Earnings Call: H1 2021

Jul 22, 2021

Ladies and gentlemen, welcome to Centrica's twenty twenty one Interim Results Q and A Call. My name is Haley, and I will be the operator for your call this morning. I will now hand you over to Chris O'Shea, Group CEO. Please go ahead. Thank you, Elaine. Good morning, everyone. Thank you very much for joining us for the Q and A session for the 2021 interim results. I'm sure you've all seen the presentation read the release. I thought we would just go straight into taking your questions. I'm joined here by our group CFO, Kate Wingroze and our Chairman, Scott Bueh, available as well. So with that, I'll ask Hailey to give us the first question. And the first telephone question is from the line of Mark Freshney of CF. Please go ahead. Hello. Good morning. Thank you for taking my questions. Firstly, regarding the EM and T business, Kate. The LNG profits are fairly low, as you acknowledged, after two or three good years, which is surprising given you've got more infrastructure now and given the dispersion in global gas prices. So I was just curious as to why the performance in the LNG element is not I mean, is it derisking in that business ahead of getting it for sale? And secondly, I guess this would also be for you, Kate, on the pension fund negotiations. Clearly, hugely sensitive, and I'm sure you pushed the envelope by going and disclosing the GBP 1,500,000,000.0 mark to market. But when is it likely that we can expect a resolution? Is it something that comes June next year? Can we expect something before then? Thank you. Mark, hi. Thanks very much for your questions. Let me start with the EM and C on LNG. So a lot of this is actually a 20 story as opposed to a 21 story. I mean, you're quite right, there's more capacity. We've got the Cheniere contract. But remember that kind of starts, as Chris talks about it behind the eight ball, it's a negative priced contract. But actually structurally coming into 2020, we were actually very well placed for what turned out to be a falling market in LNG. We set up, you know, kind of the structural dynamic over a couple of years coming into the year, and it so happened that we were very well placed for that change in price construction LNG and profited from that accordingly in 2020. So what is happening in 2021 is more a dynamic of a non repeat of what was a rather exceptional performance in LNG as opposed to anything else. With regards to the pension negotiation, quite right, it is sensitive. As we said, there's fifteen months from the March to agree the negotiated settlement. I will say that we're working very constructively with the scheme trustee chairs and the trustees as a whole for those three teams. So we're making really good progress, but it is going to be something that could take another year. Clearly, I'm hoping that it won't. We'd all, both from a trustee and from a company perspective, look forward to resolution on both the technical deficit and the payment profile that would accompany that. But I'm not able to commit to exactly when that would happen. But we're moving along as swiftly as we can. The next question is from the line of A. J. Patel of Goldman Sachs. Please go ahead. Good morning. I had a couple of questions, please. Could you just help me with the definition of the technical deficit? The reason in terms of on a roll forward basis. The reason I ask the question is that we had a 1,400,000,000.0 pension deficit back in '18, and we're rolling that forward to now to one and a half billion by the June. But there's quite considerable pension deficit payments this half. So I just wondered how do they get incorporated Do they just get subtracted and then it's just discount rates that are explaining an increase and then they're offset by that number? I just want to make sure that my understanding of the calculation is right. And then the second piece is on the E and P side. It seems like you're making progress. What sort of options are you considering? What are the what are the things that hold you back in regards to the audience that you potentially could sell this to? And what are you doing to maybe help with that? Just want any more color there would really help. Thank you. All right. So hi, Adrienne. I think I'll take the first question and then pass on to Chris for the second question. So I mean, basically, the dynamics with regards to the change in the pension valuation is effectively we value both the liabilities and the assets separately. Likewise, we have made some significant contributions into the pension, but that was in large part due to the pension strains, which effectively increased the liability to increase it and then take it off again when you pay that down. So that's the dynamic around that. And then the primary factor that changes that valuation is the movement in real guilt rates. We've effectively kept all other assumptions entirely consistent with the technical valuation that was closed for the March 2018 period. Clearly, those assumptions when it comes to membership behavior, governance, etcetera, etcetera are all what's being reviewed at the moment now. So it's important to note that what I'm talking about really is based on those '28 assumptions. But broadly, you're right. When we pay money in, then all else being equal, the deficit should come down. I think the thing that you're probably missing just a little bit is with regards to the And A. J, on E and P, it's really around we are committed to exiting this business, but we have to do it in the right way. We have the value and the decommissioning liabilities are dealt with appropriately. So I would you can bear with us. I'd far rather tell you what we've done than tell you our plan because obviously there's a commercial lens to this. Okay. Thank you very much. The next question is from the line of Deepa Venkateshwaran. Please go ahead. Thank you. I was going to ask you ask a question about the restructuring of E and P, which I guess you're not going to answer. So my question really is that you said that there's a CMD that you're outlining in November. So what are the broad areas that you