UK electricity markets hang on British Energy

UK power prices fluctuated wildly in September as a result of concerns over the future of troubled nuclear generator British Energy, the private energy firm that provides a quarter of the nation’s power supplies.

In mid-September, the winter 2002 base-load contract jumped to a four-month high of £18.20 ($28.20) per megawatt hour (MWh), before retreating to £17.67/MWh as reports suggested the UK government was set to extend an emergency loan facility it had given the company.

As EPRM went to press, the firm’s future was uncertain. On September 24, British Energy cancelled a scheduled investor update on its financial performance – citing the ongoing discussions with the UK government over the company’s future – and refused to divulge any further information on its financial status.

On September 5, the firm, which has been forced to the brink of insolvency by low power prices, received a short-term cash bail-out of £410 million, which was due to expire on September 27. However, media reports suggested the government was set to extend that loan guarantee for several months.

The facility agreement with the government was designed to provide working capital for British Energy’s immediate requirements in order to allow it to stabilise its position in the UK and North America.

The UK government’s Department of Trade and Industry says the British Energy board initiated talks with a view to seeking immediate financial support and enabling discussions “about a possible longer-term restructuring to take place”.

Any support provided by the government would need to be within the scope of the EC rules on state aid, with the government’s main objective being to ensure the safe operation of the company’s nuclear stations and security of supply.

The aim of these arrangements is to provide collateral for British Energy’s trading counterparties and to allow it to continue to trade in power markets.

Isaac Xenitides, head of the European Power Group at rating agency Fitch, says: “The fixed recovery rate for British Energy will depend on a raft of circumstances, largely dependent on the British government seeking security as part of its funding programme.

“Had it not been for immediate government assistance, the probability of British Energy reaching a state of insolvency would have increased dramatically,” he says. “The funding will help in the medium term, which is reflected in the B+ rating Fitch has given it.”

Fellow rating agency Moody’s cut the firm’s rating on 6 September to ‘junk’, citing the fact that the bondholders will be suffering from a material loss. Before September 6, 2002 British Energy bonds were rated two notches above junk status. Moody’s also says it may cut British Energy’s ratings again, because it believes the likelihood of a lower rating outweighs the chance of a higher one. The rating agency says it is unlikely the company will return to investment-grade level.

Standard & Poor’s also cut British Energy’s credit rating, to BB from BBB.

Shares in British Energy climbed to £0.20 on September 23, up from a low of £0.04 earlier in September. In early 1999, shares were worth £7.44.

Possible solutions to the company’s woes include a series of tax breaks, the sale of its North American assets – such as the 6,000MW Bruce nuclear plant in Ontario, Canada – and a financial restructuring that some have suggested could leave shareholders out of pocket and bondholders and creditors fighting over a slice of the cake.

Industry analysts have estimated that the recovery value of stocks is said to be about half the face value, which indicates there will be a downside risk for bondholders.

The amount of recovery value will, however, largely depend on the outcome of government negotiations.

Fitch adds: “A number of factors combine to support the view that existing creditors will be keen to accommodate a restructuring rather than actively pursue an insolvency.”

In addition, Fitch says it is waiting to see how British Energy’s liabilities to British Nuclear Fuels, the UK’s other nuclear generator, would be affected in forthcoming talks. The industry has expressed concern that the contracts behind these liabilities – amounting to £2.1 billion – will drastically change.

S&P says the worst-case scenario for bondholders would be if either British Energy were to lose its Bruce Power assets in Canada due to its inability to provide sufficient credit support to satisfy the Canadian Nuclear Safety Commission, or if its UK power plants were forced into closure. S&P’s infrastructure finance credit analyst Paul Lund said if these events are avoided, recovery prospects are likely to be high.