Centrica plc (CNA) Earnings Call Transcript & Summary

As usual, I'm joined by our CFO, Russell O'Brien, and we've got a leadership team and our Chairman sitting in the front row. So if you get any really difficult questions, they would be delighted to take them at the end of this. So we set out several years ago to make Centrica a higher quality, more predictable business, and that journey continues. And in the face of sustained volatility around the world, we've made more progress in the first half of 2026. Investing to support huge growth in power demand, pivoting the portfolio towards more stable earnings and improving our commercial performance across retail. And not everything has gone our way. The Middle East war has weighed in and Centrica Energy. And some of the delivery has been slower than I would like. right across our portfolio, the job is far from done. You can see that in the numbers. Retail has not yet grown as we wanted to, and EPS is a little bit lower year-on-year. But that comes as we ramp up our transformation program. We're investing in changes that will set Centrica up for the future. We invested GBP 90 million in the first half, which is over GBP 0.01 a share. If you strip that out, EPS would have grown 8% year-on-year. Our operational foundations are strong. Our product range is expanding. Our growth pipeline remains rich even after the significant investment over the past couple of years. Now our targets are ambitious, GBP 2 billion of EBITDA and doubling EPS by 2030. But by domain and nimble, driving transformation and keeping a clear eye on what we want Centrica to look like in the long term, I'm really confident that we can deliver these targets and grow further into the next decade. Unprecedented growth in power demand is a defining theme for the world over the coming years. It's a once-in-a-lifetime opportunity, driven by electrification and the growth of AI. The investment required to meet that growth is truly huge. It's over GBP 300 billion over the next decade just in Europe. And that's a huge opportunity for us. It's an opportunity to harness AI to become much more efficient. And there's an opportunity to grow by delivering the energy our customers need to power more data centers, more advanced manufacturing more economic growth. But it's not just about building new capacity. It's about linking up generation with bespoke tariffs and services that give consumers what they want. It's about managing energy flows to optimize the system. It's about assuring that energy is affordable, the energy is secure and energy is sustainable to drive that economic growth. The companies that do that will be the real winners and at Centrica. We're uniquely positioned for that future. Think about what we can see. Generator can see wholesale prices. A retailer can see demand, a trader can see market flows. We see all of this at once updated in real time by millions of connected devices, millions of smart meters and a global trading operation. And that means that we generate more data and more insight than our competitors. That sharper insight means better decisions and better decisions wines more customers and more assets. That's the flywheel. And we see that playing out every single day. And by combining our customer relationships, our trading expertise and our infrastructure capabilities, we can offer things that customers want our partners value and crucially that our competitors are unable to match. That's how we turn our strategy into earnings growth. That's how we create value for our shareholders. So enough for me at the start, our very capable CFO, Russell is going to take us through the numbers, and then I'll come back to you and talk a bit more about the strategy. Russell, over to you.

