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Rating Action:

MOODY'S PLACES THE RATINGS OF THE NATIONAL GRID UK GROUP OF COMPANIES AND TRANSCO PLC AND TRANSCO HOLDINGS PLC UNDER REVIEW FOR POSSIBLE DOWNGRADE FOLLOWING THE MERGER ANNOUNCEMENT BETWEEN THE NATIONAL GRID AND LATTICE

22 Apr 2002
MOODY'S PLACES THE RATINGS OF THE NATIONAL GRID UK GROUP OF COMPANIES AND TRANSCO PLC AND TRANSCO HOLDINGS PLC UNDER REVIEW FOR POSSIBLE DOWNGRADE FOLLOWING THE MERGER ANNOUNCEMENT BETWEEN THE NATIONAL GRID AND LATTICE Moody's Investors Service has placed National Grid Group plc's A2 long-term issuer and Prime-1 commercial paper ratings, National Grid Holdings One plc's A2 senior unsecured long-term rating, National Grid Company plc's A1 senior unsecured long-term rating as well as Transco plc's A2 senior unsecured long-term debt and Prime-1 commercial paper ratings along with Transco Holdings plc's A3 senior unsecured long-term debt rating under review for possible downgrade. The P-1 short-term rating of National Grid Company plc is not under review and is affirmed. The reviews have been prompted by today's announcement that the Lattice Group (of which Transco is the main subsidiary) and the National Grid Group have recommended an all share merger of equals. The merger is subject to shareholder and regulatory approval.


Moody's recognises the strong strategic fit of the proposed merger, which will create a larger entity (to be named National Grid Transco plc) with a more diversified regulatory asset base and source of cash flows, a better balanced international presence with the re-alignment of the new entities UK asset base with that in the USA and the opportunity for shared regulatory expertise and skills which is also value creative. Synergies in the region of £100m per annum are also expected. Furthermore the merger will create no additional debt and it is Moody's understanding that all existing debt will not be re-positioned. However Moody's is concerned that over the medium term following the consummation of the merger and the integration of the USA NIMO acquisition the enlarged entity will have an enhanced platform from which there are prospects to pursue further acquisitions, particularly in the USA. The ratings review will asses the extent to which this could result in a deterioration of cash flow coverages and other financial measures which, in Moody's opinion, are already somewhat weak for their respective rating categories.


The outlook for National Grid Company ("NGC") and National Grid Group ("NGG") was changed from stable to negative in January 2002 to reflect Moody's concerns over the deterioration in financial flexibility as a result of loss in value of NGG's 32% stake in Energis and the potential capital commitments which may fall due as part of NGG's participation in the ongoing consolidation of the Regional Transmission Operators in the USA. The ratings review will quantify this loss of financial flexibility as well as examine Moody's further concerns that the new enlarged UK base will be used to leverage future acquisitions, placing increased claims on the cash flows of the regulated NGC.


The ratings of NGG's USA subsidiaries are not under review as a result of this merger and are affirmed. In Moody's opinion the National Grid holding company will be more reliant on the cash flows of the UK side to service any future debt going forward. Furthermore Transco's skills and expertise in managing a large gas transportation network reduce the integration risk of the NIMO acquisition, which includes both an electricity and gas asset base.


Moody's ratings of the Transco group were confirmed in December 2001 after a review process was carried out in light of the UK regulator's (OFGEM) final price control proposals for the regulatory period 2002-2007. The ratings, however, remain weakly positioned in their current rating categories. One factor encompassed within the current rating levels is the continued implied support of management that Transco cash flows will not be used to help service debt of other group activities. Moody's ratings review will assess any additional risk that Transco cash flows may in the future be required to help support the debt potentially created, external to Transco in the new combined group, from the more acquisitive National Grid USA strategy in comparison to the more stagnant Lattice Group growth strategy. Furthermore the legal structure of the Transco subsidiaries in the context of the whole National Grid Transco group will also be considered.


Moody's recognises that strength of the ring fence around the Transco regulated assets. However, given the weakly positioned nature of the ratings in the current rating categories, it is well within the scope of the current ring fence provisions to allow cash flows to support additional debt to a position where the existing ratings would no longer be sustainable.


The rating review period is expected to be completed upon regulatory approval which is thought could be as early as autumn 2002.


Headquartered in London, England, National Grid Group is the holding company for a range of international businesses focusing on the ownership and operation of electricity and telecommunications networks. Its two principal geographic areas of activity are the UK and the US. The National Grid Company plc is a wholly owned subsidiary of NGG, and owns and operates the regulated high-voltage electricity transmission network in England and Wales as well as various interconnectors. In the US, NGG provides electricity transmission and distribution services in three New England states 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 Lattice Group plc, headquartered in London, England, which was demerged from BG Group plc in 2000.

No Related Data.
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