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2011/2012 Corporate plan

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I am pleased to submit our 2011/12 Corporate Plan - the fourth under the framework of Water Plan 2 - 2008-13.2011/12 is a year moving from strategy to action. We have invested heavily in strategic projects - MID 2030, Western Irrigation Futures and Southern Groundwater Futures. We expect these works to bear fruit in 2011/12 with the development of formal business cases and work planned to modernise our irrigation districts. We also expect to see substantial completion of our groundwater atlases across the state.

The plan has been prepared in a much improved water supply context. Most of our irrigation dams are effectively full and irrigation districts have operated at or near maximum allocations for the year.

While local conditions have been harsh at times with violent storms and flooding, the impact of the Global Financial Crisis has eased and the milk prices outlook, which still difficult in the short term, is more optimistic for future years. Vegetable prices vary significantly throughout any year but there have been periods of good prices which have benefited that part of our customer base.

Our power generation and urban water customers are also well placed. There have been massive increases in water availability for Western Water, while Gippsland Water and the power generators have their share of our storages largely full. All customer groups will be well placed for a good 2011/12 financial year.

We are currently finalising the Western Irrigation Futures strategy following detailed consultation with customers and stakeholders. We are developing new recycled water / metro water contracts for Werribee irrigators which will be complemented by new shandy rules improving both water quality and quantity available in dry years. We expect to have the business case for modernisation of the Werribee Irrigation District (channel lining, metering and automation) ready by the end of 2011 with decisions to follow.

While the current storage levels provide short term relief for Bacchus Marsh, no affordable water source has been identified should another extended dry period emerge. We continue to work with stakeholders on this issue, along with assessing options for infrastructure improvement.

Throughout 2010 and into 2011 we continued to work with government on the potential for a funding contribution for the MID 2030 project in the Macalister Irrigation District, Gippsland. While discussions are continuing, we are making provision for capital works over the next 3 years in the order of $14M. We believe this level of expenditure is appropriate; however, further customer consultation will be needed. We encourage government to consider investing in this important economic development opportunity.

We are completing what may be our last major headworks dam safety project at Melton Reservoir, upgrading the spillway.

We are noticing an increase in the level of emergent major works on our headworks assets with age and flood flows likely contributing factors. Major works are planned to start or be completed on the Yallourn Weir spillway, Melton Weir outlet and Lake Glenmaggie Main Southern Valve.

During 2010/11 we launched our Balanced Scorecard approach to the delivery of our strategic vision. We have established a strategy focusing on 5 strategic themes:

• SustainableWaterManagement;

• WorkingwithStakeholders;

• CustomerServiceExcellence;

• StrengtheningourBusiness;and

• LearningandGrowth.

Progress toward our vision is measured through objectives set against each of these themes, with improvement initiatives established and monitored on a regular basis. This has brought a strong alignment of action across the organisation which is outlined in this corporate plan.

I look forward to working in partnership with our customers, stakeholders and Government to bring the plan to fruition.

Jan GreigChairperson

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Foreword

Section 1 - Statement of corporate intent 5

1.1 Our business & activities 61.2 Our strategic direction 101.3 Performance measures 121.4 Reporting 15

Section 2 - Business plan 16

2.1 Major initiatives 172.2 Capital works program 232.3 Major capital works 242.4 Changes from 2010/11 corporate plan 25

Section 3 - Risk 26

3.1 Risk management 273.2 Strategic risks 283.3 Operational risks 303.4 Sensitivity analysis 31

Section 4 - Financial statements 33

4.1 Preface to financial statements 344.2 Operating statement 37 4.3 Income and expenditure statement 384.4 Financial statement reconciliation 394.5 Balance sheet 404.6 Statement of cash flow 414.7 Financial performance indicators 424.8 Quarterly operating statement 434.9 Quarterly balance sheet 444.10 Quarterly statement of cash flow 454.11 Quarterly performance indicators 46

Appendices 47

Appendix a: tariff schedule 47Appendix b: notes to tariff schedule 56Appendix c: indicative tariffs 2011-15 58

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Contents

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Section 1Statement of corporate intent1.1 Our business & activities 6

1.2 Our strategic direction 10

1.3 Performance measures 12

1.4 Reporting 15

Southern Rural Water (SRW) is the manager of rural water for southern Victoria. We deliver water to irrigators in our irrigation districts, we harvest bulk water for rural and urban use, and we licence and monitor extractions from most surface and groundwater systems south of the Great Divide.

We also licence the construction of farm dams and groundwater bores across our region.

Our business is structured around two operational divisions:

• WaterSupply–operatingtheMacalister,Werribeeand Bacchus Marsh Irrigation Districts, and seven major dams in the Werribee, Maribyrnong, Latrobe and Macalister basins;

• GroundwaterandRivers–licensingdiversionsfrom surface and groundwater, and the construction of bores and dams.

These operating businesses are supported by a range of corporate and technical functions, structured into three groups:

• Strategic&Technical–developinganddelivering strategic initiatives, as well as providing technical support to our operating businesses in engineering, environmental management and water resource management.

• PeopleandPerformance–supportinghumanresources, performance management, safety, information technology, information management, customer service, communications, and strategic planning.

• Finance–supportinganddeliveringfinancial management, risk management and regulatory compliance.

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1.1 Our business & activities

Hamilton

Bacchus Marsh Irrigation District

Werribee Irrigation District Macalister Irrigation District

WarrnamboolColac

Ballarat

Bacchus Marsh

Pykes Creek

Rosslynne

WerribeeMelton

Merrimu

Ringwood

Koo-wee-rup

Morwell

Maffra

Glenmaggie

Narracan

Blue Rock

Bairnsdale

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Our organisational structure

Board & Governance

Water SupplyGroundwater

& RiversStrategic

& TechnicalPeople

& PerformanceFinance

Eastern Irrigation

Western Irrigation

Eastern Headworks

Western Headworks

Field Operations & Compliance

Applications

Water Resource Management

Sustainability

Distribution Assets

Headworks Assets

Human Resources

Information Technology

Information Services

Customer Services

Communications

Financial Services

Revenue

Regulatory Reporting

The Macalister gravity irrigation system is operated by ourEasternIrrigationBusiness.Thedistrictissituatedaround Maffra in central Gippsland and sources water from the Macalister River, via Lake Glenmaggie, and from the Thomson River, via Cowwarr Weir.

Approximately 33,500 ha are currently used for irrigation, and of this 90% is under pasture.

A study based on 2006 ABS data indicates that the value of agricultural commodity produced by the MID is between $165 to $180 million per annum. This represents an annual regional economic contribution of between $410 to $450 million. The MID is therefore a significant contributor to Victoria’s annual regional economic output.

The irrigation season runs from 15 August to 15 May, although if supply and weather conditions are favour-able, early starts and extensions beyond the scheduled close down are arranged.

On average, SRW processes up to 20,000 irrigation orders each irrigation season in the MID.

The Werribee Irrigation District (WID) is one of Melbourne’s vegetable gardens, located on Melbourne’s doorstep in the estuarine flood plain of the Werribee River.

The district is one of the premier vegetable growing locations in Australia, with broccoli, lettuce, cauliflower and cabbage the main crops, and annual aggregate production with an annual market value of around $200 million. The WID generates a large percentage of the total annual Victorian production of many veg-etables, with 85% of the state’s cauliflower and nearly 50% of the broccoli grown in the district.

The WID receives its irrigation supply from both the Werribee and Lerderderg Rivers, via a combination of three storages at Pykes Creek, Lake Merrimu and Melton Reservoir.

Most irrigators also have access to Class A recycled water supplied from Melbourne Water’s Western Treatment Plant. The recycled water is treated through the standard wastewater treatment system and two additionaldisinfectionsystems–chlorinationandultravioletlight–andisdeliveredthroughSRW’sexistingirrigation supply infrastructure.

