Centrica plc ("Centrica") today announces a fully underwritten rights issue of 1,392,545,298 New Shares at a price of 160 pence per New Share on the basis of 3 New Shares for every 8 Existing Shares held on the record date of 14 November 2008 (the "Rights Issue"). This Rights Issue is intended to help fund Centrica's vertical integration strategy, either through the potential acquisition of a 25% interest in British Energy plc ("British Energy") or other vertical integration opportunities.
The total net proceeds of the Rights Issue, after estimated aggregate costs and expenses, are expected to be approximately £2.2 billion.
The Issue Price of 160 pence per New Share represents a 39.9% discount to the theoretical ex-rights price of 266 pence, based on the closing price of 306.25 pence per Ordinary Share on 30 October 2008 (being the last business day before today's announcement of the terms of the Rights Issue).
Roger Carr, Chairman, said:
"Following this Rights Issue, Centrica will be well-capitalised to fund the potential acquisition of a 25% interest in British Energy. Assuming we reach agreement with EDF regarding Centrica acquiring a 25% interest in British Energy, the proceeds of the Rights Issue will be directed towards this opportunity, with the balance of the consideration being funded with additional debt and, possibly, asset sales.
We have also released our interim management statement today. Overall, Centrica continues to trade in line with expectations."
The Rights Issue is fully underwritten by Goldman Sachs International, Credit Suisse Securities (Europe) Limited, and UBS Investment Bank as Joint Bookrunners, and by HSBC, BNP PARIBAS, RBS Hoare Govett and Barclays Capital as Lead Managers.
The full prospectus contains further details and the full terms and conditions of the Rights Issue.
Background to and Reasons for the Rights Issue
In February 2007, Centrica announced a new Group strategy which included a key priority of reducing wholesale gas price risk through increased vertical integration. Centrica is exposed to short-term movements in UK wholesale gas prices because it produces substantially less gas from the resources that it owns than it requires to fulfil customer demand and demand from its combined cycle gas turbines power stations. This strategic priority seeks to partially address the risks arising from this exposure. In the past, this imbalance has, at times, resulted in Centrica's residential energy business in the UK being uncompetitive vis-à-vis other major energy suppliers who are more vertically integrated. The acquisition of additional upstream assets addresses this strategic priority and Centrica has announced a number of related transactions recently, including the acquisition of gas reserves on the UK and Norwegian continental shelves.
Lower wholesale gas price exposure can be achieved through the acquisition of gas production assets or power generation assets where the input fuel is not natural gas. Therefore, one way of addressing this strategic priority is to acquire nuclear generation assets.
The leading supplier of nuclear energy in the UK is British Energy Group plc ("British Energy"). On 24 September 2008, Lake Acquisitions Limited ("Lake Acquisitions"), a subsidiary of Electricité de France S. A. ("EDF"), announced a recommended offer for the entire issued share capital of British Energy. Centrica and EDF also announced on 24 September 2008 that they are in discussions in relation to an option for Centrica to acquire a 25% interest in Lake Acquisitions following the completion by Lake Acquisitions of its acquisition of British Energy. The acquisition by Centrica would be at the same implied price per share as EDF pays for British Energy, subject to certain costs to be agreed, and based on EDF's current offer, is expected to be valued at approximately £3.1 billion.
EDF has announced its intention to build four European pressurised reactors ("EPRs") in the UK and is aiming to have the first reactor on-stream by the end of 2017. The acquisition of a 25% interest in Lake Acquisitions (and the option to participate in EDF's nuclear new build activities in the UK on a 75/25 (EDF/Centrica) basis) would represent significant progress in increasing Centrica's vertical integration, which would make a significant contribution to reducing Centrica's exposure to short-term commodity price fluctuations and provide another growth platform.
Centrica and EDF have entered into a non-legally binding Memorandum of Understanding effecting the above terms and Centrica continues to be in discussions with EDF regarding this transaction. However, legally binding documentation has not yet been entered into for the acquisition by Centrica of any interest in British Energy. Any transaction would likely be subject to the fulfilment of certain conditions precedent, including Centrica shareholder approval and regulatory approvals. Centrica would seek to finance any transaction with the proceeds of this Rights Issue, additional debt and, possibly, the sale of certain assets.
Centrica will remain a significant buyer of gas and power in the UK market, for which a strong credit rating is of key importance. Centrica's objective is therefore to maintain credit ratings in the ‘A' range and it believes that this Rights Issue will help ensure this. Centrica also believes that there are significant benefits from being well capitalised in the current uncertain market environment where opportunities can arise rapidly and traditional sources of short-term capital are less available.
If Centrica does not acquire an interest in Lake Acquisitions, Centrica would evaluate the use of the proceeds of the Rights Issue for other acquisition opportunities that meet its vertical integration objective, for general corporate purposes or for returns to shareholders, with a view to maintaining an appropriate capital structure and maximising long-term shareholder value.
Financial Effects of the Potential Acquisition
If Centrica acquires a 25% stake in Lake Acquisitions, the financial impact on Centrica will depend on a number of variables, including power prices and the output from British Energy's nuclear power stations. Based on current forward power prices, and Centrica's estimates of output, synergies and other variables, Centrica estimates that the acquisition, in combination with the Rights Issue, would be mildly dilutive in the first two years and neutral in 2011 on each of earnings per share and on return on capital, before taking into account the impact of fair value accounting adjustments which are described below.
