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Monday 09 December, 2019

Wales & West Ut. Ltd

Planning for the next regulatory control period

RNS Number : 1757W
Wales & West Utilities Limited
09 December 2019

Wales & West Utilities Limited ("WWU")

Planning for the next regulatory control period, "GD2"


Today, WWU submitted its Business Plan to Ofgem for the next regulatory control period ("GD2") which will operate from 1 April 2021 to 31 March 2026. 


A copy of this Business plan can be located on WWU's website ( and should be read in conjunction with the remainder of this announcement.


In the foreword to the Business Plan, Graham Edwards, CEO, states: "Our plan puts customers at its core. It has been developed in partnership with our customers and stakeholders, through extensive conversations that have combined far-reaching engagement with granular, in-depth research. This is our most ambitious and stretching plan ever, but one we have confidence in delivering based on our history as a leading performer. We are proud of our record to date, and we see the opportunity in the next five years to take our ambitions further."


Chapter 22 of the Business Plan covers financeability, and we outline below some of its key financial highlights:


1.    WWU Business Plan


·     This plan should be financeable and assumes revenue allowances will cover efficient levels of operating, financial and investment expenditures. 


·     Maintains headroom within our secured lender financial ratios to support debt ratings of A- for class A debt and BBB for class B debt.


·     Average annual customer bills to remain flat over GD1 (in 2018/19 prices).


·     Notably, in terms of revenue allowances for cost of capital, based on independent expert evidence the Plan uses an allowed real cost of equity of 6.1% (real, CPIH); an allowed real cost of debt of 5.25% (real, CPIH), producing an allowed cost of capital of 5.59% (real, CPIH) based on Ofgem's working assumption of 60% leverage.   


·     This Plan does not apply Ofgem's working assumptions for cost of capital allowances, which are an average 3.08% (real, CPIH), comprising cost of equity of 4.8% (real, CPIH) and cost of debt averaging 1.93% (real, CPIH).  These levels are considered too low, as supported by expert reports commissioned by WWU and the Energy Network Association.


2.    Ofgem required plan versions: Ofgem Notional Company and Ofgem Actual Company


·     Ofgem requires licensees to submit two plan versions (we refer to these as the "Ofgem Notional Company" and the "Ofgem Actual Company") with financeability assessments.


·     These two plan versions use Ofgem's working assumption for cost of capital allowances of an average 3.08% p.a. (real, CPIH). Ofgem's Notional Company uses a cost of capital covered by this revenue allowance. For the Ofgem Actual Company, Ofgem requires WWU's actual capital structure and cost of capital to be used. We apply a notional leverage of 60% to each, Ofgem's working assumption.


·     We consider the Ofgem Notional Company to be financeable for GD2, but with significant reservations over a longer timeframe.  We project a reduction to customer bills (2018/19 prices) of 13.4% for GD2 compared to GD1.


·     We consider the Ofgem Actual Company plan not to be financeable, even though we have included certain assumed mitigating measures. Without these measures, we would be at greater risk of failing to comply with certain of our secured lender financial ratios and regulatory licence requirements.  This conclusion is due to Ofgem's current assumed allowances for cost of capital of 3.08%, which is too low.  Our business plan submission includes external evidence to support our position. Using the Ofgem current working assumptions for cost of capital, we project a reduction to customer bills (2018/19 prices) of 14.5% for GD2 compared to GD1.



Final remarks


WWU has a track record of excellent customer service, compliance with regulatory outputs and efficient operations.  It has maintained consistent credit rating levels with Standard and Poor's and Fitch Rating Agency since March 2010.   


The planning process with Ofgem continues to develop. The cost of capital data referenced above may or may not change materially before Ofgem's Interim and Final Determinations expected in June 2020 and November 2020 respectively.  As we have yet to receive feedback from Ofgem, the final shape and content of the Business Plan for GD2 may change materially before GD2 commences.  Accordingly, at this time, we are unable to predict with any certainty the impact that the final Business Plan for GD2 will have on financeability, our ability to comply with our secured lender financial ratios and the ratings of our class A and class B debt.


WWU will continue to work with Ofgem and other stakeholders to ensure it is prepared for GD2.  In the meantime, in relation to any financial matters, the following WWU executives are available for discussion:



Chief Executive: Graham Edwards

Email: [email protected]

Telephone: 029 2027 8500


Director of Finance: Neil Henson

Email: [email protected]

Telephone: 029 2027 8500


Head of Treasury and Tax: Ian Weldon

Email: [email protected]

Telephone: 029 2027 8500


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