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Total Assets (excl derivatives)

€4,677m

2011: €4,515m


2012

 

2011

 

Profit Before Income Tax

€121m

2011: €94m


2012

 

2011

 

Acting Chief Executive’s Review

chairman

“We are operating a profitable business in the Irish market, realising value for our shareholder and contributing
to the Exchequer.”

blue corner

A strong contributor to the
Irish economy in 2012

I am pleased to report on the operational and financial performance of Bord Gáis during 2012, in my role as Acting Chief Executive. I took over the stewardship of the company from John Mullins on 31st December 2012 after five years of solid growth and transformation. I did so at a time of enormous and ongoing change for Bord Gáis. I am happy to report a strong financial performance for the year, matched with robust operational results.

Over the course of 2012, while the business continued to operate in line with the stated Corporate Plan, it was recognised that the strategy also needed to reflect the changing objectives of the organisation as set by the shareholder. The key elements of this revised agenda are:

• The sale of Bord Gáis Energy
• The establishment of Irish Water
• The need to drive efficiencies in the existing business units and restructure the organisation in line with the above two events.

These objectives will be met while also delivering all our “business as usual” objectives, ensuring these major changes are enacted while continuing to deliver best in class services to our existing customer base.

Looking at what was achieved in 2012, the underlying fundamentals of the business remain solid.

Strong Financial Performance

We are operating a profitable business in the Irish market, realising value for our shareholder and contributing to the Exchequer. We continue as a strong contributor to the Irish economy both as a substantial purchaser of goods and services and as a large employer.

Key Results

Revenue was €1,625 million for the year to 31 December 2012, relative to €1,608 million in 2011. The increase of €17 million is mainly attributable to increased gas sales partially offset by reduced electricity sales.

EBITDA has increased from €343 million in 2011 to €380 million in 2012, reflecting the strong underlying performance of the business. Profit before income tax also increased to €121 million in 2012. The year on year increase of €37 million in EBITDA was offset by increased finance costs and higher depreciation.

In 2011, the total asset figure (excluding derivatives) for Bord Gáis Éireann was €4,515 million. At 31 December 2012, this total asset figure increased to €4,677 million.

Continuing to Attract Private Funding

In 2012, Bord Gáis continued to attract strong interest from investors, culminating, in November 2012, in the successful placement of a €500 million bond with a 5 year maturity. The transaction received total orders of more than €6.5 billion in just one hour, a clear endorsement of the strategic direction and strong performance of the company.

Closely following the announcement of the successful bond sale, Bord Gáis confirmed that it had attracted €155 million of funding from the European Investment Bank (EIB). The EIB support will contribute to the construction and operation of six onshore wind farms in Counties Tipperary, Clare, and Kilkenny, with a total generation capacity of 141 MW. The expansion programme, representing a total investment of €311 million, is expected to be completed in 2014.

Working with Customers in Arrears

Customer debt remains a key area of focus for Bord Gáis. We are committed to providing help, support and flexibility to any customer experiencing difficulty paying their gas or electricity bills. Payment plans are being put in place with customers who are in arrears and Pay As You Go (PAYG) meters are being installed as a payment alternative for those in financial difficulties. It continues to be our policy that withdrawal of supply is considered an absolute last resort after all other options have been exhausted. The scale of the issue remains significant, with 94,000 Bord Gáis Energy customer accounts in arrears at the end of 2012.

Throughout 2012, our Networks business, which installs PAYG meters, worked with the CER to extend this option to suppliers not already offering this solution. Bord Gáis Energy has been active in progressing this as a viable solution with its customers. At 31st December 2012, there were 62,625 PAYG meters installed, which is nearly 15% of Bord Gáis Energy’s total gas customer base.

The industry has also been working with the Regulator to develop an electricity PAYG model which will be run by ESB Networks. The rollout of electricity PAYG meters is expected to increase in 2013 as this solution becomes embedded into the supplier process.

In October 2011, a process of debt flagging was introduced to the gas and electricity markets. This measure has been incorporated into the Change of Supplier processes and involves the new supplier being informed when a switching customer is in debt with their previous supplier. The purpose is not to impede the switching process, but to avoid a situation where a customer could build up debts with a number of suppliers and to enable the new supplier to make an appropriate risk assessment of the new customer. Initial volumes are low with a total of 3,429 customers receiving debt flags during the switching process in the period from October 2011 to end December 2012.

 

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Committed to Organisational Restructuring

We are committed to organisational restructuring to ensure that, in the future, Bord Gáis is structured to meet the strategic objectives of the company, while operating at optimal efficiency, and delivering cost savings to the business.

Following the announcement by the Government in April 2012 of the intention to establish Irish Water as a subsidiary of Bord Gáis Éireann, an Irish Water Programme has been established under Bord Gáis Group where I have also been working as Programme Director. Following an intensive twelve week Mobilisation Phase to July 2012, the programme has entered the Establishment Phase which will continue until the end of 2013. Substantial resources were committed to the Mobilisation Phase and during the Establishment Phase, Bord Gáis is seconding subject matter experts from across its businesses to the Programme, as well as appointing external experts from the water industry to participate in this process. As part of the implementation plan, we will identify the skills needed, and expertise and experience from the Local Authorities will join the Irish Water team. There is regular engagement with DECLG on the progress of the programme and policy issues.

