Manx Gas

Summary

The request sought minutes of a Treasury meeting with Manx Gas and details of government support since September 2021; the response disclosed the full minutes of a February 2022 meeting regarding unpaid debts and regulatory pricing issues, though the outcome was noted as partially exempt.

Key Facts

• The meeting on 3 February 2022 was convened to resolve Manx Gas's failure to pay sums owed to the Manx Utilities Authority.
• Manx Gas has been supplying gas at a loss due to regulatory price structures preventing effective operation.
• CURA approved a 2.1 pence price increase in August 2021, but cash flow delays meant the increase did not feed through until January 2022.
• The UK Government announced a £200 loan and £150 Council Tax rebate to support consumers against rising energy costs.
• Manx Gas is unable to set its own prices and is trapped by a regulatory framework that rejected their second request for a price increase.

Data Disclosed

• 3rd February 2022
• 2.30pm
• September 2021
• 9th August 2021
• 20th October 2021
• January 2022
• 2.1 pence
• £200
• £150
• 80%
• 5 years

Original Request

I seek the publication of minutes taken during the meeting between Treasury and Manx Gas which was referenced by CEO Jo Cox in the April 12 sitting of the Economic Policy Review Committee. Should minutes not exist, I seek the publication of a summary of the topics and what decisions were taken by Treasury relating to Manx Gas following this meeting? Finally I seek the publication of any and all support provided by the Manx government to Manx Gas since September 1 2021.

Data Tables (1)

Full Response Text

Minutes of a meeting with the Island Energy Group and Manx Gas held on Thursday 3rd February 2022 at 2.30pm in the King Orry Room and via MS Teams

Present: Caldric Randall, Chief Financial Officer

David Catlow, Executive Director – Financial Governance

Elizabeth Smith, Executive Director of Legal Services – Attorney General’s Chambers

Sarah De-Yoxall, Chief Accountant (via MS Teams)

Joanne Robinson, Ernst & Young (via MS Teams)

Donna McNeill, Ernst & Young (via MS Teams)

Jo Cox, Chief Executive Officer – IEG

Aidan Baglow, Managing Director – Manx Gas

Gareth Fooks, Chief Financial Officer – IEG (via MS Teams)

Kendra Lace, Notetaker

01/22 Introductions

Mr Randall welcomed the representatives of IEG and Manx Gas to the meeting and those present introduced themselves.

02/22 Purpose of the Meeting

Mr Randall reported that the purpose of the meeting was the need to resolve the position where Manx Gas were not paying the sums owed to the Manx Utilities Authority.

Mr Catlow highlighted that Treasury’s responsibility was to oversee the fiscal responsibility of the public purse for the Island and so had a clear interest in this matter and the impact of the decision to withhold payment to Manx Utilities.

03/22 IEG Strategic and Regulatory Update

Ms Cox reported that the regulation and price structure was preventing them from operating the business effectively and Manx Gas had for a time been supplying gas at a loss.

Ms Cox advised that she had been brought into IEG to move the Group forward rather than to just sustain their position and outlined the plans for improvements in the business, such as smart home subscription and the investment in a web platform, investments which could help to drive down the reliance on gas as well as being aimed at bringing in new business to sustain the company and move towards home energy efficiency. However, to do that they needed to negotiate this short-term crisis to move those plans forward.

Manx Gas had approached (CURA) in September 2021 in relation to a price increase and Ms Cox advised that the management accounts had been assessed in a specific way. However, following a second request for a price increase, a different methodology had been used.

Mr Fooks detailed the background and current situation with CURA and advised that the framework was in place to recommend how much Manx Gas should increase or decrease their consumer prices. Tynwald had voted on the process previously to increase prices and they had expected the same situation with regards to the second request for an increase, but as Ms Cox had indicated, CURA differed their methodology for that second request.

Mr Fooks provided the background to the markets and highlighted that the OFGEM price cap had been announced this morning and in recognising that higher energy bills would be expected, the UK Chancellor had averred it would be wrong not to acknowledge that, but the UK Government had sought to take some of the sting out of the increase. The UK regulator had acknowledged that commodity costs were to be passed through to the consumer and the UK Government was supporting consumers with a £200 loan for each customer, which would have to be paid back over a period of years, with 80% of households also receiving a £150 Council Tax rebate. Further support had also been announced for Northern Ireland and other jurisdictions such as Norway, Spain and Portugal were also looking at supporting consumers, but the increase in prices did in the first instance need to be met by the consumer.

