Initial Modification Report

Modification Proposal No. 7

Introduction

Premier Transmission Limited has prepared this report in accordance with section 3 of its Transportation Code Modification Rules.

Ofreg has made a modification proposal to change sections 12, 13 and 16 of PTL’s Transportation Code, relating to credit issues in order to facilitate the implementation of postalisation which is due to commence on 1st October 2004. Ofreg has also provided supporting information in the form of Appendix D – Credit Committee Terms of Reference. The proposed modification was issued on the 17thAugust 2004 and is also available on (Code Modifications).

Premier Transmission’s Opinion

Premier Transmission broadly supports the proposal but has some concerns. Generally, PTL believe that the drafting of the documents and the definitions within the document require further consideration.

PTL have the following particular concerns:

Section 12

12.1.8 (b) This requirement should sit in the Standard Conditions of Licence

12.2 Needs to be amended to reflect that shippers upstream of NI will pay a charge in accordance with PTL Special Licence Conditions and that PS Gas Suppliers will pay postalised charges

Section 13

13.3.1 It is necessary to clarify that it is the Shippers right to choose one of the acceptable forms of credit listed, not the Transporters (except where the Shipper has a credit ratingin which case the credit rating is utilised).

13.3.2This contains proposals whereby a Shipper or prospective Shipper can seek Unsecured Credit on the basis of financial ratios. These ratios were originally drawn from a Standard & Poor’s publication, “International Utility Ratings and Ratios”, published on 05.09.2001. In the document S&P make it clear that in conducting a ratings analysis they use both a qualitative (business profile) and a quantitative (financial ratio) analysis. They also make it clear that “Ratio Ranges Should be Used With Caution”.

PTL recommend that the Ofreg modification proposal is amended for the following reasons:

  • Shippers (or Shipper’s guarantor) do not neatly fall into the defined utility categories and indeed it is possible to conceive of prospective Shippers that fit none of the categories.
  • Using ratios alone, without a qualitative assessment of the Shipper’s (or Shipper’s guarantor) business, and taking into account specific business risks, may not properly reflect the credit risk.

Accordingly, PTL argue that the ratios as proposed in 13.3.4 be set more conservatively as follows:

Ratio changes for Transmission Utilities
Notional S&P credit rating
Accounting ratio / AA / A / BBB
FFO interest coverage / above 3.5 / 2.65 to 3.5 / 1.75 to 2.65
FFO to total debt / above 14.5 / 12.5 to 14.5 / 7.5 to 12.5
Ratio changes for Distribution Utilities
Notional S&P credit rating
Accounting ratio / AA / A / BBB
FFO interest coverage / above 6.0 / 4.0 to 6.0 / 2.5 to 4.0
FFO to total debt / above 35 / 19 to 35 / 12 to 19
Ratio changes for Integrated Utilities
Notional S&P credit rating
Accounting ratio / AA / A / BBB
FFO interest coverage / above 4.75 / 3.0 to 4.75 / 2.2 to 3.0
FFO to total debt / above 25 / 16 to 25 / 11 to 16
Ratio changes for Generation Utilities
Notional S&P credit rating
Accounting ratio / AA / A / BBB
FFO interest coverage / above 6.75 / 4.5 to 6.75 / 3.25 to 4.5
FFO to total debt / above 37.5 / 27.5 to 37.5 / 15 to 27.5

13.3.6(b) This needs to be modified so that the Shipper or Shipper’s guarantor shall provide a calculation of Accounting Ratios, cross referenced to its annual audited accounts, and provide any other information that might reasonably affect its credit standing including details of any guarantees provided or other material contingent liabilities (that may not necessarily be referenced or noted in its accounts). Further, PTL believes that the calculation of financial ratios should be conducted and signed-off by the Shipper’s (or Shipper’s guarantor) auditors.

13.6.2(d) This needs to be amended such that where a Shipper provides security in the form of 13.3.1(d), it shall evidence extension or replacement at least one month before expiry.

Section 16

16.5.2 This requires to be amended so that it better reflects the Transporter’s genuine loss, giving consideration to its duty to mitigate its loss. Any change should include the deletion of 16.5.2(c) (ii).

Appendix D - Credit Committee Terms of Reference

6.2 This should include an obligation on the Authority to consult with and have due regard to the interests of the Transporters in relation to 6.1 (B) because as a result of the 10% cap on the pass through of bad debt each Designated Operator is at risk in relation to bad debt

7.7 In addition to the Credit Committee Obligations listed, PTL propose that there should be an obligation for the Credit Committee to be transparent and provide written reasons for all its decisions.

Likely Implementation Date

Premier Transmission suggests that the proposed implementation date is the 1st October 2004, when Postalisation is due to be implemented.

Conclusion

Premier Transmission supports the Ofreg proposal amended as indicated above.

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