DCHL chief executive replies to critics

In his letter to the editor, Bevan Dodds explains that DCHL was established to allow Dunedin City Council-owned companies to operate commercially at arm’s length from the council while returning a dividend which the council can then use to offset rates. Although in conclusion he asks, “Why would you not smile at payments of $19.8m that help keep your rates down?”, this doesn’t begin to address – and doesn’t have to – the signalled rate increases ahead. Ahhh, the convenience of that arm’s length between truth or dare.


[here abridged]

### ODT Tue, 20 Oct 2009 (page 8)
Letters to the editor
Inconvenient truth: DCHL did well
By Bevan Dodds
Chief Executive, Dunedin City Holdings Ltd

Several “Letters to the Editor” have claimed ‘spin’ or challenged the expenditure of ratepayers’ money on celebrating, via a half page advertisement in your newspaper, the 2008-09 financial results posted by the Dunedin City Holdings Ltd Group of companies.
The payments made by DCHL to the council of $19.8 million comprised $9.5 million dividends and $10.3 million of interest, reflecting the investment in DCHL made up of both loans and shares. The breakdown is carefully set out in the annual report.
After tax profit figures calculated under NZ accounting standards for a group such as DCHL will never match cash or “what is left over in the bank”. Note 34 to the DCHL accounts lists 20 reconciling items between the accounting profit and the cash generated by the group from its business activities.
The total of the profits of the subsidiaries plus the profit of the parent company will only in very rare situations match the consolidated profit of an accounting group. There is no magic here, or mysterious losses because if there was Audit New Zealand and indeed the ODT’s own business reporters would make this very clear, just the pure principles of consolidated accounting.

The full letter is available in print and digital editions of the Otago Daily Times.

Posted by Elizabeth Kerr


Filed under Business, DCC, DCHL, DCTL, Economics, Hot air, Media, Name, People, Politics, Project management, What stadium

12 responses to “DCHL chief executive replies to critics

  1. Elizabeth

    ### ODT Wed 28 Oct 2009 (page 16)
    Letters to the editor
    DCHL investment performance woeful
    By J White, Maori Hill
    In response to the discourse provided by Dunedin City Holdings Ltd CEO Bevan Dodds (ODT 20.10.09)…I observe the following: The earnings before interest, tax, depreciation and amortisation return on DCHL assets is relatively low at 8.9%. The DCHL balance sheet is highly geared with only 20.14% of equity to total assets… Interest-bearing debt has increased $69.8 million to an eye-watering $492.8 million. The aggressive leveraging of the DCHL balance sheet produces a return on DCHL shareholders’ funds of only 5.7%, insufficient to cover DCHL cost of capital.

    ### ODT Wed 28 Oct 2009 (page 16)
    To the point
    By Brian Miller, Mosgiel
    Bevan Dodds, chief executive of Dunedin City Holdings Ltd, in his letter (20.10.09) could have saved us all a lot of time reading his letter if only he had explained that it takes from Peter to pay Paul. And if you happen to be both Peter and Paul, you get double-dipped.

    Available in print and digital editions of the Otago Daily Times.

    • Elizabeth

      A part acid trip in reply to Ian Pillans, in which we’re told (again) DCHL’s annual report is “good news”…

      ### ODT Wed, 11 Nov 2009 (page 14)
      Letters to the editor
      DCHL finances too complex for the public
      By Ian Pillans, Dunedin
      …Next year’s payment [to the Dunedin City Council] totals $23 million, yet Mr Dodds implies that no borrowing will be needed to meet it. Amazing, since normally if you pay out more than you earn, it either comes from cash reserves or by borrowing from future cash flows or from the bank. In both of the latter cases, you have still borrowed it and, failing any windfall income, it becomes core debt.

      [Bevan Dodds replies: “…Unfortunately, the reading of the DCHL accounts, the figures derived, and the assumptions reached, by Mr Pillans are quite incorrect but it would require too much editorial space to explain the intricacies of modern consolidated accounting standards…”]

      Catch the full correspondence in print and digital editions of the Otago Daily Times.

      And then you might ask, properly, if Dunedin business people are wrong to challenge the spin!

  2. David

    Yet again we have a complete failure by Mr Dodds to explain to the public how he can continue to pay council a $20m dividend each year when the companies he runs only make half that.

    It’s the sort of policy (going further and further into debt so you can pay out much more than you’re actually earning) that has seen finance companies collapse like dominoes recently.

  3. James

    I saw this in the paper today. The DCHL response rather beggars belief, but the group’s net profit post tax and interest does exceed the dividend. The headline book figure is smaller than the dividend post accounting entries revaluing assets, and accounting for depreciation and amortisation.

  4. David

    James, DCHL states in its own annual report that it has paid out more than it earns.

    Despite increasing debt from $244m to $372m (in addition to $113m debt to council) over the last two years, its profit after tax has dropped from $22.6m to $8.7m over the same period.

    They seem to share the council’s love for spending masses of other people’s money, and going into huge debt, without the hope of any real commercial return on the money borrowed..

