M&A Announcement

Jul 17, 2017

Ladies and gentlemen, we welcome you to the Centrica and E and P and Beergas joint venture. My name is Tatch, and I'll be the coordinator for your call today. I'll now hand over to Ian Kond to begin today's conference. Ian, the line is now yours. Well, thank you, Jess. Good morning, everyone. I'm joined here by a group of people, including Jeff Bell, Chief Financial Officer, Martin Esplied and Rebecca Trippett from Investor Relations and Chris Cox, who is the Head of Exploration and Production. Graham Dawson, our General Counsel is also here. As you've seen, we've announced this morning an exploration and production joint venture with Stabwerk and Munson who control Byron Gas Norge. We're putting Centrica's European E and P business together with Byron Gas Norge and this creates a more sustainable, stronger E and P business with greater future optionality, generates positive NPV and the new entity will be self financing with an attractive financial profile. We said since 2015 that we wish to create a stronger, more focused E and P business and with the sale of our Canadian E and P business, this achieves that goal. Just a word on Stadtberg and Munshen before I go to some slides, which you should have access to. Stadtberg and Munshen is one of the top utilities in Germany. It's owned by the city of Munich. They're involved in energy and water supply, generation and district heating, public transport and telecoms. And they have about 9,000 employees and EBITDA of last year €935,000,000. That just gives you a sense of the company. But obviously, they've been involved in exploration and production through Byron Gas, GmbH and Byron Gas Norge. And they are very aligned with us in terms of the future of E and P and what they're seeking from it. And that resulted in this joint venture. So I'd now like to go through about 10 slides, and then we'll take your questions. And the first slide is obviously our disclaimer, which I'd just like you to remind yourselves of. And then if I go to Slide three, the transaction overview. So we are combining Centrica's E and P business with Biongas Norge Group to create a newly incorporated independent JV. It will be an incorporated JV. And as you can see in the chart on the right, we will own 69% of the shares and the group controlled by Safrak I mentioned will own 31% of the shares. And the holding companies and assets of Centrica's E and P business in North West Europe and Bio and Gas will be contributed to the JV. Centrica is contributing our business and making a series of deferred payments totaling GBP $340,000,000 post tax over the first five, six years for 69% of the JV. And the reason for that, which I'm sure we'll come back to in questions, is very simple, which is that we have a number of assets that are in or entering decommissioning. And clearly, a partner purchasing those would want us to pay for them simply given the fact that they are going to have no ability to generate cash flow. And that was part of the structure of putting the two businesses together. There is no cash consideration in this transaction at the time of the deal. There'll obviously be the usual true ups to the balance sheet date, the effective date being the 01/01/2017. Stavroek and Lynchen and minority shareholders will contribute Virengas Norge Group for 31% of the JV. We will have an independent JV Board, which will comprise the CEO and that CEO will be Chris Cox, who is sitting next to me here. And Centrica will also have four other shareholder nominated directors and Staff Berkhamunchen will have two. We expect the deal to complete in the fourth quarter of this year. In terms of the strategic rationale on the next slide, we have two like minded shareholders who want to own and be part of a stronger and more resilient D and P business, but also want that business to be strong enough to be able to participate in future consolidation in the industry. And at the same time, to limit the amount of recourse that, that business has on a day to day basis from a cash perspective back to the shareholders. So we're very aligned and obviously given that we are two companies that are involved in supply of services and utilities to customers, we are very, very aligned around the role of E and P and come from similar backgrounds. And certainly over the last discussions, it's quite clear that we are very like minded, which bodes well for the JV's future. What we're putting together is a complementary mix of producing assets and development assets with strong positions in Northwest Europe and I'll come back to that. We have an entity which will be self financing with an attractive financial profile, enabling healthy reinvestment and distributions and sustainable production levels, which I'll also come back to. The transaction generates a modest amount of NPV initially, but obviously there is also the potential for future stages of consolidation, but 100,000,000 to £150,000,000 of NPV expected through synergies from cost savings and optimization of the portfolio. And then lastly, we see that this venture will have the opportunity to further participate in consolidation or other joint ventures. And we don't rule out the possibility of an IPO in the medium term, Although I should stress that we're not coming into this with the sole intention of getting out at all. This is just pointing out that this creates the optionality for the shareholders should either of them wish after an initial lockup period to pursue an IPO that we see that as a viable pathway. So that is the strategic rationale for the transaction. If I then move on to some of the impacts of it before describing the physical parameters of the business, firstly, the the joint venture financial framework. We have an objective to create a sustainable European E and P business, something that we have said since 2015. This business is capable