Centrica PLC

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Earnings Call Analysis

Earnings Call Transcript 2022-Q2

[Chris O’Shea, executive]

Hello, good morning, everyone. Welcome to our interim results presentation for 2022. Absolutely brilliant that we're able to be here in person. We were just reflecting this is Kate's fourth set results, I think, as CFO, but the first face-to-face and fantastic venue to be in.

We're also delighted because we've got some of our executives, Chairman Scott Wheway, sitting here. So any really difficult question, Scott is absolutely on point to take them.

Look, I'd like to welcome those of you watching this on the webcast as well. We look forward to seeing many of you over the coming weeks.

Total of the presentation today should last around 50 minutes. I'll cover the performance and the progress in our turnaround. And then Kate will look at the first half financial performance, share with you our thoughts on capital allocation and the updated financial framework. And then finally, I want to spend some time talking you through our long-term strategy, including some of the evolving growth opportunities that we see across our retail, our optimization and our infrastructure activities as we look to capitalize on what I believe are unique capabilities and make the long-term investments needed to support our customers play a leading role in the U.K. and Ireland energy security and help Britain reach net zero, all while delivering a return for our shareholders. Kate and I are then looking forward to taking your questions along with Scott.

So how do we do in the first half? It seems like right now, every time someone says they seem to use the word unprecedented but it really rather accurately describes the landscape that we continue to navigate right now. Regardless of how you want to describe it, our amazing team is managing volatility in the market incredibly effectively. They're helping to ensure our customers remain supplied whilst derisking strengthening and positioning Centrica for growth.

Performance has been strong. Financial and operational results from our energy infrastructure and our optimization businesses were both improved when you compare them to last year. Operational performance in the retail business has improved as we invested in enhancing customer services and absorb both inflation in services and an increase by the exposure in energy.

We expect the impact of higher energy prices and general inflation to dampen both energy demand and discretionary spend in our services business. But we'll continue to invest so that when economic recovery comes, as it will, we're in a far better shape coming out of the crisis than we were going into.

We reported a strong set of financial results with EPS, excluding Norway E&P, increasing to 10.2p from 1.3p last year. And total free cash flow was up by 23% to GBP 643 million. At the end of June, we had just over GBP 300 million of cash.

We completed the GBP 1.1 billion disposal of Spirit Norway, at the same time, transferring over $1 billion of decommissioning liabilities to the buyers in the process. And we agreed with our partner in Spirit to refocus activities to production and net zero opportunities. Spirit is no longer engaged in exploration.

The 2022 financial outlook is positive, although of course, there are significant uncertainties particularly so in today's environment. I am really pleased that we're now in a position to restart the payment of dividends for the first time in 3 years. We declared an interim dividend of 1p per share, and we intend to retain our historic policy to pay roughly 1/3 of the full year dividend as an interim with the remainder coming as a final dividend.

We're acutely aware of the difficult environment many customers and colleagues are facing utilizing energy bills and the wider inflationary impacts that we see in the economy, and we're going to continue to do all that we can to support them. We're investing more than GBP 100 million in customer service support and prices. And we took on another 200,000 customers from failed energy suppliers in January of this year, and that takes the total number that we've rescued to well over 700,000.

We're working hard to make sure the U.K. has resilience in its energy supply chain. And you can see that by the multibillion-pound deal that we signed to increase gas deliveries to the U.K. over the coming 3 winters while simultaneously working with government on proposals to reopen the rough field as a gas storage facility.

And one of the best things in my role has been able to create jobs. I'm delighted that in addition to the 1,000 new engineering apprentices that we'll have by the end of this year, we're also investing in 500 additional U.K.-based customer service roles in British Gas Energy. And that's so that we can cope with the increased demand from customers and to be there when they need us.

We're supporting our 20,000 amazing colleagues through these challenging times. And we're working hard to serve them well. We did a new [indiscernible] deal earlier this year, and that takes account of current inflationary pressures in the U.K. I was also delighted to see a further increase in our colleague engagement to 63%.

We take our responsibilities to the community seriously as well. And in January, we repaid GBP 27 million we received from the U.K. government in federal funding and also provided GBP 6 million of funds for our most vulnerable customers through the British Gas Energy Support Fund. And that's in addition to the GBP 7 million we've contributed to the British Gas Energy Trust, which helps fund debt charities and provide grants of up to GBP 750 to help any customer, not just the British gas customer but any customer struggling to pay their bills. And we believe that this is the biggest ever aid package in the U.K. energy sector, and we're going to continue to review what more we can do in the light of future projected increases in the price cap.

I'd like to move on now to cover our continuing turnaround. You might remember this slide from February, [indiscernible] the 3 overlapping phases to our turnaround. And I'm really pleased with the progress we're making. We were clear that the most important building block was to simplify and derisk the portfolio and in the process, strengthen the balance sheet -- building the foundation from which we can grow, to make sure that we were in control of our own destiny and have the space to make the right decisions rather than being forced to do the wrong thing at the wrong time.

And the sales of Direct Energy and Spirit Norway together raised GBP 3.5 billion. And this, coupled with our relentless focus on cash means we've now eliminated our net debt, but that's not all. As you can see here, we've removed over GBP 6 billion of liabilities in the past 2 years. You can see significant reductions in decommissioning liabilities, a technical pension deficit and the future expected losses in the Sole Pit legacy gas contract. To put this into context, that's equivalent of more than GBP 1 per share in equity value.

So Stage 1 is complete. The foundation is laid, and we're on the way in our journey to deliver Phase 2. We managed to stabilize the business. We're now focused on improving operational performance, in particular, in both the British Gas businesses. We're much more focused on customers now with the restructuring largely complete.

The restructuring removed management layers and it is fewer and more focused business units, engaged and empowered colleagues, as you can see by the increase -- coming to 63%. But we still got further to go [indiscernible] in that space. I'm confident we'll get here. Over 1 of our business units today has top quartile engagement models -- a major turnaround, a huge turnaround in colleague sentiment.

We continue to build the services engineer workforce to ensure that we can meet not only our customer needs today but the demands in the future. And we've recruited further 600 qualified engineers and apprentices in the first half of the year.

So we're now increasingly turning our minds to Phase 3, not because Phase 2 is finished but because we've always got to be looking ahead. The opportunities presented by net zero for our retail businesses are absolutely huge. We've got the largest field force in the U.K. We've got the capability and capacity to further upskill and cross-train colleagues, and that means that we're incredibly well positioned. I'm really excited about the future for the retail activities, and that's why we're investing heavily in these businesses.

We also said in February, we look at options to deliver growth through investing more capital into flexible distributed generation as well as developing options to repurpose existing infrastructure to support the energy transition to turn it from hydrocarbon infrastructure into net zero infrastructure. We've made good progress here, and I'm going to give you a bit more color on that after Kate has taken us through the financials.

But today, let's look at the group. So Centrica is focused largely in the U.K. and Ireland. We participate selectively across the energy value chain. We've got strong U.K. and Ireland retail positions through brands such as British Gas, Hive, Dyno and Bord Gáis. We've got world-class pan-European optimization positions and capabilities in Centrica Business Solutions and Centrica Energy Marketing & Trading. And we've got incredible infrastructure positions in the U.K. and Ireland in gas reduction and processing in both nuclear and gas-fired electricity generation and in battery storage.

Now all of these activities are interlinked and each and every one of them have got significant growth potential. That includes both British Gas businesses. We're currently focused on improving operational performance in order to position us well so that we can grow.

In British Gas Energy, we're focused on improving the areas we control. And I was really pleased that we delivered organic customer growth in the first half of 2022 because NPS continues to improve. We remain focused on IT platform migration, investing in the lower-cost software-as-a-service platform. And this has been a future proof of the business as the U.K. energy system develops and there is an inevitable and substantial increase in electrification.

Combined with more modern and agile ways of working, this is also going to allow us to offer a better customer experience whilst ensuring that our cost for our customer remains competitive.

And for those of you that have seen these types of migrations, you'll know that it requires focused efforts and also it can be bumpy. But we've now got almost 1 million customers on our new platform. We'll continue with a controlled approach as we scale up and migrate all residential and small business customers over time.

However, the current environment remains incredibly challenging for customers and for suppliers. And as you know, more than half of U.K. energy suppliers went out of business in the past year.

Those players like us, who have got a responsible business model and a disciplined approach to hedging and risk management will be able to see out of the situation. And we think the regulatory focus has got to ensure that both the market and all suppliers are viable.

We've been clear that there's been a huge regulatory failure which required urgent intervention and financial services by prudential regulation. That includes fit and proper person tests, capital adequacy rules, well-monitored risk management activities and full protection for customer deposits.

There's been a number of positive changes to regulation over the past 6 months, which include the introduction of regulations that should ultimately protect 100% of customer deposits together with the market stabilization mechanism which should ensure that companies are not commercially disadvantaged by hedging responsibly when commodity prices start to fall.

Whilst we would always like change to be quicker, we are supportive of what we see coming out of Ofgem. We'll continue to engage in the future of retail energy markets in the U.K. to ensure that only well-run responsible suppliers are allowed to remain in this market and that they can make a fair return. That is very important as well.

We've been encouraged by positive action from the Irish government in terms of direct support for customers rather than intervening in the market with potentially unintended consequences. And the U.K. government customer support package has been similarly encouraging.

And finally, in this section, let me cover British Gas Services & Solutions. Operational performance here is improving, and we've got significantly reduced reschedule rates and higher engineered NPS. We've also seen some improvement in our boiler and power supply chain issues after the issues that we saw earlier this year.

And our engineered recruitment drive is continuing at pace. I'm really proud of the team who has regrown this recruitment and training capability far faster than any of us had the right to expect. You can see in the chart how we've changed this. The team have been phenomenal.

Now this investment obviously impacts some productivity in the short term because new recruits, when they're trained, they're mentored by existing colleagues. That takes some productivity, but it's absolutely essential for the long-term health of our business. We have to grow our own talent. And we can expect this impact to last probably into early 2024 until the apprentice pipeline normalizes. It's not going to go back to the levels of 2018, but it doesn't need to stay at the levels of 2021 and '22.

