Conference call transcript
25 February 2016
INTERIM RESULTS ANALYST AND INVESTOR CONFERENCE CALL
Operator:
Thank you for standing by and welcome to the ERM Power Half Year Results Announcement. [Operator instructions]. I would now like to hand the conference over to your first speaker today, Mr Jon Stretch, Managing Director and CEO. Go ahead thank you Mr Stretch.
Jon Stretch:
Thanks Jodie. Good afternoon everybody and thanks for joining the call. We made a few announcements this morning, our results, a new financing agreement, and a new director, so there's plenty to get through. We'll try to skip through and make sure we have plenty of time for Q&A. I'll be providing an overview of our half year financial results. I'll then hand over to James Spence our CFO to talk through the numbers, and then I'll conclude with an overview of the operations and guidance, and then we'll go into Q&A.
So let's turn to slide 4, the half year summary. ERM Power delivered half year earnings of $37.9 million. While EBITDAF is down on previous period this is a good result which reflects a range of factors including firstly our good performance from the electricity retailing business in Australia. Second, our investment in the growth of our US business which is showing good leading indicators that increase our confidence, and, thirdly, changes to Oakey Power Station contract and operating arrangements.
The electricity retailing business in Australia has performed well in a highly competitive market. Electricity load was up 14% to 9 terawatt hours on the previous corresponding half. EBITDAF for electricity retailing in Australia was up 35% to $29 million. Gross margin is up 10% on a dollar per megawatt basis which we'll explore in more detail shortly, and underscoring this we retained the number one ranking in customer satisfaction for the fifth year running.
Looking at Source Power and Gas, our US business, this is a business in development, operating expenditure is up as we invest in people, systems and capability. We're investing to build our forward contract book and the growth of the business. While we're reporting an underling EBITDAF loss for the half of $3.2 million, given higher opex and some high cost related to extreme weather we're very pleased with the progress made just in the one year since we acquired it, and we'll provide some more flavour on the US in a moment.
Briefly on our strategy, there have been a number of really pleasing developments since our October presentation. We completed the acquisition of Greensense in January, which adds an important plank in our strategy to build complete customer solutions business. We've also taken a number of steps in delivering capital efficiency initiatives. We announced a Sunset Power offtake agreement in November, and today we've announced a new financing facility with Liberty which James will go through in some detail.
Finally the board declared an unfranked dividend of 6 cents per share for the half. These are solid results reflecting the change and transition we're driving in our business. Our core business in Australia has performed well in a very competitive landscape, and while the overall numbers don't reflect the potential of our business or your expectations our strategy is clear and will deliver results. So now, let me hand over to James who will take you through today's announcement of the financing facility with Liberty and CBA and then the detail of the half year results.
James Spence:
Thanks Jon. Now looking at slide 5 we advised at the AGM in October that we'd been working on a range of funding options to make capital available for investment in diversification and growth. In November we announced the first initiative along those lines, an offtake agreement with Sunset Power. Today we're pleased to announce another significant step in that program of work. We've finalised a $150 million three year financing facility with Liberty International Underwriters, and put in place an associated fronting bank facility agreement with CBA.
This provides for the issue of guarantees to support our prudential requirements which will include collateral provided to EMO, the market operator. It's a three year agreement issued unsecured at the parent level which is attractively priced at a credit margin of 172.5 basis points. These initiatives form part of our stated objectives of improved capital efficiency to support growth and diversification in delivering customer solutions. We're reducing our financing costs, diversifying our funding sources, and giving ourselves the flexibility to execute on our growth strategy. Today's announcement furthers these objectives.
Now turning to the half year results starting on slide 7, underlying EBITDAF including interest income for the period was $37.9 million compared to $44.6 million in the previous period. I'll detail the drivers of that change on the next slide. But at the top line level underlying NPAT was $9.4 million compared to $14.7 million in the previous year with the key driver of the decrease being the after tax impact of reduced EBITDAF.
Finance costs and depreciation combined were $1.3 million higher than the comparable period, with the main driver being the credit sleeving costs in the US. Statutory NPAT was $14.9 million and differs to underlying NPAT largely due to the unrealised net fair value movement in financial instruments which are excluded from the underlying NPAT result.
