CFO Insight report - static.utilityweek.co.uk · 2 | 18TH - 24TH JANUARY 2019 | UTILITY WEEK...

CFO Insight report

2 | 18TH - 24TH JANUARY 2019 | UTILITY WEEK

Finance & Investment

CFO Insight report

Like most things in the utility sector the role of the chief financial officer (CFO) is in a state of flux. As the energy and

water sectors decarbonise, localise and embrace new technologies, so the job of the CFO is evolving from a traditional guardian of company value to one that plays a bigger role in strategy, planning and positioning of the business with new ideas and offshoots to boost its value – both financially and, increasingly, socially.

Managing the company’s finances, including financial planning and credit con-trol, managing risk and financial reporting is still at the heart of the CFO’s job description. But the boundaries of today’s incumbents are not so narrowly defined, and as the role

expands so too will the skills and knowledge required. In some organisations finance and regulation functions are already under the same umbrella; in others the IT department is subordinate to finance, reflecting perhaps the ever-growing cost of cyber-security and investment in digitalisation and tech-led cus-tomer engagement.

CFOs must continue to impress the City, but as we discuss in the following sections, the balance of fiduciary stewardship will be increasingly balanced with a need for an eye on the social good, with financial manoeu-vres that play to customer trust, public ben-efit and the sustainability agenda.

There is a key role for the CFO in longer- term transformations, such as the roll out of

electric vehicles (EVs) and the move to the smart grid and a myriad of renewables, as they work with operations teams to plan new investment and where and how to maximise returns. In the energy sector, where decen-tralisation is the direction of travel, barriers to entry are also being broken down and business models disrupted in ways that have yet to become fully apparent.

In the immediate term the day job is also becoming ever more of an exercise in finan-cial agility as utility firms begin to feel the regulatory pincers at work – pushing perfor-mance on the one side and financial returns on the other. There’s also unpredictable political factors at play, including the spec-tre of a no-deal Brexit and renationalisation.

Why today’s CFO needs to adapt to thriveHow do you keep shareholders happy and financial plates spinning at a time of huge technological change, tougher regulation and political uncertainty? Utility Week in association with Oracle interviewed CFOs about their challenges and changing role.

UTILITY WEEK | 18TH - 24TH JANUARY 2019 | 3


Key points:

l Utility CFOs would like to see the debate on profits and returns to be “properly informed” and based on fact not hysteria.l Water CFOs expect a “very challenging price review”, especially following the nega-tive credit rating given to some operators.l CFOs are having to make difficult decisions around competing demands for investment, such as upgrading ageing infrastructure, climate change resilience and cyber security – and the quality of this decision-making is the difference between success and failure.l CFOs are far more involved in their busi-nesses than 20 years ago and finance leaders must help drive the CEO’s and board’s vision for the business, its core operating models and how those can be made better over time.l Brexit is creating uncertainty and “inves-tors generally don’t like uncertainty”.l But new investment streams are opening up, with pension funds looking to support long-term sustainability projects.l Financial decisions will increasingly need to weigh up social good.

For some finance leaders in the sector there’s also the pure wild cards. It came as a surprise to many in the industry when the capacity market ground to a halt, leaving European Union officials red-faced and gaping holes in the finances of energy generators.

On the retail side, competition is grow-ing, pulling customers away from the big six: SSE lost 460,000 customers in the year to September alone. This unbridled market competition is bringing its own turmoil – ten retailers have gone under in the past 18 months, before the price cap begins to take a seemingly inevitable toll. The tough oper-ating climate is one of the reasons why the City has fallen out of love with listed firms like Centrica, which has announced that the price cap is likely to see profits fall by £70 million in the first quarter of 2019.

Martin Beesley, CFO of Morrison Utility Services, sees a new landscape emerging. “There are currently over 70 [suppliers] oper-ating, which is not sustainable in the long term. It’s an evolving market with an inter-esting period that lies ahead as lower-cost suppliers, without the big legacy systems and associated costs, may be well positioned to flourish alongside established players.”

One thing is certain: the steady-as-she-goes regulated sector is looking increasingly bumpy. The CFO has a huge role to play in steering a safe passage through uncharted terrain.

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The impact of PR19The most pressing and immediate challenge facing the CFO in the highly regulated util-ity sector of water and networks concerns the issue of legitimacy and its regulatory repercussions.

