19 November 2013
Investor roadshow presentation
Attached is a presentation which ERM Power Managing Director and CEO Philip St Baker will make to investors in Australia, Asia, the United Kingdom and the United States over the next three weeks.
Peter Jans
Group General Counsel & Company Secretary ERM Power Limited
Investor Roadshow
19 November 2013
Important notice - disclaimer
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Disclaimer
This presentation contains certain forward-looking statements with respect to the financial condition, results of operations and business of ERM Power Limited (ERM Power) and certain plans and objectives of the management of ERM Power.
Such forward-looking statements involve both known and unknown risks, uncertainties, assumptions and other important factors which are beyond the control of ERM Power and could cause the actual outcomes to be materially different from the events or results
expressed or implied by such statements.
None of ERM Power, its officers, advisers or any other person makes any representation, assurance or guarantee as to the accuracy or likelihood of fulfilment of any forward-looking statements or any outcomes expressed or implied by any forward-looking statements. The information contained in this presentation does not take into account investors investment objectives, financial situation or particular needs. Before making an investment decision, investors should consider their own needs and situation and, if necessary, seek
professional advice.
To the maximum extent permitted by law, none of ERM Power, its directors, employees or agents, nor any other person accepts any liability for any loss arising from the use of this presentation or its contents or otherwise arising out of, or in connection with it.
Non-IFRS information
This document may contain certain non-IFRS financial measures and other defined financial terms.
The directors believe the presentation of certain non-IFRS financial measures is useful for the users of this document as they reflect the underlying financial performance of the business. The non-IFRS financial measures include but are not limited to:
• EBITDAIF - Earnings before interest, tax, depreciation, amortisation, impairment and net fair value gains / losses on financial instruments designated at fair value through profit and loss and gains/losses on onerous contracts.
• Statutory NPAT - Statutory net profit after tax attributable to equity holders of ERM Power unless otherwise stated.
• Underlying profit or Underlying NPAT- Statutory net profit after tax attributable to equity holders of ERM Power after excluding the after tax effect of unrealised marked to market changes in the fair value of financial instruments and impairment.
The above non-IFRS financial measures have not been subject to review or audit. However, the Company’s auditors,
PricewaterhouseCoopers, have separately undertaken a set of procedures to agree the non-IFRS financial measures disclosed to the books and records of the consolidated entity.
All reference to $ is a reference to Australian dollars unless otherwise stated. Individual items and totals are rounded to the nearest appropriate number or decimal. Some totals may not add down the page due to rounding of individual components.
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The Objective
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• Well-positioned, fast-growing Australian
energy business
• Strongly differentiated customer proposition
that has led to steady business sector
market share growth – 0 to 7.5% in six years
• Expanding into small business market
segment and developing complementary
business lines including metering
• Macquarie Generation offers opportunity to
become the 4
thpillar – a significant,
integrated generation and retailing business
• Board and management have highly
disciplined approach to acquisitions
To become the 4th pillar in the Australian energy market
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Section 1 – Introduction to ERM Power
Our business in a snapshot
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Australia's 4th largest electricity retailer, with significant generation development and operating expertise
• Ownership interest in, and operator of, two low emission gas-fired peaking power stations − Oakey (100%1) in Queensland
− Neerabup (50%) in Western Australia • Operator of the 320MW Kwinana baseload
power station in Western Australia
• Australia's 4th2largest electricity retailer, licenced to sell electricity in all Australian states and the ACT and Northern Territory
• Electricity supply exposure is hedged by using owned or contracted generation capacity and derivative contracts • Targeting business customer
market
− Large businesses − Small businesses
• Conventional and unconventional exploration and production
tenements in Western Australia and New South Wales
