Centrica Plc (OTCPK:CPYYF) Q2 2014 Results Earnings Conference Call July 31, 2014 4:30 AM ET
Rick Haythornthwaite - Chairman
Sam Laidlaw - Chief Executive
Nick Luff - Chief Financial Officer
Chris Weston - MD, International Downstream
Andrew Mead - Goldman Sachs
Edmund Reid - Lazarus
Peter Atherton - Liberum
Lakis Athanasiou - Agency Partners
Martin Brough - Deutsche Bank
Mark Freshney - Credit Suisse
[Call starts abruptly]
Before handing over to Sam and Nick who will say more about our strategy direction and performance I would like to make some opening remarks about the progress we've making into other important areas. First our continuing engagement with stakeholders as we strive to regain their trusts.
Second succession plans for the leadership of the group. In February I talked about my early discussions in listing sessions with some of our most important stakeholders, politicians, regulators, the media and above all our customers helping to build an understanding of the true costs of energy and the contribution we make to country's energy security.
It is important that we establish a common set of facts about energy in the UK so that all parties to the debate can have a rational exchange of views. As part of our contribution you would have seen that we recently published our energy choices for the UK report.
This is a serious detailed piece of research which examines whether the country could meet its climate change ambitions in way that it is more affordable to households and businesses. The inquiry by the competition in the markets authority into the UK energy market will also (Audio Gap) to the debate and these are all part of the process which will enable retake some time as we seek to rebuild trust in the industry.
In the meantime, I will continue my conversations with customers and other stakeholders, which I believe are extremely valuable way of exchanging views and building a mutual understanding, but engagement is only part of the solution that we recognize, trust needs to be earned trough our relationships with our customers and the service we provide and this remains I want to totally call priority, and Sam's going to return to this later in his presentation.
As you would imagine, management’s succession has been a key focus in the Board and I'm please to say that we reached an important stage in that process with the announcement earlier this week of being current appointment of Chief Executive Designate to succeed Sam on his retirement at the end of the year.
Sam will be a very tough act to follow. He’s shown exactly the ship over the past eight years. On the Sam's stewardship Centrica has become a significantly stronger business, which is invested in systems and service developing a technology leadership position in smart meters like connected homes to British Gas. This has established a downstream business of substance in North America it now has a balance in its upstream portfolio across the Atlantic Basin, it has a power generation business that benefits from low carbon baseload nuclear alongside renewables and gas fire generation and growing midstream business.
Importantly, the partnerships structures and culture that have been noted on the Sam's guidance provide a very solid platform for long-term growth delivering returns to shareholders and securing the future energy needs of our customers. And on behalf of the Board, I'd like to thank this opportunity to thank you him for his enormous commitment and contribution.
I will delighted that we've been able to recruit a successor of Ian’s caliber. He will bring an impressive combination of experience and skills for our business. He currently heads a retail brand familiar to millions of people and also possess a deep understanding of the energy sector built up over lifetime in the industry. His proven strategic [progress], deep understanding of the importance of stakeholder engagement, breadth of knowledge as well as his track record of commitment to customers and safety make him ideally suited to lead Centrica into the next phase of our development. The announcement of Ian does now mean that we can progress with other succession steps that we need to take.
Today we have announced succession plans for Nick Luff who will leave the group at the end of August. And Nick has made a hugely valuable contribution to the group over the past seven years and we wish him well.
Jeff Bell will take on the role of Interim CFO. Jeff has been Centrica’s Director of Corporate Finance for the past three years and has an internal knowledge of the business, having held the range of senior management roles over the past 12 years. Jeff is here today along with a number of other senior leaders in our management team and I hope you will have the opportunity to meet them after the presentation.
Meanwhile, we felt it important that Sam’s successor should play a significant role in managing the change of leadership as the head of the downstream businesses with the departure of Chris Weston scheduled for sometime in the coming nine months. Again, Iain’s recruitment would allow us press ahead with this process. In the meantime, I remain deeply impressed with the commitment of Chris with his British Gas and Direct Energy teams are showing to get our service back to levels that are rightly expected by our customers.
And I will conclude by remarking that I’ve seen similar strength and depth of talent throughout Centrica. We are in good hands for the future, thanks not only to the appointments that have been made and will be made at group level but also to the excellent people in our businesses. In a challenging first half impacted by the unusual weather on each side of the Atlantic, I have been consistently impressed by the quality, values and commitment of the people that I have met during my first months as Chairman. I have no comps about the momentum, direction and pace of this company as we deliver the senior management transition. And much -- does remain to be done this year, you will hear in a moment about the plans that we have in place for each part of the group. But for now, I’ll hand over to Nick. Nick?
Thank you, Rick. Good morning everyone. As usual, I will start with commodity prices and the weather. The weather first, looking at the bottom right charts, it has been mild in the UK, certainly in contrast to the very cold early part of last year.
Residential gas consumption per household for British Gas was down 24% as a result. That meant lower bills for consumers, of course, and lower sales volumes for us. Across the Atlantic, it was a very different story, with extreme low temperatures caused by the polar vortex; increasing demand for demand for gas and power with causing havoc in wholesale markets.
Gas prices reacted accordingly, as shown on the two left hand charts, folding sharp in the UK, but increasing in the U.S. Well UK spark spreads being low, kind of followed gas prices down here, squeezing dark spreads. Oil prices held up in dollar terms, but with the pound strengthening, they were down in sterling terms.
Those weather conditions warm in the UK, extremely cold in the U.S. and allow UK gas price to have a significant impact on the group's financial performance, with adjusted operating profit down 35%. Revenue actually increased with additional contribution in the North America from the Hess Energy Marketing acquisition, more than offsetting lower revenues in the UK and the supply businesses due to lower consumption.
As I’ll say in a second, our four business units so low adjusted operating profit. But the after tax profit from upstream business was protected by hedging and by the benefit of tax allowances on new investment. As a result, the Group's tax rate came down to 37%. Adjusted earnings of 530 million translates to 10.5 pents per share down almost 30%. The income dividend will be 5.1 pence per share, an increase of 4% and representing 30% of last year’s full year dividend in line with our established practice, consistent with our policy of real dividend growth.
Here's the breakdown of the operating results and you can see the lower profits in all four business units. Starting with British Gas here profits were down 20% to £455 million. BGR impacted by warm weather came in at £265 million, given that we do not intend to change retail price of this year, but lower commodity cost offsetting rising cost elsewhere, we are forecasting full year post-tax margins of just over 4%, assuming normal weather in the second half of the year of course. BGS was slightly down £229 million, we delivered an 11% increase in boiler installations and retention of existing contract customers was good. However new contract sales proved challenging moving customer numbers down around 2% and impacting profits.