CFOs must play with a more constrained financial hand, while still keeping investors keen and credit ratings high. CFOs acknowl-edge the need to rebuild public trust but are concerned that any measures they adopt will alienate investors and investment. Under-standably, they would like to see more open and measured debate of the issues they face.

Richard Khaldi, water specialist, PA Con-sulting, explains: “Both PR19 and RIIO2 will set lower costs of capital than utility firms currently enjoy. This will inevitably lead to reduced revenues and a need for increased efficiency as both Ofwat and Ofgem have made it clear their expectations regard-ing customer outcomes/outputs will only increase going forward. It’s the CFO that sits at the heart of this challenge.”

Operations directors and chief execu-tives may be the ones deciding where they can save costs by reducing or closing down operations, but financial modelling will increasingly be part of the finance director’s armoury as they weigh up savings versus capital investment, says analyst Nigel Hawk-ins, of Hardman & Co.

The tightening control comes in the wake of a backlash from politicians and the public, who have railed against electricity and water companies and questioned their legitimacy. They have been accused of over- profiting from financial engineering, award-ing excessive executive pay and dividends and presiding over questionable operations in tax havens.

In March, environment secretary Michael Gove launched an unprecedented attack on the water sector, hitting out at its com-

Under the microscope and feeling the financial pressure

“It’s important to be honest about our performance – good and bad.”

Liz Barber, Yorkshire Water group director of finance, regulation and markets

continued overleaf

plex financial arrangements and profits and accusing it of operating in a way that did not serve the public interest. Several months later, the GMB union launched a high-profile campaign criticising the water sector in par-ticular for high salaries, claiming nine execu-tives had earned £58 million in salaries, bonuses, pensions and other benefits over the past five years.

The charge of self-enrichment was fur-ther hammered home by shadow chancel-lor John McDonnell during his speech to the Labour party conference in September last year, when he claimed the water industry had paid £18 billion out in dividends since privatisation.

Such attacks on water follow a report published in September 2017 by the Energy and Climate Information Unit (ECIU) that claimed distribution network operators (DNOs) had been achieving annual average profit margins of 32 per cent during the first half of this decade. According to that report, six DNOs made a collective final profit of £10.7 billion on total revenues of £33.5 bil-lion between 2010 and 2015, which equates to £27 per home per annum. The margins it cited of the individual DNOs ranged from 25.7 per cent at Electricity North West to 38.9 per cent at Scottish Power.

Regardless of whether or not Labour wins at the next general election, the public sen-timent it is currently tapping into is unlikely to dissipate. Firms accept that the dial has been reset and they must rebuild their public reputations and become trusted as forces for public good.

Accordingly, water CFOs have been busy winding up their Cayman Islands subsidi-aries as they try to improve transparency. Yorkshire Water announced its intention to close its offshore financial arrangements in October 2017 and transferred the £3 billion of



l “Debate is important, but it has to be a debate based on fact and not outlandish claims.”Ian Williams, finance director, WPD

l “The regulator is making it more and more challenging, introducing mechanisms that limit the capacity to pay dividends.”Matan Benjamin, lead analyst on UK utilities, S&P Global Ratings

bonds and US private placement notes that were held within its Cayman Islands subsidi-aries into a new UK incorporated company during the summer.

Liz Barber, Yorkshire Water group director of finance, regulation and markets, recently told Utility Week: “When we announced the plan to remove our Cayman companies, it was pleasing to see that our colleagues in other companies with similar structures decided to follow suit. We also said at the time that removing the companies was far from straightforward and would take some time, with a range of legal and regulatory approvals. Nonetheless, we’ve moved as quickly as we could.”

In what it describes as a first of its kind, the company also aims to become an open data business and will publish data sets that underpin its business plan submis-sion, including 12 months of leakage data and reports into pollution incidents. Barber told Utility Week: “It’s important to be hon-est about our performance – good and bad.” This is surely a reflection of the efforts to build trust and the role CFOs are playing in that rehabilitation process.

There will certainly be no let-up in regu-latory pressures on the utilities sector. Con-scious of being widely seen as over-lenient in the past, regulators won’t be in a generous mood as they embark on the latest round of price reviews. Ofwat’s 2019 price review (PR19) sets the price, service and incentive package that water companies must deliver during the five-year asset management plan period. As part of PR19, each water company in England and Wales has set out a business plan detailing what it intends to deliver and what it proposes to charge customers.