would seek to cover? And would you clarify the dividend policy by then and also outline whether there are other noncore divisions like LNG, etcetera, that you might still consider selling in the future? So Deepa, on that, I mean, we'll lay out our long term strategy and our financial framework and financial structure at the Capital Markets Day. And similarly, in terms of the E and P question, I always think if you preannounce disposals of disposal candidates, you often harm your ability to get the best price. So I think I don't think there'll be too many surprises. We're clear the future for us is net zero. Hence, the reason that we'll get out producing hydrocarbon. It's very difficult to invest in hydrocarbon production and have a future in net zero. But in terms of other, I part of would rather be it to be done on what we do to simplify the portfolio. And as you can see, the disposal of direct energy, that's huge disposal, which is also the balance sheet. You'll also notice we have a few smaller disposals. So we sold a small gas fired power station in Peterborough, sold the old British Gas headquarters and sold our data management business to bring in £50,000,000 So we look at big things, we look at small things. But everything that we do is about simplifying the business, about reducing volatility in earnings, and it's about making sure that we're progressing past it. And that's the framework that we assess pretty much all of our decisions on. Thanks. Chris, the line was just a bit unclear. What was the third priority? I couldn't quite hear that. Simplify, reduce volatility and what was the last thing? And does it help us on helping our customers, our most countries on the path to net zero, so to decarbonizing energy system, because that is the future for us, huge opportunity. Okay, great. Thank you. The next question is from the line of Dominic Nash of Barclays. Please go ahead. Good morning. Thanks for allowing me questions. I have two, please. The first one, could you just give us in around what the accounting rules are for the revaluation of your E and P asset, the GBP $366,000,000 uplift or the write back? And are you obliged to do the lower of value or book on this? And does that imply that the actual value of that asset is up $366,000,000 if your assumptions are correct? Or is it purely an accounting sort of irrelevance? The second question I've got is on power prices and gas prices. Obviously, they've roofed it in the last few months. What do you think the impact of what you're seeing are going to be on residential bills and on the retailers out there to sort of pass through this volatility without getting sort of financially distressed? And the follow on question from this is, is that carbon is obviously a part of the rise in this. Do you see any carbon intervention coming from the government either on reducing the supply and demand imbalance, reducing the carbon tax supplement or maybe even going down the continental route of carbon windfall recovery? You. Hey, Dominic. That's second question. Let me take the second question first and then Kate will talk to you about the E and P revaluation. I think probably we assure you that it's just an almost irrelevant noncash business reflecting price changes. Regarding the do we expect any intervention on carbon? I think the government and regulators are working really hard to figure out what the pathway is to net zero and what the best way is That will include things like carbon certificates, potentially carbon taxes, policies, etcetera. So I wouldn't want to second guess that. They're quite busy with some other things. In terms of the volatility in gas and power prices and the impact I think the question was about the impact on suppliers as well as individuals. It's because we hedge, and so we hedge based on our forecast demand and prices that are down. And for companies other companies that hedge, then your exposure is to get your volumetric forecast from then if you're overhead but the market goes up, you're in a good place because you're selling your excess hedges in the market. If you're under hedged and the market goes down, you're in a good place. But you can really have some payment if you're over hedged in the falling market. Remember, that's what we saw last year in when COVID hit in the B2B space primarily because you're selling as volumes in the market is falling, so you're and you're pushing if you're a big supplier, you're pushing that fall down. I think in terms of suppliers, we don't have fuel line of sight. So we hedge and a number of other suppliers hedge. Those that don't hedge will be in a world of pain at the moment. Those that do hedge, it's not I'm not saying it's pleasurable, but you hedge to take risk out. And the hedges that are in the money. Obviously, there's a danger that some smaller suppliers that may have hedges in the money, then the temptation if you're struggling in other parts of the business, the temptation is to cash those hedges in, which is a little bit like burning the furniture to stay warm. So short term gives you some relief. Long term is not a thing to do. So I think the volatility in the market, the responsible suppliers manage that volatility as we do by hedging the book. Therefore, as an upward sloping curve means the prices go up, you're not really too worried about the in day volatility in your supply. But if you're unhedged, I can't imagine what it must be like to be an energy retailer over the past two months and not be hedged. It must be an incredibly stressful journey, and it would undoubtedly put a lot in the finance. So with that, I'll hand over to Kate about the question on E and P revaluation. So Dominic, thank you very much for a good gnarly accounting question. There's quite a lot of detail on this on the R and S. Briefly, the way we deal with this, the recoverable amount is the higher of value in use and what we term as the fair value cost of disposal. And this is assessed on a field by field basis. So basically, if the recoverable amount is seen as higher than the book value and we prepare the field, then we have to write it back. The process