Centrica plc (CNA) Earnings Call Transcript & Summary

Good morning. Welcome to the 2024 interim results presentation. It's absolutely super to have you all here again. And as usual, we've got our CFO, Russell O'Brien, and most of the leadership team, the people who actually do the work are with us and the looking forward to catching up with you after the presentation. We also announced today that Kevin O'Byrne, who's with us today, will succeed Scott as a chair at the end of the year. We're delighted with Kevin, becoming our new Chairman, delighted that Kevin is able to be with us today. On behalf of the Board and personally, I'd like to thank Scott for the contribution he's made to Centrica. He chaired the board through a period of huge volatility and change for our company. Scott has been a huge support to me personally through some very, very interesting times. And Centrica is a very different company to the one Scott asked me to lead in early 2020. And he leaves the business in a great position. Now our purpose is energizing a greener, fairer future, and we're doing this by focusing on 3 things: number one, relentlessly driving operational improvements throughout our existing businesses. Number two, giving customers what they want, not what's easiest for us to offer. And number three, investing in projects that both add value and create a range of long-term growth options aligned to the changing energy system. And that's our business in a nutshell run the current stuff better than anyone else could and invest wisely. And this allows us to support our customers and reward our colleagues and reward our shareholders. It's very, very simple, but it's also difficult for others to replicate because of the market positions and the deep expertise that we have. I'm pleased with the performance so far in 2024. EPS is, of course, down from a very tough comp but we've seen further very pleasing improvements in colleague engagement and customer Net Promoter Scores and in customer retention. We need to get better in new customer acquisition, but I'm increasingly confident that the material improvements our incredible team has already made to customer service, coupled with the appointment of our new and our first ever Chief Customer Officer, Gary Booker, will see us deliver organic customer growth on a sustainable basis over the long term. At this time last year, we shared medium-term profit target ranges for our retail and our optimization divisions, with the aim of reaching those targets by 2026. I'm absolutely delighted that we're on track to deliver these for most of our businesses this year, 2 years earlier than planned and for the whole group by 2026, in line with our targets. The increase in our dividend is a sign of our confidence in the future and the extension of the share buyback program is a sign of our commitment to providing superior capital returns to our shareholders. We have repurchased more than 15% of the company in a little over 2 years. Now we often get asked how we think of share buybacks versus investments is very, very straightforward. Our first priority is to invest our capital in the business to create value. But the returns have got to be in line with the framework that Russell laid out last year. If they're not, we'll pass. And we've done that already on a number of investments this year and that might mean that our CapEx trajectory is not linear. But it's not a straight choice between making an investment or buying back shares. Our retail and optimization businesses rely on a strong balance sheet. Cassim Mangerah and his team hedge and trade billions of pounds of commodities every single month. That balance sheet strength comes from the assets that we hold, but those assets are finite. And unless you reinvest the diminish over time. For the last 4 years, we focused on fixing the operations, slimming down our portfolio and improving our customer service. And as a result, we've been turning our wasting assets into cash. That's why we've got a large amount of cash in the balance sheet. And at the moment, that cash provides the balance sheet strength to support the retail and optimization businesses. It also provides us with a very valuable option to acquire attractive assets as and when they become available. And we in this business for the long term to create long-term value. That's what drives our investment philosophy. And investment alongside maintaining our strong balance sheet will be what supports our progressive dividend over the long term. We never ever forget that we work for the shareholders nor that our owners justifiably want a return. By February next year, we will have returned around GBP 1.7 billion over 2 years in dividends and in buybacks. Today, we've got a much stronger, much more focused set of businesses than we had even a year ago. These foundations are balance sheet strength and our net cash position gives us tremendous flexibility as we look to the future. So it's been a year when we laid out our strategic and financial framework, and we believe this will continue to create compelling value for our stakeholders. Let me recap briefly. In short, we see the energy system becoming more electrified, more intermittent and more consumer-driven as a transition towards net-zero continues. Electricity demand in our core markets is set to almost triple by 2050 driven by clear trends in transportation and residential heating with emerging demand from areas, including data centers and the growth in AI. At the same time, the goods becoming far more intermittent with renewables expected to make up over 2/3 of generation capacity by 2050. This will increase the need for assets that can provide energy storage and bridge weather-driven gaps in generation. Now given the short cycle times, batteries alone will not be the solution. flexible generation capacity, principally thermal and long-duration energy stories, such as rough and our recent GBP 70 million investment in high-view powers, liquid air energy projects will increasingly be required over the long term to support the rollout of renewables and overall system decarbonization, while still meeting the #1 aim of making sure that customers have got electricity on demand. Alongside these customers will be far more engaged than ever before, taking greater control of their energy use and adding further complexity to the system as their use of heat pumps, solar panels, home batteries and EVs grow. All of these changes present huge opportunities for Centrica from building the U.K.'s first ever grid scale battery REstore to being the biggest optimizer of home batteries in Belgium. We know how this works. We've seen this movie already. We've got the expertise across the whole energy value chain, and we believe we can identify and take advantage of the increasing interdependencies that are likely to emerge. Our unique portfolio is already set up to benefit from many of these trends. We've got the leading supply and services businesses in the U.K. and in Ireland. The U.K. is only truly national engineer network. International optimization capabilities and systemically important infrastructure assets, no other company has this combination of experience and assets. Profit pools shift across the value chain over time. And as we're confident in the structural trends, it's difficult to tell at this stage exactly where the value will accrue in the long term, which is why we are focused on creating a deep and diverse portfolio of growth options. This will allow us to remain nimble as remaining disciplined as the energy transition unfolds creating the opportunity to exploit the best options at pace. We've got unrivaled access to data, both in terms of how grids respond to differing levels of intermittency through Centrica Energy's operations in more than 25 countries. And through our smart thermostats, and smart meters, where we can see how customers respond to different circumstances. This allows us to identify development trends earlier than most can in the market. And while the migration of British Gas energy customers onto our new ignition platform will help us roll out new offers far more quickly than we've been able to do in the past. Delivering on these opportunities will come with challenges, and we must continue to build our operational and our project development capabilities to compete effectively. We can and must also do more to harness the value of our data, which is why we appointed our first ever Chief Data and Analytics Officer late last year. We want to speed up the deployment of capital, hence, our new Managing Director of Power, both Cengiz and Ulrika here with us today, and I'd encourage you to speak to them after we finished. I feel really excited about the future. There is a huge change coming and we've got the opportunity to be right at the heart of the energy transition. All of our businesses are good growth options. And all of them have got improvement opportunities. They are very, very good, but they can be so much better. We are relentless in our pursuit of excellence. We never stop. Now with that, I'm going to put you in the very clearly capable hands of Mr. Russell O'Brien, who will take you through the financial results, and I'm going to come back and we all and talk to you a bit more about the future.

