ERM Power — Offering solutions to corporate energy challenges

Founded in 1980 and listed on the ASX in 2010, ERM Power is a leading energy retailer and trader operating in Australia and the US. ERM’s portfolio of activities in Australia includes an electricity supply business (the second largest retailer to commercial and industrial (C&I) customers) and two gas-fired power generation plants (with equity-owned capacity of 497MW, c 1% of the country’s total installed capacity). In addition, ERM Power has been developing an energy solutions business. ‘Energy solutions’ provides value-added services to its C&I supply customers, including solutions to improve energy efficiency, reduce costs and improve customers’ environmental footprint. Beyond Australia, ERM Power entered the US energy retail business in 2015 with the acquisition of Source Power & Gas. In the US, ERM Power aims to replicate its Australian business model, focusing on supply and energy solutions.

Based on our analysis, we believe the current market valuation for ERM Power implies that the market is not only attributing zero value to the highest growth divisions of the group (US retail and energy solutions) but is also assuming that margins in generation and supply will decrease significantly. Consistent delivery on growth potential from US and energy solutions, in addition to the generation of cash flow from supply and power generation, could lead to a re-rating, in our view. We derive a sum-of-the-parts valuation of A$2.6/share (c 45% higher than current share price), even assuming no value for US and Energy solutions. Including a valuation for these two activities would increase value per share to A$2.8/MWh, implying almost 60% potential upside.

We see positive earnings momentum for ERM Power and forecast +14% y-o-y EBITDA in FY18e (this is consistent with “double digit growth” guidance by management). In FY17-23e, we forecast 12% EBITDA CAGR combined with solid cash flow generation (12% per year average FCF yield through to FY23e). As ERM Power is in a net cash position (non-recourse debt in power generation assets is more than offset by the cash in the holding), we see room for balance sheet redeployment, including acquisitions and/or a continuation beyond 2018 of the recently announced A$20m share buyback programme.

The key risk that ERM Power faces is volatility in supply margins: supply activities are low-margin but have the potential to generate significant cash flow and high returns on capital invested. However profits can be volatile and are dependent on several factors, including price volatility, competition, hedging strategy etc. However, ERM Power’s supply margins have shown little variation averaging A$4.4/MWh on an annual basis (ranging between A$4.1 and A$4.7 over the last five years). We forecast 2018 EBITDA of A$89m, based on an Australian supply margin in line with management targets (A$4.7/MWh with upside potential). To illustrate earnings sensitivity to higher/lower margins, we calculate EBITDA of A$76-105m and EPS of A$0.006/0.089 if we apply the medium-term guidance of A$4.0/5.5 (upgraded twice over the last 12 months, driven by successful commercial and trading activity).

ERM Power is an energy retailer and trader operating in the US and Australia. ERM’s strategy is focused on delivering consistent returns from its core Australian electricity supply and production activities, while at the same time expanding in new growth markets and areas: the US and energy solutions. While Australian supply and power production currently generate all the cash flow of the group, our forecasts indicate that most of the profit growth will come from US retail (a business which ERM Power entered in 2015) and energy solutions, the most innovative product offering of the group.

Founded in 1980 and listed on ASX in 2010, ERM Power is a leading energy retailer and trader operating in Australia and the US. Its portfolio of activities in Australia includes an electricity supply business (the second largest retailer to commercial and industrial customers) and two gas-fired power generation plants (with equity-owned capacity of 497MW, equivalent to c 1% of the country’s total installed capacity). In addition, ERM Power has been developing an energy solutions business which it strengthened with two acquisitions in 2016. With energy solutions, ERM Power provides value-added services to its C&I supply customers, including solutions to improve their energy efficiency, reduce costs and improve their environmental footprint. Beyond Australia, ERM Power entered the US energy retail business in 2015 with the acquisition of Source Power & Gas. In the US, ERM Power aims to replicate its Australian retail business model. Most of the EBITDA growth we expect for the group is driven by the US business (although this division drives significant growth in D&A and financial costs as well). We expect strong growth in energy solutions although we view our estimates for this business as conservative.

ERM Power’s vision is to be the preferred energy supplier and solutions provider to business customers in Australia and the US. The company’s strategy is focused on the expansion of its core retail supply business, by increasingly integrating the offer with technologically advanced energy solutions. The power generation activities are managed in an integrated way with the core energy supply business. ERM Power aims to replicate its successful Australian energy supply model in target markets in the US and management expects this to be a key area of growth. Over the next few years management expects stable contribution from power generation, profitable volume growth in Australian retail and stronger growth in US retail and energy solutions.

