British Energy back from financial abyss

Two years after being bailed out by the Government, the nuclear generator is poised to show a £50m operating profit

Nuclear generator British Energy will next month announce its first annual operating profit since the Government bailout nearly two years ago.

The group, which generates a fifth of the UK's power, is expected to announce an operating profit for the last financial year of around £50m on the back of higher wholesale electricity prices and after cutting its generation costs.

But after tax and exceptional items, it will still show a loss when it reports the results in mid-June.

Its balance sheet has been boosted by the sale of its stake in US joint venture Amergen in the third quarter, bringing in $277m (£151m). The group is also expected to announce that it will give a higher value to its main assets, its nuclear reactors.

When it reported annual results last year, it wrote off £3.7bn in value from its chain of reactors, blaming higher generation costs and lower electricity prices which, it said, had "resulted in terrible damage to our company".

But since then, wholesale prices on the spot market have increased by around a third because of higher demand from consumers and higher fuel costs for coal- and gas-fired power stations. More onerous environmental demands, such as the Renewable Obligation Act requiring suppliers to increase the amount of electricity they buy that is generated from sources such as wind power, have also increased costs for generators. Analysts expect wholesale prices to continue to rise.

British Energy has not benefited fully from the increase in prices. It sells around 75 per cent of its power on long-term fixed contracts, usually of around a year, which are not affected by the spot price.

Its largest supply contract is with Centrica, which has six million electricity customers. Centrica will take around 15 per cent of its electricity over the next three years. The contract was struck at the beginning of 2003 to help the group hedge against future wholesale price fluctuations, but months later, prices began to rise. In September 2002, the Government rescued the company, which is still listed, with a £650m loan to prevent it from going into administration.

The rescue package ended in a massive debt-for-equity swap, which left shareholders with just 2.5 per cent of the company. It also transferred £4bn of liabilities into a new Nuclear Liabilities Fund provided that the company deposited £275m worth of bonds in the fund. It must also hand over 65 per cent of all future free cash flow.

The restructuring is conditional on clearance on competition grounds by the European Commission, but Brussels is reported to be ready to give the go-ahead this summer.

Several conditions are expected to be attached, however. These include a commitment not to buy any electricity assets for the next five years and to ringfence its nuclear business to restrict the use of the sub-sidies. The Department of Trade and Industry did not comment on the reports earlier this month.

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