4̂ TaurangaCity _ .,

gi^^ Council 23 June 2015

Bay Venues Ltd: Balance Sheet Restructure

DC No: 201

Purpose 1. To complete the balance sheet restructure of Bay Venues Ltd

Executive Summary 2. As part of its review of funding opflons for Bay Venues Ltd (BVL) Council resolved to

restructure the balance sheet of BVL.

3. This decision was included in the consultaflon document as part ofthe 2015-25 LTP.

4. Council will agree to BVL issuing new shares worth $38,181 Million. BVL will use these funds to repay debt to achieve at debt: equity raflo of approximately 20 : 80.

5. Council will establish a targeted debt level on which to base the debt servicing grant as per the Enduring Statement of Expectations. This will ensure that BVL funds any new capital expenditure from other sources.

6. Council will update its loan agreement with BVL.

7. This resoluflon is being passed in advance of the overall adoption of the 2015-25 LTP in order to allow all of the funding arrangements to be completed within the current flnancial year.

Recommendation/s That the Council:

(a) Receive Report DC - Bay Venues Ltd: Balance Sheet Restructure.

(b) Conflrms the decision as consulted upon in the 2015/25 LTP to restructure the balance sheet of BVL by recapitalising BVL to enable it to achieve a debt to equity ratio of 20:80.

(c) Agrees to purchase shares in BVL to the value of $38,181,000 in order to enable BVL to achieve that raflo as at the subscripflon date of 29 June 2015.

(d) TCC will fund Interest on the targeted debt level of $8,600,000 at the prevailing TCC interest rate, after which BVL will be required to fund any additional debt servicing costs. This is in line with the Enduring Statement of Expectations.

(e) Agrees to revise the TCC loan arrangements with BVL to reflect the 5 year term of the loan arrangements and to make other minor changes.

(f) Delegates to the Chief Executive and the General Manager: Organisational Services, the authority to negotiate and enter into the loan agreement, and subscribe for the shares on behalf of council.

Objective Ref:A6342870 Bay Venues Ltd: Balance Sheet - 1 -Restructure

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Council

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Discussion 8. In November 2014 Council considered a range of funding options in relaflon to Bay

Venues Ltd (BVL). A copy of this resolution is included as Attachment 1

9. The parts of this resoluflon relaflng to the transfer of nine buildings to BVL (DC 189) and the funding of depreciation have already been enacted.

10. This report covers the flnal aspects of the funding opflons, namely the balance sheet restructure of BVL. Because of the nature of this transaction it was decided to include it within the consultation that was part of the 2015-25 LTP.

11. This consultation has been completed and the outcome reported to Council (report DC 163) through deliberations from 2 to 5 June 2015. There was no speciflc feedback on the balance sheet restructure arising through the consultaflon.

12. This resoluflon is being passed in advance of the overall adopflon of the 2015-25 LTP. This flming has been brought forward so that the opening balance sheet for the 2015/16 flnancial year (starting 1 July 2015) incorporates all of these changes. This will enable a clear monitoring of BVL's flnancial performance.

13. BVL will fund the transfer through cash received from the sale of shares to TCC. These funds will be used to repay debt owed to TCC.

Calculation of Target Debt Level 14. Because we are expecting to complete this transacflon before 30 June and there are

a number of adjustments that could impact BVL's balance sheet after that date (eg asset valuaflons currenfly underway) it will be extremely difficult to predict exactly where the 80 :20 split will fall.

15. In addiflon the exact split of the 80:20 is less important going fonward than the agreed balance of the debt level that will be funded by TCC on an ongoing basis. This Target Debt Level will be used as the basis for future debt servicing funding as ouflined in secflon 7.5 ofthe Enduring Statement of Intent.

16. Level of debt that TCC will provide funding on will be calculated based on schedule ih Attachment 2. This is based on the following equaflon:

Balance sheet for BVL as at 31 May 2015 Plus Impact of Asset purchase from TCC Plus Impact of repayment of depreciation funds to TCC Plus Impact of asset revaluations (if known) Plus Impact of known June transacfions To give Esflmated Balance sheet as at 30 June 2015

17. Based on this the Target Debt Level is $8.6 Million.

18. Given the TCC interest rate of 6.0% this will mean that Council will fund debt servicing costs of $516,000. Any debt servicing costs in addition to this (arising from new capital expenditure - renewals funded from depreciation grants) will be required to fund by BVL from other operational sources (such as external revenue or cost savings).

