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Dept of Trade and Industry

Answer

Mr. Whittingdale: To ask the President of the Board of Trade if he will make a statement on the financial position of British Energy, and on the financial and commercial position of Magnox Electric, following the restructuring of Nuclear Electric on 31 March.[29058] Mr. Eggar: On 31 March 1996, Nuclear Electric plc and Scottish Nuclear Ltd. were restructured to form one group of companies which owns the advanced gas-cooled reactor/pressurised water reactor stations and their associated assets and liabilities--British Energy plc and its subsidiaries Nuclear Electric Ltd. and Scottish Nuclear Ltd. (British Energy) and one company which owns the magnox stations and their associated assets and liabilities--Nuclear Electric plc, which was renamed Magnox Electric plc ("Magnox") on 1 April 1996. In due course, British Energy and Magnox will be publishing their financial statements for the period ended 31 March 1996. These will give details of the companies' financial results for the period and of their financial positions at that date. In addition, the prospectus for the sale of British Energy will give further information on its activities. The companies intend to use a 3 per cent. real discount rate when calculating their nuclear liabilities for inclusion in their financial statements. A rate of 2 per cent. real was used in previous years. The change is consistent with recent United Kingdom accounting proposals and has been approved by the auditors of both companies. British Energy will be taking into the private sector the liabilities associated with its assets, including--using a 3 per cent. real discount rate--nuclear liabilities of approximately £3.7 billion for past use of fuel and for decommissioning. In addition, British Energy will owe debt, and has inherited a debt due from Scottish Nuclear Ltd. to the Government which will be repaid before privatisation. Whenever financial statements are produced the directors must consider the carrying value of the company's fixed assets as recorded in the accounting records. The Companies Act 1985 requires fixed assets as recorded int he accounting records. The Companies Act 1985 requires fixed assets to be written down if there has been a permanent diminution in value. This is a technical accounting matter and is purely an entry in the books of account. No cash changes hands as a result of such a write-down. It will have no effect on the cash generated by the stations nor will it reduce the proceeds of sale-- the company is expected to be valued by investors on the basis of its dividends and cash flow. Asset write-downs by British Energy are a matter for the board of directors and the company's auditors. The board has informed me, ahead of the publication of its annual financial statements, of its provisional decision to write down the carrying value of their fixed assets. As a result, the fixed assets will stand in the balance sheet of British Energy at approximately £5 billion. There are two main elements in the change. First, a decision was taken not to build any new UK nuclear power stations at present and accordingly the directors of Nuclear Electric plc decided to write-off, in the accounting records, the first-of-a-kind costs of about £0.8 billion, incurred in building the UK's first PWR reactor, Sizewell B. This accounting write-off has been agreed with the company's auditors. In addition, British Energy's directors' view of the long term economic value of the stations differs from the views adopted when the 31 March 1995 accounts were finalised: in particular, the planned reduction in levels of payments under the primary nuclear contract and the ending of the nuclear energy agreement premium following privatisation; and lower than previous expectations of future electricity pool prices. I understand that, having considered these factors, the board of British Energy has concluded, with the agreement of its auditors, that there has been a permanent diminution in the value of certain nuclear fixed assets of about £1.2 billion. It will, therefore, as required by the Companies Act 1985, reduce the carrying value of the fixed assets in its accounting records. In return for the disposal of the assets and liabilities related to the AGR/PWR stations in England and Wales, and the assumption of assets and liabilities related to the Hunterston A magnox station in Scotland, Magnox has received a financial undertaking from the Government. No payments are to be made under the undertaking before Magnox exhausts its other sources of funding, including cash and investments currently held--£3.0 billion at 31 March 1996--income from electricity generation, and outstanding fossil fuel levy income that is due. In recent years the nuclear generators have made significant improvements in their understanding and control of decommissioning costs and other nuclear liabilities; and the active management of Magnox Electric's costs and integration with BNFL should allow it to reduce its liabilities even further. Payments will be made under the undertaking only to the extent they are needed to enable Magnox to meet its financial obligations, including reprocessing, waste management and decommissioning costs, as those obligations fall due. The face value of the undertaking is initially capped at £3.8 billion at 31 March 1996. I have placed a copy of the undertaking in the Library of each House. Assurances on financial obligations given to Nuclear Electric plc in March 1990 by the then Secretary of State for Energy will remain in force for Magnox. The Government are keen to secure the advantages of integrating Magnox into BNFL and will proceed with the process of integration after the privatisation of British Energy. Consultation with the Health and Safety Executive, Environment agencies, and others over the integration will begin in due course. In addition, the Government plan to free Magnox from some of the restrictions on contracting originally placed on Nuclear Electric plc--in particular the requirement to offer electricity sale contracts by open tender. The Government intend that Magnox should be required to act in a commercial manner, and that it should be a full competitor in the electricity market.

Secondary information

Type

Written question

Reference

29058; 277 c294-6W

Session

1995-96

Subjects

Accountancy Company accounts British Energy Finance Nuclear power Scottish Nuclear Nuclear Electric Magnox Electric