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 result is very good. Can it touch 7 in a year?

British Energy confirms to extend Dungeness B life to 2018 http://www.moneyam.com/action/news/showArticle?id=964600

That is 10 years more than expected

BGY should move anytime soon. the future is bright imo

It seems nuclear reactors are the chapest answer to energy shortage.
Has BGY paid off its debt?

Is anyone interested in BGY?
They have had a fantastic run and IMHO have more in the tank.
The aniversary of chernoyl looked to upset the chart but they are now back on track.
One to lock away?

British Energy Group PLC
20 December 2006

British Energy Group plc

20 December 2006

Hunterston B and Hinkley Point B

The Company has largely completed inspection and repair of boiler tube
bifurcations at all 4 units at Hunterston B and Hinkley Point B. The results of
the boiler tube bifurcation inspections at the R4 units were broadly in line
with previous expectations.

To provide baseline data for the boiler safety case, boiler management strategy
and life extension decisions, other boiler tube components (tail pipes) were
inspected. These revealed a small number of defects requiring repair. Repair of
these components has been completed at Hinkley Point B R4 and has yet to be
completed at Hunterston B R4. As a prudent measure, there will be further
inspections at both R3 units so that the Company can be satisfied as to the
integrity of the boilers for the return to service of all 4 units at 70% of full
capacity.

As a result of the work referred to above and resulting human resource
constraints, the Company is now working towards a return to service of all four
units by the end of March 2007, subject to approval of the associated safety
cases and assuming no further unexpected problems are identified by the
inspections.

The impact on nuclear output in the financial year 2006/07 of a return to
service at end of March 2007 remains as set out in the Company's interim results
announcement on 17 November 2006. In concert with these further inspections,
the Company is seeking to bring forward the work intended for the planned outage
of both units at Hunterston B in May 2007. This will have a positive impact in
the financial year 2007/08.

Hartlepool

The Company announced on 16 October that Hartlepool power station had shutdown to undertake repairs to cast iron pipe work related to the cooling water system. The replacement of the affected pipe work has now been completed and the Company is in the process of returning the units at Hartlepool to service. One unit returned to service on 18 December 2006. The other unit at Hartlepool is
expected to return to service over the next week.

Notes: Tail pipes consist of a length of boiler tube at the top of the boiler.
The issues affecting the tail pipes are specific to Hunterston B and Hinkley
Point B.

Citigroup cut BGY recommendation to 'sell' from 'hold', and JP Morgan cut its rating to 'neutral' from 'overweight'. Down 18p to 520p today.

Why the fall?

Can it be the warm weather effect?

I think nuclear energy has fallen out of favour for the time being ahoj

The fall is due to on-going repair of boiler tube bifurcations at all 4 units at Hunterston B and Hinkley Point B. Expect more downside as these units won't be in full service until at least end of March.

That's god. It will help to keep electricity prices up and he load closer to 90%.

Not going to well Ahoj - but IMO there the SP must bottom out somewhere around 350p, and once there is more certainty over the governments position on nuclear energy the shares could rebound nicely.

Sorry but I disagree we are going bust im afraid.

I think British Energy will fall to 300p with the news below...



FOCUS British Energy's Hunterston/Hinkley Pt plants may not have lives extended
AFX


LONDON (AFX) - British Energy PLC boss Bill Coley today invited responses from potential partners for new build nuclear power plants but analysts were more interested in comments hinting that two existing plants, Hunterston B and Hinkley Point B, may not have their lives extended.

Coley, who joined British Energy in 2005, has invited contractors, investors, utilities and anyone else who might be interested to beat a path to his door to discuss the next generation of nuclear power stations. Most who are will have already done this, and the emphasis on the future has served to divert attention away from what has been a difficult nine months for the energy firm.

Hinkley Point and Hunterston have been running on lower output since the middle of last year after cracks were found in their boiler tubes. Dungeness, Hartlepool and Heysham 2 have all had difficulties over the last year, and 'human performance issues' at Torness caused a 50 pct jump in shortages there in the three months to July 2 last year.

Coley was relatively upbeat today: Group EBITDA was up from 462 mln stg to 775 mln stg in the nine months to Dec 31 2006, and Hunterston and Hinkley Point should be up and running by next month. On the other hand, analysts had already said March was a 'worst case scenario', and Coley admitted that Hunterston may not open until April because he had brought forward a planned outage to repair problems unrelated to the boiler tube issues.

But analysts' attention has focused on new guidance over whether the lives of the two stations will be extended. British Energy has conceded that because Hunterston and Hinkley will only come back on line at 70 pct of their former capacity (because anything higher would involve further investment to upgrade the boilers) extending their lives beyond 2011 may not be economically justifiable.

'Life extension of these two stations could be economically unjustifiable, depending on projected operating capacity and forecasts of electricity prices, along with all other factors considered in the life extension decision,' the company said today.

The basic problem is that a plant operating at around two thirds capacity does not generate so much electricity, so prices would need to be high for British Energy to break even -- not the way they are going at the moment.

'There were lots of questions today on life extensions -- they're not a definite,' said one analyst. 'Now for the first time British Energy is beginning to say it might not be economically justifiable to have a life extension -- if the thing only operates at 70 pct they need just over 30 stg/MWhr to break even. It's such a fixed cost business -- if you have a lower output then you need higher electricity prices to break even -- so it may not be worthwhile to continue to operate the reactors.'

The analyst described a price of low 30 stg per MWhr as 'quite optimistic' going forward.

Merrill Lynch agreed. 'Given potential additional capex and the current lower level of power prices, it is uncertain whether life extensions can be assured for these two plants,' analyst Philip Green said.

The company will make a decision on life extension by the end of March next year. On the new build front, meanwhile, all eyes will be fixed on what the government says regarding the planning regime in next month's energy white paper.

British Energy gets regulatory approval to restart two more reactors
http://www.moneyam.com/action/news/showArticle?id=1977029

LONDON (Thomson Financial) - British Energy Group PLC said it has received permission from the Nuclear Installations Inspectorate to restart Reactor 3 at Hinkley Point B nuclear power station and Reactor 3 at Hunterston B nuclear power station.

It follows an announcement on May 11 that the company had been granted permission to restart Reactor 4 at Hinkley Point B while three days later, it received permission to restart Reactor 4 at Hunterston B.

The company said all four units will return to service at about 70 pct of full capacity.

The units had been shut down for inspection, repair and preparation of safety cases related to boiler tube cracking issues.

TFN.newsdesk@thomson.com

rsh/wj

Nuclear appears to be the only solution. It seems everyone is gradually accepting that.
BGY has so many reactors "now"---a couple of times more that its market value.

Today, Citi group raised price target and changed its view from sell to hold.

It appears that they have no plan to sell any of the 450M shares cheap. I think they will start to sell after banking the first dividend, above 620p.

Looks like my 313 post was nearly right on the mark, but that they bottomed at 390.
To Transco - doesnt look like they're going bust either, I mean its got to be hard to do that if you own a few nuclear reactors that are guarenteed to make millions every year. Even the Stanelco board would struggle to attain such a monumentous feet.

Youve done well to have the patience Ahoj and im sure it will be rewarded in the long run.