Thank you, Chris, and good morning, everybody. So we've had a good start to 2024 with adjusted operating profit of just over GBP 1 billion and adjusted earnings per share of 12.8p. Free cash flow was GBP 816 million, including a modest increase in CapEx to GBP 221 million. Our balance sheet remains strong with GBP 3.2 billion of net cash. And in line with our progressive dividend policy, we have increased the interim dividend by almost 13% to 1.5p. And as Chris mentioned, we have extended our share buyback program by a further GBP 200 million to be completed by February next year, building on a GBP 1 billion repurchased over the past 2 years. Let me now take you through our operating profit by business unit. And as always, the breakdown is in the appendix. And there's a more detailed commentary on performance in this morning's RNS announcement. But let me cover the headlines. So starting with Retail, which generated GBP 237 million of profit. Within this, British Gas Services & Solutions has continued its recovery delivering GBP 35 million in the period, underpinned by strong operational performance. In British Gas Energy, profit is of GBP 159 million. It is lower than last year, but you'll recall that benefited from material prior period one-off cost recoveries. Underlying business performance in British Gas Energy remains solid, and we're continuing to further strengthen the business with disciplined investment in customer service and offerings. Bad debt is also showing an improving picture, but it's still something I'm keeping an eye on as we go into the second half of this year. We do continue to carry dual running costs associated with our new technology platform, although the migration is progressing really well, and we expect it to be materially complete next year. In Ireland, Board gosh Energy has recovered strongly and generated a profit of GBP 43 million, helped by an improving retail market backdrop. Moving on to optimization. Profit for the first half was GBP 287 million, a strong result that was expected lower than last year. In Centrica Energy, profit was GBP 232 million, with lower commodity price volatility naturally impacting opportunities across both gas and power trading and our route-to-market businesses. However, LNG had another strong half, supported in part by tailwinds from earlier periods, but also capturing value from the flexibility and optionality we built into that portfolio. In Centrica Business Solutions, the environment offered fewer optimization opportunities than last year and resulted in a more normalized profits of GBP 55 million. However, performance was supported by our continued shift away from lower-margin industrial and commercial customers to the medium-sized business segment, where encouragingly, volumes increased by 5%. And last but not least, infrastructure, which delivered operating profit of GBP 522 million. Spirit Energy increased to GBP 245 million. Within this, we had a higher achieved gas price underpinned by our hedging strategy, and that more than offset production outages at Morecambe in May and June, which along with a natural year-on-year decline resulted in volumes reducing by 18%. Nuclear profit of GBP 224 million reflected lower achieved power prices and a marginally lower level of generation in the half. Profits also include GBP 124 million of electricity generator levy, which to remind you is captured partly in the group's cost of sales and partly in our share of associates profit. Lastly, Centrica Energy Storage. RAF was operationally strong through the first half with good asset availability although, as expected, delivered lower profit of GBP 53 million against the backdrop of lower prices and spreads. Moving now to cash flow. In the first half, EBITDA of GBP 1.1 billion was supplemented by GBP 240 million of dividends received from our investment in the nuclear business. This is a higher dividend than you would normally expect for the period. We paid cash tax of GBP 323 million, and the overall working capital move was less significant than we have seen in previous periods with a small inflow in the first half, reflecting larger but offsetting moves in our underlying businesses. Chris and I would have liked to ramp up capital expenditure faster in the first half, but we've retained our disciplined focus on returns, deploying GBP 221 million. So altogether, this led to a strong free cash flow generation of GBP 816 million for the period. I want to pause for a moment on working capital. The markets we operate in are naturally volatile. And as we've seen in the past year, this can give rise to large swings in working capital for Centrica. But while it fluctuates, as you can see from the chart on the right, if you look back, Centrica operates with a small negative working capital position on average over time, even when including margin cash. And our businesses typically deliver offsetting working capital movements through the cycle. We believe that this is an enviable position for a company to be in and a clear benefit of our unique portfolio. Moving now to our outlook, which remains consistent with the trading statement issued in June. As Chris mentioned, we're on track to deliver on our medium-term sustainable operating profit ranges for all of our retail and optimization businesses by 2026. And I'm very pleased that we have expect residential and business energy supply Bord Gais Energy and Centrica Energy to achieve those ranges this year, 2 years ahead of schedule. For infrastructure. While we have had some protection from hedging in the first half in a lower price environment, you would naturally expect profitability to fall in the second half. As usual, we provided hedging positions for Spirit and Nuclear, as of the end of June in the appendix today. The outlook for rough is challenging. Gas prices are lower and seasonal spreads are currently limited. With an operating cost base of over GBP 100 million, profitability will be challenged in the second half and looking forward. So overall, and coupled with the normal seasonality of our retail businesses, we expect group profitability to be heavily weighted to the first half of this year. Net cash is expected to decline in the second half driven by lower earnings and expected ramp-up in CapEx, which we currently anticipate will reach a GBP 600 million to GBP 800 million range this year. We will also pay both cash dividends, which is around GBP 220 million, continued the share buyback program, and we won't have the benefit of that higher nuclear dividend we saw in the first half. I want to spend a bit of time now on Centrica's balance sheet, strength and credit rating, critical strategic assets for our business. You remember last year in our strategy update that Chris and I outlined the benefit of our balanced portfolio with each business in Centrica helping and sometimes offsetting each other as we move through the inevitable cycles of the business. And to underpin this portfolio, we do need financial strength. Our balance sheet helps us mitigate risk and navigate the volatile markets we operate in. It allows us to enter into long-term contracts to secure energy in advance for our customers and to hedge our infrastructure production. To do this effectively, we have to balance market credit and cash liquidity risks. And as we saw in the past couple of years, when we manage this well, it can bring significant upside. The balance sheet also helps underpin our long-term decommissioning and pension liabilities but most importantly, in combination with our strong free cash flow generation, it also supports our investment program, our progressive dividend policy and our overall shareholder returns framework. Now today, our credit metrics are very strong. But to remind you, we are required to hold more material capital buffers than many of our peers. For example, 50% FFO to net debt with S&P for our BBB rating. So while you should expect us to manage our balance sheet as efficiently as possible, we must preserve the rating and overall financial strength. And we believe a degree of financial flexibility for Centrica is a significant competitive advantage that we will maintain to create and preserve shareholder value. In the past 5 years, Nuclear and Spirit have contributed over GBP 3 billion of cash flow to the group. Now these are naturally declining assets, but they have helped create the balance sheet capacity today for us to reinvest into new infrastructure assets as we look to maintain the balance in our portfolio and further align ourselves to the energy transition trends Chris has outlined. And investing in assets with more ratable cash flows will help to grow the business, but importantly, help us maintain and unlock further balance sheet capacity to create more value for our shareholders. Investment will ramp up in the coming years. However, as we have said from the start, we will remain disciplined on any investment we make, whether that be organic or inorganic. Adding scale has to be coupled with delivering attractive returns and returns have to be commensurate with the risk we're taking. We will not invest in projects that do not meet our return thresholds. And you remember, we deliberately retained flexibility across asset classes when we announced our capital framework last summer. It's fair to say the developments in the external environment, such as interest rate moves, cost inflation, longer planning consent time lines and grid connection challenges means the return profile across some projects are proving less attractive than 12 months ago. And as a result, we're investing less in those areas. But in other areas and geographies, we're seeing more attractive opportunities emerge, aligned to our strategy and in many cases, driven by our unique optimization and route-to-market capabilities. We still retain the ambition for over 50% of our CapEx to be green taxonomy eligible. And we have a healthy opportunity set currently under review, which allows us to be disciplined and selective about the projects we pursue, ensuring we deliver our targeted returns. As a reminder, we expect group return on capital employed to remain above 20% over the rest of this decade. I want to reiterate what we said before, though, if we do not find accretive investment opportunities to grow the company, or we generate cash that we believe is surplus to our requirements, we will return it to our shareholders. And you see further evidence of that with our announcements today. So in summary, a good first half of the year, I'm very happy with the group's performance. And looking forward, I feel that we are well set up to take advantage of further opportunities we have coming down the track. Let me now hand back to Chris to talk through some of the projects we're investing in as well as wider strategic progress.

