British Energy profits surge on power price rise

The nuclear generator British Energy reported soaring profits yesterday due to higher electricity prices but unsettled investors with a warning that it is likely to miss its power output target for the third year in a row.
British Energy shares fell almost 5% despite the 145% rise in earnings before tax, interest, depreciation and amortisation to £289m in the three months to June 2.

The company had set its sights on producing 63 terawatt-hours from its nuclear plants this financial year but acknowledged yesterday this target looked "very challenging" and it now expects output to be between 61 and 63TW-h. Output from its one coal-fired plant was 1.7TW-h, the same as in the comparable quarter last year.


The company blamed equipment problems at several plants and what it described as "human performance issues", primarily at one plant, for unplanned stoppages which have cost it 4.4TW-h of output up to August 6. The company said there were no safety issues involved.
Bill Coley, British Energy's chief executive, said: "I am pleased with our financial results benefiting from strong electricity prices and continuing improvement in many of our key operating metrics. However, I am not pleased with the level of unplanned losses. We are sharply focused on improving losses over the remainder of the year."
Analysts expressed concern about the revised output target. "The new management team has consistently missed its output targets over the last three years and there is probably an issue of credibility," said Edmund Reid, an analyst at Cazenove, in a research note. "However, it may be slightly unfair to judge them on output this year, given there is still quite a lot of ongoing work on the plant."
He added that the main value drivers were the wholesale price of electricity and extensions to the life of the company's nuclear reactors. "We remain positive on both these."
British Energy increased its spending on plants, projects and strategic spares by £13m to £54m in the quarter and expects full-year spending to be between £250m and £300m. "This is a turnaround story. The level of investment being put in is pretty significant. Turnaround does not happen overnight. It's a multi-year event," a British Energy spokesman said.
In 2002 British Energy faced collapse because of a slump in electricity prices and had to be rescued by the government, which took over responsibility for its estimated £5bn decommissioning bill under a complex scheme that in effect left the state with a stake of about 65%.
It is now reaping the benefits of soaring energy costs, with average prices for its electricity reaching £35.90 a megawatt-hour, compared with £11.20 a year ago. British Energy said it had signed contracts to sell three-quarters of its output for 2006-07 at an average price of £45 a MW-h.
Although the company is benefiting from the rise in energy prices, it also faces increases in its costs. The market price for uranium is climbing and at the current level the company faces a rise of £80m a year when its current contracts run out. It said the initial impact would be felt in 2009 and the full effect would show in 2015.
The government has said it is considering selling its stake in British Energy, which could raise up to £6bn. Yesterday British Energy said it would decide what to do about paying dividends when it was clear how the sale would be carried out.
Analysts believe the sale will attract strong interest, not least from the US. One theory is that would-be buyers will see ownership of the company as a way to enter the multibillion-pound British market for decommissioning and clean-up.
Mr Coley welcomed the government's energy review, which concluded that nuclear power should form part of a balanced energy portfolio. However, he warned: "While we firmly believe that nuclear generation is essential to the country's energy future, there is further work that must be done to pave the way.
"Certainty is needed in licensing, planning approval and regulation that will ensure new nuclear generation is economic and reliable, and which maximises safety."