Earnings Call: H1 2020

Jul 24, 2020

Good morning, everybody. It's Chris O'Shea from Concentrica here. I'm joined by Jonathan Ford, our new CFO, who's been with us six weeks and by Scott Eby, our Chairman. So hopefully, you'll get a chance to see our results, see the announcement about our disposal of Direct Energy and also to watch our presentation. And with that, I'm very happy to move into to take any questions that you've got. And the first question is from Mark Freshney of Credit Suisse. Please go ahead. Good morning, Thanks for taking my question or questions. On the pension deficit, your sale circular or sale document announced towards the back, it talks about some restrictions and agreements that you've entered with the pension fund trustees on regarding deficit or potential deficit repairs. Can you talk through the issues surrounding that and whether you're potentially only on the hook for the GBP 1,400,000,000.0 now or whether the pension fund trustees would demand that it's actually the current GBP 2,400,000,000.0 that's relevant here. So that's my first question. Secondly, on British Gas and the higher consumption and price caps, just what your predecessor spoke about targeting a 3% margin. I just want to understand if that's still the case within British Gas Residential. And I guess my third question is on your services business. Your services business, clearly, Jonathan, you came from the major competitor of British Gas, which showed a lot more growth than British Gas Services. Can you talk about what your expectations might be for that business in the medium term regarding growing the top line rather than cost out and what you think you might be able to do with it? Thank you. Mark, thank you very much. I'll try and take the pension deficit restrictions question and the discuss, and then Jonathan will can talk about services. So the deficit we had on a technical provisions basis at the 03/31/2018 was £1,400,000,000 If you roll forward the assumptions to today recognizing things with discount rates and etcetera, that deficit would be £2,400,000,000 And so it's very important that, obviously, it's different to the IAS 19 deficit, I think, because one uses essentially government discount rates and one uses AA corporate bonds. So that's the first point. The restrictions of the benefit with the pension trustees is obviously, we anticipate making a substantial contribution to the pension scheme from the proceeds of the direct energy disposal. We haven't yet agreed the level of that contribution, and we'll enter into negotiations with the trustees in the intervening period and hopefully have that before completion of the transaction. But in advance of that, we have agreed to a couple of restrictions. One of the restrictions is that we won't make any excess distributions or special distributions to shareholders before we've agreed the size of the contribution into the pension scheme. And the second thing is that we also won't undertake any accelerated debt repayment again until we've entered into agreement with the pension scheme. And so those are the restrictions that are referred to in the documents. So we'll enter into discussions with them and agree the level of contribution. But the reason for saving the GBP2.4 billion is simply that's a like for like comparison to the GBP1.4 billion. That does need to be funded over time if there's no other changes in the external metrics of this get mix, etcetera, but it doesn't need to be funded from this transaction. So your second question was in terms of the higher consumption and the price cap in the margin. Obviously, we still target the 3% margin that we are permitted to make under the cap, including some headroom that we've got there. We have seen consumption increase in our residential business over the lockdown, not much in gas, but we've seen higher electricity consumption, but it hasn't offset the reduction that we've seen in the B2B space. And so both in British Gas and in Direct Energy Home, residential demand has gone up a bit, but both in what was U. K. Business and what is was North American business, the drop in demand has more than offset that increase in demand. So net net, we have seen a reduction due to the impact of COVID. And then on the services question, I'll pass it over to Jonathan so he can give his views. Thanks, Chris. The first thing I'd say on services is I think it's been a very resilient performance in the first half. You can see that in the numbers that have come through with The UK Home business up 27%. I think that speaks to a very stable business with high levels of retention and recurring revenues. And that's, as you quite rightly pointed out, model that HomeServe had. I think when you talk about the growth from HomeServe, that was mainly an international story. I think if you look at The UK picture there, customer numbers are flat to slightly down. The profits have increased a little bit. And I certainly think within Senshiq, you're looking at the services business there. I think this is a services business that can grow its profitability. I think there are opportunities to improve retention. So we're much more efficient and cheaper to retain the customers and go buy within the marketplace. So I think we can do more there. I think we can also drive our customer service up. It's performed well today, but I think there's more to do there. Think technology can help us do that. We are investing to allow us to do that. And I think we're also moving more customers online. That migration has also increased in the last six months. And that's a channel that customers like to use and are happy to use. So I think there's a number of opportunities for us to move that business forward. Thank you very much. The next question is from Jenny Ping of Citi. Please go ahead. Hello, hi, good morning. A couple of questions from me, please. Firstly, just going back to the cost savings from restructuring you've announced a couple of months back in terms of the redundancies and the potential cost savings that could come through from that. Should we or how should we think about the cost savings falling through the bottom line going into 2021? Or are we really going to be seeing all of that savings to plow back into the business in terms of coming up with more price competitive products, etcetera. So actually, it's much more focused on customer retention rather than seeing the benefits in the bottom line. I'm just thinking about this in the context. So obviously, you've got the dilutive impact coming through from the disposal. How we should marry those two up on your bottom line earnings? Any views there would be appreciated. Secondly, just on homes following the earlier question. Could you give us an update on where we are on the FCA investigation and the results of potentially coming up with elements that could increase the competition here? And then lastly, Chris, you said in your video recording that there's potential for further small assets that could be put up for sale in the coming months to try and continue to simplify the business. Can you give us a feel of what they are or what it could be, the areas that they fall