Centrica plc (LON:CNA)

Earnings Call: H1 2018

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Jul 31, 2018

Ladies and gentlemen, good morning, and thank you for coming to Centrica's twenty eighteen Interim Results Presentation. As usual, we'll be reporting on our first half results and also providing an update on our strategic progress. First, a word on, as usual, on safety in this building. There are no planned fire alarms today, and any building evacuation will be announced by Tannoy. Emergency exits are marked at the front and the rear of the auditorium, and Goldman Sachs staff will direct you to the muster point, which is towards the rear of the building on the junction of Stonecutter and St. Bride Street. This morning, I'll summarize our first half performance, full year outlook and business headlines. I'll also provide a reminder of our multiyear performance to date and our current priorities. Geoff will then take us through the results in detail before I come back to provide an update on the progress we're making in demonstrating customer led gross margin growth on our asset businesses and on the key on The U. K. Energy supply default tariff cap. Before I do that, a moment on the other announcement we made this morning. We announced that after four years in Post and over fifteen years with the company, my friend, Jeff Bell, will be stepping down as CFO at the October. With his extensive knowledge of Centrica, he has been an invaluable partner as we reshape the group and strengthen the company in this first phase of our repositioning following the announcement of our strategy in July 2015. I'd like to thank Jeff most warmly for everything he's done for the company. Jeff will be replaced by Chris O'Shea, who will take up the post of CFO and join the Board on the November 1 after a handover period. Chris is an experienced CFO, most recently of Smiths Group plc and prior to that, Vesuvius plc. Chris has broad experience of the energy industry, having spent many years in both World Up Shell and BG Group plc. He's ideally suited to take Centrica through the next phase of its transformation, and I look forward to working with him. We also announced earlier in July that Mark Hannifin will be retiring at the March 2019. And once again, I would similarly like to express my appreciation for his significant contribution to the company. His successor as Chief Executive of Centrica Business will be the subject of a separate announcement. I realize this is a lot of change within the executive team, but the Board has continued to pay close attention to careful succession planning. We experienced a challenging environment in the first half of the year with extreme weather, rising commodity prices, regulatory uncertainty and continuing competitive pressures. The rising wholesale commodity prices resulted in margin compression in Energy Supply that helped drive improvement in the E and P financial result. Although challenging, against this backdrop, we remain on track to deliver the twenty eighteen group financial targets outlined in February. First half gross margin and EBITDA were stable year on year, while adjusted operating cash flow was £1,100,000,000 down 11%, but including the impact of a £200,000,000 working capital build due to rising commodity prices and the impact of cold weather. Net debt was £2,900,000,000 Adjusted operating profit was down 4% to £782,000,000 while adjusted EPS was down 22% to 6.4p due to a higher effective tax rate of 39%, reflecting E and P's higher share of the profit mix. Jeff will cover this in more detail shortly. For the full year, we expect higher adjusted operating cash flow than in 2017, within our targeted £2,100,000,000 to £2,300,000,000 range. We expect capital expenditure to be below our £1,100,000,000 limit for this year and net debt to remain within our 2018 targeted £2,500,000,000 to £3,000,000,000 range. As we outlined in February, we expect to maintain our full year dividend at its current level of €0.12 per share, provided we're on track to deliver 2,100,000,000.0 to £2,300,000,000 per annum on average over of operating cash flow over 2018 to 2020 and maintain net debt in the 2,250,000,000.00 to £3,250,000,000 range. Let me now cover the main business headlines from our presentation today. As you know, we have a major focus on stabilizing and then growing gross margin from our mix of businesses. Although consumer account losses continue, this has been at a reduced rate compared to both first half twenty seventeen, especially if the impact of our 2018 price increases take into account and to the full year. In some areas, we've made significant progress with U. K. Home Services account numbers stable in the first half for the first time since 2011. We've been developing our capabilities to underpin gross margin through improved customer segmentation, developing enhanced tailored propositions, maximizing customer lifetime value and reducing our cost to serve. I'll return to some of this later in the presentation. In North America, both Energy Supply businesses have shown improvement relative to the 2017. Although retail power supply continues to be weak in North America business, we are seeing encouraging North America business forward book development for 2019. I should add that UK business has also seen good recovery compared to the 2017. We're seeing encouraging progress in Connected Home and Distributed Energy and Power with strong development of our pipeline of products, services and channels in Connected Home and firm order book growth in Distributed Energy and Power. Although revenue conversion is behind planned levels in both businesses, we expect revenue growth to accelerate in the second half. Demonstrating 2018 revenue delivery is important, but even more so is securing a material forward pipeline and momentum at scale, and this will be the ultimate determinant of success if we are to hit our 2022 revenue targets. In exploration and production, Spirit Energy has been successfully established and is focusing on reliable operations and creating value through portfolio optimization. Rough is fully operational as a production asset and delivered strong volumes in the first half. Cost efficiency remains a key priority, and we continued our strong track record of delivery. We remain on track to deliver £200,000,000 of savings for the full year. And finally, we're still awaiting clarity on the regulations for the temporary default tariff cap in The UK. This is not a simple task for Ofgem, and we continue to engage constructively and have been contributing to their consultations as the process concludes while implementing our own mitigating actions. Before I hand over to Jeff, I'd like to set our 2018 performance in a longer context, both looking back to 2014 and as we look forward to 2020. This chart shows revenue, adjusted gross margin, operating cash flow and operating profit for Centrica since 2014. The key message is how resilient Centrica's portfolio and performance has been despite the collapse and partial recovery of energy prices, increased competition and loss of customer accounts, the structural advantages given to small suppliers in The U. K. Energy market, U. K. Regulatory intervention, including two price caps already in place and the changes we've made to Centrica's portfolio as we reduced our net debt. What you can see is that despite these significant changes in prices and some volatility in our revenues, Centrica's adjusted gross margin, operating cash flow and operating profit have been relatively stable over the period. This is not just serendipity. We've had to work strenuously to underpin gross margin through a focus on quality, not quantity, and on reducing our cost of goods. We've managed to deliver adjusted operating profit in a range around, on average, just under £1,500,000,000 per annum through the mix of our businesses and through driving operating cost efficiency. All of this has resulted in a £2,100,000,000 to £2,300,000,000 range of operating cash flow adjusted operating cash flow throughout the period. And I said a moment ago that we expect this to continue in 2018 as indicated on the slide. It is this delivery of stable operating cash flows, combined with discipline in our capital deployment and net debt, which underpins our expectation to be able to balance sources and uses of cash flow and to maintain the current level of dividend. Finally, I recognize that although we've demonstrated relative stability of gross margin over this period, we have not yet demonstrated the ability to grow it. This is key if we are to deliver on our overarching objective of operating cash flow growth and therefore delivering both growth and returns over the medium term. Let me therefore turn to our medium term priorities of performance delivery and financial discipline, which we outlined in February. We have four performance focus areas to 2020 in addition to maintaining capital discipline and balance sheet strength. They are demonstrating customer led gross margin growth driving cost efficiency hard towards being the most efficient price setter, consistent with our brand and propositions, improving the effectiveness of Centrica's organization and securing the capabilities we need for 2020 and beyond as the world of Energy and Services continues to change. We're making material progress in all of these areas, but perhaps the most challenging for us so far is to overcome some of the competitive and regulatory pressures on our business and to demonstrate the ability to grow gross margin through the customer. After Geoff has reviewed our results in more detail, I'll be back in about twenty minutes to spend some time expanding on our progress in this area. Let me now hand over to Jeff. Thank you, Ian, and good morning, everyone. Let me start with our financial headlines for the 2018. Revenue was up 7%, largely reflecting the higher impact of volumes and commodity prices. Gross margin was broadly stable overall, while adjusted operating profit fell 4% to £782,000,000 with lower profits from our customer facing division, Centrica Consumer, Centrica Business, largely offset by increased profits from the E and P division. I'll cover this in more detail shortly. Adjusted earnings fell by 20% to £358,000,000 primarily reflecting the impact of a greater proportion of the group's operating profit from the more highly taxed E and P division and historic tax settlements in 2017. As a result, the effective tax rate rose to 39%. We expect the full year