You'll note we've made some small changes to the way we're reporting. Firstly we're reporting EBITDAF as opposed to EBITDAIF excluding impairments. Any impairment charges will be reported as significant items. We're also reporting EBITDAF including and excluding interest income. We'll report both for some periods as we transition to EBITDAF excluding interest income. This follows feedback from you and brings our reporting into line with industry practice.
So turning now to slide 8 I'll provide some more detail on the drivers of earnings in the half. Firstly, electricity retailing in Australia recorded a $7.6 million increase in underlying EBITDAF to $29 million. This reflects sales load growth and strong margin growth particularly in our SME business. The electricity retailing loss in the US reflects the impact of opex spend required to build the forward sales book, enter new markets, and due to hedging costs of approximately AUD1 million related to severe weather. As a result the reported underlying loss is $3.2 million for the US business in the half.
As mentioned you can see the single largest move in our results is related to Oakey. The Oakey Power Station offtake contract expired at the end of 2014. Oakey then moved to operating as a merchant facility, and as previously noted this results in a reduction in earnings which is $8 million versus the previous period. This is tracking to previous guidance for the full year.
Corporate costs are up. This includes executive hires and consulting fees to assist with group strategy. Gas earnings decreased following the sale of gas assets which had a $1.5 million EBITDAF contribution in the comparable half.
Those factors led to a $14.3 million decrease in earnings on the previous period which was offset by an increase of $7.6 million in earnings from our Australian electricity sales business. Earnings contributions from C&I and in particular SME both increased from the comparable prior period. Now turning to slide 9, following feedback we're providing some additional detail on gross margin to give further insight into the factors which affect margin. As you can see the chart shows margin, opex and load from the Australian retailing business.
Key points to note are, firstly, there's been steady growth in load from 5.2 terawatt hours in the first half of FY13 to 9 terawatt hours in the first half of FY16. Secondly, the orange line shows opex, which you can see has dropped from $1.33 per megawatt hour in the first half of FY13 to $1.25 per megawatt hour in the first half of FY16, a 6% decrease, which would of course be more if we took inflation into account. It's worth noting that we achieved this opex decrease while changing our business mix towards SME which has a higher cost to serve. This clearly illustrates the benefits of scale in the business and our business efficiency.
In a moment we'll look specifically at the US. But it's worth noting at this point that we see the opportunity for opex per megawatt hour to reduce significantly in the US as the business scales in the same way as we have seen in Australia. Thirdly turning to margin you can see quite some movement in the margin over time. There are a number of factors contributing to the variability of margin including the differential SME and C&I margins. Typically we see SME margins higher, reflecting the higher cost to serve. This segment in itself has a wide margin band, reflecting the differing types of business in the segment. Underlying volatility in commodity prices also impacts margin.
Over the past year the market has seen material moves in commodity prices, particularly black and green energy products. As you would be aware, seasonality driven by weather and demand also affect margin, as does regulatory change which can impact prices.
Finally risk management strategies and portfolio optimisation will impact overall margin. Looking at that last point, risk management, to describe further ERM buys and sells energy derivatives to hedge retail customer contracts. Customer contracts cannot be perfectly hedged from inception and the customers' consumption profile with often change over time, so we manage the variability, open
positions, unders and overs, through a number of hedging and portfolio optimisation strategies. These variables ultimately determine the realised customer margin. ERM has considerable expertise in managing these risks based on insights from our extensive customer data and the experience of our trading and risk management team. We have a comprehensive risk management system which includes clear risk limits within which we manage the exposures in the portfolio. We also include as part of our retail cost stack a margin to cover these risks.
Taking all these factors into account and given the high levels of volatility in the market over the six months, the gross margin result in this half is pleasing.
Now briefly on to generation on slide 10, as you can see generation EBITDAF is lower than the previous period driven by Oakey moving to merchant operations following expiry of the offtake agreement at the end of calendar 2014. Oakey's performing well in a challenging market which is characterised by intermittent levels of extreme volatility. Oakey's profitability is weighted to the second half of the financial year. Our current expectation is that Oakey's FY16 earnings will be about $16 million, which is in line with prior guidance.
Neerabup is performing in line with expectations.
Now turning to the US business on slide 11, where we've seen strong load growth to 1.1 terawatt hours in the half, up 83% against the preceding half - note this is not the prior corresponding period, so does not account for seasonality. Load growth reflects improvement across our sales channels, particularly investment in the team and in broader relationships with the growth community.
