Sydney Desalination Plant Pty Ltd - IPART - … Desalination Plant Pty Ltd Application to IPART for Network Operator and Retail Supplier Licence Water Industry Competition Act 2006

Sydney Desalination Plant Pty Ltd

Application to IPART for Network Operator and Retail Supplier Licence

Water Industry Competition Act 2006

PART 4 – APPENDIX 4A

Q 4(a) What is the applicant’s financial history?

• Financial statements • Tax returns • Credit rating memo

SYDNEY DESALINATION PLANT PTY LIMITED ABN 50 125 935 177

Annual Financial Statements for the period 13 June 2007 to

30 June 2008

SYDNEY DESALINATION PLANT PTY LIMITED - 30 June 2008 page 1

Contents Income statement page 3 Statement of recognised income and expense page 4 Balance sheet page 5 Cash flow statement page 6 Notes to and forming part of the financial statements: page 7 Corporate information page 7 1. Summary of significant accounting policies page 7 2. Income and expenses page 17 3. Income tax expense page 18 4. Cash and cash equivalents page 19 5. Trade and other receivables page 20 6. Current tax payable or receivable page 20 7. Property, plant and equipment page 21 8. Deferred tax assets and liabilities page 23 9. Trade and other payables page 24 10. Borrowings page 24 11. Share capital page 26 12. Other contributed (distributed) equity page 26 13. Retained earnings (accumulated losses) page 26 14. Total equity reconciliation page 26 15. Notes to the cash flow statement page 27 16. Commitments page 28 17. Consultants page 29 18. Auditors’ remuneration page 29 19. Related party disclosures page 29 20. Financial risk management disclosures page 31 21. Segment reporting page 37 22. Contingencies page 37 23. Event subsequent to the reporting date page 37 Directors’ Declaration page 38 Independent Auditor’s Report page 39


13 June 2007 toNote 30 June 2008

$'000

Revenue 2(a) -

Finance costs 2(b) -

Other expenses 2(b) (18)

Profit (loss) before income tax (18)

Income tax (expense) income 3(a), (b) 5

Profit (loss) for the period (13)

Start of audited Financial Statements

SYDNEY DESALINATION PLANT PTY LIMITED

INCOME STATEMENT

for the period 13 June 2007 to 30 June 2008



$'000

Net income (expense) recognised directly in equity -

Profit (loss) for the period (13)

Total recognised income and expense for the period (13)


STATEMENT OF RECOGNISED INCOME AND EXPENSEfor the period 13 June 2007 to 30 June 2008


Note 2008$'000

CURRENT ASSETS

Cash and cash equivalents 4 5Trade and other receivables 5 14,860

TOTAL CURRENT ASSETS 14,865

NON-CURRENT ASSETS

Property, plant and equipment 7 511,739

TOTAL NON-CURRENT ASSETS 511,739

TOTAL ASSETS 526,604

CURRENT LIABILITIES

Trade and other payables 9 47,969

TOTAL CURRENT LIABILITIES 47,969

NON-CURRENT LIABILITIES

Borrowings 10 440,430Deferred tax liabilities 8 3,777

TOTAL NON-CURRENT LIABILITIES 444,207

TOTAL LIABILITIES 492,176

NET ASSETS 34,428

EQUITY

Share capital 11 37,877Other contributed (distributed) equity 12 (3,436)Retained earnings (accumulated losses) 13 (13)

TOTAL EQUITY 14 34,428


BALANCE SHEET

as at 30 June 2008



$'000

CASH FLOWS FROM OPERATING ACTIVITIES

Cash receipts in the course of operations 29,656Cash payments in the course of operations (40,652)

Cash generated from operations (10,996)Interest received 9Interest paid (9,484)

Net cash from operating activities 15 (20,471)

CASH FLOWS FROM INVESTING ACTIVITIES

Payments for property, plant and equipment (419,961)

Net cash from investing activities (419,961)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from borrowings 445,711Repayment of borrowings (5,274)

Net cash from financing activities 440,437

Net increase (decrease) in cash and cash equivalents 5

Cash and cash equivalents at beginning of period -

CASH AND CASH EQUIVALENTS AT END OF PERIOD 4 5


CASH FLOW STATEMENT

for the period 13 June 2007 to 30 June 2008



NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE PERIOD 13 JUNE 2007 TO

30 JUNE 2008 CORPORATE INFORMATION

Sydney Desalination Plant Pty Limited (ABN 50 125 935 177) is a wholly owned subsidiary of Sydney Water Corporation and will be referred to in this financial report as “the Company”. The Company’s parent entity, Sydney Water Corporation, will be referred to as “the Parent”. The Company was incorporated in Australia on 13 June 2007. The address of the Company’s registered office in Australia is Level 23, 115-123 Bathurst Street, Sydney, NSW, 2000. The principal activity of the Company is to procure the construction and ongoing operation and maintenance of a desalination plant at Kurnell, Sydney. The Company is a for-profit entity. The Company’s first financial report for the period 13 June 2007 to 30 June 2008 was authorised for issue in accordance with a resolution of the Directors on 5 September 2008. The significant accounting policies that have been adopted in the preparation of the financial report are detailed below.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PREPARATION

This first financial report is a general purpose financial report, which has been prepared in accordance with applicable Australian Accounting Standards (including Australian Interpretations) adopted by the Australian Accounting Standards Board (“AASB”), mandates issued by NSW Treasury and other mandatory and statutory reporting requirements, including Part 3 of the Public Finance and Audit Act 1983 and the associated requirements of the Public Finance and Audit Regulation 2005. In preparing this financial report, the accounting policies described below are based on the requirements applicable to for-profit entities in these mandatory and statutory requirements. The financial report covers the financial performance of the Company for the reporting period 13 June 2007 to 30 June 2008 and its financial position as at 30 June 2008.

The financial report has been prepared on the historical cost basis, except for certain classes of property, plant and equipment that are stated at the lower of fair value and recoverable amount. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000). There are no comparatives as this is the first financial report for the Company, following NSW Treasury’s approval on 22 June 2007 to extend the first financial reporting period for the Company from 13 June 2007 to 30 June 2008 in accordance with Section 4(1A) of the Public Finance and Audit Act 1983.

(b) STATEMENT OF COMPLIANCE

The financial report complies with all applicable Australian Accounting Standards, including those Standards that are Australian equivalents to International Financial Reporting Standards (“AEIFRS”). Compliance with AEIFRS also ensures that the financial report complies with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”).


(c) REVENUE

Revenue is income that arises in the course of ordinary activities. Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. In respect of the following category of revenue earned, the following recognition criteria must also be met before revenue is recognised:

• INTEREST REVENUE

Interest revenue is recognised as the interest accrues using the effective interest method. The effective interest method calculates the amortised cost of a financial asset and allocates interest revenue over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to its net carrying amount. Where interest revenue is earned on the temporary investment of borrowings used for the construction of qualifying assets (refer Note 1(e)), the interest revenue is netted against the borrowing costs that are incurred prior to their capitalisation against the cost of the qualifying assets.

(d) OTHER INCOME

Other income comprises gains arising from either the disposal of recognised assets and liabilities or the remeasurement of some items to fair value at the reporting date that are required to be taken to the Income Statement under the relevant applicable Australian Accounting Standards.

• DISPOSAL OF INVESTMENTS OR OTHER FINANCIAL ASSETS

The net gain or loss on disposal of investments or other financial assets is calculated as the difference between the carrying amount at the time of disposal and the net proceeds on disposal and is recorded in the Income Statement in the period of disposal. Net losses on disposal, if any, are reclassified as expenses.

• DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT

The net gain or loss on disposal of these assets is calculated as the difference between the carrying amount of the assets at the time of disposal and the net proceeds on disposal and is recorded in the Income Statement in the period of disposal. Net losses on disposal, if any, are reclassified as expenses.

(e) EXPENSES

Expenses are recognised in the Income Statement when incurred. Expenses include items that are incurred in the course of ordinary activities as well as various losses that arise from either the disposal of recognised assets or the remeasurement of some items at the reporting date that are required to be taken to the Income Statement under the relevant applicable Australian Accounting Standards. Examples of losses are those arising from the disposal of property, plant and equipment and some asset impairment losses. Expenses, if any, are disclosed in the Company’s financial report by nature.

• DEPRECIATION

Items of property, plant and equipment (excluding freehold land), if any, are depreciated on a straight-line basis over their estimated useful lives, making allowance where appropriate for residual values. The review of lives for any depreciable property, plant and equipment is undertaken as part of the Parent’s current annual processes, and takes into account assessments of asset condition, commercial and technical obsolescence and expected normal wear and tear. Work in progress is not depreciated until the assets are brought into service and are available for use. Partially capitalised assets attract depreciation only after they have been commissioned.

• BORROWING COSTS

Interest and other borrowing costs, such as NSW Government Guarantee fees payable in respect of the Company’s borrowings, are expensed as incurred within finance costs in the Income Statement unless they relate to qualifying assets, in which case they are capitalised as part of the cost of those assets. Qualifying assets are assets that take a substantial period of time to get ready for their intended use or sale. The Company considers this to be 12 months or more. The desalination plant that is currently being constructed at Kurnell is the Company’s only qualifying asset in this regard.


Capitalisation of borrowing costs is undertaken where a direct relationship can be established between the borrowings and the relevant projects giving rise to qualifying assets. In this regard, all of the Company’s borrowings are directly attributable to the construction of the desalination plant. Accordingly, the borrowing costs arising from these borrowings are being capitalised as part of the cost of the plant. The amount of borrowing costs capitalised is net of any interest earned by the Company from temporarily investing those borrowings. (Refer Note 1(c)).

(f) TAXATION

• INCOME TAX

The Company is subject to notional taxation in accordance with the State Owned Corporations Act 1989. An “equivalent” or “notional” income tax is payable to the NSW Government through the Office of State Revenue. Taxation liability is assessed according to the National Tax Equivalent Regime (“NTER”) that replaced the former State Tax Equivalent Regime of the NSW Treasury from 1 July 2001. The NTER closely mirrors the Commonwealth Income Tax Assessment Acts of 1936 and 1997 (as amended) and is administered by the Australian Taxation Office (“ATO”). The Company applies the Balance Sheet method of tax-effect accounting to determine income tax expense and current and deferred tax assets and liabilities. Income tax expense or income on the operating result for the reporting period comprises both current and deferred tax. Income tax is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity, in which case the income tax is itself recognised directly in equity. Current tax is the expected tax payable or receivable on the taxable income for the reporting period, using tax rates enacted or substantively enacted at the reporting date, and covers any adjustment to tax payable or receivable in respect of previous years. Deferred tax represents future assessable or deductible amounts that arise due to temporary differences existing at the reporting date between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes (their tax bases). Deferred tax balances are not recognised for temporary differences that arise from the initial recognition of assets or liabilities that affect neither accounting profit or taxable profit. The carrying amount of deferred tax assets is reviewed at the reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Deferred tax assets and liabilities provided are based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates (and tax laws) enacted or substantively enacted at the reporting date. Current and deferred tax assets are offset with current and deferred tax liabilities respectively where they relate to income taxes levied by the same taxation authority and they are expected to be settled with that taxation authority on a net basis. (Refer Note 8).

• TAX CONSOLIDATION The Company and the Parent have consolidated as a single entity for income tax purposes. The Parent is the head entity in the tax-consolidated group and accordingly is the only Australian taxpayer in the tax-consolidated group for the purposes of the NTER. As the head entity, the Parent recognises all of the current tax assets and liabilities of the tax-consolidated group (after elimination of intra-group transactions). The tax-consolidated group does not have a tax funding agreement. In accordance with Australian Interpretation 1052 “Tax Consolidation Accounting”, the Company initially recognises its own income tax expense or income and current and deferred tax balances. Subsequent to initial recognition, the Parent as the head entity assumes all of the current Australian tax balances from its wholly owned Australian subsidiaries in order to recognise the total current tax payable or receivable of the tax-consolidated group in its own Balance Sheet. As there is no tax funding agreement, the assumption of the Company’s current tax balances by the Parent is recognised as an equity transaction (as either other contributed or other distributed equity) in the Company’s Balance Sheet.

• GOODS AND SERVICES TAX

Revenue, expenses and assets are recognised net of the amount of Goods and Services Tax (“GST”), except where the amount of GST incurred by the Company as a purchaser is not recoverable from the ATO. In such cases, the GST incurred is recognised as part of the cost of acquisition of an asset or as part of an item of expense. The Company’s GST obligations (amount receivable) are remitted to (received from) the Parent and are included in the Parent’s monthly consolidated Business Activity Statement remitted to the ATO. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from or payable to the ATO is included as a current asset or liability respectively in the Balance Sheet. Cash flows of GST are included in the Cash Flow Statement on a gross basis. The GST components of cash flows arising from investing and financing activities that are recoverable from or payable to the ATO are classified as cash flows from operating activities. Commitments are disclosed inclusive of GST where applicable. (Refer Note 16).


(g) CASH AND CASH EQUIVALENTS

Cash and cash equivalents in the Balance Sheet comprise positive cash balances and short-term investments with a maturity period of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For the purposes of the Cash Flow Statement, cash and cash equivalents consists of the above Balance Sheet definition, net of bank overdraft balances. Bank overdraft balances, if any, are included within Borrowings under Current Liabilities in the Balance Sheet. (Refer Note 10).

(h) TRADE AND OTHER RECEIVABLES

Trade and other receivables represent amounts that are receivable by the Company at the end of the reporting period and that are yet to be collected. Trade and other receivables are recognised initially and subsequently carried at original invoice amount, which is their fair value, less any impairment losses recognised by way of an allowance for doubtful debts that represents specific amounts considered to be either doubtful or uncollectible. Recognition at original invoice amount is adopted as this is not materially different to amortised cost, given the short-term nature of these receivables. The recoverability of trade and other receivables is regularly reviewed throughout the reporting period. An allowance for doubtful debts is recognised when collection of the full amount invoiced is considered to be no longer probable after due consideration of factors such as the length of time in excess of the due date and prevailing economic conditions. These factors are considered to be objective evidence of impairment. Known bad debts, if any, are written off against the allowance as and when identified.

(i) PROPERTY, PLANT AND EQUIPMENT

• ACQUISITIONS AND CAPITALISATION

All items of property, plant and equipment acquired by the Company are recognised initially at the cost of acquisition. Subsequent to initial recognition, particular classes of completed assets are to be revalued in accordance with the Parent’s revaluation policies (see Asset Valuations below). Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire the asset, including costs that are directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended. Items costing $5,000 or more individually and having a minimum expected working life of three years are capitalised. In the case of assets acquired that form part of an overall network, all expenditures are capitalised regardless of cost. In respect of the Company’s desalination plant currently under construction, cost includes:

• services and resources provided by the Parent, such as labour for project management; • contractors’ services; and • borrowing costs (refer Note 1(e)).

Construction costs are initially capitalised as work in progress and are subsequently reclassified as completed property, plant and equipment assets once they are ready for use.

• ASSET VALUATIONS

Following initial recognition at cost, each class of property, plant and equipment is stated in the Balance Sheet at fair value less any subsequent accumulated depreciation and accumulated impairment losses where applicable. Adopting the fair value model for property, plant and equipment assets, rather than the cost model, is a requirement of NSW Treasury’s mandates in respect of options to be adopted by NSW public sector entities under Australian Accounting Standards. For some classes of assets, remeasurement to fair value is to be undertaken by way of an asset revaluation. Valuations are to be performed with sufficient regularity to ensure that the carrying amount does not differ materially from the asset’s fair value at the reporting date. The valuation basis that is representative of fair value in respect of each class of assets is detailed below. In respect of classes of assets for which there exists an active market, fair value is the amount for which the assets could be exchanged between knowledgeable and willing parties in an arm’s length transaction, having regard to the highest and best use of the assets for which other parties would be willing to pay to obtain the most advantageous price or highest possible value. In respect of classes for which there is no active market due to the specialised nature of the assets, fair value is determined as the estimated depreciated current replacement cost of the assets.


Desalination Plant and System Assets

The desalination plant at Kurnell and any associated system assets subsequently acquired by the Company, when operational, will be specialised infrastructure assets owned by the Company. Their function will be to convert seawater into potable water and to then supply it to the Parent’s water delivery system network. Due to the specialised nature of these assets, their fair value is determined as their estimated depreciated current replacement cost. The determination of estimated depreciated current replacement cost for these assets is based on estimates of modern engineering equivalent replacement asset (“MEERA”) values on a whole of facility basis and takes into account condition-based assessments of the assets and their asset lives to determine their remaining service potential. Subsequent to determining their fair value, the assets are then tested for impairment by applying a cash-generating unit test to determine their recoverable amount, which represents their value in use. The cash-generating unit test calculates the discounted present value of the net cash inflows that the Company expects to be generated from its assets, operating together within separately identified cash-generating units, over their expected useful lives. For the Company, the cash-generating unit is considered to be the entire network of infrastructure assets that it owns as all of these assets work together, rather than individually, to generate cash flows under current pricing methodologies. In addition, the Company will have its own regulated asset base at this level for pricing purposes and will ultimately be able to generate revenue with these assets when they become operational. After determining recoverable amount, the assets are then stated in the Balance Sheet at the lower of their fair value and recoverable amount. (For further details regarding the assumptions used in the cash-generating unit test, refer Note 7(b)). Valuations for these assets are to be carried out annually, effective from 1 July each financial reporting period. Comprehensive engineering valuations of different categories of these assets are to be carried out on a progressive cycle not exceeding five years. Valuations carried out during the intervening years of the progressive cycle are to be carried out using an output index that is applicable to the general construction industry. When these assets are revalued, any accumulated depreciation is to be restated proportionately with the change in the gross carrying amount of the asset so that the net carrying amount of the asset after revaluation equals its revalued amount.

For each class of property, plant and equipment subject to valuation, revaluation increments, if any, will be credited to an asset revaluation reserve within equity in the Balance Sheet. Where a revaluation decrement or an impairment loss is to reverse a revaluation increment previously credited to, and which is still in the balance of, the asset revaluation reserve, the revaluation decrement or impairment loss will be debited to that reserve. In other cases, the decrement or impairment loss will be recognised as an expense in the Income Statement. Revaluation increments and decrements will be offset against one another on an “individual asset” basis. For revaluation purposes in respect of its infrastructure assets, the Company considers the desalination plant currently being constructed at Kurnell to be an “individual asset” separate from any other possible infrastructure assets that it may subsequently acquire. Upon any disposal of assets that have been revalued, any asset revaluation reserve balance relating to the particular asset being disposed will be transferred to retained earnings.

(j) IMPAIRMENT OF ASSETS

At each reporting date, the carrying amounts of assets (other than any deferred tax assets) are reviewed to determine whether there is an indication of impairment. If any such indication exists, a formal estimate of their recoverable amount is made. (Refer below - Calculation of recoverable amount). Where the carrying amount of an asset is greater than its recoverable amount, the asset is considered impaired. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised as an expense in the Income Statement, unless an asset has previously been revalued through the asset revaluation reserve, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the Income Statement. Impairment losses recognised in respect of a cash-generating unit are allocated to reduce the carrying amount of the assets in the unit on a pro rata basis.

• CALCULATION OF RECOVERABLE AMOUNT

Financial assets

The recoverable amount of any receivables stated at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate determined at initial recognition. Receivables with a short duration are not discounted. Impairment in respect of these receivables is determined in accordance with the accounting policy in Note 1(h).


Other assets

The recoverable amount of other assets for which there is an active and liquid market, such as land, is the greater of fair value less costs to sell and their value in use. The recoverable amount of other assets for which there is no active and liquid market due to their specialised nature, such as the desalination plant currently being constructed, is their value in use. In assessing value in use, the estimated future cash flows from the continuing use and ultimate disposal of an asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash flows that are largely independent from other assets, the recoverable amount is determined for the cash-generating unit to which it belongs. (Refer also Note 1(i)). For further specific details of the assumptions behind the cash-generating unit test used for the Company’s infrastructure assets, refer Note 7(b).

• REVERSALS OF IMPAIRMENT

Financial assets

An impairment loss in respect of any receivables stated at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment was recognised.

Other assets

Impairment losses in respect of other assets, such as the desalination plant currently being constructed, are reversed if there has been a change in the estimates used to determine the recoverable amount or if an event or significant changes have occurred during the reporting period that have led, or will lead, to a benefit to the Company because of the manner in which the relevant asset is expected to be used. Impairment losses are reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised.

(k) TRADE AND OTHER PAYABLES

Trade and other payables represent liabilities for goods and services provided to the Company prior to the end of the reporting period and that are unpaid. Trade and other payables are recognised in the Balance Sheet at cost, which is considered to approximate amortised cost due to their short-term nature. They are not discounted, as the effect of discounting would not be material for these liabilities. Recognition of trade and other payables occurs when the goods or services purchased by the Company have been received and an obligation to make future payments arises. (Refer Note 9).

(l) BORROWINGS

Interest-bearing borrowings obtained by the Company from the NSW Treasury Corporation are recognised initially at the fair value of the consideration received, which incorporates any transaction costs associated with the borrowing. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method. (Refer Note 10). Amortised cost is calculated by taking into account any differences between the initial fair value and the final redemption value of the borrowings, such as discounts or premiums. These differences are amortised to the Income Statement as part of finance costs over the period of the borrowings on an effective interest basis. Gains or losses are recognised in the Income Statement when liabilities are derecognised, such as through a debt restructuring, as well as through the amortisation process. Interest-bearing borrowings are classified as Current Liabilities only if the borrowing is due to be settled within 12 months after the reporting date and there is no intention to extend or refinance the obligation on a long-term basis with the respective lender. All other interest-bearing borrowings are classified as Non-current Liabilities.

