BarCap - UK Big 6 Utilities - 20111102

EQUITY RESEARCH
2 November 2011
UK UTILITIES Time for a price war?

Our analysis in this report argues that two factors could shift the balance of power between the Big 6 UK utilities: declining household energy demand, and the shift in profitability from old fossil fuel generation to cleaner generation. The winners will have the potential to compete more aggressively in downstream energy supply and gain market share. The losers could see retail margins squeezed and customer numbers decline. We believe investors should steer clear of this potential price war, and focus instead on assets which benefit directly from the changing shape of the UK utilities industry. Our top picks are Drax (we upgrade to 1-OW) and National Grid. We downgrade Centrica to 3-UW, and initiate coverage of SSE with a 2-EW rating. The household energy demand squeeze. Our analysis finds that growing energy efficiency and pressure on disposable income could drive annual declines in UK household gas and electricity consumption of 3.7% and 2.4% per annum respectively to 2015. Centrica appears most exposed to this risk, due to its high gas market share. The great generation profit transfer. A surge in new gas capacity, an acceleration in biomass build, offshore wind, potential nuclear life extensions and falling energy demand are likely to leave owners of older coal and gas capacity struggling to cover fixed costs, while cleaner generators profit. Drax is now potentially a key beneficiary, while SSEs high fossil fuel exposure could act as a drag on earnings. Time for a price war? We analyse the relative competitive positions of the Big 6. We find that EdF Energy could see a net increase in relative earnings power of up to 37/customer over the next three years. Centrica could see a relative decrease in earnings power of up to 18/customer. We believe this divergence in fortunes could be the trigger for increased price competition. In particular, we believe EdF Energy (and RWE npower) have both the means and motivation to grab downstream market share. We see evidence that they are already pricing more aggressively. Avoid downstream exposure. Centrica is the biggest loser in our analysis. We see risk of 7% consensus EPS downgrades. We also believe Centrica could experience a P/E derating, leading it to trade at a substantial discount to SOTP. We cut our price target to 2.60 and downgrade Centrica from 1-OW to 3-UW. On the other hand, Draxs potential to convert to biomass confers significant option value. We upgrade from 3UW to 1-OW with a 6.75 price target. We move European Utilities to Neutral. The UK joins the list of regions we see with weak fundamentals. We take this opportunity to cut our sector stance to 2-Neutral.
SECTOR UPDATE European Utilities 2-NEUTRAL from 1-Positive For a full list of our ratings, price target and earnings changes in this report, please see table on page 2. European Utilities Peter Bisztyga +44 (0)20 3134 4763 peter.bisztyga@barcap.com Barclays Capital, London Monica Girardi +39 02 6372 2683 monica.girardi@barcap.com Barclays Capital, London Julie Arav +44 (0)20 7773 1722 julie.arav@barcap.com Barclays Capital, London Susanna Invernizzi +39 02 6372 2681 susanna.invernizzi@barcap.com Barclays Capital, London Harry Wyburd +44 (0)20 3134 2115 harry.wyburd@barcap.com Barclays Capital, London Wen Du +44 (0)20 7773 2317 wen.du@barcap.com Barclays Capital, London U.S. Power Daniel Ford, CFA 1.212.526.0836 dan.ford@barcap.com BCI, New York Ross A. Fowler, CFA 1.212.526.3432 ross.fowler@barcap.com BCI, New York
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 56.
Barclays Capital | UK Utilities
Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)
Company Rating Old European Utilities Centrica (CNA LN / CNA.L) Drax Group (DRX LN / DRX.L) SSE (SSE LN / SSE.L) 1-Pos 1-OW 3-UW N/A New 2-Neu 3-UW 1-OW 2-EW 2.97 5.43 13.44 3.70 3.20 N/A 2.60 6.75 12.35 -30 111 0.27 0.47 N/A 0.26 0.52 1.12 -4 11 0.31 0.35 N/A 0.27 0.51 1.23 -13 46 Price 31-Oct-11 Old Price Target New %Chg Old EPS FY1 (E) New %Chg Old EPS FY2 (E) New %Chg
Source: Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency. FY1(E): Current fiscal year estimates by Barclays Capital. FY2(E): Next fiscal year estimates by Barclays Capital. Stock Rating: 1-OW: 1-Overweight 2-EW: 2-Equal Weight 3-UW: 3-Underweight RS: RS-Rating Suspended Sector View: 1-Pos: 1-Positive 2-Neu: 2-Neutral 3-Neg: 3-Negative
2 November 2011
CONTENTS
EUROPEAN UTILITIES COMPARABLE ANALYSIS..........................................................................4 THE SHIFTING BALANCE OF POWER..............................................................................................5 THE HOUSEHOLD ENERGY DEMAND SQUEEZE ...........................................................................9 THE GREAT GENERATION PROFIT TRANSFER............................................................................12 TIME FOR A PRICE WAR?................................................................................................................18 COMPANY SECTION ........................................................................................................................23 Centrica not so safe after all ...............................................................................................................25 Drax from dark to bark ........................................................................................................................35 SSE still struggling for momentum ...................................................................................................43 National Grid proactive asset management started .....................................................................53
2 November 2011
EUROPEAN UTILITIES COMPARABLE ANALYSIS

Company Rating Target Price Current Price Up / (Downside) Div. Yield YE 11 Integrated Utilities Centrica Endesa Enel E.ON Fortum GDF Suez Gas Natural Iberdrola SSE RWE Average 3-UW 1-OW 1-OW 3-UW 2-EW 3-UW 2-EW 3-UW 2-EW 3-UW 2.60 28.00 5.20 14.20 18.90 20.00 12.50 5.85 12.35 24.80 2.97 17.26 3.41 17.58 17.63 20.52 13.49 5.26 13.44 30.95 -12.4% 62.2% 52.5% -19.2% 7.2% -2.5% -7.3% 11.3% -8.1% -19.9% 6.4% 5.1% 5.6% 7.9% 5.7% 5.7% 7.4% 6.2% 6.6% 5.6% 7.1% 6.3% EV / EBITDA 2011 5.9x 5.6x 5.8x 10.2x 9.3x 6.9x 7.4x 7.8x 8.6x 9.1x 7.7x 7.1x na 7.1x 5.4x 7.6x 4.0x 5.7x 7.6x 8.9x 8.6x 8.0x 9.1x 9.1x 8.5x 9.4x 10.0x 8.7x 9.6x 9.4x 6.5x 7.2x 6.8x 2012 5.4x 5.2x 5.8x 8.4x 8.7x 6.6x 6.8x 7.9x 8.4x 8.0x 7.1x 6.4x na 6.4x 5.4x 6.5x 3.3x 5.1x 7.0x 8.5x 7.7x 7.1x 8.9x 9.0x 8.0x 9.0x 9.6x 8.5x 9.3x 9.1x 6.0x 6.7x 6.3x 2013 5.2x 4.8x 5.5x 8.0x 8.4x 6.0x 6.6x 7.9x 7.8x 8.6x 6.9x 5.4x na 5.4x 11.1x 5.7x 3.6x 6.8x 6.4x 9.3x 7.0x 6.6x 8.8x 8.9x 7.8x 8.8x na 8.2x 9.0x 8.7x 5.9x 6.0x 5.9x 2011 11.3x 8.9x 7.6x 14.3x 12.4x 13.4x 10.6x 10.7x 12.0x 7.1x 10.8x 10.3x 7.1x 8.7x 10.5x 13.8x 22.1x 15.4x 9.1x 12.4x 10.7x 10.1x 12.5x 15.1x 11.6x 15.6x 16.6x 15.0x 15.9x 15.8x 11.1x 6.9x 9.0x P/E 2012 11.0x 8.0x 7.6x 10.5x 10.8x 12.3x 9.8x 10.4x 12.0x 6.8x 9.9x 9.4x 7.1x 8.3x 10.6x 9.9x 13.9x 11.5x 8.5x 11.9x 9.2x 8.1x 11.9x 14.5x 10.7x 14.4x 14.9x 13.9x 14.8x 14.5x 10.0x 6.1x 8.0x 2013 10.9x 7.5x 7.6x 10.0x 10.5x 9.8x 9.7x 10.5x 11.0x 9.5x 9.7x 7.6x 6.0x 6.8x 24.0x 8.5x 13.2x 15.3x 7.9x 14.2x 8.1x 7.7x 11.6x 14.0x 10.6x 13.5x 13.7x 13.6x 13.9x 13.7x 9.5x 5.6x 7.5x Dividend Payout Ratio 2011 57.1% 49.6% 60.0% 81.5% 70.1% 99.8% 65.8% 70.2% 58.8% 50.0% 66.3% 58.8% 62.5% 60.6% 50.0% 40.0% 57.8% 49.3% 60.0% 74.9% 60.5% 85.2% 85.2% 114.8% 80.1% 51.5% 63.4% 69.3% 84.2% 67.1% 71.6% 84.6% 78.1% 2012 58.6% 50.0% 60.0% 66.0% 61.3% 92.6% 70.4% 69.5% 71.3% 50.0% 65.0% 57.6% 65.6% 61.6% 50.0% 40.0% 45.0% 45.0% 60.0% 76.2% 60.5% 82.3% 82.3% 99.4% 76.8% 50.3% 60.6% 67.7% 82.5% 65.3% 67.5% 78.6% 73.1% 2013 61.1% 50.0% 60.0% 62.5% 60.0% 73.8% 76.6% 72.8% 68.2% 50.0% 63.5% 53.8% 60.5% 57.2% 50.0% 40.0% 45.0% 45.0% 60.0% 93.1% 60.5% 83.0% 83.0% 96.2% 79.3% 49.9% 59.9% 70.8% 82.6% 65.8% 65.8% 73.0% 69.4% 10-11 4.3% -50.5% -4.4% -52.1% -10.2% -11.4% 5.5% -6.0% 1.9% -37.6% -16.0% 15.9% 10.3% 13.1% -18.8% 4.8% -35.5% -16.5% 7.8% -3.4% 15.4% 1.1% -14.0% -40.2% -5.6% 16.0% 14.1% 12.2% 5.2% 11.9% 5.8% 11.2% 8.5% EPS Growth 11-12 2.4% 11.5% 0.4% 35.8% 14.5% 9.1% 8.1% 2.9% -0.5% 4.3% 8.9% 9.5% 0.0% 4.7% -1.4% 39.3% 58.5% 32.1% 6.1% 4.0% 16.5% 24.3% 4.8% 4.4% 10.0% 7.8% 11.5% 7.8% 7.5% 8.7% 5.5% 12.8% 9.1% 12-13 P / BV 2011 2012 2013 2011 5.7% 13.0% 7.9% -5.1% 1.2% 0.3% 0.7% 3.6% 2.2% 25.9% 5.5% -2.7% 11.4% 4.3% 6.5% 13.7% -4.0% 5.4% FCF Yield 2012 6.8% 16.7% 7.9% 6.6% 4.9% 2.4% 15.0% 1.8% -1.4% 22.6% 8.3% 0.5% na 0.5% 2013 7.8% 22.2% 7.9% 8.0% 6.7% 4.9% 14.2% 2.7% 1.4% 22.6% 9.8% -2.8% na -2.8%
0.6% 2.1x 2.0x 1.8x 7.5% 1.0x 0.9x 0.9x -0.2% 0.8x 0.8x 0.7x 5.6% 0.7x 0.7x 0.7x 3.1% 1.7x 1.6x 1.5x 25.8% 0.7x 0.7x 0.7x 0.3% 1.1x 1.0x 1.0x -0.9% 0.9x 0.9x 0.9x 9.8% 2.4x 2.3x 2.2x -28.5% 0.8x 0.9x 0.9x 2.3% 1.2x 1.2x 1.1x 23.8% 18.8% 21.3% 1.1x 1.1x 1.0x 0.9x 0.9x na 1.0x 1.0x 1.0x
Integrated Utilities (not covered, Thomson Reuters consensus figures) EDF na 36.34 21.71 67.4% 5.7% EDP na 3.09 2.29 35.2% 8.8% Average 51.3% 7.2% Generation Utilities Drax International Power Verbund Average Regulated Utilities Enagas National Grid Red Electrica REN Snam RG Terna Average 1-OW 1-OW 2-EW 6.75 4.00 21.00 5.43 3.38 21.03 24.3% 18.3% -0.1% 14.1% 15.6% 10.1% 11.5% 18.9% 7.9% 13.9% 13.0% 4.8% 2.9% 2.6% 3.4% 6.1% 6.1% 4.9% 8.2% 6.8% 7.6% 6.6% 3.3% 3.8% 4.6% 5.3% 4.3% 6.4% 12.3% 9.3%
-55.7% 2.0x 1.6x 1.7x 15.7% 1.5x 1.4x 1.3x 5.2% 1.7x 1.6x 1.5x -11.6% 1.8x 1.6x 1.5x
1.6% -14.8% 16.9% 18.9% 3.1% 4.3% 7.2% 2.8%
1-OW 1-OW 2-EW 2-EW 1-OW 1-OW
16.50 6.80 39.00 2.50 3.80 3.15
14.27 6.18 34.98 2.10 3.52 2.77
8.2% 1.8x 1.6x 1.5x 2.5% 6.6% 8.1% -16.5% 2.2x 2.1x 2.0x -2.8% -3.9% -5.5% 12.9% 2.6x 2.3x 2.0x 3.4% 5.5% 7.5% 4.8% 1.1x 1.0x 1.0x -16.2% -14.6% -14.0% 3.2% 2.0x 1.9x 1.9x -1.3% 0.0% -0.4% 3.3% 2.1x 2.1x 2.1x -5.4% -2.7% -3.9% 2.7% 1.9x 1.8x 1.7x -3.3% -1.5% -1.4% 7.0% 8.6% 2.6% 6.5% 6.2% 2.6% 10.1% 6.4% 5.3x 4.6x na 3.2x 3.0x na 3.3x 3.0x 3.0x 2.4x 2.4x 3.1x 3.5x 3.2x 3.1x 0.1% 2.5% 0.6% -2.7% 0.1% -1.0% 3.8% 1.4% -1.0% 0.8% na na na na na na na na
UK Water Utilities (not covered, Thomson Reuters consensus figures) Northumbrian na 3.47 4.64 -25.3% Pennon na 6.74 6.96 -3.1% Severn Trent na 15.28 15.16 0.8% United Utilities na 6.56 6.07 8.2% Average -4.9% Waste & Water (not covered, Thomson Reuters consensus figures) Suez Env. na 17.56 11.35 54.8% Veolia Env. na 25.51 10.28 148.3% Average 101.5%
1.2x 1.1x na 10.0% 5.3% 0.6x 0.6x 0.6x 15.6% 21.9% 0.9x 0.8x 0.6x 12.8% 13.6%
Source: Barclays Capital, Thomson Reuters, Company Data. Prices as at 31 October 2011 at market close
2 November 2011
THE SHIFTING BALANCE OF POWER

Our analysis in this report argues that two factors could shift the balance of power between the Big 6 UK utilities over the next two to three years: the twin challenges of declining household energy demand and the shift in profitability from old fossil fuel generation to cleaner generation. There will be winners and losers. The winners will have the potential to compete more aggressively in downstream energy supply and gain market share. Specifically, we identify EdF Energy and RWE npower as having the capacity and motivation to compete more aggressively, to the detriment of Centrica, SSE and E.On Energy. We believe investors should steer clear of this battle, and focus instead on assets which benefit directly from the changing shape of the UK utilities industry: such as Draxs biomass conversion project, and National Grids UK electricity transmission division.
The changing shape of the UK utilities sector

Time for a price war?
UK energy bills have made headline-grabbing news, with politicians and the public bemoaning the lack of competition. We believe this could be about to change, driven by a shift in the balance of power between the Big 6 UK utilities:
The household energy demand squeeze. If improvements in household energy efficiency continue, we would expect household gas and electricity consumption to decline by around 2.1% and 0.7% per annum respectively. However, we estimate these declines could accelerate to 3.7% and 2.4% per annum respectively if household real incomes remain under pressure. We expect Centrica to be more negatively impacted than its competitors given its high volume share of the residential gas market. We estimate it could see a demand decline that amounts to a loss of EBIT margin of 17/customer over 2012-15E nearly half of its 2011E margin of 38/customer. Figure 2: UK power generation capacity (GW)
5,000 4,500 4,000 60 3,500 3,000 2,500 40 20 0 2009 100 Biomass 80 Wind Hydro Oil OCGT CHP CCGT Hard Coal Nuclear 2011E 2013E 2015E 2017E
Figure 1: Energy consumption per household (kWh)

20,000 18,000 16,000 14,000 12,000 10,000 2000 2002 2004 Gas
Source: Barclays Capital, ONS.
2006
2008
2010
Electricity
Source: Barclays Capital, National Grid.
The great generation profit transfer. Our analysis shows that a surge in new Combined Cycle Gas Turbine (CCGT) capacity, an acceleration in biomass build, potential nuclear life extensions and falling energy demand will leave owners of older coal and gas capacity struggling to cover fixed costs. The winners are likely to be those with most
5
2012E
2014E
2 November 2011
exposure to cleaner generation, or those involved in connecting these assets to the transmission grid. In our view, Drax and National Grid benefit the most directly. However, SSEs significant old fossil fuel exposure is likely to act as a drag on earnings, despite its renewables and transmission exposure.
Time for a price war? We estimate EdF Energy could see a net increase in generation and supply earnings power of 31-37/customer over the next three years, driven by its high upstream nuclear exposure and low downstream gas exposure. RWE npower and ScottishPower also have better than average profit momentum in generation. On the other hand, we believe Centrica could see a decrease of 10-18/customer in its net generation and supply earnings power as a result of the declining household energy demand and weaker profits for its CCGT fleet. For SSE and E.On Energy the net negative impact could be as high 10/customer and 16/customer respectively. This divergence in fortunes could be the trigger for increased price competition. In particular, we believe EdF Energy and RWE npower have the motivation to grab downstream market share to rebalance their long generation exposure. Indeed, we see evidence that they are already pricing more aggressively. We believe investors should steer clear of this battle, as it is likely to mean lower margins for the whole downstream industry.
EdFs exposure to clean generation leaves it positioned to compete more aggressively in the downstream retail market
Figure 3: Net shift in generation and supply EBITDA ( per residential single fuel customer, 2012-15E)
50 40 30 20 10 0 (10 ) (20 ) (30 ) (10 ) (18 ) CNA
Source: Barclays Capital.
37
31 10 3 (2 ) (8 ) (16 ) 0 (7 ) (14 ) RWE IBE SSE "Big 6" Average (7 )
Slow Demand Decline Scenario
We see two principal risks to our UK utilities industry views:
Utilities fail to compete more aggressively. Our cautious stance on the UK downstream retail energy market may prove to be unfounded should the Big 6 utilities fail to compete more aggressively on price, despite the potential for a clear shift in the balance of power. However, if this were to be the case, we would expect regulatory or political intervention, in the form of a Competition Commission investigation. Politicians withdraw from green energy policies. Concerns about the impact that the transition to cleaner generation will have on household energy bills have raised questions about the UK Governments commitment to its renewables and carbon reduction goals. This raises this risk that this, or a future, government reneges on policies such as the Renewables Obligation and the carbon price floor. Indeed, there are already apparent divisions within the Coalition, with the Chancellor, George Osborne, seeming to distance himself from the UKs ambitious renewables and carbon reduction
6
EDF
E.ON
Fast Demand Decline Scenario
2 November 2011
targets 1, and the Prime Ministers new energy adviser questioning the Department of Energy and Climate Changes (DECC) calculations about the impact of renewables policy on energy bills 2. That said, recent comments by the Committee on Climate Change, which sets the legally binding targets for business, said that it would be very difficult to change the targets 3. In any case, green energy policy is a central tenet of the UK Governments coalition agreement, and we see little probability of these targets being abandoned on a 2-3 year view. Instead, we believe the key risk is that politicians force the downstream energy suppliers to share some of the burden, for example through windfall taxation.
Stock recommendations
Centrica (3-UW, 2.60 PT) not so safe after all. Over the past few months we have argued that Centrica is a relative safe haven. Its defensive characteristics have been borne out in 14% outperformance relative to the Stoxx 600 since May. Whilst its financial position remains robust, the economic and retail market environment is evolving rapidly. In particular, with declines in energy demand accelerating, we now think both sides of Centricas upstream hedge could come under pressure. We believe its competitive advantage in the UK retail market will fade, and that persistently weak spark spreads will lead to disappointing power generation profits in 2012/13E. We also see increasing downside risks for BGS, BGB and Direct Energy given the deteriorating economic environment. We cut our 2012-14E EPS forecasts to 7% below IBES consensus on average. In the current market environment, we doubt Centrica can trade at our revised SOTP valuation of 3.29. Given the deteriorating fundamentals, we believe Centricas shares could instead derate towards their historical P/E discount to the Stoxx Utilities index of -0.5, implying 12% share price downside. We downgrade Centrica from 1-OW to 3-UW with a new 2.60 price target. Drax (1-OW, 6.75 PT) from dark to bark. Drax is a key beneficiary of the current UK Governments support for cleaner generation. Following the proposed increase in Renewable Obligation Certificate (ROC) support, we now believe it is highly likely that Drax will proceed with plans to convert to 50% biomass co-firing. We believe this completely transforms the equity story of Drax, securing its position in the UK power market for the long term. A combination of the carbon tax and Renewables Obligation (RO) support should underpin progressively rising earnings. Over the medium term, our analysis suggests that Drax has the potential to return significant amounts of cash to investors. Numerous uncertainties remain, which means Drax remains a risky stock, in our view. Nonetheless we consider the upside potential to be considerable, particularly if Drax opts to convert the plant to 100% biomass in the future. We upgrade from 3-UW to 1-OW and set a new price target of 6.75.
Were not going to save the planet by putting our country out of business so let's at the very least resolve that were going to cut our carbon emissions no slower but also no faster than our fellow countries in Europe. Thats what I've insisted on in the recent carbon budget, George Osbornes speech at the Conservative Party conference, 3 October 2011.
2 Over time it is clear that the impact of our policies on consumer bills will become significantly greater four policies stand out as having the most significant impact on household energy bills: carbon pricing (both out own carbon price floor and the EU emissions trading scheme), the new Energy Company Obligation, our Electricity Market Reform package and the Renewables Obligation, Letter to David Cameron from advisers Ben Moxham and Gila Sacks on the impact of energy and climate policies on consumer energy bills, The Telegraph, 5 September 2011. 3
Energy giants told carbon targets are here to stay, The Times, 1 November 2011.
2 November 2011
SSE (2-EW, 12.35 PT) still struggling for momentum. We see deteriorating fundamentals in SSEs generation and supply business. Its large ageing coal and gas fleet is likely to struggle to cover its fixed costs once free CO2 permits expire, and it has less earnings momentum in its UK cleaner generation fleet than some of its competitors. As a result, we believe SSE will be at a competitive disadvantage in the UK retail market, which could see its market share and margins come under pressure. However, risk to EPS is mitigated by SSEs exposure to UK regulated networks, specifically electricity transmission. We see just 2% downside to consensus estimates. And whilst we expect a P/E de-rating, the downside is partially offset by a 5.9% yield and potential for 6-7% dividend growth. We consider the risks to SSEs shares, therefore, to be moderate when compared to the risks we see across other integrated utility names. We initiate coverage with a 2-EW recommendation and a 12.35 price target. National Grid (1-OW, 6.80 PT) proactive asset management started. For exposure to UK electricity transmission, our preferred play remains National Grid. The RIIO regulatory review (Revenue = Incentives + Innovation + Outputs), which will define new tariffs from April 2013, enters into its central phase in the second half of next year. Preparing for that, the company has already started to follow a strategy of asset rationalisation, which will result, in our view, in a cleaner structure and more focused business lines. In the medium term, we see two main drivers of performance for the stock: 1) the implementation of a regulatory framework which should stimulate rapid RAV growth; 2) a financing strategy with ongoing asset rationalisation aimed at achieving the highest possible blended return on the companys invested capital.
2 November 2011
THE HOUSEHOLD ENERGY DEMAND SQUEEZE