We're also seeing inflation in the cost of living prices affecting both the cost base and our sales performance. So therefore, full financial recovery in this business is likely to be dependent on how long any economic downturn lasts. And therefore, it's probably going to be a bit slower than we would have thought when we spoke to you in February.

Now historically, in this environment, our approach would have been to make unsustainable cost cuts that underpin your profits. And this happened in late 2019 when a substantial proportion of contracted labor was let go just at the start of winter, which impacted customer service from the fourth quarter onwards.

And actually, only now are we recovering from that. You can see here that we carried out more than 400,000 additional service visits in the first half of this year. When you compare to the same period in 2020 and 2021, both of those comparable periods, both impacted firstly by COVID and secondly by industrial action. That actually masked the impact of the very short-term decision that was made in 2019. We won't repeat that.

This business will only realize its growth potential if we continue to invest in our capacity and our capabilities in our technology, in our colleagues. We'll continue on the path that we're on to ensure that we capture the great opportunities that are presented by net zero. We feel there's no contradiction between the planet and the profit when you talk about net zero. Look again how we made our money this year, by managing 15 gigawatts of power across Europe, 80% of which is renewable, by sticking with low-carbon nuclear.

The energy transition is an immense opportunity for us at Centrica. We want to be the ones to install the heat pumps or convert gas boilers to hydrogen, to link up the solar farms and wind farms of the U.K. and Europe into one giant sustainable grid. We pioneered the new technologies like carbon capture. It will take Britain and Ireland all the way to net zero. That is at the forefront of everything that we do.

So now I'm going to hand you over to Kate to talk about the financials, and I'll come back and talk about our strategy. Thank you.

[Kate Ringrose, executive]

Thanks, Chris. Good morning, everyone. All right. Let me move straight on to the results.

Overall, financial performance was healthy in the first half of 2022. Revenue increased in all our business units, which reflects good operational performance against the backdrop of higher commodity prices. This also resulted in higher gross margin in our Upstream and Energy Marketing & Trading businesses.

Operating costs increased by just over GBP 100 million. This is largely due to higher bad debt charge and the GBP 27 million further repayment made to the government in February. We continue our focus on discipline and costs whilst prioritizing OpEx investment into our retail businesses to improve service levels and position for future gross margin growth.

Adjusted operating profit was up significantly to GBP 1.3 billion, although nearly GBP 0.5 billion of this relates to the disposed Norwegian Spirit Energy assets. I'll cover the segmental detail in the next slide.

Net tax costs were lower, which includes the benefit from over GBP 900 million of debt maturities since the start of 2021. The group tax rate increased to 46%, reflecting the increased proportion of operating profit made in the highly taxed E&P businesses. This resulted in adjusted earnings per share of 11p or 10.2p when excluding the disposed Spirit Energy assets.

Moving now on to operating profit. Chris talked to how we think about the integrated portfolio. And I'll follow that structure, albeit there is some overlap in our current businesses. In retail, we include British Gas Services and Solutions, British Gas energy and Bord Gáis. Optimization includes Centrica Business Solutions and Energy Marketing & Trading. And Infrastructure includes our Spirit Energy, CSL and nuclear assets.

A notable outlier from our overall strong performance in the first half was British Gas Services and Solutions, where operating profit reduced to GBP 7 million from GBP 60 million last year. So that's where I'll start.

As you've heard from Chris, operational performance is improving. However, it is going to take time for this progress to be fully reflected in the financial results. You may recall we said last year that COVID and industrial action had cost us GBP 50 million in the first half of 2021.

All things being equal, you would have expected this to reverse out in the first half of 2022. However, as we signaled in February, elevated absence rates continued into '22 while we also saw ongoing high levels of customer compensation following disappointing service levels over the last winter.

We caught up on our backlog of annual service visits whilst the level of customer callout was higher than we had expected, which we believe is a function of customers choosing to have nonurgent work that they have been delaying over the COVID period completed.

These should be temporary factors, but they impacted the result by approximately GBP 25 million in the first half of the year. We are seeing commercial challenges exacerbated by the current high inflation environment. Customer retention rates remain strong at above 80% as we remain mindful of the price changes customers can absorb. However, customer acquisition has been challenging, and we lost a net 157,000 customers in the first half of 2022. We are also seeing more customers trade down to lower-priced products within our home care range. This negatively impacted us by around GBP 20 million compared with the first half of last year.

We are making a number of choices to improve the resilience of our business, investing in service and pricing and ensuring our current propositions are attractive and we're well placed as alternate testing solutions gain more prominence. This investment includes the recruitment of engineers and apprentices and the training of colleagues who have joined us over the last 18 months as more experienced engineers mentor new joiners.

We continue to invest in additional OpEx in our core IT systems to improve our productivity, particularly in planning and dispatch and modernizing our supply chain and in building our net zero capability. We are seeing increasing costs in a high inflation environment, including our own employee cost as we look to support colleagues through the cost of living crisis. Mindful of the difficult time for customers, we are choosing to invest in our pricing by not fully passing these inflationary costs on to our customers.

This investment totaled around GBP 50 million. And although this will create a drag on profit in the immediate term, we believe these are the right short-term choices for the long-term health of a business which can play an important role in helping households transition to net zero.

Finally, on services, heating installations were up 13% compared with the first half of last year in a market which reduced in size. However, the average sales price was lower with customers again tending to choose lower -- boilers. Global supply chain issues earlier in the year resulted in higher costs and reduced productivity. Combined, these factors drove a negative impact on profit of GBP 10 million compared with last year.

Moving on to British Gas Energy, where operating profit reduced by GBP 74 million to GBP 98 million. The current market environment continues to make the forecasting of customer numbers and demand challenging. Given the tariff default cap remains cheaper than nearly all fixed price offers available in the market, we saw a continuation of the trend from Q4 last year with a higher number of customers moving on to the default tariff than we had purchased gas and power -- we now have 83% of our portfolio priced on a capped product.

This resulted in us having to procure additional commodity at high market prices with optimum allowances for this unexpected cost only kicking in from April. This is a negative factor in the first half financial results.

Offsetting this, warmer than normal temperatures in the first half naturally reduced demand. But eventually, we're able to sell surplus gas and power back into a high-priced commodity market and resulted in a net positive impact overall from weather. These were large swings moving in opposite directions, which almost netted out.

In OpEx, we recognized a roughly GBP 65 million increase in our bad debt charge linked to both elevated revenue and emerging pressures on customer wallets. This took bad debt as a proportion of revenue to 2.3%. We also made the GBP 27 million further repayment I talked to earlier.

Finally, for retail, Bord Gáis Energy operating profit increased from GBP 19 million to GBP 33 million despite a challenging environment for energy supply with good trading performance and the Whitegate CCGT back online following a major outage throughout the first half of 2021.

Next on to optimization. Centrica Business Solutions contributed GBP 20 million of operating profit in the first half compared with the GBP 24 million operating loss in the same period last year. Within this, we saw a recovery in the energy supply with no repeat of COVID-19-driven demand reductions seen in H1 2021 and warmer weather allowing us to sell excess gas and power back to the market. The loss in new energy services halved, reflecting improved commercial performance and lower operating costs as we refocused this business.

Switching now to Energy Marketing & Trading, which made an operating profit of GBP 278 million compared with a loss of GBP 40 million in H1 2021. As we mentioned in our May trading update, EM&T has managed the commodity markets well. Our portfolio of physical contracts and associated capability, technology and data are well placed in this commodity environment. This portfolio, which includes PPA storage and LNG delivered a strong optimization performance across the European markets in which we operate.

The long-standing legacy gas contract for Sole Pit contributed an operating profit of GBP 25 million in the first half as we use optionality around the timing of gas offtake. We currently expect the contract to broadly break even for the first half, after which the contract only has another 2.5 years before it expires. At current board commodity prices, we expect the contract to lose around GBP 150 million before it ends, albeit the phasing of the losses is uncertain.

Lastly, I'll talk to the infrastructure or upstream businesses. After excluding the Spirit Energy assets sold in May this year, pretax operating profit was GBP 421 million compared with a small loss last year. The retained Spirit Energy assets delivered operating profit of GBP 59 million with strong operational performance at Morecambe and sickness and higher achieved prices despite the impact of forward hedging. This was partially offset by higher depreciation rates as a result of impairment write-backs last year.

CSL operating profit increased to GBP 76 million as operational performance was robust and enabled us to optimize production from the rough asset. Production was up compared with the same period last year and the achieved gas price was higher.

And in nuclear, reliability exceeded our expectations given our 2021 experience with volumes up 11% despite the closure of 2 stations since June of last year. Operating profit was GBP 286 million in the first half as a function of the higher achieved prices, lower OpEx and depreciation following the closure.

Finally, touching briefly on the disposed for energy assets, which contributed GBP 485 million of operating profit with the valuation date for the transaction set as of the 1st of January 2021. We've isolated this contribution.

Moving on to cash flow. EBITDA increased by GBP 1 billion while tax payments of GBP 367 million were made compared with the net rebate received in H1 last year, reflecting the increased profit. We used a lot more working capital this half, resulting in a cash outflow of GBP 438 million. This was largely in British Gas Energy for 2 main reasons, the impact of taking on supplier of last resort customers, which will unwind over the next 9 months and the impact of higher commodity costs as we typically pay for the purchase of commodity in advance of receiving payment from customers.

Growth in Energy Marketing & Trading activity also resulted in a working capital outflow in this business. Net investment was flat versus last year while exceptional cash flows were again lower as our 2020 restructuring program comes towards an end. And as I've highlighted before, any OpEx efforts we make like those in British Gas Energy and British Gas Services and Solutions to improve operational performance will not be charged as exceptional items. Overall, free cash flow was GBP 643 million, up from GBP 524 million from the same period last year.

Switching to the right-hand side of the slide. Pension payments were reduced as we saw no repeat of redundancy-related accelerated payments from 2021. We also saw a reversal of our margin cash position over the first half.

A core capability in managing our business risk is how we balance market credit and cash liquidity risk. The potential exposures to these individual risks are particularly acute in this current environment. And our strong balance sheet and access to liquidity ensures we have good options to manage this trilemma. It is very possible our margin cash position could increase further as effective risk mitigation lever. Our cash position gives us good choices in how to balance this trilemma and is one of the reasons we will continue to run a conservative balance sheet.