Mr Fooks reported that the format for price review submissions was set by CURA and Manx Gas were required to submit data every 3 months thereafter, or if the EBIT moved Manx Gas were required to submit data to CURA for assessment as to whether or not the price should change.

Manx Gas submitted data for the first review on 9th August 2021 and CURA believed that a 2.1 pence increase (inclusive of VAT) was appropriate. This increase was from 20th October 2021 and Ms Cox advised that there was therefore a long period where Manx Gas were meeting the cost of the commodity increases.
However, the commodity costs continued to increase and although the increase was from 20th October, that increase would not have fed through to cash until January 2022 because of the delays in billing and domestic consumers only being billed every 2 months, with commercial consumers being billed every month.

It was noted that there were no regulators in the Channel Islands and when LPG had increased in price, a price increase was implemented for consumers and that increase would be removed as and when it could be. However, in the Isle of Man, Manx Gas were trapped in a position where they couldn’t set prices and their request to the regulator had been rejected. They were now in a position where everyone was rushing to implement regulation and that would set the scene for the next 5 years which was why they had recently briefed Tynwald Members and had also sought a meeting with the Chief Minister and Treasury Minister.

Mr Catlow queried whether the company had taken any risk management steps and Ms Cox advised that hedging had been undertaken at a level of 35% via the MUA and this had been requested by the MUA and was usually only undertaken when there was volatility as you would not normally hedge when the market was flat and would in any case only normally hedge a maximum of 50%. Usage of gas in October had been significantly down and if they had hedged at a higher level, it would have proven to be a bad deal. They were however protected to March 2022 at 35% of their volume.

Mr Fooks highlighted that the biggest challenge once regulation was in place was the commodity prices being passed on to consumers. To give an idea of the pence per unit at the moment, it had been hovering at around £2.00 to £2.20 and Manx Gas were therefore making a loss

Ms Smith questioned whether the company would be able to react properly once the regulatory framework was in place and Ms Cox confirmed this was correct.

04/22 IEG Financial Update

(a) Amounts owed to Manx utilities and payment profile

Mr Fooks reported that the November 2021 invoice had been delayed, but would normally be invoiced early in December and settled in early December. They had however been open with regards to why payment terms had been opened up to 90 days and discussions were taking place every fortnight.

Mr Fooks advised that the relationship with Manx Utilities was unusual and they had not been able to react to price increases.

Mr Randall questioned where Manx Gas was in terms of the increasing level of debt with Manx Utilities which was increase each month and what has happening to the customer cash being collected. Ms Cox and Mr Fooks confirmed that customer payments were being reinvested back into operating costs because it was not covering their costs. Mr Randall countered this point as Manx Gas were not incurring costs as they were not paying their liabilities to Manx Utilities.

Mr Fooks questioned whether IEG/Manx Gas should stop engaging with Manx Utilities and Treasury representatives advised that officers needed to understand what the current position was and how to proceed and therefore the more information provided at this point the better.

Mr Catlow questioned whether there were any other creditors which IEG had chosen not to pay and Mr Fooks advised that IEG were leaning on all creditors where they could and were having those conversations, but the MUA was their main creditor.

Ms Smith highlighted that another bill was due from the MUA at any moment

However, they viewed this is a short-term problem, whilst there was no regulatory framework in place. If the second price increase request was reassessed, or they were able to get support for Q1 in the form of a grant, they would be able to pay the invoices for November/December 2021 and could then start to react to price fluctuations, with the regulatory framework doing its job.

Mr Catlow questioned whether there was any plan for the support that was inadvertently being provided to Manx Gas by way of the unpaid bills to be repaid and it was noted that with the payment terms of 90 days, the bills were reaching the point at which they would become due for payment. Ms Smith questioned whether the payment terms of 90 days had been agreed with MUA and Ms Cox confirmed they had not.

(b) IEG/Manx Gas current liquidity

Mr Fooks presented a slideshow detailing the financial position, profit and loss and cashflow in more detail. It was noted that the slides had been what was submitted to CURA.

Ms Robinson queried whether all the commodity costs were to Manx Utilities and it was noted that in excess of 95% of natural gas usage was from Manx Utilities, with a small percentage of LPG and operating costs. The vast majority of their costs were therefore fixed.