The first of the twin challenges facing the Big 6 UK utilities is that of falling residential energy demand. If improvements in household energy efficiency continue in line with the trend over the past five years, and household real incomes start to recover, we would expect household gas and electricity consumption to continue to decline by around 2.1% and 0.7% per annum respectively. However, if there was little or no growth in real incomes, we would expect the declines to be 3.7% and 2.4% per annum respectively.
Drivers of falling energy demand

Energy efficiency and falling real incomes put pressure on demand
Domestic gas and electricity consumption had been rising steadily by 1.7% p.a. for decades up until around 2004/05 (Figure 4), driven by rising disposable incomes and increasing penetration of gas for domestic central heating. However, the past few years have seen household demand for both electricity and gas decline in absolute terms. For reference, households account for about 35% of total UK electricity consumption and 60% of UK nonpower generation gas consumption. Figure 5: Domestic energy intensity index* (1987 = 100)
110 100 90 80 70 60 50 40 30 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011E 2013E 2015E
Figure 4: Trends in domestic energy consumption (TWh)

450 400 350 300 250 200 150 100 50 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 130 120 110 100 90 80 70 60 50
Gas (Left Axis)

Source: Barclays Capital, DECC Statistics.
Electricity (Right Axis)

Gas
Electricity
* Domestic energy intensity is measured as annual energy consumption per household, per unit of real disposable income.
In our view, this trend of declining household energy consumption has the potential to accelerate, driven by two factors:
Rising energy efficiency. Domestic energy intensity 4 has been declining for many years (Figure 5). However, the trend accelerated for gas after 2004, coinciding with the second phase of the Energy Efficiency Commitment (EEC). This increased the obligations on energy suppliers to achieve improvements in household energy efficiency via measures relating to insulation, lighting, appliances and heating. Since then the UK Government has introduced a number of follow-up measures, including the Carbon Emissions Reduction Target (CERT), Community Energy Saving Programme (CESP) and, from late 2012, the Energy Company Obligation (ECO) and Green Deal. The latter aims to create a new financing framework with savings recovered through energy bills, avoiding the need for consumers to pay upfront costs. In aggregate, the supplier
Domestic energy intensity is defined as energy consumption per unit of household disposable income.
2 November 2011
obligations alongside other measures such as building regulations, the roll-out of smart meters and products standards are expected by DECC (The Department of Energy and Climate Change) to deliver 67TWh of annual energy savings by 2016. This equates to around 13% of current household annual energy consumption of c500TWh. Figure 6: Expected UK household energy savings
2010E TWh Supplier Obligations Building Regulations Product Standards Smart Meters/In Home Displays Renewable Heat Incentive Warm Front Total 26.7 22.4 1.4 8.0 58.5 MtCO2e 7.6 4.3 0.7 2.4 14.9 TWh 61.4 40.9 8.5 5.3 1.3 8.4 125.9 2016E MtCO2e 14.8 7.8 3.8 1.4 1.2 2.6 31.7
Source: UK Report on Articles 4 and 14 of the EU End-use Efficiency and Energy Services Directive (ESD), DECC, July 2011.
Pressure on household disposable income. Although increased efficiency has caused household energy consumption to decline in recent years, the rate of decline has been partially mitigated by continued growth in real disposable incomes. However, this may not be the case going forward. UK households are currently facing a decline in real disposable income for the first time in 30 years. This has coincided with a 22% increase in household energy bills over the last 12 months. As a result, we estimate that the average duel fuel bill now amounts to 7.9% of per capita gross disposable household income, compared to 6.7% a year ago, and 4.6% in 2004. The result is that households are cutting back on energy usage: in 1H11, SSE reported that underlying electricity consumption had fallen by 2.9% y/y, and that underlying gas consumption had fallen by 5.8%. Our economists currently expect real household disposable income to decline by 1.7% in 2011, and then to recover by 1.7% per annum on average to 2015. Not only is this below the average annual growth of 2.1% over 1999-2009, our economists acknowledge that there are downside risks to their forecasts from persistently high inflation and rising unemployment.
If improvements in household energy efficiency continue in line with the trend over the past five years, and our economists are correct about real income growth, we would expect household gas and electricity consumption to continue to decline by around 2.1% and 0.7% per annum respectively. However, if there was little or no growth in real income, we would expect the declines to be 3.7% and 2.4% per annum respectively (Figure 8).
2 November 2011
10
Figure 7: Real household disposable income (bn)

1,000 960 920 7.9% 7.7% 7.2% 6.7% 10% 9% 8% 7% 6% 5% 4% 3% 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Figure 8: Energy consumption per household (kWh)

20,000 18,000 16,000 14,000 12,000 10,000 2000 2002 2004 2006 2008 2010 2012E 2014E 5,000 4,500 4,000 3,500 3,000 2,500
6.4% 5.7% 4.9% 880 4.6% 840 800
Real Household Disposable Income (bn, Left Axis) Dual Fuel Bill as % Gross Household Income (Right Axis)
Gas
Electricity
2 November 2011
11
THE GREAT GENERATION PROFIT TRANSFER

The second of the twin challenges facing the Big 6 UK utilities is the expected shift in profitability from old fossil fuel generation to clean generation. Our analysis shows that a surge in new CCGT capacity, an acceleration in biomass build, potential nuclear life extensions and falling energy demand will leave owners of older coal and gas capacity struggling to cover fixed costs. The winners are likely to be those with most exposure to new CCGT, nuclear generation, wind and biomass.
The transforming power generation market

The shape of the UK power market is changing
We believe that the UK power market will become increasingly tough for owners of existing, ageing coal and CCGT generation, driven by a number of different factors:
9GW of highly efficient new CCGTs. One of the key factors driving down spark spreads on existing CCGTs in the UK has been new build of highly efficient plant. State-of-the-art new gas plant, such as RWEs 2.2GW Pembroke CCGT, due to commission during 2012, have thermal efficiencies of 59% (gross calorific value). This compares to a UK average of around 52.4% (2010A), while some of the oldest CCGTs opened in the 1990s have efficiencies below 48%. The higher efficiency of new CCGTs means marginal costs are some 20% lower than those of the least efficient plant. As a result, these new plants will sit low down the merit order, displacing less efficient capacity (see Figure 9) and lowering the cost curve for the whole market. Around 5.6GW of new CCGT capacity became operational over 2010/11, and we expect a further 3.3GW to commission during 2012 (see Figure 10). In addition to this, we believe there are around 3GW of planned new CCGTs that are likely to go ahead and be operational by 2015/16. Figure 10: Cumulative new CCGT capacity (GW)
14.0 12.0
Oil GT CCGT CHP Nuclear Hydro Coal
Figure 9: New CCGT in the UK merit order, 2011E (GW)

SRMC (/MWh) 140 120 100 80 60 40 20 0 0 20 40 60 Capacity (MW)
Source: Barclays Capital. SRMC = Short-Run Marginal Cost
New CCGT
10.0 8.0 6.0 4.0 2.0 0.0 2010 2011 2012E 2013E 2014E 2015E 2016E
Operational
Under Construction
Potential New Build
Majority of LCPD plant likely to run until 2014/15. During winter 2010/11 much of the UKs opted-out 5 coal plant was running so hard that it looked then like it would run out of operating hours during 2012. However, in spite of a substantial increase in clean dark spreads since the Japanese earthquake in March 2011, load factors of opted-out coal plant in the UK during summer have been lower than during 2010. As a result, we only
This refers to power stations that have opted out of the LCPD and therefore are limited to 20,000 running hours between 2008-15, and have to close thereafter.
2 November 2011
12
expect one plant to close by the end of 2012. Furthermore, RWE has already converted its Tilbury plant into a 750MW dedicated biomass facility that is expected to operate until the end of 2015. Indeed, as shown in Figure 12, if all the opted-out plants average their last 12-month load factor going forwards, only two other plants will close before 2015. Figure 11: UK opted-out plant load factor (%)
100% 80% 60% 40% 20% 0% Aug-09
Figure 12: UK opted-out plant estimated closure dates

Cockenzie 2 Cockenzie 1 Ferrybridge C Tilbury 2* Tilbury 1* Littlebrook Fawley Didcot A Kingsnorth Ironbridge Grain
Feb-10
Aug-10
Feb-11 Average Oil
Aug-11
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Average Coal
Source: Barclays Capital, BM Reports.
at Ave. Last 12mth Load

Source: Barclays Capital, BM Reports.
at Ave. Last 24mth Load
Nuclear life extensions. After 2015, when the opted-out coal plant has shut, we believe some of the pressure on the UK reserve margin could be relieved by life extensions at British Energys nuclear fleet. This would mitigate upside for spark spreads. Currently, Hinkley Point B (870MW) and Hunterston B (890MW) are due to close in 2016. However, we believe that the UK carbon price floor significantly improves the economics of life extensions. As for new nuclear, we believe that the probability of a new plant becoming operational before 2020 is slim. Growth in wind capacity. Our European Clean Technology & Sustainability team forecast that 11GW of onshore and offshore wind will be added in the UK over the course of 2011-2015E 6. This could displace 3.5GW of CCGT capacity on average during the year. In our view, these wind capacity forecasts are relatively conservative: they are derived from current renewables developers pipelines and sit between the low and base case set out by DECC in its UK Renewable Energy Roadmap in July 2011. The proposed Renewables Obligation Certificate bandings of 0.9 for onshore wind and 1.8-1.9 for offshore wind appear be sufficient to ensure these pipelines are delivered 7 . Mott MacDonald estimate that the levelised cost for onshore wind is around 86/MWh, while the current 2013 forward power price plus 0.9x ROC buyout price equates to 99/MWh. For offshore wind our forecast 2015 power price plus 1.8-1.9x ROC buyout price equates to 150-155/MWh versus an estimated levelised cost of 112-146/MWh 8. See Figure 23 for more details.
See: Global demand outlook - five-year CAGR wind 10%, solar 8%, Barclays Capital, 15 August 2011. Consultation on proposals for the levels of banded support under the Renewables Obligation for the period 2013-17 and the Renewables Obligation Order 2012, DECC, 20 October 2011. 8 UK Electricity Generation Costs Update, Mott MacDonald, June 2010.
7
2 November 2011
13
Figure 13: Forecast UK wind and biomass capacity (GW)

25.0
Figure 14: Biomass in the UK merit order, 2015E (GW)

SRMC (/MWh) 140
20.0 15.0 10.0 5.0 0.0 2010
120 100 80 60 40 20 0 2011 2012E 2013E 2014E 2015E 2016E 0 20 40 60 Onshore Wind Dedicated Biomass Offshore Wind Co-Firing Capacity (MW)
Source: Barclays Capital. SRMC = Short-Run Marginal Cost
Other co-firing Drax
Dedicated biomass
Oil GT CCGT CHP Nuclear Hydro Coal Biomass Co-Firing
Source: Barclays Capital, DECC RESTATS.
Growth in biomass capacity. Our analysis of current project pipelines suggests that there is potential for some 2.6GW of additional dedicated and biomass co-firing capacity to be added in the UK by 2016, in addition to RWEs Tilbury plant. The biggest project within our forecast is Draxs plan to convert to 50% co-firing capacity by 2015, up from 12.5% currently equivalent to 1.5GW of additional capacity. The proposed increase in the ROC banding from 0.5x to 1.0x from 1 April 2013 is likely to be enough, in our view, for Drax to go ahead with this project. Based on current forward wood pellet prices, we estimate biomass will be running ahead of all conventional coal and CCGT plant in the UK merit order (Figure 14). Figure 16: Forecast UK capacity margin (%)
50% 40% 30%
Figure 15: Forecast total UK annual power demand (TWh)

330 320 310 300 290 280 270 2010/11E
20% 10% 0% 2009
2012/13E
2014/15E Base Low
2016/17E
2011E 2013E 2015E Derated Margin Headline Margin
2017E 2019E No-Wind Margin
Source: Seven Year Statement 2010, National Grid.
Falling electricity demand. We have already discussed the potential for residential energy demand to fall in the UK due to a combination of rising energy efficiency and falling disposable income. In addition, industrial and commercial electricity demand may come under pressure if UK economic growth stalls. Figure 15 shows National Grids base and low case forecasts for total UK electricity demand. The low case which averages at a -1.1% annual decline in demand assumes annual growth of 1.4% for GDP, -0.4% for household disposable income, 1.0% for manufacturing output and 1.4% for non-manufacturing output.
14
2 November 2011
Figure 17: UK seasonal forward clean spark spreads (/MWh)

25 20 15 10 5 0 Jan-09
Figure 18: UK seasonal forward clean dark spreads (/MWh)

25 20 15 10 5 0 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
1st Winter 2nd Winter

Source: Barclays Capital, Bloomberg.
1st Summer 2nd Summer
1st Winter 2nd Winter

Source: Barclays Capital, Bloomberg.
1st Summer 2nd Summer
Implications for power prices and spreads

Old fossil fuel plant will struggle to cover fixed costs
Our analysis of future supply and demand leads us to several conclusions about the outlook for the UK power generation market:
Spark spreads to stay low until 2014. Clean spark spreads in the UK have been steadily declining since the start of 2010. The winter 2012/13 spread is currently trading at just 1.0/MWh (Figure 17). Unfortunately for gas-fired power generators, we would not expect these to recover before 2014, based on current relative gas and coal prices (Figure 19). Clean dark spreads to get squeezed from 2013 onwards. Despite growing pressure on household energy bills, there is no evidence to suggest that the UK Government is considering abandoning the UK carbon price floor, introduced in the 2011 Budget. We believe the carbon floor price will have the desired effect of squeezing clean dark spreads (Figure 19) and gradually pushing coal plant to the margin.
Figure 19: UK power price, clean spark spread (CSS) and clean dark spread (CDS) forecasts (/MWh, net of carbon price floor)
2011E Baseload Power BarCap Forecast Baseload Power Forward Curve* Baseload CDS - 36% Efficiency Baseload CDS - 40% Efficiency (Drax) Baseload CSS - 49% Efficiency Baseload CSS - 59% Efficiency
Source: Barclays Capital, Bloomberg. * Forward curve as at 21 October 2011.
2012E 52.4 53.7 14.3 18.1 2.0 10.5
2013E 54.6 54.7 11.5 15.8 1.5 10.4
2014E 61.1 10.9 15.9 4.0 13.5
2015E 64.7 9.8 15.3 4.5 14.6
2016E 67.8 8.9 14.8 4.7 15.3
51.5 51.4 10.5 14.6 5.1 12.9
2 November 2011
15
Figure 20: Commodity price assumptions*

2011E Hard Coal - API2 (US$/t) Oil - Brent Crude (US$/bbl) Gas - NBP (p/th) CO2 - EUA (/t) CO2 - with price floor (/t) Biomass - Wood Pellet (/t) EUR/GBP GBP/USD 121.7 111.1 59.9 13.4 13.4 133.9 1.15 1.61 2012E 116.8 105.1 66.8 10.9 10.9 134.4 0.87 1.61 2013E 120.4 100.3 68.1 11.6 15.8 138.5 0.87 1.61 2014E 124.2 100.3 70.2 12.3 23.3 142.6 0.87 1.61 2015E 127.9 103.3 72.3 12.6 27.9 146.9 0.87 1.61 2016E 131.8 106.4 74.4 13.0 31.7 151.3 0.87 1.61
Source: Barclays Capital, Bloomberg. *Commodity prices marked-to-market as at 21 October 2011.
Fossil fuel load factors to decline. As shown in Figure 21, we expect load factors for older, unhedged CCGT plant to collapse to below 10% over 2012-15E. We only expect these to pick up as coal plant gets pushed to the margin, by around 2016.
Figure 21: Forecast load factors for UK fossil fuel generation capacity
2012E Hard Coal - 36% Efficiency CCGT - 49% Efficiency Hard Coal - 40% Efficiency (Drax) CCGT - 58-59% Efficiency
2013E 71% 7% 80% 37%
2014E 52% 8% 80% 77%
2015E 45% 5% 80% 76%
2016E 27% 18% 80% 74%
2017E 12% 26% 65% 74%
2018E 9% 23% 59% 71%
72% 10% 80% 43%
Old fossil fuel plant will not be covering fixed costs. The last free CO2 allocations will be given to UK fossil fuel generators around February 2012. Once these have been used up, we believe owners of older capacity will struggle to cover fixed costs. Specifically, we believe CCGT plant will be unable to cover its fixed costs over the period from 2013-15E, while old coal plant will become permanently out-of-the money from 2013 onwards. Indeed, we believe the period from 2013-15E has the potential to be punishing for generators with significant exposure to old coal and CCGT plant.
Figure 22: Annual EBITDA of 1GW power station, excluding free CO2 (m)
2010 Hard Coal - 36% Efficiency CCGT - 49% Efficiency
2011E (11.0 ) (6.4 )
2012E 12.2 (9.3 )
2013E (6.7 ) (10.3 )
2014E (9.2 ) (6.4 )
2015E (17.2 ) (8.4 )
2016E (24.4 ) 2.2
(24.3 ) 14.8
Transfer of value to cleaner generation. New CCGT, nuclear generation, offshore wind and biomass (including Draxs co-firing plans) should all stand to benefit from rising revenues, driven by a combination of the carbon price floor and the proposed Renewables Obligation Certificate (ROC) bandings for 2013-2017, as shown in Figure 23. Our modelling shows that the pass-through of the carbon tax into wholesale power prices should step up in 2017E as conventional hard coal plant moves to the margin in the UK, substantially improving the economics of clean generators. Separately, we expect ROC prices to decline due to accelerating growth in renewable capacity, though the RPI-indexed buyout price should provide a floor (we think this floor will be reached in 2014/15).
16
2 November 2011
Figure 23: UK clean generation economics*

