Fairbairn Irrigation Network Pty Ltd ACN 615 973 754 Offer Document Fairbairn Irrigation Network Pty Ltd Offer Document
Responsibility for information Customers are cautioned about relying on any such forward The information in this Offer Document has been prepared looking statements. The forward looking statements in this by the Company and is the responsibility of the Company. Offer Document reflect views held only as at the date of this The Government Shareholder and the Department (and, as Offer Document. applicable, their directors, officers, employees and advisers) do Additionally, statements of the intentions of the Company and not assume any responsibility for the accuracy or completeness the Board reflect present intentions as at the date of this Offer of any such information, subject to the following: Document and may be subject to change. (a). the Department has prepared and is responsible for To the maximum extent permitted by law, the Company, the the Department Information. The Company and its Government Shareholder and the Department disclaim any directors, officers and advisers: duty to update any forward-looking statements other than (i). have not verified the Department Information; with respect to information of which they become aware (ii). have relied on the Department to verify the prior to the Closing Date which is material to the decision of Department Information; a Customer whether or not to support the Local Management Proposal and apply for their Share Entitlement. (iii). do not assume any responsibility for the accuracy or completeness of the Department Information; Your decisions and This Offer Document does not take into account the particular (iv). accordingly, disclaim responsibility and liability for needs, objectives and financial circumstances of each the Department Information. individual Customer or any other person. Before making any (b). KPMG Transaction Services has prepared the decision in relation to whether or not to support the Local Investigating Accountant’s Report (contained in Management Proposal or to apply for your Share Entitlement, annexure A) and takes responsibility for that report. the Directors encourage you to consider whether that decision None of the Company, the Government Shareholder, is appropriate in light of your particular needs, objectives and the Department, or (as applicable) their directors, financial circumstances, and to consult your financial or legal officers, employees and advisers assume any adviser. responsibility for the accuracy or completeness of the information contained in the Investigating Accountant’s Restrictions on distribution of this Offer Document Report, except in relation to information given to This Offer Document does not constitute an offer or invitation KPMG Transaction Services by them. KPMG Transaction in any place in which, or to any person to whom, it would not Services does not assume any responsibility for the be lawful to make such an offer or invitation. accuracy or completeness of the information contained The distribution of this Offer Document (including an in this Offer Document other than that contained in the electronic copy) outside Australia may be restricted by law. If Investigating Accountant’s Report. you are a Customer outside Australia and come into possession (c). Jacobs has provided and is responsible for the Jacobs of this Offer Document, you should observe and seek your Report (contained in annexure B). None of the Company, own advice on any restrictions. Any failure to comply with such the Government Shareholder, the Department, or (as restrictions may contravene applicable laws. The Company applicable) their directors, officers, employees and and the Government Shareholder disclaim all liabilities to such advisers assume any responsibility for the accuracy or persons. Customers’ trustees or custodians for persons outside completeness of the information contained in the Jacobs Australia are encouraged to seek independent advice as to how Report, except in relation to information given to Jacobs they should proceed. by them. Jacobs does not assume any responsibility No action has been taken to register or qualify the Shares for the accuracy or completeness of the information or to otherwise permit a public offering of the Shares in any contained in this Offer Document other than that jurisdiction other than in Australia. contained in the Jacobs Report. External websites Forward looking statements and intentions Unless expressly stated otherwise, the content of the Certain statements in this Offer Document relate to future Company’s and the Department’s websites, including matters. www.fairbairnirrigation.com.au and www.lmairrigation.com. Customers should be aware that there are risks (both au, do not form part of this Offer Document and Customers known and unknown), uncertainties, assumptions and other should not rely on any such content. important factors that could cause the actual conduct, results, performance or achievements of the Company to be materially Glossary and defined terms different from the future conduct, results, performance or Capitalised terms used in this Offer Document are defined in achievements expressed or implied by such statements or the Glossary in Section 10 of this Offer Document. Section 10 that could cause the future conduct, results, performance or also sets out rules of interpretation which apply to this Offer achievements to be materially different from historical conduct, Document. results, performance or achievements. The calculation of figures, amounts, percentages, prices, These risks, uncertainties, assumptions and other important estimates, calculations of value and fractions in this Offer factors include the risks set out in Sections 4 and 7 of this Offer Document are subject to the effects of rounding. Accordingly, Document. their actual calculation may differ from the calculations set out in this Offer Document. None of the Company, the Government Shareholder, the Department, their respective directors, officers or advisers, Date of the Offer Document or any other person, gives any representation, assurance This Offer Document is dated 14 January 2019. or guarantee that the occurrence of the events expressed or implied in any forward looking statements in this Offer Document will actually occur. ii
Fairbairn Irrigation Network Pty Ltd Offer DocumentACN 615 973 754
If you are in any doubt as to how to deal with this document, please consult your financial or legal adviser, or call the LMA Information Line on 0468 960 538 or email admin@lmairrigation. com.au. You can also obtain more information about the Local Management Proposal from the Directors of the Company. Their contact details are included at page iv. This Offer Document is not a prospectus within the meaning of the Corporations Act and may not contain all of the information that would be required to be in a prospectus.
IMPORTANT DATES AND EXPECTED TIMETABLE Event Date and time Customer information session Wednesday 6 February at 6.30pm at the Mayfair, Emerald Date by which the Support and Acceptance Form must be received in 1 March 2019 Brisbane Anticipated transition to Local Management 30 June 2019
These dates are indicative only and subject to change. Any changes will be notified on the Company’s website. Fairbairn Irrigation Network Pty Ltd Offer Document
If I have a question about this document who should I contact? For further information on the Local Management Proposal and the Offer, please contact the LMA Information Line or a member of the Board. Contact details are provided below.
Name Position Contact Anne Marie O’Callaghan Chair 0428 582 852 Ross Burnett Director 0427 336 340 Peter Galea Director 0417 636 881 David McDougall Director 0419 782 419 Emma McCullagh Director 0438 789 488 Hamish Millar Director 0418 741 553 LMA Information Line 0468 960 538 or [email protected]
iv Fairbairn Irrigation Network Pty Ltd Offer Document
Contents
OVERVIEW OF THE OFFER DOCUMENT ...... 6
1. LOCAL MANAGEMENT PROPOSAL ...... 7
2. FAIRBAIRN IRRIGATION’S BUSINESS PROPOSAL ...... 8
3. REASONS TO ACCEPT OR NOT ACCEPT THE OFFER ...... 13
4. KEY QUESTIONS AND ANSWERS ...... 15
5. FINANCIAL INFORMATION ...... 23
6. THE COMPANY’S PRICING POLICY AND COMPARISONS WITH SUNWATER ...... 29
7. RISK FACTORS ...... 33
8. DETAILS OF THE OFFER ...... 40
9. ADDITIONAL INFORMATION ...... 44
10. GLOSSARY ...... 58
Annexure A: Investigating Accountant’s Report ...... 63
Annexure B: Jacobs Report ...... 72
v Fairbairn Irrigation Network Pty Ltd Offer Document
OVERVIEW OF THE OFFER What you need to do? DOCUMENT You should read this Offer Document carefully before deciding whether or not to support the Local Management Proposal. You must be an Introduction ‘Eligible Customer’ to be able to complete and This Offer Document is important and requires return the Support and Acceptance Form. You are your immediate attention, as you are being an Eligible Customer if you: asked to decide whether you support the Local 1 Management Proposal and agree to become a • are registered as a holder of a Water Shareholder of Fairbairn Irrigation Network Pty Allocation (which is delivered to you via the Irrigation Scheme) on the Initial Record Ltd (referred to in this Document as either ‘the Date; and Company’ or ‘FIN’). you are a SunWater Customer with a The Local Management Proposal is the proposal • channel and pipeline contract for the Water to transfer the Emerald Channel Irrigation Allocation delivered in the area of the Scheme from SunWater to FIN. The transfer Irrigation Scheme; and is targeted for 30 June 2019. Under the terms of the transfer the Department will pay FIN a • are located in Australia. Separation Payment of $2.5 million. FIN will also If you are not a registered holder of a Water receive a further $350,000 (part related to exit Allocation (which is delivered to you via the fees previously paid to SunWater, and part in lieu Irrigation Scheme) on the Initial Record Date of SunWater upgrading the bulk meters for the (29 November 2018) you are not eligible to be a Scheme). Shareholder of the Company. The Local Management Proposal will only If you support the Local Management Proposal proceed if customers representing at least 70% of you must complete and return the Support and Water Allocations by nominal volume support the Acceptance Form which must be received by no proposal and accept the Offer of Shares in the later than 5.00 pm (Brisbane time) on 1 March Company or the Board and Government agree to 2019. waive that requirement. If you do not return your Support and Supported by the Board of FIN Acceptance Form, you will be taken not to support the Local Management Proposal and will The current Board of FIN has carefully considered not receive Shares in the Company. the Local Management Proposal and the Directors unanimously recommend that you The terms and conditions associated with SUPPORT the Local Management Proposal. In becoming a Shareholder in the Company can addition, the Directors on the Board who are be found in Section 8 and 9.7. You will only eligible to vote and accept Shares in FIN intend to receive Shares if the Local Management Proposal support the Local Management Proposal. proceeds. You do not have to pay any cash amount to accept the Offer of Shares. Further details are set out in Section 8.1. When making your decision, you should consider the risks associated with the Local Management Proposal, some of which are set out in Sections 3, 4 and 7.
1 A holder of a Water Allocation is either the person whose details are stated on the water allocations register as the person who holds the water allocation or if a lease of the water allocation is registered on the register—the lessee of the lease.
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1. LOCAL MANAGEMENT Summary of the Local Management PROPOSAL Proposal 1.1 Background • Assets: Selma and Weemah channel In late 2016, the Queensland Government set up and pipeline systems and related drains (excluding part of the LN1 drain) to be FIN and appointed the Board to negotiate and transferred to FIN investigate the local management proposal with the Queensland Government and ultimately, if • Employees: Existing local SunWater staff to accepted by the Board and the Customers, to transfer to FIN, on the same employment become the owner and operator of the Irrigation conditions and with any accrued leave Scheme. entitlements preserved (and with FIN to receive a cash payment for certain accrued The move toward local management of the leave entitlements) Irrigation Scheme has been discussed and considered by customers of the Irrigation • Separation Payment: Government to pay Scheme and the Queensland Government for FIN a Separation Payment of $2.5 million over 20 years. This document is the culmination • Cash Assets: SunWater will transfer cash of work commenced in 2012 when Government assets representing exit fees previously paid began detailed investigations into the feasibility by Customers to SunWater (at this stage of Local Management for SunWater’s irrigation approximately $81,000), $276,000 in lieu schemes.2 It was that process that resulted in the of SunWater replacing the Parshall flumes formation of the Company and the appointment with new bulk meters3, an amount for any of the Board (see Section 2.2 for details of the non-routine works in the 2018/19 network Board). service plan that are not undertaken by SunWater prior to the Transfer Day, and The Board has assessed the offer from the amounts to cover certain leave entitlements Government and negotiated the terms of the for the transferring employees. proposed transfer of the Irrigation Scheme to the Company. As part of this process, risk-based • Winton Creek: SunWater will be required to enquiries supported by external experts, including undertake works on Winton Creek legal, accounting and engineering assessments, • Customers: Existing SunWater customers into the transferring assets and liabilities have in the Scheme to transfer to FIN, including been undertaken and the Board has examined Water Allocation holders who will become various financial models to assist it to understand customers of FIN under a new Customer the prospects of the Company should the Local Contract Management Proposal proceed. • Shareholders: Water Allocation holders can elect to become Shareholders of FIN 1.2 Local Management Proposal • Bulk Water: SunWater will continue to The Local Management Proposal is the proposal operate the Fairbairn Dam and collect bulk by the Government to transfer the Irrigation water charges (Part A and B charges) Scheme and its associated business and certain liabilities from SunWater to FIN. A Transfer Deed • Transfer Date: Transfer scheduled for 30 has been executed by FIN under which the June 2019 Department has agreed to transfer the Irrigation • Conditions need to be met: Transfer Scheme to the Company. The box below conditional on sufficient customer support summarises key aspects of the proposal. Further and other conditions being met. details of the terms of the transfer are provided in Section 9.2.
2 More information on the history of the Local Management Project is available at http://lmairrigation.com.au/overview/history/ 3 FIN has no current plans to upgrade these bulk meters. More information can be found in Section 4 below.
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The transfer is conditional on: 2. FAIRBAIRN IRRIGATION’S • customers representing 70% of Allocations BUSINESS PROPOSAL by nominal volume of Water Allocations in the Scheme supporting the proposal and 2.1 Board’s vision for FIN accepting the Offer of Shares in FIN. The Board’s vision for FIN is a locally owned entity, working with irrigators to create • FIN entering agreements with SunWater related to: sustainable water access solutions for the Irrigation Scheme. Its core business principles will » the provision of pumping services from be: the Selma pump station, • Sustainability and growth: The Board » the supply of distribution loss intends to take a long-term view of allocations to be transferred to FIN, management of the business, to ensure the Irrigation Scheme remains financially viable » a service level agreement between the and is able to support future generations of parties, farmers in the district, while also having the potential to grow over time. » the release of water into the section of the LN1 drain that will be retained by • Local accountability: The Board, which SunWater, and currently includes several local irrigators, will be directly accountable to its customer » the Channel Lining Project. Shareholders. • Term sheets which set out the main terms • Efficient and cost-effective services: The to be included in the final agreements have Board’s goal is to provide cost effective already been agreed for the Selma pump water services to its customers through station and LN1 drain agreements, as have efficient and effective management of its the principles for the Channel Lining Project. physical and human resources. These conditions can be varied or waived by • Working with customers: The Board agreement between FIN and the Department. intends to work closely with customers, If FIN is unable to agree satisfactory terms with with the goal of building their trust and SunWater, then the Board intends to consult with understanding their needs. Current Customers prior to making a decision on how to proceed under the Transfer Deed. • Revenue stays in the scheme: All revenue from distribution and drainage charges will be accounted for, and spent, in operating and maintaining the Irrigation Scheme. There will be no dividends or other distributions paid to Shareholders. Customers will be able to track the performance of FIN as a standalone entity.
Further detail on key elements of the Board’s proposal for FIN are set out below. Pricing. After the Transfer Date, the Board will be responsible for setting prices (as opposed to Government, based on recommendations from the Queensland Competition Authority (QCA)). The Board will be able to set prices annually by giving customers at least six months’ notice before the start of each financial year. The Board has determined the distribution prices to apply from the Transfer Date for the 2019/20 financial year. These are shown in Table 1.
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Table 1: FIN prices 2019/20 and comparison with SunWater
Fixed (per ML) Variable (per ML) FIN Total SunWater Total4 (Part C) (Part D) Medium Priority Allocation $25 $6.71 $31.71 $34.15 High Priority Allocation $36.27 $6.71 $42.98 $46.74
Fixed distribution prices for medium priority expenditure through the savings in operating water will be 8% lower in 2019/20 under FIN expenses described above. (Note that if the Board compared with SunWater. were to adopt the SunWater capital profile, this would mean that the modelled prices under FIN The lower prices under FIN reflect the Board’s would increase by only 2.4% per annum over the estimate of operating expenses, which is more 29-year period, rather than 3.7%.) than $400,000 lower than SunWater’s estimate. The Board’s intention is to operate under a lower One of the Board’s goals is to bring more water cost base than currently exists under SunWater into the network, for example, where feasible by and to continue to look for ways to reduce the making any surplus distribution loss allocation cost of supplying water to customers. The Board available for productive use. (Since 2008, is targeting long-term price increases of 3.7%5. between 11,900 ML and 23,500 ML of surplus This compares with since 2007: distribution loss water has been available at the end of each water year.) While not included in • an average annual increase in SunWater’s prices of 4.9%, and the current Asset Refurbishment and Renewal Strategy, the Board also intends to look at options • an average annual increase in SunWater’s for modernising the scheme, as well as funding costs of 8.4%.6 options (including government grants) to support modernisation, to ensure the scheme can provide Drainage charges in 2019/20 will be the same services that respond to irrigator demands. as the 2018/2019 year but escalated by inflation. The 2018/2019 rates are $28.10 per hectare for Meeting service standards, with a view to irrigable land and $6.85 per hectare for non- improvement. The existing service levels, as irrigable land. Drainage charges will increase in described in the current distribution rules under line with inflation each financial year thereafter. SunWater, will be adopted by the Company. The Board’s intention is to target an improvement Maintaining, growing and modernising the in service standards over time through its local scheme for the benefit of customers.The Board focus and capacity for independent decision- intends to manage the network to enhance its making. The Board intends to set service capacity to support and promote agriculture standards, based on customer needs, and then in the region. The Board’s Asset Refurbishment meet those standards. Concerns raised during the and Renewal Strategy provides for $19.5 million Local Management process have already resulted of capital expenditure over 29 years, which is in SunWater agreeing to spend additional funds fully funded under the proposed price path. This improving drainage through Winton Creek. The compares with $7.9 million planned by SunWater Board is committed to continuing to fund such over the same period7. The Board’s intention maintenance activities. is to meet the cost of the additional capital
4 SunWater prices are currently only set until 30 June 2019. The prices shown here are based on the 2018/19 prices increased by 2.5%. 5 This target has been developed for the total price that is the fixed and variable and applies to both the Medium and High Allocations. These are targets developed by the Board using information available to the Board. The actual prices will be set by the Company over time and will be subject to the information available to the Company at that time. There are inherent risks associated with the operation of the business, which may impact the price of water which are discussed in more detail at Section 7. 6 Based on SunWater’s total actual prices and total cost-reflective price for medium priority allocations. For further detail see section 6.4. 7 Both the FIN and SunWater capital expenditure values exclude costs associated with the Selma pump station. The SunWater values also exclude any SunWater overheads. This is to allow for a like-for-like comparison, given that any overhead costs for FIN are already captured in their operating costs.
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Corporate structure. FIN will be a public company operations of bulk water supply. SunWater will limited by shares.8 Holders of a water allocation also continue to own and operate the Selma distributed under the distribution operations Pump Station (with relevant costs passed on licence for the Irrigation Scheme will be eligible to to FIN) and the section of the LN1 drain within become Shareholders in FIN. Shareholders will be the town of Emerald. In addition, SunWater will eligible to stand for election as a Director of the be responsible for implementing the Channel Company and attend meetings of the Company. Lining Project. The Company and SunWater are A customer’s Share Entitlement will reflect the working towards agreements to govern these nominal volume held under Allocation. There is arrangements prior to the Transfer Date. Term a restriction in the Constitution to ensure that sheets have already been agreed for the Selma a person together with their Associates cannot pump station and LN1 drain agreements, as have hold more than 25% of the Shares in FIN9. The the principles for the Channel Lining Project. Company will prepare annual financial reports which will be publicly available. 2.2 Board Continuity of operation. From the Transfer Date, The Constitution provides that the Board will FIN will operate out of the existing SunWater consist of a minimum of five and a maximum of office and depot at Esmond Street, Emerald seven Directors, with at least two Independent and the current local SunWater employees will Directors and at least two Shareholder Directors. transfer to FIN. The current SunWater employees At the first general meeting after the Transfer between them have significant experience Day, and each year thereafter, at least two of the working in the Irrigation Scheme and the Board Directors will retire. The Constitution provides recognises the importance of retaining their local that Directors may not serve for longer than a knowledge and skills. Staff will transfer with their three-year term, without re-election. Directors existing entitlements and SunWater’s existing will be entitled to be paid for their role on the enterprise agreement. Board. The Directors are currently paid based on rates that have been determined by Government Funding to support the transition. The $2.5 in accordance with the Government’s general million separation payment from the Government policy for remuneration for board members will assist FIN with its initial set up costs and to on an entity of this type and size. Those rates replace systems and equipment that are currently will initially, subject to review by the Board, provided centrally by SunWater. Allowance continue to apply after the transition to Local for these costs has been factored into the Management. The Board intends to adopt higher Company’s business plan. There is also separate rates for Independent Directors, as a means for funding available from Government to meet attracting suitably qualified individuals. certain transitional costs incurred prior to the Transfer Day. The Board will have the power to manage the business of the Company except for those A local approach to business. The Board’s matters reserved for the Shareholders. The Board intention is to operate with a preference towards may delegate any of its powers to a committee engaging local suppliers and contractors. of the Board, a Director or an employee of the Insurance to manage risks. The Board intends Company. taking out insurance to mitigate key risks to the Details of the current Directors are set out below. business. In addition, the Board proposes to rely on its operating budget and funding set aside for Chair Anne Marie O’Callaghan, Independent capital costs to manage uninsurable risks such as director floods and insurance deductibles. Anne Marie is an experienced director and finance professional with over 20 years’ A new relationship with SunWater. FIN will experience in executive leadership and on have a close relationship with SunWater given company boards throughout rural and regional SunWater’s ongoing role in management and Queensland. She is a former partner of a regional chartered accounting practice with excellent 8 FIN is currently a proprietary limited company. FIN will be converted to a public company prior to the Transfer Date. business acumen and financial skills, including extensive expertise in business advisory, financial 9 Article 8(c)(ii)B1) of the Constitution
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modelling, taxation and audit. She is also Director Emma and her husband manage a family farming and Chair of Finance on the board of Suncare enterprise on the river system at Emerald. During Community Services Limited, a healthcare Stage 2 Emma was the project co-ordinator company. A strong advocate for agribusiness for the Emerald interim board, gaining direct and community development, Anne Marie experience of the Local Management governance was a director of the Emerald Stage 2 Local and stakeholder engagement processes, in Management Arrangements Interim Board. addition to an understanding of the entire Emerald distribution scheme. Ross Burnett, Shareholder director For more than 14 years Ross has successfully David McDougall, Independent director owned, operated and expanded his cropping David has over 35 years’ experience providing business in the Emerald Irrigation Area. He strategic, financial and economic advice to has been a pro-active advocate for Emerald Government and the private sector. He was agribusiness on local and national industry previously a partner of KPMG leading the organisations, serving in various executive roles on Infrastructure & Projects Group in Queensland the Central Highland Cotton Growers & Irrigators and PNG, a Director of a major Australian Association since 2006 and as President from investment bank in Australia and the USA and a 2011-2014. He has been the Emerald Member senior manager at Westpac specialising in Project Representative on Cotton Australia from 2015- Finance. David has expertise in project evaluation 2018. He is currently the grower representative on and procurement, transaction structuring, project Cotton Australia’s Sustainability Working Group and structured finance, mergers and acquisitions, and is a director on the Queensland Farmers valuations, capital raising and strategic advice. Federation board. His understanding of corporate He was previously a Director of Water Secure governance and stakeholder engagement has and Seqwater and a number of public and private been gained through involvement in operating his companies and is currently a Director of Mineral own business and past board and executive roles. Resources Lihir Pty Ltd the manager of the Ross has been involved in the LMA process since Australian assets of the Lihirian Equity Trust, a its inception in 2012. PNG based investment fund.