Thank you, Chris, and good morning, everyone. Let me start with the headlines from the first half. We've delivered solid numbers in a volatile market, demonstrating the resilience of our business. And we continue to deploy our balance sheet and strong financial platform to execute our strategy. So to the numbers, adjusted EBITDA was GBP 737 million, down versus last year, and adjusted earnings per share was 6.8p. After factoring in a step-up in investment, we had free cash outflow of almost GBP 600 million, which led to a net cash at the end of the period of just over GBP 700 million. And with the balance sheet remaining strong and confidence in our underlying earnings trajectory, we continue to progress our shareholder returns, raising the interim dividend by 9% to 2p. Now let me just unpack some of those numbers in a bit more detail. Retail EBITDA of GBP 346 million was slightly higher than last year, and optimization generated GBP 87 million, and I'll come back to both of those in a second. Infrastructure EBITDA of GBP 355 million was down by GBP 150 million versus last year. Over GBP 100 million of that, though, was driven by the Spirit Energy disposal our production outages and lower nuclear realized prices were also headwinds. At the same time, we saw strong year-on-year gains across the map, grain, LNG and size welling those areas will continue to build predictably over time. having generated almost GBP 90 million of EBITDA in the first half. Lastly, RAF contributed EBITDA of almost GBP 60 million as we kept our focus on costs and produced unhedged indigenous gas, which captured higher prices in recent months. We won't see a repeat of the performance in the second half as lower reservoir pressure naturally reduces production. As always, you'll find more detail on business performance in this morning's release. In retail, EBITDA was marginally higher than last year, reflecting stronger operational performance and favorable price effects, offsetting a step up in transformation investment, higher bad debt in a more normalized result in business. And while the weather was significantly warmer than normal, it was only a small headwind compared to last year. And in the end, this was offset by selling excess commodity back into a higher-priced market. Given the shape of the commodity curve, however, we expect a negative earnings impact in the second half of the year, and therefore, more of our retail profits than normal falling into the first half. Bad debt remains an industry-wide challenge, and our charge of just over 4% of revenue is still elevated. We're not happy with that. So while we expect this cost to be socialized and recovered over time, we're laser focused on improving our performance, and as you would expect, we continue to press GM for more proactive steps on the nonpayment of bills. And the movements we've seen in the first half speak to the essence of home energy supply, short-term mismatches between revenue and costs, offset by through-the-cycle predictability with a regulated underpin. And you can see that in our margins in the slide, which are broadly in line with the price gap since it began. Our focus here is firmly on value over volume, and I'm pleased we're moving in the right direction with customer satisfaction up and greater engineer productivity. Moving to Centrica Energy, which remains on track to deliver its full year guidance. Gas and Power Trading had a good first half, capturing value from structural volatility across asset-backed and algorithmic strategies. Although pricing driven by nonmarket fundamentals still proved challenging. Our renewables route-to-market business, retail also delivered a solid result, but LNG is a more complex story. Profitability was lower in half 1, partly reflecting normalized commodity prices and partly reflecting a conscious decision to delay cargoes into the second half to maximize value. Although disruption costs for the Middle East crisis created price dislocations and volatility, it also led to Asia temporarily buying less LNG and disruption to shipping and insurance markets. So combined with our fully hedged physical portfolio. This meant our ability to capture additional value was limited. So for the remainder of the year, we already have good visibility on LNG shipments and in retail, which is a more ratable profile. And alongside what we're seeing in gas and power markets, we remain confident in our guidance of around GBP 250 million of EBITDA for 2026. Looking further out, the conflict does have implications for; 27. Centrica Energy's portfolio was positioned for higher global LNG supply and weaker gas prices, a gas good. The conflict in the Middle East changed the market significantly as the risk reward balance evolved, the team reacted and repositioned our portfolio, exactly what a prudent approach to risk management looks like. But the same actions that protect the downside, I mean, we've reduced our exposure to upside opportunities across the portfolio. Combined with continued volatility driven by news flows rather than fundamentals, that means we currently expect our value at risk to remain muted for next year. Now while there's a wide range of outcomes, that means we currently think EBITDA is likely to be around the level we delivered in 2025 and expect to deliver this year. as frustrating, but if conditions change, we're ready to react, and we continue to develop our underlying capabilities driving long-term value. Expanding our Rich & Gas & Power, further asset growth in retail and new long-term LNG deals in Mozambique, and at Delfin like to this decade. And that's why we remain confident in the longer-term outlook and earnings growing to GBP 300 million to GBP 400 million by the end of 2028. Our transformation program is now well underway and underpins our outlook. As promised, we wanted to give you the tools to assess our performance and be transparent about the associated costs. We don't treat this as exceptional. And by doing it that way, our teams remain focused on maximizing value from every pound spend. although that, of course, means that today's results reflect the costs that will support growth for many years to come. So how are we doing? In the first half, we've invested just over GBP 90 million, including GBP 20 million of CapEx, a significant step-up from our normal run rate. We got several programs on the go. And most of those are multiyear journeys with benefits building over time, but some such as the 1,300 role reductions we've announced across the group are more immediate. Operating costs were down 3% year-on-year in nominal terms, giving us confidence that the targets we laid out in February are on track. GBP 500 million of underlying savings with flat nominal cost to 2030, and we're doing everything we can to accelerate delivery. The first half, that's the importance of a resilience a resilient balance sheet that allows us to absorb market shocks and take advantage of opportunities. Working capital is an outflow, largely driven by retail with no offsetting really some gas storage inventories that we'd normally see. We already run an efficient working capital position, but we see a number of opportunities to improve further, and we've got several projects in the works for the second half of the year. Investment tripled year-on-year, including the GBP 370 million on and further investment to size we'll see in the map. 3 great examples of more predictable contracted infrastructure portfolio. Alongside the other movement, which you can see, this led to a free cash outflow of GBP 570 million and a closing net cash position of GBP 709 million. Now to the full year outlook. 2026 expectations are largely unchanged from the AGM statement in May. So I'll be very brief here. No change to either retail or optimization. For infrastructure, performance is expected to be above our previous range given higher prices. So we've updated that for you here. With the phasings I've mentioned in retail and optimization, we expect group earnings to be weighted to the first half. And following the acquisition of Severin, we now expect investment to be around GBP 1.1 billion this year. So to summarize, our performance in the first half was solid. There are still plenty of areas we need to improve, and we remain focused on the areas we can control to maximize long-term value. Our transformation program is moving at pace, and we're continuing to invest in that will be the new bedrock for the group. We are putting the building blocks in place to deliver on our targets, support a progressive dividend and to create long-term value for shareholders. With that, let me hand back to Chris.

