Bye bye troika, hello financial engineering
Bord Gáis and now ESB are borrowing €500 million to boost the State’s income. Are the good times back in the State energy sector?
A Bord na Mona peat powered Power station in Co Offaly. Photograph: Niall Carson/PA Wire
Despite the weight of conventional wisdom to the contrary, issues can and do move at high speed within the public sector. On Monday morning, the National Treasury Management Agency (NTMA) prepared to release its annual report. In it, the State’s money manager noted ESB was selling two peat power plants in Offaly and Longford to raise cash towards a €400 million dividend for the exchequer, and “the sale process will be completed” later in 2014.
The very same morning, the board of ESB, chaired by veteran investor Lochlann Quinn, was meeting to scrap the sale after consultation with New Era, a silo within the NTMA. The company announced it will keep the plants and instead borrow the remaining €203 million it owes the State.
“It will be financially more beneficial to both ESB and the Government,” ESB said.
The decision to reverse the sale of the power plants’ was clearly taken at speed.
Earlier in the summer in its first post-bailout assessment of Ireland, the European Commission said it expected the sale to proceed, resulting in “the transfer of €200 million” to the Government.
In a written answer to Fianna Fáil’s Sean Fleming earlier this month by Brendan Howlin, the Minister for Public Expenditure, there also was no hint of the u-turn to come. “ESB is currently finalising [the sale] plans, which is expected to yield a further special dividend in the near future,” said Howlin on July 9th.
But the proposed sell-off of the plants, under pressure from the Government, was by now already becoming a sore point for ESB’s unions and also for some within its management team.
ESB engaged Macquarie Capital to test the market for buyers, but it wasn’t good – the carbon-spewing peat plants, supported by a levy on all customer bills to prop up the peat industry, were worth little on the market. “There was no business sense in it, and all the advice confirmed that,” said a source privvy to the company’s thinking.
The public levies are due to run out in about five years, making the two plants particularly unattractive to institutional buyers.
“Whoever bought them would probably eventually have to convert them to burn biomass or something to make a return,” said one corporate finance source. “Unless a buyer was able to do a deal with Bord na Móna [to keep supplying cheap peat], the plants would not be worth buying.”
The sale of the two plants, it was decided, would bring nowhere near the level of cash required. To reach its €400 million target using asset sales, ESB would have had to offload far more than just Lough Ree and West Offaly, potentially sparking a bitter industrial relations dispute. The company began looking for an alternative solution.