Centrica plc (CNA) Earnings Call Transcript & Summary

Thank you for coming along to our teach-in. We're going to speak about Centrica Energy and the map in due course. Just before I do that, just very quick piece of housekeeping. No fire drills planned for today. If you do hear the fire alarm, please leave calmly. Leave your belongings. The exits are over here where you came in. So with that, I will pass over to Chris O'Shea, our CEO.

Thank you very much. I was hoping I would tell you that the exits were down here and here like in a plane. But look, good afternoon. Welcome, everybody. It's super to see all of you here and also to have everyone that is with us online. I'm very grateful that you've taken the time to join, and already got a round of applause, which is -- this is brilliant. I'm also delighted to say that we've got our new chairman, Kevin O'Byrne, here with us as well. So we will be doing more of these events as we go forward, helping you to understand more about the important areas of Centrica and how we drive value creation. So you've heard me speak before about the key dynamics that will shape the energy market of the future. There'll be more electrification, there'll be more intermittency and there will be more consumer engagement. Today's session will focus on two parts of our business to start -- to benefit from those trends. You've got Centrica Energy and our Meter Asset Provider or MAP. These are great businesses in their own right, but they're even more valuable as part of our group. Centrica Energy is ideally positioned to create value from intermittency and system complexity. And Cassim and John will share how we built our capabilities into a very hard-to-replicate asset-backed optimization business, underpinning our confidence in delivering consistent profitability and creating options for future growth. A little bit after that, you'll hear from Dan and Gareth, sitting in the front row, about the new meter asset provider, which is a fantastic low-risk business with contracted unregulated returns that creates the foundation for consumers to take control of their energy use. At face value, these two businesses may seem very, very different. But I think, today, you'll see just how much they have in common. Both are asset-backed, both deliver exciting future optionality. Both can maximize the options, which arise as a result of being part of the Centrica Group. Thank you. I'm a bit jealous, I want to know what they're doing. You'll have an opportunity to ask questions following each session. So we'll have two separate Q&A sessions, and we're also joined by our superb CFO, Russell O'Brien, for any of the trickier questions that you may have. So like -- today, I'm increasingly confident in the outlook for our business. And you'll see that hopefully reflected in the trading statement that we issued this morning. All of our businesses are expected to deliver 2024 earnings within our medium-term range, 2 years early with the exception of services, which is still improving and it remains on track to deliver by 2026. We've extended the lives of our nuclear reactors again. Our CapEx is ramping up, albeit more slowly than I would like. And our balance sheet remains very, very strong. And it's against this backdrop that we announced a further GBP 300 million extension to the share buyback program, which will be completed by September. We won't talk about the trading update in detail today, but Russell and I are very happy to answer any questions that you might have. And if we could keep those questions to the end, so we'll have the first Q&A session about John and Cassim's session and then the second one Gareth and Dan. And then we'll take some questions on the trading update if you've got it. But before I hand you over to the Centrica Energy team, I want to give you a very quick reminder of our strategy, what we are doing to create value and options across the group. Earlier this year, we launched our new purpose which is energizing a greener, fairer future. This embodies what we're doing for our colleagues, what we're doing for our customers and what we're doing for the broader energy system is why we get out of bed every morning. All of the countries we operate in have ambitious decarbonization targets. These ambitions present big opportunities for and big challenges to the energy sector. In January, we'll be launching an updated climate transition plan, which will reveal more on how we'll achieve these ambitions. But to capitalize on these opportunities, we have a really simple focused approach. Firstly, we're maximizing the value of our existing businesses and driving operational excellence. Secondly, we're challenging ourselves to deliver the most attractive commercial offers to our customers. I think we've shown progress in both of these areas, but there's still a huge amount of work to do, and there is still a huge amount of opportunities for us to go after in both these areas. A great example of this is the flexible energy or demand-side response capabilities that we've got, which will help our customers to make the most of their energy use and to reduce their bills. We're already working on how we embed these capabilities into our customer tariffs, and it's not going to happen overnight. But we have the platform, we have the technology, we have the people. We have the ability to deliver for our customers when the time is right. And thirdly, we're investing for value. Now we're often asked what does that mean? So the capital base that we have provides crucial support to the rest of the group. So as that existing assets wind down, there is a clear strategic need for us to reinvest to secure the future. But we will maintain discipline and remain disciplined to ensure our investments generate value, focusing on returns. We won't focus on some ideological commitment to specific asset types, which we think has led to some pretty poor capital allocation across the industry, although not in Centrica in the very recent past. We've also said that we'll favor regulated and contracted assets that can make us a more predictable and more boring business and to allow us to generate multiple returns on single assets. And we want to invest in assets that create future options. So when I look at the pipeline, I'm increasingly confident that we can meet all of these objectives, investing up to GBP 4 billion whilst delivering a return of capital in excess of 20% throughout the investment cycle. So the obvious question is how are we doing? We made good progress this year, including our best operating metrics for many, many years. And some of you might have seen the recent Ofgem market data, which shows that over the last 2 quarters, British Gas Energy has had lower complaints than Octopus, lower complaints than EDF, lower complaints than OVO. This is a testament to the great work underway, but we're not declaring victory. We will not be happy until we are the best, and we're going to continue to make improvements. We've also launched several new customer propositions, which are gaining traction in the market. I'm really pleased that we've been able to deliver recently our service promise. What that says basically is it guarantees you same-day boiler repair if you call us before 11:00 with no heating and no hot water. This is an offer that no one else can replicate and it's because of our unique engineer network. It's great for our customers and it's leading to encouraging signs both in terms of customer retention, but also in terms of new customer acquisition. Most importantly, though, this has given the team and services the confidence to be even more ambitious. The operational performance is in the right place, is doing really well. But we've got to step up in the commercial side to support the next phase of growth. And this is something that I'm sure my colleagues would agree that I am laser-focused on. So you should expect to see our brands much more prominently in the future with more attractive propositions, and we look forward to welcoming each and every one of you who are not currently customers as customers. I think we're also demonstrating how we can deploy capital effectively. You're going to hear the MAP has made quite an incredible start, deploying not far off GBP 100 million of CapEx this year from a standing start. The Irish peakers remain on track for commissioning next year. And we were really pleased to complete the acquisition of ENSEK, the software company, the software we use for the Energy business. This will deliver value in its own right, but it will also expand the range of commercial options for us to generate future value. So we've already told you that we'll be in our sustainable operating profit ranges for all of our retail supply and optimization businesses this year 2 years ahead of schedule with the recovery in services delivering by 2026. Now as a reminder, the midpoint of these ranges gets to around GBP 800 million of EBIT, which is roughly GBP 1 billion of EBITDA. We said this morning that we're in line with consensus for 2024. And if you look forward to 2025, we expect EBITDA from infrastructure assets of around GBP 600 million subject, of course, as usual, to asset performance and commodity prices albeit that we've already hedged the majority of the 2025 production. Now as part of this, we expect Rough to make an adjusted operating loss of between GBP 50 million and GBP 100 million next year. Rough is absolutely critical, in my view, to the U.K. energy supply and security mix. And it can be a crucial part of future hydrogen economy. But it's clear that making material losses is not something that is either sustainable or will be sustained by us. We're working with the government to see if we can find a regulatory model to support the asset and unlock investment of up to GBP 2 billion, about 5,000 jobs, in the construction phase and converting this to be the world's largest single hydrogen storage facility. If you permit me, if we fast-forward to 2028 and do just a little bit of simple math. So the MAP in the Irish peakers should deliver up to about GBP 170 million of EBITDA by 2028. The MAP will continue to ramp up beyond that, and Dan and Gareth will tell you how we'll do that, at about GBP 170 million. Add to that roughly GBP 1 billion at the midpoint for retail and optimization, you get to just shy of GBP 1.2 billion EBITDA by 2028. Then add on another GBP 200 million from assets that we have today, mainly Spirit and the existing nuclear business, and you get to just shy of GBP 1.4 billion. And then if you assume that we deliver the IRRs we're targeting, and that is a very safe assumption because if we don't see the IRRs, we don't sanction projects, then you'll see that we would add another GBP 240 million or thereabouts of EBITDA by 2028. So you can expect EBITDA in 2028 of around GBP 1.6 billion with the vast majority, over 85%, coming from activities that are either in operation today or have already been sanctioned by us. I've got advisers here even one in the front row keeping a very close eye. This is not a forecast and neither is it new guidance. What we're trying to do is to actually help you understand and do the maths some of the guys we've already given you. But GBP 1.6 billion EBITDA 2028, the vast majority in flight or sanctioned already today. This brings us on to the focus for today. We've spoken a lot about each part of our integrated business adding value to the other parts of the group and allowing us to earn potentially three returns from a single asset: return on the asset itself and optimization opportunity and underpinning the retail business. The MAP is, I think, a perfect example of our strategy in action. A low-risk contracted return, which is a really attractive stand-alone business. It also builds an asset base that supports the group's balance sheet, which in turn supports profitability in both optimization and retail. And it helps to support commercial innovation through new tariffs and data insight. But before we speak about that, I'm going to pass you over to Cassim to talk about Centrica Energy. You've heard me say before, Centrica Energy is the glue that binds our group together through the procurement and route-to-market services it provides to retail and infrastructure. It really helps us understand the energy system, identifying opportunities to deploy more capital and allowing us to create more attractive products for our customers, both corporate and retail. And as the energy system evolves, the services we provide to third-parties are helping us accelerate the energy transition, thus offering a growing set of options for Centrica. So you've heard me drone on enough now. I'm going to start, I'm going to hand over to Cassim and John who will help you understand a lot more about how we deliver value from these options, then I'll come back before we do the Q&A. So Cassim, over to you.

