Sustainability is not a policy... ERM POWER ANNUAL REPORT 2019 REPORT ANNUAL ANNUAL REPORT 2019 ...it's our DNA. CONTENTS Performance highlights 2 Operating and financial review 29 Directors’ report 50 Chair and Managing Director’s report 4 Financial year highlights 30 Remuneration report 53 Rethinking energy 6 Outlook and future prospects 32 Annual financial statements 69 Board of Directors 8 Summary of group financial results 34 Shareholder information 133 Executive team 12 Divisional performance review 39 Corporate information 135 Our business model 14 Our strategy 16 Appendices 46 Corporate social responsibility 18 Glossary 49 ERM Power Limited ABN 28 122 259 223 shares are traded on the Australian Securities Exchange under the symbol EPW. This review is for ERM Power (Company, Group, we, our) for the year ended 30 June 2019 with comparison against the previous corresponding period ended 30 June 2018 (previous period, previous year or comparative period). All reference to $ is a reference to Australian dollars unless otherwise stated. Individual items totals and percentages are rounded to the nearest approximate number or decimal. Some totals may not add down the page due to rounding of individual components. Bigger thinking: it’s just better business. Sustainability is fundamental to ERM Power’s business strategy and our reason for being. Electricity retailing and energy management are what we do. These core business functions: 1. support customers to manage energy volatility, reduce energy consumption and build energy productivity for cost and environmental benefits; and 2. ensure our own business sustainability by doing the right things for customers, the environment and our relevance in a rapidly evolving energy sector. ERM POWER | 2019 ANNUAL REPORT 1 ERM Power’s success in FY2019 was Kicking achieved by placing customers at the centre of what we do and delivering on our strategy to meet the growing supply and goals. demand side needs of our customers. $ 1 7. 7 TWh 90.5 m ELECTRICITY SALES UNDERLYING EBITDAF1 LOAD VOLUME $ $ 5.16 26.0 m ELECTRICITY GROSS UNDERLYING NPAT 1 MARGIN/MWh YEARS 8IN A ROW 91% #1 FOR CUSTOMER OF EMPLOYEES PROUD TO WORK SATISFACTION2 AT ERM POWER. ABOVE GLOBAL HIGH PERFORMING NORMS.3 CPS 1. All figures continuing operations unless otherwise stated. 12 Refer Appendix A1.2 for reconciliation to statutory earnings. FY2019 DIVIDENDS 2. Utility Market Intelligence (UMI) Survey, Feb 2019. FULLY FRANKED 3. Korn Ferry Hay Group Employee Survey, Feb 2019. 2 ERM POWER | 2019 ANNUAL REPORT PERFORMANCE HIGHLIGHTS ERM POWER | 2019 ANNUAL REPORT 3 A nimbler, swifter, smarter year. ERM Power performed well in FY2019, Our business model has always placed customers at the centre of what we do. We help our customers to better delivering on our strategy to meet the navigate and manage through their energy supply side and growing supply and demand needs of demand side challenges. commercial and industrial energy consumers On the supply side of the equation we work with businesses in an increasingly complex market. to manage wholesale market volatility through their retail contract. We have been good at this for the past 10 years All parts of the business performed in line with expectations. and have successfully continued to grow and innovate in this Strategic acquisitions delivered further capability and market space. We are a retailer that can understand the complexity reach to our growing Energy Solutions business. of a customer’s electricity load and shape and help them optimise outcomes, ultimately by offering a fixed unit price for Earnings were at $90.5m (EBITDAF1) relative to $97.5m in what is a volatile commodity. FY2018 primarily due to lower earnings from Oakey Power Station and higher corporate costs as the business invested On the demand side of the equation we work with our in IT and infrastructure to support new energy productivity customers to improve their energy productivity. We’re platforms and an expanded proposition for customers. motivated to help customers with their energy efficiency, demand management and renewable generation to drive Underlying Net Profit After Tax was $26.0m2 ($30.2m in FY2018). energy productivity because customers want it and it is the An additional $16.1m of Net Profit After Tax was realised through future. We are offering solutions that harness smart data and our 2017 large scale generation certificate strategy, which allowed analytics to give businesses meaningful ways of driving down us to support two large renewable generation projects. consumption for cost and environmental benefits. The sale of the US business, Source Power & Gas, was completed allowing a focus on value creation in our Australian Performance business. The growth and potential of our Energy Solutions In FY2019 electricity sales load was at 17.7TWh and pleasingly business was underpinned by the acquisition of Out forward contracted load at 30 June 2019 was the highest Performers in September 2018 and investment in Alliance on record at 32.2TWh. The full-year gross margin was at Automation in