Report - All Formats

Report - All Formats

Attachment 1 Report No. 14.367

WRC Holdings Group Statement of Intent

(Covering the years to 30 June 2015,2016 and 2017)

Contents

1.Scope of Statement of Intent (SOI)

2.Reasons for the WRC Holdings Group

3.Objectives and Activities of the Group

4.Financial and Operational Performance Targets

5.CentrePort Performance Targets

6.Governance of the WRC Holdings Group

7.Financial Information

8.Issues Facing the Group

9.Distribution of Profits to Shareholders

10.Information to be Reported

11.Procedures for the Purchase and Acquisition of Shares

12.Compensation

13.Value of Shareholder’s Investment

  1. Scope of Statement of Intent (SOI)
  2. This SOI relates to WRC Holdings Group Limited and its subsidiary companies Pringle House Limited (PHL), Port Investments Limited (PIL), CentrePort Ltd (CentrePort), Greater Wellington Rail Ltd. Together they make up WRC Holdings Group (the Group).

WRC Holdings is 100% owned by Greater Wellington Regional Council (the Regional Council).

WRC Holdings is an entity established under the Local Government Act 2002 (LGA). WRC Holdings and its wholly owned subsidiaries are Council Controlled Trading Organisations (CCTO’s), and Council Controlled Organisations (CCO’s) as defined under the LGA. CentrePort, a partly owned subsidiary, is not a CCTO as its activities are governed by the Port Companies Act 1988.

  1. Reasons for the WRC Holdings Group
  • Appropriate separation of management and governance
  • To impose commercial discipline on the Group’s activities and produce an appropriate return to shareholders and ensure an appropriate debt/equity ratio.
  • To separatethe Regional Council’s commercial assets from its public good assets, where appropriate[1].
  • To provide a structure to allow external Directors with a commercial background to provide advice and expertise at the governance level.
  • To minimise the risks and optimise the opportunities of owning commercial assets, such as rail rolling stock.
  1. Objectives and Activities of the Group
  2. Objectives

The primary objectives of the Group shall be to:

a)Support the Regional Council’s strategic vision; operate successful, sustainable and responsible businesses.

b)Manage its assets prudently.

c)Where appropriate, provide a commercial return to shareholders.

d)Adopt policies that prudently manage risks and protect the investment of its shareholders.

3.2Activities of the Group

WRC Holdings Limited

WRC Holdings Limited is the holding company for PHL, PIL, GWRL and indirectly CentrePort.

Effectively manages any other investments held by the Group in order to maximise the commercial value to the shareholders and to protect the shareholder’s investment.

WRCH acts as a diligent constructive and inquiring shareholder, through its Board of Directors.

Pringle House Limited

PHL owns and operates the Regional Council Centre at 142-146 Wakefield Street, Wellington. The building is currently vacant and is earthquake prone. A decision on its future has been postposed pending the Regional Councilclearing out the building.

Pringle House will be held until it is deemed to be surplus to GWRC requirements. However, as part of the eight year financial plan this SOI assumes the building will be placed on the market and sold by 30 June 2015. The price at which it is sold at is lower than the present book value and is an arbitrary figure such that equity is reduced to zero. This is after sale with all assets and liabilities liquidated.

Greater Wellington Rail Limited

GWRL owns the Regional Council’s investments in metro rail assets. These include the following rolling stock and infrastructure assets:

Rolling Stock:

18 - SW Carriages

6 - SE Carriages

1 - AG Luggage van

48 - 2 Car Matangi units

27 - 2 Car Ganz Mavag units

Infrastructure Assets:

Thorndon electric multiple unit (EMU) depot and EMU train wash

Metro wheel lathe and building

48 – Railway stations including furniture, CCTV, signage, fixtures and fittings - (excluding the main Wellington central station)

14 – Pedestrian over-bridges

13 – Pedestrian underpasses

Various carparks, other station improvements and other ancillary rail related assets.

The bulk of the above infrastructure assets were taken over from KiwiRail in June 2011 for $1 consideration with the balance of $5.3 million being transferredfrom the Regional Councilto GWRL in June 2012.

