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Sydney Desalination Plant Pty Limited

Financial Statements for the year ended

30 June 2010

Sydney Desalination Plant Pty Limited - 30 June 2010

Contents Statement of comprehensive income Page 3 Statement of financial position Page 4 Statement of changes in equity Page 5 Statement of cash flows 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 1 4. Cash and cash equivalents Page 22 5. Trade and other receivables Page 23 6. Other current assets Page 23 7. Current tax payable or receivable Page 23 8. Property, plant and equipment Page 24 9. Intangible assets Page 30 10. Deferred tax assets and liabilities Page 33 11. Trade and other payables Page 34 12. Borrowings Page 34 13. Share capital Page 36 14. Other contributed (distributed) equity Page 36 15. Retained earnings (accumulated losses) Page 36 16. Total equity reconciliation Page 36 17. Notes to the statement of cash flows Page 37 18. Commitments Page 38 19. Consultants Page 39 20. Auditors’ remuneration Page 39 21. Related party disclosures Page 39 22. Financial risk management disclosures Page 41 23. Contingencies Page 48 Directors’ Declaration Page 49 Independent Auditor’s Report Page 50

Sydney Desalination Plant Pty Limited - 30 June 2010 Page 2

Start of audited financial statements

Note 2010 2009$'000 $'000

Revenue 2(a) 6,106 -

Finance costs 2(b) (3,498) -

Other expenses 2(b) (5,899) (17)

Profit (loss) before income tax (3,291) (17)

Income tax (expense) income 3(a), (b) 987 5

Profit (loss) for the period (2,304) (12)

Total comprehensive income for the period (2,304) (12)

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


Statement of comprehensive income

for the year ended 30 June 2010


Note 2010 2009$'000 $'000

Current assets

Cash and cash equivalents 4 75 385Trade and other receivables 5 15,045 9,723Other current assets 6 3,588 -

Total current assets 18,708 10,108

Non-current assets

Property, plant and equipment 8 1,288,097 1,074,251Intangible assets 9 180 268

Total non-current assets 1,288,277 1,074,519

Total assets 1,306,985 1,084,627

Current liabilities

Trade and other payables 11 48,178 79,855

Total current liabilities 48,178 79,855

Non-current liabilities

Borrowings 12 1,134,441 917,584Deferred tax liabilities 10 31,921 17,847

Total non-current liabilities 1,166,362 935,431

Total liabilities 1,214,540 1,015,286

Net assets 92,445 69,341

Equity

Share capital 13 127,346 86,877Other contributed (distributed) equity 14 (32,572) (17,511)Retained earnings (accumulated losses) 15 (2,329) (25)

Total equity 16 92,445 69,341



Statement of financial position

as at 30 June 2010


Other Retained contributed earnings

Share (distributed) (Accumulated TotalNote capital equity losses) equity

$'000 $'000 $'000 $'000

Balances as at 1 July 2009 86,877 (17,511) (25) 69,341

Comprehensive income for the period:

Profit (loss) for the period - - (2,304) (2,304)

Other comprehensive income - - - -

Total comprehensive income for the period - - (2,304) (2,304)

Transactions with owners in their capacity as owners:

Share capital issued 40,469 - - 40,469

Tax liabilities (assets) assumed by the Parent - (15,061) - (15,061)

Total transactions with owners in their capacity as owners 40,469 (15,061) - 25,408

Balances as at 30 June 2010 127,346 (32,572) (2,329) 92,445

Balances as at 1 July 2008 37,877 (3,436) (13) 34,428

Comprehensive income for the period:

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

Other comprehensive income - - - -

Total comprehensive income for the period - - (12) (12)

Transactions with owners in their capacity as owners:

Share capital issued 49,000 - - 49,000

Tax liabilities (assets) assumed by the Parent - (14,075) - (14,075)

Total transactions with owners in their capacity as owners 49,000 (14,075) - 34,925

Balances as at 30 June 2009 86,877 (17,511) (25) 69,341


Statement of changes in equity




Note 2010 2009$'000 $'000

Cash flows from operating activities

Cash receipts in the course of operations 19,904 50,405Cash payments in the course of operations (14,639) (43,785)

Cash generated from operations 5,265 6,620Interest paid (61,717) (30,169)Government guarantee fee paid (5,828) -

Net cash from operating activities 17 (62,280) (23,549)

Cash flows from investing activities

Cash receipts from sales as part of construction activities 23,237 - Payments for property, plant and equipment (177,332) (452,631)Payments for intangible assets - (268)

Net cash from investing activities (154,095) (452,899)

Cash flows from financing activities

Proceeds from borrowings 233,165 476,828Repayment of borrowings (17,100) -

Net cash from financing activities 216,065 476,828

Net increase (decrease) in cash and cash equivalents (310) 380

Cash and cash equivalents at beginning of period 385 5

Cash and cash equivalents at end of period 4 75 385



Statement of cash flows




Notes to the financial statements for the year ended 30 June 2010

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 these financial statements as ‘the Company’. The Company’s parent entity, Sydney Water Corporation, is a NSW statutory state owned corporation and will be referred to in these financial statements 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, NSW. The Company is a for-profit entity. The Company’s financial statements for the year ended 30 June 2010 were authorised for issue in accordance with a resolution of the directors on 3 September 2010. The significant accounting policies that have been adopted in the preparation of the financial statements are detailed below.

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

The financial statements are general purpose financial statements, which have 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 2010. In preparing these financial statements, the accounting policies described below are based on the requirements applicable to for-profit entities in these mandatory and statutory requirements. The financial statements cover the financial performance and cash flows of the Company for the reporting period 1 July 2009 to 30 June 2010 and its financial position as at 30 June 2010.

The financial statements have 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 statements are 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 statements. Where relevant, comparative amounts have been restated to conform to the current reporting period’s presentation, whether this is as a result of a change in accounting policy, the requirements of new or revised Australian Accounting Standards or Australian Interpretations, or a reclassification of items presented.

(b) Statement of compliance

The financial statements comply with all applicable Australian Accounting Standards, including Australian Interpretations. The financial statements also comply 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 categories of revenue earned, the following recognition criteria must also be met before revenue is recognised:

Sales of desalinated water

The Company’s newly constructed desalination plant at Kurnell, NSW, provides desalinated water to the Company’s Parent, Sydney Water Corporation. Revenue arising from sales of desalinated water to the Parent is recognised on an accrual basis as the water is accepted into the Parent’s system asset network. Sales of desalinated water during the testing phase of the desalination plant’s construction have been netted off against the costs of testing and capitalised as part of the cost of the plant. (Refer notes 1(k), 2(a) and 21(c)). Any revenue earned after the plant has become fully operational is recognised in profit or loss.

