OREANDA-NEWS. Fitch Ratings has affirmed Centrica plc's Long-term Issuer Default Rating (IDR) and senior unsecured notes at 'A-' and its Short-term IDR at 'F2'. The agency has also affirmed Centrica's deeply subordinated EUR750m and GBP450m hybrid securities' rating at 'BBB'. The Outlook on the Long-term IDR is Stable.

The company's 'A-' rating reflects additional cuts to capex, GBP750m of cost reduction, lower tax and asset sales for GBP500m-1,000m, which Fitch expects to offset most of the impact of lower gas prices on E&P and margin pressure in UK residential supply. With the Competition and Markets Authority (CMA) expected to make recommendations in line with preliminary findings in 2016, visibility of cash flow in supply should improve.

KEY RATING DRIVERS
Hit from Lower Gas Prices
Gas prices are trending lower with oil prices and European LNG overcapacity on expanding global supply and weaker Asian demand. Centrica hedges commodity price risk by selling up to two years ahead, delaying the financial impact.

Based on the latest oil & gas price deck, Fitch has lowered UK gas prices for 2016 by 8% to USD5.5/000 cu ft (35p/ therm), 2017 by 14% to USD6 and 2018 by 13% to USD7. We are lowering estimates of EBITDA in E&P for 2016 by 20% to GBP897m, 2017 by 22% to GBP1,015m and 2018 by 35% to GBP923m. Centrica is cutting capex to below GBP800m in 2015 and to GBP400m-600m for 2016-18. Based on these numbers, including GBP100m of lower cash production costs by 2016, we expect E&P to be broadly free cash flow (FCF)-neutral over 2015-16.

As a key part of the July strategic review, Centrica will likely sell Canada and Trinidad and Tobago upstream assets to focus on the North & East Irish Sea. We assume that these assets are sold by end-2017. The cuts to capex and asset sales support Centrica's target of withdrawing GBP1.5bn of capital from E&P and central thermal generation by 2020. Fitch views positively the longer-term credit impact of the partial withdrawal from E&P.

Uncertainty in UK Residential Receding
Provisional findings from the CMA investigation suggest that pressure on supply margins may continue; it may take time before customer trust in energy suppliers is restored and further intervention remains a risk. The CMA is due to take a provisional decision on remedies in January with final recommendations due by June 2016. It is expected that they will be similar to provisional findings, lowering political risk.

Centrica cut residential gas tariffs 5% in August 2015, also lowering risk and stabilising customer numbers. Despite two gas price cuts, the fall in gas purchasing costs and normalisation of temperatures support stable supply margins in 2015. The positive impact of lower gas prices partly offsets the earnings hit to E&P, highlighting the underlying resilience of the business model.

Cost reduction should help reduce volatility in supply margins. UK supply is potentially the biggest source of additional cost-cutting announced in July of GBP750m nominal by 2020. This will largely be front-ended, with two-thirds of the savings expected by 2018. The company will increase capital invested in customer-facing businesses, mainly UK supply, by GBP1.5bn by 2020. Overall, despite continued pressure on UK supply margins, Fitch expects stable supply earnings over the next few years with cost reduction and greater contributions from the US & Ireland.

Asset Sales, Leverage Within Guidelines
Centrica sold assets for GBP544m in 2014 and GBP153m in 1H15. The decision to sell part of E&P and offshore wind partly substitutes the GBP600m from the abandoned sale of CCGT assets and is expected to raise GBP500m-1,000m by end-2017. As E&P assets may be more difficult to sell than offshore wind assets we are assuming asset sales of GBP500m.

Despite downward pressure on EBITDA from lower gas prices, lower cash tax, additional cuts to capex and asset sales largely offset the impact, leaving Centrica free cash flow-positive. Although expected average funds from operations (FFO) adjusted net leverage is higher at 2.09x for 2015-18 versus our previous forecast of 1.98x, this remains well within rating guidelines. This is also true in a stress case scenario, based on lower oil & gas price forecasts, with expected average FFO adjusted net leverage of 2.14x.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Centrica include:
-Fitch's latest oil & gas price deck (November 2015)
-Restructuring costs of GBP600m over 2016-17, comprising one-third capex and two-thirds non-recurring items in the P & L.
-Asset sales to raise GBP500m, backdated to end-2017
-Working capital assumed recovery of GBP677m cash collateral posted to support wholesale energy procurement.by end-2016

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- FFO adjusted net leverage sustainably below 2x and FFO fixed charge cover above 6x (2014: 5.5x)

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO net leverage sustainably above 3x and FFO fixed charge cover below 5x, for instance due to debt-funded acquisitions.

LIQUIDITY
As of end-June 2015, Centrica had unrestricted cash of GBP817m. It also had undrawn committed facilities of GBP4,840m as of end-October 2015, comprising GBP3,350m of committed cash facilities and GBP1,490m of committed credit facilities in the form of letter of credit facilities, both expiring in 2020. This is more than sufficient to meet operating needs and debt maturities totalling GBP1,154m through 2018. We expect Centrica to generate positive FCF in 2015-18.