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Global credit rating agency Standard & Poor’s has renewed its tick of approval of the Dunedin City Council, but retains concerns over its predicted debt burden of  more than $600 million and huge replacement costs associated with power poles and water infrastructure.

S&P has reaffirmed, unchanged, the DCC’s credit rating as AA/A-1 (long term/short term), with a stable outlook.

The AAA rating is near the top end of carrying least risk, meaning the DCC does not have to pay higher interest charges when borrowing money.

Areas scrutinised by S&P included the large $417 million capital works programme announced for beleaguered Aurora Energy, an extra $10million on other infrastructure backlogs and debt levels hitting $600 million again.S&P’s report said the AA/A-1 ratings affirmation on Dunedin reflected its view of the extremely  predictable and supportive institutional framework available to local and regional councils within New Zealand, S&P said.

Dunedin City Holdings Ltd chairman Graham Crombie said when  contacted yesterday, he was "very pleased" with the unchanged rating, noting S&P was aware of all "recent issues", in reference to Aurora Energy’s escalating power pole problems.

"This [unchanged rating] highlights the overall progress the city is making. It’s an excellent outcome," he said.

He was asked whether the DCC would have been better off without the relatively sudden need for $417million to be spent on Aurora over the next decade.

"Again,  it’s  something that’s been planned and they [S&P] have taken that into account ... the rating’s unchanged," Mr Crombie said.S&P had noted the DCC’s strong financial management, very strong budgetary performance, and its very low contingent liabilities. However, constraining the S&P rating was Dunedin’s high debt burden.

"We project Dunedin’s debt burden to remain high compared with international peers," S&P said.

Due to the funding requirements of the Aurora Energy capital works, S&P projected that the DCC’s total tax-supported debt would reach around $600 million in 2019, compared with its peak of $630 million in 2013.

"A large backlog of infrastructure renewals still exists, particularly in its water assets," S&P said.

"We consider Dunedin’s economy and budgetary flexibility to be average, and its liquidity position to be adequate," S&P said.

Mr Crombie said while the DCC debt would again broach $600 million, he was "comfortable" with that, given it had been planned.

"It’s an anticipated risk," he said of the debt level.

While Aurora was the main item boosting debt, once that capital expenditure was complete, council debt levels would decline, Mr Crombie said. S&P noted a recent review of Dunedin’s council-owned electricity companies, amid public debate about the safety of the existing power pole infrastructure, and that Aurora Energy planned to accelerate its power pole replacement programme during the next few years, increasing council debt levels.

"We project Dunedin’s debt burden to remain high compared with international peers.

"Dunedin’s debt is likely to increase slightly over the next three years due to funding requirements of the Aurora Energy capital works," S&P said.

At the group level, Dunedin City Holdings Ltd had announced a "significant capital works programme" of about $417million for Aurora Energy, between 2016 and 2026. The works will increase preventive maintenance works and renewal investment on the Dunedin electricity network, as well as meeting additional demand on the Central Otago network, S&P said.

To reduce the infrastructure backlog, the council was increasing spending from $12million in 2016 to $22million during the next eight years, a level it was likely to  maintain until 2033.

The DCC had continued to strengthen its risk management, following discovery of car fraud in the council in 2014, having put in place process changes and controls, including an audit and risk subcommittee and a risk and internal audit manager.

S&P said the DCC’s budgetary flexibility was "average", with modifiable revenues of about 46% of consolidated operating revenues.

"In our view, the council’s high reliance on income from council-owned corporations lessens its budgetary flexibility compared with most New Zealand councils," S&P said.

With the council having a constrained ability to adjust the revenues of these businesses, particularly the regulated utilities, S&P considered those revenues to be nonmodifiable.

"Overall, we don’t believe that Dunedin has significant scope to defer capital spending," S&P said.

At the core council level, the DCC had completed several major new projects and would be focusing on renewals. S&P noted that while deferring spending on renewals could be easier than large projects, any project delays would further increase the DCC’s existing infrastructure backlog. S&P forecast the DCC’s total tax-supported debt, including borrowings of its council-owned companies, would be about 139% of cash operating revenues in 2019 and interest expense less than 9% of total revenues over 2016-18.

The DCC has long-established and sophisticated debt-management strategies and unlike other New Zealand councils, has its own treasury corporation, Dunedin City Treasury Ltd.

DCTL raises all debt for both the council and its trading organisations. The council had no foreign debt and most of its interest rate risk was hedged. DCTL’s debt risk management policies are aimed at extending its debt-maturity profile, reducing its reliance on short-term funding, S&P said.

The DCC’s budgetary performance was "very strong". S&P forecast cash operating surpluses to average 20% of operating revenues between 2015 and 2019, and after-capital surpluses of 0.6% of total revenues for the same period.

"The council’s focus on constraining growth in operating spending and limiting capital spending largely to infrastructure renewals would enable it to achieve a very strong budgetary performance and gradually reduce debt over the long term," S&P said.

The DCC’s contingent liabilities were "very low".

The quantifiable liabilities were primarily guarantees from the council to recreation and service organisations, plus borrowing for Dunedin International Airport, in which the DCC has a 50% share.

However, S&P considered Dunedin’s economy to be "average" relative to regional economies globally.

While its per capita income of about $US36,500 ($NZ51,824) was relatively high in international context, it was much lower than New Zealand’s national level of $US42,900 ($NZ60,894).

simon.hartley@odt.co.nz

 

Rating the DCC

Standard & Poor’s rating of the Dunedin City Council

Economy: Average

Financial management: Strong

Budgetary flexibility: Average

Budgetary performance: Very strong

Liquidity: Adequate

Debt burden: High

Contingent liabilities: Very low

— Source: Standard & Poor’s