Centrica plc (CNA) Earnings Call Transcript & Summary

We're ready to start. So apparently we're ready now. Good morning. Thank you very much, everybody, for joining us here today as well as interim results, which you've already heard about. We're really focused on our future strategy, what we plan to achieve in the coming years and most importantly, what that's going to mean for our profits, for our cash flows and for our shareholder returns. I hope you've already watched our video on the first half results, and we'll be happy to take your questions on the results when we get to the Q&A session later. I think it's fairly safe to say that we're really quite happy with our first half performance. I'm delighted to be joined on stage today by Russell O'Brien, our CFO, this is his first results presentation. In the room, we've got our Chair, Scott Wheway, and the wider leadership team. And for those of you that are here in person, we're all really looking forward to chatting to you over lunch. I'm lucky to have a fantastic leadership team with deep, deep knowledge and complementary skills and experience right across the energy value chain. So please do ask some questions about what they're doing to deliver our strategy over lunch. Over the next hour and a bit, I'll outline our integrated energy strategy and show you how our businesses fit together, how our longer-term plans are aligned to changes in energy markets and how this comes together in our refreshed investment case. I'll then highlight the improvements we've made to strengthen our existing retail and optimization businesses and why we're confident they can deliver sustainable operating profit of GBP 800 million a year, which equates to around 11p to 12p of EPS with growth potential on top. I'll also touch upon the improvements we've made to our valuable existing infrastructure positions and how we're planning to invest an average of GBP 600 million to GBP 800 million of CapEx each year into new assets at least until 2028. This will help maintain the balance in our portfolio, which we value so much and upon which our strategy is based. Russell will then pull all this together to explain our new capital allocation framework including the importance of a strong balance sheet and our approach to investment and shareholder returns all focused on underpinning value creation for shareholders through the energy transition as we help our customers transition to net zero. Before we look forward, let me remind you the journey we've been on for the past 3 years. Back in 2020, we set out how we deliver the turnaround of Centrica. We said we'd simplify and derisk the portfolio through prioritizing and focusing on those areas where we can win for strengthening the balance sheet. And we've done this by creating a simpler, more customer-focused business model through delayering the organization and through selling direct energy and Spirit Energy Norway. We said we have an energy services and solutions company with engaged and empowered colleagues. We said we reversed the mindset of cost cutting to hit in year numbers at the expense of the customer experience and longer-term growth opportunities. And the fruits of this, you can see that as follows, colleague engagement has almost doubled. NPS is up significantly. Our cost per customer in British Gas Energy is coming down, as we said it would. Operational performance in British Gas Services & Solutions is as good as it's been for a very, very long time. We said we will deliver stable predictable profits and cash flows. Now you have seen that the design of the Ofgem price cap can affect the timing when profits are recognized. But despite this, over the last 3 years, we consistently delivered material cash flows. This is one of the areas I think may be underappreciated when people look at Centrica, the highly cash-generative nature of our businesses. Over the past 3.5 years, we've delivered GBP 10 billion in free cash flow. 2/3 has come from normal operations and the remainder has come from asset disposals. I'm incredibly proud of all of the hard work of our 20,000-plus colleagues. We've come a long way and is there's always room for improvement. The foundations of the business are now strong enough to allow us to create value and deliver sustainable growth. When we say we'll do something, we do it, we don't make commitments lightly, and we take the delivery of those commitments extremely seriously, and that's part of the culture that we built at Centrica. You can see the benefit of all of this hard work coming through in the first half performance, improved delivery for customers in our retail businesses, another excellent performance and optimization and strong reliability and volumes in our infrastructure businesses. It has allowed us to deliver earnings per share of 25.8p and free cash flow of GBP 1.4 billion both well over double what we achieved last year. And we ended the period with net cash of more than GBP 3 billion, again, well over double the level we saw at the end of 2022. Our performance and outlook gives us the confidence to announce a 33% increase in the interim dividend and to extend our share buyback program by GBP 450 million to GBP 1 billion. When completed, we expect to bought back around 15% of our company shares. Following this, our focus will be on delivering our investment plans with any further distributions of surplus capital reviewed against the new capital allocation framework. So the operational turnaround is materially complete. We've got a focused and complementary portfolio, a platform that's performing well and an incredibly strong financial base. And very, very importantly, our talented colleagues have been reengaged and reenergized. We now have got all of the ingredients we need for Phase 3 of the turnaround. We want to underpin Centrica for decades to come, delivering sustainable earnings from our core businesses, investing for longer-term value and growth and delivering attractive shareholder returns. I'm sure you'll all be asking how we plan to do that. So let me tell you that. The way that Centrica has been designed is no accident because we're incredibly well placed to succeed through the energy transition. If the transition is slower than anticipated, our core businesses will still deliver healthy returns. And if it's faster than anticipated, that's great because we are very, very well prepared. We've designed our business model to be resilient in all scenarios, and the integrated nature of the portfolio means we'll benefit from the growing complexity of the new-look Energy System. We are absolutely committed to deliver net zero for Centrica and for our customers. Our new green investments won't be made just to satisfy some ESG target but because they make good business sense and they give good financial returns. They'll be made to maintain the balance in our portfolio and to underpin the company. We believe that taken together, this strategy represents a highly attractive investment proposition. The strong underlying earnings and the tremendous businesses we already have today combined with our robust balance sheet, will allow us to invest or value, capture the inevitable upside from energy market volatility and deliver strong returns to shareholders. We've got a well-balanced portfolio with market-leading positions across the entire energy value chain. We're the largest supplier of energy to residential customers in the U.K. through British Gas Energy and the second largest in Ireland through Bord Gáis Energy and we have a strong and growing B2B energy supply position. We're the largest provider of energy services in the U.K. and Ireland with the largest energy services workforce, these capabilities and the scale will prove extremely valuable as the world decarbonizes, in short, we have an enviable retail position. Our customers need energy, and this need is growing. Our infrastructure businesses bring electricity and gas to the market every single day. Today, Spirit Energy produces just over 250 million standard cubic feet of gas a day and our stake in the U.K.'s nuclear fleet generated last year more than 7 terawatt hours of electricity. While these assets will decline naturally over time, over the past year, we've been able to extend their lives so they can be important parts of our portfolio for years to come. And of course, we have the unique rough gas storage facility. We also have a growing number of flexible and renewable power assets, but to maintain the balance in our portfolio, crucial to our strategy as existing gas production and nuclear positions decline, we need to invest to replace this infrastructure, and we'll talk more about that later. Then at the heart of these energy flows, sits the optimization business, the glue that binds our group together. This has been a core part of the portfolio for many, many years, but it's really come into its own in the past 18 months. And as you'll hear this morning, this will continue to be vitally important to our delivery of sustainable profits. As I look at our portfolio, I expect each business to succeed in its own right, whether it's through the day-to-day customer experience in retail right through to top quartile operational performance and uptime in infrastructure. But the real value add that makes us unique at Centrica comes at a portfolio level as we integrate the 3 legs of our stool. This isn't just a strat line. If you let me pause for a moment to look at the advantaged portfolio position we've got because it's key to our investment proposition. For Munich investments, we aim to make 3 returns from a single investment: an asset return, an optimization return and a retail return. So for example, when we invest in new power generation, we'll aim to create additional value by optimizing the energy flows in the market. Meanwhile, the invested capital will underpin the retail business, allowing us a further margin by selling energy to customers, 3 returns, 1 investment. In addition to the portfolio balance, it helps in so many other ways every day. Now let me share 3 examples. Number one, every day we buy energy for 1/4 of the U.K.'s household and many, many businesses. We do this better than anyone else by utilizing our world-class optimization capabilities. Number two, unexpected warm weather may impact the retail business as customers turn down their boilers. Now normally, when this happens, you're forced to sell your gas into what's likely to be a falling market. But we can put that gas into rough which acts essentially like a stock room, only we have that. And that gas and storage can be further optimized by our colleagues in energy marketing and trading. And number three, we generate a huge amount of zero carbon electricity, principally through our nuclear assets but we recently started adding solar. Combined with additional green energy sourced by our optimization business, this allows us to respond to the demand from customers for zero carbon tariffs. There are plenty, plenty more examples. But as you can see, EM&T is involved in most of them. And [indiscernible] Centrica truly is greater than the sum of its parts. Our unique portfolio is ideally placed to help us make superior returns from the energy transition. Now everyone in the room today is well aware of these dynamics, but let's look at the key components. Electricity demand in the U.K. is set to grow materially over the coming years, and this will create significant opportunities, both in retail and in infrastructure. In retail as we help our huge customer base manage the transition and in infrastructure as we invest more to grow our access to green electrons. It's estimated just now that around GBP 240 billion will need to be invested in the U.K. electricity system by 2035, not all by Centrica. Most importantly for us, the electricity generation mix is becoming much, much more intermittent. This is because of the increasing penetration of renewables as opposed to the most stable baseload system we've seen in the past. For Centrica, this means that we can monetize our optimization capabilities, both on our own and in third-party assets to help balance the grid and to add value from any pricing disconnects we see. We already see this in Ireland and in Scandinavia, where we help to balance and optimize grids with substantial intermittent renewable assets. For customers, the residential technology mix will transition away from natural gas boilers over time. As I said, this will create significant opportunities for our retail business in installations, in servicing and repair and in energy supply. Then there are various views on the pace of this change, but we can all see it coming. And at Centrica, we are well positioned to capitalize on the opportunities as and when they arrive without being dependent upon their arrival. These trends provide us with attractive investment opportunities across the entire energy value chain. And here, we've clustered them into customers, renewables and flexibility, all aligned to our current capabilities and where we know we have the ability to win. We also have further long-term opportunities building on existing positions and assets in hydrogen or carbon capture, utilization and storage and potentially in nuclear as well. And through our green focused investment strategy, we will build investment levels to between GBP 600 million and GBP 800 million a year, at least until 2028. These investments should deliver average post-tax unlevered returns of at least 7% to 10% at the asset level. But remember, we can make 3 returns on 1 investment. So we'll exceed that 7% to 10% when you add in the optimization and the retail portfolio benefit. We already make attractive returns through optimizing 16 gigawatts of third-party assets in the renewable energy part of our EM&T business, which provide route-to-market services. And of course, we're very confident we'll be able to do the same for our own assets. We'll invest to maintain balance across the portfolio. Which will mean most of the capital investment is targeted towards infrastructure given our current portfolio will decline over time. But at the same time, we'll continue to invest heavily in customer service and in systems in our retail and their optimization businesses. This investment is mostly expensed in the year as incurred. And over the past few years, we've stopped the practice of identifying revenue investments separately and treating it as an exceptional cost. When we look at customers as well as the investments we're making in energy management and demand response, we see a lot of opportunity to deploy capital and develop a scalable annuity stream of income. We're starting here with smart meters. For years, we use third-party providers to finance our meters but now we're setting up our own