Buy British Energy
argues Evil Knievil of www.t1ps.com

British Energy has paid for many a lunch over the past couple of years. I have been shorting it aggressively Convinced that it was going bust I regarded it as the quickest way of making money since Cherie Blair and her ghastly husband turned freeloading into an art form. But, while the liar-in-chief and the wicked witch continue will continue to carry on sponging forever, other things have changed and I am now aggressively long of British Energy to the tune of five million shares. I admit my timing was not perfect - I am only running at break-even at this stage but I am expecting to trouser it in a big way over the next six months. In putting together this bull case I am most indebted to the publication Utilities Week - a must read in every household and whose words I have cribbed liberally.

The Bail Out

British Energy runs nuclear power stations. As such it has high fixed costs and always has a potential liability for decommissioning its plants when they come to the end of their useful lives. Its problems started when a slump in electricity prices meant that it was not covering those fixed costs which exposed the fact that its borrowings were unsupportable. It was this that allowed me to profit so greatly on the short tack.

Then the Government stepped in with a "rescue" plan. Surprisingly for a body which shows an ability to waste taxpayers' cash of unmatched proportions this did not involve a huge bail out. Instead it involves the Government, bond-holders, BNFL, other creditors and an array of vastly overpaid parasites (i.e. advisors on a success only fee) reconstructing the business such that equity holders will be diluted to obliteration. This motley crew are determined that their proposed reconstruction goes ahead and the board seems happy to play ball but any such proposal must be agreed by shareholders and I think that the times they are a changin'.

If the reconstruction proceeds, existing shareholders will be diluted to 2.5% of the equity plus warrants to buy a further 5%. Since 65% of free cash flow will be diverted to the Nuclear Liabilities Fund (i.e. decommissioning), this 7.5% becomes an economic interest of just 2.6%. This is clearly not an attractive proposition and if it goes through the shares, at 7.65p may be overvalued. However, I think that even on the current reconstruction terms, 15p-25p will prove to be the eventual outturn.

In the interim results, announced in December, and again with the latest quarterlies British Energy warned shareholders that if they did not support the proposed reconstruction by approving either a scheme of arrangement or the disposal of the company, the shares would be de-listed and the reconstruction completed anyway. But if it can be shown that the company is a going concern without the reconstruction, Turkey's won't vote for Christmas and shareholders (who have to approve any deal) will block it.

The Upside from a No Vote

The disposal of British Energy's 50% interest in Amergen, netted 160 million pounds. This repaid the 94 million owed to the Government so removing its ability to force insolvency by calling in its loan. It leaves three groups of creditors to be satisfied from the remaining 66 million pounds, the 20 million pounds of other cash, any cash flow from trading since 12th December and any cash that can be released from the 359 million pounds tied up in trading collateral.

Group one are the bondholders, owed 408 million. The 2003 bonds have matured, but British Energy can probably pay the 110 million pounds owed to the holders from its cash. The 2006 and 2016 bonds may be in default even though their interest continues to be paid. They are very generously treated in the proposed reconstruction, as a result of which the bonds are trading well above par. They may have the right to put British Energy into receivership if the reconstruction is voted down, but it would not be in their interest to do so. In a liquidation, they would receive very little, whereas, if British Energy continues to trade, they will continue to receive interest and can be repaid in full on redemption.

The second group of creditors are the Banks who lent 475 million pounds to finance the purchase of the 2000 MW coal-fired Eggborough power station. They are being offered 150 million pounds in new bonds and 14% of the new shares being issued, worth some 150 million pounds at 5p each. The value of Eggborough has risen significantly in the last year. It is half the size of the Drax power station, and, like Drax, is being fitted with a Flue Gas Desulphurisation plant, due for completion this year. In December, Drax's creditors rejected an offer by International Power to buy up to 36% of its equity and 15% of its debt. Since then, the value of Drax's debt in the secondary market has continued to rise, and Drax is now valued in the market at about 1.25 billion pounds . This suggests that Eggborough is worth closer to 600 million pounds than the 300 million pounds it is valued at in the secondary debt market. If the reconstruction fails, the Eggborough banks will be significantly better off whether or not the power station is sold.

