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SHAREHOLDER AGREEMENT

ENDEAVOUR ENERGY

STATEMENT OF CORPORATE INTENT

Year Ending 30 June 2017

This Statement of Corporate Intent has been agreed between:

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~/4 ___ ""~ Rod Howard

A/Chief Executive Officer Endeavour Energy

·-- ------

The Honourable Gladys Berejiklian MP

Treasurer of New South Wales

7 --- - ... ? j ~-------.. -------- ---

Chairman Endeavour Energy

on behalf of the Board of Directors

--~~ Minister for Finance. Services and Property

.·~·. -. . : •. -.~.

Endeavour Energy

OBJECTIVES

Primary objectives for energy distributors under Energy Services Corporations Act 1995 are:

To be a successful business and, to this end:

operate at least as efficiently as any comparable businesses;

maximise the net worth of the State's investment in it;

exhibit a sense of soc1al responsibility by having regard to the interests of the community in which it operates.

To protect the environment by conducting its operations in compliance with the principles of ecologically sustainable development.

To exhibit a sense of responsibility towards regional development and decentralisation in the way in which it operates.

To operate efficient, safe and rel iable facilities for the distribution of electricity and other forms of energy.

To be an efficient and responsible supplier of electricity and other fo rms of energy and of services relating to the use and conservation of electricity and other forms ot energy.

Each of these principal objectives is of equal importance.

Endeavour Energy focuses on three key goals:

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Safety - We will protect ourselves , our colleagues, contractors and the community by improving our safety performance. Safety remains our number one priority.

Reliability - We will provide a network that delivers reliable electricity supply and quality service to our customers.

Sustainability- We will ensure our business is sustainable by making it efficient, affordable and competitive so that it can meet future challenges.

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Endeavour Energy

BUSINESS OVERVIEW- THE ENDEAVOUR ENERGY NETWORK

Essential Energy

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Nare1tal'le

Central • Po®n

rcgton

M~\'ale•

region

Ausgrid

• Endeavour Energy serves approximately 946.546 customers, or 2.3 million people, in households and businesses across a network area spann ing 24,800 square kilometres in Sydney's Greater West, the Blue Mountains, Southern Highlands, lllawarra and South Coast of NSW

• Endeavour Energy employs 2,053 Full Time Equivalent Employees over 17 locations

• Forecast FY1 G Regulated asset base of $6 .0 bi llion

• Forecast FY16 Revenue (Tota l sa les) $1 .1 bil lion

• Forecnst FY16 NPAT $148 million

Network statistics

Substations 24 sub-transmission Output 16,556 GWh 161 zone 31 ,900 distri bution

Line length, km 46 ,100 GWh/ '000 17.5 customers

Power poles 4~0.500 Employees/ '000 2.2 customers

Maximum 3.855 Mill/ Opexi customer $437 Demand

Revenue . NPAT. opex ilnd outru t are FY1ti ForecasT as per FY H SCI Assets ddta . custorn er and enlployl"e nui! •Det:; dS at IVlcucll 20 16 Employee nurn bers exclude agency staff IV1<1Xtmurll demand IS FY·J6 YTD

.·~·- ~ . : : . ·· ··~··

Endeavour Energy

BUSINESS OVERVIEW

OUR PURPOSE

To be of service to our communities by efficiently distributing electricity to our customers in a way that is safe, reliable and sustainable

OUR VALUES

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Safety excellence

Respect for people

Customer and Continuous commun~ty focus improvement

Act with Integrity

.·~·. •. Endeavour ~ z •• : : Energy

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BUSINESS AND REGULATORY ENVIRONMENT

Long term consumption trends

Electricity consumption across NSW has declined over the recent years due to a number of factors. Notwithstanding the take up of solar photovolta ic installations, the Australian Energy Market Operator (AEMO) forecasts a recovery in grid consumption in NSW in the short term and stable growth in the medium to long term. Endeavour Energy's output is predicted to grow steadily in FY17-25.

18,0 00

175(10

17.000

16.500

16.000

15 .500

1:> .000

14 .500

Endeavour Energy's annual output, GWh

16,506

1J ,1\ s

16, 556

17 1 1'7.356

16,071 16,29 6 16, 3 39 16,47 3 16,688 16,811 16,937 ' 21

UIJ.Ih.l IU/ 1 1 11111 1 2.' 1 ~ lJ./ 1-1 1-1 /1'• 1',/ 11• lu/1/ l //1}( I J::'/ 1 ~1 l'J/.lo / V/ 11 11/ ! l V / J{ 1 3/l•l 1.4/l ~•

Regulatory environment . . ~ctual Focecast

The Austral ian Energy Regulator (AER) employs economic benchmarking to assess network service providers' expenditure forecasts. Endeavour Energy currently benchmarks in the AER's opex efficiency frontier. The focus on continuous sustainable improvement to maintain a favourable position within the moving efficiency frontier remains one of Endeavour Energy's top priorities.

