Deutsche Banks on British Energy

Deutsche Banks on British Energy

Jul 12 - Sunday Business; London (UK)

DEUTSCHE Bank has made a '200m (E300m, $370m) bet on the revival of British Energy, paying a 25% premium for a package of bonds and shares in the ailing nuclear generator.

Deutsche's move, made after a deal was struck on Wednesday, is a vote of confidence in the UK government's ability to get approval from European Commission for its '5bn rescue package for the generator, which was devastated when power prices crashed in 2001. British Energy generates just under a fifth of the UK's electricity.

Commission approval has been delayed until September, but the market increasingly sees it as a near certainty that Brussels will give its approval.

"The market outlook for British Energy has changed dramatically since it became clear the commission would approve the deal," said a distressed bond specialist at BNP Paribas. "It's viewed as a rubber stamp now."

Teesside Power, owned by a consortium of creditor banks, was given the '159m package of bonds and shares under the restructuring plan British Energy agreed with its creditors in 2003.

British Energy had reneged on a power-purchasing deal with Teesside that the company claimed was worth billions of pounds. Under the deal, British Energy had to buy power at substantially more than market rates. In return Teesside gained '43.5m of British Energy bonds and 14.4% of the new ordinary shares to be issued in the company. It has now sold them to Deutsche.

British Energy's fortunes have undergone a reversal this year on the operational front, as it finds itself better positioned than any other UK generator to take advantage of soaring electricity prices.

"The value of British Energy's bonds has exploded," the trader said. The bonds have leapt from trading at junk-bond level of 25p at the depths of its financial woes to being valued at some 167p.

Coal and gas power stations are unable to benefit fully from wholesale electricity prices of about '30 per megawatt hour (MWh) as gas and coal prices have risen by similar amounts, leaving British Energy the best positioned company to benefit.

David Newport at Standard Bank in London said: "Above a price of about '21MWh, their energy costs are basically fixed."

The company cannot yet take full advantage of the high prices as it has sold ahead much of its production at below the market price, but most analysts expect prices to rise further due to the UK's tightening gas supply and the introduction of the European carbon emissions trading scheme.

It made an operating profit of '57m last year after losing almost '4bn a year earlier.

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