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, such as the Company’s desalination plant at Kurnell, NSW (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 profit or loss 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 recognised in profit or loss 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 recognised in profit or loss in the period of disposal. Net losses on disposal, if any, are reclassified as expenses.

Sale of other current assets

The net gain or loss on sale of other current assets is calculated as the difference between the carrying amount of the assets at the time of sale and the net proceeds on sale and is recognised in profit or loss in the period of sale. Net gains on sale are recognised as other income. Net losses on sale are reclassified as expenses.

Fair value gains through profit or loss

Refer accounting policies for investments (note 1(h) and greenhouse trading certificates (note 1(j)). Net losses are reclassified as expenses.


(e) Expenses

Expenses are recognised in profit or loss 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 profit or loss 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 statements by nature. (Refer note 2(b)).

Depreciation

Items of property, plant and equipment (excluding freehold land) are depreciated on a straight-line basis over their estimated useful lives, making allowance where appropriate for residual values. The lives are reviewed annually, taking into account assessments of asset condition, commercial and technical obsolescence and expected normal wear and tear. The normal life expectancies of major asset categories are as follows: Depreciable asset classes and categories Number of Years

Property, plant and equipment

System assets: Water pumping station: - Civil component 50 to 100 - Electrical component 25 to 30 - Mechanical component 25 to 40 - Electronic component 10 to 15 Desalination plant: - Civil component 100 - Civil metal component 50 - Electrical component 25 - Mechanical component 25 - Electronic component 15 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 profit or loss 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. 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 during the current reporting period are directly attributable to the construction of the Company’s desalination plant at Kurnell, NSW. Accordingly, the borrowing costs arising from these borrowings have been capitalised as part of the construction cost of the plant up until the date that construction activities necessary to prepare the plant for its intended use were determined to be complete. 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 profit or loss 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 as part of other comprehensive income.


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 in a transaction that is not a business combination and that affect neither accounting profit nor taxable profit. The carrying amount of deferred tax assets is reviewed at each 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 to which they relate. They are measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the 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 10).

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 between the Parent and its wholly-owned subsidiaries. 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 statement of financial position. As there is no tax funding agreement in the tax-consolidated group, 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 statement of financial position.

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 statement of financial position. Cash flows of GST are included in the statement of cash flows 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 18).

(g) Cash and cash equivalents

Cash and cash equivalents in the statement of financial position 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 statement of cash flows, cash and cash equivalents consists of the above definition for the statement of financial position, net of bank overdraft balances. Bank overdraft balances, if any, are included within borrowings under current liabilities in the statement of financial position. (Refer note 12).


(h) Investments

Financial assets

Investments in marketable securities with a maturity period of three months or less are classified as cash and cash equivalents (see note 1(g) above) and those with a maturity period longer than three months are classified as Investments. Those with a maturity period greater than 12 months are classified under non-current assets. All others are classified under current assets. Valuations for all investments are carried out annually as at the reporting date. Investments in marketable securities are initially recognised at cost, being the fair value of the consideration given and including any acquisition charges associated with the investment. After initial recognition, investments are classified as either held-to-maturity, at fair value through profit or loss (held for trading) or available-for-sale, and are measured as follows: Held-to-maturity

Where the Company has the positive intent of holding investments to maturity, they are classified as held-to-maturity and are measured at amortised cost less any impairment losses. Amortised cost is calculated using the effective interest method, taking into account any discount or premium on acquisition, over the period to maturity. For investments carried at amortised cost, gains and losses are recognised in profit or loss when the investments are derecognised or impaired, as well as through the amortisation process.

At fair value through profit or loss (held for trading)

Where the Company holds investments with the intention of trading them to generate a profit from fluctuations in price, they are classified as held for trading within the category of ‘At fair value through profit or loss’ and are measured at the reporting date at fair value. Any gains or losses arising from their measurement to fair value are recognised in profit or loss.

Available-for-sale

Where the Company holds investments that are not classified as either held-to-maturity or held for trading, they are classified as available-for-sale and are measured at the reporting date at fair value. Any gains or losses arising from their measurement to fair value are recognised in other comprehensive income and taken directly to an investment revaluation reserve (a separate component of equity) until the investment is disposed of, or until the investment is determined to be impaired, at which time the cumulative amount previously taken to this reserve is transferred to profit or loss.

For investments classified as at fair value through profit or loss (held for trading) or available-for-sale, fair value is their market value determined on the basis of discounted cash flows using valuation rates supplied by independent market sources. Purchases and sales of investments in marketable securities that require delivery within the time frame generally established by regulation or convention in the market place are recognised on the trade date, which is the date on which the Company commits to purchase or sell the securities.

(i) 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, which generally have a settlement term of 30 days, 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.

(j) Other current assets Other current assets comprises greenhouse trading certificates acquired and held by the Company at the reporting date. (Refer note

6).

Greenhouse trading certificates

Greenhouse trading certificates held at the reporting date by the Company include NSW Greenhouse Abatement Certificates (NGACs) and Renewable Energy Certificates (RECs). These certificates are items that can be traded in energy markets and are required by energy retailers to meet greenhouse gas emissions or renewable energy targets imposed on them by NSW or Commonwealth legislation, respectively. As such, they have a fair value that can be attributed to them at the reporting date based on observable market prices.


The Company is required to purchase RECs under a Renewable Energy Certificate Supply Agreement entered into as part of the arrangements to ensure that the electricity used for the desalination plant constructed at Kurnell, NSW, is sourced entirely from renewable energy sources. It also acquires NGACs to a lesser extent, for a nominal registration fee. Greenhouse trading certificates can either be held for trading purposes, or utilised/surrendered to the regulators that administer the registration of these certificates in order to demonstrate the achievement of carbon neutral initiatives during any relevant period. Greenhouse trading certificates that are generated by the Company for a nominal registration fee are initially recognised at fair value based on the market price at the time of acquisition. Their carrying amount is subsequently restated at each reporting date to the fair value based on the prevailing market price at that time, with any gains or losses recognised in profit or loss as part of other income. Greenhouse trading certificates that have been purchased under contractual arrangements based on a contracted price are initially recognised at cost. At each reporting date, certificates that are considered surplus to requirements or tradeable are stated at the lower of cost and their net realisable value based on the market price prevailing at the reporting date. Any reductions in carrying amount to a lower net realisable value are recognised as an expense in profit or loss. When greenhouse trading certificates are surrendered, their carrying value is recognised as an expense in profit or loss at that time.

(k) 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 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 infrastructure assets that work together to form an entire network, all expenditures are capitalised regardless of cost. In respect of the construction of the Company’s desalination plant, cost includes:

services and resources provided by the Parent, such as labour for project management contractors’ services costs for testing, net of any revenue from sales of output during testing borrowing costs (refer note 1(e)).

