Bioenergy has been a major source of renewable energy in parts of the world, such as Europe and the U. S. and this trend is expected to continue in the developing markets of Australia. There are indications that this trend has begun to spread in Australia with projects already undertaken such as the Rocky Point Congregation Plant, Pioneer Congregation Plant and Condong and Broadwater Cogeneration plants utilising a variety of green waste. More of these projects shall be commissioned in the foreseeable future given the renewable energy targets set by the G20 of 20%.
The renewable energy industry in Australia is growing and includes bulk electricity generation from diverse sources such as wind, biomass and hydro power as well as photovoltaics, solar hot water and remote area power systems (RAPS). The industry holds immense potential, not only for delivering significant environmental benefits, namely reducing greenhouse gas emissions, but also for providing substantial economic and employment benefits. Australians spend about $50 billion on energy each year, while energy exports earn more than $24 billion a year.
The sector involves massive, long-lived capital items such as electricity plants, transmission lines, coal, oil and gas production facilities, pipelines, refineries, wind farms as well as a multitude of smaller facilities such as wholesale and retail distribution sites. Demand for energy in Australia is projected to increase by 50% by 2020, and the energy industry has estimated that at least $37 billion in energy investments will be required by 2020 to meet the nation’s energy needs.
Meeting this increased demand for energy, while moving to a low-emissions future, is a key challenge facing Australia’s future growth and living standards. This challenge can be met with the development of a renewable energy industry such as Biogen’s biomass generation plant. As seen in the figure below, biomass is set to grow steadily and continue to increase its energy contribution. The Porter’s 5 model below illustrates the industry issues specific to Biogen.
From our analysis, Biogen have positioned themselves well to overcome these challenges and to excel within their narrow field of expertise. As highlighted above, through extensive due diligence, the contracting of low-cost suppliers and investing in new renewable technology, Biogen will be able to avoid the threat of new entrants and substitutes from intruding on their market competitiveness. The attention to cost from due diligence also means that the biomass plant will be able to produce energy efficiently and at a reasonable and low cost.
Biogen intends to build and operate custom-built, state-of-the-art biomass power plants aiming to maximise the efficiency of electricity generation. Once the plant operates at full capacity, it will operate with availability between 90% and 98%. However it will take one or two years to operate at these levels. Only availability in excess of 85% will be reached in the first few months. The initial biomass generating facility will be constructed in the Sydney Basin – a location that is advantageous to Biogen’s concept designs.
The strategic location of this site takes advantage of the proximity to distribution networks to retail subscribers and low transportation costs for green waste. The majority of Biogen’s project materials will be acquired in China through a range of large Chinese boiler and turbine manufacturers. Biogen have been able to obtain a competitive edge by securing these cheaper materials through contractual agreements with overseas manufacturers. To mitigate any product risks, Biogen have screened these companies to ensure quality standards are adhered to.
It was assumed that Biogen’s pre-feasibility studies and due diligence proved satisfactory and that construction of the Sydney plant commenced in 2nd quarter 2009, and was completed in 1st quarter 2011. It was assumed that the total cost of the Project would be $45million with funding of 70% equity and 30% debt. The debt funding would be in the form of a 30-year $13. 5 million project-finance facility. Total equity financing of $31. 5 million would be needed, with 40% ($12. 6 million) coming from Biogen.
As such, with the commencing of construction of the project, Biogen will have to undergo a large capital raising of around $12. 6 million. REIT Earnings Forecast Biogen was valued by first forecasting earnings for the REIT. Earnings were forecasted for the REIT for the years 2009-2015 on the basis of the cash flows of its only asset, the Sydney plant. Electricity prices, the prices of Renewable Energy Certificates, the total cost of generation (including operating and fuel costs), and electricity output were the key earnings drivers.
A balance sheet, income statement and cash flow statement were all produced for the REIT (Appendices). The forecasted earnings show strong fundamentals with strong growth over the period. This is despite not taking into account the effects of the soon-to-be implemented Carbon Emission Trading Scheme which will inevitably reduce the cost of generation and increase the price of electricity and RECs (the price for electricity and RECs were grown at 3. 25% and Cost of Generation at 2.
25%), which means that the forecasts are rather conservative and it is very likely that earnings and profitability will be higher in reality. Biogen Earning Forecast ; Valuation Since Biogen has a 40% stake in the REIT, and it is the only investment it has, the value of Biogen is inextricably linked to the earnings of the REIT. In valuing Biogen, distributions from the REIT and management fees were forecast, as well as Selling, General ; Administrative Expenses. Moreover line by line consolidation accounting was utilised in preparing Biogen’s Financial Statements to better show the operating characteristics of Biogen.
Once Biogen’s earnings were forecasted for the years 2009-2015, a Terminal Value was calculated. It was found using the perpetual growth method, where the terminal growth rate used was 6. 5%. We believed such a growth rate was justified in that subsequent to 2015, Biogen would IPO and continue to grow by using those funds to invest in new assets and expand its portfolio of renewable energy projects well into the future, which would lead to an increase in the growth rate of distributions and management fees received.