embracing the future
Western Power
annual report 2005 Western Power Annual Report 2005
operations review
Year in review
Chairman’s and Managing Director’s Year In Review 2 NETWORKS Business Unit 6 GENERATION Business Unit 12 RETAIL Business Unit 19 REGIONAL Business Unit 22 Review of Financial Performance 27 Electricity Reform 29
Our company
Our Company in 2005 31 Areas serviced by Western Power 32 Statement of Corporate Priorities 33 Our Organisational Structure 34
Key result areas
Corporate Result Areas 35 Corporate Facts and Figures 38 Glossary 41 Electricity Corporation ACT 1994 42 financial review
STATISTICAL SUMMARY 44 DIRECTORS’ REPORT 45 STATEMENT OF FINANCIAL PERFORMANCE 64 STATEMENT OF FINANCIAL POSITION 65 STATEMENT OF CASH FLOWS 66 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005 67 DIRECTORS’ DECLARATION 117 INDEPENDENT AUDIT REPORT 118 Chairman’s and Managing Director’s Year In Review
Neil Hamilton Chairman Tony Iannello Managing Director
The WA energy industry has undergone • made a commitment to build our capabilities, both revolutionary change over the past 12 months. At people and systems. the centre of that change, Western Power has been With these changes and challenges, Western Power has challenged to deliver safe, reliable and efficient continued to perform strongly, achieving solid profits for energy services while positioning the organisation the eleventh consecutive year and delivering significant for a competitive and dynamic market. We have dividends to our shareholder, the State of Western needed to respond quickly and positively to energy Australia. We have approached the challenges set by reforms while working towards restoring confidence the events of the previous year with enthusiasm and among our customers and the Western Australian commitment and have successfully shown that we are able community. to improve our performance.
In response we have: It is particularly pleasing to note that this financial performance has been maintained whilst electricity tariffs • moved to a new level of commercial behaviour with have remained unchanged. In fact our customers have our business units taking a more assertive role to achieve the best outcome; enjoyed reductions, in real terms, in electricity charges over the period. • continued to build trust by becoming more open
and transparent, sharing our position publicly within Throughout the year the people of Western Power have legal and commercial sensitivities, delivering on worked extraordinarily hard to provide our customers with expectations and being more proactive with all our the reliable and efficient service they expect from stakeholders; Western Power. Summer demand peaks, storms and • driven many initiatives that will improve performance bushfires provided further challenges in addition to and make each of our businesses a competitive force; the great changes occurring in the industry and the • improved services to customers and are continuing to corporation. Our people have worked tirelessly to do so; minimise disruption and improve reliability in the system • strengthened understanding of accountabilities, we for our customers. will deliver what we promise; and
Western Power Annual Report 2005 Chairman’s and Managing Director’s Year In Review continued...
Jenny Seabrook Deputy Chairperson Mervyn Davies Director Harvey Collins Director
Alan Mulgrew Director John O’Connor Director Charlotte Stockwell Director Sue Wilson Director
PREPARING For Disaggregation
In August 2004, significant structural changes were Generation to an optimal supplier of reliable, low-cost energy. implemented at Western Power in preparation for Retail to a competitive retailer of multi-sourced energy, the anticipated disaggregation of the corporation. differentiated on customer service. The split of Western Power into four businesses is For reform to benefit customers, Western Power must one of the key steps in the reform process – and the compete for market share. Half of Western Power’s beginning of a new business direction. revenue base is now contestable and new entrants are Whilst still operating as one integrated business, vigorously entering the market and providing very real Western Power is now made up of four ‘strengthened’ and competition. Western Power welcomes this competition independent business units – Generation, Networks, Retail and its new business units are preparing to participate in and Regional. Each business unit has been structured and this new market. In particular, our Retail and Generation allocated functions according to the recommendations of business units are bringing a renewed commercial vigour the Electricity Reform Task Force. to the way they do business.
A transformation of each business unit is occurring: A number of projects and changes are underway including
Networks to a customer-focused, best-in-class regulated organisational structural reviews, financial management network service and infrastructure provider. system planning and branding exercises for each new business. This will ensure that each new business is best Regional to a customer-focused commercial entity positioned to capitalise on the opportunities in the new supporting and facilitating regional development with competitive marketplace. efficient energy services.
Western Power Annual Report 2005 Chairman’s and Managing Director’s Year In Review continued...
BOARD Changes
Significant change occurred during the year at both Mr Tony Iannello took up the position of Managing Board and senior management level. In September Director in mid-July 2004 after a notable career at State Cabinet formally ratified two new Board BankWest where he was most recently General Manager, appointments. The Board welcomed Mr Mervyn Finance and Corporate Services. As Managing Director, Davies, the former General Manager Networks Mr Iannello saw an opportunity to work with staff to with EnergyAustralia who has more than 40 years meet the many challenges that the corporation faced experience in the electricity industry, and welcomed and to rebuild Western Power’s reputation and drive the back Mr Harvey Collins, the former Chief Financial corporation to success.
Officer of Challenge Bank, Chairman of HBF, Director A new business model was established which enabled of the Government Employees Superannuation the business units to be semi-autonomous and paved the Board and former interim Chief Executive Officer at way forward for disaggregation. Vital to this new model Western Power. was the formation of the Business Leaders Council (BLC),
With regret the company farewelled Ms Sue Wilson at the which replaced the Executive Committee and empowered end of June 2005. We would like to thank Ms Wilson, the businesses to operate in an efficient and competitive who joined the Board in September 2003, for her support manner. The BLC welcomed several new members for Western Power and contribution to the Board during a including Ms Libby Lyons as Executive Manager Corporate period of considerable change and challenge and wish her Relations, Mr Greg Denton as Executive Manager Strategy, well in her future endeavours. Reform and Strategic Projects and Mr Greg Monkhouse as Executive Manager of Human Resources and Organisation Mr Collins came to Western Power in February 2004. Development. Each brings to Western Power a wealth of During his short-term contract from February 2004 experience and expertise in their respective fields. Western Power regained its focus on its core role of providing safe and reliable electricity supplies to our customers. Mr Collins finished his term as Chief Executive Officer in late-July 2004 with the thanks of the Board and people of Western Power.
Western Power Annual Report 2005 Chairman’s and Managing Director’s Year In Review continued...
LOOKING Forward
The situation as we have known it to date – of We are committed to facing the challenges of the new operating largely as the dominant generator and reformed electricity markets in Western Australia and have retailer of electricity – is changing and will continue progressed towards being able to do so in a commercially to do so for many years. We believe that this is a responsible manner. good thing for the State and for the community of Western Australia. Western Power will continue to support the Government’s decisions on changes to the electricity sector in Western Australia but we will
also work towards being a competitive participant in Neil Hamilton Tony Iannello this new market place. Chairman Managing Director
“Western Power is finding the right balance between these competing forces to meet the needs of our stakeholders.”
The expectations of Western Power are clear. We must deliver safe, reliable and efficient electricity services to all Western Australians, operate in a manner that maximises the return to the State and nurture the development of a competitive market. Western Power is finding the right balance between these competing forces to meet the needs of our stakeholders.
Western Power Annual Report 2005 NETWORKS Business Unit
ACHIEVEMENTS
We were summer ready!
In the lead up to summer 2004/05, the Networks 2004/05 Highlights business worked hard to ensure that Western Power • ‘Summer Ready’ program delivers performance was in a position to meet Western Australia’s peak improvements summer electricity demand. Since February 2004 • Launched ‘Switch on Mate’ safety program Western Power has instituted a ‘Summer Ready’ • Planning criteria for Network upgrades reviewed and network program that has reduced the number of updated overload-related network faults by 90 per cent and • Customer service to land developers upgraded instituted a pole-top fire mitigation strategy that will • Recruitment and training of linesmen, technicians, see a marked reduction in pole-top fires. draftsmen and engineers boosted
This was tested in February 2005 when Perth electricity • Top Up and Spill market introduction supported demand hit a record 3059 MW. The previous year we • Rural Power Improvement Program commenced experienced around 55 transformer overloads causing • Obtained Government commitment to funding disruptions to power supplies. This year that number was $2.3 billion of OPEX and CAPEX over the next four years reduced to five - a figure we will continue to improve upon. Outlook for 2005/06 With a $10 million upgrade to the network information • Improved reliability systems, we are able to deal with network faults faster • Access Agreement completed with Economic than ever before. The improved system also helps to Regulation Authority (ERA) identify faults more quickly and allows us to be more • Strategic outsourcing of large capital works prepared for problems that are likely to occur. • Customer service improvements continue Networks have invested in emergency response vehicles • New organisation and KPI framework established to allow us to reach hazardous situations more quickly • OPEX and CAPEX capital and operating productivity and safely. Line crews have been increased, with further improvements increases planned each year for the next four years. More • Bushfire Mitigation Initiative continues than half the extra staff will be located in the country.
Western Power Annual Report 2005 NETWORKS Business Unit continued...
“The program is about challenging what we do and how we do it. It is about moving from average to best practice.”
One Step Ahead
Long-term planning is currently underway to enable Networks to meet changing customer expectations, increase safety standards and manage a continually growing network in a new regulatory framework. To meet these demands and with the need to replace ageing infrastructure, Networks will invest $1.6 billion in capital works associated with transmission and distribution networks over the next four years.
An additional $630 million has been allocated to ongoing Networks is embarking on a transformational change maintenance costs for the next four years, from which we program to greatly enhance the customer experience expect a 25 per cent improvement in the reliability of the around safety, service, reliability and value for money. South West Interconnected System. Launched in April 2005, the One Step Ahead program is Pole-top fires are often the cause of network faults, a major organisational initiative that will review how the which is not unusual especially given the climatic and Networks business is currently operating and develop a environmental conditions that Perth experiences. This framework to transform Networks into a highly efficient,
was the second year of an extensive four-year program externally regulated, performance driven and customer- to reduce the risk of pole-top fires. The program will focused business. see insulators on 40,000 power poles in high-risk areas The program is about challenging what we do and how we of Perth and the Geraldton/Dongara region coated with do it. It is about moving from average to best practice. silicone. Additional steps taken to reduce the number of The program is expected to have made significant faults include the replacement of wooden power poles changes to the business by the end of 2005 with full with cement power poles and a continuation of the implementation in 2006. Underground Power Program.
Western Power Annual Report 2005 NETWORKS Business Unit continued...
BENCHMARKS
Tenterden bushfire Reliability Performance
The Tenterden bushfire in 2003 was a tragedy and The provision of a safe, reliable and efficient energy one the corporation deeply regrets. We are doing service with first-rate customer service is at the very everything we can to ensure that such a tragedy is heart of everything we do. not repeated. Our reliability performance is similar to Australian averages,
As well as making significant changes in the way unfortunately in 2004/05 we did not meet all of our Western Power manages the risk of bushfires throughout self-determined targets. However with an overhead the State, we have made major inroads into a number of distribution network, weather conditions will continue to findings raised during the Coronial Inquiry into the tragic affect electricity services from time to time and in these deaths of Ms Judith Ward and Ms Lorraine Melia in the situations we will continue to aim to restore power as bushfire. quickly as possible.
Western Power has developed a Bushfire Mitigation Strategy, reinforced measures which ensure that the corporation investigates and reports any notifiable “..we will continue to aim to incidents to the Directorate of Energy Safety and will restore power as quickly as continue to work with all investigative bodies, including possible. the Coroner’s Office, to ensure the safe operation of the ” electricity network and associated infrastructure.
Following the prosecution of Western Power by the Directorate of Energy Safety in March 2005 over the To achieve this we have embarked on a transformation tragic deaths of two children in Wyndham in 2003, program in Networks to greatly enhance the customer Western Power made several changes to its work practices experience around safety, service, reliability and value and commenced an extensive replacement program for money. In line with this our capital works program of overhead service connections. In addition, all new is targeted at continuing to ensure reliability of supply to connections in the metropolitan area and an increasing customers across the state as well as reducing costs. number of regional areas are being placed underground.
Western Power Annual Report 2005 NETWORKS Business Unit continued...
2004/05 2003/04 Performance Indicators Actual Target Target
Reliability and Quality * CBD Area ** SAIDI – Outage duration (minutes) 10 22.7 23 (Total duration of interruptions / customers per year) CAIDI – average duration of incident 68 68 66 (Total minutes / average number of customers) SAIFI – average number of incidents 0.14 0.33 0.34 (Total customers interrupted / average number of customers) Urban Area *** SAIDI – Outage duration (minutes) 244 256 260 (Total duration of interruptions / customers per year) CAIDI – average duration of incident 82 72 72 (Total minutes / average number of customers) SAIFI – average number of incidents 2.97 3.56 3.61 (Total customers interrupted / average number of customers) Rural & Country Area **** SAIDI – Outage duration (minutes) 520 539 547 (Total duration of interruptions / customers per year) CAIDI – average duration of incident 132 123 124 (Total minutes / average number of customers) SAIFI – average number of incidents 3.93 4.36 4.43 (Total customers interrupted / average number of customers) SWIS Total SAIDI – Outage duration (minutes) 281 294 298 (Total duration of interruptions / customers per year) CAIDI – average duration of incident 91 81 81 (Total minutes / average number of customers) SAIFI – average number of incidents 3.09 3.64 3.70 (Total customers interrupted / average number of customers)
* A new, more rigorous system was used to calculate the SWIS Reliability and Quality figures for 2004/05. For comparison purposes, the system was applied to the 2003/04 figures for this Annual Report. The Reliability and Quality figures exclude Major Event Days – as per SCNRRR Guidelines and IEEE Std 1366 (Guide for Electric Power Distribution Reliability Indices).
** 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.
Western Power Annual Report 2005 NETWORKS Business Unit continued...
Customer Service Charter
The Customer Service Charter was introduced in 1998 to demonstrate Western Power’s public commitment to the service standards we offer customers. Networks developed its customer service measures based on advice from customers about the service standards of greatest importance to them.
2004/05 2003/04 2002/03 Customer Service Charter Actual Target Actual Actual
Restoration of unplanned outages within four hours - metro and major regional (%). 93.0 85.0 96.0 96.5
Restoration of unplanned outages within four hours - rural and remote (%). 90.8 85.0 93.0 91.5
Providing at least two working days’ notice of scheduled power interruptions, 100.0 100.0 100.0 100.0 including metro, regional, rural and remote (%).
Completing new connections within three working days for metro and major regional, 93.9 95.0 93.0 91.3 and within five days for rural and remote (%).
Replacing faulty street lights within five working days - metro and major regional (%). 95.2 100.0 98.0 97.6
Replacing faulty street lights within nine working days - rural and remote areas (%). 94.1 100.0 96.0 93.0
Western Power Annual Report 2005 10 NETWORKS Business Unit continued...
FACTS AND FIGURES
Assets Overhead Underground
South West Interconnected System Transmission Lines
330 kV (km) 775
220 kV (km) 655
132 kV (km) 4,005 16
66 kV (km) 1,130 42
South West Interconnected System Distribution Network
High voltage mains (km) 58,956 3,635
Low voltage mains (km) 9,727 8,830
Total transformer capacity (MVA) 5,389
Street lights 192,643
South West Interconnected System - Distribution & Transmission
Sent out - GWh 14,058.3 13,140.5
Line loss - GWh 1,084.4 785.4
Sold to customers - GWh 12,973.9 12,355.1
Environmental Licenses
A summary of licences held by Networks facilities is provided below.
Total
Western Australia Department of Environmental Protection Licence 1
Department of Industry and Resources Licence to Store Dangerous Goods 3
Water and Rivers Commission Underground Water Pollution Control Area Permit 2
Western Power Annual Report 2005 11 GENERATION Business Unit
ACHIEVEMENTS 2004/05 Highlights The Generation business significantly improved • New gas transport contract with Dampier to Bunbury capacity through the enhancement of generation Natural Gas Pipeline equipment and fuel availability and flexibility. Steps • Installed new wind/diesel system at Bremer Bay and taken to boost capacity included the installation Rottnest Island of the Pinjar cooling sprays and the Parkeston • Reinstated oil firing at Kwinana power station to interconnector. The measures undertaken to either improve reliability of supply free up or create extra generation capacity resulted • Installed low pressure turbine blades on Muja C in Western Power being able to deliver up to an yielding an extra 200 MW capacity • Installed inlet air cooling at Pinjar gas turbines additional 200 MW of peaking capacity. • Established CollTech Australia collagen extraction We put in place extra fuel arrangements, including facility at Collie power station restoring oil firing at Kwinana power station and the • Upgraded the Shotts bore water system servicing capability to purchase gas from Wesfarmers if required. Muja and Collie power stations The availability of increased quantities of fuels and, even • Generation plant performed reliably to meet high more importantly, the greater flexibility in the mix of demand for energy fuels meant that Generation was in a better position to Outlook for 2005/06 maximise supply when required. • Uprate of Muja D 50 MW and life extension Our ability to meet record demand for electricity was tested • Implement new control and instrumentation system in February 2005 when Perth’s temperature soared to 42oC of Muja C and D and demand reached 3,059 MW - 55 MW higher than the • Benefits of the new coal supply arrangements previous summer’s peak demand. We were pleased that become apparent the strategies put in place after the power restrictions in • Installation of new wind/diesel system at Coral Bay February 2004 enabled us to meet this demand. • Facilitation of Water Corporation’s sea water desalination plant at Kwinana power station Continued planning for future summers includes ‘uprating’ • Biomass project to be commissioned at Muja power Muja Stage D by 10 per cent during the 2006 winter. station, in liaison with Pinetec For the summer of 2005/06, the 240 MW Kemerton
Western Power Annual Report 2005 12 GENERATION Business Unit continued...
power station, which is a peaking dual-fuel plant, will be the pipeline’s capacity and Western Power’s access to the ready in the third-quarter of 2005 plus the maintenance expanded capacity. programs during the off-summer period will ensure that all Coal Supply Contracts generating plant is available for the peak summer demand. Western Power coal supply contracts expire in 2010. Securing access to gas supplies Generation undertook a process to reduce the price of coal Generation achieved a significant result from negotiations by replacing existing long-term coal contracts with more with the bidding consortium that went on to become sustainable agreements. The coal Request for Proposal the new owner of the Dampier to Bunbury Natural Gas (RFP) process invited coal companies to submit proposals to Pipeline. supply coal post-2010. The proposals were assessed with a view to negotiating the best commercial outcome for At stake were the long-term gas shipping capacity for Western Power and its customers in the new competitive Western Power, the price of that capacity and the impact environment. It was announced on 16 August 2005 that the new ownership of the pipeline will have on Wesfarmers Premier Coal was the successful bidder to Western Power’s long term competitive position – a supply low-ash coal for the Muja C and D and Collie power significant point given Western Power is now facing major stations until 2030. competition from one of the new owners.
At the core of Western Power’s approach to negotiations Peaking Plant was the understanding that the outcome will present The peaking power station, being constructed by Transfield significant issues for the Western Australian energy Services Kemerton Pty Ltd at Kemerton north of Bunbury, industry and have an enormous bearing on the price is on schedule for commissioning in October 2005, in time consumers will pay for electricity in the future. for the 2005/06 summer.
Western Power achieved a positive commercial outcome in Generation will use the dual-fuelled Kemerton power terms of the cost of gas transport and a major commitment station at times of peak power demand such as the height from the owners of the pipeline on a planned expansion of of summer. This power station can burn gas or distillate
Western Power Annual Report 2005 13 GENERATION Business Unit continued...
BENCHMARKS
Working for a better environment and is similar to peaking plant Western Power owns and Western Power’s customers expect a quality, reliable, operates at Pinjar. electricity supply that is delivered in a manner that respects the environment. Their concern for the Until the new power station is connected to the Dampier environment mirrors our own. Western Power to Bunbury Natural Gas Pipeline by a lateral pipeline in the recognises that our innovative programs and on- second quarter of 2006, it will be fired on distillate. As a going management procedures must protect the peaking plant, the Kemerton power station is expected to rights of future generations to a sustainable and be used infrequently during summer. diverse natural environment. New Renewable Energy Projects
Replacing ageing diesel power plant in regional areas with more reliable, quality power stations was a significant focus for Generation. Projects underway include the completion and commissioning of a highly advanced wind- diesel system at Hopetoun and the construction of a similar system at Bremer Bay. The system combines a single wind turbine with new diesel generator and control system technology and would supply approximately 40 per cent Our environmental performance is tracked annually of each town’s energy needs over the year. The Hopetoun utilising a number of performance indicators. Our main system is expected to result in a saving of approximately environmental performance indicators are our greenhouse 400,000 litres of distillate and replaces 1,100 tonnes of response and renewable energy use. Measuring greenhouse gas emissions (the equivalent of taking 300 performance against targets is an integral element of cars off the road each year). Western Power’s continuous improvement process, assisting the efficient allocation of resources and helping to identify areas of weakness.
Western Power Annual Report 2005 14 GENERATION Business Unit continued...
2004/05 2004/05 2003/04 2002/03 Performance Indicators Actual Target Actual Actual
Greenhouse Response
Carbon Intensity (kgCO2e/kWh electricity sold) 0.90 0.91 0.91 0.95
Renewable Energy
REC obligation compliance (% of obligations acquired) (based on calendar years) 152 133 - -
Greenhouse Response Renewable Energy Certificates
Western Power’s total electricity sales increased by 5.3 Western Power continues to develop renewable energy per cent to a total of 13,677 GWh in 2004/05. Direct generation using wind and bio-energy technologies, greenhouse gas emissions associated with the electricity while maintaining an interest in solar technologies. We supplied by Western Power amounted to 12.36 million are also joining new partners to meet our renewable tonnes of carbon dioxide equivalent (CO2e). 11.74 million energy obligations and to encourage the development of tonnes of this was emitted directly from Western Power renewable energy resources in Western Australia. operations and another 0.62 million tonnes from other Our Renewable Energy Certificate (REC) obligation was entities from whom we purchased electricity to on-sell to met and surpassed. The performance indicator measuring Western Power customers. this is based on the number of RECs acquitted to satisfy
Renewable energy generation has led to the offset of an Mandatory Renewable Energy Target REC liability and our estimated 0.072 million tonnes of CO2e during 2004/05. A Natural Power REC liability and only includes RECs created further emissions offset of 0.13 million tonnes of CO2e is up to 2004. estimated to have been absorbed by Western Power’s tree In 2004/05 Western Power generated enough renewable plantation activities in 2004/05. energy from our own renewable energy generators
The net greenhouse gas emissions associated with the including the Albany, Denham, Esperance (Ten Mile corporation’s electricity sales in 2004/05 was 12.34 million Lagoon and Nine Mile Beach), Hopetoun and Exmouth tonnes of CO2e. wind farms to create over 72,000 RECs. We also sourced 106,000 RECs from other renewable energy generators.
Western Power Annual Report 2005 15 GENERATION Business Unit continued...
FACTS AND FIGURES
Acquired or Energy Generated Fuel Capacity (kW) Generating Plant Commissioned 2004/05 (GWh)
South West Interconnected System
Collie Coal 330,000 1999 2,457.0
Cockburn Gas 240,000 2003 1,415.7
Muja A & B Coal & Heavy Fuel Oil 240,000 1965 1,080.7
Muja C Coal & Heavy Fuel Oil 400,000 1981 2,489.6
Muja D Coal & Heavy Fuel Oil 400,000 1985 - 86 2,674.8
Kwinana A & C Coal, Gas & Fuel Oil 640,000 1970 - 78 1,858.2
Kwinana B Gas & Fuel Oil 240,000 1970 - 73 220.9
Kwinana Gas Turbine Gas & Distillate 21,000 1972 0.7
Geraldton Gas Turbine Gas & Distillate 21,000 1973 0.7
Kalgoorlie Gas Turbines Distillate 62,000 1984 - 90 6.4
Mungarra Gas Turbines Gas 112,000 1990 - 91 269.0
Pinjar Gas Turbines Gas & Distillate 586,000 1990 - 96 474.7
Wellington Dam Hydro 2,000 1992 -
Worsley (50% Joint Venture Share) Gas 60,000 2000 521.3
Tiwest Gas 36,000 1999 147.2
Albany Wind Farm Wind 22,000 2002 62.1
Bremer Bay Wind 600 2005 -
3,412,600 13,679.2
Western Power Annual Report 2005 16 GENERATION Business Unit continued...
Production and Distribution 2004/05 2003/04
Electricity Generation
Generation (thermal, diesel, wind) - GWh 13,875.10 13,310.0
Used in works - GWh 839.1 943.5
Purchased - GWh 1782.5 1,425.4
Sent out - GWh 14,818.2 13,791.9
Cold weather maximum demand - MW generated 2,586 2,406
Hot weather maximum demand - MW generated 3,059 3,004
Peak load interconnected system - MW generated 3,059 3,004
Interconnected generation capacity - Winter capability MW 3,518 3,412
Thermal efficiency for kWh generated - % 32.2 32.0
Fuel Consumption Used for Generation
Coal - ‘000 tonnes 4,914 4,747
Distillate and other fuel oils - tonnes 86,008 62,982
Gas - TJ 43,684 41,870
Environmental Licence
A summary of licences held by Generation facilities is provided below.
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
Western Power Annual Report 2005 17 GENERATION Business Unit continued...
