Centrica in North America London, 6th December 2005
Disclaimers This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Centrica shares. This presentation contains certain forward-looking statements with respect to the…
Introduction Phil Bentley Group Finance Director
Objective for Today To make the investment case for North America by: Providing insight into our North American business Supplying data that will help you better value this part of our business 4
Background and Strategic Rationale Deryk King President & CEO
Presenters Deryk King President & CEO, Centrica North America Maura Clark Senior Vice President, Strategy and M&A Phil Tonge President, Texas Retail Operations Bob Huggard President, Canadian Retail Operations & CEO Consumers…
Agenda Objective and Welcome Phil Bentley Background and Strategic Rationale Deryk King Regulation and Competition Maura Clark Business Unit Reviews: Canadian Retail Operations Bob Huggard First Q&A Session Coffee Break Business…
Turnover and profitability have grown steadily since entry into North America Revenues, Cm EBITDA, Cm Op Profit, Cm 6,000 500 400 450 350 5,000 400 300 350 4,000 300 250 3,000 250 200 200 150 2,000 150 100 100 1,000 50…
The market is huge, diverse and complex Annual Revenues bn Gas & Power 160 Home Services 50 Business Services 25 123 million households 21 million commercial and small Energy Statistics business customers Peak Power Demand 800GW…
and different from the UK Annual Power Annual Natural Gas Households Consumption Consumption 123m 4,100 TWh 25.5 Tcf North America 25m 3.5 Tcf 370 TWh UK 10
Regulatory landscape on an upswing 2001 2002 2003 2004 2005 Enter via Organic Acquire Increase asset Accelerate acquisition growth incumbent focus; enter business markets; augmented by customers; build business optimize services &…
Track record demonstrates ability to create value regardless of macro environment Record of growth and performance in often difficult environment Have built a large, diversified scaleable business; profitable since inception…
Strategy of development through adjacencies Time testifies to low risk profile of the business Ontario Plumbing Alberta Home & Drains Services Ontario Auto Texas Renewable Alberta Upstream Technology Energy Gas E&P, CBM Ontario…
Sustained, fast pace of development Acquisitions Disposals Direct Energy Consumers Waterheater Fund Avalanche Energy Georgia gas customers Energy America Enbridge Services Inc Closures NewPower gas customers Maryland gas…
Our current businesses BUSINESS UNIT TARGET CUSTOMER PRODUCT OFFERING Natural Gas Electricity Heating & Cooling Protection Plans Residential MASS MARKETS RETAIL Water heater Rentals Small Commercial Plumbing & Drains Duct…
Current business footprint Canada Calgary US North EMG offices Texas Houston Gas Fields Power Stations 16
Our Core Strategy Optimize and Grow Influence regulatory progress in Residential Energy markets and maximise value of core markets Continue to build Home Services business in Canada and extend geography and product suite in United…
A strong and integral part of the Centrica Group Major growth platform for Centrica 23% of Group EBIT growth since 2000 Common skill sets give competitive edge both ways Sharing of business models and processes Interchange of…
Strong synergies with Centrica in the UK Sales channel management Product design Home services operational processes Global natural gas markets/LNG Asset management Natural gas exploration and development Regulatory skills Energy…
Regulation and Competition Maura Clark SVP Strategy and M&A
We are thriving in a difficult regulatory and competitive environment Regulatory environment variable and evolving Texas pre-eminent model for retail competition Canadian landscape presents discrete challenges Incremental…
Protracted period of restructuring in North America Federal legislation not primary driver of deregulation Dictated by state legislation and/or regulatory mandate No single authority; hundreds of LDCs/EDCs Regulation for gas and…
Natural Gas Regulatory Landscape North American gas network is highly integrated All states and provinces open in large C&I sector Limited new economic residential market opportunities Open to all customers Some utilities…
Electricity Regulatory Landscape Market reforms offer opportunities: Ontario market re- opened California rejected Proposition 80 New York rapidly advancing rules and standards Aggregation programs Significant progress in…
