NewERA

Background and Functions

In September 2011 the Government announced the establishment of NewERA, initially on a non-statutory basis, within the NTMA. The core role of NewERA involves the oversight of the financial performance, corporate strategy, capital and investment plans of the following commercial State entities:

  • ESB;
  • Ervia (formerly Bord Gáis Éireann (BGE));
  • EirGrid;
  • Bord na Móna; and
  • Coillte.

NewERA’s role also involves, where requested, advising on the disposal or restructuring of State assets. In addition, NewERA works with relevant stakeholders to develop proposals for investment in energy, telecommunications, water and forestry to support economic activity and employment.

The NTMA (Amendment) Bill 2014 provides for putting the NTMA’s NewERA functions on a statutory basis.

Corporate Finance and Governance Advice

During 2013 NewERA continued its structured programme of engagement on a quarterly basis with the commercial State entities within its remit. This engagement focuses on the financial performance of these entities which collectively generate revenues of c. €6 billion per annum and employ capital of c. €14 billion.

Shareholder Expectations Framework
NewERA has developed, in conjunction with the relevant Government Departments, a Shareholder Expectations Framework intended to provide clarity and guidance for each of the commercial State entities in relation to the Government’s strategic priorities, policy objectives and financial performance and reporting requirements.

A Shareholder Expectations letter based on this Framework was issued to the Board of ESB during 2013 and it is intended that Framework letters will be issued to the other entities within NewERA’s remit in 2014. It is envisaged that these letters will be updated on an annual basis.

Dividend Policy
NewERA reviewed the dividend policy of ESB and provided advice to the Department of Communications, Energy and Natural Resources and the Department of Public Expenditure and Reform on a revised dividend policy, which was announced by ESB in October 2013. The revised policy envisages an increase in ESB’s dividend payout ratio from 2015, with a target payout of 40 per cent of normalised profits after tax by 2017, while having regard to ESB’s investment grade credit rating. NewERA will review the existing dividend policy of each of the other companies following issue of the respective Framework letters by the relevant Ministers.

Financial Analysis
NewERA has provided detailed financial analysis and recommendations to relevant Ministers on requests for advice concerning the commercial State entities. These requests primarily stem from legislative obligations on commercial State entities to seek Ministerial approval (e.g. for an entity to borrow) or arise under the Code of Practice for the Governance of State Bodies. During 2013 NewERA provided detailed financial analysis and recommendations (where appropriate) to relevant Ministers on a total of 36 requests for advice, including €2.9 billion in financing-related requests and €0.6 billion in capital expenditure project requests.

An overview of these requests, broken down by company and by category as follows:

Requests by Company6

Fig_13

Source: NTMA

Request by Type7

Fig_14

Source: NTMA

6 Irish Water is a subsidiary of Bord Gáis
7 “Other” includes advice on such matters as pensions and establishment of subsidiaries

Portfolio Financial Overview
During quarter 4 2013 NewERA prepared a Portfolio Financial Overview the purpose of which was to provide a snapshot of the financial performance of each of the commercial State entities within its remit as at the date of their respective latest published annual financial statements8. It also provided an overview of the financial performance of these entities on a combined basis for the first time. This report was finalised in early 2014 and issued to relevant stakeholders. The main financial and operating performance measures covered by the report are summarised below:

  • Turnover increased from €5.6 billion to €6.1 billion in the latest reported financial year with all entities reporting revenue increases;
  • Adjusted operating margins for the latest reported financial period were at their highest level since 2008/09;
  • In the latest reported financial year, the entities spent an aggregate of €1.25 billion on capital investment, bringing the total spend over the past five years to €6.4 billion;
  • Combined net debt increased from €6.7 billion to €6.8 billion in the latest reported financial year representing a multiple of EBITDA of 3.7 times and a net interest cover of 4.6 times. The increase in net debt of just €0.1 billion when coupled with capital investment of €1.25 billion is reflective of cash generation from operations of the combined entities in excess of €1 billion;
  • Net gearing (excl. pension and employee liabilities) remained at the same level as the previous reported financial year;
  • Return on Capital Employed increased in the latest reported financial year to 6.6 per cent from the prior year and was marginally higher than the historical 5 year average;
  • Dividends of €102 million paid in the latest reported financial year representing c. 1.5 per cent of combined net assets and a payout rate of 26 per cent of profit after tax; and
  • Adjusted earnings growth in latest financial year was 34 per cent but over last 5 years the average earnings growth was –1 per cent.

8 The dates of the latest financial statements are as follows: EirGrid – 30 Sep. 2012; Coillte, BGE and ESB – 31 Dec. 2012; Bord na Móna – 27 Mar. 2013.

Other Activities
NewERA also carried out financial reviews of both An Post and RTÉ at the request of the Minister for Communications, Energy and Natural Resources. The An Post review focused on An Post’s historical performance and future plans and also provided peer company analysis. The RTÉ review analysed the company on a group and divisional basis together with a benchmarking exercise of the financial performance of RTÉ relative to peer broadcasting organisations.

State Asset Disposals & Restructuring

A Government decision in relation to the disposal of State assets was announced in February 2012. The Government decided that the asset disposal options to be pursued include the sale of BGE’s energy business and some of ESB’s non-strategic power generation capacity, with consideration also to be given to the sale of some of Coillte’s assets, excluding the sale of land, and the sale of the State’s remaining shareholding in Aer Lingus Plc when market conditions are favourable and at an acceptable price.

