Statement2010 of Corporate Intent

Statement of Corporate Intent 2010 Table of contents

Executive Summary 3

1 Introduction 4

2 Business Overview 5

2.1 Who we are 5

2.2 What we do 5

2.3 How we do it 5

3 Strategic Objectives 6

3.1 Corporate purpose 6

3.2 Values 7

3.3 Business objectives 7

3.4 Performance measures 8

4 Summary of Major Programs 9

4.1 Asset management 9

4.2 Energy Grid 9

4.3 Remote service extension 10

4.4 Customer service 10

4.5 Knowledge and technology 11

4.6 Carbon management 11

4.7 Leadership capability 12

5 Financial Impacts 13

5.1 Business impacts 13

6 Accounting and Dividend Policies 15

7 Ministerial Reporting 16

Statement of Corporate Intent 2010 2 Executive summary

Horizon Power is a Government owned, vertically integrated energy business providing energy solutions to residential, business and industrial customers living and operating throughout regional Western . ’s service area is vast, covering all areas outside the South West Interconnected System (SWIS), and extending from Kununurra in the north to Esperance in the south. Operating within the legislative framework and the external environment, Horizon Power’s purpose is to create lasting value from its activities by maximising the social, environmental and economic benefit for the company and the communities which we service. This is reflected in Horizon Power’s business objectives, which are: • Social. To increase customer and community value. • Environmental. To reduce operating impact, influence customer behaviour, and offer sustainable solutions. • Economic. To grow profitably and deliver value from regional development. • Business Capability. To develop people and learning and comply with legislation. Horizon Power has identified three broad strategic platforms to respond to these issues. They are: • Performance excellence in existing business; • Pilbara Energy Grid; and • Remote service extension. The major programs that support these strategic platforms are: • Asset management. This strategy will address the social objectives of community safety, within the context of the economic and environmental objectives. • Pilbara Energy Grid. The North West Interconnected System (NWIS) is Horizon Power’s most significant opportunity to protect the financial sustainability of the organisation and thereby improve the economic outcomes for the organisation. The NWIS is also a significant opportunity for Horizon Power to pursue initiatives within our environmental objectives. • Remote service extension. Horizon Power is continuing to progress regularisation strategies for remote communities using an extension of the Modular, Automated, Renewable and Scalable (MARS) generation concept. • Customer service. Horizon Power is pursuing strategies to improve the customer experience through the development of new products and services. • Knowledge and technology. Horizon Power continues to manage its separation from Western Power. These strategies will assist Horizon Power staff to improve customer service. • Carbon management. Horizon Power is developing strategies to respond to immediate issues posed by the Carbon Pollution Reduction Scheme. • Leadership capability. A number of initiatives are underway to develop the capability and capacity of Horizon Power staff. These strategies directly address the business capability objectives of the organisation.

Statement of Corporate Intent 2010 3 1. Introduction

Horizon Power’s 2010 Statement of Corporate Intent (SCI) has been written in accordance with the Electricity Corporations Act 2005 (the Act). Under the Act, the SCI sets out the objectives and operational targets for the business and details how these will be achieved. The business strategies discussed in this document have been developed with the overarching aim of increasing the value of Horizon Power by delivering better outcomes for regional Western Australians. The underlying business model has been developed to increase the social, economic and environmental benefits provided to regional communities by Horizon Power’s operations. These benefits will be realised through Horizon Power using its assets, skills and resources to achieve a state of organisational excellence in the simultaneous performance of: • Existing operational activities; and, • Deployment of capabilities to new growth opportunities. This SCI describes the strategies that have been developed to achieve these aims and details how they will be carried out in the expected business environment over the coming year. The expected social, environmental and economic benefits that will be provided to stakeholders are also described.

