Consistent returns and reduced risk have been identified as key benefits for the Dunedin City Council if a proposed sale of Aurora Energy goes ahead.
If it does not, the value of the company would increase over time, but so would borrowing, councillors have been told.
Selling the electricity distribution company would enable a diversified investment fund worth hundreds of millions of dollars to be set up — generating consistent income, a report for councillors said.
Use of the fund ‘‘could include such things as paying down debt or offsetting rates’’, it said.
By contrast, holding on to the company would carry risks that might include lack of dividends for a decade and increased pressure on council group debt.
The council decided last week to consult the public on a potential sale of the company, and councillors are due to discuss the issue tomorrow.
A submissions period is set to run between March 28 and May 2, before hearings in May.
A decision on whether to approve a sale of Aurora would be made after the council has considered public feedback.
Aurora Energy is New Zealand’s seventh-largest electricity network by customer connections, supplying electricity to more than 90,000 homes, farms and businesses in Dunedin, Central Otago and Queenstown Lakes.
Any sale price is expected to comfortably exceed $1 billion and allow the council to reduce its group debt by about $576 million.
The company has historically been criticised for neglecting upkeep of its network but there has since been major investment in asset replacement and renewal.
Both the council and the company were labelled in the report as ‘‘capital intensive’’.
The council summarised the view of Dunedin City Holdings Ltd (DCHL), which recommended the sale of its subsidiary, Aurora.
Reasons included increasing income to the council by having a more consistent and sustainable income stream, reducing council group debt by paying down Aurora’s debt, avoiding group debt rising to fund Aurora’s future capital requirements and reducing risk to the council by having a more diversified asset portfolio.
A sale would reduce risk to the council’s future credit ratings, debt covenants and borrowing costs, DCHL said.
‘‘Aurora is delivering reasonable capital growth but, as an infrastructure business with growing demand, significant capital expenditure requirements are likely to require more debt.
‘‘Should the proposal go ahead, interest in purchasing Aurora is expected to be high and a premium sale price could be expected.
‘‘Investing the proceeds in a diversified investment fund, with risk diversified across many different assets, rather than just one, will enable long-run higher cash returns that are more sustainable.’’
The council report noted Aurora had not generated dividends since 2017.
‘‘Aurora may be able to deliver dividends in the future, but there is high uncertainty around the amount of the dividends due to inherent uncertainties in Aurora’s capital reinvestment requirements, regulatory settings and ordinary business risks.’’
If it remained a council company, producing dividends could place pressure on the group debt position.
‘‘Any dividends from Aurora over the next 10 years would likely be based on increased capital value and funded by debt,’’ the report said.
Aurora’s electricity network was largely built in the 1950s and 1960s, the report said.
‘‘It now requires significant capital investment to renew aged assets, build resilience in its network, meet population growth in Central Otago and meet greater demand for electricity due to decarbonisation.’’
The council is planning extensive consultation about the proposed sale.
This includes printing 7000 copies of a consultation document, producing 63,000 copies of a postcard with QR code distributed around Dunedin and running drop-in sessions.
