Wales & West Utilities Limited ("WWU")
Planning for the next regulatory control period:
"RIIO-GD3"
Today, WWU published its Business
Plan to Ofgem for the next regulatory control period ("RIIO-GD3")
which will run from 1 April 2026 to 31 March
2031.
A copy of this Business plan can be
located on WWU's website (www.wwutilities.co.uk/about-us/business-plan)
and should be read in conjunction with the remainder of this
announcement.
In the foreword to the Business Plan,
Graham Edwards, CEO, states: I'm very pleased to present our 5-year Business Plan for
RIIO-GD3. A demonstration of our commitment, the plan contains a
detailed vision for the work we will continue, using our expertise
to keep on delivering a safe and reliable network to our customers.
While we navigate the future of energy distribution, our strategy
will be strengthened by innovative initiatives and dedication to
fulfilling our role to the highest possible standard, not just to
meet the requirements set by our regulator - but because it's the
right thing to do and is embedded in our ethos.
Document 58 of the Business Plan
covers finance, and we outline below some key
highlights.
1.
WWU Business Plan
a. This plan assumes
revenue allowances will cover efficient operating, financial and
investment expenditures. We project a step change
increase to our Totex, which is 96% mandatory, to ensure continued
strong levels of safety, reliability and customer service
performance.
b. It is supportive
to our investment grade ratings including our long-standing debt
rating of A- for class A debt since March 2010 with two rating
agencies, which is unique in the sector, and underpinned by
significant shareholder equity support in 2023 of £344
million.
c. Revenue allowances for
cost of capital are based on independent expert evidence. The Plan
uses an allowed cost of equity of 6.89% (real, CPIH), a base
distribution rate of 5%, and an allowed cost of debt equivalent to
5.00% (real, CPIH). A gearing target of 60% of RAV is applied and
maintained, in a context of accelerated RAV depreciation reflecting
Ofgem's policy intent.
d. The impact of this Plan to
the network distribution charge component of the average annual
residential customer bill for RIIO-GD3 would be an increase over
RIIO-GD2 (in 2023/24 prices) by £91 from £153 to £244 (2023/24
prices). This represents an estimated increase of 11.5% of
the total gas bill (excl VAT). Most of this increase
stems from Ofgem methodological policy decisions on cost of capital
and RAV depreciation, together with higher Totex noted in 1a.
above. Our customer research showed a majority of respondents in
support of the bill level and direction.
2.
Ofgem required plan versions: Ofgem Notional Company and Ofgem
Actual Company
a. 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 and assurances.
b. These two plan
versions use Ofgem's assumptions for revenue allowances for cost of
equity of 5.43% p.a (real CPIH) and cost of debt equivalent to 2.9%
p.a. (real, CPIH). We assume gearing is controlled to 60% of RAV in
each case, in a context of accelerated RAV depreciation.
c. For each of these
two plans, their impact to the network distribution charge
component of average annual residential customer bills for RIIO-GD3
would be an increase over RIIO-GD2 (in 2023/24 prices) of £73 from
£153 to £226 (2023/24 prices). This represents an estimated
increase of 9% of the total gas bill (excl VAT). Most of this
increase stems from Ofgem methodological policy decisions on cost
of capital and RAV depreciation, together with higher Totex noted
in 1a above.
d. We consider the
Ofgem Notional Company should be financeable for RIIO-GD3, but with
significant reservations.
As for the RIIO-GD2 Business Plan submission in
2019, we consider the Ofgem Actual Company plan would not be
financeable mainly because the assumed cost of capital would be too
low.
Final remarks
There remains considerable
uncertainty surrounding the level and composition of the final
revenue allowances for RIIO-GD3 and this will continue at least
until Ofgem's Draft Determination in summer 2025. There is the
ongoing Judicial Review expected to be heard in 2025 at the High
Court in London against the CMA's Final Determination of WWU
RIIO-GD2 appeal. There is also the impact of uncertainties on the
gas distribution sector regarding pathways to the Government's Net
Zero Carbon 2050 target. Accordingly, at this time, we are
unable to predict with sufficient certainty the final level and
composition of revenue allowances for RIIO-GD3.
However, we face those considerable
uncertainties from a position of operational strength with our
long-standing track record of excellent customer service,
compliance with regulatory outputs and efficient
operations. When combined with ongoing shareholder support - notably their
equity support of £344m in 2023 - we expect our strong credit
rating of A- on our Class A debt with Standard and Poor's and Fitch
Rating Agency to support our debt programme in the coming
years.
WWU will continue to work closely
with Ofgem and other stakeholders. In the meantime, in relation to
any financial matters, the following WWU executives are available
for discussion:
Chief Executive: Graham Edwards
Email:
graham.edwards@wwutilities.co.uk
Director of Finance: Neil Henson
Email:
neil.henson@wwutilities.co.uk
Head
of Treasury and Tax: Ian Weldon
Email:
ian.weldon@wwutilities.co.uk
