Centrica plc (LON:CNA)

Earnings Call: H1 2015

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Jul 30, 2015

Good morning, everyone, and welcome to Centrica's twenty fifteen Interim Results Presentation. Today, we're also presenting the outcome of our wide ranging strategic review. The headlines of both are contained in the RNS that we issued earlier this morning. In our presentations and subsequent Q and A on both the interim results and the conclusions of the strategic review, we're intending to provide you with clarity on our performance, forward strategic intent and priorities along with key parameters that will shape Centrica as an investment. I'm joined today on stage by Jeff Bell, who yesterday we confirmed as CFO going forward. Jeff is deeply knowledgeable about Centrica's business performance and strategy. I'm also joined by our divisional heads Mark Hodges, who took over as Head of British Gas in June Mark Hanafin, Head of Centrica Energy and Badar Khan, Head of Direct Energy. And in the front row over here, we have our Chairman, Rick Haithon Sweig Grant Dawson, Group General Counsel Jill Shetton, Group HR Director Nick Baird, Head of Corporate Affairs and Ian Peters, Head of Customer Facing Strategy. Those of us on the stage yesterday asked if we could have a bigger table because it was a bit cramped and we've ended up with smaller chairs. That's one way to deal with it. So but before we begin, just a word on safety in this building. There are no planned fire alarms today. Any building evacuation will be announced by Tannoy. Emergency exits are marked in green at the rear and front of the auditorium. And Deutsche Bank staff will direct you to the muster point by Draper's Hall at the bottom of Throgmorton Street. So let's hope we don't have any interruptions. Let me now turn to the agenda for today. We're going to take just over thirty, thirty five minutes presenting the first half results, leaving nearly half an hour for questions. We'll then come back after a short break for an in-depth presentation on the outcomes of the strategic review, leaving adequate time for questions on our strategy and direction. A buffet lunch will be available after the session, and the team will all be available for further discussion should you wish to stay. I've been only with Centrica for seven months. Since the beginning of the year, I've obviously been working on our strategy with the executive team. I've also been able to deepen my understanding of our operations, our people and our capabilities. I'm very pleased with where we've got to strategically and believe Centrica has all the components necessary to deliver a powerful proposition. Although we've had a very difficult time in the last year and have had to take some tough decisions, I'm confident that we've built a strong platform from which we can be a leading energy and services company. We have the right capabilities and strengths with which to do this. I'm therefore excited about this next phase, and I look forward to describing later on how we plan to pursue that future and deliver long term shareholder value. So let's move to the results part of the morning. Geoff will go through the details of the results in a few minutes. I'll then come back after Geoff has finished just to cover the current context and the operational performance and milestones. And then along with Geoff, Mark, Mark and Bednar, we'll then take your questions. A lot's happened in the external environment since January. Geoff will cover wholesale gas, oil and power prices, which remain depressed. In addition, we've had the U. K. General election in May and the Competition and Markets Authority investigation is ongoing. I'll return to these subjects and particularly the Centimeters May investigation after Geoff has been through our financial results in detail. Let me just briefly cover the headlines. So earnings in the first half of the year were £611,000,000 up 15% with corresponding earnings per share of 12.3p. Post tax adjusted operating cash flow was £1,100,000,000 We've made good progress in strengthening the balance sheet and improving our financial metrics, with sources of cash exceeding uses in the first half, reflecting the actions that we took at the start of the year to cut capital investment and rebase the dividend. With capital discipline, we remain on track to constrain investment levels to just over £1,000,000,000 in 2015. Our full year outlook remains broadly unchanged, but uncertainties include low wholesale commodity prices, a competitive environment for our customer facing businesses and the ongoing resolution of the billing issues in British Gas business, which we'll cover in more detail later. As a result, given the colder than normal weather we've seen, we expect earnings to be weighted towards the first half of the year. We've made changes to the senior management. In addition to appointing Jeff as CFO, we welcome Mark Hodges to the team as Managing Director of British Gas. Mark is a veteran of The U. K. Insurance industry and is already making a significant contribution both to performance and to strategy. Our strategic review is complete. A significant amount of management time has been dedicated to the review and it's been a thorough and rigorous analysis of the group's prospects, capabilities and performance. We have concluded that Centrica is an energy and services company. Our purpose is to provide energy and services to satisfy the changing needs of our customers. In the future, our focus in everything we do will be to enable us to be excellent in serving those customers. Serving customers is what we're known for, what we're good at and what we where we already have distinctive positions. The strategy has therefore been developed around that as we look to deliver long term shareholder value through returns and growth. And I look forward to coming back in the second session to describe the conclusions of the strategic review in some depth. I'd now like to hand over to Geoff to take you through the first half context financial results and the outlook for the rest of the year. Geoff? Thank you, Ian, and good morning, everyone. I'd like to start with the financial headlines of our interim results this morning and then review business unit results as well as cash flow and the balance sheet. Let me start with revenue, which decreased 2% compared to the 2014, primarily driven by lower realized unit prices for oil and gas in Centrica Energy and fewer customer accounts and lower unit retail prices in Direct Energy. Adjusted operating profit fell 3% to £1,000,000,000 While our customer facing businesses British Gas, Ford Gas and Direct Energy reported higher profit, this was more than offset by a lower profit in Centrica Energy. The adjusted effective tax rate was 29%, eight percentage points lower than in the 2014, reflecting the shift in the group's profit mix away from the higher taxed E and P business. As a result, adjusted earnings increased to £611,000,000 15% higher than in the first half last year and equivalent to 12.3p per share. As indicated at the preliminary results, the interim dividend per share is down in line with the 30% reduction in last year's final dividend to 3.57p per share. And finally, net debt fell from £5,200,000,000 at the 2014 to £4,900,000,000 as a result of positive net cash flow. As a backdrop to the more detailed business unit results, I would first like to touch on commodity prices and weather in the first half. From a commodity price perspective, prices traded in a much more stable range than the dramatic changes experienced in the last 2014. After reaching a low point in January, Brent oil prices rose to trade for most of the first half in the $55 to $65 per barrel range. NBP gas prices also fell in January and remained below £0.50 per therm for the remainder of the period. While in The U. S, Henry Hub gas prices traded generally in the $2.5 to $3 per MMBtu range or around $0.02 0 pounds per therm equivalent. AECO prices for our Alberta production traded at a further discount to Henry Hub. U. K. Power prices also remained low and spark spreads were just above zero for much of the period. This created a challenging environment for Centrica Energy. For the Energy Supply businesses, weather was again a key factor in understanding first half results, although for very different reasons for which I will outline shortly. As you can see on the left hand side of the slide, average U. K. Temperatures were generally colder than normal represented by the blue areas compared to the orange areas which represent warmer than normal temperatures. In contrast, the 2014 was exceptionally warm. And as a result, average residential gas consumption per household in The U. K. Was up 11%. In North America, average temperatures in The U. S. Northeast were significantly colder than normal through the winter months, as you can see on the chart on the right. Temperatures were also extremely cold in the same period in 2014. But as Alberta experienced much warmer temperatures than the previous year, overall average residential gas consumption fell by 6% for Direct Energy. Now moving on to the different components of our operating results, You can see the breakdown by different business units and their relative contribution to first half operating profit. In British Gas, profits increased to £656,000,000 up 44%. Residential Energy profit increased to £528,000,000 reflecting the higher average gas consumption from the colder weather mentioned earlier as well as lower ECO costs due to the phasing of spend between the two years. Post tax margins increased to 9%. However, taking into account our two gas price reductions and assuming normal weather in the second half of the year, we would expect full year margins to be broadly in line with recent years. Residential Services operating profit was down 3% to £125,000,000 A 2% reduction in product holdings since the start of the year was largely offset by a one off benefit related to a change in the employee pension scheme. In British Gas business, operating profit fell significantly to just above breakeven, due primarily to issues related to the transition to a new billing and customer relationship management system. This resulted in higher bad debt charges and increased costs as additional resources were deployed in response. The business also faced competitive pressures on both margins and accounts. We expect to have resolved the system issues for customers by the end of this year and the impact to be primarily affecting the current year only. In Direct Energy, operating profit increased significantly. Unlike the 2014, similar periods of cold weather this year did not result in a significant additional polar vortex related cost to the business. As a combination of more physical more stable physical infrastructure, market redesign and management action led to a significantly improved outcome for the Energy Supply businesses. In Direct Energy business, underlying profit increased as the higher unit margins from sales contracts written over the last eighteen months were reflected in operating profit outturn. Furthermore, the cold weather in the first quarter enabled the business to deliver a strong optimization performance from its pipeline and storage capacity contracts. The business also benefited from the roll off of amortization charges related to the Hess acquisition. In Direct Energy Residential, excluding the impact of the additional costs of the associated polar vortex in 2014, underlying operating profit fell predominantly driven by the continued decline in the Ontario customer base and a competitive operating environment in The U. S. Northeast. However, unit margins remain broadly unchanged and we are starting to see organic customer growth in Texas. In Direct Energy Services, the business reported an operating loss, reflecting the sale of the Ontario Home Services business in the 2014 and our accelerated investment this year in solar installation capacity to drive future growth. In The Republic Of Ireland, Borgash Energy reported an operating profit of 23,000,000 in the first half of the year, reflecting higher than expected gas consumption as a result of colder than normal weather. Whitegate, the gas fired power station performed well with strong availability and reliability. Turning to Centrica Energy. Operating profit in gas was down significantly to £48,000,000 predominantly reflecting the impact of the lower wholesale price environment. The reduced operating profit also reflects an operating loss from our midstream gas business, which was impacted by losses flexible gas contracts and lower trading profits. As we indicated in February, these flexible contracts were optimized for value during 2014 with a consequential impact on 2015. Reflecting this, the gas business reported a loss after tax of £23,000,000 The midstream business is expected to return to profitability in the second half. In E and P, European realized gas prices were down 13 from £0.56 per therm to just under £0.49 and realized oil and liquid prices were down 33% from £60 per barrel to £0.40 In The Americas, the reduction in gas and oil prices was even more significant with realized prices for both down by over 40%. In terms of volumes, production was broadly flat compared to the first half last year at just over 40,000,000 barrels of oil equivalent. In Europe, gas production decreased by 7%, reflecting the natural decline of our assets in The U. K. And The Netherlands, partly offset by an increase from Norway as a result of the Valemond field coming on stream at the start of the year and strong production from the Kevitibjorn and Stadtfjord fields. Oil and liquids production was flat. In The Americas, gas production increased by 8% and oil and liquids by 25% as new wells and assets acquired from Shell in 2014 produced ahead of expectations. Total unit lifting costs and other production costs were broadly flat in comparison to the 2014 with a 7% increase in Europe reflecting reduced production broadly offset by a reduction in The Americas from lower royalty payments in Alberta. Our program to deliver £100,000,000 reduction in cash production costs by 2016 is on track and already realizing benefits. In Power, operating profit increased 11% to £68,000,000 Gas fired generation volumes decreased by 20%, reflecting an outage at Language earlier in the year, but lower depreciation charges as a result of previous year impairments resulted in a reduced operating loss for the gas fired fleet. Nuclear output was only slightly down at 6.1 terawatt hours despite four reactors at Haysham-one and Hartlepool operating at reduced power generation levels following the discovery of a boiler spine issue at Haysham-one in 2014. The reduced output, lower power prices and inflationary cost increases all contributed to the decrease in operating profit to £108,000,000 Renewables profitability was £18,000,000 compared to a loss in 2014 with the prior period reflecting a £40,000,000 write off of cost relating to the Round three Celtic Array offshore wind project, partly offset by lower generation volumes. Midstream profit fell in comparison to a strong prior period. And lastly, Centrica Storage, where seasonal spreads remain at low levels. However, operating profit in the 2015 was slightly higher than in the same period in 2014 due to higher space sales in the twenty fourteen-twenty fifteen storage year and lower fuel gas costs due to a later start to the injection season. We discovered a potential technical issue at the rough asset during a routine inspection in March, which resulted in us deciding to limit the maximum operating pressure of the rough wells. It is anticipated that the limitation will remain in place until the testing and verification works are completed between September 2016. This will negatively impact second half profitability, although this impact will be broadly offset by the sale of Cushing gas with Centrica Storage receiving consent from the oil and gas authority in July to increase the reservoir size of rough. I'd like now to move on to net investment. Organic capital expenditure was just over £200,000,000 lower than in the 2014. In E and P, capital expenditure was slightly over £400,000,000 down 24% compared to the first half last year and remains on track for full year expenditure of approximately £800,000,000 British Gas capital expenditure reduced by nearly 50%, reflecting the completion of systems projects towards the 2014. The group realized disposal proceeds of £180,000,000 in the first half related to the sale of our portion of the Lynx Wind Farm project financing debt, partially offset by the acquisition of Alertme earlier in the year. Turning now to cash flow. As you can see on the slide, in the 2015, the group had £357,000,000 of cash inflow in comparison to a £59,000,000 cash outflow in the same period of 2014. This reflected actions we took earlier in the year to restore balance to our sources and uses of cash. EBITDA fell 4% to just over £1,400,000,000 primarily driven by lower cash generation in E and P from falling commodity prices. We saw a negative working capital movement compared to a positive movement in 2014, mainly due to the billing issues in BGB and cold weather. We would expect this to largely reduce in the second half assuming normal weather patterns. This was broadly offset by a reduction in taxes paid of nearly £300,000,000 reflecting the significantly lower profits in the higher taxed E and P business. Adjusted operating cash flow was £1,100,000,000 slightly lower than last year. However, at a net cash flow level, we saw a much more favorable year on year comparison, primarily from lower dividends paid, reflecting our decision to rebase the twenty fourteen final dividend by 30% and a first time take up of our scrip dividend alternative of over 40% and no share buyback activity. Taking into account non cash movements, group net debt therefore fell by £300,000,000 in the first half of the year to £4,900,000,000 This excludes margin cash balances of £465,000,000 which were around £300,000,000 lower than at the start of the year. Although not visible in these numbers, during the first half we concluded the issuance of €750,000,000 and £450,000,000 of hybrid securities helping underpin the group's financial metrics and improving the group's liquidity. We continue to retain strong investment grade credit ratings with Moody's at Baa1 stable downgraded from A3 negative outlook in March and with A- with negative outlook with S and P. So let me summarize before handing back to Iain. Twenty fifteen first half earnings were up 15% with improved earnings from the customer facing businesses more than offsetting lower earnings from the Upstream gas business, although operating cash flow fell to £1,100,000,000 However, the actions we took in February to be more structurally balanced and rebalanced in the group sources and uses of cash have been effective. And as a result, we've made good progress on reducing net debt. Looking forward to the full year, earnings will be weighted to the first half. Our full year outlook remains broadly unchanged from February, but uncertainties include continued low wholesale commodity prices, a competitive environment for our customer facing businesses and the ongoing resolution of the BGB system issues. With that, I will hand back to Iain. So thanks, Geoff. I'd now like to cover the recent context for the group and our operational performance in a little bit more detail. As Jeff outlined, commodity prices remained low and we are responding to adjust to this new environment through attention to operational uptime and a focus on cost and capital discipline, particularly in E and P. Colder than normal weather helped all of our customer facing businesses. Although competition is intense and excluding weather fluctuations, demand for energy per unit GDP continues to fall. Operations have been generally strong, although we've had some issues, which I'll cover in a moment. Two other external uncertainties the business has had to deal with during the first half of the year was, of course, the U. K. General election and the Competition and Markets Authority investigation into the functioning of The U. K. Energy market. We welcome the certainty and continuity provided by the clear result of The U. K. Election, And we look forward to working constructively with the new conservative government as we've indeed as we have started. The Competition and Markets Authority investigation into The U. K. Energy market is ongoing and they published their provisional findings and notice of possible remedies earlier this month. We welcome this wide ranging review, which recognizes the realities and difficulties of implementing policy, pricing and regulation in what's a complex marketplace. The CMA have carried out a comprehensive and thorough assessment. We also welcome the possibility that this review will have a constructive and positive influence on competition in the energy market. We agree with the conclusions the CMA has reached in most areas, in particular their conclusions regarding the functioning of the wholesale markets, vertical integration and the fact they found that the evidence does not suggest there's tacit coordination between suppliers. We also agree with many of their conclusions regarding the impact of regulations on supplier ability to innovate and to offer broader tariff choices. We do agree there's more which needs to be done regarding customer engagement and agree with the conclusion that smart meters will help significantly in eliminating customer frustration with estimated bills and improving insight. We are keen to work with the CMA on remedies designed to improve customer engagement still further. Where we don't agree or have some questions about the practicality of some of the proposed remedies, we're