Frequently Asked Questions

Alpine Energy Consultation

Frequently Asked Questions

Below are a list of questions you may have about this proposal. If you have further questions, please let us know so we can update this page at aelproposal@timdc.govt.nz.

What does Alpine Energy do?

The Alpine Energy distribution network runs from the Rangitata River in the north to the Waitaki River in the south and reaches as far inland as Mount Cook. The distribution area covers over 10,000 km2 and includes 4,138 km of overhead and underground electricity lines.

As there is no competition in local electricity distribution, prices are regulated by the Commerce Commission, and electricity distributors cannot change their prices without Commerce Commission approval.

Alpine Energy is primarily a lines business. As an electricity distribution company it owns and maintains the power lines used to transfer electricity from the national transmission grid to consumers.

In addition to the distribution of electricity in South Canterbury, Alpine Energy owns, or part owns several other companies.

Company
Alpine Energy’s Shareholding percentage
Netcon Limited (Netcon)
Netcon constructs and maintains substations, overhead and underground lines and associated equipment.
100%
Infratec Limited (Infratec)
100% owned by Netcon Limited. Infratec specialises in design, construction and maintenance for all electrical management and supply requirements.
100%
Rockgas Timaru Limited
A liquid gas supplier to commercial and residential customers.
50%
On Metering Limited
A joint venture between Alpine Energy Limited and Network Tasman Limited. On Metering is a member of the SmartCo Group which is deploying over 250,000 meters across New Zealand.
50%
SmartCo Limited
Provides high quality meter services to energy retailers.
14.29%

TDHL currently gets $4.7M from its Alpine Energy investment per annum. How much will TDHL and the Council get annually if this proposal is approved?

TDHL and the Council will still receive income and financial benefits if it sells its shares in Alpine Energy.

Firstly, the Council will save $1.1 million a year by repaying debt and so it will have lower interest costs.  These savings can be invested in a Reserve Fund and interest earned on them.

Secondly, TDHL will still receive income from the investments it makes on the sale proceeds of its shares in Alpine Energy.  How much depends on the average return it gets on the investments it makes after selling its shares.  The table below shows the three scenarios over the ten-year period:

Average return before taxIncrease in investment portfolio valueInvestment Portfolio Value at end of ten year period
5%$16 million$104 million
8%$43 million$130 million
10%$63 million$151 million

If it makes an average of 5% per year before tax over 10 years, TDHL’s portfolio will increase in value by approximately $16 million

If it makes an average of 8% per year before tax over 10 years, TDHL’s portfolio will increase in value by approximately $43 million.

If it makes an average of 10% per year before tax over 10 years, TDHL’s portfolio will increase in value by approximately $63 million

TDHL and the Council are confident they would get at least the equivalent of the current $4.7 million from the existing Alpine Energy investment, from a combination of savings from interest costs on debt (as a result of paying off $22.1 million of debt) and investment returns on prudent investment of the remaining funds.

Why does TDHL not join with other Councils to get majority control and greater influence over Alpine Energy’s future direction?

The current ownership structure of Alpine Energy means Mackenzie and Waimate District Councils own a parcel of shares. While TDHL holds the most shares, we cannot influence the decisions of the other shareholders. TDHL also believes that it is a prudent time to diversify its holdings, for the reasons outlined earlier in this document.

If another Council sells its portion of the Alpine Energy’s shares, this will mean that majority control is no longer in public ownership. What will be the impact of this?

Alpine Energy will still operate within a regulated market where its prices for lines charges are controlled by the Commerce Commission, which means there are limitations on how much it can charge.  Line Trust South Canterbury owns 40% of Alpine Energy shares, with a postal vote required should Line Trust South Canterbury propose to sell its shares in the company. Other Councils are also required to consult on any sale of Alpine Energy shares.

Why will this proposal not impact electricity consumers?

