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

The Daily Telegraph. 12/07/2004

FRESH HOPE FOR BRITISH ENERGY INVESTORS

Shareholders in British Energy have been thrown a lifeline by the Financial Services Authority, which has decided to close a loophole in its listing regulations that may scupper the current rescue plan for the company. British Energy, the UK's largest power producer, called in the government after its share price collapsed when it revealed its UK operations were losing five million pounds a week, due to trading conditions at that time. The debt for equity swap that ensued from the deal struck with its banks left investors with only 2.5 percent of the company. A spokesman for BE said: "We had to sign binding agreements in October. Without an agreement the company would have gone into administration and shareholders would have been left with no return at all."

Presumably they are talking about http://www.fsa.gov.uk/pubs/cp/cp04_08.pdf (see section 7)? Preumably if this was implemented in time then BE shareholders could vote against the restructuring in its present form without BE being able to delist the shares and go ahead anyway (as they have said they will).

RNS Number:2779A
British Energy PLC
29 June 2004

29 June 2004



British Energy plc

Notification of Interest in Shares pursuant to Part VI of the Companies Act 1985
(as amended)

In accordance with Part VI of the Companies Act 1985 (as amended), please note
that the interests of Cater Allen International Limited (CAIL) in the ordinary
shares of British Energy plc has increased to 18,749,022 ordinary shares or
3.02% of the issued share capital.

This holding has arisen from stock loan transactions done under the relevant
approved documentation as a principal trading member of the London Stock
Exchange.


This information is provided by RNS
The company news service from the London Stock Exchange
END

HOLBLGDLLUDGGSC

RNS Number:6973A
British Energy PLC
09 July 2004

9 July 2004


UK COMPANIES ACT 1985 - SECTIONS 198-203 - British Energy plc (the "Company")

This notification relates to issued common stock of the Company ("shares") and
is given in fulfilment of the obligations imposed by sections 198 to 203 of the
Companies Act 1985 (the "Act").

The Company was notified that as at close of business on 7 July 2004, The
Goldman Sachs Group, Inc ("GS Inc") of 85 Broad Street, New York, NY 10004, USA,
was interested, by attribution only, in a total of 22,771,077 shares.

Of these 22,771,077 shares:

* The interest in 14,965,852 shares arose from the interest held by Goldman,
Sachs & Co. ("GS&Co."), a direct subsidiary of GS Inc, acting as custodian.
These shares are, or will be, registered in the name of Goldman Sachs
Securities (Nominees), Limited.

* The interest in 4,380,225 shares arose from the interest held by GS&Co.
acting as custodian of 58,403 American Depositary Receipts ("ADRs"). These
ADRs are, or will be, held at the Depositary Trust Company of New York.

* The interest in 3,425,000 shares arose from a beneficial interest held by
Goldman Sachs International, a direct subsidiary of GS Inc, these shares
are, or will be, registered at CREST in account CREPTEMP.


This information is provided by RNS
The company news service from the London Stock Exchange
END

HOLBUGDRBSGGGSC

SueHelen, thank you for all your posts on this topic but I am confused about your last two. Presumably they explain why the price seems to be dropping despite the fact that there was some positive news for shareholders (ie: the FSA may change the listing rules and thus give shareholders some power to get a better deal in the restructuring). To a novice like me all this seems very strange, are you able to shed any light on this please?

RNS Number:9575A
British Energy PLC
16 July 2004


16 July 2004


UK COMPANIES ACT 1985 - SECTIONS 198-203 - British Energy plc (the "Company")


This notification relates to issued common stock of the Company ("shares") and
is given in fulfilment of the obligations imposed by sections 198 to 203 of the
Companies Act 1985 (the "Act").

We hereby notify you that as at close of business on 14 July 2004, The Goldman
Sachs Group, Inc ("GS Inc") of 85 Broad Street, New York, NY 10004, USA, was
interested, by attribution only, in a total of 25,786,077 shares.