Thank you. Thanks, Russell. Investments crucial to reposition Centrica as a more predictable and ultimately more valuable company going forward. The investment environment is never straightforward and the volatility and the financing environment over the past year has added a further challenge. But what I see coming through our pipeline gives me confidence that we can deliver compelling growth and returns from assets that align with our strategy. We're already demonstrating that with projects we have in development right now, and we're driving the business hard to mature and accelerate the longer-term pipeline. But to reiterate what Russell just said, we're focused on value over volume. If the returns aren't there, we're not going to invest One of the areas where we see great value is the new meter asset business, which Dan Rosenfield and his team have set up from scratch. Our engineers already installed smart meters today for our customers. But in the past, these meters were owned and they were financed by third parties. This is an activity that we're bringing in-house. We see an opportunity to deploy over GBP 100 million a year, generating a predictable 20-year revenue stream which is retained even if a customer moves to a new supplier. It's expected to support a material operating profit contribution by the early 2030s with a low-risk, unlevered IRR of over 8%. As you know, we're always looking for ways to create value through optionality. And by building capabilities in small asset financing and management, we're developing a skill set that could ultimately be deployed in other areas potentially turning one-off sales into recurring revenue streams across the supply, services and the infrastructure pillars. And this project shows Centrica at its best spotting and opportunity being nimble within a flexibility in creating options. I think it's a similar story with the investment in the hydrogen-ready gas-fired peaking plants in Athlon in Dublin. Now Ireland is a market that we like. It's a market that we know very well. The energy system is constrained with demand growing strongly and a need for new generation capacity. We already have a large presence in this market and a fantastic management team led by Dave Kirwan, who's here today. So we know we've got the capabilities to deliver these projects successfully. The plants are around 70% complete. And once they're commissioned later next year, they will play a crucial role and stabilizing the grid and enabling a further build-out of renewables. And this is reflected in the 10-year capacity market contracts each plant has been awarded, which derisks our cash flow delivers an unlevered IRR of more than 9%. And again, we retain optionality. In this case, we manage all of the power that's generated through our optimization business. Assets like these, including the Bord Gais because we have in the U.K. deliver the kind of stable cash flow profile that will help to turn Centrica into a more predictable business over time. And they also create a platform from which we can capture the growing value flexibility. Now let's have a look at some of the earlier stage options that we've got, where we have exposure across almost all of the key segments of the energy system of the future. Let me start with Rough and Morecambe our 2 big storage projects. These assets play a crucial role in the U.K. energy system today, producing and storing enough energy to heat more than 1/3 of U.K. homes that's 10 million homes. But they can and they should be even more important in the future. At roughly continue to mature our plans to deploy more than GBP 1 billion to develop the world's biggest single methane and hydrogen storage facility. This is the best way to store electricity for the times when the sun doesn't shine or the wind doesn't blow. And we want to repurpose Morecambe, transforming it into one of the U.K.'s largest carbon storage hubs, having received a carbon stories license in 2023. And Morecambe can store 25 megatons of carbon each year for 40 years. To put that into context, the U.K. plans to store 50 megatons per annum by 2035 and 75 to 180 megatonnes by 2050. So Morecambe is material. But the existing regulatory environment does not reflect the importance of these assets in a net-zero future. So progressing these projects which would create thousands of jobs through the construction and then the operations period will ultimately depend on suitable and stable regulatory regimes being put in place. We're looking forward to working with the new government to demonstrate the value of these projects and to move them forward at pace. In power, we continue to develop our pipeline of generation assets, but I'm a little bit frustrated that we haven't been able to accelerate the program as quickly as I would have liked. So no pressure, Ulrika. But seriously, Ulrika is going to drive our power generation strategy forward, and that will start with a full review of the existing pipeline. But power projects do take time. Just like [indiscernible] we'll see. This is a project that we bolstered the U.K.'s net-zero carbon generation capacity. It's a project which is aligned to our strategy. And it's a project that we can bring a range of experience and capabilities to. And also we remain involved in discussions, I want to reiterate that we would only invest in this project if the risk and the reward is right for Centrica shareholders. This project has to compete in a level playing field for capital with all of our other options. Undoubtedly, the energy transition will require new technologies. So we're proactively securing a foothold in some promising areas. Our recent investment in Highview Power, which is developing the first commercial scale liquid air energy storage plant in the U.K. is a fantastic example of this. This technology is essentially a different slightly more environmentally friendly type of battery, which discharges electricity over a longer time than a traditional battery does, and it will provide important stability services to the grid. The initial investment delivers attractive returns aligned with the investment thresholds that Russell laid out. But far more importantly, we're helping to commercialize a new technology here, and we secured the rights to equity participation and energy optimization from Highview's project pipeline. It's another example of us investing for value with further optionality. As I mentioned earlier, our business model is very simple. One, we're relentlessly driving operational improvements throughout the existing businesses; two, giving customers what they want, not what's easiest for us to offer; and three, investing in projects that both add value and create a long -- a range of long-term growth options aligned to the changing energy system. The foundation of improving our performance is very, very straightforward, doing the right thing by colleagues and customers building engagement, building loyalty. It makes good business sense. We're supporting our most vulnerable customers directly, including through our new UP repay scheme and indirectly by calling on changes to regulations such as the