centrica plc strategy update - 27 february 2013
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Learn how our refreshed strategic priorities position Centrica to best advantage in a rapidly evolving energy world: Innovate to drive service excellence and growth; Integrate our natural gas business, linked to our core markets; and Increase our returns through efficiency and continued capital disciplineTRANSCRIPT
Strategy update 27 February 2013
2
Disclaimer
This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Centrica shares or other securities. This presentation contains certain forward-looking statements with respect to the financial condition, results, operations and businesses of Centrica plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser. Unless otherwise stated all reported figures include share of JVs and associates after interest and taxation (except adjusted operating profit which includes share of JVs and associates before interest and taxation) and are before depreciation of fair value uplifts to property, plant and equipment from Strategic Investments and exceptional items and certain re-measurements.
Sam Laidlaw Chief Executive
Progress against previous strategic priorities
Stable BGR profit and market share BGS profit up 34% Leadership in systems, online and smart
2P reserves up 50%, production up 50% Established significant Norwegian business Strong nuclear output and life extensions
US customer numbers up 75%, DEB power volumes up 54% Multi-state services capability Gas and liquids production up 50%, resource base trebled
EPS up 25% DPS up 28% TSR 36% (FTSE 100: 21%)
Strategic priorities
Grow British Gas
Deliver value from our growing upstream
business
Build an integrated North American
business
Drive superior financial returns
Strategy delivery over past 3 years
4
The external environment is evolving
• Gas continues to play a major but changing role in UK and US energy supplies – the UK is increasingly reliant on imports. LNG will intensify the link between the
UK and global gas markets – in North America, growing shale production has resulted in low prices and is
opening an opportunity for exports
• In UK power generation, new investment depends on regulatory outcomes
• Downstream trends differ in our markets – in the UK, affordability is high on the political agenda and energy efficiency and
technology are key to managing energy bills – in contrast, in North America bills are decreasing and the market environment
is improving
5
2010 2015 2020 2025
Gas has an important role to play in the US and UK
Source: UK – National Grid National Grid Ten Year Statement US – EIA Annual Energy Outlook 2013 Early Release, central case
• Coal to gas switching in power
• Lower CO2 emissions
• Potential additional industrial demand growth
• Scope for gas exports
Forecast UK gas demand
2010 2012
8.4 8.0
bcf/d
2015 2020 2025
8.5 8.4 7.8
Forecast demand for power generation
2010 2015
bcf/d
2020 2025
UK - continuing role for gas
1
2
3
4 Forecast residential gas demand bcf/d
1
2
3
4
Gas currently heats 81% of UK homes
Gone Green scenario
Slow Progression scenario
Gone Green scenario
Slow Progression scenario
2010 2012
64 69
bcf/d
2015 2020 2025
68 71 72
Gas demand for power generation
2009 2010
19 20
bcf/d
2011 2012
21
25
US - new sources of demand Forecast US gas demand
6
Source: UK – National Grid Ten Year Statement (Slow Progression scenario)
UK more reliant on gas imports
• Traditional supplies declining • LNG increasing • UK shale may contribute in the longer-term
7
LNG imports
Europe imports
Norway imports
UK onshore
UKCS domestic 0
2
4
6
8
10
12
2001 2006 2011 2016 2021
29% 3% 57% 61% 72% % of supply from import
UK gas supply (bcf/d)
2000 2012 2010 2008 2006 2004 2002 2018 2016 2014
Forward curve
LNG intensifies link between UK and global markets
• UK competing for supply in a global LNG market
• 25 countries importing LNG in 2011 (12 in 2001)
• Spot LNG increased from 6% to 25% of traded volume between 2005 and 2012
• Regional price spreads are driven by – North America: abundance of gas – Asia: oil indexation and growing demand – Europe: tension between oil indexed and
gas-on-gas pricing
Growing global LNG demand
8 Source: UK – BCG, IHS CERA, ICE, Nymex
2011 2001
7
2
31
13
Other
India
Spain
UK
Japan
South Korea
France
US
bcf/d
Regional pricing with high volatility
Gas Europe (NBP) Gas U.S. (Henry Hub)
Gas Asia (Japan LNG) (USD/mmbtu)
0
5
10
15
20
Shale gas has transformed the US energy outlook
• Greater certainty about scale and enduring nature of shale gas in the US given technology developments
• >20 LNG export projects under consideration
• UK a potential future market for US gas
Shale increasing gas production
9 Source: EIA Annual Energy Outlook 2012; FERC: Federal Energy Regulatory Commission; LNG export project status as at 21 February 2013
LNG export projects are planned
Cameron LNG, LA (Sempra)