Opex has increased to $9.6 million, an increase of over 60% as we invest in building capability in the team, which has almost doubled in size to around 55 employees. We've also invested in key systems, particularly our CRM and pricing capabilities. Margins were impacted by extreme prices related to severe weather in early August, which had an impact of approximately AUD1 million. Taking all these factors into account the net result for our US business was an underlying EBITDAF loss of $3.2 million for the half.
Turning now to slide 12 and staying with the US business, you can see from the chart on the left the opex growth as mentioned on the previous slide. In the chart on the right on a dollar per megawatt hour basis, see that opex is $8.95 per megawatt hour. That's the orange bar. For comparison purposes we show the comparative figure for the Australian retail business of $1.25 per megawatt hour, which I referred to previously. Clearly as we grow volume in the US business we expect to see the opex on a per megawatt hour basis reduce sharply. Similarly for comparison purposes we've shown the current gross margin of $5.61 per megawatt hour in the US business versus the Australian comparator of $4.48.
It's too early to draw conclusions from this as margin will vary depending on the customer mix and other factors as we grow, but clearly against a lower opex when we're operating at scale we see the potential to generate good, profitable growth from this business. We entered into new markets within PJM in the half which has supported strong growth in our US book. Forward contract load is up from 4 terawatt hours to 7.9 terawatt hours in six months and revenue will scale up as future dated contracts come online.
Turning now to the cash and net debt position, as at the end of December 2015, slide 13, the business generated $45.5 million of cash during the period, as you can see in the chart on the right. This was net of borrowings and post dividend. As you can see there was a positive working capital movement for
the period reflecting the timing of purchase of renewable energy certificates and network and wholesale market settlements. Cash outflow on financing activities reflects our interest costs and payment of dividend, and the investing cash flow during the period primarily represents our first half capital expenditure.
In the left hand chart you can see the corresponding movement in our net debt, the main point to note here is the increase in restricted cash of $41.5 million which is mainly a seasonal impact to support collateral requirements over the summer months. With that I'll hand back to Jon to go through the operational performance.
Jon Stretch:
Thank you James. So let's turn to slide 15, looking at some of our customer numbers in our electricity retail business in Australia. These charts demonstrate the growth we're driving in our Australian business. Our customer base is growing across C&I and SME, founded on service, billing accuracy, reliability and customer satisfaction. This strong, stable and satisfied customer base is so important to our strategy of building valued energy management solutions which go beyond the meter.
Pleasingly it's a stable customer base evidenced by our recontracting rates for the first half which were very good in spite of sustained competition in the C&I segment. 71% of our customers load was recontracted with us in calendar year 2015, which is a great result in a highly competitive market. We're pleased with progress in the SME portfolio both from a growth and profitability perspective. Across both SME and C&I we're driving profitable growth and creating a strong foundation customer base from which to build our solutions portfolio. This is all about meeting more of our customers' energy needs, retailing and beyond.
You can see our contracted load by state in the pie chart, our load distribution is broadly in line with energy demand. I'm often surprised by people thinking our load is mostly in Queensland, so this is a good chart to remind ourselves we're a national player with good geographic and market diversification across the country.
Turning now to slide 16 here you can see ERM's total load growth across both our Australian and US businesses. Our forward contracted load continues to grow with the US business contributing significantly and I'll go into more detail on slide 18 on how we're increasing our market share in the US. As you can see we're on track to reach our guided annual sales target of 20 to 21.5 terawatt hours.
On to slide 17 our two peaking plants are great assets. They've had outstanding operating and safety records and they form a key platform for our business. Oakey's particularly strategic within our portfolio of risk management tools given its location in the Queensland market. Its revenues are derived from a range of sources and we dynamically manage the asset based on market conditions. Oakey started operating as a merchant facility in early 2015, strategically supporting our electricity retailing business, selling hedge products to third parties, and making spot market sales. Neerabup has a long term agreement with Synergy, providing stable earnings. There are occasional additional merchant electricity and gas opportunities there and we expect similar opportunities in the future, but that depends on market circumstances.
Moving now onto our US business, Source Power and Gas, on slide18, and I want to spend a little bit of time on this. Let's first remind ourselves why we invested in the US. It's our contention, just as the ERM did in Australia, that by focusing on business customers we can use process, systems and data to build superior customer and channel satisfaction. This will drive top line growth through industry leading customer acquisition and contract retention rates. At the same time, we'll use that customer data to more accurately forecast the customer forward load and can therefore more accurately manage our hedge book and therefore deliver the bottom line growth.
