RGON ENERGY tatement of Corporate ntent

Transcription

1 Ergon Energy Statement of Corporate Intent 2011/12 RGON ENERGY tatement of Corporate ntent 011/12 ERGON ENERGY Statement of Corporate Intent 2011/12 DRAFT March 2011 June

2 NOTE: This document contains highly confidential material relating to the business affairs of Ergon Energy. Release of its contents is subject to the provisions of the Right to Information Act Any unauthorised disclosure of material contained in this statement may diminish the commercial value of that information and would have an adverse effect on the business, commercial and financial affairs of Ergon Energy. 2

3 TABLE OF CONTENTS 1. SCOPE Main Undertakings Corporate & Operational Objectives Corporate & Operational Tactics Corporate Performance Measures Performance Drivers Strategic Expectations MANDATORY MATTERS Financial Key Performance Indicators Non Financial Key Performance Indicators Assumptions Community Service Obligations Employment And Industrial Relations (E&IR) Plan ADDITIONAL MATTERS Financials Group Financials: Selected Subsidiaries Financial Contributions: Selected Subsidiaries Financial Contributions: Major Business Divisions Main Undertakings And Business Capital Expenditure Program Assets Under Construction Capital Expenditure Planned To Commence In SCI Year Business Development Total Capital Expenditure Other Significant Expenses

4 3.5 Major Initiatives Being Undertaken By Ergon Energy National Broadband Network (NBN) Ubinet Demand Management Joint Workings Long Term Energy Supply for North West Queensland Sponsorship, Advertising, Corporate Entertainment, Donations and Other Arrangements Other Prudent Financial Information Capital Structure Weighted Average Cost of Capital (WACC) Dividend Policy and Payment Corporate Governance Risk Management Compliance with Government Policies PERFORMANCE AGREEMENT ATTACHMENTS ATTACHMENT 1: Definitions Of Financial Ratios ATTACHMENT 2: Employment And Industrial Relations Plan ERGON ENERGY CORPORATION LIMITED, EMPLOYMENT AND INDUSTRIAL RELATIONS PLAN SPARQ SOLUTIONS EMPLOYMENT AND INDUSTRIAL RELATIONS PLAN ATTACHMENT 3: Sponsorship, Advertising, Corporate Entertainment, Donations And Other Arrangements ATTACHMENT 4: WACC Calculations ATTACHMENT 5: Corporate Governance Guidelines For Government Owned Corporations ATTACHMENT 6: Compliance With Government Policies ATTACHMENT 7: Minimum Employment, Industrial Relations and Job Security Principles for Government Owned Corporations (GOC) Employees

5 1. SCOPE This Statement of Corporate Intent outlines the strategies that will be implemented in 2011/12, the first year of the five year strategic direction described in the Ergon Energy Corporate Plan. The summer storm season of 2010/11 was especially severe in its impact on regional Queensland and on the Ergon Energy network. A string of major weather events; flooding in December/January and cyclones Tasha, Anthony and Yasi caused significant damage. While Ergon Energy responded rapidly and demonstrated its capability to restore supply to customers as soon as was possible, the impact of these weather events is expected to be felt into 2011/12. In particular, Ergon Energy expects that there will be ongoing impacts on the program of works, and around the Service Target Performance Incentive Scheme (STPIS). There is also expected to be ongoing economic hardship for our customers, especially in regional communities hit by Cyclone Yasi, which will have implications for Ergon Energy. These issues are addressed in this SCI. 1.1 MAIN UNDERTAKINGS Ergon Energy s purpose is to enhance the economic and lifestyle aspirations of our customers through sustainable energy solutions. The core business of Ergon Energy is to operate as a regional electricity distribution entity and as a noncompetitive electricity retailer within its franchise area of regional Queensland (as defined in the Electricity Act (1994)). The main operating companies within the Ergon Energy Group and their activities are: Ergon Energy Corporation Limited (EECL). As a distribution entity, the principal function is to operate, maintain (including repair and replace), develop and protect its electricity supply network to ensure the adequate, economic and safe supply of electricity to its geographically dispersed customers. Ergon Energy Queensland Pty Ltd (EEQ), a 100% subsidiary to EECL, acts as the non competitive retailer serving over 690,000 customers in the supply area. EECL is also a 100% shareholder in Ergon Energy Telecommunications Pty Ltd (EET). EET trading as Nexium Telecommunications is a licensed telecommunications carrier who provides high speed data services to entities outside of the Ergon Energy Group on a commercial basis from spare telecommunications capacity generated from the provision of telecommunications services to the Ergon Energy Group. EECL is a 50% shareholder in SPARQ Pty Ltd (SPARQ). SPARQ is a company jointly owned with Energex that offers Information and Communications Technology (ICT) and telecommunication support functions. The Ergon Energy Group services customers across 97% of Queensland around 1.7 million square kilometres with an electricity network consisting of approximately 150,000 kilometres of powerlines and one million power poles, along with associated infrastructure such as major substations and power transformers. Ergon Energy also owns and operates a 55MW gas fired power station in Barcaldine, which supplies power to the statewide electricity grid, along with 33 stand alone power stations that provide supply to isolated communities across Queensland that are not connected to the grid. The Group s assets are valued at over $9 billion, which includes telecommunication assets of approximately $3 million, held within EET, and assets of approximately $784 million (which are predominantly financial instruments) held by EEQ. Ergon Energy is also a 50% shareholder in SPARQ, whose total assets are approximately $283 million. 5

