As Senators will be aware from the explanatory memorandum already circulated the purpose of this Bill is to increase the authorised share capital of Nítrigin Éireann Teoranta by £22.5 million, that is from £77.5 million to £100 million, to authorise the Minister for Finance to subscribe for shares up to the new level of £100 million and to increase the Company's facility to borrow under ministerial guarantee by £20 million, from the existing limit of £180 million to £200 million. The text of the Bill is in standard format and I hope will not give rise to any major difficulty.
Over the past 30 years the company and its financial difficulties has been the subject of much attention and debate within the Oireachtas and elsewhere. I will now briefly outline the background which has given rise to the necessity for this legislation.
NET was established in 1961 as a State sponsored body to manufacture nitrogenous fertilisers at Arklow. The company started in a relatively modest way but expanded to the stage where after the completion of the Marino Point plant in 1979 it was one of our largest manufacturing companies and a major chemical undertaking employing over 1,500 persons. While the Arklow plant operated profitably up to the early 1970s the growth of import competition pushed it into a loss making situation from 1974. By early 1973 NET was already considering a new facility at Marino Point to manufacture ammonia from oil but following the discovery of gas off Kinsale, the Government decided that an allocation of gas for ammonia manufacture should be made to NET.
To put matters in perspective, it should be recalled that at that time Irish gas consumption, including LPG, was around 200,000 tonnes of oil equivalent or approximately 80 million therms annually. Therefore new major customers had to be found for the 450 million therm potential annual gas flow — which was almost six times the national consumption — to enable the commercial development of the field. After negotiations between NET (and ESB) with Marathon, pricing terms were agreed for the 20 year take or pay contracts as they are called. These terms largely reflected the capital costs of developing the field and were then incorporated in the 20 year legal agreements with Bord Gáis Éireann Teoranta.
The construction of the Marino Point plant to produce ammonia from natural gas and the cost overruns which pushed the final cost of this project up to £137 million, has been the subject of much examination and controversy in the past including an Oireachtas report in April 1981. The effect of this expenditure, which was largely funded by borrowings, was to leave NET with a burden of debt from which they have never freed themselves despite extensive support from State funds.
The State support afforded has been of enormous proportions. Initially the Arklow plant was funded by borrowings. The Nítrigin Eireann Teoranta Act, 1963, had set the issued share capital at only £100 but provided for State advances of up to £6 million and a facility to borrow £1 million with a ministerial guarantee. In 1970 the company was put on a more commercial basis when the share capital was increased to £7.5 million, including £3.5 million in the capitalisation of State advances, and the limit for loan guarantees increased to £2 million.
As the construction of the Marino Point plant advanced the share capital was increased in 1977 to £27.5 million and the limit for State guarantees increased to £30 million. By 1981 it was necessary, because of the company's dire financial situation to come back to the Oireachtas to provide another £100 million for NET, £50 million by way of additional equity and a further £50 million in State guarantees for its borrowings. In 1987 with the setting up of the joint venture with ICI, the old core debt of over £160 million was left with NET and, as senators will recall, legislation was introduced to increase the limit for ministerial guarantees on NET's borrowings from £150 million to £180 million to enable the issue of a State guarantee for the full debt.
By the early 1980s it was clearly recognised that because of the cost overruns and operating losses in the early years of the Marino Point plant a substantial part of the NET debt was a sunk cost which could not be expected to be recovered. The overall size of the debt and the costs of servicing it were such as to keep the future of NET's fertilizer business and that of its employees in constant jeopardy.
However, the future of the business was safeguarded with the formation of the joint venture with Imperial Chemical Industries in 1987 whereby NET's fertilizer businesses at Cork and Arklow and ICI's Richardsons Fertilizers at Belfast were transferred to the new joint venture company, Irish Fertilizer Industries Ltd. NET's old core capital debt, most of which was guaranteed by the State as you will recall, was left with NET. As a result of these arrangements Irish Fertilizer Industries and the future of its workforce is no longer under any threat by reason of the debt which has been left with NET. This is an important point to put forward.
Under the joint venture arrangements NET took a 51 per cent shareholding in the new company with ICI taking the remaining 49 per cent. In addition NET entered into a long term agreement with IFI for the supply of its gas allocation at an arm's length price to IFI. The old accumulated NET debt, which was £164.6 million on 30 September 1987, remained with NET with the intention that NET would service the borrowings involved from its income from profits on the sale of gas to Irish Fertilizer Industries Limited and dividends from that company. Since 1987 therefore NET's primary activity has been the management of its debt portfolio as well as managing a gas contract and monitoring IFI. It is basically now a financial holding company.
