Centrica Plc · LSE:CNA
Centrica — Investor Presentation (December 2003)
55 slides from Centrica's investor presentation, Dec 3, 2003
Slide 1: Centrica Energy Management Group
Centrica Energy Management Group 3 December 2003
Slide 2: Disclaimer
Disclaimer This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Centrica Shares. Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser.
Slide 3: Jake Ulrich, Managing Director - CEMG
Jake Ulrich Managing Director - CEMG
Slide 4: Agenda
AGENDA Context Gas Position Power Position Financial Drivers Wrap-up 3
Slide 5: Why we exist
Why we exist • Optimise energy costs for downstream businesses • Reduce earnings volatility 4
Slide 6: We achieve this using a number of tools
We achieve this using a number of tools... • Gas and power asset portfolio • Energy procurement through traded market and bilateral contracts • Wholesale and Industrial customer base • Asset and contract optimisation … which in combination provide flexibility & shape 5
Slide 7: Our core UK energy business has performed well through volatile markets
Our core UK energy business has performed well through volatile markets ‘Energy 1998 1999 2000 2001 2002 Business’ £165m £456m £545m £601m £829m Operating Profit * 26 27 22 24 Gas Electricity p/therm 18 21 £/MWh 14 18 10 15 Jun-98 Jun-99 Jun-00 Jun-01 Jun-03 Jun-02 Dec-99 Dec-01 Dec-02 Dec-98 Dec-00
Slide 8: Our approach to procurement gives us competitive advantage
Our approach to procurement gives us competitive advantage • Tailored to customer propositions • Asset hedge based on long-term risk reduction (impact of volatility) • Dynamic over time • Asset ‘right’ strategy reflecting - Liquidity - Credit risks (post Enron) - Competitor positions • Trade-off bet
Slide 9: Determinants of the asset hedge are market specific
Determinants of the asset hedge are market specific 100% UK UK Power Power ½ hour balancing Competitors as counterparties Asset Hedge Texas Texas Power Power Limited balancing risk Limited liquidity UK UK Gas Gas Daily balancing Short term liquidity 0% Risk Factors 8
Slide 10: Our procurement strategy balances short-term risks with long term optionality
Our procurement strategy balances short-term risks with long term optionality Gas Procurement Power Procurement Fixed Target Range Fixed Target Range 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% Win Yr 0 Win Yr 1 Win Yr 3 Win Yr 2 Sum Yr 0 Sum Yr 1 Sum Yr 2 Sum Yr 3 Year 4 Year 5 Year 7 Year 8 Ye
Slide 11: Ian Wood, Director, Sales & Marketing - CEMG
Ian Wood Director, Sales & Marketing - CEMG
Slide 12: Agenda
AGENDA Context Gas Position Power Position Financial Drivers Wrap-up 11
Slide 13: CEMG is the fifth largest producer in the UK
CEMG is the fifth largest producer in the UK (10% of total UK supply) Goldeneye Armada Key bcf <30 31-85 86-185 186-299 >300 Galleon N&S Morecambe Rose Bains Chiswick Ensign York Victor End of 2003 Reserves: Hewett Complex S.Morecambe 1.5 tcf Ravenspurn North N.Morecambe 0.3 tcf Amethyst Rest 0.5 tc
Slide 14: We have the technical capability to maximise asset values
We have the technical capability to maximise asset values 2000 South South Morecambe Morecambe Offshore Offshore DP4 D6 Well 1800 Compression DP8 Extended South Morecambe Deliverability - mmscfd Compression South Morecambe Reach Well 1600 Offshore South Morecambe Compression Onshore 1400 Compression
Slide 15: Our portfolio of flexible assets and contracts is fully optimised
Our portfolio of flexible assets and contracts is fully optimised Current Portfolio 225 Portfolio Volumes Available (MCM/day) 200 LNG Hornsea 175 Rough Sean 150 Flat Winter Gas 125 South Morecambe 100 Leman East 75 Bruce & Galleon 50 Put/Call contract 25 Annual flat gas 0 0 50 100 150 200 250 300 35
Slide 16: Overall we are well positioned to meet our customer demand