Thanks, Chris. And good afternoon to everyone, and thank you for the opportunity to talk about Centrica Energy. My name is Cassim Mangerah, I'm the Managing Director for CE. I've been in the energy industry for almost 3 decades, across 5 different companies, and prior to that, qualified as a chartered accountant. And also joining me today, as Chris said, is John Park, our CFO. In today's session, we will explore three things: how we generate value as a trading and logistics business, how we've built the core capabilities we have and some of our future growth options. We will also explain how these capabilities support our earnings guidance and create upside opportunities. There is a compelling and enduring opportunity within the energy value chain for our physical trading and logistics business. This opportunity is fundamentally driven by the complexity in the flow of energy from source to sync, and the continuous need to balance supply and demand. As the decarbonization of the energy system accelerates, the need to transfer energy and to balance intermittent generation with demand will continue to grow. The inherent financial risks associated with the movement and the balancing of energy is also going up. Global events and changing weather patterns can significantly alter these flows and balances resulting in distressed and volatile markets. Downstream and upstream players will always need to manage risk in the face of market volatility. This requires counterparties with the right capabilities to help them achieve their financial goals and ensure reliable access to the energy they need. We are one of these counterparties, and these factors present huge opportunities for Centrica Energy across the value chain. Moving forward, the landscape will continue to be shaped by the energy transition, technological advancements, policy changes and geopolitical developments, and we will evolve accordingly. We have fundamentally built CE to take advantage of the fundamental mechanics of the energy markets. This results in what we consider to be a hard-to-replicate model that generates asymmetric upside opportunities. Let me explain what I mean by that. First, our model in a nutshell, we have a portfolio that is anchored in physical assets diversified across the entire energy value chain and its geographies. We traded a comprehensive portfolio of commodities with long-term growth potential, and we see huge benefits from participating across all of them. Our business model is also underpinned by world-class capabilities that ensure the effective implementation of our strategies. These include our deep market expertise, a scalable in-house digital platform and sophisticated risk management capabilities. Furthermore, we are constantly developing these capabilities, giving our fantastic teams the tools they need to succeed. This, in turn, helps us to deliver innovative products for our customers, which ultimately creates value we can capture. Now coming back to what I said, on our model, generating asymmetrical upside opportunities. The fundamental value drivers of our physical trading and logistics business are based on creating a network of physical assets spread across a diverse geographic footprint. For example, when securing physical asset capacity, the initial cost of the investment is known. A baseline return is also, to a large extent, locked in at that point. But the ultimate return from this investment is skewed asymmetrically to the upside. If the markets move in our favor, we can lock in further gains, but if it doesn't, we still secure our base return. The larger the network of physical assets we have available and the more geographies we can optimize those assets in, the greater the opportunity to extract value. This extensive network and our expertise enable us to add value to a broad spectrum of counterparts, including other energy companies, exchanges and grid operators across Europe by providing a range of financial -- sorry, a range of professional services. When taken together, our model and capabilities provide us with substantial competitive advantage and sets us apart from other trading houses you may be familiar with. Our operating model is simple, but the markets we operate in is complex. Building this knowledge and the wider capability is hard, and as Chris already touched on, is also highly complementary to the wider Centrica strategy. We haven't always had this range of capabilities, developing our current model has required time and effort achieved through both organic and inorganic growth. Initially, we focus on managing internal commodity risk for Centrica. The precursor to Centrica Energy was established in 2010 with a primary scope centered on the U.K. gas sector. Over time, we have evolved our model by strategically expanding into adjacencies and developing a competitive advantage, leading us to where we are now: Pan-European gas and power trading with the leading renewables route-to-market business and a global LNG portfolio. Our expansion into new markets or products follows a consistent, meticulous approach where we adhere to a key principle: we start small to test and learn with limited risk capital and progressively expand towards developing full capabilities. For example, when entering a new geography for power trading, we start with small short-term positions using standardized products. Once we develop a good understanding of that market, we expand the time horizon and the trading and risk management strategies. As our presence matures, we move into longer-term renewables, corporate PPAs and batteries. This incremental growth approach is capital efficient because we leverage the scalable platform we have built and we consistently explore strategies that have synergies with our existing portfolio. This approach also enables us to grow whilst managing risk prudently. If conditions are not favorable, we can reverse our decision with limited impact. We did this in France. We're drawing from third-party asset management after realizing we couldn't deliver acceptable returns at the time. We have also grown inorganically, such as when we decided to accelerate the building of our valuable renewables route-to-market business through the acquisition of Neas Energy in 2016. This measured approach to growth has worked out well. As we look forward, the next expansion opportunity for us is in the U.S. market. This is the world's largest liberalized energy market, a key player in an increasingly interconnected system and a market we are already familiar with from our LNG business. Recently, we conducted our first trades in short-term U.S. power trading, and I might add, we made a profit. We are starting small in line with the iterative approach I just laid out with the goal of eventually expanding to full physical trading and logistics services. So moving on now to how we are set up. The business is organized into four verticals, and John will shortly explain how we generate value in each. First, gas and power trading, which is the foundation upon which we have built the businesses we have today. The key value driver here is in the need to move energy through the system to match supply and demand. Through this, we have more efficient markets, managing gas transportation across borders, trading power across interconnectors and optimizing our storage positions. This vertical is now operating in 28 countries, executing over 11 million trades per year. Next, we have renewable energy trading and optimization or RET&O. With increasing decentralization of power generation, many assets owners do not possess the required trading and risk management capabilities to optimize returns on their investment. And crucially, they don't have the desire to build these capabilities, which are hard to develop. We provide the valuable route-to-market services that allows them to get their energy onto the grid. With approximately 16 gigawatts of assets under management, we are also able to match our managed generation and flexible capacity to downstream customer demand. This helps corporates decarbonize through power purchase agreements, i.e., PPAs, another service we can extract value from. Our LNG business has also been built by connecting production to consumption. We began by procuring a few cargoes for our Isle of Grain regasification position followed by risk managing our Sabine Pass contract. By identifying and building around these 2 initial positions, we have gradually expanded to trading 260 cargoes in 2023 supported by a flexible portfolio of contracts. And to date, we've delivered to and from 39 countries globally. Finally, there is a support we provide to the wider group. This includes risk management optimization services across upstream and downstream. And more recently, we have been playing a crucial role in identifying investment opportunities based on our extensive knowledge of the energy system. Now looking at all four pillars together, I'd like to highlight 3 points. First, all 4 verticals are managed with a highly disciplined approach through the deployment of risk capital and resources. Second, there is a portfolio benefit in building these verticals together. For example, the movement of LNG often interacts with the pipeline gas network, adding an extra value dimension. Finally, as we have developed these verticals, we are seeing an increasing balance in the earnings of the business, further enhancing our resilience and underpinning our confidence in the delivery of our GBP 250 million to GBP 350 million operating profit range. That's enough for me for now. Let me hand over to John, who will take you through each business in a bit more detail.

Thank you, Cassim. I joined Centrica Energy just over 2 years ago from a 20-year career in energy trading businesses across investment banks and private equity, and I jumped at the opportunity to join Centrica Energy and the team. You have had the overview of Centrica Energy now and our journey to date. Let me take you through our business in a little bit more detail. I want to explain why we believe that our unique portfolio can consistently deliver our operating profit guidance. First, gas and power trading, an area that has been the foundation of our capabilities since inception. As Cassim outlined, today we have a gas and power trading business across 28 markets in Europe and now the U.S. We trade a broad range of products and strategies. The business is backed by our transportation and gas storage positions. Our physical trading allows us to extract value through time and location spreads supported by our geographical diversification. This is also a unique -- this also creates a unique opportunity for financial trading with analytics underpinned by us being a physical market participant. To give you a sense of scale, we currently have 25 contracted gas storage locations in 9 countries with 500 million therms of capacity under contract. This is enough to heat over 2 million homes over the winter. We are also a leading player in the power markets, flowing electrons in 2024 across 40 European market borders. Let me give you an example of our power trading capabilities can support grids in times of need, in this case, the Hungarian power grid over this past summer. On the ninth of July, the Hungarian power grid saw a number of issues combining resulting in a distressed system. There was a heat wave with temperatures above 37 degrees. There was low rainfall, which reduced output from hydro plants. Daytime had very high solar production, pushing conventional production out of the generation mix. There was also a curtailment on the interconnector cable between Hungary and Serbia. This created a big problem during the evening when solar production ramped down. We had to act fast to balance the system and capture value from our services. This is where our capabilities truly shined. It started with our ability to predict these events like these. We have developed a number of machine learning algorithms that combine weather data with information from my extensive physical presence to spot these patterns. This allows us to move faster than the market to capture value from these distressed market events. And in this case, our models have predicted pressure before the distress became apparent to others, using our grid of interconnected capacity where we were able to flow power into the Hungarian power grid during the evening hours. This helped to alleviate the pressure and limit price spikes from the distressed system. And of course, we've earned an attractive return for our services. It is important to understand that very few market participants can do what we do. See, you can only do this because we have a comprehensive portfolio of physical positions with a wide geographical footprint. We have a scalable 24/7 trading and operations set up that continuously monitors the market. We have sophisticated trading capabilities to manage risk backed by deep fundamental market knowledge. And of course, we benefit from being able to deploy the group balance sheet and credit rating. Let's move to RET&O, our second pillar. There's been a massive renewable rollout in Europe and the U.K. The total installed capacity for wind and solar alone was almost 570 gigawatts at the end of 2023. This is an increase of over 170% in the last 10 years. This will continue to grow as renewables have become one of the lowest-cost new build technologies across most major European markets. Centrica Energy has grown along with this trend. We've increased from 2 gigawatts of capacity under management in 2015 to around 16 gigawatts of renewable and flexible assets today. This already makes us one of the largest independent renewable portfolios in Europe. We are expecting strong growth going forward, reaching approximately 28 gigawatts of renewable and flexible capacity by 2030. As Cassim touched on, many renewable asset owners and investors do not have the ability to balance themselves on the grid. There are material financial consequences for them, including grid suspension, if they have imbalances with the grid connected -- operator. With our capabilities and market knowledge, we can step in to solve these problems for them, earning ourselves an attractive return. We can provide a route to market for the renewable generation. We can balance renewable energy and indemnify asset owners against penalties for imbalances. We can participate in ancillary markets on their behalf, further increasing the value for the asset owners, and therefore, the value that they're willing to pay us for our services. And of course, we can provide bankable products for developers to help their products or projects onto the market. Meanwhile, on the consumer side, we move renewable energy from generation to offtakers who want to decarbonize their operations while managing their risk exposure. Our ability to package up uninterruptible renewable power from our diverse portfolio is a unique value proposition that only a few market participants can match. This dynamic has obviously become to the fore recently with a growth in power demand from data centers. Our capabilities make us an attractive partner, and in 2023, around 35% of our corporate PPAs was executed with the tech sector. It is also key to understand our markets continue to grow. As cheap renewables transform our grids and thermal generation is retired, the production stack becomes more intermittent. This creates an opportunity for flexible generation and storage to be deployed at scale. This is an area of focus for us for growth. Our battery portfolio under management is currently at over 400 megawatts, and we are turning a profit on this portfolio today. Overall, these dynamics mean that we have a business with highly ratable earnings profile, around 70% of our asset contracts extend beyond 2026. We offer an essential service that the market will pay for. Therefore, a significant part of this business has fee-based revenue streams. All of this means this is a business set up to succeed in all market conditions. To bring this to life, let us look at an example in Finland of how we adapted our offerings to compete and win. The Finnish market is an interesting and challenging one. As more and more renewables are deployed, there are not enough flexible consumption in the system. This increases the risk of high imbalance cost. Also, cold winters often cause icing issues taking down some of the renewable generation and further stressing the system. We saw this as an opportunity to innovate in how we manage risk for our customers. We were the first in the market with an offering, which included protection against financial losses in times of extreme imbalance cost. In addition, we enabled renewable assets to participate in ancillary service markets. This is where assets are paid by the grid operator to be on standby for energy generation or consumption. We also strengthened our physical trading capabilities in Finland to capture additional value from the distressed market. These innovations made us a highly attractive counterparty, which is reflected in the fact that we have been able to double our operational renewable portfolio in 2 years towards 1.2 gigawatts by the end of 2023, while delivering very attractive returns on our risk-adjusted capital. Finland is one of our newer market entries and one of our top performing markets in 2024. This demonstrates how we can profit from renewable rollout across countries. We were able to achieve this growth in Finland because of the scalable platform we've developed over the past years, and we are using the same capabilities to further grow our RET&O business. Let's move on to our global LNG business, our third pillar. Stepping back for a moment and looking at the wider market, LNG has had a transformative effect on the global energy system and is the key driver behind the globalization of gas markets. In under 10 years between 2014 and 2023, global LNG trade grew almost 70%. We see the importance of LNG continuing to increase. Demand is expected to approximately double by 2050 compared to 2020 as LNG is used to replace coal and we see a lot of new LNG supply coming online. The LNG impact on the global energy system is the reason why we got into the LNG business. Today, we have a mature LNG portfolio. We grew from a business that traded 27 cargoes in 2014 to 260 cargoes in 2023, as Cassim mentioned. Expanding our capabilities has been crucial. This is fundamentally a bilateral physical activity where credibility is key. That includes having the right team and processes in place as well as group financial support. As Cassim mentioned, original portfolio was anchored around 2 contracts. The Sabine Pass LNG offtake and the Isle of Grain regasification capacity. That was a solid start, but it meant that we were heavily exposed to the particular dynamics of those assets and markets. So over time, we've added to our portfolio with a combination of short-, medium- and long-term positions in the U.S., Europe, Middle East and Far East. Our new long-term deals grew the portfolio while diversifying our risk and increasing our optionality. On the buy side, we've added Delfin and Mozambique, while on the sales side, with Shenergy, all with common threads of flexibility and optionality. Our optimization activities are supported by 2 long-term vessel charters alongside a range of shorter-term shipping capabilities. These capabilities meant we can optimize our portfolio through a range of strategies, including, for example, cargo diversions, adjusting delivery timing or executing on partial deliveries. Let's now look at a real-life example to illustrate this further. In July this year, we took a cargo from Sabine Pass with a base case delivery to the Isle of Grain. However, market conditions shifted and our traders found an opportunity to shift the delivery to the Far East, selling the cargo indexed to the Asian market, which was paying a higher premium at the time. This gave us an uplift of $5 million, which we could only achieve because of our capabilities across trading, analytics, operations and the flexibility we have in our current portfolio. Crucially, we captured this additional value without carrying any further price risk as we immediately transfer our hedge positions from Europe to Asia. We also continue to focus on a prudent risk management to underpin our portfolio and returns. Looking at the next few years of Sabine Pass contract, we are largely hedged and we have also recently taken further steps to offset our Sabine Pass price exposure through physical supply deals in the U.S. with Coterra starting in 2028. This deal hedges around 1/3 of our annual Sabine Pass offtake for 10 years. Importantly, these hedges generate a positive margin and we retain the physical optionality, as I just described, to improve our returns when market conditions move into our favor. Besides direct LNG hedging, we can also use our capabilities in physical gas markets to support the LNG risk management. Finally, as Chris mentioned, we use our capabilities and platform to create value for the wider Centrica Group. This includes the procurement and risk management of our energy supply business and a route to market and hedging services for our infrastructure assets in a similar way as what we do for third parties through our RET&O business. Equally, we can use our knowledge and experience in physical grids to support more informed investment decisions for the group. As a rough guide, we can generally add about 2% incremental returns on investment decisions through optimization. A great example of this came in September this year when Centrica announced the acquisition of a portfolio of ready-to-build battery projects in Sweden. Identifying that opportunity started with our long-term experience in the Swedish market, where we have been trading since 2009. We saw a structural undersupply in frequency control products in a specific region in Sweden. That led us to work with our colleagues across the broader group to deliver this investment, which is expected to create attractive returns while also strengthening our expertise in managing batteries in the Nordics. As we've gone through these examples, you will have seen how our business is anchored in physical assets. As Cassim said, this gives us a fundamental different risk profile to other trading businesses. We are further supported by the group's financial strength. This gives us the trading capacity, credit lines and liquidity to capture value under all market conditions, and you saw this value in 2022 and 2023. This does not mean our returns are guaranteed. Price and volatility impact the size of the opportunity set for us, but it adds predictability to our earnings base. We have a more diverse business today with greater capabilities and a track record for growth. You can see this in our financial performance. In 2019 before COVID and major market volatilities, we delivered GBP 140 million of adjusted operating profit. In 2024 and 2025, we'll deliver within our GBP 250 million to GBP 350 million range demonstrating a strong organic growth over this period. We have also more balanced gross margin contribution across our pillars over the last couple of years. In particular, as we've grown RET&O, we've added a more sustainable earnings profile to our business. Looking forward, we remain confident in our GBP 250 million to GBP 350 million operating profit range under normalizing market conditions. And if you saw the same market conditions as in 2022 and 2023, we are confident we can deliver a similar or better performance as what we did while still operating within a controlled risk environment. This will not be due to luck, but by design of our business, as we've outlined today. Additionally, our strategy and performance are underpinned by powerful market trends in globalization and decarbonization that has come a long way to go -- that's come a long way and it's got a long way to go. Cassim, let me pass over to you.

