Sept 13 - Fitch Ratings has affirmed Electricity North West Limited’s (ENW) Long-term Issuer Default Rating (IDR) at ‘BBB+', senior unsecured rating at ‘A-', and Short-term IDR at ‘F2’. Fitch has also affirmed the following ratings:
--Senior Unsecured debt rating of ENW Finance Plc at ‘A-’
--Long-term IDR of North West Electricity Networks Limited (NWEN) at ‘BBB’
--Senior Secured rating of ENW Capital Finance Plc at ‘BBB+’
The Rating Outlook is Stable.
Bonds issued by ENW Finance plc, a financing subsidiary of ENW, are for the benefit of ENW and are guaranteed by ENW, and bonds issued by ENW Capital Finance plc are guaranteed by NWEN, the immediate parent of ENW.
Today’s ratings action reflects cash flow stability and visibility under the UK’s Office for Gas and Electricity Markets’ (Ofgem) framework for the remainder of the regulatory price control regime (DPCR5), outperformance of operational and regulatory outputs by ENW, and a covenanted financing structure. The Stable Outlook reflects ample liquidity to manage immediate funding needs, a manageable DPCR5 capital spending program, and the absence of material debt maturities over the next couple of years.
Fitch expects the company to maintain its low-risk business profile by continuing to operate its core, monopolistic electricity distribution business in the supportive regulatory regime in the UK. Under Fitch’s rating forecast, ENW should achieve a post-maintenance and post-tax interest coverage ratio (PMICR) of 1.75x and a net debt/regulatory asset value (RAV) of 63% over DPCR5. Similarly, on a consolidated basis, NWEN should achieve a PMICR of 1.5x over DPCR5 and maintain RAV based leverage of 83%. Fitch’s rating forecast incorporates the Ofgem approved DPCR5 operating and capital budget, ENW’s track record in terms of regulatory performance, and the capital structure of the group.
Fitch has assumed a conservative outperformance of the regulatory incentive targets by ENW on a cumulative basis. The incentive scheme in DPCR5 provides an opportunity to all regulated networks to supplement cash flow from a low return on the regulatory asset base. Target leverage (based on RAV) of 63% reflects the company’s financial policy along with uncertainty over cash needs of the company’s shareholders.
Fitch expects operating cash flow and leverage at ENW and NWEN will remain at current levels, which is commensurate with the current ratings.
At 31 March 2012 ENW had GBP84 million in cash and cash equivalents and undrawn committed facilities of GBP55 million which expire in 2016. NWEN had GBP0.5 million in cash and cash equivalents and a GBP150 million capex facility maturing in 2016 of which GBP122 million remain undrawn, as well as a GBP40 million undrawn liquidity facility renewable annually, for its 18-month forward-looking debt service funding.
For FY12 ending March 31, 2012, ENW achieved strong results, including an adjusted PMICR of 1.5x and RAV based leverage of 63.6%. FY12 improvement in operating cash flow from operating cost efficiencies and higher revenues was offset by the refund of over-collected revenues in FY11 and higher operating costs that are recoverable as revenues in the future years. FY12 consolidated adjusted PMICR for NWEN was 1.15x and the Net Debt/RAV ratio was 81.5%. These credit metrics reflect Fitch’s anticipated adjustment for the capital expenditure efficiencies and the deferral of certain capital projects to a future date and are preliminary in nature. These ratios will change once Ofgem provides details on the network’s actual performance against the regulatory performance targets for FY12. The ratios were also adjusted for the perceived reclassification of capital expenditure as operating costs to reconcile with the regulatory cost allocations.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--ENW: PMICR above 2x and a decline in RAV based leverage below 60% on sustainable basis
--NWEN: A rating upgrade at its operating subsidiary, ENW, would support a rating upgrade along with an improvement in PMICR above 1.6x and a decline in RAV based leverage below 75% on sustainable basis
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--ENW: PMICR below 1.6x and RAV based leverage over 74% on a sustainable basis.
--NWEN: PMICR below 1.4x and RAV based leverage over 84% on a sustainable basis.