Construction costs for infrastructure assets are capitalised initially as work in progress within property, plant and equipment. Subsequently, the costs within work in progress are reclassified as completed assets when construction has ended and each asset becomes operational and available for use in the manner intended. In respect of major inspections undertaken for infrastructure assets, the cost of the inspection is capitalised as part of the cost of the asset if it is probable that future economic benefits will flow to the Company and the cost can be measured reliably. The inspection cost capitalised is then depreciated over the period of time until the next inspection. When each major inspection cost is capitalised, any remaining cost or estimated cost of the previous inspection is derecognised.

Asset valuations

Following initial recognition at cost, each class of property, plant and equipment is stated in the statement of financial position 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 each class of property, plant and equipment assets, remeasurement to fair value is undertaken by way of an asset revaluation. Valuations are 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, NSW, and any associated system assets subsequently acquired by the Company are specialised infrastructure assets. The desalination plant is considered to be a separate asset class within the Company due to its unique function of converting seawater into potable water. System assets acquired from the Parent that support the delivery of desalinated water to the Parent’s system asset network are also considered to be a separate asset class at initial recognition and are subsequently reclassified as a component of the desalination plant where they are integral to the plant’s operation. Due to the specialised nature of these classes of 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 infrastructure assets are revalued in the future, 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 statement of financial position 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, within separately identified cash-generating units, over their expected useful lives. For the Company, the cash-generating unit is considered to be at the whole of entity level as all of the infrastructure asset categories or components that it owns work together as one overall asset, rather than as individual assets, to generate cash flows under current pricing methodologies. In this regard, it is expected that the Company will ultimately have its own regulated asset base at this level for pricing purposes and its own revenue stream on this basis beyond current trading arrangements with the Parent. (Refer note 21(c)). After determining recoverable amount, the assets are then stated in the statement of financial position 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 8(d)).

System land

System land is land upon which the Company’s infrastructure assets 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, system land is valued using the market valuation provided by the Valuer-General that is normally used for rating purposes, less estimated costs to sell.

For each class of property, plant and equipment subject to valuation, revaluation increments, if any, will be recognised in other comprehensive income and credited to an asset revaluation reserve within equity in the statement of financial position. 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 profit or loss. Revaluation increments and decrements will be offset against one another on an ‘individual asset’ basis for revaluation purposes as follows:

The Company’s desalination plant at Kurnell, NSW, and any associated system assets reclassified as an integral component of the plant are together regarded as a separate ‘individual asset’ within the Company’s single cash-generating unit.

In respect of the Company’s property holdings, the ‘individual asset’ is considered to be each individual land parcel.

Upon any disposal of assets or asset components that have been revalued, any asset revaluation reserve balance relating to the particular asset or asset component being disposed will be transferred to retained earnings.

(l) 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 profit or loss. These assets are recognised in the statement of financial position 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 profit or loss. Any reversals of impairment losses are also recognised in profit or loss. These assets are recognised in the statement of financial position at cost less accumulated impairment losses, where applicable. (Refer note 9).

(m) Impairment of assets

At each reporting date, the carrying amounts of assets (other than any greenhouse trading certificates and 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 profit or loss, 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 in profit or loss. 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 where those assets do not have a separately determinable recoverable amount. When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity through other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been previously recognised directly in equity is transferred to profit or loss even though the financial asset has not been derecognised. The amount of the cumulative loss that is recognised in profit or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised through profit or loss.

Calculation of recoverable amount

Financial assets

The recoverable amount of investments classified as held-to-maturity and 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 of these financial assets. 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(i). 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 at Kurnell, NSW, and associated system assets, 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(k)). For further specific details of the assumptions behind the cash-generating unit test used for the Company’s infrastructure assets, refer Note 8(d).

Reversals of impairment

Financial assets

An impairment loss in respect of investments classified as held-to-maturity or 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 at Kurnell, NSW, and associated system assets, 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 or amortisation, if no impairment loss had been recognised.


(n) 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 statement of financial position 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 11).

(o) 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 12). 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 profit or loss as part of finance costs over the period of the borrowings on an effective interest basis. Gains or losses are recognised in profit or loss 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.

(p) 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 statements in the period of their initial application: 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 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).

AASB 2009-9 ‘Amendments to Australian Accounting Standards – Additional Exemptions for First-time Adopters [AASB 1]’ (issued September 2009)

This standard makes amendments to AASB 1 ‘First-time Adoption of Australian Accounting Standards’. The amendments address the retrospective application of Australian Accounting Standards to ensure that entities applying them for the first time will not face undue cost or effort in the transition process in particular situations. The amendments specify requirements for entities using the full cost method in place of retrospective application of Australian Accounting Standards for oil and gas assets, and they exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance with Australian Interpretation 4 ‘Determining whether an Arrangement contains a Lease’ when the application of their previous accounting policies would have given the same outcome. 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 2009-10 ‘Amendments to Australian Accounting Standards – Classification of Rights Issue [AASB 132]’ (issued October 2009)

This standard makes amendments to AASB 132 ‘Financial Instruments: Presentation’. The amendments clarify that rights, options or warrants to acquire a fixed number of an entity’s own equity instruments for a fixed amount in any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all existing owners of the same class of its own non-derivative equity instruments. 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 February 2010 (ie 2010-11).

AASB 9 ‘Financial Instruments’ (issued December 2009)

This standard includes new requirements for the classification and measurement of financial assets resulting from the first part of Phase 1 of the IASB’s project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’ (and consequently AASB 139 ‘Financial Instruments: Recognition and Measurement’). These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of the existing AASB 139. The main changes from AASB 139 are as follows:

(a) Financial assets are classified on the basis of both the objective of an entity’s business model for managing its financial assets, and the characteristics of the contractual cash flows. This reduces the numerous categories of financial assets in AASB 139, each of which had its own classification criteria.

(b) The standard requires a financial asset to be measured at amortised cost if the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and if the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Otherwise, financial assets are to be measured at fair value.

(c) The standard allows an irrevocable option on initial recognition to present gains or losses on investments in equity instruments that are not held for trading in other comprehensive income. There is no subsequent recycling on disposal of the instrument through profit or loss. Investments in unquoted equity instruments must be measured at fair value.

(d) Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces an accounting mismatch from measuring assets or liabilities, or recognising the gains or losses on them, on different bases.

(e) Financial assets may be reclassified when there is a relevant change in the entity’s business model.

While these are significant changes to the classification and measurement requirements for financial assets for many entities, these amendments and 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 2013 (ie 2013-14).