• Exploring options for the business, including potential demerger
Notes:
1 Financial close on acquisition of the remaining 16.67% interest in Oakey expected prior to end of CY2013
2 Based on ERM Power’s forecast league table for volume of electricity sold in the National Electricity Market for FY2013. The analysis draws on 2011 SRES scheme liability data, ERM Power signed contracts and broad assumptions about the market and participants. This is not an independently verified forecast
• Since inception, ERM Power has developed >2,600MW of generation and has a further >2,000MW
approved for development
0 10 20 30 40 50 60 70 80 90 1.00 1.50 2.00 2.50 3.00 3.50
Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13
A$m
Share price
(A$/share)
Underlying EBITDAIF¹ ERM Power S&P / ASX 200 (rebased to EPW)
72.4% TSR since listing
Solid growth in underlying earnings
Rated no. 1 in customer satisfaction2
Forecasting 28% growth in FY14 electricity sales
Early wins in the small business space
Delivering growth
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Strong earnings and dividend growth since IPO with increasingly diverse customer type and geography
Notes:
1 Earnings before interest, tax, depreciation, amortisation, goodwill impairment and net fair value gains / losses on financial instruments designated at fair value through profit and loss. Excludes significant items
2 Utility Market Intelligence (UMI) survey of retail electricity industry by independent research company NTF Group in 2012 (17th year of Survey). Research based on survey of 495 business electricity customers between November 2012 and January 2013. Five major electricity retailers benchmarked
National Energy Market structure
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7 Customers Hedge counterparties1 Note:1 Providers of financial hedges to electricity price movements
Generators Transmission and distribution
Electricity Cash payment
Cash settled hedge contracts
Australian Energy Market Operator
ERM Sales
Pool price Pool price Bilaterally agreed contract price Network charge • Delivery under physicallydeliverable electricity sales contracts occurs by
purchasing electricity from spot market to meet
obligations under sales contracts
• ERM Power manages exposure by entering into a variety of non-deliverable electricity derivative contracts
• ERM Power has agreements with generators and
intermediaries such as investment banks
Sales strategy
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• Business customer market accounts for around 70% of Australia’s total electricity market by load
• The larger retailers are focussed on mass-market customers, providing an opportunity for ERM Power to capitalise on its superior
customer service and efficient operations
Business customer market Size of market 1
(TWh) ~150
ERM Power Market Share
> 7.5%
(from 0% six years ago)
Note:
1 ESAA 2013 annual report
Why target the business
market?
ERM Power targets the business customer market and has organically grown market share to >7.5%
Small business expansion underway
• Gross margins in small business segment can be five times higher than in large business segment • Opportunity to set a new standard for small
business customer service
• Natural path to the small business market
− Many large business customers have small sites that ERM Power can now supply
− Many brokers who bring large customers to ERM Power also represent small businesses
Small business sales growth
11,500 customer sites contracted
Over A$150m of forward sales contracted
More than 0.5TWh over three years contracted Rapid growth since
commencement of small business offering on 1 July
Demonstrated risk management
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• Daily exposure to spot market tightly managed with no major losses since electricity sales business started in 2008
• This six year track record has tested ERM Power’s risk management with significant events including the GFC, two major floods and a major cyclone in Qld, and severe heat waves and bushfires in Victoria, NSW and Western Australia
• The most significant adverse daily event was ~$500,000 in November 2011 and the most significant favourable daily event was ~$1.4 million in January 2013
ERM Power's accuracy in forecasting, monitoring and hedging customer electricity consumption enables effective risk management
-60% -40% -20% 0% 20% 40% 60%
80%
Two Year History of Unexpected Spot Earnings
<---FY2012---><---FY2013---><---FY2014---% of dail y rev enu e 9
Track record of growing sales
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10 0 5 10 15 20 25 30 35 40 45FY2009A FY2010A FY2011A FY2012A FY2013A FY2014F FY2015F AGL FY2013A
ORG FY2013A
TWh
Electricity Sales - All Segments
ERM Power
Source: ERM Power, Origin Energy and AGL Energy FY2013 annual reports and ERM Power forecasts