The third group of creditors are the three parties claiming 316 million pounds in relation to onerous trading contracts. Two of the contracts, accounting for half the total, were terminated in 2003, making their claims payable. The third contract, with Teeside Power, may be renegotiable. The sharp rise in electricity prices makes this contract to buy high-priced electricity no longer a financial liability, but 158 million pounds must still be found to satisfy the other two.



In the short term, British Energy would struggle to satisfy these creditors, but given time, the prospects look better. 75 million pounds was absorbed into working capital in the first half of 2003/4, which may be reversible. The Board is "exploring initiatives to reduce the demand for trading collateral," which should diminish as the forward sales run out. Halving the collateral would release 180 million pounds.

And Critically...

The strength of electricity prices means that British Energy will be highly cash-generative when it can take advantage of current prices, and only half of output for the year to 31st March 2005 has been sold forward at low prices. Implementation of the Emission Trading Scheme, due to start on January 1st, 2005, could add a further 10% to electricity prices, increasing profits and cash flow by 160 million pounds per annum. What British Energy's shareholders need is time.

Fortunately, the bureaucracy and delays of the European Union are working in our favour. The EU is not expected to reach a decision on the restructuring until the middle of 2004, delaying a shareholder vote until the Autumn. With luck, if it runs true to form the EU will take longer, postponing the vote until 2005. This gives more time for cash flow to build up and for the prospects to look more secure. It also gives larger shareholders time to prepare an alternative plan. This is necessary because British Energy is firmly committed to the restructuring. Shareholders cannot look to their Board to safeguard their interests and indeed should think about handing out P45s liberally to the top table.

While negotiating with the creditors is the short-term priority of such a plan, there are other considerations. If the reconstruction is voted down, it is quite possible that the government will force the reconstruction through by Act of Parliament, leaving shareholders with nothing. But does this sordid little Government really want to repeat its Railtrack fiasco with an election looming?

The key to this gamble - and I admit it is such - is that electricity prices are increasing which makes a big difference to cashflow. If shareholders are given time to work out an alternative plan, British Energy will still need to raise cash via a rights issue but it is not ludicrous to suggest that current investors will be left owning 65% of the company rather than 2.5%. In other words the shares would be worth 150p each and possibly rather more.

There are obvious risks. The board might steamroller shareholders into accepting a deal that is patently not in the interests of shareholders. Electricity prices might fall. Big shareholders might cave in cravenly. The EU might whizz through approval giving shareholders no time to organise. Okay, there is no risk of the EU being efficient that was my little joke. But there are risks. If I am wrong these shares could conceivably be overvalued but could even in this scenario head up towards 20p. But if I am right 150p here we come. On a risk reward basis that looks good to me.

Key Data

EPIC: BGY
NMS: 150,000
Market Cap: 47 million pounds
Market: Full
Spread: 7.6-7.7p

SUE,

No one who have made good profits from your research are paying you for the time you put in,so you are not obliged to anyone after all you do have a life outside of this board.Can you tell me what % stop loss you use for say a share like CDN, my feeling on BGY which i bought at 11.50p is to sell at 15-20p before the 16th june.

Technical Analysis (TA)

The volatily risk is extreme with BGY, easily the most volatile stock on the LSE. Caution : Hence my TA analysis may not prove to be spot on.

1. Support at 11.70 pence which is the floor of the trend channel
2. Relative Strength Index (RSI) is at 74 which is technicallly overbought - though RSI could easily rise to 85 with another 10% early next week before a short term reversal. With the RSI already overbought they maybe another 10% maximum rise on these for the time then being then a short term reversal. May start to rise again thereafter...or traders may decide to take profits as RSI is in the overbougt position not heavily overbought though even so...
3. Next Resistance points at 16.5 and 17.5 pence
4. A continuation of the rise depends on Automatic Traders (AT) buyers continuing to put buy trades through on the order book. Generally only AT buys moves this stock substantially. Ordinary buy trades are retail investors buying and at most times do not have an impact on the price.
5. MACD is bullish, with the blue line above the green line
6. There is a big negative signal on the charts....the price is currently above the upper bollinger band which indicates a potential reaction back down to below 13 pence...In addition, a Harami Cross has appeared on the candlesticks after friday's close which could indicate a reversal of the bullish trend...in that some weakness in the price may be forthcoming in the short term. For the short term, the price may come down with the harami cross appearing and the price being above the upper bollinger band. For the first time in the last month, the price has got way ahead of itself in that it has crossed the upper bollinger band line.