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Macalister Irrigation District (MID)

Werribee Irrigation District (WID)

Total area of the district 54,753 Ha

Total length of channels 592 Km

Total length of pipes 39 Km

Total length of drains 511 Km

No of delivery outlets 2,231

No of customers 904

Total of high reliability water shares 144,534 Ml

Total of delivery shares 1,419 Ml/Day

Total area of the district 2,981 ha

Total length of channels 52 km

Total length of pipes 12 km

Total length of drains 63 km

No of delivery outlets 366

No of customers 226

Total of high reliability water shares 11,152 ML

Total of delivery shares 156 ML/day

Groundwater and Rivers businessOur Groundwater and Rivers Business manages and controls the taking and use of water for irrigation and other purposes from rivers and groundwater aquifers in southern Victoria. It is also responsible for licensing the construction of bores and farm dams.

The business administers around 7,800 licences. Of these, 4,400 are to take and use up to 145,000 ML of water from unregulated(andpartiallyregulated)rivers,and3,400licencestousenearly330,000MLfromgroundwaterbores.Each year around 1,200 bore construction licences are issued, mostly for stock and domestic use - with much higher numbers of applications in recent drought years.

Headworks businessTheHeadworksBusinessharvestsandstoreswaterinaccordancewiththeprovisionsofBulkEntitlementOrders,forourown irrigation customers, urban water authorities and Latrobe Valley power generators, in four major systems and utilising seven large dams at Pykes Creek, Merrimu, Rosslynne, Melton, Blue Rock, Narracan and Glenmaggie.

TheBulkEntitlementholdersusearound300,000MLofwaterduringanaverageyear.

Other responsibilitiesWe also undertake a range of other responsibilities, the largest of which is the management of recreational facilities on our major water storages at Glenmaggie, Cowwarr, Blue Rock, Melton, Merrimu, and Pykes Creek.

We are also the appointed Resource Manager for a range of surface water catchments, mostly in Gippsland, and provide administrative support to the Victorian Drillers’ Licensing Board.

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Bacchus Marsh Irrigation District

The Bacchus Marsh Irrigation District (BMID) is located some 30 km north-west of Melbourne, on a fertile flood plain of the Werribee River. This region which, at the timeofEuropeansettlementwasalargeswamp,is now a highly developed agricultural district, specialising in horticulture.

The district is dominated by several large-scale enterprises that produce a significant proportion of the total production of the district. Vegetable growing and orchards are the primary businesses. The growers had an annual turnover of around $53 million in 2008/09 - although the existing district has a value closer to $95M if a full water resource was available to meet demand. SRW also supplies water to several major quarries in the region for sand-washing.

A key priority for SRW over the recent prolonged drought has been securing access to alternative emergency water supplies for Bacchus Marsh. These have been made available from unallocated bulk entitlements and the transfer of water from SRW’s drought reserve for the Macalister Irrigation District in the Thomson Reservoir.

Total area of the district 1,368 ha

Total length of channels 15 km

Total length of pipes 28 km

Total length of drains 0 km

No of delivery outlets 196

No of customers 121

Total of high reliability water shares 3,818 ML

Total of delivery shares 71 ML/day

Section 1.2 Our strategic direction

Our purposeTo manage rural water sustainably for the benefit of our communities.

Our 10 year goalTo be respected for our management of the most sustainable rural water system in the land.

Our values• Listeningdeeplytoworkeffectively

• Caringaboutsafety,theenvironment,ourcustomersandcommunities,andeachother

• Creatingsolutionsthatleadtosustainableoutcomes

• Deliveringtimely,effectiveservice

• Demonstratingourhighpersonalstandards

• Reflectingtoimprovewhatwedo

If we are living our values, we will be:• Closetopeopleandgroups

• Technicallyexceptional

• Approachingchallengeswithawin-winmindset

• Employinganddevelopinggreatpeople

• Alwayssustainable

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Sustainable water cycle

Working with stakeholders

Customer service excellence

Strengthening our business

We manage water sustainably, recognising social, economic & environmental demands

We meet our obligations to stakeholders, and help them meet their objectives

We strive for excellence in service delivery to meet our obligations and customer expectations

Secure, strengthen and grow our business and our people for tomorrow

•Licensing groundwater and surface water use

•Supporting groundwater reform through our Southern Groundwater Futures project

•Enhancing catchments

•Meeting our environmental obligations

•Good governance and compliance

•Building relationships with stakeholders

•Meeting internal and external reporting obligations

•Managing three irrigation districts

•Managing seven major dams

•Delivering capital works

•Undertaking Strategic projects – MID2030 and Western Irrigation Futures

•Enhancing field operations

•Building our people competencies

•Providing a safe and healthy workplace

•Aligning staff to our business direction

•Removing barriers to productivity

•Building our own, customers’ and stakeholders’ knowledge of the water cycle

•Managing competing demands for scarce resources

•Contributing to community understanding and policy development in groundwater management

•Ensuring we have effective systems to meet our compliance and reporting obligations

•Continuing to build positive relationships with key stakeholders

•Progressing Southern Groundwater Futures

•Continuing to meet the challenges of drought, flood and seasonal fluctuations.

•Understanding, managing and delivering to customer expectations

•Implementing the Western Irrigation Futures Strategy including modernising the Werribee channel system

•Modernising the Macalister Irrigation District through MID2030

•Developing our third Water Plan.

•Working towards a zero harm workplace

•Identifying and pursuing new business opportunities

•Developing a performance and development culture across our business

Cha

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Our vision

Our vision contains a number of elements, some of which we are living, some which we are progressing towards, and some for which we are aiming. We continually strive to create a future in which:

• Weareenvironmentallysustainable

• Weareefficient,capableandresilient

• OurpeopleloveworkingwithSRW

• Ourcustomersbelieveweprovidegreatserviceatafairprice

• Ourcommunitiesunderstandtheirwaterissues,what we do and why we do it

• Weaddvaluetoourstakeholdersandcustomersand they value our relationship

• Ourtenacitycreatessensibleoutcomesintough situations

• Weinfluenceourregulatoryandlegislativeenvironment to balance environmental, economic and social outcomes

• Ourirrigationdistrictsareadaptive,efficientandsustainable

• Ourdamsanddistributionassetsmeetagreedlevelsof community safety and are managed to high professional standards

• Weunderstandthescienceofourcatchmentsand aquifers and we apply this to the benefit of our communities

Our obligations

The projects and initiatives proposed within this Corporate Plan reflect our commitment to the sustainable management principles contained within our Statement of Obligations. In performing our functions and delivering our services, we are committed to:

• Managingwaterresourcesinasustainablemanner

• Effectivelyintegratingeconomic,environmentalandsocial objectives into our business operations

• Minimisingtheimpactsofouractivitiesontheenvironment

• Managingrisktoprotectpublicsafety,qualityand security of supply

• Operatingasefficientlyaspossibleconsistentwithsound commercial practice

• Managingourbusinessoperationstomaintainourlong term financial viability

• Undertakingcontinuousreview,innovationandimprovement

• Collaboratingwithotherpublicauthoritiesand government agencies to take account of regional needs

Our strategic themes

In order to achieve our 10 year goal of being respected for our management of the most sustainable rural water system in the land, we have defined four themes, or sub-strategies. These themes guide us in setting our strategic initiatives, and provide a framework for reporting through our new Balanced Scorecard.

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Section 1.3 Performance measures

SRW is committed to using service standards to drive improved performance and to demonstrate to customers and stakeholders that we are focussed on delivering those outcomes that are important to them. Our 2008-13 Water Plan introduced a revised suite of performance indicators, reflecting extensive analysis of what is important to our customers. Our Balanced Scorecard reporting framework is leading to further refinement of our performance measures and targets.

In some areas, we are unable to set targets as yet as we do not have the baseline data and are procuring equipment to be able to do this - e.g. flow rate consistency for the non automated part of our irrigation districts. We are building our baseline data in order to establish meaningful targets for the future.