effective tax rate to be broadly a similar level. The interim dividend has been set at 3.6p, in line with our established practice of paying 30% of the previous year full year dividend. Turning to cash flow. EBITDA was up 3% to £1,320,000,000 while adjusted operating cash flow was just over £1100000000.0.11 percent lower than in the 2017, primarily reflecting working capital outflows due to year on year variances in U. K. Weather. Group net investment of £463,000,000 is consistent with the prior year period when excluding disposal proceeds from the Lynx Wind Farm joint venture in 2017. Net debt of just under £2,900,000,000 is around £300,000,000 higher than at the start of the year, reflecting the higher working capital outflows and the one off costs of our debt repurchase program earlier in the year. Now briefly touching upon commodity prices. Brent oil, NBP gas and baseload power prices continued their recovery over the first half of this year. This is positive for our E and P and Nuclear businesses. However, with our forward hedging of production, we would expect to see more of a benefit in 2019 and 2020, while in the short term, higher commodity prices had put pressure on energy supply margins. Turning now to Centrica Consumer. Total gross margin for the division was down by 8% to £1,400,000,000 while adjusted operating profit was down 20 to £430,000,000 U. K. Home profit was down 20% to £393,000,000 and within this, Energy Supply profit was down 16% to £321,000,000 Although the cold weather in the first quarter was positive overall for Energy Supply, gross margin was impacted by a lower number of customer accounts, the full impact of the prepayment cap and higher commodity and other input costs. Additionally, the cold weather in the first quarter was negative for Energy Services, with the record number of callouts we experienced resulting in higher costs. In addition, we continue to invest in future growth that won't materialize until the second half of the year. Reflecting these factors, Services adjusted operating profit was down 33% to £72,000,000 We would expect an improvement in the services result for the second half of the year as we assume a return to more normal weather conditions and as our cost efficiencies accelerate. The investments we are making in data science and customer segmentation are also expected to improve our pricing sophistication and customer mix. Ireland operating profit fell 55% to £15,000,000 predominantly reflecting the impact of scheduled extended maintenance outage at the Whitegate Power Plant, its first major overhaul since it was commissioned in 2010, and higher commodity costs. The White Gate plant came back online in May and has seen high levels of reliability since, while a tariff increase to reflect the higher commodity input costs will take effect in August. North American home profit rose 14% to £66,000,000 with improved gross margin from our services business and the impact of the closure of our loss making residential solar business in the second half of twenty seventeen. In Connected Home, gross revenue rose by 31% to £21,000,000 with an increase in product sales. Gross margin also grew by 67%, although the adjusted operating loss was flat year on year at £44,000,000 as we continue to underpin future growth through revenue investments. Total Centrica Consumer adjusted operating cash flow declined by 60%, which largely reflects the impact of the working capital outflows I referred to earlier and lower year on year profitability. While the previous slide showed the first half performance summarized by business unit, this slide shows the primary commercial drivers of the Consumer division's first half operating profit. External factors were slightly positive, with negative impacts on gross margin of the prepayment and safeguard tariff caps and foreign exchange movements more than offset by the positive impact of higher consumption in energy supply due to cold weather despite the additional costs in service. The choices we made to invest in services growth and to undertake the maintenance outage at Whitegate negatively impacted profits, while lower customer accounts in U. K. Home and North American home energy supply were the primary drivers of reduced gross margin. As in the previous periods, our cost efficiency program played a significant role in partially offsetting these factors at an operating profit level. Now let me turn to Centrica Business, where gross margin was down 13% to $5.00 £7,000,000 and adjusted operating profit fell to £96,000,000 primarily driven by continued weakness in retail power and North American business and losses from the legacy gas contracts in energy marketing and trading, which we highlighted in our February preliminary results. I'll provide more detail on these performance drivers in the next few slides. Before I do, although small, the Central Power Generation segment operating profit was down £12,000,000 primarily due to nuclear outages earlier in the year at Seizel and the current outage at Hunterston V. Adjusted operating cash flow fell 41% to £262,000,000 largely reflecting the timing of working capital payments in Energy Marketing and Trading. Here's a summary of the primary drivers of Centrica's business gross margin and operating profit. The impact of external factors, namely weather, foreign exchange movements and commodity price changes, were broadly neutral, while additional investment in distributed energy and power was offset by cost efficiencies. The lower gross margin and adjusted operating profit were predominantly driven by the impact of the losses on our legacy gas contract and weaker performance in North American business, partially offset by improved underlying Energy Marketing and Trading and U. K. Business performance. As we did in February, this slide breaks out North American business gross margin by its components. On the left hand side, you can see good gross margin capture in the gas supply and optimization books in the first half, with a particularly strong performance in the first quarter as the business captured value in the cold weather environment. However, this was more than offset by a reduction in the retail tower book, with unit margins remaining at lower levels during 2018. The latter was driven mainly by the timing of revenue from historic sales of longer term fixed price retail contracts compared to the timing of the input costs, in particular capacity market charges. As a result, operating profit fell by 51% in dollar terms to $69,000,000 although by 55% in sterling as foreign exchange rate movements had a 10,000,000 year on year impact. However, the launch of new customer propositions and improved sales channel mix and the system and process improvements implemented in the second half last year are delivering, and we should begin to see improvements going forward. And as you can see on the right hand side of the chart, our margin under contract in 2019 is ahead of where we were at this time last year as we see the unwind of the higher capacity market and other input costs and a progression towards more normalized Power Retail unit margins. Turning now to the remaining Centrica business segments. U. K. Business is recovering as we expected and delivered a 28% increase in gross margin, with no repeat of the electricity cost volatility and phasing of energy settlements seen in the first half of last year. The number of small and medium sized enterprise accounts was broadly stable, while we continued to deliver improved operational performance. Distributed Energy and Power gross revenue was slightly down compared to the 2017, although gross margin was up, reflecting improved project delivery. The business reported an increased operating loss due to continued investment in growth. With the order book significantly higher than at this stage last year, we are building good momentum and expect strong revenue and gross margin growth in the second half. We currently expect full year revenue to grow by around 50% or 40% after the impact of the adoption of IFRS 15 this year for the full year and the second half operating loss to be broadly similar to the first half. Energy Marketing and Trading delivered lower gross margin and reported a reduced operating profit, although as you can see from the chart, our core Energy Marketing and Trading activities, route to market services, trading and optimization and LNG delivered good growth as we were able to capitalize on commodity price volatility in the first quarter. Gross margin from these activities was up 30% year on year. However, gross margin from the remaining three flexible legacy gas contracts, which in the right blue on the chart, which we've been optimizing for value since we've emerged in 1997, was negative, in line with the guidance given in February. With the two most profitable of these contracts ending during 2018 and the remaining contract expected to be loss making this year based on the current commodity price inputs that make up its commercial terms, we still expect 2018 full year adjusted operating profit in Energy Marketing and Trading to be around half the level of 2017. Moving to exploration and production, which now includes Spirit Energy and Centrica Storage. Production in Europe was up 36% to 32,000,000 barrels of oil equivalent as the Byron Gas assets were consolidated into Spirit Energy, and we saw significant production from the CSL operated rough asset. Realized European gas and liquids prices rose, and when combined with the increased production, realizations were significantly higher than in 2017. With stable unit cash lifting and other production costs as well as unit DD and A, adjusted operating profit increased to £256,000,000 Adjusted operating cash flow also rose, reflecting the increased operating profit but also the phasing of working capital, which will normalize over the year. As a result, we would expect E and P adjusted operating cash flow to be heavily weighted towards the first half of the year. With capital expenditure of £231,000,000 in line with our full year expectation of around £500,000,000 E and P also saw a material rise in free cash flow year on year. This chart shows the primary drivers of the increased E and P adjusted operating profit. The impact of the sale of the Canadian assets in 2017 was small, with the largest drivers of the improvement being the impact of production from rough and higher commodity prices, partially offset by higher remediation costs at Morkum and increased drilling