These are my views from my TA expertise, my TA may prove to be correct or wrong...

GoodLuck !!!

Sue, Thanks you very much. Have a good weekend.

As always after my own analysis I use TA tools for confirmation. In the case of the bollinger bands...I can confirm my TA is right in that there is a negative signal.

There are no buy signals on Best-Charts and 1 sell signal has appeared under Bollinger Bands.

You may see a short term reversal....

GoodLuck !!!

as always Sue Heln you help is much appreciated. Your fan xmortal here.

How TA can change in a flash:

The upper bollinger band has risen again today (which can be seen on the MoneyAM charts) hence the price has stayed stable....

evil bought another 500k

mayiguo - how do you know?

it's on t1ps.com's BB, you need to subscribe to read

The price has fallen because their was a negative signal on the charts which I reported about in my TA on Sunday (see my posts on saturday and sunday)...coupled with the RSI in an overbought position.

nowhere to go but down & down from here!!

Sue Helen. My knowledge/confidence in TA is not high , however with a volatile stock such as this its probably a very useful addition to the armoury. Can you recommend a good guide to understanding charts and do you use any allied software to assist your trading decisions. What is your view of the BE chart now? Incidentally do you have a view on the likelihood of a renegotiation of the restructuring to shareholders advantage?

Hi Fast Freddy...I have included everything you need to know on the restructuring in my post last Saturday. Will be very helpful to you if you read it. Read it twice if needed be...but do try to understand the permutations.

I will update you on the TA tomorrow evening....I'm out for most of the day tomorrow.

I managed to get my TA right in my post on Sunday post courtesy of analysing everything for an hour or two...I did point out to Xmortal and others that it was wrong off them to suggest 20 pence my Tuesday etc with this volatile stock....I will provide you an updated TA perspective tomorrow..Though on top of my head the price did break the support at 11.80 pence today which was not good news...which was followed by a drop to 11.30 pence but did climb back up to close around 11.70 pence...The price needs to get back up 11.80 pence as soon as possible for the rise to continue otherwise the price will form a horizontal development for a few sessions or drift down to 11.00 pence. There is some good support at 11.00 pence. AT Buyers will support the 11.00 pence price.

With regards to how I analyse my TA : I always analyse everything on the charts myself first...I know in my mind at what points the RSI becomes overbought, oversold etc...then what I do is use some charting tools though they are not always reliable. Hence I use 3 or 4 charting web sites for confirmation of my analysis...though my final decision does rest with the TA that I have done.

Some websites in preference order:

www.bigcharts.com
www.best-charts.com
www.investtech.com
www.yahoo.co.uk/finance

PS. I am not a holder of this stock...I have posted this warning before...but if you are a holder of this stock then whatever you do just do not leave the screen throughout the trading session.

GoodLuck.

Further to my post last night Freddy...the price has rose today as duly thought it would as the price went up above the support at 11.80 pence early this morning. The level of 11.80 pence should provide some good support now in case of the price dropping back.

Europe thinks again on scrapping nuclear power
Fri 11 June, 2004 11:38


"Nuclear power has gone from being very peripheral to being taken seriously again."
Dieter Helm at Oxford University


By Stuart Penson

LONDON (Reuters) - Europe is finding it harder to rule out a future for nuclear power as governments face the need to tackle climate change without risking the future security of energy supplies.

Nuclear's ability to generate power round the clock without sending carbon dioxide into the atmosphere is testing the resolve to abandon a hugely expensive industry still tainted by the legacy of past disasters at Three Mile Island and Chernobyl.

Helping the industry's case are doubts that the current attempt by governments to spark a green power revolution by building hundreds of windfarms can deliver big enough cuts in CO2 or ensure that the lights stay on after existing reactors have shut down.

"Nuclear power has gone from being very peripheral to being taken seriously again," said Dieter Helm, a fellow in economics at Oxford University.

"The exclusive focus on renewables and energy efficiency in several social democratic governments in Europe is not delivering enough carbon savings to keep on track with the ambitious climate change targets."

