Provisions on a nuclear scale

The details of the nuclear privatisation, expected to be announced after a government White Paper next Tuesday, could leave investors wondering whether they are reading science fiction or sales literature.

Accounting issues may be well down the priority list for the Cabinet as it braces itself for the political reaction, but the City will be in for a rare treat when the prospectus eventually emerges next year.

One of the main features of the nuclear companies is the scale of the provisions for the future cost of fuel reprocessing, waste treatment and the decommissioning of power stations as they come out of use. Nuclear Electric estimates these at a mind-boggling £27bn.

Provisions are based on expert advice, but at the end of the day they come down to boardroom judgement, because they are about events that have yet to happen. As a result, amounts set aside are arrived at far from scientifically. Auditors must verify them, but rarely demur.

In practice, banking provisions are so subjective they are laughably easy to manipulate. By publishing unrealistically low provisions, sometimes with the collusion of their central bank supervisors, it is possible to disguise the fact that a bank is bust.

The difficulty in assessing a nuclear company's accounts is the scope there is for games of the same sort, and it will take rather longer for the implications to come to light.

Nuclear Electric and Scottish Nuclear's combined provisions last year reached £12.8bn, of which £10.4bn was for waste treatment and reprocessing, and the balance for power station decommissioning.

The time scale is equally breathtaking. In Nuclear Electric's accounts, there were £11bn of provisions set aside to cover total decommissioning costs of £15.7bn, after discounting to present values at a conventional rate of 2 per cent a year. (The shortfall is to be made up from future profits of power stations while they continue operating).

Using an undiscounted figure of £27bn for the total costs of fuel treatment and decommissioning in money of the day, the breakdown is as follows: costs in the first five years, £5.5bn; from six to 10 years £3.8bn; from 11 to over 100 years £17.7bn. Nuclear Electric's provisions are not just for its own power stations.

They include payments to British Nuclear Fuels to defray the £4bn cost of eventual decommissioning of its fuel treatment works. Because of these arrangements with BNFL, the nuclear generators are about to benefit from one of the well-known vagaries of provisioning - a large write-back, probably worth hundreds of millions, because they have just signed advantageous new fuel contracts with BNFL for advanced gas-cooled reactor fuel.

The Government also has a provisioning problem of its own. It has acceded to City demands that the older first-generation Magnox power stations, nearing the end of their useful lives, should be kept in state hands.

Of the £16bn of provisions expected to be in Nuclear Electric's balance sheet at the time of privatisation next year, £7bn will be for modern power stations - three times what the company may fetch in the sale - and £9bn will be for Magnox reprocessing and decommissioning.

These latter provisions will have to remain in the Government's accounts, and it therefore will have to find a great deal of capital over the coming decades to finance fuel treatment and station decommissioning.

Nuclear Electric, headed by Bob Hawley, is expected to have only £2.6bn of its total provisions in cash at the time of the privatisation next year. The rest is tied up in company assets.

So where does the Government find the £9bn? The most recent calculations, by Nuclear Electric, are that £2bn would come from the sale of the company (excluding Scottish Nuclear), £2bn from Magnox operating profits until the end of their lives, £500m from new methods of coping with spent fuel, £2.6bn from NE's cash reserves and £2bn from the nuclear levy, by which electricity consumers subsidise the industry.

As the Prime Minister hinted, the nuclear levy will probably be abolished, to sweeten electricity customers with a cut in tariffs, leaving a £2bn shortfall.

Don't be surprised if the solution is to massage provisions downwards. Alternatively, the Government could increase Magnox revenues by pushing the nuclear safety regulator to extend still further the working lives of the stations. Either way, it could be another government that faces the reality of finding the money. Long-term provisioning is a minefield, as private investors are soon to discover.