in active discussions and have made proposals in our recent oral hearing. We do not agree with their conclusions on profitability and returns. However, our view is that profitability is an outcome of a competitive market, and our focus therefore is on helping the CMA with their remedies to improve the functioning of the market. On remedies, we're generally supportive of many of the proposals, but believe that some of the possible remedies are not in the best interests of competition and the consumer. The potential introduction of a transitional safeguard tariff for domestic and micro business customers who remain not engaged following other remedies will be difficult to implement and could actually decrease engagement. We believe if the other remedies are designed well, such a default tariff would not be necessary. We 've had two constructive oral hearings with the CMA and look forward to engaging with them as we provide responses to the provisional findings and potential remedies in the coming weeks and months. Let me now turn to briefly to operational performance in the first half. In our customer facing businesses, we continued to focus on safety, compliance and improving customer service. Our safety performance is stable, but we're paying particular attention to the risk of customer injuries and to driving safety. In customer service, Net Promoter Scores improved in our residential businesses in the first half of the year, while we also announced that we'd be investing an additional £50,000,000 in our U. K. Residential energy call centers to improve service levels further. In Residential Energy, our market share remained broadly flat in The U. K. As we responded to a competitive environment with a 5% price reduction in our residential standard gas tariff in February and some competitive fixed price and collective switch offerings. On July 15, we announced a second 5% reduction in gas tariffs effective at the August. This combined 10% reduction will benefit our customers significantly in the coming winter. We saw stable accounts in The Republic Of Ireland having reduced our residential prices during the first quarter. The sales environment remains challenging for U. K. Services, with accounts down 2% in the first half. Some of this was due to demand moving towards home emergency and on demand services. We're currently working on a new range of products to meet this change in demand. In North America, services product holdings grew slightly. The major operational challenge in the customer facing businesses during the first half of the year was in relation to resolving issues following the implementation of a new billing system in British Gas business. All customers are now on the new system. However, we've been unable to bill some of our customers and service levels have fallen to unacceptably low levels. Geoff has already talked you through the impact on the first half result, and we're working hard to resolve the issues. The majority of customers, I'm pleased to say, are now being served normally, the vast majority, in fact. And although some uncertainty remains, actions are in place to resolve the issues for customers by the 2015. In North America energy supply, the number of residential accounts fell slightly as we deliberately focus on the more valuable customer segments and the quality of our offerings and on sales margin discipline. Turning to E and P and Power. Safety is also a focus and we've again seen relatively stable performance, but have been focusing on process safety and high potential incidents. In E and P, production was flat relative to 2014 and we remain on track to achieve production volumes of around 75,000,000 barrels of oil equivalent in 2015 in line with previous expectations. This includes a first contribution from the Valeman field in the Norwegian North Sea, which came on stream in January. We continue to make progress with the Cygnus project with our partners Anji and Bayern Gas with first gas expected in the 2016. In Power, Nuclear operational performance was good with volumes broadly flat despite four of the reactors running at reduced power during the first half of the year. However, gas fired operating performance was impacted by an unplanned outage at Landgage. As well as delivering solid operational performance, we delivered on a number of important milestones during the first half. We've now installed more than 1,500,000 residential smart meters in The U. K, building on our market leading position. Smart meters are the enabler to help customers understand and control their energy use, and we believe will be a key driver in helping to improve trust in the sector. We're also pleased that the CMA reached a similar conclusion. Our leading position in Connected Homes in The U. K. Is another key differentiator for Centrica, and the acquisition of AlertMe in the first quarter gives us control over the technical platform that will underpin our Connected Homes activity, including the Hive Active Heating smart thermostat. We've now sold over 200,000 smart thermostats in The U. K. Have launched the next generation of Hive and a number of new devices. Hive has been sold into Ireland for the first time. We continue to develop a further range of products and will return to Connected Home in the second part of the morning. In all our markets, we're focused on product innovation and increasing bundling of products and offerings. We believe smart meters and Connected Home are contributing to improved customer offers and reduced churn. In North America, we've accelerated our investment in solar installation capacity and are looking to develop a proposition for Hive in The U. S. In LNG at the June, Cheniere made a positive final investment decision on the fifth train at the Sabine Pass liquefaction facility in Louisiana. As a result, we expect to take the first commercial delivery under our twenty year U. S. Export contract with Cheniere by 2019. And in Power, as announced in February, we've progressed plans to rationalize our CCGT fleet with the closure of the Killinghome gas fired power station in 2016. We also had intended to close the station at Brig, but will now run it as a distributed generation asset. So in summary, we delivered solid operational and financial performance in the first half of the year and also made good progress on our shorter term targets aimed at strengthening the balance sheet and balancing sources and uses of cash. We completed our strategic review and are clear on our purpose, direction and priorities for the next phase of Centrica. We'll come back to that after the break. So I'd now like to open it up to questions. Can I ask at this stage that we keep the questions focused on the first half results? I know that will be difficult. And pick up any questions on the strategy after the second presentation later this morning. And when you are asking a question, could you just identify yourself? And we'll obviously take the next half an hour to cover the ground you'd like on the results. Thanks very much. So there are a couple of roving mics coming. Let's start on this side near the front and we'll do a couple on this side and then go over to the right hand side. Thanks. It's Martin Bruff from Deutsche Bank. A couple of questions. One was on British Gas, you've shown joint product households down 8% year on year, which is already a relatively low proportion of your total households that you're servicing. So could you just explain what's going on in terms of that decline? Because that seems to be a focus to increase going forward. And the second question was on the scrip. So 40% scrip take up is quite a lot. Are you worried that you're sort of pricing in too much of the sort of embedded option value there? And if people do want to take cash out of Centrica, aren't they being diluted quite a bit from the scrip? So what's your policy going forward in looking at that? Well, great. Thank you very much for those. Mark Hodges will I'll be able to talk into the first one, and I'll ask Geoff to talk to our views of scrip. Okay. Let's just talk about the customer holdings. I mean, I think you we look at this a number of different ways. If we look at Residential Energy broadly firstly, actually customer holdings in the first half of the year are down by about £45,000 which is broadly stable. That's actually an improvement I think on the previous couple of years. So we see that as reasonably positive and a function of the investment we're making in service, but also in terms of the pricing strategy. When you look at things like joint holdings, I think there are just some competitive forces in there. People are shopping around more. You look at the impact of switching sites. You look at the whether that's dual fuel or whether that's fuel with services, those are areas where we just see more intensity of competition. And when you look at British Gas Services, actually our holdings are down 3% since the end of the year. So that will have had an impact on that number. For me, this is reflection of the market environment we're in and that people have choice and we're going to have to work hard to make sure they choose us not just for one product, but for multiple products. And with respect to the scrip dividend, I think we would consider the sort of 40% we saw for the first time as not representative of what we'd expect to see going forward somewhat atypically. It priced in just before the results of the election, which were clearly sort of very positive for the share price. So not surprisingly, it was quite financially attractive. And we wouldn't expect that level on a sort of normal basis going forward. But to your point, it was the first time. It's the first time we've offered the scrip alternative. I think as we've said before, we'd like to offer that to our shareholders, see what sort of interest and take up there is. We're not unaware of the dilutive effects longer term and we will keep it under review, but we'd like to see what sort of sustained take up and interest there might be from our shareholders first. Thank you for that. And also just on the first part, just to add one thing. We'll come back after the break to talk about prospectively what we think about attracting customers. And clearly, of the questions that you all must be holding is, all right, if the track record isn't to grow them, how do we do it going forward? And if you can hold that, we'll try and address that in the second part. There's a question just behind you or just next to you and then one behind you, sorry. Thank you. Thank you. Deepa from Bernstein. So I have a couple of questions. So on BGB, could you just help us understand what percentage of your customer base are these micro customers, which is covered under the CMA? And maybe what percentage of your normalized profits would be from these micro customers? And secondly, on British Gas Services, so the product holdings are down there. Do you think that with the CMA review and potentially some of the restrictions on cross selling or four tariffs goes away, do you think that can help you to increase your holdings in BGS in any way? Or maybe this is the second half question, but Well, let me just touch on the second part of your question. I mean we do think that the CMA attention to regulatory framework and the ability for us to have more flexibility on tariffs and the offerings that we can make will allow us to compete and differentiate in a more effective way. And we think it's a really important part of the changes that the CMA is looking to implement. And we also believe with the capabilities we've got that we'll be able to play into that very effectively in a relative way. And we'll talk more about that after the break. On micro business numbers, Mauro? Yes. Think in terms of the numbers, the numbers of customers will be the vast majority. I mean if you think about how many where the revenue split, the revenue will actually be weighted towards the I and C customers, but the customer numbers will be weighted towards the micro. I think one of the challenges that we need to think about is how similar are the propositions and how similar are the services the offerings that we have for those micro customers in terms of comparing them to our residential customers. In terms of the CMA, it goes back to, I think, partially the point Ian has made. If we see a rollback of some of the RMR restrictions, if we're allowed to offer, I think, more innovative products and that applies both to Micron customers and Residential, we think that's good for competition. We think that could be good for us. I don't think we disclosed specific breakdown between micro, medium, I and C. I think that's it's something that's in the round in the numbers unless Jeff wants to correct me. Can we pass the mic back just behind you? Thank you. And then we'll go over to the right hand side for a couple of questions. Hello. It's Mark Freshley from Credit Suisse. I have a question for Badar. Following the Polar Vortex, pricing discipline in B2B massively improved. You're seeing the benefit of that this year. Can I ask how much more of the benefit is there to flow through? And you spoke about the gross margin improvement last year. My second question is for you, Mark. You spoke sorry, the CMA spoke about the big six potentially having overcharged by £50 per household. And working through their maths and redacted numbers, it seems that what they're really saying is the cost to serve for the big six is about £150 And for some of the new entrants, it's some way below £100 that analysis that you agree with? Can I just start on the CMA point and then just on the macro level, which is just that we don't agree with the CMA's conclusion that the six large energy suppliers have been overcharging by £1,700,000,000 I mean that's more than our entire profits? And the implication is that we must therefore want to do this for free. Now I do think that as we admitted in February, our benchmark costs imply that despite our scale, we are not as efficient as we should be or could be to the benefit of our customers. And so clearly, a part of the strategic review, which we'll come back to after the break, is all about efficiency. We don't agree with lots of aspects of the CMA's analysis around profitability. And we think that some of it has been based on some pretty theoretical models of competition, perfect competition, where everyone is supposed to compete at cost of capital and generate no shareholder return. We just don't think that's feasible in a real market. So that's the general point. But Mark any specific points on the costs and the deductions from the CMA? And then I'll ask Berard to comment. I think you covered it. I mean, I don't think we want to get into a kind of a mathematical debate with the CMA about how they get to cost to serve per customer. I don't think in terms of the big six, we're very obviously focused on what we're doing. I think we're coming on to this after the break. Do I think we can serve our customers more effectively and more efficiently in terms of some of the trends that are out there, but in terms of some of the ways that we work? Absolutely. So I think you've covered it Ian. And North America? Yes. On North America, our B2B contract lengths are typically just over eighteen months. And we've been saying that for the last eighteen months, we've been restoring margins through pricing risk more appropriately. So we're clearly seeing the benefit in this first half. But you'll expect to see that continue into the second half. So you could take a look at our half '2 results last year and assume that we'll make a little bit more as a result of expanded margins. Thank you. Mark, thanks a lot. Over to the right now. There are two in a row just five back. In fact, are three in the row, five back. That makes it easy. So just pass the mic along. It's actually Thomas from SocGen. Two questions. The first on ECO. You noted that ECO costs were down in H1. H1. Can I just confirm that you recognize ECO costs as expensed rather than accrued? And has your expectation for the cumulative ECO costs for the total period, has that changed at all, I. E, sort of has that come down? Second question is just on the dividend policy. The progressive dividend is now linked to growth in operating cash flow. Therefore, on that basis, will you review the treatment of the strategic investments, fair value depreciation in your adjusted EPS calculation? Why don't Mark touch on the operational aspects of ECO? And then Jeff can talk to the accounting treatment and kind of cover the dividend policy items. Yes. So I think in terms of the expectation of the full spend, no, I don't think we're making any changes. And we are actually on track to deliver our ECO obligations by March 2017. I think in terms of the spend profile, it's more a case of spending more in half one twenty fourteen to get ahead of the game. We actually spent we had measures in place through the back end of 'thirteen. I see this as a natural reaction from the business to having missed one of the earlier targets. We got very much ahead in that 2014. And what you're seeing in the 2015 is a return to kind of normal levels of spend. That's how I would think about the difference. But in terms of the overall profile, no, we're still expecting it to be about the same. Geoff, on the accounting treatment and On the accounting treatment, and we will touch on this in the second half. What I would say is that we will be taking the output of the strategic review and in the second half of this year looking at both the more sort of detailed KPIs that we would evaluate the strategy on, but also with our change in focus of investment and areas of growth going forward, we will also revisit our reporting segments and how we report the business. And so we'll sort of look fairly completely across all of that, including how we define different adjusted profit measures as well. Just on the Eco treatment. Yes, sorry. It is on an expense basis as opposed to an accrual basis. Yes, sir. And the dividend policy, was it on? No. I think that's been answered. Thank you. Move the mic along to the middle of the row then the two of you there. It's Jon Musk from RBC. Just a question on the E and P business or the Upstream business there. I'm trying to get a handle on what we should expect in the second half. Can you just quantify the Midstream loss that was in the first half that you're saying will return to profitability in the second half and give a bit of guidance on the phasing of the €100,000,000 savings just so that we can figure out what H2 is going to look like and potentially what 2016 is going to look like if prices remain where they are. Mark? Yes. So in terms of the Midstream profitability, it doesn't form a large part of the overall E and P business. So it was sort of slightly loss making in the first half, will be sort of slightly more loss slightly profitable in second half, but would be sort of reasonably small compared to the overall E and P business. With it, just to explain the issue there. We have three gas contracts that have a lot of flexibility in them and they have take or pay provisions. We optimize those contracts for value rather than the P and L in the year. So we took benefit in 2014. We get hit a little bit in 2015. The second thing is that, they're priced off oil a basket of oil indexes with a lag. So we hedge that. We accrual account for it. And it means that with a drop in oil prices that's hit us in the first half. Because we've hedged it and there's a lag, we get the benefit next year in terms of the margin on it. So if we were marking it to market, these would be pretty reasonable contracts, but we've got these lags and differences in hedging, is what you're seeing in the first half versus last year and also versus second half this year. Thanks. Two more questions on this side, so we'll go there and then the row in front. Good morning. It's Fred Barassi from Goldman Sachs. Two questions for me, please. Could you give an update on how your credit metrics look after the first half, either on a six month or rolling twelve month basis? And then secondly, BGR, very strong margin in the first half, 9% post tax. Could you give any guidance for the full year margin, please? Okay. That's definitely one for Geoff and one for Mark Hodges, respectively. And I'll come back on BGR in a second as well. So in terms of the credit metrics, as you saw, a good reduction in net debt from 5.2 to 4.9. We continue to project that we are strengthening our financial metrics and would expect to meet or exceed those currently set over the twenty fifteen, twenty sixteen period. So we remain on track to do that. And on BGR? In terms of BGR margins, so yes, 9% in the first half. I think we've explained some of the moving parts in terms of increasing consumption related to weather. It was colder than 2014. Actually, cold weather extended through to sort of April, May and June, which benefited in terms of profitability. In terms of looking forward, we put the 5% price reduction in on the February 27. We announced a couple of weeks ago the price reduction from the August going into this winter. So it's 10% reduction in prices going into the winter. That will have a material impact in the second half of the year's profits. And I think the broad guidance we're giving is that would return profitability to the kind of normal ish levels we've seen over the last few years in terms of margins, if you think about that 10% price impact feeding in through the really the October, November, December months. Yes. Mean just to add to that. I said publicly this morning that our history has been £40 to £65 post tax per customer margin out of £1,200 or so. And we expect that for the year as a whole, we'll be back in that range. And one way to think about it is this 9% post tax margin. If you strip out the one off