of self financing in a range of environments, including Centrica's low case of 30 fivethirty '5. We have always said that to sustain 30 fivethirty '5, clearly, E and P businesses, including Centrica's heritage business, would have to make adjustments to capital in order to be self financing that we believe it's capable of doing so. And in a normal environment or at least in the current environment, we see the business as being sustainable with medium term annual production of 45,000,000 to 55,000,000 barrels of oil equivalent per annum and investing GBP 400 to 600,000,000 a year of CapEx in the near term, representing an 80% post tax operating cash flow reinvestment ratio through the cycle. And finally, that the remaining post tax operating cash would be distributed to the shareholders. And so clearly, all other things being equal and provided the JV is debt free, you can calculate from that that the venture through the cycle in the current environment should be capable of generating a dividend stream of GBP 100,000,000 to 150,000,000 per annum. But obviously, that depends on the environment and preventing circumstances and the capital structure of the JV as it goes forward. In terms of the impact on the Seneca Group, from an operating perspective and an E and P perspective, it increases the reserves to production ratio from a level where we were just a bit below 7% to around eight Now it's not a massive increase in R2P just given the relative scale of the businesses, but it's going in the right direction. And it importantly reduces the net decommissioning liabilities of Centrica by combining our maturity and P portfolio. And Byron Gas' portfolio has a lot of early life cycle assets with a significant number of developments, which we think we can add material value to. It reduces Centrica's share of annual production into the range of 30,000,000 to 40,000,000 barrels of oil equivalent and our share of capital expenditure on proportionate basis to GBP 300 to 400,000,000. Now that 30,000,000 to 40,000,000 barrels of oil equivalent is below our 40,000,000 to 50,000,000 barrels of oil equivalent that we announced we were targeting back in 2015. I think it's worth just spending a moment on that. We've done some financial modeling and believe that 30,000,000 to 40,000,000 will achieve the same contribution to the group's portfolio in terms of diversity of cash flows and balance sheet strength or similar contribution to 40 to 50. And the other reason for pursuing 40 to 50 is we believe really you need to be about that size to create a sustainable E and P company. Now obviously, this company is going to have 45 to 55 sustainable production. So it meets that second objective and we're satisfied it meets the group's financial objectives around the portfolio mix. Our share of synergies is obviously going to be 70,000,000 to £100,000,000 of NPV. We will be pretty consolidating the JV post completion. And initially, although the E and P assets and staff and companies will all transfer to the JV, the direct operational team. We will be providing functional services to the joint venture initially, IT systems support, HR services, finance, HSES in order to enable the JV to get up and running. Over time, we would imagine that the JV will want to establish its own have its own choices as to how it procures group services down the road. The transaction is expected to be earnings accretive from 2018 in the current environment, and it will have a positive impact on Centrica's credit rating agency financial metrics. So turning then to the what is this JV and what is it capable of. On the next chart, you see that all the independents in Northwest Europe and we've excluded the super majors. Basically, this chart shows the reserves ranking of the companies and you can see that we are creating one of the largest independent European E and P companies in this step. And as we've disclosed, the joint venture will have reserves of four zero nine million barrels of oil equivalent and additional resources. I'll come on to that in a minute. On the next slide, we show production. Now Centric is already one of the larger independent European E and P companies by production. Fire and gas is much smaller because it's much earlier life and many of their reserves are still to come on to production, which is obviously what attracts us. The combined entity in 2017 will be the largest or one of the two largest independents in Northwest Europe. We think that positioning relative to all the other players in the market gives us the ability to lead and participate in further consolidation, so creating an even stronger entity over time. In terms of the portfolio on Slide nine, we have complementary positions in Northwest Europe with Biongas. And first of all, 50,000,000 to 55,000,000 barrels of oil equivalent production this year from 27 fields. You can see on the map on the right that there is significant overlap of our acreage and assets. We are quite strong together in the Southern North Sea and this brings us together in Cygnus, which has just come on stream. If you remember, Viengas is a shareholder in Cygnus and it actually takes us to over 61% ownership in Cygnus. But we're also active in the Norwegian and Danish sector of Continental Shelf. And there are a number of developments that we have and they have in Norway. And there's quite a large development in Denmark, which is partially developed at present, Hyra, which we see the ability to add significant value to. In the Northern Norwegian continental shelf, we also have acreage overlap. And then interestingly also in the Barents Sea, we have a number of exploration blocks in the mature Barents, which creates further optionality for the group. The combined JV will have 2P reserves and 2C resources of six twenty five million barrels of oil equivalent. The split of that in the footnote is four zero nine million