Thank you, John. Today, we've given you greater insight into Centrica Energy's model at the physical trading and logistics business and how we create value across our verticals. What we've built is hard to replicate with a comprehensive product suite across the energy value chain and deep capabilities that leverage cutting-edge technology to make credit decisions day in and day out. . You've seen our demonstrated ability to grow the business, such as how we've built one of the largest third-party renewable portfolios in Europe and how we scaled our LNG business. And this has been achieved both through innovation, like how we adapted our offerings in the Finnish market to win in retail and how we've changed how we think about managing risk for LNG for a recent Coterra deal, and through deliberate iterative approach to expand into new products and markets. As John mentioned, we are confident in our physical outlook and meeting the GBP 250 million to GBP 350 million operating profit guidance, supported by a balanced portfolio, aligned with enduring market trends and strong contributions from businesses backed by ratable contracts. And of course, we have the ability to capture asymmetric upside potential like we saw in 2022 and 2023. And we will not stop there. We have exciting and material opportunities ahead of us, continuing our track record of growth. Thank you for your time, and we'll be delighted to take any questions you have before moving on to the next session.

Excellent. So look, before we go to the questions, there's a couple of things. We try and focus on questions on this section rather than anything on the trade update. I just want to emphasize one thing that Cassim and John touched on before we do that. We expect the global gas market to be soft over the next 2 to 3 years. With lots of questions, what's going to happen to Russian gas, U.S. LNG, we don't know, but we expect a bit of a glut of gas. We therefore hedged the vast majority of our LNG exposure over the next 2 to 3 years to limit any downside and that's through things like the innovative Coterra deal that Cassim and the team have done over the last few months and some recent LNG sales, some of which we've announced, some of which we haven't announced because the counterparty wants to keep below the radar. If the softness comes to pass, we stand ready to pick up well-priced, long-term LNG deals where we think we can add value for the shareholders and also energy security for our customers. But the key thing to know is we've limited that downside. I know that, that's been something on some people's minds. So the majority and the number that Cassim and John showed in the chart, actually, we debated whether we'd have something that would move during the presentation because it is literally moving at the moment as we hedge a bit more of it. So we've got far less exposure over the next 2 to 3 years. But with that, let's move to questions. I know there are probably loads of questions. I will try and moderate. So we'll go Jenny, Mark and we'll go here. So I've got microphones. I should have said, people watching this feed won't know -- I don't know if you could because the noise -- we're having a fair bit of noise. There's a room next store with lots of applause. So in case you wonder, you think I've lost my marbles, it was just every time we speak, you hear a little round of applause. It was rather pleasing. So anyway, Jenny?

Jenny Ping from Citi. Just on Page 19 -- sorry, on page the one before, if I can get the page number, 17, on the LNG portfolio, can you just explain to us -- obviously, what we can see as outsiders is the spreads between the Henry Hub and the NBP. And there's obviously been some sizable margins that appeared in the market. Can you just explain to us what is holding you back from capturing some of those sizable margins that actually reflects in your numbers? And then in addition to that, I guess, in terms of the portfolio mix, if I look back on Page 19, historically, pre-Russia-Ukraine war, you've been trading at around 100 or so, so effectively 1/3, 1/3, 1/3. Is that the direction of travel going forward in terms of what we should expect medium term in that evenly split manner?

So just to answer the question in terms of let me just break it down to a couple of things. First and foremost, which is, obviously, markets and spreads are moving around. So when you talk about the current situation between Henry Hub and NBP just a point we are making earlier, we are obviously trying to hedge our portfolio progressively as we go through time. So taking spread at one time will not necessarily reflect our portfolio. The other dimension to add to that is since as you look back and you look forward, we've obviously had a period where Centrica was rebuilding the business and the balance sheet. So our inactivity in 2020, '21 as part of the story in terms of why we have some of the differences along. Going forward, as Chris said, we are looking to manage our portfolio in a much more consistent manner, which is to progressively hedge our portfolio. We continue to do that, particularly as we see an opportunity to lay off material risk financially and from an FM perspective, but retaining the flexibility to capture upside opportunities that we see going forward.

I mean, if I could add on that, Jenny, you remember when prices went to the most crazy level after the Russian invasion of Ukraine, I remember saying to the Board, if we could lift the cargo from Cheniere today and deliver it to Isle of Grain today, we would pay GBP 25 million with sales of GBP 315 million. So the spread is GBP 219 million per cargo, but we don't operate the portfolio that way. It's not that it could go the other way, but you could see a huge spike in U.S. gas prices. So what we're try and do is to make sure that we're pretty well hedged, so that we're well set and Arturo is at the back -- Arturo and the team can capture value, but we are very rarely very naked on LNG exposure. And what we're always trying to do is to have a baseline hedge and then to be able to capture that upside optionality. So you can look at the spreads on any one particular day and say we should have got them. But today, we are hedged out into 2028. And the more we think the market is going to be bearish, the more we hedge. And when we think it's bullish, we might hedge a bit less to keep a bit more just based also on fundamentals. And that might change. If our view next year changes of how 2028 is going to go, we may lay on more hedges or fewer hedges because it's all about making sure that we've got the right exposure we can capture the upside, but we don't run too much naked price risk. Mark, and then we'll come over here.

Mark Freshney from UBS. Can I ask, it's interesting, Cassim, that you're talking about making moves into the U.S. market. I mean, that's very different to Europe, but it's much, much bigger in energy trading in the U.S. as a European activity, right? So I can see. But the last time you went was not successful, right? You lost lots of money in short periods of time. Margins were never there, polar vortex. I think NRG had a very bad experience with Direct Energy. And despite being the second largest energy trader in North America, you couldn't make it work. So Cassim, what are you doing differently this time? And why are you going back to North America?