activity resulting in higher exploration costs. For the full year, Spirit Energy production is now anticipated to be around 50,000,000 barrels of oil equivalent, at the lower end of the range we expected at the start of the year, reflecting continued performance issues at Morecambe and lower volumes from our non operated Norwegian fields, while rough production is expected to be in the 9,000,000 to 11,000,000 barrel of oil equivalent range. I'd like to turn now to our cost efficiency program. As a reminder, here is the slide we showed in February, setting up the increased target of 1,250,000,000 pounds of annual efficiencies by 2020 when compared to 2015. Our efficiency program is on track to deliver £200,000,000 of savings in 2018 with 92,000,000 realized in the first half of the year. While foreign exchange movements benefited our cost base, our efficiency program wasn't completely able to offset inflation and other costs, which are mainly a combination of one off credits reversing from the prior year, exploration and platform remediation works in C and P and increased bad debt costs in the customer facing divisions that aren't counted as part of our efficiency programs. This other category has typically resulted in a reduction in overall controllable costs since we commenced our efficiency program in 2015. Delivering on the full year cost targets is underpinned by various initiatives, including further digitization of our customer operations activities in response to customer demand for self-service and field force effectiveness through the integration of our field operations and associated back office and support activities. We also delivered further procurement and supply chain savings, including from the simplification of our IT systems landscape, while the ongoing transformations of our HR and finance functions are proceeding to plan. Moving now to net investments. Total capital expenditure increased 28% to £493,000,000 with increased investment in both Centrica Consumer and in Centrica Business, including the development of merchant assets in Distributed Energy and Power and two small bolt on customer acquisitions in North American business. E and P capital expenditure was broadly unchanged and in line with expected full year our full year view of around £500,000,000 Overall, including the impact of some small disposals, group net investment was £463,000,000 while 2017 included the disposals of our stake in the Lynx wind farm as well as our Trinidad and Tobago E and P assets. Capital discipline is a key priority for the group, and we expect to spend no more than £1,100,000,000 on capital expenditure and any small bolt on acquisitions for the full year. Moving on to cash flow. As already referenced, EBITDA increased 3% to just over £1,300,000,000 although an increase in working capital outflows as a result of year on year variances driven primarily by weather led to adjusted operating cash flow falling 11% to 1,100,000,000 In addition to the increase in net investment already described, we incurred interest costs of £139,000,000 associated with the early bond settlement charges as part of the group's debt repurchase program earlier this year. A lower scrip take up resulted in higher cash dividend payments, while other cash flows include payments related to restructuring charges and pension deficit funding. As I mentioned in the financial summary, net debt was £2,900,000,000 at the end of the first half, within our targeted 2018 range of 2,500,000,000.0 to £3,000,000,000 while we maintained strong investment grade credit ratings with both S and P and Moody's having achieved our target financial metrics at the 2017. The efficiency of our balance sheet has been improved by the completion of the £1,100,000,000 debt repurchase program earlier this year, and Circle's cash will fall by approximately £400,000,000 further in September when another bond repayment is due. In addition, the IAS 19 pension deficit has reduced from £886,000,000 to £29,000,000 over the past six months, back to a level we last saw in 2015. We are in the midst of our triennial pension review with the pension trustees, which, of course, is based on a different set of assumptions than for accounting purposes and at this early stage makes it difficult to predict the final outcome. We would expect to complete this review in early twenty nineteen. I'll finish by summarizing our 2018 group financial targets. As Ian has already mentioned, adjusted operating cash flow is still expected to be within our targeted £2,100,000,000 to £2,300,000,000 range. Capital reinvestment is expected not to exceed £1,100,000,000 We expect to maintain the current level of the dividend at £0.12 per share, subject to achieving our targets for adjusted operating cash flow and net debt. We also remain on track to achieve £200,000,000 of efficiency savings in 2018, with like for like headcount expected to be lower by around 1,000 for the full year. And with our focus on capital discipline, net debt is expected to remain within the 2,500,000,000.0 to £3,000,000,000 range. I'll now hand back to Thank you, Jeff. In the rest of the presentation, I'd like to cover a few specific topics. In the context of our performance agenda, I'll spend some time on the progress we've made developing our capabilities to deliver customer led gross margin growth with some specific examples. I'll then cover progress in our asset businesses, E and P and Nuclear, before updating you on how we see The U. K. Energy supply default tariff cap. This is the same slide I showed earlier, indicating our priorities over the next three years. Today, I would like to provide a deeper understanding of our progress in one priority area, namely the first one, what are we doing to grow gross margin through our customer relationships. Centrica's strategy is built around our purpose of satisfying the changing needs of our customers in Energy and Services. We've developed new skills and capabilities in both Consumer and Business divisions, which allow us to provide more than just commodity energy within clear strategic frameworks and do so in a much more tailored way depending on the customer. We are leveraging the significant customer data resource we have, providing new propositions and solutions platforms which customers value and channels which make it easier to deal with us. We're enriching the customer relationship with rewards and improved levels of service. Over time, we believe this will allow us to stabilize our customer relationships, stabilize gross margin and then begin to grow it. I realize in some other consumer sectors, these capabilities would be regarded as more commonplace. However, in the energy supply sector, it has been normal to use simplified averaging assumptions. We've also not taken full advantage of the wealth of customer data we possess. Not anymore. Although we have more to do in embedding these capabilities, we believe Centrica is accelerating quite quickly towards some of the best in class sectors. Let me begin with customer service. We've been paying strong attention to getting the basics right and monitoring key indicators such as customer complaint levels. This chart shows customer complaint rates per 100,000 energy customers in Consumer indexed to mid-twenty fifteen. Over the last three years, you can see that we've made steady progress in all the energy supply businesses with a reduction in complaint levels on average of over 60%. This represents a run rate of about 1,000,000 fewer actual complaints per annum relative to 2015. Turning now to account numbers in Consumer. Here is the slide we've shown previously, showing the movement in Consumer accounts for the first six months of the year. Consumer accounts fell by 226,000 in the 2018 or less than 1% of the total. This is a material improvement compared to last year's run rate in both the first half and full year, where, on average, we were losing over 100,000 accounts a month. In 2017, the majority of our losses were from unattractive channels we closed and from largely loss making customers switching away. This year, reductions due to loss making or very low margin collective tariff or white label customers, shown in the yellow bar, were less significant, and we lost a further 50,000 prepayment customers customer accounts who are now subject to a price cap. Competitive pressures did result in a net reduction of a further 247,000 accounts in the first half, predominantly in UK energy supply, where we saw a spike in churn as is typical following the announcement of our standard tariff price increase in April. However, this was partially offset by the gain of a further 135,000 connected home customer accounts during the first half of the year. Most of the net losses in The UK in the first half of the year were Standard Variable Tariff Accounts or SVT. However, in line with our strategy in advance of the default tariff cap, within this total, we were able to encourage many other SVT customers to move to alternative tariffs offered by British Gas. Over the period, just under 900,000 SVT accounts moved internally to other British Gas fixed term contracts or onto the new vulnerable customer safeguard tariff or our new fixed term default temporary tariff. Our goal remains to stabilize the net position in our core consumer portfolio and then begin to grow it with a strong focus on customer value. We are deploying more advanced customer segmentation, data science, development of actionable insights and delivery of tailored propositions. We've been moving rapidly from average assumptions about groups of customers to seeking to understand customers at the individual level, ultimately in pursuit of the customer segment of one. We now understand individual customer behavior and propensity to consume other propositions and can use this to drive differentiated pricing, develop new propositions which are tailored to meet the needs of individual customers, reward loyal customers with differentiated offers and optimize our sales and marketing activity towards the channels and customers that maximize customer lifetime value. Let me show you an example from the U. K. Home business unit. These three graphs depict the customer lifetime value distribution of our energy only, services only and energy and services customers in U. K. Home. Customer lifetime value is shown on the x axis, and the proportion of the customer base at each level of value is shown on the y axis. We know where each of our customers sit within these curves and