(m) ACCOUNTING STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET OPERATIVE

At the reporting date, a number of Australian Accounting Standards and Interpretations adopted by the AASB had been issued but are not yet operative and have not been early adopted by the Company. The following is a list of these Standards and Interpretations and a description of their possible impact on the financial report in the period of their initial application:


• AASB 1049 “Financial Reporting of General Government Sectors by Governments” (issued September 2006)

This Standard specifies requirements for financial reports of the General Government Sector of each government, which is not applicable to the Company. The initial application of this Standard will not impact on the financial results of the Company. The Standard is operative for annual reporting periods beginning on or after 1 July 2008 (ie. 2008/09). However, it is unlikely that it will ever individually come into operation (unless it is early adopted by a government in 2007/08) as it is being replaced by AASB 1049 “Whole of Government and General Government Sector Reporting” (issued October 2007), which has the same operative date. (See below).

• AASB 8 “Operating Segments” (issued February 2007)

This Standard replaces the presentation requirements of segment reporting in AASB 114 “Segment Reporting”, which is currently not relevant to the Company. The initial application of this Standard will have no impact on the financial results of the Company. The Standard is operative for annual reporting periods ending on or after 1 January 2009 (ie. 2009/10).

• AASB 2007-3 “Amendments to Australian Accounting Standards arising from AASB 8” (issued February 2007)

This Standard makes changes to AASB 5 “Non-current Assets Held for Sale and Discontinued Operations”, AASB 6 “Exploration for and Evaluation of Mineral Resources”, AASB 102 “Inventories”, AASB 107 “Cash Flow Statements”, AASB 119 “Employee Benefits”, AASB 127 “Consolidated and Separate Financial Statements”, AASB 134 “Interim Financial Reporting”, AASB 136 “Impairment of Assets”, AASB 1023 “General Insurance Contracts” and AASB 1038 “Life Insurance Contracts”. These changes are consequential changes due to the issuance of AASB 8 “Operating Segments” and include changes to references and to language compatible with AASB 8. The initial application of this Standard will have no impact on the financial results of the Company. The Standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie. 2009/10).

• AASB Interpretation 12 “Service Concession Arrangements” (issued February 2007)

This Interpretation addresses the accounting for service concession operators, but not grantors, for public-to-private service concession arrangements. It states that for arrangements falling within its scope, the infrastructure assets within the arrangements are not recognised as property, plant and equipment of the operator and that instead, the operator shall recognise either a financial asset or an intangible asset, or a combination of the two depending on the terms of the arrangement. The initial application of this Interpretation will not impact on the financial results of the Company. The Interpretation is operative for annual reporting periods beginning on or after 1 January 2008 (ie. 2008/09).

• AASB 2007-2 “Amendments to Australian Accounting Standards arising from AASB Interpretation 12” (issued February 2007)

This Standard makes amendments to AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards” to allow a first-time adopter an optional exemption from full retrospective application of Interpretation 12 and allows recognition from the start of the earliest period presented in the financial report if retrospective application is impracticable. Application of this requirement must be made at the same time as Interpretation 12 “Service Concession Arrangements”. The initial application of this Standard will have no impact on the financial results of the Company. This part of the Standard is operative for annual reporting periods beginning on or after 1 January 2008 (ie. 2008/09).

• AASB Interpretation 4 “Determining whether an Arrangement contains a Lease” (issued February 2007)

This Interpretation specifies criteria for determining whether an arrangement is, or contains, a lease. The determination is based on an assessment of whether fulfilment of the arrangement is dependent on the use of a specific asset and whether the arrangement conveys a right to use the asset. This Interpretation replaces the existing Interpretation 4 (issued in June 2005) to specifically exclude from its scope public-to-private service concession arrangements within the scope of Interpretation 12 “Service Concession Arrangements”. The initial application of this Interpretation will have no impact on the financial results of the Company. The Interpretation is operative for annual reporting periods beginning on or after 1 January 2008 (ie. 2008/09).

• AASB Interpretation 129 “Service Concession Arrangements: Disclosures” (issued February 2007)

This Interpretation requires specific disclosures about service concession arrangements entered into by an entity, whether as a grantor or as an operator. The required disclosures include significant terms of each individual arrangement that may affect the amount, timing and certainty of future cash flows. This Interpretation replaces Interpretation 129 “Disclosure – Service Concession Arrangements” issued in July 2004 but must only be applied at the same time as Interpretation 12 “Service Concession Arrangements”. The initial application of this Interpretation will not impact on the financial results of the Company. The Interpretation is operative for annual reporting periods beginning on or after 1 January 2008 (ie. 2008/09).

• AASB 123 “Borrowing Costs” (issued June 2007)

This Standard makes amendments to AASB 123 “Borrowing Costs” issued in July 2004 to require the capitalisation of all borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset, which is an asset that necessarily takes a substantial period of time to get ready for its intended use. In the July 2004 version of AASB 123, entities had a choice to either expense or capitalise such costs. This choice is no longer available under the revised AASB 123 and only capitalisation of such costs is permitted. All other borrowing costs, however, are to continue to be expensed. The initial


application of this Standard will have no impact on the financial results of the Company. The Standard is operative for annual reporting periods beginning on or after 1 July 2009 (ie. 2009/10).

• AASB 2007-6 “Amendments to Australian Accounting Standards arising from AASB 123 [AASB 1, AASB 101, AASB 107, AASB 111, AASB 116 & AASB 138 and Interpretations 1 & 12]” (issued June 2007)

This Standard makes consequential amendments to AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards”, AASB 101 “Presentation of Financial Statements”, AASB 107 “Cash Flow Statements”, AASB 111 “Construction Contracts”, AASB 116 “Property, Plant and Equipment”, AASB 138 “Intangible Assets”, Interpretation 1 “Changes in Existing Decommissioning, Restoration and Similar Liabilities” and Interpretation 12 “Service Concession Arrangements” as a result of the issue of the revised AASB 123 “Borrowing Costs” in June 2007 (see above). The amendments principally remove references to expensing borrowing costs on qualifying assets, as AASB 123 was revised to require such borrowing costs to be capitalised. The initial application of this Standard will have no impact on the financial results of the Company. The Standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie. 2009/10).

• AASB Interpretation 13 “Customer Loyalty Programmes” (issued August 2007)

This Interpretation addresses accounting for customer loyalty programmes under which customers are granted loyalty award credits as part of a sales transaction and those credits can be redeemed by them in the future for discounted goods and services. The initial application of this Interpretation will not impact on the financial results of the Company. The Interpretation is operative for annual reporting periods beginning on or after 1 July 2008 (ie. 2008/09).

• AASB Interpretation 14 “AASB 119 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction” (issued August 2007)

Under Australian Accounting Standard AASB 119 “Employee Benefits”, the measurement of a defined benefit superannuation scheme recognised asset arising from a surplus in that scheme is limited to the present value of economic benefits available in the form of refunds from the scheme or reductions in future contributions to the scheme plus any unrecognised gains and losses. This Interpretation provides general guidance on when refunds or reductions in future contributions should be regarded as available by an employer sponsor in assessing that limit, particularly when a minimum funding requirement exists for the particular scheme. The initial application of this Interpretation will not impact on the financial results of the Company. The Interpretation is operative for annual reporting periods beginning on or after 1 January 2008 (ie. 2008/09).

• AASB 101 “Presentation of Financial Statements” (issued September 2007)

This Standard will replace the existing AASB 101 (issued October 2006) and will make changes to the names and content of the Financial Statements of an entity. When operative, the Balance Sheet will be referred to as a Statement of Financial Position and the Cash Flow Statement will be referred to as a Statement of Cash Flows. Items of income and expense will be permitted to be displayed either in one single Statement of Comprehensive Income (combining the current Income Statement and Statement of Recognised Income and Expense) or two separate Statements - an Income Statement for items comprising profit or loss and a Statement of Comprehensive Income for non-owner changes in Equity such as movements in Reserves. Additionally, a new Statement of Changes in Equity will be required to display changes in Equity arising from transactions with owners in their capacity as owners. Whenever an entity applies an accounting policy retrospectively, the Standard also requires an entity to display an additional comparative column as at the beginning of the previous reporting period in its Statement of Financial Position. The Standard also requires disclosure of any reclassification adjustments from other comprehensive income to profit or loss. The initial application of this Standard will not impact on the financial results of the Company, as it is only concerned with presentation of the Financial Statements and their form and content. The Standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie. 2009/10).

• AASB 2007-8 “Amendments to Australian Accounting Standards arising from AASB 101” (issued September 2007)

This Standard makes editorial and terminology amendments to Australian Accounting Standards (including Interpretations) as a consequence of the issuance of revised AASB 101 “Presentation of Financial Statements” in September 2007 (see above). The changes are largely to better align Australian Accounting Standards (and Interpretations) with IFRS terminology, such as changing the term “financial report” to “financial statements”. The initial application of this Standard will have no impact on the financial results of the Company. The Standard is operative when the revised AASB 101 above is operative, being annual reporting periods beginning on or after 1 January 2009 (ie. 2009/10).

• AASB 1049 “Whole of Government and General Government Sector Financial Reporting” (issued October 2007)

This Standard specifies requirements for whole of government financial reports and General Government Sector financial reports of each government, and as such is not applicable to the Company. When operative, the Standard will replace AASB 1049 “Financial Reporting of General Government Sectors by Governments” issued in September 2006 (see earlier) and AAS 31 “Financial Reporting by Governments” issued in November 1996 (as amended). The initial application of this Standard will not impact on the financial results of the Company. The Standard is operative for annual reporting periods beginning on or after 1 July 2008 (ie. 2008/09).


• AASB 1004 “Contributions” (issued December 2007)

This Standard specifies requirements for financial reporting of contributions received by not-for-profit entities, local governments, government departments that are reporting entities, General Government Sectors and whole of governments. Accordingly, it is not applicable to the Company and will have no impact on its financial results upon initial application. When operative, this Standard together with AASB 1049 “Whole of Government and General Government Sector Financial Reporting” (see above), AASB 1050 “Administered Items”, AASB 1051 “Land Under Roads”, AASB 1052 “Disaggregated Disclosures”, AASB 2007-9 “Amendments to Australian Accounting Standards arising from the Review of AAS 27, AAS 29 and AAS 31” and AASB Interpretation 1038 “Contributions by Owners to Wholly-Owned Public Sector Entities” (all issued in December 2007 - see below) will supersede AASB 1004 “Contributions” issued in July 2004, AAS 27 “Financial Reporting by Local Governments” issued in June 1996 (as amended), AAS 29 “Financial Reporting by Government Departments” issued in June 1998 (as amended) and AAS 31 “Financial Reporting by Governments” issued in June 1998 (as amended). The Standard is operative for annual reporting periods beginning on or after 1 July 2008 (ie. 2008/09).

• AASB 1050 “Administered Items” (issued December 2007)

This Standard specifies requirements for government departments relating to disclosure of administered items in their Financial Statements. It applies to government departments only. Accordingly, it is not applicable to the Company and will have no impact on its financial results upon initial application. When operative, this Standard together with AASB 1049 “Whole of Government and General Government Sector Financial Reporting”, AASB 1004 “Contributions” (see above), AASB 1051 “Land Under Roads”, AASB 1052 “Disaggregated Disclosures”, AASB 2007-9 “Amendments to Australian Accounting Standards arising from the Review of AAS 27, AAS 29 and AAS 31” and AASB Interpretation 1038 “Contributions by Owners to Wholly-Owned Public Sector Entities” (see below) will supersede AAS 29 “Financial Reporting by Government Departments” issued in June 1998 (as amended). The Standard is operative for annual reporting periods beginning on or after 1 July 2008 (ie. 2008/09).

• AASB 1051 “Land Under Roads” (issued December 2007)

This Standard specifies requirements for financial reporting of land under roads by local governments, government departments, General Government Sectors and whole of governments. Accordingly, it is not applicable to the Company and will have no impact on its financial results upon initial application. When operative, this Standard together with AASB 1049 “Whole of Government and General Government Sector Financial Reporting”, AASB 1004 “Contributions”, AASB 1050 “Administered Items” (see above), AASB 1052 “Disaggregated Disclosures”, AASB 2007-9 “Amendments to Australian Accounting Standards arising from the Review of AAS 27, AAS 29 and AAS 31” and AASB Interpretation 1038 “Contributions by Owners to Wholly-Owned Public Sector Entities” (see below) will supersede AAS 27 “Financial Reporting by Local Governments” issued in June 1996 (as amended), AAS 29 “Financial Reporting by Government Departments” issued in June 1998 (as amended) and AAS 31 “Financial Reporting by Governments” issued in June 1998 (as amended). The Standard is operative for annual reporting periods beginning on or after 1 July 2008 (ie. 2008/09).

• AASB 1052 “Disaggregated Disclosures” (issued December 2007)

This Standard specifies principles for reporting financial information by function or activity by local governments, and financial information about service costs and achievements by government departments. Accordingly, it is not applicable to the Company and will have no impact on its financial results upon initial application. When operative, this Standard together with AASB 1049 “Whole of Government and General Government Sector Financial Reporting”, AASB 1004 “Contributions”, AASB 1050 “Administered Items”, AASB 1051 “Land Under Roads” (see above), AASB 2007-9 “Amendments to Australian Accounting Standards arising from the Review of AAS 27, AAS 29 and AAS 31” and AASB Interpretation 1038 “Contributions by Owners to Wholly-Owned Public Sector Entities” (see below) will supersede AAS 27 “Financial Reporting by Local Governments” issued in June 1996 (as amended) and AAS 29 “Financial Reporting by Government Departments” issued in June 1998 (as amended). The Standard is operative for annual reporting periods beginning on or after 1 July 2008 (ie. 2008/09).

• AASB 2007-9 “Amendments to Australian Accounting Standards arising from the Review of AAS 27, AAS 29 and AAS 31” (issued December 2007)

This Standard makes amendments to AASB 3 “Business Combinations”, AASB 5 “Non-current Assets Held for Sale and Discontinued Operations”, AASB 8 “Operating Segments”, AASB 101 “Presentation of Financial Statements”, AASB 114 “Segment Reporting”, AASB 116 “Property, Plant and Equipment”, AASB 127 “Consolidated and Separate Financial Statements” and AASB 137 “Provisions, Contingent Liabilities and Contingent Assets” as a consequence of the AASB’s short term review of the requirements in AAS 27 ”Financial Reporting by Local Governments”, AAS 29 “Financial Reporting by Government Departments” and AAS 31”Financial Reporting by Governments”. The initial application of this Standard will have no impact on the financial results of the Company. When operative, this Standard will apply at the same time as AASB 1049 “Whole of Government and General Government Sector Financial Reporting”, AASB 1004 “Contributions”, AASB 1050 “Administered Items”, AASB 1051 “Land Under Roads”, AASB 1052 “Disaggregated Disclosures” (see above) and AASB Interpretation 1038 “Contributions by Owners to Wholly-Owned Public Sector Entities” (see below), being annual reporting periods beginning on or after 1 July 2008 (ie. 2008/09).

• AASB Interpretation 1038 “Contributions by Owners Made to Wholly-Owned Public Sector Entities” (issued December 2007)

This Interpretation is a result of changes made to the September 2004 version of UIG Interpretation 1038 with the same title arising from the December 2007 version of AASB 1004 “Contributions” (see above), dealing with accounting for restructures of administrative government arrangements. The Interpretation establishes criteria for determining whether a transfer of assets (or of assets and liabilities) to wholly-owned public sector entities from other entities in the same group of entities satisfies the


definition of “contributions by owners” in AASB 1004 “Contributions”, based on the rights held directly or indirectly by the controlling government. The initial application of this Standard will have no impact on the financial results of the Company. When operative, the Interpretation will supersede UIG Interpretation 1038 “Contributions by Owners Made to Wholly-Owned Public Sector Entities” (issued September 2004) and will apply at the same time as AASB 1004 “Contributions”, AASB 1050 “Administered Items”, AASB 1051 “Land Under Roads”, AASB 1052 “Disaggregated Disclosures” and AASB 2007-9 “Amendments to Australian Accounting Standards arising from the Review of AAS 27, AAS 29 and AAS 31” (all issued in December 2007 - see above), being annual reporting periods beginning on or after 1 July 2008 (ie. 2008/09).

• AASB 2008-1 “Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations [AASB 2]” (issued February 2008)

This Standard makes amendments to AASB 2 “Share-based Payment” as a result of the issuance in January 2008 of amendments to IFRS 2 “Share-based Payment” by the IASB regarding vesting conditions and cancellations in relation to share-based payments. The amendments clarify that vesting conditions comprise service conditions and performance conditions only and that other features of a share-based payment transaction are not vesting conditions. They also specify that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The initial application of this Standard will have no impact on the financial results of the Company. The Standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie. 2009/10).

• AASB 2008-2 “Amendments to Australian Accounting Standards – Puttable Financial Instruments and Obligations arising on Liquidation [AASB 7, AASB 101, AASB 132 & AASB 139 and Interpretation 2] (issued March 2008)

This Standard makes amendments to AASB 132 “Financial Instruments: Presentation” as a result of the issuance in February 2008 of amendments to IAS 32 “Financial Instruments: Presentation” by the IASB regarding puttable financial instruments and obligations arising on liquidation. These amendments result in consequential amendments to AASB 7 “Financial Instruments: Disclosures”, AASB 101 “Presentation of Financial Statements”, AASB 139 “Financial Instruments: Recognition and Measurement” and AASB Interpretation 2 “Members’ Shares in Co-operative Entities and Similar Instruments”. The Standard introduces an exception to the definition of financial liability to classify as equity instruments certain puttable financial instruments and certain instruments that impose on an entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation of the entity. The initial application of this Standard will have no impact on the financial results of the Company. The Standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie. 2009/10).

• AASB 3 “Business Combinations” (issued March 2008)

This Standard will replace the existing AASB 3 (issued in July 2004 and amended to December 2007) and establishes principles and requirements on how an acquirer applies the acquisition method of accounting in a business combination. It covers how the acquirer recognises and measures in its Financial Statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree, how the acquirer recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and how the acquirer determines information to disclose on the nature and financial effects of the business combination. When operative, the Standard will replace AASB Interpretation 1001 “Consolidated Financial Reports in relation to Pre-Date-of-Transition Dual Listed Company Stapling Arrangements” issued in December 2005, AASB Interpretation 1002 “Post-date-of-Transition Stapling Arrangements” issued in December 2005 and AASB Interpretation 1013 “Consolidated Financial Reports in relation to Pre-Date-of-Transition Stapling Arrangements’ issued in April 2005. The initial application of the Standard will have no impact on the financial results of the Company. The Standard applies prospectively to business combinations for which the acquisition date is on after the beginning of the first annual reporting period beginning on or after 1 July 2009 (ie. 2009/10).

• AASB 127 “Consolidated and Separate Financial Statements” (issued March 2008)

This Standard will replace the existing AASB 127 (issued in July 2004 and amended to December 2007) and incorporates amendments made as a result of the issuance of revised AASB 3 “Business Combinations” in March 2008 (see above). In general terms, the Standard specifies the circumstances in which an entity must consolidate the Financial Statements of another entity (being a subsidiary), the accounting for changes in the level of ownership interest in a subsidiary, the accounting for the loss of control of a subsidiary and disclosures in relation to the nature of the relationship between the entity and its subsidiaries. The initial application of the Standard will have no impact on the financial results of the Company. The amendments to the Standard arising from the revised AASB 3 can only be applied at the same time as the revised AASB 3 and are operative for annual reporting periods beginning on or after 1 July 2009 (ie. 2009/10).

• AASB 2008-3 “Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 [AASBs 1, 2, 4, 5, 7, 101, 107, 112, 114, 116, 121, 128, 131, 132, 133, 134, 136, 137, 138 & 139 and Interpretations 9 & 107] (issued March 2008)

This Standard makes consequential amendments to various existing Accounting Standards and Interpretations as a result of the issuance in March 2008 of revised AASB 3 “Business Combinations” and amended AASB 127 “Consolidated and Separate Financial Statements” (see above). The amendments include, inter alia, various editorial changes such as amending the term minority interests to non-controlling interests, as well as inserting references to the revised AASB 3 issued in March 2008 within the other Standards and Interpretations where necessary. The initial application of this Standard will have no impact on the financial results of the Company. The Standard can only be applied at the same time as revised AASB 3 and amended AASB 127 and is operative for annual reporting periods beginning on or after 1 July 2009 (ie. 2009/10).


___________________________________________________________________________________________________________ 13.6.2007 to Note 30.6.2008 $'000 ___________________________________________________________________________________________________________

2. INCOME AND EXPENSES

Profit before income tax expense has been arrived at after including the following income and expense items: (a) REVENUE Interest revenue from: Financial assets not at fair value through profit or loss using the effective interest method: Investments in marketable securities 2 Bank balances 7

___________ 9 Less amount netted against finance costs prior to capitalisation (9)

___________ Total interest revenue recognised in the Income Statement -

___________ Total revenue - ___________ (b) EXPENSES Finance costs expense Financial liabilities not at fair value through profit and loss using the effective interest method: Interest expense 10,648 Amortisation of deferred discounts (premiums) on loans (7)

___________ Total interest expense using effective interest method 10,641 Government guarantee fee expense 820 Interest revenue netted against finance costs prior to capitalisation (9) ___________ 11,452 Less amount capitalised (11,452)

___________ Finance costs expense recognised in the Income Statement -

___________

Other expenses

Audit fees 18 ___________

Total Other expenses 18

___________


___________________________________________________________________________________________________________ 13.6.2007 to Note 30.6.2008 $'000 ___________________________________________________________________________________________________________

3. INCOME TAX EXPENSE

Major components of income tax expense (income) for the reporting period are as follows: (a) RECOGNISED IN THE INCOME STATEMENT Current tax expense (income) Current year (3,436) Deferred tax expense Origination of temporary differences 3,431

___________ Total income tax expense (income) in Income Statement (5)

___________ (b) RECONCILIATION BETWEEN INCOME TAX EXPENSE (INCOME) AND PRE-TAX NET PROFIT (LOSS) Profit (loss) before income tax (18)

___________ Income tax expense (income) calculated using the domestic corporation tax rate of 30% (5)

___________ Income tax expense (income) on pre-tax net profit (loss) (5)

___________


___________________________________________________________________________________________________________ Note 2008 $'000 ___________________________________________________________________________________________________________

4. CASH AND CASH EQUIVALENTS Cash 5

___________ Cash and cash equivalents in the Balance Sheet and Cash Flow Statement 5

___________ SIGNIFICANT TERMS AND CONDITIONS Cash book balance

During the reporting period, the cash book balance can fluctuate from a positive balance to a negative (overdraft) balance. When the cash book balance is negative at the reporting date, it is shown as a bank overdraft under Borrowings in the Balance Sheet. (Refer Note 10).