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 our major power stations
SULFUR DIOXIDE EMISSIONS (Kgs emitted per MWh of electricity sent out)
2004/05 2003/04 2002/03 2001/02
Collie 5.3 5.2 5.3 5.3
Muja 6.0 6.1 6.0 6.0
Kwinana 2.8 2.7 2.1 1.4
Pinjar Gas Turbines 0.0 0.0 0.0 0.0
Mungarra Gas Turbines 0.0 0.0 0.0 0.0
Cockburn 0.0 0.0 - -
NITROGEN OXIDES EMISSIONS (Kgs emitted per MWh of electricity sent out)
2004/05 2003/04 2002/03 2001/02
Collie 3.1 3.2 3.3 3.2
Muja 3.8 3.9 3.9 3.8
Kwinana 3.5 3.4 3.2 3.1
Pinjar Gas Turbines* 4.0 1.9 2.1 2.1
Mungarra Gas Turbines 1.9 1.9 2.2 2.2
Cockburn 0.1 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)
2004/05 2003/04 2002/03 2001/02
Collie 0.2 0.2 0.2 0.2
Muja 7.7 7.8 9.0 6.9
Kwinana 0.1 0.1 0.1 0.0
Pinjar Gas Turbines - - - -
Mungarra Gas Turbines - - - -
Western Power Annual Report 2005 18 RETAIL Business Unit
ACHIEVEMENTS
Peak Demand Saver Program
A Retail business initiative significantly contributed to Western Power’s ability to meet the peak summer 2004/05 Highlights electricity demand. Further emphasis was placed on • Finalisation of the Renewable Energy Certificate the Peak Demand Saver program, which encourages (1 and 2) programs large business customers to reduce electricity • Successful roll-out of the Peak Demand Saver consumption during periods of high demand in Program during summer the South West Interconnected System in return • New organisational structure for Retail business for payments for participating in the program and with improved focus on the customer reducing load when required. • HOA signed with Simcoa - States largest
Western Power had 61 customers on the Peak Demand customer Saver program, providing 81 MW of additional reserve • Successful penetration of the WA gas market capacity - double the 40 MW target. The program Outlook for 2005/06 significantly contributed to peak demand management over the 2004/05 summer and reduced the risk of power • Launch of new Retail corporation interruptions to customers. We are continuing this • Enhance customer services initiative. • Develop strategic alliances to provide better and broader services Communication • Participate in the new electricity wholesale Another key change in getting ready for summer was the market way Western Power communicated with its customers. • Develop business case for new customer From the beginning of November 2004 through to early management system March 2005, Western Power published weekly supply and • Develop wholesale market capabilities demand graphs in the press and on our website. These graphs were aimed at keeping our customers and the
Western Power Annual Report 2005 19 RETAIL Business Unit continued...
wider community up-to-date with the expected electricity demand and available supply for the coming week as well as a six-month outlook.
This information helped provide customers with the means to manage their power needs and to encourage demand management in periods of high demand or limited supply. All business units contributed to the complex process required to produce these graphs.
Power procurement Dual fuel success
Western Power’s SWIS Power Procurement Process Stage Western Power has continued to establish itself as a Two being for 300-330 MW of baseload capacity short- strong competitor in the Western Australian gas market listed three of the companies which submitted proposals. since entering the market in 2003. Western Power is The bids included both gas-fired and coal-fired proposals. able to offer gas services to customers with a need These were evaluated against a range of criteria with the greater than one terajoule per annum. We have secured intention of selecting the bid that minimises the total large commercial customers against tough competition, delivered cost of electricity, while maintaining the safety exceeding customer numbers and sales targets and look and reliability of electricity. forward to being able to provide dual fuel options to the
Wambo Power Ventures Pty Ltd was declared the broader energy market in the future. successful bidder on 16 August 2005 and will construct a 320 MW gas-fire combined-cycle power station in Kwinana, expected to be in operation by December 2008.
Western Power Annual Report 2005 20 RETAIL Business Unit continued...
“We have secured large commercial customers against tough competition, exceeding customer numbers...”
BENCHMARKS
Customer Service Charter
These customer service measures are based on the service standards most important to customers.
2004/05 2003/04 2002/03 Customer Service Charter Actual Target Actual Actual
Answering phone calls to our Customer Service Centre within 30 seconds (%). 82.8 100.0 89.0 92.2
Acknowledging the receipt of, or replying to, letters within five working days (%). 100.0 100.0 100.0 100.0
Acknowledging the receipt of, or replying to, e-mails within two working days (hrs). 52.5 48.0 31.0 30.2
FACTS AND FIGURES
2004/05 2003/04
Customer Accounts at 30 June 888,103 867,067
Western Power Annual Report 2005 21 REGIONAL Business Unit
ACHIEVEMENTS
Supporting regional development
As we work towards improving our operations 2004/05 Highlights across Western Australia and in preparation for the disaggregation of Western Power in 2006, our • Launched new Regional business model regional operations were restructured. A new • Funding agreed for the Aboriginal and Remote Regional business unit confirmed its structure Communities Power Supply Project in March 2005 with a vision to provide excellent • Commenced Town Reserves Regularisation Project customer service and help facilitate development and • Extension of the State Underground Power Project economic growth within regional Western Australia. to Port Hedland
To achieve this, the Regional business has taken steps to • Commenced undergrounding of Roebourne increase its presence in regional areas and will continue to • 12 months free of Lost Time Injuries maintain a strong customer and operational presence in Outlook for 2005/06 the Pilbara in recognition of that region’s importance to the • Creation of the new Regional business and State’s economy. achieving integrated power supply license The new Regional business brings together the previous • Commencement of work to normalise Coral Bay Regional, Pilbara and Business Development branches. and upgrade power infrastructure in the town It will pursue cost effective management strategies, • Identification of preferred bidder for the leverage its existing commercial arrangements and develop Carnarvon Power Purchase Agreement (PPA) programs to ensure it retains and expands its workforce to • PPA and commercial operation of Exmouth power deliver the right outcomes. station
Improving infrastructure • Start of construction on power stations in five West Kimberley towns as part of the West Almost $250 million in improvements to electricity Kimberley Power Procurement Project infrastructure in regional areas will be made through partnerships and commercial arrangements, with a key • Completion of $500,000 Kununurra Network Reinforcement and Upgrade Projects goal being to replace ageing diesel power plant with more reliable, quality power stations.
Western Power Annual Report 2005 22 REGIONAL Business Unit continued...
Projects already underway include:
• Five new power stations in Marble Bar, Nullagine, station in Carnarvon. The network in the town will Menzies, Laverton and Gascoyne Junction. also be upgraded before connection to the new power StateWest Power Pty Ltd, in a $20 million agreement station, which is scheduled to be operational in early with Western Power will build, own and operate the 2007. With the expectation that the power station new power stations which will use modern diesel will be gas-fired, it will be more efficient, reliable and generating technology which is cleaner, quieter and environmentally-friendly than the current power station.
more fuel efficient. The power stations are due for • The completion and commissioning of a high completion by the end of 2005. Western Power advanced wind/diesel system at Hopetoun and the will upgrade the networks in each of these towns to start of construction of a similar system at Bremer Bay. connect to the new power stations.
• Five new power stations in Broome, Derby, Fitzroy Crossing, Halls Creek and Camballin/Looma, to be constructed and operated by Energy Developments Limited. These power stations will also be significantly more efficient, cleaner and quieter than the current diesel facilities. The power stations are due for completion in late 2006/ early 2007.
• Work has been carried out in Derby, Camballin/ Looma and Fitzroy Crossing to upgrade the network in preparation for the new power stations and to improve the reliability of the power system.
• A new power station, to be built and operated by Burns and Roe Worley, in Exmouth is expected to start operation in mid-2006.
• Expressions of interest were called for in December 2004 to build, own and operate a new power
Western Power Annual Report 2005 23 REGIONAL Business Unit continued...
BENCHMARKS
Reliability Performance
2004/05 2003/04 Performance Indicators Actual Target Actual
Regional
SAIDI - Outage duration (minutes) (Total duration of interruptions / customers per year) 289 264 304.2
CAIDI - average duration of incident (Total minutes / average number of customers) 33.8 48 44
SAIFI - average number of incidents (Total customers interrupted / average number of customers) 8.5 5.5 6.9
Pilbara
SAIDI - Outage duration (minutes) (Total duration of interruptions / customers per year) 95 172 43
CAIDI - average duration of incident (Total minutes / average number of customers) 61 101 93
SAIFI - average number of incidents (Total customers interrupted / average number of customers) 1.6 1.7 0.4
FACTS AND FIGURES
Acquired or Energy Generated Non-Interconnected System* Fuel Capacity (kW) Commissioned 2004/05 (GWh)
Broome Distillate 18,060 1976 59.1
Camballin Distillate 888 1976 2.2
Carnarvon Gas or Distillate 15,265 1981 43.0
Denham Wind 690 1998 1.6
Denham Distillate 1,994 1973 3.1
Derby Distillate 10,180 1973 32.1
Esperance Wind 5,625 1993,2003 1.8
Exmouth Wind 60 2002 0.0
Western Power Annual Report 2005 24 REGIONAL Business Unit continued...
Acquired or Energy Generated Non-Interconnected System* Fuel Capacity (kW) Commissioned 2004/05 (GWh) Exmouth Distillate 6,984 1977 19.0
Fitzroy Crossing Distillate 2,856 1976 11.5
Gascoyne Junction Distillate 280 1973 0.6
Halls Creek Distillate 3,204 1970 9.7
Hopetoun Wind 600 2005 0.6
Hopetoun Distillate 1,176 1976 2.8
Kununurra Distillate 12,400 1970 0.1
Lake Argyle Distillate 180 1985 0.0
Laverton Distillate 1,724 1994 3.4
Marble Bar Distillate 1,168 1973 2.2
Menzies Distillate 350 1977 0.5
Nullagine Distillate 643 1973 1.2
Wittenoom Distillate 228 1975 0.1
Wyndham** Distillate 1,920 2000 0.0
Total 86,475 195.1
* Western Power purchases electricity from independent power producers in Esperance, Cue, Meekatharra, Mt Magnet, Leonora, Onslow, Sandstone, Wiluna and Yalgoo and the NWIS. ** Wyndham stand-by generating capacity provided with hire plant.
Non Interconnected System and Pilbara - Distribution & Transmission 2004/05 2003/04
Sent out - GWh 760.0 651.4
Line loss - GWh 33.9 19.1
Sold to customers - GWh 726.1 632.3
Regional power stations
(Kgs emitted per MWh of electricity sent out) 2004/05 2003/04 2002/03 2001/02
Nitrogen Oxides Emissions 18.1 15.8 15.7 15.9
Sulphur Dioxide Emissions 1.2 1.2 1.2 1.3
Western Power Annual Report 2005 25 REGIONAL Business Unit continued...
Pilbara Interconnected System Transmission Lines Overhead Underground
220 kV (km) 200 -
132 kV (km) 71 -
66 kV (km) 149 -
33 kV (km) 26 -
Pilbara Distribution System
High voltage mains (km) 352 49
Low voltage mains (km) 169 104
Total transformer capacity (MVA) 158 -
Street lights 3,774 -
Regional Distribution System
High voltage mains (km) 4,376 94
Low voltage mains (km) 536 162
Total transformer capacity (MVA) 256 -
Street lights 7,498 -
Environmental Licences
A summary of licences held by Regional facilities is provided below.
Total
Western Australia Department of Environmental Protection Licence 3
Department of Industry and Resources Licence to Store Dangerous Goods 16
Western Power Annual Report 2005 26 Review of Financial Performance
Western Power’s net profit after tax for the year to 30 June 2005 was $206.1 million, which is $35.4 million lower than last year. Net profit is expected to continue to fall in 2005/06, as we experience the impact of increased competition, higher fuel prices and greater expenditure on the network.
Total revenue was $1,874.6 million, representing growth of 5.7 per cent above last year. Increased revenue from the sales of electricity was a major driver of this result. Unit sales were 5.5 per cent above the previous year. This performance, and is contrast to previous years where is mainly because of strong growth in all sectors and the all developer and customer funded capital activity was favorable impact of weather conditions. The year again set estimated to be completed within a financial year. new highs for both summer and winter peak demand for Total expenditure excluding interest and income tax was energy. $1,430.9 million. Increased energy demand resulted in Other revenue was also significantly higher than the higher costs for fuel and electricity purchases. Higher fuel previous year, mainly in the areas of developer and prices compared to last year are a major contributing factor customer contributions, State Government tariff and in the last quarter there was a significant increase migration reimbursements, and external chargeable in consumption of more expensive liquid fuel due to a works. During the year enhanced information systems shortage of gas capacity and unavailability of coal plant. enabled the corporation to more accurately estimate the Labour and materials were higher than last year. actual percentage of completion for the developer and Significant materials expenditure was incurred to ensure customer funded activity in the electricity distribution the company was in the best position for the 2004/05 network and resulted in $30.1 million of revenue being summer period. Increased external works and large deferred to future accounting periods to be matched with overhaul programs also contributed to the increase. construction progress. This has had an impact on financial
Western Power Annual Report 2005 27 Review of Financial Performance continued...
FINANCIALS AT A GLANCE
30/06/05 Total debt has increased by $124.7 million from the prior Sales Revenue 1,615,888 year as a result of increased capital expenditure. Capital Other Revenue expenditure was $430.0 million for the year, an increase of $119.7 million from the previous year. Major components Developer and Customer 109,839 Contributions of this year’s program included summer ready initiatives,
State Government Tariff Migration increased system reinforcement to upgrade transformers 8,620 Reimbursements to prevent customer outages, and customer funded works.
External Chargeable Works 38,525 Gross payments to the State Government for the 2004/05 year totalled $215.7 million. Total Revenue 1,874,626
Fuel Purchases
Coal 269,719
Gas 158,624 “Major components of this year’s Fuel Oils 75,406 program included summer ready Capital Expenditure 430,000 initiatives...” Total Debt 2,450,569
Payments to Government 215,652
*Unit - $’000
Western Power Annual Report 2005 28 Electricity Reform
Market reforms are aimed at establishing a new market and standards will be set for which the Networks business framework and structure, to support new entrants will be accountable. into the industry and to create more competition to Contestability thresholds have been lowered. Some lead to better services and lower prices. 12,000 electricity customers with a power bill of around
These include: $8,000 or more per year are now able to choose their supplier of electricity. • An independently regulated and operated wholesale
market where retailers and generators can buy and The disaggregation of Western Power is vital to the reform sell electricity due to start on 1 July 2006; process. The separation of Generation, Networks and • A new Independent Market Operator will be Retail is a key part of the Government’s reform agenda. appointed to run this market and ensure we have Western Power currently has almost 60 per cent of sufficient capacity – Western Power generation will generating capacity in the State or about 80 per cent retain this role for the next two summers of total capacity on the SWIS. However in April 2005, (till 2006/07); Western Power was directed to reduce, with planned • A code of conduct to protect small retail customers retirements, and hold its generating capacity to 3,000 MW has been introduced; as a means of encouraging new private sector entrants into • An electricity ombudsman to be set up in August the generation market (a copy of the Ministerial Direction 2005. can be found on page 23). One of the key changes in the new market is that the The State Government renewed its commitment to economic regulator will be responsible for regulating the disaggregate Western Power as part of its overall electricity services and standards delivered by the networks business. reform program by introducing the Electricity Corporations This is a big change and one we strongly support. Bill 2005 into State Parliament, which passed through the Western Power’s capital and operational expenditure lower house in June 2005. programs will be subject to external scrutiny and challenge, The bill is the last piece of legislation in the State Government’s reform package. The Opposition’s decision
Western Power Annual Report 2005 29 Electricity Reform continued...
“The corporation is committed to fulfilling the Government’s aim to create a competitive electricity market...”
to support the bill has created a level of confidence that the legislation will be enacted to create four separate, stand-alone businesses by 2006, these being: Networks, Generation, Retail and Regional Power.
In anticipation of the passing of the legislation, a comprehensive reform business program has been initiated by Western Power to ensure that each of the new businesses is ready to operate as independent entities by a target date of 31 March 2006.
This program has included a review of current business and operational processes as part of developing new frameworks and organisational structures for each new business.
Much has happened in the past twelve months in relation to the future structure of Western Power and this has provided a much needed clarity and focus for all staff. The corporation is committed to fulfilling the Government’s aim to create a competitive electricity market by ensuring that the four new businesses are equipped to be more performance-driven and customer-focused for the electricity market of the future.
Western Power Annual Report 2005 30 Our Company in 2005
Western Power is Western Australia’s leading energy In addition, Western Power purchases electricity from company and has traded as a corporatised entity Independent Power Producers in the Pilbara. since 1995, following our establishment under Western Power owns about 56 per cent of electricity the Electricity Corporation Act 1994. The Board of generation capacity in Western Australia with the Directors is the governing body, reporting to the remaining 44 per cent owned by private industry. Minister for Energy, while the Managing Director Western Power is a valuable State asset with an equity is responsible for the Corporation’s day-to-day level of $1.70 billion, assets of $4.84 billion and an annual operations. revenue of $1.87 billion. With operations across the State, Western Power owns five Western Power pays to the State Government dividends, major power stations and 23 smaller power stations with a local government rates and charges and the equivalent of total generating capacity of nearly 3,500 MW. Included in Commonwealth income tax. this generation portfolio are seven wind farms, owned and operated by Western Power. Cash payments to government have totalled more than $1,475 million since 1995. We operate and maintain all except one of our major power stations. Collie Power Station is operated and Electricity prices have fallen by an average of nearly 20 maintained by a private company. per cent in real terms over the past decade, with further assurances by the Government at the start of 2005 that Western Power’s 888,103 industrial, commercial and there would be no increase in tariff charges for the next residential customers are supplied with electricity four years. via two major interconnected networks, the South West Interconnected System (SWIS) and North West The corporation is focused on the future and that focus Interconnected System (NWIS). Smaller distribution includes a strong commitment to sustainable practices and networks supply power to customers in 28 regional towns. to the development of renewable energy sources.
Western Power owns and operates power stations in 15 of these towns and purchases power in the others.
Western Power Annual Report 2005 31 Areas serviced by Western Power
legend
South West Interconnected System
North West Interconnected System
Regional Non-Interconnected System (Western Power owned generation)
Regional Non-Interconnected System (Non-Western Power owned generation)
Thermal Generating Station
Hydro Electric Generating Station
Wind Farm
Gas Turbine Generating Station
Solar (Photovoltaic) Generating Station
Western Power Annual Report 2005 32 Statement of Corporate Priorities
Our Statement of Strategic Intent was revised early in the year in line with the new direction and the pending disaggregation of Western Power. Our new Statement of Corporate Priorities provides a focus for our efforts in the immediate future and assists in setting priorities for programs.
Our Seven Corporate Priorities:
1. Demonstrate Operational Strength
− Improve the reliability, safety and quality of electricity. − Ensure there is adequate generation capacity to minimise risk of supply interruptions.
2. Deliver Solid Financial Returns
− Deliver satisfactory financial return to the shareholder, in line with agreed projections, and which incorporate impacting factors such as the extent of market reform and the agreed supply risk position. − Invest in the future of our new businesses
3. Be Competitive and Customer Focused
− Develop capabilities to trade successfully in the new market. − Resolve the commercial issues affecting competitiveness and develop strategies to enhance customer position.
4. Provide full support for Reform
− Support the Government in the implementation of its electricity reform program and the development of a competitive electricity market in WA.
5. Nurture an environment for opportunity and success
− Shape the organisational structure and business model to allow fast and positive response to the electricity reform program. − Develop the people capability to tackle a competitive market. − Ingrain a proactive business culture based on achievement, customer focus and responsibility.
6. Build market and community respect
− Build the reputation of Western Power and develop quality relationships with all its key stakeholders.
7. Maintain strong corporate practices
− Enhance governance and risk management practices with the new business model.
Western Power Annual Report 2005 33 Our Organisational Structure
as at 30 June 2005
Tony Iannello Managing Director
Greg Denton Greg Monkhouse Mark Hands Libby Lyons Nenad Ninkov
Executive Manager Strategy & Reform Executive Manager Human Executive Manager Executive Manager Corporate General Manager Finance, Resources & Organisational Governance & Audit Relations Risk Management & Development & General Counsel. Service Delivery
Office of the Managing Director
Operational Business Units
Trevor James Doug Aberle Ken Bowron John Lillywhite
General Manager Retail General Manager Networks General Manager Regional Power General Manager Generation
Western Power Annual Report 2005 34 Corporate Result Areas
Western Power measures its performance against the Electricity tariffs remain unchanged again this year, with targets set out in its Statement of Corporate Intent, average electricity prices reducing by nearly 20 per cent in which is tabled in State Parliament each year. real terms since 1995.
The targets, while taking into account the company’s We have continued to perform well financially, with return commitments, are deliberately set higher than expected on assets, return on equity and our debt to equity ratio all performance levels to challenge Western Power’s people. meeting targets set for the year.
Increasing efficiency Innovative customer service
Western Power has undergone a period of continued Listening to our customers is the key to being effectively change and significant challenge in the past 12 months responsive. Our ultimate success depends upon the including increased competition and restructure in the enthusiasm and dedication of our own team of people and State’s electricity market and the implementation of major our people remain the “key ingredient” of our customer changes to the corporation’s internal structure.
2004/05 2003/04 2002/03 Performance Indicators Actual Target Actual Actual
Benchmark Performance *
Average unit cost (cents) (Total expenditure before tax / kWh sold) 11.5 10.9 10.7 10.8
Return on assets (%) (EBITDA / average non-current assets) 15.6 14.8 17.4 17.2
Debt to Equity Ratio (Capital structure geared to debt) 59/41 60/40 59/41 62/38
Return on equity (Net profit after income tax / total equity) 12.1 11.2 15.1 15.3
* Performance measures are inclusive of significant items which impact on financial results.
Western Power Annual Report 2005 35 Corporate Result Areas continued...
2004/05 2003/04 Performance Indicator Actual Target Actual
World Class Customer Satisfaction
Average customer satisfaction (score out of five) 3.55 3.95 3.8
service. Every day we service an average of 14,000 of our • Starlight Children’s Foundation
888,000 customers across Western Australia, whether by • The Royal Life Saving Society Australia phone, fax, internet or self-service. We also have account • Regional Junior Cricket and Netball Programs managers in daily contact with our larger customers • West Australian Symphony Orchestra making sure that we satisfy their energy needs. • Charity Link
A key education initiative that Western Power has Listening to our community supported since its inception in 1996 is the World of Western Power touches the lives of thousands of people Energy. The World of Energy is an education centre based every day in communities throughout the State. in Fremantle that provides information about all aspects
We believe we should have more than one role in these of Western Australia’s energy industry, through the use of communities. Clearly we have our business role, but we interactive displays and multimedia. have also chosen to contribute where we educate our The centre offers a range of hands-on, curriculum-based young people about science, energy and the environment, educational programs for primary and secondary students, work with landcare groups to preserve our environment, and has a strong focus on promoting an awareness and cultivate the development of sports, and support the arts. understanding of a variety or energy and environmental
Some of our major community partnerships include: issues. These programs are offered on-site at the World of Energy and also on request at schools throughout the • Western Power Parkland metropolitan and regional areas.
Western Power Annual Report 2005 36 Corporate Result Areas continued...
Caring for our people
The welfare of our people is paramount and we despite additional workloads and pressures placed upon integrate safety in all we do. We manage the the corporation. risks inherent in the generation, transmission and Following the tragic electrocution of a Networks employee distribution of electricity to provide a safe and in August 2004, safety procedures around the job risk healthy working environment for all our people. assessment process have been reviewed and strengthened.
We have more than 2,700 people working for us around The SWITCH ON MATE education program, which focuses the state, including small depots in remote locations, on the key aspects of safety communication and keeping power stations in country towns and head office in the minds focused on the job, has been delivered to all city. To improve the quality of working life and business employees in Networks. performance, reduce the risks of illness and injury and to During the year business units have participated in safety boost well-being, we drive a number of programs and audit programs, including an external assessment of initiatives. Western Power’s safety management systems conducted
Consistent with safety as our core value, in everything we by minRISK Pty Ltd. The four strengthened business units do we first consider the safety of our people, contractors have been working to improve their safety management and the public. Our safety performance is reflected in our systems in readiness for disaggregation. Generation has Lost Time Injury Frequency Rate, which is 4.5, against a established an integrated Health, Safety, Security and target of <5.0. It has been a year of consolidation with the Environment Management System as part of this process. number of medical treatment incidents holding steady,
2004/05 2003/04 2002/03 Performance Indicator Actual Target Actual Actual
Lost Time Injury Frequency Rate (LTIs / million hours worked) 4.5 <5.0 4.1 5.2
Western Power Annual Report 2005 37 Corporate Facts and Figures
State Records Act 2000
Western Power maintains and supports quality Market Research Organisations: $1,319,268.71 - Data recordkeeping practices in its day-to-day business activities. Analysis Aust. Pty Ltd, Market Equity Pty Ltd and Neo All records are managed according to the requirements Knowledge. of the State Records Act 2000 and Western Power’s Media Advertising Organisations: $2,418,428.56 - approved Recordkeeping Plan. Regular reviews are Marketforce Productions and Media Decisions WA conducted of the corporate recordkeeping systems and Total expenditure was $5,043,485.87 practices to ensure their efficiency and effectiveness. New employees and contractors are provided with information on the recordkeeping 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.
