Nuclear sell-off to fall pounds 1bn short of target

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The Independent Online
The sale of Britain's nuclear power stations, is expected to raise pounds 1bn less than the Government had forecast. The privatisation of British Energy will realise only pounds 1.5bn-pounds 2bn - barely one-third of its asset value.

The flotation, which is scheduled to take place in mid-July, had been expected to bring in about pounds 2.6bn. But the Government's advisers have been forced to reduce their estimates sharply because of an expected drop in electricity pool prices.

This means the proceeds from the sale will not be enough to cover the shortfall in funds needed to meet the liabilities of the ageing Magnox reactors which are being left in the public sector.

When the industry was split into two a year ago, and the sale announced of the more modern reactors, the Magnox liabilities were put at pounds 8.5bn compared with pounds 5.9bn already in the kitty. The Government said it would make up the shortfall - pounds 2.6bn - from the proceeds of the flotation.

In March, the broking arm of BZW, the investment bank advising the Government on the sale, estimated that British Energy would be worth pounds 2.4bn to pounds 2.8bn based on likely cash flows over the next five years.

But ABN Amro Hoare Govett, the compny's brokers, are set to publish a report this week indicating a much lower valuation. The report is not expected to specify any price range but it will set out a dividend range which, together with pool price sensitivities, indicates a value of less than pounds 2bn.

Merrill Lynch, the US investment house which took over Smith New Court, is understood to take an even more pessimistic view on price. The Hoare Govett study will be followed by a wave of research reports from banks appointed to manage the flotation including Cazenove, HSBC Investment Bank, Morgan Stanley and Paribas Capital Markets.

British Energy's capital structure is now largely in place. Its assets have been been written down by pounds 3bn to pounds 5bn, the Government has agreed to write off almost pounds 1bn of debt and the liabilities it will take with it into the private sector have been set at pounds 3.9bn.

But despite the huge debt write-down, the Government has decided that British Energy must be priced at a level which guarantees a successful sale and takes into account the possibility that pool prices will fall.

British Energy is dependent on pool prices since its eight power stations - Advanced Gas Cooled Reactors and the Sizewell B Pressurised Water Reactor are all baseload stations, which have no control over the price they are paid.

BZW's pounds 2.4bn-pounds 2.8bn valuation assumed that pool prices would be 2.4p a unit and that the stations would operate with a load factor of 82.5 per cent compared with 74 per cent achieved in 1994/95. However, it also said that a collapse in pool prices to 2p a unit would wipe pounds 750m off the sale value while early closure of one of its stations would knock a further pounds 500m off the price.

The latest brokers' forecasts take a much more cautious view both of pool prices and capacity utilisation.

Political and regulatory risks are regarded as less of a threat to the flotation. Dr Robert Hawley, British Energy's chief executive, has had a series of recent meetings with senior Labour Party figures and is thought to have been reassured that in government it would neither seek to renationalise the industry nor levy a punitive windfall tax.

Meanwhile, British Energy is less exposed to direct action from the industry regulator Professor Stephen Littlechild, because its prices are not controlled, unlike those of the regional electricity companies, and it has no direct influence over pool prices, unlike National Power and PowerGen.

Just under one-third of the shares will be held back for the public with the remainder sold to UK and international institutions through a book- building exercise which will also set the actual share price.

The pathfinder prospectus is due out in the middle of next month after which Dr Hawley and British Energy's chairman John Robb will embark on an international roadshow to sell the offer to investors in the US, Japan and Europe.