Introduction

Centrica is a multinational utility company based in England, UK and the largest producer of electricity in the UK. The company was formed in 1997 when British Gas demerged into Centrica and BG Group. Centrica focuses on electricity and gas supply, production and service as well as a UK home services business. It operates under the names British Gas, Scottish Gas, and Nwy Prydain in Wales. It has a small presence in Europe outside the UK and is expanding its holdings in North America. Its British Gas unit is the largest residential supplier of gas and electricity in the UK and the largest energy supplier to the British commercial sector. ^[1]

Business Segments

Centrica has over 20 million customers worldwide. Revenue in H1 2009 was £11.66bn, a 20% increase compared to the H2 of the previous year. Profit before tax and interest for H1 2009 was £936m, a 5% increase compared to H2 of the previous year. ^[2]

Worldwide Operations

Geographical

Centrica operates in 9 countries: the UK, Canada, USA, Norway, Germany, Spain, The Netherlands, Belgium, Nigeria. We also own assets in Trinidad and Egypt and have outsourced operations in South Africa and India. Their businesses in Spain, The Netherlands, and Belgium are planned on being sold.

United Kingdom (69% of revenue)

Centrica has 4.6GW of UK electricity generation capacity, 1,500bcfe of gas and liquid reserves and 120bcf of gas storage capacity. Centrica is making a strong effort to integrate its business by producing more of the energy it sells. In the UK, it supplies 29% of its gas requirements from its own gas fields and 58% of its peak electricity demand from its own generation facilities. Wholesale markets are volatile and represent a potential hazard due to variations in Oil and gas prices. As a result Centrica has made it a priority in acquiring power generation assets. In August 2008, Centrica purchased a 20% stake in British Energy. 2009.^[3]

Europe (4% of revenue)

Centrica has assets in Belgium, the Netherlands, Germany, Spain, and Norway. It first entered the European market in Belgium in 2001 with a joint venture with GdF controlling Belgian generation and supply company SPE which s the second largest player in the country. It produces electricity at 21 plants with an installed generation capacity of 1,900 MW and has over 1.5 million gas and electricity customers. In 2009 Centrics sold its stake in SPE. In 2002, Centrica Energy opened their Spanish subsidiary with the goal of becoming Spain’s leading alternative provider of energy solutions to business. ^[4]In 2005, Centrica acquired Oxxio, the fourth largest energy retailer in the Netherlands. Oxxio has struggled to compete due to highly volatile commodity prices and vertically integrated competitors with only 800,000 customers. ^[5]In 2006 Centrica Energy opened a subsidiary in Germany.^[6] Since 2002 Centrica has had an interest in the Statfjord oil and gas field which straddles the UK and Norwegian sectors. This gas exploration is meant to provide supply to Centrica's UK customers.^[7]

North America (27% of revenue)

Centrica's subsidiary Direct Energy is the third largest commercial supplier of energy in North America supplying over 200,000 meter points. ^[8]

Segments

British Gas

British Gas supplies gas and electricity to UK residential and business customers, provides central heating and gas appliance installation and maintenance and low-carbon and energy efficient products and services. They are the biggest energy supplier in Britain's domestic market with 15.6 million customers in 2008. They are also Britain's largest operator in the installation and maintenance of domestic central heating and gas appliances with 8.1 million customers. In 2007, they launched British Gas New Energy to supply low-carbon and energy efficient products and services. They supply and install a range of microgeneration technologies including solar thermal, wind turbines and ground source heat pumps. ^[10]

Dyno Group

Dyno is the UK’s leading drain cleaning service, also offering plumbing and lock fitting. Dyno-Rod specializes in emergency drainage and plumbing. Dyno Locks & Alarms specialises in home and property security. ^[11]

Centrica Storage

Centrica Storage specializes in gas storage. The "Rough" facility, bought in 2002, stores gas under the North Sea on behalf of a number of companies, including other Centrica businesses, to meet seasonal peak demands. The facility is the largest in the UK, able to meet approximately 10% of the UK's current peak day demand and representing over 70% of UK storage capacity. In 2006 Centrica began operating a facility nearby storing Norwegian gas. They are currently constructing two new storage facilities in the UK. ^[12]

Centrica Energy

Centrica Energy is a subsidiary of Centrica sourcing gas and electricity to its customers in the UK and Europe. It operates the North and South Morecambe gas fields in the East Irish Sea which in terms of reserves are two of the biggest in the UK. They also pursue gas exploration with assets in Norway, Nigeria, Egypt and Trinidad. ^[13]

Centrica in Europe

Centrica's operations in Europe are small with subsidiaries Centrica Energía in Spain, Centrica Energie in Germany, and Oxxio in The Netherlands. Oxxio is the fourth largest supplier in the Dutch market and has 800.000 customers for electricity and natural gas. In the Dutch market.