Sabine Pass, LA (Cheniere)
Lake Charles, TX (BG/S. Union)
Lavaca Bay LNG, TX (Excelerate)
Corpus Christi LNG, TX (Cheniere)
Freeport LNG, TX (FLNG)
Oregon LNG, OR (OLNG)
Jordan Cove, OR (Veresen/OPD)
FERC filing
FERC pre-filing
Under construction
Cove Point, MD (Dominion)
Shale increasing gas production
1990 2000 2010 2020 2030
100
20
bcf/day
US gas production
0
40
60
80
US demand
Non-Shale
Shale
UK Power investments depend on regulatory support
• Spark spreads remain low
• Reserve margins expected to fall for next three years, leading to market tightening
• Attraction of new investment will depend on capacity payments, which remain uncertain
• Projects are becoming larger and more complex
• Regulatory uncertainty remains – CfD design and strike price
• Few equity investors able to take construction risk
• Fixed price will no longer provide a hedge for downstream volatility
Gas fired generation
10 Source: Argus; 4C Offshore
Renewables Average offshore wind project characteristics
~100
~500
~1,0001
Round 1
Round 2
Round 3
Average size (MW)
9
15
45
8
25
60
Average water depth (m)
Distance to shore (km)
1. R3 zones are c.3,500MW but actual projects are likely to be divided into smaller sizes
(£/MWh)
UK power price and clean spark spread
40
60
80
100
20
0
-20
Baseload power
2005 2007 2009 2013 2011 2015
Clean Spark Spread
Forward curve
Downstream: emphasis on affordability in the UK
• Regulatory scrutiny of pricing and product transparency – building trust a key issue
• Energy efficiency more important for customers and Government – underlying gas consumption down 15% since 2008 – cost of carbon abatement increasing
11 Source: ONS, economic position of households, Q2 2012 update; European Commission/nVision 2012; Average bills based on national average direct debit rates and at Seasonal Normal Temperature (SNT)
Energy bills increasing British Gas residential dual fuel energy bill
£/customer/year @SNT
2008 2009 2010 2012 2011
1,067
944 1,027 1,005 Non-commodity
costs
Commodity costs 14.8
15.0
15.2
14.4
14.2
14.6
14.0
2008 2009 2010 2012 2011 2013
Real households’ disposable income per head £ ‘000 /year, real 2009
UK consumer confidence Index, %
Challenging economy, pressure on spending
15.4
-40
-35
-30
-25
-20
-15
-10
-5
0
1,125
Downstream: favourable environment in NA
• Improving market environment – regulators welcoming competition – ~8m new residential competitive retail customers since 2008 (up 64%)
• Businesses interested in demand response and energy management services
12 Source: Federal Reserve Economic Data: US Department of Commerce, Bureau of Economic Analysis; University of Michigan; KEMA retailer landscape September 2012
Energy bills decreasing Direct Energy customer energy bills
$/customer/year
2008 2009 2010 2012 2011
US North
Texas
1,000
1,500
2,000
3,000
500
0
2,500
Income and sentiment improving
35
32
30
2008 2009 2010 2012 2011 2013
34
33
31
Real households’ disposable income per head $ ’000s/year, real 2005
90
50
30
70
60
40
80
US consumer sentiment index, %
1. Innovate to drive growth and service excellence
2. Integrate our natural gas business, linked to our core markets
3. Increase our returns through efficiency and continued capital discipline
Our strategic priorities
The leading integrated energy company with customers at its core
13
What these priorities mean
14
Share technology and new propositions across the Atlantic, leveraging our leading positions. Grow in B2B, services and North American residential
Invest for value in E&P, notably in North America, and limit capital employed in power. Increase our presence in LNG and grow optimisation activities
Drive operational and cost efficiency across the Group, deploy balance sheet capacity where we see value, return surplus capital to shareholders
1. Innovate to drive growth and service excellence
2. Integrate our natural gas business, linked to our core markets
3. Increase our returns through efficiency and continued capital discipline
New organisational structure
• Leverage scale benefits in sales operations, billing and customer service
• Share best practice in competitive energy retailing
• Share innovations and new products e.g. connected homes
• Deploy expertise across the Atlantic e.g. B2B and services
• Leverage scale, systems and technology in the UK and North America
• Share best practice across the Atlantic
International Downstream
• Deliver best in class safety and environmental performance
• Reduce cost
15
• Leverage technology, reservoir and geoscience expertise
• Harness project management capability
• Explore options for North American exports to UK as well as to US customers
• Optimise midstream and arbitrage opportunities
International Upstream
International functional organisation
New organisational structure
16
Sam Laidlaw Chief Executive
• E&P Global • UK Power
Jill Shedden Group Director
Human Resources
Grant Dawson General Counsel & Company Secretary