Objective Ref: A6342870 Bay Venues Ltd: Balance Sheet - 2 -Restructure

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TaurangaCity <^ 5 23 June 2015

Issue of Shares

19. As part of a sponsorship deal BVL (then TCVL) received funding of $750,000 for use on capital projects. Council has agreed with BVL that this money is sflll available for use after the balance sheet restructure. On this basis the number of shares to be offered will need to be increased by 750,000.

20. This gives a total of 38,181,000 $1 shares to be issued by BVL. This can be seen on Attachment 2.

21. This is higher than the estimated value of the shares to be issued when it was esflmated in November 2014. This estimate was based on the June 2014 balance sheet and didn't include the current year's capital works programme and did not include the $750,000 adjustment.

Updated Loan agreement

22. TCC has a two way loan agreement with BVL. This agreement is several years old, refers to an old enflty (TCVL) and has a large portion of the debt about to become current.

23. It was considered a good time to update this agreement. The terms are essentially unchanged, except that TCC has agreed that the loan balance will not be required to be repaid in the next flve years (previously there was a mix of repayment terms) unless otherwise agreed in writing with TCC.

24. If a repayment date is not specifled the enflre loan will be current. This would result in BVL remaining in a technically insolvent position and conflnue the requirement for TCC to issue a letter of comfort each year. Removing the requirement to issue a letter of comfort was one of the principle reasons for undertaking the balance sheet restructure.

Disclosure in TCC reports

25. As borrowings relating to CCO's are linked to external borrowings TCC has typically included both the investment in CCOs and the related borrowings in the Corporate Treasury activity. I I

26. With the return of depreciaflon funding within TCC the investment in BVL (and the related debt) will be included in the indoor space acflvity. This will enable the BVL accounts to be consolidated into the Indoor Space activity on a stand-alone basis, allowing Council to understand the full picture.

27. The implicaflon is that rates requirements for the indoor space acflvity will increase signiflcantly. This will be offset within the Corporate Treasury activity and, as for the other transacflons above, there will be no impact on either rates or external debt for Council as a whole.

Objective Ref: A6342870 Bay Venues Ltd: Balance Sheet - 3 -Restructure

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Options 28. Council could decide not to complete the balance sheet restructure. This would be

contrary to the work that has been undertaken in relation to the development of a Letter of Expectation and an Enduring Statement of Expectation that are intended to provide clarity about TCC's expectations of BVL.

29. Council could elect not to take account of the $750,000 sponsorship deal in determining the number of shares to issue. This may jeopardise the sponsorship arrangement and could have an impact on other projects under consideraflon.

30. The loan agreement does not require updating and could be left unchanged. This will leave most of the remaining debt as being repayable on demand. Having a negaflve current raflo (current assets being less than current liabilifles) is likely to require Council to continue to provide a letter of comfort to BVL each year.

Consideration strategic Context 31. Council has expended considerable effort in developing a Letter of Expectation and

an Enduring Statement of Expectation in conjunction with BVL over the past year. The intenflon has been to clarify Council's expectations of BVL.

32. The balance sheet restructure is a key part of this process as it removes the ongoing issue with BVL being technically insolvent and cleariy identifles where the responsibility for funding new projects sits.

Community 33. The community were informed of the balance sheet restructure as part of the

2015/25 LTP coriisultaflon. I

Significance and Engagement 34. Under the Signiflcance and Engagement Policv 2014. this transacflon has been

assessed as having medium signiflcance.

35. For this reason it was included in the consultaflon for the 2015-25 Long Term Plan.

Implementation 36. Once Council has approved the balance sheet restructure and the purchase of

shares, BVL will undertake a similar resoluflon on 26 June 2015.

