Annual Report 2011–12
including the Financial Report
Contents
Chairman and Managing Director’s Message
2
Company Highlights
3
Corporate Governance
6
Bulk entitlements Directors’ biographies Executives’ biographies
9 14 15
Major Non-Residential Water Users
17
2011–12 Performance Report
18
Summary of financial results Summary of financial performance Financial performance indicators Service performance indicators Environmental performance indicators Performance against corporate KPIs
18 19 20 21 22 22
Financial Report
26
Directors’ Statutory Report Auditor-General’s Independence Declaration Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Cash Flow Statement Notes to the Financial Statements
28 30 31 32 33 34 35
Directors’ Declaration
68
Independent Auditor’s Report
69
Risk Management Attestation
71
1
Chairman and Managing Director’s Message
We are pleased to present South East Water’s Annual Report for 2011–12. This report provides a summary of our performance, audited financial report, corporate governance statement and other statutory information requested by the Department of Sustainability and Environment. Our activities during the year were largely influenced by the ongoing challenges of population growth, the longterm impacts of climate variability and achieving further operational efficiencies. Operational efficiency, financial sustainability and innovation were the drivers of many of our achievements in 2011–12. These elements have been embedded in our new strategic framework that was launched internally to our people in early 2012. The new strategic framework reflects a renewed focus on our core business and is built around the four pillars of customers, assets, employees and sustainability. Each of these pillars is supported by a range of initiatives that will ready us for future opportunities and challenges. With Melbourne’s water supplies now in recovery, we are reinvesting in essential water and sewerage services while still planning for our longer term future water needs. The demonstration of customer value continues to be a priority for South East Water. Customer-driven activities, including implementation of an enhanced customer management system and the development of an online self-service portal, were key initiatives undertaken during the year to shape and enhance our customers’ experience.
Despite challenging business conditions, South East Water recorded a profit before tax closely aligned to budget expectations. This result reflects a balance between the provision of returns to our shareholder, and the delivery of value to our customers. We will continue to drive operating efficiencies to achieve value for money in everything we do. Our capital investment program continues to meet the needs of our growing population. In 2011–12, the program supported suburban development in the growth areas of Casey and Cardinia, upgrades to water recycling plants and our ongoing work to connect communities to sewerage. Through our ongoing relationship with key stakeholders, including the 17 councils in our region, we are well placed to deliver on our obligations. We look forward to working closely with the Department of Health, Department of Sustainability and Environment, Environment Protection Authority, and the newly formed Office of Living Victoria. Most importantly, we would like to extend our appreciation to South East Water’s workforce. Without each member of this team, we could not achieve our objectives as a company. Their ongoing commitment to the delivery of first class water and sewerage services puts our customers, community and stakeholders in good stead for the future.
Douglas Shirrefs Chairman
Kevin Hutchings Managing Director
27 August 2012
2
Company Highlights
Customers Experience South East Water introduced a customer experience program across three major customer touch points in April 2012. This program incorporates daily measurement and tracking of service interactions and identifies immediate follow up actions as well as priority areas for improvement. The progressive roll out of the program across additional customer touch points will take place in 2012–13. Customer ratings of 87 per cent for value, 90 per cent for satisfaction and 91 per cent for commendation were recorded for the last quarter. Customer satisfaction was also measured across the full year through a range of customer surveys, with a rating of 85 per cent achieved.
Improvement A new customer relationship management system, which integrates with South East Water’s property-based billing system, was introduced in 2011–12. The system will provide greater capacity to support customers and generate long-term efficiencies.
Responsiveness A key focus during the year was expert and speedy service. Ninety per cent of calls to the customer support centre were answered within 30 seconds. In the 24-hour faults and emergencies centre, 97 per cent of calls were answered within 30 seconds. In 2011–12, the average time to attend priority 1 bursts on water mains was 33.1 minutes. This was the fastest response time ever recorded by South East Water in this area.
Support The South East Water Assist team provided support to 1,600 customers experiencing financial hardship. In 2011–12, around 29,000 customers seeking greater certainty and flexibility around billing entered into payment plans. South East Water’s eleven-year partnership with Good Shepherd Youth & Family Service provided financial counselling to around 2,500 eligible customers.
Choice South East Water’s online customer self service portal was developed in 2011–12. Named mySouthEastWater, the portal has been developed with input from a forum of 280 customers. It will give customers the ability to pay their bills online, manage their details, track their water use and arrange payment plans and extensions for themselves at a time convenient to them. It will be launched in late 2012.
3
Company Highlights
Water management
Sewerage management
Growth and efficiency
Growth and efficiency
Across its entire service region, South East Water renewed 33.2 kilometres of water mains to support the reliable delivery of quality drinking water. A total of 72 renewal projects were undertaken during the year, benefitting 3,991 properties. More than 42 kilometres of new mains were created in 2011–12 to support the growing population across Melbourne’s south east.
South East Water renewed 25.3 kilometres of sewer mains to support the continued reliability and safety of its sewerage network. A total of 420 renewal projects were undertaken during the year, benefitting 3,620 properties.
Recycled water In 2011–12, South East Water supplied 3.1 billion litres of recycled water to its customers. The amount of recycled water supplied was 39 per cent more than the previous year, largely a result of more favourable climatic conditions. As at 30 June 2012, 4,323 households were supplied with recycled water for outdoor and toilet use.
Alternative water projects In September 2011, South East Water, Melbourne Water and Southern Rural Water released the draft Water Initiatives for 2050: an Integrated Water Management Strategy for Melbourne’s South East. The strategy reflects 18 months of investigation by the project partners into long-term water cycle planning and management to enhance economic, social and environmental outcomes across the region. Public exhibition of the draft strategy, including a number of information sessions, presentations and briefings, took place in late 2011. South East Water is working closely with the recently formed Office of Living Victoria on its implementation. Work continued on the development of sustainable water solutions for the growing areas of Southbank and Fisherman’s Bend. In the south eastern growth corridor, detailed planning commenced around the treatment of local stormwater to supply recycled water for gardens and toilets at Botanic Ridge residential estate in Cranbourne. Through a partnership with the local council and Places Victoria, South East Water supported the construction and installation of underground water tanks in Dandenong. Part of a revitalisation project, the tanks will capture stormwater to water the city’s trees and plants.
4
South East Water created more than 96 kilometres of new sewer mains in 2011–12 to support the growing population across Melbourne’s south east. It collaborated with developers to service 4,500 new properties with the construction of the Cranbourne West sewer branch.
Backlog sewer program In 2011–12, South East Water connected 653 properties to its sewerage network in Belgrave Heights, Belgrave South and Rye. This work is part of a program that protects the environment and public health from the impacts of failing household septic tanks.
Capital works In 2011–12, the Pakenham to Narre Warren Transfer Scheme, including Officer South pump station, became fully operational. These projects support the servicing of customers in the Cardinia growth corridor. Works to a number of water recycling plants were undertaken during the year. These upgrades will increase the amount of recycled water available to customers and the community, and improve the quality of water that is discharged to the environment. Upgrades to the Pakenham and Somers water recycling plants were commissioned in 2011–12. The plant in Somers now produces Class A recycled water (in addition to Class C), with the works also catering to growth by creating capacity to treat a greater volume of sewage. Water treated at the plant will be supplied to industrial users and irrigators along the Hastings pipeline from Somers to Mt Martha. As at 30 June 2012, construction was underway at Mt Martha Water Recycling Plant. These works include the construction of a tertiary treatment plant as well as upgrades to the sludge handling process. The latter will ensure the plant has the capacity to meet the demands of the growing population and reduce odour. The works are expected to be completed by early 2014.
Environment
Community
South East Water completed its enforceable undertaking with the Environment Protection Authority (EPA). The enforceable undertaking was implemented in response to a rising main failure that occurred in 2008. The outcomes, including the trial and installation of enhanced early warning leak detection systems, and development of contingency plans for 57 rising mains, position South East Water as a leader in sewer spill mitigation and management.
Education
Innovation
Engagement
South East Water continued to create and foster innovation across its business. In 2011–12, a number of external operations were consolidated under a single brand, iota, to promote products and services to businesses both within and outside the water industry.
South East Water attended 28 community events and delivered water and sewerage education activities to 10,560 people in 2011–12. In addition, over 2,500 students and community members toured the Mt Martha Water Recycling Plant and education centre to learn more about the sewerage system and recycled water in Melbourne’s south east.
Community and stakeholder relationships were strengthened through South East Water’s extensive engagement around its capital works program in 2011–12. An 88 per cent satisfaction score was recorded for the community’s experience with South East Water’s capital works.
In May 2012, South East Water held a technology forum to showcase its technological successes and expertise. Following the event, almost 100 requests for further information were received from a range of organisations keen to capture the operational and service benefits of these innovations. Two products developed by South East Water were named in a top 100 list of Australia’s most innovative products and services. Leak detection technology (NuRON) and a real-time control and monitoring system for pressure sewer pumps (SUREpoint) were both named in the Anthill Magazine ‘SMART 100’ Index - one of the largest innovation awards of its kind in the country.
5
Corporate Governance
South East Water was a company incorporated under the Corporations Act 2001 (Cth) and remains a State owned company under the State Owned Enterprises Act 1993 (Vic).
The board
On 1 July 2012, South East Water became a statutory authority.
• setting the strategic objectives of the company
The company’s activities are governed by a number of other Acts, including the Water Act, Catchment and Land Protection Act 1994, the Safe Drinking Water Act 2003, the Food Act 1984 and the Environment Protection Act 1970.
• determining all material policies governing operations
The Essential Services Commission (ESC) is our economic regulator. Five year water plans outlining what we will deliver and proposed prices are submitted to the ESC for review and approval. Other regulators that oversee South East Water include the Environment Protection Authority (EPA) and the Department of Health, which oversee recycled water quality and drinking water respectively.
Governance and management South East Water maintains a strong governance and management framework so that statutory requirements are met and government policy can be effectively delivered. The Board of Directors presides over all significant strategic, commercial, regulatory, financial and risk-focussed elements of the business. Quality management systems underpin the company’s performance and a number of accredited systems and standards are in place that are subject to independent auditing and certification. They include: • ISO 9001 (Quality System) • ISO 14001 (Environment Management System) • AS NZS 4801 (Occupational Health and Safety) • Hazard Analysis and Critical Control Point (HACCP) for drinking water and recycled water management • ISO 22000 (Food Safety Management) for sewage quality management. South East Water’s governance strategy is focussed on enhancing its strong practices through ongoing adherence to statutory and regulatory obligations and achieving best practice.
The board is responsible for governance of South East Water including:
• risk management
• reviewing the progress and performance of the company in meeting its strategic objectives. The board currently comprises six non-executive directors including a chairman, and the Managing Director. The directors are appointed by the shareholder and bring a mix of skills and experience to the board. The board met 11 times in the year.
Director independence The board has considered the status of each non-executive director and is of the view that each non-executive director is independent, having no relationships or interests, business or otherwise, which could compromise their autonomy.
Independent advice Should an issue arise warranting a director to seek independent advice, this may be obtained with the prior approval of the chairman or the board, with all reasonable costs reimbursed.
Reporting to the shareholder The board informs its shareholder of all major developments through: • quarterly performance reports • annual and half-yearly reports (each containing information about operations and financial and nonfinancial performance against key indicators) • a detailed, annual three-year corporate business plan, as provided by the State Owned Enterprises Act 1992 and consultation thereon • direct contact between the chairman, managing director and shareholder representatives on key issues • frequent communication at executive level on performance, industry and policy issues • board performance evaluation.
6
Board committees The board has three sub committees, each operating under a written charter and chaired by a non-executive director. The purpose of each committee is as follows: Committee
Role
Finance, Audit and Risk Management Committee
The Finance, Audit and Risk Management Committee assists the board in discharging its duties regarding the company’s financial management, risk and control framework.
Membership James Turcato (Chair) Douglas Shirrefs Geraldine Gentle Lynda Cheng (appointed on 29 November 2011) Kevin Hutchings Service Delivery Committee Membership Ross Passalaqua (Chair – appointed on 27 February 2012) Douglas Shirrefs Judith Slocombe Kevin Hutchings Anthony Beach (resigned as Chair on 23 November 2011) People and Culture Committee Membership
The committee reviews and monitors internal control processes, financial reporting, internal and external audit function, the external audit process, health, environment, workplace safety, compliance and the company’s risk management process. Meetings are held at least quarterly or more often if requested by the committee. The Service Delivery Committee assists the board in discharging its duties regarding the company’s service delivery responsibilities. The committee reviews key strategies and plans for the effective and efficient delivery of services to customers and other stakeholders. Meetings are held at least quarterly or more often if requested by the committee.
The People and Culture Committee assists the board in discharging its duties towards the company’s staff and organisational culture.
The committee reviews, monitors and recommends to the board Douglas Shirrefs (Chair) for approval relevant strategies and procedures in relation to the Judith Slocombe company’s remuneration and employment practices. Meetings are Geraldine Gentle held at least quarterly or more often if requested by the committee. James Turcato Ross Passalaqua Lynda Cheng (appointed on 29 November 2011) Kevin Hutchings Anthony Beach (resigned on 23 November 2011)
7
Corporate Governance
Director attendance at board and committee meetings Board
Finance, Audit and Risk Management Committee
Service Delivery Committee1
People and Culture Committee2
Douglas Shirrefs
11 of 11
4 of 4
5 of 5
4 of 4
Anthony Beach
4 of 4
N/A
2 of 2
1 of 1
Judith Slocombe
11 of 11
N/A
3 of 5
4 of 4
Geraldine Gentle
11 of 11
4 of 4
N/A
4 of 4
James Turcato
11 of 11
4 of 4
N/A
4 of 4
Ross Passalaqua
11 of 11
N/A
5 of 5
4 of 4
Lynda Cheng
8 of 8
2 of 2
N/A
3 of 3
11 of 11
3 of 4
4 of 5
4 of 4
3
4
Kevin Hutchings
6
5
1. The Service Delivery, Capacity and Performance Committee was renamed the Service Delivery Committee effective 29 November 2011. 2. The Remuneration Committee was renamed the People and Culture Committee effective 29 November 2011. 3. Anthony Beach resigned from the board effective 23 November 2011. 4. Lynda Cheng was appointed a director effective 1 October 2011. 5. Lynda Cheng was appointed as a member of the Finance, Audit and Risk Management Committee effective 29 November 2011. 6. Kevin Hutchings was appointed Managing Director effective 1 July 2011.
