Energy Australia Did Not Meetthe Design,Reliability and Performancelicence Conditions in Urbanfeeder SAIDI and the Cbdfeeder SAIFI

NEWSOUTH WALES STATEOWNED CORPORATIONS

STATEMENTOF CORPORATE INTENT

YEARENDING 30 JUNE2010

EnergyAustralia

This Statementof CorporateIntent has beenagreed between:

John C. CondeAO Chairmanof EnergyAustralia

On behalfof the Boardof EnergyAustralia

ManagingDirector reasurerof New SouthWales

------. -- Contents Statement of Corporate Intent 2009/10 2 Nature and scope of operations 2 Main Undertakings 2 Objectives of the corporation 2 Strategic direction 2 Business risk management for 2009 / 10 2 Performance targets 2 Financial asset and liability management 2 Representation and commitment statement 2 Reporting 2 Appendices 2 1 EnergyAustralia funded capital expenditure ($millions) 2 2 2009 / 10 Our Scorecard 2

Page2 of 10 EnergyAustraliaSlatement of CorporateIntent 2009 /10 (TREASURY)v38 © EnergyAustra!ia2009 Statement of Corporate Intent 2009/10

The Boardof EnergyAustraliaproposes this agreementwith the ShareholdingMinisters for EnergyAustralia's commercialobjectives for 2009/10.

Nature and scope of operations

EnergyAustralia is a NewSouth Wales (NSW) State Owned Corporation constituted under the Energy ServicesCorporations Act 1995. We hold, and operatewithin the requirementsof, a NSWElectricity DistributionNetwork Service Provider Licence issued under the ElectricitySupply Act 1995. Ourelectricity networkcovers 22,275 square kilometres from Waterfall,in Sydney'sSouth, to Auburnin WesternSydney, and the upperHunter Valley in the North. We providemore than 30,000GWh1 of electricityto 1.6 million networkconnections with over 5,000full time employees.

In accordancewith NSWTreasury requirements the 2009/10Statement of CorporateIntent is basedon the Networkdistribution business only. i.e excludingRetail business contribution from 2009/10and forwardyears.

Main Undertakings

Our mainundertakings are to establish,maintain and operatefacilities for the distributionof electricity. Our operationsinclude:

• Assetownership and management,including the electricitytransmission and distributionnetworks within our licencearea. • Leveragingcore capabilitiesin the areasof energy-relatedproducts and services. • Deliveryof retail operationsunder revenue neutral cost recoverybasis Transitional Service Agreements.

No substantivechange in scopewill be undertakenwithout prior agreementof the shareholders.

Objectives of the corporation

EnergyAustralia will becomeAustralia's energy provider of choicebecause our networkis safe and reliable; our customersvalue our service;our staff are proudto work here andour communityrecognises our values, our contribution,our citizenshipand our achievements.

1 GWh(gigawatt hour) = onemillion kilowatt hours

EnergyAustraliaStatement of CorporateIntent 2009/10 Page3 of 10 (TREASURY)v38 © EnergyAustralia2009 Strategic direction Network Investment

EnergyAustralia plans to deliverthe investments,operations and strategicinitiatives as describedin our RegulatoryProposal submitted in June 2008,and revisedin February2009. The proposednetwork investmentplans for 2009-2014have beenaccepted by the AustralianEnergy Regulator (AER} and investmenthas increasedsignificantly compared to the previousregulatory period. In the threefinancial years of this SCI, 2009/10to 2011/12,the total networksystem capital expenditure is $4.3 billion,including expenditureof $1.1 billion in 2009/10. Thisis 40%above the investmentin the previousthree years. (Referto Appendix1 for details).

