Centrica plc (CNA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Centrica's 2021 Interim Results Q&A Call. My name is Haley, and I will be the operator for your call this morning. [Operator Instructions] I will now hand you over to Chris O'Shea, Group CEO. Please go ahead.

Thank you, Haley. Good morning, everyone. Thank you very much for joining us for the Q&A session for our 2021 interim results. I'm sure you've all seen the presentation and read the release. I thought we would just go straight into taking your questions. I'm joined here by our group CFO, Kate Ringrose, and we've got Chairman, Scott Wheway, available as well. So with that, I'll ask Haley to give us the first question.

[Operator Instructions] And the first telephone question is from the line of Mark Freshney of CS.

Firstly, regarding the EM&T business, Kate. The LNG profits are fairly low as you acknowledged after 2 or 3 good years, which is surprising given you've got more infrastructure now and given the dispersion in global gas prices. So I was just curious as to why the performance in the LNG element is not -- I mean is it derisking in that business ahead of getting it for sale? And secondly, I guess this would also be for you, Kate, on the pension fund negotiations. Clearly, hugely sensitive. And I'm sure you pushed the envelope by going and disclosing the GBP 1.5 billion mark-to-market. But when is it likely that we can expect a resolution? Is it something that comes June next year? Or can we expect something before then?

Mark, thanks very much for your questions. Let me start with the EM&T on LNG. So a lot of this is actually [ 2020 ] story as opposed to a '21 story. I mean, you're quite right. There's more capacity. We've got the Cheniere contract. But remember, that kind of starts, as Chris talked about, it behind the eight ball, it's a negative price contract. But actually, structurally coming into 2020, we were actually very well placed for what turned out to be a falling market in LNG. We've set up kind of the structural dynamics over a couple of years coming into the year. And it so happened that we were very well placed for that change in pricing structure of LNG and profited from that accordingly in 2020. So what is happening in '21 is more dynamic of the non-repeat of what was a rather exceptional performance in LNG as opposed to anything else. With regards to the pension negotiations, quite right, it is sensitive, as we've said, it's 15 months to have from the end of March to agree the negotiated segment. I will say that we're working very constructively with the team, trustee, chairs and the trustees as a whole for those 3 teams. So we're making really good progress but it is going to be a company that could take another year. Clearly, I'm hoping that it won't. We all, both from a trustee's and from a company perspective, look forward to resolution on both the technical deficit and the payment profile over the company there. But I'm not able to commit to exactly when that would happen. But we're moving along as swiftly as we can.

The next question is from the line of Ajay Patel of Goldman Sachs.

I had a couple of questions, please. Could you just help me with the definition of the technical deficit? The reason in terms of -- on a roll-forward basis. The reason I ask the question is that we had a GBP 1.4 billion pension deficit back in '18, and we're rolling that forward to now to $1.5 billion by the end of June. But there was quite a considerable pension deficit payments this half. So I just wondered how do they get incorporated into the calculation? Do they just get subtracted and then it's just discount rates that are explaining an increase and then they're offset by that number. I just want to make sure that my understanding of the calculation is right. And then the second piece is on the E&P side. It seems like you're making progress. What sort of options are you considering? What are the things that hold you back in regards to the audience that you potentially could sell this to? And what are you doing to maybe help with that? I just want any more color there would really help.

So I think I'll take the first question and then pass on to Chris for the second question. So basically, the dynamics with regards to the change in the pension valuation is effectively, we value growth in liabilities and the asset [ equity ]. We have made some significant contribution into the pension. But that was in large part due to the pension strains, especially increase in liabilities. We increase it and then take it off again when you pay that down. So that's the dynamic around that. And then the primary factor that changes the valuation is the movement in real gilt rates. We've effectively kept all other assumptions entirely consistent with the technical valuation that was closed for the end of March 2018 period. Clearly, those assumptions when it comes to membership behavior, governance, et cetera, et cetera are all what's being reviewed at the moment now. So it is important to note that. So what I'm talking about really is based on the 2018 assumption. But broadly, you're right. When we pay money, and then all else being equal, the deficit could come down. I think the thing that you're probably missing just a little bit is with regards to the [Audio Gap].

And Ajay, on E&P, it's really around -- we are committed to exiting this business, we have to do it in the right way. We have the value and the [ decommissioning ] liabilities are dealt with appropriately. So I would -- you can bear with us as far rather tell you what we've done than tell your plan because obviously there's a commercial lens to this.

The next question is from the line of Deepa Venkateswaran.

I was going to ask you -- ask a question about the restructuring of E&P, which I guess you're not going to answer. So my question really is that you said that there's a CMD that you're outlining in November. So what are the broad areas that you would seek to cover? And would you clarify the dividend policy by then and also outline whether there are other noncore divisions like LNG, et cetera, that you might still consider selling in the future?

