Centrica PLC

LSE:CNA

Earnings Call Transcript 2021-Q2

[Chris O’Shea, Group Chief Executive & Director]

Good morning, everyone. Thanks for joining our group CFO, Kate Ringrose and I today for Centrica's 2021 Interim Results Presentation. We're once again doing this virtually with restrictions in the U.K. having only just been listed, and hopefully, I'll be able to meet up with many of you in person later in the year. But in the meantime, I hope you and your families are all keeping safe and well. In total, our presentation will last around 30 minutes, and then we'll have a live Q&A session, where Kate and I will be joined by our Chairman, Scott Wheway. As you'll be aware, last year, we started a major transformation to turn our company around and to rebuild shareholder value. We recognize the need to make changes as a company as we clearly failed to adapt quickly enough to challenges from competition and changes in regulation in our markets. This was the driver of the significant restructure we announced last year and the changes we're making will help us to get the basics right. We are absolutely focused on improving customer service and then stripping out bureaucracy and unnecessary costs, which over time will allow us to grow customer numbers in a sustainable and profitable way. But this won't happen overnight. I'll hand over to Kate in a minute to cover the financial performance in the first half, but let me briefly cover the headlines. Overall, our first half performance was broadly as we expected, with both operating profit and earnings flat when compared to last year. Our cash flow performance was once again very strong as we maintained tight control on all expenditure and we disposed of noncore assets with net debt falling below GBP 100 million. Although our balance sheet is in a much stronger place now, we're still only part of the way through the pension triennial valuation process and COVID-19 restrictions have only just been lifted in our core markets. Therefore, we're not yet restarting our dividend. However, we continue to recognize the importance of dividends to shareholders, and we intend to restart them as soon as it's prudent to do so. Our customer numbers fell again as we saw further intense competition in the U.K. energy supply market and operational issues caused by COVID-19 and industrial action in British Gas Services & Solutions, which negatively impacted customer service levels. But we are absolutely committed to reverse this decline over time through focusing our businesses and improving customer service. And I'll cover the progress we're making after Kate has taken us through a detailed review of our financial performance. Over to you, Kate.

[Kate Ringrose, Group CFO & Executive Director]