Overall we are well positioned to meet our customer demand 2005 Competitors’ Position 14 12 Long-term 10 Contracted Equity 8 Demand 6 4 2 0 Centrica Competitor Competitor Competitor Competitor 93% 1 2 3 4 Source: Centrica estimates 15
Slide 17: The bulk of our requirements is covered in volume terms to 2009
The bulk of our requirements is covered in volume terms to 2009 Centrica Annual Supply vs. Demand 120% 100% 80% % of Demand 60% 40% 20% 0% 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 Equity Contracted Statoil Gasunie New Equity Source: Centrica estimates. New equity based on estimated
Slide 18: Imported gas will fill the emerging supply gap
Imported gas will fill the emerging supply gap UK Annual Supply vs. Demand 140 120 100 BCM 80 60 40 20 0 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 UKCS (On Production and Discoveries) Norwegian Imports (St Fergus) Planned New Norwegian, Dutch, LNG Imports Demand UK 17 Source:
Slide 19: Diverse new supplies are available to the UK
Diverse new supplies are available to the UK Supply Cost into UK 18 16 Russian Gas North Africa & Middle 14 East LNG Projects Ormen Lange 12 North African & Middle East • Britpipe - 20 •LNG NGTProjects LNG - 5 bcm • Dutch p/therm 10 bcm Interconnector - ••NGT LNG - 5/ BG Petroplus bcm- 5 bcm 10 bcm
Slide 20: Peak supply remains tight in the near-term
Peak supply remains tight in the near-term UK Peak Day Supply Demand 700 600 500 MCM/ day 400 300 200 100 0 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 UKCS (On Production and Discoveries) Norwegian Imports (St Fergus) Planned New Norwegian, Dutch, LNG Imports IUK Storage Rough
Slide 21: Implications for future UK prices
Implications for future UK prices UK Gas Price Forecasts 25 24 NBP 23 22 Continental Gas Price 21 p/therm 20 19 18 Resource Cost 17 16 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Centrica estimates 20
Slide 22: Management of weather risk is critical
Management of weather risk is critical 2003 Variation of Heating Degree Days Cumulative YTD vs Ten Year Average • Centrica instrumental in 80 developing weather trading 60 market 40 • Weather hedge has delivered 20 reduced earnings volatility 0 over past three warm winters, HDDs -20 however: -40 - I
Slide 23: Our gas strategy gives us a relative cost advantage
We believe our strategy in gas gives us a relative cost advantage Competitor WACOG Relative to Centrica (100%) 110% Highest cost 105% Competitor 100% Lowest cost Competitor 95% 2003 2004 2005 2006 2007 Source: Centrica estimates 22
Slide 24: Summary - Gas
Summary - Gas • Fifth largest gas producer in the UK • We have a strong technical team that can maximise asset values • Portfolio mix of equity & contracts gives us flexibility to best serve downstream demand • The bulk of our gas requirements are covered in volume terms to 2009 … longer-term we are
Slide 25: Gearóid Lane, Head of Electricity Supplies - CEMG
Gearóid Lane Head of Electricity Supplies - CEMG
Slide 26: Agenda
AGENDA Context Gas Position Power Position Financial Drivers Wrap-up 25
Slide 27: Our power station portfolio currently stands at 2.2 GW
Our power station portfolio currently stands at 2.2 GW Spalding 860 MW Humber Power 1260 MW Tolling Contract with InterGen JV: 60% Centrica & 40% TFE Q4 2004 £343/kW 2001 Roosecote 229MW 100% Centrica Glanford Brigg 4x60MW £105/kW 2003 100% Centrica £154/kW 2002 Kings Lynn 325MW 100% Centrica £305/k
Slide 28: We have acquired power stations at low cost
We have acquired power stations at low cost History of Forward Prices for April Annual Baseload Contract and Generation Asset Transaction Multiples 27 Brigg 640 Prompt Forward April Annual (£/MWh) 26 Killingholme CCGT Deals 590 Sutton Bridge FGD Coal Deals 25 Non-FGD Coal Deals 540 Corby 24 CCGT New
Slide 29: We manage our portfolio to match the shape of downstream demand
