NRG Cements Push Into Retail Market With Direct Energy Purchase
NRG Energy Inc. is making its boldest push yet into the retail electricity business, cementing a strategy overhaul that started three years ago.
The power supplier said Friday it’s buying Centrica Plc’s Direct Energy unit in a $3.6 billion deal that will nearly double the number of homes and businesses it serves across North America. It’s NRG’s biggest acquisition in eight years.
The transaction highlights the extent to which U.S. merchant power producers are seeking to redefine themselves after a surge of new wind and solar energy capacity in the U.S. eroded electricity prices in the wholesale markets. By expanding sales through their retail channels, NRG and peers including Vistra Energy Corp. can reduce their exposure to price fluctuations, stabilize earnings and offer services with higher margins.
The deal comes as retail power sales have have remained strong throughout the pandemic, with waning demand from offices and factories offset by booming residential sales, which have greater returns. The U.S. Energy Information Administration forecasts that retail prices will rise 1.2% in 2020 from 2019.
“The ‘independent power producer’ label has become an outdated term as NRG and other large power generators have taken on substantial retail supply businesses,” said Travis Miller, an analyst at Morningstar. “NRG is no longer solely a power producer. They are just as much a retail supplier.”
NRG’s strategy shift came after activist investors Elliott Management Corp. and C. John Wilder’s Bluescape Energy Partners pressed it to cut costs in 2017 and streamline operations amid sagging profit and stagnant demand for electricity. Chief Executive Officer Mauricio Gutierrez in 2018 described the shift as a “pivot.”
The company shed renewable assets as part of that shift. In 2018, it completed one of the largest-ever renewables deals -- a $1.35 billion sale of clean-power assets to Global Infrastructure Partners. That year, Gutierrez told Wall Street that it should begin thinking of the longtime independent power producer in terms of the customers it serves, not the megawatts it produces.
By acquiring Direct Energy, which owns no generation plants, NRG will rely more and more on power supplied by third parties through long-term agreements to meet its customers’ needs. The move will allow the company to expand its supply of renewable energy and cut carbon emissions with reduced capital spending, Gutierrez said in a conference call with investors.
Gutierrez calls it a “capital-light renewable PPA strategy,” referring to power-purchase agreements between electric generators and utilities. NRG produces about 23 gigawatts of power, enough to supply a nation the size of Chile or Belgium.
The all-cash deal to buy Direct Energy gives NRG 3 million more retail customers in the U.S. and Canada and is expected to generate about $740 million in annual adjusted earnings before interest, taxes, depreciation and amortization, according to an NRG statement. The company plans to pay for the acquisition with a mix of debt, cash and equity-related securities.
NRG rose as much as 2.1% Friday before paring gains. The company is down more than 15% this year, which compares to a 6.6% decline in the utility benchmark index.
“This is the right transaction at the right time,” Gutierrez said in the conference call with investors. “We want to move closer to the customer. We believe that the mega trends that we’re seeing support that move.”
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 U.K. benchmark stock index after 33 years. O’Shea is building on a restructuring announced last month to create a more simple business.
In London, Centrica jumped 17%, the most on record during intraday trading.
The offer from NRG Energy felt “compelling,” O’Shea said on a call with reporters. “The more you can focus, the better your results can be.”
Centrica acquired Direct Energy in 2000. It’s based in Houston, Texas, and says it’s one of the largest residential energy retailers in North America, operating in all 50 U.S. states, the District of Columbia and eight Canadian provinces.
©2020 Bloomberg L.P.