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MEMORANDUM 23 April 1996
From: DIRECTOR OF FINANCE To: COUNCIL ANNUAL PLAN AND BUDGET - CHANGES RELATING TO CHRISTCHURCH CITY HOLDINGS LIMITED
Officer responsible Author Director of Finance Bob Lineham Corporate Plan Output: Volume 1: Page 5.1.text.4This report was originally submitted to the Council meeting on 3 April 1996. It sets out the detail of changes made to the Annual Plan which relate to Christchurch City Holdings Limited and the changed basis of providing for expenditure on undergrounding. Changed Basis of Southpower Dividends
The Board of CCHL met with Southpower and subsequently it was agreed that from 1996/97 the dividend rate would be increased from 38% to 50% of Net Profit after Tax and that all discretionary undergrounding would be purchased from Southpower. Southpower has previously shown this discretionary undergrounding (approximately $2.7M) plus some additional undergrounding which is justifiable for the purpose of strengthening the reticulation network (approximately $0.7M) in its Statement of Corporate Intent, as a provision in lieu of dividend. Effectively the Council (through CCHL) is now intending to take the provision for discretionary undergrounding by way of cash dividend and make its own decisions about the level of discretionary undergrounding as part of its wider priority setting process. This raises the cash dividend projections to approximately $11.8M in 1996/97 for all shareholders, very close to the original total amount of dividends plus discretionary undergrounding. CCC/CCHL is entitled to 87.6% of the dividends based on these amounts and I have accordingly revised the budget to provide dividend streams from Southpower as follows:
1996/97 $10.3M
1997/98 $10.6M
1998/99 and thereafter $12.2M
It should be noted that Southpower has indicated that these results are vulnerable to adverse change if there was a difficult trading season. Provision for Undergrounding
Southpower will continue to do undergrounding which is commercially justifiable from its ordinary capital works programme. In 1996/97 it is providing for three projects to a total value of $677,000 in conjunction with Council roading projects. Due to the changed dividend structure as outlined above, future provision for undergrounding which is for environmental, road safety or infrastructural enhancement purposes but not commercially justifiable by Southpower, will need to be provided for from the Council's own budget and determined according to the Council's overall expenditure priorities. Southpower prefers this treatment of undergrounding. Roading staff have identified a need for undergrounding projects totalling $1.044M to go ahead in 1996/97. Attached is a report from the Roading Manager which justifies the need for these projects. It should be noted that $117,000 of the 1996/97 projects is being funded from an ex Paparua County Council special fund - the Hornby Undergrounding Wiring Fund. This drawdown eliminates the fund. Provision has now been made in the Draft Annual Plan for these specific undergrounding projects totalling $1.044M in 1996/97. A provisional sum of $500,000 has also been allowed for 1997/98. As previously agreed with the Strategy and Resources Working Party, the amount previously provided by Southpower in lieu of dividend has been phased back in from 1998/99 to 2000/01. I had previously advised the Working Party that the purchase of undergrounding from Southpower would need to be treated as an operating expense. However, I have had tentative discussions with Audit New Zealand which advises that such expenditure may be able to be treated as capital provided an appropriate policy is developed and approved which defines the benefit to the roading infrastructure asset of the undergrounding process. This is not a definitive decision and will require further discussion before it can be finalised. In the meantime, however, I have provided the expenditure in the Annual Plan on the following basis:
Year Capital Operating
$M $M
1996/97 1.044 NIL
1997/98 0.500 NIL
1998/99 1.000 NIL
1999/00 1.000 1.000
2000/01 and later 1.000 1.500
Should it not be possible to charge this expenditure as a capital item then the programme will need to revamped to take account of the reduced funding which would be available from revenue sources until 1999/00. Update on CIAL Dividend Streams
Following review of detailed financial projections from CIAL and the resultant dividend streams, the CCHL budget has been revised. The figures are the same as previously provided for the first two years but after that grow significantly through the balance of the 20 year projection. Sale of Tax Losses
The CCC tax group has significant tax losses due to the majority of the CCHL income being derived from fully imputed dividends. The CCHL board has entered into an agreement with Southpower to sell those losses to Southpower and this has enabled a review of this income stream in the CCHL budget by the addition of $600,000 per annum. Review of Accumulated CCHL Reserves
Since the establishment of CCHL, the dividends actually paid to CCC each year have been based on the amount anticipated in the CCC Annual Plan for the year (adjusted for delays in transferring shareholdings in some of the trading enterprises). Any surpluses or losses have remained in retained earnings of the company and either been invested or applied to the reduction of debt. An analysis of the debt levels of CCHL and the appropriate reductions that are required in debt levels in accordance with the Financial Management Policy indicates that additional special dividends should be able to be paid from reserves (ie, $1.4M in 1997/98 and $400,000 in 1998/99). These special dividends will assist in smoothing out what would have otherwise been peaks in the rate increases. Summary
The projected dividend flow from CCHL to the Council over the next five years, taking account of the changes outlined in this report, is as follows:
1996/97 $7.97M
1997/98 $11.22M
1998/99 $13.33M
1999/00 $14.31M
2000/01 $14.89M
These matters have been reflected in the Draft Annual Plan. Recommendation:
That the issues outlined in this report be noted.