BGB was also impacted by the warm weather and profits dropped at £61 million as a result. However we expect second half profitability to improve and power affecting our ongoing cost reduction program on the implementation of a new billing system.
In North America, we reported substantial decrease in profit, reflecting margin pressures due to competitive market positions, but also the 110 million of cost related to Polar Vortex that we have flagged in previous updates.
The strength of pound also impacted the figures when translating back to sterling also impacted the figures when translated back to sterling. Excluding the Vortex costs the residential result was down impacted by margin pressure and the expected decline of our Ontario business. The business was also down before taking into the discount of available test costs. That was despite a strong contribution from the newly acquired Hess business and reflected low margins for business written in the second half of last year when we have those very competitive market conditions.
The actual margins from that business are turning out even lower than expected causing us to lower expectations for the full year further. However the margins on the business we are now writing post of Vortex are much improved and we have built more risk into our margin estimates.
We'll see the benefit of that starting to come through towards the end of this year and DE business positions for a strong 201. Given the seasonality the first half is not that important for DE services, nevertheless the business performed well with good sales and protection plans in the U.S. Of course we have now sold the Ontario home services business and that will come out figures at some point in the second half.
Turning to the upstream Centrica Energy 526 million 34% lower than last year. Overall international gas and oil production increased by 9% but that increase came from Canadian gas which does earned lower margins, the fall in UK gas price and that oil price in sterling terms squeezed pre-tax margin for European production but the after tax is also protected by hedging.
The tax charge was also reduced by investment allowances in the UK moving after tax profit up almost 30% despite the low pre-tax margins. We remain on track for the full year production post to 83 million barrels lower UK gas prices will bring down the pre-tax by more market forecast imply but the expected contribution to earnings after tax is unchanged.
The UK Power look (inaudible) market conditions remain challenging for our CCGT fleet, which continued to lose money. In contrast, the nuclear business perform well, so the 7% increase in generation volumes had been to a small increase in profit.
Underlying wind profitability also increased as we received the full contribution from the Lincs offshore wind farm. Although, we did recognize a £14 million charge license to write-down of around three wind investment following a review of the economic liability of the Celtic Array project that reduced over reported results apart to 61 million.
Finally storage, we've performed very well operationally. However now of our wind spreads meant with the SBU prices are much lower than in previous years and our operating profit fell 10 million. Spreads increased slightly over the first half of the year, although it take a while for any sustain improvement to be reflected in operating profit.
Turning to cash flow, reduced earnings resulted in lower EBITDA. However, net CapEx is low due to disposals, which when the net debt only increased slightly to 5.2 billion, even though we are returned the rate of £100 million to shareholders through the dividend and the buyback.
Subject to working capital a margin cash shrinks, we expect net debt to be around 5 billion by the end of the year, helpfully Ontario services sales. It could come down further depending on the timing of other disposals.
Organic CapEx for the first half is up a little bit on last year as we invested in the new projects upstream. We have pull back upstream CapEx in response to our UK gas prices, but within slight purchase progressing well, particularly Cygnus and the Norway Valemon. We now expect to spend this year around a billion pound before the upstream CapEx fulls next year.
On the M&A front, we closed on a Bord Gas acquisition on 30th June, so that is in these first half numbers, but that was more than offset by the Texas CCGT sale hence the £329 million inflow you see out there. The second half will see us complete the $200 million of our stake in our existing gas facility in Canada to QPI as well as the receipt of the $450 million cash settlement of Ontario home services sale offset by the reinvestment of some of that cash into the small seller acquisition that we announced earlier this week.
We do have a number of other disposal prices underway as we seek to ensure capitals deployed where we see the best return in growth prospects. As well as the Ontario home services sale, we signed last week, we have already announced our intention to sell the three largest CCGTs in the UK. We will also potentially get to all these capital from our gas assets in Trinidad and Tobago and for our operational wind farms in the UK. In total we expect to realize proceeds of around £1 billion, returning those proceeds reducing debt will improve our credit metrics as will be instruction of the scrip dividend alternative next year with shareholders being able to choose between cash and stock. We believe that this will offset to proceed higher business risk that group faces. As we seek to retain our current A3/A- credit ratings.
So in summary while our first half EPS was down significantly, we expect second earnings to be inline with last year. Full year as a whole that will give us EPS of between 21 pence and 22 pence, slightly below previous guidance reflecting the write-off of our round three wind investment.
So slightly lower earnings cash generation remains strong and we are maintaining our commitment to real dividend growth as well as planning to complete this year’s £420 million share buyback and further ahead we expect the business to return to growth in 2015 assuming more normal weather condition and as the benefit of our recent investments flowing the results.
And with that for the 15th and the final time I will handover to Sam.
Good morning everyone and thank you Rick for your very kind words. It's been a privilege to lead this company over the last eight years, but of course it's been a huge team effort. And I would very much like to pay special thanks to Nick, not only as you have just heard for delivering his 15th set of results, but also Nick for all your terrific support and advice over the last seven and half years and my very best wishes for the future.
But many thanks also to Chris, Mark, Grant and Joe, my colleagues on the Executive Committee for all that we have achieved as a team and all that remains for us to do together over the second half of the year.
As you just heard the first half of the year has seen the Group face a range of external challenges which have held back our financial performance, however the outlook is more positive.
We are focusing our efforts on maintaining momentum within the business and I believe that the actions that we are taking which I'm going to outline in detail shortly, position us well for future growth.
With our brands and distinctive combination of energy and services propositions, our customers remain at the very heart of the business. And the Group is stronger as a result of the investments we’ve made over a number of years both downstream and upstream with scale operations on each side of the Atlantic, supported by a balanced portfolio of upstream assets.
And as we look ahead, innovation and smart connected technologies will increasingly become the key differentiators between energy suppliers, giving customers greater control over the energy needs in the home.
However, affordability remains a key issue for many customers, who are unsure about the drivers of the costs on the bill. Therefore trust in the industry is low and against this back drop the competition in markets for authority is reviewing the structure and competitive position with the industry and its investigation should help to bring welcome clarity. We are already engaging with the CMA and we look forward to working with them constructively and comprehensively throughout the process.
In summary with the sharp focus on service and with clear priorities for the second half of the year, we believe that the position is well positioned to deliver growth in 2015 and beyond. As Rick outlined, we have to engage with all our stakeholders throughout the period, particularly our customers. We believe if we're to regain that trust, there needs to be an open honest dialogue about all the components of the energy bill.