So where are we at in terms of our investment thesis one year into the acquisition? Let's start with the market. During the half year we developed the capability to serve an additional nine new local markets across Pennsylvania, Delaware and District of Columbia within the PJM market. So we now serve 31 local markets in eight states, and have added 105 terawatt hours of opportunity to our current total accessible market of 516 terawatt hours. And you've got to see that as 2.5 times the size of the NEM in Australia.
Secondly from a people point of view, since the acquisition we've grown our employee base from 36 to 55 and we expect to end the year at 61. Those people are focused mostly on sales, account management, IT and trading. We're satisfied we've hired people with skills that will allow us to scale the business as we envisage.
Thirdly, from a systems point of view, as James mentioned, we've commissioned phase one of our new CRM system, phase two goes into production next month and we manage all of our sales leads, customer management, and we have a new customer pricing system for PJM and ERCOT markets. These implementations have leveraged the experience and IP we've got within ERM.
Fourthly, channels. We just received the results of the ERCG broker satisfaction survey. This is the second year Source has participated in this comprehensive survey of over 130 brokers that collectively have more than 400 terawatt hours of annual load under management. Those brokers are surveyed on their relationship with more than 40 electricity retailers, and the key results from the survey were as follows. Firstly, Source was ranked third overall for broker satisfaction, up from fourth the year prior. Just as in Australia, all of the big retailers are in the survey, and many rank well below us. In December 2014, 21% of those 130 brokers surveyed said that they did business and knew of Source. In December 2015 that corresponding number grew to 44%. So as you can see, in the first 12 months since we acquired Source, we've been able to achieve both an increase in broker satisfaction as well as an increase in broker penetration, which was evidenced by the strong growth in our sales pipeline. The fifth area is our top line growth. In the half, our forward book has increased from 4 terawatt hours to 7.9 terawatt hours, showing that the increased deal flow is being converted to customer contracts. And then finally, bottom line growth. At the moment our gross margin looks good even though we're in a high growth phase. Our opex is high, as shown by James earlier, but we can't see a reason why that won't drop substantially with scale to levels we've seen in Australia. So while we finished our first full half with an EBITDAF loss of $3.2 million, we're comfortable with the lead indicators of the business and we've certainly increased our confidence on delivering on the acquisition phase.
Turning to slide 20, in October we outlined our strategy to the market. We're very clear about our focus on capital efficiency, investing to diversify and grow, and building a culture of agility which supports complete energy customer solutions. On the foundation of our C&I business and generation, we're building our US business, our Australian SME business, and a customer solutions
business. We're a business which is transforming. So let's look at how we're tracking. Our generation assets are solid performers, providing an underpinning revenue stream. C&I load for the half was up 8.7 terawatt hours, or 12% compared to the first half of financial year 2015, and tracking well towards our 2018 target. SME is on track to reach the target of 50,000 to 60,000 customers by 2018, and our US business forward contracted load is 7.9 terawatt hours. With a first half delivered load of 1.1 terawatt hours we're confident of reaching our target of 8 to 11 terawatt hours in 2018. But we've made this amber because even though the leading indicators that I've mentioned are looking good, we know there's plenty of execution ahead of us in this business.
Finally we're building a customer solutions business to leverage our strong customer relationships and knowledge of our customers' consumption. The first step is to focus on customer reporting and analytics, and then energy efficiency solutions. To that end, last month we completed the acquisitions of Greensense and we expect to be making similar announcement to build this portfolio and leverage opportunities in this changing sector.
On the next slide, looking briefly at our capital management program as it relates to our strategy, we've made strong progress on a range of initiatives. We announced the offtake agreement with Sunset Power in November, and today we've followed that up with a guarantee facility with Liberty and CBA as James outlined earlier. These arrangements will give us greater flexibility, optionality, and attractively priced funding that will support the execution of our strategy in a timely and efficient way. Now let's move on to guidance on slide 23. We're narrowing our guidance for underlying EBITDAF Including interest income for FY16 to be in the range of $81 to $85 million, which equates to an underlying NPAT in the range of $20 to $22 million. The company plans to maintain at a minimum the current level of dividends. In our October guidance we left a wider range and commented that a hot summer on the Eastern Seaboard could lead to volatility in margin and that we would implement a more aggressive hedging program. Essentially we took extra insurance to protect downside risk to gross margin which at the same time limits upside opportunity. Being a fair way through summer that looks like not only a prudent choice but a good call, and that allows us to narrow the range.