AASB 2009-11 ‘Amendments to Australian Accounting Standards arising from AASB 9 [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 121, 127, 128, 131, 132, 136, 139, 1023 & 1038 and Interpretations 10 & 12]’ (issued December 2009)

This standard makes consequential amendments to various standards and interpretations as a result of the issuance of AASB 9 ‘Financial Instruments’ (see above). AASB 9 sets out new requirements for the classification and measurement of financial assets. 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 2013 when AASB 9 is applied (ie 2013-14).

AASB 124 ‘Related Party Disclosures’ (issued December 2009)

This standard simplifies and clarifies the intended meaning of a related party and eliminates inconsistencies from the definition. The definition now identifies a subsidiary and an associate with the same investor as related parties of each other. Entities significantly influenced by one person and entities significantly influenced by a close family member of the family of that person are no longer related parties of each other. Also, the definition now identifies that whenever a person or entity has both joint control over a second entity and joint control or significant influence over a third party, the second and third entities are related parties of each other. Finally, a partial exemption is provided from the full disclosure requirements for government-related entities where they are controlled by the same government. 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 2011 when AASB 9 is applied (ie 2011-12).

AASB 2009-12 ‘Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023 & 1031 and Interpretations 2, 4, 16, 1039 & 1052]’ (issued December 2009)

This standard makes amendments to a number of Australian Accounting Standards and Interpretations. The main amendment is in relation to AASB 8 ‘Operating Segments’ as a result of the issuance of revised AASB 124 ‘Related Party Disclosures’ in December 2009. AASB 8 is not applicable to the Company. All the other amendments principally arise from editorial corrections made by the IASB to its Standards and Interpretations (IFRSs) and by the AASB to its pronouncements. These amendments are considered to be minor and 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 2011 (ie 2011-12).


AASB Interpretation 19 ‘Extinguishing Financial Liabilities with Equity Instruments’ (Issued December 2009)

This Interpretation addresses the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability. Such transactions are sometimes referred to as ‘debt for equity swaps’. The initial application of this interpretation will have no impact on the financial results of the Company. This interpretation is applicable to annual reporting periods beginning on or after 1 July 2010 (ie 2010-11).

AASB 2009-13 ‘Amendments to Australian Accounting Standards arising from Interpretation 19 [AASB 1]’ (issued December 2009)

This standard makes amendments to AASB 1 ‘First-time Adoption of Australian Accounting Standards’. The amendments arise from the issuance of IFRIC Interpretation 19 ‘Extinguishing Financial Liabilities with Equity Instruments’ by the IASB in November 2009 and the corresponding Australian Interpretation 19 (see above). They permit a first-time adopter of Australian Accounting Standards to apply the transitional provisions in Interpretation 19. 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 2010 (ie 2010-11).

AASB 2009-14 ‘Amendments to Australian Interpretation – Prepayments of a Minimum Funding Requirement [AASB Interpretation 14] (issued December 2009)

This standard makes amendments to AASB Interpretation 14 ‘AASB 119 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction”. These amendments arise from the issuance of ‘Prepayments of a Minimum Funding Requirement (Amendment to IFRIC 14)’ by the IASB in November 2009. The amendments relate to grammatical changes to remove an unintended consequence arising from the treatment of prepayments of future contributions to defined benefit plans in some circumstances where there is a minimum funding requirement. 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 2011 (ie 2011-12).

AASB 2010-1 ‘Amendments to Australian Accounting Standards – Limited Exemption from Comparative AASB 7 Disclosures for First-time Adopters [AASB 1 & AASB 7] (issued February 2010)

This standard makes amendments to AASB 1 ‘First-time Adoption of Australian Accounting Standards’ and AASB 7 ‘Financial Instruments: Disclosures’. These amendments principally give effect to extending the transition provisions of AASB 2009-2 ‘Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments’ to first-time adopters of Australian Accounting Standards. They permit first-time adopters to use the same transition arrangements in AASB 2009-2 as those applicable to existing preparers of financial statements prepared in accordance with Australian Accounting Standards. 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 2010 (ie 2010-11).

AASB 1053 ‘Application of Tiers of Australian Accounting Standards’ (issued June 2010)

This standard establishes a differential financial reporting framework consisting of two Tiers of reporting requirements for preparing general purpose financial statements: (a) Tier 1 – Australian Accounting Standards; and (b) Tier 2 – Australian Accounting Standards – Reduced Disclosure Requirements Tier 2 comprises the recognition, measurement and presentation requirements of Tier 1, and substantially reduced disclosures corresponding to those requirements. Tier 1 requirements must be complied with by for-profit entities in the private sector that have public accountability (as defined in the standard), and Australian, State, Territory and Local Governments. Tier 2 requirements can apply as an optional choice to for-profit private sector entities that do not have public accountability, all not-for-profit private sector entities and public sector entities other than Australian, State, Territory and Local Governments. Whether this becomes an optional choice for the Company in the future to present reduced disclosure requirements under the standard will depend on NSW public sector-wide policy decisions of the NSW Treasury. The initial application of this standard will have no impact on the financial results of the Company as it is concerned with disclosure only. This standard is applicable to annual reporting periods beginning on or after 1 July 2013 (ie 2013-14).

AASB 2010-2 ‘Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements’ (issued June 2010)

This standard makes amendments to many Australian Accounting Standards and Interpretations, to introduce reduced disclosure requirements to these pronouncements for entities that prepare general purpose financial statements under the differential reporting framework and the two Tiers of financial reporting requirements established by Australian Accounting Standard AASB 1053 ‘Application of Tiers of Australian Accounting Standards’ (see above). The initial application of this standard will have no impact on the financial results of the Company as it is concerned with disclosure only, and its applicability on the Company is dependent on NSW public sector-wide policy decisions of the NSW Treasury in the future. This standard is applicable to annual reporting periods beginning on or after 1 July 2013 (ie 2013-14).


AASB 2010-3 ‘Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 3, AASB 7, AASB 121, AASB 128, AASB 131, AASB 132 & AASB 139]’ (issued June 2010)

This standard makes amendments to various Australian Accounting Standards as a consequence of the IASB’s annual improvements project that provides a vehicle for non-urgent but necessary amendments being made to standards. The amendments mainly cover transitional arrangements in relation to business combinations, various requirements regarding share-based payment awards and measurement of non-controlling interests at the acquisition date of a business combination. 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 2010 (ie 2010-11).

