Report Card: Powerco weathers sector changes well

By David McEwen

Friday 5th July 2002

Business consultants encourage people to take the "elevator test." They say executives should be able to describe what their business does in the time it takes for an elevator to move between floors.

The same principle applies to annual reports. A company should be able to describe what it does in a sentence.

Energy distributor Powerco does a reasonably good job of this in its latest annual report, saying what the company is and does in plain language.

Its mission statement reads: "To provide a safe reliable and economically efficient delivery service while providing sustainable returns and growth for shareholders."

Meanwhile, its vision statement is a typically imprecise slogan... "To be New Zealand's leader in the lines and pipes utility business."

Chairman Barry Upson puts it better in his review when he states: "Our business is to keep the lights on."

The first few pages of the report give the reader a good feel for the company, with a comprehensive selection of highlights. An unusual feature is its series of what look like war maps showing how Powerco's territory has expanded inexorably across the lower half of the North Island and into Australia.

Like many other reports from energy companies, comments about the political and regulatory changes are prominent.

Mr Upson highlights the company's voluntary announcement in April this year of a one-year price freeze on electricity line charges for residential consumers.

"This announcement followed our earlier decision to move to full variable pricing for residential consumers - going well beyond the concession the minister for energy had requested of the industry," he stresses.

Powerco has made representations on what it wants to see from a regulatory regime - consistency, even-handedness and transparency.

"This is important to Powerco and our shareholders as international examples show heavyhanded regimes inevitably tie up company resources on complying with or trying to avoid the application of regulations, shifting focus from the core business of providing customer service and stakeholder value," he says.

Chief executive Steven Boulton picks up the theme: "Industry and regulatory issues remain a prime focus as inappropriate, intrusive regimes can have a significant cost impact on the industry as demonstrated overseas. As a consequence, increased costs would be introduced for consumers."

The rest of his commentary covers the usual bases, listed under subheadings such as financial, service, operations and people. However, he appears reticent to offer depth of detail or real insight into the business.

In a chief executive's "outlook" comments, readers generally expect to see how, where and when the company expects to deliver growth.

Mr Boulton offers minimal detail, preferring statements like "The company will continue to sharpen its focus on asset
management issues and the reduction of operating costs while maintaining improvement in network quality and reliability of service for our consumers over the next year."

The report's two-page corporate governance statement is a reasonably good example of its kind, particularly in the detail it gives of the board's functions and responsibilities.

There is also a page on risk management which talks of the company's "risk management charter" and plans. This is bound to be more important for energy companies than many others but it is good to see the company spelling it out. Other companies have risk management or contingency plans but few mention them.

The financial statements show Powerco doubled earnings to $163.1 million and made a 121% gain in profit to $14 million for the year to March 31.

However, any comparisons are futile, not only because the company made acquisitions during the year but because it has changed its balance date. That means its 2001 figures cover just seven months. Nevertheless, one impressive figure is its net operating cashflow, which went from $6.7 million in the 2001 period to nearly $62 million last year.

Powerco is in good financial shape and has weathered well the changes in the energy sector. If it can make good use of its new acquisitions, it should be able to demonstrate meaningful year-on-year growth in 2003.

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Web: www.mcewen.co.nz, email: davidm@mcewen.co.nz

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