Infratil Limited · NZX:IFT
Infratil — Investor Day (March 2011)
68 slides from Infratil's investor day presentation, Mar 29, 2011
Slide 1: Infratil Energy Australia Investor Day
Infratil Energy Australia Investor Day 29 March 2011
Slide 2: Overview and Strategic Context
Overview and Strategic Context Overview - Retail – key metrics and key trends - Wholesale Positions, Generation and PE - Financial results preview and outlook for 2012 O Ambition Our A biti - 10% market share of the NEM, incl dual fuel in NSW - increasing customer quality through more selective outb
Slide 3: Defensively positioned for a range of wholesale developments
Defensively positioned for a range of wholesale developments Electricity - Favourable liquidity and market structure - Options to cover contract roll-off profile with self build • but purchasing forward cover looks lower cost Gas - 3-4 year ahead gas purchasing is a sustainable strategy, including f
Slide 4: On Carbon
On Carbon • Not a key ‘bet’ that retail has to make – pass on will occur • Predict P di t a low l level l l price i – nott enough h tto make k gas workk for f baseload, b l d no compensation for existing coal PS • Predict a REC market that springs to life to make wind work (initially close to $100/M
Slide 5: Vertical Integration
Vertical Integration • Several specific and atypical features active in Australia • Government ownership and horizontal disaggregation • IFT can cover risks at low cost and with bit sized chunks - Because of carbon – large scale is not needed to vertically integrate - Dual fuel gas plant (3x100 ( MW
Slide 6: Retail Energy
Retail Energy Infratil Investor Day Simon Draper 29 March 2011
Slide 7: Why invest in the sector?
Why invest in the sector? The story remains in tact … Material Growth Opportunities + Increasing commercialisation = Above IRR target returns A sector still emerging from government ownership and monopoly provision - Untouched and large new markets in some states - Increasingly commercial pricing an
Slide 8: What is energy retail anyway?
What is energy retail anyway? Generation, NEM, spot market G producers, Gas d gas storage t Contracts markets Retail Consumers Transmission, Distribution, Metering & Meter Data Complexity Simplicity 3
Slide 9: Retailing itself is complex with lots of moving parts
Retailing itself is complex with lots of moving parts •Market, risk and profile reflective transfer prices, updated weekly Products & Offers •Myriad of network tariff regimes & meter types •Benchmark prices and competitor offers •Incorporation p of the latest Government schemes n system perrformance
Slide 10: Retailing is a discipline in itself
Retailing is a discipline in itself • There are lots of pitfalls in retail - Risk management disciplines are not for everyone - Success and scale brings its own challenges - Not all customers are the same • Across the industry there are a variety of models - Generation companies with retail as a “ro
Slide 11: Retail earnings have been favourable for last 2 years
Retail earnings have been favourable for last 2 years FY 2010 – Retail EBITDA FY 2011 – Retail EBITDA 60 60 50 50 53.6 40 40 44.1 42.4 A$ millions 30 31.6 30 20 20 10 10 0 0 0 ‐5 ‐2 ‐3.8 ‐5 ‐4.5 ‐10 ‐10 2011 result supported by high winter demand 6
Slide 12: Retail margins reflected in earnings performance
Retail margins reflected in earnings performance Earnings reflects volume growth, but also improved margins. Margin performance has followed the path set out in guidance 12 months ago and is at or above industry benchmarks. Retail EBITDA Margin 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% FY2010 FY2011 7 Note: Net
Slide 13: FY2012 guidance is for a temporary dip in earnings
FY2012 guidance is for a temporary dip in earnings FY2012 Retail EBITDA guidance is for $33m, with a range of $31m to $35m Assume normal winter rather than high winter demand Start year with less Victorian electricity and gas client accounts Assume high churn of second half FY2011 for most of FY2012
Slide 14: Customer growth is mixed for now
Customer growth is mixed for now High churn in Victoria, particularly in the second half has caused a negative movement in Victorian accounts over the full year. Other markets have experienced net growth, but net growth is still constrained by high churn. churn As well as high market switching, chur
Slide 15: Victorian churn stands out – an issue for most retailers