At the reporting date, the cash book equated to the actual bank balance at the reporting date. Cash balances earn interest at bank rates. Short-term investments maturing three months or less

Short-term investments maturing three months or less are considered cash equivalents. These are usually interest-bearing deposits (see below). There were no cash equivalents at the reporting date.

Interest-bearing deposits are non-negotiable investments with banks and Government Authorities. Interest-bearing deposits are

issued at face value paying a fixed interest rate over their life at maturity. Interest-bearing deposits can be issued for any duration although the Company typically holds only short dated deposits maturing within three months. Their carrying amount approximates fair value due to their short term to maturity.

Refer also Note 20(c) for a maturity analysis of all financial assets and financial liabilities.


___________________________________________________________________________________________________________ Note 2008 $'000 ___________________________________________________________________________________________________________

5. TRADE AND OTHER RECEIVABLES CURRENT Non-trade debtors and accrued receivables: Parent 10,995 Other parties 3,865

___________ Total trade and other receivables 14,860 ___________ SIGNIFICANT TERMS AND CONDITIONS There were no trade debtors at the reporting date as the Company will not be able to earn revenue from supplying desalinated water

until the desalination plant currently being constructed becomes operational from 2009/10 onwards.

Accrued investment income is receivable within a maximum period of six months. Receivables for GST from the ATO are receivable monthly via the Parent. (Refer Note 19(c). All other receivables are expected to be realised within 12 months of the reporting date.

Refer also Note 20(c) for a maturity analysis of all financial assets and financial liabilities. AGEING ANALYSIS OF TRADE AND OTHER RECEIVABLES

At the reporting date, all outstanding trade and other receivables are not past due and are expected to be realised at the amounts carried in the Balance Sheet when due.

ALLOWANCE FOR DOUBTFUL DEBTS

There was no Allowance for doubtful debts at the beginning or end of the reporting period and there was no movement during the reporting period.

6. CURRENT TAX PAYABLE OR RECEIVABLE Income tax payable or receivable by the Company in relation to the NTER is assumed by the Parent after initial recognition, as the

Parent is the head entity in the tax-consolidated group. The amount initially recognised, prior to assumption by the Parent, was an income tax receivable asset of $3.436 million.


7. PROPERTY, PLANT AND EQUIPMENT NON-CURRENT

(a) MOVEMENTS AND CARRYING AMOUNTS

Period 13 June 2007 to 30 June 2008 Work in

progress

Total

- at cost

$’000 $’000 At 13 June 2007 – Net carrying amount - - Additions 473,516 473,516 Disposals - - Reclassified as assets held for sale - - Other reclassifications - - Transfer from Parent as consideration for shares issued 38,223 38,223 Revaluation increases (+) and decreases (-), unrelated to impairments, recognised in the asset revaluation reserve

-

-

Revaluation decreases (-), related to impairments, recognised in the asset revaluation reserve

-

-

Revaluation increases (+), related to impairments, recognised in the asset revaluation reserve

-

-

Impairment losses (-) recognised in the Income Statement in the line item “Other expenses”

-

-

Impairment losses reversed (+) recognised in the Income Statement in the line item “Other expenses”

-

-

Depreciation charge - - At 30 June 2008 – Net carrying amount 511,739 511,739


Work in

progress

Total

- at cost

$’000 $’000 At 13 June 2007 Cost or fair value:

Cost - - - -

Accumulated depreciation - - Accumulated impairment - - - - Net carrying amount - - At 30 June 2008 Cost or fair value:

Cost 511,739 511,739

511,739 511,739 Accumulated depreciation or amortisation - - Accumulated impairment - - - - Net carrying amount 511,739 511,739

(b) RECOVERABLE AMOUNT

Due to the nature of Water industry assets, their recoverable amount is determined by the stream of income that can be derived from the use of the assets working together as an integrated network within the relevant cash-generating unit, rather than the realisable value of the assets themselves. Accordingly, the cash-generating unit test referred to in Notes 1(n), 1(o), 1(p) and 10(c) calculates the recoverable amount using relevant estimated net cash flows discounted to their present value for each cash-generating unit. In this regard, future cash flows for revenue and expenses are estimated over the average useful life of the assets within each cash-generating unit and are then discounted to their present value using a discount rate equivalent to the weighted average cost of capital calculated on a nominal pre-tax basis for the relevant cash-generating unit. The major assumptions underlying the calculations for the Company’s cash-generating unit test are:

• Time period, being the weighted average remaining service life of depreciable assets – 46 years; • Nominal discount rate – 10.2% before tax; • Inflation rate – 2.5% per annum

Estimates of future revenues used for the current reporting period have been based on prices determined by the Independent Pricing and Regulatory Tribunal (“IPART”) from 1 July 2008 to 30 June 2012. Beyond 30 June 2012, inflation is applied to estimates of revenue over the remaining time period. Estimates of future expenses have been based on actual expenses for the relevant reporting period as well as expected levels of operations and maintenance expenses once the desalination plant becomes operational. These base amounts are then escalated over the above time periods using the same inflation rate used for future revenues (see above). As the determination of recoverable amount is dependent on the assumptions used in the cash-generating unit test, there is an element of subjectivity and uncertainty in relation to these assumptions (if all other variables remain unchanged), which can result in sensitivity around the calculation of recoverable amount. For instance, any increase in the expected price relating to the Company’s expected revenue stream over the time period of the average remaining life of its cash-generating unit’s assets will cause an increase in the recoverable amount. Similarly, if the average remaining life of the cash-generating unit’s assets subsequently becomes longer, then the change will also lead to an increase in recoverable amount. In addition, reductions in future expenses and a decrease in the discount rate will result in a higher recoverable amount. Conversely, lower than expected revenue or any increase in estimated future expenses will cause the recoverable amount to decrease. Further, if there is a subsequent increase in the weighted average cost of capital used to discount the expected future cash flows due to changed circumstances and economic conditions, then this increase in the nominal discount rate will also lead to a decrease in the recoverable amount. After applying the cash-generating unit test at the reporting date, recoverable amount exceeded the carrying amount of the Company’s work in progress asset and consequently no impairment was required.


8. DEFERRED TAX ASSETS AND LIABILITIES

(a) RECOGNISED AND UNRECOGNISED DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities are attributable to the following:

Assets 2008

Liabilities 2008

Net 2008

$’000 $’000 $’000 Recognised: Property, plant and equipment - 3,782 3,782 Anticipated receipts and accrued expenses

(5)

-

(5)

Tax (assets) liabilities (5) 3,782 3,777 Set-off of tax 5 (5) - Net tax (assets) / liabilities - 3,777 3,777

(b) MOVEMENTS IN TEMPORARY DIFFERENCES

Period 13 June 2007 to 30 June 2008

Balance 13 June 2007

Recognised in Income

Recognised in Equity


$’000 $’000 $’000 $’000 Property, plant and equipment - 3,436 346 3,782 Anticipated receipts and accrued expenses - (5) - (5) Net tax (assets) / liabilities - 3,431 346 3,777


___________________________________________________________________________________________________________ Note 2008 $'000 ___________________________________________________________________________________________________________

9. TRADE AND OTHER PAYABLES CURRENT Trade payables: Other parties 147

___________ 147 Non-trade payables and accrued expenses: Parent 3,333 Other parties 44,489

___________ 47,822

___________ Total trade and other payables 47,969

___________ SIGNIFICANT TERMS AND CONDITIONS

Trade accounts payable and accrued expenses (other than for interest on loans) are normally settled within 30 days. Accrued interest on loans and advances is generally payable within a maximum period of six months. Other non-trade payables are payable at various times throughout the reporting period. Trade and other payables are not secured against the assets of the Company.

Refer also Note 20(c) for a maturity analysis of all financial assets and financial liabilities. 10. BORROWINGS NON-CURRENT

Long-term borrowings 440,430 ___________

Total non-current borrowings 440,430 ___________

SIGNIFICANT TERMS AND CONDITIONS

Financial Accommodation

The Company obtains financial accommodation from the following facilities: a “Come and Go” short-term borrowing facility with NSW Treasury Corporation long-term borrowing facilities with NSW Treasury Corporation.

These financing facilities are approved by the NSW Treasurer under the Public Authorities (Financial Arrangements) Act 1987. In addition to the above financing facilities, the Parent has provided a financial guarantee for the Company’s obligations under the

contract for the construction of the desalination plant at Kurnell. Details in relation to each of the above at the reporting date are provided below.


“Come and Go” short-term borrowing facility At the reporting date, the Company has a “Come and Go” short term borrowing facility of $5 million in place with the NSW Treasury

Corporation. This facility is in place until 30 June 2010. The “Come and Go“ facility is used extensively as part of the Company’s daily cash management function during the reporting

period. This facility was not utilised at the reporting date by the Company.

Long- term borrowing facilities At the reporting date, the Company has approval to obtain long-term borrowing facilities from the central borrowing authority, the

NSW Treasury Corporation. The Company cannot borrow in its own name from the market. Instead, both new loans and the refinancing of maturing existing loans need to be arranged via the NSW Treasury Corporation, which raises borrowings on the Company’s behalf.

During the current reporting period, the approval of the NSW Treasurer was obtained for the Company to have a global borrowing

limit up to $1.350 billion in place with the NSW Treasury Corporation up to 30 June 2010. Of this facility, loan proceeds of $445.711 million had been drawn down, with $5.274 million repaid, by the reporting date.

The long-term borrowings shown in this Note consist of NSW Treasury Corporation loans only. These loans are not secured against the assets of the Company.

Loans are negotiated with either a floating interest rate, in which case the rate is reset periodically in accordance with the requirements of the Company, or at a fixed rate where interest is paid either half-yearly in arrears, or on maturity of short-term loans. It is expected that the majority of the Company’s loans will initially be refinanced when construction of the desalination plant at Kurnell is completed, but then they will be repaid over time when the Company is able to earn revenue in its own right from operating and maintaining the plant. Short-term debt facilities have a duration of between one and six months, while fixed rate bond style loans currently have maturities up to 11 years. NSW Treasury Corporation loans outstanding at the reporting date, inclusive of any deferred discounts or premiums on the loans, totalled $440.430 million for the Company.

For details in respect of the maturity analysis of these long-term borrowings, refer to Note 20(c).

Financial Guarantees Under the contract between the Company and the contractors for the design and construction of the desalination plant at Kurnell, the Parent has provided the contractors with a financial guarantee covering all of the financial obligations of the Company under the contract in the event of a default by the Company. At the reporting date, the Company has a remaining capital commitment of $597.919 million under the contract for the design and construction of the desalination plant. (Refer also Note 16). This remaining commitment represents the maximum possible exposure to the Parent at the reporting date in the event that the Company defaults on all of its future payments to the contractors. However, as the Company has the NSW Treasurer’s approval to obtain total financial accommodation up to an amount of $1.355 billion in its own right from NSW Treasury Corporation until 30 June 2010 in order to meet all of its obligations under the contract, the Company has ready access to funds on a daily basis as required and it is most unlikely that it would be in a position to default on any of its future payments during the approval period.


___________________________________________________________________________________________________________ Note 2008 $'000 ___________________________________________________________________________________________________________

11. SHARE CAPITAL (a) CARRYING AMOUNTS ISSUED AND FULLY PAID UP SHARE CAPITAL 37,876,581 ordinary shares of $1.00 each 37,877

___________ SIGNIFICANT TERMS AND CONDITIONS

The Company is wholly owned by its Parent, Sydney Water Corporation. Any changes to the Company’s share capital can only be undertaken in accordance with the Company’s constitution and with the agreement of the Parent. There are no restrictions to dividends payable to the Parent. Under the NTER, the company is not required to maintain a dividend franking account.

(b) MOVEMENTS DURING THE REPORTING PERIOD

Balance at beginning of period - Shares issued as consideration for acquisition of assets from the Parent: Work in progress (net of deferred tax liabilities) 37,877

___________ Balance at end of period 37,877

___________ In the current reporting period, an amount of $37.877 million of share capital was issued to the Parent as consideration for the Company acquiring from the Parent work in progress costs totalling $38.223 million (offset by deferred tax liabilities of $0.346 million) directly related to the construction of the desalination project. These costs were initially incurred by the Parent prior to the Company’s incorporation, with the intention that they would ultimately be disposed to the Company as part of establishing its initial equity structure.

12. OTHER CONTRIBUTED (DISTRIBUTED) EQUITY Assumption by the Parent of the Company’s current tax liabilities (assets) under tax consolidation (3,436)

___________ 13. RETAINED EARNINGS (ACCUMULATED LOSSES) Balance at beginning of period - Profit (loss) attributable to equity holders of the Company (13)

___________ Balance at end of period (13)

___________ 14. TOTAL EQUITY RECONCILIATION Balance at beginning of period - Total recognised income and expense attributable to equity holders of the Company in the Statement of Recognised Income and Expense (13) Transactions with owners as owners: Shares issued to Parent 11(b) 37,877 Other contributed (distributed) equity from assumption of tax balances 12 (3,436)

___________ Balance at end of period 34,428

___________


___________________________________________________________________________________________________________ 13.6.2007 to Note 30.6.2008 $'000 ___________________________________________________________________________________________________________

15. NOTES TO THE CASH FLOW STATEMENT (a) RECONCILIATION OF PROFIT (LOSS) TO NET CASH FROM OPERATING ACTIVITIES Profit (loss) for the period (13) Adjustments for: Income Statement items classified as either investing or financing: Borrowing costs capitalised to work in progress 2(b) (11,452) Amortisation of deferred discounts (premiums) on loans 2(b) (7) Net movement in Balance Sheet items applicable to operating activities: Trade and other receivables (14,860) Trade and other payables 5,866 Income tax assets and liabilities (5)

___________ Net cash from operating activities (20,471)

___________ (b) NON-CASH FINANCING AND INVESTING ACTIVITIES Assets acquired by the Company during the reporting period for which shares were issued as consideration are not included in the

Cash Flow Statements as these are regarded as non-cash. During the reporting period, this amounted to $38.223 million for work in progress costs acquired from the Parent. (Refer also Note 11(b)).

(c) STANDBY CREDIT ARRANGEMENTS Details of financial accommodation facilities for the Company are disclosed in Note 10.


___________________________________________________________________________________________________________ Note 2008 $'000 ___________________________________________________________________________________________________________

16. COMMITMENTS CAPITAL EXPENDITURE COMMITMENTS Property, plant and equipment Contracted but not provided for and payable: not longer than one year 456,601 longer than one year but not longer than five years 141,318

___________ 597,919

___________

Amounts disclosed for these commitments include total GST of $54.356 million for the Company that is recoverable from the ATO via the Parent.

OTHER EXPENDITURE COMMITMENTS Operation and Maintenance Contracted but not provided for and payable: not longer than one year - longer than one year but not longer than five years 101,607 longer than five years 790,928

___________ 892,535

___________

Amounts disclosed for these commitments include total GST of $81.139 million for the Company that is recoverable from the ATO via the Parent.


___________________________________________________________________________________________________________ 13.6.2007 to Note 30.6.2008 $'000 ___________________________________________________________________________________________________________

17. CONSULTANTS During the reporting period, there were no amounts paid or payable to consultants by the Company. 18. AUDITORS' REMUNERATION Audit services Remuneration for audit or review of the financial report of the Company: Auditors of the Company 18

___________ 18

___________ 19. RELATED PARTY DISCLOSURES

The Company has related party relationships with key management personnel (refer (a) below), their related entities (refer (b) below), the Parent (refer (c) below) and other related parties (refer (d) below).

(a) KEY MANAGEMENT PERSONNEL COMPENSATION Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly. This comprises all Directors, whether executive or non-executive, and senior executives who lead the business operations of the Company.

There was no compensation paid by the Company to key management personnel during the reporting period.

(b) OTHER TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL AND RELATED ENTITIES Any transactions undertaken with entities related to key management personnel are conducted on an arm's length basis in the normal course of business and on commercial terms and conditions. During the current reporting period, there were no transactions with such entities.

(c) TRANSACTIONS WITH PARENT

The Parent provides the Company with all of the resources and services necessary for the Company to fulfil its contractual obligations for the construction of the desalination plant at Kurnell. Services provided to the Company by the Parent include engineering consulting and project management. Additionally, the Parent passes through to the Company all refunds for GST attributable to the Company that have been received from the ATO following the lodgement of the Sydney Water Group’s monthly Business Activity Statement, as all subsidiaries in the Sydney Water Group are grouped with the Parent for GST purposes. In providing its services and resources to the Company under the current trading arrangements, the Parent charges for its services based upon an assessment of direct costs and a factor to cover local and corporate overheads. The following is a summary of related party transactions and balances with the Parent:

Purchase of services for capital works from the Parent 16,924

___________

Net assets acquired from the Parent as consideration for shares issued 11(b) 37,877

___________


___________________________________________________________________________________________________________ Note 2008 $'000 ___________________________________________________________________________________________________________

Income tax liabilities (assets) assumed from the Company by the Parent 12, 14 (3,436)

___________ Trade and other receivables outstanding * 5 10,995

___________ Trade and other payables outstanding 9 3,333

___________

* This relates to the Company’s GST refund receivable from the Parent for the June 2008 Business Activity Statement. In relation to this receivable, no allowance for doubtful debts has been recognised as each GST receivable amount is received from the Parent on a monthly basis.

(d) TRANSACTIONS WITH OTHER RELATED PARTIES There were no transactions with other related parties in the current reporting period.


20. FINANCIAL RISK MANAGEMENT DISCLOSURES FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS The Company undertakes transactions in a range of financial instruments including:

cash (refer Note 4) investments in marketable securities (refer Note 4) receivables (refer Note 5) payables (refer Note 9) borrowings (refer Note 10)

These financial instruments expose the Company to a range of financial risks in the normal course of its business operations. These risks include market risk (which includes foreign currency risk and interest rate risk), credit risk and liquidity risk. FINANCIAL RISK MANAGEMENT POLICIES, OBJECTIVES AND REPORTING The risks outlined above for the Company are managed by staff within the Parent, Sydney Water Corporation, as part of the overall management of the Sydney Water Group. The Parent has put in place treasury management policies approved by its Board that are applicable to both the Parent and the Company. These policies provide a framework of strict controls within the Sydney Water Group so as to minimise the impact of these exposures on the financial results of the Sydney Water Group and the entities within it. The policies have also been set to operate in a manner that sits within the overall framework of the Public Authorities (Financial Arrangements) Act 1987 in NSW. The policies cover a number of aspects such as:

approved delegation levels and segregation of duties for dealing, authorising and settling treasury management transactions approved credit limits for dealing with counterparties the types of treasury transactions, including derivatives, that can be entered into approved limits for hedging foreign exchange exposures the structure of debt and investment portfolios, and approved benchmarks for managing performance.

Reporting of treasury and financial risk management performance to the Parent’s Board occurs on a quarterly basis, with specific treasury management matters being reviewed by the Finance Committee, a sub committee of the Parent’s Board, also on a quarterly basis. Treasury management strategies and performance are also reported on and reviewed on a monthly basis by a Treasury Committee of senior finance managers within the Finance and Regulatory Division of the Parent. In addition, the NSW Treasury conducts a review of the Sydney Water Group’s treasury management activities in respect of compliance with the Public Authorities (Financial Arrangements) Act 1987. USE OF DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING Derivative financial instruments to manage exposure to foreign currency risk are usually undertaken by the Parent on behalf of the Company. The instruments can include forward foreign exchange contracts and foreign exchange options. Typically, the most common that would be used are forward foreign exchange contracts. Derivative financial instruments are used for hedging purposes only. The Parent does not enter into or trade them for speculative purposes. Strict internal guidelines and treasury management policies approved by the Parent’s Board exist to control the use of derivative financial instruments for the Sydney Water Group. There were no derivative financial instruments in place at the reporting date for the Company and accordingly hedge accounting was not required. FINANCIAL RISK EXPOSURES (a) MARKET RISK Market risk is the risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises two types of financial risk for the Company: foreign currency risk and interest rate risk. FOREIGN CURRENCY RISK

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The objective in managing foreign currency risk is to minimise the impact that changes in foreign exchange rates will have on the Company’s financial outcomes. At the reporting date, the Company is not exposed to foreign currency risk as this risk is borne by the contractor under the contractual arrangement to construct the desalination plant at Kurnell. Exposure to foreign currency risk for the Company would only arise from contractual arrangements for the purchase or supply of goods and services where payment is either required to be made in foreign currency or is pegged to foreign currency rates. There were no such contracts in place at the reporting date.