Mark Hanafin Managing Director
International Upstream
• Centrica Storage Ltd
• British Gas Residential • British Gas Services • British Gas Business • North America (excl. E&P)
Chris Weston Managing Director
International Downstream
Nick Luff Group Finance
Director
1. Innovate to drive growth and service excellence • Lead with great service and efficient operations
• Enable our customers to control their energy use in a simpler, smarter, more efficient way
• Grow in selected markets, building on our leading capabilities
2. Integrate our natural gas business, linked to our core markets
3. Increase our returns through efficiency and continued capital discipline
Our strategic priorities
17
Our downstream business
18
Benefits of scale in sales operations, billing and customer service
15.7m residential energy accounts • 1.2 bcf/d gas • 26 TWh electricity
4.1m services customers
3.5m residential energy accounts • 584 mcf/d gas • 19 TWh electricity
0.4m B2B accounts • 217 mcf/d gas • 51 TWh electricity
3.1m services customer relationships
0.9m B2B accounts • 248 mcf/d gas • 17 TWh electricity
Distinctive capabilities across downstream
• ‘Five star’ UK customer service rating from Consumer Focus • Same day service promise in NA and UK • IT platforms driving scale efficiencies
• UK base of over 11,000 highly trained engineers • Presence in 78 of top 100 US metropolitan areas – 1,900 US
employee licensed technicians and 1,600 franchisees
• No. 1 UK website, 30% of customers registered online • Innovative US ‘Free Power Saturdays’ and ‘Power-to-Go’ propositions • Highly rated connected home products and applications
Customer service and efficiency
Home and business services
Innovation
Great brands
19
UK:
• Relentless focus on costs, enabled by leading systems and efficiencies
• Energy customer churn 3pp below industry average
20
Great service and efficient operations
Efficiency in energy and services has improved . . .
British Gas
Competitor Average
90
80
70
60
40
20
10
0
30
50
2011 operating cost per account
9
8
7
6
4
2
1
0
3
5
2011 post- tax BGR margin (%)
2009 2012
Material costs 600
575
550
525
500
BGS product holdings per FTE
20
15
10
5
0 2009 2010 2011 2012
Total British Gas Net Promoter Score 35
30
25
20
15
10
5
0
. . . while Net Promoter Score has been increasing
£ £/job, real
great service and efficient operations
US:
• Call centre consolidation reduced costs but maintained service
• Investment in customer information platforms to improve first call resolution
21
Great service and efficient operations
. . . as are Net Promoter Scores Operational efficiency is increasing…
80
60
40
20
0
-20
Services
Business
Residential
DE operating metrics
US$
Cost to serve/ customer
2009
2012
Opex/ customer
Operating profit/customer
104
67
167 157
64 76
Direct Energy Net Promoter Score
2009 2010 2011 2012
great service and efficient operations
Opportunities to differentiate in residential
• Target attractive customer segments bundling products, services and energy
• Aid customer retention differentiates British Gas and Direct Energy from competitors
• Material contribution to future operating profit
Simpler, smarter, more efficient energy
• Additional opportunities in connected homes driven by – smart meter roll-out – energy efficiency
• Good fit with our digital presence and services capabilities
Power-To-Go
Free Power Saturdays
22
Remote Heating Control
Smart phone application
Smart Energy Report
Source: 1. Lawrence Berkley National Lab
Opportunities to differentiate in B2B Simpler, smarter, more efficient energy
23
Improving energy performance in UK
• EPCs – partnering with major organisations to fund energy saving measures, paid via energy bill reduction
• 7 UK partnerships from standing start
– 5-10 year contracts – growing book, 5-10%
net margin • BGB Services 2012 revenue
up 12%
Demand response is already material in US
• Customers modify electricity consumption in response to electricity prices
• Large and growing US market: from 15GW in 2007 to >30GW in 2012
• Creates a ‘virtual generation’ asset at lower capital and operational risk than peaking plants
Distributed generation poised for growth
• Energy management – potential for >15 GW of commercial solar by 2016 in DEB’s footprint
Reducing churn and improving margins through additional B2B services
Average Installed Price of Distributed Solar PV 1
1998 2010
$/W
2011 2012
12
10
8
6
4
2
0
All other costs
PV module
A market leading position in North America
• DE downstream ROACE up from 9% to 13% since 2009
24
Strong growth track record Market leading position
Grow in selected markets
• 400,000 DEB accounts – small business segment operating
profit has grown 8x since 2009
Direct Energy underlying operating profit
£m
2009 2010 2011 2012
331 312
234 214
Ontario
CAGR:+16%
North America competitive residential energy retailers
Energy customers, millions
Direct Energy