Thanks, Russel. So the trend shape in the energy system remain clear. Number one, greater electrification, number two, more intermittent generation and number three, growing customer engagement. There is no economy without energy. It's the foundation that everything is built on. And as we speak, this foundation has been rebuilt, bringing with a once-in-a-lifetime investment opportunity. The demand growth is coming is clearly huge. U.K. electricity demand is set to grow for the third straight year, and it's forecast to increase by 40% by the middle of the next decade. And yet despite all the investment being announced, dispatchable generation capacity is expected to stay flat and perhaps even decline by 2050 as existing generating plants reached the end of the lines, increasing system risk and constraining economic growth. So this isn't about choosing between nuclear and renewables or batteries and gas. They needed so much greater it calls for an everywhere all at once approach, if we're serious about making energy affordable and secure. And no one can be certain about the exact path, but my job, our job at Centrica is to make sure that whatever route we end up taking and at whatever pace we end up going, we're setting the company up to deliver for our customers, for our colleagues and for our shareholders. That means building a portfolio that's resilient and adaptable with the people and the capabilities to navigate a fast-changing environment. It's about remaining disciplined and laser focus on value in every single thing that we do. We've taken some important steps this year that fundamentally strengthened our group for the future. The acquisition of 7 brings another large, high-quality dispatchable into the portfolio, the type of asset that will allow renewables penetration to increase by providing a reliable safety net. In return, we get earnings with a contracted underpin and upside optionality as volatility grows. And those are exactly the traits that we look for when we invest. And since we got the keys, very, very tight market conditions, I mean the performance has been much better than we expected. Underlying the value of combining the right asset with our operating and trading capabilities in a fast-changing market. We've also been working hard to reposition our existing assets, and I'm delighted that many months, in fact, many years of hard work have paid off recently at Sizewell B. A contract for difference in terms of merchant exposure into predictable regulated earnings for decades to come, and that starts in 2035. It delivers attractive value for us, and it guarantees much-needed baseload power for the grid well into the 2050s. And we're delighted that we've also been able to announce yesterday the extension of the lives of Hain and Hartlepool again by another 2 years now, they're aligned with the rest of the advanced gas-cooled reactor fleet. I'd hope to be able to talk to you today about redevelopment rough. It had a good first half. but the position cannot be sustained, then we're at the limit now of what this asset can deliver. Without a support framework in place, we've not injected any gas into the reservoir this summer. The reservoir pressure continues to drop. And by this winter rough, we'll be close to empty, almost exhausted producing less than 2% of what it could deliver if it was redeveloped. Redeveloped, it could do 50x more than it will do this winter. We continue to discuss rough's future with the government. To me, it remains a compelling opportunity for the country, and it would deliver significant investment and thousands of scaled jobs during the construction phase in the east of the U.K., but the window is narrowing. Our current production consent expires in April next year, and we do not currently intend to ask for an extension. That doesn't close off redevelopment. But it does underline the need for a prompt decision. Our position is consistent, and we will be guided by value. I truly hope that we can reach a positive outcome later this year. Rough is the U.K.'s largest gas storage asset. It provides half of the U.K.'s coming gas storage capacity, and it's the U.K.'s biggest hydrogen storage opportunity. But it's not simply a commercial decision for Centrica and losing it would not only be a bad outcome for us. It would be a strategic and major loss for the U.K. We continue to make good progress on our organic projects, we've now invested more than GBP 400 million in the sizes and our meter asset provider continues to beat our expectations with an unrivaled growth pipeline. It's clearly the best growth pipeline in the U.K. Recent comparable transactions tell you this business is already worth well over GBP 1 billion. That's on the back of us investing around GBP 0.5 billion to get here. That's real value creation in assets that will underpin our business cash flow for years to come. These aren't one-offs that are deliberate pattern. Looking back to where we were in 2023, you can see how far we've come. We've recycled capital out of legacy merchant assets into critical infrastructure with far more predictable earnings, pivoting North Sea merchant gas exposure into highly contracted assets like Green LNG and building a power portfolio heading towards 4 gigawatts, underpinned by capacity market contracts by CFDs and by the RAB, we've got the sizes. Our are speakers will begin running shortly and they'll be fully commissioned later this year. But they are late, and that shows that we still got work to do as we rebuild our delivery capabilities, and we've been working hard to ensure that we do better in the future, including the planned station Cash Lin Galway. We continue to grow our longer-term options as the grid gets more constrained. Our customers are more willing to consider a much broader range of options