2016 ANNUAL REPORT AND ACCOUNTS A Northern Ireland company working for consumers A Northern Ireland company working for consumers Mutual energy Annual part 1 2016 v2.qxp_NIEH An Report 18/08/2016 11:20 Page 1 Mutual energy Annual part 1 2016 v2.qxp_NIEH An Report 18/08/2016 11:20 Page 2 Mutual energy Annual part 1 2016 v2.qxp_NIEH An Report 18/08/2016 11:20 Page 3 Contents 05 Strategic report 05 Chairman’s statement 07 Our strategy and business model 08 Business structure 10 Strategic objectives 11 Key performance indicators 12 Business performance 24 Risk management 26 Corporate governance report 26 Board of directors 28 Corporate governance statement 33 Directors’ remuneration report 45 Risk committee report 46 Audit committee report 50 Members 57 Annual reports and financial statements 57 Mutual Energy Limited 97 Moyle Interconnector (Financing) plc 129 Premier Transmission Financing plc 159 Belfast Gas Transmission Financing plc Mutual energy Annual part 1 2016 v2.qxp_NIEH An Report 18/08/2016 11:20 Page 4 A Northern Ireland company working for consumers Mutual energy Annual part 1 2016 v2.qxp_NIEH An Report 18/08/2016 11:21 Page 5 Strategic report ................................................................................................................................................................................. Regina Finn, Chairman 2015/16 has been a busy year for Mutual group with significant milestones achieved in both the electricity and the gas businesses. Moyle Interconnector’s North cable, which had been out of operation since 2012 due to problems with the insulation on the low voltage cables, returned to full operation at the end of January 2016. Significant progress has also been made towards replacing the low voltage element of the South cable and the remaining work has been scheduled to align with a National Grid outage over summer 2016. At the same time, we continued to contribute to the implementation of an Integrated Single Electricity Market (I-SEM) for Ireland and Northern Ireland, making sure the interests of Northern Ireland consumers are protected and the full value of the Moyle Interconnector is recognised. The I-SEM is due to be implemented in October 2017. Having successfully won the competition to bring gas to the west of Northern Ireland, the year saw rapid progress on this project which we are undertaking with our partners SGN. Planning has been granted for the Maydown Pressure Reduction Station, works have commenced, and gas is expected to be available in Strabane in October 2016. The timeline for the high pressure pipeline remains extremely challenging with works due to commence in 2017, subject to the required consents. Chairman’s statement 5 Mutual energy Annual part 1 2016 v2.qxp_NIEH An Report 18/08/2016 11:21 Page 6 Strategic report Major milestones in the implementation of new EU gas regulations were achieved in October 2015, including the introduction of several new products, the use of an auction platform to auction capacity, development of the Northern Ireland Trading Point to facilitate gas trading within NI and a significant rewrite of the Northern Ireland Network codes. The commercial IT system was successfully upgraded to facilitate this. Further work continues to develop a single gas system operator for Northern Ireland, as required by the Northern Ireland Utility Regulator, and to deliver the remaining work streams driven by the EU Regulations. The strategy of the Moyle Interconnector business is to ensure that cash is recovered to ensure full payment of the costs of the business as evenly as possible over the lifetime of the business, without building up excess cash when the interconnector reaches the end of its useful life. In line with our underlying strategy the board decided it did not need to fully recover the expenditure on the recent cables works through the tariff mechanisms. This means that the cash reserves in Moyle have reduced to pay for the project costs. The strategy of using built up reserves, combined with recent decreased auction prices, has led to a large impairment in the Moyle Interconnectors assets in the financial statements. The effect of this treatment, which is explained in note 9, is not dissimilar to writing off a large part of the work as a repair. The impairment is a non-cash adjustment and has no impact on the business’ cash flows or viability. The Moyle business will continue to recover only the cash it needs to meet the long term needs of the business. In a year that has posed many operational and commercial challenges I would like to pay tribute to the professionalism and dedication of the entire Mutual team, who have worked so well together to deliver on our vision and goals. I am grateful to my Board colleagues for their continued commitment and support, and to our members who play a unique and invaluable role in holding the business to account to ensure it delivers for Northern Ireland consumers. Regina Finn 23 June 2016 6 Chairman’s statement Mutual energy Annual part 1 2016 v2.qxp_NIEH An Report 18/08/2016 11:21 Page 7 