ERM Power (ASX:EPW) Managing Director & CEO Jon Stretch discusses the company's FY17 results and work with corporate customers here and in the US managing prices and demand efficiently.


Jessica Amir: Hello I’m Jessica Amir for the Finance News Network. Joining me now from ERM Power Limited (ASX:EPW) is Managing Director Jon Stretch. Jon, welcome to the Finance News Network.

Jon Stretch: Thanks Jessica.

Jessica Amir: First up, for those new to the company. Can you give us an introduction?

Jon Stretch: ERM Power is an electricity retailer to commercial and industrial customers in Australia, and in the US. We’ve been in business now for about 10 years. And in that time, we’ve come from nowhere to be number two in commercial industrial in Australia. In fact, one in five businesses, governments and industrials purchase their electricity through us.

Jessica Amir: Now to your FY17 results, you just released them back in August. What were some of the highlights?

Jon Stretch: We had a good year. Our FY17 EBITDAF, that’s earnings before interest tax depreciation and finance charges, which is a standard energy industry measure, we delivered an EBITDAF of $78.4 million. Which is a five per cent increase over our prior financial year.

Jessica Amir: What drove that result?

Jon Stretch: We had a good year in Australia. Our Australian business, we got some load growth but most importantly, we saw an improvement in margin. We were forecasting a margin of about $3.50 a megawatt hour and we were able to deliver $4.11, which was terrific.

Our generation business at Oakey and Neerabup also performed at the top end of expectations. And in the US, we were really able to get great growth of the business. We more than doubled our in-year load to 3.8 terawatt hours. Whilst we didn’t hit the gross margin targets that we had set, our overall result for the business was above expectations.

Jessica Amir: Can you tell us about the dividend?

Jon Stretch: The Board approved a 3.5-cent dividend fully franked for the second half, taking the full year total to seven cents fully franked.

Jessica Amir: Can you tell us about the operating environment that ERM Power works in?

Jon Stretch: Pretty much the front page of every paper on most days, talks about the big issue in our industry at the moment, and that’s high prices. And commercial industrial customers are not immune. You can imagine if you’re a manufacturer or a bank or a miner, where energy is a high part of your input cost, the fact that those prices have doubled over the last couple of years, has a real impact.

So we’re working with our customers to help them better understand and see, what’s driving that price in terms of the forward market, and help them optimise the price that they’re paying today. And at the same time, we work with them on the demand side. How can they use power more efficiently and improve their energy productivity, to better operate their businesses.

One of the interesting things Jessica, ERM Power has by far the highest customer satisfaction ranking in our industry. In fact, we’ve had the highest ranked customer satisfaction for the last six years straight. This year, our score of 94 out of 100 was not only by far and away the highest customer ‘sat’ for the industry, but it broke the record for highest customer satisfaction, in the 21 years that this monitor has run. So that tells you, even when customers are really hurting with their high prices, the insights that we can give them, the help we can give them on managing their energy productivity, has been really well received.

Jessica Amir: Now to your strategy, what’s your objective and how’s that progressing?

Jon Stretch: We think about the business in the following way. Our Australian retail and generation business will continue to perform well now, and into the future. It’s a business that’s running well. We’re investing heavily in the energy solutions component. As I said before, we can really help work with our customers on not just managing their supply, but managing their demand. Managing the way they effectively use their energy. And in the US, we’re taking our proven successful model in Australia and translating that to continued growth.

Jessica Amir: Back home now, what do you think the Government need to do to reduce power prices?

Jon Stretch: The Government’s taken an important step in the last year or so. They’ve said it’s not just about sustainability, it’s also about affordability and security. So that’s the trilemma that they’re trying to solve and are in the process now of bringing in policy, that supports those three objectives. But without doubt, the biggest thing we have been missing is national enduring energy policy. Because of the policy vacuum, we have seen States become misaligned with the Government, we’ve seen Government and Opposition playing oppositional politics. And really, we now need to go forward and focus on that energy trilemma – affordability, reliability and security, as well as sustainability in a national and enduring way.

Jessica Amir: Last question now. What’s your outlook for FY18?

Jon Stretch: In Australia, we’re going to see some modest low growth of market share gain, from 18.5 terawatt hours to 19 terawatt hours, in FY18. Our gross margin will continue to improve. We delivered $4.11 per megawatt hour in Australia in FY17, and in FY18 we’re outlooking $4.40.

In the US, we’re going to continue to see great load growth, 3.8 terawatt hours in FY17 will grow to 7.5 terawatt hours in FY18. Our margin will remain stable in the US at about five dollars a megawatt hour.

And our generation business in Australia, we’re outlooking our Oakey Power Station to deliver between $14 million and $16 million of EBITDAF, in FY18. So overall that will give us double-digit EBITDAF growth.

Jessica Amir: Jon Stretch from ERM Power, thank you so much for your time.

Jon Stretch: Thanks Jess.


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