Health and safety
Ethical standards
Until 30 June 2012, the company operated a coordinated and systematic approach to managing health and safety risks through an Occupation Health and Safety Management System (OHSMS). This complied with AS/NZS 4801:2001 and is accredited annually by SAI Global. The OHSMS assists South East Water to continually improve safety performance and compliance with health and safety legislation and standards. It is audited both internally and externally on an annual basis.
The board seeks to ensure high standards of ethical behaviour through adoption of a board code of ethics, an employee code of conduct and appropriate policies, supported by specific awareness and compliance programs in areas such as equal employment opportunity and trade practices.
8
The code of conduct provides a framework to guide all South East Water employees in the professional, ethical and social aspects of their working lives. The code highlights expectations regarding performance, behaviours, legal compliance and a range of work-related matters regardless of where the employee is located or what they are working on. The standards set within the code apply to full-time, part-time, fixed term and casual employees of South East Water as well as its temporary contractors and consultants.
Whistleblower protection
Freedom of information
South East Water has established procedures under the Whistleblowers Protection Act 2001 (Vic) (Act). A member of the public or an employee of South East Water can make a disclosure under the Act if he or she believes on reasonable grounds that a public officer of South East Water has engaged in improper conduct or detrimental action.
South East Water is subject to the Freedom of Information Act 1982. In 2011–12 South East Water received six requests for access to documents under the Freedom of Information Act 1982. Access to documents was granted either in full (five) or in part (one).
Where a protected disclosure has been made, the whistleblower has protections under the Act. Their identity is kept confidential as far as possible and they are protected from detrimental action. The whistleblower (unless anonymous) will receive regular reports on the progress of the matter. Disclosures can be made to: Protected Disclosure Coordinator 20 Corporate Drive Heatherton 3202 Ph: (03) 9552 3674 Fax: (03) 9552 3771 Email:
[email protected] or The Ombudsman Victoria Level 9, 459 Collins Street Melbourne 3000 Ph: (03) 9613 6222, Toll Free: 1800 806 314 DX: 210174 Email:
[email protected] There were no disclosures, disclosed matters, requests, recommendations or investigations described in section 104(b)-( j) of the Act during the year.
Requests for access to South East Water documents under the Freedom of Information Act 1982 may be made in writing to: John Robertson Manager Audit and Customer Advocacy South East Water Locked Bag 1 Moorabbin 3189 Each application must be accompanied by a $25.10 application fee and clearly identify the documents sought. General enquiries relating to Freedom of Information can be made by contacting the Manager Audit and Customer Advocacy on (03) 9552 3674 between 8:30am and 4:30pm (Monday to Friday) or via email at
[email protected].
Disability South East Water has a disability action plan in place to address the four outcome areas as set out in section 38 of the Disability Act 2006 (Vic). Achievements to date include access audits conducted at the company’s offices in Heatherton and Lynbrook, and at Mt Martha Sewage Treatment Plant. The company has provided disability awareness training to employees and supported people with disabilities to enter the workforce through employment.
Bulk entitlements The three metropolitan retail water businesses (the retailers) hold bulk entitlements to the water resources of the Yarra River, Thomson River, Tarago and Bunyip Rivers, Silver and Wallaby Creeks (Goulburn River Basin) and to the Victorian Desalination Project. The entitlements have been established as a collective ’pool‘.
9
Corporate Governance
Compliance with the retailers’ bulk entitlements Melbourne retail water businesses reporting obligation
Combined Yarra River2 Yarra River, Silver and Wallaby Creeks, Thomson River
Silver and Wallaby Creeks5
Thomson River7
Tarago and Bunyip Rivers9
Clause 15.1 (a) Clause 14.1 (a) 1,100 ML 6,500 ML (Tarago)
Victorian Desalination Project12
The volume Clause 15.1 (a) of water taken 345,600 ML by the retailers in 2011–12
Clause 15.1 (a) Clause 13.1 (a) 343,400 ML 1,100 ML
Compliance with the long-term average bulk entitlement diversion limit
Clause 15.1 (b) 421,300 ML1
Clause 15.1 (b) Clause 13.1 (b) 289,500 ML3 17,700 ML6
The total annual consumption in 2011–12
365,600 ML
N/A
N/A
N/A
N/A
N/A
The retailers’ share of flow in 2011–12
N/A
Clause 15.1 (a) 271,700 ML
Clause 13.1 (a) N/A
Clause 15.1 (a) 235,900 ML
Clause 14.1 (a) 33,400 ML
Clause 11.1 (a) N/A
The retailers’ share of storage volume at 30/06/12
N/A
Clause 15.1 (a) 535,300 ML
N/A
Clause 15.1 (a) 638,900 ML
Clause 14.1 (a) 19,400 ML
N/A
Volume supplied to primary entitlement holders
N/A
Clause 15.1 (a) N/A N/A
N/A
Clause 14.1 (a) 286 ML (Gippsland Water)
Clause 11.1 (a)14 5,108 ML (Western Water)
Clause 11.1 (a) 0 ML13
2,200 ML (Bunyip) Clause 15.1 (b) Clause 14.1 (f) 127,000 ML8 11,500 ML (Tarago)10
Clause 11.1 (e) 0 ML
2,200 ML (Bunyip)11
0 ML (Southern Rural Water)
0 ML (Barwon Water) 0 ML (Westernport Water) 0 ML (South Gippsland Water)
10
Melbourne retail water businesses reporting obligation
Combined Yarra River, Silver and Wallaby Creeks, Thomson River
Yarra River2
Silver and Wallaby Creeks5
Any assignment of water allocation or temporary/ permanent transfers of the bulk entitlement
N/A
Clause 15.1 (c) Clause 13.1 (c) Nil Nil
Clause 15.1 (c) Clause 14.1 (b) Clause 11.1 (b) Nil Nil Nil
Any temporary N/A or permanent transfer of the bulk entitlement which may alter the flow in the waterway
Clause 15.1 (d) Clause 13.1 (d) Nil Nil
Clause 15.1 (d) Clause 14.1 (a) Nil Nil
Any amendment to the bulk entitlement
N/A
Clause 15.1 (e) Clause 13.1 (e) Yes4 Yes4
Clause 15.1 (e) Clause 14.1 (d) Clause 11.1 (c) Yes4 Yes4 Nil
Any new bulk entitlement granted to the retailers
N/A
Clause 15.1 (f) Nil
Clause 15.1 (f) Nil
Clause 13.1 (f) Nil
Thomson River7
Tarago and Bunyip Rivers9
Victorian Desalination Project12
N/A
Clause 14.1 (e) Clause 11.1 (d) Nil Nil
Any failures N/A to comply with any provision of the bulk entitlement
Clause 15.1 (g) Clause 13.1 (g) Nil Nil
Clause 15.1 (g) Clause 14.1 (g) Nil Nil
Any difficulty experienced in complying with the bulk entitlement and if so, any remedial action taken or proposed
Clause 15.1 (h) Clause 13.1 (h) Nil Nil
Clause 15.1 (h) Clause 14.1 (h) Clause 11.1 (g) Nil Nil Nil
N/A
Clause 11.1 (f) Nil
11
Corporate Governance
Notes for compliance with bulk entitlements Combined Yarra River, Silver and Wallaby Creeks, Thomson River (1) Compliance with the long-term average diversion limit of 555,000 ML is assessed using a 15-year rolling average annual diversion.
Yarra River (2) The retailers hold the following bulk entitlements on the Yarra River: • Bulk Entitlement (Yarra River – Melbourne Water for City West Water Limited) Conversion Order 2006 – BEE049364 • Bulk Entitlement (Yarra River – Melbourne Water for South East Water Limited) Conversion Order 2006 – BEE049363 • Bulk Entitlement (Yarra River – Melbourne Water for Yarra Valley Water Limited) Conversion Order 2006 – BEE049362 (3) Compliance with the long-term average diversion limit of 400,000 ML is assessed using a 15-year rolling average annual diversion. (4) On 1 July 2011 the Minister for Water made effect to the retailers’ bulk entitlements to substitute the Minister for Environment’s responsibilities for Environmental Entitlements with the Victorian Environmental Water Holder.
Silver and Wallaby Creeks (5) The retailers hold the following bulk entitlements on the Silver and Wallaby Creeks: • Bulk Entitlement (Silver & Wallaby Creeks – Melbourne Water for City West Water Limited) Conversion Order 2006 – BEE049475 • Bulk Entitlement (Silver & Wallaby Creeks – Melbourne Water for South East Water Limited) Conversion Order 2006 – BEE049474 • Bulk Entitlement (Silver & Wallaby Creeks – Melbourne Water for Yarra Valley Water Limited) Conversion Order 2006 – BEE049473 (6) Compliance with the 3-year total diversion limit of 66,000 ML is assessed using a 3-year rolling total diversion.
Thomson River (7) The retailers hold the following bulk entitlements on the Thomson River: • Transfer of Bulk Entitlement (Thomson River – Melbourne Water Corporation) Conversion Order 2001 to City West Water Limited 2006 – BEE049361 • Transfer of Bulk Entitlement (Thomson River – Melbourne Water Corporation) Conversion Order 2001 to South East Water Limited 2006 – BEE049360 • Transfer of Bulk Entitlement (Thomson River – Melbourne Water Corporation) Conversion Order 2001 to Yarra Valley Water Limited 2006 – BEE049359 (8) Compliance with the long-term average diversion limit of 171,800 ML is assessed using a 15-year rolling average annual diversion.
12
Tarago and Bunyip Rivers
Victorian Desalination Project
(9) The retailers hold the following bulk entitlements on the Tarago and Bunyip Rivers:
(12) The retailers hold the following bulk entitlements to the Victorian Desalination Project:
• Bulk Entitlement (Tarago and Bunyip Rivers – Melbourne Water for City West Water Limited) Conversion Order 2009 – BEE049358 • Bulk Entitlement (Tarago and Bunyip Rivers – Melbourne Water for South East Water Limited) Conversion Order 2009 – BEE049357 • Bulk Entitlement (Tarago and Bunyip Rivers – Melbourne Water for Yarra Valley Water Limited) Conversion Order 2009 – BEE049356 (10) Compliance with the long-term average diversion limit of 24,950 ML is assessed using a 5-year rolling average annual diversion. (11) Compliance with the long-term average diversion limit of 5,560 ML is assessed using a 5-year rolling average annual diversion.
• Bulk Entitlement (Desalinated Water – City West Water Limited) Order 2010 – BEE050814 • Bulk Entitlement (Desalinated Water – South East Water Limited) Order 2010 – BEE050815 • Bulk Entitlement (Desalinated Water – Yarra Valley Water Limited) Order 2010 – BEE050816 (13) Based on the Auditor-General’s Annual Report of the State of Victoria 2010–11, the Victorian Desalination Project is expected to be able to provide water to the Melbourne retailers by February 2013. (14) Supply of primary entitlement holders for the Victorian Desalination Project bulk entitlements are supplied through the Melbourne ‘pool’ with water sourced from all of Melbourne’s bulk entitlement sources.
13
Corporate Governance
Directors’ biographies Douglas Shirrefs
Ross Passalaqua
BAg and Res Eco, LLB, MAICD
Dip. Eng (Civil), GAICD
Chairman
Director
Doug was appointed as a director in August 2005 and as Chairman in October 2010. He is a barrister, economist and professional company director. He practises commercial law with a particular interest in franchising, competition and public law. Prior to commencing practice as a lawyer, he held senior positions as a regulatory economist for both the Commonwealth and Victorian governments. Doug has extensive experience in public policy and public administration, particularly in utilities and infrastructure sectors. He is also a director of Watermove Pty Ltd and the Victorian Water Industry Association (VicWater).
Ross was appointed as a director in October 2010. He has broad commercial, operational, and technical experience gained across multiple business sectors including services, logistics and petrochemicals. Ross worked with consulting engineers in the water supply and sewerage field before gaining diversified experience in Australia and internationally with Shell, the Mayne Group, and a Victorian Government statutory authority. He holds other board roles with the North East Victoria Tourism Board and Disabled Wintersport Australia and is a consultant with the Du Pont organisation.
Lynda Cheng
Judith Slocombe
BComm, LLB (Hons), GAICD
BVSc, Post Grad Dip Mgt, MBA, FAICD, FAIM
Director
Director
Lynda was appointed as a director in October 2011. She has broad commercial and international corporate finance experience. She is currently Director of Corporate Development and Mergers and Acquisitions and has held other senior executive roles at Visy Industries and Pratt Holdings since 2005. Previously, Lynda was a Vice President at JPMorgan Investment Bank and worked in their New York, San Francisco, Sydney and Melbourne offices.
Judith was appointed as a director in July 2008. She has extensive experience in business, running her own veterinary diagnostic company and then moving on to a career in executive management within a public company. She is currently CEO of The Alannah and Madeline Foundation and holds directorships on numerous boards. In 2001, Judith was named the Telstra Australian Business Woman of the Year. In 2003, she was awarded a Centenary Medal for her service to Australian society in business leadership.
Geraldine Gentle BEcon (Hons), PhD, GAICD
Director Geraldine was appointed as a director in September 2008. She is an economist with extensive experience in economic analysis and public policy, particularly in areas relating to industry, trade and natural resources and environmental management. She has held senior positions with the Australian, Victorian and Queensland governments and was a Commissioner of the Murray Darling Basin Commission. Geraldine has also worked in the private sector as a consultant, and currently runs her own consulting business.
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Executives’ biographies James Turcato Dip. Business Studies (Accounting), Grad.Dip.Ed, Grad.Dip.Computer Ed, Dip. Training & Assessment, CPA, AIMM, GAICD
Director James was appointed as a director in January 2007. He is a business consultant and professional facilitator with extensive corporate experience in financial management, strategic financial decision-making and business case development. He has facilitated management development programs for some of Australia’s leading organisations including BHP Billiton, Mercedes Benz, SCA Hygiene, ANZ, Infosys, Programmed Group and Marsh. His professional interests include the development of financial skills for directors and he is an accredited course facilitator for the Australian Institute of Company Directors.