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 financial year ended 30 June 2005 is disclosed as follows:
Advertising Agencies: $1,305,788.68 – 303 Advertising, The Brand Agency Pty Ltd, Marketforce Productions, Shearman Communications (WA) Pty Ltd, Hermes Precisa Pty Ltd and TMP Worldwide Pty Ltd.
Western Power Annual Report 2005 38 Corporate Facts and Figures continued...
Western Power Workforce
At 30 June 2005 At 30 June 2004 At 30 June 2003
Generation 523 N/A* N/A*
Networks 1,565 N/A N/A
Regional Power 149 N/A N/A
Retail 211 N/A N/A
Shared Services 139 N/A N/A
Corporate Services 187 N/A N/A
Total 2,774 2616 2590
* Changes in Western Power’s organisation structure required to facilitate the disaggregation of the corporation in 2006 has meant that we are unable to compare yearly employee numbers for each business unit accurately. We have included a comparison of total numbers.
Environmental Due Diligence
Western Power’s operational sites are subject to State and Environmental due diligence audits were undertaken by Federal environmental legislation, and some require State internal and external accredited auditors to assess the environmental licences. Complying with all regulatory and effectiveness of processes that manage environmental licence requirements is an integral part of Western Power’s compliance and identify potential liabilities or gaps in value of practical environmental care at all times. these processes. The results of this work revealed that overall environmental performance was high in terms Environmental due diligence in Western Power is provided of implementation of specific elements of the EMS and by a corporate Environmental Management System (EMS) compliance with environmental licences and permit which is driven by an intranet based documentation and conditions. management tool (EMISWeb) to facilitate the process of environmental governance and management in the ESAA Code audit corporation. As a signatory to the Energy Supply Association of Although the EMISWeb has been split to independently Australia’s (ESAA) Environmental Code of Practice, service each new entity (after 31 March, 2006), Western Power is committed to the promotion of Western Power’s environmental due diligence will be sustainable development, social responsibility and maintained up to that point through corporate EMS environmental and resource management in the documentation and reporting to ascertain overall production and delivery of electricity. environmental performance.
Western Power Annual Report 2005 39 Corporate Facts and Figures continued...
Internal auditors completed the biennial audit of our harm. However six incidents, including three minor performance in November 2004. The company’s overall licence departures, were reported to the Department of score was 4.3 (based on a scale of 0 to 5) compared to the Environment in accordance with the conditions of the national average score across the industry of 3.8. operating licences.
Our results indicate that on average, environmental management practices in Western Power have improved to a point where aspects of the corporation’s performance demonstrate leadership or industry best practice implementation and functioning of Code actions.
ESAA overall average Western Power Score Western Power Score Policy score 2004 2004 2002
A - Sustainable Development 3.9 4.4 4.2
B - Social Responsibility 3.8 4.5 4.3
C - Environmental Responsibility 3.7 4.2 4.1
D - Resource Management 3.6 4.2 4.2
All Policies 3.8 4.3 4.2
Environmental incidents
To enable effective corrective and preventative action to be taken, all environmental incidents in Western Power are recorded in our Environmental Management System. In 2004/05, there were no environmental incidents that caused pollution or any significant environmental
Western Power Annual Report 2005 40 Glossary
CAIDI Total outage duration minutes / average number of customers.
Carbon Dioxide. CO2
Carbon Dioxide equivalent The amount of carbon dioxide that has the same global warming effect as a CO e 2 mixture of greenhouse gases.
EMS Environmental Management System.
EMISWeb Electronic environmental management information 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. International Standards Organisation 14001. The international standard for environmental management ISO 14001 systems. IEEE The Institute of Electrical and Electronic Engineers, Inc.
kV Kilovolt. One kV = 1000 volts. A volt is the unit of potential of electric pressure.
kW Kilowatt. One kW = 1000 watts. A watt is the rate at which electrical energy is produced or used.
Kilowatt-hour.The standard unit of energy, equivalent to the consumption rate of one kilowatt for one kWh hour. Commonly used as the ‘unit’ of electrical energy.
Megavolts-ampere. The product of the voltage rating (kV) and the current rating (kA).Used to represent MVA the rating of electrical equipment such as transformers.
MW Megawatt. One MW = 1000 kW or one million watts.
MWh Megawatt-hour. One MWh = 1000 kWh.
Nitrogen Oxides. A term used for a mixture of nitrogen oxides. NOX SAIFI Total customers interrupted / average number of customers.
Sulfur Dioxide SO2 Spinning The amount of instantly available spare generation capacity on the system at any one moment. Reserve SWIS South West Interconnected System
SCNRRR Steering Committee on National Reliability Reporting Requirements
TJ Terajoule. One TJ = one million, million joules, or 1012 joules. Used to indicate the energy content of gas.
Western Power Annual Report 2005 41 Electricity Corporation ACT 1994
MINISTERIAL DIRECTION
I, Alan Carpenter MLA, acting in accordance with section 66 of the Electricity Corporation Act 1994, direct that the corporation must:
(a) not establish any new or additional generating works (as defined in section 3 of the Electricity Industry Act 2004) if those new or additional generating works will cause the aggregate maximum electricity generation capacity (as specified by the manufacturer of each generating works and taking into account any capacity upgrades to those generating works) of all generating works owned by the corporation for the provision of electricity to the South West interconnected system, to exceed, or be likely to exceed, 3000 megawatts in any year, other than:
(i) upgrades to existing generating works which are scheduled to commence operations before 1 January 2007;
(ii) generating works that generate electricity solely using renewable energy sources; or
(iii) generating works which will provide electricity capacity to an electricity system other than the South West interconnected system (as defined in section 3 of theElectricity Industry Act 2004); and
(b) apply for a generation licence (as defined in section 3 of the Electricity Industry Act 2004) for each of the Muja A/B generating works, the Kwinana A generating works and the Kwinana B generating works, the duration of which is not to exceed the date of the planned retirement of each generating works (in accordance with a retirement program to be determined by the corporation prior to the date that the corporation applies for a generation licence for the relevant generating works).
Alan Carpenter MLA
MINISTER FOR ENERGY
7 April 2005
Western Power Annual Report 2005 42 financialreview 2005 financial review 2005
STATISTICAL SUMMARY 44 DIRECTORS’ REPORT 45 STATEMENT OF FINANCIAL PERFORMANCE 64 STATEMENT OF FINANCIAL POSITION 65 STATEMENT OF CASH FLOWS 66 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005 67 DIRECTORS’ DECLARATION 117 INDEPENDENT AUDIT REPORT 118 STATISTICAL SUMMARY
Five Year Financial Summary
UNIT 30/06/05 30/06/04 30/06/03 30/06/02 30/06/01
Sales Revenue $’000 1,615,888 1,542,806 1,482,099 1,433,760 1,415,685
Total Revenue $’000 1,874,626 1,773,207 1,697,900 1,601,236 1,573,833
Total Expenditure $’000 1,430,949 1,273,858 1,234,597 1,148,083 1,126,464
Borrowing Costs $’000 146,745 148,164 144,337 154,089 161,057
Income Tax Expense $’000 90,797 109,604 96,901 91,342 98,121
EBIT $’000 443,677 499,349 463,303 453,153 447,369
EBITDA $’000 673,100 728,133 691,396 673,509 658,540
Net Profit after Income Tax Expense $’000 206,135 241,581 222,065 207,722 188,191
Current Assets $’000 416,068 366,693 347,239 332,937 345,749
Non-Current Assets $’000 4,422,672 4,222,747 4,131,499 3,906,638 3,764,311
Total Assets $’000 4,838,740 4,589,440 4,478,738 4,239,575 4,110,060
Current Liabilities $’000 345,342 334,096 309,001 283,174 261,056
Non-Current Liabilities $’000 2,794,594 2,663,904 2,717,596 2,609,220 2,593,586
Total Liabilities $’000 3,139,936 2,998,000 3,026,597 2,892,394 2,854,642
Total Debt $’000 2,450,569 2,325,855 2,416,341 2,332,777 2,363,884
Total Equity $’000 1,698,804 1,591,440 1,452,141 1,347,181 1,255,418
Return on Assets % 15.6 17.4 17.2 17.6 17.6 (EBITDA/average non-current assets) Return on Equity % 12.1 15.2 15.3 15.4 15.0 (Net profit after income tax/total equity) Debt to Equity Ratio 59/41 59/41 62/38 63/37 65/35 (Capital structure geared to debt)
Returns to Government $’000 181,824 211,873 203,669 203,278 184,422
Where necessary, comparative information has been reclassified to achieve consistency in disclosure with current financial year statistics.
Western Power Annual Report 2005 44 DIRECTORS’ REPORT
TABLE OF CONTENTS
1. Directors...... 46 1.1 Company Secretary ...... 47 2. Committees...... 47 3. Directors’ Meetings ...... 48 4. Corporate Governance Statement ...... 48 4.1 Board of Directors ...... 50 4.2 Role of the Committees ...... 51 4.3 Remuneration Report...... 52 4.4 Risk Management ...... 56 4.5 Internal Control Framework ...... 56 4.6 Ethical Standards...... 57 4.7 Environment...... 58 4.8 Communication with Shareholders...... 58 4.9 Other Accountability Measures...... 58 5. Principal Activities...... 59 6. Operating Results...... 59 7. Dividends Paid or Recommended...... 59 8. Review of Operations...... 59 9. Change in State of Affairs ...... 59 10. Events Subsequent to Balance Date ...... 60 11. Likely Developments and Expected Results of Operations...... 61 12. Directors’ Benefits ...... 62 13. Indemnification of Directors and Officers...... 62 14. Auditor Independence and Non-Audit Services...... 62 15. Rounding of Amounts ...... 63
Western Power Annual Report 2005 45 DIRECTORS’ REPORT
The Board of Directors of Western Power Corporation (“the Corporation”) present their report for the financial year ended 30 June 2005.
1.Directors The names and details of the Directors in office at any time during the year or at the date of this Report are:
Neil Douglas Hamilton LLB - Chairman (Age 53) Mr Hamilton was appointed to the Board as a Non-Executive Director in May 2002, Deputy Chair in February 2003 and as Chairman in February 2004. Mr Hamilton holds several chairman and director positions in both public and private companies, and the AFL Players Association Advisory Board. Mr Hamilton’s term expires on 31 December 2007.
During the past three years, Mr Hamilton has served as a director of the following listed companies: • Integrated Group Limited * • Iress Market Technology Ltd * • Insurance Australia Group Ltd * • Chieftain Securities Limited • Sons of Gwalia Limited * denotes current directorship
Jennifer Anne Seabrook BComm, CA - Deputy Chair (Age 48) Ms Seabrook was appointed to the Board as a Non-Executive Director in September 2001 and Deputy Chair in March 2004. Ms Seabrook is a member of the Federal Government’s Takeovers Panel and the Western Australian Government’s Pearling Industry Advisory Committee. Ms Seabrook’s term expires on 30 June 2007.
Antonino (Tony) Mario Iannello BComm, FCPA, FAICD – Managing Director (Age 47) Mr Iannello was appointed as Managing Director in July 2004. Mr Iannello had a distinguished career at BankWest holding many senior positions, with most recently General Manager Finance and Corporate Services. Mr Iannello’s term concludes on 30 June 2007.
Alan James Mulgrew BA - Director (Age 58) Mr Mulgrew was appointed to the Board as a Non-Executive Director in September 2003. Mr Mulgrew is Chairman of Western Australian Tourism Commission and Western Carbon Pty Ltd. He is also Director of Strategic Solutions Pty Ltd, BAC Holdco Pty Ltd and Doric Group Pty Ltd. Mr Mulgrew also held a number of senior executive positions in airport management both in Australia and overseas. Mr Mulgrew’s term expires on 30 June 2006.
John Joseph O’Connor - Director (Age 67) Mr O’Connor was appointed to the Board as a Non-Executive Director in December 2003. Mr O’Connor served as a Commissioner on the Australian Industrial Relations for eight years and is also a Director of Fremantle Port Authority. Mr O’Connor’s term expires on 31 December 2006.
Charlotte Ellen Stockwell BA, B.Ed (Hons), MLM - Director (Age 44) Ms Stockwell was appointed to the Board as a Non-Executive Director in December 2003. Ms Stockwell until June 2005 was Chief Executive Officer Town of Kwinana and until November 2004 a Director of Daughters of Charity Ltd. Ms Stockwell’s term expires on 31 December 2006.
Western Power Annual Report 2005 46 DIRECTORS’ REPORT continued
Harvey Russell Collins BBus, FCPA, FAICD, FSIA - Director (Age 56) Mr Collins was appointed to the Board as a Non-Executive Director in September 2004. He was also Interim Managing Director for five months concluding on 21 July 2004. Mr Collins is Chairman of HBF, a Director of the Government Employees Superannuation Board and holds directorship in both public and private companies. Mr Collins’ term expires on 30 June 2007.
During the past three years, Mr Collins has served as a director of the following listed companies: • IBT Education Limited * • Abra Mining Limited * • Chieftain Securities Limited • iiNet Limited. * denotes current directorship
Mervyn J Davies BE (Hons), M Eng Sc, B Comm - Director (Age 61) Mr Davies was appointed to the Board as a Non-Executive Director in September 2004. Mr Davies has more than 40 years experience working in engineering and senior management positions within the Electricity Supply Industry in NSW. Mr Davies’ term expires on 30 June 2007.
Sue Alison Wilson LLB - Director (Age 45) Ms Wilson was appointed to the Board as a Non-Executive Director in September 2003. Ms Wilson is General Counsel and Company Secretary for the HBOS Australia Group which includes BankWest having previously worked as a partner in a major Western Australian law firm. Ms Wilson resigned from Western Power with effect from 30 June 2005.
1.1 Company Secretary Ian Gilbert Paterson (Age 55) Mr Paterson was appointed Company Secretary in February 2003. Prior to holding this position, Mr Paterson held the role of Executive Officer Management for nineteen years.
2.Committees The Corporation has the Governance and Remuneration Committee and the Audit and Risk Management Committee consisting of the following Directors:
Governance and Remuneration: ND Hamilton (Chairman), JJ O’Connor and AJ Mulgrew.*
Audit and Risk Management: JA Seabrook (Chair), CE Stockwell, HR Collins** and MJ Davies**.
* AJ Mulgrew was a member of the Audit and Risk Committee until October 2004. ** HR Collins and MJ Davies were appointed on 14 September 2004.
Western Power Annual Report 2005 47 DIRECTORS’ REPORT continued
3.Directors’ Meetings The number of meetings of the Board (including meetings of committees) and number of meetings attended by each of the Directors during the financial year ended 30 June 2005 are as follows:
Governance & Audit and Risk Board Meetings Remuneration Management Committee Meetings Committee Meetings A B A B A B ND Hamilton 22 24 4 4 - - JA Seabrook 22 23 - - 11 11 AJ Mulgrew 22 22 2 3 3 3 SA Wilson 13 22 4 4 - - JJ O’Connor 20 22 4 4 - - CE Stockwell 19 22 - - 8 11 HR Collins1 17 21 - - 8 8 MJ Davies2 18 20 - - 7 8 AM Iannello3 23 24 - - - -
A Number of meetings attended.
B Number of meetings eligible to attend during the time the Director held office during the year.
1 HR Collins: Managing Director until 21 July 2004 and Director since 14 September 2004; 2 MJ Davies: Director since 14 September 2004. 3 AM Iannello: Managing Director since 19 July 2004;
4. Corporate Governance Statement This statement outlines the principle corporate governance practices that were followed during the 2004/05 financial year. These practices form the framework that ensure that the business acts with high standards of corporate behaviour and in the best interests of its stakeholders.
On 31 March 2003 the ASX Corporate Governance Council issued “Ten Principles of Good Corporate Governance and Best Practice Recommendations”. The Corporation, whilst not obliged to follow the ASX guidelines, seeks to adopt recognised best practice for publicly listed companies where it is relevant to do so and therefore acknowledges the recommendations and has included details of progress towards compliance with the ASX Best Practice Principles, as detailed below.
The Corporation complies with all the 10 ASX Principles and is currently developing a web presence to disclose its corporate governance information.
Western Power Annual Report 2005 48 DIRECTORS’ REPORT continued
ASX Corporate Governance Principles
Best Practice Western Power Governance Practices Recommendation
1. Lay solid foundations · The role and responsibilities of the Board and Committees of the Board are clearly defined in for management and Charters for each body. oversight · A comprehensive Corporate Governance Framework defines the system by which the Corporation is directed and managed. It influences how objectives are set and achieved, how risk is monitored and assessed and performance optimised. It supports directors and senior managers in undertaking their governance responsibilities. · Management’s responsibilities are well defined and documented through formal position descriptions, performance agreements and Board-approved delegation of authority policies.
2. Structure the Board to · All Non-Executive Directors (including the Chairman) are considered to be independent. add value · Details of Director’s experience, expertise and attendance at Board and Committee meetings are disclosed in the Annual Report. · Each director has access to all relevant company information and personnel. Subject to prior consultation with the Chairman, directors may seek independent professional advice on any matter, at the Corporation’s expense. A copy of the independent advice received is available to all other members of the Board.
3. Promote ethical and · The Corporation has a set of behavioural standards incorporating leadership principles and responsible decision- minimum standards applicable to the management of its personnel as well as a Code of making Conduct setting out minimum standards of conduct for all personnel.
4. Safeguard integrity in · The Managing Director and General Manager Finance, Risk Management and Service Delivery financial reporting certify that the financial statements give a true and fair view to the Board. · The Board has an Audit and Risk Management Committee that operates under a formal Charter. The committee comprises of only independent directors with a Chair who is not the Chairman of the Board. Membership and attendance of the Audit and Risk Management Committee is disclosed in the Annual Report. · The Risk Assurance and Audit branch performs the internal audit function. · The Office of the Auditor General performs the external audit function.
5. Make timely and · Western Power is a statutory corporation. As such, the ASX Listing Rules do not apply. balanced disclosure · Nonetheless, an extensive continuous reporting regime is in place in relation to the Corporation’s shareholder, the Minister for Energy (including quarterly reporting in relation to the Statement of Corporate Intent which is negotiated and completed with the Minister on an annual basis). The Minister tables the Statement of Corporate Intent in both Houses of Parliament within 14 days of its approval.
6. Respect the rights of · The Corporation has developed a formal protocol to ensure that a comprehensive level of shareholders governance applies to all communications with the Minister and his Office. · Legislation requires the Corporation to consult the Minister on major initiatives or courses of action that are likely to be of significant public interest. The Corporation must obtain the approval of the Minister for major strategic initiatives and any project involving expenditure greater than one per cent of the written down value of the Corporation’s fixed assets.
7. Recognise and manage · The Board Audit and Risk Management Committee oversees risk related issues. The risk committee oversees the Risk Management Framework and its implementation plan. · The Managing Director and General Manager Finance, Risk Management and Service Delivery certify to the Board that the financial statements are founded on a sound system of risk management and internal compliance and control, which implements the policies adopted by the Board.
8. Encourage enhanced · A performance framework is established and overseen by the Board’s Governance and performance Remuneration Committee (as reflected in its Charter). · Board has an induction process in place for directors and on-going education. · Board has a comprehensive performance evaluation regime in place that covers the evaluation of the Board, its Committees, Business Units and members of staff. · During 2005 the Board undertook a formal performance assessment evaluation of the Board, its Committees and associated processes.
Western Power Annual Report 2005 49 DIRECTORS’ REPORT continued
Best Practice Western Power Governance Practices Recommendation
9. Remunerate fairly and · The Minister for Energy approves the remuneration of all non-executive directors. responsibly · The Board subject to the concurrence of the Minister for Energy approves the remuneration of the Managing Director. · The Board on recommendation of the Managing Director approves the remuneration of all Executive Officers. · The directors and senior executive remuneration is disclosed in the Annual Report.
10. Recognised the · The Corporation has a clear view of its wider group of stakeholders (including but not legitimate interests of limited to the Minister and Government, employees, customers, the community, unions and stakeholders regulatory authorities).
4.1 Board of Directors
Role of the Board The Board of Directors is the governing body of the Corporation and is responsible to the Minister for Energy (“the Minister”) for the performance of the Corporation. Subject to the Electricity Corporation Act 1994 (“the Act”), the Board has the authority to perform the functions, determine policies and control the affairs of the Corporation.
The Corporation’s operating activities focus on ensuring safe, reliable and secure supplies of electricity, delivering consistently high levels of customer service and increasing the value of the Corporation. In undertaking these activities, an acceptable balance will be sought between the Corporation’s three fundamental priorities:
• Commercial requirements: The Act requires the Corporation to act in accordance with prudent commercial principles and endeavour to make a profit consistent with maximising its long-term value. • Reliability and safety requirements: The Act, related legislation and regulations require the Corporation to supply electricity in a safe and reliable manner. Since it was established, the Corporation has placed the safety of the public and its employees as its overarching value and has consistently sought to maximise reliability and security of supply consistent with its other obligations. • Government policy: As a State-owned enterprise, the Corporation is mindful and supportive of Government policies that will impact on the Company’s business operations. Accordingly, the Corporation assists the Government to implement its polices and acts in accordance with the policies to the maximum extent possible, subject to other legislated requirements.
Composition of the Board Legislation passed through Parliament in 2003 increased the maximum number of non-executive directors by two. The Corporation’s Board of Directors now comprises:
• The Managing Director; • No less than four and no more than eight non-executive directors appointed by the Governor of Western Australia (“the Governor”) on the nomination of the Minister; • The Governor appoints the Chairman and Deputy Chairman, appointments in each case are made on the nomination of the Minister; and • The Managing Director may not hold the positions of Chairman or Deputy Chair.
Western Power Annual Report 2005 50 DIRECTORS’ REPORT continued
The Board is scheduled to meet at least ten times per year to address the strategic issues of the business and as needed special meetings are held to address urgent issues that are encountered during the year.
When a non-executive director position is vacant, the Board may recommend a candidate to the Minister. If the Minister chooses to make a nomination to the Governor, the Minister must ensure that:
• Each nomination is made only after consultation with the Board (except where the nominee was recommended by the Board); and • The nominee is not a member of the Corporation's staff.
Non-executive directors are appointed for periods of up to three years and are eligible for reappointment. The Governor may, at any time, remove a director from office. The Governor need not give any reason for doing so. A director may resign from office by notice in writing delivered to the Minister.
The Act prohibits directors from:
• Making improper use of information or their position; • Voting in matters where they have a material personal interest; and • Furnishing false information.
The Act also prevents directors and their relations from receiving loans from the Corporation.
4.2 Role of the Committees
Governance and Remuneration Committee The Governance and Remuneration Committee’s role is to:
• Develop and review the Corporation’s corporate governance framework and policies; • Quality assurance relating to the integrity and probity of the Corporation’s remuneration policies and practices; • Power to determine the remuneration and other terms and conditions of service for Western Power staff; • Succession planning and nomination of directors and the Managing Director in accordance with Section 7(3) and Section 13(2)(b) of the Act; and • Review the performance of the Board and its Committees and the Managing Director.
The Governance and Remuneration Committee is authorised by the Board to evaluate different remuneration methods and philosophies, and investigate any activity within its terms of reference. The Governance and Remuneration Committee is a non-executive Committee. It has unrestricted access to personnel records and senior management as appropriate. The Governance and Remuneration Committee is authorised to obtain outside independent professional advice and if it considers it necessary, to secure the attendance of outsiders with relevant experience and expertise.
The Governance and Remuneration Committee consist of not less than two and up to four non-executive directors. The Chairman of Western Power will be the Chairman of the Governance and Remuneration Committee.
Western Power Annual Report 2005 51 DIRECTORS’ REPORT continued
Audit and Risk Management Committee The purpose of the Audit and Risk Management Committee is to assist the Board to fulfil its corporate governance and oversight responsibilities in relation to financial reporting, capital investment, internal control structure, risk management systems, compliance framework and the internal and external audit function.
The Audit and Risk Management Committee is authorised by the Board to investigate any activity within its terms of reference. The Audit and Risk Management Committee is a non-executive Committee and is tasked with recommending to Western Power appropriate actions emanating from these investigations. The Audit and Risk Management Committee shall have unrestricted access to personnel, records, external auditors, risk assessment and assurance and senior management as appropriate. The Audit and Risk Management Committee is authorised by the Board to obtain outside legal or other independent professional advice and to secure the attendance of outsiders with relevant experience and expertise if it considers this necessary.
The Audit and Risk Management Committee consist of not less than two and up to four independent non- executive Directors, each of whom is financially literate. 4.3 Remuneration Report
A. Principles Used to Determine the Nature and Amount of Remuneration Remuneration approval protocols are as follows:
Specified Non-Executive The Minister����������������������������������������������������������������������������� for Energy approves the remuneration of all Non-Executive Directors. Directors: The Board subject to the concurrence of the Minister for Energy approves the remuneration Managing Director: of the Managing Director (also referred to as the CEO). Specified Executive The Board on�������������������������������������������������������������������������� recommendation of the Managing Director approves�������������������������������� the remuneration of all Officers: Specified Executive Officers.
The Remuneration Policy is to:
• remunerate individuals in accordance with performance and responsibility; • ensure consistent decision making on individual remuneration adjustments; • establish flexible remuneration arrangements; and • establish and maintain salary ranges comparable to other companies of similar size and industry.
Specified Non-Executive Directors Payment to Specified Non-Executive Directors consists of Base Remuneration, a Committee Fee and superannuation.
