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Sydney Water Annual Report 2009
Sustainability indicators: Being an economically efficient business
 
Ensured reliability and availability of services through ongoing investment in renewing, rehabilitating and maintaining infrastructure.
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In this section:

 

 
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Profitability
Performance: Profit below target due to lower demand for water, the abolition of regulated developer charges, and asset impairment due to a downward revaluation of system assets.

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Indicator: Net profit after tax (versus SCI)

A Statement of Corporate Intent (SCI) is agreed each year between Sydney Water’s Board of Directors and its shareholders: the NSW Treasurer and the Minister for Finance. This specifies key business objectives, commercial performance and revenue targets, operational expenditure and capital investment. The SCI forms the basis of Sydney Water’s annual budget.

Sydney Water’s consolidated net profit after tax for 2008–09 was $178 million, which was $194 million below the SCI target. The shortfall was largely due to:

  • lower demand for water
  • the abolition of regulated developer charges
  • a large asset impairment charge

offset by lower than budgeted core operating costs, financing and depreciation charges.

Earnings before interest, tax, depreciation and amortisation (EBITDA) were $931 million compared to the SCI budget of $977 million.

Summary operating results 2007–09

Financial performance target

2007–08
result

2008–09
SCI

budget

2008–09
result

Result
compared to
SCI budget

Total revenue ($m)

-1,766

-2,047

-1,958

(89)unfavourable

Earnings before interest, tax, depreciation and amortisation (EBITDA) ($m)

-801

-977

-931

(46)unfavourable

Net profit before tax (NPBT) ($m)

-388

-533

-353

(179)unfavourable

Income tax expense ($m)

-109

-161

-176

(15)unfavourable

Net profit after tax (NPAT) ($m)

-279

-372

-178

(194)unfavourable

Dividend payable ($m)

-190

-205

-205

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Return on assets (%)

-4.7

-5.4

-4.6

(0.8)unfavourable

Funds flow interest cover (%)

-1.9

-2.4

-2.4

--

Net new borrowings ($m)

-950

-1,435

-1,331

104favourable

Notes:
unfavourableUnfavourable variance to SCI.
favourableFavourable variance to SCI.

 

Revenue

Total revenue for 2008–09 was $1,958 million, $89 million (4.3%) below the SCI budget. A shortfall in water use revenue of $64 million was due to lower demand as a result of continuing restrictions and improved water efficiency.

Developer contributions (cash) were $54 million lower than the SCI budget because of the abolition during the year of regulated developer charges.

Capital contributions (assets free of charge) were $37 million higher than the SCI budget. This increase was largely due to an internal review of assets and the transfer of water and sewer assets associated with Lane Cove tunnel and other non-development land from the Roads and Traffic Authority.

Operating expenditure

Total core operating expenses for the year were $748 million, $33 million lower than the SCI budget.

The surplus was largely due to labour savings from Sydney Water’s continuing efficiency programs and productivity improvements. In addition, there was a lower than expected contribution to the Department of Environment and Climate Change (now Department of Environment, Climate Change and Water) Climate Change Fund and minor savings from other costs including transport, contractors and marketing.

Non-core expense variances included:

  • asset impairment charges, which were $146 million higher than budgeted due to a reduction in estimates of future cash flows used for the impairment test of property, plant and equipment and intangible assets
  • financing charges (after capitalisation), which were under budget by $6 million due to interest rate reductions and the timing of expenditure on property, plant and equipment
  • depreciation and amortisation charges, which were under budget by $6 million due to lower asset values after impairments.

Tax and dividends

Tax on profit from continuing operations was $176 million. This was boosted by the reversal of temporary differences, partly reflecting the increased amount of capitalised interest and labour.

A dividend of $205 million has been declared for 2008–09, as agreed with NSW Treasury.

 

 

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Debt servicing
Performance: Increased debt to fund a comprehensive capital expenditure program, but interest cover remains at prudent levels.

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Indicator: Funds flow from operations interest cover

The term ‘funds flow from operations interest cover’ refers to the adjusted cash flow from operations that is available to meet interest costs. It is calculated as the net cash from operating activities, plus cash interest and guarantee fee payments and other capital contributions.

This ratio reflects Sydney Water’s ability to service debt costs and manage additional debt.

The funds flow from operations improved to $680 million in 2008–09, from $479 million the previous year, as a result of continued cost control and higher prices set by the latest Independent Pricing and Regulatory Tribunal (IPART) determination.

The funds flow from operations interest cover ratio was 2.4. This reflects the additional funds offsetting the higher level of debt needed to fund increased capital expenditure (including for the desalination plant).

Funds flow from operations interest cover 2006–07 to 2008–09

Indicator

2006–07

2007–08

2008–09

Funds flow from operations ($m)

533

479

680

Funds flow from operations interest cover ratio (times)

2.4

1.9

2.4

Treasury management

Sydney Water Group – which comprises Sydney Water Corporation and its subsidiary Sydney Desalination Plant Pty Limited – uses debt to help fund capital investments. Sydney Water’s Treasury Management Unit actively manages the group’s debt portfolio and the risk associated with financial market volatility to protect equity and minimise liabilities. Debt is sourced almost entirely from the NSW Government’s Treasury Corporation.

