Minutes of Extraordinary Regional Council Meeting

1. Welcome/Prayer/Apologies/Notices

The Chairman welcomed everyone to the meeting and covered evacuation and housekeeping matters before Councillor Scott offered the prayer.

2. Conflict of Interest Declarations

There were no conflict of interest declarations.

3. Confirmation of Minutes of the Regional Council Meeting Held on 29 June 2016

RC54/16

Resolution

Minutes of the Regional Council Meeting held on Wednesday, 29 June 2016, a copy having been circulated prior to the meeting, were taken as read and confirmed as a true and correct record as amended.

Hewitt/Beaven

CARRIED

4. Matters Arising from Minutes of the Regional Council Meeting Held on 29 June 2016

In relation to pg 3 and a reference to the legal advice sought regarding RWSS independent panel requirements, Mr Maxwell confirmed that once the advice has been finalised it will be provided to councillors.

There were no further matters arising from the minutes.

Confirmation of Public Excluded Minutes of the Regional Council Meeting Held on 29 June 2016

RC55/16

Resolution

That the Council excludes the public from this section of the meeting being Confirmation of Public Excluded Minutes Agenda Item 7 with the general subject of the item to be considered while the public is excluded; the reasons for passing the resolution and the specific grounds under Section 48 (1) of the Local Government Official Information and Meetings Act 1987 for the passing of this resolution being:

GENERAL SUBJECT OF THE ITEM TO BE CONSIDERED

REASON FOR PASSING THIS RESOLUTION

GROUNDS UNDER SECTION 48(1) FOR THE PASSING OF THE RESOLUTION

Confirmation of Public Excluded Meeting held on 15 June 2016

7(2)(a) That the public conduct of this agenda item would be likely to result in the disclosure of information where the withholding of the information is necessary to protect the privacy of natural persons

The Council is specified, in the First Schedule to this Act, as a body to which the Act applies.

RWSS Concession Deed and Project Agreement

7(2)(b)(ii) That the public conduct of this agenda item would be likely to result in the disclosure of information where the withholding of that information is necessary to protect information which otherwise would be likely unreasonably to prejudice the commercial position of the person who supplied or who is the subject of the information

7(2)(i) That the public conduct of this agenda item would be likely to result in the disclosure of information where the withholding of the information is necessary to enable the local authority holding the information to carry out, without prejudice or disadvantage, negotiations (including commercial and industrial negotiations)

The Council is specified, in the First Schedule to this Act, as a body to which the Act applies.

Scott/Hewitt

CARRIED

HBRIC Ltd Report on RWSS Conditions Precedent – Confidential Documents

RC56/16

Resolutions

1. That Council excludes the public from this section of the meeting, being Agenda Item 8 HBRIC Ltd Report on RWSS Conditions Precedent – Confidential Documents with the general subject of the item to be considered while the public is excluded; the reasons for passing the resolution and the specific grounds under Section 48 (1) of the Local Government Official Information and Meetings Act 1987 for the passing of this resolution being:

GENERAL SUBJECT OF THE ITEM TO BE CONSIDERED

REASON FOR PASSING THIS RESOLUTION

GROUNDS UNDER SECTION 48(1) FOR THE PASSING OF THE RESOLUTION

HBRIC Ltd Report on RWSS Conditions Precedent – Confidential Documents

The Council is specified, in the First Schedule to this Act, as a body to which the Act applies.

2. That staff and directors of HBRIC Ltd, and Mssrs Alan Dent and David Morgan of Deloitte Touche Tohmatsu Ltd attend for consideration of this item as the subject of the item and report.

Scott/Hewitt

CARRIED

Deloitte RWSS Business Case Peer Review – Confidential Information

RC57/16

Resolutions

1. That Council excludes the public from this section of the meeting, being Agenda Item 9 Deloitte Ruataniwha Water Storage Scheme Business Case Peer Review – Confidential Information with the general subject of the item to be considered while the public is excluded; the reasons for passing the resolution and the specific grounds under Section 48 (1) of the Local Government Official Information and Meetings Act 1987 for the passing of this resolution being:

GENERAL SUBJECT OF THE ITEM TO BE CONSIDERED

REASON FOR PASSING THIS RESOLUTION

GROUNDS UNDER SECTION 48(1) FOR THE PASSING OF THE RESOLUTION

Deloitte RWSS Business Case Peer Review – Confidential Information

The Council is specified, in the First Schedule to this Act, as a body to which the Act applies.

