Ruataniwha promoter seeks mix of equity, debt funding, sees long-term value in spot water

Hawke's Bay Regional Investment Co, the developer and sponsor of the Ruataniwha Water Storage Scheme, says the $275 million project will be funded with a mix of equity and debt, and is likely to result in a secondary market for water contracts.

HBRIC, the investment arm of Hawke's Bay Regional Council, is in talks with three potential investors and banks about funding. The council is putting up $80 million for an equity stake in a yet-to-be formed irrigation company. The $195 million balance will come from outside investors, bank debt and an expected contribution from the government's Crown Irrigation Investments, which acts as a bridging investor for regional water infrastructure developments.

Assuming HBRIC can complete funding arrangements without major hiccoughs, expected early next year, and reach its target for water uptake, construction work could begin as soon as September 2016, said Andrew Newman, the investment company's chief executive. It has about 75% of water contracts counter-signed out of a total 42 million cubic metres of water.

The irrigation business would suit a long-term holder and as an investment will have the characteristics of a utility, Mr Newman said. "Once you hit the sweet spot in the 'water uptake curve,' it has reliable cashflow." He declined to comment on the likely mix of debt and equity but noted interest rates are "pretty favourable," compared to five to six years ago, when the project was envisaged as equity-only.

The financing challenge with Ruataniwha was that it involved a single, large dam and not all the water would be sold from day one, he said. The business had to be structured to ensure sufficient reliable cashflow. The whole proposal has been slowed by, among other things, a High Court challenge by Forest & Bird to a Department of Conservation decision allowing 22 hectares of Ruahine Forest Park to be flooded in a land swap deal that will allow the scheme to proceed. An announcement on funding was now expected early next year.

Rural Equities, the farm investment group, told its shareholders yesterday it had signed water user agreements to irrigate 536 hectares across three Hawke's Bay farms, Middle Hills, Maranoa and Tahuna, taking a total of 2 million cubic metres of water a year.

The farms are currently mixed arable and livestock properties and would continue to be run that way, albeit at "a higher level," said chief executive Brian Burrough. He wouldn't rule out conversion to dairy longer term.

"They are typical Hawke's Bay farms – water will be a huge benefit," Mr Burrough said. He declined to give the cost of the water other than every water scheme "has a different price for its water and Ruataniwha water is at the top end."

Mr Burrough says he has no doubt all the water will be taken up and will end up having scarcity value. "There may well be some secondary trading in seasonal water."

Rural Equities shares last traded at $4.30 on the Unlisted platform, up from $4.20 on November 6.

Yesterday, HBRIC said it had counter-signed contracts for 30 million cubic metres of water. The contracts are for 35 years, matching the life of the scheme's consent and giving participating farmers a long enough term to make their own investment decisions. The contracts have an automatic rollover right when the irrigation has to renew its consent. Farmers would make monthly payments for their contracts, ensuring steady cashflow for the company.

It also reported back and gained sign-off from the council for the renegotiated design and construction contract, with the group led by Spain's Obrascon Huarte Lain (OHL) and local construction firm Hawkins. The group also includes Australia's GHD, a consultancy with dam design expertise, and Water Infrastructure Group NZ, which would design the canals and pipe distribution. Mr Newman declined to give the value of the contract.

The project involves the dam, which will have a hydroelectric generator attached, and a primary distribution network that includes a 16 kilometre canal and some high-capacity pipe. From that flows a secondary pipe network delivering water to the farm gate via a mix of gravity and pumping. HBRIC has used "complex modelling" involving 40 years of catchment records, an assessment of likely land uses and climate change assumptions to produce a reservoir reliability threshold. The design standard at 95% reliability amounts to 104 million cubic metres of water.

Mr Newman said there was a possibility of "curtailments" in especially dry years, and the contracts are written to reflect that. If the irrigation company itself mismanages the water supply, such as by selling too much on the spot market, then it carries that risk.

The irrigation company would expect to sell spot water and it was likely that farmers would buy and sell water as their needs fluctuated. Those water rights were likely to rise in value once all the available supply was contracted.

Mr Newman said at least a portion of HBRIC's investment would be long term although potentially some of the stake could be sold down to allow the investment company to recycle its capital.

(BusinessDesk)