Recommended offer by Centrica plc for Direct Energy Marketing Limited - paves way for international expansion

Centrica plc has today agreed with the trustees of the Direct Energy Income Fund to acquire its North American energy supply business, Direct Energy Marketing Limited ("Direct Energy"). In addition, Centrica has agreed to purchase the assets of Direct Energy's primary marketing agent, Natural Gas Wholesalers, which provides marketing and call centre services to Direct Energy and Energy America L.L.C. ("Energy America") customers. The total consideration including assumption of debt is C$912m/£406m. The offer to acquire Direct Energy has the unanimous recommendation of the Direct Energy Income Fund trustees and the board of directors of Direct Energy.

The offer comes as the gas and electricity supply markets in North America deregulate and as the pace of development in those markets begins to accelerate. The agreement marks a significant step in the delivery of Centrica's international strategy by providing a strong base for future growth in North America, and an opportunity to apply the skills and expertise gained during the deregulation of the UK energy markets. It also creates a platform for the introduction of other products and services as appropriate.

Direct Energy is the largest unregulated retailer of natural gas in North America, with approximately 820,000 gas customers, primarily in Ontario. In addition, it owns and operates natural gas reserves in Alberta, which provide up to 20% of its customer demand.

Direct Energy also has a 27.5% interest in Energy America, a joint venture with Sempra Energy. This joint venture is expanding across the deregulating gas and electricity markets of the United States and currently has approximately 450,000 customers.

Centrica expects the acquisition to be earnings enhancing in 2002, before amortisation of goodwill and any new investment. It will fund the acquisition from existing cash resources and debt facilities. Direct Energy's net assets were C$225 million (£100 million) at 31 December 1999 and EBITDA for 1999 was C$56 million (£24.9 million).

Under the terms of the agreement, Centrica will be retaining the experienced existing senior management team of Direct Energy, who have built the largest unregulated energy customer base in North America.

Roy Gardner, Chief Executive of Centrica said: "I am delighted we have reached agreement with Direct Energy who share our customer vision. This provides us with the ideal vehicle for rolling out our strategy into the North American markets. Our expertise in building customer relationships and operating in deregulating markets, combined with Direct Energy's risk management and sales skills, will make us a powerful combination."

Gary J Drummond, President of Direct Energy Marketing Limited, said: "Centrica's experience and investment capability will enhance our rapidly-growing operations and allow us to further develop our strategy in North America, at a critical time as more markets are deregulated."

Since its formation in 1997, Centrica has focussed on developing relationships with its traditional gas customer base, successfully expanding into new products and services.

These comprise electricity supply and home services under the British Gas and Scottish Gas brands, motoring services under the AA brand, and insurance and financial services under the AA and Goldfish brands. It intends to launch its telecommunications service in September this year.

Subject to conditions, which include regulatory and unit holder approval, it is expected the transaction will be closed during August of this year.

Chase Securities Inc. acted as the financial adviser to Centrica and Bennett Jones acted as the legal adviser to Centrica. National Bank Financial Inc. acted as financial adviser to Direct Energy and Burnet Duckworth and Palmer acted as legal adviser to Direct Energy.