Good morning, everybody. It's Chris O'Shea from Centrica here. I'm joined by Johnathan Ford, our new CFO. He's been with us six weeks, and by Scott Wheway, our chairman. Hopefully, you've had a chance to see our results through the announcement about our disposal of Direct Energy. Also to watch our presentation, and with that, be happy to move into taking any questions you've got.
If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm, that's star followed by one to ask a question. The first question is from Mark Freshney at Credit Suisse. Please go ahead.
Morning, gentlemen. Thanks for taking my question or questions. On the pension deficit, your sale circular or sale document, 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 1.4 billion now or whether the pension fund trustees would demand that it's actually the current GBP 2.4 billion that's relevant here? 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. I guess my third question is on your services business.
Your services business, clearly, Johnathan, 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 British Gas, and then Johnathan can talk about services. The deficit we had on a technical provisions basis at the 31st of March 2018 was GBP 1.4 billion. If you roll forward the assumptions to today, recognizing things like discount rate, et cetera, that deficit would be GBP 2.4 billion. 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 double A corporate bonds. That's the first point. The restrictions that we've entered into 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. 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. 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. Those are the restrictions that are referred to in the document. We'll enter into discussions with them and agree the level of contribution. The reason for sharing the GBP 2.4 billion is simply that's a like-for-like comparison to the GBP 1.4 billion.
That does need to be funded over time if there's no other changes in the external metrics of discount rates, et cetera. It doesn't need to be funded from this transaction. Your second question was in terms of the higher consumption and the price cap and 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're seeing in the B2B space.
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 was North American Business, the drop in demand has more than offset that increase in demand. Net-net, we have seen a reduction due to the impact of COVID. Then on the services question, I'll pass it on to Johnathan 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 U.K. home business up 27%. I think that speaks to a very stable business with high levels of retention and recurring revenues. That's, as you quite rightly point out, the 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 U.K. picture there, customer numbers are flat to slightly down, but profits have increased a little bit. I certainly think with essentially 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. It's always much more efficient and cheaper to retain a customer than go and buy within the marketplace. I think we can do more there. I think we can also drive our customer service up. It's performed well to date, but I think there's more to do there, and I think technology can help us do that. We are investing to allow us to do that. I think we're also moving more customers online. That migration has also increased in the last six months.
That's a channel that customers like to use and are happy to use. 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 the 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. How should we think about the cost savings falling through the bottom line going into 2021? Are we really going to be seeing all of that savings plowed back into the business in terms of coming up with more price competitive products, et cetera? 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 of, 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, though, following the earlier question, could you give us an update on where we are on the FCA investigation and the result of potentially coming up with elements that could increase the competition here? Lastly, Chris, you said in your video recording that there's potential for further smaller 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. 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 Direct Energy. We have in the past, we could be accused of having overpromised and underdelivered. What I would rather do is to tell you what we've done rather than tell you what we're going to do. I wouldn't speculate on what assets we may or may not dispose of, we will manage this portfolio for value. There are some things that we could consider selling. If you would bear with me, we prefer to do what we did this morning, which is to let you know when we've done something. On the cost savings, I mean, how should you think about this? We are accelerating the GBP 2 billion program.
You're right in terms of will it all fall through to the bottom line? This is not profit support. This is about us being way more competitive. We will happily invest some of this in customer retention and in growing the business. I wouldn't speculate at the moment as to how much goes where. I mean, the reason that we're doing a 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 give them more time to think commercially and sell more to customers. We've got to get away from cost cutting being in need of profit support.
Therefore, very happy to reinvest some of this in the customer experience and in growing retention and in also growing customer numbers. I can't give you a number as to what will fall through. You'll have to make your own judgment on that. On the FCA investigation, could you just repeat the question? Because I wasn't sure that I got the whole part of the question.
The FCA was investigating how the insurance industry is able to price more competitively. They were supposed to come out with a decision in June, as far as I was aware, to implement, whether it's 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 on that. Yeah, I think actually they've delayed and they said it will come out later in the year. I suppose like many people there, they've been impacted by COVID. There's no update on that. I'm sure that 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. I'm hopeful that any regulator will be able to see that.
Thank you.
Thanks.
The next question is from Dominic Nash of Barclays. Please go ahead.
