Proposed Acquisition of Phoenix Transmission by Northern Ireland Energy Holdings Decision Paper

Published date05 October 2007
Energy SectorGas
Proposed Acquisition of Phoenix Transmission by Northern Ireland Energy
Utility Regulator Decision Paper
October 2007
1.0 Introduction
1.1 The Utility Regulator issued a consultation paper on 25th June 2007 seeking
on issues raised by the proposed acquisition of the regulated gas
transmission utility, Phoenix Natural Gas Limited (“PNG”) by a subsidiary of
a not-for-dividend 100% debt financed company, Northern Ireland Energy
Holdings Limited (“NIEH”). This paper sets out the responses received and
sets out the Utility Regulator‟s decisions on the issues raised.
1.2 Currently, PNG owns and operates both distribution and transmission assets
and it is proposed that, prior to the acquisition taking place, the distribution
assets will be transferred to a new entity, Phoenix Distribution (Northern
Ireland) Limited (“PDL”) and, upon completion of the acquisition, PNG will
be renamed Belfast Gas Transmission Limited. For ease of reference, this
entity will be referred to as „Phoenix Transmission‟ in this paper. The correct
company name is, however, used in diagrams referring to the company
2.0 Background
2.1 Mutualisation involves the transfer of a private sector company (funded by a
mixture of equity and debt) to a not-for-dividend company limited by
guarantee (“CLG”), which has no shareholders and instead has a group of
Members. Significant cost savings can be made from such transfers, as CLGs
are typically financed solely with debt. Given the absence of equity and,
therefore, the need to distribute profits, with appropriate regulatory support the
CLG can raise capital at a very low all-in cost, producing significant savings
for the benefit of consumers. However, achieving these benefits also entails
transferring to consumers certain risks normally retained by the shareholders.
2.2 NIEH is a CLG which was formed in January 2005 to acquire and hold
important energy infrastructure assets for the benefit of the energy consumers
of Northern Ireland. A wholly owned subsidiary of NIEH owns the Moyle
Interconnector which links the electricity systems of Northern Ireland and
Scotland, and the Scotland to Northern Ireland Pipeline ( “SNIP”) which
conveys natural gas from Twynholm in Scotland to Ballylumford in Northern
The consultation responses are detailed in Annex 1
Ireland. The acquisition of Moyle Interconnector Limited in 2003
Premier Transmission Limited (“PTL”) in 2005 have both been funded by
long-term bond finance and are obvious benchmarks for the proposed
acquisition of Phoenix Transmission by NIEH.
2.3 The Utility Regulator must assess any proposed transfer of ownership against
its legal duties as outlined in the Energy (Northern Ireland) Order 2003. In
relation to its gas functions, the Utility Regulator‟s pr incipal o bjective is to
promote the development and maintenance of an efficient, economic and
coordinated gas industry in Northern Ireland. A critical question facing the
Utility Regulator has therefore been, whether the interests of consumers are
prejudiced by moving from the current equity financed model of ownership of
Phoenix Transmission to a new CLG ownership structure. In analysing any
potential risks to consumers, the Utility Regulator will have regard to the
extent of the compensating benefits for consumers. It should be noted that the
Utility Regulator has previously analysed these issues in 2005 and concluded
that the benefits to customers outweighed the risks. However in our June
consultation we revisited these questions and examined how mutualisation has
operated in the intervening period.
2.4 Prior to any acquisition of Phoenix Transmission by NIEH, the current
structure of NIEH is as follows:
2.5 Any proposed purchase of Phoenix Transmission by NIEH would mean that
Phoenix Transmission would operate within this corporate structure. Therefore
in comparison to its current structure outlined above, the „position‟ of Phoenix
Transmission within the NIEH structure would be as set out in the following
In 2003 Moyle In terconnector Limited was re-financed and acquired by Moyle Holdings Limited.
Northern Ireland Energy Holdings was then formed in January 2005 in preparation for the purchase of
Premier Transmission in March 2005. Moyle Holdings Limited then joined the NIEH Group in October
Northern Ireland Energy Holdings
Northern Ireland Gas
Holdings Limited
Moyle Group of
Other Activities
Premier Transmission
Holdings Limited
Premier Transmission
Financing Plc
Premier Transmission
diagram. As mentioned above, the existing Phoenix distribution and supply
businesses intend to retain the „Phoenix‟ brand-name, and therefore, Phoenix
Transmission would be renamed “Belfast Gas Transmission Limited”.
3.0 Benefits of Acquisition
3.1 Since our June consultation, we have had an opportunity to update our
financial analysis on the capital benefits of mutualisation and the impact on
the postalised tariff. This now includes a more up to date view on the profile,
tax payments and tenor.
3.2 Under its current licence, Phoenix Transmission is entitled to recover its asset
value until 2024. The rate of return is set at 7.5% real pre-tax until 2016, after
which it can be set by the Utility Regulator pursuant to the licence. Given this
allowed rate and the current level of long-term interest rates it should be
possible to refinance at a considerably lower rate of interest, thereby achieving
significant gains to consumers. As part of the 2006 agreement
it was agreed
that the underlying asset value of the transmission asset was £98m. This figure
will be adjusted at point of sale to take into account revenue received,
additional capital expenditure, inflation and other factors. This will be subject
to Utility Regulator approval but it is likely that the final asset value will be in
the region of £98m.
3.3 The transaction costs associated with the acquisition of Phoenix Transmission
by NIEH are estimated to be approx £3m, including legal, technical, financial
advisors, etc., and we estimate initial reserves to be £4.5m, which is
approximately half the figure required for PTL. These costs will also need to
be funded from the financing.
For further information see NIAUR Press Release of November 2006.
Northern Ireland Energy Holdings
Northern Ireland Gas
Holdings Limited
Moyle Group of
Belfast Gas
Transmission Holdings Limited
Belfast Gas
Transmission Financing Plc
Belfast Gas
Transmission Limited

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