Sue Newberry is Associate Professor of Accounting at the University of Sydney.

When Transpower’s $701 million sale and leaseback of the South Island high voltage electricity grid came to public attention in early 2005, Transpower claimed it still owns the grid, and continues to do so 1. But Transpower also defended its actions by saying that it has an option to “repurchase” the grid, thus giving the lie to the claim it still owns the grid.

Transpower refused to disclose further details on the grounds of commercial sensitivity. That, too, was difficult to believe because others involved in the deal were not so constrained. For example, Asset Finance International awarded the Macquarie Bank the Asia/Power prize for cross border leasing transactions and Macquarie was happy to boast about it 2, while Asset Finance International published a feature article in February 2004, titled “Transpower signs NZ’s largest US lease”. That article contains information that Transpower refused to release.

My article last year (Watchdog 111, April 2006), explained what was known then about the deal 3 . Briefly, information that had come out by then included:

• The buyer of the grid was the US-based Wachovia Bank;
• The leaseback of the grid runs through the Cayman Islands, a tax haven;
• The leaseback of the grid runs for about 100 years, but Transpower has the option to repurchase the grid after about 25 years;
• The deal was tax-driven. At the time, it was being arranged, an inquiry into abusive tax avoidance schemes was underway in the United States. A ban on this particular type of deal (lease to service) took effect from just days after this deal was signed;
• Transpower delayed for a year showing the one-off profit effect in its financial report because of uncertainties related to the tax inquiry.

Layers Within Layers

Recently, a document filed with the US Securities and Exchange Commission (SEC) has come to light, so it is now possible to identify more clearly the buyer of the grid and the structure of the leaseback arrangement 4. The arrangement disclosed in that document may be summarised:

• On December 11, 2003, Transpower sold the South Island grid to a US-based trust called TP2003-A1 Owner Trust (TP 2003 Trust). This trust has a beneficial owner and a trustee owner.
• The sole beneficial owner of the TP 2003 Trust is First Fidelity International Bank, a subsidiary of the Wachovia Corporation which is based in Charlotte, North Carolina.
• The trustee owner of the TP 2003 Trust is the Wilmington Trust Company which is based in Delaware. Delaware is known for its tax regime.
• The South Island grid is leased back to Transpower via three layers of leases which track back to New Zealand through the Cayman Islands.
• Layer 1 : TP 2003 Trust leases the grid to NZ Power Cayman 2003 – 1 Limited. Transpower fully guarantees all of the obligations of NZ Power Cayman 2003 – 1 Limited.
• Layer 2 : NZ Power Cayman 2003 – 1 Limited sub-leases the grid to Halfway Bush Finance Limited (a Transpower subsidiary);
• Layer 3 : Halfway Bush Finance Limited sub-sub-leases the grid to Transpower.
• Transpower is the operator (not the owner) of the South Island grid.

The document contents are reproduced below:

Description of the Facilities Used for the Generation, Transmission or Distribution of Electric Energy for Sale

Wilmington Trust Company, in its capacity as owner trustee of TP 2003 – A1 Owner Trust (‘TP 2003 Trust’) will act as the lessor of a high voltage, AC electricity transmission network comprising 220kV, 110kV, and 50/66kV substations, overhead transmission lines and supporting structures, the ancillary system comprising relays, meters and panel equipment that protect or monitor the electricity transmission system and certain real estate relating thereto (the ‘Network’) located on the South Island of New Zealand.

Ownership

The TP 2003 will lease the interest in the Network to NZ Power Cayman 2003 – 1 Limited (“Lessee”), a company incorporated in the Cayman Islands whose obligations under the lease are fully guaranteed by Transpower New Zealand Limited (“Transpower”) a limited liability company organised under New Zealand law. Lessee will sublease the interest in the Network to Halfway Bush Finance Limited, a subsidiary of Transpower, which will then lease its interests in the Network to Transpower. Transpower will be the operator of the Network.

TP 2003 Trust is a non-business trust established pursuant to the Owner Trust Agreement (TP2003 – A1) dated as of December 11, 2003 between Wilmington Trust Company, a Delaware banking corporation, and First Fidelity International Bank, an Edge Act corporation organised under the laws of the United States (“First Fidelity”) which is an indirect, wholly owned subsidiary of Wachovia Corporation. The sole beneficial owner of the Trust is First Fidelity.

Endnotes:

(1) See http://www.transpower.co.nz/?id=184 “Transpower is the asset owner and system operator of New Zealand’s high-voltage electricity transmission grid”

(2) See http://www.macquarie.com.au/au/about_macquarie/company_profile/history/awards_2003.htm

(3) Sue Newberry, “Foreign Investment In Transpower: What’s Going On With Our Power Transmission System?” http://www.converge.org.nz/watchdog/11/06.htm

(4) The document may be obtained from www.secinfo.com/d14D5a.22rf4.htm