Peter Galea, Shareholder director Hamish Millar, Shareholder director Peter has practical and in-field agribusiness Hamish is the Managing Director of Cowal experience spanning more than 35 years Agriculture, a large scale agribusiness based including irrigation farms in Mackay, Burdekin in Emerald, producing predominately irrigated and Emerald, in addition to dryland farming in the cotton and grain. He is a graduate of the Clermont district. An active representative of the Memphis Exchange International Cotton School, local community, Peter served as a director on and has experience in classing and marketing. Stage 2 of the Local Management process. Hamish has extensive knowledge of production and agribusiness within the cotton industry, Emma McCullagh, Independent director including roles requiring strategic planning, Emma has been actively involved in advocating business management and trading commodities. for Emerald’s community and agribusiness for He has had extensive experience in several many years. She is the former president of the cotton industry organisations, including the Central Highlands Cotton Growers and Irrigators Chair of the Australian Cotton Growers Research Association and has held various executive Association, Director of Cotton Australia, Director positions in the organisation over the past seven of the Cotton Industry Council, Director of the years. Emma is a representative on the people’s Cotton Research & Development Corporation, panel of the Cotton Research and Development Chair of Cotton Industry Development in Corporation. She is employed as a project Northern Australia and is a fellow of the officer for Central Queensland Rural Health Australian Institute of Company Directors. where her role includes conducting stakeholder Hamish is committed to the benefits of well- engagement across the primary health sector. targeted research and development to underpin She also supports the governance process and the overall performance of Australian agriculture. procedures within the organisation.
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2.3 Operations team The day-to-day management of the Company will be overseen by a general manager, Jason Smith, who will report directly to the Board. In addition to the general manager, the staff of the Company will comprise an additional eight staff. All the positions are expected to be filled by staff who transfer from SunWater. The proposed organisational structure is set out in the diagram below. In addition, the Board is proposing to engage a bookkeeper.
Board of Directors
General Manager
Administration Water distribution Maintenance 1x administrator 1x operations supervisor 1x operations supervisor 4x operator maintainer 1x operator maintainer
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3. REASONS TO ACCEPT OR NOT ACCEPT THE OFFER
3.1 Introduction Given the significant resources committed by the Department to investigating and supporting a move to Local Management since 2012, if the Local Management Proposal is rejected by Current Customers, further resources to facilitate a move to Local Management may not be made available for some time, if at all. As such, you should carefully consider the reasons for and against a transition to Local Management before responding to this Offer Document. If this Local Management Proposal does not proceed, the Department has indicated that the Irrigation Scheme will remain within SunWater. Comparisons between FIN and SunWater are shown in section 6.
3.2 Reasons to support the Local Management Proposal Reasons why you may wish to support the Local Management Proposal include: P A more flexible and responsive business controlled by a customer-elected Board Local Management would mean that the Irrigation Scheme will be owned and run by a company with a Shareholder elected Board. A locally owned Irrigation Scheme will mean greater flexibility and control in how the network is operated, including scope to vary service standards to meet local conditions or distribution pricing structures to respond to local demands, or to modernise the network. P Transparency and local accountability, with all revenue staying in the scheme With a more accessible management team and a Board that is directly accountable to Shareholders, you are likely to benefit from greater transparency relating to the operation, decision-making and finances of the Company and the Irrigation Scheme. The Company will be a not-for-profit entity and all revenue earned by the Company will stay in the scheme and all costs accounted for within a local standalone entity. There will be no dividends or other distributions paid to Shareholders. P Greater control over distribution prices Under Local Management, the Board will be responsible for future pricing policy.10 This is different to SunWater which is subject to pricing recommendations from the QCA and subject to the risk that Government policy in relation to pricing may change. Based on the Board’s proposal, the fixed prices paid by Customers in 2019/20 will be lower under Local Management than they will be under SunWater. There is a detailed discussion of pricing issues in section 6. P More say over maintenance and replacement/refurbishment of key assets Local Management will give Shareholders more involvement in decisions on the refurbishment or replacement of assets including critical infrastructure. Decisions will be driven by the needs of the scheme and no longer influenced by SunWater’s corporate or state-wide policies. The Board is proposing a capital expenditure program that is significantly more than SunWater’s, while still targeting lower prices. P Capacity to realise benefits from distribution loss allocations If there is surplus water available under FIN’s distribution loss allocations in any given year, then the Company may be able to trade water on the temporary market. Such revenue could be used to improve service standards or to reduce water prices. This would also increase the amount of water available for productive use within the Irrigation Scheme.
10 Bulk water prices will continue to be set in accordance with legislative and regulatory processes, which currently includes review by the QCA with prices set by the Government based on QCA recommendations.
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P Scheme assets transferred at no cost, and money from the Government paid up front As part of the transition to Local Management, the Company will receive, at no cost, assets with a replacement value of $162 million. In addition, the Department has agreed to pay the Company a Separation Payment of $2.5 million and SunWater will transfer certain cash assets including approximately $81,000 for exit fees previously paid to SunWater and $276,000 in lieu of SunWater upgrading certain bulk meters. The Board will be able to determine how those funds are best spent. Government has advised that there will be no future subsidies paid to the Company. P Other benefits: Local economy: Local Management of the Irrigation Scheme may result in more of the work related to the scheme being undertaken locally, rather than (as currently) in SunWater’s regional centres or in the Brisbane head office. This may provide local economic benefits. A voice for Customers: FIN will be a platform to raise issues with the Government on your behalf, for example during bulk water pricing reviews or water planning processes, such as changes to the water plan. Potential to access alternative funding: FIN may be able to access a range of funding sources, including Federal or State funds that are only available to private entities. The Company may be more flexible and have greater incentives to apply for funding.
3.3 Reasons not to support the Local Management Proposal Reasons not to support the Local Management Proposal: O Maintain the status quo and avoid risks associated with Local Management There is a risk that the operation of the Irrigation Scheme will not be a financially viable business or that distribution prices will need to increase by more than anticipated to ensure its viability. As a small, stand-alone, privately owned entity, FIN may have less capacity to withstand unexpected events, including events that increase operating costs or capital requirements or adversely affect customer viability. To mitigate these risks the Board intends to take out appropriate insurance, and to build a cash reserve to meet future capital costs. Risks associated with Local Management are discussed in detail in Sections 4 and 7. O Lost potential to access Government subsidies and support The Government has historically capped distribution price rises by subsidising the operation of the Irrigation Scheme. Current Government policy is that Customers should ultimately pay the full cost of operating and maintaining the network, but the Government has sought to smooth the transition to Cost-reflective Pricing by limiting the rate at which prices have increased. This support may continue if the network remains with SunWater (although there are no guarantees regarding the Government’s future pricing policy). Under Government ownership through SunWater, the Government has the financial ability, should it choose to do so, to respond to unexpected events and support the Irrigation Scheme. Under Local Management, the Company will need to rely upon insurance together with existing operational budgets and cash reserves to respond to unexpected events. Where additional funding is required, it will most likely need to be sourced from Customers through an increase in distribution prices charged to them.
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4. KEY QUESTIONS AND ANSWERS This Section 4 answers some questions Customers may have about the Local Management Proposal and the Offer of Shares, and should be read together with the other parts of this Offer Document.
Question Answer Further information
General What is the Local The Local Management Proposal is the proposal Sections 1.2 and 9.2 Management Proposal? to transfer the Emerald Irrigation Channel Scheme from SunWater to FIN and pay FIN a Separation Payment of $2.5 million as well as certain cash assets including around $81,000 for exit fees previously paid to SunWater and $276,000 in lieu of SunWater upgrading certain bulk meters. The transfer is targeted for 30 June 2019. The Local Management Proposal is subject to a number of pre-conditions. What are the pre- Under the Transfer Deed, a number of conditions Section 1.2 and 9.2 conditions to the must be satisfied before the transfer may occur, Proposal and what including: happens if they are not • 70% of Current Customers (by volume) met? accepting this Offer; and • FIN concluding agreements with SunWater in relation the Selma Pump Station, the LN1 drain, the Channel Lining Project, supply of distribution loss allocations and ongoing services via a service level agreement.
If the pre-conditions are not met by the dates required in the Transfer Deed: • those dates may be extended by agreement between the Company and the State (which could result in the Transfer Date being extended) • the Transfer Deed may be terminated by the Company or the State and the Local Management Proposal will not proceed, or • the Board and/or State may waive the relevant condition allowing for the transfer to proceed despite one or some of the conditions not being met.
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Question Answer Further information What is the Irrigation The Irrigation Scheme refers to the distribution and Section 9 Scheme and what assets drainage assets in the Emerald Irrigation Area. This are being transferred? includes: • the Selma and Weemah channel systems, including associated channels, pipes, pumps, meters, and the Parshall flumes • the drainage network, including the part of the LN1 drain within the channel system • the distribution loss water allocations • the house on Old Airport Drive, and • the depot and office at Esmond Street and plant and equipment related to the Irrigation Scheme. Does the Irrigation No, Fairbairn Dam and other bulk water assets will Scheme include the remain with SunWater. Fairbairn Dam? What happens to Selma SunWater will continue to own and operate the Section 9.4 pump station? Selma pump station, which will be used to supply water to the Irrigation Scheme. FIN will pay SunWater for the cost of providing pumping services from the pump station. SunWater and FIN are negotiating an agreement regarding pumping services from the pump station. A term sheet has already been agreed. What about the LN1 FIN has successfully negotiated the retention by Section 9.4 drain? SunWater of the part of the LN1 drain that traverses the township of Emerald. The remainder of the LN1 will transfer to FIN. FIN and SunWater are negotiating an agreement under which the Company will be required to pay SunWater for the discharge of water into LN1. A term sheet has already been agreed.
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Question Answer Further information What about the Channel SunWater has been granted $3.01 million from the Section 9.5 Lining Project? National Water Infrastructure Development Fund towards lining channels within the Scheme to reduce water loss. The funding is subject to final agreements being concluded between the Federal Government, the State and SunWater. Under the Transfer Deed, SunWater and FIN must enter into a Channel Lining Project Agreement prior to the Transfer Date in line with principles set out in the Transfer Deed. Under those principles: • generally, SunWater will fund the capital costs of the Channel Lining Project and carry out the works after the Transfer Date, • SunWater will be able to recover the capital costs from the sale of any water saved by the project, • interest will be payable with respect to the capital costs and that interest amount should be recovered from the sale of any water saved by the project, • if there are surplus funds from the sale of water saved by the project after SunWater capital costs and interest have been paid, those funds would go to FIN. What about the bulk SunWater had planned to replace the Parshall meters? Flumes with new bulk water meters in the current network service plan. The Board determined that the upgrade was not required immediately and the funds allocated for the upgrade will instead be paid to the Company on the Transfer Date. The Board currently has no plans to install new bulk water meters. Operation of the Irrigation Scheme Who will run the FIN, overseen by its Board, will operate the Irrigation Section 2.2 and Irrigation Scheme under Scheme. FIN will be owned by those Eligible section 2.3 Local Management? Customers who agree to become Shareholders in the Company. The Board will be responsible for the strategic direction of the Company, while the staff, led by the general manager, will be responsible for day-to-day operations. Neither the Government nor SunWater will be involved in the management or decision-making of the Company.
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Question Answer Further information What happens to existing All local SunWater staff working in the Irrigation Sections 9.2 and 9.8 SunWater employees? Scheme in Emerald will transfer and the SunWater enterprise agreement will continue to apply to their employment with FIN. In addition, provision has been made: • to ensure that the ‘no forced redundancy provisions’ in the SunWater enterprise agreement will apply for 3 years from the Transfer Date, and • in the Transfer Deed to ensure that the transferring employees shall receive the benefit of any future beneficial terms in the new enterprise agreement currently being negotiated between SunWater and its employees. Will the operation and Initially, the Irrigation Scheme will be operated by Section 1.1 and maintenance of the the same staff (except employed by FIN instead of section 5.9 Irrigation Scheme be SunWater) and using the same or similar operating different under Local rules. Over time, the Board and management may Management? change service standards in response to decisions of the Board and feedback from Customers. The Board has planned for significantly more capital expenditure than is currently planned by SunWater. Water prices under Local Management Who will set the The FIN Board will set prices for water distribution Section 1.2 and 6.1 distribution water in the Irrigation Scheme and for related services. prices under Local Distribution prices will be determined based on Management? the Board’s assessment of the revenue required to operate and maintain the scheme including provision for capital expenditure into the future. Under the new deemed Customer Contract, FIN can adjust the distribution prices (fixed and variable) annually on 1 July, provided it has given Customers at least six months’ prior notice. What about bulk water Bulk water charges will continue to be paid to Section 7.3(a)(ii)(C) prices under Local SunWater. Bulk water prices will continue to be Management? set in accordance with legislative and regulatory processes, which currently includes reviews by the QCA with prices set by the Government based on the QCA recommendations. Will the Government No. A Separation Payment will be paid on or before Section 9.2 subsidise water the Transfer Date, which is a one-off lump sum to distribution prices under assist with the transition of the Irrigation Scheme to Local Management in the Local Management. The Government has stated that future? no subsidies will be paid by the Government to the Company in the future.
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Question Answer Further information
Proposed governance arrangements What type of entity is FIN will be a public company limited by shares.11 Section 9.7 FIN? How do I have a say in To have a say in the decisions of the Company you Section 9.7 the decisions of FIN? need to be a Shareholder. If you are a Shareholder: • you or your nominee could seek election as a Shareholder Director; • you will be able to attend general meetings of the Company; and • you will be entitled to vote on the election of Directors and certain other decisions set out in the Constitution or where required by the Corporations Act.
The Company will prepare annual financial reports which will be publicly available. How many Directors will There must be a minimum of five Directors and a Section 9.7 there be? maximum of seven Directors, of which at least two must be Independent Directors and two must be Shareholder Directors. How long are Directors Directors will, depending on the particular date of Section 9.7 appointed to the Board? the relevant meeting and the rotation process in the Constitution, typically be appointed for a maximum of three years (subject to re-election). Other questions What happens to my On the Transfer Day, if you are a registered holder Section 9.3 existing supply contracts of a Water Allocation holder, your existing contracts with SunWater? with SunWater for bulk water and for the delivery of water through the Irrigation Scheme will be replaced by two new contracts: • one with SunWater for your bulk water; and • a new deemed Customer Contract with FIN for the water distribution and drainage services.
The new deemed Customer Contract has been based on the existing SunWater channel and pipeline contract. You are the ‘holder’ of the relevant Water Allocation if you are registered as the person who holds the Water Allocation or if a lease of the Water Allocation is registered on the register, the lessee of the lease.
11 FIN is currently a proprietary limited company. FIN will be converted to a public company prior to the Transfer Date.
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Question Answer Further information Does this mean I Yes, it is the Board’s intention that FIN will issue will now receive two customers with an invoice for the distribution (fixed separate invoices for my and variable) and drainage charges and SunWater water charges? will continue to invoice customers for the bulk water charges. What if I am a SunWater If you have an existing channel and pipeline contract Section 9.6 customer who temporary with SunWater to temporary transfer water into transfers water into the the Scheme and you are not a registered holder scheme but don’t hold a of a Water Allocation in the Scheme, that existing Water Allocation in the contract will be transferred to FIN on the Transfer Scheme? Date. The terms of the existing contract will be amended via the Transfer Notice to provide for the change to Local Management, including, for example to allow FIN to set the charges in the same manner that it is able to set charges under the deemed Customer Contract which applies to the holders of water allocations in the Scheme. People who only trade on a temporary basis and are not a registered holder of a Water Allocation holder will not be entitled to own Shares in FIN. How do I have a say FIN intends to establish an irrigator advisory if I don’t become a committee. The governance structure of this group Shareholder or I am is yet to be determined but the Board’s intention not eligible to be a is that this could include customers who are not Shareholder? Shareholders. What about drainage FIN will levy a drainage charge for each hectare in Section 9.6 under Local the Declared Drainage Area. The Declared Drainage Management? Area will be the same area as under SunWater. The drainage charge will be the current drainage charges escalated by CPI for the start of the next financial year. The terms and conditions associated with drainage are contained in either: • the new deemed Customer Contract; or • in the Company’s standalone Drainage Contract for landowners in the Declared Drainage Area who are not a party to the deemed Customer Contract (because they are not the registered holder of a Water Allocation in the Scheme).12
12 The standalone drainage contract is available at www.fairbairnirrigation.com.au.
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Question Answer Further information What happens if It will be the responsibility of FIN to ensure that the Section 7 following the transition, operation of the scheme remains viable over the FIN does not have long term. FIN will need to ensure that its prices are sufficient funds to set at a rate to cover its costs and build sufficient operate the Irrigation funds to cover future capital expenses or deal with Scheme? unforeseen circumstances. The Government has stated that there will be no recourse to the Government for funding once Local Management is implemented. Under Local The Constitution provides that a person together Section 9.7 Management, could the with their Associates cannot own more than 25% of Irrigation Scheme be the Shares in FIN13. taken over by another A takeover therefore could only occur if company? Shareholders passed a special resolution majority vote to amend the Constitution to remove this 25% cap. Any potential acquirer would also need to comply with the takeover provisions of the Corporations Act. Accepting the Offer of Share Entitlement If I accept the Offer, You will receive one Share for each megalitre of the Sections 8.1 and 8.6 how many Shares will I nominal volume of your Allocation. However, no receive? one person together with their Associates may hold more than 25% of Shares in the Company. Does it cost anything to No. There is no amount payable for an application Section 8.1 become a Shareholder? for your Share Entitlement. Will becoming a As a Shareholder in a public company limited by Section 7 Shareholder expose me shares, you are not exposed to the financial risks of to financial risk? FIN. In circumstances where revenues and reserves are insufficient, FIN may consider any additional sources of funds available to it. The most likely source of funding would come from an increase in prices charged to customers.
13 See Article 7.3 of the Constitution. Also note that “Associates” is widely defined in the Constitution and includes, for example children, spouse, dependent or in the case of a company, another company in the group of companies.
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Question Answer Further information Will becoming a An application for an Administrative Binding Section 9.1(a) Shareholder expose me Advice has been made to the Australian Taxation to any tax risk? Office with a response due in early 2019. In similar circumstances, advices have been issued providing that no material income tax liability would arise for customers electing to become shareholder of the similar entities. The Transfer Deed is conditional upon the Company and the State being satisfied no material tax liabilities will arise as a consequence of the Local Management Proposal. You should obtain your own tax advice in relation to your individual circumstances. If I support the Local Yes. By supporting the Local Management Proposal Sections 8 and Management Proposal, and returning the Support and Acceptance Form, 9.7(g) do I have to apply for you also agree to apply for Shares in the Company. Shares? If you support the proposal and return the Support and Acceptance Form but do not wish to be a Shareholder, then after the Transfer Date you may apply to the Company to have your Shares transferred, bought-back, cancelled or forfeited under the Constitution. What happens if I don’t You will still become a customer of FIN under the Section 8 become a Shareholder? new standard deemed Customer Contract. If I don’t support the Yes, but only after the Transfer Day, at which time if Section 8 Local Management you meet the criteria to hold Shares in FIN you can Proposal can I still apply to become a Shareholder. become a Shareholder? Who will know whether Your Support and Acceptance Form will be collected Section 8.9 or not I support the Local by an entity called LMA Support Services Pty Ltd. Management Proposal? LMA Support Services will review all responses and advise the Government and the Board whether the Customer Support Threshold has been met. If you support the proposal and thereby elect to become a Shareholder of FIN, and if the Local Management Proposal proceeds, then your details will be provided to the Government and FIN for the purpose of managing the Share Register. During the Offer phase, Board members may contact you to encourage you to return your Support and Acceptance Form and to discuss the Local Management Proposal with you.
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5. FINANCIAL INFORMATION purpose financial reports prepared in accordance with the Corporations Act. 5.1 Introduction The financial information used by the Directors 5.3 Balance Sheet Introduction to inform this Offer Document includes the During the period from incorporation of the existing financial information of the Company Company (17 November 2016) to 30 June 2018, and SunWater’s historical financial information the Company did not trade and had no assets or related to the operation of the Irrigation Scheme. liabilities. To understand the initial financial position of the Company, this Section includes: 5.4 Preparation of the Pro Forma • the pro forma historical balance sheet as Historical Balance Sheet at 30 June 2018 (Pro Forma Historical Balance Sheet). The Pro Forma Historical The signing of the Transfer Deed in respect of the Balance Sheet has been prepared on the transfer of the Irrigation Scheme and associated basis that the assets, liabilities and equity of assets and liabilities of the business from SunWater the business to be transferred in the Transfer to the Company whilst the Company’s sole Deed occurred on 30 June 2018 using asset Shareholder is the Government Shareholder, is and liability values provided by SunWater and a transfer between wholly-owned Government any subsequent adjustments made by the entities. Department, and The Pro Forma Historical Balance Sheet for the • information related to the future operating and Company has been prepared solely for inclusion in capital expenditure of the Company, and the this Offer Document. Company’s revenue. The Pro Forma Historical Balance Sheet for the (collectively, the “Financial Information”). Company has been derived from the historical balance sheet of the Company as at 30 June 2018 The purpose of including the Pro Forma Balance and includes adjustments for the effects of the Sheet in this form is to show what the starting following group of pro forma transactions: position would be for the Company assuming the business was transferred on 30 June 2018 (as • Assets as per the Transfer Deed based opposed to the actual Transfer Date scheduled for on SunWater values and any subsequent 30 June 2019). adjustments made by the Department as at 30 June 2018; The Financial Information presented in this Section should be read in conjunction with the risk • Liabilities as per the Transfer Deed based factors set out in Section 7 and other information on SunWater values as at 30 June 2018 and contained in this Offer Document. any subsequent adjustments made by the Department; and
5.2 Basis of Preparation and Presentation • The Separation Payment. of the Financial Information The Pro Forma Historical Balance Sheet for the The Directors of the Company are responsible for Company has been prepared in accordance with the preparation and presentation of the Financial the recognition and measurement requirements Information. The Financial Information included of AAS other than it includes adjustments which in this Offer Document is intended to present have been prepared in a manner consistent with potential Shareholders with information to assist AAS that reflect the impact of certain transactions them in understanding the impact of the Local as if they occurred as at 30 June 2018. Significant Management Proposal on the financial position of accounting policies of the Company relevant to the the Company. Pro Forma Historical Balance Sheet are available on The Financial Information is presented in an the Company’s Website at www.fairbairnirrigation. abbreviated form and does not include all of com.au. These policies will be adopted and applied the presentation, disclosures, statements and in the preparation of the Financial Statements of comparative information as required by Australian the Company following the Transfer Date, unless Accounting Standards (AAS) applicable to general otherwise noted.
