Brendan Leshone, apprentice, Capital Solutions.

Cathy Micallef, Customer Service Team member.

Steve Perkatis, Team Leader, Customer Interaction Centre.

>how?

ARSBA/ GRI ARSBR guidelines

Economic performance ✓ ✓

• Electricity sold ✓ ✓

• Customer connections ✓ ✓

• Network reliability ✓ ✓

• Customer rebates and payment assistance ✓ ✓

• Subsidies and grants received ✓

• Customer complaints about network ✓ ✓

• Goods and services fromsuppliers and contractors ✓ ✓

• Suppliers paid on time ✓ ✓

• Wages and benefits ✓ ✓

• EBIT, before capital contributions ✓ ✓

• Net profit after tax ✓ ✓

• Dividends to shareholder ✓ ✓

• Interest on debt and dividend payments ✓ ✓

• Income tax equivalents ✓ ✓

AbbreviationsARSBA - Annual Reports (Statutory Bodies) Act 1984ARSBR - Annual Reports (Statutory Bodies) Regulation 2000GRI - Global Reporting Index

01>ECONOMIC PERFORMANCE

…by creating wealth for ourshareholder, which in turn contributesto the success of regional economiesand well-being of communities inwhich we operate.

In a highly competitiveelectricity market, customersexpect high levels of advice

and service. It is provided bydedicated account managers,

such as Joanna Williams ofSales and Marketing, who

deals with medium-sizebusiness customers.

Did we meet our challenges?Financial challenges were set out in our second Sustainability Report, Balancing considerations, 2001-2002.These challenges, and our performance against them, are listed below.

20>

INTE

GRA

L EN

ERG

Y A

NN

UA

L RE

PORT

Key challenge Status Remarks

Key

✓ challenge exceeded✓✓ challenge achieved✗ challenge not achieved0 ✓ ongoing challenge with targets met to date or positive progress shown0 ✗ ongoing challenge with targets not met to date

Improving our network operatingperformance, including increasingreliability of supply.

0 ✗ Network reliability (planned and unplanned interruptions to supply)was again disappointing at 155.1 minutes lost per customer (excludingmajor storms and bushfires), above our target of 133.7 minutes.

Continuing to build and maintain valuein our network.

0 ✓

Building up the accuracy andcompleteness of data about thenetwork and non-network assets thatwe own through the development of acomprehensive register for our networkand non-network assets.

0 ✓ The stock-take of non-network assets is continuing in line with theproject plan. Paintings and IT&T hardware completed. Furniture,fittings and office equipment progressing to schedule.

System assets are maintained on the Power Asset Database (PAD). Thisinformation will be linked to the asset register on delivery of the IAIMSproject.

Continuing to improve the integrity offinancial data across all business units.

0 ✓ Further developed provision of financial strategy, discipline and cashflow management for the organisation, and the accurate capture,control and reporting of financial performance to key stakeholders,including development of web-based financial budgeting andreporting.

Continuing to address the mass-marketchallenges of full retail contestability,including addressing the needs of ourcustomers.

0 ✓ Won significant numbers of non-franchise customers, scored continuedsuccess with cost-effective direct marketing campaigns, and securedexisting profitable customers onto contract.

Continued to deliver new differentiated green products acrossresidential and business segments.

Conducted an exhaustive research program to identify key customervalue drivers related to our products.

Introduced new bill payment plan options targeted at specific customersegments.

Spent a total of $118m on network capital programs, $17m belowtarget, but 10% more than in 2001-2002.

<21

INTEG

RAL EN

ERGY

AN

NU

AL REPO

RT

Integral Energy is an industry leader in seeking out and applying demandmanagement (DM) initiatives to itsgrowth-related capital planning process.The organisation convened and led theDemand Management Code of PracticeWorking Group, inaugurated in 1998,and has since taken a leadership role incontinuing to develop the existing Codein conjunction with key stakeholders.

Any proposals involving major expansionof the distribution network are carefullyconsidered through a value basedmanagement process that incorporatesthe following options:1 Whether the expansion is needed.2 If so, is the expansion

economically justified.3 Alternative strategies.

Evaluation includes assessment of therisk of increased demand on existinginfrastructure and calculation of anyexcess energy supply, that is, the energyat risk.

DM is investigated as an alternative tomajor network expansion in all cases;initiatives primarily involve working withcustomers to reduce or modify theirload profile via voluntary or controlledmechanisms. If the peak demand can besufficiently reduced, the major networkexpansion can often be deferred andsometimes avoided.

Our extensive DM program aims tomanage the growth of electricitydemand in selected ares in thefranchise. Key projects have enabledus to reduce energy consumption,better manage peak consumptionperiods, and reduce the impact ofnetwork charges on customers.

A major DM program commencedat Castle Hill, the first of its kind inAustralia. Under an agreement signedwith the NSW Sustainable EnergyDevelopment Authority (SEDA), IntegralEnergy will pay for demand reductionbased on performance.

The initial phase of the program involvesconsultation with major customers inthe Castle Hill commercial centre,managed by SEDA. The NSWIndependent Pricing and RegulatoryTribunal (IPART) has shown keen interest in this project as a case study for determining cost recovery for DM initiatives.

In the Parramatta CBD, a surveyconducted by SEDA under its AustralianGreenhouse Building Scheme was usedby Integral Energy to identify DMopportunities. Some were found leading to proposals to fund alternativestrategies to network augmentationor construction.

Requests for Proposal (RFPs) were alsoissued for the Liverpool and BlacktownCBDs, part of the process to engage thepublic in debate over solutions tospecific areas of constraint on thenetwork. Integral Energy is seekingsubmissions on alternatives to DMstrategies for these areas.

