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Rating Action:

Moody's assigns Baa3/P-3 ratings to Western Power Distribution Ltd; outlook stable

31 Oct 2014

London, 31 October 2014 -- Moody's Investors Service (Moody's) has today assigned Baa3/Prime-3 (P-3) long and short-term issuer ratings to Western Power Distribution Ltd (WPD Ltd), the main holding company for the four distribution network operators (DNOs) owned by the Western Power Distribution (WPD) group following a re-organisation. Concurrently, Moody's has affirmed (1) the Baa1 senior unsecured ratings of WPD Ltd's four subsidiary DNOs - Western Power Distribution (South Wales) plc, Western Power Distribution (South West) plc, Western Power Distribution (East Midlands) plc and Western Power Distribution (West Midlands) plc; and (2) the Baa3 senior unsecured ratings of two bonds originally issued by PPL WEM Holdings Limited (PPL WEM) and two bonds originally issued by PPL WW Holdings Limited (PPL WW), for which WPD Ltd has agreed to make all future payments as a co-obligor. The outlook on all of the ratings is stable.

Finally, Moody's has withdrawn the issuer rating on PPL WW Holdings Ltd.

RATINGS RATIONALE

"The consolidated credit quality of the WPD group is broadly unchanged as a result of this re-organisation", said Christopher Bredholt, an Assistant Vice President -- Analyst in Moody's Infrastructure Finance Group and lead analyst for WPD.

The rating actions follow changes to the legal structure of the WPD group by PPL Corporation (Baa3 positive), the ultimate parent, that are intended to simplify WPD and reduce administration costs. As part of the re-organisation, completed on 31 October 2014, ownership of the four rated DNOs, has been transferred to a single holding company, WPD Ltd. Previously, the DNOs were held by two separate groups under the intermediate holding companies PPL WEM and PPL WW. In addition, WPD Ltd has become a co-obligor to the rated debt issued by the two former holding companies, agreeing to the punctual payment of amounts due.

Whilst there was no change in the group's third party debt as a result of the re-organisation, WPD's net debt, on a Moody's-adjusted basis, increased by 4.4% at 31 March 2014 based on pro-forma accounts, although this remains in line with Moody's guidance for the rating category. This increase is primarily owing to a intercompany loan to WPD Ltd from an entity now outside of the consolidated WPD group. However, Moody's considers this increase in indebtedness on a net debt/RAV basis for the consolidated group, from 76% to 81% at 31 March 2014, to be a short-term development. The intercompany loan has to be repaid by December 2016, with principal repayments due during this time, and no dividends can be paid from WPD Ltd whilst the loan is outstanding.

WPD Ltd is now a co-obligor on the debt that was issued by PPL WEM and PPL WW, which each sat above two DNOs in the previous structure. In addition, the swaps that used to sit with PPL WEM and PPL WW have been novated over to WPD Ltd.

The assigned ratings for WPD Ltd and the four DNOs take into account (1) the natural monopoly position of the operating subsidiaries, which provide electricity distribution services in the UK; (2) the low business risk of such activities; (3) a well established and transparent regulatory regime for the sector in the UK which provides a good degree of stability and predictability of cash flows; (4) management's track record of excellent operational performance; and (5) the frontier ranking of the network for the forthcoming price control and the associated financial reward. However, the ratings are constrained by (1) a material capital investment programme; and (2) ownership by a leveraged holding company, which limits the company's ability to de-leverage.

In line with the rating agency's methodology for European regulated utility groups (see "European Regulated Utility Groups: Methodology Update", January 2007), Moody's factors into its assessment of the DNO operating subsidiaries, the weaker credit quality of the WPD Ltd group they belong to, whose consolidated credit quality is commensurate with a Baa2 rating. This would normally act as a cap on their ratings. However, Moody's recognises the regulatory ring-fencing that applies to each of the DNOs (in the form of provisions embedded in the company's license that force it to maintain a certain financial profile), which the rating agency believes partly insulates their credit quality from that of the parent. Indeed, under Moody's methodology, ratings of UK regulated subsidiaries can pierce the consolidated credit quality of their group when this is Baa2 or lower owing to the existence of the ring-fence. Accordingly, ratings on Western Power Distribution (South Wales) plc, Western Power Distribution (South West) plc, Western Power Distribution (East Midlands) plc and Western Power Distribution (West Midlands) plc result from the piercing of the WPD Ltd's group's consolidated credit quality (i.e., Baa2) by one notch, up to a Baa1 level. Conversely, the ratings of WPD Ltd have been notched down by one notch from the consolidated credit quality to reflect the impact of structural subordination of the debt, to Baa3.