in? Thank you. No problem. Thanks, Jenny. So look, dealing with the last question first, the point is that we will actively manage our portfolio. We've demonstrated that this morning, obviously, with the disposal of Thyat Energy. But we have in the past we could be accused of having overpromised and under delivered. So what I would rather do is to tell you what we've done rather than tell you what we're going to do. So I wouldn't speculate on what assets we may or may not dispose of, but we will manage this portfolio for value. And there are some things that we could consider selling. But if you would bear with me, we have to do what we did this morning, which is to have to let you know when we've done something. On the cost savings, mean, how should we think about this? So we are accelerating the GBP 2,000,000,000 program. But you're right, terms of whether all falls through to the bottom line and this is not profit support. This is about us being way, way more competitive. And so we will happily invest some of this in customer retention and in growing the business. But I wouldn't speculate at the moment as to how much goes where. I mean the reason that we're doing our restructuring is to make this a far simpler business. We are, as you saw in my presentation, way too bureaucratic, top heavy. It's a difficult place to navigate. We're going to cut through all of that, and we're going to make it easier for people to work here, which will make them give them more time to think commercially and sell more to customers. So we've got to get away from cost cutting being a new profit support. And therefore, very happy to reinvest some of this in the customer experience and then growing retention and then also growing customer numbers. So I can't give you a number as to what we fall through. You'll have to make your own judgment on that. And on the FCA investigation, could you just repeat your question? So I wasn't sure that I got the whole part of the question. The FCA was investigating how the industry, the insurance industry is able to price more competitively. And they were supposed to come out with a decision in June as far as I was aware to implement that is to put some sort of price cap in or to enforce churn a bit like the price cap really on the energy side. Do we have any update on that? I don't have any update whatsoever from that. Yes. And I think actually, the delay and the sales will come out later in the year, suppose, but many people there have been impacted by COVID. So there's no update on that, I'm sure, but you will find out at the same point that we find out. I mean our drive and our belief is to provide good value to all of our customers and to make sure that everybody gets value for money, no matter how long you've been with Centrica and with British Gas in home servicing. So I'm hopeful that any regulator will be able to see that. Thank you. The next question is from Dominic Nash of Barclays. Please go ahead. Good morning. Congratulations on the sale of Direct Energy. So two questions for me, please. Firstly, on the proceeds, you say you're going pay down debt, but you've got quite long dated debt. Will you be using the proceeds to call in longer dated debt? And so what sort of exceptional charges will we be sort of looking at there? And then on the second question is almost like the race to the bottom. You're putting in a quite a big cost cutting program. You're facing fierce competition. Your customer numbers are down, I think, 2% in retail in six months. You're saying you're introducing a BGX to sort of come up as a low cost option. With that, are you a, are we actually going to start seeing in this environment a collapse in your competitors? I mean, with the way the world's going, you starting to see the competitor pressure disappearing as they themselves get under pressure? Or secondly, are you at risk of everybody just going down the same route and we end up with a similar sort of insipid margin forevermore whilst everybody puts the same sort of cost cutting processes in? There's a lot to unpack in there, Don. So first, let's I'll give a very high level comment on the proceeds and the debt. I'll talk to next one, and Jonathan will jump in if I've got anything wrong on the debt. We published our annual report in the purity of all of our debts. You guys know all the risk you raised. So you could all make your own judgment as to what some would call it if we were to prepay debt. But I would like just remind you that we signed the deal to sell Direct Energy. We've got to get approval from our shareholders. We've got to get approval from antitrust authorities and other regulatory approvals in The States. And so we do have some time to think about this, you'd be able to price any of that here and yourself. In terms of the rates to the bottom and VGS and obviously, other competitors, so we have seen quite some price competition in the past few months, and we have been more disciplined than The UK in that people want to sell energy at gross loss, then they're welcome to that business. That's not business that we want, and it's not a sustainable position. So the competition hasn't eased, but the market practices are such that you cannot when you sell on gross margin, basically, pay someone to take the product, that's not good business and won't last in the long term. So I mean I wouldn't want to talk too much about our competitors other than to see I don't think anyone can expect to survive if they pay someone to take the product off them. There has been some relief, obviously, through COVID. You've had the various government support schemes. And for some of the small suppliers that were unable to access the government loan schemes, they were able have been able to defer their network charges to at the National Bridge. So that has provided them with a capital influence if choose to take that. And that's attracted interest at 8%. That was a change to the rules introduced by Ofgem. So And companies can access that. You can make your own judgment to whether or not that's a good idea, but it's very much a temporary measure. So we're in this market for the long term and we'll be disciplined in our pricing, but we will be competitive as well. BGS is not a different brand. This is what we've been doing, and if you take a step back in our UKB division, a couple of years ago, tried some we tried a digital only platform, we call it BGS Lite. Quick succession, we've got over 13,000 customers on that. And so we built something in an agile way, test and learn, and then we've got some success there. We've decided, decided a few months ago, to replicate that in the residential business. And again, to test that and get a proof of concept and see how that works, probably not digital only, probably digital first. But we believe the customers still want to be able to pick up the phone. So what we're doing here is looking to see what kind of platform alternatives can we have. And we've got over 10,000 customers, I think, on the BGX platform. And so we're learning a lot. So we'll do this. We'll learn. We'll make amends and adjustments, and we'll continue to move forward. It's all about giving the customer