Our objectivesfor the capital programare to:

• increasethe capacityof the networkand improvenetwork performance to meetthe mandatoryDesign, Reliabilityand Performancelicence conditions set by the NSWGovernment • meet increasingduty of care and communityobligations, with improvedstandards for safetyof our staff and our communityand protectingthe environmentaround our networkinfrastructure • moderniseour communicationsand controlsystems to integratenew technologiesand buildan "intelligent"network for improvedreliability • enhanceour informationtechnology systems to supportnetwork, asset and customermanagement initiatives. Worker and Community Safety

EnergyAustralia'shighest priority is safety. Afterachieving a leadingposition in 2005,our performancehas plateauedin comparisonto peer organisations.Our objectives for safetyare to improvepublic safety measuredby fewerincidents arising from contactwith the network,reduce worker injuries and their severity and achievebest practicesafety performance. Leverage innovation

EnergyAustralia is at the forefrontof the implementationof smartmetering and "SmartGrid"technologies includingnew communications, monitoring and control infrastructwe. Thesetechnologies will improve reliability,enable new customer products and empowerconnection of small,local generation. This means changingnetwork operations and designand newasset management strategies. Performance Management

EnergyAustraliarestructured the businessoperations in 2008/09and upgradedthe SAParchitecture of our managementsystem. In 2009/10,capability building initiatives include improving our regulatorystrategies, projectmanagement and leadershipskills and improvementsto partsof our managementsystems.

EnergyAustraliais also drivingproductivity improvements and efficiencyto achievethe Government'sWages Policyundertakings and deliverbetter than regulatedreturns. Build the Foundation for the Future

EnergyAustraliahas initiateda strategicprogram to developthe products,services and networkenabling technologiesthat will be requiredby our customersin the future,building on our expertisein energyefficiency adviceand services.

Page4 of 10 EnergyAustraliaStatement of CorporateIntent 2009/10 (TREASURY)v38 © EnergyAustralia2009 Business risk management for 2009/10

Significantemerging risks arise for the shareholders'investment in EnergyAustraliafrom: Regulatory return

The AERreleased its final determinationin April 2009,which to a largeextent accepted EnergyAustralia's proposal. However,EnergyAustralia applied for a meritreview of someof the AER'sdecisions.

On 12 November2009, the AustralianCompetition Tribunal released its decisionin relationto EnergyAustralia'sapplication for a 'meritsreview' of the AER's regulatorydetermination , As a result, EnergyAustralia'srevenues for standardcontrol services over the 2009-14regulatory period will increaseby approximately$777m (unsmoothed) or $818.4m (smoothed).That is, $773massociated with the risk free rate and the debt risk premium,and $4mfor the 'Financeand Commercial- BusinessSystems' step change. Network Reliability

The Design,Reliability and Performancelicence conditions include System Average Interruption Duration Index (SAIDI)and SystemAverage Interruption Frequency Index (SAIFI) reliability standards by feedertype (CBD,Urban, Short Rural, LongRural).

Due to a numberof significantevents during 2008/09, Energy Australia did not meetthe Design,Reliability and Performancelicence conditions in urbanfeeder SAIDI and the CBDfeeder SAIFI. It is inevitablethat carryingout a largeamount of capitalwork, for bothreplacement and new capacity projects,increases the likelihoodof outageson the network. Thehigh load periodhas extendedin recent years from four monthsto eight months,leaving only a shortperiod for workwithout increasing risk. Thisrisk can be mitigatedto someextent but cannotbe eliminatedfrom the workprogram. The operation, maintenanceand capital plans are beingmanaged in accordancewith our NetworkManagement Plan and our commitmentto safety,asset protectionand reliability. We havetargeted programs to improvereliability and to respondto the poor performancein Urbanand CBDreliability . Carbon Pollution Reduction Scheme

The energyindustry will be impactedby the introductionof a carbontrading scheme proposed for July 2011. The legislativeframework, targets andcost of carboncertificates are not decidedat the time of writing.

This SCIassumes that the costs of obligationsare able to be passedthrough to consumers.The costs of complianceand reportingobligations are uncertainand not includedwithin this SCI.

RecentNational Electricity Market reviews have highlighted that the CPRSintroduction will add risks to systemoperations, including the risk of potentiallytight supplybalances, and the likelihoodof more investmentin networksand changesto connectionarrangements. These are not reflectedin this SCI. NSW Government electricity industry reform program

EnergyAustraliais continuingto workwith NSWTreasury regarding electricity industry reform in NewSouth Wales. Thisincludes maintaining a levelof readinessfor TransitionalService Agreements and management of separationprocesses. The Retail businesscontribution has beenexcluded from 2009/10 and forward years consistentwith NSWTreasury Guidelines.

