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Update #4:
Direct Energy To Be Sold To NRG Energy In Multi-Billion Dollar Sale

Would Result In NRG Owning Four Of The Former Affiliated REPs (Utility Spin-offs) In Texas

Update: NRG Details Strategy Under Acquisition; Product, Geography Expansion; Pro Forma Customers, Volumes

Update: NRG Provides Expected Annual Run-Rate Adjusted EBITDA From Transaction

July 24, 2020

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Copyright 2010-20
Reporting by Paul Ring •

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* Update 4, 9:05 am ET

Updated with details from NRG

Added section, NRG Product, Geographic Expansion

Added section, Pro Forma NRG, Post-Transaction Customer, Other Data

Added section, NRG Financial Highlights

* Note: This is a breaking news alert. Check back on this page for updates throughout the morning. NRG is holding an investor call later this morning concerning the transaction, details will be added as released. Refresh this page as needed to see updates

Centrica plc ("Centrica" or the "Company" or the "Group") today announced that it has entered into an agreement to sell its North American energy supply, services, and trading business, Direct Energy, to NRG Energy, Inc. ("NRG Energy") for $3.625 billion in cash (equivalent to approximately £2.85 billion) on a debt free, cash free basis (the "Transaction").

Centrica stated, "Direct Energy has been a valuable and strategically important part of the Group. However, having received a highly compelling unsolicited offer from NRG Energy to acquire Direct Energy, we entered into a limited period of exclusive negotiations in May with NRG Energy, to explore further the basis for a transaction. The Board believes the transaction results in an attractive price for Direct Energy, representing a multiple of 7.9x 2019 Underlying Adjusted EBITDA of $457 million."

Centrica stated that Direct Energy Home serves more than 3.3 million residential customers in North America. As noted in our related story today (click here) on Centrica's first half financial results in North America, Centrica's North America Home segment was serving 2.719 million Energy Supply customers and 599,000 Services customers as of June 30, 2020. Direct Energy Business serves 160,000 retail customers across about 461,000 locations in North America.

In a 10-Q for the quarter ending March 31, 2020, NRG had reported its retail Mass Market customer count, as of March 31, 2020, as 3,651,000.

After the Direct Energy acquisition, NRG is anticipated to serve about 7 million retail customers

The transaction would combine two of the largest three residential retail electric providers in Texas, and more notably, result in all of the former "affiliated REPs" (A-REPs), the REPs born from the legacy integrated utilities (either as an affiliate or sale/spin-off), that inherited customers at the start of electric competition who had not made an affirmative choice, being owned by only two companies -- with Vistra owning TXU, and NRG owning the other four: Reliant, plus Direct Energy's CPL Retail, WTU Retail, and First Choice Power brands. Both Vistra and NRG also recently purchased two of the largest "challenger" (independent) REPs in Texas, with their respective purchases of Stream (NRG) and Ambit (Vistra)

Direct Energy has stated that, in terms of size, it was ranked the #2 non-residential retail electricity supplier in North America. Direct Energy Business delivered approximately 81 TWh of power and approximately 775 Bcf of gas to retail customers in 2019

In the financial year ended 31 December 2019, Direct Energy contributed Adjusted Operating Profit of £221 million ($282 million) and Profit for the year of £105 million ($134 million) to Centrica

NRG Product, Geographic Expansion

NRG noted that the transaction will expand NRG's products and geographic reach

NRG said that the transaction expands the company's natural gas retail expertise with an established team and platform

NRG said that the transaction strengthens its load-generation balance in Northeast and lowers its risk profile

The transaction creates greater geographic and regulatory diversity, NRG said.