Thanks, Chris, and good morning, everyone. Let me move straight on to the results, and I will start with the group P&L. I'll focus on continuing operations, which excludes Direct Energy following the completion of its sales in early January. Revenue was up 6% to GBP 8.2 billion, which reflects higher commodity prices and colder weather. Gross margin was slightly down. However, operating costs reduced by GBP 63 million, which reflects our cost focus when we include an increased loss from the nuclear associate, operating profit was broadly flat. I'll take you through the drivers in more detail shortly. Our net finance costs were lower as we benefited from the lower interest rate environment on the floating element of our debt book and our decision to redeem the EUR 750 million hybrid at its first call date in April. The tax rate reduced to 35%, which includes one-off deferred tax credits related to Rough decommissioning as well as the future change in the U.K.'s corporation rate to 25%. The noncontrolling interest relating to our partner, Spirit Energy, is slightly higher with the net of that all being adjusted earnings per share of 1.7p, which was 0.1p higher than in the first half of 2020. The operating profit split as shown here under our new business unit structure, which we laid out in February. We have also moved 450,000 small business sites into British Gas Energy from Centrica Business Solutions, given their needs closely match those households. As we did at prelims, we've reconciled the prior year adjusting operating profit from the previous segmentation in an appendix slide. There you will recognize the corporate cost reallocations, which were acquired following the sale of Direct Energy, which I talked to in February. In total, adjusted operating profit from continuing operations was broadly flat at GBP 262 million. Going through the segment, profit was down by GBP 34 million in British Gas Services & Solutions with benefits from cost efficiency more than offset by the combined impact of COVID-19 and industrial action. These totaled around GBP 50 million, largely relating to the increased use of third-party labor and customer refunds. We delivered higher profit in British Gas Energy, which includes benefits from colder weather and reduced COVID-19-related impacts, including bad debt and small business volume recovery. We also saw material efficiencies, which more than offset the impact of competitive pressures on customer numbers and margins as well as the increase in ECO costs. Energy Marketing & Trading reported a loss of GBP 40 million in the first half of 2021 and given the scale of change relative to 2020, I'll cover this in more detail shortly. Centrica Business Solutions saw a significantly improved result with energy supply to large and midsized businesses having been materially impacted by COVID-19 in the first half of last year. Losses were also reduced in new energy services with signs of demand picking up in the second quarter as COVID-19 restrictions began to ease. Bord Gais profit was down, largely reflecting the outage of the Whitegate CCGT that we talked about at prelims, and upstream profit was up with the impact of higher achieved gas and oil prices more than offsetting the impact of lower E&P production and reduced nuclear generation volumes. I'll summarize the main drivers on the next slide, but let me cover exceptional items first, which are shown on the right. We recognized GBP 366 million of write-backs on oil and gas assets predominantly due to the increase in near-term commodity prices. These write-backs are expected to result in an additional depreciation charge of about GBP 40 million in the second half of the year. It is also worth highlighting that there were no exceptional restructuring charges in the first half of 2021, as I indicated, would be the case in February. Any future transformation initiatives will be treated as business as usual. In fact, there was actually a small release of the restructuring provision we put through at the end of 2020, with pension stream costs coming in slightly below our original estimate. We also recognized a GBP 597 million profit on the disposal of Direct Energy, which allows me to turn to the summarized operating profit bridge. I will talk to each brick in turn. First, I will help you unpack the year-on-year impact of COVID-19 and industrial action. These are somewhat intertwined. The gross impact of COVID and industrial action versus overall in 2021 as some recovery in business energy demand and a more normal bad debt charge in all our energy supply businesses more than offset the additional costs incurred in British Gas Services. However, in 2020, we benefited from some significant mitigating actions, which were not repeated, such as using the U.K. job retention scheme and choosing not to pay cash bonuses to management. As a result, COVID-19 and industrial action actually had a net negative impact on us in the first half of the year. Moving on to the effect of weather and commodity on our downstream businesses. A colder-than-normal first half in 2021 compared with a warm first half in 2020, resulted in increased energy consumption year-on-year. The additional gross margin from the increased volumes more than offset the impact of both the incremental cost of gas and power, which was at higher prices as well as higher within month balancing costs. Given its one-off nature, we've also highlighted the financial impact of the Whitegate outage at GBP 28 million. Given seasonality, the impact is not linear, but we would now expect the full year impact to be toward the upper end of the GBP 25 million to GBP 40 million range, which we previously indicated. Concentrating on the underlying performance, our Energy Supply Services and Solutions businesses improved when compared with last year, with all benefiting from efficiency programs. In British Gas Energy specifically, we also benefited from GBP 20 million from an additional temporary allowance in the default price cap in the first quarter, which follows a judicial review in late 2019. This allowed the part recovery of additional wholesale costs, which were originally incurred when the price cap first came into being in 2019. ECO spend was GBP 55 million higher as we increased activity in advance of the end date of the current ECO3 scheme in March 2022. We also saw some impact of competitive pressures on margins and customer numbers. In addition, as we move our platform in British Gas Energy toward a software-as-a-service model, our IT-related operating costs increased. However, this was offset on a cash basis by reduced capital expenditure on the legacy system. I'll come on to Energy Marketing & Trading on the next slide. Underlying upstream operating profit was up GBP 58 million. The pretax benefit of higher commodity prices for Spirit Energy was partially offset by the impact of hedging, lower volumes and higher unit lifting costs. In CSL, the impact of the natural decline in production was more than offset by higher commodity prices. And in nuclear, ongoing operational issues meant generation volumes are down 8%, negatively impacting the result. Given the scale of the change in the first half results, I wanted to spend a bit of time covering Energy Marketing & Trading performance in more detail. The chart you see here on the left show EM&T gross margin from 2017 to 2020 split into its major activities. These show reasonably consistent gross margin contributions from proprietary trading and route to market. These are profitable extensions of the required risk management of our commodity exposure primarily for British Gas, Spirit and Nuclear, which EM&T provides on behalf of the group. The gross margin contribution from LNG and the legacy gas contract have been more variable. Moving to