centrica plc credit presentation · 01-09-2016 · 17 credit presentation – september 2016...

Centrica plc

Credit Presentation September 2016

2 Credit Presentation – September 2016

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.

This announcement contains inside information which is disclosed in accordance with the

Market Abuse Regulation which came into effect on 3 July 2016.


Centrica – 2015

• Over 38,000 employees across multiple geographies

• Provider of energy and energy related services to around 28m customer accounts in the UK, Ireland and North America

• Production of 79m barrels of oil or gas equivalents across the UK, Norway, Netherlands, Canada and Trinidad & Tobago

• 19TWh of power generated in the UK from gas-fired, nuclear and wind generation

• Energy Marketing & Trading business – trading in energy produced both inside and outside the business

• The UK’s largest gas storage facility, located in the southern North Sea with an onshore processing facility in East Yorkshire


Centrica footprint

E&P production

• 79mmboe/a gas & oil p.a.

Energy Supply & Services – North America

• 3.0m supply accounts

• 0.9m services accounts

• 0.6m Business supply points

• 7,732mmth gas consumption / 112TWh

power consumption p.a.

Energy Supply & Services - Ireland

• 0.7m residential and services

accounts

• 294mmth gas consumption / 3TWh

power consumption p.a

Energy Supply & Services - UK

• 14.3m supply accounts

• 7.5m residential services accounts

• 0.7m Business supply points

• 4,151mmth gas consumption /

37TWh power consumption p.a.

Energy Marketing & Trading

• Global LNG

• Route to market services

• Trading and optimisation

• Long term gas supply contracts

Centrica Storage

• UK’s largest gas storage facility

• 33-36 TWh maximum capacity

Power capacity

• 3.5GW gas-fired

• 1.8GW nuclear

• 135MW wind

Connected Home

• Hive eco-system, Boiler IQ

• 364k hubs installed in the UK

• Plans to launch in North America in

2016

Distributed Energy & Power

• Energy insights, asset optimisation

and energy solutions

• 2,450 active customer sites, 517MW

capacity under management


Strategic context

• Some recovery in commodity prices

• UK regulatory and political context evolving

- CMA final report published

- UK Capacity Market changes constructive

- Brexit vote creates uncertainty but limited immediate impact

• Competition in energy supply intense, but Centrica responding well

- Focus on customer service, offer innovation and cost efficiency

• Shift to distributed energy requires new capabilities

- Acquisitions of Panoramic Power, ENER-G Cogen and Neas Energy

- New products and offers in Connected Home


Centrica’s strategy

• Energy and services company

• Purpose: “to provide energy and services to satisfy the changing needs of our customers”

• Long term shareholder value through returns and growth

• 3-5% per annum operating cash flow growth

• Cost efficiency programme to deliver £750m per annum by 2020

• Growth focus on customer-facing businesses and reduce scale in E&P and central power generation

- £1.5bn resource reallocation to 2020

• Progressive dividend policy and strong investment grade credit rating


Financial framework

ROACE • 10-12%

Adjusted operating cash

flow • 3-5% growth p.a.

Dividend • Progressive in line with adjusted operating cash

flow

Controllable costs • Operating cost growth < inflation

Capital re-investment • Investment <70% of operating cash flow

• Limited to £1bn p.a. in 2016-17

Credit rating • Strong investment grade (Baa1/BBB+ or above)

Targets Metric


Challenges and opportunities

• Challenging environment

- Low commodity prices

- Weak economic growth

- Political uncertainty

• Fundamental trends – market participants must change

• Centrica has a strong starting position

- Customer base and key customer-facing capabilities

• Competition likely to be intense

- Quality, efficiency and pace of execution are key

• Opportunities outweigh challenges


Reduce scale in E&P and CPG

• Reduced investment into E&P

• E&P free cash flow positive in H1

- Capex ~£500m for the full year

- Cash production costs down ~£200m for the full year vs 2014

• Commenced process to exit Canada E&P

• Killingholme CCGT closed; will assess Capacity Market options

• GLID wind farm JV sold; Lincs disposal expected by end of 2017

E&P capex (£m)

FY 2014

FY 2016

FY 2015

E&P lifting and other cash production costs (£m)