Statement of Corporate Intent 2010 4 2. Business overview

2.1 who we are Horizon Power is an innovative, Government owned, vertically integrated energy business providing energy solutions to residential, business and industrial customers living and operating throughout regional . Horizon Power’s service area is vast, covering all areas outside the South West Interconnected System (SWIS), and extending from Kununurra in the north to Esperance in the south. Horizon Power is responsible for generating, procuring, distributing and retailing electricity in the fast growing regional centres of Western Australia. The rapid expansion of regional developments has demanded the achievement of step changes in the quality and capacity of industrial infrastructure that leaves a valuable legacy for generations of Western Australians in a way that is both socially and environmentally sustainable.

2.2 what we do Within our service area, Horizon Power supplies electricity to approximately41,000 customers. Horizon Power manages a diverse set of power systems including small scale liquified natural gas, compressed natural gas and diesel/wind hybrids. These systems have been developed by Horizon Power and provide an ideal basis for proving new systems and technologies. This has resulted in 10 per cent of the power supplied by Horizon Power coming from renewable sources. Our customer base reflects a diversity of lifestyles, modes of work and income levels across a spectrum of different townships, ranging from major resource towns to self-sustaining remote and Indigenous communities. Similarly, weather experienced in the service areas is widely divergent, from the tropical north with its wet season and frequent cyclones to the temperate southeast with its cold and windy winters.

2.3 How we do it In June 2008, Horizon Power undertook significant operational realignment across the business to ensure we are best placed to achieve our corporate objective to contribute lasting social, economic and environmental value in the communities we serve. The new structure has aligned structure with strategy and seeks to minimise internal barriers that inhibit the effective and efficient deployment of our initiatives. The business structure comprises of eight divisions that support Horizon Power’s tripartite strategies of Performance Excellence, Expanding the North West Interconnected System and Expanding Regional Supplies. Horizon Power’s eight divisions are: • Operations: Delivers balanced, consistent and sustainable operational performance in each district. • Islanded Systems Development: Develops, sells and implements islanded system opportunities. • Strategy and Business Development: Leads strategy development, pursues new opportunities to grow, and commercially manages the NWIS. • Governance and Company Secretariat: Develops and implements effective systems of governance, monitors and reports on compliance and legislative obligations, and manages risk and maintains the company’s policies and procedures. This division also provides support to the Board. • People and Corporate Services: Develops and ensures effective deployment of key corporate services such as Public Affairs, People Services, Marketing and Product Development and Occupational Safety and Health management. • Shared Services: Develops and maintains a range of internal consulting services and support solutions. • Knowledge and Technology: Creates, deploys and manages a strategy to position the business as an innovative user of technology. • Finance Services: Leads and secures appropriate funding and ensures sound financial management and reporting. Horizon Power’s head office is in Karratha, with regional offices located in Kununurra, Broome, Port Hedland, Carnarvon and Esperance so that we can respond to customer queries and investigate local issues promptly. Coinciding with the realignment of the business was the move of Horizon Power’s administration centre to a new premise at Technology Park in Bentley.

Statement of Corporate Intent 2010 5 3. Strategic objectives

3.1 corporate purpose Operating within the legislative framework and the external environment, Horizon Power’s purpose is to create lasting value from its activities by maximising the social, environmental and economic benefit for the company and the communities in which it lives.

Horizon Power believes that lasting value is created by seeking better solutions for stakeholders. The focus therefore is not on growth for the sake of growth, but on innovation, cost management and financial prudence. Horizon Power has identified three broad strategic areas of focus for the organisation that will be the main vehicle for delivering lasting value. These are: • Performance excellence in existing business. Define, pursue and deliver performance excellence in the management of our existing business through the safe, efficient and effective supply of electricity and related services within the communities served; • Pilbara Energy Plan. Lead, support and profit from the development of the strategically vital NWIS and broader Pilbara Energy Grid into a robust, efficient and well managed system capable of supporting the significant market growth that is expected in the Pilbara; and • Remote service extension. Develop, implement and leverage market-leading skills and competitive advantage in the design, implementation and management of fully integrated islanded/renewable power supplies and associated services.

