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23 Dec 2002
MOODY'S DOWNGRADES NATIONAL GRID COMPANY TO A2 FROM A1 AND NATIONAL GRID TRANSCO TO Baa1 FROM A2; CONFIRMS TRANSCO AT A2 AND TRANSCO HOLDINGS AT A3
Moody's Investors Service today downgraded the senior unsecured long-term debt rating of National Grid Company plc ("NGC") to A2 from A1 and affirmed its Prime-1 short-term rating, while downgrading the senior unsecured ratings of NGG Finance plc and National Grid Holdings One plc ("NGH1") to Baa1 from A2. Moody's also downgraded the issuer rating of the holding company National Grid Transco plc ("NGT") to Baa1 from A2 and its short-term rating to Prime-2 from Prime-1. At the same time, Moody's confirmed the A2 senior unsecured rating and Prime-1 short-term rating of Transco plc ("Transco"), as well as the A3 senior unsecured rating of Transco Holdings plc ("TH").
The rating actions conclude the review initiated on 22 April 2002 following the announcement of the merger of Lattice Group plc (which owns Transco) and National Grid Group plc, which was completed on 21 October 2002. The outlook is stable. (The ratings of NGT's USA subsidiaries were not under review as a result of this merger and have been affirmed.)
The following debt was affected;
- National Grid Company plc: Senior unsecured rating downgraded to A2 from A1
- National Grid Transco plc: Senior unsecured rating downgraded to Baa1 from A2
- NGG Finance plc: Senior unsecured rating downgraded to Baa1 from A2
- National Grid Holdings One plc: Senior unsecured rating downgraded to Baa1 from A2
- National Grid Transco plc's issuer rating downgraded to Baa1 from A2
- Transco plc: Senior unsecured rating confirmed at A2
- Transco Holdings plc: Senior unsecured rating confirmed at A3
- British Transco Finance Inc (guaranteed by Transco plc): Senior unsecured rating confirmed at A2
- British Transco International Finance B.V. (guaranteed by Transco plc): Senior unsecured rating confirmed at A2
- National Grid Transco plc's short-term rating downgraded to Prime-2 from Prime-1
- British Transco Capital Inc's short-term rating (guaranteed by Transco plc) confirmed at Prime-1
Whilst Moody's recognises that the merger represents a strong strategic fit which creates a more diversified regulatory asset base and opportunity for synergy savings, the rating agency also believes that the enlarged entity is gaining an enhanced platform from which to launch further acquisitions, particularly in the USA. Furthermore, Moody's anticipates that future acquisitions will lead the group to leverage further its UK operating companies, especially NGC - thereby moving closer towards UK regulator Ofgem's assumptions for the ratio of Debt to Regulated Asset Base ("RAB") - as a method of financing these acquisitions, in addition to the possibility of increasing debt in the North American businesses in the future.
Moody's said that the A2 ratings on both NGC and Transco continue to reflect the stable and predictable cash flows generated from the regulatory framework in which they both operate.
Currently, UK cash flows (on an FFO level) represent over two-thirds of the total merged group, with the remainder coming from its US operations. NGC and Transco continue to benefit from a 6.25% (Pre-tax real) return on their regulated asset base, with the regulatory ring-fencing provisions separating Transco and NGC from the rest of the NGT group, and the significant barriers to entry which protect their positions. Moody's notes, however, the relatively modest debt protection measures anticipated at each company over the medium term.
Whilst the extent of any future acquisition activity still remains uncertain, Moody's takes some comfort from management's intention to maintain a long-term 'single-A' credit profile at both Transco and NGC and believes that any future acquisitions will only be made after due consideration to potential ratings consequence. This underpins Moody's stable outlook.
As the Prime-1 ratings for the short-term debt of both UK operating companies reflect continued solid liquidity and adequate back-up lines, Moody's has confirmed the short-term ratings of Transco and NGC.
Moody's said the two-notch downgrade of NGT's long-term issuer rating as well as the senior unsecured ratings of NGG Finance (guaranteed by NGT) and NGH1 to Baa1 from A2 take into account structural subordination, which reflects (1) bondholders' distance from the operating companies' cash flows, (2) the size of current and anticipated future debt carried by NGC and Transco and (3) the possible negative consequences of the regulatory ring-fencing applicable to the UK operating companies for bondholders at holding company levels. These include Ofgem's requirement for both Transco and NGC to take reasonable measures to maintain investment-grade ratings or risk the loss of their licences. Moody's also notes that many of NGT's and NGC's bonds have a put option requiring NGC to maintain its operating licence.
Together with the downgrade of the senior unsecured rating of NGT, Moody's has also downgraded the company's short-term rating to Prime-2 from Prime-1, although the rating agency acknowledges NGT's continued adequate back-up facilities and solid liquidity.
TH's affirmed A3 long-term rating continues to reflect the close proximity of this subsidiary to the Transco operating company as well as other factors considered by Moody's, including:
- Ofgems's implied acknowledgement of TH's debt in its regulation of Transco,
- Bondholders at TH now benefit from regulatory ring-fence conditions,
- and the fact that bondholders at this level would benefit from any residual cash flows of Transco before those at NGT in a bankruptcy scenario.
Headquartered in London, England, National Grid Transco is the holding company for a range of international businesses focusing on the ownership and operation of electricity and gas networks. Its two principal geographic areas of activity are the UK and the US.
National Grid Company plc is a wholly owned subsidiary of NGT, and owns and operates the regulated high-voltage electricity transmission network in England and Wales as well as various interconnectors.
In the US, NGT provides electricity (and gas) transmission and distribution services, owning several New England businesses and one New York operating company through National Grid USA.
Transco plc, a wholly owned subsidiary of Transco Holdings plc, owns and operates substantially all of the UK natural gas transmission and distribution network. Transco Holdings plc is currently 100% owned by NGT.
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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