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British Gas Gets Political Heat 27 Years After Sale: U.K. Credit

British Gas Engineers' Vans Sit in Leicester
British Gas was sold to stock-market investors in 1986 as part of a wave of privatizations undertaken by Thatcher’s Conservative government. Part of that business became Centrica, which supplies more than 11 million U.K. households. Photographer: Paul Hackett/Bloomberg

More than 27 years after Margaret Thatcher privatized British Gas, its successor remains at the mercy of politicians.

Centrica Plc, the largest U.K. energy supplier, issued its second profit warning in six months in May as a public outcry over rising living costs led it to freeze tariffs. The company and other “Big Six” utilities are facing an inquiry into their profits, and the opposition Labour Party has pledged to cap prices if it wins the 2015 general election.

“We believe that Centrica is the most exposed to the political risk,” said Mark Davidson, a credit analyst at Standard & Poor’s, which put the company on review for a possible downgrade last month. “They have more to lose as they have higher profit margins in gas due to their leading market position.”

Centrica is ranked the fourth-lowest investment grade with the main ratings companies. S&P’s decision followed a similar move by Moody’s Investors Service at the end of April.

Centrica’s pound bonds returned 3.5 percent this year compared with an average of 4.6 percent for the 50 largest similarly rated issuers, according to Bank of America Merrill Lynch index data. The Sterling Utility Index handed investors 4.8 percent. The company is the worst-performing utility in the Markit iTraxx Europe Index of credit-default swaps over the past six months.

Management Exodus

British Gas was sold to stock-market investors in 1986 as part of a wave of privatizations undertaken by Thatcher’s Conservative government. Part of that business became Centrica, which supplies more than 11 million U.K. households.

Ofgem, the regulator, said in March it proposes to refer the biggest suppliers to the Competition and Markets Authority to determine whether they’re making excessive profits. The move potentially opens the way for a breakup of companies such as Centrica that both generate power and sell it to customers.

The largest energy firms, which also include SSE Plc, Electricite de France SA, EON SE, Iberdrola SA’s Scottish Power Ltd. and RWE AG’s Npower unit, say the increase in prices reflects rising gas costs, levies designed to reduce fossil-fuel emissions and costlier network charges.

Pressure on Centrica intensified last week when Chris Weston, head of its British Gas unit, resigned a year into the job to become chief executive officer of temporary power provider Aggreko Plc.

‘Looking Rudderless’

It leaves the Windsor, England-based company needing to replace at least two of its most senior executives. Chief Financial Officer Nick Luff announced in January he’s leaving for Reed Elsevier Plc. The company is also considering options for replacing CEO Sam Laidlaw “when he and the board mutually decide it would be timely for him to retire,” Centrica Chairman Rick Haythornthwaite told shareholders on May 12. Spokeswoman Sophie Fitton declined to comment further.

“Centrica is looking rudderless,” analysts at Deutsche Bank AG, said in a note after Weston quit. “With the upstream gas business facing upward cost pressures and lower European gas prices, the U.S. retail business facing a margin squeeze and British Gas expecting to be subjected to a two-year CMA inquiry, the company may not be a fun place to be for a while.”

Utility costs rose to the top of the political agenda in September when Labour leader Ed Miliband pledged to freeze prices for 20 months if the party wins next May.

Soaring Bills

According to government estimates, the average annual gas and electricity bill rose about 26 percent between 2010 and 2013 to more than 1,300 pounds ($2,177), more than double the increase in consumer prices. Ofgem calculates the six biggest energy companies made 53 pounds of profit per household in 2012 compared with 8 pounds in 2009.

Centrica shares have fallen 9.8 percent in the past year, the worst performer in the Stoxx 600 Utilities Index as the company lost customers to smaller suppliers. The stock rose 0.2 percent to 330.5 pence in London today.

The utility said May 8 it doesn’t expect to change prices this year and announced that profit would be lower than forecast. Centrica said in March the competition probe could delay work on new plants needed to boost generating capacity.

“Who’s going to invest in the U.K.’s electricity business when you don’t know what the CMA outcome will be,” Andrew Moulder, an analyst at CreditSights Inc. in London, said by phone. “It’ll possibly cost Centrica more to get funding in the future in light of all the political wrangling and CMA investigation.”

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