than they ever have been before to secure the energy that they need waiting patiently for a good connection is no longer the only choice they have, and that's creating very exciting opportunities for us. We're building on several fronts, the leading U.K. nuclear pipeline through [indiscernible] and our X-energy partnership. Private wire and data center colocation opportunities and our fuel cell partnerships to support behind the meter power generation, opportunities for us to deliver practical solutions for our customers, faster connections secure long-term supply, decarbonized industrial heat and at the same time, generating attractive returns for our shareholders by prioritizing only the best projects from a deep, deep pipeline of options. Great physical portfolio gives you the right to participate in the market, but the value that you create depends on how you operate that portfolio. And although we're facing some headwinds in Centrica Energy right now, the foundation we've built and that we continue to improve gives us confidence in the long-term outlook. The standard approach in energy trading is to buy technology, pay a vendor get a platform. Then you've got exactly what your competitors have got. We took a different decision over the years, Kasim and his team have built our own in-house platform, bringing together data and insight from across the group to automate back office tasks to improve controls and to give our team faster, more consistent insight, that is a massive, massive efficiency gain. But even greater value comes from what we can do with that foundation by building our own proprietary tools. We're now a more innovative responsive partner to our customers, and it allows us to better optimize our own positions. That's a key driver of the growth in retail, and it's the basis of what we're doing in algorithmic trading, building and our existing capabilities to optimize physical positions in real time, adding another layer of return to the underlying trades. That is super hard to replicate, and it's a core part of the flywheel that I was talking about earlier. Our retail businesses where much of our transformation will show up, and there's real value to unlock there. More commercial innovation backed by exceptional service and more efficient operations. There's much, much more to do, but we're starting to see this coming through. Take our core business in February, we told you how we turn boiler installs from loss-making to profitable. With the foundations fix, we've pushed alter commercially, and we're driving even better performance. And the changes are not complicated. We'd always accepted that boiler installs or a seasonal business, demand is lower in the summer. So we advertise in the winter. But with modest marketing investment, we grew sales 20% in the warmest June since records began. And over the first half as a whole, sales were up 11% against the market is down. more sales, more efficient use of our engineers. That's the impact of thinking differently and it's a model for expanding into markets built on emerging demand. In April, we launched nationwide air conditioning installs alongside an in-store partnership with Curry's. Early demand is very encouraging. And with warmer summers now seemingly the 1 being able to offer both heating and cooling will be a growing competitive advantage for us. Partnerships like that and with other OEMs for warranty servicing, for example, have a key avenue of growth for us, adjacent markets with a strong outlook and very, very attractive margins. Our digital first British Gas membership has now passed 1 million members with around 15%, 1 in 7 already converting to paid products, and that's in just a year. It's a strong conversion rate today, but the bigger prices reach. As we roll this out across our customer base and beyond, we can speak directly to millions more people. Every single 1 of them are route to cross-sell every single 1 of them are route to grow. Now is this delivering transformative value today? Not yet. But you can see the shape of a deeper, more personal relationship with customers and their homes the hive device, the boiler, the heat pump the battery of the air conditioning and the data that connects it all. Now to get there, we have to deliver as efficiently as possible. We have to get it right first time. We have to reduce the need for the customer to contact us. Most of our customers now self-serve mainly through the app and contact per customer is down 20% year-on-year. That's allowing us to reshape our business. Fewer roles overall, as Russell mentioned, but the right skills of the future and lower costs, all of this whilst delivering record customer satisfaction. So we continue to make progress in building a fundamentally stronger, higher quality, more durable, more valuable Centrica. Our operations remain strong. The transformation program is well underway, and we're already making headway in repositioning the group was building a very healthy portfolio of very tangible long-term options. The path to GBP 2 billion of EBITDA by 2030 and doubling our EPS against 2025 is clearly ambitious. And we've got to remain nimble and bold to deliver it. It's not in the bag, but we are super confident that we've got all of the pieces in place to deliver that. Now I'm going to stop talking. I'm going to thank you for listening, and Russell and I would be delighted to take your questions. I've got to remind you the microphone that our microphones to think somewhere in the seats. So if you can go for that and then every so often will go to Fraser, who is monitoring the online. I think people have to ask a question through you Fraser, I think you'd be able to get the time of your own voice. Is that right? Excellent. Mark will go here first. We'll come to Jenny and we'll come here.

