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Edited Transcript of CNA.L earnings conference call or presentation 13-Feb-20 9:30am GMT

Full Year 2019 Centrica PLC Earnings Call

London Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Centrica PLC earnings conference call or presentation Thursday, February 13, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chris O’Shea

Centrica plc - Group CFO & Executive Director

* Iain C. Conn

Centrica plc - Group CEO & Executive Director

* Jonathan Scott Wheway

Centrica plc - Interim Chairman

* Richard Hookway

Centrica plc - Chief Executive of Centrica Business & Director

* Sarwjit Sambhi

Centrica plc - CEO of Centrica Consumer & Executive Director

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Conference Call Participants

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* Ahmed Farman

Jefferies LLC, Research Division - Equity Analyst

* Bartlomiej Kubicki

Societe Generale Cross Asset Research - Equity Analyst

* Christopher Robert Laybutt

JP Morgan Chase & Co, Research Division - Research Analyst

* Dominic Charles Nash

Barclays Bank PLC, Research Division - Head of Utilities Research

* Jenny Ping

Citigroup Inc, Research Division - Director and Analyst

* Mark Freshney

Crédit Suisse AG, Research Division - Research Analyst

* Martin C. Young

Investec Bank plc, Research Division - Equities Analyst of Utilities

* Pandelakis Athanasiou

Agency Partners LLP - Equities Analyst

* Samuel James Hugo Arie

UBS Investment Bank, Research Division - MD and Research Analyst

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Presentation

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [1]

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Welcome to Centrica's 2019 preliminary results presentation. First, a word on safety. There are no planned fire alarms today and any building evacuation will be announced by security. Emergency exits are marked at the front and rear of the auditorium and UBS event staff will accompany you to the muster point, which is located in Finsbury Square.

For today's presentation and Q&A, I'm joined by Chris O'Shea, the Chief Financial Officer; Sarwjit Sambhi, the CEO of Centrica Consumer; and Richard Hookway, CEO, Centrica Business.

We also have other members of the executive team present. And following yesterday's announcement about the Chairman taking a leave of absence due to an unanticipated medical condition, Scott Wheway, Interim Chairman, is also in the audience in the front here.

The Board wishes Charles well and expect him to return to his duties shortly.

In the first part of the presentation today, I'll provide some key headlines and briefly summarize our 2019 performance, and the strategic progress that we've made since our strategic update last July.

Chris will then provide a more detailed review of our 2019 financial performance and the outlook for 2020. I'll then come back to provide some more detail on our strategic implementation at the group level, including our role in enabling the transition to a lower-carbon future and specific updates for both the Consumer and Business divisions.

Let me start with the key messages from today's announcement. First, our operating profit was stable year-on-year on an underlying basis. Excluding the impact of external factors and before inflation, the customer-facing division's adjusted operating profit contribution was up materially relative to 2018, but this was offset by the upstream division, whose underlying performance was down by a slightly higher amount. The underlying year-on-year improvement in the customer-facing division is encouraging. Chris will show you this in more detail shortly.

However, our reported financial performance was materially below 2018, significantly due to the impact of falling commodity prices and the U.K. energy supply default tariff cap, including a one-off impact of an additional GBP 70 million, which we have successfully challenged through the courts.

Reflecting these circumstances and the impact on our near-term cash flows, and considering our pension obligations and the requirement for strong investment-grade credit ratings for the future customer-facing company, we also had to take the difficult decision in July to reduce the dividend to 5p per share. Adjusted operating cash flow and net debt were both within the 2019 target ranges we set out last February.

Importantly, as predicted, second half earnings performance was significantly improved compared to the first half. We delivered material customer account growth in Consumer, the first full year of growth in my time with Centrica, with total accounts at the end of 2019 above the level of 2 years ago. And we're beginning to see indicators of stabilization in the U.K. energy supply.

This growth has been enabled in part by new propositions and improvements in customer experience, which have been reflected in higher net promoter scores and better customer retention.

Our services and solutions activities are all demonstrating improvement in adjusted operating profit. We're seeing this in both Consumer and Business divisions and across an expanding set of services and solutions we now have in market. As well as fueling future growth, this also means we're increasingly well positioned to help our customers transition to a lower-carbon future.

I'll return to this in the second part of the presentation. We continue to deliver significant cost efficiencies across the group. And having over-delivered on our updated 2019 target, we have significant momentum as we enter 2020.

We're progressing the portfolio conclusions we announced in our strategic update in July, including our planned exit from exploration and production, the refocusing of Centrica Home Solutions and the rebasing of U.K. Home.

Turning to 2020. In addition to pursuing the planned divestments, our focus will be on growing customer relationships, delivering further efficiency, continuing to build our customer-facing propositions and capabilities and, very importantly, maintaining financial discipline.

Finally, in terms of outlook for this year, we expect to deliver underlying earnings momentum from the customer-facing divisions. But recent commodity prices are weak, and if they remain at current levels, this will impact the upstream division.

In trying to judge this net impact, we expect adjusted operating cash flow in 2020 to be in the GBP 1.6 billion to GBP 1.8 billion range, based on the prices at the end of December 2019, and for sources and uses of cash flow to remain broadly balanced.

Moving now on to our 2019 performance headlines. As already referenced, the challenging operating environment impacted financial performance in 2019. EBITDA of GBP 2.1 billion was down 13%, and gross margin of GBP 3.9 billion was down 9%.

Adjusted operating profit was down 35% to GBP 901 million and adjusted earnings per share was also down 35% to 7.3p. After correcting for the impact of the U.K. default tariff cap implementation and other external factors, including inflation, underlying operating profit was down year-on-year by GBP 15 million or 2%.

The core customer-facing divisions were up GBP 258 million relative to 2018, but this was offset by the upstream division, whose underlying performance was GBP 273 million down, primarily due to lower volumes in both exploration and production and nuclear and higher noncash charges. This underlying growth in our core divisions is encouraging.

And within this, in total across the group, adjusted operating profit from our services and solutions activities was up GBP 80 million year-on-year to GBP 120 million, and we're targeting a similar year-on-year improvement in 2020.

Adjusted operating cash flow of GBP 1.83 billion was within our 2019 targeted range of GBP 1.8 billion to GBP 2 billion. Closing net debt of GBP 3.18 billion was also in the 2019 targeted range of GBP 3 billion to GBP 3.5 billion. Chris will cover our 2019 financial performance in more detail shortly.

Consumer accounts increased by 722,000 and by 451,000 in the U.K., with further growth in services and solutions relationships. We also saw account growth in North America and a further stabilization of account losses in U.K. energy supply in the second half of the year. This reflects increased sales of energy and services bundles and a more competitive cost base due to our strong focus on cost efficiency.

We recognize there's more to do in improving customer journeys and NPS and in becoming the most competitive provider, but we continued to show improvement in 2019.

Across the group, we again delivered significant efficiencies with GBP 315 million of like-for-like cost efficiencies, savings rather, in 2019. This is in excess of the increased target of GBP 300 million, providing significant momentum into 2020.

Looking now at the drivers of earnings momentum in 2020. Relative to last year, we expect to see continued earnings momentum from the core activities of the customer divisions. This is from gross margin expansion in services and solutions, continued consumer account growth, expanded unit gross margins in U.K. energy supply, with the absence of the one-off price cap impact from 1Q 2019, and continued cost efficiency momentum as we target being the most competitive provider.

As Chris will outline in a moment, we will have a negative impact from the remaining legacy gas contract from the 1980s, which we expect to be loss-making until expiry in 2025.

In the upstream, the latest remit announcements indicate higher Nuclear volumes this year, and we expect stable Spirit Energy volumes, but lower volumes in Centrica Storage. The big uncertainty is what is going to happen to commodity prices.

This is naturally impossible to predict precisely.

If we apply the commodity price curves prevailing earlier this week, we would expect the earnings impact from the noncore upstream portfolio and the legacy gas contract to broadly offset the continuing year-on-year earnings momentum from the customer divisions.

Let me now turn to strategic progress. At our strategic update in July, we reiterated our purpose and strategy. Our purpose remains to satisfy the changing needs of our customers, but we have increased our emphasis on enabling the transition to a lower carbon future.

Our focus is on 2 things: our distinctive strengths of energy supply and its optimization; and services and solutions centered around energy. This includes us beginning to capitalize on the growing opportunities in Home Energy Management, mobility solutions with electric vehicles and the interface with them, and system optimization, including leveraging our competitive advantage in demand response.

I'll share a few examples later in the presentation. This focus is reflected in our new climate change ambitions and targets we set out last February.

I'll provide a progress update later, but I'm pleased that Centrica regained the coveted CDP A rating in early 2020, and we continue to engage constructively with the Climate Action 100+ group, who've recently published a case study on Centrica.

Our shift back towards the customer began in 2015, and having concluded that Centrica had built sufficient capability in the customer-facing businesses to complete this shift, we are progressing the announced divestments of both Spirit Energy and Nuclear.

Chris will provide an update on divestments in his section. In July, we also announced some specific decisions relating to a number of our business units. We've made progress in all of these areas. We're pursuing the fundamental rebasing of U.K. Home as we reimagine British Gas, continuing to drive structural changes in customer journeys, internal processes, digitalization of the cost base -- sorry, digitalization and the cost base.

Also within U.K. Home, we saw significant growth in home services in 2019 and further revenue and order book growth in Business Solutions.

Centrica Home Solutions, formerly Connected Home, continued to demonstrate revenue and customer growth and has been refocused on the U.K. and Ireland following our decision to exit North America and Italy, with new propositions centered around home energy management and remote diagnostics.

We delivered improved returns in North America business, up to 9% in 2019, having made structural interventions to reduce costs, improve underlying margin, quality and optimize capital employed.

Finally, we're targeting GBP 350 million of cost efficiency in 2020, which is already significantly underpinned. This would take our total annualized cost efficiency delivery since 2015 to GBP 1.6 billion.

Our like-for-like controllable cost base in 2020 will be materially below that of 2015 in nominal terms, even after funding our growth investments, fulfilling a 5-year target we set out in 2015.

Let me hand over to Chris to take you through our 2019 financial performance and the 2020 outlook in more detail.

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Chris O’Shea, Centrica plc - Group CFO & Executive Director [2]

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Thanks, Iain. Good morning, everyone. Let me start with the current commodity price environment.

The group continues to be heavily exposed to commodity prices, and this will remain the case until we complete the disposals of Spirit Energy and Nuclear. Market prices of rent oil, NBP gas, and U.K. baseload power were all materially lower in 2019 than in 2018, and forward prices indicate that it will be significantly lower again in 2020.

The fall in the U.K. gas price has been particularly dramatic, with the average 2020 calendar year price now 1/3 below that seen in 2019 and well under 1/2 that seen in 2018.

Hedging protects us from these low prices to some degree, and as usual, we've hedged around 2/3 of our 2020 Spirit Energy post-tax exposure, at an average price of 51p per [firm] for gas and GBP 45 per barrel for liquids.

However, overall the current commodity price environment is expected to have a negative impact on cash flows and earnings in 2020 relative to last year, as you heard from Iain.

As usual, we provided an indicative rule of thumb, which you can find in the appendix, that shows the impact on upstream earnings and adjusted operating cash flow of any further movements in gas, oil and power prices. And it is worth noting that these rules also apply to any increases in prices, however remote that might feel right now.

