FRANCE'S EDF BUYS BRITISH ENERGY, TAKING THE FIRST

UNCLAS SECTION 01 OF 02 LONDON 002443

SIPDIS
SENSITIVE

EEB FOR CBA/FRANK MERMOUD
DEPARTMENT OF COMMERCE FOR JAMIE ESTRADA
DEPARTMENT OF ENERGY FOR GEORGE KERESTES
NRC FOR CHARLOTTE ABRAMS
USEU FOR RICHARD FROST
EMBASSY PARIS FOR JENNIFER MERGY

E.O. 12958: N/A
TAGS: ENRG UK
SUBJECT: FRANCE'S EDF BUYS BRITISH ENERGY, TAKING THE FIRST
CONCRETE STEP TOWARD NEW NUCLEAR BUILD IN BRITAIN


1. (U) Summary: French utility Electricite de France (EDF)
will purchase the UK,s nuclear energy firm British Energy
(BE) for a reported USD23 billion (USD 14.40 per share),
making HMG's 36% stake worth an estimated USD 8.3 billion.
The long-discussed entry of EDF, with its financial and
technical resources, into the UK,s civilian nuclear sector
is a large step forward towards building new nuclear power
plants in the UK. EDF also signed an MOU with Centrica, owner
of British Gas, for a 25% stake in British Energy and options
for part ownership of any new reactors.

Why Purchase British Energy?
--------------


2. (U) The primary value of BE is that it owns the best
sites for new nuclear reactors, and has a nuclear-skilled
workforce. Existing sites already have grid connections, a
major hurdle for any new site to overcome. Also, communities
around existing nuclear plants tend to be supportive of
nuclear plants, reducing the uncertainty of obtaining
planning permits. Next steps for EDF are site selection for
the first planning permit, and the Generic Design Assessment
and site-specific assessment for Areva,s EPR reactor.
Ivesco Perpetual, BE,s largest institutional investor,
blocked a previous offer from EDF in July but has been won
over by a slightly improved offer worth $23 billion. BE owns
all of the UK,s nuclear power plants and generates 15% of
the UK,s electricity. BE is producing less power, though, as
maintenance outages increase at its ageing reactors. All but
one reactor are expected to be decommissioned by 2024.


3. (U) Centrica, owner of British Gas, had signed an MOU with
EDF for a 25% stake in British Energy. This gives Centrica
the right to 25% of BE,s output, cushioning Centrica from
any rise in natural gas prices. Centrica had attempted to
purchase BE after EDF,s offer was rejected in July, but was
unable to acquire the cash necessary to complete the
transaction. (Comment: Centrica currently only operates
gas-fired power plants, and may be looking to diversify
supply. The participation of Centrica in the BE deal not only
helps EDF offset the cost of the purchase, but also keeps
partial control of BE in the hands of a British company. It
has been well documented that BE is being sold to a utility
owned by the French government. End Comment.)

Enough Sites to Go Around?
--------------


4. (U) An important part of the deal was that EDF has
reportedly agreed to sell an as-yet undisclosed number of
BE,s nuclear sites to other utilities looking to build new
reactors. According to the Financial Times, this includes
land at Bradwell in Essex, and possibly at Dungeness in Kent
or at Heysham in Lancaster. Cliff Harris, Vice President for
Europe of GE-Hitachi, noted in a private meeting with Embassy
officers that without these provisions a technology provider
other than Areva would find it difficult to get a foothold in
the UK market. (Note: EDF is expected to build Areva
reactors.) David Powell, Westinghouse,s Regional Vice
President for the UK, stated in a separate meeting that there
were other sites that were appropriate for their AP-1000, but
that having access to some of BE,s sites would help with
economies of scale. Both representatives pointed out that
their respective companies aimed to build more than one
reactor in the UK for economies of scale and supply chain
development.


5. (SBU) Comment: HMG has publicly supported EDF,s purchase
of British Energy over the past few months, with both
Secretary of State for Business, Enterprise and Regulatory
Reform (BERR) John Hutton and Minister for Energy Malcolm
Wicks endorsing an EDF takeover deal. EDF increased their
offer from July by only 17 cents per share, which suggests
the possibility of some political pressure on the hold-out
investors.


6. (SBU) Comment: The purchase of BE will help to speed up
the development of new reactors in the UK. It is expected
that EDF will finance mostly from its balance sheet, and is
relatively unaffected by the current credit situation. With
an investment of 23 billion dollars in the UK market, EDF has
made the firm financial commitment that will allow vendors
and other pieces of the supply chain to begin making
preparations.

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