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The Pro Forma Historical Balance Sheet has of the Company. been reviewed by KPMG Financial Advisory Section 5.8 which provides information Services (Australia) Pty Ltd in accordance with the • on the Director’s Asset Refurbishment and Australian Standard on Assurance Engagements Renewal Strategy. ASAE 3450 Assurance Engagements involving Corporate Fundraisings and/or Prospective • Section 6.3 where the Directors have Financial Information as stated in its Investigating considered the sensitivity of potential future Accountant’s Report set out in annexure A. You prices to a range of variables to illustrate the should note the scope and limitations of the impacts under differing assumptions. Investigating Accountant’s Report. 5.7 Operating expenditure of the 5.5 Pro Forma Historical Balance Sheet Company Table 3 sets out the Pro Forma Historical Balance The Directors have prepared a proposed budget Sheet of the Company as at 30 June 2018 as if for the first year of the Company’s operation the Transfer Deed was implemented on that date. post-transition. The cost estimates have been Adjustments have been made to the 30 June 2018 developed from a combination of SunWater’s data to account for impairment and to incorporate historic costs and independent expert advice. more up to date information on employee A high-level summary of the estimated entitlements. operational costs for the Company for a 12-month period for 2019/20 is set out in Table 5.6 Management discussion & analysis 2. This does not include the cost of capital of future prospects expenditure discussed in section 5.8. The Irrigation Scheme has operated historically This estimate of $3.236 million under FIN as part of SunWater and not as a single compares with the SunWater Network Service stand-alone entity as proposed under Local Plan forecast for 2019/20 of $3.7 million14. Management. Consequently, there is inherent uncertainty surrounding the costs of operating Table 2: FIN operating costs 2019/20 as a standalone company. There are numerous variables which could impact the potential Item Indicative costs* operating and capital costs associated with the Staff salaries and on costs 1,034,000 network. Board costs 87,000 However, the Directors have reviewed SunWater’s past and present operating costs as the basis Electricity 312,000 for assessing the potential operating costs for Insurance 180,000 the Company. The Directors have developed an 15 Asset Refurbishment and Renewal Strategy for Other operating costs 849,880 the Company over a 29-year period. The Strategy Selma pump station costs 238,000 is based on SunWater’s asset management Start-up costs (year 1 only) 103,120 history as well as irrigation industry standards and recommendations from independent engineering Sub-Total 2,804,000 advisors. These costs have been used to assist the Bulk water costs associated 432,000 Directors to understand the prices that may need with distribution loss to be levied on Customers based on a number of allocation different scenarios. Total 3,236,000 In particular we draw your attention to: • Section 5.7 which sets out the Directors’ *Rounded to the nearest 1000. projected summary of operating expenditure
14 SunWater’s estimate of costs for 2018/19 has been increased by 2.5% to give an estimate for 2019/20. The SunWater cost estimate also includes overhead and indirect costs allocated to non-routine costs. 15 Including contractors; materials; and plant, equipment and vehicles.
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Table 3: FIN Pro Forma Historical Balance Sheet
Item Balances Notes Current Assets Cash $3,109,731 This reflects the Separation Payment to be received by the Company and includes funds for employee entitlements (refer to Employee Benefits below), and cash payable to FIN in lieu of bulk meter replacement and for exit fees previously paid to SunWater Debtors $0 All amounts owing to SunWater with respect to the Irrigation Scheme at the time of the transfer will remain payable to SunWater Total Current Assets $3,109,731 Non-Current Assets Property, Plant and $51,933 Property, Plant and Equipment has been included at its Equipment carrying value transferred from SunWater, following an impairment assessment process16 Inventories $177,198 Carrying value of Inventories to be transferred from SunWater Total Non-Current Assets $229,131 Total Assets $3,338,862 Current Liabilities Creditors $0 All amounts payable by SunWater with respect to the Irrigation Scheme at the time of the transfer will remain payable by SunWater. Employee Benefits $232,015 The Company will receive a cash payment equal to 100% of the accrued annual leave and long-service leave entitlement and 75% of the sick leave entitlement of those employees that transfer across from SunWater Other Liabilities $0 No other liabilities have been identified for transfer Total Current Liabilities $232,015 Non-Current Liabilities Employee Benefits $48,645 The Company will receive a cash payment equal to 100% of the accrued annual leave and long-service leave entitlement and 75% of the sick leave entitlement of those employees that transfer across from SunWater Total Non-Current $48,645 Liabilities Total Liabilities $280,660 Net Assets $3,058,202 Equity Issued Contributed Capital $0 Issue Price of $0.0 per ML of entitlement. Establishment Reserve $3,058,202 Total Equity $3,058,202 A summary of significant accounting policies that have been adopted in preparation of the Pro Forma
16 The value of assets as shown in the balance sheet reflects the carrying value of the assets (after a significant impairment of the assets) to be transferred. The replacement value of the assets is estimated at $162 million, which equates to approximately $1,950 per ML supplied by the scheme.
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Historical Balance Sheet are included on the Company’s Website.
5.8 Revenue source for the Company Following transition to Local Management, legislation will deem a contract to be in place between the Company and each Current Customer (see Section 9.3). This contract will form the basis for the Company to charge Customers for (i) distribution charges, (ii) drainage charges, and (iii) other fees or charges as implemented by the Company from time to time. The Company will also receive interest on any funds held by the Company and (potentially, in some years) revenue from trading any unused part of its distribution loss allocation. Indicative revenue for the Company for 2019/20 is shown in Table 4. The estimate of the Company’s revenue is based on 12 months of operation.
Table 4: FIN revenue 2019/20
Charge Basis of charge Indicative revenue* Distribution charges 81,683ML @ $25 per ML of Medium Priority Allocation $2,084,000 (fixed) 1,166ML @ $36.27 per ML of High Priority Allocation Distribution charges 81,683ML by 75%17 usage @ $6.71 per ML of Medium $417,000 (variable) Priority Allocation 1,166ML by 75% usage @ $6.71 per ML of High Priority Allocation Drainage charges $28.10 per hectare of irrigable land and $6.85 $422,00018 per hectare for non-irrigable land (these are the 2018/2019 charges however, these will be escalated by CPI by the State, prior to the Transfer Date). Interest Interest calculated on $2.5m at an interest rate of 3.3% $83,000 Total $3,006,000
*Rounded to the nearest 1000. For subsequent years, the financial modelling assumes the annual sale of 3,000ML of surplus distribution loss allocation at a price of $100, which increases revenue by approximately $300,000 per year.
17 The modelling assumes 75% usage for the first three years of operation. After that it reverts to the long-term average of 82.3% usage. 18 This figure will be slightly higher as the drainage charges will be escalated by CPI prior to the Transfer Date.
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5.9 Asset Refurbishment and Renewal to inform the revenue required to maintain Strategy for the Company and replace assets over the long-term for the The Company has developed an Asset purposes of setting prices. The strategy and Refurbishment and Renewal Strategy which profile do not include costs associated with: estimates the refurbishment and renewal costs • Selma pump station, as this will continue to and timeframes for each type of asset in the be owned by SunWater and costs associated Irrigation Scheme and underpins a projected 29- with the pump station are treated as an year capital expenditure profile. operational expense for the Company (see section 5.7), The Company’s Asset Refurbishment and Renewal Strategy is based on the asset • The Channel Lining Project. refurbishment and renewal strategy described The Asset Refurbishment and Renewal Strategy in the business proposal submitted by the has been reviewed by Jacobs who stated the Emerald Interim Board to Government in June following: 2014, which was prepared following extensive engineering due diligence carried out around that Jacobs considers that the Company’s time (‘the Stage 2 strategy’). asset refurbishment and renewal strategy is reasonable and prudent and based on a Acknowledging that this exercise took place sound interpretation of Jacobs’ findings. several years ago, the Company identified any Where the strategy varies, such as for pump required adjustments to the Stage 2 strategy stations and meters, the strategy adopted by and implemented these changes to generate the Company is reasonable and the risks are the Company’s Asset Refurbishment and relatively minor. Renewal Strategy and projected 29-year capital expenditure profile. The information considered Jacobs’ full executive summary is set out in in this updating process was based on further annexure B. The report from Jacobs was issued engineering due diligence carried out by Jacobs in October 2017 and Jacobs has not undertaken in 2017 and included: any work on this matter since that time. • A quality-assured spreadsheet-based capital It is relevant to note that at the time of the expenditure model including updated cost Jacobs’ review, the target transfer date was escalation factors; 30 June 2018 and the capital profile prepared at that time was for a 30-year period starting • General industry information and standards; 1 July 2018. Given that the transfer date will • A review of SunWater’s asset refurbishment now be 1 July 2019, the Board has modified the and renewal strategy; original capital profile reviewed by Jacobs by rolling capital expenditure from 2018/19 into the • A review of the condition and risk of the 2019/20 year and making minor adjustments assets as per SunWater’s asset management related to this change. The Asset Refurbishment system; and Renewal Strategy otherwise remains • Detailed investigations into service lives unchanged from the document reviewed by for key asset types (Reinforced Concrete Jacobs. Pipelines, Asbestos Cement Pipelines, Under the modelled profile, expenditure varies Plastic Pipelines, Mild Steel Cement Lined significantly between years as assets fall due for Pipelines, Drain Management, Concrete refurbishment or replacement. The Directors Lined Channels, Synthetic Lined Channels and Earthen Channels); and intend to use the profile as the basis for calculating a smooth price path by allowing for • Specific investigations into the Emerald the Company to estimate the long-term capital drainage system and the Selma pump requirements for the business and to include in
station. prices an amount to allow the Company to build cash reserves so that assets can be refurbished or Based on this information, the Directors have replaced at the appropriate time. modelled a 29-year capital expenditure profile for the Company. The Asset Refurbishment and The graphs below show the annual capital Renewal Strategy and profile have been prepared expenditure that may be required, based on the
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Board’s preferred profile and its estimates of the timing and cost of asset refurbishment and replacement, and using SunWater’s data on the existing condition of the assets at the time of the Jacobs review in 2017. The graphs show both the estimated annual and cumulative capital expenditure. The graphs also include the amounts included in SunWater’s work management system for future renewals at that time. Both the FIN and SunWater capital expenditure values exclude costs associated with the Selma pump station. The SunWater values also exclude any SunWater overheads. This is to allow for a like-for-like comparison, given that any overhead costs for FIN are already captured in their operating costs. The actual timing and cost, both under SunWater ownership or under Local Management, is expected to vary from the indicative numbers shown below as circumstances may change in the future away from the assumptions that have been considered in the current modelling. The Constitution requires that, at least every five years, the Board must review the Company’s Strategic Asset Management Plan for managing the Company’s strategic assets for the subsequent five-year period and table a new or revised plan to the following Annual General Meeting for discussion (see section 9.7). Actual expenditure on replacement and renewals will be based on the Strategic Asset Management Plan, not on the 29-year capital expenditure profile.
$1,400,000 Fairbairn Irrigation Network $1,200,000 SunWater
$1,000,000
$800,000
$600,000
$400,000 Total Annual CAPEX ($ - Real) CAPEX Annual Total $200,000
$- 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048
$25,000,000 Fairbairn Irrigation Network SunWater $20,000,000
$15,000,000
$10,000,000
$5,000,000 Total Cumulatiev CAPEX ($ - Real) CAPEX Cumulatiev Total
$- 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 Figure 1: Comparison of annual and cumulative capex under SunWater and FIN
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6. THE COMPANY’S PRICING Based on these starting prices and the Board’s POLICY AND COMPARISONS target of 3.7% for future increases in the total WITH SUNWATER distribution price19, the financial modelling undertaken by the Board suggests that this will 6.1 The Company’s pricing policy allow the business to set aside funds for long- term capital requirements while remaining cash The Board proposes to develop, in consultation positive. with Customers, a pricing policy to set the principles for determining distribution prices and Drainage prices under Local Management other charges payable by Customers. The Board’s for 2019/20 under the Company will be the view is that prices should be cost reflective, 2018/2019 current price, escalated by CPI. The recognising the not for profit status of the current prices are $28.10 per hectare for irrigable Company and allowing for an amount to cover land and $6.85 for non-irrigable land. These long-term asset refurbishment and renewal, are the prices that will be payable to SunWater based on a 29-year assessment of capital costs. immediately prior to the Transfer Date. The Board proposes that prices be reviewed annually in accordance with the Customer 6.3 Scenarios and sensitivities Contract (see Section 9.3) and based on actual associated with pricing operating and capital costs and the financial The scenarios and sensitivity analysis that follows position of the business. Once the Company has is based on a number of specific and general established an operating history, the Board may assumptions which have been outlined in consider setting prices for a longer period of Section 5 or itemised in scenarios listed below time. and which are subject to change. The scenarios The Board’s intent is to keep costs as low as and sensitivities are also subject to the risks possible with a view to continually looking for outlined in Section 7. You should be aware that operating efficiencies. future events cannot be predicted with certainty and, as a result, deviations from the projections contained in the scenarios and sensitivity tables 6.2 Prices in the first financial year below are to be expected. under the Company Based on the operating costs outlined in Section In the event that the Local Management Proposal 5.7, the revenues outline in section 5.8, the proceeds, the Board has determined that capital costs outlined in Section 5.8, and based distribution prices for 2019/20 will be as set out on the principles set out in Section 6.1, projected below. distribution prices for the Company have been calculated (Board preferred scenario, see Table 5).
Table 5: FIN prices 2019/20
Fixed charge Variable charge Total (ML allocation held) (ML of water supplied) Medium Priority $25 $6.71 $31.71 Allocation High Priority Allocation $36.27 $6.71 $42.98
19 Based on fixed and variable prices combined
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To reflect the inherent uncertainty of the exceed the ranges shown. assumptions used, some of the key inputs have The sensitivities are calculated over 29 years (to been varied to create two further (Pessimistic align with the timeframes adopted for modelling and Optimistic) scenarios of possible distribution the Company’s long life assets) with the change price projections. The key variables driving the in price expressed as the sum of the fixed Optimistic and Pessimistic scenario outcomes are and variable average price over 29 years after listed in Table 6. changing each of the assumptions independently. Table 6: Pessimistic and Optimistic scenarios.
Variable Description 40
Operating Opex in the first year is 35 costs increased (decreased) by 10%. $34.12 $33.60 $31.96 $32.41 (except This is then escalated every year base rate 30 $31.46 $31.01 $31.71/ML electricity) at the unchanged escalation $29.85 $29.33 rates so opex remains 10% Price ($/ML) higher (lower). 25 Electricity Electricity in the first year is increased (decreased) by 20%. 20 ±10% ±20% ±1% ±20% This is then escalated every year opex capex interest rate electricity at the unchanged escalation change change change change rates so electricity remains 20% higher (lower). 6.4 Comparison with costs and prices Capital Every capex item is increased/ under SunWater Expenditure decreased by 20% From 2006/07 to 2018/19, the distribution price20 per megalitre in the Irrigation Scheme Deposit Deposit rates are changed by for medium priority water has increased from rates 1%. For example, rates may $18.6621 to $33.3122, an increase of 4.9% per year change from 4% to 5%. on average. Each of the variables in the table above will have Over that same period, SunWater’s per megalitre a different impact on projected prices, that is, the cost23 to provide distribution services has sensitivity of prices to a change in the variable. increased from $18.8424 to $49.8425 or by Care should be taken when assessing these 8.4% per year on average. That is, SunWater’s sensitivities. The estimated impact of changes costs, to provide the services have increased in each of these variables has been calculated at a greater rate than prices. The difference in isolation from changes in other variables in between SunWater’s costs and the prices paid order to illustrate the likely impact on distribution by Customers has historically been covered prices. In practice, changes in variables may by a subsidy from Government or absorbed by offset each other or be additive, and it is likely SunWater. that the Company would respond to any adverse change in one variable by seeking to minimise the impact on Shareholders and customers. The sensitivity analysis is intended to provide a guide only and variations in actual performance could
20 Fixed and variable prices combined 21 QCA Final Report SunWater Irrigation Price Review: 2012-18 Volume 2 Emerald Distribution System, April 2012, Table 2 22 SunWater Network Service Plan Nogoa Mackenzie Distribution Service Contract, 31 July 2018, Table 2 23 Fixed and variable prices combined 24 SunWater Irrigation Price Paths 2006/07 – 2010/11 Final Report, page 72, Table 2 (Lower Bound Cost Tariff, based on Channel price less River price) 25 SunWater Network Service Plan Nogoa Mackenzie Distribution Service Contract, 31 July 2018, Table 2
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Government policy is that irrigation customers • Government maintains the current irrigation should ultimately pay the full cost of water pricing policy, notably that fixed prices supply. If there were no subsidy, then the price should increase at $2/ML26 + CPI until prices paid by customers would equal the Cost- recover costs, then at CPI thereafter and reflective Price – that is, $49.84 based on variable prices increase at CPI. The Board’s SunWater’s current estimate. modelling assumes a CPI increase of 2.5%. The Board-preferred scenario provides for price Table 8 shows the total prices27: increases below these historic increases (see • under the Company, based on the Table 7). assumptions set out in sections 5 and 6.2, and SunWater’s prices are currently set until 30 June 2019. Beyond that time, it is not possible to • under SunWater, based on the assumptions know what future prices will be under continued described above. SunWater ownership. SunWater’s Network Service Plan includes an estimate of the current Cost- By way of an example, based on these reflective Price for distribution services in the assumptions, in 2023/24 the total price payable Irrigation Scheme. Based on that information, the for medium priority water per megalitre under Board has developed a hypothetical price path SunWater would be $11.67 higher (or 32% more) that shows what distribution prices would be than under FIN. For a customer holding a 2,000 under SunWater assuming that: ML Water Allocation, this would equate to a difference of approximately $23,347 per year in SunWater’s estimate of its costs are • water charges. endorsed by the QCA as being prudent and efficient and are used as the basis for setting future prices, and
Table 7: Comparison between SunWater and FIN.
SunWater FIN Medium Priority Prices (2019/20) Fixed: $27.27 per ML28 Fixed: $25 per ML Variable: $6.88 per ML Variable: $6.71 per ML
Operating costs (2019/20) $3.7 million29 $3.24 million
Indicative capital expenditure $7.9 million $19.48 million (2020-2048)
Average annual increase SunWater historic price Target price increases: increases30 - 4.9% 3.7% (assuming full capex) SunWater historic cost 2.4% (if FIN were to adopt increases31 – 8.4% SunWater’s capex strategy)
26 The $2 is based on 2011/12 real, which in 2018/19 equates to $2.38 27 Sum of fixed and variable charges 28 Assumed SunWater prices for 2019/20 based on 2018/19 prices increased by 2.5% 29 SunWater costs are based on the costs in the 2018/19 Network Service Plan, escalated by 2.5%, and include overhead and indirect costs allocated to non-routine costs 30 For period 2007-2019 31 For period 2007-2019
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The Board has only set prices for 2019/20. SunWater vs FIN prices The prices shown below that are beyond that (Part C and D combined) (MP) date are indicative only and subject to risks 60 and uncertainties associated with the cost of 50 operating and maintaining the scheme, some of SunWater which are beyond the control of the Board. 10 The prices set out in Table 8 are based different FIN Total 30
assumptions about capital expenditure. Notably, Price the Company’s prices assume capital expenditure 20 of $19.5m over 29 years, compared with $7.9m 10 under SunWater. The reasons for the difference are described further in section 5.9. 0 2020 2021 2022 2023 2024 If the Company were to adopt SunWater’s projections for capital costs, then the modelled price increases over a 29 year period would SunWater vs FIN prices (Part C and D combined) (HP) change from 3.7% to 2.4%. This would mean, for 60 example, that after ten years (2029), if FIN adopts SunWater the full capital profile, then the modelled total 50 price for medium priority water would be $44.14 FIN Total 10 per ML. If FIN instead adopted the SunWater capital profile, prices at that time would instead 30 be $39.57. Price 20 The Board considers that allowing for a greater potential capital spend will provide greater 10 resilience to the Company to respond to 0 unforeseen events. Ultimately, the Company, 2020 2021 2022 2023 2024 through the decisions of the Board, will have flexibility in how it decides to manage its assets, including what balance it strikes between improving service standards and minimising costs (and prices).