Statement of Corporate Intent 2010 6 3.2 values Horizon Power operates in a dynamic and expanding business environment and to successfully achieve our purpose we must be: • Agile. Able to respond to the tight timeframes and changing requirements of our customers and communities; • Professional. Consistently and predictably delivering high quality interactions and outcomes for everyone who deals with us; and • Engaged. Knowledgeable about and involved with each of the communities we serve. We believe that Horizon Power can achieve this organisational outcome if our people pursue the following behaviours: • Safety above all, • Seek to understand, • See the possibilities, • Involve the relevant people, • Plan for success, • Deliver on our commitments, and • Recognise our success.

3.3 Business objectives Horizon Power’s business objectives span the pillars of social, environmental and economic outcomes. Social objectives

Horizon Power’s primary social objective is to provide safe, reliable and efficient generation, transmission and distribution systems and effective high quality customer service. Horizon Power also seeks to conduct business in ways that benefits our local communities and ultimately the State by enhancing local capacity, capability or opportunity. Horizon Power will use our role and expertise as an energy provider to continue to work with government agencies, communities and other local stakeholders to ensure reliable and commercially viable energy solutions are developed to enable regional development opportunities. Environmental objectives

Horizon Power’s major impacts on the environment come from greenhouse gas and other pollutants created in the electricity generation process. Our objective is to significantly reduce our environmental footprint, both in greenhouse gas emissions and in the management and remediation of other pollutants. Horizon Power aims to change the energy consumption behaviours of our customers through innovative product offerings and education campaigns. We will partner with our customers to reduce consumption to further reduce Horizon Power’s greenhouse gas intensity footprint. Economic objectives

Horizon Power aims to grow profitable revenue from value adding investment. This will provide the Government, as Horizon Power’s owner, with future flexibility and choice in regard to funding levels, dividend yields and business reinvestment. Business capability objectives

Horizon Power will develop the internal capability that will most effectively deliver the desired business objectives, which will also include appropriate use of locally based resources and other inputs.

Statement of Corporate Intent 2010 7 3.4 Performance measures A balanced set of key critical business outcomes has been established to measure the success of Horizon Power in achieving its objectives. These outcomes are not the only indicators that will be measured by the organisation but represent the key strategic measures of success.

Critical business outcomes Business 2007/08 2008/09 2009/10 goal actual target target

Customer Satisfaction Social benefit 84 78 80 Survey rating (%)

Reliability Social benefit 25/34 28/34 30/34 Complying towns / systems

Employee Safety Social benefit 9.3 0 0 (LTIFR)

Public Safety Social benefit 8 6 4 Public Safety Incidents

Regularised towns Social benefit 8 11 10 Number of remote and Indigenous communities

Environment Environmental benefit 0.85 0.80 0.71 Greenhouse Gas Intensity (kg CO2/kWh sold)

Profitability Economic benefit 60.5 30.4 115 EBITDA ($M)

Capital Efficiency Economic benefit Not 90 90 Project Delivery (%) available

Cost Management Economic benefit 27.3 27.7 28.5 Average unit cost (cents/kWh)

Statement of Corporate Intent 2010 8 4. Summary of major programs

The business priorities identified above are addressed through the following major programs of work.

4.1 asset management The objective of the Asset Management (AM) Strategy is to satisfy Horizon Power’s lasting economic, social and environmental values and stakeholder expectations through: • Assets that are fit for purpose by 2011; and • Safe, innovative and efficient practices in operations and services. In this context, fit for purpose means that Horizon Power’s assets: • present minimal risk to the safety of our people and communities; • supply quality and reliable power; • are designed to keep pace with demand growth in our communities; • represent value for money; • are replaced in accordance with optimal life cycle costs; • are proactively inspected and maintained to minimise points of failure; and • comply with all regulations, codes and standards. The AM strategy will be implemented through a cascading set of plans: • Master. This provides guidelines, methodology and performance targets for each of the asset classes and is used to develop District Asset Management Plans. • District. Each of the six districts develops their own plan by comparing asset performance against the Master plan targets and developing solutions for closing performance gaps. • Individual. A plan for each asset is developed detailing timelines for extensions and / or replacement. The specific initiatives that will be undertaken are summarised below. The first year of the strategy focussed on setting up and planning the implementation of the strategy.