While the new joint venture company, Irish Fertilizer Industries Limited, has operated quite profitably since it commenced trading on 1 October 1987, the combined income accruing to NET from its profits on the sale of gas and from dividends from IFI has been insufficient to fully cover the interest payable on NET's borrowings. The shortfall in interest has had to be converted into new State guaranteed borrowings with the result that overall borrowings have continued to grow and have now reached £180 million. This is the maximum that may be guaranteed by the State under the provisions of the Nítrigin Éireann Teoranta Acts.
The following figures I think illustrate the situation — at the setting up of the joint venture in 1987, the debt remaining with NET, after working capital adjustments, was £164.6 million. Over the ensuing five years ending on the 30 September 1992, on a cash flow basis NET received a net income of £70.9 million from IFI but the interest payments on its massive debt over those five years amounted to £85.2 million — a shortfall of £14.3 million. The addition to this shortfall of operating expenses left NET with a closing debt of £179.9 million on 30 September 1992.
The principal reason for the shortfall in NET's income and the consequential build up in its debt, has been the comparative weakness over recent years of oil prices in Irish pound terms. It is on oil prices that the basic price that Irish Fertilizer Industries pays NET for its supply of natural gas is based. While the economy at large has benefited considerably from the reduction in international prices, in Irish pound terms, for oil, the reverse has been the case for NET. NET's financial flow has been dependent on four very volatile elements. These are fertiliser profits, interest rates, the dollar/pound exchange rates and international oil prices. The behaviour of the three latter elements over the past five years has proved less favourable to NET than earlier expected. Senators will be aware of how volatile these indicators can be.
There was, in fact, a slight improvement in NET's financial situation during 1991, with oil prices high because of the Gulf War and more buoyant prices for fertilisers. However, the position severely deteriorated from the beginning of 1992 with oil prices dropping to their lowest in Irish pound terms since 1987. Therefore, the basic gas price payable by Irish Fertilizer Industries was consequently the lowest in five years. With only a marginal reduction in the purchase price payable by NET to Bord Gáis Éireann for gas, NET's profit margin on sales to Irish Fertilizer Industries Limited was severely reduced. At the end of 1991, reflecting the buoyant conditions of 1991, NET's net debt situation on a cash flow basis, i.e., borrowings less cash reserves, had come down to £171 million. However, by the end of September 1992 this had risen to £179.9 million.
Since September 1992 the already difficult position of NET has worsened considerably because of the devaluation of sterling and the currency crisis. NET was affected in two ways: first, because over 55 per cent of its borrowings are at floating rates, the rise in interest rates greatly increased its interest costs and, secondly, because a substantial proportion of IFI's income is dependent on returns from the UK, both by way of sales in Britain and in the returns of its Northern Ireland subsidiary, the devaluation of sterling impacted on the profits of Irish Fertilizer Industries for 1991-92 and, consequently, NET's income from that company.
Because of this worsening situation, NET's borrowing requirements reached £181.6 million by the end of November 1992 and, as the excess over £180 million could not be rolled over into further bank borrowings because of the £180 million legislative limit on guaranteed borrowings, £1.96 million was issued to the company by way of repayable Exchequer advances. This was the maximum that could be provided under the Exchequer advances provision of the NET Acts, but was sufficient only to maintain the solvency of NET to near the end of December, when further major payments became due. In order to enable NET to meet these payments, a grant of £6 million had to be voted for the company in December 1992 to give it sufficient funds to meet interest payments due up to March 1993.
I must emphasise that over these five years, NET's borrowings were covered by a ministerial guarantee as to payment of both principal and interest and if NET were to default on payment of interest on any particular loans as they fell due, the State, as guarantor, would have become immediately liable to pay. A default in any payment by NET would have immediate consequences on its future ability to trade and its solvency with direct responsibility for all its borrowings then falling on the Exchequer.
NET's financial difficulties can be traced directly back in time to the cost overruns, funded largely by borrowings in the late 1970s, on the construction of the £137 million Marino Point plant, which manufactures ammonia and urea from natural gas. In retrospect, while as a result of this investment we have a strong competitive fertiliser industry employing 700 people on this island, it has been at a very high cost to the taxpayer. The current situation is that NET has debts in excess of £180 million with the realisable value of its assets probably now worth much less than that. These assets are its favourable gas contract with Bord Gáis Éireann and its 51 per cent shareholding in IFI. Therefore, it must be recognised that a substantial proportion of its £180 million debt is, as it is known, a sunk cost, which will not be recovered within NET's future income by way of gas price and dividends from IFI. With NET's income over the past five years inadequate to even cover the interest on its borrowings, the rolling over of each year's shortfall in interest payments, into new guaranteed borrowings, only further increases the debt which will ultimately have to be met by the State.