Table 8: Comparison of indicative prices under SunWater and FIN
2019/20 2020/21 2021/22 2022/23 2023/24 FIN – price per ML 31.71 32.88 34.13 35.42 36.77 (medium priority) SunWater – price per ML 34.15 37.49 40.99 44.64 48.45 (medium priority) FIN – price per ML (high 42.98 44.52 46.15 47.85 49.61 priority) SunWater – price per ML 46.74 50.41 53.67 55.01 56.39 (high priority)
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7. RISK FACTORS 7.3 Risks relating specifically to the Company and its business 7.1 Introduction (a) Risks to the financial viability of the There are a number of risks and uncertainties – Company due to higher costs, lower some that are specific to the Company, some revenues, and limited capacity to access that are common to the irrigation industry external funding and some of a more general nature – which may either individually or in combination have There are a number of risks related to a material adverse effect on the business, the long-term viability of the Irrigation operational performance and financial results of Scheme under Local Management. These the Company. Many of these risks are outside risks include the potential that: the control of the Company and its Directors. (i) Costs relating to owning and There can be no guarantee that the Company will operating the Irrigation Scheme may achieve its stated objectives or that any forward- be higher than anticipated because: looking statements or forecasts included in this Offer Document will eventuate. (A) capital or operating costs have been materially underestimated. Operating costs have 7.2 The Local Management Proposal been developed based on may not proceed consideration of SunWater’s The Local Management Proposal will not proceed historic costs. The Asset and the Transfer Deed could be terminated if Refurbishment and Renewal certain conditions are not satisfied, including: Strategy adopted by the Board • the Customer Support Threshold is not met; has been reviewed by Jacobs, as set out in annexure B. In • tax rulings which adequately address addition, scenarios have been tax risks for Customers who become used to test the resilience of the Shareholders, for the Company, and for the Company to a range of possible Government, that arise as a consequence future capital and operating of the transition to Local Management have costs. However, it is impossible not been obtained; and to predict the exact timing • contracts have not been agreed between and amount of future capital the Company and SunWater for the supply requirements and operating of the distribution loss allocations, a general costs; and/or service level agreement, and agreements related to the Selma Pump Station, the LN1 (B) unexpected events result in Drain, and the Channel Lining Project. significant damage or loss and the level and extent of insurance In addition, should an unforeseen event occur, cover and cash reserves may be including a change of law between signing the insufficient to meet unexpected Transfer Deed and the Transfer Date, the Transfer damage or loss events as they Deed includes a mechanism to deal with that arise; event, should it have a material adverse impact (ii) revenues generated by the Irrigation on the Irrigation Scheme or its operation after Scheme may be lower than the Transfer Date. This includes an ability by the anticipated because: Department or the Company to terminate the Transfer Deed. (A) water users surrender their Water Allocation, trade their Water Allocation out of the network or are unable to continue to meet the financial obligations associated with their Water Allocation;
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(B) interest rates are lower than loss allocations held by FIN. FIN anticipated. The Board plans has made assumptions about to accumulate funds to meet the likely future cost of bulk future capital requirements. This water related to distribution fund will rely on future interest losses. If future bulk prices are earnings to help them achieve materially higher than the prices their target balances; and estimated by FIN, this could impact on the viability of the (C) increased bulk water prices scheme. Given the ongoing QCA affect Customer viability and review32 of SunWater’s prices hence the Company’s revenues. there is considerable uncertainty There are a range of factors regarding future bulk prices. that could increase the cost to SunWater of providing bulk water The Company has no history of operating services. SunWater has recently as a stand-alone entity and no historical made a submission to the QCA financial performance as a business in its as part of the current price own right. As such, historical performance review. This proposes increases of SunWater is only partly a guide to likely in bulk water costs and prices, future performance of the Company. In including to allow for a portion these circumstances, it is possible key of dam safety upgrade costs to inputs into the Board’s assessment of be passed on to irrigators. The the Company’s future financial viability transfer of the Emerald Channel may be either overstated (in the case of Irrigation Scheme alone to Local revenue) or understated (in the case of Management is not expected costs). to have a material impact on SunWater’s costs. However, two Any material overstatement or Transition Schemes have already understatement may result in the need for moved to Local Management additional funding. Options for additional and the Government has made funding are likely to be limited to (i) offers to a further two Transition increased prices charged to Customers Schemes (including FIN) and or (ii) external debt funding (to the extent is considering options for two possible given the nature of the Company of SunWater’s other irrigation structure and lack of stand-alone schemes. It is uncertain how operating history). many irrigation schemes will Given the lack of operating history transition and how SunWater and and the not-for-profit status of the the Government will respond Company, obtaining debt funding from to the impact on SunWater’s financial institutions may be difficult cost base. It is possible that and the Government has advised that bulk water costs will increase debt funding will not be available to the if irrigation schemes transition Company through Queensland Treasury to Local Management and the Corporation. Consequently, if additional Government allows those costs funding is required this funding will most to be passed on in future prices. likely need to be sourced through an Any increase in bulk water increase in prices charged to Customers. prices will also directly impact If the Company cannot meet any on the operating costs for the additional funding requirements by Scheme as FIN will be required passing on the higher costs or lower to pay SunWater the bulk water revenues as an increase in prices charged charges related to distribution to Customers and cannot otherwise raise
32 For further information on the current QCA review process see the QCA website.
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the necessary funds through other means, against the Department or SunWater. this would adversely affect the Company’s future financial viability and may prevent it (c) Costs associated with pre-existing from continuing as a going concern. liabilities The Company is acquiring a pre-existing (b) The Company has carried out a business and assets with a long operating risk based due diligence based on history. The terms of the Transfer Deed information provided by SunWater and provide that pre-existing liabilities that the Department are a result of the operation of the In preparing this Offer Document Irrigation Scheme prior to the transfer to including development of the Financial the Company remain the responsibility Information, the Company reviewed of the Government. However, under the and considered a significant amount of terms of the transfer SunWater and the information provided by SunWater as part Government have capped its liability (see of assessing the current condition of the Section 9.2 for details) which will restrict assets, their operating standards and prior the Company’s ability to make claims maintenance schedules, assessing the under the terms of the Transfer Deed. legal due diligence process, determining the licences required to operate the (d) Customer services may be adversely Irrigation Scheme and other matters impacted by the transition of the which may be material to the operation of Company to Local Management the network. While it is expected that all local SunWater A risk-based approach has been taken in Irrigation Scheme staff will transfer, relation to the due diligence carried out the Company will need to establish its by the Company, Jacobs and lawyers for own organisational culture, systems both the Department and the Company. and processes. New systems or service This due diligence was finalised in 2017 arrangements suitable for a business of and there is no intention that the advisors this size and type will need to be put in will be required to provide an update to place. A new deemed Customer Contract, the reports prepared in 2017 prior to the based on the existing SunWater contract, transfer. During the time between the will be put in place and the Company substantive due diligence and signing of will be responsible for meeting relevant the Transfer Deed, SunWater was directed service targets and managing Customer by the Department to continue to keep relations (see Section 9.3 for details of the the Company updated in relation matters Customer Contract). Failure to transition material to the operation of the Scheme. effectively may result in business disruption and poor service outcomes for In addition, in relation to the information Customers. provided by the Department and SunWater, neither the Department nor (e) The Company may be unable to engage SunWater has provided any substantive key personnel which may disrupt the warranty in relation to that information business and increase operating costs being accurate, complete and not Local SunWater staff who work on the misleading. The warranties given by the Irrigation Scheme will be transferred Department have been qualified to the to the Company and the terms of the actual knowledge of the Department. SunWater enterprise agreement will Given the limited nature of the warranties continue to apply to their employment. if, following the transfer to Local The no forced redundancy provisions Management, information which may in the enterprise agreement will be have a material effect on the operation preserved for at least a three-year period of the Irrigation Scheme is uncovered, from the Transfer Date. Directors with the Company will have limited recourse appropriate skills and experience will need
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to be appointed, in accordance with the uses approximately 50% of the distribution Constitution. The Company may need loss allocation available to it to deliver to engage additional staff or replace water within the Irrigation Scheme. There key staff or Directors and there is a risk is a risk that the Company may need that the necessary skills and experience more distribution loss allocations than may not be readily available or may be the allocations it receives on transfer and more expensive than budgeted, with that the Company would incur additional the potential to disrupt the business and costs in acquiring those allocations. In increase operating costs. addition, the introduction of new meter standards could result in a different (f) Rights of access to land may be limited method for measuring distribution which may disrupt the business and losses, which could also result in the increase operating costs Company requiring more distribution Under the Local Management Proposal, loss allocations. Further, the financial where SunWater currently holds a tenure modelling has assumed that the Company right (e.g. lease, freehold or easement) will have surplus distribution loss in relation to land on which Irrigation allocations and will be able to sell some Scheme assets are located, the general of this on the temporary water market. If approach is that similar rights will be there is no such surplus, if the surplus is granted or transferred to the Company. less than anticipated, or if the Company In addition, there are Irrigation Scheme is unable to sell the surplus water at the assets located on land which is owned assumed price, then this may reduce the by third parties, within the area of a rail revenue of the Company. corridor or local or state controlled roads. (h) Operation of Selma pump station It is intended that prior to transfer to Local Management, agreements will be entered Selma pump station is critical for into which govern access to network supplying water to the Irrigation Scheme assets within state-controlled road. Where once the water level in Fairbairn Dam there is no existing permit to occupy a drops to a level where gravity supply local road, a statutory permit will apply for can no longer meet demand for water a period of 1 year to the network assets in the Scheme. The pump station will located within a local road to allow the remain with SunWater. The Company will Company to negotiate an appropriate pay for the pumping services from the agreement with the Central Highlands Selma pump station in accordance with Regional Council. an agreement between SunWater and the Company. The Company has made If there are assets on land owned by third assumptions regarding the amount the parties (including in the rail corridor), the Company will need to pay but these costs Company will have to rely on its legislative will be controlled by SunWater. There is right to access under the Water Supply risk that SunWater may fail to properly Act. It should be noted that, SunWater has maintain the pump station and that this advised that there has not been a physical could impact on supply of water to the survey carried out to identify the exact Irrigation Scheme. There is also a risk location of each asset. that the cost payable to SunWater for the pumping services could be more than (g) Distribution loss entitlements may be the Board has assumed in its financial insufficient which may increase operating modelling which could affect the financial costs position of the Company. SunWater’s existing distribution loss allocations will transfer to the Company. Based on SunWater’s estimates of its historical distribution losses, SunWater
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(i) Operation of LN1 Drain the Declared Drainage Area who are registered Water Allocation holders) or The portion of the LN1 drain that passes the standalone Drainage Contract (for through the town of Emerald will be customers within the Declared Drainage retained by SunWater. Drainage water Area who are not a party to the deemed from the scheme will still need to pass Customer Contract). Due to the limited through that section of the drain, and the provisions associated with drainage at Company will be required to contribute present, the terms the Company is able towards the cost of maintaining the drain. to include in the standalone Drainage The Company has made assumptions Contract (which will apply via the regarding the amount the Company legislation) are limited and may limit the will need to pay but these costs will be Company’s ability to increase drainage controlled by SunWater. There is a risk charges under the standalone Drainage that the cost payable to SunWater could Contract, other than in line with inflation, be more than the Board has assumed in overtime. its financial modelling which could affect the financial position of the Company. (m) Future declaration of the operation of the Irrigation Scheme as a monopoly (j) Channel Lining Project business activity There are significant uncertainties On the Transfer Day, the operation of the regarding the Channel Lining Project, Irrigation Scheme will not be a monopoly including the costs and benefits business activity for the purposes of Part 3 associated with the project, the volume of of the Queensland Competition Authority water that would be saved through lining, Act 1997 (Qld). However, the operation and whether the project will proceed at of the scheme may, in future, be declared all. If the project does proceed, there is by Government to be a monopoly the risk that the cost of maintaining the business activity. This may result in the newly lined channels will exceed the prices charged by the Company being benefits to the Company associated with subject to regulation by the QCA and may any savings in operational costs and/ adversely affect the Company’s future or from increased revenue due to an financial viability and may prevent it from increase in the volume of water delivered continuing as a going concern. to customers in the Irrigation Scheme.
(k) Compliance costs associated with a 7.4 Industry-specific Risks public company Industry-specific risks are risks that are likely On the Transfer Date, the Company will to exist for entities involved in similar activities, be a public company and is expected to regardless of whether the ownership of the have more than 50 shareholders. The Irrigation Scheme is with SunWater, the Company Company will be required to manage or another entity. While some of these risks may the share register and ensure the exist under Government ownership, a locally Company complies with the regulatory owned entity may have less capacity to deal with requirements (including the takeover these issues should they arise, for example due provisions) in the Corporations Act. to their limited access to debt or other external funding. As a result, should these risks eventuate (l) Drainage it will most likely result in the need for the Currently, customers within the Declared Company to recover additional revenue through Drainage Area pay drainage charges set an increase in prices charged to Customers. by the State under the Water Regulation. Following the transfer, drainage charges will be imposed under either the Customer Contract (for customers within
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(a) Any adverse impact on the viability of costs and/or reduce Customer demand the Customer base may affect future for the supply of irrigation water by the financial viability Company. The Company is currently supplied electricity under transitional The financial viability of the Company will tariffs that are due to expire in 2020. depend on the viability of its Customers. Their viability can be affected by many (d) Alternative supply may affect future factors, including: financial viability • sustained periods of drought or failure Changes in farming practices, weather of bulk water supply; patterns and industry may generate • increased input costs, including the alternative sources of supply or impact cost of bulk water supply; or demand for irrigation water. Where available, alternatives such as water • falls in commodity prices. generated as a by-product of coal These factors have the potential to seam gas extraction, ground water, reduce demand and/or result in Customer reduced use technologies or conversion defaults. To the extent any associated to unsupplemented supply have the reduction in revenue cannot be recovered potential to materially impact demand from Customers through an increase in for the Company’s product, affecting its prices charged to them, this would have a operational performance and financial material adverse effect on the Company’s results. future financial viability and may prevent it (e) Limitations in accessing supplies may from continuing as a going concern. impede operations (b) Water exiting the Irrigation Scheme Inability to access essential chemicals to Customers may choose to permanently control weeds or to procure replacement sell their Water Allocation and terminate parts for critical pieces of plant and their Customer Contract, for example, equipment may adversely impact the because of a change in land use (such as Company’s ability to deliver irrigation to mining or solar farming), or because water to Customers. Such outcomes may of high prices offered by water users have a material effect on the Company’s outside the scheme. This would reduce operational performance and financial the customer base and increase the results. proportion of fixed costs that need to be (f) Health, safety and environmental met by remaining customers. The operation of the Irrigation Scheme The Customer Contract requires requires the Company to manage any Customers to pay a fee if the Customer health, safety or environmental risks Contract is terminated as a consequence associated with the operations and of a breach by the Customer. assets. For example, operation of the Irrigation Scheme may contribute to rising (c) Electricity price increases or disruption groundwater tables and related salinity may affect future financial viability issues. The Company will be responsible The Irrigation Scheme uses electricity for any health, safety and environmental to pump water to Customers. Any impacts of future operations. Should an prolonged disruption to electricity supply incident occur, following the transition has the potential to adversely impact to Local Management which results the Company’s ability to deliver water to in any harm, the Company may incur Customers. unexpected costs. The Company intends to mitigate the risks associated with any A material increase in electricity prices harm to property and persons through has the potential to increase operational appropriate insurance.
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Not all health, safety or environmental (c) Other Risks risks may be known at the time of the The Company’s operations may be transfer. The terms of the Transfer Deed adversely affected by risks outside the provide that liabilities (including in relation control of the company, including natural to health, safety and the environment) disasters, acts of terrorism, an outbreak that are a result of the operation of the of international hostilities, fires, floods, Irrigation Distribution Scheme prior to the drought, earthquakes, labour unrest, civil Transfer Date remain the responsibility of wars and other catastrophes. the Government.
(g) Changes to laws and regulations, 7.6 Risks relating to not acquiring including relating to metering Shares where the Proposal proceeds The introduction of new laws or (a) No Voting Rights regulations may require the Company to incur additional, unplanned costs. A Customer who does not support For example, if regulations are changed the Proposal and take up Shares in the to require a different, higher standard Company will have no voting rights of water metering within the Irrigation on matters reserved for decisions by Scheme, this would require significant Shareholders, including the appointment capital expenditure, and may lead to of Directors, changes to the entity type, higher water prices for Customers. and changes to the Constitution.
7.5 General Risks 7.7 Risks relating to not transitioning to Local Management (a) Changes in economic conditions may If the Proposal does not proceed, the Department affect future financial viability has indicated that the Irrigation Scheme will General economic conditions, remain within SunWater. If the network remains in introduction of tax reform, new legislation SunWater, Customers will forgo the opportunity and movements in interest rates, inflation to assume local ownership and control of the rates and commodity prices may have network, including the benefits listed in Section an adverse effect on the Company’s 3. In addition, there are risks associated with operations and financial results. continued SunWater ownership.
(b) Flooding or other adverse weather (a) SunWater costs increase conditions may affect operations and There is a risk that SunWater’s costs of future financial viability operating and maintaining the Irrigation Adverse weather conditions and natural Scheme will continue to increase at rates disasters, such as flooding, may directly that are greater than inflation. This may impact on the Company’s business, result in prices paid by Customers also operational performance and financial increasing by greater than inflation. results. For example, above average rainfall may reduce demand, flooding (b) Assets maintained to a reduced standard may cause damage, interrupt supply There is a risk that the standard of and impact Customers’ production maintenance of the Irrigation Scheme and drought may reduce the Irrigation assets could be reduced. The Company’s Scheme’s supply volumes, leading to proposed approach allows for greater Customer failure and default. capital expenditure over the next 29 years than is provided for under SunWater’s current strategy. Details on the different approaches to asset management are set out in Section 5.8.
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(c) Change in Government pricing policy 8. DETAILS OF THE OFFER The Government has the capacity to alter its pricing policy as it sees 8.1 The Offer fit. Consequently, there is a risk that This Offer to apply for Shares in the Company Government policy may change in a is made to all Eligible Customers. An Eligible way that results in further increases in Customer is a Current Customer who is located prices for water supplied by the Irrigation in Australia. Scheme. This could arise due to changes Each Eligible Customer is entitled to apply in policy that result in: for the number of Shares equal to their • the Government not paying a subsidy Share Entitlement subject to the 25% cap on to SunWater for irrigation distribution shareholding by an entity or its Associates and services; the takeover provisions in the Corporations Act. • additional costs being included in the The Offer is an offer by the Government cost base as part of a future regulatory Shareholder for the transfer of your Share price review, for example meter Entitlement to you. Under the Transfer Deed, upgrade costs or longer term capital shortly before the Share Entitlement is transferred costs, which would increase the cost to Eligible Customers who apply for Shares, the reflective price; Company will issue a number of Shares equal to the aggregate Share Entitlements of all Applicants • prices being set to include a return on (less any Shares already held by the Government assets or to achieve a profit; or Shareholder). The Government Shareholder will • prices no longer being subject to then transfer the Shares so that each Applicant pricing recommendations from receives their Share Entitlement immediately the QCA, with SunWater taking after the transfer of the Irrigation Scheme to the responsibility for setting prices. Company. The Offer is made by the Government Shareholder, and is being managed on its behalf Alternatively, or in addition, this could by the Company under the Transfer Deed. result in service levels being reduced as a result of revenue being inadequate to There is no application price for the Shares. maintain current service levels. If you accept the Offer, you may only accept for your entire Share Entitlement.
8.2 Withdrawal of Offer The Board reserves the right to withdraw all or part of the Offer at any time before the transfer of Shares.
8.3 No Shares if you cease to hold any Allocation prior to the transfer to Local Management If you do not hold a Water Allocation on the Final Record Date, you will not be entitled to receive any Shares.
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8.4 No Shares if Local Management such persons. Customers who are nominees, Proposal does not proceed trustees or custodians for persons outside If the Local Management Proposal does not Australia are encouraged to seek independent proceed, Shares will not be issued or transferred. advice as to how they should proceed. The Company will be wound up and the Irrigation Return of a duly completed Support and Scheme will continue to be owned and operated Acceptance Form with a completed application by SunWater. for Shares will be taken by the Company to constitute a representation that there has been 8.5 Opening and Closing Date for no breach of any foreign laws and that the applications Applicant is physically present in Australia. The Offer opens for acceptances on 14 January No action has been taken to register or qualify 2019 and all Support and Acceptance Forms must the Shares or to otherwise permit a public be received by no later than 5.00 pm (Brisbane offering of the Shares in any jurisdiction other time) on the Closing Date (1 March 2019), than in Australia. subject to any ability to vary the Closing Date in In particular, this Offer Document may not be accordance with the Transfer Deed. released or distributed in the United States. The Offer of Shares is not being made to US 8.6 Transfer of Shares persons or persons in the United States. Shares will be transferred by the Government Shareholder to Applicants immediately after the transfer of the Irrigation Scheme to the Company. 8.8 Ineligible Customers The Company is not extending the Offer to The Transfer Date is currently expected to occur Ineligible Customers having regard to the cost of on 30 June 2019, but is subject to satisfaction complying with legal and regulatory requirements of a number of conditions (see Section 9.2 for outside Australia. further information). Where this Offer Document has been dispatched If an Applicant’s Entitlement has changed to Ineligible Customers, it is provided for between the Initial Record Date and the Final information purposes only. Record Date, the Applicant is taken to have applied for the Entitlement they have on the Final In limited circumstances, the Company may elect Record Date. If the Applicant does not have any to treat certain Customers as Eligible Customers Entitlement on the Final Record Date, they will who would otherwise be Ineligible Customers, not receive any Shares. provided the Company is satisfied that the Government Shareholder is not precluded from lawfully transferring Shares to such Customers 8.7 Persons outside Australia either unconditionally or after compliance with This Offer Document does not constitute an conditions which the Board in its sole discretion offer or invitation for Shares in the Company, in regards as acceptable and not unduly onerous. any place in which, or to any person to whom, it would not be lawful to make such an offer or invitation. 8.9 Privacy The distribution of this Offer Document Share Register (including an electronic copy) outside Australia The information about Eligible Customers may be restricted by law. If you are a Customer included on a Support and Acceptance Form outside Australia and come into possession is used for the purposes of processing the of this Offer Document, you should observe Support and Acceptance Form and to administer and seek your own advice on any restrictions. the Eligible Customer’s application for, and Any failure to comply with such restrictions holding of, Shares. By submitting a Support and may contravene applicable securities laws. Acceptance Form, each Eligible Customer agrees The Company, the Government Shareholder, that the Company may use the information the Department and their directors, officers, provided by an Eligible Customer on the form employees and advisors disclaim all liabilities to for the purposes set out in this privacy statement
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and may disclose it for those purposes to the How to request access to your personal share registry, the Government Shareholder, the information Department and to their and the Company’s Under the Privacy Act 1988 (Cth), you may respective agents and contractors and third party request access to your personal information held service providers, including mailing houses and by, or on behalf of, the Company. A fee may be professional advisers, and to other regulatory charged for access. You can request access to authorities. your personal information by telephoning or writing to: The Corporations Act requires the Company to include information about each Shareholder • Before the Transfer Date: LMA Support Services Pty Ltd (including name, address and details of the PO Box 3026 Shares held) in the Register. The information West End QLD 4101 contained in the Register must remain there Telephone: 0468 960 538 even if that person ceases to be a Shareholder. Email: [email protected] Information contained in the Register is also used to facilitate corporate communications • After the Transfer Date: (including the Company’s financial results, annual Fairbairn Irrigation Network Pty Ltd reports and other information that the Company c/o the Company Secretary wishes to communicate to its Shareholders) Emerald QLD 4720 and compliance by the Company with legal and regulatory requirements. 8.10 Effect of returning the Support and Details regarding your response to the Local Acceptance Form Management Proposal By completing, and the Company receiving, your Your Support and Acceptance Form will be completed Support and Acceptance Form, you: collected by an entity called LMA Support Services. LMA Support Services will collect and (a) agree to be bound by the terms of this review all responses set out in the Support and Offer Document and the provisions of the Acceptance Form and advise the Government Constitution; and the Company whether the Customer Support Threshold has been met. LMA Support Services (b) authorise the Company to register you as may contact you via phone, email or post to the holder(s) of the Shares transferred to remind you to return to Support and Acceptance you; Form or to discuss any discrepancy or error on (c) authorise the Company, LMA Support your returned form. Services and the Department to use the If LMA Support Services has not received your information contained in it to determine Support and Acceptance Form before the Return whether the Customer Support Threshold Date, LMA Support Services may provide the has been met; Board with your details so that Board members (d) declare that all details and statements can contact you to discuss the Offer and the made in the Support and Acceptance Local Management Proposal. If you do not want Form are complete and accurate; to be contacted by either LMA Support Services or the Board please notify us as soon as possible (e) declare that if you are an individual, you on 0468 960 538 or [email protected] are over 18 years of age and have full legal capacity and power to perform all your rights and obligations under the Offer;
(f) acknowledge that once the Company receives the Support and Acceptance Form, you may not withdraw it except as allowed by law;
(g) agree to apply for, and receive a transfer of, the number of Shares equal to your
42 Fairbairn Irrigation Network Pty Ltd Offer Document
Entitlement as at the Final Record Date (if any);
(h) authorise the Company, and their officers or agents to do anything on your behalf necessary for any Shares to be transferred to you, including to act on instructions of the LMA Support Services upon you using the contact details set out in the Support and Acceptance Form;
(i) declare that you were the registered holder(s) at the Initial Record Date of the Water Allocation indicated on the Support and Acceptance Form as being held by you on the Initial Record Date;
(j) acknowledge that the information contained in this Offer Document is not investment advice or a recommendation that the Shares are suitable for you, given your objectives, financial situation or particular needs;
(k) represent and warrant that the law of any place (other than Australia) does not prohibit you from being given this Offer Document or making an application for Shares; and
(l) represent and warrant that you are an Eligible Customer and have read and understood this Offer Document and the Support and Acceptance Form and that you acknowledge the matters, and make the warranties and representations and agreements contained in this Offer Document and the Support and Acceptance Form.
