Ride like the wind

Following on his Airtricity success, Eddie O’Connor has even bigger wind-energy plans with his firm Mainstream, writes John Walsh.

Ask any graduate of an MBA programme or management school what a ‘BHAG’ is and they will probably look on in wide-eyed bemusement. It certainly hasn’t made its way into the popular lexicon but if you work for Eddie O’Connor, there is more than a good chance you will understand the term. BHAG stands for big, hairy, aggressive goals and it is the unofficial raison d’etre of Mainstream Renewable Power. O’Connor says that he wants Mainstream to become the biggest private-sector operator in the offshore wind-energy industry.

It helps that he has a proven track record in this area. He was the original founder of Airtricity in 1997 and acted as the company’s CEO until it was sold to E.on and Scottish and Southern Energy for a combined sum of €2.2bn in 2008. He bagged €45m out of that deal – not bad considering he started the company eleven years previously with a capital sum of €625,000.

O’Connor and former Airtricity finance chief Fintan Whelan started Mainstream in 2008 with a joint investment of €32m. The target is to float the company in three to five years’ time and break into profitability in three years.

Business & Finance caught up with O’Connor at his company’s headquarters in Sandyford. He cites his own office and its lack of insulation and energy efficiency as the starting point in what is going to be a once-off transition to sustainable development. And that isn’t just the Irish economy, it is the global economy. O’Connor aims to put Mainstream at the vanguard of this transition by making electricity the de facto source of energy and, in turn, wind as the key driver of that market.

He certainly hasn’t rested on his laurels since offloading Airtricity. Mainstream has acquired assets in the US, Canada, Europe, Chile and South Africa. He doesn’t rule out making acquisitions in other geographical areas in the future but, for now, the focus is on bringing the assets already in the company’s portfolio onstream and profitable.

“We are consolidating in the places we are in but it is quite an expansionary programme. We have raised a good deal of money,” says O’Connor. On top of the €32m committed by O’Connor and Whelan, Barclays Capital invested €20m in the firm. The board and associates of board members of Mainstream pumped in a further €20m. In 2009, O’Connor went on an investor roadshow and raised a further €25m in equity. There is also a debt instrument facility of €25m which brings current working capital up to €122m. There are plans to raise €35m this year and a further €80m in 2011.

The Mainstream CEO describes fund-raising conditions in 2009 as “terrible” but says it is improving dramatically. Mainstream’s fund-raising activities are aimed at Irish high net-worth individuals [HNW] and UK institutional investors. Airtricity used NCB’s private clients as its main investment source. It appears to be a winning formula as O’Connor is back to the same well for Mainstream.

Banks are shrinking their balance sheets, which means that they will hardly provide a rich seam of financing over the next few years. Irish HNW individuals should provide a lucrative source of funding in the form of angel investors or venture capital funds but this sector has been hammered over the last 12 months. For any company on a growth path similar to Mainstream’s, sources of capital appear to be narrowing.

O’Connor does not see any problem raising a further €115m over the next two years. He says that the same investors who made rich returns on Airtricity are still in play. “The same market (Irish HNW individuals and British institutions) is still there. What happened last year was nothing to do with this industry; the whole world went risk averse. The last tranche of the Scottish & Southern payments for Airtricity is coming in February and a lot of folks will get big injections of capital out of that.”

Moreover, he says that wind energy is going to be an extremely lucrative sector in the  future. “We grew at 54% each year for 13 years at Airtricity and it is the same formula for Mainstream. The world is on a one-off transition to sustainability. Electricity is a great product. There is no alternative in the horizon. You can make electricity out of everything but fossil fuels are becoming scarcer. We have arrived at or are close to peak oil.”Not everybody has the same faith in offshore wind energy as O’Connor. BP famously pulled its investment in offshore wind in April 2008 on the basis that it didn’t deliver the appropriate level of shareholder returns. Moreover, there are still huge technical hurdles such as salt-water erosion and breakdown rates.

