CHAIRMAN’S STATEMENT
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The clear strategy adopted by the company in 2008 and pursued with great vigour over the past two years has transformed Bord Gáis.
| • | At the start of the year, Bord Gáis had 600,000 residential gas customers; by the end of 2009, it had acquired over 300,000 residential electricity customers through the very successful Big Switch campaign. |
| • | The company acquired operational and development assets in conventional and renewable power generation. The combination of these assets with the Whitegate development will offer the company up to 1,500MW of electricity generation in the future. |
| • | Our Networks business continued to expand its network and completed the mains renewal programme making the Irish network one of the most modern gas networks in Europe. |
The philosophy of our business to provide Exemplary Service at the Right Price led it to become the first Irish recipient of the coveted CCA International Customer Contact Award.
The significant increase in the business base of Bord Gáis during 2009 was against a backdrop of weak economic performance in Ireland leading to falling energy demand and a difficult financial environment. Nevertheless, Bord Gáis raised over €900 million from international investors on competitive terms in the first half of the year and completed the acquisition of a renewable portfolio of wind generation assets in a transaction worth over €500 million in December 2009 (the second largest transaction in Ireland in 2009).
In spite of external economic conditions, Bord Gáis delivered a strong financial performance in 2009. Group turnover at €1,349 million for the year to 31 December 2009 was down 2% on the 2008 result. The profit before tax decreased by 21% on the 2008 return to €119 million. These results are robust, given they are based in a period when the economic downturn created significant gas demand reductions, when three gas price reductions were implemented and when a significant entry position was established in the domestic electricity market.
Furthermore, a dividend of €38 million was paid to the Exchequer in 2009, based on 30% of 2008 pre-tax profits, bringing total dividends to €767 million since the formation of Bord Gáis in 1976.
Corporate Fundraising
In February 2009, the Gas (Amendment) Bill 2008, increasing Bord Gáis’ Statutory Borrowing Limit to €3 billion from €1.7 billion, was signed into law.
In March 2009, Bord Gáis successfully raised US$450 million on the US Private Placement market. The fundraising attracted considerable interest from a diverse group of US institutional investors and was significantly oversubscribed. This was the first transaction executed on the US Private Placement market in 2009 for an Irish company and, given the challenging credit market, reflected strong investor confidence in Bord Gáis’ business strategy and its ambitions for the future.
In June 2009, Bord Gáis successfully priced a five year €550m debut Euro Corporate Bond at a fixed coupon of 5.75%. Again, the fundraising was oversubscribed and the order book attracted a breadth of high quality investors. A total of 156 orders came from 25 jurisdictions with 32% of the bonds being allocated to UK investors, 20% to France, 12% to Scandinavia and 6% to Ireland.
The pricing obtained on both of these fundraising rounds was very attractive considering the constrained financial environment. These fundraising actions increased the diversity of funding sources available to the company, considerably enhanced its liquidity position and extended the average tenor of its debt, placing the company on a very strong footing to fund its development strategy by investing in Irish energy assets.
Strategy Implementation
In early 2008, the company’s strategy was announced to the market. The strategy to 2014 has five pillars:
| 1. | Transform from being a gas company to an energy company; |
| 2. | Own, or part-own, in excess of 1,000MW of power generation facilities; |
| 3. | Be a dual-fuel energy supplier to over 1 million customers, providing exemplary service; |
| 4. | Invest €2 billion in regulated and unregulated assets; |
| 5. | Champion energy sustainability. |
The company made major advances in 2009 in bringing each of these key objectives to fruition, with the first three now substantially achieved.
The company’s strategy is directly aligned with the Irish Government’s White Paper on Energy, published in 2007, and reflects international trends in the energy industry. Bord Gáis is well placed to develop its role in the energy markets in Ireland and plans to grow in line with the imperatives faced by the energy industry. The company has a proven ability to develop, finance, execute and manage large capital projects, as well as the experience and expertise in product and market development serving a large customer base.
Sustainability
Addressing climate change is a clear and growing political and economic priority. Bord Gáis’ concentrated actions in this area will bring more efficient and lower-carbon assets into the power generation mix in Ireland and will enable householders to reduce their carbon footprint as well as their energy costs. Programmes underway, accounting for c. €2 billion in investment and creating up to 500 jobs, include:
| • | Construction of a highly efficient 445MW gas-fired power plant in Cork; |
| • | Acquisition and development of over 700MW of wind generation assets; |
| • | Investment in up to 300MW of peaking power plants to support wind generation; |
| • | Investment of €10 million in our Alternative Energy R&D fund; |
| • | Provision of comprehensive retrofit products and services, including finance, to homes and businesses to help them to improve their energy efficiency; |
| • | Minimising the carbon footprint of our employees at work. |
Security of Energy Supply is a key issue in national energy policies and at an EU level. A recent security of supply study completed by Poyry Energy Consulting for the UK market states that gas availability at Moffat, the delivery point for gas to Ireland from Scotland, is robust. This, combined with the robustness of the Irish Interconnector system, reduces the probability of supply disruption in Ireland although proposed EU Security of Supply regulation may lead to a requirement for additional storage.