Bord Gáis has been actively working to develop an Independent Transmission Operator (ITO) Model in line with the requirements of the Third EU Energy Directive. The intention was to establish a new company within the Bord Gáis Group to undertake the activities of Bord Gáis Networks and Gaslink. Throughout 2011 we completed the operational separation of the Networks business from the Group and Energy businesses in preparation for the establishment of this ITO. The announcement by Government in February 2012 of its intention to sell the Energy business raised the possibility that Bord Gáis would ultimately seek certification under the Third Directive via the Ownership Unbundling option rather than the ITO model. Bord Gáis is in ongoing and continuous engagement with key stakeholders, including the Regulators and the EU Commission, to ensure EU Third Directive compliance.

Diversification of our Asset Portfolio

We have continued to diversify our asset portfolio away from a dependence on imported oil and gas to renewable energy. With 240 MWs of operating wind capacity, stretching from Cork to Donegal, Bord Gáis now has one of the largest renewable energy portfolios in the country. In addition, it also has a significant pipeline of wind development projects. Major progress was made on the consents for these projects in 2012, supporting a build out programme which has 174 MWs of wind projects in construction, 100 MWs to be brought to financial close within 24 months and a further 350 MWs of medium to long term wind development.

In October 2012, Bord Gáis and its Irish tidal energy partner, OpenHydro, were awarded exclusive rights to develop a 100 MW tidal energy farm off Torr Head on the north coast of Antrim. The project, potentially the first of its kind in the island of Ireland, is expected to be completed by 2020. Bord Gáis Energy’s ability to manage large scale infrastructure projects such as Whitegate CCGT power plant and our wind farm portfolio, coupled with OpenHydro’s specialism in tidal engineering, was instrumental in securing this milestone lease.

Continuing to Add Value for our Customers

2012 was a period of increased competition in both the gas and electricity markets with heavy discounting by suppliers coupled with increased advertising. Following a period of rapid expansion by Bord Gáis Energy, the customer strategy in 2012 moved to an emphasis on customer consolidation and engagement. Bord Gáis Energy continues to focus on customer value, including an ongoing commitment to offering the lowest standard electricity prices for residential customers. In March 2012, Bord Gáis Energy launched its “Rewards Club” aimed at rewarding customers for their loyalty. The initial offerings were based around the sponsorship of the Bord Gáis Energy Theatre. In May 2012, these offerings were further enhanced by the inclusion of Tesco Clubcard. The offer, which is exclusive to Bord Gáis Energy, allows Rewards Club customers to pay for their energy using Tesco Clubcard vouchers, and also receive Clubcard points when they pay their energy bill.

Bord Gáis has always been conscious of the need to help customers to manage their energy usage efficiently. In 2012, Bord Gáis Energy undertook a review of the Home Energy Services business in response to changing customer demand, and a new operating model will be launched in 2013 to meet the changing needs of our customers. For our business customers, Bord Gáis Energy launched the innovative new Business Energy Services in conjunction with Siemens, offering bespoke energy solutions designed to reduce their overall energy consumption and energy bills.

In 2012, Bord Gáis Networks completed the Networks Services and Works Contract, a result of a substantial review and redesign of its contracting model. This new model is based on a long term partnership approach with a single larger contractor. It offers substantial benefits to the organisation in terms of continued safety performance, improved customer service and cost savings. It delivers increased efficiencies and service levels while enhancing the existing high levels of customer service.

Gas Business

The total amount of gas transported by Bord Gáis Networks in 2012 decreased by 7% compared with 2011 levels, to approximately 67,900 GWh. This reduction in overall gas demand was due to a combination of mild weather conditions during 2012, reduced gas demand for power generation and the continued uncertain economic conditions. Power generation gas demand was also 7% lower than 2011 because of reduced electricity demand and increased generation from coal and peat. Non Daily Metered (NDM) demand from domestic and business users was down 16% in 2012 from 2011.

Natural gas is now available in over 160 population centres within 19 counties throughout the country and the number of gas users increased to 657,500 by the end of 2012, mainly as a result of the new towns connections.

The majority of Ireland’s gas demand (93%) continued to be met by imports from the UK. This dependence on imported gas leaves us vulnerable to changes in the cost of wholesale gas on the international markets.

Electricity Business

2012 saw increased competitor activity in the electricity market following deregulation of the electricity sector. In response to these competitive pressures, Bord Gáis Energy continues to focus on customer value, including an ongoing commitment to offering the lowest standard electricity prices for residential customers.

Bord Gáis is committed to actively developing alternative sources of power generation to lessen our dependence on imports and to enable us to offer green electricity to our customers. Our Whitegate power plant has been in commercial operation since 9th November 2010. The plant has full firm access for its 445MW capacity and throughout 2012 was operating flexibly and reliably in the market.