a better experience. It's all about making sure the customers can access our team in the way that they wish. In the first half, through COVID, we saw twothree of our transactions in British Gas actually being carried out online, which is tremendous. So there's an appetite to do things online and what we're trying to do to satisfy that customer demand. Thank you. The next question comes from the line of Peter Venkateshwaran of Bernstein. Please go ahead. Thank you. So there's probably a bit of overlap with the previous questions, but just I want to focus on the use of proceeds. So firstly, wanted to say that it's a great thing to have simplified the business and the valuation seems to be definitely better than what we were expecting. But just wanted to understand what might be below the line adjustments that might come through because of the sales. Particularly on the pension side, if you do manage to contribute a chunk of this towards reducing your technical deficit, does that mean that we might see any benefits below the line? Because above the line, it seems like it's a 3P hit to earnings going forward. So just wanted to understand the nuance. And of course, then if you're going to buy back any bonds, one would have to see and there'll be a hit. So that's basically the main question I had really, is how should we look at the divestment below the line and above the line? Thank you. So Deepa, on that, I'm looking at I'm Jonathan, I'm getting a naughty here. I mean it's the same answer as opposed to the last one in terms of below the line. So I we've just signed this transaction. Obviously, we know our debt portfolio. We know how we could retire debt. But you can make the judgment. And that moves about because obviously, if the risk free rate moves, then the price of any buyback moves. So rather than speculate, I think what we'd have to do is we can see where the market was at the point that we completed this transaction. For the contribution to the pension scheme, we are talking about substantial contribution, but we will negotiate with the pension scheme the best way for us to do that. So I think that you'll just have to make your own judgment on that, but the proceeds will go strengthen the balance sheet either through a reduction in debt or a contribution to the pension scheme. And I view both of those quite similarly, they are both essentially debt. So I think you think of that. In terms of the comment, I think I mentioned that Direct Energy contributed, I said around the quarter, 26% of our pretax operating profit last year. So you can work that through yourself. Know The U. S. Tax rate, the R tax payment in The U. S, not in The U. K, but you'll be able to work that through. Thank you. The next question is from Martin Jung of Investec. Please go ahead. Yes. Good morning to everybody. Three quick questions, hopefully. The first one on dividends. You've said in the Direct Energy documents that you would look to reinstate dividends when it is prudent to do so. I just wondered what, if any, restrictions there are currently in place preventing you from reinstating those dividends? Obviously, the Ts and Cs of Direct Energy and the relation with the pension funds appear to place some restriction, but presumably not a total barrier, but also anything that you may or may not have done with the various support mechanisms offered by the UK government. So just interested in that sort of ballpark picture there. Secondly, Chris made comments about sort of slimming down the range of offers from home services, specifically referencing EVs heat pumps. Just wanted to be clear on whether you saw those as being a key part of your offering going forward or something that might be done on a low touch basis with less priority? And then the final question, an accounting one. Note 6C in today's release sets out a value of GBP 44,000,000 for the recoverable estimates on E and P. Is that a number that relates to your 69% stake after all decommissioning liabilities and net cash or net debt positions at Spirit have been taken into account? Thanks. Martin, thank you very much for that very detailed accounting question, which Jonathan will be no doubt delighted to take. But let me start with heat pumps and the license. And let me talk about restrictions and dividends. And I'd like to ask our Chairman to give you I think that we've got the Chairman here an ultimate dividend as a Board decision. So I'll give you my view and Scott can add in the view of the Board and then we can go to Jonathan in terms of the accounting rules. I mentioned heat pumps, I think the possibility of hydrogen being part of the economy, home energy management, electric vehicles, etcetera. The point to make is that we are technology agnostic. We have a great in home servicing business, and we have a great relationship with customers and with The UK's largest energy supplier. Now I think that as we move through decarbonization, we'll have a mix of technologies. So I think that you'll find air source heat pumps, I think you'll find hybrid heat pumps, and I think it's entirely possible that hydrogen will become part of the energy mix. And the point is that we are very well placed to both enable that and to benefit from that. So we're not going to throw our way behind any one technology over another because I don't think we know any better than anybody else. But these are great opportunities for us as we move forward, and I'm actually very excited about the opportunities that we see in this. And therefore, we'll keep that under review and we will be fast followers in such that we will make sure that we understand what technology is going to take and that we're very well positioned for that. But we're not going to take a position in pushing one technology over the other. This is really down to what the government wants to drive in policy and what our customers want and what our customers want to be able to provide them. So I'm very excited about that. On this dividend, on your specific question about what restrictions do we have, other than the undertaking we've given not to pay excess capital distributions until we've agreed the level of contribution to the pension scheme, We have no restrictions on our dividend. So we are free, but we're also prudent and we all recognize the importance of distributions. But I think it's probably best for us to take advantage of the fact that our Chairman, Scott Wiebe, is here. So Scott will share his view and the view of the Board. Good morning, Martin. Thanks for the question. Look, let me just underline what Chris described to you. The Board is acutely aware of how important the dividend is to Centrica's investors and to Centrica's stocks. But frankly, Chris and I are in violent agreement that the truth is that Centrica recently has had a bit of a history of overpromising and under delivering. And so we want to be very cautious and very prudent in the way that we proceed. And if you look at the amount of uncertainty that's ahead of us over the next six months, Chris has been through the steps that are required in order to get the deal that we've announced today completed, the COVID remaining shadow across our