So Deepa on that, I mean, we'll lay out our ongoing strategy and the financial framework and financial structure at the Capital Markets Day. And similarly, in terms of the E&P question, I always think if you preannounce disposals, disposal candidates, you often harm your ability to get the best price. So I think -- I don't think there'll be too many strides. We are clear that the future for us is net zero. Hence the reason that we'll get out of producing hydrocarbons. It's very difficult to invest in hydrocarbon production and have a future in net zero. But in terms of other [indiscernible] we'd rather be [indiscernible] than to be judged on what we did to simplify this portfolio. And as you can see, the disposal of Direct Energy, that's a huge disposal, which will alert the balance sheet. You'll also notice we have a few smaller disposals. So we sold a small gas line power station in Peterborough, sold still the old British Gas headquarters, and we sold our data management business [indiscernible] bringing GBP 50 million. So we look at big things, and we look at small things. But everything that we do is about simplifying the business, about reducing volatility in earnings. And it's about making sure that [ we're ] progressing past it. As you know, that's the framework that we assess pretty much all of our decisions on.

Chris, the line was just a bit unclear. What was the third priority? I couldn't quite hear that simplify, reduce volatility and what was the last thing?

And does it help us on helping our customers whose countries are on the path to net zero, so to decarbonizing energy system. Because that is the future for us, huge opportunity.

The next question is from the line of Dominic Nash of Barclays.

Two, please. The first one, could you just give us an amount what the accounting rules are for the revaluation of your E&P asset, the GBP 366 million uplift to the write-back. Are you obliged to do the lower of value or book on this? And does that imply that the actual value of that asset is up GBP 366 million if your assumptions are correct? Or is it purely an accounting sort of irrelevance? And the second question I've got is on power prices and gas prices. Obviously, they've roofed it in the last few months. What do you think the impact of what you're seeing are going to be on residential bills and on the retailers out there to sort of pass through this volatility without getting sort of financially distressed? And the follow-on question from this is that carbon is obviously a part of the rise in this. Do you see any carbon intervention coming from the government, either on reducing the supply and demand imbalance, reducing the carbon tax supplement or maybe even going down the continental route of carbon windfall recovery?

Dominic, that second question -- let me take the second question first and then Kate can talk about E&P revaluation. And I think probably we assure you that it is just almost a relevant noncash business reflecting price changes. But regarding the -- so we expect that intervention on carbon. I think the government and the regulators are working really hard to figure out what the pathway is to net zero and what the best way is to get there. That will include things like carbon certificates, potentially carbon taxes, policies, et cetera. So I wouldn't want to second guess that. That was quite busy for some other things. In terms of the volatility in gas and power prices and the impact -- I think the question was about the impact on supplier as well as individuals. It's because we hedge -- and so we hedge based on our forecast, demand and prices that's around. And for companies -- other companies that hedge and your exposure is to get your volumetric forecast from. Then if you're over hedged but the market goes up, you're in a good place because you're selling your excess hedged in the market. If you're under hedged and the market goes down, you're in a good place. You can really have some payments if you are over hedged in the falling market. Remember, that's what we saw last year when COVID hit in the B2B space, primarily, because you're selling as volumes in the market is falling, so you're -- and you're pushing to get a big -- while you're pushing that falls down. I think in terms of suppliers, we don't have still line of sight. So we hedge, and a number of other suppliers hedge. Those that don't hedge will be [ in trouble ] in payment at the moment. Those that do hedge is not -- I'm not saying it's pleasurable, but you hedged to take risk out. And the hedges that are in the money, obviously, there is a danger that some smaller suppliers that may have hedged, hedges in the money. Then the temptation, if you're struggling in other parts of the business, the temptation is cash those hedges in, which is a little bit like burning the furniture to stay warm. So short term, gives you some relief. Long term, it's not a thing to do. So I think the volatility in the market, the responsible suppliers manage that volatility as we do by hedging the book so far. As an upper slope in curve means the prices go up. You're not really too worried about the volatility in your supply. But if you're unhedged, I can't imagine what it must be like to be an energy retailer over the past 2 months and not be hedged. It must be an incredibly stressful journey, and it's undoubtedly a lot in the finance. So with that, I'll hand over to Kate about the question in E&P reevaluation.