O’Connor disagrees that wind energy doesn’t deliver shareholder value. “Airtricity developed the Greater Gabbard [wind farm off the Suffolk coast]. Scottish and Southern returned a profit of €107m from the sale of half the Greater Gabbard to RWE and that was after paying us [Airtricity]. So that was highly profitable.” Moreover, he says Mainstream’s recent success in the British government’s round three of its offshore wind-farm programme shows it has the potential to significantly boost topline growth.

On January 8th, it was announced that Mainstream, in partnership with Siemens Project Ventures (SPV), a division of the German multinational Siemens, had been awarded a contract to develop 4MW [megawatts] of wind energy by 2020 on the Hornsea zone which is just off the coast of Yorkshire. “I would be surprised if we don’t get 6MW out of it [Hornsea]. We have created something there that nominally has a value of £2bn right now. All my evidence of offshore wind is that it is the place to be right now.

“I love the problem of others not being able to make profitability out of things. We institutionalise imagination and innovation in this company. We have invested in a new turbine. We think that if it turns out like it should, then it will take 40% of the cost off offshore turbines. We are going to be the low-cost developer of offshore wind.”

O’Connor has put a 30% return on investment hurdle on the company’s assets in Chile and South Africa. He declines to put a specific return on investment target for the overall company.  “The returns will be appropriate to a high risk investment. I am not going to give you a ballpark right now. All I will say is that it is high risk/high reward. It very much depends on what happens in the banking system. Are we going to get back to a situation where we were? Are we going to be able to get mezzanine funds in there? Can we convince quasi-banking investors that the risks are work taking? Any figure I might give you right now is trivial.”

The UN sponsored climate-change conference in Copenhagen last December was supposed to broker a deal that would cut CO² emissions by the levels needed to prevent global warming increasing by another 2°C. In the event, the conference ended without reaching a successful conclusion. O’Connor says that an appropriate framework will be hammered out in Mexico later this year that will affect all countries.

That is why Mainstream moved into Chile and South Africa. Both have a massive reliance on fossil fuels and huge energy demands. More importantly, both countries have stable democracies with a fixed rule of law. O’Connor says he looked at a number of other developing countries but decided not to invest because the terms were not right.

He says that Mainstream’s investment in the US is not working out as he had originally planned. The country is one of the biggest polluters in the world with a massive dependency on fossil fuels. But the credit crisis changed the energy landscape in the US. The economic downturn saw an unprecedented 25% fall in demand for electricity which, in turn, triggered a collapse in gas prices. The way contracts are agreed in the US, Mainstream would receive one third of its revenues from the sale of electricity.

In Europe, governments give a fixed price for delivering the wind energy. As it stands, it is hard for Mainstream to compete against gas companies in the US and that will remain the case until gas reaches $7/million Btu (British thermal units), says O’Connor. He ruled out a move into China because of the state control of the sector and the absence of a market economy.

He is not particularly complimentary about the Irish Government’s efforts to promote the green agenda and the supply of electricity through offshore wind, although he blames the latter on the ESB. He is full of praise for Minister for Energy Eamon Ryan, whom he describes as “doing his best”.

“If I was reliant on doing business in Ireland, I wouldn’t raise €2m, never mind €120m because I couldn’t justify how I would ever get a return on the investment. Britain is way ahead of the curve in terms of developing the offshore sector. I think Ireland will probably figure out how to do this. There are a lot of committees around and people are putting a lot of thought into this. Ireland will probably turn out to be very good in the end but right now, it is not good. The big vested interests cannot cope with change.”

O’Connor’s BHAG is to make Mainstream the lowest cost, most efficient and biggest offshore wind producer. He plans to achieve this by keeping a tight focus.“You will never catch us messing with the brown stuff. We will never move into nuclear or coal-fired energy. We have the experience, the supply chain, the imagination and the vision. We are absolutely determined to do it.”