Near term strategies Closing the Gap

From 2007 to 2011 the focus is on developing and implementing asset management plans for Horizon Power owned assets. Network Hardening

Under the Royalties for Regions program with expected contribution from Local Government, Horizon Power has secured funding for undergrounding the entire electricity networks in Karratha, South Hedland, Onslow and the remainder of Roebourne over the budget cycle. The project will begin next year, be completed by the end of 2012 and will incorporate Smart-Grid technology.

4.2 Pilbara Energy Grid Managing the NWIS, Horizon Power plays a significant role in the Pilbara Energy Grid. The NWIS is WA’s second largest transmission network delivering 500 megawatts across 1200 kilometres of transmission lines. Horizon Power’s vision for the Pilbara Energy Grid is that all customers have access to a secure energy supply at competitive prices. Horizon Power’s current estimates show that energy consumption in the medium term is expected to reach 3,000 MW. Overall demand is expected to grow beyond the current consumption of the SWIS. While the recent downturn in commodity prices is expected to delay some Pilbara projects, energy demand is still expected to rise over the coming decade on the back of currently producing projects.

Statement of Corporate Intent 2010 9 The specific initiatives that will be undertaken are summarised below.

Near term strategies West Pilbara Power Station

In November 2008, the WA Government approved the construction of a power station to replace existing supply arrangements with Rio Tinto that are due to terminate on 28 February 2010. The project entails building a new 80 MW open cycle, gas fired power station near Karratha, comprising of two identical 40 MW GE gas turbines with the flexibility to add a third unit if converted to a closed cycle configuration. ATCO Power Australia (Karratha) Pty Ltd (ATCO), an Independent Power Producer (IPP), will build, own and operate the facility. ATCO is a 100 per cent subsidiary of the Canadian listed ATCO Ltd.

4.3 remote Service Extension Horizon Power recognises the scope to develop new integrated remote systems. Horizon Power’s strategy is to implement efficient total system solutions that can be adapted to include other service offerings. Where appropriate this will be provided as an extension of the MARS generation concept being developed in meeting current generation requirements. Horizon Power will continue to work with the State and Federal Government agencies to extend the regularisation of remote power systems and services throughout the State and beyond. Currently, State funding has been secured under Horizon Power’s Aboriginal and Remote Communities Power Supply Project (ARCPSP) for deployment of the MARS generation model to the communities of Kalumburu and Nookenbah. Horizon Power is also executing the second phase of the Town Reserve Regularisation Project. Under this program an additional 12 communities will be regularised by 2011. Near term strategies Horizon Power will continue the confirmed Regularisation Activities such as ARCPSP, Town Reserves Regularisation Program and Horizon Power Metering Services. Horizon Power will implement system expansions and asset replacement at Marble Bar and Nullagine and Carnarvon Power Stations.

4.4 Customer service Horizon Power’s customer service strategy will focus on: • Creating value for customers and the business through the development of new products and growing profit margins through management of the cost to serve; • Focusing sales and business development effort on areas that will deliver increased profit margins to the business; and, • Progressively reengineering our customer service approaches as IT systems and SLA arrangements with Synergy and Western Power evolve. Our aim is to achieve an enhanced balance of effective service and efficient delivery across all customer touch points. Near term strategies Demand Side Management

Demand Side Management (DSM) projects have been initiated to examine the potential benefits to Horizon Power of deploying such strategies into the current customer footprint. The study identified some clear and significant opportunities for Horizon Power, in terms of financial, social, and environmental benefits, to deploy a series of DSM pilot programs. These programs will allow the business to build its capability and understanding of the net benefit of DSM activity for the business, while realizing real short term benefits in the target locations during the process. The Betterways Program has been established to provide the market-based umbrella/structure to incorporate all Horizon Power initiatives that promote energy efficiency and facilitate progress towards effective DSM. While DSM pilot programs have been targeted towards specific locations, energy efficiency communication activities are now being deployed across the entire Horizon Power customer footprint. As DSM pilot programs are progressed, the next step will be to establish a suite of DSM products that the business can offer to selectively targeted market segments (where greatest value can be generated). The intent is also to establish DSM as a viable option, sitting alongside supply side solutions, when addressing Horizon Power generation and networks capacity issues.