Moving on to the financials now. Revenue was down 2% to GBP 26.8 billion, which reflects a lower commodity price environment and the impact of the introduction of the U.K. default tariff price cap.

Adjusted operating profit fell by 35% to just over GBP 900 million, reflecting the impact of the price cap and lower commodity prices.

With the reduced tax rate reflecting a lower proportion of profits coming from the more highly taxed E&P businesses, adjusted earnings fell by 34% to GBP 419 million and adjusted basic EPS reduced to 7.3p. The proposed full-year dividend is 5p per share, in line with the announcement we made in July.

As you know, we've canceled the scrip dividend alternative, and therefore this will be paid fully in cash.

EBITDA fell by GBP 328 million, less than the reduction in adjusted operating profit due to increases in DD&A following price-related write-backs to E&P assets at the end of 2018 and the impact of increased IT capital spend in 2018.

Adjusted operating cash flow reduced by 18% to GBP 1.83 billion, in the bottom half of our 2019 targeted range, as we indicated would be the case in July.

Group net investment was significantly lower than 2018, reflecting proceeds from the Clockwork disposal and lower capital expenditure as we increased focus on financial discipline.

Closing net debt was GBP 3.2 billion, within our targeted 2019 range of GBP 3 billion to GBP 3.5 billion. And this includes a noncash impact of adopting IFRS 16 on the 1st of January 2019.

Let me now cover exceptional items and certain accounting remeasurements, both of which had a significant impact on statutory earnings in 2019.

We separately identify exceptional items and certain remeasurements in the face of the income statement, to make our underlying performance easier to understand. In 2019, we recognized GBP 934 million of total impairments, largely in E&P and Nuclear, due to lower forward market commodity prices. We also incurred GBP 356 million of restructuring costs. Our net pension credit includes a GBP 108 million charge related to pension streams associated with our redundancy program, which was more than offset by a GBP 260 million past service credit, following an amendment to help future pensioners take their benefits from our U.K. pension schemes.

Finally, we recognized a net gain on disposals under our noncore asset divestment program of GBP 35 million.

And we also have substantial risk management activities, hedging a large proportion of purchases of gas and electricity to meet the future needs of our customers, principally where we sell fixed price energy.

We separately identified those noncash mark-to-market movements, and against the backdrop of falling gas and power prices, this generated a post-tax expense of GBP 544 million in 2019. The combination of the exceptionals and the noncash mark-to-market movements led to a statutory loss for the year of 17.8p per share.

I'll move on now and cover adjusted operating profit in some more detail. The U.K. default tariff price cap impacted profit by GBP 300 million, while other external factors, including commodity, FX, weather and inflation reduced profit by a further GBP 176 million.

Excluding these impacts, operating profit fell by 2%, with significant efficiencies and improved underlying Centrica business performance largely offsetting declines in both consumer and upstream.

I'll now take some time to cover each of the divisions in turn, to provide some more color on the results.

Starting with Centrica Consumer. Adjusted operating profit was down 33% to GBP 505 million. Again, here, you can see the GBP 300 million related to the U.K. default tariff price cap, which includes a one-off nonrecurring impact of GBP 70 million related to wholesale energy costs.

As you know, we won a judicial review in this matter, although it's [largely] unclear how and when we'll recover any of the GBP 70 million. The net effect of other external factors was GBP 104 million. However, as we saw no repeat of the service challenges which arose from the Beast from the East in 2018, and with colder weather on average in 2019 versus a warmer than normal 2018, we had a positive movement in profits of GBP 55 million due to weather.

The underlying margin bar reflects the lower average number of energy accounts in the U.K., changes in product mix and the non-recurrence of a bad debt provision release in 2018, which is partially offset by the recognition of a one-off benefit of around GBP 30 million from the renegotiation of one of our smart metering contracts.

Partially offsetting this was another year of improved profits in both North America Home and the Bord Gáis Energy in Ireland. The decline in underlying margins in the Consumer division as a whole was more than offset by cost savings from the group's efficiency program, with GBP 229 million of savings delivered in 2019.

Moving on now to Centrica Business, which delivered a much improved result in 2019, with all businesses delivering year-on-year growth in profit. Please note, this segment no longer includes our Nuclear business.

External factors had a small negative impact on the result. However, our one remaining legacy gas contract made a small profit in the year compared to a loss in 2018. The improvement in underlying margin includes a recovery in North America Business power margins as expected, but we also delivered strong trading and optimization performance in Europe, including in our route-to-market services.

In addition, we saw a strong performance in delivering cost savings through the group's efficiency program. I think it's worth providing you with a bit more detail now on our Energy Marketing & Trading track record and our legacy gas contracts, to ensure you have a good understanding of the underlying activities in and the quality of this business.

The chart on the left shows the historic financial results of the underlying EM&T business. Iain will provide some more details on its activities later in his section.

In 2015 to 2019, we've delivered compound annual growth of 20% in pretax profits. The chart on the right shows the material swings in profitability from the legacy gas contracts over the last few years, and the outlook moving forward.

We now have one remaining contract relating to the Sole Pit gas field, which at current prices is out of the money. The contract was originally signed in 1988, well before Centrica came into existence, and it runs until 2025.

In 2019, we were able to make a small profit due to favorable oil hedges and reducing the volumes taken under the contract. However, we currently expect to be required to take significantly higher volumes in 2020. And as a result, we expect the contract to make a pretax loss of a little under GBP 100 million in 2020, and this translates to EPS of a little over 1p.

There is some flexibility in the contract regarding the timing of delivery, and our traders will continue to focus on trading around and optimizing the contract for value. However, if the current environment remains, it's likely to result in an annual loss of between GBP 50 million and GBP 100 million each year until the contract ends in 2025.

Moving now to upstream, where adjusted operating profit fell by almost 70% to GBP 179 million. The combined negative impact of commodity prices and FX moves was GBP 115 million, with a lower achieved gas price only partly mitigated by slightly higher achieved oil and power prices and capacity market income relating to 2018.

Nuclear volumes were 14% lower, reflecting the outages at Hunterston and Dungeness, which combined with higher costs negatively impacted profits by GBP 96 million.

Please remember that the nuclear power plants have very high fixed costs, so when you lose volumes, the profit impact can be disproportionately large.

In Spirit Energy, the impact of slightly lower production and higher depreciation following price related asset write-backs at the end of 2018, negatively impacted profit by GBP 103 million. Volumes from Rough were lower than as expected, due both to natural fuel decline and the decision to produce only in the winter, with underlying profit down GBP 73 million as a result.

There was GBP 47 million of additional costs, field-specific exploration write-off costs in Spirit, including at Warwick in the West of Shetland, although we also delivered GBP 46 million of cost efficiencies in the E&P business.

If you look at upstream in a little more detail now, our share of nuclear generation was down 1.6 terawatt hours to 10.2 terawatt hours. And this reflects the outages due to cracks in the steam pipes at Dungeness, which resulted in the reactor being off-line for the whole year and a higher rate of cracks than expected in the graphite reactor core of the Hunterston reactors, which significantly limited availability.

It is worth noting that the other 6 sites saw increased output compared to 2018. Overall, E&P production was in line with our expectations in 2019. And in Spirit Energy, improved availability at Morecambe helped offset lower production from the region assets, and we expect Spirit production to remain broadly flat to flat in 2020.

Continuing our seasonal production profile, we expect Rough to produce between 3 million and 5 million barrels of oil equivalent this year.

Touching briefly on projects. During 2019, the Oda field has brought onstream a project to develop further reserves that are ongoing at Nova, Chiswick and Maria. The reserves replacement ratio at Spirit was 140%, which is an excellent performance. And it means that we end 2019 with more reserves than we had at the start of the year, even after producing almost 50 million barrels of oil equivalent.

Units of oil recognized includes the effects of a 10-year field life extension at Statfjord and positive revisions at Kvitebjorn, Cygnus and South Morecambe.

As planned, we drilled 3 wells in the Greater Warwick Area in 2019. The first well, at Warwick Deep, discovered oil but didn't flow at commercial rates. The second well, Lincoln Crestal, confirmed the presence of light oil which can be produced at commercial rates. And the third well at Warwick West confirmed the presence of light oil. However, further technical analysis is required.

And we will, of course, keep you informed of updates as we finalize and then execute the 2020 work program.

If we turn now to cash flow. You can see in the left the reduction in EBITDA I referred to earlier. We saw a relatively small increase in cash tax payments, although not to the scale that I indicated a year ago. And that's largely due to the impact of falling commodity prices on E&P profit and some success with various tax authorities, which resulted in tax refunds to Centrica.

The Nuclear dividend was down, as you would expect, while the working capital movements are slight negative, as GBP 250 million of structural working capital benefit delivered in the year was largely offset by the timing effects between years, including the impact of both the capacity market suspension in 2018 and its reinstatement late in 2019.

As you can see on the right, despite adjusted operating cash flow falling by GBP 415 million, our free cash flow fell by less than GBP 50 million, as we took steps to restrict CapEx, cut back in acquisitions and execute our noncore asset disposal program. And I made this point a few times, but I really do want to stress the flexibility in our cash flows. Our capital expenditure program is made up of a large number of relatively small projects, and we can adjust these to suit our conditions. The same also applies to the restructuring program.

Net interest outflows were lower, due to the reduction in gross debt and a GBP 139 million expense in 2018 relating to our debt repurchase program.

Dividends paid to Centrica shareholders of GBP 471 million were lower than last year, reflecting a lower interim dividend paid in 2019, following the rebasing we announced in July and where we paid our first dividend to Spirit Energy's minority shareholders. Spirit's dividends depend on its cash flows, and currently we don't expect to pay a dividend relating to 2019.

Our pension deficit payments also increased compared to last year, under the new payment scheme agreed with the pension trustees as part of our 2018 triennial valuation. This included a one-off payment of GBP 50 million, and therefore when you model 2020, you should assume pension deficit payments of around GBP 175 million.

If we move on to our efficiency program, we delivered a further GBP 350 million of savings in 2019, once again more than offsetting the impact of inflation and foreign exchange movements. In addition, we reduced our total IT cash spend, including CapEx, by a further GBP 56 million. We delivered the savings through continued functional activity review and transformation, further procurement and supply chain efficiencies, and a focus on overhead cost and management structures in all businesses and functions.

We also announced the closure of a number of office locations during the year. Even after accounting for GBP 100 million of other cost increases, which principally comprises costs associated with growth in Centrica Business, and the noncash write-offs I mentioned earlier in Spirit, like-for-like controllable costs reduced by GBP 74 million.

We've now delivered GBP 1.25 billion of our cost efficiencies in 2015, despite the impact of inflation and foreign exchange movements, and around GBP 100 million of additional operating costs in Home Solutions and Business solutions. Nominal costs have reduced by GBP 400 million over the period.

Over this same period, we've seen around 12,500 colleagues leave the business, and this is something that we deeply regret. However, it has unfortunately been necessary, as we adapt to the changing environment, and we look to put the group on a more stable and competitive footing.

Having delivered in excess of our target in 2019, we are expecting to see a slight acceleration in the delivery of efficiencies, and we now expect around GBP 350 million of end year savings in 2020, which is GBP 50 million higher than we expected at the time of the strategic review in July last year.

Around 2/3 of these 2020 efficiencies are underpinned by the annualization of 2019 efficiencies, and we expect to be in a similar position at the end of this year, meaning that the majority of our restructuring efforts should be completed in 2020.

