This Corporate Plan has been developed to balance the needs of today with the challenges and opportunities of the future.

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2 Contents 1. Executive summary Summary of financial and pricing forecasts Introduction Our customers An industry in transition Strategic goals Strategic initiatives Performance goals Business risks Conclusion About us We own, operate and maintain the network that delivers electricity to more than 280,000 households, businesses and organisations on mainland Tasmania. We also own, operate and maintain a telecommunication network to enable safe and efficient operation of the electricity system. We are a commercial business with an asset base valued at over $3 billion. We are owned by the State of Tasmania. Our shareholders have directed us to perform some non-commercial activities, primarily funding the grandfathered solar feed-in-tariff payment to eligible customers and inspecting private poles on behalf of the State until a longer-term solution is implemented. 2

3 1. Executive summary This Corporate Plan has been developed to balance the needs of today with the challenges and opportunities of the future. Key aspects of our plan for include: We are operating within an industry in transition whilst serving the needs of an existing customer base with a continuing requirement for access to a safe and reliable electricity supply at a reasonable cost Given this context, we must continue to run and transform our business to drive more efficient outcomes for our customers and owners To achieve this, our plan includes a number of continuing initiatives to fully realise the benefits of operating as one network business Our plan also introduces our changing role of the grid program, to ensure that we give necessary focus to considering and meeting the evolving needs of our customers, and creating a better tomorrow Our performance measures and targets have been set with a focus on improvement except for network reliability where we have listened to our customers feedback and are aiming to maintain average reliability at current levels rather than spending more. Our financial forecasts show that: Our net profits (and ant returns to our owners) are declining over the planning period due to lower forecast returns from our regulated services, higher interest costs to service debt and rising depreciation ing from our investment in short life assets. Our profitability outlook also reflects an underlying plateauing in demand for traditional network services in Tasmania Our distribution revenue proposal, together with our current transmission revenue allowance, s in lower or the same indicative average network charges for the majority of small business and residential customers. This continues the downward pressure on network charges from June 2017 onwards Underlying operating cash flows (EBITDA) are holding, reflecting our continued focus on achieving sustainable cost reductions Debt levels are forecast to peak at over $1.9 billion during the planning period. In the short term we are forecasting to borrow to fund increasing dividend payout ratios and meet our capital investment requirements Despite this, our balance sheet remains resilient. Our forecasts indicate we are able to service these increasing debt levels. We will need to seek additional financial accommodation as we will reach borrowing limits under our existing lending arrangements. 3

4 This Corporate Plan includes a number of initial steps required to position our business to successfully navigate the changes occurring within our industry. Our business had a strong track record of responding to similar challenges. Our business strategy for is summarised on our strategy on a page. 4

5 2. Summary of financial and pricing forecasts The table below presents the key items contained within our financial forecasts for the to planning period Performance measure LEOY Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) ($m) Profit after tax ($m) Returns to government ($m) Total revenue ($m) Operating expenditure ($m) Other operating expenses (Feed in tariff and non regulated services) ($m) Capital expenditure ($m) Total equity ($m) ,019 1,080 1,143 1,209 Total assets ($m) 3,212 3,317 3,410 3,494 3,565 3,631 Total debt ($m) 1,798 1,850 1,913 1,927 1,927 1,923 Key Financial Ratios Return on assets (%) 7.3% 6.8% 5.3% 5.1% 4.9% 4.8% Return on equity (%) 8.4% 9.7% 6.4% 5.6% 5.0% 4.6% Gearing ratio (%) 65.4% 65.3% 65.2% 64.1% 62.8% 61.4% Pre-tax interest cover Borrowings Increase (decrease) in borrowings (5.0) Closing borrowings 1, , , , , ,

