THE FRIDAY INTERVIEW: Barry O'Halloraninterviews Rafael Miranda, chief executive of Endesa
THIS WOULD not strike anyone as the best time to be half way through a near-€1 billion investment in the Republic.
The economy is firmly in recession and is expected to shrink by more than 4 per cent this year, asset values are falling and demand for most services is heading south.
It is probably a bit late at this stage though for Spanish energy group Endesa to turn around.
Last July it agreed to buy four ESB electricity plants for €450 million. After formally closing the purchase last week, it said it would spend at least that amount again, and possibly closer to €500 million, on updating the two larger plants at Tarbert, Co Kerry, and Great Island, Co Wexford.
The original deal was done over a month before world financial markets went into the final stages of meltdown, well ahead of the subsequent “official” confirmation from the Central Statistics Office that the Republic lurched into recession in 2008.
None of this bothers Endesa chief executive Rafael Miranda. He says that setting up shop here is part of the group’s overall strategy to increase its global presence. Endesa is the biggest player in the Spanish and Portuguese energy markets and is the largest private operator in the business in Latin America, where the only bigger companies are state-owned.
Up to about two years ago, the group also had businesses in Italy, France and other European markets. These were sold to German giant Eon, following a drawn-out and complex takeover battle during which its smaller Spanish rival, Gas Natural, emerged at one point as the likely buyer.
That left Spanish construction group Acciona as its largest shareholder.
“We wanted to compensate for the loss of Italy and France,” he says, adding that the group sought to do this by going into other European markets where it felt comfortable.
“We feel comfortable in Ireland. It’s an island and we operate in all the islands in Spain. Of course, their operating systems are smaller than the Irish one but, nonetheless, we know how to operate in an island and that was an incentive for us. Second, it is a country where the regulation is serious, transparent and predictable.”
The move makes Endesa Ireland’s second biggest utility after State-owned ESB, which sold it the plants and against which it will be competing from this point on.
Its strategy is twofold. First, it intends replacing the existing plants at Tarbert and Great Island with modern gas-fired generators. Endesa will replace the 260 megawatt plant at Great Island with a 420mw generator. It intends building a new 300mw facility in place of the existing 600mw generator at Tarbert.
This will cut its overall Irish capacity, but the new generators will be more efficient than the existing plants. The new plants will also cut the Republic’s greenhouse gas emissions.
Tarbert and Great Island generate electricity by burning heavy fuel oil, which produces high quantities of carbon. The modern gas-fired facilities will be far cleaner.
The new generating stations will also be more productive. Tarbert and Great Island are at or near the end of their useful lives, a consequence of the fact that the ESB has only been allowed to build one new generating plant since the beginning of the decade.
Endesa already has experience of entering new regions by taking over older plants and upgrading them. It moved into the Italian market in much the same way in 2000. It subsequently boosted earnings from these plants to €800 million a year in 2007 from €300 million when it arrived.
It also cracked a far tougher nut, the French market, which is much more closed and dominated by their homegrown giant, EDF.
“We still got a lot of long-term contracts with clients that included the French railway system,” Miranda says.
The group will continue to operate the existing generators and the smaller “peaking plants” it bought alongside them while it is building the new facilities.
About three-quarters of the 188 workers in Kerry and Wexford have come on board, a process that involved negotiations with the unions and an incentive package, paid by the ESB, which cost a about €2 million.
Miranda acknowledges that the process was “not easy”, but indicates that the overall experience was positive.
While it is working towards its initial goal of building and commissioning two new power plants, Endesa will have to sell the power it is generating from its four plants. It will be sold into the “pool” through which all the electricity produced on this island is traded.
The single electricity market was introduced in November 2007 and is still very much in its infancy. To develop, it needs more players in the market and more interconnection between the Republic, the North and Britain.
Endesa’s arrival boosts one element and the company is planning to play a full part in it.
Miranda says that it is establishing a trading arm, which will buy and sell the contracts for difference (CFDs) that form part of the single market mechanism and which will be the real engine of price competition in the pool in the future.
“The Irish system is very similar to systems in other European markets and we already have experience of this,” Miranda says. He agrees that the single market and the overall liberalisation process still has some way to go, but says it is heading “in the right direction”.
All this means that it will be recruiting clients from existing independent players who mainly supply business, industry and large organisations.
It has not ruled out targeting the domestic market, but that is unlikely to happen before it upgrades its Irish plants.
Over the medium term, once the group is happy with the returns it is getting from its Irish operations and feels confident here, Miranda says it will look at opportunities to expand here.
It has already dipped its toe into that pool.
Last year, while it was working on the ESB deal, it also bidded for independent generator Viridian’s power plants in north Co Dublin. Its rivals included another State company, Bord Gáis Éireann (BGÉ), which is entering the electricity market and against which Endesa will be competing.
The Viridian sale did not go ahead. Miranda says Endesa was interested but that it was not prepared to buy at the sort of price that the seller, Bahrain-based fund Arcapita, was seeking.
“We believed that the value that they were trying to achieve in the current environment was not realistic,” he says. The vendor was reported to have been seeking about €2 billion for the assets.
There is one other opportunity that will follow from the development of the interconnector between Meath and Wales – the British market. The link will have the capacity of a medium-sized power plant and will allow electricity to travel in both directions.
Miranda says Endesa is aware of this, adding that selling excess power to Britain will be on its agenda when the interconnector is up and running.
Nor is the company averse to entering joint ventures with partners who are also seeking to grow their global presence.
So, given that the ESB is already developing power plants in Spain and sees international markets as key to its future growth, would Endesa do deals with its Irish competitor? “That is a possibility,” Miranda says.
ON THE RECORD:
Name: Rafael Miranda
Position: Chief executive officer, Endesa
Age: 60
Background: has BSc in industrial engineering, Comillas University, Madrid, and masters in management, School of Industrial Organisation, Madrid.
Joined Endesa as general manager in 1987; made chief executive in 1997 and oversaw its privatisation. Before that, he was vice chief executive at Campofrio, one of Spain's main food groups, and technical director of battery maker Tudor.