business and in particular, across bad debt, where we're all cognizant of a lot of studies that show what a lagging impact bad debt can be when we look to previous crises, we've come to the view that right now there's too much uncertainty for us to say anymore other than to give you the reassurance that we understand how important the dividend is and we hope to be able to say more as soon as we can in the future. Excellent. Thanks, Scott. And on that, you wouldn't advise for the most detailed read of the results. I will pass it over to Jonathan to give you a high level response, but I would suggest that if this gets into any detail, probably best to take this one offline. So I'll ask Jonathan to do that. But in the interest of time, we'll see if we can look at the questions from the local. The next question is from Fraser McLaren of Bank of America. Please go ahead. Good morning, everybody. I hope you're well. Just four very brief questions from me, if I may. First, just like to get your views on the extent to which the sale of Direct Energy will impact on the outlook for the Business Solutions division, especially as you had identified North America as a key market there. And also for connected homes, I know it's not a U. S. Angle, but just wondering what your view is on connected home and whether or not that also should form part of the portfolio in the future. Then on nuclear, just wondering when the pause in the process becomes a stop because you can't sell it and your views on whether Hunterston will return. And then just in terms of uncertainties in the second half, I understand your views on bad debts. Just wondering if there's anything else there that you worry about in particular in relation to the remainder of the year. Thank you. I'm wondering, Fraser, we're all well in this event, perhaps as Martin came up with me, you came up with four. If somebody comes up with five, I think you're all trying to trust each other. Look, on the let's take them in order. So to the extent the sale of Diodes Energy impacts in Centrica Business Solutions. So Centrica Business Solutions, where we have activities, we have people we have boots on the ground in The U. S, that's not part of this disposal. So we've decided to retain that. We do see this as a strong market going forward. Undoubtedly, it there was some co selling opportunities with Direct Energy, which we no longer have once we will no longer have once we sold the end of business, but we still see the opportunity for us to grow Sensica Business Solutions in North America. We think we can do that without having a large energy supply business there. If we are right, then we'll be very happy. And if we're wrong, then we'll no longer have it. So what we won't do is fund lots and losses for a long time. So we have a view, and time will tell whether that's right, but you can be sure that we and hopefully, you see that, that we will take action and decisions very quickly. So we'll watch this and then decide what to do. But I think this is a good business we've got out there. In terms of Hive, what you call connected, I might call it Hive, We've got good products there. This, in my view, will never be a material contributor to profit in and of its own right. Those customers that have Hive, everything that we see tells that the retention level is higher, the satisfaction is higher, etcetera, customers that take high on services and energy probably have some of the best customer satisfaction there. So what we've done is it's no longer a business unit and that's already the steps we've already been taken. It's part of British Gas. It's in a business unit and it's a product that we've got in there. So we think we can benefit over 1,000,000 active customers with that. We think we can benefit from that as part of the British Gas portfolio without further material cash stream. Again, if our hypothesis isn't right, then we won't continue with that. So what we want is to continue to throw money at this. But there is definitely some benefit there, but it's more as customer experience benefit, customer retention benefit rather than as a stand alone business unit. So it's no longer a separate business. In terms of nuclear, when did the pause become a stop? I mean that's a good question. I think I don't have a view on whether Hunterston will return to service other than if it can be returned to service safely, then I'm confident that the regulator will get to the place where we can do that. If it can't be returned to service safely, then we and EDS as our partners, we wouldn't want to return it to service. So we obviously have a view that is to revise safety case allow us to operate it safely. We've got to reach agreement with the ONR. And if we can, we'll restart it. If we can't, then it goes without saying that we won't. You've got to remember that a lot of value in this portfolio sits in size wells, so it's a different kind of technology. So we're undoubtedly seeing some issues and issues we've got in Dungeness and Hunterston wells. But different issues, they are in the older plants. And so we just want to see whether we can get these things get the common position as a regulator, get them up and running again. If we can, we can proceed with the sale as we've got. If we can, we either can decide to retain this or we can potentially see a different type of sale. But what we've agreed with ADS is it doesn't make sense for us to continue to try and sell something. I wouldn't be over the moon buying assets that weren't working, and I wouldn't pay top dollar for that. And therefore, let's just take the time to figure out what the future holds, and then we'll make a decision at that point. Your last question, what worries me and the rest of me, Jonathan can talk about bad debt levels and like. I'm equally worried about the impact of potentially of COVID. And specifically, I'm worried about a mass unemployment event. That's the thing that worries me most. So our underlying business is strong. If the economy is strong and if lots of people lose their job and we can't pay their bills, that's more problematic. In The UK, bear in mind, it's now effectively a regulated market. And so it's not simply that we have merchant risk here. There's also risk in terms of for the regulators. So this is one of the few areas we have in our regulated cap market actually can work reasonably well because there are mechanisms for recovering things like bad debt levels, obviously, it's not a straight pass through, but there are some protections in there. So I'm worried a little bit about that. But other than that, I actually feel very optimistic about the opportunities that we've got ahead. What we've found during COVID is when we've had to, we can work really very differently. So our customer service agents were always in the office, and now they're all at home. And so that opens up a huge amount of possibilities for us. Our ability to do things quickly, we've demonstrated that with the Direct Energy sale. We're demonstrating that with a number of other things as well in terms of the restructuring. We can move really quickly. So I think a lot of our colleagues have learned just how to do