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Business and financial management

As a State-owned corporation, Sydney Water is required to operate at least as efficiently as any comparable business and maximise the net worth of the State's investment.

Statement of Corporate Intent

Each year Sydney Water completes an agreement, called a Statement of Corporate Intent (SCI), with the NSW Treasurer and the Minister for Finance who represent the NSW Government as shareholders of Sydney Water. The SCI specifies key business directions and commercial performance targets for Sydney Water and is based on the business revenue, operating expenditure and capital budget for the year.

In its financial statements, Sydney Water is required to reflect changes in its liability for future superannuation payments to staff under its defined benefits superannuation schemes. These changes are not related to any performance by Sydney Water and arise from changes in investment markets and other factors that are beyond its control.

In 2006/07, actuarial gains on superannuation liabilities amounted to $112.4 million before taxation. Taxation impact of these gains was $33.7 million. Excluding these amounts the net profit after tax from continuing operations was $257.3 million, which was $109.1 million above the SCI target.

The following table indicates Sydney Water's actual financial performance during 2006/07 as reflected in Sydney Water's audited financial statements excluding the superannuation adjustments, compared with the targets agreed in the SCI.

Performance against 2006-07 SCI budget
Items	Result2006-07$ million	SCI budget 2006-07$ million	Budget2007-08$ million
Service and usage revenue	1,445	1,467	1,518
Capital contributions	158	104	111
Other income	88	69	68
Total income	1,692	1,641	1,698
Operating expenses	989	1,051	1,001
Depreciation	164	180	175
Borrowing costs	180	188	225
Total expenses	1,332	1,419	1,414
Profit before tax	360	223	283
Income tax expense	103	75	85
Profit after tax	257	148	199
Capital investment program	649	609	1,180

Performance

Excluding actuarial gains on superannuation liabilities, the full year net profit after tax of $257.0 million was $109.3 million above the SCI target for the year.

Service and Usage revenue

Service and Usage revenue (including social program reimbursements) during 2006/07 was $1,445.4 million, which was $22.0 million below the SCI budget.

Water usage during 2006/07 coincided with a period of continuing mandatory water restrictions for customers in Sydney Water's area of operations. Restrictions have been at level 3 since June 2005 due to the ongoing drought which have acted to significantly reduce water consumption. Due to continuing demand management measures and above average rainfall during the final quarter of 2006/07, total water consumption during the year was 461.4 gigalitres. This was 42.9 billion litres or 8.5 per cent below the SCI target. In fact, Sydney Water's sales volumes in 2006/07 were the same as they were in 1974, despite a population growth of over one million people during this time.

Capital contributions

Capital contributions from developers were $158.4 million - $53.5 million higher than the SCI budget. The increase was largely due to recognising significant road infrastructure assets that were not included in the 2006/07 SCI budget. Major infrastructure assets transferred to Sydney Water during the year included water and sewer assets associated with the M2 Motorway, the Lane Cove Tunnel and the M7 Motorway.

Other income

Other income was favourable compared to the SCI budget by $18.6 million. This mostly reflected the unplanned reimbursement received in relation to the sale of property at Miranda of $8.4 million and the net gains on the sale of other properties of $9.1 million.

Expenses

Total operating expenses for the year were $1,332.3 million, which was $86.4 million favourable to the SCI budget.

2006/07 expenses ($ millions)
	Actual	SCI	Variance
Operating expenses
Core operations	718.3	740.2	21.9
Bulk water and water treatment	249.7	253.1	3.4
Total core operating expenses	968.0	993.3	25.3
Asset Impairment and write off	-6.1	32.5	38.6
Losses from property disposals	26.6	25.0	-1.6
Financing charges	179.8	187.9	8.1
Depreciation and amortisation	164.0	180.0	16.0
Total other operating expenses	364.3	425.4	61.1
Total expenses	1,332.3	1,418.7	86.4

Favourable variances for core operations of $21.9 million reflect the success of Sydney Water's program for implementing efficiency and productivity improvements. Favourable variances of $38.6 million and $16.0 million were attributable to lower than planned asset impairments and a reduction in depreciation charges, driven by lower than planned fixed asset valuations.