Now the chart here shows the evolution of the average British Gas dual fuel bill over the last five years. As you can see, customers have faced a substantial increase in their energy bills, reflecting higher commodity costs and more significantly in recent years, higher network delivery costs and environmental and social charges. By contrast, our profits have remained broadly stable around £50 times but higher sold. In fact, as you can see on the right of the chart, we expect both the average bill and our profit to be lower this year than last.
We believe that there is effective competition in the energy market and it brings significant benefits to consumers delivering choice, innovation and some of the lowest energy prices in the European Union. Through our vertically integrated structure, we’re also able to provide protection against the volatility of energy prices and deliver scale efficiencies for the benefit of both customers and shareholders alike.
The UK’s energy policy was formed in a very different market in economic context in a world pre-shale gas, pre-credit crunch and with the expectation that the cost of renewables would rapidly reduce through technological advances. Now much has changed and with the emphasis progressively shifting from environmental concerns to affordability and now towards security of supply. We therefore believe it's relevant to look again at the energy choice available and the competing priorities faced. In this context, as a contribution to the wider energy debate, we published our energy choices report last week.
This gives an indexed review of the cost of current energy policy and sets out a series of alternative choices, all within the existing carbon reduction framework and without compromising our long-term de-carbonization ambition. We proposed three core principles to ensure that the country can meet its carbon reduction commitments in a most cost effective way. First to prioritize the lowest cost least regret options; second, to set simple and cost effective de-carbonization targets and third to support those most affected by carbon reduction programs whether they are energy intensive industries or vulnerable customers. Together, we believe these measures can help to ensure a sustainable, low carbon energy future for the UK while minimizing the cost for the consumer and potentially saving as much as two-thirds of the current estimated policy cost.
Some eight years ago, we recognized that we needed to strengthen our business model to respond to changing energy markets, increasing security of supply and climate change concerns and competitive pressures. And as we look at the group today, we now have a well balanced and much more resilient business. This is true both geographically with scale businesses and investment options on both sides of the Atlantic and structurally along the gas value chain with our vertically integrated model aligning us more closely with our peers and delivering benefits through lower collateral requirements. In British Gas, we are benefiting from our investment in systems and service. We’ve also built also built a leadership position in innovation and smart connected homes, each of these is essential to underpin future growth.
In the first half of the year, we’ve made important progress with clear strategy targeting three priorities: To deliver great service; to transform the business to a platform for growth; and to engage with key stakeholders.
Following the high levels of switching seen at the end of last year, service levels in British Gas have improved significantly over the first half of this year. Average answering and call handling times, both reduced in BGR, driving a big improvement in our net promoter score. And in BGS, customer service also improved significantly with 40% reduction in complaints and improved response time, directly stemming from our investments in the business.
And in British Gas business, we’re making good progress on the implementation of the new billing system and we remain on track to deliver targeted reductions in operating cost, totaling a £100 million, at the same time as delivering improved service to our customers. We also continued to drive improvements and technology and innovation. Two-thirds of our residential energy customer interactions are now through digital channels, half of those by smartphone or tablet and we see mobile and online technology as a core part of the customer proposition. Last month, we installed our millionth residential smart meter substantially more than any other supplier. Over the 350,000 customers now receive a unique smart energy report, helping them to understand and manage their energy consumption.
And the launch of Hive has also been particularly successful with over a 100,000 smart thermostats now sold to-date. The brand NPS, the customer using Hive is substantially higher than for the wider customer base and some 80% of customers say they will actively recommend the product. Innovation provides an important source of differentiation in the market as well as the choice for the customer but at the same time helping to improve the overall perception in British Gas.
Now looking ahead a clear aim is to return British Gas to customer account growth while continuing to drive improvements in customer service. Residential customer account numbers have now stabilized and our fixed price contracts are proving particularly popular. In services new boiler installations have picked up and we are focused on returning to contract through development of attractive propositions. We are making further progress in simplifying the core customer account interactions such as moving home and paying by direct debit and we are on track to complete the migration of our customer accounts on to a new residential billing and CRM platform later this year which will deliver a more integrated customer experience across both energy and services. This autumn we are planning to launch a new energy and services product providing a new source of account growth and we are also leveraging our leadership in smart connected homes with a trial of free Saturdays or Sundays time of use tariff. We have commenced trials of our smart connected boiler product and our virtually in home display which enables customers to track their energy consumption in real time either online or via their smartphone.
So in summary we are making important progress in improving both efficiency and service. The business is well positioned for long-term growth with our distinctive combination of energy and services and our leadership and innovation and smart connected home technology. In North America, we now have a scale business in deregulated markets with over 4 million residential and services accounts. And in our commercial business, annual gas and electricity sales now exceed 200 terawatt hours. However the current market environment has been challenging in energy supply with higher gas prices and intense competition. And it is essential, therefore that we improve the cost competitiveness of the business, using our enhanced scale to drive synergies alongside innovation to enhance customer choice.
We are on track to deliver our $100 million cost reduction program by the end of this year with a number of initiatives underway across the business, including investment in our billing systems, consolidation of our services operating systems and integration of our energy and services call centers.
We added nearly a 100,000 residential energy accounts in North America during the first half. And we've also been successful in driving sales through digital channels which nearly tripled followed the acquisition of Bounce Energy last year. And in DE services we recorded a small increase in the number of customer accounts with further growth in our protection plant offerings. Last week, we announced the disposal of our Ontario home services activities releasing capital from an area of the business which is no longer core to grow. We are focusing our efforts on the U.S. market particularly little potential from protection plans and combining energy and services offerings, which we see as a central part of our strategy for Direct Energy.
And our acquisition earlier this week of Astrum Solar further enhances our product range in this rapidly growing area of the market. In DE business, the Hess acquisition is performing ahead of its investment case. We've retained key personnel and customer service remains strong. Moving forward we see further opportunities to deploy our dual-fuel capabilities and continue to develop advantage positions along the gas value chain.
Although the legacy DE business was significantly impacted by the Polar Vortex in the first half, we're now seeing a repricing of risk and a substantial uplift in the margins, up from 35% for gas and 33% from power compared to the second half of 2013. As a result, we expect to deliver a much improved financial results in the second half of this year and well into 2015.
And earlier in the year we completed the disposal of our three CCGTs in Texas with proceeds being returned to shareholders through the share repurchase program while we continue to access the power through off take agreements. So we have clear priorities in place that DE for the second half of the year targeting disciplined margin expansion alongside customer service, value and choice. In DE business we expect to build on the sales margin expansion we saw in the first half of the year. We also completed the integration of the Hess energy marketing acquisition and we look to capitalize on our enhanced dual fuel capabilities whether as the leading aggregator of Marcellus shale gas production or through helping customers switch from fuel oil to gas. And in services, we continue to drive growth through innovative products. We target to achieve over 250,000 U.S. protection plan customers and 100,000 energy and services bundled products by the end of this year.
