Infratil Limited · NZX:IFT
Infratil — Investor Presentation (May 2009)
81 slides from Infratil's investor presentation, May 5, 2009
Slide 1: A Substantial Sustainable Energy Business
A Substantial Sustainable Energy Business 5 May 2009
Slide 2: The Team
The Team Darryl Flukes Simon Draper Paul Forsyth Mark Tume Tim Brown Marko Bogoievski Bruce Harker Page 2
Slide 3: Infratil Business Make Up
Infratil Business Make Up Infratil has assets currently valued at approximately $2,400 million (book or market). Approximately 60% ($1,500 milion) is in the energy sector. TrustPower, Infratil Energy Australia, Energy Developments. Page 3
Slide 4: Infratil Australian Energy Assets
Infratil Australian Energy Assets Infratil has direct and indirect investment of approximately $650 million in Australian energy Infratil Energy Australia TrustPower’s Snowtown windfarm Energy Developments 33% Page 4
Slide 5: Infratil's Energy Assets in Australia
Infratil’s Energy Assets in Australia West Kimberley Yulara CNG German Creek Queensland Electricity Moranbah North South Australia Perth Electricity Hunter Energy Snowtown Valley Lonsdale Angaston Victoria Electricity Page 5
Slide 6: Infratil's Energy Assets in Australia
Infratil’s Energy Assets in Australia Page 6
Slide 7: A Substantial Sustainable Energy Business
A Substantial Sustainable Energy Business IEA is a substantial sustainable energy business, which means profits as well as scale. The model is not about just creating a large number of customers to be on-sold Page 7
Slide 8: A Substantial Sustainable Energy Business
A Substantial Sustainable Energy Business YE 31 March 2009 2008 2007 2006 2005 Generation Capacity 99MW 70MW 70MW 40MW - Billed Accounts 386,941 285,997 186,033 76,950 24,000 Revenue Generation $11.0m $12.1m $8.3m - - Revenue Retail $445.0m $230.0m $110.5m $49.8m $12.0m EBITDAF $16.7m $10.6m $13.4m
Slide 9: Infratil's Energy Interests
Infratil’s Energy Interests Bruce Harker
Slide 10: 2009 – A Tough Year for Retail but A Better Forecast 2010
2009 – A Tough Year for Retail but A Better Forecast 2010 • 2009 has been a tough year for East Coast retail – we will explain why • Perth Energy has worked hard on its 2-5 year vision and also benefited from postponing its retail placement of a long position and making a material gain associated wi
Slide 11: The beliefs that underpin what we are building
So What are the ‘beliefs’ that underpin what we are building • That life is good in a retail end game of a small number of players When horizontal disaggregated ownership of generation is preserved When you have upstream integration as a strategy to counter growing vertical integration We aim
Slide 12: NSW Privatisation
NSW Privatisation • Mass Market Retail Industry Consolidation is at Hand Post NSW sale process – the die is cast for two or at most three dominant mass market retail industry players Small players will exit, NSW GOC’s no longer competing out of state = falling churn Two giants (AGL, ORG) and o
Slide 13: Are Customers Worth more to Others Than to Us?
Are Customers Worth more to Others Than to Us? • A cost to serve advantage (marginal cost versus average cost) of $20-30/account means the business (in a no growth world) should be worth more to others than it is to us It isn’t clear that cost to serve is really that much lower (allocation of over
Slide 14: What can we Achieve Organically? (I) SA
What can we Achieve Organically? (I) SA • Outlook for SA low churn REC scheme subsidises wind energy Average spot should fall while peak prices become more volatile on non windy days • We get 50 MW at Angaston back in Dec 2011 We get a step up in revenue when the contract falls away • We can
Slide 15: SA Wind Will Put Downward Pressure on Average Energy Prices
SA Wind Will Put Downward Pressure on Average Energy Prices • Cover the peak risks and retail margins will come Total Wind in SA (MW) 1400 Hallet IV Peak demand in SA = 3500MW Hallet III 1200 Average demand in SA approx 1600MW Mt Millar Hallett Myponga Snowtown Clements Gap Cathedral Rock 1000 Halle
Slide 16: Review of Generation
Review of Generation • We expect a revenue step up at Angaston from Jan 2012 when the PPA with AGL expires • Cap values are firming in NSW and we expect adequate performance from Hunter
Slide 17: We are building options – Lonsdale PS Expansion Project
We are building options – with timing flexibility eg Lonsdale PS Expansion Project
Slide 18: What can we Achieve Organically (I) VIC
What can we Achieve Organically (I) VIC • Victoria is approx 70% dual fuel and 30% electricity only • We currently have about 8% market share • Good electricity margins • Gas competitiveness expected to improve • Gas residual risk expected to moderate • We forecast 30% growth for 2010 • Churn may mo
Slide 19: Regulatory Risks – Price Caps and CPRS
Regulatory Risks – Price Caps and CPRS • States under considerable pressure for increased clarity and increased discipline • Retail sector consolidation makes it hard to not respect the views of dominant retailers ie AGL and ORG • QLD judicial review a strong signal • COAG has given strong direction
Slide 20: Will Vertical Integration Squeeze us Out?