Touching on the balance sheet now and the pension deficit. We continue to target strong investment-grade credit ratings, and we're currently rated Baa1 with a negative outlook by Moody's, and BBB with a stable outlook by S&P.

We worked closely with the agencies to discuss our strategic plans, and we understand the impact that the planned asset disposal will have to the credit rating thresholds. It's important to note that we're disposing of our asset-based businesses in order to deliver our strategy of focusing on the customer and simplifying the group.

We're not disposing of these businesses to strengthen our balance sheet. We've got a long-dated bond portfolio with maturities out to 2045 and an average interest rate of 4.8%. And furthermore, in February last year, we renewed GBP 4.2 billion of committed revolving credit facilities with 21 banks, which had an initial maturity of 2024 with 2 separate 1-year extension options.

Our IAS 19 deficit is GBP 163 million, which is a little higher than it was last year. The technical provisions deficit, as agreed with the trustees as part of our 2018 triennial review at 31st of March 2018, was GBP 1.4 billion. Based on assumptions as at the 31st of December 2019, this technical provisions deficit is estimated to have increased to around GBP 1.6 billion. The main difference between IAS 19 and technical provisions is the discount rate. IAS 19 uses high-quality corporate credit discount rates, whilst the technical provision discount rate is based on gilts.

In the short term, the increase in the technical provision deficit wouldn't impact the GBP 175 million annual contributions which we've agreed to make, with the next triennial review based on March 2021 valuation date.

We continue to take actions to reduce both the level and the volatility of the pension liabilities. During 2019, we agreed with those U.K.-based employees in the defined benefit pension schemes to reduce benefit accrual rates and make lower company contributions going forward.

In addition, we've now substantially derisked the pension fund asset portfolios, increasing inflation and interest rate hedges from around 1/3 to over 2/3, thus reducing the volatility in the net deficit from interest rate movements.

I'll now give you an update on our divestment program. As a reminder, we plan to divest our 20% interest in the U.K. Nuclear fleet and our 69% share in Spirit Energy, in line with our strategic shift towards the customer.

The operational issues we've experienced at Hunterston and Dungeness have impacted the Nuclear disposal process. And as you know, there's a relatively small pool of buyers for nuclear power stations.

Whilst we're still disposing -- pursuing the disposal of our share in this business in conjunction with our partner, it's unlikely we'll dispose of all of our stake in a single transaction. And as such, we now expect to still hold a share of the Nuclear business at the end of 2020.

For Spirit Energy, there's a wider universe of buyers and a very active market. We kicked off a disposal process in the second half of 2019, and we expect initial bids around the end of the first quarter of this year.

In 2019, we announced our noncore asset disposal program initially targeting GBP 500 million of proceeds. The sales of Clockwork and King's Lynn, which we completed yesterday, plus some smaller E&P assets, have generated roughly 2/3 of the GBP 500 million. However, when we took the decision to sell our overall interest in Spirit, we decided not to sell the remaining GBP 150 million of E&P assets originally earmarked for disposal, and therefore we've concluded our noncore asset disposal program.

The slide here shows what 2019 cash flow, EBITDA, adjusted operating profit and EPS look like, both for the current portfolio and excluding Spirit Energy and Nuclear. You can see on the left how sources and uses of cash are broadly balanced in both scenarios, despite around 1/3 of the group's adjusted operating cash flow coming from the 2 businesses we're looking to sell. And this largely reflects the high capital reinvestment requirement of Spirit Energy.

For 2020, we expect sources and uses of cash to again be broadly balanced, both for the existing portfolio and for the portfolio excluding Spirit and Nuclear. This applies to the current commodity price environment. And as I mentioned earlier, we will proactively adjust our capital and restructuring programs to reflect the operating cash generation of the business.

As you can see from the table at the bottom of the slide, the earnings contribution in 2019 of Spirit Energy and Nuclear was relatively small. Before summarizing, I'd like to remind you of our refreshed financial framework. We continue to target growth in adjusted operating cash flow over the medium term. The dividend is expected to grow from the rebased 2019 level over the medium term, in line with the underlying growth in earnings and cash flow, and dividend cover from earnings is expected to be in the range of 1.5 to 2x over the medium term. We plan to deliver a further GBP 1 billion of cost efficiencies between 2019 and 2022, and we've delivered GBP 350 million of this in 2019.

Following the disposals of Spirit and Nuclear, CapEx is expected to be around GBP 500 million per annum, although it will be lower in 2020 as we focus on delivering our restructuring program.

As I've already said, we continue to target strong investment-grade credit ratings.

Finally, the group return on capital employed target is at least 10% to 12%, and we achieved 9% in 2019, which largely reflects the lower level of post tax profit.

Finally, let me cover our outlook and 2020 targets. We're expecting adjusted operating cash flow to be in the range of GBP 1.6 billion to GBP 1.8 billion in 2020, and that's based on the commodity price environment as at the 31st of December 2019.

If we fast forward to now, we've seen further commodity price falls, and if the current prices persist, we would expect to be around or even slightly below the bottom of this range, despite the fact we've already hedged around 2/3 of our upstream production in 2020.

As I've already covered, in the current commodity environment we still expect sources and uses of cash to be broadly balanced, as we proactively adjust our capital and restructuring programs, and you can expect us to continue to focus on this.

As indicated at the interims in July, momentum from our customer-facing businesses in the second half of 2019 should benefit us at an earnings level and cash flow level in 2020, including the absence of the one-off price cap impact, cost efficiency momentum, a full year of higher unit margins in North America business, further growth in U.K. services and growth in margins in the Solutions businesses. However, as I mentioned earlier, we expect the remaining legacy gas contract to make a pretax operating loss of a little under GBP 100 million this year or around 1p of EPS.

All in all, we expect earnings growth in our core customer-facing businesses to more than offset the drag from the legacy gas contract.

As you've already heard, the current extremely low and rather uncertain commodity price environment is likely to have a significant impact on upstream adjusted operating cash flow.

However, the earnings impact is likely to be much less material, due in part to lower depreciation in 2020, which reflects the impairments we've just taken at the end of 2019.

As a result, and as Iain indicated earlier, at the group level, we would expect the year-on-year positive earnings momentum from the customer-facing divisions to be broadly offset by the negative earnings impact from the noncore upstream portfolio and the legacy gas contract.

Finally, let me summarize our targets for 2020. As just covered, we're targeting AOCF in the range of GBP 1.6 billion to GBP 1.8 billion based on the December 31, 2019 commodity prices.

We're targeting a further GBP 350 million of cost efficiencies, and this would mean we've delivered 2/3 of the GBP 1 billion 2019 to 2022 target by the end of this year. In addition, we're targeting a further GBP 50 million reduction in an IT change capital expenditure. Including this, cash CapEx is expected to be around GBP 800 million, including no more than GBP 500 million in Spirit Energy. And Spirit Energy's GBP 500 million includes a one-off payment of around GBP 100 million, relating to a decision we've taken not to proceed with the Hejre development in Denmark.

As mentioned previously, we expect sources and uses of cash to be broadly balanced in 2020. And finally, we expect closing net debt to be in the range of GBP 3.2 billion to GBP 3.6 billion. Now this excludes any impact from any disposals of Spirit and Nuclear, but it does include a GBP 200 million noncash increase in our debt, due to the recognition under IFRS 16 of lease commitments for 2 new LNG tankers.

Ladies and gentlemen, that concludes my remarks, and I'll pass you back to Iain.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [3]

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Well, thank you, Chris. I'd now like to cover some of our operational and strategic progress in more detail, and I'm going to be covering 3 things: firstly, an update on the changing energy landscape and a reminder of Centrica's purpose and strategy, including our role in addressing climate change and associated commitments. I'll then cover strategic progress in the Consumer division, including on customer account growth, energy supply dynamics in the U.K. and the objectives, plans and progress in the rebasing of U.K. Home. I'll also cover growth in services in the U.K. and finish the consumer update by covering services and solutions more broadly, and specifically the refocusing of Home solutions. The third topic is strategic progress in the business division, and specifically the growth and prospects for our Business Solutions activities, including specific case studies, the mix of activities of Energy Marketing & Trading and the delivery of improved returns in North America business. And I'll close with a brief summary.

So let me start with the changing energy landscape. As we reiterated in July, the trends we identified in 2015 continue to play out. Specifically, the energy system is becoming more decentralized, as advances in distributed technologies support decarbonization. Choice, power and influence are moving to the customer. And digitalization is improving customer interfaces, accelerating proposition development and delivering efficiencies.

In addition, societal pressures to address climate change are intensifying. In our focus area of energy supply and its optimization, we've seen much greater regulatory focus and intervention in energy supply in recent years. In the U.K., this includes the implementation of the default tariff cap which, as you've heard already from Chris, impacted our operating profit by GBP 300 million in 2019.

GBP 70 million of this was related to the treatment of wholesale costs in the initial period of the cap in the first quarter of 2019, which we have successfully challenged in the courts. This outcome underlines the importance of transparent and rigorous regulatory processes to ensure a well-designed regulation that's in the interest of a well-functioning market, which in turn allows participants to operate with confidence and ultimately benefits all energy consumers.

We will continue to engage with Ofgem to ensure a fair implementation of this ruling.

In North America, the New York Public Service Commission recently issued an order to stop competitive retailers pricing their variable tariffs at above local default utility rates.

We have around 140,000 customers in New York, a relatively small proportion of our North America customer base, but this is another example of increased regulatory intervention.

Against this backdrop, we must continue to focus on treating our customers fairly, improving their experience, reducing our costs to allow us to price as competitively as possible, and providing customers with the products and services they demand.

If we do this, we can maintain sustainable and profitable energy supply businesses. At the same time, energy demand per unit GDP continues to decline in our core markets, and competition is intense. However, managing their energy is leading customers to demand greater optimization in services and solutions linked to their energy supply, which is a developing source of growth and competitive advantage for Centrica.

There is rapidly increasing demand for lower-carbon services and solutions centered around energy. This is true for both consumers and business customers, and digitalization and software platforms are enabling more sophisticated customer relationships. The higher renewables load is leading to growth in route-to-market services, requirements for grid optimization and flexibility services, such as demand response and "virtual power plant". We have built skills and capabilities in all of these areas. And against this changing backdrop, we believe we have the scale, positions and capabilities to leverage these growing needs.

Faced with these fundamentals, it reaffirms that Centrica must become an energy services and solutions company if we are to harness this growth in demand, and we must increase the proportion of services and solutions in the portfolio relative to pure commodity energy supply.

Recognizing this, in July 2019 we refreshed our purpose, and we're ready to put addressing climate change explicitly at its heart. We're dedicated to satisfying the changing needs of our customers, enabling the transition to a lower-carbon future. We are becoming a 21st century energy services and solutions company, focused on our distinctive strengths of energy supply and its optimization and services and solutions centered around energy.

We're completing the shift towards the customer by exiting exploration and production in Nuclear. We're now equipped and committed to help our customers transition to a lower-carbon future with a range of skills and technologies which are increasingly in demand. This has dramatically increased our ability to make a difference in addressing climate change and is reflected in our new climate change ambitions and goals we announced last February, which reflect the Paris Accord.

We committed to own the obligation to reduce the emissions of our customers, our Scope 3 emissions. And as a company, are committed to develop a plan to achieve net 0 by 2050. This has been recognized externally. And as I said earlier, Centrica regained the coveted CDP A rating for environmental transparency and performance, which only 179 of over 8,400 disclosing companies achieved.

