Good business?

British Nuclear Fuels never really started out as a business. It was put together from service providers to the nuclear industry and the UK government whose activities were undertaken on strategic, not economic grounds. Over the past few years its role has changed dramatically, and senior management and its government masters believe that privatisation will help the company move forward. But if this is ultimately the right way for BNFL, it may still require some tough choices on activities that the company holds very dear.

The proposed public-private partnership, in which 49% of BNFL would be sold, has already been delayed from 2000 to 2002, as the government announced at the end of March. Nevertheless, on 30 March a UK government Select Committee heard evidence on the privatisation from BNFL, represented by Hugh Collum (chairman), Norman Askew (chief executive) and Jeremy Ryecroft (commercial director).

MAKING MOX

When BNFL admitted that quality control data had been falsified in a shipment of MOX fuel to Japan, it was not just the company?s management practices that came into question. The debate quickly widened to ask whether it was really necessary to use MOX fuel at all.

MOX fuel is intended to be the final part in the nuclear fuel cycle, using recovered uranium and plutonium to make fresh assemblies. But it is more expensive than conventional fuel and the presence of plutonium means the cost of management, transport and security is also increased.

What MOX does offer to countries who have followed the reprocessing route is a plutonium management strategy. The MOX business provides 10% of BNFL?s turnover, and the company certainly believes that it has the support of its customers in using up stocks of plutonium. ?We think there is a business [in MOX fuel]?, Hugh Collum told the Committee, ?But we must get customer confidence back?.

The new MOX fabrication plant at Sellafield is still waiting on government approval to start up; it currently has contracts covering 6.7% of its reference capacity, Ryecroft told the Committee. Other potential customers, he said, were unwilling to commit to a plant whose future was uncertain, although BNFL was holding letters of intent. Nevertheless, Ryecroft said that he believed the business would not disappear if the Sellafield plant did not start up. Japan, for example, had decided that plutonium that was produced in Europe would be made into MOX in Europe, and if the MOX was not produced in the UK, the business would go to France. French fuel manufacturer Cogema is currently supplying MOX fuel to plants in France and elsewhere. It had plans to nearly double its production capacity to 300t/year by 2000, but taking on BNFL?s business would require more capacity.

MOX may be a valid plutonium management strategy where political considerations can weigh heavily on nuclear plant operators. The question is, whether it will have any place in an increasingly common scenario: one where nuclear competes solely on price with other forms of generation. In a deregulated marketplace, what operator will incur the costs of MOX, unless paid well for it by central government? The UK?s British Energy (BE) answers the question at its Sizewell B PWR: that plant does not use MOX fuel because the costs are too high.

With its own privatisation on the horizon, BNFL has to face the possibility that the Sellafield MOX plant will not start up. The UK government has told it that approval will be granted on solely economic grounds. Hugh Collum told the committee that if there is no approval for MOX BNFL would have a plant worth £300 million doing nothing.

Asked if, after a part privatisation, the plant could be written off, he said, ?We would have to write it of before the privatisation. We have a very valuable asset,? he said, ?and we need to know before privatisation if it must be written down or written off. We must be certain.?

Askew said that BNFL hoped to restart its operable fabrication plant, which provided the suspect pellets to Japan, ?In the next two or three months. We will do retraining for MOX staff, retesting and recertification. We will also add automation,? he said, ?so that the process is automated direct to computer.? The company was due to make proposals to the Nuclear Installations Inspectorate to improve quality and safety by 18 April.

And the fate of the MOX pellets that have caused BNFL and its customers to reconsider their plans? As yet, no one knows. The UK was due to present proposals to Japan in early May on how to deal with them, but in April there were signs of a split between BNFL and the UK government. BNFL was quoted as saying that it would take the fuel back, but that the UK government would not allow it.

REPROCESSING

Reprocessing is intended to provide both plutonium and uranium for use in new fuel. But in fact, no recovered uranium has yet been used, and Ryecroft agreed with the Committee that the reason was its cost.

