Discounted Cash Flow Valuation Model Water Infrastructure ... Masterclass/Logan City Council... ·...
Transcript of Discounted Cash Flow Valuation Model Water Infrastructure ... Masterclass/Logan City Council... ·...
Introduction – Logan City
• Logan City situated in the heart of South East Queensland
• 63 suburbs • More than 300,000 people • Fifth largest local government area (by population)
in Australia • Third largest budget • Covers 957 square kilometres
Change in Accounting Policy
• During 2013/2014 Logan City Council (LCC) worked with QAO, QTC & Deloittes to change the valuation methodology of its Water Infrastructure Assets
• We moved from Depreciated Replacement Cost (DRC) to Discounted Cash Flow (DCF)
Change in Accounting Policy
• Initial valuation of $1.827 billion based on
DRC as at 1 July 2012 after the return of water from Allconnex Water (AW)
• Revised to $1.15 billion based on changed valuation methodology to DCF
• $677 million or 37% reduction in value
Valuation as at 30 June 2014
For 2013/14"• The carrying value of Council’s water infrastructure assets was $1.382 billion as" at 30 June 2014."• Depreciation expense of $24.5 million for the year.
How we made the change
• Reviewed the nature of the water business • Reviewed the accounting standards • Developed a water and sewerage assets
valuation position paper • Held initial meetings with key stakeholders • Developed a water and sewerage assets
valuation methodology
How we made the change
• Made changes to Council’s Revaluation of Non- Current Assets Policy
• Refined our 10 year water business financial model
• Established a DCF valuation model • Input 10 year financial model information
into DCF valuation tool
How we made the change
• Reviewed DCF model results for reasonableness
• Reviewed impact on financial statements –change in accounting policy
• Prepared final valuation work papers for audit
Consequence of change
• A reduction in depreciation • Move from operating deficit to surplus • An improvement in our asset sustainability
ratios • Alignment of valuation approach with other
water service providers in South East Queensland which are subject to the QCA Regulatory Framework ie QUU, Unitywater and SEQWater.
Consequence of change Con’t
• An opportunity to smooth asset valuations on a year by year basis by using future cashflows of the business
• An alignment of pricing and depreciation methodologies
Where to from here
But we can’t stand still as: • Spending on renewals changes each year (impact on asset sustainability ratio) • Asset base increase yearly (donated assets, assets constructed and annual revaluations) • Still a large value of assets under DRC valuation methodology
Where to from here
• LCC now has a focus on Stormwater Drainage Assets to review: Ø The componentisation of assets Ø The use of new technology as modern
equivalent (pipe relining) Ø The assets estimated useful lives
• Early indications are that the overall life of the stormwater drainage assets may be extended.