smart meter asset provider business. This will underpin the setup of a small asset tracking and financing capability. And as the model matures, we can consider further opportunities such as financing or leasing, for example, heat pumps and boilers to households, expanding our business and turning one-off sales into recurring revenue streams. Secondly, investment in new renewable generation. This could be in our own projects like the recently opened Codford solar farm or by investing with partners like our recent Gresham House investment. In addition to the asset investments, we'll generate additional returns through providing route-to-market services and supplying customers. Thirdly, investment in flexibility. We've got the existing capability and we've got an opportunity to scale this up. We're already invested in batteries and gas peakers, and we own a range of sites with valuable grid connections such as the Brigg Energy Park, where today we're colocating batteries, hydrogen production and gas peakers, and that allows the optimization teams to optimize those assets based on the prevailing market conditions. And on the right, you can see the longer-term options. We own 100% of rough, and our controlled subsidiary Spirit Energy owns 100% of Morecambe and that means that we are in full control of developing plans for potential future hydrogen and carbon capture, utilization and storage investments. These are at relatively early stage, and they may depend on government regulatory mechanisms, but these are incredibly valuable options for us to have in our portfolio. And we've been clear in the past that we could be interested in investing in new nuclear depending on how the regulatory framework develops. It's important to note that our strategy and our investment plans are aligned to our net 0 ambitions. And they also help energy security and decarbonization priorities in our core markets. Our climate credentials are good. We're currently on CDP's prestigious A-list leadership category for climate change and Centrica was one of the first U.K. companies to publish a climate transition plan, detailing how we would achieve net zero by 2045 and how we would help our customers reach net zero by 2050. Achieving net zero is an absolutely nonnegotiable for us. And it will provide opportunities for us to grow and create value for our shareholders. It's not just good for the planet. It's very good for our company, too. And as you'll hear from Russell later, is a core component in our investment decision-making. And in line with the targets published in our climate transition plan last year, more than 50% of our capital is planned to go into green taxonomy eligible projects such as solar and batteries. Now that's up from less than 5% only 2 years ago. Before I provide some color on the business unit plans, let me pause and recap why I'm so excited about the future of Centrica. Our balanced portfolio has leading market positions and hopefully have shown each component complements, derisks and adds value to at least 1 other part of the group. We'll deliver around GBP 800 million of sustainable operating profit from our existing retail and optimization capabilities. and we'll continue to deliver material cash flows beyond the end of this decade from our existing infrastructure positions. And over time, we'll complement this with valuable investments in new lower carbon assets as we replace the existing asset base, helping us deliver net zero for Centrica and net zero for our customers. In the past few years, we've rebuilt the balance sheet. Russell will explain later why the investment-grade rating remains so crucial to us and why we want to keep net debt-to-EBITDA at less than 1x for now. We'll invest GBP 600 million to GBP 800 million per annum until at least till 2028 and we aim to deliver average portfolio returns of 7% to 10% plus with additional group portfolio benefit, including from optimization and retail activities. At a portfolio level, despite the expected ramp-up in investment over the coming years, we expect group return on capital employed to remain above 20% over the rest of this decade. As you expect, we will maintain capital discipline, and we will return surplus capital to shareholders whenever appropriate. As I said earlier, we're extending today our existing share buyback program up to GBP 1 billion. And the progressive dividend policy will allow for an increase in the dividend today, we expect this to grow to 2x earnings cover over time. Now Russell will take some time to unpick the capital allocation and investment framework in about 25 minutes. But now let's focus on our businesses and at the heart of Centrica are our customers. So maybe I could start with retail. We've got incredibly strong positions and capabilities in British Gas Services & Solutions, British Gas Energy and Bord Gáis in Ireland. And while I'm going to focus today on the U.K. businesses. I just want to reiterate how important Bord Gáis is to the group with its integrated business model essentially acting like a mini Centrica. I'm really pleased with the work the teams have done to improve operational performance over the past 2 years. There will always be more to do to become more efficient and give customers better service. The journey actually never ends, but we're now able to focus on delivering sustainable profit and growth. As mentioned earlier, electricity demand from customers in the U.K. is set to grow materially. This is going to lead to increasing demand for time and type of use tariffs and demand-type response offers. We've already got the platform, the technology and the people and that includes 65 software engineers. We've got an antibot focused on developing our demand-side response offering. We've got only 1 of 3 platforms, license or demand side response in the U.K. And under our PeakSave product, we're able to provide customers with offers such as summer Sundays, which allows half-priced electricity each Sunday now until the end of September. We've also got the Smart Charge EV offer, which uses a high platform to allow customers to charge a car when the grid is quiet. The opportunity from decarbonizing U.K. households is huge, and we are brilliantly positioned to capture value from this. We've got leading market positions in a highly fragmented market with a much lower share in on-demand. This is a market that is materially larger than our traditional contract service and repair market. And I think we're also underrepresented in heating installations. And this means that we've got a significant opportunity to grow our core services business by increasing the total addressable market and increasing our market share, and that's without any change coming in the energy transition. British Gas Services & Solutions is a tremendous business, no one is anywhere near our 7,000 directly employed engineers. No one offers as wide a range of products. And no one else offers existing and new colleagues, the quality of training that we can through our award-winning in-house academies. Now on top of this, the progress that we've made to improve our operations has placed this business on a much stronger footing. And as you can see the H1 results were back in profit. Our KPIs are the best that they've been for years. And I believe that we are well positioned to move back into a growth phase in this business. So we serve around 30% of households in the U.K. But the 3 million customers we provide cover to, in this business is only around 10% of the U.K.'s 28 million households. We installed less than 10% of boilers, we installed around 4% of heat pumps. So the growth opportunities are truly huge here. Our core protection product remains important for our future success. Improved operational metrics are enhancing the customer experience, and this remains a top priority for us. And ongoing planning and supply chain projects should improve efficiency and further improve customer retention. We're also taking a different approach to new customer acquisition, improving the digital channels and constantly refreshing propositions, testing the market, see what works and going back to it. All of these improvements will take time to flow through to the financials, but we are absolutely on the right track. And the opportunity in on-demand services is huge, the 20 million homes in the U.K. who don't have a contract, half of which are owner-occupied properties. We're now in a much better place operationally, our recent recruitment and productivity improvements, and we can focus on growing in this area, leveraging our brand, our scale and our supply chain capabilities. And having the capacity to grow in on-demand derisks the contract business. Now this is a virtuous circle. Because we've created the capacity in our existing workforce, we can now test on-demand offerings, and we're doing it right now. And as we grow in on-demand, we'll ultimately need to add to our workforce. With a bigger workforce, we'll have more capacity and we can prioritize our contract customers, and this will allow us to grow that part of the business by giving better service and so on and so forth, you keep growing one that grows the other. But to help you size this opportunity each 1% increase in our market share in on-demand should add GBP 25 million to revenue. And most of that will initially fall to the bottom line. But over time, that will reduce as we have to add colleagues and reduced around GBP 5 million to GBP 7 million of gross margin depending on the job mix. As I said, we're also underrepresented in the boiler installation market. And here, we want to improve our digital channels and the customer journeys to increase market share. Other things remain an equal, we estimate that each incremental 1% market share increase in boilers would add GBP 40 million to revenue and around GBP 8 million to GBP 10 million to gross margin. As I mentioned at the outset, we'd expect any margin increase to drop to the bottom line or revenue increase, but over time, we have to recruit more people, and that would then mitigate the margin improvement, but it's very profitable. Now with the improvements we're making in the growth we're driving, I expect British Gas Services & Solutions to return towards historic profit levels of GBP 100 million to GBP 200 million over the coming years. Now let's take some time and move on to British Gas Energy. As you know, this is a market that has been somewhat challenging for suppliers. We're the only major retail supplier to have consistently made a profit over the past several years. Between 2019 when the standard variable tariff -- default tariff cap came into effect and 2022, we made an average margin of 1.1% from the supply of energy to residential customers. This is around 1/3 of what supermarket would make. When you normalize that for the incremental costs incurred over this period that were recovered in the first half of 2023, the margin would have been slightly over 2%. Now if you compare that with a 1.9% margin, the price gap is designed to give the average supplier. We beat this margin because we are better than the average supplier, especially in energy procurement. It also reflects the work that we've done in costs over the last few years. We've driven an annual -- an average annual cost reduction of 8% per customer since 2019, and we said that we would drive down cost per customer we've absolutely delivered. But we see the possibility of a further 10% to 15% reduction over time as our processes continue to improve and we migrate more customers onto our new IT platform. The market dynamics are changing. And most customer switching has declined over the past 18 months. We would expect competition to intensify as the market emerges and energy crisis. But given our strong foundation, we see this as an opportunity. It's not a threat. The regulatory environment has also changed largely in response to the supplier failures we've seen over the last 2 years. Ofgem just now are consulting and changing to the price cap structure which at current prices would allow an increase roughly 2.4% margin for the average supplier. And with the new capital adequacy requirements in place, all suppliers should be encouraged to price at more sustainable margins. As the leading player in this market, this is incredibly positive for us. So we've now got a good foundation, but we need to continue building a better customer experience. And there are 3 ways that we're doing this. Firstly, we're migrating all of our customers from our legacy systems to a modern, more efficient Software as a Service platform, and that's having a positive impact. The NPS of a customer on the new platform is almost double that of a customer in the legacy platform. And so far, we've migrated around 3 million residential customers. Number two, we're building a simplified digital-first customer experience and customers can interact with us through their preferred channel of choice, and they can self-serve for basic queries which reduces contact volumes and improves customer resolution. And number three, we set up a new customer service delivery model with multidisciplinary pods, and that improves the way our expertise is deployed. It reduces handoffs between teams and allows us to resolve more customer queries at the first point of contact. Ultimately driving better customer outcomes and lowering costs will underpin our ability to continue delivering sustainable results. And under the current and proposed regulations, we believe we should be able to achieve around GBP 150 million to GBP 250 million of operating profit each year, broadly in line with the margins allowed by the energy price cap. And we, of course, see potential for this to be higher at times when our energy procurement expertise really comes to the fore as we saw in the first half of this year. This is already a great business and we see a clear path for making it even better in the future. Let me take some time and move on to optimization and another fantastic business in EM&T. You've heard a lot from us in the last 9 months about the strength of EM&T, including the LNG teach-in that we had in May and the route-to-market teach-in in last December. So let me provide a brief reminder of our capabilities and set out what this means in terms of long-term sustainable profit. As you've already heard me see a few times, EM&T is the glue that binds our group together. It supports both the retail and the infrastructure businesses. It is responsible for moving electricity and gas from the point of production to the point of consumption, sometimes via storage facilities. It's a massive logistics operation and where we excel is in our ability to move power and gas across Europe and in the case of LNG, globally. EM&T's primary purpose is to procure and