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
Rating actions follow completion of Lattice Group and National Grid Group merger
London, 23 December 2002 -- 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
- Transco plc: Senior unsecured rating confirmed at A2
- Transco Holdings plc: Senior unsecured rating confirmed
- 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
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
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
- Bondholders at TH now benefit from regulatory ring-fence
- and the fact that bondholders at this level would benefit from
any residual cash flows of Transco before those at NGT in a bankruptcy
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.
CFG - Europe
Moody's Investors Service Ltd.
44 20 7772 5454
CFG - Europe
Moody's Investors Service Ltd.
44 20 7772 5454