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Macalister Irrigation District

The seasonal adjustment standardises the efficiency calculation on a median delivery volume of 146,000 ML. This eliminates changes in efficiency results that are due to changes in delivery volume and reflects efficiency performance affected by losses.

Our Western Irrigation Futures initiative will consider long term options for this district, which may bring significant changes beyond 2011. Delivery efficiency is now being focused on the recycled water scheme which is providing the main source of irrigation water supply for the district. Implementing the proposed delivery system improvements will lead to significant reductions in losses and improvements in efficiency. Future Corporate Plans will reflect these changes once their timing is certain. The normalised delivery efficiency calculation removes performance variations that are due to seasonal differ-ences in delivery volumes and days of system operation. The basis for the normalised efficiency figures is deliveries of 10,200 ML and 230 supply days.

Our Western Irrigation Futures initiative will consider long term options for this district, which may bring significant changes beyond 2011. The normalised delivery efficiency calculation removes performance variations that are due to seasonal differences in delivery volumes and days of system operation. The basis for the normalised efficiency figures is deliveries of 2,000 ML and 150 supply days.

Werribee Irrigation District

Bacchus Marsh Irrigation District

Measure Target

2011/12 2012/13 2013/14 2014/15 2015/16

Flow Rate Consistency – Automated System

All outlets 69% 69% 69% 69% 69%

Excluding customer side issues 83% 83% 83% 83% 83%

Delivery Reliability 99% 99% 99% 99% 99%

Seasonally adjusted delivery efficiency 70% 71% 72% 73% 74%

Customer Satisfaction Index NA 80% NA 80% NA

Measure Target

2011/12 2012/13 2013/14 2014/15 2015/16

Volume Consistency 93% 95% 95% 95% 95%

Delivery Reliability 99% 99% 99% 99% 99%

Normalised Delivery Efficiency 70% 70% 70% 70% 70%

Outfalls <2% <2% <2% <2% <2%

Customer Satisfaction Index NA 80% NA 80% NA

Measure Target

2011/12 2012/13 2013/14 2014/15 2015/16

Volume Consistency NA NA NA NA NA

Delivery Reliability 99% 99% 99% 99% 99%

Normalised Delivery Efficiency 69% 69% 69% 69% 69%

Outfalls <2% <2% <2% <2% <2%

Customer Satisfaction Index NA 80% NA 80% NA

Headworks

Measure Target

2011/12 2012/13 2013/14 2014/15 2015/16

Service standards

Delivery of Ordered releases on time 95% 95% 95% 95% 95%

Release Reliability 99% 99% 99% 99% 99%

Compliance standards

ANCOLD Dam Monitoring Compliance 96% 98% 100% 100% 100%

Portfolio Risk (lives lost in 1,000 years) 1.2 1.2 1.2 0.8 0.8

Bulk Entitlement Breaches Nil Nil Nil Nil Nil

Drinking Water Act Audit Comply Comply Comply Comply Comply

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Initial applications are sometimes incomplete and require further work by the customer before processing can start. Our performance targets start from the time a fully completed application, including necessary documentation and fee, is received. We retain responsibility for managing the interface with referral authorities and for managing any required consultation.

Dairy Shed Amnesty applications have not been considered to fall within the target measures due to a significantly high number of applications received. Our target to complete these applications is by 31 December 2011.

Corporate sustainability targets

These interim targets reflect past experience. During 2011/12 we will develop a sustainability strategy, which will help us to set more robust measures and targets.

Financial performance outcomes

Our financial performance outcomes are contained in Section 4 - Financial Statements, commencing on page 45.

Application processing

Measure Target (days)

2011/12 2012/13 2013/14 2014/15 2015/16

Farm Dam Construction Licences 60 60 60 60 60

Bore Construction Licences 14 14 14 14 14

Surface And Groundwater Licences 60 60 60 60 60

Surface And Groundwater Licence Transfers 14 14 14 14 14

Information Statements 7 7 7 7 7

Measure Unit Target

CO2 Equivalent Emissions tonnes 1,800

Office Water Consumption - Annual kilolitres 520

Office Water Consumption – per Employee kilolitres 3.7

Section 1.4 Reporting

Quarterly reporting

In accordance with the Corporate Planning Guidelines, quarterly reporting is to be provided on the following financial indicators:

• returnonassets;

• returnonequity;

• gearingratio;

• interestcover-EBIT;

• interestcover-cash;and

• currentratio.

We are aware of a draft proposal circulating that may further refine this list of financial indicators. Should this be confirmed we would adapt our reporting to comply with this requirement.

Exception reporting

As required by s.247 of the Water Act, SRW will inform the Minister of any proposal that is a major deviation from this Corporate Plan.

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Section 2Business plan

2.1 Major initiatives 17

2.2 Capital works program 23

2.3 Major capital works 24

2.4 Changes from 2010/11 plan 25

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Section 2.1 Major initiativesOverview

We have identified 3 strategic project projects and 20 major initiatives within this plan. These projects and initiatives support our strategic themes as follows:

Sustainable water cycle

Working with stakeholders

Customer service excellence

Strengthening our business

Learning & growth

We manage water sustainably, recognising social, economic & environmental demands

We meet our obligations to stakeholders, and help them meet their objectives

We strive for excellence in service delivery to meet our obligations and customer expecta-tions

Secure, strengthen and grow our business and our people for tomorrow

We sustain our ability to change and improve by developing our people, aligning our culture and leveraging our infor-mation technology

•Southern Groundwater Futures

•MID2030

•Western Irrigation Futures

•Supporting environ-mental entitlements

•Improving water education

•Managing catchment erosion

•Managing reservoir surrounds

•Establishing Local Management Rules

•Improving our compliance

•Strategic communica-tions campaigns

•Stakeholder survey action plan

•Waterwise awards

•Building a customer centric culture

•Improved capital and asset management planning

•Regular customer surveys and action planning

•Business development

•Business model review

•Succession planning

•Training programs

•Productivity

•OH&S strategy

•Cultural change

•IT & SCADA strategies

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Southern Groundwater Futures

Southern Groundwater Futures aims to build and share the best available knowledge about groundwater across southern Victoria through the development of regional atlases. This will be achieved through a collaborative process that combines our innovative 3D groundwater mapping, the most up-to-date science and contributions from stakeholders and the community.

The project is being rolled out in three overlapping phases; South west Victoria, Gippsland and Melbourne & surrounds. Overseeing the process in each region will be a Stakeholder Reference Group consisting of key groups including licence holders, government agencies, urban water corporations, and industry representatives.

Consultation activities to support the development of the south west atlas began in December 2010 and will continue through until late 2011. During this time we will hold a series of community and industry based forums. These forums will provide a platform for our stakeholders to learn about groundwater and offer input into the final atlas product.

Work will begin on the development of Gippsland ground-water atlas by late 2011, and continue for approximately nine months. The stakeholder engagement process and atlas structure is likely to be similar to that of the south west region.

Planning for the Melbourne & surrounds will begin in 2012, after the conclusion and release of the southwest atlas. The large urban presence in this region will require a tailored ap-proach to accommodate different engagement needs and information requirements.

Southern Groundwater Futures is also seeking to stay abreast of groundwater mapping initiatives, and contribute to strategic groundwater projects such as the Safe Allocation FutureEntitlementsprojectbytheDepartmentofSustainabilityandEnvironment.

MID2030

The MID2030 strategy was finalised in 2007 and provided an infrastructure improvement strategy to transform the efficiency, service levels and environmental footprint of the Macalister Irrigation District. It provided a plan for future investment to ensure the district is upgraded to serve the needs of the customers and region for generations to come. Since completion of the strategy, Southern Rural Water has:

• Completeddetailedplanningforthemajorpipelineproject

• UndertakenaLidarsurveytogeneratedetailedGISdata for the district

• Undertakenafullcostestimationfortheproject, subsequentlyvalidatedbyEvansandPeck

• HadthewatersavingsestimatesvalidatedbySKM

• Undertakenstudiesintocustomercapacitytopay and regional economic benefit

• Presentedarangeofprojectoptionstogovernment or consideration in the context of project funding

This work has validated the substantial economic benefits from the project; however, funding the full program remains problematic.