Managing Director and Specified Executives The Managing Director and Specified Executives remuneration framework is based upon:
Total Target Remuneration that includes: • Total Fixed Remuneration structured with: • Cash; • Selection of prescribed non-financial benefits; • Superannuation; and • Cost of the fringe benefit tax. • An annual at risk remuneration element
Western Power Annual Report 2005 52 DIRECTORS’ REPORT continued
Total Fixed Remuneration The remuneration framework is market competitive, performance based with flexibility for the package to be structured at the executive’s discretion upon a combination of cash, a selection of prescribed non-financial benefits, superannuation and cost of the fringe benefit tax.
External remuneration consultants provide analysis and advice to ensure remuneration is set to reflect the market for a comparable role. Remuneration for executives is reviewed annually to ensure the level is market competitive. There are no guaranteed remuneration increases included in any executive contracts.
Non-financial Benefits – selection available: cost of novated or associated leasing of selected motor vehicle, electricity (to a maximum tax allowable figure), laptop computer, salary continuance insurance, life insurance, health checkup and the cost of the fringe benefits tax.
Superannuation - is paid at not less than the amount that is required under the Superannuation Guarantee (Administration) Act 1992 (Cth), on the Executive’s behalf to a superannuation fund which is a Complying Superannuation Fund within the meaning of that Act.
Annual At Risk Remuneration Element - At the Board’s absolute discretion with the concurrence of the Minister, the Managing Director is eligible for up to 10% of remuneration for the achievement of specific performance targets in the following areas: Strategic Leadership, Operational Management, Team Building and Leadership, Commercial Acumen and Customer Management, Strong Financial Analysis Ability, Media and Public Relations and Shareholder Relationship.
Review of Remuneration Arrangements A review of remuneration strategies was undertaken during 2005 and the Board has adopted effective for 2005/06 a more strategic, performance based remuneration program to underpin a high performance work culture, and assist attraction and retention of a talented workforce.
Western Power Annual Report 2005 53 DIRECTORS’ REPORT continued
B. Details of Remuneration Details of the nature and amount of each element of the emolument for Specified Directors(1) during 2004/05 are detailed below:
Post Employment Other Primary Benefits Total Benefits Benefits Benefits Salary Bonus Non- Superannuation b Retirement & Termi- Total & Fees Monetary a nation Benefits $ $ $ $ $ $ Non-Executive Specified Directors ND Hamilton Chairman 2004/05 104,006 - 666 9,147 - 113,819 2003/04 63,719 - 668 5,866 - 70,253 JA Seabrook Deputy Chair 2004/05 66,813 - 666 5,829 - 73,308 2003/04 45,915 - 668 4,206 - 50,789 AJ Mulgrew Director 2004/05 51,868 - - 4,395 - 56,263 2003/04 40,152 - - 3,429 - 43,581 SA Wilson Director 2004/05 16,441 - - 37,815 - 54,256 2003/04 33,157 - - 9,590 - 42,747 Mr JJ O’Connor Director 2004/05 30,272 - - 22,365 - 52,637 2003/04 19,869 - - 6,867 - 26,736 Ms CE Stockwell Director 2004/05 48,290 - - 4,347 - 52,637 2003/04 24,563 - - 2,173 - 26,736 HR Collins Director (Appointed 14 September 2004) 2004/05 37,619 - 528 3,436 - 41,583 MJ Davies Director (Appointed 14 September 2004) 2004/05 38,146 - - 3,436 - 41,582 Others reported in2003/04 113,737 - 556 10,288 - 124,581 Executive Specified Directors AM Iannello Chief Executive Officer (Appointed 19 July 2004) 2004/05 400,093 584 32,209 432,886 Mr HR Collins Chief Executive Officer (Resigned 21 July 2004) 2004/05 19,431 - 187 1,709 10,382 31,709 2004/03 120,523 - 743 10,598 - 131,864 Others reported in 003/04 230,898 - 41,181 32,421 - 304,500 Total Specified Directors 2004/05 812,979 - 2,631 124,688 10,382 950,680 2003/04 692,533 - 43,816 85,438 - 821,787
a Non-monetary benefits represent motor vehicle benefits and electricity benefits. b Superannuation represents employer and employee contributed superannuation.
(1) Specified Executive means a person who who was, at any time during the reporting period, a director of the Corporation.
Western Power Annual Report 2005 54 DIRECTORS’ REPORT continued
Details of the nature and amount of each element of the emolument for Specified Executives(2) during 2004/05 are detailed below:
Post Employment Other Primary Benefits Total Benefits Benefits Benefits
Salary Non- Retirement & Termi- & Fees Bonus Monetary a Superannuation b nation Benefits Total $ $ $ $ $ $ Specified Executives
DT Aberle General Manager Networks
2004/05 264,328 - 30,326 39,156 - 333,810
2003/04 211,567 6,850 21,604 36,077 - 276,098
JE Lillywhite General Manager Generation
2004/05 230,766 - 19,498 44,354 - 294,618
2003/04 196,651 6,850 25,689 42,186 - 271,376
N Ninkov General Manager Finance, Risk Management and Service Delivery
2004/05 233,177 - 25,695 30,020 - 288,892
2003/04 221,949 6,850 29,361 26,824 - 284,984
TH James General Manager Retail
2004/05 187,849 - 20,626 35,196 - 243,671
2003/04 148,356 6,850 19,090 31,356 - 205,652
KD Bowron General Manager Regional
2004/05 192,247 - 16,931 32,537 - 241,715
2003/04 145,795 6,850 16,872 30,379 - 199,896
Others reported in 576,153 32,400 111,705 118,631 562,360 1,401,249 2003/04 Total Specified Executives
2004/05 1,108,367 - 113,076 181,263 - 1,402,706
2003/04 1,500,471 66,650 224,321 285,453 562,360 2,639,255
a Non-monetary benefits represent motor vehicle benefits and electricity benefits. b Superannuation represents employer and employee contributed superannuation.
(2 ) Specified Executive means one of the five or more executives who: a. have the highest emoluments/greatest authority for managing the economic entity; b. are employed at any time during the reporting period by the entity; and c. are not specified directors. Executive means a person who is directly accountable and responsible for the strategic direction and operational management of the entity.
Western Power Annual Report 2005 55 DIRECTORS’ REPORT continued
4.4 Risk Management
Processes and systems are in place to manage the Corporation’s business, environmental and operational risks. This process was formalized during the year with the endorsement of the Risk Management Framework and implementation plan. The Framework, which is consistent with Australian Standard “AS4360 Risk Management”, provides a methodology and process for the identification, allocation and management of risk throughout the Corporation. Business Unit managers are responsible for implementing strategies to mitigate risks that have been classified as extreme or high. The Audit and Risk Management Committee oversees the Framework and reviews the effectiveness of key mitigation strategies. Risk reviews are conducted at least annually to ensure emerging risks, such as those from changes in market structure and design, organizational restructures, and operational issues are identified and responses developed.
The Risk Management Branch provides advice to business unit management and coordinates the findings of the various risk reviews undertaken.
The Treasury Branch makes recommendations to the Board on the appropriate level of insurance cover for the Corporation. Financial risk issues are managed through a Treasury Policy Statement that requires regular reporting to the Audit and Risk Management Committee on treasury activities.
4.5 Internal Control Framework
The Board is responsible for the overall internal control framework. While recognising that no cost effective internal control system can preclude all errors and irregularities, the rigour of regular assessment ensures performance is kept under review.
To monitor the performance and management of the Corporation, the Board has instigated an internal control framework covering financial reporting, quality of personnel, business unit controls and expenditure guidelines.
The Corporation’s internal control system is based on:
• Written procedures, policies and guidelines; • Organisational structures that provide an appropriate division of responsibility; • A program of internal audit; and • The careful selection and training of qualified personnel.
Financial Reporting Actual financial results are reviewed against budget each month. Reports on performance, including financial statements, are produced quarterly and submitted to the Minister. Revised forecasts for the year are also prepared each quarter.
A five-year budget is produced annually from a comprehensive budgeting system and approved by directors. This is included in the Strategic Development Plan (SDP) produced by the Corporation each year.
Management is required to sign-off on a detailed questionnaire that covers: management of risks, overall control environment, regulatory areas and financial reporting. These support the sign-off by the Managing Director and General Manager Finance, Risk Management and Service Delivery in the assurances provided to the Board for the half-year and full-year results.
Western Power Annual Report 2005 56 DIRECTORS’ REPORT continued
Business Unit Controls On a quarterly basis, business unit finance managers confirm the reasonableness and accuracy of their financial records. Half yearly, business unit finance managers confirm compliance with financial controls and procedures to support the Board’s certification of the accounts.
Expenditure Guidelines The Corporation has clearly defined guidelines for operating and capital expenditure. These include annual budgets, detailed appraisal and review procedures as well as formally stated levels of delegated financial authority approved by the Board. The Corporation must obtain the approval of the Minister for major strategic initiatives and any project involving expenditure greater than one per cent of the written down value of the Corporation’s fixed assets.
Internal and External Audit The internal audit function of the Corporation reports directly to the Executive Manager Governance and Audit and pursuant to a second reporting line, reports are made available to the Audit and Risk Management Committee, so that the internal audit objectives, plans and resources provide for adequate support of the Committee’s own goals and objectives. The internal audit function is independent of the external audit and has full access to the Audit and Risk Management Committee, and to the staff and records of the Corporation.
The Act requires the Auditor General to complete an audit of the Corporation by 30 September each year. If this is not undertaken, an interim report is to be submitted to the Minister setting out the reasons for his inability to complete the audit by that date.
Quality of Personnel The Corporation has a formal employee appraisal framework designed to see the cascading of the company’s vision and goals – its strategic plan, linked into individual’s achievement plans so ensuring the corporate goals are translated into action.
Special attention has been given to identifying skill gaps, ensuring appropriate resourcing and succession- planning processes are implemented via the Workforce Planning project, which is currently being implemented. This process will assist in attracting and retaining employees within some specific skill areas.
4.6 Ethical Standards
The Corporation is mindful of its duties outlined in the Act and has developed a set of behavioural standards incorporating leadership principles and minimum standards applicable to the management of the staff as well as a Code of Conduct setting out minimum standards of conduct for all staff.
Conflicts of Interest Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Corporation. The Board has developed procedures to assist directors to disclose potential conflicts of interest.
Where the Board believes that any conflict exists for a director on a board matter being considered, the director concerned does not receive the relevant board papers and is not present at the meeting whilst the item is considered.
Western Power Annual Report 2005 57 DIRECTORS’ REPORT continued
4.7 Environment Environmental Standards The Corporation recognises that rigorous environmental management is critical to the sustainability of the business. Corporate policies and strategies are in place encompassing environmental management principles administered through a formal Environmental Management System (EMS). These principles include community consultation, planning, compliance and sustainable development with continuous improvement objectives. Adherence to environmental policies and implementation of the EMS are audited. A steady decline in the greenhouse intensity of energy supplied and enhancement of environmental reputation are included in the Corporation’s corporate performance targets.
Environmental Regulation Performance All Corporation sites are subject to a range of environmental regulations, both State and Federal, and some are also covered by specific Ministerial conditions and environmental operating licences issued by the State. All performance obligations under these regulations, conditions and licences are monitored, audited and reported, and may be subject to Government agency audit or inspection from time to time. No actions have been taken against the Corporation by any Government agency for any breaches of environmental regulation, Ministerial condition or licence conditions in the financial year ended 30 June 2005.
4.8 Communication with Shareholders The Corporation’s key stakeholder is the company’s shareholder, the Minister, and therefore the Government of the day. A formal protocol has been developed to ensure that the most comprehensive levels of governance apply to communications with the Minister and his Office. The protocol specifically reflects the particular relationship that exists between a corporatised Government Trading Enterprise and the Government.
Overall, the protocol recognises that the Minister must receive information to enable him to discharge his duties. It seeks to ensure that this will be factual, timely and reflect the best available information at the time.
4.9 Other Accountability Measures It is a requirement under the Act that the Corporation produces, annually, both a Statement of Corporate Intent, a one-year plan and a Strategic Development Plan, a five-year plan. These are to be agreed between the Minister and the Board with the concurrence of the Treasurer.
Strategic Development Plan The Strategic Development Plan (SDP) is a confidential document. It sets out the Corporation’s five-year economic and financial objectives, Strategic Result Areas and associated performance targets as well as strategies. The 2005/06 SDP has been submitted to the Minister.
Statement of Corporate Intent The Statement of Corporate Intent (SCI) sets out the Corporation’s scope of activities, objectives and performance targets for the financial year ahead and is consistent with the SDP. The SCI is tabled in Parliament after agreement with the Minister and the Treasurer’s concurrence. The 2005/06 SCI has been submitted to the Minister.
In addition, the Corporation provides written quarterly and annual reports to the Minister detailing its performance and progress made in fulfilling the agreed targets set in the SCI.
Western Power Annual Report 2005 58 DIRECTORS’ REPORT continued
5.Principal Activities The functions of the Corporation are: • to generate, acquire, exchange, transport, distribute, market and otherwise supply electricity to commercial, industrial and residential customers throughout Western Australia; • to undertake, maintain and operate any works, systems, facilities, apparatus or equipment required for such purposes; • to use its expertise and resources to provide consultative, advisory or other services for profit; • to develop and turn to account any technology, software or other intellectual property that relates to activities referred to above; and • to manufacture and market any product that relates to these activities including the retailing of gas.
It is also the function of the Corporation to use or exploit its fixed assets for profit so long as the proper performance of its functions are not affected. The Corporation can do anything that it determines to be conducive or incidental to the performance of its function mentioned above.
The Corporation in performing its functions must act in accordance with prudent commercial principles and endeavour to make a profit, consistently with maximizing its long term value.
There have been no significant changes in the nature of the principal activities during the financial year.
6.Operating Results For the financial year ended 30 June 2005, the Corporation achieved a net profit after income tax of $206.1 million.
7.Dividends Paid or Recommended Dividends paid or recommended by the Corporation since the end of the previous financial year were:
• An interim dividend of $ 54.2 million in respect of the period ended 31 December 2004, paid on 30 June 2005. • A final dividend of a further $ 51.6 million in respect of the financial year ended 30 June 2005, recommended to be paid during December 2005.
8.Review of Operations The operations of the Corporation during the financial year and the result of those operations are discussed in the Chairman’s and Managing Director’s Review, Financial Review section and Review of Operations section of the Annual Report.
9.Change in State of Affairs There were no significant changes in the state of affairs of the Corporation during the financial year, except as noted below: • In July 2004, Tony Iannello was appointed Managing Director of Western Power. In August, Mr Iannello instituted significant structural changes to Western Power in preparation for the eventual disaggregation of the company. As part of the re-structure, four Strengthened Business Units were created, representing the four operational arms of the business. • In August 2004, Western Power announced StateWest Power was the successful bidder in the MidWest Power Procurement program and would build power stations in five remote towns. Similar procurement programs are delivering efficient, modern generation solutions helping Western Power to meet customer expectations, comply with environmental licensing provisions and reduce losses in regional areas of the State.
Western Power Annual Report 2005 59 DIRECTORS’ REPORT continued
• In early October 2004, an innovative way of achieving renewable energy certificated (RECs) targets was formalized with the signing of a biomass agreement with Western Australian pallet manufacturer Pinetec Ltd. In displacing some 45,000 tonnes of coal each year, with a corresponding reduction of greenhouse gas emissions, this agreement will produce more than 70,000 RECs a year. The agreement runs until 2010. • In October 2004, Western Power signed a gas transportation agreement with the eventual new owners of the Dampier to Bunbury Natural Gas Pipeline. The agreement sealed a gas transportation price and an agreed mechanism for access to future expansion of gas pipeline capacity. • Industrial action by the workforce of the Western Power maintenance contractor at Muja Power Station caused considerable delay to the completion of the company’s generation portfolio maintenance schedule. • In the lead-up to summer, Western Power initiated a number of programs to increase generation capacity and improve fuel flexibility in order to safeguard power supplies over the high demand summer period. This included installing cooling sprays at Pinjar Power Station to offset the effect of hot weather and provide 40-50 MW additional capacity, repairs of the two Muja Stage C units, which were damaged during 2003 and the rental of four mobile distillate-fuelled turbines. Together these projects realised a 185-205MW increase in generating capacity over the previous summer. • On completion of a $7 million, 132,000-volt transmission link between the Parkestone Power Station and the State’s main power grid in Kalgoorlie-Boulder, Western Power signed a power purchase agreement with the Parkeston Power Station in December 2004 increasing available capacity by 35MW. • Western Power has increased its oil stocks to achieve greater flexibility and security in fuel arrangements and to offset occasional constraints on the Dampier to Bunbury Natural Gas Pipeline. The impact of these measures, in the short-term, has been that higher fuel costs have been experienced. • Deregulation to 5.7kW of the retail electricity market in WA on 1 January 2005 resulting in 60% of Western Power sales being able to change supplier. • In early March 2005, the State Coroner handed down findings in relation to the death of two women in the Tenterden bushfire of 2003. The findings included a comprehensive set of recommendations for Western Power to implement regarding network operation and bushfire risk mitigation. Western Power has made major inroads into a number of the areas raised by the Coroner and has given an undertaking to report to the Coroner on steps taken to action the recommendations. • Western Power also faced prosecution in the Perth Magistrate’s Court in April 2005 over a series of safety incidents that occurred in 2002 and 2003. Western Power pleaded guilty to these offences and was fined a total of $80,500. Actions to remedy this situation have been put in place. • As part of preparation for the disaggregation of Western Power and a future as stand- alone businesses, the Networks Business Unit recognised the need to move from being internally regulated to being externally regulated with a strong desire to improve customer experience and many of the business unit’s operational activities. To achieve this, Networks has embarked on an integrated program of major change related initiatives known as the One Step Ahead Implementation Program. • The Electricity Corporations Bill 2005 has been amended to give the Minister powers to give directions to the Corporation either generally or in relation to a particular matter, with respect to the performance of its functions.
10.Events Subsequent to Balance Date Other than as disclosed below, there has not arisen in the interval between the end of the financial year and the date of this report any matter or circumstance likely, in the opinion of the Directors, to affect significantly the operations of the Corporation, the results of those operations, or the state of affairs of the Corporation in subsequent financial years.
Western Power Annual Report 2005 60 DIRECTORS’ REPORT continued
• On 9 August 2005, the Corporation announced an unconditional agreement with Energy Developments Limited to construct five new power stations in the West Kimberley. The West Kimberley Power Procurement program will deliver new power stations in the towns of Broome, Derby, Fitzroy Crossing, Halls Creek and Camballin-Looma. The Corporation has agreed a new schedule for construction of the power stations. The Corporation will continue to supply power to the five towns until the new plants are commissioned. The expected dates for the commercial operation are as follows: Broome – March/April 2007, Looma – April 2007, Derby – May 2007, Fitzroy Crossing – June 2007 and Halls Creek – July 2007. • On 16 August 2005, the Corporation announced, following approval of the Western Power Board and State Cabinet, that the successful bidder to construct a new baseload power station for the SWIS was Wambo Power Ventures Pty Ltd (Wambo). Under the proposal, Wambo will provide an additional 320 megawatts of power to the SWIS from a new gas-fired combined-cycle power station to be built adjacent to Western Power’s Cockburn Power Station, which will enter commercial service by end of November 2008. • On 16 August 2005, the Corporation also announced, following approval of the Western Power Board and State Cabinet, details of a 25-year contract to supply coal to the Corporation’s existing power stations. Wesfarmers Premier Coal was the successful bidder to supply low-ash coal for the Muja C and D and Collie Power Stations until 2030. Supply arrangements with Griffin Coal will remain in place until 2010. Current arrangements with Wesfarmers Premier Coal are incorporated in the new arrangements.
11.Likely Developments and Expected Results of Operations The most significant future developments for the Corporation are noted below: • The Minister for Energy has signalled a clear intention for Western Power to be disaggregated by 31 March 2006. Disaggregation will result in the formation of four new state-owned businesses, each with their own brand and Board of Directors. A networks business, a generation business and a retail business will carry out the functions currently carried out by Western Power in the SWIS. A regional power business will be formed to provide integrated energy services in the NWIS and 28 non-interconnected towns in regional WA. • The Independent Market Operator (IMO) will conduct the first capacity auctions in 2006. While Western Power will retain responsibility for ensuring adequate system capacity, the IMO will take on this responsibility in 2007 with the capacity auctions the first step in this process. Western Power has been directed by the Minister to cap its generation capacity at 3,000MW. • Kemerton Power Station is expected to be commissioned during 2005 providing an additional 260MW of peaking capacity for the summer of 2005/06. • An upgrade of the Dampier to Bunbury Natural Gas Pipeline for the summer of 2005/06 is expected to provide an additional 23tj/day of firm gas transport. • In 2005/06, Western Power’s total capital works program will increase $135 million to almost $600 million – a 29 per cent increase on the estimated outturn for 2004/05. Western Power’s total capital works program amounts to $2.1 billion over the 2005/06 to 2008/09 budget period. The Government has approved a significant increase in capital works for the State’s electricity system, with $488 million of additional capital works being approved for Western Power over the four-year budget period. • The Certified Agreement 2002 concludes in 2005. The new agreement is expected to be signed in 2005/06.
Western Power Annual Report 2005 61 DIRECTORS’ REPORT continued
• The Corporation is embarking on a comprehensive Information Technology (IT) plan that has been developed with independent external assistance that will support the planned disaggregation of Western Power. The plan is aimed at meeting the requirements of the electricity reform process and the future strategic direction of the successor entities in a competitive market. In response to the IT plan, the Government had approved additional funding of $66 million over the next four years. • The Electricity Networks Access Code, which came into force on 30 November 2004, requires Western Power to prepare a proposed Access Arrangement under the Code for an initial 3 year period, and submit (by 24 August 2005) to the Economic Regulation Authority for approval. The Authority will review Western Power’s proposal in detail, including a formal process for public consultation, with a view to approving an Access Arrangement for commencement on 1 July 2006. Existing arrangements and conditions for network access remain in effect until then. • The Government has given a commitment that small business and domestic tariffs will remain unchanged until 2009.
The Directors have not included in this report any further information on the likely developments in the operations of the Corporation, the carrying value of the Corporation assets and the expected results of those operations in future years due to the uncertainty surrounding the potential impact of the electricity reform program discussed above.
12.Directors’ Benefits During the financial year, no Director (other than those disclosed above) has received or become entitled to receive a benefit, other than benefits disclosed in the financial statements as emoluments or the fixed salary of a full-time employee of the Corporation, by reason of a contract made by the Corporation with the Director or with a firm of which he/she is a member, or with an entity in which he/she has a substantial financial interest.
13.Indemnification of Directors and Officers During the financial year the Directors’ and Officers’ Liability Insurance Policy was renewed to ensure that the Directors and Officers of the Corporation had adequate coverage. The cover will pay on behalf of the Corporation, or Directors and Officers of the Corporation, losses arising from a claim or claims made against them jointly or severally during the period of insurance by reason of any wrongful act (as defined by the policy) in the capacity of Director or Officer of the Corporation.
The Directors’ and Officers’ Liability Insurance Policy forms part of the Corporation’s Third Party Liability Policy, and it is therefore not possible to determine the premium applicable.
At the date of this Report no claims have been made against the Directors and Officers component of the policy.
14.Auditor Independence and Non-Audit Services Under the Corporation’s enabling legislation, the Parliament has appointed the Auditor General for Western Australia as its Independent Auditor.
The Auditor General is appointed under the Financial Administration and Audit Act 1985, which provides for the independence of the position. This Act provides that the Auditor General can conduct audits in the manner he sees fit and is not subject to direction by any person about the way in which those powers are exercised.
The Auditor General does not perform non-audit services.
Western Power Annual Report 2005 62 DIRECTORS’ REPORT continued
15.Rounding of Amounts The Corporation satisfies the requirements of clause 32 of Schedule 3 contained in the Electricity Corporation Act 1994 and accordingly, amounts in the financial statements and Directors’ Report have been rounded to the nearest thousand dollars unless specifically stated to be otherwise.
Signed in accordance with a resolution of the Board of Directors.
Mr ND HAMILTON Mr AM IANNELLO Chairman Managing Director 22 August 2005
Western Power Annual Report 2005 63 STATEMENT OF FINANCIAL PERFORMANCE
FOR THE YEAR ENDED 30 JUNE 2005
NOTES 30/06/05 30/06/04 $’000 $’000
Sales of Electricity 1,615,888 1,542,806 Less: Cost of Sales 2 1,258,249 1,077,060 Gross Profit 357,639 465,746
Plus: Other Revenue from Ordinary Activities 3 258,738 230,401
Less: Other Expenditure from Ordinary Activities 4 172,700 196,798
Less: Borrowing Costs 5 146,745 148,164
Profit from Ordinary Activities Before Income Tax Expense 6 296,932 351,185
Less: Income Tax Expense 7 90,797 109,604 NET PROFIT 206,135 241,581
This Statement should be read in conjunction with the attached Notes to the Financial Statements set out on the following pages. For ease of use the numbers in the above ’notes’ column are hyperlinked to the relevant notes pages.