It's Mark Freshney from UBS. Just a question on the bad debt. I mean I know we -- you and I disagree about price caps. I think you've argued for support for consumers. I would argue it distorts the market. But clearly, it's over GBP 2 billion of receivables, massively provided. It's becoming a strain on your balance sheet, which I think we can start to see today. Clearly, there's you've litigated against Ofgem before to prove that the price cap should allow recoverability. What is your plan to get some of that cash flow back or at the very least ensure that it ceases to be a problem in future years because it is a problem for the industry, right?

I mean, let me touch the first bit, and Russell can give you the details. So any kind of market intervention will give you distortion. So in the price caps you have to say, there's no point in organ against that. I don't think anybody is going to lift price controls on energy anytime soon. I haven't met a politician yet who feels believe enough to do that. I think that, you're right, this is an industry issue. So industry debt is forecast to go to GBP 7 billion at the end of the year. That's up from GBP 1.8 billion 3 or 4 years ago. So it's clearly a massive industry issue. And we are looking for some leadership from our regulator. So we had a debt release scheme that was supposed to be in place earlier this year. We all signed up to. We all say what we're going to do, still not there. For a regulator that has doubled its budget and its head count over the last 5 years, that is quite troubling. So we've got to see results in the regulator because we can't fix this ourselves, but we can do better. And I think that our relative performance in bad debts, and Russell will come on to that. Our relative performance in bad debt has deteriorated. So we used to lead the industry in bad debt. And now we're at least the best were in the pack. And if not, were a bit or slightly worse. But so we need leadership from a regulator. The long-term solution for this is a social tariff. And we worked with the new Energy Secretary when she was a consumer Minister on this. And she was quite enthusiastic. Now she's now in charge of the whole thing. So we've got to let it settle in and find out what she thinks. But a social tariff, whereby you use DWP and HMRC data to determine who can pay and who can't. And at the extreme of those that can't afford to pay anything get a bill for 0. So you don't go through all of the stress, you don't build them and then provide and then pursue them and then realize that they can pay and those are bots that can afford more, get a double bill, if you assume the same usage. So that's the extreme case if you just get 2 people in the market. That's a solution to this. Because the issue at the moment is we cannot differentiate between people who choose not to pay and people who are unable to be. And when you can't do that, then you have to treat everybody the same. And that means that you have to curtail your pursuit of those people who don't pay you. If we could isolate those people who choose not to be, then we can pursue them a lot harder because I have very little sympathy for people who choose not to pay I have huge sympathy for people who can't afford to pay their heating can afford the food can't afford the rent can't afford the basic essentials in life. And so that's the long-term solution for a market like this one. But Russell, we've got every -- what we're going to do here.

Yes. So just starting with the numbers because there has been quite a movement year-on-year, so GBP 216 million charge, which is 4% of revenue in the first half of the year for the U.K. energy supply business. Last year, that was GBP 159 million or 3%. So you can see it's quite a stark change. And you can look at Note 14 in the accounts, if you want all the details, we can see the aging buckets, but it's the older greater than 360 days that's dragging in particular. And that includes build and unbilled, which is now GBP 2 billion, as you say, Mark, outstanding on the balance sheet after the provisions were made. There's various levers we're pulling. Gary is in the front row here and his team have redoubled their efforts in terms of the processes systems, the chasing that we can do to make sure that we collect this money as quickly as we can. But as Chris summarized, there's only so much we can do in our processes, there's a broader challenge that the regulator will have to face into.

Jenny.

Jenny Ping from Citi. Three questions, please. Firstly, just on the optimization business. I understand there are things outside of your control going on here. But to get to the GBP 300 million to GBP 400 million longer term, what do you need to see happening in the market, the wider market for you to get there give us some clues on the direction of travel of what we should be looking out for? So that's my first. Secondly, you talked about rough and continuing dialogue with the government. Can you just give us a bit more in terms of where we are, when we expected to hear on that? And then lastly, just on share buybacks, noting where your share price is today versus the last tranche of shares you bought back, which is a 181. Can you just talk us through how you see the opportunities between the sort of investment for growth route versus share buyback and value creation that way?

Yes. So let me take the last 2, then Russell to you. Through what we need to see in optimization. Look, in share buybacks, we have a huge pipeline of very attractive opportunities. And I think we can create more value by working through that pipeline if the opportunity as good as we think they are, then investing in those will create more value for shareholders than the share buyback. But we're very disciplined. And so if we get to the point where we would recognize that these investments are not as good as we think they are, then shareholders' money. We are very clear about this, and we are very comfortable returning money to shareholders, but we've got a lot of opportunities just now. And so I don't anticipate that being something that we have to work through imminently. On Rough, look, everything takes longer than you would expect. So I was -- I've been in had some discussions with the previous Prime Minister about a short-term deal for rough over this coming winter, they need display some interest. So we have written to the government, the previous government to outline what that would look like. And what we proposed was we would use our working capital to fill the reservoir we would get a return on that, and the government would take the risk. So if prices went down, they would take the loss prices up, they would take the profit. Just to bridge us through this winter because I think if I'm in government, I'd be very, very worried that we got into this winter with less than 4 days of gas -- peak gas demand available. Now we've not filled up our storage. I doubt very much whether others have filled up the storage because you'd be buying at a price in the summer higher than you could sell on the winter. So there's 1 thing about capacity. There's nothing about actual storage. And bone Prime Minister since Monday, so we've got to give me a little bit of time to get you under the table. The Fandsbeen Energy Secretary, I think since Tuesday or late Monday night, maybe or something. So I've already spoken to me to, we spoke yesterday, she which wanted an introductory call. I need to give a little bit of time to get our feet under the table. But we're getting close to this asset simply disappear and when that in close to storage operations in 2017, there was a conservative government in place. The labor opposition were incandescent with range about how we let that close, including some recently departed members of the cabinet, some current members of the covenant. I've amazed to change the position in the last 9 years. And so I'm hopeful that we'll get something I think it would be extremely foolish to allow this asset to close. But I'm not the Prime Minister, I'm not the Energy Secretary. And if they allow it to close, I think it's a shame. I think we've got a brilliant team, really brilliant team there. they'll find jobs elsewhere because they're really good and that will be a loss in some ways to the U.K. because some of them will find jobs overseas do know what they do. And that's the biggest risk for us the biggest risk to this dragging on is not that the reservoir becomes unusable. The reservoirs years and it will remain usable. The biggest risk is that we lose the crew, and it's not easy to rebuild. So let's see our offer stands. And we also say to the government, if you don't like us using our working capital, you can use the treasury cash, we don't mind let's just fill the thing up for the winter, but the government has to take the risk on the prices and insurance policy for the government. But they will take the upside. So this is not a headwind deals you lose type of things. So if the gas price doubles, they made a lot of money if half they've lost a bit of money. But this is really -- we keep hearing from energy security department and the media getting touch it. This is a commercial decision for Centrica. That is absolutely not the case. And we've been very clear with them that that's not the case. So this is a commercial decision for Centrica the decisions made, the thing that closed. This is a decision for the government as to whether they want adequate gas storage. Optimization, Russell, how were we going to GBP 300 milion to GBP 400 million. Maybe we should get to answer the numbers there.