The organisation has recognised thatthe long-term success of its DM strategyrests in working with stakeholders.To ensure this success, Integral Energy is:• working closely with local councils to

introduce energy efficiencyrequirements as part of thedevelopment approval process;

• working with government bodiesand councils, such as SEDA, toencourage energy efficiency anddemand reducing initiatives

• Supporting regulation that meetsthe principles of DM;

• working within regulatoryrequirements in the investigationand implementation of DMinitiatives; and,

• working with the IPART on ways toadequately compensate distributorsfor capital and operating expenditureassociated with DM.

Economic performance

01>Beyond meeting the financialcommitments made to our shareholder,the NSW Government, Integral Energy’seconomic performance has a significantimpact on local and regional economieswithin and beyond the network franchise.

Case study

Customers• Sold 9,932 GWh of electricity, a 6.5% increase on 2001-2002.• Total customer connections were 808,767, a 2.4% increase from 2001-2002.• Network reliability (planned and unplanned interruptions to supply) was 155.1

minutes lost per customer (excluding storms), a 16% increase on 2001-2002and above our target of 125 minutes. Our target for 2003-2004 is 149 minuteslost per customer.

• Provided customers with almost $19m in rebates and payment assistance underthe Pensioner Rebates Scheme, Life Support Equipment Scheme and the EnergyAccounts Payment Assistance Scheme, a 14.5% increase from the previousyear. This money is reimbursed to us by the NSW Government.

• Received a total of 3,072 complaints about the operation of our network,which equates to around 3.8 complaints received for every 1000 customers, anincrease over last year due mainly to the impact of bushfires and severe storms.

Suppliers• Purchased around $385m of goods and services from 2,200 external suppliers

and contractors.• 94% of suppliers were paid on time.

Employees• Paid $126.6m in wages and benefits (including superannuation) to our

employees, an 8% increase from the $117.3m paid in 2001-2002. This wasdue to a range of factors, including an increased staff numbers, wage increasesand an increase in overtime.

Providers of capital• Earnings before interest and tax, before capital contributions, were $119.9m,

a 17.6% decrease from 2001-2002 but 15.4% above forecast. Our target for2003-2004 is $143.1m.

• Returned a net profit, after tax, of $43.0m, a 24% decrease from the previous year.

• Returned $43m in dividend to our shareholder.• Interest on debt and dividend payments was $85.3m, a 3.5% increase on

2001-2002.

Public sector• Income tax equivalents were $33.9m, a decrease on the $42.9m of equivalents

in 2001-2002.

22>

INTE

GRA

L EN

ERG

Y A

NN

UA

L RE

PORT

Performance Indicators

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

13,2

55

11,3

15

9,46

2

9,32

9

9,93

2

Electricity Sold (GWh)

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

137.7

123.7

136.3133.7

125

155.1

Target

Reliability

Minutes lost per customer99

117.

3

126.

6

2000

/01

2001

/02

2002

/03

Employees wages and benefits

$m

Good

Over the past four years, IntegralEnergy has significantly increasedinvestment in its network to improvethe reliability and safety of electricitysupply to customers. As a key generatorof income for the organisation, thenetwork is characterised by ageingassets attempting to deal withincreasing demand through growth,notably in residential areas, and higherdemand through appliance usage,particularly air-conditioning.

Integral Energy’s electricity supplynetwork serves over two million peoplein homes and businesses across 24,500square kilometres. With an estimatedvalue in excess of $2b, the networkis made up of more than 26,000substations, 315,000 power poles and175,000 streetlights, bound together byin excess of 33,000km of overhead andunderground mains.

Day-to-day responsibility for thedevelopment and operation of thenetwork rests with two business units.

Engineering Performance hasresponsibility for providing the checksand balances necessary to ensure theappropriate management of electricityassets. These include system operationsand development, contestable workauthorisations and performance review,and development of policies andstandards governing the development,maintenance and refurbishment of the network.

Asset Management, which employsmore than half of the organisation’sstaff, ensures that the organisation’selectrical assets are ‘fit for service’through transmission and distributionengineering, maintenance,construction, refurbishment andemergency response.

In July 2002, a new business unit,Capital Solutions, was formed inrecognition of the rising level ofinvestment in the network, and theneed to ensure delivery of the capitalprogram in the interests of increasedcustomer expectations and changingconsumption patterns.

An independent customer satisfactionsurvey across the franchise concludedthat while the majority of customerswere satisfied with current servicestandards, they fell below expectationsin certain areas. In response, the threebusiness units developed a basestrategy aimed at:• halting the deteriorating trend

in reliability;• addressing network performance in

outlying areas of the franchise;• managing and containing

customers’ load at risk;• managing and containing the

remaining life of assets; and,• focusing on preventive

maintenance procedures.

Reliability of supplyExtreme weather conditions – hot dryspells and bushfires – again made asignificant impact on network reliabilityfigures. The reliability target was set at125 minutes of supply lost percustomer, comprising 30 minutes percustomer for planned outages and95 minutes for unplanned outages.

We achieved a result of 35.3 minutesfor planned reliability, an encouragingresult, given the high levels ofmaintenance carried out on thenetwork throughout the year.

Excluding major storms, the unplannedreliability result of 119.8 minutes was26% above target. Overall reliability(planned and unplanned, excludingmajor storms) was 155.1 minutes,24% above target.

Three events in 2002-2003 made asignificant impact on the reliability result:• A high incidence of pole top fires

occurring across a large area. Theseincidents were a result of droughtconditions, which caused a build-upof dust and other airborne materialon cross-arms. When mixed withdrizzling rain, the conditions causedinsulation failures, contributing11.4 minutes.

• Unusually hot days caused overloadson the network, including 30January, which alone recordedinterruptions contributing 6.51minutes. Outages on days classifiedas 'hot' contributed 21 minutes.

• An equipment failure in SouthWollongong zone substation in Julythat resulted in major interruptionsto the Wollongong business district.This interruption affected 10,653customers and contributed 4.87minutes to SAIDI.