the first half result, and as you've already seen, EM&T operating profit decreased by GBP 151 million compared with the first half last year, which I'll attribute to 4 primary factors: first, we saved around GBP 30 million of OpEx in 2020 in response to COVID to support the group; second, as you can see on the dark blue bars in the charts on the right, the contribution from our core proprietary trading and route-to-market activities was lower than in the first half of 2020, albeit still made a positive contribution; thirdly, 2020 was, as we described, an exceptional year for our LNG portfolio. We do not expect the structural advantage, which we held in 2020 to repeat this year or next; fourth, the legacy gas contract lost GBP 57 million in the first half of 2021 compared with GBP 27 million in 2020. This is due to increased prices in unhedgeable indexes as well as the decision to take more gas in 2021, which is economically sound over the life of the contract. We therefore expect full year 2021 to be at or above the high point of our GBP 50 million to GBP 100 million range and the remaining 4 years to fall within range. Moving on to cash flow. Free cash flow from continuing operations of GBP 524 million, was 4% higher than 2020 despite EBITDA being GBP 68 million lower. We saw net tax rebates in relation to E&P activities in the first half of the year. In addition, working capital was broadly stable with cash collection to date remaining sound. However, we remain cautious on our customers' ability to pay beyond the end of the government support schemes and will continue to robustly review trends. CapEx was also reduced with lower spend in Spirit Energy and reduced IT outlay. As I've already indicated, we are now expensing costs related to the British Gas & Bord platform, having historically capitalized spend on the legacy SAP billing system. So overall IT costs will shift from the balance sheet to the P&L. British Gas Energy CapEx reduced by GBP 18 million compared with the first half of last year. Divestment proceeds were also lower, with the first half of last year, including $100 million disposal of the King's Lynn power station, whilst this year's figure largely relates to the proceeds from the sale of British Gas headquarters. Free cash flow from discontinued operation relates to direct energy with 2020 reflecting the performance of the business, and 2021, the disposal proceeds. If we shift to the table on the right, the big change compared with last year is the scale of the contributions, which we have made to the pension schemes. In addition to the regular H1 payment of GBP 76 million. We also paid GBP 167 million of pension streams. These were incurred during previous redundancies as we restructured the group. We saw EUR 130 million inflow of margin cash as our position as a net buyer means margin cash generally flows into the group in a rising commodity environment, all of which has led to a GBP 2.9 billion reduction in net debt over the first half of the year and the closing net debt position of less than GBP 100 million. As I said in February, balance sheet strength remains a major focus of mine, and I'm pleased with the progress we made over the past 12 months. The stronger position also supports our credit metrics as we continue to target investment-grade ratings. However, as mentioned previously, due to the reduction of diversity in our cash flows, which follows the Direct Energy disposal, credit rating thresholds have risen. This reduces our capacity for net debt if we are to maintain the same credit rating. While we redeem the hybrid in April and our net debt is much reduced, we still have an expensive and long-dated gross debt book totaling GBP 3.4 billion. Moving on to pensions. The IAS 19 net pension deficit has reduced from GBP 601 million at year-end to GBP 130 million at the end of June as we have made payments into the schemes and discount rates have improved by 40 basis points. However, as you'll be aware, it is the technical provision deficit, which determines the level of cash contributions we are required to fund. As a reminder, the funding deficit calculation is designed to incorporate a level of prudence and is based on filtrates as opposed to IAS 19, which is a best estimate calculation based on corporate bonds. The triennial pension negotiations for the valuation date of 31st of March 2021 are well underway. We have 15 months to agree the valuations and the contribution profile. We agreed with the pension trustees at the time of the Direct Energy sale announcement in July 2020, that we would contribute a portion of the disposal proceeds to the pension deficit. We have been encouraged to see the deficit fall significantly since then. In February, we said that we estimated the deficit was roughly GBP 1.9 billion on a roll-forward basis. And with the continued rise in real gilt rates since then, we estimate it would currently be around GBP 400 million to GBP 500 million lower again. So to close my section, I'll summarize where we are and provide a perspective on the remainder of the year. Our first half financial performance was overall broadly in line with last year, with the benefit of efficiencies and colder weather being offset by the lower profit in Energy Marketing & Trading and one-off impacts of COVID-19 and industrial action. I am also encouraged by signs of underlying financial improvement in many of our businesses. Looking to the full year as well as these factors that impacted first half performance, the areas I highlighted in February to take into consideration for your modeling remain valid. We expect the Whitegate power station outage impact on 2021 full year operating profit of lost revenue and the requirement to purchase more electricity to be up to GBP 40 million. And we still forecast ECO costs in British Gas Energy to be around GBP 80 million higher in 2021 than in 2020 with the higher run rate expected to continue into 2022. The ECO scheme for ECO 4 will start in April. In the other direction, we still expect to materially benefit from the restructuring with expected year-on-year savings of more than GBP 100 million. In addition to these factors, we are also beginning to benefit from higher commodity prices in upstream to a greater extent than we had assumed at the start of the year, given the increased uses we have seen so far this year. However, we will see higher unit depreciation rates in the second half. And due to our ratable hedging, the benefits won't fully come through this year. E&P is also very heavily taxed, of course. Spirit production is now forecast to be 50% to 20% down compared to 2020 and an increase on the 10% estimate we provided in February. Although we now have greater operational clarity on the nuclear fleet, generation volumes are expected to be lower year-on-year. And as already mentioned, we now expect the remaining legacy gas contract to lose around GBP 100 million or slightly more this year. A key unknown for us remains customer bad debt and what happens once various COVID-19 government support schemes end. We will also begin to get a better view of what the new normal for business energy demand looks like. We are still experiencing a volume shortfall of 5% to 10% today compared with pre-COVID-19 levels. We will continue our focus on free cash flow and the strength of our balance sheet, in particular, keeping a tight discipline around operating costs, cash restructuring and CapEx. In summary, although there is more we need to do to improve the performance of our business units, there are some encouraging signs. And the progress we have made in strengthening the group's financial position over the past year or so, puts us in a strong position from which to continue with the turnaround of Centrica. I'll now hand it back to Chris.