barrels of 2P reserves and two sixteen million barrels of oil equivalent of 2C resources. It's gas biased, but we are not driving the business to be gas only, although we value it having a high proportion of gas, but this business will be seeking hydrocarbons of liquids and gas as it seeks to create value for the shareholders. And as you see also, there's a material proportion of production that is operated by the partners, so giving a good balance between operated and non operated activity. On the next slide, when you put the portfolio together, what you can see is that Centrica's portfolio, which is very heavily weighted to established assets with 15% of our portfolio by reserves and resources recently on stream and some very good development assets focused around Norway and a number of exploration licenses. When we put this together with Birengas' portfolio, which is heavily weighted towards future development with some material on stream assets, a very few established producing assets, it creates a much more balanced and sustainable portfolio of assets and hydrocarbon resources. And as you see, we're also involved in 64 exploration blocks, giving further optionality around infill exploration, infrastructure led exploration and also some of the more frontier type exploration up in the Barents Sea. And then finally, in terms of capabilities, we have operated and non operated assets and experience in that. We are experienced in being a non operated partner with major companies such as Statoil in Norway. We have onshore and offshore operations. The onshore being in The UK owned by Centrica and that being the Barrow Terminal and the East Irish Sea coming ashore. We're also involved as you know in terms of very limited degree in onshore unconventionals. We have deep subsurface knowledge of these regions that we're in. And the combined capability particularly in the Norwegian continental shelf, we think is going to be very complementary and also true in the Barents Sea. We have six fifty employees involved in this business and the main offices today are in Aberdeen, Stavanger, Oslo and Hoofthorpe in The Netherlands. And so in summary, this joint venture brings together like minded shareholders with a strong strategic alignment on the role of E and P, a complementary mix of producing and development assets with good positions strong positions in Northwest Europe a robust self financing entity with attractive financial profile, enabling reinvestments and distributions to shareholders the creation of NPV through bringing the portfolios together from cost savings and portfolio optimization, and importantly, the opportunity to strengthen the entity further through additional consolidation of joint ventures as the industry looks to do so, including the potential for an IPO in the medium term. So ladies and gentlemen, I hope that's been a useful summary. And now I would be happy to turn over to your questions. And between us, we will aim answer them. Thank you. Thank you, Ian. Ladies and gentlemen, you now have the opportunity to ask your questions. Our Our first question today is from Jenny Pan from Citigroup. Jenny, please go ahead. Hi, Jenny. Hi. It's Jenny Ping from Citi. Firstly, a question on strategy. You obviously hinted through the presentation that you're not coming into this with a view to exit. So can I just ask what is your long term strategy on the E and P business? And is there an extent in which you still want to maintain a degree of hedging with the retail business? And how do you sort of generally think about that? And then secondly, on the financial metrics, you talk about E and P accretive. I don't know whether you or Jeff would be able to really would be able to give us some numbers there. And then lastly on Hirer, as far as I understand, this is one field that had very difficult technical difficulties in the past and has been over budget due to numerous delays. Can you sort of talk about that project specifically as well? Thanks. What I'll do is I'll just cover the strategic points and I'll ask Jeff to comment on accretion. And then I'll make a comment about Hydro before asking Chris Cox just to give his perspective on it. So strategically, first of all, we always said that the primary role of E and P in our portfolio is to contribute cash flow diversity and through that and being invested in asset based businesses, balance sheet strength for the group as a whole. That has not changed. To your point about the secondary factors, there are a number of secondary factors. By being in gas production, our ability to manage the cost of, matching hedge positions with our own production reduces the cost of our overall cost of supply, and it makes us more efficient. However, we did conclude in 2015 that the shorthand vertical integration arguments and security of supply arguments didn't really hold water, neither didn't the the point about and being a natural hedge because we tend to independently risk manage the E and P and customer facing risk. And so we hedge them independently. And obviously, if gas prices collapsed, we couldn't turn around to our customers and say, sorry, we're going to keep prices up, simply because we've got this hedge. The security of supply argument doesn't really hold water because the markets are now very fungible and only in the most extreme circumstances would this really apply. And vertical integration, we don't really consume or sell much of our own production. So Jenny, that's the strategic rationale. And I'll just pass to Jeff to comment on accretion, and then I'll come back to Hiram. Yes, Jenny. The accretion, we indicated on the slide, from an EPS perspective, is small, not a material number and doesn't materially sort of change the overall forward view of the group. But it is slightly better than neutral in a sense. From a cash flow perspective, obviously, consolidating the business on