For the longer term as in the UK we believe that connected home propositions will become increasingly important. To-date we've sold over 10,000 smart thermostats initially in Alberta and signed an exclusive partnership with Nest to sell 100,000 units across North America over the next 18 months.
Upstream in our gas and oil business we now have a balanced portfolio with expertise across the Atlantic Basin. Most notably adding to our positions in Norway and Western Canada to compliment the assets in UK waters.
In power generation we have a business that benefits from low carbon base-load nuclear production alongside renewables and gas power generation. And we've developed strong relationships with world class global partners [Qatar Gas] and QPI Statoil, GDF SUEZ (inaudible) and EDF to name but a few.
With lever UK wholesale gas prices and increased unit costs of production in the UK North Sea our focus is on improving returns through operational efficiency and capital discipline. Gas and oil production in the first half was good with solid production from our core assets in Europe and higher production in North America following the Suncore acquisition.
We've now aligned our interest in Canada with QPI further strengthening our strategic partnership and we've continued to make progress on our projects including the large scale Cygnus and Valemon projects. The nuclear fleet once again performed strongly and our wind assets benefited from favorable wind yields in the spring and a full combination from the links offshore wind farm. Our growing mid stream business has continued perform well with LNG becoming increasingly important in global energy markets and we expect for regulatory approval for the fifth crane being passed export facility in the U.S. around the end of the year.
In EMP we have clear priorities for the second half of the year. We're targeting flat unit cash production costs and reduced capital expenditure. And on development projects we expect to deliver first gas from fourth well at York and a new well Grove.
In power generation following the strategic review of our gas portfolio earlier this year we've now commenced the sales prices for the three larger power stations in our fleet, Langage, Hamba and Killingholme while we continue to evaluate plans for a smaller more flexible stations under the proposed capacity option.
Longer term, we have a strong platform for growth as we continue to invest where we see attractive opportunities and as Britain’s North Sea resources deplete Centrica continues to play a critical role in bringing supplies of gas for the UK with commitments totaling over £60 billion to secure long-term gas and power supplies for our customers.
So in summary, we've made good progress in the first half despite the challenging weather conditions and market backdrop. But we have very clear priorities in the second half of the year to drive performance. We will continue our effort to regain the trust of customers based through ever grated transparency as to the custom bill, but also improve levels of service and continues engagement with key stakeholders.
And the previous investments we've made upstream and downstream, I mean that the business is more balanced and resilient in an increasingly international energy market. With customers at half of the business are distinctive combination of energy and services and our leadership position and innovation backed up by secure supplies of low carbon energy leave us well placed for the future.
And as I said earlier, we expect to see a return to growth in 2015. Despite the impact of lower gas prices on our upstream business. As well as an assumption of more normal weather conditions in North America we're targeting underlying growth in customer accounts and profits across our downstream activities. With services growth on each side of the Atlantic, with improved margins in DE business, with the benefit of our cost cutting programs in both BGB and direct energy and also with the benefit of the full year’s contribution from our Bord Gas acquisition and with strong operational performance and capital discipline upstream, we continue to strengthen the business for the future.
So with that let me open it up to questions.
So I am going to downgrade in and of itself and if one would not leave that significant we would have to post more collaterals, some of our training activities the proposed more collateral for security and decommissioning. But we would prefer not to lose the rating our judgment is that we are better operating as an A3/A- company for those reasons, but also in terms of the perception of us as a counterparty for big long term contract for example. So we are looking to retain the rating and as we said in the presentation, doing things to offset the proceed higher business risk with things that’s happening by reducing debt levels and improving the credit metrics and clearly the steps we have outlined today in particular about £1 billion of disposal proceeds retaining those on the balance sheet, reducing debt and we hope and believe that would be sufficient to do that but clearly we have to wait for the conclusions of the agencies. And we absolutely could cope if we got downgrade just to be clear, but we would prefer not to.
In terms of what that means for net debt, I think by the end of the year, by which time of course what have the Ontario home services sales proceeds in, but the other processes I talked about on the CCGTs, Trinidad and the wind farms are not in our forecast, possible some of those could happen this year. But without those, we should be down to around 5 billion with the usual caveat at around margin cash and working capital which come soon about with whether and commodity prices and cost.
So, going further out, I do expect the agencies to be more demanding in terms of the calculated debt metrics that they set for us. At the moment Moody's focused on returning cash for the debt metric at 25%, I expect that us then to be looking for something higher than that, if we are going to maintain rating and similarly with S&P a little bit side for metric.
So, the scrip dividend will help those credit metrics, in particular returning cash flow to debt. It is the dividend, the cash cost of the dividend comes up with cash flow. So, it will help that metric depending the level take up. It will be part of the overall cash flows of the business, it's in that -- we actually do the math and compared to the proceeds and disposals, it’s not the significant, but it is important that they have real credit metrics.
So the hedging?
You see the hedging, I'll talk about the long-term analysis.
So, the hedging effectively takes place outside of the high taxed environment of the upstream. So if you take a 60% tax rate, which is for normal field in the UK and for the actual gas production0 whereas you have a 20%, 21% corporate tax rate in the actual buoyed and the hedging. If you do the math on that, you are actually earning half of the volume. So as you mentioned we for 2014 were largely hedged and post tax basis but that means we've only hedged on the pre-tax basis only half the volume.
So if you lose 10 p off the gas price and not for all the production, you can lose a 100 million of pre-tax earnings, but quickly you’ll get 50 million of pre-tax earnings back in your hedging book. The tax effect of that will net out after-tax. So, you'll be left where you started, but your pre-tax numbers will be down 50 million net. Now of course that applies for the current year, when you are largely hedged. And if you take a 24 month ratable hedging strategy, it’s not quite as simple as that. But if you take that sort of hedging timeframe, will largely hedge for this year.
So next year, we’re not so -- relatively partially hedged when that falling gas price assuming stays down, would flow into the numbers pre-tax and post tax to some extent in 2015.
And then, second part of your question John was around where we and I think [Chairman] acknowledged that there are deficiencies in that methodology and they are repent to say this is not a profit forecast although it's being interpreted by some as such.
