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Rating Action:

Moody's affirms Centrica's ratings; stable outlook

14 Mar 2019

London, 14 March 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Baa1 issuer rating and Baa3 junior subordinate rating of Centrica plc (Centrica). Concurrently, Moody's has affirmed Centrica's Prime-2 commercial paper rating. The outlook remains stable.

The rating action follows the company's preliminary results announcement on 21 February 2019, which reaffirmed the company's disciplined financial policy while signaling the likelihood of weaker cash flow in 2019 following the introduction of retail price caps in the core UK market.

A full list of affected ratings is provided toward the end of this press release.

RATINGS RATIONALE

Centrica's ratings reflect, as positives, the company's leading position in the UK retail energy supply market, its diversification across the UK, Ireland and North America and across energy supply, energy services and gas production, and its track record of executing cost reductions and asset disposals to bolster its balance sheet. However, credit quality is constrained by persistently weak trading conditions across many of Centrica's key segments and its increasing focus on retail and services businesses, which reduces the diversification of its cash flows and debt capacity.

Profits and cash flows have weakened for many of Centrica's key businesses in recent years. Retail energy supply in Great Britain has faced intense competitive pressure, resulting in an 18% reduction in energy supply accounts and 16% fall in operating profits from household energy supply since 2015. Competitive pressure in North American business energy supply has been compounded by temporary margin reductions because of rising capacity costs, which has reduced segmental operating profit by more than 30% since 2015. Growth in UK home services has been weaker than anticipated. Operating losses in Distributed Energy & Power and Connected Home, which the company regards as key drivers of future growth, have also reduced Centrica's funds from operations (FFO) over the period.

The Baa1 issuer reflecting reflects the fact that Centrica has achieved steadily improving credit metrics, despite these pressures, as a result of substantial reductions in leverage. Including Moody's adjustments, net debt fell to GBP 3.9 billion in December 2018, based on unaudited preliminary results, from GBP 7.7 billion as of December 2014. As a result, Centrica's ratio of FFO to net debt has improved to around 44% in 2018 from 30.9% in 2014, and retained cash flow (RCF) to net debt to around 29% from 19.4%. The reduction in net debt reflects the company's highly disciplined financial policy, demonstrated by a dividend reduction and introduction of a scrip alternative in 2015, the sale of equity in 2016, and the retention of proceeds from asset disposals.

In February 2019, Centrica announced that it expects cash flow to weaken further in 2019 as a result of factors including the partial re-regulation of household retail energy prices in Great Britain, which took effect on 1 January, lower dividends from its nuclear joint venture as a result of low output, and the timing of tax payments. However, the company also announced a series of measures that will significantly offset pressure on key credit metrics, including a GBP 750 million cost reduction programme to be achieved over the next three years and non-core asset sales of GBP 500 million in 2019, and signaled that the dividend could be reduced at the time of half-year results in July 2019, which would improve RCF in 2020.

The Baa1 issuer rating is constrained by Centrica's increasing focus on less asset-intensive services businesses. The large majority of Centrica's remaining long-term assets are associated with its nuclear investment, which the company has designated as non-core and intends to sell by the end of 2020, and its gas production assets, which the company contributed to a joint venture in 2018 and has indicated may ultimately be sold.

RATIONALE FOR THE STABLE OUTLOOK

Moody's estimates that FFO/net debt in 2019 will fall to the mid-30s, in percentage terms. RCF/net debt will fall to around 20% if scrip takeup is in line with historical averages and the company does not reduce its interim dividend. These ratios are broadly in line with Moody's prior expectation, but below the rating agency's revised guidance for the Baa1 ratings that FFO/net debt should not fall persistently below 40% or RCF/net debt below around 30%. Moody's has increased its guidance for the Baa1 rating to reflect the more difficult competitive and regulatory environment and resulting increase in Centrica's business risk.

The stable outlook reflects Moody's expectation that metrics will strengthen from 2020 as a result of announced cost savings and further reductions in net debt following asset disposals planned for 2019. The stable outlook also reflects Moody's expectation that any weakness in FFO will be offset by appropriate reductions in dividends in order to achieve guidance for RCF/net debt beyond 2019.

Moody's expects that any further reduction in Centrica's diversification or asset base, particularly as a consequence of a divestment of the nuclear or E&P joint ventures, would be offset by further measures to strengthen the balance sheet.

FACTORS THAT COULD LEAD TO AN UPGRADE/DOWNGRADE

Positive rating pressure is not currently anticipated given competitive and regulatory pressures in the British retail energy market and the business risk associated with Centrica's transition to a customer-facing and service-led business model.

The rating could be downgraded if Centrica's FFO/net debt appeared likely to fall persistently below 40% or its RCF/net debt below around 30%. The rating could also be downgraded if the company adopted a financial policy that appeared to favour shareholders over creditors, or if asset sales reduced the scale and diversification of Centrica's business without a commensurate reduction in leverage.

Following the partial re-regulation of retail energy supply in Great Britain, future rating actions will also take account of any changes in the political and regulatory framework.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Centrica plc

....LT Issuer Rating, Affirmed Baa1

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa3

....Senior Unsecured Bank Credit Facility , Affirmed Baa1

....Commercial Paper, Affirmed P-2

.... Other Short Term, Affirmed (P)P-2

....Senior Unsecured MTN Program, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Outlook Actions:

..Issuer: Centrica plc

....Outlook, Remains Stable

Centrica plc is the UK's largest energy supplier. It provides gas and electricity to residential and commercial customers, mostly under the British Gas brand. The company also provides energy-related services, mainly comprising maintenance and repair. In North America, Centrica supplies energy to commercial and residential customers via its Direct Energy subsidiary.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Graham Taylor
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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