Rising prices for fossil fuels and Europe's growing reliance on gas imported from outside the region have also encouraged policymakers to think again about phasing out nuclear, which has high initial capital costs but low production costs thereafter.

Industry sources say Britain is likely to conduct a serious reappraisal of nuclear power but because of the issue's sensitivity the question will not get a public airing until after a general election expected next year.

Britain put on hold its nuclear building programme with the completion in 1995 of the Sizewell B station in eastern England and is scheduled to close its last reactor in 2035.

A sharp drop in power prices recently forced the government to rescue privatised nuclear giant British Energy from bankruptcy, although prices have since recovered.

Despite the BE debacle ministers were careful to leave the door ajar to a new generation of reactors when they updated their thinking on energy policy earlier this year.

REACTORS GET CHEAPER

Analysts say the up-front costs of new reactors are dropping because they are smaller than earlier models.

"I think there is evidence beginning to build that the capital costs of nuclear plants will be substantially lower than in the past," said Philip Ruffles, vice president of The Royal Academy of Engineers in London. "Plants would be smaller, roughly half the physical size of current plants."

Crucial to the viability of new reactors would be the cost of capital and the length of time taken to build the plants, other analysts said.

Nuclear costs must include the management of waste, problems with which remains central to the argument of the industry's widespread opponents.

"The biggest problem for nuclear is the disposal of radioactive waste in a politically and publicly acceptable way," said Frank Barnaby, a nuclear security specialist at the independent Oxford Research Group.

Nuclear power is making headway in some countries. Finland is building a three-billion-euro reactor, its fifth. France, which already relies heavily on nuclear power, is pressing ahead with plans to build a prototype pressurised water reactor as it looks beyond the retirement of its existing plants.

Shifts in opinion are also evident in Sweden. A majority voted in 1980 to phase out atomic plants by 2010 but a recent Gallup poll showed more than 55 percent in favour of keeping existing plants.

The Swiss last year voted not to scrap nuclear power after the government argued it would be premature to shut down a cheap energy source that meets 40 percent of its power needs.

How long can this momentum go on for? Thinking about having some of these for the short term as it appears to be gathering strength. Anyone got any views for the next few weeks?

Results in the morning - already stated they are worth very very little - leave if I were you!

What a battering it took this morning, almost 18% down by 11am. It emerged unscathed and gained 0.80% by close. The bulls won over the bears...... I think today it demostrated that there are people who bet on the short term price. (upwards in my opinion) See 1 year charts.

There are investors who will believe BGY's shareholders can make. The results of today can be viewed as god news in my opinion. It will be good to see what Eveil Kneivel thinks of this and the performace BGY displayed today!!! Im holding and I think it has further to go.

Read below



LONDON (Reuters) - British Energy, the UK's biggest electricity producer, has reported a return to profit for 2004, although it says there is still uncertainty over a key restructuring deal.

British Energy BGY.L said on Thursday it made a post-tax profit, after exceptional items, of 234 million pounds for the year ending March 2004. In the previous year, it made a loss of 3.9 billion pounds.

Its earnings were boosted by lower production costs and a recovery in selling prices from a year ago.

British Energy, which produces around a fifth of the country's electricity, is surviving on a state loan after weak power prices pushed it towards insolvency.

It drew up a restructuring deal with creditors and the government last year that is set to favour bondholders and leave shareholders with little.

The European Commission has been scrutinising the deal to see if Britain's state aid to the company was illegal.

"Progress has been made towards the completion of the restructuring, but it still remains subject to a large number of significant uncertainties," British Energy said in a statement.

A source familiar with the matter has told Reuters that British Energy is expected to win European approval for its restructuring.

Shares in British Energy, once part of the FTSE 100 index and now just a penny stock, were down 4 percent at 12 pence in morning trade. At that price, the company has a stock market value of around 83 million pounds.

What a battering it took this morning, almost 18% down by 11am. It emerged unscathed and gained 0.80% by close. The bulls won over the bears...... I think today it demostrated that there are people who bet on the short term price. (upwards in my opinion) See 1 year charts.

There are investors who will believe BGY's shareholders can make. The results of today can be viewed as god news in my opinion. It will be good to see what Eveil Kneivel thinks of this and the performace BGY displayed today!!! Im holding and I think it has further to go.

Anybody got any further thoughts on british energy?, up to 13 bid today.....