Centrica plc Strategy Update - 27 February 2013
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Centrica plc Strategy Update - 27 February 2013



Learn how our refreshed strategic priorities position Centrica to best advantage in a rapidly evolving energy world: ...

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 discipline



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Centrica plc Strategy Update - 27 February 2013 Centrica plc Strategy Update - 27 February 2013 Presentation Transcript

  • 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 demandForecast 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 domestic0 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 201220102008200620042002 201820162014 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 20112001 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 ~1,000 1 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 20132011 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 20122011 1,067 944 1,0271,005 Non-commodity costs Commodity costs14.8 15.0 15.2 14.4 14.2 14.6 14.0 2008 2009 2010 20122011 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 20122011 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 20122011 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 ScoresOperational 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 1.61.6 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 396796 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 profitServices 18 15 28 33£m 2011 201220102009 • Target growth in small business and through new offerings (e.g. demand response) DE Business operating profit 34 88 110 129£m 2011 201220102009 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 2013e2009 2P reserves 1,2 mmboe 2009 290 633 tcfe 4.0 20132009 2C resources 1 mmboe 60 590 tcfe 4.0 20132009 Trinidad & TobagoNorth America NetherlandsNorwayUK 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 SupplyDemand Residential pre-tax energy hedge: Centrica’s changing energy balance1 bth 2009 6.3 4.8 SupplyDemand Power Gas 2009 2012 % 2009 CompetitorsCentrica 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 achievementsDistinctive 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 20122011 128117 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 201220112008 mmboebcfe 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 0 10 20 30 40 50 60 70 80 90 100 110 120 0 1 2 3 4 5 6 7 8 9 10 11 12 Forward curve $/bbl$/mmbtu Historic EV/ EBITDA of Companies Exposed to Unconventional GasWestern Texas Intermediate Oil Price Henry Hub Gas Price EV/ EBITDA Multiple1 20152014201320122011201020092008 0 1 2 3 4 5 6 7 8 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 21.5TWh 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 £bn1.5
  • 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 well51
  • 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