Some of the other principal variances which we've been in discussion with them for a number of months if not years are around consumption patterns. They take a electrical consumption of course with energy efficiency; consumption is declining every year. So they're receiving, customers actually have higher bills than they do, particularly weather patterns which we've obviously we have big factor for us this year with our average customer using 24% or less gas than they did last year. And also some of the costs on the bill such as the rate of spend on the ECO program and also the fact that not all our customers are on standard variable tariffs. So you put all those things together and you come up with in a business that's fundamentally a very thin margin business and very big differences in numbers.
And they do recognize, they need to modify the methodology but this not a new composition.
Okay. So Nick, you would like to the change in the guidance as a result of the wind write-off and is there anything else there?
Yes. So, the penny reduction and there is a range, remember, we're going to from 23 pence a share to down to 21, 22. So I won’t be overly precise but in essence, that is essentially the Celtic Array write-off of 40 million for which I think it must tax release. And that I mean that's what 0.8 of a penny certainly pre-tax. There are some ups and downs elsewhere with the commodity prices as they are. And I think you said BGR margins slightly above 4 rather than at 4. DE, we have brought down as we said in the presentation, given its transfer, the margins, the business right last year not coming through as we expected. And again, we have built more risk premium to the margin for the future and our writing business had substantially high margin. So that is only 2014 impact. And there is also some other minor ups and downs, but it is largely about the category writing.
And I think second part of your question was around the new services propositions that we're going to be launching later this year.
So maybe more broadly on growth and services, summer months and other -- not the time of the year, you'd expect to sell much volume; heating is on the top of mind for customers. But nevertheless, the team, [Susan] and the team are working very hard on what they can do to drive growth, particularly in the last quarter when we returned to colder weather.
So, we have seen improvements in conversion in the area service centers where we handle all the coals, so almost double since the beginning of the year. We have some of the sale going at the moment looking at gas supply and shacks which is proving to be quite popular. But the keys will be as we come into the autumn we see an uptick is sales as I said from the cold weather and also opening up again to cross sell through the BGRE call centers which is something that we have not been able to do really since last summer because of call volumes and our ability to handle longer calls. So that will return to the channel mix in September. And at the same time we are looking some point in the autumn launching a particular product that will appeal to our broader energy base I am reluctant to go into detail as to what that might look like but there is a lot of thinking going into it.
I think the final part of your question is around Scottish independence I mean we yes we do have an important business in Scottish Gas in Scotland but it is relatively small part of our retail business. We wouldn’t expect it to be fundamentally impacted by Scottish Independence and actually if you look at our North Sea production most of it is actually in English waters in Morecambe and the southern and central sectors of the North Sea so and you are back 15% of this is in Scotland. We are not big investors in renewables in Scotland which is clearly one of the areas that we have almost no onshore wind in Scotland we do have two nuclear power stations in Scotland but they are a small part of power portfolio. So for us it’s not as impactful question as it is some other energy suppliers.
I'll let Chris speak to the first question which is around why we're confident and I think it's based on recent history that actually we can continue to take market share of the other large suppliers. Chris?
Yes. So when you look at the way the market is going at the momentum. We do lose to smaller suppliers they have gained more credibility I think over the last nine months with support in the media and some other stakeholders. But against the other six, we generally gaining week by week not against all of them, but against the majority of them.
So, there are two things that customers look for and which British Gas work on providing. One is service levels and our service levels have improved dramatically and that is important to our customers. And the other is price and we are being sharp on price.
Now going forward, we are looking at our brand strategy and how that might be developed to help us in the market, we are looking at channel strategy and I have already mentioned the cross sell. And the very interesting ones that we see coming through are around innovation. So in smart at the moment we are deploying 8,000 odd smart meters a week. We are in the middle trialing smart prepaid which will be a large development in the market so smart prepay will allow you to top up your smart meter from your mobile phone, you will be able to have alters around it, it will keep track of your usage more effectively and that could be quite a change in the market. So going forward we are optimistic and we would expect to have about 3,000 of those deployed by the year end.
And then if you put that together with the likes of Hive or even in summer months we are selling 1,500 a week I think there is a lot of scope for that innovation to support the energy sale.
And I think second part of your question was around network cost how is the ship sailed because of the agreement that have been reached I mean I think we saw yet yesterday’s announcement although very modest and not starting till April next year it’s a positive step in greater scrutiny of network cost and I think that is now happening and obviously it’s not just I think for the regulator it’s also something I think that the public accounts committee will start to take an increasing interest in. So now I think there is going to be continued scrutiny of very important part of customers bills and we will continue to make the case on behalf of our customers that any increase it should as low as possible despite yesterday’s announcement we still see increasing network charges next year.
Fine, let me ask Chris to talk about the financial impact of smart meters and you right that it will reduce operation cost but equally there is an installation cost and he will talk about how that flows through?
Yeah I think it's early days while the impact is smart meters for the impact on the operations to flow through into our cost basis to deploy 1 million to put them throughout our whole customer base we will have to flow about 16 million.
So you are not going to see that feeding through into our operational statistics for a year or so yet. And then you will start to see it in the margin. But it does reduce cost in a number of areas. So you do see an improvement in customer service you see lower complaints higher MPS, lower cools. So some of your ongoing operational costs are reduced and that then means it has back office knock on impacts. When you look at the deployment of a smart meter to and a customer, then the deployment the install cost for dual fuel customers is just over £200 the benefits that you get are around £50 per annum, half of which are in operational benefits. So that’s how it works at a per customer level but the effect wont feed through for a number of years until we get a higher portion of smart meters in our base.
I think your second question as I understand it was what will be the benefits the cost reduction program in direct energy and (inaudible) come all the way from North America, runs our North American business so we give an opportunity to ask that question [Mr. Laidlaw]?
Thank you. Sam?
We've got a very competitive environment in North America and so we have to taking quite a lot of action to address our competitive position in the marketplace. And we expect that the cost program will really result in improving our price proposition versus other competitors. And that's really how we expect the cost program to impact our businesses one around competitive positioning.
With respect to our financial projections next year, the single biggest driver will be the expansion in margins at (inaudible) and Nick has already spoken about where we are writing business today in the first half of this year on average 33% and 35% higher than we wrote in the second half of last year and indeed in most recent months our margin expansions C&I are at levels in terms of margins that we haven't seen since the beginning of 2012 and so we're very committed to same margin expansion in the second half of this year as well.
Unidentified Company Representative
And the BGB cost reductions, which are also well underway and the essential piece of that which is the [copay] we have introducing new systems in BGB. It is going to be complete third quarter this year and that's a big systems migration which will reduce our costs, we've already reduced the overall number of full time employees by some 300 people in that business. So that again as we have North America, some of that will be given to customers to ensure that we remain competitive in the marketplace but we would expect that some of that will also translate into improved margins for the business.