phasing issues that Mark touched on earlier, it was more like at the higher end of our normal range, which we used to talk about as 4% to 6% rather than some supernormal profits. But clearly, we got into a lot of questions from the media over it this morning, as you can imagine. Can we go right in front? If you could pass the mic down, that would be great. And then there's one at the back in the middle there, and Peter, and then we'll come back to this side. It's Bobby Chatter from Morgan Stanley. Two questions. First, on storage, I think I might have misheard what you said. But did you say that the issues with capacity and the reduced sales effectively from that will be offset in the second half by selling Cushing gas? So sort of the two things net each other out. And then the second question is given the focus from the CMA on sort of the differential procurement strategies across larger and smaller players and given the expectation for changes in tariffs over time, are you changing your commodity procurement strategy yet? Or is it basically the same kind of system you've been using for the last few years? So Bobby, if I could take those. I mean, think on the storage issue first, I mean, let me just explain what happened. We've been pressuring up and then depressuring that old reservoir for quite a long time. We have got no imminent issue. But having been doing that for thirty odd years, we decided that we should test the integrity of the wells. And as a result of a recent inspection, a regular one that we had, we decided this year to do that. That reduces the maximum pressure that's available. Therefore, we can't put as much gas into the reservoir. So far, that interrogation is we issued a recent remit notice on this. That interrogation is going well. We're not done with it yet. And until we're done with it, we can't raise the pressure. So the size of the reservoir has dropped. The government has given us permission to reduce the lower end of the pressure range and therefore effectively offsets about half of the lost volumetric capacity of rough, and it means that we can sell that volume over the coming winter. And so that's what we're going to do. So it's about volumetrically, it's about half. But the obviously, we'll get some profit from selling the Cushing gas, which we've agreed the treatment of with the government. On the procurement strategy, I'd just say in general terms, it's too early for us to make changes to that until we clearly know what the changes to the marketplace are. We think we've got a very sensible procurement strategy. Clearly, we procure largely against the standard variable tariff in its current form as well as our fixed tariffs. And it really does depend where the CMA ends up in terms of its determinations. But we're having really constructive conversation with them about how tariff structures, including the tariff choices we were talking about earlier, but also how tariff structures could ultimately improve the working of the market. Once that's clear, obviously, we'll need to adapt our procurement strategy accordingly, but it's too early for us to know that outcome yet. And so we're not changing it at this stage. I ask a follow-up on the C and A Briefly. It just feels from reading all the documents that the argument that you and the industry put forward that not everyone on a standard variable tariff should be viewed as disengaged has basically fallen on deaf ears. Do you get a sense that there is any recognition of that argument whenever you have your meetings with them? Because it's really not clear in the papers, I would say. No. But no, again, don't believe everything you read in the papers. I mean I think we have had some very good conversations with the CMA, and this topic, of course, has come up. And some of the evidence we've submitted to them is that some of our customers, quite a lot actually of our new customers each year, choose the standard variable tariff. And so they're recognizing that. And the issue is twofold really: who's really disengaged versus just got perfect choice to switch. I mean 90% of people say they're aware they can switch. The issue is some of them don't. And so dividing the standard variable tariff customers into people who've actively chosen to go on it, people who are on it and quite happily on it and aren't switching and those who really are disengaged is the essence of the conversation. And then the other part of it is all markets have certain percentage of customers that aren't fully engaged. Where do you draw the line there? What is satisfactory from a competitive point of view? That's the key issue. And how do you then deal with the people or should you and who should deal with the people who remain? So clearly, that's the dialogue. It's they're very much listening. I don't think it's falling on deaf ears at all, but we'll have to see where the outcome is. I think we had a question from Peter behind you, and then we'll see if there's one or two more on the results and then we'll take a break. Thank you. It's Peter Hamilton from Jefferies. Really a question to Mark on the B2B billing problems. This industry you're a newcomer to the industry, but this industry seems utterly incapable of introducing a billing system and a CRM system without a catastrophic customer failure. Coming from outside the industry, is there anything just specifically about this industry and the data flows and the data management that you get that just makes it really, really hard to do and therefore we can expect these problems? Or is there something inherently rubbish about the way this industry actually manages introduction of new systems? Mark, could you also just no, could you also touch on the issue of exactly what the problem is and what as are we doing about well as answering the wider question of are we incompetent? So I may resist the temptation to describe the energy sector's ability to move to these systems as incompetent. I mean, think a lot of industries struggle with big ERP type transfers. I think in terms of where we are, the first thing I'd say is, I do think the system when it works is better. There's always the danger that you look back and you think that the old world was a panacea. In terms of as we move BGB onto this new billing and CRM system, it will be consistent with what we're doing in BGR and BGS. That gives us the ability to leverage, if you like, the platform across the businesses. It gives us extra functionality. We had no online capability in the world pre migration. And we're already, despite some of the issues, being able to convert people to online services and sell product online. So I think it increases our functionality. So I'm convinced that it will be better and I'm convinced it's the right thing to do. Obviously, the transition has been painful. It arose towards the back end of last year. And it is a data migration issue and a readiness issue to work in a more constrained environment, which is what the SAP system gives us. It's great looking back with hindsight. Hindsight is a wonderful thing. I'm sure there are things that we could do have done differently. We will conduct a kind of a full review to make sure we get the learnings. Right now, the teams are focused on improving the billing accuracy, the timeliness. And actually in some of the areas of the business right now, we're back ahead of where we were. So this isn't a question of it not working. This will work. It's just now a question of working through the rump of customers who haven't had the service they deserve, making sure we get them back to normal. And then as we move into 2016 exploiting the opportunity we've created. That would be my kind of broad synopsis. And then how good is the sector? I think it's not easy moving the amount of data. It's especially not easy moving from quite old legacy systems into a new systems environment. I think, as I say, my experience going back to the insurance world is that that's hard in all sectors. And is there a brewing reputational risk? Yeah, you've mentioned that some customers aren't getting billed. We're to hear about small businesses being driven out of business because they suddenly get hit with a fifteen, eighteen month bill from Centrica? So we're very, very cognizant of the reputational risk. We've been contacting and in dialogue with customers as often as we can, keeping them updated. We so that they are aware of where we are. So to my knowledge, that's there aren't those examples of us driving businesses out of business. But we're very thoughtful about as we land bills that are catching up that we need to think about the implications. What I would say is that the SME and we go back to the micro SME, that because those are relatively more straightforward accounts, those are the ones that are now performing, frankly, better than they were before the migration. Okay. We have one more question over here. And then I suggest what I'd like to do is draw this to a close, have a break. And then we do have time at the end when we do the Q and A on the strategic review to also pick up any questions that are overhanging from this morning on the results, if that's okay. I'll just check before we break if there's any burning question. It's Ian Turner from Exane. It's on the B2B billing again actually. Just how much that's cost you in the first half in terms of extra cost and how much working capital you've got tied up unbilled, please? Do want to take your thoughts? Yes. So very much all of the fall in profitability that we would see sort of first half last year to first half this year would more or less encapsulate that cost. It's obviously spread across increased costs in terms of dealing with the issue, increased bad debt, which we think we've sort of gotten underneath of. And the fact that we were unable to sign up new customers to the rate that we would have had last year and we would have expected this year. Clearly, we move into the second half, we think we've got underneath the bad debt component of that. There will clearly be some additional cost in the second half as we finish resolving the issues. So you kind of want to think about it in that frame, I think. I'm sorry. In terms of a working capital perspective, we currently see the business itself carries a fair amount of working capital to begin with. We would see it to being probably 100,000,000 $200,000,000 more than it would normally be at this stage. And just back to Peter's question, a provocative question about competence. Mean, needless to say, I've reviewed this situation quite a bit with the business answers. Mark's all over it. And I think that just to put it in perspective a little bit, in addition to Mark's point that these systems implementations are not always easy, we did test the system against the majority of customers and actually it showed up pretty well. And most of the customers are very effectively on it, especially the SME customers. The issue with hindsight we didn't do well enough was around testing it for some of the most complex multisite customers in the I and C sector. And there, we have hit a problem. And some of it was legacy. I'm not sure that we would have been able to resolve the issue easily given some of the legacy data issues we had on some of customers. So I don't want people to go away thinking this is complete incompetence about implementation. It wasn't. But clearly, could have done it better in hindsight. And the system itself, as Mark said, is now functioning reasonably well and we're in a better state than we were probably at the 2013 before we implemented it. It just it's caused some real one off issues for us that we're still trying to resolve and we've got some customers that aren't too happy admittedly. Is there one more burning question on the results? Otherwise, we'll take a break. Okay. We'll take a break. We're going to try and come back at about twenty past in about fifteen minutes, but we'll try and get the air con dialed up a bit in here while in the meantime. Thanks. Welcome back. I don't know whether we've got any stragglers out there, but we are running slightly late. So we better get going. This will take a little bit of time. So bear with us and then we'll have lots of time for questions including any remaining ones that come from earlier. So in the second part of this morning's presentation, obviously, we're covering the outcomes of the strategic review, which we announced with the prelims on the February 19. Jeff and I will cover the key aspects and conclusions from the review in some depth, no doubt not enough for you, but we will cover it in some depth. This will take about an hour and fifteen minutes. Mark and Badar, who haven't left over there, will then rejoin us on the stage and the whole team will be happy to take your questions, including any outstanding from earlier. So in February, in light of the significantly changed circumstances, which we experienced in 2014, particularly the significant fall in the oil and gas prices and the outcome of the first U. K. Capacity market auction, the consequent effect on our cash flows and the decision to rebase the dividend, we announced we were launching a group wide strategic review. A fundamental review was the appropriate way for us to test our strategy and its resilience in light of such changed circumstances. We designed it to be focused around these four dimensions: firstly, the outlook and we see and the sources of growth secondly, the portfolio mix and its capital intensity thirdly, our operating capabilities and efficiency and finally, the financial framework for the group going forward. Let me briefly explain what we've been doing, and later on, I'll cover the individual aspects in more detail. The review has been a thorough and rigorous analysis of where we are and leading to clear conclusions about where we're going to go in the future. It's been led by the executive team, supported by a significant cross section of the senior leadership and by external strategic consultants. I'm confident that the conclusions we've reached are the right ones for Centrica and the actions we'll take as a result are within our capabilities to deliver. Under sources sorry, under outlook and sources of growth, we tested the market trends and environment and what this means for our ability to grow. Given the changes in global oil and gas markets, the continuing weakness in clean spark spreads and the changing trends in demand and customer behavior, we've reassessed the medium term view of the fundamental trends which drive our business. Reflecting this, we believe we've identified a number of areas of potential growth as well as assessing some drivers such as energy efficiency, which all other things being equal would obviously reduce our operating cash flows. Secondly, against that fundamental backdrop, under portfolio mix and capital intensity, we've tested the businesses we wish to be in and the desired mix and capital intensity we wish to have going forward. This led to focus areas for potential growth and associated resource and investment needs and the resultant capital intensity of the group. Thirdly, under our operating capability and efficiency, as we've been considering our portfolio, we've assessed our capabilities in each area, both in absolute terms and relative to the competition. We've taken a hard look at the level of efficiency that we're delivering as a company relative to benchmarks in other industries and against our competition. We've identified material potential efficiency savings across the group. And finally, we've determined a robust financial framework for the group, which establishes medium term expectations for growth, returns, reinvestment, distributions and the credit rating. The headlines of our conclusions are as follows. We've concluded that Centrica is indeed well positioned to deliver into the emerging trends in energy and our strength lies in being a customer facing business. This is where we're most distinctive. This is where we can make the biggest difference in contribution going forward. Our purpose is therefore to provide energy and services to satisfy the changing needs of our customers. Everything must be in support of this. We believe we can deliver increasing shareholder value in the next phase through both returns and growth. By growth, we mean post tax operating cash flow growth and not necessarily expansion of the physical parameters of the company. We're targeting 3% to 5% post tax operating cash flow growth per annum on average out to 2020 and believe this could be a sustainable level of growth over the longer term. This growth is at flat real oil and gas prices of $70 a barrel Brent and zero five zero pounds per therm NBP gas price and assumes normal weather patterns and impact on demand. This includes assumed minor inorganics of say 50,000,000 to £100,000,000 within the capital expenditure limits set by our financial framework, but excludes larger major inorganic activity. In the near term, it's also before the one off cash costs to deliver our major efficiency program. Having built today's platform, going forward, we'll be putting greater emphasis on the customer facing activities of Centrica and less relative emphasis on exploration and production and on central power generation. This will involve a shift relative to 2015 in resource allocation of £1,500,000,000 towards the less capital intense customer facing businesses and away from E and P and Central Power Generation over the next five years. And obviously up to 2015, we've already made a shift in reducing the capital allocation to E and P relative to the past. In the customer facing businesses, we'll be focused both on our traditional areas of expanding into new adjacency traditional areas and expanding into new adjacencies and offerings, including the Connected Home and Distributed Energy. This will lead over time to a less capital intense business model, and we'll be limiting capital reinvestment in the group in the next three years with the objective of underpinning the dividend and credit metrics, while our plans to deliver operating cash flow growth are implemented. As part of growing operating cash flow, we'll be focusing significantly on improving the efficiency and effectiveness of our organization. With our near term growth underpinned by a major efficiency program targeted at delivery of annual savings of £750,000,000 per annum by 2020 relative to 2015 from our operating costs and non commodity costs of goods. These savings are in nominal terms. After inflation, we'd expect the like for like operating cost base of the group to reduce by about £300,000,000 per annum by 2020 relative to the 2015 baseline. After investments in our focus areas for growth, which by 2020 we estimate could involve additional operating costs annually of about £200,000,000 we would therefore still expect the reported operating cost base of the group in 2020 to be below that of 2015. This excludes any major inorganic changes to the portfolio. In other words, delivery of our efficiency target of £750,000,000 per annum is on a like for like basis and does not assume reduction of our operating cost base through asset sales and likewise excludes any increase in operating costs if we were to make major acquisitions. This cost efficiency program supersedes all previous efficiency programs planned or announced for the five calendar years of 2016 to 2020. And indeed, the targets that we're announcing today supersede all other targets that we've had in place for 2016 to 2020. Finally, we'll manage the group within a clear financial framework. We expect to deliver a progressive dividend with growth over time reflecting our operating cash flow growth of 3% to 5% per annum. This will not be mechanistically derived in any calendar year, but will reflect our ability to deliver sustainable levels of operating cash flow at flat real oil and gas prices and normal weather patterns. Capital reinvestment will be limited in the near term to £1,000,000,000 per annum and in the longer term to 70% of operating cash flows, but again limited by our intention to deliver the dividend and maintain a strong investment grade credit rating. Regarding returns, we expect to deliver post tax returns on average capital employed of 10% to 12% and would aim to improve on this over time as we lower capital intensity. That summarizes the headline messages. And I hope that when taken together, what we're announcing today gives you all confidence and clarity about the future direction of Centrica in this next phase and of its strategic evolution. It's designed to deliver an attractive total shareholder return through a combination of returns and growth. I'm confident in the conclusions we've reached and in our ability to deliver on the future path for Centrica, which we're laying out today. Now let me talk through the strategy in more detail, beginning with the outlook and sources of growth and focusing first on the market fundamentals. The world of energy is changing. Primary energy demand has been growing at around 1.5% per annum, with nearly all of that growth now in the non OECD, with OECD markets essentially flat. The trend is likely to continue. Power demand growth is the biggest driver. Natural gas for both heat and power, nuclear and renewables will be the fastest growing contributors to satisfying primary energy demand growth. However, it's not clear that returns in central power generation central thermal power in the OECD will be attractive. And the subsidies, which currently support renewables growth, are uncertain. Fossil hydrocarbons are likely still to supply over 70% of global primary energy in 02/1935. Energy demand growth is diverging from GDP growth and CO2 production is beginning to diverge from energy. The trend towards lower carbon pathways for heat and power continues to support that divergence driven by both demand