BUSINESS ELECTRICITY CAN BE BETTER. MUCH BETTER. ERM POWER HAS BEEN A QUIET ACHIEVER IN THE ENERGY INDUSTRY FOR MORE THAN 30 YEARS. WE SPECIALISE IN SELLING ELECTRICITY TO BUSINESS CUSTOMERS AND HAVE GROWN TO BECOME ONE OF THE NATION’S LARGEST SELLERS OF ELECTRICITY. BUT WE DON’T JUST SELL ELECTRICITY. WE OFFER UNRIVALLED CUSTOMER SERVICE AND VALUE FOR MONEY. IT’S WHAT MAKES US DIFFERENT. IT’S WHAT MAKES US BETTER. NO.1 FOR CUSTOMER SATISFACTION IN ELECTRICITY ANNUAL REPort 2012 ABOUT ERM POWER ERM Power (ASX code: EPW) is a diversified energy company which operates electricity sales, generation and gas exploration and procurement businesses in Australia. THE ENERGY BUSINESS NEEDS. CONTENTS Chairman’s and Managing Director’s Report 2 Management Discussion and Analysis 4 1. Report on Financial Performance 4 2. Outlook 7 3. Significant Developments 8 4. Operational Review 9 5. Carbon 15 6. Safety and Environment 15 7. Community 16 Directors’ Report 20 Remuneration Report 28 Corporate Governance Statement 37 Annual Financial Statements 4 1 Auditor’s Independence Declaration 42 Directors’ Declaration 104 Independent Auditor’s Report 105 Share and Shareholder Information 107 Corporate Directory Inside Back Cover Chairman’s and MANAGING DIRECTor’s REPORT Successful year earningS driverS In preparing this report we have reflected on the success of A major contributor to earnings was our electricity sales the ERM Power group (Group) over the last 12 months and business, which boosted electricity sales volumes, revenue the dynamic nature of the external environment over the and profits as it continued to expand around Australia with same period. It has been a challenging time with significant a service offering focussed on large commercial and industrial regulatory and market changes affecting all energy market customers. The business increased its market share, participants. Yet over this period the Group has prospered, particularly outside Queensland, diversifying its customer exceeding its prospectus forecasts for revenue, EBITDAIF1 base and accounted for 4%3 of all electricity sales by volume and underlying net profit after tax1 for the second successive in Australia in July 2012. The quality of our service and year, which is testimony to the strategy set by the board, product offering was confirmed when independent research the execution of the business plan by management and the ranked ERM Power the No 1 electricity retailer for customer experience and expertise of our people. There is no better service to business. demonstration of our success than the expansion of our The Group also seized the opportunity to increase our electricity sales business which is forecast to become the effective interest in the Oakey power station in Queensland fourth2 largest electricity retailer in the National Electricity from 12.5% to 83.33% and become the operator of the power Market in FY2013 after just five years of operations. station. This transaction has created significant value for shareholders as the additional interest was purchased for challenging environment less than half the replacement cost of an equivalent new A clear demonstration of the pace of change in the energy power station and without the construction risk. Some of market is the fact that demand for electricity is weaker this value was recognised as a $19 million gain associated than many would have expected. This can be attributed to with the discount on acquisition which, when coupled with a range of factors including sluggish industrial activity in recurring earnings from the Oakey and Neerabup power some parts of the economy, higher electricity costs, greater stations, made our generation business a major contributor consciousness of the need to reduce energy consumption to to earnings in FY2012. lower costs and help the planet, and increased introduction As a peaking power station that is rarely required to operate, of rooftop solar power. This has had a major impact on Oakey will be in near-new condition when the current off- generation development with market participants reviewing take agreement ends in December 2014, providing a range the timing of the need for new power stations on the eastern of options to extract full value from this asset. The project seaboard of Australia. Another major challenge is the Federal debt is scheduled to be repaid in FY2015. The acquisition is Government’s carbon pricing scheme which a year ago was consistent with the strategy of strengthening our business clouded by uncertainty but is now law and expected to have model by increasing our vertical integration capability. a significant impact across the Australian economy. Another major milestone was achieved with our gas However, we are well positioned to prosper in this business moving closer to becoming a profit contributor in carbon-constrained environment with gas-fired generation its own right. Important in this regard was the signing of an which has half the emissions of equivalent coal-fired agreement for the sale of gas from the Red Gully and Gingin generation producing the same amount of energy. We have West fields in exploration permit EP 389 in Western Australia development or environmental approval for four generation to Alcoa. projects in Queensland, New South Wales, and Western Australia that are well located near gas supplies, electricity and gas infrastructure and growing markets. 