Will Vertical Integration Squeeze us Out? • Government ownership of generation (QLD, Hydro Tas, Non int gen Snowy and rollover of trading rights in NSW) added to some independent generators suggest liquidity collapse is unlikely for Vic, NSW and QLD • Electricity Futures Market liquidity continues
Slide 21: Where will all the QLD CSG Go?
Where will all the QLD CSG Go? • Asia Pacific LNG supply/demand balance may be a little short 2010-2013 but some excess foreseen thereafter • Only BG LNG plant looks likely to reach Final Investment Decision in the near term BG to back up csg reserve risk by selling out of global portfolio • Santo
Slide 22: CSG from Northern NSW
CSG from Northern NSW • 40,000 PJ potential • will look for domestic markets, possibly reserves backup for QLD LNG • QLD – Sydney pipeline expansion looks highly likely
Slide 23: Our Conclusion on East Coast Gas
Our Conclusion on East Coast Gas • A lot of gas is available in Eastern Australia • We see increasing liquidity in 3-5 year gas contract durations Shifts gas short term but allows reserves to come back into to fold for LNG • We are confident that we can build a cost competitive acceptable risk dua
Slide 24: Perth Energy
Perth Energy • PE had a great year, EBITDA over A$12m (cf budget of A$1m) • Mainly due to high spot electricity prices while PE had recently purchased contract length to expand retail sales The option was taken to delay product placement and take front end spot profits • Wholesale length now being
Slide 25: IEA/VEL Time to Go or Get Set for a Growth Spurt?
IEA/VEL Time to Go or Get Set for a Growth Spurt? Answer We are a long way from being done with Value Additive Growth We are confident rising EBITDA will support growing valuation Source: Merrill Lynch
Slide 26: Financial Results and 2008/09 Summary
Financial Results and 2008/09 Summary - Paul Forsyth 1
Slide 27: 2008/09 Full Year result
2008/09 Full Year result.. AUD $000 1H 2009 2H 2009 FY 2008/09 FY 2007/08 Generation (MW) 70 99 99 70 Billable Customers (No.) 285,997 372,346 386,941 285,997 Revenue 233,000 223,000 456,000 238,000 Reported EBITDAF 23,290 (6,580) 16,710 10,603 Net Finance Expense 2,504 1,910 4,414 1,824 Depreciatio
Slide 28: Overview of 2008/09 (1)
Overview of 2008/09..(1) • $6.1mill increase in EBITDAF or 57% compared to 2007/08. • Customer increase of just over 100,000 or 35%. • Commissioning of Hunter Valley Power Station in early September 2008 (29MW). • Finance secured and well progressed on development of 120MW Duel Fuel Kwinana Power St
Slide 29: Overview of 2008/09 (2)
Overview of 2008/09..(2) • An extreme summer proved yet again that wholesale risk management is an essential part of successful retailing. – Our portfolio performed well under extreme scenarios in January/February 2009 • Working capital requirements continue to increase – Barriers to entry have rise
Slide 30: 2008/09 Full Year result. The seasonality explained
2008/09 Full Year result. The seasonality explained…. AUD $000 1H 2009 2H 2009 FY 2008/09 Australia EBITDAF 23,290 (6,580) 16,710 Generation 1,036 3,241 4,277 Retail 12,447 (12,568) (121) Perth 9,807 2,747 12,554 REPORTED EBITDAF 23,290 (6,580) 16,710 • High profiled wholesale prices in March quarte
Slide 31: Seasonal Electricity Prices & Demand
Seasonal Electricity Prices & Demand 350 80 MW Peak Demand Avg Demand 70 300 Avg Spot Price 60 250 50 200 $/MWh 40 150 30 100 20 50 10 0 0 Q208 Q308 Q408 Q109 6
Slide 32: Seasonal Gas Demand
Seasonal Gas Demand 50,000 45,000 40,000 35,000 GJ/day (avg) 30,000 25,000 20,000 15,000 10,000 5,000 - Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 7
Slide 33: How did we go from 2007/08 to 2008/09?
