overview of centrica storage
TRANSCRIPT
Overview of Centrica Storage
Analyst site visit
26th October 2006
2
Agenda
• Introduction to Centrica Storage
• Achievements since Centrica acquisition
• Rough’s place in the storage and wider gas market
• Value of storage
• Financial drivers
• Opportunities
• Wrap up
3
An introduction to Centrica Storage
• Centrica Storage Limited is a wholly owned subsidiary of Centrica plc
• Centrica Storage is a ring-fenced part of Centrica plc, separated from the
supply side legally, physically and financially (Chinese walls). Undertakings
agreed with Secretary of State December 2003 governing operation of
Rough
4
• October 1975 – Rough field, 18 miles off East Yorkshire coast originally developedto produce natural gas
• 1983/1984 – Rough field converted to a storage facility
• 1st October 1997 - BG Storage established as a standalone business (ringfencedfor competition reasons) following split of British Gas plc
• 16th July 2001 – BG sell Rough storage to Dynegy
• 14th November 2002 – Centrica acquires Rough gas storage assets from Dynegyfor £304m
• 1st December 2003 – Following a Competition Commission inquiry into theacquisition, Centrica provided Ofgem and DTI with a list of Undertakings on theoperation of Rough. ‘Separated’ Centrica Storage business unit established
A brief history of Rough
5
47/8A
Installed 1977
6 wells
24/7 Operation
Easington Terminal
Rough gas processing
Amethyst gas processing
Tie in to National Transmission System
24/7 Operation
Hedon, near Hull
Administration/engineering
Venture House, Staines
Headquarters and
Commercial
office
24/7 Operation
AMETHYST
0 10 20 km
EASINGTONTERMINAL
29 km @ 36"29 km @ 16"
ROUGHYork
47/3B
Installed 1983
24 wells
24/7 Operation
Facilities overview
6
Rough
York
Easington
Terminal
To National
Transmission
System
36” Pipeline
Riser Shaft
AP
BD
BP
CD
AD
16”
Pipeline
36” Submarine
Pipeline
18 Miles
18”Inter-field
Pipeline
1.25 Miles
47/3B 47/8A
Centrica Storage assets• Represents over 70% of UK
storage and supplies 10%
of UK peak winter demand
• Largest offshore gas
storage facility in Western
Europe (strategically
important).
• 185 billion cubic feet
(bcf) cushion gas
• ~118 bcf storage
capacity
• Deliverability max
44.8mcm/day
• Average Injection
~15mcm/day
• Onshore processing
terminal at Easington
for Rough, Amethyst,
Rose and Helvellyn
processing (third party
gas).
7
An exceptionally good storage reservoir
Reservoir Characteristics
Size and wells
• Approx 10 x 3 km, 9,000 ft deep
• Thickness from 80 to 117 ft
• 30 wells in place
Homogeneous high quality reservoir rock
• Uniform properties allow consistent production / injection across the field.
Cushion Gas provides pressure support
• Rough was converted from a partly depleted gas field, with the residual gas inside left as cushion gas to provide pressure support.
• To build another Rough requires right combination of reservoir characteristics and sufficient cushion gas in place.
8
How the reservoir is made up
Cushion Gas
NR
V –
Net R
eserv
oir
Volu
me
SBU sales volume
185 bcf
non-
recoverable
reserves
185 bcf
recoverable
reserves
72 bcf
Cushion Gas sales 2005-28 bcf
-31 bcf
-400 bcf
90 bcf Space
9
Achievements since acquisition
Immediate priorities:
• Cleared backlog (c37,000 man hours) of maintenance work from previousoperators
• Lifted HSE deferred prohibition notice
• Restored manning and competence levels
• Undertakings agreed following Competition Commission investigation –physical, legal and financial separation
• Focus on reducing and mitigating operational risk and improved safetyperformance
• Significant project expenditure to improve reliability, maintain integrity, andenhance performance - approx £50m spent to date (not including £30mrecovery cost following Feb 2006 fire)
• Offshore Safety Case and onshore COMAH case
• Marketing strategy to enhance commercial value
10
• Operational reliability nearly 100% in 2005 (compared to
~ 90% in 2000/1/2/3)
• Maximum deliverability rate increased by 8% enabling sale of additional
peak product last winter
• 8A – 3B bypass
• Improved sand monitoring and well control
• Reperforation
• Excellent injection performance enabled record levels of additional space
sales
• Proven reliability and marketing strategy led to approx 10% increase in SBU
revenue relative to market between 2004/5 and 2006/7
• Full recovery for this winter from major explosion and fire in February 2006
…resulting in
11
