Earnings Call: H2 2020

Feb 25, 2021

Good morning, everyone. I'm delighted to be joined by our group CFO, Kate Ringrose and our Chairman, Scott Weeway, for the question and answer session. And I'm sure you've all had a chance to look at the results and to look at the presentation. So I would suggest that we dive straight in to take your questions. So Emma, if you could let people know how to do that, and we'll get going. So thank Your first question today is from the line of Alex Leng of UBS. Please go ahead. Hi, good morning. Yes, Alex here from UBS. I have three questions from me, if possible, please. Just first, you obviously are not giving guidance for 2021, but you have flagged 100,000,000 to €120,000,000 of new negatives today, which would be a quarter of your operating profit for the continuing business. But then you also state potential restructuring savings coming through. I just thought it might be useful to start if you could walk through a bridge of the various parts that you think could offset the new negatives. And do you think there are enough offsets in total for continuing EBIT to rise in 2021? I thought I'd start by trying with that. Then just coming on to the Spirit disposal process, the language is the intention remains to sell the assets, And I just can't help but wonder whether this is sort of softer language than it's been used in the past, especially in light of the sort of quite strong recovery in commodity prices since the disruption last year. And I guess also you've now had about six months or so to talk to the market and establish it with interest. I'm just wondering if there's anything you could share around that process with us. And then third and finally, I'm aware it's quite a sensitive topic and it's probably quite difficult to answer. Just with the ongoing industrial action, there are various headlines and numbers around canceled appointments, backlogs, etcetera. Is there anything you can share with us regarding the potential implications? Are we seeing anything coming through customer numbers or satisfaction levels at this point? Thank you. Okay. Alex, thank you very much for that. Let me take the question on Spirit and on the industrial action, and then I'll ask Kate to talk you through some of the moving parts. I would applaud you on your attempt to give you guidance in a slightly different way. Kate will talk you through some of the things we've spoken about, but I think there is a lot of uncertainty, which is obviously why we're not looking to give guidance. On Spirit, I mean, intention is absolutely to exit Spirit Energy. You're right, commodity prices have recovered, which is really quite good, but you also know that the move to net zero, the decarbonization of the economy, means there are fewer people that are in the market for these types of assets. So there's no signal to take in terms of the wording. What I prefer to do is to tell you when we've done things rather than to to necessarily tell you what we're we're going to do. So I wouldn't read anything into that. Our our key focus is to get the portfolio where we want it, but it's not part of that portfolio and make sure that we get the best value that we possibly can for the assets. But we also look forward to when we can focus more on the core businesses. On the industrial action, so there's a number of questions you asked there. We measure our Net Promoter Score for engineers and it's substantial. It's in the 70s. Net Promoter Score, as you know, how many people say they like you versus how many people say they don't like you, so promoters less detractors. It's usually up in the 70s for engineers. That's probably in the 60s at the moment. So we see a little bit of an impact, but not a huge amount. In terms of some of the numbers that are out there, when we entered into the lockdown first time, so what seems like a long time ago but less than a year ago, we postponed a huge amount of work because we weren't allowed to do it. So things like service visits, annual service visits were deemed to be nonessential. We postponed them, but we caught up with them. Now in the numbers last year, to the extent we didn't complete all of the annual services is we give customers a refund for that part of the contract at £65. That there's about £7,000,000 or so cost in last year for that. So just over a 100,000 customers either said they actually didn't want us to go into their house because of COVID or that we would struggle there. That's about 7,000,000 cost in there. What we did when we entered the lockdown that we're in at the moment is so early this year, we can actually we're permitted to do annual service visits. But one of the things we're trying to do is to make sure that by the layer in the organization, colleagues have more of a voice. It's easier for me, the fewer layers for me to go through to talk to them. I picked up in talking with our colleagues that they were nervous actually going into houses for what they deemed to be non essential work for two reasons. One is, obviously, there's a personal issue for them and they go home to their families every night. The second thing is if you go in and doing six, seven service visits a day, or ideally eight service visits a day, then they were worried that they could end up spreading coronavirus. So we took the decision to be slightly stricter than the government guidelines and we postponed again annual service visits. I think we've postponed, I said this at the parliamentary cycle committee earlier this year, 230,000 or so, 240,000 service We've postponed them but we will perform those service visits within three months of the lockdown being lifted on our assessment that it's safe to do so. That's the big impact on customers but it's about keeping them and our colleagues safe. In terms of the impact of the industrial action, we're prioritizing our elderly and vulnerable customers. But undoubtedly, when you have a number of your engineers on strike, it does impact service. So when we've seen that over, it's got into a pattern in the last little while of Friday, Saturday, Sunday, Monday. And obviously, there's less demand at the weekend. But when we see that we've probably got a backlog, which is not a large number, and we clear that within a day. So if the strike finishes in the Monday, we have that cleared by the Tuesday. But the service levels have held up really quite well and it is regrettable that we have this industrial action, but I would note that the vast majority of our staff have signed up to new terms and conditions and the dispute remains with one union and we've actually been in talks with ACAS over the past month or so, which does demand an element of confidentiality. But I'm encouraged by the fact that we're able to get into these talks and I remain committed to, if we can find a way to have a negotiated collective settlement so that we can move forward. I mean, one of the things that we've been able to do with our new terms and conditions is increase recruitment. So we've recruited 50 apprentices over the last two years. We're now in the market. We're going to have 1,000 new apprentices by the end of next year. We've got 5,000, 6,000, 7,000 applications just now. That's what our new conditions allows us to do. It allows us to recommit to a direct labor model. It is painful. The impacts manageable just now, but I don't like the impact on our colleagues. I don't like the stress that they've got through it, but I'm really hopeful that we find our way through that. And with that, maybe I could ask Kate to take you through the moving parts that we discussed this morning for 2021. No problem. Hi, Alex. So let me start with what we know and talk about it from what are the upsides that we know. So firstly, the restructuring benefits. We've talked about being in excess of $100,000,000 And I think you'll hopefully see in the 2020 results that there's a meaningful cost improvement fall through that we're seeing in our OpEx numbers, and we expect that to come through again next year as the significant restructure that we did in 2020, those benefits largely roll into 2021. So that's one. The other area we anticipate is improvements in the loss situation in CVS and CHS, and commodity prices have improved. So those are kind of more known as they are today, upside. With regards to the known