The range of supply sources available via the UK, including Norwegian and diverse Liquefied Natural Gas (LNG) sources, means that Ireland remains well positioned from a gas security of supply perspective. Future indigenous supplies from the Corrib field and the proposed LNG terminal on the Shannon will add to the diversity of gas supplies for Ireland.
The role of Bord Gáis in security of gas supply to date has been to build and maintain a robust gas transportation system with sufficient capacity to meet peak day demand and to act as the emergency manager to prevent or minimise the impact of any gas supply disruption.
In 2008, Bord Gáis formed a consortium with Storengy, a GDF-Suez company, to assess the feasibility of developing an underground natural gas storage facility in an area of salt caverns near Larne in Northern Ireland. This part of Northern Ireland is a unique location on the island with salt layers deep underground. Salt caverns are used in the UK and throughout the world to store natural gas.
The initial phase of a seismic study to determine the extent and nature of subterranean salt was completed at the end of 2009. Processing of the data recorded from the survey will take several months. The successful development of such a facility would increase the security of Ireland’s gas supply as well as assist in the management of seasonal fluctuations in demand.
Bord Gáis already utilises gas storage facilities at the Kinsale Head facility in Ireland and at various locations in the UK.
Competitiveness
The cost of energy is crucial to the competitiveness of the Irish economy. Bord Gáis is deeply conscious of the responsibility it carries to do everything in its power to ensure energy prices are as low as possible to assist the restoration of growth to the economy.
In 2009, the company reduced gas prices for industrial, business and residential customers on two occasions, with total average reductions of close to 20%. Taken with the reduction implemented in February 2010, average gas prices in Ireland over the past 12 months have fallen by 25%. A recent Sustainable Energy Authority of Ireland (SEAI) report showed that business gas prices in Ireland, in mid-range consumption levels, were up to 15% below the average for Euro Area States.
The report also showed that in purchasing power parity terms, gas costs to domestic consumers in Ireland ranged from 8% to 28% below the average for the Euro Area countries depending on gas usage levels. In the electricity markets, the powerful entry by the company has delivered real price benefits to customers and has demonstrated the benefits of competition.
While international wholesale prices are the major determinant of retail gas prices in Ireland, Bord Gáis continues to exert downward pressure on gas tariffs through a range of measures to control its own costs:
| • | In 2008 the company commenced its Networks Transformation Programme, a major three year project to introduce leading edge technology to the company and place Bord Gáis at the forefront of Networks asset management internationally. |
| • | Bord Gáis is undertaking a Strategic Sourcing Project, aimed at achieving 4%-6% savings on all externally sourced costs year on year and including 10%+ reductions on all professional services fees. Cost efficiencies have been achieved in many areas, including professional services, telecommunications, advertising, construction and travel/accommodation. |
Third EU Energy Directive
In September 2009, Directive 2009/73/EC concerning the common rules for the internal market in natural gas and repealing Directive 2003/55/EC was passed into law. A key element of this ‘Third Directive’ is the requirement for more stringent unbundling of vertically integrated utilities (VIU) such as Bord Gáis, to further separate energy supply from transmission network activities. The three options for organisational restructuring under the Third Directive are:
| 1. | Ownership Unbundling: Under this option, the transmission system is owned and operated by an entity completely separate to a VIU (an entity with gas supply activities); |
| 2. | Independent System Operator: In this model, an Independent System Operator (ISO), which must be completely separate from the VIU, is responsible for all aspects for the operation, maintenance and development of the Transmission system. The VIU maintains ownership of the transmission assets; |
| 3. | Independent Transmission Operator: In this ITO model, operation and ownership of the transmission system remain within a VIU, subject to stringent, detailed ring-fencing requirements. |
Any of these options will fundamentally alter the Bord Gáis organisation. This Third Directive applies in the three jurisdictions in which the company operates (Ireland, Northern Ireland and Great Britain) and the company has had ongoing discussions with the relevant parties in all areas.
Bord Gáis sees the ITO model as the most appropriate and efficient solution, as it is the least cost option, and believes it would be beneficial, also from a cost perspective, to have the same regime throughout the island of Ireland.