things differently. So I'm actually quite excited about that. But the macroeconomic environment is clearly something that worries us as we go forward. But we can't really we can't control that. So all we can do is make sure that we're very, very well prepared. And as I mentioned, thousand colleagues working from home every day and System Resilience Touchwood working fine is really a very useful piece of learning. Just the week I took over, we were planning on running a test to see how many people can work from home. And we weren't sure which half of our building in Windsor to send home to see whether the system could cope with it. And I was quite nervous that our heat department were fine. But then we had to send everybody home and we found it could work with 15,000 people. So through events like this, you learn a lot. So I'm really actually optimistic about what we can do going forward, but I don't mean worried about the economic backdrop. But maybe Jonathan can talk a bit about bad debt specifically and what is around that? Yes. So with bad debt, we took an extra charge of about £60,000,000 in the first half. I'd say that our provisioning rates at the half year are pretty good, and they stack up to where we were with the financial crisis back in 02/2009. So I think we're on the right side. Going forward, who knows? The risk, we feel, is bigger in the second half as the government job retention scheme unwinds, but it's just difficult to predict. It's a real judgment at this point. I think the other big unknown is the impact on energy demand we saw in the first half, the lower demand in our B2B businesses impacting quite significantly. And that combined with the need to unwind the hedges and sell the energy back, that cost us as well. So again, that's a big unknown. Clearly, if there's a recurrence of COVID, that's also a risk. Thanks. The next question is from John Musk of RBC. Please go ahead. Yes. Good morning, everyone. Just two questions from me, slightly repeating, unfortunately. But on the dilution impact from The U. S. Sale, you're obviously not giving direct guidance what you're going to be doing with the proceeds other than saying there's a large chunk towards pension. But if we were to think about what the right level of debt is for the business going forward, Maybe you can give us some sort of guidance there because the EBITDA level post The U. S. Sale is perhaps in round numbers around €1,500,000,000 How much debt do you think you can carry in this business post The U. S. Sale? And then secondly, on the nuclear disposal, I don't know how much color you can give, but the political situation with China is obviously deteriorating. Are there buyers that are outside of China that you could be discussing the nuclear business with? Or is it all Chinese counterparties? So thanks, John. Let me take the second one first. So I wouldn't want to speculate on who may or may not be buyers, but I would say that there are more buyers for nuclear power businesses than Chinese buyers. So I'm quite confident about that. So we watch with interest what The UK and the Chinese governments are doing just now. But that is not has no impact on our no impact on our decision and has no impact going forward. If Chinese buyers are not acceptable, then subject right, it just means it's a smaller buyer pool. So on that, we'll see how that plays out. On the dilution of that, what's the right level of debt going forward. So normally, net debt to EBITDA is a very, very good measure. But when you've got an E and P business that's got a huge capital investment profile and a large depreciation charge, it's a less relevant measure. So I think that if we didn't have Spirit Energy, then we would have an easier way to talk about gearing. But at the moment, you need to just bear with us to say we will carry the appropriate level of debt on the balance sheet. But what we what should be clear is that we anticipate the entire proceeds from the disposal will be held on the balance sheet either to pay down net debt or to make a contribution to the pension scheme. So that's how we intend to use the full $316,000,000,000 disposal proceeds. And Chris, I think in any event, our leverage ratios will be materially improved as a result of this transaction. The next question is a follow-up from Mark Freshney of Credit Suisse. Please go ahead. Hi. Two questions. Firstly, on the hybrid bond, which I think you have to issue a notice to call early in 2021 or the first hybrid bond. Does the agreement with the pension fund preclude you from recalling, calling that bond and not issuing a new one? So that's my first question. And my second question, is just on the credit metrics. Clearly, there's a big change within the group. The group is BBB, BBB. Is there at the other side, would you hope to be a higher credit rating to enable The U. K. Businesses to trade with lower collateral? What are your thoughts there? Let Let me me try and I would always hope that we would have a higher credit rating. It just makes life easier. But I mean, Jonathan can take you through the process. Obviously, we've been through process with the agencies on this in advance of transaction that you would expect. On the high yield, I think I would say probably I'd like to just leave it that we have an agreement not to prepay any debt without getting into too much detail. Just to remind you that we do have a period of time from today until closing, and we hope to be in a position whereby we've got a meeting of minds with the pension trustees as we go forward. Maybe Jonathan can talk about the credit metrics. Yes. So on the credit metrics, as you know, we continue to focus on retaining a strong investment grade credit rating. I don't really want to go into the discussions that we've had with the ratepayers because we can't do that. But I think it's safe to say that our leverage ratios will look considerably stronger once we've received the proceeds from the direct energy sale. The next question is from Verity of HSBC. Please go ahead. Good morning, everybody. I'm going to talk about something and ask some questions about something completely different. On in the Power presentation on Slide 16, you have all your different businesses. And what struck me this morning was that you said that each customer is gonna be served by one business unit, which will require quite a lot of restructuring. Could you talk through how you're gonna deliver that? You need more IT spend. That is quite a big call. And I'm also secondly, just on your business customer mix. I noticed that you've reduced a lot of IMT customers. So is the focus in Business Energy going to be much more SME than IMC going forward? Thank you. Thanks, Felipe. So the key point is, if you take, for example, under what we had, if you bought energy and services, you also got a customer of Hyde, you were served by two different business units, have two different customer experiences, which we don't think is the best way to deal with customers. So Hyde is not part of British Gas, that's already been done and we'll integrate those customer experiences. Similarly, in terms of Business Solutions, so we had teams that would go out