2. That staff and directors of HBRIC Ltd, and Mssrs Alan Dent and David Morgan of Deloitte Touche Tohmatsu Ltd attend for consideration of this item as the subject of the item and report.

Scott/Pipe

CARRIED

The meeting went into public excluded session at 10.42am and out of public excluded session at 1.45pm – with Mr Mohi having been excused at 12.30pm

HBRIC Ltd Report on Ruataniwha Water Storage Scheme Conditions Precedent and Pre-conditions

Dr Andy Pearce introduced the item, advising that the HBRIC board is confident that the RWSS will achieve the goals and meet the requirements of Council, and that the case for the RWSS is compelling, being a once in a generation opportunity to make a lasting positive impact on a number of dimensions.

Overview of environmental benefits of the scheme include:

• Return flows from irrigation and reduced deep groundwater extraction support acquifer recharge and low flows. Combined with minimum flow released at the dam, these will contribute more than the amount required to achieve the 2023 minimum flow at Red Bridge set by Plan Change 6

• 4 million m³/year of flushing flows will help manage periphyton and cyanobacteria

• designed and consented to support PC6, avoiding $40-60M costs to HBRC and ratepayers if required to achieve low flow levels without assistance provided by RWSS

Overview of biodiversity enhancements include:

• Upstream catchment enhancement and restoration of habitats, recreation spaces, increased indigenous vegetation ($2.55M)

• Riparian enhancement and weed control over 300ha in Makaroro and upper Waipawa catchments, supporting banded dotterel and wading birds ($1.74M)

• Threatened species habitat enhancement for bats, predator control for 30 years, trap and transfer for native fish ($3.1M)

• Spring fed stream enhancement, wetland protection and phosphorous mitigation ($0.5M)

• Restoration of old Waipawa riverbed and Papanui stream incl 24km fencing, 85,000 riparian plants, wetland creation, walking and cycling tracks ($1.3M)

• Lower Tukituki cultural values mitigation and native fish enhancement ($0.9M)

• environmental benefits and biodiversity enhancements are paid for by water users.

RWSS will provide economic stimulus, by way of:

• A boost of c.$3 billion into the local economy

• An additional 2,500 + jobs

• Supporting investment in new farming options not available without irrigation

• Supporting and Protecting Industry

• Retaining what we have and keeping jobs and industry here

Financial returns for investors include:

• Reasonable rate of return over 70 year life of project is commercially acceptable

• lower rate of return during construction and early years prior to full uptake are offset by significant environmental and wider economic benefits to Hawke’s Bay

• A lasting asset (dam and distribution network) returning to public (HBRC) ownership, with a value in 70 years likely to be hundreds of millions

• Funded by local industry (water users)

• after uptake reaches 100% HBRIC gets commercial rate of return of approximately 10%

Total costs of the project have increased by 4.5% to $345M, providing:

• 97% construction now fixed price and time (previously 89%)

• Up to 80%* uptake now built up front (previously 50%), being Dam + Primary distribution + most of Secondary distribution networks

• Delayed delivery for 2020-21 irrigation season lessens the risk to constructor and assured health and safety requirements are met

HBRIC directors are satisfied that the investment is appropriate and consistent with its approved Statement of Intent having carried out extensive due diligence including:

• Extensive environmental and economic assessments completed

• Detailed engineering, technical, legal, financial and tax advice, with stringent, well-understood consent conditions

• All negotiations conducted on a commercial basis

Detailed review of financial and strategic considerations has confirmed that:

• Co-investor is large, stable institution and invests for long-term stable returns

• HBRIC Ltd liability limited to $80M - no recourse to HBRIC Ltd or its Subsidiaries, to Council, or to ratepayers

