British Energy facing insolvency

Nuclear generator needs 'immediate' cash aid; no guarantee rescue will 'preserve value for investors'

British Energy was facing financial disaster last night after admitting that without an immediate cash injection from the Government it may have to file for insolvency.

Even if the emergency discussions now taking place with ministers stave off bankruptcy, the loss-making nuclear generator may have to be taken back into public ownership effectively, leaving shareholders with nothing.

The beleaguered company went to the Government and its financial advisers CSFB on Wednesday morning warning that without immediate financial support it would not be able to meet its financial obligations and might therefore "have to take appropriate insolvency proceedings".

It has just over £1bn in borrowings of which £408m are in the form of bonds. Of these bonds, £110m are repayable in 2003 but interest payments fall due shortly. It has a further £508m in project finance loans and a £104m loan to finance its operations in Canada.

Neither the Government nor the company would indicate how much emergency support was needed although industry insiders said it was likely to run into hundreds of millions of pounds.

A government source said that although it had begun rescue talks with British Energy, "there is no question of it receiving a blank cheque".

The crisis appears to have been triggered by the failure of British Energy to negotiate a new deal with British Nuclear Fuels Ltd to cut the costs of reprocessing its spent nuclear fuel.

The contracts cost British Energy £300m a year but it believes this figure could be cut to £50m if BNFL would agree to storage rather than reprocessing of the fuel.

BNFL delivered its formal offer to British Energy on Wednesday morning. "The terms offered by BNFL fell short of those which British Energy requires," the company said. The rescue talks with the Government then began.

Ministers have been drawing up contingency plans for some weeks in the event that British Energy failed. It lost £518m last year, including an operating loss of £41m in the UK where it operates eight nuclear reactors, including the Sizewell PWR, and one coal-fired station.

British Energy cautioned that the discussions over a longer-term restructuring would be complex and lengthy. Any rescue package would also need to be approved by the European Commission under its state aid rules.

Among the options being considered are exempting British Energy from the climate change levy, giving it the management contract to run BNFL's Magnox stations and cutting its rates bill. Ministers are also examining changes to the new electricity trading arrangements which have cut wholesale prices to less than British Energy's cost of production, making it impossible for the company to make a profit in the UK.

The company's only profit-making operations are in the US and Canada. But last night British Energy disclosed that it was exploring the sale of its 50 per cent stake in Amergen, a joint-venture company which took over part of the Three Mile Island plant in the US, the scene of a near-disastrous meltdown in the mid-1970s.

Amergen contributed £30m to £40m of profit last year. The owner of the other 50 per cent share, Exelon, is selling its stake.

British Energy's shock announcement came after the chief executive of BNFL said the crisis at the company had made it more difficult to promote the case for a new generation of reactors.

Norman Askew said British Energy's predicament made it more difficult to foster public confidence in the industry and convince ministers of the need for a £10bn programme to construct 10 new stations to replace the country's ageing Magnox and AGR reactors.