I mean, outlook, let me -- I'm not sure we would have -- we might have said we were the second largest energy trader, I'd be very surprised if we were. So we did an awful lot of wholesale gas and power when we owned Direct Energy. You're right, NRG -- that was a point which I thought maybe actually maybe the luck was with us when we completed the deal. I can't remember the name of the storm, but we complete the deal about a week before the storm came in. We completed, the cost is about $1 billion because you were kept massively short. Now the regulator actually gave NRG and other companies a lot of that back through increased prices. But if you had uncovered shorts, you were really in trouble. Look, I think it's a fundamentally different business. And I remember when I came into the company, we caught really short because we had sold one a bunch of gas into California. We bought the gas in Canada. And there was one route in and the pipeline went on fire. It wasn't our pipeline and you look and think we are absolutely s******. We've got a seal here, there's no way to get the gas and the market is going crazy. I think the initial thing I remember Cassim -- Russell and I were in a meeting. Cassim came in delighted and said, we've done our first full trade in the U.S. Closed them out, made $16. And so these are very small trades. They don't use algorithms, but they're also trading in either, [ Cassim says ], either within day or day ahead. And that's not to say that's all that we'll do. But we took a very, very different approach in Direct Energy. And I was never really clear, if I'm being brutally honest, as to how we differentiated between what was optimization and what was B2B energy supply. And if I'm being frank, it was a good team we had there. I'm not sure that they were super clear. What was clear to me as soon as I joined the company. And Alex, I think you were based there, what was clear to me is we did not have expert trading capability in that business. We were, I think, good in marketing to the retail customer base. I think we were good at marketing to the B2B customer base. One of the first things I did when I was doing a Russell's job is I changed and appointed a Group Chief Risk Officer in order to understand the risks that we've been taking in there because I didn't really think that we had a full handle on it. But I mean, Cassim, you can describe what we're doing, but it is fundamentally different. And whilst we might get to something that's far bigger, I can promise you it won't be without the Chief Risk Officer and Russell being happy and me being happy and then I've got to get the Board happy as well. This is something we had lots of conversations with the Board, but you should relay to people, was it $16 in total? Or was it $4 for all four trades?

No, $15 in total, $4 per trade, I think, on average. Just to reiterate, I would agree with everything Chris said, the model and approach was entirely different. I was here at the time as well as in part of Centrica and part of the senior management, too, so I think have a reasonable insight on that. Also, I think when we look at the U.S., the U.S. is not just 1 market, there are 11 ISOs. We're taking an iterative approach, as Chris said. So we're approaching the model entirely different. We also see connectivity between the U.S. and Europe because of LNG. And so the Coterra deal has happened because even the U.S. players see that connectivity, which was not the case before. And if you look at some of the dynamics between what we can do in Europe from a renewables perspective, we can take the same model into the U.S. because of the technological advances in Europe relative to what's happening in U.S. simply because we are ahead of the curve. We think the same portfolio, of course, that we are taking in Europe, the same iterative approach to grow, we can apply to the U.S. So we are confident that we will do that in a measured way and it is a different approach.

I think a good example, if you look at the deal with Coterra, where effectively we give Coterra access to European gas prices. And what we are able to do therefore is effectively have a lot of the Cheniere purchase now denominated in European gas prices. So we've got -- the market risk has actually reduced massively. We could have chosen to go in and physically trade gas in the U.S., but the Coterra deal gave us what we were looking for without having to take all that risk of physical gas trading. So this will not be something where we come back in February and say surprise, surprise. We've got 50 people in the U.S. and we're trading 2 or 3 Bcf a day. This is something that we decided to get bigger we'll take quite some time for us. We've got a question over here and then we've got a couple online as well, I think so.

Harrison Williams from Morgan Stanley. So actually, following on, on the U.S. topic. I mean, one of the big benefits you talked about in Europe was your large physical presence and the deep market knowledge. Do you think the LNG presence you've got is sufficient for you to pursue this organically? Or to really pursue this, would it need to be something more inorganic? And then the second question is, I think, you are building confidence in this long term GBP 250 million to GBP 350 million adjusted operating profit range. Clearly, you have ambitions to go beyond that. And I'm wondering if you could give us some key metrics we should be tracking, which could help you -- or help us follow when you might surpass the top end of that range? Is that countries -- number of countries? Is that capacity under management or what else?

That's a brilliant question because Russell has been asking Cassim that as we've been trying to set the budget for next year. So I'm really interested in the answer to this. Go on, Cassim.

Kind of fear that. So just first on the organic/inorganic in the U.S. that you mentioned. Look, it's early days. As we said, we are going to take an iterative approach in growing in the U.S. How we actually grow will be a function of how successful we are. We're taking a small step and we'll grow on that. Can we grow scalable business in the U.S.? Ultimately, that is the objective, as I said earlier. There's no two ways about that. But what we're not going to do here today is tell you what steps they are on a predetermined basis because it's completely determined -- it will be dependent on how successfully we deliver on the strategy. In terms of the guidance, we are comfortable, very comfortable, with the guidance of GBP 250 million to GBP 350 million. I'm confident that we can deliver that. And obviously, we are trying to grow and look at growth opportunities. And when we have something to say on our range, you'll be the first to know. But right now, we are sticking with the guidance of GBP 250 million to GBP 350 million.

Perfect. Brilliant answer. Go here, here. Okay and then...

Just -- did you get the answer there covering the range, you're happy with that?

Covering the range, happy, yes. I mean, if you had anything to add on kind of longer term, what we could track metrics-wise to kind of be on that, great, but...

So I mean, the critical thing on this is so we think we've got a competitive advantage in the markets that we're in. And we think that others will either be unwilling or unable to replicate what we've got. I might be wrong, so they might come into those markets and then you expect the returns to be a bit down a little bit. So this is why we're going into new markets. And so if we're right and they either are unable to do it or they choose not to do it, we'll keep the margins we've got in the existing markets, we'll add margins on the new market. But again, covering the downside, if people -- other people come in and they bid that way, then, okay, we'll have -- we won't leave. We'll have lower margins in these existing markets, but we're building positions in new markets. And there's a whole bunch of markets we can go into, but very, very cautiously. It's one of the beauties of this business that we bought in Denmark where the intraday trading team would go into a new market, test the market with very small trades, learn about it and either come out and say, okay, we think we understand this market. And then the retail team would go into long-term deals or they say, you know what, we just don't think that we can make this work. And I've seen them going in and I've seen them put in for a few months to come out and say not for us. They're super disciplined. And we can -- we've been very comfortable applying that in Europe because there's a land border and we say, why would we be uncomfortable with the sea borders? So we'll do that. We might not make all 11 ISOs, sorry, in the electricity market. We might say these are quite -- like ERCOT is probably quite good, the Texas market. But we'll test, we'll test [ MISO ] first, we'll test ERCOT, we'll probably try PGM. They're probably the 3 really good markets for us to try and understand. I'd be amazed if we can make all 11 of the markets. There will be some way the liquidity won't be right, the market knowledge will be required. So we'll just have to see, but I [ told ] you'd get answer there saying Cassim is going to up the range to maybe GBP 350 million to GBP 400 million, but unfortunately, we're going to have to wait. So let's go on now. Okay. So we'll go here, here, here, here and then we'll go online and then we'll go on to our meter asset provider.

Charles Swabey, HSBC. Two questions. Maybe one, to go back to the question on guidance. So just if you look at the route-to-market business, we think about that 28 gigawatt you're looking to get to by 2030, up from the 16 now. Does that support the medium-term guidance range or is that suggest some potential upside, is the first question. And then the second one, is there any read across for Centrica Energy from the current unfavorable economics we're seeing in storage at the moment due to seasonal spreads?

So look at that, first, we see obviously the target for that is out to 2030, the mid-range target is to, I think, 2026. And whereas things might be a bit away, I would be incredibly disappointed if we went from 16 gigs to 28 gigs and said, you know what, the profit guidance to see. But we just got to understand and learn how the market evolves. So I would hope that, that would be the case. And on storage, obviously, we've seen an impact because Cassim's team trade the Rough field. So we're seeing an impact there, as you can see with the losses, but Cassim was just talking about, we've talked regularly about the fact there's no shape in the curve. Actually, summer/winter was inverted for a wee bit. It's a bit odd, but I don't know.

Yes. I mean, on the -- if I start with the summer/winter spread that you mentioned, it is inverted right now. It does provide a challenging environment from a trading perspective clearly because we don't think it is sustainable. We expect it to be traded away before the end of winter. If it doesn't, nobody is going to store gas in the storage facility across Europe, although there are regulatory measures that force people to do that, the economics of which are not certain. So there's still a compensation package that needs to be agreed and determined. So we think it's a quirk in the market right now. It has an impact on us, to be fair. But we think we'll manage that as it competes away naturally because it has to. Otherwise, as I said, there's no storage there in gas storage.

Excellent. Thank you.

Harry Wyburd from Exane. Turning to the RET&O business. I'm interested in your thoughts on an asset-light versus asset-heavy model. So you've done -- you're probably one of the only companies we cover that's gone heavily down the aggregation raise, whereas most of your peers are going down the physical asset loads, adding gigawatts and gigawatts of batteries in particular. So how do you compare the two? Have you gone down aggregation because you think that's better, is better ROIC. And do you feel like you should or could add more physical assets and that would improve your ability to trade the market you're trading in. And in particular, if you're thinking about that inorganically, I guess there are potential assets in the U.K. that are trading at quite depressed multiples in the battery space. What was your thoughts be on adding additional capacity? And do you think you can monetize that?

Let me try that. So we are agnostic as to whether we own the asset or not. If we think by owning the asset, we can make a better return, we're happy to buy. We bought battery in Belgium last week, the week before, we've been operating for 5, 6 years. So we know this thing really well, opportunity camp up to buy it. We're building some batteries. I can't remember, we've got built on in Sweden, just now we're building another one in Belgium. We looked at -- I think yesterday, another one in Belgium, a couple in the U.K. So we're very happy to build these things. But we're also very happy to have these on the third-party management by Cassim's team. And when we build something, there is no debate is managed by Cassim's team. So there is a separate team that manage little batteries. But we buy or build batteries and we're trading them, and we can make money, and we see some deals with peers more for the equity ownership we'll sell the batteries. So we don't have this [indiscernible] there's nothing an ideological about what we do. There's just a very strict criteria of we can make money or not. I think we looked yesterday -- so you've also [indiscernible] investment and we do just a bit investment committee, Cassim's sits in it. The number of things that we've looked at and there was something like, we had -- we looked at 200 M&A deals this year. Now some of it is just lots of inbound stuff and you have a look -- I don't know how many, we followed up on nonbinding offer, but we kicked out something like 85% of them because of price at the first round of the nonbinding offer and the team was not sure that's a good idea. That is absolutely brilliant. But obviously now is the market is coming towards us because people have been overpaying. And we've been very disciplined if we get in -- we get in as we don't, we don't. Just now we're getting through more. Now we're not getting through more because we've relaxed their investment criteria because the interest rate environment has changed. And as you see, there's some distressed assets there. So we'd be very comfortable in buying them, but something you've got to be very careful. Sometimes assets are distressed not because of financing changes, but because they're distressed assets that may be in the wrong place. And that's where the knowledge we've got from this team is incredible. We know we chose the Swedish sites because Cassim's team said there's going to be a crunch here for 5 or 6 years, and we can make super normal returns and then it will just be normal returns thereafter. So we picked these sites and went looking for a developer who own the sites specifically based on what we understood from the grid constraints that were coming. So we're quite agnostic. If there's a big portfolio there that's -- that looks good, then very happy to look at it if it gets through the screening criteria for Russell and the team. Cassim and the team are happy at it. If it meets our hurdle rates, then we talk to the Chairman. And if we want to put the money, we're happy to buy it, we will. But we would do both actually, we're kind of very happy to continue with the capital light. We manage it for people and to supplement it with our own assets as well.

