Centrica sells shares to help cut debt

In a move which has shocked the market, British Gas parent company Centrica announced it will issue around 350 million additional shares to raise £700 million, in an effort to reduce its debt.

The energy giant will use the proceeds to fund the acquisition of Neas Energy – an energy trading business – for £200 million and a planned £150 million acquisition of a consumer-facing business.

The remaining will be used to reduce debt by £350 million, ahead of a decision by Moody’s ratings agency, expected in mid-May, on whether to downgrade it from its current Baa1 rating.

In a statement, the company said it “continues to target its current strong investment grade credit ratings of Baa1 with Moody’s and BBB+ with Standard and Poor’s”.

Moody’s analysts said: “In isolation, the debt reduction will improve Centrica’s funds from operations to net debt by less than 2 percentage points and retained cash flow to net debt by 1 percentage point, with some additional benefit likely from the cash flow of the acquired businesses,” they said.

“However, the equity issuance is the latest in a series of significant actions taken by Centrica’s new management team to strengthen the company’s balance sheet, which have also included a 30 per cent reduction of the dividend, the introduction of a scrip alternative and the issuance of a £1 billion hybrid bond in 2015.”

GRAPH: Evolution of Centrica’s adjusted net debt

Source: Moody’s

The move came as a surprise to analysts, and upset some in the market who were not expecting it in the near term.

Whitman Howard utilities analyst Angelos Anastasiou said: “The capital raise was a surprise, and so the subsequent 10 per cent fall in the shares was not necessarily that unexpected.”

However, he added: “The move should remove any near term credit issues and, we believe that the shares should once again edge better once the impact of the share issue has been digested.”

Meanwhile, analysts at Citi downgraded Centrica from ‘buy’ to ‘neutral’, expressing concern that the company is “increasingly looking for growth through acquisitive means”, which the group sees as a risk to the shares.

Centrica announced in July last year a multi-billion pound strategy shift away from its loss-making upstream gas and power businesses and towards core customer-facing activities.

Chief executive Iain Conn said at the time that the company will capitalise on the “increasing trend” in supplying business energy customers with advanced efficiency services and will also adapt to the way its residential customers are shifting towards the use of integrated home technologies. 

Iain Conn is speaking at the Utility Week Energy Summit on July 5 in London. For details, visit: www.uw-energysummit.net