the key drivers of value. Customer lifetime value is driven by several factors, including propensity to take other products, propensity to churn, propensity to contact us and the preferred channel through which they contact us. In addition, for energy only customers, consumption, debt risk and meter type are also factors driving value. For services only customers, we consider number of products bought, number of claims and type of central heating system installed. As you can see from the chart on the right, and as you would expect, joint customers are typically more valuable, demonstrating that cross sell and upsell are key to driving incremental customer lifetime value. You can see they're more valuable by the mode of the curve being further away from the red line. As you can see on the left, we also have energy only customers with a negative customer lifetime value. For these customers, we must ensure we reduce our cost to serve if we are to move them up the value curve while directing our resources to more valuable segments. So how are we using this data to drive customer lifetime value? We can deliver top line growth through improved customer retention and acquisition. We're targeting higher value energy customers through our sales channels. We're also increasingly using personalized roll off offers for customers we know are high value. British Gas Rewards is also allowing us to improve retention through our offer of personalized rewards. We're focused on increasing the value of our existing customers through cross sell and upsell, increasing the number of holdings per customer. We developed propositions focused on customer needs such as breakdown only cover for less risk averse customers. We're also using data to be more sophisticated in our pricing with a greater focus on risk based pricing at an individual customer level. In Ireland, we've been offering differentiated service levels for certain customer segments who would value them, such as reduced wait time and call length. We can serve all our customers in a more cost effective way with online journeys tailored to different customer types. We are now able to target marketing spend to the highest valued channels and segments and have increased our digital marketing capability. British Gas Rewards has been a successful driver of retention and customer lifetime value. It involves simple digital customer journeys and tailored experiences, and we now have over 1,000,000 customers signed up. We have developed a wide and increasing range of personalized offers, providing more valuable customers with a greater number or value of rewards. We're already seeing the benefits of this. Average churn is 22% lower for rewards customers and Net Promoter Scores are six points higher. Rewards is prompting more customers to manage their accounts online. It's also driving incremental product sales and more customers opting in to receive future marketing communications. Highly targeted segmentation and proposition development is not unique to The UK and Ireland. In North America Home, as you can see on this chart, we've also segmented down to the individual customer level. And as a result, we identified an optimal sales channel mix and better targeted marketing spend. We've delivered new offers targeted at the highest value segments. And as you can see from the chart, we've materially increased the percentage of sales to higher value customers, and it's a much lower cost to acquire. Across Consumer, we're beginning to benefit from our enhanced capabilities in data science, insight generation, segmentation and proposition development. Let me now move on to another source of gross margin growth through building our customer base, products and propositions, platforms and channels in both Connected Home and Distributed Energy and Power. We saw further growth in Connected Home products, hubs and subscriptions in the 2018. The cumulative number of customers increased by 135,000, and cumulative product sales were up by 90% on a year ago and nearly 500 on two years ago. Gross revenue was up 31% in the first half relative to 2017. This reflects the wider range of products now available on the Hive ecosystem, including the Hive View camera, HiHUB three sixty and our new GU10 lighting product, all of which we launched during the first half. We also introduced subscription options for camera storage, high video playback membership and water leak detection. We continue to develop and build strategic partnerships. In The UK, we announced a partnership with EE, allowing customers to bundle with their monthly mobile subscription. We have now expanded Hive into Mainland Europe with our partnership with ENI Gas and Power in Italy going live in April and the launch of the Hive website in France. Most recently, we've entered into a partnership with Anglian Water and their WAVE channel for 250,000 SME customers through which we're offering Hive Leak and made our first sale last week. We have other water companies also interested, probably for obvious reasons, in hive leak. All of this underpins momentum. This shows the Connected Home pipeline and indicates the number of products, services and channels we launched during the first half that will be fully available in the second half. As a result, we expect growth to accelerate in the 2018, and we continue to target a doubling of revenue and an additional 500,000 customers for the full year compared to 2017. Moving on to Distributed Energy and Power, we're also beginning to see real momentum. Although first half revenue was slightly down compared to the 2017, we have seen significant growth in our leading indicators in 2018 with firm order intake up 119 compared to the same period last year and the secured order book up 47% over the past twelve months. The exact monthly phasing of when this firm order book revenue will come through is challenging to forecast. We clearly expect revenue to be weighted towards the second half of the year. And although challenging, we're still aiming to achieve our targeted full year like for like revenue growth of 50% versus 2017. However, please note, as on the slide, when restated now under IFRS 15, the same results will be recognized as 40% growth. DE and P has been developing an integrated solutions platform, which will allow customers to access all DEP offerings through one consolidated user interface. Customers can now access services to help them with their energy usage, operational efficiency, demand management and optimization, demand response and operations and maintenance services through a single user interface. All of these services are enabled by a common market interface information subsystem. The platform will give customers monitoring, diagnostic, predictive and remote control capabilities for their equipment and enable them to interact with energy markets. The first instance of this is now live, and we believe it provides a unique and differentiated customer offering for distributed energy products and services with the key differentiators being ease of interaction and Centrica having the full suite of capabilities to offer. The platform incorporates the capabilities gained from our targeted acquisitions of Panoramic Power, ReStore, NIAS and Energy Cogent. Over the next two years, we will continue to enhance the platform and deepen the full suite of services it offers. Distributed Energy and Power is no longer a concept, but a reality. We now have a large number of projects which have been completed. I would like to give you a few examples. In December 2017, we began a contract with River Bay Co op City, a three thirty acre housing community with 40,000 residents located in the Bronx, New York. Under the contract, we offer a wide suite of services, including wholesale energy management, power and gas procurement and supply and demand response. River Bay is saving over $1,000,000 a year compared to their previous contract. In June, St. George's Hospital in Tooting in South London opened a new energy center delivered by Centrica Business Solutions. The project features two combined heat and power units, as you can see in the picture, that will deliver almost all the power needed to run the hospital, four boilers, a highly efficient chiller system, and energy efficient lighting and controls. We guarantee that St. George's will save over a million pounds per year while their annual carbon emissions are reduced by 20% or 6,000 tons. Also during the first half of the year, Centrica's Restore business, which was acquired in 2017, successfully launched a 27 megawatt virtual power plant or VPP in Terre Hills, a holiday resort on the Belgian Dutch border, although it's right next to a coal mine, but it is a holiday resort. Your project combines an 18 megawatt Tesla battery project with flexible load and generation from a group of industrial customers to deliver up to 27 megawatts of flexibility services to the European transmission grid. Distributed Energy and Power currently has an installed base of over 1,400 combined heat and power units in seven countries, is currently building 130 projects in six countries and has another 200 projects within a total of 1,300 opportunities in the pipeline. I'm very encouraged by the prospects for future growth, and we continue to target unit gross margins of 20% to 30%. Let me briefly turn to our asset businesses and first, exploration and production. E and P continues to play an important role in our portfolio, providing cash flow diversity and balance sheet strength for the group. Our focus is now solely on Europe with the disposal of Canada and Trinidad And Tobago in 2017. Spirit Energy is successfully established, creating a stronger and more sustainable self financing European E and P business. Spirit Energy's current focus is on reliable operations and value creation through accessing synergies and portfolio optimization, with medium term production expected to be in the 45,000,000 to 55,000,000 barrels of oil equivalent range, equivalent to 123,000 to 150,000 barrels a day, with annual CapEx of 400,000,000 to 600,000,000 The E and P division also includes Centrica Storage Limited, which in January received consent to produce all recoverable gas reserves from the rough field. Early production from rough has been stronger than expected. In addition, CSL has significant commercial optionality, and we are actively engaging with a number of companies to explore gas processing contracts to realize value from the CSL owned Easington terminal. Spiric