Western Power Annual Report 2005 64 STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 2005
NOTES 30/06/05 30/06/04 $’000 $’000
CURRENT ASSETS Cash Assets 9 18,743 29,549 Receivables 10 238,150 216,722 Inventories 11 145,931 103,416 Other 12 13,244 17,006 Total Current Assets 416,068 366,693
NON-CURRENT ASSETS Property, Plant and Equipment 13 4,335,605 4,130,296 Future Income Tax Benefit 74,523 76,497 Other Financial Assets 14 752 1,342 Other 12 11,792 14,612 Total Non-Current Assets 4,222,672 4,222,747 Total Assets 4,838,740 4,589,440
CURRENT LIABILITIES Payables 15 162,458 124,590 Tax Liabilities 17 7,105 56,696 Provisions 18 107,164 112,462 Other 19 68,615 40,348 Total Current Liabilities 345,342 334,096
NON-CURRENT LIABILITIES Payables 15 31,272 32,783 Interest Bearing Liabilities 16 2,450,569 2,325,855 Tax Liabilities 17 157,778 144,096 Provisions 18 154,951 149,984 Other 19 24 11,186 Total Non-Current Liabilities 2,794,594 2,663,904 Total Liabilities 3,139,936 2,998,000 NET ASSETS 1,698,804 1,591,440
EQUITY Contributed Equity 20 17,769 10,757 Retained Profits 20 1,681,035 1,580,683 TOTAL EQUITY 1,698,804 1,591,440
This Statement should be read in conjunction with the attached Notes to the Financial Statements set out on the following pages. For ease of use the numbers in the above ’notes’ column are hyperlinked to the relevant notes pages.
Western Power Annual Report 2005 65 STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30 JUNE 2005
NOTES 30/06/05 30/06/04 $’000 $’000
CASH FLOWS FROM OPERATING ACTIVITIES Receipts in the Course of Operations 1,787,898 1,705,058 Other Operating Revenue from Ordinary Activities 124,018 145,690 Interest Received 1,338 1,447 Payments to Employees and Suppliers (1,326,891) (1,065,108) Borrowing Costs Paid (150,933) (191,677) Lease Expenses (15,714) (6,482) Income Tax Paid (120,257) (93,638) Goods & Services Tax Paid (47,131) (66,938) NET CASH INFLOWS FROM OPERATING ACTIVITIES 25 248,328 428,352
CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Investments in Other Entities (15) 1,773 Payment for Property, Plant and Equipment (422,906) (315,947) Proceeds from Sale of Property, Plant and Equipment 7,874 13,316 NET CASH OUTFLOWS FROM INVESTING ACTIVITIES (415,047) (300,858)
CASH FLOWS FROM FINANCING ACTIVITIES Dividends Paid (95,395) (117,900) Proceeds from Interest Bearing Liabilities 1,317,304 1,014,612 Repayment of Interest Bearing Liabilities (1,188,589) (1,101,365) CES, Customers’ and Contractors’ Deposits (1,038) (1,104) Developer and Customer Contributions to Capital Works 116,516 77,618 Proceeds from Contributed Equity 7,013 1,231 NET CASH INFLOWS/(OUTFLOWS) FROM FINANCING ACTIVITIES 155,811 (126,908)
NET INCREASE IN CASH ASSETS HELD (10,908) 586
CASH ASSETS AT BEGINNING OF FINANCIAL YEAR 29,549 29,101
Effects of Exchange Rate Changes on Cash Assets 102 (138) CASH AT END OF THE FINANCIAL YEAR 25 18,743 29,549
This Statement should be read in conjunction with the attached Notes to the Financial Statements set out on the following pages. For ease of use the numbers in the above ’notes’ column are hyperlinked to the relevant notes pages.
Western Power Annual Report 2005 66 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2005
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.1 Basis of Preparation
The financial statements are a general purpose financial report which has been prepared in accordance with relevant Australian Accounting Standards, Urgent Issues Group (UIG) Consensus Views and the disclosure requirements of Schedule 3 of the Electricity Corporation Act 1994.
These financial statements have been prepared on the basis of historical costs and, except where stated, do not take into account changing money values or current valuations of non-current assets.
1.2 Revenue Recognition
1.2.1 Sales of Electricity
Sales of electricity comprises revenue earned from the provision of electricity to entities outside the economic entity and is recognised when the electricity is provided. As at each reporting date, sales and trade debtors incorporate amounts attributable to ‘unread sales’, which are an estimate of electricity delivered to customers, which has not been billed at the reporting date.
1.2.2 Developer and Customer Contributions
The Corporation receives developer and customer contributions toward the extension of electricity infrastructure to facilitate network connection. Contributions can be in the form of either cash or assets and consist of: • Work Performed for Developers – developers make cash contributions to the Corporation for the construction of electricity infrastructure within a subdivision; • Handover Works – developers have the option to independently construct electricity infrastructure within a subdivision. Upon approval by the Corporation of the completed work these network assets are vested to the Corporation; • Upgrade and New Connections – customers (including generators) make cash contributions for the upgrade or extension of electricity infrastructure to existing lots, or for the construction of electricity infrastructure to new lots in existing areas.
Cash contributions received are recognised as revenue consistent with the percentage completion of the asset construction being funded. Vested assets are recognised as revenue at the point of handover and are measured at their fair value. The network assets resulting from contributions received are recognised as property, plant and equipment and depreciated over their useful life.
Western Power Annual Report 2005 67 NOTES TO THE FINANCIAL STATEMENTS continued
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
1.2 Revenue Recognition continued
1.2.3 Other Revenue from Ordinary Activities Revenue is recognised to the extent it is probable the economic benefits will flow to the Corporation and that it can be reliably measured. It is valued at the fair value of the consideration received, or to be received net of the amount of goods and services tax.
Other revenue from ordinary activities includes: • Account Fees • Business Ventures • External Chargeable Works • Generation Fuel Sales • Grant Received • Interest • Lease Renewal Incentive • Network Access Charges • Proceeds on Sale of Non-Current Assets • Property Rent • Renewable Energy Certificates, and • Tariff Migration Reimbursement.
1.3 Goods and Services Tax
Revenues, expenses and assets are recognised net of amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of expense.
Receivables and payables are stated with the amount of GST included.
The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the statement of financial position.
Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recovered from, or paid to, the ATO are classified as operating cash flows.
1.4 Receivables
Trade debtors to be settled within 30 days are carried at amounts due. A provision for doubtful debts is raised where some doubt as to collection exists. The provision for doubtful debts is based on an analysis of bad debts experience and current economic conditions.
Collectability of trade debtors is reviewed on an ongoing basis. Debts, which are known to be irrecoverable, are written off.
Western Power Annual Report 2005 68 NOTES TO THE FINANCIAL STATEMENTS continued
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
1.5 Cost of Sales
Cost of sales represents the costs attributable to the integrated manufacturing process involved in the generation and transformation of electricity into a saleable good.
1.5.1 Fuel Costs
Costs for coal and liquid fuels are assigned on the basis of weighted average cost. Gas costs comprise payments made under the sale and purchase agreement and the drawdown of prepaid gas. Prepaid gas is assigned at its holding cost.
1.6 Borrowing Costs
Borrowing costs are recognised as expenses in the reporting period in which they are incurred, except where they are included in the costs of qualifying assets as described in Note 1.9.1.
Borrowing costs are capitalised at the weighted average interest rate applicable to the Corporation’s outstanding borrowings during the period of capitalisation. The weighted average interest rate used during the reporting period was 6.4% (June 04: 6.5%). Capitalisation ceases when the activities necessary to prepare the asset for use are substantially completed.
Borrowing costs include: • Interest on bank overdrafts, short-term and long-term borrowings • Amortisation of discounts relating to borrowings • Amortisation of ancillary costs incurred in connection with the arrangement of borrowings • Finance lease charges • Exchange differences arising from foreign currency borrowings • Unrealised and realised gains and losses on bond futures contracts, and • Amortisation of realised gains and losses on forward rate agreements.
1.7 Current Assets and Current Liabilities
Current assets and current liabilities are recognised on the basis of assets expected to be realised or consumed and liabilities expected to be settled within the next twelve months.
1.8 Cash Assets
For purposes of the statement of cash flows, cash assets include deposits at call which are readily convertible to cash on hand and which are used in the cash management function on a day-to-day basis, net of any outstanding bank overdraft.
Western Power Annual Report 2005 69 NOTES TO THE FINANCIAL STATEMENTS continued
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
1.9 Property, Plant and Equipment
1.9.1 Capitalisation of Borrowing Costs
Borrowing costs are capitalised during the construction of major capital projects that have construction periods extending beyond one year. Capitalised borrowing costs are broadly determined as the amount of borrowing costs that would have been avoided, but for the construction of the asset.
1.9.2 Acquisition of Assets
The cost method of accounting is used for all acquisitions of assets. Cost is determined as the fair value of the asset given at the date of acquisition plus costs incidental to the acquisition.
The Corporation is a statutory corporation subject to the requirements of the Electricity Corporation Act 1994 and came into existence on 1 January 1995. The electricity functions and assets of the State Energy Commission of Western Australia (SECWA) were transferred to the Corporation on this date. The assets acquired were brought to account at their written down accounting value in the books as at 31 December 1994.
Direct costs together with associated indirect costs in respect of assets being constructed, are capitalised.
1.9.3 Recoverable Amount of Non-Current Assets
The carrying amounts of non-current assets are reviewed annually to determine whether they are in excess of their recoverable amount. If the carrying amounts of non-current assets exceed the recoverable amount, the assets are written down to the lower amount. The recoverable amount of an asset is the net amount expected to be recovered through the net cash inflows arising from its continued use and subsequent disposal.
In assessing recoverable amount of non-current assets the relevant cash flows are based on projected financial results and an assumed terminal value. These cashflows are discounted to their present value using rates that reflect asset specific risk. The range used is from a minimum of 6.4% to a maximum of 10.3%.
Western Power Annual Report 2005 70 NOTES TO THE FINANCIAL STATEMENTS continued
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
1.9 Property, Plant and Equipment continued
1.9.4 Depreciation
Discrete assets that are not subject to continual extension and modification are depreciated using the straight-line method. Such assets include power stations, gas turbines, the transmission network, buildings and motor vehicles.
Other assets, primarily the electricity distribution network, which are continually extended and modified, are depreciated using the reducing balance method.
The useful lives of the Corporation’s major asset classes are as follows:
Plant and Equipment 240-540 months Buildings 480 months Leasehold Improvements 120 months
Depreciation rates are reviewed annually, and if necessary adjusted so they reflect the most recent assessment of the useful lives of the assets.
1.9.5 Leased Assets
Leases of plant and equipment under which the Corporation assumes substantially all the risks and benefits of ownership are classified as finance leases. Other leases are classified as operating leases.
Finance leases are brought to account by recording an initial asset and liability equal to the present value of the minimum lease payments including any guaranteed residual values. Leased assets are amortised over their expected useful lives. Lease payments are allocated between interest expense in the statement of financial performance and reduction of lease liability in the statement of financial position.
Operating lease payments are representative of the pattern of benefits derived from the leased assets and accordingly are charged to the statement of financial performance in the reporting periods in which they are incurred.
1.10 Inventories
Inventories are valued at the lower of cost and net realisable value. Cost is assigned on the basis of weighted average cost. A provision is maintained to allow for the diminution in value of inventories due to obsolescence and items being surplus to requirements.
Western Power Annual Report 2005 71 NOTES TO THE FINANCIAL STATEMENTS continued
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
1.11 Controlled Entities
1.11.1 Joint Venture Operations
The Corporation’s interests in unincorporated joint ventures are brought to account by including amounts in the following categories in the statement of financial performance and the statement of financial position: • Each of the individual assets employed in the joint ventures • Liabilities incurred by the Corporation in relation to the joint ventures • Expenses incurred in relation to the joint ventures, and • Revenue from the sale of output.
1.11.2 Joint Venture Entities
The investment in joint venture entities is carried at the lower of cost and recoverable amount.
1.11.3 Associate Entities
The investment in associates is carried at the lower of cost and recoverable amount. Dividend income is brought to account at the time it is declared.
1.12 Trade and Other Creditors
These amounts represent liabilities for goods and services provided to the Corporation prior to the end of the reporting period that are unpaid. The amounts are unsecured and are settled within prescribed periods.
1.13 Provisions
A provision is recognised when there is a legal, equitable or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation.
1.13.1 Dividends
A provision for dividends payable is recognised in the reporting period in which they are declared, for the entire amount declared but undistributed, regardless of the extent to which they will be paid in cash.
1.13.2 Employee Entitlements
Provision is made for employee entitlements accumulated as a result of employees rendering services up to the reporting date. These entitlements include annual leave and long service leave including relevant on-costs.
Western Power Annual Report 2005 72 NOTES TO THE FINANCIAL STATEMENTS continued
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
1.13 Provisions continued
1.13.2 Employee Entitlements continued
Liabilities arising in respect of annual leave, long service leave and any other employee entitlements expected to be settled within twelve months of the reporting date are measured at their nominal amount based on remuneration rates which are expected to be paid when the liability is settled. All other employee entitlement liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of future cash outflows, the market yield as at the reporting date on selected commonwealth government securities, which have terms to maturity approximating the terms of the related liability, are used.
1.13.3 Superannuation
The Corporation has a liability in respect to employees who are members of the Superannuation and Family Benefits Act Scheme. This scheme is closed to new members. The Corporation’s liability is in respect of the employer portion of any amounts that are payable to scheme members in their retirement.
The balance of the provision is actuarially reviewed at the conclusion of each financial year; PriceWaterhouseCoopers performed an actuarial review as at 30 June 2005.
1.13.4 Decommissioning Costs
As generation plant nears the end of its useful life a provision is made for anticipated costs of restoration and rehabilitation. Restoration and rehabilitation costs are calculated and spread over the remaining life of the asset on a straight-line method.
1.14 Foreign Exchange
As a policy objective, the Corporation has eliminated its exposure to foreign currencies, except for minor exposures arising through the normal course of business.
Foreign exchange transactions are brought to account to conform to Accounting Standard AASB 1012 “Foreign Currency Translation”. Specific treatment of these transactions is stated below:
1.14.1 Transactions
Foreign currency transactions are initially translated into Australian currency at the rate of exchange at the date of the transaction. At the reporting date, amounts payable and receivable in foreign currencies are translated into Australian currency at rates of exchange current at that date and the resulting exchange differences are brought to account in determining the profit or loss for the reporting period.
Western Power Annual Report 2005 73 NOTES TO THE FINANCIAL STATEMENTS continued
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
1.14 Foreign Exchange continued
1.14.2 Specific Commitments
Gains or losses arising upon entry into a hedging transaction intended to hedge the purchase or sale of goods or services, together with subsequent exchange gains or losses resulting from those transactions are deferred and included in the measurement of the purchase or sale. In the case of hedges of monetary items, exchange gains or losses are brought to account in the reporting period in which the exchange rate changes.
1.14.3 General Commitments
Exchange gains or losses on hedge transactions, other than those covered above, are brought to account in the statement of financial performance in the reporting period in which exchange rates change.
1.14.4 Speculative Commitments
The Corporation does not undertake speculative transactions.
1.15 Derivative Financial Instruments
Through its operations, the Corporation is exposed to changes in foreign exchange rates, interest rates and commodity prices. These risks are managed with the prudent use of derivative products. The Corporation only uses derivatives in highly liquid markets and all hedge activities are conducted within Board approved policy. Comprehensive systems are in place and compliance is monitored closely. The Corporation uses derivatives solely for hedging and not for speculative purposes.
Gains and losses on derivatives used as hedges are accounted for on the same basis as the underlying physical exposures they are hedging. Accordingly, hedge gains and losses are included in the statement of financial performance when the gains and losses arising on the related primary exposures are recognised.
Gains and losses related to hedges for qualifying assets in respect of firm commitments are deferred and recognised as adjustments of carrying amounts when the hedged transaction occurs.
The Corporation uses the following derivative financial instruments to hedge risks - interest rate swaps, cross currency swaps, commodity swaps, forward foreign exchange contracts, forward rate agreements, foreign currency and commodity options, and bond futures contracts.
1.15.1 Interest Rate Swaps Interest payments and receipts under interest rate swap contracts are recognised on an accrual basis in the statement of financial performance as an adjustment to borrowing costs during the reporting period.
Western Power Annual Report 2005 74 NOTES TO THE FINANCIAL STATEMENTS continued
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
1.15 Derivative Financial Instruments continued
1.15.2 Cross Currency Swaps Interest payments and receipts under cross currency swaps are recognised on an accrual basis in the statement of financial performance. The carrying amounts of cross currency swaps, which comprise net receivables and payables are included in the statement of financial position.
1.15.3 Commodity Swaps Gains or losses arising upon entering into commodity swaps intended to hedge the purchase of commodities are recognised as adjustments to the carrying amount of the asset.
1.15.4 Forward Foreign Exchange Contracts The accounting for forward foreign exchange contracts is set out in Note 1.14.
1.15.5 Forward Rate Agreements Realised gains or losses on forward rate agreements are deferred in the statement of financial position and amortised to the statement of financial performance over the underlying term of the agreement.
1.15.6 Foreign Currency and Commodity Options
The premium paid on foreign currency and commodity options is amortised over the period of the contracts and together with any realised gains or losses on exercising the options, is included in the measurement of the purchase.
1.15.7 Bond Futures Contracts
Unrealised and realised gains and losses arising from entering into bond futures contracts are recognised in the statement of financial performance as an adjustment to borrowing costs in the reporting period they arise.
1.16 National Taxation Equivalent Regime
The Corporation entered into the National Taxation Equivalent Regime (NTER) environment on 1 July 2001 having previously operated under the state-based Taxation Equivalent Regime. While tax equivalent payments will continue to be remitted to State Treasury, the Corporation’s tax is subject to Australian Taxation Office administration. The calculation of the liability in respect of these taxes is governed by the Income Tax Assessment Acts and the NTER guidelines as agreed by the State Government.
The Corporation has adopted the liability method of tax effect accounting procedures whereby the income tax expense shown in the statement of financial performance is based on the net profit before income tax adjusted for permanent differences.
Western Power Annual Report 2005 75 NOTES TO THE FINANCIAL STATEMENTS continued
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
1.16 National Taxation Equivalent Regime continued
Timing differences, which arise due to the different accounting periods in which items of revenue and expense are included in the determination of net profit before income tax and taxable income, are brought to account as either a provision for deferred income tax or as an asset described as future income tax benefit at the rate of income tax applicable to the reporting period in which the benefit will be received or the liability will become payable.
Future income tax benefits are not brought to account unless realisation of the asset is assured beyond reasonable doubt. Future tax benefits in relation to tax losses are not brought to account unless the benefit can be regarded as being virtually certain of realisation.
1.17 Prepayments
Current and non-current prepayments comprise fuel for generation, lease and other payments. Prepaid expenses are charged to the statement of financial performance in the reporting period in which the associated benefit is consumed.
1.18 Community Service Obligations
Community Service Obligations (CSO’s) are obligations to perform functions, on behalf of the State Government, that it is not in the commercial interests of the Corporation to perform. Where the Government agrees to reimburse the Corporation for the cost of CSO’s, the entitlement to reimbursement is recognised in the statement of financial performance on a basis consistent with the associated CSO expenses. As at 30 June 2005 the Corporation recognised an entitlement of $42.7 million (June 2004: $34.7 million) for the reimbursement of CSO’s including: • Supply charge rebates • Tariff migration reimbursement • Interval Electricity Meter subsidy • Caravan park rebates, and • Air conditioning subsidy for seniors.
1.19 Repairs and Maintenance
Maintenance, repair costs and minor renewals are charged as expenses as incurred.
1.20 Comparatives
Where necessary, comparative information has been reclassified to achieve consistency in disclosure with current reporting period amounts and other disclosures.
Western Power Annual Report 2005 76 NOTES TO THE FINANCIAL STATEMENTS continued
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
1.21 Renewable Energy Certificates
The Renewable Energy (Electricity) Act which took effect on 1 April 2001, requires electricity wholesale purchasers to source specified amounts of electricity from Renewable Energy (RE) sources. The Act imposes an annual liability, on a calender year basis, by applying the specified Renewable Power Percentage to relevant wholesale acquisitions.
The RE liability is extinguished by annual surrender of an equivalent number of Renewable Energy Certificates (RECs), with a penalty applying for any shortfall. The Corporation’s liability is recognised at a value equivalent to the REC penalty. For the financial year ended 30 June 2005, $7.7 million (June 2004: $4.9 million) has been recognised as an expense in relation to the Corporation’s renewable energy obligation.
The Corporation extinguishes its REC liability by the surrender of RECs that are either self produced or purchased in the open market. Self-produced RECs are recognised as an asset at a value equivalent to its net realisable value. RECs purchased from external sources are recognised as an asset at their purchase price.
1.22 Revision of Accounting Estimate
At the beginning of the financial year all developer and customer funded capital activity in the electricity distribution network was estimated to be complete. This was based on a historically short completion period for such capital work. Increased capital activity on the electricity distribution network is however leading to increases in the time taken to complete capital jobs and in the number of jobs incomplete at period end. Through enhanced information systems the Corporation can now more accurately estimate the actual percentage of completion for the large volume of jobs involved. For the financial year ended 30 June 2005 this has resulted in an additional $30.1 million of developer and customer contributions revenue being deferred to future accounting periods to be matched with construction progress on the related electricity distribution network assets. The size of the amount deferred may vary in future periods subject to the level of customer and developer demand for capital work, the scope of works, and the lead time and duration of those works.
Western Power Annual Report 2005 77 NOTES TO THE FINANCIAL STATEMENTS continued
2.COST OF SALES 30/06/05 30/06/04 $’000 $’000
Fuel and Electricity Purchases 636,323 524,809 Labour, Materials and Services 386,119 321,386 Depreciation 223,161 220,415 Other 12,646 10,450 1,258,249 1,077,060
3.OTHER REVENUE FROM ORDINARY ACTIVITIES
Revenue from Operating Activities Developer and Customer Contributions* 109,839 87,727 External Chargeable Works 38,525 32,793 Network Access Charges 16,936 17,050 Account Fees 11,871 11,500
Revenue from Non-Operating Activities Generation Fuel Sales 32,467 26,588 Tariff Migration Reimbursement ** 8,620 - Business Ventures 8,078 8,891 Proceeds on Sale of Non-Current Assets 7,874 13,522 Grant Received 3,474 2,164 Renewable Energy Certificates 2,372 2,459 Lease Renewal Incentive 2,023 2,838 Interest 1,110 1,659 Property Rent 425 422 Other 15,124 22,788 258,738 230,401
* Developer and Customer Contributions revenue recognised is in respect of electricity network assets vested to the Corporation or constructed using cash contributions. As at 30 June 2005 cash contributions of $58.9 million (comprising of $34.8 million for Distribution and $24.1 million for Transmission) have also been recognised as Deferred Income in the balance sheet and will be recognised as revenue in future reporting periods as construction of the related electricity network asset progresses. Contributions are taxable in the period they are recognised as revenue. In future reporting periods the Corporation will incur depreciation and interest costs in relation to the assets constructed.
The Corporation’s Developer and Customer Contributions accounting policy is disclosed in Note 1.2.2. This should be read in conjunction with Note 1.22.
** New revenue item representing reimbursement by the State Government of revenue losses resulting from the transfer of selected State Government agencies, conducting commercial activities in the Pilbara and remote areas, to the general business tariff. Western Power Annual Report 2005 78 NOTES TO THE FINANCIAL STATEMENTS continued
4.OTHER EXPENDITURE FROM ORDINARY ACTIVITIES 30/06/05 30/06/04 $’000 $’000
Labour, Materials and Services 102,559 105,081 Generation Fuel Costs 29,843 19,857 Operating Lease Rentals 15,714 6,482 Renewable Energy Certificates 7,686 4,919 Depreciation 6,262 8,369 Written Down Value on Sale of Non-Current Assets 4,360 9,826 Bad Debts Written Off 2,351 1,968 Write Down of Other Financial Assets 609 1,646 Write Down of Plant and Equipment to Recoverable Amount - 23,081 (Write Up)/Write down of Power Station Fuel Inventory (2,035) 5,825 Other 5,351 9,744 172,700 196,798
5.BORROWING COSTS
Domestic Currency Loans 147,078 151,038 Currency and Interest Rate Swaps (675) (3) Forward Rate Agreements 289 (291) Finance Lease Interest 150 - Other 68 406 146,910 151,150
Government Loan Guarantee Charge 3,854 4,046 150,764 155,196
Less: Capitalised Borrowing Costs 4,019 7,032 146,745 148,164
Western Power Annual Report 2005 79 NOTES TO THE FINANCIAL STATEMENTS continued
6.PROFIT FROM ORDINARY ACTIVITIES BEFORE INCOME TAX EXPENSE
30/06/05 30/06/04 $’000 $’000
Profit Before Income Tax Expense is Arrived at After: Crediting the Following Items Net Profit/(Loss) on Sale of Non-Current Assets - Property, Plant and Equipment 3,514 3,712 - Investments - (16)
Charging the Following Items Bad Debts - Written off to the Statement of Financial Performance 2,351 1,968 - (Decrease)/Increase in Provision for Doubtful Debts (146) 315
Depreciation and Amortisation - Plant and Equipment 219,686 219,775 - Buildings 11,465 10,639 - Capitalised (2,162) (1,676) - Leasehold Improvements 46 46 - Leased Assets 388 -
Leasing Costs - Operating Lease Rentals 15,714 6,482
Auditors’ Remuneration Audit Services for Annual Accounts - External Auditors of the Corporation 247 230
Significant Items
2004/2005 As at the reporting date there are no significant items.
