CORPORATION FINANCE.
A VERY SOUND POSITION. A lucid and informative address on ‘‘Some Aspects of Civic Finance” was delivered yesterday at the weekly luncheon of the Dunedin Rotary Chib by Rotarian H. H. Henderson, who occupies the position of city treasurer. In the course of his address, which was greatly appreciated by the members, Rotarian Henderson said: — During the past two and a-half years wo hnv issued debentures for over a million pounds, of which approximately two-thirds was in payment of previous loans falling due, and the balance was for new works in the electric and other departments. The question which I purpose considering today is the security which we have to offer to debenture-holders. I want, you to regard the corporation a s a company carrying on a number of businesses, and I suggest to you that in addition to scrutinising the list of assets and liabilities we should apply the following tests:— 1. Are they carrying on a successful business and showing a reasonable prtfit? 2. Are they using a fair proportion of e-ach year’s profits for extending their business, or, in other words, are they accumulating something substantial in the way of reserves ? 3. What resources have they which could ho called on to increase their profits if necessary ? 4. What backing can they obtain in addition to the securities represented by their business? Now, I will apply these tests to the corporation’s accounts, and will consider—first : “Are wo carrying on a successful business and are we showing a reasonable surplus or profit?” The corporation’s accounts are divided into two sections, one being the general or municipal account, and the other the trading accounts, this latter section being subdivided into water, gas, tramways, and electric. The general account is not calculated to have a surplus, hut nevertheless. by endeavouring to live within our means and by applying the brake to any branch which appears to be over-running the constable, wo generally manage, even in the general account, to finish the year with something in hand. I might explain that at the beginning of each year each branch of the municipal department—viz., works, sanitary, reserves, library, baths, abattoir, and finance —makes up an estimate of its expenditure for the ensuing year. These are carefully scrutniscd by the Finance Committee and the pruning knife applied where considered necessary. An estimate of the revenue is also compiled. This consists of: (1) rates; (2) rents, licenses, and sundry; and (3) transfers from tho trading departments. It is frequently quite a problem to endeavour to stretch tho revenue side of the -sheet to make it balance with the demands for expenditure by the different branches as set forth on the expenditure side. The revenue of the general account is not very elastic, and as the council has fixed the contributions from the trading departments at 2 per cent, on the amount of their respective loans, and as an increase in the general rate would not bo papular with the ratepayers, it follows that tho only means of effecting a balance is by reducing the estimated expenditure, and thus some of the promised improvements have frequently to be postponed till the following year. However, as I have already said, we do manage to show surpluses. For the year ended March 31 last them was a surplus of revenue over expenditure of nearly £SOOO, and for the previous year the surplus was £3000., It will thus be seen that even in (he general account we live well within our income os a rule; in fact we are obliged to do so now the law only allows ns to have an overdraft to the extent of our outstanding accounts, which is not much. We pass on to the accounts of the trading departments, and here I think it can bo demonstrated that the first nuestion : “Are we making satisfactory profits?” can readily be answered in the affirmative. For the year ended 31st March last our profits are declared as follows: Water ... - - ...£11.395 Gas „ ._ ... ... 15.054 Trams Electric 17,636 Total ... _ _. ... £53,019 For tho previous year tho total was £59.858, and over the past five years the average has been £52,336, so you will see that our profits are steady as well as a satisfactory figure. It may, however, bo asked whether these are true profits ami whether we arc making sufficient reserve for depreciation and renewals, and I think the figures "ill show that we are on the right side. 1 may hero explain that the charge for depreciation is 1 per cent, on the value of our wasting assets, and is a book entry only, just exactly as you find it in practically every commercial bu'siness, while the charge for renewal fund varies from j per cent, up to ID per cent., according to the estimated life of the various classes of assets. This charge for renewal fund is paid into a special bank account, and is invested in debentures and otherwise, so that the whole of the fund is earning interest which is of course credited to the fund. For the past year the sum of £15,633 was charged against profit and loss accounts for depreciation, while Uie charge for contribution to renewal fund was £43,365, or a total of £58,993. This amount is, of course, provided for before arriving at our net profit of £53,019. The total amount charged for depreciation and renewal fund is equivalent to over 3J per cent, upon the whole of the wasting assets of the trading departments. Assuming for the moment' that one trading concern were carried on by a limited liability company and that the capital of the company is represented by the amount of our loans—viz., £1,355,355 —then tho amount we have paid as interest on these loans would require to he added to the net profit of £53,000 in order to arrive at the amount which tho company would show as available for paying dividends. This would give them a surplus for the year of £119.527, out of which the directors would probably recommend a dividend of 6 per cent., absorbing £31,300, and leaving £58,000 odd to bo added to reserves. Now, when we remember that it is pot the sole object of the corporation to make profits, but rather that it i s run on strict Rotarian principles, with service as its motto, 1 think you will agree that we satisfactorily comply with