§ Mr. Bill WalkerTo ask the Secretary of State for Energy whether he has yet fully assessed the financial implications of the squeeze on British Coal's trading margins discussed in the recent Public Expenditure White Paper, Cm. 606.
§ Mr. ParkinsonThe projections set out in Cm. 606 assumed breakeven in 1988–89 and steadily growing profitability thereafter. External finance requirements were set as follows:480W
£ million 1988–89 750 1989–90 560 1990–91 385 1991–92 273 However, subsequent negotiations with the CEGB and other major customers have resulted in a price freeze. This, together with the effect of higher cost inflation than expected, loss of output due both to geological difficulties and to industrial relations problems, mainly in Yorkshire, and the reduction in sales caused by the recent mild weather have caused the industry's trading position to deteriorate. As a consequence the corporation's operating profit in 1988–89 is likely to be reduced by some £50 million to about £450 million.
The corporation is responding firmly to these pressures by accelerating the restructuring of its operations into 1988–89 and the first half of 1989–90, by shedding unprofitable business in non-core markets, and by further reduction of its capital requirements over the period to 1991–92. While these actions should lead to a more profitable industry in the future, there is nevertheless an adverse short-term effect on the corporation's bottom line result because of additional restructuring costs and terminal depreciation. This together with the lower operating profits and a higher interest charge will lead to an overall loss for 1988–89 of around £100 million. The adverse market factors which have affected operating profit and the bottom line in the current year will have an even greater effect on British Coal's outlook for 1989–90. The industry is planning at least to sustain the level of operating profit in 1989–90; however, after taking account of significantly higher restructuring and terminal depreciation costs, and interest charges, a further overall loss is expected.
The corporation's external finance requirements are now projected as follows:
£ million 1988–89 850 1989–90 720 1990–91 335 1991–92 223 I am accordingly raising the corporation's external financing limits for 1988–89 and 1989–90 to £850 million and £720 million respectively. These increases will be charged to the reserve and will not therefore add to the planned total of public expenditure. The capital allocations for 1988–89 and 1989–90 are being reduced from £650 million and £575 million to £600 million and £550 million respectively. British Coal's temporary borrowing limit is being increased from £1,800 million to £2,050 million immediately and further increased to £2,500 million from the beginning of 1989–90. A Supplementary Estimate for additional voted loans to meet the extra financing requirements in 1988–89 will shortly be laid before the House.