Bushfires also destroyed large sectionsof our network in November andDecember 2002. These fires sweptthrough wide parts of the Hills,Hawkesbury and Blue Mountains. Our field crews spent three weeksreconstructing our network in areassuch as Glenorie, where new polesand power lines replaced the charredremains of network assets.

<23

INTEG

RAL EN

ERGY

AN

NU

AL REPO

RT

Building value in the network

Steve Hollins, Electrical Fitter Mechanic, Penrith.

Steve Bucher and Bill Shorter, Electricity Workers, Transmission Substations, Blacktown.

01>

The reliability target for 2003-2004is 149 minutes (119 minutes percustomer unplanned, and 30 minutesplanned). The slightly higher targetreflects the long-term nature of thenetwork strategy, which aims to returnaverage reliability figures in 2004-2009to the same as those for 2000-2004.

To help strengthen our capacity toconduct network maintenance andrepair – while minimising the need forplanned outages – we have createdadditional live line crews. These crewsare able to carry out work on thenetwork without de-energising powerlines and affecting supply to customers.Crew members receive extensivetraining and are specially equipped to help carry out this sensitive work.Our newest crew was established inLithgow, bringing the total numberof crews to 15.

Growth in demandBeyond regional Sydney and the SouthCoast, our franchise area contains someof Australia’s fastest developing areaswhere electricity demand has beengrowing at 5% per year over the lastfour years.

The expansion of Sydney’s urbanboundaries is also posing challenges tothe way we deliver electricity. Newsuburbs such as Kellyville and Rouse Hillare two prime examples of areas whereIntegral Energy is investing significantlyto transform its network.

Previously, we supplied electricity tosemi-rural properties in these areas.We now need to upgrade thesenetworks to help meet the highersupply volumes and expectationsrequired by new residents moving into

areas such as these. In Kellyville andRouse Hill we have invested almost$2m on a range of projects which willimprove supply reliability to these areas.

In order to meet the demand of growthand rising customer expectations,Integral Energy has also managed anextensive network investment programover the last three years. In 2002-2003,there were key programs in thefollowing areas:• Finalised a $3.3m augmentation of

the Bow Bowing zone substation tostrengthen customer supply to theIngleburn and Bow Bowingresidential and industrial areas.

• Completion of a $4m enhancementof the Southern Highlands network,including the roll out of a new15km, 33,000-volt transmission linefrom Moss Vale to Robertson, andinstalling new transformers at FairfaxLane zone substation, Moss Vale.

• Commencement of theaugmentation of the NorthRichmond zone substation in orderto enhance the reliability ofelectricity supply to customersin the area.

• Work commenced on the $3.3maugmentation of Parramatta’sLennox zone substation, to helpbolster supply to the city’s CBD.

• Commenced a $3.9m augmentationof the capacity of the Glenmore Parkzone substation, includingtransmission line upgrades andinstallation of new substationtransformers.

• Began installing a fourth transformerwithin the Blacktown transmissionsubstation.

Future projectsAs well as meeting the growingdemands of new customers, IntegralEnergy is continuing a major capitalinvestment program for the network.This program is detailed in IntegralEnergy’s annual planning statement,Network 2013, and includes spendingin the following areas, beginning in2003-2004:• $23.4m to expand the East Liverpool

transmission substation, on top of$8.2m invested to build the newPrestons Zone Substation, whichwas opened in 2001.

• $21.7m to build the new WetherillPark transmission and zonesubstation.

• $3.2m to finalise the expansion ofNorth Richmond zone substation.

• $9.8m to establish the new Mamrezone substation, required to supplya new industrial development aswell as residential customers inthe Erskine Park area. This projectfollows nearly $5.4m set aside tostrengthen supply reliability inresidential areas such asGlenmore Park.

• $21.7m to build a new zonesubstation in the eastern section ofthe Parramatta CBD. This will helpour network to keep pace with thechanging face of the CBD, which isalso one of Sydney's most importantcommercial centres.

• $7.8m to strengthen supply to theSeven Hills industrial estate andsurrounding residential areas. This will be achieved throughthe establishment of a new zonesubstation within the Baulkham HillsTransmission Substation site.

24>

INTE

GRA

L EN

ERG

Y A

NN

UA

L RE

PORT

• $8m on rebuilding the Quarries zonesubstation at Greystanes to supplythe future residential and industrialdevelopment located on the formerBoral site.

• A $4.3m program to boost thecapacity of the Shellharbour zonesubstation to supply the newresidential release area of Shell Coveas well as the existing residentialareas of Shellharbour.

• A $40m redevelopment of theSpringhill transmission substation.This will ensure Wollongong and the Port Kembla industrial area have access to ongoing reliableelectricity supplies.

Major maintenance programs included:• replacement of transformers at

Yennora and Kenthurst;• Refurbishment of the 33kV feeder

between Windsor and Cattai zonesubstations, including the inspectionof nearly 200 poles and thereplacement of over 30 cross arms;

• completion of major environmentalworks on transformers located atthe Leabons Lane zone substation,Blacktown; and,

• accelerating the bulk changestreet lighting program, bringingmaintenance back to target, andensuring 18 new streetlight projectsdesigned to upgrade our lightingservices were completed.

Improved responsivenessIn December 2002, Integral Energyopened a new $1.3m depot at SouthWindsor. Completion of the centreplaces our field crews within 60minutes travel of possible work sites,strengthening our response to supplyinterruptions or emergencies.

We also commenced development oftwo other depots at key locations,Springhill, near Wollongong, andNarellan, in Sydney’s south-west. Both are expected to be operationalduring 2003-2004.

Integral Energy currently operates13 depots across its 24,500 squarekilometre franchise.

Network connectionsGrowth was reflected during the yearwith 4,788 applications for connectionto the system, including 1,483 sub-divisions (each with multiple units orland blocks); processing more than75,000 notifications of electrical orservice work by contractors; and,more than 15,000 subdivision andproject inspections.