of assessing that is pretty mechanistic, and we've moved and we've been fairly consistent on this for the last few years that we reported to looking at third party curves and looking at the peers reported within that set of third party curves and also looking at the liquid curves that we can see in assessing according to that. A big driver behind this write back is liquid curves that we have at the moment. But as I say, it's a pretty mechanistic calculation, which is why you see large ups and downs. Last year, it was mostly down, but far up. You. Sorry, can I follow-up quickly, Chris, on the so thank you both, by way? But can I just follow-up on the first part of my question is that do you think we're going to see significantly higher retail bills coming through as well? Have you sort of quantified what the scope will be? I think our expectation of the price cap is set with observable forward market prices. I think we expect it to be up about GBP 10 a month. I think that's the numbers, I think about GBP 120 a year or so. So it's not insignificant, but that would be for the Austrian will announce that, I think, August 2, and it affects October 1. There's roughly a term in a month on a dual fuel bill. The next question is from the line of Chris Leibart of Morgan Stanley. First question just on operating profit seasonality, actually, like operating cash flow. Just wondering whether you can give a sense for first half versus second half SKU in the current environment. And you had a strong performance in first half with your free cash flow across the group. Do you expect that to continue into the second half? And I guess any comments that you could make, that would be terrific. And then second question, we've seen some policy documents released in the last couple of days by Bayes. Just wondering whether you can comment on a couple of policy changes that might be coming your way in retail. Firstly, just on the collective switch policies and your views on those. And today, it looks like there's a move to address ECO and some of the market distortions that we're seeing. So some comments there would be terrific as well. Thank you. Okay. So thanks, Chris. Let me take the question on the policy docs. I'll touch on seasonality and Kate can correct any mistakes. To make them switch, we argue against that quite strongly. We don't believe that that's the right thing. And it I mean, ultimately, what a selective switch says is the government, the regulator wants to make decisions on behalf of consumers. And I'm not sure that there's any thesis on which to do that. So we believe that you should have a competitive market with even markets. And I collected which I think was completely and utterly against that. And I think you could argue that it's a bit insulting to consumers. So that's not something that we think is not something we've supported in the past. It's something that we would argue against to go and see that as being necessary. And I think if you look at the vast majority of retail energy buyers in The U. K. Making a loss, hard to see what the justification for a collective switch would be unless the regulator is looking to deepen the losses in the market, and that would be a very, very odd decision. You mentioned that another policy and what was the other policy you wanted me to comment on, sorry? It was the consultation on the ECO program to remove the distortion for small suppliers. Yes. So the more important this gets us take it down from, I think, probably two fifty thousand suppliers, it's stepped down to 150,000 and the proposal now to take it down to 1,000. What we argue for is competitive market level playing field. And therefore, the fact that basically what this would do is require every supplier to even encourage that because we think it is right. So there's no comment on scheme in and of itself. However, then you've got scheme, you have to apply it to everybody. So we think that's very positive. There's also a consultation issued buy off GM, I think, on the supplier license and even the requirement to ring send to customer deposits. We not only support that, but we have been encouraging that because it is the nice lead in to the cash flow thing. Customers tend to pay a lot of pay by direct debit over the year. And in the first half, when your profits are up, you're not recovering all the cash that you would otherwise cover because you're buying more commodity because your customers spend more during the summer months, you get more cash from them than you get into the winter. And so if you've got customers that paid for a product that you haven't delivered and you spend that money, that's quite serious. So we think it is absolutely right that anybody's paid customer deposit regularly could be regulated like financial services companies are, so we welcome that. On the cash flow, I would say that if anything you would expect in our downstream business, the cash flow would be slightly negatively impacted in the first half. So taking top of those guidance is a nice step, just to give you guidance, but he can talk about it. But one thing I'm glad to pick incredibly strong free cash flow generation. And one of the reasons is we've got a CFO who is laser like focused on cash. We've got a CEO who is quite interested as well. And our Chairman is also quite interested, so we are all focused on cash because you can't pay the bills with property, pay the bills with cash. And we're quite disciplined on our investment criteria as well. So we would like to invest behind good ideas, but we're only going to invest whether it is a good idea. So I think one of the things misunderstood or underappreciated by people is incredibly strong cash generative attributes of this business. With that, Kate can give you a view in terms of seasonality and cash flow. Sure. So I mean, I think what Chris has talked to is correct. Mean, when you look at the dynamics of seasonality, you have cash more weighted to the front half and the back half. And then from an operating profit perspective, differs by business units. And the energy is probably the most obvious one where we tend to have