The dataset for November included the price increase and profit levels of had been anticipated, but CURA had advised that they should not be anticipating that level, despite the reduction in profit margin because of the delay in implementation. Ms Cox advised that CURA therefore appeared to be assessing them on insolvency rather than EBIT and despite a deadline of 10th January 2022 to respond to her submission, they had failed to respond.

IEG were looking at investing on their infrastructure which was required to be invested to maintain safety and at present they were unable to react due to the way they were being regulated.

Mr Fooks advised that it was not unusual for the business to lose money in the summer months, but Q4/Q1 was where they made their returns to invest and what they were currently seeing was in Q3, which was not providing a platform for a safe and sustainable business. Cash balances were being maintained to the maximum in order that they could protect their bank covenants, with in the bank at group level. That could however be worked down to local level.

Ms Cox advised that IEG had identified a preferred option in that they would clear the invoices for November 2021 and December 2021, but as this would mean they would run out of cash, they were seeking grant funding from Isle of Man Government to fund January to March 2022 of , which was broadly equivalent to the bills for November and December 2021. If the regulatory framework was then in place from March 2022, it would give them the clear methodology for prices which would be enforced.

However, there were other options: (a) they could seek to accelerate the request to CURA to increase prices by around 3 pence, using the same methodology used for the first assessment of prices; (b) they could take legal action against CURA as they were operating in a manner which meant that they could not run their business. Ms Cox advised that her letter to CURA in December 2021 did infer that, but it was not a route they wished to take.

Mr Catlow highlighted that one further option was for support through external creditors and questioned what other support had been explored and what was the view of Ancala.

Mr Randall questioned whether any cash was retained for an emergency and Ms Cox advised that they had to retain a certain amount for the bank covenants, but in a gas crisis that would be eaten away fairly quickly and prices had escalated at a rate that could not have been predicted.

(c) IEG/Manx Gas current financing arrangements

Mr Catlow advised that he appreciated the position of Ms Cox and Mr Fooks as directors of IEG, but Mr Baglow was a director of Manx Gas and Treasury’s priority was Manx Gas. Looking at IEG the impression given was that Manx Gas was a large element of that business and he questioned what the position of the other members of the Group was as Manx Gas was likely to have supported them in the past. Mr Fooks advised however that although Manx Gas although the largest element, the other elements were self-sustaining with two operating businesses in Jersey and two in Guernsey, with those elements having a smaller penetration in those islands.

Mr Randall questioned if a loan was to be made to Manx Gas, whether there were any assets upon which to secure it and Mr Fooks advised that the assets were secured for a facility agreement and returning to their financers would not help their situation. Mrs Cox also advised that it would still mean that the company was being asked to hold the increase in commodity.

Mr Catlow questioned whether with the cash generation of Manx Gas being moved to the centre, whether that was accessed across the Group and it was noted that all the businesses were self- funding, with IEG sitting above them and Ms Cox and Mr Fooks being directors of them all, but they all operated on their own accord.

Ms Cox reported that IEG could not hedge with the MUA because they could not future buy and if commodity prices were to increase they would have an issue which would risk the supply.
.

Mr Fooks advised that with regards to swaps, when the debt was due to expire a hedge could not be given without significant capital. The lack of a stable regulatory regime was impacting on the ability to look longer term due to the impending expiration of the debt and only being able to extend for 11 months.

Mr Randall questioned what would happen if IEG’s options could not be pursued in the short-term and Mr Fooks advised that part of the answer would be what the commodity costs would do and that was proving to be a volatile trend. However, their lenders did not want to be in a position where they owned a gas business. If regulation was to be forthcoming that might help. They may end up with a distressed extension and any future debt would be at considerable higher rates, with the impact of that being felt by consumers. By May 2022 it would be 6 months before they would start generating cash again. However, they were not in a position where insolvency was likely at this point,

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(d) Update on IEG refinancing

IEG were due to refinance their debt in April 2022 and concerns had been expressed by their financers over the lack of consistency in regulation. Financiers were aware that regulation was have been introduced in January 2022 and obviously that had not happened, which was impacting on their ability to refinance and although refinancing had not been abandoned, because of the inconsistency in the current regulation,

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Mr Randall queried who the debt providers were and Mr Fooks confirmed them to be

Mr Fooks confirmed these lenders had been in the business since 2016 and we

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