The design and connection ofcontestable works is carried out by both external Accredited ServiceProviders (ASPs) operating at variouslevels of skill and knowledge, andinternal staff, governed by a detailedprocess encompassing engineeringstandards and safety. During the year,32 level 2 ASPs were suspended fromworking on the Integral Energy networkfor breaches of safety and workpractice requirements.

<25

INTEG

RAL EN

ERGY

AN

NU

AL REPO

RT

01>

Environmental initiativesA number of major changes weremade to environmental processesand procedures during the past year,including an assessment of how newpoles and padmount substations areinstalled in the network; updating ourenvironmental standards; soil erosionand sediment control training for over300 asset management staff; and,hazardous waste awareness training forthe drivers of vehicles that are licensedto carry such waste.

Our network also runs through largetracts of remote bushland that is proneto bushfire risk. To help providecustomers with added protectionagainst the risk of bushfire, webroadened our network inspectionregime to cover private customer lines.

A large number of our customers haveoverhead power connections runningover long distances, stretching fromtheir home to our network. Some ofthese lines may be affected by generalwear and tear or may have trees andshrubs growing into them – presentinga possible bushfire risk.

Integral Energy’s inspections will checkthat private power lines are in properworking order and have safe clearancesfrom nearby vegetation. If we spot aprivate line or power pole that has alikely defect or needs some attention,then we will inform our customers ofthe repair work required.

In addition to the ground-basedinspections, Integral Energy also usedhelicopters to gain a bird’s eye view ofits power lines running through variousparts of its franchise.

Vegetation managementStriking a balance betweenenvironmental concerns and networkneeds, Integral Energy operates a $12m vegetation managementprogram through specifically contractedfirms and its own staff with skills inhorticulture. Vegetation contact withoverhead powerlines is a commoncause of supply interruptions. To help maintain supply reliability, we have a comprehensive vegetationmanagement policy that is underpinnedby both Australian and industryhorticultural standards.

In a year-round activity, 12 vegetationcontrol contracts were managed to helprecover from significant backlogs in thisprogram over the past five years.Careful planning and cooperativeresponses by contractors helped achieveperformance within 99% of the settargets by year-end.

Further information on environmentalinitiatives is contained in theenvironment report on page 36.

Systems management programComputer-based systems underpin the operation and performance of thenetwork. The organisation establishedthe Integrated Asset InformationManagement System (IAIMS) project toevaluate existing business systems andprocesses, and assist in making optimaldecisions about upgrades to or newinvestments.

IAIMS has a long-term vision and, onsuccessful completion, it will ultimatelyprovide asset and works managers withaccess to best practice processes,systems and information for the

effective ongoing management ofthe organisation’s asset base.This, in turn, will:• provide improved reliability of supply

for our customers;• promote the safety of the

community and our staff;• improve our network performance;• comply with statutory and

community expectations; and,• provide our shareholder with

increased value.

The project started in 2001, witha review of the organisation’sGeographical Information System (GIS),a database showing the location of allnetwork assets. After documenting therequirements of a broad range of GISusers, and preparing a detailed solutiondesign, an external vendor wasappointed to manage the replacementof the system by April 2002. This datewas subsequently extended toNovember 2002 due mainly toadditional requirements identified bythe organisation. Notwithstanding thedelay, the project is running to budget.

The IAIMS team is also documentingimproved business processes within the Mincom Information ManagementSystem (MIMS) as a blueprint tosupport Engineering Performance andAsset Management in any designdecisions that may be required forfuture process re-engineering.

26>

INTE

GRA

L EN

ERG

Y A

NN

UA

L RE

PORT

Rakesh Sharma, Technologist, Asset Management.

Chris Tunchon, Office Facilities Coordinator, Commercial.

Regulatory ManagementIntegral Energy’s network revenue andnetwork pricing are regulated by theNSW Independent Pricing andRegulatory Tribunal (IPART), which istherefore a key stakeholder in ourfinancial performance.

IPART’s current Network Determinationwas made in 1999 and set the level ofannual revenues for all distributors fromFebruary 2000 to June 2004. Webelieve this Determination did not allowIntegral Energy to recover sufficientrevenues when set against currentlevels of capital expenditure.

Since 1999 there have been significantchanges in key factors affectingIntegral’s network business including:• high growth rates in Integral’s supply

area and increasing urbanconsolidation of formerly rural orsemi-rural areas;

• high growth in electricity demandespecially during peak periods; and,

• increasing ageing and deteriorationof network assets.

As a consequence, our capital andoperating expenditures are now muchgreater than those forecast in 1999.By the end of the current regulatoryperiod, we expect to spend nearly$165m more of distribution networkrelated capital than was allowed for inthe 1999 Determination. Operatingexpenditures, largely driven by changesin our operating environment –including new legislation – are forecastto be overspent by $135m.

In November, IPART released an IssuesPaper, which effectively commenced theprocess for determining distributors’

revenue requirements for the nextregulatory period, commencingJuly 2004.

Much of the focus of the organisationthis year has been to ensure we havethe right network investment analysis,strategies and arguments to develop aconsidered and realistic revenue andpricing proposal for the next regulatoryperiod.

Integral Energy lodged its firstsubmission to IPART in April 2003.Our proposal provides for significantlyincreased expenditures in the areasof asset investment for both growthand renewal and to improve networkperformance and service standards.Required average annual system-relatedcapital expenditure is estimated tobe $229m and forecast averageannual operating expenditure isapproximately $205m.

Our submission also foreshadowed theneed for tariff reform to improve pricesignals to customers, an issue driven bythe rapid uptake of air-conditioning bycustomers, particularly in WesternSydney. Air-conditioning can double thenetwork capacity requirements ofresidential and commercial customers.

In general, our current network tariffsdo not provide customers with the rightsignals and are not equitable. We areproposing to reform the structure ofthe standard domestic tariff and areinvestigating an increasing block tariff,which charges a premium for energyconsumption above a specifiedthreshold.