AASB 2010-4 ‘Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 1, AASB 7, AASB 101 & AASB 134 and Interpretation 13]’ (issued June 2010)

This standard makes further amendments to various Australian Accounting Standards and Interpretations as a consequence of the IASB’s annual improvements project. The amendments clarify existing requirements in the standards and cover transitional arrangements for first-time adopters of Australian Accounting Standards, disclosures related to the statement of changes in equity and financial instruments, significant event disclosures for interim financial reporting and the fair value of award credits in customer loyalty programs. 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 2011 (ie 2011-12).


___________________________________________________________________________________________________________ Note 2010 2009 $’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 Sale of desalinated water to the Parent: Usage charges 35,449 - Less amount netted against capitalised testing costs (29,343) -

________________________ Total sales revenue recognised in profit or loss 6,106 - Interest revenue from: Financial assets not at fair value through profit or loss using the effective interest method: Bank balances 1 - Less amount netted against finance costs prior to capitalisation (1) -

________________________ Total interest revenue recognised in profit or loss - -

________________________

Total revenue recognised in profit or loss 6,106 - ________________________


___________________________________________________________________________________________________________ Note 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________

(b) Expenses Finance costs expense Financial liabilities not at fair value through profit and loss using the effective interest method: Interest expense 59,883 40,816 Amortisation of deferred discounts (premiums) on loans 862 325

________________________ Total interest expense using effective interest method 60,745 41,141 Government guarantee fee expense 16,965 5,758 Gain on loan (69) - Interest revenue netted against finance costs prior to capitalisation (1) -

________________________ 77,640 46,899 Less amount capitalised (74,142) (46,899)

________________________ Finance costs expense recognised in profit or loss 3,498 -

________________________ Other expenses

Maintenance services expenses 6,458 - Operational services expenses 843 - Electricity and other energy expenses 11,142 - Property expenses 700 - Other expenses from ordinary activities 48 17

________________________ 19,191 17 Less amount capitalised (16,387) -

________________________ Total core operations expenses 2,804 17 Depreciation expenses 1,742 -

________________________ Total other expenses in the course of ordinary activities 4,546 17 Net losses from fair value adjustments through profit or loss: Greenhouse trading certificates 1,353 -

________________________ 1,353 -

________________________ Total other expenses recognised in profit or loss 5,899 17

________________________


___________________________________________________________________________________________________________ Note 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________

3. Income tax expense

Major components of income tax expense (income) recognised in profit or loss for the reporting period are as follows: (a) Recognised in profit or loss Current tax expense (income) Current year (15,061) (14,075) Deferred tax expense Origination of temporary differences 10(b) 14,074 14,070

________________________ Total income tax expense (income) in profit or loss (987) (5)

________________________ (b) Reconciliation between income tax expense (income) and profit (loss) before income tax Profit (loss) before income tax (3,291) (17)

________________________ Income tax expense (income) calculated using the domestic corporation tax rate of 30% (2009: 30%) (987) (5)

________________________ Income tax expense (income) (987) (5)

________________________


___________________________________________________________________________________________________________ Note 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________

4. Cash and cash equivalents Cash 75 385

________________________ Cash and cash equivalents in statement of financial position and statement of cash flows 75 385

________________________ 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 statement of financial position. (Refer note 12).

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 (2009: 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 22(c) for a maturity analysis of all financial assets and financial liabilities.


___________________________________________________________________________________________________________ Note 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________

5. Trade and other receivables Current Other receivables Other debtors and accrued revenue: Parent 13,295 4,358 Other parties 1,462 5,365 Prepayments 288 -

________________________ 15,045 9,723

________________________ Total trade and other receivables 15,045 9,723

________________________ Significant terms and conditions Trade debtors receivable for usage charges in providing desalinated water to the Parent are required to be settled within 30 days.

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.


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 statement of financial position 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. Other current assets Greenhouse trading certificates – at market value 3,588 -

________________________ 3,588 -

________________________ 7. 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 $15.061 million (2009: $14.075 million) during the current reporting period.


8. Property, plant and equipment Non-current

(a) Movements and carrying amounts

2010 System

land System assets

Desalination Plant

Work in progress

Total

$’000 $’000 $’000 $’000 $’000

At 1 July 2009 – net carrying amount 49,000 - - 1,025,251 1,074,251 Additions - 40,469 1,200,370 174,926 1,415,765 Disposals - - - - - Reclassified as assets held for sale - - - - - Other reclassifications - (39,954) 39,954 (1,240,646) (1,240,646) Transfer from the Parent - - - 40,469 40,469 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 profit or loss in the line item ‘Other expenses’

-

-

-

-

-

Impairment losses reversed (+) and recognised in profit or loss in the line item ‘Other expenses’

-

-

-

-

-

Depreciation charge - (515) (1,227) - (1,742) At 30 June 2010 – net carrying amount 49,000 - 1,239,097 - 1,288,097


System

land System assets

Desalination plant

Work in progress

Total

$’000 $’000 $’000 $’000 $’000

At 1 July 2009 Fair value:

Cost (based on market valuation obtained by the Parent effective as at 1 July 2008)

49,000 - - 1,025,251 1,074,251

49,000 - - 1,025,251 1,074,251

Accumulated depreciation - - - - - Accumulated impairment - - - - - - - - - - Net carrying amount 49,000 - - 1,025,251 1,074,251 At 30 June 2010 Fair value:

Independent market value 2008 49,000 - - - 49,000 Replacement value 2009 - - 1,240,839 - 1,240,839 49,000 - 1,240,839 - 1,289,839

Accumulated depreciation or amortisation - - (1,742) - (1,742) Accumulated impairment - - - - - - - (1,742) - (1,742) Net carrying amount 49,000 - 1,239,097 - 1,288,097


2009 System

land System assets

Desalination Plant

Work in progress

Total

$’000 $’000 $’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

-

-

-

-

-

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 profit or loss 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 System assets

Desalination plant

Work in progress

Total

$’000 $’000 $’000 $’000 $’000

At 1 July 2008 Fair value:

Cost - - - 511,739 511,739 - - - 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


(b) Land valuations

System land is land upon which the Company’s infrastructure assets 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 is subsequently identified as being surplus to requirements, it would be reclassified as market land consistent with the Parent’s policies. An independent valuation would then be undertaken with an effective date of 1 July in the reporting period during which the reclassification has taken place. There were no acquisitions of land by the Company during the current reporting period. During the previous reporting period, the Parent transferred to the Company the land parcels upon which the desalination plant at Kurnell, NSW, has been constructed. An independent valuation of $49 million effective from 1 July 2008 was obtained by the Parent and was used as the fair value of the consideration for that 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. Although this valuation was an independent valuation used for the purpose of obtaining a fair value for the transfer, this value is the cost of acquisition for the Company. 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 most recent valuation. Where there has been a material change, the carrying amount in the statement of financial position is adjusted accordingly.

