Direct Energy Says Texas Churn at Lowest Rate Ever

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February 25, 2011  

Despite a 7% decline in total residential energy supply customers year-over-year, Direct Energy said that its Texas residential book saw improved retention, driving churn to its lowest ever level.

As noted by Matters yesterday (see 2/24), Direct's residential supply customer count declined to 2.855 million as of December 31, 2010 versus 3.075 million as of December 31, 2009.

A significant amount of the churn was in Ontario, due to the challenging market structure. While Texas also saw churn, much of it reflected an earlier strategic decision to retain only higher-value customers. Retention improved in Texas through, "an increased focus on value based pricing and proactive outbound retention," Direct said.

During an earnings call, Chris Weston, Direct Energy President & CEO, said that Direct recorded "good margins" in Texas, and expects Texas residential margins to remain steady in the coming year. Overall, residential operating margin increased to 7.1% in 2010 versus 3.6% in 2009 (the 2009 margin was 5.9% when excluding one-off charges cited below).

In the Northeast, where Direct grew its residential supply customer base in Pennsylvania and Maryland from 11,000 to 100,000 during 2010, Weston said that margins were slightly lower, as Direct is investing more in the cost of acquisition to grow the business quickly. Weston expects Northeast margins to improve slightly in 2011, and said that the 7% range remains Direct's overall expectation for operating margins in 2011.

Centrica executives said that the Northeast remains an "attractive source of growth" for Direct's residential supply business, and also reported "solid returns" from Alberta.

Operating profit for Direct's residential supply business increased to £177 million from £94 million in 2009. The 2009 results were weighed by £61 million in one-off charges, such as bad debt write-offs in Texas, but even when eliminating the impact of these items, operating profit increased 15%.

For Direct Energy's business supply unit, operating profit grew to £88 million from £34 million a year ago, while operating margin improved to 3.3% from 1.4%.

Business electric volumes increased to 39,722 GWh from 33,430 GWh a year ago, while gas sales were 633 mmth in 2010 versus 689 mmth a year ago. Paul Dobson, Senior Vice President for Direct Energy Business, reported that much of the growth was in Pennsylvania, and said that Texas remains the largest market for the business supply unit.

Operating profit for all of Direct Energy's lines of business increased to £234 million from £153 million a year ago.

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