Money: Energy Shares/ How to nuke your cash -and watch it grow!
Ken Welsby looks at the case for investing in Britain's nuclear power industry
Wednesday 12 June 1996
Anyone who bought into Railtrack will immediately recognise how the offer is structured:
private investors can buy through the UK Public Offer at a discount to the price institutional investors will pay;
payment in two instalments, each in a different tax year;
incentives for buying through one of the network of share shops;
opportunity to buy more shares at the full price - with priority for shares being committed to a PEP.
The first instalment in the UK Public Offer is priced at 100p a share, with a minimum subscription of 300 shares, ie pounds 300. The company forecasts an interim dividend of 4.6p a share net in January 1997 and a final dividend of 9.1p the following July.
The business includes Britain's eight modern nuclear power stations, but not the older Magnox reactors which are costly to operate and in some cases are being retained in the private sector - along with the cost of their decommissioning.
In contrast, British Energy's plant operates profitably and the oldest of its stations has a life-span of at least 10, and probably 15 years. The company is a strong cash generator, and a large part of its costs are fixed over the medium term. What this means, say City analysts, is that it should deliver an attractive level of profits, growing from about pounds 50m pre-tax next year to almost pounds 200m by the turn of the century.
Because of its high fixed costs, long-term liabilities and inherited debt, the company is highly geared. Unveiling the pathfinder prospectus on Monday, its finance director, Mike Kirwan, acknowledged that dividends in the early years would be financed out of cash flow, but he insisted they would be covered by future earnings.
British Energy is seen as a good prospect because of its competitive pricing. It is a base-load generator. The nuclear reactors run constantly - unless they are shut down for maintenance or repairs. Because the vast majority of their costs are fixed, the nuclear stations can supply power to the system round the clock, even when demand, and therefore pool prices, are low.
Although British Energy is a new business, it is the umbrella for two companies, Nuclear Electric and Scottish Nuclear, which own and operate the nuclear stations in England and Scotland respectively, while the holding company's head office has been established in Edinburgh.
Of the eight British Energy power stations, seven are advanced gas-cooled reactors (AGRs) which came into operation between 1976 and 1988. All but one have shown dramatic improvements in output performance since NE and SN took over their management.
The exception, Dungeness B - on the Kent coast between Folkestone and Hastings - has had a chequered history. It was intended to be the first AGR, and work started on site in 1965. But construction was dogged by difficulties including redesigns, protracted labour disputes - a feature of most power station construction projects in the Sixties and Seventies - and the eventual bankruptcy of the builders.
Commissioning was delayed until 1982/83, and over the past 10 years the history of Dungeness B has been one long saga of problems, with the result that in 1995/96 the station achieved a load factor of less than 23 per cent. This compares with a load factor of 91.1 per cent last year at Hinkley B and figures of more than 80 per cent for most of the other AGRs.
Repair work at Dungeness is now complete, and, looking ahead, analysts expect all the stations except Dungeness to achieve load factors in excess of 80 per cent by 2000 - and stress that, since the majority of costs are fixed, such improvements will make a direct impact on the bottom line.
One of the biggest items in the budget is the cost of reprocessing spent fuel, but this is undertaken by British Nuclear Fuels on index-linked terms - and, because of the way nuclear reactors operate, fuel costs do not increase directly in line with output.
In common with other power privatisations, there is thought to be considerable room for efficiency improvements and cost savings - not all through cutting jobs.
All reactors have to undergo periodic shutdowns for inspections, known as statutory outages. The length of the outages varies enormously from station to station, with Heysham currently holding the record for the shortest, at 36 days. As other stations approach this performance, British Energy is able to increase sales revenue for an almost insignificant increase in costs.
Refuelling is another area for improvement. At the most efficient AGRs - Heysham, Hinkley and Hunterston - refuelling can be undertaken while the plant is on-load, delivering electricity to the grid, albeit at lower power levels. At the others, the plant has to go off-load before refuelling. But with plant modifications and improvements to procedures at several sites, managers hope that the NII will sanction a move to on-load refuelling.
The eighth station, Sizewell, is Britain's only pressurised water reactor. It delivered electricity to the grid for the first time in February last year, working to full power by June. In the last quarter of 1995 it had an average load factor of 97 per cent.
Some investors may initially be put off by a combination of unfamiliarity, the uncertainties of the electricity market and a perception of nuclear power as a risky business. Such a view is likely to be short-lived, but analysts say that could, in itself, provide an opportunity for canny investors.
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