The policies for management of any foreign currency risks arising from contractual arrangements for the purchase or supply of goods and services are contained in the Parent’s Treasury Management Policy manual. These policies include hedging of all foreign currency exposures in excess of Australian Dollars (AUD) 1,000,000 and foreign currency exposures above AUD 500,000 that exceed 90 days. This is done by entering into forward foreign exchange contracts to hedge the relevant purchase commitments. Under such contracts, the Company or Parent agrees to exchange specified amounts of various currencies at an agreed future date at a specified exchange rate. Forward foreign exchange contracts can vary in duration from less than one month to several years. It is the Sydney Water Group’s policy not to enter forward foreign exchange contracts until a firm commitment is in place and to negotiate the terms of these cash flow hedging derivatives to match the terms of the hedged item in order to maximise hedge effectiveness. INTEREST RATE RISK

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The objective in managing interest rate risk is to minimise the impact that changes in interest rates will have on the Company’s financial outcomes. The Company is exposed to changes in market interest rates. Although there is a small exposure arising from cash and investment portfolios, the main exposure arises primarily from the Company’s portfolio of interest-bearing short and long-term borrowings. The Company manages this exposure by implementing treasury management policies and controls approved by the Parent’s Board. These controls specify the maximum percentages of debt issuance in maturity bands, portfolio duration management targets and approved trading bands for the Sydney Water Group. The Company and the Parent constantly analyse the Company’s interest rate exposure arising from the extensive use of borrowing facilities with the NSW Treasury Corporation to fund the significant capital works program of the Company. Within this analysis, consideration is given to potential renewals of existing positions, possible hedging strategies and the appropriate mix of fixed and variable interest rates for debt undertaken in light of current and expected conditions in the economy that may affect interest rates. Debt portfolios are managed within approved parameters and compared with approved benchmark positions in order to minimise the impact of interest rates on finance costs over the long term and to measure portfolio performance. At the reporting date, there were no derivative financial instruments outstanding for managing interest rate risk for the Company. The following table details the carrying amounts of financial assets and financial liabilities, including their weighted average interest rates, that are exposed to interest rate risk at the reporting date and that are not designated in cash flow hedges: ___________________________________________________________________________________________________________ Weighted Average Interest Carrying amount Rate 2008 2008 Note % $’000 ___________________________________________________________________________________________________________ FINANCIAL ASSETS Cash 4 6.18 5

___________

5 ___________

FINANCIAL LIABILITIES Borrowings: NSW Treasury Corporation loans 10 7.18 440,430

___________

440,430 ___________


Sensitivity Analysis The following table shows the effect on profit or loss and equity after tax at the reporting date if nominal interest rates had been 100 basis points (that is, one percentage point) higher or lower than current levels, with all other variables being held constant and taking into account all underlying exposures and related hedges if any. A sensitivity of 100 basis points has been used as this is considered reasonable based on the current level of both short-term and long-term NSW Treasury Corporation and Australian interest rates. Based on the value of the Australian short-term interest rates (one month Bank Bill Swap Rate – BBSW) at the reporting date of 7.61 per cent, a 100 basis points increase would increase the rate to 8.61 per cent and a 100 basis points decrease would reduce the rate to 6.61 per cent. This would represent two or three rate increases, which is reasonably possible given historical movements in official interest rates by the Reserve Bank of Australia (RBA). Historically, the RBA official cash rate has fluctuated between 4.75 per cent and 7.25 per cent over the past five years. ___________________________________________________________________________________________________________ Finance Costs* Post tax Profit or Loss* Equity* Higher (Lower) Higher (Lower) Higher (Lower) Judgement of reasonably 2008 2008 2008 possible events $’000 $'000 $'000 ___________________________________________________________________________________________________________ Interest rates 100 basis points higher 1,224 (857) (857) Interest rates 100 basis points lower (1,224) 857 857

* The impact shown above is before capitalisation to qualifying assets and any consequential tax consolidation adjustments. After capitalisation and consequential tax consolidation adjustments, there would be no impact on finance costs or post tax profit or loss. However, equity would be lower by $0.367 million for a 100 basis points increase, and vice versa.

(b) CREDIT RISK Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. In this context, it refers to the risk that indebted counterparties will default on their contractual obligations, resulting in financial loss to the Company. Exposures to credit risk for the Company exist in respect of all financial assets recognised in the Balance Sheet, such as trade and other receivables and cash and cash equivalents. In respect of trade and other receivables, the Company monitors balances outstanding on an ongoing basis and uses the Parent’s policies for the recovery or write-off of amounts outstanding. In respect of cash and cash equivalents, the Company only deals with creditworthy counterparties and recognised financial intermediaries as a means of mitigating against the risk of financial losses from defaults. Policies are in place to monitor the credit ratings of counterparties and to limit the amount of funds placed with those counterparties, depending on their credit rating. In addition, only highly liquid marketable securities are used for any investment purposes. At the reporting date, there were no significant concentrations of credit risk in which the Company is significantly exposed to any single counterparty or group of counterparties having similar characteristics. At the reporting date, the maximum exposure to credit risk for the Company is represented by the carrying amount of each financial asset in the Balance Sheet. (Refer Notes 4 and 5). (c) LIQUIDITY RISK Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is managed by the Parent for the Company through the maintenance of extensive short-term and long-term cash flow forecasting models, and through the availability of financial accommodation facilities approved by the Treasurer of NSW under the Public Authorities (Financial Arrangements) Act 1987. These facilities include a long-term fixed borrowing facility with the NSW Treasury Corporation and a “Come and Go” short-term borrowing facility with the NSW Treasury Corporation. Details of all financial accommodation facilities for the Company are shown in Note 10. The objective of managing liquidity risk using the above facilities is to maintain a balance of funding and flexibility in ensuring cash is available each day to meet the Company’s financial obligations, whilst maintaining a daily bank balance with minimum surplus funds (with a target of between $Nil and $2 million on at least 80 per cent of calendar days). In addition, the Company’s and Parent’s treasury management policies limit debt with terms to maturity of less than three months to only 30 per cent of total borrowings within their debt portfolios.


MATURITY ANALYSIS OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES RECOGNISED IN THE BALANCE SHEET The following tables reflect the maturity bands for the settlement of the carrying amounts of financial assets and financial liabilities recognised in the Balance Sheet of the Company at the reporting date. ________________________________________________________________________________________________________________________________________________________________ Repricing or Maturing in: 2008 Less than 1 to 2 2 to 3 3 to 4 4 to 5 More than Total Note 1 Year Years Years Years Years 5 Years $’000 $’000 $’000 $’000 $’000 $’000 $’000 ________________________________________________________________________________________________________________________________________________________________ Financial Assets Cash 4 5 - - - - - 5 Trade and other receivables 5 14,860 - - - - - 14,860 __________________________________________________________________________________________ 14,865 - - - - 14,865 __________________________________________________________________________________________ * Floating rate instruments. Financial Liabilities Trade and other payables 9 47,969 - - - - - 47,969 Borrowings: NSW Treasury Corporation loans 10 122,428 161,616 96,720 - - 59,666 440,430 __________________________________________________________________________________________ 170,397 161,616 96,720 - - 59,666 488,399 __________________________________________________________________________________________


CONTRACTUAL MATURITIES OF ALL CASH FLOWS FROM FINANCIAL LIABILITIES The following table reflects the maturity bands for all contractual payments for settlement, including repayments of principal and interest, resulting from recognised financial liabilities as at the reporting date for the Company. For these obligations, the respective undiscounted cash flows for the maturity bands shown are presented. ________________________________________________________________________________________________________________________________________________________________ Repricing or Maturing in: Less than 1 to 2 2 to 3 3 to 4 4 to 5 More than Total Note 1 Year Years Years Years Years 5 Years $’000 $’000 $’000 $’000 $’000 $’000 $’000 ________________________________________________________________________________________________________________________________________________________________ 2008 Trade and other payables 9 47,969 - - - - - 47,969 Borrowings: NSW Treasury Corporation loans 143,994 183,617 103,851 3,900 3,900 88,400 527,662 __________________________________________________________________________________________ 191,963 183,617 103,851 3,900 3,900 88,400 575,631 __________________________________________________________________________________________


FAIR VALUES OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

Fair values of financial assets and financial liabilities are determined on the following bases: Cash The carrying amount is considered to be a reasonable approximation of the fair value. Cash equivalents Fair values are determined on the basis of discounted cash flows using valuation rates supplied by independent market sources. Trade and other receivables The carrying amount is considered to be a reasonable approximation of the fair value. Trade and other payables The carrying amount is considered to be a reasonable approximation of the fair value. Borrowings NSW Treasury Corporation loans

Fair values are determined on the basis of discounted cash flows using valuation rates supplied by independent market sources. For cash and cash equivalents, trade and other receivables, trade and other payables, carrying values in the Balance Sheet for the

Company equate to their fair value. The following table details the carrying amounts and fair values at the reporting date for those financial instruments in which the carrying amount is different to their fair value:

___________________________________________________________________________________________________________ Carrying Amount Fair Value Note 2008 2008 $’000 $’000 ___________________________________________________________________________________________________________ FINANCIAL LIABILITIES Borrowings: NSW Treasury Corporation loans 10 440,430 439,906 ____________________________________________________ 440,430 439,906 ____________________________________________________ MANAGEMENT OF CAPITAL The Company’s objective when managing capital is to safeguard its ability to continue as a going concern, and ultimately to provide

appropriate returns for its Parent when required whilst providing benefits for the community within the Parent’s area of operations. This is achieved by maintaining an optimal capital structure that aims to minimise or reduce the cost of capital, whilst at the same time ensuring the Company’s operations and capital works objectives are achieved and the Company is well-positioned for its future strategic direction.

The Company’s capital structure is monitored throughout each reporting period on the basis of key performance indicators, such as

the level of gearing (see below), within the context of adding value to the Sydney Water Group as a whole. In determining appropriate prices for desalination as part of the Parent’s Pricing Determination, IPART, the Company’s and the

Parent’s pricing regulator, has adopted a gearing assumption of 60 per cent for the purposes of determining the Company’s weighted average cost of capital (WACC). The WACC is a key input in IPART’s Regulated Asset Base framework, which is used to determine the annual revenue requirement for the Parent based on the efficient use of resources (and ultimately prices to be charged to customers), including the portion relating to desalination.

The table below shows the level of capital employed at the reporting date for the Company, as well as the gearing ratio used in the

management of capital based on the definitions within the NSW Treasury’s Commercial Policy Framework.


___________________________________________________________________________________________________________ Note 2008 $'000 ___________________________________________________________________________________________________________ Interest-bearing debt 10 440,430 Other interest-bearing liabilities -

___________ Total interest-bearing liabilities 440,430 Total equity 14 34,428

___________ Total capital employed 474,858

___________

%

Gearing ratio (Interest-bearing debt / Interest-bearing debt + Total equity) 92.8 The Company is currently highly geared in its capital structure with a significant debt to equity ratio. This is due to the financing of the

construction of the desalination plant at Kurnell predominantly being sourced through approved debt facilities with the NSW Treasury Corporation. (Refer Note10). This trend is expected to continue during the period of the plant’s construction as more debt is taken up to finance the construction.

21. SEGMENT REPORTING

The Company operates in one business segment of water and water-related services, through the construction and the ongoing operation and maintenance of a desalination plant, and in one geographical segment of Kurnell, NSW, Australia.

22. CONTINGENCIES

To the best of their knowledge and belief, the Directors are not aware of any contingent liabilities or contingent assets existing at the reporting date that would result in a material cost, loss or economic benefit to the Company.

23. EVENT SUBSEQUENT TO THE REPORTING DATE

On 28 July 2008, the Company entered into an Electricity Supply Agreement with BBP Energy Markets Pty Limited, a subsidiary of Babcock & Brown Power Limited and a Renewable Energy Certificate Supply Agreement and Project Deed with Renewable Power Ventures, a subsidiary of Babcock & Brown Wind Partners. The Agreements are for the supply of renewable energy to the desalination plant at Kurnell over a period of 20 years. Under the new Agreements, the Capital Wind Farm at Bungendore near Queanbeyan, which is already under construction, will supply enough renewable energy into the electricity supply system to meet all of the Kurnell plant’s needs. The desalination plant will then draw its energy from the existing electricity supply system. The Company will buy renewable energy at firm prices adjusted annually by CPI, and will buy a minimum of 180,000 Renewable Energy Certificates (RECs) per year to facilitate the construction of the Wind Farm. Additional RECs will be purchased whenever the plant is operating in order to match the plant’s total energy use. The RECs demonstrate that the desalination plant is powered by an accredited, renewable energy source and they will be surrendered to the Renewable Energy Regulator as unequivocal evidence that the desalination plant is 100 per cent powered by renewable energy. When the desalination plant is in standby mode, the Wind Farm will continue to operate and the power will be sold to other customers.

End of audited Financial Statements





Sydney Desalination Plant Pty Limited

Financial Report for the year ended

30 June 2009


Contents Income statement Page 3 Statement of recognised income and expense Page 4 Balance sheet Page 5 Cash flow statement Page 6 Notes to the financial statements: Page 7 Corporate information Page 7 1. Summary of significant accounting policies Page 7 2. Income and expenses Page 19 3. Income tax expense Page 20 4. Cash and cash equivalents Page 21 5. Trade and other receivables Page 22 6. Current tax payable or receivable Page 22 7. Property, plant and equipment Page 23 8. Intangible assets Page 29 9.Deferred tax assets and liabilities Page 32 10. Trade and other payables Page 33 11. Borrowings Page 33 12. Share capital Page 35 13. Other contributed (distributed) equity Page 35 14. Retained earnings (accumulated losses) Page 35 15. Total equity reconciliation Page 35 16. Notes to the cash flow statement Page 36 17. Commitments Page 37 18. Consultants Page 38 19. Auditors’ remuneration Page 38 20. Related party disclosures Page 38 21. Financial risk management disclosures Page 40 22. Segment reporting Page 47 23. Contingencies Page 47 Directors’ Declaration Page 48 Independent Auditor’s Report Page 49


Start of audited financial Statements

13 June 2007 toNote 2009 30 June 2008

$'000 $'000

Revenue 2(a) - -

Finance costs 2(b) - -

Other expenses 2(b) (17) (18)

Profit (loss) before income tax (17) (18)

Income tax (expense) income 3(a), (b) 5 5

Profit (loss) for the period (12) (13)

This statement should be read in conjunction with the accompanying notes.


Income statement

for the year ended 30 June 2009


13 June 2007 toNote 2009 30 June 2008

$'000 $'000

Net income (expense) recognised directly in equity - -

Profit (loss) for the period (12) (13)

Total recognised income and expense for the period (12) (13)



Statement of recognised income and expensefor the year ended 30 June 2009


Note 2009 2008$'000 $'000

Current assets

Cash and cash equivalents 4 385 5Trade and other receivables 5 9,723 14,860

Total current assets 10,108 14,865

Non-current assets

Property, plant and equipment 7 1,074,251 511,739Intangible assets 8 268 -

Total non-current assets 1,074,519 511,739

Total assets 1,084,627 526,604

Current liabilities

Trade and other payables 10 79,855 47,969

Total current liabilities 79,855 47,969

Non-current liabilities

Borrowings 11 917,584 440,430Deferred tax liabilities 9 17,847 3,777

Total non-current liabilities 935,431 444,207

Total liabilities 1,015,286 492,176

Net assets 69,341 34,428

Equity

Share capital 12 86,877 37,877Other contributed (distributed) equity 13 (17,511) (3,436)Retained earnings (accumulated losses) 14 (25) (13)

Total equity 15 69,341 34,428



Balance sheet

as at 30 June 2009


13 June 2007 toNote 2009 30 June 2008

$'000 $'000

Cash flows from operating activities

Cash receipts in the course of operations 50,405 29,656Cash payments in the course of operations (43,785) (40,652)

Cash generated from operations 6,620 (10,996)Interest received - 9Interest paid (30,169) (9,484)

Net cash from operating activities 16 (23,549) (20,471)

Cash flows from investing activities

Payments for property, plant and equipment (452,631) (419,961)Payments for intangible assets (268) -

Net cash from investing activities (452,899) (419,961)

Cash flows from financing activities

Proceeds from borrowings 476,828 445,711Repayment of borrowings - (5,274)

Net cash from financing activities 476,828 440,437

Net increase (decrease) in cash and cash equivalents 380 5

Cash and cash equivalents at beginning of period 5 -

Cash and cash equivalents at end of period 4 385 5



Cash flow statement

for the year ended 30 June 2009



Notes to the financial statements for the year ended 30 June 2009

Corporate information

Sydney Desalination Plant Pty Limited (ABN 50 125 935 177) is a wholly owned subsidiary of Sydney Water Corporation and will be referred to in this financial report as ‘the Company’. The Company’s parent entity, Sydney Water Corporation, is a NSW statutory state owned corporation and will be referred to in this financial report as ‘the Parent’. The Company was incorporated in Australia on 13 June 2007. The address of the Company’s registered office in Australia is Level 15, 1 Smith Street, Parramatta, NSW 2150. The principal activity of the Company is to procure the construction and ongoing operation and maintenance of a desalination plant at Kurnell, Sydney. The Company is a for-profit entity. The Company’s financial report for the year ended 30 June 2009 was authorised for issue in accordance with a resolution of the directors on 4 September 2009. The significant accounting policies that have been adopted in the preparation of the financial report are detailed below.

1. Summary of significant accounting policies (a) Basis of preparation

The financial report is a general purpose financial report, which has been prepared in accordance with applicable Australian Accounting Standards (including Australian Interpretations) adopted by the Australian Accounting Standards Board (AASB), mandates issued by NSW Treasury and other mandatory and statutory reporting requirements, including Part 3 of the Public Finance and Audit Act 1983 and the associated requirements of the Public Finance and Audit Regulation 2005. In preparing this financial report, the accounting policies described below are based on the requirements applicable to for-profit entities in these mandatory and statutory requirements. The financial report covers the financial performance and cash flows of the Company for the reporting period 1 July 2008 to 30 June 2009 and its financial position as at 30 June 2009.

The financial report has been prepared on the historical cost basis, except for certain classes of property, plant and equipment that are stated at the lower of fair value and recoverable amount. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000). The accounting policies set out below have been consistently applied to all periods presented in the financial report. Where relevant, comparative amounts have been restated to conform to the current reporting period’s presentation.

The comparatives in this financial report cover the Company’s financial performance and cash flows for the period 13 June 2007 to 30 June 2008 and its financial position as at 30 June 2008 from the Company’s first financial report, following NSW Treasury’s approval on 22 June 2007 to extend the first financial reporting period for the Company from 13 June 2007 to 30 June 2008 in accordance with Section 4(1A) of the Public Finance and Audit Act 1983.

(b) Statement of compliance

The financial report complies with all applicable Australian Accounting Standards, including Australian Interpretations. The financial report also complies with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).


(c) Revenue

Revenue is income that arises in the course of ordinary activities. Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. In respect of the following category of revenue earned, the following recognition criteria must also be met before revenue is recognised:

• Interest revenue

Interest revenue is recognised as the interest accrues using the effective interest method. The effective interest method calculates the amortised cost of a financial asset and allocates interest revenue over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to its net carrying amount. Where interest revenue is earned on the temporary investment of borrowings used for the construction of qualifying assets (refer Note 1(e)), the interest revenue is netted against the borrowing costs that are incurred prior to their capitalisation against the cost of the qualifying assets.

(d) Other income

Other income comprises gains arising from either the disposal of recognised assets and liabilities or the remeasurement of some items to fair value at the reporting date that are required to be taken to the income statement under the relevant applicable Australian Accounting Standards.

• Disposal of investments or other financial assets

The net gain or loss on disposal of investments or other financial assets is calculated as the difference between the carrying amount at the time of disposal and the net proceeds on disposal and is recorded in the income statement in the period of disposal. Net losses on disposal, if any, are reclassified as expenses.

• Disposal of property, plant and equipment and intangible assets

The net gain or loss on disposal of these assets is calculated as the difference between the carrying amount of the assets at the time of disposal and the net proceeds on disposal and is recorded in the income statement in the period of disposal. Net losses on disposal, if any, are reclassified as expenses.

(e) Expenses

Expenses are recognised in the income statement when incurred. Expenses include items that are incurred in the course of ordinary activities as well as various losses that arise from either the disposal of recognised assets or the remeasurement of some items at the reporting date that are required to be taken to the income statement under the relevant applicable Australian Accounting Standards. Examples of losses are those arising from the disposal of property, plant and equipment and some asset impairment losses. Expenses, if any, are disclosed in the Company’s financial report by nature. (Refer note 2(b)).

• Depreciation

Items of property, plant and equipment (excluding freehold land), if any, are depreciated on a straight-line basis over their estimated useful lives, making allowance where appropriate for residual values. The review of lives for any depreciable property, plant and equipment is undertaken as part of the Parent’s current annual processes, and takes into account assessments of asset condition, commercial and technical obsolescence and expected normal wear and tear. Work in progress is not depreciated until the assets are brought into service and are available for use. Partially capitalised assets attract depreciation only after they have been commissioned.

• Borrowing costs

Interest and other borrowing costs, such as government guarantee fees payable in respect of the Company’s borrowings, are expensed as incurred within finance costs in the income statement unless they relate to qualifying assets, in which case they are capitalised as part of the cost of those assets. Qualifying assets are assets that take a substantial period of time to get ready for their intended use or sale. The Company considers this to be 12 months or more. The desalination plant that is currently being constructed at Kurnell is the Company’s only qualifying asset in this regard.


Capitalisation of borrowing costs is undertaken where a direct relationship can be established between the borrowings and the relevant projects giving rise to qualifying assets. In this regard, all of the Company’s borrowings are directly attributable to the construction of the desalination plant. Accordingly, the borrowing costs arising from these borrowings are being capitalised as part of the cost of the plant. The amount of borrowing costs capitalised is net of any interest earned by the Company from temporarily investing those borrowings. (Refer note 1(c)).

(f) Taxation

• Income tax

The Company is subject to notional taxation in accordance with the State Owned Corporations Act 1989. An ‘equivalent’ or ‘notional’ income tax is payable to the NSW Government through the Office of State Revenue. Taxation liability is assessed according to the National Tax Equivalent Regime (NTER) that replaced the former State Tax Equivalent Regime of the NSW Treasury from 1 July 2001. The NTER closely mirrors the Commonwealth Income Tax Assessment Acts of 1936 and 1997 (as amended) and is administered by the Australian Taxation Office (ATO). The Company applies the balance sheet method of tax-effect accounting to determine income tax expense and current and deferred tax assets and liabilities. Income tax expense or income on the operating result for the reporting period comprises both current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case the income tax is itself recognised directly in equity. Current tax is the expected tax payable or receivable on the taxable income for the reporting period, using tax rates enacted or substantively enacted at the reporting date, and covers any adjustment to tax payable or receivable in respect of previous years. Deferred tax represents future assessable or deductible amounts that arise due to temporary differences existing at the reporting date between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes (their tax bases). Deferred tax balances are not recognised for temporary differences that arise from the initial recognition of assets or liabilities that affect neither accounting profit or taxable profit. The carrying amount of deferred tax assets is reviewed at the reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Deferred tax assets and liabilities provided are based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates (and tax laws) enacted or substantively enacted at the reporting date. Current and deferred tax assets are offset with current and deferred tax liabilities respectively where they relate to income taxes levied by the same taxation authority and they are expected to be settled with that taxation authority on a net basis. (Refer Note 9).

