They're selling off the family plutonium
And the privatisation of British Energy will short-change taxpayers again
Sunday 26 May 1996
That may explain the tone of the glossy TV commercials: "I don't think you're going to see monolithic power stations or pylons," says chief executive Bob Hawley. No black and yellow radioactive warning symbols, either. The company does not even have the dreaded N-word in its name. It is a simple, anodyne name: British Energy.
And like Railtrack a fortnight ago, British Energy has to be sold. The Tory Government needs the money to offset the costs of the beef debacle (which could be as much as pounds 2.4bn), and to help fund pre-election tax cuts.
The signs are that this will be a difficult sale and, like Railtrack, will be made all the more lucrative for that - that is, another bad deal for the taxpayer and a potential bonanza for City investors.
For bad timing it could rival the BP sell-off (which coincided with the 1987 stock market crash). A week before British Energy is expected to come to market, in mid-July, National Power's shares will become a particularly attractive option, without the unknown elements of its nuclear rival.
In the longer term, too, there are doubts about the accuracy of the estimates for decommissioning (the expensive dismantling that aims to reduce the radiation hazard from the dead reactors) the eight power stations that the company owns. There are 14 working nuclear power stations in the UK producing about 30 per cent of our electricity. British Energy's eight include the newest, Sizewell B, a pressurised water reactor that cost pounds 2.8bn, and seven advanced gas-cooled reactors.
The six older "Magnox" stations will remain in the public sector; they are too near the end of their lives and too close to decommissioning to be saleable.
Overseas investors are expected to shun the offer; so too are the smaller investors (the "Sids") at home. Who is left? "What the adverts will really be aiming at is the super-Sids," says a spokesman for British Energy. "The people who already own shares, and who have remained in the stock market."
The sale price will be decided in July but it now looks as though the early valuations of up to pounds 3bn will not be realised, and that a more modest pounds 1.5bn - or less - will have to do.
Even the original price would have barely met the cost of building Sizewell B alone. The Labour Party estimated earlier this month that the taxpayer has put a total of pounds 13bn into the building of the eight stations. "It is a financial scandal, tantamount to a closing down sale," said John Battle, the Labour energy spokesman. In fact, it looks less like that than a car boot sale.
The Government has tried to sell off the nuclear industry before. When National Power and PowerGen were being readied for sale in 1989, the then energy minister, Cecil Parkinson, tried to bundle the nuclear stations into the wrapping. The City revolted over the risks, Mr Parkinson lost his job, and the gen- erators were floated with only power stations using "conventional" (fossil) fuels.
The nuclear stations were hived off into Scottish Nuclear and Nuclear Electric, British Energy's two parts.
The generators have already come back to haunt the flotation. Pessimistic views of electricity prices given to the Monopolies and Mergers Commission have hit value expectations. In April, the Government also blocked National Power's bid for Southern Electric - and a US bid for the generator itself in May - in decisions that may yet rebound with a vengeance.
As one City analyst explained, the problem arises from the cash left over in National Power's disposal of some of its surplus capacity. It has pounds 1.7bn to spend, most of which is now going in a dividend to shareholders.
"The shares go ex-dividend on 15 July - about a week, we estimate, before the nuclear sell-off. The shares have fallen a long way from their peak when they were a takeover target. So, taking all that into account, National Power shares will offer a yield of 8.5 per cent fully paid. This is a generator without liabilities, in a market that it understands, with a good track record behind it.
"Are people really going to hold back their money in order to buy shares in a business where we don't know the full structure for the next five years, with unknown quantities needing to be set aside for decommissioning? I think that the yield [the percentage return to investors] on the shares will have to be very good to make it at all attractive."
Another analyst agreed: "We think that a yield of 9 per cent is necessary to make it at all attractive. And they're unlikely to get much overseas interest. Sid will have to take a lot of this."
The higher the yield, the lower the sale price. Last week, the Government's brokers, BZW, put a price of pounds 1.7bn to pounds 2.1bn on British Energy, after the debt of pounds 700m with which the Government has saddled it. That implied a yield of 7.4 to 6 per cent. But the broker admitted that up to 8 per cent might be needed. Take that to 9 per cent and the price drops to pounds 1.4bn.
