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. DMS#: 3010461v1 6 File#: PM/3/TLS519(37A)V1 Western Power has also played a leading role in establishing the State’s renewable energy industry, since its construction of Western Australia’s first commercial wind farm in Esperance in 1987.

Added to this, numerous sponsorships and partnerships have helped enrich communities’ sporting, arts and educational pursuits throughout the State. Western Power’s ongoing commitment to environmental excellence has built trust with local communities and achieved national acclaim for programs such as the award-winning Hotham Williams Western Power Greening Challenge, which saw more than 4.2 million trees planted across the State’s salt-affected farms.

This all provides a strong foundation for the four new businesses created from Western Power. The reform process has led to greater efficiencies and enhanced customer focus. Ongoing challenges lie ahead, but the four new entities are well placed to be competitive and commercially successful in Western Australia’s exciting new energy market.

Neil Hamilton Tony Iannello Chairman Managing Director

31 March 2006

DMS#: 3010461v1 7 File#: PM/3/TLS519(37A)V1

NETWORKS BUSINESS UNIT

ACHIEVEMENTS

The Networks Business Unit continued its long-term program to meet changing customer expectations, increase safety standards and manage a continually growing network in a new regulatory framework.

Network and customer service improvements Phase 2 of the $48 million four-year Rural Power Improvement Program (RPIP) started in 2005/06, upgrading specific rural lines in Dongara, Kalbarri, Merredin, Dandaragan, Watheroo, Narrogin and Collie. To date, $16 million has been invested (in Phase 1), focusing on low-cost, high-impact equipment upgrades to improve fault detection and help locate and isolate problem areas.

In addition, focus on country areas has been enhanced, with the appointment of Goldfields and Great Southern country service coordinators, expanding on the company’s existing Mid West and South West local presence.

Further network improvements are being made with the State Underground Power Program, and ongoing capital works in Western Power’s transmission and distribution networks – which is expected, along with increasing operational expenditure, to deliver a 25 per cent improvement in the reliability of the South West Interconnected System within the next four years.

Bushfire mitigation and vegetation management Western Power partnered with the Fire and Emergency Services Authority (FESA) of WA and the Department of Conservation and Land Management (CALM) in a state wide Bushfire Threat Analysis project, to improve its bushfire area risk assessment.

The company’s enhanced vegetation management program, which requires annual vegetation inspection and cutting in high-risk bushfire areas, is further assisting network reliability.

Award-winning environmental program The National Banksia Award was presented to Western Power in June 2005, recognising the company’s environmental leadership in the rural sector.

Western Power’s Environmentally Sensitive Areas (ESA) program, which started in 1996, recognises that areas containing rare plants, ecosystems and organic farms need special consideration. To date, there are 230 designated ESAs, including 68 organic farms scattered from Kalbarri to Hopetoun.

Improved crisis communication Western Power continued to enhance its Crisis Management and Recovery Systems in 2005/06, holding mock-crisis exercises pre-winter and summer to further enhance the preparedness of its people and systems.

DMS#: 3010461v1 8 File#: PM/3/TLS519(37A)V1

One Step Ahead program The Networks Business Unit launched a comprehensive change management program in April 2005, called One Step Ahead, to greatly enhance the business’ customer experience around safety, service, reliability and value for money.

To date, under the program, a new organisation structure; preparation for the new regulatory environment; and Key Performance Indicators (KPIs) have been implemented, assisting in performance driven decision-making and improved communication with the business’ key stakeholders.

In 2005/06 the Networks Business Unit’s handling of customer complaints and queries was significantly improved helping further the business’ objective of becoming a highly efficient operator in the new Western Australian electricity market.

The new Western Power Following the disaggregation of Western Power on 31 March 2006, the company’s Networks Business Unit retains the Western Power brand name, but the operation of the new business changes.

The new Western Power will operate as a business that maintains the ongoing delivery of power in a transparent and expert manner.

