Diversifying to keep the home fires burning

There was a degree of pride in the air after the annual general meeting of Bord na Móna last Tuesday afternoon. Managing director Mr John Hourican was not exactly trumpeting his accomplishments, but he was happy to reflect on them all the same.

Chief among these bright spots was Bord na Móna's ability last year to wipe out its debt and move into a small cash surplus.

The achievement - seemingly small in that it involved the elimination of just €8 million in debt - was highly symbolic in terms of the company's history.

Flick back less than 10 years and you will recall that successive governments were investing more than £100 million (€127 million) in the semi-state, just so it could approach something close to viability on the debt front.

Mr Hourican is not a man for looking back, however, preferring to set out the semi-state's vision for the future - a future which is unlikely to see the State as knee-deep in turf as it once was.

Since taking up his managing director role at Bord na Móna in 2001, Mr Hourican has been directing subtle change at the group. At that point, peat - which is sold primarily to the ESB for the production of electricity - accounted for 70 per cent of turnover whereas now it provides just about half of sales.

The remainder comes from a range of initiatives that might not be traditionally associated with the group, such as energy consulting and horticulture.

Over the course of the past financial year, the firm has reorganised its internal structures to take account of the shift.

The idea, as Mr Hourican explains, is to leave Bord na Móna in a position to leverage off its old reliable peat operations as it seeks new sources of growth in other areas. In other words, peat is no longer where it's at, with other types of fuel more appealing both from cost and environmental perspectives.

"We have identified areas where we can fund and grow sustainable new businesses of a critical mass using the cashflow of indigenous businesses," he says.

If all goes to plan, this will see Bord na Móna spending up to €250 million on acquisitions over the next four years in these non-peat sectors.

The most advanced of these at this stage is wind energy, with Bord na Móna already holding an 88.5 per cent shareholding in a 6.5 megawatt (mw) wind farm in Co Mayo. Additional capacity of 320 mw is on the way for the same location, where the firm operates jointly with the ESB. Over the next 10 years, some 5,000 hectares of land currently used for peat production will be turned over to windmills.

Mr Hourican is careful to avoid much criticism of the Government (his company's sole shareholder) or the energy regulator on their efforts to develop a wind energy market.

"The pace of regulation and preparing for the introduction of new sources of energy has been slower than we would have liked," is all he will say, referring vaguely to problems with connecting new wind farms to the national grid. Apologising for the pun, he points out that the State is "sailing very close to the wind" on its electricity generation, as evidenced by the numerous recent "amber alerts" reported in this newspaper.

Mr Hourican is also keen on tapping into Bord na Móna's vast 80,000-hectare land bank for landfill facilities. A site in north Kildare is the first target for such a shift into a sector that looks well-placed to boom before long.

"We see the opportunity to become a high-quality service provider in that niche," says Mr Hourican, pointing to the firm's existing experience in the scientific end of the environmental spectrum.

Other newer initiatives are a little further off, but Mr Hourican believes in their potential. He speaks almost evangelically about fuel cell technology - a system that uses hydrogen to generate power that could, for example, be used in cars. Such vehicles are already in development, with car manufacturers more than aware of the benefits of fuel that does not emit carbon into the atmosphere.

The snag, Mr Hourican admits, lies in the current prices for such alternative fuels. This is where taxes should come in to help level the field over the next decade or so, he suggests.

If it came to pass, all of this would transform Bord na Móna into an entirely different animal from the one generations of Irish people grew up with in their fireplace. But would this be an animal with which the State should justifiably be involved?

This issue of ownership came to the fore about two years ago, when Bord na Móna first outlined its plan to ease off reliance on peat. The private sector seemed to beckon, just as it was calling a number of other semi-states at the time.

Back to 2004, Mr Hourican says the obvious "kneejerk" reaction to Bord na Móna's needs would be a straight privatisation. He argues however that different parts of the company would benefit from differing approaches. The Government could retain a majority holding in one bit, with a private-sector partner taking the same position in another operation.

Mr Hourican says more "joint ventures", such as the windfarm with ESB, will emerge within the next 18 months, acknowledging that the long-term ownership of such ventures would at some point become an issue. Conglomerates, he admits, are no longer fashionable.

Bord na Móna's hand in this regard will be strengthened from next year when it begins to pay a dividend of up to 30 per cent of pre-tax profits to the State. This would have amounted to a modest €5 million in the year gone by, although the results were hit by an €11 million exceptional restructuring charge.

In return, the firm is expecting a greater degree of commercial freedom that would include the ability to borrow more than its existing limit of €127 million. This extra space to manoeuvre could then be combined with new funding drawn from new partners. This could allow Bord na Móna, according to Mr Hourican, to treble its enterprise value of €173 million over the coming five years.

"If we're successful with our ambitions, I would expect 60-70 per cent of profits to come from new businesses within three to four years," he says. "We need that sense of urgency."