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British Energy: 2005/6 results
British Energy reported that it had made “good progress” in the year to March 2006. A change in the accounting year end from July to March means that it is difficult to assess just how well the company has done, since like-for-like figures are not available for comparison.
By way of explanation the company states that “due to the seasonality of its business, the results and cash flows for the Group for the period from 15 January 2005 to 31 March 2005 are not directly comparable to the current year ended 31 March 2006”.
The little comparable information that is available however appears to indicate a fairly strong performance. Output for the year rose slightly to 68.4 TWh from 67.4 TWh for the corresponding period last year but realised price were much stronger at £32/MWh for the year, up £11.6/MWh compared to the corresponding period last year. The higher realised prices have translated to much stronger margins – mainly due to the fact that the company has experienced minimal cost increases in generating electricity. The company generated 88% of its power from nuclear sources – and has thus been insulated from the rising oil prices which have plagued conventional power generators.
The company’s operating margin has risen to £9.2/MWh (an extremely healthy 28.75% of selling price) largely reflecting the increase in realised power prices.
The company reported an operating profit £635m for the year; pre-tax profit of £599m and an operating cash inflow of £664m for the year.
The company’s strength is that the bulk of its power is generated from nuclear sources and is thus insulated from the rising costs of generating power. Unfortunately, this also the company’s biggest problem – in the long run. It faces huge decommissioning costs as its power stations age - last year the company had to be rescued by the Department of Trade and Industry which agreed to takeover £5.1bn in decommissioning costs in a debt for equity deal concluded in January 2005. We have examined these issues for more fully in our previous piece.
Short-term prospects are good and the company should outperform the sector. The share trades at 687.5p, on a prospective PE (2007 earnings) of 8.2x, at the lower end of the sector range with an attractive 8.8% yield.
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