and would look to sell Business Solutions type kits, so gas engines, solar panels, batteries, operations and maintenance contracts. And we also had a business that we go out and try and sell energy. And so those two businesses have now been put together. So Tentrica Business Solutions and that includes a form of the UKB business. So that, again, we believe the customers so if your customer is somebody coming from UKB to sell them energy and then somebody comes from Sensica Business Solutions, understandably, they might not feel that they get the best customer service. They will be served by one business. I don't anticipate that there will be a huge amount of IT spend required for that. And so we're not going go into some massive systems change in order to integrate back offices. There's a lot that you can do, as people would call me, we're in front office customer facing IT spend. So the digital experience will improve, but that doesn't mean you have to get your back office. So that's it, Ki Bin. And in terms of your question on IT and SME, the margins in I and C business, so the volume business, you've got lots of volumes and smaller margins. And again, I mentioned earlier about the residential business, we will manage this for value. And so we won't chase volumes in I and C. Margins in SME are better, but obviously volumes in I and C are a lot larger. Again, you can have some customers, you can lose a couple of customers deliberately or inadvertently, and they can take a lot of sites away. So you do see that number moving up and down. But it's not we're exiting that market, but we don't want to be in that market just to have high volumes. Thank you. The next question is from A. J. Patel of Goldman Sachs. Please go ahead. Good morning. I have three questions, if I may. And apologies if that could be for being I I logged in a little bit late. Firstly, I just wanted to look at the technical provision deficit on the pensions. It went up from $1,400,000,000 to $2,400,000,000 And I'm just thinking in the one, if you could just give us some brief explanation to what has been the drivers behind that large increase? Secondly, in terms of paying down, thinking about proceeds from The U. S. Disposal, that's quite a sizable number now. Can we infer that a good chunk of the proceeds will be used to pay this down quite substantially? Or is there nothing to infer at this stage? And then the other last question I had is, I'm not sure, but have you gone through the tax implications of The U. S. Disposal? I do see that in the statement, I just wanted to see if there's any clarity there. Thank you. Thanks, Ignacio. So I'll let you answer the tax implications, and I'll resist the hesitation to give you the wrong answer. So Jonathan can talk about that and also speak to the movement in the things that have driven the pension deficit movement. I mean in terms of the proceeds, what we said is that the proceeds will be redeemed to strengthen the balance sheet through a combination of a material contribution to the pension scheme and the rest we use to reduce net debt. And obviously, we've got some time between announcement and closure. So we lent it into discussions with the pension schemes. We've been in quite intensive discussions with them over the past few weeks, and we'll continue to do that as we go forward. But we anticipate a substantial contribution to the pension scheme and the rest will be used to pay down net debt. And then I'll pass over to Jonathan to talk about pensions and tax. So the technical provision, as we say, has increased on a roll forward basis from £1,400,000,000 to £1,000,000,000 to £2,400,000,000 and that's almost entirely down to the movement in the discount rate. So we are looking at something like a 70 basis point increase that's driving that increase in the liabilities that's driving the deficit. With regard to the tax implications, we put at the back of the statement that the transaction costs and taxation costs are going to cost around about £100,000,000 And that's predominantly taxation costs in The U. S. As part of the reorganization. Okay. Thank you. Thank you very much. We have a follow-up question from Fraser McLaren of Bank of America. Please go ahead. Hello. Please forgive me for asking a follow-up or two. Just first of all, on the restructuring program, mean, you're losing a large number of colleagues as part of the program, probably more than you had originally intended. Just wondering how you manage the risk of dropping the ball on the way along and actually having the business damaged by such a transformation, especially in terms of levels of service. And then just on E and P, I mean, confident are you that you'll be able to sell E and P at a price that makes sense? And why are you not holding it for sale if you're sure that there will be a transaction? Thanks. I will just test the agent to point out. If somebody went to five, you've asked two more to go to six questions, Fraser. So there definitely is some kind of competition here. So in terms of the question on restructure, the first thing is you mentioned the risk and level of service. As you mentioned, the majority of the job losses will come from management levels. We come from people that don't actually interact with the customer. And so the first thing we do is to focus this the reason we're doing this is to simplify the business, is to make it easier for our colleagues in Centrica to focus more on the customer than on the internal work in Centrica. That's the first thing. And the second thing is that the majority of the losses come from people who don't actually interact with the customer. So what I mean is there's no impact on customer service those people leaving. The other way and it sounds like a glib answer, but I do mean it seriously, we have great people. And we want to I want to we want to empower them, and we want to show them that we trust them. And there is a bit of an adjustment there. And so I think that we've got to show people that we support them. We've to give them responsibility. And the response, as I mentioned, through the we've learned through the COVID crisis just what people are capable of. So in some ways, what we've had in COVID is an experience with an ability to show for us to learn what our people are capable of, but also to show them what they're capable of. And I think they've responded tremendously well. There's always improvements, but I think they've responded really well. And so what I just about it sounds a little bit about managing properly, making sure we don't put too much stress into the organization. The But other thing you've to bear in mind is we have been doing this for five years. And my assessment is that the stress of just doing this year after year after year should not be underestimated. And so while this might seem larger than we wanted to initially go, and it's certainly quicker and it's certainly done in a different way, it's done with the intention of saying, once we're through this, we're now going to get back to winning ways. I think we've forgotten how to win. And so I think actually this can reduce the stress in the organization. Right now, it's stressful