FY 2014

FY 2016

FY 2015

<£900m

£984m

£1,068m

£1,086m

£728m

~£500m


Growth focus on customer-facing businesses

• Underpinning growth in Energy Supply & Services

- Repositioning organisation and capability

- Customer service, offer innovation, cost efficiency

• Growing capabilities and customers in DE&P and EM&T

- Panoramic Power, ENER-G Cogen, Neas Energy

- Organic customer growth and ENER-G Cogen additions

• New product development and growth in Connected Home

- Hive hub growth, five new products, international approach


Delivery in Energy Supply & Services

NA Business H2 net margin under contract as at 30 June

31

UK Business Operating Profit (£m)

NA Home Energy supply complaints

UK Home Energy supply complaints

Innovative offers

38%

H1 2015

H1 2016

43%

H1 2015

H1 2016

2015 2016

37%

H2 2014

H1 2016

H2 2015

H1 2015


Stand-by

Generators

Distributed Energy & Power capabilities

CHP

Battery

PV

Energy

Efficiency Demand side response

Energy insights

Underlying products

Trading

Differentiated offering

Asset optimisation Energy solutions


489

517

983

2,450

Customer growth in DE&P

DE&P active customer sites and capacity under management

Active customer sites

Capacity under management (MW)

• Customer growth

• Capacity under management increased

• Material increase in order book secured revenue

H1 2015

H1 2016

H1 2015

H1 2016


Growth in Connected Home

Connected Home cumulative UK hubs installed (‘000)

H1 2015

H1 2016

H1 2015

H1 2016 48

96

160

214

292

364

FY2013

H12014

FY2014

H12015

FY2015

H12016

• Five new products launched in H1

• Smart thermostat sales remain strong

• Plans to launch our suite of connected home products in North America around end of the year


2015 Inflation Efficiencyprogramme

Other / oneoff / phasing

2016

Cost efficiency programme

~£100m ~£300m

Operating costs

Costs of goods sold

£5.0bn

~£4.8bn

• Efficiency programme ahead of target

• H1 progress

- Efficiencies of £141m

- ~1,500 direct headcount reduction

• Full year headcount reduction ~3,000

• Full year efficiencies ~£300m

• £750m per annum of savings by 2020

• Early success de-risks delivery and accelerates value capture

Controllable costs


• Neas Energy

- Acquisition of Neas Energy, one of Europe’s leading providers of energy management and revenue optimisation services

- Well positioned to benefit from growing trend away from large centralised power generation to decentralised technologies

• ENER-G Cogen

- Acquisition of ENER-G Cogen, an established supplier and operator of CHP solutions

- The business complements Centrica’s existing capability in installing and managing distributed systems for customers in both the UK and North America

Targeted acquisitions support growth


Equity Placing

• Placing of 350m Centrica shares at 200 pence per share to institutional investors

• Raised funds of £700m, equivalent to 6.8% of the issued share capital

• Allowed

- acceleration of the Group’s customer-facing strategy through two prioritised and attractive acquisitions, with combined consideration of around £350m; and

- continued lowering of net debt, reducing pressure on the Group’s targeted strong investment grade credit ratings in a continuing uncertain environment.


Credit Rating

• Strategic target of strong investment grade rating

• 2014 significantly impacted by weather events

• 2015 impacted by lower E&P cash generation as commodity prices fell

• Ratios expected to improve in medium term from AOCF growth and debt reduction but pension deficit will impact in the near term

2013 2014 2015

S&P FFO / Net Debt 48.4%(1) 32.8% 26.2%

Moody’s RCF / Net Debt 29.8% 19.4% 24.3%

S&P: “Our assessment of Centrica's business risk profile

as satisfactory takes into account the company's

leading positions in the U.K. energy supply markets... It also factors in an element of geographic diversification through its North American business.”

Moodys: “Centrica's Baa1 rating reflects the company's

demonstrated commitment to reducing leverage, its leading market position and strong performance in UK

retail energy supply…….”

