Centrica plc (CNA) Earnings Call Transcript & Summary

Good morning, everyone. Thank you very much for joining the call, especially short notice. I hope you're all well. I'm joined today at the Easington gas processing plant in East Yorkshire by Martin Scargill, is the Managing Director of Centrica Storage Limited. I'm really excited that we've announced this morning that Rough is now operational as a gas storage facility again, so much so that I thought it well worth providing a bit more color to the announcement. And I'm going to spend about 10 minutes going through the current status and also touch upon the potential longer-term future for Rough to the hydrogen storage facility. And Martin and I would then be delighted to take any questions that you may have. Obviously, the more difficult ones for Martin and the easier ones for me. So how have we got to where we are today? No doubt you'll recall that until 2017, Rough was by far the U.K.'s largest gas storage facility, making up around 70% of total U.K. capacity of about 200 billion cubic feet. However, I have an identified well integrity issues and after assessing the economics of seasonal gas storage. We concluded that it would not be economic to make a significant investment required to continue to operate roughly a gas storage asset at similar levels of capacity. So we were granted permission to produce all recoverable reserves, and we've been operating roughly at the gas production facility for the past 5 years. It has been [ mould ] at any point at all, it's been fully operational, fully staffed and working all the way through. Over the past couple of years, we've been investigating the possibility of extending the life of rough, essentially by repurposing it as a hydrogen storage facility. That would require reopening it first as a meeting natural gas soda facility and then converting to hydrogen over time. In July, we were granted a 10-year storage license by the North Sea transition Authority. And at the end of August, we were given all necessary permissions to recommence storage operations at the site. Ross going to provide around 30 billion cubic feet of gas storage capacity this winter, which is around 9 LNG tankers work. We've had an extended commissioning period for the facility, and we've currently got well over 20 billion cubic feet of gas in the field, that includes around 14 billion cubic feet of indigenous reserves that were still in the field at the end of June. Rough immediately becomes the U.K.'s largest gas storage facility once again, and it adds more than 50% to the country's previous capacity of around 60 billion cubic feet. Rough play an important role this winter in the U.K. It will help to balance the U.K. gas market. We've got enough visibility of gas prices over this coming winter to be able to run rough with no need for our regulatory support model. We'll add value through injecting gas when prices are low like they are today, and then withdrawn that gas when the prices are higher as we expect them to be in the coming months as it gets colder. However, our long-term aim remains to turn rough into Europe's largest long-duration energy storage facility. Initially starting methane and subsequently converting to hydrogen storage, helping the U.K. reach a net 0 electricity system by 2035 and the decarbonization of the U.K.'s industrial clusters, including the Humber region by 2040. We intend to make rough the largest hydrogen storage facility in the world. As we said back at our interim results in July, we need to spend around GBP 150 million to increase the storage capacity to around 60 million cubic feet for next winter. And the total project, including the cost of converting rough to store hydrogen wood cost in the region of GBP 2 billion. I'll reiterate that we would be highly unlikely to invest such sums on a merchant basis. Given that it's impossible to predict future commodity prices and more importantly, seasonal spreads with any certainty. So any future investment is dependent on a regulated return model. We're not looking for government money. We don't want it. We haven't asked for it. We don't need it. We can fund this either ourselves or with partners. We're simply looking for a model such as that, which is used in existing strategic U.K. energy assets like the interconnectors to boost U.K. energy security. The chart you see here shows the daily injection of the draw volume since we started our commissioning operations. We've gradually built up to injection levels averaging over 200 million cubic feet or 2 million firms a day, having also tested the assets with draw capability during September. After all, we want to make sure we can get the gas out of the