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I AGREE
18 Apr 2011
London, 18 April 2011 -- Moody's Investors Service today downgraded to Baa1 from A3 the senior
unsecured ratings of Western Power Distribution (East Midlands) plc (WPDEM),
formerly known as Central Networks East plc, and of Western Power
Distribution (West Midlands) plc (WPDWM), formerly known as Central
Networks West plc. The Prime-2 senior unsecured short-term
issuer rating of WPDEM, which was not on review was affirmed.
These rating actions conclude the rating review initiated in November
2010. At the same time Moody's assigned a first time provisional
(P)Baa3 rating to the planned issuance of Senior Notes by PPL WEM Holdings
plc (PPL WEM), holding company of WPDEM and WPDWM. The outlook
on all ratings is stable.
The following ratings were downgraded:
Western Power Distribution (East Midlands) plc -- the senior unsecured
debt and issuer ratings to Baa1, from A3.
Western Power Distribution (West Midlands) plc - the senior unsecured
debt and issuer ratings to Baa1, from A3.
The following rating was affirmed:
Western Power Distribution (East Midlands) plc - the Prime-2
short-term issuer rating.
The following rating was assigned:
PPL WEM Holdings plc -- (P)Baa3 senior unsecured debt rating.
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 Notes. A definitive rating may differ
from a provisional rating.
RATINGS RATIONALE
The rating downgrades follow the recent completion of the GBP4 billion
acquisition by PPL WEM Holdings plc (PPL WEM) of WPDEM and WPDWM,
two UK distribution network operators (DNOs), together known as
the WPDM Group. PPL WEM is an indirectly wholly-owned subsidiary
of PPL Corporation (rated Baa3), the US utility group. Moody's
says that the downgrades reflect the impact of the additional leverage
at the two DNOs following their acquisition by PPL WEM, and that
their ratings no longer incorporate an element of support from membership
of the E.ON Group (rated A2, stable).
The Baa1 ratings primarily reflect the very low business risk profile
of the companies as monopoly providers of electricity distribution services
in their licensed areas in the Midlands region of the UK. The utilities'
business is conducted within a regulatory framework that Moody's regards
as well-established and generally transparent, thus providing
a good degree of stability and predictability of cash flows. The
ratings take account of the two networks' moderate operating performance
during the latest price control review period, as well as management's
plans for improving this. At the same time, the financial
flexibility of WPDEM and WPDWM is constrained by relatively high debt
levels, as reflected in estimated net debt/regulated asset value
(RAV) in the mid 60%s following the acquisition and associated
refinancing.
Moody's analysis further considers the creditworthiness of the WPDM
group of companies as one of the two principal elements of the wider PPL
UK Group which includes also the DNOs WPD South Wales plc and WPD South
West plc, both rated Baa1 by Moody's, and controlled
by PPL WW Holdings Limited (the PPL WW Group). The ratings of WPDEM
and WPDWM factor in the DNOs' membership of the broader WPDM Group
-- which includes certain non-regulated assets and
liabilities, as well as the additional indebtedness implied by PPL
WEM's planned issuance of Notes, which Moody's estimates
will result in net debt/RAV in the low 80%s. However,
these factors are offset by the regulatory ring-fencing that applies
to WPDEM and WPDWM which in Moody's view partly insulate their credit
quality from that of their parent/intermediate holding company at the
current rating level. Finally the ratings incorporate Moody's
expectation that both the WPDM Group and the PPL WW Group will also maintain
a similar capital structure at both the regulated entity and holding company
levels.
In line with the approach adopted for Western Power Distribution South
Wales plc and Western Power Distribution South West plc (both rated Baa1
by Moody's), which are also ultimately owned by PPL Corporation,
Moody's assumes that management will aim to maintain a degree of
financial flexibility with respect to leverage, and will accordingly
calibrate net debt/regulated asset value (RAV) to remain comfortably less
than 70%.
In assigning a (P)Baa3 rating to PPL WEM Holdings plc's planned
issuance of notes Moody's has notched down the rating from the consolidated
credit quality of the WPDM group of companies which Moody's assesses
at Baa2. The (P)Baa3 rating thereby reflects PPL WEM's creditors'
distance from the operating companies' cash flows and the possible
negative consequences of the regulatory ring-fence applied to WPDEM
and WPDWM for creditors of PPL WEM.
The stable outlook reflects Moody's expectation that WPDEM and WPDWM will
maintain its leverage as measured by net debt/RAV in the 65% to
70% range. It also assumes that the refinancing of the GBP3.6
billion acquisition facility is completed on a timely basis. Upward
pressure on ratings is unlikely to arise given the networks' recent
moderate operating performance and targeted leverage. Conversely,
deterioration in operating performance versus plan and/or a change in
financial policy resulting in a stand-alone leverage trending towards
the mid-70%s would exert downward pressure on the Baa1 ratings.
Headquartered in Bristol, UK, PPL WEM Holdings plc owns and
operates two electricity distribution networks serving approximately 5.1
million customers in the Midlands through a network of approximately 83,000
kilometres of underground cables and overhead lines.
The principal methodology used in this rating was Regulated Electric and
Gas Networks published in August 2009.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
London
Niel Bisset
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades to Baa1 ratings of Western Power Distribution (East and West Midlands); assigns (P)Baa3 to PPL WEM Holdings
No Related Data.
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