Victorian churn stands out – an issue for most retailers Earnings performance has been achieved despite a high churn environment – market churn in Victoria is a stand out market, even by world standards. Victorian Market Churn ‐ Annualised 35.0% Vassaett World Energy Consumer Switching Rankings 2010
Slide 16: Other markets are also competitive
Other markets are also competitive Victoria is not alone in having high and growing market churn … 3.00% Monthly Switching 2.50% 2.00% 1.50% Victoria Queensland 1.00% SA 0.50% 0.00% 11
Slide 17: Churn uplift is driven by particular circumstances
Churn uplift is driven by particular circumstances Increases in churn during 2010 were driven in large part by: - some sales oriented second tier retailers enabled by particularly good wholesale conditions - NSW Government retailers adopting an aggressive market position in Vic & Qld with sub‐commer
Slide 18: Polarisation of churn behavior among consumers
Polarisation of churn behavior among consumers There are signs of some clients churning repeatedly and frequently between retailers. It is evidence of a distinct segment of the market, prolonged period of a highly competitive market, as well as intensive win back activity. Churn by Tenure – Half Yea
Slide 19: A focus on lifting sales capacity
A focus on lifting sales capacity Lumo is focused on lifting sales capacity as a priority. What used to be a growth rate of sales (say 15,000 sales per month) now is required to stand still, allowing for churn and pre‐switch cancellations. LLumo will ill be b lifting lifti sales l during d i the th
Slide 20: Growth capacity will increase during the year
Growth capacity will increase during the year • Focus on active retention - Pricing & products - Proactive identification and resolution of service problems • Creating a stable environment for outbound selling - Industry self regulation - Internal controls • Upgrading the sales management capability
Slide 21: Growth is about quality and sustainability
Growth is about quality and sustainability • Pursuing a balanced portfolio of clients over medium term - Large body of clients who just do not respond to direct selling – exhibit limited churn - Also often exhibit g good p payment y behaviours and above average g consumption p • Large players pursue
Slide 22: movingtracker
movingtracker the e ay to move home home connectme | connectlater | movingtips about us Plan Your Move Now So You Can Enjoy The Ride Later Movejtosan n Te aa EnergyiPackage that suits yo Flexibility Open Contract Freedom to upgrade any time LUM® Find OutMore @® ~~ 2 Connect Me Connect Later Z Moving
Slide 23: What about “Lumo” as a brand?
What about “Lumo” as a brand? • The role of “Lumo” as our energy brand - Create a national, all-fuels proposition - Present a challenger g p personality y for clients in the market for an offer,, and for employees p y - Provide a partnering proposition for valued national partners • The launch of th
Slide 24: Lumo Energy website
oo Make a Payment O Choose Packages O Switch & Save O Moving Home O Use our online portal Checkout our new energy packages Receive 5% off your energy today Take the stress out of moving Meet Gavin Latest News Tutorials Got a Question? We've got the answer e .. Read More > The Premier's Disaster Reli
Slide 25: Lumo_Energy on Twitter
© About @Lumo_Energy Lumo_Energy @Lumo_Energy Australia 353 643 am ‘S At Lumo, we love Lumo is Australia's new name in energy. One that we think | Tweets Folowng Folowers Listed to chat. So if you you'll remember. sh ia bole dake http:/lumoenergy.com.au ifyou Just want to Connections tell us about y
Slide 26: Lumo Energy on Facebook
facebook ‘Whatever makes you shine. B® wan Hidden Posts © info © Welcome [0] Work for Lumo @ Bio [@& Photos (5) @h YouTube BD Twitter More+ About of Edit www. lumoenergy.com.auTwitter: ‘@Lumo_EnerayYT: youtube.com/lumo.energyLumo Energy is an electricity and gas retailer. 9,475 people like this Like
Slide 27: There is plenty of scope for future growth
There is plenty of scope for future growth Customer Accountts 22
Slide 28: Headroom drives acquisition
Headroom drives acquisition $400 Net margins before incentives, discounts and acquisition costs $350 $300 $250 $200 $150 $100 $50 $0 Victoria SA Queensland NSW ‐ Current NSW ‐ possible ‐$50 ‐$100 - Margins for an “average” average residential customer in each market. ‐ Country Energy far west not in
Slide 29: NSW – a shift to high churn?
