Second thoughts on Aurora sale?

The extent of opposition to the proposed sale of electricity lines company Aurora would have surprised many Dunedin City councillors.

They had been presented with the view the council company should be sold, and they backed the sale consultation process 13-1.

Councillors have since had the chance to hear differing points of view and different numbers and to see the magnitude of disapproval.

The decision was due about now but is delayed, likely to next month. Dunedin City Holdings Ltd (DCHL) wanted time to respond to what it calls misleading and inaccurate information among the public presentations.

Given the slant of the consultation document, this could be considered a bit rich. It is questionable how much from the presentations was, in fact, wrong.

Supposedly, "a good chunk" of DCHL’s response will be made public as it should be in the interests of fairness. Submitters should have the right to see the criticisms. DCHL’s comments should face public scrutiny.

After all, DCHL has hung its hat on the advantages of selling and will, almost inevitably, continue with that line.

The consultation information about Aurora itself presents a chart beginning at 2011 illustrating how Aurora’s dividends to the council have fallen away.

It fails to show the high dividends before that year when the business was a cash cow. We have since learned that too much was sucked out and insufficient money was reinvested in maintenance and upgrades.

The summary also notes the sizeable Aurora debt and the predicted large investment needed over the next decade ($800 million). The net profit for the year ended June 2023 is there ($11m), but not the increased profits predicted after that.

Why not produce a graph illustrating this? Instead, the second graph simply has parallels with the first, investment income received by the council from DCHL. The documents have been described as a sales pitch.

The limited information and its overall partiality have meant the public has been forced to make various assumptions.

Basically, DCHL has two net revenue sources — City Forests and Aurora. They complement each other. Forestry, dealing in a commodity, produces erratic business. Aurora, an infrastructure monopoly regulated by the Commerce Commission, should generate regular and consistent profits.

Domestic electricity lines. PHOTO: AURORA
Domestic electricity lines. PHOTO: AURORA
DCHL says the case to sell is "compelling"; Aurora’s debt could be paid off (projected at $576m next year) and the balance invested in a diversified fund. Revenue from the fund could help subsidise rates.

It is argued the fund would provide consistent returns and has the advantage of not being one industry in one region.

However, even diversified funds rise and fall — in contrast to what should be the guaranteed income of a lines company.

Dividends to the council would be nil or limited for a few years. But net profits should rise consistently and substantially. Those profits are increasing the company’s worth, and therefore the city council as owner, for future generations.

These returns should be higher than any diversified fund. Aurora’s Statement of Intent predicts net profit climbing to $31.6m for the year ending June 2026. Despite high reinvestment, debt levels will be manageable, and dividends should be forthcoming.

Instead, the council wants dividends sooner to take pressure off in the shorter term. The money will make it less difficult for the council to spend, reducing the necessity for strict financial discipline.

Is that an underlying reason why councillors with a leftish lean, often the biggest spenders, favoured selling? Usually, these politicians support public ownership of key assets. Might those councillors be having second thoughts?

One option is to set a minimum price (a reserve). That would have to be a long way north of $1 billion because of the expected rising profits. Is the council, in effect, admitting that someone else can govern the company better than it can?

Putting to one side emotional, strategic or philosophical points, the council’s investment case is unconvincing.

Aurora should be an increasingly valuable asset able to return regular and increasing dividends.