Western Power’s new logo tagline, 'networks today and tomorrow', reflects the business’ dual focus - operating and maintaining a safe, reliable, and efficient electricity network today while planning for the needs of tomorrow.

BENCHMARKS

Reliability performance The provision of a safe, reliable and efficient energy service with first-rate customer service is at the focus of everything Western Power does. A combination of favourable weather and the company’s targeted capital works program produced generally better than target performance figures across the South West Interconnected System.

DMS#: 3010461v1 9 File#: PM/3/TLS519(37A)V1

PERFORMANCE INDICATORS 2005/06 2005/06 2004/05 Actual MED SDP Actual Exclusion Target 2 Target 1 *Reliability and quality **CBD area SAIDI – Outage duration (minutes) 7 22 48.1 10 (Total duration of interruptions/ customers per year) CAIDI – average duration of incident (Total minutes/ average number of customers) 188 68 114.1 68 SAIFI – average number of incidents (Total customers interrupted/ average number of 0.04 0.33 0.421 0.14 customers) ***Urban area SAIDI – Outage duration (minutes) 233 252 227.8 244 (Total duration of interruptions/ customers per year) CAIDI – average duration of incident (Total minutes / average number of customers) 83 72 71.4 82 SAIFI – average number of incidents (Total customers interrupted / average number of 2.81 3.50 3.2 2.97 customers) ****Rural and country area SAIDI – Outage duration (minutes) 444 531 430.6 520 (Total duration of interruptions/ customers per year) CAIDI – average duration of incident (Total minutes / average number of customers) 113 123 109.3 132 SAIFI – average number of incidents (Total customers interrupted / average number of 3.92 4.30 3.9 3.93 customers) SWIS total SAIDI – Outage duration (minutes) 261 289 269 281 (Total duration of interruptions/customers per year) CAIDI – average duration of incident (Total minutes / average number of customers) 89 81 80.6 91 SAIFI – average number of incidents (Total customers interrupted / average number of 2.95 3.64 3.34 3.09 customers) 1 Major Event Days (MED) Exclusion Target figures. * The Reliability and Quality figures exclude Major Event Days – as per SCNRRR Guidelines and IEEE Std 1366 (Guide for Electric Power Distribution Reliability Indices). 2 Target figures established in the Western Power Corporation Strategic Development Plan 2005/06.

** CBD Area is the area supplied by the Hay Street and Milligan Street zone substations. *** Urban Area are those components of the SWIS network that supply the following areas: - the Perth Metropolitan area but excluding the CBD Area - the local government district of Mandurah - the local government district of Murray - the town sites of Albany, Bunbury, Geraldton and Kalgoorlie.

****Rural and Country Area is the SWIS network other than the CBD and Urban areas.

DMS#: 3010461v1 10 File#: PM/3/TLS519(37A)V1

Total duration of interruptions for one year SAIDI = Average number of customers per year

Total duration of interruptions for one year CAIDI = Total customers interrupted for one year

Total customers interrupted for one year SAIFI = Average number of customers per year

Customer Service Charter The Customer Service Charter was introduced in 1998 to demonstrate Western Power’s public commitment to the service standards the company offers customers. The Networks Business Unit developed customer service measures based on advice from customers about the service standards of greatest importance to them.

2005/06 2004/05 2003/04 Customer Service Charter Actual Target Actual Actual Restoration of unplanned outages within four hours – metro 93.4 85.0 93.0 96.0 and major regional (%). Restoration of unplanned outages within four hours – rural and 92.0 85.0 90.8 93.0 remote (%). Providing at least two working days’ notice of scheduled power 100.0 100.0 100.0 100.0 interruptions, including metro, regional, rural and remote (%). Completing new connections within one * working day for 87.6 95.0 93.9 93.0 metro and major regional, and within five days for rural and remote (%). Replacing faulty streetlights within five working days - metro 94.3 100.0 95.2 98.0 and major regional (%). Replacing faulty streetlights within nine working days – rural 86.8 100.0 94.1 96.0 and remote areas (%).

