Centrica pays pounds 440m to settle take-or-pay North Sea contracts

Centrica, the demerged British Gas supply business, yesterday lifted a huge burden from its balance sheet, with pounds 440m worth of deals to settle the bulk of its long running "take-or-pay" problem from high- price North Sea gas contracts. As Chris Godsmark, Business Correspondent, reports, the agreements with three oil companies yesterday mark the end of a two years of marathon negotiations.

At signing ceremonies in Amsterdam yesterday Centrica agreed to pay pounds 365m to buy itself out of high-priced gas contracts with Conoco, Elf and Total in the biggest of renegotiation package so far unveiled by the company.

The contracts, most of which were signed in the early to mid-1980s, were to supply 6 million therms of gas. Though Centrica declined to specify the cost of the gas, it was thought to be committed to paying near to 20p a therm in the contracts, around twice the current market price.

The company also refused to reveal the new prices in the renogotiated contracts, but they are believed to near to the market price. It means the group's average purchase cost of gas has fallen from about 18p a therm to about 14p a therm. Centrica, which split itself off from the old British Gas in February, also revealed options to spend pounds 155m by 2008 to buy out further contracts with Conoco. The arrangement, which will depend on the future level of gas reserves, involves a further provision of pounds 75m from Centrica's profits this year, bringing the total bill to pounds 440m.

It means Centrica has renegotiated about two thirds of its take-or-pay burden, or 46 billion therms, over the past year. Earlier deals included paying pounds 295m to British Petroleum and an agreement with Mobil which cost pounds 340m.

Ken Gardener, a director of Charterhouse Bank who has spent the past two years renegotiating the deals on secondment with Centrica, said the new prices were in line with the market price.

He said there were "two or three" smaller deals in the pipeline, the first of which would be revealed in the new year. Centrica shares rose 2.75p, to 92.5p.

"Centrica has a fighting chance to compete on a level playing field. We're clearing away the legacy of the past."

Rachel Beaver, analyst with ABN Amro Hoare Govett, said the deal had all but eliminated the take-or-pay problem. "This is also a major endorsement for the management. They said they would do this by the end of the year and they've delivered."

The take-or-pay burden emerged spectacularly in 1995, when the market price of gas plummeted to less than 10p a therm. British Gas had committed itself to buying gas at high prices in contacts which obliged the company to take delivery of supplies from producers or pay the equivalent cost in compensation, leaving a pounds 30bn burden in its accounts.

Mr Gardener rejected suggestions that Centrica was paying too high a price to extricate itself from the contracts.