6 1.2 CORPORATE AND OPERATIONAL OBJECTIVES The overarching objectives for Ergon Energy are to increase shareholder value and to be more efficient in the delivery of its services. The year 2011/12 is the second year of the current five year regulatory control period for Ergon Energy. Within this control period, Ergon Energy will deliver shareholder value by operating within the Distribution Determination set by the Australian Energy Regulator (AER), and achieve its regulated financial targets in a sustainable manner. To this end, Ergon Energy has established the following strategic themes to describe its longer term strategy. These are: Financial Customer Driven Asset Management Excellence Leverage Climate Change Response A Leader in Safety High Performance Organisation Each of the strategic themes below contributes to a set of umbrella aspirational goals that help drive increasing shareholder value and the efficiency of our service delivery. Increasing customer value; working with our customers to better understand and anticipate their needs while providing them with an electricity service that is cost efficient and dependable. Improving our asset management practices as a basis for providing a more cost efficient and dependable service for our customers. Mitigating and adapting to climate change impacts by developing a smarter network using technologies that extend our ability to remotely control the network. Working with our customers and other stakeholders as part of climate change response to achieve the dual objectives of reducing greenhouse gas emissions and decreasing the cost of electricity by reducing the growth in peak demand. Improving our safety leadership at all levels within Ergon Energy. Working to ensure the safety of our communities by assisting them to interact safely with our assets. Ensuring our people have the knowledge, information, tools, skills and leadership they require to carry out their work effectively and efficiently. The long term aspirational goals that relate to these strategic themes are described further in the following table. To ensure we achieve these aspirational goals, over the longer term, the key strategic priorities for Ergon Energy over the coming year are: To be a high performing and commercially focussed organisation delivering economic value within a sound corporate governance framework. Reduce unplanned and planned outages. Improve our performance in works delivery by delivering the works plan on time and within cost. Improve safety performance by promoting and supporting a work environment that delivers improved safety leadership at all levels within Ergon Energy. 6

7 2015 Aspirational Goals FINANCIAL Network Charges Drive network charges down towards CPI over the long term. Financial Targets Consistently achieve financial targets that meet or better our AER Distribution Determination. Achieve a commercial return on assets. Unregulated Business Increase unregulated revenue while improving core business. CUSTOMER DRIVEN Service Deliver quality, cost, value and choice by customer segment. Customer Satisfaction Maintain strong customer relationships and work with them to identify and meet their future needs. ASSET MANAGEMENT EXCELLENCE Reliability Meet minimum service standards and secure optimal STPIS result. Prudent & Efficient Prudently invest and efficiently deliver the capital expenditure and operating expenditure programs. LEVERAGE CLIMATE CHANGE RESPONSE Demand Management Reduce peak load growth to defer capital expenditure on our network. Emissions Reduction Reduce fleet, property, travel and isolated generation emissions to meet government and internal targets. A LEADER IN SAFETY Safety Make sustained progress towards "no one gets hurt today" in ensuring a safe workplace for our people. HIGH PERFORMANCE ORGANISATION Information Integrate a spatial model into business processes to enable our people to improve work practices and efficiency. Skills and Culture Build and foster a resilient and adaptable organisation with the skills and culture required to manage increasingly sophisticated networks, information systems and renewable energy solutions. 7

8 1.3 CORPORATE & OPERATIONAL TACTICS Over the 2011/12 year Ergon Energy will deliver on its strategic priorities (see the performance measures Table 1.4) and work towards the achievement of the longer term aspirational goals by implementing the tactics shown in the tables below: STRATEGIC THEME: 2011/12 KEY STRATEGIC TACTICS: Asset Management Excellence Customer Driven Financial A Leader in Safety Leverage Climate Change Response High Performance Organisation Reliability Plan Distribution Management System Non Network Alternatives Remote Observation, Automated Modelling and Economic Simulation (ROAMES) Work Improvement Program Smart Network of the Future National Energy Customer Framework Community Safety Safety Management Plan 2011/12 KEY STRATEGIC TACTICS Reliability Plan Distribution Management System Non Network Alternatives ROAMES Work Improvement Program Smart Network of the Future National Energy Customer Framework (NECF) Community Safety Safety Management Plan DESCRIPTION Reducing the number and duration of outages that impact on customers and improving performance over the current Distribution Determination period. This initiative is key to achieving Minimum Service Standards (MSS) and Service Performance Target Incentive Scheme (STPIS) targets. Automation of many of the manual processes currently used to operate the distribution network. This system will also support Smart Grid technologies. Implementation of the Asset Management Alternative Energy Solutions to delay/defer network upgrades by providing cost effective non network solutions. The 3D observation, modelling and simulation of infrastructure and environment. It is expected to significantly improve the efficiency of asset management and operations activities in Ergon Energy. Implementation of delivery improvements across the whole of the Works Program from concept to implementation. Developing a Smart Grid that will suit the nature of Ergon Energy s distribution network and deliver improved customer and shareholder outcomes. Implementation of the requirements of the new NECF requirements. Continuation of existing community safety programmes. A range of programmes to support improved safety outcomes. 8