Ervia (formerly BGE): Disposal of Energy Business
NewERA has provided financial advice to the Government Steering Group established to oversee the sale of BGE’s energy business. Following the announcement on 27 November 2013 by the Minister for Communications, Energy and Natural Resources that bids received at that date were not acceptable, further interaction with bidders resulted in revised bids which offered materially increased value. On 12 December 2013 a consortium comprising Centrica plc, Brookfield Renewable Power Inc and iCON Infrastructure was selected as the preferred bidder on the basis of its revised bid which had an enterprise value of up to €1.1 billion.

NewERA is currently examining options for the longer term corporate structure of Ervia, which is responsible for gas networks and water/waste water infrastructure, and will report to Government in the second half of 2014.

ESB: Disposal of Non-strategic Power Generation Capacity
ESB was asked by Government to develop proposals for the sale of some non-strategic generation capacity, with the specific objective of delivering special dividends to the Government targeted at up to €400 million by the end of 2014. NewERA is working closely with ESB and the Government Steering Group established to oversee these disposals. Within this role NewERA provides analysis of bids received and a recommendation to the relevant Ministers as to whether or not, from a financial perspective, the Ministers should consent to the respective sales.

In February 2013 ESB’s shareholding in the power generation plants Marchwood Power Limited in the UK and Bizkaia Energia SL in Spain were identified for sale. The sale of ESB’s 50 per cent shareholding in Marchwood Power Limited to Munich Re, a major European insurance company based in Germany completed in November 2013 and a competitive price was achieved with dividends of c. €153 million paid to the State in the first quarter of 2014 from the proceeds of the sale. The sale of Bizkaia to an affiliate of ArcLight Capital Partners LLC, a US based energy investment firm, completed in May 2014.

In October 2013 ESB announced its intention to sell its two peat stations, West Offaly Power and Lough Ree Power. It is expected that the sales process for these two plants will be completed in late 2014.

Bord na Móna/Coillte: Beneficial Merger
In June 2013 the Government announced that it was not proceeding with the sale of harvesting rights in Coillte and that the company should instead undergo a restructuring, overseen by NewERA and the relevant stakeholder Departments, which will include operational streamlining, financial de-leveraging and a critical examination of the disposal options for its non-core activities such as telecoms and wind. The Government also announced that financial analysis would be carried out to evaluate how to give effect to a beneficial merger of Coillte and Bord na Móna with the objective of creating a streamlined and refocused commercial state company operating in the bio-energy and forestry sectors.

A report on the financial costs and benefits of a Coillte/Bord na Móna merger was prepared by NewERA in conjunction with the two companies.

In June 2014 the Government announced a joint venture between Bord na Móna and Coillte focusing on their common business activities in biomass, wind energy, shared services, and recreation and tourism. NewERA will oversee the implementation process to give effect to the Government decision.

Activities to Facilitate Investment in Economic Infrastructure

NewERA continues to work with the relevant Government Departments and other stakeholders on investment initiatives in the areas of water, energy and telecommunications.

Irish Water
During 2013 NewERA provided advice to the Department of the Environment, Community and Local Government on certain financial aspects of the establishment of Irish Water. This has included:

  • Construction of a high level financial model, based on inputs from the Department of Environment, Community and Local Government and Irish Water, to assist Government in the assessment of Irish Water’s likely annual funding requirements; and
  • Advising on potential capital structures that meet various accounting and credit rating constraints.

Energy Retrofit
Energy retrofit involves investment in domestic, public and commercial buildings in order to help meet Ireland’s commitment to achieving a 20 per cent reduction in energy demand by 2020 through energy efficiency measures. The National Energy Efficiency Fund (the Fund) was announced by the Minister for Public Expenditure and Reform in Budget 2013 to finance energy efficiency projects in the non-domestic sector with finance to be provided on a commercial basis.

The Government, as announced by the Minister for Communications, Energy and Natural Resources, indicated its intention to provide €35 million as seed capital with a view to a fund of over €70 million being established in conjunction with private sector investment. NewERA provided extensive advice and analysis to the Department of Communications, Energy and Natural Resources on the establishment of the Fund.

Following a competitive process Sustainable Development Capital LLP (SDCL), a specialist financial and investment advisory firm headquartered in London and with offices in Dublin, New York and Hong Kong, was selected as investment adviser and manager of the Fund. SDCL also manages a similar energy efficiency fund in the UK.

The Fund has recently reached a first close of €35 million with a capital commitment of €17.2 million from the Government, together with private sector capital from London & Regional Properties (€12.8m) and the Glen Dimplex Group (€5m). It is anticipated that as much as €300 million leveraged funding will be delivered by the Fund over the next three years based on a fund size of €70 million.

Telecommunications
During 2013 NewERA was a member of the high-level Steering Group established to oversee the implementation of the National Broadband Plan. In April 2014 the Minister for Communications, Energy and Natural Resources, announced that the Government has committed to a major telecommunications network build-out to rural Ireland, with fibre as a cornerstone of its investment. This project is to address all parts of Ireland that cannot access commercial high-speed broadband services. Detailed planning work is continuing in order to deliver the project with a comprehensive implementation strategy targeted to be published later in 2014.