This means Quayside Holdings Limited, which manages Council’s shareholding in the Port of Tauranga, would over time be able to reduce its shareholding from the current 54.14%, to a minimum of 28%.

Returns from this shareholding, and Quayside Holding Limited’s other investments are currently used to reduce general rates. The proceeds of any sale would be invested to benefit current and future Bay of Plenty residents. Council’s independent advisors suggest that a portion of the proceeds should be used to pay back $200 million that Council has used to help pay for regional infrastructure.

Quayside Holdings Limited (Quayside) owns a 54.14% shareholding in the Port of Tauranga Limited (PoTL). These shares were valued at $2.3 billion as at 30 June 2023. The shareholding is a “strategic asset” for Bay of Plenty Regional Council in terms of the Local Government Act 2002 (LGA) with the Council’s Significance and Engagement Policy identifying Council’s majority shareholding in Port of Tauranga Limited, which is held through Quayside Holdings Limited’ as a strategic asset.

The PoTL shareholding has proved to be a well performing growth asset over a number of years and currently makes up over 80% of Quayside’s investment portfolio.

In 2023/24 Bay of Plenty Regional Council received a dividend of $45 million from Quayside which made up 24% of Council’s annual revenue, enabling better outcomes for the community while maintaining affordable rates. In 2023/24 dividends from Quayside equated to an average rates reduction of $380 per household. The dividend that Quayside pays to Council is entirely funded by dividends on the PoTL shares.

The Port of Tauranga has provided significant returns to the region and continues to be strategically important for the Bay of Plenty – it provides employment and drives and enables economic activity in this growing region. The Port of Tauranga will continue to be strategically important to the Bay of Plenty and Aotearoa New Zealand given its location and alignment to the success of the region. PoTL is publicly listed on the NZ stock exchange (NZX) and must follow the rules of the NZX.

Quayside’s investments are regularly reviewed and monitored to ensure they are well managed to provide sustainable income over the long term. This has been successfully achieved since its formation in 1998.

Advice from independent financial experts has identified that the current investment portfolio is not optimal and is inconsistent with managing an intergenerational fund.

Quayside’s dividend to Council is limited by not being able to realise capital gains on the significant PoTL shareholding because of legislative constraints around strategic assets (see below “why are we consulting on this proposal” below).

In addition, the current large concentration of investment in the PoTL shareholding presents risks which could be reduced through having a more diversified portfolio. Investment diversification is a tool for reducing the riskiness of returns and is regarded as best practice for good financial portfolio management.

Currently the funds from Quayside’s investment portfolio (including the Council’s shareholding in PoTL) are reinvested into the portfolio and distributed to the Council according to a dividend policy. This means there is limited capacity to fund a higher dividend over time – the risk of this occurring could be reduced through a partial divestment.

This proposal is about financial risk management. Like councils across the country, the Council is facing growing demands for services and infrastructure, increased climate risk, uncertainty around insurance premiums and coverage, and increasing costs due to interest rates and inflation. These challenges support the need to consider the sell down Council’s PoTL shareholding and diversification of the investment portfolio to ensure:

• Council remains resilient to financial shocks, climate change, and unforeseen events.
• Council has access to a reliable and growing dividend stream over time.
• Through Quayside, Council has an investment portfolio which can be adjusted over time to ensure earnings and the value of assets continue to grow.
• Every household in the region continues to receive a rates subsidy each year, while still enabling Council to fund the important mahi we deliver for the Bay of Plenty.

Ultimately, the careful and prudent financial management has a flow-on effect to every household and resident in our region. It’s critical we continue to deliver our important work and keep rates affordable.

Key considerations by Council on this matter are that the following objectives should guide our decision making:

• Best benefit for the whole region now and into the future
• Protection of the PoTL for future investment
• Prudent stewardship of investments

Council is proposing selling some of its PoTL shares, down to a minimum 28% shareholding. This large cornerstone shareholding would remain the strategic asset for Council and our community which would allow Council to block any future takeover. Any further proposed sell down below 28% would be subject to public consultation and Council decision-making.