* Since November 2005, new connections have a one-working-day completion target timeframe; previous to this the target was three working days.

Environmental licences A summary of licences held by the Networks Business Unit’s facilities is provided below.

Environmental licence Total Western Australia Department of Environmental Protection Licence 1 Department of Consumer and Employment Protection Dangerous Goods Storage Licence 3 Water and Rivers Commission Underground Water Pollution Control Area Permit 1

DMS#: 3010461v1 11 File#: PM/3/TLS519(37A)V1 GENERATION BUSINESS UNIT

ACHIEVEMENTS

Increased security of supply The Generation Business Unit’s strategies for improved fuel and plant flexibility set the foundation to meet the challenge of rising electricity demand in Western Australia.

These strategies included commissioning a 260MW peaking power station at Kemerton and reinstating oil-firing capability at Kwinana Power Station. Both projects enhance the security of electricity supplies ahead of additional capacity in the Dampier-Bunbury Natural Gas pipeline, which is to be available from late 2006.

Coal supply contracts and improved plant The business’ coal contracts were renegotiated in 2005/06. This will mean Wesfarmers Premier Coal is to be the sole coal supplier to the new Verve Energy business from 2010. Griffin Energy will continue to supply coal under its contract until 2010.

The new coal supply arrangements complete the renegotiation of Western Power’s major fuel inputs ahead of the start of the competitive electricity market (from 1 July 2006), and underpin coal mining at Collie and the long-term future of Verve Energy’s coal-fired generating assets.

During 2006 plant improvement occured at Muja Power Station, with the uprating of the Muja’s Stage D plant to add 54MW of generating capacity during 2006/07. The business’ fuel strategies will be further complemented with an extra 10MW at Collie Power Station, along with conversion of the ageing control and instrumentation systems within Muja Power Station Stages C/D.

Gas arrangements Western Power’s Generation Business also concluded a gas storage agreement with Australian Pipeline Trust, which will expand its Mondarra facility near Dongara. This arrangement, coupled with the Parmelia gas pipeline, will help the new Verve Energy manage its portfolio of fuel and generation requirements.

Renewable energy projects Good progress is being made in the development of wind farm projects at Grasmere (Albany) and Kalbarri, both presently in the feasibility studies phase. Together with the Coral Bay wind farm project (underway), if the three proposals proceed, this will add 16.4MW to the business’ renewable energy portfolio.

Preparation for the new energy market Alongside business-as-usual demands, considerable effort and focus was committed in preparation for the new wholesale energy market to ensure that post-March 2006, the new Verve Energy consolidates its position as a leading participant in Western Australia.

DMS#: 3010461v1 12 File#: PM/3/TLS519(37A)V1 BENCHMARKS

Working for a better environment Western Power’s customers expect a quality, reliable, electricity supply that is delivered in a manner that respects the environment. The company recognises that innovative programs and on-going management procedures must protect the rights of future generations to a sustainable and diverse natural environment.

Performance indicators 2005/06 2005/06 2004/05 2003/04 Actual Target Actual Actual Greenhouse Response Carbon Intensity (kgCO2e/kWh electricity sold) 0.94 0.86 0.90 0.91

Renewable Energy REC obligation compliance (% of obligations 144% 133% 152% - acquired) (based on calendar years)

Environmental licence A summary of licences held by the Generation Business Unit’s facilities is provided below.

Environmental licence Total Western Australia Department of Environmental Protection Licence 13 Department of Industry and Resources Licence to Store Dangerous Goods 9 Water and Rivers Commission Groundwater Well Licence 5

Atmospheric emissions Western Power’s emission details are provided annually to the National Pollutant Inventory (NPI). This information can be accessed via http://www.npi.gov.au. The following tables provide information on the main atmospheric emissions from the Generation Business Unit’s major power stations.

