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DCHL group records smaller loss than forecast in challenging year

Fuseworks Media
Fuseworks Media

The Dunedin City Holdings Ltd (DCHL) Group has recorded a net loss of $5.3 million for the year ended 30 June 2020, significantly lower than the $14.6 million loss forecast. "As for many entities, 2019/2020 has been a challenging year for the DCHL group. While the full year financial results for the year are better than forecast, all companies have faced new challenges and difficult decisions," says DCHL Chair Keith Cooper.

"The group result reflects the lower than forecast loss at Aurora Energy and the unexpected hibernation of Dunedin Railways Ltd, with those losses offset by surpluses at City Forests and Delta, and by continued reduction in cost of funds across the group."

Covid-19 severely impacted the group’s tourism and travel-related businesses in the final quarter of the year, particularly Dunedin International Airport Ltd, Dunedin Venues Management Ltd and Dunedin Railways Ltd. Other group companies were also impacted by Covid-19, but this impact was generally limited to New Zealand’s lockdown period. 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."

The group’s overall debt, managed by Dunedin City Treasury Ltd (DCTL), increased over the year, as forecast. This was principally driven by increased capital expenditure at Aurora Energy Ltd and DCC. DCHL debt also increased as a result of Dunedin Railways’ transition to hibernation. 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 $790 million (excluding shareholder’s advance). This includes $244 million DCC debt, $86 million stadium debt, and operating company borrowings of $380 million. Group debt compares favourably with the book value of DCHL’s assets, which now sits at $1.46 billion (FY19: $1.35 billion). The impact of historically low global interest rates can be seen in DCTL’s accounts.

DCTL manages the Group’s debt in accordance with the Treasury Risk Management Policy. This Policy requires the Group’s debt to be hedged within minimum and maximum limits, to protect Dunedin ratepayers and companies against the impact of a sudden increase in interest rates. The Group’s debt book is currently hedged to near minimum levels, reflecting the outlook for continued low interest rates. Historically low global interest rates mean DCTL’s balance sheet records a negative impact from the fair value ("mark to market") adjustment of its hedging activity. The negative impact of $56m does not have an impact on DCTL’s viability. The Group’s cost of funds over the 2019/2020 year was a record low 3.36%. Group cash from operations remains strong at $22 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 compared favourably with forecasts for the year aided by strong use of system revenues and customer contributions to growth-related network connections.

Capital expenditure of $53.6 million was invested in new and replaced network assets across the Dunedin, Central Otago and Queenstown Lakes areas during the year. The company recorded a net loss after tax of $4.2 million (FY19: loss $10.9 million) compared with a forecast loss of $18.2 million.

City Forests had a satisfactory year delivering an after-tax profit of $12.7 million. The results were in line with budget, but less than the previous year, mainly a result of deferred harvesting due to Covid-19. City Forests still made a strong financial contribution to the DCHL group through $4.5 million in dividends (FY19: $8.0 million).

Managing workflow challenges in the first half of Financial Year 2020 and global disruption with the outbreak of COVID-19 proved difficult for Delta and impacted the company’s ability to meet some targets. Significant action in the second half of the year resulted in an adequate financial performance overall and an improvement on FY19 results.

Delta recorded a net profit before tax of $2.2 million in FY20, a moderate increase on FY19’s $1.7 million, however significantly below budget for the year of $3.7 million. Total revenue was $100.4 million in FY20 (budget $97.1 million). Operating revenue at $95.8 million, excluding the New Zealand Government Wage Subsidy due to COVID-19, fell just short of FY19 levels ($97.5 million) and budget expectations ($96.7 million).

Dunedin Stadium Property Ltd (DSPL) experienced an operating loss, as budgeted. The loss of $8.2 million (FY19: $7.0m) was a little higher this year as DSPL did not receive subvention payments from companies within the Group. Subvention payments are dependent on the ongoing profitability of DCHL group companies.