ERM Power has delivered a 50% CAGR in electricity sales between 2009 and 2013 and is forecasting continued growth in FY2014 and FY2015
Embraced by large business
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11 0 5 10 15 20 25FY2009A FY2010A FY2011A FY2012A FY2013A FY2014F FY2015F AGL FY2013A ORG FY2013A
TWh
Electricity Sales – Large Business Segment
ERM Power
Source: ERM Power, Origin Energy and AGL Energy FY2013 annual reports and ERM Power forecasts
ERM Power is among Australia's largest and most successful large business electricity retailers
AGL FY2013
Diversified national business
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Increasingly diverse sales mix by customer and region reduces business risk
Sales (GWh) by Industry Type
Sales (GWh) by Region
26%
23% 31%
20%
Goverment, Healthcare & Education Manufacturing & Heavy Industry
Retail, Property, Tourism & Primary Industries Mining & Major Infrastructure
FY2014F FY2013A 41% 24% 23% 6%3% 3% QLD NSW VIC TAS SA WA 35% 31% 24% 5% 3% 2% As at September 2013
13 44% 9% 8% 7% 7% ERM Power Retailer D Retailer B Retailer C Retailer A
% of customers “very satisfied”
Leader in customer satisfaction
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• Best in class customer service, as demonstrated by superior customer satisfaction rating − ERM Power customers are five times more likely to be “very satisfied”
• Proprietary IT system which is difficult for competitors with established systems to replicate − ERM Power billing accuracy exceeded 99.8% and billing collection rate exceeded 99.98% • Tailored offering to large customers
ERM Power outranks its competitors in customer service and satisfaction
Note:
1 Utility Market Intelligence (UMI) survey of retail electricity industry by independent research company NTF Group in 2012 (17th year of Survey). Research based on survey of 495 business electricity customers between November 2012 and January 2013. Five major electricity retailers benchmarked
Capability in generation
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ERM Power has developed 6 power stations, representing ~5% of Australia's generation capacity
Neerabup, WA (2009)
Kwinana, WA (2008) Uranquinty, NSW (2008)
Oakey, Qld (1999)
Braemar, 1 Qld (2006)
Braemar, 2 Qld (2009)
Generation portfolio
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• Oakey (332MW) Peaker (100%1)
− Outstanding availability and reliability
Availability2 99.2% & Forced Outage Rate20.02%
− Inspection reaffirmed excellent condition • Neerabup (330MW) Peaker (50%)
− Outstanding availability and reliability
Availability2 98.2% & Forced Outage Rate20.05%
− WA electricity market improvements created potential for additional revenue
• Kwinana (320MW) Baseload
− ERM Power operates this asset for others − Outstanding availability and reliability • Development
− Opportunities affected by demand – ERM Power is not currently progressing its development projects − 2000MW of development approvals in hand for future
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Oakey Power Station - Queensland
ERM Power currently operates three and owns interests in two power stations in Australia
Neerabup Power Station – Western Australia
Note:
1 Financial close on acquisition of remaining 16.67% interest in Oakey expected prior to end of CY2013 2 IEEE Standard used for calculation of Availability and Forced Outage Rate
0 10 20 30 40 50 60 70 80 90
FY2009 FY2010 FY2011 FY2012 FY2013
$ million
Earnings growth trajectory
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ERM Power's underlying business profitability since 2009
1ERM Power has continued to deliver strong earnings growth
Note:
1 Earnings before interest, tax, depreciation, amortisation, goodwill impairment and net fair value gains / losses on financial instruments designated at fair value through profit and loss. Excludes significant items. Profits from the power development business and other discontinued activities have been excluded
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Section 2 – Strategic rationale for an acquisition of
Macquarie Generation
Background to the process
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18 • In November 2011, the NSW Government (State) announced it would sell State Owned
Corporations engaged in the generation of electricity, including:
− Macquarie Generation (MacGen);
− Eraring Energy (including generation trading agreements);
− Delta Electricity; and
− the electricity generation development sites at Bayswater B, Munmorah and Tomago
• The State announced the sale of Eraring Energy and Delta Electricity's Western power stations in July 2013
• Subsequently the State confirmed its intention to proceed with the sale of MacGen and the power station development sites, and has commenced a formal sale process
Background to the transaction
ERM Power participation
• Stage 2 of the sale process commenced at the beginning of November 2013
