Restructuring of British Energy

3 December 2002

The government loan, of which some 60% has been drawn on, was due to expire on 29 November. In a statement to parliament on 28 November, trade and industry secretary Patricia Hewitt said the government would "play its part in allowing the company to attempt solvent restructuring."

The extension of the loan was granted to give BE enough time to obtain approval from its creditors for the restructuring proposals. BE said that the restructuring "will require certain significant creditors to compromise their claims and will lead to very significant dilution of existing shareholders." Should BE's financial stakeholders not support the proposals, "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." Under a debt-for-equity swap, £425 million of new bonds will be issued in exchange for around £1.26 billion of debt. Of this, £490 million is owed to BE's banks in relation to the financing of the Eggborough coal-fired power station. Bondholders are owed £408 million, and three energy trading counterparties are owed £365 million. The bankrupt US company Enron is one of these, along with Teeside Power (TPL) and French oil group TotalFinaElf (TFE). BE hopes to complete negotiations with its creditors by 14 February 2003.

The government assistance to the restructuring proposals is subject to state aid approval by the European Commission (EC). Once the plan has agreement in principle from the creditors, the government will notify the plan to the European Commission for approval. A decision by the EC is expected by mid-2004, and only then can the restructuring be fully implemented. The current loan was approved by the EC at the end of November.

As well as reaching formal agreement with its creditors, the restructuring requires the successful disposal of BE's interests in Bruce Power and Amergen. BE is currently in discussions with potential buyers for its shares in these companies. The company is aiming to complete the sale of its interest in Bruce by 14 February 2003, and to agree the sale of its Amergen interest by 30 June 2003. Any proceeds from disposal will go firstly towards repayment of the government loan, and secondly in establishing and maintaining cash reserves for the purposes of providing collateral for trading and operations.

BE has entered into non-binding heads of terms with BNFL, which will provide for two new contracts to replace the current front-end and back-end fuel contracts. BNFL has agreed in principle to a freeze on all payments for storage and reprocessing until 31 March 2003, after which it would accept reduced payment for spent fuel services until restructuring is completed.

The restructuring plan seeks to meet all uncontracted nuclear liabilities, decommissioning liabilities and historic liabilities relating to spent fuel through a nuclear liability fund (NLF).

BE estimates £2.1 billion liabilities for back-end contracts with BNFL, which extend to 2086; provisions of approximately £0.7 billion for uncontracted back-end liabilities; and approximately £0.6 billion for costs of decommissioning. The present value of the NLF is £0.3 billion. After restructuring, BE will contribute to the NLF:

• £20 million per year for fixed decommissioning costs. This amount will reduce as stations close.

• £150,000 for every tonne of fuel loaded into Sizewell B.

• £275 million of new bonds.

• 65% of its free cash flow.

The UK government has agreed to assume financial responsibility for such liabilities to the extent that they exceed the assets in the NLF. BE estimates the cost to the government to average £150-200 million per year for the next 10 years and fall thereafter.

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