We view ERM Power’s business model as built on the following competitive advantages:

ERM Power’s supply and power production activities generate all the profits and cash flow at present. However, we believe the highest growth potential for ERM Power is from its recently developed divisions, energy solutions and US retail. The growth in the US should be driven by volumes and margin expansion as ERM Power aims to replicate its Australian business model. The energy solutions business is expected to benefit from strong customer demand for products aimed at improving energy efficiency, cutting costs and improving carbon footprint. We estimate that energy solutions has the potential to convert a A$3m negative contribution to net income in FY18E into a A$3m positive contribution by FY23e, by assuming growth in revenue will continue and profit margins are benchmarked to competitors (and we view our estimate as conservative). Similarly, we see potential for the US business to convert a loss of A$19m in FY18e into a profit of A$7m in FY23e. This large profit opportunity comes with significant uncertainties, but as we see limited downside (in particular the US business is funded independently), risks are skewed to the upside, in our view.

ERM Power’s core business is the supply of electricity to commercial and industrial customers in Australia. Supply activities are the final link in the electricity value chain, when electricity is commercialised to final customers. We estimate that in FY18, this activity will generate around two thirds of the group’s EBITDA.

The C&I segment of the electricity retail market is very competitive. The four largest suppliers control almost 70% of the market. ERM Power is the second largest supplier with a market share of 22% behind Origin Energy with a market share of 24% (Exhibit 3).

Australia is divided into various electricity markets. ERM Power’s supply business is mainly concentrated on Queensland, Victoria and New South Wales. The largest and most important one is the National Electricity Market (NEM), which covers southern and eastern Australia and represents slightly less than 80% of Australia's power generation. The NEM includes five different regional markets (Queensland, Victoria, New South Wales, South Australia and Tasmania) which are all interconnected. The Western Australia market and the Northern Territory are not interconnected with the NEM.

As ERM Power’s market share in the C&I segment is already high and Australian electricity consumption is not expected to grow very significantly over the next few years, margins rather than volume growth will be the key driver of ERM Power’s supply business profitability, in our view.

In general, supply activities are low-margin activities that have the potential to generate significant cash flow and high returns on capital invested. However, the key risk is the potential volatility in unit margins, which can drive material and rapid changes in the profitability of the group as a result of changes in trading conditions. Most suppliers, including ERM Power, lock in margins in advance by forward selling electricity to customers (usually with two/three-year contracts) and by buying electricity on wholesale markets on a spot and forward basis or through long-term contracts (for example Vales Point contract). In addition, ERM Power engages in trading activity, leveraging its large portfolio of spot and forward contracts.

We believe the intensity of the competition, the scale and efficiency of the operations, the portfolio of trading positions, the customer satisfaction and the ability to provide additional integrated value-added services are all significant drivers of profitability. Historically, ERM Power’s supply margins have varied little, averaging A$4.4/MWh on an annual basis over the last five years (ranging between A$4.11 and A$4.72), hence ERM Power has built a track-record of stability for a business which is potentially very volatile. More recently, the profitability of ERM Power’s supply business has been experiencing strong positive momentum which led the management to upgrade the medium-term profit guidance twice over the last 12-months. This improvement has been driven by a variety of factors: a normalisation in competitive intensity following a period of very strong pressure, successful portfolio optimisation, favourable offtake agreements (the Vales Point contract in particular) and commercial success with innovative products.

In our forecasts we have assumed ERM Power achieves a gross margin of A$4.7/MWh in FY18-20 which is slightly higher the last five-year historical average of A$4.4/MWh. Our FY18-20 assumptions are consistent with management’s expectations of “A$4.7/MWh with upside potential” in FY18 (upgraded at H118 results from A$4.4/MWh) and a range between A$4.0/MWh to A$5.5/MWh in FY18-20. Overall, we expect the supply business to remain the strongest cash flow engine of the group. In the sensitivity section we provide a scenario analysis with a bull/bear case (higher/lower supply margins).