You can see the GBP 233 million minority dividend paid to our Spirit Energy Partners following the completion of the Norway disposal. And the net impact of all of this was a net cash position of GBP 316 million at the end of June.

I'm pleased with the progress we've made on the balance sheet over the last 2 years. A strong balance sheet and strong investment-grade ratings remain important to us, and the benefits of this are clear during periods of extreme commodity volatility like that we are seeing at the moment.

As regards to pensions, recent increases in corporate bond yields mean that we now have an accounting surplus of GBP 747 million. However, it is the technical provisions deficit, which determines the future level of cash contributions that the company has to make.

Here, we have just reached agreement in principle with the pension trustees regarding the March 2021 technical deficit valuation at GBP 944 million. I'm pleased that on a roll-forward basis, the deficit is around GBP 600 million today, reflecting changes in wheel build rates and deficit contributions since the valuation date and a solid covenant rating. Therefore, the contributions are expected to remain at around the current level of around GBP 175 million per year.

Pensions have been an unpleasant source of volatility in recent years, as Chris said, reaching over GBP 2 billion a couple of years ago. So we have been heavily focused on derisking our net pension liabilities. As you can see from the table on the right, the overall level of interest rate and evation hedging as applied to the asset base has increased from 36% 3 years ago to 95% today. This means the volatility of our pension deficit should be much reduced in future.

Before I move on to cover our updated financial framework, let me address the outlook for 2022. Financial performance so far this year has been good, which positions us well as we head into the second half. We'll continue to invest in and drive operational improvement over the second half of the year particularly given the uncertain economic environment, which creates challenges for British Gas Services and Solutions and also increase bad debt risk for our energy supply businesses.

If forward commodity prices were to stay around current levels and asset performance remains strong, it is likely that full year adjusted earnings per share could be at or even above the top end of the current sell-side consensus range. However, as always, there are a range of external factors that we cannot control, most significantly, weather and wholesale commodity prices, the risks from which are elevated in the current commodity environment.

As a reminder, we start hedging our upstream production and generation ratably 24 to 30 months ahead of delivery. On the right of the slide, you can see the amount of gas and power we have already sold forward in our E&P and Nuclear businesses, which should help you with your modeling. We also have exposure to European power prices to our PPA and route-to-market activity in energy marketing and trading.

Finally, let me turn to our updated financial framework approach, which will underpin our strategy moving forward. It should come as no surprise for me to start by talking about the balance sheet. Maintaining a strong balance sheet will be key to our continued success. We are currently in a net cash position. But remember, this figure does not include the GBP 1.5 billion of gross Spirit Energy and CSL decommissioning liabilities nor the GBP 0.6 billion current roll forward valuation of the technical pension deficit.

We've talked to the significant cash swings and the [indiscernible] uncertainty. And Chris will provide more color shortly on how we see the investment opportunities ahead of us. With current levels of volatility and economic uncertainty, I intend to maintain a prudent balance sheet which provides cash agility, resilience and the ability to respond to opportunities whilst maintaining meaningful headroom to maintain our strong investment-grade credit ratings given their importance for our energy procurement and optimization activities.

Let me now turn to dividends. Importantly, we are now in a position to reinstate cash returns to shareholders, starting with the 2022 interim dividend payment of 1p per share. The full year dividend will be progressive. And over time, we expect the cover ratio to move to around 2x, recognizing the ratio is likely to vary each year, dependent on the business cycle.

We will continue to invest in our people and technology, whether that's through OpEx or CapEx, and this will underpin further improvements in customer service and productivity and, in turn, improve customer retention. Our balance sheet approach also means we're able to support increased working capital capacity should attractive opportunities arise in our optimization activities.

Next, we have the opportunities to invest in a value-accretive way in flexible and lower carbon assets to accelerate the energy transition and improve security of supply in our core markets. Chris will lay out the robust framework we will consider each opportunity against, but you would expect each one will need to deliver appropriate returns commensurate with the risks taken. Such investment will also help us retain a diversified and balanced portfolio as our existing E&P and nuclear assets naturally reducing scale over time.

Finally, we will continue to focus on the efficient use of capital. And while the current volatility of the market and uncertain timing of our potential investments means we can't yet get clarity on timing, this does include the potential to return any surface structural capital to shareholders.

I'll now hand back to Chris.

[Chris O’Shea, executive]

Thanks, Kate. So now we've stabilized the group, we reshaped the portfolio and we put in place our operational improvement plan. We can share our long-term strategy and outline the growth potential. So for those of you that know me, you know that I prefer to let my delivery do the talking. But on this occasion, I'm actually really quite excited to share a little bit more.

So how do we see Centrica today? We're evolving into a new type of integrated energy company. It's not about investing in upstream assets to hedge the downstream activities. That isn't my as my kids would say [indiscernible] essentially. It's about balance. It's about balance in our portfolio, balance in an increasingly imbalanced energy system. It's about investing in net zero, investing in the retail business to deliver new net zero propositions, investing in flexible assets which will enable our net zero electricity system and using our optimization capabilities to help derisk the group and add value to the retail businesses that we've got in the U.K. and Ireland. It's about investing in net zero infrastructure which will capture carbon and will produce net zero gas.

It's about our unique combination of strong retail optimization and infrastructure businesses. The strength of each of our business is reinforced and derisk the other elements, and this makes us a stronger company. Our markets are dynamic. Delayered organization allows us to respond quickly.

We'll only invest to get the best returns to the ideas that we've got. We'll only invest where the risk is compensated by the returns. And we expect to have a mix of merchant and regulated assets.

And we're market-led. We're not going to invest material sums into primary research and development. That's not our bag. We'll invest in our proprietary optimization technology, and we'll deploy new technologies faster than our competitors can. These are the principles to guide our strategy, the principle to guide our approach.

So we've worked hard to get into this position. But our portfolio makes sense with each part complements another, where we've got growth opportunities, we have good balance. The great thing is that we've got growth opportunities across the entire value chain. We can choose where to invest, and we can choose the mix dependent upon the circumstances we've got choice.

So firstly, let's look at the growth opportunities that we see in the retail businesses. I talked a lot in February at the prelims about how well positioned we are for the transition to net zero. It hasn't changed in the past 6 months. And I'm actually more excited today than I was then by the growth potential of both British Gas Energy and British Gas Services and Solutions.

We're the largest energy supplier and the largest related services company in the U.K. and Ireland. We've got more than 10 million customers. They're served by the largest energy services field force with well over 7,000 engineers, and as you saw earlier on, it's growing.

But we've got another huge competitive advantage, our award-winning in-house training academies. They already allow us to both train and to certify our own apprentices and to upscale engineers to install everything from heat pumps to EV charging points with smart meters to hydrogen boilers.

These are the people that are going to deliver the U.K.'s net zero future. The people that will allow us to capitalize on the opportunities presented by decarbonization. It's what allows us to confidently participate to be in hydrogen village trials to install heat pumps as other people talk about.

All of the parts of the trade in Germany are in our hands. Our competitors would love to have something similar. The regulatory environment in U.K. energy supply is actually heading in a more sensible direction. And that means that suppliers like us focused on improving customer service levels should be able to make a fair and a sustainable return.

The decarbonization of heat is going to drive substantial demand for new heating systems. This is a huge opportunity for us. There are 28 million homes in the U.K. and more than 2 million homes in Ireland. And each and every one of those homes will require some form of change to the heating systems probably over the next decade to ensure that net zero is achieved.

And we don't know what the exact technology mix is going to be, but it is almost inevitable that both heat pumps and hydrogen will have a massive role. But we plan to be the leader no matter what the technology is. And the timing to switch over to lower carbon heating is also quite uncertain. I would argue it's not held by the current cost of living crisis. But whatever the mix, whatever the timing, our job is to be well placed than we are.

But we clearly need to get match fit to be able to access those opportunities. And that's why we're investing so much in improving our operational performance and our customer service across the British Gas businesses to capture the huge opportunities that will inevitably come in the next decade.

We stand at a very interesting point in time. The changes coming in the energy landscape in the next decade will be monumental, like changes that we've never seen before. The energy system will become a much cleaner, much more complicated, much more volatile and much more intermittent. Those are the skills to optimize such a system. We'll have a competitive advantage.

Now we've always had a requirement to manage our commodity exposure and the risk in our core markets given the scale of the retail and the infrastructure positions that we've had historically. The expertise that we've gained through doing this is incredibly valuable as we're seeing at the moment in our results.

When commodity prices are high in a regulated downstream business, you typically don't make more money but the risk profile increases materially. Our world-class power and gas trading and optimization capabilities help to mitigate this, and they are a genuine differentiator for us.

We use the knowledge and expertise that we gain through doing this to put a modest amount of risk capital into commodity trading. And the main point here to note is we're not taking speculative funds. We're optimizing a wide range of positions to make a return. And this is something that would otherwise get a cost center into a profit center for Centrica.

Over time, energy markets have also become increasingly international. Gas has moved from being separate local markets to one which is now interlinked European market. It's actually now becoming much more of a global market with LNG playing an increasingly important role.

Electricity markets across Europe are interlinked. Our optimization activity is generally underpinned by contractual positions, including within our route-to-market business. And that provides market access and optimization services for customer-owned assets.

We've grown this. Now we manage 15 gigawatts of third-party assets with about 80% of renewable technologies mainly across 8 countries, principally in the U.K., in Germany and across Scandinavia.

A typical example of one of these types of deals would involve us receiving a fee from a renewables asset owner to take on the balancing cost. We can then utilize our intraday trading capabilities to make an additional return. For more flexible assets, such as combined heat and power units or CHPs, we can also help them schedule when they run to optimize the return and also to participate in demand side response.

We've shown in this slide how the 15 gigawatts of assets break down by technology. The majority relates to wind to solar, to CHP. Small scale, we are also optimizing other technologies that will be important in the future.

For example, we're involved at the moment in optimizing about 200 megawatts of green hydrogen production from electrolysis in a number of trials. We've got proprietary technology deployed. We're always learning, always gathering data, understanding the market is more changing, evolving.

You can see we also manage our global LNG portfolio. You're probably familiar with the Isle of Grain capacity we've got in Kent and the long-term LNG contract we've got from the Sabine Pass plant in Louisiana.