a consolidated basis, we'll see a larger impact from an operating cash flow perspective. And then on high route, look, mean, field actually far from being a big negative was of interest to us because it's already been materially developed. Now it has had problems. And so clearly, we were spending quite a bit of time making sure we understood the nature of those problems, but we're very satisfied with the level at which higher end has been represented in the JV and the optionality for upside value that it creates. Chris, would you like to comment on that? Sure. And Jenny, obviously, it's something that stands out in the biogas portfolio. And therefore, we spend a lot of time in due diligence looking at hardware. And whether you like hardware or not kind of depends on whether you've been spending money on it up till now. So if Donald probably look at this from a very different perspective from from us, frankly, we're not we haven't put a huge amount of money on the higher end in the transaction, and we see quite a lot of upside in it. It's it's a field that has a jacket in place already. It's got three producing wells already drilled. It has an export pipeline in place. It probably needs a couple more wells, and it needs a topside to some description on it. The problems with the project today have been pretty much all around the topside where the contractors could not deliver, frankly. That contract has now been canceled and and will have nothing to do with that contract going forward. Any obligations in relation to that sit with Don. So we're quite excited about Conifer as a development coming into it, already partially developed. And of course, the intent is for INEOS to take over as operator there. And I think combined with our abilities, ought to be able to find an interesting way to develop that. And we'll be looking at different development options in the coming months. Thanks, Chris. And I think Jenny, last comment would be that this joint venture brings two companies together and the optionality with a number of other big companies like INEOS, for example, who are going to be involved post their transaction on the other side of or with us in Hira, just as it brings up BioNgaps and Centrica together in Cygnus. And so we're going to end up having material capability to influence some quite important projects going forward. Jenny, thanks for your questions. Next question please, Chuck. Our next question is from the line of A. J. Patel from Goldman Sachs. A. J, please go ahead. Good morning. Yes. Three questions if I can, please. Firstly, you alluded to a lockup period. Could you give us an indication how long that lockup period is? Secondly, on the credit metrics and the comment on decommissioning liabilities and how this would be an effective structure for that, how how much does that actually reduce your net exposure on in your decommissioning liabilities? Is it I mean, is that the sole reason the credit metrics are better as a result of this deal rather than not? And then finally, I understand that you're marketing at 50 to 55,000,000 barrels of oil equivalent from this effective deal, but you're earning 30 to 40. But why is 30 to 40 the right number? Why not 20 to 30? I understand balance of cash flow, we were on a situation where 40 to 50 was fine. I'm just wondering why is thirty, forty the right number? So let me cover the lockup and then also the 30 to 40 comment. And then we will I'll ask Jeff to just come back on the point about the decommissioning impact. So I mean the lockup period is medium term and it depends on the shareholders. But can confirm two to five years depending on the circumstances. And as far as the thirty to 40 is concerned, when we announced the 40 to 50 in 2015, we were trying to judge from a range of different inputs as we said at the time, from a portfolio modeling perspective, from a capital affordability and cash flow balancing perspective? How what's the right sweet spot for us to get benefit from the diversity of the portfolio while at the same time reducing Centrica's exposure and reinvestment ratio going into E and P. And we settled on the 40% to 50 Now the other reason for the 40% to 50%, as I said earlier, was the notion that really below that sort of scale, it's quite difficult to be a material player able to shape consolidation and to participate in a range of developments and support a decent exploration budget. And so we believe for a sustainable business, it also needed to be about forty fifty. Now in analyzing this a bit further over the last year and a half, we've concluded that actually 75 or so would fulfill the same effect or similar effect for us as a group from the first reason around the balance sheet strength and diversity of cash flows. But we also still conclude that the second reason holds, I. E, you need to have an E and P company of sufficient materiality to have enough optionality and choice so that you can create a high quality E and P portfolio. This transaction achieved both of those things. It achieved the 35,000,000 barrels or 30,000,000 to 40,000,000 for Us net, but it also achieves the appropriate scale to be able to shape a sustainable future. So that's the just to repeat, that's the simple rationale. And Jeff, the decommissioning liability and impact? Sure. So basically, I think the effect of the course two things here. From an NPV or economic value perspective, obviously, outside of the £340,000,000 payment, our other joint venture partner is picking up 31% of our decommissioning liability. From an actual credit metric perspective, of course, we consolidate all of the joint venture, which means we do consolidate all of the decommissioning liability. However, because, buyer gap comes with very little decommissioning liability, in effect, that that really doesn't change the liability, much at all. Whereas from a from a retained cash flow perspective, we, of