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