While we continue discussions with government on the potential to provide future funding, we are working with our customers to start a small program of works. This program will bring good water savings, rationalise our meters to reduce future replacement liability and design two balancing storages to improve service and maximise water availability.We expect to finalise discussions in time to start delivery in the 2011/12 financial year.

Western Irrigation Futures

We have continued with our Western Irrigation Futures project, which considers long term options for BMID and WID. We will be in the implementation phase of this project in 2011/12.

During 2010/11 we have continued extensive discussions with government, stakeholders and our customer base on the outcomes of the options paper. We are now finalising a strategy document that establishes the preferred future direction for each district.

For both districts the preferred primary supply remains river water. In Werribee, access to water from the metro pool means we can reduce the salinity of recycled water in dry years, satisfying an important requirement of both our irriga-tors and our regulator. For Bacchus Marsh, there is still no affordable alternative supply - meaning the district remains vulnerable in very dry periods. We continue to work with agencies to identify alternative supply options.

To preserve and optimise river water we have implemented new allocation rules which put water aside earlier for the next year. We expect, following further study, to implement new carryover rules for both districts in 2011/12.

We are currently working with our Customer Consultative Committee on developing new long term recycled water contracts incorporating the metro water. This is comple-mentedbyasubmissiontotheEPAtomodifythecurrentriver water / recycled water shandy rules, which should see both improved quality and quantity of water for customers.

During 2011/12 we will decide on a business case to improve the channel infrastructure in Werribee, which will reduce losses and increase the volume of water available to customers. In Bacchus Marsh, we will complete a cost and feasibility study on reconfiguration of the irrigation district. This includes assessing the closure of the main channel, creating some new river diverters, and some further minor upgrades.

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Strategic projects

Sustainable water cycle An important part of our vision is to be seen to be managing water sustainably and responsibly- recognising social, economic & environmental demands. In support of this vision, we have planned the following initiatives:

Supporting environmental entitlements

Through its sustainable water strategies, government has signalled its intention to establish environmental entitlements in a range of systems to improve river and estuarine health. In some areas, we can enable and support these entitlements being established without undue impact on our own customers. This will directly contribute to the sustainability of the water systems which we operate in.

In the Macalister system, we are working to deliver the final tranche of a 15GL annual entitlement by June 2013. This requires that we optimise performance of our automated delivery system during 2011/12, in preparation for subse-quent validation and conversion of water savings.

Improving water education

We regularly put information regarding SRW activities into the public sphere through general media channels. This initiative seeks to identify those groups with specific information needs and the best method to communicate with those groups.

Starting in June 2011 we will conduct a gap analysis between the information special interest groups have and can access against the information that they require to inform their activities. We will then analyse the best methods of reaching those groups and communities, and develop a plan to deliver on their information needs. This will lead to greater understanding of our role within rural communities, and will promote informed discussion about water issues.

Managing catchment erosion

In order to reduce the rate of volume lost in the Melton stor-age due to siltation, we have started a program to identify silt sources within the Werribee River catchment and deliver or support activities to mitigate the impacts.

Such activities are delivered in partnership with Melbourne Water, Local Government, Landcare groups and other catchment stakeholders.

During 2011/12 we hope to expand Parwan Gorge reveg-etation work to neighbouring properties adjacent to Melton Reservoir.

Managing reservoir surrounds

During 2010/11, we began developing and implementing plans for the sustainable management of land around our storages. The plans demonstrate an integrated approach to land management by combining existing frameworks e.g. Safe Drinking Water Risk Management Plans, Catch-ment and Surrounds Management plans etc. Our priority for 2011/12 is to develop and implement a new plan for Melton Reservoir.

Establishing Local Management Rules

We have Local Management Rules for our major river catchments. These detail our restriction policies, trading zones and allocation rules - giving customers the information they need to understand how their licences are managed.

In 2011/12 we will start preparing Local Management Rules for five priority Groundwater Management Areas. In many ar-eas the management arrangements are well established and simply need to put into a format that is readily accessible to customers. In a small number of areas customer and agency engagement will occur as we test the adequacy of current management arrangements. An example is the Wa De Lock GMA which interacts with the Avon River. Following an en-gagement process and technical review, our Local Manage-ment Rules may recognise and manage this interaction.

Working with stakeholdersWorking effectively with stakeholders is some-thing we need to do well if we are going to stretch towards our vision. We want our stakeholders to value their partnership with us, and to understand and value what we do. We also want to meet our obligations towards stakeholders, and to meet their expectations.

Our major initiatives under this theme for 2011-12 include:

Improving our compliance

This initiative seeks to reduce our governance risks by:

• ensuringourlegislativeandotherobligationsareidentified,

• nominatingappropriateofficersforresponsibilityin meeting the obligations, and

• planningforandmonitoringrequiredactionstomeet obligations

A core component of this initiative is developing a compliance register across the whole of the organisation, detailing every legislative compliance obligation that Southern Rural Water must comply with. Work to compile this register is substantially complete.

In 2011-12, we will implement our legislative compliance program based on the register, and implement ways to manage the program. 19

Major initiatives

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Strategic communications campaignsAs well as our “business as usual” communications activities, we have identified a need to raise our profile in specific communities to help manage developing issues.

A pilot project is being run in the Melton/Werribee/Bacchus Marsh area in April to July to improve community under-standing of our role in managing irrigation districts and their importance to the area’s economy. The project includes a mix of media, advertising, website, print and face-to-face communications.

This is being run hand-in-hand with compliance activities and development of stakeholder partnerships to improve severe anti-social behaviour at and on our western storages.

This pilot project will be evaluated after its completion early in the 2011-12 financial year. The evaluation will form the basis of any future pilot projects.

Stakeholder survey action plan

In 2010/11, we surveyed key stakeholders to find out their opinions of Southern Rural Water, including their understanding of our role, and whether they value what we provide.

We have developed an action plan from the results of this survey. This initiative will continue throughout 2011-12 and includes activities such as:

• engagementmeetingswithkeylocalgovernmentsand urban water authorities, including their Boards, who are seeking to better understand rural water resources in their area

• thecontinuedroll-outofSouthernGroundwaterFutures

• continuingtopromoteourenvironmentalsuccesses

• integratedmaterialsthatclearlyandsimplycommunicate our strategic intent

• morestronglylinkinglargewaterapplicationstoour customer service processes

Waterwise Awards

Our Waterwise Awards, held for the first time in 2010-11, were the result of an initiative in our Water Plan 2 to publicly recognise water saving and efficiency by our customers and licence holders.

The objectives of the 2010 Waterwise Awards were to:

• PubliclyrecognisewatersavingandefficiencybySRW licence holders and in doing so, encourage others to use the same techniques

• Buildrelationshipswithkeystakeholdersandtheir understanding of what our licence holders do with water.

Following an evaluation of the project, we propose to continue with the awards, with:

• someoperationalchangesasrecommendedby staff, awardees and judges, and

• afocusondevelopingpartnersintheawards, notably the Victorian Farmers Federation and Goulburn Murray Water

Customer service excellenceOurCustomerServiceExcellencethemeisaboutdelivering great service at a fair price to our customers. This requires understanding customer expectations, and delivering on agreed service and pricing outcomes

This theme is a strong driver for two of our major strategic projects, MID2030 and Western Irrigation Futures. Both of these projects propose more efficient, effective and reliable water delivery for our irrigation districts.

We have three other major initiatives in support of this theme:

Building a customer centric culture

During 2010/11 we contracted an external consultant to un-dertake a review of our customer service culture. The review made a number of recommendations, and we have devel-oped an action plan to address these findings.

