[cdn-nucl-l] British Energy surges on hopes of BNFL deal

["Adam McLean" <adam.mclean@utoronto.ca>]

Posted on Yahoo Business on August 27, 2002 and at:
http://uk.biz.yahoo.com/020827/80/d89ud.html
Buy!

Adam

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British Energy surges on hopes of BNFL deal
(Rewrites with company, analyst comments, updates shares)
By Mark Potter and Andrew Hay

LONDON, Aug 27 (Reuters) - Shares in British Energy Plc (LSE: BGY.L -
news) surged on Tuesday amid hopes the UK's biggest electricity
generator was close to taking over the running of some of Britain's
oldest nuclear reactors, raising much-needed cash.

The company, which generates a quarter of Britain's electricity, said it
was still in talks with state-owned British Nuclear Fuels (BNFL) about
taking over six Magnox reactors, which have been in service for almost
50 years.

Neither side would comment on the timing of a possible deal, nor on how
much BNFL might pay British Energy to take over the ageing reactors. But
several newspapers, without citing sources, said an agreement could be
reached as soon as this week. 

At 1050 GMT British Energy shares, which have plunged around 75 percent
since the start of the year, were 16 percent higher at 68-1/2 pence,
valuing the business at around 451 million pounds ($688 million).

British Energy is struggling to cope with a steep fall in electricity
prices following the introduction of new wholesale trading arrangements,
known as Neta, in 2001 and has also been hit more recently by shutdowns
at two of its nuclear plants.

An agreement with BNFL would provide short-term financial relief, and
also revive investor confidence, analysts said.

"British Energy continues to be in discussions with BNFL on a wide range
of issues, including fuel service arrangements, new nuclear build, the
possible operation of Magnox plant and transportation," the company said
in a statement.

The firm, which was privatised six years ago, also said it was lobbying
the government for exemptions to the UK's climate change levy and
reductions in its business rates which together could save over 100
million pounds a year.

British Energy argues it should be exempt from the climate change levy
because it does not emit the carbon dioxide targeted by the legislation,
and that a quirk in business rates means it pays 20-25 million pounds a
year more than rivals. 

The UK government declined to say whether it would grant these
exemptions. Many commentators believe it is anxious to prevent British
Energy from following the route of Railtrack -- the privatised rail
operator it drove into administration after a funding crisis.

PRICES PROBLEM

"If they get a deal with BNFL and if the rates issue and the climate
change issues were resolved in British Energy's favour, that would go a
long way to reassuring investors," said Philip Hollobone, analyst at SG
Securities, who has a "sell" rating on the firm's shares and a price
target of 50 pence. 

But he said the firm was likely to continue struggling unless
electricity prices recovered.

British Energy is particularly exposed to low prices because it is
burdened with high fixed costs and because it has inflexible capacity
management -- meaning it cannot mothball power stations as some
conventional suppliers have done.

British Energy also does not have a retail business to offset the effect
of lower wholesale prices on its generating plants' profitability.

British Energy Minister Brian Wilson hinted on Sunday that the
government could introduce changes to the wholesale electricity trading
market to help British Energy get a higher price for its product. 

But SG Securities' Hollobone said any changes were likely to take time
to be agreed and implemented. 

"Faced with the prospect of continuing low wholesale prices in the UK,
British Energy's outlook at home looks grim," he said.