Good morning. Congratulations on the sale of Direct Energy. Two questions from me, please. Firstly, on the proceeds. You say you're going to pay down debt, but you've got quite long-dated debt. Will you be using the proceeds to call in longer-dated debt, and what sort of exceptional charges will we be looking at there? On the second question is almost like the race to the bottom. You're putting in 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 introducing a BGX to come up with a low-cost option. With that, are we actually going to start seeing in this environment a collapse in your competitors? With the way the world's going, are you starting to see the competitor pressure disappearing as they themselves get under pressure?
Secondly, are you at risk of everybody just going down the same route, and we end up with a similar insipid margin forevermore while everybody puts the same sort of cost-cutting processes in?
There's a lot to unpack in there, Dom. Look, first, I'll give a very high-level comment on the proceeds and the debt. I'll talk to you at the next point, Johnathan will jump in if I put anything wrong on the debt. We publish in our annual report the maturity of all of our debts. You guys know all the risk you take. You could all make your own judgment as to what something we'd call if we were to prepay debt. I would like just to 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 authority to another regulatory approvals in the state. We do have some time to think about this, but you'd be able to price any of that yourself.
In terms of is it a race to the bottom and BGX and what we're seeing in other competitors, we have seen quite some price competition in the past few months, and we have been more disciplined in the U.K. in that if people want to sell energy at a gross loss, then they're welcome to that business. That's not business that we want, and it's not a sustainable position. The competition hadn't eased, but the market practices are such that if you sell at gross loss, you're basically paying someone to take your product. That's not good business and won't last in the long term. I wouldn't want to talk too much about our competitors other than to say, 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 have been able to defer their network charges to National Grid. That has provided them with a capital inflow if they so choose to take that. That's attracting interest at 8%. That was a change to the rules introduced by Ofgem, and so companies can access that. You can make your own judgments to whether or not that's a good idea, but it's very much a temporary measure. We're in this market for the long term, and we'll be disciplined in our pricing, but we will be competitive as well. BGX is not a different brand.
What we've been doing, if you take a step back in our U.K. Business division, a couple of years ago, we tried a digital-only platform we called BG Lite. Quite successful. We've got over 30,000 customers on that. We built something in an agile way, test and learn. We've got some success there. We've decided a few months ago to replicate that in the residential business. Again, to test that and get a proof of concept to see how that works. Probably not digital only, probably digital first, we believe that customers still want to be able to pick up the phone. What we're doing here is looking to see what kind of platform alternatives can we have. We've got over 10,000 customers, I think, on the BGX platform. We're learning a lot.
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 manner they wish. In the first half through COVID, we saw [2,000] of our transactions with British Gas actually being carried out online, which is tremendous. There is an appetite to do things online, and what we're trying to do is to satisfy that customer demand.
Thank you.
The next question comes from [audio distortion] of Bernstein. Please go ahead.
Thank you. There's probably a bit of overlap with the previous questions, but just want to focus on the use of proceeds. 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. Just wanted to understand what might be below the line adjustments that might come through because of the sale. 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 benefit below the line? Because above the line, it seems like it's a 3p hit to earnings going forward. Just wanted to understand the nuance. Of course then, if you're going to buy back any bonds, one would have to see, and there'll be a hit.
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.
On that, I'm looking at Johnathan. I'm nodding. It's the same answer, I suppose, to the last one in terms of below the line. We've just signed this transaction. Obviously, we know our debt portfolio. We know how we could retire debt. You can make the judgment. That moves about because obviously as the risk-free rate moves, then the price of any buyback moves. Rather than speculate, I think what we'd have to do is wait and see where the market was at the point that we completed this transaction. For the contribution to the pension scheme, we are talking about a substantial contribution. We will negotiate with the pension scheme the best way for us to do that. I think that you'll just have to make your own judgment on that.
The proceeds will go strengthening the balance sheet either through a reduction in debt or a contribution to the pension scheme. I view both of those quite similarly. They are both essentially debt. I think you think of that. In terms of the comment, I think I mentioned that Direct Energy contributed, I said around about 26% of our pre-tax operating profit last year. You can work that through yourself. You know the U.S. tax rate. We are tax paying 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 Young of Investec. Please go ahead.
