Minimum cost, efficient, financially robust provider

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Water utilities across the world constantly balance two challenges: planning and building infrastructure for a growing population and ensuring minimum-cost services so communities are not constrained to access a necessity of life. In the past year, COVID-19 and the severe drought presented additional challenges for Watercare.

The predominantly hot and dry year resulted in increased demand for water and higher than budgeted revenue but it also caused more breaks and bursts in our pipes, leading to more unplanned maintenance and increased operating expenses. We also invested in additional workplace infrastructure such as laptops, personal protective equipment (PPE) and technology solutions to enable our staff to continue working safely throughout the lockdown.

In response to the drought, we are investing $224 million to augment our water supply in the short term and a further $780,000 towards our proactive leak detection programme to reduce water loss. Above and beyond the drought, our investment in capital infrastructure and systems has also steadily increased over the last five years, with $615 million of capital expenditure in 2019/20, to keep pace with population growth and demand for our services.

We plan and build infrastructure based on growth projections from Auckland Council. Our planning and consenting horizons are long and underpinned by the need to build at the right time, right size and in the right place. As a council-controlled public water utility, we have a responsibility to invest prudently and ensure optimum use of existing infrastructure.

The drought and stage 1 water restrictions in Auckland have shed more light on customer and community expectations from a municipal water utility: the need for and cost of providing expensive drought-proof infrastructure versus a drought-resilient infrastructure where demand management and water conservation play a key role. This will be an ongoing long-term conversation with our stakeholders.

Being a council-owned entity has an impact on our borrowings to fund new infrastructure. We fund our capital infrastructure programme and systems through a combination of user charges and borrowings. We borrow through council’s centralised treasury so our capital works, though fully-funded, have an impact on the council’s debt levels.

In 2019/20, debt only increased by $245.6 million, despite our capital expenditure being at its highest ever. Since the council amalgamation in 2010, when Watercare became an integrated water supplier for Auckland, we have invested $2.7 billion to build water and wastewater assets, with debt extended by only $725 million. We plan to invest $4.8 billion on water and wastewater projects over the next eight years, with a further $5.2 billion in the following 10 years.

We work closely with the Auckland Council treasury team to ensure we manage our debt and cash flow requirements effectively.

In line with the Mayor of Auckland’s Letter of Expectation (LoE), we continued to explore new opportunities for revenue in 2019/20.

In October 2019, Watercare started providing ‘three waters’ services to Waikato District Council (WDC) via a contract of service for a period of up to 28 years, focusing on better environmental outcomes and improved water services in northern Waikato.

WDC continues to own all assets, while Watercare manages the infrastructure above and below the ground. This includes 16 treatment plants (9 wastewater, 7 water), 106 pump stations, 805 kilometres of water pipes, 323 kilometres of wastewater pipes, 154 kilometres of stormwater pipes, 31 reservoirs and 16,644 homes and businesses in the region. At the commencement of the contract 29 WDC staff joined Watercare’s workforce.

We also acquired majority shares in Wellington-based software company Lutra Limited. Lutra develops software for the water and wastewater industry and this acquisition will enable us to improve process efficiencies by utilising their software systems and in return, we can accelerate their growth plans.

Our focus for the year ahead will be on the reform of the water sector by the central government, including the proposed introduction of a water services regulator. We will collaborate with council in the planning and subsequent implementation of any changes that will contribute to improved water quality and service outcomes for Auckland.

Financial CapitalCS

Case study

Watercare becomes majority shareholder of Lutra

In February 2020, Watercare became the majority shareholder of Wellington-based software and process engineering company Lutra.

Lutra provides software and technical services to improve the performance of people and processes involved in water and wastewater operations.

The company has a team of 25 people which includes highly-skilled process engineers, software developers and data analysts, and has strong relationships with a number of New Zealand councils and commercial customers.

The clear synergies between Lutra and Watercare were a key driver for this acquisition. Watercare seeks to gain efficiencies by implementing Lutra’s software and training systems at our sites and we can help Lutra accelerate and realise their software development growth plans.

This acquisition also strengthens Watercare’s ability to prepare for the upcoming water industry regulations.

The long-term aspiration for both companies is to see a cross-fertilisation of staff, with both organisations sharing knowledge, experience and learning from each other.

Two of Watercare’s executive team members are on the board of Lutra and the company retains its name and continues to operate from its head office in Wellington.