2003/2004 Fuel Price Renegotiation During the financial year ended 30 June 2004 fuel and electricity purchases increased from $522.3 million to $524.3 million. This increase was less than proportional to the rate of increase in sales, due mainly to renegotiated contracts, some of which related to the prior year. The financial impact was brought to account in 2003/2004.
Western Power Annual Report 2005 80 NOTES TO THE FINANCIAL STATEMENTS continued
6.PROFIT FROM ORDINARY ACTIVITIES BEFORE INCOME TAX EXPENSE continued
Significant Itemscontinued 2003/2004 continued Write-Down of Plant and Equipment to Recoverable Amount Since late 1999 the Corporation has been trialling a telecommunications initiative under the name “Bright Telecommunications”. The aim of the pilot project was to develop a new broadband access network providing customers with fully independent telephony services, affordable high-speed internet access and other advanced services. The pilot project involved the deployment of a broadband access network in conjunction with the undergrounding of low voltage distribution assets. This included conducting service trials in the suburbs of South Perth and Como. In addition, a low visibility aerial deployment trial was completed in the suburb of Victoria Park.
The pilot phase of this project was completed during 2003/2004 and the results assessed, including the requirements to progress to a full commercial operation. On 21 July 2004 the Directors decided to close the project. Directors subsequently assessed the disposal value of the assets as up to $1 million, but because the costs associated with an orderly wind up of operations were anticipated to exceed the sale proceeds, the recoverable amount of these assets was assessed as zero. Based on this assessment the Directors wrote down the assets by $23.1 million to their recoverable amount.
The financial impact for the year ended 30 June 2004 was a $23.1 million increase in other expenditure from ordinary activities.
A detailed assessment of disposal options was conducted during 2004/2005 from which it was concluded that a sale of the Bright business as a going concern may yield a higher return than a sale of the assets of the project. As at 30 June 2005 a sale of the Bright Telecommuniciations project is in progress.
7.INCOME TAX EXPENSE 30/06/05 30/06/04 $’000 $’000
The Prima Facie Tax on Profit is Reconciled to Income Tax Provided in the Accounts as follows: Profit Before Income Tax Expense 296,932 351,185 Income Tax Calculated at 30% 89,080 105,356
Tax Effect of Permanent Differences - Provision for Decommissioning Costs 2,669 3,238 - Non-Assessable Profit on Sale of Non-Current Assets (551) (424) - Research and Developments Costs (451) (450) - Non-Deductible Depreciation of Buildings 576 580 - Non-Deductible Depn/Amortn/Bright/Other 197 579 - Other (723) 725 Total Tax Effect of Permanent Differences 1,717 4,248 Income Tax Expense 90,797 109,604
Total Income Tax Expense Comprises the Following: Additions to: Provision for Income Tax 75,141 106,871 Provision for Deferred Income Tax 13,682 15,940 Future Income Tax Benefit - (13,207) Reduction to: Future Income Tax Benefit 1,974 - 90,797 109,604
Western Power Annual Report 2005 81 NOTES TO THE FINANCIAL STATEMENTS continued 8. Segment Information
GENERATION NETWORKS RETAIL PILBARA REGIONAL POWER UNALLOCATED CONSOLIDATED 30/06/05 30/06/04 30/06/05 30/06/04 30/06/05 30/06/04 30/06/05 30/06/04 30/06/05 30/06/04 30/06/05 30/06/04 30/06/05 30/06/04 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 STATEMENT OF FINANCIAL PERFORMANCE
External Revenue 69,063 60,376 170,155 152,572 1,512,572 1,445,418 51,555 43,040 70,320 66,185 828 5,616 1,874,626 1,773,207
Inter-Segment Revenue 851,091 803,549 483,716 474,580 5,093 4,887 143 1,716 66 449 25,859 36,937 1,365,968 1,322,118
Total Revenue 920,154 863,925 653,871 627,152 1,517,798 1,450,305 51,698 44,756 70,386 66,634 26,687 42,553 3,240,594 3,095,325
External Expenditure (800,392) (696,633) (306,035) (253,947) (119,112) (107,385) (23,356) (20,240) (116,246) (99,270) (65,808) (96,383) (1,430,949) (1,273,858)
Inter-Segment Expenditure (48,497) (45,503) (24,177) (37,218) (1,270,819) (1,207,468) (8,740) (11,152) (9,155) (10,639) (4,580) (10,138) (1,365,968) (1,322,118)
Total Expenditure (848,889) (742,136) (330,212) (291,165) (1,389,931) (1,314,853) (32,096) (31,392) (125,401) (109,909) (70,388) (106,521) (2,796,917) (2,595,976)
Segment Results 71,265 121,789 323,659 335,987 127,867 135,452 19,602 13,364 (55,015) (43,275) (43,701) (63,968) 443.677 499.349
Borrowing Costs (146,745) (148,164)
Profit from Ordinary Activities before Income Tax Expense 296,932 351,185
Income Tax Expense (90,797) (109,604)
NET PROFIT 206,135 241,581
Depreciation 124,937 128,819 88,711 83,013 969 2,752 3,396 3,354 7,417 7,440 3,993 3,406 229,423 228,784
Western Power Annual Report 2005 82 NOTES TO THE FINANCIAL STATEMENTS continued 8. Segment Information continued
GENERATION NETWORKS RETAIL PILBARA REGIONAL POWER UNALLOCATED CONSOLIDATED 30/06/05 30/06/04 30/06/05 30/06/04 30/06/05 30/06/04 30/06/05 30/06/04 30/06/05 30/06/04 30/06/05 30/06/04 30/06/05 30/06/04 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 STATEMENT OF FINANCIAL POSITION
Segment Assets 1,699,507 1,762,704 2,675,941 2,368,004 201,290 187,259 108,233 104,198 125,964 114,614 27,805 52,661 4,838,740 4,589,440
Segment Liabilities (292,419) (285,879) (292,913) (265,249) (58,667) (67,486) (6,532) (5,879) (28,636) (25,211) (10,200) (22,441) (689,367) (672,145)
Net Assets Before Borrowings 1,407,088 1,476,825 2,383,028 2,102,755 142,623 119,733 101,701 98,319 97,328 89,403 17,605 30,220 4,149,373 3,917,295
Borrowings (2,450,569) (2,325,855) NET ASSETS 1,698,804 1,591,440
Acquisitions of Non-Current Assets 29,543 36,280 373,678 256,982 1,630 1,102 6,691 4,737 8,347 12,784 10,072 (1,595) 429,961 310,290
Segment Reporting Segment revenues, expenditures, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise corporate office and Information Technology Group revenues, expenditures, assets and liabilities.
Western Power Corporation operates as a vertically integrated business, but in accordance with the disclosure requirements of the Electricity Corporation Act 1994 the following segments are presented - Industry Segment The major products/services from which the above segments derive revenue are: Generation - Generates and sells electricity to the Retail segment; Networks - Transports and distributes electricity from generators to the Retail segment and third party users of the network. Retail - Purchases and sells electricity to customers in the South West Interconnected System. Pilbara Power - Purchases, transports, distributes and sells electricity in Western Australia’s Pilbara System; and Regional Power - Generates, purchases, distributes and sells electricity in Western Australia’s remote areas.
Geographical Segments The Corporation operates entirely in Australia.
Significant inter-segment revenues are earned by the Generation and Network segments. Inter-segment Generation revenues are based on an internal pricing mechanism and inter-segment Network revenues are based on published network access price schedules. The result of the Retail segment is significantly influenced by inter-segment expenditure in respect of electricity purchases from the Generation segment and access charges from the Network segment.
The State Government has announced a plan to separate Western Power Corporation into four new corporations from 1 April 2006. The process of establishing these new entities will require the allocation of the Corporation’s assets, liabilities, revenues, expenses, and contracts. The resulting financial arrangements may differ significantly from those presented above as arrangements such as vesting contracts, tariff equalisation funds, service level agreements and other such mechanisms will be finalised during the course of 2005/06. Western Power Annual Report 2005 83 NOTES TO THE FINANCIAL STATEMENTS continued
9.CASH ASSETS 30/06/05 30/06/04 $’000 $’000
Cash at Bank 13,686 26,390 Domestic Currency Deposits 5,000 3,000 Foreign Currency Deposits 57 159 18,743 29,549
10.RECEIVABLES
Trade Debtors 233,391 208,368 Less: Provision for Doubtful Debts 3,259 3,405 230,132 204,963
Other Debtors 8,018 11,759 238,150 216,722
11.INVENTORIES
Power Station Fuels - at Cost 62,493 38,550 Power Station Fuels - at Net Realisable Value * - 9,684
Material Stores - at Cost 79,659 53,184 Less: Provision for Obsolete Stock 272 884 79,387 52,300
Work in Progress - at Cost 575 363 Renewable Energy Certificates 3,394 2,519 Other 82 - 145,931 103,416
* In the financial years ended 30 June 2003 and 30 June 2004 coal stocks held for delivery against firm sales contracts were written down to their net realisable value. These sale contracts expired on 30 June 2005. The unsold quantity of coal has been restated back to cost of $5.2 million. This has resulted in a write up of $2.0 million.
Western Power Annual Report 2005 84 NOTES TO THE FINANCIAL STATEMENTS continued
12.OTHER ASSETS 30/06/05 30/06/04 $’000 $’000
Current Prepayments 13,244 17,006
Non-Current Prepayments 8,086 13,936 Other 3,706 676 11,792 14,612
13.PROPERTY, PLANT AND EQUIPMENT
Plant and Equipment Plant and Equipment - at Cost 6,139,933 5,818,396 Less: Accumulated Depreciation 2,551,971 2,340,982 Plant and Equipment - at Cost 3,587,962 3,477,414
Plant and Equipment - at Recoverable Amount 8,077 8,077 Less: Accumulated Depreciation 1,775 731 Plant and Equipment - at Recoverable Amount 6,302 7,346
Plant and Equipment - Net Book Value 3,594,264 3,484,760
Land - Net Book Value 48,160 39,554
Buildings Buildings 309,648 308,100 Less: Accumulated Depreciation 133,860 122,847 Buildings - Net Book Value 175,788 185,253
Leasehold Improvements Leasehold Improvements 458 458 Less: Accumulated Depreciation 161 115 Leasehold Improvements - Net Book Value 297 343
Works under Construction - Net Book Value 517,096 420,386 TOTAL PROPERTY, PLANT AND EQUIPMENT 4,335,605 4,130,296
Valuations During the financial year ended 30 June 2004 an independent valuation of land and buildings on the basis of current use for land and market value for buildings was conducted. The independent valuation valued land and buildings at $426.0 million as at 30 June 2004.
Western Power Annual Report 2005 85 NOTES TO THE FINANCIAL STATEMENTS continued
13.PROPERTY, PLANT AND EQUIPMENT continued
Reconciliation Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below:
30/06/05 30/06/04 $’000 $’000 Plant and Equipment Opening Balance 3,484,760 3,283,172 Additions 333,159 435,076 Disposals (3,969) (7,239) Depreciation (219,686) (219,775) Write Down to Recoverable Amount - (6,474) Plant and Equipment - Net Book Value 3,594,264 3,484,760
Land Opening Balance 39,554 27,478 Additions 8,699 12,686 Disposals (93) (610) Land - Net Book Value 48,160 39,554
Buildings Opening Balance 185,253 127,843 Additions 2,298 68,236 Disposals (298) (187) Depreciation (11,465) (10,639) Buildings - Net Book Value 175,788 185,253
Leasehold Improvements Opening Balance 343 389 Amortisation (46) (46) Leasehold Improvements - Net Book Value 297 343
Works under Construction Opening Balance 420,386 602,900 Additions 96,710 (165,907) Write Down to Recoverable Amount - (16,607) Works Under Construction - Net Book Value 517,096 420,386
TOTAL PROPERTY, PLANT AND EQUIPMENT 4,335,605 4,130,296
Western Power Annual Report 2005 86 NOTES TO THE FINANCIAL STATEMENTS continued
14.OTHER FINANCIAL ASSETS
30/06/05 30/06/04 $’000 $’000
Non-Current Other * 752 1,342
* In the financial year ended 30 June 2005 the investment shares in Ceramic Fuel Cells Limited were written down by $0.6 million (June 2004 $1.0 million) to its market share price of $0.56.
15.PAYABLES
Current Trade Creditors 141,040 113,107 Other Creditors 21,418 11,483 162,458 124,590
Non-Current Contributory Extension Scheme (CES) * 31,272 32,783
* This represents contributions received from customers to extend specific electricity supplies. These deposits are progressively refunded as other customers are connected to existing supply extension schemes. By 2022, when the scheme finishes, all scheme members will have their contributions refunded.
16.INTEREST BEARING LIABILITIES
Non-Current Domestic Currency Loans 2,40,569 2,325,855
The above liabilities are ultimately secured by Government Guarantee.
All domestic currency loans are governed by a facility agreement, which provides the Corporation with the full discretion to refinance all or any part of maturing debt. Therefore the amount of any current domestic currency loans represents the total debt expected to be repaid within twelve months, with all remaining debt classified as non-current. For domestic currency loans maturing over the next twelve months it is the intention of the Corporation to refinance all maturing debt under the facility agreement.
Western Power Annual Report 2005 87 NOTES TO THE FINANCIAL STATEMENTS continued
17.TAX LIABILITIES 30/06/05 30/06/04 $’000 $’000
Current Income Tax Provision (2,939) 42,177 Goods and Services Tax 9,609 13,357 Other 435 1,162 7,105 56,696
Non-Current Deferred Income Tax 157,778 144,096
18.PROVISIONS
Current Provision for: Dividends Opening Balance 41,213 55,600 Provisions Final Dividend 51,601 41,213 Interim Dividend 54,182 62,300 Payments (95,395) (117,900) Closing Balance 51,601 41,213
Employee Entitlements 51,615 58,356
Decommissioning Costs * Opening Balance 11,839 7,273 Provisions 113 5,149 Payments (8,378) (583) Closing Balance 3,574 11,839
Other Opening Balance 1,054 - Provisions 330 1,318 Payments (1,010) (264) Closing Balance 374 1,054
107,164 112,462
* This item represents estimated costs of rehabilitation and disposal of the decommissioned East Perth, Bunbury and South Fremantle Power Stations; and an estimate for the decommissioning costs of Kwinana Stage B and specific Regional generating assets.
Western Power Annual Report 2005 88 NOTES TO THE FINANCIAL STATEMENTS continued
18.PROVISIONS continued 30/06/05 30/06/04 $’000 $’000 Non-Current Provision for: Employee Entitlements 19,603 19,342
Superannuation Opening Balance 54,676 51,045 Provisions 24,548 21,633 Payments (19,834) (18,002) Closing Balance 59,390 54,676
Decommissioning Costs * Opening Balance 71,965 55,814 Provisions 256 16,151 Payments - - Closing Balance 72,221 71,965
Other Opening Balance 4,001 4,529 Provisions (264) (528) Payments - - Closing Balance 3,737 4,001 154,951 149,984
* This item represents estimated costs of rehabilitation and disposal of the decommissioned South Fremantle Power Station; an estimate for the decommissioning costs of Kwinana Stages A and B, Muja Stages A and B and specific Pilbara and Regional generating assets.
19. OTHER LIABILITIES
Current Deferred Income - Developer & Cust. Contributions 58,854 28,841 Deferred Income - Other 5,167 4,543 Accrued Interest 2,342 2,479 Lease Renewal Incentive - 2,830 Other 2,252 1,655 68,615 40,348
Non-Current Deferred Income - Developer & Cust. Contributions - 4,790 Lease Renewal Incentive - 2,765 Other 24 3,631 24 11,186
Western Power Annual Report 2005 89 NOTES TO THE FINANCIAL STATEMENTS continued
20.EQUITY 30/06/05 30/06/04 $’000 $’000
Retained Profits at the Beginning of the Financial Year 1,580,683 1,442,615 Net Profit After Income Tax Expense 206,135 241,581 Less: Dividends Provided for or Paid 105,783 103,513 Retained Profits at the End of the Financial Year 1,681,035 1,580,683
Contributed Equity * 17,769 10,757 Total Equity 1,698,804 1,591,440
* This amount represents the State Government’s equity contribution to the Corporation in support of the Mid West Gas Lateral and Tubridgi to Onslow Gas Pipeline projects, the Rural Power Improvement Program, the undergrounding of a 132kV transmission line to Burswood and the Esperance nine mile beach wind farm. No shares have been allotted or issued for the equity contribution.
21.LEASE LIABILITY AND LEASE COMMITMENTS
Future Lease Commitments Operating Leases: Not later than one year 3,300 6,342 Later than one year and not later than five years 5,722 6,745 Later than five years 652 1,082 9,674 14,169
22.CAPITAL EXPENDITURE COMMITMENTS
Total capital commitments contracted for at balance date, including the retrospective underground project and other major capital expenditure programs, but not provided for in the accounts is as follows:
Future Capital Commitments Not later than one year 140,046 78,754 Later than one year and not later than five years 4,310 5,596 Later than five years - - 144,356 84,350
Western Power Annual Report 2005 90 NOTES TO THE FINANCIAL STATEMENTS continued
23.CONTINGENT LIABILITIES AND CONTINGENT ASSETS
The Corporation’s policy is to disclose details of contingent liabilities and contingent assets where the probability of future payments/receipts is not considered remote, as well as details of contingent liabilities and contingent assets, which although considered remote, the Directors of the Corporation consider should be disclosed. The Directors are of the opinion that provisions are not required in respect of these matters as it is unlikely that a future sacrifice/inflow of economic benefits will be required.
Contingent liabilities General and Civil (Australia) Pty Ltd (in liquidation) An action is to be commenced against the Corporation by General and Civil (Australia) Pty Ltd (in liquidation). It is alleged the Corporation is in breach of contract as a result of the Corporation terminating its contract with General and Civil (Australia) Pty Ltd. The claim is for $7,000,000 and also relates to services provided under the contract. The allegation is denied and the action will be defended.
Pacific Western Pty Ltd Pacific Western Pty Ltd have lodged a claim for $2,470,000 against the Corporation. Pacific Western Pty Ltd claim this is money owed for work completed under the operation and maintenance agreement for Collie Power Station. The Corporation has also made a claim against Pacific Western Pty Ltd. Refer to the contingent assets section.
Ericsson Australia Pty Ltd Ericsson Australia Pty Ltd have lodged a claim for approximately $310,000 against the Corporation. The claim relates to a dispute with Bright Telecommunications over services and equipment.
Contractual Breach An action against the Corporation has been undertaken by the former Chief Executive Officer, Dr WS van der Mye seeking additional employment payments of $462,011 and unquantified amounts for breach of contract, interest and legal costs. The allegation is denied and the action is being defended.
Newmont Power Pty Ltd An action against the Corporation as fifth defendant has been undertaken by Newmont Power Pty Ltd for damage to a power station as a result of alleged breach of the Interim Access Agreement. At the time of making this statement we are unable to ascertain the quantum.
Bush Fires Two actions against the Corporation have been undertaken for losses and damages as a result of bush fires in the Serpentine (2 February 2002) and Gingin (20 December 2002) areas. It is alleged the bush fires were the result of the Corporation’s negligence. Both allegations are denied and the actions are being defended.
On 2 December 2004 bush fires occurred in Esperance and Badjebup. The Corporation’s liability cannot be determined until all investigations, including those by insurers, are complete. Insurance arrangements provide for a cap on the Corporation’s liability in respect of each event.
Western Power Annual Report 2005 91 NOTES TO THE FINANCIAL STATEMENTS continued
23.CONTINGENT LIABILITIES AND CONTINGENT ASSETS continued
Contingent Assets Pacific Western Pty Ltd On 24 March 2005 Pacific Western terminated the operations and maintenance contract in respect of Collie A Power Station. The Corporation has lodged a claim against Pacific Western Pty Limited for $4,992,000 being for the amount of loss or damage directly attributable to the early termination.
24.REMUNERATION OF DIRECTORS AND EXECUTIVE DISCLOSURES
Principles Used to Determine the Nature and Amount of Remuneration Remuneration approval protocols are as follows:
Specified Non-Executive Directors: The Minister����������������������������������������������������������������������������� for Energy approves the remuneration of all Non-Executive Directors.
The Board subject to the concurrence of the Minister for Energy approves the remuneration of Managing Director: the Managing Director (also referred to as the CEO)..
The Board on recommendation of the Managing Director approves the remuneration of all Specified Executive Officers: Specified Executive Officers.
The Remuneration Policy is to:
• remunerate individuals in accordance with performance and responsibility; • ensure consistent decision making on individual remuneration adjustments; • establish flexible remuneration arrangements; and • establish and maintain salary ranges comparable to other companies of similar size and industry.
Specified Non-Executive Directors Payment to Specified Non Executive Directors consists of a Base Fee, a Committee Fee and superannuation of 9% of the Base Fee. The fees must be approved by the Minister for Energy annually.
Managing Director and Specified Executives The Managing Director and Specified Executives pay and reward framework has three components:
• Base pay and benefits; • Superannuation; and • Performance incentive (for the Managing Director only).
Performance Incentive At the Board’s absolute discretion with the concurrence of the Minister, the Managing Director is eligible for up to 10% of Remuneration for the achievement of specific performance targets in the following areas: Strategic Leadership, Operational Management, Team Building and Leadership, Commercial Acumen and Customer Management, Strong Financial Analysis Ability, Media and Public Relations and Shareholder Relationship.
Western Power Annual Report 2005 92 NOTES TO THE FINANCIAL STATEMENTS continued
24.REMUNERATION OF DIRECTORS AND EXECUTIVE DISCLOSURES continued
Details of the nature and amount of each element of the emolument for Specified Directors(1) during 2004/05 are detailed below:
Post Employment Other Primary Benefits Total Benefits Benefits Benefits Salary Bonus Non- Superannuation b Retirement & Ter- Total & Fees Monetary a mination Benefits $ $ $ $ $ $ Non-Executive Specified Directors ND Hamilton Chairman 2004/05 104,006 - 666 9,147 - 113,819 2003/04 63,719 - 668 5,866 - 70,253 JA Seabrook Deputy Chair 2004/05 66,813 - 666 5,829 - 73,308 2003/04 45,915 - 668 4,206 - 50,789 AJ Mulgrew Director 2004/05 51,868 - - 4,395 - 56,263 2003/04 40,152 - - 3,429 - 43,581 SA Wilson Director 2004/05 16,441 - - 37,815 - 54,256 2003/04 33,157 - - 9,590 - 42,747 JJ O’Connor Director 2004/05 30,272 - - 22,365 - 52,637 2003/04 19,869 - - 6,867 - 26,736 CE Stockwell Director 2004/05 48,290 - - 4,347 - 52,637 2003/04 24,563 - - 2,173 - 26,736 HR Collins Director (Appointed 14 September 2004) 2004/05 37,619 - 528 3,436 - 41,583 MJ Davies Director (Appointed 14 September 2004) 2004/05 38,146 - - 3,436 - 41,582 Others Reported in 2003/04 113,737 - 556 10,288 - 124,581 Executive Specified Directors AM Iannello Chief Executive Officer (Appointed 19 July 2004) 2004/05 400,093 584 32,209 432,886 HR Collins Chief Executive Officer (Resigned 21 July 2004) 2004/05 19,431 - 187 1,709 10,382 31,709 2003/04 120,523 - 743 10,598 - 131,864 Others Reported in 2003/04 230,898 - 41,181 32,421 - 304,500 Total Specified Directors 2004/05 812,979 - 2,631 124,688 10,382 950,680 2003/04 692,533 - 43,816 85,438 - 821,787
a Non-monetary benefits represent motor vehicle benefits and electricity benefits.
b Superannuation represents employer and employee contributed superannuation.
(1) Specified Director means a person who was, at any time during the reporting period, a director of the Corporation. Western Power Annual Report 2005 93 NOTES TO THE FINANCIAL STATEMENTS continued
24.REMUNERATION OF DIRECTORS AND EXECUTIVE DISCLOSURES continued
Details of the nature and amount of each element of the emolument for Specified Executives(2) during 2004/05 are detailed below:
Post Employment Other Primary Benefits Total Benefits Benefits Benefits
Salary Bonus Non- Superannuation b Retirement & Ter- Total & Fees Monetary a mination Benefits $ $ $ $ $ $ Specified Executives DT Aberle General Manager Networks 2004/05 264,328 - 30,326 39,156 - 333,810 2003/04 211,567 6,850 21,604 36,077 - 276,098 JE Lillywhite General Manager Generation 2004/05 230,766 - 19,498 44,354 - 294,618 2003/04 196,651 6,850 25,689 42,186 - 271,376 N Ninkov General Manager Finance, Risk Management and Service Delivery 2004/05 233,177 - 25,695 30,020 - 288,892 2003/04 221,949 6,850 29,361 26,824 - 284,984 TH James General Manager Retail 2004/05 187,849 - 20,626 35,196 - 243,671 2003/04 148,356 6,850 19,090 31,356 - 205,652 KD Bowron General Manager Regional 2004/05 192,247 - 16,931 32,537 - 241,715 2003/04 145,795 6,850 16,872 30,379 - 199,896 Others reported in 2003/04 576,153 32,400 111,705 118,631 562,360 1,401,249 Total Specified Executives 2004/05 1,108,367 - 113,076 181,263 - 1,402,706 2003/04 1,500,471 66,650 224,321 285,453 562,360 2,639,255
a Non-monetary benefits represent motor vehicle benefits and electricity benefits.
b Superannuation represents employer and employee contributed superannuation.
