Shareholder Executive

British Energy

Purpose

British Energy's (BE) principal activities are the generation, sale and trading of electricity. It owns and operates eight nuclear and one coal-fired power station in the UK.

Legal Status and Ownership

A public limited company listed on the London Stock Exchange. No single shareholder owns more than 15% of the issued share capital. The Government does not own any shares, other than special shares giving certain administrative rights and exercisable only on grounds of national security. In 2004 BE was classified to the public sector by the Office of National Statistics for the purpose of the national accounts.

Description of Rights

As a result of BE's solvent restructuring, completed in 2005, the Government underwrote certain of its liabilities and took an offsetting economic stake in the business. In particular, the Nuclear Liabilities Fund (NLF) has a right to receive a proportion of BE's annual adjusted free cash flow (the 'cash sweep', which is convertible into equity). The NLF also holds £225m of BE bonds.

The restructuring agreements give Government certain controls over the company, which are intended to ensure that Government's exposure to BE's liabilities is minimised, and to provide mechanisms for financial oversight of the company.

Government's Objectives

BE is managed by its board of directors. The Shareholder Executive monitors BE's performance and advises the Secretary of State on the NLF's holdings. The Government's objectives are that:

• BE is a successful and profitable generator, subject to the overriding requirements of nuclear safety, thereby contributing to the UK's security of electricity supplies
• the contribution BE makes to its nuclear liabilities is maximised, consistent with the restructuring agreements
• the NLF's stake in the company is managed in a way that ensures best value and is consistent with the Government's wider energy policy objectives.

Financial Performance

£m	2008	2007	2006
Turnover	2,811	2,999	2,593
Operating Profit	507	794	635
Profit/(Loss) for the year	335	465	430
Net Cash flow	(73)	463	403
Net Operating Assets	2,720	2,430	2,577
RONA1	18.6%	32.7%	24.6%
Shareholders' Funds	4,982	2,647	2,101
Dividends	140	-	-

¹ Net operating assets in 2008 excludes Conversion Assets of £2.2bn, relating to the conversion and sale by the NLF of part of its interest in BE. For comparative purposes, if this figure is included, the RONA decreases to 10.4%.

Commentary

BE's total output for the year remained stable at 58.4TWh, but nuclear output was slightly lower than last year at 50.3TWh. This was mostly due to problems with the Boiler Closure Units at Hartlepool and Heysham 1. BE stated in its May preliminary results that both stations should be operational over the course of financial year 2008-09. The company also obtained five year life extensions for Hinkley Point B and Hunterston B, enabling them to continue operating to 2016.

BE's need to buy back power in the market, together with power price movements, meant that the realised price for the year reduced from £44.2/MWh in 2006-07 to £40.7/MWh in 2007-08. BE's operating profit was down 28% for the year to £507m. BE paid a base dividend of 13.6p per share in July 2007, and an additional dividend of 14.5p per share in April 2008. The Board also recommended that a base dividend of 13.6p per share be paid in respect of the financial year 2007-08 in July 2008. The Government received a cash sweep payment of £102m for financial year 2007-08 in July 2008.

In June 2007, the Government converted and sold part of its cash sweep interest in BE, reducing its stake in the company from 64% to 36%, and raising proceeds of £2.34bn for the NLF to pay for the costs of decommissioning BE's nuclear power stations.

In March 2008 BE announced that it was in discussions with interested parties about a potential takeover of the company. The Government issued a statement that it was monitoring developments closely and would consider its position in relation to any proposal in the public interest, having regard to its objectives in relation to energy policy and its obligations to the taxpayer.

In August 2007 Robert Walvis replaced Clare Spottiswoode as a Non-Executive Director. Her role as Deputy Chair was taken by Ian Harley, who was already on the BE Board.