Dominic, thank you very much for a good gnarly accounting question. Despite a lot of detail on this on Note 6 on the RNS But briefly, the way we deal with this [ recoverable months ] the recoverable amount is the higher of value in use and what we confirm as a fair value cost of disposal. And this is assessed on a field-by-field basis. So basically, if the recoverable amount is seen as higher than the book value, and we [indiscernible] bills, than we have to write it back. The process of assessing that is pretty mechanistic. And we've moved and we've been fairly consistent on this for the last few periods that we reported to looking at third-party curve, looking at the [indiscernible] reported within that set of third-party curves and also looking at the liquid curves that we can see in addition, according to that. A big driver behind this write-back is [ third-party curves ] and that we have at the moment. But I say, it's pretty mechanistic calculation, which is why you see large ups and downs. Last year, it was mostly down [ but back up ].

Sorry, can I just follow up quickly, Chris. On the first part of my question is that do you think we're going to see significantly higher retail bills coming through as well. Have you sort of quantified what the scope will be?

I think our expectation of the -- the price cap is set with observable forward market prices. I think we expect it to be up about 10 times a month. I think that's the numbers, it's [ 120% or so ]. So not insignificant. But that would be the -- Ofgem will announce that, I think, 2nd of August. In fact, possible, 1st of October. There's roughly a fair amount.

The next question is from the line of Chris Laybutt of Morgan Stanley.

First question just on operating profit seasonality. Actually, more like operating cash flow. Just wondering whether you can give a sense for first half versus second half skew in the current environment. And you had a strong performance in the first half with your free cash flow across the group. Do you expect that to continue into the second half? And I guess any comments that you could make that would be terrific. And then second question, we've seen some policy documents released in the last couple of days by Bayes. Just wondering whether you can comment on a couple of policy changes that might be coming your way in retail. Firstly, just on the collective switch policies and your views on those. And today, it looks like there's a move to address ECO and some of the market distortions that we're seeing. So some comments there would be terrific as well.

So thanks, Chris. Let me take the question on the policy notes. I'll touch on seasonality and then Kate can [ correct anything ]. Collective switch, we argue against that quite strongly. We don't believe that that's the right thing. And I mean ultimately, what a collective switch says is the government, the regulator wants to make decisions on behalf of consumers. And I'm not sure that there's any thesis on which to do that. So we believe that you should have a competitive market and even markets. And a collective switch, I think, was completely and fully against that. And I think you could argue that it's a bit insulting to consumers. So that's not something that we think is -- it's not something we supported in the past. It's something that we would argue again we don't see that necessary. And I think if you look at the vast majority of retail energy buyers in the U.K., making a loss hard to see what the justification for a collective switch would be unless the regulator is looking to deepen the losses in the market. And that would be a very, very odd position. You mentioned that another policy. What was the other policy you wanted me to comment on, sorry?

It was the consultation on the ECO program to remove the distortion of small suppliers.

Yes. So [indiscernible] take it down from I think, probably [ 250,000 ] suppliers stepped down to [ 150,000 ]. And there's a proposal now to take it down to 1,000. What we argue for this competitive market is a level playing field. And therefore, the fact that basically what this will do is require every supplier [indiscernible] because we think that it's right. So there's no comment on in and of itself. However, you've got scheme, you have to plan everybody. So we think that's very positive. And also consultation issued recently by Ofgem, I think, on the supplier license and even with a requirement to bring sense to customer deposits. We not only support that, but we have been encouraging that because it is a nice lead into the [ cash flow]. Customers tend to be a lot can say by [indiscernible] over the year. And in the first half, when your profits are up, you're not recovering all the cash that you would otherwise recover because you're buying more commodity because your customers [ give more ] during summer months. You can get more cash from them than you get into the winter. And so if you got customers that pay for a product that you haven't delivered and you spend that money, that's quite serious. So we think that it's absolutely right that anybody takes customer deposits regularly should be regulated like financial services companies are, so we welcome that. But on the cash flow, I would say that if anything you would expect in downstream business the cash flow to be quite negatively impacted in the first half. So Kate can cover the guidance. [indiscernible] give you guidance. Kate can talk about that. But one thing, I'm glad [indiscernible] incredibly strong free cash flow generation. And one of that means is we've got a CFO who is laser-like focused on cash. We've got a CEO whose quite interested as well. And our Chairman is also quite interesting. So we are all focused on cash because you can't pay the bills with property. You pay the bills with cash. And we're quite disciplined on our investment criteria as well, so we would like to invest in good ideas. But we're only going invest where there is a good idea. So I think 1 of the things misunderstood or underappreciated by people is incredibly strong cash generative attributes of this business. But with that, Kate will give you a view in terms of seasonality and cash flow.