• ERM Power was shortlisted and is now undertaking detailed due diligence which is expected to take a number of months
• Any acquisition will be consistent with ERM Power's strategy
• Board and management will be disciplined in approach to value
• Funding structure remains to be finalised
ERM Power has been shortlisted for the second stage of the sale process for Macquarie Generation
MacGen owns two of the largest, and among the lowest cost, baseload power stations in Australia
MacGen overview
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•
Owner of Liddell and Bayswater power
stations in the Upper Hunter Valley of New
South Wales
−
two of the largest and lowest cost
baseload power stations in NSW with a
combined capacity of 4,640MW
•
Supplied c.13% of east coast Australian
electricity in FY2012
Note:
1. Refer to appendix for further detail on MacGen assets
SYDNEY NEWCASTLE NEW SOUTH
WALES
Strategic rationale
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MacGen is low cost capacity that would enhance ERM Power's position as the 4th pillar of the Australian
energy market
1
MacGen would provide long term, low cost electricity product
MacGen offers the opportunity for ERM Power to accelerate growth
2
MacGen would provide substantial vertical integration benefits
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The next growth platform
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An acquisition of MacGen would assist ERM Power in accelerating electricity sales growth
Lower cost to serve Ability to offer extended contract tenor Increased market visibility
• After an acquisition of MacGen, ERM Power would be well positioned to offer a more competitive offering
− reduced hedging costs
− improved working capital position
• The ability to offer longer term contracts will expand the pool of potential customers vs ERM Power on a standalone basis
• ERM Power commenced a successful marketing campaign for its electricity sales business in 2012, aiming to increase brand recognition • An acquisition of MacGen would be expected to
further improve perception of ERM Power's standing in the market, and potentially increase access to non-brokered loads
MacGen Energy Supply vs ERM Power Demand Forecast (TWh) 0 5 10 15 20 25 30
FY2013A FY2014F FY2015F
TW
h
ERM Power Business Energy sales Tomago Offtake
MacGen FY2013 Generation
MacGen is critical for NSW
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22 Source: Australian Electricity Market Operator ('AEMO') 2013 Planning Study – Existing Generator Technical Data Summary – based on variable operations
and maintenance, emissions intensity and fuel cost estimates
MacGen represents a low cost supply of electricity to underpin ERM Power's electricity sales growth
NSW electricity merit order
- 1,900 3,800 5,700 7,600 9,500 11,300 SRMC Cumulative capacity (MW) - 2,000 3,900 5,700 7,500 9,400 11,300 SRMC Cumulative capacity (MW) Bayswater Liddell Bayswater Liddell
Mt Piper Eraring Vales Point
B Wallerawang B Tallawarra Redbank Smithfield Colongra GT Colongra GT
Mt Piper Eraring Vales Point B
Wallerawang B Tallawarra
Smithfield
Redbank
Short Run Marginal Cost excluding carbon (FY2014)
Short Run Marginal Cost including carbon (FY2014)
- 2,000 4,000 6,000 8,000 10,000 12,000
- 2,000 4,000 6,000 8,000 10,000 12,000
Vertical integration benefits
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• ERM Power is required to provide prudential credit support to the Australian Energy Market Operator (AEMO) and other counterparties
− this is achieved via bank guarantees and cash collateral
• An acquisition of MacGen would provide ERM Power with the ability to offset these prudential obligations
Adding baseload generation to the ERM Power portfolio would be expected to reduce AEMO and hedge prudential requirements Reduced prudential requirements Natural hedge
• Physical dispatch capability provides a natural hedge, reducing the financial hedge position required to manage the risk of the Electricity Sales business
• This will reduce costs associated with hedging and hence improve profitability
Optimisation over value
chain
• Improved ability to maximise total return across generation and sales through adjusting dispatch
• Elimination of the opposing risk between generators and retailers
• Diversification of ERM Power’s value creation and risk mitigation opportunities
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Acquisition criteria
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• As Australia's 4
thlargest buyer and seller of electricity, ERM Power
routinely assesses generation acquisition opportunities
• In the last three years, ERM Power has assessed numerous
opportunities and proceeded with just one: Oakey
• ERM Power has no set targets to own generation, however generation,
at the right price, can increase financial returns for shareholders
