NLF Annual Report 2018
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Protecting the future — Annual report and accounts 2018 nlf.uk.net “ The primary objective of the board is to achieve sufficiency of the Fund to meet certain costs of decommissioning EDFE’s eight nuclear power stations that are currently operating in the UK.” Richard Wohanka Chair Nuclear Liabilities Fund 1 — Contents 2 Chair’s statement 2 Protecting future generations 4 Strategic report 4 Our key performance indicators 8 Review of the year 12 Principal risks and uncertainties 14 Director’s report 14 Director’s report for the year ended 31 March 2018 20 Directors 20 Statement of Directors’ responsibilities 22 Independent auditor’s report 22 Independent auditor’s report to the members of the Nuclear Liabilities Fund Limited 24 Financial statements 24 Statement of comprehensive income 25 Statement of financial position 26 Statement of changes in equity 27 Statement of cash flows 28 Notes to the financial statements 52 Company information Annual report and accounts 2018 Contents 2 Nuclear Liabilities Fund — Chair’s statement Protecting future generations The financial year ending 31 March 2018 was eventful for the Nuclear Liabilities Fund (‘NLF’ or the ‘Fund’) as preparations intensify for the start of decommissioning of the first Advanced Gas Cooled Reactors (‘AGR’) in the nuclear fleet of EDF Energy Nuclear Generation Limited (‘EDFE’). This is currently planned to commence in about five years’ time and will mark the start of a long journey that will take about 100 years to complete. As directors we are conscious of this timeline. Whilst we have to prepare for the large step up in payments % in a few years’ time with the first 80 reactor closure, we also have to seek to ensure there are sufficient funds to cover the final decommissioning Richard Wohanka costs that occur in the next century. Chair Approximately 80% of the assets are — The aim of the Fund is to help ensure held in the National Loans Fund and that future generations are not 20% in the Mixed Assets Portfolio. burdened by decommissioning costs related to the consumption of nuclear generated energy by the present generation.1 It is this that deeply influences our investment strategy Whilst the Mixed Assets Portfolio has and the work we do to assist in both performed in line with our targets, the reducing the near and long-term continued low level of interest rates liabilities and having greater certainty which apply to the NatLF has meant about their scale. that the overall portfolio has not. Our investment strategy and its The directors are keenly aware of results are discussed in more detail the risks to the sufficiency of the later, but the continuing low level of Fund. In last year’s annual report, interest rates during the year have we noted that we were working with made it more challenging to ensure the Department for Business, Energy the Fund has sufficient assets to meet and Industrial Strategy (‘BEIS’), the liabilities for decommissioning HM Treasury and UK Government the EDFE nuclear power stations 1 The primary purpose of the Fund is to receive and Investments (‘UKGI’) to agree a hold monies, investments and other assets, in that are due to be met by the Fund. plan to diversify funds currently held order to secure funding for discharging certain Approximately 80% of the assets in the NatLF. I am pleased to confirm decommissioning liabilities related to EDFE’s UK nuclear power stations which were in existence are held in the National Loans Fund that a programme of transferring in 1996 and to make payments for approved costs (‘NatLF’)2 and 20% in a portfolio of approximately £2bn is now underway in accordance with the provisions of the Nuclear Liabilities Funding Agreement (‘NLFA’) entered into mixed assets (the ‘Mixed Assets and is expected to be completed on 14 January 2005 and amended and restated on Portfolio’) which are long term in by FY2021/22. 5 January 2009. nature and seek to exploit the 2 The National Loans Fund, established on 1 April illiquidity premium attached to 1968 and administered by HM Treasury accounts for government borrowing and lending. many financial assets. Chair’s statement Annual report and accounts 2018 Nuclear Liabilities Fund 3 The sufficiency of the Fund’s assets is The Fund also plays a role, at a The directors have worked closely monitored carefully and the directors strategic level, in helping scrutinise and with NDA’s Nuclear Liabilities regularly explore new areas in which challenge EDFE’s decommissioning Assurance (‘NLA’) team all year and to invest, including opportunities liabilities, primarily through participation wish to thank them for the diligent where the Fund can contribute to in two committees. The directors work undertaken to vet EDFE’s initiatives to strengthen the