Sure. So I mean I think what Chris has talked to is correct. I mean when you look at the dynamics of seasonality, you have cash more weighted to the front half than the back half. And then from an operating profit perspective, it's different by business units. But energy is probably the most obvious one where we tend to have profits more weighted to funds in the back half. I think a couple of things that I'll just point to note to look for is on cash steady, as Chris has already mentioned, about the dynamics in working capital. And so far, are they impacted by COVID remains a dynamic of uncertainty. But the other thing just to be aware of is in a period of high commodity prices, particularly in energy, that tends to consume more working capital because if you think about what that means is that you're paying for or we're paying for the commodity and settling it sort of month in arrears. And our customers take longer over the winter period for those direct the other two. The other thing as well just to point out that have been positive is margin cash flow. Again, we tend to be net buyers in the market. That means in a rising commodity environment backend cash is [ back ] into us as margins. Whereas a bit over the last couple of years where commodity prices have fallen, we've had margin placed without the counterparty. So that's been a swing factor, and it's very uncertain as to how that's going to manifest by the end of the year given it's so commodity price dependent. And then the other things that I'll just remind yourself is we talked pensions earlier. Pension settlement will come through as well at some point in time. We still got [ degrees ] of interest to pay. So those are the other sort of key movements that will come through. But all in all, I would expect a weighting more to the front than to the back of the cash.

The next question is from the line of Jenny Ping of Citi.

Three questions from me, please. Just following on from that cash flow question from first. I just wanted to know whether there are any lumpy one-offs or any funnies in the 1H cash flow that we shouldn't think about or think about taking out for the second half? Secondly, just in terms of the services business, clearly, this year's the strike and COVID has had an impact. But I was also hoping for some commentary around as you look forward into 2022 when the new FCA rules kick in, in terms of the ban on auto renewals, how you think that would likely to impact the churn of the business and the profitability of margin of the business. And then thirdly, just going back on to Spirit. I wonder if, Chris, you can say whether you have thought about listing stand-alone Spirit rather than through a disposal process and whether there are any quirks in there, which effectively stops you doing the stand-alone listing. Clearly, this is an option that some of the other utilities are thinking about with other parts of their business. And I just wondered whether that's something that you've explored.

Let me take those questions in reverse order as I'll start with Spirit and touch on the FCA. And then we can talk about any one-off lumpy things in the cash flow. So on Spirit, there's no restriction for listing the business. But there's -- I think it's highly unlikely to [indiscernible] for Spirit. And so I mean, don't hold your breath on that one. On the FCA [ undoubtedly lower ] retention rate in services in the first half was 79.5%. And I'm quite disappointed at that. Normally, it's north of 80%. So my drive on this means that we have a service that customers want to buy. And COVID has really impacted us the first quarter of 2020, and COVID impacted again in the first half of this year, obviously, the industrial action, in fact. So what I'm really focused on is to get the service in a place where not only retention goes up, but we can actually grow the customer numbers. So I wouldn't want to be complacent and say any changes wouldn't have an impact, but I'd like it either the service is in a place where the customers are coming to us and the retention rate as well. So I don't anticipate any impact there. But we do have work to do in terms of improving customer service. And with that, I'll ask Kate to take the question on cash flow.

Jenny, so I mean honestly, nothing particularly major that really comes to mind. I mean, on tax, we got a couple of rebates, particularly with regards to Norway and Spirit. That's probably 1 thing. I talked about the pension payments that we made. But then I'd also highlight that there's probably a couple of lumpy things to come. So I mean the key things that I would call out here, the pension that we've talked about as a potential, albeit unknown. There are other things like the renewable certificates that Chris has spoken to in terms of the supply contributions in August. So that's another lumpy thing too. But no, nothing in particular.

Sorry, if I may, just a follow-up, Chris, on Spirit. Highly unlikely. Is that because there is the need to add additional cash into a separate business because of the decommissioning liability, is that why? I'm just trying to understand why highly unlikely. And then just on the FCA, when you talk about retention rates and aiming to continue to have that high, presumably, the no price walking will hit margins as a result if you want to keep the retention rate high.

So second question, so we tend not to do what you would call price walk. And we do give customers sometimes introductory offers, but we don't then [ auto-renew and walk them up in ] prices. So that's not something part of our business model. So we want -- we tend to find -- within [indiscernible] is we also have our own essentially fulfillment. It's not just our internal policy. So what we tend to find is you give people good service. Then say you don't get people good service and they tend to go somewhere else. So the key thing for us is not really stop offering incredibly low prices. And walking customers up is about giving customers very good service. And that's why our focus is on making good services in the right place for things that we can hold so that customers participate for the services that they get. On Spirit, it's not about having to inject cash because I don't think it's the best way to realize value from that business. If you know the reserves to production, life of that is shorter than average E&P business. And I think the best way to get value from assets like that are probably through private sales rather than to go out and list some. To me, that's something that's got lots of growth opportunities, lots of growth projects that are ongoing. Then that's something that's officially quite easier to list that you saw with, for example, Harbour Energy [ basically ] backing into Premier. I don't think the Spirit has that same profile. But the real thing is that [indiscernible] is a lot -- an awful lot of effort. And I don't think it's the best way to get the value. I don't think we need to go down that route.