course, are consolidating their operating cash flow and of course we're consolidating the synergies that we get within the joint venture as well. It's really the combination of those two having a much more positive effect than the small decommissioning liability and the additional decommissioning liability from fire and gas within the metrics themselves that leads it to be to give us a small positive on the credit metrics. Fantastic. Thank you. Thanks, Geoff. Thanks, Ajay. Next question, Geoff. We have a question from the line of Mark Freshney from Credit Suisse. Mark, please go ahead. Hi. Morning. Three three questions, if I may. Firstly, you've spoken about the rationale for 30 to 40, but my question is how we we got there. Because going through this transaction, you've you you entered with a 40 to 50 target and you're coming out with 30 to 40. So is it the case that, you know, you know, the my my point is what is the justification for that dilution? Secondly, on the trading businesses. So, you know, you've got a large commodity trading business. You've got contracts with Cheniere and various swaps with Asia. The value of those, that trading business partly revolves around having the hard assets. So how are you going to capture all of the value through through those? And thirdly, a question for Jeff just on the technical accounting. This transaction provides a lot of mark to market data, if you like, on the value of your oil and gas production business. Is there going to be any potential impairment or loss on disposal reported either at the half year or the full year? Thanks, Mark. Well, I'll ask Jeff to comment on that. But obviously, the JV operates at varying prices and the strategic point is that we can do this JV without having to crystallize net crystallize value. But Jeff can comment on value and impairments. On the rationale for the 30,000,000 to 40,000,000 I really think I've covered that in some detail. It's not a dilution per se. I mean, it is a lower participation in a larger business, but with a net effect that we believe fulfills our strategic objectives. And we're having reviewed that really carefully, we're very satisfied that although it's not 40,000,000 to 50,000,000 anymore net, As I said, it fulfills Centrica's objectives while also making sure that we participate and lead as a lead shareholder in a business capable of reshaping and consolidating the industry. In terms of trading business, as the RNS, as we will be buying and marketing all the production from the JV. And so our energy marketing and trading business will retain some optionality around this. Although the reality is that as it's always been the case, our energy marketing and trading business and the clue is in the word marketing is significantly involved in serving and servicing the other businesses of the group and will do so for this joint venture as well. And needless to say, staff recognition has been very focused on making sure that the cost for pricing and the ability for EMT the to stir up the JV is in the interest of both shareholders. But we by having access to these flows, clearly, at a fair market price, EMT will still potentially be able to capture some additional value from it that our other shareholder is not capable of doing. So Jeff, on impairments and valuations. Yes. I mean, Mike will have a chance in a couple of weeks to talk about where we are at the half year. But I think I'd probably make the observation that at the December 2016, when, of course, we did our impairment testing, as you rightly point out, we effectively are mark to marking the E and P assets at near term lifting curves and our longer term view of prices. I think my observation would be that prices haven't materially changed in the last six months versus where we were at the December. So clearly, we'll have a chance to talk more about that at the interims, but you might hold it that way. Thank you very much. Thank you. Our next question is from the line of Deepa Venkateswaran from Bernstein. Deepa, please go ahead. I've got three questions. So firstly, just wanted a clarification that the post tax contribution of $340,000,000 that you referred to, that is indeed the net outflow from the group because presumably the tax reduction will happen at the JV level. So just wanted to get that, that's the net amount that goes out from the group. Secondly, can you clarify how does this transaction really impact your group sources and uses of cash both immediately as well as in the next two to three years given that your dividend policy is quite linked to that. So just wanted to understand what's the net impact on group sources and uses of cash? And last question, clearly you've acquired less mature assets or the JV has some less mature assets from Bayer. So is the combined CapEx level of 400,000,000 to €600,000,000 still sufficient to harvest those assets? Thank you. Thanks, Deepa. Let me answer the third question and ask Jeff to cover the first two. So on the third one, yes, we believe that 400,000,000 to $600,000,000 at the appropriate level of finding and development costs, we should be able to stabilize and sustain a business of 45,000,000 to 55,000,000 barrels of oil equivalent. So you can get from that, but it infers in a very rough way F and D costs of sort of GBP 10 to 12 per BOE, which is absolutely within our grasp going forward. Clearly, on what happens to inflation in the industry, if you get prices going up, you'll see F and D costs going up. But we model that this joint venture has a number of different price environments, and it's relatively price inelastic in terms of our ability to sustain the business under a range of environments. And certainly, base case assumption in this current environment is within our grasp, having driven quite a lot of capital efficiency and operating efficiency into both businesses. Jeff, the first two? Yes. So