Just like a lot of other ratepayers I have been following the debate and ensuing discussions around the proposed sell-off of Aurora Energy over the last few months.
As I am pretty "risk averse", initially the idea of selling to a third party and paying off the term debt (at 31.12.23) of $511 million seemed a good idea.
However, the good thing about ongoing discussion and debate is that it creates more research and looking into a variety of possible solutions.
Today I’m going to present you as our councillors with another option that probably seems to you to have come "out of left field". However, I’m surprised also that as part of the process that DCHL have not mentioned this example.
It is the experience of the Auckland City region in divesting their lines company, and from what I can see has been very successful over the years, especially for their ratepayers and lines users.
I have also seen that a lot of ratepayers have been vocal about the need for us to keep Aurora, but I feel that none of those people have presented solutions for the ongoing financial bind Aurora is in, as well as reducing the DCC debt.
Financially it appears to have been a very hard road for the management of Aurora for the last 20 or more years as they have been advised to pay out at times more than usual dividends and have the ongoing need to keep renewing and maintaining the lines. It seems that this work has then been paid for by the ever-increasing debt.
I would have then found it hard in management to continually have to go "cap in hand" to DCHL/DCC to get the funds for this, as it is a regularly needed part of capital works in a lines company (recently quoted at being at least $200m over next 10 years).
I am now aware of the Auckland City Council experience whereby in 1993 the city transferred 100% of the shares of their lines company into a trust with consumers/ratepayers as beneficiaries. The lines company is now called Vector Energy Ltd, a public company.
After a further capital-raising exercise in 2005, this trust (now named Entrust, representing the users) still has a majority shareholding of 75.1% of Vector.
At year end, significant dividends are then paid out directly to consumers/ratepayers who can individually register their interest online with the trust. (I am assuming that the board of trustees would still include someone from the council such as CEO).
I really would love to see that transformation of ownership of Aurora for the people here in Dunedin.
Looking at your latest updated estimated Aurora Energy profit at June 30, 2024 (from your finance committee meeting 7.8.24) there is an estimated profit of 35.9m, significantly more than forecast.
But still after monetary commitments net dispersal of this amount would seem to be as follows: net profit for year 2024 35.9m; less provision for tax @ 28% 10.05m; provision for capital works @10% of 200m, 20.00mill. Therefore, available for dividend, $5.85m.
But there is still accumulated the debt of $511m. This is clearly dragging the company returns down. In the 2023 year the company had debt servicing of $26m. I’m pretty sure this would have probably been pointed out to you all in your workshops.
So, if the debt was paid off, and returns continue to be consistent, it seems that the company would make just over $60m annually in 2025. This would be more than enough to pay tax, put aside at least $20m a year for estimated ongoing capital works over the next 10 years, as well as pay out a dividend that could benefit ratepayers directly if the company shares were ring-fenced into a trust.
There is also the opportunity in 2024 for Aurora to increase its line charges.
It seems to me, that we the ratepayers need to move to protect our asset Aurora Energy Ltd and not totally sell out to another party outside of the city, but also come up with a solution. We are being told by DCHL that the value of Aurora Assets (without debt) could be more than $1 billion. So, raising capital of another $500m to repay the debt would seem to create less than a further 50% shareholding.
Aurora currently has 10m shares. Why not do a capital-raising issue of a further 5m shares at an appropriate price? Make them firstly available just for ratepaying/user individuals, of the Dunedin City/or greater Otago area.
If the full amount is not raised within the city/province then open the remainder of those shares to others. If the majority 10m shares are still owned by a trust for the people, then we would still retain a majority shareholding of Aurora.
It has been suggested to change to a diversified managed fund to replace our singular local (all in one basket) Aurora investment company. Yes, technically some would say we are not diversified enough.
But after spending many years as a tax advisor and also eight rewarding years as a trustee on the Otago Community Trust in the early 2000s I am also very conscious of the fluctuations of returns on managed funds from year to year.
When returns are good, they can be astronomical. But when global funds drop below that "green line of comfort" towards the red line that portfolio managers have provided trustees with it can be very stressful. Especially when in a particular year you are unable to provide your beneficiaries, community groups as much as they have relied on in previous years.
Yes, keeping Aurora Energy means the investment is "all in the same basket" but it’s also a very certain, consistent type of essential income stream. People will always need power at a consistent level.
And ... if the day comes when there is no income from electricity, then for sure global investment funds would have previously also collapsed.
I have always been impressed with Aurora Energy management and personnel. They are forward-thinking and have always been open to discussions on future improvements.
But will that change if they are owned by a global or out of Dunedin owner? Please mull over the possibilities I have raised, so that we are not losing Aurora Energy ownership from our city or region.
— Raewynne Pedofski is a Dunedin tax adviser.
