Northern Ireland Electricity is likely to have its credit rating downgraded, Fitch Ratings has warned. Fitch says it will downgrade NIE from A- to BBB+ on senior unsecured debt if the Competition Commission’s provisional determination on a new system for price controls is confirmed.
The Competition Commission made its provisional determination earlier this month, after the matter was referred to it by Northern Ireland’s Utility Regulator. NIE had rejected the Utility Regulator’s own price control determination, arguing that it failed to allow NIE to invest sufficiently in infrastructure improvement.
But under the proposal from the Competition Commission, NIE will be allowed 6.4% less revenue than it would have under the Utility Regulator’s proposal.
NIE owns the electricity transmission and distribution infrastructure in Northern Ireland, which accounts for 20 to 25% of consumer bills. The company is a subsidiary of ESB, which is owned by the Irish state.
The Competition Commission’s provisional determination would allow NIE to raise its prices by 3.3% by 2017 over 2012 prices. The Commission also concluded that the Utility Regulator did not obtain sufficient information from NIE to enable it to carry out its regulation “in a full effective manner”.
Fitch Ratings stated: “We expect a negative impact on NIE’s credit profile, which is likely to lead to a weaker standalone credit profile for the company and hence a downgrade of its senior unsecured rating.”
Fitch pointed not only to the Competition Commission’s tougher price controls, but also to its proposal for a lower allowance for the cost of capital. The Utility Regulator had proposed recognition of a cost of capital at 4.6%, whereas the Competition Commission assessed this at 4.1%.
Under the Competition Commission’s proposed new regime, says Fitch, NIE would have a reduced capacity to generate cash flow and more limited financial flexibility.
The Competition Commission’s provisional determination was welcomed by Manufacturing Northern Ireland. Chief executive Stephen Kelly said: “Northern Ireland has the second most expensive energy in Europe, after Italy. While we understand the need to invest, it has to be done in ways that are in the interests of consumers. The Competition Commission report broadly has our support.”
ESB declined to comment on the likely ratings downgrade of its subsidiary. No one was contactable at NIE, but it has previously stated its intention to respond formally to the Competition Commission’s proposals. The closing date for responses is tomorrow. [29 November]
A final determination is expected to be published by the Commission in February.