2011E ROC Price () ROC Buyout Price () Gross Margin - Nuclear (/MWh) Gross Margin - Onshore Wind at 0.9x ROC (/MWh) Gross Margin - Offshore Wind at 1.8x ROC (/MWh) Gross Margin - Offshore Wind at 1.9x ROC (/MWh) Gross Margin - Biomass Co-Firing at 1.0x ROC - Drax (/MWh) 47.6 38.3 41.1 96.2 140.8 145.8 35.4 2012E 46.4 40.2 41.7 96.3 140.3 145.2 35.1 2013E 46.6 42.0 43.7 98.8 143.0 147.9 35.6 2014E 44.4 43.3 50.0 103.5 146.0 150.7 38.2 2015E 44.6 44.6 53.4 107.5 150.3 155.1 40.1 2016E 46.0 46.0 56.3 111.9 156.0 160.9 42.5
Source: Barclays Capital. * Gross margins calculated using ROC plus LEC at a 5% discount and excluding own fuel use and non-fuel variable costs.
The prospect of capacity closures

We do not expect capacity closures to drive material upside to spreads
Our power price forecasts assume that 12GW of old coal and oil plant will shut by the end of 2015 under LCPD, and that a further 8.4GW of CCGT capacity reaches the end of its useful life by 2020. In spite of this, we do not expect the UK reserve margin to become uncomfortably tight until the end of the decade (Figure 16). The question is whether more coal and CCGT capacity could be closed from 2012 onwards, since it is not covering fixed costs, and whether this would have a material impact on power prices and spreads. We conclude that material closures are unlikely, and that spreads will remain under pressure:
CCGT closure unlikely to have impact on spreads. Some early CCGT closures are highly likely, in our view. Indeed, Centrica has been reported to be planning closing 570MW of CCGT capacity in 2012 (Barry and Kings Lynn) 9. However, since we expect the oldest 8.4GW CCGT plant to be operating at sub-10% load factors and to be at the margin only c3% of the time, its closure should have little impact on the overall power price level. Value of flexibility. In a market with growing wind capacity, portfolio generators and those with residential demand to fill may attribute additional option value to flexible plant that justifies keeping it available. Alternatively, National Grid may directly contract certain plant (for example, as it has done with three of Centricas CCGTs) to remain on the system. Biomass conversion. The prospect of an increased banding for enhanced biomass cofiring, combined with the carbon price floor, make the economics of converting certain hard coal plant more attractive. As discussed earlier, partial or full conversion of UK coal plant would have the effect of displacing older gas or unconverted coal plant in the merit order, putting further pressure on spreads.
Centrica job and plant cuts could spark price increases, The Times, 17 October 2011.
2 November 2011
17
TIME FOR A PRICE WAR?

We believe the twin challenges of declining household energy demand and the shift in profitability from old fossil fuel generation to clean generation could shift the balance of power between the Big 6 utilities over the next few years. The winners will have the potential to compete more aggressively in downstream energy supply and gain market share. The losers could see retail margins squeezed and customer numbers decline. Specifically, we identify EdF Energy, RWE npower, as having the capacity and motivation to compete more aggressively, to the detriment of Centrica, SSE and E.On Energy.
The household energy demand squeeze winners and losers

Centricas exposure to declining household gas demand is a competitive disadvantage
As we concluded earlier, if improvements in household energy efficiency continue in line with the trend over the past five years, and our economists are correct about real income growth, we would expect household gas and electricity consumption to continue to decline by around 2.1% and 0.7% per annum respectively this is our slow demand decline scenario. However, if there is little or no growth in real income, we would expect the declines to be 3.7% and 2.4% per annum respectively our fast demand decline scenario. Figure 24 shows the impact the loss of volume would have on /customer margin over 201215E for each of the Big 6 UK utilities. On average, it amounts to 14 per single fuel customer account a negative profit delta of 0.7bn for the industry. Two companies stand out:
British Gas. We expect Centricas British Gas division to be more negatively impacted than its competitors given its high volume share of the residential gas market. Indeed, under our fast demand decline scenario, we estimate British Gas could see a demand decline that amounts to a loss of EBIT margin of 17/customer over 2012-15E nearly half of its 2011E margin of 38/customer. EdF Energy. EdF Energy, on the other hand, has the highest proportion of electricity demand relative to gas demand. This means that in our more bearish scenario it needs to recover 11/customer of margin. Indeed, it is possible that since EdFs customer base has a large component of Londoners, it may see less of an impact on demand from falling disposable incomes.
We would expect the industry as a whole to try and compensate for the loss of demand through higher retail prices. However, there are two points to consider:
EdF Energy could attempt to gain competitive advantage. EdF Energy is in a position whereby it can raise dual fuel tariffs by 12/customer less than British Gas in order to keep profits stable. This is equivalent to 90-100m of EBIT for British Gas. However, since 12 is only around 1% on the UKs average dual fuel bill, we suspect British Gas would rather price higher than lose margin. Political pressure. We estimate that the industry will need to raise household dual fuel bills by 28/customer (i.e. double the figure shown in Figure 24) in order to compensate for lost volumes. Whilst this may not sound like much, for the 5.5m fuel poor households in the UK this is significant 10. This alone may dismay politicians, as will the fact that households are not seeing the full benefit of energy efficiency in their bills.
10 5.5m is the official statistic for 2009, the last available verified data from ONS. In reality, the number of fuel poor in the UK in Britain in 2012-15E is likely to be significantly higher than this.
2 November 2011
18
Figure 24: Shift in retail EBITDA margin from declining energy demand ( per residential single fuel customer, 2012-15E)
0 (5 ) (5 ) (10 ) (15 ) (20 ) (25 ) CNA
(6 ) (11 ) (13 )
(7 ) (14 )
(6 ) (13 )
(7 ) (13 )
(9 )
(7 ) (14 )
(17 )
The great generation profit transfer winners and losers

We see Centrica, SSE and E.On Energy as relative losers
The UK Governments green energy policies are designed to promote clean generation at the expense of older fossil fuel plant. Whilst there is considerable debate about the longterm viability of these energy policies, given the costs that they ultimately place on the UK consumer, we do not see the Government reneging on these policies on a 2-3 year view. We have summarised the impact of this profit transfer for each of the Big 6 in Figure 25 on a /customer basis. Our observations are as follows:
The end of free CO2 allocations. We estimate that the Big 6 will see a step-down in profits in 2013 equivalent to around 20/cust on average, as free CO2 allocations come to an end. The exception is Centrica, which does not have any coal generation, which we expect to take a hit of just 4/cust. Three potential winners: EdF Energy, RWE npower and ScottishPower (Iberdrola). We estimate the contribution from EdFs 80% stake in British Energy and its new 1.3GW West Burton CCGT should drive a net profit gain of 43/cust over 2012-15E. Despite its significant exposure to coal generation, RWE should see a gain of 12/cust from the conversion of Tilbury to biomass, its offshore wind projects and 3.8GW of state-of-the art new CCGT capacity. Iberdrolas onshore and offshore wind pipeline is relatively large compared to its small customer base, and should drive a net gain of 16/cust. Three potential losers: Centrica Energy, SSE and E.On Energy. Although we expect Centrica Energy to see its old CCGT profits squeezed over 2012-13E, it does not carry the burden of old coal plant or material free CO2 allocations. However, it does not have a significant portfolio of clean generation relative to the size of its 16m customer base. As a result, we expect the aggregate profitability of its upstream activities (including gas production) to be relatively flat between 2012-15E. We believe SSE may only see a net increase in generation profits equivalent to 4/cust between 2012-15E. We believe its large exposure to renewables will be offset by substantial exposure to old coal and gas plant and the largest burden from free CO2 permit expiry. Finally, E.On Energy could face the toughest few years as it has the biggest exposure to coal generation, and a relatively modest UK clean generation pipeline.
19
EDF
E.ON
RWE
IBE
SSE
"Big 6" Average
2 November 2011
Figure 25: Shift in EBITDA from dirty to clean generation* ( per residential single fuel customer, 2012-15E)
80 60 40 20 0 (20 ) (40 ) CNA
Source: Barclays Capital. * We have included the expiry of free CO2 permits in the Old Fossil category. We have also included EBIT from upstream gas production (net of production taxes) for Centrica and SSE in the Clean Generation category. All analysis assumes zero hedging.
43 12 (1 ) (2 ) 16 (1 )
Old Fossil Fuel Generation
The shifting balance of power: the potential for a price war

EdF Energy and RWE npower have the relative earnings momentum and motivation to grab market share
Figure 26 quantifies the net impact of declining household energy demand and the shift in profitability from old fossil fuel generation to clean generation on the earnings power of the Big 6s generation and supply businesses over 2012-15E. This analysis suggests that there could be a significant shift in the balance of power between the Big 6 utilities over the next few years:
EdF Energy has the potential to price lead the market We estimate EdFs UK division could see a net increase in earnings power of 31-37/customer over the next three years. This is around 28/customer higher than its closest competitor. This gives EdF considerable scope to price more aggressively in retail supply and gain customer market share. Centrica, E.On Energy and SSE at competitive disadvantage. We believe Centrica could see a decrease of 10-18/cust in its net generation and supply earnings power as a result of the declining household energy demand and the shift in profitability from old fossil fuel generation to clean generation. For SSE and E.On Energy the net negative impact could be as high as 10/cust and 16/cust respectively. In practice, we would expect them to try and raise retail tariffs to offset this, and to try and earn a return on incremental clean generation investment. However, EdF Energy, RWE npower and ScottishPower could all be in a position to compete more aggressively on price and try and gain market share. Indeed, we believe EdF Energy would have the potential to undercut Centricas pricing by nearly 100/cust on an average dual fuel bill.
EDF
E.ON
Clean Generation/Upstream Gas
RWE
IBE
SSE
Net
"Big 6" Average
2 November 2011
20
EdFs exposure to clean generation leaves it positioned to compete more aggressively in the downstream retail market
Figure 26: Net shift in generation and supply EBITDA ( per residential single fuel customer, 2012-15E)
50 40 30 20 10 0 (10 ) (20 ) (30 ) (10 ) (18 ) CNA
37
31 10 3 (2 ) (8 ) (16 ) 0 (7 ) (14 ) RWE IBE SSE "Big 6" Average (7 )
We see several motivations for why EdF Energy and RWE npower in particular could start to price more aggressively in the retail market:
Rebalancing upstream/downstream exposure. As shown in Figure 27, EdF is already significantly long generation following its acquisition of an 80% stake in British Energy, while RWE npowers investment in 3.8GW of new CCGT will leave it long, even after its opted-out coal plant closes. Both companies currently have relatively low market share (Figure 27), and have an incentive to increase customer numbers in order to have a more balanced upstream/downstream hedge. Figure 28: Upstream/downstream hedge (%)
300% 250%
EDF
E.ON
Figure 27: Residential energy customers, 2010 (m)

18 16 14 12 10 8 6 4 2 0 CNA 9.3 3.4 2.1 EDF 2.9 E.ON Gas
Source: Company reports.
6.6
200% 150% 5.0 5.2 4.0 2.6 RWE Electricity

100% 50% 0%
3.2 2.0 IBE 3.6 SSE
CNA
EDF
E.ON 2010A
RWE 2016E
IBE
SSE
Kick-starting growth. In our view, RWEs new group CEO, Peter Terium, faces a challenge to reposition RWE as a business with genuine growth prospects. Our analysis in this report suggests that the UK could genuinely provide such an opportunity. More aggressive competition for customers could allow RWE to significantly increase the scale of its UK operations over time, though potentially at the expense of near-term profits.
2 November 2011
21
Offset declining average revenues. The decline in energy demand will put pressure on average revenue per customer for the whole industry. If political pressure makes it difficult to compensate for this through higher retail tariffs, the alternative is to increase customer numbers. Cash cow to fund future investment. A large downstream customer base can be a source of stable cash generation to help fund future investment in e.g. new nuclear, offshore wind.
There is evidence already that RWE npower and EdF Energy are competing more aggressively on price: they were the last to raise retail tariffs in the latest round of price increases, raised their prices by the lowest amount, and based on our estimates will have the lowest weighted average sales price after the price increases have taken effect. Figure 29: Big 6 UK utilities residential price increase analysis
Price Increase Date of Increase EdF Energy RWE npower SSE E.On Energy British Gas ScottishPower 10-Nov 01-Oct 14-Sep 13-Sep 18-Aug 01-Aug Weighted Average Sales Price*, 2012E Electricity (p/kWh) 118 123 123 132 131 127 Average (Index) 100 104 107 105 112 107
Gas 15% 16% 18% 18% 18% 19%
Electricity 5% 7% 11% 11% 16% 10%
Gas (p/th) 112 116 122 111 127 118
Source: Barclays Capital, company data. * Methodology: we take 2010A WASP quoted in the Ofgem Consolidated Segmental Statements and apply yearaverage retail price increases to derive a 2012E WASP. It is important to note that the accuracy of this calculation is affected by the lack of disclosure on the number of fixed-price customers and changing tariff mix (e.g. discounted internet tariffs versus standard credit). Therefore, the analysis is for illustrative purposes only. Indeed, Ofgem is currently trying to address the difficulty customers face in comparing retail tariffs between companies.
Political pressure is already having an impact

Political pressure could be a catalyst for greater competition
Regulatory and political pressure is already prompting all six of the Big 6 utilities to change their behaviour. The UK government has asked all of the Big 6 to offer simplified tariffs, to make it easier for customers to switch, and to indicate to customers whether cheaper tariffs are available. Ofgem has proposed that it will effectively re-regulate standing charges. SSE, in particular, has been fast to respond to the political and regulatory criticism. It was the first to end doorstep selling, suspending it in July 2011 after it was found guilty of mis-selling the rest of the Big 6 are now following. It has been the first to scrap discounted internet tariffs, to respond to accusations of predatory pricing by Chris Huhne, the UK Energy Secretary 11. It has also written to its customers and to Huhne, pledging a fairer deal for its customers. In the very short term these measures, somewhat ironically, may reduce customer switching (less doorstep selling) and raise weighted average sales prices (no more discounted internet tariffs). However, over time, we believe the changes should lead to increased customer switching and a migration to lower tariff levels. This could play into the hands of EdF Energy and RWE npower.
11
It is not fair that big energy companies can push their prices up for the vast majority of their consumers who do not switch while introducing cut-throat offers for new customers that stop small firms entering the market that looks to me like predatory pricing. It must and will stop, Chris Huhnes speech at the Liberal Democrat party conference, 20 September 2011.
2 November 2011
22
COMPANY SECTION
2 November 2011
23
COMPANY SNAPSHOT Centrica Income statement (m) EBITDA, adjusted EBIT, adjusted Pre-tax income, adjusted Net income, adjusted EPS, adjusted (p) Diluted shares (m) Dividend per share (p) Margin and return data (%) EBITDA margin EBIT margin Pre-tax margin Net margin ROIC ROA ROE 2010A 3,320 2,390 1,929 1,297 25.2 5,191 14.3 2011E 3,498 2,603 2,222 1,359 26.3 5,213 15.0 2012E 3,777 2,788 2,418 1,397 26.9 5,234 15.8 2013E CAGR 3,823 4.8% 2,764 5.0% 2,401 1,412 27.1 5,256 16.6 7.6% 2.9% 2.5% 0.4% 5.0% Integrated Utilities
Stock Rating Sector View Price (31-Oct-2011) Price Target Ticker Investment case
3-UNDERWEIGHT 2-NEUTRAL 2.97 2.60 RIC: CNA.L, BB: CNA LN
14.0 10.1 8.1 5.5 12.0 8.0 25.7
14.7 11.0 9.4 5.7 10.2 7.4 22.3
15.0 11.0 9.6 5.5 10.1 7.2 21.1
Average 14.6 14.6 10.6 10.7 9.2 5.4 9.9 7.0 19.8 9.1 5.5 10.5 7.4 22.2 CAGR 4.6% 2.9% 4.6% 8.4% NA -4.0% NA -16.7% 12.6% Average 11.3 5.7 14.0 5.2 8.5 2.3 1.4 0.9
Why a 3-UW? We believe Centrica's competitive advantage in the UK will fade, driven in part by declining gas demand. We believe weak spreads will lead to disappointing power generation profits.
Balance sheet and cash flow (m) Net PP&E 6,398 Total net assets 18,820 Capital employed (average) Shareholders' equity Economic net debt Operating cash flow Capital expenditure Free cash flow Pre-dividend FCF Valuation and leverage metrics P/E (x) EV/EBITDA (x) EV/NOPAT (x) Dividend yield (%) FCF yield (%) P/BV (x) EV/IC (x) Net debt/EBITDA (x) Selected operating metrics Energy hedge ratio (%) Gas product. (mm therms) Electricity product. (TWh) BGRE - EBIT margin (%) BGRE - Energy cust. (m) BGRE - WACOG (p/th) BGRE - WACOE (/MWh) 12,680 5,819 (3,312) 2,679 (592) 2,087 866
6,942 19,438 13,788 6,351 (3,310) 2,172 (1,298) 874 763
7,215 20,366 14,290 6,893 (3,023) 2,307 (1,262) 1,045 1,075
7,320 20,524 14,492 7,407 (2,618) 2,369 (1,163) 1,205 1,235
Upside case 3.63 Our upside case assumes spark spreads rise by 5/MWh and retail margins by 1%. We assume Centrica trades in line with SOTP.
Downside case 2.06 Our downside case sees Centrica's BGRE margin squeezed by a further 1%, and assumes that Centrica derates to 8x 2013E P/E
11.8 6.2 13.6 4.8 13.6 2.6 1.5 1.0
11.3 5.9 14.6 5.1 5.7 2.4 1.5 0.9
11.0 5.4 14.1 5.3 6.8 2.2 1.4 0.8
10.9 5.2 13.9 5.6 7.8 2.1 1.4 0.7
Upside/downside scenarios
403 403 353 303 303 253 203 203 153 103 343p 363p (22.3%) (15.6%) 260p 260p (-12.3%) 206p (-12.3%) 206p (-30.5%) (-30.5%)
Down side Case Price Target Target
Upsi Upsi de de Case Case
52.2 3,199 32.9 8.9 16.0 49.5 45.1
58.8 2,984 26.7 7.4 15.9 57.2 61.1
61.1 3,076 19.7 6.7 15.6 68.2 66.3
57.0 3,111 18.1 7.0 15.4 70.6 62.7
18-Nov-2010 Source: DataStream
31-Oc t-11
British Gas Residential EBIT Margin (%)

10 8 6 4 2 0 2010E 2011E 2012E 2013E
Source: Com pany data, Barclays Capital
Note: FY end Dec.
2 November 2011
24
CENTRICA NOT SO SAFE AFTER ALL

CNA.L / CNA LN Stock Rating
3-Underweight
Sector View
2-Neutral
Price Target
2.60
Price (31 Oct 2011)
2.97
Potential Upside / Downside
-12.4%
Over the past few months we have argued that Centrica is a relative safe haven. Its defensive characteristics have been borne out in 14% outperformance relative to the Stoxx 600 since May. Whilst its financial position remains robust, the economic and retail market environment is evolving rapidly. In particular, with declines in energy demand accelerating, we now think both sides of Centricas upstream hedge could come under pressure. We believe its competitive advantage in the UK retail market will fade, and that persistently weak spark spreads will lead to disappointing power generation profits in 2012/13E. We also see increasing downside risks for BGS, BGB and Direct Energy given the deteriorating economic environment. We cut our 2012-14E EPS forecasts to 7% below consensus on average. In the current market environment, we doubt Centrica can trade at our revised SOTP valuation of 3.29. Given the deteriorating fundamentals, we believe Centricas shares could instead derate towards their historical P/E discount to the Stoxx Utilities index of -0.5, implying 12% share price downside. We downgrade Centrica from 1-OW to 3-UW with a new 2.60 price target.
Power generation squeeze 2011-13E