Steve, for the $340,000,000 is the cash outflow from the group, so you were interpreting that correctly. I think on the second question, in terms of the sources and uses of cash, a bit linked to my response to A. J. On the credit metrics. Clearly, we will end up consolidating fire and gas's consolidating 100% of the joint venture and therefore effectively their production and cash flow profile as well. While at the same time, the capital expenditure, at least the short to medium term is still within the 400 to 600,000,000 that we've been signaling for the Centrica Group. So kind of the net of the operating cash flow improvements backed by the existing Brighter and Gas cash flows and synergies will be a slight net positive to the group as we also have slightly less share of capital. Peter, thanks. Just everybody everyone so far has had three questions. We may struggle to get through everyone's questions and everyone has three, but we'll keep going and see how we do. Next question, chat. Our next question is from Lakis Antonizio from Agency Partners. Lakis, please go ahead. Good morning, Lakis. Good morning. I'm going to have questions. Everyone else has, I don't see why I shouldn't. You're quite right. You deserve three. Go ahead. Okay. And these are simple, think. The first is, what's the timeframe of the delivery of the NPV benefit? I presume that they're operating expenditure and what kind of level will they reach in steady state per annum pretax? Secondly, on the reserve split, I presume all the reserves are at beginning of this year, so first January twenty seventeen. And we can get out of that what the splits is on the 2P reserves. But the 2Cs, the two sixteen and the two sixteen, can you split that between yourselves and buying gas, please? And the third question, I still don't understand what the $340,000,000 post tax actually means. Could you explain it in the context of the physical amounts of money that are going from Centrica to the joint venture irrespective of how the consolidation is done? What is actually going to be paid to the joint venture? Okay. So first of all, the timeframe of the NPV. So we're not disclosing that precisely, but some elements of the NPV will clearly depend on the ability to optimize capital flows, and those will be slightly longer dated. But most of the value we think will be pretty front end loaded. It's about optimization of the portfolio immediately. It's about cost efficiency and optimization. It's about tax optimization of the portfolios. And so it should be pretty front end loaded. On the reserve split, look, we're not giving the split today of the 2P or the 2C between the two companies, but we will do it at the end of the next reporting period. I mean, you can clearly go and find the split certainly of the 2P. With 2C, the problem is people do tend to use slightly different bases. And what we have disclosed, so just to confirm your question, on the WoodMac consistent basis, and it is as of the end of last year. In terms of the $340,000,000 lekker, so this from memory, this is a nominal amount. I believe it's nominal. And it directly corresponds to and is derived from the estimated cash obligations for fields that are actually in decommissioning or literally about to start decommissioning in 2017 or 2018 pretty much. What the problem we've got there is quite rightly any partners going to say, well, what's the point of me buying 31 percent of that? Because I it's near in. I can't participate in the learning curve of decommissioning. It's got no cash generation capability. It's just a straight liability. And so we've agreed that for those fields in the very front end, we will pay for sole risk effectively, the cash payments for those, and it's an identified group of fields over the next five years. For all the rest of the decommissioning, and you know our nominal decommissioning liabilities, 3,000,000,000, that's right, isn't it? That is is good, good to Canada. Canada. I'm sorry. So a bit lower than that. But it's a sizable number. And obviously, with the exception of the £340,000,000 our partner is participating 31% in the full decommissioning liability of the rest, including its upsides and risks. But can I think of the full 40,000,000 then as the amount of money Centrica will be paying into the joint venture less tax credits associated with those payments? It's a post tax number, Nakae. So it includes our estimate of the tax treatment. But obviously, it's before we receive cash from the joint venture from the dividend. And so it's probable that if you do the math on the inferred dividend level, if you take the 80% reinvestment ratio and dividend of dividend of 100,000,000 to $150,000,000 or thereabouts, gross our share of that should easily pay for these payments, although they'll be a bit lumpy, so that Centrica will be able to receive free cash flow from the JV net of these payments. Okay. Thanks very much, Lucas. Our next question on the line is from Ian Turner from Exane. Ian, please go ahead. Hi, Ian. Hi, everybody. Can I just ask, in the R and S, you say that the buy end side was loss making last year and that you expect the deal to be accretive in 2018? Can you just walk us through what changes between last year and next year in terms of the performance? And then just secondly, can you just clarify how many staff from each side are transferring into the JV? Okay. I'm going to ask Jeff to talk to accretion. On the staff, it's about 10% from the biogas side, so about 65 people on the balance are from Centrica. I'm just checking with Chris, that is about right, isn't it? Yes. So Jeff, on the accretion On the accretion, Ian, it's primarily driven by synergies, including tax optimization starting in 2018 that allows us to have a slight positive from an accretion perspective. As you rightly say, it wasn't a big loss in the context of the size of the joint venture and the synergies