How did we go from 2007/08 to 2008/09 ? 1,821 800 1,300 4,686 1,360 1,950 1,000 1,300 16,710 11,740 400 10,625 4,970 FY 08 WA - High WA – HVPS VIC/SA Bus Develop QLD Retail VIC Gas VIC Electricity Direct Telco start up FY 09 Normalised FY 08/09 Spot Prices increase Retail Retail Hedge gains Connect
Slide 34: 2010 Australian earnings Guidance
2010 Australian earnings Guidance … AUD $ FY 2009/10 Forecast EBITDAF $17.0 mill - $23.0 mill Generation $5.5mill - $6.5mill Retail $9.9 mill - $11.0 mill Perth $1.6 mill - $2.5 mill FORECAST EBITDAF $17.0mill - $23.0mill
Slide 35: Going from 2008/09 to 2009/10
Going from 2008/09 to 2009/10….. 608 184 2,000 20,000 2,800 1,600 8,620 2,400 4,970 1,186 FY 09 WA - Volume Vic/SA - Retail QLD - Retail VIC Gas Retail Direct Connect Telco Other Gas Risk FY 10 and Margin mitigation
Slide 36: Retail Commentary
Retail Commentary - Simon Draper 11
Slide 37: Growth Earnings
Our focus has been adjusted for the times, & our own stage of development … Growth Earnings 12
Slide 38: Expecting significantly improved net margin performance in coming year
Expecting significantly improved net margin performance in coming year Electricity – Vic/SA Queensland Vic Gas 10.00% 10.00% 10.00% 8.00% 8.00% 8.00% 6.00% 6.00% 6.00% 4.00% 4.00% 4.00% 2.00% 2.00% 2.00% 0.00% 0.00% 0.00% -2.00% 08/09 09/10 -2.00% 08/09 09/10 -2.00% 08/09 09/10 -4.00% -4.00% -4.00%
Slide 39: Growth remains, but focused in Vic
Growth remains, but focused in Vic … Billable Customers “Net Pipeline” 20,000 200,000 15,000 Vic elec 150,000 10,000 100,000 5,000 Vic gas 50,000 Vic Elect Vic Gas Qld 0 SA elec 0 SA End Dec End April Qld elec End Dec End April -5,000 14
Slide 40: Churn by market varies greatly
Churn by market varies greatly… & is highly influenced by retailer activity 60% Annualised Churn Estimates – Total Market (small customers) 50% 40% VE Churn pa – Mar 09 Vic 24% 30% SA 13% Qld 37% 20% NSW na 10% 0% All churn figures calculated by annualising moving three month average. VE churn inclu
Slide 41: Even within Victoria, there is a spectrum of customer behaviour
Even within Victoria, there is a spectrum of customer behaviour … Victoria – Total Market Standing offers 38% Market offers 62% Non Switchers Switchers 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Just stayed Don't know Couldn't be Other -10% Lower price Green Other bothered Source: AEMC (W
Slide 42: We do have some attributes of incumbency
We do have some attributes of incumbency … 60% Duration of customers – open accounts 50% 40% 30% Vic SA 20% 10% 0% <12 months 12-24 months 24-36 months 36-48 months >48 months - More than a third of Vic customers have been with us more than 2 years (standard contract length) - Also have to adjust fo
Slide 43: There are real reasons for churn rates to decline over time
There are real reasons for churn rates to decline over time … • Consolidation • Cash constrained new entrants • Regulatory controls on direct sales • Customer fatigue Industry Maturity • Investor fatigue • Emphasis on non-churn customers • More targeted acquisition • Development of brand Company • A
Slide 44: Victoria is starting to show signs of likely consolidation
Victoria is starting to show signs of likely consolidation … 30.00% VE Churn out 08/09 25.00% 20.00% 15.00% Unmet Dual Fuel Retailer 10.00% expectations Elec only retailer 5.00% 0.00% Neighbourhood Powerdirect AGL Simply Energy Country Energy TRU Red Energy AP&G Click Energy Origin Energy Australia
Slide 45: Gas has been a major effort for the group
Gas has been a major effort for the group … but an important product 2.5 2 Million customers 1.5 Electricity 1 Gas 0.5 0 Victoria About 70% of electricity customers in Victoria have gas - single fuel a weak proposition. To survive, retailers like Red Energy have had to enter gas – harder for others.
