Hey buddy, wanna buy an asset-real cheap?

By Pam Boschee, Managing Editor

The British gas and home services company, Centrica PLC, announced its acquisition of NewPower Holdings, a U.S. retailer of gas and electricity, on February 23. Actually it may be more accurate to say NewPower cried uncle and acquiesced to Centrica.

NewPower was staggering and on the ropes; it simply could not recover from the uppercut it took from Enron. In December, NewPower said it was taking a $110 million charge for its exposure to Enron, which had been its main provider of energy. Enron still holds $70 million in cash collateral and $40 million against NewPower’s gas inventories.

With an established residential and small business customer base in Georgia, New Jersey, Ohio, Pennsylvania and Texas (about 650,000 customers), NewPower came at a deep discount price for Centrica at the announced $1.05 per share, totaling $130 million, which amounts to $200 per established customer.

NewPower’s shares peaked at $27 in October 2000, but closed at 80 cents on the New York Stock Exchange the day before the announcement of the acquisition.

Centrica plans to explore opportunities in the Midwest and Northeast during the course of the year. In a statement, the company said it “expects to be addressing a viable market of over 20 million households in the United States by the end of 2002.”

This may sound ambitious, but bear in mind that Centrica’s North American expansion escalated in August 2000 when it acquired Toronto-based Direct Energy, North America’s largest unregulated retailer of natural gas at that time. Centrica also supplies gas in six U.S. states under the brand Energy America, which it acquired in January 2001. Today, Centrica is the largest North American unregulated energy supplier.

In June 2001, Centrica assumed full ownership of GreenSource Ltd., a company providing access to a network of private gas servicing and installation contracting firms in Ontario. In January 2002, it acquired Enbridge Services, expanding Centrica’s Canadian natural gas supply and home services business by another 1 million customers.

Referring to NewPower, Centrica’s CEO, Roy Gardner, said, “This transaction”demonstrates Centrica’s ability to leverage its considerable financial strengths to gain market leadership and seize profitable growth opportunities as they arise.”

The key is “considerable financial strengths,” and some industry analysts and bankers have suggested that the financial muscle of power companies, including Duke Energy Corp., American Electric Power Co, Dominion Resources, FPL Group and Southern Co., may allow these companies to do some cherry picking of their own.

Power plants are going up for sale as companies like El Paso Corp., Williams Cos., AES Corp. and Mirant, among others, offer up about $7.5 billion worth of assets. To battle analysts’ skepticism about their finances, they’re attempting to beef up their balance sheets-and investors’ confidence.

A year ago, AES was trading at just under $57 a share; Calpine at about $43 a share. Recently, AES saw a 10-year low with shares around $4; Calpine was about $7.

Although the assets are for sale, will the potential buyers be interested? How long can the sellers wait, and how low will they bewilling to go?

AES hopes to raise $1.5 billion, Williams is aiming for $750 million, NRG Energy is seeking $2 billion and El Paso plans to raise $2.25 billion.

Mirant snared $1 billion from the sale of its German utility toward its target of raising $1.6 billion.

Debt has become an objectionable four-letter word. If the financial pressures mount for these companies, as they did for NewPower, don’t be surprised to see some “midnight madness” sales. So, bargain hunters-be alert.

Addendum: Centrica and NewPower announced on March 29 that they terminated their agreement. A bankruptcy court ruling left NewPower responsible for any of Enron’s outstanding tax liability in 1999-2000. The court refused to block claims against NewPower.

P.S. This issue introduces our new look. We’ve kept all the same sections, but have changed the format to include more interesting presentations of copy and graphics. Your feedback would be much appreciated. Drop me a line at pamb@pennwell.com to share your comments.

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