evolution of standing charges, the introduction of a social tariff and the urgent need for far better prudential regulation of U.K. energy retailers. Our safety performance remains strong. And crucially, colleague engagement is now in the top quartile for the industry, and that reflects the hard work that the leadership team has put in to show our colleagues we care and to attract a more diverse range of skills and experience into the organization so that we continue to learn. Improving colleague engagement has played a major role in delivering more stable operations in turn, allowing us to be more proactive and more innovative in the way that we interact with customers. We spent the last few years focused on repairing the core of our retail businesses to stem customer losses. Until relatively recently, our operational perform -- underperformance, sorry, meant it was really difficult for us to react to changes in the market, let alone to offer innovation. And we're not yet perfect, but there is plenty of evidence of this improvement being embedded in our business. Customer Net Promoter Score is up across the board, complete levels are falling and our retention rates are rising, improvements, which are now also being recognized externally for example, by Uswitch and in our trust pilot scores. And now that we're able to increasingly look beyond day-to-day operational stability, we can start to really think about what our customers want and how we can make it as simple as possible for them to manage the home energy use. Combining the unique access we have to data with our beefed up data science capabilities, we're now starting to look at our customers in a more sophisticated way segmenting our target markets and focusing on the proposition that really cut through with a customer group. This is a collaboration across many parts of the company driven by Gary and his team with a singular focus on maximizing commercial value across our portfolio by being our customers' partner of choice. And with renewed confidence in the capabilities, we can be more proactive in engaging with customers and marketing our leading brands. You can see some of the initiatives stemming from the shift in focus in the market today, including our summer sport marketing campaign which highlights the connection between the energy supply and the services businesses. And we're expanding our time-based tariffs and testing new propositions in part supported by the migration to our new ignition platform in British Gas Energy. For example, we've got the best value EV tariff available to all customers in the U.K. We just need to be a bit more confident about it a bit more [indiscernible]. The migration being delivered by Catherine O'Kelly and our team is delivering substantial customer benefits and massively improved customer satisfaction. There are still huge opportunities for us. I want us to develop an obsessive focus on our customers. And I think the truth is that we're only now implementing that mindset. For example, we recently rolled out Hive Solar, which offers a one-stop installation, energy management and tariff solution after finding out if they were marketing something else at what customers really wanted was integrated solar offerings. In the past, we wouldn't have been able to make that switch. Agility of thinking the speed of action is so, so important in our markets. So with brands that we can be increasingly proud of backed by better operating performance and more innovative products and services. We have the confidence and we have the ability to change our offerings as our customer tastes change. Services & Solutions is a great example of our increased focus on giving customers what they want off the back of substantial operational improvements driven by Jana Siber and her team. We've massively increased operational resilience, which you can see in the improvement in our rescheduled rates. And that's helped us create capacity to continue growing our on-demand business with jobs increasing by almost 50% year-on-year. And none of what we're doing is rocket times. By fixing some of the basics like modernizing our planning and dispatch and inventory management systems, we're getting the right people in the right part in the right place at the right time. And that allows our colleagues to serve our customers more effectively. I expect to see these initiatives deliver further improvements over the remainder of this year and into 2025, which will in turn allow us to start rolling out the commercial offers that will drive the next leg of our growth. Rather than trying to sell the same product to everyone, we've now got a far greater understanding, and we're far better set up to plan and deliver many different products at pace. One example is guaranteed, same-day breakdown cover. We now visit more than 80% of our customers with an emergency breakdown, which is no heating or no hot water on the same day, and that's up from less than 65% just a year ago. We think there might be a premium offering for customers in this. And the beauty is that the more on-demand jobs we do, the more engineers we can employ. The more engineers we have, the quicker we can respond, the quicker we can respond, the happier the customers are and the happier the customers are the more we will attract new customers and so on and so forth to get a virtuous circle. It's not rocket science as we've seen, but it's also not something that's easy to replicate by others. That's the strength of our model, we now need to get even better at developing the data and insight-led propositions that customers really want. Early signs are encouraging. Revenue in this business is up 3% in the first half. Revenue per customer is up 3% in the first half. That's delivering improved margins are now up almost 5%. And with further work on embedding operational stability and maturing the commercial proposition, this creates a huge, huge long-term opportunity for this business and for the entire group. So I'd like now to conclude. In summary, we've had a very good start to the year with improved colleague engagement feeding into strong operational performance, which in turn supports our financial results and our shareholder returns. We are successfully implementing our strategy. And at the risk of sounding like a broken record, the model is simple. One, relentlessly drive operational improvements throughout the existing businesses, running them better than anyone else could. Two, give customers what they want, not as easy for us to offer; and three, invest in projects that add value in of themselves and create a range of long-term growth options aligned to the changing energy system. I'm really proud of what the team has achieved in the first half, but I want to see us accelerating delivery of the huge opportunities that lie ahead. I remain very, very impatient, but I'm also very, very disciplined. So with that, I just want to say thanks very much for listening. Russell and I will be delighted to take your questions, any difficult questions for our Chief Financial Officer. I'll take the easier ones, but we look to take your questions now. Thank you.