profits more weighted to funds in the back half. I think a couple of things that I'll just point to note in the look forward on cash steady as Chris has already mentioned. The dynamics in working capital and so far as they impacted by COVID remains a dynamic of uncertainty. But the other thing just to be aware of is in a period of high commodity prices, particularly in energy that tends to consume more working capital because if you think about what that means is that you're paying for or we're paying for the commodity and assessing it for the month in arrears. And our customers take longer over the winter period for those on direct debit too. The other things as well just to point out that have been positive is margin cash. So again, we tend to be net buyers in the market. That means in a rising commodity environment that cash is cut into us as margins whereas a bit earlier for the last couple of years where commodity prices have fallen, we've had margin placed without the counterparty. So that's been a swing factor and it's very uncertain as to how that's going to manifest by the end of the year given it's so commodity price dependent. And then the other things that I'll just remind us of is we talked to pensions earlier, pension settlements will come through as well at some point in time. We still got to agree their interest to pay. So those the other sort of key movements that will come through. But all in all, I would expect to waiting more to the front than to the back for cash. Thanks very much. The next question is from the line of Jenny Ping of Citi. Please go ahead. Hi, good morning. Three questions from me, please. Just following on from that cash flow question from Chris. I just wanted to know whether there are any lumpy one offs or any funnies in the 1H cash flow that we shouldn't think about or think about taking out for the second half? Secondly, just in terms of the services business, clearly, this year's the strike and COVID has had an impact. But I was also hoping for some commentary around as you look forward into 2022 when the new FCA rules kick in, in terms of the ban on auto renewals, how you think that would likely to impact the churn of the business and the profitability of margin of the business? And then thirdly, just going back on to Spirit, I wonder if, Chris, you can say whether you have thought about listing standalone spirits rather than through a disposal process and whether there are any quirks in there which effectively stops you doing the the standalone listing. Clearly, is an option that some of the other utilities are thinking about with other parts of their business. And I just wondered whether that's something that you've explored. Thank you. Good morning, Jenny. Thanks very much. Let me take those questions in reverse. I'll then start with Spirit and touch with the FCA comment, and then Pete can talk about any lumpy things in the cash flow. So on Spirit, there's no restriction for listing the business, but there's I think it's highly unlikely we would do 90.04% for it. So I wouldn't hold your breath on that one. On the SME, on all of the new, their retention rate in services in the first half was 79.5%, and I'm quite disappointed in that. Normally, it's north of 80%. So my drive on this makes sure that we have a service the customers want to buy. COVID has really impacted us 2020 and COVID impacted again in the first half of this year. And obviously, the industrial action impacts what I'm really focused on is to get the service in a place where not only retention goes up, but we can actually grow the customer numbers. So I wouldn't want to be complacent and say any changes wouldn't have an impact, but I'd like it either the service is in a place the customers are coming to us and we can see the retention rate as well. So don't anticipate any impact there, but we do have work to do in terms of improving customer service. And with that, ask Kate to take the question on cash flow. Jenny. So I mean, and honestly, nothing particularly major that really comes to mind. I mean, tax, we got a couple of rebates, particularly with regards to Norway and Spurs. That's probably one thing. I've talked about the pension payment that we made, but then I'd also highlight that there's probably a couple of lumpy things to come. So I mean, the key things that I would call out here, pensions that we talked about as a potential, albeit unknown, other things like the renewable certificates that Chris has spoken to in terms of the supply contributions in August, so that's another lumpy thing to do. But no, nothing in particular. Thank you. Sorry, if I may, just to follow-up, Chris, on Spirit. Highly unlikely, is that because there is the need to add additional cash into a separate business because of the decommissioning liability? Is that why? Just trying to understand why highly unlikely. And then just on the FCA, when you talk about retention rates and aiming to continue to have that high, presumably, the no price walking will hit margins as a result if you want to keep the retention rate high. Second question, so we tend not to do what you would call price walk. And we do give customers sometimes introductory offers, but we don't then auto renew and walk them up in prices. So that's not something in part of our business model. So we want we tend to find within the other materials, we also have our own essentially fulfillment. It's not just a settlement policy. So what we tend to find is you get people good service, then to say you don't get people good service, and they tend to go somewhere different. So the key thing for us is not really start off with incredibly low prices and walking customers up. It's about giving customers very good service. That's why the focus is on making sure the service is in the right place, the things that we can control so that customers are complete for the service that they get. On Spirit, it's not about having to inject cash because I don't think it's the best way to realign value from that business. As you know, the reserves to production life of that is shorter than an average E and P business. And I think the