SULFUR DIOXIDE EMISSIONS (Kgs emitted per MWh of electricity sent out) 1/7/05 to 2004/05 2003/04 2002/03 2001/02 31/3/06 Collie 5.4 5.3 5.2 5.3 5.3 Muja 6.4 6.0 6.1 6.0 6.0 Kwinana 2.3 2.8 2.7 2.1 1.4 Pinjar Gas Turbine 0.0 0.0 0.0 0.0 0.0 Mungarra Gas Turbine 0.0 0.0 0.0 0.0 0.0 Regional Power Stations 0.4 1.2 1.2 1.2 1.3 Cockburn 0.0 0.0 0.0 - -

DMS#: 3010461v1 13 File#: PM/3/TLS519(37A)V1

NITROGEN OXIDES EMISSIONS (Kgs emitted per MWh of electricity sent out) 1/7/05 to 2004/05 2003/04 2002/03 2001/02 31/3/06 Collie 3.3 3.1 3.2 3.3 3.2 Muja 4.2 3.8 3.9 3.9 3.8 Kwinana 3.1 3.5 3.4 3.2 3.1 Pinjar Gas Turbine* 2.1 2.8 1.9 2.1 2.1 Mungarra Gas Turbine 2.5 3.0 1.9 2.2 2.2 Regional Power Stations 20.9 18.1 15.8 15.7 15.9 Cockburn 0.3 0.3 0.3 - -

*Increase in NOx emissions for Pinjar due to increase use of distillate.

PARTICULATE (COAL ONLY) EMISSIONS (Kgs emitted per MWh of electricity sent out) 1/7/05 to 2004/05 2003/04 2002/03 2001/02 31/3/06 Collie 0.15 0.2 0.2 0.2 0.2 Muja 9.2 7.7 7.8 9.0 6.9 Kwinana 0.1 0.1 0.1 0.1 0.0 Pinjar Gas Turbine 0.0 - - - - Mungarra Gas Turbine 0.0 - - - -

DMS#: 3010461v1 14 File#: PM/3/TLS519(37A)V1

RETAIL BUSINESS UNIT

ACHIEVEMENTS

Peak demand saver program

Western Power’s peak demand saver program was introduced in 2005 to encourage large business customers to reduce electricity consumption during periods of high demand in the South West Interconnected System (SWIS). In the past year, 59 large industrial and commercial customers participated in the program, in return for payment, providing up to 94.87 MW of reserve capacity.

Power Procurement 2 In August 2005, commitment to securing a reliable and commercially competitive electricity supply for the state over the longer term was progressed with the awarding of a contract to Wambo Pty Ltd to construct a new baseload power station for the SWIS. The new 320 MW plant, a gas-fired combined-cycle unit, will be built alongside Western Power's Cockburn power station. It is expected to be in operation from November 2008.

Developing gas business Profitable growth of the Retail Business Unit’s natural gas business exceeded expectation in 2005/06. Although confined to selling gas to customers consuming more than one terrajoule each year, the business’ retail sector market share is approaching 20 per cent – with customers including Austral Brick, 19 hospitals, and Edith Cowan and Murdoch universities.

Work also started on securing the business’ wholesale gas position, which will provide a platform for future growth, along with positioning the business for the opening up of the domestic gas market.

New major agreements The Retail Business Unit completed negotiations for several major supply agreements in 2005/06, including:

• 15-year agreement with Simcoa Operations - In November 2005, Simcoa Operations signed a 15-year agreement (starting in 2008) for the supply of electricity to its silicon smelter in Kemerton. Simcoa produces 32,000 tonnes of premium grade silicon each year and is the largest single site consumer of electricity in the SWIS. The deal will be worth hundreds of millions of dollars throughout the agreement.

• Black Swan Nickel Pty Ltd agreement- In January 2006, Black Swan Nickel Pty Ltd agreed on a major five-year deal for the supply of electricity to the planned expansion of its nickel mining operations near Kalgoorlie. The contract, worth in excess of $50 million over five years, will commence from July 2006.