Jenny and Mark. Good lord, I got the chance to sit down.

Jenny, you go first.

Jenny Ping from Citi. Three questions, please. Firstly, just on balance sheet and probably one for Russell. Obviously, you made it very clear that we need to get very robust balance sheet in order to do the day-to-day. But you also talked about going to one potentially going to 1x net debt from a rating agency's point of view. That's obviously a very wide gap. Can you just nuance that a little bit more to give us a sense of where can you take in the next 12 months in the medium-term view to give us a sense of the scale of potential excess cash? Secondly, just around your nuclear, Chris, can you give us an update on where you are with that discussion with the government? And then very thirdly, you both have talked about M&A of potential assets. Can we get a sense of what areas you're looking at? Obviously, not naming specific assets, but certainly the direction of travel.

Thanks, Jenny. Let me take the last and then hand over to Russell to talk about the balance sheet. So look, new nuclear, I can't really go into any details other than to say the civil servants, the same civil servants there before the election. The new government is in place less than 3 weeks. We need a bit of time to get their feet under the table. But our position remains as it's always been, which is we're interested, but in nuclear, we like nuclear. We like EDF as a partner, but the risk of return has to be in the right place. So we'll see where this is in the government's list of priorities, but we remain engaged. And look, on M&A, how I would look at that is I'm quite relaxed about whether we have organic or inorganic build-out. If you build something yourself, you've got unproductive capital for a while, you've got risks and project delivery, you've got other things that come with running big projects. If you acquire something, you don't have those risks, but you've got risk of integration, you don't know what you're acquiring. So I think we've just got to look at the balance of risk and we look at the reward available. So I'd be quite comfortable if it's all organic. I'd be quite comfortable if it was all inorganic. It just really depends on the asset. It depends on the risks in the balance. And then I'll let Russell talk to the balance sheet. But I think one of the things we've got to be super careful of, for us, I think, in general, in the U.K., in particular, is when you start a buyback scheme people tend to focus almost religiously on that buyback about what excess cash do you have and when you get it back? And I actually think that's to the detriment of us actually looking to grow the business. So what I'm hopeful of is people see the investment program that we've got they start to look at Centrica less as what's the size of the buyback and more in how are we growing the business? How are we making sure that we give the customers what they want, how we're making sure that we have the assets that we can run better than everybody else? Because otherwise, it's just -- it becomes a very kind of perfunctory conversation. But with that, I'm also interested as to when we'll get to 1x net debt to EBITDA also.

Thank you, Chris. So Jenny, thank you for the question. And when we laid out the capital allocation framework last summer, we tried to give you an idea and sort of the boundaries we might operate in as we guide this company forward and the 1x net debt to EBITDA was a boundary rather than a target. That's something that we would think that we could get up to undercut circumstances. But generally, we expect a business like ours to be moving at levels below that. And our philosophy on capital allocation, it hasn't changed since we laid it out last summer. So when I look at the capital framework, when I look at the balance sheet, I'm not looking at a single point in time and not looking at the 30th of June. I'm looking over multiple years and I'm projecting the company forward. I'm looking at the strength and flexibility we need. We have the ability to seize opportunities when they come. But also, we're ramping up a significant investment program. We have to take that into account as we look at the balance sheet over the coming years. And as Chris said earlier, that will be lumpy, and we've seen that already. So that's why when I look at sort of the potential, and we've unpack all of that, there's various moving parts. And as we pull them all together, and we stand back from it. We also want to make sure we've got the capability and the capacity to continually grow the progressive dividend. So not looking at a single point in time, 1x net debt to EBITDA is more of a boundary and when you take it all into account, that's how we ended up with the discussions with the Board about the surplus capital we have today and the decision for the GBP 200 million of share buyback. so that's the overall philosophy...

Carbon copy the answer I get when I try and spend lots of money need to be disciplined. Mark, we'll go over to you.

Mark Freshney from UBS. Firstly, on British Gas residential. I mean you and Chris are -- Chris, I disagree with you on price caps. I think they've been very bad for the market, you like them. Ofgem seems to be taking the lead on looking at a future market structure. Clearly, tentative steps and clearly, ban on acquisition tariffs comes off in October potentially. What are you hearing when you speak to Ofgem and the government? And I guess further to that, we haven't seen -- your business has been shielded from competition for about 3 years. How do you think -- I mean you seem confident on winning customers, but how do you think the market will behave in October?