for people, particularly because of doing it when they're at home. But we will manage this very closely. But we have great people and they're capable of a huge amount. So I'm confident that we will get the right we monitor the levels of service quite closely. But your question on E and C, I've always said I'm confident we can sell this. The question is at what price and in what form. And so we are committed to exiting the production of hydrocarbons. But we're not it's not a fire sale. We're not panic sale. The reason that we paused this process is that we wanted to understand what the level of interest was and get things signed to settle and then go back to the market and figure out what is the best way to go back to the market for this. And that's exactly what we've done. We told you what we were going to do and that's what we've done. The reason it's not held for sale, I suspect you know the answer to this, but you've got to be highly confident of executing a transaction within twelve months. And in order for you to hold the sale, I'm looking at Jonathan and our Group Controller for that, but I'm not on this because I'm rusty on accounting standards. And in order to do that, it's just very, very high-tech. And so whilst I'm very confident that we can sell this, I couldn't say the subject of June, I'm confident that we will have a transaction that we will execute within twelve months because frankly, we've got to decide with our partner what is the best way to dispose of this asset. So if you bear with us, rest assured our commitment hasn't wavered to selling this, but we're committed to doing it in a way that we get the maximum value for our shareholders. Many thanks. We have a follow-up question from Jenny Ping of Citi. Please go ahead. Thanks. Just on the bad debt, what conversations have you had with Ofgem if they were to get significantly worse in the second half in terms of further movements of cap to essentially make that a pass through? And then quickly on the impairments for E and P and Nuke, can you just confirm you're now using the forward curve to impair those assets as at thirty June? Yes. So let me take the conversation with So I've spoken a lot to Ofgem, probably a lot more than Ofgem would like us, have a number of the energy companies. The response of Ofgem and the government in terms of openness and communication has been really quite positive. So we've had energy efficiency supplier around people with Ofgem on a weekly basis. And similarly, we've had it with those conversations with Bays as well. And so they are acutely aware of this issue. What we encouraged the regulators and the government to think about is there were some suppliers that immediately wanted an emergency fund. And the position that we took in Centrica is that if you're a well run company, you have to be able to withstand bumps in the road. So we actually didn't think there was a need for some emergency fund, and I remain of that view. And we said we should wait and see what the impact is on customers and we should support our customers. It's been proven right actually that our customers have demonstrated that if they can pay, they do pay. And so we're quite comfortable with that. And as you know, through the price cap, there is a mechanism for recovering bad debt. It's a life mechanism, and there are different opinions amongst various energy companies. So I would say we have a very open, transparent communication. I can't say that there's necessarily a meeting of minds, but I think the regulation in the price cap is quite clear that the Ofgem has shown a willingness through this deferral of network charges to small suppliers, a willingness to support some small suppliers. My personal view is they won't all succeed once we come out of this crisis. But for businesses that have been making losses for a number of years, it's not rocket science to figure out they don't have a long term future. So I think we just have to wait and see how to be driven by customer behavior. But with that, I'll then ask Jonathan to answer the question on the Carousel and impairment. So the answer is yes, we are using forward curves P50, forward curves long dated. And as we mentioned in the script, the impairment is driven off expectation of around 10 to 30% lower power prices. Thank you very much. The next question is from Bartek Abiqui of Societe Generale. Please go ahead. Good morning. Just very short two questions, please. Firstly, on your legacy contract, I wonder if that one first half performance was actually a bit better than I thought. If this changes somehow your guidance in terms of the loss the contract will bring this year and in the following years? And secondly, on Centrica Business Solutions, I would like to know your view on the post COVID world and your expectations in terms of revenue growth and actually customer demand for this sort of service. Thank you. That sounds perfect. So look, I'll take the CBS question and then ask Jonathan to answer your question, which I think relates to the GANS asset, which is important as elsewhere and the first half will continue our view going forward. So during COVID, we saw quite a reduction in customers signing up for Tenorshare Business Solutions contracts, which is to be expected when you're in a type of extreme uncertainty, you don't necessarily want to commit capital. So we saw that pullback. We saw a great performance in terms of order intake in June, even to the extent that it cost one of my colleagues a bottle of champagne because in the June, it wasn't clear that we would actually deliver that. The team in Central Business Solutions, we're very, very confident and had a side bet with a colleague and delivered. So they know their business really well. They know the behavior of the customers and they can anticipate how the demand moves. Look, I think as we go forward, it's clear that one of the things that we've learned through COVID is the impact of a severe reduction in carbon emissions. And I think you hear governments talking about that more. You certainly hear the UK government talking about it more and you hear people are more attuned to the impact of climate change and just what can be done if you were to to reverse that. Centrica Business Solutions is there to reduce help companies decarbonize and help them to reduce their solutions as well as to help them be more efficient, and there can be cost savings there as well. So my view is that, if anything, what we've seen through COVID should strengthen the demand for Centrica Business Solutions products as we go forward to help organizations, would be the companies or government bodies, to both reduce both the carbon emissions and the costs. And so I think there is there will be huge demand for that as we move forward. We have to be incredibly disciplined, and we have to make sure that we have a clear path to that business turning a profit. And June was a very, very strong month. The one swallow doesn't make a summer, but I do think there's quite a lot of demand for that. But we see how we've progressed in the second half of the year. If we see a further issue with regards to COVID, I would expect that to impact on