The argument for more not-for-dividend infrastructure projects in the UK PFI sector got another boost last month with the close of the £107 million 25-year monoline wrapped bond for the Scotland-Northern Ireland Gas Pipeline (SNIP) acquisition financing. The deal is expected to reduce the venture's cost of capital from 8% to 5%.

Built between 1994 and 1996, SNIP has been acquired by Northern Ireland Energy Holdings Limited (NIEH) – a not for dividend company designed to return financial savings to energy consumers in Northern Ireland – from a 50-50 joint venture (Premier Transmission Ltd) between BG Group and Keyspan Energy Development Corporation.

The long running project is an integral part of Northern Ireland's power plan. The 24-inch diameter pipeline is 135 kilometres long and transports gas from Twynholm in Scotland to Ballylumford Power Station which generates over half of Northern Ireland's electricity needs. The pipeline also feeds the Phoenix Natural Gas natural gas distribution system in Belfast and the Greater Belfast area.

Northern Irish gas demand is escalating and is expected to exceed available capacity by 2006. SNIP's acquisition by a not-for-dividend company is expected to ensure the future growth of gas infrastructure build-out in Northern Ireland and reduce costs to users by up to £6 million per year.

The deal is structured through 100% debt vehicle Premier Transmission Finance and closed on 18 March. In addition to buying out around £44 million of BG and Keyspan joint equity, the deal refinances existing debt obligations and prefunds cash reserves.

The financing comprises £107 million in 25-year fixed rate bonds wrapped by monoline Financial Guaranty Insurance Company (FGIC) – the first FGIC wrap into the UK infrastructure market. In addition to the triple-A rating ensured by the wrap, the financing pulled in underlying ratings of A1 from Moodys and A from Standard & Poor's.

Arranged by joint lead managers Barclays Capital and RBC Capital Markets, the triple-A bonds have a final maturity of 31 March 3030 and an average life of 15.4 years. The bonds priced at 5.2022% semi-annual with a 43bp margin over 8% 2021 UK gilts.

The structure is very similar to the £135 million Moyle Interconnector financing that closed in 2003 wrapped by FSA and priced at 2.9376% with an 85bp spread over the 2.5% July 2016 gilt.

Like Moyle, the project functions in a relatively benign regulatory regime. The Premier concession has no fixed term, and a minimum term of 35 years. Premier is entitled to a 25-year notice of termination from the Northern Ireland Authority for Energy Regulation which can only be served for the first time 10 years after the transference of the economic interest.

Also like Moyle, cashflows for the deal come from a capacity fee and a volumisation fee. The deal is supported by a cost-plus regulatory mechanism whereby gas users and shippers pay Premier a monthly capacity fee equal to the monthly forecast revenue required to cover the pipeline's costs. Total payments are then matched against costs at the end of the year and underpayments or overpayments are reconciled during the following year.

At the moment the revenue structure does expose 50% of Premier's revenues to swings in transmitted gas volumes, as well as to mismatches in gas flow forecasts, for up to 12 months. But this risk is reduced from October 2008, when the gas volume element of required revenues falls to 25%.

The risk of shipper default is also covered by a payment mechanism under which the other shippers' up their payments to Premier to cover the shortfall, usually starting three months after the default. In addition to BG's Ballylumford Power Station and Belfast gas distributor Pheonix, the shippers that will use the pipeline are ESB for its Coolkeeragh plant ( at least initially) and Bord Gais.

Along with its strong payments mechanisms, Premier is also bolstered by strong liquidity. The deal comes with a six-month debt service reserve account and a £9 million secured liquidity facility – equivalent to an additional 12 months' debt service.

The combination of payment mechanisms, liquidity facilities and the insulation of the operating company from its sponsor through its special purpose entity guarantee means that average debt service coverage ratios (DSCRs) are expected to be 2x for the life of the transaction.
Premier will function under Northern Ireland's new postalisation regime whereby shippers revenues are split between designated pipeline operators. The deal is effectively risk-free, although the rights of the bondholders to enforce security may be constrained because of the importance of the asset to the Northern Irish energy system.

Given the savings in cost of capital on the deal and the benefits to both consumers and gas developers in terms of the boost to build-out, the not-for-dividend structure could have an application cross a range of UK PFI sectors – anyone for UK rail?

Premier Transmission
Status: Closed 18 March
Amount: £107 million
Description: 25-year gas pipeline bond issue to finance sale of Scotland-Northern Ireland Pipeline to not-for dividend company
Buyer: Northern Ireland Energy Holdings
Vendors: Keyspan; BG
Issuer: Premier Transmission Finance
Lead managers and underwriters: Barclays Capital; Royal Bank of Canada
Financial advisory: Royal Bank of Canada; David Wylde Project Finance
Legal counsel to issuer: McGrigors
Legal counsel to underwriters: Linklaters
Legal counsel to vendors: Allen & Overy