ERM POWER LIMITED ANNUAL REPORT 2017 CONTENTS 1 FINANCIAL HIGHLIGHTS 26 CORPORATE RESPONSIBILITY 2 CHAIRMAN AND MANAGING DIRECTOR’S REPORT 26 Corporate Governance Statement 4 BOARD OF DIRECTORS’ PROFILES 32 Corporate Social Responsibility 8 EXECUTIVE TEAM PROFILES 32 – Leadership 10 OPERATING AND FINANCIAL REVIEW 32 – Customers 10 Financial Year Highlights 33 – Workplace 10 Strategy Overview 34 – Community 10 Review of Operating and Financial Results 35 – Environment 21 Market Overview 37 DIRECTORS’ REPORT 22 Material Business Risks 40 REMUNERATION REPORT 24 Outlook and Future Prospects 53 ANNUAL FINANCIAL STATEMENTS 125 DIRECTORS’ DECLARATION 126 INDEPENDENT AUDITOR’S REPORT 133 SHAREHOLDER INFORMATION 135 CORPORATE INFORMATION ABOUT ERM POWER ERM Power is an Australian energy company operating electricity sales, generation and energy solutions businesses. The Company has grown to become the second largest electricity provider to commercial businesses and industrials in Australia by load1, and is the only energy retailer licensed to sell electricity in all Australian states as well as the Northern Territory and the Australian Capital Territory. A growing range of energy solutions products and services are being delivered, including lighting and energy efficiency software and data analytics, to the Company’s existing and new customer base. ERM Power also sells electricity in several markets in the United States. The Company operates 662 megawatts of low emission, gas‐fired peaking power stations in Western Australia and Queensland. www.ermpower.com.au 1 Based on ERM Power analysis of latest published information. 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 2017 with comparison against the previous corresponding period ended 30 June 2016 (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. FINANCIAL HIGHLIGHTS For FY2017, ERM Power’s underlying EBITDAF was $78.4m, up 5%. Our industry is changing and we are transforming the business to take advantage of the growing need for new energy solutions in a dynamic and competitive market. SALES GROWTH OPPORTUNITY AND INVESTMENT Record Australian electricity sales of 18.5TWh. Accelerating investment in Energy Solutions and the US electricity sales more than doubled to 3.8TWh. US Business, taking opportunity in a dynamic market. The Large-scale Generation Certificate (LGC) strategy results in a one-off tax charge of $37.1m, contributing to an underlying NPAT loss of ($26.3)m. UNDERLYING EBITDAF UNDERLYING NPAT LOSS DIVIDENDS ELECTRICITY SALES UP 12% TO Total declared dividend for FY2017 was 7c per share, fully franked. 1 ERM POWER CHAIRMAN AND MANAGING DIRECTOR’S REPORT ERM Power has delivered a strong set of results in financial In April 2017, we were pleased to announce the sale of the non- year 2017, taking strategic opportunities and investing core residential electricity retailing component of our US business. for growth and diversification in a disrupting energy market. This allows exclusive focus on our core and growing business customer base in line with the broader ERM Power Group strategy. Policy uncertainty and challenging market conditions have not The residential business sold for US$12m, comfortably exceeding constrained the Company in creating opportunities to deliver for the original acquisition price of the entire business in 2015. customers and shareholders. Our clear and consistent business strategy accounts for an industry in transition, harnessing and Both our US electricity retail and Australian Energy Solutions rewarding our deep industry expertise, innovative approach and businesses are in investment phase, and will remain that way in well-timed execution. financial year 2018. We are confident they are on track to become material profit contributors in the medium term. FY2017 earnings increased by 5% to $78.4m (underlying EBITDAF), with positive results across the business. ERM Power’s generation assets had a strong year, maximising merchant generation opportunities. Earnings increased by $4.3m STRATEGIC GROWTH for Oakey Power Station in Queensland, and $2.1m for Neerabup Power Station in Western Australia. ERM Power’s strategy capitalises on the Company’s strong, enduring customer relationships and industry-leading customer The Australian electricity sales business increased load to satisfaction to deliver an expanded, integrated value proposition 18.5TWh, up 0.4TWh from the prior year. Forward contract load to businesses seeking to take control of their energy costs. grew 13% from 25.3TWh to 28.6TWh, which is a positive outcome in a