Ahmed From Jefferies. Two questions. I was just hoping if you could sort of help us think a little bit about the sort of the gross margin split more on a contracted, uncontracted basis for '25, '26. So I'm thinking Vitol is a large part of that is contracted, maybe LNG is contracted as well. So would it be fair to think 50%, 60% or more than that of this is contracted?

Honestly, that's commercially confidential that we wouldn't give that out [indiscernible] Vitol.

The other part I just wanted to ask you is how has the capital intensity or capital allocation of this business evolved over time as you're sort of going from 100 to sort of -- sort of the 300-plus range you're talking about?

So look, Ahmed, see that one maybe Jon. I would say way more sophisticated than it used to be. So we have a very well calculated risk capital balance. We monitor that very regularly. And I think if I go back 2, 3, 4 years, we kind of knew what we were doing there, but we're nowhere near as professional as it -- on that. And that was one of the prerequisites. And when we saw just how good this business could be in 2022 and 2023, we looked -- we had long chats Cassim and the team of the Board if we want to do this, we have to really make it far more like a trade in the house. And John coming in from really helps us with that. And so it's far more sophisticated now. But Russell, you probably touch on Jon, you've probably got something you want to comment in there.

Yes. Do you want me to start, Jon, and I [indiscernible]. Yes. I think when you think about the capital that you keep for this business, you also have to think about the risk you're taking every day. So the business has grown. The types of markets we're in are slightly different. We, of course, need to manage that very carefully. And there's 3 types of risks that we have to manage every day. You've got your liquidity risk, you got your market, or your price risk and you've got your counterparty risk, and you actually have to think about them in slightly different ways. Now one of the things that we do in the group is we make sure that all those types of risks from across the group are pulled into Centric Energy. So actually, a lot of the price risk for our downstream book, that's included in Centric Energy. The work that we do for the nuclear reactors for Spirit, that comes into Centric Energy. We pool all of those risks together. That's the most capital-efficient way for the group to manage all of these things. So for market risk, commodity risk, we've got a suite of tools to manage that. It's not just capital that you hold. You've got value at risk, profit at risk, volumetric limits. Even though -- there's various different tools you're using to make sure that you're managing that business well. Chris and I set an overall VaR limit for the business. That goes through the Chief Risk Officer, who reports into me, and that's cascaded down into the businesses. So that's one of the primary tools that we use to look at just both risk and capital in that respect. The actual amount of VaR that we use, and there's a question on this online, so I'll just cover that at the same time. That varies. Nominal prices, volatility, the market, of course, judge that. The VaR limits were a lot higher in 2022. They've come down significantly. If you look at the annual report at the end of last year, you can see that the 1-day 95% VaR for the business was GBP 4 million. That's for the proprietary book. So we keep those levels relatively tight. Liquidity risk, again, a big focus in 2022. So margin calls and big movements there. The group at one point had GBP 1.8 billion of margin cash posted out. That was a significant impact for the industry. We managed that really well then. We learned from it as well. So we've now put in new tools, new capital options that we have so that we can manage liquidity in a much more sophisticated way. Margin levels, of course, have dropped down significantly since then. It's now probably GBP 200 million to GBP 300 million on average that we have on that side. And then in terms of like supporting the liquidity and supporting the overall limits, of course, the big thing you got there is the group's BBB investment-grade credit rating. And that allows us to go on to the exchanges with very limited amount of margin, allows us to sign long-term contracts without having to put much capital behind that. So the sort of primary thing that we want to do is maintain that balance sheet strength. And we do that in a variety of different ways, including committed and uncommitted lines that we've got available just to make sure that we can take advantage of opportunities that they come. And then there's risk capital itself. So risk capital would be the actual amount of working capital you might expect to use in a deal plus your risk-weighted potential loss on that. Of course, we've got buffers for that, and we've got a very sophisticated toolkit. So we've got various different structures that we use. And I think it's either for the existing business, the growing business, we flex it for that or even going into the U.S., we make sure that we've got the right toolkit for that. So that's the way it's managed.

Jon anything from you?

Yes. Let me just add to that. A couple of things that's also important for me is all these risk and risk capital calculations is calculated by a risk team that does not report to the business. All these calculations are completely independent from Cassim or the business. Every single trade we execute, is it an intraday trade, a day trade or a 15-year LNG trade gets captured in our risk system on the day of execution and then included into the risk runs. The risk team is run by Chiara Sada sitting there at the back of the house. Run by risk professionals from investment banks. She reports into Dawn Bell that reports into Russell and the final decision on risk capital consumption sits with Russell and it does not sit with Cassim.

Excellent. Thanks. And just before we go to Dominic's question, the question I've got online, it talks about how do you measure risk. I think we've answered all of that. We talk about maximum GBP losses. We've also got stop-loss limits. So there's a daily stop loss, but we've also got profit drawdowns. So as you go through the year as your profit goes up. And we've had bad days. I've seen them in an operation when I was CFO. I've seen in operation as CEO. And you get that comfort that you have a bad day, and you get a phone call it seems a bit sheepish saying not a good day, closed all the positions out. We're redoing the fundamental analysis. That's great because if you never get those calls, you know that you're still having the bad days. So you always worry about risk in business of this. But the key thing to remember is we don't take massive open speculative positions. It's asset, but we take storage capacity, we take capacity in pipelines, we take capacity in cables. We take basis differential spreads. We take calendar spreads, but we very, very rarely take an open risk on a commodity. And if we do, we don't take an open risk in a commodity, which could be existential for us or even material enough that you would see it in our results when you look at it. So it's -- and we executed -- what was it, 11 million algorithmic trades last year. Sometimes we make to quit in the trade. But we've got our own proprietary software and ability to do that. So we're not buying 20 LNG cargoes and saying you know we're going to sit because we think the price is going to go up and it will be heroes if we do, we'll get the spreads that Jenny talks about or will be complete muppets if we don't. So just to say there's a few other. There's also -- just before we go to [indiscernible], there's a question probably for you, Jon, [indiscernible] a PPA with the power price producer, do you hedge it with a third party? Or do you take that PPA onto your books? And the second part of [indiscernible] question online.

It's a combination of things. All these positions are managed in the portfolio, and it will be a combination of financial hedges, physical hedges or corporate PPAs. And all of these decisions are made with consideration of the risk capital and long-term risk measures that we apply to this portfolio. And again, it's something that's independently verified by our risk team.

Okay. Excellent. Dominic, and then we will take last 2 questions from Richard, and then we'll switch over and we'll have Dan and Gareth up on the stage.

It's Dominic Nash from Barclays. Two questions from me, sort of following up from the risk capital question. Could you actually give us a view what the actual invested capital tied up in trading actually is and/or what the returns that you make on that balance sheet usage is or hurdle rate for it? And then the second question is sort of tying it back into the asset. Could you -- are you going to rule yourself out from bidding for Grain LNG if and when that comes up for sale next year?

All right. Second one, again, good time. Look, we are -- we wouldn't rule ourselves in or out of anything. We're not -- I don't know, we wouldn't -- Kevin used to be CFO in J Sainsbury, Sainsbury said they're selling 100 stores. We're not going to bid for Sainsbury store completely out in the picture. But energy...

That will be the title of my note tomorrow.

I always say something. I always go to ask myself one thing. But look, energy assets that are linked to the energy transition that we think we know how to operate, that we think we can make a good return that we think is more contracted than not we could be interested in. But as I mentioned, I was surprised yesterday, obviously, we see all the stuff that we look at. But when somebody put it all together and you said we looked at 202 deals this year. I think [indiscernible] that's a lot. And then we filter them all out and we go through. So if and when Jon decides that he wants to send out a memorandum, of course, we will look at it because we know how to run gas assets. I think we're pretty good at it. But the value is not there, then we wouldn't look at the value was there when -- we can have a chat, but it depends on what else is about because if that comes out, there's nothing else, that's quite good. As long as the result, the returns are there. But if there's 2 or 3 other things we're looking at, then who knows. But I wouldn't -- I would neither or not tomorrow saying we're going to buy Sainsbury's supermarkets that they're going to sell nor that we're either in or out of Grain. But we would obviously look at that in the same way we would look at nuclear power stations. We look at other power stations, we look at batteries and the likes, so.

And in terms of the capital charge and how much we've got tied up. And of course, it's quite a it's a multifaceted business. To some extent, you hold capital in storage. We've got gas and storage in some places. Some capital is tied up in long-term contracts. Some are tied up in terms of wanting to make sure you've got the liquidity resources when you need it to capture opportunities when they pop up. We don't give guidance on that from that perspective. And you can see the amount of, for example, storage that we've got at any reporting period. What I would say though, and I think it's fair to say, Jon, if we've got incremental deals that come to us, we're expecting to get at least a 20% return on the risk-adjusted capital employed. That would be the sort of metrics that we would use internally for incremental deals.

I think -- on that, what I would add is it's -- it's one of the real benefits of our business. I mean this would be one of the best return on capital employed businesses probably along with the energy retail business. But the credit rating that we have that allow Cassim and the team that we've got here to participate in the market is underpinned by Spirit Energy, the nuclear power stations, the Meter Asset provider, et cetera. And so that's why we look at the overall -- we look at the return on -- risk-adjusted return on capital in individual transactions, but we're really interested in the overall return on capital of the group. It's why we keep -- and I think it's probably still not fully understood that we plan to invest 2/3 of our market cap over the next 4 years, and we will have a return on invested capital north of 20% throughout that investment phase. I think that's quite some -- and that return will be north of 20% once we're done, which I think is really quite strong because we have this complementary business. But we've got 2 questions, Richard, and then we'll switch over. And does the growth in trading across Europe mean you need to keep debt off the balance sheet in the mid- to long-term, you need collateral to adequately flex the portfolio in high as well as low price scenarios? No is the answer to that. And then Sabine Pass, under what scenarios can Sabine Pass gas end up out of the money again. We're unhedged. U.S. gas prices go through the roof and European gas prices go through the floor. That's the basis on which Sabine Pass could be out of the money. But because we're mainly hedged for the next 3-ish year, then I'm looking at [indiscernible], could be 3 to 4 years actually depending on. Yes. So it's -- you would never say never, but that's one of the reasons I really like the Coterra deal. And the Coterra -- because even I went to meet with [indiscernible], meet the CEO of Coterra and the team because I think you're doing these deals, you want to understand who you're dealing with. Really impressive people. I think they run a brilliant business. But the beauty of this is if we can get Sabine Pass to be something that we purchase and we buy and sell on the same index, my god, you reduce the risk, materially. And it allows you to have -- what I would say is a slightly more conventional LNG portfolio I would have been used to 15 years ago, where you buy and sell in the same index, and then your optimization becomes a lot easier. Look, Cassim, Jon, thank you very much. And we'll get Dan and Gareth up on to the stage, and they're going to talk about our Meter Asset Provider.

