Fitch Ratings has revised
Fitch has affirmed Long-Term Issuer Default Rating (IDR) for NG at 'BBB' and NGET and NGG at 'A-'. We also affirmed the senior unsecured debt ratings for NG at 'BBB+' and for NGET and NGG at 'A'. NGET and NGG are wholly owned operating subsidiaries of
The Negative Outlooks reflects our expectation of funds from operations (FFO) net leverage above our negative sensitivity until financial year ending
The affirmation reflects the availability of mitigating measures, which could be implemented to maintain credit metrics in line with our rating sensitivities. If deleveraging takes longer than expected and no mitigating factors are implemented, this could be negative for the rating.
The affirmation also factors in the adequate financial profiles of NGET and NGG, where we anticipate NGET's operational and regulatory performance could lead to some incentive income over RIIO T2. Our view is supported by the regulated and diversified nature as well as the scale of NG's business providing good earnings visibility and by the group's consistent operational and financial performance.
KEY RATING DRIVERS
Credit Metrics above Rating Sensitivities: The Negative Outlook signals our medium-term view that the downside risks could lead to a one-notch downgrade, given the depleted rating headroom at 'BBB', despite our view of moderately higher debt capacity for NG. Fitch expects FFO net leverage to peak at about 7.5x in FY21 and FY22, which is sharply above our negative rating sensitivity of 6.3x (revised from 6.0x). This is due to the transition to RIIO-T2 from RIIO-T1 price controls (including one-off adjustments), deferral of rate increases across
Leverage May Improve by FY23: NG's ability to return to net leverage in the low 6.0x range by FY23 depends on the outcome of RIIO-T2 final determination (FD), US rate cases and the timing and extent of COVID-19-related cost recovery. An important consideration for future rating action will be how NG manages its cash deployment and debt levels during the downturn in FY21-FY22. A longer deleveraging timeframe would likely result in a negative rating action.
Moderately Higher Debt Capacity: Fitch has revised upwards the debt capacity (FFO net leverage and gearing (net debt/regulated asset base)) for NG's US regulated businesses following our updated peer comparison with rated US regulated peers. Fitch considers
For more information, see 'Fitch Affirms Brooklyn Union Gas &
Focus on US Asset Growth: Fitch expects US regulatory asset value (RAV) to grow faster than the
Linkage between US Opco's and NG: In our rating approach for US opcos KEDNY and KEDLI whose IDRs are at 'BBB+', we recognise the benefit of ring-fencing measures including authorised regulatory capital structures, and dividend payment restrictions to allow for the rating to be above that of the parent. If NG's IDR is downgraded to 'BBB-', the US subsidiaries are unlikely to be constrained, as Fitch currently allows a two-notch rating differential.
Challenging
Rating Pressure on NG: The rating of NG could face further negative pressure should there be no substantial progress on the totex allowances between the DD and FD and no other remedial measures, such as a reduction to the scope of works. NG's FFO net leverage is above our current negative rating sensitivity and could be further affected by lower operational cash flow of NGET and NGG, which in turn could reduce the amount of cash flow available to NG for debt service.