highly competitive market. We are proud of ERM Power’s history of self-disruption and reinvention, with 2017 demonstrating our continued focus on strategic business transformation. SUPPORTING RENEWABLE ENERGY ERM Power is committed to playing its part in the transition to It has been a critical year for our growing Energy Solutions a less emission-intensive energy sector, and this year, executed business, with existing, acquired and new business capability a progressive strategy to cost-effectively support renewable now delivering results through one integrated and focussed team. energy development. Revenue more than doubled compared with the previous period, underpinned by increased opportunities in metering and demand For the 2016 compliance year, the Company chose to achieve response. The Company continues to invest in new capabilities compliance with the Renewable Energy Target scheme by and initiatives, such as our National Schools Program, responding paying the Clean Energy Regulator $123m, in lieu of surrendering to a clear customer need. 1.9 million Large-scale Generation Certificates (LGCs). This enabled the sale of existing LGC inventory into the market while prices were Our US retail business, Source Power & Gas, is also delivering high, with the Company reaching agreements to procure lower growth as it continues to apply and adapt the ERM Power cost LGCs in the future. approach to the US market. Load sold through the US market more than doubled to 3.8TWh. Importantly, contracted forward We were pleased to announce a renewable offtake agreement electricity sales increased substantially from 10.8TWh to 16.7TWh. with Hamilton Solar Farm in Queensland (58MW, currently under This demonstrates the success of our comprehensive broker construction) and continue to work with developers of new engagement plan and significant investment in new systems, renewable energy assets, such as Nexif Energy Australia Pty Ltd processes and people. on their Lincoln Gap Wind Farm project. 2 ANNUAL REPORT 2017 ERM Power has delivered a strong set of results in financial year 2017, taking strategic opportunities and investing for growth and diversification in a disrupting energy market. LEADING CUSTOMER SERVICE In the Australian market, the 2016 Utility Market Intelligence survey1 On behalf of the Board, we would like to thank ERM Power’s reported 94% of ERM Power’s large business customers are staff and management team, whose innovative thinking, belief in satisfied – the highest level of customer satisfaction recorded since our strategy, and focussed work ethic are the foundation of our the survey began in 1997. This marks the sixth consecutive year success. We also thank our shareholders, many of whom are staff, that ERM Power has out-ranked all other retailers in this survey. for your support as we continue to progress our strategy at this exciting time of industry transition. In the US market, the 2016 Energy Research Consulting Group’s survey2 of energy broker satisfaction also demonstrates our strong To our customers, thank you for supporting us, inspiring us, and focus on customer needs and relationships, with Source Power & challenging us to do more for your business. We look forward to Gas placing third out of over 50 retailers. Since acquisition in 2015, helping you in new and exciting ways in the coming year. Source Power & Gas broker recognition rate has tripled, with 62% We thank our fellow Directors, and in particular acknowledge of surveyed brokers now saying they do business with Source. ERM Power founder Trevor St Baker, who announced his resignation from the Board in July 2017. Trevor’s ongoing HIGHLY ENGAGED PEOPLE commitment and guidance to the Company has been invaluable. It takes great people to deliver great results. ERM Power’s We’d also like to take this opportunity to thank Martin Greenberg, second employee engagement and enablement survey again who also stepped down from the Board in October 2016, for his demonstrated our people are well-positioned to deliver continued service and contribution and we welcome Georganne Hodges and business success. Phil St Baker to the Board. The Company’s 2017 engagement score was consistent with the ERM Power is at an exciting juncture in its transformation. highest performing organisations in the world, and its enablement We look forward to continuing to grow and prosper in a score was five percentage points above the global high-performing transforming market which presents us plenty of opportunity. norm3. ERM Power also ranked above the global high-performing