EnergyAustraliaStatement of CorporateIntent 2009/10 Page5 of 10 (TREASURY)v38 © EnergyAustralia2009 ------·. ------. ------Performance targets

The financialforecasts contained in this draft SCI assumeno changeto the existingcapital structure. EnergyAustraliawill maintaina target dividendequal to 70%of 2009/10adjusted net profit after tax (NPAT). In addition,a special fixed dividendof $7.3m is includedin this SCI.

EnergyAustraliahas commissionedan independentreview of its capital structure.The outcomeof this review indicatesthat while an investmentgrade credit rating is expectedto be maintained,a credit rating downgrade would be likely if the currentcapital structureis maintained.A copy of this review has been providedto Treasuryfor considerationof the recommendations. Commercial performance targets

For comparativepurposes, the 2008/09results are comparedto the SCI & Retail BusinessPlan targets. All SCI performancetargets (2008/09to 2011/12)exclude Retail as per NSWTreasury instructions .

Forecast 2010/11 2011/12 EBITDA $m 1,252.4 1,548.1 EBIT(Excluding Retail} $m 865.4 1,127.1 Retail EBIT contribution $m OperatingProfit Before Tax $m 187.5 311.0 487.7 OperatingProfit After Tax $m 130.2 215.8 339.5 TargetDividend Payout Ratio 70.0% 70.0% 70.0% Returnon assets % 6.8% 8.4% 9.5%

Returnon equity % 7.6% 13.0% 19.5% (SCl+RBP)= Statementof CorporateIntent plus Retail Business Plan

Distributions target

Thereis a $182.2 million increasein 2008/09total distributionscompared to the 2008/09SCI due to the inclusionof tax equivalentpayments from the Retail businesswhich were excludedfrom the SCf and foiward yearsconsistent with NSWTreasury direction. The 2009/10distribution from operationsare less than 2009/10forecast submitted in the 2008/09SCI, largely reflectingthe final AER Determinationoutcomes of lower WACCand smoothedpricing. Unrealisedgains or losseson financialinstruments and superannuationresulting from accountingstandards AASB139 and AASB 119 are excludedfrom adjustednet profit after tax whencalculating the dividend,in accordancewith Treasury'sImpact of AEIFRS2 on FinancialDistribution ·

2008/09 • 2009/10 2011/12 Incometax expense $m 34.3 57.3 95.2 148.2 AdditionalDividend $m 7.3 Dividendexpense $m 55.8 91.1 151.0 Total distributions $m (SCl+RBP)= Statementof CorporateInte nt plusRetail Business Plan Note: 2009/10in cludes a fixed Additional Dividendof $7.3mi n additiont o the targetd ividend payoutratio o f 70%of adjusted NPAT

2 AEIFRS- Australian EquivalentInternational Financial Reporting Stand ards

Page6of 10 EnergyAustraiiaStatement of CorporateIntent 2009/10 (TREASURY)v38 © EnergyAustralia 2009 Operating performance targets

EnergyAustralia's Scorecard targets are shownin Appendix2 as at September2009. Thesetargets do not includethe revisedEBIT and systemcapital expenditure targets resulting from the outcomesof the AER meritsreview, rephasing of capital and GovernmentGuarantee Fee. The key resultareas are: • Workplace • Community • Marketplace • OperationalExcellence • PerformanceReporting • Environment

Financial asset and liability management

EnergyAustraliamaintains short-term overdraft facilities of up to $450million from T-Corpfor workingcapital purposes,in particular,to cover NEMMCOfunding in extremepool price circumstancesand $42 millionfrom CBA to providefunding for very short term workingcapital requirements. Other facilities are a WorkCover guaranteein order to maintaina self-insurer'slicence, and bankguarantees in favourof NEMMCOand VENCorpin order for EnergyAustraliato be a marketparticipant.

