17 September 2002 – Standard & Poor’s Ratings Services said today it lowered its corporate credit ratings on UK-based nuclear power company British Energy PLC to single-“B” from double-“B”. The ratings remain on CreditWatch with developing implications.
The rating action reflects the increased risk that British Energy will be placed in administration, which is further heightened by the fact that continued credit support is not a prerequisite for the UK government to ensure security of supply and operational safety.
“Standard & Poor’s believes that the government has yet to decide whether to extend the credit facility,” said Standard & Poor’s credit analyst Paul Lund. “In addition, it is becoming apparent that none of the key decision-makers appear to have a strong aversion to British Energy being placed into administration.”
Government has indicated that its key priorities remain the continued security of supply, and the operational safety of the company’s nuclear power stations. Furthermore, the government has the incentive to continue British Energy’s operations and therefore avoid acceleration of additional costs that would relate to decommissioning the plants, which British Energy would not be able to pay if realized immediately. Administration does not appear to be a bar to the realization of these priorities, thus increasing the risk of administration.
The potential loss of credit support would substantially affect British Energy’s ability to trade and operate in the U.K. electricity market. In addition, it could lead to the revocation of the rights of British Energy’s Canadian subsidiary, Bruce Power LP, to operate its Bruce ‘A’ and ‘B’ nuclear plants.
The immediate problems facing British Energy have been caused by low wholesale power prices and plant reliability. The crisis appears to have been precipitated by a substantial deterioration in the directors’ perception of the future of the business prompting them to announce that they will decline to use available liquidity funding to support debt service.
The CreditWatch with developing implications reflects the fact that should credit support from either governmental or private financial sources be found to meet liquidity problems, and the directors conclude that they can draw down on this credit support, the value of the investment in Bruce Power will likely be preserved. British Energy could therefore still receive the benefit of expected significant future cash flows from Bruce Power. Standard & Poor’s estimates that Bruce Power could contribute cash flow of about £200m ($308m) to the British Energy group from fiscal 2004, which could support debt service going forward, offsetting cash losses in the U.K. operations based on current UK wholesale prices. Further cash benefit could result from the sale of its 50 per cent stake in Amergen, British Energy’s US-based joint venture. Standard & Poor’s does not believe there are any legal or regulatory restrictions to the movement of cash from Canada to the U.K. to service debt obligations.
Withdrawal of the government’s credit support without meaningful prospect of a successful restructuring of the company’s financial profile would likely cause an immediate and significant rating fall. In conformity with Standard & Poor’s criteria, the corporate credit ratings would be lowered to ‘D’ if British Energy were to be placed into administration.