Statement of Corporate Intent 2010 10 4.5 Knowledge and technology The objective of the Knowledge and Technology strategy is to effectively manage Horizon Power’s corporate knowledge and ensure this knowledge is available anywhere, anytime for Horizon Power people to make informed decisions. The Knowledge and Technology strategy will be completed within the planning cycle of the Strategic development Plan. The principles are: • Improve service delivery, • Simplify and standardise by rationalising applications and ensuring flexibility, and • Increase visibility by developing knowledge ownership and accountability. Major initiatives include: • SPOW - Strategic Program Work. The Strategic Program of Work intends to simplify complex and costly technology and position Horizon Power for future growth and improved flexibility and visibility. • Project Sunrise - Customer Information System (CIS) Replacement. This Project aims to build a new customer relationship/ information system, transition customer services from Synergy to a new service provider, and develop a customer service vision and strategy. • Network Management System/Trouble Call System Replacement. This Program addresses the replacement of end-of-life, business critical technology required for network and fault management. • Separation/Sourcing. This Program relates to the separation of Western Power’s IT Infrastructure and Services from the other disaggregated entities. Horizon Power is pursuing a hybrid approach where Western Power continues to support business critical systems such as Ellipse, DQM and Lotus Notes.

4.6 Carbon management Horizon Power already has 10 per cent of the generating capacity supplied via renewable sources (wind, solar and hydro electric). Furthermore with the extensive use of low greenhouse intensity fossil fuels such as natural gas and compressed and liquified natural gas, we are already well placed in terms of managing the impacts of CPRS to our business. By adopting a carbon management strategy, Horizon Power demonstrates its commitment to continuous improvement, the search for value creation opportunities, and the reduction of the greenhouse gas intensity of its operations. Horizon Power is uniquely positioned within regional WA to deliver carbon management leadership to our customers. Horizon Power is assessing the impacts of the expanded national Renewable Energy Target (RET) and reviewing options to meet this requirement. The impacts of RET will be modelled and considered in future new generation needs. Near term strategies Regulatory compliance

Horizon Power will initiate a project to develop a baseline Marginal Abatement Cost Curve for the organisation and map all risks and opportunities across the business to ensure regulatory compliance. This project will identify opportunities to extract value from existing activities and identify new, low cost carbon abatement opportunities.

Statement of Corporate Intent 2010 11 4.7 leadership capability Building the skills of Horizon Power’s leadership team is an important element of the drive to build the capability and capacity of the organisation. The objectives of the Effective Shared Leadership Program are to develop: • Leaders who understand their roles in creating the future for Horizon Power; • Skilled inspirational and managerial leaders; • Leaders who embody Horizon Power’s way of working; • Staff skilled in new processes, systems and procedures; • An engaged, motivated, capable and committed workforce; • Staff who live the values through demonstrable behaviours; and • High performance teams that achieve the business outcome. The knowledge gained from this training will work towards enhancing our people leadership skills. It will also translate across the business as we increasingly embrace the notion of effective, shared leadership to achieve improved and innovative business outcomes.

Statement of Corporate Intent 2010 12 5. Financial impacts

The financial impact of Horizon Power’s activities over the coming year is detailed below.

5.1 Business impacts Horizon Power has been impacted in several ways as a result of the economic boom and this will continue to be felt for the short to medium term as confirmed construction projects are completed. Demand for housing, labour and materials are expected to remain at, or slightly above, prior expectations with no substantive increase in supply.

Operating expenditure

Operating expenditure forecasts incorporate changes to maintenance costs for generation and network assets as part of the annual asset management plan review. Increased costs of housing employees, additional audit and compliance costs and the delivery of a state-wide demand side management program are some of the other major items that have been incorporated in these forecasts. The table below shows the escalated expenditure forecasts.