Kevin Hutchings GAICD
Managing Director Kevin was appointed as the Managing Director of South East Water on 1 July 2011, having held the role of Acting Chief Executive Officer from February 2011. He brings a wealth of water, sewerage and infrastructure expertise to his role. Kevin was previously the general manager responsible for asset creation, management of treatment plants, new growth areas for external works, and emergency and scheduled maintenance. Before joining South East Water in 1995, Kevin worked for 19 years at Email Electronics, which specialised in the development of new hardware and software technologies in retail and distribution markets for the petroleum industry.
Kevin Hutchings GAICD
Managing Director Refer to Kevin’s biography in the opposite column.
Rex Dusting BEng (Civil), MBA, MIE Aust, CP Eng (Civil)
General Manager Infrastructure Rex leads the Infrastructure group, which is responsible for ensuring our pipes, pumps and treatment plants meet the ongoing service needs of our customers. The group uses its technical expertise to review asset performance and future urban development needs to develop master plans, budgets and projects for growth, renewal and replacement of our assets. He has worked for other water authorities and engineering consultants, in roles incorporating planning, design, operation and construction of water industry infrastructure. Rex joined South East Water in 1996.
Chris Feil BEc, LLB (Hons)
General Counsel and Governance Chris is South East Water’s General Counsel and leads the Governance group, which is responsible for secretariat, legal, internal and external audit, contracts and compliance functions. He has held a variety of roles at South East Water including corporate lawyer, corporate counsel, legal branch manager and continues as its company secretary, a role he has held since September 2009. He has previously worked as a solicitor in the areas of commercial, government and administrative law. Chris joined South East Water in 2006.
15
Corporate Governance
Phil Johnson
Julia Oxley
BBus (Acc), CPA, GAICD
BA, MBus (Marketing), AAICD
General Manager Corporate and Commercial, and Chief Financial Officer
General Manager Customer and Community
Phil leads the Corporate and Commercial group, which encompasses commercial services, risk and business services, business technology services, major projects, iota services (the company’s commercial business arm), business process improvement and quality. Previously, Phil was Group Manager, Commercial and Technical Services for the ‘us’ – Utility Services alliance. He was also a member of the alliance governance board. Prior roles include Chief Financial Officer for South East Water from 2000 to 2004 and director of the Water Industry Super Fund (now Equipsuper). Phil joined South East Water in 1995.
Julia leads the Customer and Community group, which is responsible for managing South East Water’s relationship with its customers and community. This incorporates the areas of customer support, metering and accounts integrity, channel and revenue management, and marketing communications and engagement. She has a broad range of business, management and leadership expertise in marketing and brand management, customer account management and support, and business development. Julia has worked for high profile organisations including BP, Mattel, Mitre 10, Pacific Brands, National Australia Bank and Kmart. Julia joined South East Water in 2010.
Charlie Littlefair
Hamish Reid
BEng (Civil), CP Eng, IntPE(NZ), MIPENZ
BSc (Hons), PhD, MAICD
General Manager Asset Creation
General Manager Strategy
Charlie leads the Asset Creation group, which manages the design and construction of South East Water built infrastructure assets, developer works and customer connection of new developer built assets. He also manages the handover of assets to Network Services. Previously he was General Manager, Asset Investment for Metrowater in Auckland. Charlie has over 25 years of international experience in the water and sewerage industry, having worked for both private and public water utility organisations in New Zealand, Australia and the United Kingdom. Charlie joined South East Water in 2008.
Hamish leads the Strategy group, which provides strategic direction to South East Water through development of the corporate plan and the water plan. He also oversees a number of strategic areas including integrated water management, stakeholder relationships, water resource and industry policy, innovation, sustainability and environment. He has held a range of previous water industry and government roles at Melbourne Water, the Victorian Environment Protection Authority and the New Zealand Ministry for the Environment. Hamish joined South East Water in 2005.
Mark McCormack
Sharon Robinson
BEng (Civil), EWS
BBus (Marketing and Management)
General Manager Network Services
General Manager People and Culture
Mark leads the Network Services group, which oversees the operation and maintenance of South East Water’s water and sewerage network and treatment plants. He is a member of the ‘us’- Utility Services alliance board, which delivers the company’s capital works and maintenance programs. He has more than 20 years of experience in the water industry and has worked for a number of water companies in a broad range of roles. He commenced his career with the State Rivers and Water Supply Commission. Mark joined South East Water in 1995.
Sharon leads the People and Culture group, which is responsible for overseeing South East Water’s delivery of human resources services and shaping of organisational development. She brings a wealth of experience in the human resources field having worked in various industries including natural resource management, hospitality, engineering and banking. She has held senior roles at Crown Melbourne Ltd, National Australia Bank and Arup Group. Sharon joined South East Water in 2012.
16
Major Non-Residential Water Users
Customer by volume range Volumetric range – ML per year
No of customers
Equal to or greater than 200ML and less than 300 ML
5
Equal to or greater than 300ML and less than 400 ML
1
Equal to or greater than 400ML and less than 500 ML
1
Equal to or greater than 500ML and less than 750 ML
1
Equal to or greater than 750ML and less than 1000 ML
0
Greater than 1000ML
0
Total number of customers
8
Names of major customers and their participation in water conservation programs Name of customer
Information as to customer’s participation in water conservation program
Crown Melbourne Ltd
Yes, water management plan developed
Inghams Enterprises Pty Ltd
Yes, water management plan developed
Coca-Cola Amatil (Aust) Pty Ltd
Yes, water management plan developed
BlueScope Steel Limited
Yes, water management plan developed
O’Connor G & K Pty Ltd
Yes, water management plan developed
Lesaffre Australia Pacific Pty Ltd
Yes, water management plan developed
Alfred Hospital
Yes, water management plan developed
Symex Holdings Limited
Yes, water management plan developed
17
2011–12 Performance Report
Summary of financial results 2006–07 $’000
2007–08 $’000
2008–09 $’000
2009–10 $’000
2010–11 $’000
2011–12 $’000
380,541
385,575
447,540
529,974
619,731
742,392
-
-
8,023
1,550
324
250
Other revenue
9,989
57
37
3,894
266
319
Total revenue
390,530
385,632
455,600
535,418
620,321
742,961
Financial Result Core business revenue Government contributions
Operating expenditure
239,465
255,405
318,467
357,177
404,806
492,640
Depreciation expenditure
33,036
35,722
36,380
37,412
61,658
61,101
Finance costs
26,864
31,268
34,178
41,487
51,767
58,210
Other expenditure
6,908
4,563
3,192
3,916
2,379
1,749
Total expenditure
306,273
326,958
392,217
439,992
520,610
613,700
Net result before tax
84,257
58,674
63,383
95,426
99,711
129,261
Current assets
43,647
43,856
71,496
60,758
69,431
97,629
Non-current assets
1,418,934
1,516,199
1,620,177
2,791,976
2,995,095
3,135,095
Total assets
1,462,581
1,560,055
1,691,673
2,852,734
3,064,526
3,232,724
Current liabilities
90,462
108,001
160,624
139,757
142,831
147,571
Non-current liabilities
643,713
705,010
759,800
1,210,503
1,320,229
1,455,194
Total liabilities
734,175
813,011
920,424
1,350,260
1,463,060
1,602,765
Net cash flows from operations
74,416
72,491
60,058
86,607
114,504
103,454
Payments for property, plant and equipment
84,841
100,017
123,290
131,281
167,496
162,268
18
Summary of financial performance Performance Indicator
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
Internal Financing Ratio (Net operating cash flow – dividends)/Capital expenditure
65.5%
35.1%
26.9%
35.3%
60.0%
32.2%
Gearing Ratio Total debt (including finance leases)/Total assets
29.9%
32.3%
35.1%
25.2%
26.4%
28.6%
Interest Cover (EBIT) Earnings before net interest and tax expense/ Net interest expense
4.1 times
2.9 times
2.9 times
3.3 times
2.9 times
3.2 times
Interest Cover (Cash) Cash flow from operations before net interest and tax payments/Net interest payments
4.6 times
3.7 times
3.4 times
3.9 times
3.9 times
3.4 times
7.9%
6.0%
6.0%
6.0%
5.1%
6.0%
15.3%
5.2%
5.6%
5.8%
4.5%
5.6%
Return on Assets Earnings before net interest and tax/Average total assets Return on Equity Net profit after tax/ Average total equity
19
2011–12 Performance Report
Financial performance indicators F1
Performance Indicator
Notes
2010–11 Result
2011–12 Result
2011–12 Target
Variance*
Internal Financing Ratio
1
54.7%
32.2%
46.9%
-31.3%
2
26.4%
28.6%
29.6%
-3.4%
3
2.9 times
3.2 times
3.2 times
-
4
3.9 times
3.4 times
3.7 times
-8.1%
5
5.1%
6.0%
6.2%
-3.2%
6
4.5%
5.6%
5.6%
-
(Net operating cash flow – dividends)/ Capital expenditure F2
Gearing Ratio Total debt (including finance leases)/Total assets
F3
Interest Cover (EBIT) Earnings before net interest and tax expense/Net interest expense
F4
Interest Cover (Cash) Cash flow from operations before net interest and tax payments/Net interest payments
F5
Return on Assets Earnings before net interest and tax/ Average total assets
F6
Return on Equity Net profit after tax/Average total equity
* Variance is calculated based on current year targets versus actuals.
Notes: (1) The result for the year has been impacted by higher bulk sewage volumes and the final dividend for 2010–11 offset in part by lower capital expenditure. (2) Variance not material. (3) No variance. (4) The result for the year was impacted by lower operating cash flows brought about by higher bulk sewage flows and working capital balances. (5) Variance not material. (6) No variance.
20
Service performance indicators Performance Indicator S1
Water supply interruptions
S1.1
Number of customers receiving 5 unplanned interruptions in the year
S2
Interruption time indicators
S2.1
Average duration of unplanned water supply interruptions
Notes
2010–11 Result
2011–12 Result
2011–12 Target
Variance*
7
0.038%
0.052%
0.023%
126.1%
8
88.4 minutes
87.5 minutes
85.1 minutes
2.8%
9
99.4%
99.3%
99.7%
-0.4%
10
506 spills
327 spills
650 spills
-50.0%
11
100%
100%
100%
0.0%
12
2.0
2.0
2.2
-9.1%
S6.2 Sewerage service quality and reliability complaints per 1,000 customers
13
0.002
0.000
0.010
0.0%
S6.3 Billing complaints per 1,000 customers
14
0.32
0.20
0.40
-50.0%
S6.4 Sewage odours complaints per 1,000 customers
15
0.05
0.03
0.06
-50.0%
S3
Restoration of water supply
S3.1
Unplanned water supply interruptions restored within 5 hours
S4
Reliability of sewage collection services
S4.1
Sewer spills from reticulation and branch sewers (priority 1 and 2)
S5
Containment of sewer spillages
S5.1
Sewerage spills contained within 5 hours
S6
Customer complaints indicators
S6.1
Water quality complaints per 1,000 customers
* Variance is calculated based on current year targets versus actuals.
Notes: (7) Unfavourable result primarily due to a greater emphasis placed on safety and increasing waiting times for traffic management, council or other utility attendances (e.g. power and gas). (8) Variance not material. (9) Variance not material. (10) Sewer blockages and associated spills have significantly reduced this year. South East Water has a comprehensive preventative maintenance program in place for its sewerage assets. This includes a targeted sewerage cleaning program and a CCTV program that identifies potential problems before a blockage and spill occur. (11) No variance. (12) Variance not material. (13) No variance. (14) Favourable result primarily due to proactive management of customer issues and queries. (15) Favourable result primarily due to continued program of proactively addressing odour hotspots. This, combined with a wet summer, has resulted in reduced odour complaints.
21
2011–12 Performance Report
Environmental performance indicators Performance Indicator
Notes
2010–11 Result
2011–12 Result
2011–12 Target
Variance*
E1
Reuse Indicators
E1.1
Effluent reuse (volume)
16
12%
17%
39%
-44%
E1.2
Biosolids reuse (dry mass)
17
111%
110%
105%
5%
18
100%
100%
100%
0.0%
E2
Sewage Treatment Standards
E2.1
Number of analyses complying with licence agreements as % of samples
* Variance is calculated based on current year targets versus actuals.
Notes: (16) The result for the year has been impacted by delayed commissioning of the BlueScope industrial recycling project and Officer – Pakenham residential recycling scheme. In addition, reduced consumption volumes due to wetter than average spring and summer periods have contributed to the variance. (17) Variance not material. (18) No variance.
Performance against corporate KPIs Our Customers and Community Performance Indicator
2010–11 Result
2011–12 Result
2011–12 Target
Customer satisfaction (%)*
84.0
84.7
80.0
Complaints received (per 1,000 customers)
3.42
3.52
3.00
90
88
68
Community engagement score (%)
*The target was to achieve a customer satisfaction rating of 6+ on a scale of 0–10 with 80 per cent of our customers, with 5 being neither satisfied or dissatisfied. Please note that in prior years we only surveyed bill payers (as opposed to both bill payers and non-bill payers in 2010–11).
The bulk of complaints received related to water quality and pressure, followed by a range of other complaints including billing and service. While not meeting the target set in the corporate plan, the result fell within the forecast that was adjusted in early 2012 (3.7 per 1,000 customers). Despite a challenging year, the implementation of a customer experience program ensured that South East Water’s customer satisfaction rating remained robust. Central to the program is the daily measurement of satisfaction, identification of immediate follow up actions and prioritisation of areas for improvement. South East Water’s community engagement performance reflects the proactive planning and robust consultation processes undertaken in 2011–12 across a range of projects.
22
Service Delivery Performance Indicator
2010–11 Result
2011–12 Result
2011–12 Target
Compliance with drinking water quality regulations (%)
100
100
100
Drinking water quality complaints (per 1,000 customers)
2.0
2.0
2.2
Unmet customer demand for recycled water (ML per annum)
2.7
2.5
220
Recycled water quality complaints (per 1,000 customers)
2.3
2.1
5.0
Customer time off supply (planned and unplanned) (minutes)
21.0
20.6
24.6
Spills within buildings from sewerage system (no. per annum)
24
8
19
8,391
615
3,750
Ammonia loads to waterways (tonnes per annum)
5.0
2.4
13.0
Treatment plant compliance (%)
100
100
100
31,351
33,555
39,200
103,828
100,189
131,300
Total volume of sewage spilled to waterways due to sewer system failure (kL per annum)
Greenhouse gas emissions (net tonnes)* Total energy purchased (GJ)
*Tonnes of CO2 equivalent per annum. Includes Scope 1 and 2 emissions as reported to the National Greenhouse and Energy Reporting System, less offsets.
