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

Now up 10% on very strong volume.. you were right on with your comments yeaterday Suehelen.. something is happening behind the scenes.Did it really spike to 14p..?

LONDON (AFX) - CGE Power, a company set up by six leading banks to buy financially distressed UK power stations, is to raise 2 bln stg of bank debt to fund its proposed spending spree, reported The Times without citing sources.

The report said the move is a change in strategy for the group, which has been trying to buy power stations by offering the stations's creditors debt in CGE in return for their existing debt.

The report says the cash injection is expected to help to bring to a head negotiations over several plants, including Drax, Europe's largest coal fired power station.

CGE, which is backed by four British high street banks - Abbey national PLC, Royal Bank of Scotland Group PLC, HBOS PLC and Lloyds TSB Group PLC- and two German banks, has been competing with established electricity generators, including Scottish Power PLC, to buy distressed assets.

mps/lam

Good call- SueHelen - maybe not such a lifetime gamble after all, done the 1 bagger heading fot the 2 bagger +++++ now.
Well done that girl....

Bring to top to read

Have been aware of this for a time and having read through the thread it appears that Evils main hopes centre around increasing electric prices, delay by various organisations in approving reconstruction, and the ability of shareholders to block reconstruction raising money via a rights issue.

I believe that is the story in essence...does this thread agree with this synopsis?

BTW SueHelen, congrats on non ramping info type posts

Another time to a have a look at these with a view to buying some possibly tomorrow. Price getting close to breaking 10 pence. There has been good volume in the last few days. Price is up quite a bit since this thread was started.

Just purchased 19,623 shares at 9.95 pence. Plenty of heavy buys have gone through at 10 pence.

Eeey gall you don't arf know how to pick em well done :o)!
Do walk on water as well! lol lol

Above 10 pence now.

Bit of a roller-coaster to-day - I get giddy watching it - but very much holding in there with my 20,000 despite being tempted to take handsome profit. I have been heartened for sometime by you posts SueHelen

Love you Peggysue got a pot full.

bookman

Is this looking good or what?

traders are talking the stock up to 15p on the back of the new contracts that will be re-negotiated at substantially higher prices in a few weeks. Also a bid could override the deal with the bondholders who are about to make huge profits at the expense of the shareholders.

Good day again today.

Think this is from Share Mag ....

BRITISH ENERGY (BGY) - 9.74P BUY

The share price has broken through key resistance points this week suggesting it will re-test recent highs in the low-teens. The fundamental backdrop looks sound with electricity prices falling from recent peaks but still maintaining an upwards trend.

The European Commission is expected to approve the 275 million grant to BE by the UK Government this summer removing another big uncertainty. The restructuring plan will then be almost home and dry leaving shareholders with around 7.5% of the equity.

If electricity prices average 27 per megawatt hour (MWh)in 2005 the shares should be worth 17p. This is based on how much profit BE will make over its cost base which has been cut to 14 per MWh.

Reprocessing costs at BNFL were slashed and decommissioning costs were written off by the government gifting BE a total of 3 billion. The share valuation assumes an average utility market valuation of around 10 PE.

Profit recovery this year will be limited as half of BEs contracts are fixed price so the increase in electricity prices will not make any difference until the contracts expire and are re-negotiated upwards.

These fixed-price sales contracts will still cover half of electricity output for 2004 and 2005 at an average price of only 18.7 MWh.

The excitement in profit terms starts in 2006 when BE could make 300 million pre-tax if electricity prices rise to 30 MWh. Improved management is cutting back on costs and nuclear outages when reactors have to be shut down for maintainance or to repair faults. Output should rise again this year by maybe 3% with the latest March monthly figure showing output up from 5.59 TWh to 5.91 TWh.

BE is currently valued at 68 million which represents the stub value of the remaining shareholders equity in this huge geared recovery play.

Shares Summary

Even without a possible renegotiation of the restructuring terms, which give bondholders most of the shares in exchange for writing off their debts and leave shareholders with a stub of 7.5%, the shares look substantially undervalued.

Electricity prices are expected to continue to recover albeit not back to the record levels of three years ago. The EU should approve the aid package and nuclear power could be around for a lot longer than sceptics expect.

BUSINESS: Nuclear generation and sale of electricity

VITAL STATS
Market capitalisation: 68 million
Historic PE 2003: losses
Prospective PE 2004: 25
Prospective PE 2005: 16
No dividend
NMS: 100,000 shares
Spread: 1.9%

and this from.....From UK-Analyst.com: April 28th 2004

Small Caps, AIM and Ofex:

British Energy added another 0.82p to 10.78p as bear raider Evil Knievil told listeners to his EvilCast that having bought heavily at sub 7p his one year target remained 20p in a worst case scenario or 200p in a best case scenario.

Would now be a good time to purchase, open to risk? Any thoughts on this one...

did anyone watch the IF programes they will understand the uk gov got to keep nuclear going as north sea gas will run out and would be too dependant on natuaral gas been with BGy b4 but in again today

Have bought today.
On a roll!! Gimme, gimme, gimme.......money, money, money. Whizz, bang, boing, bounce!

Looking jolly good for Tuesday. Very heavy buying reported this afternoon, a lot of Automatic Trades buys went through for big chunky amounts.

165,000 BUY reported at 12.3 pence after close. Something is brewing here. EK's 100 pence target may come, never know.