The next question is from the line of Elchin Mammadov of Bloomberg Intelligence.

My first one is on your customer losses. I mean the number of active U.K. suppliers keeps declining. You keep shrinking your customer base. When do you expect to stabilize your customer numbers and potentially even grow it? So that's question number one. The second one is on nukes. Dungeness B, it was announced that it would be shut 7 years earlier than planned. Is this a one-off event? Or is it a more widespread issue? And what does it mean for your plans to eventually sell your nuclear stake? And the final question is on your Energy Services business. I mean some of your peers, notably, [ ENER-G ] is divesting it. Do you still think it's a good business to be in and why?

Thanks. So let me take the U.K. customer losses and Energy Services and then Kate has responsibility for the nuclear business, so she will answer that. One thing just on the back of your mind is, so I think some of the plans are closing earlier than some expectations. The life has been extended quite a bit. So if you look at when the expected closure dates where [indiscernible] is constructed, I think it has gone on a bit longer than me. And for Energy Services, we think it's very good growth. Our home and energy services business is very good as expected. [indiscernible] you're talking about the B2B energy services. I think this is something where in many companies, you have to focus on what we're good at and get better at it and do more of it. We have a good business there. In Centrica Business Solutions, we're not yet at the level of profitability, but we've got -- I think we've got a very strong business there that they can get to breakeven and then beyond to profitability. We don't have infinite patience with it, and we've brought a lot of commercial focus in terms of how you go after your orders and how you manage your cost base. But this is a business that we see real potential. And others may not see the same potential in their business. We got to a point where we thought this couldn't be a material profit contributor to the group, then we would stop the activity. So there are no sectors closed in the company. We see the possibility of it in a good business. And U.K. customer losses, we've been quite clear that there a number of things that we need to do, and we're making progress. So 1 of them is we need to have a more flexible system and a better way of serving our customers, which is why we've launched a new Software as a Service platform. We've now got [ 250,000 customers ] in that. We have 100,000 at the start of the year. We're testing and learning, and we are confident now we can do migration, taking customers directly on to the platform. We've migrated customers from our existing system. And we've migrated 5 customers to [indiscernible]. So we're testing how we can do that, and we're increasing in confidence. We also need to have the cost to serve in the right place. The cost to serve has come down by 7% in this year, so first half 2021 versus year 2020. You have to be reminded that within that there [ 2,000 ] running costs. And the running costs are going to increase as we go forward as we bring more customers on [indiscernible]. And we still have cost of the legacy system. So again, we got to balance the need for speed on this, but also with the need to do this very responsibly with our customers experience. So I think costs are in the right place. You need to get your customers better service. We see some really good indicators in that, but I'll never be happy. And I can assure you, none of us will be happy. Kate won't be happy. Our Chairman, Scott, won't be happy until we see customer numbers going in the right way. But we have to be realistic. It doesn't just happen overnight, but it's not something that we are waiting passively to see. We're actively working at this, but they've got to be the right customers. And we've got to also see how the market and chase that as well. Although we had a few supplier failures. We still have an awful lot of unprofitable suppliers in the market, and we'll see how that pans out.

That's very encouraging.

So if I just pick up the question on nuclear. I mean as you'll be aware, Dungeness hasn't run for a couple of years. It was a difficult decision that we made with our partners to close the station, but Dungeness is quite a unique construct of a station. I think it's quite a long time to just come online in the best place and there were other stations started to build later and finished earlier. So it's always been a little bit tricky and so hence, the decision to close it early. In terms of read across means there are a number of ADRs, as you'd be aware, in the seat. So the key thing that both the regulator and [ CDF ] monitor very closely is any issues with cracking. And that's just something that remains under constant review, but there's just no update certainly on any of those dynamics there as yet. And then sizable is a different -- a completely different technology that is used while it's on outage at the moment. And that's been slightly extended. As per the [indiscernible] we expect that to come back in August is the latest information that we have. In terms of what this means from a sales perspective, I mean, I think we've talked about how we're thinking about holding nuclear in the portfolio. And Chris talked to some degree with regards to how we feel about the fit of nuclear and its carbon credentials. But more broadly, if I look at the nuclear portfolio for us, there have been a number of uncertainties that we've been working through with DDM, both with regards to reliability of the fleet also with regards to existing agreements with [ Bail ]. And the latter has been resolved, which we view as very positive. And as EDF and ourselves work towards a fleet that will be smaller over time as these stations reach their natural end of life, there's very key activity going on within the nuclear business to ensure that we manage the cost.