9 1.4 CORPORATE PERFORMANCE MEASURES Ergon Energy is seeking to achieve the following performance outcomes for 2011/12: 2011/12 KEY STRATEGIC PRIORITIES 2011/12 PERFORMANCE OUTCOMES To be a high performing and commercially focussed organisation delivering economic value within a sound corporate governance framework. Reduce unplanned and planned outages. Improve our performance in works delivery by delivering the works plan on time and within cost. See Table 2.1. We will achieve the best possible level of network reliability performance as measured by the achievement SAIDI and SAIFI levels at or better than the Minimum Service Standards (MSS) targets in Table 2.2. We will work within the allowances set by our Distribution Determination for both operating and capital expenditure as set out in Table 2.2. Improve safety performance by promoting and supporting a work environment that delivers improved safety leadership at all levels within Ergon Energy. We will achieve a measurable improvement in our work safety culture that results in our CCFR, AIFR and LTIFR for employees decreasing in a sustainable way to achieve the targets in Table

10 1.5 PERFORMANCE DRIVERS The key issues which are expected to impact on the performance of Ergon Energy over the 2011/12 year are: Affordability Network Reliability and Security 2010/11 Storm Season Impacts Delivering the Capital Works Program National Energy Customer Framework Efficiency Saving Targets Safety Performance. These issues are discussed in turn below. Affordability Our customers continue to expect that Ergon Energy will operate in a manner that assists all customers to have a cost efficient electricity supply that meets their needs. Increases in the price of electricity from the point of view of the distribution network are being driven by rising customer demand for electricity at peak times as this is the primary driver of network augmentation costs. Ergon Energy is seeking to moderate price rises for customers over the longer term by expanding the functionality of the network, and by encouraging customers to use less electricity at peak times. This work with customers forms part of the demand management program which is explained in further detail in Section 3.5 of this Statement of Corporate Intent (SCI). Network Reliability and Security Improving the reliability and security of our network remains a priority for Ergon Energy. Since 2005/06 reliability performance has improved significantly; however, the minimum service standard targets set by the Queensland Competition authority have become more onerous over the same time period. Since 2005/06 the duration of unplanned outages has been reduced by 19% and the frequency by 16%. The overall frequency and duration of outages in this period has also improved by 9%, despite operational restrictions for safety being in place for a large part of 2009/10. As at the end of March 2011 network performance as measured by overall SAIDI and SAIFI for the year to date had improved by 21% and 25% compared to the same period in Ergon Energy expects to achieve 5 of the 6 Minimum Service Standards for the 2010/11 year, a sound result in a year with significant weather conditions, including flooding across regional Queensland, where supply restoration timeframes were adversely affected by flooding of access routes and significant infrastructure damage resulting from numerous cyclones. A whole of business reliability plan has been developed and is being implemented to address network performance requirements for the regulatory control period for both Minimum Service Standards (MSS) and the Service Target Performance Incentive Scheme (STPIS). This plan involves assessing and analysing network performance; capital investment strategies on remote control of the network; management of planned outages; management of response to unplanned outages; and focus on operational measures. 10

11 For planned outages the focus is on reducing events, reducing impact and improving response, while for unplanned outages the focus is on reducing events, reducing impact and minimising duration. Ergon Energy expects that its continuing focus on network performance will not only improve the achievement of MSS and STPIS targets, but will also improve the perception of service levels by customers, as well as their broader satisfaction with their electricity supply. Ergon Energy continues to address security of supply matters by introducing redundancy in zone substations, subtransmission lines and distribution lines, in line with the agreed security of supply criteria as total customer loads increase. This network redundancy provides the ability to promptly restore supply to customers following single points of failure in the distribution system. 2010/11 Storm Season Impacts While the summer storm season of 2010/11 has allowed Ergon Energy to demonstrate its capabilities, the string of major weather events from the December/January floods through cyclones Tasha, Anthony and lastly Yasi (the largest system in living memory) will challenge some aspects of our future performance going forward. Severe Tropical Cyclone Yasi (Cyclone Yasi) Cyclone Yasi crossed the Queensland coast at Mission Beach as a Category 5 cyclone on the third of February It was over 600 kilometres wide, and had wind speeds of 295 kilometres per hour at its greatest intensity and was the largest system in living memory. It took out power supplies to nearly a third of Ergon Energy s customer base with extensive damage to the network from Cooktown to Sarina and west to Mt Isa. In total Cyclone Yasi interrupted the power to over 220,000 (estimate as at 1 March 2011) homes and businesses and at least 50 major substations were off supply in the initial impact. On Friday, 25 February 2011, the restoration of supply was completed for all properties that were able to be safely connected, after 23 days of crews working long hours in what were extremely difficult operating conditions. The scale of the restoration effort was immense. This event triggered what is believed to be the largest ever deployment of electrical field staff in Australia s history. At its peak there were around 1,340 personnel and support staff on the ground during the response effort, and many more involved from across the organisation plus support from Energex and interstate Distributors and supplier. During the three week operation Ergon Energy acquired and/or used for repairs or rebuilds around 600km of cable and conductor line, almost 2,300 poles and cross arms, 25,000 fuses and lightning arrestors, 6,754 insulators and 350,000 hardware items like bolts, screws, brackets and clamps. Ergon Energy also deployed a fleet of mobile generators throughout the communities hardest hit by Cyclone Yasi. Through a combination of Ergon Energy s own inventory and external providers there was a total of 70,000kVA in generating capacity, available for deployment. At the peak, to meet requirements, 155 units were deployed in the field with 109 running concurrently at one point while others were in transit or on standby. This meant that many communities were able to maintain basic services while repairs to the power network continued. The diversion of resources and the depletion of stores will have a significant impact on the delivery of the capital and maintenance programs (the asset inspection cycle, defects repairs and the GSL for streetlights in particular). There will also be a short term impact on customer requested works, which may extend into the 2011/12 financial year, however, due to the overall sluggish economy the impact on overall cycle times for customer initiated construction projects is not expected to be significant. The current expectations are that the total cost of the Cyclone Yasi will be between $80 to $120 million but this may change as more detailed information becomes available. Ergon Energy has now received a direction from shareholding Ministers under section 115 of the Government Owned Corporations Act 1993 not to make a cost pass through application to the AER in respect of the costs incurred in relation to natural disasters in the 2010/11 financial year which will include Cyclone Yasi. 11

