Rating agency Moody’s has dropped its credit rating for Wales and West Utilities, saying that it expected to see long term lower returns for the western gas network owner and operator.
The cut follows similar action on SGN and is a consequence of signals from Ofgem that it will allow much lower returns for network companies after 2021.
Moody’s said that although all companies will be affected WWU has high borrowing costs. Moody’s estimates that WWU’s real cost of debt, including swaps, will average over 4% in the RIIO-GD2 period, compared to an indicated regulatory allowance of less than 2.
The rating agency notes that Ofgem has a statutory duty to ensure that companies are able to finance their functions, and it disagrees with WWU over how the company’s debt structure should be regarded in its ‘efficiency’ measure.
Ofgem has indicated that it will consider providing a “smaller company allowance” to reflect the particular circumstances of companies such as WWU, but based on precedents we would expect any such adjustment to be small.
WWU is also expected to see cash flows fall by around £20 million annually from April 2021 as a result of changes to regulatory tax allowances. Operational outperformance is unlikely to be sufficient to close the gap between Ofgem’s working assumption of allowed returns and WWU’s current financing structure, Moody’s said.
Given the ongoing price review, upward rating pressure is not currently anticipated but the outlook could be stabilised if WWU took measures to strengthen its balance sheet or materially reduce financing costs, it added.