Is Na­tional Grid’s div­i­dend in dan­ger af­ter a new as­sault from the reg­u­la­tors? Questor In­come Port­fo­lio: monthly per­for­mance ta­ble

Watch­dog wants the com­pany to cut the re­turns it makes on its as­sets. We look at the likely con­se­quences

The Daily Telegraph - Business - - Business - Richard Evans

WE COVER a range of sub­jects to­day: up­dates on Na­tional Grid and one of our bond hold­ings and a note on how our monthly per­for­mance ta­bles are com­piled.

Up­date: Na­tional Grid

On Dec 18 last year, af­ter Questor’s week­day col­umns had be­gun their Christ­mas break, the en­ergy reg­u­la­tor, Ofgem, an­nounced a se­ries of pro­pos­als about the re­turns that en­ergy trans­mis­sion com­pa­nies would be al­lowed to make on their as­sets in fu­ture. It said it wanted to cut in­vestors’ re­turns to a range of 3pc-5pc from 6pc-7pc. Shares in Na­tional Grid, a hold­ing in our In­come Port­fo­lio, fell by about 9pc on the day, al­though they have partly re­cov­ered since.

How wor­ried should read­ers be, and should we con­sider sell­ing the shares? Grid it­self said: “We are dis­ap­pointed with the pro­posed fi­nan­cial pack­age as we do not be­lieve it ap­pro­pri­ately re­flects the level of risk borne by trans­mis­sion net­works. In or­der to de­liver the ma­jor cap­i­tal pro­gramme re­quired across our net­works in a rapidly chang­ing en­ergy mar­ket, we need to en­sure the reg­u­la­tory frame­work also pro­vides for fair re­turns to share­hold­ers.” How­ever, in the com­pany’s words, “the con­sul­ta­tion is a very de­tailed doc­u­ment which we will need to work through [and] we will pro­vide a de­tailed re­sponse to the con­sul­ta­tion in early 2019”.

Cer­tainly if the pro­pos­als go through un­changed there will be pres­sure on Grid’s prof­its and there­fore on its div­i­dends af­ter 2021, when the new regime would take ef­fect, al­though the com­pany’s in­ter­na­tional di­ver­si­fi­ca­tion should di­lute the ef­fects. How­ever, we are dis­in­clined to sell on the ba­sis of a threat whose ex­act form is not yet known and that may turn out to be less se­vere than the ini­tial pro­pos­als sug­gest.

Ofgem’s con­sul­ta­tion is ex­pected to end in the sec­ond quar­ter of this year. We will keep a close eye on de­vel­op­ments and keep read­ers up­dated. Hold for now.

Up­date: Premier Oil bonds

Premier Oil, whose bonds we hold in the In­come Port­fo­lio, pub­lished a trad­ing up­date yes­ter­day.

There were no profit fig­ures but the

com­pany said out­put had risen and sales for 2018 were likely to be $1.4bn (£1.1bn), up from $1.1bn the pre­vi­ous year. It es­ti­mated that net debt at the end of the year would be $2.3bn, below pre­vi­ous guid­ance of $2.4bn and a re­duc­tion of $390m on 2017.

As al­ways with oil com­pa­nies, a lot de­pends on the price of crude, which has fallen re­cently to about $61 a bar­rel. How­ever, Premier has hedged 36pc of its out­put at a price of about $70. Tak­ing this into ac­count, oil prices would have to fall by a fur­ther $17 or 28pc to $44 be­fore the com­pany ceased to gen­er­ate cash.

Stifel, the stock­bro­ker, said: “Lever­age [the debt level] hasn’t been com­pletely fixed so the busi­ness re­mains vulnerable if there’s an ex­tended pe­riod of sub-$60 oil prices. How­ever, it is mov­ing in the right di­rec­tion, and quicker than ex­pected. Man­age­ment is to be con­grat­u­lated for do­ing the things that are in their con­trol very well.” Hold. Af­ter we pub­lished our reg­u­lar sum­mary of the port­fo­lio’s per­for­mance a week ago, a num­ber of read­ers got in touch to say they couldn’t make sense of our num­bers.

We cer­tainly apol­o­gise for any con­fu­sion, which we think will have arisen be­cause the ta­ble quotes gains and losses on an an­nu­alised ba­sis. As the port­fo­lio has now been in ex­is­tence for more than two years, this makes a big dif­fer­ence: if, say, a stock has gained 10pc in to­tal since pur­chase in De­cem­ber 2017, the fig­ure in the ta­ble is likely to be roughly half that.

This may seem a coun­ter­in­tu­itive ap­proach when it comes to cap­i­tal gains and losses but we feel that it is ap­pro­pri­ate for the in­come side of things, which is af­ter all where the port­fo­lio’s pur­pose lies.

We will make the ba­sis of cal­cu­la­tion clearer in fu­ture. Read­ers who wish to dis­cuss this fur­ther are wel­come to email us at [email protected] tele­

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