12 Flooding There was significant flooding in regional Queensland from December 2010 to January 2011 covering approximately 600,000 square kilometres of our supply area. Damage to Ergon Energy assets was relatively low and less than 0.05% of Ergon Energy assets were damaged as a result of flooding. Large numbers of customers within the flood areas experienced disconnection due to the floods for safety reasons. However, the assets remained in working order and customers were reconnected as soon as floodwaters receded and electrical wiring was confirmed as safe. Customer impacts: customer debt liability increased as bills were not processed for disaster declared areas within standard timeframes which resulted in customers receiving bills later than usual. Debt processing was also delayed as a result. Flooding and Cyclone Impacts The flooding and cyclones from late December 2011 will have implications for 2010/11 network performance statistics. Prior to December 2010, all six Minimum Service Standards (MSS) measures were forecast to meet the year end targets. Analysis of the impact of weather events on network performance outcomes is continuing, this will also confirm the precise number of customers impacted (outage management records are being checked for any duplications). As well as performance against the MSS targets, there will also be a potential financial risk associated with the Service Target and Performance Incentive Scheme (STPIS). The flooding and cyclones have also impacted on billing and meter reading. Meter reading was not able to be carried out and the dispatch of bills was also delayed in the areas hardest hit by the floods and cyclone. It is likely that customer hardship in these areas to be a significant ongoing issue. These customers will have the option of flexible bill payment arrangements and, for those in financial difficulty, access to our Customer Assistance Program (formally known as the Keeping Customers Connected program) or hardship provisions. An internal review of Ergon Energy s emergency management plans is being undertaken to identify opportunities for improvement. The results of this review and any other reviews that Ergon Energy may participate in as a result of Cyclone Yasi and the floods, will inform any refinement to emergency management plans as well as existing asset management and operational plans and practices. Delivering the Capital Works Program Growth is expected to vary between regions, and be driven positively by strength in the resources industry; however this is expected to be offset by weakness in commercial property investment and construction delays from recent floods and cyclones. The level of Customer Initiated Capital Works (CICW) is expected to remain subdued with only modest growth in National Energy Customer Framework The National Energy Customer Framework (NECF) is a national framework for the non economic aspects of energy retail sale and distribution connection and supply, including consumer protection, to be regulated by the AER. NECF is expected to provide efficiencies and reduce the regulatory burden for energy businesses, particularly retailers operating across jurisdictions and fuels. NECF implementation includes: A national retailer authorisation (licensing) regime Consumer protections Obligations on distributors to connect and retailers to sell to certain customers A standard retail contract 12

13 Arrangements for new customer connections Retail support obligations between distributors and retailers National Retailer of Last Resort (ROLR) arrangements Performance and compliance monitoring and enforcement regimes Bill Benchmarking A connections framework for new and altered connections. The following elements will remain the responsibility of Queensland Government: Community Service Obligations Land use, planning and environmental approvals or policies Distributor technical and safety authorisations Small customer dispute resolution (e.g. ombudsman schemes) Network service reliability standards Metering policy Specification of distribution and retail service areas Retail price regulation. Impact and Ergon Energy Response NECF involves the creation of a new National Energy Retail Law, National Energy Retail Rules, National Regulations and amendments to the National Electricity Rules. These instruments will replace many of the state based obligations contained in the Queensland Electricity Industry Code, Electricity Act 1994 (Qld) and Electricity Regulation 2006 (Qld). Movement to a harmonised national framework will involve changes to Ergon Energy s existing systems and processes and require significant resources to ensure full and timely implementation. At this time, the total implementation cost is not known with certainty, but could be as high as $10 million over the 2011/12 year. Ergon Energy will work closely with government to ensure a timely and efficient transition to the new regime. Implementation Timing The legislation to give effect to NECF was introduced to the South Australian Parliament on 27 October State and territory Ministerial Council of Energy Ministers have agreed to work towards a commencement date of 1 July 2012 in their jurisdictions. Ergon Energy will continue, throughout 2011/12, to: Identify the system, process and resource impacts of NECF and the activities that will be required to ensure compliance with NECF s detailed obligations; Assess impacts of the NECF package on customer service provision and communicate changes as necessary; and Work closely with the Department of Employment, Economic Development and Innovation (DEEDI) to develop the legislative and regulatory changes, including transitional arrangements, required to support NECF s introduction in Queensland. Communicate the changes resulting from the implementation of the NECF package as required to customers and other stakeholders. 13