Greater Wellington Rail Limited is responsible for all aspects of asset management and stewardship, implemented through a management contract with the Regional Council. An asset management plan has been developed which articulates a structured programme to minimise the life cycle costs of asset ownership while maintaining the desired levels of service and sustaining the assets. Operational delivery of the services is the responsibility of the Regional Council directly and is delivered via separate maintenance and operating contracts with KiwiRail.

The Regional Councilhas budgeted expenditure of $170 million over the next three years to replace the Ganz Mavag units with a second tranche of 35 Matangi units. This also includes and upgrade to some components of the existing Matangi to realise whole of life savings and improve the operational efficiency and safety.

These 35 new Matangi units are expected to be introduced into service over the period middle 2015 to late 2016. 15 Ganz Mavag units have been withdrawn from service and have been sold. The remaining 27 Ganz Mavag units are being retained in operational service until the introduction of the second tranche of Matangi Trains.

Other planned expenditure on rail assets includes $3.5million per annum for renewal work and like for like replacement of rail related infrastructure. It is also planned to continue with the $1.5 millionspend on security enhancements to protect infrastructure and rolling stock assets from vandalism and taggingleading to lower risk and insurance premiums.

Port Investments Limited

Port Investments Limited is an investment vehicle that owns 76.9% of CentrePort Limited.

The major activities of CentrePort, who produce their own Statement of Corporate Intent, similar to this SOI,are:

  • Port infrastructure (land, wharves, buildings, equipment, utilities)
  • Shipping and logistical services (pilotage, towage, berthage)
  • Operational service (cargo handling, warehousing, facilities management, property management, security, emergency services)
  • Integrated logistics solutions (networks, communications, partnerships)
  • Property services (development, leasing management)
  • Joint ventures (coldstore, container repair, cleaning, packing, unpacking and storage).

Port Investments monitors the performance of CentrePort.

  1. Financial and Operational Performance Targets
  2. WRC Holdings Group

The following section covers the operating performance targets and the financial performance targets of the companies making up the WRC Holdings Group. The performance targets for CentrePort are included as information only as CentrePort is part of Port Investments Limited.

4.1.2WRC Holdings Limited

Operational performance targets

(a)WRC Holdings to act as a responsible and inquiring shareholder

(b)WRC Holdings to hold a meeting at least six times a year to review the operation and financial position of the company and Group.

Financial performance targets

(1) Based on net surplus before tax divided by average equity, but excluding revaluation gains and losses.

(2) Based on earnings before interest and tax, divided by average assets

4.1.3Pringle House Limited

Operational performance targets

(a)Minimise on-going running costs

(b)Maintain adequate security commensurate with building occupancy

(c)Maintain insurance to cover demolition and indemnity cost

(d)Ensure immediate legislative obligations are met

Financial performance targets

To ensure the operating budgetedexpenses are within budget.

4.1.4Greater Wellington Rail Limited

Operational performance targets

(a)From Annual Plan 2014-2015

(i)Percentage of the required fleet that is available to operate scheduled services – 99.3%

(ii)Average condition ratings for buildings and structures – 2.6/5.0*

(iii)Average condition rating for car parks – 2.4/5.0

(b)From the asset management plan

(i)Rail assets are maintained in accordance with the maintenance schedules

(ii)Mean distance between failure (MDBF) Matangi fleet – 30,000 km

(iii)MDBF Ganz fleet – 8,500 km

(iv)MDBF carriage fleet – 40,000 km

(c)Other measurable targets

(i)Deliver the second tranche of Matangi trains and M1 retrofit programme in accordance with the supply contract.

(ii)Deliver train maintenance services within approved budgets through a contract with KiwiRail ensuring that train availability and reliability targets are met.

(iii)Deliver infrastructure cleaning, maintenance and security services within approved budgets through various contracts ensuring asset condition does not deteriorate.

(iv)Implement year three of the five year renewals and like for like replacement programme in accordance with the asset investment priority framework.

(v)Maximise leasing and advertising revenue streams (within overall Council policy)

* The scoring grades for assets is on a scale of 1-5 , with 1 being very good and 5 being very poor.