• An acquisition of MacGen would only be undertaken if it were materially
EPS accretive
• ERM Power's targeted capital structure and refinancing strategy is
aimed at obtaining an investment grade rating in the medium term
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Conclusion
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• Fast-growing business model –
continuing to pursue growth, into small
business market and other business
lines including metering
• MacGen represents an opportunity to
increase financial returns and gain
vertical integration benefits
• Board and management will be
disciplined in any acquisition
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Appendix A – Review of 2013 results and outlook
for 2014
ERM Power corporate overview
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27 Note:
1 As at 15 November 2013, pro-forma for shares to be issued as a result of the share placement announced on 18 November 2013
ERM Power is committed to delivering high quality and flexible services to business energy customers
• ERM Power is a dynamic energy
company with interests in in electricity
sales and generation and gas
production and exploration
• Trading as ERM Business Energy
and founded in 1980, ERM Power
has grown to become the 4th largest
electricity retailer in the National
Electricity Market with operations in
every state
• ERM Power aspires to be the
preferred energy supplier to business
customers across Australia
Key metrics1
ASX code EPW
Shares on issue 238.7m
Share price A$2.71/share
Market capitalisation A$647m
Shareholders1 35.9% 2.7% 61.5% Trevor St Baker Other directors Ordinary shareholders
Continued to deliver in FY2013
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Record electricity sales and NPAT1 in FY2013
Notes:
1 Underlying NPAT is Statutory NPAT attributable to equity holders of the Company but excludes the impact of unrealised changes in fair values of financial instruments and onerous contracts, which best reflects the ongoing performance of the business
2 Excludes significant items including the costs of the Neerabup contractor arbitration, depreciation adjustments, entering the small business market and staff rationalisation in FY2013 and the one-off discount on acquisition in FY2012
A$ million (unless noted) FY2013 FY2012 % change
Revenue 1,569.6 918.8 +71% Discount on Acquisition - 19.8 -EBITDAIF 69.8 85.4 -18% Underlying EBITDAIF2 78.4 70.1 +12% Statutory NPAT 36.5 34.2 +7% Underlying NPAT1 15.7 30.3 -48%
Underlying NPAT ex. significant items2 20.0 13.9 +44%
Interim Dividend (cps) fully franked 5.0 4.0 +25%
Final Dividend (cps) fully franked 5.5 4.5 +22%
FY2013 full year results
Strong growth in forward sales
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28% growth in forward contracts for FY2014
-2 4 6 8 10 12 14 16 FY2013 FY2014 TWh
Actual Sales (FY2013), Forecast Sales (FY2014)
Contracted sales
(FY2013 @ 01 November 2012, FY2014 @ 29 October 2013)
+28% +28%
Electricity Sales Growth Forecast
FY2014 forecast sales substantially contracted FY2014 forecast sales are 28% higher than
FY2013 actual load
− ERM Power has a track record since IPO of meeting projected sales targets
− high degree of visibility and confidence in FY2014 uncontracted GWh
Total contracted sales of 21TWh over FY2014 and FY2015
Small business sales starting to get traction, now at 11,500 sites
FY2014 outlook
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FY2014 EBITDAIF guidance of A$79 – $86 million confirmed
A$ million FY2014 Forecast FY2013 Actual EBITDAIF 79 – 86 69.8
Underlying NPAT 23 – 261 15.7
Investment A$ million
Small business – finishing development of single site capability 3.0 Complementary metering offering – leveraging existing customers 2.0 Complementary gas offering – leveraging existing customers 1.0
Assessing new generation opportunities 1.0
Total ~7.0
This guidance includes ~$7m investment to enhance retailing capability and assess
generation opportunities (details below)
Note:
1 Includes expected impact of the buyout of the remaining 16.67% of Oakey Power Station as announced on 18 November 2013
Balance sheet strength to support growth
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A significant proportion of ERM Power's debt is recourse to its power stations, which are supported by contracted revenue from the WA Government and AGL
Note:
1 Restricted cash deposits substantially support ERM Business Energy’s AEMO and Hedging Prudential requirements
2 ERM Power plans to repay the outstanding Oakey term debt with the proceeds of the share placement announced 18 November 2013
Cash A$ million
Free cash 94.9
Restricted cash1 120.5
Total cash and equivalents 215.4
Debt A$ million
Electricity sales working capital facility 59.1 Electricity sales environmental certificate financing 36.4 Term debt – recourse to Oakey Power Station2 38.9 Term debt and convertible notes – recourse to Neerabup Power Station 204.5