• Tax consolidation The Company and the Parent have consolidated as a single entity for income tax purposes. The Parent is the head entity in the tax-consolidated group and accordingly is the only Australian taxpayer in the tax-consolidated group for the purposes of the NTER. As the head entity, the Parent recognises all of the current tax assets and liabilities of the tax-consolidated group (after elimination of intra-group transactions). The tax-consolidated group does not have a tax funding agreement. In accordance with Australian Interpretation 1052 ‘Tax Consolidation Accounting’, the Company initially recognises its own income tax expense or income and current and deferred tax balances. Subsequent to initial recognition, the Parent as the head entity assumes all of the current Australian tax balances from its wholly owned Australian subsidiaries in order to recognise the total current tax payable or receivable of the tax-consolidated group in its own balance sheet. As there is no tax funding agreement, the assumption of the Company’s current tax balances by the Parent is recognised as an equity transaction (as either other contributed or other distributed equity) in the Company’s balance sheet.

• Goods and services tax

Revenue, expenses and assets are recognised net of the amount of Goods and Services Tax (GST), except where the amount of GST incurred by the Company as a purchaser is not recoverable from the ATO. In such cases, the GST incurred is recognised as part of the cost of acquisition of an asset or as part of an item of expense. The Company’s GST obligations (amount receivable) are remitted to (received from) the Parent and are included in the Parent’s monthly consolidated Business Activity Statement remitted to the ATO. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from or payable to the ATO is included as a current asset or liability respectively in the balance sheet. Cash flows of GST are included in the cash flow statement on a gross basis. The GST components of cash flows arising from investing and financing activities that are recoverable from or payable to the ATO are classified as cash flows from operating activities. Commitments are disclosed inclusive of GST where applicable. (Refer note 17).


(g) Cash and cash equivalents

Cash and cash equivalents in the balance sheet comprise positive cash balances and short-term investments with a maturity period of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For the purposes of the cash flow statement, cash and cash equivalents consists of the above balance sheet definition, net of bank overdraft balances. Bank overdraft balances, if any, are included within borrowings under current liabilities in the balance sheet. (Refer note 11).

(h) Trade and other receivables

Trade and other receivables represent amounts that are receivable by the Company at the end of the reporting period and that are yet to be collected. Trade and other receivables are recognised initially and subsequently carried at original invoice amount, which is their fair value, less any impairment losses recognised by way of an allowance for impairment that represents specific amounts considered to be either doubtful or uncollectible. Recognition at original invoice amount is adopted as this is not materially different to amortised cost, given the short-term nature of these receivables. The recoverability of trade and other receivables is regularly reviewed throughout the reporting period. An allowance for impairment is recognised when collection of the full amount invoiced is considered to be no longer probable after due consideration of factors such as the length of time in excess of the due date and prevailing economic conditions. These factors are considered to be objective evidence of impairment. Known bad debts, if any, are written off against the allowance as and when identified.

(i) Property, plant and equipment

• Acquisitions and capitalisation

All items of property, plant and equipment acquired by the Company are recognised initially at the cost of acquisition. Subsequent to initial recognition, particular classes of completed assets are to be revalued in accordance with the Parent’s revaluation policies (see Asset valuations below). Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire the asset, including costs that are directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended. Items costing $5,000 or more individually and having a minimum expected working life of three years are capitalised. In the case of assets acquired that form part of an overall network, all expenditures are capitalised regardless of cost. In respect of the Company’s desalination plant currently under construction, cost includes:

• services and resources provided by the Parent, such as labour for project management • contractors’ services • borrowing costs (refer note 1(e)).

Construction costs for the desalination plant are capitalised initially as work in progress within property, plant and equipment. Subsequently, these costs will be reclassified as a completed asset when construction has ended and the plant becomes operational and available for use.

• Asset valuations

Following initial recognition at cost, each class of property, plant and equipment is stated in the balance sheet at fair value less any subsequent accumulated depreciation and accumulated impairment losses where applicable. Adopting the fair value model for property, plant and equipment assets, rather than the cost model, is a requirement of NSW Treasury’s mandates in respect of options to be adopted by NSW public sector entities under Australian Accounting Standards. For some classes of assets, remeasurement to fair value is to be undertaken by way of an asset revaluation. Valuations are to be performed with sufficient regularity to ensure that the carrying amount does not differ materially from the asset’s fair value at the reporting date. The valuation basis that is representative of fair value in respect of each class of assets is detailed below. In respect of classes of assets for which there exists an active market, fair value is the amount for which the assets could be exchanged between knowledgeable and willing parties in an arm’s length transaction, having regard to the highest and best use of the assets for which other parties would be willing to pay to obtain the most advantageous price or highest possible value. In respect of classes for which there is no active market due to the specialised nature of the assets, fair value is determined as the estimated depreciated current replacement cost of the assets.


• Desalination plant and system assets

The desalination plant at Kurnell and any associated system assets subsequently acquired by the Company, when operational, will be specialised infrastructure assets owned by the Company. Their function will be to convert seawater into potable water and to then supply it to the Parent’s water delivery system network. Due to the specialised nature of these assets, their fair value is determined as their estimated depreciated current replacement cost. The determination of estimated depreciated current replacement cost for these assets is based on estimates of modern engineering equivalent replacement asset (MEERA) values on a whole of facility basis and takes into account condition-based assessments of the assets and their asset lives to determine their remaining service potential. Valuations for these assets are to be carried out annually, effective from 1 July each financial reporting period. Comprehensive engineering valuations of different categories of these assets are to be carried out on a progressive cycle not exceeding five years. Valuations carried out during the intervening years of the progressive cycle are to be carried out using an output index that is applicable to the general construction industry. When these assets are revalued, any accumulated depreciation is to be restated proportionately with the change in the gross carrying amount of the asset so that the net carrying amount of the asset after revaluation equals its revalued amount. Work in progress is not revalued as the cost that is recognised in the balance sheet is considered to approximate the fair value of the assets under construction at the reporting date. Subsequent to determining their fair value, the assets are then tested for impairment by applying a cash-generating unit test to determine their recoverable amount, which represents their value in use. The cash-generating unit test calculates the discounted present value of the net cash inflows that the Company expects to be generated from its assets, operating together within separately identified cash-generating units, over their expected useful lives. For the Company, the cash-generating unit is considered to be the entire network of infrastructure assets that it owns as all of these assets work together, rather than individually, to generate cash flows under current pricing methodologies. In addition, the Company will have its own regulated asset base at this level for pricing purposes and will ultimately be able to generate revenue with these assets when they become operational. After determining recoverable amount, the assets are then stated in the balance sheet at the lower of their fair value and recoverable amount. (For further details regarding the assumptions used in the cash-generating unit test, refer Note 7(c)).

• System land

System land is land upon which infrastructure assets are located and has no other alternative use at the reporting date. In accordance with the desalination plant project development agreement between the Company and the Parent, the Company has acquired the relevant system land parcels for the desalination plant from the Parent during the current reporting period (refer note 7(b) based on an independently determined market valuation. In subsequent reporting periods, system land will be valued by the Company using the market valuation provided by the Valuer General that is normally used for rating purposes, less estimated selling costs, unless there is a specific business need to obtain separate independent market valuations.

For each class of property, plant and equipment subject to valuation, revaluation increments, if any, will be credited to an asset revaluation reserve within equity in the balance sheet. Where a revaluation decrement or an impairment loss is to reverse a revaluation increment previously credited to, and which is still in the balance of, the asset revaluation reserve, the revaluation decrement or impairment loss will be debited to that reserve. In other cases, the decrement or impairment loss will be recognised as an expense in the income statement. Revaluation increments and decrements will be offset against one another on an ‘individual asset’ basis. For revaluation purposes in respect of its infrastructure assets, the Company considers the desalination plant currently being constructed at Kurnell to be an ‘individual asset’ separate from any other possible infrastructure assets that it may subsequently acquire. Upon any disposal of assets that have been revalued, any asset revaluation reserve balance relating to the particular asset being disposed will be transferred to retained earnings.

(j) Intangible assets

Intangible assets are identifiable non-monetary assets without physical substance. Intangible assets are capitalised initially at cost. Costs incurred on incomplete intangible assets that are being progressively acquired, such as easements, are recognised as acquisitions in progress at the reporting date. These assets are reclassified as completed intangible assets when the assets are fully acquired and are operational or available for use. Following initial recognition, the cost model is applied as it is considered that there is no active market that can be referenced for performing revaluations to a market-based fair value in respect of the particular items within each class of the Company’s intangible assets. The useful lives of intangible assets are assessed to be either finite or indefinite.


Where intangible assets are determined to have finite lives, they are amortised on a straight-line basis and the expense is recognised as part of the depreciation and amortisation line item in the income statement. These assets are recognised in the balance Sheet at cost less accumulated amortisation and accumulated impairment losses, where applicable. Where intangible assets are determined to have indefinite lives, they are not amortised. However, they are tested for impairment as part of the cash-generating unit test applied by the Company in conjunction with other assets. Any resulting impairment losses are recognised as an expense in the income statement. Any reversals of impairment losses are also recognised in the income statement. These assets are recognised in the balance sheet at cost less accumulated impairment, where applicable. (Refer note 8).

(k) Impairment of assets

At each reporting date, the carrying amounts of assets (other than any deferred tax assets) are reviewed to determine whether there is an indication of impairment. If any such indication exists, a formal estimate of their recoverable amount is made. (Refer below - Calculation of recoverable amount). Where the carrying amount of an asset is greater than its recoverable amount, the asset is considered impaired. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised as an expense in the income statement, unless an asset has previously been revalued through the asset revaluation reserve, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the income statement. Impairment losses recognised in respect of a cash-generating unit are allocated to reduce the carrying amount of the assets in the unit on a pro rata basis.

• Calculation of recoverable amount

Financial assets

The recoverable amount of any receivables stated at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate determined at initial recognition. Receivables with a short duration are not discounted. Impairment in respect of these receivables is determined in accordance with the accounting policy in note 1(h). Other assets

The recoverable amount of other assets for which there is an active and liquid market, such as land, is the greater of fair value less costs to sell and their value in use. The recoverable amount of other assets for which there is no active and liquid market due to their specialised nature, such as the desalination plant currently being constructed, is their value in use. In assessing value in use, the estimated future cash flows from the continuing use and ultimate disposal of an asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash flows that are largely independent from other assets, the recoverable amount is determined for the cash-generating unit to which it belongs. (Refer also note 1(i)). For further specific details of the assumptions behind the cash-generating unit test used for the Company’s infrastructure assets, refer Note 7(c).

• Reversals of impairment

Financial assets

An impairment loss in respect of any receivables stated at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment was recognised.

Other assets

Impairment losses in respect of other assets, such as the desalination plant currently being constructed, are reversed if there has been a change in the estimates used to determine the recoverable amount or if an event or significant changes have occurred during the reporting period that have led, or will lead, to a benefit to the Company because of the manner in which the relevant asset is expected to be used. Impairment losses are reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised.

(l) Trade and other payables

Trade and other payables represent liabilities for goods and services provided to the Company prior to the end of the reporting period and that are unpaid. Trade and other payables are recognised in the balance sheet at cost, which is considered to approximate amortised cost due to their short-term nature. They are not discounted, as the effect of discounting would not be material for these liabilities. Recognition of trade and other payables occurs when the goods or services purchased by the Company have been received and an obligation to make future payments arises. (Refer note 10).


(m) Borrowings

Interest-bearing borrowings obtained by the Company from the NSW Treasury Corporation are recognised initially at the fair value of the consideration received, which incorporates any transaction costs associated with the borrowing. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method. (Refer note 11). Amortised cost is calculated by taking into account any differences between the initial fair value and the final redemption value of the borrowings, such as discounts or premiums. These differences are amortised to the income statement as part of finance costs over the period of the borrowings on an effective interest basis. Gains or losses are recognised in the income statement when liabilities are derecognised, such as through a debt restructuring, as well as through the amortisation process. Interest-bearing borrowings are classified as current liabilities only if the borrowing is due to be settled within 12 months after the reporting date and there is no intention to extend or refinance the obligation on a long-term basis with the respective lender. All other interest-bearing borrowings are classified as non-current liabilities.

(n) Accounting standards and interpretations issued but not yet operative

At the reporting date, a number of Australian Accounting Standards and Australian Interpretations adopted by the AASB had been issued but are not yet operative and have not been early adopted by the Company. The following is a list of these standards and interpretations and a description of their possible impact on the financial report in the period of their initial application: • AASB 8 ‘Operating Segments’ (issued February 2007)

This standard replaces the presentation requirements of segment reporting in AASB 114 ‘Segment Reporting’, which is currently not relevant to the Company. The initial application of this standard will have no impact on the financial results of the Company and is only concerned with disclosures for entities where segment reporting is relevant. The standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 2007-3 ‘Amendments to Australian Accounting Standards arising from AASB 8 [AASB 5, AASB 6, AASB 102, AASB 107, AASB 119, AASB 127, AASB 134, AASB 136, AASB 1023 & AASB 1038]’ (issued February 2007)

This standard makes changes to AASB 5 ‘Non-current Assets Held for Sale’ and ‘Discontinued Operations’, AASB 6 ‘Exploration for and Evaluation of Mineral Resources’, AASB 102 ‘Inventories’, AASB 107 ‘Cash Flow Statements’, AASB 119 ‘Employee Benefits’, AASB 127 ‘Consolidated and Separate Financial Statements’, AASB 134 ‘Interim Financial Reporting’, AASB 136 ‘Impairment of Assets’, AASB 1023 ‘General Insurance Contracts’ and AASB 1038 ‘Life Insurance Contracts’. These changes are consequential changes due to the issuance of AASB 8 ‘Operating Segments’ and include changes to references and to language compatible with AASB 8. The initial application of this standard will have no impact on the financial results of the Company. The standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 123 ‘Borrowing Costs’ (issued June 2007)

This standard makes amendments to AASB 123 ‘Borrowing Costs’ issued in July 2004 to require the capitalisation of all borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset, which is an asset that necessarily takes a substantial period of time to get ready for its intended use. In the July 2004 version of AASB 123, entities had a choice to either expense or capitalise such costs. This choice is no longer available under the revised AASB 123 and only capitalisation of such costs is permitted. All other borrowing costs, however, are to continue to be expensed. The initial application of this standard will have no impact on the financial results of the Company. The standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 2007-6 ‘Amendments to Australian Accounting Standards arising from AASB 123 [AASB 1, AASB 101, AASB 107, AASB 111, AASB 116 & AASB 138 and Interpretations 1 & 12]’ (issued June 2007)

This standard makes consequential amendments to AASB 1 ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’, AASB 101 ‘Presentation of Financial Statements’, AASB 107 ‘Cash Flow Statements’, AASB 111 ‘Construction Contracts’, AASB 116 ‘Property, Plant and Equipment’, AASB 138 ‘Intangible Assets’, Interpretation 1 ‘Changes in Existing Decommissioning, Restoration and Similar Liabilities’ and Interpretation 12 ‘Service Concession Arrangements’ as a result of the issue of the revised AASB 123 ‘Borrowing Costs’ in June 2007 (see above). The amendments principally remove references to expensing borrowing costs on qualifying assets, as AASB 123 was revised to require such borrowing costs to be capitalised. The initial application of this standard will have no impact on the financial results of the Company. The standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 101 ‘Presentation of Financial Statements’ (issued September 2007)

This standard will replace the existing AASB 101 ‘Presentation of Financial Statements’ (issued October 2006) and will make changes to the names and content of the financial statements of an entity. When operative, the balance sheet will be referred to as a statement of financial position and the cash flow statement will be referred to as a statement of cash flows. Items of income and expense will be permitted to be displayed either in one single statement of comprehensive income (combining the current income statement and statement of recognised income and expense) or two separate statements - an income statement for items comprising profit or loss and a statement of comprehensive income for non-owner changes in equity such


as movements in reserves. Additionally, a new statement of changes in equity will be required to display changes in equity arising from transactions with owners in their capacity as owners. Whenever an entity applies an accounting policy retrospectively, the standard also requires an entity to display an additional comparative column as at the beginning of the previous reporting period in its statement of financial position. The standard also requires disclosure of any reclassification adjustments from other comprehensive income to profit or loss. The initial application of this standard will not impact on the financial results of the Company, as it is only concerned with presentation of the financial statements and their form and content. The standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 2007-8 ‘Amendments to Australian Accounting Standards arising from AASB 101’ (issued September 2007)

This standard makes editorial and terminology amendments to Australian Accounting Standards (including Australian Interpretations) as a consequence of the issuance of revised AASB 101 ‘Presentation of Financial Statements’ in September 2007 (see above). The changes are largely to better align Australian Accounting Standards (and Australian Interpretations) with International Financial Reporting Standards (IFRS) terminology, such as changing the term ‘financial report’ to ‘financial statements’. The initial application of this standard will have no impact on the financial results of the Company. The standard is operative when the revised AASB 101 above is operative, being annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 2007-10 ‘Further Amendments to Australian Accounting Standards arising from AASB 101’ (issued December

2007)

This standard changes the term ‘general purpose financial report’ to ‘general purpose financial statements’ and the term ‘financial report’ to ‘financial statements’, where appropriate, in Australian Accounting Standards (including Australian Interpretations) and the Framework to better align with IFRS terminology. This standard builds on the changes made by AASB 2007-8 ‘Amendments to Australian Accounting Standards arising from AASB 101’ (see above). The initial application of this standard will have no impact on the financial results of the Corporation or the Group. The standard is operative when the revised AASB 101 above is operative, being annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 2008-1 ‘Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations [AASB 2]’ (issued February 2008)

This standard makes amendments to AASB 2 ‘Share-based Payment’ as a result of the issuance in January 2008 of amendments to IFRS 2 ‘Share-based Payment’ by the IASB regarding vesting conditions and cancellations in relation to share-based payments. The amendments clarify that vesting conditions comprise service conditions and performance conditions only and that other features of a share-based payment transaction are not vesting conditions. They also specify that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The initial application of this standard will have no impact on the financial results of the Company. The standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 2008-2 ‘Amendments to Australian Accounting Standards – Puttable Financial Instruments and Obligations arising on Liquidation [AASB 7, AASB 101, AASB 132 & AASB 139 and Interpretation 2]’ (issued March 2008)

This standard makes amendments to AASB 132 ‘Financial Instruments: Presentation’ as a result of the issuance in February 2008 of amendments to IAS 32 ‘Financial Instruments: Presentation’ by the IASB regarding puttable financial instruments and obligations arising on liquidation. These amendments result in consequential amendments to AASB 7 ‘Financial Instruments: Disclosures’, AASB 101 ‘Presentation of Financial Statements’, AASB 139 ‘Financial Instruments: Recognition and Measurement’ and AASB Interpretation 2 ‘Members’ Shares in Co-operative Entities and Similar Instruments’. The standard introduces an exception to the definition of financial liability to classify as equity instruments certain puttable financial instruments and certain instruments that impose on an entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation of the entity. The initial application of this standard will have no impact on the financial results of the Company. The standard is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 3 ‘Business Combinations’ (issued March 2008)

This standard will replace the existing AASB 3 ‘Business Combinations’ (issued in July 2004 and amended to December 2007) and establishes principles and requirements on how an acquirer applies the acquisition method of accounting in a business combination. It covers how the acquirer recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree, how the acquirer recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and how the acquirer determines information to disclose on the nature and financial effects of the business combination. When operative, the standard will replace AASB Interpretation 1001 ‘Consolidated Financial Reports in relation to Pre-Date-of-Transition Dual Listed Company Stapling Arrangements’ issued in December 2005, AASB Interpretation 1002 ‘Post-date-of-Transition Stapling Arrangements’ issued in December 2005 and AASB Interpretation 1013 ‘Consolidated Financial Reports in relation to Pre-Date-of-Transition Stapling Arrangements’ issued in April 2005. The initial application of the standard will have no impact on the financial results of the Company. The standard applies prospectively to business combinations for which the acquisition date is on after the beginning of the first annual reporting period beginning on or after 1 July 2009 (ie 2009-10).


• AASB 127 ‘Consolidated and Separate Financial Statements’ (issued March 2008)

This standard will replace the existing AASB 127 ‘Consolidated and Separate Financial Statements’ (issued in July 2004 and amended to December 2007) and incorporates amendments made as a result of the issuance of revised AASB 3 ‘Business Combinations’ in March 2008 (see above). In general terms, the standard specifies the circumstances in which an entity must consolidate the financial statements of another entity (being a subsidiary), the accounting for changes in the level of ownership interest in a subsidiary, the accounting for the loss of control of a subsidiary and disclosures in relation to the nature of the relationship between the entity and its subsidiaries. The initial application of the standard will have no impact on the financial results of the Company. The amendments to the standard arising from the revised AASB 3 can only be applied at the same time as the revised AASB 3 and are operative for annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).

• AASB 2008-3 ‘Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 [AASBs 1, 2, 4, 5, 7, 101, 107, 112, 114, 116, 121, 128, 131, 132, 133, 134, 136, 137, 138 & 139 and Interpretations 9 & 107]’ (issued March 2008)

This standard makes consequential amendments to various existing Australian Accounting Standards and Australian Interpretations as a result of the issuance in March 2008 of revised AASB 3 ‘Business Combinations’ and amended AASB 127 ‘Consolidated and Separate Financial Statements’ (see above). The amendments include, inter alia, various editorial changes such as amending the term minority interests to non-controlling interests, as well as inserting references to the revised AASB 3 issued in March 2008 within the other standards and interpretations where necessary. The initial application of this standard will have no impact on the financial results of the Company. The standard can only be applied at the same time as revised AASB 3 and amended AASB 127 and is operative for annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).