Focused on reducing risk and management of
health, safety and environmental issues…
12 month LTIFR (since 1 January 2004)
0
2
4
6
8
10
12
LT
I p
er
mil
lio
n m
an
ho
urs
2004 2005 2006
UKOOA average - 2005
(24 companies)
Increase entirely due to
16 February 3B incident -
12 LTI's
Excluding incident,
LTIFR = 0
Total Combined Maintenance Backlog Hours
Trendlines, 2002-2006
0
10000
20000
30000
40000
50000
60000
No
v-0
2
Ja
n-0
3
Mar-
03
Ma
y-0
3
Ju
l-0
3
Se
p-0
3
No
v-0
3
Ja
n-0
4
Mar-
04
Ma
y-0
4
Ju
l-0
4
Se
p-0
4
No
v-0
4
Ja
n-0
5
Mar-
05
Ma
y-0
5
Ju
l-0
5
Se
p-0
5
No
v-0
5
Ja
n-0
6
Mar-
06
Ma
y-0
6
Ju
l-0
6
Man
ho
urs
Offshore 3B + 8A Onshore
12
….and operational availability
95.0% 95.3%
99.9%
51.3%
92.0%
96.1%
99.3%
45.8%
98.9%
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006
Production Injection Injection (Post Recovery)
Availability on Demand Performance
Injection:
Availability post recovery 98.9%
Production:
Recommences October 2006
13
961546940Operating profit (£m)*
28353336Cost of gas (£m)
12619513383External turnover (£m)
154253164129 Total
12252222Other
25302130Gas sales
2000Native gas sales
131983Extra space
10315911374Standard SBUs
Turnover (£m)
47.134.824.615.6Average SBU price (calendar year)
(pence)
H1
2006
FY
2005
FY
2004
FY
2003
P&L trend since acquisition
14
Rough SBU Price History
Rough SBU Price versus 2.55*(Q1-Summer) Spread
0
5
10
1520
25
30
3540
45
50
55
6065
70
75
8085
90
95
100
105110
115
120
125130
Oct-99
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
pen
ce/S
BU
2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
9.90 p/SBU 13.87 p/SBU 20.76 p/SBU
23.14 p/SBU 28.46 p/SBU
65.56 p/SBU
37.81 p/SBU
15
Rough’s place in the storage and wider gas market
Storage Capacity
Rough
74%
Hafield Moor
3%
Hornsea
8%
Humbly Grove
7%
Hole House
1%
National Grid LNG
7%
Deliverability
Rough
35%Hafield Moor
2%
Hornsea
15%
Humbly Grove
6%
Hole House
2%
National Grid
LNG
40%
Average Injection - Summer 06
Rough
66%Hafield Moor
4%
Hornsea
8%
Humbly Grove
6%
Hole House
13%
National Grid
LNG
3%
16
UK gas storage – current picture
0
500
1000
1500
2000
2500
3000
3500
4000
1 16 31 46 61
Time to empty (Days)
GW
h
LNG Partington
LNG Glenmavis
LNG Dynevor Arms
LNG Avonmouth
Hole House Farm
Hornsea
Humbly Grove
Hatfield Moor
Rough
- still largely the old “British Gas” facilities
- Rough dominates seasonal storage market
17
UK gas storage – including all planned projects
0
500
1000
1500
2000
2500
3000
3500
4000
1 16 31 46 61
Time to empty (Days)
GW
h
Holford H165
LNG Partington
LNG Glenmavis
LNG Dynevor Arms
LNG Avonmouth
Fleetwood
Hole House Farm
Byley
Aldborough
Stublach
Portland
Hornsea
Caythorpe
Humbly Grove
Hatfield Moor
Welton and Scampton North
Bletchingly
Albury
Rough
- Assumes all current / planned projects built
- Rough remains the major part of seasonal storage
18
Impact of “gas surpluses” - winter 2007/08
Theoretical Maximum Case
All planned infrastructure built on time and utilised 100%
• Additional projects significantly boost supply potential
• Winter appears amply supplied
CSL mid case
Interconnectors, LNG terminals at 70% capacity, field gas
at 90% of capacity, new storage at 50% capacity
• Tightness in cold winters, not necessarily at peak but
after long duration of cold weather.
• Shows importance of Rough’s position and
advantageous shape
• Summer surpluses
19
….further ahead – winter 2010/11
Theoretical Maximum Case
All projects are implemented on time and utilised 100%
• Potential supply surpluses
• This is reflected in the forward curve with 2010/11
being the “dip” in the curve
• Too many short duration storage facilities
• Unlikely all projects will be completed due to planning
consents, development challenges and incorrect mix of
infrastructure
CSL Mid Case
LNG imports and interconnectors at 70% capacity,
field gas at 90%, “conceptual” storage facilities
excluded
• Supply gaps beginning to appear, again not
necessarily at peak
• Summer surpluses
• Implies storage is a likely candidate for bundling of
shapes
20
Expected UKCS declineBeach Production decline - 2006 - 2012 vs Rough Production
-
50
100
150
200
250
300
1 12 23 34 45 56 67 78 89 100 111 122 133 144 155 166 177 188 199 210 221 232 243 254 265 276 287 298 309 320 331 342 353 364
mcm
/d
Peak Beach Decline
Rough Storage
"Size"
Duration - 76 days
Deliverability - 42 mcm/d
Beach Swing - 2006
2006
2012
Beach Swing - 2012
21
Substitutes for long range storage (LRS)
Can European Storage compete against Rough?