July 2019. Both add substantially to the the higher end of expectations at $5.16/MWh. In Retail, capability of our business across the energy procurement and we’ve driven growth in forward sales load and gross margin productivity value chain. demonstrating the value and strength of this franchise with its exceptional customer service, satisfaction and preference. Strategy and sustainability In the Generation business, Neerabup Power Station Sustainability is fundamental to our business strategy and performed strongly, primarily off the back of merchant the way we operate. It isn’t simply a policy for ERM Power. opportunities. Oakey Power Station, which underperformed Electricity retailing and energy efficiency are what we do. relative to FY2018 due to benign market conditions, will These core functions: benefit from the increasing penetration of renewable • support customers to manage energy volatility, reduce generation and resulting wholesale price volatility. The energy consumption and build energy productivity for cost power stations delivered outstanding availability and overall and environmental benefits; and performance, while maintaining excellent safety records. • ensure our own business sustainability by doing the Energy Solutions recorded revenue of $21.8m and increased right things for customers, the environment and our own gross margin as we continued to invest in the growth of relevance in a rapidly evolving energy sector. our energy productivity business. Energy Solutions is on track to make material contributions in the medium term ERM Power and the energy environment and achieve breakeven at the NPAT level in FY2020. This is Our success throughout the year was achieved in the face of all about partnering with customers to deliver end to end, a volatile and transforming energy market, policy uncertainty integrated solutions - meeting the energy management needs and political rhetoric that further added to customer of Australian businesses, driving customer retention, and confusion and frustration. Our advocacy for commercial and leveraging our significant retail customer base into Energy industrial (C&I) customers, and ultimately all C&I energy Solutions. We estimate this will build to an annual market of users, has been core to our success and will remain our unique about $1 billion of spend - a sizable market opportunity for market differentiator. our Energy Solutions business. 4 ERM POWER | 2019 ANNUAL REPORT CHAIR AND MANAGING DIRECTOR’S REPORT Capital management and dividends Julieanne Jon Stretch Alroe A share buyback commenced in March 2018 as part of our Managing Chair Director capital management framework to return excess capital to and CEO shareholders. At 30 June 2019 $12.8m of capital had been utilised for the buyback with a total of 7.3m shares acquired. Culture A fully franked final dividend of 4.5 cents per share for The strong performance of ERM Power is underpinned by the FY2019 was declared on 22 August 2019. A fully franked interim hard work, innovation and responsiveness of our people. dividend of 4.5 cents per share was paid on 17 April 2019. We have the highest customer satisfaction ratings in the A fully franked special dividend of 3 cents per share was paid industry by a long shot and that’s because our people are on 17 April 2019. We saw this as an efficient way to return engaged and enabled to deliver. In February 2019 we undertook surplus capital to shareholders while retaining capital for the Korn Ferry Hay Group employee survey for the third time in investment in further growth opportunities. four years to gauge employee sentiment during what has been The capital management program reflects the Company’s strong a period of growth and change for the business and industry. liquidity position and our confidence in the earnings outlook. The results were at or above global high-performing norms in engagement, enablement, leadership, safety and across a range Transitioning to a lower-carbon future of key dimensions important to our people. Energy Solutions is at the core of supporting C&I energy We would like to thank the employees of ERM Power for consumers with efficiency and productivity solutions that their professionalism and dedication to delivering outstanding answer to environmental, cost and value creation imperatives. customer service. Importantly, to our loyal customers and We’re also supporting the transition to renewables through shareholders, thank you for the trust you place in us as we offtake agreements underpinning the Lincoln Gap wind farm continue on this journey to deliver great energy outcomes and (126MW) and Hamilton solar farm (58MW), and through new create shared value for all. generation financial products. This strategy further supports corporate investment in renewable energy. To our fellow directors, your support and commitment to the business during FY2019 is greatly appreciated and a special ERM Power is proud to have pioneered these new generation thanks to Tony Bellas who served as Chair for seven years products which have been well received in the market.