8.11 Governing law This Offer Document, the Offer and the contracts formed on acceptance of applications are governed by the laws applicable in Queensland, Australia.
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9. ADDITIONAL INFORMATION This summary accords with the This Section 9 sets out additional information that outcomes of binding rulings made by the is relevant to Customers’ decisions whether or Australian Taxation Office (ATO) in similar not to support the Local Management Proposal circumstances as the circumstances set and, in any event, whether or not to apply for out in this Offer Document. Importantly, their Share Entitlement. all comments on the tax implications of the Local Management Proposal will apply only to Current Customers who are 9.1 Taxation Implications tax residents of Australia and who hold The below comments are based on Australian their Shares in the Company on a capital tax laws and regulations, interpretations of account. such laws and regulations, and administrative practice as at the date of this Offer Document. Administrative Binding Advice Prior to the Transfer Date, binding rulings are It is expected that the Commissioner of expected to be issued by the ATO. An application Taxation in the ABA will consider that for an administrative binding advice (ABA) has the receipt of Shares in the Company been made and a response is expected in 2019. will not be included in the assessable They are expected to confirm the income income of a Current Customer who tax implications for the Company and the becomes a Shareholder of the Company Customers, as relevant. The Board intends to on the Transfer Day as ordinary income obtain advice on the GST implications for the under section 6-5 of the Income Tax Company and Customers. The Transfer Deed Assessment Act 1997 (ITAA97). This is on is subject to and conditional upon the Board the basis that: and the State being satisfied that no material tax liabilities will arise for the Shareholders, the • the receipt of Shares will not constitute Company or the State in connection with the a receipt received by the Current Local Management Proposal. The Board will Customer in the ordinary course of update Customers if the response from the ATO carrying on its business; and is materially different to similar rulings of the ATO. • there is no evidence of an intention The tax implications noted in this Section 9.1 are or motive by a Current Customer to not exhaustive and Current Customers should make a profit or gain from becoming a seek advice from their tax advisor or other Shareholder of the Company. professional advisor before deciding whether Further, receipt of Shares in the Company to support the Local Management Proposal or will not be included in the assessable accept the Offer of Shares in the Company. income of a Customer as statutory (a) Outline of income tax implications for income under section 6-10 of the ITAA97. Customers who become Shareholders of This is on the basis that the receipt of the Company Shares will not be a ‘bounty’ or subsidy received in relation to carrying on a Summary business under section 15-10 of the If the Local Management Proposal is ITAA97 or a non-cash business benefit accepted, it is expected that a Current under section 21A of the ITAA36. Customer who accepts the Offer of Further, for capital gains tax purposes, the Shares in the Company: first element of a Current Customer’s cost • will not be subject to income tax on base in Shares in the Company received receipt of the Shares on the Transfer on the Transfer Day should be nil. Day; and While the ABA is only administratively • will not have any value attributed to rather than legally binding on the its acquisition of the Shares that will ATO, the ATO’s policy is only to depart constitute a cost base for capital gains from administratively binding advice tax (CGT) purposes. where there is a material change to the
44 Fairbairn Irrigation Network Pty Ltd Offer Document
relevant law, where a court or tribunal due to this change in status. Where adopts a different interpretation to that considered necessary and appropriate, previously followed by the ATO, or where applications for private rulings will be the existing interpretation is no longer prepared to confirm the operation of considered appropriate (for example, these provisions (Divisions 57 and Division because it has created unforeseen 58). Broadly: consequences for the revenue). Division 57 ITAA 1936 requires Notwithstanding this, it is expected that • corporate entities making the transition the ABA, once received, will be converted from exempt to taxable to ensure that to a legally binding ruling prior to the only income deductions, gains and Transfer Date. losses relating to the taxable period are taken into account to determine their (b) Outline of tax implications for the taxable position; and Company • Division 58 of the ITAA 1997 sets Income tax out the special rules that apply in calculating depreciation deductions The Director General of the Department and balancing adjustments in respect will be the sole Shareholder of the of depreciating assets previously Company up until the end of the Transfer owned by an exempt entity. These rules Day. Current Customers who accept an operate to reset the tax cost of such Offer of Shares will then be transferred assets. Shares and the Director General will cease to be a Shareholder. While the GST Government Shareholder is the sole Advice is intended to be obtained and is Shareholder, the Company will be an expected to confirm the GST treatment income tax exempt entity. On this basis: outlined below: • Income derived by the Company The Company should be registered for during this period will be tax exempt • GST purposes; (for Commonwealth income tax purposes) by virtue of it being a State or • As the transfer of assets by SunWater Territory Body (STB); and to the Company is to occur under a valid transfer notice, no supply for • Receipt of the Separation Payment consideration will arise, resulting in no should not result in any adverse Federal GST becoming payable on the transfer; income tax consequence for the Company as the Separation Payment is • GST should not become payable on the received while the Company is an STB; Separation Payment; and and • No GST should be payable upon the • Receipt of the assets and liabilities transfer of Shares in the Company to should not result in any adverse Federal the Applicants. income tax consequence for the Company as it is undertaken whilst it is The parties to the transactions, including an STB. the Current Customers who become Shareholders, will need to determine When the Current Customers are whether they breach the financial transferred Shares, the Company will acquisitions threshold test in order to no longer be an STB tax-exempt entity. quantify their respective entitlements to Rather, the Company will enter the input tax credits. Federal income tax regime. When a taxpayer transitions from being tax exempt to taxable, there are certain income tax provisions which operate to ensure no tax advantage can be obtained
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9.2 Summary of Transfer Deed Period prior to the Transfer Date On 29 November 2018, the Company and the During the period between execution of the Department entered into the Transfer Deed Transfer Deed and the actual Transfer Date, the under which the various assets, plant, equipment, Department must use its best endeavours to contracts and approvals necessary to operate the ensure SunWater: Irrigation Scheme will, subject to the satisfaction • continues to operate and maintain the or waiver of a number of conditions precedent be Irrigation Scheme: transferred to the Company on the Transfer Date, » which is expected to be 30 June 2019. The assets in accordance with the Scheme will be transferred on an ‘as is where is’ basis. Operations Manual and the Network Service Plan;
Conditions precedent » to a standard that is consistent with The Transfer Deed is conditional upon a number SunWater’s business as usual practices of conditions precedent being satisfied or waived and standards of operating and including: maintaining the network in the previous 12 months; and • achieving the Customer Support Threshold; • consults with or, after the Customer Support an appropriate tax ruling being obtained; • Threshold has been achieved, obtains the • the Company and SunWater entering into approval of the Company in relation to key agreements in relation to the Selma Pump operational decisions. Station, LN1 Drain and the Channel Lining Project (each of these are discussed in more Winton Creek detail at Sections 9.4 and 9.5); SunWater is required to the extent it is reasonably able to carry out works to Winton Creek which • the Company and SunWater entering into an agreement for the supply of the distribution includes installation of treatment roads along side loss allocations to be transferred to the the creek and remove trees and weeds to allow Company; water flow (SunWater’s obligation continues following the Transfer Date, if the works have not • the Company and SunWater entering into a been completed by that date). service level agreement; and • SunWater implementing annual price Cash assets setting in its standard channel and pipeline On the Transfer Date, in addition to transferring contracts for the Irrigation Scheme. the physical assets to the Company, SunWater is required to transfer the following cash assets: If any condition precedent is not satisfied or waived by the relevant date specified in the • All Exit Fees paid or payable to SunWater in respect of a SunWater customer channel Transfer Deed, either the Company or the and pipeline contract terminated prior to Department may terminate the Transfer Deed. the Transfer Date which as at 1 March 2018 equalled $81,746.85; Separation payment The Department has agreed to pay the Company • The amount equal to the annual service the Separation Payment on the Transfer Date leave and long service leave entitlements of although provision is made for the Department to the Transferring Employees; pay to the Company a portion of the Separation • $276,870 being the amount SunWater Payment, up to a maximum of $500,000, upon allocated in the Network Service Plan for the the Customer Support Threshold being achieved, provision of the bulk water meters; and for the purpose of assisting the Company to be ready to operate the Irrigation Scheme from the • Amounts allocated as non-routine works Transfer Date. In addition, the on Transfer, the in the Network Service Plan which remain Department will pay 75% of any accrued sick unspent at the Transfer Date (other than an amount for the bulk water meters and leave entitlements to the Company. certain drainage works).
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Transfer of employees Warranties The Transfer Deed makes provision for the The Department has provided very limited transfer of employees of SunWater to the warranties regarding the information provided Company on the Transfer Date in accordance by or on behalf of the Department (including with the relevant provisions of the Water Act. In the information provided by SunWater) to the addition, as SunWater is currently negotiating Company and to the entities which have issued a new enterprise agreement, which may not legal, engineering and insurance due diligence be concluded before the Transfer Date, the reports in relation to the Local Management Transfer Deed provides that upon approval Proposal. of that new enterprise agreement by the Fair Work Commission that the Company will Overall liability cap give the transferring employees the benefit of Except for a failure to pay on the Transfer Date terms which are beneficial for the transferring the unpaid Separation Payment and 75% of the employees. sick leave liability in respect of the transferring employees, the liability of the Department and Unforeseen events occurring before the Transfer SunWater for all other claims in relation to Date the Transfer Deed, the Offer Document and If a force majeure event, change in law or any other matter connected to the Irrigation any other event occurs prior to the Transfer Scheme, including exposure for pre-Transfer Date Date which is likely to materially and adversely liabilities, is limited in aggregate to $1.5 million. affect the Irrigation Scheme or its operation In addition, the State will not be liable to the or cost of operation after the Transfer Date, Company for “Consequential Damages”, which and the Company and the Department are is defined to include indirect and consequential unable to agree on the steps to be taken by the damages, loss of revenue and loss of profits. Department to address the issues arising from the relevant event, then either the Company or the Other rights of termination Department may terminate the Transfer Deed. The Department may, at its discretion, terminate the Transfer Deed at any time before the Transfer Pre-transfer liabilities Date. Any liability (known or unknown) unless specifically identified and transferred to the The Company may terminate the Transfer Deed Company in the Transfer Notice will remain with if the Department proposes a Transfer Date SunWater. At the date of signing the Transfer which is different to that contemplated in the Deed the only liabilities to be transferred to Transfer Deed and the Company does not agree the Company are the employee entitlements. with the State’s proposed amended dates for The majority of this liability will be offset by a undertaking actions to effect the transition to cash payment made to the Company by the Local Management. Department on the Transfer Date. Also, if any of the specified actions to be If the Company incurs any costs or liability completed on the Transfer Date to effect relating to any matter occurring prior to the the transition to Local Management become Transfer Date other than employment liabilities incapable of being achieved, and the Company in relation to employees to be transferred to the and the Department are unable to agree an Company from the Transfer Date (including, for appropriate resolution, the Transfer Deed will example, contamination), its right of recourse automatically terminate. against the Department is capped at $1.5 million.
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9.3 Summary of new deemed contract terms from time to time (but not Customer Contract more frequently than once every 5 years). If a customer objects to the new conditions, Under the Water Act, the Company is required the existing (unamended) contract terms to prepare a standard customer contract for will continue to apply to that customer. The the supply of distribution and drainage services Company does not have the right (which to customers of the Company. The Water Act existed under the SunWater contract) to provides that this new Customer Contract will terminate that customer’s contract. This does be deemed to apply between the Company and not limit changes by agreement or as a result each holder33 of a Water Allocation to whom of a change in law. water was supplied under the relevant resource operations licences immediately before the • To facilitate the transition to Local Management (and in addition to other rights Transfer Day and continues to be supplied under which are equivalent to those in the SunWater the new distribution operations licence to be contract), the Company may request that granted to the Company. security be provided by a customer if security The Water Act further provides that the new is being provided by that customer to Customer Contract: SunWater before the Transfer Date. • must be based on the standard supply • The Customer Contract includes other contract applying to SunWater and the provisions to facilitate the transition to Local holders of the water allocations and fairly Management to address the consequences represent the supply arrangements and where Water Allocations are leased or financial obligations as in place before the transferred and to identify the Location for Transfer Day; and Taking Water. In addition to providing for the supply of distribution services in the • may include additional provisions to Irrigation Scheme, to the extent a Customer facilitate implementing the arrangements is located within the Declared Drainage and meeting the obligations, but the Area, the new Customer Contract makes additional provisions must not be capable provision for the provision of drainage services of operating to the detriment, in substance, and the imposition of charges which are of the holder of a water allocation after the currently levied by SunWater under the Water Transfer Day. Regulation.
The Company has prepared the new Customer The Company is required under the Water Act Contract to meet the requirements set out in the to prepare a standard drainage contract for any Water Act and the Customer Contract can be drainage customers who receive drainage services found at the Company Website. but is not the holder of a water allocation the The Customer Contract is based on SunWater’s subject of a Distribution Contract. existing supply contract channel and pipeline standard conditions and, subject to the following, 9.4 LN1 Drain and Selma Pump Station is consistent with the SunWater contract. The key Term Sheets differences with the SunWater contract are: The Company and SunWater have entered into • Charges under the Customer Contract a non-binding term sheets to inform the terms will be set by the Company and, as at the of the LN1 Drainage Services Agreement and the Transfer Date, will not be regulated by the Selma Pump Station Operation and Maintenance QCA. The Distribution Fixed Charges and Agreement. Under the Transfer Deed: Distribution Consumption Charges may be reviewed annually by the Company. Further • only part of the LN1 Drain will be transferred to details on pricing are provided in Section 6. the Company. That part of the LN1 Drain which runs through the town of Emerald will continue • Consistent with the SunWater contract, in SunWater’s ownership. Therefore, for the the Company may propose changes to the Company’s drainage customers to discharge water into the LN1 drain, the Company is 33 A holder of a Water Allocation is either the person whose required to pay for the drainage services which details are stated on the water allocations register as the will continue to be provided by SunWater. person who holds the water allocation or if a lease of the water allocation is registered on the register—the lessee of the lease.
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• the Selma Pump Station will be retained by Zero allocation customer contracts SunWater and SunWater will continue to SunWater has entered into a number of channel operate and maintain that the Pump Station. and pipeline contracts with customers who temporarily trade water into the Scheme. These The term sheets both provide: customers are not registered Water Allocation • for the agreements to be for 20 years; holders and therefore the Company’s standard Customer Contract will not be deemed, via • that during the first 3 years, the services will be provided at cost; provisions of the Water Act to those customers on the Transfer Date. These ‘zero allocation’ • that after the initial 3 year period the cost of contracts will be transferred to the Company, via the services will be renegotiated and there the Transfer Notice and may be subject to certain are certain limits on the margins that can be amendments made via the Transfer Notice, to applied by SunWater; and provide for the transition to Local Management • SunWater will be required to provide details and, align the provisions associated with setting of its costs on an open book basis. charges with the provisions in the standard Customer Contract.
9.5 Channel Lining Project 9.7 Overview of Constitution and rights The Commonwealth Government has announced funding of $3.01 million from the and liabilities attaching to Shares National Water Infrastructure Development Fund The rights attaching to Shares are set out in towards the lining of certain channels within the the Company’s Constitution. A summary of Scheme. The funding is subject to agreements the significant rights attaching to Shares and a between the Commonwealth, the State and description of other material provisions of the SunWater being finalised. The Channel Lining Constitution is set out below. This summary Project will be carried out by SunWater (as the is not exhaustive, nor does it constitute a recipient of the funding) after the Transfer Date. definitive statement of the rights and liabilities of The Transfer Deed sets out the principles to apply Shareholders. to the agreement between the Company and It does not replace careful review or consideration SunWater to enable the works to proceed. of the Constitution, a full copy of which is available Under those principles SunWater will fund the at www.fairbairnirrigation.com.au. capital costs of the Channel Lining Project and (a) Objects carry out the works after the Transfer Date. SunWater will be able to recover the capital costs The objects of the Company are to: and interest from the sale of any water saved by (i) own, operate and maintain the the project. If there are surplus funds from the sale Irrigation Scheme; of water, those funds would go to the Company. (ii) provide irrigation services, water transportation services and drainage 9.6 Other customer contracts services to customers; Drainage contract (iii) purchase, sell, transfer or lease water In addition to the deemed Customer Contract, allocations distributed under the the Company is required to prepare a standalone DOL for the Irrigation Scheme, or to drainage contract to provide for the drainage facilitate the purchase, sale, transfer services provided in the Declared Drainage Area to or lease of such water allocations; customers who do not on the Transfer Day hold a Water Allocation in the Scheme34. The Company (iv) plan and provide for the renewal has prepared a standard alone Drainage Contract and refurbishment of the Irrigation which will apply to drainage customers within the Scheme infrastructure, plant and Declared Drainage Area who do not hold a Water equipment to meet anticipated future Allocation in the Scheme. requirements; and
34 Section 738JB(1) of the Water Act
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(v) do all such other lawful things as are just because they hold an Allocation. incidental or conducive to (and for the However, they may hold any number of purpose of) the attainment of any of ordinary Shares up to their Entitlement and the above objects. any number of other securities determined by the Board from time to time. (vi) The assets and income of the Company must be applied solely in (e) Shareholding limit furtherance of those objects. A person and their Associates must not (b) Not for profit together be the registered holders of The assets and income of the Company more than 25% of the Shares at any time. must not be distributed directly or The takeovers provisions of the indirectly to the Shareholders, except Corporations Act also separately regulate as payment for services provided to, the ‘voting power’ that a person may hold or expenses incurred on behalf of, the in the Company from time to time. Voting Company. power means the relevant interests that The Company must not pay any dividends. a person and their associates (as defined in the Corporations Act) have in voting (c) Winding up shares of the Company. Relevant interest means, in general terms, the power to On a winding up or dissolution of the control the right to vote or to control the Company, any surplus assets of the disposal of shares. Company remaining after the payment of its debts may not be paid or distributed In general terms, the takeovers provisions to a Shareholder, but will be given or provide that a person must not acquire a transferred, for no consideration, to some relevant interest in issued voting shares of other body: a company if, because of the transaction, that person’s or someone else’s voting • that has objects similar to or consistent with any or all of the objects of the power in the company increases from: Company; and • 20% or below to more than 20%; or • has similar restrictions on the • from more than 20% but below 90%, distribution to Shareholders of asset or income, or surplus on a winding up as unless an exception applies. the Company. (f) Persons holding less than their (d) Eligibility to hold Shares Entitlement A person is only eligible to be a If a person holds less than their Shareholder if they are the holder of an Entitlement, the holder of the relevant Allocation. A holder of a Water Allocation is Allocation may apply to the Company for either the person whose details are stated the issue or transfer of fully paid ordinary on the water allocations register as the Shares up to their Entitlement for no person who holds the water allocation or if issue or purchase price, subject to the a lease of the water allocation is registered shareholding limits discussed above. on the register—the lessee of the lease. A holder of an Allocation is permitted to hold (g) Compulsory transfer, cancellation, one ordinary Share for every megalitre of buy-back or forfeiture of Shares, and the total Allocation held by that person suspension of rights attaching to Shares, (Entitlement). A person’s Entitlement will in certain circumstances vary with any changes to the size of their Where: Allocation from time to time. • a Shareholder’s Entitlement is reduced A person does not have to hold any Shares to below the number of Shares they
50 Fairbairn Irrigation Network Pty Ltd Offer Document
hold (the difference being the Relevant Share, a Shareholder: Shares); or • may only transfer Shares to another • the number of Shares held by the eligible person to whom the person and their Associates together Shareholder transfers an Allocation; exceeds 25% (the Relevant Shares being and the number of Shares held in excess of that limit and which were most recently • must transfer a number of Shares to acquired); the person to whom the Shareholder transfers an Allocation, unless the • the holder of Shares in respect of an transferee does not want the Shares Allocation no longer wishes to hold or the transfer would cause a breach those Shares (Relevant Shares), of the 25% Shareholding limit or the takeovers provisions of the then: Corporations Act or the Company otherwise refuses to register the • all rights (including the right to vote) transfer, attaching to the Relevant Shares are suspended; and in each case on the basis of one Share for • the Board may at any time: each megalitre of the Allocation which is transferred. » direct the relevant Shareholder or Associate (as applicable) in writing If the Directors give a direction to to transfer any or all of the Relevant a person to transfer their Shares as Shares to another person who is outlined in paragraph (g) above, they eligible to hold them; must promptly do all things necessary or reasonably requested by the Board to do » direct that any or all of the so, and appoint the Company and each Relevant Shares be bought-back or cancelled; or Director individually to do those things.
» determine that any or all of the The Company may refuse to register a Relevant Shares be forfeited, transfer of Shares where the Board so resolves. The Company is not required to in each case for no cash consideration. give any reason for that refusal.
