BRITISH ENERGY, the stricken nuclear generator responsible for supplying a fifth of the UK’s electricity, still faces the threat of administration, even though creditors agreed at the eleventh hour to a £2 billion debt-for-equity swap.

Patricia Hewitt, the Trade and Industry Secretary, has warned British Energy that it is not out of the woods yet despite its creditors signing up to an agreement yesterday that gives them 97.5 per cent of the company.

Ms Hewitt told British Energy yesterday that the Government will pull the plug if ministers are not certain that it is viable, or if the European Commission blocks state help for the company. The Commission has begun an investigation into whether the rescue plan constitutes illegal state aid.

Administrators from KPMG will remain on standby to take over at British Energy until September 2004, by which time the Commission will have decided whether or not to grant approval for a rescue.

Ms Hewitt has made sure that she can buy back British Energy’s generators for just £1 each, if the company’s financial position deteriorates again and it becomes insolvent.

She said: “If any of the restructuring conditions are not met the Government has contingency plans ready for the administration of the company.”

If the restructuring plan is not carried out, the running of the nuclear power plants will be handed over to the administrators.

The restructuring has been agreed despite a worsening financial position at the nuclear generator, which was forced to draw down £84 million of its government-provided overdraft facility last month. That represents a sharp rise on the £13 million it drew down in August.

Under yesterday’s deal, which was fiercely contested by bondholders, the Government is continuing to underwrite British Energy with a £200 million overdraft facility until the end of September 2004. A spokesman for British Energy said there was no plan to ask the Government to increase that facility.

The Government will also fund British Energy’s nuclear clean-up liabilities and has forced BNFL, a government agency, to accept a lower price for its reprocessing contracts with British Energy.

Banks which funded British Energy’s coal-fired Eggborough power station have also accepted a deal that will see them swap £640 million of debt for the equivalent of £150 million of new bonds. The banks can acquire Eggborough in 2010 for a £104 million break fee. Credit agencies said bonds to be issued by the generator to raise new debt would get nothing above a “speculative” rating.

Even if the company recovers, there will be no dividend payout until 2005 at the earliest. Even then, dividends are likely to be small, since British Energy has agreed to pay 65 per cent of its free cashflow into a nuclear liabilities fund that is being set up.

Mike Alexander, chief executive of the generator, said that the formal agreement would allow management to focus on improving the operational performance of the company.