Direct Energy

Direct Energy is Centrica's subsidiary in North America. It operates 3,000 natural gas wells in Alberta, while in Texas has three gas-fired power plants and power purchase agreements totalling 813MW of wind power. Its principal business lines are sales of natural gas and electricity to residential and small commercial customers, sales to medium and large-sized businesses, government, and public institutions, wholesale energy, and home and business service including household ventilation and air conditioning, plumbing, water heater and electrical appliance services along with facility maintenance and energy management consulting services for commercial customers. ^[14]

Key Trends and Forces

Centrica buys stake in British Energy

In November, 2009 Centrica was cleared by the European Commission to purchase a 20% stake in British Energy; a deal that was proposed in August. British Energy has a nuclear output of 8,683 MWh with 8 nuclear plants in the UK. The operational performance of the British Energy nuclear fleet has improved in the first 3 quarters of 2009, with 42.5TWh of power generated, 42 per cent above the level in the same period of 2008. It is owned by the larger EDF, the largest utility company is the world. This new partnership formed with EDF enables Centrica to be a part of the focus on expanding nuclear energy in the UK with an 80/20 joint venture with EDF to build four nuclear reactors the first planned for operation in 2017. EDF will also provide Centrica with an additional 18TWh of power at market prices over five years from 2011. The final term of the transaction is that EDF will acquire Centrica’s 51 percent stake in Belgian generation and supply business SPE for £1.2 billion. ^[15]

Centrica’s bid accepted for takeover of Venture Production

In 2009 Centrica has been successful in a takeover coup of Venture Production, a North Sea oil and gas company. This acquisition is important for Centrica who needs Venture’s output to supply its customers. As of April, 2009 Venture has oil reserves of 240 million barrels and extracts 52,000 barrels of oil a day. The accepted offer was 845p a share valuing Venture at £1.3 billion. Many including Venture investors believe this price was a steal. The acquisition helps Centrica reduce its exposure to the volatile wholesale oil and gas market. ^[16]

Centrica plans for major wind farm

Centrica plans to construct a £725m offshore Wind Energy to be completed by the end of 2012. Its plans include 75 turbines generating 270 megawatts of energy. They already have approval for the site off the eastern coast of the UK. According to Sarjit Sambi, Centrica's managing director of power generation, offshore wind farms are more expensive but helps the country to meet its carbon reduction target. The wind farm would increase the total output of Centrica's Renewable Energy projects to 650MW. ^[17]

Oil and Gas Price Risk

Oil and Gas prices pose a risk to the company's cost. Centrica is expanding its business by buying power stations in order to reduce this risk. UK wholesale gas prices have been resilient in the face of falling oil prices. The spot UK gas price since the summer of 2008 is down 40% while oil prices are down 70%. Historically there has been parity between oil and gas prices in the UK. Whether this de-correlation will last over the next year or oil and gas prices will return to historical parity should be closely watched.

^[18]

Competition

Within the UK, Centrica competes with E.ON AG (EON) , RWE AG (RWE-FF) , Scottish & Southern Energy, and EDF Energy.

Market Share

British Gas Residential has a market share of 43.5% in gas and 22.2% in electricity. This makes British Gas the largest supplier of gas and electricity to residents in the UK. ^[40]

References

1. ↑ Centrica: Our Businesses
2. ↑ Centrica: 2008 Financial Statement
3. ↑ British Gas
4. ↑ Centrica Energia
5. ↑ Oxxio
6. ↑ Centrica Energie
7. ↑ Norway
8. ↑ Direct Energy
9. ↑ Centrica: Corporate Profile July 2009
10. ↑ British Gas
11. ↑ Dyno
12. ↑ Centrica Storage
13. ↑ Centrica Energy
14. ↑ Direct Energy
15. ↑ Centrica to complete on British Energy investment
16. ↑ Venture takeover a coup for gas-hungry Centrica
17. ↑ Centrica powers up £725m wind farm venture
18. ↑ Fleet Street Invest
19. ↑ Centrica 2008 Annual Report
20. ↑ EDF Key Economic Figures
21. ↑ EDF Energy Generation
22. ↑ EDF Energy Generation
23. ↑ EDF Key Economic Figures
24. ↑ Centrics Corporate Profile
25. ↑ Centrica: At a Glance
26. ↑ Centrica: At a Glance
27. ↑ Centrics Corporate Profile
28. ↑ E.ON Annual Report 2008
29. ↑ Report_2008.pdf E.ON Accounts 2008
30. ↑ E.ON Statistics: Portfolio
31. ↑ E.ON Annual Report 2008
32. ↑ S & S Annual Report 2008
33. ↑ S & S Power Generation
34. ↑ S & S Generation Portfolio
35. ↑ S & S Annual Report 2008
36. ↑ RWE 2008 Annual Report
37. ↑ RWE Power Generation
38. ↑ RWE Sites UK
39. ↑ RWE 2008 Profit Report
40. ↑ Centrica 2008 Annual Report