Financial performance targets

(1)Based on net surplus before tax divided by average equity, but excluding revaluation gains and losses.

(2)Based on earnings before interest and tax,divided by average assets

4.1.5Port Investments Limited, Parent & Group including CentrePort

Operational performance targets

(a)Port Investments to act as a responsible and inquiring shareholder of CentrePort.

(b)CentrePort to report at least four times a year to Port Investments Limited and for the board to approve significant transactions of CentrePort as determined by the constitution.

(c)Performance indicators for CentrePort as noted below.

Financial performance targets

(1)Based on net surplus before tax divided by average equity, but excluding revaluation gains and losses.

(2)Based on earnings before interest and tax, divided by average assets

  1. CentrePort Performance Targets

From CentrePort’s 2014/15 – 2016/17Statement of Intent (SOI).

SOI 3 year - Financial Performance measures

The Group’s performance is measured against the following ratios:

Definition of Terms:

  • Return on Assets for each business segment

Port:

Earnings before interest and tax (EBIT) plus share of associate earnings divided by the average of total fixed assets and investments in Associates.

Property:

EBIT plus share of associate earnings divided by the value of investment properties plus investment in associates. This calculation is performed separately on the value of developed investment properties and the total portfolio.

  • Return on Equity

Underlying net profit after tax* divided by average equity.

  • Dividend

Dividend as a percentage of underlying net profit after tax*

  • Underlying earnings per share

Underlying net profit after tax* divided by number of shares issued.

  • Dividend per share

Dividend divided by number of shares.

  • Net Asset backing per share

Shareholders’ Funds or Net Assets divided by number of shares.

SOI - 3 year - Financial Health measures

The Group’s financial health is measured against the following ratios:

Definition of Terms:

  • Shareholders’ Funds (or equity) is defined as the total issued capital plus the balance of undistributed profits and all revenue and capital reserves less any minority interests of the parent company, CentrePort Limited and its subsidiaries, (“the Group”)
  • Total Assets are defined as all the recorded tangible and intangible assets of the Group at their current value as determined by the Group's Accounting Policies.
  • Equity Ratio is Shareholders’ Funds divided by Total Assets
  • Debt is the sum of Interest Bearing Debt (Borrowings) and Financial Liabilities arising from financial instruments
  • Gearing is the ratio of Debt to Debt plus Equity (Shareholders Funds)
  • Interest cover is the ratio of free funds from operations to interest expense. It is measured as Earnings before interest, tax depreciation and amortisation (‘EBITDA’) plus dividends received from investments in associates and joint ventures divided by the Interest Expense.
  • The Solvency Ratio is Current Assets divided by Current Liabilities.
Safety and Security performance targets

a)Year on year improvement towards zero harm.

b)Maintain the tertiary level of compliance with the ACC Workplace Safety Management Practices Programme and comply with the AS/NZS 4801: Occupational Health and Safety Management Systems.

c)Annual review of Health and Safety Policy and Plan.

d)Undertake risk assessments and implement any mitigating procedures relating to the Port & Harbour Safety Code which promotes safety and excellence in marine operations.

e)Maintain compliance with international Ship & Port Security (ISPS) Code which promotes security against terrorism within the port environment

Environmentalperformance targets

a)Develop and maintain a formal environmental risk management system consistent with the standards specified in AS/NZS ISO 14001: 2004.

b)Formally review, at least annually, the Company’s compliance with all environmental legislation, district and regional plans and conditions of resource consents held, including the monitoring of environmental discharges in accordance with implemented management plans in the areas of .

  1. Port Noise
  2. Stormwater discharges to the Coastal Marine Area
  3. Fumigants associated with the pest treatment of cargoes, including the introduction of recapture technology for containerised cargo during 2014.

c)Maintain a sustainability programme with measurable performance criteria covering, as a minimum, the monitoring of waste and greenhouse gas emissions

d)Maintain the requirement for fumigation contractors to use recapture technology for the fumigation of containers

e)Monitor compliance by contractors for the fumigation of log shipments in line with the Environmental Protection Agency policies. Continue to review the availability of recognised alternative fumigation options.

f)Maintain a register of environmental risks and incidents for monitoring and actioning purposes. The register to be reported to CentrePort's Health, Safety and Environmental Committee on a regular basis (the committee meets 4 times per annum).

g)Develop appropriate and useful measures to monitor CentrePort’s carbon footprint.

h)CentrePort Ltd will hold a minimum of three Environmental Consultative Committee meetings in 2014/15 comprising CentrePort Ltd and affected stakeholders (customers, port users, local authorities, Iwi and residential groups). The meetings provide a forum to identify and inform on a range of environmental port related matters.

