Q. As capital beneficiary, can Gisborne District Council influence the sale?
Gisborne District Council is a key stakeholder in the Trust and through it in Eastland Group. This is because at the end of the life of the Trust, the capital remaining in the Trust at that time is transferred to the Council. Reflecting this, the Council has various consultation rights under the Trust Deed. As such, the Trustees have engaged with Council in June in respect of the proposed sale and have taken into account, and will continue to do so, any views expressed.
However, there is no requirement under the Trust Deed or otherwise at law for the Trustees to seek the Council’s consent to the sale. The Trustees (and directors of Eastland Group) bear the responsibility for these decisions.
Q. Will power consumers receive a rebate or dividend from the sale?
Because Trust Tairāwhiti is not a consumer trust, no power rebates are paid. The community trust model allows Trustees to provide for the direct and indirect benefit of beneficiaries.
Through their Strategic Plan and annual Statement of Intent process, Trustees determined three ways of doing this:
- Enabling others through grant funding, including community facilities, for example, the War Memorial Theatre, Lawson Field Theatre, Skate Park and Pump Track, Eastland Rescue Helicopter Trust, Tairāwhiti Arts Festival and Supergrans.
- Direct investments into sectors such as wood processing, digital and technology.
- Delivery of the regional Economic Development Agency and Regional Tourism Organisation functions. These are funded in partnership with central and local government.
Since its inception in 1993, the Trust has distributed, invested or delivered $122 million to a diverse range of initiatives and operations and Trustees aspire to do more. A sale of the network will allow Trustees to deliver more for current and future beneficiaries across these strategic areas.
Q. How well has Eastland Group performed since it was formed?
The organisation known as Eastland Group today has its origins in 2003, when Eastland Network and the then recently purchased Eastland Port were set up to be collectively operated by a holding company.
In 2003 Eastland Group had assets of $106m and it was able to return a dividend to the shareholder of $250,000.
In the 20 years since then it has:
- Grown assets to $871 million
- Has paid the shareholder cumulative distributions of $148 million
- Has increased shareholder equity in the company by $294 million
- Has created over $440 million of value for Trust Tairāwhiti
That represents an average return to the shareholder of just under 13% over the 20 year period.
Q. How will the Trust and Eastland Group use the proceeds of a potential sale?
The Trust intends to use funds received from any future sale of the network assets to continue delivering on regional projects and initiatives for current and future beneficiaries. The Trust is committed to investing in community facilities that are needed and will be well-used.
The Trust will continue supporting community initiatives and investing in regional economic development and tourism opportunities. The Trust also has a strong desire to continue building its investment portfolio for future generations in Tairāwhiti. These invested funds generate returns that provide revenue, liquidity and diversity to the total Trust fund.
Following a period of sustained investment and expansion for the company, and with rising interest rate levels, it makes sense for Eastland Group to use a share of any sale to reduce debt. This will give the company the headroom to fund future growth opportunities – such as greater investment in local and national renewable generation. One example of this is the new utility scale solar farm at Gisborne Airport. The company is also looking at further in-region solar and wind opportunities, to build the energy capacity and resilience needed to power a sustainable future for the region. Another project is the port development, which will support long-term economic expansion for the region.
Q. What other options did you look at and why is selling Eastland Network the preferred option?
A range of options were considered including a full or partial sale of the port, generation and network businesses, an IPO of all or part of Eastland Group, potential joint venture arrangements or part sales whereby partial control of some or all assets would be ceded in exchange for investment, and maintaining the status quo. Each option was assessed against specified criteria including capital return for the Group, valuation outcomes, ability to meet future growth potential and returns to Trust Tairāwhiti as shareholder to provide for beneficiaries.
Eastland Network has relatively fixed growth potential. However as a regulated entity with stable earnings, it is attractive to prospective investors. It will benefit from an investor with scale, who in addition to economies of scale can bring expertise and capital to the company.
The regulations that apply to Eastland Network mean there are ongoing protections for consumers around price and quality, including quality of supply, and any future owner will be subject to these (see further detail in next question).
Eastland Group has a strategy to grow a renewable energy portfolio which directors believe will provide greater returns to the Group and, over time, to the beneficiaries. A sale within this sector would compromise this and compromise future returns to the Trust as shareholder. Accordingly a sale of the generation assets was not favoured.
Taking into account these factors, the Trust and Eastland Group worked with their independent advisors to review the options and both separately agreed the sale of Eastland Network as the most suitable to achieve the combined capital structure objectives at this point in time.