Energy continues to focus investment on the most attractive development options in the portfolio and made good progress during the first half. The operated Oda project is progressing to plan, and we have commenced offshore installation with first oil currently expected in the fourth quarter of next year. In May, FID was taken on the Nova oilfield development in which Spirit Energy has a 20% interest. An appraisal well was also successfully drilled at the Spirit Energy operated Fogleberg discovery in which Spirit owns 51.7%, resulting in an improved reserves range. Spirit will make a final investment decision on Fogleberg in 2019. In exploration, Spirit has had success at the Hades Iris prospect, is drilling the Scarecrow Well in the Barents Sea, is evaluating a number of other well results and was awarded exploration licenses in the latest UK and Norwegian rounds. Let me briefly cover Nuclear. In February, we announced that subject to ensuring alignment with our partner and being very mindful of UK government sensitivities in this area, we would hope to divest our shareholding in UK nuclear power by the 2020. A process of pre marketing has now begun with full support of our partner. We plan to commence the first round of the sales process in September. Finally, before concluding, let me touch on The U. K. Energy supply market and the default tariff cap. The default tariff cap bill was passed into UK law two weeks ago with Ofgem due to publish a statutory consultation on the cap setting mechanism on the August 23. That consultation should give us a good sense of where the cap might be set, but the regulator's final decision is not due until October with the initial cap level set at the October and the cap in place by the end of the year. Particular areas of concern for Centrica have been our appeal rights in the event of a poorly designed cap, understanding how a cap can take account of significant differences in cost to serve for individual suppliers depending on their customer mix and how it will take account of differing spend levels on the rollout of smart meters. We're also concerned to understand how the cap design will continue to incentivize competition, one of the government's criteria for an effective cap. We continue to engage constructively with the government and regulator. We also remain focused on lowering the impact on Centrica through the implementation of mitigating actions, namely the withdrawal of the SVT for new customers, encouraging existing SVT customers to take up another fixed term tariff, competitive default pricing and a continued focus on driving cost efficiency. But let me update you on our current position. We now have 3,500,000 customers on the standard variable tariff, down from 4,300,000 at the start of the year. As I said a few minutes ago, many of these customers have moved on to alternative British Gas fixed term tariffs, and we continue to aim to have reduced this number to 3,000,000 customers on the SVT by the end of the year. We also currently have around 250,000 customers on our new twelve month fixed default tariff, a temporary tariff, which would also be subject to the default tariff cap. But taking this into account, we're meeting our objective of reducing our exposure to the cap. On the left is the chart we showed in February updated to today, which shows that our current SVT is cheaper than 77% of the other SVTs in the market and £52 below the average of large supplier SVTs, while our temporary tariff is currently £77 below. These gaps have actually increased since February, with many suppliers raising prices in recent months as wholesale energy costs have continued to rise. We are watching this trend carefully. As in February, this chart shows that the price cap will impact the majority of the market first before it impacts us. The impact on those with the highest SVT prices, including some of the smallest suppliers, will be more significant. We also continue to target an additional £20 per customer of efficiencies by 2020, further protecting us against the impact of the cap. With the final level of the cap still uncertain, as we said in February, net margin compression is possible in 2019 before we see the full benefit of further cost efficiency. But with these mitigations, we continue to believe that we can deliver an attractive and sustainable energy supply business in The U. K. Even under a price cap. So let me now summarize. The environment in the 2018 was challenging with extreme weather, rising commodity prices, regulatory uncertainty and continuing competitive pressures. Against this backdrop, we delivered stable adjusted gross margin and operating profit with adjusted operating cash flow of £1,100,000,000 Earnings per share was impacted by a higher tax rate. We continue to make strong progress on cost efficiency as we pursue our target of £1,250,000,000 per annum of cumulative cost efficiencies by 2020 relative to 2015. We've developed significant new capabilities to allow us to capture, optimize and grow gross margin through the customer. These are now being deployed in market with encouraging early results. We're on track to deliver the group financial targets for 2018, although we recognize there's still a lot to do in the second half. We await the final outcome of The U. K. Default tariff cap regulation and have clear mitigations underway. Our portfolio of businesses has shown material resilience in terms of adjusted gross margin, operating cash flow and operating profit over the last four years. It is this resilience which continues to be reflected in our forward targets to 2020. As a result, for 2018 to 2020, provided we can continue to deliver adjusted operating cash flow on average in the 2,100,000,000 to £2,300,000,000 range and net debt between 2,250,000,000.00 and £3,250,000,000 we expect to maintain the current dividend at €0.12 a share. Ladies and gentlemen, I would finally conclude by noting that while it's a fact that against the challenging backdrop of today, we have not yet proved we can grow the group as a whole, from the base we've established, I believe we're beginning to demonstrate the factors which will get us there. Thank you for listening. I'd now like to invite Mark Hodges and Mark Hannifin to join Jeff and me on the stage, and we look forward to taking your questions. Thank you. And as usual, if you can indicate your name and affiliation and try and keep the questions to no more than one or two, that would be great. Deepa, then Mark Freshney. Thank you. This is Deepa Venkateshwaran from Bernstein. I have two questions. The first one is on tax payments. So if I look at the overall EPS, it's lower because of the tax the mix shift. But then in terms of your cash taxes, it's actually a positive €6,000,000 So just wondering, more for the long term, what do you expect your cash tax situation to be versus your book tax situation? And then the second and also maybe anything on the second half if we need to keep that in mind. And secondly, in terms of the market cap, the default price cap on August 23, what exactly do you expect? I mean they won't give the final level of a cap, but do you expect them to say that if the cap was enforced for these six months, this is the level, so maybe we can benchmark it to the prepayment cap or the existing level of SPTs. Thank you. So the first one for Geoff on tax and the second one, Mark Hodges, on the tariff cap. So Deepa, you're absolutely right. The actual payment cash taxes is lagging somewhat behind the actual recognition in the income statement. And it's just really a phasing issue more than anything else. It's actually I mentioned for the E and P business, for instance, that we would see more of a sort of phasing of the tax payments in the second half of the year. So and as we move forward, I would expect over time for cash taxes and the tax charge to over a run of twelve to eighteen months to start to normalize and be roughly sort of similar. But of course, it depends particularly for the E and P business. It's increasing in profitability, there just tends to be a lag in terms of when the cash tax payments are paid versus the P and L. All right. On the tariff cap, what are we going expect for August to pay down? Good question. Steve, I think the honest answer is Ofgem have used words that are slightly ambiguous. So they said that they're going to publish a policy decision, and they've said they're going to publish an impact assessment, but it's not entirely clear what will be in the policy decision. And our expectation is it will be a paper for consultation, and therefore, it might not have all of the detail that would allow us to be able to calculate what the cap would look like. We probably expect that later in October. We're trying to clarify with them, with the open letter I'm sure you've seen from Dermot Nolan to the market, we're trying to clarify with them exactly what policy decision means in terms of a form of words. But being entirely transparent at this stage, it's open to interpretation. I don't have a precise answer. But my if you want my best guess, we'll see the choices continue to narrow. We'll see I think we already know where we are on things like commodity input strategies. I think they'll start to hopefully indicate the direction of travel on some of the key parts that Ian outlined, so how are they going to deal with the concept of different customer mix, how they're going to deal with smart metering. And again, to date, the detail around smart meter allowances have been fairly scant. So I think we can expect to see more. I'm not convinced we'll be able to model a price cap from what we see. But at this stage, yes, that's as much as we know. Thank you, Mark. And obviously, Deepa, we've got a clear plan as to how we're going to deal with the cap, whatever it turns out to be. None of us are very long to wait, somewhere between one and three months, and we should know exactly how this is being done. I don't envy Ofgem's challenge here, given the detail that Mark's outlined. It's going to be extremely difficult for them to balance all of the things that the government wants them to do, but we're helping as best we can. Mark? And then, Nick Ashworth behind him. Mark Freshney from Credit Suisse. Two questions. Sorry to dwell on the price caps, but you have a situation where forward curves have increased. Looking at the prepayment price cap and the formula, it seems that, that will move up to where the standard variable currently is. So it's fair to say that under the