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Integral Energy - Statement of Corporate Intent - 2005/2006 ~ ~~!!~~~L The power IS m your hands
Contents
Foreword ...... 4 Objectives of the Corporation ...... 5 Nature and Scope of Operations ...... 6 Strategic Direction (overview) ...... 7 Financial Performance Targets ...... 8 Social Programs and Non-Commercial Activities ...... 9 Financial Asset and Liability Management ...... 10 Statement Addressing Shareholders' Issues ...... 12 Half Yearly Report ...... 13 Representation and Commitment Statement ...... 14
2005/2006 Statement of Corporate Intent Page 2 ~ ~~r!~~~L The power is in your hands
New South Wales State Owned Corporation
Statement of Corporate Intent
Organisation: Integral Energy Australia
Period Ending: 30 June 2006
The Statement of Corporate Intent has been agreed between:
Michael Mcleod Chairman Integral Energy Australia
\ .j I'( ./ ... ~ Richard Powis 1 The Hon Michael Costa MLC Chief Executive Officer · Minister for Finance Integral Energy Australia
Dated this day the ___ of 2005.
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Foreword
Integral Energy's 2005/06 Statement of Corporate Intent has been developed through a robust corporate planning process. Planning has centred on achieving the business purpose:
"to be a successful energy corporation with a long term focus on being a best practice asset manager and competing in profitable retail energy markets."
Specific objectives have been set for the Network and Retail businesses. The Network business aims to "provide long term customer service by building a sustainable and reliable network". The Retail business is focussed on "ensuring Integral Energy competes effectively in a changing environment while managing market risk".
Strategic initiatives have been developed to drive the organisation towards achievement of these objectives.
The focus of this year's plan is on ensuring the corporation has the capabilities required for effective strategy implementation. With this capability, and widespread organisational commitment, Integral Energy expects to realise shareholder, stakeholder and customer benefits.
I commend this report for your attention.
Richard Powis Chief Executive Officer
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Objectives of the Corporation
Integral Energy is the second largest state owned energy corporation in NSW. Incorporated under the Energy Services Corporations Act 1995, Integral Energy operates as a distributor and retailer within the terms of the Electricity Supply Act 1995. Integral Energy is a forward looking, progressive business, intent on achieving its vision: to be Australia's leading energy business.
In pursuit of this vision, Integral Energy intends to build sustainable success into all facets of operation, and have set the following business purpose:-
"to be a successful energy corporation with a long term focus on being a best practice asset manager and competing in profitable retail energy markets."
Integral Energy's primary objectives are set out in the Energy SetVices Corporations Act 1995, which states that the primary objectives of an energy distributor are:-
(a) To be a successful business and, to this end: (i) to operate at least as efficiently as any comparable businesses; (ii) to maximise the net worth of the State's investment in it; (iii) to exhibit a sense of social responsibility by having regard to the interests of the community in which it operates.
(b) To protect the environment by conducting its operations in compliance with the principles of ecologically sustainable development contained in section 6 (2) of the Protection of the Environment Administration Act 1991.
(c) To exhibit a sense of responsibility towards regional development and decentralisation in the way in which it operates.
(d) To operate efficient, safe and reliable facilities for the distribution of electricity and other forms of energy.
(e) To be an efficient and responsible supplier of electricity and other forms of energy and of services relating to the use and conservation of electricity and other forms of energy.
(f) To be a successful participant in the wholesale and retail markets for electricity and other forms of energy and for services relating to the use and conservation of electricity and other forms of energy.
The principal objectives of an energy distributor are of equal importance.
Integral Energy has developed strategic initiatives which will drive the organisation towards achievement of the above objectives. Integral Energy intends to undertake no material change to its business objectives, without seeking prior agreement with the Shareholding Ministers.
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Nature and Scope of Operations
Integral Energy's primary operations are within New South Wales, owning an electricity network spanning 24,500 square kilometres in Greater Western Sydney, the lllawarra, and the Southern Highlands. The network is made up of more than 26,000 substations, 315,000 power poles, and 175,000 streetlights bound together by more than 33 ,000 kilometres of underground and overhead mains. The Retail business operates in the deregulated electricity market, where customers can choose their electricity retailer.
Integral Energy serves more than 2.1 million people, and employs more than 2,400 staff.
