One of the United Kingdom’s leading natural gas suppliers took ahuge step across the Big Pond last week, agreeing to purchase oneof Canada’s largest gas marketers. Centrica Plc will pay $612million in cash and assumed debt for Calgary’s Direct EnergyMarketing Ltd. and its associated marketer, Natural GasWholesalers.

Although Centrica would not disclose how much debt it wasassuming, the company said it did not expect to add to its earningswith this purchase before 2002. Direct Energy’s net assets wereC$225 million on Dec. 31, 1999.

Direct Energy, the largest unregulated natural gas retailer inNorth America, has about 820,000 customers, mostly in Ontario. Italso owns and operates natural gas reserves in Alberta, whichprovide up to 20% of its required supply. Direct Energy’s customerservices unit, Natural Gas Wholesalers, provides marketing and callcenter services to Direct Energy and Energy America LLC customers -giving Centrica the opportunity to secure more customers and moreimportant, to secure inroads into not just Canada but the U.S.marketplace as well.

A key part of the purchase agreement is a 27.5% stake thatDirect Energy holds in Energy America, a unit of Sempra Energy.Energy America supplies gas and electricity to about 450,000 U.S.customers, and Centrica is expected to use its new holdings toexpand further into the U.S. marketplace. Energy America customersare centered in six U.S. states: Georgia, Maryland, Michigan, NewJersey, Ohio and Pennsylvania.

“This provides us with the ideal vehicle for rolling out ourstrategy into the North American markets,” said Centrica CEO RoyGardner. “Our expertise in building customer relationships andoperating in deregulating markets, combined with Direct Energy’srisk management and sales skills, will make us a powerfulcombination.”

Centrica, which maintained a 73% share of UK’s domestic gasmarket at the end of 1999, offers electricity supply and homeservices under the British Gas and Scottish Gas brands, vehicleservices under the AA brand and insurance and financial servicesunder the AA and Goldfish brands. It also plans to launch atelecommunications service in September. It owns and operates theMorecambe gas fields in the East Irish Sea, and has other gas andoil reserves in the southern North Sea and Liverpool Bay. It alsois a leading player in the emerging European wholesale energytrading market.

At the end of 1999, Centrica signed up 2.6 million powercustomers through its British Gas unit, and is expected to becomethe largest regional supplier of natural gas in Britain by the endof this year.

Following the announcement of the planned acquisition of DirectEnergy, Standard & Poors affirmed its single-‘A’ long-termrating and ‘A-1’ short-term rating on Centrica and its relatedentities. The S&P said the acquisition was “complementary toCentrica’s core business activity,” and said it is positioned toparticipate in the “deregulating North American energy market…andin the Canadian electricity market that is expected to be opened tocompetition in 2001.”

Following the announcement on Thursday, Direct Energy’s stock onthe Toronto Stock Exchange was up almost 19%, selling in the rangeof C$128 a share, up nearly C$20. Centrica, which trades on theLondon Stock Exchange, has a market capitalization of C$20 billion.Its shares have risen about 27% this year alone. Centrica wasformed in 1997 from the de-merger of the sales, trading, servicing,retailing and Morecambe Bay production operations of British GasPLC, now BG Transco Holdings PLC.

Carolyn Davis, Houston

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