FirstEnergy Solutions
Just Energy
TXU Energy
1.6 1.6
2.1
2.7
1.1
1.4
Reliant Energy
Dominion Retail
North America: growth in residential
25
Grow in selected markets
• Product differentiation and effective sales channel management delivering higher organic growth
– USNE customer base now 1.4m
• New sales channels including improved digital platform
Organic customer base growth
Residential energy net customer additions (’000)1 % of total
2011 2012
396 796
Acquisitive
Organic
100%
80%
60%
40%
20%
0%
Integration of bolt-on acquisitions
• Platform standardisation and staff consolidation to deliver synergies
• Flexible integration approach to identify opportunity above investment case
• Identify and retain best practices (e.g. targeted sales strategies)
Gateway
Vectren
First Choice Power
$90m
$39m
$270m
15%
17%
12%
Cost IRR
(latest view) 2011 acquisitions
1. Excludes Ontario, Alberta regulated, transfers of accounts to DEB and aggregation customers acquired as a result of the 2011 Vectren acquisition
Positioned for further growth in North America
26
Grow in selected markets
• 50m homes in deregulated markets in the US
• Realise scale benefits and portfolio diversity
• Leverage smart opportunity
Large residential energy market with room for growth . . .
. . . supported by growth in Services and B2B
• 13% p.a. growth in customer relationships (2009-12)
• Strengthen services platform and build protection plan business
Residential Energy market share % of total (2012)
85% 77%
Incumbents
Retailers
100%
80%
60%
40%
20%
0% 15%
23%
Direct Energy
DE Services operating profit Services
18 15
28 33 £m
2011 2012 2010 2009
• Target growth in small business and through new offerings (e.g. demand response)
DE Business operating profit
34
88 110
129 £m
2011 2012 2010 2009 C&I
Small Business
B2B
Growth prospects in downstream
• Operational efficiency and great service to remain competitive
• New segments (e.g. landlords), affinity partnerships, and smart meter enabled sales
• Connected homes and businesses to contribute ~£50m and underpin core propositions
• Near term challenging • Growth supported by business services
maintain stable margins
high single digit growth
mid single digit growth over time
double in the next 3-5 years
(downstream)
• Organic growth in DER, DEB and DES: customer loyalty in DER and differentiated products and services
• Bolt-on acquisitions: leveraging our integration expertise
• Attractive adjacencies: leverage our existing customer base and core capabilities
Operating profit
BGR
BGS
BGB
27
International downstream in summary
28
1. Innovate to drive growth and service excellence
Growth in selected markets
Simpler, smarter, more efficient energy
Great service and efficient operations
Lead with great service and relentless focus on costs, utilising our unique scale, systems and services capabilities
Enable our customers to control their energy use with innovative new products and services
Apply our leading capabilities in services and B2B in the UK and US, build scale in US NE and Texas residential
1. Innovate to drive growth and service excellence
2. Integrate our natural gas business, linked to our core markets • Grow and diversify our E&P portfolio for value
• Develop our midstream business to integrate along the value chain
• Maintain a low carbon power hedge and invest where we see value
3. Increase our returns through efficiency and continued capital discipline
Our strategic priorities
29
Delivering on our strategy Grow and diversify our E&P portfolio for value
• Larger, more diverse portfolio
• 30 operated fields compared to 6 at the start of 2009
• Sustainable mix of producing, development and exploration assets
• Good progress towards existing production target
– ~75mmboe/a in 2013 including 10mmboe/a in North America
• 208% Production Replacement Ratio for 2009-12
30
Global oil & gas production
mmboe/a
2009
44
75
bcfe/d 1.3
2013e 2009
2P reserves 1,2
mmboe
2009
290
633
tcfe 4.0
2013 2009
2C resources 1
mmboe
60
590
tcfe 4.0
2013 2009
Trinidad & Tobago North America
Netherlands Norway UK
1. At 1 January; Netherlands includes UK sector of Markham hub, Norway includes UK sector of Statfjord hub 2. Excludes Rough cushion gas (31mmboe in 2012)
31
Our UK hedge is now in line with our competitors
bth
2009
6.6
2.7
Supply Demand Residential pre-tax energy hedge:
Centrica’s changing energy balance1
bth
2009
6.3
4.8
Supply Demand
Power
Gas
2009 2012 %
2009
Competitors Centrica
Centrica hedge ratio vs competitors
Competitors
Pre-tax Post-tax
0 10
20
30
40
50
60
70
80
210
220
230
2009
46
Centrica
1. Demand includes residential energy demand, power station gas requirements and gas required to generate power demand not covered by own gas-fired generation. Supply includes non-US gas and oil production and the gas equivalent of power generated from non-gas sources (wind power, nuclear power and coal linked purchase contracts).
