Coal-Fired Plant Shifted $1bn Offshore While Pocketing $117m From Australian Taxpayers

The Guardian - Christopher Knaus | Nick Evershed

Payment to owner of Loy Yang B – one of country’s dirtiest plants – was compensation for short-lived carbon tax

The Loy Yang power plants in Victoria. The Paradise Papers revelation has prompted renewed criticism of Australia’s climate policy. Photograph: Bloomberg via Getty Images

The owner of one of Australia’s dirtiest coal-fired power plants quietly moved $1bn offshore within days of pocketing $117m from taxpayers in compensation for Labor’s now-defunct carbon tax.
The revelation, contained in the Paradise Papers, has prompted renewed criticism of the “chronic failure” of Australian climate policy and warnings against future cash handouts to multinational polluters.
It also comes in the final stages of the looming sale of the plant, Loy Yang B, one of the last remaining brown coal-fired generators in Victoria’s Latrobe valley.
In 2012, fearing an industry backlash, Julia Gillard’s government created a $5.5bn compensation scheme to accompany its carbon tax, which Tony Abbott scrapped two years later.
The $5.5bn energy security fund was dubbed by the shadow environment minister, Greg Hunt, as “the biggest cash handouts in Australian history” made to the companies thought to be the country’s “biggest polluters”.

One of the big winners was the owner of Loy Yang B, the British-listed company International Power, which in turn was owned by the French multinational GDF Suez – now known as Engie.
Loy Yang B’s owner received $116.9m in carbon tax compensation from the government’s energy security fund on 22 June 2012, money it had been anticipating since it was first announced in March.
It was also promised 4.87m free carbon units – in effect a permission to emit – each year for four years.

Within days of the $116.9m payment from taxpayers, Loy Yang B’s owner upstreamed $1bn out of its Australian operations

The compensation package was met with derision from energy and climate experts. Chief among its critics was the Australian energy market analyst Bruce Mountain, who warned that the compensation would simply be treated by polluters as windfall profit.
Mountain’s firm, CME, published analysis in 2013 showing generators were passing on the carbon tax’s costs to consumers and keeping the compensation as profit.
New revelations about the movement of wealth from Loy Yang B’s Australian entities have now been made in the Paradise Papers, based on millions of documents from two offshore service providers and the company registries of 19 tax havens. The material was obtained by the German newspaper Süddeutsche Zeitung and shared by the International Consortium of Investigative Journalists with partners including the Guardian.
The documents reveal that within days of receiving the compensation, Loy Yang B’s owner upstreamed $1bn in dividends out of its Australian operations as part of its aptly named “Project Salmon”.
Mountain is far from surprised. He said it was simply further evidence that the policy of polluter compensation was a “chronic failure”.
“That they would have such largesse to dispatch back to their parent, it doesn’t surprise me at all,” Mountain told Guardian Australia. “It was a pure windfall, that compensation. The compensation scheme was very badly designed.”
The Australian companies behind Loy Yang B had used internal loans to give large amounts of money back to their British parent companies in the lead-up to 2012.
Project Salmon involved restructuring the debt, so the Australian entities could use the $1bn in dividend payments to cancel the loans.
Engie said in a statement that the dividends did not involve the distribution of any cash outside of Australia. It also flatly denied sending any of the carbon tax compensation back to its offshore owners.
“No cash was distributed out of Australia as a consequence of these dividends,” the company said.
“Where dividends were paid in cash they did not include compensation received from the government. Further, carbon tax compensation was not permitted to be distributed overseas under the project finance restrictions and was used to meet the future carbon tax liabilities of Loy Yang B.”
The $1bn dividend payments appear to be at odds with the company’s public statements at the time.
In 2011 it warned that the carbon tax had the potential to send power plants in the Latrobe valley broke.

