Western Power Corporation Annual Report 2006 for the period from 1 July 2005 to 31 March 2006 TABLE OF CONTENTS FOREWORD FROM THE ADMINISTRATOR 3 OPERATIONS REVIEW 2006 4 CHAIRMAN’S AND MANAGING DIRECTOR’S REVIEW 4 NETWORKS BUSINESS UNIT 8 GENERATION BUSINESS UNIT 12 RETAIL BUSINESS UNIT 15 REGIONAL BUSINESS UNIT 17 CORPORATE RESULT AREAS 19 GLOSSARY 21 MINISTERIAL DIRECTION 22 FINANCIAL REVIEW 2006 REVIEW OF FINANCIAL PERFORMANCE ADMINISTRATOR’S REPORT INCOME STATEMENT BALANCE SHEET CASH FLOW STATEMENT STATEMENT OF CHANGES IN EQUITY NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS ADMINISTRATOR’S DECLARATION INDEPENDENT AUDIT REPORT DMS#: 3010461v1 2 File#: PM/3/TLS519(37A)V1 FOREWORD FROM THE ADMINISTRATOR The Western Australian Government’s commitment to disaggregate Western Power Corporation as part of its overall electricity reform program took effect when the company ceased operations on 31 March 2006. Four separate, stand-alone businesses were created from the disaggregation process. Section 188 of the Electricity Corporations Act 2005 (the “Act”) provides that, notwithstanding the repeal of the Electricity Corporation Act 1994, Western Power continues in existence for the purpose of designated functions under section 188(1) (a) of the Act. One of these functions is the preparation of an annual report for the Corporation to cover the period from 1 July 2005 to 31 March 2006. In accordance with section 188(2) of the Act, the Minister for Energy appointed me as Administrator to manage the closure of Western Power after its disaggregation on 1 April 2006. The Western Power Corporation Annual Report 2006 covers the period from 1 July 2005 to 31 March 2006 and has been prepared in accordance with section 182 of the Act. Frank Oliver Administrator DMS#: 3010461v1 3 File#: PM/3/TLS519(37A)V1 OPERATIONS REVIEW 2006 CHAIRMAN’S AND MANAGING DIRECTOR’S REVIEW This is Western Power’s final Annual Report, marking the end of an era for the State’s leading energy company, and with it, the start of an exciting new direction for the Western Australian energy industry. We are proud to have supported one of the most significant periods of change faced by the State’s energy sector. Throughout this change, Western Power strived to further enhance the organisation’s capability to meet competitive and dynamic market demands, while continuing to deliver safe, reliable and efficient energy services. From April 2006, Western Power as we knew it was replaced by four independent businesses, supporting the State Government’s program to reform how energy is produced, distributed and sold in Western Australia. Creating four new businesses out of an organisation that was as large and as complex as Western Power was no easy feat. In doing so, the company met the challenge of delivering ‘business as usual’ services, concurrently with: • preparing for the new wholesale energy market, which will start on 1 July 2006, where retailers and generators can buy and sell electricity; • implementing around 100 specific reform projects to ensure a smooth transition to four successor independent businesses; • improving business performance by reviewing processes and developing strategies to increase effectiveness and efficiencies; • restructuring coal supply and gas transportation and supply contracts, to prepare our Generation business for the new market; • establishing arrangements for the construction of a new base load power station in readiness for the 2007/08 summer, and commissioning the new peak load station at Kemerton, south of Perth, for the 2005/06 summer; and, • identifying successor business needs and allocating staff to one of the existing business units or recruiting externally as required, in preparation for the establishment of the four independent businesses. New businesses created following Western Power’s disaggregation • Verve Energy generates electricity at power stations (using a variety of energy sources such as coal, gas and wind in the South West Interconnected System (SWIS), which is bound by Kalbarri, Kalgoorlie and Albany; • Synergy purchases electricity from suppliers and sells this to customers in the SWIS; • The Western Power name was retained by the part of the existing business that manages the distribution system ('the poles and wires'), i.e. transports the electricity from the suppliers to customers in the SWIS; and DMS#: 3010461v1 4 File#: PM/3/TLS519(37A)V1 • Horizon Power is responsible for generating, transporting and retailing electricity to customers outside of the SWIS. Western Power faced a diverse range of operational and market-driven challenges throughout 2005/06: • Following six months of intense negotiations between Western Power, the Australian Services Union and the Communication Electrical and Plumbing Union of Australia, employees voted to endorse a three-year Certified Agreement in February 2006. • The clarity brought about by the State Government decision to create the four new businesses was welcomed in September, which provided a clear mandate for the disaggregation process and ended a prolonged period of