Nuclear Electric to switch pounds 500m of cash into gilts: State-owned generator seeks better rate of return

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NUCLEAR ELECTRIC, the state-owned generator, is preparing to switch up to pounds 500m of its pounds 800m cash pile into government securities.

Michael Kirwan, its finance director, said yesterday that the company was taking advice on the composition of a suitable gilt portfolio and had begun sounding out potential fund managers about costs.

Nuclear Electric is building a surplus that is expected to peak in 1998 at about pounds 5bn. The money is being set aside to pay for the costs of decommissioning reactors.

The funds are at present held on deposit with the National Loans Fund, the Government's account with the Bank of England, but Nuclear Electric believes it will be able to improve the rate of return it receives by transferring it into gilts. National Loans Fund return rates are up to half a percentage point lower than those commercially available.

The Treasury stressed that any switch would have no significant impact on government finances since the funds would remain invested within the public sector.

Nationalised industries are generally restricted to investing in the National Loans Fund, gilts or local authority bonds, or to self-investment. Only two nationalised industries, Nuclear Electric and the Post Office, generate a surplus for external investment, however.

Nuclear Electric's profitability stems from a pounds 1.2bn-a-year subsidy designed to help it meet the eventual decommissioning costs of Magnox reactors inherited from the CEGB.

The Post Office already holds about pounds 200m in gilts and has also recently begun using external fund managers in addition to its in-house treasury department.

Nuclear Electric, which generates about a fifth of the UK's electricity, was set up three years ago as part of the electricity privatisation process. At the time the flotation of Nuclear Electric was frustrated because of nervousness in the City about the uncertain liabilities involved in decommissioning reactors.

However, the company is still hoping for privatisation, possibly as early as 1996, and as such is attempting to appear more commercially oriented.

It recently persuaded the Government to allow it to become involved in a consortium to bid for a pounds 3bn contract to supply a nuclear reactor to Taiwan.

This has now hit a hitch, with the closing date for formal bids, which was to have been yesterday, delayed by the Taiwanese government for another two months.