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Plenty of gems buried in the fine print

12 Oct 2017

Plenty of gems buried in the fine print Image

By Stephen Mayne

For ASX-listed companies, the full-year profit results each August are the most scrutinised document of the year.

For some strange reason though, the equivalent document from councils or other levels of government is often ignored, with far more attention given instead to the annual budget in May.

The budget just predicts what you’d like to do, but the annual financials actually tell you what happened.

And so it went at City of Melbourne this year when the 2016-17 financials were released, debated and then approved at a special council meeting on September 5, largely passing without comment.

Sadly, the 5pm meeting didn’t even last for seven minutes – it was “long and drawn out”, the Lord Mayor joked as he wrapped up proceedings at 5.07pm.

Finance chair and deputy lord mayor Arron Wood gave a brief insightful speech, including confirming that the majority of the $98 million City of Melbourne surplus was “largely due to the asset sale of City Square”.

There’s yet to be a public announcement about this second biggest asset sale in the city’s history – behind the $230 million disposal of the electricity business in the mid-1990s – but the financials do disclose asset sales of $62.7 million, which was well north of the $20.6 million City Square book value. Indeed, note 8 on page 29 of the accounts clearly states: “The net gain mainly relates to compulsory acquisition of City Square assets by Melbourne Metro Rail.”

Perhaps an announcement will come when the cash actually arrives as it is still being recorded as accrued income in the 2016-17 financial statements.

It is not yet clear what will happen when the CBD South train station is completed underneath City Square, but presumably council will manage the street level activities.

For now, council has clearly negotiated a cash windfall from the State Government which will effectively be reinvested in the $250 million overhaul of the Queen Victoria Market. Cr Wood told the special council meeting $75 million had now been set aside in the QVM Renewal Fund.

Here are a few other interesting points from 2016-17 City of Melbourne financials:

Wholly-owned services company Citywide has stabilised its performance after a few tough years, delivering a healthy surplus of $9.64 million on revenue of $241 million. About $38 million was received from City of Melbourne on the vital “civil infrastructure contract” which expires in 2018 and will be important for Citywide to retain. Citywide’s net cash held rose by $8.15 million and the company now reports net assets of $92.4 million with no debt. It could easily be raided to help finance the QVM project given council is forecasting a sharp rise in debt through until 2022.

Rates and charges revenue jumped from $243.8 million in 2015-16 to a healthy $262.1 million in 2016-17, which was $5 million ahead of budget courtesy of more apartment development than was forecast.

The consolidated gross cash holdings at year end rose from $88.3 million to $104.4 million, although you need to net off the $30.5 million debt to the Federal Government’s Clean Energy Finance Corporation to get net cash of $73.9 million. Council calls $45.9 million of this cash “restricted”, the bulk of it being the $37.7 million from developers which must legally be spent on open space.

The operating result at QVM deteriorated with a $2.24 million loss in 2016-17, including negative cash flow of $1.03 million. This is unlikely to include any payout to former CEO Malcolm McCullough who departed in early July. Council is clearly trying to ease the pain for stallholders who paid licence fees of $17.1 million for the year, down from $18.2 million in 2015-16.

Council’s WorkCover bill jumped from $615,000 to $1.5 million. Including Citywide and QVM, the total WorkCover bill jumped from $2.62 million to $4.05 million.

Council has $16.4 million of intangible assets relating to software sitting on its balance sheet, whilst Citywide is still valuing $22 million of goodwill from various acquisitions over the past decade as an intangible asset.

The buoyant property market saw council’s land holdings revalued by $152.8 million to $2.017 billion, whilst the net worth of its buildings only went up from $340 million to $362.3 million and total infrastructure assets rose by $34 million to $1.446 billion.

All up, the city remains in rude financial health and has plenty of capacity to crank up capital works over the coming decade, although the size and scale of the QVM project means that debt is on the horizon.

Stephen Mayne is a former City of Melbourne councillor who chaired the Finance and Governance Committee from 2012 until 2016.

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