Thanks to the question, Jenny. Actually, there's quite a few moving parts in optimization. So it's probably useful just to unpick it a little bit to answer your question about what that market backdrop needs to look like as we go through the next couple of years. If we start with and look at the 3 different elements of that business, so retail, LNG and gas and power. Retail had a really strong first half, and it grew again versus half 1 last year. And that business has proven to be quite resilient is a different risk categorization versus the other parts of the trading business, and we expect that to continue to grow year-on-year. So assets under management now at 19 gigawatts. So that's a very solid part of the portfolio. Gas and Power Trading in the first half of this year was actually stronger than it was last year. Remember, last year, we were talking about the storage markets in Europe being quite difficult. There are still some challenges on economic storage gas spreads in Europe, but it was beginning to pick up and be a bit more normal, but then the Middle East crisis came, and that, of course, resulted in further unpredictable behavior. But actually, overall, we were quite happy with gas and power trading in the first half of this year. And then LNG was softer, but you've got to remember, some of that was because last year, we were still seeing the contracts deliver that were priced at the time of the Russia-Ukraine crisis, so that's part of the decline as we moved into this year. We were fully hedged on '26 in LNG and in the coming years, as we said in February. And we proactively manage the risk on that portfolio and overall those portfolios. And 1 of the things that we're able to do is while managing the LNG in 2026 was to move some cargoes from the first half to the second half. at a profit. So that underpins what we're going to see in the second half of this year. And as I said earlier, the GBP 250 million worth of EBITDA. But it's in the future years where there's been a bit of a change in the update today. And just to repeat, that was because we were thinking as a whole industry was that the new LNG supplies from the U.S. and Qatar would come into the market. There'll be a bit of a gas clot. And we positioned the portfolio to both to protect and take advantage of that. And of course, when the Middle East crisis happened, we had to step back from that. And we now see the gas go up later in the decade. So we've repositioned the portfolio for the next couple of years. We've got very tight risk management controls when we saw the markets moving, they were enacted, but that just meant we've taken money off the table for the years in terms of position. So that's really the core of the update today. And as we sit today, the news flows, the way that the markets are pricing certainly the back end of this year into next year, it's hard to see that that's driven by fundamentals. A lot of it is driven by news flow, and it's very hard for Casino and his team to take positions in that backdrop. So for now, we thought the prudent thing was just to wait and that naturally just brings the profitability down for the next couple of -- for the next year 2027. But your question was what does it need to look like to get back to that GBP 300 million to GBP 400 million, and we're very confident that we can get back up to that GBP 300 million to GBP 400 million because of the 3 core parts of the portfolio I just described. For LNG, as we move towards the end of the decade, we've got the Mozambique, Delfin and several gas producer deals already locked in. So we're very confident that's going to underpin the LNG business. Retail, as I said, continues to grow the renewable market across Europe. We'll continue to diversify or give opportunities for us to step in as we've done successfully over the past couple of years. and Gas & Power, yes, it does require a degree of normalization in the markets from what we see today. But if you look over the past 4 or 5 years, when the markets have been right, we've definitely been able to capitalize on that. And you've got to remember, this portfolio is skewed to the upside. When things are -- where we've taken positions in the move away from us, the risk controls lock it in, and we make sure that we don't have a negative impact. But of course, if it's going in our favor, we've got the risk capital to ride that wave and capture value in done that successfully in the past. So overall, I think we need to get through this current period, but the underlying business remains strong, and we're confident in GBP 300 million to GBP 400 million in the medium to long term.