We've also been building up a number of medium-term positions that derisk and optimize Sabine Pass and the overall LNG portfolio. And over the past 2 years, we've transported almost 300 LNG cargoes across the world. We've got a world-class team with a deep understanding of the LNG market and its logistics.

We'll continue to seek options to derisk and potentially grow the portfolio, which is enabled by our stronger balance sheet, our ability to act quickly and decisively and our deep knowledge of global gas markets.

And hopefully, this demonstrates the strong optimization positions that we've got today. We've been building our capability and market knowledge over the years. And this means that we understand the direction that energy markets are heading.

So why is this all important? We already build and maintain customer assets as well as our own today through Centrica Business Solutions. Combined with a world-class optimization capability, this is core for future growth. We spent years gathering the data on how European energy markets operate.

What we've got is unrivaled, is something that competitors don't have. We see things that they don't. And that's not because we're smarter than them. It may well be, but it's because we have the data that they don't have. We have the knowledge that they don't have.

And it's also because we don't stand still. We keep moving. We keep improving. So even if they try and catch us, we keep moving forward. All of this gives us the knowledge to compete across the value chain and the confidence that we know where to invest Centrica's Capital and flexible assets.

So how are we going to deploy that knowledge? How will we monetize the data that we've spent years building. Investment in the U.K. and Ireland energy system is expected to increase materially over the next decade, you can see here to nearly GBP 200 million in total. This might be conservative. But it's going to be driven by government decarbonization targets in the U.K. and the need in Ireland to address the intermittency that they're seeing together with the push for increased security of supply we've seen in both countries and elsewhere.

The combination of technologies is going to be required. And it will create opportunities for companies with strong balance sheets, flexible business models and detailed knowledge of these markets. Companies that don't have a legacy portfolio to defend will be able to move the quickest, companies like Centrica.

The majority of the investment is projected to come from intermittent renewable technologies such as wind and solar. We don't know what the precise mix is going to be. Nobody knows. But you can see from the chart on the right here, the proportion of the U.K.'s electricity generated from intermittent technologies is projected to more than double from below 30% in 2020 to around 60% by the end of this decade.

So what, you might ask. Well, the increased intermittency is going to result in a growing need for distributors to rapid response to electricity sources. And it will demonstrate the value of having strong optimization capabilities. And with security supply also remaining important, assets such as gas peaking plants and gas storage are also likely to play an important role.

How do we know this? When you look in the top 20 countries in terms of electricity generated by wind per capita, we are active in 12 of them. We know how the system is working in Denmark. We optimize a large part of it. We know how the system is working in Ireland. We have a material presence there today.

Now whether it's wind or solar, it doesn't really matter. What matters is how do you optimize an intermittent energy system. So the U.K. looks to double its energy from intermittent renewable energy sources this decade. If it succeeds, it will become more like Ireland. Or if it overachieves, it will become more like Denmark, both countries where we've got a lot of experience and a lot of data.

The opportunity for Centrica is significant, and we've got a clear view on where we can participate. We're weighing up those opportunities using our robust framework, which takes account of the size and growth rates of the market, the appropriate levels of return commensurate with the risk taken, including whether the asset might be regulated on the option.

What competitive advantage we have? Specifically, why are we better at developing and running an asset than competitors? Carbon asset complements the existing portfolio. As an example, investment in flexible distributed energy assets provides offsets with intermittency-related volatility in wholesale prices, which can feed into our downstream businesses, our retail businesses.

Clearly, technologies are going to develop and new opportunities will align. But at this point, we see the main areas of investment focus are likely to be in batteries, gas peaking plants, solar, hydrogen and carbon capture utilization and storage or CCUS as people call it.

The focus for our investment will be in the U.K. and Ireland markets, where synergies with our retail positions and capabilities are the most obvious. But we could consider other countries where we have a strong optimization position.

Of course, we will remain focused on improving the operational performance of our retail businesses. But owning the right type of flexible assets will help to derisk the overall portfolio, utilize our leading optimization skills, both of which provide us with a great opportunity to help with and benefit from the transition to net zero.

We've got a good mix of current projects, near-term opportunities and longer-term options. Although we might see variability in capital expenditure between years, the phasing should be controlled so we can comfortably afford the spend within the boundaries of our financial framework.

And the majority of these projects should be relatively small capital commitments, short cycle rather than multibillion-pound multiyear projects. Flexibility for us is key, having choice.

Potential investments in smaller scale, flexible generation will be aligned to existing capabilities. So we already own operational assets in the U.K. and Ireland. We've got a battery at Roosecote, a 50-megawatt battery in the northwest of the U.K. of England.

We've got a gas peaking plant at Brigg. And we've got the Whitegate combined site turbine power plant in Cork in Southern Ireland. But we've got the ambition to grow a bigger portfolio of flexible distributed assets, and we're already developing a number of projects across a range of technologies.

We've got a great legacy. We're not starting from scratch. The opportunities have become clearer at the back of the bureaucracy and complexity -- we've got sites in Roosecote, which is adjacent to the Bord Gáis terminal. We got a site at Brigg, a site at Barry and Wales, each of these previously housed major electricity generation activities.

And now we've got a number of sites which we believe are suitable for various types of power generation, not to mention the Whitegate station in Cork. We're currently building an 18-megawatt solar farm at Codford and Wiltshire. That will cost around GBP 50 million, and we hope it will be operational in the turn of the year [indiscernible] not great because it might not be too much sun around the turn of the year, but it should be operational.

We recently made the final investment decision to build another 50-megawatt battery on the site of Brigg, one of the gas peaking plants we've got. We expect this to be operational in the next year to 18 months.

As I mentioned in February, we were successful earlier this year in the Irish capacity auction with bids to offer up to 200 megawatts of capacity. We're now moving towards final investment decision and the build of 2 separate 100-megawatt gas-fired plants, which should cost around EUR 250 million. These would support the growth of renewables and maintain stability of energy supply and Ireland, remember, twice the intermittency that the U.K. has got.

Including these projects, we've got brownfield sites across the U.K. and Ireland that could support well over 1 gigawatt of new flexible generation capacity over the coming 5 years. That includes the Barrow and Easington gas terminals. They could support further investment in power generation assets.

It's worth noting that the investment that we're looking to sanction in Ireland, we'll initially run in methane but we expect to be able to convert them to run a zero-carbon hydrogen. And that's going to be the aim for all of our future gas generation investments. We would expect all of these projects to deliver asset returns in excess of 5%. This is before we include any optimization upside that the unrivaled capabilities I've spoken about should allow us to achieve.

The short-cycle projects typically taking no more than 2 years from initial investment decision to be fully operational will limit the amount of pre-productive capital deployed at any one time, again, retain flexibility, retain choice. So overall, we're very comfortable we should be able to make returns on these investments to create substantial shareholder value over time.

So what about the infrastructure assets? The benefit from the balanced portfolio that we've got is clear and the current environment is clear in these results, providing diversification for the group and generating good levels of cash flow. However, the lifespan is necessarily limited particularly so now that we stopped exploring in Spirit.

The retained Spirit portfolio is expected to decline between 10% and 20% each year, and that's fairly typical for a gas production business. And roughly, existing reserves will by and large be exhausted over the next 2 years if we simply produce the remaining gas.

2 of the remaining 5 nuclear plants are going to be closed in 2024 with another 2 expected to be closed by around 2028. But we expect the size of the nuclear power station to be granted a 20-year life extension and ultimately run until 2055, so for more than an additional 3 decades.

Our challenge is to reinvest these cash flows into new net zero assets, which continue to provide the balance of our portfolio benefits from today and create shareholder value. As you would expect, we've been working hard on this. We've got 2 great assets in rough and Morecambe.

And we've won them both for decades. So we know these assets very well. We've been working to maintain optionality to extend their lives and to utilize them as net zero assets ultimately to maximize the value of these assets. Both are currently producing gas. Rough has got a couple of years of production remaining, as I mentioned. Morecambe could conceivably, depending on prices, keep producing for the rest of this decade.

Now as you know, we've been looking at the possibility of repurposing Rough to store gas, initially methane which would support the U.K. security supply. It's subsequently storing hydrogen, the world's largest hydrogen storage facility, which would support the U.K.'s hydrogen strategy, which recently aim to double hydrogen production from 5 gigawatts to 10 gigawatts by the end of this decade.

Hydrogen should play an important role for Centrica in the future. And that doubling of the capacity is, I think, the thing that means that Rough is required. Rough's potential as the world's largest storage facility is a real enabler to allow us to achieve those aim.

It is, in our view, impossible that this target can be met without hydrogen storage capacity. Once you start to use it, you have to have an uninterrupted oil supply. So in our current estimates, the project would cost in the region of about GBP 2 billion, including the cost of converting it to store hydrogen. And we are highly unlikely, I'm sure you'll be glad to hear, to invest in a project of this scale in such a nascent market on a merchant basis.

So we're looking for a regulated return model. We're not looking for government money. We can fund this either ourselves or with partners. We're simply looking for a model such as that which is used for existing strategic U.K. energy assets.

We're due at the moment to decommission -- start decommissioning Rough in the next 2 years. That would cost about GBP 300 million. If we can repurpose this asset, that could delay some or a substantial part of that cost for decades. So we remain in active conversation with the U.K. government on the role this asset can play in the future of hydrogen, and we're very encouraged by the discussions.

The yearly refocused Spirit Energy gives us the opportunity to repurpose the large-scale Morecambe field ultimately into CO2 reservoir. It could be the world's largest such facility, and I've been reliably informed that it could store more molecules of CO2 than there are grains of sand in the Sahara Desert, which would make it essentially to me as a nontechnical person as the world's largest soda stream. But it's in very early stages, but we're going to continue to look at the various options as to how we maximize the value of this asset.

We've got more time with Morecambe and Rough given the remaining life of gas reserves in the field, but it's an incredibly exciting option for Spirit Energy for our partners and for Centrica. Like with any investment could defer material decommissioning costs plus the regulated model would offer low-risk returns as well as derisking the overall portfolio that we've got.