In addition, Bord Gáis has one of the largest renewable energy portfolios in the country, and this wind power complements the output from Whitegate power plant to provide clean, sustainable sources of electricity for our customers.

Irish Water

The creation of Irish Water is a new approach to the provision of public water services in Ireland. The utility approach is radically different to the current model, and has the ability to deliver many advantages in the realisation of economies of scale; the delivery of integrated operations; centralised capital expenditure and funding; and centralised policy and planning.

The provision of public water and wastewater services is a vital public service which has been professionally and expertly delivered by the Local Authorities to date. However, it is also a significant cost to the Exchequer and is in need of investment in both the short and the long term. A key aim of Irish Water will be to seek external funding for the major capital programmes to meet environmental and development needs of water services in Ireland.

We do not in any way underestimate the major task we have undertaken to establish and make operational this new Irish utility. We recognise the significant challenge in winning public acceptance for water and wastewater as a utility, similar to gas and electricity, and paying for such a utility accordingly. Bord Gáis has extensive experience of successfully completing large infrastructural projects, for delivering exemplary customer service and for attracting international finance, and we hope to bring these strengths to Irish Water.

Safety

Safety is at the core of all Bord Gáis activities and it is committed to further developing and maintaining the systems, processes and resources necessary to promote continuous safety improvement and performance.

Bord Gáis Networks, working with the Register of Gas Installers in Ireland (RGII), continued a training programme on the installation of carbon monoxide alarms. The successful programme, which commenced in 2011, has now trained over 1,500 Registered Gas Installers. In addition, 2012 saw the inaugural launch of Carbon Monoxide Awareness Week, an industry wide initiative to raise awareness of the dangers of Carbon Monoxide.

Current Challenges

Never in the history of Bord Gáis has the organisation faced such major changes simultaneously. We are dedicating considerable resources to ensuring each challenge is met to the highest standards and achieves the desired output for all stakeholders.

The first of these challenges is the sale of Bord Gáis Energy. The management of Bord Gáis is engaging with the relevant Government departments and NewERA, to deliver on this Government objective. Our aim is to ensure that the sale of Bord Gáis Energy will generate the maximum value to the State, whilst also ensuring the long term welfare of our skilled and loyal staff is given due consideration in the sales process.

The establishment of a new utility for the Irish market of the scale of Irish Water is unprecedented. Bringing together and building on the workings and expertise of 34 Local Authorities into one new public water utility is a collaborative process that will take many years to complete. Bord Gáis is proud to have been chosen to implement this milestone project for the Irish State and is committed to ensuring its successful completion to the benefit of all.

Bord Gáis has already enacted substantial structural changes to meet its obligations under the Third EU Energy Directive. Bord Gáis continues to engage with Regulators and the European Commission to ensure Bord Gáis meets the requirements of the Third Directive. This re-engineering of the existing business continues, to include delivering efficiencies within the business units, managing operational and trading risks, and maintaining our credit rating. Planning is also underway to prepare the organisation to transition to the optimal structure incorporating the sale of Bord Gáis Energy and the new Irish Water governance.

Bord Gáis has an ongoing need to raise funds on the international financial markets to fund the required investment in infrastructural projects, and to repay existing debt as it falls due. A sound credit rating is essential to enable us to do so, and this is dependent on the ratings agencies continuing to view Bord Gáis as a company that is performing financially, and managing its financial and business risk profile. Throughout 2012 we worked closely with the ratings agencies to ensure our best standing in credit terms, and we will continue to do so as the changes above unfold.

In summary, the current challenges for Bord Gáis are to ensure that Bord Gáis Energy continues with business as usual, pending a decision from the shareholder on the sale, including continued expansion of its asset portfolio; Bord Gáis Networks to continue its investment programmes in the gas pipeline infrastructure and telecoms; and the establishment of Irish Water to proceed under guidance from the Government and the CER.

Acknowledgements

2012 was a period of unprecedented change and uncertainty for staff at all levels of the organisation. It is a testament to the professionalism of all our staff that they met each challenge with enthusiasm and energy and were instrumental in achieving the milestones set for both Bord Gáis Éireann and for the Irish Water Programme.

I would like to thank the Minister for Energy, Communications and Natural Resources for his support of the company during the year. We are also indebted to his officials, for their continuing advice and active engagement in support of the business. I would also like to extend my thanks to the Minister for the Environment, Community and Local Government, and his officials, for their close support and interaction involved in the challenging task of creating a new water utility for Ireland. Finally, I would also like to thank the Director, Dr. Eileen Fitzpatrick, and managers of NewERA for the continuation of a productive and supportive relationship.

I would like to thank Rose Hynes, Chairman, and all of the Board Members for their support of me in this role, their active engagement throughout 2012, and their continued support to the present day.

I would also like to extend my best wishes to Michael McNicholas as the future Group CEO of Bord Gáis. I look forward to handing over the reins to Michael when he takes up his position in June of this year.

John Barry
Acting Chief Executive

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