The proceeds of the sale would be used to repay the $200 million Perpetual Preference Shares (PPS) (if required) with the remainder invested by Quayside in a diversified portfolio similar to the current non-Port investment portfolio. This will include fixed interest, equities and real assets, and investment allocations will be reviewed due to the potential size of the additional investment. Quayside would continue to pay annual dividends to Council from the remaining PoTL shareholding, diversified investment portfolio and any cost savings if the PPS is repaid. If this divestment occurs, the financial impact on Council will be considered in future annual or long term plans.

In 1991 Quayside Holdings Limited (Quayside) was established as the investment arm of Bay of Plenty Regional Council.

The purpose of Quayside is to grow a responsible and diversified fund that generates long term returns to support the growth and prosperity of the Bay of Plenty.

Quayside is a Council Controlled Organisation (CCO) and today has the second largest investment portfolio of any regional council in Aotearoa New Zealand and is one of the Bay of Plenty’s largest investors.

The Local Government Act 2002 requires any proposed change in ownership or control of any of the equity securities held by Council in the Port of Tauranga to be consulted on, and explicitly provided for in the council’s long-term plan.

The purpose of consultation on this proposal is to explain the proposal, to seek your views, and to explain how the Council’s Long Term Plan 2024-2034 would provide for the proposal.

Perpetual Preference Shares (PPS) are a type of share that has no maturity date and pays a dividend to investors for as long as an organisation remains in business.

In 2008, Quayside raised $200 million through the issue of PPS that are tradable on the NZX. Council has used the proceeds from the issue of the PPS to help fund (primarily) environmental projects through the Regional Infrastructure Fund. These initiatives include:

• Tauranga Marine Precinct
• University of Waikato Tertiary Campus
• Ōpōtiki Harbour Transformation
• Forestry Innovation Hub at Scion Research Institute
• Environmental Infrastructure

Costs associated with the PPS have grown significantly following the recent triennial dividend reset. Repaying the PPS (which can be required if Quayside reduces its PoTL shareholding below 50.1%), is expected to deliver $9.6 million annual cost savings. The PPS is accounted for as an equity on Quayside's balance sheet, however, S&P Global treat this as debt for credit rating purposes.

The financial assumptions including forecast investment returns, the value of sale proceeds and the cost of borrowing, are based on information available at the time the document was prepared. “It is assumed that investment returns from a diversified investment portfolio will at least match dividends from PoTL to Quayside that are currently expected, if no divestment took place. Quayside also operates a reserving policy to protect the dividend to Council against any short-term investment downturns.

In the event of a sustained investment downturn Council could either reduce services, increase rates or sell assets. Diversifying the investment reduces the overall risk of a sustained downturn. As with most investment decisions, past performance is no guarantee of future performance.

Although it is possible that the proposed divestment will result in increased dividends from Quayside to Council, we have not forecast significant dividend income increases in the first three years of this LTP. This is because the key reason for the divestment proposal is not the need for greater revenue in the short term – it is about reducing overall investment portfolio risk.

The timeline for selling down shares and the number of shares sold would be dependent on further analysis, market fluctuations and changing economic conditions to ensure the best possible results.

Initially, sale proceeds are expected to be reinvested by Quayside in accordance with Council expectations over a transition period, noting the potential impact on the Perpetual Preference Shares. If this proposal proceeds following consultation Council will consider whether to repay the PPS using the sale proceeds (see ‘Perpetual Preference Shares’ above).

During the transition period Council and Quayside would need to agree a revised investment strategy which will be overseen through Council’s Statement of Expectations process with Quayside.

We have prepared a proposal (Option 2 - our preferred option) and alternative (Option 1 - status quo).

Option 2 is preferred because financial advice shows that Quayside’s current investment portfolio is not optimised due to the large concentration in the PoTL shareholding. This reduces the portfolio’s overall diversification and liquidity.

Additionally, selling a portion of shares is also projected to deliver higher long term dividends for the benefit of future generations.

