Discounted Cash Flow Valuation Model Water Infrastructure Assets

Introduction – Logan City

•  Logan City situated in the heart of South East Queensland

•  63 suburbs •  More than 300,000 people •  Fifth largest local government area (by population)

in Australia •  Third largest budget •  Covers 957 square kilometres

Change in Accounting Policy

•  During 2013/2014 Logan City Council (LCC) worked with QAO, QTC & Deloittes to change the valuation methodology of its Water Infrastructure Assets

•  We moved from Depreciated Replacement Cost (DRC) to Discounted Cash Flow (DCF)

Change in Accounting Policy

•  Initial valuation of $1.827 billion based on

DRC as at 1 July 2012 after the return of water from Allconnex Water (AW)

•  Revised to $1.15 billion based on changed valuation methodology to DCF

•  $677 million or 37% reduction in value

Valuation as at 30 June 2014

For 2013/14"• The carrying value of Council’s water infrastructure assets was $1.382 billion as" at 30 June 2014."• Depreciation expense of $24.5 million for the year.

LCC Sustainability Ratios

LCC Sustainability Ratios

How we made the change

•  Reviewed the nature of the water business •  Reviewed the accounting standards •  Developed a water and sewerage assets

valuation position paper •  Held initial meetings with key stakeholders •  Developed a water and sewerage assets

valuation methodology

How we made the change

•  Made changes to Council’s Revaluation of Non- Current Assets Policy

•  Refined our 10 year water business financial model

•  Established a DCF valuation model •  Input 10 year financial model information

into DCF valuation tool

How we made the change

•  Reviewed DCF model results for reasonableness

•  Reviewed impact on financial statements –change in accounting policy

•  Prepared final valuation work papers for audit

Consequence of change

•  A reduction in depreciation •  Move from operating deficit to surplus •  An improvement in our asset sustainability

ratios •  Alignment of valuation approach with other

water service providers in South East Queensland which are subject to the QCA Regulatory Framework ie QUU, Unitywater and SEQWater.

Consequence of change Con’t

•  An opportunity to smooth asset valuations on a year by year basis by using future cashflows of the business

•  An alignment of pricing and depreciation methodologies

Where to from here

But we can’t stand still as: • Spending on renewals changes each year (impact on asset sustainability ratio) • Asset base increase yearly (donated assets, assets constructed and annual revaluations) • Still a large value of assets under DRC valuation methodology

Where to from here

•  LCC now has a focus on Stormwater Drainage Assets to review: Ø The componentisation of assets Ø The use of new technology as modern

equivalent (pipe relining) Ø The assets estimated useful lives

•  Early indications are that the overall life of the stormwater drainage assets may be extended.

Where to from here

•  Continued improvement in asset management systems to refine identification of renewals spending

•  Continued use of prudency and efficiency principles in the development of the capital program