Chris, are we good to go?

Rosenfield, very good to go. Over to you.

Fantastic. Thank you, Chris, and good afternoon, everybody. I'm Dan Rosenfield. I'm the Managing Director of the New Business and Net Zero division with Centrica, and I'm joined by my colleague here, Gareth Openshaw, VP of our Meter Asset Provider or MAP business. And just taking a step back for a moment and looking at the bigger picture, we set up the New Business and Net Zero division at the start of this year to bring a singular focus to our efforts in electrification and decarbonizing homes. So we're really busy building out the Hive platform to evolve from smart heating and the thermostat that I hope you all know and love into a whole house smart energy platform accessed through our app. And that is the gateway to a broad range of capabilities across heat pumps, EV chargers, flex energy, as Chris mentioned in his introduction, and solar and storage. And one of the points I do want to emphasize is that smart meters are the essential foundation for all of this. And whilst I'm really pleased to be presenting the MAP, a new business and a new revenue stream for Centrica, I also want to emphasize that smart meters are absolutely not new to us at Centrica. In fact, we've been a leader in the rollout of smart energy for many years. Our British Gas engineers install smart meters in our customers' homes every day and have done for many years. And those smart meters are the essential backbone of the energy transition. They provide meter readings for our customers' accounts and increasingly support time-of-use tariffs such as British Gas PeakSave and Hive FreeCharge. Up until last year, we partnered with external meter asset providers, MAPs to finance those smart meters. They own them and British Gas paid rents on each of those meters. As we strengthen Centrica's operations and balance sheet, we created the space and the investment optionality, and that's why we took the decision to in-house our meter asset provision, effectively ensuring we capture the full value across the whole metering cycle. And from a strategic group perspective, as Chris alluded to in his introduction, the MAP is a critical element of our overall plan to maintain balance across our retail optimization and infrastructure businesses with the MAP providing an opportunity to build stable long-term cash flows from an asset base that supports the group's balance sheet. So today, our MAP finances and supplies all our new smart meters. Our MAP owns them, British Gas Services installs them, British Gas Energy operates them, simple. And the MAP business, I'd like to say, is attractive for 3 core attributes: scale, predictability and optionality. And you'll hear more about those as we take you through the session. So scale rather than a third-party MAP, our MAP receives rental payments across the life of the meter and has an existing in-house pipeline of British Gas customers that equaints to around 12-million-meter points. That brings scale. Predictability, rental payment flows for the lifetime of a meter, typically 15 years. This is a natural hedge to churn in British Gas Energy with a continued revenue stream from third-party suppliers who may then go on and inherit our meters. And that means predictable, low-risk cash flows with exposure only to other regulated energy suppliers, predictability. And thirdly, optionality. Those stable low-risk cash flows equate to an unlevered asset-backed return of 9%, and that provides real optionality to the group. The MAP operates as a stand-alone business within Centrica, ring-fencing the ownership of meter assets and related cash flows. Now turning to the broader metering landscape and why we think we have a right to win in this space. The MAP landscape in the U.K., as you'll know, effectively comprises both energy suppliers such as E.ON and Scottish Power and larger infrastructure players, SMS, Macquarie, Callison, for example. And they've built long-term sustainable business models from financing the smart rollout. When comparing ourselves to these larger infrastructure MAPs, it is worth noting that our MAP business has a clear line of sight to building a significant meter portfolio without the need to enter the wider market, and that's due to the 12-million-meter points in the British Gas customer base. So we do not need to compete in the wider market in the first instance. And it's also worth noting that our MAP is building a portfolio of SMETS2 meters. That's the latest generation of meters, which have a more capable communication and more reliable communication capability, particularly around points of churn. And that means we have a young, clean portfolio of meters with a long life ahead of them. And finally, as with all MAPs, this is ultimately a B2B, a business-to-business relationship backed by regulation. So within the MAP, we don't have exposure to consumer credit risk. And I think that further underlines the quality of the cash flow on offer for those who have the capability that we've been able to build. Now with a clear understanding of metering and a clear and compelling strategy, we've been able to move quickly. It took us just 7 months from the investment decision to get our first Centrica-owned smart meter on a customer's wall. And I think key to that was building a lean expert MAP team from scratch. And we were lucky enough as part of that to welcome Gareth Openshaw to the company to lead the MAP. Gareth brings a wealth of experience. He spent the first 10 years of his career in the British military serving in the Queen's Lancashire Regiment and then followed that with 10 years in civilian life in the smart metering business. He really knows his onions, working with the likes of utility warehouse and SMS and also setting up his own businesses on the way. So let me now hand over to Gareth to talk you through our progress in the MAP so far.

Thank you, Dan. Well, I'm proud to say that we've hit the ground running, establishing a lean team with operational and commercial notes and a mindset of ready to scale. We use our systems and our process today as if we were operating at scale. We've diversified our supply chain and now have contracts in place with 5 leading manufacturers, bringing flexibility and resilience to our metering supply chain. Technology and data are at the very center of the MAP. We have clean data flows that track and monitor smart meters and ensure timely and accurate billing for meter rentals. A steady and controlled ramp-up of volumes has enabled us to stress test processes and operational rigor as the portfolio has scaled. Despite only becoming the sole funding map for British Gas since October of this year, we already have close to 400,000 assets now under our management. We are now billing 25 retail and suppliers for meter rental revenues where they have inherited one of our meters, and we have a clear line of sight to every single meter that we have funded. When we put all this together, we expect to end the year having deployed up to GBP 100 million of capital, and that's higher than the original forecast as we grow in confidence on our delivery. So now that you have a better view of the overall business, let me walk you through the life of a Centrica-owned smart meter. Revenue into the MAP is determined by the size of the meter portfolio installed multiplied by the rental rate per meter. Each meter equates to a capital investment of approximately GBP 200. And a meter typically has a 15-year life and can often operate well beyond that. And our meters are all SMETS2 meters, as we've already mentioned, the latest generation of smart meters. Having acquired the meter from one of our meter manufacturers, it is installed by British Gas Services, and we collect a rental payment against that meter. Broadly, we expect the rental rate received for our portfolio to be around the average market rate. Where meters churn away from one end supplier to another, the market operates on deemed [ Ts and Cs ], where the receiving supplier pays a deemed rental rate. This is covered in any supplier regulations. Some suppliers will also enter -- will also enter into so-called churn contracts that lock-in an agreed rental rate normally lower than the deemed rate in return for contractual obligations and protections, including a premature removal charge for any meters removed ahead of the end of their life. Now let me walk you through how that single meter builds up to an annual plan to deploy capital of up to GBP 200 million per year, building a business that generates up to GBP 130 million of EBITDA per annum by the end of 2028. First, let's look at our scale. Within our British Gas Energy base, we have 7.5 million customers, which equates to over 12-million-meter points, which need to be smart to enable smart products and services in a net 0 world. As of today, roughly 60% of those meters are smart meters, leaving around 5-million-meter points in British Gas' customers' homes to get after in Phase 1. But as the chart on the left shows, that's not the whole story. Within the current smart portfolio, the 60%, there are also a significant number of SMETS1 meters that over time will require replacing, in particular, due to the switch-off of 2G and 3G networks. And don't forget, this continues on past Phase 1 as older SMETS2 meters that are already partway through their lives become due for renewal or as we inherit non-smart customers into the British Gas customer base. This all means that we do have significant further headroom to grow, subject to installation capacity and customer demand, and this replacement activity will go on well into the future. As you can then see in the middle chart, Phase 1 will see us deploy around GBP 900 million of group capital by 2028, with Phase 2 providing greater long-term optionality for the reasons that I have just outlined. And so finally, bringing all this together, we can see the opportunity for the MAP to generate an annual EBITDA of up to GBP 130 million by the end of 2028 with adjusted operating profit of up to GBP 70 million annually. This equates to a low-risk 9% IRR with no ongoing sustaining capital required, whilst generating a higher free cash flow yield of around 11%. Let me now hand you back to Dan to take you through the embedded optionality that the MAP provides.

Brilliant. Thanks, Gareth. So Gareth has taken you through the MAP business, and I hope those first 2 core attributes of scale and predictability have come out in the outline he's given you. Before I turn to the third key attribute of optionality, let me just talk briefly to our confidence in our ability to deploy capital and deliver the repeatable contracted cash flows that Gareth has described. And we are confident, as we've already said, we have a very attractive pipeline of in-house opportunity to install and over time, replace meters and the resulting stable recurring rental flows provide a natural hedge to churn of energy retail customers, and we know we can do this. The team at British Gas has been installing smart meters for many years, having really led the way in the smart rollouts, and they've repeatedly installed more smart meters every year than any other supplier. All in all, that equates to the robust business that Gareth has outlined, generating up to GBP 130 million EBITDA by the end of 2028, predicted on stable and predictable cash flows. So let me now turn to the third attribute, optionality. So first, we have the ability to manage capital deployment carefully. You have seen that even just in-house; we still have headroom to grow into should we want to expand our portfolio more rapidly and deploy more capital. And second, we've set up our MAP as a stand-alone business, as I said, within Centrica. It operates as its own business, it's asset-backed, and it has arm's length relationships with British Gas Energy and British Gas Services. And that gives us the optionality to assess the optimal financing structure at any given time should we choose to do so. It's not just financial optionality, it's strategic optionality, too. In the MAP, we have effectively built an in-house capability, a new capability to lease and track small assets in customers' homes. That capability is the team comprising deep expertise from the world of metering and some of our Centrica homegrowners as well as robust systems and processes that ensure we know where our assets are, and we're collecting rental against them in a timely manner. So that capability also gives us strategic optionality, especially in the context of the energy transition and the U.K. and Centrica's net 0 targets. So smart meters, as I said, are the first step for any household's net 0 journey. We see this as a gateway to new commercial offerings, time-of-use tariffs and so forth and supports embedding customers into our Hive ecosystem. And in that context, we'll explore how we can use the MAPs capability to the benefit of our customers. We know that upfront cost is a significant barrier for many looking to cut their energy bills and decarbonize their homes. So be it an energy-efficient boiler, a heat pump or solar and storage, we'll assess demand for and the value dynamics of leasing rather than selling hardware and the MAPs capabilities will be absolutely central to this. And these choices, to be clear, are not reflected in the plan that Gareth and I have presented today. So they would offer potential upside to that plan. They're under consideration and we'll be hardheaded about whether and how to take them forward. And what's also not included in Phase 1 of this plan is the ongoing future replacement activity of the metering base as and when it comes up for renewal. So whilst we can and will actively explore growing the business by offering this capability to others, we don't necessarily need to. We have an ongoing pipeline of work, not just installing smart meters for the first time, but also replacing smart meters over time in our British Gas customers' homes. And so to wrap up, I think Gareth and I have been really pleased to present the MAP to you today, effectively a new business and a new revenue stream for Centrica. We've moved quickly with real agility to build our MAP from scratch as a clean stand-alone business within Centrica. And I hope we're already starting to demonstrate those 3 key attributes: scale, predictability and optionality. Scale, an in-house pipeline that supports CapEx deployment of GBP 900 million; predictability, stable recurring rental payments that translate into annual EBITDA of up to GBP 130 million by the end of 2028. This ratable contracted cash flow replaces declining near-term returns from some of our legacy infrastructure business, bring stability to the group and supports our strong credit rating; and optionality, both financial to consider optimal financial structure in the future and strategic to grow into leasing of meters to other businesses and exploring leasing of heating and in-home energy hardware. So that's it from us. Thank you so much for your time. I'll hand back to Chris, and we're very pleased to take your questions.