• Emu Downs Windfarm - In 2005, the Retail Business Unit awarded a tender for the construction of an 80 MW wind farm, consisting of 48 wind turbines. The Emu Downs Windfarm proposal, developed by Stanwell Corporation Limited and

DMS#: 3010461v1 15 File#: PM/3/TLS519(37A)V1 Griffin Energy, is now under construction east of Cervantes. The Retail Business Unit will purchase all electricity generated from the wind farm, which will also provide the business with renewable energy certificates.

• Water Corporation desalination plant agreement - In July 2005 the Retail Business Unit signed an agreement to power a Water Corporation seawater desalination plant with renewable energy (starting in November 2006) from the new Emu Downs Windfarm.

New corporate identity The Retail Business Unit oversaw the development of a new name and corporate identity for the business post-disaggregation.

The new name, Synergy, represents a ‘one-stop-shop’, and aims to be customer-driven and future-focused, while reflecting the retail business’ concern for the environment and the community.

BENCHMARKS

Customer Service Charter These customer service measures are based on the service standards most important to customers.

2005/06 2004/05 2003/04 Customer Service Charter Actual Target Actual Actual Answering phone calls to our Customer Service 76.2 90.0 82.8 89.0 Centre within 30 seconds (%). Acknowledging the receipt of, or replying to, letters 100.0 100.0 100.0 100.0 within five working days (%).

DMS#: 3010461v1 16 File#: PM/3/TLS519(37A)V1 REGIONAL BUSINESS UNIT

ACHIEVEMENTS

Building the new business Significant resources and effort were committed throughout 2005-06 to ensure a capable, effective and viable regional business would be created from the former Western Power.

Comprehensive stakeholder engagement occurred to support the State Government’s commitment to restore a corporate presence in regional Western Australia; and the most appropriate and effective business model was developed to meet the requirements of the new regional power business and its customers.

Improving infrastructure The business undertook a number of initiatives in 2005/06 to improve both the quality and reliability of power supplies in regional areas as well as enhancing the Regional Business Unit’s commercial position.

Almost $19O million in improvements to electricity infrastructure in the West Kimberley will be made as part of a concerted power improvement process through partnerships and commercial arrangements, with a key goal being to replace ageing diesel power plant with more reliable, quality power stations.

These projects include:

• The Town Reserves Regularisation Project, which by December 2005 was underway in eight communities in areas surrounding Kununurra, Wyndham, Fitzroy Crossing and Halls Creek, with further network upgrades to be complete following the wet season in April 2006.

• Further progress in working with local governments and development bodies in the Pilbara, placing power supplies underground in cyclone-prone areas. Underground power projects have been completed in Roebourne Township (Stage one) and Point Samson (Stage four). Port Hedland project work started in January 2006.

• The West Kimberley Power Project achieved commercial settlement in August 2005, with Energy Developments Limited committing to have the Broome Power Station ready for commercial operations in March 2007, with the other power stations in the region commencing operation in the following months.

• The Remote Towns Power Procurement project reached a milestone with commissioning of the Menzies, Gascoyne Junction and Laverton power stations in January and February 2006. It is expected that the Marble Bar Power Station will be commissioned in mid-September and Nullagine Power Station in mid- October 2006.

• Carnarvon and Exmouth Power Projects are making progress with commercial negotiations - Energy Generation Pty Ltd was announced as the Preferred Bidder for Carnarvon Power Station in mid-December 2005. The new power station is expected to be operational in late 2007. Burns Rowe Worley achieved financial DMS#: 3010461v1 17 File#: PM/3/TLS519(37A)V1 close for the Exmouth Power Project in late June 2005, with the project due to be operational in August 2006.

Cyclones hit the North West Cyclone Clare crossed the Pilbara coast 40km west of Karratha in January 2006, causing damage to a transmission line, substations, distribution feeders and residential connections. Overall, Regional crews rectified an estimated 600 faults in Karratha and Port Hedland. Power was restored to the majority of customers within 10 hours of the red alert being lifted. The remaining residential connections were repaired within four days. The crews worked long hours in high heat and humidity to complete this work without a safety incident.