Instead, DSPL has tax losses to carry forward for the current year, which the company intends to transfer to the DCC Group in future years by means of a subvention payment and tax loss offset. DSPL provided temporary rent relief to DVML during the final quarter of the year. DSPL was still able to reduce term debt by $1.9 million.

Dunedin Venues Management Ltd (DVML) had been enjoying a successful year until the outbreak of COVID-19 on New Zealand’s shores. DVML had had a strong concert line-up, with Fleetwood Mac, Elton John, Queen and Adam Lambert and Dunedin’s own SIX60. Dunedin City benefited to the tune of $41.5 million in economic impact from major concerts alone. Conference delegates assisted the city’s economy too, contributing $3.3 million of economic impact. This is represented by 4,040 delegates attending 21 multi-day conferences.

The impact of the Covid-19 pandemic on DVML was instant with income halted overnight resulting in a disappointing final financial quarter. DVML recorded a net loss after tax of $.05 million for the year, down on their 2019 net profit after tax of $0.2 million.

Dunedin Railways entered the 2019/2020 year with a focus on developing a sustainable business model. The company was forecasting ongoing losses and had signalled additional equity would be required to ensure the ongoing viability of the business. The Dunedin Railways board were focussed on preparing a business turnaround plan and developing a sustainable business model for discussion with shareholders. In context of its existing challenges, Dunedin Railways was unable to weather the forecast impacts of Covid-19 on the tourism sector. In April 2020 Dunedin City Council (DCC) agreed that Dunedin Railways be put into hibernation as an alternative to complete closure of the business. As part of this change, the Otago Excursion Train Trust (OETT) decided to sell its 28% shareholding in Dunedin Railways to DCHL. DCHL has been the sole shareholder of the company since April 2020. The company’s full year loss of $6.6 million (FY19: $0.1 million loss) reflects the operating loss plus the cost of transitioning the company to hibernation mode.

Like the group’s other tourism-related companies, Dunedin Airport was also severely impacted by Covid-19 in the final quarter of the financial year. Total passengers through the airport ended 26.4% down over the previous year. The decrease in passengers has had a significant impact on the Dunedin Airport’s FY2020 performance and position. The company’s total revenue decreased 12.6% to $15.0 million. Despite steps taken to reduce cost structure, a relatively fixed cost base resulted in operating expenditure of $12.7 million, a 5.7% increase over the prior year. This culminated in a pre-tax operating surplus of $2.3 million, which is $2.8 million behind the prior year.

DCHL audit report DCHL’s 2020 audit report includes several points of note:

An emphasis of matter relating to Covid-19. The 2020 audit reports of all New Zealand public entities with a 30 June balance date will include an emphasis of matter relating to Covid-19.

An emphasis of matter relating to the key assumptions Aurora Energy applied in performing the impairment test of its network in response to Covid-19. A qualification related to the stadium asset valuation within the group accounts, as in DCHL’s 2016, 2017, 2018 and 2019 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.

A qualification related to the write-down of assets at Dunedin Railways Ltd. The transition of the company to hibernation required the Dunedin Railways Board to re-assess the value of the company’s assets. The Board considered the potential to earn revenue from the assets was minimal, given the company’s transition to hibernation and wider uncertainty in the tourism sector. The Board also considered the hypothetical net realisable value of the assets. Dunedin Railways’ assets are relatively specialist and, in some instances, unique - for example, its heritage rolling stock and in situ Taieri Gorge track assets. This makes it difficult to obtain externally verified market values of these assets. On balance, and with the benefit of industry and commercial knowledge, the Board considered it appropriate to write-down the Company’s fixed assets to $297,000, being the Board’s best estimate of the net realisable value after any costs of disposal. An associated impairment expense of $4,486,000 has been recorded in Dunedin Railways’ statements. The significance of these amounts and the unavailability of externally verified market values has led Audit New Zealand to advise they are unable to form an audit opinion on Dunedin Railways’ 2020 financial statements, and a qualified opinion on the Statement of Service Performance. The Dunedin Railways and DCHL boards remain comfortable that the value ascribed to the Company’s assets is appropriate, given the Company’s current circumstances.

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