Financial liabilities of the Sydney Water Group had a market value of $5.7 billion at 30 June 2009 compared to $4.2 billion the previous year.

During 2008–09, $859 million in new loans was raised for Sydney Water Corporation at an average interest rate of 5.02%. In addition, $477 million in new loans was raised for Sydney Desalination Plant Pty Limited at an average interest rate of 4.12%.

At 30 June 2009, 69% of the group’s debt was on fixed interest rates with a maturity exceeding one year. In addition, five per cent was long-term inflation indexed debt. The remaining 26% was due for refinancing in 2009–10.

Sydney Water measures its debt management performance against a model debt benchmark portfolio, constructed and maintained in accordance with NSW Treasury guidelines. In 2008-09, Sydney Water’s actual debt portfolio outperformed the benchmark by 0.45%.

Continued use of Treasury Corporation’s short-term borrowing facility helped meet 2008–09 cash flow obligations and reduce the volume of additional fixed borrowings. Sydney Water held $2 million in cash and at call investments at 30 June 2009.

Debt portfolio 2008–09

Measure

Sydney Water

Benchmark

Market valuation at 30 June 2009 ($m)

5,728

5,539

Generalised cost of funds (%)*

11.58

12.03

* Includes ‘mark to market’ costs

Cash flow

During 2008–09, the net cash flow from operating activities was $392 million. This was $220 million higher than in 2007–08 and largely reflected additional service and usage revenue from higher regulated prices. A further $1.3 billion were raised from net new borrowings and the total amount was used to finance new capital assets. $22 million were withdrawn from cash reserves, in line with cash management targets. The closing cash balance in 2008–09 was $2.3 million.

Credit worthiness rating

Sydney Water’s credit worthiness rating was unchanged in 2008–09, reflecting its close operational and financial links to the NSW Government. Sydney Water’s issuer default credit rating is AAA and its senior unsecured debt rating is AAA.

 

 

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Return on assets and equity
Performance: Return on assets and equity low by commercial standards. Return on equity decreased due to one-off asset impairments.

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Indicator: Return on assets and equity

Sydney Water measures the return it receives from assets. This is calculated by dividing the earnings before interest and tax (EBIT) by the total assets employed.

The book value of total assets was $12.7 billion at 30 June 2009.

Sydney Water measures the return on equity as a percentage return on its investment of shareholder funds. This is calculated by dividing the net profit after tax (NPAT) by total shareholder funds.

The value of Sydney Water’s shareholder funds was $5.4 billion at 30 June 2009.

The table below presents the returns on Sydney Water’s assets and equity. The results are low by commercial standards, but this reflects the organisation’s position as a regulated monopoly in a low-risk market. The deterioration in the return on equity in 2008–09 was largely the result of one-off asset impairments, despite continuing efficiencies and higher revenue from regulated price increases.

Return on total assets and equity 2006–07 to 2008–09

Measure

2006–07%

2007–08%

2008–09%

Return on assets

4.4

4.7

 4.6

Return on equity

3.6

4.1

 3.3

 

 

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Infrastructure management
Performance: Ensured reliability and availability of services through ongoing investment in renewal, rehabilitation and maintenance of infrastructure.

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Indicator: Delivery of capital investment program for renewals/rehabilitation

Water and wastewater

Sydney Water manages its water and wastewater assets to maintain performance levels and to extend their useful life. Water and sewer mains are renewed or rehabilitated when maintenance would cost more than replacing them.

Sydney Water aims to meet customer service requirements and minimise life cycle costs and risks in managing water and sewer mains. Mains are assessed each year to identify those that should be renewed or rehabilitated.

In 2008–09, 114 km of water mains were renewed or rehabilitated at a cost of about $93 million, compared to the planned renewal or rehabilitation of 111 km of water mains at a cost of about $76 million. The increase in expenditure is partly due to further funds being made available for reticulation and critical main renewals by bringing forward future planned expenditure. These costs include all water reticulation and critical water mains works, but exclude the cost of repairing water mains breaks. The length of water mains renewed or rehabilitated in 2008–09 was about 25% less than in the previous year, when we completed a backlog of required renewal work. Costs can vary if the scope of work changes and priority is given to larger, more difficult renewals, or when contractor costs differ from what was estimated.

During the year, 79 km of sewer mains were renewed or rehabilitated at a cost of about $58 million. The length was about 30% less than in 2007–08, and the cost was about 20% less. The previous year’s figures included rehabilitation of several large concrete mains in the Malabar sewerage system.

Completed water and sewer main renewals 2008–09 compared
to 2007–08

2008–09 renewals/ rehabilitation

Planned
km

Actual
km

Actual
%

Planned
$m

Actual
$m

Actual
%

Water mains

111

114

103

76

93

122

Sewer mains

75

79

105

56

58

104

 

2007–08 renewals/ rehabilitation

Planned
km

Actual
km

Actual
%

Planned
$m

Actual
$m

Actual
%

Water mains

132

152

115

70

100

143

Sewer mains

98

113

115

58

73

126

Information technology

Sydney Water has secure and reliable computing systems to support its business. Its information technology network supports about 4,100 internal users and provides web services to more than one million people. Sydney Water renews its information technology systems and carries out business efficiency reviews each year. Renewals generally include updating software. Efficiency reviews identify process improvements and automations that save time and money.

