(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings has affirmed London Power Networks plc's (LPN)Long-term Issuer Default Rating (IDR) at 'BBB+ and South Eastern Power Networksplc (SPN) and Eastern Power Networks plc's (EPN) Long-term IDRs at 'BBB'. TheOutlooks are Stable. A complete list of rating actions is at the end of thisrelease.
The affirmations reflect the low-risk regulated electricity distributionbusiness profiles, the supportive and transparent regulatory environment in theUK, and the focused approach of new management on improving operations and theasset management. As a result, there was a considerable improvement inoperational and regulatory performance at the end of FY12. Fitch expectscontinued outperformance of regulatory targets during the remainder of thedistribution price control period (April 2013 to March 2015; DPCR5). The agencyalso factored into the affirmation the interest rate and RPI swaps agreementsput in place by management, which should help the companies manage theirinterest coverage ratios.
For LPN, the agency expects the post maintenance and post-tax interest coverratio (PMICR) to be between 1.6x and 1.7x (DPCR5 five-year average) assuming netleverage of 73% (based on net adjusted debt/regulatory asset value (RAV)). Thesecredit metrics place the company comfortably at the current rating level. Thecompany has outperformed its affiliates in meeting the operational targetsresulting in higher outperformance, which is reflected in LPN's current creditprofile.
Fitch expects SPN's PMICR to be between 1.5x and 1.6x (DPCR5 five-year average)assuming RAV-based net leverage of 73%. SPN's operational and regulatoryperformance is weaker than LPN and is reflected in its current Long-term IDR.
Fitch expects EPN's PMICR will range between 1.3x and 1.5x (DPCR5 five-yearaverage) assuming net debt to RAV-based leverage of 73%. EPN's leverage remainsstrong for its current rating, but the PMICR is weak. However, the currentrating also assumes that the company will improve its operational performanceand earn performance incentives during the remainder of DPCR5 under the UK'sOffice for Gas and Electricity Markets' (Ofgem) incentive schemes.
The range for the expected PMICR ratios represents calculations with and withoutthe swaps to reflect Fitch's view that the credit-enhancing benefits of anRPI-based interest rate swap are limited and are taken into consideration onlyif the break and/or accretion payment clauses in the swap agreements are longterm. Fitch believes that these synthetic financial products will not improvethe company's credit profile materially, but are instrumental in maintainingcovenanted financial ratios.
For FY11, the three distribution networks, in terms of regulatory andoperational performance, remained mostly in the bottom of the third quartilerankings in the Ofgem's performance benchmarks. Fitch expects considerableimprovement in the rankings based on the performance benchmark for FY12 andbeyond.
As of 31 March 2012, LPN had GBP39.1m in cash and cash equivalents and availablecommitted bank facilities of GBP145m expiring in February 2017. This fundingposition provides liquidity for operating requirements through 2014. SPN hadGBP6.2m in cash and cash equivalents and available committed bank facilities ofGBP145m expiring in February 2017. This funding position as of 31 March 2012provides liquidity for operating requirements into 2013 and constraints thecompany in settling its financial operations when compared to its affiliates.EPN had GBP9.4m in cash and cash equivalents at the end of FY12 and availablecommitted bank facilities of GBP210m expiring in February 2017 and will lastthrough FY13. The available liquidity could be a constraint in a tighteningcredit markets and a high dividend payout scenario.
At present, PMICR and gearing levels represent estimated values. As Ofgem hasnot yet published any performance data in comparison to regulatory targets, andfollowing the introduction of the regulator's total expenditure approach, it isdifficult to calculate credit metrics based only on the statutory financialaccounts. Once Ofgem publishes this information in early 2013, Fitch will beable to confirm the estimated financial ratios. The uncertainty on the close-outof the DPCR4 losses incentive remains an issue, but the agency does notcontemplate it materially affecting the rating.
WHAT COULD TRIGGER A RATING ACTION
Positive: Currently, the probability of a positive rating action is low, even ifthe financial metrics listed below are achieved, given that changes to beimplemented in the next price controls are yet to be finalised and evaluated andcould lead to revised rating guidelines for the sector. Future developments thatnevertheless may, individually or collectively, lead to a positive rating actioninclude:
-LPN: Decline in RAV-based and net leverage to below 60% and rise in PMICR above2x, on a sustainable basis.
-SPN and EPN: An improvement in PMICR above 1.7x and a decline in RAV-based netleverage to below 70% on a sustainable basis for both companies.
Negative: Future developments that may, individually or collectively, lead tonegative rating action include:
-LPN: PMICR falls below 1.6x and RAV-based, pension-adjusted net leverageincreases over 73% on a sustainable basis.
-SPN and EPN: PMICR falls below 1.4x and RAV-based, net leverage rises over 73%on a sustainable basis.
Fitch has affirmed the following ratings:
London Power Networks plcLong-term IDR at 'BBB+'; Stable OutlookShort-term IDR at 'F2'Senior unsecured notes at 'A-'South Eastern Power Networks plcLong-term IDR at 'BBB'; Stable OutlookShort-term IDR at 'F3'Senior unsecured notes at 'BBB+'Eastern Power Networks plcLong-term IDR at 'BBB'; Stable OutlookShort-term IDR at 'F3'Senior unsecured notes at 'BBB+'
(Caryn Trokie, New York Ratings Unit)