OREANDA-NEWS. Fitch Ratings says that the proposed majority stake sale by National Grid plc (NG; BBB/Stable) in four gas distribution network operators (DNOs) has limited ratings impact on the group and its subsidiaries, National Grid Electricity Transmission plc (NGET), National Grid Gas plc (NGG), and National Grid Gas Holdings (NGGH, NGG's parent).

While Fitch expects the financial profile of the group and its subsidiaries to remain broadly unchanged post transaction, NG's business risk would moderately increase due to higher relative contribution from the US business, which we perceive as higher-risk than the UK unit. We may tighten guideline ratios for the group's 'BBB' Issuer Default Rating (IDR) to reflect an increase in business risk, but we do not expect this to impact the rating because NG currently has sufficient headroom to absorb the change in business risk.

In its pursuit of 5%-7% portfolio asset growth over the medium term, NG has recently announced its intention to sell a 51%-80% stake in the currently wholly-owned UK DNOs, located in North West, East of England, West Midlands and London. The four networks are planned to be sold together in a bundle rather than individually. Regulatory asset value (RAV) of the four networks was GBP8.5bn at the end of the financial year to 31 March 2015, representing 23% of the group's total RAV or 21% of the group's total invested capital.

Net proceeds from the transaction would be returned to shareholders rather than used for investment purposes. The group's dividend policy is not expected to change, with dividends increasing at least in line with RPI. A number of details remain unknown, such as the exact stake to be sold, transaction structure, minority dividend inflow and the form of proceeds that will be returned to shareholders.

Assuming no retention of sale proceeds, the impact on NG's financial profile would come from the deconsolidation of DNOs and the dividend funding gap. Dividend funding gap would negatively impact gearing: while the group's dividend would continue to grow at least in line with RPI, part of the cash flow supporting the pay-out would no longer be available from the DNOs. This would be partially offset by the positive impact from the DNOs' deconsolidation because UK DNOs have higher gearing than the group (notional regulatory gearing of 65% net debt/RAV versus NG's consolidated gearing of 63.5% of net debt/invested capital at FYE15). Fitch estimates a neutral to marginally negative impact on the gearing from these two factors, depending on the actual stake sold and minority dividends received. We assume that the group would in a timely manner redeem the respective proportions of DNO's debt post-disposal, some of which is external at NGG level and some in the form of inter-company loans, raised elsewhere in the group.

Business risk impact of the sale would be moderately negative as deconsolidation would lead to higher cash flow contribution from the US operations. National Grid North America (NGNA) would provide 38% of NG's operating profit to the pro forma entity as opposed to 30% in FY15.

Fitch considers NG's US assets to be higher-risk than those in the UK. This is primarily due to the differences in regulation. In our view, RIIO regulation provides higher long-term cash flow visibility as most key regulatory variables are adjusted for automatically, with the adjustments flowing through cash flows with a two-year regulatory lag. Allowed regulatory equity return remains stable during the whole eight-year regulatory period. In contrast, most of the US distribution grids regulation does not allow for an automatic adjustment of key variables, such as inflation or capex, or some of non-controllable opex. New rate cases need to be filed continuously to ensure that all regulated assets are earning allowed regulatory returns and all of the operating expenses are recovered through customer bills. Regular re-filings carry associated equity return reset risk in the US.