Pandemic-Associated Cost Considerable: NG's 1HFY20 results published in November reiterated the group's guidance for FY21, a
RIIO-T2 PMICRs Considerably Weaker: We expect NGET's and NGG's average cash-based post-maintenance interest coverage (PMICR) to be materially weaker during RIIO-T2 than in the current regulatory period, but above our negative sensitivity of 1.7x and 1.9x, respectively. In our view, both companies are better-placed than other
DERIVATION SUMMARY
NG
NG's Long-Term IDR is notched down once below the consolidated credit profile of 'BBB+' reflecting additional debt at the group level and structural subordination to opcos. NG's consolidated credit profile is comparable with other European transmission/system operators'. NG has marginally lower debt capacity than
NGET
We consider other main European transmission system operators, such as
NGG
We consider other western European gas transmission operators, such as
KEY ASSUMPTIONS
Fitch's Key Assumptions
NG's capex of about
Average annual cash dividend of about
NG's average cash cost of debt at about 3% per year in FY21-FY24
Foreign exchange rates: GBP/
Restricted cash in FY21-FY25 assumed at the same level as in FY20 audited accounts (
Cross-currency interest rate swaps out of the money (
Operating profit to reduce by about
US Business achieving slightly below 95% target for allowed ROE
Fitch Key Assumptions for RIIO-T1 and RIIO-T2
RPI of 1.6% in FY21, 2% in FY22, and 2.6% for FY23-FY26
CPIH of 2% on average from FY22-FY26
Allowed cost of debt at 1.1% in FY21 (real, RPI-linked)
Allowed cost of debt at 1.74% on average for FY22-FY26 (real, CPIH-linked)
Allowed cost of equity at 3.95% (CPIH-stripped) for FY22-FY26
25 bp outperformance included in ROE, in line with Ofgem's indications for FY22-FY26
No additional totex or incentive outperformance for FY22-FY26
Allowed weighted average cost of capital (WACC) at 2.75% in FY22 reducing to 2.53% by FY26 (real, CPIH-linked)
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
NG: The rating is on Negative Outlook; therefore, a positive rating action is unlikely in the short term. However, the Outlook could be revised to Stable if NG demonstrates a clear deleveraging path with FFO consolidated net leverage at or below 6.3x by FY23.
A revision of NG's Outlook to Stable will be replicated for NGET and NGG, provided there are no changes in parent and subsidiary linkage (PSL) between the companies.
NGET: An improvement in cash PMICR above 2.3x / nominal PMICR above 2.5x and a decline in RAV-based net leverage to below 55% on a sustained basis, would be positive for the rating, if accompanied by a positive rating action on NG.
NGG: An improvement in cash PMICR above 2.5x / nominal PMICR above 2.7x and a decline in RAV-based net leverage to below 50% on a sustained basis, would be positive for the rating, if accompanied by a positive rating action on NG.
NGGH: A positive rating action on NGG, accompanied by no material debt at NGGH, would be positive for the rating.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
NG:
Increase in FFO consolidated net leverage to 6.3x or higher on a sustained basis or consolidated gearing towards 69%, the latter of which will complement our assessment of NG's debt capacity.
Decline in consolidated FFO interest coverage to below 3.5x.
Negative rating action on key opcos, which could trigger our reassessment of NG' rating.
Significant adverse regulatory developments, including RIIO-T2 methodology decisions or outcome of KEDNY/KEDLI and other US rate case filings.
NGET: Decline in cash PMICR to below 1.7x/ nominal PMICR below 2.0x and RAV-based net leverage increasing to over 67.5% on a sustained basis or a downgrade of NG.
NGG: Decline in cash PMICR to below 1.9x / nominal PMICR below 2.1x and RAV-based net leverage increasing to over 64% on a sustained basis or a downgrade of NG.
NGGH: A negative rating action on NGG or issue of a significant amount of debt by NGGH or a negative rating action on NG.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: At FYE20, NG had about
SUMMARY OF FINANCIAL ADJUSTMENTS
Cash interest paid adjusted to include capitalised interest.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
National Grid Gas Holdings Limited LT IDR A- Affirmed A-
senior unsecured
LT A Affirmed A
National Grid Electricity Transmission plc LT IDR A- Affirmed A-
ST IDR F2 Affirmed F2
senior unsecured
LT A Affirmed A
subordinated
LT BBB- Affirmed BBB-
National Grid Gas plc LT IDR A- Affirmed A-
ST IDR F2 Affirmed F2
senior unsecured
LT A Affirmed A
senior unsecured
ST F2 Affirmed F2
National Grid Plc LT IDR BBB Affirmed BBB
ST IDR F2 Affirmed F2
senior unsecured
LT BBB+ Affirmed BBB+
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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