current environment, customers could well be paying could well not see an optical saving as we move to price caps. When you speak to government, Iain and Mark, do they understand that? Because that's an important part of their political proposition. And just secondly, a question for Iain and Jeff. British Energy could potentially be sold. You might be looking at proceeds of £1,500,000,000 Can you remind us of the framework that you would go through in seeking to allocate that capital, be it pension fund where the deficit has gone down, shareholders or potential acquisitions? Thanks very much, Marc. Because on those I mean, firstly, the optics of what actually happens when a price gap comes into being are pretty important. I fear that the political realities of the current situation are going to be at least as difficult as the Ofgem situation for some of the reasons you've said. Although a price cap is now in law through the recent bill, I feel satisfied that we have been very clear of the unintended consequences of the cap. We and the CMA have brought to bear the evidence from around the world when price caps get price controls get put into competitive energy markets. And I'm afraid the unintended consequences can be quite significant. We are getting on with it. I mean, there's no point in us now arguing about the fact it's going to happen. And we've been very clear that, we're not challenging the price cap from a legal perspective. And obviously, we reserve our rights, but we're not going to do that. In discussions with the government, I mean, we've moved from warning about some of these unintended consequences through being very clear what we recommend should be done to improve the energy market, which is what we are pursuing, and what we think the government should do, including removing policy costs from people's bills. I have to admit, I've had limited success with the chancellor on the last one, but we keep talking about it. And now we're just moving into a place of engagement with the government to try and create the best possible outcome here for the customer and for the market. So we're just going to have to see. On British Energy, I indicated last time the question was asked that firstly, let's have some proceeds before we start arguing over where they should go. It's not going to be a simple, thing to transact, and we're working very closely with EDF on this and keeping the government informed. There are some sensitivities about the buyer universe, shall I say. If we are successful, I believe there's a competition for funds between our balance sheet, other obligations such as pensioners and obviously our shareholders. And let's wait until we've got there before we start defining where the money might go. Yes. One piece to that. Of course, Mark, we're very pleased to see the accounting pension deficit reduce as it does. It could play into things like our financial credit metrics. We should also remember that the triennial pension review that sets our deficit payments is based on a different set of assumptions, and they don't always sort of move in the same way. So as I said in my presentation, it's still too early to see where we land on that, but I just wanted to make sure we flag that. Thanks, Jeff. You're going to be you've a lot of experience in this area. You're going be advising us a bit on after the November 1 about the triennial review as well. Nick Ashworth and then Chris Labord. Perfect. So a couple of questions on the on Central Consumer, if possible. Firstly, just on Connected Home. You've obviously had very good trajectory in terms of product sales, but it's not yet being converted into revenues. What is the issue with that? Why aren't we seeing such strong revenue growth there? And just quickly on the operating profit for the full year. I think, Jeff, you said for DE and P, if I heard it correctly, you're expecting operating loss to be similar in H2 to H1. I just wondered whether there's some steer for Connected Home as well. And then secondly, on the legacy business on BGRE. I note that the cost per customer is starting to edge up again. And going back to that slide around profitability, and it's very, very clear that cross selling drives profitability from here. How do you think about BG Rewards? Again, you've had good uptake in that, but it looks like that's starting to slow down. Do you have medium term targets around that number of customers? How do you think that can help profitability in the legacy business going forward? Well, I think these are largely for Mark Hodges. Just to frame it in terms of what we've said previously about Connected Home. We said that we expected last year, 2017, to be the bottom of the cash S curve for Connected Home. That still holds true. And our current view around DE and P is it's getting there as well, and we're starting to see the growth coming through from some of the projects that I just described. But Mark, a number of questions there for you. Okay. So let's try and work through this. So Connected Home first half revenue is up. I think it's 30%, 31%. We're really focusing on if you go into the numbers, you'll be able to calculate that the average revenue per customer is up. You can see that the average products per customer is up. Having got to the million hubs level, I think this is about trying to use the scale we now have in the business. So rather than just chasing hubs, it's about actually making sure we're chasing revenue with the customer relationships. So that's why those average holdings and average revenue per unit numbers are important. Traditionally, the business over the last two, three years has been second half weighted. I think the slide that Ian showed, showed you that we spent a lot of time in the first half of the year really making sure that the product set is expanded, that the channel set is expanded, and all of those products and all of those channels effectively we're expecting to deliver in H2. And we've been successful in each of the last couple of years in delivering a much stronger H2 delivery than H1. So I'm optimistic. It's not easy. We stretch targets. I know there's a huge amount of interest in those stretch targets in this room and outside, But the customer demand is strong. I feel that the wins we're having with partners and being able to get to other companies, other brands, customers is going to be a really important part of the development of the business. So Ian mentioned the EE relationship as an example. That actually gives us not only the opportunity to bundle Connected Home within the mobile tariff, it actually gives us a shop front presence going forward. So we will be in the EE stores. That's something we haven't had before. So I think that's a very exciting development. So I think all of those things lead me to believe that we will see accelerated revenue growth in H2. But we're going to have to keep working very hard on Connected Home. In terms of the other two questions, cost per customer in U. K. Home has gone up. The thing I would remind you is we lost an awful lot of customer accounts last year. Now we demonstrated, as you went through the prelims, that they were low value. And so the gross margin loss wasn't particularly high, but you've lost the customer account number in that equation. So really, that's the biggest driver of the change. And in terms of rewards, I mean, yes, look, we're really excited about it. Ian showed the slide. It's a great example of segmentation in action. Every single customer who signs up for the rewards program does get an individually tailored offer for themselves with different offers based on their needs, their attitudes, the value of the relationship. We tend to see sign ups linked to when we're doing promotions. It's something we're still having to promote. It's being promoted in our contact centers, promoted in our marketing materials. That has slowed down a little bit in Q2. I mean it's a little bit of seasonality. It's harder to it's easier to engage customers, frankly, when it's colder and they're thinking about energy, which is obviously the biggest set of relationships we have. But we do have we're not publishing them. We do have ambitious targets. I do want to see millions of customers benefiting from the rewards program, and enjoying, if you like, both the offers but the engagement it gives them with us as a company. Mark, thanks. I should have I know that Nick mentioned DE and P second half versus first half. Mark Hennepin, do you want to comment on how do you see DE and P this year? Yes. So the as Liam had in his presentation, the revenue is broadly similar to last year in first half, a little bit less. But what we've that's a whole mix issue and just how the orders flow into revenue. But what we're seeing is a real pickup in projects, real pickup in the size of the order book, which is, as you know, the difference between the orders going in and how the orders are actualizing to revenue, 120% increase in order intake in H1. So there's real momentum there. We spent a couple of years developing the central marketing propositions, products, capabilities, and now we're executing those on a sort of worldwide basis. So a lot of excitement in that business. The acquisitions we've made, very strategic, really complementing the overall proposition that we're making to the customer. Thank you, Mark. So going to Chris Labert, I think Dominic Nirsch and Martin Bruff had questions. Chris Labert, JPMorgan. Two questions, please. The first is in terms of the weaker than expected or a disappointment in the first half, but it sounds like from your commentary that the full year, you're quite comfortable with. Know you don't provide any guidance at EPS or any commentary there, but if you could give us an idea maybe at a high level, looking at a second half that might be better than first half for a second half SKU, which is a rare occurrence for Centrica? And do you think that's a fair assumption for us to carry forward into the second half? And secondly, just while we have you here, any information you could give us on the new LNG contract in terms of pricing, what we can think about in terms of modeling that one up in the future would be very helpful. Well, thanks, Chris. In a moment, I'll pass to Mark and let him to talk about LNG. Because of the presentation, we're covering quite lot of ground, we didn't have a chance to talk about this growing part of our business. And there's quite a lot that's changed in the last couple of years. So I think it'd