TEXT-Fitch:UK gas distribution networks' ratings at risk under new price control
Oct 18 - In a new report, Fitch Ratings says that the new price control (RIIO-GD1) could put pressure on UK gas distribution networks' (GDNs) financial profiles, and therefore ratings. Based on its assessment of the initial proposals, the agency considers key forecast credit metrics to be borderline with Fitch's negative rating guidelines, assuming companies neither outperform nor underperform the set targets.
"If the Office of the Gas and Electricity Markets' final proposals due in December 2012 do not contain material positive changes to the Information Quality Incentive scores or GDNs fail to provide evidence of their ability to outperform tightly set targets and/or adjust dividend policies, Fitch may revise their Outlooks to Negative from Stable," says Angelina Valavina, Senior Director in Fitch's Corporates group.
Fitch believes that a combination of a low weighted average cost of capital, challenging IQI scores and relatively high incentive rates is likely to increase downside risk in the companies' operations. Although Ofgem believes that the new price control may provide an opportunity for best performers to achieve double-digit returns, Fitch believes it could equally put additional pressure on the underperforming companies, potentially widening the gap between the most and the least efficient networks.
Link to Fitch Ratings' Report: UK Gas Distribution Price Control 2013-2021: Stricter Targets, Stronger Incentives
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