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Centrica Preliminary Results 2008

26 February 2009
Presentation Transcript

Roger Carr

Thanks Sam. Fine, Q&A. You will remember, I am sure everyone has used them, but you have to activate the microphone by pressing the button, when you finish the question and press the button again to allow somebody else to come in. So who would like to be the first question? If you could say who you are and where you are from, that would be good.

Questions and Answers

Q1. Nathalie Casali Ė JP Morgan

Nathalie Casali from JP Morgan. Two questions if I may. Firstly on the European business. When you acquired the second tranche of SPE, you indicated 240 million euros EBITDA going forward including the Pax Electrica. Are you confident you can still deliver that, given the move in power prices in Europe? And secondly if you could give us some more detail on the £470 million FX cash outflow, if you can give us a breakdown of that? Thank you.

Answer: Sam Laidlaw

Let me take the first question and I will hand the second one over to Nick on the FX. The answer is, as you saw and as we said, Pax Electrica as you saw from Nickís Presentation, about two months later than we had forecast and therefore you need to reduce that 240 effectively by about 20 million.

Answer: Nick Luff

The power prices have had some impact on the value of Pax Electrica but weíre making up a lot of that in the value of the downstream. Net is probably slightly down but not significant. And on your second question Nathalie, the FX and other is mainly FX, we carry a large proportion of our gross debt in dollars and Canadian dollars to offset the net assets we have over there. And so when the way sterling has fallen, the value of that dollar bit has gone up substantially so it is almost all FX.

Q2. Nick Ashworth – Morgan Stanley

Hi, itís Nick Ashworth at Morgan Stanley. Also two questions if I may. Firstly on the residential energy business. Just interested to get a bit more colour around the hedging you took on last year throughout the winter and how you have been able to reduce gas tariffs in the middle of February, that is a little bit earlier than I thought maybe it could be and the implications that may have for the rest of the year, given that you have delivered nearly a 5% margin last year as well? And then secondly on British Energy, have you got a timeline when you expect that to be completed and I know EDF a couple of weeks ago were a little bit more optimistic with their outlook saying it could potentially be done by the end of Q1 and I wondered if you had any further thoughts around that?

Answer: Sam Laidlaw

Let me take both of those. In terms of our gas hedging, we are very careful for competitive reasons that we donít get specific about what our current hedging position is, but you are absolutely right, we were able to open up some of the position towards the end of last year, which enabled us to achieve the results we did but also enabled us to reduce our prices earlier than anybody else. I think it would wrong to comment on our hedge position going forward.

In terms of the timeline on British Energy, you are absolutely correct, that EDF have said that they aim to conclude this by the end of the first quarter, and that remains our aim as well one way or another.

Q3. Ajay Patel - UBS

Ajay Patel from UBS, three questions if I can. Firstly could you give us guidance to the gas production change year on year for the UK business? And in terms of your slide in regards to getting greater overlap between British Gas Residential and the Services business. To attain the £100 million of cost opportunity, how much of an overlap are you projecting for the two years, 1 million customers 1/2 a million?, or is there any sort of indication you can give me on that? And then thirdly on Oxxio, is there any residual impact to '09 on the back of Oxxio's performance in '08?

Answer: Sam Laidlaw

Let me give you a guidance first on gas production. I think a good number is to say that Gas production will be down by about 15%. It is more than that on Morecambe, just over 20% on Morecambe. But the new fields are really starting to contribute and the decline on the North Sea fields is significantly less. Interestingly actually, if you look at Newfield and if you look at the Heimdal acquisition in Norway, we expect them to contribute about 15% of our gas production this year, so those fields are doing very well, but overall 15%.

Your second question I think was on cost reduction from the combined business. I mean we are still at a very early stage of working through that, but we can see in marketing spend, in driving more customers online that there are significant opportunities here, but I think as we put the businesses together and as Phil and the team start to work on it, we will sharpen up those targets.

Answer: Nick Luff

And on Oxxio, we still have to work through some of the procurement issues from ’08 so there will be some impact in 2009. So we might lose £10 million. I mean nothing like the loss we experience in ’08, then that should be behind us.

Q4. John Musk – Nomura

Hi there, it is John Musk from Nomura. Can I ask two questions please? Firstly on the industrial and wholesale contracts. It is very difficult obviously for us to understand where that may go for next year. If I go back to ’07 when you made profits, average gas prices were about in the low 30s. This year, when you are making large losses you were about 55 pence for average gas prices, what can we expect for 2009, is there in inflexion point you can give us? And then secondly, again on Oxxio, just trying to understand the strategy there and perhaps you can give us an indication of how you expect to compete going forward? Obviously we have seen Vattenfall and RWE enter the market, is that going to make it even more difficult for you?

Answer: Nick Luff

John, on the first one. The difficulty on the contracts is that there is so much optionality in them for the customer and therefore it is quite hard to predict exactly what the volumes will be. A lot of the indexation in the pricing is linked to oil so actually the selling price is actually being hurt by the low oil prices. As guidance on current gas, forward gas prices, we would expect to lose about £175 million in the I&W segment after the changes we have made. Clearly it could move around depending on where the gas price turns out.

Answer: Sam Laidlaw

And I think your question on Oxxio is that as we said in the Statement, clearly in a world where the market hasn’t yet unbundled that business model is challenged. We have two things and we will clearly look at all options going forward. I think we do have two things in our favour. One is that unbundling is starting to happen during 2009 and secondly of course, when we bring Rijnmond on in 2010 that will provide us with a source of integration in power so those are the elements in the mix but we are clearly exploring all the opportunities.