Dan, Gareth, thank you very much. So look, just to wrap up, I'm super proud of the work the team have done to create what is a brand-new business from scratch. And a brand-new revenue stream for Centrica. It's not easy, but Gareth and Dan have made it seem easy. And it's also just worthwhile touching on Gareth is one of hundreds of ex-Forces people we've got in the organization. We found an unbelievable talent stream. And so we have Forces Pathway. I think we've got well over 500 now that we've recruited in the last 3 or 4 years. If every one of them could generate a new revenue stream, my god, we would be very happy. But look, we've got the largest U.K. energy customer base. We've got the largest in-house installation and servicing capability. We probably, I think, have the strongest balance sheet, the most available cash, all of which makes this a unique proposition that is well within our control. Just to reinforce what Dan and Gareth told you, beyond the first phase, the 4.5 million meters 900 million or GBP 1 billion depends. That's what I was saying to Russell and his rounds, but anyway, GBP 900 million or so, GBP 130 million of EBITDA. That's just 1/3 of what this could be because there's another 8 million meters will be replaced. You can do the math yourself, but I think if you multiply that by 3, you get to -- that's quite a good number, a very material number. SMS was taken private at GBP 1.3 billion. That's smaller than where we'll be in just a few years. Calisen was recently valued at GBP 4 billion. That's a portfolio that will have the same size of portfolio that we'll have if we just satisfy the internal demand that we've got, very material. The only thing it depends on is us having our energy customers, no other competitive pressures. Clearly, the way the government drives the rollout is important but no competitive pressures in this switch. In a business like our with lots of competitive pressures is actually quite a nice thing to have. It also creates options to finance small energy transition assets across our businesses for our customers then and Gareth laid out the foundational capabilities, establish the ability to finance, lease, tracking for small assets. That give us options, doesn't give a requirement. So the mark Centrica has created really, I think very hard to replicate capabilities to support the earnings that we create opportunities for future growth. Today, hopefully, you've seen a bit of the quality of the businesses we've got. You've also seen the quality of the people that we have generating the value, the four people you see on the stage, the people you see at the back of the room that are supporting this. Our focus in the group is very, very, very simple. Number one, to maximize the value of our existing businesses, driving continuous operational improvement. Today, will be better than yesterday, tomorrow will be better than today. That's continuous improvement. Every single day, you never take a day off. Number two, we are focused on delivering the most compelling propositions for our customers. We're building further optionality through optimization. And #3, we're investing in assets that will create value. I think we're unbelievably well positioned for the changing energy system, as I said earlier, in 2020, we expect group EBITDA around GBP 1.6 billion with around 85% coming from things in operation or sanctioned today. And that includes GBP 200 million from Spirit and Nuclear combining the existing nuclear business. But for the avoidance of doubt, not forecast, just help me with the math. So although we continue to pursue material options such as rough, [indiscernible] is super important to remember that we've already sanctioned the projects that will deliver the vast majority of the 2028 expected EBITDA. These other things would be nice, but the majority is already in our hands. And we'll deliver that -- so that was maintained and a return on capital employed of north of 20%. So thanks very much for the time. We're all very happy to get your questions. I'd like to focus first on the questions on map because you get more time to see Russell and I than you do to see Dan and Gareth. So if we start with the MAP, we have a hard stop at 4:30, we will take questions and the general questions taken towards the end. Jenny, let me go to Dom first, you get the first one Dom, and then we'll come to Jenny.

Dominic Nash from Barclays. I have a couple of questions. First of all, on the rental model, could you just -- there's no whether you're adopting a real or nominal model for the rent and/or do consumers have the choice as to which one they go for? And secondly, you've got 4.5 million Phase 1 by 2028, looking at sort of the colors. I assume that, that is a non-smart or majority is non-smart meters, but what scope is there for cannibalization of existing meter owner meters in your portfolio, either that you haven't got a churn contract with and their SMETS 1 and do you want to get rid of them early.

Perfect. Gareth, do you want to take that second and also go ahead and talk about whether real or nominal returns talking about cannibalization risk.

Just on the -- sorry, second question. So yes, non-smart meters within the portfolio, so the 4.5 million are not smart meters in the portfolio. That's what we're going after. And with regards to the cannibalization, so every energy supplier in the market and we are no exception there has various different contracts in place with maps within the market. So there is a trade-off there and that you take tendency on one side to accelerate and progress on another side. But with regards to the 2G and 3G switch-off, there will be a necessity to replace a certain amount of meters as well.

Yes. And just on the inflation plays in this business and really nominal returns. So when you put a meter on a wall and you create a contract for that, that's a flat rate for the life of that meter that doesn't inflate. If you have certain churn and deemed contracts, elements of them sometimes can inflate and in terms of the overall recovery, there's a degree of inflation protection there but the main contract is fixed.

Jenny?

Jenny Ping from Citi. Three questions, please. There have been recently talks by NISO or at least the industry has been talking. Obviously, NISO is trying to promote net zero and one of the route to net zero is more take-up of smart meters and we've had challenges in the smart meter take-up. So I guess, 2 questions from that. One, is there no potential for this market to be effectively taken back by the distribution companies to roll out smart meters in a more forceable way or to be done by NISO as a change of government policy effectively? And then secondly, the 4.5 million that's on the chart going from non-smart into smart effectively that's assuming everybody converts, right? So isn't that quite an aggressive assumption because you've still got people like me who don't own a dumb meter. Secondly, just on the CapEx, GBP 200, Talison is talking about GBP 220, GBP 225. So what makes you at an advantage in buying that at a lower price? And then I think third link to that, I guess, is your utilization of your engineer workforce. Can you just talk to us a little bit about sort of the efficiency measures you can have there by cross utilizing that workforce to install the meters?

Let me have a go and then Russell can talk about the CapEx because it is -- there's something that is not capitalized -- probably cost is not capitalized and then Gareth can give an idea on utilization. So firstly, on the update until this will be taken over by the network companies, I haven't heard any conversations about that at all. We have a conversations with the industry. And what I've said to the government, to the regulator and not yet to me, so I will is -- so firstly, government has to decide whether or not it wants to mandate this. I have to be really careful because I made that comment in parliament that government had to decide and the news headlines were Centrica plc demands mandatory smart meters. And I got lots of e-mails from people saying, when will I have a smart meter. So firstly, government has got to decide how it wants to do this rollout or whether it wants to mandate them. And it doesn't mandate them, we can't have a smart grid. If we can't have a smart grid, I don't think they can get to net zero by 2030 because we just cannot get there by just having more and more and more generational, it will be too expensive. So that's a question. It's not an easy one for government, but they've got to figure out. Then the second one we said is and some of the other industry players have said the same, which is you could have a halfway house, which is rather than say we're just going to go customer by customer by customer, you could divvy up the people that want smart meters street by street by street and based on proportion of what you've already got. And some companies will say, I don't care. So you pick up a higher proportion. But we said we could be comfortable with that rather than say we'll go to every single one of their customers and say if you give us 25% of the non-smart meters market and let us get there. It's kind of linked to utilization because if you go from your house to Fraser's house, you live next street of his building, because you're not spending a lot of time in the van. So I think that's probably more likely. I have no idea how you would get something distribution companies would all of a sudden take over this. I mean may the best win in the world, we are not quick at making decisions, especially not in the energy space. So by the time we made the decision, we will probably have 4.5 million meters on the wall. So I do think there's a possibility that you could change this and make it better. I think Russell can touch on the noncapitalized element of the smart meter. And then on utilization, I think that one of the areas and Gareth can talk about this, more knowledgeable there, but one of the big issues we've had is on the commissioning of the smart meters. And frankly, the dreadfully poor performance by the BCC, the communications center, which is outsourced by NISO, often they would have this as a contract to a third-party company. And frankly, their performance is woeful. And we have an engineer that can stand in trying to commission a meter and you've got a third party who's operating this thing, there's no incentive to make sure that there are some utilization things I think we can control and there are some things that we have to lobby for, but it's deeply frustrating. But I don't know, Gareth, do you want to touch on that and Russell, you want to touch on the costs?

Yes, A great question. With regards to utilization, so again, coming back to what Dan said earlier on we've been installing smart meters almost for a long period of time. We've got one of the largest direct engineering workforces in the U.K. So we've got massive amounts of experience in installing smart meters doing that efficiently and effectively. But also as well, we've got the flexibility of using third-party resource as well. So what that means with regard to the utilization from what we're seeing now, we're more than capable to deliver against the numbers that have been projected today.

And Chris, could I just have one point, Jenny, your question on the overall rollout and I think your question, will it become harder to reach customers as we get down that GBP 4.5 million. And I think one of the things you've got to envisage as we're going through the next few years is the energy transition continues, electrification continues. Smart meters as I said, really are the gateway products. So you can't have time of use tariffs, if you don't have a smart meter that settles your energy supply every 30 minutes. And likewise, colleagues can't utilize the virtual power plant if we're not pulling that out of smart meter homes. So you've got an incentive for government to really make it happen in the BPP space and mitigating the supply headwinds that Chris described. And one would hope we're talking about how it's not fixed with customers. But actually, as we bring more time of use tariffs to market, you see customers more interested and more engaged and wanting to take a smart meter. And that's exactly what we've seen, for example, in British Gas peak sale where you're going to get that half-price electricity on a Sunday, if you don't have a smart meter.

And just on the accounting and the capital for the MAP. So we're setting up this company as a stand-alone entity, so it has independent relationships as an arm's length relationships with British Gas Energy and British Gas Services. So the direct cost of installing the meter is about GBP 200 as we quoted. The overall cost is about GBP 230, GBP 240, that's probably similar to the number that you quoted. I think that's relatively similar in the market. The difference is that some of these payments are arm's length payments between companies in Centrica and indirect costs, variable costs and other things. We can't capitalize them. They would be expensed in the year of installation. So that's the difference between the 2 numbers.