Less than two weeks after Cyclone Clare crossed the coast, Cyclone Darryl struck the North West, though causing considerably less damage than Clare.

BENCHMARKS

Reliability performance

Performance indicators 2005/06 2004/05 Actual Target Actual Regional SAIDI - Outage duration (minutes) 315 220 289 (Total duration of interruptions / customers per year) CAIDI – average duration of incident 41.9 40 33.8 (Total minutes / average number of customers) SAIFI – average number of incidents 7.53 5.5 8.5 (Total customers interrupted / average number of customers) Pilbara SAIDI - Outage duration (minutes) 570* 161 95 (Total duration of interruptions / customers per year) CAIDI – average duration of incident 144* 98 61.0 (Total minutes / average number of customers) SAIFI – average number of incidents (Total customers interrupted / average number of customers) 3.95* 1.65 1.6 * Includes the outages caused by cyclones Clare and Glenda.

Environmental licences A summary of licences held by the Regional Business Unit’s facilities is provided below.

Environmental licence Total Western Australia Department of Environmental Protection Licence 3 Department of Industry and Resources Licence to Store Dangerous Goods 16

DMS#: 3010461v1 18 File#: PM/3/TLS519(37A)V1

CORPORATE RESULT AREAS

Western Power measures its performance against the targets set out in its Statement of Corporate Intent, which is tabled in State Parliament each year.

The targets, while taking into account the company’s commitments, are deliberately set higher than expected performance levels to challenge Western Power’s people.

Performance indicators 2005/06 2004/05 2003/04 Actual Target Actual Actual 1/7/05 to Full 31/3/06 Year Benchmark performance * Average unit cost (cents) (Total expenditure before tax /kWh sold) 12.7 12.2 11.5 10.7 Return on capital employed (%) (EBITDA / average non-current assets) 9.7 13.2 15.6 17.4 Debt to equity ratio (Capital structure geared to debt) 64/36 61/39 59/41 59/41 Return on equity (Net profit after income tax / total equity) 5.8 7.8 12.1 15.1 Profit after tax ($m) $92.9 $136.8 $190.2 $241.6 Revenue ($m) $1473.1 $1775.7 $1845.4 $1773.2 Earnings before interest and tax (EBIT $m) $265.6 $373.5 $429.3 $499.3 * Performance measures are inclusive of significant items which impact on financial results.

Performance indicators 2005/06 2004/05 2003/04 Actual Target Actual Actual Customer satisfaction (score out of five) 3.55 4.00 3.55 3.80 Corporate reputation (% viewed as positive) 58 68 53 62 Safety - Lost time injury frequency rate 4.7 <4.5 4.5 4.1 (LTIs / million hours worked) Safety – All medical frequency rate 21.5 20 20.3 22.2 (AMFs / million hours worked)

There were no fatalities in 2005/06 involving Western Power staff, however there were a number of major incidents with Western Power contractors, including one fatality. Following this tragedy, Western Power is introducing a program to measure and monitor the performance of individual contractors, to improve safety performance.

State Records Act 2000 Western Power maintains and supports quality record keeping practices in its day-to-day business activities. All records are managed according to the requirements of the State Records Act 2000 and Western Power’s approved Record Keeping Plan. Regular reviews are conducted of the corporate record keeping systems and practices to ensure their efficiency and effectiveness. New employees and contractors are provided with information on the record keeping systems both at induction and at compulsory training in the use of the system. The training programs are reviewed on an ongoing basis to ensure they reflect any new business requirements. DMS#: 3010461v1 19 File#: PM/3/TLS519(37A)V1

