Now potential investors have to decide whether to part with actual cash. On page 9, we spell out the nuts and bolts of applying for shares and the different options available to investors. Here we look at whether you should invest in the first place.
There are five good reasons to buy into the generators, and four for steering clear of them.
The first and most important plus factor is that they have a near-duopoly in the market for an absolute necessity. Together they generate about 60 per cent of the electricity consumed in England and Wales. Competition is increasing - from nuclear power and independent generators. And the duo are obliged to dispose of a substantial chunk of capacity by the end of this year. But even allowing for this, it's hard to see their market share falling beneath 50 per cent before the millenium. Electricity demand is growing and is not especially price-sensitive. The generators simply pass on fuel price increases to customers. Compared with other industries, power generation is a wonderfully profitable and low-risk activity.
The second reason is history. Since the Government sold 60 per cent stakes in each of the generators in March 1991, they have performed superbly for investors by virtually any measure, with management showing itself well able to drive earnings and dividends higher each year.
Factor three is the scope for further cost-cutting. The generators have pared away at their costs, slashing manning levels. But there is further demanning to go, if they are to achieve the efficiency levels of power stations in the United States.
The fourth plus point is the sheer financial strength of the two companies. They are cash cows, and their balance sheets are rock-solid. As well as dividend growth, there is the prospect of both buying in their own shares, which the stock market loves.
Attraction number five is the array of goodies for small investors in the issue. Investors in the UK public offer who register with a share shop are being offered a 25p a share discount (so long as they hang on until the final instalment in the three-part offer in September 1996) or one bonus share for every 15 bought (if they hang on to March 1998).
National Power and PowerGen have forecast (ie, to all intents and purposes, guaranteed) final dividends of 11.1p and 10p a share, respectively. There is an appealing geared effect, in that holders of the partly paid shares get the whole of the dividend. Investors who only hang on until after the final dividend in June will, therefore, receive an effective annualised return on their investment of 25.35 per cent on the package of National Power and PowerGen shares.
The downside is mostly about regulation. The biggest cloud hanging over the shares is the uncertainty of a Labour government. Gordon Brown, the shadow chancellor, said last October that "a Labour Government today would introduce a windfall tax on the excess profits of the privatised utilities". Labour has also said it will consider clawing back debts of up to £350m which were written off at the time of privatisation for anti-pollution equipment that was never installed.
Then there is the more immediate worry of the industry regulator, Stephen Littlechild. His unexpected announcement about the possibility of an inquiry into wholesale prices - which forced the generators to delay publishing their pathfinder prospectus by a week - was clearly a warning that he was not to be trifled with.
Another uncertainty is the possibility of tougher environmental rules. The generators meet the current requirements on sulphur dioxide emissions and, as yet, there are no limits on carbon dioxide. But the Government has begun to embrace the principle of "the polluter pays" taxes - witness the surprise levy on landfill site operators announced in the last Budget.
One final caution for the short-term investor. There are still quite a few forecasters who believe the stock market will end the year sharply lower, seeing the Footsie index plunging by one-sixth to 2,500. If it does, it will take the generators with it.
Those caveats aside, the generators look attractive, though there is no way they will produce the returns of the last four years. The perks are cleverly designed so that shareholders have to stay loyal to benefit fully. But for short-term and long-term investors, the issue is seriously worth considering.
National Power Activities Generation and sale of electricity in England and Wales through 28 power stations with capacity of 22,300 MW. Designs and sets up co-generation plant for industrial customers; has gas trading subsidiary and generating investments in US, Portugal, Pakistan. Share price 478p Yield 4.0% Price/earnings ratio 13.1 Year ended Year ended Year ended March 1992 March 1993 April 1994 Turnover £4.7bn £4.35bn £3.64bn Pre-tax profit £514m £580m £632m Net profit £365m £420m £522m Earnings per share 28.6p 32.9p 40.9p Dividend per share 9.1p 10.6p 12.5p
PowerGen Activities: Generation and sale of electricity in England and Wales through 14 power stations with capacity of 16,000 MW. Also developing businesses in gas production and transportation, and in power generation overseas. Share price 509p Yield 3.7% Price/earnings ratio 11.0 Year ended Year ended Year ended March 1992 March 1993 April 1994 Turnover £2.67bn £2.54bn £2.23bn Pre-tax profit £359m £425m £476m Net profit £242m £285m £345m Earnings per share 31.0p 36.5p 44.0p Dividend per share 9.25p 10.5p 12.65pReuse content