This includes the development of a target training program for all staff to improve our customer service through the organisation.

During 2011/12 we will work on further understanding customer needs and expectations and we will develop standards and measures that truly reflect these customer expectations. This will lead to further training and develop-ment for staff at all levels to embed a customer centric culture.

Improved capital and asset management planning

The quality of our customer service is ultimately dependent upon our water supply infrastructure. During 2010/11 we implemented a new capital planning process to assist in identifying the right capital projects and delivering them effectively, and we started updating our asset management plan.

In 2011/12 we will continue to review, refine and reinforce our capital planning process, and finish developing our new asset management plan.

21

Customer surveys

We have established a process to undertake customer surveys for all parts of our business. The timing ranges from continuous for our groundwater and surface water applica-tions to two yearly for our irrigation districts and headworks customers. This provides a regular source of feedback and supports a culture of continuous review and improvement.

During 2011/12 we will survey our headworks and groundwater & rivers customers.

Strengthening our businessTo continue to deliver value for our customers and the state of Victoria, we need to have a sound and capable business. For us this means hav-ing strong finances, an effective business model and the right staff capabilities to deliver effective service to our customers and maintain effective stakeholder relationships.

To do this, we measure feedback about our business capability, financial strength and perceptions of our staff and organisation in the broader community.

We have launched a number of initiatives to build on our existing strengths and address opportunities for improvement.

Business development

By growing our business we can further build our staff capability and spread the overhead required to operate our business over a broader range of activities. We have identi-fied and are pursuing a range of opportunities, including:

• MIDsaleofwatersavingsproject-wehaveundertaken physical works to improve system efficiency in the Macalister Irrigation District. We plan to complete a further auction of 1125ML of water shares in the 2011/12 financial year

• BunyipFoodBelt–wearepartneringwithMelbourne Water,SouthEastWaterandlocalgovernmenttoexplore the use of approximately 26GL of water per annum for agriculturalusefromtheEasternTreatmentPlant

• SaleoflandintheWerribeeIrrigationDistrict(between the weir and the district itself) - we are partnering with the Wyndham Shire on an opportunity to pipeline this section of channel, creating an easement and converting the land to residential use;

• Hydropoweropportunities-weareexploringopportunities to use the constant water flow at some of our sites for hydro power

There are other opportunities under development which may also mature in the 2011/12 financial year.

Business model review

As we approach our third regulatory period, it is timely to review our business model to ensure that it supports a financially strong business. We have been progressively reviewing aspects of our business model including:

• Pricingprinciples;

• Pricingforinfrastructureinvestment;

• Compliancetoourrevenuecapandcapitalexpenditure plan under Water Plan 2;

• Fundingassetreplacementandrefurbishment;

• Meteringcompliance;

• Rateofreturn;

• Annualpriceinflator;

• Accountingforlosses;

• Financialresilience;

• ConsultationplansforWaterPlan3

Learning and growthOur Learning and Growth theme is about ensuring we have people with the right skills, operating in the right way, and supported by the right systems, to deliver on our strategic objectives and move us towards our vision.

Succession planning

During 2010/11 we completed the first phase of a succes-sion planning project which identified critical executive roles and assessed our pool of existing and potential talent to fill those roles.

The next phase of this project will involve focussed develop-ment of identified staff, and cascading the process to identify other critical roles across the business.

Training programs

Resulting from a skills gap analysis conducted during 2010, we have a number of our operational staff undertaking training programs at the Certificate IV and Diploma levels in Water Operations, Certificate IV in Frontline Management, and Diplomas in Management and Project Management. These training programs are facilitated in partnership with Chisholm Institute, and will continue through 2011 until 2012.

22

Productivity

During2010werevisedthecharterorourEmployeeCon-sultative Committee to provide leadership in identifying and pursuing productivity improvements. During 2011/12, the team will:

• encourageandpromoteacultureofproductivity improvement across the business

• establishasystemandprocessforattractingand assessing suggestions, and recording productivity outcomes

• assistbusinessunitsandthecorporationinputting productivity initiatives into action

Alongside this, we work to develop meaningful productivity measures for our workgroups and activities. This means understanding the value of our outputs so that we can make better decisions about price and service levels.

Occupational Health & Safety Strategy

The recently developed 3 year OH&S strategy aims to achieve an incident free and a zero harm workplace within Southern Rural Water. Initiatives have been progressively rolled out since the middle of 2010, and during 2010/11 we achieved 2 years without a lost time injury.In the coming year we will be focusing of staff development and training in internal safety procedures to enhance our knowledge and capabilities. We have an external safety sys-tems audit scheduled to review our system against relevant standards in readiness for the release of new workplace safety legislation. The strategy will be reviewed by internal workgroup sessions to give staff the opportunity to provide ideas on further improvements to enhance our system. During these sessions we will review our indicators of suc-cess towards the journey to a “Zero harm” and incident free workplace.

Cultural change

Over the last two years we have done a lot of work to under-stand and influence our corporate culture. This started with workshops undertaken in 2010 which enhanced understanding of our strategic direction and organisational functions. We expect to convene a further workshop during this year to focus on striving for excellence in customer service.We reviewed and re-wrote our values during 2009, and surveyed our staff in 2010 to better understand how we reflect those values in the way we work. A substantial action plan resulting from this survey will be put into place during 2011/12.

We have also implemented a process of recognition and appreciation to provide public feedback and acknowledge-ment for staff who deliver exceptional service and embrace our values in their work. During 2011/12 we will conduct our first “Values in Action” awards.

Other initiatives during 2011/12 will include introduction of a new intranet, a specific leadership development program for supervisors and managers, and whole-of-organisation workshops for staff.

IT and SCADA Strategies

Over the last 3 years SRW has invested significantly in IT related projects. The introduction of the Victorian Water Register and the associated unbundling of water entitle-ments required changes not just to processes and stand-ards with respect to water licences and entitlements, but also changes to pricing, water trading, reporting and billing. These changes required the introduction of new systems and upgrades to existing systems such as IPM, the opera-tional software that controls our delivery of water to irrigation districts, as well as our billing software.

We have also have invested increasingly over recent years in SCADA systems to meet various customer and stakeholder obligations.

During 2010/11 we finalised two strategies to guide the next phase of our technology investment. Our SCADA strategy focuses on enhancing security, improving resiliency to ensure business continuity, developing functionality to meet changing requirements and standardising systems to improve productivity.

Our information systems strategy will see us upgrade a number of ageing systems to contemporary versions, including our document management system, and also upgrading our standard desktop environment from Office 2003 on Windows XP to Office 2010 on Windows 7. We will also investigate options for better integrating our corporate data and providing mobile technology for field staff.

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Section 2.2 Capital works programThe following table summarises our proposed capital expenditure across the planning period (in $000s).

2011/12 2012/13 2013/14 2014/15 2015/16

Eastern Irrigation

MID2030 leading works program 6,300,362 7,644,908 1,324,810 0 0

Maffra Storeyard remodel 95,000 0 150,000 50,000 0

Main Northern Channel rehabilitate (renewal) 384,000 0 0 0 0

Main Northern Channel - Boisdale tunnel (renewal) 143,000 0 0 0 0

Carp damage rehabilitation (renewal) 280,000 280,000 420,000 420,000 420,000

Renewals Program 479,200 272,300 318,300 224,300 245,800

Other 127,400 127,900 110,400 70,900 150,000

Western Irrigation

WID 4/1 losses, access and operational difficulties 176,100 0 2,066,667 1,033,333 0

Renewals Program 208,420 304,460 171,133 129,049 167,783

Other 48,218 7,200 15,400 5,562 0

Headworks

Glenmaggie Ream out drainage lines through dam Design review Southern outlet bypass valve

