the CAA said - Heathrow Airport

CAP 1027
Chapter 9: Cost of capital
account non-systematic risks. And although there is some apparent
inconsistency between the presentation of risks by HAL's advisers and
its actual gearing level (as noted above), the CAA considers that a
prudent gearing assumption will enable the airport to continue to be
resilient to the shocks of the nature that EE and NERA have
suggested that it faces.
9.125 The CAA's view that gearing of 60% is appropriate for HAL compares
to Ofgem's recent decisions for energy companies (55% to 65%), and
Ofwat's 2009 price controls (57.5%) for water companies. It is,
however higher than telecoms (wholesale broadband access: 50%
and mobile call termination: 30%), but the CAA considers that this is
consistent with the risk differential between the sectors.
Setting the WACC for the CAA’s initial proposals
9.126 PwC estimated that the WACC was in the range of 4.21% to 5.63%.
CEPA estimated it to be in the range 4.5% to 5.5%. These estimates
are below the Q5 WACC of 6.2%. HAL estimated the WACC to be
7.1%. Had the Q6 Corporation Tax rate (20.2%) been used in the
calculation of the Q5 WACC, it would have been approximately 0.4%
lower at 5.8%. Therefore, all other things being equal, one would
expect a reduction in the WACC.
9.127 The CAA has examined the sale of equity stakes in HAL’s parent
company. While it is not possible to precisely estimate the value of
HAL from this (and therefore the WACC), estimates suggest that the
value in excess of the RAB at the time is in the region of 5% to 15%.
The CAA would expect a small premium to the RAB to reflect HAL’s
incentive to outperform the price control assumptions. The lower end
of the range of the premium over the RAB would suggest that the Q5
WACC is broadly correct (once the reduction in corporation tax had
been taken into account). 72 The top end of the range would suggest
that the Q5 WACC might be marginally high. This evidence is
informative, but given the difficulty with estimating, the CAA is
cautious of an overly formulaic approach to its interpretation.
72
The Q5 ARR (i.e. the rate actually applied to the RAB in the price cap) was 6.01%, less the
effect of the reduction in tax (0.42%) equates to a rate of 5.6%.
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