Integral Energy's corporate governance framework establishes the processes by which the organisation is directed, controlled and held to account. As part of the governance and decision making framework, Integral Energy pursues a triple bottom line approach which seeks to consider and balance financial, social and environmental outcomes.
Integral Energy's corporate values provide a set of principles which guide behaviour and business operations. The Board, management and staff have adopted seven key statements to describe the core values of Integral Energy's:
• Safety excellence; • Integrity; • Management by fact; • Customer commitment; • Respect for people; • Accountability and responsibility; and • Sustainability and commercial success.
We believe the inherent quality of our people enables Integral Energy to look confidently to the future.
2005/2006 Statement of Corporate Intent Page 6 77::"\ INTEGRAL i, 4' 1ler .g _r ,__ i}_j The power 1$ myour hands
Strategic Direction (overview)
Integral Energy's vision and business purpose underpin the corporate plan. Integral Energy's vision is "to be Australia's leading energy business': To achieve this vision, the business purpose is: "to be a successful energy corporation with a long term focus on being a best practice asset manager and competing in profitable energy markets".
Integral Energy is centred around providing a reliable energy network and successfully retailing energy within a competitive marketplace. A key element of success will be leveraging the 2004 Network and Retail regulatory determinations. The overall determination result represented a good outcome for Integral Energy, and provides a solid financial platform for Integral Energy to address long-term issues in both the Network and Retail business.
Integral Energy's corporate plan sets out business strategies and targets to achieve the corporate vision and business purpose. By managing against these targets using a triple bottom line approach, i.e. balancing financial, social and environmental outcomes, it is expected that this plan will deliver sustainable success for Integral Energy going forward.
Business Context: The NSW Government Green Paper
In December 2004, the NSW Government released a Green Paper titled 'Energy Directions'. The paper outlined the need to address significant generation investment requirements to meet growing electricity demand in NSW and ensure security of supply to customers.
Integral Energy submitted a public response in late February 2005. In the response, Integral Energy agreed that any reform initiatives for the electricity sector should be focussed on addressing generation issues. Structural changes which reduce Government risk, facilitate increased competition, and improve customer choice and outcomes, were supported in the response. Integral Energy suggested that Government decision-making should be prioritised around four inter-related issues: • Involving private sector participation in retailing (as this approach has the potential to improve the management of risk and provide incentives for private sector investment in generation); • Facilitating a medium term price path which reflects the cost of new generation and other factors; • Undertaking generation reform together with changes in the retail sector structure in order to establish a framework for investment in new generation; and • Clarifying the policy for greenhouse gas emissions.
Integral Energy noted that resolving these four issues in a timely manner would play a key part in addressing the main issues raised by the Government in the Green Paper.
The Green Paper also canvassed the possibility of a distribution boundary review. Integral Energy submitted that this was a low priority issue which will have no impact on the Green Paper's central focus of ensuring appropriate investment in generation and ensuring security of supply. Furthermore, the submission suggested that a review of distribution boundaries at this time would only divert resources from addressing higher priority issues.
The NSW Government is expected to release the White Paper early in the 2005/06 financial year. Although developed with the Green Paper as a consideration, the uncertainty of the outcome of the Government's deliberations required this corporate plan to be developed based on the status quo.
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Financial Performance Targets
The performance targets contained in this document are consistent with the Corporation's underlying business plan.
Annual Financial Performance Targets
20041U5 2005/06 2006/U7 2007/UB As stated Restated SCI Forecast Forecast (Forecast) (AEIFRSl Ea rnings Before Interest and Taxes ($rn) 247.82 247.82 230.63 243.11 252.34 Operating Profit Before Tax ($rn) 161.88 161 .88 134.35 135.49 133.10 Target Dividend ($rn) 95.26 95.26 66 .89 56.96 55.68 Return on Assets (%) 8.66% 8.39% 7.54% 7.63% 7.28% Return on Equity (%) 9.89% 10.64% 8.33% 8.94% 7.91%
2005/2006 Statement of Corporate Intent Page 8 .. ;;r;;\::26 i. INTEGRAL,,,,,,.-"' ;- The power is in your hands
Social Programs and Non-Commercial Activities
Social Programs
Integral Energy undertakes a number of social programs on behalf of the NSW Government, for which we receive full-cost reimbursement directly from the State Budget
Integral Energy's social obligations under the NSW Governments Social Program Policy incorporates the following community services- Pensioner Rebates, Life Support Equipment Rebates, and Energy Accounts Payment Assistance Scheme (EAPA).