Social performance targets

a)Contribute to the desired outcome of the Wellington Regional Strategy through:

  1. The provision of workplace opportunities and skills enhancements of our employees.
  2. Ensuring the regional economy is connected by the provision of high quality port services to support international and coastal trade.
  3. Supporting the regional community by investing in community sponsorship and engaging community activities.
  4. To meet regularly with representative community groups
General performance targets

a)The company will, in consultation with the shareholders, continue to develop performance targets in the financial, environmental and social areas.

b)CentrePort will report achievement against the above targets in the quarterly reports to shareholders and the annual report. The report will include specific initiatives to enhance the environment in which we operate.

c)When developing ‘property held for development’ the Board is to adhere to the following principles:

  1. Properties may be developed without the building being fully pre-let so long as tenancy risk is managed prudently.
  2. Property developments must not compromise port operations.
  3. Developments are to be undertaken only if they are able to be funded without additional capital from shareholders.
  4. Development construction contracts are to be negotiated on a guaranteed maximum price or lump sum basis.

Definition of terms regarding property:

Management of tenancy risk means that each single property investment has committed rental income (via development and executed lease contracts) that is sufficient to meet forecast interest costs on (i) the cost of the site development related to the development and (ii) the cost of the construction of the development AND the vacant net lettable area of the proposed development is no greater than 25%.

  1. Governance of the WRC Holdings Group

6.1The shareholder, the Regional Council, appoints the directors to WRC Holdings Ltd in terms of the Regional Council’s approved process. Section 57 of the LGA 2002 requires that directors have the skills, knowledge and experience to:

  • Guide the Group, given the nature and scope of its activities; and to
  • Contribute to the achievement of the objectives of the Group.

The shareholder also approves the directors of PHL, PIL and GWRL. These are appointed by WRC Holdings Ltd by way of a special resolution. There is a commonality of directors between WRCHoldings Ltd, PHL, PIL and GWRL.

The directors of CentrePort are appointed by PIL and Horizons Regional Council.

6.2Any changes to the constitutions of the companies within the Group are to be approved by the shareholder.

6.3The Regional Council monitors the performance of the Group on a regular basis to evaluate its contribution to the achievement of its objectives, performance against the Group’s statement of intent and the Regional Council’s overall aims in accordance with section 65 (1) of the LGA 2002.

6.4The directors monitor the performance of each company at each board meeting.

  1. Financial Information
  2. Prospective statement of comprehensive income

7.2Prospective statement of financial position

7.3Prospective statement of changes in equity

7.4Prospective statement of cashflows

7.5Financial Statements commentary

The prospective statement of comprehensive income shows revenue growing over the forecast period. This is stemming predominately from other revenue i.e. Port revenues from CentrePort. Rental income increases markedly in 2016/17and is due to the 35 new Matangi trains beginning to earn rent. This rent is paid by the operator and charged back to Council, it is required to be done this way to correctly account for the use of the assets from a taxation perspective.

Interest expense increases due to higher levels of debt in CentrePort and higher interest costs in WRCH on the $44 million of debt.

The depreciation increases as CentrePort increases its capex programme and as the 35 new Matangi trains coming into service.

The other expenditure increase is driven mainly by CentrePort and relates to the revenue increases, and to a lesser extent by rising cost from GWRL.

The revaluations predominately relate to CentrePort revaluing their derivatives from previous devaluations as they are used. The higher level in 2014/15 relates to the assumed hypothetical profit on sale over existing valuation of the Regional Council Centre.

The credit from tax refers to the movement (reduction) in deferred tax emanating from GWRL offset by a taxation charge from CentrePort.