October 28, 2008
Troubled retailer Commerce Energy is exiting the ERCOT market and has sold its entire Texas customer book, about 60,000 customers, to Ambit Energy for an estimated $14.8 million.
The asset purchase agreement includes a non-compete clause that bars Commerce from competing in the retail electricity business in the State of Texas, or soliciting Ambit’s employees, customers or clients in the State of Texas. Commerce said it will focus on the Ohio and California gas markets and other markets in the Northeast.
The deal follows a much smaller sale this summer under which MXenergy bought Commerce’s residential book at Baltimore Gas & Electric (Matters, 9/30/08), as Commerce tries to turn things around. In shedding nearly 60,000 ERCOT customers, Commerce’s book will shrink by about one-third, according to Commerce’s last publicly reported customer count of 165,000 as of April 30, 2008. Commerce started the summer by shedding one-third of its workforce, and also sold its consulting business Skipping Stone.
Ambit will preserve the terms and conditions of the acquired customer contracts, which Commerce said featured residential, small C&I and large C&I customers. The bulk of Commerce’s ERCOT business has traditionally been C&I.
The initial purchase price paid to Commerce is $11.2 million, with $8.5 million paid on October 24. The remaining $2.7 million, to be reduced by customer deposits and adjusted by positive or negative monetary adjustments if the number of active customers transferred deviates by more than 2.5% from 57,588 customers, is payable in cash on or before November 24, 2008. Additionally, Ambit will assume certain liabilities relating to the assets being sold, and has also agreed to make residual payments to Commerce during a period beginning on the closing date and continuing through December 31, 2010. The residual payments, which are calculated and paid monthly, generally consist of $3.50 for each electric service contract being transferred that has charges invoiced to Ambit that are not past due, and are estimated to be approximately $3.6 million.
For Ambit, the deal represents the marketer’s continued growth, which has relied primarily on multi-level marketing to date and has focused on residential sales. Ambit’s Chief Financial Officer Jim Timmer said Ambit had looked at previous asset purchases before deciding against them, but noted the Commerce deal represented a “great opportunity” for Ambit. Ambit has been able to manage growth because it invested in developing proprietary billing, customer care, forecasting and other backoffice systems at start-up that have proven to be scalable, Ambit Chief Marketing Officer Chris Chambless added.
Ambit is currently marketing in ERCOT, New York and Illinois, and Chambless is excited about the prospects for deregulated markets in all three areas. Ambit also received an Ohio gas license just one month ago (Matters, 9/24/08).
“The Texas deregulated electricity markets remain attractive, which is further emphasized by the completion of deals on terms mutually beneficial to sellers and buyers despite unprecedented disruptions in the global financial and credit markets,” noted Rob Potosky, executive vice president at AEG Affiliated Energy Group, which represented Commerce in
the sale.
Potosky added that greater due diligence is being conducted by potential buyers in ERCOT, usually driven by the parties providing financing. Parties looking to sell their assets or raise money will likely encounter major obstacles if unwilling or incapable of complying with more thorough due diligence requests versus what may have been customary a couple of years ago, Potosky said. Potosky has also seen increased reliance on direct and indirect financing from overseas markets and multinational companies, the U.K. and northern Europe in transactions.
Commerce said the deal will help pay down debt, with Commerce CEO Gregory Craig stating, “this sale will better position Commerce operationally, financially, and strategically to achieve our future objectives.”
In connection with the sale, Commerce also entered into amendments to its debt agreements, which, among other things, allow additional support of up to $6.0 million from AP Finance, LLC, remove the requirement to have a refinancing term sheet by October 30, 2008, and decrease the revolving loan limit and letter of credit limit under the credit facility.