South East Water either met or outperformed its service delivery performance targets in 2011–12. Unmet customer demand for recycled water was low due to a reduction in system downtimes as well as cooler weather reducing peak demand. In addition, the target was based on delays and outages from the introduction of new schemes which were yet to be commissioned. Ammonia loads to waterways outperformed the target as a result of investment in plant upgrades and improved monitoring and control of treatment processes. The target was developed in 2009 based on a combination of historical plant performance and predicted improvements (made prior to plant upgrades). The result in 2011–12 significantly exceeded expectations, reflecting the success of the upgrades. Total volume of sewage spilled to waterways due to sewer system failure outperformed the target due to fewer than predicted rainfall events (of less than one in five year intensity) in critical parts of the system and ongoing investment in sewer system reliability. The annual target reflects the probability of wet weather and other significant failure events occurring in a year, and therefore actual performance will at times be significantly better than the target. The result for greenhouse gas emissions outperformed the target in 2011–12, partially due to a wet summer reducing recycled water demand. There was a slight increase in emissions from the previous year due to the discontinuation of purchasing carbon offsets. This cost saving will be directed to internal carbon reduction programs.
23
2011–12 Performance Report
Business Growth
Portfolio EBIT (total portfolio) ($‘000) Customer satisfaction – used a product or service (%) Profit margin (excluding alliance dividend) (%)
2010–11 Result
2011–12 Result
2011–12 Target
2,724
1,126
1,178
90
97
86
14
20
22
The 2011–12 ‘customer satisfaction – used a product or service’ result refers to customer ratings of Priority Plumbing. Each Priority Plumbing customer during the year was asked to complete a survey following completion of works. For explanation of financial performance, refer to the Financial Report.
Integrated Water Management 2010–11 Result
2011–12 Result
2011–12 Target
Total per capita water consumption (l/p/d)
224
230
246
Total potable substitution (ML)
172
237
400
The result for potable substitution was lower than the target primarily due to a wetter than average winter and spring in 2011.
24
Organisational Capability 2010–11 Result
2011–12 Result
2011–12 Target
1.6
1.3
0
33/51/28
-
-
149.8
187.1
180.5
33.6
35.6
37.7
Return on invested capital (%)
4.6
5.3
4.6
FFO net interest cover (times)
3.3
2.8
3.2
Lost time injury frequency rate (no. per million hours) Culture improvement (OCI) (index) Achievement/humanistic encouraging/self actualisation Operating before interest and tax ($ million) Gearing (%)
Three lost time incidents occurred in 2011–12, all of which were investigated with strategies put in place to mitigate the risk of further incidents. Culture improvement is measured on a biennial basis with the most recent undertaken in 2010–11. For explanation of financial performance, refer to the Financial Report.
Influence and Leadership
Reputation survey (government, government agencies and water industry) (%)
2010–11 Result
2011–12 Result
2011–12 Target
-
81.7
76.0
The reputation result in 2011–12 outperformed the target, validating the work undertaken to manage stakeholder relationships during the year. It also indicates that South East Water’s research and development, and innovation programs, have resonated with key government and industry stakeholders.
25
Financial Report 2011–12
26
Financial Report
26
Directors’ Statutory Report Auditor-General’s Independence Declaration Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Cash Flow Statement Notes to the Financial Statements
28 30 31 32 33 34 35
Directors’ Declaration
68
Independent Auditor’s Report
69
Risk Management Attestation
71
27
Directors’ Statutory Report
The directors present their report on the financial year ended 30 June 2012 on South East Water Limited (the company).
Dividends
Directors
The payment of an interim dividend for the year ended 30 June 2012 was deferred by the Treasurer and will be incorporated into the final dividend payment for the 2011–12 financial year.
The directors of the company in office at the date of this report are: Douglas Shirrefs
Chairman
Kevin Hutchings
Managing Director
Geraldine Gentle
Director
Ross Passalaqua
Director
Judith Slocombe
Director
James Turcato
Director
Lynda Cheng
Director
As at the date of the report, no director has any interests in the shares of the company. Particulars of the directors’ and company secretary’s qualifications, experience and special responsibilities (if any) are set out on pages 14 and 15 of the Annual Report.
Directors’ meetings The number of directors’ meetings and board committee meetings, and number of meetings attended by each of the directors of the company during the financial year, are set out in the corporate governance section of the Annual Report.
Principal activities The core principal activities of the company during the financial year were, within the State of Victoria, to:
A final dividend of $50 million for the year ended 30 June 2011 was paid on 30 November 2011.
The amount of the dividend for the year ended 30 June 2012 will be determined after consultation between the board, the Minister for Water and the Treasurer of Victoria.
Review of operations A review of the operations of the company during the financial year and the results of those operations is set out in the main body of the Annual Report.
State of affairs On 1 July 2012, under the provisions of the Water Amendment (Governance and Other Reforms) Act 2012, all assets, liabilities, contracts and employees of South East Water Limited transferred to South East Water Corporation. The services previously supplied by South East Water Limited are now supplied by South East Water Corporation. These legislative changes create uniformity across the Victorian water and sewerage sector, with the three Melbourne metropolitan retailers becoming Water Corporations under the Water Act 1989, in line with the structure of the water industry throughout the rest of Victoria. In due course, South East Water Limited will be wound up and cease to exist.
• treat, distribute and supply potable water
Events subsequent to balance date
• provide, manage and operate systems for the conveyance, treatment and disposal of sewage and trade waste
No matter or circumstance has arisen that has significantly affected or may significantly affect the operations of the company, the results of those operations or the state of affairs of the company in financial years after the financial year.
• treat, distribute and supply recycled water. Commercial ventures of the company during the financial year led to an increased focus on niche markets to leverage our core business activities, technology and innovations. An important element of this process has been the development of a brand (iota) for our commercial ventures. These opportunities will benefit our core water and sewerage business and develop new revenue streams. This is in contrast to our previous focus which was to expand retail products and services. There was no significant change in the nature of the company’s activities during the financial year.
28
It is noted, for the sake of completeness, that South East Water Corporation entered into a contract of sale dated 2 August 2012 to purchase land in Frankston. As set out in the notes to the Financial Statements included in the Annual Report, a return to customers of desalination plant charges collected during the year ended 30 June 2012 is required as a result of the announcements made by the Minister for Water. Customers are to be returned funds in the form of a price freeze for the 12 months from 1 July 2012 to 30 June 2013.
Past customers, being those customers that no longer reside in metropolitan Melbourne, have passed away or will no longer receive a bill, cannot be returned funds through a price freeze and are therefore entitled to a return of money. As at reporting date, the company is unable to reliably determine the expected total amount required to be returned to past customers. A plan, which will be audited by the Essential Services Commission, is being put in place to enable the return of these funds to past customers. All contingent assets and liabilities have, with effect from 1 July 2012, been transferred to South East Water Corporation pursuant to the Water Act Amendment (Governance and Other Reforms) Act 2012.
Likely developments Certain likely developments in the operations of the company known as at the date of this report have been covered generally within the main body of the Annual Report.
Environmental regulation performance The company is subject to significant environmental regulations in respect of its operations. In particular, the company holds a corporate licence for its eight sewage treatment plants issued by the Victorian Environment Protection Authority (EPA) under the Environment Protection Act 1970 (Vic). The corporate licence imposes conditions about waste discharges, sustainability commitments, reporting obligations and other matters concerning the operation of the sewage treatment plants. The corporate licence combines regulatory requirements with projects that will assist South East Water to realise its longer-term business sustainability goals. In 2011–12, the environmental performance conditions for effluent discharge stated within the corporate licence were met at each of the company’s sewage treatment plants. No enforcement action was taken against South East Water regarding non-compliance with the corporate licence. However, South East Water completed all the requirements of the Enforceable Undertaking that was approved by the EPA in July 2010 for an incident that occurred in September 2008. An EPA appointed auditor verified that South East Water successfully delivered all the requirements of the Enforceable Undertaking. Further particulars of specific environmental programs and performance are included through the main body of the Annual Report.
Directors’ benefits No director has received, or has become entitled to receive, a benefit (other than a remuneration benefit included in Note 18 of the Financial Report) because of a contract the director, a firm of which the director is a member or an entity in which the director has a substantial financial interest, has made (during the financial year ended 30 June 2012 or at any other time) with the company. Additional information about director-related disclosure is provided in Note 18 of the Financial Report.
Insurance and indemnity The company’s constitution provides that every person who is, or has been, an officer or auditor of the company, will be indemnified out of the property of the company to the extent allowed by the Corporations Act 2001. No amount has been paid pursuant to this indemnity during, or since the end of the financial year. During or since the financial year, the company has paid or contributed to the premium in respect of a contract or contracts insuring against certain liabilities of each of the directors, whose names appear earlier in this report, and certain officers of the company. The terms of the policy of insurance prohibit the disclosure of the nature of the liabilities insured and the amount of the premium.
Auditor’s independence declaration to the directors of South East Water The company has obtained an independence declaration from the Victorian Auditor-General’s Office as required under section 307C of the Corporations Act, a copy of which is provided on page 30.
Rounding of amounts to nearest thousand dollars The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investment Commission, relating to the “rounding off” of amounts in the Directors’ Report and Financial Report. Amounts have been rounded off in the Directors’ Report and Financial Report in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. Dated at Melbourne this 27th day of August 2012. Signed in accordance with a resolution of the directors.
Douglas Shirrefs Kevin Hutchings Chairman Managing Director
29
Auditor-General’s Independence Declaration
30
South East Water Limited ACN 066 902 547
Statement of Comprehensive Income for the year ended 30 June 2012
Notes Sales revenue Other income Total income Expenses Finance costs Profit before income tax expense Income tax expense Net profit after income tax Other comprehensive income Gain on revaluation of infrastructure assets Gain on revaluation of land and buildings Actuarial gains/(losses) on defined benefit fund Transfer from asset revaluation reserve to retained earnings Income tax relating to components of other comprehensive income Other comprehensive income after tax Total comprehensive income for the year
3 3 4
5
9 9 16,22 16
2012 $’000 742,642 319 742,961 (555,490) (58,210) 129,261 (38,841) 90,420
2011 $’000 620,055 266 620,321 (468,843) (51,767) 99,711 (30,033) 69,678
(16,931) -
26,962 30,054 (4,287) 1,399 5,004 (8,134) (11,927) 45,994 78,493 115,672
The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes.
31
South East Water Limited ACN 066 902 547
Balance Sheet as at 30 June 2012
Notes
2012 $’000
2011 $’000
7,17 8,17
837 94,570 622 1,600 97,629
663 66,873 517 1,378 69,431
9 10
3,026,543 108,552 3,135,095 3,232,724
2,896,905 98,190 2,995,095 3,064,526
11,17 12,17 13
85,716 29,475 14,735 10,842 6,803 147,571
73,944 35,400 17,706 8,084 7,697 142,831
12,17 5 22 13
895,525 540,893 16,986 1,790 1,455,194
774,750 542,175 2,001 1,303 1,320,229
Current assets Cash assets Receivables Inventories Prepayments Total current assets
Non-current assets Infrastructure, property, plant and equipment Intangible assets Total non-current assets Total assets
Current liabilities Payables Borrowings Provisions Income tax payable Deposits and advances Total current liabilities
Non-current liabilities Borrowings Deferred tax liabilities Defined benefit superannuation liability Provisions Total non-current liabilities
Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity
1,602,765 1,463,060 1,629,959 1,601,466 14
121,509 121,509
15 16
1,148,069 1,148,069 360,381 331,888 1,629,959 1,601,466
The above Balance Sheet should be read in conjunction with the accompanying notes.
32
South East Water Limited ACN 066 902 547
Statement of Changes in Equity for the year ended 30 June 2012
Notes Balance at 1 July 2010 Total comprehensive income for the year Net profit after income tax Other comprehensive income for the year after tax Total comprehensive income for the year after tax Transactions with equity holders in their capacity as equity holders Dividends paid Balance at 30 June 2011 Total comprehensive income for the year Net profit after income tax Other comprehensive income for the year after tax Total comprehensive income for the year after tax Transactions with equity holders in their capacity as equity holders Dividends paid Balance at 30 June 2012
16 15,16
Attributable to equity holders of the company Contributed Reserves Retained Total equity equity profits $’000 $’000 $’000 $’000 121,509 1,103,737 277,228 1,502,474 - - 69,678 69,678 - 44,332 - 44,332
1,662 45,994 71,340
115,672
6
- - (16,680) (16,680) 1,148,069 331,888 1,601,466 121,509
16
- - 90,420 90,420
15,16
- - (11,927) (11,927) - - 78,493 78,493
6
- - (50,000) (50,000) 1,148,069 360,381 1,629,959 121,509
The above Statement of Changes in Equity should be read in conjunction with the accompanying notes.
33
South East Water Limited ACN 066 902 547
Cash Flow Statement for the year ended 30 June 2012
Note Cash flows from operating activities Receipts from customers Payments to suppliers and employees GST refunded GST paid Income tax paid Interest received Interest and other costs of finance paid Net cash inflow from operating activities Cash flows from investing activities Proceeds from sale of infrastructure, property, plant and equipment Payments for infrastructure, property, IT software, plant and equipment Payments for water entitlements Net cash outflow from investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Dividends paid Net cash inflow/(outflow) from financing activities Net increase/(decrease) in cash held Cash at the beginning of the financial year Cash at the end of the financial year
24
2012 $’000
2011 $’000
683,503 (513,033) 23,747 (2,220) (32,362) 49 (56,230) 103,454
581,327 (415,912) 26,344 (2,400) (25,777) 71 (49,149) 114,504
805 4,763 (162,268) (167,496) (6,667) (26,666) (168,130) (189,399)
7
200,000 (85,150) (50,000) 64,850 174 663 837
The above Cash Flow Statement should be read in conjunction with the accompanying notes.
