3 Managing future risks
15. Restructuring has left the taxpayer facing a
significant risk from British Energy's nuclear liabilities. The
contribution by British Energy towards the liabilities will depend
on how well the Company performs. This in turn, will be influenced
by the success of the Company's commercial strategy, the reliability
of its power stations and the market price of electricity. The
Company accepts that it has been a poor performer in the past
due to lack of investment and operating inefficiencies and has
introduced a Performance Improvement Programme, with current expenditure
of over £200 million a year, to improve its output performance.
There have been unplanned shutdowns of some of its power stations,
for example in October 2006 when the Company announced that two
of its reactors, Hinkley Point B and Hunterston B, would have
to shut down for inspection and repair. The Company's share price
dropped following the announcement.[16]
16. The Department plays no formal role in approving
the Company's commercial strategy. It does not, for example, have
a direct shareholding in the Company although it does have an
option to convert some or all of the cash sweep into shares. The
Department has, however, set a number of conditions for the Company
through the restructuring agreement: it must adhere to prudent
trading principles; it cannot make capital distributions until
it has built up sufficient cash reserves; it cannot undertake
corporate restructuring without the Department's consent; and
its freedom to borrow and scope of business activity is limited.
The Department has developed contingency plans to deal with a
range of scenarios should they occur.[17]
17. At present, the Nuclear Liabilities Fund is highly
exposed to British Energy's future financial performance. The
Department has, however, the option to convert all or part of
the cash sweep into shares in the Company at any time, equivalent
to up to 65% of the Company's issued shares. The increase in the
Company's share price following restructuring had resulted in
a significant increase in the potential value of the cash sweep
(£6.5 billion at the end of February 2006) although the share
price later fell back (Figure 4). On 30 May 2007 the Government
announced that it intended to dispose of part of its interest
in British Energy. The Government confirmed that the net proceeds
from any such sale would be paid into the Nuclear Liabilities
Fund.[18]
18. Our predecessors' report on the events leading
up to the Company's request for support in September 2002, concluded
that the Department had failed to establish a credible overview
of British Energy's deteriorating financial position and that
this inaction had been compounded by split responsibilities for
energy matters within the Department. The Department has since
strengthened its right of access to Company information and, for
example, now receives a regular rolling 18-month cash flow forecast,
supplemented with meetings with Company officials. But responsibility
for monitoring the Company's performance and evaluating the information
received remains split across a number of teams within the Department,
including the Shareholder Executive and the Nuclear Decommissioning
Authority. There is regular contact between the various teams
and regular risk reports to the Department's Management Board.
But there remains a risk that information obtained by the different
teams is not shared quickly and evaluated as a whole. The Department
has commissioned its internal audit team to look at the current
arrangements to ensure they are effective.[19]
16 Q 141; REG-British Energy Corporate Update, 16 October
2006, www.British-Energy.com Back
17
Qq 110-113, 116 Back
18
Ev 16 Back
19
Qq 15, 144-145 Back
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