6 Compared to last year s plan, our financial forecasts reflect changes to a range of inputs. These include updates to: the cost of capital - which is higher than that used for last year s plan but lower than that from recent regulatory decisions made interstate our capital expenditure forecast which has seen an increase to align with our distribution regulatory proposal, reflecting the planning and customer consultation work undertaken over the last year, together with finalisation of the Ajilis business transformation business case depreciation allowances and expenses - updated to reflect the increased proportion of short-life assets in the asset base, and consequent increase in depreciation costs operating expenditure we have refined the forecast opex profile including the timing of efficiency savings to align with our distribution regulatory proposal incentive payments - our revenue outlook is bolstered in the short term by incentive payments received in the transmission regulatory period and forecast in the distribution regulatory period from our strong operating and capital expenditure savings performance. This includes significant one-off merger savings, with the same scale of savings and incentive opportunities and payments not expected into the future Financing costs which reflect the higher level of gearing as a of shareholder portfolio adjustments. 6

7 A key focus for our customers is the outlook for network charges ing from our plans. Our proactive approach to driving cost savings means that the outlook is good news for our customer base. Our transmission revenue allowance puts continuing downward pressure on transmission network prices for all our customers, including major industrial customers and generators directly-connected to the transmission network, and our distribution network customers. For customers connected to our distribution network, our combined transmission and distribution networks costs presently make up over 50 per cent of the typical Tasmanian residential and small business customers electricity bill. Our distribution regulatory proposal, together with our current transmission revenue allowance, s in lower or the same indicative average network charges for the majority of small business and residential customers. This continues the downward pressure on network charges from June 2017 onwards. Figure 1: Indicative average annual total network charges (June 2017 $)* * Forecast is based upon our distribution regulatory proposal submitted on 31 January

8 3. Introduction Welcome to our Corporate Plan for At TasNetworks we are focussed on delivering power safely and reliably while embracing change driven by our customers. We are working hard to keep our costs and our prices as low as we sustainably can, through fully realising the benefits of our integrated network business, while delivering safe and reliable services. We are engaging our customers in developing our plans for the future. We are investing in our people, improving our business systems and maintaining the electricity network in good order to serve our customers. We have submitted our distribution regulatory proposal that will determine the distribution network revenue and pricing framework for 2017 to The draft decision is expected in September We have also commenced preparing the combined transmission and distribution revenue proposal that will determine network revenues for 2019 to Including customers and other stakeholders in the development of these proposals is vital to ensuring that they are robust and deliver value. With an eye to the future, we are starting a long-term transition to more cost-reflective network tariffs. The purpose of these changes is to provide customers with information and incentives to use the network more efficiently. This is a complex area, but one that has the potential to deliver savings for our customer base. Our changes will be introduced over a number of years to help customers with this transition. We are also developing a tariff trial with about 600 customers to support and inform these changes. Our customers have told us they want more choice when they connect to our network. We are now offering choice to some customers (relating to who designs and constructs their underground residential subdivision connection) and will be investigating offering similar choices to more customers for other connection types. To prepare our business for the changes that customers are driving we are developing trials and demonstrations of new technologies. These include battery storage integrated with solar generation, using electric vehicles in our fleet and trialling advanced meters and the communications systems required to support them. Our customers expect us to innovate and we are responding to this challenge. All this creates a vibrant business where our people are making customers central to all we do, and helping to create a better tomorrow. This plan continues our progression towards achieving our vision of being trusted by our customers to deliver today and create a better tomorrow. 8

9 4. Our customers We are committed to engaging with, informing and educating our customers about our activities and plans for the future. Our customer strategic goal is to understand our customers and make them central to all we do, with the ultimate aim of improving price and service outcomes whilst maintaining reliability levels. A number of large industrial and commercial customers are connected directly to our transmission network More than half of the energy delivered in the state is transmitted to these transmission customers. The balance of customers in the state are connected via our distribution network While directly-connected transmission customers use more energy, our distribution customers create more of the Tasmanian peak demand. Peak demand is a key cost driver for networks We connect a number of renewable generation sources to our network including hydro, wind and solar energy resources We serve a number of customers in the wholesale telecommunications market, both within and outside of the Electricity Supply Industry We also provide a number of services to our customers which are complementary to existing core competencies within our business 9

10 5. An industry in transition Our operating environment is undergoing fundamental changes and the pace of change is increasing. Technological changes are influencing how customers use our network and what they expect from us. Increased use of solar panels and battery technology will mean that many customers are able to generate and store electricity for the first time. Electric vehicles will provide new opportunities and also impose new demands on our network. The following diagram outlines some key drivers, emerging technologies and our current responses to these changes: The drivers of these changes can broadly be grouped into the following categories: 10

