Electricity North West on negative ratings watch over lower returns in RIIO2

Ratings agency Moody’s has reacted to Ofgem’s plans to cut returns to network companies by placing a ‘negative’ outlook on the rating of Electricity North West (ENWL) and its parent, because of the companies’ high leverage and borrowing costs.

Moody’s said ENWL’s outstanding debt is “materially more expensive” than other network operators, and the company has inflation swaps which Moody’s expects to mean cash outflows until the late 2030s. ”The group’s relatively expensive and long-term debt burden is illustrated by the fair value of its debt and swaps, which was around 100% of Regulatory Asset Value (RAV) at ENWL and 120% at parent NWEN MidCo”, it said.

Ofgem has already warned that it plans to bear down on network company returns in RIIO 2. Moodys noted that companies to recover only the borrowing costs of a hypothetical “notionally geared, efficient network company”, and not to pass through actual borrowing costs. The regulator will also adopt a structurally lower measure of inflation, Consumer Prices Index including owner occupiers’ housing costs (CPIH), in place of the Retail Prices Index. Moody’s said this would create a mismatch between regulatory asset growth and ENWL and NWEN MidCo’s large portfolios of index-linked debt and swaps. Including swaps, around 70% of both companies’ total debt is linked to RPI, compared to 0-25% for most other gas and electricity distribution network groups.
Moody’s said the company’s outlook could be stabilised if ENWL and NWEN strengthened their balance sheets and or materially reduced financing costs. The rating could be downgraded if announcements by Ofgem signal continued pressure on returns.
ENWL is a wholly-owned subsidiary of North West Electricity Networks plc, which is in turn owned
by Colonial First State Global Asset Management and a JP Morgan-led infrastructure fund, IIF Int’l Holding GP Ltd.