Given the steady but low allowable returns from the Network, and the cost of debt, we actually expect Group profitability – and returns to the shareholder – to increase over the coming years. The Network sale will also allow Eastland Group to continue investing in more higher growth, and higher return, opportunities.
Q. What protections are in place to make sure a new owner doesn’t charge people too much for their electricity, or invest too little in maintaining the infrastructure?
1. Commerce Commission regulations
Price-quality regulation is applied to certain businesses that are regulated under Part 4 of the Commerce Act, including the electricity industry.
There are 29 local electricity lines companies across the country. The Commerce Commission sets price and quality controls for 17 of them, including Eastland Network. (The other 12 are exempt as they meet community-ownership criteria.)
The regulations mean that, no matter who owns Eastland Network, they must not earn excessive profits. And, they must keep up the quality of services. In other words, the communities of Tairāwhiti and Wairoa can be sure that both the amount of money they’re charged by their local lines company (which makes up around 40% of an average power bill), and the reliability of their electricity supply, will be maintained. These protections are explained in more detail by the Commerce Commission.
2. Electricity Act 2010 requirements
The Electricity Industry Act 2010 provides a framework for the regulation of the industry, and includes further requirements to continue supplying electricity.
The owner of the local lines company is required, under this act, to continue to supply electricity to everyone who is currently on the network. Customers can only be disconnected from the network if they agree (for example, if they decide to go off grid and move to an alternative source of power).
Plus, it’s worth bearing in mind that the lines, poles, towers, sub stations, cables and all the other assets that deliver electricity across our region aren’t going anywhere. They all stay right here.
Q. What are some of the potential benefits of a new owner?
As mentioned, there are 29 local electricity lines companies across New Zealand. Eastland Network is one of the smaller networks, with just under 26,000 domestic and non-domestic customers. But this is spread across a large area: 12,000 square kilometres covering Gisborne, Wairoa and the East Coast.
Eastland Network met its regulated requirements around price and quality in the most recent financial year – a great result when you consider the severe storms that battered the region and caused a number of power outages. They also continued with their ongoing asset maintenance and upgrade programme.
However, as the network is comparatively small, it will benefit from a new owner with the scale and ability to make the necessary long-term investments. And, to ensure it can adapt and accommodate the way people will use electricity in the future.
The regulations that apply to Eastland Network mean there are ongoing protections for consumers around price and quality.
Q. Please explain Eastland Group’s capital structure and debt levels.
Most corporate organisations have a capital structure that includes a portion of debt (generally bank debt) as well as equity, which is the money the shareholder(s) have invested in the company.
A capital structure is a term used to describe how the assets of the business are funded.
Businesses borrow money because it is generally cheaper than the cost of equity and they use this debt to fund investment into assets that can afford to pay the interest cost and return positive cashflows (from which they derive profits).
The concept of using debt to buy something is the same as when a person buys a house.
If they have a 10% deposit (their equity) then they have to borrow the remaining 90% (debt) from the bank. This is their capital structure associated with owning the house.
There are differences in opinion about what constitutes a prudent level of debt and there are a lot of factors that go into making this decision.
The amount of debt proportionate to the assets of the company is called gearing.
As an example, a house purchased for $800,000 with a $160,000 deposit will have gearing of 80% ($640,000 / $800,000).
Highly leveraged companies will often have debt well above 60%.
As at 31 March 2022, Eastland Group had $359m of debt and total assets of $871m, meaning it is 41% geared. Gearing over the last five years has averaged 38%.
In discussions with the Trust as shareholder, it has been agreed that prudent long-term gearing for Eastland Group is the range of 35-45%.
Debt has grown, but that money has been invested into new assets that produce additional revenue.
The implications of this are that Eastland Group cannot use debt to purchase new investments unless they reduce the amount of debt proportionate to the assets of the company.
Q. What happens next?
Eastland Group are currently undertaking an indicative bid process to determine the level of interest in Eastland Network’s assets. This involves seeking non-binding indicative offers and any wider expectations from interested parties. At the conclusion of that process the Eastland Group Board will make a recommendation for Trustees to consider, along with any further conditions.
Once the indicative bid process has been completed, the Eastland Group Board and then the Trustees will consider factors including price, terms of the sale (including warranties and indemnities), benefit to Eastland Group from the sale, and consequential benefit to the Trust and its beneficiaries.
Trustees will continue to be supported by independent advisers throughout this process if it does proceed. The process will take a number of months and we will continue to keep the community informed throughout by way of our engagement processes.