14 Efficiency Savings Targets Ergon Energy continues to have a strong focus on delivering reliable, efficient and cost effective services to our customers while building shareholder value. In line with its commitment to operate within the Distribution Determination set by the AER, Ergon Energy is committed to achieving the efficiency savings targets set by the Queensland Government. For the 2011/12 year, Ergon Energy will continue to further improve efficiency and productivity in its operations consistent with the parameters of its Distribution Determination. These are expected to include savings from the Joint Workings program with Energex both from the successes of phase one and the new opportunities to be identified in phase two (see Section 3.5). Continuing operational efficiency savings in vegetation management are also expected as a result of the review of vegetation management practices (such as a revised cutting profile) and the introduction of the Remote Observation, Automated Modelling and Economic Simulation initiative (ROAMES), which will result in reduced asset inspection costs. Further efficiency savings in the form of reduced overtime and increased productivity continue to be realised as a result of management actions including the Depot 3PR project. As a result, Ergon Energy is forecasting that it will meet the efficiency target for the 2011/12 year. Safety Performance Ergon Energy is committed to improving its safety performance. During 2011/12 the focus will be on continuing to improve the safety culture, through improvements in safety leadership at all levels and improvements in behavioural safety. This work aims to deliver a safety culture that is always safe; No job is so important, no task so urgent. The safety of our people and the community must always come first (Ergon Energy Always Safe Handbook). Ergon Energy will also seek to continue to improve community electrical safety through implementing targeted behavioural and industry programs. 14

15 1.6 STRATEGIC EXPECTATIONS Shareholding Ministers have set a number of expectations for Ergon Energy for the 2011/12 year and the table below indicates where each of these expectations has been addressed in this SCI: EXPECTATION WHERE ADDRESSED Ergon Energy will progress whole of business reliability improvement strategy to achieve Minimum Service Standards for 2010/11 and beyond. Ergon Energy will meet performance targets for reliability of supply, quality of supply and customer service to maximise potential benefits of the STPIS and ensure Ergon Energy is not penalised. Ergon Energy will deliver its extensive capital program within the parameters established by the regulatory allowance over the regulatory period. Ergon Energy will manage the considerable growth in its capital program to ensure network assets are delivered on time, efficiently and at minimal cost. Ergon Energy will work within the allowances provided by the regulatory determination and will strive towards continued improvements in operational efficiency at every level of the organisation. Ergon Energy will work in conjunction with Energex Limited and the Queensland Government to develop refined network security standards that utilise both network and non network solutions and over time will assist with optimising capital investment. Ergon will also work with ENERGEX and the Queensland Government to provide advice and input into national reviews and reforms relating to reliability and security standards appropriate for Queensland. Ergon Energy will develop a property strategy that is cost effective and fits within the allowance provided under the regulatory determination. Ergon Energy is to keep shareholding ministers informed throughout the process. Ergon Energy will consult shareholding Ministers for any agreements that are sought to be established in support of the long term energy supply solution for North West Queensland and the broader roll out of the National Broadband Network beyond the first and second release sites, irrespective of how these arrangements are captured under the Investment Guidelines for Government Owned Corporations. Ergon Energy will only consider involvement in unregulated projects and initiatives outside the core business focus when there is sufficient commercial merit and a clear benefit to the distribution business. Ergon Energy will enthusiastically pursue joint workings initiatives with Energex Limited and will work actively with shareholders in identifying, investigation and implementing initiatives and reforms where agreed. Ergon Energy will manage the risk associated with the implementation of the National Energy Customer Framework. Ergon Energy will undertake negotiations leading up to the expiry of the current Ergon Energy Union Collective Agreement in October 2011 consistent with relevant legislation, Government Policies and the Ergon Energy Employment and Industrial Relations Plan. The negotiations will need to provide an outcome which is acceptable to Ergon Energy and the State. Ergon Energy s business will be managed in a prudential manner in accordance with its commercial charter to ensure business performance meets expectations and the returns on the Government s investment are maximised. Ergon Energy will exercise continued diligence in the attainment of operational efficiencies as detailed in the Mid Year Review outcomes letter of 9 December 2008, generating EBIT improvements of $21 million from 2011/12 ongoing. Ergon Energy will only hold corporate entertainment and hospitality activities where there is a clear benefit for Ergon Energy and all activities will be in accordance with approved guidelines. 15 Sections Table 2.1 Sections Table 2.1 Section 1.2 Table 2.1 Table 2.2 Section 1.5 Table 2.1 Section 3.5 Section Section 3.5 Section Section 3.5 Section 1.5 Section 2.5 & Attachment 2 Sections Table 2.1 & Table 2.2 Section Section 1.5 Section 3.6

16 2. MANDATORY MATTERS NOTE: The financial measures in section 2.1 of this SCI were revised in December 2011 to reflect an updated asset valuation. These revisions were agreed by shareholding Ministers and are presented here. 2.1 FINANCIAL KEY PERFORMANCE INDICATORS Performance Targets QUARTER 2011/12 SEP DEC MAR JUN PERFORMANCE TARGETS 2009/10 ACTUAL 2010/11 BUDGET 2010/11 EST ACTUAL 2011/12 BUDGET EBITDA ($M) Group excluding EEQ EEQ EBIT ($M) Consolidated NPAT ($M) Consolidated Return on Assets (%) Consolidated 5.7% 8.2% 8.3% 7.0% Regulated 6.5% 9.0% 9.0% 7.7% Non Regulated 41.5% 26.8% 22.2% 10.0% Group excluding EEQ 5.4% 8.2% 8.0% 6.8% Return on Equity (%) Consolidated 6.4% 11.1% 11.3% 8.5% NOTE: On 19 May 2011 the Australian Competition Tribunal (ACT), in response to an application made by Ergon Energy, Energex and ETSA Utilities, decided that the level of regulated revenue should be higher as a result of the value for gamma of 0.25 being applied to the current distribution determination period. For the 2011/12 year this change in gamma would result in the Ergon Energy recovering additional revenue of $40.9 million. However, in accordance with the direction received from shareholding Ministers under section 108(4) of the Government Owned Corporations Act 1993, on 30 May 2011, Ergon Energy will not seek to recover this additional revenue and the financial information contained in this SCI excludes the additional regulated revenue that would have resulted from the implementation of the ACT decision. The shareholding Ministers have indicated that they accept the lower rate of return in 2011/12 to the State as a result of the direction due to the benefits that will flow to electricity customers. 16