In 2008–09, Sydney Water spent $65.8 million on information technology renewals and business efficiency projects, $19.5 million more than last year. This was 100% of planned expenditure.

Major projects completed in 2008–09 were:

  • integrated data storage, retrieval and reporting (business intelligence systems) for water and environmental monitoring and financial and human resource management
  • an upgrade of the Every Drop Counts website and database
  • a technical fit-out of the new head office at Parramatta
  • upgrade of telephony and network infrastructure.

Ongoing projects that required significant expenditure in 2008–09 are:

  • consolidation of asset management software
  • an integrated customer management system
  • business intelligence systems for safety, asset and customer management
  • an information management program comprising web publishing, improved document management and system collaboration.

 

Indicator: Percentage of planned maintenance completed

Planned maintenance is the preventive and corrective work on assets to keep them in good working order. Sydney Water spent 99.1% of its planned budget for water and sewer main maintenance during 2008–09.

Water

Sydney Water marginally underspent its planned budget for maintenance of water mains in 2008–09, including planned spending on recycled water systems. This was the result of above ground mains inspection and leak detection programs being delivered under budget; some forecast work not realised and some work being delayed due to logistical issues.

Wastewater

Sydney Water marginally overspent its planned budget for maintenance of sewer mains during the year. The dredging program overspent due to an increase in identified work. Repairs to sewer mains, both externally (dig and repair) and internally (patches, robotics), also overspent, but have resulted in eliminating much of the backlog work. This was somewhat offset by under expenditure in CCTV inspection work due to operator unavailability, difficult access to assets and wet weather.

Planned maintenance completed for water and sewer mains in 2008–09
compared to 2007–08

 

2007–08

2008–09

Planned maintenance 

Planned
$m

Actual
$m

Actual
%

Planned
$m

Actual
$m

Actual
%

Water mains

11.3

11.5

101

13.8

13.4

96.9

Sewer mains

13.5

12.7

94

15.7

15.9

101.1

Total

24.8

24.2

97.5

29.5

29.3

99.1

Stormwater

In 2008–09, Sydney Water spent 77% of its planned overall budget for stormwater inspection and maintenance programs. Although this percentage was down from the 105% spent the previous year, a similar amount was spent and the length of stormwater assets inspected increased by nearly 100 kilometres (km).

The Structural Inspection Program was completed, with the exception of 21 km of stormwater drains in Sydney’s CBD. Inspection of these assets was postponed, as Sydney Water was unable to secure the required traffic permits from the City of Sydney council.

The Open Channel Inspection Program was completed to plan for the year. This is an ongoing program to determine the condition of assets and identify necessary repairs.

Stormwater maintenance and the SQID (stormwater quality improvement device) Cleaning and Channel Desilting programs were completed, with the exception of the channel inlet to Botany wetlands, scheduled for June. This work was postponed for health and safety reasons, due to a blue-green algal bloom that had washed into the wetland from Centennial Park.

Planned stormwater inspection and maintenance programs 2008–09
compared to 2007–08

 

Planned
$m

Actual
$m

Actual
%

Planned
km

Actual
km

Actual
%

2008–09

 *5.75

4.43

 77

603

586.8

97

2007–08

4.25

4.48

105

557

487

87

*Includes additional $0.731 million allocated in the second half of the financial year.

Property

Sydney Water’s property infrastructure includes more than 1,500 sites and 2,500 buildings that house offices, depots, plant and equipment. Property is cleaned and maintained to a high standard to preserve its condition and maintain heritage and environmental values. Sydney Water audits the condition of its assets to develop and refine maintenance programs.

Sydney Water increased its spending on property maintenance in 2008–09 and spent 106% of its budget, a similar result to that of the previous year.

Some heritage maintenance expenditure was delayed, while a strategic heritage asset plan was finalised. This plan was completed in December 2008 and a revised program of heritage conservation works was developed.

Sydney Water also invested about $8 million in property capital works to improve infrastructure management.

During 2008–09, Sydney Water and its contractors:

  • finalised a strategic heritage asset plan and a heritage conservation works program
  • completed a detailed condition audit of all buildings
  • drafted a 20-year life cycle analysis of the property portfolio and a program of backlog maintenance works
  • acquired more land for easements for water, wastewater, stormwater and recycled water infrastructure
  • continued to develop the eastern precinct at Potts Hill in conjunction with Landcom
  • finished a major upgrade of accommodation at Homebush for 200 staff.

Property maintenance 200708 and 200809

 

200708

200809

Planned maintenance programs

Planned
$m

Actual
$m

Actual
%

Planned
$m

Actual
$m

Actual
%

TOTAL

15.48

15.88

103

17.00

18.02

106