Nuclear Electric goes back to the City: Peter Rodgers says industry faces tough task in proving it is ready

FOUR years after the Government abandoned plans to privatise the nuclear industry because investors thought it impossible to finance, Nuclear Electric has begun a softly, softly campaign to persuade the City to change its mind.

In speeches this month, senior executives of Nuclear Electric and its advisers, Price Waterhouse, have laid out their case for private finance.

'We think this company is privatisable,' says Howard Hyman, head of European corporate finance at Price Waterhouse, citing improved management, rapidly increasing efficiency of power stations, a rising contribution to power consumption and the prospect of income from electricity sales - excluding the nuclear levy - exceeding costs by 1995-96.

The centrepiece of any privatisation campaign is likely to be the boast that Sizewell B, the new nuclear power station on the Suffolk coast, has been completed to budget and on time - although hopes of beating the original 72-month timetable by nine months are slipping.

The Sizewell record is important as privatisation will be needed to raise capital for further nuclear projects. Until now, construction delays have been legendary.

Mr Hyman also points to four years' further experience in pinning down the long-term costs of decommissioning nuclear stations and to developments in handling radioactive waste and spent fuel.

The campaign is discreet and low key as the Government has yet to announce the terms of reference of a long-promised review of nuclear power. It will be at least two years before an attempt is made to sell NE.

Mr Hyman says: 'We have sounded people out, in a limited way.' Most contacts have been with analysts, but the circle is widening to banks and insurance companies.

Opinion in the City certainly appears to be shifting to the view that enough has changed in the past four years to make some form of privatisation possible. But it is still difficult to find anyone who believes Nuclear Electric can be sold lock, stock and barrel.

Nigel Burton of Warburg Securities says: 'I am sure there is something privatisable at a positive price.' But he suggests there is no hope of selling Nuclear Electric if the deal includes the ageing Magnox reactors, which are gradually being decommissioned. UBS analysts hold similar views.

What killed privatisation in 1989 were high estimates of the cost of nuclear electricity combined with the potentially enormous long-term liability shareholders might face from decommissioning and from coping with spent fuel and waste. Generating costs may also have been exaggerated because the companies did not want to be saddled with the nuclear stations.

John Collier, chairman of Nuclear Electric, said last week that there was a big increase in the forecast cost of decommissioning old power stations between 1988 and 1989, but since 1990 estimates had fallen by 25 per cent.

But the main issue is still the same as it was in 1989: is the business at all priceable?

NE has pounds 10.5bn of provisions in its accounts for waste management and decommissioning, dwarfing cash flow. Investors will want these risks nailed down before they look at the thorny problem of the profitability of investing in new stations and whether a rising flow of dividends is feasible. And some risks are more open-ended than others.

Disasters on the scale of Chernobyl are, curiously, the least of the pricing problems as any cost above pounds 20m is covered by government. Negotiations are under way to raise the limit to more than pounds 100m, but NE is confident this is still insurable commercially. A bigger problem for shareholders would be lost output after a disaster, but that type of risk is not peculiar to nuclear power.

Under present plans it would take 135 years to decommission a station into a greenfield site. Much of that time would be spent waiting for radioactivity to fall.

Financing should not be a problem if reasonable provisions are made, as discounting costs so far into the future at even a modest rate reduces the provisions needed now and limits the effect of variations in cost estimates.

This assumes that a real rate of return is earned on the funds set aside as provisions. If investment does not earn a real return over the next 100 years, the world will have had much worse problems than nuclear power to worry about.

As Patrick Green of Friends of the Earth points out, the most serious risk for investors would be if the timescale were suddenly shortened - in the event, for example, of regulators forcing a site clean-up much sooner.

There might also be a cash problem, as all but pounds 1bn of NE's pounds 10bn of provisions has been reinvested in the business. (On current forecasts the pounds 1bn will, however, be quadrupled in five years.)

NE is now covered by a letter of comfort from the Government promising to pay any excess costs of decommissioning and waste management. The City will expect some guarantees to continue after privatisation, or the exclusion from the sale of the biggest headaches such as the Magnox stations. But a broad guarantee for a private company would be difficult, politically, to justify and investors would also have to worry about whether a future government would honour it.

The Government has yet to give a formal go-ahead to the Thorp reprocessing plant at Sellafield, and long-term storage of high-level radioactive waste is enormously contentious. Mr Hyman points to alternative dry-storage methods for spent fuel without Thorp.

The immediate share pricing problem, however, is that the Government has said it will not pay if extra costs from a future tightening of environmental regulations hit NE's spent fuel reprocessing and waste management contract with British Nuclear Fuels. NE and BNFL are negotiating over how they would split this risk. 'At least the problem has been identified,' says Mr Hyman.

Of course, the best way to reassure investors that this is not a black hole will be if NE's part of the split is tiny. But what happens after the 15-year contract expires?

Banks fear the effects of new environmental legislation suggested by the European Commission, which might make lenders liable for polluted land if customers go bust. Mike Pummell, head of environmental risks at Barclays, says: 'Nuclear environmental liability would be at the forefront of any lender's concerns.'

Liz Christie, electricity analyst at Goldman Sachs, says: 'It comes down to a question of the Government needing to answer questions about open- ended liability and whether it will be responsible for the cost of decommissioning. Until it answers, it is practically impossible to value Nuclear Electric.'

Mr Burton of Warburg Securities sees a range of possibilities for privatisation, from letting out management contracts for nuclear stations to the private sector through joint ventures to outright sale of a company based on Sizewell B and perhaps the second-generation advanced gas-cooled reactors.

But calming fears about risk will be only half the problem. Mr Burton says: 'If they are not going to build new reactors, the question arises as to whether it is worth privatising.'

Above all, the Government might find it hard to persuade the City that new stations offer a decent return, unless it fixes electricity supply regulations in their favour to underpin the economics. Yet Britain now has an unusually transparent electricity market. That will make it difficult, politically, to slip in sweeteners for private investors.

And not all the nuclear industry is as enthusiastic as Nuclear Electric about rapid privatisation. James Hann, chairman of Scottish Nuclear, last week argued for the nuclear review to cover all the difficult issues surrounding nuclear power, rather than a 'narrow focus' on commercial viability and privatisation.

(Photograph omitted)