Yeah. Good morning to everybody. Three quick questions, hopefully. The first one on dividends. You've said in the Direct Energy document 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 T's and C's of Direct Energy and the relation with the pension fund appear to place some restriction, but presumably not a total barrier. Also anything that you may or may not have done with the various support mechanisms offered by the U.K. government. 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 and 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. The final question, an accounting one. Note 6C in today's release sets out a value of GBP 44 million for the recoverable estimate on E&P. Is that a number that relates to your 69% stake after all decommissioning liabilities and net cash or net debt positions that Spirit Energy have been taken into account? Thanks.
Thanks, Martin. Thank you very much for that very detailed accounting question, which Johnathan will be no doubt delighted to take. Let me start with heat pumps and the like. As we talk about restrictions on dividends, I'd like to ask our chairman to give you, I think that we've got the chairman here, ultimately dividends is a board decision. I'll give you my view, Scott can add in the view of the board, we can go to Johnathan in terms of the accounting though. I mentioned heat pumps. I think the possibility of hydrogen being part of the economy, home energy management, electric vehicles, et cetera. The point to me 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 U.K.'s largest energy supplier.
I think that as we move through decarbonization, we'll have a mix of technologies. I think that you'll find air source heat pumps, I think you'll find hydrogen pumps, and I think it's entirely possible that hydrogen will become part of the energy mix. The point is that we are very well placed to both enable that and to benefit from that. We're not going to throw our weight behind any one technology over another because I don't think we know any better than anybody else. These are great opportunities for us as we move forward, and I'm actually very excited about the opportunities that we see in this.
Therefore, we'll keep that under review, and we will be fast followers and such that we will make sure that we understand what technology is going to take and that we're very well positioned for that. We're not going to take a position 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, we're able to provide them. 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. We are free, but we're also prudent, and we all recognize the importance of distributions.
I think it's probably best for us to take advantage of the fact that our Chairman, Scott Wheway, is here. Scott will share his view and the view of the board.
Morning, Martin. Thanks for the question. Look, let me just underline what Chris has described to you. The board is acutely aware to Centrica's investors and to Centrica's stocks. Frankly, Chris and I are in violent agreement that the truth is that Centrica recently has had a bit of a history of over-promising and under-delivering. We want to be very cautious and very prudent in the way that we proceed. 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 debts, 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 any more 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. On that, you wouldn't apply for the most detailed read of the results. I'll pass you over to Johnathan to give you a high-level response. I would suggest that if this gets into any detail, probably best to take this one offline. I'll ask Johnathan to do that, but in the interest of time, we'll save detailed accounting questions for when we go for a [walk call]. Yeah.
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. Also for Connected Home, 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. 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. 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.
Excellent. Thank you. One of them, Fraser, we're all well because of answers for answers. Martin came up with three, and you came up with four. If somebody comes up with five, I'll think you're all trying to trump each other. Let me take them in order. The extent the sale of Direct Energy impacts on Centrica Business Solutions. 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. We've decided to retain that. We do see this as a strong market going forward. Undoubtedly, there was some core selling opportunities with Direct Energy, which we no longer have. We will no longer have once we've sold the business. We still see the opportunity for us to grow Centrica 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. What we won't do is fund lots of losses for a long time. We have a view, and time will tell whether that's right, but you can be sure that we, and hopefully you see that we will take action and decisions very quickly. We'll watch this and then decide what to do. I think this is a good business we've got out there. In terms of Hive, well you call it Connected, I might call it Hive. We've got a good product there. This, in my view, will never be a material contributor to profit in and of its own right.
Customers that have Hive, everything that we see tells us that the retention level is higher, the satisfaction is higher, et cetera, and customers that take Hive and services and energy probably have some of the best customer satisfaction there. What we've done is it's no longer a business unit, and the step's 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. We think we can benefit over one million 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. What we won't do is to continue to throw money at this.
There is definitely some benefit there, but it's more as a customer experience benefit, customer retention benefit rather than a standalone business unit. It's no longer a separate business. In terms of nuclear, when did a pause become a stop? That's a good question. 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 EDF as our partners, we wouldn't want to return it to service. We obviously have a view that the revised safety case allows us to operate this safely.