We manage our portfolio of assets & contracts to match the shape of downstream demand Typical Centrica Winter Day Demand 7,000 Balancing Volume Power Stations 6,000 Long & Short-term Contracted 5,000 MW 4,000 3,000 2,000 1,000 0 00:00 05:00 07:00 08:00 10:00 12:00 14:00 15:00 16:00 17:00 19:00 22:00
Slide 30: Rising wholesale forward power prices
Rising wholesale forward power prices ... Comparison of Forward Wholesale Electricity prices (Mar 2003 vs Nov 2003) 35.00 30.00 Nov-03 25.00 £/MWh 20.00 Mar-03 15.00 10.00 W-03 S-04 W-04 S-05 W-05 S-06 W-06 S-07 W-07 S-08 Source: Spectrometer 29
Slide 31: Driven by fuel input costs and reduced plant availability
… driven in part by recent increases in fuel input costs as well as reduced plant availability Fuel Price Impact on Power Production (Jan 02 to Oct 03) 150 Coal 140 130 Input Price Impact on 120 Gas Marginal Production Costs 110 (Jan 02=100) 100 90 80 Jan-02 Jun-02 Aug-02 Nov-02 Dec-02 Jan-03 Aug-03
Slide 32: Our portfolio of equity and contracts provides significant cover
Our portfolio of equity and contracts provides significant cover in the near-term Centrica UK Power: Equity & Contract Cover 120% 100% 80% % Cover 60% 40% 20% 0% 2004 2005 2006 2007 Equity & Contracts Power stations uplift to 85% LF CEMG Power Stations Portfolio 50% 67% 67% 67% Load Factor 31
Slide 33: Our assets cover over 50% of our total demand
Our assets cover over 50% of our total demand Estimated 2005 Demand 90 LT PPA 80 Equity 70 Demand 60 TWh 50 40 30 20 10 0 Competitor Competitor Competitor Competitor Competitor Competitor Centrica 1 2 3 4 5 6 32 Source: Centrica estimates
Slide 34: Our strategy in electricity has given us a relative cost advantage
Our strategy in electricity has given us a relative cost advantage Competitor WACOE Relative to Centrica (100%) 125% • Centrica acquired assets at competitive prices 120% 115% • Forward purchases by 110% Centrica at bottom of market 105% Highest • Several competitors have cost 100% competitor materi
Slide 35: Committed to investing in renewable generation
We have committed to investing in renewable generation as part of meeting our obligation Centrica ROC Requirement vs Renewable Energy Supply Sources 6000 Actual Purchases to date Estimated market purchases 5000 Renewable generation 4000 Requirement GWh 3000 2000 1000 0 2002/ 2003/ 2004/ 2005/ 2006/
Slide 36: The Renewables obligation is a major challenge for all suppliers
The Renewables obligation is a major challenge for all suppliers Renewables Obligation 2002/3 by Company (obligation vs. own generation) 3,000 2,000 GWh 1,000 0 Other Generation Obligation Other NFPA Competitor 2 Competitor 3 Competitor 4 Competitor 5 Competitor 1 Centrica Own NFPA Renewables Obliga
Slide 37: Offshore wind is critical to meeting the obligation
Offshore wind is critical to meeting the obligation Renewables Obligation in 2010 • Existing generation gives little (Total UK Obligation ~ 34TWh) strategic advantage to competitors Existing Facilities • Larger scale onshore projects in the pipeline but not sufficient to meet obligation Potential On
Slide 38: Returns of 12 to 15% expected from offshore wind
Based on our view of ROC prices, returns of 12 to 15% can be expected from offshore wind Assumptions Assumptions Assumptions 70 •• 100MW 100MW ofof offshore offshore wind wind in in aa 60 phased phased development development 50 •• Construction Construction Cost Cost £100m £100m ROC 40 •• Annual Ann
Slide 39: The emissions trading timeline is extremely tight
The emissions trading timeline is extremely tight Dec 03 Mar 04 Sept 04 Jan 05 Feb 05 Dec 05 Feb 06 Apr 06 EU compliance year considers EU ETS Phase I Consultation process End of all NAPs Surrender Draft UK Proportion allowances NAP of total equivalent allowances to 2005 Laws, issued emissions NAP r
Slide 40: There is significant uncertainty about the value of carbon
