Post on 14-Aug-2020
Infratil Investor Day
31 July 2012
The Consolidated Australian Energy Group
2
• East Coast – National Energy Market (NEM)
- Lumo Energy
• Retailing electricity & gas primarily to mass market customers…although this is changing
• 457,000 customers - 4th largest customer base in the NEM
• CEO – Dean Carroll
- Infratil Energy Australia (IEA)
• Wholesale supplier of electricity, gas & environmental products to Lumo
• Owner of 160MW of peaking generators
• CEO – Darryl Flukes
• West Coast – Western Australian Wholesale Electricity Market (WEM)
- Perth Energy
• Retailing electricity and gas to commercial & industrial clients
• Owns 120MW of gas-fired peaking plant
• CEO – Ky Cao
Developed organically from a start-up business by Infratil
Our energy businesses in Australia
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Leveraging the Infratil / TrustPower relationship
• In New Zealand TrustPower is an active retailer and generator
• In Australia TrustPower is an accomplished wind farm developer and operator
• Australian retail market is very different to the market in NZ
- Indeed different retail strategies are often needed for different jurisdictions in Australia
• Collaboration between Lumo/IEA and TrustPower does occur at both the board and executive level
- Where appropriate intellectual property and common experiences are shared
• Little gain if any from integrating the two entities
• Infratil sees benefits in both businesses operating independently, avoiding overlaps and with each
operating to their proven strengths
• Infratil has straightforward sale liquidity with 100% ownership of Lumo
• Collaboration and knowledge shared at all levels, a benefit of being part of the Infratil Group
4
NEM Retail Landscape
• Carbon Price – retailers pass on the cost, but bear the brunt of consumer anger
• More knee jerk political responses to electricity (& gas) pricing?
- Qld legislating to make contract termination fees illegal. NSW requiring carbon costs to be
separately identified on each consumer’s invoice
• Retail price caps remain in all jurisdictions except for Victoria
- Despite the 2010 COAG* agreement and calls from the Productivity Commission
• Regulatory compliance – ultimately customers bear the cost
- Unlike NZ, Australia has different regulatory requirements for each jurisdiction in addition to a
national framework
• Credit management issues challenging for all retailers
- Timely credit processes, accurate billing data, hardship programs & payment plans are all of
critical importance
- Overhaul of government utility assistance programs potentially a win-win for all
• Intense competition in the retail market continues
• Sales methods will need to evolve – outbound telesales market decreasing
… even with these challenges Lumo’s retail base continues to grow
* COAG – Council of Australian Governments
5
NEM Supply Landscape
• Electricity
- Surplus supply driven by manufacturing sector slowdown, domestic solar PV penetration and
energy efficiency measures
• Should the market have seen this coming? YES
- Will further vertical and/or horizontal integration reduce wholesale market liquidity?
- Buyers for the NSW generators?
- Existing Gentraders unlikely to be buyers. Preference for Macquarie Generation to be
broken up for sale
- Three years before Queensland generators are put on the block
- Promises by new state government will preclude sale in the current electoral cycle
• Gas
- Huge uncertainty beyond 2015 driven by LNG export timing, number of trains and feedstock
availability
- Near term ramp-up over supply not currently seen in spot prices with other supporting factors
- other supply reductions (Moomba, Yolla, Longtom)
- base load (coal) generation outages
- cold weather across Eastern seaboard
… IEA well positioned with a competitively priced portfolio of wholesale
products for the future
6
WEM Landscape and Perth Energy
• Retailing
- 3rd largest WA retailer with a growing market
share of 14% of the commercial & industrial
market. Mass market is not contestable.
- FY2012 sales volume of 1300GWh, a 24%
increase on pcp
- High barriers to retail new entry due to illiquid
wholesale contract market
- Timing of full retail contestability (FRC)
unknown
• Generation
- 120MW Kwinana dual fuel open cycle gas
turbine power station has performed
satisfactorily with recent engine problems
now rectified
- Two valuable new build options at Kwinana
(K2 & K3) continue to be developed
• Reviewing ownership given ongoing market
structure uncertainties and IFT prioritising of
pipeline of development opportunities in the NEM
* Based on number of NMI’s and max demand
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Further Consolidation?
• Integration amongst the big three, Origin, AGL & TruEnergy very unlikely
• Horizontal integration in the generation market may be limited in some jurisdictions also due to Restrictive
Trade Practices legislation (Competition and Consumer Act 2010)
• Horizontal integration in the retail market likely…
• 2nd tier retailers – 8 players
- Government owned – will they eventually be up for sale?