34
173,725 (83,429) (16,680) 73,616 (1,279) 1,942 663
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
1 Statement of significant accounting policies The significant policies which have been adopted in the preparation of the Financial Report are:
(a) Basis of preparation South East Water Limited is a company limited by shares, incorporated and domiciled in Australia. The Financial Report is a general purpose Financial Report that has been prepared in accordance with the requirements of Australian Accounting Standards (including Australian Interpretations) and the Corporations Act 2001. The Financial Report has also been prepared on a historical cost basis, except for infrastructure, property, plant and equipment which have been measured at fair value. The accrual basis of accounting has been applied in the preparation of these financial statements whereby assets, liabilities, equity, income and expenses are recognised in the reporting period to which they relate, regardless of when cash is received or paid. The Financial Report is presented in Australian dollars. The Financial Report of South East Water (the company) for the year ended 30 June 2012 was authorised for issue in accordance with a resolution of the directors on 27 August 2012. Compliance with AIFRS The Financial Report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the Financial Report, comprising the financial statements and notes thereto, complies with International Financial Reporting Standards (IFRS). Transition to Statutory Authority On 1 July 2012, under the provisions of the Water Amendment (Governance & Other Reforms) Act 2012, all assets, liabilities, contracts and employees of South East Water Limited transferred to South East Water Corporation. The services previously provided by South East Water Limited are now to be supplied by South East Water Corporation. Accounting standards not yet effective The following Australian Accounting Standards and interpretations have not been adopted for the annual reporting period ending 30 June 2012: AASB amendment
Affected standard(s)
Nature of change to accounting policy
Applicable for annual reporting periods ending on or after
AASB 2011–9
Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income
Requires entities to present separately items 1 July 2012 of other comprehensive income that would be reclassified to profit or loss in the future if certain conditions are met from those that would never be reclassified to profit or loss and provides them with the option of renaming the Statement of Comprehensive Income to Statement of Profit and Loss and Other Comprehensive Income.
Under review
AASB 119
Employee Benefits
Changes the methodology applied to the calculation of superannuation expense relating to defined benefit superannuation plans and requires all actuarial gains and losses related to defined benefits schemes to be reported in Other Comprehensive Income.
Under review
1 January 2013
Impact on Financial Report
35
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
Significant accounting judgements, estimates and assumptions In the application of AIFRS, management is required to make judgements, estimates and assumptions about the carrying values of assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period relate to the financial planning and valuation assumptions used to determine the fair value of infrastructure assets and the actuarial assumptions used to determine the company’s defined benefit obligations. The assumptions and the related carrying amounts of the company’s defined benefit obligation are discussed in Note 22.
(b) Taxes Income tax South East Water is subject to the National Tax Equivalent Regime pursuant to Section 88(3D) of the State Owned Enterprises Act 1992. The Act requires the company to pay the Victorian Government its tax liability based on the rules of the Income Tax Assessment Act 1936 (as amended). Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the Statement of Comprehensive Income except to the extent that it relates to items recognised directly in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes at balance date.
36
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are recognised at the tax rates expected to apply when the assets are recovered or liabilities are settled based on those tax rates which are enacted or substantially enacted at balance date. Deferred tax liabilities are reported net of any deferred tax assets. Goods and services tax (GST) Revenues, expenses, liabilities and assets are recognised net of the amount of GST except where the GST incurred on a purchase of goods and services is not recoverable from the Australian Taxation Office, in which case the GST is recognised as part of the acquisition cost of the asset or as part of the expense item as applicable. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the Australian Taxation Office is included as part of receivables or payables in the Balance Sheet. Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from or payable to the Australian Taxation Office are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the Australian Taxation Office.
(c) Infrastructure, property, plant and equipment Infrastructure, property, plant and equipment assets are measured initially at cost and subsequently revalued at fair value less accumulated depreciation and impairment losses where applicable.
1 Statement of significant accounting policies (continued) Infrastructure, land and buildings Freehold land and buildings are stated at fair value, being the amount which an asset could be exchanged between knowledgeable willing parties at an arm’s length transaction. All infrastructure assets are recognised initially at cost and subsequently revalued to fair value less accumulated depreciation and impairment losses. Fair value is determined using the ‘income approach’ (based on discounted cash flows). This approach has been adopted as there is no market-based evidence of ‘fair value’ due to the specialised nature of the business’s fixed assets. Furthermore, consistent with the business’s classification as a ‘for profit’ entity for financial reporting purposes, the future economic benefits of the infrastructure assets is primarily dependant on their ability to generate net cash inflows. Revaluation increments are credited directly to equity in the revaluation reserve, except to the extent that an increment reverses a revaluation decrement in respect of the same asset previously recognised as an expense in the net result, the increment is recognised as revenue in determining the net result. Revaluation decrements are recognised immediately as expenses in the net result, except that, to the extent that a credit balance exists in the revaluation reserve in respect of the same asset, they are debited to the asset revaluation reserve. Plant and equipment All plant and equipment (including leasehold improvements) are stated at fair value. The carrying amount of plant and equipment is reviewed annually to ensure it is not in excess of its recoverable amount. The recoverable amount of an asset is the net amount expected to be recovered through the net cash inflows from its continued use and subsequent disposal. Recoverable amount is determined using net cash flows which are discounted to present values. At balance date, the carrying amount of plant and equipment was not in excess of its recoverable amount.
Depreciation Items of infrastructure, property, plant and equipment, excluding land, are depreciated over their expected useful lives to the company on the following basis: Buildings
Straight line
40 years
Leasehold improvements
Straight line
The lease term
Infrastructure assets*
Straight line
10–99 years
Plant and equipment
Straight line
20–40%
* Average depreciation of infrastructure assets is approximately 50 years
Assets are depreciated from the date of acquisition or, in respect of constructed assets, from the time an asset is completed or held ready for use. Depreciation rates are reviewed annually and, in respect of 2011–12, are unchanged from the previous financial year. Impairment of assets Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its calculated recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing for impairment, assets are grouped at a whole of business level which is considered to be the lowest level for which there are separately identifiable cash flows (cash generating unit). Derecognition and disposal The carrying amount of an item of infrastructure, property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Any loss arising on derecognition of an item of property, plant and equipment is included in profit or loss in the year the asset is derecognised. Revaluations Revaluations are performed with sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the end of the reporting period.
Assets acquired at no cost to the company (developer contributed assets) are brought to account at fair value, being the actual or estimated cost of construction.
37
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
(d) Intangible assets
(f) Employee benefits
Intangible assets are comprised of IT software and water entitlements arising from the company’s investment in Stage 1 of the Northern Victoria Irrigation Renewal Project. Intangible assets acquired separately are initially recognised at cost. Subsequently, intangible assets with finite useful lives are carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets with indefinite useful lives are carried at cost less accumulated impairment losses. Costs incurred subsequent to initial acquisition are capitalised when it is expected that additional future economic benefits will flow to the company.
Wages, salaries, annual leave and sick leave In accordance with AASB 119 ‘Employee Benefits’, liabilities for wages and salaries (including non-monetary benefits) and annual leave entitlements which are expected to be settled within 12 months of the reporting date are measured using remuneration rates expected to apply when the obligation is settled. All on costs including payroll tax, workers compensation premiums and superannuation are included in the determination of these liabilities.
(e) Revenue recognition
Sick leave is a non-vesting benefit and is not expected to exceed current and future sick leave entitlements, and accordingly, no liability has been recognised.
Water and sewerage
Long service leave
Water and sewerage service charges are brought to account evenly throughout the financial year in order to reflect how they are earned.
The liability for employees’ benefits to long service leave represents the present value of the estimated future cash outflows to be made by the company resulting from employees’ services provided up to the reporting date. Expected future cash outflows are discounted using interest rates attached to national government guaranteed securities as at reporting date with terms to maturity that closely match the estimated future long service leave cash outflows. Discount rates, probability factors and wage/salary growth assumptions are provided by the Department of Treasury and Finance as part of its long service leave financial model.
Water usage and sewage disposal charges are brought to account as revenue in the financial year the water is consumed and sewage disposed. New customer contributions Developers are required to make a contribution towards the cost of developing the company’s water supply distribution systems and sewage disposal systems. The level of these cash contributions are regulated by the Essential Services Commission and are recorded as New Customer Contributions. Consistent with the requirements of AASB 118 ‘Revenue’, these cash contributions have been recognised as income in the Statement of Comprehensive Income upon receipt. Developer contributed assets Developers are required to provide water supply and sewerage facilities and in some cases recycling facilities to new subdivisions which are subsequently gifted to, and maintained by, the company. In accordance with the requirements of Interpretation 18 ‘Transfers of Assets from Customers’, and AASB 118 ‘Revenue’, the fair value of these assets is recognised as income in the accounts when the company gains control of the assets. This non-cash income is recorded as Developer Contributed Assets.
38
The current portion of long service leave liability represents the nominal amount expected to be taken within 12 months of balance date based on historical data and known commitments for the forthcoming financial year as well as the present value of long service leave entitlements for employees with seven or more years of continuous service. The non-current portion represents the present value of long service leave entitlements for employees with less than seven years service. Superannuation Contributions to superannuation plans are charged to the Statement of Comprehensive Income as the contributions are paid or become payable. Actuarial gains and losses arising from the company’s defined benefit superannuation scheme are recognised immediately in Other Comprehensive Income in the Statement of Comprehensive Income in the year in which they occur.
1 Statement of significant accounting policies (continued) (g) Cash For the purposes of the Cash Flow Statement, cash includes cash on hand and at bank. Bank overdrafts are shown as current liabilities in the Balance Sheet.
(h) Receivables Trade debtors are recorded at the amount of contracted sales proceeds less a provision for doubtful debts. Trade debtors are required to be settled within 14 days. Accrued earnings represent the estimated value of water consumed and sewage disposal charges earned but not yet billed at reporting date.
(i) Bad and doubtful debts Provision for doubtful debts is recognised to the extent that recovery of the outstanding receivable balance is considered no longer probable. The provision represents an estimate of bad debts to be written off and is made when there is objective evidence that the company will not be able to collect the debt. Bad debts are written off when determined uncollectable, subject to approval by the Board or delegated officer.
( j) Prepayments Prepayments represent payments in advance for goods and services yet to be provided at balance date.
(k) Payables Payables represent the amounts to be paid in the future by the company for goods and services received. Trade accounts payable are normally settled within 30 days from the date of invoice.
(l) Provision for insurance claims The provision for insurance claims represents the value of outstanding insurance claims as advised by the company’s insurance claims manager. The value represents outstanding claims in respect of public liability, professional indemnity and motor vehicles.
(m) Provision for customer refunds The provision for customer refunds represents the value of refunds (including interest) yet to be paid to customers as a result of the overcharging of single title properties since 1 January 1998. An expense was recognised in the Statement of Comprehensive Income
for these refunds. All customer refunds provided for were paid in 2011–12.
(n) Dividends An obligation to pay a dividend only arises after consultation between the board, the relevant portfolio Minister and the Treasurer. Following this consultation, an agreement on the dividend payable is passed by the members at a general meeting.
(o) Borrowings Borrowings are recognised at fair value being the nominal value of funds drawn at balance date. Interest is expensed as incurred. The company has classified borrowings which mature within 12 months as non-current on the basis that the entity will, and has the discretion to, refinance or roll over these loans under a government-approved financing facility.
(p) Deposits and advances Deposits and advances represent monies held by the company as security for capital works.
(q) Developer reimbursements In accordance with the company’s land development policy, the company will reimburse developers, subject to the nature of the works involved, for all or part of their costs incurred in constructing water, sewerage and/or recycling assets. Reimbursements are generally paid upon completion of the works, however, in cases where reimbursements are to be paid at an agreed date in the future, a liability is recognised. Developer reimbursements are capitalised and recognised as infrastructure, property, plant and equipment in the Balance Sheet.
(r) Financial instruments A financial instrument is recognised when the company becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when contractual rights to the cash flows from the assets expire. Financial liabilities are derecognised if the company’s obligations specified in the contract expire or are discharged or cancelled. Financial instruments are initially measured at fair value.
39
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
Subsequent to recognition, the financial instruments are measured as set out next: Receivables Trade receivables and other receivables are recorded at amortised cost less impairment. Financial liabilities All financial liabilities including borrowings and payables are measured at cost. Impairment The company assesses at each balance date whether there is objective evidence that a financial asset is impaired i.e. when the amount outstanding will not be recovered in full.
(s) Alliances ‘us’– Utility Services The ‘us’ – Utility Services alliance commenced in April 2005 and was established to provide water and sewer civil maintenance and mechanical and electrical services to South East Water. Our alliance partners include Thiess Services Pty Ltd and Siemens Ltd. During 2009–10, the capabilities of this alliance were expanded to be able to deliver South East Water’s network upgrades and renewals, and capital works program. A sub alliance relationship to the capital works program exists with Montgomery Watson to provide design services. The alliance operates on a cost plus ‘at risk’ margin basis and includes separate commercial frameworks for maintenance and capital works each designed to incentivise non-cost performance aligned with South East Water’s strategic direction. The alliance also provides maintenance and construction services to external parties on a commercial basis. South East Water is entitled to a 50 per cent share of the operating profit from these external services, which is recognised as income progressively as works are completed. The alliance also receives a management fee for external contracts. South East Recycled Water Alliance (SERWA) Established in May 2009, the SERWA alliance is a partnership between South East Water, Transfield Services (Australia) Pty Ltd and AECOM to deliver a program of works to meet the Victorian Government’s Central Region Sustainable Water Strategy. This includes upgrading and operating key South East Water sewage treatment plants. The alliance operates on a cost plus ‘at risk’ margin basis and includes incentives for enhanced 40
service and performance. Operating costs are expensed as incurred, while costs which create or enhance an asset are capitalised.
(t) Smart Water Fund The Smart Water Fund was established in 2002 by Melbourne’s four water businesses and the Victorian Government for the purpose of providing grant funding to support the development of sustainable water use projects. Contributions made to the Smart Water Fund are initially recognised as prepayments in South East Water’s Balance Sheet. Expenses are subsequently recognised by the company when incurred by the fund. South East Water’s share of the fund’s expenses for 2011–12 was $848,696 ($1,057,189 for 2010–11) and is included in the Statement of Comprehensive Income. As at 30 June 2012, the company’s Balance Sheet reflects its share of prepaid fund expenditure totalling $428,924 ($261,944 for 2010–11).