11 Regulatory climate Significant changes to the regulatory framework, including the Power of Choice 1 program continue to impact our business. Metering services for small customers will be open to competition from Tasmania is presently considering if the new arrangements and proposed timing will provide the best outcome for Tasmanian customers. New rules require networks to transition to charging our customers based on the efficient costs associated with providing electricity to them. We continue to work constructively with the Australian Energy Regulator (AER). Our recent transmission and distribution revenue proposals seek to reduce expenditure and provide stable or lower prices to our customers. The fact that our transmission proposal was accepted without material change is indicative of the approach and relationship we are building. Benchmarking is playing a major role in regulatory decisions, with a number of businesses interstate experiencing changes to expenditure allowances and revenues as a of their benchmarking performance. Recent appeal outcomes are likely to affect the future application of benchmarking to determining revenue allowances. At a high level, our transmission network is currently assessed as the most efficient in the NEM by the AER. Our distribution business does not benchmark as well, with the AER acknowledging that our performance is negatively influenced by Tasmanian network characteristics. Technological innovation Solar PV customer numbers continue to increase and we are starting to see batteries and electric vehicles interacting with our network. The decreasing cost of new technologies, including electricity storage methods (batteries) may make them economically viable and enhance customer uptake rates. Uptake of electric vehicles is also likely to increase as the technology improves and costs of electric vehicle ownership decrease. The network will increasingly be a platform for trade of energy services, provided to and from large and small load and generation sources. Customers increasingly expect access to real time data and customer-focused information and services in a digital age. 1 The AEMC s Power of Choice reforms aim to enable informed customer choices including by providing customers with better information about the cost of network services and customer energy usage patterns. The introduction of cost reflective network tariffs and advanced metering for small customers, provided by the competitive market, are part of these reforms. 11

12 Electricity prices TasNetworks (and its predecessor businesses) contributed to a stabilisation and reduction in network revenues, after a period of increases. Our recent transmission determination placed significant downward pressure on prices. Our distribution revenue proposal continues this trend. Network prices have not reduced to the same extent as network revenues, as many distribution network tariffs are linked to consumption. Allocating lower network revenue over a lower consumption base can dilute the effects of the lower network revenues. Electricity prices in Tasmania have stabilised in recent years after a period of significant increases. However, across the national electricity market, the costs of generation and renewable energy schemes are now starting to increase. Macroeconomic factors Economic growth in Tasmania is relatively modest and forecast to remain so for the next 5 years. Our larger customers remain exposed to low international commodity prices, competition from overseas, and changes to the Australian exchange rates. Population growth in Tasmania is forecast to remain at below average levels. Levels of new residential dwellings and new residential subdivision lots are forecast to remain at low levels. These factors contribute to a modest increase in forecast annual residential electricity sales for Increasing customer choice Many customers are exercising more choice as the ways they source and use energy become more and more diverse. The AEMC s Power of Choice reforms aim to enable informed customer choices including by providing customers with better information about the cost of network services and customer energy usage patterns. The introduction of cost reflective network tariffs and advanced metering for small customers, provided by the competitive market, are part of these reforms. The flow of electricity is no longer one way, with some consumers also generating electricity themselves ( prosumers ). As a, customers expect to be able to use the network in ways that suit them, and expect to pay only based on what they need from the network. Customers expect us to be more innovative with new technology to find better energy solutions. We should not build traditional network assets (with very long technical lives), if technological advances provide more flexible, lower cost options. We must also ensure that the increasing two-way flows across our network do not compromise safety or reliability. The overall challenge for our business will be to achieve high levels of operational and investment efficiency while at the same time managing a more complex network. Many of these issues are already present in our network today; it is the scale and pace of change that is increasing. 12