• Red Energy (owned by Snowy Hydro)
• Momentum Energy (owned by Hydro Tasmania)
- Solid financial backing
• Simply Energy (GDF Suez), Alinta Energy/ Neighbourhood Energy
• Lumo Energy
- Potential capital constraints and a reduced suite of wholesale supply products will squeeze margins
• Australian Power & Gas, Dodo Power & Gas, ERM Retail, Click Energy
Our intention is to be an end game player… but we do have a price…
8
IEA is well placed to address uncertainties
• Australian energy landscape has never been so uncertain… impacting:
- Investment in new gas-fired generating plant
- New renewables projects through difficulties in securing long term off-take agreements
- Forward wholesale electricity prices – will there be a carbon price in 2.5 years?
- Gas availability and prices beyond 2015 – how much gas will be required / available for the
Gladstone LNG projects?
- Retail product offerings through the lack of regulatory & legislative harmony across jurisdictions
• Lumo/IEA is well positioned to deal with these uncertainties, securing attractive positions and
mitigating downside exposures via low cost options
• Our favourable position is the result of several years of hard work and repositioning - especially
regarding our wholesale gas position
So, what is the value of the journey?
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• 457,000 as at 30 June 2012 and still counting…
• Lumo well positioned in the attractive Victoria market
• Selective acquisition activity undertaken and ongoing in other States
• Taking a wait and see position in Queensland
Our Customers… Where are they?
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Who are they?
• Lumo’s customer profile skewed a little to older demographic
- Largely a function of sales channels employed to date (D2D and telesales)
• Solid representation in family belt
Source: Roy Morgan Research Lumo Energy User Profile Dec 2011
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Organic customer growth trajectory
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,0002
00
62
00
62
00
72
00
72
00
82
00
92
00
92
01
02
01
02
01
12
01
22
01
22
01
32
01
32
01
42
01
42
01
52
01
62
01
6
Cu
sto
me
rs
Current Replace churn Likely range
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Acquisition… Plenty of fish in the sea!
Source: Internal analysis of market data
13
Changing the traditional acquisition method
• Channels to achieve the first 450,000 customers are unlikely to sustain the next five years of customer
growth
- ‘Opt outs’ into the Do Not Call register total circa 7 million phone numbers
- Campaigning for door to door channels under threat
• Lumo will maintain outbound channels but will reduce reliance on them
• We will attract, retain and grow customers with more sophisticated sales and marketing capability
• Lumo has come a long way on two primary channels:
- Door to door
- Telesales
… But we must now diversify
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Developing channel diversity is crucial
• Increasingly a greater range of marketing channels are being deployed
• Already getting good traction from online leads and Virgin Velocity Partnerships
Internet
SMS/Mobile
Door to door
Telesales
Inbound sales
Advertising
Sponsorship
PR
Direct Mail/eDM
Other
Our marketing philosophy is to
be customer centric utilising
appropriate channels that
engage consumers cost
effectively.
Over time the reliance on these
channels will reduce as a greater
percentage of activity is inbound.
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• Strong group of channel sales partners with good compliance orientation
• Targeting diversification of sales channels to spread the risk
• Positioning for a world with a greater percentage of in-bound sales activity
Channel Source Feb-11 Jun-12 Mvt
Energy Aggregator 4% 8%
Moving Aggregator 0% 6%
Door to Door 28% 45%
Outbound Telemarketing 36% 14%
Inbound Telemarketing 32% 27%
100% 100%
Significant focus on enhancing our sales capability
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Our major new channel… 100% Infratil owned
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Introduction to Direct Connect (DC)
• Incorporated in August 2004 to arrange connection services for customers moving into new
premises which successfully serviced 140,000 energy customers in 2011/12
Business Profile
• To June 2012, DC has partnered with 3,084 Connecting Agents (Real Estate Agents) providing
customer referrals to DC
• Currently a majority of customers are renters that come through the property management division
of a Real Estate Agents office
• There is an opportunity to broaden the DC offering from home owners to the business and
commercial sectors
• DC provides connection services to customers for a range of services as follows:
- Electricity - Gas
- Telephone/Broadband - Pay TV
- Insurance - Removalists & Cleaning
• The Direct Connect brand is now seen on its own as a genuine Real Estate market leader
• In 2009, three of the four key Real Estate Institutes on the eastern seaboard acknowledged DC in
their top 3 realestate supplier brands
Vision: To make moving easy for everyone in Australia
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Direct Connect – who are they?