10,000

0 1,864,272

240,000

0 235,728

250,000 190,000

0

0

140,000 0

0

20,000 0

Cowwarr weir Secondary sheetpile weir Gate strengthening

0 0

75,000

135,000

500,000 190,000

0

15,000

0

60,000

Melton Right abutment protect Fabricate and install bulkhead Conduit replacement

2,972,000 261,437 121,000

0 0

253,000

0 0

1,620,000

0 0 0

0 0 0

Rosslynne Design review Perimeter road full upgrade

0 0

0

250,000

250,000

0

0 0

0 0

Lerderderg weir Gate painting and roller and seal refurbishment Downstream erosion protection Access road erosion

0

244,000 50,000

0 0

125,000

0 0

180,000

300,000

0 210,000

0 0

235,000

Other storages Maffra weir: Recoat & repair gates Yallourn: Repairs to apron Narracan: Gate painting and roller and seal refurbishment Pykes Creek: Goodmans road batter stability Merrimu: Detailed design interim flood capacity Meyers creek channel Other

0

1,620,000 20,000

0 50,000

0 1,925,267

0 0 0

250,000 20,000

0 2,077,000

55,000

0 120,000

0 0

180,000 1,884,000

195,000

0 380,000

0 2,000,000 100,000

2,223,000

0 0 0 0 0 0

4,259,000

Groundwater and Rivers

Wandin Yallock Meter replacements 150,000 150,000 0 0 0

Other 370,000 380,457 80,000 200,000 200,000

Other

Glenmaggie Residence Upgrade 40,000 12,000 0 0 0

Asset Management System 400,000 50,000 30,000 30,000 0

IT Infrastructure & Network Technology 25,000 180,000 25,000 0 160,000

Other 621,000 396,333 329,000 304,000 110,000

18,985,676 13,466,286 10,459,709 8,030,145 6,027,583

2424

Section 2.3 Major capital works

MID2030 Capital Program

In this plan we have forecast around $15.3M of capital works to start our MID2030 infrastructure investment, with over $6M of that program identified in 2011/12.

This budget represents a modest scale works program to continue the momentum of modernisation that we established through our recent channel automation works.

This works program will support a customer initiated rationalisation program, and includes automation of main channelsinNambrok-DenisonandtheSale/Easternsystem.

The program also includes preparation of detailed design of two balancing storages, which are longer lead time projects. A Southern-Cowwarr balancing storage will improve opera-tions along the Southern Main Channel, while a balancing storage on Valencia Creek will improve service to meet the often conflicting demands of dairy and vegetable growers, as well as providing potential for a new “winter water” product.

Finalising the business case and the investment strategy to confirm funding arrangements will be a prerequisite to commencing any substantial works under this program.

Glenmaggie - southern outlet auxilliary valve

We plan to install an auxiliary valve on Glenmaggie Dam’s southern outlet, to mitigate the risk of failure of the existing valves. The existing valves were last overhauled in 2000, and should continue to operate for another 10 years under normal conditions with the valves moving on average two times per day. However, the introduction of channel automa-tion requires frequent small movements in valves - between 30 and up to 173 per day. The main valve is not designed for frequent small changes, without incurring excessive wear leading to expensive overhaul costs.

Without an auxiliary valve, the failure of either of the existing valves during peak season would cause a widespread inter-ruption to supply on the southern channel system for at least three months.

We estimate capital works in the order of $2M, which will have a 75 year life. We are currently in discussion with the National Water Commission about joint funding of this project as part of the Macalister Channel Automation project being funded by the federal government.

Melton - right abutment protection

Our most recent review of Melton Reservoir has identified that the right abutment is susceptible to erosion in a major flood. We plan to undertake protective works to control the potential erosion and bring this structure in line with contemporary standards.

Our most recent estimate of the cost of these works is $3.4M. This includes $400k spent during 2010/11, and equates to around $210k per annum over the life of the works.

Yallourn - repairs to apron

The concrete apron on the downstream side of the Yallourn Weir has experienced some settling, and recent inspection has also revealed undermining. We expect to spend in the order of $1.6 million in 2011/12, and more detailed investigations may require further expenditure in 2012/13.

WorksatYallournWeirarefundedbyBulkEntitlement owners and costs are billed as they are incurred. BulkEntitlementholdershavebeenregularlyconsultedabout the issue and support the proposed works.

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Section 2.4 Changes from 2010/11 corporate plan

Seasonal conditions

2010/11 saw a major turnaround in seasonal conditions in the Werribee Basin. After four years of sub 15% allocations, continual rain through spring and summer has seen all storages effectively full. We expect to start the 2011/12 financial year with a minimum of an 80% High Reliability Water Share allocation so even with dry conditions we are confident of a 100% allocation for the season.

In the Macalister Irrigation District we have had regular rain in the catchment and a storage level the highest it has been at this time of year for at least the last 40 years. This provides a very sound basis for well in excess of a 100% allocation in 2011/12 and confidence that the reservoir will spill early in the season.

Our unregulated areas across the state have had good to record rainfall over 2010/11 so this provides a good basis to start 2011/12. Pleasingly, this has assisted with recharge of many aquifers across the state.

Budgeting for projects not yet funded

We have three major projects currently planned which are subject to significant uncertainty:

• MID2030–Wehavebudgetedforasmall“leading works program” to continue with the momentum of modernisation developed from the state and federal government channel automation program. This is a limited scope of works ($15.3m) that we intend to progress over the next three years. We will continue to discuss funding options with government and expect to develop a formal business case and investment strategy as a prerequisite to starting any substantial works under this program.

• WerribeeIrrigationDistrictmodernisation-Similarto MID2030, we have developed a preferred approach to the modernisation of Werribee irrigation District (lining, automation and metering). We expect to complete a business case late in 2011 and consider funding of these works following that.

• DairyWash-Weareawaitingconfirmationfrom government on funding for the meters.

Other than the budgeted $15.3m of leading MID 2030 works, given the significance of these projects and the uncertainty that remains, we have not included estimates of future works within our financial plans.

Tariff changes

The tariffs we propose within this plan are consistent with the forward projections from our 2008/09 to 2012/13 Water Plan, adjusted to reflect recent CPI movements. There are some minor tariff increases in the regulated irrigation districts compared to last year’s Corporate Plan. These were discussed with our consultative committees, as part of our annual pricing review, who supported making price adjustments in the 2100/12 financial year.

All of our tariffs will be subject to review and approval by theEssentialServicesCommission.

26

Section 3Risk

3.1 Risk management 27

3.2 Strategic risks 28

3.3 Operational risks 30

3.5 Sensitivity analysis 31

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Section 3.1 Risk management

We have a well established risk framework. Risks are recorded in our risk register, and characterised in accordance with our risk framework, using a likelihood and consequence table. This has regard to a range of factors (health and safety, environmental, governmental, financial, legal, water quality and service) and is subject to regular review and refinement.

Appropriate controls and treatments are established to manage risk. This is a continuous process, with new and modified risk events being populated within our risk register, with some risks being accepted with existing controls in place.

Changes are subject to Board Committee review on a regular basis, with a full risk review conducted by management and the Board on an annual basis. A monthly attestation to the Board includes:

• Riskoccurrenceforthemonth;

• Changestoindividualriskratings;and

• Changestoriskmitigationstrategies

We have highlighted the following strategic risks:

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Section 3.2 Strategic risks

Our challenge Our response

Ageing and inefficient irrigation (channel) infrastructure

We drive decisions from well founded strategic plans – such as MID2030 and Western Irrigation Futures project that are based on broad customer and stakeholder consultation. These strategic plans provide a firm foundation to develop business cases for major expenditure and securing infrastructure for future generations. Water efficiency will lead to more water for irrigators and economic devel-opment, or further environmental entitlements to improve river health.

Climate change and climate variability We maintain close watching brief on potential impacts of climate change (and variability). This has shaped our approach to managing financial risks, particularly in the Werribee Basin.

We have undertaken specific research to support strategic projects such as MID 2030 and Western Irrigation Futures to guide decision making, or on specific issues such as groundwater yield in Hawkesdale or risk of siltation in Lake Glenmaggie.