So in summary, our diversified group has served us well throughout this crisis. There are 4 main messages I'd like to take away from this session. Number one, we significantly simplified de-risk and strengthen Centrica. Number two, we're driving improved operational performance across the group particularly in our British Gas businesses as we look to get the match fit so they're positioned to capitalize on the huge opportunities presented by the move to net zero. Number three, we're focused on delivering sustainable value over the long term, empowering colleagues, growing our business, growing jobs. And number four, we'll continue to focus on delivering sustainably, simply and affordably for our customers whilst delivering stable and attractive returns for our shareholders.

I am really pleased that we've been able to restart the dividend today. And I am personally very grateful, I know our board is grateful for the patience that's been extended as by our shareholders. Centrica is evolving into a new type of energy company -- a new type of integrated energy company. We're using our strong established positions, our capabilities and our unrivaled data across retail optimization and infrastructure. After a period of extreme market volatility, we're turning a corner with emerging stronger, and I hope you'd be much more focused, and I think just in time.

Britain and Ireland are trying out for long-term investment. We're putting Centrica at the center of that. We're backing it by our capabilities and our financial strength, which will allow us to invest in attractive opportunities and align to the energy transition and the move towards net zero. So I hope that you're as excited about the future as I am. I guess we're going to find out as Kate and I look forward to taking your questions. So thank you.

I think it's going to be a hybrid. I don't know we've got people online. Is that right, Martin? So this is a bit of a voyage of discovery for us as well as you.

[Ajay Patel, analyst]

It's Ajay Patel from Goldman Sachs. Can you maybe help with a few things. So firstly, on a conservative balance sheet. Clearly, we have quite uncertain times. And there's requirements in the balance sheet for margin cash, working capital move being quite sizable, but also maybe for gas storage coming up. In this type of environment, what type of net debt-to-EBITDA leverage would you look to in? Or would basically, net cash be a good place to start until maybe some of the market conditions and certainties start to form?

And then secondly on -- I know that the company has highlighted that it doesn't really want to expand on the exploration side, but, is there any opportunity on the exploration licenses that Spirit Energy own that could be sold for value? Or is there any merit in maybe developing some licenses to get the incentives that the government highlighted recently?

And then when I piece together what you've put together on the CapEx outlook in regards to solar battery is gas peaking and then put that to sort of potential cash flow that you could generate over the next 3 years. I'm just wondering, there seems to be some further opportunities there. So I'm just wondering, is it that more towards M&A? And if you would, what would be the criteria for M&A? Or is it more to consider the excess capital -- in regards to a capital structure, could it be returns of value? And when -- what are the thought processes for such decisions?

[Chris O’Shea, executive]

Thanks very much. So I'll take the second and then Kate will come back and talk about the balance sheet. On the exploration licenses, so we won't explore. It's not a core competence. We weren't very good at Spirit to be open, but it's also not aligned with a company that's looking to deliver net zero to go and find new gas and oil resources.

So we focus on gas around some of the fields that we've got. If there are existing proved gas deposits, we'll develop that if it makes sense financially. What we won't do is to go into prime at the exploration. So those days are gone where we're [indiscernible]. So that's not an option. But if we've got existing value, find if there's existing value and exploration licenses, the way it works is if you don't drill it, you give it back to the regulator, they give it to someone else. So we have very little, if any, exploration licenses. If we had somewhere we thought there was huge value, we would have drilled them already. If you remember, we drilled west of Shetland, didn't find much. Spent quite a bit of money. So we're going to focus on what we're good at not just in store but across the group.

On the CapEx and the cash flow, I mean, obviously, you see as we lay out the investment in the flexible assets, that's one thing you've then got potential for Rough and potential for Morecambe, they are more binary. Either we'll get the yes or the not, and either we'll get the right regulated model that will support the investment and the Board will make that decision firstly, an investment want to support and secondly, how much do we want to support. So there's some fairly big fluctuations there, but Kate will probably talk about common and answer the third question on net debt to EBITDA ratios.

But I would ask if we have just a little bit patient. We're really happy that we've got the dividend started, and what we want to do is to take one step at a time. You'll see the financial framework lays out how we think about it. And first, I would never rule out M&A. It's not on our agenda at the moment. We're always looking for value. So we would look at an inorganic opportunity in the same way as we look at an organic opportunity. Inorganic, I think, brings more risk than organic, but it's all about value.

[Kate Ringrose, executive]

Thanks for the question. I mean I understand the dynamic in terms of how one looks at relationships between net debt and EBITDA. But if I just come back to the trilemma that I talked about with regards to margin, credit and cash, those risks are very accentuated at the moment. And having cash that is available as a lever to manage those other 2 materials is a real -- really big enabler to helping us ensure that we're realizing the potential of the group and the positions it have as a whole.

I don't know how long this environment is going to last, and I don't know what that's going to mean for margin outflow in particular. And then when you look at the very accentuated EBITDA positions that we have that are again somewhat types that a net debt-to-EBITDA ratio is very difficult to look at as a mechanism right now. So I think it's a question of let's see how this runs through but really understanding kind of the dynamics and the purpose that, that conservative balance sheet serves in here and now.

[Ajay Patel, analyst]

Do you mind if I have one follow-up? Just on Rough and Morecambe. What sort of timing do you envisage to get a decision? Is it something that could happen over the next 2 or 3 years or longer or shorter?

[Chris O’Shea, executive]

So Rough at the moment, you'll have seen we've been granted a storage license for Rough was necessary, but it's not sufficient to restart. The discussions over Rough are around can we have this reopened -- this winter to store gas. Now it's a phased return to storage. It's -- Rough could have a capacity of up to 200 Bcf of storage. This winter, you're probably talking about, say, about 9 LNG cargoes. You could have investment next year have to double that. And ultimately, you can make a choice whether you want to take it up to the 200 Bcf. 200 Bcf would be the largest storage facility in Europe. There's nothing bigger than this. So it's critical for the U.K., but it's actually quite important for Europe.

For Morecambe, Morecambe's got a production profile that goes out to the late part of this decade, is not really suitable for gas storage because it's so huge. If you put gas in, you're going to have to pump it in for a couple of years before you get any out. So it's not really -- it's very suitable for CO2 storage we think. So the Morecambe license has been included in the current licensing round for carbon capture and storage. So we're starting to have a conversation about that. That's, I think, a far slower burn. It's -- there's some upside and downside.

So Morecambe not beside an existing industrial cluster, which in some ways can make it more difficult because you don't have sources of CO2 right beside Morecambe where it's located in Northwest England. However, it could be suitable to ship CO2. So it may not compete with other existing industrial clusters, there could be a fairly different revenue stream, both for us and for the U.K., but these are very early stage. So obviously, Morecambe is in a far slower burn. Rough, I would guess if it is reopened will be initially reopened at a smaller level with a short-term agreement pending future because the government hasn't yet published the hydrogen business models, and they still want to have those conversations and Morecambe, sorry, Rough is a hydrogen storage facility could well be captured by that. So that's -- there's almost a 2 track thing here.

[Mark Freshney, analyst]

Mark Freshney from Credit Suisse. Kate, follow-up on. If you like, capital structure, I accept that net debt to EBITDA is very difficult. But if we're to look at the absolute reported level of cash, I mean, presumably, that a bit misleading because a lot is within Spirit, which is ring-fenced. You're advocating and pushing Ofgem, which they seem to be following to ring-fence customer balances, then you've got to take out margin cash. So would you be able to give us a net debt number that's -- and then there's the pension fund as well? I don't know whether there are any Scottish limited partnerships or other things that you've done in the past. So what would be the true net debt number that's free to you?

And just as a follow-up, I mean you've given the investment opportunities, Chris. But what about the investment appraisal? Is it -- what kind of returns would you be expecting?

And my final question, again, back to you, Kate is just on what was formerly the British Gas Residential business. I mean there was the GBP 234 million credit last year, which was for solar costs. What would be the net credit in the first half? Because last year, it was severely loss-making work, not for the credit, right? So what would the underlying level be this year?

[Chris O’Shea, executive]

Thanks, Mark. Let me take the returns question. And then if I can, I'd like to touch on the Spirit stuff before passing it to Kate. So what we said was we would expect to come in 5% asset return, but it depends really on whether it's regulated or not. The regulated models can be a -- can be a simple ad model that can be at capping floor. You're going to CFD model. So it really does depend, but we would expect to make a minimum 5% on these smaller and flexible assets. And Kate will talk more on the net debt. I think rather than say what is the true net debt.

So the Spirit cash -- so Spirit's a controlled entity, we own 69% of it, and the shareholders agreement that we've negotiated. And it took a long time to negotiate our General Counsel, [ Radhe ] he's got the [indiscernible] and probably we wanted it to be right. And what that does is it holds cash within Spirit until it covers 150% of anticipated decommissioning costs. Keith talks about credit risk market as we said. What that does is it means that we don't have any risk of our partner, not funding that now.

We have a great partner, and we don't think that they would look not to fund, but we didn't want to strip cash out of that joint venture. So it's -- I would argue that the net debt number you see today is a true net debt number, about GBP 200 million fund ring-fenced for customer credit balances. But you've got to look at all sides of Spirit, you've got to look at our decommissioning liabilities. It's in excess of GBP 1 billion. You've got to look at the fact now we've got an agreement, which means the cash is within that joint venture to do. The only restriction is actually in the dividends that can be paid to the minority shareholder.

And then the last one I can turn the BGR, and Kate might touch on this. It's not actually a loss. So the solar cost that you reclaim, you remember we went through a lot easy to forget. When these companies collapsed, they had customers that you could only place to the cap on the similar cap is GBP 1,000. And at that point, it may have cost you GBP 1,500 to actually buying that stuff in the market. So the way solar works is you buy that stuff in the market, you submit essentially a big expense claim to Ofgem and say we're going to sell x GBP 1,000 as a cap. We bought it for GBP 1,500 to do an audit and you say that your expense claim is approved.

So I just wouldn't want to think that anything to do with solar made an unprofitable business profitable. The solar customers carry no profit, they're no gain, no loss. So you're kept all for the first period of having them. So I just -- I wanted to say that before Kate comes in and probably gives you the right answer on it.