We've also now signed up to the Task Force on climate change -- or Climate-Related Financial Disclosure and continue to engage constructively with representatives of the Climate Action 100+ group of investors, whose case study on Centrica I also mentioned.

So I'd now like to spend a moment on our commitments to address climate change, our specific ambitions and progress against them.

We first showed this slide last February. Our strategy is now formulated to contribute to and benefit from the long-term structural changes required to address climate change. As we complete the shift from a company unsuited to where the world of energy is going, to one in tune with it. We made commitments with clear targets in line with the Paris Accord, built around 3 pillars: to help our customers reduce their emissions; to enable a decarbonized energy system; and to reduce our own emissions. We said at the time we'd report our progress against this framework on an annual basis. And you can see at the bottom of the slide, a summary of how we did in 2019.

At a headline level, we delivered a 3.9% reduction in customer emissions, largely driven by Hive, smart meters and the rollout of more green tariffs in the U.K. against the 2030 target of 3%.

Excluding green tariffs, the other measures delivered a 1.4% saving. We delivered 2.7 gigawatts of flexible distributed and low-carbon capacity, on track with our targets. And we've reduced our own internal carbon footprint by 39% since 2015, well ahead of our 2025 target. There will be more detail included in our annual report and accounts, but in short, after 1 year, we are ahead of our medium-term and long-term objectives. This is a long-term ambition, and we'll update on delivery and review targets annually.

Turning then to what we're focusing on to operationalize all of this in each of the customer divisions. Our strategy has translated into clear strategic pillars, and these next 2 slides are, as we shared in July, updated for recent progress.

In Centrica Consumer, we have 3 strategic pillars: Energy Supply, in-home servicing and Home Solutions. These are all activities in which we have distinctive positions, strengths and capabilities. And in Centrica Business, we're focused on Energy Supply, Energy Optimization and Business Services & Solutions.

As we transition the mix of each division more towards providing services and solutions as well as Energy Supply, revenues, gross margin and unit margins are evolving. We've had to endure some big shocks from regulators. But despite this, the overall picture remains relatively stable. This is a slide that we've shown for the last 2 years, now updated for 2019, showing revenue, gross margin and gross margin as a percentage of revenue for both the Consumer and Business divisions.

Consumer gross margin fell -- per account fell materially as expected to GBP 90, which reflects the implementation of the U.K. default tariff cap. However, despite that step change, a gross margin of nearly 20% remains healthy overall, and with our focus on growth from higher-margin non-energy propositions and further cost of goods savings, we are targeting an improvement in future years.

In business, we saw a 7% increase in average gross margin per account, as we saw further recovery in North America Energy Supply and encouraging expansion of our services and solutions offerings. Customer accounts fell, as we focused our attention on higher-value customer segments.

In terms of customer accounts in the consumer division, we're finally starting to see signs of growth. As I've already mentioned, customer accounts grew by 722,000 in total in the year, and total accounts at 25.6 million ended the year above levels of 2 years ago.

We saw net growth of 206,000 accounts in North America energy and services, as we gained some profitable aggregation in energy customer books and continued to compete well in home warranties and services for newbuild homes, while accounts were broadly stable in Ireland.

In the U.K., shown in the light blue horizontal bar, total customer accounts were up by 451,000, also to levels above those of 2 years ago.

Growth in services and solutions more than offset a decline in energy. Ignoring Home Solutions for a moment, which grew by 373,000 accounts, the total of traditional energy supply and in-home servicing accounts in the U.K. grew by 78,000, as a result of our new bundled energy and services offering.

U.K. energy supply accounts were down by 286,000. This includes a reduction of 275,000 collective switch and white label accounts in the first half of the year, as we exited the Sainsbury's relationship. While the number of customers on our British Gas branded tariffs was broadly stable, albeit with a change in mix, with a number of customers taking online tariffs increasing by 367,000, in line with our digitalization strategy and the number of customers on default tariffs declining.

This is a chart we showed in July, which shows the relative stabilization of U.K. energy customer accounts over recent periods, updated to the end of 2019.

As you know, we saw a big stepdown over 2017 and 2018, as we focused on margin quality and addressed loss-making channels. Since then, as we've become more cost competitive, improved both service levels and customer journeys, and introduced energy and services bundled propositions, we're seeing the decline slow markedly. And accounts have been broadly stable since our trading update in November.

There's still much to do, but the resilience of gross margin and trends in customer account numbers are encouraging. Nevertheless, the U.K. energy supply market remains very challenging, not least thanks to regulatory intervention.

2019 was the first year under the energy default tariff cap. Market switching rates have remained high, as shown on the top left, with total switching around 8% higher than -- in 2019 than in 2018. This is in part due to the falling spot gas price over the year, which has resulted in an increase in the differentials between fixed term tariffs and the default tariff cap, which is calculated using lagging formula input costs to do with hedging.

However, with our more competitive cost base and our cheapest energy tariff, which is bundled with services typically being priced very competitively compared to the market, as you can see on the right our rate of customer losses was much improved, and we attracted many new-to-brand customers.

Faced with intense competition, the price cap and difficulty meeting Ofgem's requirements, the number of suppliers in the market is also now falling. Fourteen domestic suppliers exited the market in 2019 and a number have been asking to pay their social, environmental and capacity market obligations late.

Ofgem is consulting on new license conditions that are designed to reduce excessive risk taking by suppliers, including a requirement to put in place arrangements to protect a proportion of customer credit balances and the cost of government obligations. We support this and any change in regulation that creates a more level playing field and ensures that the energy supply market remains robust for the benefit of customers.

Let me turn then to our ongoing response to such a competitive U.K. market, as we set ourselves up to win for the future. We announced in July our plans for further improvement in the performance of our U.K. activities and in the face of the price cap to fundamentally rebase U.K. Home.

There are 4 objectives. The first is to take us towards the cost base of the projected lowest cost supplier in the market for energy, and also reduce our costs of in-home servicing to market-leading levels consistent with our brand and propositions.

The second is to innovate and improve our agility as we respond to the needs of our customers, to improve the customer experience, increase retention rates and grow the number of product holdings per customer.

The third is to bring value-adding propositions to market more quickly, to allow us to respond to an increasingly dynamic marketplace and enable growth in market share for both energy and services.

And finally, we need to fundamentally change our organization, culture and ways of working to fully capitalize on the opportunities available.

This slide shows -- and it's rather busy, apologies for that -- on the left, the plans we laid out in July to achieve these objectives, along with some of the progress we've made to date on the right. And let me pull out a few highlights.

Overall, we're transitioning to reorganize around customer end-to-end journeys, not traditional industry processes. This will also mean transforming our technology stack to be more flexible and lower-cost. We've been testing various technologies across the company in both customer-facing divisions and are currently in market with a proof-of-concept, more agile offering based on our experiences in Ireland and learning from our new digital proposition for U.K. business customers.

I must stress, this is not a massive 5-year IT capital program, but rather a collaborative test and learn environment, with key software partners with whom we're already in market.

And at the same time, we're in the process of simplifying the organization by removing around 800 noncustomer-facing roles in 2019 as part of our efficiency plans, with energy supply back office costs 15% lower in 2019 than in 2018.

We continue to focus on improving our digital journeys and the customer experience. British Gas brand NPS increased by 3 points over 2019 to plus 12, while energy supply digital transactions were up 10% and call volumes were down 15% or by 4.3 million calls. We increased the proportion of customer queries we resolved first time. And in in-home servicing, we're focused on improving our engineer effectiveness through the development of a new engineer fulfillment platform in partnership with Microsoft, which is on track to be fully operational in 2021. We're improving our parts supply chain and we're increasingly preparing ourselves to benefit from new market opportunities, such as electric vehicle integration.

In 2019, we upskilled around 100 of our service engineers to install electric vehicle charge points. All of this is about transforming gross margin capture capability, while driving cost competitiveness.

In July, we set out our ambition to reduce our cost per customer in U.K. energy supply to become the most competitive supplier in the market. We said the plans already in place would deliver savings of around GBP 20 per customer in real terms by 2022, taking us to around the level of the projected first quartile performer. We intend to deliver below this level, towards the cost base of the projected lowest cost supplier in the market.

We have changed our cost methodology slightly since the interims to calculate the cost per customer on a unique customer basis rather than a dual fuel equivalent, and to include depreciation to capture the impact of any IT CapEx savings that we plan to deliver.

The initial first quartile benchmark target of GBP 85 remains the same. In 2019, we saw a GBP 5 per customer reduction in real terms compared to the underlying 2018 level on a like-for-like basis.

Our 2020 plans show we remain on track with the 2022 goals. In in-home servicing, on the right, we're also focused on driving further improvements to competitiveness and service. In July, the measure of efficiency we used was cost per job. However, we believe that cost per customer is a more appropriate measure, given that cost per job can be heavily influenced by the mix of products within the customer base.

Our target is to achieve below GBP 300 per customer by 2022, which we believe reflects our premium proposition and brand.

In 2019, we saw a reduction in cost per customer from GBP 348 to GBP 320 in real terms, largely in our cost of goods sold, which was the most significant driver of the improved year-on-year profit growth.

In-home servicing in the U.K. is one of our unique capabilities and other progress in 2019 has been encouraging. We've been building on our nationwide scale as the largest provider of contract cover and installation of boilers, leading brand awareness and high levels of customer trust. We continue to deliver high levels of customer service, with the proportion of customer visits delivered on time on the scheduled day already at high levels and improving, and with an engineer Net Promoter Score consistently above plus 60.

On the bottom left, we saw growth in customers and products per customer in 2019. And on the right, delivered a much better financial result with improvements in both gross margin and adjusted operating profit, largely due to cost of goods efficiencies.

We have strong momentum as we enter 2020, and we're targeting further account growth, including through the continued development of energy and services bundled propositions, joint propositions with Home Solutions, and further profit growth with a significant proportion of the group's cost efficiency program expected to come from U.K. home services again in 2020.

Services and solutions propositions centered around energy are key to our future growth. We've been evolving dramatically in recent years. As a company, we've had a strong track record of innovating for our customers, initially from the installation and maintenance of gas boilers, through to leading the smart rollout in the U.K. and the development of the Hive smart thermostat. More recently, this innovation for customers has accelerated, with an increasing focus on energy and services bundles, the launch of other Hive propositions, including the smart thermostatic radiator valve, the launch of green tariffs such as our Green Future offer, and electric vehicle charge point installations and tariffs.

We also now have developed the technology and capabilities to offer consumers further low-carbon propositions.

Taking 2 specific examples, in partnership with Mixergy, we are now able to offer customers the smart hot water tank system, which learns the habits of users to reduce heat losses by up to 40%. And in partnership with Xenon, we've installed a network of 100 domestic batteries to form the U.K.'s most advanced residential demand response enabled virtual power plant, harnessing consumer actions to support National Grid's task of balancing the electricity system.

These activities are small today, but as the energy system transition accelerates, delivering these types of technologies to consumers will be increasingly important.

Our Home Solutions business now has 1.8 million customers and over 4 million cumulative products in market, and cumulative subscription customers have reached over 250,000. We announced in July that our Home Solutions focus would now be on the U.K. and Ireland. Despite this refocusing, we delivered further revenue and gross margin growth in 2019, with our gross margin percentage improving to 22% from 19% and average revenue per customer increasing by 11% compared to 2018.