downside, so the big ones there being eco and also we talked about wide gate availability and also just where we are on strike, which is likely to be a bit of a downside going into 2021. The other area that is less is more unknown, so weather, we assume normalization of weather. It was warm in 2019. So if you have a normalization of weather in 2020, that is an upside. What we don't know is what the impact of COVID will be in full. So and that's particularly in regards to business volume consumption and the bad debt situation. We don't know in full what the strike impact is going to be, and the other unknown is trading performance. So that's kind of how kind of I hold it as a relatively balanced situation on the norms and the on what we know on the ups and the downs, but a few kind of factors that we don't know how they're going call out as yet. Great. Thank you very much. Really appreciate that. Maybe just, Chris, very shortly, just as a follow-up, but just on your point about clearing some backlog potentially by sort of Tuesday or so following the strength of the weekend. Is there a cost associated with that? Or is it sort of very efficient of operations to sort of get back in line? Well, I suppose it depends how we do it. If we do it with our own staff, then there's no additional cost. But there there will be an there will be an impact of the strike on the bottom line this year, undoubtedly. But we also had the the the second beast in the East. And and so that that also, if you recall, we had that in 2018, and that had a bit of an impact on our results as well. So so there will undoubtedly be be an impact, but my focus is on as in moving us forward, hopefully, with a collective agreement with with the one union that is still outstanding with and we get back to doing what we do best. Got it. Thank you. The next question comes from the line of Ahmed Farman with Jefferies. Please go ahead. Yes, morning. Thank you for taking my questions. A few from my side. I just wanted to ask if you could tell us the impact on the continuing EPS from the allocated cost that was removed from Direct Energy in 2020? And is that an additional year on year sort of positive moving part that we should have on top of the factors that you have in Slide 15? Or is that already covered in the restructuring benefits? And secondly, could you talk a little bit about sort of the technical pension deficit, where it stands? It would be helpful just to understand where it stands today on a sort of mark to market basis and give us a bit more specifics around the timeline of the negotiations with the trustees. And just finally, I think in the sort of the prepared sort of prepared, webs webcast, you had a comment about margin improvement in British Gas Energy. I just want to see if you could give a bit more color around that. Putting eco costs aside, where do you see that margin in 2021? What do you see as sort of the medium term outlook? What can be sort of achieved in the context of restructuring in a more competitive environment? You. Good morning. Amit, thanks very much, and good morning. Let me try and touch on the margin improvement in British Gas, which will be more qualitative than quantitative and then pass on to Kate for the technical pension deficit. And I'll touch on the restructuring, but Kate will give you more detail on that. So we've got the margin improvement. Obviously, as we take costs out and nonproductive costs, operating costs, and you'd expect that to fall through to the margin at the bottom line. But rather than give a prediction on the margin, you can see that they're they've been under pressure. You know that the allowable margin from the price cap is 1.8% plus an allowance from the fishing operator, but it's about 3% tops. Now we are the only company at the moment, as far as we can see, that's making a profit. So forgive me if I don't tell you what I think the margin will be, but we are committed to there are a lot of things we can improve in that business and we're committed to making those improvements and driving the margin higher, given our customers hopefully better prices as well. On the continued impact or the impact on EPS from the cost with the direct energy, it's a bit of both. You asked, is that added on to the benefit that we stated or is it part of the restructuring? So it's in the numbers that Kate will talk to you about and that we mentioned this morning, but it's not simply that if you take out direct energy, these costs fall away. So obviously we have costs that are allocated to different parts of the group and the bigger the group, then the smaller an allocation of business gets. So with the disposal of Direct Energy, that's taken into account in terms of the restructuring, taking out lots of bureaucracy, lots of the levels, the overhead cost. And so it doesn't just fall away, it does require work. But undoubtedly having a simpler group makes it far easier for us to have a simpler structure running that group. It would be within the numbers that Kate's talking about. Maybe that's the point at which I can hand you over to Kate. She can talk to you about the numbers and then she can talk to you about the pension deficit. Kate will be too modest, but I did the last pension negotiations with trustees and I actually went over the time allowed. I took a month more than it was allowed and I'm really confident that in Kate, we've got somebody who will do it far quicker than I did, but she should be too modest to tell you that. Thanks, Chris. So I was just focusing on the question on the continuing EPS. When we talked to the efficiencies, and we anticipated from the sale that we were at risk of having a stranding element, and we've taken action in 2020 to ensure that that's not the case. So there's around about $40,000,000 is the allocation of costs that would have before come to the direct energy businesses that's been allocated to the continuing businesses, and we've taken action to ensure that, that doesn't recur in 2021. So that's part of the in excess of $100,000,000 of efficiency costs that we talked to as an upside. And again, for clarity, we do expect most of that upside to fall through into the British Gas businesses. Moving on to the technical deficit. I can't give you a view of what the mark to market would be as of today, but it's right to say that as we'd expect, all else being equal, that as the gilt rates increase, that the technical deficit starting points and kind of the music stops with regards to the technical deficit on the March 31. So what gilt rates are at that date will be the most important, factor for how we set that technical deficit, but there are a number of other things that come into play. It's a pretty complex sort of series of assumptions and negotiations that come into play. I'm certainly hopeful that it won't take fifteen months. We started this quite early. The Chairman and the trustees and ourselves have been in conversation for some months now on the various parameters that we need to work through in anticipation of it because we're all eager to get to closure and be able to have clarity as to what the deficit is and what the funding requirements are. And I think that's pretty much it for me. Okay. Thanks. The next question comes from the line of Mark Freshney with Credit Suisse. Please go ahead. Hello, good morning. Thank you for taking my question. Just to drill down a little bit more into the pension deficit. I mean, clearly, there's a couple of ways you can approach ongoing contributions or a one off payment using some of the Direct Energy proceeds. So perhaps you could talk about whether it would be possible to do a big one off payment to clear the whole thing. And secondly, regarding the on the pension deficit regarding the, ability to get the deficit to self sufficiency, I. E. Where it ceases to be a problem once and for all. Is is is that something you think you may be able to wrap up in this round of negotiations? And I guess I guess, thirdly, to to that, what is the well, yes, those are my two questions. I think that one's definitely in my court, Mark. So with regards to the pension deficit, so I mean, clearly, there's a number of ways that we can deal with the funding requirement as and when I know what that is. So ultimately, we need to get to a degree technical deficit position to be