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17 May 1996
MOODY'S DOWNGRADES LONG TERM DEBT RATING ON SENIOR DEBT OF BRITISH GAS PLC TO A3 FROM A1; SHORT TERM RATING LOWERED TO PRIME-2 FROM PRIME-1
London, 05-17-96 -- Moody's Investors Service has lowered the long term senior debt ratings of British Gas plc and its subsidiary debt guaranteed by the parent, to A3 from A1and lowered the short term rating to Prime-2 from Prime-1. Moody's said that British Gas may bear the full impact of deregulatory pressures in the UK and coincidentally is subject to measured regulatory actions in its monopoly transportation and supply businesses which could threaten a substantial amount of cash flow and earnings. These rating actions conclude a review initiated on January 29, 1996. The rating outlook remains negative.
This week the UK regulator, Ofgas, published its consultation document for the 1997 price control review of British Gas' Transportation and Storage businesses, covering the period April, 1997 to 2002. Ofgas has put forward its view of the proper regulatory principles to be applied in the regulation of British Gas' UK pipeline system; however, its findings would have widespread negative ramifications on the wider British Gas context.
Ofgas rejects the view that British Gas should recover from its customers the full "current cost accounting" (CCA) value of depreciation on assets valued at œ17 billion on a CCA basis. Currently Ofgas finds the regulatory value of the assets is only about œ10 billion. It proposes to substitute a system which allows British Gas to recover an imputed present value of capital expenditures actually made on the system. The impact of the change would be a material reduction in cash flow and reported historical cost earnings. Adoption of Ofgas' position would create an effective cash ringfence around the regulated pipeline system and allow British Gas TransCo a future recovery of funds via depreciation when capital expenditures are needed on the transmission and storage network. In theory the proposed change could be protective for bondholders. However, in the short-to-medium term the impact is negative. This is because of the pace and materiality of the proposed shift in the context of British Gas' ongoing investment plans in international exploration and production (E&P), when assets are underperforming. Also, British Gas is facing exposure to deregulatory pressures in the UK gas market. Ofgas projects net cash flow to pay interest and dividends of œ340million in 1997 in a mid-case scenario which compares to British Gas' actual spend of œ930m in 1995. In a deregulated market,after the demerger, servicing of their debt would have to be met by a substantial recovery in E&P earnings, very large cost reductions or by additional debt.
In 1997 British Gas intends to demerge its business into two separate and independent companies , TransCo International (TI) and British Gas Energy (BGE). TI is to hold the gas transportation and storage business, exploration and production (excluding the Morecambe gas fields), power generation, and global and other businesses. BGE will hold all of British Gas' trading businesses, while a subsidiary of BGE, British Gas Trading (BGT), will hold the assets, liabilities, rights and obligations of the British Gas supply business, including the Morecambe gas fields, as well as the gas supply contracts. British Gas envisages that TI will retain most of the existing British Gas debt, including all its public debt obligations. Under this scenario Moody's envisages that TI's leverage will increase substantially and TI will lose the current substantial contribution from the Morecambe gas fields. Moody's also takes the view that the outcome of a successful assignment of the gas supply contracts to BGT is far from certain because producers will take significant steps to preserve the contracts. Moody's said also that the fortunes of TI and BGT will be closely tied as BGT is expected to remain TI's largest customer by far.
Ofgas is due to announce its proposals for a revised supply price formula for the domestic market to take effect from April 1, 1997 to the introduction of full deregulation expected during 1998. Moody's believes that the present cost-of-gas recovery component will be under threat, lowering available net returns in the regulated domestic market.
Moody's said that British Gas currently enjoys a strong balance sheet and good debt protection measurements. However the company faces substantial threats over the medium term given the uncertainties outlined above.
Downgraded issues are:
British Gas plc- Eurobonds and debt issuance under its Euro MTN program
British Gas Finance Inc-guaranteed Notes and Debentures
British Gas International Finance plc--guaranteed Eurobonds
British Gas International Finance BV-guaranteed Euronotes, Eurobonds and debt issuance under its Euro MTN program
Commercial paper of British Gas plc, British Gas Capital Inc, and British Gas International Finance BV.
British Gas has its head office in London, England.
No Related Data.
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