Although power generation is not the core business of ERM Power, its two gas-fired peaker power plants Neerabup (50% equity share) and Oakey (100%-owned) generate a significant portion of the profits for the group (c 40% of FY18e EBITDA). We believe that these two plants (open-cycle gas turbine plants – OCGT – with total installed capacity of 662MW o/w ERM Power has 497MW equity ownership) are valuable assets with strong competitive positioning. We view gas plants as benefitting from increasing volatility in prices as a result of growing renewable installed capacity (wind and solar are intermittent sources of generation) and from reducing production from polluting coal plants (regulation and aging plants are likely to result in significant closures). As shown in Exhibit 9, on our estimates, by FY35 c 70% of Australia’s current coal-fired power plant capacity will have reached 50 years of age and will likely be closed. In our view, the level of investments needed to continue to generate, combined with evolving stricter environmental regulations, are unlikely to allow the operation of the plants beyond this limit.

Coal power plants closures and growth in the installed capacity of renewable generation are likely to profoundly change the electricity generation mix in Australia and continue to provide profit opportunities for lower-emissions flexible gas plants, which, together with batteries, are able to quickly respond to peaks in demand. Our forecasts assume moderate growth in spreads and load factors for Oakey power plant, which is the most exposed to market dynamics.

Exhibit 13 sets out the very different characteristics of the two plants. Oakey power plant is 100% merchant, hence it is fully exposed to fluctuations in market prices/spreads while the Neerabup’s earnings profile is significantly more stable as a result of a 20-year power purchasing agreement (expiring in 2029) from which it generates almost all its current revenues. In terms of geographic location, Oakey participates in Australia’s largest electricity markets (National Electricity Market in Eastern/South Australia) while the Neerabup plant operates in Western Australia.

The energy market in Australia (and globally) is undergoing significant transformation as a result of the energy transition, the emergence of new technology and the customers' demand for higher energy efficiency and sustainable solutions. Sophisticated C&I customers, who represent the core business of ERM Power, increasingly require a comprehensive energy service in addition to the delivery of the physical commodity, with the objective of reducing costs and consumption and improving their environmental footprint.

All of these trends are supported by more stringent government regulations (eg energy efficiency, renewables growth and carbon reduction). The Australian government set out a target of improving energy productivity by 40% in 2030 vs 2015 and identified several sectors where efficiencies can be achieved (Exhibits 14 and 15).

Furthermore, demand for energy efficiency solutions is likely to be supported by the expected increase in electricity costs for commercial and industrial customers (Exhibit 16). Finally, we expect corporates to target a reduction in carbon emissions to reduce costs and achieve sustainability targets (see renewable growth target in Exhibit 17). While a renewable target is currently set for 2020 (with limited growth thereafter), the likely introduction of the National Energy Guarantee legislation (which aims at improving security of supply and reducing emissions) should result in continuous growth beyond 2020. While the framework is currently under discussion, more details about the regulatory design should be available at the end of April 2018.

This disruption to the traditional energy sector provides both risks and opportunities for incumbents. Currently, the energy services industry is fragmented and dynamic because of new technology players looking to enter the markets. At the moment ERM Power faces significant competition: from local utility players such as Origin Energy and Energy Australia; from global players such as ENGIE, Vinci and Veolia; from renewable plant providers; and from energy brokers. In this highly competitive environment, we see two competitive advantages for ERM Power: 1) it already has a client base to whom it can cross-sell its energy solutions (although its offer is not limited to these clients); 2) it provides a full comprehensive service (from auditing of energy costs/consumption to installation of solar PV plants, LEDs etc), rather than just focusing on one category of products. More in detail, ERM’s product offering includes advisory services, development of data analytics and energy management software, energy audits, end-to-end project management (including LEDs and solar PV plant). We set out in Exhibit 18 the key products/services which ERM Power offers to meet the new energy customers’ needs and the expected financial impact of the business growth.