77
42%
26%
Residential post-tax energy hedge: 46%
77%
Distinctive capabilities underpin recent success
• Morecambe field life extended beyond 2025 • Wildcat Hills redevelopment commenced in 2012 • Hydraulic fracturing of tight sands in Southern North Sea
• Ensign, Seven Seas and Atla fields brought into production • Cygnus FID taken, supported by new £500m tax allowance, peak
production ~110 mmcf/d • Innovative but proven solutions (e.g. F3-FA self-installing platform)
• 40% 2010-12 exploration success rate, £3.5/boe finding costs • 22 awards in latest UK and Norwegian license rounds • Discoveries at Butch, Maria and Rodriguez
• Norwegian assets acquired from Statoil for c.£1bn, alongside partnership agreement on gas exploration opportunities
• Statfjørd share increased to ~35% • North American reserves up 65% over 3 years
Recent achievements Distinctive capabilities
Asset stewardship
Delivering mid-sized projects
Exploration in known subsurfaces
Strategic acquisitions and partnerships
32
Grow and diversify our E&P portfolio for value
Norway – a successful growth story
Production: fastest growing entrant since 2000
• 4 acquisitions between 2008 and 2012
• Statoil and Statfjørd acquisitions outperforming double-digit IRR acquisition cases
• ~65kboe/d in 2013 from Statfjørd, Kvitebjørn and Heimdal hubs
Development: capturing upside from our acquisitions
• Portfolio of 8 development assets (5 operated)
• Can sustain current production until at least 2020
• Self-funding from 2013
Exploration: outstanding success
• 37 licences awarded – 95% success rate
• 10 wells drilled, with 60% success rate
• Average finding costs of £2.4/boe
• 10 further exploration wells identified 33
Grow and diversify our E&P portfolio for value
1. Includes UK sector of Statfjørd field
From entry to successful mid-scale E&P in 5 years
Production assets Development assets
2P + C
2007 2009 2010 2012 2011
128 117
63
0
375
2008
63
Exploration discoveries
mmboe1
Morecambe – extracting value from a mature asset Production: managing performance and cost
• FEED underway on Barrow terminal optimisation project – potential for field life extension
• Ongoing terminal reliability and maintenance programmes
Development: adding new reserves
• Rhyl - first Centrica gas development in the East Irish Sea in over 10 years (13mmboe, 80bcf)
• First gas expected Q1 2013, reserves doubled since sanction
• Whitehaven exploration well successful, may add up to 20bcf to reserves
Exploration: adding new resources
• 3D seismic survey completed in January, first in region since 1993
• Identifying deep pre-Triassic targets under the current reservoir
• First deep exploration well expected 2014
34
Grow and diversify our E&P portfolio for value
North Morecambe
Rhyl
Marram
Bains
Ormonde Millom
Heysham
Barrow
A highly strategic asset
• One of UK’s largest gas fields • First gas 1985, peak gas 2000 • 100% owned and operated • Low operating cost
South Morecambe
Western Canada – capabilities in onshore E&P
35
Transforming our business Production: building scale
• Doubled our 2P reserves and production
• Taking advantage of low gas prices to acquire long-life assets for value
Development: capabilities in horizontal wells
• Shifted focus from shallow gas and coal bed methane to more valuable liquids-rich gas and oil
– average well length increased from ~0.8km to ~ 3km – drilling programme from 95% vertical wells to 80% horizontal wells
• Unit costs decreased from $5.5/mcf to under $4/mcf
• Well positioned for further growth in North America
Production 2P Reserves
2007 2009 2010 2012 2011 2008
mmboe bcfe
700
350
0
bcfe/d
0.2
0.1
0.0
mmboe/a
Grow and diversify our E&P portfolio for value
120 12