Our power generation EBIT forecasts are up to 60% below consensus
Clean spark spreads in the UK have been steadily declining since the start of 2010. The winter 2012/13 spread is currently trading at just 1.0/MWh. Unfortunately for Centrica, which currently has economic interests in 5.1GW of installed CCGT capacity in the UK, we would not expect these to recover before 2014, based on current relative gas and coal prices. Because of these weak spreads, we expect load factors for older, unhedged CCGT plant to collapse to below 10% over 2012-15E. We only expect these to pick up as coal plant gets pushed to the margin, by around 2016. Figure 30 summarises our spark spread and load factor forecasts.
Figure 30: UK power price, clean spark spread (CSS) and CCGT load factor forecasts (/MWh, net of carbon price floor)
2011E Baseload Power BarCap Forecast Baseload Power Forward Curve* Baseload CSS - 49% Efficiency Baseload CSS - 59% Efficiency CCGT Load Factor - 49% Efficiency CCGT Load Factor - 58-59% Efficiency
Source: Barclays Capital, Bloomberg. * Forward curve as at 21 October 2011.
2012E 52.4 53.7 2.0 10.5 7% 37%
2013E 54.6 54.7 1.5 10.4 8% 77%
2014E 61.1 4.0 13.5 5% 76%
2015E 64.7 4.5 14.6 18% 74%
2016E 67.8 4.7 15.3 26% 74%
51.5 51.4 5.1 12.9 10% 43%
As a result, we believe Centricas CCGT fleet will not cover its fixed costs over the next 2-3 years. We expect Centrica to respond by closing some of its least profitable CCGT assets. Indeed, Centrica has already been reported to be planning closing 570MW of CCGT capacity in 2012 (Barry and Kings Lynn) 12. Centrica may also be able to recover some fixed costs by providing ancillary services to National Grid. Centricas exposure to clean generation via its wind capacity, its 20% stake in British Energy and its new CCGT capacity should help drive a generation margin recovery over the medium-term, but we do not expect any material impact before 2013/14, when the UK carbon price floor kicks in.
12
Centrica job and plant cuts could spark price increases, The Times, 17 October 2011.
2 November 2011
25
Overall, our forecasts for Centricas UK power generation division for 2012-13E are materially below consensus, as shown in Figure 31. Our forecasts assume British Energy delivers 53TWh of output, in line with historic average but below our 2011E forecast of 57TWh. Each +1TWh would add +9m of EBIT. Figure 31: Centricas UK Power Generation EBIT (m)
2011E BarCap Consensus Difference
Source: Barclays Capital, company data.
2012E 211 332 -36%
2013E 150 372 -60%
252 279 -10%
Greater exposure to falling energy demand

Gas demand could fall by a further 4% pa in 2012/13E
Underlying UK residential gas demand was down around 5.8% in 1H11, double the rate of decline of electricity demand. Our analysis in this report concludes that if improvements in household energy efficiency continue in line with the trend over the past five years, and our economists are correct about real income growth, we would expect household gas and electricity consumption to continue to decline by around 2.1% and 0.7% per annum respectively. However, if there was little or no growth in real income, we would expect the declines to be 3.7% and 2.4% per annum respectively. We expect Centrica to be more negatively impacted than its competitors given its high volume share of the residential gas market. Indeed, under our fast demand decline scenario, we estimate Centrica could see a demand decline that amounts to a loss of EBIT margin of 17/cust over 2012-15E nearly half of its 2011E margin of 38/customer.
Increasing downstream competition

EdF Energy represents a growing competitive threat
Based on our analysis in this report, we conclude that EdF Energy and, to a lesser extent, RWE npower have both the earnings momentum and the motivation to drive a more aggressive pricing strategy in the downstream residential energy market. Specifically we estimate that over 2012-15E EdF Energy could see a positive underlying delta in its UK generation and supply EBITDA of 31-37/cust, compared to a 10-18/cust delta for Centrica. This amounts to a net delta in profitability between the two companies of 100 per dual fuel customer. We believe this could serve to reduce Centricas retail pricing power over the next 2-3 years, and potentially put pressure on Centricas BGRE EBIT margin. We estimate EdF Energys weighted average sales price (i.e. across all gas/electricity products) is already below that of Centrica, following recent tariff increases (see Figure 29), and EdFs superior profit momentum could allow it to further widen the gap. Centricas management is unlikely to take this lying down. It could respond by pricing more aggressively to maintain market share, though this would put significant pressure on its BGRE EBIT margin; or it could seek to preserve margins, though this could put Centrica back into a similar position to the one it found itself in 2004-2006 when SSE competed aggressively on price and Centrica lost 2.7m customers.
2 November 2011
26
Earnings outlook deteriorating

We cut EPS forecasts to 7% below consensus on average
We have cut our EPS forecasts to 7% below consensus on average, to reflect the risks we have identified in this report. Specifically, we have made the following key changes to forecasts:
British Gas Residential Energy. We factor in our weaker energy demand assumptions, and assume Centrica picks a middle road between managing market share and margin. We assume no tariff increase for 2012E, but assume tariffs rise by 15% 2012-15E to recover some of the cost pressures faced by the industry (though we assume no further increase in forward wholesale gas prices). We assume 200k net customer losses per annum to 2015E, equivalent to 0.5% annual market share loss, and that EBIT falls Centricas target level of c600m in 2011-13E (6.7-7.0%) to c500m by 2015E (5.7% margin). Our forecasts assume management take action to reduce operating costs further (by 30m), and that churn is lower than in the past due to increased penetration of multi-product customers. While Centricas management consider this to be a key advantage compared to the competition, we believe Centrica will struggle to fully offset top-line pressures. British Gas Business and Services. In line with Centricas own expectations, we expect revenue investment to keep EBIT relatively flat in BGB over 2011-13E. We also believe the scope for longer-term margin expansion will be limited by increasing competition in the commercial energy market. Centrica is targeting double-digit EBIT growth for BGS, mainly driven by cost-control rather than top line growth. However, given the increasingly challenging economic environment, we reduce our 2011-14E forecast from 9.4% to 7.6% EBIT CAGR. We recognise that suspension of marketing activity at a key competitor, Homeserve, could provide short-term upside to product sales. Separately, we also believe a challenging economic environment could constrain growth in Centricas North American home services and business supply divisions. Upstream energy. We mark-to-market our commodity price assumptions 13, reflecting the current contango in the forward gas curve. The current backwardation in the forward curve for Brent crude brings down our forecasts for Upstream Gas and Oil, which produces 11-12mmboe of liquids per annum. As described above, we are now more bearish on the outlook for Centricas power generation division.
Figure 32: Centrica EPS revisions (p)

2011E BarCap EPS - New BarCap EPS - Old Change Consensus EPS Difference
Source: Barclays Capital, DataStream.
2012E 26.9 30.7 -12.2% 28.3 -4.9%
2013E 27.1 32.5 -16.6% 30.7 -11.6%
2014E 28.9 35.2 -17.8% 30.3 -4.7%
26.3 26.7 -1.7% 26.0 1.2%
Balance sheet re-leverage is a modest upside risk to earnings
We note that Centricas robust cash flow and balance sheet mean that it is progressively deleveraging. That gives management financial flexibility to enhance EPS through either acquisitions or share buybacks an upside risk to our forecasts. We believe Centricas management is comfortable with net debt/EBITDA around 1.0x, suggesting c1bn of balance sheet capacity by 2013. We estimate that this would enhance EPS by c5%, or 1.3p/share.
13
As at 21 October 2011.
2 November 2011
27
P/E analysis justifies a 2.60 price target

Centrica does not appear to trade on SOTP
Our analysis leads us to cut our SOTP valuation from 3.72 to 3.29, principally reflecting a lower long-term BGRE margin assumption (reduced from 5.5% to 5.0%) and the impact of lower commodity prices and spreads for Centricas upstream activities. Our SOTP valuation points to modest upside for Centrica. However, we have to accept the fact that Centrica has rarely traded close to SOTP. For example, over the past two years Centrica has consistently traded at a 10% discount to its Bloomberg consensus average target price.
we think P/E is a better indicator of share price performance
Given the negative earnings momentum we now expect for Centrica, we believe P/E may be a better indicator of where Centricas shares could trade on a 12-month view. Figure 33 shows that, over the past five years, Centrica has on average traded at a -0.5 point Y+2 P/E discount to the Stoxx Utilities index, with a standard deviation of -1.9 to +0.8. Based on current consensus 2013E EPS, Centrica is trading at 9.7x 2013E P/E, compared to an average Y+2 P/E for the Stoxx Utilities index of 10.0x this year (current Y+2 P/E is 9.9x). Give the deteriorating fundamentals, we believe Centrica should de-rate to at least its historical average discount of -0.5x, implying a target 2013E P/E of 9.5x. When coupled with our 2013E EPS forecast of 27.1p (12% below consensus), this implies a target price of 2.60 a 20% discount to our SOTP valuation. Given our view of the challenges that Centrica is likely to face in the UK, such a discount may well be warranted. Investors may take a more critical view of the assumptions used to drive the SOTP. Our SOTP is based on a series of DCF models, and uses a 7.7% post-tax nominal discount rate and a series of long-term margin assumptions for its downstream activities. A 2.60 price target would be consistent with a 1ppt reduction in long-term margin assumptions, and a 1ppt increase in our WACC.
Deteriorating fundamentals justify a derating
Balance sheet re-leverage is a modest upside risk to earnings
We note a flaw in this approach, which is that Centricas robust cash flow and balance sheet mean that it is progressively deleveraging. That gives management financial flexibility to enhance EPS through either acquisitions or share buybacks. We believe Centricas management is comfortable with net debt/EBITDA around 1.0x, suggesting c1bn of balance sheet capacity by 2013. We estimate that this would enhance EPS by around 5%, or 1.3p/share. Figure 33: Centrica average forward P/E premium/discount vs. Stoxx Utilities
4.0x 3.0x 2.0x 1.0x 0.0x -1.0x -2.0x -3.0x -4.0x Jan-06 Jan-07 Jan-08 Jan-09 Y+1
Source: Bloomberg, Barclays Capital.
Centrica has on average traded at a 0.5 point P/E discount to European Utilities
Jan-10 Y+2
Jan-11
2 November 2011
28
Figure 34: Centrica SOTP valuation (as at 31 December 2012)

EB/EBITDA 2011E 6.9x 9.6x 10.5x 3.3x 3.2x 8.5x 8.0x 6.3x EB/EBITDA 2012E 7.1x 9.3x 9.7x 2.7x 3.4x 6.0x 6.0x 11.2x 7.1x 5.8x CAGR 11-15E -3.6% 3.7% 6.9% 5.8% 4.4% 5.6% 7.2% 4.0%
m British Gas Residential British Gas Business British Gas Services Gas Production and Development Power Generation - Conventional Power Generation - 20% British Energy Industrial and Commercial Accord Energy Trading Centrica Storage Direct Energy Enterprise Value 4,617 2,522 2,870 4,474 1,173 2,170 12 115 815 3,170 21,937
p/share 89 49 55 86 23 42 0 2 16 61 422
%EV 21.0% 11.5% 13.1% 20.4% 5.3% 9.9% 0.1% 0.5% 3.7% 14.4% -
Net Debt Net Pension Deficit Provisions Minorities Equity Value

(3,023 ) (72 ) (1,746 ) 0 17,097
(58 ) (1 ) (34 ) 0 329
2 November 2011
29
Figure 35: Centrica Financial ratios and valuation multiples

2008 EPS/DPS EPS - Recurrent (p/share) DPS - Total (p/share) 21.7 12.2 21.7 12.8 25.2 14.3 26.3 15.0 26.9 15.8 27.1 16.6 28.9 17.4 29.9 18.3 2009 2010 2011E 2012E 2013E 2014E 2015E
Valuation Multiples P/E (x) EV/EBITDA (x) EV/EBITDA - Ex-Upstream Gas (x) EV/NOPAT (x) Dividend Yield (%) FCF Yield (%) P/BV (x) EV/IC (x) 11.3x 5.9x 7.7x 14.6x 5.1% 5.7% 2.4x 1.5x 11.0x 5.4x 7.6x 14.1x 5.3% 6.8% 2.2x 1.4x 10.9x 5.2x 7.3x 13.9x 5.6% 7.8% 2.1x 1.4x 10.3x 5.0x 7.1x 13.1x 5.9% 6.7% 1.9x 1.3x 9.9x 4.8x 6.9x 12.5x 6.2% 7.8% 1.8x 1.3x
Financial Ratios Dividend Payout Ratio (%) Financial Net Debt/EBITDA (x) ROE ROIC WACC Weighted Ave. Shares (mm)
Source: Barclays Capital, DataStream.
56.2% 0.2x 23.5% 14.0% 4,198
59.0% 1.2x 25.8% 12.5% 5,121
56.7% 1.0x 25.7% 12.0% 5,146
57.1% 0.9x 22.3% 10.2% 7.7% 5,168
58.6% 0.8x 21.1% 10.1% 7.7% 5,189
61.1% 0.7x 19.8% 9.9% 7.7% 5,211
60.1% 0.6x 19.7% 10.3% 7.7% 5,232
61.1% 0.5x 19.0% 10.4% 7.7% 5,253
Figure 36: Centrica Segmental operating profit (m)

2008 Residential Energy Supply Business Energy Supply and Services Residential Services Upstream Gas and Oil Power Generation Industrial and Commercial Proprietary Energy Trading Storage UK North America Other Adjusted Operating Profit Growth (%) Margin (%)
2009 598 183 230 444 147 (93 ) 27 168 153 0 1,857 -7.3% 7.9%
2010 742 233 241 581 226 (36 ) 0 169 234 0 2,390 28.7% 10.1%
2011E 605 247 262 855 252 0 19 70 293 0 2,603 8.9% 11.0%
2012E 579 252 285 1,049 211 1 19 45 345 0 2,788 7.1% 11.0%
2013E 609 263 309 1,002 150 2 19 33 379 0 2,764 -0.8% 10.6%
2014E 547 272 324 977 238 2 19 66 404 0 2,849 3.1% 10.4%
2015E 507 283 339 969 283 2 19 84 421 0 2,907 2.1% 10.2%
376 143 193 1,164 11 (331 ) 37 195 215 0 2,003 2.8% 8.5%
2 November 2011
30
Figure 37: Centrica Income statement (m)

2008 External Revenue Costs Income from Associates EBITDA Depreciation and Amortisation Adjusted Operating Profit JV/Associate Interest/Tax Fair Value Adjustments Operating Profit Net Interest Other Finance Income/(Costs) PBT Tax Effective Tax Rate (%) Income from Discontinued Operations Minority Interests Fair Value Adjustments Adjusted Net Income Growth (%) Margin (%) 20,872 (18,251 ) 12 2,633 (630 ) 2,003 (3 ) (8 ) 1,992 (45 ) 43 1,990 (1,026 ) 51.6% (52 ) (1 ) 911 -18.8% 3.9% 2009 21,963 (19,410 ) 28 2,581 (724 ) 1,857 (11 ) (32 ) 1,814 (227 ) 48 1,635 (531 ) 32.5% 40 (50 ) 17 1,111 22.0% 4.7% 2010 22,423 (19,246 ) 143 3,320 (930 ) 2,390 (78 ) (118 ) 2,194 (275 ) 10 1,929 (708 ) 36.7% (5 ) (7 ) 88 1,297 16.7% 5.5% 2011E 22,357 (19,139 ) 280 3,498 (895 ) 2,603 (77 ) (120 ) 2,407 (195 ) 10 2,222 (960 ) 43.2% 0 0 97 1,359 4.8% 5.7% 2012E 23,806 (20,276 ) 247 3,777 (989 ) 2,788 (65 ) (120 ) 2,603 (195 ) 10 2,418 (1,118 ) 46.2% 0 0 97 1,397 2.8% 5.5% 2013E 24,704 (21,154 ) 272 3,823 (1,058 ) 2,764 (68 ) (120 ) 2,576 (185 ) 10 2,401 (1,086 ) 45.2% 0 0 97 1,412 1.1% 5.4% 2014E 25,762 (22,142 ) 337 3,957 (1,108 ) 2,849 (81 ) (120 ) 2,648 (167 ) 10 2,491 (1,076 ) 43.2% 0 0 97 1,512 7.1% 5.5% 2015E 26,725 (22,992 ) 367 4,100 (1,193 ) 2,907 (87 ) (120 ) 2,700 (155 ) 10 2,555 (1,082 ) 42.3% 0 0 97 1,570 3.9% 5.5%
Continuing EPS - Basic (p) Continuing EPS - Adjusted (p) Growth (%)
1.1 21.7 -20.1%
12.7 21.7 0.0%
36.4 25.2 16.1%
24.4 26.3 4.3%
25.1 26.9 2.4%
25.2 27.1 0.6%
27.0 28.9 6.6%
28.0 29.9 3.4%
DPS - Interim (p) DPS - Final (p) DPS - Total (p) Growth - Ordinary DPS (%) Payout Ratio (%)
3.5 8.7 12.2 5.4% 56.2%
3.7 9.1 12.8 4.9% 59.0%
3.8 10.5 14.3 11.7% 56.7%
4.3 10.7 15.0 5.0% 57.1%
4.5 11.3 15.8 5.0% 58.6%
4.7 11.8 16.6 5.0% 61.1%
5.0 12.4 17.4 5.0% 60.1%
5.2 13.0 18.3 5.0% 61.1%
2 November 2011
31
Figure 38: Centrica Cash flow (m)

2008 Operating Profit + Depreciation, Amortisation and Impairment +/- Changes in Provisions +/- Change in Working Capital +/- Other Non-Cash Items + Dividends from Associates - Net Interest - Income Tax Operating Cash Flow - Capital Expenditure Free Cash Flow +/- Acquisitions and Disposals +/- Change in Equity - Dividends Paid to Shareholders/Minorities Net Cash Flow Other Movements in Net Debt 652 630 (106 ) (1,083 ) 1,111 0 (24 ) (907 ) 273 (546 ) (273 ) (552 ) 2,199 (500 ) 874 (590 ) 2009 1,174 917 11 899 (12 ) 0 10 (503 ) 2,496 (2,964 ) (468 ) (1,244 ) 25 (635 ) (2,322 ) (303 ) 2010 3,081 1,153 (105 ) 435 (1,339 ) 0 (6 ) (540 ) 2,679 (592 ) 2,087 (1,243 ) 22 (668 ) 198 (374 ) 2011E 2,275 895 (100 ) (175 ) 0 173 (195 ) (702 ) 2,172 (1,298 ) 874 (141 ) 30 (760 ) 2 0 2012E 2,493 989 0 (68 ) 0 146 (195 ) (1,058 ) 2,307 (1,262 ) 1,045 0 30 (788 ) 287 0 2013E 2,445 1,058 0 (8 ) 0 164 (185 ) (1,106 ) 2,369 (1,163 ) 1,205 0 30 (831 ) 404 0 2014E 2,464 1,108 0 (25 ) 0 209 (167 ) (1,078 ) 2,511 (1,473 ) 1,037 0 30 (876 ) 191 0 2015E 2,492 1,193 0 (31 ) 0 229 (155 ) (1,078 ) 2,650 (1,437 ) 1,213 0 30 (924 ) 319 0
Non-Recourse Financial Net Cash/(Debt) Net Debt/EBITDA

(511 ) 0.2x
(3,136 ) 1.2x
(3,312 ) 1.0x
(3,310 ) 0.9x
(3,023 ) 0.8x
(2,618 ) 0.7x
(2,427 ) 0.6x
(2,108 ) 0.5x
Figure 39: Centrica Balance sheet (m)

2008 Tangible Fixed Assets Intangible Assets Investments Cash/Marketable Securities Working Capital Assets Other Assets Total Assets 4,689 2,181 330 3,002 5,786 2,478 18,466 2009 6,059 2,822 2,422 1,368 4,632 1,661 18,964 2010 6,398 3,454 2,507 490 4,612 1,359 18,820 2011E 6,942 3,454 2,465 635 4,582 1,359 19,438 2012E 7,215 3,454 2,430 553 4,877 1,837 20,366 2013E 7,320 3,454 2,397 475 5,063 1,814 20,524 2014E 7,686 3,454 2,372 503 5,281 1,814 21,109 2015E 7,930 3,454 2,351 595 5,478 1,814 21,622
Short-Term Debt Long-Term Debt Working Capital Liabilities Provisions Other Liabilities Total Liabilities
(330 ) (3,218 ) (4,395 ) (1,080 ) (5,071 )
(86 ) (4,594 ) (3,955 ) (2,007 ) (4,545 )
(77 ) (3,959 ) (4,059 ) (1,985 ) (3,376 )
(77 ) (4,102 ) (3,844 ) (1,885 ) (3,635 )
(77 ) (3,733 ) (4,061 ) (1,885 ) (3,695 )
(77 ) (3,250 ) (4,229 ) (1,885 ) (3,676 )
(77 ) (3,087 ) (4,411 ) (1,885 ) (3,673 )
(77 ) (2,860 ) (4,568 ) (1,885 ) (3,677 )
(14,094 ) (15,187 ) (13,456 ) (13,543 ) (13,451 ) (13,117 ) (13,134 ) (13,067 )
Shareholders' Equity Minority Interest/Other Total Equity

