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

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....

also bailed out at 19.25. I will only trades this on big deeps from now. good luck to all.

Press Mention : will appear in the Times Newspaper tomorrow. The price will most likely rise again tomorrow on back of the below snippet :

Evidence of growing opposition from shareholders to the proposed restructuring of British Energy, which will leave them with 2.5 per cent of the equity, helped the nuclear generator up 2p to 19p.

http://business.timesonline.co.uk/article/0,,8211-1193464,00.html

Article in Monday's edition of the Independent :

Rebel investors attack British Energy rescue
By Stephen Foley
26 July 2004


Rebel investors have launched a campaign to scrap the proposed 5bn rescue deal at British Energy, the nuclear power generator, which would leave shareholders owning just 2.5 per cent of the company.

Polygon Investments, a UK hedge fund owning 5.6 per cent of British Energy shares, says the restructuring is "worse than a mugging" for shareholders, and is offering to underwrite a new refinancing deal.

Polygon's proposals were initially given short shrift by British Energy, but over the weekend a big institutional shareholder - Invesco, with 6 per cent - indicated its willingness to support a refinancing and Polygon urged other investors to join its campaign.

British Energy was insisting yesterday that the rebel shareholders' plan was a non-starter. "We had to sign binding agreements with creditors last October," the company said in a statement. "We now have an obligation to implement that agreement." The company is furious at the idea that shareholders who refused to refinance the company when it fell into difficulties in 2002 are now hoping to claw back some of the value they have lost.

Under current plans, shareholders will be left with a maximum of 2.5 per cent of a refinanced British Energy, with the Government holding a majority stake and bondholders taking up to 33 per cent. Since the deal, a revival in wholesale electricity prices has improved British Energy's fortunes. As a result, the company's equity is more attractive and its bonds, which will be swapped for shares, are trading at an 80 per cent premium to their face value.

The refinancing hammered out with the Government and bondholders says that the company will be delisted from the stock market if shareholders do not approve the deal. Polygon is claiming that a stock market rule change, which comes into force this year and which requires companies to get shareholder approval before delisting, means that British Energy could not delist. If the rule change comes in time, Polygon says it will vote against the deal, but it is also hoping shareholders will put pressure on the Government to renegotiate.

One Polygon insider said: "The creditors have carried out more than a mugging, nicking this company off 230,000 private shareholders and some grown-up institutions. No alternative is a non-starter when the Government is going to end up owning 65 per cent of the company."

British Energy said: "Without an agreement in October, we would have faced administration and shareholders the likelihood of no return at all. What they are getting under the proposals is more than shareholders have got in recent similar situations."

http://news.independent.co.uk/business/news/story.jsp?story=544741

Press Release: July 25, 2004

London

BRITISH ENERGY: POTENTIAL RESTRUCTURING IN FAVOUR OF SHAREHOLDERS

SUMMARY

Polygon Investments - a UK investment firm - announces that it has 5.6% of the voting rights of British Energy (the Company) and intends to vote against the Proposed Restructuring of the Company (as defined in the British Energy press release of October 2003), provided shareholders receive a vote in any proposed delisting request of the Company.

Polygon made an approach to the Company in June of this year with a revised restructuring proposal (the Revised Proposal) that would be capable of providing additional value to current shareholders. The approach was rejected.

Polygon now intends to canvas other shareholders to seek their support.

HIGHLIGHTS OF THE POLYGON REVISED PROPOSAL

The UK Government would receive the same terms and economics as under the Proposed Restructuring

The Eggborough banks would receive a small amount of additional cash in addition to their existing entitlement under the Proposed Restructuring

Current bondholders would be paid out in full

A claw-back of value would be received from certain Power Purchase Agreement (PPA) counterparties currently treated as creditors

Shareholders would receive equity equal to approximately 30% of the new company after the injection of the necessary additional capital

Polygon is confident that the Revised Proposal would result in a major benefit to shareholders, a very high proportion of whom are retail investors who, according to company filings, number some 230,000 people who probably control more than 40% of the stock, and whose interests are not being served fairly by the existing schemes on offer.

LEGAL OBJECTIONS TO THE EXISTING RESTRUCTURING PROPOSALS

Polygon is exploring whether the Proposed Restructuring violates fundamental rights of shareholders under European Community Law. In this regard, we intend to lobby the European Union so that its approval of the state aid package is conditional on shareholders rights being respected.

Polygon is also considering whether the Proposed Restructuring amounts to expropriation without adequate compensation and is reviewing whether the UK Human Rights Act 1998 has been respected.

MEETING WITH BRITISH ENERGY

In early June, Polygon, in conjunction with its financial and legal advisors, approached the Company and its financial and legal advisors with the Revised Proposal that would be capable of delivering additional value to shareholders. Polygon was informed that the Company was not able to facilitate alternatives to the Proposed Restructuring due to legal commitments under the Creditor Restructuring Agreement (CRA). Polygon accepts the potential validity of this legal opinion.