Diversified portfolio with stable production outlook
• Increasing diversification: UK <25% of production by 2020
• Four developments approved: Cygnus, Valemon, Kew, Grove
• Development options represent over 0.5bn boe of 2C resources
• Targeting double-digit returns from developments
36
Grow and diversify our E&P portfolio for value
0
15
30
45
60
75
90
Global gas & oil production outlook mmboe/a
Exploration
Development options
Approved developments
North America
Europe, T&T2 Base
1.5 bcfe/d Typical investment
~£100m/a
~£1bn/a1
1. Includes ~£100m/a maintenance capital expenditure 2. Base production includes York and Rhyl
2009 2011 2013 2015 2017 2019
Deploying further capital in E&P for value
• Consider upstream growth only where we see value
• Apply rigorous capital discipline
• North America currently an attractive market for further investment
– good value opportunities – our gas production is
only ~20% of our NA gas demand
37
Opportunity to step up from 75mmboe/a towards 100mmboe/a production globally
Grow and diversify our E&P portfolio for value
Norway • Scale and longevity - exploration
potential • Further acquisitions around hubs
UK & Netherlands • Mature assets, declining resources • Focus on existing hubs • Bolt-on acquisitions and
divestments to high-grade portfolio
North America • Opportunity to acquire position in
conventional and unconventional plays • Scalable with the potential for exports • Diversifies NBP exposure
Trinidad & Tobago • Opportunities to deliver value
from our existing positions • Further exploration potential
Value is emerging in US unconventionals
• Natural gas prices recovering as demand grows and production adjusts
• Asset prices now more realistic
• Technological advances have de-risked unconventional resources and increased well productivity
38
0102030405060708090100110120
0123456789
101112
Forward curve
$/bbl $/mmbtu
Historic
EV/ EBITDA of Companies Exposed to Unconventional Gas Western Texas Intermediate
Oil Price
Henry Hub Gas Price
EV/ EBITDA Multiple1
2015 2014 2013 2012 2011 2010 2009 2008 012345678
1. Enterprise value over 12-month forward earnings forecast for selected group of companies exposed to US unconventional gas
Grow and diversify our E&P portfolio for value
Significant positions along the gas value chain
800 mmcf/d residential & business gas demand
1.3 GW CCGT (126 mmcf/d fuel gas)
Potential investment in gas production (focus on NA)
Access to 1 bcf/d pipeline & 23 bcf storage capacity
321 mmcf/d supply contract with Qatargas
1.5bcf/d residential & business gas demand
4.1 GW CCGT (175 mmcf/d fuel gas)
10 mmboe/a production (159 mmcf/d)
39mmboe/a production UK and NL (588 mmcf/d)
150mmcf/d production potential development
22mmboe/a production Norway (270 mmcf/d)
117 bcf of gas storage (Rough)
566 mmcf/d LNG import at Isle of Grain
LNG
Upstream production
Gas demand
Midstream Positions
1.2bcf/d of European contracts and storage and
pipeline capacity
Opportunities to link and optimise our positions along the value chain
39
Develop our midstream business to integrate along the value chain
Develop our midstream business to integrate along the value chain
Deploying our midstream capabilities
• Managing price risk, shape, intermittency and seasonal swing
• Track record in gas and power asset optimisation
• Assets and positions in UK, North America, Norway and Benelux across E&P, power, storage and logistics
• Strategic partnerships – 0.5 bcf/d supply contract with Statoil
alongside a £1bn upstream asset acquisition
– 2.4mmtpa (0.3 bcf/d) supply contract with Qatargas; MoU with QPI
• Market insights from participation across gas value chain
Asset-backed optimisation
Procurement and contracting
40