Council proposes that setting a minimum shareholding level of 28% will realise strategic and financial benefits. In order to be financially prudent, Council is consulting on a managed sell down of PoTL.

If the Council’s preferred option (option 2 – enable a reduction to a minimum of 28% shareholding) proceeds, the Long Term Plan 2024-2034 would reflect that decision. This is the basis on which the supporting documents for this consultation have been prepared.

If, after consultation, Council chooses the alternative, (option 1 – status quo - retain the existing Port of Tauranga Shareholding), the Long Term Plan 2024-2034 would be prepared to reflect that decision so that it is ready for adoption by Council at the end of June 2024.

Once the Long Term Plan 2024-2034 is adopted, and if option 2 is adopted, Quayside would be in a position to divest/sell down shares to the minimum level agreed (28%), subject to any conditions set by Council and reflected in Quayside’s Statement of Intent relating to a sell down of the shares.

Initially sale proceeds are assumed to be reinvested by Quayside over a transition period, after taking into account any need to repay the $200m Perpetual Preference Shares (refer ‘Perpetual Preference Shares’ above).

Council intends to establish appropriate structures to manage the transaction and Regional Council’s continued ownership position in the Port, such as the possibility of creating new holding entities or corporate structures as required.

In addition, if option 2 - enable a reduction to a minimum of 28% shareholding is chosen, Council’s Significance and Engagement Policy would be revised.

The Council’s existing Significant and Engagement Policy specifies a requirement to maintain a majority shareholding in the PoTL. Council’s Significance and Engagement Policy, including the updated wording to amend the policy, is included as a supporting document.

In summary, the Council’s PoTL shareholding would continue to be a Strategic Asset listed in the Significance and Engagement Policy, and any further change to Council’s shareholding in PoTL (beyond the decision reflected in the Long Term Plan 2024-2034) would require further public consultation.

During the transition period Council and Quayside would need to agree a revised investment strategy including the future consideration of whether to repay the $200m Perpetual Preference Shares (refer ‘Perpetual Preference Shares’ above).

In developing this proposal, Regional Council has made key assumptions and noted where it may need to respond to matters outside its control. The options presented in this consultation document are subject to the following:

• The proposed draft LTP 2024-2034 has been prepared on the basis of a minimum 28% stake in the PoTL being retained (option 2) which is Council’s preferred option. The Council may increase the minimum percentage in response to variables, including market conditions. However, Council will not permit Quayside to reduce the shareholding in the PoTL to less than 28%.
• Council may alter the timing of divestment decisions in response to changing conditions and to protect value. A planned transaction will not proceed if Regional Council’s expectations are not met. Council may withdraw from any transaction for any reason prior to a transaction being concluded.
• The sell down is expected to provide for a range of benefits, including repaying debt, subsidising rates across the region and Council future consideration of further Regional Investment opportunities.
• Transactions are subject to all applicable regulatory approvals, including NZX, foreign investment and competition approvals.
• Financial assumptions used to inform the consultation document are based on information available at the time it was prepared and includes independent analysis and review. These assumptions, while based on best available information, are subject to change.
• Where the consultation document references ownership, this also includes shares held by QHL on Regional Council’s behalf.
• Financial forecasts assume no adverse tax consequences arise.

Legislation requires Council to describe any accountability or monitoring arrangements to be used to assess the performance of others in respect of Council’s shareholding following any sale. Given that shares in PoTL are publicly traded equities, Council does not propose any such arrangements.

Existing oversight and monitoring arrangements with respect to the operations and governance of PoTL will remain in place. These include rules and reporting requirements with the NZX, Commerce Commission oversight with respect to competition law and pricing, and the Overseas Investment Office oversight with respect to levels of foreign ownership.

The responsibility Council has through its role as a consenting authority, and as a regulator will remain unchanged.

The presence of actual or perceived conflicts of interest will depend on the exact manner in which any sell down of PoTL shares is implemented.

These conflicts will be managed in accordance with Council’s current processes. We will ensure any specialist expert advisor on implementation options will not stand to benefit financially inappropriately from any transaction.