and government incentives. Given those fundamentals, supplying fossil fuels to the world through E and P should, on average, contribute continue to be an attractive business through the cycle. But it involves significant risk and requires focus and specialization. On a global level, regional gas supply and demand imbalances are expected to widen, driving significant growth in LNG trade. Demand for gas in Asia Pacific is currently the primary driver. And unless significant unconventional resources are discovered in Asia, this trend is likely to be robust. In addition to LNG, there are growing profit pools in energy marketing and trading more generally, as the global trade in energy increases and as customers seek energy marketing and risk services. In Power, significant capacity additions are required to both replace existing capacity retirement and also to satisfy demand growth. However, as we've seen in recent years, the key question is whether it's possible to make good returns out of satisfying such demand for capacity. Central generation in the OECD is experiencing something of a market failure because of government policy implementation leading to overcapacity, a price of CO2 which is too low to drive changes in returns or mix in favor of gas fired power and undifferentiated and inflexible marginal capacity, which pegs returns at about cost of capital in the face of higher intermittency from renewables. Distributed Energy, including distributed generation, energy efficiency solutions, smaller scale combined heat and power systems and demand side response applications appears to be a significant trend in both OECD and the non OECD. We believe this is likely to take power market share and to generate significant potential gross margin pools. In terms of our core business of energy supply, gas and power demand in our core markets is likely at best to be flat, driven by energy efficiency and low levels of economic growth. Customer service expectations are very high. Today residential customers don't appear willing to pay materially more for excellent service in commodity energy supply, although they reward this through lower churn and higher customer loyalty, thereby reducing the cost of holding or growing market share. Energy services and potential adjacencies remain a source of differentiation and potential growth in both B2B and B2C. The Internet of Things appears to be developing rapidly and will enable a wider range of applications, insights, efficiency and services. It's as yet unclear how much of this space can evolve into separately valued offers and businesses and how much will be services, which help to differentiate integrated offerings within the overall customer relationship. Whatever the outcome, we believe this area will become an important source of differentiation and a component of our service offering and will underpin new margin pools in the future. When we compare this outlook with where Centrica is today, we've reached clear conclusions about our purpose, individual sources of growth available to the group, where we should focus and the potential outcomes we should deliver. Let me now expand in more detail on the principal conclusions we've reached beginning with the purpose of the group. Centrica is an energy and services company. The purpose of Centrica is to provide energy and services to satisfy the changing needs of our customers, so contributing to economic progress and society. We have a two hundred year history anchored in such a purpose, which began with the Gas Light and Coke Company in 1812. Serving customers is what we're known for and as I said, what we're good at, where we can make the most significant difference and in which we already have distinctive positions. The focus of everything we do will be to deliver for the changing needs of our customer base, including the sourcing and optimization of energy to meet those needs. With so much change occurring in what our customers want and expect, we must focus significant efforts on their needs, both to access new strategic opportunities and to respond to competitive threats. In pursuing this purpose, we intend to deliver long term shareholder value through returns and growth cash flow growth, which if we can deliver it is clearly a much better investment proposition than simply returns. To deliver our purpose over the long term, we must be a trusted corporate citizen and an employer of choice. The provision of energy and associated services is fundamental to people's lives. To have a sustainable future, we must be trusted in that delivery. The cost of lack of trust is high and would ultimately cause us to fail. We must redouble our efforts to engage constructively with all stakeholders in a meaningful way to deliver that trust. We will contribute proactively to energy policy in all our markets, in the areas of security of supply, competitiveness and affordability and climate change. We will also play our part in the improvement of the role of business in society. Being an employer of choice is necessary if we are to have access to the best talent and to win in the long term. Without the right capabilities in such a competitive marketplace, we will fail. So we aim to be a twenty first century energy company. Our purpose is a fundamental one, and being trusted to deliver it and doing it well will result in our ability to attract the best and potentially be the best in our sector. Let me now turn to sources of growth. As I go through this, I'll also be addressing parts of the second dimension of the strategic review, portfolio mix and capital intensity as well as describing our level of capability in each business. It will not be easy to grow Centrica, but we've concluded that we can grow the group's cash flows as a whole. It will retire require great focus, enhanced capabilities, significant organizational change and excellence in delivery. The sources of growth will evolve between the near term horizon and the long term. Centrica's customer facing businesses are a source of real competitive advantage in the face of the trends outlined earlier. Positive attributes include strong market shares, good brands, significant customer books, deep capability and services on the ground and ability to process a high density of transactions at scale. Growth in our customer facing businesses is key to Centrica being able to grow given the realities of E and P natural decline and the low attractiveness of central power generation today. We believe that growth in operating cash flow in our customer facing businesses is absolutely possible. Given the starting point in British Gas in terms of market share, it will require excellent delivery across many dimensions and to access all available growth in our existing markets. There's clearly evidently more ability to grow in direct energy given the size of the market and where we start. Borgosh Energy has growth potential and is a recent example of a successful geographic step out, but the scale of impact on the group is limited. In all our market geographies, growth in the near term will require close attention to our own efficiency and effectiveness. When taken with our assumed activities in the other parts of the group, we believe we can deliver operating cash flow growth of 3% to 5% per annum until 2020, assuming flat real oil and gas prices and normal weather conditions. I'll now address in more detail the main areas for long term growth. Our main focus for long term growth will be on energy supply, services, distributed energy and power, the connected home and energy marketing and trading. These are areas where we have some or all of the characteristics of material market shares, strong product brands, competitive and or distinctive capabilities and emerging products and offerings. We have the potential to have distinctive positions and capabilities in all of these. We will invest to be excellent in serving our customers in technology and offers, which provide the solutions they need and in driving efficiency into our processes, which support them. In Energy Supply Services, Distributed Energy and Connected Home, the desires of our customers and the trends I set out earlier appear to be the same across the developed world. We should therefore aim to build or acquire capabilities, which can be applied internationally across all of our existing markets, so leveraging our scale and ensuring efficient route to market and use of resources. We should also have a common approach to delivering into these opportunities. Some of the trends also apply to the growing markets outside of the OECD, and such capabilities may open up future pathways to new geographic markets. I'll now turn to each of these focus areas in turn beginning with Energy Supply. Our Energy Supply businesses will continue to be a key contributor to group cash flow. As already indicated, in The U. K, it will be difficult to grow British Gas energy supply cash flows given underlying consumption decline and a highly competitive market for both residential and business customers. However, we will look to offset these factors through significantly improved cost efficiency, reduced churn driven by improved customer service levels, new B2C and B2B offerings in conjunction with Connected Home and Distributed Energy and Power respectively and tight working capital management. In Ireland, we'll also look to improve efficiencies in Bored Gosch and in a more recently deregulated market than The U. K, look to increase our electricity supply and services market shares. In North America, for residential customers, we are focused on developing a more sustainable business model with the potential to access additional market share in The United States. Twothree of our business is in Texas and Alberta, which are fully or materially deregulated and where we can compete effectively. The focus on developing a more sustainable model is therefore largely about The U. S. Northeast. This will require delivery on three dimensions: improved propositions, including adding higher retention Connected Home offerings greater focus on customer mix and achieving lower churn. We believe this will allow for the possibility of market share growth targeting the 60% of customers who haven't yet switched from the default supply in The U. S. Northeast and also the potential of expansion into other states. In business energy supply, the acquisition of Hess Energy Marketing in 2013 made Direct Energy the largest industrial and commercial gas supplier on the East Coast Of The U. S. And the second largest power supplier in competitive U. S. Markets retail markets. As a result, we now have a market leading position in the provision of energy to business customers and the ability to optimize around capacity and storage positions. This provides a strong base for the business to deliver sustainable returns over the long term. Taking all of our energy supply activities together, although we are targeting to enable growth, our prudent base case assumption is that operating cash flows from the energy supply businesses will be broadly flat from 2015 to 2020, with competitive commodity margin pressures and energy efficiency being offset by higher retention, improved cost and working capital efficiency, increased margins from enhanced offers and some market share growth in The U. S. And Ireland. Let me now turn to the Services businesses. We also continue to see good growth potential in Services. In The U. K, although our contract base has been declining in recent years, we're confident we can reverse this trend and return the business to growth. We'll focus on refreshing the residential home care offer as well as growing into new customer sub segments such as offerings for landlords. This segment is a particularly important area for growth with the proportion of private tenants growing and an increase in regulation driving the need for landlord insurance cover. We also see growth coming from the on demand segment in repair and service and by adding capacity to pursue share in central heating installations. Here, too, we will focus on driving growth through efficiency. In North America, our services business is relatively small compared to The U. K. And to The U. S. Energy supply businesses. However, we've been investing in capability and capacity and are now represented in all 50 U. S. States. We are The U. S. National market leader, albeit with only a 1.4% national market share. The market is very fragmented, but it is very large, with revenues estimated to total $80,000,000,000 per annum. We believe there's great potential for growth from the wide range of products we're able to offer, including protection plans, potentially offering them alongside energy, solar and connected home products. We are seeing growth in franchise revenues and we should also benefit from recent IT consolidation projects and operational improvements, which will enable us to grow scale efficiently. We expect to commit an additional £250,000,000 mainly in operating costs into services growth over the next five years and expect operating cash flows from services to grow over the period. The next area to cover is distributed energy. Distributed energy is a growth market into which we intend to expand. This rapidly growing market applies to all geographies in which we operate and is focused around five offerings: energy efficiency, flexible generation, integrating new technology offerings such as battery storage and energy management systems sorry, energy management systems and virtual power plant or VPP and optimization. These trends also apply to markets we're not in and distributed energy could become a very material growth node for Centrica. Because of the existence of peak rates for electricity and incentives to install renewable and backup distributed capacity, many types of distributed generation technologies are competitive with central grid supply. Many industrial and commercial customers are seeking ways to drive energy efficiency, but don't have the spare capital capacity to pursue it and don't have the installation capability at scale. Optimizing and managing the energy system for a large customer requires real expertise. When customers seek out such integrated services, they cannot find offerings at scale. Centrica has most of the capabilities to deliver such offerings, and we believe we can expand in this area materially over time. We therefore believe that distributed energy will be a global opportunity for us, targeted at industrial and commercial customers and providing a full value chain offering. Centrica already participates in distributed energy with I and C customers on both sides of The Atlantic. We're in discussions with a number of major clients at the current time in addition to our existing customer base, which in The U. K. Includes hospitals in eight NHS Trusts and three terminals at Heathrow Airport. We have an existing distributed energy team and have a range of skills, which can be applied to this, including our existing power capacity and capability. This is a good starting position, and we intend to build on this to make it a material growth opportunity for the company. We intend to combine our distributed energy team with our power team and build capability to respond to customer needs and demand growth in this area. We would expect to dedicate about £700,000,000 of additional operating and capital resources to this area over the next five years. Turning now to the Connected Home. The Connected Home is another focus area for growth in all our markets and we've built high quality capability in this area. We already have products in the market, including the market leading Hive Active Heating smart thermostat and end to end capability in the areas of operating platform design and operation, hardware and software development, data analytics, installation and maintenance. The acquisition of Alert. Me earlier this year has cemented this capability and we have a well advanced pipeline of other products and offerings beyond Hive. Earlier this month, we launched Hive two point zero in addition to a new smart thermostat and smart plugs and motion sensors, which can be integrated through our operating platform. We've also built impressive data analytics capability. As an example, when our data analytics capability is married to our rollout of smart meters, the insights and potential to help customers with their energy use expands considerably. Let me show you a short video, which demonstrates the potential. He says. You may wonder what you're looking at. This is London waking up and this represents London's energy use as the day progresses. We have tied the data from the 130,000 smart meters we've installed in London through our operating platform and built a model to show the energy use pattern over a typical day. We can see the highs at breakfast time, at the end of the school day and into the evening. We can see London going to sleep again at the end of the day. We could do this real time. We can do similar things at the individual property level. While the generation of the data is relatively straightforward, it's the insight you can get from the data and the ability to combine it with offerings and services, which generates new business models. For example, combined with additional sensors in people's homes, we are able to provide insight into their energy use and provide the tools to manage it more effectively. We can add sensors to the operating platform so people can manage other aspects of their lives, including home security and monitoring. All of this differentiates Centrica's businesses and makes us more valuable to our customers, becoming a partner with them in their home. Our starting position in this area is not insignificant. From the vantage point of millions of energy and services accounts, strong brands and having engineers and technicians on the ground in all our markets, who are increasingly being trained to install digitally enabled equipment, with the addition of our Connected Home capability, we have the potential to integrate physical with digital and participate in end to end offerings. We've already developed offerings to protect and enhance the core Energy and Services businesses through bundling of Connected Homes products. We're already retailing offers associated with Energy Management for stand alone sale and installation. Our capabilities already offer the possibility of expanding our use of data analytics and insight, while over time we'll be able to provide complete home management solutions. Some of these could ultimately be sold internationally into new markets. While we recognize that there's a lot of uncertainty as to how the markets will evolve around the Internet of Things, we believe we have a very good starting position. We have plans to invest £500,000,000 of OpEx and CapEx in this area out to 2020. Our plans indicate Connected Homes could become material to the group in 2020 and beyond. The fifth focus area for growth is in Energy Marketing and Trading, and we have a good benchmark capability to pursue this ambition in LNG, marketing and risk management services for customers and in trading and optimization of our portfolio. We've been expanding our presence and capabilities in LNG recently. And at the June, the Cheniere Train five achieved final investment decision, cementing our twenty year LNG contract. Our U. S. Export contract with Cheniere for 2,000,000 tons per annum is due for its first commercial delivery by 2019. Coupled with our Qatari volumes, isle of grain commitments, together with an increasing presence in traded LNG, we expect to grow the contribution from LNG trading over the next ten years. We'll also look to expand our route to market services in Europe, helping customers to manage risk and their participation with the energy markets, and we'll continue to utilize our knowledge of European energy markets to benefit from trading and optimization activity. Together with our optimization and risk management activity in The U. S, we plan to build an international energy marketing and trading capability based on our physical requirements and risk management services for our customers. Energy marketing and trading obviously utilizes working capital and involves long term contractual commitments for energy supply and sales contracts. It may involve some small capital participations with certain of our customers. In terms of OpEx and CapEx, we would expect to commit a further £150,000,000 out to 2020. I've now covered in some detail the areas of increased emphasis in our customer facing business activities. As I've outlined, these areas will receive additional resources as we look to grow operating cash flows from the customer facing activities as a whole. The total incremental allocation of operating and capital resources to deliver growth in services, distributed energy, the connected home and energy marketing and trading over the next five years is estimated at about £1,500,000,000 or an average of about £300,000,000 per annum. This will be approximately half capital investment and half into operating costs. When combined with the reduction in resource allocation to E and P and central power generation, also of £1,500,000,000 over the next five years relative to 2015, most of which is capital. And the reasons for which I'll cover in a moment, this represents a material shift in the resource allocation pattern and will deliver a less capital intense business mix over time. Before leaving the customer facing businesses, let me make one comment about our North American portfolio. I've spent a lot of time looking at our businesses in North America, and I'm convinced we have the capabilities to evolve the business model so that direct energy could be a material source of future growth for Centrica. Through the customer facing lens, I've addressed both the