9 September 2002 – British Energy (BE) announces that it had today entered into a facility agreement with the UK Government for up to £410m to provide working capital for its immediate requirements and to allow BE to stabilise its trading position in the UK and North America.
The offer of temporary cash bailout follows an initial refusal to help last week leading to shares in BE being suspended. Talks have continued since last Thursday with the outcome that ministers have agreed to provide collateral, where appropriate, for BE’s trading counterparties which will allow BE to continue to trade in the electricity markets in which it operates.
The support package expires on 27th September and it is expected that discussions regarding longer term restructuring will commence shortly.
In its statement, the Board of BE said it was optimistic that these discussions would be successful but warned that there was no certainty that this will preserve value for investors. The Board said that if these discussions were not successful, the company may be unable to meet its financial obligations as they fall due and therefore the company may have to take appropriate insolvency proceedings.
Shares fell 84 per cent within minutes of trading restarting to13p. On Friday bookmaking firm Financial Spreads said it was offering a grey-market buy/sell spread on British Energy shares of 40-44 pence.
BE owns and operates eight nuclear power stations in the UK and accounts for around 20 per cent of UK power generation. It also has interests in nuclear facilities both in the US and Canada.
Trade Unions welcomed the move, which they hoped would protect the 5 200 people employed by British Energy in the UK. “This is a welcome announcement to provide a short-term lifeline for the industry,” said the general secretary of the GMB, John Edmonds. “But we now need a complete rethink of the role of the private sector in major UK utilities. We cannot continue to gamble the future of such an important sector on the roulette wheel of the Stock Exchange.”
The Financial Services Authority, the UK’s securities watchdog, is to launch an enquiry into financial reporting at BE after concerns were raised that investors were not kept sufficiently informed about the company’s deepening crisis. News of the approach for aid to the government caught analysts by surprise. But British Energy said its financial situation rapidly deteriorated after negotiations with state-owned British Nuclear Fuel failed.
As recently as last Thursday, respected investment bank Morgan Stanley issued a report on British Energy in which it said, “We do not believe that BE has liquidity problems based on its current funding needs, sources of finance and credit ratings”.
It had hoped that BNFL would agree to a contract to run six of its reactors in return for a management fee. BE has also been unable to agree a renegotiation of a fuel reprocessing contract with BNFL.
The sudden deterioration has also been blamed on the continued low level of pricing for electricity in the UK under the New Electricity Trading arrangement. In addition, BE has been forced to unexpectedly shutdown two of its reactors due to problems with gas cooling systems.
Last year BE posted a £518m loss which included a £41m trading loss.
The fall in electricity prices since the new rules were introduced in March 2001 has been around 40 per cent and has caused a number of UK players in the power generation market to mothball plant to reduce the overcapacity and stem losses. At £19 per MWh, it is unlikely that any power station in the UK is making money. The option to close plants is not available to British Energy in view of its nuclear portfolio.
The success stories in the industry have mostly come from utilities which have been able to make money from their retail side such as Centrica and TXU. Be has few retail customers and as prices have tumbled the company has had to shelve plans to raise money in order to replace its ageing reactors.
Longer term help for British Energy may include relief from the UK Carbon Levy which it argues should not be imposed on generation which does not produce C02 as a by-product.
Investment bank Credit Suisse First Boston is advising the government on the issue. Sources said Lazard was advising British Energy.