Trend in switched electricity volumes demonstrates continued support of competitive markets Switched Volumes Volume switched in 2004 is 700 almost three times 2001 switched volumes: 600 Market reforms driving market based…
Regulatory status has created differing opportunities across our businesses Ontario Alberta Texas US North Gas competition Gas rebates Price-to-beat is Mass markets well-established hampering gold standard for deregulation Renewed…
No true peer to our unique model and geographic footprint Primary Competitors Residential Canada Leading position in Canada Union Gas, ESC Enmax Strong 3 in Texas US Smaller independents lack staying power TXU, Reliant and…
Canadian Retail Operations Bob Huggard President, Canadian Retail Operations
Canadian Retail Operations 1.8m households taking 2.8m energy & services products 1m gas & electricity customers Calgary Toronto Market Size Gas Power 34,000 gas Over 12,000 Business (res cust) customers in Markets…
Canada Mass Markets Energy Highlights 12 months to June 30, 2005 Gas Power Branded, fixed price offer - 1 Customers (000s) 1,550 576 market share Fixed price contracts, low risk, Volumes* 2,414 7,399 fully hedged, nominal weather…
DEs energy proposition emphasizes price stability 31
Evolving channel mix to reach new customer segments and increase CTA leverage Ontario Gas Channel Mix 100% D2D remains important channel Sales force excellence initiatives 80% have improved agent productivity Engineers cross-selling…
Residential power margins revert to lower, but attractive and sustainable levels with rebate expiry in Ontario April 2006 marks the end of government payments under Market Power Mitigation Agreement Decision to capture MPMA rebates…
Alberta The 37.5m ATCO Retail acquisition gave us: 1 million regulated gas and power customers in Canadas second largest and fastest-growing market A profit growth opportunity by migrating these accounts to competitive offers…
Canada Home Services Highlights Largest Home Services business 12 months to Home Services June 2005 in Ontario: Customers (000s) 1,797 Serves over 40% of all Ontario households Annual calls (000s) 735 780 engineers and installers…
Restructuring of Enbridge Services established our services platform with minimal invested capital Acquisition included: Gross - Water tanks We retained the following: Cost - Rental customers relationships with 1.3m C1.0bn - HVAC…
Knowledge transfer from British Gas is enabling us to extract more value from each customer relationship Service Volumes (000) Jobs per Day 5.9 667 Transformation 541 created platform that: 5.2 Supports incremental revenue 2002…
Leading position in Ontario Services is increasingly being leveraged to pull through energy sales Products combine premium price and high service, Service Relationships At June 30, (000s) 2005 creating strong loyalty Rental Water…
Canada Business Markets Highlights Focus on mid-sized 12 months to June 30, Gas Power Services 2005 business customers Volumes* 323 2,397 n/a National services capability Turnover (m) 108 65 28 Gross Profit (m) 9 16 7 Successful…
Canada Business Markets Strategy Summary Focus on customers with consumption above mass-market tariff thresholds, but below volumes requiring wholesale procurement Expand blue chip customer base, raising profile and creating…
Total Solutions approach gaining traction in Canada; plans to replicate in the US as appropriate SOURCE BUY CONVERT USE DISPOSE Heating, Cooling, Wind, Solar, Energy Regulatory tracking Equipment that Lighting, On-site,…
Growing Success Sample Cross-selling gas and power Gas Power Services Customers Exploiting national services footprint to become provider of choice for multi-regional customers Winning with differentiated energy and energy…
Significant growth opportunity 20bn therms 150TWh 100% 20 billion therms and 150 TWh of C&I volumes in 75% open markets in Canada Open C&I Volume Focusing on retail, light 50% industrial, property management, hospitality…
Canada Retail Summary Ontario power market re-opening revitalizes residential dual fuel opportunity Opportunity to grow energy and services in under-penetrated segments Value creation in Alberta will focus on Business Markets and…
Questions
United States Retail Operations Phil Tonge President, Texas Retail Operations