So what I think I said in price caps was that a price regulation has provided benefits to consumers. If you were to design price regulation, you wouldn't design it as it is just now. So I think we've got to be quite careful about that. But I think it does give consumers protection. I think the mistake that was made was that Ofgem designed a price cap and then said they wanted extreme competition and its economics 101 to say if you want to regulate prices in the market have extreme competition at our price regulation, but don't have both. So it was economically illiterate and it was always going to fail. However, regulation of some form, I think, has been good for customers. Ofgem, we have an open relationship with Ofgem. I meet with the Chief Executive regularly, but they don't give us advanced notice of what they're thinking. So they have conversations. The ban on acquisition tariffs, I think we saw something similar in the insurance market recently, so they can see what the impact on that is. I don't know what they'll come out with. I don't agree we've been protected from competition. I think that everybody is in the same position. I think that we had -- under the old market, we had an illusion of competition. We had very poorly regulated companies that could come in, GBP 400, I think it was, to get a license and you hadn't been makeup in 10 years up was it. And we saw the impact of that at cost consumers billions of pounds. Every single consumer paid nearly GBP 100 for that failure. The reason that we campaign for prudential regulation is that, that law sold are going to shareholders. Some people left this market very rich and leaving consumers ripped off. And I think that was a failure of regulation. Until we have prudential regulation where Ofgem require companies to have adequate capital before they enter this market. We run the same risk again. So we call for prudential regulation. We call for a social tariff, we call for the evolution of standard chargers, and we want to get rid of this postcode lottery of you get a different energy price, electricity price mainly, but also gas, different standard chargers, depending on where you are in the country, make it simple for people. We think those are the things to focus on rather than to say, should we have a price cap or not, but regulation should over time. So look, I give you an example, last week, we answered the telephone to British Gas customers sort be responded telephone and WebChat 10 seconds. Last year, it could be up to 7 minutes. That's how you keep customers. Customers want to -- they want to know that companies are easy to deal with they want to know they give them what they want. So that's why it's really important. We used to do one thing for everybody. So if you like that's great, you want to stand, you go somewhere else. We want to be in gang stalks about having a segment of one. And when you got 7.5 million customers like Catherine -- it's maybe a little bit stressful, but that's how you keep customers. So I don't agree we've been protected from competition. I do think that we're seeing real improvements in from the improved customer service, Net Promoter Scores. And somebody try to sell me a system to run our energy business on a few weeks ago. And they said, if you do this, you're going to get a Net Promoter Score, we can evidence at 35, I said we had 42 last week. And it was a very, very short meeting. So we have got far greater improvements in customer services and I think people realize we're quite reticent about shouting about that because we want to make sure that they're sustained, but they're definitely there what we need to get better at is customer acquisition. I don't think we're very good at that at the moment. So if we can improve that and keep the customer service right. That's why seem like we never stop. You will never be satisfied with what you've got in a customer-facing business. You always have to improve, you always have to innovate. So a kind of longer answer, I don't know what's covering the regulation, but I do know it could be improved.

I need to get better use of the system here. is Harry Wyburd from Exane. So 2.5% for me, please. First one, on the share buybacks, so completely get talking about the share buyback and having us to focus on the share buyback detracts from what you spend most of your time doing, which is running a business that deploys capital at good returns. But if this is a down playing of the share buyback, should we think that we're going to hear more from you on organic CapEx over the next year or 2? So should we expect that at some point, we'll get another capital markets update of some shape or form where we see higher organic CapEx in return for having less share buyback? That's the first one. The second half one is on the buyback, I guess, you said it till February. So should we expect another update on the buyback? Will you revisit that at full year results? Or are we going to wait until July for any further update on the buyback? And then the final one, just on the finance costs. So you bought back several of your bonds. Would I be right to assume, therefore, that the levy medium-term operating profit guidance is unchanged. Probably the medium-term net income guidance would have improved because you're going to make a saving on interest costs? And is there more you can do there? And maybe if I could really stretch it, could you guide us on interest income for full year '25?

Harry, let me take the 1.5 questions in the buyback and then there are a few people that know about financing bonds Ross on Shell's balance sheet, which is bigger than our service is his area of expertise. And yes, you should expect to see us spend more CapEx in the next year or 2. Whether that's going to be another capital market, I mean, this is a capital markets event. So again, I prefer to focus on running the business. February or July, so if you look at this, we have GBP 1.7 billion of shareholder returns in just over 2 years. I think that's quite healthy for the company is capitalized at about GBP 7-ish billion. We'll have bought back 15% of the company. I think at an average at the moment, I think, at the end of the first half, the average price we paid for shares is about GBP 120 or something. So we're in the money today even with today's share price reduction. I think not many companies that would say that they've bought 15% back of the capital, but we've got an investment program of billions of pounds going forward. So what we're trying to do is to make clear, hopefully, people understand the money has not burned a hole in our pocket. So while it can be a bit of pain sometimes, you have to give you GBP 3 billion on the balance sheet what you're going to do with it. The alternative is that we say, like, we can't take these questions. Let's go to invest at all and then you act at pace and repent leisure. So we're going to take our time and make sure that the returns are there. But that's our focus really. Hopefully, shareholders see that we get it, we manage money for shareholders. And when we've got excess capital, we will return that and we took the decision -- I can't know what we stand at the buyback at GBP 250 or something we increased it. And we looked and then performance was a bit better. I think the second half of '23 or '22, the performance was better than we expected, particularly in the trading business. So we said, "Look, we'll get some of that money back to shareholders because we've got enough here to invest what we want to invest. And now we saw some -- I think this second half of '22, we saw some amazing performance in our treatment business. We get most of that outperformance back to shareholders because it wasn't in our plan to invest that. That's how we think about it. So I wouldn't see -- expect -- what is means if you say that you expect the February expect July. And you guys write about that, then people come into our stock just before the results and then you see what happened this morning, which is it wasn't GBP 250 million, it was GBP 200 million, it was GBP 300 million. They don't focus on the fact that it's best part of GBP 2 billion over 2 years and your stock price is going to fall. So I would say I don't expect anything at any point, but do expect us to be a very conservative custodian of our shareholders' capital and take as a sign that we've paid a lot of that back, and it was very important as to restart the dividend. Taking a lot of that back, we've increased the dividend quite a bit and would like to great companies have dividends that grow over not just years but decades. That's what we want -- that's what we aspire to be, something that this is the start is something that our successor's successor's successors are still building, it's still an upper sloping line as we go forward. And that, Russell, what was IREIT? Are you playing with the balance sheet?

