2. Achievability
2.1 Introduction
ERTU has been asked to consider whether or not the proposed split of ECNZ into three new SOEs is achievable within the framework of the Government's objectives and principles referred to in the Reform Package. ERTU has considered both legal and practical aspects of the split and is recommending that the split take place according to the structure set out in the Transaction Overview Report.
2.2 Approach for Interim Certification
Prior to its interim certification, ERTU had:
- agreed with ECNZ the criteria for identifying which items are material;
- undertaken a detailed review of ECNZ's material assets and liabilities and other material matters affecting ECNZ;
- developed strategies for transferring material contracts to the new SOEs; and
- consulted with ECNZ, Crown Company Monitoring Advisory Unit and Treasury on the issues which would need to be resolved by ERTU and the IDGs prior to the establishment of the new SOEs.
ERTU then, as required by its terms of reference:
- designed a transaction structure to effect the split;
- allocated all known ECNZ material assets not referred to in the Reform Package;
- considered transfer strategies for ECNZ's existing major contracts including:
- ECNZ's debt obligations;
- the Comalco contracts;
- ECNZ's existing hedge and bilateral contracts relating to electricity supply and pricing;
- other material contracts and assets (including the Contact Energy gas contract);
- considered options for managing the Fletcher Challenge Energy Heads of Agreement relating to gas;
- developed a framework to transfer staff to the new SOEs;
- prepared with ECNZ agreements for the sale to, and purchase of ECNZ's assets by, the new SOEs; and
- designed with ECNZ a process for the sharing of intellectual property between the SOEs.
2.3 Approach for Final Certification Report
In the period prior to ERTU's final certification, ERTU has:
- reviewed the retail acquisition asset allocation decisions recorded in its Transaction Structure Report and reallocated certain acquisitions in the manner set out in the Transaction Overview Report;
- continued its participation in discussions and negotiations with key counterparties to ECNZ's existing major contracts;
- continued to explore with both ECNZ and the Huntly IDG options for managing the Fletcher Challenge Energy Heads of Agreement;
- negotiated with Transpower an interim transmission arrangement for the new SOEs;
- finalised with the IDGs an agreement setting out the process for and basis of sharing of intellectual property between the new SOEs;
- finalised with ECNZ and the IDGs the documentation necessary to implement the agreed debt restructuring arrangements;
- finalised an agreement putting in place a hedge offset arrangement between ECNZ and the new SOEs;
- finalised with the IDGs the agreements for the sale to, and purchase of ECNZ's assets by, the new SOEs;
- consulted with ECNZ and the IDGs about the transfer of staff to the new SOEs (including consideration of superannuation issues);
- prepared a detailed plan for the management of the assets and liabilities of the residual ECNZ; and
- overseen and assisted the IDGs achieve the tasks set out in their Terms ofReference.
2.4 Summary of Progress on Key Steps to Achieve Split
Structure
The structure recommended by ERTU involves the establishment of three new SOEs that will acquire the assets and liabilities of ECNZ. ECNZ will retain certain residual assets and liabilities that it will manage until it can be wound up. As part of ERTU's final reports it has prepared a comprehensive plan for the management of these assets. This is recorded in the Residual ECNZ Business Plan.
Asset Allocation
In its Transaction Structure Report, ERTU allocated a variety of assets and contractual agreements to the new SOEs based on business synergies, geographical location, existing relationships and effect on commercial viability. Since these initial allocations ECNZ has become involved in a number of different bids for the retail businesses of power companies. The opportunities deriving from these bids have been allocated amongst the IDGs. The IDGs have worked with ECNZ on the relevant bids. The nature of these allocations (to the extent they are not commercially sensitive) are identified in the Transaction Overview Report.
Final Letter of Representation
ECNZ has agreed to give ERTU a letter of representation which confirms that all material contracts have been identified and that the Agreements for Sale and Purchase are complete and do not omit any material matters.
Agreements for Sale and Purchase
These agreements set out the assets to be purchased by each new SOE, the payment mechanisms to effect settlement and the obligations of each of the parties. The IDGs have confirmed that these agreements are agreed in principle. These agreements are intended to be attached to the Crown's direction to ECNZ under the Electricity Industry Reform Act.
These agreements also record the other agreements required to effect the split and which are to be signed before settlement.
Debt Arrangements
ERTU has proposed a structure for ECNZ's existing debt and associated financial swap transactions under which the existing contracts remain with the residual ECNZ entity and the Crown guarantees ECNZ's debt obligations to third parties. ECNZ will provide the initial debt funding for the new SOEs on terms that match ECNZ's own debt. Payments by the new SOEs would be made in such a way as to meet ECNZ's current debt obligations. Loan Facility Agreements and the form of the Crown guarantees have been substantially agreed. It may still be necessary to hold a meeting of ECNZ's domestic bondholders in January to approve these arrangements. However, there appears to be no reason why this process will not result in bondholder support. Further details are provided in the Final Legal Transfer Report.
Comalco
ERTU has concluded commercial negotiations with Comalco and has received confirmation from Comalco and its legal advisers that the draft documentation is acceptable. The form of the assignment document has been fixed by a letter exchanged between Comalco and ERTU.
Fletcher Challenge Heads of Agreement
ERTU has facilitated a discussion between the Huntly IDG and ECNZ on the options for managing this arrangement. The management of this arrangement will be transferred to the new Huntly SOE.
Hedge Contracts
The consent of ECNZ's hedge counterparties is required to the split. Under the recommended structure ECNZ's existing hedges remain with ECNZ and ECNZ enters into an offsetting agreement with the new SOEs under which the value and risk associated with the hedges is passed through to the new SOEs. The Crown has agreed to guarantee ECNZ's obligations in order to ensure a counterparty cannot reasonably withhold its consent. The Hedge Offset Agreement has been substantially agreed. Further details are provided in the FinalLegal Transfer Report.
Other Material Contracts
These include the Contact Energy gas agreement and other fuel supply contracts, the agreement for the construction of the Manapouri second tailrace tunnel, various joint venture and other contracts associated with development projects and ECNZ's direct supply contracts. The Agreements for Sale and Purchase require that these contracts are to be novated to the new SOE which is to acquire the particular contract or asset. Such novation requires counterparty consent and ECNZ has commenced a process to obtain these consents.
Transmission
As ECNZ's current transmission arrangements with Transpower expire on the date of the proposed split of ECNZ, ERTU has negotiated with Transpower a cap on expenditure for all three SOEs and certain other terms which are more fully described in the FinalLegal Transfer Report.
Residual ECNZ
ERTU has prepared a detailed plan for the management of the assets, liabilities and other functions likely to be left with the residual ECNZ following the split. ECNZ will remain as an SOE with the objective of disposing of the remaining assets and satisfying its liabilities as quickly as possible. ERTU anticipates this will take between two to four years. ERTU believes that a tidy rationalisation of these issues is possible provided this entity is appropriately resourced.
IDG Terms of Reference
ERTU has received and reviewed the reports prepared by the IDGs in relation to the completion of the tasks identified for them in their Terms of Reference. ERTU believes that there are no issues as to achievability of the split arising from this review.
IDG Certification
ERTU notes that each of the IDGs has certified to Government that in its opinion, subject to the assumptions set out in its report, the relevant SOE will be a commercially viable entity and effective competitor.
2.5 Conclusion on Achievability
ERTU's final opinion is that the split of ECNZ into three SOEs is achievable within the principles and parameters set out in the Reform Package.
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