9. Hedge Contracts Restructuring
Under ERTU's recommended structure for the split, the economic value of ECNZ's existing hedge contracts will be allocated amongst the new SOEs according to the following arrangements:
- ECNZ's existing hedges will remain with ECNZ as a residual entity;
- as part of the split ECNZ will "transfer" all the rights and obligations under its existing hedges to the three new SOEs under an "offsetting contract". ERTU has recommended the proportion of the total price risk to be transferred to each SOE;
- ECNZ's ongoing obligations under its existing hedges will be guaranteed by the Crown. The guarantee is intended to ensure hedge counterparties' credit exposure to ECNZ after 1 April 1999 is protected and that, therefore, there is no basis for terminating the hedges as a result of the split;
- payments from hedge counterparties to ECNZ will be matched by equivalent payments from ECNZ to the new SOEs, in the recommended proportions, under the offsetting contract. Similarly, payments due by ECNZ to the hedge counterparties will be funded by payments from the new SOEs to ECNZ;
- the risk of non-payment by a hedge counterparty to ECNZ will be shared between the new SOEs in accordance with their proportionate interests under the offsetting contract; and
- each new SOE will counter-indemnify the Crown in the event of the guarantee being called as a consequence of any non-payment by it under its offsetting contract.
These arrangements are summarised in the following diagram:
A programme has been commenced to obtain the consents of the current counterparties to the transfer of ECNZ's assets. ERTU has received legal advice that it would be unreasonable for these counterparties to withhold consent where a Crown guarantee is provided. ERTU has advised counterparties that this will be available and a number of consents have already been obtained. ERTU anticipates that the remaining consents will be received over the next few months.
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