sources of growth and also by describing our emphasis on these areas, I've begun to describe the implications for portfolio mix and capital intensity, which is the second dimension of the strategic review. Let me now complete the picture in terms of both outlook and sources of growth and portfolio mix and capital intensity by turning to the upstream parts of the group: exploration and production, central power generation and Centrica storage. A fundamental part of the strategic review was to consider the role of E and P in Centrica's portfolio. As outlined, going forward, Centrica will be placing significant emphasis on growth of the customer facing businesses. On a stand alone basis, in what are volatile energy commodity markets, this carries risk exposure and volatility of earnings and cash flows. To service such significant commitments to our customers, Centrica must have the balance sheet strength to take on long term supply commitments and to manage the margin calls and other working capital commitment requirements associated with risk managing this exposure. One way to manage these risks is to hold diversified material sources of cash flows, ideally rooted in largely non correlated energy activities. One such activity which fulfills this role is exploration and production, and we have this today in our portfolio. Through the commodity cycle, the E and P business provides such diversification of cash flows and the materiality of presence, which contributes to Centrica's balance sheet strength and credit rating, provided of course that it returns to profitability and cash flow delivery. Theoretically, a number of asset types in energy could provide such a role. But having considered what would be expensive investments in buying regulated assets and unattractive alternatives such as increasing our exposure to central power generation, we've concluded that continuing to hold an appropriately scaled position in E and P is right for the group. We have sufficient capability in E and P to allow us to participate effectively and deliver enduring returns above the cost of capital. We've therefore concluded that in the next phase of Centrica, the role of E and P in the portfolio is to provide material diversity of cash flow and the balance sheet strength which goes with this. However, given the changed competitive dynamics and the liquid open commodity markets, the role has evolved away from that of security of supply and any material form of integration. We have also concluded that to provide sufficient materiality and cash flow diversity, we do not need to be as large in E and P as we are today. We have also concluded that we are stretched very thinly and will need to focus our activities geographically. We will never be a global E and P player. We've therefore taken the decision to reduce the scale and diversity of our E and P business, which will lead to lower capital intensity across the group. We will transition over the next few years to a smaller E and P business focused on the North Sea and the East Irish Sea. We will also aim to evolve our participation over time to rebalance the portfolio in favor of more non operated activities. As a result, we'll refocus the business and limit its size to that necessary to fulfill its role in the portfolio, which we have concluded is annual production of about 40,000,000 to 50,000,000 barrels of oil equivalent per annum with an annual capital requirement of between £400,000,000 and £600,000,000 This compares to recent levels of between 75,000,000 to 80,000,000 barrels of oil equivalent to production and around 1,100,000,000 pounds per annum of CapEx as we sought to grow E and P. We've looked at the scale issue of E and P in a number of ways, including portfolio earnings volatility mitigation, what we can afford to invest within our financial framework and credit rating agency considerations. All three lenses point to a size of about 40,000,000 to 50,000,000 barrels of oil equivalent per annum. In the period beyond 2017, to sustain production in this range, we may also look to supplement our reserves with small inorganic and non operated additions to the portfolio sorry, inorganic non operated positions in our portfolio. However, we will focus on quality not quantity, and we would obviously only do this if the additions were of high quality and represented good shareholder value. The total capital investment in E and P of 400,000,000 to £600,000,000 per annum includes these small inorganic acquisition assumptions, although we cannot exactly predict inorganic activity and when it falls in any future calendar year. Although our financial framework and cash flow projections are based upon flat real oil and gas prices, clearly from where we start today, restoration of margins and cash flows in E and P as the supply chain adjusts is also a near term source of cash flow growth. We've concluded we can deliver a strong E and P business within the boundaries we've set. We can deliver the diversity of cash flows, balance sheet strength and additional shareholder value through focus in E and P and setting appropriate scale and resource boundaries. Today, Centrica's E and P business is stretched across five countries and four basin types. This is too diverse and too stretching for our capabilities we need to focus. We therefore decided that despite the challenges, the North Sea and East Irish Sea will form the focus of our E and P business going forward. It is a high cost region and relatively mature, but its gas production can still compete on a landed basis into The U. K. Market relative to other international sources of gas and we have sufficient capability to be able to deliver effectively. We will aim to add strength to the portfolio and improve efficiencies in The U. K. Continental Shelf in The Netherlands as we manage natural decline rates, while we will continue to develop our less mature Norwegian portfolio. We are also likely to increase the proportion of non operated assets over time, although we will need to retain some operating capability to help manage decline and abandonment of some of the more mature assets. We are material enough to play a major part in The U. K. And Netherlands and have the capability, presence and reputation in Norway to allow us to access material value. We have previously signaled our intention to release capital from our Trinidad And Tobago positions. And given the fundamental realities and competitive dynamic in North America, we now consider our Canadian E and P business to be noncore. However, we have a very important partner in Qatar Petroleum International and we'll look to manage the future of our Canadian business together. As a noncore asset, we will not seek to grow Canada and will seek ways to maximize value from our existing position. Let me now turn to power generation. We will also have a more focused central power generation business going forward. We will not have a strong emphasis on central thermal power generation, preferring to seek opportunities in peaking units and distributed generation offerings linked to our service to serving our B2B customers, as I've already outlined. Central gas fired generation in the OECD does not appear attractive today. Given current trends, even in future, it may always play at the margin. New scale capacity may fare better than legacy, given higher efficiencies in the capacity market, but returns may not be sufficiently attractive. We will maintain a watching brief on The U. K. Market as the capacity market evolves and will retain sufficient capability in central power generation to enable us to manage power assets in the future. As such, we will continue operating our small CCGT fleet considering each station on a plant by plant basis, but linking it to our optimization activities. We will seek opportunities to make improvements, such as we have recently done at Brigg in terms of capacity repositioning and potentially a replant at King's Lynn. We have good power capabilities and we will transition our capabilities towards distributed energy over time. We will establish a new unit distributed energy and power to affect this. Turning to nuclear power generation. Our nuclear participation has been important for Centrica and is an attractive investment. Like E and P, this position also provides diversity of cash flows and balance sheet strength as well as providing a useful source of baseload power. The acquisition of 20% of British Energy gave Centrica zero carbon power generation, influence and participation in the joint venture with EDF and the option to access future nuclear growth in The U. K. However, having decided to exit U. K. Nuclear Newbuild, a decision we're very comfortable with, we are left with a non operated minority investment with limited or no strategic optionality for the group. The future value of the nuclear business depends on excellent uptime and safe execution in operations, securing life extensions for the existing fleet, managing costs effectively and the future outcomes of the capacity market. While we're capable of contributing in all of these areas, the reality is that this is a non operated position with limited optionality for Centrica. Moving forward, we will therefore consider our shareholding in the existing nuclear fleet to be largely financial in nature. As such, we'll assess its merits in the portfolio on that basis. Moving to wind. We intend to complete the exit of our direct investments in wind, participating instead to a limited degree through power purchase agreements. The wind portfolio has delivered attractive returns for Centrica, delivering an IRR of 12%. However, Centrica's net generating capacity in wind is only two forty five megawatts. It's not material today and prospects are uncertain with a politically sorry a potentially rhodium slip there, a potentially increasingly an increasing risk profile. Therefore, we believe that this is the right time to exit. We've built a number of wind projects generating good returns, but we've also spent significant funds chasing additional projects only to find that the incentives to develop them were not sufficient or that we were set back by the planning and consenting process. New offshore wind is expensive, and we currently have no future potential projects. We hope to complete exit from wind by 2017. Achieving the reduced scale in both wind and E and P, we expect to release between £500,000,000 and £1,000,000,000 of divestment proceeds by the 2017. The changed dimensions of E and P and central power generation will result in reduced capital and operating costs of at least £1,500,000,000 over the next five years relative to 2015. This allows us to make a material shift in our resource allocation and to redirect these resources toward the customer facing businesses. Lastly, with regards to Centrica Storage, we intend to hold the rough asset the rough gas storage asset, although we do not see it as a growth option in the current environment given the relatively low seasonal spreads. We'll focus on completing the assessment of the operating integrity and storage capability of the asset, implementing the necessary plans arising from that assessment and continue to work with the U. K. Government on any changes necessary to ensure the asset fulfills its role as the main strategic storage asset for The U. K. I've now outlined our conclusions regarding the various components of our business portfolio and have addressed the components of both outlook and sources of growth and also portfolio mix and capital intensity. Sendrica's relative focus will result in a less capital intense business model, and I hope I've given you sufficient detail on the rationale for the relative emphasis on the respective parts of the portfolio going forward. I've also addressed our operating capability as we've been going along. I therefore now like to complete the dimension of operating capability and efficiency by addressing the final major source of near term cash flow growth, cost efficiency, before handing over to Geoff to bring it all together as he addresses the fourth dimension around the financial framework. Transforming our cost base and the efficiency with which we go to market is a major strategic opportunity. Centrica has become an international energy company, but we have not yet capitalized on the potential efficiency and effectiveness, which our scale enables. We see a significant cost efficiency opportunity over the next five years, which will allow us to more than offset inflation on our current cost base, which totals just over £4,500,000,000 per annum, including both operating costs and our controllable cost of goods sold. As I outlined earlier, the gross efficiency prize we are seeking to deliver from our end twenty fifteen like for like cost base before inflation and investment to achieve it is £750,000,000 per annum by 2020. This excludes the cost of investment in smart meters in The U. K, which is an offsetting revenue stream and any major acquisitions and disposals. It's also before the estimated additional £200,000,000 per annum of OpEx investment in services, connected home, distributed energy and power and energy marketing and trading by 2020. Net of inflation, this will see our like for like 2015 OpEx reduce by an estimated £300,000,000 per annum. With the expected growth in OpEx associated with our growth areas, we would therefore still expect our reported OpEx in 2020 to be below that of 2015, again excluding the cost of smart meters and any inorganic portfolio changes. In addition to the cash flow arising from this net cost reduction, this would allow all additional gross margin generation from our growth nodes to fall to the bottom line. We'll deliver this without compromising improvement plans to safety and compliance and customer service. Our current plans indicate that about twothree or £500,000,000 per annum of the efficiency savings will be delivered by the 2018. We expect full delivery of these cost savings to require investments of 500,000,000 to £600,000,000 over the next five years. To underpin the delivery of the £750,000,000 cost reduction, the activities will be pursued in four main areas: firstly, in the customer facing businesses where we've not been leveraging our scale across the markets we're in and we've not driven cost efficiency into our routes to market. Areas of focus will be back and front office simplification and automation, the establishment of shared marketing sales and network services across all geographies, call center optimization and shifting the organizational model within Downstream. The second area is simplification of Centrica Energy and delivery of efficiency in E and P. Here, we will be focusing on rationalization of layers, functional simplification, the supply chain and field lifting costs. The third area is transformation of the group corporate center, the relationship to the business units and changes to the group's functional model, including in finance, HR and information systems. In HR, we currently operate 18 separate HR applications across the group. Consolidation and enhancement of IS platforms will also be a focus, including rationalizing our data centers, adopting common technologies and making better use of cloud based systems. In finance, our existing structure is highly decentralized with teams embedded in each subdivision of our business units. Finally, we'll be pursuing major procurement efficiencies in all aspects of third party costs and cost of goods sold. As an example, we currently have 30,000 vendors and seven separate procurement teams. We are not leveraging our scale in either supplier or category management. Over these four areas, we expect the savings to be split roughly equally between first and second party costs and third party costs. Regarding the customer facing businesses, given that the trends are similar in all our markets, a major enabler and driver of efficiency will be a decision to move to a common operating model and philosophy across the customer facing regions. This will simplify and drive efficiency into the way we go to market, allow us to share functional resource and enable supporting systems and processes to be streamlined. It will also allow us to report performance in a common way across the customer facing businesses. In terms of impact on headcount, this program will involve a reduction in like for like headcount by 2020 of about 6,000 roles. Given the growth in some of the areas I described earlier, we would estimate that the net result would be a reduction in some 4,000 roles, again before the workforce necessary to deliver the rollout of smart meters in The U. K. Of the reduction of 6,000 roles, we estimate about half would come from natural attrition and about half from redundancies, with most of the redundancies occurring before the 2017. Safety, compliance and customer service are fundamental priorities and will not be compromised. Therefore, frontline services and sales and field operations personnel involved in direct interaction with customers are not our focus. We are investing in customer service. Although changes to service demand levels, as for example smart meters, result in the elimination of estimated bills and the associated activity will have an impact over time and require consolidation of service agents, we believe reductions can be managed through natural turnover and attrition. This completes the strategic and operational aspects of the strategic review, and I've covered the first three dimensions of the review. At the beginning, I talked briefly about the fourth dimension, the group financial framework. I'd now like to hand over to Geoff to talk you through how this all comes together in financial terms and the boundaries and expectations for our financial performance in the future. Thank you, Ian, and good morning again everyone. I would like now to describe in some detail the financial framework, including the elements of operating cash flow, credit rating, reinvestment rate, sources and uses of cash and the dividend policy. However, before beginning, I would like to make clear the overarching purpose of the financial framework, namely to provide a set of financial parameters that the group will operate under, linking cash flow generation and reinvestment in the business with the desired outputs of a progressive dividend and a strong investment grade credit rating, while making clear how conflicting outcomes would be managed. We expect this financial framework to be good for all seasons. Only in the most extreme scenarios such as a further major downward movement in commodity prices would we expect to move away from the financial framework parameters. Let me now move to the financial framework itself. As Ian outlined earlier, we expect to deliver a progressive dividend over time reflecting operating cash flow growth of 3% to 5% per annum. This will not be mechanistically derived in any calendar year, but will reflect our ability to deliver sustainable levels of operating cash flow at flat real oil and gas prices and normal weather conditions. Continuous cost improvement will help underpin our operating cash flow growth in the longer term by limiting growth in our controllable costs to less than inflation and in the short term through the £750,000,000 cost efficiency program we've announced today. To deliver the dividend and maintain a strong investment grade credit rating, capital reinvestment will be limited in the near term to £1,000,000,000 per annum and in the longer term to 70% of operating cash flows. With improving cash flows and reduced capital investment, we would expect to deliver post tax returns on average capital employed well in excess of our weighted average cost of capital, 10% to 12% initially and potentially higher longer term as the mix of the businesses change. These are the key financial outcomes and boundary conditions of the strategic review and form the financial framework in which we will manage the business going forward. I will discuss each of these areas in more detail starting first with operating cash flow. We consider operating cash flow as the most appropriate measure of the group's performance through the cycle. It provides the foundation for our dividend policy and credit rating financial metrics and is the best indicator of long term shareholder value. Assuming roughly £2,000,000,000 of operating cash flow in 2015 as a starting point, a 3% to 5% growth rate range would deliver 300 to £600,000,000 of additional operating cash flow by 2020. This forecast is based on flat real commodity price curves oil at $70 Brent and gas at £0.50 per therm NBP and normal weather. The 500 to £600,000,000 of cost to achieve in the efficiency program, which is made up of capital investment in such areas as new systems and cash realization expenditure is excluded from operating cash flows and we would expect to disclose these separately. Let me take each of the main contributors to operating cash flow in turn. First, Energy Supply, Residential and Commercial will have an operating cash flow profile as you heard from Ian that will be broadly flat over the forecast period, with continuing consumption decline and competitive pressures in The U. K. And Ireland being largely offset by cost efficiencies and by continued growth in North America, particularly in commercial energy supply. Secondly, E and P will also continue to be a significant contributor to operating cash flow, focusing the business in the North Sea and East Irish Sea, realizing new production from our investment in the Valomon and Cygnus gas fields and lower costs through efficiency programs already underway will mean that operating cash flow will be broadly flat over the five year period despite a reduction in the scale of the overall business. However, the shape of the cash flows will be lower in the near term until the full benefit of