(c) Valuation of desalination plant and associated water pumping station

The construction activities necessary to prepare the Company’s desalination plant at Kurnell, NSW, for its intended use were completed during the current reporting period at a cost of $1.239 billion at the reporting date and hence the plant was reclassified from work in progress to completed assets during the current reporting period, even though there is still some remaining capital expenditure expected to be incurred in the next reporting period to finalise the project. Accordingly, the plant is now recognised as a completed asset in the statement of financial position at cost, net of depreciation, and this is considered to be its fair value at the reporting date as this is the most recent evidence of the expenditure that would be required to acquire an asset of this magnitude and nature with its remaining service potential using modern engineering methodologies. During the current reporting period, the Parent transferred to the Company the completed construction costs of the water pumping station that supports the delivery of desalinated water from the desalination plant to the Parent’s system asset network. Upon transfer of these costs to the Company, the water pumping station was reclassified initially as a completed asset within the asset class of system assets and was subsequently reclassified to the desalination plant asset class as it is considered to be an integral component of the plant as a whole. The cost of the water pumping station was $40.469 million. This amount was used as the fair value of the consideration for transferring the water pumping station construction costs from the Parent to the Company. The form of consideration given by the Company to the Parent for this transfer was the issue of additional share capital for an equivalent amount of $40.469 million. This value, net of depreciation during the current reporting period, is considered to be the fair value at the reporting date as this is the most recent evidence of the expenditure that would be required to acquire such an asset component with its remaining service potential using modern engineering methodologies. The desalination plant will be included within the Parent’s annual asset revaluation procedures in the next reporting period.

(d) Recoverable amount Due to the interdependent nature of water industry infrastructure assets, their recoverable amount is determined by the stream of future net cash flows 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(k), 1(l) and 1(m) 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), and those same cash flows are essentially passed through to the Company through trading arrangements with its Parent, the Company aligns 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 uses a model developed 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 streams, and therefore the future cash flows, attributable to the existing assets at the reporting date. The ‘annual revenue requirement’ for the Company’s assets is equivalent to the cash flows that would be passed through to the Company from the Parent under trading arrangements between the two entities, given that IPART has already set prices for the Parent that include desalination as an inherent component to ultimately recover the cost of the investment and to earn an appropriate rate of return over time. The ‘annual revenue requirement’ derived for each year of the model decreases over the long term as the RAB decays through regulatory depreciation.


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. As mentioned above, its purpose is to derive an ‘annual revenue requirement’, which is 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. 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. 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 2010 2009

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 The regulated asset base (RAB) was escalated by a year average CPI rate of 1.9% prior to determining the annual revenue requirement. Other than this, modelling was undertaken in a ‘real’ framework.

The regulated asset base (RAB) was escalated by a year average CPI rate of 3.9% prior to determining the annual revenue requirement. Other than this, modelling was undertaken in a ‘real’ framework.

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

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

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. This is equivalent to the future cash flows that will be generated from trading arrangements in place with the Parent as desalinated water is provided. Investment/interest income is excluded.

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. 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.

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.

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.

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.


9. Intangible assets Non-current

(a) Movements and carrying amounts

2010 Acquisitions

in progress

Total

$’000 $’000 At 1 July 2009 – net carrying amount 268 268 Additions 105 105 Disposals - - Reclassifications (193) (193) Transfer from the Parent - - Impairment losses (-) recognised in profit or loss in the line item ‘Other expenses’

-

-


-

-

Amortisation charge - - At 30 June 2010 – net carrying amount 180 180

Acquisitions

in progress

Total

$’000 $’000 At 1 July 2009 Cost 268 268 Accumulated amortisation - - Accumulated impairment - - - - Net carrying amount 268 268 At 30 June 2010 Cost 180 180 Accumulated amortisation - - Accumulated impairment - - - - Net carrying amount 180 180


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 profit or loss 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


(b) Recognition and Measurement The Company has intangible assets comprising easements that are currently classified as acquisitions in progress, as their cost of acquisition has not as yet been finalised. These intangible assets are recognised in the statement of financial position, 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 8(c) and 8(d)). 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. After reclassifying costs totalling $0.193 million that more specifically related to the project development costs of the desalination plant asset at Kurnell, NSW, the cost to date of easements within acquisitions in progress at the reporting date amounted to $0.180 million (2009: $0.268 million). When the final cost of the easements is known, the consideration for any transfer from the Parent will be in the form of share capital issued to the Parent.


10. 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

2010

2009

2010

2009

2010

2009

$’000 $’000 $’000 $’000 $’000 $’000 Property, plant and equipment - - 31,260 17,852 31,260 17,852 Greenhouse trading certificates - - 670 - 670 - Anticipated receipts and accrued expenses

(9)

(5)

-

-

(9)

(5)

Tax (assets) liabilities (9) (5) 31,930 17,852 31,921 17,847 Set-off of tax 9 5 (9) (5) - - Net tax (assets) / liabilities - - 31,921 17,847 31,921 17,847

There were no unrecognised deferred tax assets and liabilities for the Company at the reporting date. (b) Movements in temporary differences

2010

Balance 1 July 2009

Recognised in profit or loss

Recognised in other comprehensive

income

Balance 30 June 2010

$’000 $’000 $’000 $’000 Property, plant and equipment 17,852 13,408 - 31,260 Greenhouse trading certificates - 670 - 670 Anticipated receipts and accrued expenses (5) (4) - (9) Net tax (assets) / liabilities 17,847 14,074 - 31,921

2009

Balance 1 July 2008

Recognised in profit or loss

Recognised in other comprehensive

income

Balance 30 June 2009

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


___________________________________________________________________________________________________________ Note 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________

11. Trade and other payables Current Trade payables: Other parties 1,897 -

________________________ 1,897 - Non-trade payables and accrued expenses: Parent 2,507 2,455 Other parties 43,774 77,400

________________________ 46,281 79,855

________________________ Total trade and other payables 48,178 79,855

________________________ 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.


12. Borrowings Non-current

Long-term borrowings 1,134,441 917,584

________________________ Total non-current borrowings 1,134,441 917,584


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, NSW. 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 (2009: $5 million) in place with

the NSW Treasury Corporation. 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 (2009: $Nil).

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 a prior 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 the reporting date. Of this facility, loan proceeds of $233.165 million were drawn down during the current reporting period (2009: $476.828 million drawn down).

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. 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 13 years. NSW Treasury Corporation loans outstanding at the reporting date, inclusive of any deferred discounts or premiums on the loans, totalled $1.134 billion (2009: $917.584 million) for the Company.