US Retail Operations 4,000 business markets gas & electricity customers Stamford Dayton 300,000 residential & small commercial gas customers 900,000 residential & small commercial Houston electricity customers 40,000…
US Retail Agenda Focus residential energy efforts in Texas power, Ohio gas and New York dual fuel Continue to grow the profitable RSG residential new construction business and build out home services from this platform focusing…
Texas has the 2nd largest energy consumption in the US, and is enjoying robust growth Residential Customers TXU 2.5m Reliant 1.7m CPL/WTU 0.8m First Choice 0.2m 50
Texas Residential Energy Highlights Mature branded incumbent and high growth insurgent in largest US 12 months to June 30, 2005 competitive market Customers (000s) 892 Attractive market structure, similar Volume (GWh) 12,871 to UK,…
Texas Mass Markets Strategy Summary Build on strong 3 position and narrow gap with market leaders Successfully manage through end of Price to Beat by: Maintaining gross profit Retaining high value customers Achieve continued…
Effectively managed PtB dynamics to maximize profitability and customer retention Illustrative Composition of Rates are designed to leave Price-to-Beat headroom for competitive offers Headroom and cost of power Headroom Set by…
Our proposition offers short-term price stability and guaranteed savings off the PtB rate Award winning TV advertisement 54
Diversified channel mix and process improvements have improved sales performance Insurgent Sales Channels 100% Exploiting direct marketing 90% opportunity with direct mail, 80% affinity programs, moves 70% Diversified channel mix…
Successful channel strategy has translated into sales wins against key competitors Comparative Insurgent Net Growth 50 Focus on attracting and retaining higher-value 40 customers Customer Growth (000s) In Houston and…
and in combination with reduced incumbent attrition, has resulted in faster net growth Comparative Incumbent Attrition 5% Managed attrition in incumbent territories through: 4% Rebates and price Quarterly Attrition (%)…
Grown net customers by 112,000 and maintained profitability through a 16% price increase Price-to-Beat Discounting 0.17 Recent commodity price Negotiated spikes have driven negative 0.16 discounts to mitigate price margins at…
We believe Texas margins will remain attractive post PtB expiry PtB expiry offers the opportunity to tailor our pricing strategy to target acquisition and retention of high value customers The market is consolidating through a…
US North residential performance has improved with optimisation and growth Cleaned up acquired books, 12 months to June 30, 2005 shedding low value customers Customers 317,000 Retained larger customers with Volume (m.therms) 506…
RSG provides an excellent, profitable platform on which to build home services HVAC installation and services markets: residential new construction after-market service, maintenance and retrofit Integration with energy business…
Home services has opened new, lower cost channels for energy sales not available to competitors Partner with builders DE Energy Sell maintenance to sell power to new contracts to homes and extend energy install relationship…
US Business Markets Highlights 12 months to June 30, Power Gas Market entry in 2003 2005 Volumes* 1,321 44 Very strong growth to date Turnover (m) 90 23 OP reflects market entry costs associated with early stage Gross Profit (m) 9…
US Business Markets Strategy Summary Low risk, adjacency-driven strategy, leveraging Canadian experience to drive growth in Texas, the Northeast and Midwest Will build on early success of PJM and NEPOOL power market entries with…
US North expansion will increase our Business Markets footprint three-fold in gas and five-fold in power Today Huge eligible power and gas business markets in the Northeast and Midwest Opportunity to leverage efficiencies from…
Leveraging our Services and Technology knowledge to gain traction in Texas Sample Customers Power Services Dallas Early high-profile wins in Cowboys replicating our Canadian Stadium Business Services and Technology capabilities…
US Retail Summary Strong number three incumbent position in Texas leveraged into number one insurgent operation, as we are: Retaining more incumbent customers than peers Acquiring more insurgent customers than peers Business…
Upstream Gas & Power Generation Mike Hogan SVP Upstream Gas & Power
