Centrica loses long-term A-grade credit rating

Centrica’s credit rating has been downgraded by a major ratings agency despite the company’s radical strategic overhaul outlined last week.

Standard & Poor’s said it has taken the decision to cut Centrica’s long-term credit rating from A- to BBB+ due to “the tough market environment” faced by its core business.

Last week Centrica announced plans to implement a billion pound strategy shift away from its centralised generation and upstream oil and gas assets towards its customer-facing activities. But S&P warned that weak energy markets and strong political pressure on the retail market could hit Centrica’s credit ratios across its vertically integrated business chain.

“We expect the operating environment will remain tough because of subdued power and gas prices in the UK and low commodity prices in the upstream business,” S&P said.

Centrica will be making heavy investment cuts to its upstream business to protect the company against the difficult market conditions in E&P but the rating agency adds that by scaling back in this area Centrica will rely more on long-term supply contracts and the wholesale market rather than its beneficial ‘natural hedge ratio’ as its own supply reserves deplete.

In the retail market Centrica’s supply arm British Gas is poised to face increased competition and a possible erosion of its strong market share. Although political risk has decreased following the Conservative party win in May’s general election, the Competition and Markets Authority (CMA) could still call for tough measures as part of its ongoing investigation.

“Centrica remains the most exposed of the ‘big six’ UK energy suppliers to potential remedies following the CMA’s preliminary findings. In 2013, Centrica derived roughly one-quarter of its operating profit from UK residential gas and power sales,” the agency said.

The company could see further cuts to its credit rating if its business risk profile weakens further, S&P warned.

“This could occur, for example, if operating margins in the UK retail business were to weaken beyond our base case, if customer turnover were to significantly increase, or if the CMA remedies materially affect Centrica’s residential retail earnings,” S&P said.

But despite the pressure on its business model Centrica has for now avoided the plunge to a BBB- rating by maintaining what S&P refers to as a “satisfactory” risk profile helped by its strong market position in retail supply, geographical diversification in North America and “constructive outcome” of the strategy review.

“We consider Centrica’s business risk profile to be at the stronger end of the ‘satisfactory’ category,” S&P said.