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Whanganui District credit rating upgraded as new wastewater plant closes chapter on embarrassing failure

Thursday 7th June 2018

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Whanganui District Council has been rewarded for building a new wastewater plant within budget with cheaper borrowing costs via a credit rating upgrade at Standard & Poor's.

The $42 million facility is in its commissioning phase and at full speed will take waste that is currently piped out to sea. The council, which predominantly borrows through the Local Government Funding Agency, expects the improved financial risk rating will lower borrowing costs on bank debt as well. 

Whanganui District gained its first credit rating, AA-, in 2013, when it was funding the wastewater plant. The upgrade to AA long-term came this week (while the short-term A-1+ rating was affirmed), as the potential risk to the council's financial position "has abated since the completion of its wastewater plant," S&P said. "We expect the council's financial position to improve, reducing its debt burden."

The previous plant suffered a complete failure in 2012, after five years of operation in which it never met the terms of its resource consents. An independent review in 2016 called the failure "a sobering saga of shortcomings and mistakes that have cost the Whanganui community $27 million, generated much anger and anxiety among residents and inflicted considerable damage to the district’s reputation."

The council had signed off on a hybrid plant in 2003 and 2004, "a plant which was untried and untested anywhere in the world, and created entirely by council staff and their consultants," the 2016 report said. "An independent peer review was shut down prematurely by staff, and that cost-cutting was clearly a key driver resulting in a crude, low-technology, low-cost plant that ultimately failed."

S&P's base case for the council is that revenue grows in each of the next three years to reach $87 million in 2020 while operating expenses rise a more modest $5 million to $60.9 million. Debt is projected to blow out to 154 percent of operating revenue in 2018 before retreating to 114 percent in 2019. It was at about 95 percent in 2016. Debt repayment is expected to average about $8.4 million in the next three years.    

The district's general manager - finance Mike Fermour says ever since the council gained the rating, S&P has had its major capital projects in mind, especially the wastewater facility. The council also incurred extra costs on road repairs after the June floods. 

"The main thing is it's completed within budget, so that's one reason they increased the credit rating," Fermour said. S&P upgraded the outlook on the rating last year to positive from stable and "when it was confirmed we were on track it gave them confidence," he told BusinessDesk."With a higher credit rating, for the lending institutions, we become a lower risk. Going forward we'd expect a slight reduction in the premium we're charged on the borrowings." 

According to S&P, the district has something of a tailwind. Population growth of 1.5 percent was the highest in a decade and the local economy grew 3.5 percent and 3.7 percent in 2016 and 2017 respectively. Still, GDP per capita of US$25,700 on average in the past three years was half the national average of US$42,000, it said. The district's higher-than-average welfare dependency was a burden for central government although social assistance is included among a range of industries in the local economy that include manufacturing, healthcare, agriculture, forestry and fishing.

Total borrowings stood at $94 million at June 30 last year, up from $72.8 million a year earlier. Much of that was borrowed at floating rates. Of its bank debt, just $2 million was drawn against a $15 million multi-option credit facility with Westpac and nothing against a same-sized facility at ANZ Bank.

S&P said the council's sale of forestry assets, funding from grants and higher operating revenues "will support the budget during the next few years." That includes the council's next major infrastructure project, the Sarjeant Gallery redevelopment, due to commence in 2019. 

"We expect the council to fund only a small proportion of the gallery's $35 million cost, with the balance coming from external sources," S&P said. "Because of these funding arrangements, the gallery won't weigh on the council's financial position."


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