Western Australian Electoral Act 1907 In accordance with the requirements of Section 175ZE of the Western Australian Electoral Act 1907, the following information in respect to expenditures (excluding GST) incurred by, or on behalf of Western Power Corporation during the period 1 July 2005 to 31 March 2006 is disclosed as follows: Advertising Agencies: $2,239,041.30 – 303 Advertising Pty Ltd, Braincells Pty Ltd, Hermes Precisa Pty Ltd, Marketforce Advertising Ltd, Mindfield Group Pty Ltd, Shearman Communications (WA) Pty Ltd, TMP Worldwide Pty Ltd and Trademark DM Pty Ltd. Market Research Organisations: $745,014.24 - Data Analysis Aust. Pty Ltd, Market Equity Pty Ltd, and Synovate (new trading name of Market Equity). Media Advertising Organisations: $177,617.76 - Media Decisions WA

Total expenditure was $3,161,673.30

Environmental due diligence Western Power’s operational sites are subject to State and Federal environmental legislation, and some require State environmental licences. Complying with all regulatory and licence requirements is an integral part of Western Power’s value of practical environmental care at all times.

Environmental due diligence in Western Power is provided by a corporate Environmental Management System (EMS) which is driven by an intranet based documentation and management tool (EMISWeb) to facilitate the process of environmental governance and management in the company.

Although the EMISWeb has been split to independently service each new entity (after 31 March, 2006), Western Power’s environmental due diligence was maintained up to that point through corporate EMS documentation and reporting to ascertain overall environmental performance.

Environmental incidents

To enable effective corrective and preventative action to be taken, all environmental incidents in Western Power are recorded in the company’s Environmental Management System. In the period 1 July 2005 to 31 March 2006, there were eight reportable environmental incidents, including three minor licence departures. No infringements, penalties or fines were issued from the DoE.

DMS#: 3010461v1 20 File#: PM/3/TLS519(37A)V1 GLOSSARY

CAIDI Total outage duration minutes/average number of customers.

CO2 Carbon Dioxide.

EMS Environmental Management System.

GW Gigawatt. A measure of electrical power. Equivalent to one million kilowatts.

GWh Gigawatt-hour. One Gwh = 1000 MWh or one million kilowatt-hours.

ISO 14001 International Standards Organisation 14001. The international standard for environmental management systems.

IEEE The Institute of Electrical and Electronic Engineers, Inc.

kW Kilowatt. One kW = 1000 watts. A watt is the rate at which electrical energy is produced or used. kWh Kilowatt-hour. The standard unit of energy, equivalent to the consumption rate of one kilowatt for one hour. Commonly used as the ‘unit’ of electrical energy.

MW Megawatt One MW = 1000 kW or one million watts.

MWh Megawatt-hour. One MWh = 1000 kWh.

NOx Nitrogen Oxides. A term used for a mixture of nitrogen oxides.

SAIFI Total customers interrupted/average number of customers.

SO2 Sulfur Dioxide

SWIS South West Interconnected System

SCNRRR Steering Committee on National Reliability Reporting Requirements

DMS#: 3010461v1 21 File#: PM/3/TLS519(37A)V1 ELECTRICITY CORPORATIONS ACT 2005

MINISTERIAL DIRECTION

To Western Power Corporation (the Corporation) 363-365 Wellington Street Perth Western Australia

I, Francis Michael Logan MLA, acting in accordance with section 145 of the Electricity Corporations Act 2005, direct the Corporation to execute on 20 March 2006:

(a) the Master Lending Agreement (Generation) between Western Australian Treasury Corporation and Western Power Corporation;

(b) the Master Lending Agreement (Networks) between Western Australian Treasury Corporation and Western Power Corporation;

(c) the Master Lending Agreement (Retail) between Western Australian Treasury Corporation and Western Power Corporation;

(d) the Master Lending Agreement (Regional) between Western Australian Treasury Corporation and Western Power Corporation; and,

(e) the letter of escrow between Western Australian Treasury Corporation regarding the completion and replacement of the Schedules to the Master Lending Agreements described in paragraphs (a), (b), (c) and (d), in the form of the respective documents made available to Western Power Corporation by the Western Australian Treasury Corporation on or before 20 March 2006.

