Legal Report
[ Last Updated 22 November 2005 ]
Table of Contents
Other South Island IDG Documents
Transfer of Assets and Liabilities
The Agreement for Sale and Purchase is the key document in implementing the ECNZ split. It may be regarded as the umbrella document in the sense that it identifies other documents that are essential to implementation of the split and that establish the framework for SISOE's business.
There are several matters that are significant to the SISOE in the Agreement for Sale and Purchase.
Conditions Precedent
While the subscription agreement with the Crown for equity funding has been specified as a condition precedent, a number of other agreements will need to be executed before the ASP can itself be executed. These include:
- The assignment of the Comalco contracts
- Insurance
- Loan Agreement
- Hedge Offset Agreement
Representations and Warranties
It is customary in an agreement of this type that, where due diligence has not been performed, the seller will provide representations as to the assets being transferred and the liabilities being assumed. In this case, ECNZ will provide letters of representation to ERTU only, and the SI SOE will not have the benefit of those representations directly.
Taxation
The transaction is not intended to provide the Crown with any net gain arising from any taxes payable on this transaction. While the ASP provides specifically for a top up for stamp duty, there is no such provision for other tax top ups that may be required.
Land and Treaty Issues
ECNZ does not, at present, have legal title to the land that will be transferred to SISOE. Rather it has beneficial title. The Crown has an obligation to transfer legal title to ECNZ on legal title becoming available. This obligation will devolve to SISOE when it comes into existence.
There is a need on the part of SISOE to put in place on settlement a procedure for the completion of issue of legal title to its land assets and, in particular, to liaise with Government departments, local authorities and other relevant organisations in that process.
In terms of the Public Works Act 1981, it appears that the majority of properties, or other estates or interests that are being acquired by SISOE, will be exempt from the provisions of the Act. This comment applies in respect of land that has been developed for generation purposes, although not in respect of land held for development purposes and as buffer zones. There is a procedure in the Agreement for Sale and Purchase relating to the transfer of land that is not exempt from the provisions of the Public Works Act.
As the Crown and Te Runanga o Ngai Tahu have settled the Ngai Tahu claim, section 27B memorials will be removed from land transferred to SISOE. There are therefore no Treaty issues (with the exception of Highbank Station which is subject to a right of first refusal in favour of Ngai Tahu) in respect of land the subject of the Ngai Tahu claim. This does not include Nelson and Marlborough Districts. Potential claims in these areas have not been identified at this stage. However, Ngai Tahu have indicated their wish to be involved in a review of Waitaki resource consents.
Human Resources
When a business is transferred by asset sale, all employees of the business become redundant on settlement. The Agreement for Sale and Purchase provides that ECNZ will meet any costs arising out of redundancy of its employees prior to settlement.
The Southern Generation Group comprises two broad types of employee who are to be treated differently as a consequence of the sale to SISOE. These are generation group employees and management and administrative employees.
On settlement of the sale, all of ECNZ's Southern Generation Group employees will become redundant. The intention is that the generation group employees are to be offered substantially similar jobs by SISOE after settlement, which will mean that ECNZ may not have to pay redundancy compensation to these employees, whether or not they accept the jobs offered to them by SISOE.
Generation group employees taken on in similar positions will carry over their past service and this will affect any long service related benefits.
SISOE is required to consider ECNZ management and administrative employees who apply for jobs. It is not required to give preference to those employees.
Because of SISOE's obligation to provide substantially similar positions to generation group employees, and because of the Health and Safety in Employment Act 1992, SISOE must establish systems to ensure the health and safety of its work force.
Intellectual Property
ERTU has recognised the transfer of intellectual property as a key implementation issue. A broad framework has been established which allows all relevant intellectual property of ECNZ to be transferred to all the SOEs unless there is a good reason to do otherwise.
A working group has been established to address issues arising out of the transfer of intellectual property to the SOEs. The working group seeks to manage the identification of ECNZ's intellectual property, the compilation of a catalogue of intellectual property, the categorisation of intellectual property and the institution of systems to ensure a timely and orderly transfer of intellectual property. The cataloguing is due for completion in December 1998.
The working group has adopted three categories of intellectual property. These are common allocation (which is intellectual property which will be available to all SOEs), exclusive allocation (which is intellectual property which will be exclusively allocated to one SOE) and ECNZ only intellectual property (where intellectual property relates to specific matters required to be maintained by ECNZ or where retention is required to maintain confidentiality).
