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

I agree LordCake - However buyers beware its a big drop from here if the board gets its way shareholders will get nowt! As I see it the only way to stop the mega dilution is for the government to step in as it did with Railtrack.
I doubt it will happen this time but we shall see.
Bering in mind the share building going on over the past twelve months
and an almost constant rise someone may know the outcome already!!

Thanks, Lord Cake.

Balanced report on the BBC website: http://news.bbc.co.uk/1/hi/business/3618616.stm

Also from Radio 4 today: http://www.be-fair.org/media/bbcradio4_03.09.04.mp3

British Energy rebels offer 800m to scupper shake-up
By Tim Webb
05 September 2004


Rebel shareholders of nuclear generator British Energy have offered to buy out its 800m of debt, in effect cancelling its financial restructuring.

They have been holding secret talks with the European Commission aimed at putting together an alternative rescue plan for the company, which was saved from bankruptcy by the Government two years ago.

The EC is currently examining the existing government-backed restructuring, which would leave shareholders with just 2.5 per cent of the equity. The EC is expected to give its approval within weeks, unless the rebel shareholders can persuade it to back their own plan.

The hedge fund Polygon, which is leading the revolt, believes British Energy is worth around 1.5bn. But the company has a current stock market value of only 140m because of the proposed restructuring, which favours bondholders over shareholders. British Energy bonds have been trading well above par, at around 1.70 per pound.

Polygon says the restructuring should be changed to take into account higher electricity prices, which should boost its stock market value.

Under the proposals suggested to EC officials at the end of last week, the rebel shareholders - Polygon, Brandes and Invesco, who together own 22 per cent of the company - would arrange up to 800m in bridging finance to buy out bondholders holding around 400m of debt at face value. The shareholders would also repay the rest of the bank loans and debt. In return, the shareholders would receive new shares issued in the company.

Polygon argues that it can secure a better deal for UK taxpayers by cutting the amount the Government has to contribute to its long-term decommissioning liabilities. British Energy argues that without the proposed restructuring, the company would have gone into administration and that terms are binding.

On Friday afternoon, Polygon and Brandes, who together hold 12.5 per cent of British Energy's shares, also notified the company in writing that they are seeking an extraordinary general meeting. Under listing rules, a company must agree to hold a meeting if shareholders representing more than 10 per cent of its shares demand it.

British Energy has until the last week of October to hold the meeting. Polygon wants shareholders to be given the opportunity to vote on the government-backed restructuring.

If shareholders vote against the restructuring but the company, as it has indicated, goes ahead anyway, Polygon is threatening legal action. It would claim that British Energy's directors had breached their fiduciary duty to look after the interests of shareholders.
5 September 2004 01:07

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09/09/04 00:16 UK taxpayer burdened with 1.7 bln stg of British Energy liabilities - MPs

They want a brighter future for the company....
The management should not receive any bonuses if they go ahead with the current D4E proposal....
Good for the company and the shareholders.

Yes I agree - however I see sellers are out in force.
This must be good for shareholders and in my mind Im convinced
Sharehoders will be given a better deal.
No doubt!!

cAN ANYONE PLEASE EXPLAIN THE RAFT OF 100 SHARE BUYS GOING THROUGH THIS MORNING?
IS THIS CORRECT DO YOU THINK?

if this is a done and dusted deal and shareholders are to get only 7%
why are the creditors making such a fuss.

If there is any shred of a chance that terms could be re-negotiated
this baby will fly. And as it ticks up yet again someone must know something?



--------------------------------------------------------------------------------



Legal spat breaks out in British Energy rescue
Tue 14 September, 2004 16:56

By Gerard Wynn

LONDON (Reuters) - A war of words between minority investor Polygon and creditors of indebted nuclear power group British Energy has broken out after they wrangled over a rescue plan carving up the company's equity.

In October 2003 British Energy, its creditors and the government agreed a rescue plan which proposed that creditors would get over 90 percent of undiluted equity in a restructured company in exchange for cancelling more than 1.3 billion pounds of debt, leaving shareholders with around seven percent.

But an exceptional increase in power prices since October has meant that the deal effectively over-compensates bondholders, with bonds trading at 176 percent of face value on Tuesday, indicating the level of over-payment.

Last week minority shareholder Polygon demanded an EGM after BE said it would de-list the company -- leaving shareholders with nothing -- if shareholders did not approve the rescue plan.

"If the company de-listed we would proceed to take legal action, as we've said we would," a source close to Polygon said on Tuesday.

Now creditors have joined the fray, saying that a de-listing was legal if required to see the rescue deal through.

"It is dangerous for your client to contend that the company should not take steps to promulgate the CRA (creditor restructuring agreement), since that is exactly what the company is bound to do," lawyers Cadwalader, Wickersham & Taft LLP, acting for an ad hoc committee of BE creditors, said in a letter to Polygon's lawyers, dated September 14, obtained by Reuters.

The spat has escalated in anticipation of imminent approval for the rescue plan by the European Commission's competition authorities, after which the shareholder vote and implementation of the debt swap can go ahead.

If BE does not call an EGM, Polygon would be in a position to sue the company, while if it does call an EGM and shareholders voted to prevent a de-listing, the creditors could sue the company for breaching the CRA, a source familiar with the situation told Reuters.

They try to pretend that's a done deal.

We know the terms of agreement has been renegotiated many times before. The terms changed for many shares like telewest, Marconi etc. offcourse all in favour of the bondholders. I wounder why bondholders say that the terms cannot be negotiated this time!!! That's probably why some of the bondholders like DB has recently bought BGY.

Any comments?

Anyway, I might be wrong, but I beleive oil and Gas prices will not fall and, therefore, energy prices will stay high. 2.5% of BGY should worth more than
21. All IMO

Nice one sue

whats the likelyhood of shareholders getting more than 2.5%. SLIM. can you guys tell me when we will find out?

Also they are trying to delist bgy from LSE, what are the implications for shareholders on this point

I believe if they de-list, the shareholders get nowt!

If they de-list the shares still have a value - shareholders will still own 2.5% of BE, but de-listed shares are difficult to trade. There is a possibilty of re-listing once the restructuring has gone through.

Rubbish ptholden - dont comment if you dont know the facts.
They will de-list but existing shareholders will receive
new shares representing 2.5% of the new company at some time in the future.
Even if they de-list the existing shares will ahve a value!!!
Well said stoatwrites - they will relist.

hello guys.
does any one know what is happening with bgy at the moment?
for me it is very dangerous situation because it could drop all the way down, if you look at the one year chart.
but looking at the 5 years share price chart, it is ending an important hand and cup,hat could push the share price quite high the price if everything goes ok. ftse is treading high almost 800 points, but we have to see what will happen with the america market. The election has finished but the dollars weakness, which is no bad because will keep the americans spending in america and will keep it looking good in a way that they want, please i would like to hear from you and about bgy because i am worried.
Richard

Richard, see all the previous posts. The shares were delisted from the LSE in mid-October and will relist again in the third week of January 2005 after the restructuring has been carried out.

Wow suehelen thank you very much.
we will see what will happen

very pleased to see some positive comment here,everything seemed to vanish in a moment, thought I'd lost all without a word.

thanks SueHelen for as usuall reliable info.

HELLOS GUYS
i love this company.
for me it is the best penny share that i know.
for a short term is very good, but now is doing this. in my opinion it is in a very dangerous position.
if they do a head and shoulder, we will be in trouble for a long time,
the only thing that keeps me happy is the 5 years share price.
if everything goes well we could reach 30-50p by july or sept, and that would be good, but to stop like this is very bad
all the best RICHARD