[Chris O’Shea, Group Chief Executive & Director]

Thanks, Kate. I've got a very simple view of business. If you look after your colleagues, they'll look after your customers, and that will take care of your cash flow. We had a turbulent 6 months with our colleagues as we made the difficult but necessary changes to modernize our terms and conditions in the U.K. I'm pleased that the industrial dispute with our engineers has now concluded, following acceptance of our revised offer earlier this week. And one of the real benefits of modernizing our terms and conditions is that we can now build directly employed capacity to reduce our reliance on contractors, creating the jobs, which will help us deliver a net zero future for our customers. To put it into context, we've recruited more experienced and apprentice engineers in the first half of 2021 than in the previous 4 years combined. Our new business unit structure and delayered organization is now being embedded. As part of this, we split British Gas into 2 distinct businesses: U.K. energy supply and U.K. services and solutions. These businesses are distinct allowing us to focus on what's important for our customers, but they work very closely to deliver combined solutions to those customers who want both energy and services. And whilst we continue to generate cash by disposing of noncore assets and businesses, we want to ensure that we balance speed of disposal with value delivered. For Spirit Energy, of course, we had bids for the whole. These were not compelling either in terms of price or continuing exposure to future liabilities. But we remain committed to exiting hydrocarbon production, and we've made real progress towards pursuing alternative sale options, which will simplify the sales structure, enabling us to maximize the value of our assets whilst derisking liabilities. While we maintain our stake in Spirit Energy, we'll continue to actively manage it. The business generated GBP 239 million of free cash flow in the first half of the year and the recent increase in gas and oil prices means we expect the business to remain comfortably free cash flow positive for the full year. I believe a well-managed business will always actively manage its portfolio. And in the first half, we sold a small gas-fired power station in Peterborough, a data management business Io-Tahoe, and the former British Gas headquarter site in Staines. These disposals will generate around GBP 50 million of net cash when completed. As I said, we are absolutely focused on eliminating unnecessary costs to improve our competitiveness. And you can see the impact of this in British Gas Energy with the cost to serve per residential customer and down 7% against last year, and 10% against 2019. We launched British Gas Evolve last year, trialing a lower cost software-as-a-service platform and more agile ways of working, allowing us to compete more effectively with challenger brands. The platform's greater flexibility compared to our legacy system means we can now bring propositions to market in a matter of hours rather than weeks. We've now proved to ourselves that we can make this work, having both migrated the simplicity and [indiscernible] energy customers and organically acquired new customers directly onto the platforms. In total, we now have over 250,000 customers on the platform, up from around 100,000 at the start of the year. We'll continue with a controlled approach to migration as we scale up and migrate all residential and small business customers over time. And whilst this will ultimately result in lower costs, we'll obviously have dual running costs during the migration. And this added around GBP 2 per customer to our cost to serve in the first half. We also continue to engage with Ofgem on the future of retail energy markets in the U.K. And whilst we remain concerned that the current regulations could lead to serious negative issues in the market, we have been encouraged by proposals, which, if implemented, would reduce the ability of unscrupulous suppliers to operate the reckless business models. These proposals include an increase in the number of suppliers who must offer customers the Warm Home Discount and the requirement that all suppliers must either ring-fence customer deposits or offer payment company guarantees for them. We'll continue to work with our regulator to ensure we achieve a level-playing field in the U.K. energy retail market. Moving now to British Gas Services. We are the largest energy services company in the U.K. with around 7,500 directly employed engineers and technicians. However, we've been in decline, losing more than 1 million customers over the past 10 years. We've been losing competitiveness and damaging customer service. We got into a spiral, which went something like this: lose customers, cut costs, damaged service, lose customers and so on and so forth. You get the picture. But the root cause of our issue was the fact that our cost per job was between 0.5 and 1/3 more expensive than smaller contractors. So when our engineers left, we replaced them with contractors, but our engineers are the best in the business. And our customers reasonably expect a British Gas engineer to turn up when they book an appointment. Rather than continue the slow, painful decline, we decided to take the actions necessary to lay the foundations of a sustainable and growing services business, and that required a painful process of modernizing our terms and conditions. The changes will improve productivity, making the cost of our own labor much more competitive relative to third-party contractors. This means we're able to ramp up the recruitment of engineers that I referred to earlier. We remain committed to direct labor model, which delivers a much better experience for the customers. They get the British Gas engineer that they want. The changes will also increase our flexibility so we can offer our customers appointments at times that will better meet their needs, further enhancing the customer experience. Now as you heard from Kate, there was a negative impact on our first half financial results and the combined effects of COVID-19 restrictions and industrial action. We also let down some of our customers, causing a drop in customer satisfaction levels over the first quarter, and that's simply not good enough. However, we saw improvements in our key operational metrics over the second quarter. As you can see in the charts on the right, productivity, measured here by jobs per engineer per day, reached pre-COVID-19 levels in the second quarter. An engineer NPS, which has remained high, but not quite at the world-class levels we aspire to and have previously achieved, has also been recovering. This will allow us to drive further recovery in customer service levels, which should improve customer retention from the current level of around 80%. With the organizational change now complete, this business is on a more stable footing and plans to drive further improvements that are in place for the second half of the year. Although the past 12 months have been difficult for our colleagues, the changes we're making are the right thing for us in the long term, not just to improve our business today but to allow us to capture future opportunities arising from the move to net zero. We now have a much more sustainable platform from which we can deliver customer growth. The drive to net zero presents a significant opportunity for our services and solutions businesses and for Centrica as a whole. We already have the largest field services force in the U.K., and we're looking to increase this, as I've already mentioned, through the recruitment of both qualified engineers and apprentices. And we're on track to recruit 1,000 new apprentices in British Gas across 2021 and 2022, creating new, highly skilled and well-paid British jobs. Our award-winning training academies also provide us with a competitive advantage, allowing us to upscale our engineers to install newer technologies, such as electric vehicle charging points and heat pumps. We already have over 300 engineers multi-scaled across heating, smart meter and EV installation. We'll be looking to expand the range of low-carbon propositions across the second half of the year, including the launch of new electric vehicle, heat pump and home energy management propositions. We've also been reconsidering whether our interest in nuclear can play a role for the Centrica of the future. Our focus remains on the customer. However, as we look to help our customers reduce their carbon emissions, our interest provides us with an important source of zero-carbon electricity. Therefore, we may decide to keep our 20% interest in the U.K.'s operating nuclear fleet. Hydrogen must be a part of a lower carbon energy mix in the future. We're engaged in a number of hydrogen initiatives. And in January this year, we joined the Hydrogen Taskforce coalition of companies. We're looking into the possibility of repurposing the Rough field, so it can act as the hydrogen storage facility and play an important role in the U.K.'s and in our net zero ambitions, potentially creating thousands of green jobs in the North of England and providing green gas to millions of U.K. customers. Clearly, any development plans would be dependent on a regulated support model, allowing appropriate and stable returns. But we continue to view this as an interesting option for Centrica should the economic model look attractive. We also continue to support the build out of renewables throughout Europe by providing route-to-market services as you look to add to the 11 gigawatts we already have under contract today. And as we laid out in February, we're committed to achieving net zero by 2045. And we'll outline how we'll champion adjust transition for customers and colleagues when we publish our climate transition plan later this year. Let me briefly summarize. The journey we started last year to transform Centrica continues. And I want to leave you with 3 things. Firstly, I'm really excited by the opportunities that I see from the energy transition, the path to net zero. There are undoubtedly risks for us, but the opportunities are huge. Secondly, we're making progress in building the foundations to capture those opportunities. And thirdly, we're looking forward to laying out our future strategy at our Capital Markets Day in November. I'd like to thank you all for listening, and we look forward to the Q&A session shortly.