Subscriptions were also up 34%. The refocus will result in significantly reduced costs and investment requirements moving forward. We reduced Home Solutions headcount by around 40% in the second half of 2019 and expect to deliver GBP 15 million of operating costs and GBP 10 million of CapEx savings in 2020.

Customer satisfaction rates remain high, with a Hive brand NPS of plus 39. And importantly, we continue to see a positive impact on our energy and services businesses, with the energy NPS for a Hive customer on average 20 points higher than for an energy-only customer.

Looking ahead, there are further synergies to be delivered from closer integration of Centrica Home Solutions and U.K. Home, including continued leverage of our distinctive field force.

In future, Home Solutions propositions will be centered around Home Energy Management and Remote Diagnostics and Monitoring, with a focus on further scaling subscription offers, which are typically higher margin.

We've been developing the customer interface and integrating the Hive Honeycomb platform with demand response capabilities and electric vehicle management to engage our customers in broader Home Energy Management use cases, such as with Mixergy and Xenon, which I mentioned earlier.

We continue to target EBITDA breakeven by 2021 and revenue of around GBP 150 million to GBP 200 million by 2022 in Home Solutions, although this will increasingly be integrated with our other consumer activities in the U.K.

That completes my review of the Consumer division. I hope you can see how the energy services and solutions strategy for the customer -- or sorry, for the Consumer, is taking shape, enabling customer account growth and retention and increasing stabilization and growth of the business.

In my final section, I'd like to cover strategic progress in the Business division, starting with Centrica Business Solutions. This slide shows how the business has developed over the past 4 years. We formed the business unit back in 2016 by consolidating relevant capabilities across the group, in particular relating to energy insight technology and energy efficiency.

We have added further capabilities through targeted acquisitions, which now allows us to offer a wide range of products and propositions for customers, underpinning the revenue and profitability improvement we're now seeing.

We've built and are leveraging distinctive capabilities, integrating multiple technologies to deliver customer solutions. We're able to leverage our existing energy supply customer bases in the U.K. and North America to grow the business, with our focus increasingly on lower-carbon solutions.

The chart on the left shows the growth profile of Centrica Business Solutions since 2016 in terms of order intake or sales, the total order book and importantly, revenue, which was up 36% in 2019 to GBP 285 million. The outlook remains positive for 2020 and beyond, with our order book supporting future revenue growth. And importantly, 70% of the order book is recurring revenue from long-term contracts.

We're achieving healthy gross margins of around 20% on average across the portfolio, and we continue to target EBITDA breakeven by 2021, and our goal remains to achieve GBP 1 billion of revenue by 2022.

With recent growth rates and some small inorganic investment, this remains within our sights.

Let me cover a couple of real-life customer examples. Through Direct Energy, we've been supplying energy to the New York City Housing Authority, the largest housing authority in North America, since 2008. In recent years, they've installed 186 natural gas backup generators to improve the resilience of their energy system, but identified a need to improve automation and the efficiency of their monitoring and dispatch processes.

Utilizing our capabilities and technologies, we were able to leverage our existing customer relationship to meet a range of customer needs, including saving them money, improving their operations and maintenance of the assets, providing additional peace of mind through improving resiliency, and a low-cost automated and remote solution to optimize the portfolio of generators.

In so doing, we also add multiple revenue streams for Centrica. Another big opportunity is in the health care sector of the U.K. We already provide contracted services to around 90 U.K. hospitals, including the Royal Devon and Exeter NHS Foundation Trust. They identified a need to improve the efficiency of their operations, to ensure resilience, but also to reduce costs and carbon emissions. We were able to develop a combined solution factoring in LED lighting, solar PV, HVAC improvements, combined heat and power units and new efficient boilers, which has resulted in significant savings for the trust of GBP 800,000 per annum and 2,200 tonnes of CO2 emissions. This is what Centrica is all about.

For Centrica, the partnership provides a 15-year income stream to cover design, construction, operations and maintenance and like many other projects is an example to other public sector organizations of the benefits we can bring them.

Likewise, in Energy Marketing & Trading, we are significantly focused on serving the customer, providing security of supply, and increasingly, optimization services. EM&T is focused on 4 activities. The first, and the original, reason for requiring a European trading function is to manage the price risk on customer demand for our U.K. energy supply businesses and provide a route to market for our Upstream businesses.

Secondly, part of our focus on the end customer, we've built a material route to market and related services business for third parties, and currently have 14 gigawatts of largely renewable customer assets in Europe, where we provide the route to market for the power generated. These volumes grew by 4% last year. We have high market shares, particularly in the Nordics, and this is a profitable revenue stream.

Third, we have more recently built an LNG business. We accessed the Isle of Grain and entered into contracts with Qatar and Cheniere as a further way of securing gas supply for our downstream customers in the U.K. However, we recognized in 2015 that Cheniere was potentially not an attractive position in the near term, and we've now created a global portfolio with a web of asset positions to capitalize on value opportunities in the LNG market and access customers in multiple regions, from the Caribbean to Japan.

Finally, as one of the largest gas and power traders in Europe, it makes sense for us to use the insight from our hedging and route-to-market activities to generate further profits from proprietary trading.

We offer a very strict risk management framework and deploy limited risk capital in these activities to add value to the group where opportunities present themselves.

The risk capital we employ in gas and power trading is about or less -- just a bit less than 20% of the total, with the balance having connection to customers.

To conclude my Business division update, let me describe progress in North America business.

As you know, margins and returns in North America in 2017 and 2018 were disappointing, due to a combination of both structural and internal factors.

In early 2018, we laid out the actions we had taken to address this, and in July last year, were explicit about putting returns first and our goal to deliver 10% to 12% economic ROCE as the top priority.

We're making improvements in the quality of underlying gross margin, focusing on higher-value customer segments, and increasingly looking to leverage our Business Solutions' technologies and propositions in what is the largest services and solutions market in the world.

The mix of the business allows for more balanced portfolio outcomes through time.

As you can see on the left, natural gas supply to customers with infrastructure optionality has been a steady earner, whereas power supply has recently been impacted by higher cost of sales, including capacity market charges.

Optimization of both gas and power books have consistently added material additional value, though where margin is captured varies year-to-year. In addition to rebuilding gross margin, we're focused on delivering cost efficiencies and maintaining capital discipline through optimizing the capital employed in the business, while maintaining the margin quality of the customer book.

We indicated that these actions, combined with the reversal of the commodity curve shaping effect and those capacity charges, were expected to lead to improved economic returns. And we achieved 9% return on average capital employed in 2019, in excess of the group's cost of capital and in line with our expectation for the year.

With improvement actions ongoing, we currently expect to achieve post-tax economic returns on capital employed in 2020 of at least 10% to 12%, in line with our medium-term average target. This is underpinned by the higher net margin under contract we've booked as we enter 2020 relative to a year ago, as shown on the right.

As always, returns in this business are subject to some commodity price and weather volatility. However, the actions we've taken have placed the business on a much firmer footing. That covers the specific updates for the Consumer and Business divisions.

I'd now like to summarize what I hope you've heard today. Centrica's financial performance in 2019 was impacted by an extraordinary combination of external and regulatory factors, but underlying operating profit was stable with material improvement in the core customer-facing divisions, which is very encouraging.

Adjusted operating cash flow and net debt were within the 2019 target ranges we set out last February. Importantly, second half performance was significantly improved compared to the first half, demonstrating momentum as we enter 2020.

We delivered material customer account growth in Consumer and are seeing indicators of stabilization in energy supply accounts in the U.K. This growth has been in part enabled by new propositions and improved customer experience, which have also led to higher Net Promoter Scores and better customer retention.

New services and solutions capabilities mean we're well positioned to meet our customers' increasing demands to transition to a lower-carbon future and to harness the growth associated with that demand. We continue to deliver significant cost efficiency across the group. And having over-delivered on our 2019 target, we have significant momentum as we enter 2020. This efficiency is crucial to enable us to compete to win and while we build new sources of gross margin.

We're continuing to progress the portfolio conclusions and divestments we announced last year. As we look towards 2020, our focus will be on growing customer relationships, further efficiency delivery, building customer-facing capability and maintaining financial discipline and a strong focus on cash flow.

And finally, in 2020, we expect the customer-facing divisions to continue to deliver year-on-year earnings momentum, although recent weakness in commodity prices will impact E&P and Nuclear and could offset this growth.

Based upon end 2019 commodity prices, we expect 2020 adjusted operating cash flow to be in the range of GBP 1.6 billion to GBP 1.8 billion, and sources and uses of cash flow to remain broadly balanced.

After 5 years of repositioning this company away from investing in exploration and production and carbon production, and back towards the customer and energy services and solutions more tied to emissions reduction, we are starting to see performance stabilize and the competitive potential to be demonstrated.

Finally, let me take this moment to thank the Centrica team for their extraordinary commitment, effort and dedication as we have undergone this journey. It's not over yet. But we anticipate 2020 to be the last year of major restructuring. And without the commitment of my Centrica colleagues, we could not have repositioned this company to face into a future in which we're now much more competitive and able to access new sources of opportunity and growth potential.

Thank you. Let me now invite Sarwjit and Richard to join Chris and me on the stage to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [2]

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So if we -- when we do this, if you could remember to give your name and affiliation, and we will pass -- I'll pass the questions around and see how many we can do in the remaining time. I did want to just make 2 points which I think are important to make. I know there's been a lot of focus on 2020 outlook and the guidance we've given today about earnings, and the potential that commodity prices would result if today's curves stay in offsetting the earnings momentum of the customer businesses, therefore, that earnings in 2020 would be broadly flat with 2019. And I note the share price reaction to that. One point I wanted to just make at the outset is, when we were putting our plans together for this year, we were comfortable with the outlook and consensus that the market had also reached a few months ago.

It is the movement down in commodity prices, not any other changes to our activity set, which give rise to this outlook that we've just described today.

The second point I wanted to make was just around Nuclear. I saw a couple of people react when Chris said that we may not sell the whole of Nuclear this year. It is quite a large ticket size, if we were to sell our interest plus the maximum amount that EDF is prepared to sell. We don't know yet the size of the first tranche that we'd be able to sell, and the timing clearly is impacted by these outages.

But as Chris can talk into more detail, we're relatively neutral in a cash flow sense and an earnings sense to whether we sell the whole tranche or a partial tranche, and we can touch on that in a moment. So who'd like to go first?

Mark and then Lakis and then Sam and then Chris.

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Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [3]

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It's Mark Freshney from Crédit Suisse. Just following on from that. Presumably, when you look to sell assets, any asset, you'd have a hold valuation -- a valuation at which you wouldn't sell it. Is it plausible that this year, you decide -- at what level would you decide not to sell? And then also on the commodity hedging that you would have relating to U.K. Nuclear and Spirit. Can you talk about that and whether you would be able to extract any cash from that on an asset sale, and how that would fit in? And just finally, on the Upstream assets themselves. You alluded to earlier, not needing to sell them. But would there be any impact on things like credit ratings, if you were to keep them under a low commodity price scenario?

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [4]

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These are all for you, Chris.

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Chris O’Shea, Centrica plc - Group CFO & Executive Director [5]

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Excellent. So there is a price at which we wouldn't sell the assets, but just in case any of the buyers are watching, we wouldn't disclose that. So we'd rather wait and see where the bids came in, but my view as always is, everything is for sale at the right price and nothing is for sale at the wrong price.