However, since Polygons approach to the company, we have become aware that the FSA is strongly considering accelerating the implementation of certain elements of CP203 regarding delisting procedures. Polygon believes the FSA delisting rule change is the single most important factor in obtaining a more favourable outcome for British Energy shareholders. Provided that the FSA is able to affect the rule change prior to the attempted implementation of the Proposed Restructuring, the Company will have to obtain shareholder approval to proceed. Since, in our view, the Proposed Restructuring is manifestly unfair to shareholders, we would expect this to lead to its failure.

In our view, the Company would then be free to negotiate a more equitable settlement with its shareholders and creditors along the lines discussed above in the Revised Proposal.


THE EXISTING PROPOSALS AS THEY AFFECT ORDINARY SHAREHOLDERS

According to the Companys press release of October 1 2003:

If shareholders approve the Members Scheme (requiring a 75% vote), they will receive shares representing 2.5% (0.9% adjusted for the Governments 65% cash sweep) of NewCo share capital, plus warrants equivalent to 5% (1.7% adjusted).

If shareholders do not approve the Members Scheme, but pass the resolution required under the listing rules to approve the Disposal Route, then shareholders would not receive any shares but would receive warrants entitling them to subscribe for 5.0% (1.7% adjusted) of NewCos equity.

If shareholders do not vote in favour of the Members Scheme and shareholders approval in respect of the Disposal is not obtained, the Company will delist in order to complete the restructuring. Shareholders will receive no shares or warrants. In this scenario no shareholders vote at all is required.

Polygon, through its communications advisors, welcomes shareholders feedback to these proposals. Polygon intends to update the market as to its progress when appropriate.

-ENDS-

Enquiries to:

M: Communications

Media Enquiries: Tom Hampson +44(0) 20 7153 1522
+44(0) 7974 228 852
hampson@mcomgroup.com

Shareholder Enquiries: Gemma Knowles knowles@mcomgroup.com



NOTES TO EDITORS:

Background on Polygon

Polygon Investment Partners LLP (Polygon) is a global private investment firm based in London and New York. It is authorised and regulated by the Financial Services Authority. Polygon manages a multi-strategy investment fund and invests in a wide range of publicly traded securities. The firm currently has over $1.35 billion under management. www.polygoninv.com

UKLA CP203, May 2004

The UKLA made the following remarks:

7.2 In our consultation paper titled Review of the Listing Regime in October 2003 (CP203), we expressed the concern that the current regime does not provide adequate protection to minority shareholders, who may be forced to sell their shares at a price they consider to be unfairly low, or to hold unlisted securities. We therefore put forward a proposal to require shareholder approval before the cancellation of listing in order to provide adequate protection to minority shareholders.

7.7 Due to the overwhelming positive response from market participants in respect of this proposal, we have decided to accelerate the introduction of this rule ahead of the rules we will be introducing as a result of the review of the listing regime. We believe that the introduction of this requirement is important for the protection of minority shareholders who may be forced to hold securities which are fundamentally different from what they originally purchased.

7.8 We intend to follow the proposal in CP203 and introduce a requirement that, save where the UKLA otherwise agrees under rule 1.11, any issuer that wishes to cancel the listing of its shares or preference shares must obtain the prior approval of at least 75% of the total votes cast by its shareholders in a general meeting. This is in addition to the current requirements in the Listing Rules to notify a RIS and send a circular to the holders of those securities, giving at least 20 business days notice of the intended cancellation. The circular must be sent to the holders of the relevant securities at the same times as the notification to a RIS is made

Statement of Risk

Shareholders should note that there can be no guarantee that should the CRA terminate the company will be able to pursue the Revised Proposal or another proposal similar to it. It is a possibility that shareholders could end up with less than under the Proposed Restructuring if the CRA terminates.


--------------------------------------------------------------------------------
http://www.polygoninv.com/Press%20Releases.htm

The price was up again today to a high of 22-23 pence before closing around 20.75 pence. I woke up too late today so could not day trade these today. I feel the price may start to drift down from sometime tomorrow as the RSI is in a very heavy overbought postion and the price has got way above the Upper Bollinger Band (see below chart). If the price does start to drift down it will find support at 18.00-19.00 pence.

Sue - I take it that was not your 10.75m bought after the bell? ;

Nice to hear from you Chartist. There I was thinking it was yours, for a moment anyway.

Sorry Sue but I dont agree. With a Wall St recovery late on and further press
comment likely I dont see much downside from here.
10.75m after the bell is interesting too.
A lot of sellers came in this afternoon but were quickly swept up by more AT's.
Oil / energy prices jumping ever higher - at worst I guess consolidation at 20-21.
The only worry is the potential profit Poly and others are sitting on.