From a financial point of view, the activity of this division has so far been a drag on profit and cash flow and management expects this to continue in 2018. The negative EBITDA contribution has a significant effect on the bottom line: company guidance of FY18e EBITDA of -A$4.0-4.5m implies a negative effect on net income (on a post-tax basis) equivalent to 28% of our FY18e forecast. In addition, we estimate a negative cash flow for the division of -A$7.3m, equivalent to 27% of FY18e free cash flow and 2% of ERM’s market cap. Beyond FY18, we have conservatively assumed EBITDA breakeven in FY20 and a long-term EBIT margin of 5%, based on benchmarking with competitors. The company targets positive contribution to group net income from 2020. The business is currently generating a loss as it is at an early stage of development and sub-scale, but over time significant profit growth is likely to be driven by economies of scale as revenue continues to expand. The analysis of competitors’ margins in energy services activities shows a significant profit opportunity for ERM Power in this business:

As a sensitivity, by applying a 3-7% EBIT margin to our revenue forecast for FY22 (A$79m), we estimate that the division could contribute 4-10% (7% in our base case of 5% EBIT margin) to ERM Power’s net income, on a post-tax basis (vs negative contribution of -28% in FY18e). The reversal of the loss into a medium-term profit is a key driver of the earnings growth we forecast for ERM Power, although clearly this is subject to significant risks and uncertainties.

ERM Power entered the US market in 2015 with the acquisition of Source Power & Gas aiming to replicate its Australian business model, focusing on electricity supply activities to C&I customers and challenging well-established players such Direct Energy (Centrica) and ENGIE. Results have been mixed in our view, with significant growth in volumes sales (+260% in FY18E vs FY16) and strong customer satisfaction (third out of 40 brokers according to Energy Research Consulting Group survey, December 2017), but with profit margins below expectations and the business not yet breaking even.

We expect volume growth to continue in the US and see potential for margins expansion, as ERM Power optimises its trading portfolio, improves its processes (including better pricing and risk management which have so far been responsible for lower margins than initially expected) and achieves higher economies of scale (which should reduce opex/unit by >40%). On our estimates, this should drive the reversal of the FY17-18 loss into a positive contribution to group net income from FY20e. The US market, like the Australian one, is very competitive and this results in continuous pressure on margins. However, in our view the competitive advantages of ERM Power in the US are its strong client ranking and the fact that ERM Power is dedicated to supply activities only as opposed to most competitors which are integrated energy players. This strong business focus can result in better customer service and product offering. In addition, the ability to offer energy solutions to US clients as well in the future should strongly support the value proposition of ERM Power and result in additional business growth, in our view.

We have assumed that volumes increase by 70% in FY18e vs FY17e, in line with management guidance and consistent with H1 results. Beyond FY18e we have assumed around 1TWh/year growth, well below the historical growth rates to take into account possible risks following H118 indication that volume growth in FY18 has been slower than previously expected. In terms of margin we have assumed a gross margin of A$4.5/MWh in FY18e (10% lower than FY17 and in line with management guidance) and growth thereafter to A$7/MWh in FY20E (guidance is A$6.5/7.5/MWh medium term). The growth in margins reflect the company indication that in the PJM region (eastern US), where over 50% of the new business has been written, the margin is low at the front-end and higher at the back-end of the contract due to backwardation. Overall, while we forecast very strong growth, our estimates imply only 2% EBIT margin in FY20e (vs competitor Direct Energy’s 3% EBIT margin in North America business in 2016). We show in Exhibit 21 the economics of the business: FY18e gross margin in the US does not cover costs and based on our estimates should result in a A$14m negative impact on net income. Medium-term recovery in margins and volume growth have the potential to deliver a A$10.5m positive contribution to net income (assuming 15TWh volumes) – we conservatively assume A$7m, based on lower volume growth.

Our forecasts also include a A$3.8m negative one-off effect in FY18e (termination fee for credit sleeve agreement) and a significant increase in D&A over the next years (reflecting the increase in number of customers – ERM Power pays A$2.6/MWh broker commissions for customer acquisitions – this is accounted as capex and completely expensed in the P&L as D&A). We have also assumed the US corporate tax rate reduces to 21% from 2018.

We see growth potential for ERM Power in the US, although this comes with significant uncertainties. However, were our forecasts not to prove correct, we note that downside risks for ERM Power are limited as the US division is independently financed (it has a credit sleeve agreement with Uniper according to which it pays A$1.5/MWh in exchange for working capital and collateral). In addition, the business is already contributing negatively to group’s profits (FY18e PBT for this business is -A$19m vs total group PBT, including US, of +A$10m on our forecasts). Overall risks for this business are skewed to the upside, in our view.

The appointment of ERM Power's current top management is relatively recent, with the team taking over in 2015. The team has substantial experience in energy, telco, IT and industrial sectors and, since the team’s appointment, ERM Power has been accelerating the development of the energy solutions business, a strategy which we believe improves the competitive positioning of the group. As well as developing new advanced energy services products for its customers (energy solutions), management has focused on improving the profitability of the core supply business.

