Preferred Option (subject to consultation and council approval) - Sale of Aurora Energy
The Council’s preferred option is to sell Aurora Energy, repay Aurora Energy’s debt and establish a diversified investment fund worth many hundreds of millions of dollars to create income for Council. The capital in the diversified investment fund would be protected (including against inflation) to create an intergenerational asset. Council would decide how to use income from the fund through the usual annual plan and long-terms plan processes. Council could use the income for such things as the reduction in Council debt or to offset rate increases.
Advantages
- Increase income to Council: The income to Council from a diversified investment fund is expected to be more consistent and higher compared to Aurora Energy’s dividend forecasts. The income from the diversified investment fund would be available for the benefit of ratepayers such as repaying Council debt or offsetting rates increases.
- Reduce debt: A sale of Aurora Energy would reduce the Council Group debt, strengthen financial ratios and help protect Council’s credit rating.
- Premium value available in market now: Recent sales evidence indicates that major infrastructure investors are currently willing to pay premiums to buy regulated infrastructure businesses.
- Reduce risk: A professionally managed diversified investment fund would reduce risk because risks would be spread across many assets. It would also improve liquidity.
Disadvantages
- Potential future increase in value: Council would not get the benefit of any potential capital growth in the value of Aurora Energy. In other words, Council may be able to sell Aurora Energy at a higher price in the future.
- Regulated asset: Council would no longer own a regulated asset that is a natural monopoly.
- Potential for future dividends: If Council keeps Aurora Energy for the long term, Council may receive dividends in the future. With continued investment there is the potential for future dividends, but this is uncertain.
- Returns may vary: An investment fund may be subject to market fluctuations, although this would be managed through having a fund that is diversified across many different assets.
- Ownership control: Council (through DCHL) monitors Aurora Energy's performance and has some ability to influence Aurora Energy's direction, to promote Council interests. Council would no longer monitor Aurora Energy or have potential influence over Aurora Energy if it is sold. Oversight and monitoring would be by the Commerce Commission and Electricity Authority.
Alternative Option: Keep Aurora Energy
The alternative to keep Aurora Energy and not sell. This option would mean that Council, through DCHL, retains 100% ownership of Aurora Energy.
Advantages
- Potential increase in value: Aurora Energy is likely to continue to increase in value with continued investment and may generate increased profits over time. Council may be able to sell Aurora Energy at a higher price later. Premium value available in the market now.
- Regulated asset: Council continues to own a regulated asset that is a natural monopoly.
- Potential for dividends (income) in long term: If Council kept Aurora Energy for the long term, Council may receive dividends. However, it is uncertain when Council would receive dividends and what the amount of any dividends would be.
- Ownership control: Council (through DCHL) monitors Aurora Energy's performance and has some ability to potentially influence Aurora Energy's direction, to promote Council interests. Oversight and monitoring would be by the Commerce Commission and Electricity Authority.
Disadvantages
- Low dividends (income) to Council in short to medium term: It is uncertain when Council will receive dividends (income) from Aurora Energy and what the amount of any dividends would be. Any dividends in the short to medium term would likely be debt funded.
- Increase debt: Interest would continue to be payable on Aurora Energy’s debt which is likely to increase to fund capital expenditure on Aurora Energy’s network.
- Risk remains: Aurora Energy is a single asset in one industry and in one region, as opposed to a diversified investment fund that would have risk spread across many assets.
- Premium value may not be available later: Recent sales evidence indicates that major infrastructure investors are currently willing to pay premiums to buy regulated infrastructure businesses. However, there is no guarantee that a premium would be available in the market in later years.