4,312 60 4,372
4,192 63 4,255
5,819 0 5,819
6,351 0 6,351
6,893 0 6,893
7,407 0 7,407
7,975 0 7,975
8,555 0 8,555
2 November 2011
32
This page is intentionally left blank
2 November 2011
33
COMPANY SNAPSHOT Drax Income statement (m) EBITDA, adjusted EBIT, adjusted Pre-tax income, adjusted Net income, adjusted EPS, adjusted (p) Diluted shares (m) Dividend per share (p) Margin and return data (%) EBITDA margin EBIT margin Pre-tax margin Net margin ROIC ROA ROE 2010A 391 338 315 233 63.8 366 32.0 2011E 321 264 240 189 51.8 366 25.9 2012E 331 273 260 199 51.1 391 25.6 2013E CAGR 200 -20.0% 134 -26.5% 116 94 22.6 416 11.3 -28.4% -26.1% -29.2% 4.4% -29.3% Average 17.1 14.0 12.9 9.9 15.6 8.5 15.2 CAGR 7.3% 10.6% 16.7% 19.0% Downside case 3.30 Our downside case assumes 50% conversion, but thermal efficiency of 35%, high capex and a 10% rise in coal prices. Upside case 15.52 Our upside scenario assumes Drax invests further (we assume 250m) to fully-covert the plant into dedicated biomass by 2020 at 1.0x ROC. Generators
1-OVERWEIGHT 2-NEUTRAL 5.43 6.75 RIC: DRX.L, BB: DRX LN
23.7 20.5 19.1 14.1 19.5 11.6 23.5
17.2 14.2 12.9 10.2 18.2 9.7 17.3
17.6 14.5 13.8 10.6 17.5 9.0 14.1
10.1 6.8 5.8 4.7 7.0 3.8 5.8
Why a 1-OW? We now believe it is highly likely that Drax will proceed with plans to convert to 50% biomass co-firing. This completely transforms the equity story of Drax, securing its position in the UK power market for the long-term. Drax also retains the option to convet to 100% in the future.
Balance sheet and cash flow (m) Net PP&E 1,184 Total net assets 2,047 Capital employed Shareholders' equity Adjusted net debt Cash flow from operations Capital expenditure Free cash flow Pre-dividend FCF Valuation and leverage metrics P/E (x) EV/EBITDA (x) EV/NOPAT (x) Dividend Yield (%) FCF Yield (%) P/BV (x) EV/IC (x) Net debt/EBITDA (x) Selected operating metrics Payout ratio (%) Power price (/MWh) Dark spread (/MWh) Load factor (%) Output (TWh) 1,043 958 204 411 (62) 349 349
1,167 1,976 1,086 1,224 210 169 (40) 129 129
1,291 2,558 1,241 1,605 422 216 (182) 34 284
1,461 2,771 1,659 1,615
3 -76.5% (97) NA (236) NA (333) (333) NA NA Average 13.4 6.6 11.7 4.4 2.7 1.6 1.5 0.6
8.5 4.4 7.1 5.9 17.6 2.1 1.7 (0.5)
10.5 5.4 8.9 4.8 6.5 1.6 1.6 (0.7)
10.6 5.4 8.8 4.7 1.5 1.4 1.4 (1.3)
24.0 11.1 21.8 2.1 14.8 1.4 1.3
108 1665 88 1165 68 665 48 165 28 330p Downsi de (-39.2%)
Case
1552p (185.%) 675p (24.3%)

Pri ce Target Upside Case
(0.0) -
50.1 79.7 26.4
50.0 55.6 16.8 80.0 26.5
50.0 55.8 18.3 80.0 26.6
50.0 57.0 16.2 80.0 26.5
18-Nov-10 18-Nov-10
31-Oct-11 31-Oc t-11
Source: Thomson Re uters Datastream, Barclays Capital est.
Output (TWh)
28.0 27.0 26.0 25.0 24.0 2010A 2011E 2012E 2013E Output (TWh)
Note: FY end Dec.
2 November 2011
34
DRAX FROM DARK TO BARK

DRX.L / DRX LN Stock Rating
1-Overweight
Sector View
2-Neutral
Price Target
6.75
Price (31Oct 2011)
5.43
Following the proposed increase in ROC support, we now believe it is highly likely that Drax will proceed with plans to convert to 50% biomass co-firing. We believe this completely transforms the equity story of Drax, securing its position in the UK power market for the long-term. A combination of the carbon tax and ROC support should underpin progressively rising earnings. Over the medium term our analysis suggests that Drax has the potential to return significant amounts of cash to investors. Numerous uncertainties remain, meaning we believe Drax remains a risky stock. Nonetheless, we see the upside potential as potentially very high indeed, particularly if Drax opts to convert the plant to 100% biomass in the future. We upgrade from 3-UW to 1-OW and set a new price target of 6.75.
24.3%
Biomass conversion transforms earnings outlook

The key driver for Draxs shares up until now has been the UK clean dark spread. However, if, as we expect, Drax converts to 50% biomass co-firing, this will change. The key driver of Draxs EBITDA will instead become the bark spread the gross margin on cofiring biomass. Given the significant pressure we see on dark spreads over the next few years, this is a transformational story for Drax.
The bark spread transforms Draxs equity story
This bark spread has three components: the power price, the ROC price and the cost of biomass. We think its characteristics will be rather more attractive than that of the clean dark spread:
Carbon price floor drives progressive growth in power prices. We expect the carbon price floor to underpin a 30% increase in UK power prices to 2020 (relative to current EUA futures). Our modelling shows that the pass-through of the carbon tax into wholesale power prices should step up in 2017E as conventional hard coal plant moves to the margin in the UK, substantially improving the economics of biomass.
Figure 40: Impact of carbon price floor on UK power prices (/MWh)

2011E Baseload Power with carbon floor Baseload Power no carbon floor Difference
2012E 52.4 52.4 -
2013E 54.6 52.4 2.1
2014E 61.1 54.2 6.8
2015E 64.7 54.9 9.7
2016E 67.8 56.9 10.9
2017E 71.2 58.0 13.1
2018E 73.1 59.2 13.9
2019E 74.7 60.5 14.2
2020E 76.6 62.0 14.6
51.5 51.5 -
ROC prices supported by buy-out price. Our analysis suggests that growth in UK renewables (including Draxs own plans) will put downward pressure on ROC prices (currently trading at 45). However, the buy-out price should provide support at a level of at least 40 (see Figure 23). Implicit inflation protection. Both the carbon price floor and the ROC buy-out price are linked to UK RPI, giving revenues implicit inflation protection. Long-term contracts for biomass. We expect Drax to secure a meaningful proportion of its biomass under long-term fixed priced indexed contracts, giving a much higher degree of cost visibility than with its current exposure to coal.
2 November 2011
35
As shown in Figure 41, the difference in EBITDA between Drax operating as a normal coal plant and operating as a biomass plant is profound, though we would expect EBITDA to start to come under pressure again as coal becomes less economic as a fuel, reducing Draxs load factor. Importantly, we believe Drax will retain the option of converting to 100%, given how the economics could transform in the latter part of the decade. This could turn Drax into a 1bn EBITDA generating asset. However, this decision would depend on the bankability of the carbon price floor which currently remains a discretionary tool for the government or on the attractiveness of proposed contract-for-difference feed-in tariffs. Figure 41: Drax from dark spread to bark spread
2012E Clean Dark Spread @ 40% Efficiency (/MWh) Bark Spread @ 37.5% Efficiency (/MWh)* EBITDA - Normal Coal Operation (m)** EBITDA - 50% Co-Firing by 2015 (m) EBITDA - 100% Biomass by 2020 (m) 18.1 35.1 343 331 331 2013E 15.8 35.6 179 200 200 2014E 15.9 38.2 206 352 352 2015E 15.3 40.1 187 427 427 2016E 14.8 42.5 147 452 452 2017E 14.3 45.1 133 460 567 2018E 12.2 46.2 106 437 736 2019E 9.6 47.0 41 376 925 2020E 7.1 48.1 (33 ) 302 1,082
Source: Barclays Capital. * Our EBITDA forecasts assume Drax outperforms this by operating flexibly and by burning up to c10% energy crop biomass at 1.5x ROC. ** Assumes Drax operates as it does today, with up to 12.5% co-firing capability at 0.5x ROC.
Numerous uncertain variables remain

Drax remains a risky stock
There are still several uncertainties relating to Draxs plans to convert to enhance co-firing:
ROC banding. DECC has proposed an increase in the banding for enhanced co-firing from 0.5 to 1.0x 14, commencing on 1 April 2013 and grandfathered until 2027 for Drax. The consultation will run until 12 January 2012, and DECC is expected to announce its final decision on bandings around March 2012 (this then has to be passed into legislation). There is a risk that the banding could be reduced, though we would ascribe a low probability to this, given the implicit support that DECC has provided biomass in its recent publications. Drax is currently lobbying for a further increase in the banding to enable it to increase co-firing above 50% in the long-term, so there is also a chance that the banding could be increased. Capital investment. Drax is currently indicating that capex will be between 350-500m for co-firing conversion depending on whether or not boiler modification will be required in order to increase co-firing to 50%. Drax is likely to also have to invest in Selective Catalytic Reduction technology on 2-3 of its units over 2013-2015 to comply with the Industrial Emissions Directive, at an expected cost of 170-250m. For the purposes of modelling we have taken the mid-point of both of these capex ranges. Capital structure. We estimate that in order to convert to biomass, Drax will need to finance around 250m of biomass stock and 350m of ROC inventory build-up over the course of 2012-14E, in addition to the investment outlay. This implies a total capital requirement of 950-1,100m. Drax has indicated it may need to issue equity to finance a portion of this, and we prudently assume a 250m capital raising in our forecasts to keep net debt/EBITDA below 1.0x. This dilutes EPS by c10%.
14 Consultation on proposals for the levels of banded support under the Renewables Obligation for the period 2013-17 and the Renewables Obligation Order 2012, DECC, 20 October 2011.
2 November 2011
36
Thermal efficiency. Co-firing is expected to reduce thermal efficiency. Until Drax has completed the technical analysis, there is no guidance available on the potential impact. We have assumed a 2.5% reduction in efficiency, to 37.5%. However, it is important to note that fuel costs, and therefore Draxs DCF valuation, are very sensitive to this number. Biomass availability and price. Drax is likely to import the vast majority of its biomass from accredited sustainable sources, and is seeking to strike long-term fixed-price contracts with suppliers. However, there is considerable variability in the price, quality and availability of biomass. Figure 43: Ratio of wood pellet to API2 coal
4.0
Figure 42: Forward wood pellet prices, CIF (/GJ)

8.0 7.5 7.0
3.5
3.0 6.5 6.0 5.5 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 2010 2011 2012 2013
Source: ENDEX, Bloomberg, Barclays Capital.
2.5
2.0 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Source: ENDEX, Barclays Capital.
Drax currently indicates that it is able to source biomass at between 2.0-2.5x the cost of coal. This implies a fuel cost of in the range of 6.1-7.7/GJ. The current forward wood pellet price (ENDEX) is in the middle of this range at 6.9/GJ. We use this as the basis of our modelling. In reality, the range of prices for different types of biomass is very wide. Processed wood pellets typically mark the upper end of the range. Agricultural residues, for example, are available at 0.5-4.5/GJ. We would expect Drax to be able to achieve better than average prices given its ability to bulk purchase through long-term fixed price contracts, and to use less processed feedstock. However, one key uncertainty that Drax is likely to face is currency risk. We do not see any material constraints to biomass availability per se, though bottlenecks in the supply chain will need to be addressed. We estimate that Drax itself at 50% co-firing will consume around 125PJ per annum, and that total UK biomass generation by 2015 could be c300PJ. This is comfortably below ranges of available biomass estimated in a report commissioned by DECC 15, which suggests that by 2015 there could be 390-670PJ of domestically produced biomass available within the UK at 4/GJ (2010 prices) and a further 403-549PJ of imported biomass. The amount within these ranges depends on the extent to which constraints are overcome (e.g. processing plant capacity, transport infrastructure, policy uncertainty). In its recent Renewables Roadmap 16, the DECC appears committed to addressing such constraints.
15 16
UK and Global Bioenergy Resource Final Report, AEA, March 2011 UK Renewable Energy Roadmap, DECC, July 2011
2 November 2011
37
Valuation analysis
Drax has considerable option value
The high probability that Drax will now pursue biomass conversion transforms the equity story for Drax. It is no longer a binary call on UK government policy. Our revised 1-OW recommendation reflects the significant option value that we believe a biomass conversion strategy creates for Drax. Drax remains a risky stock, in our view, but we estimate the upside potential under certain scenarios is considerable. We believe the reward is now worth the risk. We analyse risk/reward using a DCF scenario analysis. Given Drax is a finite life asset, we believe DCF is the most appropriate valuation methodology. Our base case DCF valuation is 5.86. However, this is very sensitive to a number of variables, as shown in Figure 44. Figure 44: DCF valuation sensitivity and scenario analysis (/share)
Normal Coal Operation Base Case DCF Valuation Equity IRR (based on 5.43 share price) 2.16 50% CoFiring by 2015 5.86 7.9% 100% Biomass by 2020 15.52 15.8%
Sensitivities Power Price +/- 5% ROC Banding +/- 0.1x Biomass Price +/- 5% Coal Price +/- 5% Thermal Efficiency +/- 1% Capex +/- 115m WACC* +/- 50bps 47% 4% 5% 19% 2% 4% 1% 34% 15% 17% 9% 9% 4% 7% 15% 12% 13% 1% 7% 2% 9%
Scenarios Low Case - 35% Efficiency / High Capex / Coal Price +10% High Case - 38% Efficiency / Low Capex / 1.1x ROC 1.15 2.26 3.30 7.23 12.14 18.08
Source: Barclays Capital. NB. Our base case WACC assumption is 7.62% post-tax real. We assume ROC support is maintained at 1.0x after 2027, however we also assume that the UK carbon price floor remains at 30/t (it is currently stipulated to rise to 70/t by 2030).
Our scenario analysis considers three high level cases:
Normal coal plant operation. This scenario assumes that DECC reneges on its proposal to raise the banding for enhanced co-firing from 0.5x. This would leave Drax operating as an increasingly marginalised coal plant, worth less than half of its current share price. We believe the probability of this scenario is less than 5%. 50% co-firing. Our base case assumes that Drax invests to progressively raise biomass co-firing to 50% by 2015, at 1.0x ROC. We ascribe an 80% likelihood to this scenario, which would give investors in Drax today an attractive 7.9% equity IRR. 100% biomass. This scenario assumes Drax invests further (we assume 250m) to fullycovert the plant into dedicated biomass by 2020 at 1.0x ROC. The potential value upside here is considerable: 15.52 under our base case power price assumptions, providing investors with 15.8% equity IRR. We would ascribe a 15% probability to this scenario.
2 November 2011
38
We then consider two alternative sets of operational assumptions:
Low case. This assumes thermal efficiency drops to 35% on co-firing, capex is towards the top end of the range indicated by Drax (i.e. 750m for 50% conversion and SCR retrofit), and clean dark spreads get squeezed by a 10% raise in coal prices. High case. This assumes thermal efficiency is only modestly impacted by co-firing, capex is towards the bottom end of the range indicated by Drax (i.e. c520m for 50% conversion and SCR retrofit), and that DECC raises the ROC banding to 1.1x for enhanced co-firing/ biomass conversion.
We set our price target at 6.75 based on a probability-weighted assessment of these scenarios. Essentially, we are valuing Drax at 5.86 plus an 0.89, or 15% premium, to reflect the option value of 100% biomass conversion. This implies 24% upside to the current share price. Figure 45: Drax Financial ratios and valuation multiples
2008 EPS/DPS EPS - Recurrent (p/share) DPS - Total (p/share) 86.2 53.0 57.9 13.7 63.8 32.0 51.8 25.9 51.1 25.6 22.6 11.3 46.3 23.1 56.0 28.0 2009 2010 2011E 2012E 2013E 2014E 2015E
Valuation Multiples P/E (x) EV/EBITDA (x) EV/NOPAT (x) Dividend Yield (%) FCF Yield (%) P/BV (x) EV/Capital Employed (x) 10.5x 5.4x 8.9x 4.8% 6.5% 1.6x 1.6x 10.6x 5.4x 8.8x 4.7% 1.5% 1.4x 1.4x 24.0x 11.1x 21.8x 2.1% -14.8% 1.4x 1.3x 11.7x 7.3x 12.0x 4.3% -11.8% 1.3x 1.2x 9.7x 5.8x 9.3x 5.2% 8.8% 1.2x 1.2x
Financial Ratios Dividend Payout Ratio (%) Financial Net Debt/EBITDA (x) ROE ROIC WACC
61.5% 0.5x 55.5% 25.3% -
23.7% 0.2x 23.8% 15.8% -
50.1% (0.5x) 23.5% 19.5% -
50.0% (0.7x) 17.3% 18.2% 7.6%
50.0% (1.3x) 14.1% 17.5% 7.6%
50.0% (0.0x) 5.8% 7.0% 7.6%
50.0% 0.9x 11.4% 11.4% 7.6%
50.0% 0.5x 12.8% 12.5% 7.6%
2 November 2011
39
Figure 46: Drax EBITDA drivers (m)

2008 Clean Dark Spread Biomass Spread Other Fuels Spread Free CO2 Allocation Other Revenues Retail Grid Charges Operating Costs EBITDA
2009 -
2010 -
2011E 316 46 24 131 28 (1 ) (57 ) (166 ) 321
2012E 350 52 19 129 28 (1 ) (59 ) (187 ) 331
2013E 276 133 18 0 28 0 (61 ) (194 ) 200
2014E 226 331 18 0 28 1 (63 ) (190 ) 352
2015E 180 463 18 0 28 1 (65 ) (198 ) 427
Figure 47: Drax Income statement (m)

2008 Total Revenue Cost of Sales Operating Costs Adjusted EBITDA Depreciation, Amortisation and Impairment Charges Adjusted Operating Profit Net Finance Costs Adjusted PBT Income Tax Expense Adjusted Net Income Growth (%) Margin (%) 1,753 (1,130 ) (169 ) 454 (46 ) 408 (22 ) 386 (94 ) 292 -15.6% 16.7% 2009 1,476 (973 ) (148 ) 355 (52 ) 303 (15 ) 288 (83 ) 204 -30.1% 13.8% 2010 1,648 (1,098 ) (160 ) 391 (52 ) 338 (23 ) 315 (82 ) 233 14.0% 14.1% 2011E 1,863 (1,357 ) (185 ) 321 (57 ) 264 (24 ) 240 (51 ) 189 -18.8% 10.2% 2012E 1,882 (1,344 ) (207 ) 331 (58 ) 273 (13 ) 260 (61 ) 199 5.3% 10.6% 2013E 1,987 (1,572 ) (215 ) 200 (66 ) 134 (19 ) 116 (22 ) 94 -52.9% 4.7% 2014E 2,349 (1,786 ) (211 ) 352 (73 ) 279 (35 ) 243 (52 ) 192 104.4% 8.2% 2015E 2,708 (2,061 ) (220 ) 427 (81 ) 346 (40 ) 306 (73 ) 233 21.2% 8.6%
98.1 86.2 -13.3%
31.4 57.9 -32.8%
51.6 63.8 10.2%
106.1 51.8 -18.8%
51.1 51.1 -1.4%
22.6 22.6 -55.7%
46.3 46.3 104.4%
56.0 56.0 21.2%
DPS - Interim (p) DPS - Final (p) DPS - Special (p) DPS - Total (p) Growth - Ordinary DPS (%) Payout Ratio - Total DPS (%)
5.0 38.3 9.7 53.0 196.6% 61.5%
4.1 9.6 0.0 13.7 -68.4% 23.7%
14.1 17.9 0.0 32.0 133.6% 50.1%
16.0 9.9 0.0 25.9 -19.0% 50.0%
8.5 17.0 0.0 25.6 -1.4% 50.0%
3.8 7.5 0.0 11.3 -55.7% 50.0%
7.7 15.4 0.0 23.1 104.4% 50.0%
9.3 18.7 0.0 28.0 21.2% 50.0%
2 November 2011
40
Figure 48: Drax Cash flow (m)