And your last question on disposals and dilution if you go across the four Ontario home services CCGTs in the UK, Trinidad and the windfarms they actually all broadly net out if you take them all together you have obviously got the Ontario home services is a profitable business $37 million of annual EBITDA. We quoted the wind we make around £50 million from the existing wind portfolio ignoring the Celtic Array write-off which is a one-off, but against that the CCGTs are losing £130 million plus in total, we are not saying them all but obviously that was certainly the big ones that make most of that Trinidad is largely a development opportunity and not a lot of existing production profits there so that doesn’t have a material impact so net-net that actually shouldn’t be that material.
(Inaudible). It’s a 100,000 down into the point of the IMS, it’s a 180,000 in the first half, what is it that will flip the switch so quickly?
Secondly in North America in DEB how long will it take to -- you talked about writing business at higher margins but presumably there is a lot of business that was already written at lower margins. How long does it take that all to watch through?
And then lastly, hopefully one that you could answer Sam, it struck me that in your presentation you told us about vertical integration quite a number of times, maybe with the benefit of the last few years and all the steps you’ve made, can you give us sort of just a few words on why you think that's so important?
Let me ask Chris to speak the first question around why is it that we have confidence that after and I think our retention has been good, but our sales have been lower than last year as Nick mentioned. So we talk about what we are going to improve sales in second half in services.
Services retention in H1 was about a point better than it was in H2 in 2013. So, we are quite pleased with how retention is going, it is the sales issue and sending more sales in the first half of the year were about 21% down in the same half last year.
That trend you see is seasonal. So in the summer, you do see, I mean for the last, I mean some of us (inaudible) services from the months. So when you see a reduction in sales and customer just because people aren't interested. So returning to the colder weather of winter and as I was talking about earlier, I think the new channels and products that we are going to put in place. You will start to see that business grow again over the last six months in the year.
I'm not saying we are going to get it back to the same customer numbers that we had at the beginning of the year to be clear.
And I think your last point probably was really around vertical integration and why we think it's important. I think there are number of dimensions to this. So firstly I think when we embarked upon the vertical integration journey, we were the only one of the big six if you like, that wasn’t vertically integrated and therefore in an environment of rising commodity prices, we were competitively disadvantaged and we're now at a point where our vertical integration is comparable to our peer group.
There is another reality that vertical integration actually reduces our requirement for collateral which we would otherwise have to place in volatile commodity markets and strengthen the asset base, so that we can go out and procure the sort of long-term gas contracts that we need. And it also helps us shelter customers from very volatile spikes in the wholesale market and we saw that particularly, if you like couple of years ago when we had Fukushima all of a sudden, the wholesale gas price went up by 20%. We hope that's not going to happen in new Ukraine but it is events like that, but the vertical integration give you the protection for. Now the question we're always asking ourselves is, are there ways in which we can do this for less capital and that's one of the reasons why we took the decision with the power stations, particularly as in power we see our competitors actually either closing power stations, because their coal stations or actually moving to a world of more fixed price power whether through capacity payments or whether through feed and tariffs. The benefit of vertical integration in power, I think is going to be less than it was, less essential than it was two years or three years ago.
Your question about the margins and when they will flow through, next year essentially. I mean you are typically writing 12 month contracts, typically you are writing and some of them start three or four months out. So we've been writing business at better margins since the polar vortex in the first quarter. So you will see it come through next year.
So after 12 months, you’ve effectively re-priced your entire book?
There are some slightly longer contracts and slight delay on start often but actual 12, 15 months.
Yes, this really is the second half of last year where in order to keep business we’re rising very low margin.
Andrew Mead - Goldman Sachs
This is Andrew Mead, Goldman Sachs. I'll ask couple of questions, want to start, I have got two. Can you just say the 1 billion disposal and you told it partly as a tying of the portfolio, I guess giving a target or a number of 1 billion is for the rating agencies. Can you sort of say why you think that's right number and the risk of whether you need to do more than or sell other assets in the next 12 months anyway that is potential returns back to shareholders.
So why is 1 billion the right number?
Andrew Mead - Goldman Sachs
Yes. We have had a significant amount of dialogue with the agencies, it's obviously ultimately their judgment as to what the credit rating applied to the company is. But based on discussions we've had, our judgment to what it will take in terms of the change of financial risk, what metrics we think we'll need to hit we believe the 1 billion will be sufficient?
Andrew Mead - Goldman Sachs
Do you know the timing as to when they'll review?
Well, Moody's started their review I think 91 days ago and they normally take 90 days, so soon. And S&P started about a month later, so they will be about a month later, towards the end of August probably.
Andrew Mead - Goldman Sachs
And I think this analysis and that I guess any one of you would be there next year on the panel to say whether the answer is right or not. But with regards to the CMA and also Scottish -- Scotland votes for independence, I guess the CMA leaves Scotland out for this review. Does that change your debate and arguments given you obviously got a little bit critical assets is going to turn to meet to that and I guess market share is slightly different.
The interplay between the CMA and Scottish independence I think is we have to take one step at a time and I think we’ll where that goes. So that's the hypothetical and then how the CMA would handle it…
Andrew Mead - Goldman Sachs
But do you know whether it’s definitely that they will still cover the Scotland if Scotland is out?
I will defer to graft on that.
I think we have to come back to on that. I'm not sure in terms of whether they're proceeding as to how they're going to proceed. So we’ll get back to you.
Edmund Reid - Lazarus
Edmund Reid from Lazarus, three questions. First one is on environment [essential] costs. Just wonder what they were or they will be for BGR in 2014 and your expectations on the information for 2015? The second question is what portion of BGR’s energy customers run standard variable tariff and how has that moved over the past few years? And then third question is kind of a follow-up on vertical integration. It seems that your strategy going forward is a lot less capital intensive then it has been historically. And I was wondering whether that was due to balance sheet constraints given what’s happening at the rating agencies or whether you felt that although vertical integration is important, perhaps you needed less of it now than you did a few years ago?
Let me pass on Nick Luff to speak to the expected cost on the bill of environmental and social cost this year and next, I'd make a sort of general statement that actually what we are continuing to see is very different between gas and electricity. So in electricity where we see the combination of the carbon flow, the feed and tariffs and rocks actually continuing to add cost pressure on the bill.
So, if you take into account the social tariff, the government is funding separately, then this year’s total if you think about light ball, our social environment cost should be roughly the same actually because ECO costs will be roughly the same year-over-year. There will be higher rocks and carbon cost in there but that will be offset by the social -- removal of the social discount. If you play that into next year, you’ve got rising network costs albeit possibly not as much as expected given what (inaudible) said yesterday and you have got further increases in carbon and rocks, then on ECO, we’ll see I mean I think hopefully we can manage the cost and maybe get that a bit lower next year than this year.