1. S&P 2013 ratio excludes decommissioning obligations from net debt


Conservative Funding Structure

• Centrica adopts a prudent approach to financing

- £4,379m undrawn committed credit facilities at 31 December 2015 (over £3bn matures in 2021)

- Extended bond maturity profile with average maturity of 12 years


Pension Obligations

• Triennial review at 31/ 03 /15 being finalised

• Falling interest rates increase liabilities under IAS19

• Agreement in principle with pension trustees for funding of deficit to provide stability

- Additional payments of £76m p.a. over 14 years

- £995m security package agreed

• Asset matching strategy and changes in scheme benefits mitigate impact of low rate environment

£m 31 Dec

2015 30 Jun

2016

Fair value of plan assets 6,642 7,297

PV of defined benefit obligation (6,761) (7,860)

Net liability recognised in Group B/S (119) (563)

Pension assets held on B/S 76 79


2016 targets

• Adjusted operating cash flow >£2bn

• Group capital investment limited to £1bn

- E&P capex of around £500m

• Around £300m of cost efficiencies in 2016, increased from £200m expectation in February

• Like-for-like operating costs below 2015

• Like-for-like direct headcount reduced by around 3,000


Financial headlines

The above adjusted figures are before exceptional items and certain re-measurements. The H1 2015 adjusted comparatives have been restated to include depreciation of fair value uplifts to property, plant and equipment from our investments in Venture and Nuclear. Adjusted operating profit also includes share of JVs and associates before interest and taxation. Underlying adjusted operating cash flow growth is calculated after adjusting 2015 for the impact of commodity price movements on E&P and Nuclear and excluding the impact of one-off working capital recovery in UK Business in 2016.

Reconciliations of adjusted operating profit, adjusted effective tax rate and adjusted operating cash flow are provided in the Group Financial Review in the Interim Results and Preliminary Results announcement.

Period ended 30 June H1 2015 H1 2016 ∆ FY 2015

Revenue (£m) 15,451 13,380 (13%) 27,971

Adjusted operating profit (£m) 970 853 (12%) 1,459

Adjusted effective tax rate 29% 28% (1ppt) 26%

Adjusted earnings (£m) 587 507 (14%) 863

Adjusted basic earnings per share (p) 11.8 9.8 (17%) 17.2

Interim dividend per share (p) 3.57 3.60 1% FY 12.00

Adjusted operating cash flow (£m) 1,149 1,372 19% 2,253

Underlying adjusted operating cash flow growth - 11% nm -

Group net investment (£m) 383 444 16% 855

Net debt (£m) 4,905 3,783 (23%) 4,747

Exceptional items after taxation (£m) 116 (63) nm (1,846)


Adjusted operating cash flow – H1

The above figures are stated before exceptional items and certain re-measurements. Adjusted operating profit includes share of JVs and associates before interest and taxation.

The 2015 comparatives have been restated to include depreciation of fair value uplifts to property, plant and equipment from our investments in Venture and Nuclear and reflect the new reporting segmentation.

Period ended 30 June (£m) H1 2015 H1 2016 ∆

Energy Supply & Services – UK & Ireland 178 822 362%

Energy Supply & Services – North America 370 199 (46%)

Connected Home (31) (25) 19%

Distributed Energy & Power (22) (19) 14%

Energy Marketing & Trading 143 103 (28%)

Total customer-facing businesses 638 1,080 69%

Exploration & Production 450 336 (25%)

Central Power Generation 26 (30) nm

Centrica Storage 60 30 (50%)

Other (25) (44) (76%)

Adjusted operating cash flow 1,149 1,372 19%

Appendix


30

35

40

45

50

55

Jan 15 Jul 15 Jan 16 Jul 16

1.5

2.0

2.5

3.0


25

35

45

55

65


0.0

1.0

2.0

3.0

0

25

50

75

Commodity prices Average UK NBP gas prices (p/th)

(24%)

Average Henry Hub gas prices ($/mmbtu)

Average Brent Oil prices ($/boe)

(31%)

H1 2015

H1 2016

H1 2015

H1 2016

0

20

40

60

(31%)

H1 2015

H1 2016

Brent Oil and Henry Hub prices are historic month ahead prices averaged over the half year and historic month ahead prices to 27 July 2016. UK NBP prices are historic winter 2016/17 prices averaged over the half year and historic winter 2016/17 prices to 27 July 2016.


2,719

2,612

20.7

19.6

97

99

Energy Supply & Services – UK & Ireland

The above figures are stated before exceptional items and certain re-measurements and include share of JVs and associates before interest and taxation.

From 2016 new segments are in place. 2015 comparatives have been restated accordingly. Adjusted cashflow number will be available in February 2017.

