Utility Week

Utility Week 25th October

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Page 19 of 31

Finance & Investment Market view Jump before you're pushed The pressure is on energy firms to be more transparent financially. Jonathan Sykes reports on research published last week and lessons from the oil and gas sector. I t can be difficult for energy companies to talk about profit. Financial statements are scrutinised, and often criticised and exposed. When turnover and profits are high, questions are asked about why consumers must pay more. The response is usually to do with the rising wholesale energy prices. In reality, it is very difficult to understand where the true profits lie and how large they are. The picture is often complicated by the differences in profit and loss between the various divisions of companies operating, at times, in different countries. However, what is clear is that attention is now focusing on the issue of financial transparency, because it appears to have contributed to consumer mistrust. In some countries, trust in energy companies is reported to be at an all-time low. This is largely to do with the complexity and (lack of) transparency on pricing and cross- company revenues. Other sectors also have issues with financial transparency. The extractives industry is a good example of a related sector that has already improved. It was ten years ago that a small group of governments, extractive com- panies and other interested parties all met in London to discuss the challenges of natural resource management. People in resourcerich countries were not always seeing the benefits from the extraction of their natural resources. The meeting agreed that the lack of transparency and accountability was at the heart of the problem. There was little transparency on company revenue – making it difficult or impossible to understand payments to governments from oil, gas and mining companies. These discussions ultimately evolved into the Extractives Industry Transparency Initiative (EITI) standard, which now defines the minimum requirements for a company reporting on revenues. EITI is a voluntary framework to which countries can apply, but it creates a common framework for disclosure. Seventy-six companies now support the EITI, plus over 80 institutional investors. Out last week, the 2013 Tomorrow's Value Rating examines the sustainability programmes of 50 companies listed in the 2012 Dow Jones Sustainability Index, providing in-depth analysis of sustainability practices and performance in each of five sectors: automotive; energy utilities; food and beverages; information and communications technology; and oil and gas. In the extractives industry, the research shows that leading companies now report against revenue and tax transparency. BP, Exxon Mobil, Repsol and Shell all demonstrate leading practice by providing a breakdown of revenue and tax payments to governments at a country and business division level. So despite different legal requirements for financial reporting in different countries, there is now some degree of consistency across global companies. This level of disclosure is not only due to EITI, but also emerging legislation. For example, the Securities and Exchange Commission in the US requires disclosure, and the European Union is also in the process of drafting legislation. There are some important lessons here for energy utilities. Given the scale of investment required in new energy infrastructure, it is clear that prices are only going to increase. Energy companies must make major investments in new infrastructure, which needs both profit generation and parent company Energy sector results The Tomorrow's Value Rating (TVR), published by corporate sustainability adviser Two Tomorrows, assesses energy utilities in the 2012 Dow Jones Sustainability Index against five domains: strategy; governance; innovation; engagement; and value chain. Key facts: •  An average score of 66 per cent for the sector compared with 63 per cent for the TVR as a whole. •  Eon and Iberdrola were top, both scoring an impressive 82 per cent. They both fare particularly well on innovation because of their involvement in sustainability-related networks, groups and partnerships. Iberdrola, for example, is involved in more than 80 collaborative initiatives worldwide. Eon and Iberdrola also scored well for strategy, with 20 | 25th - 31st October 2013 | UTILITY WEEK both having fully integrated sustainability into business planning. •  Three companies scored full marks for governance (KEPCO, SSE and Centrica). •  Strategy was the weak link, with all companies scoring lower in this domain of the TVR than others. •  Collaboration is important for innovation. Major technological innovations cannot be achieved by one company alone, and energy utilities are increasingly working with other parties such as universities, governments, industry peers and entrepreneurs. For example, Enel has worked with Electrolux, Indesit and Telecom Italia to develop a communication platform for indoor smart devices. •  The performance indicators in place suggest customer satisfaction is increasing, with feedback scores being generally high. However, media coverage paints a different picture. Trust in energy companies is reported to be at an all-time low – largely to do with the complexity and lack of transparency in pricing. Customer satisfaction is one thing, but trust is clearly something else. •  The report identified several emerging sustainability issues that will play an important role in future strategies of firms in this sector: 1.  Human rights. The disclosures that are made to date tend to be limited to details of human rights policy and the overall approach. Discussions of human rights mostly revolve around responsible procurement. 2.  Transparent pricing. 3.  ocal resistance to energy developments. L 4.  Smart use of conventional power.

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