If a Shareholder has failed to pay any If permitted by the Corporations Act and Charges to the Company under the New the Board so resolves, the Company Water Supply Contract between the may refuse to register an instrument of Shareholder and the Company for more transfer of Shares where the transfer is than: not in registrable form, the Company has • 90 days after those Charges become a lien on any of the Shares transferred, due and payable, the Board may the registration of the transfer may breach determine that all rights (including the an Australian law or a court order, or right to vote) attaching to the Relevant the Company is otherwise permitted Shares are suspended; or or required to do so pursuant to the terms of issue of the Shares and/or the • 12 months after those Charges become Constitution. due and payable, all rights in relation to all of their Shares are suspended and The Company must refuse to register a the Board may direct the transfer, buy- transfer of Shares where the Corporations back, cancellation or forfeiture of those Act or a law about stamp duty requires Shares. the Company to do so or the Constitution otherwise requires, where the transferee (h) Transfers of Shares is not eligible to hold Shares under the Subject to the Corporations Act, the terms of the Constitution, or if upon Constitution and the terms of issue of any registration of the transfer the transferee
51 Fairbairn Irrigation Network Pty Ltd Offer Document
would hold more Shares than their paid Shares, and a separate forfeiture Entitlement or the Company is aware that process and terms apply to such a the transfer would cause a breach of the forfeiture. 25% Shareholding limit or the takeovers provisions of the Corporations Act. The Company may cancel any forfeited Share by ordinary resolution. (i) Compulsory Share cancellations or buy- backs (k) Issue of further Shares and other securities If the Board decides that Shares should be Subject to the Corporations Act, the bought back or cancelled as outlined in Constitution and any rights and restrictions paragraph (g) above, the Board may give attached to a class of Shares or other written notice to the Shareholder, and securities, the Company may, by resolution subject to the Company complying with of the Board, issue Shares (including the relevant provisions of the Corporations preference shares), options to acquire Act, the holder of the Relevant Shares Shares, and other securities with rights specified in such notice must promptly of conversion to Shares on any terms, do all things necessary, or reasonably to any person, at any time and for any requested by the Board, to be done by consideration, as the Board resolves. them in connection with the buy-back or However, the Company must not issue cancellation and appoints the Company Shares to a person who is not eligible and each Director individually to be their to hold Shares, or if upon the issue the attorney to do such things. person would hold more ordinary Shares than their Entitlement, or the Company is (j) Forfeiture aware that any person and their Associates If the Board decides that Shares should would hold more than 25% of the Shares be forfeited as outlined in paragraph (g) or the issue would cause a breach of the above, the Board may give notice to the takeovers provisions. Shareholder stating that any or all of the Relevant Shares are forfeited. (l) General meetings of Shareholders
The Board may sell or otherwise dispose Under the Corporations Act, the Company of any forfeited Share on behalf of the is required to hold an annual general Shareholder. The terms and manner of meeting with at least once in each sale or disposal are to be determined by calendar year and within 5 months after 35 the Board but will not include any cash the end of its financial year . consideration. Each Shareholder is entitled to receive At any time before any forfeited Share notice of, and to attend and vote at, is sold or otherwise disposed of, the general meetings of the Company. Board may cancel the forfeiture on terms The quorum for a meeting of Shareholders determined by it. is seven Shareholders present in person or On forfeiture of any Share, the holder of by proxy, attorney or representative at the that Share ceases to be a Shareholder, and meeting. Each individual present may only ceases to have any right as a Shareholder, be counted once. in respect of that forfeited Share (including A Shareholder may attend the meeting in respect of any right to vote). personally, or by appointing a proxy The Company may execute an instrument or attorney. A Shareholder that is a of transfer in respect of the forfeited company may also appoint a corporate Shares. representative.
The Company may also forfeit shares for
failure to pay a call or instalment on partly 35 Section 250N(2) of the Corporations Act 2001 (Cth).
52 Fairbairn Irrigation Network Pty Ltd Offer Document
(m) Voting rights There must be a minimum of five Directors and a maximum of seven Directors, of Subject to any rights or restrictions which at least two must be Independent attached to a class of Shares, each Directors and two must be Shareholder Shareholder present in person or by proxy, Directors. attorney or corporate representative has one vote on a show of hands and, A Shareholder Director is a Director who on a poll, one vote for each Share held. is a Shareholder, or who is a director, If the Share is partly paid, on a poll the secretary, employee or shareholder of a Shareholder has a fraction of a vote equal Shareholder that is a body corporate, or a to the proportion which the amount paid unitholder or beneficiary of a Shareholder up bears to the issue price. All Shares which holds its shares as a trustee, or being offered under the Offer are fully paid any other person who is nominated (with Shares. their consent) by a Shareholder to be a Shareholder Director. (n) Special Majority Resolutions An Independent Director is a Director The Company may not undertake any who is not eligible to be a Shareholder of the following matters unless and until Director at the time of their appointment the Board’s decision is ratified by Special or election. Majority Resolution of the Company: Directors may be appointed by the Board • changing the Company’s name; to fill casual vacancies or as an addition • changing the Company to a different to the Board, or be elected at a general type of company or making an meeting. All candidates for election application to transfer registration (e.g. or appointment as a Director must be to become a cooperative); nominated by a Shareholder, unless they • modification or repeal of this are a retiring Director. Constitution; or If the number of nominees for election • changing rights attaching to any issued is equal to or fewer than the number Shares. of vacancies, the persons nominated or eligible for election or re-election A Special Majority Resolution means a are taken to be elected unless it would resolution passed by at least 75% of the cause a breach of the requirements for Shareholders who are entitled to vote, and two Independent Directors and two who cast a vote, on the resolution. Shareholder directors.
(o) Variation of class rights Directors appointed by casual vacancy or Subject to the Corporations Act and the as an addition to the Board must not hold terms of issue of a class of Shares, the office beyond the next annual general rights attaching to any class of shares may meeting without re-election. be varied or cancelled with the written Directors must also retire by rotation. consent of the holders of 75% of the issued At the first annual general meeting after shares of the affected class, or by a special completion of the transition to Local resolution passed at a separate meeting Management, two Directors must retire of the holders of the issued Shares of the and after that a minimum of two of the affected class. Directors must retire at each annual Any proposal to amend the terms of any general meeting. No Director may issued Shares also requires the approval (without re-election) hold office beyond of Shareholders by Special Majority the third annual general meeting after Resolution. their election or three years, whichever is longest. The Directors in office at the (p) Election and retirement of Directors time that this Constitution takes effect are
53 Fairbairn Irrigation Network Pty Ltd Offer Document
taken to have been appointed on the date Licence Agreements this Constitution takes effect. SunWater has entered into a significant number of licence agreements which permit third parties Shareholders may by ordinary resolution to access areas of the SunWater perpetual lease. remove any Director. The Company understands that these licence agreements (to the extent they are able) will be (q) Strategic Asset Management Plan transferred to the Company on Transfer. If there Every five years, or such lesser period as are draft licence agreements which have not the Board determines from time to time, been executed prior to the Transfer, these will the Board must review the Company’s not be transferred, and any third party would plans for managing the Company’s need to negotiate directly with the Company to strategic assets for the subsequent five access the areas of the perpetual lease (provided year period (Strategic Asset Management such access is permitted under the terms of the Plan) and table a new or revised Strategic perpetual lease). Asset Management Plan to the following Annual General Meeting for discussion. 9.9 Other material information (a) Access to Irrigation Scheme’s assets 9.8 Other material contracts The Irrigation Scheme assets are located Employee Framework across land which is subject to different As part of the Local Management Proposal, tenure arrangements. The majority of SunWater, the Department, the Australian the assets are located within the area of Workers Union, and the Together Union have a perpetual lease issued under the Land entered into a Transition Employment Principles Act. Other assets are also located on Framework (Framework Agreement) which sets land which will be retained by SunWater, out the principles applying to the transition of within easements, within local roads SunWater employees to the Company. under a permit to occupy, within local Under the Framework Agreement, SunWater’s roads without a permit to occupy, within enterprise agreement and the SunWater Human a state-controlled road and within rail Resources Policies will continue to apply to those corridor land leased by both Aurizon employees who transfer from SunWater to the and Queensland Rail. In addition, at least Company on the Transfer Day. The provisions 2 instances assets have been identified in relation to no forced redundancies in the which are located on private property. existing SunWater enterprise agreement will Under the Local Management Proposal: apply for 3 years from the Transfer Date. The SunWater enterprise agreement will continue • the depot and the house at 46 Old to apply until the Company and the employees Airport Drive will be transferred as agree a replacement enterprise agreement or the freehold to the Company; enterprise agreement is terminated by the Fair • a new perpetual lease will be granted Work Commission. to SunWater and transferred to the In addition, as SunWater is currently in the Company; process of negotiating a new enterprise • easements will be transferred to the agreement, if that agreement has been Company; concluded prior to the Transfer Date, that agreement will apply to the transferring • a draft agreement has been negotiated employees or in the alternative if it has not been between SunWater and DTMR setting concluded by the Transfer Date, provision has out arrangements for the management been made in the Transfer Deed to ensure that of the Irrigation Scheme within a the transferring employees shall receive the state-controlled road. If the agreement is executed by SunWater before the benefit of any more beneficial terms in that new Transfer Date, it will be transferred to enterprise agreement. the Company;
54 Fairbairn Irrigation Network Pty Ltd Offer Document
• the Water Act provides that the Assets located within the rail corridor Company will be deemed to have a There are Irrigation Scheme assets located within permit to occupy the local roads for a rail corridor areas. These are areas which are period of a year after the Transfer Date subleased to either Aurizon Network Pty Ltd or for those local roads not covered by Queensland Rail Ltd. SunWater has advised that the existing permits to occupy; it does not have an existing agreement to access • SunWater will provide access (likely the rail corridor land and relies on rights under s in the form of an easement) to the 36 of the Water Supply Act. Following Transfer, Company in relation to assets located the Company’s rights to access the assets in the on land being retained by SunWater; rail corridor are limited to the rights under the and Water Supply Act (discussed below) unless the Company agrees some other arrangement with • where assets are located on land where Aurizon and / or Queensland Rail Ltd. Access the Company does not own, lease or have an arrangement in place with the to these assets is likely to be subject to the rail relevant landowner including the rail operator’s safety requirements. corridor land, the Company will have Water Supply Act certain statutory rights available to it to assist with access and protection of Following the Transfer Date, the Company will assets under the Water Supply Act. be a registered water service provider for the purpose of the Water Supply Act. As a registered Perpetual lease water service provider, the Water Supply Act A new perpetual lease is to be granted by the includes statutory rights to access land owned Government to SunWater on the Transfer Date by third parties (including the rail corridor but and then transferred to the Company. The excluding residential buildings) to inspect, lease is granted under the Land Act. The lease operate, change, maintain, remove, repair or is perpetual and therefore is ongoing and does replace and maintain the Company’s existing not include a termination date. The rent payable Irrigation Scheme assets. Any access under to the Government under the lease is $1 per the Water Supply Act must comply with, and is annum, if demanded. The lease has been granted subject to, the requirements in that Act. for ‘irrigation purposes, namely, the use, control, To the extent that assets being transferred to and flow of water’. Therefore, any use of the land the Company are located outside the area of within the area of the lease must be for that end. the tenure held by the Company (e.g. because Assets located within roads the information provided by the Department SunWater and DTMR have negotiated a draft and SunWater in relation to the actual physical agreement for the management of Irrigation location of the assets is incorrect or there is a Scheme assets located within the area of a state- known tenure gap), the Company could rely controlled road. It is intended that the agreement upon the Water Supply Act to access those assets is to be finalised before the Transfer Date and subject to the requirements in that Act. transferred to the Company. In its current form (b) Regulatory requirements it has a term of 20 years. Under the agreement DTMR provides approval for the Irrigation Following the transfer to Local Scheme assets to be maintained and operated Management, the Company will be within the area of a state-controlled road and subject to various regulatory requirements sets out the conditions upon which works can be associated with the operation of irrigation carried out on those assets. assets. In particular: For local roads not within a permit to occupy, • the Company will hold a distribution the Water Act grants the Company a permit operations licence with respect to the to occupy for a period of 1 year following the Irrigation Scheme; and Transfer Date. The majority of assets within local • the Company will be a registered roads are covered by existing permits to occupy ‘service provider’ for the purposes of granted the Central Highland Regional Council the Water Supply Act. which will be transferred to the Company.
55 Fairbairn Irrigation Network Pty Ltd Offer Document
As part of the Asset Refurbishment and the insurance is in place when it becomes Renewal Strategy, the Company may an employer. be required to seek approvals for works under the planning or environmental The Transfer Deed provides that the State legislation. is to use its best endeavours to ensure that SunWater continues to operate the The operation of the Irrigation Scheme Irrigation Scheme prior to the Transfer will not be a monopoly business Day on a business as usual basis and activity for the purposes of Part 3 of the as otherwise provided in the Transfer Queensland Competition Authority Act Deed. The Transfer Deed provides for 1997 (Qld). There could be a risk that the existing SunWater insurance to include operation of the Irrigation Scheme may, the Company as an additional insured so in future, be declared to be a monopoly that the Company will have the benefit business activity (see Section 7.3). of the SunWater insurances from the Transfer Day for events or circumstances (c) Insurance Due Diligence arising before the Transfer Day. In Marsh’s As part of the due diligence investigations opinion this is an appropriate insurance associated with the Local Management and self-insurance programme based on Proposal, the Department engaged Marsh the disclosed business activities for the Pty Ltd (Marsh) to provide insurance period up to Transfer Day. due diligence advice on the pre- transition insurance arrangements for the 9.10 Formal disclosures and consents protection of the Company. This advice The following parties have given and have was provided to the Department on 30 not, before the date of this Offer Document, October 2017 and has not been updated withdrawn their written consent: for any changes that may have occurred subsequently. Prior to the Transfer Day, • to be named in this Offer Document in the the Company is covered by the following form and context in which they are named; and insurance or self-insurance coverages: • if applicable, to the inclusion of each • Directors’ and officers’ insurance statement it has made (if any) in the form arranged with a commercial insurer and context in which the statement appears subject to insurance limits considered in this Offer Document. appropriate for the nature of the activities pre-transition; and Name Role • Cover under the Queensland Government Insurance Fund (QGIF), Corrs Chambers Legal Adviser being the Queensland Treasury self- Westgarth insurance fund for State Agencies. This KPMG Financial Advisory Investigating provides coverage for the incidental Services (Australia) Pty Accountant property and liability exposures arising Ltd (KPMG Transaction from the Company’s activities. QGIF does not provide motor vehicle or Services) statutory workers compensation Jacobs Engineering coverage. Adviser Prior to the Transfer Day, it is anticipated, Marsh Pty Ltd Insurance Adviser that the Company will not hold any motor vehicle insurances (such as CTP KPMG Transaction Services has given, and for registered vehicles) as the Company not withdrawn before the date of this Offer will not own, lease or be responsible for Document, its written consent to the inclusion of registered motor vehicles during this its Investigating Accountant’s Report in this Offer period. The Company intends obtaining Document in the form and context in which it WorkCover during this period to ensure appears in annexure A to this Offer Document
56 Fairbairn Irrigation Network Pty Ltd Offer Document
and references to that report in the form and 9.11 Supplementary information context in which they appear. The Company will issue a supplementary Jacobs has given, and not withdrawn before the document to this Offer Document if it becomes date of this Offer Document, its written consent aware of any of the following between the date to the inclusion of its Jacobs Report in this Offer of this Offer Document and the Closing Date: Document in the form and context in which it • a material statement in this Offer Document appears in annexure B of this Offer Document is or becomes false or misleading in a and to references to the Jacobs Report in the material respect; form and context in which they appear in this • a material omission from this Offer Offer Document. Document; Marsh has given, and not withdrawn before the • a significant change affecting a matter date of this Offer Document, its written consent included in this Offer Document; or to the inclusion of statements set out in Section (c) of this Offer Document. • a significant new matter has arisen and it would have been included in this Offer Each person named above: Document if it had arisen before the date of • does not make or purport to make any this Offer Document. statement in this Offer Document or any statement on which a statement in this Depending on the nature and timing of the Offer Document is based, other than the changed circumstances the Company may Department in respect of the Department circulate and publish any supplementary Information, KPMG Transaction Services in document by: respect of the Investigating Accountant’s • posting the supplementary document Report on the Historical Pro Forma Balance to Customers at address registered with Sheets, Jacobs in relation to the Jacobs SunWater; or Report, and Marsh in relation to Section (c); • posting a statement on the Company • to the maximum extent permitted by law, Website disclaims all liability in respect of, makes no representation regarding, and takes as the Company, in its absolute discretion, no responsibility for, any part of this Offer considers appropriate. Document, other than a reference to its name and any statement included in this Offer Document with the consent of that person as specified in this Section (a); and • has not authorised or caused the issue of this Offer Document.
57 Fairbairn Irrigation Network Pty Ltd Offer Document
10. GLOSSARY
10.1 Definitions The meanings of the terms used in this Offer Document are set out below, unless the context otherwise requires.
Term Meaning ABA Administratively Binding Advice from the Australian Taxation Office Allocation In relation to a person, the nominal volume of the Water Allocation of which they are the holder. Applicant An Eligible Customer who accepts the Offer by returning the Support and Acceptance Form. ASIC The Australian Securities and Investments Commission. Asset Refurbishment An Asset Refurbishment and Renewal Strategy as developed by the Company and Renewal Strategy which defines the refurbishment and renewal costs and timeframes for each type of asset in the Irrigation Scheme and underpins the projected 29-year capital expenditure profile (described more fully in Section 5.8). Associate The meaning given in sections 12 and 16 of the Corporations Act; and includes, in respect of a reference to an associate of a person: (a) a spouse or child of the person; (b) a child of the person’s spouse; (c) a dependant of the person or the person’s spouse; (d) anyone else who is one of the person’s family and may be expected to influence the person, or be influenced by the person, in the person’s dealings with the Company; and (e) an entity that the person Controls (within the meaning of section 50AA of the Corporations Act). ATO Australian Taxation Office. Board The board of Directors of the Company. Business Day A day that is not a Saturday, Sunday, or public or bank holiday in Brisbane. Channel Lining The proposed lining of channels in the Irrigation Scheme in accordance Project with an agreement entered into (or to be entered into) by SunWater and the State for the provision of funding from the National Water Infrastructure Development Fund. Closing Date 1 March 2019 being the last date on which a Support and Acceptance Form can be received. Company or FIN Fairbairn Irrigation Network Pty Ltd ACN 615 973 754. COAG The Council of Australian Governments. Company Website www.fairbairnirrigation.com.au Constitution Means the constitution for the Company proposed to take effect immediately following the transfer of the Irrigation Scheme to the Company. Corporations Act The Corporations Act 2001 (Cth).
58 Fairbairn Irrigation Network Pty Ltd Offer Document
Term Meaning Cost-reflective The pricing required to allow a water business to recover costs, including the Pricing or Cost- operational, maintenance and administrative costs and to make provision for reflective Price(s) future asset refurbishment and replacement. Current Customer A person who, at the Initial Record Date: (a) holds a Water Allocation; and (b) is a Customer. Customer A customer under an arrangement entered into with SunWater for supply of water the subject of a Water Allocation under the resource operations licence held by SunWater in the area of the Irrigation Scheme. Customer Contract Means the standard customer contract prepared by the Company for the provision of distribution and drainage services pursuant to the requirements in the Water Act and published on the Company’s website. Customer Support Unless an alternative threshold is agreed between the Company and the Threshold Department, a minimum of 70% of Current Customers by nominal volume of Water Allocations support the Local Management Proposal and accept the Offer of Shares in the Company. Declared Drainage Means the area defined in Schedule 16 of the Water Regulation as Emerald Area Valley drainage area, shown on AP4146. Department The State of Queensland, acting through the Department of Natural Resources, Mines and Energy. Department All information provided in this Offer Document referred to as a statement, Information statement of opinion or an intention or belief of the Department or the Government. Director A director of the Company. Distribution Rules Means the distribution rules for the Irrigation Scheme updated as required by the Company in accordance with the new Customer Contract. DOL A distribution operations licence under the Water Act 2000 (Qld). Drainage Contract Means the standard standalone customer drainage contract prepared by the Company pursuant to the requirements in the Water Act and published on the Company’s website. DTMR The Department of Transport and Main Roads. Entitlement The entitlement under the Constitution for a holder of an Allocation to hold one ordinary Share for every megalitre of the total Allocation held by that person, as outlined in Section 9.7. Eligible Customer A Current Customer who is located in Australia. Financial Information The Pro Forma Historical Balance Sheet as at 30 June 2018 prepared on the basis that the assets, liabilities and equity of the business to be transferred in the Transfer Deed occurred on 30 June 2018 using asset and liability values provided by SunWater and any subsequent adjustments made by the Department and information related to the future operating and capital expenditure of the Company, and the Company’s revenue.
59 Fairbairn Irrigation Network Pty Ltd Offer Document
Term Meaning Final Record Date The date that is 25 Business Days prior to the Transfer Date, being the date for determining the Share Entitlement of Eligible Customers who accepted the Offer. Government The State of Queensland. Government The Director General of the Department as trustee for the State of Shareholder Queensland. High Priority A high priority water allocation under the Fitzroy Basin Nogoa Mackenzie Allocation Water Supply Scheme. Independent Director The meaning given in Section (p). Ineligible Customer Customers at the Initial Record Date who are not Eligible Customers. Investigating The Limited Assurance Investigating Accountant’s Report and Financial Accountant’s Report Services Guide prepared by KPMG Transaction Services dated 17 December 2018 set out in annexure A. Initial Record Date 29 November 2018, being the date on which the Transfer Deed was executed. Irrigation Scheme The distribution system used to supply water under Water Allocations to or Emerald Channel Customers who purchase irrigation services in the Nogoa Mackenzie Water Irrigation Scheme Supply Scheme with water supplied from Fairbairn Dam. Jacobs Jacobs Group (Australia) Pty Ltd. Jacobs Report The report prepared by Jacobs and contained in annexure B. KPMG Transaction KPMG Transaction Services, a division of KPMG Financial Advisory Services Services (Australia) Pty Ltd ABN 43 007 363 215, AFSL No. 246901. Land Act Land Act 1994 (Qld). LMA Information Line 0468 960 538 or [email protected] LMA Support Services LMA Support Services Pty Ltd ACN 614 965 918. Local Management The ownership, management and control of an Irrigation Scheme by an entity which is owned by customers of the Irrigation Scheme. Local Management The proposal to transfer the Irrigation Scheme and its associated business Proposal and certain liabilities to the Company, as outlined in this Offer Document and more particularly in sections 8 and 9.2. Medium Priority A medium priority water allocation under the Fitzroy Basin Nogoa Mackenzie Allocation Water Supply Scheme. ML Megalitre. NWI The National Water Initiative. Offer The offer of Shares under this Offer Document. Offer Document This document, including any annexure to it. Pro Forma Historical The Pro Forma Historical Balance Sheet prepared on the basis that the Balance Sheet assets, liabilities and equity of the business to be transferred in the Transfer Deed occurred on 30 June 2018 using asset and liability values provided by SunWater and any subsequent adjustments made by the Department. QCA The Queensland Competition Authority.
