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

200,000 Automatic Trade buy at 7.95 pence.

First AT trade today, need more AT buys to provide stimulus to the price.

Price 7.75-8.00 pence. More AT buys may be on the horizon at 8 pence.

The 2 trades for 1,500,000 each are a rollover which bodes very well for BGY as they obviously think it has a lot higher to climb.

A rollover trade is executed when someone has bought on, say, a T10 (10 working days credit) and then wants to extend that i.e. delay paying for the shares. To do that they arrange to "sell" and "buy back" the shares for a small premium and then they have another, say, 10 working days to cough up for them - it is done to extend the credit in the hope of being able to sell at a profit before the settlement date. You will note the small price differential between the two trades of 1.5 million of 0.04p which equates to a charge of 600 for the privelage of doing the rollover.

183,000 AT buy at 8 pence followed by a 250,000 ordinary buy at 8 pence.

Price 7.85-8.10 pence.

7.9-8.0 pence, lots of AT buys gone through at 8 pence.

Price 8.0-8.15 pence. The 250,000 and 140,000 at 8 pence are buys, appeared in the sell column.

The blue line has nearly fully crossed the green line on the MACD indicator. Bodes well.

Online spread 8.0-8.15 pence. A 0.1 pence premium on the bid all morning today.

Getting interesting now, 2*250,000 buys reported at 8.1 pence. Lots of AT buys coming through.

Price stable at 7.90-8.09 pence. Trying to push through pass 8 pence.

hiya suehelen, i bet your`re gutted that black rock didnt go anywhere after you paid 2.25 and can only get 1.75, a 500 loss in two days, ouch!!!! i see you have found BGY to ramp now!!

I am and will continue to hold BLR for the medium/long term. It will rise substantially in the coming months. I am allowed to hold more than one stock and spread my eggs hence I have purchased some in BGY as well.

If you would like to know then I am holding BGY, AFG, BLR, MDW at this moment in time.

I will let you work out the profits as you're so keen on doing my sums for me.

Order book is thin this afternoon hence the slight pullback on the bid price. Offer price has remained around 8 pence with the price now at 7.76-7.99 pence.

sue helen did you sell your cms shares as well after ramping them or do you still hold them?

Hi windys, I did state on the thread when I had sold them which was few months ago. I did not ramp otheriwse I would have sold them at around 20 pence but the expected news which I was expecting did come through as you would agree but nonetheless there hasn't been any news on the TDI front hence I sold out in January. This was also because there have been so many better plays out there in the last couple of months.

I am still interested in CWV and will re-assess my position around the time when the results are to be released.

You have to be fair, I did mention them first at 6.5 pence to buy.

Best Wishes.

Price approaching close at 7.81-8.0 pence. The blue line looks like going over the green line on the MACD indicator tomorrow morning which is a strong buy sign.

110,000 buy reported at 8 pence after close.

Price adjusted to 7.9-8.0 pence.

Investtech Analysis:

Positive Candidate (Short term) - Mar 3, 2004
Has risen 99% since the bottom on 17 Dec 2003 at 4.03. Shows a strong development within a rising trend channel. A further positive development is indicated, and there is support against the floor of the trend channel. The stock has support at p 6.20 and resistance at p 10.20. High risk with a difference between the lowest and the highest price of an average month of 130%.