able to then look at what is the right way to fund that, both from a company perspective and from a trustee's perspective. And the direct energy proceeds form a part of that. I can't really give you the all the different things that come into play in that negotiation because that is confidential and ongoing. But there are various kind of parameters that we look to, to make sure that we get the best result possible for both the members of the schemes as well as the company position. With regards to self sufficiency, this is a young scheme. So it's probably one of the younger schemes that's on the market. So self sufficiency is something that is arguably a way away. However, with regards to how our asset performance is working, that's really encouraging and working very well. And we've also quite well hedged. We changed the parameters of the hedging of that asset portfolio to kind of look at how we can remove some of the potential volatility to ensure that, ultimately, from a Centrica perspective, the volatility of the technical deficit is well managed and under control. Okay. Thank you. The next question comes from line of Martin Young with Investec. Please go ahead. Yes. Good morning to everybody. I hope everybody is safe and well. Three questions, if I may. The first just gets back to the margin issue in the domestic supply business. Is your indication that there will be an improvement after the €80,000,000 jump in the ECO costs is taken into account, which means when they perhaps roll off in 2022, we could be looking at a bigger jump in margins in 2022. And then questions two and three relate to the future and how you intend to take advantage of the energy transition. Your sort of concluding comments in the presentation alluded to being agile and bringing forward new products. I think it's probably fair to say at this juncture, you don't have much, by the way, for the domestic market that could be described as being innovative. Don't think you have a time of use tariff there, for example. So I just wondered if you could say some more about the types of things that you intend to launch and when you intend to launch them. And then sort of allied to that, you indicated that you're looking to build the customer book. You obviously picked up Robin Hood Energy, for example, you know, last year. Now I understand that there were some sort of minor issues with the the onboarding process with Robin Hood Energy. So how can we be, sort of safe in the knowledge that when you pick up, customer books, you can bring these people, onto the the Centrica platform in an efficient way? Thanks. Awesome. Thanks very much for your questions. Let me take the energy transition questions, and then Kate can talk about the margin in the domestic business. But I would say that the ECO obligation, ECO three finishes, I think, on the 03/31/2022, but ECO four starts on the 04/01/2022. So I think the ECO obligation is with us a current program. We'll follow it, but Kate can talk about the market supply. I mean, in terms of of being agile and looking to to bring new new products out there, mean, I would say we have, agreements with a number of The UK car manufacturers to install their electric vehicle charge points. We obviously have, we're walking the talk as well in terms of the number of electric vehicles that we've ordered from Vauxhall. We did the record order last year and then we beat a record and doubled it, this year. But we've also got a new agreement as you'll have seen earlier in the year with Vauxhall whereby if you buy an electric vehicle from Vauxhall, you we've we've set a charge point for you, but we also have a tariff which gives you 30,030 free miles. So in time of use tariff really does demand to have customers to have smart meters. We have large penetration there. So it's something that we're looking at. But you're right, at the moment, the time of use tariffs that we have is essentially the same as other people, which is an overnight cheaper tariff, but the team are working on that. Our new system allows us to be far more agile. The other thing that we've done is that even in our existing system, previously it would take us weeks to change propositions And by simplifying the company and simplifying the decision making process and not accepting maybe easy explanations, actually, we can change our tariffs within our existing system in a matter of hours rather than in a matter of weeks. So our new energy platform is absolutely essential to be innovative as you described. But we're also able to make improvements on the legacy system that we've got. Moving on to the customer acquisition. So when you take on a couple of 100,000 customers, I think that's what Robinhood Energy had, undoubtedly you're going to have bumps and you'll hear from the people that it didn't go well. I would say that the performance of that onboarding exceeded all of our expectations. So we onboarded and retained more customers with from Robinhood Energy than we had actually expected to. And recently, in early this year, we took over the customers of Simplicity Energy through the supplier of last resort process run by Ofgem because Simplicity went out of business. That onboarding has gone incredibly smoothly. The characteristics of some of the Robin Hood customers meant that they actually went on to our legacy system because one of the things that we're looking to do is to make sure that we, an agile way of working, is to test and learn and make sure that the new system works properly and assessment was that we weren't ready to take on that large volume of customers from Robinhood. But the simplicity boot went right onto our new system and it's gone incredibly well. And so we are making progress there. It does take time and we can always be more innovative. But we also have to be a bit more front foot in our marketing. We buy more green energy than any other supplier in The UK. You wouldn't think that if you looked at the marketing. We need to get smarter on that and that's something that the team are looking at the moment. Some of the other suppliers that look very green are not as green as they might look. They tend to buy certificates rather than buy energy, but we buy 11 GW of renewable energy every year. So there is certainly more that we can do on that. But maybe I could pass you on to Kate, who can talk a bit about the comment on margin improvement and whether that does include the eco increase in eco costs in 2021. Yes. And I think it may be helpful just for me to explain a little bit what happens with eco. So technically, because it's tied to the license, the accounting rules require us to cash account for eco. So this is why you have this phasing dynamic, which is closely tied to the cash you actually spend. So that's why we have an acceleration of spend in 2021 relative to 'twenty two to 2020 and 2019. When we get to 2022, we've got one more quarter of ECO3, and then we have a new regime and new pricing dynamic starting on the April 1. It's certainly our strong preference to phase the spend more evenly through Eco4, which will allow less choppy margins as a result. Okay. But in terms of 2021, if the margin in British Gas and Domestic Retail goes up, that is after taking into account the £80,000,000 jump in the ECAD in South Hedges? Yes. Thanks. The next question comes from the line of A. J. Patel with Goldman Sachs. Please go ahead. Good morning. Okay. A few questions here from my side. Found the slide on Slide 11 really interesting. And I just wondered if you could, maybe Kate, walk through a couple of points. The main one here is that at the moment, you haven't incurred a cash additional cash amount for, for an increase in bad debt charge, but you made a provision for it. So I'm just wondering if we think about this year, if if if what are your assumptions or how are you thinking about the bad debt charge to put through? As in, it sounds like you're a bit ahead of yourself already. Do you go back to historical norms, or do you continue to provide for that sort of double run rate or or what I think you said with the first year after the financial crisis sort of levels even into this year because it's a sizable component of the cost that was born in h two. And then on business solutions and and home solutions, these are that many businesses were sizably loss making