Centrica's credit ratings under review for downgrade by Moody's

Moody's has placed the Baa1 issuer rating and Baa3 junior subordinate rating of British Gas-owner Centrica on review for downgrade.

The move follows the recent sharp drop in European gas and power prices and reflects the risk that measures already announced by Centrica may be insufficient to achieve the guideline metrics for the Baa1 rating in the intermediate term.

UK wholesale gas prices have declined by 17% in the past three months and 34% since Moody's assigned the Baa1 issuer rating in March 2015, which has in turn led to a drop of 11% and 22% in wholesale electricity prices.

Current one-year forward baseload electricity prices of around GBP35/MWh are below Moody's previous expectation, published in June 2015, of a GBP42-46/MWh range.

In a note to clients, Moody’s said, “A prolonged period of low prices will affect Centrica through its exposure to gas production and to electricity generation, particularly via its nuclear joint venture.”

Nuclear generation, which contributed more than 50% of Centrica's generation output and substantially all generation earnings in 2014, is effectively fixed-cost and therefore particularly exposed to movements in wholesale power prices.”

Centrica has recently taken significant steps to enhance its credit profile, including identifying significant cost savings, selling non-core renewable generating assets, cutting the dividend and introducing a scrip option, and reducing capital expenditure.

Moody’s said the ratings could be confirmed if the adverse effect of lower commodity prices is adequately mitigated so that Centrica is expected to achieve a financial profile in line with Moody's guidance as discussed above.

However, the ratings could be downgraded if Centrica appears unable to offset the impact of lower commodity prices by mitigating measures that would create adequate financial headroom; or if the UK Competition and Markets Authority's investigation's provisional remedies (due for publication in March) significantly reduce credit metrics or increase business risk.