Following a consultation launched in April, the regulator has introduced a range of measures that will see customers share the financial gains made by water companies, which have high levels of debt. These debt levels have enabled them to drive up profits because the allowance for the weighted aver-age cost of capital (Wacc) had been set much higher in PR14 than the historically low interest rates.

The cost of capital is the allowance Ofwat makes within its price controls for the costs of raising debt or equity to fund improve-ments. It has also set out more details on the transparency expected around shareholder dividends and performance-related executive pay in companies’ business plans for PR19.

The document includes an initial view of the cost of capital of 2.4 per cent in RPI terms, a record low for a regulated utility. The regu-lator estimates this reduced cost of capital

l “There are currently over 70 [suppliers] operating, which is not sustainable in the long term.”Martin Beesley, CFO, Morrison Utility Services

could result in an average saving per cus-tomer of £15-£25 per year from 2020 onwards. The 2.4 per cent figure represents a material reduction of 1.3 per cent since PR14, which Ofwat says has been driven by the lower expectation of the cost of debt and equity.

Analyst Nigel Hawkins says CFOs will be working hard to push this figure higher for their individual businesses as they make their cases to Ofwat (which is now scruti-nising business plans) – while at the same time calming the nerves of shareholders con-cerned about cuts to dividends.

The water regulator is due to publish its initial assessment of each company’s plan on 31 January 2019, when it will categorise companies’ plans according to the level of quality, ambition and innovation they have demonstrated. The best plans could ben-efit from incentives through the price review process, while those that fall short will face closer scrutiny and interventions and could receive lower returns.

Says Hawkins: “It’s unbelievably compli-cated because of the fixed costs and healthy operating margins which the regular seeks to curb. But if yields are still at 5-6 per cent, that shouldn’t dent investors’ appetites.”

Gearing up for RIIO2 Energy networks, the other heavily regulated arm of the utility sector, have come in for equally harsh criticism and they too are fac-ing greater financial control in the next price review, RIIO2. This is currently being formu-lated – and the first tranche will come into effect in 2021.

In July, Ofgem confirmed that the cost of equity range (the amount network compa-nies pay their shareholders) will go down to between 3 per cent and 5 per cent, from 6 per cent to 7 per cent currently and in December confirmed a rate of 4 per cent. According to Ofgem, this is the lowest rate ever proposed for energy network price controls in Britain.

The reduced range will also impact the return on regulated equity, which is an esti-mate of a company’s return including the cost of equity and earnings across the range of incentives in the price control, for exam-ple to reduce power cuts, reduce losses and improve service.

According to the regulator, the average return on regulated equity across the sector is currently 9.45 per cent. However, to some CFOs the measure is misleading and is skew-ing the debate. In the run-up to RIIO2 they will be pushing hard to ensure a fair hearing of their side of the story.

“Ofgem looks at the return on regulated equity as being the measure of how we are compared to each other and the level of

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CFO Insight report



Brexit: the big unknownA very big elephant in the CFO’s room is Brexit. At the time of going to press, there is still a large question over Britain’s exit from the EU, although a report published at the end of last year by the Department for Business, Energy and Industrial Strategy (BEIS) claimed Brexit will not undermine the security of the UK’s energy supply.

“We have considered the potential impacts on our supply chain, as we source some equipment from the EU,” explains UK Power Networks finance director Jenny Harrison. “We will seek to manage the risk of any delays at the ports, which could mean bringing forward some purchases.”

Utility Week’s annual CEO Insight report, the first of which was published in September last year, found Brexit worries had particularly grown among the chief executives of energy retailers, where a downturn in the economy could impact on customers’ ability to pay their bills.

In addition, many of the senior figures interviewed for that report highlighted the growing risks that they faced over the cost of materials and labour.

NI Water finance director Ronan Larkin says the current economic and political climate around Brexit is creating uncer-tainty and “investors generally don’t like uncertainty”.

“Brexit might bring difficul-ties in relation to continued availability of skills and labour for the sector,” says Larkin. “It might give rise to supply chain and logistic difficulties in bringing into the UK essential parts and components and consumable supplies used in water production and in wastewater treatment.”