2008 EBITDA (inc. cash exceptionals) +/- Changes in Working Capital + Share-Based Payments + Pension Charge - Pension Contributions +/- Intangible Assets - ROC - Net Interest Paid - Net Tax Paid + Other Changes Operating Cash Flow Capital Expenditure Free Cash Flow Acquisitions and Disposals Change in Equity Dividends Paid to Shareholders/Minorities Net Cash Flow Other Movements in Net Debt 454 (21 ) 4 4 (10 ) 0 (19 ) (102 ) 0 310 (91 ) 218 0 0 (110 ) 108 (6 ) 2009 355 (43 ) 2 5 (8 ) 10 (13 ) 19 0 328 (93 ) 235 (12 ) 106 (145 ) 184 (4 ) 2010 391 115 3 6 (8 ) (21 ) (20 ) (56 ) 2 411 (62 ) 349 0 0 (87 ) 262 (4 ) 2011E 321 (60 ) 3 6 (11 ) (5 ) (20 ) (63 ) 0 169 (40 ) 129 0 0 (124 ) 6 0 2012E 331 (11 ) 3 6 (11 ) (36 ) (11 ) (56 ) 0 216 (182 ) 34 0 250 (72 ) 213 0 2013E 200 (153 ) 3 6 (11 ) (110 ) (16 ) (17 ) 0 (97 ) (236 ) (333 ) 0 0 (86 ) (420 ) 0 2014E 352 (94 ) 3 6 (11 ) (208 ) (30 ) (46 ) 0 (29 ) (237 ) (266 ) 0 0 (63 ) (330 ) 0 2015E 427 99 3 6 (11 ) (135 ) (34 ) (61 ) 0 294 (96 ) 198 0 0 (103 ) 95 0
Financial Net (Debt)/Cash Net Debt/EBITDA

(235 ) 0.5x
(54 ) 0.2x
204 (0.5x)
210 (0.7x)
422 (1.3x)
3 (0.0x)
(327 ) 0.9x
(232 ) 0.5x
Figure 49: Drax Balance sheet (m)

2008 Tangible Fixed Assets Intangible Assets Cash/Marketable Securities Working Capital Assets Other Assets Total Assets 1,136 0 130 449 392 2,107 2009 1,177 22 135 403 421 2,159 2010 1,184 44 331 350 138 2,047 2011E 1,167 49 220 401 138 1,976 2012E 1,291 85 632 412 138 2,558 2013E 1,461 195 413 564 138 2,771 2014E 1,625 403 283 659 138 3,108 2015E 1,640 538 303 560 138 3,179
(15 ) (350 ) (295 ) (23 ) (731 ) (1,414 )
(63 ) (127 ) (227 ) (39 ) (679 ) (1,135 )
(62 ) (65 ) (285 ) (44 ) (633 ) (1,089 )
(10 ) 0 (280 ) (39 ) (423 ) (751 )
(10 ) (200 ) (281 ) (34 ) (428 ) (953 )
(10 ) (400 ) (284 ) (29 ) (433 ) (1,156 )
(10 ) (600 ) (290 ) (24 ) (438 ) (1,362 )
(10 ) (525 ) (296 ) (19 ) (451 ) (1,300 )
Shareholders' Equity Total Equity

693 693
1,025 1,025
958 958
1,224 1,224
1,605 1,605
1,615 1,615
1,747 1,747
1,879 1,879
2 November 2011
41
COMPANY SNAPSHOT SSE Income statement (m) EBITDA, adjusted EBIT, adjusted Pre-tax income, adjusted Net income, adjusted EPS, adjusted (p) Diluted shares (m) Dividend per share (p) Margin and return data (%) EBITDA margin EBIT margin Pre-tax margin Net margin ROIC ROA ROE 2011A 2,227 1,455 1,310 1,042 112.3 929 75.0 2012E 2,398 1,533 1,382 1,048 111.8 939 79.7 2013E 2,658 1,726 1,521 1,152 122.7 940 83.6 2014E 2,764 1,792 1,545 1,172 124.6 942 87.8 CAGR 7.5% 7.2% 5.7% 4.0% 3.5% 0.5% 5.4% Integrated Utilities
2-EQUAL WEIGHT 2-NEUTRAL 13.44 12.35 RIC: SSE.L, BB: SSE LN
7.6 5.0 4.5 3.6 11.1 6.1 25.0
8.0 5.1 4.6 3.5 10.7 5.9 19.7
8.6 5.6 4.9 3.7 11.2 6.4 20.5
Average 8.8 8.3 5.7 5.4 4.9 3.7 11.0 6.4 19.8 4.7 3.6 11.0 6.2 21.2 CAGR 10.1% 4.3% 7.3% 5.4% NA 1.1% NA -1.5% NA Average 11.4 7.8 14.5 6.1 1.1 2.3 1.5 3.1
Why a 2-EW? We see weak fundamentals in fossil fuel generation and believe SSE will be at a competitive disadvantage in the UK energy market, despite its investment in renewables. However, this is offset by SSE's exposure to regulated networks.
Upside case
Balance sheet and cash flow (m) Net PP&E 8,518 Total net assets 21,181 Capital employed Shareholders' equity Adjusted net debt Cash flow from operations Capital expenditure Free cash flow Pre-dividend FCF Valuation and leverage metrics P/E (x) EV/EBITDA (x) EV/NOPAT (x) Dividend yield (%) FCF yield (%) P/BV (x) EV/IC (x) Net debt/EBITDA (x) Selected operating metrics Payout ratio (%) Thermal Cap. (MW) Renewable Cap. (MW) Electricity Product. (TWh) Resi. EBIT Margin (%) Energy Customers (m) RAB - Scotland (m) RAB - England (m) RAB - SGN (m) 11,482 5,201 (5,891) 1,719 (1,444) 276 10
9,634 22,300 12,561 5,457 (6,801) 1,520 (1,694) (174) (174)
10,534 23,217 13,392 5,774 (7,403) 1,720 (1,538) 182 182
11,374 24,046 14,175 6,086 (7,962) 1,779 (1,515) 263 263
14.45 Our upside case assumes spark spreads rise by 5/MWh and retail margins by 1%. We assume SSE trades in line with SOTP.
Downside case
11.05 Our downside case assumes retail margins decline by a further 1% and SSE derates to 9.2x 2013/14E P/E.
12.0 8.3 15.5 5.6 2.2 2.4 1.6 3.0
12.0 8.1 15.1 5.9 (1.4) 2.3 1.5 3.2
11.0 7.5 13.8 6.2 1.4 2.2 1.5 3.1
10.8 7.5 13.6 6.5 2.1 2.1 1.5 3.2
1752 108 1552 88 1352 1152 68 952 48 752 552 28 9-Nov-09 18-Nov-10 1445p (7.5%) 1235p $75 $69 1105p (-8.11%) (-11.5%) (-18.6%) $56 (-17.7%) (-33.9%)
Downsi de Down side Case Case Pri ce Price Target Target Upside Upsi de Case Case
66.8 10,067 2,445 47.3 9.7 9.2 1,459 1,863 2,122
71.3 9,947 2,866 41.8 6.3 9.1 1,605 1,988 2,262
68.2 9,947 3,501 49.1 4.4 9.0 2,103 2,096 2,372
70.5 9,947 3,692 48.6 6.0 9.0 2,362 2,201 2,483
2-Nov-10 31-Oct-11
Renewable capacity (MW)

5000 4000 3000 2000 1000 0 2011A 2012E 2013E 2014E Rene wable Cap. (MW)
Note: FY end Mar.
2 November 2011
42
SSE STILL STRUGGLING FOR MOMENTUM

SSE.L / SSE LN Stock Rating
2-Equal Weight
Sector View
2-Neutral
Price Target
12.35
Price (31 Oct 2011)
13.44
-8.1%
We see deteriorating fundamentals in SSEs generation and supply business. Its large ageing coal and gas fleet is likely to struggle to cover its fixed costs once free CO2 permits expire, and it has less earnings momentum in its UK cleaner generation fleet than some of its competitors. As a result, we believe SSE will be at a competitive disadvantage in the UK retail market, which could see market share and margins come under pressure. However, risk to EPS is mitigated by SSEs exposure to UK regulated networks, specifically electricity transmission. We see just 2% downside to consensus estimates. And whilst we expect a P/E de-rating, the downside is partially offset by a 5.9% yield and potential for 6-7% dividend growth. We believe the risks to SSEs shares are therefore moderate when compared to the risks we see across other integrated utility names. We initiate coverage with a 2-EW recommendation and a 12.45 price target.
Fossil fuel exposure acts as a drag

SSE has a significant pipeline of investment in clean generation, focused predominantly on wind. However, our analysis in this report points to a very tough environment for older gas and coalfired generation. With economic interests in 10GW of older fossil fuel capacity, as well as the largest free CO2 allocation of the Big 6, we expect SSEs exposure to dirty generation to hamper its relative competitive position and act as a drag on overall earnings growth. Figure 50: Annual EBITDA of 1GW power station on an unhedged basis, excluding free CO2 (m)
2010 Hard Coal - 36% Efficiency CCGT - 49% Efficiency
2011E (11.0 ) (6.4 )
2012E 12.2 (9.3 )
2013E (6.7 ) (10.3 )
2014E (9.2 ) (6.4 )
2015E (17.2 ) (8.4 )
2016E (24.4 ) 2.2
(24.3 ) 14.8
The last free CO2 allocations will be given to UK fossil fuel generators around February 2012. Once these have been used up, we believe owners of older capacity will struggle to cover fixed costs. Specifically, we believe CCGT plant will be unable to cover its fixed costs over the period from 2013-15E, while old coal plant will become permanently out-of-the money from 2013 onwards (Figure 50). Indeed, we believe the period from 2013-15E has the potential to be punishing for generators with significant exposure to old coal and CCGT plant. Unfortunately, SSE has material exposure to both. Figure 51: SSE Economic interest in generating capacity (MW)
2009 Hard Coal Gas/Oil Renewable Total 3,984 4,870 2,226 11,080 2010 4,211 5,224 2,375 11,810 2011 4,347 5,720 2,445 12,512 2012E 4,347 5,600 2,866 12,813 2013E 4,347 5,600 3,501 13,448 2014E 4,347 5,600 3,692 13,639 2015E 3,350 5,533 3,875 12,758
Competitive disadvantage in UK retail

SSE has been fast to respond to political pressure
SSE has been fast to respond to the political and regulatory criticism facing all of the Big 6. It was the first to end doorstep selling, suspending it in July 2011 after it was found guilty of mis-selling the rest of the Big 6 are now following. It has been the first to scrap discounted internet tariffs, to respond to accusations of predatory pricing by Chris Huhne, the UK
43
2 November 2011
Energy Secretary 17. It has also written to both its customers and to Huhne, pledging a fairer deal for its customers. Whilst these actions may curry favour with politicians, help to increase customer loyalty and reduce churn at the margin, we do not believe they will be enough to prevent SSEs downstream residential supply business from suffering a challenging few years.
but commercial pressure will be more challenging to manage
As we discuss earlier, our analysis in this report concludes that EdF Energy and, to a lesser extent, RWE npower have both the earnings momentum and the motivation to drive a more aggressive pricing strategy in the downstream residential energy market. Unfortunately, the pressure on earnings in SSEs fossil fuel generation fleet, as well as the need to earn a return on capital on its renewables investment means we believe SSE will not be well positioned to compete on price. This is already starting to show. SSE had typically priced towards the bottom end of the Big 6, though since the start of 2010, only British Gas has increased tariffs by more (Figure 52). That now places SSE towards the top of the pack on weighted average sales price (Figure 53). As a result, we expect SSE to start losing market share in UK downstream retail for the first time since competition began. Indeed, SSE has flagged in recent analyst meetings that it had lost customers in 1H11/12.
Figure 52: Average dual fuel price increase since March 2010
Figure 53: Average estimated dual fuel weighted average sales price* (Index = 100)
115 112 107 107 105
30% 25% 20% 15% 10% 5% 0%
26% 23% 22% 21% 20% 18%
110 105 100 95 90
104 100
We expect SSE to hit its target of 3.5GW renewables in 2013
2 November 2011
British Gas
SSE
E.On UK
Renewables growth finally starting to come through

We forecast that FY11/12E will be the fourth consecutive year of sub-3% EPS growth for SSE (in fact we forecast a 0.5% decline). However, FY12/13E should see a 10% jump in EPS, as a number of SSEs high profile wind projects reach commissioning (specifically Clyde, Griffin, Greater Gabbard and Walney), increasing capacity to SSEs target of 3.5GW. Thereafter, we expect that momentum to slow: SSEs advanced offshore development pipeline is 1.1GW, and there are no additional offshore wind projects expected to come on stream before 2015/16 (after which the ROC banding drops to 1.9x, then 1.8x).
17
It is not fair that big energy companies can push their prices up for the vast majority of their consumers who do not switch while introducing cut-throat offers for new customers that stop small firms entering the market that looks to me like predatory pricing. It must and will stop, Chris Huhnes speech at the Liberal Democrat party conference, 20 September 2011.
ScottishPower
EDF Energy
RWE npower
Source: Barclays Capital, company data. * See note to Figure 29 for methodology and caveats.
British Gas
SSE
ScottishPower
E.On Energy
RWE npower
EdF Energy
44
SSE is also investigating options to develop cleaner generation at some of its existing coal plant: it recently received consent to develop up to 108MW multi-fuel project at Ferrybridge, with potential completion in early 2015, and is developing a project to repower its Uskmouth plant into a 100MW biomass unit. However, both these projects are small compared to RWEs conversion of Tilbury into a 750MW dedicated biomass plant and Draxs plans to develop 2GW of co-firing capacity.
Networks underpin earnings

SSE has exposure to UK electricity transmission upside
It is important to remember that regulated network activities continue to represent 40% of SSEs Adjusted EBIT. These have benefited from high RPI over the last two years, though Barclays Capitals economists expect UK RPI to decline from 5.7% y/y in October 2011E to 2.9% in January 2013E. Nonetheless, this could be more than offset by a substantial tariff increase for Scottish Hydro Electricity Transmission (SHELT) on 1 April 2012 the TCPR4 18 rollover initial proposal is currently for a 31% real tariff increase and the potential for accelerating regulated asset value (RAV) growth. We currently forecast SHELTs RAV to grow from 0.5bn in FY10/11 to 1.8bn by FY17/18E. However, SHELT has identified growth projects that could see RAV hit 3.0bn by FY17/18E even if only 50% of them were to be allowed by Ofgem.
Figure 54: SSE Projected RAV growth (m)

Year ending 31 March Southern Electric Power Distribution Scottish Hydro Power Distribution Scottish Hydro Electricity Transmission Scotia Gas Networks Total RAV SHETL upside from 50% business plan growth projects SHETL upside from 100% business plan growth projects
2009 1,729 840 387 1,815 4,770 -
2010 1,820 869 419 1,959 5,067 -
2011 1,863 927 533 2,122 5,444 -
2012E 1,988 970 635 2,262 5,855 -
2013E 2,096 1,002 1,101 2,372 6,571 -
2014E 2,201 1,031 1,331 2,483 7,045 219 438
2015E 2,299 1,064 1,522 2,593 7,478 520 1,039
Stable earnings, but balance sheet becoming more stretched

Overall, we believe SSE will have a relatively stable financial outlook from an earnings perspective, though we believe its balance sheet is becoming more stretched due to a high ongoing level of capex.
Modest EPS downgrade risk. We believe the ongoing pressures we see in SSEs generation and supply business will be largely offset by stronger growth in electricity transmission. As a result, we currently see only around 2% downside to consensus EPS estimates for FY11/12E-FY14/15E. Balance sheet becoming more stretched. Compared to its integrated utility peers, SSE has relatively high net debt/EBITDA. Whilst one could argue that this is justified given the large proportion of regulated network activities in its earnings mix, stripping out networks reveals that net debt/EBITDA in the non-regulated business could grow to 4.2x. However, we believe SSE could mitigate this by financing new wind farm projects (especially offshore) off balance sheet.
18
Transmission Price Control Review 4
2 November 2011
45
Figure 55: SSE Adjusted net debt/EBITDA analysis (m)

Year ending 31 March Adjusted Net Debt of which: Networks @ 70% Debt/RAV Adjusted Net Debt/EBITDA - Group Adjusted Net Debt/EBITDA - Networks Adjusted Net Debt/EBITDA - Non-Regulated Adjusted Net Debt/EBITDA - Non-Regulated (ex. new offshore)
2009 (5,100 ) (2,069 ) 3.0x 3.9x 2.6x 2.6x
2010 (5,292 ) (2,176 ) 2.8x 3.7x 2.7x 2.7x
2011 (5,891 ) (2,326 ) 3.0x 3.3x 3.1x 3.1x
2012E (6,801 ) (2,515 ) 3.2x 3.3x 3.7x 3.7x
2013E (7,403 ) (2,939 ) 3.1x 3.5x 3.8x 3.8x
2014E (8,412 ) (3,194 ) 3.2x 3.5x 4.1x 4.0x
2015E (9,541 ) (3,419 ) 3.2x 3.4x 4.2x 4.0x
Moderate earnings and dividend growth. We forecast FY11/12-FY14/15E EPS CAGR of 6.9%, and therefore we believe SSE will be able to continue to deliver on its promise of sustained dividend growth. We forecast DPS to grow at a 6.7% CAGR FY11/12FY14/15E.
P/E analysis justifies a 12.35 price target

Our SOTP valuation for SSE is 12.65. However, as with Centrica, we think P/E analysis may give a clearer indication of where SSEs shares could trade on a 12-month view. Figure 56 shows that, over the past five years, SSE has on average traded at a -0.1 point Y+2 P/E discount to the Stoxx Utilities index, with a standard deviation of -0.8 to +0.6. Based on current consensus 2013E EPS, SSE is trading at 10.5x FY13/14E P/E, compared to an average Y+2 P/E for the Stoxx Utilities index of 10.0x this year (current Y+2 P/E is 9.9x). Similar to Centrica, given the deteriorating fundamentals of its generation and supply activities, we believe SSE should de-rate to at least its historical average discount of -0.1x, implying a target 2013E P/E of 9.9x. When coupled with our FY13/14E EPS forecast of 124.6p (2% below consensus), this implies a target price of 12.35 just a 2% discount to our SOTP valuation.
SSE has on average traded at a 0.1 point P/E discount to European Utilities
Figure 56: SSE average forward P/E premium/discount vs. Stoxx Utilities
2.0x 1.5x 1.0x 0.5x 0.0x -0.5x -1.0x -1.5x -2.0x Jan-06 Jan-07 Jan-08 Y+1
Source: Bloomberg, Barclays Capital.
Jan-09 Y+2
Jan-10
Jan-11
2 November 2011
46
Figure 57: SSE SOTP valuation (as at 31 December 2011)

m Generation - Coal Generation - Gas/Oil Generation - Renewable Generation - EUA Allowance Supply Generation and Supply (735 ) 120 9,197 104 4,192 12,879 p/share (78 ) 13 980 11 447 1,372 %EV -4% 1% 44% 0% 20% 61% EV/EBITDA - EV/EBITDA - CAGR 20122012E 2014E 15E 11.5x 10.1x 7.1%
Power Systems - SE Distribution Power Systems - SH Distribution Power Systems - SH Transmission Scotia Gas Networks Networks
2,441 1,158 642 2,332 6,573
260 123 68 248 700
12% 6% 3% 11% 31%
6.4x
5.5x
7.9%
Other - Gas Storage Other - Gas Production Other - Contracting, Connections and Metering Other - Telecoms Other - Property and Corporate Services Other
346 296 745 154 19 1,559
37 31 79 16 2 166
2% 1% 4% 1% 0% 7%
6.0x 6.0x 6.0x 5.8x
5.2x
3.1%
Corporate Costs Enterprise Value
(32 ) 20,980
(3 ) 2,235
0% -
6.0x 9.0x
7.8x
7.0%
Net Debt - Adjusted Net Debt - Scotia Gas Networks Net Debt - Hybrid Capital Net Pension Deficit Provisions Minorities Equity Value
(5,639 ) (1,569 ) (1,161 ) (553 ) (179 ) 0 11,878
(601 ) (167 ) (124 ) (59 ) (19 ) 0 1,265
2 November 2011
47
Figure 58: SSE Financial ratios and valuation multiples