• Debt funding is secured by Ruataniwha Water Limited Partnership (RWLP) assets – no recourse to HBRIC Ltd or its Subsidiaries, to Council, or to ratepayers

• The $80M of HBRIC Ltd investment is necessary

• At the current level of water sales (42.6M m³) there is no obligation for HBRIC Ltd (or HBRC) to inject any more equity into RWLP (liability limited to $80M)

Measured against Statement of Intent objects, RWSS:

• generates environmental, biodiversity, economic and community benefits

• is a secure and sustainable investment with adequate return, albeit initial slower route to profitability

• supports key environmental goals in Council’s strategy

• provides resilient infrastructure

Overview of next steps includes:

• More Water sales

• Final negotiations with constructor, investors and financiers

• Advise HBRC of any material adverse changes

• Secure funding and confirm to Council

• Finalise and sign documentation (August)

Deloitte Peer Review of the Final Ruataniwha Water Storage Scheme Business Case

Mr Alan Dent provided the findings of the Deloitte peer review of the updated RWSS business case, taking changes from information in 2014 into account.

The scope of the peer review covered:

• Review of the latest version of the financial model and base case financial projections to understand the calculation and allocation of financial returns by investor category, Identify key assumptions, confirm the water take-up breakeven point and undertake sensitivity analysis to demonstrate the impact of different water take-up assumptions on cash flows and investor returns beyond the base case.

• Validation of key assumptions to trace capital assumptions to the latest version of the Design and Construct (D&C) contract, trace investor assumptions to investor term sheets and ownership model/investment structure and test the basis for the water uptake assumptions.

Key changes (between 2014 review and now) relate to:

· Total upfront construction and financing costs for the dam and majority of the distribution network have increased by $50.1 million (dam $36.9 million) - partly from the additional two years inflation and adverse foreign exchange rate movements, partly due to expanded irrigation footprint, higher specification distribution system and removal of the hydro generation station as well as delay in Financial Close and legal proceedings

· A greater portion of the construction cost for the dam is now on a fixed time / fixed cost basis

· Provisional terms have been negotiated with a sub-debt provider for it to provide subordinated debt to assist with the funding of the Project through the initial water take up period

· Provisional terms have been agreed with an institutional investor to provide approximately 50% of the equity required to fund the Project

· Bank debt will now be used to fund a substantial portion of the up-front capital cost of the Project

· The catchment area for the RWSS has been expanded to include an additional 5,000 ha in the area serviced

· The interest rate environment has materially changed

· The project now has a substantial volume of water contracted

· The first full irrigation season post construction is now 2021, which is later than targeted in the 2014 business case.

Operating and maintenance (O&M) assumptions significantly updated to include:

• substantial increase in scheme energy costs due to the removal of the hydro generation and increased scheme footprint

• Increased distribution costs due to a higher number of pumps in the secondary distribution network

• Increased mitigation / consenting costs arising from the Board of Inquiry requirements

• Increased costs with Centralines due to an expanded control zone and the associated increase in costs to service the larger network.

Mechanisms to minimise or mitigate operational cost increases include:

• sub-contracting elements of the O&M back to related parties

• price reset mechanism in the Water User Agreement if revenue and cost growth diverge by more than 0.25%

• hedging electricity price risk through fixed price, variable volume electricity supply contracts and energy futures and options.

Deloitte definition of breakeven is:

• the point all the fixed cost commitments of the Project are covered – it is not the point at which all investors have their rate of return expectations met

• fixed cost commitments include payment of senior debt and the O&M costs of the scheme

• analysis shows the breakeven point for the Project to be at a water uptake volume of 41.5 million m³(uptake currently @ 42.6M m³) with uptake beyond that level, cash becomes available to meet the requirements of the equity investors.