FRANCIS MICHAEL LOGAN MLA MINISTER FOR ENERGY

DMS#: 3010461v1 22 File#: PM/3/TLS519(37A)V1

Western Power Corporation Financial Review 2006

REVIEW OF FINANCIAL PERFORMANCE

Under section 182 of the Electricity Corporations Act 2005 Western Power Corporation (the Corporation) is required to prepare an Annual Report for the period from the preceding 1 July to the commencement date of its successor entities. If the period is less than a year, the Annual Report is to be prepared as if that period was a full financial year.

The requirement to produce an Annual Report for the nine months ended 31 March 2006, and the adoption of the Australian equivalent of the International Financial Reporting Standards in the 2005/06 reporting period, makes comparison with prior full year financial performance of limited value. Consequently, financial performance has been reviewed against the budgetary position established in the Corporation’s latest Strategic Development Plan.

The projected profit result for the nine months ended 31 March 2006 was $110.1 million. This contrasts with the final audited result of $92.9 million, which was $17.2 million lower than budgeted. The budget variance results from increased expenditure in fuel, and labour and materials. This was partially offset by higher than expected revenue stemming from electricity sales, the recognition of previously deferred developer and customer contributions, as well as external works and gas sales.

Total revenue was $1,473.1 million, which was $135.8 million above budget. Within this amount sales revenue of $1210.5 million was $44.4 million above budget. A significant contributor to this variance was standby energy sales to Alinta.

Other revenue of $262.6 million was above budget by $91.4 million. The variance results from several sources, most notably developer and customer contributions, external works, and gas sales. External works revenues and gas sales were however substantially offset by expenditure incurred to generate those revenues.

The Developer and Customer Contributions variance was primarily due to timing differences in recognising revenues in relation to transmission works for the Kemerton power station project caused by conversion to International Financial Reporting Standards (IFRS). Under IFRS, adopted from 1 July 2005, developer and customer contributions revenue is recognised when the project work is fully completed whereas the budget assumed the revenues would have been substantially recognised in the prior year on a percentage of completion basis.

Total expenditure excluding interest and income tax was $1,207.6 million, which was $160.6 million above budget. Within this amount fuel and electricity purchases expenditure, relating to the production and sale of electricity, was $79.2 million above budget. Increased fuel consumption to meet above budget sales, a differing fuel mix to that budgeted (mainly a result of gas curtailments) and unfavourable oil prices have resulted in this variance. Additionally, $17.0 million of above budget fuel costs were incurred, offset however by above budget retail gas sales and other fuel income.

Labour and materials expenditure was $60.8 million above budget. The majority of this variance is due to above budget inspection, vegetation clearing, follow up maintenance, business transformation costs and emergency response work. A significant part of the variance can also be attributed to greater than forecast expenditure to generate external revenues from Procurement and Fleet activities.

Total debt has increased by $363.4 million from the prior year as a result of increased capital expenditure. Capital expenditure was $429.0 million for the year, which is $23.2 million below budget. Major components of this year’s program included summer ready initiatives, increased system reinforcement to upgrade transformers to prevent customer outages, and customer funded works.

Dividend and Income Tax equivalent payments to the State Government for the nine months to 31 March 2006 totalled $152.7 million.

FINANCIALS AT A GLANCE

31/03/06 $’000

Extract of Profit and Loss Statement for the nine months ended 31 March 2006 Sales Revenue 1,210,548 Other Revenue and Income 262,625 Cost of Sales 1,054,304 Other Expenditure 153,277 Earnings Before Interest and Tax 139,084 Net Profit 92,889

Capital Expenditure 429,000 Payments to Government 152,669

Extract of Balance Sheet as at 31 March 2006 Total Assets 5,102,195 Total Debt 2,813,951 Total Other Liabilities 694,968 Total Equity 1,593,276