NRG said that the transaction will enhance its Texas market capabilities with additional retail and Home Services offerings

The transaction will also increase NRG's East market reach through additional retail customers plus natural gas and home services. The transaction will also increase NRG's Canadian market reach beyond its small XOOM base, by acquiring significant natural gas and dual fuel capabilities

NRG said that the transaction will allow for an expansion of home service product offerings, with a concentration in the East markets

Discussing strategy more broadly, NRG said that it will expand its previously reported renewable PPAs strategy nationally to balance and green its portfolio

Pro Forma NRG, Post-Transaction Customer, Other Data

NRG listed customer and volume data pre-transaction and pro forma post-transaction as follows:

Direct Energy - Current 

Residential Retail Customers
 0.6 MM Texas 
 1.2 MM East 
 0.9 MM Canada 
 0.6 MM Services 

Residential Retail Sales 
 17 TWhs Electricity 
 166 Bcf Natural Gas 

C&I Retail Sales 
 81 TWhs Electricity 
 775 Bcf Natural Gas 

Generating Capacity 
 Zero GW Owned 

NRG -  Current

Mass Retail Customers 
 2.4 MM Texas 
 1.2 MM East / Other 

Mass Retail Sales 
 49 TWhs Electricity 
 23 Bcf Natural Gas 

C&I Retail Sales 
 20 TWhs Electricity 
 0 Bcf Natural Gas 

Generation Capacity 
 23 GW 

Pro Forma NRG, Post Transaction

Mass Retail Customers 
 3.0 MM Texas 
 3.3 MM East / Canada 
 0.6 MM Services 

Mass Retail Sales 
 66 TWhs Electricity
 189 Bcf Natural Gas 

C&I Retail Sales 
 101 TWhs Electricity 
 775 Bcf Natural Gas 

Generating Capacity 
 23 GW 

NRG said that the post-transaction company would serve 166 TWh total (+140% increase)

NRG said that the transaction would enhance its retail natural gas capabilities, with a combined 958 bcf in sales

NRG listed Retail Gross Margin Mix pre-transaction and pro forma post-transaction as follows:

Direct Energy - Current
Home         60%
Business     40%

NRG - Current
Mass         90%
C&I          10%

NRG Post-Transaction Pro Forma
Mass         80%
C&I          20%

NRG Financial Highlights

NRG listed the following financial highlights under the transaction:

• "Expect to realize $300 MM in annual synergies by leveraging our scalable operating platform and unlocking further value for the customer"

• "Transaction exceeds our investment hurdles rates, highly accretive at 4.9x EV/Adj EBITDA with a 28% FCF Yield and run rate of $740 MM Adj. EBITDA, including synergies."

• $3,625 MM purchase price to be financed with a mix of debt, equity-linked securities and cash-on-hand. New secured/unsecured financing would be used for $2,361 million of the purchase price, with $750 million equity linked, and $664 million sourced from NRG capital.

• "Committed to investment grade credit ratings target. Expected to return to 2.50x – 2.75x Net Debt / Adj EBITDA within twelve months of closing"

NRG Highlights

In announcing the transaction, NRG said, "The transaction builds on NRG’s status as a growing, customer-driven integrated energy provider, adding more than three million retail customers across 50 states and Canada."

NRG said that, "The transaction on closing is expected to generate approximately $740 million in annual run-rate Adjusted EBITDA, while enhancing free cash flow strength and stability and providing earnings diversification."

NRG said that, "the acquisition builds on and complements its integrated model, enabling better matching of power generation with customer demand. It also broadens NRG’s presence into states and locales where it does not currently operate, supporting NRG’s objective to diversify its business."

"The combination will deliver greater efficiencies and enable continued investment in NRG’s award-winning customer service, operational best practices and reliability," NRG said

Mauricio Gutierrez, President and Chief Executive Officer of NRG, stated, "The acquisition aligns with our broader strategy of perfecting our integrated business model and drives significant value creation for our customers and stakeholders. Direct Energy's complementary assets, talented team and excellent customer service make it a natural fit for our portfolio, and we look forward to welcoming Direct Energy to the NRG team.”