ground, having put it in there. Roughly and backlog means we've been able to buy gas in the spot market while selling forward for later in the winter, capturing price spread and creating significant value, both for U.K. energy consumers by helping to balance supply and demand in peak times and obviously for Centrica shareholders. Running roughly the storage asset this winter also provide optionality to do the same again for the next winter with a similar level of potential capacity without the need for additional investment. However, we don't know at this stage whether this is going to make economic sense. That's why we've been in discussions about our regulated return model. We've included a couple of slides with some detail in the history of Rough and Easington, both of which have been part of the Centrica family since 2002. We own 100% of these assets. And also on the unique characteristics of Rough, which makes it the only proven large gas [ tourist ] facility in the U.K. If I will be[ available ] in Centrica website, I won't go through them in too much detail, but there are a couple of points to highlight on this slide. The Easington gas terminal remains an important part of infrastructure for both Rough and the U.K. as a whole. It's capable of processing 1.6 billion cubic feet of gas per day, equivalent to approximately half an LNG tanker or around 20% of average U.K. daily gas demand. And our management team, including Martin, who is here with me today, has a long and proven track record in gas infrastructure development and safe operations. They know what they're doing. They've been doing it for decades. Future of Rough is in very safe hands. These are some of the facts of the unique characteristics of Rough. We call it the Goldilocks reservoir. It meets all of the requirements and temperature it's not too hot, it's not too cold, it's just run both for meeting, but more importantly, for hydrogen. It's got the right requirements and dryness and sign-on proximity to land is very close to the coast. It's a really nice size and we don't have water or other liquids in there. And it remains the only proven offshore gas storage reservoir in the U.K. Is these characteristics also mean that Rough is well-placed to play a role in a hydrogen future. And it does support the U.K. hydrogen strategy, which in April this year, doubled the target for hydrogen production from 5 gigawatts to 10 gigawatts by the end of this decade in the next 8 years. Again, there's further detail on this slide, but the key takeaway is that the doubling of the capacity is the thing that should mean that Rough is required. It is, in our view, impossible that this heightened target for hydrogen production can be met without hydrogen storage capacity. We believe Rough is the only meaningful material option available. Once you start to use hydrogen, you must have an uninterruptible supply, and that means you must have storage. Rough is also incredibly well located, given the proximity to the combined East Coast cluster, which is responsible for around half of the U.K.'s industrial CO2 emissions. [ Buskas ] the potential to play an incredibly important role in the decarbonization of the Humber region and by extension in the U.K. And before I move to any questions you may have for Martin and I, let me briefly summarize. Having been granted alliance Storegas at Rough again with around 30 Bcf of potential capacity this winter. Given that we've been injecting gas in September, we currently got well over 20 billion cubic feet in the field already. The availability of prices means that we don't require a regulatory support model for this winter. However, longer term, we will require the right regulation to be confident enough to invest the material capital in this project that we would like to invest to create thousands of jobs in the U.K. to reduce prices for consumers and to help deliver the U.K. [ Hyten ] targets. We'll continue discussions with the U.K. government. We're not asking for any government investment, just the appropriate regulatory framework. Everyone I speak to whether in government and opposition and NGOs, everyone agrees that we need rough. So I'm really hopeful that we'll be able to live upon a regulatory framework, which underpins the investment needed to materially boost the U.K. energy security, keep consumer prices down enable the U.K. hydrogen economy and returned once again to a country, which is a net exporter of energy, which, in my view, would transform the U.K. economy. I'd just like to thanks very much for your time, and we're now happy to take any questions that you might have. So Timo, if you could let us know with the questions that we've got, please?