NSW – a shift to high churn? Factor Impact on Churn NSW ELECTRICITY CUSTOMERS Highly g y concentrated Scope p for new entrants Origin, 1.7m , Customer valuations Supports acquisition TRU, 1.4m , confidence 49% 40% Wholesale liquidity Disparate ownership supports new entry Privatisation of retailers
Slide 30: Cost to serve is above long term target
Cost to serve is above long term target Bad & Doubtful Debts are stable and in line with expectations, but remain a material cost of doing business and ongoing challenge for all retailers. - Unusually high winter bills - Renewed regulatory pressure - Public and media concern about cost of living (an
Slide 31: Summary Outlook for FY2012
Summary Outlook for FY2012 • Earnings – Ongoing profitability, albeit a dip in FY2012. Earnings expected to resume growth in 2013 as client growth beds-in beds in and operational maturity allows focus on unit cost management. • Client Growth – targeting 450,000 – 500,000 client accounts in 2012 (exc
Slide 32: Generation, Risk Management and Perth Energy
Generation, Risk Management and Perth Energy Infratil Investor Day Darryl Flukes 29 March 2011
Slide 33: Risk Management
Risk Management 2 sf Infratil
Slide 34: Electricity – Impact of Industry Restructure
Electricity – Impact of Industry Restructure • Significant consolidation in the industry QLD generator consolidation from 1 July 2011 Sale of retailers in NSW Large generators without a route to market IEA getting a seat at the table with the big players, some for the first time. • NSW asset
Slide 35: Electricity - Carbon
Electricity - Carbon • IEA will generally be unaffected by carbon pricing so long as it can be passed onto the retail customer, we assume this ‐ but with varying degrees of comfort • Risk for retailers is that carbon premiums are priced into wholesale contracts but not able to pass that cost onto
Slide 36: Electricity – Energy Prices
Electricity – Energy Prices Source: d‐cyphatrade/SFE • Energy prices continue the downward trend bleak spot prices notwithstanding high Q1 demand • However, volatility remains a feature of the NEM • Longer term, term IEA expects these features to continue • exacerbated by the renewables target (MR
Slide 37: Electricity – Consistent Strategy continues to Deliver
Electricity – Consistent Strategy continues to Deliver • During periods of depressed spot prices and extreme price events, IEA’s portfolio performed well • IEA continues to buy at prices competitive with / no more than incumbents and without the high premium demanded for fully load‐following arr
Slide 38: Gas - IEA’s Portfolio
Gas - IEA’s Portfolio • Enough gas to meet expected customer demand until 2015..... • ....on a peak winter day with a single, largest, source failure. • Successful in delivering flexibility and diversity to manage many load factors through — multiple supply sources, — more flexible supply arrangemen
Slide 39: Risk Management – Key Messages
Risk Management – Key Messages • Electricity price risk continues to be conservatively managed while delivering added value from astute product mix (financial & physical) • Conservatism in gas supply has been very expensive but a flexible, diverse and competitive portfolio in now in place for 2012‐1
Slide 40: Generation
Generation o 2 infratil
Slide 41: IEA’s Generation Investment Strategy (recap) – To Date
IEA’s Generation Investment Strategy (recap) TO DATE • Build lowest cost capacity (diesel recips) in the most volatile regions • Predominantly SA • IEA has developed a niche business in small scale diesel power stations • Develop “hot options” for further investments when opportunities present for e
Slide 42: IEA’s Generation Investment Strategy (recap) – Looking Forward
IEA’s Generation Investment Strategy (recap) LOOKING FORWARD • Continue diesel recip strategy • As the h retaill business b grows and d moves into gas supply l consider larger plant and unit sizes, include gas fired plant to assist in balancing gas portfolio • Prepare the business for dual fuel
Slide 43: IEA’s Generation Investments to date (exc Perth)
IEA’s Generation Investments to date (exc Perth) Power Station Date of MW Cost Cost Current Valuation purchase/ A$ m $k/MW Valuation+ $k/MW completion A$ m Angaston Mar 06 38 20 500 36 900 Angaston g Extension Jan 07 10 7 700 9 900 Lonsdale Sep 06 20 11 550 17 850 HEZ (NSW) Oct 08 29 21 724 26 896 P