uncertainty for Western Power people. • Following the announcement of a record $2.23 billion over four years to maintain and improve the network infrastructure, the business embarked on a capital expenditure program to improve the safety, reliability and quality of power supplies to customers in the South West Interconnected System (SWIS). • This increase in capital expenditure however, and the increased cost of materials and labour expenditure, provided ongoing pressure, exacerbated by the labour and skills shortage in the 2005/06 Western Australian, and global energy industry marketplaces. • Further competition emerged with contestability thresholds enabling some 12,000 electricity customers with a power bill of around $8,000 a year to choose their energy supplier. • Western Power continued to prepare for market reforms to support the new market framework. One of the key changes includes the appointment of an economic regulator, the Economic Regulation Authority (ERA), charged with the responsibility of regulating the services and standards delivered by the networks business. • Similarly, Western Power has worked to support the development of new market rules – this includes a code of conduct to protect small retail customers; the appointment of an Electricity Ombudsman; and the establishment of an Independent Market Operator to ensure there is sufficient capacity in the new wholesale market. Embracing the challenges of 2005/06, Western Power’s performance in the nine months to 31 March 2006 includes: • We again implemented a Summer Ready campaign to improve our ability to respond to the challenges of summer (our generation plant met the 2005/06 summer demand for electricity); and our Peak Saver Demand program attracted greater support this year from some of our large customers to make power available if needed. • In January 2006 cyclones hit the State’s North West, and with bushfires in the SWIS, provided operational challenges to our networks and people. Our crews DMS#: 3010461v1 5 File#: PM/3/TLS519(37A)V1 worked tirelessly to quickly and safely restore power to affected communities across the State. • In November 2005, the signing of a 15-year agreement with Simcoa Operations for the supply of electricity to its silicon smelter in Kemerton, south of Perth, will mean hundreds of millions of dollars to our new Retail business (Synergy) over the life of the agreement (starting in 2008). • Our Retail business was successful in competing for its larger customers, and continued to make a mark in the new gas market by attracting large contestable gas customers, with a market share in the retail sector approaching 20 per cent. • Power Procurement 2 reached a new milestone in November 2005 with the financial sign-off of a high efficiency, 320MW gas-fired, combined-cycle power station, which will be built by NewGen Power and operational from 2008. • Electricity demand increased by about five per cent in the 2005 winter, with a new record set at 2599MW on 17 August 2005. • A mild 2005/06 summer meant the previous summer’s record electricity demand of 3059MW was not exceeded. However, Western Power ensured its preparedness for the peak summer period, achieving a record level of available generation capacity at 3490MW. • Our Generation business successfully negotiated low cost coal and gas contracts, which, combined with the value of its existing assets, puts it in a strong position to be competitive. • By December 2005, the Town Reserves Regularisation Project was underway in eight communities in areas surrounding Kununurra, Wyndham, Fitzroy Crossing and Halls Creek, with further network upgrades to be completed following the wet season in April 2006. Preparing for disaggregation while at the same time preparing for the new energy market created an unusual set of circumstances. We would like to acknowledge the tremendous effort of Western Power people this past year – both management and staff – and thank them for their ongoing commitment during the final stages of the company’s transformation. Without such focus, we would have struggled to complete the enormous number of tasks and projects necessary to achieve a smooth transition to the new businesses. We sincerely thank our colleagues on the Board for their considerable effort this past year. The Board welcomed Mr Peter Mansell as a Non-Executive Director in December 2005. Mr Mansell holds several director positions in both public and private companies. We wish all the Directors of the Board well in their future endeavours, from April 2006. Since Western Power’s formation on 1 January 1995, the company has contributed to the State’s economic growth and regional development, with more than $1.628 billion in cash payments to government. Electricity prices have fallen by an average of nearly 20 per cent in real terms over the past decade, with further assurances by the Government at the start of 2005 that there would be no increase in tariff charges for the next three years. Significant capital expenditure investment in our networks and generating portfolios has improved power supply and reliability.