[Unknown Executive]

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

[Operator]

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

[Mark Freshney, Research Analyst]

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

[Kate Ringrose, Group CFO & Executive Director]

Mark, thanks very much for your questions. Let me start with the EM&T on LNG. So a lot of this is actually a '20 story as opposed to a '21 story. I mean you're quite right, there's more [ clarity ]. We've got the Cheniere contract. But remember that kind of starts, as Chris talked about it, behind the [ 8 ball ]. It's a negative price contract. But actually, structurally coming into 2020, we were actually very well placed for what turned out to be a falling market in LNG. We've set up kind of the structural dynamic over a couple of years coming into the year. And it so happens that we were very well placed for that change in pricing structure in LNG and profited from that accordingly in 2020. So what is happening in 2021 is more a dynamic of the nonrepeat of what was a rather exceptional performance in LNG as opposed to anything else. With regards to the pension negotiations, quite right, it is sensitive. As we've said, there's 15 months [ and a half ] from the end of March to agree the negotiated settlement. I will say that we're working very constructively with the scheme trustee Chairs and the trustees as a whole for those 3 schemes. So we're making really good progress, but it is going to be something that could take another year. Clearly, I'm hoping that as [indiscernible] we all, both from a trustee perspective and from a company perspective, look forward to resolution on both the technical deficit and the payment profile that would accompany that, but I'm not able to commit to exactly when that would happen. But we're moving along as swiftly as we can.

[Operator]

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

[Ajay Patel, Executive Director]

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

[Kate Ringrose, Group CFO & Executive Director]

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

[Chris O’Shea, Group Chief Executive & Director]

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

[Operator]

The next question is from the line of Deepa Venkateswaran.

[Deepa Venkateswaran, Senior Analyst]

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

[Chris O’Shea, Group Chief Executive & Director]

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

[Deepa Venkateswaran, Senior Analyst]

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

[Chris O’Shea, Group Chief Executive & Director]

And does it help us on -- helping our customers that -- those countries on the path to net zero. So to decarbonizing energy system because that is the future for us, huge opportunity.