60 Fairbairn Irrigation Network Pty Ltd Offer Document
Term Meaning Register The register of Shareholders required to be kept under the Corporations Act. Separation Payment The sum of $2.5 million to be paid by the Department to the Company on or before the Transfer Date under the Transfer Deed. Share A fully paid ordinary share in the Company. Share Entitlement In relation to an Eligible Customer, means the Eligible Customer’s Entitlement as at the Final Record Date. Shareholder A person recorded in the Register as the holder of a Share. Shareholder Director The meaning given in Section (p). Special Majority A resolution passed by at least 75% of the Shareholders who are entitled to Resolution vote, and who cast a vote, on the resolution. State The State of Queensland, acting through the Department of Natural Resources, Mines and Energy. Strategic Asset Has the meaning given in paragraph (q). Management Plan SunWater SunWater Ltd ACN 131 034 985. Support and The support and acceptance form accompanying this Offer Document. Acceptance Form Transfer Date or The date or day on which the transition to Local Management occurs, as Transfer Day determined under the Transfer Deed. Transfer Deed The Transfer Deed executed on the Initial Record Date between the Department and the Company, a summary of which is set out in Section 9.2 of this Offer Document. Transition Schemes The Irrigation Schemes located at Emerald, Eton, St George, and Theodore. US or United States The United States of America, its territories and possessions, any State of the United States of America and the District of Columbia. US Person The meaning given in Regulation S under the US Securities Act. US Securities Act The United States Securities Act of 1933, as amended. Voting Power The meaning given in the Corporations Act. Water Act The Water Act 2000 (Qld). Water Allocation A water allocation, as that term is defined in the Water Act, in respect of the Irrigation Scheme. Water Allocations Means the register for water allocations, as that term is defined in the Water Register Act established under the Water Act. Water Regulation The Water Regulation 2016 (Qld). Water Supply Act The Water Supply (Safety and Reliability) Act 2008 (Qld). You A Current Customer who has received this Offer Document.
61 Fairbairn Irrigation Network Pty Ltd Offer Document
10.2 Interpretation In this Offer Document, unless the context requires otherwise:
(c) headings are inserted for convenience and do not affect the interpretation of this Offer Document;
(d) words and phrases in this Offer Document have the same meaning given to them (if any) in the Corporations Act;
(e) the singular includes the plural and vice versa;
(f) a gender includes all genders;
(g) a reference to a person includes a corporation, partnership, joint venture, association, unincorporated body or other body corporate and vice versa;
(h) if a word is defined, another part of speech has a corresponding meaning;
(i) a reference to a section or annexure is a reference to a section or annexure of this Offer Document;
(j) a reference to a statute, ordinance, code or other law includes regulations and other instruments under it and consolidations, amendments, re- enactments or replacements of any of them;
(k) unless expressly stated otherwise, a reference to time is a reference to time in Brisbane, Queensland; and
(l) unless expressly stated otherwise, a reference to dollars, $, A$ or AUD is a reference to the lawful currency of Australia.
62 Fairbairn Irrigation Network Pty Ltd Offer Document
Annexure A: Investigating Accountant’s Report
63 F ir irn Irrig tion Netw r Pty Ltd Limited Assurance Investi ati Accountant’s Report kpmg KPMG Transaction Services ABN: 43 007 363 215 Fi ncial Services Guide A division of KPMG Financial Advisory Services Telephone: +61 7 3233 3111 (Australia) Pty Ltd Facsimile: +61 7 3233 3100 17 December Australian Financial Services Licence No. 246901 www.kpmg.com.au Riparian Plaza 71 Eagle Street Brisbane Qld 4000
GPO Box 223 Brisbane Qld 4001 Australia
The Directors C m ilation f the Pr F rma Historical B l nce Sheet Fairbairn Irrigation Network Pty Ltd You ha e re este KPMG Transacti Ser ices to erf rm limited assurance r ced res i c/- Level 9, 179 Turbot Street relati t the com ilati f t e Pr F rma Hist rical Balance S eet as at Ju e 2 of the Brisbane, QLD 4000 Compa (the res onsible part ) include in the Offer Document
T e Pr F rma Hist rical Balance S eet as been eri ed fr m t e hist rical alance sheet f S Water as it ertai s t t e Emeral Channel Irri ation Sc eme as at J ne a 17 December 2018 includes a justme ts f r t e effects f the followi roup of r forma transacti ns:
• Assets as per t e transfer eed betwee t e Department a the Compa (“Transfer Deed”) ased S Water re rte al es a an su seq e t adj stments made b the Dear Directors Department as at June ;
Limited Assurance Investigating Accountant’s Report and Financial Services Guide • Liabilities as per t e Transfer Deed ased S Water al es as at J es ; a
Investigating Accountant’s Report • The se aration pa ment t be pai the Department to the Compa on or ef re the Introduction transfer ate KPMG Financial Advisory Services (Australia) Pty Ltd (of which KPMG Transaction Services and relate notes as set t in secti of the Offer D cument (collecti el t e “Pr F rma is a division) (“KPMG Transaction Services”) has been engaged by LMA Support Services Pty Hist rical Fi ancial I f rmati ”) T e basis o w ich the Compa has compile the Pr Ltd to prepare this report for inclusion in the Offer Document to be dated 14 January 2019 F rma Historical Balance S eet is specified i secti of the Offer Document (“Offer Document”) to be issued to customer irrigators (“Customers”) by the State of Queensland acting through the Department of Natural Resources, Mines and Energy T e Pr F rma Hist rical Balance S eet as been com iled the Compa to illustrate the (“Department”) in respect of the offer to the Customers of shares in Fairbairn Irrigation impact of the Offer the Compa ’s financial position as at 30 June as if t e tra sfer of Network Pty Ltd (“Company”), to which SunWater Ltd (“SunWater”) will transfer the Emerald the Emeral Cha el Irri ation Scheme occ rre t at date Channel Irrigation Scheme (the “Offer”). For t e rposes f prepari this rep rt we have erf rmed limited assurance r ced res i Expressions defined in the Offer Document have the same meaning in this report. relati t the Pro Forma Historical Balance S eet i r er t state w et er t e asis of t e procedures descri ed, a thi has come t ur atte tion that causes us t elie e that t e Pr Scope Forma Historical Balance S eet has ot ee r erl compile the basis state in secti You have requested KPMG Transaction Services to perform a limited assurance engagement in of the Offer Document relation to the Pro Forma Historical Balance Sheet described below and disclosed in the Offer We ha e c nducte ur r ced res i accor ance wit t e Stan ar Assurance E agements Document. ASAE Ass rance E agements To Report the C m ilatio f Pr F rm Historic l The Pro Forma Historical Balance Sheet is presented in the Offer Document in an abbreviated Financi l I form ti n i cluded in a Pr spect s or t er Docume t (ASAE 3420) form, insofar as it does not include all of the presentation and disclosures required by Australian Our limited assurance en a ement has i ol e performi procedures t assess whether the Accounting Standards and other mandatory professional reporting requirements applicable to ap licable criteria used the Compa in the c m ilatio f the Pr F rma Historical Balance general purpose financial reports prepared in accordance with the Corporations Act 2001. S eet pr ides a reaso able asis f r resenti t e si ificant effects directl attri table t the e e t(s) r transacti (s), a that the:
• relate r f rma adj stments gi e ap r riate effect to those criteria; a
KPMG Financial Advisory Services (Australia) Pty Ltd is an affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Fairbairn Irrigation Network Pty Ltd Limited Assurance Investigating Accountant’s Report and kpmg KPMG Transaction Services ABN: 43 007 363 215 Financial Services Guide A division of KPMG Financial Advisor Services Telephone: +61 7 3233 3111 (Au tralia) Pt Ltd Fac imile: +61 7 3233 3100 17 December 2018 Au tralian Financial Services Licen e No. 246901 www.kpmg.com.au Riparian Pla a 71 Eagle Street Bri bane Qld 4000
GPO Box 223 Bri bane Qld 4001 Au tralia
T e Direct rs Compilation of the Pro Forma Historical Balance Sheet Fair air Irrigatio Netw r Pty Ltd You have requested KPMG Transaction Services to perform limited assurance procedures in c/- Le el Tur ot Street relation to the compilation of the Pro Forma Historical Balance Sheet as at 30 June 2018 of the Bris ane, QLD Company (the responsible party) included in the Offer Document.
The Pro Forma Historical Balance Sheet has been derived from the historical balance sheet of SunWater as it pertains to the Emerald Channel Irrigation Scheme as at 30 June 2018 and 17 December includes adjustments for the effects of the following group of pro forma transactions:
• Assets as per the transfer deed between the Department and the Company (“Transfer Deed”) based on SunWater reported values and any subsequent adjustments made by the Dear Direct rs Department as at 30 June 2018;
Limited Assurance In esti ting Acc unt nt’s Rep rt nd Financi l Ser ices Guide • Liabilities as per the Transfer Deed based on SunWater values as at 30 Junes 2018; and
Investigating Accountant’s Report • The separation payment to be paid by the Department to the Company on or before the Intr ducti n transfer date, KPMG Fi ancial A isor Ser ices (A stralia) Pt Lt ( f w ich KPMG Tra sacti Ser ices and related notes as set out in section 5 of the Offer Document (collectively the “Pro Forma is a di isi ) (“KPMG Tra sacti Ser ices”) as bee en aged LMA S rt Ser ices Pt Historical Financial Information”). The basis on which the Company has compiled the Pro Ltd t prepare this re ort f r i cl si i the Offer Document to be ate Ja ar Forma Historical Balance Sheet is specified in section 5.5 of the Offer Document. (“Offer D cument”) t e issued t c st mer irri at rs (“Customers”) the State f Queensla acti t r h the Department f Nat ral Reso rces, Mi es an E er The Pro Forma Historical Balance Sheet has been compiled by the Company to illustrate the (“Department”) in respect f t e offer t the C st mers of shares i Fairbairn Irri ati impact of the Offer on the Company’s financial position as at 30 June 2018 as if the transfer of Netw r Pty Ltd (“Compa ”), to whic S nWater Lt (“S Water”) will tra sfer t e Emeral the Emerald Channel Irrigation Scheme occurred on that date. Channel Irri ation Scheme (t e “Offer”) For the purposes of preparing this report we have performed limited assurance procedures in Expressi ns define i the Offer Document ha e the same meani in t is re rt relation to the Pro Forma Historical Balance Sheet in order to state whether, on the basis of the procedures described, anything has come to our attention that causes us to believe that the Pro Sc pe Forma Historical Balance Sheet has not been properly compiled on the basis stated in section Y ave req ested KPMG Transacti Ser ices t erf rm a limite assurance engageme t i 5.5 of the Offer Document. relation t the Pro F rma Hist rical Balance S eet escri e elow and disclose in t e Offer We have conducted our procedures in accordance with the Standard on Assurance Engagements Document ASAE 3420 Assurance Engagements To Report on the Compilation of Pro Forma Historical T e Pr F rma Hist rical Balance S eet is presented i t e Offer D cument i a ab reviated Financial Information included in a Prospectus or other Document (ASAE 3420). form ins far as it does not include all of t e prese tation a isclosures require Australia Our limited assurance engagement has involved performing procedures to assess whether the Accounti Sta dards a other mandat r professi al re rti re irements applica le t applicable criteria used by the Company in the compilation of the Pro Forma Historical Balance eneral pur se fi ancial reports prepared i acc rdance with the Cor rations Act Sheet provides a reasonable basis for presenting the significant effects directly attributable to the event(s) or transaction(s), and that the:
• related pro forma adjustments give appropriate effect to those criteria; and
KPMG Financial Advi or Ser i es (Australia) Pt Ltd i an affiliate of KPMG. KPMG i an Australian partner hip and a member firm of the 2 KPMG networ of independent member firm affiliated with KPMG International Cooperati e (“KPMG International”), a Swi entit . Fairbairn Irrigation Network Pty Ltd F ir irn Irrig tion Netw r Pty Ltd Limited Assurance Investigating Accountant’s Report and Limited Assurance Investi ati Accountant’s Report Financial Services Guide Fi ncial Services Guide 17 December 2018 17 December
inf rmati f the Compa . Accordi l , we t pr ide a assurance that t e actual • the resultant Pro Forma Historical Balance Sheet reflects the proper application of those outcome of the Offer woul ave been as prese te adjustments to the unadjusted financial information. Direct rs’ resp nsibilities The engagement has also involved evaluating the overall presentation of the Pro Forma T e irect rs f t e Compa are res si le for the reparati of t e Pr F rma Hist rical Historical Balance Sheet. Balance S eet, incl i t e selecti an determinati of the ro forma transactions and/or The procedures we performed were based on our professional judgement and included: a justments and for roperl compili the Pro F rma Hist rical Balance S eet f t e basis state in secti of the Offer Document • consideration of whether the unadjusted historical financial information, which forms the basis for the Pro Forma Historical Balance Sheet, has been extracted from an appropriate The direct rs’ responsi ilit includes esta lis i a maintai i such i ter al c tr ls as t e source; irect rs etermi e are necessar t enable t e preparati f fi ancial inf rmati t at is free from material misstatement, whether e t fra r error • consideration of work papers, accounting records and other documents, including those C nclusi n dealing with the extraction of the unadjusted historical financial information; C mpil tion of the Pr F rma Historical B l nce Sheet • consideration of the pro forma adjustments described in the Offer Document; Base on our pr ce ures, whic are not an a dit thi has come to our atte ti n that causes s t elieve t at t e Pr F rma Hist rical Balance S eet is t roperl compile t e basis • enquiry of directors, management, personnel and advisors; state in sectio of the Offer Document
• the performance of analytical procedures applied to the Pro Forma Historical Balance We have n t au ited r reviewed t e hist rical fi ancial i f rmati extracted fr m t e Sheet; and ist rical alance s eet f S Water as it ertai s t t e Emeral Channel Irri ation Sc eme as at 30 June , and we not e press a opinion, or ma e a statement f ne ati e assura ce, as t w et er t e Pr F rma Hist rical Balance S eet is prepare r prese te fairl • a review of accounting policies for consistency of application in the preparation of the pro forma adjustments. i all material respects, i accor ance wit t e reco iti an measurement ri ci les prescribe in Australian Accounti Sta ar s, a t e Compa ’s accounti licies. The procedures performed in a limited assurance engagement vary in nature from, and are less Independence in extent than for, an audit. As a result, the level of assurance obtained in a limited assurance engagement is substantially lower than the assurance that would have been obtained had we KPMG Transacti Ser ices d es t ave an i terest in the tcome of the Offer other tha performed an audit. Accordingly, we do not express an audit opinion about whether the Pro in c necti n with t e pre arati of t is report and participati i e ili ence procedures Forma Historical Balance Sheet has been properly compiled on the basis stated in section 5.4 of f r w ich rmal r fessi al fees will e recei e the Offer Document. General d ice w rnin We have not performed an audit or review of the unadjusted historical financial information T is rep rt as been repared an i cl ed i t e Offer Document, to pr i e Customers with used in compiling the Pro Forma Historical Balance Sheet, or of the Pro Forma Historical e eral inf rmatio ly a es t ta e into acc t the jectives fi a cial situatio r Balance Sheet itself. Also, our engagement did not involve updating or re-issuing any eeds f a specific C st mer It is n t i ten ed t ta e t e place f r fessi al ad ice an previously issued audit or review report on any financial information used in compiling the Pro Customers s oul not ma e specific i estment decisi ns i reliance on t e inf rmati Forma Historical Balance Sheet. contained i t is re rt. Before acti or rel i on a informati a Customer shoul co si er w et er it is ap r riate f r t eir circumstances avi regar t t eir jecti es, The purpose of the compilation of the Pro Forma Historical Balance Sheet being included in the financial situati or nee s Offer Document is solely to illustrate the impact of the Offer on the unadjusted financial
3 F ir irn Irrig tion Netw r Pty Ltd Fairbairn Irrigation Network Pty Ltd Limited Assurance Investi ati Accountant’s Report nd Limited Assurance Investigating Accountant’s Report and Fi ncial Services Guide Financial Services Guide 17 December 18 17 December 2018
information of the Company. Accordingly, we do not provide any assurance that the actual • the resultant Pr F rma Historical Bala ce S eet reflects the roper a licati n of those outcome of the Offer would have been as presented. a justments to the a j sted fina cial inf rmati Directors’ responsibilities T e en agement as also i l ed eval ati t e o erall resentati f t e Pro F rma The directors of the Company are responsible for the preparation of the Pro Forma Historical Hist rical Balance S eet Balance Sheet, including the selection and determination of the pro forma transactions and/or The pr ce res we perf rmed were base ur rofessi nal j ement a included: adjustments, and for properly compiling the Pro Forma Historical Balance Sheet of the basis stated in section 5.4 of the Offer Document. • considerati f whether t e una juste istorical fi ancial inf rmati , w ic f rms the asis f r t e Pr F rma Hist rical Balance S eet has been extracted fr m an ap r riate The directors’ responsibility includes establishing and maintaining such internal controls as the source; directors determine are necessary to enable the preparation of financial information that is free from material misstatement, whether due to fraud or error. • considerati f wor pa ers, acc ti rec rds a other documents, i cl di those Conclusion deali with the extraction of t e a j ste istorical fina cial inf rmatio ; Compilation of the Pro Forma Historical Balance Sheet • co si erati f t e pr f rma adj stments descri ed i t e Offer Document; Based on our procedures, which are not an audit, nothing has come to our attention that causes us to believe that the Pro Forma Historical Balance Sheet is not properly compiled on the basis • enquir of direct rs, mana ement, personnel a a isors; stated in section 5.5 of the Offer Document.
• t e perf rmance of anal tical r ce res ap lied t t e Pr F rma Hist rical Balance We have not audited or reviewed the historical financial information extracted from the S eet; a historical balance sheet of SunWater as it pertains to the Emerald Channel Irrigation Scheme as at 30 June 2018, and we do not express any opinion, or make any statement of negative assurance, as to whether the Pro Forma Historical Balance Sheet is prepared or presented fairly, • a review f acco ti licies f r co siste cy f ap licati i the preparati f the r f rma adj stments in all material respects, in accordance with the recognition and measurement principles prescribed in Australian Accounting Standards, and the Company’s accounting policies. T e r ced res erf rmed i a limited assurance en agement ar i at re fr m an are less Independence i e te t than for, an a dit As a result t e level f ass rance o tai ed i a limited assurance e a ement is substa tiall lower than t e assurance t at w ld ha e bee tained had we KPMG Transaction Services does not have any interest in the outcome of the Offer, other than performe an a it. Acc r i l , we do not express a audit inion a ut whet er t e Pr in connection with the preparation of this report and participation in due diligence procedures F rma Hist rical Balance S eet as been pr perl c mpile t e asis stated i secti of for which normal professional fees will be received. the Offer Document General advice warning We have n t erf rmed an au it r review f t e u adj sted ist rical fi ancial i f rmati This report has been prepared, and included in the Offer Document, to provide Customers with use in compili the Pro Forma Hist rical Bala ce S eet or of the Pro F rma Hist rical general information only and does not take into account the objectives, financial situation or Balance S eet itself. Als our e a ement di t i ol e updati or re-issui a needs of any specific Customer. It is not intended to take the place of professional advice and pre iousl iss ed a dit or re iew re rt on a financial inf rmati se in compili the Pr Customers should not make specific investment decisions in reliance on the information F rma Hist rical Balance S eet contained in this report. Before acting or relying on any information, a Customer should consider whether it is appropriate for their circumstances having regard to their objectives, The purpose of the compilation of the Pr F rma Historical Balance S eet bei incl ed in t e financial situation or needs. Offer Document is s lely to illustrate the im act of t e Offer on the a justed fi ancial
4 Fairbairn Irrigation Network Pty Ltd F ir irn Irrig tion Netw r Pty Ltd Limited Assurance Investigating Accountant’s Report and Limited Assurance Investi ati Accountant’s Report Financial Services Guide Fi ncial Services Guide 17 December 2018 17 December
Restriction on use Financial Services Guide Without modifying our conclusions, we draw attention to section 5 of the Offer Document, 17 December 2018 which describes the purpose of the financial information, being for inclusion in the Offer Document. As a result, the financial information may not be suitable for use for another What is a Financial Services Guide (FSG)? purpose. We disclaim any assumption of responsibility for any reliance on this report, or on the financial information to which it relates, for any purpose other than that for which it was Thi FSG i designed to help ou to decide whether to use any of the general financial product advi e provided by prepared. KPMG Financial Advisory Services (Australia) Pty Ltd ABN 43 007 363 215, Australian Financial Ser i es KPMG Transaction Services has consented to the inclusion of this Investigating Accountant’s Li ence Number 246901 (of whi h KPMG Transaction Ser i es i a di i ion) (‘KPMG Transaction Services’), and Report in the Offer Document in the form and context in which it is so included, but has not Anne-Maree Keane as an authori ed representati e of KPMG Transaction Ser i es (Authorised Representative), authorised the issue of the Offer Document. Accordingly, KPMG Transaction Services makes authori ed representati e number 1236095. no representation regarding, and takes no responsibility for, any other statements, or material in, or omissions from, the Offer Document. This FSG includes information about:
Yours faithfully • KPMG Transaction Ser i es and it Authori ed Representati e and how they an be ontacted • the er i es KPMG Transaction Ser i es and it Authori ed Representati e are authori ed to provide • how KPMG Transaction Ser i es and it Authori ed Representati e are paid • any relevant as ociations or relationship of KPMG Transaction Ser i es and it Authori ed Representati e Anne-Maree Keane • how omplaint are dealt with as well as information about internal and external di pute resolution tem and Authorised Representative how ou an ac es them; and • the ompensation arrangement that KPMG Transaction Ser i es has in place.
The di tribution of thi FSG by the Authori ed Representati e has been authori ed by KPMG Transaction Ser i es. Thi FSG form part of an Investigating A ountant’ Report (Report) whi h has been prepared for inclusion in a di losure document or, if ou are offered a finan ial product for i ue or ale, a Product Di losure Statement (PDS). The purpose of the di losure document or PDS i to help ou make an informed deci ion in relation to a financial product. The ontent of the di losure document or PDS, as relevant, will in lude detail uch as the ri , benefit and ost of acquiring the parti ular financial product.
