Energising an ailing company to profit

As chief executive of the ESB since 2002, Padraig McManus has overseen huge changes in the commercial state body. He will step down later this year, leaving a rejuvenated company behind, writes Kyran Fitzgerald

IT is easy to knock the ESB. Few of us enjoy opening our electricity bills, never mind having to pay them.

With energy costs in Ireland traditionally near the upper end of the scale and ESB staff well paid and enjoying plenty of perks and privileges, there is plenty of resentment.

But when people put their thinking caps on, they are usually forced to accept that this commercial state company has played a positive role in Irish life, right from the Ardnacrusha project of the 1920s through rural electrification to the present day.

Through stormy periods, ESB staff have operated with efficiency to restore services. Ireland has enjoyed regularity of supply, something that has been critical to the country’s energy hungry manufacturers.

The company has also been a good training ground for engineers, apprentices and financial controllers.

Brendan Ogle, of the ESB Group of unions, said: “If Ireland had been run in the way the ESB has been in the past ten years, we would not be in the mess we are in. We would be flying.”

The ESB has been effectively forced by the state to shed 800,000 customers as part of an effort to introduce competition to the marketplace.

Despite this, last year it still generated revenues of €3bn and returned a total dividend to the state of almost €280m.

This week, the company’s long-serving chief executive, Padraig McManus, announced that he would be stepping down from the job later this year.

McManus has come in for criticism over levels of personal payments that reached €750,000 in 2009. While his pay fell to around €500,000 last year, the commentators have had a field day — hardly surprising at a time when customer disconnections at one point reached 1,500 a month. McManus’ response was that his large salary hike in 2008 came as a result of a review of semi-state boss remuneration carried out the previous year by the then government.

McManus took over the ESB in 2002. He was viewed as having a more nuanced approach to industrial relations than his main rival for the job, Donal Curtin, who headed-off to take over the running of An Post.

Last year, he steered through big changes in the operation of the ESB pension fund, which had run up a deficit of €2bn. The unions agreed to major changes, including a shift from a pension based on final salary to one based on average earnings.

He also announced plans to cut costs across the organisation by 20% — including the €700m pay bill.

He has been there before, having played an important part in the Cost & Competitiveness Review of the 1990s which involved an extensive overhaul of the organisation.

Much of his career was spent overseas with the successful ESB offshoot, ESB International. He has also worked in the private sector.

In 2002, when McManus took over, the economy was at full throttle. Up until 2008, the emphasis was on meeting soaring demand for connections from new customers as the property boom gathered momentum. Since then, the process of expansion has been thrown into reverse. New connections have been replaced by disconnections — a staggering 200,000 customers are now the subject of special payment arrangements. The economic and social crisis flood has seeped through the ESB’s front door.

ESB charges were well above the European average, causing huge annoyance to Irish business. These have been brought back in line and the company now looks better placed to begin the fight back in consumer markets from early April.

Its hands tied at home by the Commission for Energy Regulation (CER), the ESB has pursued an ambitious strategy of overseas expansion.

Last December, it completed the acquisition of NI Electricity Networks from Viridian Plc and is planning a €2bn investment in the British energy market over the next decade. The company is also expanding in Poland, fulfilling a strategy that was cut short by the government in 2001. It is also planning heavy investments in interconnectors connecting Ireland with Britain and the continent with the aim of boosting the country’s renewable energy sector.

The job of ESB chief executive is clearly a multi-faceted one.

The company has always faced challenges.

It has long had to manage a sometimes fractious relationship with the Department of Energy and with politicians keen to keep a lid on electricity prices. Under Paddy Moriarty, the ESB became famous for its conservative accounting policies as it sought to husband resources for future expansion. In the mid 1990s, the ESB fought with energy minister Michael Lowry, a critic of what he termed “the cosy cartels”. More recently, relations with the State owner have appeared less turbulent, reflecting the current CEO’s non-confrontational approach to things.

Padraig McManus has had to deal with ministers who favoured a breakup of the organisation, something he viewed as anathema.

Not surprisingly, the Green agenda has been at the forefront in recent years, with the Green Party in office for the first time in its history and Eamon Ryan installed as energy minister. The ESB adapted to this new requirement by setting a target of carbon neutrality in electricity generation by 2030. It is on target to reach the first stage in this goal next year.

In 2008, the ESB published details of a €22bn investment plan involving the creation of 3,700 jobs over the period 2009 to 2013. Billions are expected to be invested in renewable energy and in energy conservation through an ambitious retro-fit programme.

However, the sharp contraction in the economy and related sovereign debt crisis threatens the project on a number of fronts.

Company insiders suggest that the profit earned in 2010 will fall below €100m. The sovereign debt crisis is also threatening the ESB’s ability to raise funding at competitive rates. In January, they were awarded a rating by the credit rating agencies.

One commentator described it as “being closer to junk status”. The ESB faces major refinancing challenges as it manages debts of around €2bn. A company source claimed: “We are fine for the next couple of years, but there are clearly challenges ahead.”

They recently negotiated a term loan of €810m and a revolving credit facility of €1.5bn at what are coyly described as “favourable interest rates”. However, the decline in Ireland’s reputation could yet hit the ESB and by extension its customers and the Irish taxpayer, hard in the pocket .

At the same time, the state is under pressure from the IMF and EU to raise finance. The Government has indicated that it will seek to raise €2bn from the sale of state assets. The appointment of long-serving Labour politician Pat Rabbitte to the Department of Energy should ease the concerns of those who fear a fire sale.

Padraig McManus, insists that it is up to the Government to reach a decision on privatisation, but he has declared himself absolutely opposed to any further break-up of the company, beyond that achieved with the establishment of Eirgrid. The state will have to work hard with the company to come up with innovative solutions, perhaps involving partnerships with strong international players.

As McManus prepares to move on, he can reflect on some jobs well done, and other tasks yet to be tackled in full.

He has begun the task of addressing the cost base. Union boss Brendan Ogle believes that while he has had regular skirmishes with McManus, the industrial relations climate is completely different to what he experienced at CIE as leader of the locomotive drivers’ union. He warns against a rush to privatisation, citing the example of California after its electricity industry fell into the hands of Enron.

McManus meanwhile, is preparing calmly for the next phase in his life. He will remain on until the autumn to help guide his successor.

The Bord Gáis boss, John Mullins, has been installed as a favourite for the job. He has a background in the ESB but said yesterday at a function in Cork that he was not a contender.

Others mentioned include former ESB Energy International boss, Mike McNicholas, now at NTR, and Bernard Byrne, the group finance director who left to join AIB as chief finance officer. Leading insider candidates include Pat Doherty, executive director of ESB Energy, and John Shine, deputy chief executive. A politically-driven squeeze on chief executive salaries may deter non-Irish candidates. The ESB, anyhow, has a strong tradition of looking after its own, when it comes to selections to the top job.

Picture: Maxwells

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