Evidence provided that the water uptake assumptions and scenarios are realistic include:

· HBRIC, the Institutional investor and sub-debt provider have all undertaken due diligence on uptake risk

· Substantial work done by the HBRIC to validate the uptake assumptions including constructing a bottom-up water demand model based on a database of farmers within the catchment area, re-running the MacFarlane farm financial feasibility work and commissioning a separate piece of work about on-farm financial feasibility; and undertaking analysis of approx. 20 differing farms for soil types, climatic risk, and farming systems to assess optimal volumes of water / application rates per hectare.

· The sub-debt provider and the institutional investor have both commissioned their own independent assessment of the demand for water.

· Three separate parties have undertaken analysis of the Project and have confirmed views that it is reasonable to assume that there will be sufficient demand for water.

· These three parties are independent from HBRIC and its advisors (being Castalia, Macfarlane and BNZ) and independent from the institutional investor and the sub-debt provider

· While full uptake over time represents a reasonable assumption, uptake remains the key project risk

· Deloitte focussed on risk so did not model any upside uptake scenarios.

Item - 7. Confirmation of Public Excluded Meeting held on 29 June 2016 - has been moved to immediately following item 4.

Item - 8. HBRIC Ltd Report on RWSS Conditions Precedent – Confidential Documents - has been moved to follow items 4 and 7.

Item - 9. Deloitte RWSS Business Case Peer Review – Confidential Information - has been moved to follow items 4, 7 and 8.

HBRIC Ltd Report on Ruataniwha Water Storage Scheme Conditions Precedent and Pre-conditions

Deloitte Peer Review of the Final Ruataniwha Water Storage Scheme Business Case

There was discussion around the process for resolving the decisions for the RWSS items and agreement that representatives of both Deloitte and HBRIC would respond to queries during question time while councillors sought clarity prior to moving into debate. Queries and discussion traversed:

· Scrutiny the scheme has undergone includes – substantial due diligence and financial modelling carried out by 3 original investor parties; CIIL & preferred investor have carried out their own legal, financial, and commercial due diligence; and expert advice has been sought and used extensively including legal, financial, engineering, and tax and audit; plus more

· 42.6M as of 18 April still stands, as no effort put into pushing further sales until the point where HBRC signs off on the conditions precedent and financial close is “in sight”

· Returns to Council – over the first 35 year consent period the project is geared up with debt and capital is paid back to investors, regearing is then carried out at the time of consent renewal and the bank debt paid down so that there is 0 debt when the capital/asset is transferred to Council at the end of the 70 year period.

· Personal view of Mr Dent that reliable water has a material impact not only to the immediate farming environment, but also wider community – and considering the financial and wider benefits including avoided costs believes the scheme should go ahead.

· McFarlane Rural Business forecast the landuse make-up of the catchment would be 30% dairy, however with environmental and other considerations it is believed that there will not be a substantial increase in dairy – born out somewhat by the fact that only 1 of the 196 current water contracts is for a new Dairy operation.

· Analysis of how much HBRIC will need to borrow to pay the guaranteed 6% per annum return to Council in a ‘worst case’ scenario was not carried out by Deloitte

· In the base case, over the first 15 years, HBRIC will regear to 15% debt (assuming no change in equity value) (approx. $55M) if they have to borrow to pay the Council dividends however assuming that the equity value of HBRIC increases modestly, the debt gearing is expected (again under the downside case) to reach about 7%.

· Deloitte and HBRIC confirmed the limitation of investment of up to $80M by HBRIC with no obligation on Council or HBRIC or the ratepayers to invest any more than that in the RWSS.