be a good opportunity for Mark to talk both about Mozambique, and what we're doing there, but also just more broadly. On the full year, look, we don't give full year guidance at the half year, and yet we always get the question, not surprisingly. But what we have done is given clarity that operating cash flow this year will be higher than last year is what we expect as of today, and it's going to be within our targeted range. Now if you take the midpoint of our targeted range, that would imply that operating cash flow in the second half is going to be the same as the first half. And that's the only guidance we're giving. But clearly, one thing that a number of people got wrong, I think, in terms of assessment for this year was the tax rate, the effective tax rate, even though a number of you got the mix right. So Jeff, do you want to comment about the second half in terms of any other comments you want make about expectations on tax? But obviously, giving guidance on EPS, unless you fancy doing so? I don't think I'll end that way. I think you've made the right point. We have tried to signal in a few areas at an operating profit level, particularly where we've seen the first half slightly different than where we might have sort of seen things previously, how we might think about the full year. But at the same time, even though we're seeing some of those higher prices playing through as we sign into E and P, the effective tax rate we expect to be in that sort of high 30% range. And therefore, you'd want to take that into account when you look at the full year. I mean, Chris, the other thing, I mean, know people focus a lot on EPS, and it's absolutely it's a very important metric on one basis relative to the DPS. But we do need to also remember that cash flow per share and the dividend per share is also rather important. And right now, the financial framework that we have, as I tried to demonstrate with that new slide on looking back just four years, we've been delivering every single year 2,100,000,000.0 to 2,300,000,000.0 of operating cash flow. Now not without a lot of hard work, but that is what our guidance says on average for the next three years. And as long as we can do that, then we can we estimate, we can pay for all of our outgoings, and we just need to watch the net debt range to make sure that we don't burst out of that. Mark, LNG? Yes. So typically, in recessions, we sort of look forward to the Sabine contract and how the sort of dynamics in the gas world are shaping up. What we've seen in recent months and over the last year is that the global gas market has been a lot tighter than have been forecast. So supply liquefaction projects have been going backwards. Demand has been increasing, particularly in China. And it's created more of a tightness in the market than was expected. So when we look at the forward prices for next year, for 2019, when you take Henry Hub at around $2.8 and the equivalent NBP at around $7.5 with $5 cost for liquefaction, shipping and regasification. There's just a small loss there now in terms of just basic economics to Northwest Europe. If you target the Far East, then there's a healthy profit in terms of the forward numbers for 2019. Now we do still see, with the projects coming on stream, that 2020 and 2021 still look oversupplied. But what's interesting, that oil supply is being worked off really quite quickly. And beyond that period, things start to look really quite tight. So Sabine contract starts to look very attractive in that sense. If I just remind you, though, what really we're trying to do with LNG. We're trying to build a global network, which has geographic diversification. It has pricing diversification and it has optionality. And that's what we're aiming at. The Mozambique announcement is very much in line with that. It's too early to talk about it as a contract. It's a heads of agreement. We're now in negotiations to turn it into a sales and purchase agreement. We're partnering with Tokyo Gas. We have a terrific relationship now with them. What we're trying to do in that contract is we're trying to get a very healthy element of NBP pricing. What that means is we can point the ships at our home market, with reasonable economics. And then with volatility in the rest of the world, we're able to divert and capture that. Now there will be an element of oil pricing in the contracts as well. But as I said, we are looking for diversifying our pricing mix. Just finally, we've traded 43 cargoes so far this year. It's about 3,000,000 tons, and that's into all kinds of new destinations globally. And that also bodes well for our ability to handle Sabine as it starts to ramp up in the fourth quarter of next year. Well, thank you. I'll just add that energy price risk management and global natural gas optimization are important elements when you supply the quantity of gas that we supply to our customers. And Mark and the team have done a terrific job building on the early positions in LNG to get to where we are now. We're going to go to Dominic Nos, Martin Braffmanian Turner, and I'm going to check to see if anyone can give us one second. You can feedback, Dominic. You. Yes. Dominic Nash, Macquarie. Two questions, please. Firstly, going back to the SVT price caps again. You stood up and said that you had some concerns over the appeal process of it if the price cap turned out to be quite detrimental. Can you just give us more clarity on what the options are to you available to you if the price cap were indeed to come out with an unreasonable number? And secondly, on Spirit, can I just have a couple of points of confirmation on that one, please, which is looking at the twenty seventeen numbers, does that include the minorities within it? And on your operating cash flow forecast, you don't take the minorities out of it. I think that's correct, isn't it, on that number? And was your cash flow target set before we had the Spirit sort of minorities added in, I. E, you've said like about eighteen months ago, think it was, isn't it? Geoff, if you don't mind, I'll just quickly answer the second part, which is just I mean our target, the 2,100,000,000.0 to 2,300,000,000.0 on average, was set in February when we and that's after Spirit was established. You're absolutely right. We do consolidate all of the cash flows, and then, of course, we pay the minorities. I should note that remember what we've been doing with the portfolio. We had minorities in Canada. We had minorities in our wind portfolio. And actually, if you look at the minorities that we've now got in E and P versus what we had before, it's not the the actual net interest is not that not that different. On on your question about the price cap and what we do, look, we lost the argument about the Competition and Markets Authority being the right body to be the first port of call in an appeal if the cap's not well designed. The there were a number of members of the House of Lords who tried to get that changed. I think it's a dangerous precedent. It's the first time, I think, maybe the second time in the post privatization era that a government has removed that recourse. So we would be left with recourse through judicial review, if we have an issue. We are not we are not intending to challenge. Obviously, need to wait and see. I think, Mark, our interactions with Ofgem said they're certainly thinking Whether they'll come to the right answer is a different question. But it would be JR that's the process. If I can then go to Martin Greff. You. Yes. Martin Greff from Deutsche Bank. Just to push you a little bit more on the Connected Home side. Just over a year ago, set yourself a sort of ambition of getting €500,000,000 of revenue, I think, for 2019. Obviously, we're a year down the line. You talked about maybe still being on track to get double the revenue in 2018 as the new product channels sort of come through. But even if you have like a couple of million hubs in place by 2019, that's still an awful lot of revenue per hub that you'd need to get to to about €500,000,000 sort of revenue number. Obviously, it's more important to build capability in the near term to end up where you want to be longer term. But just give us some handling. Is that still a current number that's out there? Or is it already clear that really that's going to be too ambitious? So Martin, first of we didn't our guidance was actually €1,000,000,000 of revenue. But in 2022, with cash breakeven as early as 2019. But Mark, do you want to talk about the shape? Yes. I mean so I think it's a great question. It is challenging. We set an ambitious target. That was deliberate. We see the dynamics in the market and the opportunity is there. And why aim low when you can aim high? What we need to do is we need to hit the doubling of revenue target this year and every year for the next few years to get to that 20,000,000,022 billion We said breakeven as early as 2019, but the small caveat around that was, to some degree, it depends on how successful we are. The more successful we are, the more subscriptions we're growing, for instance, the more strain there will be on the profit number because we'll be front loading the growth. As we sit here today, I am expecting us to grow in the second half, as I've already said, because of the delivery in the first half. I think that breakeven in 2019, we as early as we will still be running for, but it's looking more difficult. It's definitely a challenge. But as you say, the main the most important thing here is to remember this is a strategic play for the group, that we see a market opportunity, that we had a leading position here in The UK, that we're now expanding into new territories. We're expanding into new relationships. We're learning all of the time how to make those successful. And I think in the long run, it's the learning we get from the partnerships, from the customers in new markets as well as from exploiting a position in The UK that will stand us in good stead. But there's no doubt it's an ambitious target. And I think as Mark said, I think and I've tried to say in my presentation about DE and P as well, The important thing here is the momentum we're building rather than precisely in which months the revenue is going to accrue. Clearly, we are focused on short term delivery as well as building that pipeline. The pipeline development in both these businesses is becoming pretty encouraging, and we are getting a lot of incoming on Connected Home from people who want our platform. I don't think I could