What makes up the electricity price is controlled by a range of factors including:

  • The demand for power
  • The amount of electricity generation supply available (e.g. if there are low hydro storage levels the price of generation goes up as it is in short supply and this pushes the price up)
  • The amount that is charged by Transpower for operating the national grid
  • The amount the retailers charge – this is who a householder has their contract with

This shows there are multiple parties in the supply of electricity and Alpine Energy is one player in a large complex market.  TDHL has a lot of money tied up in this and it cannot control what happens.

What is the value of TDHL’s shareholding in Alpine Energy?

As part of the due diligence in undertaking this review, TDHL has obtained an independent valuation for financial reporting purposes of TDHL’s shareholding in Alpine Energy. This valuation has indicated that the shares are worth in the range of $87.6- $97.9 million.

Will this proposal reduce my rates bill?

Currently, income received from TDHL reduces an average residential rates bill by over $100 per annum. The proposal will continue this situation, and over time is likely to increase the proportion that can be used to offset rates bills, as there is less reliance on external borrowing and greater investment returns.

This proposal gives Council greater control over non-rate funded sources of revenue. This means it can use these funds for projects that would either not occur or would require greater increases in rates. For example, the savings on the interest over 10 years will approximately equate to the funding required for the Theatre Royal upgrade.

If TDHL does not have significant influence over Alpine Energy, why will this be any different for anyone who purchases the shares?

Any new investor is likely to have specialist infrastructure knowledge and expertise. They will only take on an investment when they are satisfied it meets their investment requirements, with their knowledge and expertise giving them an advantage. Further, for a business that invests in Alpine Energy it is likely to make up a much smaller proportion of their business than it is of TDHL’s assets. Ultimately, TDHL and the Council do not believe it is prudent to have 60% of their investments tied up in one investment which they do not control.

Why wasn’t this dealt with as part of the 2018-28 LTP process?

TDHL operates independently to the Council. TDHL has undertaken an independent strategic review of its operations outside of the Council’s normal LTP timeframes. As the timing of this review and its resulting proposal represents a significant decision, this consultation document has been prepared to enable public comment.

What’s a diversified investment portfolio?

A diversified investment portfolio means that investments are made across a range of investment products that earn the highest return for the least risk. Investment products could include properties, fixed interest investments and shares.

What does a regulated market environment mean?

A regulated market environment means a government body (like the Commerce Commission) sets the amount of money companies like Alpine Energy can charge consumers.

Why are the funds not held within TDC Accounts?

Maintaining funds in TDHL enables easier access to independent management of these funds. It also allows for the use of specialist governance, skills and expertise to manage it for the benefit of Timaru District residents and ratepayers. There are a number of successful examples of arrangements across the country where investments are managed in Council Holding companies.

How can Timaru District residents and ratepayers be sure that the remaining sale funds would be invested wisely?

TDHL directors are appointed by and remain accountable to the Council. The Council has ultimate control over the funds.

The Council already has a very rigorous process for appointing directors to TDHL to ensure that its directors have the skills to make commercially smart investments. TDHL must provide a Statement of Intent annually which the Council must approve. TDHL is audited annually to provide assurance to the community that its accounts are true and fair, and this is part of the oversight of prudent investment.

Why would more of the sale funds not be used to pay off more of the Council’s debt?

Lots of the Council’s big and expensive assets have a very long life, well over 50 years.  To be fair to today’s ratepayers and the next generation the Council wants to spread who pays for those assets over more than just the ratepayers at the time the asset is built.  This spreading is called inter- generational equity.

Debt is a good way to do this and it means, just like a mortgage, that payment occurs over a number of years.  To do this, the Council does not want to repay all or too much of its debt at once. It thinks it has the balance about right as it repays a significant amount of debt ($22.1 million) and it still has a substantial sum of money to invest to build up generational wealth and provide non-rates source of revenue.

What about pre-emptive rights?

The other Alpine Energy Ltd shareholders have a pre-emptive right to buy TDHL's shares.

Pre-emptive rights means that the existing shareholders have the first right of refusal to buy the shares at their market value before they are offered to the open market. It does not mean a discount. It means they get the first choice if they want to buy the shares.  This process will need to be followed with the other existing shareholders.

Publish Date: 08 Nov 2018