deliver physical gas and electricity for our retail energy supply business. This is an area of real competitive advantage for us today, and you can see that in our results. The team also provides a route to market for the physical output from our infrastructure assets, which helps to deliver additional returns. And at the same time, EM&T's world-class risk management expertise helps to optimize the integrated use of risk capital and cash across the group. As we said before, over the years, we've developed the capabilities, proprietary platforms and colleagues to be able to add incremental value in related areas. I think that what we've created is incredibly hard to replicate. In addition to the role that EM&T plays for the group, the other lines of business are logistics operations all anchored around physical assets. Firstly, Gas & Power trading, where we've got more than 10 terawatt hours of European gas storage capacity alongside substantial cable and pipeline capacity. These physical contracts allow us to capture value from any regional arbitrage opportunities, moving gas and power to where and when it's most needed. We now trade across more than 25 European countries giving us distinctive insights into energy markets. We manage the systems complexity and we can add value in all commodity price environments. Number two, the renewable energy trading and optimization business or the route-to-market business optimizes around 16 gigawatts of renewables and flexible assets. And our expertise here gives me great confidence that we'll be able to deliver additional returns from the capital that we deploy into our own flexible and renewable assets. And number three, the LNG business built up over the last 15 years has great capabilities and it's a valuable and flexible global portfolio of contracts and positions. By having these 3 well-established lines of business across the energy system, we gain valuable information in real time through physical assets across a wide geographic reach, and that in turn helps us inform the best decisions on supporting our retail and our infrastructure businesses. And all of these businesses are supported by scalable and well-controlled operations as well as our distinctive talent and fundamental and quantitative analysis, our leading proprietary technology for analytics and algorithmic trading and our robust risk management controls. We have a business model that has a track record of delivering operating profit growth with a compound annual growth rate of more than 20% between 2018 and 2021. And this growth has come through a range of different market conditions. The portfolio today is very well positioned and as 2022 demonstrated, we are also able to capture significant value in periods of extreme market volatility. And we see particularly strong growth potential in our renewable energy and in our LNG businesses. These are the core reason why our portfolio is so robust today with both so well positioned given the energy transition. The renewable energy business will benefit in 2 ways: first, from the growing proportion of intermittent assets supplying energy grids and secondly, from the changing ownership model towards independent producers who either can't or don't want to replicate our trading capabilities, and they have a need to outsource the risk management requirements. We've got 16 gigs of assets under management today, and our ambition is to double that over the next 5 years. And we would expect this to translate to at least a doubling of gross margin compared to 2021 base in that part of the business. For LNG, the globalization of gas will increase global demand, and with new attractive flexible contracts coming on stream in the coming years, including the recently announced Delfin contract, we're very well placed to capture additional value through optimization. These activities will help provide more stable and ratable profit. This is why we believe EM&T should be able to deliver operating profit in the range of GBP 250 million to GBP 350 million per year on average in normalized conditions. There's the potential to do materially better than that when market conditions are favorable, and we saw that in 2022 and in the early part of this year, and we'll get more opportunities as we grow our activities. So let me underline just how EM&T adds value to the group. And crucially, how we can do so for the capital we deploy as part of our green focused investment strategy. Firstly, here's an example where we've invested in renewables with partners in March we announced a GBP 65 million investment into the Gresham House fund. This investment provides an alternative route to support the building of renewable generation assets and batteries. It provides diversification to the portfolio, exposure to multiple technology classes and access to third-party project pipelines minimizing construction risk. But importantly, we can take the energy output from these assets and thus capture additional market value from our route-to-market capabilities, thereby realizing higher returns compared to somebody who simply injects capital, we would expect the offtake for more power than we actually own through that fund. We expect this investment to deliver returns consistent with the top end of the capital framework that Russell will outline later. Another fantastic example of how the portfolio works together to deliver value is the relationship between the EM&T team and the team running the Rough gas storage facility. Here, the optimization capability can add value above the intrinsic seasonal spread from a physical infrastructure asset. And number three, the value that EM&T adds to our retail energy businesses was very clearly demonstrated in the first half of 2023. Energy Marketing & Trading manages the downstream commodity risk, and the focus has moved in recent years from risk mitigation to commodity purchase price optimization. This will continue to help underpin the sector-leading margins that we see in British Gas Energy. The world-class optimization capability, coupled with our market-leading positions and infrastructure assets puts us in a really enviable position to create value from the energy transition. So you've now heard about the fantastic retail and optimization businesses that are delivering value today, and that are very well set up to create even more value in the future. But we've also got great large-scale infrastructure positions in Rough, in Spirit Energy and the nuclear. I think that today, there's a misconception that these values -- these assets are have no long-term value. Indeed, in the case of Spirit Energy, some may think it may actually have a negative value given the eventual cost of decommissioning, but that's simply not the case. Over the past 12 months, all 3 of these infrastructure businesses have performed strongly, and they've all seen significant developments that will extend their lives, materially increasing the value. They should continue to deliver strong cash flows for the rest of this decade and beyond. This time last year, we were producing the cushion gas from rough and the asset was due to close in 2024. Today, it provides half the U.K.'s gas storage, significantly boosting energy security. And at Centrica, we've got the exclusive use of this asset at least until 2030. You can see the impact this has had on our results, pretax profit of GBP 76 million in the first half of 2022, combined pretax profit of more than GBP 0.5 billion in the 12 months since. We retain optionality to increase this even further. We may require a regulatory support mechanism to ensure we can make an adequate return on what would be a material investment though. And we remain willing to engage constructively with the government of the long-term future of Rough. Next, look at Nuclear. This time last year, we were about to decommission the Heysham 1 and the Hartlepool nuclear power stations in 2024. They're now expected to run at least until 2026, maybe even into 2027. And these extensions were underpinned by deep understanding of life limiting issues and a strong and open relationship with the regulator, and that bodes well for the lifetime of -- other advanced gas cool reactor stations. And in Spirit this time last year, it was expected that the Morecambe gas field would stop producing around the middle of this decade. Today, the team expects production to continue until the end of the decade. And in my position as chair of Spirit, I suspect it might be even longer than that. And we've just been awarded a carbon storage license, and that provides further future optionality. In recent years, we've taken the time to get the focus on infrastructure right on maximizing the value in existing assets and then improving the way that they're operating much in the same way we've done for the retail and the optimization operations. This focus on running our existing assets much better has already created substantial shareholder value, and not all of that, in my view, have been fully appreciated yet. Let me take a minute to touch on the net zero optionality we've got. This time last year, we were just really talking about hydrogen. We've now got 3 credible joint ventures in the U.K. and Ireland, and we're making some real progress there. And our existing assets provide an excellent platform given the positioning across key net zero clusters. In the Irish sea, the Morecambe hub and the gas fields are very well placed for carbon capture given the proximity to West Coast cluster. And in May, the Morecambe gas fuels moved a step closer towards this net zero vision by being granted a carbon storage license. The location of the Whitegate combined cycle gas turbine power station in Ireland could also prove important over time. And we've got the potential to ship carbon from Cork -- from Whitegate in Cork to Morecambe. This again demonstrates the portfolio benefits of our unique position. The rough gas field is near the East Coast cluster, and that's aiming to remove 50% of the U.K.'s industrial CO2 emissions, half of the U.K.'s industrial CO2 emissions come from the East Coast cluster, and that's going to require a material amount of hydrogen. Rough is in a perfect position to be repurposed as a hydrogen storage facility. And I've said this before, but it's really difficult to see how the U.K. can meet any hydrogen ambition without material hydrogen storage. Ultimately, Rough could store up to 200 billion cubic feet of hydrogen, and that would make it not only the world's largest hydrogen storage facility, but the world's largest single gas storage facility. It truly is an exceptional asset. It is important to reiterate that for both Rough and Morecambe, in the absence of clear market signals, we would only invest if the appropriate regulated support mechanisms were in place because of our capital discipline. As I said earlier, if we want to maintain the balance of the group, and underpin long-term profitability, we need to invest. So it's not just in the legacy at large-scale positions where we've been moving the dial. We're doing tangible things now in flexible and renewable power assets. This time last year, we had 1 gas peaker producer. We've now got an additional 5 being delivered today. We had 1 battery at Risco. We've now got detailed plans for another 5, some of which today are under construction. And we had no solar. We recently opened a first solar farm at Codford in Wiltshire, and we've got a big pipeline of further opportunities. The progress we've made in the past 2 years means we're now ready to ramp up our investment plans having demonstrated the capabilities over the last 18 months. In addition to the 600 megawatts of projects we've got in planning and delivery today, we've got a further 2 gigawatts of early phase prospects. Now this number will continue to evolve as we assess existing options and new opportunities, both organic and inorganic as they come to life. Russell is going to talk to you shortly about the investment process we follow, but I'd like to provide a few examples of what we're already investing in and to highlight this is across a range of assets from merchant to contracted. The 18-megawatt Codford solar farm was opened in June and is our first major solar asset. It was sanctioned on a fully merchant basis and returns from solar are typically reasonably stable due to a relatively predictable generation profile and low ongoing operating costs and construction of this took a little more than a year. But this is another example of how business units benefit each other because EM&T arranged a 10-year power purchase agreement with Vodafone for half of the output from Codford. Now this PPA reduces the merchant risk that we carry, and we currently expect that project to deliver post-tax unlevered returns of around 9%. You've then got our battery at Brigg. Battery investments are very, very attractive to us. They provide a natural hedge to system balancing costs in the retail supply business, and it looks just now like it's the only way you can hedge those costs. Batteries are also significantly derisked due to significant financial underpin from capacity markets, and they benefit from our strong optimization capabilities. We would expect this asset to deliver a return of around 10% before portfolio benefits. Next, let's look at our two 100-megawatt flexible gas-fired generation assets in Ireland. These are a great example of what we see as a partially contracted investment. The project is a unique opportunity in the constrained Irish power market with significant underpin from capacity payments. This project is future-proofed with the ability to convert it to 100% hydrogen in the future. We're leveraging the advantage access that we've got to good connections, and it's a great example of us deploying capital in markets where we see the most attractive dynamics. Again, on this, we would expect to make a return of around 9% once again before any portfolio benefits on top. And finally, as we described earlier, the plans that we have to become a meter asset provider in the U.K. provide what is essentially a regulated return with a predictable, contracted, annuity-type revenue stream. But this also derisks the impact of customer churn because we would retain a revenue stream even if a customer left us. This is aligned to our net zero strategy, and we currently expect to deploy more than GBP 100 million of annual CapEx and into this annuity stream with expected returns over 8%. Now I'll be back in about 20 minutes to close the session before we move to questions, but now I'm going to hand you over to Russell, who is another in the line of fine prudent Scottish accountants to fill the CFO position in Centrica and Russell is going to update you on the refreshed capital allocation framework.

