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Rating Action:

Moody's affirms National Grid ratings and assigns (P)Baa3 rating to proposed Hybrid instrument

04 Mar 2013

London, 04 March 2013 -- Moody's Investors Service has today affirmed the Baa1 rating of National Grid plc (National Grid) and the A3 ratings of its regulated UK subsidiaries, National Grid Gas plc (NGG) and National Grid Electricity Transmission plc (NGET), following the group's announcement on 28 February 2013 that it had agreed new price controls for NGG and NGET. The new controls, published by the UK energy regulator, Ofgem, in December 2012 are the first to be set under the regulator's new RIIO methodology. Moody's has also assigned a provisional (P)Baa3 long-term rating to the proposed issuance of capital securities (the Hybrid) by NGG Finance plc (the Issuer), a subsidiary of National Grid plc, which guarantees the instrument on a subordinated basis. The outlook on all ratings is stable.

The new price controls, known as RIIO-T1 and RIIO-GD1, cover all of National Grid's electricity and gas transmission and gas distribution (respectively) owner and system operator businesses in the UK, with a regulated asset value (RAV) in excess of GBP22 billion. Ofgem's latest forecast predicts this asset value will grow by around 80% over the eight years of the price control, which will run from 1 April 2013.

RATINGS RATIONALE

The affirmation of the ratings of National Grid, NGG and NGET reflects (1) the evolutionary nature of the changes in Ofgem's new RIIO methodology; (2) allowed returns for NGG and NGET in line with Moody's expectations and other recent regulatory determinations in the UK; (3) projected financial metrics in line with Moody's guidance for the current ratings under base case and downside scenarios; (4) solid operational and financial performance by the group, with FFO interest cover around 3.8x since 2009/10; and (5) National Grid's stated policies to maintain the group's financial strength, notwithstanding sizeable investment plans, as evidenced by the proposed Hybrid instrument and the GBP3.2 billion rights issue announced in May 2010.

The provisional (P)Baa3 of the proposed Hybrid reflects the Baa1 senior unsecured rating of National Grid as guarantor and the terms of the instrument including its ability to defer coupons on a cumulative basis. Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the Hybrid. A definitive rating may differ from a provisional rating.

RIIO refers to the formula Revenue = Incentives + Innovation + Outputs and the revised regulatory framework has been used by Ofgem to set prices for the electricity and gas transmission companies and the gas distribution networks (GDNs) in the UK for the eight year period starting in April 2013. According to the regulator, RIIO is intended to attract the efficient investment needed for the industry whilst incentivising network companies to deliver the outputs required by customers in an efficient and innovative way. Key features of the new regime include an extended price control of eight years rather than five, use of a trailing average debt index to set allowed returns, enhanced incentives and penalties and increased customer engagement by the companies.

The new price controls for National Grid's electricity and gas transmission businesses and its four GDNs allow a weighted average cost of capital (WACC) of 4.6% for electricity transmission, 4.4% for gas transmission and 4.2% for gas distribution. These returns are below those for the current transmission and gas distribution price controls which have allowed WACCs of 5.1% and 4.9% respectively. The reduction was, however, anticipated given declining interest rates and the allowed returns are in line with other recent regulatory determinations.

Under RIIO, the part of the WACC relating to interest costs will be re-set every year, based on a 10-year rolling average yield for A and Baa rated non-financial companies -- the average that will be applied for 2013/14 will be 2.92%. National Grid is considered well positioned to manage the refinancing of its existing debt and new funding in order to mitigate its exposure under this new framework.

A significant risk for National Grid is the execution of its extensive capital investment programme which, Ofgem forecasts, will result in the RAV increasing by around 80% over the eight-year term of the new price controls. We note, however, that the work will be largely in the ordinary course of business for the group. It will also be necessary for the operating companies to meet challenging efficiency targets if they are to outperform the regulatory assumptions. Allowed costs for the group's gas distribution businesses, for example, are 7% below NGG's final business plans submitted to Ofgem, after adjusting for the reduction in scope.

The stable outlook reflects Moody's expectation that (1) operational and financial performance by the group will be broadly in line with the regulatory assumptions in the UK and US; and (2) National Grid will manage its dividend policy, in the context of other steps that may be taken, to support the large investment programme in line with its stated commitment to maintain the overall credit quality of the group. We further note the group's financial flexibility and hence ability to accommodate downside scenarios.

Moody's considers upward rating pressure is unlikely in the medium term. The 2010 rights issue left National Grid and its subsidiaries better positioned in their rating categories but Moody's believes that the group's large capital investment programme for the UK and the possibility of additional investment in the US (above and beyond what is currently planned) will most likely constrain upward rating pressure. National Grid seems likely to favour using free cash flow to support growth and/or fund shareholder distributions rather than to reduce gearing. We note, as a positive, that the group intends to increase dividends for the current year by 4% as compared to the 8% annual growth over recent years.

Moody's anticipates that National Grid will demonstrate that it is able to maintain ratios of (i) consolidated RCF to Net Debt in excess of 9.0% and (ii) FFO Interest Cover in excess of 3.0x in the current financial year and beyond and a failure to do so would likely lead to negative rating pressure.

National Grid plc is the holding company for a range of largely regulated businesses focusing on the ownership and operation of electricity and gas networks in the UK and the US.

In the UK, NGET owns the high-voltage electricity transmission network in England and Wales and operates the system across Great Britain. NGG owns and operates the high pressure gas transmission system in Britain and its distribution business delivers gas to 11 million homes and commercial customers.

In the US, National Grid distributes electricity to more than three million customers in Massachusetts, New York and Rhode Island. Owning 4,000 megawatts of electricity generation, it is the largest power producer in New York State - carrying power to over one million customers on Long Island. It is also the largest distributor of natural gas in the northeastern US, delivering gas to 3.4 million customers in New York, Massachusetts and Rhode Island.

National Grid also has a number of related unregulated businesses such as Liquefied Natural Gas importation and storage, interconnectors, property and metering. These operate mostly in the UK and are modest in the context of the group as a whole, accounting for around 5% of revenue and operating profit in the year to March 2012.

The methodologies used in this rating were Regulated Electric and Gas Networks published in August 2009, and Regulated Electric and Gas Utilities published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Neil Griffiths-Lambeth
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms National Grid ratings and assigns (P)Baa3 rating to proposed Hybrid instrument
No Related Data.
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