[Kate Ringrose, executive]

In terms of -- I think I said we're now was talking about the net cash figure of around GBP 300 million that there's a gross decommissioning of GBP 1.1 million. That is as press says, there's around 90-odd percent of that it's got the cash within Spirit. Against that, so it is balanced and also remembering the cash generation potential of that business going forward as well.

With regards to the pension, again, we talked about the GBP 600 million. I am alert to the dynamics around British Gas energy ring-fence customer balances. That is a figure that we put aside. And also just looking at what kind of frameworks over time may come out of the regulators to recognize the risks are that come with being a very large energy supplier in terms of what they would look to us to ensure that we have an appropriate balance sheet that we could demonstrate, what the mechanics of that are and remain to be seen.

So I mean, as Chris said, I think the net cash figure is the net cash figure. But you're quite right in how I look at the prudent balance sheet, how I look at [ headroom ] as you'd expect has sensitized this for all sorts of different commodity environmental factors to ensure that we are in a strong and robust position when it comes to credit rating and being able to meet our obligations whilst also being able to have choices in the opportunities that we want to take advantage of.

Just on to the British Gas Residential business. I think Chris has talked about it, but just a few numbers perhaps that may help you, and you'll find these in the notes later on in the pack that we've put in a claim. I mean, overall, the costs are sort of north of GBP 500-odd million a little bit, and we've claimed for over 2/3 of that. We've got around GBP 100 million of that back already. We'll get the rest of their payment back by sort of April-ish time 2023. We'll be putting in a further claim and then that amount for that last third will come through into '23, '24. So there'll be a degree of working capital overhang that will come back in this year, but there'll be more to see in 2023 and a little bit more in '24.

[Chris O’Shea, executive]

The interest applying new technology. I see that we've got 3 questions on the, call maybe take one of the online questions first? Bear with us because I don't know the senior want.

[Operator]

The first question from the telephone is from the line of Martin Young with Investec.

[Martin Young, analyst]

Can I just ask what I hopefully 3 quick questions? In terms of the market stabilization charge that you mentioned, Chris, obviously, the Ofgem consultation to extend this prior to March of next year. It's possible, probably -- probable, what that MSC won't be triggered by that time. So don't you think we need to move this to an enduring future or does Ofgem just limp along kicking in the can down the road every 6 months.

Also on the issue of affordability, myself and other are predicting quite a significant increase in the tariff coming October and then a further increase come -- January. I think it's pretty clear that the government has been slow to act in the past with the package that is brought forward. What do you think government needs to do to help offset the devastating consequences for many people out there of energy bills of this magnitude.

And then finally, on Sizewell C and the possibility of investing in Nuclear and nothing sort of about that in today's presentation. I would say that given the reputational risk of getting in all of the projects that could partner on a cost basis on a timing basis, it's probably not way you want to go, but I just wondered if you could confirm that you're not looking at it then conscious that there have been press reports recently suggesting AEs potentially on your asking.

[Chris O’Shea, executive]

Martin, thank you very much. Looking on Sizewell, as you know, we are obviously involved in Sizewell B, Sizewell A stopped producing a while ago. We own the land on which Sizewell C would be built along with our partner, EDF. And we had the opportunity to go into Hinkley. Hinkley C, we decided against that. We're happy that we decided against that. We look at every investment opportunity as it comes.

So I'm sure EDF would rather finish the negotiations with the government to figure out what the overall funding model is and the regulatory support model is for Sizewell C. Once that's done, if we think that there's an opportunity for us to make an investment, which makes sense for our portfolio helps to derisk our portfolio is aligned, then we'll discuss that as a Board and make a call. It has to add value.

In terms of the affordability question, look, there's a lot of people giving politicians advice. So the last thing they needed additional advice for me and what they should do. The 2 candidates are prime minutes that have both noted that they intend to do more to help energy customers. We welcome that. We welcome the fact that the U.K. and the Irish government have already provided support to energy customers, and we should wait and see where the price cap comes out. And if it comes out at the levels that people are predicting just now, and it's not unreasonable to expect to be more help from government.

On the market stabilization charge, I'm sure your ex colleagues at Ofgem would be delighted to hear you say that you're kicking the can down the road, like I don't know what they're looking to do. I think that this is one of the examples of quite quick implementation of regulation, which helps to cover a potential risk in the market. And as you see with the -- I mean we've seen quite an uptick in wholesale prices over the past 3 or 4 days, which would suggest that the market stabilization charge is not something that's going to kick in or be needed before March 2023.

I don't know what Ofgem's intentions are, whether this will be a permanent feature or not because there's a bit of controversy about it. What I would say is for those that have been involved in the energy industry for any period of time, you just got no idea as to where energy prices are going to be in the next month or 2. So I'm quite comfortable to -- for us to wait and see. But Ofgem, I think, have done a good job in the market stabilization charge.

Excellent. We've got another question in the room, and then maybe we'll go to 2 questions, and then maybe we'll go to John and Jenny online. So...

[Pavan Mahbubani, analyst]

Yes. Pavan Mahbubani from JPMorgan. I have 2 questions, please. Firstly, there were some headlines, I think, from a media briefing this morning on GBP 600 million of windfall tax. Would you mind just clarifying what that figure was and sort of over what period and how it's calculated?

And then secondly, I appreciate that the energy profits levy, again. That's had some changes. So I just wanted to get the latest on whether or not you can offset any of the tax with decommissioning costs? And also, is there going to be any impact on your deferred tax assets as a result of that levy? Those are my questions.

[Chris O’Shea, executive]

Pavan, let me take the first part, and then Kate can talk about the fair tax, I could never even figure out when that was in finance. So the GBP 600 million windfall is the energy profits levy. So the windfall tax that people don't want to call a windfall tax. And that's just conflated. It's expected to be in place until the end of 2025, which is then there's a sunset clause. It's calculated based on the prices at a point when we looked at the numbers. The prices have gone up. So it could be more than GBP 600 million. You can't offset decommissioning. You can't offset brought-forward losses.

Again, you can't contest a Prime Minister. One of them said they'll keep it. One of them has hinted that there might be some changes. So we continue to look and that was that was the best estimate. I think at some point on one day, but they are the same thing, the windfall tax that I referred to this morning with the media is the same as the energy profits, levy. Deferred tax?

[Kate Ringrose, executive]

I got a lot of deferred tax problem. I mean, I think, as Chris said, because you can't do things that are historical, it's the future dynamic and the future decommissioning that you can take against the deferred tax assets. So there's some change, but it's pretty restrictive in terms of its application and our current read of it.

[Verity Mitchell, analyst]

Verity Mitchell from HSBC. I've just a couple of questions. The first one is I'm very interested in your plans for Rough and Morecambe. I mean, would that change the decommissioning costs for both assets, if you're thinking of developing them and maybe change that pricing dynamic?

And secondly, on British Gas Services, I mean you're spending essentially about half of your operating profit on services and pricing, and yet you're not projecting an enormous exponential growth in decarbonized home products? And what's the payback going to be for that level of investment given that there is pressure on households for conventional gas boiler servicing?

[Chris O’Shea, executive]

Thanks. There's a couple of things in the services business. So 20 million homes in the U.K., our analysis is that 5.5 million homes can only be decarbonized with heat pumps, and there are 6 million homes that can only be decarbonized with hydrogen. And there's, I don't know, 16.5 million homes in between. The debate sometimes focuses on is a hydrogen or heat pumps, which we think I think is the wrong debate because why don't we just start on these 2 bookends in a bit in the middle, we'll figure itself it.

The current increased energy prices could give a bit more incentive to people to have a more energy-efficient boiler. Unfortunately, heat pumps just are not more energy efficient. But the other cost of living squeeze could cause people to be less likely to invest money on heat pumps, and that's why we said we actually don't know when this is going to come. The investment we're making is not to turn thousands of gas engineers into heat pump engineers. The investment is to make sure that we've got a multiscale workforce that will install all of the new hydrogen boilers or as many as we can and as many as we can of the heat pumps. We already do hundreds of heat pumps a year through our PH Jones business. And so the investment is about making sure that we are ready to service and install the largest amount that we kind of 28 million heating systems in the U.K. and GBP 2 million in Ireland. -- whether heat pumps or hydrogen.

On the Rough and Morecambe, the decommissioning, obviously, whatever kit you can reuse, you don't decommission, you push it out for over many years. If you take Rough for example, at the moment, the investment is not huge. And over the next couple of years, it wouldn't be huge. But to go to hydrogen, that's when the investment you come up to probably the $2 billion number. you're likely at that point to require a new platform. So the legs will be fine, called the jacket. That's all fine. You take the top sides off. But the jacket is not that expensive. The expensive part are the processing kit. So likely, you'd probably be commissioned a lot of that anyway and put some new stuff in.

So we would expect to see a good amount of deferral, but not -- you wouldn't defer the entire amount, you would still replace some of the kit because what we're looking to do for both Rough and Morecambe, Rough is to have these assets for another 40 years. And so thankfully, when they were designed, they were designed at a time when lots of these things are overengineered, but some of the catches won't be suitable. So hard to give a number there, but we would expect to defer a good proportion of it, but not all of it.

Excellent. Thank you. So we're going to go to Jordan, if we go to John Musk online. And then we'll come back.

[John Musk, analyst]

Two questions from me as well. Firstly, Sorry, coming back to Rough. If you do go ahead look to bring that back online for winter storage this year. Can you just explain who is on the hook for the gas that you may put into that? I think you mentioned 30 Bcf. So it that something that you would be fully paying for is that something is there some government subsidy that is going to look to help with that?

And then secondly, you gave us some indication on hedging, obviously, around the nuclear position in the upstream position. But can you also run through your hedging on LNG and how those contracts now look because on my calculation, those are looking extremely profitable as we put in forward prices.

[Chris O’Shea, executive]

John, thanks very much. Let me take the Rough question, and then Kate will talk about the LNG hedging. There's already about 14 Bcf of gas in Rough at the moment. And therefore, you would look to inject more in there. The model is not yet agreed with government. I would just emphasize we're not asking government for any money at all. So what we're looking to do is to get this thing back and storing gas.

