Energy boost

Thursday, May 31, 2007

Number 10 has finally pressed the button. By the end of today, the government should have offloaded a large chunk of its holding in British Energy, the UK's big nuclear generator. This stands to increase the company's free-float by about three-quarters, hence the 6 per cent drop in British Energy's share price yesterday. But the shares could easily have fallen further - were it not for the clever timing of the sale.

News of the transaction came a couple of hours after British Energy unveiled a good set of annual results. These included a low level of plant shutdowns so far this year, beyond those already known about. It was boiler problems at several of British Energy's plants - forcing their temporary closure - that sent the shares into a tail-spin last year.

Moreover, confirmation of the share sale came less than a week after the nuclear-friendly Energy White Paper. As the incumbent operator, British Energy should play a significant role in plans for new nuclear capacity. The government has reinforced that impression by saying it will retain a blocking interest in the company.

As for Number 10, it is behaving rationally. Before yesterday, British Energy's shares had risen by 46 per cent since February's trough. The Pounds 2bn or so of proceeds will go into the decommissioning fund for British Energy's existing plants. Given that most of the fund currently consists of a call over British Energy's cash flow - essentially, equity in a single stock - diversification is wise.

And with the UK about to go from famine to feast on gas supplies, thereby putting downward pressure on electricity prices, locking in some gains on British Energy is a prudent trading decision. That ought to please Number 10's incoming occupant.

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