[Operator Instructions] The first question is from the line of Mark Freshney with CS.

So Chris, if we do the maths, if we look at the National Grid long-term storage, we can see what you've been injecting, we can work out that you can fill up the storage facility at 150p per firm and take it out in Q1 at 370. So we can work back through the math and get to some very, very high numbers. My question to you is, is that right? Why would you not make order of magnitude GBP 400 million to GBP 500 million of post-tax profits from this injection trade? And secondly, what is your revenue recognition policy, which years will you recognize will you have to mark-to-market the gas as at December 31 or the profits? How should we think about revenue and profit recognition?

Mark, Kate, and I spoke about whether Katepally any financial questions. So Kees not on the call. So it should be -- if you've listened to it should be going absolutely may think I'm going to answer a mark-to-market question. But look, it has to understand what will happen is we will recognize the revenue when we withdraw the gas. So I think it's covered by -- I'm getting I think it's covered by what's called the old use exempt. I remember I'm about 15 years on a day on this stuff, but I don't think we'd recognize this year to recognize when you withdraw it. Obviously, on the capacity on the prices and the like, we need to see where prices are when we withdraw this. So as you know, I've long been [indiscernible] profit forecast and I wouldn't be anywhere near as good as you are at your job in doing that. So I'm sure you'll come to the right number.

And if I could just follow up with a question for your CSL manager. On the hydrogen, you mentioned 10 terawatt hours of hydrogen storage, which I believe is GBP 2 billion of CapEx. But when I look at rough storing methane on my math, and I've got a cheat sheet in front of me actually, so it's not really my math, but 180 Bcf of gas, rough stores, 54 terawatt hours. And you're talking about GBP 2 billion of CapEx to only store 10 watt-hours of hydrogen. So is it correct that there's a fairly big derating in the energy content that Rough food store moving to hydrogen?

Mark, it's Martin, and thanks for the question. So the first thing you need to have to achieve here is that the energy density of hydrogen is a third of the meter. So anybody storing hydrogen, their store got 2/3 smaller overnight by changing the fluid. And the other number probably to add to Cusi, is the number we're putting out there in terms of 10 terawatt hours for rough is utilizing 120 billion cubic feet of its working capacity, which could go higher, it could go to 200, but we pitched it in around 120. We think that's a good sweet spot for what we see needed in the market, but it could go higher. So Mark, that's what we see that our TC is probably quite right. I have a lot that engineers tend to be quite conservative. So I tend to round up something that anything you tend to run down. So by and large, I think that's if you take you have 13 energy density and you go from 120 to 180 which is probably been goes from 100 to 200, then you've got just about the right number, so 10 million versus 54%. So your numbers are pretty much right. Not often the case, but thank you very much. You'd be more different.

The next question is from the line of Martin Young with Investec.

To everybody just got a couple of questions. You mentioned GBP 150 million in respect of dealing with the methane storage side of things. How much of that has already been spent to take you up to 30 Bcf. And given the comments around the lack of visibility for next winter, would you be prepared to spend the balance on a merchant basis? Or are your comments about regulatory support applicable to the second phase of the meeting spend? And then the second question is, look, we live in some strange times at the moment, and we have another changing government that is doing very strange things, and you can argue that some of those strange things fly in the face of dealing with the much needed any security that this country has got. Can you rule out the possibility of government getting interested in a ramp of spread profits from storage facilities like RAF. So a number of questions.

The GBP 150 million, Martin, that is all for the increasing capacity for next year. And that's a lot of money. And really, what we are looking for and Rough what we think are, I think is the right thing we think is the right thing to do is to have a long-term deal to bring this thing back for 40 years or let's talk about the next 4 years, not the next 40 weeks. So the likelihood of our spending GBP 150 million on spec increase capacity from 30 to 55, 60 or so is quite limited. We do need government backup. We've already invested a reasonable amount. In terms of commenting on like hot government doing stuff, I don't want to get broad on that at all. I mean, it's really for government to decide what it is that they do. The thing I would always come back to is governments who decided to take profits from companies in good times may well scale away investment. So as you know, my view I've been very open in this my view is that to transform the U.K. energy system, we could have contracts for businesses and that, that could achieve something which is an energy market that can work for the consumer. But I do worry about the idea of government in this because what that would suggest to you that the governments are going to go after or are they going to go after all the energies probably the energy between the U.K. markets but are not in the U.K. I mean you know this better than I do work than Ofgem. So I think that what the current situation calls for this cool heads. And we never have any conversation with government what I was see is if we think about what we're trying to achieve, then let's try and find the best way of achieving the objectives rather than instantly run to talking about top slice and revenue and the like. So we're actively engaged with this. I hope the government does the right thing. But I wouldn't want to be drawn on what they may or may not be considering that as that's been proven to be a [ fill and over ] the past files.

