ANNUAL REPORT 2012

Managing Director’s Review

Introduction

Current economic conditions, reflected in a collapse in consumer confidence, have resulted in a global downturn that has left no single region and very few business sectors untouched. In 2011/2012 trading conditions continued to be challenging due to rising pressure on consumers’ disposable income and higher commodity prices. The unseasonably mild Winter had an adverse impact on our Retail business and the increased consumer demand for value put pressure on margins. The interdependence of waste generation and the macroeconomic environment is clear and continues to impact on the profitability of the Resource Recovery business which operates in a market that is highly fragmented.

Gabriel D’Arcy

While the economic outlook remains challenging I am confident in the long term growth prospects for the Group. We will continue to focus on delivering our vision, ensuring that as we grow we meet our customers’ expectations, invest in innovation and improve our competitiveness. We will also continue to invest in our management and leadership capability and drive an organisational culture built on our core values of being resourceful, engaging and respectful.

I can report the following progress in delivering on our long term strategy of diversification across our five businesses:

Strategic Review

Feedstock
2011/2012 delivered 95% (3.6 million tonnes) of our annual targeted peat harvest. This was despite the significant challenges resulting from higher than average summer rainfall in our western bogs. Peat sales were down 6% on Fiscal Year 2011 due to the planned five month outage at West Offaly power, Feedstock’s biggest customer, but strong customer sales in the energy generation and horticultural markets contributed to reasonable operating profits for the year. We face challenges, however, in our peat supply chain as the proximity of suitable peat to our customers becomes stretched. This is being addressed through a programme of transformational business change to ensure improved competitiveness and business sustainability into the future.

We increased our biomass supply to our Edenderry power station to 156,000 energy tonnes in the year ended 28 March 2012, representing 15.1% peat dilution. This underpins our commitment to develop a sustainable model for the plant over the longer term, and we are well on the way to reaching our 2016 objective of 30% co-firing of the plant with biomass.

We experienced bog fires on an unprecedented scale during April and May 2011, mainly as a result of fires spreading to our peatlands from adjoining lands. This resulted in significant peat stock damage. I would like to acknowledge the exceptional efforts of our workforce and the fire services in ensuring that members of the public and their property were protected.

Powergen
Powergen delivered a strong performance for the year with turnover up 17.9% to €71.3 million. The Edenderry power station experienced a period of very good availability and stable generation following the major overhaul of a steam turbine. The Cushaling peaking plant had a successful full first year of operation at 99.2% availability. Our wind farm in Bellacorick, Co. Mayo enjoyed one of its best years since operations began 20 years ago, with a capacity factor of over 26%.

A new joint venture company was established with ESB Wind Development Limited, which will see the creation of a 172 MW wind farm at Oweninny, Co. Mayo. Commercial operation is targeted for late 2015. In addition, grid connection offers were signed for the Bord na Móna wind farms at Mount Lucas, Co. Offaly, and at Bruckana, Co. Tipperary. These projects, with a combined installed capacity of 120 MW, should commence commercial operation in 2014 and 2015 respectively. Substantial progress was made on the co-firing of Edenderry power station. Planning was obtained for the supporting infrastructure to ensure that future targets can be met in order to underpin the sustainability of the plant and its contribution to national RES-E (Renewable Electricity) targets.

A high level assessment was carried out on a number of our cutaway peatlands to ascertain their suitability for the construction of large-scale onshore wind farms as part of renewable energy export opportunities.

Resource Recovery
The resource recovery industry continues to experience significant challenges. The volume of waste generated nationally has fallen significantly since we acquired the AES collection business in 2007. This is a direct consequence of the economic downturn, particularly in the construction and commercial sectors. The resulting decline in customer numbers along with over capacity due to lack of consolidation has driven operating margins to an all time low.

The regulatory environment is also impacting on behaviour in the industry. The acceleration of landfill levies and the uncertainty regarding incineration has seen significant quantities of waste being stored and then exported by other industry participants. This is creating a significant issue for the industry and Ireland. As a consequence waste operators intent on moving to higher end treatment solutions are finding it difficult to execute their plans. This is further compounded by the credit crunch.

Despite this backdrop we have achieved market share growth in our collection business. We succeeded in acquiring the customer business of both the Kildare and Wexford County Councils through a competitive tender process. This has added 32,000 customers to our domestic operation and will produce additional operational efficiencies as we implement our integration plan. We are particularly delighted with the recognition from our local authority partners of the seamless transition of the service and billing operations. This demonstrates our capability to upscale as future opportunities unfold.

As part of our drive to create a best-in-class customer experience we launched a new internet self-service channel. This will not only benefit our customers but it will improve customer service efficiency and costs. The continued roll-out of our RFID (radio frequency identification) technology (bin chipping) is also leading to routing efficiencies as well as offering a wider range of payment options.

