Centrica's Direct Energy May Spend $3 Billion to Buy North American Assets

Centrica Plc’s Direct Energy unit may spend as much as 2 billion pounds ($3 billion) to acquire power and natural-gas assets in North America by 2015, Chief Executive Officer Chris Weston said.

Direct Energy will focus on buying existing power plants, preferably gas-fired, rather than building capacity, Weston said yesterday in an interview at an energy conference in Montreal. The company will target assets in Texas and the northeastern U.S., regions that offer the best potential for growth, he said.

Utilities have been snapping up energy assets in the U.S., where the economic slowdown has made targets more affordable, in a bid to boost generation capacity and add clients. Direct Energy, the Toronto-based subsidiary of Britain’s biggest energy supplier, has more than 5 million customers and owns gas- production assets in Alberta and gas-fed power plants in Texas.

“We have put in about 2 billion pounds so far, and over the next three to five years we want to invest probably as much again in developing our North American upstream business,” Weston said. “Power prices are low and asset prices are depressed because of that, so you could argue now is a good time to buy. The economics of power do not support new-builds.”

Direct Energy will consider drilling more gas wells and buying more land in western Canada to increase output, according to Weston. “We have a lot of acreage in Canada, and we are looking at how we can exploit it,” he said. “In natural gas, our heartland is western Canada. We are being quite choosy at the moment in this lower gas-price environment.”

Invest in Shale

Direct Energy is also studying whether to invest in shale gas production and may make a decision this year, Weston said.

“We are looking at how we get into shale,” he said. “Do we do it though an acquisition, do we do an early-stage joint venture or do we partner with a more mature player? These are questions that we have, and I suspect that over the next six to nine months we will have formed a view.”

North American gas producers are boosting output from shale formations, where rocks hundreds of feet below the ground are fractured to free trapped natural gas. Techniques created in the 1990s to tap gas from shale have made such extraction economically feasible.

Gas prices will probably remain “depressed” in 2010 amid a glut in supply, Weston said. Gas futures have dropped 28 percent this year on the New York Mercantile Exchange.

Gas Prices

“Given the rate at which horizontal wells are being drilled, I think we will see depressed gas prices for the near term,” Weston said. “Obviously the price of gas at the moment makes us assess our breakeven costs of doing it even more. In the longer term it will be interesting to see whether gas starts to play a bigger role in the economy.”

Direct Energy has about 1.2 million customers in Alberta, 700,000 in Texas and 600,000 in northeastern U.S. states including New York and Pennsylvania, Weston said.

Pennsylvania’s PPL Corp. agreed to buy E.ON AG’s U.S. power and gas unit for $6.7 billion last week, while FirstEnergy Corp. in February struck a deal to purchase Allegheny Energy for about $4.7 billion.

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.

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