Thanks for your email and questions. I appreciate your concerns and questions and will endeavour to answer them as best I can with the obvious caveat that I am limited to what has already been disclosed to market. There will be more detail in both the Notice of Meeting and our usual reporting (quarterly and end of financial year) which should help clarify further over the coming weeks.
The Board has been constantly reviewing options for growing EMC to profitability from the time we bought it – both organically and via transactions – including looking at a number of M&A options, different capital sources, strategic partners etc. The decision to transact with Tag was only taken after the capital raise. The value that Carnegie shareholders receive from merger of EMC with Tag/MPower has been deliberately structured as equity in the combined entity. This mean that the value attributed to this stake increases as the market discovers the unlocked value that already sits in Tag and future value that will be unlocked by bringing the businesses together. Any pipeline value that EMC currently has transfers across into the entity and is preserved that way. In terms of the fundamental relative valuation between EMC and Tag – there were many ways to consider this (and many debated) but ultimately they are more than twice the size of EMC but EMC also brings the BOO pipeline (which requires significant capital to develop) so, on balance, the Board believes that 32% ownership represents good value for CCE shareholders. Particularly given we retain Northam and Garden Island. I’m sure you’ve seen that TAG is up ca. 50% since the announcement started to put them on the radar. As we now market the transaction and its benefits, we fully expect this will continue to grow significantly in value and directly benefit Carnegie shareholders. This will ultimately be how our EMC deal will be measured.
We have always said that EMC was a pre-profitable business but one with great prospects, and that whilst we had growing revenues ($5m H1 FY18 and $10m H2 FY18) it still required funding to give it the scale it needed to be profitable. The message from our shareholders during our roadshow was clear - they wanted us to get it to profitability and be self sustaining as soon as possible. They also didn’t want to continue to fund a loss making business, no matter how prospective the opportunities were, and I think that was borne out in part by us not raising what we’d targeted. The capital we did raise is being used for the stated purposes: EMC, BOO and CETO, and until the current transaction completes it will continue to be used as such. Beyond this it will be used for CCE/CETO. The $30m figure you reference, is actually the current EMC/LLS JV order book (sum of Northam, Summerhill and Kalbarri contracts). EMC pipeline is much larger than that and extends across Defence, mining, remote communities, stand alone power systems etc but the bottom line is that to win EPC contracts and develop BOO sites, capital is still required. And significant capital in the case of the BOO pipeline. Northam alone costs $17m to develop and build. 200MW will cost something like $300m in total and even if we were to own 50% of these projects and 50% of the capital was debt, we’d still need $75m in equity for the current BOO pipeline. So, gaining scale is critical and a key rationale for the MPower deal. In the short-term, CCE shareholders will no longer have to fund this capital and so the aim is for CCE shareholders to retain their CCE shares focused on wave (and with the value of Northam and Garden Island projects) and to own shares in a MPower which will be a leader in off-grid and fringe of grid renewables and be fully funded to profitability. The stand-alone power system information you mention is largely correct. Both Western Power and Horizon Power processes have eventuated and we have responded to these tender opportunities in the normal course of our business. Should we be successful (most likely we won’t know until after this transaction completes) then that value transfers to the new combined business and would logically be reflected in the shareprice, to the benefit of the Carnegie shareholders holding shares in MPower.
The Lendlease JV itself was never the “global opportunity”. In fact its explicitly constrained to Australia. That said, both microgrids and wave energy are global opportunities. We have really only focused on the Australian opportunity with EMC. MPower have been more successful in delivering a number of projects throughout NZ and the Pacific. The geographic complementarity is another reason for the MPower deal.
Post transaction, Carnegie will retain its focus on commercialising CETO. It remains a huge, global opportunity but not one without risk and challenges clearly. We continue to improve our design and performance, and we need to ensure we can be competitive in a world where the competition (used to be coal but is not renewables and storage) is continuing to improve their competitive position. We are currently focused on what we can control - finalising CETO 6 and Albany design (and maintaining global options around what we can’t e.g. constantly changing Australian Govt policy) so we can move to the next stage of procurement and manufacturing to hit our 2019/2020 deployment window.
I hope this helps clarify.
Best regards
Michael Ottaviano
CCE Price at posting:
2.3¢ Sentiment: Sell Disclosure: Held
