UK nuclear power

Friday, February 15, 2008

Recent rumours of a takeover or break-up of British Energy are exaggerated.

The UK nuclear generator, with an enterprise value of £5bn, is still in effect controlled by the government. In return for taking on the long-term liabilities associated with decommissioning nuclear plants, the state has a call on BE's net cash flows - 65 per cent from 2004 to 2007, and now 35 per cent. It can convert this right into equity at any point and could potentially block unwanted interest. Whether it would, though, is a moot point. While some potential suitors - Russia's Gazprom, for example - would be politically less appealing than others, the UK government appears to feel sanguine about foreign ownership even of such strategic assets.

More off-putting to any potentially interested party are the difficulties of valuing BE. Although it is benefiting from high energy prices, BE is dogged by operational and cost issues, which make it difficult to predict cash flows. A more appealing prospect than the whole company would therefore be to get involved in BE's plans to build new nuclear plants, which should be more dependable than the ageing assets it owns now.

BE's choice of partner will depend both on the technology and the funding structure it prefers. Using project finance to pay for the capital investment required - an estimated £3bn for each plant - could prove challenging, given the need for cast-iron agreements with electricity suppliers, guaranteeing cash flows 10 years in the future. If, instead, BE sought a partner with a strong balance sheet, only a few names, such as European giants EDF and Eon, are viable.

Given the still-torrid interest in infrastructure assets, though, these companies should be careful what they wish for. Involvement in a notoriously risky sector of the UK economy could come at too high a price.

Copyright The Financial Times Limited 2008

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