VIC
QLD NSW
SA
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2004 2005 2006 2007 2008 2009 2010 2011
Direct Connect Growth in Energy sales
Rentals 64%
Home Owners
36%
Total Moves across Australia
• Only 18% of the total moving market uses an aggregator like DCA
DCA, 8.1%
Others, 9.7%
Not Touched,
82.2%
Market Share
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Direct Connect – how are they growing?
• Continue to develop products using Partnerships
• Expand product offering in SME markets in conjunction with Lumo
• Development of new products to capture more home owner moves
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NSW is an emerging market
• NSW is an emerging opportunity for Lumo
- Over 3 million electricity sites / 1 million gas
- Recent deregulation = poor service by
incumbents
• Lumo entered in earnest in July 2011
- Early mover
• Very selective acquisition
- Only Integral (Endeavour) to date
• Introduced gas in January 2012 to capture Dual
Fuel market
• We are building a good sales capability that is
sustainable
- Target customers in most profitable
catchments
- Closely monitoring incumbents significant
investment in retention activity
- Not willing to pay a material premium for
customers
• Our view is that the market will settle in the longer
term
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• The brand will be evolved through:
- Building a clear and compelling brand position and delivering on it
- Driving customer segmentation and targeted marketing programs
- Channel diversification to reach and cost effectively engage preferred customers
- Promote customer engagement through up-selling and retention programs
Brand evolution
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• Energy is a difficult category for consumers to differentiate and position brands
• Price and scale/reputation are the current defaults used
• Key to being differentiated and owning a gap in the market is to offer better value by improving and
reinforcing quality and utility
Brand positioning
Quality & Utility
Price
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Aspirational brand position
Modern
Traditional
Servant (Leadership driven
by Customers)
Master (Leadership driven
by Corporation)
2nd tier
retailers
a
Incumbents
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Building the Lumo brand
• Our objective is to develop a compelling brand position for Lumo that is both exciting and distinctive
within the highly competitive energy sector
Phase 3
Implementation
Phase 4
Measurement
Phase 2
Creative Idea & Implementation
Plan
Phase 1
Brand Essence Brand DNA
Complete
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• Investment has been, and is being made in Information Technology to:
- Enhance our systems
- Provide for scalability
- Improve the customer experience
• Developing and extending programs that touch all key moments of truth
• Creating an ongoing dialogue with customers to reinforce the value of Lumo
• Developing product propositions that more closely address segment needs to drive longevity
• Investment in analytical and customer relationship management (CRM) platforms to sustain
relationships
Sales and On-
boarding
Billing and
servicing Customer re-
contracting
Customer
Retention
Customer analytics and segmentation
Looking after customers… In the Lifecycle
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• Front and back offices working together allows customer feedback data to be collected, analysed
and fed back into the customer value chain to ensure improvements are delivered
• Implementing a quality methodology and starting to see the associated improvement culture
• Selected basic tools to use in Kaizen, Rapid Improvement events with our front line staff across the
business. Over time we will inject more complicated tool sets
• Investing in our front line leaders in their management capability and their business improvement
tool set
• The customer has noticed a significant improvement in the past 12 months
- Ombudsman enquiries are down 50%
- Net promoter score has moved 25 basis points
- Headcount to cope with 15% volume improvement
• Ensure price competitive by creating Revenue Assurance program
… Improving our service to customers
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• New propositions will address specific customer needs. An example is a movers product for new
customers from Direct Connect
• Ultimately market segmentation will inform product development
• To date Lumo has been successful with a very narrow product range
• Group buying schemes are offering some opportunity to reach new customers – however product
pricing and on-boarding processes need to be finely tuned to assure profitability
… With new Propositions
