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British gas owner stirs market concern as oil falls: U.K. credit

18 December 2014 18:16 (UTC+04:00)
British gas owner stirs market concern as oil falls: U.K. credit

By Bloomberg

Centrica Plc, the biggest supplier of energy to U.K. households, has little to celebrate this Christmas.

The British Gas owner, which cut its earnings outlook in November, is facing pressure from tumbling oil prices, a competition probe and the prospect of a tariff freeze if the Labour Party wins the May election. Moody’s Investors Service and Standard & Poor’s say Centrica is at risk of a ratings downgrade.

“It doesn’t look good,” Andrew Moulder, an analyst at CreditSights Inc. in London, said in a telephone interview on Dec. 3. “It’s still a very uncertain time for them.”

The cost of insuring Centrica bonds against default has risen 8 percent this year, compared with a 13 percent decline in the Markit iTraxx Europe Index of credit-default swaps. Centrica has lost almost a quarter of its stock-market value in 2014. SSE Plc, which is less dependent on producing oil and gas, gained 17 percent. Centrica pound bonds yield 132 basis points over benchmark government debt, Bank of America Merrill Lynch indexes show. The spread on SSE bonds is 123.

Centrica is pinning its hopes on a new chief executive officer, Iain Conn, who joins in January from BP Plc. He replaces Sam Laidlaw, who is retiring after almost a decade at the helm.

‘Significant Reduction’

Conn takes over a company that saw its first-half profit fall by a third. In the latest in a series of profit warnings this year, Centrica said in November mild weather and outages at nuclear plants it partly owns would hit full-year earnings.

Centrica now expects adjusted earnings per share to be in the range of 19 pence to 20 pence, down from 26.6 pence in 2013. It plans to dispose of some money-losing assets such as gas- fired power stations.

The Windsor, England-based company said last month it expects a “significant reduction” to earnings at upstream operations -- oil and gas extraction -- next year amid a slump in oil prices.

Crude oil has fallen almost 50 percent over the past six months to about $60 a barrel. Every $10 drop costs Centrica 0.7 pence of earnings per share, estimates Dominic Nash at Macquarie Capital Ltd. in London. The company’s shares rose 0.3 percent to 267.40 pence by 11:29 a.m. in London.

‘Execution Risk’

Regulatory uncertainty is also clouding the outlook as the Competition and Markets Authority investigates whether the so- called Big Six suppliers, which also include Iberdrola SA’s ScottishPower, EON SE, RWE AG’s nPower and Electricite de France SA’s U.K. unit, profited from excessively high tariffs. The probe followed Labour leader Ed Miliband’s 2013 pledge to freeze energy prices if elected.

Fitch Ratings affirmed Centrica at A- with a stable outlook on Dec. 15, citing “measures taken to protect the balance sheet from the impact of lower oil prices” including budget cuts and asset disposals valued at 1 billion pounds ($1.6 billion).

Moody’s and S&P also rank Centrica the fourth-lowest investment grade, but say the outlook is negative, meaning its rating could be lowered.

That reflects “execution risk relating to its disposal strategy and the uncertainty surrounding the outcome of the review by the CMA,” Helen Francis, a senior credit analyst at Moody’s in London, said by phone. “The company is exposed to negative competitive and regulatory pressures in the U.K.”

The ratio of funds from operations to debt may well dip below the 45 percent threshold that S&P uses to determine credit ratings, should earnings disappoint, according to analyst Mark Davidson.

Alan McLaughlin, a Centrica spokesman, declined to comment on its ratings when contacted by Bloomberg News.

“Besides the new management team, the company doesn’t have much to celebrate,” Nash at Macquarie Capital said.

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