It is unclear what tax benefit, if any, International Power achieved through Project Salmon. Photograph: The Age/Fairfax Media via Getty Images

When details of the compensation were announced in March 2012, International Power issued a statement saying it was not enough.
The taxpayer assistance would only provide “some level of compensation for the impact of the introduction of a carbon tax”, but was “significantly less than the actual impact on its business”.
“Compensation through the Energy Security Fund is essential to ensure investors do not lose faith in the Australian energy market, and to ensure the secure operation of the National Electricity Market,” it said.
International Power first approached the Cayman Islands offices of an offshore law firm, Appleby, in April 2012, to seek help with part of Project Salmon. Their initial emails are among the 6.8m Appleby records exposed as part of the Paradise Papers.
“We are acting for International Power in connection with a proposed internal restructuring involving the companies in the chain of ownership relating to the Loy Yang B power station in Australia,” International Power’s lawyers told Appleby.
“The intention is for the proposed internal restructuring to be implemented shortly after the refinancing for the Loy Yang B power station is completion [sic] (targeted for mid-end June 2012).”
It is unclear what was done with the $1bn in dividend payments once they reached the top companies.
Not long after the dividend payments, the Australian subsidiaries came under some financial pressure. In late 2014 Loy Yang’s main Australian entity, Loy Yang Holdings Pty Ltd, reported it was at risk of breaching the conditions of its loans.
Engie denied that had anything to do with the $1bn dividends.
“The risk of breach of covenants on the project finance highlighted in the 2015 accounts of the Loy Yang B entities was due to low energy prices and the performance of the business after the 2012 refinancing,” the company said.
“This related to market factors outside of the control of Loy Yang B and coincided with the introduction of the carbon tax, which negatively impacted the business, despite compensation received from the government.”

The Loy Yang B power station in the Latrobe valley. Photograph: Paul Crock/AFP/Getty Images

It is unclear what tax benefit, if any, was achieved through Project Salmon.
Many of the dividend payments were made to a company first incorporated in the Netherlands, but managed from the UK.
Other parts of Loy Yang’s ownership structure were incorporated in the tax havens of the Cayman Islands, Cyprus and Guernsey.
Engie said all of the Loy Yang entities situated in “so-called tax haven countries” were managed in either the UK or Australia, meaning they were subject to the tax laws in both nations.
“As a matter of principle, Engie avoids investments in so-called tax haven countries and such investments can only be made if supported by strong economic reasons, other than tax savings,” it said.
The main entity in Australia, Loy Yang Holdings, paid no tax in 2014-15, despite recording $452m in revenue, according to the tax office’s corporate transparency report. The year before it paid $26.4m in tax on $760m total income.
The Guardian is not suggesting the company acted unlawfully or sought to avoid its tax obligations.
The Loy Yang dividends were paid through retained earnings, meaning they were made from profits that were already taxed in Australia.

This government can’t square the wheel on keeping its coal generators in business and meeting the Paris agreement.
Bruce Mountain, energy market analyst

The Project Salmon documents suggest the company’s chief concern in Australia was the imposition of dividend withholding tax. But it said the Australian Taxation Office had already made “favourable determinations” that such a withholding tax would not apply on the payments.
Engie is in the final stages of selling Loy Yang B. Three bidders – Delta Electricity, Alinta Energy, owned by Chow Tai Fook Enterprises, and China Resources Power Holdings – are thought to be left in the race.
Mountain said the failure of the compensation scheme served as a lesson for future policy.
He said the current government would be inclined to again offer compensation to polluters for climate policies. The experience of the past, he said, showed this was simply bad policy.
“This government can’t square the wheel on keeping its coal generators in business and meeting the Paris agreement,” Mountain said.
“If they ever do anything they’ll be inclined towards bailing out the coal generators to make them good. And I think to the extent to which you can say: ‘But we’ve already done that, and then some, when there was no good reason at all’ – I think it’s important. It’s important for the public policy debate and where it all ends up. So that, for me, is a critical lesson.”

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Paradise Papers: who's who in the leak of offshore secrets