Thank you, Chris, and what an introduction. Good morning, everybody. It's great to be with you today. So one of the things Chris and the Board asked me to do on joining the company was to look at the capital allocation philosophy. We have a positive future, but we must be measured and balanced. Our strategy will only succeed if it's underpinned by a solid financial framework. And then speaking to investors over the past couple of months, I know there's a desire for us to lay this out in a bit more detail. So today, I'm going to talk you through the 5 key components of our financial framework that will underpin long-term value creation, namely sustainable earnings, maintaining a strong balance sheet, progressive dividends, investing for value and our philosophy on returning surplus capital. So first, let's go to sustainable earnings. So in the past, we've been hesitant to give forecasts or guidance for the company or any of our individual business pillars. Now this was primarily because it wasn't really practical with the company navigating its turnaround but it's also due to the inherent volatility of our business, the energy system is complex and our portfolio earnings will flex with the environment. The past year or so highlights this perfectly. However, the work done to solidify the core of Centrica has given me the opportunity to unpack the underlying sustainable profitability of our businesses. And overall, I am confident that we can deliver around GBP 800 million a year in adjusted operating profit over the medium term, and that's equivalent to around 11p to 12p per share of earnings given the current tax rates and share count, and that's just from our retail and optimization businesses. Now that number will flex with market conditions. So we've set out some ranges today. But of course, we also have credible diversification across the portfolio. For example, in some years, volatile market conditions may be unfavorable for energy supply but provide a positive backdrop for our optimization business. So on balance, I think the framework of sustainable profit is a fair yardstick to measure us by. And remember, this is before any earnings from our infrastructure business. Chris has walked us through what we're going to do to underpin profit in our larger business units. So let me bring that all together. Starting at the bottom of the slide, U.K. residential energy supply. Now given the current and proposed regulations, we should be able to make GBP 150 million to GBP 250 million per year. This is supported by our work on customer experience and importantly, the reductions in cost per customer that Catherine and her team are pursuing. It also includes some benefit from our superior energy procurement and risk management capabilities which, as you've seen in today's results, allow us to capture industry-leading margins. Then British Gas Services & Solutions. The recovery is now well underway, and we expect continued momentum in the coming years. Underpinned by new technology and refreshed customer offerings. We must walk before we run, and I do not want to overpromise on services. However, the actions Jana and her team are pursuing should mean that we see continued financial recovery over the next 3 years, building to GBP 100 million to GBP 200 million from 2026. Then to optimization and energy marketing and trading are world-class energy movers. I'm glad to get this one on the table today as the profit dynamics in this business have definitely been where I've had the most questions from investors over the past months. And it's understandable, given last year, this business made GBP 1.4 billion against the backdrop of unprecedented market dynamics. Strong performance has continued into the first half and we said before that if prices and volatilities return to 2022 levels, then we would expect to deliver a similar outcome. But in more normal market dynamics this business should be able to deliver profits of between GBP 250 million and GBP 350 million per year and higher in favorable market conditions as we've seen recently. Longer term, there is growth potential in this business too. Then finally, I've put U.K. business energy supply and Bord Gáis together. We expect those businesses combined to deliver between GBP 100 million and GBP 200 million per year. U.K. business energy supply is, of course, embedded across our retail and CBS businesses, and it's performing well. We expect that business to continue to be a solid contributor with room to grow. And our Irish business, Bord Gáis. Although it made a small loss in the first half of this year, reflecting a difficult energy retail backdrop, the integrated nature of this business model and the improvements Dave and his team are driving mean that we plan to restore profit in line with historic levels. So overall for the group, that gets us to around GBP 800 million. And I should reiterate again, this is only from retail and optimization. For the foreseeable future, we will also continue to benefit from our gas production in Spirit Energy and a 20% holding in the U.K.'s nuclear fleet. These businesses will decline over time but as you've heard today, we also had good news with the expectation for the Morecambe field to be producing until at least the 2030s and 2 of the nuclear fleet extended to 2026 versus shutdown in 2024. Then there's Rough, what an asset to have in the portfolio and critical for U.K. energy supply. We have sold use of this asset until at least 2030. So this profit stream will be with us for a while. Infrastructure overall delivered operating profit of GBP 1.3 billion last year and GBP 650 million in the first half of 2023. Profit will drop over time if market prices in curves remain as they are, but we are helped in the short term by our ratable hedging strategy, which will underpin contributions over the next few years. We've included details about our current hedge positions in the half 1 deck, which you have today. Over time, our infrastructure asset cash flows will be replaced by a contribution from the assets we are developing as part of our green-focused investment plan. The earnings from those new assets should be more stable, helping provide a more reliable, ratable earnings stream for the longer term. So that's the money coming in. Let's move to the next element of our framework, the balance sheet. The transformation of Centrica and our recent financial performance has significantly strengthened our balance sheet. If you look back, at the end of 2020, we had net debt of GBP 3 billion and additional pension and decommissioning liabilities of over GBP 4 billion. Now we have GBP 3 billion of net cash and our other liabilities have halved to around GBP 2 billion. A strong balance sheet and investment-grade credit rating is not just a nice to have. It is essential for the efficient running of Centrica. And let me remind you why. As a responsible energy supplier, we manage the risk of providing energy to our customers by hedging our exposures through financial derivatives and other contracts. And as a supplier to nearly 1/4 of the U.K. households those positions are significant. And this is not optional. We all saw what happened in the past 2 years to those suppliers who did not have the balance sheet strength or the inclination to manage their risks sensibly. Similarly, we hedge our upstream electricity and gas production ratably, and we can only do this risk management with a strong credit rating. The balance sheet also allows us to secure financing. Now given our current positive cash position, this may not be immediately pressing, but we must maintain flexibility to finance our company and investments in ways that add the most value and diversify our risks. We described the opportunities for our LNG business earlier. They will, in part, be underpinned by long-term contracts, which require the backing of an investment-grade credit rating. We also need to maintain material liquidity at all times. The energy system can be volatile as we saw last year. And when markets move, we're required to post collateral on some of our hedging positions. In August last year, the group saw a GBP 2 billion margin cash outflow at 1 stage. But it's worth remembering that by having that liquidity, we were able to capture significant value from market disconnects as you saw in the EM&T results last year. So the balance sheet both protects and adds value. We will continue to take a prudent and robust approach to managing the balance sheet at all times. So having reviewed our current position and future aspirations, I've also considered the appropriate medium-term leverage for the group. And I currently see us needing to operate at debt levels of up to 1x net debt to EBITDA. I believe that this level provides enough of a buffer to manage volatility in the energy system, while we could continue to invest in the future and importantly, maintain and grow our shareholder distributions. I wouldn't want to take this as a hard target though. I wouldn't want you to see it as a solid cap. I mean, you could see us going above this boundary for a short time if the right opportunity was there. But only if I was comfortable, we had a credible path to get debt back into the zone thereafter. Our position with the rating agencies is good. Given our current business mix and risk profile, they do require us to hold material buffers. In S&P language, that's 50% FFO to net debt for our current BBB rating. Over time, I'd hope our debt flexibility could increase as our portfolio evolves, we have more certainty in the core underlying profitability of our existing business than we've ever had in the past. And we'll invest in green assets that will build a new stable infrastructure cash flow stream. Both of these should be credit positive through time. Let me now cover shareholder returns. So shareholder returns are quarter investment case, and we were delighted to restart the dividend last year at 3p per share for the full year. The Board has reconfirmed our intention to grow the dividend progressively over time as the business develops. And given the continued positive progress in the business this year, we're today declaring a 33% increase in the interim dividend. As another guideline in this overall capital framework, we expect to move to a dividend cover of around 2x over the coming years. I should highlight the ordering of the capital allocation framework is deliberate. We do see the payment of the sustainable and progressive dividend as coming before further investments. And when we have surplus capital, we will consider further share buybacks. This is an element where we will not be giving specific long-term guidance as it really depends on our performance, our market outlooks and investment opportunities in any period. We have already bought back over GBP 400 million of shares as part of our GBP 550 million program. And as you've heard already, we expect to extend the buyback by a further GBP 450 million, taking the total to around GBP 1 billion to be completed over the next 12 months. Our focus then will be on delivering on our investment plans and dividends with any further additional distribution being subject to the prudent capital allocation we've outlined and our future outlook. Moving on to the next element in the framework, our investments. Now Chris has set out the logic for a green-focused investment strategy. Given this is a step-up from the previous levels of spend, we've refreshed our internal investment processes. I thought it would be useful to walk through this today. Our investment committee process sets 5 tests for any opportunity that enters the funnel. What's the impact on the group and the balance of the portfolio? Is it aligned with our strategy or said another way, can we bring a competitive advantage? Will it help us achieve our net 0 ambitions? Does it have the right financial profile and deliver appropriate returns? And here, we also consider the potential for any investment to generate additional returns across the portfolio. And then importantly, the broader risk profile. So let me unpack that element in a bit more detail. The environment we operate in is evolving, and we must take care to understand the broad risk profile now, but also how that may change. As you might expect, we take into account macroeconomic risks, specific industry and asset class risk, project development risk, but we also need to take into account regulatory risk, market risk, counter party risk and more. We then consider if we have the ability to manage these risks and mitigate them and then ensure the expected project returns capture the risk properly. All our investments follow a stringent management process with critically reviewed opportunities as they move through the funnel. In fact, in the past months, there have been a number of opportunities presented to Chris and I, which we didn't -- which didn't match the criteria and we rejected them. We push hard to ensure that we can see real portfolio upside and some asset development options just didn't bring it. So subject to meeting all the criteria, the opportunity is sanctioned first by the Centrica Investment Committee and if scale, the Board -- we will consider the evolving shape of the portfolio. In practice, that could mean, for example, ensuring that we have a good mix between investments with a short return cycle and those with a longer duration, merchant and contracted returns. We don't want to have all of our eggs in 1 basket nor do we want significant unproductive development capital at any point in time. And importantly, we also learn from the cycle for future investments through a robust post-investment review process. So let's look in a bit more detail on how this links to the options we're currently considering. So this is the framework Chris showed a little bit earlier unpacked a bit. As you would expect, given different risk profiles, the returns we are targeting differ across the investment options. For investment in customer energy assets, we would expect to make a post-tax unlevered return of at least 8%. And importantly, given the nature of these investments, there is negligible pre-productive capital deployed. For renewables, the contractual framework is key, a solar asset fully contracted under a fixed price PPA with a highly creditworthy corporate offtaker would be a lower hurdle rate than a fully merchant renewable investment. Investments in flexible assets are expected to make a return of at least 7% to 10%, again depending on the risk profile. As an example, if a project comes with a guaranteed capacity payment, we might be willing to accept a low return. If fully merchant, then we will be looking for returns at the higher end of the range at least. And finally, for potential larger scale infrastructure projects such as Rough or Morecambe or new nuclear, we would only invest in these, as Chris said, if government regulatory support was in place. We would need to work through the risk and return dynamics for those as they develop. I want to delve into 4 things that are worth reinforcing here. First, we're aiming to invest in assets which complement the group's overall capabilities, positions and exposures, therefore, enabling us to generate additional portfolio returns of up to 2% beyond the individual core asset return. Then on the actual returns. These are based on current interest rates, and it's important to remember that we invest for the long term, and we'll look to earn an appropriate return over the life of our ownerships, so we remain responsive to ongoing rate and market developments. Third, our philosophy on financing. Here for simplicity, we assume our investments are funded 100% from our own balance sheet. And in general, we believe that can speed up development, avoid partner misalignment and the risk of value leakage. But of course, there are many projects and structures where project financing will be appropriate -- it will be appropriate and we're open to that if it maximizes value overall. And to partnerships. We're also very open to partner with other sources of capital to help accelerate the development of those assets. And we can bring considerable value to a partnership by providing a route to market for the electrons. Having Centrica as a partner can derisk a project development, and we aim to be a preferred partner. The Gresham House investment outlined earlier is a perfect example here. We don't contribute all the capital, but can take more than our share of the electrons, helping the venture, but also allowing us to keep the optimization upside. And needless to say, if we were to consider hydrogen storage at Rough or carbon capture storage at Morecambe, we would certainly look at bringing in partners and other sources of capital in addition to needing the required government support. So bringing all this together, how do we expect CapEx to evolve over the coming years? We expect CapEx to build over the next couple of years to around GBP 600 million to GBP 800 million to 2028. This is in addition to the retail and optimize investments in customer service and systems that's typically expensed, as Chris has mentioned earlier. CapEx is likely to be at the lower end of the range in the shorter term. We're naturally prudent, and we're still building our capability and pipeline. But 2023 and 2024 are still likely to see a significant step up compared to previous years of around GBP 250 million. For clarity, given likely project time lines, we're not assuming any material spend on Rough to redevelopment or Morecambe within this range. And this range also includes maintenance and other capital for our existing business of between GBP 100 million to GBP 200 million. This is expected to decline to the bottom of that range in the medium term. The actual phase of our spend will undoubtedly be lumpy as it will depend on our development funnel and what projects make it through. We would consider M&A in addition to organic spend. But as I said -- as Chris has said before, and I agree with him, this curve -- this comes with an additional hurdle, and we would only expect inorganic spend when we have a really robust value case around. I think of M&A here as an opportunity to accelerate our organic plans and create value above other options. So this level of spend will fit comfortably into our financial framework and still leave a balance sheet buffer. If the world changes around us, of course, we'll revisit the range. But certainly for the period to 2028, I think this is a sensible level. So before I hand back to Chris, in summary, our earnings and cash potential is strong with around GBP 800 million of underlying sustainable operating profit just from our retail and optimization businesses with further material medium-term cash flows from our infrastructure positions. I hope I've made clear that a strong balance sheet underpins everything we do, supporting our current business and allowing us to add more value in the long term as we guide the company through the energy transition. Core earnings and a strong balance sheet support a progressive dividend trending towards 2x coverage over time. And today, we announced a 33% increase in our interim dividend. Plus, we have the capacity to ramp up investment, delivering attractive and accretive returns across a range of net zero aligned technologies. We've penciled in GBP 600 million to GBP 800 million per annum, but let me repeat that will only be spent if the investments pass our investment criteria and hurdles. If they don't, we'll spend less. And any additional financial capacity will either be kept on the balance sheet or return to shareholders when appropriate. This is more information on capital allocation and our philosophy than we have shared in the past. I do hope this helps answer most of the questions you have been asking me over the past months and gives you comfort that we will be good stewards of your capital as we drive for value through the energy transition. Back to you, Chris.