He adds: “The uncertainty experienced currently with Brexit does present challenges on planning ahead. The sector is assess-ing these challenges right now so any risks can be understood and mitigated. The sector generally focuses more on customers and customer outcomes than it does on share price – and that is the right focus. If goods and materials cost more after Brexit due to tariffs then that will put some pressure on cashflows in the sector.”

“Both Ofwat and Ofgem have made it clear their expectations regarding customer outcomes/outputs will only increase going

forward.”

Richard Khaldi, water specialist, PA Consulting

“All this public and political scrutiny is putting regulated utilities under more pressure than they

have ever been before.”Jane Pilcher, treasurer,

Anglian Water


returns,” says Electricity North West CFO David Brocksom. “However, the way the measure is calculated overstates the returns. They quote a return for us of 9.27 per cent, but if you look at our annual report, it’s actu-ally between 5.5 per cent and 6 per cent, the big issue being the amount of under-funding we get for interest costs.

“It reflects incentive income. We have taken 25 per cent of our customer minutes lost out of the network, so we have massively improved reliability. Those incentives have encouraged us to perform well and our cus-tomers get the benefit.

“Ofgem is indicating a very significant cut in equity returns. I think that cut will prob-ably save customers about 1p a day, but if it results in the sector not being attractive to long-term, patient capital then we will not be able to fund the business plans and invest-ment in the infrastructure that we need as a country. And that’s my concern.

“When you are looking at pension fund money and assets that depreciate over 40 years, you have to take a long-term view and my fear is that political pressure will mean people will do the wrong thing by accident.”

Western Power Distribution (WPD) finance director Ian Williams is another who is calling for a better informed debate. “What is important is the need for political and regulatory stability to be maintained so we can continue to perform well for our cus-tomers, and for any debate about profit and return to be properly informed.

“I welcome dialogue about our role as network operators and what we are deliv-ering to our customers for 27p per day. It is important, but it has to be a debate based on fact and not outlandish claims. This is one of the reasons why we were the first net-work company to voluntarily publish RIIO accounts for 2016/17. We have just published RIIO accounts for 2017/18 and I would urge other DNOs to do the same.

“We will have to ensure that the frame-work for RIIO2 is practical and works for all stakeholders – and first and foremost it needs to work for our bill-paying customers, both today and into the future.”

“We will seek to manage the risk of any delays at the ports, which could mean bringing forward some purchases.”JENNY HARRISON, UK POWER NETWORKS FINANCE DIRECTOR



Looking to the future As utility firms walk the tightrope between a tighter financial environment and the need to improve performance and mod-ernise, CFOs will be at the heart of tough decision-making.

Going forward, CFOs and finance direc-tors will have to make difficult choices about investment, and in particular whether to prioritise the upgrading of ageing infra-structure, new capital projects and the shift to digital and low-carbon technology. And where and how to get the best returns when it comes to investing in customer engage-ment and reducing bad debt, as Anglian Water’s treasurer Jane Pilcher points out. “You have to work with quite a lot of differ-ent technologies to find the few that give you those added benefits,” she says.

WPD’s Ian Williams says cyber-security is a further important factor that sits alongside other competing investment requirements.

PA Consulting water specialist Richard Khaldi also points to the difficult choices: “Operational leaders in water business will be looking for increased investment to main-tain and improve networks, while treasury colleagues will be seeking further efficien-cies to manage shareholder expectations.

“In our view it will be the quality of deci-sion-making that is the difference between success and failure. With more reliance than ever before on the operational side of busi-nesses generating returns, investment deci-sions will take on a new criticality and the CFO must have confidence in the processes that support those decisions.”

One of the major issues facing CFOs and finance directors working in the energy

Credit ratings are the City’s verdict on financial strength The financial repercussions of regulators’ activity don’t stop at rate of returns. How well organisations perform against their tar-gets can impact credit ratings, which in turn affects the cost of borrowing, shareholder confidence and investment. With a negative cashflow, a benign borrowing environment is particularly crucial for water. So perfor-mance across a range of measures, like water leakage, also needs to be on the CFO’s radar.

Anglian Water treasurer Jane Pilcher says: “Some of the rating agencies have the water industry on a negative outlook, and with the political and public scrutiny we are under, we are all expecting a very challeng-ing review.

