(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 Networks plc (SPN) and Eastern Power Networks plc's (EPN) Long-term IDRs at 'BBB'. The Outlooks are Stable. A complete list of rating actions is at the end of this release.
The affirmations reflect the low-risk regulated electricity distribution business profiles, the supportive and transparent regulatory environment in the UK, and the focused approach of new management on improving operations and the asset management. As a result, there was a considerable improvement in operational and regulatory performance at the end of FY12. Fitch expects continued outperformance of regulatory targets during the remainder of the distribution price control period (April 2013 to March 2015; DPCR5). The agency also factored into the affirmation the interest rate and RPI swaps agreements put in place by management, which should help the companies manage their interest coverage ratios.
For LPN, the agency expects the post maintenance and post-tax interest cover ratio (PMICR) to be between 1.6x and 1.7x (DPCR5 five-year average) assuming net leverage of 73% (based on net adjusted debt/regulatory asset value (RAV)). These credit metrics place the company comfortably at the current rating level. The company has outperformed its affiliates in meeting the operational targets resulting in higher outperformance, which is reflected in LPN's current credit profile.
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 regulatory performance 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-year average) assuming net debt to RAV-based leverage of 73%. EPN's leverage remains strong for its current rating, but the PMICR is weak. However, the current rating also assumes that the company will improve its operational performance and earn performance incentives during the remainder of DPCR5 under the UK's Office for Gas and Electricity Markets' (Ofgem) incentive schemes.
The range for the expected PMICR ratios represents calculations with and without the swaps to reflect Fitch's view that the credit-enhancing benefits of an RPI-based interest rate swap are limited and are taken into consideration only if the break and/or accretion payment clauses in the swap agreements are long term. Fitch believes that these synthetic financial products will not improve the company's credit profile materially, but are instrumental in maintaining covenanted financial ratios.
For FY11, the three distribution networks, in terms of regulatory and operational performance, remained mostly in the bottom of the third quartile rankings in the Ofgem's performance benchmarks. Fitch expects considerable improvement in the rankings based on the performance benchmark for FY12 and beyond.
As of 31 March 2012, LPN had GBP39.1m in cash and cash equivalents and available committed bank facilities of GBP145m expiring in February 2017. This funding position provides liquidity for operating requirements through 2014. SPN had GBP6.2m in cash and cash equivalents and available committed bank facilities of GBP145m expiring in February 2017. This funding position as of 31 March 2012 provides liquidity for operating requirements into 2013 and constraints the company 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 available committed bank facilities of GBP210m expiring in February 2017 and will last through FY13. The available liquidity could be a constraint in a tightening credit markets and a high dividend payout scenario.
At present, PMICR and gearing levels represent estimated values. As Ofgem has not yet published any performance data in comparison to regulatory targets, and following the introduction of the regulator's total expenditure approach, it is difficult to calculate credit metrics based only on the statutory financial accounts. Once Ofgem publishes this information in early 2013, Fitch will be able to confirm the estimated financial ratios. The uncertainty on the close-out of the DPCR4 losses incentive remains an issue, but the agency does not contemplate it materially affecting the rating.
WHAT COULD TRIGGER A RATING ACTION
Positive: Currently, the probability of a positive rating action is low, even if the financial metrics listed below are achieved, given that changes to be implemented in the next price controls are yet to be finalised and evaluated and could lead to revised rating guidelines for the sector. Future developments that nevertheless may, individually or collectively, lead to a positive rating action include:
-LPN: Decline in RAV-based and net leverage to below 60% and rise in PMICR above 2x, on a sustainable basis.
-SPN and EPN: An improvement in PMICR above 1.7x and a decline in RAV-based net leverage to below 70% on a sustainable basis for both companies.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-LPN: PMICR falls below 1.6x and RAV-based, pension-adjusted net leverage increases 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 plc Long-term IDR at 'BBB+'; Stable Outlook Short-term IDR at 'F2' Senior unsecured notes at 'A-' South Eastern Power Networks plc Long-term IDR at 'BBB'; Stable Outlook Short-term IDR at 'F3' Senior unsecured notes at 'BBB+' Eastern Power Networks plc Long-term IDR at 'BBB'; Stable Outlook Short-term IDR at 'F3' Senior unsecured notes at 'BBB+'
(Caryn Trokie, New York Ratings Unit)