1 Refer to non-IFRS measures on page 19 for definitions 3 Based on ERM Power’s actual electricity sales in FY2012 and our analysis of the volume of actual electricity sold in the National 2 Based on ERM Power’s forecast league table for volume of Electricity Market in FY2012. 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 page 2 ERM POWER ANNuAl report | 2012 PeoPle and community outlook We had another safe operating year with no lost time injuries The future remains bright with our electricity sales business or recordable environmental incidents and maintained our forecasting to maintain its strong growth, supported by record of no permanent injuries over more than 30 years a first ever marketing campaign and further expansion of of operations. We also maintained an active engagement the business into the small to medium enterprise (SME) with the community through sponsorships, donations and market; our generation business expected to remain a major partnerships with a focus on education, sport and the arts. earnings contributor; and our gas business moving closer to becoming a profit centre in its own right. The Group remains On behalf of the board we would like to thank the management committed to creating value for shareholders as we pursue team and all employees for their contribution to the growth our aspiration of being the preferred energy supplier to and success of the Group in the face of challenges over the business in Australia. last 12 months. We also want to acknowledge our fellow directors for their support and guidance over this period and thank ERM Power’s founder, Trevor St Baker, for his valuable contribution as Deputy Chairman of the Board and a consultant to the executive team. Finally, it is important to recognise all other stakeholders including customers, shareholders, suppliers and community members for the important role they have played during our Tony Bellas Philip St Baker second year as a listed company. Chairman Managing Director and CEO page 3 MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 30 JUNE 2012 1. RePort on financial consolidation of Oakey’s financial results for the first time from this year. Oakey was previously equity accounted as an Performance investment in an associate. 1.1. Revenue – $938 million, uP 71% on PRioR yeaR The purchase of the additional 50% interest in Oakey in the Revenues and other income for the year were $937.9 million, first half of the year produced a gain of $19 million arising an increase of $388.1 million (71%) over the prior year of from the acquisition of a controlling interest in the asset. $549.8 million. Accounting standards preclude the recognition of any further This continuing growth was mainly due to the strong growth gain from the subsequent ownership increase during the of our electricity sales business and the acquisition of an year. This outcome is similar to the Prospectus forecast for increased interest in the Oakey power station (“Oakey”), generation development which had anticipated the Braemar and its consolidation in the Group’s accounts. This increased 3 development financial close in the second half of the year. interest was acquired at a discount reflecting the controlling The improvement in statutory profit also includes an interest it provided to ERM Power. unrealised gain of $5.5 million before tax in the fair value Our electricity sales business has continued its strong of financial instruments in the current year, compared to growth with sales revenue for the year up 73% over the prior an unrealised gain of $14.2 million in the prior year. year, increasing from $486.7 million to $842.4 million. This % revenue figure is 30% above the forecast of $646.5 million STaTuToRy 2012a 2011a 2012P change in the Company’s prospectus dated 17 November 2010 PRofiT $ million on P (“Prospectus”). Revenue increased as a result of growth in customers and load, increases in environmental legislation Statutory Profit 34.2 16.2 39.0 (12%) and increased network costs, which we pass directly through Which includes unrealised to our business customers. changes in financial Revenue from our generation business was 61% over the instruments before tax 5.5 14.2 19.8 prior year, increasing from $55.8 million to $90.1 million, and (A = actual, P = Prospectus) also 85% above the Prospectus forecast of $48.6 million.