Our capabilities Opportunities
Grow our optimisation business, linking our positions along the gas value chain
Increase our presence in LNG contracting, securing energy for our customers
Expertise and options in UK storage
• UK has relatively low seasonal storage capacity
• Volatility in gas price may increase with more wind on the system
• Strong Asian demand may limit LNG imports
• Floor price may be required to promote investment and provide insurance
41
Develop our midstream business to integrate along the value chain
Rough (existing)
Baird
Caythorpe
% owned by Centrica
Working gas (bcf)
Injection/withdrawal (days)
100%
117
190/90
Rough
100%
4.9
26/30
Caythorpe
70%
108
90/95
Baird
Projects
Maximising value from our existing UK power assets
• CCGT: managing the fleet for market recovery – higher utilisation expected by 2015 – turbine blade upgrade at South Humber and
potential Kings Lynn replant – ongoing portfolio restructuring
• Nuclear: focus on reliability and life extension – good performance – seven year average life extension now assumed
• Wind: management of asset and maintain new options – Lincs into production and financing complete
Flexible, low carbon generation capacity
Expected increase from existing fleet
42
Maintain a low carbon hedge and invest in power where we see value
Centrica Energy UK equity generation capacity1
6.0 GW
2012
4.1
1.7 0.2 Nuclear
CCGT
Wind
Peak Power cover ratio2
~ 70%
Centrica Energy UK equity generation output
21.5 TWh
2012
9.0
12.0
0.5
2015e 1. Includes Spalding tolling contract 2. Peak power demand from BGR and BGB / maximum CCGT, nuclear and contract power generation capacity
Options to invest if we see value
CCGT • New build options maintained at least cost • Investment decision subject to improvements in
market outlook and capacity payment outcome – Kings Lynn 2 (1 GW) – other sites being considered
Offshore wind • Pipeline of development opportunities but
challenging environment. Investment requires: – regulatory certainty around revenues – steady, predictable timelines – fast capital cycling – availability of partners
• Seeking to progress Race Bank to FID • R3 ‘Celtic Array’ next in pipeline, following
successful Race Bank
Langage Power Station
43
Maintain a low carbon hedge and invest in power where we see value
Offshore wind project pipeline 3,500
3,000
2,500
2,000
1,500
1,000
500
0
MW
2006 2008 2010 2012 2014 2016 2018e 2007 2009 2011 2013 2015 2017e Post
2018
Race Bank
R3 Celtic Array
LID
Lincs
Barrow
International upstream in summary
44
2. Integrate our natural gas business, linked to our core markets
Maintain a low carbon power hedge and invest
where we see value
Develop our midstream business to integrate along
the value chain
Grow and diversify our E&P portfolio for value
• Strong near term growth and good development pipeline • Build and optimise our portfolio: moving towards 100mmboe/a,
investing only for value • Greater focus on North America
• Grow our midstream activities to integrate along the gas value chain and across the Atlantic
– focus on LNG, storage, and asset optimisation
• Further investment in offshore wind with limited capital employed • Maintain new build CCGT options at least cost
– higher output and margins as market conditions improve
Nick Luff Group Finance Director
Our strategic priorities 1. Innovate
to drive growth and service excellence
2. Integrate our natural gas business, linked to our core markets
3. Increase our returns through efficiency and continued capital discipline • Further develop organisational capability
• Continuously focus on safety
• Deliver value to shareholders
46
Cash generation
• Highly cash generative business model – ~£1.8bn free cash flow p.a.