and have been for a while. But I'm just thinking when you talk about that 100,000,000 of cost reduction, does that include the costs that would come down as these businesses move towards being breakeven? And then I just thought maybe one for Chris. The low low cost software that you're introducing in the supply business and the 36,000 customers that you've migrated over, what is the end intention here? Is it to move a several categories of supply of customers over onto that over time? Just a little bit more from that. I know maybe a bit early stage, but it'd be really helpful. And then I was just thinking on the cost per head chart that you put there. I imagine some of the mitigations this year were one off. Right? Some furlough arrangements, for example, or or bonuses being held. What would that cost per ahead look like if you strip those out just to kind of get a better understanding of what maybe the underlying performance here is? AJ, thanks very much. Let me take the last two, so the low cost software and the cost per head and then let Kate take the two that you asked. On low cost software, so the what we've got is a legacy SAP system, which is a very good system, but it's not fit for the future. And systems now I'm quite allergic because I've been very open to in the past. I'm quite allergic to the idea of a big bang system implementation. I've yet to see one that goes really well and I've yet to meet someone that's seen one that goes really well. And how I think the market's moving, how we are definitely moving is that we have spent the past, but a lot of last year, testing our new software. It's not one bit software, it's testing different parts that help us run the back office for energy but also help us to have a good customer interface. We spent some time testing that, which is why we've got these customers on this platform. We'd also I mean, we'd we'd previously tested the software on the small and medium enterprise market in what was UKB. So we've got a couple of years experience of running this, and we're confident actually that this can can do what we want it to do. Now there are a number of different types of software, we're not just looking at at one type, but we're confident that we can see a path to migrating our entire customer base from the legacy SAP system to our new system. Now obviously, we want to take our time to do that. We will do that in the coming years and that's about as precise as I would be at the moment. But the intention is that this is how we'll operate our energy business going forward. It's not, however, just because the costs are competitive. It's a completely different way of working. And so it's something that's organised around satisfying the customer and dealing with the customer queries when they call in rather than the system we've got today, which is to deal with specific historical legacy industry processes. So one of the big things about what we've learned from looking at some of these challenges that have come in is it's not just about the system, it's actually about how you work, it's the way of working. So I'm quite enthusiastic about that, but we will obviously be cautious because the last thing you want to do is to detrimentally impact the customer experience. On the cost per head, so in terms of the bonus change, that is a part of it but it's quite a bit below half of the change in cost per head. On the furlough, I suppose the way I think about that is that we did actually incur additional costs in terms of extra overtime costs and in terms of, you know, what I mentioned earlier on, there's about GBP 7,000,000 in cost to customers where we didn't fulfill their annual service visits. So the total furlough money we took from the government was £27,000,000 We topped that up and paid 35,000,000 to those mainly engineers that were furloughed. But I don't see that as a one off. That helped to compensate for the cost that we incurred to keep those jobs open because we still had to do the work. So the reason I wanted to share the chart on the cost per head count is I think it is really, really important that we realize that what we've done now is to take out management layers in the organization, take out more expensive people that were maybe more focused on running the company rather than on giving a good customer experience. And that's something that we it's a measure that I use a lot when I look at companies. It's something that I want to continue the cost. If you see headcount coming down with the wage bill going up, that tells you that you're taking out frontline staff, and that's not often the way to improve customer service. And that's what's different about what we're doing at the moment. It's actually all about making sure that we only have the overhead which is required to run this business and you should see that in a reducing average cost per employee. So with that, I'll pass you on to Kate to talk through Slide 11 and then your question on the cost savings in Business and Home Solutions. Thank you. So looking specifically on bad debt, and I think, Ajay, your question was when what are our assumption on the cash impact of it and how do we hold bad debt going into 2021? So a bit of context may be helpful. So big kind of dynamics around 2020 were, from a collections perspective, we weren't able to follow through collections in all areas because of the restrictions that we have that we were able to before. And particularly in the smallmedium enterprise segment, we are seeing an increase in aged debt in that area. And when you look at the increase in bad debt provision that we've put in, it's fairly evenly split between the B2B part of the supply business and the energy part and the residential energy part of the supply business. What we don't know, as at the December, is what the extent of the economic impact is going to be on our customers and when they and therefore are also going to feel the extent of that impact. And that's what's created the significant uncertainty. So what we did was we went back to 02/2009. We looked at what kind of increases in provision rates we saw then, and we've used that as a proxy. We've kind of tested what unemployment assumptions we have versus some of the banking stuff that was released a little bit a short while ago. We're in the kind of in the range of what they were talking about. And that's what we've used to assess what the bad debt requirement could be for those balances as at the December. So when I look forward into 2021, the way I think about it is we may be over or under provided for those December results. That impact may hit us earlier and be more excessive than we thought. It could also be later and could be less impactful than we thought. So and that will then allow us to kind of true up what the right provision rate would be. And we'll know that in relatively short order through this year given the cash collection cycle that we have. And how many home solutions? Sorry. Yes. So just moving on to the other question with regards to efficiency costs in home solutions and the like. So we are expecting an improvement in CVS and CHS in terms of their performance year on year. That will be a combination of efficiencies, but also gross margin improvement and particularly in Centrica Home Solutions, significant reduction in depreciation. So it's by no means all an improvement in efficiencies. There's an element of it. But when I look at the 100,000,000 of the in excess of £100,000,000 efficiencies that we're calling out in 2021, I do expect the vast majority of that to fall into British Gas. Some element will be here of solutions, but by no means that significant relative to the services and energy side. And if you could just indulge me just on one thing. Just as for Chris, You've got a huge benefit, happening on on the pension deficit side. You have now the ability to pay down some debt. It's clear that your free cash flow is gonna sizably improve over the coming years once these effects start to hit through. What are your strategic priorities at the moment? Is it to establish yourself as an energy and services company, and that may involve utilizing some of the capital for growth in the future or focus on around the dividend and shareholder remuneration? Just trying to understand how you're at least I know a bit early, and then I know