The principal risks that the WPD group face relates to the execution of the capital programme and the associated financing and re-financing requirements. However, Moody's considers that these risks are manageable and takes comfort from the group's track record of strong performance against regulatory assumptions. Moody's also notes the high level of gearing, which after taking into consideration the pension deficit and operating leases, equated to around 81% net debt/RAV as at 31 March 2014 on a pro-forma basis following the transaction.

The credit quality of WPD Ltd will continue to be driven by the performance of the DNOs under the regulatory price controls. Following Ofgem's Final Determination in February 2014 for WPD's DNOs for the forthcoming price control, the group has over eight years of revenue and cash flow visibility.

The withdrawal of the issuer rating for PPL WW reflects WPD Ltd being a co-obligor on and jointly and severally liable for all rated debt issued by the former holding company and Moody's expectation that the company will not issue further debt. PPL WEM does not have an issuer rating.

STABLE OUTLOOK FOR ALL FIVE WPD ENTITIES

The stable outlook for the ratings of WPD reflects Moody's expectation that operational performance will be in line with management's projections and to the extent that these deviate, WPD will manage the leverage of the entities at levels commensurate with Moody's guidance for the current rating via the appropriate calibration of shareholder distributions.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Given the highly leveraged group structure, Moody's sees no potential for upward pressure on the various WPD ratings, which reflect the overall credit quality of the consolidated group. However, the ratings would come under pressure if there is (1) failure of the consolidated group to maintain a net debt/Regulatory Asset Value below 85%; (2) deterioration in operating performance and/or a change in financial policy that results in a standalone DNO leverage above 75%; (3) a material adverse change to the electricity distribution regulatory framework; or (4) unforeseen funding difficulties.

The following ratings were assigned:

Western Power Distribution Ltd: Baa3 and P-3 long and short-term issuer ratings

The following ratings were affirmed:

Western Power Distribution (South Wales) plc: the Baa1 senior unsecured rating and (P)Baa1 senior unsecured EMTN programme rating

Western Power Distribution (South West) plc: the Baa1 senior unsecured rating, the Baa1 issuer rating, (P)Baa1 senior unsecured EMTN programme rating, the P-2 commercial paper rating and P-2 other short term rating

Western Power Distribution (East Midlands) plc: the Baa1 issuer rating, Baa1 senior unsecured rating, (P)Baa1 senior unsecured MTN rating and P-2 ST issuer rating

Western Power Distribution (West Midlands) plc: the Baa1 issuer rating, Baa1 senior unsecured rating and the (P)Baa1 senior unsecured MTN rating

The Baa3 instrument rating on the $460 million 3.9% bonds due 2016 and the $500 million 5.375% bonds due 2021 issued by PPL WEM Holdings Ltd which Western Power Distribution Ltd is now a co-obligor to

The Baa3 instrument rating on the $100 million 7.25% bonds due 2017 and the $202 million of outstanding 7.375% bonds due 2028 issued by PPL WW Holdings Limited which Western Power Distribution Ltd is now a co-obligor to

The following ratings were withdrawn:

PPL WW Holdings Limited: the Baa3 issuer rating

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology

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.

The following ratings (debt numbers 10294587 and 10294595 assigned to PPL WW Holdings Limited, debt number 10122247 assigned to Western Power Distribution (South Wales) plc, and debt number 10077165 assigned to Western Power Distribution (South West) plc) were initiated by Moody's and were not requested by these rated entities.

Rated entities or their agent(s) participated in the rating process. These rated entities or their agent(s), if any, provided Moody's - access to the books, records and other relevant internal documents of the rated entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Christopher Peter Bredholt
Asst Vice President - Analyst
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

Neil Griffiths-Lambeth
Associate Managing Director
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 assigns Baa3/P-3 ratings to Western Power Distribution Ltd; outlook stable
No Related Data.
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