Centrica to buy 20% stake in British Energy; Reaffirms FY09 earnings view - Update

(RTTNews) - Monday, Centrica Plc ( CNA.L | Quote | Chart | News | PowerRating, CPYYY.PK, CPYYF.PK), the parent company of British Gas, confirming media speculations, said it has agreed with Électricité de France, or EDF ( EDFEF.PK | Quote | Chart | News | PowerRating), to acquire a 20% equity stake in nuclear power generator British Energy for GBP 2.3 billion, or EUR 2.5 billion. Separately, Centrica said it experienced a strong start to the year, benefiting from low wholesale prices and higher demand than forecast due to the cold weather, and added that overall the outlook for Group earnings for fiscal 2009 continues to be in line with expectations.

The stake acquisition is to be part funded by the sale of Centrica's 51% stake in its Belgian generation and supply business SPE to EDF for GBP 1.2 billion, or EUR 1.3 billion. The deal is expected to close sometime towards the end of 2009 third quarter and is conditional upon the Centrica shareholders' as well as regulatory approval.

Reviewing its operations, Centrica noted that it has performed well in the year to date, primarily due to combination of cold weather, which increased demand for gas and power in the UK and North America, as well as falling wholesale commodity prices, which were caused by consistent supply and weak demand from large industrial users.

The group operations can be classified into six divisions. British Gas supplies electricity and gas throughout U.K. Centrica Energy is involved in sourcing gas and electricity for UK customers. Direct Energy is one of North America's leading integrated energy companies. Centrica in Europe supplies gas and electricity in Netherlands, Belgium, Spain, and Germany through its Oxxio, SPE, Centrica Energia, and Centrica Energie brands. Centrica Storage stores natural gas for European energy producers, traders, and suppliers. Dyno supplies drain cleaning, plumbing, and lock fitting services.

The company noted that British Gas Residential has had a strong start to the year compared to that of last year, gaining from the unusually high demand stemming from the cold weather and falling wholesale commodity prices. These factors enabled this segment to cut its retail prices in February 2009 and its residential gas prices by 10%, followed by a further 10% reduction in the latter in early May. The combination of lower prices and better quality service has resulted in an increase of around 60,000 jointly-held products across British Gas and greater stability in energy customer numbers, the company noted. British Gas Residential had 15.5 million customer accounts on supply as at April end, the company added.

The company also reported that British Gas Business has had a very strong start to the year, benefiting from the low wholesale prices and higher demand than forecast due to the cold weather. The positive outcome to this segment is reflected in improved customer service levels, high levels of retention, and continued good financial performance, the company added.

In Centrica Energy, the upstream gas production volumes as of April end were down by 39% year-over-year, resulting from the fall in wholesale gas price in the UK.

In Centrica's power generation business, lower power prices and narrower spark spreads are currently impacting the operating results, despite results having been forecast to be well ahead of 2008.

In Centrica Storage, business has had a good start to the year, with strong reliability during the withdrawal season and in the switch to injection. The company, however, continues to expect full year profitability to be lower than last year in the absence of non-recurring revenue from the sale of reservoir cushion gas.

In North America, trading conditions remain challenging, with "no signs yet of any improvement in the new home construction market which impacts our services business," the company noted.

Looking ahead, the company noted that "the reduction in wholesale commodity prices in the UK provides an encouraging backdrop for the downstream energy supply businesses. Upstream profits are adversely impacted by lower commodity prices, reducing total Group operating profit. This is offset by the lower tax rate that results from the change in profit mix, with the tax rate for the existing business currently expected to be around 40% and after tax earnings therefore expected to be ahead of 2008."

Overall, the outlook for Group earnings for the full year continue to be in line with expectations, the company added.

Centrica, which reported its fiscal 2008 results in February, is slated to release its 2009 Interim results on July 30, 2009.

In a separate press communiqué, Centrica and the French government-controlled EDF announced the reaching of a definitive agreement, under which Centrica will invest in EDF's UK nuclear business with the purchase a 20% stake in British Energy. EDF's UK business constitutes of the January 2009, GBP 12.5 billion takeover of British Energy's eight existing nuclear power stations, and one coal-fired power station.

Under the deal, both companies will also form an 80/20 joint venture to pursue a planned program to build four new nuclear power stations in the UK, under EDF's UK new build nuclear program.

The GBP 2.3 billion cost of the stake purchase will be funded in part by a net cash consideration of around GBP 1.1 billion, or EUR 1.2 billion, besides the divestiture of Centrica's SPE stake to EDF, and which will be funded from existing cash resources, including the GBP 2.2 billion rights issue proceeds that was raised in December 2008.

Centrica will make the British Energy stake acquisition by taking 20% stake in Lake Acquisitions, the vehicle through which EDF acquired British Energy. This investment represents a 6% discount as compared to the EDF's offer price for British Energy and is consistent with Centrica's position as a 20% partner, it confirmed.

The other terms of the deal call for Centrica to assume 20% of the liability for contingent guarantees given by EDF in respect of the Contingent Value Rights issued by Lake Acquisitions as part of its acquisition consideration for British Energy.

British Energy will continue to be operated by EDF, with Centrica having board representation and other appropriate governance rights. Both companies will offtake the available power from the British Energy fleet on an 80/20 basis. Also, EDF will provide Centrica with an additional 18TWh of power at market prices over five years, beginning from 2011.

Centrica further stated that its investment in British Energy and the acquisition of SPE by the EDF Group are inter-conditional and will be subject to relevant regulatory approvals in UK and Europe. It is also subject to approval by Centrica's shareholders for which an extraordinary general meeting is being planned for June.

EDF Chairman and Chief Executive Pierre Gadonneix commented, "The asset swap in this deal will also see the EDF group reinforce its Benelux presence by becoming the second-largest generator in Belgium."

CNA.L is currently trading on the LSE at 239.50, up 12.00 pence, or 5.27% on day, with a volume of 8.03 million shares.

EDFEF.PK last traded on May 7, to close at $42.25.

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