ADJUSTED OPERATING PROFIT

Period ended 30 June (£m) H1 2015 H1 2016 ∆ FY 2015

UK Home 678 635 (6%) 880

UK Business 6 31 417% (19)

Ireland 23 24 4% 30

Energy Supply & Services – UK & Ireland 707 690 (2%) 891

ADJUSTED OPERATING CASH FLOW

Energy Supply & Services – UK & Ireland 178 822 362% -

Total customer energy consumption

Gas (mmth) Electricity (TWh)

Annualised cost per Home customer (£)

SNT 9.1 H1 2015

H1 2016

H1 2015

H1 2016

H1 2015

H1 2016

H1 2015

H1 2016

Average UK temperature (degrees Celsius)


4,574

4,211

55.0

51.6

186

195

Energy Supply & Services – North America



North America Home 50 33 (34%) 77

North America Business 139 62 (55%) 246

Energy Supply & Services – North America 189 95 (50%) 323


Energy Supply & Services – North America 370 199 (46%) -

Total customer energy consumption

Gas (mmth)

Annualised cost per Home customer (£)

SNT 8.4

Average USNE temperature (degrees Celsius)


From 2016 new segments are in place. 2015 comparatives have been restated accordingly. FY 2015 adjusted operating cash flow comparatives will be published as part of the 2016 Preliminary Results

H1 2015

H1 2016

H1 2015

H1 2016

H1 2015

H1 2016

H1 2015

H1 2016

Electricity (TWh)


44

67

8

12

Connected Home, DE&P and EM&T



Connected Home (28) (23) 18% (49)

Distributed Energy & Power (DE&P) (20) (11) 45% (32)

Energy Marketing & Trading (EM&T) (55) (14) 75% 66

Total Connected Home, DE&P, EM&T (103) (48) 53% (15)


Connected Home (31) (25) 19% -

Distributed Energy & Power (22) (19) 14% -

Energy Marketing & Trading 143 103 (28%) -

Total Connected Home, DE&P, EM&T 90 59 (34%) -


Connected Home, Distributed Energy & Power and Energy Marketing & Trading are new segments. 2015 comparatives have been restated accordingly. FY 2015 adjusted operating cash flow comparatives will be published as part of the 2016 Preliminary Results

DE&P revenue (£m)

H1 2015

H1 2016

Connected Home revenue (£m)

H1 2016

H1 2015


40.7

37.8

8.2

4.3

15.6

12.2

12.9

9.6

Exploration & Production


The 2015 comparatives have been restated to include depreciation of fair value uplifts to property, plant and equipment from our investments in Venture and Nuclear, and to reflect the new segmentation. FY 2015 adjusted operating cash flow comparatives will be published as part of the 2016 Preliminary Results

(mmboe)


Adjusted operating profit 106 88 (17%) 95

Adjusted operating cash flow 450 336 (25%) -

Free cash flow 35 72 106% -

Unit lifting and other cash production costs

Europe (£/boe) Americas (£/boe)

H1 2015

H1 2016

Total (£/boe)

H1 2015

H1 2016

Total production volumes

H1 2016

H1 2015

H1 2016

H1 2015


Central Power Generation



Adjusted operating cash flow 26 (30) nm -

Gas-fired generation (TWh)

Nuclear generation (TWh)

Wind generation (TWh)

3.1

4.7

6.1

6.2

0.4

0.3

H1 2015

H1 2016

H1 2015

H1 2016

H1 2015

H1 2016


The 2015 comparatives have been restated to include depreciation of fair value uplifts to property, plant and equipment from our investments in Venture and Nuclear, and to reflect the new segmentation. FY 2015 adjusted operating cash flow comparatives will be published as part of the 2016 Preliminary Results


2

3

4

5

6

7

8

Jan 15 Jan 16

Centrica Storage

W17 - S17 spread

W16 - S16 spread

W15 - S15 spread

As at 27 July 2016

Forward seasonal gas spreads (p/th)

The above figures are stated before exceptional items and certain re-measurements and include share of JVs and associates before interest and taxation. FY 2015 adjusted operating cash flow comparatives will be published as part of the 2016 Preliminary Results



Adjusted operating cash flow 60 30 (50%) -

SBU

Additional space / cushion gas / other

Storage revenue (£m)

46

40

25

42

H1 2015

H1 2016


Operating costs

Adjusted operating costs exclude depreciation, smart metering expenses, dry hole costs, profit on fixed asset disposals, business performance impairments, AlertMe acquisition costs, FX movements and growth investment.