• Significant flexibility in investment choices across the Group
• Opportunities benchmarked against returns to shareholders
Sources and uses
Sources Uses
£4.0bn EBITDA
Normalised cash flows
£1.2bn
£0.9bn
Interest and tax
Dividends
Other1 £0.1bn
Free cash flow
47 1. Includes working capital, exceptional payments, pension deficit payments
Capex profile
• ~£200m p.a. maintenance capex
• ~£1.1bn p.a. to maintain and sustain production – bring gas and oil projects onstream – enhance production from existing assets – includes ~£100m p.a. exploration spend
• ~£400m-£500m p.a. available for ‘growth’ investment choices, broadly maintaining current levels of net debt
– including additional upstream investment, offshore wind, new-build CCGT, gas storage, bolt-on acquisitions
48
Other maintenance
Upstream gas and oil (Including maintenance)
‘Growth’ capex
Annualised capex profile 2013-15
~£0.2bn
~£1.1bn
£0.4bn-£0.5bn
Credit headroom
• Maintain commitment to A3 / A- credit ratings
• Comfortable 2012 metrics, expected to improve in 2013
• Headroom for value-adding acquisitions
49
EBITDA Net debt
£3.7bn £4.0bn
Funds from operations
Adjusted debt
£3.0bn
£5.2bn
Retained cash flow
£1.7bn
£5.9bn
Adjusted debt
57% 29%
For the year ended 31 December 2012
Bringing projects on stream
• Bringing £1.5bn of major new projects onstream between 2013-2015
• Track record of bringing resources into production – Rhyl discovery in 2009, first gas due early 2013 – York appraisal in 2010, first gas due early 2013
• Balanced portfolio of exploration, development and production assets
– high grading portfolio through investment choices
50
Capital moving from pre-productive to productive
2012 2013 2014 2015 First year
of project earnings
Ensign Seven Seas
Atla Lincs
York Rhyl Kew
Valemon Cygnus
0.0
£bn 1.5
Case studies – organic investment decisions Cygnus
• Strong strategic fit – cornerstone asset – acquired through Venture Production acquisition – largest discovery in Southern North Sea for 25 years, £1.4bn total investment – Centrica share of 2P reserves of 53mmboe – deploying our expertise through 48.75% non-operated interest
• Shallow field allowance improves full cycle returns to ~10% level and point forward IRR to >20%
New nuclear
• Potentially attractive option acquired as part of BE acquisition in 2009
• £200m pre FID investment – good progress in a number of key areas
• Strict financial discipline, decision not to proceed – increased costs, extended timeline for return on capital – CFD structure does not provide hedge against downstream price volatility – existing nuclear JV performing well 51
Case studies - acquisitions Statoil strategic partnership
• Delivered step change in scale of Norwegian activities, trebling 2P reserves – £1bn investment for 117mmboe 2P reserves (including 90mmboe producing
Kvitebjørn field and 21mmboe Valemon development asset) – building on existing Norwegian position – leveraging our relationship with Statoil – specially tailored package - upside through development and exploration
• Broader partnership, including supply contract and exploration MoU
• ~10% IRR, production ahead of investment case
First Choice Power
• Added 200,000 customers in core Texas market, increasing our scale by one third – high consumption, low-churn incumbent customer base
• Double digit IRR investment case; accretive in first year; five-year payback period – integration into existing platform completed ahead of plan, delivering synergies – lower churn
52
Operational excellence
• Strong health and safety record – process and personal safety a core priority
• Strong track record of cost reduction – on track to deliver £500m Group-wide cost
reduction programme, ensuring we remain competitive
– half of savings achieved in 2012 – 3,000 roles removed – 5% reduction in underlying British Gas costs
in 2012 – improved levels of customer service
• Continuous focus on operational efficiency and cost reduction
53
1. Excludes exploration, bad debt, depreciation, additional investment in growth areas and the impact of acquisitions
A further £100m of cost savings are targeted within cost of sales
Controllable operating cost base1
2011 2012
£2.3bn
£2.1bn
2013
£1.9bn
Controllable cost base
Inflationary impact
Dividend growth
• Strong track record of real dividend growth
• £500m share buy back announced in February 2013
• All investments benchmarked against returns to shareholders
• TSR of 36% over past 3 years
0
2
4
6
8
10
12
14
16
18
1999 2001 2003 2005 2007 2009 2011
CAGR = 16.5%
DPS (p)
54
Sam Laidlaw Chief Executive
Our five year vision for a leading integrated energy company with customers at its core
• Growing Midstream business in North America and Europe, with emerging presence in LNG
• Increase linkage between our gas supply and demand positions, maximising value through midstream optimisation
• Strong and stable UK retail business, with growth in services and adjacent sectors
• More material energy retail and services businesses in North America
• Sustainable and high-grade portfolio in the North Sea
• Significant upstream position in North America e.g. unconventional gas
• Efficient power plants in the UK and North America, maintaining an appropriate hedge
56
Upstream Midstream Downstream
The next 3-5 years
57
1. Innovate to drive growth and service excellence
• Stable profits in BGR, growth in BGS and BGB • Build capabilities in connected homes and businesses • Double operating profit in North America downstream through
organic growth and acquisition
• Invest for value across our international portfolio, delivering annual production in the range 75mmboe to 100mmboe
• Link our positions along the gas value chain, emerging presence in LNG
• Options to invest in UK power generation if we see value, with partners to share equity risk
• Drive cost efficiency across the Group • Stay focused on health, safety and environmental performance • Deploy capital where we see value • Return surplus capital to shareholders
2. Integrate our natural gas business, linked to our core markets
3. Increase our returns through efficiency and continued capital discipline