• AASB 2008-5 ‘Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 5, 7, 101, 102, 107, 108, 110, 116, 118, 119, 120, 123, 127, 128, 129, 131, 132, 134, 136, 138, 139, 140, 141, 1023 & 1038]’ (issued July 2008)

This standard makes amendments to various Australian Accounting Standards as a result of the Annual Improvements Project undertaken by the IASB and implemented in Australian Accounting Standards by the AASB. Some of the amendments result in accounting changes for presentation, recognition and measurement purposes, whilst some of the amendments relate to terminology and editorial changes. The initial application of this standard will have no impact on the financial results of the Company and it is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 2008-6 ‘Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 1 & AASB 5]’ (issued July 2008)

This standard amends AASB 1 ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’ and AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ to include requirements relating to a sale plan involving the loss of control of a subsidiary. The amendments require all the assets and liabilities of such a subsidiary to be classified as held for sale and clarify the disclosures required when the subsidiary is part of a disposal group that meets the definition of a discontinued operation. These amendments are a result of the Annual Improvements Project undertaken by the IASB and implemented in Australian Accounting Standards by the AASB. The initial application of this standard will have no impact on the financial results of the Company and it is operative for annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).

• AASB 2008-7 ‘Amendments to Australian Accounting Standards – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate [AASB 1, AASB 118, AASB 121, AASB 127 & AASB 136]’ (issued July 2008)

This standard makes amendments to AASB 1 ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’, AASB 118 ‘Revenue’, AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’, AASB 127 ‘Consolidated and Separate Financial Statements’ and AASB 136 ‘Impairment of Assets’ in relation to the cost of an investment in a subsidiary, jointly controlled entity or associate. The amendments permit first-time adopters of AEIFRS to use a deemed cost option for determining the cost of such an investment. In addition, the amendments remove the requirement of deducting dividends declared out of pre-acquisition profits from the cost of the investment, such that all dividends are to be recognised by the investor as revenue. The amendments also deal with the establishment of the cost of such an investment when a new parent entity is established in a group reorganisation. They also require an investor to consider whether a dividend received is an indicator of impairment for that investment. The initial application of this standard will have no impact on the financial results of the Company and it is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 2008-8 ‘Amendments to Australian Accounting Standards – Eligible Hedged Items [AASB 139]’ (issued August 2008)

This standard makes amendments to AASB 139 ‘Financial Instruments: Recognition and Measurement’. These amendments arise from the issuance, by the IASB in July 2008, of the amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’ regarding eligible hedged items. These amendments clarify how the principles that determine whether a hedged risk or portion of cash flow is eligible for designation as a hedged item, should be applied in particular situations. The initial application of this standard will have no impact on the financial results of the Company and it is operative for annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).


• AASB Interpretation 15 ‘Agreements of the Construction of Real Estate [AASB 118]’ (issued August 2008)

This interpretation applies to the accounting for revenue and associated expenses by entities that enter into agreements for the construction of real estate directly through subcontractors. This interpretation addresses whether an agreement for the construction of real estate is within the scope of AASB 111 ‘Construction Contracts’ or AASB 118 ‘Revenue’ and it addresses when revenue arising from such agreements should be recognised. The initial application of this interpretation will have no impact on the financial results of the Company and it is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB Interpretation 16 ‘Hedges of a Net Investment in a Foreign Operation’ (issued August 2008)

This interpretation provides guidance on accounting for the hedge of a net investment in a foreign operation in an entity’s consolidated financial statements. It clarifies that a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation, and that the hedging instrument(s) may be held by any entity or entities within the group. The initial application of this interpretation will have no impact on the financial results of the Company and it is operative for annual reporting periods beginning on or after 1 October 2008 (ie 2009-10).

• AASB 2008-9 ‘Amendments to AASB 1049 for Consistency with AASB 101’ (issued September 2008)

This standard amends AASB 1049 ‘Whole of Government and General Government Sector Financial Reporting’ and the accompanying Illustrative Examples to ensure AASB 1049 is consistent with the revised AASB 101 ‘Presentation of Financial Statements’ (see above). The standard applies to governments preparing whole of government or general government sector financial reports and thus it is not applicable to the Company. The initial application of this standard will have no impact on the financial results of the Company and it is operative for annual reporting periods beginning on or after 1 January 2009 (ie 2009-10).

• AASB 2008-11 ‘Amendments to Australian Accounting Standard – Business Combinations Among Not-for-Profit Entities [AASB 3]’ (issued November 2008)

This standard makes amendments to AASB 3 ‘Business Combinations’ (March 2008) as a result of a review by the AASB of the suitability of applying the requirements in that standard for business combinations among not-for-profit entities. The effect of this standard is that the requirements of AASB 3 apply to business combinations among not-for-profit entities (other than restructures of local governments) that are not commonly controlled. This standard does not apply to the Company and it will thus have no impact on its financial results upon its initial application. The standard is operative for annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).

• AASB Interpretation 17 ‘Distributions of Non-cash Assets to Owners’ (issued December 2008)

This interpretation provides guidance on how an entity should measure distributions of assets other than cash when it pays dividends to its owners, except for common control transactions. It clarifies that a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity, that an entity should measure the dividend payable at the fair value of the net assets to be distributed and that an entity should recognise the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss. It also requires an entity to provide additional disclosures if the net assets being held for distribution to owners meet the definition of a discontinued operation. The initial application of this interpretation will have no impact on the financial results of the Company and it is operative for annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).

• AASB 2008-13 ‘Amendments to Australian Accounting Standards arising from AASB Interpretation 17 – Distributions of Non-cash Assets to Owners [AASB 5 & AASB 110]’ (issued December 2008)

This standard makes amendments to AASB 5 ‘Non-current Assets Held for Sale and Discounted Operations’ and AASB 110 ‘Events after the Balance Sheet Date’. These amendments arise from the issuance of AASB Interpretation 17 ‘Distributions of Non-cash Assets to Owners’ (see above). The issuance of AASB Interpretation 17 necessitates consequential amendments to AASB 5 and AASB 110. The amendments are in respect of the classification, presentation and measurement of non-current assets held for distribution to owners in their capacity as owners and the disclosure requirements for dividends that are declared after the reporting period but before the financial statements are authorised for issue, respectively. The initial application of this standard will have no impact on the financial results of the Company and it is operative for annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).

• AASB Interpretation 18 ‘Transfers of Assets to Customers’ (issued March 2009)

This interpretation replaces AASB Interpretation 1017 ‘Developer and Customer Contributions for Connection to a Price-Regulated Network’ and covers the accounting requirements for transfers of items of property, plant and equipment by entities that receive such transfers from their customers. Agreements within the scope of this interpretation are agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services, or to do both. The interpretation also applies to agreements in which an entity receives cash from a customer when that amount of cash must be


used only to construct or acquire an item of property, plant and equipment and the entity must then use the item of property, plant and equipment either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services, or to do both. The interpretation does not apply to the Company and accordingly the initial application of this interpretation will have no impact on the financial results of the Company. The interpretation is operative for annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).

• AASB 2009-1 ‘Amendments to Australian Accounting Standards – Borrowing Costs of Not-for-Profit Public Sector Entities [AASB 1, AASB 111 & AASB 123]’ (issued April 2009)

This standard makes amendments to AASB 1 ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’, AASB 111 ‘Construction Contracts’ and AASB 123 ‘Borrowing Costs’ and reintroduces, for not-for-profit public sector entities only, the option to expense in the period incurred, rather than capitalise, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. Consequential disclosures about the accounting policy adopted are also specified. As a consequence of reintroducing the option for not-for-profit entities, this standard also amends AASB 111 ‘Construction Contracts’ to specify that costs that may be attributable to contract activity in general and can be allocated to specific contracts shall include borrowing costs only when the contractor capitalises borrowing costs in accordance with AASB 123. This standard does not apply to the Company and the initial application of this standard will have no impact on its financial results. This standard is applicable to annual reporting periods beginning on or after 1 January 2009 that end on or after 30 April 2009 (ie 2009-10).

• AASB 2009-2 ‘Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments [AASB 4, AASB 7, AASB 1023 & AASB 1038]’ (issued April 2009)

This standard makes amendments to AASB 4 ‘Insurance Contracts’, AASB 1023 ‘General Insurance Contracts’ and AASB 1038 ‘Life Insurance Contracts’ as a result of editorial changes made to AASB 7 ‘Financial Instruments: Disclosures’ covering requirements for enhanced disclosures for fair value measurement of financial instruments and liquidity risk. The initial application of this standard will have no impact on the financial results of the Company as it relates to disclosure. This standard is applicable to annual reporting periods beginning on or after 1 January 2009 that end on or after 30 April 2009 (ie 2009-10).

• AASB 2009-4 ‘Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 2 and AASB 138 and AASB Interpretation 9 & 16’ (issued May 2009)

This standard makes amendments to AASB 2 ‘Share-based Payment’, AASB 138 ‘Intangible Assets’, AASB Interpretation 9 ‘Reassessment of Embedded Derivatives’ and 16 ‘Hedges of a Net Investment in a Foreign Operation’. The amendments are as a result of the Annual Improvements Project undertaken by the IASB, and implemented in Australian Accounting Standards by the AASB. The initial application of this standard will have no impact on the financial results of the Company. This standard is applicable to annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).

• AASB 2009-5 ‘Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 5, AASB 8, AASB 101, AASB 107, AASB 117, AASB 118, AASB 136 & AASB 139’ (issued May 2009)

This standard makes amendments to AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, AASB 8 ‘Operating Segments’, AASB 101 ‘Presentation of Financial Statements’, AASB 107 ‘Statement of Cash Flows’, AASB 117 ‘Leases’, AASB 118 ‘Revenue’, AASB 136 ‘Impairment of Assets’, and AASB 139 ‘Financial Instruments: Recognition and Measurement’. The amendments are as a result of the Annual Improvements Project undertaken by the IASB, and implemented in Australian Accounting Standards by the AASB. The initial application of this standard will have no impact on the financial results of the Company. This standard is applicable to annual reporting periods beginning on or after 1 January 2010 (ie 2010-11).

• AASB 1 ‘First-time Adoption of Australian Accounting Standards’ (issued May 2009)

This standard replaces AASB 1 ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’ that was issued in July 2004 and was subsequently amended several times by a number of amending standards since that time. As a result of these numerous changes, the original standard became more complex and less clear in relation to how an entity should transition to its first-time adoption of Australian Accounting Standards. This new version of AASB 1 retains the substance of the previous version. However, the structure of the Standard has been changed to make it easier for the reader to understand and to better handle future changes. The initial application of this standard will have no impact on the financial results of the Company. This standard is applicable to annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).

• AASB 2009-6 ‘Amendments to Australian Accounting Standards’ (issued June 2009)

This standard makes numerous editorial amendments to a range of Australian Accounting Standards and Australian Interpretations, including amendments to reflect changes made to the text of IFRSs by the IASB. The standard makes additional amendments as a consequence of the issuance in September 2007 of a revised AASB 101 ‘Presentation of Financial Statements’. These amendments were omitted from or incorrectly stated in AASB 2007-8 ‘Amendments to Australian Accounting Standards arising from AASB 101’ by the AASB. All of these amendments have no major impact on the requirements of the amended pronouncements. The initial application of this standard will have no impact on the financial results of the Company. This standard is applicable to annual reporting periods beginning on or after 1 January 2009 that end on or after 30 June 2009 (ie 2009-10).


• AASB 2009-7 ‘Amendments to Australian Accounting Standards [AASB 5, 7, 107, 112, 136 & 139 and Interpretation 17]’ (issued June 2009)

This standard makes editorial amendments to AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, AASB 7 ‘Financial Instruments: Disclosures’, AASB 107 ‘Statement of Cash Flows’, AASB 112 ‘Income Taxes’, AASB 136 ‘Impairment of Assets’, AASB 139 ‘Financial Instruments: Recognition and Measurement’ and Interpretation 17 ‘Distributions of Non-cash Assets to Owners’ as a result of editorial corrections by both the AASB and the IASB. The amendments to AASB 5, AASB 7, AASB 139 and Interpretation 17 correct errors that occurred in AASB 2008-12 ‘Amendments to Australian Accounting Standards – Reclassification of Financial Assets – Effective Date and Transition’, AASB 2008-13 ‘Amendments to Australian Accounting Standards arising from AASB Interpretation 17 – Distributions of Non-cash Assets to Owners’ and Interpretation 17 itself. The other amendments reflect changes made by the IASB to its pronouncements. These editorial amendments have no major impact on the requirements of the amended pronouncements. The initial application of this standard will have no impact on the financial results of the Company. This standard is applicable to annual reporting periods beginning on or after 1 July 2009 (ie 2009-10).

• AASB 2009-8 ‘Amendments to Australian Accounting Standards – Group Cash-settled Share-based Payment Transactions [AASB 2]’ (issued July 2009)

This standard clarifies and amends the scope of AASB 2 ‘Share-based Payment’ by requiring an entity that receives goods or services in a share-based payment arrangement to account for those goods or services no matter which entity in a group settles the transaction, and no matter whether the transaction is settled in shares or cash. The standard supersedes the requirements previously included in AASB Interpretation 8 ‘Scope of AASB 2’ and AASB Interpretation 11 ‘AASB 2 – Group and Treasury Share Transactions’. The initial application of this standard will have no impact on the financial results of the Company. This standard is applicable to annual reporting periods beginning on or after 1 January 2010 (ie 2010-11).


___________________________________________________________________________________________________________ 13.6.2007 to Note 2009 30.6.2008 $’000 $'000 ___________________________________________________________________________________________________________

2. Income and expenses

Profit before income tax expense has been arrived at after including the following income and expense items: (a) Revenue Interest revenue from: Financial assets not at fair value through profit or loss using the effective interest method: Investments in marketable securities - 2 Bank balances - 7

________________________ - 9 Less amount netted against finance costs prior to capitalisation - (9)

________________________ Total interest revenue recognised in the income statement - -

________________________

Total revenue - - ________________________

(b) Expenses Finance costs expense Financial liabilities not at fair value through profit and loss using the effective interest method: Interest expense 40,816 10,648 Amortisation of deferred discounts (premiums) on loans 325 (7)

________________________ Total interest expense using effective interest method 41,141 10,641 Government guarantee fee expense 5,758 820 Interest revenue netted against finance costs prior to capitalisation - (9)

________________________ 46,899 11,452 Less amount capitalised (46,899) (11,452)

________________________ Finance costs expense recognised in the income statement - -

________________________

Other expenses

Audit fees 17 18 ________________________

Total other expenses 17 18

________________________


___________________________________________________________________________________________________________ 13.6.2007 to Note 2009 30.6.2008 $’000 $'000 ___________________________________________________________________________________________________________

3. Income tax expense

Major components of income tax expense (income) for the reporting period are as follows: (a) Recognised in the income statement Current tax expense (income) Current year (14,075) (3,436) Deferred tax expense Origination of temporary differences 14,070 3,431

________________________ Total income tax expense (income) in the income statement (5) (5)

________________________ (b) Reconciliation between income tax expense (income) and profit (loss) before income tax Profit (loss) before income tax (17) (18)

________________________ Income tax expense (income) calculated using the domestic corporation tax rate of 30% (2008: 30%) (5) (5)

________________________ Income tax expense (income) on profit (loss) before income tax (5) (5)

________________________


___________________________________________________________________________________________________________ Note 2009 2008 $’000 $'000 ___________________________________________________________________________________________________________

4. Cash and cash equivalents Cash 385 5

________________________ Cash and cash equivalents in the balance sheet and cash flow statement 385 5

________________________ Significant terms and conditions Details in respect of the above categories are as follows:

• Cash book balance

During the reporting period, the cash book balance can fluctuate from a positive balance to a negative (overdraft) balance. When the cash book balance is negative at the reporting date, it is shown as a bank overdraft under borrowings in the balance sheet. (Refer note 11).

At the reporting date, the cash book equated to the actual bank balance at the reporting date. Cash balances earn interest at bank rates.

• Short-term investments maturing three months or less

Short-term investments maturing three months or less are considered cash equivalents. These are usually interest-bearing deposits (see below). There were no cash equivalents at the reporting date (2008: Nil).

Interest-bearing deposits are non-negotiable investments with banks and government authorities. Interest-bearing deposits are

issued at face value paying a fixed interest rate over their life at maturity. Interest-bearing deposits can be issued for any duration although the Company typically holds only short dated deposits maturing within three months. Their carrying amount approximates fair value due to their short term to maturity.

Refer also note 21(c) for a maturity analysis of all financial assets and financial liabilities.


___________________________________________________________________________________________________________ Note 2009 2008 $’000 $'000 ___________________________________________________________________________________________________________

5. Trade and other receivables Current Non-trade debtors and accrued receivables: Parent 4,358 10,995 Other parties 5,365 3,865

________________________ Total trade and other receivables 9,723 14,860

________________________ Significant terms and conditions There were no trade debtors at the reporting date (2008: Nil) as the Company will not be able to earn revenue from supplying

desalinated water until the desalination plant currently being constructed becomes operational from 2009-10 onwards.

Accrued investment income is receivable within a maximum period of six months. Receivables for GST from the ATO are receivable monthly via the Parent. (Refer note 21(c)). All other receivables are expected to be realised within 12 months of the reporting date.

Refer also note 21(c) for a maturity analysis of all financial assets and financial liabilities. Ageing analysis of trade and other receivables

At the reporting date, all outstanding trade and other receivables are not past due and are expected to be realised at the amounts carried in the balance sheet when due.

Allowance for impairment

There was no allowance for impairment at the beginning or end of the reporting period and there was no movement during the reporting period.

6. Current tax payable or receivable Income tax payable or receivable by the Company in relation to the NTER is assumed by the Parent after initial recognition, as the

Parent is the head entity in the tax-consolidated group. The amount initially recognised, prior to assumption by the Parent, was an income tax receivable asset of $14.075 million (2008: $3.436 million) during the current reporting period.


7. Property, plant and equipment Non-current

(a) Movements and carrying amounts

2009 System land Work in

progress

Total

$’000 $’000 $’000 At 1 July 2008 – net carrying amount - 511,739 511,739 Additions - 513,512 513,512 Disposals - - - Reclassified as assets held for sale - - - Other reclassifications - - - Transfer from the Parent 49,000 - 49,000 Revaluation increases (+) and decreases (-), unrelated to impairments, recognised in the asset revaluation reserve

-

-

-


-

-

-


-

-

-

Impairment losses (-) recognised in the income statement in the line item ‘Other expenses’

-

-

-

Impairment losses reversed (+) recognised in the income statement in the line item ‘Other expenses’

-

-

-

Depreciation charge - - - At 30 June 2009 – net carrying amount 49,000 1,025,251 1,074,251


System land Work in

progress

Total

$’000 $’000 $’000 At 1 July 2008 Fair value:

Cost - 511,739 511,739 Independent market value 2008 - - - - 511,739 511,739

Accumulated depreciation - - - Accumulated impairment - - - - - - Net carrying amount - - - At 30 June 2009 Fair value:

Cost - 1,025,251 1,025,251 Independent market value 2008 49,000 - 49,000 49,000 1,025,251 1,074,251

Accumulated depreciation or amortisation - - - Accumulated impairment - - - - - - Net carrying amount 49,000 1,025,251 1,074,251


Period 13 June 2007 to 30 June 2008 System land Work in

progress

Total

$’000 $’000 $’000 At 13 June 2007 – net carrying amount - - - Additions - 473,516 473,516 Disposals - - - Reclassified as assets held for sale - - - Other reclassifications - - - Transfer from the Parent - 38,223 38,223 Revaluation increases (+) and decreases (-), unrelated to impairments, recognised in the asset revaluation reserve

-

-

-


-

-

-


-

-

-

Impairment losses (-) recognised in the income statement in the line item ‘Other expenses’

-

-

-


-

-

-

Depreciation charge - - - At 30 June 2008 – net carrying amount - 511,739 511,739


System land Work in

progress

Total

$’000 $’000 $’000 At 13 June 2007 Fair value:

Cost - - - Independent market value 2007 - - - - - -

Accumulated depreciation - - - Accumulated impairment - - - - - - Net carrying amount - - - At 30 June 2008 Fair value:

Cost - 511,739 511,739 Independent market value 2007 - - - - 511,739 511,739

Accumulated depreciation or amortisation - - - Accumulated impairment - - - - - - Net carrying amount - 511,739 511,739


(b) Land valuations

System land is land upon which the Company’s infrastructure assets, such as the desalination plant currently being constructed, are located and which has no other alternative use at the reporting date. Unless there is a specific business need to obtain an independent market valuation for particular system land parcels, the independent valuation used will be the current Valuer General’s market valuation that is used by local government for the purpose of rating properties, less an estimate of the cost that would be incurred by the Company in order to sell the land. Estimates of the costs to sell system land are determined internally based on recent sales experience in the particular area. Where system land has been identified as being surplus to requirements, it is reclassified as market land. An independent valuation is subsequently undertaken with an effective date of 1 July in the reporting period during which the reclassification has taken place. At each reporting date, a review of the property market is undertaken to determine whether there is evidence to suggest that there has been a material change in the fair values of land since the revaluation date. Where there has been a material change, the carrying amount in the balance sheet is adjusted accordingly. During the current reporting period, the Parent transferred the land parcels upon which the desalination plant is being constructed to the Company. An independent valuation of $49 million effective from 1 July 2008 was used as the fair value of the consideration for the transfer to take place. The form of consideration given by the Company to the Parent for the transfer of this land was the issue of additional share capital for an equivalent amount of $49 million. The cost to date of easements still in work in progress at the reporting date also form part of the basis of a transfer from the Parent to the Company. (Refer note 8(b)).

