Nuclear option can be a winner for BE.
SCRUTINEER MARTIN FLANAGAN
ARADIOACTIVE phoenix from the ashes. That may be a slightly extravagant way of describing the stock market recovery of nuclear generator British Energy (BE) from likely basket case a little over three years ago to a company looking infinitely happier now.
But few anticipated as we entered 2005 how well British Energy has recovered.
The group flirted with liquidation in 2002, largely brought low when NETA, a more competitive market for trading electricity, sent electricity prices crashing to an uneconomic £14 per megawatt hour.
A controversial and lengthy saga of brinkmanship ensued between British Energy and the government, lending banks, its bondholders and shareholders.
BE made clear that, without a major refinancing rescue, it could slide into oblivion.
It went to the wire and involved some legal challenges; but eventually the £1.3 billion debt-for-equity deal was signed off by shareholders last December ahead of BE's relisting on the stock market earlier this year.
Shareholders were not best pleased because the restructuring involved 95 per cent of BE being handed over to the lending banks and bondholders.
However, the shares since then have done better than anybody could have expected. At the January relisting, the stock opened at 286p, but brokers were lining up to say they were a relatively risky investment.
Many gave target estimates for the shares of about 200p to 220p, but last night they closed at 517p. That is an 80 per cent jump.
What has changed? Well, apart from the fact that the loan from the government has been paid back, with full interest, everybody knows what has happened to gas and electricity prices this year.
They have soared, and BE's prospects have soared with it. Compared with those dark days of £14 per megawatt hour, electricity has touched £40 and £50 an hour.
Given BE's high operational gearing - a high fixed costbase that means advantageous changes in conditions flow straight to the bottom line - this has proved a boon.
Apart from rising electricity prices, the shares have also undoubtedly benefited from better stock market sentiment towards the nuclear industry following the government's recently announced review of nuclear generation as a possible answer to Britain's perceived future energy gap.
These twin factors should support the shares. BE is playing it cool on the nuclear review, which reports back to Tony Blair next spring or summer.
It says it is concentrating on running its existing power stations, improving their reliability and cutting the outtages.
But if new nuclear power stations were to be built in Britain, it is clear BE would be in pole position to run them.
That could transform the group's prospects, and help prolong the recovery that has surprised so many of us over the past 12 months.
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