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Victoria leads the way in switching
Source: VassaETT (World Energy Retail Market Rankings 2012)
• Yes, it is competitive but our position is established and adding value
29
Wholesale electricity markets remain liquid
• Markets remain active and liquid up to two years forward
- Despite integration activities across the industry we see little benefit in vertical integration but
….. while there remains sufficient “independent” generators, and active trading participants,
threats to wholesale liquidity could emerge from generation sector horizontal aggregation
- Where market is less liquid (SA), IEA has invested in peaking generation plant
• Reducing demand → benign spot prices & falling forward prices
• Does drive retail churn but IEA’s hedging strategy has benefited
30
Electricity wholesale – other considerations
• Renewable Energy (and other “green” obligations)
- Content to buy from market
• CO₂ uncertainty leading to illiquidity beyond two years forward
- (but we’ve had to manage this issue for four years now)
• To counter any chronic shift in liquidity, IEA continues with its strategy of pursuing and holding
power station development options…
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• Up to 450MW gas generation development site in NSW
- Bought out of NSW privatisation
- Well located on the Eastern Gas Pipeline
- Approvals in place to construct
• Capacity not needed until 2016 – 2018 (or beyond)
• However, IEA may develop earlier to
- Reduce exposure to potential illiquidity and/or
- Benefit from integration of gas & electricity portfolios
• Value already being delivered in holding this option
Bamarang development site is a valuable option
32
• Total of 160MW diesel fired “super” peakers
• Excellent availability stats
• Have not been required to run commercially for last 18 months
• Medium-term capacity values (cap prices) under pressure from reducing demand
Peaking Power Stations
33
• IEA is now positioned with a very flexible, low risk gas portfolio:
IEA Wholesale Gas positioning
STORAGE TRANSPORTATION SUPPLY
34
• Well balanced to 2015/16 with a diversity of supply and no “cliff edges”
• Improved liquidity enables rolling contract renewal
• With substantial price uncertainty beyond 2015, IEA is keen to not lock into longer-term fixed price
contracts which could turn out to be uncompetitive
- Nor is it necessary with most customers re-pricing over the next 3-4 years
• Coupled with risk management and optionality from storage etc. contracts well beyond mid-decade …
• ..this ensures IEA will not be disadvantaged relative to competitors
Longer term gas position
35
• Electricity demand reducing → benign wholesale prices
• Flexible competitive gas portfolio
• Optionality to deal with mid-decade uncertainties
- Carbon
- LNG exports
- Demand levels
- Renewable etc. legislation
- Liquidity
… Management challenge in positioning for all outcomes – building a flexible portfolio
Wholesale summary and key messages
Wholesale supply is competitive and sustainable
36
The Key Messages
• IEA is delivering sustainable returns
- Good earnings
- Focus now on efficiency/process improvements
- Abnormal charges associated with historic gas position are a thing of the past
- Risk management processes are robust
• Customer growth has returned
- Confident about FY13 customer growth forecast
- Each new customer is adding Value
• Normalised earnings approaching $70 million
- Combined business value in excess of $600 million
• Return On Funds Employed is currently approximately 13% and is moving towards 16% based on
normalised earnings
Note: - Normalised earnings for Lumo retail of $48.0m based on Lumo forecast customer numbers at 31 March 2013 held over a full year
37
Overview of Financial Results
A$ million Mar’ 11 Mar’ 12 FCST Mar’ 13
Lumo customers (No.) 409,000 442,000 490,000 – 510,000
Generation capacity (MW) 277 MW 277 MW 280 MW
Revenue 698 788 950 - 995
EBITDAF 43 50 60 - 70
Hedge Revaluation movements 35 31 -
Net Finance Costs - external (3) (9) (8) - (10)
Amortisation – Customer Acquisition (9) (9) (10) – (12)
Depreciation and other Amortisation (6) (15) (16) – (18)
Tax Expense (16) (11) (5) - (7)
Note: - March 2013 forecast for full year 2012/2013
- Perth Energy revenue: $128m (Mar’11 Actual), $182m (Mar’12 Actual) and $267m (Mar’13 Forecast)
- Any discrepancies due to rounding
38
EBITDAF Contribution breakdown
A$ million Mar’ 11 Mar’ 12 FCST Mar’ 13
Perth Energy 5 13 14 - 16
Generation 8 11 9 - 11
Retail 44 44 41 - 47
Excess Gas (5) (12) -
Electricity Hedge Book Restructuring (4) 1 -
Excess NGAC’s (2) (4) (1)
Generation Development / Unallocated Overhead
(3) (3) (3)
EBITDAF (excl Perth) 38 37 46 - 54
Total EBITDAF 43 50 60 - 70
Note: - March 2013 forecast for full year 2012/2013
- Any discrepancies due to rounding