NRG Strategic and Financial Considerations

Broader Retail Platform

• "The transaction broadens NRG’s retail business adding over 3 million customers. The transaction provides substantial regional diversity to NRG given that 76% of Direct Energy’s Home Energy customers are outside of Texas. The transaction will allow the combined company to reduce costs and leverage shared best practices," NRG said

Balanced Generation and Retail Platform

• "Direct Energy’s significant East footprint provides better balance within NRG’s existing portfolio while also providing NRG the ability to expand its successful capital-light renewable PPA strategy outside of Texas," NRG said

"Significant" Cost and Operational Synergies

• "The acquisition is expected to create $300 million in annual run-rate synergies driven by leveraging NRG’s scalable operational platform and best-in-class cost discipline," NRG said

"Disciplined" Capital Allocation

• "The transaction exceeds NRG’s investment criteria and is accretive to free cash flow. In addition, NRG expects to achieve its targeted credit ratios within twelve months of closing, thereby maintaining its commitment to achieve investment grade credit metrics," NRG said

Approvals and Time to Close

• Closing for the transaction is targeted by year end 2020. The transaction is subject to customary closing conditions, consents and regulatory approvals, including approval by shareholders of Centrica PLC and the Federal Energy Regulatory Commission (FERC). The companies will also submit as pre-merger notification to the U.S. Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Act, and the Commissioner of Competition under the Canadian Competition Act.

Centrica's Takeaways

Centrica listed the key takeaways of the transaction as follows:

• "Attractive valuation for Direct Energy, representing an EV to 2019 Underlying Adjusted EBITDA multiple of 7.9x" (2019 Underlying Adjusted EBITDA of $457 million).

• "Increases the long term strength of the Group’s balance sheet with Net Cash Proceeds intended to be used to reduce net debt significantly and to make a material contribution to the Group’s defined benefit pension schemes"

• "Alongside the significant restructure announced in June 2020, creates a simpler and leaner energy services and solutions company, focused on delivering for its customers and enabling the transition to a lower carbon future"

• "Centrica to focus on its core home markets of the U.K. and Ireland, where it has leading market positions"

• "More predictable and stable cash flows from the remaining Group"

• "The Transaction is conditional upon agreement by Centrica’s shareholders and various other approvals, including regulatory approvals, and is expected to complete in the fourth quarter of 2020"

• "Centrica’s Board considers the Transaction to be in the best interests of Centrica and its shareholders"

Chris O’Shea, Group Chief Executive of Centrica, said: "The transaction provides Centrica with an opportunity to realise significant value for our shareholders at an attractive valuation. This disposal is aligned to our strategy to become a simpler, leaner business and in addition it will materially strengthen our balance sheet and remove a source of earnings volatility from the Group. Combined with our focus on completing our intended exits from Spirit Energy and Nuclear at the appropriate time, this is expected to lead to a more predictable and high-quality earnings stream moving forward."

"Direct Energy is a strong business with a great team. I believe NRG will be an owner who will invest in the business and make it even better. The remaining Company will be an energy services and solutions company, helping customers to transition to a lower carbon future, focused on the U.K. and Ireland where we have leading market positions. Alongside our recently announced organisational restructure, which puts the customer at the heart of everything we do and accelerates the delivery of targeted cost savings, this transaction is a fundamental step in the turnaround of Centrica and will leave us well placed to deliver for both customers and shareholders," O’Shea said

Centrica Business Solutions

Centrica will retain the North American operations of Centrica Business Solutions

Centrica Business Solutions provides energy insight and solutions and optimisation services such as demand response to customers internationally. "The United States is one of the most important markets in the world for the distributed energy solutions provided by Centrica Business Solutions, and will remain a focus area for growth. Centrica Business Solutions also supplies energy to business customers in the U.K," Centrica said

Transaction Details:

Centrica will, on the terms and subject to the conditions in the purchase agreement entered into with NRG Energy ('Purchase Agreement'), sell to NRG Energy the shares in the entities comprising Direct Energy. Centrica will, on completion (subject to customary adjustments to reflect the cash and debt being transferred as part of Direct Energy and a customary working capital adjustment mechanism) receive $3.625 billion in cash (equivalent to approximately £2.85 billion).