(2) Specified Executive means one of the five or more executives who:
a. have the highest emoluments/greatest authority for managing the economic entity;
b. are employed at any time during the reporting period by the entity; and
c. are not specified directors.
Executive means a person who is directly accountable and responsible for the strategic direction and operational management of the entity.
Western Power Annual Report 2005 94 NOTES TO THE FINANCIAL STATEMENTS continued
25.RECONCILIATION OF NET PROFIT AFTER INCOME TAX TO NET CASH PROVIDED BY OPERATING ACTIVITIES 30/06/05 30/06/04 $’000 $’000 Net Profit 206,135 241,581 Add/(less) items classified as investing/financing activities: Proceeds on Sale of Non-Current Assets (7,874) (13,522) Written Down Value on Sale of Non-Current Assets 4,360 9,826 Share of Associates Net Loss - 225 Developer and Customer Contributions (93,411) (74,501) Foreign Exchange (Gains)/Losses (84) 3,446 Capitalised Borrowing Costs (4,019) (7,032) Add/(less) non-cash items: Depreciation 228,989 228,738 Amortisation - Leased Assets 434 46 Write down of Other Financial Assets and PP&E 609 24,727 Write up of Inventory (2,035) - Contributed Assets (16,185) (13,031) Change in assets and liabilities: (Increase)/Decrease in Debtors (21,790) (7,987) (Increase)/Decrease in Prepayments 9,611 (5,107) Increase/(Decrease) in Accounts Payable 28,921 16,847 (Increase)/Decrease in Inventories (40,480) 2,386 Increase/(Decrease) in Employee Provisions (1,450) 14,830 Increase/(Decrease) in Other Provisions (8,952) 13 (Increase)/Decrease in Accrued Interest Receivable 228 (212) Increase/(Decrease) in Accrued Interest Payable (137) (31,240) Increase/(Decrease) in Deferred Income (5,081) 22,353 Increase/(Decrease) in Income Taxes Payable (29,461) 15,966 Net Cash Provided by Operating Activities 248,328 428,352
Reconciliation of Cash Assets at the End of the Financial Year Cash at Bank 13,686 26,390 Domestic Currency Deposits 5,000 3,000 Foreign Currency Deposits 57 159 Cash Assets at End of the Financial Year 18,743 29,549
Credit Standby Facilities The Corporation has in place two borrowing facilities with Western Australian Treasury Corporation, a AUD fixed rate facility with a limit of $3,100 million, and a short term US facility with a limit of $205 million USD. As at 30 June 2005 the unused portion of the AUD facility was $649.5 million and the USD facility was undrawn.
The planned usage of the facilities is governed by the Corporation’s Strategic Development Plan agreed with the Minister of Energy.
The Corporation has an intraday credit arrangement of $6.0 million with its bankers. As at 30 June 2005 the credit facility was undrawn.
In addition to the above the Corporation has arranged a stand-by overdraft facility of $2.0 million with its bankers. As at 30 June 2005 the overdraft facility was undrawn.
Western Power Annual Report 2005 95 NOTES TO THE FINANCIAL STATEMENTS continued
26.FINANCIAL INSTRUMENTS
(a) Interest Rate Risk The Corporation is exposed to interest rate risk through primary financial assets and liabilities, modified through derivative financial instruments such as interest rate swaps, forward rate agreements, bond futures contracts and cross currency swaps.
Interest rate swap contracts are used to manage interest rate exposures. Under an interest rate swap contract, the Corporation agrees to exchange at specified intervals, the differences between fixed rate and floating rate interest amounts calculated by reference to an agreed notional principal amount. These contracts convert a portion of floating interest rate exposures to fixed interest rate exposures to reduce the volatility of interest costs between reporting dates.
Forward rate agreements are used to manage interest rate exposures on domestic currency loans. Under a forward rate agreement, the Corporation agrees to exchange on a specified settlement date, the difference between an agreed interest rate and a floating interest rate calculated by reference to an agreed notional principal amount. These agreements fix interest rates on domestic currency loans to provide protection against increasing interest rates. No forward rate agreements were outstanding as at 30 June 2005 (June 04: nil).
Bond futures contracts are used to manage the strategic positioning of the domestic currency loans portfolio. Under a bond futures transaction, the Corporation agrees to buy or sell a specific quantity of bond futures contracts at an agreed price on a fixed settlement date. The Corporation only transacts in financial bond futures through the Sydney Futures Exchange. These contracts allow a physical debt position to be replicated at a lower cost than is possible by buying and selling physical bonds. No bond futures contracts were outstanding as at 30 June 2005 (June 04: nil).
Cross currency swap contracts are used to hedge foreign currency loans. Under cross currency swaps, the Corporation initially exchanges a principal amount in foreign currency for a principal amount in Australian dollars. At specified intervals the Corporation pays interest amounts in Australian dollars and receives interest in foreign currency. The principal and interest exchanges are matched to the exchanges on foreign currency loans. Cross currency swaps allow the Corporation to borrow offshore and minimise exposure to foreign interest rates and exchange rate fluctuations. Cross currency swaps are normally arranged for a period of three years. No cross currency swaps were outstanding as at 30 June 2005 (June 04: nil).
The subsequent tables summarise the Corporation’s exposure to interest rate risk, and the weighted average interest rates on financial instruments at the reporting date. The following financial instruments, where they are not interest bearing, are omitted: receivables, accounts payable, dividends payable and annual leave employee entitlements. .
Western Power Annual Report 2005 96 NOTES TO THE FINANCIAL STATEMENTS continued
26.FINANCIAL INSTRUMENTS continued
(a) Interest Rate Risk continued Fixed Interest Rate Maturing Weighted Floating Within One to Five Over 30/06/05 Average In- Interest Rate One Year Years Five Years Total terest Rate1 $’000 $’000 $’000 $’000 $’000 Financial Assets Cash at Bank 5.25% 13,686 - - - 13,686 Domestic Currency Deposits 5.40% 5,000 - - - 5,000 Foreign Currency Deposits - 57 - - - 57 Interest Rate Swaps2 5.78% 229,700 - - - 229,700 TOTAL ASSETS 248,443 - - - 248,443 Financial Liabilities Employee Entitlements Long Service Leave 5.03% 39,333 - - - 39,333 Domestic Currency Loans Short Term 5.59% - 80,000 - - 80,000 Long Term3 6.46% - 361,118 1,486,151 345,000 2,192,269 Floating Rate Notes4 5.70% 178,300 - - - 178,300 Interest Rate Swaps2 5.35% - 60,000 159,700 10,000 229,700 TOTAL LIABILITIES 217,633 501,118 1,645,851 355,000 2,719,602
Fixed Interest Rate Maturing Weighted Floating Within One to Five Over 30/06/04 Average Interest Interest Rate One Year Years Five Years Total Rate1 $’000 $’000 $’000 $’000 $’000 Financial Assets Cash at Bank 5.00% 26,390 - - - 26,390 Domestic Currency Deposits 5.17% 3,000 - - - 3,000 Foreign Currency Deposits - 159 - - - 159 Interest Rate Swaps2 5.66% 245,400 - - - 245,400 TOTAL ASSETS 274,949 - - - 274,949 Financial Liabilities Employee Entitlements Long Service Leave 5.47% 37,794 - - - 37,794 Domestic Currency Loans Short Term 5.50% 215,300 - - - 215,300 Long Term3 6.61% - 308,286 1,206,268 596.001 2,100,555 Interest Rate Swaps2 5.14% - 67,1000 135,000 43,300 245,400 TOTAL LIABILITIES 253,094 375,386 1,341,268 639,301 2,609,049
1 For floating interest rates this represents the most recent determined rate converted to the effective annual rate. The frequency of renegotiation for floating rates varies from daily to half yearly depending on the instrument. For fixed interest rates this represents the effective annual interest rate. 2 Notional principal. 3 Long term debt has an initial maturity period of greater than one year. 4 A Floating Rate Note facility has replaced short term borrowings previously rolled every quarter.
Western Power Annual Report 2005 97 NOTES TO THE FINANCIAL STATEMENTS continued
26.FINANCIAL INSTRUMENTS continued
(b) Foreign Exchange Risk The Corporation is exposed to foreign exchange risk through foreign currency loans and anticipated future transactions.
Foreign Currency Loans Foreign currency loans are used by the Corporation as an additional source of finance. Cross currency swaps are used to manage foreign currency exposure on foreign currency loans. No foreign currency loans were outstanding as at 30 June 2005 (June 04: nil).
Hedges of Anticipated Future Transactions The purpose of the Corporation’s foreign currency hedging activities is to protect against the risk that the eventual Australian dollar outflows for purchases of equipment and services will be adversely affected by changes in exchange rates.
The Corporation hedges this risk by purchasing foreign currency and holding it on deposit or by entering into forward foreign exchange agreements and foreign currency options.
The following table summarises the foreign currency amounts held on deposit, in Australian dollar equivalents using rates current at the reporting date.
30/06/05 30/06/04 $’000 $’000
Currency Europe Euro 57 110 United States Dollar - 49 Total Foreign Currency Deposits 57 159
The foreign currency deposits are utilised to pay invoices from foreign suppliers. The deposits are replenished when a firm order has been placed with the supplier or the future commitment can be reliably measured. In line with Note 1.14.2, any gain or loss on these hedges has been deferred and will be recognised in the financial statements at the time the underlying transaction occurs. No hedges were outstanding as at 30 June 2005 (June 04: nil).
The following tables summarise, by currency, the Australian dollar value of forward foreign exchange agreements. Foreign currency amounts are translated at rates current at the reporting date. The ‘Buy’ amount represents the Australian dollar equivalent of commitments to purchase foreign currencies, and the ‘Sell’ amount represents the Australian dollar equivalent of commitments to sell foreign currencies.
Western Power Annual Report 2005 98 NOTES TO THE FINANCIAL STATEMENTS continued
26.FINANCIAL INSTRUMENTS continued
(b) Foreign Exchange Risk continued
Weighted Average Exchange Rate Buy Sell 30/06/05 Buy Sell $’000 $’000 Within one year: Canadian Dollars 0.9259 - 3,723 - Swiss Franc 0.8592 - 1,684 - Europe Euro 0.5824 - 16,568 - British Pounds 0.3888 - 277 - Swedish Kroner 5.4605 - 1,536 - United States Dollar 0.7074 - 9,606 - Japanese Yen 79.710 - 5,926 - Within two years Japanese Yen 79.710 - 12,764 - Total 52,084 -
Weighted Average Exchange Rate Buy Sell 30/06/04 Buy Sell $’000 $’000 Within one year: Swiss Franc 0.9770 - 362 - Europe Euro 0.5954 - 2,052 - United States Dollar 0.6006 - 2,635 - Japanese Yen 0.4114 - 2,238 - Total 7,287 -
In line with Note 1.14.2, any gain or loss on these hedges has been deferred and will be recognised in the financial statements at the time the underlying transaction occurs. The net deferred loss on these hedges as at 30 June 2005 was $3.7 million (June 04: loss of $0.5 million).
No foreign currency options were outstanding as at 30 June 2005 (June 04: nil).
Western Power Annual Report 2005 99 NOTES TO THE FINANCIAL STATEMENTS continued
26.FINANCIAL INSTRUMENTS continued
(b) Foreign Exchange Risk continued Commodity Price Exposures The Corporation is exposed to fluctuations in the price of commodities associated with the purchase of materials. In addition, as these commodities are priced in United States dollars, a foreign exchange risk also exists.
The Corporation manages these risks by the use of commodity swaps and commodity options. Where these derivatives are settled in United States dollars the foreign currency risk is managed by entering into forward foreign exchange contracts and foreign currency options.
The notional amounts and maturity dates for the commodity hedge contracts are as follows:
30/06/05 30/06/04 $’000 $’000 Hedging of Commodity Purchases 3 months or less - 10,590 Over 3 to 12 months - 4,348 Total - 14,938
In line with note 1.14.2, any gain or loss on these hedges has been deferred and will be recognised in the financial statements at the time the underlying transaction occurs. The Corporation did not have any commodity hedges, and therefore no net deferred gain or loss on commodity hedges as at 30 June 2005. (June 04: gain of $3.4 million).
(c) Credit Risk Credit risk represents the extent of credit related losses that the Corporation may be subject to on amounts to be received from financial assets or exchanged under derivative financial instruments.
Financial Assets The Corporation’s maximum credit risk on current receivables is the carrying amount net of the provision for doubtful debts. The Corporation’s electricity customer base consists of customers who are billed on a tariff based system, and customers billed under specific contract terms. Tariff customers include both domestic and commercial customers who are billed either monthly or every two months, and are required to settle accounts within 21 days. Contract customers are billed monthly and are required to settle their accounts in the time period specified by the individual contract, with most customers on 14 day terms.
To minimise credit risk on large contract customers, collateral in the form of a bank guarantee or a security deposit equivalent to one electricity consumption period is obtained. Due to the Corporation’s large customer base of over 888,000 customers, the Corporation is not materially exposed to any individual customer or group of customers.
In respect of investments, credit risk is minimised by the Corporation’s practice to deal only with major banks that are highly rated by Standard & Poor’s or Moody’s Investor Services and are regulated by the Australian Prudential Regulation Authority.
Western Power Annual Report 2005 100 NOTES TO THE FINANCIAL STATEMENTS continued
26.FINANCIAL INSTRUMENTS continued
(c) Credit Risk continued Derivative Financial Instruments The credit risk on derivative financial instruments is represented by the net fair value of contracts with a positive fair value at the reporting date. The notional amounts of derivatives are not a measure of this exposure.
The following table summarises the Corporation’s credit risk on derivative financial instruments at the reporting date.
30/06/05 30/06/04 $’000 $’000
Derivative Financial Instruments Commodity Swaps - 3,409 Foreign Exchange Contracts 46 307 Bond Futures Contracts - - Interest Rate Swaps 1,350 3,320 Total 1,396 7,036
1 The credit risk associated with bond futures contracts is negligible as contracts are collateralised by cash, with any changes in the market value of contracts being settled on a daily basis with the clearing house.
The Corporation does not expect any counterparty to fail given the policy to deal in derivatives only with counterparties that are recognised financial intermediaries and possess a credit rating of A (Standard & Poor’s) or A2 (Moody’s Investor Services) or better.
(d) Net Fair Value of Financial Instruments The net fair value of a financial asset or a financial liability is the amount at which the asset could be exchanged, or liability settled in a current transaction between willing parties after allowing for transaction costs. The carrying amounts and estimated net fair values of financial assets and financial liabilities, including derivative contracts, held at the reporting date are provided in the next table. The following financial instruments, where carrying amounts approximate net fair values, are omitted: cash at bank, domestic and foreign currency deposits, receivables, accounts payable and employee entitlements.
Western Power Annual Report 2005 101 NOTES TO THE FINANCIAL STATEMENTS continued
26.FINANCIAL INSTRUMENTS continued
(d) Net Fair Value of Financial Instruments continued
Carrying Amount Net Fair Value Carrying Amount Net Fair Value 30/06/05 30/06/05 30/06/04 30/06/04 $’000 $’000 $’000 $’000 Financial Assets Interest Rate Swaps - 1,350 - 3,320 Commodity Swaps - - 3,423 3,409 Foreign Exchange Contracts 24 46 208 307 TOTAL ASSETS 3,631 7,036 3,631 7,036 Financial Liabilities Contributory Extension Scheme 32,483 20,492 33,357 18,911 Foreign Exchange Contracts 3,706 2,914 677 399 Domestic Currency Loans Short Term 80,000 80,002 215,300 217,732 Long Term 2,192,269 2,279,396 2,110,555 2,180,240 Floating Rate notes 178,300 180,191 - - Interest Rate Swaps - 2,082 - 1,360 Commodity Swaps - - - - Commodity Options - - - - TOTAL LIABILITIES 2,486,758 2,565,077 2,359,889 2,418,642
The Corporation has not written its financial liabilities up or financial assets down, to their estimated fair value as it expects to realise the carrying amount fully, by holding them to maturity.
Net fair values of financial instruments are determined on the following basis: • Foreign exchange contracts are valued at quoted market prices.
• The net fair value of interest rate swaps and commodity swaps has been calculated by discounting future cash flows at market rates applicable at the reporting date.
• The contributory extension scheme consists of a large number of non-interest bearing 30 year refundable deposits, the last of which is due to expire in 2022. The net fair value of the scheme has been calculated by discounting the expected future payment at the same interest rates used to value domestic currency loans.
• Domestic currency loans are arranged through Western Australian Treasury Corporation. The net fair value of these loans has been calculated by discounting future cash flows using interest rates currently offered to the Corporation for debt of the same remaining maturities plus costs expected to be incurred were the liability to be settled.
Western Power Annual Report 2005 102 NOTES TO THE FINANCIAL STATEMENTS continued
26.FINANCIAL INSTRUMENTS continued
(e) Miscellaneous Put option Uecomm Operations Pty Ltd has a put option to the Corporation. The option can be exercised up to 23 April 2008 should a significant change in the control environment of Uecomm Limited occur. If the option is exercised, the Corporation will be required to purchase customer contracts from Uecomm Operations Pty Ltd.
If the option was exercised on the 30 June 2005 it would not have a material value.
27.INTERESTS IN JOINT VENTURES
The South West Cogeneration Joint Venture is a joint venture between Origin Energy SWC Ltd and the Corporation, who own, as equal tenants-in-common, a 120MW cogeneration facility on the site of the Worsley Alumina Refinery in the South West of Western Australia. Within the terms of the joint venture agreement a pre-emption right exists in regard to the disposal of either parties’ interest. The output of the facility, thermal energy and electricity, is sold to the refinery and other energy customers.
APT Pipelines (WA) Pty Ltd and the Corporation, own as equal tenants-in-common, and share in output (29.2% WPC/70.8% APT) a gas pipeline taking gas from the Dampier Bunbury Natural Gas Pipeline (DBNGP) to the power station at Vanadium Australia Pty Ltd’s (VAPL) mine at Windimurra and other nearby destinations. AGL Power Generation (Mid West) Pty Ltd and the Corporation own and operate the power station at Windimurra, as equal tenants-in-common. The power station is currently in care and maintenance mode. AGL Gas Trading Pty Ltd and the Corporation formed a joint venture as equal tenants-in-common to facilitate the transportation of gas via the DBNGP to the Mid West pipeline, then sell the gas to VAPL. Within the terms of the joint venture agreements a pre-emption right exists in regard to the disposal of either parties’ interest.
Included in the assets and liabilities of the Corporation are the following items which represent the Corporation’s interest in the assets and liabilities employed in the joint ventures, recorded in accordance with the accounting policies described in Note 1.11.1.
Western Power Annual Report 2005 103 NOTES TO THE FINANCIAL STATEMENTS continued
27.INTERESTS IN JOINT VENTURES continued
30/06/05 30/06/04 $’000 $’000 Current Assets Cash Assets 171 88 Trade Debtors 1,180 1,298 Less: Provision for Doubtful Debts - - 1,180 1,298 Inventories 286 266 Prepayments - - Total Current Assets 1,637 1,652 Non-Current Assets Works Under Construction 87 78 Plant and Equipment - at Cost 65,015 65,015 Less: Accumulated Depreciation 37,597 34,900 27,418 30,115 Plant and Equipment - at Recoverable Amount 8,077 8,077 Less: Accumulated Depreciation 1,775 731 6.302 7,346 Total Non-Current Assets 33,807 37,539 TOTAL ASSETS 35,444 39,191 Current Liabilities Payables 1,242 1,178 Total Current Liabilities 1,242 1,178 TOTAL LIABILITIES 1,242 1,178
There are no contingent liabilities and capital expenditure commitments relating to the joint ventures as at 30 June 2005.
Western Power Annual Report 2005 104 NOTES TO THE FINANCIAL STATEMENTS continued
28.ASSOCIATE AND JOINT VENTURE ENTITIES
Halliburton Australia Pty Ltd and the Corporation each held a 50% ownership interest in Integrated Power Services Pty Ltd (IPS). The company was formed in February 1998, as a provider of energy services to the mining process industry, and utilities service sector. During the financial year ended 30 June 2004 the Corporation sold its 50% ownership interest in IPS.
The information relating to IPS is set out below.
30/06/05 30/06/04
$ $ Share of Associate’s Results Share of Net Profit/(Loss) Before Income Tax Expense - (36,058) Share of Income Tax Expense - - Share of Net Profit/(Loss) After Income Tax Expense - (36,058)
30/06/05 30/06/04
$ $ Summary of Performance and Financial Summary of Associate Total Assets - - Total Liabilities - - Net Profit/(Loss) After Income Tax Expense - (72,115)
Enercon Power Corporation and the Corporation each hold a 50% ownership in Wind Energy Corporation. Within the terms of the shareholder agreement a pre-emption right exists in regard to the disposal of either parties’ interest. The company was formed in August 2000 to focus on business opportunities relating to large-scale wind farms operating in parallel with an interconnected electricity grid, and hybrid power systems for remote and regional applications that utilise renewable energy technologies.
In June 2004 the Directors of the Corporation re-assessed the recoverable amount of Wind Energy Corporation and based on the assessment wrote down the investment by $675,000 to its recoverable amount of zero.
United KG Pty Ltd and the Corporation jointly agreed in June 2004 to provide design and construction services of high voltage electrical equipment to Electranet Transmission Services Pty Ltd for the Mannum Substation upgrade in South Australia. The equity method has not been adopted as at 30 June 2005 because the Corporation’s interest in the joint venture entity was immaterial in the context of the Corporation’s operations.
Western Power Annual Report 2005 105 NOTES TO THE FINANCIAL STATEMENTS continued
29.INTERESTS IN CONTROLLED ENTITIES
The Corporation formed a wholly owned subsidiary Western Carbon Pty Ltd in July 2002 to pursue the development of new and existing technologies associated with a demonstration integrated wood processing plant. Commissioning of the demonstration plant is expected to occur in September 2005. When complete the plant will process plantation grown mallee trees to produce activated carbon, eucalyptus oil and electricity.
As at 30 June 2005 the assets and liabilities of the integrated wood processing plant project are held by the Corporation. The subsidiary has undertaken no transactions and therefore there is no impact on the financial statements of the Corporation.
The Corporation formed a wholly owned subsidiary Bright Telecommunications Pty Ltd in December 2002 to develop a broadband access network, subject to the successful completion of a pilot project being conducted by the Corporation. The pilot phase of this project was completed during 2003/2004 and the results assessed, including the requirements to progress to a full commercial operation. On 21 July 2004 the Directors of the Corporation decided to close the project and write the assets down to their assessed recoverable amount of zero. For further details refer to the 30 June 2004 Annual Report.
A detailed assessment of disposal options was conducted during 2004/2005 from which it was concluded that a sale of the Bright business as a going concern may yield a higher return than a sale of the assets of the project. As at 30 June 2005 a sale of the Bright Telecommuniciations project is in progress.
As at 30 June 2005 the assets and liabilities of the “Bright Project” are held by the Corporation. The subsidiary has undertaken no transactions and therefore has no impact on the financial statements of the Corporation.
30.RELATED PARTY DISCLOSURES
Transactions with Related Parties For the purposes of these financial statements the following entity is deemed to be a related party: - Wind Energy Corporation
The value of transactions between the Corporation and Wind Energy Corporation during the financial year to 30 June 2005 is $18,000 (June 2004 nil). Trading between the Corporation and the related party is undertaken on an arm’s length basis, on commercial terms and conditions.
31.ECONOMIC DEPENDENCY
The Corporation has a significant economic dependency on gas supply and transportation capacity from North West Shelf Joint Ventures and Duet Alinta Alcoa Consortium respectively. In addition, the Corporation is solely dependent on coal supplies from Wesfarmers Premier Coal Ltd and Griffin Coal Mining Company Pty Ltd.
Western Power Annual Report 2005 106 NOTES TO THE FINANCIAL STATEMENTS continued
32.EVENTS SUBSEQUENT TO BALANCE DATE
Other than as disclosed below, there has not arisen in the interval between the end of the financial year and the date of this report any matter or circumstance likely, in the opinion of the Directors, to affect significantly the operations of the Corporation, the results of those operations, or the state of affairs of the Corporation in subsequent financial years.
Construction of new power stations On 9 August 2005, the Corporation announced an unconditional agreement with Energy Developments Limited to construct five new power stations in the West Kimberley. The West Kimberley Power Procurement program will deliver new power stations in the towns of Broome, Derby, Fitzroy Crossing, Halls Creek and Camballin-Looma. The Corporation has agreed a new schedule for construction of the power stations. The Corporation will continue to supply power to the five towns until the new plants are commissioned. The expected dates for the commercial operation are as follows: Broome – March/April 2007, Looma – April 2007, Derby – May 2007, Fitzroy Crossing – June 2007 and Halls Creek – July 2007.
On 16 August 2005, the Corporation announced, following approval of the Western Power Board and State Cabinet, that the successful bidder to construct a new baseload power station for the SWIS was Wambo Power Ventures Pty Ltd (Wambo). Under the proposal, Wambo will provide an additional 320 megawatts of power to the SWIS from a new gas- fired combined-cycle power station to be built adjacent to Western Power’s Cockburn power station, which will enter commercial service by end of November 2008.
