Centrica’s canny Irish move

Centrica has picked up Bord Gais Energy for a bargain £125m, says Nigel Hawkins.

Almost unbelievably, the Irish banking crisis was even more damaging than that the UK’s. With international financial support the Irish economy is now recovering, but as part of the price for that support the Irish government has been required to fast-track a privatisation programme.

The most valuable asset being sold is Bord Gais Energy (BGE), which is now being split up – with Centrica acquiring some of its key assets.

For around £125 million, Centrica is buying two key BGE business streams: its gas and electricity supply operations in Ireland and its 445MW combined cycle gas-fired turbine (CCGT) at Whitegate in County Cork. It is not acquiring BGE’s 13,500km of gas pipeline.

BGE’s supply business has 650,000 residential gas and electricity customers and 30,000 business accounts. As such, it is the largest dual fuel supplier in Ireland.  

Given Centrica’s well-publicised trials and tribulations with its UK CCGT plants – losses of £133 million were sustained in 2013 and three of its worst performing plants are now up for sale – it is intriguing that Centrica is acquiring the Whitegate plant.

Importantly, though, the plant is modern, having been commissioned as recently as 2010. Furthermore, last year’s 68 per cent load factor was impressive, which partly reflects its encouraging position in the merit order and, more generally, highlights ESB’s backlog of baseload generation investment.

In its recent investors’ presentation, Centrica forecast a €40 million (£32 million) Ebitda return from BGE for 2015. It also confirmed a projected earnings per share enhancement of 0.3p to 0.4p, an admittedly modest figure in the context of Centrica’s operations.

In terms of valuation, the low price paid by Centrica is noticeable given that it includes a modern gas plant. To be sure, today’s CCGT valuations are below those of the glory days before the financial crisis – a scenario that Centrica will experience first hand when bids are submitted for its three surplus CCGT plants in the UK.

Nonetheless, the implicit cost – derived from a sum-of-the-parts analysis – of the Whitegate plant is low once allowance has been made for the value of the acquired gas and electricity supply business.

More generally, the total acquisition cost of £125 million is hardly a major outlay for a company capitalised at £16.7 billion, and one dwarfed by recent exploration and production purchases. In the medium term, BGE may prove to be a canny, and value-enhancing, deal.