The next question is from the line of Dominic Nash with Barclays.

I've got a couple of questions, please. One is technical, which is roughly used to have or did have a lot of cushion gas in it. And when you decided to -- when you started to decommission, you remember, you said, well, we're going to run it down as a normal gas-producing field going forward. What cushion gas do we need to put back in or have you put back in[ to ] Rough? And how does that get put on the accounting? And the second question I've got is, I think last that we last time we mess up, I think you mentioned that you were hoping that there might be fracking might be coming back onto the table. Obviously, that -- that's obviously been pushed in the last few days or so. What your thoughts really about the U.K. government policy on producing indigenous fossil fuels going forward in order to meet the fact we're still going to be consuming stuff going forward? Or do you think that was an incorrect policy from government?

Yes. So let me take the flacking and then Martin to talk with the Cushing. Remember that any of the gas that have got in the ground just now is recognized on the books other than the gas we bought other than the cost of developing it -- but look on fracking, my view is if you step back from the gas is a key transition fuel to get to net 0 gas, it's going to be with a natural gas for the next 20 years or so. And we have to recognize that in order to have the right plans to get to net 0. The other question, which is, if you recognize that you set you're going to use gas, we have the best place to get to gas from an energy security point of view, from a cost point of view on environmental cost point of view. And if firstly, probably more expensive to produce shale in the U.K. than it is to produce Garanti Qatar or somewhere else. The environmental cost is probably a bit lower because you're not transporting the gas on ships, so you're probably seeing something there. And then you've got security supply security supplying undoubtedly higher if you produce it domestically. So the guy I think that the debate on fracking has far more heat than life. And when I see it, it's not what I would call a particularly well-informed to be. And so I haven't called for -- I can't -- I'm not in a position to say we should act. I'm in a position to say my view is that we should have an informed debate about this, and we should have cool heads involved in the debate, and we should make the right decision based on the cost, the security of supply and the environmental cost. I mean as you know, fracking is something that's been going on for decades. So what we're talking about really is onshore gas production from shale from Faro. That's proven to work. And I think that we've just got to step I can see what we're trying to solve. -- security supply is imported in the U.K. had a lot of indigenous gas. But it becomes the most important thing, I would have thought that the most port thing is to produce domestic gas. But again, people and government have got so many things on. I don't understand fully the pressure that they're under and they make what they think are the right decisions. I just want a proper open informed debate about. I just don't think we've had that at the moment. So with that, look, I'll ask Martin to talk about the Cushing Gas.

Dominic is come quick answer. The gas that we put in is old stock. We don't need to top up with cushion gas -- and the slightly longer answer is the way that we're operating in the field is much lower down its pressure envelope. So we're able to reopen the facility at lower pressure. We don't need the high levels of cushion gas that we had before.

The next question is from the line of [ Mat Luis Benstein ].

I have 2 questions. First is on the near-term earnings. Do you have a ballpark number for the near-term earnings getting affected by the broth? And the second one is that how long do you think you will operate at 3 bad capacity for this winter only? Or that can continue beyond this winter and the long-term earning impact on this BCF capacity?

Thanks for the question, Mat. On the near term only in fact, you guys are very, very capable of doing that. I don't want to give you numbers, you plug into your model. In terms of operating at 30 Bcf beyond this winter, it really does depend on the economics but also we have to wait and see how things look. Obviously, we have far better visibility over this winter's price and spreads and volatility the next winter. So as we see physically, we can operate it at 30 Bcf for a while. So we can turn to that particularly economically is that we'll get the question. Another one is on the CapEx. So you mentioned for the next year the number of GBP 1 million to GBP 2 million. And I also mentioned the GBP 2 billion investments over the long term.

So what is exactly the GBP 2 billion getting better in the hydrogen storage or any other men? So the GBP 150 million, what would be the client to double the capacity, more or less double the capacity for next year?