The following table provides further details on social programs undertaken by the Corporation.
Program DescriJrtion Customers Affected Annual Cost (excl. GST)
Pensioner Rebates Fixed deduction from quarterly bills paid by 184,000 $20,608,000 eligible pensioners
Life Support Equipment Rebates Fixed deduction frorn quarterly bills paid by 0 $670,200 eligible customers
EAPA Reimbursements Vouchers provided by V•lelfare agencies, to assist 30 $3,204,000 in the payment of energy bills where customers are experiencing r1nanciallfamily difT1culties
Non-Commercial Activities
Integral Energy does not currently undertake any non-commercial activities.
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Financial Asset and Liability Management
Financial Asset and Liability Management at Integral Energy is conducted in accordance with the Treasury Management Policy and the following related requirements (where applicable):
• Public Authorities (Financial Arrangements) Act 1987; • Treasury Circular 03/09: Guidelines on Reporting of Investment and Liability Management; • Treasury Circular 01/07: Limitation on Investment Powers of Certain Authorities under the Public Authorities (Financial Arrangements) Act; • Treasury Circular 98/7: Structured Finance; • Energy Trading Policy for Retailers, 1999; • Energy Trading Policy for Generators, 1999; and • Working with Government- Guidelines for Privately Financed Projects, 2001.
Asset management
Integral Energy does not hold liquid assets in the form of cash or short-term investments beyond the amount required to appropriately service financial commitments as they arise. In other words, Integral Energy's goal is to maximise the returns on any surplus funds held whilst maintaining appropriate liquidity. This is achieved by exercising the Investment Powers granted to Integral Energy, from time to time, under Section 24 of the Public Authorities (Financial Arrangements) Act 1987.
Performance reports on the management of financial assets are reported to the Board on a monthly basis.
Liability management
Integral Energy manages its debt management function in-house. Integral Energy has regular meetings with NSW Treasury Corporation with respect to assisting in the management and reporting requirements as outlined in NSW Treasury's Commercial Policy Framework - Treasury Management Policy. There is an ongoing arrangement in place with NSW Treasury Corporation for their assistance, as required, for their input into Integral Energy's debt management process.
Derivative transactions are currently undertaken in the debt management process. The use of derivative transactions is authorised within the Permitted Treasury Instruments, the PAFA Act, and NSW Treasury directives. The only instruments we currently use are Interest Rate Swaps. Risk limits have been imposed on the instruments within the policy document. These instruments represent a partial hedge to the underlying interest rate risk within the debt portfolio. No derivative financial instruments are or will be held for speculative purposes. The overall risk profile adopted by Integral Energy is risk neutral.
Performance reports on the management of financial liabilities are reported to the Board on a monthly basis.
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Treasury Operations
Integral Energy's in-house treasury function manages the cash flow requirements of the business. These include the short-term investment of surplus cash, ensuring there are adequate cash resources to meet day-to-day needs, and the management of the interest rate and duration exposures, which are inherent in debt and investment portfolios.
Energy Trading
The Energy Trading and Energy Sales & Marketing businesses are governed by a number of Board approved policies and strategies. A Retail Energy Risk Management policy outlines the framework for energy risk trading and reporting, and includes a list of approved products as approved by PAFA.
The Board of Directors and Executive regularly monitor the energy risk performance of the Corporation and also review adherence to trading policies on a regular basis.
Integral Energy's Board of Directors receive performance reports and recommendations on any changes to policy and strategy from the Retail Risk Management Board Committee. The Retail Risk Management Board Committee consists of between two and four non-executive Directors and the Chief Executive Officer. Membership of the committee is subject to rotation to ensure continuity of membership and to allow contribution of fresh perspectives. The Company Secretary, General Manager Finance, General Manager Sales & Marketing and General Manager Trading are invited to attend each meeting.
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Statement Addressing Shareholders' Issues
Commitment to Network Service Quality
Integral Energy's network vision is:
"Customers in Integral Energy's region should, on average, receive comparable service standards to customers in like situations within Australia."