“All this public and political scrutiny is putting regulated utilities under more pres-sure than they have ever been before. We are focusing on doing the right thing for our cus-tomers, the environment and putting public interest at the heart of everything we do.”

In July 2017 S&P Global Ratings down-graded Thames Water’s credit rating. The firm’s rating on Class A debt and Class B debt was lowered to BBB+ and BBB- respectively.

“Our downgrade of Thames Water was the result of poor water management, compared with peers, and related to leak-age from below-ground water assets that resulted in finan-cial penalties,” explained Beth Burks, environment, social and governance analyst at S&P Global Ratings.

Ofwat requires water companies, as part of the licensing provisions, to maintain an investment grade rating (AAA and BBB- cat-egories). Most licences include a cash lock-up mechanism if the ratings are lowered to a level below investment grade (from BB+ to D- or speculative grade). Once the cash lock up is triggered, the company cannot pay dividends, the mechanism acting as a tool to protect it from further deterioration.

Fitch Ratings also downgraded its ratings for UK water holding companies in July, cit-ing concerns over business risk in the water sector. Osprey Acquisitions (Anglian Water), Kelda Finance (Yorkshire Water) and Green-sands UK (Southern Water) were all down-graded from stable to negative. At the time, Fitch said the rating action reflected its reas-sessment of the industry business risk ahead of the upcoming regulatory price control

(PR19) in the sector and its revision of nega-tive rating sensitivities for companies.

S&P Global Ratings’ lead analyst on UK utilities, Matan Benjamin, says many bonds stipulate that companies must maintain an investment grade credit rating. “Overall, water is a strong sector and all the operators are all in the investment grade category,” he says. “And the regulatory framework in the UK is very supportive.

“Having said that, there are a number of elements in the framework that we consider to be challenging over the next few years. The more inefficient and highly leveraged operators will be in a weaker position to adapt to the changes. The regulator is mak-ing it more and more challenging, introduc-ing mechanisms that limit the capacity to pay dividends.

“Our rating is an indication of the likeli-hood of default,” he adds. “Investors use this information as one input from a vari-ety of market factors to price bonds. If we lower a rating of a company, it indicates

the probability of default is increasing, and there-fore the return that inves-tors demand will likely be higher.”

S&P is predicting that climate change-related fac-tors including increasing water-related risks such as freshwater scarcity, flood-

ing and drought, will play a significant role in the analysis by ratings. A report from the organisation published in November points out that water-intensive industries – includ-ing utilities and power – are, unsurprisingly, the most exposed to water factors.

“As climate change continues to fuel volatility in other weather systems and the hydrological cycle, we could see more rat-ing actions caused by water-related events,” said Beth Burks, environment, social and governance analyst at S&P Global Ratings.

But while water risks can have widely negative credit implications for utilities, they can also fuel growth for some businesses.

“As markets and issuers absorb the impacts of droughts, floods, and declining water quality, there are opportunities as well as challenges,” said Burks.

Businesses that offer water solutions, such as water treatment technologies, have experienced positive influences on credit.

Ofwat requires water companies,

as part of the licensing provisions,

to maintain an investment grade

rating

CFO Insight report



The digital age and disruptive market conditions present opportunities and threats to

many current business models. As companies evolve to survive and thrive, CFOs have to balance their traditional role of protecting value with the new requirement to cre-ate it. In utility companies, as with other walks of business, the finance head will need to support their chief executives in forming and driving strategy and making informed board decisions. At the same time they need to ensure “business as usual”. That means the mechanics of the day job, including managing risk, compliance and treasury, run as smoothly and efficiently as possible. While they do that, it’s crucial they’re not worrying about unreliable accounting systems, or out-of-date reporting software. Only with that reassurance can CFOs have more time and head space to channel their commercial thinking.

As a number of CFOs explain in this report, utility boards face difficult choices as they weigh up capital investment decisions against return on investment in a vast array of new tech-nologies, from improving customer engagement, payment processes and complaints, to upgrading assets to protect their networks against growing cyber attacks.

With energy and water companies transitioning to low carbon, sustain-able and digital environments, compa-nies need to be able to take informed decisions swiftly about how to adapt to rapid and constant change and to then implement new strategies. In addition, they need to be able to manage perfor-mance nimbly, constantly monitoring what is working and what is not and redeploy resources accordingly.