the strategy is in the second half of the year, but just the sort of early sort of thoughts around that would be really helpful. Yeah. So I mean, on that, AJ, I think that, I wouldn't want to be drawn on what we'll see in the second half of the year because, obviously, strategy is something that we will, agree as a board. What I would see is that it was not an easy decision for us as a board to cancel the dividend last year. And for us to not pay a dividend for 2020, it does not make for a good shareholder experience. We are absolutely focused on restoring shareholder value. It's not been a pleasant experience to own Centrica shares for a number of years and we want to change that. But we want to make sure that we have come out of the COVID situation so we see more clarity there. We've progressed further with the reshaping of the balance sheet and keeps talking about pensions, etcetera. So we want to see a bit more there. And we also want to be able to demonstrate that we can see line of sight not only to stabilize but to ultimately grow this business. But it is absolutely a topic of conversation in terms of the shareholder returns that I have regularly with our Chairman who's here. If Scott wants to add something to this, I'd love him to come in and Scott's and make the call with us. But it is something that we are laser like focused on. And so rest assured, we want to restart it as soon as we can. But I'll ask Scott to add something on dividend. Thanks. Scott here. I realize that, that it is frustrating that we can't say more at this point. And I think to be honest that Chris has described all the moving parts that we have under consideration. The only thing that I would add is along with owning Centrica, stop not being a good experience over the last few years. Our our team's analysis is that occasionally we've, in the past, been guilty of overpromising and then under delivering. So we are you'll notice that our tone of voice is very deliberately and unapologetically, cautious and prudent in this point. Now we know just how important the dividend is to our shareholders. So just as soon as we do feel that we've crossed the threshold of being able to describe confidently what the future trajectory looks like, we will share it. We're we're not, we're not being callous in that nature, but at the moment, we just think it's prudent to stay where we are, and we'll have more to say, later in the year. Okay. Thank you very much. The next question comes from the line of Jenny Ping with Citi. Please go ahead. Hi, morning. A couple of questions from me, please. First set to go to Kate around the balance sheet. So you obviously talked about the hybrid buyback with no replacement today. Can you just confirm that you've spoken to the rating agencies around not going to lose the equity credit on the other hybrid that's still outstanding? Secondly, just in terms of the buyback of the gross debt, which you've talked about in terms of trying to find value for money. Can you give us a sense of how much cash you need to hold at the group level? Obviously, you talked about the disposal of The U. S. Business is helpful in terms of the amount of cash at the group. Is there anything else we need to think about in terms of collateral or any other things, I. E, what is the minimum amount of cash you want to hold? And then one for Chris, just going back to one of your comments earlier in terms of, know, Centrica being the only operator making a positive margin at the moment. I know you you haven't been, uber, vocal in terms of lobbying government, etcetera, and and in the past and had really not much interest to do so. But what what do you think needs to change in terms of the market structure for things to improve? Because I don't see any sense of hurry from the government point of view to change this loss making structure that the the market seems to be keep keep on going. And, we've had a few smaller suppliers going bust, but it hasn't really stopped the status quo. So any thoughts around that would be helpful. Thank you. Absolutely. So thanks, Jane. Let me take that, your last question first, and then let Kate go on. So look, you're absolutely right. I have no interest in in getting into a public debate about about energy regulation, but I do and our Chairman does as well, Scott, does we engage actively and constructively with all of our stakeholders, whether it's the regulator or whether it's government. And we share very open views as to where we think the regulation should be and what the impacts are. I would step back and I mean this is something that you'd given what you do, you know better than me, you know investors more broadly than I would. But the reality is if you have a market where structurally it's loss making, that is an unsustainable position. Because what that means is somebody is paying for the privilege of being in that market. So therefore, if you step back and look at it from a high level, it cannot go on like that. Now, you're right, it is energy bills are politically sensitive and I wouldn't profess to tell politicians how to do their jobs. But what's clear to me is that we need an energy retail market in The UK which is investable in order for it to be sustainable. And I think that we have got government and regulators and the like that also recognize that. So we all know what we need. There are different routes to get there. But reality is no market which makes continued losses can survive. There has to be a profit at some point. So we'll continue, if you forgive me, we'll continue to work constructively with Ofgem, with government, with other stakeholders in order to try and have an energy market which is investable and fair for consumers. And with that, maybe Kate will take the other two questions that you had. Thanks, Chris. Hi, Jenny. So the first one is a relatively easy one. Yes, we have been engaging with the credit rating agencies with regards to the remaining hybrids. So as a reminder, that's £450,000,000 due in first quarter twenty twenty five, and we do expect that we'll be able to retain the equity part equity treatment on that. With regards to how much cash do we need, we had about £1,100,000,000 of cash available on balance sheet at the end of the year. I think it's fair to say that with the sale of Direct Energy, we don't need as much cash as that. We do still need an element of cash on balance sheet to manage sort of collateralized and the trading relationships, although we do use our credit rating to quite good effect to do that in an efficient manner that there is a degree of cash that we need to have available. And as a reminder, we also have access to revolving credit facilities as well, which just give us really access to cash as is where we need it. So I would say that it's more efficient post the sale of DE than it was, and that's clearly something that will be part of the ongoing conversations and discussions we're having internally as to how we get to the right balance sheet profile. Thank you. The next question comes from the line of John Musk with Royal Bank of Canada. Please go ahead. Yes. Good morning, everyone. Just one left for me. Returning to Spirit and that potential disposal, you mentioned that obviously higher commodity prices might be helpful, but buyers are perhaps dwindling as people focus on ESG. So from my understanding, the people that potentially might be left in are smaller, perhaps less creditworthy buyers. And one of the stumbling blocks is going to be around the decommissioning provisions that obviously sit with those assets. Can you perhaps talk around the buyers' attitude to taking those provisions on board? And then also your attitude to potentially having to retain some of those provisions as we've seen with some other transactions recently, most notably, SSE around Christmas time? Yeah. Absolutely, John. On on that, I'll give you, my view on this and then invite, Kate or or Scott if you want to, to to come in. What I would say is, I I don't want to be drawn on the process that we've got going on here because I'm sure the parties that are interested in the process will listen to this and they would like to use it to maximize their value in commercial discussions. What I would say is that we are committed as a board and our Chairman here so he can commit this, we are committed