2009/10 ($M)

Labour 49.37

Operating materials 67.18

Total 116.55

Capital expenditure

Horizon Power will undertake a significant capital expenditure program to ensure the quality and reliability of current supply is maintained and increases in customer growth are planned appropriately and commissioned as required. Highlighted below are a number of major projects that will be undertaken in 2009/10. The replacement and decommissioning of Marble Bar and Nullagine power stations retimed for completion in June 2010 totals $12.5M (asset replacement). The planned refurbishment of Carnarvon power station will now commence in 2009/10 with its program of activity brought forward for cost efficiency at a total project cost of $84.2M (reliability). Expenditure for growth/capacity includes initial stages of a new substation in Broome, completion of the interconnection of the West Pilbara power station and the acquisition of transmission interconnection assets in Port Hedland. These projects are debt funded. Two additional ARCPSP Phase 2 communities, Nookanbah and Kalumburu, will receive regularised services during 2009/10. This program (Government policy/initiative) is equity funded.

Driver 2009/10 ($M)

Asset replacement (age) 21.48

Customer driven 11.49

Govt policy/initiative 10.85

Growth/capacity 43.34

Other 8.59

Quality 0.31

Regulatory/compliance 1.80

Reliability 7.30

Safety 11.30

SCADA 0.75

Total 117.20

Statement of Corporate Intent 2010 13 Government funding Horizon Power receives a significant portion (approximately 46 per cent) of its income from TEF and CSO revenues.

Tariff Equalisation Fund (TEF)

TEF is broadly the funding to cover the shortfall between the cost to supply Horizon Power’s customers and the other revenues received. TEF was fixed for the first three years of Horizon Power’s operations and is due to be reset in 2009/10. The intent of this reset is to allow the TEF to be more flexible in coverage and scope.

Community Service Obligations (CSO)

As a result of the Government’s cost-reflective tariff decision, Horizon Power will receive an additional CSO (the Glidepath CSO) from 2009/10 which covers the shortfall between what the SWIS cost-reflective tariffs should be (eg 20.50¢ for A2 tariffs) and the decided retail rates. For 2009/10 Horizon Power will receive a Glidepath CSO of $21.18M. Other sources of CSO revenues include pensioner concessions, tariff migration and remote service extensions such as ARCPSP. The table below shows community service obligations and government payments.

CSO group 2009/10 ($Ms)

Pensioner/senior’s concessions 0.78

Tariff migration 21.67

ARCPSP 13.82

Glide Path CSO 21.18

TOTAL CSO PAYMENTS 57.44

Statement of Corporate Intent 2010 14 6. Accounting and dividend policies

International accounting standards As part of the adoption of international accounting standards, most of Horizon Power’s power purchase agreements are classified as finance leases. This results in recognition of a leased asset and lease liability on the balance sheet. Revenue from the Tariff Equalisation Fund will be assessable income, generally this will result in Horizon Power deriving taxable income and a net profit after tax. Dividend policy

Horizon Power pays a dividend to Government of 50 per cent of profit as a declared dividend paid in the subsequent financial year.

Statement of Corporate Intent 2010 15 7. Ministerial reporting In line with the accountability provisions of the Act, Horizon Power will provide the Minister with a quarterly report, for the first three quarters and an Annual Report for the whole financial year. Each Quarterly Performance Report will be submitted one month after the end of the quarter and will include an overview of performance and highlights of important achievements. The Annual Report will follow the end of the financial year and will be provided to the Minister within the time specified by the Act. It will include: • consolidated statutory financial statements and other statutory information required of any company under the Corporations Law; • an overview of major achievements and an appraisal of future prospects; • a comparison of performance with Statement of Corporate Intent targets; and • other information required by the Act to be included, such as the particulars of any directions given by the Minister for Energy. In addition to quarterly and annual reports, the Act requires that the Minister be provided with: • a five-year Strategic Development Plan and this one-year Statement of Corporate Intent; • a report on staff compliance with any Board issued codes of conduct; and • any information in Horizon Power’s possession requested by the Minister.

Statement of Corporate Intent 2010 16