For details in respect of the maturity analysis of these long-term borrowings, refer to note 22(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 estimated capital commitment of $7.147 million (2009: $191.852 million) inclusive of GST under the contract with external contractors to finalise the remaining costs of the desalination plant construction project. This remaining commitment represents the maximum possible exposure to the Parent at the reporting date in the unlikely event that the Company defaults on all of the remaining payments to the contractors. However, as the Company has the NSW Treasurer’s approval to obtain total financial accommodation up to an amount of $1.260 billion in its own right from NSW Treasury Corporation until 30 June 2011 (2009: $1.355 billion up to 30 June 2010) in order to meet all of its obligations, 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 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________

13. Share capital (a) Carrying amounts Issued and fully paid up share capital 127,346,465 (2009: 86,876,582) ordinary shares 127,346 86,877


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: 86,876,582 ordinary shares (2009: 37,876,582 ordinary shares) 86,877 37,877 Shares issued as consideration for acquisition of assets from the Parent: 40,469,883 ordinary shares (2009: Nil ordinary shares) for system assets (water pumping station) 40,469 - Nil ordinary shares (2009: 49,000,000 ordinary shares) for land - 49,000

________________________ Balance at end of period: 127,346,465 ordinary shares (2009: 86,876,582 ordinary shares) 127,346 86,877

________________________ In the current reporting period, an amount of $40.469 million of share capital was issued to the Parent as consideration for the Company acquiring from the Parent the completed construction costs of the water pumping station that supports the Company’s desalination plant at Kurnell, NSW, to provide desalinated water to the Parent’s system asset network. (Refer note 8(c)). In the previous reporting period, $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 has been constructed. (Refer note 8(b)).

14. Other contributed (distributed) equity Cumulative amount of current tax liabilities (assets) incurred by the Company and assumed by the Parent under tax consolidation (32,572) (17,511)

________________________ 15. Retained earnings (accumulated losses) Balance at beginning of period (25) (13) Profit (loss) attributable to equity holders of the Company (2,304) (12)

________________________ Balance at end of period (2,329) (25)

________________________ 16. Total equity reconciliation Balance at beginning of period 69,341 34,428 Total comprehensive income attributable to equity holders of the Company (2,304) (12) Transactions with owners as owners: Shares issued to Parent 13(b) 40,469 49,000 Other contributed (distributed) equity from assumption of tax balances (15,061) (14,075)

________________________ Balance at end of period 92,445 69,341

________________________


___________________________________________________________________________________________________________ Note 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________

17. Notes to the statement of cash flows (a) Reconciliation of profit (loss) to net cash from operating activities Profit (loss) for the period (2,304) (12) Adjustments for: Profit or loss items classified as either investing or financing: Depreciation expenses 2(b) 1,742 - Borrowing costs capitalised to work in progress 2(b) (74,142) (46,899) Amortisation of deferred discounts (premiums) on loans 2(b) 862 325 Gain on loans 2(b) (69) - Net movement in statement of financial position items applicable to operating activities: Greenhouse trading certificates (3,588) - Trade and other receivables 783 5,137 Trade and other payables 15,424 17,905 Income tax assets and liabilities (988) (5)

________________________ Net cash from operating activities (62,280) (23,549)

________________________ (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

statement of cash flows as these are regarded as non-cash. During the current reporting period, this amounted to $40.469 million for the transfer to the Company (from the Parent) of the completed construction costs of the water pumping station that supports the desalination plant at Kurnell, NSW, to provide desalinated water to the Parent’s system asset network (2009: $49 million for land parcels used for the construction of the desalination plant). (Refer also note 13(b)).

(c) Standby credit arrangements Details of financial accommodation facilities for the Company are disclosed in note 12.


___________________________________________________________________________________________________________ Note 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________

18. Commitments Capital expenditure commitments

Property, plant and equipment Contracted but not provided for and payable: not longer than one year 11,119 191,852

________________________ 11,119 191,852

________________________

Amounts disclosed for these commitments include total GST of $0.650 million (2009: $17.018 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 26,681 8,110 longer than one year but not longer than five years 136,751 115,641 longer than five years 714,759 751,668

________________________ 878,191 875,419

________________________


Supply of other services Contracted but not provided for and payable: not longer than one year 48,201 16,253 longer than one year but not longer than five years 242,646 202,891 longer than five years 741,537 1,100,283

________________________ 1,032,384 1,319,427

________________________



___________________________________________________________________________________________________________ Note 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________

19. Consultants The total amount paid or payable to consultants by the Company during the reporting period was $0.100 million (2009: $0.085

million). 20. Auditors' remuneration Audit services Remuneration for audit or review of the financial statements of the Company: Auditors of the Company 31 17

________________________ 31 17

________________________ 21. 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 has provided 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, NSW. Services provided to the Company by the Parent as part of the construction project included engineering consulting and project management. The Parent charged for its services based upon an assessment of direct costs and a factor to cover corporate and local overheads. During the reporting period, the Company provided the Parent with desalinated water. The Company charged the Parent based on an agreed price per kilolitre under interim arrangements for all water accepted into the Parent’s system asset network during the testing phase of construction activities, and then subsequently for a period of time up until the end of the reporting period. Formal trading arrangements to apply from 1 July 2010 for a period of 30 years were subsequently entered into on 28 June 2010. A service level agreement was also entered into during the current reporting period to cover the provision of management and support services provided by the Parent to the Company. Such services include corporate governance and executive management, operational and contract management services, telemetry services, water quality monitoring, financial services, environmental services, safety and quality audits. The Parent charges an agreed fixed management fee per month covering all of these various services. The term of the service level agreement initially covered the period 1 February 2010 to 30 June 2010, and has a mutual option to renew on a rolling six-month basis thereafter. During the current reporting period, the Company’s equity structure was increased by the Parent transferring to the Company the completed construction costs of the water pumping station that is integral to the operation of the desalination plant at Kurnell, NSW, and which supports the delivery of desalinated water to the Parent’s system asset network. The cost of the pumping station was $40.469 million and shares for this amount were issued to the Parent as consideration for the transfer.


