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DCHL group records $10.4m pre-tax profit

Fuseworks Media
Fuseworks Media

The Dunedin City Holdings Ltd (DCHL) Group has recorded a pre-tax profit of $10.4 million for the year ended 30 June 2019 ($4.2 million after tax). DCHL Chair Keith Cooper says the result was driven by another very strong year for City Forests Ltd, and supported by a continued reduction in the cost of funds across the group. Final results were, however, lower than the group’s 2018 results. "Overall, the result was modest, and reflects the substantial re-investment underway within the group, particularly at Aurora Energy Ltd," Mr Cooper says.

DCHL has distributed $5.9 million directly to the Dunedin City Council (DCC) by way of interest, in line with the Statement of Intent expectations. No dividend was distributed for the year as forecast in the group's Statement of Intent. This reflects the capital investment programme Aurora Energy Ltd continues to undertake.

"With subsidiaries embarking on a substantial re-investment programme, it’s prudent to ensure a balance between distributions and using internally generated surpluses to fund re-investment," Mr Cooper says. "This re-investment is essential to building sustainable future earnings and restoring dividends to Dunedin City Council."

Funds are also utilised within the group to maximise benefit to the city. For example, subvention payments and tax loss offsets contributed to Dunedin Stadium Property Ltd repaying $3.7 million more stadium debt than budgeted.

The group’s overall debt, managed by Dunedin City Treasury Ltd, increased over the year, as forecast. This was principally driven by increased capital expenditure at Aurora Energy and Dunedin City Council. Most other companies’ debt remained relatively static. The continued reduction in the cost of the group’s funds over the year was welcome in the context of increasing debt.

Group term borrowings total $691 million (excluding shareholder’s advance). This comprises $218 million Dunedin City Council debt, $88 million stadium debt, and operating company borrowings of $384 million. These figures compare favourably with the book value of DCHL’s assets, which now sits at $1.35 billion (FY18: $1.24 billion). Cash from operations remains strong at $31.6 million. "The ability of the group to maintain strong operational cash flows is important to meet future dividend and capital investment requirements," Mr Cooper says.

Individual results

Aurora Energy’s financial performance for the year continued to reflect the investment demands of major infrastructure renewal, the current shortfalls in historical regulated revenue allowances administered by the Commerce Commission and the additional costs of operating as a standalone company. Underlying financial performance measures were generally in line with forecast expectations.

Aurora Energy continued to invest strongly in its network evidenced by capital expenditure of $62.0 million (FY18: $78.4 million) on new network assets during the year under review. Total assets increased by $44.8 million to $580.4 million. Term borrowings increased by $46.8 million to $301.4 million.

As forecast, Aurora Energy recorded a net operating loss for the 2019 financial year. The net operating loss after tax was $10.9 million, which includes a $5.0 million provision for financial penalties in relation to breaches of network reliability standards for the 2015, 2016, 2017 and 2018 disclosure years. This enforcement action was initiated by the Commerce Commission in 2017 and aims to address Aurora’s historic performances. The actual penalty is yet to be finally determined, but the company believes the provision made at balance date remains a reasonable estimate of the likely outcome. The net operating loss before providing for the provision was $5.9 million, slightly favourable against the forecast $6.8 million loss.

City Forests Ltd reported strong financial performance again in the 2019 financial year. The combination of increasing log market prices, shipping costs and a lower value New Zealand Dollar delivered a period of very strong and mostly stable log export returns for New Zealand forest owners. City Forests Ltd recorded a profit after tax of $25.2 million, and paid a dividend of $8.0 million during the year, $1.5 million more than budgeted, as a result of the favourable trading conditions experienced during the year.

The 2019 financial year proved to be a challenging one for Delta. Whilst good progress was made in refining business processes, creating a clear understanding of strategy and engaging with their people on positive change, some targets the company set out for the year were not achieved. Delta recorded a profit after tax of $1.9 million, compared with a Statement of Intent target for the year of $2.4 million. Operating revenue, whilst not meeting budget expectation at $97.3 million (budget $101.9 million), was 4.9% up on revenue for the 2018 financial year.

The group’s cost of funds, managed by Dunedin City Treasury Ltd, has continued to reduce over the 2018/19 financial year. The DCC Group’s cost of funds reduced by approximately 0.77% to 3.93%, which reduced the costs of funds to the group by circa $5 million, based on average term borrowings over the past year.

Dunedin Stadium Property Ltd experienced an operating loss, as budgeted. The loss was smaller than that recorded over the same period in 2018, primarily due to a reduction in interest costs, and the company was able to repay more debt than budgeted. Dunedin Venues Management Limited (DVML) has completed another successful year as it approaches 10 years since the company was established to manage Forsyth Barr Stadium and soon after, the Dunedin Centre. DVML had a strong concert line-up, with Kendrick Lamar, P!NK, Shania Twain, the Eagles and Six60. Dunedin City benefited to the tune of almost $39 million in economic impact from major concerts alone. Conference delegates assisted the city’s economy too, contributing $2.6 million of economic impact. This is represented by 5,690 delegates attending 20 conferences. DVML recorded a net profit after tax of $0.2 million for the year, down on their 2018 net profit after tax of $0.6 million.

Dunedin Railways Ltd has recorded a loss of $0.1 million (pre-audit), due to lower revenue than budgeted, and increased spending on repairs and maintenance. Some non-core activity, which is unlikely to be ongoing, also contributed positively to the company’s result. The company is focussed on finding a sustainable path forward. Dunedin Airport has continued to improve its operations and experience ongoing growth in both the aeronautical and non-aeronautical parts of the business in the 2019 financial year. It has been a busy year with operational improvements made across the business along with the commencement of the Terminal Expansion Project (TXP).

There remains strong demand for services through Dunedin Airport. Pleasingly, the 2019 financial year saw a further increase in passenger numbers of 4.5% to 1,077,475. Dunedin Airport’s total revenue increased by 4.0% to $17.2 million. The after-tax operating surplus was $3.6 million, surpassing last year by $0.3 million, or 9.5%. The dividend to shareholders during the 2019 financial year remained in line with the previous year and forecasts at $1.4 million.

DCHL audit report The addition of Dunedin Stadium Property to the group in 2016, meant a financial reporting inconsistency arose.

As in 2016, 2017 and 2018, Audit New Zealand has issued a qualification related to the stadium asset valuation within the group accounts. While it is possible to identify certain cashflows, the stadium’s primary purpose is to provide public benefit. As such, the nature of existing cashflows within the group do not necessarily represent commercial cashflows for the purposes of undertaking a discounted cashflow calculation to assess fair value. These factors mean that establishing a commercial value using a market value or discounted cashflow approach involves significant assumptions and estimates which are highly uncertain, so the group could not determine the value of the acquired stadium assets on a commercial basis.

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