Beyond the numbers
European power and utility companies (P&Us) are posting end-of-year results, but do we really understand what they mean? With different companies using different indicators, it can be challenging to truly compare performance. Louis-Mathieu Perrin talks us through financial communication.
We looked at how 16 of Europe’s top P&Us1 are communicating their financial results to the market. Beyond the numbers, which are scrutinized by financial analysts, we found a great degree of variation among the indicators and language used, making it difficult to directly compare the financial performance of companies.
But, despite the complexity, we also found a number of common trends in qualitative and quantitative communication, which also highlight key concerns for the sector.
Aggregates and indicators: The companies we looked at used 52 different aggregates or indicators, mostly non-GAAP, which can be split into 12 categories (see Table 1).
Some aggregates, such as EBIDTA and EBIT, are commonly used, but most are customized, creating difficulty when comparing performance between companies.
Debt: P&Us are talking about their debt levels in different ways, making it hard to benchmark results. For example, EDF and E.ON build pictures of their debt in very different ways.
Income: When talking about income, P&Us are using various forms of non-GAAP aggregates, such as:
- Net income excluding non-recurring items
- Group net ordinary income
- Underlying net income
- Adjusted profit before tax
- Recurring net profit
While some companies present a detailed bridge of the difference between the “accounting” net income and the “adjusted” net income, others stick to a short explanation, indicating that extraordinary or one-off items have been excluded from the computation, or that only recurring elements have been maintained. The type of disclosure is, in many cases, partial at best.
Past performance: Communication about past performance is also diverse, with 27 different financial indicators used. As actual performance does not always fit within the predefined target aggregates, we sometimes see the redefinition of “adjusted” metrics in order to compare initial target and achieved performance.
Operational targets: Most P&Us also communicate on operational targets such as nuclear or conventional thermal output, forward hedging or extra-financial targets, which are not really comparable between companies. For example, GDF Suez has set specific targets towards 2015 covering growth in installed renewable capacity, health and safety, biodiversity, diversity and training.
What everybody’s talking about
While these differences make comparison challenging, identifying areas of convergence offers insights into what issues are currently on the radar for Europe’s P&Us:
- Balance sheet structure is a critical issue: Of the 16 companies we considered, 13 highlight the maturity of their debt, while 12 showcase the liquidity that helps them run their business. All 16 companies communicated either through an absolute debt number or via a ratio on their level of debt, and 10 set specific targets for the future.
- Cost reduction is a key pillar of communication: Ten companies (about two-thirds) communicated their progress on current cost reduction plans or on new cost reduction targets. For example, in its latest strategic update, Enel sets out a target of reducing operational expenses by €4b (about US$5.2b) by 2017, while Fortum announced it will improve cash flow by €1b (about US$1.3b) as part of its 2013-2014 efficiency program.
- Strong commitment to capital discipline: The specific capex levels or divestment achieved disclosed by all 16 P&Us examined in their financial communication underlines the ongoing precise monitoring of investment budgets. Twelve companies also shared specific capex or divestment targets, in a number of cases reducing capex levels and increasing divestment.
- Dividends are vital to the value proposition: Almost all P&Us put the level of dividend or payout ratio as one of the central elements of their 2012 achievements. Seven companies committed to a firm level of dividend in 2013, while seven others committed to a range of payout ratios. This shows that confidence in 2013 earnings performance is probably depending on a number of external factors, not all of which are under the company’s control.
- Regulation remains a concern: This is particularly an issue in Southern Europe. Iberdrola dedicated eight pages to the impact of recent regulatory measures. We are also seeing companies caution that achieving their financial targets is dependent on “no significant regulatory and macroeconomic changes.” 2
Common concerns highlight challenges
While the use of diverse and often customized financial indicators makes it difficult to conduct strict comparisons of the financial performance of Europe’s P&Us, an awareness of these different types of communication can help to understand results and identify where companies’ priorities lie.
While differences abound, we also found many points of convergence, showing that European P&Us share several common concerns that highlight the challenges they continue to face in a period of significant transformation for the sector.
|Read a more in-depth version of this article, including more information on specific indicators and aggregates here.|
- 1 Centrica, CEZ, EDF, EDP, E.ON, Enel, Fortum, Gas Natural Fenosa, GDF Suez, Iberdrola, RWE, Suez Environnement, Vattenfall, Veolia Environnement, Verbund for year-end 2012 and SSE for the six months ending September 30 2012. We considered the core presentations and their appendices, but not the full year accounts, nor the annual reports.
- 2 GDF Suez Consolidated Financial Statements 2012, GDF Suez, 2013
|Category||Number of aggregate/ indicator||List of aggregates/indicator used|
|Earnings before interest, taxes, depreciation and amortization (EBITDA)||4||EBITDA, recurring EBITDA, comparable EBITDA, EBITDA margin|
|Operating income||6||Earnings before interest and taxes (EBIT), adjusted/comparable operating profit, reported operating profit, current operating income, adjusted operating income, operating result|
|Other operational||3||Gross margin, operational expenditure (opex)/gross profit, net operating expenses|
|Cash flow||6||Cash flow, adjusted operating cash flow, operating cash flow/fund from operations/cash flow from operations, net cash from operating activities, free cash flow, free cash flow/revenue|
|Net income||12||Net income, net profit, net income/result group share, reported net profit, profit after tax, net income excluding non-recurring items, group net ordinary income, underlying net income, adjusted profit before tax, recurring net profit, net recurring income group share, adjusted earnings|
|Earnings per share (EPS)||2||Underlying EPS, adjusted earnings per share|
|Financial results||2||Financial items net, net financial expenses/results|
|Debt||6||Net debt/interest bearing net debt/net financial debt, adjusted/economic/comparable net debt, net debt or adjusted net debt or comparable net debt or economic net debt/EBITDA, adjusted net financial debt/(operating cash flow before working capital + operating financial assets repayments), funds from operations (FFO) or retained cash flow (RCF)/adjusted net debt or net debt, gearing or leverage or net debt/equity|
|Dividend||2||Dividend, pay-out ratio|
|Capital expenditure (capex)||5||Capex, capex and acquisitions, consolidated investments, net investments, divestments|
|Other||4||Return on capital employed, return on shareholder’s equity, adjusted effective tax rate, rating|