Of these 25,786,077 shares:

* The interest in 14,965,852 shares arose from the interest held by Goldman,
Sachs & Co. ("GS&Co."), a direct subsidiary of GS Inc, acting as a
custodian. Theses shares are, or will be, registered in the name of Goldman
Sachs Securities (Nominees), Limited.
* The interest in 4,380,225 shares arose from the interest held by GS&Co.
acting as a custodian of 58,403 American Depositary Receipts ("ADRs").
These ADRs are, or will be, held at the Depositary Trust Company of New York
("DTC").
* The interest in 15,000 shares arose from a beneficial interest by GS&Co.
in 200 ADRs. These ADRs are, or will be, held at the DTC.
* The interest in 6,425,000 shares arose from a beneficial interest held by
Goldman Sachs International, a direct subsidiary of GS Inc, these shares
are, or will be, registered at CREST in CREPTEMP.


This information is provided by RNS
The company news service from the London Stock Exchange
END

Hi LordCake, the last 3 RNS are stating that Goldman Sachs have lately increased their stake in British Energy. In addition, Cater Allen International Limited (CAIL) have increased their stake too. The price is consolidating at 15 pence at the moment. See my previous posts, maybe a good idea to read the thread from the start. You should then be able to understand the scenario as the header title suggests : British Energy - One in a Lifetime Gamble Opportunity. (BGY)

PS. I do not have a position in British Energy.

Today's Daily Telegraph :

British Energy rose .5p to 16p on heavy turnover of 42m shares. Traders said the group is meeting institutions next week.

http://www.money.telegraph.co.uk/money/main.jhtml?menuId=243&menuItemId=2839&view=&grid=M3&targetRule=1&_DARGS=/money/Menu/SideMenuItemsFrag.jhtml.1_A&_DAV=-1

whats with all the notices?
me thinks there are anumber of stake builders in the frame!

On a bad day for the markets Goldmans sachs up thier holdings to 25.586m shares and then at 6.20pm on a friday evening the market is told Polygon fund have purchased 35m shares or 5.4% of BGY equity rather then buying its debts all bodes well for the long term future of british energy imho,coupled this with institutional presentations next week and the rumours about lunch dates with employies of Deutsche bank on thursday it all makes it all for very interesting the next few months.

There could be fireworks on Monday.
BGY are outperforming the market, lots of AT trades, no weakness even on bad days, all bodes well..... Sue Helen do you think you came out too early??

Hi transco, I sold my holding at 15.5 pence few months ago having bought them at 7.70 pence and I traded them a few times as well couple of months ago which I mentioned about on this thread at that moment in time. I won't be buying back in at these prices.

Released today :

British Energy under pressure to re-negotiate rescue terms with banks - report

LONDON (AFX) - British Energy PLC, the beleaguered nuclear electricity
generator, is under pressure from a leading shareholder to renegotiate rescue
terms signed last year with creditors, the Sunday Times reported.
The paper said hedge fund Polygon, which owns 5.6 pct of the stock, is
leading a campaign to force the company to ditch the plan and improve the terms
for shareholders.
The Sunday Times said while Polygon, which has secured the backing of
Invesco Perpetual -- the fund manager which owns a further 6 pct stake -- is
proposing bondholders are paid in full, shareholders would retain a 30 pct
stake.
The hedge fund is reportedly claiming the plan fails to recognise that
wholesale electricity prices have risen sharply since the agreement was reached
with creditors last October, thereby boosting the company's value.
However, a spokesman for British Energy pointed out that it had already
signed a binding agreement.
It said had it not done that deal at that time "the company would have faced
administration and shareholders would have had the likelihood of no return at
all".
British Energy, which supplies around 20 pct of the UK electricity market --
worth around 15 bln stg per year -- last November agreed a government-backed
rescue package which will see bondholders grabbing hold of 97.5 pct of its share
capital.
The company last month warned it still faces major hurdles if it is to stave
off bankruptcy despite returning to the black last year, a year after posting
one of the biggest losses in British corporate history.
Among those hurdles is the need for European Union approval of the rescue
plan which is being partially funded by the UK government.
rob.branch@afxnews.com

Hi Sue,

But do you wear the yellow because you are too scared to stay in.
I just dont see any downside personaly. Your decision to jump ship
looks a bit hasty and dare I say it a knee jerk reaction to press
comment! Great initial pick though it was.

