Local bodies to borrow $45.6m for power bid

By Mark Reynolds

The Palmerston North City Council expects to go outside its usual borrowing guidelines to buy control of its local power lines company - a position the local authority insists it was forced into.

The council and the locally-elected CentralPower Electricity Trust will have to borrow up to $45.6 million to increase their stake in Palmerston North-based CentralPower to 59 per cent from 42 per cent.

The elected bodies say the investment is necessary to prevent a Mexican standoff with CentralPower's other main shareholder, Powerco of New Plymouth, which is also controlled by local authorities.

The two cities are tussling for control of assets that if merged would create a $400 million power lines company in the central North Island and could deliver savings of 10-15 per cent in transmission costs for consumers.

The merger might still go ahead, but CentralPower is keen for it to happen on terms that are set by people in Manawatu rather than Taranaki. The situation is a test for changes to electricity laws introduced by Energy Minister Max Bradford earlier this year.

An unwritten goal of the law change was to get companies like Powerco and CentralPower to become more efficient by pooling resources. But both companies want to lead the change and this has resulted in the expensive bidding war for shares. Palmerston North council and community trust announced last week that they would exercise a preemptive right to buy a 15 per cent stake of CentralPower from investment company Infratil. Infratil had earlier announced that Powerco had offered to buy the stake.

The council and trust are buying the shares for $4.31 each, or a total of $45.6 million. The trust has $5 million in cash to contribute to the deal but the purchase is expected to be substantially debt funded. Expected dividend earnings from the 15 per cent stake, or 10.6 million shares, are expected to fall short of the borrowing costs for the deal.

Palmerston North city manager Michael Willis was reported yesterday as saying that the company would probably have to amend its borrowing management policy in one area to complete the purchase. But he said the council had been forced to take action to prevent a loss of value in its existing investment in the company.

Jim McElwain, a manager with accounting firm PricewaterhouseCoopers, who is advising the council on the purchase, said the decision was financially prudent.

"The council had a fiduciary responsibility to protect its position. The council did not initiate the transaction," he said.

"A situation where the trust and council owned 43 per cent (of CentralPower) and Powerco/Infratil owned 37 per cent ... would be a Power New Zealand situation all over again, with three or four years of shareholders fighting each other and not making any progress.

"The key point is that with the council and the trust now having 59 per cent, they can provide clear direction for CentralPower in a way that would not have been possible if there had been a stalemate."

Mr McElwain said the new controlling shareholders had a strong economic incentive to move the company forward.