Upstream Gas Overview Upstream Gas 3,400 producing wells; 93 compressors 1,200 wells drilled 2001-2005 P+P reserves of 320 bcfe (95% gas) Current production of 88 mmcfe/d Calgary Total land portfolio of 302k hectares Bastrop…
Upstream Power Overview Bastrop Near Austin, TX 540 MW 2x1 GE 7FA CCGT Commissioned 2002 Frontera Mission, TX 477 MW 2x1 GE 7FA CCGT Commissioned 2000 Buffalo BastropGap Near Abilene, TX Buffalo Gap 120 MW Wind Farm…
Hedging Strategy Risk tightly managed within prescribed limits established by Group Risk Management policy Procurement and hedging program executed by Energy Management Groups based in Calgary and Houston Highly experienced team…
Upstream Gas and Power Asset Strategy Strategy guided by risk reduction through ownership of physical assets but must also create stand-alone value Production targets as percentage of downstream requirements generally 20-30% for…
Well-timed acquisition of quality power assets ERCOT Merchant CCGT Mid merit plants acquired Transactions in 2004 for 265-280/kW 22 700 20 650 Well located to support New build band retail load 18 Frontera 600 T r a n s a c…
The UK market a leading indicator UK Merchant CCGT Asset Transactions 700 20 Killingholme 600 Sutton Bridge Transaction price (/kW) Spark spread (/mWh) Corby Saltend New build band 500 15 Rye House 400 Humber I…
Wholesale power markets vary by region Reserve Margins* US Northeast markets 30% are large, with varying levels of transparency 25% and liquidity 20% Large shaped load in TX 15% makes asset ownership highly desirable 10%…
Upstream Gas operational excellence DE Production 20 Strong track record in replacing Prod Rate (000 15 reserves boe/d) 10 Executed on 1200 new wells 5 over past five years with 0 success rate 85% 2003 2004 2005 2006 2007…
Attractive gas asset position in Western Canadian Sedimentary Basin High working interests in existing lands Contiguous acreage in highly sought-after core areas in WCSB Production is 95% gas Proven plus probably reserve life…
Upstream Summary Physical and long-term positions are delivering real benefits to our procurement and risk management activities Assets add significant value in their own right Excellent track record of timely, targeted…
Financial Review & Valuation David Clarke Chief Financial Officer
Recent Financial Results (as published) H1 H2 H1 H2 H1 Turnover (m) 2005 2004 2004 2003 2003 Canada residential energy 706 544 275 171 252 Texas residential energy 401 412 332 465 468 Other USA energy 130 69 122 78 167 Home…
Operating Profit Trace H1 2004 to H1 2005 100 Operating Profit (m) 80 60 40 s P P y y gy es kt le O O g rg M ic sa er er 4 e 5 rv En 10 10…
Canada Residential Energy: Financial Trends H1 FY FY Customer numbers (period end 000s) 2005 2004 2003 Regulated gas 856 865 0 Deregulated gas 694 687 702 Regulated power 174 175 0 Deregulated power 402 402 459 Average consumption…
Business Markets: Financial Trends H1 FY FY Sales volumes 2005 2004 2003 Gas (m.therms) 220 249 204 Power (GWh) 2,233 2,722 1,975 Financials (m) Turnover - Gas 72 72 52 Turnover - Power 92 109 52 Turnover - Services & Technology…
Return on Invested Capital 12% 10.8% 10% 9.2% 9.2% 8% ROCE * 6% 4% 2% 0% 2003 2004 2005E Statutory Tax Rate Effective Tax Rate * NOPAT/average invested capital 87
North America Turnover Mix: 2005 and 2008 2005(E) Turnover 2008(F) Turnover 2008 14% 29% 10% 36% 43% 6% 27% 19% 8% 8% Canada Energy Texas Energy Other US Energy Home Services Business Markets Geographic/segment…
North America Operating Profit Mix: 2005 and 2008 2005(E) Operating Profit 2008(F) Operating Profit 4% 2008 2005 25% 13% 27% 25% 29% 5% 41% 28% 3% Canada Energy Texas Energy Other US Energy Home Services Business…
Selected Valuation Benchmarks Trailing 12 months Business Unit Peers Ticker P/E EV/ EBITDA Canada Energy Savings Fund1 SIF.un-T n/a 19.7 Residential Energy Services UE Waterheater Fund UWE.un-T n/a 10.0 Consumers Waterheater…
Financial Summary Impressive financial track record Portfolio of businesses that reduces exposure to external factors or individual markets Improving mix of turnover and operating profit going forward Positive and improving spread…
Summary and Questions Deryk King President & CEO
A compelling investment case Enhances Centricas growth profile by accessing opportunity-rich market Balanced footprint minimises exposure to market-specific risks Material synergies between UK and NA skill sets Leading residential…
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