39
2011/12 ended strongly despite gas impacts
Favourable Negative
43
48 4850
8
4
5
2
6
3
37
9
10
2
30.0
40.0
50.0
60.0
70.0
80.0
90.0
EBITDAF Mar2011
Retail ElectricityMargin
WholesaleElectricity Costs
Electricity HedgeRestructuring
Perth Energy -Generation
Perth Energy -Retail
Generation Retail GasVolume
Excess Gas Retail GasMargin
OperatingExpenses
Other EBITDAF Mar2012
A$
in m
illio
ns
Perth EnergyRetail Electricity Retail Gas OtherGeneration
40
2011/12 – Key Points
• Lower Wholesale Electricity Costs
- Our hedge book performed well
- Hedge restructure trading gains are not expected to re-occur
• Perth Energy Generation
- Prior comparative period only had 7 months earnings from the Kwinana Power Station
- Engine repair costs incurred in 2011/12. No assumption has been made on cost recovery
• Perth Energy Retail
- Result driven by increased sales volumes
• Generation
- Port Stanvac Power Station commissioned in May 2011
• Retail Gas Margin
- Increased presence in the Industrial sector at reduced margins
- Industrial customers provided a good “hedge” against our excess gas position
• Operating Expenses
- Increased investment in staff, systems and processes
- Step up in Cost to Serve (“CTS”)
41
Further gains anticipated in 2012/13
Favourable Negative
50
65
12
18
3
2
22
2
30.0
40.0
50.0
60.0
70.0
80.0
90.0
EBITDAF Mar2012
Excess gas Retail ElectricityVolume
Retail ElectricityMargin
Perth Energy -Generation
OperatingExpenses
Other EBITDAF Mar2013
A$
in m
illio
ns
Retail ElectricityRetail Gas Perth Energy Other
42
2012/13 – Key Points
• Excess Gas
- Much more balanced and flexible wholesale gas portfolio
• Retail Electricity Margins
- In line with customer growth
• Perth Energy - Generation
- Higher capacity prices in the short term
• Operating Expenses
- Approximately 50/50 split with CTS and Acquisition Costs
- CTS kept relatively flat from 2011/12 despite an increased programme of investment in IT,
systems and processes which will realise long term benefits and result in a lower CTS
- Focus on developing our brand is forecast to have an impact on Acquisition Costs
43
Cost to serve stable going forwards
Total = $95
Total = $113 Total = $115
Other includes
miscellaneous items
such as printing,
stationary, regulatory
and occupancy costs
…Increased investment in systems and processes will lead to a reduction in
other areas of Cost to Serve and eventually a total reduction
44
Valuation of IFT’s Australian Energy Assets
Valuation Assumptions : - Power Station values based on independent valuations
- Perth and Bamarang development sites based on cost or experience of their proximity to network and gas access
- EBITDAF multiple of 6.0x assumed. This compares to other industry participants and transactions where multiples are in the range
of 5.0x to 11.0x
ASSET
A$ million
Midpoint valuation
Investor Day 29 March 2011
Midpoint valuation
31 March 2012
Diesel recip Power Stations– 160MW 144 139
Bamarang Gen. Development Site 9 9
Kwinana Power Station – 120MW 148 138
Perth - K2 and K3 Development Options 8 10
Lumo Energy (retail) – EBITDAF multiple 205 288
Perth Energy (retail) – EBITDAF multiple 23 30
TOTAL 537 614
45
Is it worth the journey?... Yes
• We’re a business that is…
- growing… its client base & capabilities
- increasing its EBITDAF and its returns to shareholders
• …in a sector where:
- new entrants will increasingly find it difficult to gain a foothold
- players that are not well resourced will eventually exit
- margins are good in markets that are mature
• We’re building a sustainable business that will continue to
- invest in non-traditional sources of client acquisition
- augment & optimise its systems to drive down costs & accommodate growth
- maintain a strong wholesale risk management focus; and
- take advantage of a well structured & diversified wholesale electricity & gas portfolio
• So what does the end of the journey look like?
Strong returns and optionality for Infratil shareholders
46
Appendix 1: Capital Structure as at 31 March 2012
IFT = 81.2% holding; ** Derived based on (EBITDAF/E+D) adjusted for the asset revaluation reserve
A$ million Infratil Australia
Perth Energy
Australian Group
Cash 24 19 43
Receivables, prepayments and inventories 142 32 174
Prepaid Gas 38 - 38
less Payables and accruals (82) (25) (107)
Net working capital 122 26 148
Property, plant and equipment 153 139 292
Intangibles – Customer Acquisition 15 - 15
Intangibles - other 1 - 1
Net deferred taxation (10) (8) (18)
Net financial derivatives - (2) (2)
Debt - External (51) (73) (124)
Net Assets 230 82 312
Represented by
Equity Contribution 230 82 312
Return on funds employed (ROFE) 14.5% 9.2% 12.7%
Note: - Perth Energy: IFT holding is 81.2%
- ROFE calculated as: EBITDAF / (Equity + Debt – Asset Revaluation Reserve)