EnergyAustralia has an approved2009/10 debt facility of $6,300million with T-Corp. EnergyAustralia measuresdebt performanceagainst a neutralbenchmark portfolio of T-Corpstocks. EnergyAustraliais progressivelylengthening the durationof the debt portfoliofrom the previousbenchmark of 3.4 yearsand is also includlngthe use of inflationlinked debt.

Any breachesof the EnergyAustraliaBoard's Treasury Management Policy are requiredto be reportedto the EnergyAustraliaBoard.

Representation and commitment statement

The Boardof EnergyAustraliaconfirms the following:

• The performancetargets within the SCI are basedon and supportedby the Corporation'sBusiness Plan.

• EnergyAustralia'sNetwork Management plan andsupporting plans are as far as practicableconsistent with the principlesof the TotalAsset Management(TAM) requirements for updatingthe NSWState InfrastructureStrategy (SIS) Policyissued by NSWTreasury (TPP 08-02) and the NSWGovernment ProcurementPolicy (TPP 04-1). Our assetmaintenance policies and processesare adequateand appropriateto manageand controlrisks associatedwith physicalassets.

• EnergyAustralia is awareof the requirementsof MinisterialMemorandum No. 2005-9,Major InfrastructureCoordination and Deliveryand will complywith theserequirements if not contraryto the objectivesof EnergyAustralia..

• Whererelevant and applicableto EnergyAustralia,Projects of StateSignificance have been identified in accordancewith the criteria set downin the Guidelinesfor Assessmentof Projectsof StateSignificance. In-principleapproval from CabinetStanding Committee on the Budget("Budget Committee") and final approvalfrom the VotingShareholders has beenreceived for Projectsof StateSignificance planned to commencein 2008/09.

• The requirementsof the FinancialAppraisal Guidelines have been complied with for capitalexpenditure projectsproposed to commencein 2009/10.

• All known'key risks' and 'majoremerging contingent liabilities' which could materiallyimpact the current and future resultsof EnergyAustraliahave been disclosed.

EnergyAustraliaStatement of CorporateIntent 2009110 Page7 of 10 (TREASURY)v38 © EnergyAustralia 2009 ·------.. -- ---~--- • EnergyAustraliais awareof the internalaudit and risk managementpolicy and regulatoryframework outlinedin PerformanceReview: Infernal Audit Capacityin NSWPublic Sector(Final Report) and has demonstratedpractices consistent with the frameworkrequirements.

• The requirementsof the TreasuryManagement Policy have beencomplied with and relatedparty interests,which may represent a possibleconflict of interestfor Directorshave been disclosed.

• EnergyAustraliawill complywith the requirementsof Premier'sMemorandum No 2007-12,NSW Public Sector WagesPolicy 2007 . With respectto the past negotiationof the currentaward/enterprise agreements,Energy Australia confirms that any identifiednegotiated employee related cost savings, reformsand operating efficiencies will continueto be pursued. The Boardwill reportto shareholder Ministerson progressin achievingsuch savings as part of its quarterlyreporting and continuous disclosureobligations.

• The performancetargets within the SCI are inclusiveof any 2008/09Mini-Budget decisions excluding the sale of HeadOffice Building due to unfavourablemarket conditions.

• EnergyAustraliahas policiesand practicesin placethat are consistentwith the requirementsof Premier's MemorandumNo. 2008-21Filling and Advertisingof PublicSector Vacancies.

• EnergyAustraliahas policiesand practicesin placethat are consistentwith the requirementsof Premier's MemorandumNo .2009-04on Air TravelPolicy.

• EnergyAustraliawill complywith the requirementsof Premier'sMemorandum No 2005-14,Working Together:Public Sector OHS and Injury ManagementStrategy 2005-2008 .

• EnergyAustralia'sChief ExecutiveOfficer has an employmentcontract and performanceagreement. The employmentcontract is appraisedannually with the next appraisalscheduled for September2009.

• EnergyAustralia'sBoard agrees to providethe VotingShareholders with financialand other information, includinginformation on majorcapital expenditure projects, on a quarterlybasis to assessthe performanceagainst commitments in this SCIand to assessthe valueof the Shareholders'investment in the business.