Thank you very much, Russell. So hopefully, you'll all agree now that Centrica represents a compelling investment proposition and is incredibly well placed to create value through the energy transition. So there are 5 things that I'd like you to take away from this. Number one, we're a uniquely integrated energy company. We've got a balanced portfolio and each component complements, derisks and add value to at least one other. Number two, we'll deliver on average GBP 800 million of sustainable operating profit from existing retail and optimization businesses. That's around 11p to 12p of earnings and we've got growth potential on top of that. We'll grow our annuity revenue streams and asset leasing with additional strong cash flow from existing infrastructure assets into the next decade. Number three, we've now got a green focused investment strategy, creating value for shareholders and delivering net zero for Centrica and for our customers by investing around GBP 600 million to GBP 800 million a year at least until 2028, making attractive returns and additional portfolio benefits on top. Number four, we'll maintain balance sheet strength and strong liquidity and capital discipline. We'll return surplus capital to shareholders whenever it's appropriate to do. And number five, we will deliver compelling shareholder returns with a progressive dividend policy. Now I'm really proud of the work that we've done at Centrica to set ourselves up for the future, and I've got full confidence in our team to deliver the success. I hope that what you've heard here today helps demonstrate our confidence in the company's future and it helps to build your confidence in our future as well. So now we're going to stop. You probably agree we've been talking for just long enough. And we're going to move on to Q&A. And Russell and I will be delighted to take your questions. Remember, we'll get some of the leadership team here. So if you ask us really difficult questions, we might put them on the spot before lunch time, so...