The Legal Transfer Report identified the initial key steps being undertaken by the information technology group, namely identifying ECNZ's systems and what could be transferred, identifying what systems each group has, establishing the infrastructure need of each SOE and recommending how the systems can be transferred.
These matters have now been completed and transition plans developed for all the IT systems being transferred.
ECNZ's Year 2000 ("Y2K") programme is not yet complete. Therefore, we do not know whether the IT systems transferred to SISOE will be Y2K compliant. We have, however, reviewed a number of documents which indicate that ECNZ expects to complete the majority of its compliance programme by 31 March 1999 (31 December 1998 for critical systems).
However, there is a risk that two systems may not be compliant on 31 March 1999. These are the MIDAS (billing system) and the Southern Generation ARC project. SISOE will need to monitor the progress made in relation to these two systems.
Loan Agreement
SISOE's initial term debt funding will be provided under a loan agreement to be entered into with ECNZ on a back-to-back basis. The intention of that loan agreement is to provide funding to SISOE on terms that substantially mirror the terms on which ECNZ has obtained its funding. Tranches of existing ECNZ debt are then to be allocated to SISOE under the terms of that loan agreement.
In addition to a debt allocation, SISOE will also receive a swap allocation. The effect of the swap allocation is to pass on to SISOE the benefit of the foreign exchange and interest rate cover that ECNZ has taken out in respect of the debt to be transferred to SISOE.
Hedge Contracts
Like the loan agreement, the hedge agreement is a back-to-back arrangement. The level of the hedge cover available to SISOE is still the subject of negotiation.
Transmission Arrangements
The existing Memorandum of Understanding between ECNZ and Transpower will terminate on the earlier of the date of the split and 30 June 1999.
Following the expiry of the MOU, SISOE expects Transpower to offer connection to SISOE on fair and reasonable terms and conditions.
SISOE Material Contracts
Superlink Joint Venture
ECNZ has a one third share in this joint venture. As well as assigning its interest in the Superlink JV, ECNZ will need to transfer its share in the property held by the Superlink JV to SISOE.
Ceramic Fuel Cells Limited
CFCL, in which ECNZ has a participating share of 4.5%, is being restructured from a company limited by guarantee to one limited by shares. The implications of this restructuring are still being considered but it is expected to mean SISOE will have less influence and control relative to its current position as a shareholder in CFCL and will materially change the nature of SISOE's investment in this project.
Comalco Agreements
The arrangements with Comalco comprise three electricity sale and purchase agreements entered into in 1963, 1981 and 1993 with several other supplementary agreements. A transmission agreement was entered into with Transpower in 1993 with several other supplemental agreements. In general terms, the arrangements with Comalco require certain quantities of electricity to be supplied on a "delivered basis" by ECNZ to Comalco until 2012 unless renewed for a further ten years. SISOE, like ECNZ, will take responsibility for transmission and therefore assumes any risk relating to actual delivery of the electricity.
ERTU has negotiated an assignment deed with Comalco and New Zealand Aluminium Smelters Limited (as guarantor of Comalco's obligations). This deed will operate to transfer ECNZ's rights and obligations to SISOE. The guarantee provided by New Zealand Aluminium Smelters Limited will not be affected by this transfer.
An assignment of ECNZ's rights under the arrangements with Transpower under the terms of the Tiwai Point Connection Contract means ECNZ will not be released from its obligations under these arrangements. ERTU proposes to seek to obtain from Transpower a release for ECNZ from its obligations under the Tiwai Point Connection Contract.
Second Manapouri Tailrace Tunnel Project
An agreement was entered into between ECNZ and a joint venture comprising Fletcher Construction, Dillingham Construction from the United States and Ilbau from Austria. It is a lump sum contract with provision for contract variations.
A key aspect of the Manapouri Tailrace Tunnel Project is the need to shut down Manapouri station to allow the new tunnel to be connected to the existing headworks of the station. This shut down (or outage) is planned as a three week period. We understand that, because of physical transmission bottle necks, SISOE will be unable to fully utilise its Waitaki generation to meet the requirements of Comalco at Tiwai Point over the outage period.
ECNZ and Contact have entered into a Deed which required Contact to take all reasonable steps within its power to sell ECNZ electricity produced at Contact's Clutha stations to enable ECNZ to comply with its obligations under its agreements with Comalco.
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