Annual Portfolio Review

Setting Financial Targets

Commercial and Financial Advice

NewERA’s core role is to provide financial and commercial advice to Government Ministers in relation to a number of major commercial State bodies: Bord na Móna, Coillte, EirGrid, Ervia (including Gas Networks Ireland), ESB and Irish Water (the Portfolio). Where specifically requested by the relevant Government Ministers, NewERA’s role also extends to other State bodies or assets. As a dedicated centre of financial expertise NewERA brings an additional commercial focus to the oversight of State-owned enterprises.

NewERA Approach: Active Ownership

NewERA’s approach is to facilitate an enhanced level of active ownership by the State as shareholder in the Portfolio bodies. This is consistent with the approach taken in many OECD countries. To this end it has developed a Shareholder Expectations Framework to provide formal clarity and guidance to these bodies in relation to the Government’s strategic priorities, policy objectives, financial performance and reporting requirements. These are communicated to the Chairperson and Board of each body by way of annual/biennial letters (Framework Letters) from the relevant Government Ministers.

In the Framework Letters issued to date the three primary areas of focus for NewERA from a financial performance perspective have been:

• Financial performance measurement: setting out the NewERA methodology that will be applied by it in improving measurement and monitoring of financial performance of the Portfolio by the State in its role as shareholder. To do this, during 2016 NewERA finalised and communicated methodologies to calculate both return on invested capital and weighted average cost of capital on a consistent basis across the Portfolio.
• Commercial equity valuations: to facilitate the measurement of shareholder returns the Framework includes a requirement for the Portfolio bodies to undertake a commercial equity valuation on an annual basis. By the end of 2016, five of the six bodies had prepared equity valuations ².
• Financial targets: formulating financial targets in conjunction with the Portfolio bodies, with the objective of ensuring that the targets balance value creation with prudent financial management, facilitate appropriate levels of infrastructure investment and are well defined and capable of being monitored on an ongoing basis.

A key focus for NewERA has been to advise on appropriate dividend targets for the Portfolio bodies such that there is an appropriate balance between the payment of dividends and re-investment in the business. Dividend targets are now in place with relevant bodies. These dividend targets provide greater clarity to both the bodies themselves and the State as shareholder.

Combined dividends of €427m were received by the Exchequer for 2015/16. These dividends comprise of €304m arising from proceeds from the sale of assets and €123m in respect of normal dividends. Bord na Móna paid a dividend of €10m, Coillte paid a dividend of €4m and EirGrid paid a dividend of €3m. Ervia (based on the performance of Gas Networks Ireland and distribution of sale proceeds following the sale of Bord Gáis Energy) paid total dividends of €151m. In line with its dividend policy and target, ESB’s dividend pay-out increased to 35% from 30% of normalised profits and, combined with distribution of special dividends, total dividends of €259m were received by the Exchequer from ESB.

NewERA Advisory Functions

Corporate Finance Advisory Services

NewERA Portfolio

During 2016, NewERA provided detailed financial analysis and recommendations (where appropriate) to Ministers on a total of 74 submissions for Ministerial consideration and consent, made by the commercial State bodies within its remit. This included €3.9bn in financing-related requests (including bond issuance, revolving credit facilities (RCF), European Investment Bank (EIB) and commercial debt facilities), €2.8bn in relation to capital expenditure budget requests and €0.35bn in specific capital expenditure project requests. NewERA also worked closely with the Public Appointments Service in carrying out its advisory role with regard to board appointments.

Other State Bodies/Projects

2016 witnessed significant growth in the number and complexity of assignments requested of NewERA by Ministers in relation to other State bodies/projects. These covered a broad range of sectors, including transport, forestry, and climate action.

Selected NewERA Advisory Projects 2016

NewERA Annual Financial Review 2015/2016

Each year NewERA prepares a Portfolio Financial Overview of the commercial State bodies within its core remit. The most recent overview, NewERA Annual Financial Review 2015/16, was published in December 2016 and is available at ntma.ie/publications. The Review sets out key financial information and metrics both for the Portfolio as a whole and for each of the entities. The key strategic themes emerging from the Review include:

• Deployment of State Capital: The State has considerable capital invested through State-owned bodies and this, viewed in the context of its available capital, needs to be effectively and efficiently deployed in areas of priority identified by Government. In this context, it may be helpful for the State to develop an overarching framework of principles through which to consider ownership of and investment by State-owned bodies on a consistent basis.
• Market and Technological Change in the Energy Market: The energy sector, which is the sector in which the majority of the entities in the Portfolio operate, is currently experiencing considerable change (such as integration of EU energy markets, the move towards a decarbonised society, growth in unconventional fuel sources, evolution of technologies to be employed to assist in this move and energy efficiency obligations). This is expected to give rise to considerable challenges for some of the Portfolio bodies.
• Brexit: Brexit is likely to impact the Portfolio given the range of Portfolio investments in the UK (existing and planned) and the extent of the Portfolio bilateral trade with the UK.
• Pension-related Matters: A challenge in relation to defined benefit pension schemes operated by Portfolio bodies has been the low interest rate environment which has increased the current value of liabilities.

Combined turnover and profitability of the Portfolio bodies increased in 2015/16 over the prior year, as did profit margins and return on invested capital. A significant proportion of operating profit continues to be derived from the Portfolio’s regulated electricity and gas networks (2015/16: 58%, 2014/15: 60%). The net gearing (a measure of indebtedness) rose slightly reflecting continuing capital investment, a large proportion of which relates to ESB and Irish Water. Total dividends of €441m were paid, of which €427m was to the Exchequer with the balance paid to the employee share ownership plans of the relevant entities (ESB and Bord na Móna).

Financial Highlights

Source: Annual Reports, NewERA Analysis.

• Due to the stage of development of Irish Water it was agreed that Irish Water was not required to carry out an equity valuation.