We've got to reach agreement with the ONR. If we can, we'll reach that. If we can't, it goes without saying that we won't. You've got to remember that a lot of the value in this portfolio sits in Sizewell. It's a different kind of technology. We're undoubtedly seeing some issues, the issues we've got in Dungeness and Hunterston, well, they're different issues. They are in the older plants. We just want to see whether we can get these things into common position with the regulator, get them up and running again. If we can, we can proceed with the sale as we've got. We either can decide to retain this, we could proceed potentially with a different type of sale. What we have agreed with EDF 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. 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 is the risk. Johnathan can talk about our bad debt levels and the like. I'm equally worried about the impact of potentially of COVID. Specifically, I'm worried about a mass unemployment event. That's the thing that worries me most. So if our underlying business is strong, if the economy is strong, and if lots of people lose their jobs and can't pay their bills, then that's more problematic. In the U.K., bear in mind, it's now effectively a regulated market. It's not simply that we have merchant risk here. There's also risk in terms of for the regulators.
This is one of the few areas where having a 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. I worry a little bit about that. Other than that, I actually feel very optimistic about the opportunities that we've got ahead. What we found during COVID is, when we've had to, we can work really very differently. Our customer service agents were always in the office, and now they're all at home. That opens up a huge amount of possibilities for us. Our ability to do things quickly, and 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.
I think a lot of our colleagues have learned just how to do things differently. I'm actually quite excited about that. The macroeconomic environment is clearly something that will worry us as we go forward. We can't control that, so all we can do is make sure that we're very, very well prepared. As I mentioned, 15,000 colleagues working from home every day and the system resilience, touch wood, 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 could work from home. We weren't sure which half of our building in Windsor to send home to see whether the system could cope with it. I was quite nervous our IT department were fine.
We had to send everybody home, and we found it could work with 15,000 people. Through events like this, you learn a lot. I'm really actually optimistic about what we can do going forward, but I remain worried about the economic backdrop. Maybe Joh
nathan can talk a bit about bad debt specifically and our worry around that.
Yes. With bad debt, we took an extra charge of about GBP 60 million 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 2009. 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. 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 lowest 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. Again, that's a big unknown. Clearly, if there's a reoccurrence of COVID, that's also a risk.
Okay, thanks.
The next question is from John Musk of RBC. Please go ahead.
Yes. Morning, everyone. Just two questions from me. Slightly repeating, unfortunately. On the dilution impact from the U.S. sale, you're obviously not giving direct guidance on what you're going to be doing with the proceeds, other than saying there's a large chunk to go to pension. 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 one and a half billion. How much debt do you think you can carry in this business post the U.S. sale? 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? Is it all Chinese counterparties?
Thanks, John. Let me take the second one first. 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. I'm quite confident about that. We watch with interest what the U.K. and Chinese governments are doing just now. That had no impact on our decision and has no impact going forward. If Chinese buyers are not acceptable, then so be it. It just means it's a smaller buyer pool. On that, we'll see how that plays out. On the dilution impact, what's the right level of debt going forward? Normally net debt to EBITDA is a very, very good measure. When you've got an E&P business that's got a huge capital investment profile and a large depreciation charge, it's a less relevant measure.
I think that if we didn't have Spirit Energy, then we'd have an easier way to talk about gearing. At the moment, you need to just bear with us to say we will carry the appropriate level of debt on the balance sheet. 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. That's how we intend to use the full $3.6 billion disposal proceeds.
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 calling that bond and not issuing a new one? That's my first question. My second question is just on the credit metrics. Clearly, there's a big change within the group. The group is triple B. 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? Thank you.
Let me try and I would always hope that we would have a higher credit rating. Johnathan can take you through the process. Obviously, we've been through processes with the agencies on this advancement of transaction as you would expect. On that hybrid, 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 in line with the pension trustees as we go forward. Maybe Johnathan could talk about the credit metrics.
On the credit metrics, as you know, we continue to focus on retaining a strong investment-grade credit rating. Don't really want to go into the discussions that we've had with the rating agencies. We can't do that. 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.
