Scottish Power – Keeping up energy levels

For David Nish, financial director of UK-based energy company Scottish Power, it was no different, as his company and sector experienced a massive shakeup.

Looking back on 2002, Nish reflects that the meltdown of energy giant Enron had several positive results, one of which was the increased regulation of power companies in the US.

‘Before, the US market was dominated by independent small companies.

Now there are more regulated power companies,’ he says.

In the past 10 years, there was much concern over the relatively weak regulation in the market. ‘The impact (of Enron) means that the market is back to normal levels. Now we can focus on strategic issues and improving operating performance,’ says Nish.

Indeed, Scottish Power’s subsidiary PacifiCorp, based in western America, has shown some recovery from the downturn. Although the division announced a £481m drop in turnover in its last financial results, due to the plunging price of the dollar and lower wholesale prices, Nish says the impact of these problems was offset by higher wholesale volumes and regulatory rate increases.

Turnover from PacifiCorp was still at £2,499m and the operating profit increased in the last 12 months to March 2003 by £233m.

According to Nish, the whole landscape of the US energy market changed in the wake of Enron.

‘Two years ago there were power shortages. But new plants were built and now there is enough capacity available. As a result, prices are at a more normal level.’

The UK market, however, has not had an easy time either. The significant surplus of capacity meant that UK power companies had to lower the prices of energy to just marginally above cost. Lower wholesale prices led to a drop in agency turnover and lower export sales, notwithstanding the higher volume growth.

Despite the difficult times, the UK division managed to increase its operating profit by £18m to £73m. ‘We run our business in the UK by a balanced portfolio,’ says Nish. As a whole, the company delivered good results with gross profits up from £1,903.3m in 2002 to £2,047m, turning last year’s bottom line loss into a profit of £4.82m.

According to Nish, creating value for the company means doing the ‘right thing’ by shareholders. In terms of figures, the company fulfilled its promise, as earnings per share rose 29% in the annual report.

Nish emphasises the importance of protecting your business against risks.

For example, Scottish Power’s gas subsidiary PPM invested in gas storage assets, so that when gas prices became volatile, the company was able to benefit from the market. Therefore, PPM could make money both when the prices were stable and when they fluctuated.

This, he says, shows that to run a company successfully, you need to take ‘the risk of the business’.

The FD, however, stresses his success is only due to the strength of his team. He looks more after strategy rather than worrying with the finer details. ‘You are only as good as your team,’ he admits.

Currently, the team is arduously preparing for the introduction to international accounting standards in 2005. Unlike many UK-listed companies, Scottish Power will be prepared. However, it won’t be an easy transition. ‘I admit that over the next two to three years, IAS will complicate the issue as we move the accounting system towards IAS by 2005,’ he says.

Objectively, he claims to ‘wholly support anything that helps the flow of capital’. ‘Starting to account in this way will be quite interesting, and I’m not sure how (people) will react to IAS,’ he says.

But in one sense, Nish is already fluent in reporting results to different standards, as the company, listed both in the US and on the London Stock Exchange, reports its results in UK and US GAAP.

Although US accounting standards are rule-based and the UK ones are more principles-based, Nish says that giving a ‘true and fair value’ of the company’s affairs and not just box ticking means both ways of accounting can work well.

‘I am more in support of a principles-based approach. If standards are too prescriptive, people look for ways of getting around rules,’ he says.

This is why he is openly opposed to the idea, floated by the EC, of having several qualifications in accounts. He says the auditing of company reports should be an assessment based on the controls of the company and how it works.

With typical Scottish prudence, Nish adds that his company constructs its report with checks and balances from the beginning of its preparation to the end. Because the accounts are ‘subject to independent checks the whole way through’, when he sees the accounts, he is confident that the information they contain is correct.

But, he says, to bring the company in line with IAS, his team will have to do more work. ‘To present that information, we will have to effectively prepare three sets of books. It will also change how we transact.’

It was the strength of his finance team that helped it cope with the US’s Sarbanes Oxley Act, which left many finance departments floundering. For Scottish Power, the act was ‘not a major concern’. ‘We already had these approaches to corporate governance in place and were significantly in compliance.’ The only work Nish did was to formally recognise the principles by signing the famous oath, but the company had already certified the accounts and identified the risks.

But, Nish says that governments should attempt to legislate on corporate governance as little as possible: properly running a company should be down to best practice. ‘Governance is about how you run the company’s legislation and finding the way of enforcing good governance. It is not just about satisfying legal requirements.’


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