Powerful reporting
January 14, 2015
Our investor survey, on reporting in the Power and Utilities sector, is the latest in our series focusing on reporting in specific industries. The survey is broad, covering areas of reporting across the business model, non-GAAP disclosures and channels of communication. Although I can’t cover everything in this post, I wanted to share some of the highlights with you.
How did the sector stack up?
On an overall basis, the investment community’s view of P&U reporting looks a little better than the other industries we’ve looked at. They gave P&U reporting a 3.5/5 (beating Oil & Gas at 3.3/5 and Mining at 3.4/5). It’s important to remember that this result also reflects the contrast investors and analysts see between some of the larger companies, who report pretty well, and many other industry players, where they see more scope for improvement.
Either way, 3.5/5 isn’t a high score – so there are clearly opportunities for improvement. In my view, it’s worth companies stepping back and thinking about how they might respond - especially given that 60% of investment professionals told us that their perception of company reporting impacts their perception of management.
Areas for improvement
So where could reporting be better? Business models, strategy and risk reporting are all important, investors and analysts telling us they need clearer explanations of issues such as how long-term strategy relates to the current business model and how key risks are managed and mitigated. They also want to see clear links between strategic goals, risks and key performance indicators (KPIs).
We broke down many of our questions to reflect business models, so we could look at networks, generation, supply and energy trading in detail. Some of the results were surprising - for example, while customer supply is the segment we see under most political, media and regulatory scrutiny, the investors seem happiest with the reporting of this part of the value chain. So opportunities to refine reporting on supply are less obvious than we saw in other segments. In networks, our survey participants wanted to see more and better reporting on regulatory regimes, capital expenditure and additions to regulatory asset base. In generation, it’s all about expected ramp down/investment in new generating plants – where is the new investment going to be, and which assets might be coming offline? And in energy trading, we heard that hedging disclosures are particularly hard to understand and need to be explained more clearly.
As is often the case, the real areas of focus seem to tie directly to what the investment professionals are trying to model. 85% said that a company’s description of its regulatory environment, current price controls/rate cases and progress against their regulatory commitments are important to their analysis. In the environmental, social and governance space, there is less of a focus on health and safety measures than on the emissions information – perhaps reflecting the desire for more information on factors which help predict the long-term financial impact. I think we’re likely to see some changes here in the future, as companies move towards more integrated reporting and decision making, perhaps with the value impact of things like Lost time injury frequency rates (LTIFR) becoming clearer.
Why should companies care?
I think the messages in our survey are important as we approach this year’s reporting cycle – we shouldn’t forget that 80% of the investment professionals we spoke to told us that they review the Annual Report of companies that they follow.
But it’s not just about investors. A diverse range of stakeholders are now showing strong interest in the power and utilities sector, so your reporting also needs to meet the needs of these other stakeholders - governments, regulators, customers, businesses and special interest groups to name a few.
Information about your company’s performance, strategy and plans are of keen interest to them all, so it’s essential to cover all your bases.
I hope you find this report useful – as a springboard for assessing the quality of your own current reporting and to think about what you might be able to do differently. Please do get in touch if you’d like to discuss any of the ideas the survey has highlighted in more detail.
If you’d like to read more about the Power and Utilities sector, you can find our other reports on the Oil & Gas and Mining sectors here.