as a board to exit Spirit Energy. Hydrocarbon production is not in our future. It's not part of the energy transition, which is where we see our future and the drive towards net zero. And I think that what we've got to do is to make sure that we get the best value out of this and that's a mixture of proceeds and future liabilities. But this is something where, you know, I am comfortable that we're able to exit. I wish we were exiting two or three years ago. And what my my boss, what my chairman keeps telling me is if we think that I'd become more comfortable exiting two or three years ago, just think how it would feel two or three years from now. So the key thing is for us to make sure that we get the right exit from this business. But I don't really want to be drawn too much, but I do know that RBC are very active in this market. So you've got some colleagues that probably know a bit more about this than I do. Chris, thanks. Scott here again. All I was going to describe, obviously, we can't discuss an ongoing process, but we do have three core principles around this. One is that we're going to manage the process to get company the best economic return as you would absolutely imagine, and that includes all the things that you alluded to. But the second one, of course, is that we are determined to reduce our volatility and simplify the way that we do things. And the third one is that we need to continue our journey towards net zero. And those three principles will guide, the way that we manage this process. But beyond that, we really can't say any more at the moment. The next question comes from the line of Deepa Venkateshwaran with Bernstein. Kate, a warm welcome from my side for joining the Board. So my first question is actually to you. On the net debt, I think you mentioned that the agencies have increased the threshold. Would you let us know what the new thresholds are for FFO to net debt and RCF net debt? And are you targeting a particular rating? Or are you happy with the current rating? And second question for Chris, any thoughts on the Cheniere contract and the process of simplifying? I mean is that something that you would also look to exit and maybe take advantage of the fact that maybe the LNG prices are maybe looking better now? And is this also something that you might want to get rid sooner rather than later? Thank you. So, Deepa, thanks very much. Let me take the the senior question first and then see if you can manage to convince Kate to share the the new thresholds with the credit rating agencies. Look. I I think, I mean, as as Scott said earlier on, quite rightly, we have in the past maybe over promised and under delivered. I would far prefer to simply say that for any of our businesses, if we do decide to exit or expand, we'd like to tell you when we've done that rather than speculate in advance. The senior contract obviously is one which if we were faced with that today, wouldn't get into it. But we are into it and we have a very, very good team which manages our LNG business. They had a very good year last year. But we start every year, January 1, we start behind the eight ball, so to speak. And I would prefer not to start behind the eight ball, I'd rather not get drawn on that, if you don't mind. So I'm going ask Kate to take the question on net debt. Thanks, Chris. Hi, Deepa, and thank you for your welcome. That is much appreciated. So just talking about net debt, a reminder as to what the credit rating agency said before. So S and P stated that they would require us to maintain above 45% for the current Baa2 rating. So that is higher than where the requirements were before the detail. Moody's said that they would they expected above 35%, but then this would be revised up if we sold both Spirit and Nuclear. So there's a bit of a different approach between the two credit rating agencies that we're navigating. So when I talk to the thresholds being higher, I'm really referring to S and P, and it doesn't really matter whether one or both go. When one goes, you've got to look at how you manage the others. On credit rating, I mean, I'm quite comfortable with where we are now. I mean, I think with regards to an investment grade rating, we get value out of it in our business model at the moment. And ultimately, this all comes down to what is the most efficient balance sheet construct that we have for our go forward business, and that's something that we're looking at keenly at the moment. But as of today, the current credit rating that we have, I think, suits us well. Thank you. The next question comes from the line of Pavan Mabhubani with JPMorgan. Please go ahead. Hi. I have a few questions, please. So firstly, looking at British Gas Energy, I know that at the interim, the results were sort of flat year on year, yet at the full year results, which were restated for the reallocation of direct energy costs, you saw sort of the evolution of the full year was down. So would you mind walking us through what the big drivers of those of that decrease was in the second half? Is it just one offs due to COVID, bad debt provisions? Or were there difference in the cost allocations from Direct Energy between 2019 and '20? That's my first question. Secondly, looking at the legacy gas contracts, this time last year, we were expected in the commodity environment to sort of think about 50,000,000 to $100,000,000 of losses out till 2025. Is this still the case in the current commodity environment? One more. Looking at CBS and CHS going forward, should we continue to expect operating losses going forward? How should we think about that? And last quick one from me. In isolation, the move in thirty year yields, you know, sort of moved from 75 to 143 now. How should we think about the impact in the pension deficit? I mean, I know you don't want to quantify it, but in terms of the magnitude of the moves between the December and today, is that, you know, in the tens of millions, hundreds of millions? Would you be willing to sort of give an idea of how big that would be? Thanks. Pavan, thanks thanks very much. Let me take the CBS, CHS and I'll and I'll try and give you something on the gas asset with the legacy gas contract. But as I pass over to Kate for the question on energy and and pension, she will correct any mistakes I make. So CBS, CHS, now these will not, in perpetuity, make a loss. Centrica Home Solutions, which is now is not this is not a business, not a standalone business. It's part of our British Gas Services and Solutions business. And it's a good product and it gives us some optionality in terms of home energy management going forward, but not at the price that we've been paying for it. So we've taken further steps to reduce the cost of carrying that and therefore you should see a reduction there. Centrica Business Solutions, slightly different. Can see, obviously, we had big impact in that in what used to be the called UK business. So the energy supply business flipped from a profit of about GBP 55,000,000 last in 2019 to a loss about the same, so about GBP 110,000,000 swing. There's about GBP 10,000,000 reduction, I think, in what was traditionally Centrica Business Solutions, I think, GBP 75,000,000 to 85,000,000 of a loss. And again, that's disappointing. However, during COVID, companies did pull back clearly on spend. I mean, I think that was the same across the piece. So I think we've business solutions is something which has technology which helps to enable the energy transition and it's therefore got to be attractive. However, it's not attractive at any price. So rest assured that business has been managed to get to profit. Probably your follow on question would be when, I wouldn't want to be drawn on that. But I would say there is not infinite patience for us to keep loss making businesses and we are managing these businesses very, very actively as we look to move forward. On the gas asset book, I think the assumptions that we had are pretty much the same and Kate will be able to speak more knowledgeably about this. But it's a very, very complicated contract. I actually worked on this twenty years ago when I worked for Shell. I was on the other side of this contract. It's very, very complicated. There are some indices that are calculated only for the purposes of pricing this contract. And so you're looking at carbon