(u) Environmental contribution South East Water has a statutory obligation to pay an environmental contribution to the Department of Sustainability and Environment. This contribution is used to address adverse water-related environmental impacts within Victoria by promoting the sustainable management of water. These contributions are recognised as an expense as incurred.
(v) Contingent assets and contingent liabilities Contingent assets and contingent liabilities are not recognised in the Balance Sheet, but are disclosed in Note 20. Contingent assets and liabilities are presented exclusive of GST receivable or payable respectively.
(w) Commitments Commitments are disclosed at their nominal value exclusive of GST payable.
(x) Comparative figures There have been no changes to the previous year’s figures other than those made to reflect changes to the company’s policy for recognising actuarial gains and losses relating to its defined benefits scheme. The effect of the changes is summarised at Note 26 - Change in accounting policy.
(y) Rounding Unless otherwise shown in the financial statements, amounts have been rounded to the nearest thousand dollars.
2 Financial risk management objectives and policies The company’s principal financial instruments are loans sourced from the Treasury Corporation of Victoria. The loans include overnight borrowings, floating rate notes and fixed rate loans which are used to meet working capital requirements and fund capital expenditure programs. The company has other financial assets and liabilities such as receivables and payables which arise directly from its operating activities. The main risks arising from the company’s financial instruments are market interest rate risk, liquidity risk and credit risk. The board reviews and endorses policies for managing these risks and they are summarised below.
Credit risk Credit risk is the risk of financial loss to the company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The company’s exposure to credit risk is limited. With respect to receivables, the company has a broad customer base with in excess of 90 per cent being residential customers dispersed across the company’s area of responsibility. Receivable balances are monitored on an ongoing basis and as such the company is not exposed to significant bad debts. An ageing of the company’s receivables at reporting date has been provided in Note 8. At 30 June 2012, the company had no credit risk arising from investments. Exposure to credit risk from other financial assets is represented in the carrying amount of these assets in the Balance Sheet.
Liquidity risk Liquidity risk is the risk that the company will not be able to meet its financial obligations as they fall due. The company manages liquidity risk by maintaining and conducting efficient banking practices and account structures, sound cash management practices and regular monitoring of the maturity profile of assets and liabilities, together with anticipated cash flows. The company obtains annual approval from the Treasurer of Victoria for new borrowings, borrowings to refinance maturing and non-maturing loans and temporary purpose borrowing facilities. A contractual maturity analysis of financial liabilities is disclosed in Note 17(a).
Market risk The company’s exposure to market risk is primarily through interest rate risk. The company’s exposure to the risk of adverse movements in interest rates relates primarily to its debt obligations with terms to maturity or next interest rate reset of less than one year. In managing this risk, the company has adopted a policy of maintaining its debt portfolio consistent with the following target bands: Term to maturity or next interest rate reset
Target bands
0 to less than 1 year
0–35%
1 to less than 3 years
7–25%
3 to less than 5 years
7–25%
5 to less than 7 years
7–25%
7 to less than 9 years
7–25%
9 to less than 11 years
0–20%
11 years and over
0–20%
The company’s exposure to interest rate risk is set out in Note 17(b) and (c).
Sensitivity disclosure analysis Taking into account past performance, future expectations, economic forecasts and management’s knowledge and experience of the financial markets, the company believes that a movement of 0.5 per cent is reasonably possible over the next 12 months. The impact on the company’s profit and equity is disclosed in Note 17(c).
Fair value The company considers that the carrying amount of financial assets and financial liabilities (excluding borrowings and deferred reimbursements) recorded in the Financial Report to be a fair approximation of their fair values, because of the short-term nature of the financial instruments and the expectation that they will be paid in full. Borrowings are valued by discounting the expected future cash flows at yields offered by the Treasury Corporation of Victoria at balance date. Deferred reimbursements are determined by discounting the expected future cash flows at current interest rates. The carrying amounts and fair value of financial assets and liabilities at balance date are disclosed in Note 17(d).
41
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
Capital management The company has a capital management plan in place to guide and inform the board and executives on the long-term capital structure for the business. The board has adopted a long-term capital structure that targets a gearing ratio of between 35 per cent to 50 per cent and funds from operations (FFO) net interest coverage of 2.5 to 4.0 times. The plan is subject to annual review as part of the development of the company’s annual corporate plan which is subsequently approved by the board and shareholder. The review takes account of projected internal financing requirements, shareholder expectations around returns and changes in financial markets. The gearing and interest coverage ratios for the years ended 30 June 2012 and 30 June 2011 were as follows:
Gearing [net debt/(net debt + equity)] FFO net interest cover (times)
2012
2011
36.2%
33.6%
2.8
3.3
In respect to measuring working capital efficiency, the company uses a number of metrics that are reported to the board and executive on a monthly or quarterly basis.
3 Income Sales revenue
2012 $’000
2011 $’000
Water service charges (fixed)
53,196 47,825
Water usage charges
232,217 187,078
Sewerage service charges (fixed)
208,675 177,061
Sewage disposal charges
130,953 114,287
Trade waste charges
23,003 19,287
Recycled water charges
1,746 1,310
New customer contributions
24,498 23,596
Developer contributed assets
33,614 21,057
Other services rendered
14,660 13,199
Interest received/receivable
49 71
Rent
1,875 1,823
Grants
250 324
Miscellaneous
17,906 13,137 742,642 620,055
Other income Gain from sale of property, plant and equipment
68 -
Superannuation income
251 266
319 266
Total income
742,961 620,321
42
4 Expenses 2012 $’000
2011 $’000
Bulk water and sewerage charges
(336,923) (250,532)
Employee benefits cost
(48,992) (46,033)
Operating contracts
(66,895) (68,236)
Customer refunds
(832) (4,131)
Depreciation
(61,101) (61,658)
Amortisation
(4,960) (3,657)
Environmental contribution (refer Note 1(u))
(16,573) (16,573)
Asset write-offs
(393) (1,017)
Asset write downs
- (504)
Taxes, fees and charges
(7,618) (4,193)
Computer costs
(4,077) (3,611)
Rental expense on operating leases
(3,019) (3,466)
Bad and doubtful debts
(1,467) (1,481)
Transport
(891) (719)
Loss on disposal of property, plant and equipment
- (653)
Other expenses
(1,749) (2,379) (555,490) (468,843)
5 Income tax 2012 $’000
2011 $’000
(a) Income tax expense The major components of income tax expense are: Current tax
35,120 28,087
Deferred tax
3,721 1,946 38,841 30,033
(b) Deferred income tax recognised in other comprehensive income Gain on revaluation of land
0
1,331
Gain on revaluation of infrastructure
0
8,089
Loss on disposal of land
0
(1,399)
Defined benefit superannuation plan actuarial loss
(5,004) (1,286)
(5,004) 6,735
43
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
5 Income tax (continued) 2012 $’000
2011 $’000
(c) Reconciliation of income tax expense to prima facie tax payable Accounting profit before tax
129,261 99,711
Income tax calculated at 30%
38,778 29,913
Add Non-deductible expenses
63 120
Income tax expense
38,841 30,033
(d) Deferred tax items Non-current liabilities – deferred tax Accrued revenue
11,689
7,695
Infrastructure, PP&E
540,814 540,848
Total non-current liabilities – deferred tax
552,503 548,543
Recognised directly in equity
297,830
297,830
Recognised directly in net profit
254,673 250,713
Total non-current liabilities – deferred tax
552,503 548,543
Deferred tax assets Provisions
(542) (494)
Defined benefit superannuation liability
(5,096) (600)
Employee benefits
(4,805) (4,267)
Buildings future deductible amounts
(527)
(477)
Other
(640) (530)
Total deferred tax assets
(11,610) (6,368)
Recognised directly in equity
(5,096)
(600)
Recognised directly in net profit
(6,514) (5,768)
Total deferred tax assets Net non-current liabilities – deferred tax
(11,610) (6,368) 540,893 542,175
6 Dividends 2012 $’000
2011 $’000
Final dividend paid 2009–10
- 16,680
Final dividend paid 2010–11
50,000 50,000 16,680
No final dividend has been provided for in the financial statements as at 30 June 2012. Refer Note 1(n).
44
7 Cash assets 2012 $’000 Cash at bank and on hand
2011 $’000
837 663
8 Receivables 2012 $’000
2011 $’000
Trade debtors
56,036 42,246
Less: Provision for doubtful debts (Note 8A)
(1,300) (1,200) 54,736 41,046
Accrued earnings
38,964 25,649
Other debtors
870 178 94,570 66,873
Note 8A: Movement in the provision for doubtful debts Movements in the provision for doubtful debts during the financial year are set out below: Balance at the beginning of the year
1,200 1,100
Amounts written off during the year
1,422 1,446
Amounts recovered during the year
(55) (65)
Increase/(decrease) in provision recognised in profit or loss
(1,367) (1,381)
Increase/(decrease) in provision
100 100
Balance at the end of the year
1,300 1,200
Note 8B: Past due but not impaired At 30 June 2012, trade debtors of $19.0 million (2011 $12.4 million) were past due but not impaired. This amount relates largely to outstanding water and sewerage charges by residential, commercial and industrial customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows: Less than 30 days
8,800
6,500
30 to 90 days
4,000
2,200
6,200
3,700
19,000
12,400
Greater than 90 days
45
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
9 Infrastructure, property, plant and equipment 2012 $’000
2011 $’000
Land (a) At independent valuation 2011
134,472 134,472
At cost
9 – 134,481 134,472
Buildings (a) At independent valuation 2011
266 266
At cost
2 -
Less: Accumulated depreciation
(8) 260 266
Leasehold improvements At fair value
6,033 5,963
Less: Accumulated depreciation
(4,190) (3,883) 1,843 2,080
Plant and equipment At fair value
27,113 23,872
Less: Accumulated depreciation
(14,983) (11,506) 12,130 12,366
Infrastructure assets (b) (c) At independent valuation 2011
2,629,839 2,629,839
At cost
150,507 -
Less: Accumulated depreciation
(56,301) -
2,724,045 2,629,839 153,784 117,882 3,026,543 2,896,905
Capital works in progress Total infrastructure, property, plant and equipment Notes:
(a) The basis of valuation of land and buildings is estimated at fair market value based on existing use. In 2010–11, land and buildings were independently valued by the Valuer-General using fair market values as at 30 June 2011. In 2011–12, land and building values were calculated based on the Valuer-General’s indexation factors. Overall, there was no change from the 2010–11 valuations. If land and buildings were measured at historical cost, the carrying amount would be $10.8 million. (b) Infrastructure assets are comprised of water and sewerage mains, pump stations and treatment plants. (c) Infrastructure assets are valued at fair value based on the income approach (discounted cash flows). In 2010–11, an independent business valuation was completed by Deloitte to determine the implied fair value of South East Water’s infrastructure assets. In 2011–12, management has estimated that the carrying amount of infrastructure assets is not materially different from their implied fair value. If infrastructure assets had continued to be measured at historical cost, the carrying amount would be $1,760.5 million.
46
9 Infrastructure, property, plant and equipment (continued) Reconciliations Reconciliations of the carrying amounts of each class of infrastructure, property, plant and equipment between the beginning and the end of the current financial year are set out below:
2012 Opening balance
Infrastructure Plant & assets equipment $’000 $’000 2,629,839
12,366
Leasehold improvements $’000
Land $’000
Buildings $’000
Capital works in progress $’000
2,080
134,472
266
117,882
Total $’000 2,896,905
Additions
- 5,019 70 9 2 186,671 191,771
Transfers
150,769 - - - - (150,769) -
Disposals
(262) (770) - - - - (1,032)
Depreciation expense
(56,301) (4,485) (307) - (8) - (61,101)
Closing balance
2,724,045 12,130 1,843 134,481 260 153,784 3,026,543
2011
Infrastructure Plant & assets equipment $’000 $’000
Leasehold improvements $’000
Land $’000
2,497,882 10,123
2,180
Opening balance
Buildings $’000
Capital works in progress $’000
Total $’000
104,014
287
109,649
2,724,135
Additions
-
6,044
174
893
-
171,881
178,992
Transfers
163,648
-
-
-
-
(163,648)
-
Disposals
(891)
(187)
-
-
-
-
(1,078)
Revaluations ARR
26,962
-
-
29,061
(13)
-
56,010
Revaluations P&L
-
-
-
504
-
-
504
Depreciation expense
(57,762)
(3,614)
(274)
-
(8)
-
(61,658)
2,629,839
12,366
2,080 134,472
266
117,882
2,896,905
Closing balance
47
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
10 Intangible assets 2012 $’000
2011 $’000
IT software Cost
47,696 34,667
Less: Accumulated amortisation
(30,992) (26,135) 16,704 8,532
IT software works in progress
1,848 6,325 18,552 14,857
Water entitlements (a)
90,000 83,333
Total intangible assets
108,552 98,190
Reconciliations Reconciliations of the carrying amounts of each class of intangible assets between the beginning and the end of the current financial year are set out below:
2012
IT software $’000
Works in progress $’000
Water entitlements $’000
Total $’000
Opening balance
8,532 6,325 83,333 98,190
Additions
- 8,699 6,667 15,366
Transfers
13,176 (13,176) - -
Disposals
(91) - - (91)
Amortisation
(4,913) - - (4,913)
Closing balance
16,704 1,848 90,000 108,552
2011
IT software $’000
Works in progress $’000
Water entitlements $’000
Total $’000
Opening balance
7,815 2,771 56,667 67,253
Additions
- 7,997 26,666 34,663
Transfers
4,443 (4,443) - -
Disposals
(69) - - (69)
Amortisation
(3,657) - - (3,657)
Closing balance
8,532 6,325 83,333 98,190
Note: (a) Refer Note 21(a)
48
11 Payables 2012 $’000
2011 $’000
Trade creditors
17,203 16,421
Accruals
68,513 57,523 85,716 73,944
12 Borrowings The company’s borrowings are sourced from the Treasury Corporation of Victoria and secured by the Treasurer in the form of government guarantee. 2012 2011 $’000 $’000 Current 11am borrowings
29,475 35,400
Non-current Fixed/floating rate loans
895,525 774,750 925,000 810,150
13 Provisions 2012 $’000
2011 $’000
Current Employee benefits (Note 13A)
14,227 12,922
Insurance claims (refer Note 1(l) and Note 13B)
508 445
Provisions for customer refunds (refer Note 1(m))
- 4,339 14,735 17,706
Non-current
Employee benefits
1,790 1,303
Note 13A: Employee benefits Employee benefits are comprised of: Annual leave
4,403 4,012
Long service leave measured at: Nominal value
263 409
Present value
9,561 8,501
14,227 12,922
Note 13B: Insurance claims Movements in the provision for insurance claims during the financial year are set out below: Carrying amount at the beginning of the period
445 307
Additional provisions recognised
826 710
Provisions used during the period
(554) (326)
Unused amounts reversed
(209) (246)
Carrying amount at the end of the period
508 445 49
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
14 Contributed equity 2012 $’000 Opening balance
2011 $’000
121,509 121,509
Ordinary shares of $1 each fully paid. The shares are beneficially owned by the Victorian Government.
