Chairman's Address 2008
Sir Adrian Montague CBE, Chairman of British Energy Group plc, provided an overview to shareholders of the Company's performance in the financial year ended 31 March 2008 together with a Company update, as follows:
Output from our nuclear stations last year was disappointing. Our operating performance was significantly challenged by the BCU issue at Hartlepool and Heysham 1, which, together with the ongoing effect of boiler temperature limits at Hinkley Point B and Hunterston B, gave rise to significant losses of output.
Our financial performance for the year was lower than last year, resulting from lower nuclear output. Adjusted Earnings Before Interest, Tax, Depreciation and Amortisation declined from approximately £1.2bn to £882m, principally reflecting a lower realised price and higher unit operating costs of the business.
However, these large loss events mask the continued improvement we have seen in many of our underlying operating metrics, notably the record low level of small generation losses and the strong and sustained safety and environmental performance achieved across the fleet. These improvements are a reflection of the dedication of our employees and the importance they attach to our culture of nuclear professionalism.
Sizewell B, our Pressurised Water Reactor, is achieving world class standards, having operated continuously for 516 days between statutory outages – a best ever run for the station. Eggborough, our coal-fired power station, also had a good year, producing output of 8.1TWh. Eggborough provides flexible generation, and we continue to optimise its running against changing power, coal and carbon prices, and by managing the relevant environmental constraints.
During the year we returned to service all four units at Hinkley Point B and Hunterston B following boiler inspections and repairs. We also successfully completed a planned boiler inspection and repair outage at Hunterston B Reactor 3 in May 2008. Following this work, we were able to raise the power level on this unit from 59% to approximately 70%. This was the first major inspection following a period of operation since the shutdown in 2006. We are currently undertaking a planned statutory outage at Hunterston B Reactor 4 and a planned graphite core inspection and maintenance outage at Hinkley Point B Reactor 3, while the other two reactors at these stations are operating at around 70% load, which is the load currently achievable within our target temperature limits.
During the year we announced the decision to extend the accounting lives of Hinkley Point B and Hunterston B by a further five years to 2016, and we will consider the potential for further life extensions across the fleet in due course.
We have also made considerable progress towards returning Hartlepool and Heysham 1 to service, following identification of the Boiler Closure Unit issue last October. An engineered solution to the issue has been developed. This project has involved the completion of over 9,500 radiographs on the 32 BCUs and more than 1 million man hours of work to this point. We are now undertaking final visual inspections before fitting the solution – a combination of circumferential bands and secondary restraints, together with enhanced cooling and instrumentation systems.
The Regulator has had full view of the project and we continue to work with them to ensure the smooth return to service of all four units. We are approaching this project safely and carefully, to our own exacting standards, focusing on returning the units to service as soon as possible. This is a complex project involving many engineering disciplines, a variety of contract partners and bespoke technical solutions, and we now anticipate, given this complexity, that there will be some slippage in our programme. Taking into account the work that remains to be completed in the final stages of the project, we now expect the units to return to service in the third quarter of this financial year.
Initial estimates for repair and return to service costs were for £50m in this financial year. We now expect that as a result of the number of work hours incurred and the complexity of delivering the engineering solution, the final costs will be significantly higher than this initial estimate. We will give a further update on costs in our Quarter 1 results on 13 August 2008.
We are currently undertaking planned outage work on both units at Dungeness B. As we have previously advised, refuelling operations have been extended since September 2006, following identification of an issue with certain welds within the fuel plug units. We have developed, installed and commissioned a crimping machine to mitigate the issue. A safety case has now been approved by the Regulator, which allows us to proceed with crimping of the plug units and refuelling of the reactors.
Much has therefore been achieved during the past year, reflecting hard work from our staff and contract partners. However we can expect an even busier year as we look ahead to 2008/09. Delivery of the BCU project remains the most immediate task. In addition, we have the largest number of planned outages and one of the largest programmes of investment in the Company’s history. In total, we expect to invest between £280m and £305m this year excluding BCU costs.
Turning now to the wider market environment. As I am sure you will be only too well aware, commodity prices have risen to unprecedented levels in recent months. Baseload power prices have increased by over 45% in the last 3 months alone. Crude oil has reached over $140 per barrel, and coal is currently trading at over $200 per tonne. During the financial year to date, we have been successful in continuing to lock in forward sales of electricity, principally in respect of financial years 2010/11 and beyond, and have achieved this at substantially higher prices compared to last year. It will, however, take time before we see these prices coming through in our realised price for the business. In the shorter term, our Trading and Sales team continue their careful management of the fixed price trading book, in particular taking into account the expected timing of the return to service of the BCUs.
There has been much media coverage of higher prices seen by domestic consumers. I should remind you that British Energy sells into the wholesale market and not directly to domestic customers. Furthermore, the Company is restricted from selling at below market prices under the terms of the Restructuring agreements.
Let me now turn to new nuclear. Government has made the case for nuclear to play a role within a balanced energy policy. We welcome the steps being taken by Government and their leadership to remove barriers to industry taking forward new nuclear projects.
We continue to make prudent investments to secure a pivotal role in nuclear new build, maximising the value of our sites and the contribution from our experienced staff. We have a wealth of information to draw upon from previous planning applications at Hinkley Point and Sizewell, and we have been gathering further environmental and marine data for over a year so that we can be in a position to make rapid progress in submitting consent applications. We have recently held a series of public meetings with the communities around Sizewell about our proposals for a twin nuclear unit there, and we are scheduling similar meetings for our other lead sites at Hinkley Point, Dungeness and Bradwell.
Given the scale of interest in potential new build opportunities, and the significant investment required to construct a new fleet, the Board has engaged in discussions with a number of interested parties. On 9 June 2008 we indicated the Board’s clear view that in the prevailing circumstances, none of the proposals put forward by that date represented fair value for shareholders as they failed to take proper account of the forward price of electricity and the value of the Company’s sites and people in the context of nuclear new build. Our dialogue is therefore continuing and a further announcement will be made in due course, however I am sure you will understand that we will not be able to discuss the process in further detail today.
Finally, I turn to dividends. A priority for the Company is to distribute to shareholders as much of the Company’s cash flows as prudently possible. Therefore, in accordance with our declared dividend policy, we have paid dividends totalling 28.1p per share in respect of the year ended 31 March 2007. I am now pleased to confirm that the Board recommends the payment of a base dividend of 13.6 pence per share in respect of the year ended 31 March 2008, subject to your approval at this Annual General Meeting.
These are interesting times both for British Energy and for the wider nuclear industry. Our objectives are clear: to maximise value in the existing fleet, through careful stewardship and investment, while positioning ourselves for a pivotal role in the new build programme.
