Gas surprises with pounds 293m deal on take-or-pay

British Gas directors yesterday attempted to put past disasters behind them as they brought forward plans to split the company in two, and revealed the first successful renegotiation of part of the company's pounds 40bn worth of take- or-pay contracts with North Sea oil and gas producers.

Describing the news as "a defining event in the history of British Gas", Richard Giordano, chairman, said the demerger of British Gas's supply business would now take place on 17 February, two months earlier than originally planned.

Shareholders, including more than 1.5 million small investors, or Sids, will vote at an extraordinary general meeting on 12 February, just over 10 years after the group's landmark privatisation. The new company, which will supply 20 million domestic customers and run the huge Morecambe Bay gas field, is to be called Centrica, though it will continue to use the British Gas name for its residential supply business. Shareholders will get one Centrica share for every British Gas share they hold.

Directors of the new business, led by Roy Gardner, chief executive, said they chose thename from a shortlist of three because it was modern and dynamic. The remainder of British Gas will be renamed BG PLC and will run the pipeline network and all other gas exploration and production business, apart from the Morecambe Bay gas field.

One surprise was that Dame Stella Rimington, the former head of the security service MI5, would join the board as a non-executive director. This follows her appointment last week to the board of Marks & Spencer as a non-executive director.

The first completed take-or- pay contract renegotiation is with the oil giant BP. It also involves internal contracts to buy gas which British Gas has with its own subsidiaries. It will cost the company pounds 293m in compensation payments which will hit the next quarter's profits.

Mr Giordano would not say how much of the cash would go to BP, though it is thought to be more than half. He said the deal represented about 10 per cent of the contracts which the company "wanted to do something about". It is thought that another one or two big renegotiations will come in the next couple of months, probably involving either Shell or Esso. British Gas did not discount the possibility that these may involve an oil producer being given some of the assets of the Morecambe field.

Only a week ago British Gas revealed the take-or-pay burden, which involves the company paying around 20p a therm for its gas, a third more than themarket rate, had cost the company pounds 294 in three months. Under the renegotiated deal, contracts to buy 2.8 billion therms of gas will be terminated, while 13.5 billion therms will be fixed at a lower price.

Both companies face severe challenges after the demerger takes place. Centrica must restore customers' faith in its service standards after having to spend pounds 80m this year to combat problems with its billing and telephone inquiry systems.

It will also have to fight to retain its share of the domestic market when it is opened to full competition in 1998. Mr Gardner said he was looking at forming alliances with other firms to mount an assault on the electricity market after full domestic competition in two years' time.

The other business, BG, will take over the fight with the industry regulator, Clare Spottiswoode, over her proposals for stiff price controls on its pipeline charges. The issue is being investigated by the Monopolies and Mergers Commission.

If BG loses, it could reduce its after-tax profits by as much as pounds 400m, which would mean investors would be unlikely to be paid any dividend for several years. In addition Centrica shares, which analysts expect to trade at between 30p and 60p, will not pay a dividend for the immediate future.

However, British Gas forecast it would pay a final dividend for the second half of the year of 8.1p, the same as last year.

Comment, page 25

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