Year ending 31 March EPS/DPS EPS - Recurrent (p/share) DPS - Total (p/share) 108.0 66.0 110.2 70.0 112.3 75.0 111.8 79.7 122.7 83.6 124.6 87.8 135.9 92.2 129.5 96.8 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Valuation Multiples P/E (x) EV/EBITDA - exc. Assoc (x) EV/EBITDA - inc. Assoc (x) EV/NOPAT (x) Dividend Yield (%) FCF Yield (%) P/BV (x) EV/IC (x) 12.0x 8.7x 8.3x 15.5x 5.6% 2.2% 2.4x 1.6x 12.0x 8.5x 8.1x 15.1x 5.9% -1.4% 2.3x 1.5x 11.0x 7.9x 7.5x 13.8x 6.2% 1.4% 2.2x 1.5x 10.8x 7.8x 7.5x 13.6x 6.5% 2.1% 2.1x 1.5x 9.9x 7.5x 7.2x 12.7x 6.9% 3.7% 2.0x 1.4x 10.4x 7.7x 7.3x 13.1x 7.2% 4.7% 1.9x 1.4x
Financial Ratios Dividend Payout Ratio (%) Adjusted Net Debt/EBITDA (x) ROE ROIC WACC Weighted Ave. Shares (mm)
Source: Barclays Capital, company data, DataStream.
61.1% 3.0x 32.0% 13.7% 883
63.5% 2.8x 33.3% 12.4% 922
66.8% 3.0x 25.0% 11.1% 7.0% 928
71.3% 3.2x 19.7% 10.7% 7.0% 938
68.2% 3.1x 20.5% 11.2% 7.0% 939
70.5% 3.2x 19.8% 11.0% 7.0% 941
67.9% 3.2x 20.4% 11.4% 7.0% 942
74.8% 3.3x 18.6% 10.8% 7.0% 944
Figure 59: SSE Segmental operating profit (m)

Year ending 31 March Power Systems - Scotland Power Systems - England Scotia Gas Networks Generation and Supply Other Businesses Unallocated Expenses Adjusted EBIT JV & Associate Tax/Interest Adjusted Operating Profit Growth (%) Margin (%)
2009 160 243 181 832 134 (9 ) 1,541 (168 ) 1,374 13.2% 5.2%
2010 159 257 184 896 140 (10 ) 1,626 (157 ) 1,469 6.9% 6.6%
2011 168 287 187 883 137 (9 ) 1,653 (198 ) 1,455 -1.0% 5.0%
2012E 199 292 200 892 164 (9 ) 1,737 (204 ) 1,533 5.4% 5.1%
2013E 243 327 215 975 181 (9 ) 1,932 (207 ) 1,726 12.5% 5.6%
2014E 264 357 210 987 189 (9 ) 1,998 (206 ) 1,792 3.9% 5.7%
2015E 298 386 214 1,076 190 (9 ) 2,156 (211 ) 1,944 8.5% 6.2%
2016E 273 295 219 1,146 187 (9 ) 2,112 (217 ) 1,895 -2.5% 6.0%
2 November 2011
48
Figure 60: SSE Income statement (m)

Year ending 31 March External Revenue Costs Associates - EBIT Adjusted EBITDA Depreciation and Amortisation Adjusted EBIT Associates - Interest Adjusted Net Finance Cost Adjusted PBT Associates - Tax Current Tax Effective Tax Rate (%) Minority Interests Hybrid Capital Adjusted Net Income Growth (%) Margin (%) 2009 25,424 2010 21,550 2011 28,334 2012E 29,020 2013E 29,719 2014E 30,135 2015E 30,265 2016E 30,618
(23,799 ) (19,771 ) (26,463 ) (26,996 ) (27,453 ) (27,762 ) (27,725 ) (28,111 ) 246 1,872 (330 ) 1,541 (128 ) (160 ) 1,254 (12 ) (289 ) 24.0% 0 0 953 4.5% 3.6% 264 2,043 (417 ) 1,626 (107 ) (229 ) 1,290 (16 ) (258 ) 21.2% (0 ) 0 1,016 6.6% 4.5% 299 2,170 (518 ) 1,653 (140 ) (203 ) 1,310 (23 ) (245 ) 20.3% 0 0 1,042 2.6% 3.6% 312 2,336 (599 ) 1,737 (144 ) (211 ) 1,382 (24 ) (262 ) 19.0% 0 (47 ) 1,048 0.6% 3.5% 327 2,592 (660 ) 1,932 (145 ) (266 ) 1,521 (26 ) (296 ) 19.0% 0 (47 ) 1,152 9.9% 3.7% 322 2,694 (696 ) 1,998 (145 ) (308 ) 1,545 (26 ) (300 ) 19.0% 0 (47 ) 1,172 1.7% 3.7% 326 2,866 (710 ) 2,156 (151 ) (328 ) 1,677 (25 ) (324 ) 19.0% 0 (47 ) 1,280 9.3% 4.1% 331 2,839 (727 ) 2,112 (156 ) (352 ) 1,604 (25 ) (308 ) 19.0% 0 (47 ) 1,223 -4.5% 3.8%
12.7 108.0 2.3%
134.0 110.2 2.0%
162.2 112.3 1.9%
105.8 111.8 -0.5%
117.3 122.7 9.8%
120.6 124.6 1.5%
130.3 135.9 9.0%
124.3 129.5 -4.7%
DPS - Interim (p) DPS - Final (p) DPS - Total (p) Growth - Ordinary DPS (%) Payout Ratio (%)
19.8 46.2 66.0 9.1% 61.1%
21.0 49.0 70.0 6.1% 63.5%
22.4 52.6 75.0 7.1% 66.8%
24.2 55.5 79.7 6.2% 71.3%
25.5 58.1 83.6 5.0% 68.2%
26.7 61.1 87.8 5.0% 70.5%
28.1 64.1 92.2 5.0% 67.9%
29.5 67.3 96.8 5.0% 74.8%
2 November 2011
49
Figure 61: SSE Cash flow (m)

Year ending 31 March Operating Profit Depreciation, Amortisation and Impairment Losses Change in Working Capital Changes in Provisions/Other Non-Cash Items Dividends from Associates Income Tax Net Interest Operating Cash Flow Capital Expenditure Free Cash Flow Acquisitions and Disposals Change in Equity Dividends Paid to Shareholders/Minorities Net Cash Flow Other Movements in Net Debt 2009 1,398 330 (1,218 ) (193 ) 40 (145 ) (259 ) (46 ) (1,280 ) (1,326 ) 82 480 (552 ) (1,316 ) (118 ) 2010 1,362 417 525 (90 ) 22 (239 ) (308 ) 1,689 (1,315 ) 374 (86 ) 7 (619 ) (323 ) 131 2011 1,354 518 324 (88 ) 82 (277 ) (194 ) 1,719 (1,444 ) 276 (275 ) 9 (514 ) (504 ) (95 ) 2012E 1,425 599 0 (88 ) 54 (236 ) (235 ) 1,520 (1,694 ) (174 ) 0 0 (736 ) (910 ) 0 2013E 1,605 660 0 (88 ) 60 (278 ) (240 ) 1,720 (1,538 ) 182 0 0 (784 ) (602 ) 0 2014E 1,676 696 0 (88 ) 58 (309 ) (255 ) 1,779 (1,515 ) 263 0 0 (822 ) (559 ) 0 2015E 1,830 710 0 (88 ) 57 (333 ) (282 ) 1,894 (1,426 ) 467 0 0 (865 ) (397 ) 0 2016E 1,781 727 0 (88 ) 57 (349 ) (300 ) 1,828 (1,231 ) 596 0 0 (908 ) (312 ) 0
Adjusted Net Cash/(Debt) Net Debt/EBITDA

(5,100 ) 3.0x
(5,292 ) 2.8x
(5,891 ) 3.0x
(6,801 ) 3.2x
(7,403 ) 3.1x
(7,962 ) 3.2x
(8,359 ) 3.2x
(8,671 ) 3.3x
Figure 62: SSE - Balance sheet (m)

Year ending 31 March Tangible Fixed Assets Intangible Assets Investments Cash/Marketable Securities Working Capital Assets Other Assets Total Assets 2009 7,232 977 937 296 6,026 2,301 17,769 2010 8,209 1,015 1,615 262 4,723 2,305 18,128 2011 8,518 973 1,925 477 5,286 4,003 21,181 2012E 9,634 952 1,979 448 5,286 4,003 22,300 2013E 10,534 930 2,039 426 5,286 4,003 23,217 2014E 11,374 909 2,097 377 5,286 4,003 24,046 2015E 12,112 887 2,155 310 5,286 4,003 24,752 2016E 12,638 866 2,212 202 5,286 4,003 25,206
(1,060 ) (4,336 ) (4,791 ) (348 ) (4,260 )
(904 ) (5,143 ) (4,389 ) (810 ) (3,761 )
(447 ) (5,160 ) (5,382 ) (848 ) (4,413 )
(447 ) (6,041 ) (5,269 ) (848 ) (4,509 )
(447 ) (6,621 ) (5,170 ) (848 ) (4,628 )
(447 ) (7,132 ) (5,081 ) (848 ) (4,722 )
(447 ) (7,461 ) (4,988 ) (848 ) (4,829 )
(447 ) (7,665 ) (4,903 ) (848 ) (4,899 )
(14,794 ) (15,007 ) (16,250 ) (17,113 ) (17,713 ) (18,229 ) (18,572 ) (18,761 )
Shareholders' Equity Minority Interest/Other Total Equity

2,977 (2 ) 2,975
3,125 (4 ) 3,121
5,201 0 5,201
5,457 0 5,457
5,774 0 5,774
6,086 0 6,086
6,449 0 6,449
6,714 0 6,714
2 November 2011
50
This page is intentionally left blank
2 November 2011
51
COMPANY SNAPSHOT NATIONAL GRID Income statement (m) EBITDA EBIT Pre-tax income Net income EPS (p) Diluted shares (m) Dividend per share (p) Margin and return data (%) EBITDA margin EBIT margin Pre-tax margin Net margin ROIC ROA ROE 2010A 4,291 3,121 1,974 1,421 50.2 2,476 38.5 2011E 4,906 3,600 2,473 1,751 51.7 3,374 36.4 2012E 5,071 3,638 2,545 1,781 49.9 3,549 39.3 2013E 5,533 3,970 2,696 1,887 51.9 3,614 40.1 CAGR 8.8% 8.3% 11.0% 9.9% 1.1% 13.4% 1.4% European Utilities
1-OVERWEIGHT 2-NEUTRAL 618p 680p NG/ LN
30.6 22.3 14.1 10.1 8.5 3.9 33.7
34.2 25.1 13.8 12.2 9.3 4.7 19.3
34.0 24.4 16.6 12.0 8.7 4.5 17.9
Average 35.7 33.6 25.6 16.4 12.2 8.7 4.4 17.6 24.3 15.2 11.6 8.8 4.4 22.1 CAGR 5.0% 5.5% 7.5% 36.7% NA 1.1% NA NA NA Average 12.1 8.9 12.3 -6.2 2.6 6.2 71.3 4.2 CAGR
Why 1-Overweight? NG benefits from diversification by activity (mainly transmission and distribution) and geography (UK and US). The dividend policy, together with growth in the regulatory asset base, positions NG as the most attractive investment opportunity within European regulated utilities, in our view. Upside case 720p We assume unchanged blended returns in the UK post RIIO introduction, a target ROE for US activities of 10%, an increase of 100bps in domestic RPI and a decline of 100bps in 10- year bond yields.
Balance sheet and cash flow (m) Net PP&E 36,994 Total net assets 36,153 Capital employed Shareholders' equity Net debt Operating cash flow Capital expenditure Free cash flow Pre-dividend FCF Valuation and leverage metrics P/E (x) EV/EBITDA (x) EV/EBIT (x) FCF yield (%) Price/BV (x) Dividend yield (%) Total debt/capital (%) Net debt/EBITDA (x) Selected operating metrics Dividend payout ratio Interest cover UK RAV (m) US Asset Base (m) Premium to RAV (%) 26,350 4,211 (22,139) 3,275 (3,176) (589) 99
37,961 37,596 27,769 9,069 (18,700) 3,454 (3,600) (968) (146)
40,177 39,797 30,020 9,976 (20,045) 3,031 (3,649) (1,632) (618)
42,862 42,468 32,741 10,746 (21,994) 3,389 (4,249) (1,950) (860)
Downside case
590p We assume a cut in the blended return on UK assets post RIIO of 200bps, an unchanged ROE for US activities, a decline of 200bps in domestic RPI and an increase of 200bps in 10-year bond yields.
12.3 9.4 13.0 -3.8 3.6 6.2 84.0 5.2
12.0 8.7 11.8 -4.6 2.3 5.9 67.3 3.8
12.4 8.9 12.4 -7.4 2.2 6.4 66.8 4.0
11.9 8.6 11.9 -8.7 2.1 6.5 67.2 4.0
865 842 742 765 742 642 665 642 542 565 542 442 465 442 342 365 342 242 265 18-Nov-10 31-Oc t-11 640p 680p (4.1%) 610p 590p (10.4%) (10.1%) 590p (-0.73%) (-4.14%) (-4.45%)
Down side side Down Case Case Price Price Target Target
670p 720p (9.0%) (16.9%) (16.5%)
Upsi Upsi de de Case Case
76.7 2.70 18,940 9,788 2.14
70.4 3.17 20,348 9,241 5.89
78.7 3.31 22,365 10,236 3.23
77.2 3.45 24,922 10,817
9.6%
3.4% 0.80 -28.0%
EBITDA (m) and ROIC

6000 5000 4000 3000 2000 1000 0 2010A 2011E 2012E 2013E EBITD A ROIC 10% 9% 8% 7% 6% 5%
Note: FY end March.
2 November 2011
52
NATIONAL GRID PROACTIVE ASSET MANAGEMENT STARTED

NG.L / NG/ LN Stock Rating
1-Overweight
Sector View
2-Neutral
Price Target
6.80
Price (31 Oct 2011)
6.18
For exposure to UK electricity transmission, our preferred play remains National Grid. The RIIO regulatory review, which will define new tariffs from April 2013, enters into its central phase in the second half of next year. Preparing for that, the company has already started to follow a strategy of asset rationalisation, which will result, in our view, in a cleaner structure and more focused business lines. In the medium term, we see two main drivers of performance for the stock: 1) the implementation a regulatory framework which should stimulate rapid RAV growth; 2) a financing strategy with ongoing asset rationalisation aimed at achieving the highest possible blended return on the companys invested capital. Our rating on National Grid remains 1-OW.
10.1%
RIIO will be something for next year

The ongoing review, which will regulate tariffs from 1st April 2013, will be finalised during the second half of 2012. What emerged from recent publications from National Grid and the regulator is that the system will require 30.7bn of new investments into networks. This could translate into very significant UK Transmission RAV growth. Figure 63: National Grids RAV evolution - Transmission
30,000 25,000 20,000 15,000 10,000 5,000 0 2012/13E 2014/15E 2016/2017E Gas
Source: National Grid, Ofgem, Barclays Capital
2018/2019E
2020/2021E
Electricity
We therefore expect Ofgem to create a balanced structure allowing companies to maintain attractive rate of returns and where future increases for customers will be compensated by effective improvements in the level of service. For this reason, we think that the base allowed return is just one, important but single, component of the equation and that the new RIIO system will have to be judged in its entire form, including incentives and transitional arrangements. Before year end, National Grid will face a small regulatory review; the rollover until March 2013 of the current framework. The final proposals will be out on 21st November and, as pointed out in our report Constructive TPCR4 Rollover, 2 August 2011, we believe it is the firm intention of the regulator to minimise regulatory changes; we therefore expect a broad confirmation of the structure, incentives and base return. In our model, we factor in just a small fine-tuning of the vanilla return for transmission activities, from the current 5.05% down to 4.75% on a change to the base risk free rate.
2 November 2011
53
US rate cases likely in 2012 as well

We expect constructive regulatory outcomes
Also in 2012, we anticipate that the company will file a general rate case in New York and Rhode Island for both Niagara Mohawk and Narragansett. These two subsidiaries constitute the US assets that continue to under earn their allowed returns. Management structure realignment by regulatory region and their $200 million cost cutting programme should both bolster regulatory relationships and show the intent of the company to do its part to keep cost of service reasonable. We believe this should provide a framework for constructive regulatory outcomes in both regions by 2013. However, if these regulatory outcomes are not satisfactory, we would not be surprised if the company began to think strategically about the long-term viability of its two under-earning US assets. That said, we continue to believe that a wholesale disposal of the entire US business remains off the table.
Now we see the company focused on asset rationalisation

NG has an ongoing asset disposal strategy
We believe National Grids strategy will continue to focus on asset rationalisation. Recently the company announced the disposal of OnStream, a small part of its metering business, for a total consideration of 274.3m, which pointed to solid implied multiples 19. In addition, the company has also disposed of non-core assets in the US. On 8 December 2010, National Grid sold Granite State Electric and Energy North in New Hampshire to Algonquin Power & Utilities for 178m, which represented a solid implied multiple of 11.9x 31 March 2010 EBITDA. Also, on 26 September 2011 the company sold Seneca-Upshur Petroleum to PDC Mountaineer for approximately 95m. Those two transactions, even if small, in our opinion support the groups intention to maximise implied IRRs in its portfolio of activities and we think this rationalisation process will continue with the aim to fund better returns assets with the proceeds.
We continue to be positive on the stock

We reiterate our 1-OW recommendation
We do not see a risk of a short-term need of capital and we believe that the RIIO system can offer the right mechanisms to stimulate investments without diluting shareholder returns. Among regulated utilities, we think that National Grid represents an attractive equity story where future investments will fuel growth and the company, uniquely in the European market, is in a ramp-up phase of its capex rather than living in more mature markets.
Figure 64: Pan-European regulated energy utility valuation multiples

Company Rating Target Price Current Potential up Price /(downside) 2011E Enagas National Grid Red Electrica REN Snam RG Terna Average 1-OW 1-OW 2-EW 2-EW 1-OW 1-OW 16.50 6.80 39.00 2.50 3.80 3.15 14.27 6.18 34.98 2.10 3.52 2.77 15.6% 10.1% 11.5% 18.9% 7.9% 13.9% 13.0% 6.1% 6.1% 4.9% 8.2% 6.8% 7.6% 6.6% Div. Yield 2012E 6.6% 6.4% 5.7% 8.3% 6.9% 6.9% 6.8% 2013E 7.0% 6.5% 6.6% 8.5% 7.2% 6.9% 7.1% TSR 2011E 21.8% 16.2% 16.4% 27.1% 14.7% 21.5% 19.6% Dividend Payout Ratio 2011E 60.0% 74.9% 60.5% 85.2% 85.2% 114.8% 80.1% 2012E 60.0% 76.2% 60.5% 82.3% 82.3% 99.4% 76.8% 2013E 60.0% 93.1% 60.5% 83.0% 83.0% 96.2% 79.3%
Source: Barclays Capital, Thomson Reuters. Shares prices as at 31 October 2011.
19
We estimate an implied EV/EBITDA March 12 of 7.3x.
2 November 2011
54
Valuation Methodology and Risks