Long term partial lease In June 2015, legislation was enacted that al lows the NSW Government to lease 49 per cent of the State's electricity networks. It is expected that the transaction process to lease 50.4% of Endeavour Energy will commence in 2016.

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• • • • Endeavour • • • • •.· •• ~.· Energy

STRATEGIC DIRECTION

In the dynamic context of electricity industry transformation, Endeavour Energy is focussed on the following key priorities:

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Safety remains our number one priority

Customers are at the centre of our decisions

Network reliability is a key outcome for customers and remains an important focus

Significant efforts on sustainable efficiency programs to continue delivering benefits and reducing our operating costs

Exploring innovation opportunities to serve customers' diverse and evolving needs

Support of the NSW Government's policy initiative to lease 50.4% of Endeavour Energy to fund infrastructure investment within NSW

Successful EBA negotiation is key to establishing a more competitive workforce and cost base

Transformation of electricity networks

e 1- uture 0 Pre~.c-:-n t e Tra.J it iond l

l:.neruy p ro d uc t io n

Source: CSIRO and Energy Networks Association 201 5. Electricity Network Transformation fxoadmap. Interim Program Report.

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...... .. Endeavour • • • o.\ .· • Energy •••

STRATEGIC RESPONSE

Endeavour Energy's priorities are well set out and embedded in corporate strategies. Endeavour Energy has a set of strategic plans which outline key initiatives and focus areas for our business. A subset of the most important in itiatives is identified as priority actions to drive transformational change and realise targets set in the balanced scorecard. The priority actions are embedded in performance agreements for senior management and cascaded down to all senior staff.

, Strategic plan

' . . ,

People & Safety

Customers & Stakeholders

Asset management

Commercial

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! Purpose .. ! Key f.;cus areas, .... - " . - -- · ]

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-· ., - ; ·· , ..

To bring out the best in our people and keep Continue to rei nforce and cultivate them safe every day. safety culture , leadership performance I and staff engagement

To embed effective customer and stakeholder Improve customer serv1ce and engagement in our daily opemtions and place I customers' interests at the centre of everything we do.

To apply better practice asset management principles and deliver value for customers and appropriate returns for our shareholder. without compromising safety and reliabi lity.

To leverage commercial practices and actively pursue new opportunities to deliver sustainable long term value growth.

customer experience, increase customer and stakeholder engagement

Continue to improve asset management efficiency and effectiveness and prepare the network for the future

lnstitutionalise operational efficiency I and commercial excellence to provide

1 a competitive value proposition to

1 customers . ---- _J

··~·. • . . :

·· ··~· Endeavour Energy

FINANCIAL PERFORMANCE TARGETS

Endeavour Energy's financial performance targets* for FY17 and beyond are set out below.

The outcomes in the SCI reflect the focus of the organisation on achieving sustainable operating and capital expend itu re reductions.

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01 FY17 02 FY17 Q3 FY17 04 FY17

EBITDA $rn 183.3 168.0 174.8 170.3

Net Profit After Tax $m 40.9 29.6 36.1 31 .9

Dividend payout ratio (before %

additional dividends)*'

Total shareholder distributions"" $m

Return on Assets %

Return on Equity "'!(,

• Targets are based on tile coniinuation of tile current owners111p structure anti do not reflect tile proposed partial lease " Dividend payou t ratio is based on distributable NP.''>T and before additional dividends

FY17 FY18 FYi9

696.4 623.0 616.2

138.5 78.2 61 .8

70% 70% 70%

248.2 141 .2 126.7

6.26% 5.06% 4.80%

7.47% 4.18% 3.27%

*** Total shareholder distributions include d ividend~ as per NSW Treasury's Financial Oistri/)(J tion Policv for Government Businesses (TPP14-04), additiona l dividends . tax equivalent payments and Government Guarantee Fee (GGF)

...... .. Endeavour ~.;, .: : Energy

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DIVIDEND POLICY

NSW Treasury's Financial Distribution Policy for Government Businesses TPP14-04 (Distribution Policy) normally requires SOCs to pay an ordinary dividend equal to 70 per cent of net profit after tax.

The payment of a dividend calculated as a percentage of net profit after tax is constrained by a number of factors specified in the Distribution Policy. Dividends for FY16 will be provided on the basis of a dividend payout ratio target of 50% of the adjusted net profit after tax (NPAT). This variation from the Distribution Policy has been agreed with NSW Treasury acting on behalf of the shareholders.