Community engagement We remain committed to engaging fully with the regional communities that we serve. We give a voice to the interests and concerns of local people in decisions on the future allocation and management of scarce and valued water resources. This occurs through our engagement with:

•irrigation district customer consultative committees and Southern Groundwater and Rivers Forum;

•local area committees and forums; and

•regional bodies, Local Government and Catchment Management Authorities.

This engagement is also supported through our application assessment processes, which involve advertising, neighbour notification and referrals to agencies and indigenous communities.

Our Southern Groundwater Futures project is a further example of a strategic project underway which has engagement as its centrepiece.

Groundwater & water resource management We have a range of initiatives in our Water Plan 2008-13 to establish stronger controls over our management of these resources. We are implementing these initiatives in partnership with the Department of Sustainability and Environment, local Catchment Management Authorities and wider stakeholders;

Financial viability The Corporation operates within a regulated financial environment. Our annual budget is reviewed by State Government and annual pricing is subject to approval by the Essential Services Commission. Within this framework, we manage our finances so that the Corporation is financially sustainable over the long term. Prices are set each year on a full cost recovery basis, ensuring adequate revenue to cover annual operating costs, renewal of our distribution assets, recovery of investment in new assets over the life of those assets, a financial return on those assets, and recovery of past deficits.

We have highlighted the following major operational, social and environmental risks faced.

Risk Key controls

Major failure of SRW channel or structure leading to inability to supply customers

•Operation and maintenance procedures e.g. critical assets program & inspections

•Use of expert panels for major dam safety projects

•Independent auditing and reporting

Damage to aquifer from extraction (specific to Deutgam GMA, Werribee South) limiting future use

•Monitoring of aquifer levels and salinity

•Use of groundwater model

•Rosters and restrictions

Loss of reservoir capacity due to siltation reducing reliability of water entitlements

•Foreshore erosion management & catchment protection

•Scrutiny of planning applications

•Engagement with local land & waterway managers

Water quality event in storage or distribution system preventing supply to customers (specific to interruption to recycled water supply into Werribee)

•Melbourne Water’s risk reduction actions

•Recycled water reliability study (MWC etc)

•Revised operating procedures

•Contingency Plans for BGA established & reviewed

•Corporate Incident Management Plan

Water quality preventing supply to customers (specific to salinity recycled water supply into Werribee)

•Regional Environmental Improvement Plan

•Extension of the interim phase of the recycled water scheme

•Access to metro water for shandying with recycled water

Flooding downstream of reservoirs impacting community

•Operation and maintenance manuals for all storages

•Flood manuals

•Flood routing training

•Corporate Incident Management Plan

•Dam Safety Emergency Plans

•Emergency exercises

Deteriorating water reliability in the Werribee basin impacting viability of customers and/or irrigation districts

•Werribee recycled water scheme

•Annual contingency planning

•Emergency water supplies

•Western Irrigation Futures project

29

Section 3.3 Operational risks

Risk Key controls

Deteriorating water quality in the Werribee basin impacting on use of water from SRW storages for urban purposes

•Storage risk management plans

•Foreshore erosion management & catchment protection

•Scrutiny of planning applications

•Engagement with local land & waterway managers

Rapid filling of reservoirs following prolonged drought causes structural damage

•Operation and maintenance manuals for all storages

•Corporate Incident Management Plan

•Dam Safety Emergency Plans

•Policy on water releases from Lake Glenmaggie

Significant failure of major infrastructure resulting in uncontrolled release of water

•Use of ANCOLD guidelines for dam safety standards, coupled with annual external audits and safety inspections.

•Dam safety management manual in place with training (DESP’s)

•Operation and maintenance manuals in place and subject to regular review & updates

Injury or property damage due to bush fires •Vehicle tracking & communication system.

•Personal fire plans for Headworks residents (reviewed annually).

•Site specific fire plans and equipment

Injury to a member of the public at a water storage

•Coordination with local government, police, department of transport (marine safety) and other bodies

•Risk reviews

•Public education campaigns

•Physical compliance on and around storages

•Signage

Section 3.3 Operational risks (continued)

30

31

Section 3.4 Sensitivity analysis Overview

This section summarises the key assumptions underlying our Corporate Plan, particularly regarding water supply and demand, and examines the financial impacts of alternative scenarios.

At the outset we note that, as a rural water corporation, we do not operate in a conventional utility regime–wheretheutilitysupplieswatertomeetthedemandofitscustomers.Rather,our customers own their entitlements and our role is to deliver the water available to them under those entitlements when they order it, or in the case of Groundwater and Rivers, to ensure that the entitlements are exercised in accordance with conditions imposed to protect the environment and other users. Consequently, most of our revenue is derived from charges for water entitlements, and is not dependent on how much water is available to, or used by, the holders of those entitlements.

Macalister Irrigation District

The key variable within our irrigation districts is water usage. In the MID, this is charged at $9 per ML and accounts for approximately 15 % of our revenue.

This Plan assumes ‘average’ water allocations and water deliveries based on recent years, that is, 163,000ML of water deliveries.

A repeat of 2006/7, the worst year on record, would see usage limited to 50% of High Reliability Water entitlement - around 72,000ML.

This would decrease our revenue by $820k, which we would need to recover through future tariff increases.

Werribee Irrigation District

Our pricing for the Werribee Irrigation District does not include a variable usage charge for river water supplied against Water Shares.

This recognises the highly variable nature of the Werribee Catchment where we have had four years with below a 15% allocation, followed by a year with a 100% HRWS allocation and 50% LRWS allocation in 2010/11.

We have been constrained because of the original contract conditions for recycled water in pricing for cost recovery. Future pricing will seek to recover the full cost of the scheme and SRW’s costs irrespective of usage. We expect that there will be some risk in this first year of new contracts whereby if signed on volumes are less than forecast we will have a deficit. However all volumes are expected to be secured in time to reduce risk for the 2012/13 financial year and beyond.

At the time of writing, contracts for future supply of recycled water were still being finalised.

Bacchus Marsh Irrigation District

As with Werribee, our pricing for the Bacchus Marsh Irrigation District does not include a variable usage charge for river water supplied against Water Shares.

This recognises the highly variable nature of the Werribee Catchment where we have had four years with below a 15% allocation, followed by a year with a 100% HRWS allocation and 50% LRWS allocation in 2010/11.

Groundwater and Rivers: Applicaitons

This Plan assumes lower application volumes as more water management units reach their caps. The demand for domestic and stock bores in urban areas has diminished significantly.

We have reduced staffing accordingly, so that pricing remains in accordance with our Water Plan.

We have budgeted for 1200 bore construction licence applications, at $650 each.

We have returned to pre drought levels of applications and there is some risk that the decline could continue. We believe the level of revenue at risk from the budgeted $1.5m is $250k.

Despite the decline in revenue, we are committed to maintaining our capability to deal effectively and professionally with all applications and enquiries.

Groundwater and Rivers: Field operations

Our annual tariffs for ground and surface water licences comprise a fixed charge per licence and an entitlement component (per ML). This does not expose us to any revenue risk from seasonal conditions.

Headworks

Our Headworks business operates storages on behalf of bulk entitlement holders. Our charges are based on the actual costs of operating and maintaining those storages - and so does not expose us to any revenue risk from seasonal conditions.