the order intake in terms of Business Solutions as well because, again, it would be in your time of uncertainty, you don't really want to commit. So hopefully, that answers your question on Business Solutions. And then I'll ask Jonathan to talk about the gas asset we focus on in the first half and what our views go forward. So on the gas asset book, I think we've previously indicated that we were looking at a loss of between 50,000,000 and £100,000,000 We're still in that range, albeit the results recently have been a little better because there is some flex in the contract. Just a reminder, the pricing on this is complex with some indices no longer quoted. Thank you. The next question is from Alex Leng of UBS. Please go ahead. Hi, everyone. Good morning. Just two quick questions from me. Just coming back to the technical pension deficit firstly. You mentioned the €2,400,000,000 based on a roll forward of the prior methodology. I'm just wondering what are the factors by which that methodology can actually change in March 2021? Is it just input assumptions like inflation, mortality rates, etcetera? Or could there be something else and potentially something more material? And secondly, could you give a quick recap of plans around Connected Home and Distributed Energy and Power? Apologies for the prior names, I still kicking my head that way. But it's still over a $60,000,000 EBIT drag in H1. And you said you had several approaches for The U. S. Businesses. So wondering if you've had any approaches for these businesses. Thank you. Okay. So let me see if I can answer your technical provisions question. I mean you know how anybody who's been involved in capital expenditures, you know there are huge amount of interest. The biggest ones are mortality, so how long are people living. Then you've also got the discount rates in terms of risk free rates in bond markets, including government rates. You've got inflation, and you can have RPI and CPI, don't know which one we've got in ours. And then you've also got a view on how strong is the covenant of the company. So that can lead trustees to take a more positive or a more negative. Legacy pension schemes tend to the trustees They put a lot of power into the hands of trustees. So you never entered into a contract like that today, but they are what they are. And also, you've got to remember that any tenants who start buying actuators tend to be the most optimistic of people in any way. So there's a whole bunch of things that can move. If you look at the mortality table, you look at the interest rates, I mean, you look at inflation, that's a relatively good proxy for that. You've also got to look at how the asset portfolio works. So that's the first part being related and then finally, I'll take the second part on the asset side. On TDS and Hive, again, I'd just refer you back to I'd rather tell you what we've done than tell you we're going to do something. And we I wouldn't want to disclose each different individual approaches that we've had. CBS and Hyve are quite distributed energy power, which is now Centrica Business Solutions, and Connected Home, which Hyve. They're very different. So Hyve is a product within British Gas. We believe it drives a great customer experience and the benefit there. Time will tell if that's not true, then we'll no longer invest behind that. If it is true, then we'll happily invest behind it, but it's not a business unit. And Sensica Business Solutions is a very different capital push. We do think that, that is a stand alone business unit. We have now included The UK and B2B energy supply business in there. So there is more substance, I think, in that business and we've pulled together the customer interface, as we mentioned earlier on. So I do see that, that business as a path to profitability, but they have to work hard in order to demonstrate that. And also, they have that business has not been immune to delayering. It's been set up. When you set up a new business in a large company that either has a fuel, but it had a lot of money, you may not do things in a particularly thrifty way. This business is readjusted and it's going to do things in a more thrifty way. So we have to compete for capital. And I think that this business will prove ultimately to be a very strong business. If it doesn't, it won't be in our portfolio. We're probably going to have to wrap up after one more question. And so if you could maybe go to the next question, we've got I think we've got three others that have follow-up questions in the queue. In the interest of time, I suggested those with follow-up questions, we can deal with them offline. And I'm trying to act on feedback. You always tell us that presentations are too long. So we cover presentations about thirty minutes, but Q and A session is going on quite long. So we take one more question. And then if you do have a follow-up, please follow-up with Martin and the Investor Relations team in the first instance and Jonathan and I are available either Scott, so Scott is around as well. So if you've got we will absolutely answer your question. So maybe we could go to the last questioner. And the final question is from Andrew Mulder of Credit Suisse. Please go ahead. Wow. Thank you. It's great to get my question in. Yes, just a couple of bond specific questions. I heard the earlier answer on the hybrid bond. But could you just please confirm that you would be able to call the hybrid if you wanted to even if the transaction has not been finalized by the call date? I think I saw in the announcement that the backstop date is currently something like the July 2021. So could you confirm that, please? And also, you've got sterling, euro and U. S. Dollar debt. Could you just confirm that within all of that debt, there are no covenants that would be triggered by the sale of Direct Energy, which is after all a pretty significant subsidiary? Thank you. So yes, confirm the answer is yes, you could call the hybrid and no, there are no covenants in our debt. Yes, that was an easy answer. Thank you very much. You did the best of that. Well, look, thank you very much, everyone, for coming along. It would be great to get your feedback on how this format works through the video and then the Q and A session. And the phone, hopefully, it's easier for you not not having to travel. But I'd just like to leave you with a final thought, which is this is a turnaround story. The Centric is a turnaround. And it's going be challenging and it is going to take us time. But I'm increasingly confident, and I've seen this over the past months, that we have all the levers we need to deliver the turnaround for our stakeholders. Our colleagues are fantastic, and they're able to deliver this. And you've got a team here with myself, with Jonathan, with Scott, with the wider scientific team, with the Board, we are all working together very well. We're all pulling together, and we are absolutely determined to deliver this, And I'm increasingly confident that we'll be able to zone. So thank you very much, and I look forward to speaking to you either individually or when we get to the next set of results. So thanks very much, everybody.