And if anybody wants to work, you could see we said and we've got really tight risk control case there. So we just reinforce the message. Pavan over here, and then Fraser we'll come to you.

Pavan Mahbubani from JPMorgan. I have a couple of questions, please. Firstly, on the transformation costs. So you talked about expensing around GBP 75 million in H1. Is that the sort of run rate we should expect as the program goes on? And then at the full year results, you had mentioned that there was some cost but they were offset by benefits. Can you talk a bit more about whether we've seen some of those benefits in H1 or the phasing of how those benefits should be coming through to the extent you can provide color there? And then a couple of other small questions. On retail, Chris, you just mentioned that your performance relative to peers on bad debt collections has deteriorated somewhat? And you have said in the past, it's a bit more of a relative game than an absolute game. Can you talk a bit about what's driving that? Are your peers doing better? Is it operational? Is it customer behavior and maybe your mix. It would be good to hear what's driving that change in performance that's new today? And then, Russell, I don't know if you can give -- you talked about how you were positioned next year for a gas clot. Can you give a bit more color on what that actually looked like? Was it trading positions? How you sold forward LNG? It would be good to get some color as to that sort of positioning and how that changed?

Thanks, Pavan. So look, on the bad debt, it's inescapable. When you look at -- we look at the chart of absolute bad debts and the chart of our share of bad debts. And at the point, other suppliers started restarted involuntary prepayment meters, our share went from 23% to 34% of bad debts. And that might be coincidence by date very much. And so I think that I think what it shows is that for a bunch of consumers across the industry, there has to be a proper sanction before they pay the debt. The vast majority of consumers want to pay their bills and they pay their bills. And so we've got to be kind of clear in about that. We've got to really think about what we do to collect our debts. Like if there's no sanction why do you do anything? So I think we've just got to make sure that we -- it's part of the price cap you've got to make sure this send is really, really unambitious. You've got to make sure you're in the pack, and we're not in the pack just now on debt collection. I think we can do more without restarting and voluntary installation prepayment meters. But I do think we can discover that. Russell, what needs to happen in gas and how much transformation benefit?

Let's do transformation first. So just to remind the number, so GBP 90 million spent in the first half of the year. If I were to compare that to last year, maybe the last year on a comparative basis, be 30 or 40. So it's a relatively big step up. If you look at that 90%, 70% is OpEx, probably 1/3 of that would be redundancy costs and efficiencies that we've gone through there probably another 1/3 might be tax spend. We're pushing quite a few initiatives to try and harness technology to make us more efficient and then the remainder of various initiatives across the piece. Some of this will be short term in terms of where we get the benefit. Some will take a couple of years to through. So if you think about the tech in particular. Now what are we seeing in the results? So customer contact has fallen. So average contact per customer has fallen 20% year-on-year. So a just less interactions. That means there's less people that need to serve our customers. We can see that already. 1,300 colleagues leaving the group and that takes cost out naturally and just makes the whole machine more efficient. OpEx is down 3% year-on-year. So there's various moving parts inside OpEx. But you can see that the combination of -- and that includes the transformation investment. So you can see that some of this is beginning to come through. So overall, I think we'll keep you updated as we go. It's not early days. I think some of this is moving at pace. But I would expect in the second half of the year to see both the ramp-up in that transformation spend from projects that I can already see and Rob's already pushing ahead and also beginning to see the compound benefit of those efficiencies coming through. So that's 1 part of it. And then Centrica Energy. The question was 2027 positioning, how do we get into that. So I'll just go back, it's no different to what I said in February, actually. We for the LNG portfolio, we hedged all the physical cargoes we had. We were fully hedged to 2028, and I think 80% hedged towards the end of the decade. So that just means that your base is solid. And then naturally, the traders will have looked at the expected market outcomes expected movements as we moved into the gas glut and some of that have taken positions on. We're now starting to move against as those positions were locked right down. We did not make a loss on positions overall, which we're happy, but that was good execution from the team. But it just means now that you're looking at a market without money at work, you've not taken longer-term positions, and we're just going to step back a little bit until things flush through. Does that make sense?

Fraser, any questions from the online audience? These have got to be online questions, now Fraser Jamieson.

I promise there are online questions. We've got a couple from Ajay at Goldmans. Firstly, we -- Centrica have now executed a sizable part of the GBP 4 billion CapEx plan. If we move to 2030, can you explain how the portfolio fits together rather than just a set of attractive individual assets? And can you highlight the improvement in returns the portfolio effect gives? That's question number one. Question two, it's clear that Centrica is in transition. Can you detail how much earnings volatility will reduce by the end of the plan? What benefit do you expect to get from the credit rating agencies from the transformation?