15 Reserves 2012 $’000
2011 $’000
Land and buildings revaluation reserve (b)(c)
122,882 122,882
Infrastructure assets revaluation reserve (b)(c)
703,088 703,088 825,970 825,970
Capital reserve (a)
322,099 322,099 1,148,069 1,148,069
(a) The capital reserve represents an amount equivalent to the net assets transferred to the company following its formation and forms part of the company’s general reserves and is not part of its capital under the Corporations Act 2001. (b) The revaluation reserve relates to infrastructure assets and land and buildings measured at fair value in accordance with applicable Australian Accounting Standards. (c) Movements in the asset revaluation reserve: Opening balance
825,970 781,638
Revaluation of infrastructure assets, net of tax effect (refer Note 9(c))
- 18,873
Revaluation of land, net of tax effect (refer Note 9(a))
- 28,723
Transfer to retained earnings disposal of land, net of tax effect
- (3,264)
Closing balance
825,970 825,970
50
16 Retained profits 2012 $’000
2011 $’000
Opening balance
331,888 277,228
Net profit after income tax
90,420 69,678
Defined benefit superannuation actuarial gain/(loss), net of tax effect
(11,927) (3,001)
Dividends paid (refer notes 1(n) and 6)
(50,000) (16,680)
Transfers to and from reserves
- 4,663
Closing balance
360,381 331,888
17 Financial instruments (a) Maturity analysis of financial liabilities
30 June 2012
Carrying amount $’000
Less than 6 months $’000
6 to 12 months $’000
1 to 5 years $’000
More than 5 years $’000
Payables (a)
84,297 84,297 - - -
Borrowings
925,000 69,200 40,000 410,800 405,000
Deposits
6,803 586 6,216 - -
1,016,100 154,083 46,216 410,800 405,000
30 June 2011 Payables (a)
73,395 73,395 - - -
Borrowings
810,150 74,625 40,000 336,475 359,050
Deposits
7,697 250 7,447 - -
891,242 148,270 47,447 336,475 359,050
Note: (a) The amount of payables disclosed excludes statutory payables of $1.4 million (2010–11 $0.5 million).
51
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
(b) Interest rate risk
Weighted average interest rate
Floating interest rate $’000
Fixed interest rate 1 year or less $’000
Over 1 to 5 years $’000
More than 5 years $’000
Non-interest bearing
Total
$’000
$’000
30 June 2012 Financial assets Cash
3.21% 835 – - - 2 837
Receivables (a)
- - - - 91,546 91,546
Total financial assets
835 - - - 91,548 92,383
Financial liabilities Payables (a)
Borrowings
- - - - (84,297) (84,297) 5.64%
(44,475)
(79,725)
(395,800)
(405,000) -
(925,000)
Deposits and advances
- - - - (6,803) (6,803)
Total financial liabilities
(44,475)
(79,725)
(395,800)
(405,000) (91,100) (1,016,100)
30 June 2011 Financial assets Cash
3.69% 661 - - - 2 663
Receivables (a)
- - - - 63,068 63,068
Total financial assets
661 - - - 63,070 63,731
Financial liabilities Payables (a) Borrowings Deposits and advances Total financial liabilities
5.87%
- - - - (73,395)
(73,395)
(359,050) -
(810,150)
- - - - (7,697)
(7,697)
(50,400)
(50,400)
(79,225)
(321,475)
(79,225) (321,475)
(359,050) (81,092)
(891,242)
Note: (a) The amounts disclosed exclude statutory payables of $1.4 million (2010–11 $0.5 million) and statutory receivables of $3.0 million (2010–11 $3.8 million).
52
(c) Sensitivity analysis The following table summarises the sensitivity of the company’s financial assets and liabilities to interest rate risk.
Interest rate risk
30 June 2012
Carrying amount $’000
- 0.5% Result $’000
- 0.5% Equity $’000
+0.5% Result $’000
+0.5% Equity $’000
Financial assets Cash
837 (5) (5) 5 5
Financial liabilities Borrowings
925,000 (795) (795) 795 795 (800) (800) 800 800
Total increase/(decrease) 30 June 2011 Financial assets Cash
663
(7) (7) 7 7
Financial liabilities Borrowings Total increase/(decrease)
810,150 (794) (794) 794 794 (801) (801) 801 801
53
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
(d) Net fair value of financial assets and liabilities
2012
2012
2011
2011
Carrying amount $’000
Net fair value $’000
Carrying amount $’000
Net fair value $’000
Financial assets Cash
837 837 663 663
Receivables (a)
91,546 91,546 63,068 63,068
Total financial assets Financial liabilities
92,383 92,383 63,731 63,731
Payables (a) Borrowings Deposits and advances Total financial liabilities
(84,297)
(84,297)
(73,395)
(73,395)
(925,000)
(999,821)
(810,150)
(826,324)
(6,803)
(6,803)
(7,697)
(7,697)
(1,016,100)
(1,090,921)
(891,242)
(907,416)
Note: (a) The amount of receivables and payables disclosed excludes statutory amounts. Net market values of financial instruments are determined on the following basis: Cash, receivables, payables, deposits and advances are valued at their carrying amounts as this approximates net market value. Borrowings are valued by discounting the expected future cash flows at yields offered by the Treasury Corporation of Victoria at balance date.
54
18 Key management personnel disclosures (a) Responsible persons The relevant Minister and directors of South East Water are deemed to be the responsible persons by ministerial direction pursuant to the provisions of the Financial Management Act 1994. The relevant Minister for Water during the reporting period was the Hon. Peter Walsh MP. Remuneration paid to the Minister for Water is shown in the financial statements of the Department of Premier and Cabinet. Other relevant interests are declared in the Register of Members’ Interests which each member of the Parliament completes. The names of persons who were directors of South East Water at any time during the financial year are as follows: K Hutchings, G Gentle, T Beach, D Shirrefs, J Turcato, J Slocombe, R Passalaqua and L Cheng. Mr K Hutchings was formally appointed as director on 1 July 2011 from the position of Acting Chief Executive Officer. Mr T Beach resigned as a director on 23 November 2011. Ms L Cheng was appointed director on 1 October 2011. (b) Other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the company, directly or indirectly, at any time during the financial year: Name
Position
R Dusting
General Manager – Infrastructure
P Johnson
General Manager – Corporate and Commercial
J Oxley
General Manager – Customer and Community
M McCormack
General Manager – Network Services
A Kelly
General Manager – Legal and Audit (1/7/11–31/8/11)
C Feil
General Counsel and Governance
H Reid
General Manager – Strategy
S Robinson
General Manager – People and Culture (3/1/12–30/6/12)
C Littlefair
General Manager – Asset Creation (18/5/12–30/6/12)
L Walsh
Acting General Manager – Business Growth (1/7/11–2/8/11)
Key management personnel also includes an additional senior manager on a GSERP contract. (c) Key management personnel compensation
Short-term employee benefits Post employment benefits Other long-term benefits
2012 $’000
2011 $’000
2,154 387 49 2,590
1,847 339 40 2,226
Note: 2011 comparatives have been restated to exclude senior managers not on a GSERP contract.
55
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
The number of directors of the company whose remuneration from the company or any related parties was within the specified bands are as follows: 2012 2011 No No $10,000–$19,999
1 -
$30,000–$39,999
1 1
$40,000–$49,999
4 4
$90,000–$99,999
1 -
$100,000–$109,999
- 1
$260,000–$269,999
- 1
$350,000–$359,999
1 -
Total
8 7
Total amount
$’000
$’000
693
601
The number of executives of the company, excluding the Managing Director, whose remuneration from the company or related parties was within the specified bands are as follows: 2012 No
2011 No
$100,000–$109,999
1 -
$120,000–$129,999
- 1
$140,000–$149,999
- 1
$150,000–$159,999
1 -
$180,000–$189,999
- 1
$190,000–$199,999
1 -
$200,000–$209,999
1 1
$220,000–$229,999
- 1
$240,000–$249,999
4 2
$250,000–$259,999
1 -
$260,000–$269,999
- 1
Total
9 8 $’000
Total amount
$’000
1,897 1,625
(a) Total remuneration for each executive includes salary, performance pay entitlements, superannuation and other benefits. Note: 2011 comparatives have been restated to exclude senior managers not on a GSERP contract.
56
(d) Other transactions with key management personnel Water and sewerage services (including Priority Plumbing services) were provided to key management personnel and their related parties for properties within South East Water’s boundaries on an arm’s length basis and under normal commercial terms and conditions. Mr K Hutchings is a member of the Board of Water Services Association of Australia to which the company has paid $298,855 (2010-11 $298,554) for membership fees and research contributions. Mr K Hutchings is also a member of the board of the Smart Water Fund (refer Note 1 (t)). Mr D Shirrefs is a director of the Victorian Water Industry Association to which the company has paid $144,557 (2011–12 $75,100) for membership fees and other services. There were no other transactions, including loan-related transactions with key management personnel or their related parties, during the reporting period other than the payments for services referred to in (c) above.
19 Remuneration of auditors 2012 $’000 Amounts received, or due and receivable, by the Victorian Auditor-General for auditing the accounts of the company
2011 $’000
122 118
122 118
20 Contingent assets and liabilities Contingent assets In the ordinary course of business, developers often provide a commitment to the company to construct water and sewerage assets. The assets are constructed within an agreed timeframe, generally 12 months, and upon completion are transferred to the company at no charge. As at 30 June 2012, various developers have agreed to construct assets to the value of $16.7 million (2010–11 $25.5 million). This value relates to $14.7 million of assets which are under construction (2010–11 $21.8 million) and $2.0 million of assets which have not commenced construction (2010–11 $3.7 million). Contingent liabilities (a) Contingent on the construction of these assets, South East Water is liable to reimburse developers a total amount of $9.8 million (2010–11 $9.8 million) for additional works constructed at the company’s request. This reimbursement together with future investment for urban growth by the company or developers will be recovered through a combination of new customer contributions, plus service and usage charges from all customers. This is consistent with the Essential Services Commission’s final determination for water and sewerage prices in June 2008 (for the 2011–12 year). (b) A return to customers of desalination plant charges collected during the year ended 30 June 2012 is required as a result of the announcements made by the Minister for Water. Customers are to be returned funds in the form of a price freeze for the 12 months from 1 July 2012 to 30 June 2013. Past customers, being those customers that no longer reside in metropolitan Melbourne, have passed away or will no longer receive a bill, cannot be returned funds through a price freeze and therefore will be entitled to a return of money. As at reporting date, the company is unable to reliably determine the expected total amount required to be returned to past customers. A plan, which will be audited by the Essential Services Commission, is being put in place to enable the return of these funds to past customers All contingent assets and liabilities have, with effect from 1 July 2012, been transferred to South East Water Corporation pursuant to the Water Act Amendment (Governance and Other Reforms) Act 2012. 57
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
21 Commitments All commitments are disclosed exclusive of GST. (a) Contracted commitments Total capital expenditure contracted for at balance date but not provided for in the accounts, payable: 2012 $’000
2011 $’000
Not later than 1 year
57,877 59,791
Later than 1 year and not later than 5 years
1,613 40,800 59,490 100,591
The company is required to make a contribution of $100 million (excluding GST) to the Northern Victoria Irrigation Renewal Project and in return will receive an entitlement to annual water savings. At balance date, the company had made a contribution of $90 million (excluding GST) to the Melbourne Water Corporation (refer Note 10), for on forwarding to the Department of Sustainability and Environment. The company has a commitment to pay another $10.0 million by 30 June 2013 in line with an agreed payment schedule. Other expenditure contracted for at balance date but not provided for in the accounts, payable: 2012 $’000 Not later than one year Later than 1 year and not later than 5 years
2011 $’000
17,573 21,862 84,580 102,153 21,862
These contributions include the environmental contribution of $16.6 million payable in 2012–13 and $27.9 million for 2013–14 to 2015–16 .
(b) Lease commitments Total lease expenditure contracted for at balance date but not provided for in the accounts, payable: 2012 $’000
2011 $’000
Not later than 1 year
2,686 3,403
Later than 1 year and not later than 5 years
5,706 8,034
Later than 5 years
140 331 8,532 11,768
These commitments represent non-cancellable operating leases which have an average lease term of up to 10 years. Assets that are subject to operating leases include property, motor vehicles and office equipment.
Non-cancellable operating lease receivable: 2012 $’000
2011 $’000
Not later than 1 year
1,463 1,515
Later than 1 year and not later than 5 years
2,951 3,591
Later than 5 years
2,973 2,783 7,387 7,889
These commitments represent mobile telephone tower rental income on South East Water’s land and infrastructure.
