HYDRO TASMANIA ANNUAL REPORT 08 OUR BUSINESS

Statement of Corporate Intent

This statement has been prepared pursuant to section 41 of the Government Business Enterprises Act 1995. It is a summary of the Corporate Plan for the next five years which is provided to the Tasmanian Government.

Business overview

Hydro Tasmania is a Government Business Enterprise. Our principal purpose as defined in our Ministerial Charter is to undertake the following activities:

• the generation and trading of electricity
• the provision of consulting services and other services in hydropower, environment and water management, and associated services and technologies
• the conduct of scientific and commercial research in the above disciplines.

Hydro Tasmania’s principal objectives, as prescribed by the Government Business Enterprises Act 1995 are to perform its functions and exercise its powers so as to be a successful business by:

• operating in accordance with sound commercial practice and as efficiently as possible
• achieving a sustainable commercial rate of return that maximises value for the State in accordance with the Corporate Plan and having regard to the economic and social objectives of the State.

In undertaking the principal objectives it is necessary for the Corporation to consider the balance between:

• security and reliability of electricity supply
• the provision of support for development in the State of Tasmania (be it by direct investment or indirectly through the sale of energy at nationally competitive prices)
• our financial performance and associated returns to Government.

The reliability of energy supplies in the State of Tasmania is our highest priority. The effect of adopting reliability of energy supplies as our highest priority is that when Tasmania encounters very low inflows, such as those currently being experienced, financial returns achieved by the business will suffer.

	Hydro Tasmania owns 27 power stations and associated dams, canals and infrastructure on mainland Tasmania, at the following locations1:

In addition we own the King Island Huxley Hill Wind Farm and two diesel power stations on King and Flinders islands in Bass Strait. We have a Community Service Obligation, funded by the Tasmanian Government, to provide concessional arrangements to customers on the Bass Strait islands.

We hold further wind farm interests in Tasmania, South Australia, China and India as joint owner of Roaring 40s Pty Ltd with CLP Group.

Operating environment

Hydro Tasmania is currently in the midst of one of the most challenging periods in its operating history. Two years of very low inflows have extenuated our low storage situation further increasing the risk profile of the business. Storages continue to be carefully managed and the financial impacts are both immediate in terms of lower operating cash flow and prolonged due to the need to invest in rebuilding our storages to levels which reduce our operating risk profile over the five-year planning period.

Statistical analysis undertaken by Hydro Tasmania indicates that inflows into our dams have been significantly lower over the past

11 years than for any other period for which records exist. As a result, we have de-rated the expected inflows into our system to 9000 GWh per annum. The de-rating has had flow-on impacts on our revenue projections and the underlying financial strength of the business.

The change in Federal Government has seen the announcement of significant policies affecting the electricity market including:

• the proposed introduction of an emissions trading scheme by 2010
• a targeted 60 per cent reduction in Australia’s greenhouse gas emissions by 2050
• a 20 per cent mandatory renewable energy target by 2010.

Hydro Tasmania, as Australia’s largest producer of renewable energy, is well positioned to leverage from the opportunities created by these policy directions.

Hydro Tasmania’s market continues to change and is characterised by continued consolidation among market participants, increased levels of vertical and horizontal integration, and increased customer concern about climate change and strong positioning of leading industry players as ‘green’. We are monitoring these developments in the National Electricity Market, including the outcomes from the proposed sale or lease of the NSW electricity assets which represent the largest near-term competitive threat to the business. We are paying particular attention to the impact on our competitive position to ensure the business remains relevant and a key player in what is a rapidly consolidating market.

The State and Federal Governments have also announced significant initiatives aimed at improving the security of water supplies. As water management is a fundamental attribute of our business, we see substantial opportunity for the Corporation to play a key role in assisting with Tasmanian-based projects generated as a result of these announcements.