Thank you, Chris. So a few things on the financing cost. There's a few interesting stories actually in the first half of this year. So the financing cost turned into a positive GBP 20 million credit to the income statement due to the large net cash position. But behind that, you've got an interest rate paid on the bond that we have of 8.5%. And then 5.23% interest on the cash that we hold and invest. So you can see we still got a bit of a drag of some of the older, more expensive bonds from Centric has passed. And we've got GBP 6.13 billion of cash on deposit versus GBP 2.9 billion of debt. So the debt stack has moved around, but we're very happy in the first half of the year to do a couple of bits of liability management because over time, you want to make sure that, that debt stack is fit and healthy and flexible for what we see coming down the road for Centrica. So we refinanced the hybrid bond, which is an important part of the debt stack at a time when our credit spreads were at a good position historically low. We're happy to get that done. And then we had a 2033 big maturity. So we took out some of that to take a bit of refinancing risk off the table, GBP 370 million of that bond being repaid. So that's just tidied up the overall debt state for the next couple of years. We might do a bit more. Let's see, it really depends on how interest rates and swaps work out. And also, who knows where interest rates are swaps work out, so that's why I can't guide you on what the financing costs will be in the next couple of years. But certainly, I think it's left us in a stronger position in those activities.

Question here, and then we'll go to AG and then over here.

Amit from Jefferies. A few questions from my side. So firstly, I think Russell, you talked about in your presentation, how some of the attractiveness of investment opportunities have moved around over the last 12 months. So I was hoping if you could sort of elaborate on that point. And then you've given us some sort of quite helpful granularity on the various projects under development. It will be helpful to have some understanding from your side of when you expect the earnings contribution to come through? And how do you expect those to ramp up? And then finally, in terms of just broader opportunities, another sort of theme, I guess, is getting discussed is AI and data centers. And I would be interested in hearing your views how you see that in your core markets of U.K. and Ireland and shaping the business to potentially benefit from that?

Thanks, Amit. Let me take the last one and then see if Russ wants to take the first 2. I think the AI benefits for us come in 2 places. One is the impact on our business. in terms of how we give customer service, how we run the assets, we've got the second one is the demand of electricity, I think people are massively underestimating in the U.K. I think they got it in the U.S. and massively underestimating just how power intensive our energy intensive electricity intensity Ireland is. It's why we're building these 2 power stations in Ireland because a regulated government realized that their data center business or they know the data center business brings a lot of economic activity, and there's a lot of people as well, which people often under forget about. But you could see that we're becoming more electricity constrained. So they took a proactive view and asked if we would consider building some new power stations. I think you've got the benefit of being long electricity in the market, and I think that will continue. I think we'll see that over the next 10 years or so. We've been using AI in our business for her. So chat bots got the business, things that help customer service staff. But we're probably not invested much in the past few years. These are probably things that we put together maybe 4, 5 years ago is one of the reasons that we've got Cengiz joining us as our Chief Data and Analytics also because a lot of that comes through artificial intelligence. So I think you'll see lots of improvements on customer service, driven by artificial intelligence. And you should also see more efficiency, you should see ideally reduced staff costs as well. But I don't think that AI is just going to completely replace people because people want to talk to colleagues. I think it will make -- somebody said to me, but I've been doing it a few things -- I spoke to a few companies about this and said, "AI won't take your job if somebody using AI will take your job. And so I think the thing for us is to make sure that we are at the forefront of using AI for customer service improvements for making sure that we understand data in the different power stations that we've got that we can therefore compare data across pieces and understand where we can learn. So I think there's huge opportunity there. But I think somebody also said a couple of weeks ago that AI has added $8 trillion to the market cap of companies in the U.S. without delivering a single dollar of any notifiable improvement. So we've got to be careful that there's always a lot of noise and then there's a plateau, and then there's a benefit. So we're looking to deploy this now, but we think about.

Great. And on the investments that we're looking at, you're right, and I highlighted it in the speech, things have changed in the past year, and we've had to pivot a little bit. So just to give you a few examples. We had been building a pipeline of some solar assets. Those assets bring very long-term stable cash flows. We can also tie them often through PPAs directly to customers with Centrica Energy. We've done a few of them. But at the moment, the return risk balance on some of the solar assets we don't like. So we've walked back from a majority of them until we find the right assets at the right value. We've pivoted also to other geographies. So Centrica Energy, as you know, is involved in 25 markets overall, 25 countries. We're looking at, for example, batteries in Sweden, where they've got a very strong presence and where we might be able to combine their trading capabilities with new investments and batteries there to bring incremental returns. We think that's the right type of thing for Centrica. The map last year, I guided you potentially GBP 100 million a year for the map. We're now guiding GBP 100 million to GBP 150 million. And in fact, we like to do more than that. That really depends on this market rollout schedule. That's a fantastic asset class for Centrica and something that we expect to ramp up significantly in the second half of this year. And then, of course, we highlighted today that the 2 gas peakers are building in Ireland. We've got another 2 under construction in the U.K. and a few others already in the portfolio. the grid will really need assets like that, and it comes with long-term contracted stable cash flows. That's good for Centrica, good for the balance sheet. So we're spending a little bit more time looking at those assets as well. And we take it all in the round, that gives me the confidence to say that for the overall year of 2024, we will be in the range of GBP 600 million to GBP 800 million of CapEx because I can see things ramping up on the spend. When do you see the earnings? I mean we really only started this last year, and it's not yet material for the whole group. But I suppose the good thing is that most of the projects we invest in are relatively short cycle. These are not 10 years of capital sitting on your balance sheet before you get earnings. I mean, in fact, the map, you get earnings basically as soon as you put the smart meter on the wall. So we should say, in the next couple of years, the earnings profile building, but it's not material at the moment.

And then we'll come over to here.