17 Performance Indicators QUARTER 2011/12 SEP DEC MAR JUN PERFORMANCE INDICATORS Cost Recovery Ratio 2009/10 ACTUAL 2010/11 BUDGET 2010/11 EST ACTUAL 2011/12 BUDGET Consolidated Operating Sales Margin (%) 22.9% 26.8% 29.4% 27.3% Consolidated 21.2% 28.8% 29.6% 26.7% 3.48% 3.38% 3.42% 3.41% EEQ 3.06% 2.66% 4.14% 3.42% Profit Margin (%) 8.5% 11.7% 13.5% 10.8% Consolidated 7.9% 12.8% 13.9% 11.2% Gearing Ratio (%) (including reserves) 57.4% 58.8% 58.1% 59.1% Consolidated 59.8% 61.2% 57.7% 59.1% Debt to Regulated Asset Base (RAB) (%) 48.5% 52.6% 52.6% 53.9% Consolidated 55.5% 53.8% 53.6% 53.9% Economic Profit Consolidated Current Ratio (times) Consolidated Quick Ratio Consolidated Interest Cover (EBIT Times) Consolidated Interest Cover (EBITDA Times) Consolidated Funds from Operation (FFO) interest cover (times) Consolidated Fixed Asset Turnover Consolidated Capital Ratio Consolidated

18 2.2 NON-FINANCIAL KEY PERFORMANCE INDICATORS QUARTER 2011/12 PERFORMANCE INDICATORS 2009/10 ACTUAL SEP DEC MAR JUN SUPPLY RELIABILITY /11 BUDGET 2010/11 EST ACTUAL 2011/12 BUDGET Urban SAIDI Short Rural SAIDI Long Rural SAIDI Urban SAIFI Short Rural SAIFI Long Rural SAIFI GUARANTEED SERVICE LEVELS GSL Incidents Reliability Number of Claims Accepted & Paid 42 6,423 1,404 1,433 $3,607 $33,946 $44,766 $66,661 GSL Incidents Reliability Amount Paid ($) $3,360 $667,880 $146,058 $148, GSL Incidents Other Number of Claims Accepted & Paid ,097 2,904 2,961 $39,682 $24,942 $24,025 $41,985 GSL Incidents Other Amount Paid ($) $43,870 $796,793 $128,072 $130,635 OPERATIONAL PERFORMANCE Opex per Route Kilometre n/a 2,410 2,380 2,331 24% 29% 34% 39% Actual Opex with Regulatory Allowance (%) 3a n/a n/a 20% 39% 18% 22% 26% 30% Actual Capex with Regulatory Allowance (%) 3a n/a n/a 14% 30% 0.78% 0.78% 0.78% 0.78% Network Maintenance Costs/RAB n/a 3.2% 3.51% 3.11% ENVIRONMENT Environment EPA breaches (number of Class 1) SAFETY AIFR Employees CCFR Employees n/a LTIFR Employees LTIFR Contractors PEOPLE 5 Staff Turnover (annualised) 7.3% n/a 5.62% n/a Net FTE Staff Numbers 4, n/a 4, n/a FOR CAPITAL PROJECTS > $75M (REGULATED) & > $60M (UNREGULATED) Cost Performance Index Ubinet n/a Scheduled Performance Index Ubinet n/a On time OTHER Timely compliance with government & shareholder data submission & reporting requirements 100% 100% 100% 100% 18

19 Notes to Table 2.2: 1. The SAIDI and SAIFI targets are the Minimum Service Standards as set in the QCA final decision of April The 2010/11 estimated actuals are based on data to the end of March The variance between 2009/10 year figures and the 2010/11 year figures is due to changes in the legislation governing Guaranteed Service Levels. Prior to 1 July 2010 most GSLs were only paid if a customer raised a (verified) claim against Ergon Energy. The GSL forecasts are extrapolated from expected GSL payments in 2010/11 with an allowance for customer growth over the period. The difference between the 2010/11 budget and estimated actuals is due to increased scrutiny of potential GSL failures and operational improvements associated with business functions that may attract a GSL failure. 3. The opex and capex numbers are for standard control services only and are drawn from the regulated accounts. The 2010/11 figures are based on data up to the end of March The Regulated Asset Base (RAB) has not been adjusted and therefore is the same as set out in the current AER Distribution Determination. 3a) These measures are calculated on a cumulative basis over the whole of the current AER distribution determination period to 2014/15. Ergon Energy is committed to managing its opex and capex expenditure during this period within the parameters of the AER s final determination. 4. CCFR is the number of accepted employee compensation claims per 100 employees. CCFR= (Compensable Claims x 100)/ (Total Personnel) 5. Ergon Energy does not forecast these measures, so no targets are provided. 19