The Transaction is conditional on, among other things, Centrica’s shareholders passing a vote on a resolution approving the Transaction ('Resolution') by a simple majority at the General Meeting as required under the Listing Rules, and receipt of certain antitrust and regulatory approvals in the U.S. and Canada. Centrica and NRG Energy have, subject to certain exceptions, agreed to use a 'reasonable best efforts' standard to obtain the antitrust and regulatory conditions, including committing to make required divestments within specific parameters

Centrica has agreed to pay NRG Energy a termination fee of approximately $30 million if the Transaction fails to complete as a result of (i) the Purchase Agreement automatically terminating upon the Board modifying or withdrawing its recommendation that Centrica shareholders approve the Transaction, (ii) Centrica validly terminating the Purchase Agreement in order to enter into a definitive agreement for an alternative superior transaction prior to the passing of the Resolution at the General Meeting or (iii) either Centrica or NRG Energy terminating the Purchase Agreement upon the Resolution failing to be approved by Centrica’s shareholders at the General Meeting.

Centrica has agreed that it will not solicit any proposals from a third party to acquire the Direct Energy business. However, Centrica is permitted, prior to the Resolution being passed at the General Meeting, to engage with third parties in relation to any unsolicited proposal which the Board determines, in good faith, constitutes or is reasonably likely to lead to a superior transaction to the Transaction.

NRG Energy has agreed to pay Centrica a termination fee of $180 million if the Transaction fails to complete as a result of (i) either Centrica or NRG Energy terminating the Purchase Agreement upon the Transaction failing to complete by 24 July 2021 (or such later date as may be extended pursuant to the Purchase Agreement) solely as a result of one or more conditions relating to the receipt of specified antitrust or regulatory approvals not having been satisfied or waived, (ii) either Centrica or NRG Energy terminating the Purchase Agreement as a result of a final judgment of a governmental entity issued with respect to specified antitrust or other review laws that permanently restricts the Transaction from proceeding to completion, (iii) NRG Energy terminating the Purchase Agreement as a result of a final judgment of a governmental entity being issued or a law being enacted that imposes a burdensome condition in connection with specified antitrust or other review laws, or (iv) Centrica terminating the Purchase Agreement as a result of NRG Energy failing to use its 'reasonable best efforts' to satisfy the antitrust and regulatory conditions with respect to specified antitrust or regulatory approvals

In addition, Centrica and NRG Energy have agreed to cooperate to finalise the terms of a transition services agreement to be entered into at completion pursuant to which Centrica will provide or procure the provision of certain services relating to Direct Energy. Centrica will retain the North American operations of Centrica Business Solutions and Direct Energy will provide or procure provision of certain services relating to Centrica Business Solutions for a transitional period following completion while separation is taking place

Centrica said that the net cash proceeds arising from the Transaction are expected to be approximately £2.7 billion after adjustment for estimated debt-like items of approximately £0.1 billion and estimated transaction costs, including taxation costs of restructuring prior to disposal, of approximately £0.1 billion (the 'Net Cash Proceeds'). Centrica will retain cash generated by Direct Energy between signing and completion. The Centrica Board intends to use the Net Cash Proceeds to make a significant reduction in net debt and to make a material contribution to the Group’s Pension Schemes

With respect to Centrica, a shareholder circular containing further details of the Transaction, the Centrica Board's recommendation, and the notice of the General Meeting and the Resolution required to approve the Transaction will be sent to Centrica’s shareholders as soon as practicable, with the General Meeting expected to be held in mid-August 2020. Completion is expected to occur in the fourth quarter of 2020, Centrica said

Related Story: Centrica Interim Results:

--- In North America Residential Segment, Centrica Reports Higher Residential Adjusted Operating Profit From Cost Efficiencies, Offsetting "Minor" COVID Impacts (story here)

--- Centrica North America C&I Segment "Underlying" Retail Margins Improved, But Saw Wider Loss On COVID Demand & Bad Debt Impacts (story here)

--- Residential Customer Count Falls Due To Loss Of Face to Face Sales Channels (story here)

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