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Centrica plc -- Moody's affirms Centrica's ratings, maintains negative outlook

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Rating Action: Moody's affirms Centrica's ratings, maintains negative outlookGlobal Credit Research - 14 Dec 2021 London, 14 December 2021 -- Moody's Investors Service (Moody's) has today affirmed the Baa2 long-term issuer and senior unsecured ratings, and the Ba1 junior subordinated debt ratings of Centrica plc (Centrica). The outlook remains negative. A full list of affected ratings is provided towards the end of this press release.RATINGS RATIONALE The rating affirmation follows Centrica's announcement on 8 December that the subsidiaries of its 69%-owned Spirit Energy have entered into agreements to sell the Spirit Energy's Norwegian oil and gas exploration and production (E&P) business to Sval Energi AS and its interests in the Statfjord field to Equinor ASA [1]. The transaction has a headline consideration of USD1,076 million (equivalent to GBP800 million), which will be reduced for net cash flows generated by the business since 1 January 2021, adjusted for tax payable on these cash flows. Centrica said that the business under consideration generated GBP376 million of net cash flows in the 10 months to October 2021. The sales are subject to shareholder as well as various regulatory approvals, with expected completion in the second quarter of 2022. The disposals are a further step in the delivery of Centrica's strategy to focus its activities predominantly on customer-facing less carbon-intensive businesses in the UK and Ireland. Following the transaction, Centrica's exposure to E&P activities will significantly decrease as the sales will result in a 92% reduction in Spirit Energy's oil and liquid reserves and a 38% reduction of its gas reserves. Moody's considers that the sale of part of the E&P business will reduce Centrica's exposure to commodity markets and carbon-intensive activities, but it will also further decrease the company's scale and diversification. At the same time, and given costs associated with the transaction, such as a total of GBP180 million in costs of closing commodity price hedges and GBP118 million in certain notified tax claims, the main financial benefits from the disposals will stem from the reduction in Centrica's future obligations related to capital expenditure and decommissioning liabilities. In particular, the company will transfer GBP0.8 billion in pre-tax decommissioning liabilities to the buyers. Centrica expects to continue to consolidate the remainder of the E&P business of Spirit Energy, whose future strategy will be to minimise further investment in oil and gas exploration and development, and to utilise cash from these activities to meet, and de-risk decommissioning obligations in respect of the remaining portfolio in the UK and the Netherlands. Future cash flows will be retained within Spirit Energy until projected future pre-tax decommissioning costs are 1.5 times covered. As of end-December 2020, pre-tax decommissioning liabilities of the remaining business, which has a reserve life index of around 5 years, stood at GBP1.2 billion. Centrica said that it will continue to assess opportunities to exit from its remaining oil and E&P activities over time. Moody's notes the challenging operating conditions in Centrica's key markets of operations. Since the beginning of September, 24 energy suppliers have ceased trading and one energy retailer was put into a special administration. The wave of energy supplier failures is unprecedented for the industry, with a potential for further bankruptcies in the coming months. The fall in the number of energy retailers will lead to market consolidation and reduced competition for Centrica, which took over around 0.5 million of customers under the supplier of last resort scheme since the beginning of September. However, the sharp increase in commodity prices and energy supplier failures will bring significant costs and increase working capital requirements. While Centrica should be able to recover any such costs, this will not be before April 2022 and there remains some uncertainty around the timing of any cost recovery pending a review of the price cap methodology by Ofgem, the energy regulator for Great Britain. Against this backdrop, the rating affirmation recognises Centrica's strong liquidity and balance sheet. As of end-June 2021, the company held GBP3.2 billion in unrestricted cash and had access to GBP3.2 billion in undrawn committed bank lines containing no MAC clauses or financial covenants. Centrica's reported net debt amounted to GBP0.1 billion. Overall, Centrica's Baa2 rating is underpinned by (1) the company's leading position in the UK supply segment; (2) a well-established brand and market position in the services division in the UK; (3) the company's prudent hedging policies and track record as well as stated commitment to strong credit quality; (4) the current low financial leverage; and (5) strong liquidity. These factors are balanced by (1) a difficult operating environment in the UK retail supply; (2) Centrica's exposure to competition across its different business segments of operations; (3) the company's fairly low margin compared with utility businesses, albeit this is somewhat offset by limited investment requirements; (4) exposure to commodity markets and weather patterns; (5) the presence of the loss-making businesses that are yet to bring positive cash flows; and (6) the expected fairly material payment obligations related to pension and decommissioning liabilities over the medium term. The Ba1 long-term rating on the hybrid securities, which is two notches below the long-term issuer rating of Baa2 for Centrica, reflects the features of the hybrids that receive basket 'C' treatment, i.e. 50% equity or "Hybrid Equity Credit" and 50% debt for financial leverage purposes. RATIONALE FOR THE NEGATIVE OUTLOOKThe negative outlook recognises the current challenging operating environment in Centrica's main markets of operations, including in energy supply in the UK.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS A rating upgrade is unlikely in the near term given Centrica's business mix and its exposure to continued regulatory and competitive pressures. The outlook could be changed to stable if there was sufficient clarity on any changes to the operating and regulatory environment and it appeared likely that Centrica will be able to maintain financial metrics commensurate with a Baa2 rating level. Downward rating pressure could arise if Centrica appeared unlikely to maintain a financial profile in line with the current ratings, namely funds from operations (FFO)/net debt above 35% on a sustainable basis. This ratio guidance could be, however, revised in the context of the evolution of the UK energy supply market. In addition, Centrica's ratings could come under downward pressure if (1) the company's liquidity were to materially deteriorate; (2) there were adverse regulatory or market developments in Centrica's main markets of operations; or (3) the size of the decommissioning liabilities were to increase relative to the size of the company's earnings. The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. LIST OF AFFECTED RATINGS Issuer: Centrica plc Affirmations: ....LT Issuer Rating, Affirmed Baa2....Junior Subordinated Regular Bond/Debenture, Affirmed Ba1....Senior Unsecured Bank Credit Facility, Affirmed Baa2....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2Outlook Actions:....Outlook, Remains Negative 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 addition to supply and services businesses, Centrica holds a 69% stake in Spirit Energy and a 20% interest in Electricite de France's eight nuclear power stations in the UK. REGULATORY DISCLOSURES For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004. For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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. The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235. The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com. REFERENCES/CITATIONS [1]https://www.londonstockexchange.com/news-article/CNA/proposed-sale-of-spirit-energy-s-norwegian-assets/15241154Please 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. Joanna Fic Senior Vice President 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 Paul Marty Senior Vice President/Manager Infrastructure Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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