We recognise that other measures willalso be required to remove cross-subsidies between customers. Furtherareas for investigation include demandmanagement, and introducing newtariffs – such as controlled load tariffs– and tariffs designed to provideincentives for consumers with highpeak period consumption to reduce.

We have engaged with keystakeholders on the content of ourApril submission. As a result, a numberof questions have been raised related toour proposed expenditure, the tariffreforms and demand managementinitiatives we undertake.

We prepared a supplementarysubmission to IPART in August 2003,which included further analysis anddetail of our tariff reform proposals,historical and potential demandmanagement initiatives and options forregulatory incentives to encouragedemand management.

The Determination process will continueinto next year. A draft Determination byIPART is scheduled for December 2003and a final Determination is scheduledaround March 2004.

<27

INTEG

RAL EN

ERGY

AN

NU

AL REPO

RT

01>

28>

INTE

GRA

L EN

ERG

Y A

NN

UA

L RE

PORT

Major works in progressDescription Cost to date Cost Estimated Comments

2001-2002 2002-2003 Total (2yrs) overruns completion date

NORTH RICHMONDZS Upgrade $2,065,830 $1,714,304 $3,780,134 Nil September 2003 Works almost completed to

augment North RichmondZS to a 2 x 25MVA.

Power Factor $7,903,843 $10,200,000 $18,103,843 – Ongoing 78 x 11kV 5MVAr units havebeen installed and 56 unitscommissioned to addressissues with Integral Energy'spower factor as seen byTransgrid.

BOW BOWINGZS augment $1,460,532 $2,014,533 $3,475,065 – September 2003 Installation of equipment to

improve system capacity andreliability.

Albion Park ZS $659,374 $219,300 $878,674 – Completed Installation of equipmentDecember 2002 to improve reliability.

Quarries ZS Nil $1,533,355 $1,533,375 – May 2004 Major equipment purchased.

Kenny St ZS Nil $1,128,877 $1,128,877 – Completed Installation of 33kVAugmentation May 2003 switchboard to improve

reliability in Wollongong CBD.Part of restoration worksfollowing South Wollongong fire.

Glenmore $434,840 $1,029,665 $1,464,505 – December 2003 Required to meet increasing Park ZS load in the developingAugmentation Glenmore Park area.

Kenthurst ZS Nil $1,597,225 $1,597,225 – September 2003 New 132/33kV transformerAugmentation in service Associated works at

Kellyville ZS substantiallycomplete.

Blacktown TS $219,595 $1,377,630 $1,597,255 – December 2003 Installation of equipment toimprove fourth transformer system capacity and reliability.

South Coast $1,179,376 $827,591 $2,006,967 – Ongoing Replaced existing outdatedSCADA systems.Upgrades at 14 sites

33kV Circuit $584,870 $877,756 $1,462,626 – Ongoing Program to replace units, atBreaker various sites, which have beenReplacement identified as being at the endProgram of their useful life.

<29

INTEG

RAL EN

ERGY

AN

NU

AL REPO

RT

01>Maximising the contribution

of our Retail business

Since the introduction of Full RetailContestability among NSW residentialand small business customers in January2002, customer awareness increasedsignificantly, and by year-end, morethan 300,0000 electricity customers inNSW had moved to deregulated tariffs.Integral Energy continued tosuccessfully deliver against its keyobjective of maximising positivecontribution in the retail marketthrough targeted approaches tofranchise and out-of-franchisecustomers.

The year saw strong progress in theperformance of the residential andbusiness markets, driven by themovement of customers ontonegotiated agreements. Acquisitionand retention of profitable customersthrough the use of direct marketing,outbound telesales and door-to-doorsales continued throughout the year.

Integral Energy now has over 800,000business and residential customers andas a result of the success of marketingcampaigns, as well as though naturalgrowth in demand.

Key results include:• significant numbers of non-franchise

customers have been won by adedicated team of door-to-doorsales agents;

• scoring continued success with cost-effective direct marketingcampaigns, securing existingprofitable customers onto contract,while still offering savings tocustomers;

• delivery of new differentiated greenproducts across residential andbusiness segments;

• execution of an exhaustive researchprogram identifying the keycustomer value drivers related to ourproducts; and,

• introduction of new bill paymentplan options targeted at specificcustomer segments.

During the year, Retail processedwell over 100,000 contracts for bothretained and acquired customers. TheRetail team also successfully outsourceddata capture of contract informationand the deployment of two majorprojects designed to enhance both ourability to retain and win customers,and manage regulatory requirements.

Activity in the business segment wasparticularly rewarding, securingimpressive new business during theyear. A major focus of the businesssales team since the launch of FRC hasbeen building its ability to meet thedemands of customers with multiplesites and to developing strategies toleverage its strength in the market.

As a result of this concentrated effort,Integral Energy secured major contractswith multi-site customers that willcontinue to provide significant revenueover the coming years. These includeleading Australian business icons – BHPBilliton, Vinidex, Vodafone, Proudsjewellers, the Colorado retail group,State Parks of NSW and Lowesmenswear.

Door-to-door sales activity has been aparticular success during the last year,with hundreds of thousands ofcustomer contacts made in non-franchise areas of NSW, liftingawareness of the brand beyond thefranchise, and resulting in tens ofthousands of customers being signed tonegotiated contracts. Such a large-scaleoperation required a great deal ofbehind the scenes work to ensure thattraining, collateral, and scriptingprovided to sales agents fully compliedwith the relevant legislation andregulatory requirements.

Despite all of the activity undertaken tosupport this sales channel, there were asmall number of breaches of theMarketing Code of Conduct. Althoughthey accounted for less than 0.1% ofall customer contacts, these breaches

were dealt with seriously. Each wasthoroughly investigated and learningpoints gathered to ensure that thetraining and materials provided toagents were further enhanced.