An option that has been considered over the past year has been the sale of NET's shares in Irish Fertilizer Industries Limited. Freed from the old core debt that remained with NET, Irish Fertilizer Industries has been trading very profitably. The Government is interested in discussing with potential purchasers a sale of shares in this highly profitable company, but only at the right price. A number of parties have expressed an interest in that company, particularly since the time that the minority shareholder, ICI, indicated its intention to reduce substantially its fertiliser interests in the UK.
A sale of its shares in IFI on satisfactory terms could substantially improve NET's liquidity situation in the short to medium-term, but this would also necessitate the negotiation of a new gas agreement. It would also remove any conflict that might arise between NET's need to maximise receipts from IFI to meet its short-term debt servicing requirements and IFI's needs to retain earnings to fund future growth. While NET has had discussions with interested parties, no definitive offer was made to them. If such an offer was made, it would be a matter first for the board of NET to consider but ultimately a matter for Government decision.
In the meantime, provision has to be made to enable NET to continue to meet its debts. I must stress that unless this action is taken NET will be insolvent by the end of March, leading to the prospect of responsibility for its £180 million in borrowings and the interest accruing, falling directly on the Exchequer.
Several amendments to this Bill were moved by the Opposition during the passage of the Bill through the Dáil, the effect of which were to provide for an authorised share capital much lower than the £100 million proposed and a limit on guarantee levels much lower than the £200 million proposed. However, the purpose of the Bill is to provide not only for NET's immediate solvency crisis but also, by providing the enabling mechanisms, to put the Government in the position to protect NET's solvency over the next few years. For this reason, the Seanad will note I have not accepted these amendments.
During the Dáil debate, a common issue raised related to the supply of gas to NET and IFI and the question of greater transparency in gas prices. This is a complex question but I feel it should be answered.
As I have already said, the favourable gas contract negotiated by NET in the early 1970s, and covered by legal contracts, is regarded as an asset of NET. There would be no financial gain to the State in setting aside this contract and transferring the benefit from it to another body, as the profit on gas sales is needed to service NET's borrowings which would otherwise have to be serviced from the Exchequer.
As regards Irish Fertilizer Industries, the position is that the company, under agreements executed in 1987, has contractual rights to a supply of gas from NET under a set pricing formula largely based on international oil prices. This gas is put to productive use in that it is used to produce 500,000 tonnes of ammonia at Marino Point. Some 40 per cent of the ammonia is consumed at Marino Point in the manufacture of over 300,000 tonnes of urea and 16,000 tonnes of liquid CO2. Another 200,000 tonnes is used at Arklow which, combined with Irish sourced limestone and dolomite, produces over 500,000 tonnes of calcium ammonium nitrate. A further 100,000 tonnes of ammonia is sent to Belfast. Assuming the value of gas on the basis of the price of heavy fuel oil, the value added by IFI in producing product which would otherwise be imported would be four to five times the value of the gas used or the value of the oil supplanted, if the gas was substituted elsewhere in the economy for oil.
As regards the price paid by IFI for its gas supply, this must remain confidential for commercial reasons. IFI operate in a highly competitive market, both at home and abroad, in an industry dominated by major multinational companies using their muscle to increase market share. The gas price is the main cost factor in IFI's production process. Knowledge formally of a competitor's cost base is the essential information needed to attack that competitor's market, as it enables one to know how far down in price one must go to put a competitor out of business. IFI would have no confirmed knowledge of their competitors' cost bases and should not be put in a commercially damaging position by having their major cost base published formally. In any event, gas prices paid by other industrial consumers in Ireland are not published and accurate comparisons on a one-to-one basis are, therefore, not possible.
Another complicating factor in energy pricing is the excise duty on oil. Prior to the recent budget, heavy fuel oil used by the ESB was subject to an excise duty of almost £16 per tonne, the equivalent of nearly 4p per therm. Gas oil attracted a higher rate of around £44 per tonne or the equivalent of 11p per therm. However, European practice, which has now been enshrined in an EC directive, did not apply excise to oil used as a feedstock or raw material and, consequently, this element was not reflected in European prices for gas used as a feedstock, such as the Dutch F benchmark. If this excise element was excluded, I am confident that we would find that there was very little difference between the price paid over the past five years by ESB to Bord Gáis Éireann and that paid by IFI to NET.
I am confident that the NET Bill will commend itself to the Seanad and I commend the Bill to the House for its approval.