Our Resource Recovery business continues to contribute to Ireland’s waste recycling and recovery targets but the challenges in relation to waste generation and management of particular waste streams remain. In late 2011, we commenced the commissioning of our 25,000 tonne per annum brown bin composting plant at Drehid, Co. Kildare. Where possible the composted material from the plant will support the continued development of peat free growing media for the UK retail market.

Environmental - Anua
It was a mixed year in our environmental business where some encouraging trends in the UK were offset by continued pressure in the US and Ireland. We will continue to closely monitor the performance of this business while we continue in our commitment to be a leading provider of cost effective, sustainable and environmentally friendly clean air and water technologies, but will redesign our route-to-market to reflect the challenges faced.

We rebranded our Bord na Móna Environmental business to Anua (from athnuaigh – meaning ‘to renew’) during the year, to more accurately reflect the product proposition we offer in this sector. We also introduced a customer service management model to strengthen our commitment to excellence in this area.

At the start of the year we consolidated our UK operations into a single site in Bridgwater, Somerset. The benefits of our leaner manufacturing operation and customer focused sales operation are beginning to show positive results in a challenging market, with annual revenue up 15%.

To respond to the challenges in our US business we have launched a new residential water treatment solution - Platinum - to complement our Puraflo technology. This will address the requirement to offer a lower-end, value solution to tackle current market conditions in certain States. Our investment in innovation, combined with the continued development of our distribution partners, will position us well as the economy recovers.

Retail
The retail markets in Ireland and the UK remain under pressure and, combined with an unseasonably mild Winter, impacted negatively on our fuel category sales. This resulted in a decrease of 9.7% in revenue. There was better news for our horticulture products which grew by 3.4%, to €54.2 million, driven by a strong performance in our mainland Europe business. This was not sufficient to fully offset our lost fuel sales and consolidated retail sales finished 5.9% behind last year at €171.6 million. Margins were also down as a result of increased retail price competition, as consumers continue to seek out value solutions. Throughout 2011/2012 we experienced significant increases in freight costs resulting from a reduction in UK inbound freight volume into Ireland, reducing our ability to benefit from attractive back-load pricing on products which we export.

We completed a strategic review of our retail operations and merged our Fuels and Horticulture business units into a new single Retail business unit in advance of our year-end. This underlines our commitment to longer term growth, particularly in the UK market, despite the challenges of the current economic and legislative environment.

A number of new products were launched during the year, including the Verve range of growing media for B&Q. Our retail innovation and product development focus demonstrates the commitment to add a sustainable range of fuel and growing media products to our traditional range. We expanded our UK sales resource through the acquisition of the Vital Earth sales team, which gives us the opportunity to expand our full portfolio of products to the UK garden centre and convenience retail sectors. Further afield, the international footprint of our professional growing media has extended into Eurasia and we have recently appointed a distributor in Turkey.

The newly formed Retail business is uniquely positioned as a cohesive trading unit with a product innovation capability. Combined with a dedicated marketing focus this will ensure the business delivers profitable growth as an increasingly international entity.

Land and Property
The objective of the Land and Property business unit is to generate commercial, environmental and social value from these key assets.

The Bord na Móna Strategic Framework for the Future Use of Peatlands guides our decision making in relation to potential future uses and developments on cutaway bogs. During the year we commenced a programme of consultation with interested parties on the Strategic Framework, including the Midland Regional Authority and the Peatlands Council.

Lough Boora Parklands was honoured with the Most Innovative Corporate Social Responsibility (CSR) Project Award at the annual Chambers Ireland CSR awards. The Award was partnered by Business in the Community Ireland to recognise companies that are committed to socially responsible business practices. The Lough Boora project was specifically identified as contributing positively to the community.

Bord na Móna completed the signing of a fifty year lease agreement on a 400 acre peatland, which is to be used as an amenity for the people of Abbeyleix and the surrounding area.

A number of other community and wildlife projects were progressed during the year, including a conservation project promoting red grouse, a bird species that has undergone serious decline in population in past decades, and other works to rehabilitate peatlands at various locations.

The first annual review of the Group’s Biodiversity Action Plan was carried out in consultation with environmental groups and other stakeholders and good progress was noted.

A pilot project to increase the level of security of our bogs to prevent unauthorised access and trespass was initiated successfully.

Operational and Financial Review

A summary of the key Group financial results for the past three years is set out below.

