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The proposed sale of Midlands Electricity’s distribution business
to Scottish & Southern Energy
© Utility Consultants Ltd 2003
Prepared by Utility Consultants Ltd
www.utilityconsultants.co.nz
Disclaimer
This research report is of a generalnature, and is not intended as specific
professional advice. Accordingly, neitherUtility Consultants, nor its’ directors andshareholders, shall be liable for any lossor damage arising from action or inaction
based on this research report.
Contents
Disclaimer
Contents
Introduction
History of the MEB
Structure ofMidlands Electricity
Interested bidders
Deal structure
Regulatory implications
Feedback &Contact us
Introduction
Midlands Electricityserves 2.4m customers inBirmingham and the West
Midlands
Operates 60,000km oflines and cables, and has a
regulatory asset value ofabout ₤981m
Annual revenue of about₤310m, and NOPAT of ₤115m
Acquired by Scottish &Southern Energy plc in May
2003 subject to bond-holderapproval which did not
eventuate
Color Company Market share
LE Group (EdF) 28%
Scottish & Southern Energy 21%
Northern Electric 13%
ScottishPower 12%
Powergen (E.On) 9%
Western Power Distribution 9%
United Utilities 8%
Proposed industry structure
History ofthe MEB
Vested as MidlandsElectricity plc March 1990
Floated onthe LSE December1990
Acquired by AvonEnergy Partners June 1996
50% owned by Cinergyand 50% owned by GPU
Supply businesssold to National Power(since re-named Innogy
and sold to RWE)
June 1999
GPU buys outCinergy’s 50% stake July 1999
Midlands Electricityrenamed GPU Power UK March 2000
Utilicorp offer to buy outGPU’s interest in Avon
Energy PartnersOctober 2000
GPU merges withFirstEnergy Corp
in November 2001
Utilicorp changesname to Aquila in
March 2002
Aquila buys 79.9%stake in Avon Energy
Partners from FirstEnergyand renames business
Aquila Networks
May 2002
Scottish & SouthernEnergy acquire AquilaSterling for ₤1,112m
subject to bond-holderapproval in early July
May 2003
Structure ofMidlands Electricity
MidlandsElectricity plc
Aquila (79.9%) First Energy (20.1%)
Aquila Sterling
Avon EnergyPartners Holdings
Bonds (ring-fencedfrom any repatriation
to the US)
Bonds
₤360m variable bondsdue in 2006
US$250m seniornotes due in 2007
US$250m seniornotes due in 2008
Interestedbidders
Initially interestedbidders
Scottish & SouthernEnergy plc
YTL Corporation
E.On via Powergen
Macquarie Bank inassociation with United
Utilities plc
PPL (owners of WesternPower) indicated no
interest in increasingtheir UK investment
Scottish & SouthernEnergy plc
Obvious geographicalfit with former Southern
Electric business
Would incur the ₤32mpenalty for reducing inter
company comparison
YTL Corporation
Geographicalfit with Wessex Water
business
Would avoid the ₤32mpenalty for reducing inter
company comparison
Would seem to ignorethe difficulties of 2 other
multi-utility ventures
Macquarie Bank inassociation with United
Utilities plc
Would avoid the ₤32mpenalty for reducing inter
company comparison
Good source ofunregulated revenue
for United
Would have alleviatedOFGEM concerns about
operating expertise
E.On via Powergen
Would incur the ₤32mpenalty for reducing inter
company comparison
Obvious geographicalfit with former EastMidlands business
Short-listed bidders
Scottish & SouthernEnergy plc
YTL Corporation
Macquarie Bank inassociation with United
Utilities plc
Deal structure
Deal structuredas follows…
Scottish & SouthernEnergy to assume
₤502m in debt
Scottish & SouthernEnergy to pay ₤43m cashto Aquila & First Energy
Scottish & SouthernEnergy to pay ₤567m
to AEPH bond-holders
Represents about 86%of the face value of the
bonds that were recentlytrading at 78% to 80%
Aquila has anobligation to pay First
Energy US$95m
Regulatoryimplications
Key regulatory issues
Assessment under TheFair Trading Act 1973 forreduction of competition
Penalty of ₤32m over5 years to compensate
for reduced intercompany comparison
The eventual saleto E.On (Powergen)
Scottish & SouthernEnergy were unable to obtainbond-holder approval, hence
the acquisition bid failed
Aquila Sterling waseventually sold to E.On via
the UK subsidiary Powergen
A description of this bid canbe downloaded by picking here
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