the cost efficiencies and additional production from Cygnus are realized. The result will be a smaller but more profitable E and P business with a materially better return on capital. And third, the focus areas for growth. With higher operating cash flows driven initially in the Services business in North America and in The U. K. Through new segments and products and longer term in Distributed Energy, Connected Homes and Energy Marketing and Trading. Underlying and underpinning the operating cash flows of Energy Supply, E and P and the focus areas for growth will be improved efficiency through the £750,000,000 operating efficiency program and improved working capital management. Most of the benefit of the operating efficiency program will help offset demand, margin and competitive pressures in Energy Supply and E and P. However, again as Ian outlined, a portion of the cost efficiencies will also contribute to the focused areas for growth, reducing risk of deliverability in the forecast period. And in a success scenario, the above actions might drive operating cash flow beyond the 3% to 5% range we are looking to achieve. Before I outline how we will utilize these forecasted operating cash flows, let me just expand on one of the key parameters of the financial framework, maintaining a strong investment grade credit rating. As we've talked about previously, a strong investment grade credit rating is important for Centrica. The group is a large user of collateral in both The U. K. And in North America. And this credit rating supports the efficient procurement of the significant energy volumes needed to serve our downstream customers. It also supports our ability to access cost effective short term sources of liquidity to manage the impact of the material changes in commodity prices they can have on our business. We therefore believe that to operate the business sustainably, we will need to achieve financial metrics that are consistent with strong investment grade credit ratings, at least Baa1 for Moody's and at least BBB plus for S and P. As a result, the cash reinvestment rate in the business will be bounded not only to deliver a progressive dividend, but also to ensure we meet these credit rating targets. In the long term, we will limit the cash reinvestment rate to no more than 70% of operating cash flow as a way of ensuring protection of the dividend and returns to shareholders. However, to also ensure that we underpin the financial metrics required for a strong investment grade credit rating, Before 2018, we will invest no more than £1,000,000,000 per annum, equivalent to a reinvestment rate of around 50%. This will result in lower net debt and protect both our credit ratings and the dividend. Organic capital expenditure to support the business will be 600 to £900,000,000 per year. This will include £400 to £600,000,000 of E and P as already indicated, enough to maintain our assets and bring sufficient reserves into production to sustain the target 40,000,000 to 50,000,000 barrel of oil equivalent per annum business range. It also includes around 200 to £300,000,000 of organic capital expenditure across the rest of the group, enough to maintain and improve our downstream IT systems and keep our power and storage assets safe and efficient. This leaves up to approximately £200,000,000 per annum for investment in growth, the majority of which would be invested in distributed energy and connected homes to build capability, primarily through small acquisitions, but also through the associated operating costs as we build capacity. Our acquisition of Alertme earlier this year is a recent example of executing on this strategy. The lower reinvestment rate will be supplemented by targeting 500,000,000 to £1,000,000,000 of disposal proceeds, primarily from the planned exit of our wind farm joint ventures and rationalizing the E and P business to achieve its new scale and focus. We expect it will take until 2017 to fully realize all of the proceeds of these disposals. In 2018, we expect to have more flexibility in the balance sheet with the combination of higher operating cash flows and lower capital expenditure. We will assess at that point whether allowing additional investment in our growth areas above the £1,000,000,000 but clearly below our long term 70% threshold of operating cash flow would create additional value for shareholders. Conversely, where operating cash flows to fall rather than grow and the safety of our dividend or strong investment grade credit rating was threatened, additional reductions in capital expenditure would be the first action taken. This is clearly our not expectation this is clearly not our expectation, but rather an example of how we would see the financial framework working in action. As you can see on the next slide, the actions we took earlier this year to reduce capital expenditure and rebase the dividend have put the business on a more solid financial footing with respect to both sources and uses of cash. The cash dividend level in 2015 reflects the high scrip take up of the 2014 final dividend. The combination of operating cash flow growth and a lower cash reinvestment rate in our financial framework means the group will generate positive net cash flow in the coming years, initially building financial resilience and balance sheet strength through lower net debt and longer term providing optionality to fund additional investment opportunities that would drive cash flow growth and deliver greater shareholder value. Another outcome of the financial framework is that return on average capital employed will be in the range of 10% to 12% in the near term, well in excess of the group's weighted average cost of capital, but in the longer term is expected to rise as growth in operating cash flow and investment is deployed in areas that have comparatively lower levels of asset intensity. Incremental investment will continue to be subject to rigorous investment hurdles to ensure that expected returns are consistent with the overall group portfolio. Finally, deploying the financial framework we believe will result in attractive returns to investors. We indicated back in February that we would link the dividend to sustainable growth in future operating cash flows as opposed to the previous policy of delivering dividend growth in excess of inflation. With group operating cash flow expected to grow by 3% to 5% a year, this allows for a progressive dividend policy, although it will not as we've heard be mechanistic. Having just launched a scrip dividend alternative for the first time earlier this year, we will continue to offer this option to our investors in the near term as a way of assessing the value investors place on it. However, we are aware of the longer term dilutive effect it has for shareholders and therefore we'll keep it under review. We will also need to measure our progress against a number of the parameters set out strategic review and the financial framework and communicate these on a regular and consistent basis. We expect to finalize in the second half of the year, how we will report the results for the year end sorry, how we will report the results of the group in the future, potentially refining our reporting segments for the year end results to be published in February 2016. We will be transparent with any reporting changes we might make to allow a bridge from the business segments we currently report against to those in the future. In addition, we will be carefully considering the key performance indicators for the different businesses and we'll provide an update at the end of the year as well. These KPIs will include any useful rules of thumb to understand sensitivities like changes in commodity price compared to our modeled flat real price curves. Additionally, as we assume normal weather conditions in our forecast of operating cash flow, we will outline the impact of actual weather compared to normal weather at each reporting period. In summary, we believe this financial framework provides transparency to investors on the expected cash flow generation of the business, how those cash flows will be utilized, the parameters in which the business will operate, make trade offs and be measured against and the returns that can be expected. With that, I'll hand back to Iain. Well, thanks, Geoff. And I know it's a bit warm in here. We're nearly done. I'm not sure we can do anything about the air conditioning yet. But the financial framework completes the final part of the strategic review conclusions and forms the basis for tracking our progress for the portfolio overall. Let me now summarize. The strategic review has involved a fundamental look at the portfolio of our company and its individual business activities. We're now clear about Centrica's purpose. We are an energy and services company. The focus of everything we do will be to provide energy and services to satisfy the changing needs of our customers. We're very well positioned relative to the trends we see both in energy and in terms of customer needs. We've established a company with the skills and capabilities to build material new positions on the back of these trends and we have the international scale to allow us to do it efficiently. The conclusion of our strategic review provides a clear direction for the business. We will aim to deliver shareholder value through returns and growth with the focus on our customer facing businesses. We will reduce the scale of our E and P and Power businesses and launch a material wide material group wide efficiency program. In financial terms, as Geoff has outlined, this can be summarized in five points. Firstly, overall, we expect to deliver 3% to 5% growth in operating cash flow per annum out to 2020. Secondly, this will underpin a progressive dividend policy linked to sustainable delivery of operating cash flow. Thirdly, this growth will be underpinned in the short term by a substantial £750,000,000 per annum efficiency program and longer term by growth from the customer facing businesses. Fourthly, to achieve this growth in the customer facing activities, the strategy involves a material shift of cash resources, about £1,500,000,000 per annum sorry, pounds over the next five years from the pursuit of growing the E and P business, something we no longer set out to achieve, and from Central Power Generation. This will reduce the capital intensity of the business mix over time. And finally, while maintaining attractive returns, we'll limit overall capital reinvestment in the near term to underpin the dividend and ensure that the group's balance sheet and credit rating are strong. I hope by now it will be apparent to you that this has not been just a cursory review of our company, but a fundamental analysis and reshaping of where we'll take the group in the next phase. This has been a team effort and I'm very pleased with the rigor of the analysis and the quality and clarity of the conclusions and decisions we've reached. I'm very committed to delivering on them. We're already in action on implementation with work being planned across 12 organizational areas and a significant number of cross cutting efficiency initiatives. We will be building this into our operating plans for 2016 to 2018, which we'll present to the Board in October. To conclude, as an energy and services company, Centrica has an excellent mix of businesses, brands, skills and capabilities with which to pursue these goals and to deliver for our customers over the medium to long term. Very few companies can claim the same. We have excellent people and the passion and commitment with which to shape the next phase of our future. We've built the platform from which to implement this strategy, delivery of which will create material shareholder value as we pursue both returns and growth. On behalf of the Centrica team, I know I can say that we very much look forward to updating you on our progress. Thanks for listening, and we'll now be very happy to take your questions. So we're going and Bednar are going to join us up here again. And if you could identify yourselves before you ask the question and I'll field the questions as we did earlier. So let's start the far right over there with Fred and then we'll come through the middle. All the questions seem to be just in that middle swathe, so we'll start with Fred. And then are there microphones available? We'll need some microphones. If you just bear with us one minute, we'll get those. Here we are. All right. There's one just down in the right hand side near the front. Good morning. It's Fred Boratty from Goldman Sachs. Three questions from me, please. Your operating cash flow growth 3% to 5%, you say corresponds to around 60,000,000 to €100,000,000 per annum of post tax cash flow. Can you help us understand what the growth could be in net income corresponding to that please? Secondly, on the balance sheet, the 500,000,000 to €600,000,000 one off costs you talk about, presumably they're excluded from your cash flow movements. Are they cash costs? Are they 100% cash? And could you also confirm that the disposals potential disposals are excluded when thinking about how the net debt will evolve? And finally, I think, Ian, at the prelims, you talked a bit about the tensions, particularly within the E and P business, about retaining the capabilities and the excellent staff on a significantly reduced scale. Can you talk maybe a little bit about how you've addressed that challenge? Clearly, the E and P business is going to be a lot smaller going forward. So how are you looking to maintain the focus on cost efficiency and retain the talent in that business? Thank you. Thank you, Fred. Well, I'd like to address the growth question. I'd like Jeff to touch on the two balance sheet points you made and Mark Hannafin to address the E and P capability cost tension. So on operating cash flow, I think it might be helpful if I just I know a number of you are going to be saying, well, how on earth do we get at this operating cash flow 3% to 5% number? And I'm no analyst, but we have disclosed that £2,000,000,000 is the baseline. And obviously, if you do the math, you're looking at something in the region of £400 to £800,000,000 per annum pretax in 2020. I mean, I think you can all do that math. And the question is how do you get there? And just to help you with the components, no, I'm not going to give you a breakdown of it. I mean, clearly first of all got the £300,000,000 of cost savings net of inflation. And that assumes, of course, that inflation doesn't somehow also go into the top line, but you've got £300,000,000 of savings. We then have the returns on the additional resources going into the customer facing businesses. And we've talked about it being about fifty-fifty capital and operating costs, with the operating costs being about €200,000,000 a year in 2020. Now you can draw your own conclusions on return on capital that will have been put in by 2020 and obviously the gross margin to cost ratio for customer facing businesses. That gives you a pretty significant chunk. We're already into the range of that I outlined. And then we've got a number of things like the capacity market, which is going to generate cash flows for us in the future that we haven't got in 2015. And then lastly, I mean, as Mark outlined, Mark Hanafin, we've started 2015 in a pretty slow in our Energy Marketing and Trading business. And so that increases the delta between 2015 and 2020. When you add all that together, you clearly can get easily to the upper end of that range. And I think the question then is, well, what are the risks around it? And clearly, there's a risk around, first of all, growth in the sorry, a positive risk around maybe we can exceed these targets, as Geoff outlined, if we're successful in these business models. And there's also the possibility that inflation does apply to some of the top line in some of our business. So those are the upsides around it. And the downsides around it are clearly competitive intensity in the customer facing businesses. And we have assumed in the projections for the Energy Supply business significant competitive intensity as I outlined, which is why it is not seen to net grow. So that just gives you a bit of a sense of why we believe we can do 3% to 5% per annum consistently. And clearly, it's underpinned in the front end by cost efficiency and then this growth will pick up as we go through the period. Now you asked Fred the question all right, but so that's cash flow. And I'm sorry for that digression, but I think there'll be lots of people wanting that. How do you do this? I thought I'd just run through that briefly. Broadly speaking, since cash flow and income all derive from EBITDA, obviously, you've got working capital movements in cash flow and operating cash flow. You've got slightly dilutive effects of scrip dividends in terms of per share metrics. We would assume broadly that earnings would grow at about the same rate as operating cash flow. Now it's not going to be precise in any particular year and you will have movements of operating cash flow sorry, working capital in some years. But broadly, we would expect earnings and operating cash flow to be, as you might expect, to be growing at about the same rate on a like for like basis. Now the balance sheet, Geoff, and there were two points there, and then we'll pass to Mark on E and P. Yes. So in terms of the 500 to 600 there's a reasonable component of that of capital expenditure, as I think I said in my outline that we'll go into sort of system changes and system improvements in order to support the more common operating model we've talked about. And there will obviously be some level of cash redundancy costs in there as well. With respect to disposals, they are they will clearly affect net debt. They are effectively the cash the operating cash flow impact from those businesses are included in the cash flow profile that you saw. And then E and P, Mark? Yes. Let's start with cost. What was just described by Ian was moving from the reality of today, which is a 75,000,000 barrel business to kind of an inspired portfolio, which will take some time to get there. And I'm pretty confident that in that sort of journey, we're not going to lose focus on the cost efficiency. It's vital. You can see how challenging the business is in terms of the numbers. We said to you in February that we would deliver about a 10% saving in lifting another cash cost another cash production costs off a base of just over $1,000,000,000 so about $100,000,000 We're on track to do that and beat that. Now within that, there is an additional $50,000,000 of cost coming in from Valimol and Cygnus coming on stream. So the underlying saving there is about 15%. So we're committed to doing that. We're on track to doing that and I don't think that will change. The question of retention and motivation, obviously that's a difficult one because there are some tough messages in that story. But I do believe in being very honest with our employees. We've clarified the role of E and P once and for all. We've covered the security supply question, the vertical integration question. And we're now very clear about why it's part of the portfolio. It's a valued part of the portfolio and gives us some balance sheet strength. So I think with that clarity, we can look at The U. K. Netherlands and we can say we're one of the leaders in terms of production efficiency and that's something to be proud of and we can really focus on that in the future. And then looking at Norway, we've built a great business there and the strategy going forward is as Ian said, full cycle everything from exploration development through to production. So I think still a lot to be motivated by. Thanks Mark. And just put it in perspective, Fred, mean, 150,000 barrel a day company, which is what that would be, is still a big it's a big E and P second tier player. And if it's all concentrated in one geography, it's actually a very sizable player. And obviously, we're going to be doing everything that we can to make a 40,000,000 to 50,000,000 barrel oil equivalent E and P business as strong as it possibly could be. And we just defined the boundaries around it, but now our job is to make it as strong as it could be. And that unleashes all sorts of innovation and possibilities within the team. And there are a lot of ideas already coming up about how we could do that. So it's going be quite exciting, I think, going forward. And it's definitely not a case of the future has been canceled or indeed postponed. It's all about, all right, so now we know the boundaries. Let's make it a great business and we can do that. Let's keep moving. Thank you. Whoever's got the microphone, someone's taken the initiative. Yes, I stole it. It's Andrew Fisher at Berenberg. Just a couple of questions please. First of all on E and P, just to get to that 40,000,000 to 50,000,000 barrels of oil. I assume that you're in there, you've got the assumption that you're getting rid of the Canadian noncore Canadian asset as well as Trinidad. But also what's the natural rate of decline that we should assume from the portfolio at the lower level of CapEx? And then just a second question. To what extent have you discussed any of your plans such as headcount reduction, etcetera, ahead of today with the CMA and or the government? Or is that something that you've got to now deal with sort of after this meeting? Well, I'd like Mark in a minute to just talk on just address the is the capital enough to sustain and offset decline? Look, one way you could get to this outcome would of course be just to say the simple thing to do is no Canada, no Trinidad and mathematically get to the an answer that's not dissimilar. But what we're going to be doing, first of all, we said we're going to be managing Canada as a noncore asset and we want to maximize value