European Utilities Centrica (CNA LN / CNA.L) Valuation Methodology: We value Centrica using a SOTP based on divisional DCF models. We assume a 5.0% long-term BGRE EBIT margin and marked-to-market commodity prices. We use a post-tax nominal WACC of 7.7%, reflecting Centrica's relatively low gearing. However, given challenging market conditions, we believe Centrica is likely to trade at a discount to SOTP. Based on its historic valuation range relative to the Stoxx Utilities, we believe Centrica should trade on 9.5x 2013E P/E. This is how we derive our 2.60 price target. Risks which May Impede the Achievement of the Price Target: The outlook for Centrica's earnings and valuation is dependant on a number of factors, most notable the evolution of energy prices. In the short-term, a fall in wholesale energy prices would improve Centrica's competitive position, though in the long-term it would reduce valuation in our view. A more benign regulatory environment would allow Centrica to earn a higher than expected retail margin. On the downside, growing competition, slowing economic growth or regulatory risk may inhibit future growth both in the UK and US. Drax Group (DRX LN / DRX.L) Valuation Methodology: We value Drax based on a DCF valuation model. We assume a 7.6% post-tax WACC and mark our commodity price assumptions to market. Our central scenario assumes that Drax converts to 50% biomass co-firing by 2015, with biomass costs at 2.2x coal on average. However, we also assign a 15% probability to Drax converting to 100% biomass by 2020. In combination, this leads to a 6.75 price target. Risks which May Impede the Achievement of the Price Target: Drax is a risky stock and several uncertainties remain, which could trigger both upside and downside risks: 1) future ROC bandings or feed-in tariff support; 2) the level of capex required to convert the plant; 3) technical uncertainties, including the impact of conversion on thermal efficiency; 4) capital structure; 5) biomass availability and price; 6) the overall level of power prices. Drax's DCF is highly sensitive to these assumptions. SSE (SSE LN / SSE.L) Valuation Methodology: We value SSE using a SOTP based on divisional DCF models. We assume a 5.0% long-term retail margin and markedto-market commodity prices. We use a post-tax nominal WACC of 7.0%. However, given challenging market conditions, we believe SSE is likely to trade at a discount to SOTP. Based on its historic valuation range relative to the Stoxx Utilities, we believe SSE should trade on 9.9x 2013E P/E. This is how we derive our 12.35 price target. Risks which May Impede the Achievement of the Price Target: SSE's power generation business is exposed to spark spreads, dark spreads and absolute power prices. These could drive both upside and downside to the shares. SSE's network assets are exposed to UK RPI, and have upcoming regulatory reviews which could alter returns. SSE's balance sheet is relatiev stretched which could impede future investments. SSE's UK supply business is at risk should aggressive price competition break out.
Source: Barclays Capital
2 November 2011
55
ANALYST(S) CERTIFICATION(S)
We, Peter Bisztyga, Monica Girardi, Julie Arav, Susanna Invernizzi, Harry Wyburd, Daniel Ford, CFA and Ross A. Fowler, CFA, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
IMPORTANT DISCLOSURES CONTINUED

For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 1-212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analysts account. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. Primary Stocks (Ticker, Date, Price) Centrica (CNA.L, 31-Oct-2011, GBP 2.97), 3-Underweight/2-Neutral Drax Group (DRX.L, 31-Oct-2011, GBP 5.43), 1-Overweight/2-Neutral National Grid Plc (NG.L, 31-Oct-2011, GBP 6.18), 1-Overweight/2-Neutral SSE (SSE.L, 31-Oct-2011, GBP 13.44), 2-Equal Weight/2-Neutral Materially Mentioned Stocks (Ticker, Date, Price) E.ON (EONGn.DE, 31-Oct-2011, EUR 17.51), 3-Underweight/2-Neutral Enagas SA (ENAG.MC, 31-Oct-2011, EUR 14.27), 1-Overweight/2-Neutral Endesa S.A. (ELE.MC, 31-Oct-2011, EUR 17.26), 1-Overweight/2-Neutral Enel SpA (ENEI.MI, 31-Oct-2011, EUR 3.41), 1-Overweight/2-Neutral Fortum (FUM1V.HE, 31-Oct-2011, EUR 17.63), 2-Equal Weight/2-Neutral Gas Natural SDG SA (GAS.MC, 31-Oct-2011, EUR 13.49), 2-Equal Weight/2-Neutral GDF Suez SA (GSZ.PA, 31-Oct-2011, EUR 20.52), 3-Underweight/2-Neutral Iberdrola SA (IBE.MC, 31-Oct-2011, EUR 5.26), 3-Underweight/2-Neutral International Power Plc (IPR.L, 31-Oct-2011, GBP 3.38), 1-Overweight/2-Neutral Red Electrica Corporacion SA (REE.MC, 31-Oct-2011, EUR 34.98), 2-Equal Weight/2-Neutral Redes Energeticas Nacionais (RENE.LS, 31-Oct-2011, EUR 2.10), 2-Equal Weight/2-Neutral RWE (RWEG.DE, 31-Oct-2011, EUR 30.95), 3-Underweight/2-Neutral Snam Rete Gas SpA (SRG.MI, 31-Oct-2011, EUR 3.52), 1-Overweight/2-Neutral Terna SpA (TRN.MI, 31-Oct-2011, EUR 2.77), 1-Overweight/2-Neutral Verbund (VERB.VI, 31-Oct-2011, EUR 21.04), 2-Equal Weight/2-Neutral Other Material Conflicts GSZ.PA: Barclays Capital is acting as advisor to GDF Suez SA on the proposed joint sale of 10% of GDF Suez LNG Liquefaction SA and of a 30% minority stake in GDF SUEZ E&P International SAS to China Investment Corporation Barclays Capital is acting as advisor to GDF Suez SA on the proposed sale of the 22.5% stake in Elgin Franklin Oil & Gas Limited owned by GDF SUEZ to ENI S.p.A Guide to the Barclays Capital Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the sector coverage universe). In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 32 November 2011 56

Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating 1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12month investment horizon. 3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Sector View 1-Positive - sector coverage universe fundamentals/valuations are improving. 2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. 3-Negative - sector coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "sector coverage universe": European Utilities Centrica (CNA.L) Enagas SA (ENAG.MC) Fortum (FUM1V.HE) Iberdrola SA (IBE.MC) Red Electrica Corporacion SA (REE.MC) Snam Rete Gas SpA (SRG.MI) Verbund (VERB.VI) Distribution of Ratings: Barclays Capital Inc. Equity Research has 1916 companies under coverage. 44% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 56% of companies with this rating are investment banking clients of the Firm. 41% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 49% of companies with this rating are investment banking clients of the Firm. 12% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 35% of companies with this rating are investment banking clients of the Firm. Guide to the Barclays Capital Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Barclays Capital offices involved in the production of equity research: London Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Capital Japan Limited (BCJL, Tokyo) So Paulo Banco Barclays S.A. (BBSA, So Paulo) Hong Kong Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) 2 November 2011 57 Drax Group (DRX.L) Endesa S.A. (ELE.MC) Gas Natural SDG SA (GAS.MC) International Power Plc (IPR.L) Redes Energeticas Nacionais (RENE.LS) SSE (SSE.L) E.ON (EONGn.DE) Enel SpA (ENEI.MI) GDF Suez SA (GSZ.PA) National Grid Plc (NG.L) RWE (RWEG.DE) Terna SpA (TRN.MI)

Toronto Barclays Capital Canada Inc. (BCC, Toronto) Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg) Mexico City Barclays Bank Mexico, S.A. (BBMX, Mexico City) Taiwan Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) Seoul Barclays Capital Securities Limited (BCSL, Seoul) Mumbai Barclays Securities (India) Private Limited (BSIPL, Mumbai) Singapore Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)
2 November 2011
58
Centrica (CNA LN / CNA.L)

GBP 2.97 (31-Oct-2011) Rating and Price Target Chart - GBP (as of 31-Oct-2011)
Stock Rating 3-UNDERWEIGHT Currency=GBP Date Closing Price 3.19 3.09 3.03 3-Underweight Rating 1-Overweight
Sector View 2-NEUTRAL
Price Target 3.70 3.20 2.95
3.75
18-Jul-2011 10-May-2011 21-Jun-2010
3.50
3.25
3.00
2.75
2.50
2.25
2.00
Jan- 09
Jul- 09 Closing Price
Jan- 10
Jul- 10
Jan- 11 Rating Change
Jul- 11
Target Price
Link to Barclays Capital Live for interactive charting
Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Centrica in the past 12 months. Barclays Bank PLC and/or an affiliate trades regularly in the securities of Centrica. Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Centrica within the past 12 months. Centrica is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. Centrica is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We value Centrica using a SOTP based on divisional DCF models. We assume a 5.0% long-term BGRE EBIT margin and marked-to-market commodity prices. We use a post-tax nominal WACC of 7.7%, reflecting Centrica's relatively low gearing. However, given challenging market conditions, we believe Centrica is likely to trade at a discount to SOTP. Based on its historic valuation range relative to the Stoxx Utilities, we believe Centrica should trade on 9.5x 2013E P/E. This is how we derive our 2.60 price target. Risks which May Impede the Achievement of the Price Target: The outlook for Centrica's earnings and valuation is dependant on a number of factors, most notable the evolution of energy prices. In the short-term, a fall in wholesale energy prices would improve Centrica's competitive position, though in the long-term it would reduce valuation in our view. A more benign regulatory environment would allow Centrica to earn a higher than expected retail margin. On the downside, growing competition, slowing economic growth or regulatory risk may inhibit future growth both in the UK and US.
2 November 2011
59
Drax Group (DRX LN / DRX.L)

Stock Rating 1-OVERWEIGHT Currency=GBP Date 19-Jan-2011 Closing Price 3.95 3.26 3.80 Rating 3-Underweight 2-Equal Weight 3-Underweight
Price Target
6.5
25-May-2010
6.0
30-Mar-2010
3.20
5.5
5.0
4.5
4.0
3.5
3.0
Jan- 09
Jan- 10
Jul- 10
Jan- 11
Jul- 11
Target Price
Rating Change
Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Drax Group in the past 12 months. Barclays Bank PLC and/or an affiliate trades regularly in the securities of Drax Group. Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Drax Group within the past 12 months. Drax Group is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. Drax Group is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We value Drax based on a DCF valuation model. We assume a 7.6% post-tax WACC and mark our commodity price assumptions to market. Our central scenario assumes that Drax converts to 50% biomass co-firing by 2015, with biomass costs at 2.2x coal on average. However, we also assign a 15% probability to Drax converting to 100% biomass by 2020. In combination, this leads to a 6.75 price target. Risks which May Impede the Achievement of the Price Target: Drax is a risky stock and several uncertainties remain, which could trigger both upside and downside risks: 1) future ROC bandings or feed-in tariff support; 2) the level of capex required to convert the plant; 3) technical uncertainties, including the impact of conversion on thermal efficiency; 4) capital structure; 5) biomass availability and price; 6) the overall level of power prices. Drax's DCF is highly sensitive to these assumptions.
2 November 2011
60
National Grid Plc (NG/ LN / NG.L)

7.50
Stock Rating 1-OVERWEIGHT Currency=GBP Date 19-May-2011 Closing Price 6.22 5.31 5.88 5.90 5.09 6.49 1-Overweight Rating
Price Target 6.80 6.40 6.20 6.15 5.80 6.74
7.25 7.00 6.75 6.50 6.25 6.00 5.75 5.50 5.25 5.00 4.75 Jan- 09 Jul- 09 Closing Price Jan- 10 Jul- 10 Jan- 11 Rating Change Jul- 11
19-Jan-2011 18-Nov-2010 15-Nov-2010 26-Jul-2010 19-Apr-2010
Target Price
Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of National Grid Plc in the previous 12 months. Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from National Grid Plc in the past 12 months. Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from National Grid Plc within the next 3 months. Barclays Bank PLC and/or an affiliate beneficially owns 1% or more of any class of common equity securities of National Grid Plc. Barclays Bank PLC and/or an affiliate trades regularly in the securities of National Grid Plc. Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from National Grid Plc within the past 12 months. National Grid Plc is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. National Grid Plc is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We value National Grid with a SOTP approach. UK regulated activities are valued with an RAV-adjusted approach, US assets with EV/EBITDA multiples differentiated by businesses and not regulated activities at DCF or multiples as appropriate. Net debt is included at book value. Risks which May Impede the Achievement of the Price Target: National Grid financials and valuation are based on current tariffs. A change to the regulatory framework might affect our estimates. Other Material Conflicts: Barclays Capital, the Investment Banking Division of Barclays Bank PLC, is acting as corporate broker to National Grid Plc.
2 November 2011
61
SSE (SSE LN / SSE.L)

Stock Rating 2-EQUAL WEIGHT Currency=GBP Date Closing Price Rating
Price Target
24
22
20
18
16
14
Jan- 09
Jul- 09
Jan- 10
Jan- 11
Jul- 11
Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of SSE in the previous 12 months. Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from SSE in the past 12 months. Barclays Bank PLC and/or an affiliate beneficially owns 1% or more of any class of common equity securities of SSE. Barclays Bank PLC and/or an affiliate trades regularly in the securities of SSE. Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from SSE within the past 12 months. SSE is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. SSE is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We value SSE using a SOTP based on divisional DCF models. We assume a 5.0% long-term retail margin and markedto-market commodity prices. We use a post-tax nominal WACC of 7.0%. However, given challenging market conditions, we believe SSE is likely to trade at a discount to SOTP. Based on its historic valuation range relative to the Stoxx Utilities, we believe SSE should trade on 9.9x 2013E P/E. This is how we derive our 12.35 price target. Risks which May Impede the Achievement of the Price Target: SSE's power generation business is exposed to spark spreads, dark spreads and absolute power prices. These could drive both upside and downside to the shares. SSE's network assets are exposed to UK RPI, and have upcoming regulatory reviews which could alter returns. SSE's balance sheet is relatiev stretched which could impede future investments. SSE's UK supply business is at risk should aggressive price competition break out.
2 November 2011
62
DISCLAIMER: This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It is provided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays Capital, nor any affiliate, nor any of their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject to change, and Barclays Capital has no obligation to update its opinions or the information in this publication. The analyst recommendations in this publication reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any other interests, including those of Barclays Capital and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays Capital recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. This communication is being made available in the UK and Europe primarily to persons who are investment professionals as that term is defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professional experience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such persons. Barclays Capital is authorized and regulated by the Financial Services Authority ('FSA') and member of the London Stock Exchange. Barclays Capital Inc., U.S. registered broker/dealer and member of FINRA (www.finra.org), is distributing this material in the United States and, in connection therewith accepts responsibility for its contents. Any U.S. person wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Barclays Capital Inc. in the U.S. at 745 Seventh Avenue, New York, New York 10019. Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit otherwise. This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer and member of IIROC (www.iiroc.ca). To access Barclays Capital policy on the dissemination of research reports, please go to http://www.barcap.com/Client+offering/Research/Research+Policy. Subject to the conditions of this publication as set out above, Absa Capital, the Investment Banking Division of Absa Bank Limited, an authorised financial services provider (Registration No.: 1986/004794/06), is distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. This publication is not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary Services Act, 37 of 2002, or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person or entity wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Absa Capital in South Africa, 15 Alice Lane, Sandton, Johannesburg, Gauteng 2196. Absa Capital is an affiliate of Barclays Capital. In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research reports are distributed to institutional investors in Japan by Barclays Capital Japan Limited. Barclays Capital Japan Limited is a joint-stock company incorporated in Japan with registered office of 6-10-1 Roppongi, Minato-ku, Tokyo 106-6131, Japan. It is a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services Agency of Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143. Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the Hong Kong Monetary Authority. Registered Office: 41/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong. This material is issued in Taiwan by Barclays Capital Securities Taiwan Limited. This material on securities not traded in Taiwan is not to be construed as 'recommendation' in Taiwan. Barclays Capital Securities Taiwan Limited does not accept orders from clients to trade in such securities. This material may not be distributed to the public media or used by the public media without prior written consent of Barclays Capital. This material is distributed in South Korea by Barclays Capital Securities Limited, Seoul Branch. All equity research material is distributed in India by Barclays Securities (India) Private Limited (SEBI Registration No: INB/INF 231292732 (NSE), INB/INF 011292738 (BSE), Registered Office: 208 | Ceejay House | Dr. Annie Besant Road | Shivsagar Estate | Worli | Mumbai - 400 018 | India, Phone: + 91 22 67196363). Other research reports are distributed in India by Barclays Bank PLC, India Branch. Barclays Bank PLC Frankfurt Branch distributes this material in Germany under the supervision of Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin). This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd. This material is distributed in Brazil by Banco Barclays S.A. This material is distributed in Mexico by Barclays Bank Mexico, S.A. Barclays Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Barclays Bank PLCDIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence. Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a branch of a commercial bank incorporated outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi (Licence No.: 13/952/2008, Registered Office: Al Jazira Towers, Hamdan Street, PO Box 2734, Abu Dhabi). Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory Authority (QFCRA). Barclays Bank PLCQFC Branch may only undertake the regulated activities that fall within the scope of its existing QFCRA licence. Principal place of business in Qatar: Qatar Financial Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar. This material is distributed in Dubai, the UAE and Qatar by Barclays Bank PLC. Related financial products or services are only available to Professional Clients as defined by the DFSA, and Business Customers as defined by the QFCRA.
This material is distributed in Saudi Arabia by Barclays Saudi Arabia ('BSA'). It is not the intention of the Publication to be used or deemed as recommendation, option or advice for any action (s) that may take place in future. Barclays Saudi Arabia is a Closed Joint Stock Company, (CMA License No. 09141-37). Registered office Al Faisaliah Tower | Level 18 | Riyadh 11311 | Kingdom of Saudi Arabia. Authorised and regulated by the Capital Market Authority, Commercial Registration Number: 1010283024. This material is distributed in Russia by OOO Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License #177-11850-100000; Dealer License #177-11855-010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21. This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the Monetary Authority of Singapore. For matters in connection with this report, recipients in Singapore may contact the Singapore branch of Barclays Bank PLC, whose registered address is One Raffles Quay Level 28, South Tower, Singapore 048583. Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed at 'wholesale clients' as defined by Australian Corporations Act 2001. IRS Circular 230 Prepared Materials Disclaimer: Barclays Capital and its affiliates do not provide tax advice and nothing contained herein should be construed to be tax advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing of the transactions or other matters addressed herein. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor. Barclays Capital is not responsible for, and makes no warranties whatsoever as to, the content of any third-party web site accessed via a hyperlink in this publication and such information is not incorporated by reference. Copyright Barclays Bank PLC (2011). All rights reserved. No part of this publication may be reproduced in any manner without the prior written permission of Barclays Capital or any of its affiliates. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information regarding this publication will be furnished upon request.
US08-000001

BarCap - UK Big 6 Utilities - 20111102

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

BarCap - UK Big 6 Utilities - 20111102

Enviado por

Direitos autorais:

Formatos disponíveis

EQUITY RESEARCH

UK UTILITIES Time for a price war?

Barclays Capital | UK Utilities

Barclays Capital | UK Utilities

Barclays Capital | UK Utilities

EUROPEAN UTILITIES COMPARABLE ANALYSIS

1.6% -14.8% 16.9% 18.9% 3.1% 4.3% 7.2% 2.8%

1-OW 1-OW 2-EW 2-EW 1-OW 1-OW

16.50 6.80 39.00 2.50 3.80 3.15

14.27 6.18 34.98 2.10 3.52 2.77

Barclays Capital | UK Utilities

THE SHIFTING BALANCE OF POWER

The changing shape of the UK utilities sector

Figure 1: Energy consumption per household (kWh)

Barclays Capital | UK Utilities

31 10 3 (2 ) (8 ) (16 ) 0 (7 ) (14 ) RWE IBE SSE "Big 6" Average (7 )

Slow Demand Decline Scenario

We see two principal risks to our UK utilities industry views:

Fast Demand Decline Scenario

Barclays Capital | UK Utilities

Barclays Capital | UK Utilities

Barclays Capital | UK Utilities

THE HOUSEHOLD ENERGY DEMAND SQUEEZE

Drivers of falling energy demand

Figure 4: Trends in domestic energy consumption (TWh)

Gas (Left Axis)

Electricity (Right Axis)

Barclays Capital | UK Utilities

Barclays Capital | UK Utilities

Figure 7: Real household disposable income (bn)

Figure 8: Energy consumption per household (kWh)

6.4% 5.7% 4.9% 880 4.6% 840 800

Barclays Capital | UK Utilities

THE GREAT GENERATION PROFIT TRANSFER

The transforming power generation market

Figure 9: New CCGT in the UK merit order, 2011E (GW)

Potential New Build

Source: Barclays Capital.

Barclays Capital | UK Utilities

Figure 12: UK opted-out plant estimated closure dates

Feb-11 Average Oil

at Ave. Last 12mth Load

at Ave. Last 24mth Load

Barclays Capital | UK Utilities

Figure 13: Forecast UK wind and biomass capacity (GW)

Figure 14: Biomass in the UK merit order, 2015E (GW)

20.0 15.0 10.0 5.0 0.0 2010

Other co-firing Drax

Oil GT CCGT CHP Nuclear Hydro Coal Biomass Co-Firing

Source: Barclays Capital, DECC RESTATS.

Figure 15: Forecast total UK annual power demand (TWh)

20% 10% 0% 2009

2014/15E Base Low

2011E 2013E 2015E Derated Margin Headline Margin

2017E 2019E No-Wind Margin

Source: Seven Year Statement 2010, National Grid.

Source: Barclays Capital.

Barclays Capital | UK Utilities

Figure 17: UK seasonal forward clean spark spreads (/MWh)

Figure 18: UK seasonal forward clean dark spreads (/MWh)

1st Winter 2nd Winter

1st Summer 2nd Summer

1st Winter 2nd Winter

1st Summer 2nd Summer