Growing debt dominates the annual report of Dunedin City Holdings Ltd, but the news is not all bad.
While debt increased in the year ending June 30, the return on shareholders' funds improved significantly in the period.
DCHL is an investment company with the purpose of earning cash from the subsidiary companies to provide a steady flow of payments for the shareholder, the Dunedin City Council.
The subsidiary companies are Delta Utility Services, Aurora Energy, City Forests, Citibus, Taieri Gorge Railway and a 50% share in Dunedin International Airport.
Increased debt by clients and customers of the council-owned companies could affect future profits.
The annual report for the year ended June 30 showed term borrowings for DCHL had grown by nearly 9% to $405 million.
A further $91.6 million was also included in the current liabilities portion of the report because those bonds mature in April of next year.
It is likely DCHL will refinance that amount.
The $112 million advance from the council, included in non-current liabilities, is unsecured as directors believed that advance formed an integral part of the DCC's investment in the company.
That advance fell in the period from $113.1 million in the previous corresponding period but it still remained well above the historical average of $103.4 million.
Accountants spoken to yesterday said it made sense to put as much of the total council debt on to the books of DCHL as possible to gain tax advantages.
For every dollar the company paid in interest, it could claim back 33% in tax.
In the period, total assets grew by 18.1% to $889.7 million from $753.1 million last year, but total liabilities grew by 22.6% to $737.5 million from $601.4 million in the same financial period.
The current ratio (assets to liabilities) declined in the period due to the inclusion of the $91.6 million of bonds due for repayment early next year.
For every dollar the company owed at balance date, it had 79c with which to pay.
However, the operating cash flows for the company were so strong payment would never be in question.
DCHL reported an 8.9% improvement in revenue for the year to $233.6 million, from $214.4 million, and a 70.5% improvement in operating profit to $23.7 million, from $13.9 million.
The 2010 profit gave a 2.7% rate of return on total assets, compared with a return of 1.8% in 2009 and a return of 15.5% on shareholders' funds of $152.2 million, compared with a return of 9.2% last year on shareholders' funds of $151.7 million.
In his annual statement DCHL chairman Paul Hudson recognised debt was a problem - for the companies and the wider business community.
He compared the 2010 net surplus of $26.3 million in favourable terms to the profits achieved in 2006 and 2007.
"A key difference compared to 2007 is the extra $41 million of debt now carried by the three largest companies as part of our cash support to the council. Without the interest cost on this extra debt, the surplus achieved this year would have been close to the 'excellent' 2006 and 2007 years."
Looking ahead, Mr Hudson said the region had weathered the worst of the recession.
However, the world economy, which dictated the export prices and determined tourist numbers, continued to stutter.
"The nasty issue with debt being that it has to be repaid and/or reborrowed, sometimes under different terms.
"We are now finding out if there is life after debt and just how much impact there will be on our daily business from the habit changes forced by painful debt withdrawal symptoms."