• European public supply Obligations (PSO’s) limit market access
• Access to transportation capacity problematic
• Major European markets need more storage by c 2010
Can CCGT switching compete against Rough?
• Requires spare capacity to exist on the power system
• Requires a favourable spark spread versus storage costs
• Last winter CCGTs did provide significant flexibility – up to 40 mcm/day … at a price
Competitive advantages of long duration storage
• Physical proximity to market
• Large summer put optionality
• Short notice (2 hour) flexibility
• Cycling capability
Competition to storage may come from a variety of sources
Can holding LNG capacity compete against Rough?
• Requires spare/idle capacity in LNG supply chain
• Limited storage at LNG sites so limited flexibility - price takers
• Surplus regas capacity in US and Europe may allow LNG to compete in seasonal supply in short to medium term
22
Competitive Environment - Summary
• UKCS indigenous gas remains today the major competitor to
Rough in supplying seasonal swing but is in steep decline
• Most new storage is relatively low volume and short duration
and is not designed to compete directly with Rough
• Most (all?) new import infrastructure is designed to operate at
high load factor
• Rough has strong competitive advantages over actual and
potential competitors
• physical proximity to market
• large scale short notice rate flexibility
• large scale put-optionality
• low unit cost per stored volume
23
Value of storage
• Storage sold as “Standard Bundled Units” of injectability, space and
deliverability
• Rough intrinsic value driven by price spreads in the forward market
• Volatility in spot and forward markets adds significant extrinsic value to
holdings in Rough services
• Trend in recent years to greater use of Rough services by traders and
trading affiliates of banks
• Also increasing interest from producers with “flat” supply sources which
add value by shaping
• Some interest from major gas consumers and consumer groups to
manage price risks
24
Purchases
SalesInitial Hedge Shape to give 2.27 x (Q1-Summer) p/SBU
Optimal hedge Shape to give 2.4 x (Q1-Summer) p/SBU
D J F M
A M J J A S
The Q1-Summer spread fits
the shape of the SBU and
provides a good hedge in
forward markets.
Summer Contra
ct
Q1 C
ontract
Once market monthly
contracts trade one can
optimise position to fit
optimal profile
Rough – SBU pricing and intrinsic value
Standard Bundled Unit (SBU)
Withdrawal 1 kWh/day
Space 67 kWh
Injection 0.35 kWh/day
455m SBU’s sold
1 SBU provides space equivalent
to 2.27 therms
25
Note: Each SBU contains 2.27 therms, therefore to convert from pence/SBU into pence/Therm divide by 2.27
Unlocking the extrinsic valueE
xtr
insic
Intr
insic
2.27
2.4
2.8 to 3.2
Sales activity range
Poor Rough Reliability
Injection Cancellation
Long Injection Period
Force Majeure
Good Rough Reliability from high availability of
the asset to CSL and customers
Customers able to reshape the CSL product or
sell/buy unused capacity as firm or interruptible
Customers able to buy/sell gas in store
Ability to re-nominate withdrawal/injection with
short lead times
Customers nominated quantities equal their
allocated quantities – irrespective of asset
availability
Market volatility provides cycling ability to
leverage greater value from a Rough SBU
Extrinsic value from use of Rough on 100+ days
beyond intrinsic valuation
Potential upside to 2.4 intrinsic as Dec – Mar
spread increases on Fundamental change to
winter contract
Re-optimise hedge in more liquid market – further
intrinsic value
Initial Intrinsic Hedge in product-limited market fits
shape of Rough
26
Forward Curve Price Spread 2005/6
Central
50%
Minimum
Forward
Price
Maximum
Forward
Price
50%
25%
25%
(over 12 months preceding contract expiry)2005/6 Prices
0
20
40
60
80
100
120
140
Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06
0
20
40
60
80
100
120
140
Average Forward Prices SAP Prices
- Rough storage is able to
exploit arbitrage
opportunities in
differences between spot
and forward markets
- During volatile and high
priced periods, Rough can
be used to minimise
exposure or used as a
trading tool to extract value
- Different from and not a good predictor of spot/out-turn
- Rough valued using forward price spreads and volatility not
absolute level of prices
- For Rough, low (or negative) prices in summer are as good
as high winter prices
27
