Financial REVIEW
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| Summary Results | 2009 €m |
2008 €m |
Change |
| Group Turnover | 1,349 | 1,379 | 2% |
| Profit before Tax | 119 | 151 | 21% |
| Tangible Fixed Assets | 3,543 | 2,814 | 26% |
| Net Debt* | 1,823 | 1,217 | 50% |
| Book Capitalisation† | 3,225 | 2,518 | 28% |
| Ratios | |||
| Profit before Tax / Turnover (%) | 9% | 11% | 19% |
| Interest Cover (times) | 3.0 | 4.3 | 31% |
| Net Debt / Book Capitalisation (%) | 56% | 48% | 17% |
* Net Debt represents total debt less free cash deposits and deposits held specifically in relation to the debt
† Book Capitalisation represents Net Debt plus Capital and Reserves
Turnover
Group turnover at €1,349 million for the year to 31 December 2009 was down 2% on the 2008 result. Sales of energy (gas and electricity) were down 4% to €1,161 million, as increased electricity sales were offset by depressed gas demand coupled with reduced gas prices. Energy sales accounted for 86% of group turnover.
Gas transportation sales to independent shippers were up 14% to €188 million in 2009, accounting for 14% of group turnover, mainly due to a new revenue stream from the Corrib Partners activated by the commissioning of the Bord Gáis pipeline to their terminal.
Profit before Tax
Profit before Tax decreased by €32 million to €119 million. The year-on-year decrease of €32 million results from additional expenditure associated with continuing expansion into new business areas, increased financing requirements, and higher depreciation charges reflecting the impact of the capital investment programme.
Tangible Fixed Assets
Tangible fixed assets increased year-on-year by €729 million to €3,543 million. This increase of 26% is due to acquisitions, in particular SWS Natural Resources, and continued capital expenditure including construction on a 445MW gas-fired power station.
Net Debt
Net debt has increased by €606 million to €1,823 million. This increase facilitated Bord Gáis’ acquisition strategy and extensive capital investment programme.
LIQUIDITY AND CAPITAL RESOURCES
Cashflows during 2009
The net inflow of cash from operations of €353 million, together with increased financing, was utilised during 2009 as follows:
| • | €583 million on the acquisition of power generating assets; |
| • | €283 million invested in capital projects. Key projects included: |
| - Construction of a 445MW gas-fired power station in Cork; | |
| - Ongoing development of the distribution network, in particular the accelerated programme associated with the replacement of cast-iron mains; | |
| - Ongoing development of the distribution network in towns in Northern Ireland by firmus energy within its licence areas. | |
| • | Dividends paid during 2009 amounted to €39 million; |
| • | Net interest paid amounted to €61 million. |
Capital Resources
At 31 December 2009, Bord Gáis had available bank facilities of €2,964 million (including €118 million in uncommitted facilities). Of this, €2,357 million was drawn down leaving a further €607 million undrawn at year-end. As at 31 December 2009, Bord Gáis had a statutory borrowing limit of €3.0 billion which its drawn facilities cannot exceed. At 31 December 2009, the net debt to capitalisation ratio amounted to 56% and, at that date, capital and reserves amounted to €1,402 million.
Corporate Fundraising
In February 2009, the Gas (Amendment) Bill 2008, increasing Bord Gáis’ Statutory Borrowing Limit to €3.0 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, which was significantly oversubscribed, attracted considerable interest from a diverse group of US institutional investors. The placement included 4, 5, 7, 10 and 12 year fixed rate senior notes. 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 the Bord Gáis business strategy and its ambitions for the future. Bord Gáis had previously raised funds in the US Private Placement market in 2003.
In June 2009, Bord Gáis successfully priced a five year €550 million 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.
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.
Bord Gáis is rated long term A- with stable outlook by Standard & Poor’s (S&P) and A2 with stable outlook by Moody’s Investors Services. As part of their annual review of the appropriateness of these ratings, the rating agencies undertook an in-depth review of Bord Gáis, its financial and competitive position and its future business plans.
TREASURY POLICY
Bord Gáis operates a centralised Treasury function, which undertakes all Treasury activities in the Group.
Responsibility for Treasury activity and its performance rests with the Board, which exercises its responsibility through regular review. In particular, the Board Audit and Finance Committee reviews the appropriateness of the Treasury Policy and the effectiveness of controls. The Board approved an updated Treasury Policy in December 2009.
Treasury related risks faced by the company are interest rate risk, currency risk, counterparty risk and liquidity risk. Derivatives are used to manage Bord Gáis’ interest rate and foreign exchange exposures. In using derivatives, Bord Gáis complies with the Requirements of the Minister for Finance under the Financial Transactions of Certain Companies and Other Bodies Act 1992 and the Specification of the Minister for Finance. The Bord Gáis Treasury function is not operated as a profit centre and Treasury positions are managed in a risk averse manner. All Treasury transactions have a valid underlying business reason and speculative positions are strictly prohibited.
Interest Rate Risk
Interest costs are managed using fixed rate debt and interest rate swaps.