Sid's other fears and confusion may well bring that about. Consider, on the face of it, British Energy's prospects, even without the hulking shape of National Power in the background.
Last year it made a pre-tax loss of pounds 122m, the fifth in a row. Yet BZW is confident that it will make a profit of pounds 150m in its first year after privatisation, and that by 2000 the company's output will have risen by 30 per cent. This, it estimates, will generate pounds 2bn of cash by 2001. However, against that you have to set some negative factors - some so mysterious that BZW's figures may seem wildly optimistic.
First, there are the liabilities, which will total pounds 14bn against the costs of handling spent fuel and decommissioning the power stations at the end of their lives. But the way that figure is calculated is open to question. Earlier this year, British Energy abruptly changed the discount value that it applied to those decommissioning costs. Because they lie up to 30 or 40 years ahead, their present cash value must be calculated by applying a discount rate - like inflation - to the future cost. The industry norm for such procedures is 2 per cent.
However, in March, the energy minister, Tim Eggar, upped it to 3 per cent - a change that he said "is consistent with recent UK accounting proposals and has been approved by the auditors". He did not mention that it also has the convenient effect of cutting the bill by one-third - a subtle sweetener for the market. Whether this optimistic view of future costs is justified will only emerge in 20 years or so.
The newly privatised British Energy will also face the problem of competing to provide energy in the "pool" against the other generators. This could have a potentially murderous effect on revenues. BZW's valuation of up to pounds 2.1bn (after debt) assumes that the pool price would remain at its present 2.4p per kilowatt-hour for the next four years. But a fall in that price to 2p would knock pounds 750m off the valuation; one analyst reckons that every fluctuation of 0.1p changes British Energy's potential valuation by pounds 250m. At present, a fall is more likely than a rise, given the competitive state of the gas and oil markets. On the plus side, BZW has pointed out that a rise in the pool price to 2.7p would add pounds 850m to the company's value.
There will be two more key factors: the lifespan of the power stations and their output as a percentage of their theoretical maximum. A longer life is obviously good news in terms of continued revenue and has the benefit of incurring no extra decommissioning costs. But that is dependent on the approval of the Nuclear Installations Inspectorate (NII), which polices the industry. Every station would be looked at on an ad-hoc basis, and there is no way of knowing now whether the lifespans could be extended.
It may be significant that on Friday, an NII report on the 30-year-old Dungeness A Magnox reactors was released, approving their use for another 10 years in principle - though subject to regular reviews. Extended life, though, is always good news for a power station, since the extra cost of fuel is very small: most of it is already sitting in the reactor pile, unlike a coal- or gas-fired station, for which fuel costs are significant.
The effect of output percentage is a less certain guess. BZW's estimates are that the average output of the nuclear stations will rise from its most recent figure of 74.5 per cent to 82.5 per cent. This is not impossible - Sizewell B, which was only opened officially in March, is designed for higher load factors - but the effect of such assumptions on the valuation is dramatic. The difference using an 80 per cent load factor and an 85 per cent factor is pounds 700m. If the NII were to find some sloppy engineering or ageing welds that entailed the shutdown of a station for some time, British Energy's cashflow could be seriously affected.
The only rationale for assuming that it will not be is that all the stations (Sizewell excepted) have been operating for some years and since no such flaws have emerged, they are unlikely to in the future. To Sid, this will hardly be reassuring.
So with all those numbers whirling around, and the market value of the company shrinking by the minute, it is worth asking again: why is it being sold? Is the Government ashamed of an industry which once seemed to promise energy "too cheap to meter", but now seems to entail costs too huge to contemplate?
Mr Battle is in no doubt. "They are fattening up the company to make it a more attractive prospect for investors, at the expense of taxpayers. What I fear is that in five years' time the Public Accounts Committee will condemn this as having been a shabby deal for the public. But by then it will be too late."
Additional reporting by Paul Farrelly
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