And in terms of the hedges, the hedges for the Upstream assets are in the money just now. So we have hedged forward, the market price has fallen, and so we've got hedges that are in the money. So the net number you see in the income statement is the hedges for the downstream business and the hedges for the Upstream business. So when we buy forward to sell fixed energy, then that will go down in value, so we'll have a mark-to-market loss. But we've sold forward at 51p a [firm 2,000] to production in 2019 -- in 2020, sorry, incoming price is 22p, 23p a firm.

So that looks quite good. So it's not about extracting, there's value in there. And then the last question about E&P. The -- we were reflecting on this over the last few weeks. And I mean the Spirit business is a nice business, 140% reserves replacement ratio last year, and is a really good place to be. We're also not like some other E&P businesses that are in the middle of a massive multibillion-dollar project.

So we spoke about whether we could say we had small capital projects or relatively small. They are relatively small because you may have something that's $100 million or $200 million. But we can turn them up or down, then we could flex that to manage the cash flow and the Spirit executive team are doing that just now.

So I think -- I mean, undoubtedly, if we saw 20p gas for the next 5 years, that's a problem. But at the moment, having the assets gives us balance sheet strength. And I don't see any issue really in holding either the E&P or the Nuclear business, it's all about price.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [6]

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Lakis. Do we have -- is there a microphone? I think they're in the back of the...

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [7]

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Lakis Athanasiou, Agency Partners. Two questions. One, on the New York PSC ruling, I thought that was something to do with disclosure on bills in -- to compare against the incumbent utility. So being a de facto price cut rather than specific price cut. Could you comment on that, please? And second, on Nuclear, Hunterston, I can't see why anyone wants to keep Hunterston going. Its average contribution has got to be fairly negligible. Why isn't it just -- the damn thing being just shut down rather than continuing incurring costs and not running? So what would be the barriers to just shutting Hunterston down full stop?

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [8]

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Thanks, Lakis. So the first one is for Sarwjit principally and the second one is for Richard.

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Sarwjit Sambhi, Centrica plc - CEO of Centrica Consumer & Executive Director [9]

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Thanks, Lakis. So the New York PSC came out with the order or the draft order in December. And put simply, it was saying that the prices from the competitive suppliers can be no higher than the default utility unless you could comply with compliant products. And largely they're products which can demonstrate added value, and in particular if they're green. And it was planned to be implemented in February. It's now being delayed until May. And we're seeking some clarifications from the PSC in terms of the details but we're also kind of working towards seeing how we can make the portfolio compliant by buying green.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [10]

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And Sarwjit, the process is slipped, isn't it? Just remind on the time line?

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Sarwjit Sambhi, Centrica plc - CEO of Centrica Consumer & Executive Director [11]

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Yes. So it was February and implementation date now planned for May.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [12]

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And they're still consulting on it, is that right?

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Sarwjit Sambhi, Centrica plc - CEO of Centrica Consumer & Executive Director [13]

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Yes, they're still seeking views. But in New York, it's the regulator who decides. There is no legislation to be put in place. So we're just going to have to wait and see and give our views to the PSC.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [14]

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Richard, should Hunterston keep going or should it be shut down?

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Richard Hookway, Centrica plc - Chief Executive of Centrica Business & Director [15]

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Well, Lakis, the saying goes, there's life in the old asset yet, I think. And just to remind you, Hunterston 4 did run for a period last year. And as Chris noted, there's significant leverage that if we get those assets back, they can run for a couple more years, they can make a significant contribution over the remainder of their life.

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [16]

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I don't get that with my numbers. I think when you look at those very low load factors, the thing runs anyway because of the boiler tube issues. When you compare that, the contribution, to the average cost, I can't really see any profit in there. So I still wonder why this effort to keep the thing going. And at the moment, not earning any revenue, but just incurring costs continually?

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Richard Hookway, Centrica plc - Chief Executive of Centrica Business & Director [17]

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Well, the boiler tube issues are actually on Dungeness...

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Pandelakis Athanasiou, Agency Partners LLP - Equities Analyst [18]

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No, it's the bifurcated boiler tube issues that keep Hunterston down at 70% load factor versus its capacity, that's the boiler tube issues I'm talking about.

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Richard Hookway, Centrica plc - Chief Executive of Centrica Business & Director [19]

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But when it does run, it does make a positive contribution to the fixed cost base. We believe that asset will come back online. It is remitted to come back towards the end of April, as I think you're probably aware. And we think it could make a contribution in 2020 and 2021.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [20]

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Look, I think on the Nuclear fleet, for those of you who don't study it as closely, these advanced gas cooled reactors, they're of different vintages, they therefore have different longevity. And clearly, if you shut a site down, you are then exposed to more of the overhead costs, including the process safety and technology costs, as well as the site costs, and you trigger entering into the decommissioning process, which the government basically covers for the nuclear island. But precipitating all of that overnight would be quite a big call. So I think it's about -- it's a judgment. And obviously, we want to get the maximum value as a partnership out of it, if it's possible.

Sam Arie?

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [21]

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Yes, Sam Arie from UBS. I've got 2 questions, one for Chris and one, I think, for you, Iain. Chris, mine is, can we just go back to that logic that you set out last time we saw you at midyear, about the expected proceeds from the disposals and how you would use sort of half of that to fund the restructuring and half then on the balance sheet to keep the credit rating metrics where they need to be. Obviously, you're talking about doing a partial divestment on Nuclear, maybe a different valuation on E&P. You mentioned pension deficit going up as well. Where does that leave you then now versus that logic of 6 months ago in the credit metrics?

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Chris O’Shea, Centrica plc - Group CFO & Executive Director [22]

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So I didn't mention about the value of E&P going down. I think that people will look through the current low prices and take [a midge] in price. In time, I don't know where the price will come out.

If we sell E&P and Nuclear, our credit thresholds go up. And so therefore, everything else remaining equal, we have less debt capacity.

So if we -- so we have to keep some cash on the balance sheet when we essentially convert an asset into cash. But we need to keep more cash on the balance sheet than we have in terms of value of assets.

So if we keep these businesses, then the credit thresholds stay where they are, and it's actually easier to keep your rating at BBB flat or Baa1 with Moody's, and we can flex up and down our restructuring program. It came in, the cost of it I was a bit worried at the start of the year that it might be a bit more expensive than GBP 1.25 per 1. Actually, when you look at the rollover into 2020, it's come in a bit below that.

So we were quite conservative when we said the GBP 1 billion of cost savings would result in GBP 1.25 billion of -- sorry, the GBP 1 billion of cost savings would cost 1.25. It looks like it might cost slightly less, but it's too early to call that just now. But we keep this under constant review. It's one of the things that I really like about Centrica is, there are many levers to pull. So we have a lot of levers to pull in cash. The logic, I think, still holds at the moment, but we'll learn more at the end of this quarter when we see the bids for Spirit Energy.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [23]

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And I think if I can add a comment, just -- I mean this is a strategic decision, which is -- and that's not an excuse, that's an intent, which is that being a company with lots of bits, with exploration and production and customer businesses and consumer business and bits of Nuclear, it's quite confusing as to what Centrica actually is. It's much more coherent, if we're a customer-facing energy services and solutions company in multiple geographies.

And as Chris says, we're relatively neutral in the sense that we can maintain strong investment-grade credit ratings to run that customer business dependent -- I mean really independent -- on how much of these asset businesses we hold. But we don't want to hold them for strategic reasons. And we'll get the bids in for Spirit at the end of this quarter. You had a question for me?

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [24]

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Yes, I did. And it's actually a follow-on from what you're talking about there. So -- and thank you, Chris, for your answer on the balance sheet, it's very helpful. Iain, mine for you was, I mean I look, I think everybody in the room knows, it's been a difficult few years. I think you talked about some of the external shocks you had to deal with. But there is a process now to find your successor. And I'm just wondering, when you think about the strategy going forward, do you think a successor CEO essentially has to take forward the strategy as it is today? In other words, you're doing everything you have to do, and that's the only choice? Or do you think there are some big decisions on the table that successor is going to have to look at? And can you talk to us about what those big decisions might be?

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [25]

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Well, let me share this answer with Scott Wheway, who's sitting in the front row, our Interim Chairman. I mean, look, first of all, what we said last year about me leaving hasn't changed. And I'll leave Scott to talk about that.

In terms of the strategy, the Board's been clear, and we went through a 6-month update last year on what the strategy is and that it is towards the customer. And in the discussions I've had with the Chairman and the non execs, the desire is not to change the strategy. And we've had quite a lot of incoming from long-only shareholders saying exactly the same thing.

So I think it's one of our -- it's one of execution. Now I'm not in any way saying you never say never on -- obviously, things can change.

But as I see it today, and you asked me the question, I don't think that the company has another direction of travel other than towards the customer. We do have to increase the ratio of services and solutions to Energy Supply, in my view, if we're going to improve the margin quality and returns of the company. And that's something which clearly a successor will have to look at. And also, we have the issue of completing these divestments, which I hope to progress them materially before I go, but there's still a lot to do. But Scott, would you like to give the Board's perspective on this?

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Jonathan Scott Wheway, Centrica plc - Interim Chairman [26]

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I would. And is this working? I feel like I shouldn't start this conversation without just expressing the fact that it's a difficult situation for me to be here. The whole Board wishes Charles very well and looks forward to seeing him return shortly. But in that context, the Board did want me to land another message in this environment, which is, we understand, given the unique context of where Centrica is right now, we can't afford to pause for a moment for any intervenor interdicts or difficulties that might come across as [like] Charles's unexpected absence.

So we announced the process that we were going to go -- undergo in terms of the CEO change. That process has been going on for a while, and it won't pause.

I will continue to lead that process. And clearly, we can only update when we've got something to say, and that isn't today. In terms of the broader question of the Board's alignment with the strategy, the strategy that you see and the priorities that you see today has been thoroughly discussed by the Board. We don't see that 2020 is a year of suddenly throwing big strategic chips back up in the air, but we do see it as a year of increased execution and increased speed and prioritization on the things that we need to do. And I would give you the assurance that no one has sat in the boardroom thinking that it's steady sailing at the moment at Centrica. There's a lot for us to do, and we will be applying the necessary energy to make it happen at the right speed.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [27]

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Thank you, Scott. Sam, you finished? I think we were going to go to Chris, and then we'll come back in the middle here. And then over to the left.

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Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [28]

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Chris Laybutt, JP Morgan. Just a couple of questions. One for you, Richard, just in terms of the legacy gas contracts -- contract, my understanding is that if there is a move in natural gas prices versus the basket of commodities, then that can create some of the issues for you. Can you give us an indication of what the composition of that basket is. So if we see -- say, Brent and coal prices move relative to gas over the coming year or 2, we can have an idea of how that position might be moving. Just any sense would be very useful.

And Sarwjit, a question for you. Just in terms of the SVT cap, there is now a very large gap between the SVT cap and marginal prices. Can you give us a sense of how much you hedge your wholesale exposure in your customer base on that cap? And whether your margins are relatively stable? Or will you benefit from the reduction -- the sharp reduction we've seen recently in the wholesale price -- wholesale prices, excuse me? And so is there a temporary benefit or not going forward as we roll through this year, given that timing issue that Iain mentioned earlier?

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [29]

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So one for Richard and one Sarwjit.

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Richard Hookway, Centrica plc - Chief Executive of Centrica Business & Director [30]

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Why don't I start on the gas asset book. It's a contract of a different era. It was a contract that was signed back in 1988, when the world was very different, certainly the energy world was very different. You're right. The purchase price is sort of a basket of commodities, some of which are no longer actually traded, some of the gas oil and fuel oil components within that.