That’s the new reality. But there’s an additional challenge: how can finance professionals adapt and sur-vive when new digital technologies are threatening the future of knowledge work? And what does finance have

to do to remain relevant, empower the CFO and enable the business to become agile?

In our search for answers to these questions, Oracle has partnered with the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA) to conduct research on how finance can navigate successfully through today’s economic uncertainty and create value in the digital age.

Our latest study, Agile Finance Revealed, identified several common traits of agile finance leaders:• They lead cross-functional, inte-grated teams that are centralised in shared services or centres of excel-lence. Empowered by cloud and digi-tal technologies the ever-improving accounting services and efficiency delivered by these teams are driving significant business improvement.• They strive to leverage the full potential in big data analytics and AI to generate the insights organisations need to develop innovative strategies and achieve performance levels that eclipse the competition.• They’ve developed new skill sets in statistics, data analysis, data visuali-sation, and business partnering to support rapid decision making and performance management. • They are far more likely than other business functions to have fully imple-mented cloud-based enterprise perfor-mance management and are also far more likely to have fully implemented cloud ERP for standardising their accounting processes.

What also emerges from our research is modern CFOs appreciate that finance transformation is a con-tinuous journey, and fresh skill sets are needed to lead the way through today’s disruptive economy. The new operating model offers genuine clar-ity about the next destination – but getting there will require leadership and continuing innovation within the utility finance function.

sector is the changing nature of energy supply. The days of a limited number of suppliers being managed by the grid and network operators has gone, and now com-panies must adapt to their new role of man-aging peaks and troughs on the grid from a large variety of often intermittent sources.

“The sector is changing because of the transition from distribution network opera-tor to distribution system operator [DSO], and while the majority of investment is still the replacement of ageing assets, WPD is also committed to testing conventional reinforcement and developing flexible solu-tions,” says Williams.

“In 2017, we became the first DNO to pub-lish a costed strategy for the DSO transition. The first year was about creating the founda-tions with stakeholder engagement, equip-ment analysis, trials and close liaison with the Energy Networks Association’s Open Net-works project to both determine what DSO means across the industry and to share non-sensitive information with other DNOs.”

A similar approach is being taken by UKPN’s Jenny Harrison. “We want to use open and transparent market mechanisms to facilitate the flexibility we need to manage our network,” she says.

“If the market can provide the capacity, we need at a more cost-effective rate than building new infrastructure, that is exactly what should be encouraged.

“We aim to retain the flexibility in our business model to be able to respond to the evolution of markets associated with storage, EVs and low-carbon generation.”

Technology will undoubtedly play a large role in the shift to a more decentralised energy system. And again, in a reflection of the widening thinking CFOs are taking on board in an age of rapid development, which


Utilities and their CFOs can work in a more agile way to embrace opportunities in the fast-changing environment in which they operate.

Opinion Vince SmallhornERP director, communications, media and utilities, Oracle

continued overleaf



Going beyond the numbers“The CFO must understand the CEO and board’s vision for the business, its core operating models and how those can be made better over time, even more so than before. Gone are the days when utility companies can afford to have a CFO whose sole focus is the treasury function – they must understand the challenges facing their operational colleagues and work even more closely with them to ensure their businesses thrive in this rapidly changing environment.” Thus PA Consulting water specialist Richard Khaldi sums up the tra-jectory for the modern CFO.

He adds: “The CFO can be an agent for change within the business and chal-lenge the status quo through their ability to examine and question the business cases put forward by operational colleagues.

“This is particularly the case as the level of disruption increases. CFOs can ask key questions around the assumptions used for investment decisions, such as the level of ambiguity being considered and which future scenarios are being accounted for.

“The CFO can also look across the busi-ness and understand which changes to business models and core systems and pro-cesses will add most value to their firm.”

Looking to the future Electricity North West’s David Brocksom concurs and says CFOs will have to be far more involved in the business than they would have been 20 years ago. “The job has moved from report-ing the numbers to being very much part of the business. You have to use your skills to drive the business aspects. We have to get the costs down for the customers. The best way is to look at our processes, people and information. They are all intrinsically linked to the wider CFO role.

“Everybody gets excited by dramas and mergers, but the reality is that our job is to innovate, improve what we are doing and to use our small size to effect change fast.”

WPD’s Williams adds that as well as financial acumen, communication will also be a key skill as utilities adapt.

