London, 13 May 2020 -- Moody's Investors Service, (Moody's) has today affirmed
the senior unsecured ratings of Northern Powergrid Holdings Company (NPg
Holdings), the parent company for the Northern Powergrid (NPg) group
of companies, and five rated subsidiaries. The outlook on
all ratings is stable.
The ratings affirmed are for NPg Holdings (Baa1 stable), Northern
Powergrid Yorkshire plc (NPg Yorkshire) (A3 stable), Northern Powergrid
(Northeast) Limited (NPg Northeast) (A3 stable), Northern Electric
plc (A3 stable), Northern Electric Finance plc (A3 stable) and Yorkshire
Power Finance Limited (Baa1 stable).
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
The affirmation of the ratings of the NPg group of companies reflects
Moody's expectation of (1) continued solid operational performance
by the group's two main subsidiaries over the remainder of the current
regulatory period, RIIO-ED1, which runs until March
2023; (2) stronger interest coverage metrics as a result of the group
locking in significantly lower financing costs in 2019 and its most expensive
existing debt falling away over the 2020-22 period; and (3)
the continuation of a prudent financial policy.
The group's two electricity distribution networks operators (DNOs),
NPg Northeast and NPg Yorkshire, account for the vast majority of
the NPg group's earnings, 87% in FY2019, and
assets. Operational performance over the first half of RIIO-ED1
has been solid, reflected in significant rewards earnt for performance
against regulatory targets. In its determination for RIIO-ED1,
the regulator (Ofgem) provided for significant financial incentives and
penalties for companies' performance against defined operational
targets. The highest-powered incentive is on network reliability
followed by that on the broad measure of customer service (BMCS).
On both metrics, NPg's DNOs have earnt material incentive
income, GBP29 million per annum on average over the first half of
RIIO-ED1 - 6% of the consolidated group's Funds
From Operations (FFO) and 0.25x interest expense in FY2019.
Moody's expects earnt incentive income to be at least at current
levels for the remainder of RIIO-ED1 reflecting NPg's continued
improvements on these metrics and the only modest tightening of the regulatory
targets within period, none on BMCS. This material incentive
income, paid with a two year lag and thus expected to continue in
the first two years of the next price control (RIIO-ED2),
has helped moderate downward pressure on adjusted interest coverage metrics
of the DNOs during the first half of RIIO-ED1 from falling allowed
returns, due to the continued low interest rate environment.
With limited financing and refinancing requirements during this period,
the group has been particularly affected by the impact of low yields.
Funding costs have not fallen in line with allowed returns. However,
almost 30% of the consolidated NPg group's outstanding debt
at December 2019 (including its most expensive instruments) matures over
2020-22.
In 2019 the group's DNOs pre-funded upcoming debt maturities
at a weighted average coupon below 2.5%, equivalent
to a 25% reduction in the group's interest expense in FY2019,
with a tenor of at least 30-years. Consequently, as
this expensive debt is retired, Moody's expects NPg to materially
outperform the regulatory cost of debt allowance in the second half of
RIIO-ED1, particularly at NPg Yorkshire. This will
materially support interest coverage metrics and more than offset the
underperformance against regulatory allowances for controllable operating
and capital expenditure (together total expenditure, totex) over
the second half of RIIO-ED1.
Whilst NPg's DNOs have outperformed regulatory totex allowances
by 6% over the first half of RIIO-ED1 this was due to phasing
of spend (back-loading) during the control rather than underlying
outperformance; NPg forecast totex broadly in line with allowances
for the regulatory period as a whole. Moody's expects the
headroom on interest coverage metrics to reduce from the start of RIIO-ED2
in April 2023 due to (1) a material cut in allowed equity returns;
(2) less highly powered incentives, on cost efficiency and on outputs
carrying financial incentives, reducing the scope for significant
outperformance against the regulatory settlement; and (3) limited
debt maturities during RIIO-ED2. These pressures will be
greater at NPg Northeast than NPg Yorkshire.
The ratings of the NPg group of companies are supported by the group's
prudent financial policy. This is reflected in leverage levels
both for its DNOs and the consolidated group at levels well below peers
and, for its DNOs, regulatory assumptions. This reflects
the covenant in a December 2022 bond preventing the DNOs issuing debt
if senior net debt / Regulated Asset Value (excluding non-recourse
project finance debt, currently in the group's metering business)
for the consolidated NPg group, NPg Holdings, would exceed
65%. Due to debt at holding companies above the DNOs (NPg
Holdings and Yorkshire Power Finance Limited), this effectively
limits Net Debt / RAV to the low 50s in percentage terms. Whilst
this covenant falls away in 2022, we expect NPg to continue to pursue
a prudent financial policy with senior net debt / RAV around current levels.
In the long-term, i.e. after the 2022 and 2028
bonds at the holding companies have been repaid, Moody's anticipates
the DNOs will be geared broadly in line with regulatory assumptions and
the only additional debt at NPg to be non-recourse project finance
debt.
The proportion of earnings from the group's unregulated business
has increased in recent years with the growth in the smart metering business
in the UK, which along with NPg Northeast are Northern Electric
plc's main subsidiaries. Moody's estimate metering
comprised 18% of the consolidated NPg group's FFO in FY2019
and based on committed investments this to remain broadly stable over
the period to 2025. The metering business generates relative stable
cash flows though Moody's does not view the earnings as the same
quality as from the regulated networks.