Volatility drives extrinsic storage value
- Low prices do not necessarily imply lower volatilities
- Already evidence of high-volatility with low prices
- Future risk of negative prices
Volatility vs Spot Prices
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
31/1
2/2
000
28/0
2/2
001
30/0
4/2
001
30/0
6/2
001
31/0
8/2
001
31/1
0/2
001
31/1
2/2
001
28/0
2/2
002
30/0
4/2
002
30/0
6/2
002
31/0
8/2
002
31/1
0/2
002
31/1
2/2
002
28/0
2/2
003
30/0
4/2
003
30/0
6/2
003
31/0
8/2
003
31/1
0/2
003
31/1
2/2
003
29/0
2/2
004
30/0
4/2
004
30/0
6/2
004
31/0
8/2
004
31/1
0/2
004
31/1
2/2
004
28/0
2/2
005
30/0
4/2
005
30/0
6/2
005
31/0
8/2
005
31/1
0/2
005
31/1
2/2
005
28/0
2/2
006
30/0
4/2
006
30/0
6/2
006
31/0
8/2
006
Vo
lati
lity
0.0000
20.0000
40.0000
60.0000
80.0000
100.0000
120.0000
140.0000
160.0000
180.0000
200.0000
Sp
ot
Pri
ce (
p/t
h)
Rolling Annual Spot Price Volatility Rolling Average Annual Spot Price Daily Spot Price
28
Market Value
• No direct market comparator for Rough : Other storage
facilities are less transparent
• Byley reportedly sold to Eon for £96m with a further £100m
development cost required
• Ongoing contractual terms are unknown
• Byley space is 6 bcf compare to Rough’s 116 bcf
• Simplistically, this would place Rough’s market value in
excess of £3bn
• However, with higher injectability and deliverability parameters
than Rough, Byley is worth more on a pence/therm space basis
29
Financial drivers for Centrica Storage
• Revenue and profit trends
• Detailed financials
• Drivers of future SBU revenue
30
Revenue profit trends since acquisition
• SBU remains themain driver of profit,but other revenueand costs impact
• 2004
- higher revenueproject expenditureon restoring facility
- higher gas costsand insurance costs
• 2005
- “One off” peakproduct sale usingnative gas in 2005generating £20m
- Improved injectionperformanceenabling largervolumes of additionalspace sales, whichalso benefited fromhigh market prices
5443435Delta
154694024Operating profit
1591137459SBU revenue
2005200420032002£m
-
20
40
60
80
100
120
140
160
180
2002 2003 2004 2005
Year
£m
31
Detailed financials
24
89
59
2002
3752Project Spend
154253164129Total Revenue
12621812893Gross Margin
18383734Op costs
9191717Depreciation
2
13
13
19
2
11
7
11
3
Commodity,
Space
“one off” income
28353536Cost of Sales
93
25
1
6
107
2006 H1
154
30
20
10
159
2005
6940Op Profit
2330Gas Sales & fuel gas
Incremental Bundled Units
1011Processing Income Mainly Amethyst
field limited remaining life
11374SBU revenue
20042003£m
32
Drivers of future SBU revenue
• Summer/Q1 forward price spreads and volatility
- current forward curve
- risk premium in forward curve and forward price spread behaviour
- impact of summer surpluses and put option value
• Multiplier of spread in SBU price increased from 2.3 to 2.5 between
2003/4 and 2005/06 – scope to increase further to at least 2.7
• Enhancement plans to increase deliverability, injectability and space
could increase numbers of SBUs sold from 2009/10 by 5% plus
• Enhancements to offshore compressors
• Well A5 reinstatement
• Further cushion gas sales to create space
33
Opportunities
• Now - restore and enhance Rough’s reliability and reputation and
recover to 2005 levels
• 2008/09 – 2009/10 - increase injection rates and further increase
deliverability
• 2008/09 – 2010/11 Use increased injection and deliverability to
make additional cushion gas sales, creating more space to sell
• 2009/10 – 2010/11 Increase number of SBUs (5+%)
• Diversify product offerings including more “virtual” products
• Diversify asset base through acquisition or development
34
Wrap Up
• Centrica Storage has demonstrated its operational and commercial skills in
storage through significant challenges
• Rough is in a strong competitive position to meet growing market need for
long duration seasonal storage
• Uncertainties remain about the gas supply/demand position, particularly in
periods of prolonged high demand
• Rough’s capacity sales are advantaged through risk-premia present in
forward seasonal markets during uncertain periods of supply/demand
• The value of Rough’s large put-optionality in periods of over-supply not
fully recognised
• There remain opportunities to enhance capacity and to increase price
relative to market
• Acquisition or development of other storage assets will enhance the value
of Centrica Storage’s portfolio through risk diversification and improved
product offering to market