Proposed sale of Spirit Energy’s Norwegian Assets

08 December 2021

Centrica

Investor and Analysts

Media Relations

Centrica announces major progress on strategic transformation with the sale of Spirit Energy’s Norwegian oil and gas assets and run-off strategy for the remaining Spirit Energy business

Disposal of entire Norwegian portfolio plus the Statfjord field
Headline consideration to Spirit Energy of c.£800m with 1 Jan 2021 commercial effective date
Net consideration to be reduced by cash flows retained from 1 Jan 2021 to completion
In addition, related commodity price hedges will be closed at a total pre-tax cost of c.£180m
All c.£830m of decommissioning liabilities transfer to the buyers, Sval Energi and Equinor
Amended Shareholder Agreement focuses Spirit Energy on UK gas production & decommissioning
Centrica’s 69% share of proceeds expected to be c.£560m
Amount of Net consideration dependent on date of completion, currently expected in Q2 2022

"We are pleased to continue to bring focus to Centrica’s portfolio with these transactions, which are aligned with our strategy to reduce our exposure to carbon intensive oil and gas exploration and production in a way that maximises shareholder value. With the disposal of these largely oil producing assets to buyers who will be able to meet the material decommissioning costs, we can now focus on realising value for our shareholders from Spirit’s remaining gas reserves. Spirit will effectively be in run-off, and we will not explore for new hydrocarbon reserves; rather, we will focus on ensuring Spirit can fund its decommissioning liabilities whilst pursuing opportunities to leverage existing infrastructure to help the UK on its path to net zero. This sale is another important milestone in the turnaround of Centrica and follows our significant organisational restructure last year and the sale of Direct Energy earlier in 2021. I remain excited about our future, as we continue to focus on creating shareholder value and delivering for our customers by helping them live sustainably, simply and affordably."

Chris O'Shea, Chief Executive, Centrica

Transaction summary

Centrica plc (“Centrica” or the “Company” or the “Group”) announces that, in line with the Group’s stated strategy, subsidiaries of the 69% Centrica owned Spirit Energy Limited (“Spirit Energy”) group (“Spirit Energy Group”) have entered into agreements to sell the Spirit Energy Group’s Norwegian oil and gas exploration and production business excluding the Statfjord field to Sval Energi AS (“Sval”) and its interests in the Statfjord field to subsidiaries of Equinor ASA (“Equinor”) (the “Sale Business and Interests”).

The transaction has a commercial effective date of 1 January 2021 with headline consideration of $1,076 million (equivalent to approximately £800 million) in cash on a debt free, cash free basis, plus a deferred commodity price linked contingent payment. The consideration payable at closing (the “Net Consideration”) will be subject to customary adjustments to reflect working capital and debt like items. It will also be reduced for net post-tax cash flows generated by the Sale Business and Interests since 1 January 2021, adjusted for any remaining tax payable on these net cash flows to be paid by the Spirit Energy Group (the “Net Cash Flow”). As of 31 October 2021, the Sale Business and Interests had generated £376 million of net cash flows since 1 January 2021. Whilst significantly dilutive to earnings in the near term, all decommissioning liabilities related to the Sale Business and Interests will be transferred to the buyers as part of the transaction.

Spirit Energy will distribute the Net Consideration and Net Cash Flow to Centrica and its joint venture partners, SWM Group, in proportion to their ownership, after adjusting for certain transaction taxes and costs and amounts in respect of certain liabilities to be retained by the Spirit Energy Group. SWM Group’s share of this distribution from Spirit Energy is expected to be approximately £250 million.

In addition, an estimated approximately £140 million cost of closing commodity price hedges related to Statfjord U.K. will be borne by Spirit Energy and there is an estimated approximately £40 million cost of closing commodity price hedges at a Centrica Group level related to its share of Spirit Energy’s Norwegian Business and Statfjord Norway Interests.

Transaction highlights

Headline consideration as at 1 January 2021 of $1,076 million (approximately £800 million) in cash, plus a deferred commodity price linked contingent payment, the transfer of all decommissioning liabilities of the Sale Business and Interests of approximately £830 million to the buyers, and reduced capital expenditure commitments, represents attractive value for shareholders.
Centrica’s share of the proceeds of approximately £560 million to be retained by the Company.
The Sales result in a 92% reduction in the Spirit Energy Group’s oil and liquids reserves and a 38% reduction of its gas reserves, and represent a significant step towards Centrica delivering on its strategy to decarbonise its portfolio and reduce its exposure to oil and gas production.
The Sales further simplify and de-risk Centrica’s business model while strengthening the balance sheet and reducing earnings and cashflow volatility, and allow an increased focus on its customer-facing activities in its core home markets of the U.K. and Ireland where it has leading market positions.
Under an amended shareholders’ agreement (the “Amended SHA”), Spirit Energy’s future strategy will be to realise value from its remaining portfolio of assets in the UK and the Netherlands while minimising further investment in oil and gas exploration and development, and to utilise cash from the Spirit Energy Group’s operations to meet, and de-risk, decommissioning obligations in respect of its remaining portfolio. Future cashflows generated from Spirit Energy’s continuing operations will be retained within Spirit Energy until projected future pre-tax decommissioning costs are 1.5 times covered.
Spirit Energy will also be able to pursue potential opportunities to leverage existing infrastructure for net zero projects.
The Sales are conditional upon Centrica and SWM Group shareholder approvals, as well as various antitrust and regulatory approvals, and are expected to complete in the second quarter of 2022.
Centrica’s Board considers the Sales to be in the best interests of Centrica and its shareholders as a whole and intends to unanimously recommend that shareholders vote in favour of the ordinary resolution of the Company seeking approval for the Transaction (the “Resolution”) at the General Meeting to be held in January 2022. A circular convening the General Meeting will be published in due course.

The Transaction (comprising the Sales and the terms of the Amended SHA) constitutes a Class 1 transaction for Centrica under the Listing Rules and completion of the Transaction is therefore conditional on, inter alia, the approval of Centrica’s shareholders at a general meeting of the Company's shareholders (the “General Meeting”). A circular containing details of the Transaction and a notice convening the General Meeting will be sent to Centrica’s shareholders as soon as practicable, with the General Meeting expected to be held in January 2022. This summary should be read in conjunction with the full text of this announcement. This announcement is available at www.centrica.com.

The person responsible for arranging the release of this announcement on behalf of the Company is Raj Roy, the Company Secretary.