TEXT-Fitch affirms Centrica plc at 'A'; outlook stable
Dec 18 - Fitch Ratings has affirmed Centrica plc's (Centrica) Long-term Issuer Default Rating (IDR) and senior unsecured notes at 'A' and Short-term IDR at 'F1'. The Outlook on the Long-term IDR is Stable.
The affirmation reflects Centrica's well-diversified business profile in terms of operations across the energy value chain and the group's strong financial profile. Centrica also has a lower proportion of mandatory capital expenditure in comparison with peers, which leaves management scope to align its strategy to changing economic conditions and government policy.
- Financial Profile in line with Ratio Guidelines
Fitch calculates funds from operations (FFO) adjusted net leverage of 1.9x and FFO fixed charge cover of 8.4x for the year ending December 2011. The agency forecasts FFO adjusted net leverage close to 2x and FFO fixed charge cover around 8x over the rating horizon. This projection includes the acquisition of upstream assets from Statoil for GBP1bn, ConocoPhillips for GBP142m and Total for GBP129m.
- Flexibility to Adjust to Marco-Environment
Centrica's ratings take into account the following aspects:
- The group has advantages over peers in terms of gas procurement, due to own upstream exploration and production assets and scale of the operations.
- Its retail brand, British Gas, enjoys wide recognition and continues to invest in maintaining good levels of customer service.
- Centrica has a diversified generation portfolio of gas-powered generation plant, nuclear, windpower and some coal capacity contracted from Drax. This allows the group to adapt to changing pricing environments. Gas-fired power stations continue to report poor earnings due to high gas prices in comparison to coal and carbon. As a result, Centrica has reduced load factors for its gas plants, closed the station at Kings Lynn, withdrawn Roosecote from service and is bidding for balancing contracts for some of its plant. Nuclear output continues to be strong.
- Geographical diversification of the upstream exploration and production activities continues to widen. This reduces the absolute risk on earnings from government intervention, including evolving energy policies and taxation.
- Management has indicated that the group is on track to deliver half the savings of its cost reduction programme in 2012, ie around GBP250m.
- Diversification Across the Value Chain
Centrica is a diversified energy group in the UK and North America. Operations include upstream exploration and production, upstream power generation, gas storage, supply, maintenance and low carbon advice services.
RATING SENSITIVITY GUIDANCE:
Negative: Future developments that could lead to negative rating action include:
- FFO net leverage increasing sustainably above 2x and FFO fixed charge cover falling below 6x, for example due to debt-funded acquisitions or increase of capital investment
- Exploration and production output rising above the group's own requirements, resulting in increased direct exposure to commodity markets
- Weakening earning dynamics, for example if management decided not to pass on increasing input costs to customers in a timely manner
Positive: Future developments that could lead to positive rating actions include:
- FFO net leverage moving sustainably below 1x and FFO fixed charge cover increasing to above 12x
LIQUIDITY & DEBT STRUCTURE
- Adequate Liquidity Well Into 2014
As of 30 June 2012, the group had available GBP995m of cash and cash equivalents (a small element of which relates to restricted cash) and now has GBP3.1bn of undrawn, committed standby facilities, of which GBP2.9bn mature in July 2017. Annual cash flow is sufficient to cover ongoing operating requirements, including dividends and normalised capital expenditure. This funding position provides adequate liquidity well into 2014.
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