Moody's believes that NPg's DNOs like other European energy
networks have low exposure to the coronavirus outbreak. This reflects
that there is a true-up mechanism in the distribution licence which
facilitates the recovery of any potential under-recovery of allowed
revenue with a two-year delay, i.e. in regulatory
year 2022/23 for the expected under-recovery in 2020/21 regulatory
year. This true-up also extends to any energy supplier bad
debts network licensees may suffer with a three-year delay.
However, the sharp recession caused by the coronavirus outbreak,
and in particularly the large fall in commodity prices, will likely
slow the growth of NPg other notable unregulated business, its hydrocarbon
exploration subsidiary (through CalEnergy Resources Limited, CER).
Moody's understands investment decisions were due to be taken in
2020 on two projects where CER's share of project capex would have
been over GBP150 million in both cases, following on from the investment
decision taken on phase one of a project in late 2019 (Thames Pipeline
Catchment Area) with capex of over GBP200 million. Moody's
believes the impact on NPg Holdings' credit quality from the commitments
made so far is limited in the short term as (1) the acquisition and majority
of the development costs can be financed from equity (deferral of dividends,
none were paid in FY2019); and (2) NPg Holdings' has some financial
flexibility at the current rating level on leverage. When these
projects enter the operational phase, Moody's will review
its ratio guidance for the NPg Holdings to reflect that the high business
risk profile of these activities due to their volatile cash flows.
RATINGS OUTLOOK
The stable outlook for all six NPg entities reflects Moody's expectation
that management will maintain a financial profile in line with guidance
for the current ratings.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
NPg Northeast, Northern Electric Finance Plc, Northern Electric
Plc, NPg Yorkshire
An upgrade of NPg's DNOs, NPg Northeast's financing
subsidiary (Northern Electric Finance Plc) and Northern Electric plc is
not currently anticipated reflecting that (1) ratings are constrained
by leverage at NPg Holdings; and (2) Moody's expectation of
a deterioration in interest coverage metrics in RIIO-ED2.
Downward rating pressure would arise at these entities if either:
(1) Net debt / RAV rose above 68% at the licensed entity or above
the low 70s in percentage terms for NPg Holdings; or (2) adjusted
interest coverage appeared likely to fall below 1.6x either at
the DNOs or NPg Holdings, on an underlying basis.
Northern Powergrid Holdings
An upgrade of NPg Holdings is not currently anticipated given (1) the
continued growth of the unregulated business; and (2) the declining
allowed returns and likely reduced scope for outperformance in RIIO-ED2.
However, upwards rating pressure could follow if net debt/RAV appeared
likely to fall sustainably below the low 60s in percentage terms.
Yorkshire Power Finance Limited
An upgrade of Yorkshire Power Finance Limited, the financing vehicle
of NPg Yorkshire's immediate holding company (Yorkshire Power Group),
is not currently anticipated reflecting that ratings are constrained (1)
by leverage at NPg Holdings; and (2) Moody's expectation of
a deterioration of interest coverage metrics in RIIO-ED2.
Downward rating pressure at Yorkshire Power Finance Limited if for Yorkshire
Power Group either adjusted interest coverage appeared likely to fall
below 1.6x on an underlying basis or Net Debt / RAV appeared likely
to rise above 68%.
The principal methodology used in these ratings was Regulated Electric
and Gas Networks published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059225.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Northern Powergrid Holdings is the parent undertaken for the Northern
Powergrid group of companies. Its two main operating subsidiaries
are its regulated electricity distribution networks in Great Britain which
had a combined regulated asset value of GBP3.3 billion at 31 March
2020. The group has grown its unregulated business in recent years,
primarily through investments in its smart metering business, with
the non-distribution business accounting for 13% of operating
profit in 2019.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Northern Electric Finance Plc
....Backed Senior Unsecured Regular Bond/Debenture,
Affirmed A3
....Underlying Senior Unsecured Regular Bond/Debenture,
Affirmed A3
..Issuer: Northern Electric plc
....LT Issuer Rating, Affirmed A3
..Issuer: Northern Powergrid (Northeast) Limited
...LT Issuer Rating, Affirmed A3
..Issuer: Northern Powergrid (Yorkshire) plc
....LT Issuer Rating, Affirmed A3
....Senior Unsecured Regular Bond/Debenture,
Affirmed A3
....Backed Senior Unsecured Regular Bond/Debenture,
Affirmed A3
....Underlying Senior Unsecured Regular Bond/Debenture,
Affirmed A3
..Issuer: Northern Powergrid Holdings Company
....Backed Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1
....Underlying Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1
..Issuer: Yorkshire Power Finance Limited
....Backed Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1
Outlook Actions:
..Issuer: Northern Electric Finance Plc
....Outlook, Remains Stable
..Issuer: Northern Electric plc
....Outlook, Remains Stable
..Issuer: Northern Powergrid (Northeast) Limited
....Outlook, Remains Stable
..Issuer: Northern Powergrid (Yorkshire) plc
....Outlook, Remains Stable
..Issuer: Northern Powergrid Holdings Company
....Outlook, Remains Stable
..Issuer: Yorkshire Power Finance Limited
....Outlook, Remains Stable
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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.
Philip Cope
AVP-Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