best way to get value from assets like that are probably through private sales rather than to go out and list something. Maybe something's got lots of growth opportunities, lots of growth projects that are ongoing, then that's the thing that's traditionally quite easier to list with you, example, Harvard Energy, risk back into Premier. I don't think the Spirit has that same profile, but the real thing is that IPO is a lot an awful lot of effort, and I don't think it's the best way to get the value. I don't think we need go down that route. Okay. Thank you very much. The next question is from the line of Elcin Mamadov of Bloomberg Intelligence. Please go ahead. Thanks for taking my questions. My first one is on your customer losses. I mean the number of active U. K. Suppliers keeps declining, yet you keep shrinking your customer base. When do you expect to stabilize your customer numbers and potentially even grow it? So that's question number one. The second one is on Nuke's Dungeness B, it was announced that it will be shut seven years earlier that planned. Is this a one off event or is it a more widespread issue? And what does it mean for your plans to eventually sell your nuclear stake? And the final question is on your Energy Services business. I mean, of your peers, notably Angie, is divesting it. Do you still think it's a good business to be in and why? Thank you. Okay. Thanks, David. So let me take The U. K. Customer losses in Energy Services and then Kate has responsibility for the Nuclear Businesses Shield. And so that one thing just at the back of your mind is, well, I think some of the plants are closing earlier than current expectations. The life has been extended quite a bit. So if you look at when the expected closure dates were originally constructed, I think they've gone on a bit longer than we. So look at Energy Services, we think it's very good to our home Energy Services is very good. Suspect, on here, you're talking about the B2B Energy Services. I think this is something where, in many companies, you have to focus on what you're good at and get better at it and do more of it. We have good business there. In Centrica Business Solutions, we're not yet at the level of profitability, but we've got I think we've got a very strong business there that can get to breakeven and then beyond profitability. We don't have infinite patience with it, and we've got a lot of commercial focus to it in terms of how you go after your audit and how you manage your cost base. But this is a business that we see real potential and others may not see the same potential in their business. If we got to a point where we thought this didn't give a material profit contributor to the group, then we would stop the activity. So are no sacred cows in the company, but we see the possibility of this in a good business. On UK customer losses, we've been quite clear that there are number of things that we need to do. We're making progress. So one of them is we need to have a more flexible system and a better way of serving our customers, which is why we've launched our new software as a service platform. We've now got two and fifty thousand customers on that. We have 100,000 at the start of the year. We're testing and learning, and we're confident now we can do migration taking customers directly onto the platform. We've migrated customers from our existing system, and we've migrated five customers to Navios and Simplicity Energy. So we are testing how we can do that. We're increasingly confident and get the read. We also need to have the cost to serve in the right place. The cost to serve has come down by 7% in this year, so first half twenty one versus full year 2020. Just bear in mind that within that, there is GBP2 of fuel running costs. And the fuel running costs are going to increase as we go forward as we bring more customers onto our new system, and we still have cost of the legacy system. So again, we've got to balance the need for speed on this, but also with the need to do this very responsibly to give our customers a good experience. To get cost of service in the right place, need to give your customers better service. We see some really good indicators in that, but I'll never be happy. And I can assure you, none of us will happy. Kate will be happy. Our Chairman, Scott will be happy until we see customer numbers going in the right way, but we have to be realistic. It doesn't just happen overnight, but it's not something that we are waiting passively to see. We're actively working this, but we've got to be the right customers, and we've got to also see how the market shakes out as well. So although we've had a few supplier failures, we still have an awful lot of unprofitable suppliers in the market, and we'll see how that pans out in the world. Okay. Thanks a lot. That's very encouraging. Thank you. So if I just pick up the question on nuclear, I mean, as you'll be aware, Dungeness hasn't been for a couple of years. It was a difficult decision that we made with our partners to close the station. But Dungeness is quite a unique construct of a station. I think it's quite a long time to just come online in the first phase, and there were other stations started to build later and finished earlier. So it's always been a little bit tricky. And so hence, the decision to close it early. In terms of read across, I mean, there are a number of AGRs, as you'll be aware, in the speech. So the key thing that both the regulator and EDS monitor very closely is any issues with cracking. I mean, that's just something that remains under constant review. But there's sort of no update certainly on any of those dynamics there as yet. And Incisible is a different completely different technology that is used while it's on outage at the moment, and that's been slightly extended. As per the remit, we expect that it will come back in August as the latest information that we have. In terms of what this means from a sales perspective, I mean, I think we've talked about how we're thinking about holding nuclear in the portfolio, and Chris has talked to some degree with regards to how we feel