2011/2012
€’000
2010/2011
€’000
2009/2010
€’000
Turnover 383,826 382,069 384,417
% change +0.5 -0.6 -4.3
EBITDA 61,146 72,749 64,611
% change -15.9 +12.6 +12.8
(Loss)/profit before tax (12,742) 16,727 12,899
% change -176.2 +29.7 -33.9
Shareholders’ funds 181,321 231,390 224,408
% change -21.6 +3.1 +13.0

Turnover increased by €1.7 million in comparison to the previous year. There was increased sales activity in Resource Recovery, additional electrical output from the first full year of operations at the Cushaling peaking plant, increased electricity sales for the Edenderry power station and increased growing media sales into mainland Europe. On the adverse side, there were reduced peat sales to West Offaly Power (planned outage of five months) and sales of fuel category products were hampered by the mild and unfavourable winter season.

EBITDA at €61.1 million was €11.6 million down on the previous year reflecting the reduced peat sales to West Offaly Power, lower fuel product sales, reduced margins in Resource Recovery, the fire related stock losses and unrecovered costs on the peat harvest shortfall.

The reported loss before tax of €12.7 million compares unfavourably to a profit before tax of €16.7 million in the previous year. The challenges experienced by the resource recovery industry, falling waste volumes, industry over-capacity, reduction in customer numbers and an uncertain regulatory landscape, have resulted in a revaluation by many leading players. This has been no different for our AES collection business resulting in a €23.1m impairment charge. We will continue to reduce the cost base, deliver operational efficiencies and improve our customer service offering.

Despite the loss recorded for the year, the Group had an operational cash flow before capital expenditure of €42.1 million which was €14.7 million adverse to the previous year.

Shareholders’ funds have been reduced by the loss after taxation and by an increase of €27.5 million in the pension deficits on the three defined benefit schemes. The key contributing factor to the increased pension deficit is a reduction in the discount rate used to measure future liabilities, down from 5.25% in 2011 to 4.0% in 2012.

Capital Expenditure and Funding

Investment for the future

Capital Expenditure for 2011/2012 amounted to €28.3 million (€48.0 million in 2010/2011). A significant capital investment programme was undertaken during the year which included the construction of a composting plant and phase 5 of the Drehid engineered landfill (which was substantially complete at the year end), additional refuse collection vehicles, the replacement of peat harvesting plant and expenditure on wind farm projects.

Research and Development: In 2011/2012 Bord na Móna spent €5.7 million on research and development including business development, exclusive of grants (compared with €5.3 million in 2010/2011). Twelve people are directly employed in the Innovation Centre with a further twenty innovation staff embedded in the operational businesses of the Group.

Funds from Operating Activities The Group generated €42.1 million from operating activities in 2011/2012 compared to €56.8 million in the previous year.

2011/2012
€’million
2010/2011
€’million
Net cash flow from operating activities 42.1 56.8
Capital expenditure and acquisitions (25.3) (49.2)
Financing costs paid (10.3) (8.3)
Corporation tax paid (4.3) (3.4)
Dividend paid (4.3) (3.5)
(Decrease) in net cash (2.1) (7.6)

At year end, the Group had net borrowings of €66.7 million, an increase of €2.1 million in the year – a significant achievement given the level of capital expenditure. The Group’s balance sheet remains strong. The detailed cash flow statement is given on page 38 supported by Note 20 to the Financial Statements.


Capital Structure and Treasury Policy

The Group Treasury Policy is approved by the Board of Bord na Móna plc. This policy is then implemented and monitored by the Group Treasury function. The Treasury policy aims to minimise Group funding costs while maintaining flexibility in volatile markets, always subject to acceptable levels of treasury risk.

The Group has entered into hedge arrangements to fix floating rate debt.

The Treasury function has adopted a selective hedging approach in managing the Groups’ exposure to secure the Euro value of receivables and payables.

The Treasury policy permits derivative instruments to be used to mitigate financial risks and they are executed in compliance with the specification of the Minister for Finance issued under the aegis of the ‘Financial Transactions of Certain Companies and Other Bodies Act 1992’.

Net borrowings in the current financial year reached a peak of €109 million in September 2011, compared with a peak in the previous year of €104 million. Bank interest and similar charges at €10.5 million compared with €9.9 million which was an increase of €0.6 million on the previous year.

At year end, the Group had $355 million (€263.9 million) fixed rate debt raised on the US private placement debt market. In order to hedge the associated US dollar exchange rate exposures and convert the underlying interest rates to fixed, the Group entered into a number of cross currency swaps to match the maturity profile of this debt.

The maturity profile of the debt at the financial year end was as follows, 7% repayable in 2013, 16% repayable in 2014, 25% repayable in 2016, 12% repayable in 2017, 19% repayable in 2018 and 21% repayable in 2019.

Gearing was 37% at year end compared to 28% at the start of the year impacted by a reduction in the net assets as opposed to increased borrowings.

Gabriel D’Arcy
Managing Director

28 June 2012