have dreamt of that possibility three years ago. People are really ringing us up saying, what's this product? What's this platform? Can we have it? Can we and we're saying you can, but it's our brand. We want exposure to the customers, and we want to have access to the data. And partners are saying, okay, that tells you something. Now it's early days. I've given you for the first time today some sense of the pipeline that's building and distributing Energy and Power. It's the first time we've disclosed that we've got 1,300 opportunities, 200 active projects within that and 130 projects under construction. This is no longer small stuff, and it's expanding all the time. Now it is growing at very high rates from small base. And therefore, as Mark says, there is an uncertainty envelope that we've to try and manage. If you hold us to x dollars at every single time frame, we're obviously going to miss a few. But I'm very encouraged by these businesses playing into the trends that we're seeing customers now pursuing. Thank you, Martin. Ian Turner. Thanks. It's Ian Turner from Exane. Can I ask a couple of questions? One, on the existing price cap, the PPM and the vulnerable customer, what you thought that cost you in the first half? And the switches that you've seen, the 50,000 PPM switches, are those people going to do PPM somewhere else? Or are they switching them to one of your other default tariffs? And then just if you have any thoughts about whether you might be open to moving RAF into Spirit in the future. I'm not sure whether I'm going to be the last questioner. But if I am, I'm obviously the oldest analyst here. So if I could just thank Geoff and Mark for all their contributions and help over the years as well. Well, thank you, Ian. Listen, neither of them are quite gone yet. And but I also want to echo that. I mean these guys have made a huge contribution to the first phase of repositioning Centrica, and I think we're in a much stronger place as a result of both their contributions. But we do have a number of months yet of active contribution. We're not letting them off. On RAF and Spirit, we currently don't have any active plans to put Rough into Spirit. Clearly, it's part of exploration and production now. We are leveraging all the synergy between exploration and production and Rough, so the skills, the capabilities, the risk assessments, some of the technology we've developed on process safety barrier models. I could never rule it out completely, but you also have to remember that rough is going is a declining field, and it's got a finite amount of gas in it. And obviously, it will generate cash flow for a number of years. But I think for Spirit, they also might look at this and go, it's pretty near end stuff. I think it depends a lot on how much of the commercial optionality that we managed to capture for the Isingsong Terminal. If it becomes an important hub for the North Sea, that could change that equation. Mark Hodges, lots of questions on prepaid PPM switches. Yes. So the 50,000 net accounts that we lost, worth in the market, so that was effectively two competitors. So it's an overall net reduction. And in terms of the safeguard tariff, I think it was you and the cost effectively, it was a quarter's cost of PPM and then the second quarter's cost of the safeguard tax. It's kind of in the 30,000,000 to £40,000,000 range of impact. And in terms of PPM, that's in line with what we've said before in terms of what the nine month cost was last year. Thank you. Sam, Ari, and then Ron to back, and then Ajay, and then we are check to see how we're doing. Sam, over to you. Hi. Thank you. Yes, I have a sort of high level question, if you like. Just looking at what's been going on in the sector in the last six months, we've seen an increase in M and A activity in innogy, Uniper, EDP, maybe EDPR, what's going on in the sector. Think last year, there was a story that Centrica could be a takeover target. I'm sure you can't comment on that in any detail, but I'm interested what your perspective is, if you like, on the industrial logic for that. Do you are you in the camp that says Centrica needs to be independent to be successful? Or do you feel that actually being part of a larger group could be an advantage to you given the investment opportunities that you have in front of you? Thank you, Sam, for that lowball. So basically, I think my demeanor is our focus should be on delivering on the strategy. I think that the strategy is right for this company. I think we are pretty unusual in our mix of businesses, and they appear to be, judging by the trends that are continuing over the last three years, in line with where the world's going. Therefore, I suppose we could be attractive to someone else, but I haven't seen much sign of it. I mean, the question I get often is, is one of the is one of the, oil majors going to buy us or is Amazon going to buy us? Those are the most common ones I get. I don't know how to think about that. Is that a compliment? I don't know. But I mean, having been in one of the oil majors, they have differing views on how to extract value out of customers. They also are very familiar in the oil value chains and their derivatives. They're looking at electric vehicles and integration of electric vehicles in the home because actually, if you think about it, electric vehicles are probably going to take customer flow away from a fuel retailer. So the question is how do you hang on to the relationship with customer if the main reason for them going to where you sell petrol is actually changing. So it's perfectly valid for these companies to look at all of this. It's not clear to me at all that it would be necessarily an interest of Centrica shareholders just to be part of another group. There would have to be industrial logic. So it's not something I spend most of my time worrying about. It's not something I'm running around pursuing. We just need to get on with delivering value for our shareholders through this strategy, and we'll see in the future. AJ, at the back there. AJ Patel, Goldman Sachs. I just wanted to ask a quick question on Slide 34, where you went through the Connected Home pipeline. Just looking at those different parts of the list, is there any sort of indications you can give us on gross margin? As in, is the gross margin broadly similar for all of this? Or is there a range? And what kind of range would that be? Just trying to understand if the profit dynamics are changing at all as these we move down these channel services and products. So I'll remind you what we said at the Capital Markets Day last year and then pass to Mark. I'll just we said that, indicatively, the unit gross margins that we're pursuing and seeing in Connected Home are 20% to 40%. I just said today that the unit gross margins we're seeing and pursuing in DE and P, 20% to 30%. Mark, how is the dynamic changing? So gross margin year over year has gone up from 19% to 24%. That sits within the range that Iain has outlined. There is a range, from some of the simpler one off sale products through to as we think about things like leak or some of the camera functionality or into subscriptions, and the gross margins are much higher. But I think at this stage, given everything we said about the development of the business, where we are, that 20% to 40% range, as we look at the mix, is not an unreasonable expectation. It's good to see it building because I'd like to see it build some more over time. But I think there will be some products that sit outside of that range. But I think for now, as you're thinking about it, it's certainly not an unreasonable 20% to 40%. Thanks, Mark. Are there any other questions? Ladies and gentlemen, I'm there's one more next to Sam, sorry. Thank you. Alex Lang here from UBS. Just one question from me on Spirit. As I understand that Morcom is not currently operating and has been pushed back another month or so. And so to reach your 50,000,000 barrels of oil equivalent target for the full year, you expect essentially expecting a repeat of this first half. So what I wanted to ask was what does that actually require for Morecambe? Or put in another way, what did Morecambe add to the first half? Well, look, I mean, what we've said is about 50,000,000 barrels at the bottom end of our range of 50,000,000 to 55,000,000, and that is partly driven because of Morecambe and because of the nonoperated fields, particularly in Maria and some of the others that have not been performing very well this year. You raised an important point. I mean Morecambe has not been performing very well from an operational perspective. It is much, much more rigorously managed from a process safety perspective, and I'm very pleased about that. And we've seen our Tier one and Tier two process safety event rate come down from fourth quartile to bordering on first quartile. But it slowed down Morecam's agility and we are working with our partner in order to improve Morecam to get its reliability up. I'd encourage you to see this as an upside, not a downside because actually, the availability of Morcom should be significantly higher in the future, but we've got quite a lot to just resolve in terms of the operating capability. Ladies and gentlemen, I'd just like to thank you for your patience. In summary, the first half was a challenging first half. I mean, I'm afraid there are a lot of moving parts in the external world around us. I take a lot of encouragement, and I hope you do, by the fact that we delivered a resilient performance. Gross margin and EBITDA were flat year on year. We delivered £1,100,000,000 of operating cash flow, and we've repeated that we're on track to deliver our targets this year. I do hope that the longer wavelength look back and look forward actually helps penetrate away from the near term numbers into how resilient is this portfolio as a whole. We're clearly waiting for the price cap analysis, and our focus in the second half is on performance delivery and financial discipline. And as we look to the medium term, I hope we've demonstrated today that we're building some of the capabilities necessary to start to serve customers in a different way and therefore, to start to stabilize customer account numbers, stabilize gross margin and ultimately grow it. I also acknowledge we haven't demonstrated it yet that we can grow it, but I feel very satisfied and believe that the capabilities we are building will get us there. Thank you very much.

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