Ajay Patel Goldman Sachs. I think the first part is you have the side on the meter asset provider and the peakers. And if you sort of say, over a 5-year period, that accumulates to a decent amount of CapEx. And I was wondering if you could give us -- make it a little bit simpler for us and just go, what kind of earnings would you expect that to contribute given the sizable amount of its infrastructure like or very visible. The second question I had was on gas storage. You sort of called that out. I'm just wondering, with the environment that where we're in now, is there any point at which you would have to start to make a decision on what to do with Rough NEXT, which may push on a discussion with the government? And how should we think about that? And then I don't really want to draw on -- I know we've drilled on the balance sheet a lot, but I just want to think about how you put the pieces together. So as we have now, we have about just over GBP 3 billion of cash on balance sheet. You have a set out a growth CapEx program over the next -- up to '28, you can sort of bridge all of those things together, and you start to go, okay, there's got to be more that comes here. And -- is it really the decisions on the larger scale projects that ultimately you're holding back for? And then a quarter sort of folds back onto the decision today to do GBP 200 million of buyback, GBP 100 million, GBP 300 million, zero. I just -- we want to understand what framework you apply to get to that outcome. And what are the pieces ahead of you that dictate such a choice so that we sort of understand your mine map when it comes to these things.

Look, let me go and then get Russell to jump in. Look, on the map and the peakers, I think we said what, 9% IRR and the 2-peaker, EUR 300 million or something invested in them. So you can look and say it's something north of EUR 30 million. We would expect those things to be bringing in a adamant they're up and running. If you look on the map, we do we see north of 8% or something. So if you deploy GBP 500 million for 5 years, you should expect something north of GBP 50 million for the year coming in from those things. So you can see they become quite so I think we said they become quite -- a map the script, obviously, Russell has to sign off is to approve what I say, say a material contribution by the 2030. So you can easily see those 2 things together, given you more than GBP 100 million by the end of the decade, if we get our rollout done properly. On Rough, so roughly the open isolate facility and a high price, high volatility environment is brilliant having a storage facility, and we made good money out of that. If you project forward where it is at the moment, there's no shape in the price curve and there's no volatility. And there's over GBP 100 million of operating costs Rough will become a loss-making asset. Now we don't just upticks and say, okay, it's done for me in profit. We made some money we'll reinvest some of that money. But that luxury, you would get in a high price, high volatility environment of continuing to operate this thing continue to operate this thing on profit, you lose when you go into the comp environment that we're in. And so I'm hopeful that the conversations will be fruitful. I think it's strategically important the U.K. has the ability to store 12 days of average annual U.K. gas about 9 days of peak demand. The Netherlands, France and Germany coming each store around 100, if not more, I think the France is a high at 120. Rough provides half of our story, Russia is down 6 days or 4.5 days of peak demand. having less than a week's storage capacity in the winter doesn't feel right. So even if you fully redevelop Rough, you take it about 21 days, you're still at 1/5 of what the European averages. So for me, it's a no-brainer, but you would expect you to see that given that we own the asset. I think that the question is always going to be how much does the U.K. system. And I mean the government, the electricity system operator, the regulator, how much do they value have an energy security. I look at it a bit like a house insurance policy. Most people buy house insurance and never claim on it. But when you claim in it by Goa, you happy that you've got it. So I think it's a no-brainer, but I'm not the key decision maker on this but we've got time to have a conversation and decision. And then look on the balance sheet is, I know exactly what you're trying to get to, but we're a Board of 12 people. We have a conversation as you say, it could have been 0, could have been 30 could have been 100. It's not like there's a formula we sit and go, that's a brilliant answer. That's what we're going and we have a conversation and we look and see -- we look at what has been like to be a centric shareholder. And the reason that I was keen for us to return surplus capital to shareholders. But I always think it's good to remind shareholders that you know we know whose money it is. And we have been quite good at getting capital from shareholders. We had a rights of share on 2015 or some in 2016. We've cut the dividend once before I arrived once -- after I arrived, now we canceled it. And so it's not really been that happy are. So what we wanted to do was to shareholders look, we know that you've been very, very patient and you get a decent return. And when you look at it, we just thought this is reasonable for us because we don't have something to come to look, here's a big investment. So you look at shareholders, I think quite right, so you've got all this money, what are you doing with. But by the same token, we've got lots of ambition, but we've got discipline. So we have less disciplined, we'd have less of a problem on this, but would have more of a problem long term. So everything that we do is for the long term. So I can't really give you -- I don't know if you do that, I can't really give you kind of a formula, but the mindset is that we absolutely know who we work for the Board acts as the custodian of the shareholders' value. and management executes the business on behalf of the board and behalf of the shareholders. So if we've got surplus capital going forward, we'll have no hesitation in return on it. I genuinely hope that we've got enough investments that meet our investment criteria so that we can invest all the money we've got because what that does is it generates further income. And again, it is more capacity. And if you can reduce the risk in the portfolio, you can reduce the very punitive, I think thresholds we've got from the rating agencies. And that, I think, is the biggest thing to free up surplus capital in Centrica. It's not the paying away some of the money that we put in the bank at the moment, but I don't know Russell with you.

No, I think I might be and just repeating what I said earlier. I mean, you've got to look at it over multiple years, you're ramping up CapEx is a relatively slow start, but we've got GBP 3 billion to GBP 4 billion in the next couple of years. You've got to have a balance sheet that's got to have some flexibility and optionality, you've got to take that into account. And then you've got to make sure that you've always got the capability to continue to progressively grow the dividend and everything else you need, and that's what you take it all in the round and then you come back and you stand back from that and that's where we got to. So we can't be more prescriptive than that. It's a sensible framework, it's not changed from where we were before. And it's something, as Chris says, we'll continue to review as we go forward. Back to the earnings, you were asking about some of the investments, just rough and ready, so the map, if you were to invest GBP 100 million a year over 10 years, it's about 5 million meters, you probably end up with about GBP 70 million of adjusted operating profit at the end of that by the mid-30s. Of course, you've got the EBITDA, but you've got to take off the depreciation of that. So that's the rough way to calculate the map. And the team can spend more time with you to help to give you that in more detail.

Can we come back to you then can we just...