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Annual Review (as set out in the 2008-09 Annual Report)

The Shareholder Executive seeks to ensure that Government is an effective and intelligent shareholder for the businesses it owns, and aims to provide high quality, in-house financial advice on other commercial but non-shareholding matters.

Royal Mint We have outlined in this Review the part we have played in managing the Government’s shareholdings, but also cover our corporate finance advice, our role in the Operational Efficiency Programme, our work for the devolved administrations, governance and the resources that the Shareholder Executive has required during the year.

The Shareholder Executive’s portfolio

The Shareholder Executive works with 28 businesses which are wholly or partly owned by Government. As in previous years, there have been a number of changes to the businesses within our portfolio:

  • additions this year include Bradford & Bingley and National Nuclear Laboratories
  • ABRO and DARA were merged to form the Defence Support Group (DSG) which remains within the portfolio
  • the Government’s remaining shares in British Energy and QinetiQ were sold.

Whilst our participation in transactions such as British Energy and QinetiQ are perhaps the most visible part of our shareholding activities, we also seek to increase the value of our businesses over the long term, as evidenced by our work over the last few years with the likes of Royal Mint and Working Links. Our remit with our portfolio of businesses takes three main forms:

  • Executive – where we are accountable to Ministers and the Permanent Secretary of the shareholding department
  • Advisory – where departmental teams are directly accountable to Ministers and the respective Permanent Secretary for the shareholding function, but the Shareholder Executive is accountable to that team for the quality of its advice and input
  • Joint – where we work alongside the respective departmental teams.
In this year’s report we have set out our remit with each business

Financial performance of the portfolio

For the sake of consistency with previous years, we continue to provide an analysis of the combined results of the Shareholder Executive’s portfolio of businesses. Comparison from year to year, however, is diffi cult given the disparate and varied nature of our businesses and the constantly changing make-up of the portfolio: the natural tendency is for the Shareholder Executive to exit from the more successful businesses, such as BE and QinetiQ, and to assume responsibility for those in financial difficulty, such as Northern Rock and Bradford & Bingley.

Changes to the portfolio

British Waterways The departure of both British Energy and QinetiQ from the portfolio has led to their exclusion from the combined analysis this year.

Last year’s consolidated analysis excluded businesses such as the Nuclear Decommissioning Authority (NDA) and Northern Rock which had only been with the Shareholder Executive for part of that year, but which are now included unless otherwise stated (including a restatement of prior year’s figures)1. Bradford & Bingley has also been included

Click on an image to enlarge (larger images open in a new window)

Graph showing portfolio turnover and operating margin

Graph showing portfolio net operating assets and RONA

Graph showing dividends and operating profits

Turnover

Performance Combined turnover for the portfolio has fallen by £0.7bn to £20.8bn.This is largely due to the decline in value of CDC’s portfolio of investments in the poor economic climate (the movement of which impacts their turnover line)2, and a decline in Northern Rock revenues of £0.9bn reflecting conditions in the housing market and broader economy.

This is offset by an increase in NDA revenues of £0.5bn as a result of increased revenue from electricity generation and reprocessing activities, and accelerated revenue recognition on certain long-term contracts.

Operating profits & losses

Operating losses have decreased by £2.4bn to £1.7bn which has been driven primarily by NDA, which posted a year-on-year decrease in operating losses of £4.7bn.This has been caused by their improved ability to forecast more accurately the value of nuclear liabilities. Previous years have seen significant increases to the provisions associated with those liabilities, but the improved forecasting has meant the need to make further provisions has been substantially reduced this year.

Performance Gains made by the NDA were offset by increased losses at Northern Rock of £1.3bn (2007-08: £0.2bn loss) and CDC of £0.4bn (2007-08: £0.6bn profit).

The scale of businesses such as the NDA and Northern Rock mask the successes of some of the smaller businesses within the portfolio:

  • URENCO saw a 41% increase in profits to £366m due to strong operating performance and significant increases in enrichment capacity
  • NATS increased their profits by 18% to £185m through effective control of employee-related costs (which account for around 60% of total costs).

Losses after tax told a similar story, falling by £3.0bn to £3.8bn.

Return on Net Assets (RONA)

RONA has increased this year from -6.1% to -2.7%, reflecting primarily the aforementioned increase in operating profits. Net assets remained broadly consistent at £65.1bn (2007-08: £67.8bn).

Dividends and capital receipts

Total Government receipts from portfolio businesses totalled almost £5.5bn.

Performance The sale of British Energy and QinetiQ meant substantial sums were realised for Government during the year (£4.4bn and £257m respectively), with BNFL and the Defence Science and Technology Laboratory (Dstl) returning special dividends of £632m and £25m respectively.

Dividends from the businesses that remain in the portfolio have risen again this year by £18.9m to £137.9m3.This was led by URENCO (£22.9m increase) and the Met Office (£6.1m increase).This was offset by PUK which paid no dividend this year (2007-08: £4.5m) whilst it reviewed the appropriate capital structure for the business, and a decline in dividends of £3.5m from both the UK Hydrographic Office (which had paid a special dividend the previous year) and DSG4 (which having accomplished a successful merger between ABRO and DARA met its dividend target set out in its business plan).

As described in the review of each business later on in this report, many of our businesses have policy or commercially related reasons for not paying a dividend.We are therefore pleased that the dividend position has once again improved, despite difficult economic conditions.

Notes :

1 We have also excluded FSS and Northern Ireland Water from the analysis on the basis that their audited accounts have not been published at the time of going to print.
2 CDC’s turnover on a valuation basis comprises realised profits and unrealised value gains and losses. Comparing CDC’s turnover between 2007 and 2008, its turnover on this definition has fallen by approximately £1bn. This is because the 2007 numbers included substantial realisations of profit, notably on a major subsidiary’s disposal, which were not repeated in 2008 as realised profits fell away. This effect was then compounded by unrealised valuation losses in 2008 of £447m, reflecting the difficult conditions in emerging markets that year.
3 This excludes dividend payments made by Northern Rock and Bradford & Bingley prior to their transfer to HM Government.
4 Compared to the combined dividends of ABRO and DARA, which merged to form DSG at the start of the year.