of time talking with government regulators, federal and state, about planning issues. That is an external factor.”

One top of that, George has to convince Australian investors to place a value on operations in another country. So far, they are determined to be cautious. “If you look at current share price, you could build up that from cash we hold, plus our investment in Woodlawn, without looking at the US business,” he says.

George has responded by releasing more information about the company and its operations. “We have a made a lot of effort to improve our info and transparency. For example, we gave 50-page management discussion pack, that explains everything as best we can with full information and as much transparency as possible.”