A key benefit was the developmentof regular training updates to all salesagents, redesign of materials, andimprovements in scripting, all of whichresulted in Integral Energy exceedingthe basic requirements of the EnergyIndustry Marketing Code of Conduct.

Customer service and fulfilmentIntegral Energy’s retail operations aresupported by the customer servicegroup in the Commercial business.The group manages about 9 millioncontacts with customers each year,including more than 3 million in personand by phone.

Improvements in customer serviceDespite the challenge of full retailcontestability, monthly research amongcustomers showed a dramatic andsustained improvement in customerperceptions of service, leading to highstandards of customer loyalty.

Stretch targets on satisfaction andloyalty were on target in 2002-2003,with 56% of customers rating ourservice as very good or excellent. Also,84% of customers said that they wouldrecommend us to family or friends as aresult of their service experience withthe organisation. Where customers hadproblems with Integral Energy’s service,the target of resolving 90% of theseissues within 30 days was exceeded.

Working with the RegulatorIntegral Energy operates in anincreasingly complex regulatoryenvironment, which impactssubstantially on the retail operationthrough the prices it charges, the typeand standard of service provided andhow requirements on relating tocustomers.

Much of the retail focus has been oncompliance with the Marketing Code ofConduct. This has resulted in muchwork being undertaken to ensure thatsystems and training remain robust andthat the organisation continues tocomply with all elements of the code.

Confirmation of compliance wasprovided in an audit undertaken inDecember 2002 on behalf of the NSWIndependent Pricing and RegulatoryTribunal (IPART), where all systems,procedures and documentation wereidentified as satisfactory. In support ofregulatory commitments in respect ofthe code, presentations were providedto both IPART and the Energy andWater Ombudsman NSW (EWON),giving details on how the organisationmanages its code responsibilities witha focus on the door-to-door saleschannel.

IPART also regulates other aspects ofour retail business, in particular therevenues from, and pricing for,customers who are supplied underthe standard form customer supplycontract. The current Determinationis due to expire in June 2004.

Integral Energy believes there are anumber of limitations with the currentRetail Determination which need to beaddressed in any future regulatoryarrangements.

30>

INTE

GRA

L EN

ERG

Y A

NN

UA

L RE

PORT

Sharon Nikiforou, Sales Assistant, Sales and Marketing.

Mohammed Sheem Khan, Lineworker, Transmission, Seven Hills.

Current side constraints set by IPART onretail price increases prevent IntegralEnergy from achieving ‘target’ tariffsdetermined appropriate by IPART.The organisation’s view is that moreflexibility is required in this area if pricesare to reflect true costs. As competitionin the retail sector increases and morescope for customer choice emerges,price regulation should move to a morelight-handed approach.

Green energyReducing greenhouse gas emissionsis one the key challenges facing theenergy sector in general and theelectricity industry in particular. This isfurther highlighted by the number ofschemes arising both at a state andfederal level, with numerous obligationsto be met under each scheme.

Again Integral Energy met itsMandatory Renewable Energy Target(MRET) for the latest compliance year(2002). This was achieved via thepurchase of Renewable EnergyCertificates from a variety of sourcesincluding solar, wind and hydro energy,with total costs coming under budgetby approximately 10%. No RenewableEnergy Certificates were purchasedfrom wood waste generation sources.The organisation is also well positionedto meet its requirements under theMRET scheme for the 2003compliance year.

In July 2002, the organisation launchedits accredited Green Power products inthe residential market with growingnumbers of customers choosing to havebetween 20% and 100% of theirelectricity supply sourced from 100%renewable generation.

From 1 January, 2003 changes to theElectricity Supply Act enabled the NSWGreenhouse Gas Abatement scheme.This is a legislated scheme whereretailers and large users of electricitymust reduce their greenhouse gasemissions in line with benchmarktargets.

Integral Energy remains well placed tomeet its obligations through currentembedded generation contracts withthe Smithfield Energy Facility (co-generation) and the Appin and Towercollieries (waste coal seam methanegas), and expects to continue itsimpressive performance with respect togreenhouse gas emission abatement aswell as playing an active role in thesecondary market that is developingaround the scheme.

TradingThe year under review was challengingbut ultimately successful for Trading asit adjusted to the additional operationaland market risks associated with fullretail contestability and significantdisparity between spot marketliquidation and forward electricitycontract prices.

Trading continued to carry out its keyresponsibility of hedging long-termcustomer load already signed to IntegralEnergy while continuing to offercompetitive prices to the Sales andMarketing team, which contributed tosuccessful customer sales campaigns.

Trading was active in strategicallyrepositioning its energy portfolios toadjust to load forecasts and salescampaigns. Steps were also taken toobtain greater levels of detail to assist

with future analysis to identify strengthsand weaknesses within the portfolios.

As a strategic function, Tradingcontinued to monitor both the cyclicaland seasonal variations within theforward contract and spot markets.A number of opportunities were takento extract value from these markets,which provided Integral Energy witha competitive edge when quotingto larger customers.

Trading welcomed the return ofelectricity futures to the wholesaleenergy market, offered by both theAustralian Stock Exchange and SydneyFutures Exchange, together withinformation technology modificationsthat will allow Integral Energy to tradein these products. It is anticipated thatthe futures exchanges will benefit theorganisation by injecting greaterliquidity and a wider choice of hedgeproducts into the marketplace.

OutlookIn serving customers, the initiatives ofthe previous year will be consolidatedthrough a renewed focus on internaldisciplines and staff development, withthe aim of fulfilling targets for customerretention and acquisition.

There is no doubt that customer andcommunity expectations of energyproviders are increasing, challenging theorganisation to tailor products andservices to meet those expectations,while ensuring they are affordable forthe shareholder and customers.

<31

INTEG

RAL EN

ERGY

AN

NU

AL REPO

RT

01>

Building on two years of emphasis onestablishing a sound organisationalstructure that aligns with businessneeds, Integral Energy again drewfull focus on the range of resourcesneeded to support further growthof the business.