• EnergyAustralia'sBoard agrees to complywith Section3.4 (ContinuousDisclosure) of the Reportingand MonitoringPolicy.

• EnergyAustralia will complywith TreasuryCirculars on accountingpolicy matters in accordancewith Attachment1 of the Guidelinesfor the Developmentof the 2008-09Statement of CorporateIntent.

Reporting

• The Boardwill ensureforecast financial statements, Treasury Online Electronic System reporting, and forecastsof financialdistributions and tax equivalentsrequested by Treasury(budget round forecasts) are incorporatedinto the quarterlyreporting framework and are providedin accordancewith-Treasury timetables.

• The Boardwill submita complete2nd QuarterReport to December2009 in lieu of a HalfYearly Commercialin confidencereport.

1 EnergyAustralia funded capital expenditure ($millions)

SCI Actual Forecast ·------··· .. 2008/09 2008/09 2009/10 2010/11 2011/12 ------·-- - . ------System expenditure 452 702 Area Plans 385.9 .6 533.8 .6 777.6 112.1 160 211.4 293.0 370.2 ReplacementPlan .4 114.8 127.0 151.2 11kV and LV NetworkPlans 98.9 178.7 138 143 81.4 43.6 93.6 SupportPlan (incl. Property) .1 .5 1 26 34.0 26 17 27.0 OperationalTechnology Plan (incl. AMI} .5 .2 .6 55 65.5 72.0 CustomerConnecti.ons Plan .5 88.0 103.0 25 29 56.1 Duty of Care Plan .3 .0 54.7 56.4

Networkperformance (incl. reliabilitystandards} 7.2 23 17 18 MeteringPlan .5 18.9 .3 17.9 .6 14 14 15 Street LightingPlan 16.7 17.5 .0 .6 .0 1,043.4 1,640.1 Total system 882.5 1,139.1 1,483.2· .. ·- ----.. -· ---- -. ------. .. .. --- · Non-systemexpenditure

IT 76.4 118.4 75.0 75.0 51.3

Adminland & Buildings 92.0 83.0 102.0 86.8 30.5 MobilePlant 29.3 30.5 27.2 25.0 20.8 .8 Contestabl~Meters 3.6 3 3.7 3.9 4.0 Other 7.9 11.4 13.4 11.1 11.3

Total non-system 209.2 247.1 221.3 201.7 117.9 - .. ------. ·- ~- - - ·· - - -· ------Total capital investment 1,091.7 1,290.7 1,360.4 1,685.0 1,758.0 ______,. -- ·------... - ---· §Tcfi3 . 893.1- Borrowings " 1,157.6 1,374.2 1,237.4 181.0 97.5 520 Internalfunding 3 202.8 310.8 .7 ····-- ··-- --·· - --·------· --. ... -·· ------. ------1,091.7 --- 1,741.1 2,031.3 Total capital investment- 2008/09 SCI 998.3 1,666.4 0.0 199.0 -306.0 -56.1 Variance2008/09 to 2009/10SC I -273.2

-~---~-~--- . 2 2009/10 Our Scorecard ~,z.~-·::~:y;r.··-········-··· Our Scorecard 2009/10 4~h~--·-~·~···.. ·····~ OUR Pl)~<;.E.: To ~ Avstv~nis eV\ev'f\1 ~v.ovidev- ~ cli.oice EnergyAustralia-

W e will be Australia's Our Val ues Our Go~b fir st choice becau se: We are committed to: We will ,rtrive to be bv 2014: • Our network is safe and reliable • Safety • Austialia's safest networlc • Our customers value our S&rvice • Integrity • Australia's mo,rt reliable network • Our staff arv proud to work here • Reliability • Aust1111ia's most respected energy • Our community recognises our values, • Respect for our people, community services provider our contribulion, our dlizenship and end environment our achievements • Commercial success

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The system capital and EBIT targets have been adjusted to $1, 139m and $635m respectively following the outcomes of the AER merits review, rephasing of capital and Government Guarantee Fee Page 10of 10 EnergyAustralia Statement of Corporate Intent 2009/10 (TREASURY) v38 © EnergyAustralia 2009