Monday, March 27, 2006

Nuke Liability

Here's a good one.

You're a director of a company that's fast heading for the rocks. You've tried raising a few hundred mill from the bond market, but failed. You've considered borrowing from the banks, but decided you might end up in clink because you know there isn't a cat's chance of ever repaying. Who ya gonna call?

Well, you could call the administrators. But then the company would get sold or wound up, with all the attendant unpleasantness. So first...why not try 020 7215 5000? That's what the directors of British Energy did, and they immediately got a loan of £410m.

The National Audit Office report on what happened next makes interesting reading. The DTI not only baled out the company- which nobody else would have done- but it then led a financial restructuring that left taxpayers holding a £5.3bn liability, but with a sizeable de-risked ownership stake still in the hands of the original shareholders and creditors.

As you will know, British Energy is the nuclear power producer that hit the rocks in September 2002 and was baled out by the taxpayer. But unlike the notorious Railtrack confiscation, here a significant slice of the assets was left with the existing owners. The creditors received "new bonds and 97.5 per cent of the share capital in the restructured company", while the remaining 2.5 per cent was left with the original shareholders. Even better, neither group was any longer lumbered with the £5.3bn liabilities- ie the estimated cost of dealing with all that nuclear waste and eventual plant decommissioning. That was all parcelled up and pushed over to the taxpayer.

Both shareholders and creditors have done rather well. On the face of it, an administration in 2002 would have been unlikely to realise much- if any- value for them: as the NAO reports, "given the prevailing low wholesale electricity prices and the scale of British Energy’s nuclear liabilities no credible and qualified purchaser existed". But since then, energy prices have soared, taking the BE share price with them.

As at today's prices, the original shareholders' residual stake is worth £100m-plus, while the creditors' stake has surged through £4bn- not bad when you consider their pre-restructuring stake (all debt) had a nominal value of only £834m (and as at September 2002, it probably wasn't actually worth anything like that).

And the taxpayer? Well, we did get a 65% slice of BE's future net revenues, which is convertible into shares. And fair play- as those revenues have ballooned with higher energy prices, so the value of our stake has shot up to £2.5bn. But let's be clear- that's still less than all the other investors combined, and we're the only ones holding the nuke risk.

Once again, whether through political pressure, incompetence, or commercial naivety, a government department has failed to secure the financial interests of taxpayers.

PS The NAO report also reminds us of DTI's incompetence in the run-up to BE's 2002 problems. Specifically, that they "had failed to put in place any proper arrangements to manage the risk to the taxpayer arising from British Energy’s nuclear liabilities, and had failed to establish a credible overview of British Energy’s deteriorating financial position and did little more than gather information." Which is virtually identical to NAO's recent critique of DTI conduct during the MG-Rover fiasco: they've clearly learned nothing.

PPS The report also once again questions the process by which DTI appointed and remunerated its advisors. Overall they paid out £28m. We will be taking a closer look at this issue.

PPPS For those that don't know, the £5.3bn nuke liability for BE is only one small slice of the total taxpayer liability for clearing up Britain's various nuclear waste piles. The last official estimate was £48bn, so goodness knows what the real total is. £100bn? £200bn? And none of it is included in Gordo's official total for National Debt.


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