Morning, everybody. I'm going to talk about something and ask some questions about something completely different. In the power presentation on slide 16, you have all your different businesses. What struck me this morning was that you said that each customer is going to be served by one business unit, which will require quite a lot of restructuring. Could you talk through how you're going to deliver that? Will you need more IT spend? That is quite a big call. I'm also, secondly, just on your business customer mix, I noticed that you've reduced a lot of I&C customers. Is the focus in business energy going to be much more SME than I&C going forward? Thank you.
Thanks, Verity. The key point is, if you take, for example, under what we had, if you bought energy and services, but you also were a customer of Hive, you were served by two different business units, you had two different customer experiences, which we don't think is the best way to deal with customers. Hive is now part of British Gas. That's already been done. We'll integrate those customer experiences. Similarly, in Centrica Business Solutions, we had teams that would go out and would look to sell business solutions type kits. Gas engines, solar panels, batteries, operations and maintenance contract. We also had a business that would go out and try and sell energy. Those two businesses have now been put together. Centrica Business Solutions now includes a formerly UKB business.
That, again, we believe the customers, so if a customer has somebody coming from UKB to sell them energy, and then somebody coming from Centrica Business Solutions, understandably, they might not feel that they're getting the best customer service. They'll be served by one business. I don't anticipate that there'll be a huge amount of IT spend required for that. We're not going to go into some massive systems change in order to integrate back offices. There's a lot that you can do with people we call middleware and front office customer-facing IT spend. The digital experience will improve, but that doesn't mean you have to integrate your back office. That's it. Keeping it. In terms of your question on I&C and SME, the margins in I&C business, so they're volume business unit. You've got lots of volumes and smaller margins.
Again, I mentioned earlier about the residential business. We will manage this for value. We won't chase volumes in I&C. Margins in SME are better, but obviously volumes in I&C are a lot larger. Again, you can have some customers you can lose couple of customers deliberately or inadvertently, and they can take a lot of sites away. You do see that number moving up and down. It's not that we're exiting that market. We don't want to be in that market just to have high volumes.
Thank you.
The next question is from Ajay Patel of Goldman Sachs. Please go ahead.
Good morning. I have three questions, if I may. Apologies if these have been asked. I logged on a little bit late. Firstly, I just wanted to look at the technical provision deficit on the pension side. It went up from GBP 1.4 billion to GBP 2.4 billion. I'm just thinking, 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? 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 didn't see that in the statement. I just wanted to see if there's any clarity there. Thank you.
Thanks, Ajay. Thanks very much. There's a lovely answer about the tax implications, and I'll resist the temptation to give you the wrong answer. Johnathan can talk about that, and also take you through the movement in the things that have driven the pension deficit movement. I mean, in terms of the proceeds, what we've said is that the proceeds will be retained to strengthen the balance sheet through a combination of a material contribution to the pension scheme and the rest will be used to reduce net debt. Obviously, we've got some time between announcement and closure. We're left with the 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.
We anticipate a substantial contribution to the pension scheme. The rest will be used to pay down net debt. I'll pass over to Johnathan to talk about pensions and tax.
The technical provision, as we say, is increased on a roll-forward basis from 1.4 billion to 2.4 billion, and that's almost entirely down to the movement in the discount rate. We're 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 GBP 100 million. 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. First of all, on the restructuring program, 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. Then just on E&P, how confident are you that you'll be able to sell E&P at a price that makes sense? Why are you not holding it for sale if you're sure that there will be a transaction? Thanks.
Excellent. I'll resist the temptation to point out that some do identify you've asked two more to go to six questions, Fraser, so there definitely is some kind of competition here. In terms of the question on restructure, the first thing is you mentioned the risk and level of service. As we mentioned, the majority of the job losses will come from management levels, will come from people that don't actually interact with the customer. The first thing we do is to focus this. The reason we're doing this is to simplify the business. It's to make it easier for our colleagues in Centrica to focus more on the customer than on the internal workings of Centrica. That's the first thing. The second thing is that the majority of the losses come from people that don't actually interact with the customer.
What it means is there's no impact on customer service from those people leaving. The other way, it will sound like a glib answer, but I do mean it seriously, is we have great people, and we want to empower them, and we want to show them that we trust them. There is a bit of an adjustment there. I think that we've got to show people that we support them. We've got to give them responsibility, and they're responding. As I mentioned, we've learned through the COVID crisis just what people are capable of. In some ways, what we're trying to go with is an experience, is an ability for us to learn what our people are capable of, but also to show them what they're capable of. I think they've responded tremendously well.
