NRG to buy Centrica's US energy business in US$3.6b deal

[HOUSTON] NRG Energy is buying Centrica's North American energy business in a US$3.6 billion deal that broadens its retail operations across the US and Canada.

The deal to buy Direct Energy gives NRG 3 million more retail customers and is expected to generate about US$740 million in annual adjusted earnings before interest, taxes, depreciation and amortisation, the Princeton, New Jersey, based company said in a statement.

It's another step in NRG's push to expand retail sales and reduce its exposure to price swings in wholesale energy markets. The deal will also allow the company to expand power-purchase agreements with renewable energy suppliers outside Texas.

For Centrica, the deal is a decisive move by new Chief Executive Officer Chris O'Shea as he seeks to convince investors he can turn the company around after it was demoted from the FTSE-100 UK benchmark stock index after 33 years. Mr O'Shea is building on a restructuring announced last month to create a more simple business.

NRG shares fell as much as 3.9 per cent before the start of regular trading in New York. In London, Centrica jumped as much as 39 per cent, the most on record during intraday trading.

The offer from NRG Energy felt "compelling", Mr O'Shea said on a call with reporters. "The more you can focus, the better your results can be."

Mr O'Shea doesn't have an easy task as he attempts to change the course of a business that was in trouble before the coronavirus crisis. A miscalculation about where Centrica should focus its growth, a government-imposed price cap on household bills and a crash in global energy markets have all hit profits.

The Direct Energy sale "helps simplify the business back to UK customer focus and relives balance sheet pressure," said John Musk, an analyst at RBC Europe Ltd. "We see these results as a clear positive for a stock that has significantly underperformed the sector year-to-date."

There was a delay in the publication of Centrica's first-half results as the final details of the US disposal were being agreed on, Mr O'Shea said. The companies began exclusive negotiations for the sale in May.

"Talk about going to the wire," he said.

The US unit had been troublesome for Centrica in the past. In 2017, a surprise slump in earnings from its retail supply business left investors concerned that management wasn't fully focused on the US market. The proceeds of the sale will be used to reduce net debt and to make contributions to the company's pension liabilities. The deal is expected to complete by the end of the year.

Debt investors were cheered by the US disposal. The cost to protect Centrica's bonds against default dropped to the lowest since February, as measured by 5-year senior credit-default swaps, according to ICE Data Services.

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