On capital intensity, of course I look at the business and try and decide what makes sense from a business point of view and Simon and Nick tell me whether I am allowed to spend it but -- so that’s where the balance sheet comes in. But I think in terms of the driver, it’s very business driven at the moment. We have a number of big inside projects that’s driving the main capital budgets, Cygnus in particular. And then you look beyond that and you say which projects do you want to bring forward and frankly in this gas price environment, it’s a time to be very disciplined about capital which is why we are not bringing those forward. And we have also said we are looking at the balance between Europe and North America. The acquisition that we made in Western Canada is performing very well ahead of expectations and we are beginning to get to groups with the different types of assets and resources we have there. So, I see a bit more of the capital going there but it very much is a time for keeping the budget tight.
And Ed, your central hypothesis on that point, but actually we are looking to achieve the vertical integration if you like through a less capital intensive, more capital light model both by switching some of the spent in North America and doing less of it and doing less in power is indeed correct. And that's what we signaled in February of our results and that remains absolutely the strategy, partly for the reasons I described earlier, because in a competitive sense as many of peers are not going to be integrated looking forward as they has been historically. But also of view that we're not going to have the same trajectory sharply rising gas prices that we've had over the last decade for the next decade.
So, those two in form that decision. I think your second question was around the, what percentage of customers are actually on standard variable tariffs. And I'll let Chris speak to that.
So, 76% of our customer base were on standard variable, the rest around in fixed term contract. To add to that, on new sales we are seeing about 60% of new sales being on standard variable about just under 30% being on a short term fixed, about 2% being on our January 2017 product. So, that's roughly the mix of the existing basis, sales we see at the moment.
Peter Atherton - Liberum
Morning, it's Peter Atherton from Liberum. If I look at through the earnings forecast at the moment, you said 21, 23 for this year, I think consensus for 2015 is probably going to drift down a little bit, as well maybe 23p. If we go back to a year or so forecast for 2015 were probably more like 28p, 29p maybe even. So this is sort of 6p, 7p gap opened up which is about 20%, 25% shortfall in expected profits. And I guess as far as your share prices are seen and how we value the business, the fundamental question is, how much of that gap is cyclical and how much is structural? And I guess we consider looking things like stories and say that was pretty structural. But I was wondering whether you could give us a top through of your businesses and the headwinds that they are facing and gives us your view of which ones are structural and which ones cyclical?
I mean and I will let Nick build on this but I think you are absolutely right, their storage actually is probably structural and that I don’t think we will get back to the 240 million we made in storage in its hayday if you like but that sort where we have come from. But you can see that the paradox of storage is that whenever you have actually very cold weather that ends up compressing the subsequent winter summer differentials and you end up with lower storage spreads and when you have warm weather they start to expand and they have expanded modestly we know they are anything very exciting at the moment so you are probably right that structural.
I think if you look at power generation which was another area where we used to make reasonable returns in that business in gas power generation. I think there is a big debate as to whether that is structural or cyclical, the arrival at capacity markets will help that business but whether it will actually just provide a present a cap I think remains to be seen but we would see that I think we’ll like to be cyclical given the shortage of capacity that currently exists and even with our restructured capacity market I think we will see an improvement in returns there ultimately overtime.
And then I think the other piece obviously is in British Gas clearly there has been margin pressure that will I think depend on our ability to price through in a competitive market if we can get back to growth in customer accounts numbers as Chris has described I think that will really help in the services business we will -- that actually drives growth.
The other piece of course is falling also prices impacted the upstream side of the businesses, Nick has touched on that sort of relatively heavily taxed but those are the big components.
So some of the 2014 it was weather, so and hopefully one-off. In that sense that was something that Polar Vortex and that a big part of downgrade is the gas price in your view as well as mine whether is that cyclical or is that going to come back but certainly the lower gas prices is what’s feeding currently to the lower upstream profits.
Peter Atherton - Liberum
And the U.S.?
So that is another weather effect, we would say the business in particular that's cyclical because we've seen in a benign commodity price environment we've seen margins get competed down but with the Polar Vortex reminding people this business carries risk players going to market firstly come out of the market we're writing business at much higher margins again.
So in that sense it's cyclical and is coming back already and just will take a while compared to the numbers
Peter Atherton - Liberum
So as a roof talking up there let's say you are suggesting that two-thirds is cyclical, one third is structural.
Depending on how you characterize the gas price reduction.
Yes. What's your view on that Peter?
Peter Atherton - Liberum
I wouldn’t disagree actually, but what do I know.
Just one question just on the RCF metric is in terms of your own actions obviously it's quite hard to work out while other (inaudible) do but are you working on your own actions that you talked about more to something like what 27, 28 rather than the 25 that used to be the metric they we are using?
(Inaudible) holding that, over 30.
Closer to 30
Over 30. Thank you.
Lakis Athanasiou - Agency Partners
Lakis Athanasiou, Agency Partners. Same three questions from me, but different. Get back on an earlier question on your tariffs. Can you say how much of your customer basis on your one year tariff, less than one year now, which is the one let’s say the 10% discount to your standard. Can you say how much of about would have been movement from your standard tariff cannibalization of your tariff for all the new customers coming in?
Second question on CapEx in E&P. 900 is too high obviously this development going forward next year just (inaudible). So there is going to be a significant chunk there of 2Cs, I would imagine even in this price environment or unless enrollment. You got the Canadian developments here, but do you in really, and really not 900 number much development of 2Cs in Europe?
And thirdly on debt. You will probably behind the current well collect maybe depending on what rate cases that which require you capital cash. So you're going to be looking to Chinese debt mix more to floating maybe sell off that maybe spot more fixed floating to different carry cost of much more collateral?
Let me take the first one, which was I think was around trying to disaggregate where we've been gaining and leasing customers. And I think that's exactly the sort of thing that we shouldn't be talking in publicly or we would be suggestion that was some form of test coordination that we probably about leave that one. But let me ask Mark to talk to the question of CapEx and 900 million for next year.
Yes. So I mean in broad numbers probably around 700 million is development spend, 100 million maintenance, 100 million is around numbers exploration. And of that 700 million a lot of that is with non-operated large projects like Cygnus, like Valemon. Those are still in flight those will be taking up a bulk of that. And then about a third is operated between the North Sea and Canada. And as I said we are targeting 100 million to 150 million of CapEx spend in Canada and that’s subject to obviously eco price but also how we developed it the TUC and some of that looks promising but it is obviously very price determined.