Three key factors drive Integral Energy's network strategy, as follows: • Declining levels of reliability; • High growth in demand; and • An ageing asset base.
To address these factors, the network strategy comprises the following objectives aimed at providing long term customer service by building a sustainable and reliable network: • Improve declining levels of reliability, and therefore the position of customers not currently receiving average performance standards; • Address the high growth in demand by managing the current supply capacity/security risk profile' • Arrest the deteriorating trend in the condition of the network asset base; and • Achieve corporate objectives such as safety and environmental targets.
Integral's Strategic Asset Management Plan (SAMP) provides details of the capital investment program and operational and maintenance programs which have been developed to meet the Network strategy.
Integral Energy is committed to delivering shareholder value through the application of best practice asset management strategies, integrated investment planning, sound Network policies and standards, and effective management of asset performance. The Network Management Plan articulates Integral Energy's asset strategy. A revised version was submitted to the Department of Energy, Utilities and Sustainability in November 2004, as required under the Electricity Supply (Safety and Network Management) Regulation 2002. The plan will be regularly updated and is publicly available through Integral Energy's website at www. integral.com.au.
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Half Yearly Report
Section 24 of the State Owned Corporations Act 1989 requires the Board of Directors to deliver to the voting shareholders, one month after the end of December, a report on the operations of the corporation and its subsidiaries during that half-year.
The Half Yearly Report represents a special purpose report prepared for the voting shareholders, and will include a condensed set of financial statements supported by abbreviated notes and disclosures, prepared based on accounting policies consistent with the previous year's annual report. The Half Yearly Report will be prefaced by a statement by the Chief Executive Officer or Chairman of the Board of Directors, on the financial performance of the business for the half year, and the outlook up to the year end.
Following approval of the Half Yearly Report by the Board of Directors, the Chief Executive Officer or Chief Financial Officer will make a presentation to NSW Treasury on the financial performance of the business for the half year, and forward expectations of the business.
Other Information
Other information to be provided to the voting shareholders during the course of 2005-06 will include: • Quarterly reports • Forecast financial statements requested by NSW Treasury eg. via Treasury Online Electronic System (TOES) • Forecast of financial distributions and tax equivalents requested by NSW Treasury (budget round forecasts).
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Representation and Commitment Statement
The Board of Directors of Integral Energy Australia confirms the following:
• The performance targets within the SCI are based on and supported by the corporation's Business Plan.
• All relevant pre-planning requirements for capital investment and asset maintenance have been undertaken in accordance with the New South Wales Government's Total Asset Management (TAM) Manual for: i) Budget-funded and social program projects; ii) Projects which require an Environmental Impact Statement; and iii) Projects of State Significance proposed to commence in 2005-06.
• The Government business's Strategic Asset Management Plan is as far as practicable consistent with the principles of the Total Asset Management Policy issued by Treasury NSW (TPP04-3) and the NSW Government Procurement Policy (TPP04-1 ).
• Projects of State Significance have been identified in accordance with the criteria set down in the Guidelines on the Assessment of Projects of State Significance. In-principle approval from Cabinet Standing Committee on the Budget ("Budget Committee") and final approval from the Voting Shareholders has been received for Projects of State Significance planned to commence in 2005-06.
• The requirements of NSW Treasury's Financial Appraisal Guidelines have been complied with for capital expenditure projects proposed to commence in 2005-06.
• All the 'key risks' and the 'major emerging contingent liabilities' which could materially impact the current and future results of our organisation for the forthcoming year have been disclosed.
• The requirements of NSW Treasury's Treasury Management Policy have been complied with and related party interests, which may represent a possible conflict of interest for Directors, have been disclosed.
• The corporation's Chief Executive Officer has an employment contract and performance agreement. The employment contract is appraised annually with the next appraisal scheduled for September 2005.
• The corporation's Board of Directors agrees to provide the Voting Shareholders with financial and other information, including information on major capital expenditure projects, on a quarterly basis to assess the performance against commitments in this SCI, and to assess the value of the Shareholders' investment in the business.
• As a State Owned Corporation, the business will comply with Treasury Circulars on accounting policy matters in accordance with Attachment 1 of NSW Treasury's Guidelines for the Development of the 2005-06 Statement of Corporate Intent.
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