  5. James

    David — I’ve lost my spreadsheet with a bit of hard-drive failure, but I ran it through the type of analysis a person might use if they were looking at investing in a company. Net profit after tax was around $27m, but net profit after tax, asset revaluations, depreciation and amortisation was $8.7m. The latter are all accounting adjustments, not cash costs.

  6. David

    James, you say net profit after tax was around $27m.

    DCHL annual report says, quote “At $8.7m, the profit after tax is very close to that achieved last year…”

    In several places it states profit after tax as $8.7m.

    They list their operating surplus before tax as $13.9m (- $5.2m tax = $8.7m)

    However the larger figure of $29m is not only before tax, but is also before other costs like interest payments on the loan from council.

    I think the confusing thing is the $10m interest payments back to council. Is this really a normal interest payment for a loan, or is it a way of paying council interest instead of a dividend, thereby getting around tax requirements for DCHL?

  7. James

    If you go to Note 34 of the DCHL report, you will find reconcilation of the net profit figure to operating cashflows.

    Tax and interest are real costs. They are paid out during the year. Depreciation, amortisation, and revaluations are not real costs. For example, the locomotives owned by Taieri Gorge increased in value(!), but were also depreciated. This is what landlords do with rental housing. The asset is actually increasing in value, but they are claiming the depreciation to offset against tax.

    I’m not an accountant, but the person that taught me investment analysis argued that it was important to include real costs (like tax) when determining profit, but partially out [of] accounting entries like depreciation. This, I think, is what various people mean when they are saying things are paid out of cashflow.

    The interest is both. It is not unusual for businesses to structure their affairs this way. If DCHL require more money, then they can either issue new shares, for which the DCC would pay money, or the DCC can loan them the money, and receive interest (and potentially eventually have the money repaid).

  8. James;
    The differentiation between the interest and dividend paid by DCHL to the DCC was brought about in order to provide tax advantages to DCHL. Originally only a dividend was paid. The interest is not for money loaned by DCC. At the time when DCHL was set up, the various companies took over activities previously operated by the DCC. Delta for instance replaced the works and services departments plus the water and drainage and Dunedin Electricity. City Forests Ltd took over that activity etc. The DCC became the sole shareholder with their shareholder capital being supplied in the form of the assets the various dept’s owned. It was subsequently decided that the value of these assets should be quantified and that DCHL should pay interest on the assessed value. This meant that the interest would come out of the expenditure before arriving at a gross profit/loss. The tax value is right there, by reducing the taxable result. The dividend, of course would come out of the tax paid profit. Therein lies the rub, as profits have not matched the dividend requirements. But as the DCC would not forgo these payments DCHL has had to find other ways to meet the demand. Borrowing is the means. They will do and say anything in order to conceal the facts but creative accounting in the end can’t deny the truth. You may remember a few years ago – I think 2006 – the DCC was faced with a rate increase of 12.5% for the Annual Plan. Shock, horror, what were they to do? The ratepayers would squeal like stuck pigs if that was foisted upon them. Within a week or two CEO Harland said to council that he had a solution. It was by way of a special, one-off dividend of $10 million from DCHL, on top of the budgeted one. How did this happen? Well, in the next set of accounts we saw that the standing forests of City Forests Ltd plus some other bits and pieces had been revalued upwards by $12.5 million. $10 million was borrowed with the increase as collateral. Passed to the DCC and ‘voila’ the rate increase was reduced to 5.6%. Simple eh?

  9. James

    Calvin — borrowing to pay dividends is not generally to be recommended. Some companies get away with it (Telecom), others don’t (Feltex!).

    However, I don’t see evidence of it in this year’s accounts. Looking at page 36, in Operating Activities, after tax and interest is paid, there is a $29m surplus. This is more than adequate to cover payment to the DCC.

  10. James: Unlike you I confess cash flow statements leave me out there.
    However, I look at balance sheets as the medical report of the organisation of concern.
    If we look at the Year ending 30th June 2008 we see that the term borrowings were $304.55ml. For the half year to 31st Dec. 2008 we find it has increased to $399.465ml. An increase of $94.910ml. This is explained in part in the directors’ report wherein it discloses that Dunedin City Treasury Ltd had increased its debt by $95ml. ‘to match expected expenditure of Council.’ But, when we move to the full year 30th June 2009 we find that the term borrowings were [$372.422ml]. This is a shortfall of $27.038ml. Now, where do you think that might have gone? Looks mighty like to me that is where the interest and dividend amounting to $19.80ml. came from. If this is so, then it could be asked why did DCHL borrow the $95ml.? It is a figure that seems awfully close to what is expected to be spent by DCC on the construction of the stadium. If that was its intent, could it be that they have misappropriated the sum applied to the interest/dividend payment? There is then the matter of the missing difference between the $27.038ml. and the $19.80ml. some $7.95ml. Could this be the the funding for the $7ml. purchase of Carisbrook?
    Any which way it looks like they will be going back to the well seeking another $27ml. to $30ml. to meet the requirements for the stadium. Assuming of course it is constructed on budget. Maybe I am wrong in all of this, but I would need a pretty good explanation to dissuade me.

    {correction advised by Calvin entered in square bracket. EK}

  11. James: An error in my last posting. The term borrowings at 30th June 2009 should read $372.422ml.

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