with our partner, the Qataris. And we'll need to make sure that all the options are considered to maximize that value. There's quite a trade at the moment in parts of assets, but not all not the whole portfolio in Canada. We'll look at that. We'll look at also all options. Everything is on the table. But that's not the only way we can do this. And so we really mean we want to create the strongest 40,000,000 to 50,000,000 barrel business, yes, focused largely around the North Sea and East Irish Sea. And so you can draw conclusions from that, but we're going to look at all the options to maximize shareholder value and create the right future recognizing that that's the target zone we want to be in. And Mark, on decline and sustainability? Yes. I mean, we have probably 90,000,100 million of base CapEx for maintaining the assets in there. And then with the remainder, we do think that that is sufficient to maintain a 40,000,000, 50,000,000 barrel business. We have a whole range of in flight projects that you're aware of Cygnus, Falamont, Kvitibjorn, drilling on Staphyord and others. And so when we look at that portfolio of 40,000,000 to $50,000,000 $400,000,000 to 600,000,000 combination of development spending, but the occasional bolt on acquisition, we think that's the right range to sustain that kind of production level. And Andrew on your question around the government, yes, I was in touch with the government about the job reductions. And we Mark was also in touch with the unions, where we've been very clear that we're not focusing on frontline engineers in the field or our customer service personnel at this time. Indeed, we're growing them at the moment. And the government obviously, the government doesn't like hearing big noises about job losses, but they do understand this the importance of a strong Centrica and they understand the importance of a competitive market. And having been pushing very hard for a competitive market and for the major suppliers to be efficient, it's a bit difficult for them to argue against the logic. But I haven't had any difficult conversations. Obviously, wanted to inform the government after the markets closed last night of the job losses at least. It's Lawson Steel from Berenberg. We're to stop this stealing the microphone a bit in a minute because Berenberg is now having two questions. So quick one, Lawson, and we're going go along the row. Can I put my cynics hat on and say here we go again with North America, sort of been there for an awful long time? And I'm just trying to work out what's changed and why you got I mean, I admire renewed enthusiasm, but I'm just trying to work out just because we have presence in 50 states, which being an Englishman is like 50 countries. I wonder why you think you can succeed there. And then just one quick one on just on sort of general staff sort of ideas. Do you feel there's a and it's more for you, Ian, I guess, given that sort of you're not new anymore, but new to the job. Is there a need to sort of reenergize and redirect staff? Is there any hangover at all from the old days, should we call them? So firstly, now you can give the mic back, so that we don't end up with more can you take the mics back from people after each question? Because otherwise we've got these corporate clusters. And some people have never taken their cynics hats off I suspect. But let me start with that. And I'd like Badar just to expand a little bit on the point about North America. We have had a mixed track record in The U. S. But actually, we've over time built some very strong positions there. And the Hess acquisition has been quite transformative around our B2B position. I'll leave Berna to talk about the Residential Energy side and services. But the big insight for me, and this may not seem very big to you, but we're in exactly the same businesses in The U. S. As we are in British Gas. And everyone here is comfortable with British Gas and says, woah, we've got this black hole in America. We don't understand it. We're in business to business energy supply, business to residential energy supply and the services business today. And we're going to add Connected Home and we're to add Distributed Energy and Power to both of them. And we don't see any difference in the trends. There may be difference in some of the regulatory effects subregionally in North America. But actually, it's a very significant market and we know how to play in those activities. But Vater, what are the reasons to believe now? Yes. I think the most important takeaway that you should take for North America is that we are focusing on delivering organic growth. So over the last decade, you will recall that we've relied quite significantly on M and A to grow the business. What we've been saying for the last two years and we are clearly saying today is that we are looking for organic growth. And we think it can be delivered in three forms: firstly, in actually differentiating our offer for both homes and to both homes and businesses. We provided you with some sound bites in the materials today where we're bundling our energy offer with our services offers and Connected Homes offers, where in the last six months, we've seen 42% of new residential customers choose a bundle versus 10% in the same period last year. So we're making real progress on differentiating at the residential and for businesses, quite honestly. Secondly, we're delivering organic growth through efficiencies. Two years or one years point ago, we announced and disclosed that we were bringing together all of our back office, front office, IT, third party spend activities under a single accountability to deliver the same kinds of efficiencies that we're talking about today. And we delivered $100,000,000 cost reduction program last year, which we used to retain which we used for price competitiveness. And I think that the efficiency program that you've just heard about today continues with that theme quite significantly over the next five years. And the third area that we believe gives confidence for organic growth does come from the acquisition of the Hess Energy Marketing business. And in particular, as you saw in some of the slides, the business is now more balanced between power and gas. What we got from the Hess acquisition was not only significant scale in gas, but also and therefore, an understanding of where gas demand is, particularly in the Northeast Of The United States. But it's also coupled with a significant amount of storage and pipeline capacity positions. And it is the combination of knowing where demand is located at a very, very localized level and being able to move gas from supply to demand in a very complicated Northeast environment that allows us to capture additional margins when there's price volatility at a localized level. That is what's contributed to our overperformance on the Hess acquisition in the last two years, and it is very hard for others to replicate. So we see it as a sustainable source of growth for our business. And these are three things that we did not rely upon in the past and I think are sources of credibility for the business going forward. We've kicked the tires on this. I mean, it's not without its risks. We've got to we have got to adjust the operating model in the Northeast in particular for the Residential Energy business to be able to grow. So it's not just a walk in the park, but we think we can do it. In terms of your question about motivation, I believe there is a factor there absolutely. There's been a lot of change at Centrica. There's been an awful lot of the management team that either left by their own volition or left because they were leaving and retiring. And there's been a lot of, I would say, uncertainty and a little bit of a vacuum. And I think that part of this is going to be about being clear about direction and giving within the right boundaries, giving our people enough space to be able to innovate at the same time as we're trying to reshape the efficiency of the business. Now that's not easy to do. I've done it before at BP. It isn't easy to do. But I believe absolutely it's possible. And yes, there is a motivational element. But I think what our people will feel about today, at least they'll know where we're going and with clarity where we're placing our points of emphasis. And that always makes a difference to an organization. Over here now. Thank you. Is that on? Yes, it is. Thanks. It's Dominic Nash, Macquarie. So three questions, please. The first one is quite simple. The 3% to 5% free cash flow or cash flow growth, is that pre or post disposals? Can we have sort of clarity on that? And then leading on to that, the cost reduction number of £750,000,000 is obviously pre disposals. Can you just give a quick indication of how that split between upstream and downstream, that $750,000,000 And how much of it is likely to disappear with a disposal program? And just a final one, is what's your current return on capital employed? And is that going to be on an overall average or on marginal investment? So if I may take those, I I don't think we disclose our return on average capital employed, do we, Martin? And Jeff, I don't believe we do. We would it is currently, and you can calculate it within the range of what you see at 10% to 12%. Decisions around about the same level then? At least. So I mean let's be clear. The return on capital employed 10 to 12% that Jeff outlined in the financial framework is something that we would all the elements of the financial framework are things we want to be operating well within if we can. So we would want to be delivering returns above 10% to 12%. You would expect in a less capital intense business that our hurdle rates for would be much higher than that on IRR. And over time, we'd expect to walk away from it in a positive direction. On the $750,000,000 we're not disclosing a split between Upstream and Downstream. And the just to be clear about both the $750,000,000 and the 3% to 5%. I was very clear that the 3% to 5% operating cash flow growth does include minor inorganics of 50,000,000 to €100,000,000 within our capital framework. I mean like small stuff that you really it's a bit the fact that they're inorganic is really a nomenclature thing. I mean they're like sort of spending an organic. It does not include any form of major acquisitions or disposals. So it's the like for like growth rate that we believe we're capable of doing from the portfolio we've got today. And equally, the same is true with the cost of €750,000,000 that it does not assume that we are selling assets and somehow reducing our cost base through sale of assets just as it's not assuming that we're going to be doing big acquisitions. Both of those would clearly change it and we need to be very transparent about the $750,000,000 is on the like for like twenty fifteen portfolio activity and we will need to be transparent and able to demonstrate to you that that's what it is and what we're delivering. So I hope that's clear. Right. Over here again, I've forgotten your name. Mark, who asked in the first session and thank you, Mark. Hi. It's Mark Freshney from Credit Suisse. The first question is just on the cost base, the controllable cost base. I think you put a slide up showing €2,300,000,000 or thereabouts at the beginning of the year. So is the cost savings a function on that €2,300,000,000 base? Just secondly, you talk about also investing in OpEx. The 1,500,000,000 investment is both in OpEx and CapEx. Just in the OpEx, I mean, that's a marginal cost of making a sale. So could you just clarify the framework around why you're including some of the investments in the OpEx line? And my third point further to Dominic's question. The big I guess, the group, the big controllable cost or the largest amount of controllable cost will be within British Gas. So is it fair to assume that most of the cost savings you're targeting will occur within British Gas? And as per the slide on Page 48, they might be expected to go back to customers. So in a minute, I'll ask Jeff just to answer the middle one on OpEx and CapEx. But on the cost savings base, I was very clear that it's on £4,500,000,000 or just above £4,500,000,000 of operating costs and cost uncontrollable cost of goods. And I don't think we did disclose the number of £2,300,000,000 operating costs, but certainly the £4,500,000,000 is the base for the £750,000,000 And look, you can assume that a significant amount of on your third question, that a significant amount of the cost efficiency will be in British Gas, given the scale of our cost base and employment base that's in British Gas. But I do want be clear, the efficiencies are targeted at four areas: firstly, the corporate functions and the head office secondly, the simplification of Centrica Energy thirdly, the customer facing businesses including North America and we indicated one thing about the headcount reductions that about 1,000 out of the 6,000 would be in North America and lastly, big chunk of it would also be procurement and supply chain. And just to remind you, I said that the efficiencies would broadly be split half first and second party costs, and second party means dedicated contractors, and half third party costs. So the majority of half of it will be direct costs and that's why we end up with such a big number in the headcount implication. Now Geoff, OpEx, the £1,500,000,000 of OpEx and CapEx? Yes. So defining that sort of OpEx, it's not the direct cost of goods sold you would get from additional sort of hive products or other connected home products. So it is the sort of capability and capacity to support the growth in those sorts of businesses in different functional areas, but wouldn't be the direct costs that you would see in arriving at a gross margin number. So that would be separate. Yes. Mean we were clear that the 200,000,000 isn't cost of goods. The 200,000,000 is OpEx, and it's assumed to be first party OpEx, and it's assumed therefore to represent capability. Back over the aisle to your left. You. Gus Holckstrada from Deck. Two questions, if I may. Firstly, with regards to the CCGT fleet. Could you just confirm that so basically, Killinghelm is closing a brick to stay open and possibly replanting to King's Lynn, otherwise no change? And second question, in terms of the visibility of FutureCentrica, we've heard about distributed energy. How do you see kind of the new organogram? So where does, for instance, distributed energy tuck into? Does it become part of British Gas? So if you give some form of restructuring or new reporting platform. Well, on the I'm going ask Mark to answer your first question. Just on the second one, I've indicated Connected Home and the Distributed Energy and Power will be new units. Clearly, I've also indicated that they're going to be global not local. So they clearly can't just be part of one of the regional business units. They're going to have to serve all of the markets that we have. But the details of how we're going to do that, obviously, I'd like our team to hear that first. But Mark on the Power portfolio? Yes. So, Language and Humber, obviously, capacity market contracts, they will stay open obviously. Killinghome close in the spring of next year. Briggs we've converted it as we said to distributed generation. And then you're left with Barry and Peterborough. They both need some help. So they're either going to need continuing short term contracts from National Grid or they're going to need to win a capacity contract in this upcoming auction. Otherwise, they would have to close. Thank you. Immediately behind sorry, Bobby to your left and then immediately behind Bobby and next. Thanks. It's Bobby Chatter. So two questions, please. The first is if I understood the framework that you set out properly, You say you're assuming that the inflation on the €4,500,000,000 cost base erodes some of the benefit of cost savings, but you're not assuming any benefit to the top line. So that's broadly eating about €100,000,000 of inflation a year on a €4,500,000,000 cost basis. It seems like a pretty cautious assumption on inflation. Surely, you would expect to be able to have some kind of inflation in the top line in some, if not maybe not all, but some of your businesses? And then secondly, in E and P, I think the historic average exploration spend has been running at around €150,000,000 a year. It's been up and down a little bit. Where do you see that going to with this resizing of the business? I'll ask Mark to address the exploration spend, although we've obviously got business plans to do going forward. You've asked a really important question on the top line, Bobby. I mean when I walked through that broad frame, I said that we are not assuming. You can get to you can easily get to a number that meets the range necessary to deliver the 3% to 5% without assuming as inflation passes through to the top line for some of our products. Now that is a cautious way of thinking about it. And that gives us confidence to be amongst other factors, to be able to say 3% to 5%, we think, is absolutely within our ability to deliver. And we would not expect inflation just to apply to the cost base and nothing to apply to the top line in those growth areas. But you can get to the number that way. The other thing that we've assumed is we've actually assumed competitive erosion inside British Gas energy supply. And we've assumed that we will do things to offset it and cost efficiency sorry, energy efficiency, but we haven't assumed that we will be able to more than offset it even including the energy supply growth opportunities in The U. S. And Ireland. So we are trying to lay out a frame that we believe is absolutely deliverable. Now it's not without risk and there's execution risk as we were just talking about earlier. But this is something that we believe we can do. And clearly, there's possibility to exceed it in a number of ways and you've highlighted one of them. The second one would be that it turns out that the assumptions in British Gas are cautious. The third one would be that we deliver more cost saving than the €750,000,000 And the fourth one would be, Jeff had a slide about capital investment. And it showed that in the outer years of the period, there'll be more capital space potentially within our financial framework to invest at a higher rate. That means if we are successful it wouldn't necessarily all be CapEx, but it could be. If we are successful, we could see accelerating investment, therefore accelerating growth beyond the period. But we are being very thoughtful about what we commit to, and we want to be able to be measured on this 3% to 5%. We also think the 3% to 5%, if delivered and translated into a sustainable progressive dividend, when combined with the absolute level of yield today, would deliver a very interesting investment proposition. But clearly that's for you guys to deduce. But Mark on exploration expenditure £50,000,000 You passed them? Oh, you got the mic. Took the mic hostage. It's Ashley Thomas from SocGen again. On the Connected Home strategy and in particular data analytics, you had the video clip of the electricity usage for London. Do you feel confident that going forward, a strategy of developing through bolt on acquisitions and organic investment will be able to deliver to you a better end product rather than just going out into the marketplace as a number of your peers have done and taking an off the shelf solution from a vendor like O Power? We have developed our own products end to end historically. And having bought Alert Me one of the problems with Alert Me was we had a 20% share, but there were other shareholders that were also clients. And that the buy in model, unless you're exclusive, which of course most of the vendors don't want you to be, you end up with your product pipeline and the things you want to do with it being constrained by the other demands on the platform. And in the end, we decided the right thing strategically was to own it. The impressive thing about what we've done and what we've got is that we've got the physical capability to deliver the physical devices into the market. We've got the pipeline of products more much more than we've announced so far being developed. And the data analytics capability is quite sophisticated. Now we're not saying that we're suddenly going to be market leader and Google is going to be a mile behind us. But when you look at this space, actually we are quite capable of a material market share and we're perfectly capable of offering just as effective solutions and devices into the market. What we've got that other people don't have is 29,000,000 customer accounts and 12,000 engineers and technicians that go and install and maintain stuff in people's homes. We already have a relationship with the home and most of these other companies don't. That's a difference and that we think that will ultimately allow us to play. Thank you. I suggest we do Peter Atherton, then we're going come down to the front here. There are two or three in the front here. Thank you. It's a benefit, I think, of not wearing a jacket and having a white arm. Thank you. Just a couple of ones. I mean, you've used $70 oil as your sort of base assumption. Might it not be more prudent to use $60 oil given where we currently are? And perhaps you can talk us through your thinking around the $70 oil based assumption. And sort of linking the dividend to the long term growth in the operational cash flow makes a lot of sense. But it is a little vague. And as you say, the operational cash flow could bounce around. Is there any chance we can tease out if you have more specific dividend target perhaps for 2015 and 2016 just to give sort of near term certainty? I understand you're out to 2020, but perhaps for this year and next year. And perhaps for Mark, I mean a lot of the potential around the