British gas company Centrica Plc has followed through on its previously announced deal to buy NewPower Holdings Inc., greatly expanding its presence in retail energy markets in North America. Centrica intends to buy all of NewPower’s outstanding shares for $1.05 per share in cash (subject to certain conditions), or a total of $130 million (see Daily GPI, Feb. 21). The acquisition is expected to include 650,000 U.S. residential and small business customers in states including Georgia, New Jersey, Ohio, Pennsylvania and Texas.

This deal follows Centrica’s announcement in January that it intends to buy Enbridge Services Inc. (1.3 million home and business services customers in Canada) for C$1 billion. When the two purchases are completed and the Ontario electricity market opens as scheduled in May, Centrica will have around 4.3 million customer relationships with North American households, making it by far the largest retail energy service provider on the continent.

The combined business provides a strengthened platform for further growth in Centrica’s key target markets, including Texas, Michigan, Ohio and Georgia, and significantly enhances Centrica’s market analysis and entry capabilities in other U.S. states. Centrica’s said its operations will be further supported by its position as the leading energy retailer in deregulated North American markets.

Centrica CEO Roy Gardner said the agreement with NewPower will “helps us achieve critical mass in our target markets in the U.S.” He expects “significant operational and cost synergies to be gained. This transaction, together with our agreement to acquire Enbridge Services Inc. in Canada and the business of Enron Direct Limited in the UK, demonstrates Centrica’s ability to leverage its considerable financial strengths to gain market leadership and seize profitable growth opportunities as they arise.”

NewPower’s customer count at the end of December 2001 increased to over 800,000 customers (including pending accounts), compared to the fourth quarter 2000 customer base of 368,000. It reported revenues of $369.9 million, net losses of $212.8 million before non-recurring items for 2001 and net assets of $246 million as of Dec. 31, 2001. The company said its net losses in part reflected the early stage of its business development, as operating expenses and infrastructure investments exceeded gross profits. Its performance also was adversely affected in 2001 by operational and switching delays in the Texas market which, combined with volatile energy trading conditions, left NewPower with commitments to purchase commodity at prices well in excess of subsequent market levels, Centrica said. The volatility also reduced the credit available to NewPower in the market.

Initially, Centrica expects the acquisition to be slightly dilutive to its earnings and cash flow in 2002 and 2003. However, Centrica plans to improve NewPower’s situation with energy market volatility risk mitigation measures, substantially reduced infrastructure investment, a focus on profitable customer relationships and the $25 million per year in synergies between the two operations. It expects NewPower to contribute to its earnings and cash flow by 2004.

“This merger is strategically right on target as both companies have the same goals; to further deregulation and to increase customer relationship growth,” said NewPower CEO H. Eugene Lockhart. “Given the limited financial resources that would otherwise be available to extend NewPower’s retail business, I believe that today’s merger agreement with Centrica plc, a U.K. public company and leading provider of energy and other essential services, is in the best interest of our shareholders.” He added that the combination will allow the company to serve its customers from “a position of far greater stability and financial strength.”

Centrica expects to begin its tender offer in a week. The boards of both Centrica and NewPower already have approved the deal. Centrica has more than 50% of the fully diluted shares of NewPower committed to acceptance, but, in the case of the Enron interests, this is subject to bankruptcy court approval. The transaction also is subject to customary regulatory approvals and approval of the bankruptcy court overseeing Enron’s Chapter 11 bankruptcy because of certain liabilities between NewPower and Enron, the termination of inter-company agreements, and the issuance of an injunction restraining third parties from making claims against NewPower in respect to Enron-related liabilities.

The price per share that will ultimately be paid to NewPower shareholders also is subject to adjustment based on changes in the projected forward price curves for electricity and gas between the signing of the merger agreement and the date of the tender offer. If the price falls outside the range $0.80 to $1.30 per share, then Centrica and NewPower can terminate the transaction.

Centrica and NewPower also must pay transaction costs of $13 million and other related costs, totaling $65 million, for contracts with NewPower executives and for other severance costs. Centrica said these costs are expected to be largely offset by cash balances that will be held by NewPower on completion of the transaction.

As a result of the deal, NewPower also has decided to return its competitive default service customers in Pennsylvania back to PECO. Centrica said the prospective profitability of these customers is limited, given the necessity of load serving entities such as NewPower to purchase installed capacity (ICAP) requirements.

Centrica said its strategy will be to focus on states that have regulatory and pricing regimes offering the opportunity to create profitable retail businesses. Current target markets in the U.S. include Texas, Georgia, Michigan and Ohio and further opportunities are expected to open up during the course of the year in other midwestern and northeastern states. Centrica expects to be addressing a viable market of over 20 million households in the United States by the end of 2002. At the end of 2001, customers in 17 states in the U.S. had access to some form of energy choice program.

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