about the fit of nuclear and its carbon credentials. But more broadly, if I look at the nuclear portfolio for us, there have been a number of uncertainties that we've been working through with EDM versus regards to reliability of the fleet and also with regards to the agreements with Bays. And the latter has been resolved, which we view as very positive. And as EDF and ourselves work towards a fleet that will be smaller over time as these stations reach their natural end of life, there's very key activity going on within the nuclear business to ensure that we manage the cost accordingly. Thanks a lot. Thank you. The next question is from the line of Bartek Kubicki of Societe Generale. Please go ahead. Good morning. I would like to discuss three issues, if you don't mind. Firstly, on rough and the conversion to hydrogen storage. I think this is quite a CapEx intensive program. I saw some numbers about billion pounds or more. I wonder what do you think your sort of contribution to this could be in terms of amount of money potentially to be spent? And I guess this could be one of the ways how you can spend your excess capital following the disposal of direct energy? And then also on this, what kind of sort of regulations or subsidies are you already, if discussing with the government, whether something like sort of regulations of this on the RAP basis would be something of interest. And then consequently, if you get RAP regulations or rough regulations and you get whatever 2%, 3%, 4% return, if this is something which is of your interest as well. So maybe we can elaborate on this one. Second one, a bit shorter on the legacy contract, are you actually considering selling it and closing it earlier? So also one of the possibilities to sort of use your, in my opinion, excess capital you are having right now on your balance sheet? And thirdly, on heat pumps, where do you think this could sort of kick start really in terms of installations in The U. K? And whether you think this could be a game changer for your services business as well and basically given your engineer fleet, whether you could be a clear winner here? Thank you very much. Okay. Thank you very much. Great questions. And actually, the rough question and Efom's question are linked, then Kate can talk about slightly contract. But I'll warn you in advance, we're obviously not going to talk about what we'd like to do commercially with the contract. So look, on rough, the number I think has been quoted as in a very, very, very high level estimate, non engineering estimate is about 1,600,000,000.0 pounds to convert rough to hydrogen storage facility. That's about 300,000,000 pounds to basically pull all of the steel out of the holes in the ground and re debt and sell new steel because these are old wells. You need to have them running for quite some time. There's another 300,000,000 400,000,000 on what we call the topside. So that's like the processing kit on top of the platform. So basically, the legs are fine, but you need some new kit on top. And then there's another £700 £800,000,000 or so, which is about what's called cushion gas. And you need something at the bottom of the reservoir. And so that's where you get the full amount of money now. Maybe you don't need cushion gas would be meeting. So if the price of meeting is £0.80 a thermometer is just low, a lot more than the price is £0.30 a therm. So there's a huge amount of uncertainty there. And so I would just speak to those numbers. They're very, very rough ballpark numbers. What we said to the government is, first and foremost, The U. K. Has the ability to store 1% of its annual gas demand, ignore hydrogen. So 1% of annual gas demand in Germany is 31 We'll say the government is actually the values in government are quite worried about that because it puts you at the mercy that we don't have enough domestic gas to meet demand. It puts you at the mercy of supply shocks, and you see prices. LNG doesn't come here. You see prices moving as we do at the moment. So just first and foremost, security supply makes sense to have storage plus is a great storage facility, was a great storage facility. Then you see actually we think of hydrogen. We need to do some engineering. We didn't want to test the hypothesis, but we're fairly confident it can be quite good. So let me talk to the government and say, well, what can I support the union? Because I don't think people are going to spend this amount of money on a merchant basis, on a special basis, something that may or may not work. So we talk about the two main areas you could have for this would be, if you say, a regulatory asset based model or a cap and floor regime. And they both they work in a relatively similar way. But cap and floor, obviously, you can go down slightly more upside. You've just got a bit more of fairway. And so it's really down to, I think, government to see what they think they're comfortable with. I think one of the tricks on it, I think, is if you wouldn't try and use existing frameworks rather than try and propose something new. And that's something that's a bit different to be about us today than us in the past, rather than have some deep intellectual exercise as what could work. It's never worked before it takes longer. So if you can point to and there are cap and floor regimes and there are RAF regimes. So we're just simply pointing to two possibilities to make it work. We haven't had any contribution from government. It's really got to be done to them. And then when you get to what level of return so you mentioned 2%, I mean I've struggled to lend the government money at 2%, so I think that would be quite easy. I think the recent V02 or the recent V02 settlement was 4.7%, 4.8%. If you think the risk free rate is two ish percent, and that's lower than our cost of capital just now, it is truly risk free, then if you consider it because obviously your cost of capital is determined by your overall asset mix. So all I would say is that it has to be attractive for us. How much would we put in? I think the real question for us just now is can we treat value from an asset that we've got? And the second order question is how much do we want to invest in it? We want to invest all of it? Do we want to invest some of it? Do we want to have a project finance vehicle? Do we want to leverage it? So I think there's loads and loads of questions, the first thing we've got to do is find out whether actually there is an investable option there. And if there is, then we'll figure out. And I can assure you that we've got I'm looking at as I'm looking at Kate, it's now easy to get money out of Kate, so it has to be pretty good returns for us to invest in that. But really, it's about taking an option. The question on heat pumps, and I think the reason I think the linkage is that the solution to The UK's decarbonization issue has to include hydrogen and heat pumps. It cannot be pure electrification, and it will not and cannot be purely hydrogen. 