Direct Energy

Direct Energy

February 21, 2008 08:00 ET

Strength in Wholesale and Business Markets Powers Direct Energy

TORONTO, ONTARIO--(Marketwire - Feb. 21, 2008) - Direct Energy, the North American subsidiary of Centrica plc, based in Toronto, delivered strong profits for the full-year 2007 despite the backdrop of the weakening housing market and early signs of an economic downturn in the US.

Operating profit was up 12 per cent to $404 million(i) (up 16 per cent on an FX adjusted basis) on revenues of $8.6 billion up 2 per cent (up 5 per cent on an FX adjusted basis) on the prior year, with strong demand from business customers, accelerated growth in wholesale energy operations and increased profits in services offsetting a decline in mass markets energy revenues.

Direct Energy, the 43rd largest company in Canada(ii), is not publicly traded, but Centrica reports the financial performance of its North American subsidiary. Centrica, which trades on the London Stock Exchange (LSE:CNA), reported full-year 2007 revenues(v) of 16.3 billion pounds (C$32.2 billion(iii)). Net earnings rose to 1.12 billion pounds(v)(vi) (C$2.21 billion(iv)).

"Our continued growth reflects the diversity of our business and breadth of our offer to customers in increasingly competitive markets," said Direct Energy Chairman and CEO Deryk King.

"While 2008 will be a challenging year we expect to continue to deliver both top and bottom line growth. We expect to minimize any impacts of the economic downturn by further increasing the diversity of our business portfolio in particular by continuing to build material business upstream and in commercial and industrial downstream markets."

Direct Energy was reorganized from a regional structure into four pan-North American lines of business during the first half of 2007 to enable greater focus on common customer classes and efficiencies of scale through shared operations. The business reports full year results for the first time on this basis below.

Mass markets energy

The mass markets energy segment, which comprises natural gas and electricity sales to residential and small commercial customers, suffered from increased competitive pressures following the end of 'Price to Beat' regulation in the Texas market and with customers in Ontario rolling off five-year electricity contracts signed at market opening in 2002. This resulted in customer losses. However, strong growth in sales volumes in the second half helped stabilize the customer count with a return to net growth in November and December. Revenue was down 8 per cent to $5.3 billion (down 7 per cent on an FX adjusted basis) and operating profit was down 18 per cent to $267 million (down 15 per cent on an FX adjusted basis) for the full-year.

"A key focus for 2008 will be reducing customer churn while maintaining the momentum of our growth in sales," said Mr. King.

Commercial and industrial energy

The commercial and industrial energy segment, encompassing natural gas and electricity sales to medium and large-sized businesses, public institutions and government, delivered continued rapid growth and recorded its first full-year operating profit. Revenue was up 19 per cent to $2.1 billion (up 23 per cent on an FX adjusted basis), with volumes up 13 per cent and 24 per cent in natural gas and electricity respectively. Profits in the more mature Canadian and Texas businesses offset the costs of rapid expansion in existing North Eastern US markets and the business posted an operating profit of $2 million overall.

"Our commercial and industrial energy business has now moved out of its initial build phase and is delivering a positive contribution to our bottom line. We are well positioned to deliver further strong growth in this sector, particularly across the increasingly active North Eastern US markets," said Mr. King.

Home and business services

This line of business, which comprises home and business services across North America, had a good year despite challenging market conditions with continued deepening of the housing recession in the US. During the year customer numbers grew by 3.5 per cent to over two million for the first time. In the US, residential new construction business weathered the housing market downturn well, gained market share in a shrinking market and expanded its consumer service business. The acquisition in January of MABE, a service provider for white goods, enabled us to launch an appliance protection and repair business across Canada. Revenue was broadly flat at $752 million, while operating profit was up strongly at $35 million, a 75 per cent gain, following the restructuring of the business services operation and the increased focus on cost control to improve competitiveness.

Due to changes during the year in the relationship with the Consumers' Waterheater Income Fund, the decision was taken to deconsolidate the Fund's results with effect from 1 December 2007. As a consequence, Centrica's reported 2007 results exclude the Income Trust's results. The Fund was created in 2002 to refinance the waterheater assets acquired Direct Energy's acquisition of Enbridge Services.

Upstream and wholesale energy

Upstream and wholesale energy comprises Direct Energy's upstream and midstream activities which include upstream gas, power generation, gas storage and transportation leases, wholesale power and gas transactions, wind power purchase agreements and proprietary trading. The business delivered a strong performance across power stations and wind contracts as 433MW of new capacity came on stream, wholesale energy auctions, gas storage and proprietary trading. Operating profit was up 152 per cent to $101 million.

Direct Energy made a successful bid for Rockyview Energy in Alberta for $113.1 million in November and the deal, which is in the process of being completed, adds 2,700boe per day to hydrocarbon production, largely as natural gas.

"Our upstream and wholesale business is an increasingly visible part of Direct Energy. Looking forwards we will increase our market involvement in gas storage and transportation, and we will continue to evaluate opportunities to build our portfolio of upstream gas and electricity assets and contracts," said Mr. King.

About Direct Energy

Direct Energy is one of North America's largest energy and energy-related services providers with over 5 million residential and commercial customer relationships. Direct Energy provides customers with choice and support in managing their energy costs through a portfolio of innovative products and services. A subsidiary of Centrica plc (LSE:CNA), one of the world's leading integrated energy companies, Direct Energy operates in Texas, the northeastern United States and across Canada. To learn more about Direct Energy, visit www.directenergy.com.

Notes:

(i) The results reported in British pounds were adversely impacted by the weakness of US dollar against sterling through the year and, to a lesser extent, the Canadian dollar in the first half of the year. Here they are expressed in Canadian dollars except where noted. Exchange rates used: For 2007: 1 pound equals C$2.1532; 2006: 1 pound equals C$2.0871.

(ii) 2006 Financial Post 500; ranked by revenue

(iii) Exchange rate used 1 pound equals C$1.9767 (Bloomberg Benchmark Rate 15 February 2008)

(iv) Ibid

(v) from continuing operations

(vi) including joint ventures and associates net of interest and taxation, and before exceptional items and certain re-measurements

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