Jon Stretch, managing director and CEO: joined ERM Power in 2015. Mr Stretch has significant international experience as chief executive of IT, telco and industrial corporates. Before joining ERM Power, he was EVP EMEA of Landys+Gyr, a leading provider of smart metering and energy management solutions. Prior to Landys+Gyr, he was CEO of AAPT, an Australian-based telecommunications company. Mr Stretch started his career at IBM and AT&T.

James Spence, CFO: joined ERM power in 2015 and has long experience in energy retail. Between 2012 and 2015 he served as CFO of the retail and power generation company Energy Australia. Prior to that, he covered several senior financial management positions for Centrica in the UK and North America, including CFO of Direct Energy, Centrica's North America business.

Tony Bellas, non-executive chairman: was appointed in 2011, bringing to ERM Power his long experience in the energy sector, both in managerial and policy roles. Before joining ERM Power, Mr Bellas served as CEO of Seymour Group (one of Queensland’s largest private investment and development companies), CEO of Ergon Energy (energy distribution and retailing) and CEO of CS Energy (power generation). Mr Bellas also held public service roles including the appointment as chair of the Independent Review Panel by the Queensland government to review the government-owned electricity network businesses in 2012.

Based on our analysis, we believe the current market valuation for ERM Power implies that the market not only is attributing zero value to the highest growth divisions of the group (US retail and energy solutions) but is also not ascribing any value to the company for being able to sustain current margins in generation and supply. Consistent delivery on growth potential from US and Energy Solutions and generation of cash flow from supply and power generation could therefore lead to a rerating, in our view.

We value ERM Power using a sum-of-the-parts approach, which we believe allows us to capture the different risk profile and asset life of the various activities. We value the various divisions mostly with DCF valuations and we back-test this approach by comparing the implied valuation multiples with comparable companies for each activity. We see our valuation as conservative as we currently do not include any value in our SOTP for energy solutions and the US business.

Our sum-of-the-parts is A$2.6/share and implies c 45% potential upside to the current share price. Our methodology and key valuation assumptions are the following:

Our sum-of-the-parts valuation is mostly based on DCF valuations for each business. For businesses like ERM Power we would usually sense check against EV/EBITDA multiples. However, EV/EBITDA valuation methodology has specific drawbacks for the company. The problem of focusing on EV/EBITDA is mostly the result of the financing structure of ERM Power. In the US, the company finances itself with a credit sleeving agreement whose costs are booked in group financial expenses (hence below EBITDA) while no debt is included in ERM Power’s group net debt. Similarly, in Australia, ERM Power incurs in financial costs related to collateral (we assumed A$5m per year on our estimates, mostly related to Liberty International Underwriters Singapore Surety guarantee facility) and again the corresponding liability is not included in group net debt. Hence ERM Power’s EV/EBITDA ratios tend to be understated and as a result we prefer to use a DCF valuation rather than a multiple-based approach for our analysis.

As a back-test to our SOTP valuation, we note the following:

In Exhibit 23 we show that ERM Power’s valuation multiples are at a large discount to Australian small caps. In addition, ERM Power’s EV/EBITDA is at a discount to international supply companies although on P/E multiples (adjusted for losses in the US and in energy solutions) it is more in line with peers.

In Exhibit 24 we show a sensitivity to higher/lower WACC (+3%/-3% vs the c 11% average WACC we have used in our base case) and to higher/lower terminal growth rate (0%/2% vs the 1% we have used). The combination of the two sensitivities provides a valuation range of A$2.1-A$3.4/share.

Overall, we believe the current market valuation for ERM Power implies that the market not only is attributing zero value to the divisions with the highest growth potential of the group (US retail and energy solutions), but is neither giving any credit to the company for being able to sustain current margins in generation and supply. Hence, consistent delivery on growth potential from the US and energy solutions and generation of cash flow from supply and power generation could lead to a re-rating, in our view.