85% of U. K. Homes are attached to the gas infrastructure, gas network. We have a network that works really well. We need to spend some money to adapt it. But bear in mind that The U. K. Ran on hydrogen up until the mid-70s. Town gas is 55% hydrogen. And we've had a hydrogen economy before, and we can be a hydrogen economy again. There's about 6,000,005,500,000, 6,000,000 homes in The U. K. That cannot They should have heat. The heat pumps cost about 4x three to 4x as much to install and about 40% more expensive to run. So there's a cost implication there. The solution has got to be both. But for us, it's a great opportunity. Not heat pumps over hydrogen, but heat pumps and hydrogen because the installation of a heat pump is something that we are very well pleased to do. We have about 1,000 heat pumps this year. We're already doing it for trial and hybrid heat pumps. Do it through social housing. We're the trial and hybrid heat pumps with our colleagues in West Midlands. So that's a heat pump with a very small gas boiler so that you can get some really hot water. You probably don't want it right now, but you might want to for that. So we are doing that at the moment. So we see huge opportunity. I think the thing to bear in mind, e pumps are not new technologies. So France is installing 400,000 a year. The safety government said they want to get to 600,000 a year by 2026. That's a massive, massive offer. But there will be an issue with customer acceptance, customer adoption. There's quite a bit of disruption in the moment when you get one. That's a long way to see. We are in a great position, Centrica, that the decarbonization of the energy, the net zero transition is something that is a huge opportunity for us. And it will be a combination. It has to be a combination of electricity and gas, the heat pumps and hydrogen. Both of those present great opportunities for us. There are some nuances in terms of how you drive the change, but both of us have said there are more opportunities. I'm quite excited about the future. And we continue to work with government regulators to point out what we think is the right thing for the customer. We have to see this in the customer's eyes, and we'll continue to push that. And increasingly, you'll see us more representing our customers' view. So rather than representing just company view, it's really what's So with that, I'll let Kate tell you why we won't discuss what we're going do with the gas asset group contract. So I think Chris has set me up for a very short answer. I mean fundamentally, the gas asset book finishes in 2025, not specific to the gas asset book, but we look at all of our contracts with our portfolios as to what is the right to the special thing to do and the gas asset. And we have a follow-up question from the line of Mark Freshney of CS. Two follow ups. Firstly, on within The U. K. Nuclear fleet, I agree the U. K. Government's agreement to take the assets once they're defueled is a big positive because it cuts out the middleman and some of the risks of decommissioning and recovering cash from, what, a government or a fund that hasn't got any money. But regarding the reactors when they're defueling and once they've shut down, and we can see another couple of shutdowns, I think, next year, the date's already on remit. Are those reactors going to carry operating cost? And will that weigh on the profitability of The U. K. Nuclear fleet? And just secondly, within EM and T, I think there was a tacit acknowledgment from your predecessor Kate a year ago that Centrica was looking at divesting parts EM and T and particularly the LNG and follow-up press speculation. Can is that something that's feasible? Can you talk about whether that's still under consideration? So Mark, it's Hamir. Let me take maybe the EM and P question and then we can touch on the nuclear question. Any good business keeps its entire portfolio under review. What we've got in EM is a really good business. And I think probably what you're referring to was the LNG business. I wouldn't if we had a time again, we wouldn't have the senior contract. It's not a great contract. However, we've got a really good team managing LNG, the business I've been about for many, many years. I wouldn't claim to be an expert. And if I understand it well and I'm comfortable with it, I'm very comfortable with the portfolio that we've got in EMP, very comfortable with the team that we've got. And they do question earlier, although there's a reduction in profit, I don't think we've disclosed separately, the LNG was profitable in the first half of the year. We started behind the eight ball, so we have got a really good team that started the contract that is out of money. And they have to work bloody hard to get the contract. Last year, they did an unbelievable job. This year, they did just an incredible job. So I'm very comfortable with what we've got there. But then it's our job is to create value for our shareholders. So we don't have a for sale sign up above business. If somebody serious wants to come and talk about parts of our business, then we could well have a conversation. And I actually I worry more than nobody wants to talk about partial businesses. It means it's not desirable. Would love it if people were looking enviously