I think, we get the microphones first.

Exactly. We've got microphones in the room, so we're going to bring the microphone over. And when you're asking the question, just remember, there's -- people on screen if you could just say who you are and where you're from. So who's going to go first. If we could go, we'll go with Martin first. Thank you.

It's Martin Young from Investec. Can we talk a little bit more about the British Gas Residential business. You've probably got somewhere north of 6 million customers when you look at it on a dual fuel basis. If I think of about GBP 2,000 average bill hearing everything you've said around your ability to beat on procurement and your aspiration to beat on cost, Ofgem's methodology should take us to about 2.4% EBIT margin on a GBP 2,000 bill. That suggests to me that we should be landing around about GBP 300 million EBIT from the residential business. You've alluded to some of the funky things you might be able to do with time-of-use tariffs and the like, should we not -- should be a positive. So how on earth do you end up at GBP 150 million to EUR 250 million unless you're going to come up short on the EBIT margin, which I don't think you're saying or you compete very aggressively in the fixed cost market or you lose customers? And I'm sure you're not going to tell me that you're planning on losing customers. So I suggest that you're somewhat low balling it if that's not too impolite.

Always a risk when the first question comes from some that used to work for Ofgem. So look, it's probably Martin, even I am smiling is because I had exactly the same question for Russell quite a few time over the past few weeks. Firstly, we are absolutely not planning to lose customers. Obviously, we say that this is in a normalized period. There's questions on, for example, what your bad debt charges are and with the team because I keep coming along saying "I've done the sums that you've just done and GBP 150 million to GBP 250 million is too low and it should keep saying yes, but remember, it's not just the 2.4% that is coming in. There's also some offsetting consolidations. So I think, for example, and Russell can take it through them like rocks and the like, whereby there is some reduced cost allowances in there. So it's not simply -- it goes to 2.4%. I wouldn't say that we're lowballing, but what we want to make sure is that we don't come out and present something that says we need every single thing to go right in order to hit what we're telling you. What we want to say is we think that this is something that's reasonably achievable. And that means that there are points such as in the first half of this year, where you can outperform and sometimes significantly outperform. But it's really important that people realize in a normalized time, we would expect GBP 150 million to 250 million of operating profit here. Mark?

It's Mark Freshney from Credit Suisse. I have 2 questions, if I may. Firstly, as a follow-up for that, I mean, it's clear that the domestic supply industry, the market structure is not fit for purpose. We saw that earlier this week with the call for evidence. I was just wondering what your vision -- given you've worked in this industry for 5 years now, what your vision for what the market structure should look like? And just secondly, a question for Mr. O'Brien, just on the EM&T business. This is the one that clearly you believe in, but it's probably trading stroke optimization, we have the least visibility on. It's very difficult to model. You mentioned that under normal energy market conditions, you laid out a trajectory for profit. Can you confirm those normal conditions would be pre-energy crisis in terms of volatility, differentials, carbon, gas and absolute prices? Or is it assuming a new paradigm of higher volatility to meet those higher numbers? Or is it the case that the base within that business is just higher?