Centrica expects to account for its interest in Lake Acquisitions as an associate using the equity method of accounting. On acquisition, for the purposes of consolidated accounts, Centrica will be required to adjust the value of Lake Acquisitions' assets and liabilities, which will include the acquired British Energy group, to fair value. This is expected to result in an increase in the carrying values of the nuclear power stations and, as a result, additional depreciation charges which will reduce Lake Acquisitions' profit after tax and, therefore, reduce reported earnings per share in Centrica's consolidated group accounts. Fair value accounting will also require contracts entered into by British Energy to sell power forward to be marked to market, based on forward power prices at the date the acquisition by Centrica is completed. If forward power prices were to remain at their current level, it is expected that this marking to market will result in a provision being made against the contracts, and the unwinding of this provision in future periods will increase Lake Acquisitions' profit after tax and, therefore, Centrica's reported earnings per share. The net effect of these adjustments is expected to be broadly neutral in 2009, but negative from 2010 as the mark to market impact on the forward power contracts unwinds.
Current Trading Update
Overall, Centrica continues to trade in line with expectations on a pre-tax basis. Full year earnings will also benefit from a lower effective tax rate driven by a one-off deferred tax credit.
As a result of the retail price increase announced in July, British Gas Residential saw a short term increase in customer churn. However sales of energy accounts remained high, with particular success in the fixed price propositions. Churn has now fallen to levels experienced before the price increase and in recent weeks the level of account sales has been ahead of customer withdrawal notifications. British Gas Residential currently has 15.6 million customer accounts on supply. Subject to the usual uncertainties caused by weather variations, second half operating margins are now expected to be ahead of those achieved in the first half of the year.
In Centrica Energy the gas production business has continued to perform strongly, with gas volumes anticipated to be around 10% ahead of 2007, although the recent easing in fourth quarter wholesale gas prices will have some impact. Losses in the legacy industrial and commercial contracts are expected to be lower than previously forecast if the decline in the fourth quarter wholesale gas price is maintained. The operating results of the power generation business have been materially impacted by unplanned outages in the second half of the year at the Peterborough and Spalding power stations.
British Gas Services and British Gas Business are both performing ahead of expectations. Centrica Storage has undergone a strong injection season, with the Rough reservoir now effectively full, and continues to meet profit expectations. In late September we acquired the Caythorpe onshore gas field which has planning permission for conversion to a storage field with a capacity of up to 7.5 billion cubic feet of gas. The total cost was £70 million, with an additional investment of around £100 million required to complete the conversion.
Difficult economic conditions in North America and the recent disruption to the power market caused by Hurricane Ike have held back Direct Energy, but this has been offset by the strengthening of the US dollar against sterling. Commodity price movements have had a one-off adverse impact on Oxxio in The Netherlands, which in turn has had a significant adverse impact on the overall European business.
The net interest charge for the Group remains low, at around £25 million. In September we successfully placed £750 million of sterling bonds, with £300 million maturing in 2018 and the remaining £450 million maturing in 2033. We continue to forecast an underlying Group effective tax rate of around 55% due to the high proportion of upstream profits. However the tax charge will benefit from a one-off deferred tax credit, now estimated at £60 million, due to a change in the treatment of decommissioning costs for certain gas fields.
The certain remeasurements gains reported in the Interim results for the period to 30 June 2008 have subsequently been negatively impacted by the movements in commodity prices and the margin cash held at 30 June 2008 has now largely unwound.
The next scheduled reporting event in the financial calendar for Centrica is the 2008 full year results on 26 February 2009.
Rights Issue
The Rights Issue is being made to all Qualifying Shareholders on the register of members of the Company at the close of business on 14 November 2008. Pursuant to the Rights Issue, the Company is proposing to offer 1,392,545,298 New Shares by way of rights to Qualifying Shareholders other than, subject to certain exemptions as set out in paragraph 2.5 of Part III "Terms and Conditions of the Rights Issue" of the Prospectus, Shareholders with a registered address, or resident, in the Excluded Territories, the United States or one of the other Restricted Territories at 160 pence per New Share, payable in full on acceptance by no later than 11.00 a.m. on 12 December 2008. The Rights Issue is expected to raise approximately £2.2 billion, net of related costs and expenses. The Rights Issue will be on the basis of 3 New Shares for every 8 Existing Shares. The Issue Price represents a 39.9% discount to the theoretical ex-rights price, based on the closing middle-market price of 306.25 pence per Ordinary Share on 30 October 2008 (being the last business day before today's announcement of the terms of the Rights Issue).
The Rights Issue is fully underwritten by Goldman Sachs International, Credit Suisse, UBS Investment Bank and the other underwriters named in the Underwriting Agreement. The Rights Issue is conditional, inter alia, on:
(i) the Underwriting Agreement having become unconditional in all respects, save for the condition relating to Admission;
(ii) Admission becoming effective by not later than 8.00 a.m. on 15 December 2008 (or such later time and date as the parties to the Underwriting Agreement may agree); and
(iii) the passing without amendment of the Resolutions.
It is expected that Admission will occur and that dealings in the New Shares (nil paid) will commence on the London Stock Exchange at 8.00 a.m. on 24 November 2008.