Okay. Perfect. So the second question is clearly 1 for Russell. Look, the first one, I mean, how does the portfolio fit and a portfolio effect. I think the best example of that is the 7 acquisition whereby we bought a power station, which was incredibly -- I mean I don't expect this power station to be as well maintained as it was. It was a financial buyer be bank owned that they repossessed I think, 4 years ago. And I was a bit nervous because in a repossession, you tend not to expect to find something very well kept. This has been unbelievably well maintained. And I think credit to the previous owner, we've invested an awful lot of money. You can see I went there with Russell in the day that the acquisition closed. And they had a new DCS distributor control system in the control room and you very rarely see that in assets that are owned by long-term strategic owners, but that have been put in, I think, at the cost of $2.5 million this year. And so very, very well maintained, but run very, very conservatively. So we only ever 1 unit on really not looking to be up and down. But as we have been figuring out with the trading team and the power team how to optimize this. We've been testing lots of different markets. We're testing lots of different start-up regimes. And I don't know the number, but I mean this thing is probably starting 20x as much as it was starting under the old ownership and we're beating our expectations in terms of the ownership. Now very, very tight market, but that's the way that this portfolio fits together. So we buy this asset, which has got nice capacity market contracts. It's got very good long-term possibility. So as you have more wind build out more solar build-out in the U.K., the need for better price capacity market contract is going to increase because these things are going to run less. And therefore, long term, the outlook for this asset is to reduce earnings volatility. That said, we're going to have an asset that when it's needed to start. So today, it's going to have to make sure the maintenance regime is absolutely perfect because we were called on to start this thing better body start otherwise under the capacity contract, you're going to have a hellish time with the penalty payments. But when it does start, then we go semen, the team figured out what market we put this into what price that we charge. So we've got something which is the kind of asset that we love, which is what we're looking for in the portfolio, which is a downside, which is very much acceptable to our shareholders. Very predictable, and there's only a skew to the upside, because we can make sure that this thing is maintained very well, and we'll start. So therefore, we don't have that downside risk. And then the upside we got the team in Casino Shop to capture that additional value. So that's the portfolio effect, and that's the -- that's really what we're looking for as we move towards the end of the decade. Russell, how will the rating agencies reduce our FFO to net debt from 45% to 10%?

So I think -- and you can see, if you read the S&P or the Moody's report on Centrica, the strategy that we outlined in 2023 to rebalance the infrastructure side of the portfolio into more ratable flows has not just been seen as a benefit in the earnings generation we're seeing so far, but they can see that, that stable part of the portfolio is credit positive. That's the map well, slogan, everything that we've been putting thing has a favorable element to the business risk profile, which is 1 of the big determinants of the FFO to net debt at and therefore, the credit rating thresholds. And last year, we had a movement from 50% to 45%. We've had discussions with S&P and Moody's over the past couple of months, and I think in those sessions, they're giving us confidence, and you can see it in the reports that if we continue our investments over the next couple of years, we will continue to get more flexibility. Now we have to deliver and we have to put that capital to we have to get the earnings come through. But you can see that happening already. So in the first half of this year, we had earnings of GBP 80 million from size we'll see, the Map growing really solid long-term cash flows. That will be about GBP 175 million by the time you get to the full year this year. And so if you move that forward, you can see how we're growing very, very well towards that GBP 700 million worth of infrastructure cash flow as we expect by into 2028. The nuclear extensions are positive. The size will be CFD is very positive as well. So I'm confident in that dynamic. We're moving in the right direct. And then just to link back to your other question about earnings volatility and how we see that moving. Well, earnings volatility is reducing for the group. For retail, there will always be some volatility, but that's partly to do with the recognition of revenue costs between periods, that sort of settles down over time. But in the past couple of years, we've significantly reduced the merchant exposure in the group, the Spirit assets with the second divestment happening at the end of the third quarter this year, will underpin that trajectory. The effective tax rate of the group has gone down from 40% to 35%. That will continue to go down as we move out of those higher tax regime and more and more of the EBITDA will be coming from contracted and regulated cash flows as we move into the next couple of years. So it's both credit positive and more easy to understand.

Harry. And then we'll come back [indiscernible]. Harry, Dominic and then will come back to you [indiscernible].

All right. It's Harry Wyburd from BNP Paribas. So we've come a lot of ground, but a lot of it has been quite negative, so I'm going to try and be a little bit positive. Excellent. So if we think about earnings next year, depending on which consensus you used, we're probably around something like 14.5p for EPS. I think we, this morning, on Centrica Energy have all mentally taken about GBP 0.01 off. But what's happening that's positive that could offset that? Obviously, you've done your CCGT deal and you just said it's performing very well. You said the cost saving execution has been very good. You're seeing more opportunities to cut OpEx. So should we take that as a 1p hit on the chin for next year? Or is there actually stuff that we haven't asked you about that's going better? So that would be the first part.

You're asking for a forecast disguised as an [indiscernible].

Yes, yes. That's my job.