32

33

Section 4 Financial statements4.1 Preface to financial statements 34

4.2 Operating statement 37

4.3 Income and expenditure statement 38

4.4 Financial statement reconciliation 39

4.5 Balance sheet 40

4.6 Statement of cash flow 41

4.7 Financial performance indicators 42

4.8 Quarterly operating statement 43

4.9 Quarterly balance sheet 44

4.10 Quarterly statement of cash flow 45

4.11 Quarterly performance indicators 46

34

Section 4.1 Preface to financial statements

Our forecast financial statements follow, and comprise:

• OperatingStatement-preparedinaccordancewithfinancialreportingrequirements;

• IncomeandExpenditureStatement-reflectingourpricingmodel;

• FinancialStatementReconciliation-exposingthedifferencesbetweenthepriortwostatements;

• BalanceSheet-derivedfromourforecastopeningpositionandpreparedinaccordancewithfinancialreporting requirements;

• StatementofCashFlow-derivedfromourOperatingStatementandStatementofFinancialPosition,andprepared in accordance with financial reporting requirements;

• FinancialPerformanceIndicators-derivedfromourOperatingStatementandStatementofFinancialPosition, and prepared in accordance with financial reporting requirements;

• QuarterlyOperatingStatement-for2011/12

• QuarterlyBalanceSheet-for2011/12

• QuarterlyFinancialPerformanceIndicators-for2011/12

Overview

These financial statements reflect our expectation of ongoing efficient operating expenditure, within the context of planning projections already formed by our current 5 year Water Plan, which means for that activity subject to some variability:

• EasternIrrigation-deliveryvolumesconsistentwithourWaterPlanof163GLperannum,beingslightlylessthanour most recent 5 year rolling average.

• Groundwater&RiversApplicationFees-applicationsfornewgroundandsurfacewaterlicencesaresubjecttoongoing volatility (influenced by factors such as seasonal conditions and government policy). For 2011/12 we have revised our forecast activity to deteriorate beyond our 2010/11 projection. Compensating expenditure adjustments have been made within our business structure and support resources.

• Werribeeirrigation-continuationoftherecycledwaterschemeasasupplementtotheprimarysupplytotheWerribee Irrigation District. No delivery of metro water is planned for 2011/12.

• BacchusMarshirrigation-deliveryofriverwaterconsistentwithbusinessasusual.Nodeliveryofmetrowaterorother emergency supply water is planned for 2011/12.

35

This plan also continues many of the key strategies and initiatives outlined in our Water Plan.

On the revenue side, our plans are consistent with the price paths indicated in our Water Plan. This means that we will continue with increases above CPI in all parts of our busi-ness for 2011/12, and for some parts of the business until 2013 where we have smoothed impacts over the regulatory period. The quantities on which our revenue is forecast are generally stable across the planning period, with only moder-ate adjustments to reflect our proposed sale of water savings in the Macalister Irrigation District. This stability in our quanti-ties reflects the entitlement-based nature of our services.

Our Operating Statement shows significant operating losses afterinterest–between$0.1Mand$1.3Mperannumacrossthe planning period. This suggests that our planning is not financially sustainable. However, this financial statement must be interpreted within the context of our designation as a “not-for-profit” entity subject to State Government sanctioned price regulation, and the implications to this for our asset values and depreciation charges. Our Operating Statement includes around $4.3M per annum of deprecia-tion charges which are not recoverable through our regu-lated pricing framework. It is for this reason that we disclose our‘IncomeandExpenditureStatement’,asthisstatementdescribes those costs subject to reimbursement from pricing and demonstrates a consistent surplus result across the planning period.

This Corporate Plan continues our planning assumptions to treat any unapproved works proposed within MID2030 program as unfunded, and not part of our capital works program. On this basis, we have included a $15.3M leading works program within this Corporate Plan, and as the full MID2030 program remains unapproved, these works have been excluded from the financial projections included within this 2011-12 Corporate Plan.

The Balance Sheet shows an increase to our long term debt balance, from $5m to $23m at the end of the 2014 financial year. It is important to note, and this is described by the Statement of Cashflow, that this increase in long term debt is a result of capital expenditure plans. Cashflows from our operating activity continue to generate a healthy surplus throughout the planning period, and we do not require these long term debt facilities to fund operating expenditure.

Financial assumptions

InflationOur financial plans have been prepared in 2011/12 dollars, with 3% inflation applied to subsequent years.

Cost of debtOur Balance Sheet records an ongoing debt position for the Corporation. As has been our approach, we plan our interest costs at the spot interest rate applicable at the time of completing the Corporate Plan, and accordingly have assumed an interest charge of 6.1%, reflecting our current cost of debt from TCV (including 1.1% for the payment of the Financial Accommodation Levy to government).

Rate of returnOur prices are established in accordance with the pricing principles established in the WIRO. In addition to meeting our operations and maintenance costs, these prices provide for:

• areturnoninvestmentinnewcapitalinfrastructure(since 1 July 2004);

• repaymentofaccumulatedoperatingdeficits,including interest on those balances; and

• anannuitytofundrenewalofourdistributioninfrastructure.

We use a consistent rate of return for each of these calculations.Initsregulatorydetermination,theESC assessed an appropriate rate of return at 5.8% plus CPI. At current inflation, this would suggest a rate of 8.5%- 9.0%.

As for our ‘cost of debt’ assumption, we annually re-assess a rate of return for each planning period based on contem-porary financial measures (principally prevailing cost of debt). For the 2011/12 Corporate Plan, this rate increases from 6.1% to 7.2 %.

Post 2013 Our current regulatory period extends to 30 June 2013, and our revenue assumptions to that time are in accordance with our Water Plan.

Beyond 2013, we have applied a general inflation factor of 3% to both revenue and expenditure, although greater than inflationary adjustments are provided within capital expenditure plans.

Our post-2013 planning assumptions will be refined as we work through development of our third Water Plan. Ultimatelytheseassumptionswillbesubjecttoregulation bytheEssentialServicesCommission.

Asset valuations

Our Operating Statement and Balance Sheet are prepared in accordance with accounting standards and financial report-ing directions, under which our infrastructure assets are car-ried at the “deemed cost” derived from a 1999 valuation.

Our prices have been determined in accordance with the pricing principles established in the WIRO, and our revenue hasbeensubjecttodeterminationbytheESC.Thisdeter-mination has reflected the White Paper position with regard to past investments, and established our regulatory asset valuetobezeroasat1July2004.UndertheWIROpricingprinciples we are therefore unable to generate any return on these assets.

Arguably, our reported operating result is an anomaly specific to our designation as a “not-for-profit” entity. As a commercial entity, our assets would be valued to reflect their future cash flows - zero for our pre 2004 infrastructure - as a result, our depreciation charge would

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besignificantlyreduced.Underthistreatment,ouroperatingresult would be more in line with that shown on our Income andExpenditureStatement-excludingrenewals.

An asset revaluation is underway in accordance with FRD103D. We anticipate that this will result in a significant increase in our asset values and future depreciation charges. We expect that these re-valued balances will be recorded within the 2012-13 Corporate Plan.

Financing capital works

Our explicit approach over recent years to pricing for construction works has been to capitalise the financing costs of these into the constructed assets, which then impact future prices through our depreciation charges and return on investment.

In accordance with Financial Reporting Direction 105 (which prescribes the expense of these costs as incurred) we recognise these costs as expenditure within our Operating Statement.

This difference is disclosed within our Financial Statements Reconciliation, and amounts to $484,000 for 2011/12.

Sale of water savings

Our financial plan includes $3.5m as further proceeds from the sale of water savings achieved through recent infrastructure works in the Macalister Irrigation District. We have included this amount within our revenue at a nominal $1.75m per annum over the next two years. This is in addition to a first tranche for auction in June 2010, which secured $1.8m of revenue and a further sale in May 2011 which is estimated to bring a further $1.7m.

This treatment is consistent with our Water Plan objective of applying this revenue to specific sustainability initiatives, although we expect expenditure on these initiatives to extend beyond the Water Plan regulatory period.

Our positive financial results over the early years of this plan are entirely dependent on this sale of savings.

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Operating statement

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Income and expenditure statement

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Financial statement reconciliation

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Balance sheet

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Statement of cashflow

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Financial performance indicators

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Quarterly operating statement

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Quarterly balance sheet

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Quarterly statement of cash flow

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Quarterly performance indicators

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AppendicesAppendix a: tariff schedule

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Appendix b: notes to tariff schedule

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Appendix c: indicative tariffs 2011-15

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