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Thursday, 25th April 2024 |
| Funding - a key facet of Bord Gais’ treasury strategy |
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| After planning a corporate bond issue for 2003, Bord Gais decided to postpone the issue due to market conditions, and instead raised e500 million in a syndicated loan in which 22 banks participated. |
Bord G?is Eireann (BGE) is the owner and operator of Ireland’s integrated gas network. BGE is a Statutory Body, established under the Gas Acts of 1976 to 2002, wholly owned by the Government of Ireland. BGE has developed a national gas network comprising over 7,000km of distribution and 1,830km of transmission pipelines. BGE is focussed on expanding its customer base and has c.412,000 residential customers and c.16,000 industrial/commercial customers, adding 32,000 customers in 2002 alone.
BGE’s business, and the environment in which it operates, has significantly changed in the last five years. BGE has transformed from an integrated monopoly gas supply business, with all activities in Cork and Dublin and along a corridor in-between. In recent years, BGE has dealt with increasing market liberalisation, leading to a separation of activities between transportation and supply, third party access to the gas transportation networks, the introduction of the Commission for Energy Regulation (CER) as independent regulator in gas in 2002, a significant capital expenditure programme, and extension of the business into other activities including electricity supply and gas transportation in other jurisdictions.
BGE is undergoing a major capital expenditure programme and completed two major construction projects in 2002 on time and within budget - pipeline to the West, a high pressure gas pipeline between Dublin, Galway and Limerick, and the Second Interconnector pipeline, a sub-sea pipeline between Scotland and Ireland, at a combined cost of c. •700 million.
BGE’s business will continue to expand over the coming years with investments in pipelines in Northern Ireland, the Mayo-Galway pipeline to facilitate development of the Corrib field (subject to Corrib planning), development of its Public Gas Transporter business in the UK, continued expansion of its transportation network in Ireland, expansion of its supply business in Ireland and potential investment in electricity generation in Ireland.
Treasury policy/structure
Over the last year, BGE has conducted a fundamental review of its treasury policy and operating structure. This has been driven by concerns about treasury activities in the general corporate environment but primarily by the increasing importance of treasury to BGE’s financial and operational performance. BGE’s borrowings have risen from a level of •143 million in 1998 to over •1,000 million at the end of 2002, and from 20 per cent of book capitalisation to the current level of 56 per cent. Over the same period, interest costs have grown from 15 per cent of profit to the current and expected levels of over 100 per cent.
The board of BGE has ultimate responsibility for the approval of overall treasury policy including new financing and funding arrangements, cash management activities, use and entering into treasury financial instruments and for monitoring treasury performance in compliance with the approved group policy. The treasury policy sets out decision-making roles and responsibilities as well as the authority levels that apply to BGE’s treasury transactions. The board carries out an annual review of treasury policies and strategy.
All borrowings require the approval of the Department of Communications, Marine and Natural Resources, given with the consent of the Department of Finance. BGE has a statutory borrowing limit of •1.7 billion and reports on its treasury activities to the Department of Finance on a regular basis.
BGE operates a central group treasury function and has implemented the appropriate segregation of duties between front- and back-office.
Group treasurer Paul Kenny is responsible for the front-office function supported by a treasury front-office analyst. The basic role of the front-office is the management of BGE’s funding, liquidity, interest costs and foreign exchange. The main duties include development and implementation of treasury policy, arranging financing facilities, securing the approval of the BGE Board and relevant Government Departments, cash and liquidity management, foreign exchange and interest rate risk management, and ongoing communication with external and internal stakeholders.
The head of treasury operations, Jim Barrett, is responsible for the back-office function and is supported by a treasury back-office analyst. The back-office independently manages the confirmation, settlement, valuation and reporting of all deals and activities.
There is a formal monthly meeting between the treasury team, the chief financial officer, the head of business planning and analysis and the accounting team. This includes review of the detailed treasury report for the month, which reports on all positions, details activities undertaken in the month and a discussion on all material issues.
Risk management
The key risks managed by treasury are:
• Liquidity - BGE seeks to ensure its forecast funding needs are covered by existing loans or available bank facilities, for pre-determined periods. BGE also seeks to ensure a spread of maturity profiles to minimise refinancing risk. As discussed below, the major focus of BGE’s treasury activity over the last 6 months has been in securing new facilities and refinancing existing facilities.