?Most utilities don?t use it,? Ryecroft told the Select Committee, ?They are waiting for uranium prices to increase.?

But the price of fresh uranium is low and likely to remain so, and stocks are high. As a result, BNFL is currently storing more than 2500t of recovered uranium. If that recovered uranium were to be used in place of fresh uranium new research would be required, new safety cases would need to be written for the regulator, and BNFL would have to build a new plant to produce the fuel.

Reprocessing represents a major part of BNFL?s business, but it has always been unpopular with some groups in the UK, and many have argued ? most recently Grodon MacKerron, in evidence to the Select Committee ? that it should be abandoned.

The Committee asked the company about this alternative.

?Reprocessing is a worthwhile and profitable business for BNFL,? Hugh Collum said. For the Thermal Oxide Reprocessing Plant (Thorp) ?We have reservations of £12 billlion over the next 16 years, with baseload contracts above 7kt. We already have contracts after 2005, and this year we have achieved the best throughput so far.?

The company was looking at future contracts, he said; however, he admitted the events of the past few months had done it a great deal of damage, and BNFL needed ?to convince the customer that this is a good business.? Post 2004, he said the Thorp plant was half committed with UK and German fuel. If BNFL won further Japanese contracts Thorp would operate beyond 2010.

Collum admitted that there were questions over the German contracts. Around half the German throughput (some 400t) was still to be delivered and transports had been suspended in March.

But Ryecroft said, ?We have take or pay contracts which we believe are enforceable, and we have an intergovernmental letter undertaking not to interfere in the contracts or transports.? Any change would put the Germans in breach of contract, he said.

BNFL is also optimistic over its German contracts because they were tested when the current German government took power, and are still sound.

As regards UK business, ?Contracts signed in 1997 were for a mixture of reprocessing and storage,? Ryecroft said. BNFL was certainly under pressure to reduce its price, he said, and the company was not necessarily in favour of either procedure.

Norman Askew said that initial comparisons had been carried out and in fact there was ?little difference? between the costs of reprocessing or storage, as UK fuel would need to be conditioned. Nevertheless, he said, ?BE is a very important customer: our success is with their success. We must consider doing things differently.? He said that this might produce savings that BNFL and BE could split.

It has been suggested that reprocessing could be entirely abandoned in favour of storage. But reconsidering the future of Thorp raises some tricky questions. As regards overseas contracts, Jeremy Ryecroft noted, ?UK policy is that BNFL cannot store overseas fuel. The storage option is not open for that business?. He also pointed out that all the customers signed up for the first ten years of Thorp had paid partly in advance.

BNFL is not ?actively? considering storage as an alternative, Collum said, but ?We work out our strategy with our shareholder, and our intention is to stick to our strategy. But we automatically reconsider alternatives, and we will think the unthinkable.? But, he added, ?If we have viable contracts we have no intention of getting out of reprocessing.?

MAGNOX ECONOMICS

Operating the UK?s fleet of Magnox plants is one of the new facets of BNFL?s business. Acquired in 1998, the plants now contribute 25% of BNFL?s turnover. The Magnox stations are currently running at availabilities between 50% and 60% ? low in comparison to modern plant, but perhaps acceptable in view of the age of the plants. How much profit do they bring to the company? ?The stations are very cost-competitive,? Askew told the Committee, ?But electricity prices have fallen. Last year we did not get performance in terms of output.? He noted that the generating division had been separated from the reprocessing business, and reported directly to him.

There are two great uncertainties over BNFL?s future income from generation. The first is the life still left in these plants, and this is being addressed.

?We must take a view that ?this is the life of this station? and not run beyond it,? Askew said. ?Then we can consider what are the organisational issues that may bring that date forward.? Life-limiting factors for all the stations are being considered.

The second issue is the likely form of the UK generating market. The current structure of long term contracts and a spot market known as the ?power pool? are due to change in the next few months, partly to allow prices to drop further. No one knows what form the new electricity trading arrangements are going to take, but the price could be as low as 1.8p/kWh. No one believes the Magnox stations can sell at that price, and the choice will be between selling at a loss or closure.