[Operator]

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

[Dominic Charles Nash, Head of Utilities Research]

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

[Chris O’Shea, Group Chief Executive & Director]

[indiscernible] that second question. Let me take the second question first, and then Kate will talk about the E&P revaluation. And I think probably we assure you that it is just -- it is an almost irrelevant noncash business reflecting price changes. But with regards to the -- so if we expect an intervention on carbon, I think the government and the regulators are working really hard to figure out what the pathway is to net zero and what the best way is to get there. That will include things like carbon certificates, potentially carbon taxes, policies, et cetera. So I wouldn't want to second guess as I was just quite busy with some other things. In terms of the volatility in gas and power prices and the impact, I think the question was about the impact on supplier as well as individuals, it got -- we hedge -- and so we hedge based on our forecast demand and prices that [indiscernible] down. And for companies -- other companies that hedged, then your exposure is to get your volumetric forecast from. Then if you're overhedged, but the market goes up, you're in a good place because you're selling your excess hedges in the market. If your underhedged and the market goes down, you're in a good place. So you can really have some payment to get overhedged in the falling market. And remember, that's what we saw last year in -- when COVID hit in the B2B space primarily because you're selling -- as volumes in the market is falling, so your -- and you're pushing to get a big fire, your [ cushion ] might fall down. I think in terms of suppliers, we don't have full line of sight. So we hedged and a number of other suppliers hedged. Those that don't hedge will be an overall [ in pain ] at the moment. Those that do hedge is not -- I am not saying, there's plenty to move, but you hedged to take risk out and the hedges are in the money. Obviously, there's a dangers that some smaller suppliers that may have hedged that they'll hedges in the money, then the temptation if you're struggling in other parts of the business, the temptation as cash flow hedges in, which is a little bit like burning the furniture to stay warm. So short term, gives you some relief, long term, [indiscernible] nothing to do. So I think the volatility in the market, the responsible suppliers manage that volatility as we do by hedging the book before. As an [ up or slope ] in curve means the prices go up. You're not really too worried about the [indiscernible] volatility on your supply. And if you're unhedged, I can't imagine what it must be like to be an energy retailer over the past 2 months and not be hedged. It must be an incredibly stressful journey and, undoubtedly, you put a lot in the finance. So with that, I'll hand it over to Kate about the question on E&P revaluation.

[Kate Ringrose, Group CFO & Executive Director]

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

[Dominic Charles Nash, Head of Utilities Research]

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

[Chris O’Shea, Group Chief Executive & Director]

I think our expectation of -- the price cap is set within observable foreign market places. I think we expect it to be up about [ 10, 20 months ]. I think that the number is [indiscernible] short. So it's not insignificant. But that would be -- Ofgem will announce that, I think end of August or the very first of October, but it's roughly at the end of the month [indiscernible].

[Operator]

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

[Christopher Robert Laybutt, Equity Analyst]

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

[Chris O’Shea, Group Chief Executive & Director]

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

[Christopher Robert Laybutt, Equity Analyst]

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

[Chris O’Shea, Group Chief Executive & Director]

Yes. So the more home [indiscernible] is just to take it down from -- I think it's probably [ 2 to 3 pounds supply ] to step down to 150 in the proposal. I would take it down to 1,000. What our view for this competitive market and level playing field, and therefore, the fact that basically what this would do is require every supplier [indiscernible] we would encourage that and because we think that is right. So there's no comment on in and of itself. However, and you've to [indiscernible] to everybody. So we think that's very positive. And also a consultation issued by Ofgem, I think, on their supplier license and even with a requirement to bring change to customer deposits, we not only support that, but we have been encouraging that because it gives us a nice lead into the casual thing. Customers tend to be a lot to say by [indiscernible] over the year. And in the first half, when your profits are up, you're not recovering all the cash that you would otherwise recover because you're buying more commodity because your customers [indiscernible]. During the summer months, you get more cash from them than you get into the winter. And so if you got customers that pay for a product that you haven't delivered and you spend that money, that's quite serious. So we think that it's absolutely right that anybody -- if a customer deposits regularly, it'd be regulated like the financial services companies, so we welcome that. On the cash flow, I would say that, if anything, it was affecting our downstream business and cash flow slightly negatively impacted in the first half. So Kate [indiscernible] guidance and [indiscernible] to give you guidance, but Kate can talk a bit about this [indiscernible]. But one thing, I'm glad you picked [Audio Gap]incredibly strong free cash flow generation. And one of it being is we've got a CFO who is laser-like focused on cash. You've got a CEO who is quite interested as well. And our Chairman is also quite interested. So we are all focused on cash because you can't pay to build those property. You pay the bills with cash. And we're quite disciplined on our investment criteria as well. So we would like to invest behind good ideas, but we're also going to invest whether it is a good idea. So I think one of the things that misunderstood are under -- communicated by people that is -- an incredibly strong cash-generative attributes of this business. But with that, Kate can give you a view in terms of seasonality and cash flow.