During 2002-2003, strong results weredelivered in the areas of financialmanagement, technology, and peopleprocesses and resources.

Financial managementIn further providing financial strategy,discipline and cash flow managementfor the organisation, and the accuratecapture, control and reporting offinancial performance to keystakeholders, the Finance unit:• Achieved an Australian first by

signing a landmark GST cooperativecompliance advance agreement withthe Australian Taxation Office. Theagreement is designed to delivergreater certainty, reduced costs andimproved administration in GSTdealings for both Integral Energyand the Australian Taxation Office.

• Supported the organisation’s 2004Electricity Network ReviewSubmission to the IPART byproviding key financial data.

• Developed web-based budgetingand reporting tools.

• Continued a rolling stock-take offixed assets.

• Implemented a scenario planningand decision-making matrixdesigned to optimise value createdfrom network investments, as wellas providing feedback to regulatoryand network strategy developmentprocesses.

• Integrated Infomet Pty. Limited intoIntegral Energy Australia.

• Following the sale of the natural gascustomer base and network assetsof Integral Energy Gas Pty. Limitedto ActewAGL, integrated remainingassets and liabilities into IntegralEnergy Australia.

Supporting our peopleThe ongoing success of ourorganisation depends on theestablishment of a workingenvironment that supports andrecognises individual and teamperformance. Integral Energy’s focuson people issues over the past twoyears has put in place strategies forrecruitment and retention of staff, thedevelopment of skill sets and careerplanning as well as learning programs.

Key human resources initiatives over thepast year included:• establishment of the Safety Group

within HR to further drive a cultureof safety throughout theorganisation;

• providing a broad range of trainingprograms for all staff;

• further refining policies andprocedures that guide our HRpractices;

• expanding graduate and cadetengineer programs;

• analysis of staff attitude surveyresults and taking a leading role inrecommending action on key issuesraised; and,

• ongoing efforts to apply commonskill sets to a range of field positionsthrough the Competency Project.

Full details are given in the peoplereport on page 51.

Information technology andtelecommunications (IT&T)High quality information technology isthe key to corporate growth, especiallyin the new competitive climate in whichIntegral Energy operates.

IT&T develops and maintains provensolutions to support the company’soverall business strategy. The unit alsorecommends, procures and supportstechnology and systems infrastructureto ensure the cost-effectiveachievement of corporate objectives.

The major focus over the past year hasbeen on developing and delivering theprojects identified in the IT&T StrategicPlan 2002-2005. The three majorthemes of the plan are cost constraint,risk management and businessalignment.

In delivering these corporaterequirements, IT&T also addressed somemajor infrastructure issues. A programof technical standardisation andconsolidation ensured ongoingoperational capacity and provided thefoundation for consistent, cost-effectivedelivery to meet Integral Energy’scurrent and future needs.

In the coming financial year, IT&T willcontinue working towards significantcost reductions in delivering essentialservices to the organisation. A majorproject in this area will be there-tendering for supply of outsourcedIT&T services, focusing oninfrastructure, communicationsand applications support.

The ongoing attention given to IT costshas gleaned savings that have enabledthe absorption of new work withoutany net increases in cost. In particular,the contract with the company’sprovider of outsourced services wasrenegotiated, achieving a saving of16% in support costs each year, whilstmaintaining the same levels of service.

32>

INTE

GRA

L EN

ERG

Y A

NN

UA

L RE

PORT

Ensuring support systems are in place

Shift to high performanceIT&T’s activities this year were designedto move the organisation towards theestablishment of high-performance,cost-effective support systems. This hasresulted in a number of significantachievements, including:• completion and full implementation

of a new centralised data storageenvironment, together with newmid-range computers to hostbusiness critical applications,providing better performance,reliability and reduction inmaintenance costs;

• completion of the first phase of theIT security project, providingenhanced security to the company’sdata communications network andinternet services;

• functionality improvements made tothe company’s billing system,automating several labour-intensiveprocesses related to customerconnections and disconnections,billing of out-of-franchise-areacustomers and support for late feecollections;

• upgrading of computer servers at10 regional depots to provide muchneeded performance improvements,increased reliability and greater datastorage capacity;

• upgrading and functionalityimprovements to key corporatesystems, including our enterpriseresource planning environment(Finance, Payroll, HR and Logistics),enterprise email and databasemanagement systems, HR reportingsystems and the corporate intranet;

• upgrading equipment at theHuntingwood Customer InteractionCentre to provide greater callhandling efficiency and reliability,particularly at times of peak trafficload; and,

• completion of infrastructure andservices to support the move to fullretail contestability (FRC), includingapplication and network design,architectural support, requirementsanalysis and solution design.

Future IT&T directionsIn 2003-2004, IT&T will continueworking towards the goals of itsStrategic Plan by:• ensuring cost constraint in

operations by going to the marketfor the supply of services; and,

• enabling the achievement ofbusiness goals by supporting projectinitiatives in the Retail and Networkbusinesses, including thedevelopment of enhanced customerquoting, pricing and customermanagement systems, improvedenergy trading and forecastingsystems, network asset managementand planning systems and businessreporting tools.

<33

INTEG

RAL EN

ERGY

AN

NU

AL REPO

RT

01>

Managing meter dataInfoMet, Integral Energy’s chief agentfor managing all meter data throughhandling systems and processes vital tooperating in a contestable environment,is accredited by NEMMCO as a meterdata provider for FRC meter datarequirements.

Early in the year, InfoMet wasderegistered as a company and is nowintegrated into a single meter datagroup within Engineering Performance.The change was achieved withoutdisruption to customers or staff.

InfoMet also conducted a trial ofAutomated Meter Reading technology,which has the ability to assist demandmanagement initiatives as it can provideimproved price signals to residential andsmall business customers.