the" first test and that we are (--Trying on a successful business and showing a reasonable profit. Now we will apply the second test and inquire whether we are using a fair proportion of each year’s profits for extending onr business or in other words are wo accumulating something substantial in the' way of reserves? Most of you Rotarians know something of (he balance sheets of companies, and you know that what is most appreciated nowadays is to see a large sum under the reading of reserve of some form or other. It is the company with substantial reserves that can weather the storm when it comes and still continue to pay divdends, while tho company without reserves is liable to get on the rocks. Our trading departments have two main avenues for disposing of their profits—(l) Contribution to the general account, and (2' spending the money in extensions. jhe contribution to the general account may be looked upon as a special dividend to ratepayers, since it has had the effect of reducing the rates (or should I say preventing an increase in the rates?) by an average of about 6d in the. £ during the last few years. Wo will now explore tho second avenue. Tho amount expended on extensions out of revenue last year was ±/p2,700, and for the past five years (ho average has been about £33.000. If you scrutinise our balance sheets you will find on the liabilities side first tbe amount wo owe by way of loans; second, (ho amount we owe to sundry creditors, ineluding bank account, if any; and, third, certain amounts under tho heading of renewal hinds, depreciation accounts, reserves, accident insurance funds, and balances .of profit and loss accounts. If you take .the trouble to add this third section you will find that they amount in (he total to over £BOO,OOO. Of this sum our renewal funds represent almost a-qunrter of a million in hard rash or securities, and the balance of £550,000 is represented bv extensions which have been paid for out of our profits in past years. And even this is not nearly all, for there have been writings down of our assets whenever it has boon considered necessary. A few years ago we had a revaluation of the gas department’s assets, with tho result that there was a writing down to the extent of £62,006. .Similar writing down has taken place in the Tramways Department from time to time. If vou scrutinise the balance sheet of the Gas Department you will find it particularly healthy. It has been making a steady profit each year, and has been spending a large proportion of its profits in extensions. Us loan capital is only £IOB,OOO (on which it is paving only 4 per cent, interest), but to this ’loan we may add tho antecedent liability of £59,000, making a total indebtedness of £147.000. The total assets are £348 000, of which tho works, mains, etc., stand at £248.000, and £IOO,OOO is liquid in the shape of cash and investments of sinking funds and renewal funds. In other words, if we were to sell our gasworks at the low figure at which they
appear in the balance sheet we could pay off the whole of the Gas Department's indebtedness and have £200,000 remaining in band. It is no doubt duo partly to tne strong financial position of the Gas Department that it is able to make a substantial profit and yet sell gas cheaper than any other gasworks in New Zealand. The Blectric Department is quite an infant as far as years go. It is still a youth in its teens, and although it has been severely criticised in past years because it was not doing a man’s work, yet itg record is now distinctly good. Each year it is spending a large sum out of revenue on extensions, in addition to what has been borrowed, and its reserves have been steadily creeping up until now they amount to almost a-quarter of a million. I think I have said enough on reserves and will pass on to consider the third test—viz., ‘‘What resources have w T e which could be called on to increase our profits, if necessary?” Increasing our profits to any appreciable extent involves increasing our revenue, and the simplest method of doing this is by increasing the charges for commodities we sell or services which we render to the community. For instance. our price for gas is the lowest in i\ew Zealand. If we increased the price to what Christchurch users pay we could show an additional profit of £15,000 per annum. Our tramway fares are the lowest in New Zealand. livery other city has a 2d minimum fare. If we adopted the taros charged in the other centres wo could increase our revenue by £20,000 per annum. There is no place in New Zealand that sells its electric current cheaper than Dunedin, if we had been receiving only half the average price per unit which Wellington consumers have been paying for their electric current we would be richer to the extent of £65,000 per annum. Those three amounts added together would total £IOO.OOO per annum. lam not suggesting that we should attempt to collect any .portion of this sum, but I think it may bo fairly claimed that it represents the minimum amount saved to our citizens through the municipal management of our trading concerns and explains to some extent why Dunedin people have so much money available for investment in debentures. Then we come to the last test —viz., What backing can we obtain in addition to the securities represented by our business?” This is, of course, our trump card, as wc are in the happy position of being able to pledge not only our own assets, but also to pledge a special rate -over every property in the city as additional security to the lender, I can hardly imagine the necessity arising for collecting this rate, but if such were to happen the bondholders could put in a receiver, collect the special rate, and repay themselves their principal and interest. I therefore leave it to you Rotarians to judge for yourselves whether the security wo have to oifor should satisfy even the most cautious lender. _____
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Bibliographic details
Otago Daily Times, Issue 19197, 13 June 1924, Page 2
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2,116CORPORATION FINANCE. Otago Daily Times, Issue 19197, 13 June 1924, Page 2
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