ERM Power has always maintained profitable growth as its goal. In FY16 in Australia there are factors that have seen new business grow slow as a result of competitive marketing conditions. We believe we'll retain our industry leading recontracting rates. Total load as previously advised is forecast to be 20 to 21.5 terawatt hours. This is significant growth, and well above the market, but at a slower rate than in previous years. SME customers are also on track and expected to grow between 37,500 and 41,000 in 2016 as per our previous guidance.
As I said we're delighted with the progress in the US, essentially doubling both our channel penetration and forward book in the 12 months since completing the acquisition gives us confidence in the business and its ability to deliver sustained profit in FY17 and beyond. The opex profile for the US will continue through the second half of FY16 as we scale up the business and invest in capability. We now forecast a full year underlying EBITDAF loss of approximately 2 to 3 million for the US.
FY16 will be our first full year of operating Oakey as a merchant plant. We believe that the FY16 earnings will be reduced by approximately $7 million compared to FY15, that's a forecast of around $16 million for the year. Oakey's a great asset and a profitable asset.
Now we'll head into Q&A. The executive team are here with me in Brisbane, so you've got the opportunity to ask questions. I'll hand over to Jodie who can facilitate that.
Operator:
Thank you very much. [Operator instructions]. Your first question is from Nathan Lead from Morgans. Go ahead thank you.
Nathan Lead:
Yeah good afternoon gentlemen. Just first up, just wanted to thank you for the additional disclosures you've provided in the pack, very much appreciated. Just first question though, just in terms of the US, the trajectory of earnings there. Could you maybe give an indication of when you expect a full year break even to occur at the EBITDA line? I just recognise your earnings guidance there probably implies second half potentially could be break even or better, but yeah just on a full year basis, what are you thinking?
Jon Stretch:
Look I think that the trajectory will only lift, you know you're right the guidance implies a break even in the second half and we expect to deliver a profit in FY17.
Nathan Lead:
Okay and just indication in terms of when you start to pay tax again and therefore frank the dividend?
James Spence:
Nathan we don't specifically disclose that, but to give an indication, in the next one to two years there are a number of variables that affect that obviously, so we can't give a precise indication at this point.
Nathan Lead:
Yeah okay and then if I could just get you to have a look at slide 16, I suppose the contracted load related to Australia looks like it's sort of plateauing there versus previous years. Should we be sort of thinking that particularly the C&I business has reached its natural peak?
Steve Rogers:
Hi Nathan, it's Steve Rogers here Nathan, look I'll take that one. Look 2015 was a bit of an odd year for us. Our existing customer share of the total quoted market was unnaturally high at 32%. So the customers that we had renewing in 2015 represented 32% of the total volume of quotes that we responded to during the year. Now that's versus our normal market share of around 20%. This occurred during the period of market uncertainty around the repeal of the carbon tax. We proactively advised many of our customers, including obviously our largest customers, to not contract past that
fixed carbon priced period due to all the uncertainty around what could and could not happen with the repeal of that scheme.
This meant that we had an unnatural cliff of recontracts from the 2015 year. Now pleasingly you know we managed to recontract 71% of those contracts, which is a fantastic result, and that was in a market where we've had one competitor in particular who's been pricing quite irrationally and winning six to seven deals out of 10, it's a testament to the strength of competition to our customers. But however as existing load represented such a skewed proportion of the total market in the year this meant that a disproportionate quantity of newly won business went to replace loss existing load and hence slowed our growth.
Going forwards obviously we don't have that situation repeating itself. Our share of the market will return to levels more representative of our market share and this will allow growth to return going forwards.
Nathan Lead:
Okay, thank you.
Operator:
Thank you, the next question is from George Kopsiaftis from Petra Capital. Go ahead thank you.
George Kopsiaftis:
Hi guys, how are you.
Jon Stretch:
Good George:
George Kopsiaftis:
That's good. Just two questions from me, first one could you talk a little bit about the competitive pressures? I mean I know when you put out the guidance statement at the AGM you were talking about increased competitive pressures. Do you have a greater feel now whether these are structural changes or whether it was still just campaigns by a number of your other competitors, and whether that's abated at all?
