Aurora Energy in Dunedin for sale – expected to be hotly sought after

Otago Lines said it could not “absolutely” guarantee Aurora Energy would receive a premium for its electricity sales, but expected it to be well received.

Aurora Energy, which provides electricity to more than 200,000 people in the Otago region, has more than $800 million in assets and expects debt to reach $570 million by the middle of next year.

Dunedin City Council is selling the company in an effort to pay down debt and use the hundreds of millions of dollars expected to remain to create an investment fund with more sustainable income.

During public consultation, the majority of opinions opposed the potential sale, citing concerns that the new owner would increase line tolls, that a sale would only be a one-off, short-term cash gain and that the company was a strategic asset owned by the city council.

The council’s Dunedin City Holdings Limited, which owns Aurora Energy’s portfolio, asked for the opportunity to respond to public feedback and said there were strong reasons to proceed with the project.

The group sought advice from independent experts to shed light on the public’s concerns and will present its recommendations at a council workshop on Monday.

Dunedin City Holdings chairman Tim Loan said the board believed going ahead with the sale was the right decision for the city council, but public feedback was vital.

“We want to assist councillors in making informed decisions that are in the best interest of our community,” he said.

Aurora Energy forecasts that capital expenditure of about $1.1 billion may be required between 2025 and 2034 due to the need to replace ageing assets, high growth in the Central Otago and Queenstown Lakes regions, inflation and climate change resilience.

Consultancy Mafic found that not supporting the investment would affect the quality of service and the ability to meet customer needs, while owning Aurora Energy could affect the council’s borrowing capacity and its credit quality.

“Aurora has significantly dragged down the council’s credit metrics. This is expected to deteriorate further over time and there is a risk of a credit rating downgrade,” Mafic said.

Board member Greg Anderson said Aurora Energy is a high-quality asset that will rise in value if it is retained, but the challenge is converting that growing value into cash.

“How will this benefit future taxpayers of Dunedin? It either needs to generate a cash dividend or it needs to be sold at some point in the future,” Anderson said.

“That’s the only way we can hold onto this asset and create value over the next 10 years.”

He said the board believed the acquisition would be priced “significantly above current market book value” and that it was unclear whether such a premium could be achieved in the future.

Councillor Jim O’Malley questioned what solid evidence Dunedin City Holdings Limited had to show it would get a premium for selling Aurora Energy now.

Anderson said they were confident about the short-term outlook but had no quantifiable indicators other than the enquiries received and the interest generated when Tai Rāwhiti’s line company was listed two years ago.

“I can’t give you an absolute guarantee, but I’m very confident that this asset will be in high demand,” Anderson said.

“In order to give councillors confidence, we are not looking to sell this asset at any price, so if it’s not worth that, we won’t sell it.”

Sapere’s proposal looks at how regulations might affect line fees and whether new owners could defer maintenance or reduce investments to save costs.

Mr Sapere said the inquiry found lines could not charge more than allowed by the Commerce Commission, which also sets quality and reliability standards, and consumers would be well protected by the regulatory regime regardless of who owned the company.

“After years of under-maintenance and under-investment, Aurora is currently repairing, upgrading and maintaining its network.

“Aurora’s owners will have to be more resilient and forward-looking than they normally would be, and if (the council/Dunedin City Holdings Ltd) don’t have the resilience needed to get through the next few years, then consumers would be better off choosing another party.”

Aging assets and historical underinvestment led to an increase in outages between 2016 and 2019, leaving Aurora Energy facing nearly $5 million fine.

Councilman Lee Vandervis questioned how effective the regulations were if Aurora Energy underinvested during the regulations and did not maintain them for years.

Toby Stevenson of Sapere said the Commerce Commission did conduct a close review of the company at the time, but that the disclosure requirements and scrutiny of asset management plans were now more comprehensive.

“I don’t think it would have taken the Commerce Commission this long to identify the underinvestment and decline in quality, and the consequences would have been seen much sooner.”

Aurora Energy Chairman Steve Thompson said the board’s priority is to ensure future funding needs are met whether or not the line company is sold.

“I think it will be more than a decade before we can generate enough on a free cash flow basis to fund our capital program, at least not including dividends,” he said.

He said any dividends paid for the foreseeable future would be financed through debt.

Thompson said the sale of the company was a shareholder issue but said relations with the council had always been good.

“This is not a particular concern of the company in any way. The position of the Aurora Board and management is that we need shareholders to be able to provide the capital or debt we need to cover our cash flow shortfalls.

“As you can see, the business is currently unable to generate sufficient cash on its own to meet these requirements.”

He said if the council decided not to sell Aurora Energy, the board would treat it as an investment commitment so the company could meet its future funding needs.

He strongly opposed any partial sale of assets, saying it would be a bad decision.