Mark, thanks very much. I'll take the domestic supply question and then Russell will take EM&T. I would say remember in the EM&Ts we've laid out, it really is a massive logistics operation. So there is trading, but it's not really screen-based trading. It's asset back trading with storage facilities and pipeline and cable capacity, so we can move gas and power across Europe. Look, on the domestic supply business, there's a whole lot going on at the moment. And Ofgem, I think, announced earlier this week their capital adequacy requirements, which is a great start. We think it's too low, GBP 115 per customer. We think it's probably too low, but it's great to have something in place. There's then something linked to ring-fencing customer deposits. We also think that doesn't go far enough, but it's a good start. So we've been calling for proper prudential regulation in this industry for a good couple of years. Ofgem are putting some of that in place, but we think that there's more to go, but I think the market should be -- and that's different to where I think it may end up because I think the regulator doesn't always want to go as far as they could. I think if we were in financial services, we would see a very, very different regulation. But where should we end up? We should end up the companies in our market are adequately capitalized. So that if they go under, shareholders take the pain and not consumers. I think we've got to be careful as we come out of the energy crisis that we don't go back to what we saw before. So I think that some of the steps regulator has taken has been really quite good, limiting the number of new entrants, but the conditions could exist again in the future where new entrants could come in and if they're required to post only 0 capital or up to GBP 115 by 2025, you could see disruption in this market. Again, we think that would be a crime shame. So how the market should look is very, very well-capitalized companies and acceptance by the regulator that you achieve your desire in terms of fair pricing either by having extreme competition or by having price regulation, the whole design of the price cut was based on a fundamental -- fundamentally flood concept that you could have extreme competition on price regulator, just makes no sense at all. So economically, either go for extreme competition about the market at the price or go for price regulation. Now we've been quite clear we're supportive of price regulation. We'd also be supportive of extreme competition, but having both something is going to break. So hopefully, the market will move towards something whereby there is an acceptance that good customer service is a thing that should underpin the regulation on the retail market. And that should then allow you have profits that will allow innovation. And good customer service should mean if you think about where Ofgem was over the past few years, their biggest single measure was customer switching. So if you didn't have customer switching, the market wasn't very good. Customer switching suggests your customer is unhappy. If you're a regulator that's supposed to make sure your customer is happy. That's a very strange metric to have. So I think just a realization of how the market should be. You'll see something more, I say, time and type of use tariffs, you'll see more demand side response in there. You see with our fantastic take-up of the summer Sundays that we've got half price electricity, what we're doing is, we're learning as we go on what the customers want. That's what's got to drive this market. So the customers like the half-price electricity between 11 and 4 on a Sunday. Well, maybe they want it between 10 and 5. Maybe they want it Saturday night. What we're trying to do is to test and learn so that we can give customers what they want, but you've also got to make sure that you have a reasonable profit that will drive innovation. But the way we've got to go a lot further is on having fit and proper person tests and having adequate capital. In general energy crisis, somebody from one of the very large new entrants into the market suggested that their calculation was that the capital you need to hold for a customer was GBP 750. Now we haven't done that calculation. We've got an asset -- very heavy asset base. I'm not saying that's the number, but it shows you the difference between what Ofgem will come out with, and we're one of the market participants as said before. So we hope that GBP 115 is a start, and we saw this with the market stabilization charge and Ofgem brought in, they then quite quickly made a change. So hopefully, what we'll see is a realization at GBP 115 is wholly inadequate, some to hold in that market. But the most important thing is to make a start. So they should be applauded for some of the things that they're doing.

And then on EM&T and our guidance of GBP 250 million to GBP 350 million of sustainable operating profit under normal market conditions, it's important to just realize what's inside EM&T. There's 3 businesses there. There's our LNG business, our route-to-market business and our Power and Gas business. And not all of those businesses are just dependent on prices and volatility. There's a core asset position. And in the route to market, there's a base of income because of the contracts that we can package together. So it's not just, as Chris said, just trading on screens. There's logistics involved and there's an underlying base of earnings. And on the market conditions, yes, we do expect that market conditions will reverse somewhat towards where they were before the crisis. But as we also outlined today, we expect looking forward that the -- particularly in the electricity market for there to be more volatility, let's say, more intermittency and those dynamics play to our strengths. So we think that, that trend will also continue so...

Anna Webb from UBS. I've got 2 for you. The first is on nuclear. The strategy clearly has a focus on smaller flexibility, renewable security of supply assets. But you still see the potential open for new nuclear. So can I ask why you still see new nuclear as an opportunity? And do you see Centrica adding value in the new nuclear build or just as a capital provider. And you talk about needing an appropriate regulatory framework for this. Could you give a bit more detail about what would be required to make investment? And secondly, on the 11p to 12p EPS guidance you provided, which I think is very helpful, can I ask if you're thinking of this as a floor and factoring in normalized upstream and also the new investment. What's your sort of estimate of where EPS could be in 5 years from now? Could it point to sort of 15p, 16p with this new investment?

Okay. That's super question. So look, on the -- I would say [indiscernible] floor, I think what we said is we expect we can make about GBP 800 million from the existing businesses. That doesn't include existing infrastructure or new infrastructure investments. And you can never look at that as a floor because you just can't see what the market would do. On nuclear, so why is the value in nuclear in general for the U.K. because we need a baseload of electricity. And at the moment, that baseload, I mean, we were burning call 3 days ago. So a very small amount, we still good cold being burned. And so when there's no wind I check every morning when I wake up, for the electricity mix, is it's quite a sad admission and sometimes I've put on social media, and I get completely crucified, but I always have a look. And something you wake up and it can be 85% coming from wind and sometimes it's 15%. And the fact that it can be 85% coming from wind means that we've already got -- now there's not as many people are using electricity at that point, but we've already got a lot of wind. And so to quadruple wind generation in the U.K., if the wind doesn't blow, it makes no difference at all. So we've got to say, well, how do we get this baseload to there? I think hydrogen fired power stations is going to have to be part of the mix. But I also think nuclear has got to be part of the mix as well. zero-carbon electricity. How do we add value? We know nothing, but build nuclear power stations. So we don't wait until our partner put this here or there. Dave Kirwan, who runs the Irish business, knows most of it building power stations in our business. So Dave will add some personal -- will add some help there to the Board personally. But for us corporately, we're not really big on building nuclear power stations. What we can do is to add a lot of value to how we take those electrons out, how we get them to customers. So we've got 7.5 million customers. Increasingly, they want green energy tariffs. At the moment, how do companies do that, either like us, you own green assets or you buy certificates. Let me think that over time, really what you've got to say is, look, we produce -- we either produce this electricity or we buy this electricity, the idea. We've been able to go and buy certificates which are getting more expensive and saying this is green, is probably one that I think will be consigned to the past and the future. So for us, there could be an interest in it. What would we have to see? We'd have to first understand what would the construction risk, the cost overrun, the scheduled overrun, which has happened. It's quite public at Hinkley. See, I think it's less likely that you have such a big risk size, we'll see because the second one you build should be easier than the first one. We'd also have to look at the returns and we'd have to look, you just look at risk and returns. So if we take a lot of risk, we want a higher return. If we take almost no risk, then we're willing to accept a lower return. Then question for us, as a Board, is how does that fit within our strategy? And how does that fit when you look at the pipeline of other opportunities? So I can't tell you if it's X, Y and Z, we'd invest in that because there might be other things coming down the pipeline that we're not even thinking about at the moment. And we're always dynamically that we know our strategy. We know the type of things we want to invest in and for me, nuclear looks quite attractive just to know if it's done right in 2 years, but this thing you come to put money in, there might be something else in the horizon that hydrogen might really take off. So the great thing about our company is within all of these places, we've got choices. But we just need zero carbon electricity.

Ajay Patel at Goldman Sachs. A few questions. Firstly, on the balance sheet, like I heard through the presentation, fantastic cash flow and you look at the CapEx program and you work through and you think, well, if you're 1x net debt to EBITDA is your target, let's say, 2028, it looks very clear that you're not going to deploy the full amount of your cash generation that you may generate over that period. So I'm trying to understand is what's the trigger points? How much of an undergear balance sheet would you run over that period? Maybe you won't fully utilize up to 1x, but would you really sort of seriously consider at a point where maybe your net cash that the sources or directions of which you could deploy capital [indiscernible] capital returns or investment? The second question is just on the journey of services and the targets or the numbers you highlighted. Can you maybe unpack that a little bit more in terms of how much are initiatives that are driven on the revenue side? Are you increasing market share? And how much is cost driven and efficiency driven and doing differently, different practices? And then lastly, on me, I guess 1 more specific to Russell. Could you maybe go through the dynamics of this year for H2, i.e., division by division as in why would it be -- to what extent is it very heavily [indiscernible], what's open to uncertainty, just so we can gauge the range of outcomes for potentially earnings this year.