The meeting adjourned at 3pm and reconvened at 3.18pm

5.	HBRIC Ltd Report on Ruataniwha Water Storage Scheme Conditions Precedent and Pre-conditions
6.	Deloitte Peer Review of the Final Ruataniwha Water Storage Scheme Business Case
	Further discussions and queries traversed: · Mr Alan Dent stated that a huge amount of work has been undertaken on risk identification, assessment and mitigation and that all reasonable steps to manage risk have been taken · The Chairman confirmed that today’s decisions are a matter of fact in confirming that the conditions precedent, as decided in 2014, have been met and accepting the advice from Deloitte · Mr Alan Dent of Deloitte, advised that he has sought re-validation of the breakeven (meet operating costs and bank debt obligations) uptake volume from HBRIC’s advisers BNZ Advisory and will provide that evidence to Councillors · Risk management in terms of dam construction and limited risk of a change of scope for the D&C contract · Financial liability for payment of the water user contract lies with the water user, with no options to cease payments · RWSS flows that contribute to minimum flows and the flushing flows are in addition to the environmental flows Council is considering purchasing · In relation to biodiversity projects, the only project considered an off-set for direct impacts of the RWSS is the upstream (of the dam) catchment enhancement and restoration of habitats, recreation spaces, and increased indigenous vegetation. · Very stringent nutrient management requirements of the consent and PC6 set by the Board of Inquiry are achievable and HBRIC has demonstrated that the RWLP will manage in a manner consistent with achieving the 0.8 DIN limit by a reduction of around 3 kg/ha of Nitrogen over the areas of land currently contracted for · In relation to the DoC land swap, the Court has not issued a decision yet however HBRIC is contemplating how a negotiated settlement might be reached or whether there are creative solutions available for resolution of the issues Further to the recommendations, debate traversed: · Acknowledgement of the work Deloitte has undertaken · Request for a simple statement of income and expenses for year one of the RWSS · Deloitte definition of breakeven is ability to pay operational costs and bank debt for the scheme
RC58/16	Resolutions That Council: 1. Receives and notes the Deloitte Ruataniwha Water Storage Scheme Peer Review presentation. 2. Confirms that it is satisfied with advice received from Deloitte and the steps taken by HBRIC Ltd to resolve key issues of concern identified in the course of Deloitte’s review, noting that Deloitte will provide Council with a statement of income and expenditure for year one of operations. 3. Requests that Deloitte provide Council with an assessment in relation to any material adverse change that may be advised to HBRC between the time of Council’s agreement that the Conditions Precedent have been satisfied and Financial Close. Dick/Pipe CARRIED

HBRIC Ltd Report on Ruataniwha Water Storage Scheme Conditions Precedent and Pre-conditions

Further to the recommendations, debate traversed:

· RWSS is a legacy project

· Acknowledgement of the work and efforts of the HBRIC directors and the wider RWSS project team, and the work done by the Deloitte team on the peer reviews

· Biodiversity enhancements to the tune of $10M, creation of new jobs and economic opportunities for the area by providing farmers and growers with access to reliable water

· Significant costs to the ratepayer to meet the objectives of PC6 alone, without the assistance provided by RWSS in addition to economic losses the region will face

· Council will make its final call upon receiving final written confirmation of the funding provided by investors and financiers

· Once in a generation opportunity to make a lasting material positive difference to the region and the nation

· Water storage and providing primary industry with reliable water will help the primary sector adapt to climatic changes predicted for the region

· Long journey to this stage began many years ago, continuing through 3 long term plan processes, a Tukituki Choices consultation process, and finally through the Board of Inquiry Plan Change 6 and RWSS consents process.

· Advice from HBRIC and Deloitte are that the Conditions Precedent have been met, allowing councillors, as governors, to make the final decisions based on the material facts required for the RWSS to progress to financial close

· Project would not have progressed if not for the professional HBRIC Ltd Board of Directors

· Use returns from the scheme to improve other catchments in the region

· Focus needs to turn to all parties working to build a positive community together

RC59/16

Resolutions

1. Council agrees that the Conditions Precedent

“8. Resolves to invest up to $80 million in RWSS subject to Council being satisfied with:

“8.3.1 The EPA granting satisfactory resource consent conditions for Ruataniwha Water Storage Scheme infrastructure and operations, which in turn are recommended as being workable by all investors” and

“8.3.4 Obtaining a bankable construction contract which adequately addresses construction risk allocation through a fixed-time, fixed-cost arrangement”

have been satisfied.