Strategic report Our strategy and business model Our purpose To own and operate energy infrastructure in the long term interest of Northern Ireland energy consumers Our strategy 2. Deliver savings to 1. Operate assets 3. Manage market 4. Acquire stable safely and cost all Northern Ireland changes to minimise energy infrastructure effectively, consumers evenly risks to the NI assets at low cost outsourcing where over the life of the consumer to the consumer appropiate assets Our strategy and performance measures are discussed in more detail on pages 10 to 11 Our business model What we do How we do it Mutual Energy group owns and operates both Mutual Energy operates using a mutual model gas and electricity assets and operates to manage assets for the benefit of energy businesses providing services to the main consumers in Northern Ireland. company. Operation of Cost savings Business Governance assets See pages 14&18 structure structure See pages 12&17 See pages 8-9 See pages 28-32 Market Infrastructure Risk Executive environment acquisition management remuneration See pages 15&19 See pages 19-20 See pages 24-25 See pages 33-44 Our strategy and business model 7 Mutual energy Annual part 1 2016 v2.qxp_NIEH An Report 18/08/2016 11:21 Page 8 Strategic report Business structure Mutual Energy owns and operates the Moyle Interconnector (Moyle) which links the electricity systems of Northern Ireland and Scotland, and the Premier Transmission Pipeline System (PTPS), which consists of the Scotland to Northern Ireland natural gas transmission pipeline (SNIP) and the Belfast Gas Transmission Pipeline (BGTP) operated by Premier Transmission Limited and Belfast Gas Transmission Limited respectively. These strategically important assets provide vital energy links with Great Britain, and Mutual Energy aims to manage them safely, reliably and efficiently. The group, through West Transmission Limited, is in the process of extending the Northern Ireland gas network to the western part of Northern Ireland. More detail on this is available in the infrastructure acquisition section on pages 19-20. Mutual Energy’s existing transmission assets. 8 Business structure Mutual energy Annual part 1 2016 v2.qxp_NIEH An Report 18/08/2016 11:21 Page 9 Strategic report Mutual Energy is a company limited by guarantee with no shareholders, commonly known as a mutual. The mutual model and our licence structure s are attractive to long term stable investors, enabling the company to operate without equity and therefore allowing a much lower cost of capital than would otherwise be the case. Our bonds held by the group have obtained real interest rates of between 2.207% and 2.9376%. This compares with real interest rates of between 4.3% and 7.5% for other UK and Ireland gas and electricity transmission operators, resulting in significant annual savings for consumers. The group’s principal stakeholders are the energy consumers of Northern Ireland an d the financiers of its debt-financed subsidiaries. The group’s structure can be seen in the diagram below: Mutual Energy Limited West Moyle Energy NI Gas Transmission Interconnector Moyle Holdings Transmission Investments Holdings Limited Services Limited Limited Limited Limited Premier Belfast Gas Moyle Transmission Transmission Interconnector Holdings Limited Holdings Limited (Financing) Plc Premier Belfast Gas Moyle Transmission Transmission Interconnector Financing Plc Financing Plc Limited Premier Belfast Gas Transmission Transmission Limited Limited As well as each main operating company and their respective financing and holding companies, the group includes Moyle Energy Investments Limited and Interconnector Services Limited. Moyle Energy Investments manages the longer term cash reserves of the Moyle business and Interconnector Services provides services to the operational assets of the group where savings can be achieved by combining the provision of these services. The principal risks affecting the business are discussed on page 24. More information regarding our customers, stakeholders and staff can be found on page 21. Business structure 9 Mutual energy Annual part 1 2016 v2.qxp_NIEH An Report 18/08/2016 11:21 Page 10 Strategic report Strategic objectives Our strategy is made up of four key elements: OUR OBJECTIVE HOW DO WE DELIVER? HOW DO WE MEASURE SUCCESS? Our key success measures include: We provide a safe, reliable and efficient transmission • Availability targets for our assets (KPI 1); service to the electricity and gas suppliers of Northern Operate assets Ireland. • Operational savings against forecast safely and cost (KPI 2); Delivery is achieved through a competitive tendering • Lost time incidents (KPI 3); effectively, process for operational activities and the development of a • Detailed maintenance and contracting outsourcing where comprehensive contracting strategy and partnership milestones which are monitored at appropriate approach with key contractors. contract meetings; and Further information on asset operation can be found on • Detailed monthly budgets which are pages 12 and 17.