The easiest model to have is it simply responds to price signals, which is when the price is very low, you inject gas. When the price is very high, you withdraw gas. Part of our offer is that we are happy to fund the working capital on that to do that, but that requires a very straightforward model. If there's a desire to have something that's more of a strategic reserve, which is not within our control, even if I wanted to, I'm not sure I could persuade our CFO that, that would be a good use of our money. So those are the kind of things that we're still discussing. So you forgive me if I don't give you an answer because, frankly, I'm not really able to. But we just want to make sure that it makes sense for us because we're convinced that it makes sense for the company.

[Kate Ringrose, executive]

Just on the energy, I mean it's pretty helpful for me just to remind you of a few things that we've said before with regards to LNG and specifically Sabine pass. So the pricing of that dynamic has that's Sabine pass portfolio, just under sort of $300 million that we need to make good in market prices. And through activity that we do in advance, we hedge that in ensure that we're not carrying those losses, and that's what we've done coming into 2022, and those hedges would have been put in place.

Some years back, similarly, you would be expecting that the degrees of those progress would be hedged into 2023. However, how we've demonstrated today, and Chris has talked to it the energy portfolio, is more than to be passed the degrees of opportunities that comes with that LNG portfolio that we're putting to good use, and that's why we're confident in this profitability in 2022.

[Chris O’Shea, executive]

Thank you very much. We have a question at the back, and then we do here, and then we'll go to Jenny online.

[Unknown Analyst]

One question just on Hinkley, Hinkley, so Sizewell. Did you suggest earlier that you had effectively a first right of refusal over investment into Sizewell? I'm just wondering if you decided to invest in nuclear in the future under RAB model would you need to acquire into that project, which could be a competitive process? Or do you have rights to participate? So just a point of clarification.

Very quickly, just recently, there's been some press articles mentioning MP comments about relative price caps. Again, just your views on how seriously government may be taking those suggestions and whether you think that, that might be a part of the landscape in the future. I know we're revisiting old territory there.

And then thirdly, if you were to ask us whether we would be expecting a first half SKU or a second half this year in your EPS, given the challenges you faced in retail first half, challenges in services and then your hedge book is rolling off as you progress through the year, we would have suggested a second half SKU. I'm just wondering whether there could be material upside to the upper end of consensus if things progress as planned in terms of production and energy prices remain broadly in line with where they are now. So I guess trying to give some quantitative scale to the upside if things do progress well.

[Chris O’Shea, executive]

Good. Thanks very much. I'll take the first 2, and then I wish you well in getting Kate, out of in terms of the H1, H2 SKU. The one thing I would remember what I would remind you of is that the hedging policy in Spirit was ratable, but had a 12-month cliff edge. And so the policy, which is changing now, it basically saw a month -- the first 12 months for the start of the year, you had your full production. And so it's not the same impact in Spirit, obviously, or the same volume leverage is why you see a difference in price between the price hedge for Rough in the price is Spirit, and I do wish you luck in getting some clarity there on the SKU.

On Sizewell C, I think the best thing is for us to let EDF as the operator and the government agree what the overall model is I don't think they're yet done. Obviously, as part owner of the land, we might have a view and others may have a view. However, I don't think that, that's really all that relevant if I'm being honest. I think that we value our relationship with EDF, very much. They're a very good partner.

It's quite clear if you read the reports that between them and the government, they're looking to bid in 40% or so of that. So they need 60%. So I wouldn't see it as been something whereby you necessarily have to be part of a competitive bidding process. But if you do and it makes sense, excellent. And if it doesn't find good luck to them. So it's not something that we feel we don't have any ideological positions in terms of where to invest. It's all about value going to go line with our strategy, but it's got to be valued.

In terms of the price caps, the comments are coming out of the base select committee and that report into the energy market, we contributed to that and gave evidence in person. We've been quite clear that we think that help should be targeted at those that need it most. And so conceptually, some kind of relative price cap or some kind of social tariff, which they also mentioned, is not something that would that we would violently disagree with. However, I think the devil is in the detail on any of this. What we -- the point we continually make, and we'll continue to do so if we're going to have any change to price regulation, let's spend the time to work out how it's going to work. I agree the objective and get the best way to do.

So rather than comment on does this one make sense is that I think that, arguably, that's why we're in some of the situation are with the price cap, which is there are unintended consequences in the price cap. Some will tell you, they were foreseen some alter they weren't. It doesn't really matter, but it's clear there are intended consequences. I think we have to take a time and make sure we design any revised price regulation properly. But we can have targeted intervention in the way that we've seen the government in the U.K. and the government in Ireland taking to help consumers with the bill. So we'll see over time, we can continue to contribute to the debate -- anyway leading to question 3.

[Kate Ringrose, executive]

So on question 3, I mean, we've given a lot of information today, and I'm sure it will take a little bit of time to kind of digest the implications of it, and I'm comfortable with what we said with regards to outlook. So I would work that through and draw your conclusions.

The only thing perhaps that may be a little bit more helpful is just to recall that within Spirit, there's more outage in the second half of the year than in the past.

[Chris O’Shea, executive]

Thanks. We've got another question here and then we'll go to Jenny who's waiting patiently on line.

Sorry, could you press the button to the microphone?

[Unknown Analyst]

But can you discuss what level of annual CapEx maybe would be sustainable? And assuming the investment opportunities are there, what kind of level of growth CapEx would be -- you'd be comfortable with?

[Chris O’Shea, executive]

Do you want to take that? Or do you want me to take...

[Kate Ringrose, executive]

Yes. You go ahead. Yes.

[Chris O’Shea, executive]

sure so I think the annual CapEx, I think, as we said, will vary over time. The projects we're talking about, the flexible projects, they are shorter cycle, the smaller projects. So it really depends on when we sanction them and when we move through. So I don't think it will be linear. And then you've always got the big thing, which is if we get an agreement on Rough, that's a substantial proportion. So what we'll then do is to sit there and say, okay, "How does this is looking at our overall balance sheet? How much do we want to fund -- do we want to fund it all? Do we want to fund a small part that we want to bring in equity partners? Do we want to bring in debt partners?"

And so I think one of the key things of you got from the presentation is we want to be and control our own destiny. We never want to overextend ourselves. We want to retain the flexibility. So every time we've got an investment, we'll have some choice like we were talking about the Sizewell C. So I think it's quite hard to see that. And with the commodity exposed business. Then some years, the profit is going to be a bit higher, you can dial up your CapEx in. Some years, it's going to be a bit lower and you can dial it down. That's the beauty of the portfolio for us, the flexibility in CapEx because a lot of commodity-exposed businesses have to launch into multiyear multibillion-dollar projects. And if you've caught on the wrong side of a price movement, that can be catastrophic, we don't have that problem. It's one of the unique things about our portfolio. We're not reinvesting in these huge oil and gas production thing. So I think there'll be a bit of variability. And also, by and large, it depends how much we can to give us.

[Kate Ringrose, executive]

I mean that's netted me. I mean with regards to the CapEx profile, it is very difficult to give you a dynamic, and a linear sort of click rate. It would be largely opportunity-driven. We've talked about the criteria that are important to us. What's our portfolio? How would an opportunity manage within the portfolio? How does it benefit the portfolio? What are the risks around what is compensating returns for it? And how does that fit -- there is high degrees of cash generation potential this year and next year, and what we're looking for is ensuring that we can create a portfolio that fits for us as we have today.

[Chris O’Shea, executive]

Perfect. We'll be with jenny online who hopefully is still there.

[Jenny Ping, analyst]

Still here. Most of my questions have been asked but I still have a few -- just returning to the potential cash returns and more specifically focused on timing, I guess, given the need for working capital, et cetera, and investments assuming we hear from government later this year or beginning of next year, is it fair to say that the next opportunity for you to look at cash return is probably going to be a year from now? First question.

Second one, with regards to organic customer growth, which I think you talked to, clearly, there is no churn in the market at the moment. And arguably, the market stabilization mechanism is making it less locally that will have the competitive market going forward. How do you think longer term, the retail market will plan out? Do you think there's going to be further after government intervention to try and create a competitive market and we see churn starting up again?

[Chris O’Shea, executive]

Yes, thanks very much. Let me take the question on the competitive market. On the cash returns, I would say your questions are always super innovative -- a good try, but let us be happy that we've restarted the dividend and not pin us down to comment on potential capital return. I mean the key thing to take away is we're really focused on the fact this is the shareholders' money. The shareholders own the business. We work for the shareholders.

Secondly, we want to be agile and have choice. And so I think that would be one that we wouldn't be going on. But rest assured, it's something that occupies it occupies my thoughts regularly. It occupies Kate's thoughts, It occupies our Chairman's thoughts. It's something we think about a lot as a board, how do we manage the shareholders' money. So all in good time. You'll clearly be the first to know.

On the market, you're right, there's not much churn. I mean retention is about 98% just now, so that's why I'm delighted that we've managed to grow organically. It's not huge, but it's good.

Will Ofgem look to intervene to drive more competition? We all want a competitive market. So we don't worry about competition. We don't fear competition. And what you can have is a return to the illusion of competition and the illusion of savings for consumers. So we had that over the past few years, where the I mean, Ofgem is so focused by and large was on customer churn.

And Chief Executive of another energy company, I thought it was quite interesting. I said it's a weird market with a regulator as a single success measure, which is dissatisfaction of customers. I thought I was quite profound, actually. So what we can't have is it have done to what we had before, which is you let anybody into the market and they basically have a hedge, and I tell you not to lose that. Everybody, every single household, the poorest people that you see are paying GBP 88 just on the electricity bill to pay for those people to come into our market and blew up their businesses.

So we can't go back to that. What we've got to see and what some companies are fighting against, unfortunately, just now is energy retail in the U.K. is a risky business. Therefore, what we believe in Centrica, as I said, we manage shareholders money. It's the shareholders' money, that's at risk. If we get it wrong, the shareholder loses out. Just why it's quite right if we get it right to shareholder gets a benefit. These companies that don't have adequate capital and they still exist today in our market, if they go under each and every one of us in the U.K. is going to pay that. So if they make money, they get richer. And if they don't, every single person you see in the street pays for that. So that's the thing that we've got to be really careful.