Slide 46: Trends will vary between markets
Trends will vary between markets … Add Value Grow & New Customer Margins or Exit Innovate X VIC Defer & Defer or Optimise Consolidate X QLD X NSW X SA 21 Competition
Slide 47: Innovation is required in three areas
Innovation is required in three areas • Incremental margin Product • Retention • Shift in acquisition Acquisition • Customer value • Cost Operational • Delivery on customer Performance proposition 22
Slide 48: Latest innovation is in telecommunications
Latest innovation is in telecommunications … • Margin • Retention packages Proposition • Minimal additional cost • Testing with selected customers • As successful, expand Development 23
Slide 49: We already have acquisition methods that do not rely on direct selling
We already have acquisitions methods that do not rely on direct selling … 180000 160000 140000 Energy Connections pa 120000 100000 80000 60000 40000 20000 0 Inbound VE sales Direct Connect (external) Now trialling new forms of lead generation in energy efficiency and moving market 24
Slide 50: We will improve on Cost to Serve
We will improve on Cost to Serve … but need to keep perspective & compare like for like CTS 160 ($pa per account) 140 120 100 c. $3/MWh 80 or 1.5% in price 60 40 20 0 VE Origin (est.) AGL (est.) Regulators (consensus) Depreciation & interest excluded – minimal for VE. Churn/sales costs excluded for
Slide 51: We have operating cost advantages & disadvantages compared to incumbents
We have operating cost advantages & disadvantages compared to incumbents … Speed to reform / lack of “bureaucracy” Limited fixed operating assets (D&A) Unit costs Scale Costs to mature Customer mix 26
Slide 52: That analysis also extends to gross margins
That analysis also extends to gross margins … Far fewer customers on standing offers (price caps) Not supported by legacy wholesale contracts Do not start with a base of “non-switchers” 27
Slide 53: A number of operational programs underway
A number of operational programs underway … • Expected cost control disciplines. Cost Review • Active cost reduction programme. • Particular focus on Direct Connect. • Commenced 23 March 09. • Retail operations supported in-house and externally. Operational Outsourcing • Benefits in unit cost, scope
Slide 54: Staff numbers not growing proportionally to customers
Staff numbers not growing proportionally to customers … & shift to external suppliers 450 400 350 300 250 outsourced 200 inhouse 150 100 50 0 Apr-08 Mar-09 Excludes staff in external sales channels 29
Slide 55: We believe our hard work will be rewarded in new markets
We believe our hard work will be rewarded in new markets when the time is right … • Election over – new and experienced Minister • De-politicisation of electricity prices has commenced. Queensland • ORG and AGK successful in judicial review. • Expect gazetted prices to increase significantly. • Anyt
Slide 56: Wholesale & Generation Commentary
Wholesale & Generation Commentary - Darryl Flukes 31
Slide 57: Electricity Spot Price History
Electricity Spot Price History $160.00 3 days of severe hot Monthly Average Spot Price (Vic) weather $140.00 DROUGHT 12 Month Rolling Average $120.00 $100.00 $/MWh $80.00 $60.00 $40.00 $20.00 $0.00 32
Slide 58: FY 09/10 Vic Baseload Price History
FY 09/10 Vic Baseload Price History 65 60 55 $/MWh 50 45 40 35 33
Slide 59: Vic Gas Supply System
Vic Gas Supply System Injection Point Max Daily Quantity (TJ/day) \ Field Pipeline Capacity (TJ/day) (Producer / Major Offtaker) Maximum Demand 1,300 TJ/day Ex Moomba N 50 320 Jona UGS 320 2,090 Vic Hub 110 “ Seagas POO Oger ee ae eee iy v Casino (TRU) VW" tongiom pos 1,900» IEA\ Minerva eu Longford
Slide 60: Gas Spot Price History
Gas Spot Price History 45 800 $/GJ Beginning of Day (LHS) $/GJ 40 700 Highest Intra-day (RHS) 35 600 30 500 25 400 20 300 15 200 10 5 100 0 0 35
Slide 61: Cost / Risk Balance
Cost / Risk Balance Higher Expected Cost P R O ILLUSTRATIVE ONLY B A B IEA I L I T Y Generic Market Participant Lower Residual Risk GAS WHOLESALE COST 36
Slide 62: WA Average Energy Prices 2008
WA Average Energy Prices 2008 - 09 300.00 250.00 200.00 $/MWh 150.00 100.00 50.00 0.00 Short Term Energy Market Balancing Market 37