The next question is from the line of Bartlomiej Kubicki of Societe General.

I would like to discuss 3 issues, if you don't mind. Firstly, on RAP and the conversion to hydrogen storage. I think this is quite a CapEx-intensive program. I saw some numbers about GBP 2 billion or more pounds. I wonder what do you think your sort of contribution to this could be in terms of amount of money potentially to be spent? And I guess this is -- this could be one of the ways how you can spend your excess capital following the disposal of Direct Energy. And then also on this, what kind of sort of regulations or subsidies are you already discussing with the government, whether it's something like sort of regulation of this on the RAP basis would be something of interest? And then consequently, if you get RAP regulations or RAP regulations and you get whatever 2%, 3%, 4% return, if this is something which is of your interest as well. So maybe if you can elaborate on this one. Second one, a bit shorter on the legacy contract, are you actually considering selling it and closing it earlier. So also 1 of the possibilities to sort of use your -- in my opinion, excess capital you are having right now on your balance sheet? And thirdly, on heat pumps, where do you think this could sort of kick start really in terms of installations in the U.K.? And what are you think this could be a game changer for your services business as well. And basically, given your engineer fleet, whether you could be a clear winner here.

Okay. Great questions. And actually, the RAP question and heat pumps question are linked. And then Kate can talk about legacy contract. But I warn you in advance obviously nobody talks about what we'd like to do commercially with contracts. So look, on RAP, the number, I think that's been quoted is in a very, very high level [indiscernible] is about GBP 1.6 billion to convert off the hydrogen storage facility. That's about GBP 300 million to basically pull all of the steel out of the holes in the ground and we [ get ourselves ] a new steel because these are old wells, so you need to have them running for quite some time. There's another GBP 300 million, GBP 400 million on, what we call, the top side. So that's like the processing kit on top of the platform. So basically, if the legs are fine but you need to [indiscernible] on the top. And then there's about another GBP 700 million, GBP 800 million or so, which is about what's called cushion gas because you need something at the bottom of the reservoir. And so that's where you get [ to fill the amount of money ]. Now maybe you don't need -- the cushion gas can be heating. So if the price of heating [ GBP 80 ] is just a lot more than devices. Not [indiscernible] So there's a huge amount of uncertainty there. And so I would just take those numbers down. They're a very, very rough ballpark numbers. What we said to the government is, first and foremost, the U.K. has the ability to store 1% with annual gas demand, so [ ignore hydrogen ]. The 1% volume gas amount in Germany can store up to [indiscernible]. We said to the government actually if I'm in the government, I'd be quite worried about that because it puts you at a mercy. We don't have enough domestic gas to meet demand. It puts you in the mercy of supply shops and you see prices if LNG doesn't come here meeting prices, moving [indiscernible] moment. So this first and foremost, if you look at the supply it makes sense to have solid stuff. It is a great storage, it's definitely more than great storage. And then you can actually think [indiscernible] hydrogen. We need [indiscernible] to test that hypothesis, but we're fairly confident it can be quite good. So let me talk to the government and say, well, how can I support you because I don't think people are going to save so much money on a merchant basis and a specialist to [indiscernible] something that may or may not work. So we talk about it in the 2 main areas you can have for this would be regulatory asset-based model or [indiscernible] regime. And they both -- they work in a relatively similar way with [indiscernible], obviously you can go down side, more upside. You've just got a bit more of a fair way. And so it's really down to, I think, government to see what are the things that they are comfortable with. I think one of the fix in this, I think, is in you would try and use existing frameworks rather than to try and propose something new. And that's something that I would definitely [indiscernible] today than in the past rather than have some deep intellectual exercise of what could work. It never worked before it takes longer. So if you can point to -- and there are RAP [indiscernible] and there are [indiscernible]. So we're just simply pointing to 2 possibilities to make it work. We haven't had any contribution from the government. It's really [indiscernible] going to them. And then when you get to that level of return, so you mentioned 2%, I mean I struggle to lend the government money at 2%. So I think that will be quite easy. I think the recent [indiscernible] settlement of 4.7%, 4.8%. But then when you think the rest [indiscernible] and that's lower than our cost of capital. It is truly risk-free then if you consider it because obviously, your cost of capital is down by your overall asset. So all I would say is it has to be attractive for us. How much we put in, I think the real question for us just now is can we [ create ] value from an asset that we've got. And the second other question how much do we want to invest in it? And do we want to invest all of it? Do we want to invest some of it? Do we want to have a project finance vehicle? Do we want to leverage it? So I think there's lots of other questions. But the first thing we've got to do to find it whether actually there is an investable option there. And if it is then we'll figure out. And I can assure you that we've got -- I'm looking at -- as I'm looking at Kate, it's not easy to get money out of Kate, but we have to get pretty good return for us to invest in that. But really, it's about getting an option. The question on heat pumps. And I think the reason that the linkage is that the solution to the U.K. is decarbonization issue has to include hydrogen pumps. It cannot be pure electrification, and it will and cannot be purely hydrogen. 85% of U.K homes are attached to a gas infrastructure, gas network. We have a network that works really well. We've spent some money to adapt it. But bear in mind that the U.K. ran on hydrogen up until the mid-70s, town gas is 55% hydrogen. And we were a hydrogen economy before, and we can be hydrogen economy again. There is about 6 million, 5.5 million, 6 million homes in U.K. that kind of use hydrogen. The heat pumps cost about 4x -- 3x to 4x as much, installment of it, 40% more expensive to run. So there's a cost implication here. The solutions got to be both. But for us, it's a great opportunity. Heat pumps overtime, and the heat pumps and hydrogen because the installation of a heat pump is something that we're very, very pleased to do. We'll do about 1,000 heat pumps this year. We're already doing it, a trial in hydrogen heat pumps a bit in social housing [indiscernible]. We're also trying hydrogen heat pumps with our colleagues in West [indiscernible] so that's a heat pump with a very small gas boiler so that you can get some really hot water. We probably don't want it right now, but you might it [indiscernible]. So we are doing that at the moment. So we see huge opportunity. I'd like to think that heat pumps are not new technologies. So France installing 400,000 a year. Their government said they want to get to 600,000 a year by 2026. That's a massive, massive offer, but they will be [indiscernible] customer adoption is quite a disruption in the moment when you get one. That's a long way. We are in a great position in Centrica. The decarbonization of elevated, the net zero transition is something that is a huge opportunity for us. And it will be a combination. It has to be a combination of electricity, gas, heat pumps and hydrogen. Both of those present great opportunities for us. There are some nuances in terms of how you drive the change. But both of our [indiscernible] are more opportunities. So I'm quite excited about the future. And we continue to work with governments and regulators [indiscernible] what we think is right for the customer. We have to see this in the customers' eyes. And we'll continue to do that. And then you'll see us more representing our customers view rather than representing just a company view is really what's good for customers. That's why it's good. So with that, I'll let Kate tell you why we won't discuss what we're going to do with the gas asset in '25.

