Territory Stories

9.1 The Board’s Strategic Directions 2016-2020 May 2016



9.1 The Board’s Strategic Directions 2016-2020 May 2016

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Tabled paper 1883


Tabled Papers for 12th Assembly 2012 - 2016; Tabled Papers; ParliamentNT






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5.2.2 Commercial sustainability The Board requires the Corporation to instil a high level of financial discipline into all its operations, so that benchmark cost-to-serve and key financial targets are progressively achieved over the next five years. Previously the Corporation has focused almost exclusively on revenue increases to achieve financial sustainability. The Board now recognises that the main financial improvement focus must first be on controlling and minimising costs. To this end, the Board has set the initial target for the total opex/revenue ratio in the order of 50% which is slightly above the median value for Australian utilities in recognition of Power and Water's below-average scale and above-average geographic dispersion of operations. Nevertheless, this is a significant change on Power and Water's 2015-16 ratio of 56%. The Board expects some of this opex reduction to be achieved by adoption of capitalisation policies more consistent with those endorsed by the AER. Table 5.2: Commercial sustainability goals Desired outcome by FY20 Primary KPIs Board's targets for FY20 Sustainably cost efficient Total opex as % of revenue (excluding gas purchases and gas sales respectively) Corporate opex as % of total opex (excluding gas purchases) Externally-assessed stand-alone credit rating No more than 50% No more than 15% after total opex improvement Interest covers and liquidity ratios at least at levels qualifying for a minimum investment grade stand-alone credit rating The right-sizing of Power and Water's corporate services function will contribute to this objective. The Board has set the initial target for the corporate overheads / total opex ratio at 15%, which is just above the Australian utilities' median value. This is a significant change on Power and Water's 2015-16 ratio of 25%. The Board accepts that much of the corporate cost reductions will be achieved by current Corporate Services functions being devolved back, and associated costs re-allocated, to Power and Water's operating business units. The Board recognises too that Power and Water's overall financial position impacts on the Northern Territory Government's credit rating. While the net earnings improvement resulting from meeting the efficiency targets set above will improve Power and Water's debt burden and liquidity metrics, this can also be expected to take pressure off the government credit rating. In support of that goal, the Board envisages periodically seeking an independent assessment of the Corporation's stand-alone credit rating. Such a credit rating assumes the (hypothetical) absence of a guarantee or other form of parent-government support government. Power and Water must work towards qualifying for a minimum investment grade credit rating on a stand-alone basis. Such a rating is the credit quality assumed by the AER in its independent regulation of electricity network service providers in Australia. To help track progress towards these targets, the Board also requires that management demonstrably improve the Corporation's financial projections capability. The Board's confidence in financial projections made in the SCI has been eroded by its strategic review. Presently, such projections are derived by a process-driven activity rather than attention to quality of content and analysis of projections and their implications. The Board considers a robust, top-down budgeting cycle linked to business plans with regular re-forecasts to be essential to regaining confidence in the Corporation's financial projections. ...the Board...requires management to demonstrably improve the Corporation's financial projections capability. THE BOARD'S STRATEGIC DIRECTIONS 2016-2020 26

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