Financial Strategy As a result Council must also look to keep debt within acceptable levels.The best way and external debt that have arisen as a result of Council’s significant Capital of doing this is to constrain capital expenditure. Council has done this by managing its Expenditure Programme; and investment levels in Capital Projects. That Generally Accepted Accounting Practice requires vested assets and capital • There are a number of benchmarks that exist for evaluating if Council’s proposed level contributions, including development contributions, and NZTA financial assistance of debt is too high. These include obtaining a credit rating and adopting the LGFA’s for roading capital works to be treated as operating revenue. In reality these items parameters as set out above. Currently Council has AA long term stable credit rating are used to fund capital as compared to operating expenditure. from S&P Global Ratings (formerly Standard and Poors). As can be seen from the Any remaining surpluses will be used to defer the need for increasing debt. As a result above table Council easily meets the covenants outlined above. To ensure Council of the significant recent expenditure on new assets, Council is currently in a period of continues to meet these tests it is proposed that net debt remain below $140 million for low renewals. However, as these assets age, the need for renewals will increase, as the period of the Long Term Plan. shown in Council’s Infrastructure Strategy, particularly in the years post this Plan. As a result, it is important for Council to retain a strong balance sheet and continue to fund Interest Rate Risk depreciation. The Council enters into hedging arrangements to mitigate against interest rate risk. However, because of Council’s comparatively low level of current debt, it is unable to Equity Investments and Other Interests fix the interest rates until the forecast increased level of debt is actually required. In For a variety of reasons Council holds investments in: the event that interest rates moved resulting in a 1% movement above that provided for in the 10 Year Plan for Council only debt, this would provide the following result: • MDC Holdings Ltd and its subsidiaries, Port Marlborough NZ Ltd and Marlborough Airport Ltd. 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 • Marlborough Regional Forestry. 1% interest 450 642 925 1,184 1,197 1,133 1,006 • Investment Bonds and Term Deposits. rate movement 1,145 1,242 1,211 ($000) MDC Holdings Limited Average cost 450 642 925 1,184 1,197 1,133 1,006 MDC Holdings Ltd is a Council Controlled Organisation (CCO) which was established perateabler 1,145 1,242 1,211 property ($) to: Funding Depreciation • Separate Council’s commercial trading activities from the other functions it carries out; Council intends to continue funding depreciation in accordance with its Revenue and Bring Council’s main trading activities into one structure; and • Financing Policy, which requires the funding of depreciation for all assets except for Community Facilities, Roading where depreciation is only half funded because of the For the most part MDC Holdings Ltd is charged with operating in a completely NZTA financial assistance rate of 51%; and Southern Valleys Irrigation Scheme. commercial manner. As such the only significant target is to generate a tax paid return on shareholder’s funds of at least 7.0%. This target is reviewed annually when Council The revenue collected to fund depreciation will initially be used to repay the debt and considers the MDC Holdings Ltd’s Statement of Intent. then to finance new and replacement assets. Any unused revenue from depreciation will be separately accounted for in the appropriate depreciation reserve. In addition to the commercial returns received, Council through MDC Holdings Ltd’s subsidiaries (Port Marlborough NZ Ltd and Marlborough Airport Ltd) promotes Operating Surpluses Regional Economic Development as it provides means for the arrival and departure of Council also generates operating surpluses each year. These accounting surpluses visitors and the import and export of goods. shown in the Forecast Statement of Comprehensive Revenue and Expense are driven Marlborough Regional Forestry (MRF) primarily by: The need to meet the principal repayments relating to increasing levels of internal The Council has an 88.5% ownership interest in MRF, with Kaikoura District Council • 2018-2028 Long Term Plan Page 166