So I think Chris has set me up for a very short answer. I mean, fundamentally, the gas asset book finishes in 2025, not specific to the gas asset book. But we look at all of our contracts with our portfolio what is the right and special thing to do and the gas assets.

And we have a follow-up question from the line of Mark Freshney of CS.

Two follow-ups. Firstly, on within the U.K. nuclear fleet, I agree that the U.K. government agreement to take the assets once they're defueled is a big positive, because it cuts out the middleman and some of the risks of decommissioning and recovering cash from the government or a fund that hasn't got any money. But regarding the reactors, when they're defueling. And once they've shut down, and we can see another couple of shutdowns, I think, next year, the date is already on remit, are those reactors going to carry operating cost? And will that weigh on the profitability of the U.K. nuclear fleet? And just secondly, within EM&T, I think there was a test acknowledgment from your predecessor, Kate, 1 year ago that Centrica was looking at divesting parts of EM&T, and particularly the LNG and follow-up press speculation. Can -- is that something that's feasible? Can you talk about whether that's still under consideration?

So Mark, let me take EM&T question and then Kate can touch on the nuclear question. Any good business keeps our entire portfolio under review. What we've got in EM&T is a really good business, and I think probably with [indiscernible] with the LNG business. If we had the time again, we didn't have the senior contract. It's not a great contract. However, we've got a really good team managing LNG. The business have been about for many, many years. I wouldn't claim to be an expert. And I understand it well, and I'm comfortable with it. I'm very comfortable with the portfolio that we've got in EM&T, very comfortable with the team that we've got. And they do -- question earlier, what was a reduction in profit. And I think we disclosed that, but the LNG was profitable in the first half of the year. We started behind [indiscernible], so we have got a really good team to start with the contract, and that is out of the money. And they have to work really hard to get the contract. In last year, they did an unbelievable job. This year, they did just an incredible job. So I'm very comfortable with what we got here. But then it's about -- our job is to create value for our shareholders. So we don't have a for sale sign up above everything. Somebody serious can come and talk about parts of our business, then we could well have a conversation. And I actually -- I worry more. But nobody wants to talk with the [indiscernible] of our business, because it means it's not desirable. I would love it if people were looking enviously at parts of our business. Not to say we would get rid of it, but that would be a sign of a high-quality business. But look, hopefully, that answers your question on that. And Kate will give you low down on [indiscernible]