[indiscernible]

Pavan from JPMorgan. I'm paraphrasing what you said, Chris, in terms of the regulatory backdrop being important, and I think you answered previously that there is no smart meter mandate. But can you remind us what is the regulatory environment, whether it's from the government or Ofgem on the installation of smart meters? Or does it really rely on customers putting their hand up and saying, can I have one of these now?

That can still be a nightmare. We have targets and we have an allowance in the price. And we have to write to customers, would you like a smart meter and those that whom we have to we have to make sure that we make every effort to contact them and sometimes we like the customers more and sometimes customers come and say, look, I told you 3 or 4 times we don't want smart meter. Sometimes it goes to a point of threat. If you keep asking them when you need. So we say you've got this really weird thing, you have us install x, you don't tell customers they have they have it, don't p*** off our customers, which is really not what the regulators are looking for us to do. And if we don't hit the target they're going to fine us. And so like you've got -- in fact I had spoken to a previous minister -- the minister in the previous government is responsible for this. I'm not making any confidences. And I said to him, if you really want this done, you have to think about mandating it. And his answer was I thought about it. Well, we're at 60, so we're at 55% penetration. He said, once we get to 65%, let's talk about it, once we get to think 75% we'll think about it. I said why [indiscernible] previous government we don't tell people what to do. So it's something of this political ideology. So it's a bit odd. But look, everyone is grown up. We go and say, look, this is -- here's the situation. I'm confident that we'll get to the right answer. And I'm confident we have got the right answer to the previous government as well. It's just we're only 50-ish 55%, 60% penetrated. But it's not without that and other colleagues that are responsible for this. It's obviously hard one each year and we have the weirdest conversations, but I think we'll get the right answer.

I have 2 other questions, please. Firstly on the reporting of the MAP, is that going to be a separate line? Or how are you thinking about reporting that? Is that something you can say? And then my last question is how does the CapEx -- sorry, the CapEx of the MAP interact with full expensing, if there is any interaction there? And does that impact or change how you think about returns?

Yes. So for the end of this year, the map will be included in the British Gas Energy results, it's not material enough yet for us to split out. I will be providing in the notes enough information so you can begin to see how that's growing. Over time, we'll take a look at segmentation in general, this business growth because it will be a big part of Centrica. Expensing, full expensing and other things. We're assuming in our numbers that we just got normal capital deductions. There's a discussion and you've seen recently in the budget about various different allowance rules that may allow us over time to be fully expensing that, that would just be an incremental benefit for us, but we haven't included that in the numbers at the moment.

Mark [indiscernible]

Could I ask on the cost when you take down traditional meters and sometimes SMETS 1 and even SMETS 2 meters. Presumably, there's a penalty payable. So where would that penalty appear? Would it appear against the actual smart meters or within British Gas residential. Can you also talk us through the capitalized labor costs, I'm surprised that you talk about it being as low as I think GBP 40 per meter. So I think the evidence when you were passing a lot of the cost over to your third parties was much, much higher, right? You were -- at times, it seemed like you're applying everything, including the kitchen sink almost into those businesses to capitalize costs. Are those costs going to be -- are the labor costs going to be expensed upfront, which would potentially back-end load profit.

You tend to me as an ex finance person to try and answer that, but I think that -- I think you can capitalize the direct labor costs, you can't capitalize the indirect costs and I don't think any way given the productivity there's no way that the labor cost is GBP 40 per meter. And I think it's probably 3x that I think what we pay people on an hourly basis. So...

No, that's absolutely right.

Yes. There you go. See. Am I excited? What was the first part of the question, what was the first part?

So there would be higher costs. That will be these costs that you incur previously [indiscernible] to your expense.

Yes. So we will sacrifice some end-year profitability in the early years of this in order to deliver the value because what you would be charging to third party you can really charge in it. I don't know what if I'm getting level of consolidation adjustment or something. But the profit -- so the profit would be higher for us if we continue with some profit but the value would be lower. So we will sacrifice some end-year profitability but I think it all catches up near the depreciation charge changes. But for the first [indiscernible] for the ramp-up, I think this was until you get a steady state till saturation profits will be a bit lower. I mean also I think we'll lay that all out in February and say, this is what the impact would have been for 2024 is what you would expect when you get to 2025 and almost...

And the penalties you are paying...

And that's where I am getting at. What has been impressive is that with so many different contracts, I think in a given contract either there will be higher rental, but you don't have a penalty. If you're on an agreed contract, I think Gareth, you can take us through that. But what's super impressive is -- so what we're not going to do is we're not going to just see ideologically just rip all these peoples meters off the wall. I think you understand the contractual obligations so you can see, I can take these meters off and there will be no penalty and I can put things on these ones with penalty. I think it depends on the age of the meter, but you know this far better than anyone else in the room.

No of course. First of all, so the MAP and British Gas Energy we are separate entities. So there's certain information that we don't cross the boundary on that. But what I'll speak about is from an energy suppliers perspective. So all energy suppliers within the marketplace have relationships with pretty much every MAP within the marketplace because your customer base changes over time. And what that means is that you will inherit customers that have assets owned by third parties and you end up over a certain period of time interacting with all third parties within the marketplace. Now the value of the contracts and the way the contracts work is that the deemed and the churn contracts that MAPs operate to the premature removal charges. So if you remove an asset, if you're an energy supplier and you remove an asset, it's dependent on the life expectancy of that meter, so how that meter is. So they are hugely variable dependent on where the portfolio is at position in time. However, energy suppliers do have the choice to remove those assets, but they would normally, in most cases, pay a penalty for it depending on the age of the asset. I hope that answers the question.

[indiscernible]

This is [indiscernible] Kumar from Jupiter. So I have 3 questions. The first one, you've given an internal rate of return guide of 9% plus IRR post tax. But if we go with your run rate adjusted operating profit, having invested $900 million by 2028, it only gets us to about 6%. So is that a material step up post 2028? So just that bridge, how does it get to 9%? The second one, in terms of GBP 200 per meter, given that your ambition is to install something close to 4.5 million, are there any benefits to scale in terms of the cost per meter that you might achieve in that? And then third one, given the predictable nature of this income stream, what is the optimal capital structure you think, for this kind of business?

The only question of the cost one is definitely, definitely one for Russell. Look, I think the optimal capital structure is one we'll have to figure out what we're doing is we're setting this up so that we can, if we want to bring in third-party capital. We can choose to have this 100% Centrica capital. We can choose to dial up or down through the year, and Russell and the team will make sure that we've got the right partnerships and the right capital providers. And if we find the partner who got better owners to capital then we like to buy the subparts of the capital, still keep ownership of this and have some backend there. On the GBP 200 per meter I think the meter cost, we're going to do 40, 40 quid or something per meter. The meter is a small part of it. And the big part of it is the labor cost. I think the big cost benefit from this would be better productivity. Because I think we -- I mean effectively, what we do is we already buy the meters. And then we install -- even the third parties, we would buy them, we would install them and then we would effectively sell them to the meter asset provider. So we're not going to see anymore scale on perhaps in the meters because it's what we've been buying anyway. But the real benefit, if we could get smart engineers to do 4 a day rather than 2 a day, you would almost have your labor cost. And that's why if you did go to something whereby we can go street by street rather than from Russell's house to my house and you got like 2 hours traveling time. I think that would be the game changer in the cost there. And I can't see whether that will come. I can see that as we're putting a new planning in the dispatch system in our services business, which should allow us to actually do that a lot better, which is to dynamically change engineer scheduling, and therefore not having -- having reduced as much as possible the travel time the engineers have got. Russell, 9% IRR what's tax step up.

Yes, the difference between that so that you got a sort of base 7% or 8%, as you indicated. What's happening over time though is some of your customers are churning. And as Gareth outlined earlier, the rates that you receive from the team, the churn contracts are slightly higher. So you go through time and see some of your customers churn and that's just helping your IRR. slightly higher. That's the dynamic there.

Excellent thank you. And we've got a question online.

Just quickly on that bridge Russell. So what sort of time frame can we expect from a 2028 starting point as to when it would move from a 6% to 9%, what sort of phasing should we expect?

I do not have a good answer for you there. Maybe I'll come back to you later on that one.

I mean you've got about 15% churn in the market at the moment, I think. A bit less, sorry, that's 10% churn. So you can do the roles. We're all making jealous customers of each other. So you want to really cover, I hope to. We have far better, better capability now. We could choose to install smart meters and the customers are most likely to churn if we wanted to optimize for smart meter income. Because smart meters are a way to keep customers we choose those -- the customers that were most likely to churn but also easiest to retain. So Gary Booker, our Chief Customer Officer here have greater capability now within Gary's team. So we get far more deliberate in how we target smart meters if we so choose. Another nice at the moment, we're taking all the customers that we possibly can. So let me go online and come back here and then we'll [indiscernible]. The question from Richard Alderman is, are you confident you can hit all of the remaining milestones set by Ofgem regarding domestic smart meter installation target by taking all in house, the penalty for missing IMT smart meter installation milestones prior to '18 cost us GBP 5.3 million for just over 1,000 meter shortfall. Ofgem can decide to [indiscernible] you can use third party devices and all that mostly will be competing for them. So Richard, what we're bringing in-house is the financing of the smart meters. We have the biggest in-house installation team in the U.K., but we also supplement that whether it's in smart meter installation or other parts of the services business with service partners. Some of them we are uniform, some of them don't. And so bringing it in-house as we're talking today has no impact whatsoever on our ability to deliver the smart meter mandate. I'm confident we can deliver, but I also know we have to have the basis of Ofgem each year because you got this weird thing, which is you've got to install, you can't mandate them, but we have that conversation. Last question here, and then we can sort of one minute, so it can only be one question and has to be quick and the answer will be even quicker.

So the question is, you talked about a number of capabilities for the MAP business on Slide 25, control processes, industry data management. Is it already all set up for 4.5 million sort of meters? Or is that something you will be building out as you sort of get more customers?

Yes. So effectively, the way we set it up was ready for scale. So we'll have to supplement and build the team a little bit further, but it will remain a leading team, but rather like [ Katin's ] example of going and trading in North America and making a $16 profit on your first 4 trades, congratulations. Rather same for us is what we're doing is we're using our systems now and really testing them and have tested one and they are ready to scale. And we've got 400,000 plus or minus meters on the wall already, and those systems are working as Gareth described. Relationships with 25 energy suppliers really make sure you're testing the billing systems and they work. So we effectively have the systems ready to scale now.

So thank you very much, everyone, for coming. And thanks [indiscernible] Thank you very much. And we will next meet together on the 20th February for our preliminary full-year results announcement. So if we don't get a chance to chat, please have a fantastic Christmas, a great New Year. A few of us have to make a very sharp exit. So please don't think we're rude. We've just got a couple of things that we have to go to. But thanks very much, everybody, for coming.