However, that's not the only variable that you have to bear in mind. It's a contract that also volume flexes from one period to the next. It's done on a 4-year rolling backward-look basis. There are years in which you have high volumes, years in which you have lower volumes. There is some flexibility around that to influence the take in the year.

There's another complicating factor in that the contract year doesn't tie up to the calendar year. And so you have flex across the contract year which actually crosses from one calendar year to the next. And hence the profit or loss that you see depends on that as well.

And lastly, of course, we've hedged, and we've actually hedged forward for a couple of years or so. So even if I were to give you the basket today, I'm not sure it would be hugely helpful because of all those other factors. I think the best guidance we can give is what Chris says, that it will be a loss-making contract, certainly at the current spread between oil and other commodities. And gas -- that will endure until the end of the contract in 2025, and it's likely to be in the range of 50 million to 100 million. I hope that helps.

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Chris O’Shea, Centrica plc - Group CFO & Executive Director [31]

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And the way we think about this is, it's just like a debt-like item. We have it, we'd rather not have it, but we do and we have to run it to maturity. And I would encourage you to think about it like there, rather than as an underlying part of the business. It's why we split the EM&T results on an underlying basis from this gas asset book. We had one that rolled off in 2018, the Bruce field that was profitable. So -- and some were good, some were bad. But this is just like a debt that we've got to pay over the next 5 years.

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Richard Hookway, Centrica plc - Chief Executive of Centrica Business & Director [32]

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And one build on that, Chris, is that, obviously, the traders watch it minute by minute, hour by hour, day by day. And if there's an opportunity to optimize and reduce that loss, they do that. So they don't sit there and passively watch it, it's very actively managed.

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Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [33]

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Just a quick follow-up. Would it be fair to say that if gas prices were to close the gap on Brent and coal, that, that would be positive for you. Is that too simple? Or is that a fair statement?

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Richard Hookway, Centrica plc - Chief Executive of Centrica Business & Director [34]

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That would be fair to say, that it would be positive in terms of the direction of travel, but it's not completely linear because of all those volume effects I spoke about.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [35]

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And another risk management question, Sarwjit, on the price cap and hedging?

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Sarwjit Sambhi, Centrica plc - CEO of Centrica Consumer & Executive Director [36]

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The -- on -- the straight answer, Chris, on the question of, does the current wholesale price present as an opportunity on our capped products? The answer is no. Because -- and this is why we were quite vociferous with the JR on the wholesale part of the price cap. Because we -- the risk management for our default books, which are the SVT book and the temporary tariff book and the prepayment book, we hedge the wholesale load requirement, right? And so the key risk on those books is churn risk.

But we've managed that quite well during the course of 2019, and we expect to do that in 2020. The opportunity is created by the fact that we -- in the fixed term market, we can compete with a lower price. But just in terms of your reference to the current price differences, it's a combination of wholesale price reduction, but then competition where competitors are competing at a lower gross margin.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [37]

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Thanks, Chris. There was mic in the middle. And then we had 2 here and then Jenny.

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Dominic Charles Nash, Barclays Bank PLC, Research Division - Head of Utilities Research [38]

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It's Dominic Nash, actually, from Barclays. Two questions, please. Firstly, could you just tell us what the rationale for counting using not deconsolidating Spirit and Nuclear's assets held for sale. And what would be the underlying EPS, if you were to account for it on a deconsolidated basis?

And then secondly, I've got a question on Page 23 of your presentation, which is the cash flow sort of in 2019, 2020 guidance. I think you're basically saying broadly that your Consumer business is going to be better next year, and that's going to be offset by a weaker Upstream. But when I look at the cash flows between 2019 and 2020, excluding Spirit and Nuclear, and [I'm pointing since] I haven't got my glasses on, but it looks lower. And the other little thing that I [put] want some guidance on there is maybe some sort of clarity from yourselves is, that dividend part of the pie looks smaller than 2019. Have I missed that or is the dividend 5p sort of guaranteed?

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [39]

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So Chris, why don't you take all of these then?

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Chris O’Shea, Centrica plc - Group CFO & Executive Director [40]

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Excellent. So firstly, I'll give you the most interesting one first, the accounting rule. So we didn't recognize the assets as held for sale because you have to be -- there's quite a high bar, you have to be highly certain of a sale. And to go back to the point about -- these are not for sale at any price.

If we don't get a decent price, we're not selling these assets. So we didn't meet that requirement at the end of '19. We will review that at the 30th of June. But that's why it wasn't there.

The EPS, you can see on Page 23, although it is kind of small font, and actually I had to take my glasses off to read it, but the EPS impact is 0.4p for Spirit and Nuclear in 2019.

The dividend -- the reason that the dividend looks smaller is not -- so the 5p dividend is never guaranteed, but we took a lot of time to think about the future of the group over the medium term before we took the dividend down from 12p to 5p. If you remember, though, the final dividend -- so this is cash flow -- so the final dividend paid in '19 related to '18, that was 8.4p. And that was based off a 12p amount with the scrip.

And then the interim dividend that we paid in November was 1.5p, that was 30% of the expected full year. And so what you've got is a total dividend of 9.9p in 2019 with about 20% of the 8.4p, so it'll be 1.6p taken up as scrip.

So you've got 8p cash dividend. Then in 2020, we expect the 5p. So the 3.5p that we announced today, which as long as the shareholders approve that at the AGM, we'll pay sometime in June. And then our anticipation at the moment, but it's obviously subject to performance, is that we have a further 1.5p interim dividend declared around about October, November time. So there's no magic in it, there's no hidden message.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [41]

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And just to help you, Dominic, with the cash flow picture. I mean a number of you I know will be wondering about the GBP 1.83 billion we delivered in '19 in this 1.6 is to 1.8 range. And then the current commodity prices, we're towards the bottom of that or around the bottom of that range.

I mean very simply -- clearly, the one thing that -- or 2 things have changed year-on-year before I get to the commodity prices. This legacy gas contract is swinging from a positive to a negative. And going in the other direction is the one-off price cap impact, which is obviously improving. We don't have that this year.

Commodity prices at the current price levels are broadly going to impact us by about GBP 200 million of adjusted operating cash flow. Chris can correct me on the finer details of the price, there are tax differentials between Norway and the U.K., but it's roughly GBP 200 million.

And then you've got the cash flow from the earnings momentum from the rest of the group, including our efficiency program. And so what you can see is that we could be around the bottom of this range depending on the tax treatment of the cash flow. But we would also hope that we can deliver the underlying improvement in the customer-facing businesses, so that we'll be in the range. And the final point we made very clearly is, and Chris reiterated a moment ago, we have capital flexibility and flexibility on our restructuring program, so that we're confident we can keep free cash flow such that net debt is effectively broadly constant on a cash basis pre IFRS 16.

Two questions up here.

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Martin C. Young, Investec Bank plc, Research Division - Equities Analyst of Utilities [42]

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It's Martin Young from Investec. Just a couple of questions, please. The first is regarding the tariff cap both for standard credit and prepayment that consumers and Ofgem put out free consultations the other week. One you've alluded to, which is please give us our GBP 70 million back. But there's also a consultation out there about smart metering costs and the prepayment meter uplift. Have you any sort of feel for what this might mean numerically to your sales, both in respect of full year 2020 and then, obviously, full year '21, working on the principle that it's probably more likely to be a 2021 issue than a 2020 issue. That's the first question.

And then the second question is for your stand-in Chairman. Could you sort of give us a bit of a feel for why the process to appoint a new CEO has been taking quite a long period of time, given that Iain had said that he would be staying till the AGM. It could well be the case that you might not have somebody in situ by the time of that AGM?

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [43]

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So Sarwjit, on the tariff cap and the components?

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Sarwjit Sambhi, Centrica plc - CEO of Centrica Consumer & Executive Director [44]

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Yes. So the consultation that you referred to on Smart was to determine what the allowance should be for Smart in the cap. And Ofgem have left it unchanged, and they've deferred the decision as to when to change it to later in the year and probably the fourth quarter. In terms of what impact it has, I think we need to join up with what Bayes are projecting in terms of the smart meter program beyond 2020. And that's the kind of key thing that we're pushing on, with both Bayes and Ofgem, that it has to be joined up.

We don't mind what the smart allowance is, providing it's aligned with what Bayes are projecting and that we can adjust our kind of smart meter program accordingly.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [45]

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Thanks, Sarwjit. Scott?

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Jonathan Scott Wheway, Centrica plc - Interim Chairman [46]

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I don't think that I can do very much for your speculation, I'm afraid, but I would just make 2 comments. The first one is it's never helpful to speculate in these circumstances. And I've done a number of these processes in a number of different sectors. They take as long as they take when you're looking at both internal and external candidates. And the most important thing for the Board to do is to make sure that it takes the appropriate amount of time to get the right candidate.

Beyond that, it's never helpful to speculate. But I must also add to the second point, that Centrica has got a very good management team right now, 4 of whom are sat in front of you and a whole host of others continue to work and I've seen them in action over the last 3 years. And it would be wrong for us in any way to think that the entire operational management of the company hangs on one appointment. And actually, it does a disfavor to the people that are sat in front of us that have been doing that work. So I'm confident that we'll give you the news flow when it's the right time to give you the news flow.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [47]

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Can I dare to add one comment, Scott, which is just that what we did say last year is that I would step down this year, and I would be with the company at least through the AGM. It wasn't until the AGM, but otherwise. That's just an addendum. There's one more question here, and Jenny Ping, and I just want to see if there are any other remaining. One more there, so we've got 3 more questions. I think we'll then call it then.

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Ahmed Farman, Jefferies LLC, Research Division - Equity Analyst [48]

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Ahmed Farman from Jefferies. I just wanted to start with the U.K. Home Energy business. You alluded to a number of sort of developments there. There's the sort of the GBP 70 million -- the absence of the GBP 70 million charge, there's the positive momentum in the cost efficiency program, the exit of some 14 small suppliers, I think you mentioned. So I just want to see if you could share some of your thoughts about how do you think about the margin in that business for 2020? And probably beyond, as you go towards achieving your cost efficiency target, especially now that you've had sort of a year or so of operating within a price cap environment. So that's my first question.

My second question is just on the noncore disposal program, should we just assume that that's now -- you've achieved that? Or is there any other assets -- outside of Spirit and Nuclear, is there any other part of the noncore that's still yet to come?

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Chris O’Shea, Centrica plc - Group CFO & Executive Director [49]

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So maybe taking the second one first. So as of 11:59 last night, we've achieved the GBP 500 million because we got the GBP 105 million for the King's Lynn power station late last night. So...

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [50]

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11:50.

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Chris O’Shea, Centrica plc - Group CFO & Executive Director [51]

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11:50, excellent. So we've been up waiting for it to come in. So that program is now completed. But we always keep our assets under review. So if there are assets in the portfolio that we either think somebody else would be a better owner of, or somebody approaches us and gives us a bid where we just -- we can't get that value from them, then we certainly have that conversation, and we're not [a lout at] selling other things, but that program in itself is under a -- there is a constant review.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [52]

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Sarwjit.