Financial services that KPMG Transaction Services • deri ati es; and the Authorised Representative are authorised to • foreign ex hange ontract ; provide • government debentures, toc or bonds; KPMG Transaction Ser i es holds an Australian Financial • interest in managed investment hemes including Ser i es Li en e, whi h authori es it to provide, amongst investor directed portfolio er i es; other er i es, financial product advi e for the following • securities; las es of finan ial product : • uperannuation; • deposit and non- ash payment product ; • arbon unit ;
5 F ir irn Irrig tion Netw r Pty Ltd Fairbairn Irrigation Network Pty Ltd Limited Assurance Investi ati Accountant’s Report nd Limited Assurance Investigating Accountant’s Report and Fi ncial Services Guide Financial Services Guide 17 December 18 17 December 2018
Restricti n n use Financial Services Guide Wit t modif i our c clusi s we draw attenti to secti of the Offer Document 17 December 2018 whic escri es the r se of the fi ancial i formation, bei for inclusi in t e Offer Document. As a res lt the financial i formati n ma not be s itable f r use f r another What is a Financial Services Guide (FSG)? purpose We disclaim an assum ti f resp si ilit f r an reliance o t is report or n t e fina cial inf rmatio to w ic it relates for a pur se other than t at for w ic it was This FSG is designed to help you to decide whether to use any of the general financial product advice provided by prepare KPMG Financial Advisory Services (Australia) Pty Ltd ABN 43 007 363 215, Australian Financial Services KPMG Transacti Ser ices has co sented t t e i cl si f t is I esti ati Acco tant’s Licence Number 246901 (of which KPMG Transaction Services is a division) (‘KPMG Transaction Services’), and Report in the Offer Document in the form and c te t in which it is s incl e ut has t Anne-Maree Keane as an authorised representative of KPMG Transaction Services (Authorised Representative), aut rised t e iss e f t e Offer Document Acc r i l KPMG Transacti Ser ices makes authorised representative number 1236095. no re resentati re ar i , and ta es no res nsibilit for, a other statements or material i or omissi ns from, the Offer Document This FSG includes information about:
Yours faithfull • KPMG Transaction Services and its Authorised Representative and how they can be contacted • the services KPMG Transaction Services and its Authorised Representative are authorised to provide • how KPMG Transaction Services and its Authorised Representative are paid • any relevant associations or relationships of KPMG Transaction Services and its Authorised Representative Anne-Maree Keane • how complaints are dealt with as well as information about internal and external dispute resolution systems and Authorised Representati e how you can access them; and • the compensation arrangements that KPMG Transaction Services has in place.
The distribution of this FSG by the Authorised Representative has been authorised by KPMG Transaction Services. This FSG forms part of an Investigating Accountant’s Report (Report) which has been prepared for inclusion in a disclosure document or, if you are offered a financial product for issue or sale, a Product Disclosure Statement (PDS). The purpose of the disclosure document or PDS is to help you make an informed decision in relation to a financial product. The contents of the disclosure document or PDS, as relevant, will include details such as the risks, benefits and costs of acquiring the particular financial product.
Financial services that KPMG Transaction Services • derivatives; and the Authorised Representative are authorised to • foreign exchange contracts; provide • government debentures, stocks or bonds; KPMG Transaction Services holds an Australian Financial • interests in managed investments schemes including Services Licence, which authorises it to provide, amongst investor directed portfolio services; other services, financial product advice for the following • securities; classes of financial products: • superannuation; • deposit and non-cash payment products; • carbon units;
6 Fairbairn Irrigation Network Pty Ltd F ir irn Irrig tion Netw r Pty Ltd Limited Assurance Investigating Accountant’s Report and Financial Limite Ass r ce I vestig ti Acc untant’s Report nd Fi ancial Services Guide ervices G i e 17 December 2018 Decem er
• Australian carbon credit units; and Fees KPMG Transaction Services may receive and finan ial product in the ordinar our e of their Compensation arrangements remuneration or other benefits received by our busines es. • eligible international emissions units, KPMG Transaction Ser i es has profes ional indemnit representatives to retail and wholesale clients. We provide financial No indi idual invol ed in the preparation of thi Report insurance over as required by the Corporations A t product advice when engaged to prepare a report in KPMG Transaction Services charges fees for preparing holds a ubstantial interest in, or i a ubstantial reditor 2001(Cth). relation to a transaction relating to one of these types of reports. These fees will usually be agreed with, and paid of, the Client or has other material financial interest in the Contact Details financial products. The Authorised Representative is by, the Client. Fees are agreed on either a fixed fee or a transaction. You may ontact KPMG Transaction Ser i e or the authorised by KPMG Transaction Services to provide time cost basis. In this instance, the Client has agreed to Complaints resolution financial product advice on KPMG Transaction Services' pay KPMG Transaction Services in the range of $5,300 to Authori ed Representati e using the ontact detail : behalf. $10,600 (excluding GST) for preparing the Report. KPMG Internal omplaint resolution proces KPMG Transa tion Ser i es Transaction Services and its officers, representatives, KPMG Transaction Services and the Authorised If ou have a omplaint, please let either KPMG A division of KPMG Financial Ad isor related entities and associates will not receive any other Transaction Ser i es or the Authori ed Representati e Ser i es (Australia) Pt Ltd Representative's responsibility to you fee or benefit in connection with the provision of the Level 38, Tower Three now. Formal omplaint hould be ent in writing to The International Tower S dney KPMG Transaction Services has been engaged by LMA Report. Complaint Offi er, KPMG, PO Box H67, Australia Square, 300 Barangaroo A enue Support Services Pty Ltd (Client) to provide general KPMG Transaction Services’ officers and representatives S dney NSW 1213. If ou have diffi ult in putting our S dney NSW 2000 financial product advice in the form of a Report to be (including the Authorised Representative) receive a salary omplaint in writing, please telephone the Complaint PO Box H67 included in an Offer Document (Offer Document) prepared or a partnership distribution from KPMG’s Australian Offi er on 02 9335 7000 and they will as i t ou in Australia Square NSW 1213 by Fairbairn Irrigation Network Pty Ltd in relation to the documenting our omplaint. professional advisory and accounting practice (the KPMG Telephone: (02) 9335 7000 offer to the Customers of shares in the Company Partnership). KPMG Transaction Services’ representatives Written omplaint are recorded, ac nowledged within 5 Facsimile: (02) 9335 7200 (Transaction). (including the Authorised Representative) are eligible for day and investigated. A oon as practi al, and not more bonuses based on overall productivity. Bonuses and other You have not engaged KPMG Transaction Services or the than 45 day after recei ing the written omplaint, the Anne-Maree Keane remuneration and benefits are not provided directly in Authorised Representative directly but have received a response to our omplaint will be advi ed in writing. C/O KPMG connection with any engagement for the provision of copy of the Report because you have been provided with a GPO Box 223 general financial product advice in the Report. E ternal omplaint resolution proces copy of the Offer Document. Neither KPMG Transaction BRISBANE QLD 4000 Services nor the Authorised Representative are acting for Further details may be provided on request. If KPMG Transaction Ser i es or the Authori ed Telephone: (07) 3233 3111 any person other than the Client. Representati e annot resol e our omplaint to our Referrals Facsimile: (07) 3233 3100 KPMG Transaction Services and the Authorised ati fa tion within 45 day , ou an refer the matter to the Representative are responsible and accountable to you for Neither KPMG Transaction Services nor the Authorised Financial Ombudsman Ser i e (FOS). FOS i an ensuring that there is a reasonable basis for the Representative pay commissions or provide any other independent ompany that has been establi hed to conclusions in the Report. benefits to any person for referring customers to them in provide free advi e and as i tance to onsumer to help in connection with a Report. resol ing omplaint relating to the finan ial er i es General Advice industr . Associations and relationships As KPMG Transaction Services has been engaged by the Further detail about FOS are available at the FOS Client, the Report only contains general advice as it has Through a variety of corporate and trust structures KPMG website www.fos.org.au or b ontacting them directl at: been prepared without taking into account your personal Transaction Services is controlled by and operates as part objectives, financial situation or needs. of the KPMG Partnership. KPMG Transaction Services’ Addres : Financial Ombudsman Ser i e Limited, GPO directors and Authorised Representatives may be partners Box 3, Melbourne Vi toria 3001 You should consider the appropriateness of the general in the KPMG Partnership. The Authorised Representative advice in the Report having regard to your circumstances Telephone: 1800 367 287 is a partner in the KPMG Partnership. The financial before you act on the general advice contained in the Facsimile: (03) 9613 6399 product advice in the Report is provided by KPMG Report. Email: [email protected]. Transaction Services and the Authorised Representative You should also consider the other parts of the Offer and not by the KPMG Partnership. The Australian Securities and Investment Commi ion Document before making any decision in relation to the al o has a freecall infoline on 1300 300 630 whi h ou From time to time KPMG Transaction Services, the KPMG Transaction. ma use to obtain information about our right . Partnership and related entities (KPMG entities) may provide professional services, including audit, tax and financial advisory services, to companies and issuers of
7 F ir irn Irrig tion Netw r Pty Ltd Fairbairn Irrigation Network Pty Ltd Limite Ass r ce I vestig ti Acc untant’s Report nd Fi ancial Limited Assurance Investigating Accountant’s Report and Financial ervices G i e Services Guide Decem er 8 17 December 2018
• Australian arbon redit unit ; and Fees KPMG Transaction Services may receive and financial products in the ordinary course of their Compensation arrangements remuneration or other benefits received by our businesses. • eligible international emi ions unit , KPMG Transaction Services has professional indemnity representatives to retail and wholesale lient . We provide finan ial No individual involved in the preparation of this Report insurance cover as required by the Corporations Act product advi e when engaged to prepare a report in KPMG Transaction Ser i es harges fee for preparing holds a substantial interest in, or is a substantial creditor 2001(Cth). relation to a transaction relating to one of these t pes of report . These fees will usuall be agreed with, and paid of, the Client or has other material financial interests in the Contact Details finan ial product . The Authori ed Representati e i by, the Client. Fees are agreed on either a fi ed fee or a transaction. You may contact KPMG Transaction Services or the authori ed by KPMG Transa tion Ser i e to provide time ost basi . In thi instance, the Client has agreed to Complaints resolution finan ial product advi e on KPMG Transaction Ser i es' pay KPMG Transaction Ser i es in the range of $5,300 to Authorised Representative using the contact details: behalf. $10,600 (ex luding GST) for preparing the Report. KPMG Internal complaints resolution process KPMG Transaction Services Transaction Ser i es and it offi er , representati es, KPMG Transaction Services and the Authorised If you have a complaint, please let either KPMG A division of KPMG Financial Advisory related entities and as ociate will not recei e any other Transaction Services or the Authorised Representative Services (Australia) Pty Ltd Representative's responsibility to you fee or benefit in onnection with the provi ion of the Level 38, Tower Three know. Formal complaints should be sent in writing to The International Towers Sydney KPMG Transaction Ser i es has been engaged by LMA Report. Complaints Officer, KPMG, PO Box H67, Australia Square, 300 Barangaroo Avenue Support Ser i es Pt Ltd (Client) to provide general KPMG Transaction Ser i es’ offi er and representati es Sydney NSW 1213. If you have difficulty in putting your Sydney NSW 2000 finan ial product advi e in the form of a Report to be (including the Authori ed Representati e) recei e a alar complaint in writing, please telephone the Complaints PO Box H67 included in an Offer Document (Offer Document) prepared or a partner hip di tribution from KPMG’ Australian Officer on 02 9335 7000 and they will assist you in Australia Square NSW 1213 by Fairbairn Irrigation Networ Pt Ltd in relation to the documenting your complaint. profes ional advi or and ac ounting practi e (the KPMG Telephone: (02) 9335 7000 offer to the Customer of hares in the Company Partner hip). KPMG Transaction Ser i es’ representati es Written complaints are recorded, acknowledged within 5 Facsimile: (02) 9335 7200 (Transaction). (including the Authori ed Representati e) are eligible for days and investigated. As soon as practical, and not more bonuses based on overall producti it . Bonuses and other You ha e not engaged KPMG Transaction Ser i es or the than 45 days after receiving the written complaint, the Anne-Maree Keane remuneration and benefit are not provided directl in Authori ed Representati e directl but have recei ed a response to your complaint will be advised in writing. C/O KPMG onnection with any engagement for the provi ion of opy of the Report because ou have been provided with a GPO Box 223 general finan ial product advi e in the Report. External complaints resolution process opy of the Offer Document. Neither KPMG Transaction BRISBANE QLD 4000 Ser i es nor the Authori ed Representati e are acting for Further detail ma be pro ided on request. If KPMG Transaction Services or the Authorised Telephone: (07) 3233 3111 any per on other than the Client. Representative cannot resolve your complaint to your Referrals Facsimile: (07) 3233 3100 KPMG Transaction Ser i es and the Authori ed satisfaction within 45 days, you can refer the matter to the Representati e are responsible and ac ountable to ou for Neither KPMG Transaction Ser i es nor the Authori ed Financial Ombudsman Service (FOS). FOS is an ensuring that there i a reasonable basi for the Representati e pa ommi ions or provide any other independent company that has been established to onclu ions in the Report. benefit to any per on for referring ustomer to them in provide free advice and assistance to consumers to help in onnection with a Report. resolving complaints relating to the financial services General Advice industry. Associations and relationships As KPMG Transaction Ser i es has been engaged by the Further details about FOS are available at the FOS Client, the Report onl ontains general advi e as it ha Through a ariet of orporate and trust tructures KPMG website www.fos.org.au or by contacting them directly at: been prepared without taking into ac ount our per onal Transaction Ser i es i ontrolled by and operate as part objecti es, finan ial ituation or needs. of the KPMG Partner hip. KPMG Transaction Ser i es’ Address: Financial Ombudsman Service Limited, GPO director and Authori ed Representati es may be partner Box 3, Melbourne Victoria 3001 You hould onsider the appropriatenes of the general in the KPMG Partner hip. The Authori ed Representati e advi e in the Report having regard to our ir um tances Telephone: 1800 367 287 i a partner in the KPMG Partner hip. The finan ial before ou act on the general advi e ontained in the Facsimile: (03) 9613 6399 product advi e in the Report i provided by KPMG Report. Email: [email protected]. Transaction Ser i es and the Authori ed Representati e You hould al o onsider the other part of the Offer and not by the KPMG Partner hip. The Australian Securities and Investments Commission Document before making an deci ion in relation to the also has a freecall infoline on 1300 300 630 which you From time to time KPMG Transaction Ser i e , the KPMG Transaction. may use to obtain information about your rights. Partner hip and related entities (KPMG entities) ma provide profes ional er i es, including audit, tax and finan ial advi or er i es, to ompanies and i uer of
8 Fairbairn Irrigation Network Pty Ltd Offer Document
Annexure B: Jacobs Report The following report from Jacobs was issued in October 2017. Jacobs has not undertaken any work on this matter since that time and Jacobs and cannot comment on changes that may have occurred since that time with respect to the Irrigation Scheme assets or the Board’s Asset Refurbishment and Renewal Strategy. As discussed in section 5.9 of the Offer, at the time of the Jacobs’ review, the target transfer date was 30 June 2018 and the capital profile prepared at that time was for a 30-year period starting 1 July 2018. Given that the Transfer Date is now expected to be 1 July 2019, the Board has modified the original capital profile reviewed by Jacobs by rolling capital expenditure from 2018/19 into the 2019/20 year and making minor adjustments related to this change. The Asset Refurbishment and Renewal Strategy otherwise remains unchanged from the document reviewed by Jacobs.
72 Fairbairn Irrigation Network
Executive Summary
Jacobs Group (Australia) Pty Ltd ('Jacobs') is a wholly owned subsidiary of Jacobs Engineering Group Inc. which is a global technical services provider headquartered in Dallas, Texas. Jacobs was founded in 1947. and has more than 54,000 employees in over 230 locations. This report was prepared by Jacobs by a team with specialised skills and experience in irrigation, from the Rural Water Section in Tatura, Victoria.
This report has been prepared for Fairbairn Irrigation Network ('the Company'), a special purpose vehicle that has been established to investigate the potential transition to local management of the Emerald irrigation distribution network. The report is provided for inclusion in the customer offer document that will be released by the Company to customers in the irrigation distribution network.
In this report, Jacobs was asked to comment on:
• whether it considers the Company's asset refurbishment and renewal strategy which the Company proposes to implement following a transition to local management is, in Jacobs' view, reasonable and prudent;
• whether the risk position adopted by the Company in its preferred annual capex expenditure profile and associated scenarios is sufficiently conservative and consistent with industry standards;
• whether the reliability and quality of the condition assessment data maintained by SunWater is consistent with industry standards;
• whether the condition profile of the assets, based on the data maintained by SunWater, are consistent with industry experience for assets of that type and age; and
• whether SunWater's risk assessment process and allocation of risk ratings are consistent with industry standards.
Overview of the Stage 3 Engineering Due Diligence Process
Jacobs was engaged by the Queensland Department of Energy and Water Supply (‘DEWS’) in February 2017 to undertake technical engineering services related to the potential transfer of SunWater’s channel irrigation assets to local management. This engagement is referred to as the Stage 3 Engineering Due Diligence (‘Stage 3 EDD’). While Jacobs was engaged directly by DEWS, the project was managed by LMA Support Services Pty Ltd, a special purpose vehicle established by DEWS to support the activities of the Company, as well as the companies established for other three SunWater schemes considering transition to local management (transition schemes), and boards established for the four SunWater schemes where further investigations into local management are being undertaken (investigation schemes).
Since 2012 several phases of investigation have been undertaken in relation to the transfer of SunWater’s schemes to local management. The purpose of the Stage 3 EDD was to undertake further due diligence for four transition schemes and the four investigation schemes. The Stage 3 EDD has been undertaken in parallel with separate legal and financial due diligence investigations.
The Stage 3 EDD investigations draw on the investigations undertaken and conclusions drawn during the Stage 2 Engineering Due Diligence process completed in 2014 by Sinclair Knight Merz Pty Ltd (SKM). SKM was acquired by Jacobs in 2013. Where data from Stage 2 investigations continued to be relevant to the scope of a task in Stage 3, Jacobs has built upon the conclusions reached by SKM in Stage 2 to develop updated statements on expected asset lives or business risks. Jacobs has also used the extensive database of information captured in Stage 2 to enhance understanding of asset features and functions.
Jacobs has tailored the investigation and assessment of asset data throughout the Stage 3 EDD to focus on assets or outcomes that will have a material impact on the ongoing operation of the respective irrigation schemes. For low value, low consequence assets (e.g. minor fittings such as valves) analysis has been minimal
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with discussion regarding impact and sensitivity typically summarised into general statements and assumptions. High cost assets (e.g. long linear assets such as channels and pipelines) and high consequence assets (e.g. pumps) have been analysed in greater detail to better inform stakeholders of the condition and material risks these assets represent to the operation of the scheme.
The current SunWater Asset Strategy (Overall Strategy Common to all Irrigation Schemes by Object Type), which was issued in 2016, introduced significant changes to the planning of asset refurbishment and renewal. This represents new material information that the Company considered in the development of its proposed approach.
Jacobs reviewed the current SunWater strategy focusing on the consistency of this strategy relative to general industry standards. As part of the review Jacobs also revisited the Stage 2 EDD findings. To undertake these reviews Jacobs sourced information from other similar irrigation authorities or companies and referred to guidelines from relevant industry standards and suppliers. Jacobs found that SunWater’s current asset strategy is generally consistent with industry standards with the exception of some minor adjustments to service lives for pipeline and channel assets. Jacobs concluded that drains should be categorised as perpetual assets.
Jacobs developed a capital forecast expenditure model to allow the Company to generate a capital expenditure profile. The model was independently reviewed by consulting company Aither and found to perform as intended without error and as a result was considered appropriate for its intended use.
Findings of the EDD for the Emerald Irrigation Distribution Network
Asset refurbishment and renewal strategy
Jacobs reviewed the asset refurbishment and renewal strategy prepared by the Company. Jacobs considers that the Company’s asset refurbishment and renewal strategy is reasonable and prudent and based on a sound interpretation of Jacobs’ findings. Where the strategy varies, such as for pump stations and meters, the strategy adopted by the Company is reasonable and the risks are relatively minor.
Jacobs considers the risk position adopted by the Company in its preferred annual capital expenditure profile and associated scenarios, including service lives for all object types to be sufficiently conservative and consistent with industry standards based on the inherent characteristics, function and service standards of the scheme. The analysis of the scheme condition and risk data demonstrated that the scheme was consistent with industry standards for assets of this type and age. Specific business risk associated with the operation and maintenance of the Selma pump station and LN1 drain infrastructure is addressed by the Company’s strategy based on SunWater retaining ownership of and responsibility for these assets.
Condition Assessment and Condition Data
Generally, Jacobs considers the reliability and quality of the condition assessment data maintained by SunWater to be satisfactory and consistent with industry standards, with the following exceptions:
• Gaps were identified in the condition assessment data for flow meters and drain structures with a lack of recent field assessments.
Based on the condition assessment data maintained by SunWater, Jacobs considers the condition of scheme assets and failure rates of high risk assets to be consistent with industry standards based on the age and nature of the scheme.
Risk Assessment and Risk Rating During the Stage 2 EDD, a comprehensive review of SunWater's risk assessment processes and the subsequent impact on timing of replacement was undertaken. The review concluded that both SunWater's risk assessment process and SunWater's allocation of risk ratings were consistent with industry standards.
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SunWater has not changed its risk assessment or risk allocation processes since that review was undertaken. Jacobs agrees with the Stage 2 EDD conclusions.
High business risk assets (>706 risk score) are assets whose failure would significantly impact operations financially and or in terms of environment, production or stakeholder relations. The timing of refurbishment and renewal of assets is adjusted in the Company’s asset renewal and refurbishment strategy to mitigate such business risk. WH&S risks were excluded from the analysis as these are subject to a specific treatment. A number of assets are classed by SunWater as high risk across different risk categories:
• The Selma and Weemah drains (header assets) have been classed as high risk due to potential earthworks failure, however all individual drain assets are classed as a low - medium risk.
• An access crossing on the RR7 drain with current asset life 43 years (2017) is classed as high risk due to a potential air valve failure. However, there is no information in the maintenance records regarding any issues with this asset.
• The S3_A relift pump station with current asset life of 27 years (2017) is classed high risk as failure of this infrastructure would impact on water delivery to meet customer orders. Jacobs reviewed the available maintenance records and did not find an indication of recent critical issues which would have affected supply to the irrigation network. The records also indicate on-going routine maintenance has been undertaken at a level that would be reasonably expected for an asset of this type.
• A LN3 drain pump station is considered high risk because equipment failure could result in drain water overflowing to the Nogoa River. However, the maintenance records show this pump station was decommissioned in March 2017, after it was inundated and discontinued use.
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