On 16 August 2005, the Corporation also announced, following approval of the Western Power Board and State Cabinet, details of a 25-year contract to supply coal to the Corporation’s existing power stations. Wesfarmers Premier Coal was the successful bidder to supply low-ash coal for the Muja C and D and Collie power stations until 2030. Supply arrangements with Griffin Coal will remain in place until 2010. Current arrangements with Wesfarmers Premier Coal are incorporated into the new arrangements.
The financial impact for the above transactions have not been recognised in the financial statements for the year ended 30 June 2005.
33.IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS
The Corporation is in the process of transitioning its accounting policies and financial reporting from Australian Generally Accepted Accounting Principles (AGAAP) to Australian equivalents to International Financial Reporting Standards (AIFRS). The Corporation will prepare its first fully AIFRS compliant financial statements for the financial year ended 30 June 2006. This includes the restatement of the AGAAP 2004/2005 comparatives to comply with AIFRS. To facilitate this, priority has been given to the preparation of the Corporation’s 1 July 2004 AIFRS compliant opening balance sheet, the Corporation’s transition date to AIFRS. This will form the basis of accounting for AIFRS in the future. In preparing the AIFRS compliant opening balance sheet, it is evident the adjustments required to retrospectively apply AIFRS will be reflected as either a reclassification of assets or liabilities or an adjustment to retained earnings.
Western Power Annual Report 2005 107 NOTES TO THE FINANCIAL STATEMENTS continued
33.IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS continued
The transitional adjustments relating to the standards for which 2004/2005 comparatives are not required will be made on 1 July 2005. Comparatives are not required for AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139 “Financial Instruments: Recognition and Measurement”.
In 2004, the Corporation commenced a project to achieve transition to AIFRS reporting. Internal resources were allocated and expert consultants engaged to perform diagnostics and conduct impact assessments to isolate key areas impacted by the transition to AIFRS. As a result of this work, the Corporation graded the impact areas as either high, medium or low and established work streams to address each of the areas in order of their priority. An AIFRS project team was established to manage the progress of these work streams. To date, the team has largely completed the diagnostic, design and planning and solution development phases and is progressing with implementation.
Set out overleaf are the key areas where the Corporation’s accounting policies are expected to change on adoption of AIFRS and the best estimate of the quantitative impact of the changes on total equity as at the date of transition and 30 June 2005, and on net profit for the year ended 30 June 2005.
The figures disclosed are management’s best estimate of the quantitative impact of the changes as at the date of preparing the 30 June 2005 financial statements. The actual effects of transition to AIFRS may differ from the estimates disclosed due to: - ongoing AIFRS work being undertaken by the project team; - potential amendments to AIFRSs and interpretations thereof being issued by the standard-setters and the International Financial Reporting Interpretations Committee (IFRIC); and - emerging accepted practice in the interpretation and application of AIFRS and UIG Interpretations.
For the purposes of applying AIFRS to the financial statements the Corporation has adopted a not-for-profit classification. This is as a result of the Corporation’s principal objective, per the “Function and Powers” requirements of the Electricity Corporation Act 1994, being the provision of electricity services and not the generation of profit. Therefore, although the generation of profit is important to the Corporation and decisions are predominantly made on this basis, it is not the primary objective.
For the purposes of applying AIFRS to the financial statements the Corporation has determined the assets of the Corporation are principally not cash flow dependant. This is a result of the service orientation of the Corporation’s principal objective. It is the Corporation’s view that the future economic benefits of its assets are not primarily dependent on their ability to generate net cash inflows, and if deprived of an asset, the Corporation would replace that assets remaining service potential.
Western Power Annual Report 2005 108 NOTES TO THE FINANCIAL STATEMENTS continued
33.IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS continued (a) Reconciliation of Equity as Presented under AGAAP to that under AIFRS 30/06/05 01/07/04 Notes $’000 $’000 Total Equity under AGAAP 1,698,804 1,591,440 Adjustments to Retained Profits Derecognition of Internally Generated Renewable Energy Certificates 1 (1,143) (1,654) Derecognition of Provision for Final Dividend 2 51,601 41,213 Derecognition of AGAAP Provision for Decommissioning Costs 3 9,943 9,574 Recognition of AIFRS Provision for Decommissioning Costs 3 522 - Derecognition of Amortisation of AGAAP Decommissioning Costs 3 52,295 43,397 Recognition of Borrowing Costs (Decommissioning Provision) 3 (106,493) (98,553) Recognition of Depreciation of AIFRS Decommissioning Costs 3 (12,259) (12,435) Recognition of Impairment of Collie Power Station (CPS) 4 (30,530) (30,530) Tax Effect of Impairment of CPS 4 9,159 9,159 Derecognition of Depreciation for CPS Impairment 4 1,517 - Tax Effect of Derecognition of Depreciation for CPS Impairment 4 (455) - Recognition of Contributions from the Contributory Extension Scheme 5 32,428 32,509 Recognition of Borrowing Costs (Contributory Extension Scheme) 5 (15,270) (13,702) Tax Effect of Contributory Extension Scheme Payables 5 (5,147) (5,642) Derecognition of Developer & Customer Contributions 6 (74,390) (50,737) Tax Effect of Derecognition of Developer & Customer Contributions 6 22,317 15,221 Recognition of Grant Income 7 - 1,600 Recognition of Net Defined Benefit Superannuation Expense 8 169 - (65,736) (60,580) Total Equity under AIFRS 1,633,068 1,530,860
Reconciliation of Net Profit as Presented under AGAAP to that under AIFRS
Net Profit under AGAAP 206,135 Adjustments to Net Profit Derecognition of Internally Generated Renewable Energy Certificates 1 511 Derecognition of AGAAP Provision for Decommissioning Costs 3 369 Recognition of AIFRS Provision for Decommissioning Costs 3 522 Derecognition of Amortisation of AGAAP Decommissioning Costs 3 8,898 Recognition of Borrowing Costs (Decommissioning Provision) 3 (7,940) Recognition of Depreciation of AIFRS Decommissioning Costs 3 176 Derecognition of Depreciation for CPS Impairment 4 1,517 Tax Effect of Derecognition of Depreciation for CPS Impairment 4 (455) Recognition of Contributions from the Contributory Extension Scheme 5 (81) Recognition of Borrowing Costs (Contributory Extension Scheme) 5 (1,568) Tax Effect of Contributory Extension Scheme Payables 5 495 Derecognition of Developer & Customer Contributions 6 (23,653) Tax Effect of Derecognition of Developer & Customer Contributions 6 7,096 Recognition of Grant Income 7 (1,600) Recognition of Net Defined Benefit Superannuation Expense 8 169 (15,544) Net Profit under AIFRS 190,591
Western Power Annual Report 2005 109 NOTES TO THE FINANCIAL STATEMENTS continued
33.IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS continued
(a) Reconciliation of Equity and Net Profit as Presented under AGAAP to that under AIFRS continued
1 Renewable Energy Certificates Under AASB 138 “Intangible Assets”, the value inherent in internally generated Renewable Energy Certificates (RECs) is not recognised until the RECs are sold or surrendered. This results in a change to the Corporation’s current accounting policy that allows for the immediate recognition of internally generated RECs in the balance sheet (ie inventory) and profit and loss statement (ie RECs).
Therefore, on adoption of AIFRS, the Corporation is required to derecognise internally generated RECs reported in the balance sheet (ie inventory) and profit and loss statement (ie RECs) until they are sold or surrendered.
2 Dividends Under AASB 110 “Events After the Balance Sheet Date”, a provision is recognised for a dividend when it is appropriately authorised as at the reporting date and no longer at the discretion of the entity. This results in a change to the Corporation’s current accounting policy that allows for the recognition of a provision if there is a public recommendation for the dividend as at the reporting date despite the amount not being appropriately authorised.
Therefore, on adoption of AIFRS, the Corporation is required to derecognise dividends provided for in the financial statements where the dividend was approved by the Board after the reporting date.
3 Decommissioning Costs Provision Under AASB 137 “Provisions, Contingent Assets and Contingent Liabilities”, a provision for decommissioning costs is recognised when a legal or constructive obligation arises. Based on the Corporation’s past payment practices in relation to power generating facilities this is typically when the asset is commissioned. The provision is measured as the present value of the expenditure required to settle the obligation. This results in a change to the Corporation’s current accounting policy that allows for the recognition of a provision for decommissioning costs only as the generating plant nears the end of its useful life.
Therefore, on adoption of AIFRS, the Corporation is required to recognise a provision for decommissioning costs when there exists a legal or constructive obligation, and not simply when the asset nears the end of its useful life. The provision is measured as the present value of the expenditure required to settle the obligation. Any subsequent movement in the present value over time is expensed to the income statement (ie borrowing costs).
Property, Plant and Equipment Under AASB 116 “Property, Plant and Equipment”, the original cost of an item of property, plant and equipment is to include the cost of dismantling and removing the asset, and restoring the site on which it is located, to the extent that these costs are also recognised as a provision under AASB 137 “Provisions, Contingent Assets and Contingent Liabilities”. This results in a change to the Corporation’s current accounting policy that allows for the recognition of decommissioning costs only as the generating plant nears the end of its useful life.
Therefore, on adoption of AIFRS, the Corporation is required to derecognise decommissioning costs previously provided for when the generating plant nears the end of its useful life and recognise, in the asset’s original capital cost the decommissioning costs recognised as a provision under AASB 137. The impact of any subsequent changes in the assumptions used to provide for these costs must be prospectively recognised in the asset’s original capital cost. The Corporation is also required to derecognise decommissioning costs previously amortised to the profit and loss statement and expense to the income statement (ie depreciation) the systematic allocation of the decommissioning costs recognised in the asset’s original capital cost over the useful life of the asset.
Western Power Annual Report 2005 110 NOTES TO THE FINANCIAL STATEMENTS continued
33.IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS continued
(a) Reconciliation of Equity and Net Profit as Presented under AGAAP to that under AIFRS continued
4 Impairment of Assets Under AASB 136 “Impairment of Assets”, the recoverable amount of current and non-current assets is determined as the higher of the depreciable replacement amount and the net selling price. This results in a change to the Corporation’s current accounting policy that allows for the recoverable amount of non-current assets to be determined on the basis of discounted cash flows.
Therefore, on adoption of AIFRS, the Corporation is required to recognise an impairment loss for Collie Power Station of $30.5 million. This is because the carrying amount exceeds the depreciable replacement amount. This in turn results in a reduction to the Corporation’s deferred tax liability on adoption of AIFRS.
5 Contributory Extension Scheme (CES) Under AASB 1004 “Contributions”, non-reciprocal contributions are recognised in the income statement (ie other revenue). (A non-reciprocal contribution is a transfer in which an entity receives assets or services or has liabilities extinguished without directly giving approximately equal value in exchange to the other party or parties to the transfer). The requirements of AASB 1004 “Contributions” result in a change to the Corporation’s current accounting policy that allows for the recognition of a customer’s non-reciprocal contribution for the extension of specific electricity supplies in the balance sheet (ie other payables).
Therefore, on adoption of AIFRS, the Corporation is required to reclassify from the balance sheet (ie CES payables) to the income statement (ie other revenue) the CES contributions that, at the customers’ payment dates, represented non- reciprocal contributions. The impact of any subsequent changes in the assumptions used to calculate these contributions must be prospectively recognised in the income statement (ie other revenue). The Corporation is also required to expense to the income statement (ie borrowing costs) the movement in the present value over time of the CES payables.
A deferred tax liability arises on adoption of AIFRS due to the timing difference as a result of the above contributory extension scheme adjustments.
6 Developer & Customer Contributions Under UIG 1017 “Developer and Customer Contributions for Connection to a Price-Regulated Network”, contributions received in advance are deferred to the balance sheet (ie other liabilities) until the developer or customer is connected to the service delivery network in accordance with the terms of the contributions. On connection, the contributions are recognised in the income statement (ie other revenue). This results in a change to the Corporation’s current accounting policy that allows for the recognition of developer and customer contributions in the profit and loss statement in line with the estimated actual percentage of completion of the developer/customer funded jobs.
Therefore, on adoption of AIFRS, the Corporation is required to defer to the balance sheet (ie other liabilities) any developer and customer contributions recognised in the profit and loss statement for which the developer/customer has not been connected to the network.
A deferred tax asset arises on adoption of AIFRS due to the timing difference as a result of the above developer and customer contributions adjustment.
Western Power Annual Report 2005 111 NOTES TO THE FINANCIAL STATEMENTS continued
33.IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS continued
(a) Reconciliation of Equity and Net Profit as Presented under AGAAP to that under AIFRS continued
7 Grant Income Under AASB “Contributions”, grant income is recognised immediately in the income statement (ie other revenue) when the Corporation gains control of, or has the right to receive the contribution; it is probable the economic benefits comprising the contribution will flow to the Corporation; and the amount of the contribution can be reliably measured. This results in a change to the Corporation’s current accounting policy that allows for grants received to be recognised over the reporting periods in which the related costs the grant was intended to compensate are incurred.
Therefore, on adoption of AIFRS, the Corporation is required to recognise in the income statement (ie other income) the grant income previously deferred to the balance sheet (ie other liabilities) for the Narrogin Demonstration Integrated Wood Project.
8 Superannuation Under AASB 119 “Employee Benefits”, employee sponsors are required to recognise the net surplus or deficit in any employer sponsored defined benefit superannuation fund as an asset or liability in the balance sheet. This results in a change to the Corporation’s current accounting policy that does not seek to recognise the net assets or liabilities of a defined benefit superannuation fund.
Therefore, on adoption of AIFRS, the Corporation is required to recognise in the balance sheet the net defined superannuation benefit in the Western Power Superannuation Fund. Any movements in the net benefit are recognised in the income statement. As at 30 June 2004 the value of the plan assets in the Western Power Superannuation Fund was immaterial.
(b) Restated AIFRS Statement to Cash Flows for the Year Ended 30 June 2005 No material impacts are expected to the cash flows presented under AGAAP on adoption of AIFRS.
(c) Other Impacts of Adopting AIFRS Other key areas where accounting policies are expected to change on adoption of AIFRS but for which there is no quantitative impact to total equity and net profit as at 30 June 2005 are set out below.
Income Taxes Under AASB 112 “Income Taxes”, the balance sheet liability method is used to calculate the tax effect balances. This method recognises deferred tax balances when there is a difference between the carrying value of an asset or liability and its tax base. This results in a change to the Corporation’s current accounting policy that allows for the calculation of the tax effect balances using the profit and loss liability method.
AASB 112 “Income Taxes” also permits conditions in which the deferred tax liabilities can be disclosed on the face of the balance sheet net of deferred tax assets. The application of this as at 1 July 2004 and 30 June 2005 results in the reclassification of $76.5 million and $74.5 million respectively from future income tax benefits in the balance sheet to deferred tax liabilities.
Western Power Annual Report 2005 112 NOTES TO THE FINANCIAL STATEMENTS continued
33.IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS continued
(c) Other Impacts of Adopting AIFRS continued
Employee Benefits Leave Entitlements Under AASB 101 “Presentation of Financial Statements”, unconditional leave entitlements due within one year from the reporting date are disclosed in the balance sheet (ie provisions) as current. This results in a change to the Corporation’s current accounting policy that allows for the recognition of only those unconditional long service leave entitlements due and to be settled within one year from the reporting date as current. The application of this standard as at 1 July 2004 and 30 June 2005 results in the reclassification of $3.1 million and $4.4 million respectively from non-current leave entitlements in the balance sheet (ie provisions) to current leave entitlements.
Employment On-Costs Under AASB 119 “Employee Benefits”, where the settlement of employee entitlements gives rise to the payment of employment on-costs, such as payroll tax and workers’ compensation insurance, a provision is recognised for the on-costs separate to the provision for the employee entitlements. This results in a change to the Corporation’s current accounting policy that allows for the recognition of employment on-costs in the same provision as the employee entitlements. The application of this standard as at 1 July 2004 and 30 June 2005 results in the reclassification of the following from employee entitlements to other provisions in the balance sheet: - $3.3 million and $3.7 million respectively of current employment on-costs; and - $1.1 million and $1.0 million respectively of non-current employment on-costs.
Intangible Assets Under AASB 138 “Intangible Assets”, the recognition, measurement and disclosure requirements for identifiable non- monetary assets without physical substance are prescribed. This provides a specific criteria against which the Corporation can identify and recognise intangible assets. The application of this standard as at 1 July 2004 and 30 June 2005 results in the reclassification of the following to intangible assets in the balance sheet: - $1.9 million and $3.4 million respectively of externally purchased renewable energy certificates previously reported in inventory (ie current); and - $4.0 million and $7.4 million respectively of computer software and exclusive rights previously reported in plant and equipment (ie non-current). Despite this reclassification, the Corporation is to continue expensing to the income statement (ie depreciation) the systematic allocation of the depreciable amount over the useful lives of the intangible assets.
Western Power Annual Report 2005 113 NOTES TO THE FINANCIAL STATEMENTS continued
33.IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS continued
(d) Future Impacts of Adopting AIFRS
Financial Instruments The requirements of AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139 “Financial Instruments: Recognition and Measurement” are first mandatory in the financial year ended 30 June 2006. As a result of this delayed application date the Corporation’s comparative financial year ended 30 June 2005 does not require compliance with AASB 132 and AASB 139. Despite this, a narrative of the expected impact to the Corporation on adoption of these standards, ie 1 July 2005 is provided below.
Classification of Financial Instruments Under AASB 139 “Financial Instruments: Recognition and Measurement”, financial instruments are required to be classified into one of five categories which, in turn, determines the accounting treatment of the item. The classifications are: - loans and receivables (measured at amortised cost); - held to maturity (measured at amortised cost); - held for trading (measured at fair value with fair value changes charged to net profit or loss); - available for sale (measured at fair value with fair value changes taken to equity); and - non-trading liabilities (measured at amortised cost).
All derivatives contracts, whether used as hedging instruments or otherwise, are carried at fair value on the balance sheet. This results in a change to the Corporation’s current accounting policy that does not seek to classify financial instruments. Current measurement is at amortised cost, with certain derivative financial instruments not recognised in the balance sheet.
Hedge Accounting Under AASB 139 “Financial Instruments: Recognition and Measurement” in order to achieve a qualifying hedge, the entity is required to meet the following criteria: - identify the type of hedge (fair value or cash flow); - identify the hedged item or transaction; - identify the nature of the risk being hedged; - identify the hedging instrument; - demonstrate that the hedge has and will continue to be highly effective; and - document the hedging relationship, including the risk management objectives and strategy for undertaking the hedge and how effectiveness will be tested.
AIFRS recognises cash flow hedge accounting, fair value hedge accounting and hedges of investments in foreign operations. Cash flow and fair value hedge accounting can only be considered where effectiveness tests are met and stringent documentation and identification requirements under AASB 139 have been satisfied. Ineffectiveness resulting from hedge accounting can result in volatility in the income statement.
Cash flow hedge accounting Where a derivative qualifies for cash flow hedge accounting the standard requires the hedging instruments to be measured and reported on the balance sheet at fair value, with the effective portion of fair value movements in derivatives deferred to equity, and any ineffective portions and the fair value of risks excluded from hedge assessment to be recognised in the income statement. Deferred gains and losses held in equity will affect the profit and loss at the time that the hedged item effects earnings.
Western Power Annual Report 2005 114 NOTES TO THE FINANCIAL STATEMENTS continued
33.IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS continued
(d) Future Impacts of Adopting AIFRS continued
Financial Instruments continued Hedge Accounting continued Fair value hedge accounting Where a derivative qualifies for fair value hedge accounting the standard requires the hedging instruments to be measured at fair value, with any fair value changes recognised in the income statement. The carrying value of the corresponding hedged asset or liability is also adjusted by the change in the fair value of the hedging instrument, with this adjustment being recognised in the income statement to offset the effect of the gain or loss on the hedging instrument. There is no impact on equity reserves.
Where a derivative does not qualify for hedge accounting at all the entire change in fair value of the derivative will impact on profit and loss. Where a derivative ceases to be effective under the hedge accounting rules, the changes in fair value from that point forward will also impact on profit and loss.
The Corporation expects to account for the majority of its interest rate, foreign exchange risk and commodity derivatives as cash flow hedges and is reviewing its processes to ensure that they meet the enhanced requirements for hedge accounting. Ineffectiveness will result from oil commodity derivatives (due to basis risk), and also foreign exchange derivatives in limited circumstances. Ineffectiveness is not expected for interest rate risk derivatives. Excluded risks, which include the time value component of option valuations and forward point movements on oil commodity contracts will impact the profit and loss.
Embedded Derivatives Under AASB 139 “Financial Instruments: Recognition and Measurement”, embedded derivatives not closely related to the host contract are required to be disclosed separately in the balance sheet with any changes in the fair value recognised in the income statement. In most instances an embedded derivative exists when the price of the commodity in the host contract is not directly linked to the commodity. Likely indications of embedded derivatives include fluctuations in the commodity price based on the occurrence of an unrelated event or for which there is a sliding scale or index.
The Corporation is currently reviewing contractual arrangements to determine the extent of any embedded derivatives. In the event such derivatives are identified, this will result in a change to the Corporation’s current accounting policy that does not seek to recognise embedded derivatives.
Leases The requirements of UIG Interpretation 4 “Determining Whether an Arrangement Contains a Lease” are first mandatory from the financial year ended 30 June 2007. Despite this, a narrative of the expected impact on adoption of this interpretation, ie 1 July 2006 is provided below.
Under UIG Interpretation 4 “Determining Whether an Arrangement Contains a Lease”, arrangements that do not take the legal form of a lease but convey a right to the use of an item for an agreed period of time in return for a payment or series of payments is an indication that the substance of the arrangement is, or contains a lease and must be accounted for accordingly. This results in a change to the Corporation’s current accounting policy that does not seek to recognise these arrangements as leases.
Western Power Annual Report 2005 115 NOTES TO THE FINANCIAL STATEMENTS continued
33.IMPACT OF ADOPTING AASB EQUIVALENTS TO IASB STANDARDS continued
(d) Future Impacts of Adopting AIFRS continued
Leases continued Finance Leases For arrangements deemed a finance lease, the Corporation is required, on adoption of AIFRS, to recognise an asset and liability in the balance sheet equal to the present value of the minimum lease payments including any guaranteed residual values. In addition the Corporation is required to recognise in the income statement: - the amortisation of the leased asset over the expected useful life of the asset (ie depreciation); and - the interest allocation of the lease payments (ie borrowing costs). (The remainder of the lease payments are recognised as a reduction against the lease liability in the balance sheet).
Operating Leases For arrangements deemed an operating lease, the Corporation is required, on adoption of AIFRS, to recognise in the income statement the lease payments in a pattern representative of the benefits derived from the leased assets (ie operating lease rentals).
The Corporation is currently reviewing contractual arrangements to determine the extent of any deemed to be leases under the requirements of UIG Interpretation 4 “Determining Whether an Arrangement Contains a Lease”
Western Power Annual Report 2005 116 DIRECTORS’ DECLARATION
In accordance with a resolution of the Directors of Western Power Corporation, we declare that -
In the opinion of the Directors:
(a) the financial statements and associated notes comply with the accounting standards and Urgent Issues Group Consensus Views;
(b) the statement of financial performance is drawn up so as to give a true and fair view of the net profit of the Corporation for the financial year ended 30 June 2005;
(c) the statement of financial position is drawn up so as to give a true and fair view of the state of affairs of the Corporation as at 30 June 2005, and;
(d) at the date of this statement there are reasonable grounds to believe that the Corporation will be able to pay its debts as and when they fall due, in accordance with the structure of the Corporation existing at 30 June 2005.
The Directors have received a declaration by the Managing Director and Chief Financial Officer that is consistent with the requirements for a Public Company under section 295A of the Corporations Act 2001.
For and on behalf of the Board,
Mr ND HAMILTON Mr AM IANNELLO Chairman Managing Director
22 August 2005
Western Power Annual Report 2005 117 INDEPENDENT AUDIT REPORT
AUDITOR GENERAL
INDEPENDENT AUDIT REPORT ON WESTERN POWER CORPORATION
To the Parliament of Western Australia
Audit Opinion In my opinion, the financial report of Western Power Corporation is in accordance with: (a) schedule 3 of the Electricity Corporation Act 1994, including: (i) giving a true and fair view of the Corporation’s financial position at 30 June 2005 and of its performance for the financial year ended on that date; and (ii) complying with Accounting Standards in Australia ; and (b) other mandatory professional reporting requirements in Australia.
Scope The Board’s Role The Board of Directors is responsible for the financial report.
The financial report consists of the Statement of Financial Performance, Statement of Financial Position, Statement of Cash Flows, accompanying Notes and Directors’ Declaration.
Summary of my Role As required by the Electricity Corporation Act 1994, I have independently audited the financial report to express an opinion on it. This was done by looking at a sample of the evidence.
An audit does not guarantee that every amount and disclosure in the financial report is error free, nor does it examine all evidence and every transaction. However, my audit procedures should identify errors or omissions significant enough to adversely affect the decisions of users of the financial report.
D D R PEARSON AUDITOR GENERAL 26 August 2005
Western Power Annual Report 2005 118
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