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Sarwjit Sambhi, Centrica plc - CEO of Centrica Consumer & Executive Director [53]

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Yes. So I mean our outlook for the energy market in the U.K. So cost efficiencies will continue in 2020. And that will make us as competitive if not more than we were in 2019. We're going to continue the strategy of bundling with services because we're attracting new-to-brand customers with that offer. And actually, that's -- we haven't talked about it, but one of the things that we've done is refreshed how the brand shows up with customers. And the new Here to Solve campaign is actually appealing to a different customer segment, both in services and in energy. On the specific of the JR and the price cap, I mean clearly, we won't be impacted by that in 2020. The question as to how we recover the 70, I mean, that's under consultation at the moment with Ofgem. But the net margin in 2019 was 2%. I think at the very least, it should be in line with, if you look at where the price cap levels are set with the headroom and the EBIT margin allowance which -- this is public information, it's nearer the 3%, we should be able to deliver in that region.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [54]

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Thank you. Jenny.

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Jenny Ping, Citigroup Inc, Research Division - Director and Analyst [55]

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Jenny Ping from Citi. Two questions. The first one for Richard. Just in terms of the LNG contract, the Cheniere contract, which you've talked about a web of hedged asset positions that's been put in place. Can you, to some extent, translate that into what we're, expect to see or give us some feel as to what we're expect to see in the short and medium term? Because clearly, it's been a loss, out of the money contract for quite some time. And how much of that have you been able to sell forward? And when will we expect to see some of the potential big negative numbers coming through if we were to mark it to market?

And then secondly, just going back to the asset disposal question. Clearly, we all wait to see what the price of the disposals comes at. But is there a scenario where you do want to press ahead with the cost reduction program, spending that GBP 1.25 billion, but levers are hard to pull. Is there other assets? And I'm specifically thinking about the U.S. business where you could look to either reduce your stake or exit, especially given the limited synergies you have with the rest of the business?

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [56]

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So Richard, on Cheniere.

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Richard Hookway, Centrica plc - Chief Executive of Centrica Business & Director [57]

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Jenny. Well, let me talk about the LNG portfolio because if you look at Cheniere, it's about 27, 28 cargoes a year, 1.75 million tons. Last year, we traded 6 million tons. And so you always have to look at that contract in the context of the broader portfolio.

And I'll sound a bit like a broken record because I said this last year, and I said at the interims that we were confident at the beginning of '19 that we would write '19 in black ink, and we did. And I will say, again, that we're confident that we'll write 2020 in black ink because of the positions that we already have in place, not just against Cheniere, but in aggregate across the portfolio.

And 2021 is also looking to be in a similar sort of place. Obviously if you look 4 years out, 5 years out and you take today's gas price as an indicator, and you ignore everything else but the Cheniere contract, it doesn't look terribly pretty. But nothing remains static.

So even though today, we're at less than $2 Henry Hub and less than 26p in the U.K., gas prices will move at some point over the next couple of years. Spreads will wax, spreads will wane, and we will have an opportunity, as we see it, to be able to build that portfolio in the outer years as well. So whilst I'm not going to make a prediction for beyond 2022, the next couple of years look okay, and I'm pretty confident that the opportunities will arise to address the out years over the next 24, 36 months.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [58]

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And Jenny, on your -- look, I think on the asset disposal program, I think Chris answered that on the program that's underway. And if there are any -- if I missed any part of it, then we can -- Chris can just complete that.

On your question about broader portfolio interventions, what I'd say, and you specifically mentioned North America, we reviewed this as part of -- as you recall, but also would expect, we reviewed this part of our strategic update last year.

And what we concluded is there are synergies, and particularly in the fact that we -- the skills in selling energy and managing risk around energy are the same. It's the largest energy market in the world. But very importantly, the Business Solutions that we sell, as I just gave you a very big example in the New York Housing Association, they're the same solutions that we're selling over here.

So there's growth potential in North America. But what we did also conclude was that North America needs to perform, because we have had disappointments with it. And that's why we've set a returns bar on North America business. It's looking promising. Given where we are, the momentum is good, and there's further cost efficiency from the business. And therefore, I think it's logical for us to see this geographic diversity as part of the company as long as it performs and as long as the returns are above the 10% to 12% that we targeted. And that's what we concluded, that's what we announced last July.

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Chris O’Shea, Centrica plc - Group CFO & Executive Director [59]

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[the forecast], Jenny, was on the efficiency program. The question is not whether we can complete the efficiency program, the question is just one of pace. And so we can turn this up and down. So if we got offers, for example, for Spirit that we didn't like, and we didn't want to sell anything else, we may just ramp down the speed of the efficiency program or we might decide to pull back our CapEx and push forward very quickly with the efficiency program. So it is like Richard said, like a broken record, it's very flexible. And so obviously we would all like to get the efficiency program done as quickly as possible, get through that part and focus on growing the business. But we are also very conscious about where our cash position is. And we prioritize, we trade off CapEx for efficiency, it's just an investment decision.

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Sarwjit Sambhi, Centrica plc - CEO of Centrica Consumer & Executive Director [60]

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I mean, as you've said also, Chris, that the quality of it is very high. You can see the cost to achieve and the synergies that we've been getting consistently. So that would be, as you say, an intervention for cash flow. And the other thing I'd refer to is the very large efficiencies we're going to deliver this year are already underway and largely underpinned. I won't give you the number, but well over half is already defined and in action. So that's really good news. It's high quality. But as you say, as we get through this year, the remaining program for '21 and '22, we can make some adjustments around.

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Bartlomiej Kubicki, Societe Generale Cross Asset Research - Equity Analyst [61]

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This is Bart Kubicki, Societe Generale. Two questions, if I may. First, on these -- on those efficiencies of GBP 350 million expected for this year. I just wonder how much out of this will be reflected in lower revenues, i.e., you will decrease prices to customers, to sort of support your positions, to slow down your churn? And how much actually could be reflected in higher profits?

And secondly, on your CapEx, I think you were guiding on GBP 1 billion CapEx previously going forward, so GBP 500 million Spirit; the rest, the rest of the business. Now we are dropping the rest of the business to GBP 300 million. I know you have those flexibility you mentioned. But my question would be this GBP 300 million, would it be a new norm? Or this is only a one-off and later on, we should expect a pickup to GBP 500 million? And another thing related to this, would it endanger your growth somehow in whatever business solutions are for the segments?

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [62]

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So if I can take the first one, and Chris, if you could comment on capital. And the question about how much efficiency you have to give back to the market has been one that we've had for a number of years. It's especially pertinent when you're not the most competitive provider, because then you basically have to give some back in order to capture new customers. And it's one of the drivers as to why we were losing customers. Very importantly, we're now at the point, as Sarwjit demonstrated and was on the slide, we are now able to price at a level where we are not -- we see attractive or neutral customer lifetime value and we can win new-to-brand customers and upsell. That's very encouraging, but we've got further to go. And therefore I would see the proportion we have to trade into the market in order to compete, as shrinking. But as we also point out, especially in the U.K. energy market, with its weird dynamic of a lagging price cap calculated on a prior period set of inputs and spot prices, especially for people who don't hedge who then end up taking quite significant risk of not being around and unfortunately, the rest of the industry ends up picking up the tab for any customer books that lose money if they go bust, there are clearly still some errors in the design of the market, and we are currently consulting with Ofgem on that. But I would expect, in short, the proportion that we have to trade into the market to be diminishing materially and that we can fight on our own two feet, if you like.

And the final point I would make is something very distinctive about us is, we can offer bundled propositions where we own the gross margin of the other components of the bundle, which mean that someone who can only sell energy, that's all they can do. They could buy in someone else's services, components, but they'd have to pay someone else for it. So I think we're nearing stabilization, as is seen by the customer account numbers. Capital?

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Chris O’Shea, Centrica plc - Group CFO & Executive Director [63]

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I think the -- there's a number of questions in there. I think what we guided to before, I believe in February '19 was GBP 1.1 billion, and we brought it down to GBP 1 billion, and we delivered just under GBP 800 million of cash CapEx in 2019 and was able to do the same in 2020. I think that there are always -- I think any good company always has to have projects that it thumbs down. If you don't thumb down projects, then you're not -- you're either not doing enough or your bar is too low. So I quite like there to be some tension in the CapEx program. I think GBP 300 million for the non-E&P business is enough to keep it going. Sarwjit and Richard probably think it could be slightly higher than GBP 300 million, but I think that, that's fine. I don't think we're starving the business. I think we could bring CapEx down to about GBP 100 million in this, but then we would have to pause any growth. There wouldn't be much for Centrica Business Solutions. It wouldn't be the right thing to do. But I think the minimum reinvestment rate to keep the capital base is about GBP 100 million. The other thing I would say is we have identified over GBP 100 million of what we call IT change expenditure. And now some of that's CapEx and some of that is OpEx, but we've taken over GBP 100 million out of the IT budget in addition to the GBP 1 billion savings target that we've got. And so we see an ability to do that by doing a bit less, going a bit slower, but actually achieving more. So that is true efficiency. So we expect to deliver more with GBP 100 million out of the IT budget. So all in all, I wouldn't want to be at GBP 300 million. I would actually quite like to be at a point where we could increase it from GBP 300 million to a bit more, because probably what we're not looking at just now is inorganic bolt-on opportunities because we've got so much on our plate. And some of those things make sense. But at the moment, we did 1 last year. I wouldn't really expect us to do any this year. There might be customer books that it's cheaper to acquire by buying a small book than it is to go through normal channels. But I'm quite comfortable that GBP 300 million is actually quite a good level, and we could pare that back if we wanted to.

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Iain C. Conn, Centrica plc - Group CEO & Executive Director [64]

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Thank you, Chris. So look, I'm going to sort of wrap up. I mean just on that last point, we haven't turned down lots of very big opportunities. So that's really important for you to know. I think if the trends continue, there are going to be some quite sizable opportunities for growth organically and maybe small inorganics, as I've said, and we just need to keep that under review and hopefully have enough cash flow to be able to do it.

So then in summary, and thank you all for coming. Look, delivery was in line in 2019 versus consensus on earnings, and in line with our targets for operating cash flow and net debt. I realize that's already a distant memory, and we're all focused on 2020. As far as 2020 is concerned, commodity prices have done it again. This company is long commodity and is very commodity-exposed. It's one of the reasons we want to simplify the portfolio and exit the asset-based businesses, because all of the momentum that we delivered last year in the customer-facing businesses was chewed up by largely regulatory and commodity price impacts. And the GBP 258 million underlying improvement that we saw in the customer-facing businesses, I believe, is extremely encouraging. But we do need to simplify the portfolio. As we look into 2020, we expect to see similar momentum in terms of earnings momentum from the customer-facing portfolio, including last year, GBP 80 million of services and solutions improvement, we expect a similar improvement year-on-year this year.

As far as the questions about me are concerned, the only thing I want to say is, I'm totally committed to this company and totally committed to delivering for this company, in line with what Scott said earlier. And you can ask any of my colleagues, I don't think I'm spending 2 days a week at home at the moment, unfortunately. And so you, my shareholders, have total commitment from me until and when I'm no longer the CEO.

And last thing I want to say is just thank you very much to the Centrica team, not only this team that Scott referenced, but actually the wider team. This is an organization that's been through some pretty tough yards, as Chris said, 12,500 people, and there's more change to go this year. But I am very confident that we've now created a platform that's facing into a future energy system which is going to provide growth for this company, as opposed to putting all of our money into carbon production, which I think would have resulted in a pretty bad outcome. Thank you very much indeed for being here, and look forward to following up with some of you in the coming weeks. Thank you.