13 In this changing customer environment, we will evolve our service offering to provide complementary network, telecommunications and related services in emerging markets, such as competitive metering. This will support sustainable and predictable pricing in our core network services. At present, the majority of our customers use our network in order to receive electricity supply from large generators. In the future, the role of the network will evolve into one that acts as a means to transport electricity between generators and energy users of varying sizes located across the entire state. The vital role our network plays in integrating new energy sources and providing other important and valued services to our customers is illustrated in the diagram to the right. It is likely that our role in the future will not be what it is today. We are equally sure that our electricity network will continue to have a central role in meeting our customers energy needs in the future. The path ahead As we have outlined above, our industry is undergoing a significant period of transition. Navigating our business through this period will often require us to act quickly and to be agile; characteristics not normally associated with traditional energy networks. Our contribution to the Network Transformation Roadmap project being undertaken by the Energy Networks Association and CSIRO is part of our plan. Achievement of our strategic goals (as outlined in the next section of this plan) will ensure we position our business to make this transition successfully. 13

14 6. Strategic goals The vision of our business is to be trusted by our customers to deliver today and create a better tomorrow. Our vision: puts achieving customer trust at its heart recognises that we are an enabler of customer outcomes, today and in the future recognises that we are part of creating a better future: we can create customer value and value to Tasmania as a whole allows us to achieve customer trust in many different ways, through the safe and reliable provision of a range of services. Underpinning our vision statement, there are four pillars to our strategy: Our customers puts achieving customer trust at the centre of our strategy and our operations and includes delivering the services our customers value at the lowest sustainable price Our people means investing in our capability to deliver value to our customers, and enabling our people to keep safe One business is about operating our assets and business safely and effectively, whilst we continue to transform the way we work to improve customer outcomes and create business efficiencies Our owners is about efficiently operating our business to deliver sustainable returns for our shareholders This year have overtly added our owners as a fourth pillar to our strategy. This reflects feedback that there is a misconception in some quarters that TasNetworks is not a commercial business, but rather an arm of government. While it is true that TasNetworks is owned by the State of Tasmania, we are a business that must deliver sustainable returns to our owners on commercial terms. This is a core pillar of our strategy. 14

15 7. Strategic initiatives To achieve our strategic goals there are a number of business-wide initiatives that we need to focus on. Successfully implementing these initiatives will help us to achieve these goals and will be monitored by our progress against our agreed performance measures and targets. These initiatives must be delivered in a time of change for our industry. They must be implemented quickly, efficiently and in an agile manner to ensure we are taking into consideration the changes that are occurring both externally and internally as our business continues to transform. The items outlined in this section are those that our business considers are our key initiatives to achieve our strategic goals. Our strategic initiatives for are: Initiative Zero harm program Voice of the customer program Framework for predictable and sustainable pricing Details Operating our business safely is our number one priority. Our Zero Harm policy sets the guiding principles for TasNetworks health, safety, environment and quality management. Our Zero Harm strategy outlines a number areas to be focussed upon including a focus on Zero Harm Leadership within the business and a number of Public Safety campaigns. The Voice of the Customer program and the associated initiatives will enable the successful achievement of the TasNetworks vision and ensure the provision of quality service outcomes for our customers. The Voice of the Customer program is the cornerstone of our customer service strategy. It ensures that TasNetworks takes the customer perspective and voice into consideration in our activities and decisions. It establishes a platform from which customer engagement initiatives, customer culture and satisfaction measurement will evolve and is a key input to service excellence improvement planning. Feedback from our customers tells us that they want lower network prices and clearer price paths, with less volatility in prices from year to year. The focus of this initiative is: the commencement of a small tariff trial (enabled by advanced meters); further engagement with our customers on our plans for network tariff reform; and commencing our preparation for our combined (Distribution and Transmission) revenue reset for the period commencing in

