Fitch Ratings has affirmed National Grid Gas plc's (NGG) and National Grid Gas Holdings Limited's (NGGH) Long-Term Issuer Default Rating (IDRs) at 'BBB+', and removed them from Rating Watch Negative (RWN).

The Outlook on the IDRs is Stable. Fitch has also affirmed NGG's senior unsecured debt rating at 'A-'. A full list of ratings is detailed below.

The rating affirmation is supported by the group's adequate capital structure, low-risk and predictable regulated cash-flow generation and our expectation of adherence to the dividend and financial policy of the new consortium, supported by a deed poll.

On 31 January 2023, National Grid Plc (NG, BBB-/Stable) completed the sale of its 60% equity interest in NGGH and NGG to a consortium comprising Macquarie Asset Management (MAM) and British Columbia Investment Management Corporation (BCI), with NG holding the remaining 40% minority.

Key Rating Drivers

Adequate Protection in Capital Structure: The financing structure comprises senior unsecured debt issued at NGG's level, where bondholders benefit from restricted payments outlined in a deed poll published 31 January 2023. The cash-lock up restricts payments and prevents NGG's regulated asset value (RAV)-based gearing exceeding 72.5%. Fitch expects the majority of GBP2 billion of incremental debt used to fund the acquisition to be placed at entities above and without recourse to NGG and NGGH.

Comfortable Rating Headroom: Fitch expects NGG's target gearing to be well within our RAV-based negative rating sensitivity of 72%, with comfortable headroom. We expect NGG's average cash and nominal post-maintenance interest coverage ratios (PMICRs) to be above their negative rating sensitivities during the current price control period of RIIO-GT2.

Standalone Assessment under PSL: We rate NGG and NGGH on a standalone basis, reflecting their ring-fencing from entities holding additional acquisition debt and the nature of the new ultimate shareholders. We view legal ring-fencing under our Parent and Subsidiary Linkage (PSL) Rating Criteria as 'insulated', reflecting a well-defined regulatory framework, deed-poll provisions and a financial policy explicitly designed to support NGG's financial profile. We view access and control as overall 'porous' as NGG operates autonomously with separate cash management and all non-equity funding external.

Long-Term Infrastructure Investment Consortium: The new shareholders have extensive experience with investments in UK regulated networks, expect to be long-term holders and have a common financial policy including steady dividend income subject to target gearing at NGG. NG maintains a 40% stake in NGG, but it agreed a call option that may be exercised by the consortium to purchase the remaining stake in 2023. Fitch does not expect the possible purchase to be funded at NGG or NGGH and nor affect their financial policy.

Derivation Summary

NGG is rated at the same level as western European gas transmission operator, Snam S.p.A (BBB+/Stable) in Italy, and a notch higher than Enagas S.A. (BBB/Stable) in Spain. We view NGG's and Snam's debt capacity as higher than that of Enagas, supported by a larger scale and a transparent regulatory framework with a longer record, and a lower share of non-regulated earnings. We align the rating of NGGH (NGG's immediate holding company) with NGG's, reflecting no incremental debt at NGGH and that NGGH has historically agreed to abide by certain regulatory licence conditions of NGG.

We view NGG as qualifying for sector-specific recovery uplift for its debt, and its senior unsecured debt is thus notched up once from its IDR.

Key Assumptions

Our Rating Assumptions within our Rating Case for the issuer:

RPI of 10.5% for FY23, gradually decreasing to about 3.4% by FY25

CPIH of 8.2% for FY23, gradually decreasing to about 2.4% by FY25

Majority of the GBP2 billion incremental debt to be raised above NGG and NGGH

Revolving credit facility (RCF) increased to GBP735 million in December 2022

Average cost of debt of 3.1% for FY22-FY26 (fixed- and floating-rate and indexed-linked nominal debt)

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

NGG:

A decline in RAV-based gearing to below 64% on a sustained basis

Cash PMICR above 1.9x, or nominal PMICR above 2.1x

NGGH:

Positive rating action on NGG is likely to lead to similar rating action on NGGH, accompanied by no material debt at NGGH

Factors that could, individually or collectively, lead to negative rating action/downgrade:

NGG:

RAV-based gearing above 72% on a sustained basis

Cash PMICR below 1.6x, or nominal PMICR below 1.9x

NGGH:

NGGH would be downgraded if it issues any external third-party debt, including drawdown of its own liquidity facilities. This would reflect the structural subordination of NGGH's creditors to NGG's

Negative rating action on NGG is likely to lead to similar rating action on NGGH

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: At FYE22, NGG had about GBP400 million of unrestricted cash or cash equivalents (including an overnight facility between NGG and NG) and GBP350 million committed facilities, both the overnight facility and committed facilities are no longer available after the 60% disposal.

Fitch expects sufficient liquidity in FY23 to cover short-term debt maturities, supported by NGG's upsized RCF of GBP735 million. NGG paid off its December 2022 bond maturity of GBP537 million with a drawdown of committed funding.

Issuer Profile

NGG owns and operates the regulated gas national transmission system in Great Britain, with a RAV of GBP6.6 billion at FYE22. NGG also owns and operates an independent metering business, which is the largest owner of traditional gas meters in the UK with approximately 7.6 million domestic and commercial meters at FYE22.

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

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