the CAA said - Heathrow Airport

CAP 1027
Chapter 9: Cost of capital
• HAL’s estimate of the cost of maintaining a debt capital markets
platform for borrowers similar to itself (c32-38bps) which includes
new issue premia, bond issue book runner, ancillary fees and
expenses, which are taken into account by PwC in its estimate of
the yield on bonds at issue;
• HAL’s estimate of the cost for any business maintaining the liquidity
necessary to fulfil its going concern requirements includes the cost
of committed, undrawn facilities required to maintain liquidity (c17-
20bps). The CAA considers that this cost does not need to be
included as the CAA is not proposing to use an adjustment to
reduce the WACC for an ARR; and
• it is consistent with other regulatory decisions where fees have
been explicitly stated. These include Bristol Water (CC, 10 bps),
Stansted Airport Q5 (CAA/CC 10 bps), Heathrow and Gatwick
Airports Q5 (CAA/CC 15 bps) and the Northern Ireland Utility
Regulator (15 bps).
9.115 PwC considered that fees of 20 bps were appropriate to include in the
cost of debt for GAL and STAL (20 bps). These were 5 bps higher
than its estimate for HAL (15 bps) to reflect the smaller issuance size
blocks for GAL and STAL.
9.116 EE’s approach to calculating the cost of debt estimates current
corporate bond spreads over treasury gilts and adds this to its
estimate of the risk-free rate. The CAA notes that EE has not
presented the calculation of the bond spread and therefore it is not
possible to verify the consistency between its treasury gilts yields and
risk-free rate assumptions.
9.117 Figure 9.5 compares the CAA’s overall cost of debt calculation to
estimates made in other recent periodic reviews. This shows that cost
of debt assumptions have been reducing over time. The figure shows
that the CAA’s judgement in these initial proposals is consistent with
the overall trend in regulatory decisions during recent years.
April 2013 Page 146