2. Council agrees that the Condition Precedent

“8. Resolves to invest up to $80 million in RWSS subject to Council being satisfied with:

“8.3.3 Securing the funding required to build and operate the Ruataniwha Water Storage Scheme infrastructure”

will be confirmed to a Council meeting as being satisfied, by investors and financiers providing final written confirmation of the funding that is required to build and operate the RWSS infrastructure; and, further

2.1 that, if necessary, Council will convene an extraordinary meeting under Standing Order 2.14 in order to confirm this Condition Precedent.

3. Council agrees that the Pre-conditions

“8. Resolves to invest up to $80 million in RWSS subject to Council being satisfied with:

“8.1 its own legal advice on the RWSS documents and all related legal matters”,

“8.4 a Certificate issued by HBRIC Ltd’s legal advisers:

8.4.1. summarising the terms of all executed Water User Agreements;

8.4.2. identifying the water user parties who executed the Agreements; and,

8.4.3. explaining the enforceability or otherwise of the Agreements”,

“8.5 HBRIC Ltd increasing its annual distributions to HBRC to provide a 6% return to HBRC on the funds HBRIC Ltd draws down from HBRC from time to time to invest in the RWSS, up to a maximum investment of $80 million” and

“9 Requires HBRIC Ltd to keep the Council informed on progress toward meeting the conditions stipulated in Recommendation 8.3 over the period to the new Financial Close”

have been satisfied.

4. Council agrees that Pre-condition

“8. Resolves to invest up to $80 million in RWSS subject to Council being satisfied with:

“8.2 a further review of the final RWSS business case as at the new Financial Close and Council being satisfied with its advice and the steps taken (if any) by HBRIC Ltd to resolve key issues of concern (if any) then identified in the course of Deloitte’s review”

and Condition Precedent “8.3.2 Agreements to purchase a minimum of 40 million cubic metres of water per annum (Water User Agreements) and that the RWLP has committed to supply a minimum of 40 million cubic metres”

have been satisfied and that all Conditions Precedent and Pre-conditions, other than

“8.3.3 Securing the funding required to build and operate the Ruataniwha Water Storage Scheme infrastructure”

have been satisfied, subject to no further material adverse changes.

5. Council notes that, subject to investors and financiers each receiving final approvals from investment Committee, Shareholders or Credit Committee, as appropriate; and subject to HBRC being advised of any material adverse changes prior to Financial Close:

5.1. HBRIC Ltd will proceed to Financial Close with counterparties in July/August 2016, with the timing of financial draw-downs from Council to HBRIC Ltd (and all other investor and financier draw-downs) being subject to a Condition Subsequent/Precedent of either

5.1.1. obtaining full and unfettered access to the land being proposed for exchange between Department of Conservation and the Ruataniwha Water Limited Partnership, or

5.1.2. any Council funds drawn down being adequately protected by financial arrangements and/or legal agreements approved by Council.

6. That Council authorises HBRC management to prepare and execute written agreements with HBRIC Ltd for funds amounting to $80 million less the to-be-finalised sum (approximately $18 million) for capitalised development expenses incurred by HBRIC Ltd before Financial Close:

6.1. to be drawn down from Council funds in accordance with the timing and satisfaction of the Condition Subsequent/Precedent, and with the drawdown schedule agreed with counterparties at Financial Close, and

6.2. for a combination of debt and subscription for new equity in HBRIC Ltd with the proportions to be agreed between HBRIC Ltd and Council management, reflecting advice from PriceWaterhouse Coopers on achieving both an appropriate capital structure for HBRIC Ltd and an optimal balance of operating and capital cashflows to Council from the expected returns on Council’s investment, via HBRIC Ltd, in the Ruataniwha Water Storage Scheme.

7. That Council acknowledges the work undertaken by the Board and staff of HBRIC Ltd on the Ruataniwha Water Storage Scheme project and expresses its gratitude for their collective efforts.

Hewitt/Scott

for: Dick, Hewitt, Scott, Beaven, Pipe, Barker, Wilson

Against Graham, Belford

CARRIED

Closure:

There being no further business the Chairman declared the meeting closed at 4.20pm on Friday 8 July 2016.

Signed as a true and correct record.

DATE: ................................................ CHAIRMAN: ...............................................