Q5. Edmund Reid - Cazenove

Hi. Edmund Reid from Cazenove. I have three questions. The first one was on working capital and margin movements in 2008. Would you expect any of that to unwind in 2009? And the second question was, I think you mentioned asset sales as a potential means of funding and I just wondered whether you could give us slightly more details on what you were thinking of there? And then the third question was on margins in British Gas Residential, not numbers, because I know you don’t talk about that, but in terms of the split of margins between gas customers and electricity customers. I think historically your electricity customer margins have been much higher than your gas margins. And I was wondering if you saw that maybe changing going forward, given the price reduction announcements from your competitors?

Answer: Nick Luff

On working capital obviously with retail prices coming down, we would expect to see some working capital coming back. It clearly depends a lot on what consumption is towards the end of the year in terms of exactly how it turns out, it might be £100 million or £200 million from that. The margin cash is even harder to predict.

Obviously the £625 million or so margin cash out relates to contracts that roll off over 18 months or so. So if all the prices stay the same then a lot of that will roll off, but of course, we are putting on new contracts all the time, so depending on whether prices at the end of the year are higher than they are during the year or lower, then that will drive where the margin in cash goes, but that is always trending back to nil as it were if prices are stable. And asset sales?

Answer: Sam Laidlaw

I think we are not telegraphing any asset sales before we actually do them is the simple answer to that. And we do continue to look at all of the portfolio to make sure we are getting robust returns from across the business on a regular basis. So I don’t think we will comment beyond that.

On your third point Ed in terms of electricity versus gas margins, you are absolutely correct that historically you know we were in fact, in many periods losing money on gas sales. And what we have done is restore the level of profitability on gas to the equivalent to that on electricity and that is the aim. We need to make money on both fuels.

Q6. Andrew Mead - Goldman Sachs

It’s Andrew Mead at Goldman Sachs. I just have one question. Could you provide some detail at all on your exposure to industry in terms of decline in economic activity, particularly your business sales in both UK and North America?

Answer: Sam Laidlaw

I mean it is a very good question, what is happening to our business book, our BGB book as a result of the economic downturn. I think the first important point to make is that unlike some of our competitors, the vast majority of the earnings and profitability that we have in our BGB business is actually SME’s, it is small businesses, commercial businesses, shops, retail and so forth. And therefore we haven’t had the big reduction in industrial load that some competitors have had, where steel works have been closed down or car plants have been closed down and so forth. What we clearly have to be concerned about is an increase in bad debts. Actually we are not seeing any significant increase in bad debts. We are making appropriate provision and we do think that they will be higher this year versus last year and we clearly had some well publicised companies going into administration, particularly at the end of last year. But at the moment we are continuing to see the business hold up.

Q7. Mark Freshney – Credit Suisse

Hi, it’s Mark Freshney from Credit Suisse. I just have two questions. Firstly you mentioned the reasons for power generation result being down year on year. I mean could you give us a feel for what the normalised contribution from those, particularly that fleet of CCGTs could be? And secondly, regarding assets in the private secondary markets, particularly gas. Are you seeing a softening of prices for gas assets in terms of what you are seeing coming up for sale?

Answer: Nick Luff

Yes on the power generation, I think for ’09 the consensus is about £120 million at the moment, that’s a little out of date of course with the sparks spreads coming down and the Langage delay. But I would still hope we could make two thirds of that which is obviously a big improvement on the 2008 result.

Answer: Sam Laidlaw

And on your second question on asset sales, we are starting to see more packages of assets coming onto the market. There really has been very little done if you like in the new price environment. A couple of the transactions, actually the transactions we have done ourselves, I mean if you look at the share of the Peik Field that we bought and the share of the York Field we bought in the North Sea, these are both undeveloped gas reserves. You know at around the two dollar a barrel level, we haven’t seen that in a long time. So I think that does indicate that this is moving to become a buyer’s market after many years being a seller’s market.

Q8. Ajay Patel - UBS

Ajay Patel from UBS again. In the release there was a statement about re-indexing an existing contract, the total being around 4 BCM. I am just wondering in what way, is it more volume linked, is there more of a fixed element, is the underlying variable components different? How has the exposure changed? I know you can’t give us exact details, but kind of a maybe a bit more of a top down?

Answer: Sam Laidlaw

I think the fundamental point here is that we want to get away from having too much gas linked to month ahead pricing. So we are going to a variety of different indices without getting into the specifics, some may be half yearly, some maybe a yearly index. Some may be linked to other things than just gas price, they could have an oil or CPI component. And it is more the 4 BCM that you refer to is actually more than one contract, it is a variety of contracts. I think there is an important structural point here and that is that as gas markets soften, we are finding that many more producers are interested in doing long term supply contracts on different bases that they have been reluctant to do hitherto and clearly the security of demand and the demand that we offer right through to the end consumer is something that is becoming increasingly attractive.

Q9. Iain Turner – Deutsche Bank

Hi, it’s Iain Turner from Deutsche Bank. Reading what you said about still seeing the strategic need for the BGY deal and what you said this morning about how it needs to meet your hurdles for shareholder value. Am I right in thinking that it is implying that you still want to do it, but you need to get a different price?

Answer: Sam Laidlaw

I think you are right in the overall premise that strategically it makes sense and we need to see value in the entirety of the deal.

Answer: Roger Carr

I mean just to add to that I think we are clear that whatever we do would need to go to shareholders for approval and as a Board we are clear that we would not put anything to shareholders that we did not think was in their interest and would not win their wholehearted support.

Closing Comments

That is probably a good place to end. Thank you all very much for coming. We will keep you posted. Thank you.

End of presentation