The transfer and increase in equity for the Company is a continuation of the transfers made in the previous reporting period when the Parent transferred the parcels of land upon which the desalination plant is situated. The value of the land was $49 million and the transfer to the Company was made in exchange for an equivalent amount of shares issued to the Parent. The costs of both the water pumping station in the current reporting period and the land transferred in the previous reporting period were initially incurred by the Parent and have been transferred to the Company to ensure the full cost of these assets has been appropriately captured for pricing and other purposes within the Company. Further transfers will also occur for associated easements when the final cost of the easements has been determined. Shares will also be issued as consideration for those transfers. The Company’s statement of financial position will ultimately reflect the appropriate structure for the assets it will be controlling when all necessary transfers have been made. Finally, 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. The following is a summary of related party transactions and balances with the Parent:

___________________________________________________________________________________________________________ Note 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________

Sale of desalinated water to the Parent: Usage charges 35,449 - Less amount netted against capitalised testing costs (29,343) -

________________________ Total sales revenue from the Parent recognised in profit or loss 2(a) 6,106 -

Purchase of services for capital expenditure from the Parent 10,549 14,473

________________________ Purchase of services for executive and management support from the Parent 843 -

________________________

Net assets acquired from the Parent as consideration for shares issued during the period 13(b) 40,469 49,000

________________________ Income tax liabilities (assets) assumed from the Company by the Parent during the period 14, 16 (15,061) (14,075)

________________________ Trade and other receivables outstanding 5 13,295 4,358

________________________ Trade and other payables outstanding 11 2,507 2,455

________________________

In relation to amounts receivable, no allowance for impairment has been recognised as all amounts are recoverable.

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


22. 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 11) borrowings (refer note 12)

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, on a regular 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 has been borne by the contractor under the contractual arrangement to construct the desalination plant at Kurnell, NSW. 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 that was used 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. The Reserve Bank of Australia (RBA) reduced the stimulatory effects of low official interest rates by increasing official interest rates during the current reporting period. These increases were unfavourable for short-term debt financing costs. Long-term debt yields range traded throughout the current reporting period resulting in the cost of long-term debt remaining little changed from the previous reporting period. 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 and medium-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 2010 2009 2010 2009 Note % % $’000 $’000 ___________________________________________________________________________________________________________

Financial assets At amortised cost: Cash 4 3.75 3.98 75 385

________________________

75 385 ________________________

Financial liabilities

At amortised cost: Borrowings: NSW Treasury Corporation loans 12 5.67 5.77 1,134,441 917,584

________________________

1,134,441 917,584 ________________________


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 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 4.75% (2009: 3.15%), a 100 basis points increase would increase the rate to 5.75% (2009: 4.15%) and a 100 basis points decrease would reduce the rate to 3.75% (2009: 2.15%). 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% and 7.25% over the past five years. ___________________________________________________________________________________________________________ Finance costs* Post tax profit or loss* Equity* Higher (lower) Higher (lower) Higher (lower) Judgement of reasonably 2010 2009 2010 2009 2010 2009 possible events $’000 $’000 $’000 $'000 $’000 $'000 ___________________________________________________________________________________________________________ Interest rates 100 basis points higher 2,758 3,513 (1,930) (2,459) (1,930) (2,459) Interest rates 100 basis points lower (2,758) (3,513) 1,930 2,459 1,930 2,459

* 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 $0.828 million (2009: $1.054 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 statement of financial position, 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. There was no change in the level of credit risk exposure for the Company during the current reporting period. At the reporting date, the only significant concentration of credit risk in which the Company is exposed relates to amounts receivable from the Parent within trade and other receivables (refer note 5). This represents a proportion of 88.4% (2009: 44.8%) of the total trade and other receivables at the reporting date. There were no other significant concentrations of credit risk in which the Company is 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 statement of financial position. (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 12. 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% 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% 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 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 statement of financial position The following tables reflect the maturity bands for the settlement of the carrying amounts of financial assets and financial liabilities recognised in the statement of financial position of the Company at the reporting date. ________________________________________________________________________________________________________________________________________________________________ Repricing or maturing in: 2010 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 At amortised cost: Cash 4 75 - - - - - 75 Trade and other receivables 5 15,045 - - - - - 15,045 ___________________________________________________________________________________________ 15,120 - - - - - 15,120 ___________________________________________________________________________________________ Financial liabilities At amortised cost: Trade and other payables 11 48,178 - - - - - 48,178 Borrowings: NSW Treasury Corporation loans 12 337,586 356,537 109,350 100,000 - 230,968 1,134,441 ___________________________________________________________________________________________ 385,764 356,537 109,350 100,000 - 230,968 1,182,619 ___________________________________________________________________________________________


________________________________________________________________________________________________________________________________________________________________ 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 At amortised cost: Cash 4 385 - - - - - 385 Trade and other receivables 5 9,723 - - - - - 9,723 ___________________________________________________________________________________________ 10,108 - - - - - 10,108 ___________________________________________________________________________________________ Financial liabilities At amortised cost: Trade and other payables 11 79,855 - - - - - 79,855 Borrowings: NSW Treasury Corporation loans 12 513,336 221,859 - - - 182,389 917,584 ___________________________________________________________________________________________ 593,191 221,859 - - - 182,389 997,439 ___________________________________________________________________________________________


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 ________________________________________________________________________________________________________________________________________________________________ 2010 At amortised cost: Trade and other payables 11 48,178 - - - - - 48,178 Borrowings: NSW Treasury Corporation loans 393,006 395,995 133,941 116,018 14,700 339,800 1,393,460 __________________________________________________________________________________________ 441,184 395,995 133,941 116,018 14,700 339,800 1,441,638 __________________________________________________________________________________________ 2009 At amortised cost: Trade and other payables 11 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 __________________________________________________________________________________________


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. The following table details the carrying amounts and fair values at the reporting date for all financial instruments:

___________________________________________________________________________________________________________ Carrying amount Fair value Note 2010 2009 2010 2009 $’000 $’000 $’000 $’000 ___________________________________________________________________________________________________________

Financial assets At amortised cost: Cash 4 75 385 75 385 Trade and other receivables 5 15,045 9,723 15,045 9,723 ____________________________________________________ 15,120 10,108 15,120 10,108 ____________________________________________________

Financial liabilities

At amortised cost: Trade and other payables 11 48,178 79,855 48,178 79,855 Borrowings: NSW Treasury Corporation loans 12 1,134,441 917,584 1,167,740 951,782 ____________________________________________________ 1,182,619 997,439 1,215,918 1,031,637 ____________________________________________________ Fair value hierarchy There were no financial instruments at either the current or previous reporting dates that were carried in the statement of financial position at fair value determined by any of the three valuation methods defined below: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as

prices) or indirectly (i.e., derived from prices) Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).


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 the costs of 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% 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 2010 2009 $’000 $'000 ___________________________________________________________________________________________________________ Interest-bearing debt 12 1,134,441 917,584 Other interest-bearing liabilities - -

________________________ Total interest-bearing liabilities 1,134,441 917,584 Total equity 16 92,445 69,341

________________________ Total capital employed 1,226,886 986,925

________________________

% %

Gearing ratio (Interest-bearing debt / Interest-bearing debt + Total equity) 92.5 93.0 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, NSW, predominantly being sourced through approved debt facilities with the NSW Treasury Corporation. (Refer note 12).

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


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