Centrica, the UK's largest gas supplier, purchased Barry power station in South Wales from AES Barry and AES Barry Operations, wholly-owned subsidiaries of US-based AES Corporation for £39.7 million (US$65.7 million) in July 2003. The acquisition boosts Centrica's total generation capacity to 2,174 MW by utilising a reliable and flexible power station for its portfolio.

Centrica financed the purchase from its own existing cash resources. Barry power station has operated in both baseload and flexible modes and has the capability of meeting the peaks in demand of its large domestic customer base. 

The plant is currently preparing for a return to commercial operations and is completing testing work at present, according to Centrica.

Background and rationale

The project was reliant upon TXU Europe’s long-term contract, or tolling agreement, with AES Barry in which TXU supplied fuel and took power. However, TXU, a British electricity generator and retailer, went into insolvency last year. Its collapse affected the viability of the project, which is why the power station was sold.

The acquisition of Barry power station follows Centrica’s £24 million purchase of the 229 MW Roosecote gas-fired power station in Furness, Cumbria in May 2003 from the administrative receivers of Lakeland Power Limited.

Sir Roy Gardner, Chief Executive of Centrica, said the purchase of Barry power station further enhances its number one position in the UK. “With more than six million electricity customers, we are the number one supplier to the UK domestic market, and we now have a leading generation portfolio to cement our position,” he said.

Along with providing gas and electricity, Centrica’s operations include gas production, wholesale energy marketing, retail energy marketing in North America and telecommunications services.

The project

Centrica owns British Gas and the AA. Barry will be one of six gas-fired power stations which Centrica either owns or operates.

Located on a 4.7 acre site about eight miles west of Cardiff, the 240 MW gas-fired Barry station began commercial operations in 1998. It is air cooled and can use fuel oil as a backup source. 31 staff work at the plant.

The acquisition boosts Centrica's total generation capacity to 2,174 MW, approximately 25 per cent of its peak day domestic and commercial electricity customer demand.

Centrica will take over responsibility for the operation and management of the plant.

Financing

Total costs were £39.7 million, financed by Centrica’s own existing cash resources.

The project was initially financed by a syndicate of banks, which loaned AES Barry the money. The purchase price was applied by AES Barry to repay bank loans.

Centrica said it expects the financial performance of Barry to be reflected in the financial results from Centrica's Energy Management Group.

Legal advisors were Norton Rose, who represented AES Barry; Ashurst Morris Crisp, who advised Centrica; and Allen & Overy who represented the lenders to AES Barry.

Legal issues

The legal issues encountered in this sale were typical to those encountered in other recent M&A transactions in the sector post the introduction of NETA. Environmental issues are always of paramount importance. Simon Currie, Energy Partner at Norton Rose, noted that Barry is a Combined Cycle Gas Turbine (CCGT) power station and therefore the issues raised were not usually as significant when compared with coal or oil-fired generation. CCGT technology is considered the least environmentally damaging form of fossil-fuelled electricity generation.

Risks

Historically, the business of generating and supplying electricity was run by national and state-owned utilities. However, many of these utilities are now privatised. AES is one of the world’s leading independent power producers (IPPs).

The acquisition was structured as an asset sale rather than a share sale. Therefore, Centrica did not take on any liability associated with AES Barry. Yehuda Cohen, Group General Counsel for AES Europe and Africa, told Infrastructure Journal the transaction was straightforward with only the usual risks expected for this type of deal.

Conclusion

Looking ahead, market participants see continued growth in the electricity and power sectors.

Both Norton Rose’s Simon Currie and AES’s Yehuda Cohen were positive in their long-term outlooks, noting that the short to medium-term power price forecasts are significantly higher than a year ago.

“There are a still a number of distressed IPPs but there are signs that we have moved off the bottom of the cycle. By the end of 2003, a significant number of the existing financings will have been successfully restructured, and we expect that the pool of potential buyers will be widened to include additional industry participants as well as private equity players,” Currie said.

Cohen added that many inactive, known as mothballed, plants are in the process of being brought back into production, due to the pick up in power prices.

Centrica has increased its domestic and commercial customer base in recent years and said its strategy is based around sourcing a proportion of power to meet those needs. The acquisition of Barry will support this strategy of providing power for the needs of its customers.