British have been working assiduously on liabilities that have been and are economy. We are already a large the liabilities side during the year. to be met from the Fund’s assets. investor in British venture capital The directors actively participate in funds; however, we are increasing the body which examines EDFE’s The directors continue to work closely our activity in this field and are overall approach to decommissioning with both UKGI and EDFE and wish to pleased to be working closely with a (‘the Nuclear Liabilities Committee’ thank them both for support provided Government backed institution as part or ‘NLC’) as well as the body that is throughout the year. of discussions to diversify the funds driving the approach to defueling out of the NatLF. We are also active the stations (‘the Defueling Steering The primary objective of the in the work being undertaken as part Panel’ or ‘DSP’). In addition, the board is to achieve sufficiency of of the Patient Capital Review. directors commissioned and reviewed the Fund to meet certain costs of a study which recommended the decommissioning EDFE’s eight As a matter of principle, we hold a approach that should be adopted nuclear power stations that are significant percentage of our assets to estimate the increase in liabilities currently operating in the UK. We in UK related investments. We see due to inflation over the long time base our quantification of these this as a natural currency hedge for period required for defueling and decommissioning costs on EDFE’s EDFE’s decommissioning liabilities decommissioning the EDFE fleet fundamental review, every three years, as well as enabling us to play a of nuclear power stations. of their decommissioning plans. supportive role in the development The last such review took place in of the UK economy. Currently During the year, there were changes to 2016. The Mixed Assets Portfolio approximately 82% of our assets membership of the board and internal has produced strong returns over are in UK related investments and resource, notably the appointment of the last few years. This, combined approximately 31% of our Mixed Sally Bridgeland as trustee and director with the benign inflation environment Asset Portfolio assets are in UK in April 2017, and Catherine Cripps currently predicted for EDFE’s infrastructure projects. as trustee and director and Melissa decommissioning liabilities and the Hope as Executive Secretary, both planned programme of transferring in November 2017. We continue to approximately £2bn from the NatLF consider fund resources as we plan to higher returning assets enables for increasing activities in asset the directors to report the Fund is on management and the increase of track to be sufficient. However, the liability payments in the future. directors are cognisant that they will need to be extremely vigilant and pro-active and keep both liabilities and investments under regular review. Richard Wohanka 100 Chair It will take about 100 years to complete decommissioning. Annual report and accounts 2018 Chair’s statement 4 Nuclear Liabilities Fund — Strategic Report Our key performance indicators A year of growth An investment in the M25 forms part of the Fund’s infrastructure portfolio. The Fund’s investment performance is assessed using key performance indicators (‘KPIs’) agreed with UKGI on behalf of BEIS. The KPIs and investment objectives are established to measure performance against the expected future liability obligations. The aim is to provide a summary of the overall returns of the Fund, and a more detailed view of the returns of the Mixed Assets Portfolio. The KPIs are discussed in more detail in the Investment Performance section. Strategic report Annual report and accounts 2018 Nuclear Liabilities Fund 5 KPI 1: Total Portfolio Return* KPI 2: Mixed Assets Portfolio Return* 0.5% 0.6% 2015 — 5.6% 2015 — 7.7% 2016 2016 0.5% 0.5% 3.1% 16.7% 2016 — 5.6% 2016 — 7.7% 2017 2017 0.3% 0.3% 1.2% 5.3% 2017 — 2017 — 2018 5.6% 2018 7.6% 0.2% 0.2% 3 year 1.6% 3 year 7.3% period to period to 31 March 5.6% 31 March 7.7% 2018 2018 0.4% 0.4% Total Portfolio Return p.a. Total Portfolio Return p.a. Target Return p.a.3 Target Return p.a.5 Risk Free Rate p.a.4 Risk Free Rate p.a.4 Total Portfolio Return Mixed Assets % 3 year period to % Portfolio Return 31 March 2018 3 year period to 1.6 7.3 31 March 2018 The lower than predicted returns from the NatLF remain The Mixed Assets Portfolio is that portion of the NLF’s the primary driver of under-performance at the total funds not currently invested in the NatLF. portfolio level. The Chair’s statement refers to the re-allocation plan being pursued to redress this situation. * As of 31/03/2018, £7.3bn (79.0% of the Fund) was invested in the National Loans Fund and £1.9bn (21.0% of the Fund) in the Mixed Assets Portfolio.