heavy fuel pricing and the spread, but it's not just the spread between oil and gas. There are other spreads in there. I think, by and large, the assumptions of 50 to 100 until the end of this contract that we gave last year remain good. But with that, I'm straying outside my territory. I'll pass you over to Kate and ask if I've made a mistake there, Kate. And don't be shy in correcting me. So this legacy contract, I think what we said before was we expect it to be in the range of 50,000,000 to 100,000,000 In 2020, it was at the lower end of that range. At some point in time, just given the dynamics of that contract, it will get to the higher end of that range. With commodity prices priced where they are, I mean, the dynamics round it up. Oil is bad for the contract when it goes up. Gas when it goes down is bad for the contract. When you have a delink between oil and gas is when the pricing dynamics of that contract go out of our favor. But we still hold to that 50,000,000 to $100,000,000 assumption that we provided before. That's still within the range of what we're seeing. If I just move on to the first question that you had, which was with regards to finished gas performance, particularly in H2. So there were a few dynamics going on in H2 that were different from H1. So firstly, from a COVID perspective, because we had absolutely, we had impacts of COVID in H1, but also the majority of the mitigations came through at H1, you had more sort of, if I call them naked, COVID impacts coming through in H2. I may regret the use of that word. Certainly, the increase of bad debt provision was higher in H2 because that's when we kind of trued up our position at the end of the year in terms of what we were looking at. And also, that sort of rather pesky allocation cost dynamic that we've got for group functions, that is a call that we made in H2 following the disposal announcement as opposed to something that would have impacted H1. So there were just a few things that were distorting the H2 versus H1 performance there. Just looking at the pension deficit impact, I mean, I think this is probably following on from a question that I answered a little bit earlier. All else being equal, with an increase in gilt rates, certainly, the size of increase that we see, we would expect that technical deficit to come in lower. But there are lots of other factors that come into play when stating what that technical deficit is. So that is why I'm being a bit cagey. It would be disingenuous of me to kind of give you a number as to where I think it is now, given we are about to embark on a negotiation with the scheme trustees. The next questioner comes from the line of Dominic Nash with Barclays. Good morning. Three questions for me as well, please. The first one is on buying back the debt. What parameters will you be looking at in deciding which debt to come back, I. E, what's the most EPS accretive or which is going to have the most exceptional finance charging? And do you have a plan B if the cost of debt becomes too rich? What are you going to do with your cash in Plan B? The second question is on rough. There's obviously been a couple of stories that you're potentially looking at repurposing this to a hydrogen storage facility. So I hope you could give us some color on the state of play and sort of timetables there. And then finally, just coming back to sort of your overall story. You talked about it being a long story, but it seems to me that you're sorting out your troubles one by one. Your balance sheet is going to slowly sort of get it back into place. Is it unreasonable that we will have a dividend policy announced by the end of the year going forward? Or do we have to potentially wait to 2022 or beyond for that? You. Thanks very much. Let me take the rough question. Kate, obviously, we did the debt buyback, and I'll try the dividend, but I suspect it will be unsatisfactory. Look, on rough, where we are just now, The UK has got the capacity to store about 1% of its annual gas demand. So if you leave aside whether this is hydrogen or not, we have not got enough storage in The UK. And I've raised with government the fact that Germany has got 31%, we've got 1%. So some discussions there as to whether or not we need more gas storage. Rough is, we believe, has unique geological characteristics which make it uniquely positioned to store or the best store for gas. We then also have been part of what's called the H2H, the Hydrogen to Humberside Project with a number of other companies and is looking to create an industrial cluster to use hydrogen. And obviously, part of the production of hydrogen is better if you can have some storage as well because if you've got this industrial cluster that's running off hydrogen, you have a production problem and it can only run off hydrogen, you've got a real issue because you've got nowhere else to get it. So we started to look at it for that. And then we've had some conversations with government, which is around seeing reconverting rough to storage requires and we've set up a £650,000,000 of investment. That's about 300,000,000 or so to redo the wells. The wells are old and they wouldn't take another forty years of storage. You need to spend about 300,000,000 on the wells. And if you wanted to go for hydrogen, you'd probably need some new kit on it and that's probably another 3 to $3.50 or so. So the methane storage is probably 300,000,000. To go to hydrogen is probably $6.50. But what we said is that the merchant model of injecting in the summer and withdrawing in the winter doesn't work anymore and so therefore some kind of regulated support, like maybe a regulatory asset based model or a cap and floor type model could be useful. So we said to government we've got this asset, we think it could be a useful strategic asset for The UK. We'd be keen to develop ideas of that. So we're at a relatively early stage. But I am really encouraged by how we're able to work with government on a number of areas and the government, the 10 plan for the energy transition presents us with huge opportunities as does this issue on hydrogen. I wouldn't say that it's not something that's imminent. I think it's relatively early stage but I am sensing from government a real commitment driving the energy transition and an ability potentially to work at pace. So we'll continue to engage with them and work and I'm hopeful but that's because I think that we do need something in The UK and this is a fantastic asset. On the overall story, Sotnik, the troubles one by one, we are trying to get ourselves to a situation where we can really, really focus on what we're good at and bring stability to the business, to the earnings and then have a clear trajectory for growth. When we have that, then that's when we'd want to obviously have a dividend policy. Whether I wouldn't want to commit to having something this year, but by the same token, I do recognize that as we want to lay out a longer term strategy in the second half of the year, people will expect us to see more and as I say, and you have the Chairman say earlier on, it is something that we talk about a fair amount. I really don't want to be pinned down in case something else happens, but it is something that we recognize we need to give clarity on. We need to restore the shareholder value that has been lost over the past several years. So with that, I'll ask Kate to take on the really difficult question, which is how do you think about buying back the debt and how do you prioritize it? Thanks, Chris. Thanks, Dominic. I mean, without doubt, that's a tricky question, right? I mean, in an environment where interest rates are really low and the debt portfolio is quite long dated, it has the potential to be really expensive to buy back. So and we wouldn't buy back at any appetite at any price. It needs to be value accretive. I do look at it through the lens of EPS and one has to balance sort of the short term and the long term essence of that and also making sure that we're assessing what are the other uses of cash that with the appropriate amount of risk would provide a better return. But ultimately, we have said that the proceeds are about stabilizing the balance sheet, ensuring that we have a strong net debt position. And that's why this is a process that's ongoing as to what the best outcome