BELFAST BRIEFING:The semi-State's takeover of NIE will present debt and pension challenges, writes FRANCESS McDONNELL
WITH THE lights going off in all corners of the economy at the moment in Northern Ireland, there has been little energy spent debating whether the arrival of a new electricity player will make things better or worse.
The price of electricity has long been a sore point, particularly for large industry users and businesses. Historically Northern Ireland suffered because a number of legacy issues left electricity production and distribution more expensive than it was for its neighbours. But falling wholesale costs, new competition and the opening of the electricity market have helped deliver some benefits to both consumers and business users.
It also helps that electricity consumers have a particularly vigilant champion on their side in the shape of the Utility Regulator. Its vision to “make a difference for consumers” has helped bring about some price decreases but major challenges lie ahead for electricity providers. Not least because one of the key players, Northern Ireland Electricity (NIE), which currently controls the transmission and distribution business network, is the subject of a €1.24 billion takeover.
NIE, which is also responsible for the planning, development, construction and maintenance of the network, is in the process of being sold by its parent, the Viridian Group, to the ESB. The State-owned electricity group is expected to complete the deal shortly but not before it has got the chance to understand exactly what it is getting itself into.
NIE had been up for sale for some time before ESB took the carrot. Analysts had blamed a high price-tag for a lack of suitors and a variety of baggage which the former public utility carries.
To understand NIE’s dominant role in the local market, a quick history lesson is necessary. It was privatised in 1993 and in 1998 it became part of a new holding company, Viridian. This was acquired by the Bahrain-based Arcapita Bank in a £1.6 billion deal four years ago.
The bank’s chief executive, Atif A Abdulmalik, said the sale of NIE is part of “a comprehensive strategy to refinance Viridian’s balance sheet”. The bank is seeking to “deleverage the capital structure” prior to refinancing, which it claims will be required from 2011. But completion of the deal, which will create a cross-Border energy union unthinkable in the past, is subject to conditions including the refinancing of indebtedness of the Viridian Group.
According to NIE’s accounts, the main source of its liquidity, including short-term working capital requirements, is “cash generated from operations and inter-company loans from Viridian”.
NIE’s annual accounts for the year to March 2010 show the company’s debt finance position at this time comprised £173.5 million “in respect of a Eurobond due to mature in September 2018” and “inter-company loans from Viridian” of £317.6 million, which are repayable on demand.
ESB has indicated it will “assume obligations of the NIE Group”. So far it has not made any public comment as to what the position will be in relation to the inter-company loans.
One other potential hurdle for ESB to cross before it finally opens its arms to embrace NIE might be the company’s defined-benefit pension liability. The latest set of accounts show its defined-benefit scheme increased from £77.9 million at March 31st, 2009, to £136.2 million at March 31st, 2010. According to NIE there were a number of reasons for this including “higher scheme liabilities due to a decrease in the discount rate used to discount scheme liabilities”.
There was also the question of “higher inflation forecasts and changes in mortality assumption . . . offset by higher asset values”.
Under the harsh glare of a naked electricity bulb, the pension liability might well have given other potential suitors cold feet even if ESB intends to stand firm on the issue. But even the most stalwart of NIE suitors would have shifted nervously when the reality of what the Northern Ireland market will demand became obvious. The Department of Enterprise, Trade and Investment has proposed a target for Northern Ireland of 40 per cent of electricity consumption from renewable sources by 2010.
It is estimated that an investment in the transmission system in Northern Ireland “of the order of £1 billion over the next 10-15 years will be needed” to achieve this target.
ESB may be getting ready to shine in the Northern Ireland market but chances are it could still have a few dark days ahead before the switch is finally thrown.