Slide 63: Kwinana PS Site
Kwinana PS Site Kwinana Project 38
Slide 64: Agenda
Agenda • Wholesale – Electricity – Gas • Power Generation • Perth Energy
Slide 65: Wholesale Electricity
WHOLESALE ELECTRICITY
Slide 66: Market Design & Structure
Market Design & Structure A quick refresher • Centrally operated gross pool for physical procurement – non-discriminatory • Price risk management through a range of products • Transparent and liquid market with low barrier to entry – ASX futures, direct & brokered OTC contracts [SPOT & FORWARD PRICE
Slide 67: Current Situation
Current Situation • Liquidity remains sound (except SA) – Flurry of activity in FY 10/11 on announcement of CPRS delay – Mutually dependent with market structure • NSW privatisation one to watch • IEA currently well hedged to mid 2010 – Delayed hedging beyond, awaiting CPRS certainty
Slide 68: Wholesale Gas
WHOLESALE GAS
Slide 69: Features of Market Design & Structure
Features of Market Design & Structure • VICTORIA ONLY AT PRESENT – IEA has no presence in other states with different design(s) • Centrally operated net pool – for balancing • Contract carriage transportation arrangement – No need for direct contracts with pipeline owners • Requires physical purchas
Slide 70: Implications of Market Design & Structure
Implications of Market Design & Structure • High barriers to entry • No liquidity in wholesale contracts but signs emerging – Dominated by large, long term physical contracts – Vic spot market to trade imbalances – Futures market to list shortly – New STTM in SA & NSW being developed
Slide 71: IEA's Position
IEA’s Position • Paid our school fees and taken a few knocks [SPOT PRICE CHART] – Rapid learning – Established position, ahead of most other non-incumbents • See comments in Retail section • Currently not competitive with incumbents – Due to • legacy contracts • less flexible contracts (sell back of
Slide 72: Generation
GENERATION
Slide 73: Existing
Existing • 3 diesel-fuelled “peakers” = 100MW – Low capital / high variable cost • Capitalise on / protect from high spot prices (>$300/MWh) – Very quick to develop and construct – Low operational risk • Book value $56m • Revenue from sale of cap products – to third parties and/or “internally” • Rel
Slide 74: Future
Future • Stand alone return unlikely to excite but… • …addresses many of the above issues – Less reliance on OTC/futures hedging • Reduced WC • Any reduction in liquidity – Lower NEMMCO prudentials and related working capital – Absorbs excess gas in low demand periods • Options under review – A numb
Slide 75: Perth Energy
PERTH ENERGY
Slide 76: History and Current Position
History and Current Position • Small initial investment ($6m) for – 51% of business well positioned for rapid growth – Attractive gas generation project • Requiring expertise and capital to develop • Currently good window to grow – Tariffs rising sharply – Alinta floundering – Synergy playing hard w
Slide 77: Kwinana PS Future
Kwinana PS • 120MW • On target for mid 2010 • Capacity to duplicate on same site • Over 90% equity funding from IFT taking to ca 85% shareholding in PE • Substantial IFT / MCO management resource utilised in development and funding arrangement Future • Gas retailing / buyer aggregation – Good lookin
Slide 78: Summary of Key Points
SUMMARY of KEY POINTS
Slide 79: Wholesale
Wholesale • Electricity risk management well under control • Gas challenges being met – risk management well developed through • supply diversification and • development of expertise but • still a work-in-progress and • costly, for the next couple of years • Seasonality of demand (gas and electricit
Slide 80: Generation
Generation • FY 08/09 – Commissioned HEZ – Commenced development and reached financial close on KPS • Existing generation assets delivering solid Return on Capital • Gas generation options being developed to address wholesale market risks – Electricity wholesale liquidity and gas procurement – Maybe
Slide 81: Perth Energy
Perth Energy • Great investment to date • Strong growth potential • Well positioned • Solid returning generation project – Delivery is key to PE’s future