Government has determined that, for the period FY15, FY16 and FY17, Endeavour Energy will pay additional dividend amounts above the dividend agreed to above, to fund the Government energy rebate program. In FY17, this additional amount is $40.1 million.

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Endeavour Energy

NON-FINANCIAL PERFORMANCE TARGETS

Endeavour Energy's non-financial performance targets are set to challenge and improve safety performance and maintain the re liability of the network

FY17 fY1e t- Y12

Safety - LT IFR 0.6 0.6" 0.6*

Network reliability- unplanned SAlOl (min) 85 85' 85'

Output (GWh) 16,071 16,296 16,339

Total network customer connections 967,850 985,921 1.004,254

*Targets are set each year based on improvements to prior year performance

G •"~·. •. Endeavour \• \.~.: Energy

REPORTING OBLIGATIONS

Endeavour Energy's reporting obligations throughout the year are summarised below:

Annual Report:

· consistent with Annual Reports (Statutory Bodies) Act 1984 and Regulation 2000

includes general purpose financial statements (in accordance with Australian Accounting Standards), State Owned Corporations Act 1989, the Public Finance and Audit Act 1983 and the Regulation 2010.

Half Yearly Report

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a report on the operations of the Corporation during that half year delivered one month after the end of the first six months of the financial year (Section 23 of the State Owned Corporations Act 1989)

contains summary financial statements, details of the corporate profile, strategic directions and performance highlights.

Quarterly Report

• includes detailed actual quarterly and year to date performance of the business, compmisons to SCI targets, and highlights significant issues.

• provided to NSW Treasury within ten working days of the BoarrJ meeting following quarter end at which the quarterly results are considered (extended to 20 working days for the quarter end which is also financial year end).

Other information to be provided:

• Projected financial statements requested by NSW Treasury via Treasury Onl ine Electronic System (TOES);

• Projected of financial distributions and tax equivalents requested by NSW Treasury (budget round fo recasts);

• Projected capital works program via CAPTOES;

• Reporting on capital projects as required via the Major Capital Projects Reporting System (MCPRS); and

• Submissions for Projects of State Significance;

• CEO wages policy certification of FY17 result provided one month prior to submission of annual report .

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Endeavour Energy

REPRESENTATION AND COMMITMENT STATEMENT

Endeavour Energy's Board makes the fo llowing commitment in relation to th1s Statement of Corporate Intent

The Board of Endeavour Energy confirms that:

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Performance targets within the FY1 7 SCI are based on management assumptions and 10 year financial projections as approved by tt1e Board;

The voting shareholders will be provided with financial and other information, including information on maJor capital expenditure projects, on a quarterly basis to assess the performance against commitments in th is SCI and to assess the va lue of the shareholders ' investment in the business;

Asset maintenance policies and processes are adequate anc1 appropriate to manage and control risks associated with physical assets;

All known 'key ri$ks' and 'major emerging contingent liabilities' which could materially impact the current and future results of Endeavour Energy have been disclosed to NSW Treasury;

Internal aud it and nsk management practices are cons istent with standards recommended for Australian Securities Exchange (ASX) listed companies and where appropriate, it has applied any additional requirements that are set out in TPP1 5-03 Internal Audit and Risk Management Policy for the NSW Policy Sector;

The Acting Chief Executive Officer has an employment contract and performance agreement. Performance under the employment contract is appraised annually with the next appraisal scheduled for September 201 6. The contract IS an open-ended contract;

Endeavour Energy adheres lo Commercial Policy Framework policies. as listed in State Owned Corporations. Applicable TPPs under the Commercial Policy Framework (as issued by NSWT as at November 201 5);

Endeavour Energy compl ies with NSW Treasury accounting circulars and policies applicable for SOCs, as listed in the State Owned Corpomtions Mandatory Accounting Policies - NSW Treasury Circulars and Treasury Policy Papers (as issued by NSWT as at November 2015);

Endeavour Energy has agreed to comply with the requirements of Premier's Memoranda M201 2-04 Application of NSW Public Sector Wages Policy 2011 to State Owned Corporations and further guidance contc:uned in the Treasurer's January 2014 letter;

Endeavour Energy will apply the principles of Premier's Memoranda M201 2-08 Application of Biofuels,

Endeavour Energy 11as agreed to comply with the requirements of Premier's Memoranda M2013-04 /mplementation guidelines for procurement of publicly funded construction services.

••• • : •• ._ ,.. Endeavour ..... ~.~ Energy