Steve Rogers:
Yeah George it's Steve here again. Look there's no question 2015 saw a year of one competitor in particular clearly and deliberately chasing market share. In our view the pricing that was offered in many cases was irrational, and that competitor during the year has provided feedback to us by brokers and consultants that we deal with were was winning six to seven deals out of 10 and leaving a lot of money on the table. As I mentioned before, very pleasingly we recontracted 71% of our customers in a
market where a competitor was doing that. It's testament to the strength of our proposition. But obviously naturally it has an impact on our ability to grow when you have a competitor doing that.
Now having said that, they seem to have retreated from that in the final months of 2015, so we're optimistic that 2016 will return to a more sensible playing field.
George Kopsiaftis:
Right okay thank you. SME, Jon you mentioned that both SME and C&I had a better year on the PCP. But I guess SME relative to second half 15, when it did I think $5 million EBIT or EBITDA. How does it compare with the second half?
Jon Stretch:
Look I think we gave some colour on the last full year result and encourage you to not think of that as all top line generated margin. There was a bunch of SG&A that we didn't deploy while we were investigating the single site solution. So that's the first thing, you have to pack that out. But we're very comfortable that with the trajectory that's continued, higher volumes, better - you know the margin is not dissimilar, and the - you know we're getting better scale on our opex. So you know if you sort of - if you normalised that result and push it through then that's what we're experiencing.
George Kopsiaftis:
Okay thanks. Actually just one other question, the new facility, the $150 million facility, are we assuming that the Macquarie facility is being replaced now, or is this over and above?
James Spence:
Hi George, it's James here. No you shouldn't assume that. This is a facility that we're putting in place the purpose of which is specifically to be able to provide guarantees to counterparties that we work with in the marketplace day to day. It's a facility that gives us additional flexibility in terms of our funding structure. It releases some of the cash that was previously restricted on our balance sheet, and so goes to supporting our strategy of growth, particularly in the customer solutions area. Clearly the pricing is very attractive to us and so overall that makes it a good facility for us. But it would be incorrect to see that as replacing an existing facility.
Clearly we'll continue to review and optimise the funding structure of the business over time.
George Kopsiaftis:
Right okay thank you, and sorry but while I've got you James, you know you're three months down the track from having put in place the Sunset Power agreement. Have you got any more clarity on when you might be able to start releasing that restricted capital under this new agreement?
James Spence:
George so the situation there hasn't changed. We have known, and it's within our disclosures announced, that we have that - have completed all conditions precedents on that and that agreement is now fully functioning through to 2022. So the agreement is on foot. But it doesn't change what we've previously said, that we expect to release up to $60 million during the duration of the contract. We'll be looking to make use of that as quickly as we can. But no we're not changing in terms of specifically when we expect that to be released.
George Kopsiaftis:
All right thanks very much, that's all from me.
Jon Stretch:
Thanks George.
Operator:
Thank you the next question is from Steven Liu from UBS. Go ahead thank you.
Stephen Liu:
Hi guys, thanks for the additional disclosure as talked about before. I was wondering what are the commitment fees on the facility?
James Spence:
Hi Stephen it's James here. We're not disclosing that level of detail in terms of the pricing. I mean I think it would be fair to assume that they're in line with other market based arrangements. Other than that I'm not going to give the details on that. We believe the pricing is attractive as far as we are concerned.
Stephen Liu:
Right and secondly, which bench mark is the credit margin based on, just out of interest?
James Spence:
We're not providing a bench mark.
Gregg Buskey:
I mean it's a bank guarantee facility, so it's not a cash facility which would be a BBSW (BBSY) plus a margin or something of that nature, it's just a bank guarantee facility where guarantees are issued, and accordingly you are just paying the credit margin which is the 172.5 basis points that we've disclosed.
Stephen Liu:
Okay, okay, thank you so much guys.
Jon Stretch:
No worries.
Operator:
Thank you the next question is from Nadzari Norzan from Capital Dynamics. Go ahead thank you.
Nadzari Norzan:
Hi good afternoon. Just two questions. The first one is, you mentioned something about the credit sleeving facility in the US. What was that about sorry? I think I sort of missed it.