So Mark, just in terms of nuclear, I think it's quite right. Hunterston [indiscernible] in January, July 20 effectively. Hunterston is on its final 6 months production run, [indiscernible] is on its second and final production run. And in terms of -- I think your question is around look forward really in terms of how we think about nuclear. In the current year, we weren't able to really benefit from [indiscernible] prices because we are hedged, but also because of the outages. And the timing of the outages earlier in the year means the hedges that were put in place needed to be bought back in order to be effective again. So if I look forward into [indiscernible] the things that we'd be monitoring would be price, and the prices at which we're hedging also benefits from depreciation as the Dungeness closure has been decided earlier on. The other thing as well just to be aware of as well is just large operating costs. And I think I discussed this a little bit earlier in the Q&A. EDF are leading on a cost strategy. We're very alert with the risk of cost standing within the nuclear business. And there is a program in place where we need.

The next question is from the line of Verity Mitchell of HSBC.

I just got a couple of questions, and apologies if they've been answered already. One is just about retiring debt. You mentioned in the statement that you're actively looking at that, so obviously, post the pension settlement. But do you see that as being NPV positive? And should we be thinking that's something that's quite likely. And then I just wanted to come back to Software as a Service. I know there's been some comment about it already. But I think my simple question is why are you not migrating more customers more quickly on to this? Is there a constraint? And should we expect a big acceleration of that as of some of your competitors who are using these lower-cost platforms in the future, let's say, in the next 6 to 12 months?

Verity, thank you very much for the questions. So on the migration, you can migrate incredibly quickly. But you have to be careful that you get it right. So I prefer for us to test and learn, test some core, find out where the pain points are, fix them before you aggressively migrate. I can't comment on what others have done, but I can comment on other things that I've done in previous companies and intend to the system migration impact in case you can [indiscernible]. So you got to make sure that you get it right. And that's the most important thing. Now it doesn't take a rocket scientist to figure out if you migrated at the rate of 150,000 over 6 months. This is a 10-plus year project. It's not 10-year project, so it will be a nonlinear migration. But the key thing really is that we get it right. Maybe I'll hand over to Kate on the question of debt. But we have always talk about debt. Retirement as never NPV positive. It's always NPV-neutral. Now it can be earnings positive because effectively, if it's a private note, you have to have a make whole payment. If it's a public note, you have to buy it in the market. So I mean, effectively, we can pay the net present value of the delta between the current interest rate. So rarely will it ever be a net -- it could be a net present value positive, you have to find, advertise opportunity in the market and the new suggest if the bond market. But that's how I think about it but Kate is far better -- will give you her view on that.

Thanks, Chris. I mean with regards to debt, we do have significant start to process, about [ GBP 3 billion to GPB 4 billion ]. Where we have debt that's falling due then we're choosing not to finance that. That's an economic way of doing it. We just think really that we're also just looking at is what are the potential make whole costs that would need to outlay in terms of cash from a fund perspective, [indiscernible] looking for us to redeem these bonds at a discount, which is good, I guess, from the perspective that our credit is holding. So I think this is something that will be under review, I mean as the balance sheet efficiency would always be under review. But I wouldn't look at it as being anything imminent.

And this concludes our question-and-answer session. I would like to turn the conference back over to Chris O'Shea for any closing comments.

Thanks very much, Haley. So just to say thanks very much, everybody, for taking the time to watch the presentation, to give us such good questions. I mean just to wrap up, lots of moving parts, but stable profits, stable earnings. In many ways are tough first 6 months of the year, some of the operational issues we've seen, tough 6 months with the industrial action. But you can see from some of the operational metrics, we are seeing movement going in the right direction. So it's far too early to declare victory, but I am incredibly optimistic with the progress that we're making and about the opportunities that the net zero transition will afford to Centrica. We're incredibly well-placed to capitalize this. There's a lot of work to do, but there is a huge market opportunity there, and we've got great people. And I think that they are starting to believe again. I'm sure that you all noticed our employee engagement was incredibly low level. Higher than it was last year and higher above the year. If you think of all the change our people are going through, that is quite something. So we're still not where we want to be, but things are starting to move in the right direction. So thanks very much. Really looking forward to seeing all of you at the Capital Markets Day that we'll have on 10th of November, where we will be able to lay out more clearly the future strategy and the financial framework of the group. So thanks again.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Goodbye.