Hyder’s tentacles are everywhere. The Welsh utility began life as privatised company Welsh Water in 1989, built a presence in the electricity and gas markets, and can now boast several overseas ventures. Behind this frantic development, Hyder’s finance director Paul Twamley has worked to make the numbers tally.
Managing the finances of Wales’ largest company is an enormous challenge. Although during 1997 group turnover rose from #1.14bn to #1.18bn, pre-tax profit remained constant at #208.5m after start-up costs, windfall tax and restructurings. Twamley’s role means treading a fine line – producing a solid set of figures while taking an active role in shaping a profitable future. Failure to deliver profits will fuel the angst of shareholders, while excessive gains will arouse the concerns of regulators.
Twamley’s route to Wales’ top finance job began at Coopers & Lybrand where, as partner for Wales and the West of England, he worked on inward investment into Wales. Through that role he became aware of the ambitious plans of Welsh Water’s FD Graham Hawker who wanted to develop the company.
Both Twamley and Hawker became convinced that developing existing companies was the way forward. ‘What the Welsh economy needed was more plcs. We couldn’t get them to relocate to Wales,’ he says.
Twamley was not involved in the privatisation of the Welsh utility, but was aware of the difficulties faced by the emerging plc. Following privatisation, the company had to deal with city institutions for the first time, institutions which had taken large tranches of shares of the company and were looking for ‘profit and efficient use of capital’. By the time Twamley joined Welsh Water as group finance director in 1992, much of the transformation had already taken place, but the job of building the business had only just begun.
The vision Twamley shared with Hawker, then Hyder’s chief executive, was to create economies of scale by setting up a single customer services operation that could service the same customers for water and, in future, gas and electricity. Although the distribution end of the utility business is still largely monopolistic, the supply end is now fully deregulated and is set to become even more competitive.
‘We could see the merits of serving the same customers with different utilities,’ he says. Soon after privatisation, Welsh Water took a 10% share in shares of Welsh electricity company Swalec. This eventually led to a full buy-out in January 1996.
Twamley’s links with Wales are strong. He grew up on a Cardiff council estate and is committed to the notion of developing Wales’ domestic economy.
His belief is that households will remain loyal to a Welsh service provider, especially if it can keep its prices competitive. But driving the company forward requires a very entrepreneurial spirit. To achieve both aims successfully requires walking a financial tightrope.
The expensive service areas of call centres and bill functions need to be integrated to save on costs. This strategy looks set to achieve its goals. If the government relaxes its stance on demanding separate bills for each service, things would be even better. Nevertheless, there are real threats to profitability in the utility sector.
The distribution and supply divide
Twamley’s main concern is the regulator’s plans to set price reviews from 2001 to 2005 for water, electricity and gas. The biggest worry is electricity, where the government wants to see companies running distribution and supply businesses under separate managements. He says that especially will be hit by the next price review period. ‘My major concern is that efficiencies could be eroded over time.’
Another problem is that the government may wish to cream off more of the profits through windfall taxes. But Twamley feels that the threat is somewhat diminished after the 1997 bill when Hyder was taxed for #292m.
‘We paid 25% of our total market capitalisation, which was miles ahead of anybody else. For a company like us, that is a significant hit,’ he says.
Intense competition from a consolidating industry – last month saw a #5bn merger of electricity independents Scottish Hydro-Electric and Southern Electric – will also take its toll. Although US raiders such as Entergy, which is desperately trying to shed London Electricity, may have lost the appetite for UK utilities, the competition is still hot.
Hyder’s reaction to the expected free-for-all is to bolster its position in water and electricity by offering gas to the same customers. Entry into the gas market this year cost Hyder #12m. Although it will produce profits in the long run, a two-year payback period is required to recoup the #50-a-head start-up costs. The strategy has not been without its setbacks.
Hyder was charged #7 per head by network operator Transco for failing to provide meter readings for at least 10,000 customers it acquired in April.
In a deregulating sector, the penalties – like the opportunities – are new. As FD, Twamley has the task of mopping up after fines or one-off taxes as well as trying to foresee future pitfalls. What is more, the public relations task in the utility sector is huge.
Hyder will fight to defend its core market of 400,000 customers, a quarter of which are supplied with Hyder water, electricity and gas. Twamley says the name means everything. ‘The strength of the Welsh brand was a surprise. With basic services they don’t want to take a risk. They want a safe pair of hands compared to someone they don’t know,’ he explains.
In the drive to up profits, Hyder has forged ahead into new areas that offer a good return. Last month, it entered the private finance initiative market through a #15m alliance with building giant Laing.
Twamley sees the Laing joint venture as an embodiment of the approach Hyder wants to take in a new market. He says: ‘We think utilities are natural players in the PFI market because they are long-term builders and owners of assets. Within the UK, there will be a very large market worth many billions.’
Any decision to enter uncharted waters can be a fraught experience. Last month, Hyder put up for sale its 35.8% stake in the Czech Republic’s second largest water company. The disposal comes just three years after buying the share for #7m in 1995. This sudden exit follows on the heels of a disastrous decision to buy a hotel chain for #5.3m in 1990 which it sold at a #500,000 loss last year.
Customer and regulator satisfaction
Twamley’s job encompasses the art of developing value on the profit & loss account while satisfying regulators that the balance sheet is being fully utilised. He is seeking customer satisfaction while delivering value to shareholders and facing analysts’ questions. He considers the role to be a challenging and stimulating one – one which acts as a good cross-check that ‘you’ve thought of everything’.
As the business expands, much of Twamley’s work means is spent ‘looking after the top level numbers’ in the various business areas of the group. ‘My job is to make sure that all adds up. If things aren’t adding up, it’s my job to ask questions.’
Twamley will need to explain to the City the effects of Hyder’s interest burden from its capital programme.
He says the City can take a different view of expectations at any point in time: ‘It will mean dividend expectations in the marketplace are all over the place.’ Intriguingly, US shareholders account for 27% of Hyder’s shareholders. He says it is a reflection that they see the point of the multi-utility concept. ‘They feel comfortable with our efforts,’ he adds.
UTILITIES: THE GOVERNMENT’S POSITION
Energy minister John Battle has outlined his plans for the future of utility regulation in a consultation paper produced last month.
Entitled ‘A Fair Deal for Customers’, his document outlines plans for independent consumer councils to check the growth of utility companies as the electricity, water and gas markets are deregulated.
The paper is the clearest signal of the government’s determination to monitor the profit performances of utility companies, especially those like Hyder that operate in several markets. The decision to create the councils reflects the need to reassert public accountability of a politically sensitive industry.
Battle says: ‘Many consumers now have a choice of supplier and can benefit from a wide range of tariffs and services. At the same time, industries are restructuring and multi-utility companies are emerging, so consumers need high-quality information and advice if they are to take full advantage of competitive markets.
‘We also need a tough regulatory framework which protects all consumers in those areas where there are practical limits to competition – in gas transmission and in water and electricity distribution.’
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