58
22 Defined benefit superannuation asset/liability (a) Superannuation plan The company participates in a number of superannuation funds which provide benefits either on a defined benefit or cash accumulation basis, for employees on retirement, resignation, or disablement, or to their dependants on death. Employee contributions to the fund are legally enforceable and are based on an agreed percentage of total salaries and wages as recommended by the funds’ actuaries. The defined benefit section of the plan is closed to new members. All new members receive accumulation only benefits. (b) Reconciliations
2012 $’000
2011 $’000
Reconciliation of the defined benefit obligation Present value of defined benefit obligation at the beginning of the year
59,561 55,640
Current service cost
1,179 1,047
Interest cost
2,539 2,499
Contribution by fund participants
620 705
Actuarial (gain)/losses
12,490 5,874
Benefits paid
(3,585) (5,888)
Taxes and premiums paid
(375) (316)
Present value of defined benefit obligation at the end of the year
72,429 59,561
Reconciliation of fair value fund assets Financial year ending 30 June Fair value of fund assets at the beginning of year
57,560 56,228
Expected returns on fund assets
3,969 3,812
Actuarial gains/(losses)
(4,441) 1,587
Employer contributions
1,695 1,432
Contributions by fund participants
620 705
Benefits paid
(3,585) (5,888)
Taxes and premiums paid
(375) (316)
Fair value of fund assets at end of the year
55,443 57,560
Reconciliation of the assets and liabilities recognised in the Balance Sheet As at 30 June Defined benefit obligation
72,429 59,561
Fair value of fund assets
(55,443) (57,560)
Deficit/(surplus)
16,986 2,001
Net superannuation liability/(asset)
16,986 2,001
59
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
(b) Reconciliations (continued) 2012 $’000
2011 $’000
Income/expense recognised in Statement of Comprehensive Income Financial year ending 30 June Service cost
1,179 1,047
Interest cost
2,539 2,499
Expected return on assets
(3,969) (3,812)
Superannuation expense/(income)
(251) (266)
Amounts recognised in Other Comprehensive Income Financial year ending 30 June Actuarial (gains)/losses on defined benefit fund
16,931 4,287
Cumulative amount recognised in Other Comprehensive Income Cumulative amount of actuarial (gains)/losses
21,218 4,287
Fund assets The percentage invested in each asset class at the balance sheet date: As at 30 June Australian equity
35% 35%
International equity
27% 27%
Fixed income
11% 12%
Property
10% 10%
Alternatives/Other
10% 10%
Cash
7% 6% 100% 100%
Fair value of fund assets The fair value of plan assets includes no amounts relating to: • any of the company’s own financial instruments • any property occupied by, or other assets used by, the company. Expected rate of return on fund assets The expected return on assets assumption is determined by weighting the expected long-term return for each asset class by the target allocation of assets to each class and allowing for the correlations of the investment returns between asset classes. The returns used for each class are net of investment tax and investment fees. An allowance for administration expenses has also been deducted from the expected return. The expected return on assets assumption for pension assets has not been reduced for investment tax, as earnings on the assets supporting the pension liability are tax free.
60
22 Defined benefit superannuation asset/liability (continued) 2012 $’000
Financial year ending 30 June Actual return on fund assets
2011 $’000
(472) 5,399
Principal actuarial assumptions at balance sheet date Discount rate (active members)
2.6% p.a
4.4% p.a
Discount rate (pensioners)
2.8% p.a
4.8% p.a
Expected rate of return on plan assets (active members)
7.0% p.a
7.0% p.a
Expected rate of return on plan assets (pensioners)
7.5% p.a
7.5% p.a
Expected salary increase rate
4.0% p.a
4.0% p.a
Expected pension increase rate
3.0% p.a
3.0% p.a
The expected rate of return on plan assets includes a reduction to allow for administrative expenses of the plan. Historic information Financial year ending 30 June
2012 $’000
2011 $’000
2010 $’000
2009 $’000
2008 $’000
Present value of defined benefit obligation
72,429 59,561 55,640 54,632 45,820
Fair value of fund assets
55,443
(Surplus)/deficit in plan
16,986 2,001 (588) 3,306 (12,112)
Experience adjustments (gains)/losses fund assets
4,441 (1,587) (1,207) 10,543 6,606
Experience adjustments (gains)/losses fund liabilities
(524) 4,105 (2,104) 3,746 933
57,560 56,228 51,326 57,932
Funding level contribution rate The long-term employer contribution rate for the defined benefit superannuation plan is 9 per cent. An additional contribution rate of 10.2 per cent was also paid during the financial year. Funding levels and the requirement for additional contributions are reviewed every six months by the fund’s actuary, Mercer Pty Ltd. Expected employer contributions The company expects to make employer contributions to the fund of $1.8 million for 2012–13.
61
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
23 Related party disclosures Parent entity The company’s parent entity is the State Government of Victoria. The Department of Treasury and Finance is the shareholder representative.
Other related parties Other related parties relate to other wholly owned state government entities with whom the company has financial dealings.
Transactions with related parties (a) Water and sewerage services Water and sewerage services were provided to related parties for properties within the company’s boundary on the same terms and conditions that apply to all other customers. (b) Other transactions All other transactions with Victorian Government related party entities were made on normal commercial terms and conditions. Financial transactions, based on a materiality threshold of greater than $1,000,000 with each related party, during the reporting periods are as follows:
Department of Treasury and Finance
2012 $’000
2011 $’000
The company pays income tax and dividends to the department. Financial accommodation levies and Essential Services Commission (ESC) licence fees are also paid. Dividend and income tax paid
82,362 42,458
Financial accommodation levies and ESC licence fees
8,097 6,492
The following amounts remain payable at balance date: Income tax, financial accommodation and ESC licence fees payable
62
13,241 10,116
23 Related party disclosures (continued) Department of Sustainability and Environment The company bills and collects parks charges on behalf of the department. In addition, the company is required to make and receive various payments to the department which are included in the definition of profit before income tax. 2012 $’000
2011 $’000
Environmental contribution and Joint Water Communication and Marketing Program
16,693 17,323
Parks Victoria charges remitted
48,642 46,873
Fee for collecting Parks Victoria charges
1,969 1,931
Water Smart Gardens, Homes Rebate Scheme and Water Tank Conservation Concession
220 697
Grants funding
150 324
The following amounts remain payable/receivable at balance date: Parks Victoria charges yet to be remitted
15
Fees receivable for collection of Parks Victoria charges, Water Smart Gardens and Water Tank Conservation Scheme
140 90
8
Melbourne Water Corporation The company transacts solely with the Melbourne Water Corporation for the purchase of bulk potable water and sewage treatment. The company, under a normal commercial agency agreement, bills and collects drainage charges on behalf of Melbourne Water, while income is received for providing this service. 2012 $’000
2011 $’000
Bulk potable water purchase and bulk sewage treatment
336,923 250,532
Drainage charges remitted
79,288 73,671
Water entitlement relating to the Food Bowl Irrigation Modernisation Project
6,667 26,667
Melbourne Water share of information statement income
220 261
Fee for collecting drainage rates including recovery of council valuation fees
3,737 3,494
Contribution for Cranbourne tanks functional design
100 -
The following amounts remain payable/receivable at balance date: Bulk water and sewage charges and share of information statements outstanding
7,431 4,238
Drainage charges yet to be remitted
1,081 804
Fees receivable for drainage charges collection
92 59
63
South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
Treasury Corporation of Victoria As required by the state government, the company’s borrowings are sourced solely from the Treasury Corporation of Victoria. 2012 2011 $’000 $’000 Net borrowings during the year
114,850 90,296
Interest expense
50,571 45,457
Advisory services
25 31
Interest revenue
8 7
The following amounts remain payable at balance date: Aggregate amount of borrowings payable
925,000 810,150
Interest expense
14,923 13,349
State Revenue Office The company paid the State Revenue Office the following under normal commercial arrangement: 2012 $’000
2011 $’000
Land/payroll tax
5,336 2,558
Not for profit rebate scheme reimbursement
826 762
The following amounts remain payable/receivable at balance date: Land/payroll tax payable
871 771
Not for profit rebate scheme receivable
146 212
Department of Human Services The company provides a number of services to the community which includes the administration of the pension rebate scheme and Utility Relief Grant Scheme. 2012 $’000
2011 $’000
Safe Drinking Water administration levy
227 222
Pension rebate/Utility relief grant concession
37,230 33,674
Dialysis concession program
49 -
The following amounts remain payable/receivable at balance date: Pension rebate concession outstanding
1,847 677
No provision for doubtful debts has been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad and doubtful debts due from related parties. Loans to and from related parties Apart from the loan transaction reported above, there were no other loan transactions with related parties. Guarantees given/received The State Government of Victoria has provided a guarantee on loans sourced from the Treasury Corporation of Victoria. There were no other guarantees given to or received from any related parties. Ownership interests in related parties The company has no ownership interests in any related parties.
64
24 Reconciliation of net profit after income tax to net cash inflow from operating activities 2012 $’000
2011 $’000
Net profit after income tax
90,420 69,678
Depreciation
61,101 61,658
Defined benefit fund superannuation income
(251) (266)
Defined benefit fund actuarial adjustments
(1,695) (1,432)
Write-off of non-current assets
393 1,017
Net (profit)/loss on sale of assets
(68) 653
Amortisation
4,960 3,657
Asset write downs
- 504
Value of works taken over from developers
(33,614) (21,057)
Changes in operating assets and liabilities Increase in receivables
(27,696) (15,237)
(Increase)/decrease in inventories
(105) 28
(Increase)/decrease in prepayments
(222) 185
Increase/(decrease) in income tax payable
2,758 2,310
Increase/(decrease) in deferred tax liability
3,721 1,946
Increase/(decrease) in deposits and advances
(894) (1,432)
Increase/(decrease) in provisions
(2,484) 4,226
Increase in trade creditors
5,150 5,445
Increase in accrued interest payable
1,980 2,621
Net cash flows from operating activities
103,454 114,504
25 Economic dependence The normal trading activities of the company are dependent on the provision of bulk water and sewage treatment services from Melbourne Water Corporation. No alternative supplier exists and this is envisaged to continue into the foreseeable future. As required by the state government, the company’s borrowings are sourced solely from the Treasury Corporation of Victoria.
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South East Water Limited ACN 066 902 547
Notes to the Financial Statements for the year ended 30 June 2012
26 Change in accounting policy (a) The company has changed its accounting policy in respect of the accounting for actuarial gains and losses relating to its defined benefit superannuation plan. All actuarial gains and losses were previously recognised in profit and loss. However, from 1 July 2010, such actuarial gains and losses have been recognised in retained earnings. The directors are of the view that the revised accounting policy provides reliable and more relevant information. As actuarial gains and losses normally arise from changes that arise from events outside the company’s control and could be viewed as unusual or abnormal, separately disclosing these outside profit and loss in retained earnings is considered to be of more relevance to the users of the financial statements. The net impact of this change is: • Increase in income of $0.3 million • Decrease in expenses of $4.0 million • Increase in income tax expense of $1.3 million • Increase in net profit after income tax of $3.0 million • Decrease in other comprehensive income of $3.0 million. The section below titled ‘Restatement of financial statements as a result of change in accounting policy’ shows the restatement of each line item affected by the change in accounting policy. Restatement of financial statements as a result of change in accounting policy Notes Actual 2011 $’000
Change in policy Restated 2011 2011 $’000 $’000
Statement of comprehensive income (Extract) Other income
- 266 266
Total income
620,055 266 620,321
Expenses
472,864 4,021 468,843
Profit before income tax expense
95,424 4,287 99,711
Income tax expense
(28,747) (1,286) (30,033)
Net profit after income tax
66,677 3,001 69,678
Actuarial (gains)/losses on defined benefit fund
- 4,287 4,287
Income tax relating to components of other comprehensive income
(9,420) 1,286 (8,134)
Other comprehensive income after tax
48,995 (3,001) 45,994
Note 3 Income (Extract) Superannuation income
- 266 266
Total income
620,055
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266 620,321
Actual 2011
Change in policy Restated 2011 2011
Note 4 Expenses (Extract) Employee benefits cost
(47,465) 1,432 (46,033)
Actuarial loss on defined benefit fund
(2,589) 2,589 -
Total expenses
(472,864) 4,021 (468,843)
Note 5 Income tax (Extract) (a) Income tax expense Deferred tax
660 1,286 1,946
Income tax expense
28,747 1,286 30,033
(c) Reconciliation of income tax expense to prima facie tax payable Accounting profit before tax
95,425 4,286 99,711
Tax calculated at 30%
28,627 1,286 29,913
Income tax expense
28,747 1,286 30,033
Note 16 Retained profits (Extract) Net profit after income tax
66,677 3,001 69,678
Defined benefit superannuation actuarial gain/(loss), net of tax effect
- (3,001) (3,001)
Note 24 reconciliation of net profit after income tax to net cash inflow from operating activities (Extract) Net profit after income tax
66,677 3,001 69,678
Defined benefit superannuation income
- (266) (266)
Defined benefit fund actuarial adjustments
- (1,432) (1,432)
Change in operating assets and liabilities Decrease in defined benefit super surplus
588
(588)
-
Increase in deferred tax liability
660
1,286
1,946
2,001
(2,001)
-
Increase in defined benefit superannuation liability
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South East Water Limited ACN 066 902 547
Directors’ Declaration
The directors declare they have been given the declaration made by the Managing Director and the Chief Financial Officer of the company pursuant to Section 295A of the Corporations Act 2001 and declare that the financial statements and notes of the company: (a) comply with the Corporations Regulations 2001 and Australian Accounting Standards (b) give a true and fair view of the company’s financial position as at 30 June 2012 and of its performance, as represented by the results of its operations and its cash flows for the financial year ended on that date. At the date of this statement, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. Signed in accordance with a resolution of the board of directors.
D Shirrefs Chairman
K Hutchings Managing Director
Melbourne 27 August 2012
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Independent Auditor’s Report
69
Independent Auditor’s Report
70
Risk Management Attestation
Attestation of Compliance with the Australian/New Zealand Risk Management Standard I, Douglas Shirrefs, certify that South East Water Limited had risk management processes in place consistent with the Australian/New Zealand Risk Management Standard and an internal control system was in place that enables the executive to understand, manage and satisfactorily control risk exposures. The board verifies this assurance and that the risk profile of South East Water was critically reviewed within the last financial year.
Douglas Shirrefs Chairman South East Water Limited 27 August 2012
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20 Corporate Drive Heatherton VIC 3202 Locked Bag 1 Moorabbin VIC 3189 Australia Telephone (03) 9552 3000 Facsimile (03) 9552 3001
[email protected] southeastwater.com.au/enquiries For a full suite of South East Water’s corporate reports, visit southeastwater.com.au South East Water Corporation ABN 89 066 902 547