As a supply and generation company, ERM Power’s margins can be more volatile than other utility companies, especially highly capital-intensive ones such as regulated network operators. We believe that the key risk that ERM Power faces is from volatility in supply margins: the supply business is an asset-light activity whose profits can be very volatile depending on several factors, including price volatility, weather etc. Historically, ERM Power’s supply margins have shown little variation, averaging A$4.4/MWh on an annual basis (ranging between A$4.11 and A$4.72 over the last five years). ERM Power’s guidance for 2018 is A$4.7/MWh “with upside potential” and in the period 2018-20 management expects this margin to range between A$4.0/MWh to A$5.5/MWh (upgraded twice over the last 12 months from A$2.5-4.0/MWh).

The margin achieved in the Australian supply business is the key driver of ERM Power’s profitability, in our view. We estimate that for each +/-10% change in the supply margin, the impact on EBITDA would be +10%/-10% (based on 2018e EBITDA). Our published forecast for 2018 EBITDA is A$89m, based on a gross margin of A$4.7/MWh, in line with management’s target. To illustrate the profit sensitivity to higher/lower margins we calculate the potential impact on estimates expressed in terms of 2018 figures. In Exhibit 25 below we provide the profit and valuation sensitivity to various scenarios of profitability for the supply business:

Based on the medium-term guidance range provided by management (A$4-5.5/MWh over the period 2018-20), we calculate EBITDA of A$76-105m and EPS of A$0.006/A$0.089 (based on 2018e figures).

EBITDA growth: We forecast 14% EBITDA growth y-o-y in FY18e (management guidance is “double digit EBITDA growth”) and 12% FY17-23e EBITDA CAGR (vs 9% FY11-17 EBITDA CAGR).

Financial expenses and D&A: We forecast significant growth in financial expenses and D&A mainly as a result of the growth in the US business. In the US, ERM Power has a ‘credit sleeve’ agreement (provision of working capital and collateral) which links financial expenses to growth in volumes (A$1.5/MWh). In addition, ERM Power pays broker commissions of A$2.5/MWh for customer acquisition, which is treated as capex and fully expensed as D&A in the P&L.

Cash flow: We forecast average free cash flow yield (post all capex) of 12%/year through FY23E.

Dividend: We forecast 9% DPS CAGR through FY23e based on a long-term payout ratio of 60-70%, which we believe is an appropriate level and consistent with international utilities.

Balance sheet: The group is significantly cash positive (A$316m at 31 December 2017, of which A$165m is restricted cash mostly due to trading activity, including broker margin accounts), while there is non-recourse debt in the Australian generation business (A$187m at 31 December 2017). As the group has a very solid and conservative financial structure, we believe it might consider using the financial flexibility for additional shareholders’ remuneration (eg a continuation beyond FY18 of the recently announced A$20m share buyback programme) and/or acquisitions in the future (ERM Power announced A$40m budget for growth projects), especially if our forecasts of an increase in profits and cash flow generation prove correct. We do not expect ERM to acquire power generation assets, as these activities are not considered by management to be the core business of the company and we expect ERM to focus on its core supply business and energy services activities both in Australia and the US.

H118 results: Results showed a significant increase in all profit metrics with underlying EBITDA of A$51.1m vs A$11.1m in H117. This was mainly explained by the fact that FY17 results were strongly skewed towards the second half of the year as a result of trading activity. Most importantly, the company upgraded its medium-term outlook for the Australian supply business (to A$4.0-5.5/MWh from A$3.5-5.0/MWh), due to a combination of successful commercial and trading activity. In addition, ERM Power announced a A$20m share buyback and a A$40m budget for growth projects, which in our view shows the increasing ability to redeploy the balance sheet both for growth and for additional shareholder returns. On the negative side, the US business experienced lower volumes and margins than expected which led to guidance being adjusted down for the business for FY18 (6.5TWh volumes vs earlier expectation of 7.5TWh and A$4.5/MWh gross margin from A$5.00/MWh previously).

ERM Power also announced it expects to deliver approximately A$35-$45m NPAT in FY19/20 (weighted to FY20) from its large-scale green certificates (LGC) strategy (our forecasts include a profit of A$40m after-tax). Under the LGC scheme ERM Power decided to pay the shortfall charge of A$65 per certificate in FY17 and take up the three-year optionality period available to potentially acquire certificates through either the market or contracts with new renewable generators. ERM Power has now communicated that it expects to achieve a significant profit from this strategy. Although we do not expect further profits from its LGC strategy, in our view this profit is a good example of the ability by ERM Power to extract value from trading activities, leveraging on its deep market knowledge, established commercial presence and large trading portfolio.

Our divisional forecasts are shown in the table below.