Impact of a proposed sale

Impact of a proposed sale of Aurora Energy on Council’s finances

Council has clearly signalled to DCHL its desire for higher and more consistent, sustainable cash returns from its investments. Council is looking for alternative sources of funding (i.e., sources other than rates or debt) to manage its budgets.

While a sale of Aurora Energy would not make a difference on this year’s proposed rate increase of 17.5% , it would have an effect on future Council budgets as it could help Council to do any one or a mixture of the following:

• Minimise rates increases in the future.
• Repay debt sooner.
• Borrow less.
• Council’s income will match its expenditure sooner.

If Aurora Energy is not sold, it may generate dividends in the future but:

• The amount and timing of any dividends is uncertain.
• Any dividends from Aurora Energy in the medium term would probably be funded by debt, which would increase the Council Group debt.
• Given Aurora Energy’s capital requirements for its network, Council expects that for the next decade at least, any dividends from Aurora Energy would be significantly less than the amount that it would receive from a diversified investment fund.

Impact of a proposed sale of Aurora Energy on the Council Group finances

Aurora Energy is delivering reasonable capital growth, but, as an infrastructure business with growing demand, it is likely to require more debt to fund ongoing renewals and improvements in its network.

This is an issue because Council also has significant expenditure requirements. For example, Council needs funds for roading and three waters improvements, meaning that both Council and Aurora Energy are capital intensive and facing increasing borrowing.

If Aurora Energy is sold and its debt of approximately $576 million is repaid, there would be no need to borrow further to fund capital expenditure on Aurora Energy’s network.

A sale of Aurora Energy would reduce the Council Group debt and would reduce associated risks.

If Aurora Energy is not sold, then in the future, provided the network is adequately maintained and improvements continue, the capital value of Aurora Energy will increase and at some point, beyond the medium term, it will likely become profitable.

Impact of a proposed sale on the Council’s ability to influence Aurora Energy’s future plans

Council (via DCHL) monitors Aurora Energy's performance and currently has some ability to influence Aurora Energy's direction, to promote Council interests. Electricity businesses are not categorised as council-controlled organisations (CCO) under section 6(4)(a) of the Local Government Act 2002 (LGA), so Council's potential influence is different for Aurora Energy than it is for Council's subsidiary companies that are CCOs. While Council currently has limited ability to influence Aurora Energy plans, if sold it would have no influence. Oversight and monitoring would be by the Commerce Commission and Electricity Authority.

DCHL’s Recommendation

DCHL has advised that major infrastructure investors, with different objectives to Council’s objectives, are willing to pay attractive premiums to buy regulated infrastructure businesses. Aurora Energy is one of these businesses. This creates an opportunity to realise value that might not be there in the future. DCHL’s advice to Council is that now is a good time to sell to realise a price premium.

DCHL has advised that, although Council may be able to sell Aurora Energy for a higher price in later years, the advantages of selling Aurora Energy far outweigh the advantages of keeping Aurora Energy. DCHL expects that a sale of Aurora Energy would increase income to Council, reduce risk and reduce Council Group debt.

DCHL sought and obtained a range of independent and professional advice on a potential sale of Aurora Energy. After full consideration of the independent and professional advice, DCHL concluded that the case for selling Aurora Energy is compelling and has recommended that Council consider a sale of Aurora Energy.

The proposed new fund

DCHL believes the most appropriate approach to any fund established following a sale of Aurora Energy is to create a diversified investment fund, similar to the existing Waipori Fund, under professional fund management, applying the principles of evidence-based investing.

Council would have mechanisms to ensure that the capital of the new fund is protected (including against inflation). This is to ensure that the new fund is an intergenerational asset. Potential mechanisms include:

• Having a statement of investment policy and objectives (a SIPO).
• Council adding the proposed new fund as a “significant asset” under Council’s Significance and Engagement Policy so that it can only be changed through a consultation process; and/or
• Amending Council’s Standing Orders to include a provision similar to that of the Waipori Fund which requires a 75% majority of votes for the divestment of all or any part of the capital in the Waipori Fund.

Status Quo Versus the Sale

The table included summarises the difference between keeping Aurora Energy and selling Aurora Energy to repay Aurora Energy’s debt and to establish a diversified investment fund worth many hundreds of millions of dollars .

• Is it an option to sell only part of Aurora Energy?

  DCHL considered the possibility of selling only part of Aurora Energy (e.g., 50% of its shares or a specific part of the network), but DCHL does not recommend this approach. DCHL expects a higher premium and a higher probability of a successful outcome if 100% of Aurora Energy is sold. Investors typically pay higher premiums for full control (100%) or a controlling interest (>50%). DCHL would therefore expect less investor interest, and a significantly lower valuation, for a minority interest (<50%) in the business. Similarly, a lower premium would be expected from selling part of the network. As one of the largest electricity distribution businesses in New Zealand, Aurora Energy has benefits of scale, including cost efficiencies and the ability to attract and retain talent. Splitting the business would be difficult to carry out and reduce returns to both a purchaser and to Council.

What does a sale mean?

• What does the proposed sale of Aurora Energy mean for me as a ratepayer?

  The Council already owns a diversified investment fund, called the Waipori Fund. That fund was established from the sale proceeds of the Waipori electricity generation scheme. The Waipori Fund has increased in value over time and was valued at approximately $100 million as of 31 December 2023. One of the objectives of the Waipori Fund is to protect its value over time against inflation. Income earned on the fund is available to Council.

  The new fund from the proposed sale of Aurora Energy would not make a difference to the 17.5% rate increase proposed for 2024/25, but Council expects that a new fund worth many hundreds of millions of dollars would generate a future income stream for Council.

  Council would need to plan how to apply revenue received through the new fund, but potential uses include reducing Council debt and the offset of rates increases. Council would decide how to use the income through the usual annual plan and long-term plan processes.

• What does the proposed sale of Aurora Energy mean for me as an energy customer?

  The Commerce Commission sets price and quality controls across the sector, ensuring that excessive profits are not earned and the quality of service to customers is maintained, regardless of Aurora Energy’s ownership.

  If Aurora Energy is sold, a new owner would be subject to the same regulation as currently applies under Council’s ownership. Customers would notice very little difference as the Commerce Commission would continue to ensure that Aurora Energy sets prices reflecting its operating and maintenance costs. The Commerce Commission would also continue to ensure that customers who rely on the network for electricity would continue to experience reliable and safe electricity distribution.

  If sold, customers may benefit from a new owner with the scale and ability to make necessary long-term investments, ensuring the network can meet growth and electrification demands.

• Who might buy Aurora Energy

  New Zealand based investors, such as major superannuation funds, may be interested in buying Aurora Energy. Interest in buying the company may also come from overseas investors.

  Aurora Energy doesn't need to be publicly owned to protect the community and consumers because regulatory rules in place already look after consumers. There are electricity distribution companies in New Zealand that are currently owned by overseas investors.

  Under the Overseas Investment Act 2005, no overseas person or entity will be able to purchase Aurora Energy unless they first obtain Overseas Investment Office (OIO) consent. The OIO will only grant consent if it is satisfied the overseas investment will, or is likely to, benefit New Zealand and that the proposed purchaser is not unsuitable to own or control Aurora Energy.