(c) Recoverable amount

Due to the nature of water industry assets, their recoverable amount is determined by the stream of future net cash inflows that can be derived from the use of the assets working together as an integrated network within the relevant cash-generating unit, rather than the realisable value of the assets themselves. Accordingly, the cash-generating unit test referred to in notes 1(i), 1(j) and 1(k) is a value in use calculation that calculates their recoverable amount using relevant estimated future net cash flows discounted to their present value for each cash-generating unit. The discount rate used is the weighted average cost of capital for the Company, as this is the rate that best represents the time value of money and the risks specific to the infrastructure assets within the Company as a single cash-generating unit under the current regulatory pricing environment. Undertaking a cash-generating unit test is highly dependent on the assumptions used to estimate the future net cash flows that are able to be derived from the relevant assets. This calculation therefore contains an element of subjectivity and uncertainty in relation to these assumptions, particularly in relation to long-lived infrastructure assets that are subject to a regulatory pricing environment. As the cash flows that are to be generated by the Company’s infrastructure assets are a direct function of the current regulatory pricing methodology undertaken by the Parent’s regulator, the Independent Pricing and Regulatory Tribunal (IPART), the Company has decided to align the estimation of its future cash flows for the purposes of the cash-generating unit test with the IPART regulatory pricing methodology. In this regard, the Company has developed its own model internally that complies with the same regulatory principles used by IPART. These principles involve determining a regulatory asset base (RAB) for the purpose of calculating an ‘annual revenue requirement’. The ‘annual revenue requirement’ is composed of the revenue stream, and therefore the future cash flows, attributable to the existing assets at the reporting date. The model used by the Company is a 100-year model, as this captures the future revenue streams and cash flows of all of the long-lived assets within the Company. It is consistent with the model used by the Parent for the Sydney Water Group as a whole, but only focuses on the relevant cash flows attributable to the Company’s assets working together as a single cash-generating unit. The model is based on a ‘real’ framework, rather than a ‘nominal’ framework. The IPART methodology used to determine prices for the Parent’s water, wastewater and stormwater services is often referred to as a ‘building blocks’ approach. Its purpose is to derive an ‘annual revenue requirement’ needed by the Parent to pay for the investment in its assets (‘return of’ capital), obtain an investment return (‘return on’ capital) and pay for its operating expenses. The same methodology has been applied to the Company’s assets as IPART has set prices for the Parent in the June 2008 Pricing Determination that include amounts attributable to the Company’s assets. The Company’s weighted average cost of capital is used in deriving the ‘annual revenue requirement’ and is an inherent part of the calculation at each Pricing Determination. Pricing Determinations generally occur every four years. In the previous reporting period, the Company used, for the cash-generating unit test, estimates of future cash inflows based on information taken from the June 2008 Pricing Determination and it assumed that these cash flows would increase by inflation over the weighted average life of its assets. In the current reporting period, the Company changed its approach to estimating its future cash flows to more closely reflect the long term regulatory pricing model used by IPART, as mentioned above. Cash outflows used in this approach include all estimated operating expenses that are considered to be efficient and hence passed through from a pricing perspective, as well as any future capital expenditure required to complete assets that are under construction and still in progress at the reporting date. Using this new estimation approach, the ‘annual revenue requirement’ derived for each year of the model decreases over the long term (rather than it increasing) as the RAB decays through regulatory depreciation. Accordingly, when discounting these amounts to present value, this approach results in a significantly reduced calculation for the recoverable amount when compared to the previous estimation approach where estimated cash inflows were indexed upwards by CPI over the period of discounting in a ‘nominal’ framework. The estimated financial impact of adopting this new estimation approach in relation to the current reporting period is a decrease in the recoverable amount calculation by approximately $0.3 billion. This estimated financial impact is indicative only as the two calculations are not directly comparable and therefore it is not practicable to determine the full impact with any degree of accuracy for either the current period or future periods. Even though there has been a decrease in the recoverable amount calculation, however, there is no financial impact on the carrying amount of the Company’s assets in the balance sheet. The major assumptions underlying the calculations for the cash-generating unit test for the Company as a whole, for both the current and previous reporting periods, are detailed in the table below for comparative purposes:


Item 2009 2008

Discount rate Pre-tax weighted average cost of capital of 10.2% pa ‘nominal’ (equivalent to a ‘real’ pre-tax rate of 7.5% pa)

Pre-tax weighted average cost of capital of 10.2% pa ‘nominal’ (equivalent to a ‘real’ pre-tax rate of 7.5% pa)

CPI rate Not applicable as modelling is undertaken in a ‘real’ framework (equivalent to a nominal CPI forecast of 2.5% pa)

2.5% pa in a ‘nominal’ framework

Period of discounting Maximum of 100 years or the economic lives of the assets as determined by IPART, whichever is the shorter.

46 years based on the weighted average life of the desalination plant assets

Cash inflows • Revenue

The ‘annual revenue requirement’ calculated from the IPART regulatory methodology for the full period of discounting, after rolling forward an estimated regulatory asset base value (RAB) from the beginning of construction. (Note: In contrast to the 2008 estimating approach, the ‘annual revenue requirement’ under this approach decreases as assets become fully depreciated, and significantly decrease the resulting recoverable amount). The ‘annual revenue requirement’ calculated from the IPART regulatory methodology based on an estimated RAB limited the ‘return of’ and ‘return on’ capital spending in future years to only the amount of capital expenditure required to complete the construction of the desalination plant in progress at 30 June 2009. Investment/interest income is excluded.

The ‘annual revenue requirement’ determined by IPART in the June 2008 Pricing Determination for the period 1 July 2008 to 30 June 2012, and thereafter indexed by CPI for a further 42 years (up to the 46 years in total). RAB not yet established. The ‘annual revenue requirement’ determined by IPART was adjusted to limit the ‘return of’ and ‘return on’ capital spending in future years to only the amount of capital expenditure required to complete the construction of the desalination plant in progress at 30 June 2008. Investment/interest income was excluded.

Cash outflows: • Operating expenditure

• Capital expenditure

Operating expenditure from budgets for the Company in the Parent’s Statement of Corporate Intent, excluding non-cash items such as depreciation. Capital expenditure required to complete the construction of the desalination plant in work in progress at 30 June 2009.

Operating expenditure based on the most recent estimates at 30 June 2008 for operating the desalination plant, indexed by CPI over 46 years. Capital expenditure required to complete the construction of the desalination plant in work in progress at 30 June 2008.

Sensitivity to changes in assumptions

With regard to the assessment of the recoverable amount of the Company’s assets, there are no reasonably possible changes in any of the above key assumptions that would cause the carrying value to materially exceed the recoverable amount.


8. Intangible assets Non-current

(a) Movements and carrying amounts

2009 Acquisitions

in progress

Total

$’000 $’000 At 1 July 2008 – net carrying amount - - Additions 268 268 Disposals - - Reclassifications - - Transfer from the Parent - - Impairment losses (-) recognised in the income statement in the line item ‘Other expenses’

-

-


-

-

Amortisation charge - - At 30 June 2009 – net carrying amount 268 268

Acquisitions

in progress

Total

$’000 $’000 At 1 July 2008 Cost - - Accumulated amortisation - - Accumulated impairment - - - - Net carrying amount - - At 30 June 2009 Cost 268 268 Accumulated amortisation - - Accumulated impairment - - - - Net carrying amount 268 268


Period 13 June 2007 to 30 June 2008 Acquisitions

in progress

Total

$’000 $’000 At 13 June 2007 – net carrying amount - - Additions - - Disposals - - Reclassifications - - Transfer from the Parent - - Impairment losses (-) recognised in the income statement in the line item ‘Other expenses’

-

-


-

-

Amortisation charge - - At 30 June 2008 – net carrying amount - -

Acquisitions

in progress

Total

$’000 $’000 At 13 June 2007 Cost - -

Accumulated amortisation - - Accumulated impairment - - - - Net carrying amount - - At 30 June 2008 Cost - - Accumulated amortisation - - Accumulated impairment - - - - Net carrying amount - -


(b) Recognition and Measurement The Company has intangible assets comprising easements that are recognised in the balance sheet, as follows:

Easements Easements are legal rights acquired by the Company to be able to gain access to its infrastructure assets when they are situated on, or under the surface of, land owned by parties external to the Company. Easements are determined to have indefinite lives, as there is no finite period over which their use is fully consumed. They convey a right to the Company to enable it to gain access to its infrastructure assets over an indefinite period of time. Unlike the infrastructure assets themselves, which are consumed over a finite period and undergo replacement to enable continuity of service, an easement can exist continuously throughout this period and beyond, and thus may never need to be released. Easements are only derecognised when a management decision has been made to relocate the relevant infrastructure asset and the need for the easement no longer exists. Since easements are viewed as having an indefinite life, they are not amortised. However, they are tested for impairment as part of the cash-generating unit test used to determine the recoverable amount of infrastructure assets of the cash-generating unit, being the Company as a whole. (Refer notes 7(b) and 7(c)). Any proportional impairment write-down to recoverable amount that is applied to the infrastructure assets of a cash-generating unit is also applied to the easements within the unit. They do not have their own recoverable amount separate from the infrastructure assets. During the current reporting period, the Parent transferred the land parcels upon which the desalination plant is being constructed to the Company, as well as associated easements. An independent valuation of $49 million effective from 1 July 2008 was used as the fair value of the consideration for the transfer of the land to take place. The form of consideration given by the Company to the Parent for the transfer of this land was the issue of additional share capital for an equivalent amount of $49 million. The cost to date of easements still in acquisitions in progress at the reporting date amounted to $0.268 million. When the final cost of the easements is known, the consideration for any transfer from the Parent will also be in the form of share capital in the next reporting period.


9. Deferred tax assets and liabilities

(a) Recognised and unrecognised deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

Assets Liabilities Net

2009

2008

2009

2008

2009

2008

$’000 $’000 $’000 $’000 $’000 $’000 Property, plant and equipment - - 17,852 3,782 17,852 3,782 Anticipated receipts and accrued expenses

(5)

(5)

-

-

(5)

(5)

Tax (assets) liabilities (5) (5) 17,852 3,782 17,847 3,777 Set-off of tax 5 5 (5) (5) - - Net tax (assets) / liabilities - - 17,847 3,777 17,847 3,777

There were no unrecognised deferred tax assets and liabilities for the Company at the reporting date.

(b) Movements in temporary differences

2009

Balance 1 July 2008

Recognised in income

Recognised in equity


$’000 $’000 $’000 $’000 Property, plant and equipment 3,782 14,070 - 17,852 Anticipated receipts and accrued expenses (5) - - (5) Net tax (assets) / liabilities 3,777 14,070 - 17,847

Period 13 June 2007 to 30 June 2008


Recognised in income

Recognised in equity


$’000 $’000 $’000 $’000 Property, plant and equipment - 3,436 346 3,782 Anticipated receipts and accrued expenses - (5) - (5) Net tax (assets) / liabilities - 3,431 346 3,777


___________________________________________________________________________________________________________ Note 2009 2008 $’000 $'000 ___________________________________________________________________________________________________________

10. Trade and other payables Current Trade payables: Other parties - 147

________________________ - 147 Non-trade payables and accrued expenses: Parent 2,455 3,333 Other parties 77,400 44,489

________________________ 79,855 47,822

________________________ Total trade and other payables 79,855 47,969

________________________ Significant terms and conditions

Trade accounts payable and accrued expenses (other than for interest on loans) are normally settled within 30 days. Accrued interest on loans and advances is generally payable within a maximum period of six months. Other non-trade payables are payable at various times throughout the reporting period. Trade and other payables are not secured against the assets of the Company.

Refer also note 21(c) for a maturity analysis of all financial assets and financial liabilities. 11. Borrowings Non-current

Long-term borrowings 917,584 440,430 ________________________

Total non-current borrowings 917,584 440,430


Financial accommodation

The Company obtains financial accommodation from the following facilities: • a ‘Come and Go’ short-term borrowing facility with NSW Treasury Corporation • long-term borrowing facilities with NSW Treasury Corporation.

These financing facilities are approved by the NSW Treasurer under the Public Authorities (Financial Arrangements) Act 1987. In addition to the above financing facilities, the Parent has provided a financial guarantee for the Company’s obligations under the

contract for the construction of the desalination plant at Kurnell. Details in relation to each of the above at the reporting date are provided below.


• ‘Come and Go’ short-term borrowing facility At the reporting date, the Company has a ‘Come and Go’ short term borrowing facility of $5 million (2008: $5 million) in place with

the NSW Treasury Corporation. This facility is in place until 30 June 2010. The ‘Come and Go’ facility is used extensively as part of the Company’s daily cash management function during the reporting period.

This facility was not utilised at the reporting date by the Company.

• Long- term borrowing facilities At the reporting date, the Company has approval to obtain long-term borrowing facilities from the central borrowing authority, the

NSW Treasury Corporation. The Company cannot borrow in its own name from the market. Instead, both new loans and the refinancing of maturing existing loans need to be arranged via the NSW Treasury Corporation, which raises borrowings on the Company’s behalf.

During the current reporting period, the approval of the NSW Treasurer obtained in the previous reporting period was still in place for

the Company to have a global borrowing limit up to $1.350 billion with the NSW Treasury Corporation up to 30 June 2010. Of this facility, loan proceeds of $476.828 million were drawn down during the current reporting period (2008: $445.711 million drawn down and $5.274 million repaid) and $432.416 million is still available to be drawn down from the facility in the next reporting period.

The long-term borrowings shown in this note consist of NSW Treasury Corporation loans only. These loans are not secured against the assets of the Company.

Loans are negotiated with either a floating interest rate, in which case the rate is reset periodically in accordance with the requirements of the Company, or at a fixed rate where interest is paid either half-yearly in arrears, or on maturity of short-term loans. When construction of the desalination plant at Kurnell is completed, it is expected that any maturing loans at that time will initially be refinanced. Subsequently, loans will be repaid over time when the Company is able to earn revenue in its own right from operating and maintaining the plant. Short-term debt facilities have a term to maturity of between one and six months, while fixed rate bond style loans currently have maturities up to 14 years. NSW Treasury Corporation loans outstanding at the reporting date, inclusive of any deferred discounts or premiums on the loans, totalled $917.584 million (2008: $440.430 million) for the Company.

For details in respect of the maturity analysis of these long-term borrowings, refer to note 21(c).

• Financial guarantees Under the contract between the Company and the contractors for the design and construction of the desalination plant at Kurnell, the Parent has provided the contractors with a financial guarantee covering all of the financial obligations of the Company under the contract in the event of a default by the Company. At the reporting date, the Company has a remaining capital commitment of $191.852 million (2008: $597.919 million) under the contract for the design and construction of the desalination plant. (Refer also note 17). This remaining commitment represents the maximum possible exposure to the Parent at the reporting date in the event that the Company defaults on all of its future payments to the contractors. However, as the Company has the NSW Treasurer’s approval to obtain total financial accommodation up to an amount of $1.355 billion in its own right from NSW Treasury Corporation until 30 June 2010 in order to meet all of its obligations under the contract, the Company has ready access to funds on a daily basis as required and it is most unlikely that it would be in a position to default on any of its future payments during the approval period.


___________________________________________________________________________________________________________ Note 2009 2008 $’000 $'000 ___________________________________________________________________________________________________________

12. Share capital (a) Carrying amounts Issued and fully paid up share capital 86,876,581 (2008: 37,876,581) ordinary shares 86,877 37,877


The Company is wholly owned by its Parent, Sydney Water Corporation. Any changes to the Company’s share capital can only be undertaken in accordance with the Company’s constitution and with the agreement of the Parent. There are no restrictions to dividends payable to the Parent. Under the NTER, the Company is not required to maintain a dividend franking account.

(b) Movements during the reporting period

Balance at beginning of period 37,877 - Shares issued as consideration for acquisition of assets from the Parent: Work in progress (net of deferred tax liabilities) - 37,877 Land 49,000 -

________________________ Balance at end of period 86,877 37,877

________________________ In the current reporting period, an amount of $49 million of share capital was issued to the Parent as consideration for the Company acquiring from the Parent the land parcels upon which the desalination plant at Kurnell is being constructed. (Refer note 7(b)). In the previous reporting period, $37.877 million of share capital was issued to the Parent as consideration for the Company acquiring from the Parent work in progress costs totalling $38.223 million (offset by deferred tax liabilities of $0.346 million) directly related to the construction of the desalination project. These work in progress costs were initially incurred by the Parent prior to the Company’s incorporation, with the intention that they would ultimately be disposed to the Company as part of establishing its initial equity structure.

13. Other contributed (distributed) equity Assumption by the Parent of the Company’s current tax liabilities (assets) under tax consolidation (17,511) (3,436)

________________________ 14. Retained earnings (accumulated losses) Balance at beginning of period (13) - Profit (loss) attributable to equity holders of the Company (12) (13)

________________________ Balance at end of period (25) (13)

________________________ 15. Total equity reconciliation Balance at beginning of period 34,428 - Total recognised income and expense attributable to equity holders of the Company in the statement of recognised income and expense (12) (13) Transactions with owners as owners: Shares issued to Parent 12(b) 49,000 37,877 Other contributed (distributed) equity from assumption of tax balances 13 (14,075) (3,436)

________________________ Balance at end of period 69,341 34,428

________________________


___________________________________________________________________________________________________________ 13.6.2007 to Note 2009 30.6.2008 $’000 $'000 ___________________________________________________________________________________________________________

16. Notes to the cash flow statement (a) Reconciliation of profit (loss) to net cash from operating activities Profit (loss) for the period (12) (13) Adjustments for: Income statement items classified as either investing or financing: Borrowing costs capitalised to work in progress 2(b) (46,899) (11,452) Amortisation of deferred discounts (premiums) on loans 2(b) 325 (7) Net movement in balance sheet items applicable to operating activities: Trade and other receivables 5,137 (14,860) Trade and other payables 17,905 5,866 Income tax assets and liabilities (5) (5)

________________________ Net cash from operating activities (23,549) (20,471)

________________________ (b) Non-cash financing and investing activities Assets acquired by the Company during the reporting period for which shares were issued as consideration are not included in the

cash flow statement as these are regarded as non-cash. During the reporting period, this amounted to $49 million for land parcels used for the construction of the desalination plant (2008: $38.223 million for work in progress costs) acquired from the Parent. (Refer also note 12(b)).

(c) Standby credit arrangements Details of financial accommodation facilities for the Company are disclosed in note 11.


___________________________________________________________________________________________________________ Note 2009 2008 $’000 $'000 ___________________________________________________________________________________________________________

17. Commitments Capital expenditure commitments

• Property, plant and equipment Contracted but not provided for and payable: not longer than one year 191,852 456,601 longer than one year but not longer than five years - 141,318

________________________ 191,852 597,919

________________________

Amounts disclosed for these commitments include total GST of $17.018 million (2008: $54.356 million) for the Company that is recoverable from the ATO via the Parent.

Other expenditure commitments

• Operation and maintenance Contracted but not provided for and payable: not longer than one year 8,110 - longer than one year but not longer than five years 115,641 101,607 longer than five years 751,668 790,928

________________________ 875,419 892,535

________________________

Amounts disclosed for these commitments include total GST of $79.584 million (2008: $81.139 million) for the Company that is recoverable from the ATO via the Parent.

• Supply of other services Contracted but not provided for and payable: not longer than one year 16,253 - longer than one year but not longer than five years 202,891 - longer than five years 1,100,283 -

________________________ 1,319,427 -

________________________

Amounts disclosed for these commitments include total GST of $119.948 million (2008: Nil) for the Company that is recoverable from the ATO via the Parent.


___________________________________________________________________________________________________________ 13.6.2007 to Note 2009 30.6.2008 $’000 $'000 ___________________________________________________________________________________________________________

18. Consultants During the current or previous reporting periods, there were no amounts paid or payable to consultants by the Company. 19. Auditors' remuneration Audit services Remuneration for audit or review of the financial report of the Company: Auditors of the Company 17 18

________________________ 17 18

________________________ 20. Related party disclosures

The Company has related party relationships with key management personnel (refer (a) below), their related entities (refer (b) below), the Parent (refer (c) below) and other related parties (refer (d) below).

(a) Key management personnel compensation Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly. This comprises all directors, whether executive or non-executive, and senior executives of the Parent who manage the business operations of the Company.

There was no compensation paid by the Company to key management personnel during the reporting period.

(b) Other transactions with key management personnel and related entities Any transactions undertaken with entities related to key management personnel are conducted on an arm's length basis in the normal course of business and on commercial terms and conditions. During the current and previous reporting periods, there were no transactions with such entities.

(c) Transactions with the Parent

The Parent provides the Company with all of the resources and services necessary for the Company to fulfil its contractual obligations for the construction of the desalination plant at Kurnell. Services provided to the Company by the Parent include engineering consulting and project management. Additionally, the Parent passes through to the Company all refunds for GST attributable to the Company that have been received from the ATO following the lodgement of the Sydney Water Group’s monthly Business Activity Statement, as all subsidiaries in the Sydney Water Group are grouped with the Parent for GST purposes. In providing its services and resources to the Company under the current trading arrangements, the Parent charges for its services based upon an assessment of direct costs and a factor to cover local and corporate overheads. The following is a summary of related party transactions and balances with the Parent:

Purchase of services for capital expenditure from the Parent 14,473 16,924

________________________

Net assets acquired from the Parent as consideration for shares issued during the period 12(b) 49,000 37,877

________________________


___________________________________________________________________________________________________________ Note 2009 2008 $’000 $'000 ___________________________________________________________________________________________________________

Income tax liabilities (assets) assumed from the Company by the Parent during the period 13, 15 (14,075) (3,436)

________________________ Trade and other receivables outstanding * 5 4,358 10,995

________________________ Trade and other payables outstanding 10 2,455 3,333

________________________

* This relates to the Company’s GST refund receivable from the Parent for the June 2009 Business Activity Statement (2008: June 2008 Business Activity Statement). In relation to this receivable, no allowance for impairment has been recognised as each GST receivable amount is received from the Parent on a monthly basis.

(d) Transactions with other related parties There were no transactions with other related parties in the current or previous reporting periods.