Reported operating costs 1,525 1,514 (1%) 3,039

Adjustments (211) (263) nm (366)

Adjusted operating costs 1,314 1,251 (5%) 2,673

Growth investment - (22) nm (68)

Like-for-like adjusted operating costs 1,314 1,229 (6%) 2,605


Adjusted operating profit – H1

The above figures are stated before exceptional items and certain re-measurements. Adjusted operating profit includes share of JVs and associates before interest and taxation.

The 2015 comparatives have been restated to include depreciation of fair value uplifts to property, plant and equipment from our investments in Venture and Nuclear and reflect the new reporting segmentation.


Energy Supply & Services – UK & Ireland 707 690 (2%) 891

Energy Supply & Services – North America 189 95 (50%) 323

Connected Home (28) (23) 18% (49)

Distributed Energy & Power (20) (11) 45% (32)

Energy Marketing & Trading (55) (14) 75% 66

Total customer-facing businesses 793 737 (7%) 1,199

Exploration & Production 106 88 (17%) 95

Central Power Generation 58 24 (59%) 128

Centrica Storage 13 4 (69%) 37

Adjusted operating profit 970 853 (12%) 1,459

Share of JV / associates’ interest and taxation (45) (37) 18% (61)

Group operating profit 925 816 (12%) 1,398


Net investment

1. H1 2015 includes AlertMe acquisition in Connected Home.

2. Material acquisitions in H1 2016 relates to net cash payment for ENER-G Cogen. The acquisition of Neas Energy is expected to complete in H2 2016.

3. Net disposals are sale of businesses, property plant and equipment and intangible assets, net of investments in joint ventures and associates. H1 2016 includes the disposals of our 50% interest in the GLID windfarm and our interest in the Skene and Buckland E&P assets. H1 2015 includes the disposal of Lincs wind farm debt.

Period ended 30 June (£m) H1 2015 H1 2016 ∆

Energy Supply & Services – UK & Ireland 40 48

Energy Supply & Services – North America 25 24

Connected Home, DE&P, EM&T 1 47 15

Exploration & Production 416 289

Central Power Generation (CPG), Gas Storage, Other 34 48

Capital expenditure (including small acquisitions) 562 424 (25%)

Material acquisitions 2 - 132

Net disposals 3 (179) (112)

Group net investment 383 444 16%


Cash flow

Period ended 30 June (£m) H1 2015 H1 2016 FY 2015

EBITDA 1,444 1,272 2,396

Tax (144) (141) (349)

Dividends received 65 49 180

Working capital & other 1 (216) 192 26

Adjusted operating cash flow 1,149 1,372 2,253

Net investment (383) (444) (855)

Interest (119) (55) (273)

Dividends (238) (365) (387)

Equity placing - 700 -

Other 2 (27) (186) (141)

Adjusted net cash inflow / (outflow) 382 1,022 597

1. Other includes re-measurement of energy contracts, profit on disposal of business, employee share scheme costs, movement on provisions and defined benefit pension service cost and normal contributions.

2. Other includes net payments for own shares, payments relating to exceptional charges and costs associated with the equity placing.

Current credit ratings

BBB+

(Negative Outlook)

Baa1

(Stable Outlook)


Net debt

The items, to which the cash posted or received as collateral under margin and collateral agreements relate, are not included within net debt. For further details see note 12 of the Interim Results announcement.

Period ended 30 June (£m) H1 2015 H1 2016 FY 2015

Opening net debt (5,196) (4,747) (5,196)

Adjusted net cash inflow 382 1,022 597

Other non-cash movements in net debt

(91) (58) (148)

Closing net debt (4,905) (3,783) (4,747)

Margin cash (465) (359) (535)

Closing net debt including impact of

margin cash (5,370) (4,142) (5,282)


2015 summary & outlook

• Resilient financial performance

- Energy supply and services operating profit up 19%

• Lower commodity prices impacted E&P and power profitability

- £1.8bn post-tax impairments

• 2015 adjusted operating cash flow up 2% to £2.25bn

• Net debt down 9% to £4.7bn

• 2016 adjusted operating cash flow expected to be >£2bn


Sources and uses of cash at ‘35/35/35’

2018 2016 2017

Interest

Investment

Dividends

Other

Adjusted operating cash flow

1. Adjusted operating cash flow adjusted for $35/bbl Brent oil price, 35p/th UK gas price and £35/MWh UK power price. Includes benefit of hedging.

Disposals

centrica plc credit presentation · 01-09-2016 · 17 credit presentation – september 2016...

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