home services is based on smart meters. The smart meter program is potentially building up to be one of the great IT disasters, public procurement rollouts that we've ever seen. What's your thinking about the program at the moment? Are you confident it's going to go ahead? What contingency plans have you have for Centrica to sort of distance itself from the potential fiasco? So I'm going to answer the $70 barrel thing. I'd like Jeff to deal with dividend. It might be a short answer, but and then Mark to talk about smart meters. You've clearly got a donor on IT at the moment. On the 70 per barrel assumption, look, the end of the day, the forward curves up until very recently were showing 60 to 70. We were trying to figure out where we believed a sensible basis would be to draw a baseline from which we'd be able to calculate through rules of thumb differences of actual situations, so that you guys would be able to calculate. Are the is Centrica on track or not on track on this 3% to 5%? Now we could have chosen a different number. Seventy and fifty seemed like the right basis at the when we were doing all the analysis. In the last literally ten days, you could argue it's people are getting worried is it slightly to the high side, but there's an awful lot of time to play out here. I think it's just as good as any. What we have to do is make sure that we've given you decent rules of thumb, so that you can actually make that assessment. So Jeff, the dividend, I mean, a more definitive answer on the dividend. I think probably the long answer is, I don't officially become the CFO until August 1. And the most effective way for me not to take up that post would be to make up new dividend policy right now. The short answer is no, I don't think we'll you'll tease anything further out on the dividend than linked to cash flow. Smart Meters. So yes, Meters, look, it won't be a panacea, coming new to the sector, I think it's really exciting. I think it has the potential to reframe the way we connect and engage with the consumer. We've got 1,500,000 rolled out now. You're right, we're leading the way. We certainly want the whole program to continue. We're lobbying advocating that and everything I'm hearing is that it will. But there is some uncertainty. But beyond that, if you think what it does, rather than having these massive one off billing events, it allows us to target potentially propositions to use. You saw the picture of London waking up and what goes on through the day. So it should allow us to develop specific targeted propositions. It should allow us to reduce a lot of the service noise because we won't have estimated bills. They'll be highly accurate. It will allow us to help people. We do this already for a vast number of our smart customers. We can give them hints and tips about how to reduce their energy consumption. So it has this potential to change the debate from one off massive in terms of customer numbers pricing decisions to a much more engaged customer thinking about their own energy efficiency thinking about their consumption. And in terms of rebuilding trust in terms of the brand, I see that all as an opportunity. So I don't think it's a panacea, but I do think it's a really important development. And I think if others didn't go down that route notwithstanding government policy, would be an interesting debate for us to have given some of those benefits that I've just laid out in terms of our desire to continue. I mean NPS, for example, in our smart customer group is higher than our typical residential energy customer. Over to the front here. We've got two, one one behind. I'm conscious of time, but we're in two or three here. And then we might run over slightly. We started slightly late and eat into your lunch for a few minutes. Martin Braff from Deutsche. Just coming back to the sort of capital employed figure and the return on capital employed. In your results, you present about €8,000,000,000 of capital employed when you're looking at your capital structure. So I mean if you but the problem is that your market value of capital employed, you've taken the market value of equity and add on the debt, it's more like €18,000,000,000 plus any provisions or minorities. So if you're making 11% return on 8,000,000,000 it's four point something if you look at the capital employed that the market is currently attributing to your capital. So is there something wrong with that math? Or is this it's just that you're being valued a long way above book, aren't you? Are valued above sorry. Do want me to jump in? Yes. Sorry, you're looking for a mic. Yes. So first of all, I think the capital employed base that we would see in terms of the book value of the business would be higher than that. I think it's a little over $10,000,000,000 rather than the 8,000,000,000 And clearly, the market in terms of our valuation will take into account future cash flows there that create a value greater than potentially what we have on as book value for some of the parts of the business, particularly the downstream or customer facing businesses. But the market value is still about double that £10,000,000,000 The So enterprise value we just halved the 10,000,000,000 to 12,000,000,000 in terms of getting an idea of what aggregate investors are looking to get after tax? Depends how you calculate returns. But I mean, what we're defining here is return on average capital employed as an accounting definition, which is what we're delivering. You can make an argument that if you take the cost of debt and the cost of capital and obviously the cost of those are different. It depends whether you want to take that into account as well. I mean, we're talking about return on average capital employed on an accounted basis. But I mean, you could look at return on enterprise value, in which case most companies would have different returns to their posted ROCE numbers. But we would obviously hope, as Jeff said, to beat that 10% to 12%. It's a boundary of our financial framework that we would like to stay above. We're starting in it and we want to move above it as we increase our or reduce our capital intensity. But the other thing going on, don't forget that last year in the first half last year, 50% of our operating profit was from E and P and it's a tiny fraction. So there's been a very big shift. And if you just stop the clock right now, of course, we're looking at much lower returns than we've had in the past. E and P typically, the supply chain reacts and adjusts within eighteen months to two years and we would still expect that to happen and we still expect margin expansion again in E and P. Obviously, does depend on the prevailing price environment in the very near term. We'll have to see. Thanks for that. Just behind you there. Thank you. It's McLaren from Merrill's. Good afternoon. I have three quick questions, please. The first, it sounds like you may be willing to exit from Nuclear. If that were to happen, would this be as well as the other intended disposals? And how would that change your overall investment outlook, which you referred to this morning? Number two, may I ask for a bit more detail, please, about a few of the other assumptions that you've made in the review? So for example, have you included any of the harder remedies from the market investigation? What do you think will be the overall rate of energy demand reduction in the medium term? And what do you assume about the relationship between success in the Connected Homes piece and their energy use? Isn't margin in one, not just eroded by the other? And then lastly, I agree that distributed energy may be interesting in the future. But what do you think your edge is today in terms of technology, not just the fact that you have lots of relationships with customers? Okay. Can I just touch on the first two and ask Mark Hodges to deal with the Connected Homes sort of cannibalization question, I guess, and Mark Hennifin just to touch on the Distributed Energy and Power one? On the first one, we're clearly not saying that we're going to sell nuclear. What we are saying though is that we are assessing it as a financial investment and on its merits as such. That does mean it's possible that we could conclude we wish to do that. If we were to do it, it's clearly not included in the 500,000,000.0 to £1,000,000,000 of divestment proceeds. And we were clear that that's about making adjustments to the E and P portfolio and the wind. It's not obviously, including Nuclear, at least if it were, I think we've got a problem. The Nuclear business, if that were to happen and clearly this is hypothetical, we first of all need to make sure that we're delivering on our dividend and credit rating, which we in most circumstances think we would be, in which case clearly we have got a couple of uses for that potential disposal proceeds, one of which would be to acquire things or to reinvest the capital organically, but probably more likely to acquire things or it's the balance sheet. And obviously moved significantly away from our Baa1 and BBB plus rating. I mean, I don't want the company to be aiming for an A rating. I would like us to have an efficient balance sheet that's got strong investment grade credit rating as Jeff outlined. And so we would probably look to deploy the capital provided we had the opportunity to deploy it in line with strategy, simple as that. But we're getting into the zone of hypothetical. In terms of remedies and demand destruction, we have been what we believe to be reasonably conservative in and or realistic about the forward margin structure inside British Gas. And we do assume competitive pressure and pressure from regulatory evolution. We don't include or assume some sort of radical, because you just get into, well, we'll cross that bridge when we get there. But we've been sensible about our presumptions on that. Mark Hodges, on Connected Home and isn't it just eating up the other parts of the business? Look, the way I think about it is there's two sides to the opportunity. I mean, there may be an element of it which helps us to defend the relationships we have with current customers, to defend some of the margin that we have with current customers. That would be true in terms of both services and energy supply. And will it help customers to reduce some of their consumption? Is that therefore bad for us? I think then you have to look at the kind of the economic value of customers over time. If we can retain customer relationships for a longer period, then I would argue that actually it's a benefit for us rather than just looking at a kind of a one off impact. So certainly there are risks around it. We've identified Ian identified clearly there are a number of pathways to create value from Connected Homes. It won't just be through protecting the base we've got. We do see it as a material new revenue stream as well. And I think in the round in terms of the way we put the strategy together, I feel comfortable that combination of defending and helping retain value in the book we have and creating material new value is a good option for us to have. And there's demand there's real demand for bundling of new things. I mean, better just an example, better, I mean, year, this year? Yes. Well, as I said earlier, we of the residential customers that we've acquired this year, 42% of them have selected a bundle. That's either a protection plan or an element of our one of our services contract relationships or a smart thermostat or other connected home proposition. I think the just to emphasize what Ian was saying, we do the same thing on both sides of the Atlantic. Our strategies are actually the same. The difference that we've got in North America is that our starting point in market share is significantly smaller. At the residential level, it's around 10% of the customers that have switched, But there are 60 roughly 60% of the market that hasn't switched. And on this point around the proposition, we're expecting and we're in fact seeing customers who are actually larger being more attracted to this proposition, which actually offsets this energy efficiency. So the starting point is actually a larger home. And clearly in North America, the range of home sizes are really quite large. So we're actually seeing a more valuable customer segment choosing the offer. And we are in fact seeing retention materially change already in our performance this year. So it's a better customer segment. It's higher retention as well as generating additional value sources of income. I think all of it are attractive. Just one small fact. The Hive NPS right now sits at 78 In terms of maintaining a relationship with a customer and then broadening the potential offering, that's a great start place in terms of that part of the Connected Home proposition. Quickly on Distributed Energy and Technology. Power and Look, we will be neutral on technology in terms of our offering to the customer. So we'll offer best technology. That gives us an advantage because we're not going to be stuck with one manufacturer. So we will do that. I think we will develop some proprietary technology in that fourth block that Ian showed the clever block around building management services, energy management services VPP and so on. But more generally, we have a right to win in this space, believe, not just because of the customer relationships and the sales forces that we have, but also because we have a lot of the skills in the power business at the moment to do all of the licensing, the consulting, the building, the operations maintenance and we also have the skills in trading to do all the clever part about optimizing the customers' energy use and using the flexible generation. So I think it's not all there on day one, but there's a lot of elements of what we need execute on that strategy. And on that point about technology, Ian it's Ian. Fraser, sorry. The point about technology, I mean, we are going to have to invest in technology and invest in technological capability and we are going to be doing that. We've already started and we'll continue. And we have to be very technologically savvy, not just tech, but hard technology in order to pursue these goals and we believe we can do that. But that will also be part of the resource allocation that we need to make, sorry Fraser. Now we've got two more questions. Three more questions and that's it. One behind you who hasn't spoken yet. And then I think we'll do deeper and over here and then we'll be done. I'll keep you very quick. One quick question for Mark. Just on the situation with Barry and Peterborough. Can you confirm that, a, the lion's share of what I think is 60 losses in thermal generation this year? And the point you made about going into the capacity auction, if they're not successful in this year's capacity auction, would you therefore be effectively making the decision to close them by Q1 next year? So no, they don't represent the lion's share of the losses. The losses are across the portfolio on a P and L basis. We've had outages in language in the first half as well. Spark spreads have been very depressed load factors for the fleet 20%. So that is P and L problem across the fleet similar to last year in terms of the numbers. What I said was that we would need something additional. These plants can't survive in a in just an open CCGT sort of world. That either is short term contracts from National Grid, it's getting a capacity contract or potentially it's us finding some other innovative way of utilizing those assets. We've done it on Briggs where we've gone from a grid connected asset to a locally connected distributed generation asset at a slightly smaller rating. That was a very innovative step. We would obviously look at that before we would make the decision to close. But if they don't get the capacity contracts then they are vulnerable. Question here. Thank you. This is Deepa from Bernstein. So I have two questions. The first one is on the I think on the cost cutting when you started you said that this would supersede all the existing targets. So you've got the €100,000,000 going on in E and P right now and BGB again another €100,000,000 So could you just clarify out of the $750,000,000 growth and the €300,000,000 net, how much is already accounted by the existing cost programs? And the second question is on the smart metering costs. I guess you've assumed that you passed through the existing smart metering cost. Can you confirm that? And do you have any further measures on the smart metering procurement, for instance, to control those costs going forward versus, say, recent Both important questions. I mean I'll ask Mark Hodges to talk about smart, and then I'll come back and clarify the $750,000,000 for you. So in terms of the smart meter cost, yes, that's passed through. That's simple. And in terms of controlling the cost, I mean, as we're always looking at the cost of the meters that we're supplying, looking at the technology. We've been through a couple of iterations. That's something we'll keep under review. And it's not just the meter. We're also looking at the in home display. We're looking at how that might work with on the smartphone. We're looking at the whole value chain in terms of how it gets deployed in the home and used by the consumer and trying to make sure that we can minimize that cost to the end consumer over time. There is a revenue stream associated with smart rollout. And clearly, we are broadly speaking, we're rolling that out with getting the cost back. And so we haven't included that in the $750,000,000 In terms of the $750,000,000 and previous targets, I was very precise. I said that any targets for the calendar years 2016 to 2020 would be superseded. So what it means is that the of the E and P delivery that we talked about earlier this year that we delivered this year and run rate into 2016 that we've delivered this year would not be part of it. Any final I mean, obviously, in order to deliver most of the E and P program, we're going have to deliver a lot of it this year. There may be a slight part there may be some of it that's 15,000,000 to $16,000,000 that is therefore part of the $750,000,000 So we're being very clear. The baseline is 2015 costs. Therefore, by definition, if there's slight tails of existing programs, they are included in the $750,000,000 They're not additive to the $750,000,000 So I hope that's clarified that. Sorry, which B So the BGB 100,000,000 I think was deferred to next year. So that then is included in your $750,000,000 presumably? So look, cost of the group as a whole this year is the baseline. We've got pluses and minuses in this. We're not trying to play games with the BGB situation. But it is the baseline is what we've planned to deliver and what we can deliver in 2015 operating costs and controllable cost of goods. And obviously what we will do at the end of the year as we go into the prelims is give you clarity on the baseline and how we're going to monitor progress going forward. Last question, if I may. Thank you. Yes. It's John Musk from Royal Bank of Canada. A couple of questions on the Connected Home again, sorry. You say you're going to obviously have a new reporting line for the Connected Home. Can you let us know whether that is profitable in its own right at the moment? And how those profits are measured? Is it really just the sale of the equipment with all the churn benefits and the efficiency benefits that you get in your energy staying within British Gas or Direct Energy? And then secondly, one of the issues, I think, with the rollout of Connected Home is cost, GBP $2.50 for a hive seems relatively expensive, I would say, for the average man in the street. Post CMA, would you be looking to offer those bundled with an energy tariff and lock customers in on a two year deal with a Hive? I'm sorry, one more. At the moment in The U. S, I think you used Nest. Is there some confusion that you see with customers if you try to roll out Hive into The U. S? Can I take this quickly? Look, on The U. S. Situation, clearly, we're looking at Hive and its potential and we currently have Nest a relationship with Nest. We will obviously have to resolve that if we roll out Hive, but we do like our technology. As far as the way we measure Connected Home, we're not going to be getting into that today. What we are going to do is be clear in February how we want how we're doing in these areas and how we are going to report them and how we'd like to be measured. You're absolutely right that Connected Home has got profitable parts where you've got currently product in the market that we're making money on, but you've also got pre investment in research and development pipelines, which doesn't remunerate at the moment. So it's not an easy thing to just say, okay, here is the Connected Home P and L. And when you bundle the offerings with other offers, how you ascribe value isn't simple. So we're not going to be drawn on KPIs today. We are going to give you a suite of KPIs in February, which are going to allow you to measure our progress and understand what's going on in these new growth nodes as well as in the existing business. Ladies and gentlemen, I'd like to thank you all for being very patient in a very warm room for a very long time. And on behalf of our Chairman and ourselves, thank you for coming. We, I hope, have given you clarity now on where we're going to take Centrica in this next phase. We are very confident this company has tremendous set of skills to play into the trends of energy going forward. In fact, it potentially has skills today that are more relevant to the future trends in energy than the past trends in energy. And we think Centrica is very well positioned to be a leader in energy and services going forward as we serve our customers. Thank you very much indeed.

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