Total debt 338.9 Net cash position after excluding non-recourse project debt As at 30 June 2013
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Appendix B – Overview of Macquarie Generation
Bayswater power station
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Overview
• Baseload generator, producing enough power to supply 2.0 million average Australian homes in recent years
• Commissioned in 1985, with current remaining technical life exceeding 20 years
• Nameplate capacity of 2,640MW (4 x 660MW)
• Black coal fired, consuming c.7.5Mtpa
• World leading availability and production level performance
Operational summary
1. Sources: MacGen public filings, including 2012 Annual Report, 2012 / 2013 Statement of Corporate Intent and New South Wales Auditor-General's Report, Financial Audit, Volume Four 2013 – Focusing on Electricity. Select data from FY2013 not yet publicly available as 2013 Annual Report has not been released
Australia's second largest power station with 2,640MW capacity
FY20101 FY20111 FY20121 FY20131
Production (GWh) 15,176 13,661 15,770 15,555
Coal consumption (Mt) 7.2 6.6 7.5 na
Availability (%) 92 93 88 85
Equivalent forced outage (%) 3 3 5 na
Liddell power station
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Overview
• Baseload generator, producing enough power to supply 1.25 million average Australian homes in recent years
• Commissioned in 1971, with current remaining technical life out to 2022
− appropriate upgrades and maintenance could extend to 2032
• Nameplate capacity of 2,000MW (4 x 500MW)
• Black coal fired, consuming c.4.0 – 5.5Mtpa
Operational summary
Low cost baseload generator with 2,000MW generation capacity
FY20101FY20111FY20121FY20131
Production (GWh) 9,394 7,763 8,764 6,307
Coal consumption (Mt) 4.8 4.0 4.3 na
Availability (%) 72 70 73 57
Equivalent forced outage (%) 22 21 22 na
1. Sources: MacGen public filings, including 2012 Annual Report, 2012 / 2013 Statement of Corporate Intent and New South Wales Auditor-General's Report, Financial Audit, Volume Four 2013 – Focusing on Electricity. Select data from FY2013 not yet publicly available as 2013 Annual Report has not been released
Coal and water supply
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35 • Competitively priced, long term coal supply in NSW contracted until 2026 to
meet approximately 85% of MacGen's expected operations
• Coal is supplied by nearby coal mines including Wilpinjong (Peabody Energy), Mt Arthur (BHP Billiton) and Mangoola (Glencore Xstrata)
• MacGen situated in Hunter Valley “energy corridor” with access to long-term coal delivery infrastructure via rail and conveyor
MacGen has secure supply of key inputs
Coal supply
Water supply
• MacGen has aggregate water allocations of c.100,000 ML per annum, in excess of the long term average requirement of 72,000 ML per annum for the operation of its power stations (based on 80% capacity factor for Bayswater and Liddell)
• This water is extracted from the Hunter River system and stored in MacGen's dams – Plashett Dam and Lake Liddell. MacGen also extracts water from the Barnard River to meet any shortfall from the Hunter River system. This water is transferred to the Hunter River system and stored in Glenbawn Dam for use when required
MacGen customers
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36 • Approximately 1/3 of MacGen's output is
sold to Tomago Aluminium under a long term electricity supply contract
− contracted until 2028, with a formulaic repricing point in 2017
− Tomago Aluminium is a joint venture between Rio Tinto Alcan, Gove Aluminium Finance Ltd (CSR and AMP) and Hydro Aluminium and accounts for c.25% of Australia's primary aluminium capacity
• The remainder of MacGen's output is sold into the National Electricity Market (NEM), with a proportion of the spot pricing risk managed via hedge contracts with ERM Power and other retailers and market participants
A significant portion of MacGen's output is sold to Tomago Aluminium under long term contract
Retailers Customers NEM / AEMO MacGen Other counterparties Contract price Pool price Pool price Tomago Aluminium Contract price Electricity Cash payment Hedge contract Network Network charges Network charges
Carbon price
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The newly elected Coalition Government has stated that dismantling the carbon tax remains a priority
•
The Australian Government introduced a carbon pricing mechanism
from 1 July 2012
•
The newly elected Coalition Government has introduced draft
legislation to repeal the carbon tax, with a target date of 30 June 2014
•
ERM Power expects that the proposed repeal of the carbon tax would
provide stimulus to electricity demand, which would be positive for
wholesale electricity prices
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