16 Initiative Culture and capability program Ajilis business transformation program Business excellence program Changing role of the grid program Enterprise agreement Details TasNetworks is building a high performance culture and high levels of employee engagement to support achievement of our business objectives and enable us to be sustainable. As leader behaviour drives culture, we are continuing to invest in the development of our leaders at all levels to build self-awareness and leadership capability, focusing on communication, teamwork, business improvement and change. We are also investing in increasing our organisational capability including developing a capability program and continuing to develop our skills in and embed our change management framework. Ajilis is a business transformation initiative that will change the way we work. The program will touch every part of the business. Ajilis will require us to look at the way we work, the processes we use, how we organise data and the way we use technology. Ajilis has two key benefits for TasNetworks: it will deliver an integrated platform an Enterprise Resource Planning (ERP) system to replace our unsupported, disparate and disjointed IT systems, while also delivering process efficiencies that will provide the foundation for the organisation s operations in the next 10 years. In particular Ajilis will create a TasNetworks way of working, remove duplication and simplify operations across the business, improve data quality and reporting and streamline business processes. Business excellence is our integrated approach to improvement. We are developing a business excellence culture and tools. We aim to enable our people to identify and drive improvement. Process improvement is a key productivity lever in achieving our efficiency targets and improving customer service levels. This program is being developed to ensure that we continue to meet the evolving needs of our customers; both now and into the future. The driver of this program is the anticipated changes to the way that our customers use our network including the uptake of new energy technologies. During we have made significant progress towards a single enterprise agreement for our business. Our focus for will be to implement the outcomes of a successful vote. 16

17 8. Performance goals Our performance measures and targets show our present assessment of progress against the achievement of our strategic goals. As we gain more information we will continue to assess our targets. We recognise that it may not always be appropriate to improve performance above target if there is not sufficient benefit to our customers. Zero harm Our targets for Zero Harm demonstrate our commitment to not only improve our current performance levels but also to reach our goal of no harm to our people, the public and minimising our impact on the environment. Performance measure Number of Life Safe observations 1,550 1,600 1,650 1,700 1,750 Percent Life Safe participation 21% 22% 23% 24% 25% Number of significant incidents Number of reportable incidents Percent leadership zero harm interactions Lost time injury frequency rate (12 month rolling) 100% 100% 100% 100% 100%

18 Customers Our goal is to understand our customers and make them central to all we do. We aim to increase customer satisfaction and deliver lowest sustainable prices. Performance measure Customer net promoter score Customer satisfaction 77% 79% 81% 83% 85% Customer complaints volume < 3,900 < 3,800 < 3,700 < 3,600 <3,500 Connections completed within standard or agreed timeframes 100% 100% 100% 100% 100% Call answering combined Fault/Service Centre * 78.7% In accordance with performance incentive scheme targets In accordance with performance incentive scheme targets In accordance with performance incentive scheme targets In accordance with performance incentive scheme targets * Call answering targets for the first year of the planning period are aligned with current AER service target performance incentive scheme levels. Future targets will be set to align with new AER service performance targets as they become applicable for the new regulatory period commencing in

19 People Our goal is enable our people to deliver value and stay safe. We aim to develop a constructive culture and achieve high levels of employee engagement and organisational capability. Performance measure Culture improvement over over over over over Employee engagement improvement over over over over over Capability improvement Establish measurement tools and baseline over over over over

20 One business Our goal is that we care for our assets, delivering safe and reliable network services while transforming our business and reducing our costs. We aim to sustain present network service performance. Just to keep costs at current levels in nominal terms requires us to find efficiencies. We also need to invest in improving our business. Network service Performance measure Outcomes under Service Target Performance Incentive Scheme (STPIS) No net penalties as measured by STPIS No net penalties as measured by STPIS No net penalties as measured by STPIS No net penalties as measured by STPIS No net penalties as measured by STPIS Transmission loss of supply event > 1.0 system minutes (measured for calendar years) Transmission loss of supply event > 0.1 system minutes (measured for calendar years) Distribution system average interruption duration index (SAIDI) Distribution system average interruption frequency index (SAIFI) 3 events 3 events 3 events 3 events 3 events 10 events 10 events 10 events 10 events 10 events 231minutes 231 minutes 231 minutes 231 minutes 231 minutes 1.90 events 1.90 events 1.90 events 1.90 events 1.90 events Note: Network service targets have been set to maintain average network performance at current levels based upon customer feedback. Future targets will be amended to align with new AER service performance targets as they become applicable for new regulatory periods. 20