So our work with Ofgem is to say make sure that this is a market where there is model hazard for companies that are involved in it, make sure that companies are adequately capitalized. And then let us all compete, and we'll compete as hard as anyone else. But the competition that we had the customer switching, that wasn't true competition. That's left us with a bill that runs into the billions and billions and billions of pounds, and it is possible that it could happen again this winter, undercapitalized companies being in our market today. So the big thing we've called an Ofgem to do is to make sure that every single company in our market has adequate capital before the winter starts. They don't all have it at the moment.

Excellent. Got any other questions? We got another questions in the room. You're going to have a -- you guys have got busy today.

[Ajay Patel, analyst]

Ajay from Goldman Sachs again. Just one -- you mentioned on the energy side of the business that you're approaching 1 million customers on the new platform. What sort of savings are you seeing on the cost to set? And what -- how fast can you continue that migration? What can I expect in, say, 3 years' time in terms of how we get there and transfer over?

[Chris O’Shea, executive]

So we'll see the true savings on the platform when we've got all the customers. Just at the moment, we've got dual running. So the cost is actually a little bit higher. We don't always expect, but it's a long-term investment.

The pace at which we can migrate depends on a couple of things. One is the speed at which we build the features in the new system. So the new system still has features that need to be added in. So the speed at which we and the providers can build that and then the speed at which you can pass customers through the industry backbone.

Now we've -- the limit before was for transferred customers, and this was a problem we were into solar. So the one good thing that's come from the solar process is that you can see that you can actually push more customers the industry backbone because you had to. We've had about 4 million customers being displaced. So the speed at which you can migrate is actually quite a lot better than it used to be. But the pace of the development of the features is probably the rate-limiting factor at the moment. And what we've got is this constant focus and pressure, which is let's do it as quickly as we can, but let's not lose -- let's not do it just to move customers on to a new system, which ultimately is not the right thing for customers. So we've got this is constant battle. I would hope that in 3 years, we're on one system. That would be my aim.

[Ajay Patel, analyst]

Do you mind if I just follow up on -- just so I know that you're running maybe higher cost, but you have the systems. But once you've finished that process, how much of a benefit across circle would you have relative to the point on which you didn't have 2 platforms?

[Chris O’Shea, executive]

So the overall -- so I would say, overall cost per customer rather than cost to sale because our cost to serve right now is actually relatively competitive. But then when you lay in the systems costs and some other things. We'd expect -- we're aiming to get that down. I wouldn't want to give a full target, but believe to get it about GBP 94 excluding -- or including bad debts. We'd be aiming to get that down by GBP 10, GBP 20 or so.

But what we -- our overall aim is to make sure that our cost to serve is competitive. And another thing you'll find from Solar is as some companies had a homogenous customer base, they could have a lower cost, but they couldn't grow into the other customer segments. If you've got larger energy suppliers, which I think we do now who have a less homogenous customer base, then they have the same complications. We've got is we have customers from every single thing. We're the biggest prepaid business, 1.2 million customers on prepay meter. A company that's only focused on prepay can probably have a lower cost to serve. So our system has to cover all types of customers.

With other energy companies being in the same position, then you might actually see their cost to serve gone up a little bit. I know they get pressures as well with people calling and the like. So we'd see a bit more of utilization, but we would expect to save GBP 10-plus million, GBP 20 of our overall cost per customer.

Well, with that, we've got another question online. Sam.

[Samuel Arie, analyst]

Can you hear me?

[Chris O’Shea, executive]

Yes.

[Samuel Arie, analyst]

Excellent. Well, listen, I'm sure we're going to the end of the questions, and I think we covered most of the topics. But I thought I'd just try the last one, which is related again to all these investment opportunities that you've set out and the kind of potential future CapEx focus.

And maybe just a final comment from my side that I think the focus you set out energy assets across the different areas is very welcome. And I think in contrast to, I don't know, conversations in the past around Centrica investment in insulation and electric vehicle charging and so on, which a lot of people think as sort of quite tough market. So at least from my point of view, the focus you set out today makes a ton of sense. But what I hope I could do here is just get you to answer the question, the clients ask me a lot is about the Centrica, sort of track record on delivering investments with a good spread of return above WACC. And people kind of look historically. And okay, this goes way back before your time, Chris, but into the gas power stations, North America, even some of the early capacity markets, the retail IT investments. There've been quite a lot of CapEx programs of Centrica that have been difficult over the years.

So if you were in the room with me when I got this question from clients, what examples would you point to that sort of show the best examples of Centrica kind of creating value through growth CapEx? And can you talk at all about the kind of level of returns that have been achieved in the value creation spreads?

[Chris O’Shea, executive]

Well that's a big zinger related to [indiscernible], I think undoubtedly, you would argue that we have had problems in some of our investments. What's the shape exploration? A couple of hundred million dollars. Didn't make. I was in that. So I'm nobody to sit and see a big boy or big girl did it and run away. We, as a company, have had some very successful investments and some less successful. But it's one of the most successful, I mean it's not really an investment but a decision is when we decided not to sell the Nuclear business, and you can see the value of that to date.

We've got a super battery storage facility at Roosecote side Barrel, which is the Morecambe terminal, I was there a couple of weeks ago. We took a decision 3 years ago to turn Rough into seasonal storage facility to maintain the optionality to allow us to convert it into a storage field. Had we not done that, this thing might actually have already started to decommission. It might be beyond recovery.

The reason I share those is I would -- so the way to think about it, and you're going to have to judge us by what we deliver. The way to think about it is we don't take an idea and run with it, and you could maybe criticize us for that in the past. We had an idea and we got -- we fell in love with it and we run it. Every single decision we make is focused on value, every decision, whether it's optionality around Rough whether it's about let's not sell the Nuclear business, we're always looking at value. And I promise you that I feel that pressure. Acutely, I have the pressure that I put on myself or pressure that I have from our Board. We are all focused on delivery. We're all very cognizant of things that happened in the past.

But I'd also then say that our business is a long-term business. And you've seen massive impairment write-backs through our books. The Spirit assets in the nuclear business today are worth more than we paid for them. So 2, 3, 4, 5 years ago, we might have sat and thought this is actually not that great. And I think that as you look at a business like ours, this is why we want a mix between regulated and merchant businesses because merchant businesses in the energy production industry are probably a bit more volatile than we would like. We don't want to fill our balance sheet with them as a place for them. Very stable regulated businesses, lower return, very stable, have a place for us. But the impairment write-back showed that we paid for venture production, the assets are worth more than it. But we paid for British Energy, it's worth more. And that's after quite a few years of pain.

So obviously, look, trust us, trust that we're focused on having a balance, trust that we're focused on creating value and trust that we are only going to invest where we can see an acceptable return, which compensates for the risk involved. Hopefully, that helps answer your question, Sam, but I really look forward to answering that over the coming years.

I would also just draw your attention. I'm sure you saw that on Slide 40. One of the things we said is we've got to rebuild our power generation muscle. So we're not saying we got a great idea, let's go into more power generation. Let's just pile in. Kate, give us some money. I get the norm the German, and we just run into. We've got to rebuild that muscle because it's attracted, but we still got very good talent in it but we've not got as much as we would like. We want to make sure that that's there before we sanction investments. We're learning a lot through the work to bring the Irish beacon plants to sanction, and we're learning where we need to grow the talent that we've got. So we'll be disciplined, and we'll be balanced, and we'll be focused on value.

[Samuel Arie, analyst]

I'm sorry, it was a zinger of a question, but it was a zinger of an answer.

[Chris O’Shea, executive]

That's a very kind of view. And I was just at trying to put -- Jenny has got a follow-up question. So -- and then we finish because you guys have other things to go but I do appreciate your patience in what is a very busy day.

[Jenny Ping, analyst]

Or, hopefully, a quick one for Kate. -- well, 2-parters. One, just on the net debt of GBP 300 million -- sorry, net cash from GBP 300 million. How much of that is margin cash? I realize you paid out some somewhere around GBP 0.5 billion of margin cash during the first half, but I just wondered whether more of that cash is earmarked for outgoing in the second half of the year?

And then Chris, obviously, you talked about having a mixture of RAB regulated versus merchant assets. I just wondered if you do take on regulated assets such as one of Rough, how much credit agency sort of balance sheet capacity? Does it then free up? Obviously, they tend to have a tendency to favor regulated assets over merchant. I wondered whether you can give us a sense of the scale there.

[Chris O’Shea, executive]

Jenny, if I can touch on the credit agency thing before Kate comes in, and I just want to share some of which is when I worked in previous companies, our credit rating in oil and gas, our credit rating was limited by the fact we were in a risky oil and gas business. And when I came to Centrica and met with rating agencies when I was CFO, they warned me that if we sold the oil and gas business, and we sold Spirit, our metrics would go up because we didn't cease the risk of the group. So I mean credit rating agencies are clearly quite amazing people, and they do a super job. But it's really -- is that it's really difficult, I think, to see if you put this in our portfolio, what does it do to the metrics because you have to just sit down and redo the whole thing again, so I think that's probably a really difficult question to answer. But if you got one, I'd love to hear it.

[Kate Ringrose, executive]

Yes. I mean, I think with regards just to answer the net cash question is of the order of our GBP 400 million but that figure does move around a lot so I have a very different number for you one way or another at the end of the year.

With regards to credit metrics, I think just kind of to remind people where we're at the moment is BBB with S&P, Baa2 on negative watch with Moody's. We eagerly await Moody's on these kind of review on the negative water be in a negative watch for a while, but that is more reflective of the industry and the broader kind of economic environment. So that's what we're awaiting for. And there's a real balance, as you know, that's a place between sort of business, industry risk and the metrics. And the metrics are very, very strong right now.

[Chris O’Shea, executive]

Well, look, just thank you very much, everyone, for coming. Hopefully, you understand a bit more now about why we are so excited about the future, but you also see that we're going to be disciplined with what we do. We're going to be disciplined about the pace. We're going to be disciplined about the returns. And we recognize front and center that we manage the company on behalf of the shareholders. We manage the shareholders' money. A lot of your clients are managing shareholders' money as well. And if we can add value to that money and give it back to the shareholders, we'll let them take it, but we think we've got enough ideas that will add value and keep us busy for the coming while. But if not, then we know whose money it is that we invest. So we just say thank you very much. We will see you over the next few weeks. But if not, we'll see you back in February. Thank you.