There's always improvements, I think they've responded really well. For us, it's about managing it properly, making sure we don't put too much stress into the organization. The other thing you've got to bear in mind is we have been doing this for five years. My assessment is that the stress of just doing this year after year after year should not be underestimated. 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. I think actually this can reduce the stress in the organization. Right now, it's stressful for people. Particularly because they're doing it when they're at home.
We will manage this very closely. We have great people, and they're capable of a huge amount. I'm confident that we will get the right. We monitor our level of service quite closely. Your question on E&P. I've always said I'm confident that we can sell this. The question is at what price and in what form? We are committed to exiting the production of hydrocarbons. It's not a fire sale. We're not panic sellers. The reason that we paused this process is that we wanted to understand what the level of interest was and give things time to settle, and then go back to the market and figure out what was the best way to go back to the market for this. 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 is you've got to be highly confident of executing a transaction within twelve months. In order for you to hold a for sale, I'm looking at Johnathan and our group controller for that, but I know then this, because I'm a bit rusty on accounting standards. In order to do that, it means a very, very high test. Whilst I'm very confident we can sell this, I couldn't say at the 30th 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
If you bear with us and 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 opening further movements on this cap to essentially make that a pass-through? Quickly on the impairments for E&P and Nuc, can you just confirm you're now using the forward curve to impair those assets as at 30th of June?
Let me take the conversation with Ofgem. I've spoken a lot to Ofgem, probably a lot more than Ofgem would like. I 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. We've had energy agency supplier round tables with Ofgem on a weekly basis and similarly, we've had a good conversation with BEIS as well. They are acutely aware of this issue. What we encouraged the regulator and the government to think about, so there were some suppliers that immediately wanted an emergency fund. 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. We actually didn't think there was a need for some emergency fund, and I remain of that view.
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. We're quite comfortable with that. As you know, through the price cap, there is a mechanism for recovering bad debt. It's a live mechanism, and there are different opinions amongst various energy companies. I would say we've had 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.
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. I think we just have to wait and see. It has to be driven by customer behavior. With that, I'll then ask Johnathan to answer the question on carbon and payment.
The answer is, yes, we are using forward curves P 50, forward curves long dated. As we mentioned in the script there, that the impairment is driven off an expectation of around 10%-30% lower power prices.
Thank you very much.
The next question is from Bartosz Bieliszczuk of Société Générale . Please go ahead.
Good morning. Just very short two questions, please. Firstly, on your legacy contract, I wonder if the first half performance was actually a bit better than I thought. If this changes somehow your guidance in terms of the lost contract will bring this year and in the following years. Secondly, on Centrica Business Solutions, I would like to know your view on a post-COVID world and your expectations in terms of revenue growth and actually customer demand for this sort of services. Thank you.
Thanks. Look, I'll take the CBS question then ask Johnathan to answer your question, which I think relates to the gas asset, which is what the results were in the first half and if this changes our view going forward. During COVID, we saw quite a reduction in customer sign up for Centrica Business Solutions contracts, which is to be expected when you're in a time of extreme uncertainty, you don't necessarily want to commit capital. 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 middle of June it wasn't clear that we would actually deliver that. The team in Centrica Business Solutions were very confident. I had a [side step] with a colleague [in the liver].
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. I think you hear governments talking about that more. You certainly hear the U.K. 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 reverse that. Centrica Business Solutions is there to help companies decarbonize and help them to reduce their solutions as well as to help them be more efficient. There can be cost savings there as well.
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, whether it be companies or government bodies, to reduce both their carbon emissions and their costs. I think 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. June was a very strong month, and one swallow doesn't make a summer. I do think there's quite a lot of demand for that. We'll see how we progress 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 Centrica Business Solutions as well, because, like anybody, in times of uncertainty, you don't really want to commit. Hopefully that answers your question on business solutions, I'll ask Johnathan to talk about the gas asset we focused on in the first half and what reviews going forward.
On the gas asset book, I think we previously indicated that we were looking at a loss of between GBP 50 million and GBP 100 million. 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 Lang of UBS. Please go ahead.