Let me take the question on services and then gladly I'll let Russell take the other 2. If you think about -- so the recovery in profit and services is not predicated on big cost reductions. We've got programs ever to improve our supply chain, our planning and dispatch. It's predicated upon being more efficient and creating more capacity and then using that capacity to get more customers, whether those customers, I think, traditionally, what we've done is we've been focused in this pool of 8 million customers who buy contract services and not really in this 20 million customers who pay for repairs as and when they happen. We've actually been testing in the first half. So as we build as [indiscernible] leading the team to build more capacity, the dream that I've [indiscernible] 100 times and probably, the dream is that you get customers until a certain point to call you, is it a contract customer to say they need to repair that. At that point, then you've got the operational person saying I've got X 1000 jobs and you get the commercial person selling those jobs in the market on the day. And I think there's a very strong proposition there. So it's all about how do you get the maximum efficiency. And it's about managing this business really well. So how do you minimize travel time with your engineers? So you get an engineer that comes out to one home. There's another home 5 minutes away. We'd rather have them drive 30 minutes and have somebody else driving the direction, how do you make sure that -- and you can dynamically manage that. That's why we're investing heavily in a new planning in the [ smart ] system. So it's -- undoubtedly, we do have to grow customers. So we cannot get this business back to 100 million to GBP 200 million of profit by cutting costs. This is like a growth story. However, we really had to get to go through the operational issues in this business to really get control of it, and it feels is well controlled, it's been in all my time in the group. And now we can start layering the growth on that. Firstly, you'll see the growth coming through from existing capacity. Then secondly, we'll have to add on more capacity. So the idea as you test and learn, okay, we sell this capacity, what's the demand for -- on-demand, what do they like, what's the price point, make sure that it's [indiscernible] this is it's all and consolidated. Really, the competition is a man or woman in a white van. And the great thing about British Gas is, I think we've got better trained people, I think we give great service. But you know where we are. So if you get something in a [indiscernible] to the payer, can you call them [indiscernible] go wrong? You know where we are. We're not going anywhere. So I think we've got a huge demand, but we want to make sure that we don't do what's really tempting which is we go out and tell customers what they want. We test, we find it with customers. So if you got the hive out, for example, if anybody's got hive, you've seen it there for the last couple of months there've been something, click on it if you want a boiler service. It's a brilliant example of just testing that we've done quite well on that. And so we're seeing all the customers like to buy through hive. Do they want to buy one-off boiler service, how do we help understand more. And I think that's more with the digital, what we're doing. You've got the [indiscernible] we'd spend months coming up with a proposition in a long time to launch it, and then it either work that it didn't. Now some of the propositions I've got [indiscernible] a bit and we have our monthly performance reviews, and that's exactly as it should be. So I'm excited about the prospects of that business. I think there's -- you see we've got 10% market share. We used to talk about 50%. That's 50% of the value for contract services. But in reality, we touch 10% homes in the U.K., 90% we don't touch, massive growth opportunity.

Great. So moving on to the balance sheet and your question is about the 1x net debt-to-EBITDA target, and I just look back in my script, and I quite clearly said is, don't take this as a target. So I mean, I think the -- this really should be seen as a boundary over time and with the flexibility of a company like us needs to have as a sort of upper boundary. And you got to remember that this company is a great company, does sort of -- have to deal with a lot of volatility every day. We have to have significant liquidity at all times. The balance sheet needs to be -- always have the buffers for that. We talked about margining, which is positive at the moment, can go in other directions. We still got GBP 800 million of technical pension deficits. We've got GBP 1.1 billion of decommissioning liabilities. We want to invest. We want to continue with a progressive dividend. So within that mix, we've got a lot of flexibility. So we're not trying to reach that target or see it as a cap. It's just part of an overall boundary, Ajay. Then on to the second half of the year. And just to reinforce, there's no change to the guidance we gave at the AGM trading statement that we expect the profitability to be heavily weighted to the first half of this year. And let me just run through the business units as you requested. For British Gas Energy, of course, the obvious one is that we've got the material one-off items, particularly the cost recovery in the first half of this year. It's also important to note, if you look back through the last 3 years in half to British Gas Energy has lost money, just the natural seasonality of that business in the second half of the year where with the cost base and the dynamics, your profit will be naturally lower. And services, that business is continuing to grow, but I don't want to give any particular guidance there. The trajectory is positive. EM&T we did come into 2023, as I say, with a bit of a tailwind from last year and some of the dynamics that will naturally taper off as we go through this year. And with less volatility in the markets, in general, you have less opportunity for optimization around the natural flows of the business, infrastructure, spirit and nuclear prices are lower in the curve. So that drags down earnings even though we're partially hedged on part of that. In the cash flow, there is one particular item to highlight that the energy -- the upstream. So the energy generation levy, we accrued GBP 180 million in the first half for that. We haven't paid it yet, and that will continue into the second half. So there's higher taxes in the second half of the year. Margin was a cash in of GBP 300 million at the end of the first half. Of course, that's a number that can go in either direction and has been out over the past months. And we must remember that in our bank accounts, we have GBP 600 million of money, which is our customers' money, and that over time can change as well. So there's quite a few things making me to reinforce that there's many uncertainties as we look into the second half of the year.

Very good question [indiscernible], and then we should go over here and then we'll come back over to you.

It's Dominic Nash from Barclays. Just a couple of questions for me. I think you touched it just on the earlier question with A.J., but you talked about the need of actually having cash on your balance sheet. So not net cash or net debt. What do you think the actual cash that you need to have held back going forward? And then what are you going to do with your debt book? Are you going to be buying that back? Or what's the impact of the current high interest rates on earnings? And secondly, I just want to just quickly run through sort of my math here and make sure that I haven't missed something. You're starting net cash is GBP 3 billion, maybe GBP 2 billion after all the one-offs. Your operating sustainable earnings is roughly equal to the operating CapEx or your growth CapEx after tax. You probably got, I don't know, GBP 1 billion or so coming in from infrastructure and others by 2028 and that's probably very lowballing it. So -- and if you say that we could get to GBP 1 billion of net debt by 2028 in the round. I know it's not a target, but in around that sort of number. Does that actually mean that you've actually got the ability really to pay GBP 4 billion back to investors over the 5-year period?

I'd probably have to let Russell go with -- on the cash. I think the answer is probably not, but hopefully because I mean what we're in business to do is to give customers an amazing experience and give shareholders an amazing experience. And hopefully, we're getting closer to doing both of those things. And if we do kind of one follows the other. I think -- I mean, obviously, we got to bear in mind, although if you take and say that we're saying we're going to invest roughly what we're going to make in profit. Remember, we've got what, GBP $250 million or something in dividend each year, GBP $250 million depending on the number of shares, it's probably a couple of hundred million into the pension scheme. I think that comes down a little bit, but you've got other things you've got, obviously, the interest cost. So there's a number of things there. But again, I'm not in all of this because these are the questions I keep asking Russell because as you would expect [indiscernible] spend more money, but we've also got to bear in mind, I think I haven't done Russell's job before, there can be points at which you go in to some energy volatility and you see massive movements in your margin calls. And if I think back to when Scott was appointed Chairman and he asked me to be CEO, we had to sell assets in order to get the balance sheet in the right place. So we're trying to sell more assets than we wanted to. There's a number of assets in our portfolio today that we love that we tried to sell because we had no choice. And I would say I've always tried -- when I was a CFO to try to have a company in a position where you had choice and we didn't -- and obviously, I was a CFO [indiscernible] miserable and do that at Centrica, but we didn't really have choice. I'm glad that we sold the assets we sold. I'm glad we got the price that we did. But it's always hard [indiscernible] Russell's key things is to make sure that when something happens, we don't all run around. So we see [indiscernible] something that we've got choice, we get time to think. And so that will always probably in our business mean that the balance sheet is [indiscernible] than people would like, but then our points, we found this last August at a point where you say thank God for that because you're not in a panic when all of a sudden, you're posting hundreds of millions of pounds a day in margin calls and then figuring out what to do. But -- so anyway you tell them why can't I spend more money?

Yes. Well, I would say we are in a volatile business, and we need to be prudent as we serve our customers. We're not -- I just looked back on my script again. I did not say it's a target for the net debt to EBITDA. It's a boundary over time, including all this flexibility. So I really wouldn't put it in my model as a target for 2028 and back so how much cash is available. Because, of course, in any period, do you want to have some buffers and the market is changing around you. So I think take that in the round of everything else we described today about the investments and everything else we're trying to do and just on the treasury aspects you asked about as well, our Group Treasurer sitting at the back of the room, is a very prudent individual, and that's where we want him to be. We keep the cash, which is significant at GBP 6.7 billion in very secure money market fund. So that is not something we're doing anything apart from being very conservative with. And then on the debt book, of course, it's a legacy debt book of Centrica that looked a little bit different in the past. As we've looked at liability management, I mean, it's very hard to make liability management. We'll keep looking at it. We don't have any active plans. We'll tidy up the debt book if we can. But for the moment, that's all I can say.

We got a question over here, will be 2, and then we'll come back over here.

It's Harrison Williams at Morgan Stanley. So the main question, I'm afraid to also sort of comes back to shareholder distributions. But if we think about the GBP 600 million to GBP 800 million investments you have plan to deploy, what are the kind of the key barriers to potentially deploying that you foresee? Because I mean I know your recent investment into I think batteries in the U.K. can't get a grid connection until 2028. And if we can't deploy that capital obviously and that's kind of one of the things that could be considered to redistribute. So that's question one. And then secondly, just to comment on the latest kind of churn trends you've seen in the U.K. retail market.