There is significant uncertainty about the value of carbon… Cost of Carbon 30 25 Euro/ 20 tonne C02 15 10 5 0 Highest Carbon Lowest Carbon Current 2005 Forecast Forecast Market Price ‘Forecasting set’: McKinsey & Co, DKW, UBS Warburg, CERA, Citigroup, Power Ink, & JP Morgan 39
Slide 41: Uncertainty regarding the relative winners and losers
…as well as uncertainty regarding the relative winners and losers • Perception that Centrica is disadvantaged due to lower asset cover but… • …Centrica’s asset portfolio (inc. Spalding) currently provides more than 75% of British Gas’ residential customer demand. Maximum potential is nearly 90% • Hi
Slide 42: Centrica ETS action plan
Centrica ETS action plan • Review asset cover - Existing assets - Development options - Renewables • Review contract cover • Prepare for trading • Lobbying 41
Slide 43: Power position summary
Power position summary • Our fleet of power stations has been acquired at low cost • The portfolio of assets and contracts gives us the flexibility to optimally shape against demand • This portfolio provides significant cover against volatile spark spreads • We will seek to, at least, maintain our r
Slide 44: Sarwjit Sambhi, Director, Finance & Strategy - CEMG
Sarwjit Sambhi Director, Finance & Strategy - CEMG
Slide 45: Agenda
AGENDA Context Gas Position Power Position Financial Drivers Wrap-up 44
Slide 46: Gas production continues to be a major driver of profit
Gas production (existing and new) continues to be a major driver of profit Morecambe and New Equity Profile 100 ‘New ‘New Morecambe Morecambe Equity’ Equity’ 75 % of 2002 actuals Revenue Revenue 100% 100% 100% 100% DPRT DPRT -13% -13% 0% 0% 50 Depreciation Depreciation -20% -20% -34% -34% Operating
Slide 47: Future Industrial & Wholesale profits determined by opportunistic gas sales
Future Industrial & Wholesale profits will be determined by opportunistic wholesale gas sales Projected Sales 6,000 5,000 Wholesale Million 4,000 Industrial Therms per Annum 3,000 2,000 1,000 0 2002 2003 2004 2005 2006 2007 2008 * 2003 Centrica forecast 46
Slide 48: Accord profitability should start to reflect recovery in trading activity
Accord profitability should start to reflect recovery in trading activity UK Gas Market - NBP Churn Ratio 25 TXU Europe exit Enron exit 20 15 Churn Ratio (traded / 10 physical volumes) 5 0 Jan-01 May-01 Jul-01 Jan-02 Sep-02 Nov-02 Jan-03 May-03 Sep-03 Mar-01 Sep-01 Nov-01 Mar-02 May-02 Mar-03 Jul-03
Slide 49: Planned investments are focused on upstream equity
Planned investments are focused on upstream equity Estimated Calendar Year Cumulative Cumulative Expenditure for: 2004 to to 2008 2008 Upstream Upstream Gas Gas £150m £150m £500m £500m Power Power Assets Assets £100m £100m £250m £250m Renewables Renewables £80m £80m £500m £500m Generation Generation
Slide 50: Sensitivity to gas price movement
Sensitivity to gas price movement Purchase Purchase Costs Costs and and PRT PRT increases: increases: £62 £62 million million Increase in Gas Prices of 1p/therm in 2004 Sales Sales and and upstream upstream revenue revenue increases: increases: £27 £27 million million 49
Slide 51: Sensitivity to electricity price movement
Sensitivity to electricity price movement Increase in baseload Purchase costs increase power price of £1/MWh by £5m in 2004 incl. shape needs Cost of Shaped Power Products 250% 175% % over 2002 Baseload Price 113% 120% 129% 131% 2003 Stomper Winter Peak Winter EFA (07:00 - 23:00) (07:00-19:00 Block
Slide 52: Jake Ulrich, Managing Director - CEMG
Jake Ulrich Managing Director - CEMG
Slide 53: Agenda
AGENDA Context Gas Position Power Position Financial Drivers Wrap-up 52
Slide 54: Wrap-Up
Wrap-Up • Quality portfolio of assets and contractual positions • Our procurement strategy is effective and flexible • We are making good progress in advancing our renewables and emissions trading strategies • Continue to expect strong cashflows 53
Slide 55: Centrica
A centrica taking care of the essentials y