Wanganui Holdings dividend & consequences - 18/01/2008

First, some background to the issues and events that have preoccupied my office, and the council's financial team, since late last year.

On 1 January 2005, former mayor and chairman of Wanganui Gas Ltd, Chas Poynter, and the then chairman of Wanganui Holdings Limited, Ron Janes, signed a gas supply contract with NGC known as the Pohokura contract with an expiry date of 30 June 2010.

With the benefit of hindsight, this was a difficult contract with some substantial risks.

At that time, Wanganui Gas, and its 75.1% shareholder Wanganui Holdings, were concerned that gas supply could not be guaranteed into the future and that the Pohokura contract assured that supply. The terms of that contract remain confidential, but they had a number of fishhooks and liabilities if energy trading conditions markedly changed.

Accountability & Relationships

At this point, it is important to understand that Wanganui Holdings Ltd manages the council's commercial assets – forestry, Wanganui Gas, property and the Port – and it owns the shareholding in Wanganui Gas rather than the council. Wanganui Gas has two major trading arms – Gasnet and Energy Direct. The latter trades in gas and electricity supply.

The council appoints the directors of Wanganui Holdings. Wanganui Holdings appoints the directors of Wanganui Gas.

During the period under discussion, former Mayor Chas Poynter was chairman of Wanganui Gas from 13 December 1992 to 14 December 2005. Mr Ron Janes was chairman of Wanganui Gas from 15 December 2005 to 19 December 2007.

The chairman of Wanganui Holdings from its inception in July 2002 until June 2005 was Mr Ron Janes.

Dr David Warburton was chairman of Wanganui Holdings from July 2005 to October 2005. Mr Matthew Doyle is currently chairman of both Wanganui Holdings and Wanganui Gas.

In October 2006, after extensive financial, commercial and legal advice, the Wanganui District Council, through Wanganui Holdings, resolved to purchase the 24.9% shareholding of Wanganui Gas then owned by NGC (Vector). Wanganui Holdings has been 100% shareholder of Wanganui Gas since that time. All advice of that time was that the purchase was a good buy and gave Wanganui Holdings the prospect of remitting greater dividends and options.

Wanganui Gas provides an annual dividend from its trading profits to Wanganui Holdings. In turn, Wanganui Holdings provides an annual dividend from its commercial portfolio to the Wanganui District Council.

This dividend directly subsidises rates and has done so since Wanganui Holdings' inception. In 2004, Wanganui Gas provided a special dividend to allow the then council to balance its books after expected forestry dividends did not materialise. Sadly, forestry can't return the favour in 2008!

Holdings Dividends

In late-October 2007, Wanganui Gas management advised their directors that trading conditions had depressed markedly as a consequence of changes in the energy market including – new gas reserves being brought on line, the government deciding not to commission new thermal power stations, and competitive practices of other energy traders.

This was reported to the Mayor in late November 2007 by Wanganui Holdings, and to a full council meeting on December 17. Wanganui Holdings reported that they would not be able to deliver the budgeted $2 million dividend for 2007/8, nor the estimated $4 million over the 2008/9 and 2009/10 financial years.

Council resolved to seek additional financial and strategic information that was placed before it today. As a consequence, it has passed the following resolutions...

THAT the council appoint Price Waterhouse Cooper to provide the Council with independent advice relating to Wanganui Gas Ltd's current financial and operational health and the effectiveness of Wanganui Gas Ltd's business plan and its ability to return the company to profits

AND THAT Wanganui District Council Holdings Limited prepares a robust strategic plan that ensures Wanganui Gas Limited returns to financial health and that the plan is approved by the Wanganui District Council

AND FURTHER THAT Wanganui District Council Holdings Limited reports its progress each month via either Strategy Committee meetings or full Council meetings.

THAT a taskforce of the Mayor, Deputy Mayor, Cr Ray Stevens and Cr Sue Westwood be appointed to conduct an in-depth review/preview of the Council's departmental budgets ahead of the presentation of the Draft Annual Plan for 2008/09 – with the intent of reviewing projected revenue/expenditure in each sector of the Council's operation and offering political advice as to acceptable/unacceptable cost savings

AND THAT at the Council's meeting to be held on 28 January 2008, the Council's officers present a paper on operational expenditure savings the Council can make in the next six months.

THAT a freeze upon employing additional staff, as intimated in the Chief Executive's report to the Council on 17 December 2007, be implemented immediately, and that only essential staff fulfilling a statutory function be considered for employment henceforth.

Practical Consequences

The practical consequence of the foregone dividend revenue will be dramatic upon the council's accounts and, by implication, upon the council's activities and operations over the next 30 months.

There are a number of remedies that council has at its disposal, but a severe reduction in the council's operational and capital spending is going to be mandatory. This will affect staff numbers, operational activities, council services and the like.

A council meeting on January 28 will consider proposals from a joint elected members/senior management team to drastically pare the council's spending. Other options include raising rates to cover the shortfall in income [an estimated 7% per annum rise would be required simply to cover the dividend loss], further borrowing and raising council fees.

The proposals will be contained in the council’s draft Annual Plan that will be published in late March. I want to warn all agencies and activities that rely upon council funding: there is unlikely to be an area that does not receive significantly reduced council income over the next 30 months.

The Path Ahead

Dramatic as the consequences might be, Wanganui Gas' trading reverses were not anticipated by anyone – and were not apparent until October last year.

Other energy companies have been significantly affected too. Listed company Contact Energy told its shareholders in late December 2007 of drastically reduced income and profits as a consequence of the more competitive trading conditions, new gas discoveries, and government policy.

The Pohokura contract expires on 30 June 2010. It is current advice that Wanganui Gas will be able to provide Wanganui Holdings with healthy dividends after that time.

Before then, council will decide if such dividends are used simply to retire debt, or fund new capital projects, rather than subsidise rates. There will be extensive public consultation on that issue.

Every commercial entity faces trading reverses at some stage of its life. Wanganui Gas is a small player nationally but its operations have a significant impact locally. With the co-operation and goodwill of all parties, council will ride out this financial reverse and the aim is to ensure as little obvious impact as possible.

One thing is clear: we cannot simply stagnate and twiddle our thumbs. Wanganui must continue to grow, invest in its community and its future, and deliver the best value-for-rates anywhere in New Zealand.

That is one positive aspect of the current problem.

Every council dollar will be scrutinised as if it has undergone a CAT scan. No aspect of council activity will be allowed one cent of inefficiency or waste.