20 2.3 ASSUMPTIONS ASSUMPTIONS Economic Indices: 2009/10 ACTUAL 2010/11 BUDGET 2010/11 EST ACTUAL 2011/12 BUDGET Consumer Price Index (CPI) % 2.52% 2.60% 2.75% Wages Growth 3.5% % % + 1 4% Long Term Interest Rates 6.30% 7.48% 7.34% 7.30% Dividend Payout Ratio 2 80% 80% 80% 80% Distribution Regulated Electricity Maximum Demand (MW) 3 2,575 2,778 2,349 2,826 Number of Customers 679, , , ,983 Tariff Escalation % 13.83% 13.29% 5.83% Load Growth % 2.73% 8.78% 20.31% Notes to Table 2.3: 1) CPI actual is from the Australian Bureau of Statistics. The 2011/12 figure is from the RBA Statement of Monetary Policy released in February ) The dividend is calculated as 80% of consolidated profit after tax adjusted for unrealised net movement from the revaluation of financial instruments. 3) These maximum demands are for the Ergon Total as forecast and delivered to Powerlink Planning each year and as submitted to the AER. The forecast is built up from linear regression analysis of historic Transmission Connection Point (TCP) recorded seasonal peak demands with adjustments of forward trends by inclusion of future proposals of addition large loads (outside of historic trends), both increases and decreases. It is the diversified summation of Ergon TCP with any Transmission Network Connection Point (TNCP) sites (e.g. QR, Burton Downs) that were TCPs prior to Mt Isa is not included, and embedded generation is not included. 4) These figures reflect the change in prices from a customer perspective and are the actual and expected changes in the QCA Benchmark Retail Cost Index. 5) Load Growth is defined as the percentage change in the maximum demand. 20

21 2.4 COMMUNITY SERVICE OBLIGATIONS Legislation allows for GOCs to undertake Community Service Obligations (CSOs) where the Government requires them to provide a service or undertake an activity which would not be provided or undertaken on a commercial basis. Ergon Energy provides two CSOs as follows: 1. Tariffs applying to non market customers are set by the Queensland Competition Authority (QCA) under a delegation from the Minister for Energy and Water Utilities under the Electricity Act (1994) and are uniform throughout the state for a given type of customer. This gives rise to CSO payments in three ways: The Queensland Government has committed to a Uniform Tariff Policy that provides for parity of pricing for all non market electricity consumers, regardless of their geographic location in the State. For customers outside of the south east corner of the state, the cost of supply of electricity generally exceeds the price paid under the uniform tariff arrangement; More remote customers that are connected to the National Electricity Market require proportionally more transmission and distribution infrastructure to supply them and therefore incur higher network use of system charges than the state wide average charges allowed for in the standard tariffs; and Isolated customers must be provided electricity from isolated networks, with the largest isolated system being the Mt Isa Cloncurry system, where the underlying cost of supplying electricity is generally significantly greater than the price paid under the uniform tariff arrangement. To compensate for these effects, the Queensland Government pays a CSO to Ergon Energy Queensland. The actual CSO paid can vary materially from the CSO forecast due to changes in the forecast assumptions such as customer load, customer numbers, retail tariff prices, network tariff prices, and wholesale electricity prices. As at March 2011: The CSO estimate for 2010/11 is expected to be around $390 million. This is a substantial increase compared to 2009/10 (of approximately $140 million). The predominate reason for the increase is the commencement of the distribution regulatory determination, which increased network charges to Ergon Energy Queensland s non market customers. Secondary drivers are the introduction of the federal government s enhanced Renewable Energy Target (RET) and increases to EEQ s Cost to Serve and Net Retail Margin allowances; and The CSO forecast for 2011/12 is currently expected to be in the vicinity of $410 million, although the actual CSO could be higher as not all factors can be quantified at this stage. As the Deed which currently governs this CSO arrangement expires on 30 June 2012, a review is currently being undertaken to identify the terms of replacement arrangements. 2. Pensioners are entitled as per Government policy to a rebate on their electricity bills of $0.57 per day (exclusive of GST) which is expected to total approximately $33 million in 2011/12. The rebate scheme is administered by Ergon Energy as a CSO and is funded by the Department of Community Services and Housing. Ergon Energy is committed to working with the government to minimise the cost to government arising from CSO payments within the agreed risk parameters while achieving the best outcomes for our customers and shareholders. The initiatives to reduce the CSO payments are medium to long term focused strategies. 21

22 2.5 EMPLOYMENT AND INDUSTRIAL RELATIONS (E&IR) PLAN An Employment and Industrial Relations Plan meeting the requirements of Section 149 of the GOC Act and the Guidelines for the Development of Employment and Industrial Relations Plans in Government Owned Corporations (E&IR Plan Guidelines) is provided to shareholding Ministers as Attachment 2 to this SCI. The remuneration arrangements for Directors, Chief Executive Officer and all senior executives of Ergon Energy in line with the E&IR Plan Guidelines are also detailed in the Employment and Industrial Relations Plan provided as Attachment 2 to this SCI. 22