James Spence:
Yeah so in terms of how we finance the US business, we have a credit sleeving arrangement in place whereby a counterparty in the US provides the collateral that is required to be posted related to the derivative arrangements that we have in place to support our US hedging strategy. So that's a long term agreement that we have in place and we pay finance costs based on utilisation of that facility. It's a way for us to manage our overall exposures and limit our overall exposures in terms of capital that we need to provide to support the growth in the US business.
Nadzari Norzan:
All right thanks. The second question I have regards to the renewable certificates moving forward. Is there any comments - currently there is a bit of a stall regards to I guess building of the assets. So up to 2020 do you foresee it affecting your competitive position in terms of penalties etcetera?
David Guiver:
Hi it's David Guiver, I'll take the question thank you. Look we recognise that there's always a choice between buying from the market or building or going into longer term relationships with producers of these certificates. That has been a strategy that we ran for a long time in the business. ERM did have an early view on this market, that the market was likely to get very tight heading in towards 2020. So we've taken necessary steps to manage our exposure and our risk to that scheme and we're very happy with the decisions we've been taking.
Nadzari Norzan:
Okay thanks.
Thank you, the next question is from Avinash Srinivasan from Macquarie. Go ahead thank you.
Avinash Srinivasan:
Hi guys. Appreciate the more disclosure you guys gave. Just a question about your load share across the state. As you grow your load to your 20, 21.5 terawatt hours, do you see the mix shift changing at all or remaining pretty steady?
Steve Rogers:
It's Steve here. Look we see it as basically broadly representative right now of the overall electricity consumption across Australia and that's where we'd expect to be obviously. We participate in all the states and territories and we think just through natural economics it would make sense that our market share would be similar across those markets.
Avinash Srinivasan:
And is that probably similar across the US as well, or is there other regions you guys are looking into?
James Spence:
In the US we are focused on the ERCOT market which is Texas, and PJM which is East Coast and North. Yeah those markets in themselves are extremely large markets, significantly bigger than the Australian market. So we're satisfied that they create a very large opportunity for us to grow just within those areas. Certainly in the short to medium term, that's where our focus will be.
Jon Stretch:
Yeah and look let me add a little bit of colour. If you actually look at that chart you'll see it differentiates the states in which there is the greatest amount of deregulation or the greatest amount of customers which are contestable. So it's not surprising that the markets that we're majoring on are those with the greatest amount of contestability. Certainly as other states move towards a similar level of deregulation and open up to competition we'll consider that. But we've been very clear with the market, we've invested in Source Power and Gas to take the ERM proposition to the PJM and ERCOT markets and we won't be kind of looking over the fence to see whether the grass is greener in another state until we're comfortable that our proposition will get the top line and bottom line growth that we expect.
And as I said in our results announcement, we're getting pretty comfortable with the leading indicators and we'll get a sense over the next sort of two or three reporting periods how that is translating to the bottom line. But I can certainly see when we get to say FY18 we'll be thinking about how do we translate that success to other markets. But it won't be until we're confident that we can translate that success.
All right that's all from me, thanks guys.
Operator:
Thank you, once again if you do wish to ask a question please press the star key then one on your telephone and wait for your name to be announced. Thank you, the next question is from Michael Vincent from Petra Capital. Go ahead thank you.
Michael Vincent:
G'day guys, just wondering if you could give more clarity around SME customers. Growth seems to have slowed a little bit into the December half.
Steve Rogers:
Yeah, Steve Rogers here again, I'll take that one Michael. Look yeah we grew about 4000 sites across the six months. We're still very confident we're going to get to the originally provided guidance range. I think as we flagged before, the multi-site space in particular is where we see the majority of our customers, and it's characterised by large and lumpy deals. You know you can win a customer with 1000 to 2000 sites, and we have a big enough pipeline of those kind of tenders coming up over the next few months to feel quite confident about our ability to meet that range.
Michael Vincent:
Great, thank you.
Operator:
Thank you, there are no further questions in the queue at this time. I will now hand back over to Mr Stretch for any closing remarks.
Jon Stretch:
Okay guys. Thank you very much for joining. As always if you have any questions which come to mind after the call is finished, don't hesitate to contact us and we'll get back to you pretty promptly. We'll be seeing a number of you over the next couple of weeks through investor road shows. Finally I guess, this call will be posted to the website if you need to go back and review any of it. Thank you for your time and enjoy the rest of your day. Thank you.
Operator:
Thank you very much, that does conclude today's conference call. Thank you all for participating, you may now disconnect your line.