is. The next question is a follow-up from the line of Mark Freshney with Credit Suisse. Please go ahead. Hello. Yes. Two questions. Firstly, on distributable reserves. I mean, there's the capital gain coming through on the disposal of Direct Energy, but potentially other one time items such as debt buybacks and any capital losses on future disposals. So can you talk about the options around paying a dividend if your distributable reserves are not sufficient? That's my first question. And just secondly, I think it's not possible to accurately predict what the book value or the equity book value of Spirit is in Centrica's books just now. But would you be able to give some color as to what what the impairments take that value to? Thank you. So so, Mark, let me have a go on the distributional reserves thing, and then Kate will be able to correct me. So, look, there are obviously we have distributable reserves in the parent company. And, I mean, your question is what happens if you have no distributable reserves? Can you pay a dividend? As you know, there are many, many different ways to restructure a company. I've done that myself and previous companies, whereby sometimes you have to go to the high court to have a recapitalization, a capital reduction, but I would not have that as a worry at all. That's not really something that's in our issues for dividends. In terms of the book value of Spirit, that's probably something that Kate is going to tell you in about ten seconds that she's not going to give you. But I'll pass you on to Kate on that. I think there's if I remember right, there's probably more detail in the annual report than there is in the prelims. I mean the annual report is due out in April. But on that, if I was in Kate's shoes, I'd be saying, I'm really sorry you can't figure it out. I'm not going to give you a number, but maybe you'll find Kate more reasonable. Chris, that is me. I mean, if you look at the annual report and you look at the allocation to minority shareholders, you can back calculate it to about $1,300,000,000 is the book value that we have on Spirit right now. Okay. So that's the $4.25 non controlling interests divided by 0.31 is the equity book value for Spirit. And presumably the impairments that you undertook and the impairment testing is partially informed by the discussions with potential buyers. So can we take comfort that the book value is not a million miles away from the market value or should I disregard that? You should disregard that, Mark. I think that's, you know, the these there are ways, I think, to value these things from accounting purposes and very clear rules. And then there's what somebody this is worth what somebody's willing to pay for it. So, yeah, I would disregard that. Got you. Okay. Thank you very much. The next question is from the line of Elgin Mamadov with Bloomberg Intelligence. Please go ahead. Hi, I apologize if you answer these questions correctly. I had to juggle between several results today. But I have two questions. They're quite broad, high level. The first one is on the fact that some of your other utility peers are either exiting or reducing their exposure to energy supply and services. Why do you think it's a good business to be in the medium to long term? So this is the question number one. And again, as a part of that, some of your utility peers, even those that are expecting to remain in retail and and services, they're kind of preserving the status score and maybe letting their market share to, come down by one or 2% a year. So it's clearly not a growth area for them. And the second question related to that, who do you think your main competitors are going to be five years from now? I mean, they used to be big six in The UK. Now that number is shrinking. So as in there's more big market. The market is becoming more fragmented. So who do you see your biggest competitors in five years' time? Be that oil and gas companies or smaller new entrants that will become big by then? Or do you think the market is going to be as fragmented as it is today? Thanks lot. Thanks, Arjun. Let me try that quickly. So in terms of it, if you'd asked five years ago who we see our competitors today, we never would have answered the market. We wouldn't have thought the market would look like it is at the moment. I wouldn't want to be drawn on that. Shell had been in the market in The UK just now. They're a relatively big player with Bot First Utility and they've changed the name of it. Other companies are in the market. Thing I think about, rather than trying to figure out who our competition is, is to figure out how do we beat the competition. And everything that we're doing just now is to make sure that we are the most competitive in the market and we beat the competition no matter who it is, whether it's small companies, whether it's large companies. I think that the market has become more fragmented over the last five years. Over the last year, it's become more concentrated as companies are exiting the market. I expect that absent any change in regulation, that will continue because my earlier answer about the fact that a market in which there is no profit means that companies will have to leave. What this will drive the market towards, in my view, is that scale is very, very important. We are the largest player in this market. We have a position, I think, that a lot of our competitors envy, but there are things we need to do to improve our business and that's what we're really focused on. So our focus is on making sure that we are the most competitive in the market. In terms of what you'd call other peer utilities, you've got companies, I think you've seen a split between upstream generation, whether it's wind farms, whether it's gas fired power stations, whether it's oil and gas production and energy. We think the energy retail market in The UK is undoubtedly challenged, but it's a market that we hope will become more attractive and that will happen as we improve our performance in that market. So we're focused on what we can do ourselves and also influence on how the market moves. In terms of services, there is a huge, huge opportunity to do decarbonization and we are very, very well placed to partially drive that but to definitely benefit from it. So as you think about if hydrogen comes in, for example, you either need new boilers or you might need to retrofit existing boilers. British Gas Services business was built off the convert of type to natural gas in the 1970s, but every single gas appliance in The UK had to be converted. Now, I'm not saying that would happen with hydrogen. It depends how much hydrogen goes into the system, but there is a huge opportunity there. The opportunities for us are twofold. One is in the decarbonization of energy and another one is in making sure that our customers manage their energy as efficiently as possible through home energy management, electric vehicles integration, demand side response, all areas that we've got technology and also making sure that homes are more energy efficient. Again, that's an area that we work with our customers. So there is huge opportunity in this area and it's something that, with our improvements and our simplification, we should be able to focus on and hopefully capture. So we've got a lot to do, but we've got really very strong positions here I'm confident that we can make those work for us, for our colleagues, for our communities and for our shareholders. Thanks a lot, Chris. In the interest of time, this concludes our question and answer session. I would like to turn the conference back over to Chris O'Shea for any closing remarks. Thanks very much, Emma. Look, I'd just like to say thank you very much, everyone, for joining us today. And just to leave you with, we have made, I think, a lot of progress in 2020, but there's a lot more for us to do. But we have the people to deliver, the market positions, we have a division, have a team with a determination to turn this company around and to become a force again in all of our key markets and to restore the shareholder value which we've lost over the past several years. So with that, I'd like to just say thank you. Look forward to seeing some of you in the in the coming weeks and to talking to you again in July when we have our, our interims. So thank you very