Hi, everyone. Good morning. Just two quick questions from me. Coming back to the technical pension deficit, firstly. You mentioned the GBP 2.4 billion based on a roll forward of the prior methodology. I'm just wondering, what are the factors by which that methodology could actually change in March 2021? Is it just input assumptions like inflation, mortality rates, et cetera? Could there be something else, and potentially something more material? Secondly, could you give a quick recap of plans around Connected Home and Distributed Energy & Power? Apologies for the prior names. They're still kicking my head that way. They're still over a GBP 60 million EBIT drag in H1. You said you had several approaches for the U.S. businesses. I'm wondering if you've had any approaches for these businesses. Thank you.
Okay. Let me see if I can answer your technical provisions question. Anybody that has been involved in accounting pensions, you know there are a huge amount of inputs. The biggest ones are mortality. How long are people living? You've also got the discount rates in terms of risk-free rates in bond markets, including government rates. You've got inflation, you could have RPI or CPI. I don't know which one we've got in ours. You've also got a view on how strong is the covenant of the company. That can lead trustees to take a more positive or a more negative view. Now, legacy pension schemes. The trustees were [written away]. They put a lot of power in the hands of trustees. You'd never enter into a contract like that today. They are what they are.
You've got to remember that they tend to be staffed by actuaries who don't tend to be the most optimistic of people in any way. There's a whole bunch of things that can move it. If you look at the mortality table, you look at the interest rates, and you look at inflation, that's a relatively good proxy for that. You've also got to look at how the asset portfolio works. The first part dealing with the legacy and the liability, maybe second part on the asset side. On CBS and Hive, again, I just refer you back to, I'd rather tell you what we've done than tell you we're going to do something. I wouldn't want to disclose each different individual approaches that we've had. CBS and Hive are quite different.
Distributed Energy & Power, which is now Centrica Business Solutions, and Connected Home, which is Hive. They're very different. Hive is a product within British Gas. We believe it drives a great customer experience and there's a benefit there. Time will tell. If that's not true, we'll no longer invest behind that. If it is true, we'll happily invest behind it's not a business unit. Centrica Business Solutions is a very different kettle of fish. We do think that that is a standalone business unit. We've now included the U.K. B2B energy supply business in there. There's more substance, I think, to that business. We've pulled together the customer interface, as we mentioned earlier on. I do see that business as a path to profitability, they have to work hard in order to demonstrate that.
Also 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 or feels that it has a lot of money, you may not do things in a particularly thrifty way. This business is readjusting, and it's going to do things in a more thrifty way. They have to compete for capital. 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. Look, we're probably going to have to wrap up after one more question. If we could maybe go to the next person we've got. I think we've got three others that have follow-up questions in the queue. In the interest of time, I suggest that those with follow-up questions, we can deal with them offline.
I'm trying to act on feedback. You always tell us our presentations are too long, so we cut our presentations to about 30 minutes. Q&A sessions go on quite long. We'll take one more question and then if you do have a follow-up, please follow up with Martin in the Investor Relations team in the first instance. Johnathan and I are available. I know Scott's around as well. If you've got, we will absolutely answer your question. Maybe we could go to the last question.
The final question is from Andrew Moulder of CreditSights. Please go ahead.
Oh, wow. Thank you. It's great to get my question in. Just a couple of bond-specific questions. I heard the earlier answer on the hybrid bond, 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 middle of July 2021. Could you confirm that, please? You've got sterling, euro, and US 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.
Yes, to confirm, the answer is yes, we could call the hybrid and no, there are no covenants in that debt.
Yeah. That was an easy answer. Thank you very much.
You take the best of us. Well, look, thank you very much, everyone, for coming along. It'd be great to get your feedback on how this format works through having the video and then the Q&A session on the phone. Hopefully, it's easier for you not having to travel. I'd just like to leave you with a final thought, which is this is a turnaround story. Centrica is a turnaround, and it's going to be challenging and it is going to take us time, but I'm increasingly confident, and I've seen this over the past few 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. You've got a team here with myself, with Johnathan, with Scott, with the wider Centrica team, with the board.
We are all working together very well. We're all pulling together, and we are absolutely determined to deliver this. I'm increasingly confident that we'll be able to. Thank you very much. I look forward to speaking to you either individually or when we get to the next set of results. Thanks very much, everybody.