Even if the electricity price were to increase, there is no question that most Magnox stations will be closed within a few years, raising a question that still has not been satisfactorily answered. What is the extent of forward liabilities for these stations? And, further, given the need to pin down these liabilities, and the growing number of examples of nuclear plants where decommissioning is well under way, is ?Safestore?, in which partly dismantled units are placed in storage for upward of 100 years, still tenable?

NEW BUSINESS

BNFL?s core businesses are shrinking as the nuclear industry declines. Its new business is in cleanup and remediation services and, with the acquisition of Westinghouse, in providing engineering services.

BNFL?s success in starting up a US offshoot, BNFL Inc, has already been confirmed with contracts in the multi-million pound sterling range, to clean up US defence sites. BNFL?s contracts were under review, it was announced recently, but Hugh Collum told the Select Committee this was good news: he said it was a regular process in which the US government reviewed its contractors, and it would put the company in a good position for future work.

?We are negotiating two big new contracts; discussions are at an advanced stage,? he said.

He told the Committee that the usual estimate of military cleanup work in the US is $300 billion. Similar business in Russia would be significantly bigger than that and though it was not clear who would pay, the work is there to be done.

BNFL is also enlarging its commitment to the engineering and services market following its purchase of Westinghouse. Following that merger it now has some 20% of the market.

PRIVATE INDUSTRY

Given the current status of BNFL?s businesses, what would its future be as a privatised company?

Hugh Collum said that privatisation would be a ?powerful incentive to improve performance. The whole face of the company has changed. We are now a worldwide company trading in the US and the Far East. We must be more transparent, more reliable and as a private company we may be able to attract better management.?

However, Collum admitted that the most important requirement for any privatisation was that potential investors were offered certainty about costs and likely liabilities, and he admitted that this was impossible.

?We have built up a record of outstanding details that must be resolved before we can put the company before the public,? he said. ?All of them indicate that we need more time to deliver. Late 2002 gives us more time to promote stability and reliability to attract investors. The accounts of 31 March 2001 will give us a useful basis for the sale.?

Asked how BNFL performed against government targets on competitiveness set in July 1999, he admitted ?it has been a poor year. We will be lucky if we achieve any of these targets this year. On controllable costs, for example, our target was 25%; and we may achieve 17%. Profitability is also behind.? Collum said he hoped to negotiate easier targets with the Department of Trade Industry for 2000.

The question of uncertainty lies at the heart of BNFL?s future. While its new businesses in cleanup and engineering seem to offer good returns, its core activities in fuel manufacture and reprocessing, and its new generation business, are riddled with uncertainties. Some of these are external, as detailed above. But of more concern to the potential investor are the uncertainties in BNFL?s management of its own business. Costs, revenues and liabilities are all highly questionable, and BNFL?s attempts to pin them down (among the targets agreed with the DTI in 1999) have so far been unsuccessful. The company?s accounting and reporting practice has varied from year to year, and the lack of transparency led the Select Committee chairman Martin O?Neill to issue a threat to the company in no uncertain terms.

?Can BNFL make its accounts more transparent?? he asked. ?If not, the Committee will recommend that the National Accounting Office [the government scrutineer] takes BNFL seriously in hand. In the past the company has treated its shareholder, the country, with disdain on its financial performance.?

As O?Neill pointed out, BNFL has been operating as a public limited company for 13 years. But it has yet to satisfy its current shareholder that it is a well-run company, with the right operating strategy, offering a good return on investment. It may be possible to privatise BNFL by 2002. But the first requirements are transparent accounting and a real understanding of costs and liabilities. And if that process reveals that some of BNFL?s activities are not profitable, then it is time to change strategy ? even if it means jettisoning some of the company?s original, and most dearly held, functions. BNFL sees part privatisation as an opportunity, but first it has to learn what power plant operators have already found out: nuclear power is a business, not a religion.