Slide 44: Investment in Bamarang Generation site (NSW)
Investment in Bamarang Generation site (NSW) • Purchased from Delta Electricity as part of sale of NSW electricity assets Completed on 1 March 2011 • 20 Hectare site ‐ 150km South of Sydney MAP • Consent for up to 300MW OCGT (450MW CCGT) • Close proximity to transmission/gas pipelines and water •
Slide 45: Generation – Key Messages
Generation – Key Messages • Consistent C i t t andd clearly l l articulated ti l t d strategy t t • Execution to date has delivered $30m (25%) uplift in value - and supported retail growth in SA • Strongly positioned with a well located gas generation site • Experience in WA has demonstrated we can
Slide 46: Perth Energy
Perth Energy 15 2 Infratil
Slide 47: Thoughts on WA Market
Thoughts on WA Market Industry Structure & Regulation • Government committed to core market design (esp. capacity credits) with enhancements expected to benefit PE • Threat of merger of government owned retailer & generator removed • Re-birth of Alinta one to watch; Griffin remains in financial diff
Slide 48: Perth Energy - Retail
Perth Energy - Retail • h 3rdd largest PE is the l retailer l in the h SWIS with h over 8% % off the h C&I & market k b by volume l ‐ Sales volumes have grown 10 fold over the last 6 years ‐ 1,000GWh per annum (200MW peak) load ‐ Expect this to double again over the next five years. • Sales and busi
Slide 49: Perth Energy – Generation Investment Strategy
Perth Energy – Generation Investment Strategy • Build dual fuel power station justified on revenue from capacity credits ‐ Further upside from energy production • Generation investment a necessity for business resilience in WA due to lack of secondaryy wholesale market • Kwinana Power Station ‐ 120M
Slide 50: Perth Energy – Generation Investment Strategy cont.
Perth Energy – Generation Investment Strategy cont. • Kwinana value uplift driven by: ‐ Site proximity to electricity and gas networks ‐ A$10.0 million to A$20.0 million ahead of next equivalent power station development • Development Options: ‐ On current site (K2) – potential for additional 120MW
Slide 51: Perth Energy – Key Messages
Perth Energy – Key Messages • Perth Energy is expected to provide excess returns through its unique market position and high barriers to entry to the WA market ‐ plus a will among industry and government to see PE, as the only material new entrant retailer, succeed • Attractive generation expansion
Slide 52: Infratil Energy Australia - Financial Results
Infratil Energy Australia ‐ Financial Results Infratil Investor Day Paul Forsyth 29 March 2011
Slide 53: Key Messages
Key Messages • IEA has produced an outstanding financial result for 2010/11 • IEA's projections indicate that the 2011/12 EBITDAF forecast, adjusted for normalisation and modest growth, results in EBITDAF projections close to $70 million • When reviewing IEA's earnings, be mindful of: Acquisition
Slide 54: 2010/11 Overview of Financial Results
2010/11 Overview of Financial Results A$ million Mar’ 09 Mar’ 10 Mar’ 11 * Customers (No.) 386,941 411,478 410,000 Generation capacity (MW) 99 99 275 R Revenue 455 8 455.8 549 6 549.6 701 EBITDAF 17.0 8.8 45 Hedge Revaluation movements (20 0) (20.0) (60 1) (60.1) 38 Tax Benefit/(Expense) 5.5 22.5 (1
Slide 55: 2010/11 Earnings Contributions
2010/11 Earnings Contributions A$ million Mar’ 09 Mar’ 10 Mar’ 11 * Perth Energy 12.8 0.7 6 Generation 6.1 8.4 8 Retail (0 3) (0.3) 31 6 31.6 44 Excess Gas ‐ (18.6) (5) Electricity Hedge Book Restructuring 3.0 (4.1) (4) Abnormal Bad Debt ‐ (5.0) ‐ Excess NGAC’s (2.4) (2.0) (1) Generation Development
Slide 56: Highlights of 2010/11
Highlights of 2010/11 • Lumo Energy Customer numbers flat year on year • $36.8mill increase in EBITDAF or 420% compared to 2009/10. • Improved retail margins in all states and products Assisted by a long cold Melbourne winter resulting in above b average demand d d • Increase in operating costs
Slide 57: Highlights of 2010/11
Highlights of 2010/11 • Significant improvement in gas wholesale supply position Longtom outage for six months Above average residential demand Addition of C&I customers to portfolio p • Generation Growth Commissioning of Perth Energy’s 120MW Kwinana Power Station in early September on budge
Slide 58: How did we go from 2009/10 to 2010/11?