23 3. ADDITIONAL MATTERS 3.1 FINANCIALS GROUP NOTE: The financial tables in section and section of this SCI were revised in December 2011 to reflect an updated asset valuation. These revisions were agreed by shareholding Ministers and are presented here. Quarter 2011/12 Statement of Comprehensive Income Actual SCI Est. Actual Budget Sept Dec Mar Jun Ergon Energy Group 2009/ / / /12 $'000s $'000s $'000s $'000s $'000s $'000s $'000s $'000s ENERGY RELATED REVENUE 371, , , ,865 Energy Sales 1,461,486 1,728,380 1,512,483 1,612, Unbilled Energy Sales 12,455 5,945 29, Guarantee Deficiencies , , ,308 88,591 CSO Revenue 251, , , , Trading Contract Revenue 99, , Renewable Energy Revenue 107 6, Mark to Market Revenue - 8, ,710-1,330 1,897 1,555 1,495 Meter Cards Revenue 5,423 5,948 5,990 6,278 84,342 94,975 98,937 86,044 DUOS 172, , , ,298 (2,706) (3,915) (4,535) (4,774) Solar Bonus ,930 2,888 2,888 3,013 2,874 Diesel Fuel Rebate 12,058 12,450 12,079 11, Mark to Market Net Sales , , , , ,191 TOTAL ENERGY RELATED REVENUE 2,007,507 2,289,893 2,304,054 2,390,313 COST OF SALES 105, , ,676 83,880 Energy Purchases 370, , , , Energy Brokerage Fees Hedge Costs Realised 245, , Hedge Costs Unrealised ,585 22,179 28,241 24,402 Certificate Compliance Expenses 27,674 5,487 42,400 94, Renewable Energy Expense , Contestable Charges Recoverable Inter-Company Contestable Charges Recoverable ,375 74,803 77,365 77,877 Transmission Charges 234, , , , Market Charges 3,395 2,883 1,737 3, Ancillary Charges 3,594 3,393 1,660 3, Inter-Company Meter Charges Non-Recoverable Metering Charges Non-Recoverable - 2, Tariff Rebate 2,477 2,005 2,351 2,702 4,643 4,197 2,471 1,045 Embedded Energy 16,194-10,230 12,356 8,814 9,064 10,134 10,188 Isolated Energy 24,555 52,034 27,665 38, Inter-Company Compensation Retail , , , ,734 TOTAL COST OF SALES 925, , , , , , , ,457 ELECTRICITY GROSS MARGIN 1,081,563 1,372,757 1,390,493 1,510,726 OTHER PRODUCT REVENUE 22,892 22,064 17,630 23,650 Sales Revenue 98,376 93, ,631 86,237 1,328 1,343 1,322 1,343 Non-Energy Purchases 4,704 14,228 26,019 5,336 21,564 20,721 16,308 22,308 NON ENERGY RELATED GROSS MARGIN 93,672 79,373 93,612 80,901 MISCELLANEOUS REVENUE 3,451 4,186 3,002 4,823 Interest 10,575 20,345 13,731 15,462 1,799 1,862 1,895 1,948 Interest on MOFA 6,992-7,022 7, Government Grants - Solar cities 1,767 3,030 1,616 1, Government Grants - Demand Management 4,232 10,568 5,795 3, Rent 1, Bad Debts Recovered Gain on Sale of Assets 6,525 3,000 4,011 1,080 9,725 9,725 9,725 9,725 Capital Contributions - Cash 44, ,800 38,900 38,900 3,825 3,825 3,825 3,825 Capital Contributions - Non-Cash ,300 15,300 15,400 15,400 15,400 15,400 Capital Contributions - AARR Alignment ,600 61,600 4,374 4,374 4,374 4,378 Alternative Control 3,901 2,153 1,369 17, Inter-Company Alternative Control - 1, Corporate Service Fees 2,444 3,022 3,021 3, Discounts Received Insurance Claims SLA Revenue (110) 187 CAC Revenue , Other Revenue 6,801 6,168 5,823 3,968 42,267 42,833 42,172 43,418 TOTAL MISCELLANEOUS REVENUE 89, , , , , , , ,183 GROSS MARGIN & OTHER REVENUE 1,265,039 1,613,389 1,640,929 1,762, , , , ,193 Opex 500, , , ,199 Opex - Additional Items 179, , , ,193 TOTAL OPERATING EXPENSES 500, , , ,199 OTHER OPERATING EXPENDITURE 84,002 85,805 87,480 89,154 Depreciation 273, , , , Amortisation 12,847 3,949 8,797 1, Decrements Valuation ,478 86,282 87,956 89,629 TOTAL OTHER OPERATING EXPENDITURE 286, , , , , , , ,361 EARNINGS BEFORE INTEREST & TAXES (EB 477, , , ,772 76,271 80,795 82,990 85,188 Finance Charges 243, , , , Inter-Company Finance Charges , , ,324 89,173 EARNINGS BEFORE TAXES (EBT) 234, , , ,528 21,257 32,453 38,497 26,752 Income Tax 68, , , ,959 49,599 75,723 89,827 62,421 NET PROFIT AFTER TAXES (NPAT) 166, , , ,570 9,576 59, , ,725 OPENING RETAINED EARNINGS 412, , , ,188 59, , , ,146 TOTAL AVAILABLE FOR APPROPRIATION 578, , , , Inter-Company Dividends Provided For ,056 Dividends Provided For 137, , , , ,056 TOTAL DIVIDENDS 137, , , ,056 59, , ,725 65,090 CLOSING RETAINED EARNINGS 441, , , ,702 23