Centrica swaps into British Energy

11 May 2009

Gas and electricity supplier Centrica is to take a 20% stake in British Energy after a deal was reached with new owner Electricité de France (EdF). One effect of the £2.3 billion ($3.4 billion) deal will be a significant presence in Belgium for EdF.


Centrica's 20% stake will see it take the same proportion of the electricity British Energy currently generates with an option to take the same involvement in four new nuclear build projects already announced. Decisions on whether to take part in the first project at Hinkley Point C will come in 2011.


Centrica will also buy 18 TWh of power (about 35% of one year's output from BE's eight current nuclear stations) from EdF at market prices between 2011 and 2016.


A major reason for the purchase has been to reduce Centrica's exposure to fluctuating gas prices. The company currently supplies about 43% of the UK's gas as well as 22% of electricity, which it generates by burning further gas. It said that it can currently generate about 57% of its supply customers' peak electricity demand, with the remainder being bought on the wholesale market, which is also subject to fluctuating gas prices. With the addition of its share of BE's nuclear generation, Centrica will be able to meet about 85% of its customers' peak needs.


Roger Carr, chair of Centrica said, "The deal represents good value for Centrica shareholders, improves the strategic balance of our business and further underpins our green energy credentials."


EdF and Centrica will form a joint venture company to prepare plans for new nuclear projects, which EdF has already sketched out as being two Areva EPR units each at Sizewell C and Hinkley Point C. Each of the four reactors is to be handled as a separate project with the first planned for Hinkley.


Preparatory activities will have "relatively limited costs," Centrica said, but the first decision to invest in new build is likely to come in 2011, in line with a desired start of operation at the end of 2017. Further new build investment decisions are expected to be 18 to 24 months apart.


"Attractive valuation" for Belgian generator


A 6% discount has been applied to the purchase price, which the firms said was in line with the size of the stake. Centrica was originally intending to purchase 25%, but it is thought that some shareholders did not share management's enthusiasm for new nuclear to the same extent. Centrica is to leave EdF to take care of the day-to-day running of British Energy, but will have rights to appoint board members to BE and the forthcoming joint venture company.


The purchase is partly funded by an asset swap, which will give EdF control of the second biggest power producer in Belgium, SPE. Centrica took a 50% stake in 2005 and later increased it to 51% for a total cost of about £680 million ($1.0 billion). This is now to be swapped with EdF for part of the British Energy stake at the "attractive valuation" of £1.180 billion ($1.780 billion).


The remainder of the stake in BE, some £1.109 billion ($1.675 billion), is to be paid in cash raised by a £2.2 billion (3.3 billion) rights issue at the end of last year. The London stock market reacted with a rise in Centrica's share price of 15p to 243p per share, which valued the company at £12.4 billion ($18.7 billion).