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Direct Energy Reports Higher Profits, Lists Top Markets for Residential Entry

July 28, 2011
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Direct Energy reported a 32% increase in profit for the first six months of 2011, from US$212 million to US$279 million, due to strong sales performance of Direct Energy Business as well as the acquisitions of Clockwork Home Services and the Wildcat Hills gas assets.

Operating profit in the Residential energy supply business fell slightly to £105 million (2010: £110 million) reflecting less favorable market conditions and a spike in Texas power prices during the extremely cold weather in February, partially offset by customer growth and operational efficiencies. The operating margin remained broadly flat, at 8.1% (2010: 8.0%).

Residential customers rose by over 100,000 accounts (4%) during the first six months of the year, from 2.855 million as of December 31, 2010 to 2.966 million as of June 30, 2011. The residential segment total as of June 30, 2011 also reflects the reclassification of 59,000 customer accounts as Direct Energy Business customers.

In Texas, churn remains at historically low levels, with Direct's prepaid product having a positive impact on customer numbers.

The Northeast residential business is seeing both organic and inorganic growth (through the Gateway acquisition), increasing Direct's residential customer count in the Northeast U.S. to 800,000 customers.

Cory Byzewski, Vice President and General Manager, US North, for Direct Energy Residential, cited, in particular, the Pennsylvania markets as driving growth. Byzewski also cited New Jersey as standing out, where Direct is active with its own-branded electric and gas efforts at PSE&G, as well as the acquired Gateway business which is active in all territories.

At Commonwealth Edison, Byzewski said that Direct ramped residential marketing in June (after a conservative entry earlier this year), and is pleased with the response thus far.

Byzewski said that Ameren is "at or near" the top of Direct's list for new residential market entry, and said that Massachusetts is also high on the list.

Direct Energy Business operating profit for the half-year increased by 32% to £58 million (2010: £44 million), with higher gas and electric volumes. For the first six months of the year, Business electric sales were up 21% at 22,191 GWh (versus 18,280 GWh a year ago), and Business gas sales were up 16% at 417 mmth (versus 361 mmth a year ago).

Centrica said that high sales productivity, the targeting of key customer segments, operational efficiencies, and good levels of customer service allowed Direct Energy Business to increase operating margin to 4.2% (2010: 3.3%).

As only reported in Matters (7/4), Direct Energy Business is focusing on small business sales as a key growth driver.

Centrica said that while further vertical integration in its U.S. electric business remains desirable, weaker near term returns for generation in regions without capacity payments could restrict the number of opportunities available to add generation to the Direct business.

While there is "no doubt" an advantage to owning power generation in the U.S., it is not a "must-do at any price" Centrica Chief Executive Sam Laidlaw said during an investor presentation, stating that Centrica remains focused on value. Laidlaw added that, under the current wholesale energy environment, generation ownership is most beneficial in managing intra-day volatility, but it is not something, "we have to do."

Still, the Centrica board has encouraged the management team to look at further expansion opportunities in the North American markets, due to the dilution of UK upstream returns due to taxes.

Chris Weston, President and CEO of Direct Energy, said that Direct, "continue[s] to pursue our growth strategy for North America, with nearly US$700 million in acquisitions completed across North America in the last 12 months."

"There are further opportunities for both organic and acquisitive growth in both the upstream and downstream energy sectors within North America and we are well positioned to capitalize on those opportunities," Weston added.

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