Discounted Cash Flow Valuation Model Water Infrastructure Assets - PowerPoint PPT Presentation

Discounted Cash Flow Valuation Model Water Infrastructure Assets

Situated in the heart of South East Queensland

Situated in the heart of South East Queensland

Situated in the heart of South East Queensland

Situated in the heart of South East Queensland

300,000+ residents

Fifth largest local government area (by population) in Australia

Third largest budget

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

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

LCC Sustainability Ratios

LCC Sustainability Ratios

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 other council assets under DRC valuation methodology

Where to from here • LCC now has a focus on Stormwater Drainage Assets to review:  The componentisation of assets  The use of new technology as modern equivalent (pipe relining)  The assets estimated useful lives • Early indications are that the overall life of the stormwater drainage assets may be able to 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