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Rating Action:

Moody's assigns (P)Baa3 rating to hybrid notes issued by Centrica; stable outlook

24 Mar 2015

London, 24 March 2015 -- Moody's Investors Service has today assigned a provisional (P)Baa3 long-term rating to the proposed Euro Dated Subordinated Resettable Fixed Rate Notes due 2076 and the proposed Sterling Dated Subordinated Resettable Fixed Rate Notes due 2075 (the Hybrids) to be issued by Centrica plc (Centrica). The outlook on the rating is stable, in line with that of Centrica's Baa1 senior unsecured debt rating.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the Hybrids. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

The (P)Baa3 rating assigned to the Hybrids is two notches below Centrica's senior unsecured rating of Baa1, reflecting the features of the Hybrids. The instruments have a long-dated maturity (60 years or more), are deeply subordinated and Centrica can opt to defer coupons on a cumulative basis.

In Moody's view, the Hybrids have equity-like features that allow them to receive basket 'C' treatment (i.e., 50% equity or "hybrid equity credit" and 50% debt for financial leverage purposes). Please refer to Moody's Cross Sector Rating Methodology "Hybrid Equity Credit" (March 2015) for further details.

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_156230

As the Hybrids' rating is positioned relative to another rating of Centrica, a change in either (1) Moody's relative notching practice or (2) the Baa1 senior unsecured rating of Centrica, could affect the Hybrids' rating.

Centrica's Baa1 rating reflects the company's well-established position in the energy supply market in the UK, diversification across a number of geographies and business lines throughout the energy value chain, and its sizeable oil and gas exploration and production businesses.

The rating is constrained by recent weak trading, driven largely by lower energy prices, which has resulted in weaker financial metrics in 2014. The Baa1 rating factors measures announced by Centrica to bolster its credit profile, including capital expenditure and operating cost reductions and a 30% dividend cut. Progress on the company's GBP1 billion disposal programme, has been slow given difficult market conditions and the company is now unlikely to achieve the targeted proceeds. Nevertheless, the proposed hybrid should provide additional support to the company's capital strengthening measures.

The rating also factors continuing political, regulatory and competitive risks to Centrica's energy supply business. Moody's expects that the Competition and Markets Authority's ongoing investigation of the British energy market will produce provisional recommendations in May or June 2015. This report, or changes in government policy following the May 2015 general election, may result in interventions that promote competition to the detriment of Centrica's profitability.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's view that the measures already announced by the company should support a recovery of its financial profile, despite weak energy prices and tight generation margins, such that it meets the guideline metrics for the Baa1 rating category of RCF/net debt of in the mid-twenties and FFO/net debt of in the mid-thirties in the intermediate term.

A strategic review, also announced by Centrica in February and expected to conclude by July, will include a review of the company's portfolio and financial framework and may lead to further actions to support the credit profile.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive pressure could develop on the rating if the company were to implement measures and/or the operating environment were to improve such that the company was well on track to achieve credit metrics in line with guidance for the A3 rating category of FFO/net debt in the high forties and RCF/net debt in the low-to-mid thirties in percentage terms. This would assume no major deterioration in the business profile of the company.

Negative pressure could develop on the rating if it appeared that the company was unlikely to improve its financial profile to the point where it met the guideline metrics for the current Baa1 rating category. This inability could be the result of deteriorating business conditions or adverse regulatory or political actions that severely affected Centrica's earnings or business risk profile.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Centrica plc, headquartered in Windsor, England, is the leading supplier of energy and related services to domestic, commercial and industrial customers in the UK, mostly under the "British Gas" brand. Centrica is also involved in gas upstream, storage and electricity generation activities, and is an energy supplier in North America. In 2014, Centrica reported revenues of GBP29.4 billion.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Helen Francis
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's assigns (P)Baa3 rating to hybrid notes issued by Centrica; stable outlook
No Related Data.
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