Bord Gáis policy is to achieve a stable and low cost of debt, taking account of business risks in general and the regulatory price control environment in particular. Bord Gáis policy is, on a calendar year basis, to have at least 60% of the current year’s interest cost at fixed rates and at least 50% of the expected interest cost for the following three years at fixed rates.
At 31st December 2009, 78% of the Group’s borrowings were at fixed rates.
Currency Risk
Bord Gáis policy is to protect profitability by minimising the impact of material variations due to foreign exchange rate movements. Foreign exchange policy takes account of business risks and the regulatory environment. The principal foreign exchange transactional risk relates to the sale and purchase of gas and electricity denominated in sterling and sterling-related prices. Bord Gáis manages the net foreign currency cash flows using foreign exchange forward contracts. Bord Gáis is exposed to foreign exchange translation risk arising from assets and liabilities of its UK subsidiaries, denominated in sterling. Hedging is achieved using borrowings in the same currency as the assets being hedged or through the use of other hedging methods such as currency swaps.
Counterparty Risk
Bord Gáis policy is to manage this risk through the use of counterparty credit limits, which take account of, among other relevant factors, published credit ratings.
Bord Gáis only deals with approved counterparties who maintain an investment grade rating. Bord Gáis regularly evaluates and measures its counterparty exposures. Where the exposure on derivative instruments has the potential to be material to Bord Gáis’ net worth, Bord Gáis will consider entering into Credit Support Arrangements.
Liquidity Risk
Group policy is to secure a mix of funding sources at acceptable terms and conditions to finance the development of the business and to meet financial obligations as they fall due. Bord Gáis arranges its committed facilities to cover 120% of core projected needs over a one-year horizon. Over a three-year horizon, committed facilities shall be available to cover not less than 90% of core projected requirements. Facilities are arranged with appropriate financial and operating covenants ensuring that management has the necessary flexibility in the operation of its business.
Bord Gáis seeks to have a number of sources of funds at any particular time and it also maintains a balanced maturity profile to minimise, insofar as possible, peaked repayments and refinancing risk.
At 31st December 2009, Bord Gáis had €2,846 million in committed facilities. Borrowings at 31st December 2009 were €2,357 million.
Energy Trading Risk Management Policy
Bord Gáis operates a dedicated Energy Trading Function, which undertakes all its Energy procurement activities and asset optimisation.
Responsibility for setting a Risk Management and Control Policy rests with the Board, which exercises its responsibilities through regular review. The Board annually approves an updated Energy Trading Risk Management Policy under which Bord Gáis has delivered a suite of best practice portfolio tools, book structures and risk measures.
The Energy Trading Risk Management Committee meets on a monthly basis and is responsible for monitoring and making decisions in respect of commodity-related risks. Energy trading risks faced by Bord Gáis include price risk, volume risk, currency risk and counterparty risk.
Price and Volume Risks
Price risks arise from the differentials between pricing structures in sales and purchase contracts. Gas price risks vary for Non Daily Metered (NDM - Residential and Small and Medium Enterprises), Industrial/Commercial and Power Generation markets. The NDM market is charged within a regulated benchmark framework, where prices are generally reset annually at the beginning of each gas year. Fixed price gas and storage capacity (to cover demand fluctuations) are procured for this market on a gradual basis both in advance of, and during, the gas year, the aim being to minimise procurement costs and provide value to customers. Individual contract prices are set for the Industrial/Commercial and Power Generation markets and gas prices are hedged to closely match price risk within these contracts.
Small and Medium Enterprise electricity sales prices are based on standard tariffs which are typically fixed on an annual basis based on forecast costs. Individual contract prices are set for the Industrial/Commercial sector as with gas. The bulk of procurement costs arise from fixed price contracts; however Bord Gáis remains exposed to volume mismatches in electricity, which are traded out in the wholesale pool. There is also volume variability in relation to renewals contracts.
Bord Gáis is involved in the UK wholesale gas market, which is recognised as one of the most liquid gas markets in the world, but is also impacted by other global gas markets. Given that market prices are generally driven by prevailing global and local supply and demand conditions, Bord Gáis maintains a robust strategy to manage its price risk, particularly during periods of tight supply (e.g. cold weather/supply interruptions).
The Irish electricity market, under the SEM, facilitates access to physical power but is illiquid with regard to managing price risk on a forward basis. Accordingly, Bord Gáis manages its price risk exposure through a range of Contracts for Differences, made available annually as part of the SEM market regulation, but also uses the UK wholesale gas and electricity markets; offtake agreements with indigenous windfarms and CHP units; and tolling arrangements with CCGT power stations as a means to hedge electricity price risk.
Currency Risk
Energy trading currency risk arises in both the gas and electricity markets, though primarily in the gas market where the majority of gas purchases are in sterling from the UK. Currency exposure in the electricity business results from sales in Northern Ireland, capacity purchased on the Moyle Interconnector and purchases of power from the UK Power Market. Currency risk is hedged within the Treasury Function.
Counterparty Risk
Bord Gáis deals only with commodity trading counterparties approved by the Energy Trading Risk Management Committee. Bord Gáis typically only deals with counterparties who maintain an investment grade rating. However, where appropriate, the Risk Management Committee takes an independent view of counterparties. Bord Gáis routinely evaluates and measures its counterparty credit exposures.