Council To Begin Money Probe
COUNCIL TO BEGIN MONEY PROBE
A long process to decide how to use money obtained by the Christchurch City Council from the Orion sale of a gas network has started.
The Council's director of finance, Bob Lineham, says over the next few months the Council and Christchurch City Holdings need to work through a wide range of issues before decisions can be made on the specific application of the funds.
He says the sale price of Orion's gas network was $550 million and after the payment of taxes and expenses the net cash proceeds are expected to realise $525 million.
In addition, Orion has recently sold its interest in the Southdown co-generation plant in South Auckland and is seeking bids for the sale of its remaining 40 commercial gas retail customers.
Once the proceeds are added to the gas network sale the expected net proceeds are likely to be about $560 million.
The acquisition costs by Orion (formerly Southpower) for the assets was about $330 million so there has been a capital gain from the sales of about $220 million.
Settlement of the sale is expected in early May but Mr Lineham says it will be some time before decisions can be made on the distribution of the bulk of the proceeds.
Some issues to be studied are: * Funds which can be realistically extracted from Orion.
* An appropriate debt level for Orion to match its reduced asset base.
* The level of debt that is appropriate for the Council group as a whole.
* Ways of maintaining the revenue streams for the Council that will at least match those derived from the assets sold.
* Ways of protecting capital funds for the long-term benefit of Christchurch residents.
* Obtaining Inland Revenue Department rulings to support any capital repayments to the Council.
Standard and Poors has recently reviewed the credit rating of both the City Council and the Christchurch City Holdings Ltd in light of the sale.
Mr Lineham says that while it has confirmed the existing credit rating in the meantime it has posted an outlook of developing.
"Standard and Poors will clearly be watching what is done with the proceeds of this sale and there is a clear expectation that at least, in part, there will be an application to reduce earlier group debt projections," he says.
Mr Lineham says there are four main uses to which funds can be applied.
They are new investment in Orion; new investments by other Council-owned companies; new investments or debt repayment by CCHL that would yield a financial return; and the use of funds for other community investments by the Council.
He says the amounts available will depend on the projects available and the financial structure of the group, and the ability to transfer funds among Orion, CCHL, the Council, and other subsidiaries in a tax-efficient manner.
Mr Lineham says the Council will consult the public on the use of the funds available and the timing for that is dependent on how complex the issues are and the time needed to investigate them.
"There is no urgency on the consultation as the bulk of the funds is unlikely to be available this calendar year. There could either be a round of public consultation later this calendar year or it could be part of the 2001 annual plan process," he says.
Once a plan for the use of funds is developed and agreed with by the Council it will be necessary to obtain IRD binding rules on some aspects of the financial structures "to ensure that the decisions made are not open to later review for tax purposes," Mr Lineham says.
The time for that process can be quite lengthy, he says.
The Council's Strategy and Resources Committee recommended to the Council yesterday that CCHL give advice on the proportion of funds to be used to repay debt within the Orion Group, the proportion to be reinvested to maintain an income to the Council, and funds available for other purposes and investments.