themselves create some positive accretion. We have a follow-up question from the line of Mark Freshni from Credit Suisse. Mark, please go ahead. I have two extra questions, if I may. Firstly, on rough. My understanding is rough is separate to this deal. It's on a whole separate basis anyway. But is there any scope? What's your plan with the scope with the rough property going forward? Secondly, within the Centrica portfolio of upstream assets or your side of the assets, my understanding is Morecambe Bay was historically, even last year, one of the most profitable assets you had. I think it was the best part of 10 MMboe per year and only taxed at 40%. I understand that there's an outage on that asset this year. So could you update on the current operating performance of that, please? Thanks, Mark. I'll ask Chris to comment on Morecambe, it has been in an extended shutdown for us to optimize it in the current circumstances that the flows in and out of that plant have been changing. But on on rough, the rough field is absolutely separate. We're currently under obligations still to to offer rough as a storage asset, but we have now indicated that we no longer can do that from a safety perspective and believe therefore that the field can no longer be used for injection and withdrawal purposes. So we are going to be applying to the government for permission to turn it into a producing field, and we're applying to the CMA to be relieved of the obligations under the undertakings. Once we've done that, clearly, the rough field, while separate from this joint venture and not envisaged to be part of it, becomes an E and P producing asset, assuming we get all the relevant permissions. We'll look at all possibilities for the future of the rough deal. And if this joint venture, including our partner, were interested in it, then we would have a conversation, but it's well too early to draw any conclusions there. We've got to go through the appropriate permissions first. But clearly, offsetting a single field producing assets outside of this joint venture with everything else in it would mean that the joint venture would, at the very least, have to provide technical services to Ruffin. And we have already built that into the joint venture agreements. Chris, on Morkum. Yeah. So you're absolutely right. Morgan has been very profitable for us in the past, and we are in an extended outage right now. And the the purpose of that was to make some changes to make the plant more efficient. As Ian indicated, the flows into Barrow have changed a huge amount over the years from one dry gas field to several with high liquid content and CO2 and other impurities in it. And as a result, the plant has not been running very efficiently. And we're in the process of making some changes to make it more efficient going forward. We're in the middle of that work right now. We anticipate being back up sometime in August and back on stream. And our plan is that it runs more efficiently going forward. Yes. Think it's important also, Mark, to realize that we did have a we brought the plant down for the reasons Chris has just outlined, but it also had a scheduled shutdown for a couple of months from June to August. And so what we've effectively done is just run one into the other to give us more time to get the plant positioned correctly for restart. We would expect that it should restart very well on the back of all of this. But yes, it has been up. Okay. So normalized production would be what, eight or nine MMBoe per year from all of those Morecambe Bay assets. And this year will be some way below that? It will clearly be impacted by the outage. What we'll do is update you on this at the time of the interims in a couple of weeks' time. We have a question from Andrew Mulder from Credit Suisse. Andrew, please go ahead. Hi, Yes. Hi. Thank you. Just a couple of clarifications, really. On the GBP $340,000,000 payments that you've talked about, I just wanted to be clear here. Even if you hadn't done the joint venture, I guess these are payments that Centrica would still have had to have made for the decommissioning of those fields. And so that's my first clarification. Second one, on the credit metrics you talked about, is it right that the only reason they're improving is because of incremental cash flow? Or is there any other effect? And I guess when you talk to the rating agencies about this, what do they feel that this transaction has done to the risk of your business? I mean I'm guessing it's probably decreased the risk of the business slightly, but I wonder if you could just comment on that. And finally, Ian, I think you just made a comment right at the beginning about assuming the joint venture was debt free. And I just wanted to confirm, is the joint venture actually debt free at this stage? Or will there be any debt going in from either Centrica or from buying gas? You. So on the debt point, it will be debt free. Thanks for asking me to clarify that. Yes, there's no plan to put debt into it. And on the $340,000,000 you're absolutely right. These would have been obligations that Centrica was already going to have to expand. And in fact, we were already embarked upon expanding them and the rigs booked for these decommissioning of the wells and so on. And so as a result, not surprisingly, Fine Gas just said, well, not really sure why we want to participate in that. And so that's why it's the way it is. On the credit metrics, Jeff? Yes. I think I mean, the big piece probably on the credit metrics that makes a difference. And as I said, to what I answered to one the earlier questions, you know, it it it it's a small positive. It's primarily not only the the buyer and gas cash flows, which we're consolidating, but it's actually the synergies. So the actual positive impact of the 100,000,000 to £150,000,000 of NPV synergies that come in on a year by year basis. And