37. TCC will borrow the funds to purchase shares from BVL on 29 June 2015. BVL will repay debt on 29 June 2015.

38. All resoluflons, transfers and agreements have been reviewed (or prepared) by independent legal and tax advisors.

Objective Ref: A6342870 Bay Venues Ltd: Balance Sheet - 4 -Restructure

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258 Council

23 June 2015

Attachments

No. Title

1. Extract of Minutes from Council meeting on 17 November 2014 Objective: ID:: A6342870

2. Calculation of targeted debt level and number of shares to be issued. Objective: ID: A 6342887

Signatories Authors Frazer Smith, CCO & Finance Specialist Z^-^-^,

Authorisers Jaine Lovell-Gadd, General Manager: Organisational Seivices

Bay Venues Ltd: Balance Sheet Restructure

Objective Ref: A6342870

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Attachment 1 Council

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Attachment 1

Extract of Minutes from Council meeting on 17 November 2014

FROM: COUNCIL 17.11.14

M14/83.16 REVIEW OF BAY VENUES LTD (BVL) FUNDING OPTIONS (DC 325)

Points Raised by Elected Members

• Noted that Council would retain control of the transferred assets.

Moved Cr Cowley/Seconded Cr Edlin

That it be Resolved

That Council: (a) For the purposes of consultation as part of the Long Term

Plan: i. Agree to transfer the following assets to Bay

Venues Ltd for the beginning of the 2015/16 financial year:

1. Queen Elizabeth Youth Centre and Memorial Hall (excluding Daniel's leased building)

2. Mt Maunganui Sports Centre 3. Bethlehem Hall 4. Greerton Community Hall 5. Matua Hall 6. Tauriko Hall i 7. Welcome Bay Hall 8. Arataki Community Centre 9. Papamoa Sport and Recreation Centre.

ii. Recapitalise BVL, sufficient to achieve a debt to equity ratio of 20: 80. This recapitalisation will not have any Impact on external council debt or total rates requirements.

iii. To reduce the amount of rate funding Into BVL to match the debt servicing costs on the initial debt established through the achievement of a 20: 80 debt to equity ratio. This funding level is only to be changed based on:

1. Changes on interest rates on the initial debt 2. Any new projects where Council agrees a

ratepayer funded debt contribution is appropriate.

Bay Venues Ltd: Balance Sheet Restructure

Objective Ref: A6342870

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Council

23 June 2015

iv. For clarity, the general expectation for new capital projects is that they will need to generate sufficient additional revenue to cover interest costs as well as all other project costs.

V. Any funds collected as a result of depreciation charges on BVL assete will be retained by Council. Renewals will be funded by direct grants to BVL from these funds.

vi. The unspent balance of previously funded depreciation reserves will be repaid to Council.

CARRIED

Bay Venues Ltd: Balance Sheet Restructure

Objective Ref: A6342870

Council Report DC201 23 June 2015 Attachment 2 BVL Calculation of Target Debt Level for Balance Sheet Restructure

Assets Current Assets Cash other Current Assets Total Current Assets

31 May 2015 $000's

114 998

1,112

261 Building Purchase

SOOO's

June Capex expected

$000's

Depreciation Repayment

SOOO's Estimate SOOO's

114 998

1,112

Attachment 2

Equity Adj SOOO's

Restructure SOOO's

114 998

1,112

Non Current Assets Property, Plant & Equipment Total Non Current Assets

Total Assets

Liabilities Current Liabilities other Current Uabilities Loan from TCC Total Current Liabilities

Non Current Liabilities Loan from TCC Deferred Tax Total Non Current Liabilities

Total Liabilities Net Assets

Equity Share Capital P,P & E Revaluation Reserve Other Reserves Retained Earnings Total Equity

89,122 89,122

90,234

2,918 5,551 8,469

36,211 9,065

45,276

53,745 36,489

36,861 17,617

429 (18,418) 36,489

11,051 11,051

11,051

11,051

11,051

11,051

1,527 1,527

1,527

1,527

1,527

1,527 0

2,721

2,721

2,721 (2,721)

(2,721) (2,721)

101,700 101,700

102,812

2,918 5,551 8,469

40,459 9,065

49,524

57,993 44,819

47,912 17,617

429 (21,139) 44,819

(37,431)

(37,431)

(37,431) 37,431

37,431

37,431

101,700 101,700

102,812

2,918 5,551 8,469

3,028 9,065 12,093

20,562 82,250

85,343 17,617

429 (21,139) 82,250

Balance of Debt after restructure (total of current and term portion) Target Debt Level - rounded to nearest $100,000)

Base number Number of Sl shares to be issued Adjusted for sponsorship deal Base number Number of $1 shares to be issued

8,579 8,600,000

37,431,000 750,000

38,181,000

Ratio's Debt Equity (Equity/Total Assets) 40.4% 43.6% 80.0%

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