Lakis Athanasiou - Agency Partners
So are you suggesting you are not going to be looking at TUC developments in Europe over the next few years at all or what are…
For the next few years, as I said in the earlier answer I mean if you look at the gas price in the short term, it’s difficult in the North Sea to much scope for bringing on too many projects. Where that goes in the longer term, who knows. I mean I contrast let’s say medium term $5 Henry Hub with the cost of liquid fraction transport. It requires a 65 pence affirm UK price. So once we get over the glut of storage my guess is that we are going to head back towards those sorts of levels we need to take stock of that and also global supply and demand, so I don’t rule out European developments in the future, it’s just that we have got to be very choiceful about what we do short-term, but in the next year or two we do have (inaudible) project.
Unidentified Company Representative
When we talk about first intellectual and we’re strictly speaking, we need to be ready to post collateral, should prices move and the mark to market positions move. So, it’s actually more about liquidity than it is about debt levels. And it will be about making sure we had enough committed lines available rather than actually funding the company in a different way. You might have to issue debt and then sit with more cash on the balance sheet which actually will be quite inefficient, but you'd look to avoid that with committed lines and using bank guarantees and the like. So, it's more like that. And I would repeat, we are aiming and targeting to retain the ratings. So, it would be an issue.
It's actually [Thomas from Soc Generale]. I guess the question is for Mark. If gas prices stay low, I assume the production guidance is given on the basis of Morecambe running, where the gas prices were high or low. If we look at Sato, with their flexible fields like (inaudible) that made the active decision to lead the gas in the field. Have you assessed whether there could be value accretion in reducing production guidance for the flexibility, you have got in Morecambe and potentially taking that gas out later?
Unidentified Company Representative
Obviously we do time to time look at whether it makes sense, we've obviously got a half, you have got to make some kind of assessment of the technical response of the field to resting the field as that give you an uplift or do you get the gas in 15 years time or do you get in one year’s time, so that's quite a tricky one to handle. And you've also got to have a view about forward gas prices and we look at that question and so far we haven't seen a clear case for leaving the gas on the ground.
Martin Brough - Deutsche Bank
It's Martin Brough from Deutsche Bank, three questions, I think hopefully (inaudible) forward. One was just any idea what the volumes sort of being further, gas mainly, gas and power in the UK with seasonal normal temperature because obviously its’ a lot mild over the last year. It wasn't that much warmer than normal over the first half as a whole.
Second question was, could you just give us a bit more detail on the nature of the exclusivity with the Nest deal in North America, is it -- what stake out make out of that exclusive details, I think Nest two parties still we sold separately but obviously there is an exclusive arrangement at some sort.
And then thirdly in terms of thinking about generally how you are starting the terms of the scrip, the dividend, sort of how long will this pricing window be, will it be pricing to make it relatively attractive in terms of the option in that or you would be trying to price it with a fairly short window to make it a bit more neutral in terms of likely take up.
Unidentified Company Representative
I think there is a seasonal norm point.
Unidentified Company Representative
From memory it was about 20% higher I guess than last year because of the very low temperature, so you are right, it's only 24% reduction this time only 4%, 5% of it is because of the temperature being greater than seasonal norm. So the balance…
Unidentified Company Representative
The exclusivity of Nest, and I should make point that it doesn't -- in the Northeast, it doesn’t look Texas.
Unidentified Company Representative
The Nest relationship, we are the exclusive retail competitive provider in terms of bundling the Nest from a stat with our energy offer in all the markets we do business in the Northeast and Alberta it does not currently include Texas, that's for 18 months.
Unidentified Company Representative
And on the Scrip question I would not tie the hands of my successor too much. So I am sure we will do it in a conventional way. We have a lot of retail shareholders so there is a mechanic to it we would have to make sure they have time to make a decision. So we'll work out with detail on the mechanics over the next few months.
Mark Freshney - Credit Suisse
It’s Mark Freshney from Credit Suisse. Just with regards to the sanctions that are going on against Russia, have you looked to your exposure there? And if a further round of sanctions go and what could be the impact on your hedging and physical supply agreements. And just secondly, is it fair to say that the Scrip is not ideal, and as far as you cut CapEx in the upstream, next year you would generate large amounts of cash flow there is not a buyback you delevered your interest charge, goes earnings go up. And you are still doing a scrip so presumably for future management team on the future Board there is a big question as to capital deployment next year and thereafter.
Let me deal with the Russian one. I'll ask Nick to cover second one I'll come back on it too. I think in terms of dependency on Russia it is a contract that we have with Russia its very small part 5% of our requirement. And therefore we wouldn't expect it to be a significant change in our supply position where sanctions to be imposed but we think it's extremely unlikely at the moment that sanctions would go that far given the fact that the UK is much less dependent on Russian gas than southern or Eastern Europe and certainly Germany with typically a 30% dependency on Russian gas. And I think that's going to clear a question for European governments as to the extent of which they want to make that sacrifice in order to make the strong and important political point. And if they were to conclude that sanctions were the right answer, obviously we would comply with them. But I don't think it will have very significant impact on our business this winter.
Your question around the Scrip, is it ideal, I mean this is something that many other energy companies do. You are right, they will building improving cash position next year. But we still think it’s the right thing to do what it does for the next year.
Yes. So I mean I think is (inaudible). You could see, I mean actually we demanding on the current metrics and they give you time to get there. But it will possibly take us a little time to get that. But you're right, and as Sam said the business is cash generative and just by the disposal proceeds return in those in the business having lower option in CapEx. We will be reducing debt that will give financial flexibility and which is a good thing and that will give new management team choices to make and how to use that financial flexibility; it may just a little bit time to get there.
Mark Freshney - Credit Suisse
One other thing is come out the Barclays rights issues, they were lots of fees being paid to entities in Qatar, questionable fees. And you've got lots of feelings with Qatar both as a purchaser and as a current investor in North America. Have you got any similar sorts of arrangements and how have you managed the risk around that?
The short answer to your question you will relieved to hear is none whatsoever. We have a very straight forward relationship with the Qataris as buyers of gas in the way that many other companies around world do, and they were straight forward they have been terrific partners for us. We have a very good relationship with them in Canada they are co-investors on a straight up basis but with the spend any form of scrutiny and transparency you want to put against it so and I think they have been great partners for us.
Mark Freshney - Credit Suisse
Okay, thank you.
So I think with that as it’s 11 O’clock let me just thank you for all your support and interest over the years. We’ve got a lot to do over the next six months as hopefully the presentation showed which I and the team are committed to delivering and again to thank Nick for all his support. And I am sure you will all be back here equally interested in February.
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