• Interest rate risk - BGE manages a significant portion of its debt portfolio at fixed interest rates, using both fixed rate debt and interest rate swaps. BGE entered into E600 million of interest rate swaps in December 2002, giving significant predictability over future interest costs.
• Currency risk - BGE faces significant currency exposures due to the substantial portion of its gas purchases made in the UK. This exposure is managed through the negotiation of sterling linked sales prices with large customers and through forward contracts. BGE has also entered into currency options where appropriate. This risk is managed in conjunction with the Energy Supply Risk Management Committee, comprising the CEO, CFO and head of energy supply, to ensure that the hedging actions taken are consistent with the supply business requirements.
BGE is also increasing its investment activities in the UK. The currency risk on these investments is mitigated through the use of sterling borrowings.
• Credit risk - treasury has a defined policy as to the required creditworthiness of counterparties.
Recent financing activities
As a result of its major capital programme, BGE has had a requirement for significant funding. BGE has a medium term requirement for c.•1.4 billion in drawn facilities and feels it is appropriate to diversify its sources of funds by accessing different markets.
In 2000 and 2001 BGE secured a total of •377 million from the European Investment Bank (EIB) with long dated maturities at competitive costs. To date, the remainder of BGE’s financing has come from the commercial bank market.
BGE intends to raise some funds in the capital markets and therefore sought a credit rating from both Standard and Poor’s and Moody’s Investors Services in mid 2002. BGE secured a credit rating of A- from S&P and Baa1 from Moody’s. BGE provided substantial information on the structure of the business, its operating and regulatory environment and medium to long-term financial projections for the business to both rating agencies. BGE’s senior management were fully committed to securing the appropriate credit ratings. BGE feel that the ratings gives its sufficient flexibility to operate the business in the coming years although it feels that the Moody’s rating may overstate the business’ credit risk and feel a slightly higher rating may be more appropriate. Both rating agencies are conducting their annual reviews of BGE over the course of the summer period.
BGE considered accessing the Eurobond market in late 2002/early 2003. A significant amount of preparatory work was undertaken, including the preparation of the Offering Circular, the other legal documents - Trust Deed, Subscription Agreement, Paying Agency Agreement - and preparation of all marketing documentation. However, due to the prevailing adverse environment in the bond markets at the time, the issue was not launched to the market, with the intention to return to the market when conditions changed. BGE is currently again considering a capital markets transaction.
BGE’s focus then turned to securing a portion of its future requirements from the bank market and mandated four banks in February 2003 to arrange a •500 million syndicated loan. BGE negotiated of the terms and conditions with the lead arrangers and is pleased at the terms and conditions in the agreement, as it allows substantial flexibility in the future financing of the business. The transaction was launched on the 13th March, and an information memorandum was sent to the potential participants in the transaction. BGE senior management made a presentation to potential participants in mid-March. Commitments were due from lenders by the start of April, and final allocations were made in the middle of April. The transaction was a success being 50 per cent over-subscribed, with 22 banks participating.
BGE has also completed a limited recourse project financing on one of its pipeline projects. In 2002 BGE constructed a spur pipeline from its second interconnector to the Isle of Man to supply a new power station being constructed by the Manx Electricity Authority (MEA). The cost of the spur was effectively underwritten by the MEA, a statutory body, wholly owned by the Isle of Man government. In the first half of 2003, BGE refinanced a substantial portion of the cost of the pipeline with a •46 million limited recourse loan. The charges payable by MEA are due in euro, indexed to the UK Retail Price Index. To mitigate the impact on future margins from variations in UK RPI, BGE also entered into a cross-currency, RPI-linked interest rate swap, which effectively matches variations in interest costs with variations in the revenue stream resulting from UK RPI.
The importance of the treasury function to BGE’s performance has grown exponentially over the last number of years, driven by significant capital expenditure, but also by changes in its business environment. The board has recognised the current importance of the function and BGE has implemented a ‘best-practice’ operating structure. There have been substantial developments in funding over the last 12 months and this activity is likely to reduce in future, but treasury will remain an important centre of risk management for the business. |
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| Article appeared in the September 2003 issue.
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