at parts of our business. Not to say we would get rid of it, but that would be a sign of a high quality business. But Luke, hopefully, answers your question on that and give you the lowdown on mute. So Mark, just in terms of Newkering, quite right. So Hunterston is this point that our due to close in January, July '20 effectively. Hunterston is on its final six month production run. Hinckley is on its second final production run. In terms of I think your question is around look forward, really in terms of how we think about nuclear. In the current year, we weren't able to really benefit from the power prices because we're hedged, but also because of the outages and the timing of the outages earlier in the year, means that hedges that were put in place needed to be bought back in order to make that good again. So if I look forward into the things that we'd be monitoring would be price and the price at which we're hedging also benefits from depreciation as the Dungeness exposure has been decided earlier on. The other thing important to be aware of as well as just cost operating costs, and I think I've talked this a little bit earlier in the Q and A. EDF are leading on a cost strategy. We're very alert to the risks of cost stranding within the Nuclear business, and there is a program in place where we're seeking to Okay. Thank you. The next question is from the line of Verity Mitchell of HSBC. Please go ahead. Good morning, everyone. I just got a couple of questions, and apologies if they've been answered already. One is just about retiring debt. And you mentioned in the statement that you're actively looking at that. So, obviously, post the the pension settlement. But do you see that as being NPV positive? And should we be thinking that that's something that's quite likely? And then I just wanted to come back to software as a service. I know they've seen some comments about it already, but I think my simple question is, why are you not migrating more customers more quickly onto this? Is there a is there a constraint? And should we expect a big acceleration of that as with some of your competitors who are using these lower cost platforms in the future, say, the next six to twelve months? You. Verity, thank you very much for the questions. So on the migration, you could migrate incredibly quickly, but you have to be careful that you get it right. So I prepare for us to test and learn, test this in cohorts, find out what the pain points are, fix them before you aggressively migrate. I can't comment on what others have done, but I can comment on other things that I've done in previous companies and intend to the system migrations, the impact in hasty can repent of weather. So you've got to make sure that you get it right, and that's the most important thing. Now it doesn't take a rocket scientist to figure out if you migrate at the rate of 150,000 in six months, this is a ten plus year project, it's not a ten year project. You will see it be nonlinear migration. The key thing really that we get this and we get it right. Maybe I'll hand it over to Kate on the question of debt. The way I've always thought about debt retirement is never NPV positive. It's always NPV neutral. Now it can be earnings positive because effectively, if it's private note, you have to have a make whole payment. If it's a public note, you have to buy it on the market. So I mean, effectively, you pay the net present value of the future delta between the current interest rate. So rarely will it ever be a net to be net present value positive, you have to find arbitrage opportunity in the market, and you suggest it for the bond markets. Okay. So that's the way I would always think about it, but it's far better than this. We'll give you our view on that. Thanks, Chris. I mean with regards to debt, we do have significant amount of proceeds of outstanding 3,000,000,000 to $4,000,000,000 Where we have debt that's holding due, then we're choosing not to refinance that, that's the economic way of doing it. I mean, the thing really that we're also just looking at is what are the potential make whole costs that we need to outlay in terms of cash. And from a bond perspective, everybody is looking for us to redeem these bonds at a discount, which is good, I guess, from the perspective that our credit is holding. So I think this is something that will be under review, I mean, as the balance sheet efficiency would always be under review. But I wouldn't look at it as being anything imminent. And this concludes our question and answer session. I would like to turn the conference back over to Chris O'Shea for any closing comments. Thanks very much, Haley. So just to say, thanks very much, everybody, for taking the time to watch the presentation to give us such good questions. I mean just to wrap up, lots of moving parts, but stable profits, stable earnings. In many ways, a tough first six months of the year, some of the operational issues we've seen, tough six months with the industrial action. But you can see from some of the operational metrics, we're seeing movement going in the right direction. So it's far too early to declare victory. But I am incredibly optimistic with the progress that we're making and about the opportunities that the net zero transition will afford to Centrica. We're incredibly well placed, capital light. And so there's a lot of work to do, but there is a huge market opportunity there. And we've got great people, and I think that they are starting to believe. Again, I'm sure that you all noticed our employee engagement was incredibly low level, higher than it was last year at higher than it was the year. You think of all the change our people are going through, that is quite something. So we're still not where we want to be, but things are starting to move in the right direction. Steve, thanks very much. Really looking forward to seeing all of you at the Capital Markets Day that we'll have on the November, where we'll be able to lay out more clearly the future strategy and the financial framework of the group. Thanks again. Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Goodbye.