Moody’s takes dim view of Direct Energy sale by Centrica

Moody’s has changed its ratings outlook for Centrica from stable to negative, following the British Gas owner’s decision to sell its North American retail business.

In its half-year results published last week, Centrica revealed it had struck a deal with US-based NRG Energy to sell its North American retailer for $3.625 billion (£2.85 billion) as part of its efforts to focus more on the UK and Ireland.

However, Moody’s said while the disposal will improve Centrica’s financial metrics, the reduction in diversification and scale will weaken its business risk profile, citing the fact that the North American business accounted for more than a quarter (26 per cent) of Centrica’s adjusted operating profit in 2019.

“Notwithstanding robust competition, Direct Energy’s performance has been supported by strong retail energy supply margins relative to Centrica’s UK business, where profitability has been hit by the introduction of a price cap and increased competition. While energy supply to North American business customers has been subject to greater working capital volatility, it has also been a positive contributor to Centrica’s earnings and cash flows”, Moody’s said.

The ratings agency also expressed concerns about Centrica’s plans to divest is oil and gas exploration and production business, Spirit Energy, as well as its nuclear assets, both of which have been paused due to falls in the commodity markets and Covid-19.

Moody’s said that although Centrica’s exposure to commodity markets will decrease and its credit metrics will be bolstered by the sale of Direct Energy, there is uncertainty around the extent and sustainability of the improvement in its financial profile and reduction in debt.

Earlier this week, a City analyst told Utility Week that Centrica’s deal to sell Direct Energy “undervalues” the North American business.

Lakis Athanasiou, a utilities analyst at Agency Partners, believes the price reflects a lack of confidence in Centrica’s abilities to manage its overseas business.

Athanasiou said: “Centrica really did not have much of a choice, given the offer made, but to sell Direct Energy. I believe $3.6 billion undervalues the business but it is very likely to be ahead of the consensus view, roughly $2.2 billion derived from last week’s share price of 40p.

“The reasons for the low market valuation is the market has lost confidence in the company’s ability to manage these assets and is therefore valuing it on low current earnings with a low multiple.”