Other key meter data programs included: • Introduction of 3-monthly billing

(previously two-monthly) withminimal disruption to customers or normal business processes.

• Strengthening InfoMet’s reputationin the contestable metering marketas a quality supplier of meteringservices.

• Significant improvement in meterreading accuracy through bettervalidation systems and greatermanagement focus. This results inreduced re-work by Field Operationsand Billing staff and reducescustomer complaints.

• Continued implementation andrefinement of FRC processes,although further improvements arerequired in order the fully meetcustomer and market expectations.

• Contained customer complaintswithin target, even with theintroduction of newly createdprocesses for FRC.

Overseeing positioningThe Regulatory business unit overseesIntegral Energy’s position in the areas ofregulatory management, stakeholdermanagement, reputation, corporatestrategy, legal and audit. This is adiverse portfolio of responsibilities,and by focusing on key initiatives,we have achieved success for theorganisation, including:• Maximising price and revenue

outcomes for the 1 July 2003 priceincrease for the Retail and Networkbusinesses.

• Effectively managing the 2004Network Determination projectthrough the development of a highquality, well supported submissionto IPART.

• Developing and implementing astakeholder management plan tominimise impact to Integral Energy’sreputation as a result of the Appinfire and an ICAC investigation.

• Developing a cohesive sponsorshipstrategy that utilises a transparentset of criteria for selectingsponsorships by aligning benefits tothe organisation’s values.

• Ongoing communication of plansand business activities to theCustomer Consultative Committeeto ensure effective and satisfactoryengagement of this important groupof stakeholders.

• Appointing the full complement ofpersonnel within the Audit andBusiness Performance team so thatthe organisation can ensure ongoingprocess improvements that align toour governance requirements.

• Expanding the organisation’sCorporate Environment Strategy,providing a comprehensiveframework to guide environmentalactivities for the organisation.

• Ongoing improvement of processesfor obtaining legal advice ensuringadequate access is achieved for allbusiness units and activities.

Property and securityAt the beginning of 2002, IntegralEnergy began to restructure its propertyportfolio to support operationalobjectives and ensure property assetsmatch our targeted cost structure.A program also commenced to disposeof surplus properties and there was asteady wind back on occupation ofleasehold properties, deliveringsustainable savings. In particular,the organisation has progressivelyrationalised its occupancy of an officebuilding in Coniston, near Wollongong.

At the same time, the organisationbegan to acquire sites for a new depotat Smeaton Grange, as well as a site fora new logistics facility in Glendenning.Construction started on a new depot atSpringhill, south of Wollongong, inJanuary 2003 on land adjacent to atransmission substation with expectedcompletion in September 2003. Thisfacility will replace a leased depot in Coniston.

Another depot was completed at SouthWindsor in December 2003 on surplusland adjacent to a substation. Work hascommenced to move the existing polestorage yard from Schofields – wherethe organisation owns 22 hectares ofpotential residential land – to rurallyzoned land next to our Penrith depot.

There were a number of smallerdisposals, including a site at Wiseman’sFerry and a site at Brownsville. Furthersites identified for possible disposalinclude Minto, Schofields and surplusland adjacent to our Hoxton Park depot.

34>

INTE

GRA

L EN

ERG

Y A

NN

UA

L RE

PORT

Ravi Ram, Electrical Fitter Mechanic, Penrith

Administration Officer Lyne Welzel and Account Manager Karen White, Meter Data Services.

Tom Johnson, Plant Operator, Penrith.

David Lean, Cable Jointer, Penrith.

The property group is engaged in avery busy program to acquire sitesfor substations and other electricalinfrastructure to support capitalinvestment plans, as well as a programto remediate sites including Kandos,Penrith, Ulladulla, and Shellharbourdepots, and a site at Springwood.

In late 2002, Integral Energy respondedto state and federal security initiatives,working with security agencies toestablish appropriate arrangements forimportant infrastructure. These includedextensive use of dedicated guards atcritical sites, random security checks,dog handlers and remote monitoring ofsites. These initiatives are in addition tomeasures taken in previous years whichsaw a dramatic drop in incidences ofbreak-ins and theft.

During the year, security riskassessments were completed on alltransmission, distribution and zonesubstations. This will be an ongoingproject and should be completed by theend of 2003-2004. The assessmentshelp identify where resources need tobe directed, and the current level andstandard of security.

Supply and logisticsSupply and Logistics providescommercial management of thesourcing, procurement, logistics anddisposal of all goods and servicesrequired by the organisation.

The group initiated a major fleetupdating program to support customerservice and safety objectives. Newspecifications were developed internallyfor specialised plant, resulting indelivery of new elevated workplatforms (EWPs) and lifter/borersmanufactured to industry leadingelectrical and design standards. In all,

we invested $15.4m in vehicles andplant during the year and realised$6.1m in disposal of surplus vehiclesand plant.

All contract arrangements for keymaterials services were reviewed,resulting in a contracting program aswell as an active tendering and paneldevelopment throughout the year.Major contracts were let in support ofcapital investment plans including arange of cable, transformers,switchgear, metering equipment, civilworks and poles. The group also playeda key role in re-negotiating a contractwith the outsourced IT&T supplier,which delivered sustainable,significant savings.

New disposal and stock controldisciplines were introduced, resulting in a high rate of identification and re-use or disposal of excess stockthroughout our depots. More than 300 surplus transformers from theHoxton Park depot were disposed ofunder this initiative, contributing to amajor clean up with the site as well asreturning the value of that stock toshareholders. The group establishednew scrap metal disposal collection and disposal contracts and beganmonthly stock reviews to ensure this momentum continues.

The branch plays a key role in internalreform as well as managing externalrelations with suppliers, introducingdisciplines for procurement anddisposal, and developing guidelinesand training for staff to promotecompliance with internal controls, suchas fraud prevention, environmentalprotection and safety objectives.

<35

INTEG

RAL EN

ERGY

AN

NU

AL REPO

RT

01>