THE RESTRUCTURING OF BRITISH ENERGY
Publication of 43rd Report of Session 2006-07
Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:
“Upon privatisation in 1996, British Energy took on full responsibility for its nuclear power stations, including the associated nuclear liabilities. In actual fact, from 2002 when the company was restructured, those liabilities - uncertain in size but valued at £5.3 billion in 2006 - have been underwritten by the taxpayer.
“The rise in wholesale electricity prices following the restructuring resulted, under the terms of the agreement, in British Energy paying much more into the Nuclear Liabilities Fund. These receipts will have been supplemented recently by the decision to sell part of the Government’s stake in the Company. But the taxpayer is still exposed. The Department must not forget this and do a lot better job in monitoring the performance of the company, influencing its commercial strategy and ensuring that the eventual liabilities are as small as possible.”
Mr Leigh was speaking as the Committee published its 43rd Report of this Session which, on the basis of evidence from the Department and British Energy, examined the Department’s role in the restructuring of the Company and how it is monitoring and influencing the Company’s performance and managing the nuclear liabilities taken on by the taxpayer.
British Energy (the Company) is the largest electricity generator in the United Kingdom, with an annual turnover of £2.6 billion in 2005-06. Its eight nuclear power stations generate approximately 20% of the electricity used in England and Wales and half of that used in Scotland. The 1996 privatisation raised £2.1 billion for the Government, and British Energy took responsibility for all its nuclear liabilities, including the disposal of spent nuclear fuels and the decommissioning of power stations.
In September 2002, the Company approached the former Department of Trade and Industry (the Department) for assistance as it could not meet its liabilities. The Department does not normally intervene when private companies get into financial difficulty but in this case it decided to do so to preserve electricity supplies and ensure nuclear safety. As a result the taxpayer has taken on responsibility for underwriting the Company’s nuclear liabilities valued in February 2006 on a discounted basis at £5.3 billion, a figure that is likely to increase. The Committee reported on the events leading up to the Company’s request for support in its report Risk Management: the nuclear liabilities of British Energy PLC. This report deals with the financial aid provided to British Energy and the terms of the restructuring arrangement.
The Department supported a financial restructuring of the Company with the latter undertaking to make an annual contribution to its liabilities of a fixed sum of £20 million a year plus a payment expected to be about £4 million a year for each tonne of fuel loaded into Sizewell B. In addition the Company will also pay a proportion of its free cash each year. Free cash is defined as the Company’s available cash after tax and payment of its financing costs but before any dividend payments. This payment is known as the cash sweep.
The Department sought to share the cost of the restructuring with the Company’s shareholders and creditors. The shareholders, who would have received nothing in administration, agreed to exchange 100% of the existing equity for 2.5% of the equity in the restructured company. The Company’s major creditors took 97.5% of the equity in the restructured Company. By February 2006 this holding was worth £3.9 billion, far more than the creditors would have received under administration and without any responsibility for meeting the nuclear liabilities.
In considering the proposed restructuring plan the Department looked in detail at the prospects for the Company if electricity prices remained low but not if they increased. In the event prices have risen from £24 per megawatt hour to just under £40 per megawatt hour since restructuring.
British Energy now poses a risk to the taxpayer but the Department plays no formal role in approving the Company’s commercial strategy. The Department now has the legal authority to obtain information from the Company and has placed some limits on British Energy’s actions through conditions agreed as part of the restructuring.
A potential benefit for the taxpayer is that the Department can convert the stake it has in British Energy through the cash sweep into shares in the Company that it can then sell. On 30 May 2007 the Government announced that it intended to dispose of part of its interest in British Energy. The Government has stated that the net receipts will be paid into the Nuclear Liabilities Fund set up to help meet the Company’s nuclear liabilities.
The Department’s monitoring of the Company’s performance will be key to preserving the taxpayer’s interests. Monitoring responsibilities are currently split between different teams within the Department.