Financial distribution

During 2006/07, Sydney Water made dividend payments totalling $193.0 million. This represented Sydney Water's targeted dividend liability in respect of the 2005/06 operating result. Additionally, Sydney Water made income tax equivalent payments of $63 million.

The dividend declared for 2006/07 of $140 million reflects the 2006/07 SCI budgeted amount. Shareholders approved an interim dividend of $70 million, based on the recommendation of directors during the April 2007 Sydney Water board meeting.

Tax equivalent costs of $102.6 million, before superannuation adjustments, increased inline with the operating result, compared with the SCI target tax of $75.2 million. A further taxation expense of $33.7 million was attributable to the actuarial gain on superannuation liability during the year.

New borrowings

Sydney Water borrowed $420.0 million in 2006/07 to fund the capital investment program and other distributions. New borrowings were $35.0 million below the SCI cap of $455 million.

Borrowing costs of $179.8 million (after interest capitalisation) were $8.1 million below the SCI.

Additional borrowing costs to fund the capital investment program were mitigated by the effect of net gains on the sale of property and lower core operating costs.

Social programs

Sydney Water receives direct reimbursements from the NSW State Budget each year for the costs incurred in providing social programs (also known as community service obligations). In line with the SCI and State Budget projections, the total cost for these social programs during 2006/07 was $89.7 million, as itemised in the following table.

Social programs	$ million
Pensioner rate rebates	78.2
Exempt properties	9.9
Blue Mountains septic pump-out	0.8
Price impact offsets	0.4
Priority Sewerage Program	0.5
Total	89.7

Capital investment program

The SCI budgeted capital expenditure program for 2006/07 was $609 million. The following table shows the actual capital expenditure undertaken during 2006/07.

Major capital program variances at 30 June 2007 were largely due to the factors below.

• Increased expenditure for growth largely attributed to acceleration of projects. This included the South Western Sydney Sewerage Scheme ($39 million over budget) due to contract progressing four months ahead of original schedule; Rouse Hill Sewage Treatment Plant and Recycled Water Plant Stage 2 amplification ($4 million over budget) as delivery of works exceeded budget expectations. The increased expenditure was offset by private sector investment in the recycled water project (RWP) at Cronulla ($9 million under budget) and deferral of the Wollongong RWP Stage 2 to 2007/08, pending trial of new technologies ($6 million under budget).
• Expenditure on mandatory standards was lower than SCI due primarily to the revised scope and estimate for the Wet Weather Overflow Abatement Program ($6 million under budget).
• Expenditure on business efficiency projects was below the SCI due largely to a delay in the business case submission for the renewable energy program ($7 million under budget).
• Increased borrowing costs ($9 million over budget) were due to the timing of borrowings, the overall increase in borrowings and higher than forecast interest rates.

Capital efficiency savings ($9 million better than budget) were achieved from Bondi Reliability Improvement and Modernisation Program alliance, along with reduced operating costs associated with the Mt Pritchard critical water mains project and cost improvements at the Shellharbour Sewage Treatment Plant amplification project.

Risk profile of major projects

This section provides a risk profile of Sydney Water's major projects. Assessed risks include financial, political, reputation, safety, environment, customers, project, security, heritage and cultural risk. The extent of risk is defined by the likelihood of occurrence and the probable severity of impact.

Mitigation strategies are implemented and monitored for projects with medium, high and very high risk profiles to manage and alleviate risks. Projects with low risk profiles are constantly reassessed.

Operating costs per customer property

Operating costs per customer property continue to improve

Indicators	2002-03$*	2003-04$*	2004-05$*	2005-06$*	2005-06$*	2006-07$*
Total operating costs per property (excluding depreciation financing charges and superannuation)	607	520	530	522	522	558
Underlying costs per property (total excluding builder, owner, operator water purchases and filtration, employee and insurance provisions and asset impairments and losses)	333	313	314	305	305	334

*Constant $ of 2006-07

Performance

Dropping by almost 3 per cent from $304 to $295 in 2006-07, progress continued in improving controllable operating costs per property.

This measure excludes the impact of short-term or one-off factors such as superannuation, and costs outside the core operations of the business such as depreciation and financing charges.

Further significant controllable cost reductions will be challenging given the business's short-term fixed cost structure, and increasing regulatory and drought management requirements.