“Being able to communicate what a DNO delivers for the money it receives to the outside world is as crucial as communi-cating a company’s accounts as a standard way of presenting costs and profit,” says Williams. “Take the recent tales of DNO profits in excess of 30 per cent, for instance – they are simply not true. So, people need to understand where our money goes – like

the massive investment made in our net-works every year for example.

“It’s also useful if CFOs and FDs have an appreciation for the operational side of the business, particularly when you consider the huge changes ahead with EVs, battery storage, increasing network flexibility, etc. Our financial stakeholders are interested in this and appreciate the efforts DNOs are making to shape the future.”

Morrison’s Martin Beesley says the “fundamentals” of being a CFO – main-taining liquidity, robust control measures and good leadership – will always apply.

“As the pace of change continues to gather momentum, ensuring that appropri-ate values, frameworks and principles are in place will become even more important as this will provide the guidance for people to be creative, innovative and agile in order to build successful and sustainable busi-nesses,” he says.

The need to adaptUKPN’s Jenny Harrison acknowledges that the skills “I and my finance team need also have to adapt. For example, our flexibil-ity strategy to market test almost all load-related reinforcement in ED1 requires the commercial skills to be able to value and price flexibility services,” she says, adding: “We need to understand our non-financial as well as our financial performance and build lead key performance indicators that give our business the insight and levers to use to become more efficient.

“We need to have strong data analysis skills in the team to deal with the volumes now available – and business partners who can interpret this and challenge and sup-port the business. And finally, greater auto-mation so our transaction processes are swift, accurate and free up people’s time.

“It’s ultimately all about working col-laboratively as a finance function with our stakeholders, to bring the greatest benefits to our customers, and maintaining our focus on remaining the lowest cost DNO.”

As many of the CFOs interviewed for this report have revealed, they have devel-oped a greater understanding of the opera-tional side of their business, and the larger issues impacting the sector as a whole. But despite the challenges ahead, there is a sense of optimism and an appetite for not just retaining value – but adding the high-est possible value to their companies.


digital horses to back and which are likely to be left at the starting gates will be in CFOs’ orbit as they look to ensure a sound ground-ing for investment.

Disruptive technologies like blockchain are seen as potential passports to a decen-tralised future. Electricity North West CFO David Brocksom is one of those keeping close tabs on the new system. He says that “while a lot of people get quite excited about block-chain”, there are still issues to be resolved.

“Once 51 per cent of a blockchain commu-nity have got the wrong message, it becomes fact. The record is altered and it is the new fact for the blockchain, so you have to find ways of making it secure. Call me a sceptic, but maybe’s that’s why I am a CFO.

“As we go down a decarbonising path, we are going to need to manage the network at a distribution level far more tightly and closely than we have before. Technology has to solve that problem. Whatever returns people are offering, we cannot afford as a country to double the size of the network just to take double the amount of electricity. Technol-ogy will be a big enabler, but the question is which technology will it be and where will it be applied?”

New funding streamsAs well as embarking on huge technological investments, the transition to a low-carbon economy is also opening up new funding streams and investor opportunities that the deft CFO is looking to capitalise on.

Increasingly, many pension funds and financial institutions are keen to buy into the green agenda. So is Anglian Water. Its treas-urer, Jane Pilcher, says it is looking to raise finance “in accordance with the Green Bond Principles. We have now issued five separate debt instruments, which are in accordance with those principles. They are financing our infrastructure.

“If I look back over the past 12 or 18 months in terms of the focus from lenders and banks in respect of climate change, the change with the investment community has been absolutely tremendous.

“Whether its equity or debt, people want their money to work sustainably. It’s great to be able to access that sustainable source of funding as a privately owned company rais-ing funds in the public capital markets.”

Electricity North West’s Brocksom agrees: “I think most pension funds are rightly look-ing for their investments to be managing a sustainability agenda. The whole investment community is becoming far more sustain-ability focused and I believe it will become mainstream faster than we think.”

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CFO Insight report

CFO Insight report - static.utilityweek.co.uk · 2 | 18TH - 24TH JANUARY 2019 | UTILITY WEEK...

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Transcript of CFO Insight report - static.utilityweek.co.uk · 2 | 18TH - 24TH JANUARY 2019 | UTILITY WEEK...