[Kate Ringrose, Group CFO & Executive Director]

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

[Operator]

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

[Jenny Ping, Director]

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

[Chris O’Shea, Group Chief Executive & Director]

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

[Kate Ringrose, Group CFO & Executive Director]

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

[Jenny Ping, Director]

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

[Chris O’Shea, Group Chief Executive & Director]

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

[Operator]

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

[Elchin Mammadov, Utilities Analyst]

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

[Chris O’Shea, Group Chief Executive & Director]

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

[Kate Ringrose, Group CFO & Executive Director]

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

[Operator]

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

[Bartlomiej Kubicki, Equity Analyst]

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

[Chris O’Shea, Group Chief Executive & Director]

Great questions. And actually, the Rough question and e-com question are linked, and then Kate can talk about the legacy contract, but I'll warn you in advance [indiscernible], obviously nobody talks about what we'd like to do commercially with the contract. So look, on Rough, the number, I think, that's been quoted is in a very, very, very high-level estimate, [indiscernible] is about GBP 1.6 billion to convert Rough to hydrogen storage facility. That's about GBP 300 million to basically pull all of the steel out holes in the ground, and we then [ sell new ] steel because these are old wells. So you need to have them running for quite some time. So the another GBP 300 -- GBP 300 million, GBP 400 million on what we call the top side. So that's like the processing kit on top of the platform. So basically, if the legs are fine, then you need to mutate on the top. And then there's about another GBP 700 million, GBP 800 million or so, which is about what's called cushion gas, and you need something at the bottom of the reservoir. And so that's where you get to drill amount of money. Now maybe you don't need it. The cushion gas could be methane. So if the price of methane is GBP 80 a [ permit ], it is just [ low ], a lot more than the prices, GBP 30 [ a pound ]. So there's a huge amount of uncertainty there. And so I wouldn't just speak those numbers. They're very, very rough all part numbers. What we said to the government is, first and foremost, the U.K. has the ability to store 1% of its annual gas demand, so ignore hydrogen. The 1% of annual gas demand, Germany can store approximately 1%. We'll say the government is -- actually, if I was in government, I'd be quite worried about that because it puts you at the mercy of the company. Do I have enough domestic gas to meet demand? So [indiscernible] a mercy of supply shops and you see prices the LNG doesn't compare. And you see prices moving at the moment. So just first and foremost, security and supply [ chain ] that have storage. Rough is a great storage facility -- was a great storage facility. Basically, actually, we think Rough is a good [indiscernible] hydrogen. We need to have engineering to test the hypothesis, but we're fairly confident it can be quite good. So let me talk about the government and say, well, what kind of support will you give because I don't think people are going to save this amount of money on a merchant basis and a specialty basis. This is something that may have been a [indiscernible]. So we talked about the 2 main areas you could have. So this would be a regulatory asset-based model or a capital floor regime. And they both -- they work in a relatively similar way with capital floor. Obviously, you can pull downside, more upside. You've just got a bit more of a fair way. And so it's really down to, I think, governments see what do they think they're comfortable with. I think one of the statistics on it I think is if you [indiscernible] in time use existing frameworks, rather than to try and propose something you -- and that's something different to be about us today than in the past rather than have some deep intellectual exercise as what could work. It's never worked before it takes longer. So if you can point to -- in the Rough floor [indiscernible] and there are Rough [ regimes ]. So we're just simply pointing the 2 possibilities to make it work. They haven't had any contribution from government. It's really got to be down to them. And then when you get to what level of return, so you mentioned 2% and I've struggled to lend the government money, it's 2%. So I think that would be quite easy. I think the recent [ rate of 2 ] of the [indiscernible] settlement 4.7%, 4.8%, but you think the risk rerate is 30%, that's lower than our cost of capital just now. That is truly risk-free than if you consider it because obviously, your cost of capital is determined by your overall asset. So all I would say is that it has to be attractive for us. How much did we put in? I think the real question for us just now is can we [indiscernible] from an asset that we've got? And the second of the question, how much do we want to invest in a deal? Do we want to invest all of it? Do we want to invest some of it? Do we want to have a project finance vehicle? Do we want to leverage it? So I think there's loads and loads of questions, but the first thing we've got to do to find out whether actually there is an investable option there and if there is, then we'll figure out. And I can assure you that we've got -- I'm looking at -- looking to Kate just now, it's not easy to get money, right, Kate? So it has to be a pretty good return to us to invest in that. But really, it's about getting an option. The question on heat pumps. And I think the reason I think the linkage is that the solution to the U.K.'s decarbonization issue has to include hydrogen and heat pumps. It cannot be pure electrification and it will not and cannot be purely hydrogen. 55% of U.K. homes are attached to the gas infrastructure as [indiscernible]. We have a network that works really well. You need to spend some money to adapt to it. But bear in mind that the U.K. run on hydrogen up until the mid-70s. Town gas is 55% hydrogen. And we were a hydrogen economy before, and we can be a hydrogen economy again. So there's about 6 million, 5.5 million, 6 million homes in the U.K. that cannot take hydrogen. They should have heat pumps. The heat pumps cost about 4x -- 3 to 4x as much to install, another 40% for expenses to run. So there's a cost implication there. The solution has got to be both. But for us, it's a great opportunity. So heat pumps, over time, in the heat pumps and hydrogen, because the installation of a heat pump is something that we're very well pleased to do. We have 1,000 heat pumps this year. We're already doing it. Our trial in hybrid heat pumps exist through the social housing [indiscernible] hybrid heat pumps that our colleagues in the West Midlands. So that's a heat pump with a very small gas boiler so that you can get some really hot water. You probably don't want it right now, but you may want [indiscernible] for a hot bath. So we are -- there's [indiscernible] huge opportunity. I think the thing to be reminded, heat pumps are not new technologies. So France installs them 400,000 a year. [ 50 ] governments said, they want to get to 600,000 a year by 2026. That's a massive, massive offer. But there will be [indiscernible] with customer. Customer adoption is quite a bit of disruption in the home when you get one. That's a long way. We are in a great position in Centrica that the decarbonization of elevated net zero transition is something that is a huge opportunity for us. And it will be a combination -- it has to be a combination of electricity [ or gas ]. But heat pumps and hydrogen, both of those present great opportunities for us. There are some nuances in terms of how you drive the change, but both that are [indiscernible], there are more opportunities. So I'm quite excited about the future. And we continue to work with government regulators to the point of what we think is the right thing for the customer. We have to see this to the customer -- the customers' eyes, and we'll continue to push that. And then increasingly, you'll see us more representing our customers use rather than representing just a company view is really what's good for the customer. That's why it's got [ both ]. So with that, I'll let Kate tell you why we won't discuss what we're going to do with the gas asset contract.