as Ian said, we think we'll realize those in the near term or the short term. I think from how the credit rating agencies would look at this. The broad answer is we have an E and P business that we think is now more sustainable, stronger joint venture with a more balanced set of near term cash flows and long term development options. And therefore, net net is a positive to the shape and positive to the E and P business as a sustainable ongoing business. Thank you. Thanks, Andrew. We'll just hold to make sure that no one's got any other questions. We have a follow-up question from the line of Lakis Anfans Massieux Lakis, please go ahead. Hi. This seems to be a lull. On Morecambe, you seem to be accepting one of the previous questioners' statements that you're close to 10,000,000 barrels of oil equivalent production there. I thought that was I mean, certainly in 2016, my numbers there are significantly less than that, in fact, less than half that. And it's very difficult to see if you get anywhere near 10 in the future. Or am I completely wrong? Like I said, I think you're correct that it's the 10. It's not 10. It is it is below that level. But but but I think what we would be looking at is somewhere between five and eight. So you're right that it's it's below that level. And as Chris said, we need to step out. Obviously, we're hoping that the Morton field, when it comes back, will be able to operate more efficiently and with much better reliability. That is the hope. So we might actually see some net benefit in the near term, obviously, as the fields have also been rested for a while. But we would expect a lower level than that 10% high in the five to eight range. Right. Okay. Are there any other questions from anyone else, Chats? We have another question from Deepa Venkateswaran from Bernstein. Deepa, please go ahead. Hi, Deepa. Hi. Thank you for taking an additional call. I just wonder whether you would be able to comment on what are the other options you looked at for your E and P business and why you finally landed on this JV option? Thank you. Thanks, Peter. So I mean, firstly, although a number of people were convinced that we were looking at selling, as I've said many times, in this environment, it would not be the right thing to do. And furthermore, we see the strategic benefits that E and P provides to the portfolio as a whole, as I described earlier. So what we were focused on was how to strengthen the E and P business. So we have decided to sell Canada and that is a the rationale for that is very straightforward that we were not seeing the ability to extend E and P into the Lower 48 or to expand it in Canada. We believe that we are we do not have the strategic intent or capability to add yet another set of basins to the portfolio. And secondly, as a result of the amount of shale gas being produced in The United States, Canadian gas is effectively displaced up the price, if you like, and is therefore unlikely to see significant upside even if natural gas prices were to increase. It will be significantly dampened relative to the Lower 48 and even the rest of the world. And so that was the reason why we decided with our partner, the Qataris, to exit Canada. That aside, we've been very focused on only one thing, which is to strengthen what remains to make sure that it is sustainable and to create strategic optionality for us. And that meant a combination, which clearly means we don't have to crystallize net crystallize price. It means that you can evaluate a combination of a range of prices. And this one, the shareholdings between us and Bio and Gas are relatively priced inelastic, which allowed us to combine with confidence on behalf of our shareholders without running the risk of crystallizing price in a negative way at this point. So very much in line with what we've been saying. And we hope that this venture will be the beginning of further optionality for our shareholders from the E and P business. You. Chatter, I think we've come to the end of the time. And I'd just like to wrap up by, first of all, thanking everybody for joining us today to listen to this. I think I hope it's been helpful in explaining what we've announced today. I want to leave you with just one thought, which is this joint venture on its own creates value, is accretive and creates a more sustainable business, which is capable of standing on its own two feet. Therefore, it's in the interest of our shareholders, and we're very pleased with the nature of the strategic alignment with Stadtberg and Wintgen. However, I want to emphasize one important point, which is we see this as only the beginning of the ability to participate in the further consolidation of the E and P business. There's no guarantee of that, of course, but we think that this entity is now large enough and sustainable enough to enable further consolidation steps. And though we would obviously hope to create further shareholder value and NPV through those, and it also creates optionality for both shareholders in terms of their long term ownership and participation in E and P. So we see this as a strategic move in line with our strategy from 2015 and a very large component of Phase one of repositioning Centrica. We've obviously made a number of announcements recently, including the sale of the two large CCGTs, the sale of Canada, the cessation of storage operations at Ruff. And with this and the acquisitions we've been making in the customer facing businesses, we're doing what we said we would do in 2015, which is to reposition the group while benefiting from the asset businesses that remain and in particular, the E and P business. Thank you all very much for joining us today. And obviously, we can follow-up with any further questions through Investor Relations. Thank you. Ladies and gentlemen, this does conclude today's call. Thank you for joining, and enjoy the rest of your day.