21. Financial risk management disclosures Financial instruments and financial risk factors The Company undertakes transactions in a range of financial instruments including:

• cash (refer note 4) • investments in marketable securities (refer note 4) • receivables (refer note 5) • payables (refer note 10) • borrowings (refer note 11)

These financial instruments expose the Company to a range of financial risks in the normal course of its business operations. These risks include market risk (which includes foreign currency risk and interest rate risk), credit risk and liquidity risk. Financial risk management policies, objectives and reporting The risks outlined above for the Company are managed by staff within the Parent, Sydney Water Corporation, as part of the overall management of the Sydney Water Group. The Parent has put in place treasury management policies approved by its Board that are applicable to both the Parent and the Company. These policies provide a framework of strict controls within the Sydney Water Group so as to manage the impact of these exposures on the financial results of the Sydney Water Group and the entities within it. The policies have also been set to operate in a manner that sits within the overall framework of the Public Authorities (Financial Arrangements) Act 1987 in NSW. The policies cover a number of aspects such as:

• approved delegation levels and segregation of duties for dealing, authorising and settling treasury management transactions • approved credit limits for dealing with counterparties • the types of treasury transactions, including derivatives, that can be entered into • approved limits for hedging foreign exchange exposures • the structure of debt and investment portfolios • approved benchmarks for managing performance.

Reporting of treasury and financial risk management performance to the Parent’s Board occurs on a quarterly basis, with specific treasury management matters being reviewed by the Finance Committee, a sub committee of the Parent’s Board, also on a quarterly basis. Treasury management strategies and performance are also reported on and reviewed on a monthly basis by a Treasury Committee of senior finance managers within the Finance and Regulatory Division of the Parent. In addition, the NSW Treasury conducts regular reviews of the Sydney Water Group’s treasury management activities as to their compliance with the Public Authorities (Financial Arrangements) Act 1987. Use of derivative financial instruments and hedge accounting Derivative financial instruments to manage exposure to foreign currency risk are usually undertaken by the Parent on behalf of the Company. The instruments can include forward foreign exchange contracts and foreign exchange options. Typically, the most common that would be used are forward foreign exchange contracts. Derivative financial instruments are used for hedging purposes only. The Parent does not enter into or trade them for speculative purposes. Strict internal guidelines and treasury management policies approved by the Parent’s Board exist to control the use of derivative financial instruments for the Sydney Water Group. There were no derivative financial instruments in place at the reporting date for the Company and accordingly hedge accounting was not required. Financial risk exposures (a) Market risk Market risk is the risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises two types of financial risk for the Company: foreign currency risk and interest rate risk. • Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The objective in managing foreign currency risk is to minimise the impact that changes in foreign exchange rates will have on the Company’s financial outcomes. At the reporting date, the Company is not exposed to foreign currency risk as this risk is borne by the contractor under the contractual arrangement to construct the desalination plant at Kurnell. Exposure to foreign currency risk for the Company would only arise from contractual arrangements for the purchase or supply of goods and services where payment is either required to be made in foreign currency or is pegged to foreign currency rates. There were no such contracts in place at the current or previous reporting dates.


The policies for management of any foreign currency risks arising from contractual arrangements for the purchase or supply of goods and services are contained in the Parent’s Treasury Management Policy manual. These policies include hedging of all foreign currency exposures in excess of Australian Dollars (AUD) 1,000,000 and foreign currency exposures above AUD 500,000 that exceed 90 days. This is done by entering into forward foreign exchange contracts to hedge the relevant purchase commitments. Under such contracts, the Company or Parent agrees to exchange specified amounts of various currencies at an agreed future date at a specified exchange rate. Forward foreign exchange contracts can vary in duration from less than one month to several years. It is the Sydney Water Group’s policy not to enter forward foreign exchange contracts until a firm commitment is in place and to negotiate the terms of these cash flow hedging derivatives to match the terms of the hedged item in order to maximise hedge effectiveness. • Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The objective in managing interest rate risk is to manage the impact that changes in interest rates will have on the Company’s financial outcomes. The Company is exposed to changes in market interest rates. Although there is a small exposure arising from cash and investment portfolios, the main exposure arises primarily from the Company’s portfolio of interest-bearing short and long-term borrowings. The Company manages this exposure by implementing treasury management policies and controls approved by the Parent’s Board. These controls specify the minimum and maximum percentages of debt issuance in maturity bands, approved parameters limiting the maximum exposure to floating interest rate debt products, portfolio duration management targets and approved trading bands for the Sydney Water Group. The Company and the Parent constantly analyse the Company’s interest rate exposure arising from the extensive use of borrowing facilities with the NSW Treasury Corporation to fund the significant capital works program of the Company. Within this analysis, consideration is given to potential renewals of existing positions, possible hedging strategies and the appropriate mix of fixed and variable interest rates for debt undertaken in light of current and expected conditions in the economy that may affect interest rates. Debt portfolios are managed within approved parameters and compared with approved benchmark positions in order to minimise the impact of interest rates on finance costs over the long term and to measure portfolio performance. The Company’s exposure to interest rate risk increased during the current reporting period due to increased debt levels. However, decreases in interest rates in the Australian economy following on from the Reserve Bank of Australia’s response to manage the impact of the current global financial crisis on the Australian economy was favourable for short term debt financing costs. These movements in interest rates in the current and previous reporting periods have occurred at a time when a significant level of debt has been borrowed to fund the Company’s ongoing capital works program for those periods. The Company’s interest rate exposure is managed strategically by placing new and maturing debt for fixed maturity periods in order to lengthen the modified duration of the debt portfolio over time, while still maintaining a short-term variable rate proportion of debt in line with parameters approved by the Parent’s Board under current treasury management policies. At the reporting date, there were no derivative financial instruments outstanding for managing interest rate risk for the Company. The following table details the carrying amounts of financial assets and financial liabilities, including their weighted average interest rates, that are exposed to interest rate risk at the reporting date and that are not designated in cash flow hedges: ___________________________________________________________________________________________________________ Weighted Average Interest Carrying amount Rate 2009 2008 2009 2008 Note % % $’000 $’000 ___________________________________________________________________________________________________________ Financial assets Cash 4 3.98 6.18 385 5

________________________

385 5 ________________________

Financial liabilities Borrowings: NSW Treasury Corporation loans 11 5.77 7.18 917,584 440,430

________________________

917,584 440,430 ________________________


Sensitivity Analysis The following table shows the effect on profit or loss and equity after tax at the reporting date if nominal interest rates had been 100 basis points (that is, one percentage point) higher or lower than current levels, with all other variables being held constant and taking into account all underlying exposures and related hedges if any. Although interest rates markets have been extremely volatile during the current reporting period, a sensitivity of 100 basis points has been used as this is considered reasonable based on the current level of both short-term and long-term NSW Treasury Corporation and Australian interest rates. Based on the value of the Australian short-term interest rates (one month Bank Bill Swap Rate – BBSW) at the reporting date of 3.15 per cent (2008: 7.61 per cent), a 100 basis points increase would increase the rate to 4.15 per cent (2008: 8.61 per cent) and a 100 basis points decrease would reduce the rate to 2.15 per cent (2008: 6.61 per cent). This is broadly representative of four previous rate increases, which is reasonably possible given historical movements in official interest rates by the Reserve Bank of Australia (RBA). Historically, the RBA official cash rate has fluctuated between 3 per cent and 7.25 per cent over the past five years. ___________________________________________________________________________________________________________ Finance costs* Post tax profit or loss* Equity* Higher (lower) Higher (lower) Higher (lower) Judgement of reasonably 2009 2008 2009 2008 2009 2008 possible events $’000 $’000 $’000 $'000 $’000 $'000 ___________________________________________________________________________________________________________ Interest rates 100 basis points higher 3,513 1,224 (2,459) (857) (2,459) (857) Interest rates 100 basis points lower (3,513) (1,224) 2,459 857 2,459 857

* The impact shown above is before capitalisation to qualifying assets and any consequential tax consolidation adjustments. After capitalisation and consequential tax consolidation adjustments, there would be no impact on finance costs or post tax profit or loss. However, equity would be lower by $1.054 million (2008: $0.367 million) for a 100 basis points increase, and vice versa.

(b) Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. In this context, it refers to the risk that indebted counterparties will default on their contractual obligations, resulting in financial loss to the Company. Exposures to credit risk for the Company exist in respect of all financial assets recognised in the balance sheet, such as trade and other receivables and cash and cash equivalents. In respect of trade and other receivables, the Company monitors balances outstanding on an ongoing basis and uses the Parent’s policies for the recovery or write-off of amounts outstanding. In respect of cash and cash equivalents, the Company only deals with creditworthy counterparties and recognised financial intermediaries as a means of mitigating against the risk of financial losses from defaults. Policies are in place to monitor the credit ratings of counterparties and to limit the amount of funds placed with those counterparties, depending on their credit rating. In addition, only highly liquid marketable securities are used for any investment purposes. At the reporting date, there were no significant concentrations of credit risk in which the Company is significantly exposed to any single counterparty or group of counterparties having similar characteristics. At the reporting date, the maximum exposure to credit risk for the Company is represented by the carrying amount of each financial asset in the balance sheet. (Refer notes 4 and 5). (c) Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is managed by the Parent for the Company through the maintenance of extensive short-term and long-term cash flow forecasting models, and through the availability of financial accommodation facilities approved by the Treasurer of NSW under the Public Authorities (Financial Arrangements) Act 1987. These facilities include a long-term fixed borrowing facility with the NSW Treasury Corporation and a ‘Come and Go’ short-term borrowing facility with the NSW Treasury Corporation. Details of all financial accommodation facilities for the Company are shown in Note 11. The objective of managing liquidity risk using the above facilities is to maintain a balance of funding and flexibility in ensuring cash is available each day to meet the Company’s financial obligations, whilst maintaining a daily bank balance with minimum surplus funds (with a target of between $Nil and $2 million on at least 80 per cent of calendar days). In addition, the Company’s and Parent’s treasury management policies limit debt with terms to maturity of less than three months to only 30 per cent of total borrowings within their debt portfolios. During the current reporting period, the Company’s liquidity risk increased due to the additional funding required to meet commitments under its continuing capital works program. The exposure to this increased liquidity risk was managed by obtaining the approval of the NSW Treasurer to secure the appropriate levels of both long-term fixed and short-term borrowing facilities with NSW Treasury Corporation, and using the facilities in accordance with the Parent’s approved policies for cash flow management, so that all commitments could be met as and when they fell due.


Maturity analysis of financial assets and financial liabilities recognised in the balance sheet The following tables reflect the maturity bands for the settlement of the carrying amounts of financial assets and financial liabilities recognised in the balance sheet of the Company at the reporting date. ________________________________________________________________________________________________________________________________________________________________ Repricing or maturing in: 2009 Less than 1 to 2 2 to 3 3 to 4 4 to 5 More than Total Note 1 year years years years years 5 years $’000 $’000 $’000 $’000 $’000 $’000 $’000 ________________________________________________________________________________________________________________________________________________________________ • Financial assets Cash 4 385 - - - - - 385 Trade and other receivables 5 9,723 - - - - - 9,723 ___________________________________________________________________________________________ 10,108 - - - - - 10,108 ___________________________________________________________________________________________ • Financial liabilities Trade and other payables 10 79,855 - - - - - 79,855 Borrowings: NSW Treasury Corporation loans 11 513,336 221,859 - - - 182,389 917,584 ___________________________________________________________________________________________ 593,191 221,859 - - - 182,389 997,439 ___________________________________________________________________________________________


________________________________________________________________________________________________________________________________________________________________ Repricing or Maturing in: 2008 Less than 1 to 2 2 to 3 3 to 4 4 to 5 More than Total Note 1 year years years years years 5 years $’000 $’000 $’000 $’000 $’000 $’000 $’000 ________________________________________________________________________________________________________________________________________________________________ • Financial assets Cash 4 5 - - - - - 5 Trade and other receivables 5 14,860 - - - - - 14,860 ___________________________________________________________________________________________ 14,865 - - - - - 14,865 ___________________________________________________________________________________________ • Financial liabilities Trade and other payables 10 47,969 - - - - - 47,969 Borrowings: NSW Treasury Corporation loans 11 122,428 161,616 96,720 - - 59,666 440,430 ___________________________________________________________________________________________ 170,397 161,616 96,720 - - 59,666 488,399 ___________________________________________________________________________________________


Contractual maturities of all cash flows from financial liabilities The following table reflects the maturity bands for all contractual payments for settlement, including repayments of principal and interest, resulting from recognised financial liabilities as at the reporting date for the Company. For these obligations, the respective undiscounted cash flows for the maturity bands shown are presented. ________________________________________________________________________________________________________________________________________________________________ Repricing or maturing in: Less than 1 to 2 2 to 3 3 to 4 4 to 5 More than Total Note 1 year years years years years 5 years $’000 $’000 $’000 $’000 $’000 $’000 $’000 ________________________________________________________________________________________________________________________________________________________________ 2009 Trade and other payables 10 79,855 - - - - - 79,855 Borrowings: NSW Treasury Corporation loans 564,191 241,196 11,700 11,700 11,700 277,500 1,117,987 __________________________________________________________________________________________ 644,046 241,196 11,700 11,700 11,700 277,500 1,197,842 __________________________________________________________________________________________ 2008 Trade and other payables 10 47,969 - - - - - 47,969 Borrowings: NSW Treasury Corporation loans 143,994 183,617 103,851 3,900 3,900 88,400 527,662 __________________________________________________________________________________________ 191,963 183,617 103,851 3,900 3,900 88,400 575,631 __________________________________________________________________________________________


Fair values of financial assets and financial liabilities

Fair values of financial assets and financial liabilities are determined on the following bases:

• Cash The carrying amount is considered to be a reasonable approximation of the fair value.

• Cash equivalents Fair values are determined on the basis of discounted cash flows using valuation rates supplied by independent market sources.

• Trade and other receivables The carrying amount is considered to be a reasonable approximation of the fair value.

• Trade and other payables The carrying amount is considered to be a reasonable approximation of the fair value.

• Borrowings

• NSW Treasury Corporation loans

Fair values are determined on the basis of discounted cash flows using valuation rates supplied by independent market sources.

For cash and cash equivalents, trade and other receivables, trade and other payables, carrying values in the balance sheet for the

Company equate to their fair value. The following table details the carrying amounts and fair values at the reporting date for those financial instruments in which the carrying amount is different to their fair value:

___________________________________________________________________________________________________________ Carrying amount Fair value Note 2009 2008 2009 2008 $’000 $’000 $’000 $’000 ___________________________________________________________________________________________________________

• Financial liabilities Borrowings: NSW Treasury Corporation loans 11 917,584 440,430 951,782 439,906 ____________________________________________________ 917,584 440,430 951,782 439,906 ____________________________________________________ Management of capital The Company’s objective when managing capital is to safeguard its ability to continue as a going concern, and ultimately to provide

appropriate returns for its Parent when required whilst providing benefits for the community within the Parent’s area of operations. This is achieved by maintaining an optimal capital structure that aims to minimise or reduce the cost of capital, whilst at the same time ensuring the Company’s operations and capital works objectives are achieved and the Company is well-positioned for its future strategic direction.

The Company’s capital structure is monitored throughout each reporting period on the basis of key performance indicators, such as

the level of gearing (see below), within the context of adding value to the Sydney Water Group as a whole. In determining appropriate prices for desalination as part of the Parent’s Pricing Determination, IPART, the Company’s and the

Parent’s pricing regulator, has adopted a gearing assumption of 60 per cent for the purposes of determining the Company’s weighted average cost of capital (WACC). The WACC is a key input in IPART’s regulatory pricing methodology in which a regulated asset base is used to determine the ‘annual revenue requirement’ (and ultimately prices to be charged to customers) for the Parent, including the portion relating to desalination, based on the efficient use of resources and an appropriate rate of return on capital invested.

The table below shows the level of capital employed at the reporting date for the Company, as well as the gearing ratio used in the

management of capital based on the definitions within the NSW Treasury’s Commercial Policy Framework.


___________________________________________________________________________________________________________ Note 2009 2008 $’000 $'000 ___________________________________________________________________________________________________________ Interest-bearing debt 11 917,584 440,430 Other interest-bearing liabilities - -

________________________ Total interest-bearing liabilities 917,584 440,430 Total equity 15 69,341 34,428

________________________ Total capital employed 986,925 474,858

________________________

% %

Gearing ratio (Interest-bearing debt / Interest-bearing debt + Total equity) 93.0 92.8 The Company is currently highly geared in its capital structure with a significant debt to equity ratio. This is due to the financing of the

construction of the desalination plant at Kurnell predominantly being sourced through approved debt facilities with the NSW Treasury Corporation. (Refer note11). This trend is expected to continue during the period of the plant’s construction as more debt is taken up to finance the construction.

22. Segment reporting

The Company operates in one business segment of water and water-related services, through the construction and the ongoing operation and maintenance of a desalination plant, and in one geographical segment of Kurnell, NSW, Australia.

23. Contingencies

To the best of their knowledge and belief, the directors are not aware of any contingent liabilities or contingent assets existing at the reporting date that would result in a material cost, loss or economic benefit to the Company.

End of audited financial Statements





Appendix request 4(a) Where the applicant is an existing corporation, please provide the following documents in an Appendix:

• Copies of tax returns for the last three years • Credit rating memorandum

Outline relating to question 4(a) There are no tax returns for SDP. As a subsidiary, it forms part of a tax-consolidated group with Sydney Water being the head entity. Therefore, there is one group tax return completed by Sydney Water, and all payments made to the Office of State Revenue and correspondence / returns lodged with the ATO are made by Sydney Water on behalf of the entire group. Sydney Water transacts separately with SDP in relation to satisfying any tax payable by it or tax refunds due to it through equity adjustments. The Company is a wholly owned subsidiary of Sydney Water Corporation. Sydney Water’s stand alone credit rating is Commercial-in-Confidence and has been provided to IPART.




PART 4 – APPENDIX 4B

Q 4(b) What is the projected financial performance of the proposed activities?

Appendix request for 4(b) Please attach the following documents in an Appendix: • Projected cash flows for a minimum of the next five (5) years of operation

(including projected closing balance sheets and profit and loss statements), taking into account the licensing agreements, with details of all key financial modelling assumptions.

Outline in relation to 4(b) This information is confidential and has been provided to IPART.




PART 4 – APPENDIX 4C

Q 4(c) How will the applicant corporation finance the proposed activity?

Appendix request for 4(c) Please attach the following documents in an Appendix: • A copy of guarantee or cross deed of indemnity provided by the parent

entity. Outline in relation to 4(c) Sydney Water has issued parent company guarantees to the following contractors to SDP Pty Limited: John Holland Pty Ltd and Veolia Water Australia Pty Ltd (for the Design

and Construct contract) BBP Energy Markets Pty Limited (for the Electricity Supply Agreement) Renewable Power Ventures Pty Ltd (for the Renewable Energy

Certificate Supply Agreement). Finally, SDP Pty Limited is also the beneficiary of the following parent company guarantees: Leighton Holdings (for the involvement of John Holland Pty Ltd in the

Design and Construct contract) Veolia Eau – Compagnie Generale Des Eaux (for the involvement of

Veolia Water Australia Pty Ltd in the Design and Construct contract) Veolia Eau – Compagnie Generale Des Eaux (for the Operate and

Maintain contract with Veolia Water Australia Pty Ltd) Alinta Energy Services Pty Ltd (formerly known as Babcock & Brown

Power Limited) (for the involvement of BBP Energy Markets Pty Limited in the Electricity Supply Agreement)

Infigen Energy Limited (formerly known as Babcock & Brown Wind Partners Pty Ltd) (for the involvement of Renewable Power Ventures Pty Ltd in the Renewable Energy Certificate Supply Agreement).

A copy of these guarantees can be found on Sydney Water’s website at: www.sydneywater.com.au/Water4Life/Desalination/overalldocumentation.cfm

http://www.sydneywater.com.au/Water4Life/Desalination/overalldocumentation.cfm




PART 4 – APPENDIX 4D

Q 4(d) Do you have appropriate insurance arrangements in place?

3 March 2010 TMF Reference No: TMF212/0910

Suncorp Place. 18 Jamison Street, Sydney NSW 2000 GPO Box 2601, Sydney NSW 2001

Fax 61 2 8121 0694 www.riskinsite.com.au

GIO General Limited - an Agent for the NSW Treasury Managed Fund ABN 22 002 861 583

To Whom It May Concern,

CERTIFICATE OF CURRENCY

This will confirm that commencing from the inception dates below, until cancelled, the Sydney Water Corporation (including Sydney Desalination Plant Pty Ltd), is a member of the NSW Treasury Managed Fund (TMF), which provides insurable risk protection in accordance with the TMF Contract of Coverage. The Sydney Water Corporation (including Sydney Desalination Plant Pty Ltd), and their employees and volunteers, is fully covered for their legal liability to any third party arising out of their operations, worldwide, as follows: This includes, but is not limited to:

Legal liability inclusive of; o Public Liability for an amount of $500 million in respect of each and every occurrence and

unlimited in the aggregate happening during the period of cover, o Professional Indemnity for an amount of $200 Million in respect of any one claim and limited

in the aggregate happening during the period of cover, and o Product Liability for an amount of $500 Million in respect of any one claim and limited in the

aggregate happening during the period of cover. Identifier No. MF101093 Inception Date: 31/7/2008

Comprehensive Motor Vehicle coverage in respect of all vehicles owned or leased by Sydney Water Corporation (including Sydney Desalination Plant Pty Ltd).

Identifier No. MF101024 Inception Date: 31/7/2008

Property coverage (including plate glass) on a full replacement (new for old) basis, including consequential loss, worldwide, for loss and/or damage to all real and personal property either owned by, or the responsibility of the Sydney Water Corporation (including Sydney Desalination Plant Pty Ltd).

Identifier No. MF101025 Inception Date: 31/7/2008

NOTE: The Treasury Managed Fund hereby agrees that should such coverage be cancelled or withdrawn for any reason, 30 days notice will be provided.

Yours sincerely,

Eddie Dunaj Client Services Manager NSW TREASURY MANAGED FUND Phone No: (02) 8121 3678 Email : [email protected]

mailto:[email protected]

Documents

Sydney Desalination Plant Pty Ltd - IPART - … Desalination Plant Pty Ltd Application to IPART for Network Operator and Retail Supplier Licence Water Industry Competition Act 2006