2 The Department's approach to restructuring
7. The Department does not normally intervene when
private companies get into financial difficulties. But in this
case it had ultimate responsibility for the Company's nuclear
liabilities should the Company fail, so it had to consider whether
to provide support to keep the Company going. Assessments made
by the Department in autumn 2002 suggested that unplanned closures
of British Energy's nuclear stations would have put electricity
supplies at risk, with the possibility of power cuts to domestic
suppliers over the winter months. In addition because of capacity
constraints for the receipt, storage and reprocessing of spent
fuel, some stations would have had to remain fuelled for some
years. The Department therefore decided it should provide support.[7]
8. The Department decided that it was unlikely to
find a buyer for the Company in view of a depressed market for
electricity prices and the scale of the Company's liabilities.
The Department considered that the costs to the taxpayer of pursuing
a solvent restructuring or allowing the Company to fall into a
planned administration would be broadly similar. The Department
was, however, concerned that a prolonged period in administration
would pose a significant risk to the taxpayer. It therefore decided
to opt for a solvent restructuring on the grounds that this carried
less risk.[8]
9. The Nuclear Installations Inspectorate, which
licences and inspects all nuclear sites in the United Kingdom,
had expressed concern about its ability to regulate British Energy
if the Company went into administration, particularly an unplanned
administration. The Inspectorate feared that the Company might
not have enough funds to make changes the Inspectorate might require
as a result of its regulatory activities. It was also concerned
that going into an unplanned administration might undermine staff
morale with a possible loss of skills. There is still a risk that
if the Company got into difficulty again, administration might
be judged untenable thereby requiring the Department to step in
again. The Department is considering whether a special administration
regime should be available for Companies such as British Energy
but has no timetable for taking a decision.[9]
10. In return for the Department taking on or underwriting
the Company's liabilities, under the restructuring agreement British
Energy agreed to issue new bonds worth £275 million which
it gave to the Nuclear Liabilities Fund and to make annual contributions
towards the cost of meeting the Company's liabilities. British
Energy are making a fixed annual payment of £20 million towards
decommissioning, a small payment linked to the quantity of fuel
loaded into the Sizewell B reactor, and a contribution equal to
65% of the Company's free cash flow each year, known as the cash
sweep. All payments will be made into a Nuclear Liabilities Fund.
The first cash sweep payment of £105 million (relating to
the 2005-06 financial year) was paid in September 2006.[10]
11. There is virtually no link between the size of
the nuclear liabilities underwritten by the taxpayer and the contributions
to be made by the Company. The bulk of the contributions are expected
to arise from the cash sweep, which is directly linked to the
Company's performance. In other countries it is common for nuclear
liabilities to be transferred to the State but few instances,
if any, where so much of the contribution is based on the market
and operational performance of the waste producer. The Department
considered that to have linked contributions to the level of liabilities
would not have created a viable company, one of its principal
aims. The result, however, is a greater transfer of risk to the
taxpayer than in most other countries.[11]
12. The Department sought to share the cost of the
restructuring with the Company's shareholders and creditors. The
shareholders agreed to exchange 100% of their holdings in the
old company for a 2.5% stake in the new company. The Company's
main commercial creditors agreed to extinguish their debt claims
against British Energy in return for £425 million of new
bonds and 97.5% of the issued shares in the new Company. When
they agreed to the restructuring plan in October 2003, the major
creditors could have expected to lose £289 million compared
to their position as at September 2002 before the Company approached
the Department for help. The Department therefore believed that
the risk of restructuring had been reasonably well shared. By
the end of February 2006, however, the Company's share price had
risen significantly, making the creditors' stake worth £3.9
billion (Figure 3)[12]
without carrying any of the nuclear liability risks taken on by
the taxpayer. If the Company had gone into administration in 2002
the amount received by creditors, in the absence of a credible
buyer, would have been highly uncertain but much less than they
received as a result of the restructuring plan.[13]
13. The Department, and its advisers, had tested
the restructuring plan and the Company's viability against electricity
prices in the range of £15 to £21 per megawatt hour
scenarios. But they did not consider the high electricity prices
experienced following restructuring. High prices would affect
the distribution of risks and benefits between the parties to
the restructuring plan, including the taxpayer. Following restructuring
electricity prices rose significantly, in part reflecting increases
in world oil prices (Figure 4). A rise in prices had
been forecast at the time but the Department did not expect the
extent of the price increase, though oil prices had attained similar
levels in the past.[14]
Figure 3: The value of holdings in British Energy
of shareholders, creditors and the taxpayer
Source: British Energy, former Department of Trade
and Industry, National Audit Office
Figure 4: Movements in British Energy's share
price, electricity and oil prices since relisting
Note: Measured from an index of 100 at 17 January
2005. One-year forward baseload electricity price.
Source: Citigroup Investment Research, Platts,
Datastream
14. The Department spent over £29 million on
advisers fees during restructuring, plus £2.5 million on
its own administrative costs. £16.5 million was subsequently
recovered from British Energy. Of the four main firms of advisers
it used, only one was appointed through competition. For the other
three companies the Department extended contracts for providing
advice on other energy matters to include the advice provided
on British Energy. The Department accepted that it should have
appointed all of its advisers using competition. It intends to
appoint panels of advisers, following competition, for this type
of work in future, so that it does not need to re-tender every
time advice is needed; but has not yet done so. The Department
also accepted the need to benchmark the costs of its advisers.[15]
7 C&AG's Report, paras 2.2, 2.3, 24 Back
8
Qq 44, 45; C&AG's Report, paras 2.8 to 210 and Figures 11,
12 Back
9
Qq 46-48, 95; C&AG's Report, para 2.3 and Figure 12 Back
10
Q 27; C&AG's Report, para 1.15 Back
11
Qq 7, 29, 30; C&AG's Report, Appendix 6 Back
12
Note: The value of the taxpayers' holding represents the net value
after taking account of the forecast liabilities Back
13
Qq 33, 34, 35, 41, 42, 43; C&AG's Report, para 2.16 Back
14
Q 140 Back
15
Qq 84-97; C&AG's Report, paras 2.25 to 2.30 Back
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