Centrica Leaps into North American Retail Energy
One of the United Kingdom's leading natural gas suppliers took a
huge step across the Big Pond last week, agreeing to purchase one
of Canada's largest gas marketers. Centrica Plc will pay $612
million in cash and assumed debt for Calgary's Direct Energy
Marketing Ltd. and its associated marketer, Natural Gas
Although Centrica would not disclose how much debt it was
assuming, the company said it did not expect to add to its earnings
with this purchase before 2002. Direct Energy's net assets were
C$225 million on Dec. 31, 1999.
Direct Energy, the largest unregulated natural gas retailer in
North America, has about 820,000 customers, mostly in Ontario. It
also owns and operates natural gas reserves in Alberta, which
provide up to 20% of its required supply. Direct Energy's customer
services unit, Natural Gas Wholesalers, provides marketing and call
center services to Direct Energy and Energy America LLC customers -
giving Centrica the opportunity to secure more customers and more
important, 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 that
Direct 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 to
expand further into the U.S. marketplace. Energy America customers
are centered in six U.S. states: Georgia, Maryland, Michigan, New
Jersey, Ohio and Pennsylvania.
"This provides us with the ideal vehicle for rolling out our
strategy into the North American markets," said Centrica CEO Roy
Gardner. "Our expertise in building customer relationships and
operating in deregulating markets, combined with Direct Energy's
risk management and sales skills, will make us a powerful
Centrica, which maintained a 73% share of UK's domestic gas
market at the end of 1999, offers electricity supply and home
services under the British Gas and Scottish Gas brands, vehicle
services under the AA brand and insurance and financial services
under the AA and Goldfish brands. It also plans to launch a
telecommunications service in September. It owns and operates the
Morecambe gas fields in the East Irish Sea, and has other gas and
oil reserves in the southern North Sea and Liverpool Bay. It also
is a leading player in the emerging European wholesale energy
At the end of 1999, Centrica signed up 2.6 million power
customers through its British Gas unit, and is expected to become
the largest regional supplier of natural gas in Britain by the end
of this year.
Following the announcement of the planned acquisition of Direct
Energy, Standard & Poors affirmed its single-'A' long-term
rating and 'A-1' short-term rating on Centrica and its related
entities. The S&P said the acquisition was "complementary to
Centrica's core business activity," and said it is positioned to
participate in the "deregulating North American energy market...and
in the Canadian electricity market that is expected to be opened to
competition in 2001."
Following the announcement on Thursday, Direct Energy's stock on
the Toronto Stock Exchange was up almost 19%, selling in the range
of C$128 a share, up nearly C$20. Centrica, which trades on the
London Stock Exchange, has a market capitalization of C$20 billion.
Its shares have risen about 27% this year alone. Centrica was
formed in 1997 from the de-merger of the sales, trading, servicing,
retailing and Morecambe Bay production operations of British Gas
PLC, now BG Transco Holdings PLC.
Carolyn Davis, Houston