How did we go from 2009/10 to 2010/11? 7
Slide 59: 2011/12 Financial Projections
2011/12 Financial Projections A$ million Mar’ 11 Mar’ 12 Low Mid High Perth Energy 6 11 12 13 Generation 8 11 12 13 Retail 44 31 33 35 Excess Gas/ Gas Book Structure (5) (14) (13) (12) Electricity Hedge Book ((4)) ‐ ‐ ‐ R t t i Restructuring Excess NGAC’s * (1) (2) (2) (2) Generation Development (1)
Slide 60: IEA Earnings 2010/11 to 2011/12
IEA Earnings 2010/11 to 2011/12 9
Slide 61: Underlying outlook – Modest Growth Scenario
Underlying outlook – Modest Growth Scenario A$ million illi M ’ 12 Mar’ Adj for f Growth Perth Energy • Kwinana Power Station – increase in volume of 85MW to 108MW capacity credits from 85MW to 108MW primarily in 12 17‐19 17 19 2011/12 • Step up in capacity credit prices in 2012/13 Generation • Anga
Slide 62: IEA Earnings – Looking Forward to 2012/13
IEA Earnings – Looking Forward to 2012/13 Note: Including modest growth (40k – 60k customers). High level estimates only 11
Slide 63: Infratil’s Australian Energy Assets
Infratil’s Australian Energy Assets ASSET Valuation Valuation Valuation A$ $ million Low Mid High Diesel recip Power Stations– 162MW 139.4 144.0 147.1 Bamarang Gen. Development Site 9.0 9.0 9.0 Kwinana Power Station – 120MW 143.0 148.0 153.0 Perth ‐ K2 and K3 Development Options 5.0 7.5 10.0 Lumo En
Slide 64: Appendix 1 - Capital Structure 31 March 2011
Appendix 1 - Capital Structure 31 March 2011 A$ million Infratil Perth Australian Australia Energy * Group Cash 40.1 13.8 53.9 Receivables, prepayments and 130.6 30.2 160.8 inventories Prepaid Gas 21.8 ‐ 21.8 less Payables and accruals (77.8) (20.1) (97.9) Net working capital 114.7 23.9 138.6 p y p
Slide 65: Appendix - IEA Energy Hedge Revaluation movements
Appendix 2 - IEA Energy Hedge Revaluation movements • Hedge contracts are primarily financial instruments or derivatives so normally exclude physical supply agreements (eg Electricity PPA’s or Gas Supply Agreements) • Under Accounting Standards hedge contracts are required to be accounted for at fai
Slide 66: Appendix - IEA Energy Hedge Revaluation movements
Appendix 2 - IEA Energy Hedge Revaluation movements • IEA is relatively active in using financial instruments to manage itsit electricity l t i it price i risk ik Under Accounting Standards, electricity contracts are p almost impossible to treat as “effective” – this makes no sense! IEA treats a
Slide 67: Appendix 2 - IEA Energy Hedge Revaluation movements
Appendix 2 - IEA Energy Hedge Revaluation movements A$ million 31 Mar Movement 31 March 2010 2010/11 2011 Net Financial Derivatives (66.3) 37.9 (28.4) 2010/11 (41.5) 41.5 ‐ 2011/12 + ((24.8)) ((3.6)) ((28.4)) • Throughout 2010/11 the following has happened: At March 31 2010, energy hedge contracts
Slide 68: Appendix - IEA Accounting for acquisition costs
Appendix 3 - IEA Accounting for acquisition costs • Compared to others, IEA does this differently Acquisition costs are expensed fully and relatively quickly (almost immediately) IEA does not carry exorbitant values on its Balance Sheet • In accordance with applicable Accounting Standards, IEA c