In a linked development, the regulatory authorities North and South, together with the industry participants, are working to establish an appropriate framework for an all-island gas market in Ireland, including a single network code. Known as the Common Arrangements for Gas (CAG), this will have a strong impact on the appropriate unbundling model for Bord Gáis under the Third Directive.
The unbundling requirements must be met by March 2012.
Energy Affordability
Bord Gáis is conscious of the difficulty experienced by some of its customers in meeting energy bills. The company applies funds to this area in two ways: directly to organisations that assist the most vulnerable; and by supporting programmes that improve the energy efficiency of low income households, thus reducing the size of bills.
In 2009, Bord Gáis made its annual donations to the Society of St. Vincent de Paul and ALONE, among others. However, because of the prolonged cold weather experienced over Christmas and New Year 2009/10, Bord Gáis provided an additional €1 million to alleviate the higher gas bills of those most in need. This was done to encourage elderly and vulnerable customers to maintain adequate heating levels in their homes.
Bord Gáis made its second payment of €1.2 million to the SEAI’s Warmer Homes Scheme in 2009. This scheme aims to improve the energy efficiency and comfort conditions of homes occupied by low-income families to mitigate fuel poverty.
Corporate Social Responsibility
There are four main strands of the company’s Corporate Social Responsibility approach: Marketplace, Workplace, Community and Environment.
In the Community, Bord Gáis works with local communities to ensure that our construction projects in the locality cause minimum disruption. Our company sponsors popular sporting, cultural and educational events. Bord Gáis also plays its part in protecting the most vulnerable in society, leading initiatives that support a multitude of volunteer and community organisations.
Bord Gáis will publish a separate comprehensive Corporate Responsibility Report in conjunction with this Annual Report and will report annually on this basis.
Employee Share Ownership Plan (ESOP)
Under the five-year ESOP programme, Bord Gáis is transferring 3.27% of the capital stock of the company to the ESOP in return for transformational savings. 2009 was the final year of the programme and, as the projected savings were achieved, the final transfer of stock will take place.
The Way Forward
Bord Gáis has made a strong economic and social contribution to Ireland over its 35 year history. It has built a modern gas infrastructure which has met the needs of the country and brought the benefits of clean, natural gas to hundreds of thousands of customers.
The business strategy currently being aggressively implemented has changed the company dramatically. Bord Gáis is an exciting, ambitious enterprise focussed on achieving its goals. We are a full service energy company, supplying gas and electricity services to almost 1 million customers throughout Ireland. We will continue to build our position in the energy market over the coming years.
Building that position will involve significant investment in electricity generation assets over the next five years. The completion of the Whitegate Power station in 2010 and the build out of our renewable energy portfolio to 2014 will create a solid base for our electricity business. This investment will also create real economic activity and employment at a time when they are needed in Ireland.
The growth and expansion we are striving for will undoubtedly challenge the management and staff of the company. Bord Gáis is determined that serving the customer will be at the forefront of our activities regardless of the pressures arising from our significant capital expenditure plans. We are committed to excellence in the way we serve our customers and the community. A clear demonstration of our commitment is the scale of the home services programme for customers we are launching in 2010. This programme will bring a comprehensive range of energy efficiency services to customers in their homes, backed by a guarantee of quality delivery.
Acknowledgements
On behalf of myself and my fellow Board members, I would like to thank Minister Eamon Ryan and his officials in the Department of Communications, Energy and Natural Resources for their considerable support during 2009 when Bord Gáis had substantial financing and investment programmes.
The excellent work done by my predecessor, Ed O’Connell, in steering and stewarding the company over the seven years of his tenure here led to the initiation, during his Chairmanship, of many of the excellent programmes now coming to fruition. We wish him the very best in his retirement.
I would like to welcome Laurence K. Shields and Dr. Laurence Crowley, CBE, who joined the Board during 2009 and to thank all my fellow Board members for their commitment, insights and work in guiding and governing the implementation of the company’s strategy in what was a busy but satisfying year.
The management and staff of Bord Gáis achieved excellent and hard-won outcomes in 2009, testament to the skills and drive of the staff and evidenced by the award in 2009 of the Excellence through People accreditation to the company. In particular, I want to acknowledge the key role played by our Chief Executive, John Mullins, who leads with vision, energy and enthusiasm.
Finally, I want to thank our customers on whose business we depend. We never lose sight of them. Our customer service standards are frequently deemed best-in-class. We will continue to improve and broaden the service, value and products we offer.
Rose Hynes
Chairman