[Kate Ringrose, Group CFO & Executive Director]

So I think Chris has set me up for a very short answer. I mean fundamentally, the gas asset stock finishes in 2025. Not specific to the gas asset but, but we look at all of our core contracts portfolio as what is the right or the potential thing to do and the gas assets.

[Operator]

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

[Mark Freshney, Research Analyst]

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

[Chris O’Shea, Group Chief Executive & Director]

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

[Kate Ringrose, Group CFO & Executive Director]

So Mark, just in terms of new [indiscernible] prices, there hasn't been a point that our [indiscernible] exposed in January, July of [ 2020 ] effectively. [indiscernible] on its final 6 months production run. [indiscernible] is on its second final production run. And in terms of -- I think your question is around look forward really in terms of how we think about nuclear. In the current year, we weren't able to really benefit from the [indiscernible] of our prices because we are hedged, but also because of the outages and the timing of the outages earlier in the year means the hedges that were put in place needed to be bought back in order to make that good again. So if I look forward into the things that we'd be monitoring would be price and the price at which we hedge in also benefits from depreciation as the Dungeness station has been decided earlier on. The other thing as well just to be aware of as well is just on operating cost. And I think I [indiscernible] this a little bit earlier in the Q&A. EDF are leading on a cost strategy. We're very alert to the risk of cost stranding within the nuclear business and there is a program in place where we need.

[Operator]

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

[Verity Mitchell, Analyst]

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

[Chris O’Shea, Group Chief Executive & Director]

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

[Kate Ringrose, Group CFO & Executive Director]

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

[Operator]

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

[Chris O’Shea, Group Chief Executive & Director]

Thanks very much, Eli. So just to say thanks very much, everybody, for taking the time to watch the presentation to -- you gave give us some good questions. I mean just to wrap up, lots of moving parts, but stable profits, stable earnings. In many ways, a tough first 6 months of the year. Some of the operational issues we've seen, tough 6 months with the industrial action. But you can see from some of the operational metrics, we are seeing movement going in the right direction. So it's far too early to declare victory, but I am incredibly optimistic with the progress that we're making and about the opportunities that the net zero transition will afford to Centrica. We're incredibly well-placed, capitalizes -- there's a lot of work to do, but there is a huge market opportunity there, and we've got great people. And I think that they are starting to believe again. I'm sure that you all noticed that our employee engagement was incredibly low level, higher than it was last year and higher than it was a year before. So think of all the changes that people are going through that is quite something. So we're still not where we want to be, but things are starting to move in the right direction. So thanks very much. Really looking forward to seeing all of you at the Capital Markets Day we'll have on the 16th of November where we'll be able to lay out more clearly the future strategy and the financial framework of the group. So thanks, again.