21 Sustained cost reduction Performance measure Operating expenditure ($m)* Capital expenditure ($m) * - excluding feed in tariff and non-regulated services costs Program of work Performance measure Delivery of program of work > 90% of scope delivered > 91% of scope delivered > 92% of scope delivered > 93% of scope delivered > 94% of scope delivered 21

22 Our owners Our goal is to operate our business to deliver sustainable shareholder outcomes. We aim to provide an appropriate return on assets and equity, dividends to shareholders and a resilient balance sheet while maintaining our corporate reputation. Consistent with national competition principles, customers in Tasmania should not receive different network outcomes because of our Government ownership. To this end, our income is based on a benchmark entity, with debt levels and costs, and tax rates set independent of ownership. On the cost side, our interest costs reflect our gearing levels, and we make tax equivalent payments and guarantee fee payments to the State of Tasmania. Performance measure EBITDA ($m) Profit after tax ($m) Return on assets (%) 6.8% 5.3% 5.1% 4.9% 4.8% Return on equity (%) 9.7% 6.4% 5.6% 5.0% 4.6% Returns to Government ($m) Gearing ratio (%) 65.3% 65.2% 64.1% 62.8% 61.4% 22

23 9. Business risks The Board has approved and oversees the TasNetworks Risk Management Policy, Framework and Appetite Statement to ensure that management has developed and implemented a robust system of risk management and control. In accordance with the Risk Management Policy, we: prepare and deliver a plan for managing risk in accordance with our risk appetite, the expectations of our stakeholders and the law; integrate effective and appropriate risk management into all business and management activities and policies; make available the necessary resources for effectively managing risk; provide regular reports to the Board detailing material business risks and the effectiveness of associated risk management strategies; report key risks and associated management strategies to key stakeholders; and review key risks at regular intervals to ensure they remain relevant and additional risks are escalated to align with changing business circumstances. As owner and operator of a large electricity network and telecommunication business TasNetworks faces a number of key risks. Key risks at the time of publication are outlined in the following table. Risk Employee safety Public safety Alignment of strategy and culture Capabilities (breadth & depth) Enterprise Agreement Description Death or serious injury of TasNetworks employee or contractor ing from network operations Death or serious injury of a member of the public ing from network operations The organisational culture does not achieve the desired alignment with our strategic objectives The depth of capability required to deliver the strategic objectives is not maintained The Enterprise Agreement negotiations do not deliver outcomes that support the future direction of TasNetworks 23

24 Risk 2017 Distribution Determination Distribution Tariff Strategy Ajilis Widespread disruption to power supply Bushfire start Loss of major industrial customer Customer focus (change events) Metering rule changes Emergency management Description 2017 distribution determination does not deliver revenue allowances that reflect the proposal and support stakeholder expectations Distribution tariff strategy does not deliver sustainable and predictable pricing frameworks to customers Major transformation project significantly exceeds the agreed budget Widespread disruption to the power supply potentially leading to a system black condition or long-term rotational load shedding Major bushfire attributed to TasNetworks assets and/or work practices Major industrial customer ceases operations in Tasmania Change events are implemented and managed without a primary focus on the customer outcomes Metering contestability and impact on customer cost and service performance, and business profitability The ability to continue to provide mission critical services at an acceptable level during an emergency and recover to business as usual levels, or better, as soon as circumstances and resources allow 24

25 10. Conclusion This Corporate Plan outlines the steps required to position our business to successfully navigate the changes occurring within our industry. Our business has a strong track record of responding to similar challenges including: Being a leader in connecting large quantities of renewable generation to a relatively small network A history of technological innovation including developing dynamic line rating systems, system protection schemes and generator contingency schemes to extract full value from network and customer investments Constructively engaging with customers and regulators, proactively proposing savings targets, and continuing to adapt to a changing regulatory and customer environment which the AER s unprecedented acceptance of our transmission revenue proposal demonstrated A strong focus on looking after our customers and listening to and responding to their changing circumstances. Achievement of our strategic goals through implementing this plan will ensure we position our business to make this transition successfully and achieve our vision to be: trusted by our customers to deliver today and create a better tomorrow 25

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