If anyone wants to see the full Polygon press release you will find it at: http://www.polygoninv.com/

It includes a contact:

Tom Hampson,
+44(0)20 7153 1522/+44(0)7974 228852,
hampson@mcomgroup.com

where you can register your feedback on the Polygon proposals.

Hi transco, my reasons for not buying back in at these prices are stated in the newspaper article in the Guardian Newspaper today (see below and specially the statements from British Energy) : It could go either way from these prices. From when I intially bought in at 7.70 pence the price was only going to go up, now the risk/reward balance is different. I hope you understand all the different scenarios that I have posted about since the start of this thread.

Investors oppose BE rescue plan

Terry Macalister
Monday July 26, 2004
The Guardian

Government hopes of getting an easy ride over the restructuring of British Energy (BE) have been thrown into chaos with rebel shareholders agitating to throw out last year's restructuring plan.
With the European commission still to give the green light to last year's rescue plan, a hedge fund called Polygon and long-term BE investor Invesco Perpetual are together trying to unwind the October deal.

The two equity holders, with more than 11% of the nuclear generator, want to buyout bondholders with a cash offer of up to 800m and seize back 30% of the company.

The hedge fund said yesterday it was pressing to bring more shareholders on board and would vote against the BE proposals if there is any meeting to discuss delisting the group from the stock market.

There are also signs that the rebels are willing to try to turn the issue into a political case by arguing that the government stands to effectively win 65% control of future earnings while 230,000 small shareholders lose out with a tiny 2.5% of the new equity.

The dissident shareholders are aware that the government changed its mind over Rail track and eventually moved to offer them compensation.

But BE argues that it cannot unwind a binding restructuring plan that saved the firm from going into administration as wholesale power prices had collapsed.

Since this time wholesale electricity prices have increased dramatically but sources close to BE said trying to throw out an agreement signed in October when things were different was like "trying to bet on the Grand National while the race was already in progress".

The company will have to call an extraordinary general meeting for shareholders to formally agree its restructuring. This is expected once - and if - it gets the go ahead from Brussels.

That gives the opportunity for shareholders such as Polygon to vote against the board's proposals although BE has warned it will take the company off the stock market if it faces opposition to its plans.

Opponents say this loophole - whereby companies can delist without shareholder approval - will be closed in 2005 but BE seems prepared to take this action before such legislation is introduced.

http://www.guardian.co.uk/business/story/0,3604,1268991,00.html

"trying to bet on the grand national while the race was already in progress" i think the bookie's call it betting in running happens every day has done for a number of years lol

The price continues to rise with a 13.00% gain today and the price closing at 19.50 pence. I didn't think the price would have had legs to get to 20 pence.

Yes Sue I think you jumped ship far too early.
If shareholders win the day and lecy prices stay high
we could see far more gains. Jump back on while there is still time!

Hi transco, I have had a 250% gain already from these and I am very happy with that during the last three months and the risk reward ratio which I look at in my stock selections is just too great even for myself at these prices. I will wait until BGY agrees to re-negotiate the shareholder terms and then have another look in terms of recommending these to buy...I still day trade these sometimes but the risk is just too high for myself to recommend them here..otherwise what will happen is that even though I have mentioned several times about the risks involved I will get a torrid time by posters who may lose out if the price collapses back to 6.00 pence. You have to look on the other side of the coin as well that they have signed a binding agreement which means if the terms are not re-negotiated the price could fall to 5.00-6.00 pence or as they have commented several times the stock can also be delisted without shareholders approval.

Happy trading!

just bailed out at 19.25 after buying at 7.3 in my isa.....will continue to trade though....