TEXT-Fitch ups Northern Powergrid Holdings Company to 'BBB+'; outlook stable

Sept 11 - Fitch Ratings has upgraded Northern Powergrid Holdings Company's (Northern Powergrid) Long-term Issuer Default Rating (IDR) to 'BBB+' from 'BBB', senior unsecured rating to 'A-' from 'BBB+' and Short-term IDR to 'F2' from 'F3'. The agency has simultaneously affirmed the group's two distribution network operating businesses (DNOs), Northern Powergrid (Northeast) Limited (NPN) and Northern Powergrid (Yorkshire) plc's (NPY) Long-term IDRs at 'A-' and Short-term IDRs at 'F2'. The Outlooks on the Long-term IDRs are Stable. A full list of the rating actions is at the end of this comment.

The upgrade of Northern Powergrid and affirmation of NPN and NPY reflect the good operating performance of the regulated businesses and reducing overall group leverage in terms of total group net debt/regulated asset value (RAV) to below 65% as well as the financing structure that places part of the debt at operating company level with NPN and NPY and part of the debt with holding companies. Bond documentation includes covenants that limit NPN and NPY's financial indebtedness to 65% net debt/RAV and restrict distributions of the group if senior net debt/RAV exceeds 75%.

For Northern Powergrid's consolidated profile, Fitch now forecasts a senior debt (five-year average) post-maintenance and post-tax interest cover (PMICR) of 1.7x over the price control period (DPCR5). Gearing had reduced to around 64.2% at December 2011 and Fitch expects it to remain at similar levels. These credit metrics are in line with a 'BBB+' Long-term IDR.

For NPN and NPY, Fitch now forecasts PMICR in the range of 1.9-2.0x (five-year average) over DPCR5 and leverage in terms of net debt/RAV is expected to stay in the mid-50s. These credit metrics are in line with a 'A-' Long-term IDR.

During 2010 and 2011, the DNOs earned rewards from the interruptions incentive scheme, and were awarded GBP27m of funding to research solutions for assessing the potential for new network technology and flexible customer response to facilitate speedier and more economical take-up of low-carbon technologies and the connection to the distribution network of increasing amounts of low-carbon or renewable energy generation. Data from OFGEM regarding the final settlement of the electricity losses incentive from the last price control period (ended in March 2010) is not yet available.

Overall, the group's credit profile has improved due to:

--The outperformance of regulatory targets by NPN and NPY during the first two years of the price control (although lower capital expenditure relates not only to outperformance, but also to timing differences in implementing the programme).

--Continued high retail price inflation of 3.6% for the year ending March 2012 that has assisted continued deleveraging (more significant in comparison to peers as the group has no inflation-linked debt).

--Earnings from services that are outside of the regulated price control have been generating incremental cash flow that contributed to the deleveraging process, in particular metering.

--The competitive procurement of new debt capital.

As of December 2011, the group held GBP13.5m in cash and cash equivalents and had in place an undrawn, committed revolving credit facility of GBP150m with maturity in March 2013. In July 2012, NPY raised additional funds through issuance of a GBP150m bond due in 2032 and the group recently renewed the committed revolving credit facility, extending its final maturity to August 2017. This funding position provides liquidity for all operating requirements for the remainder of the price control period to March 2015.

WHAT COULD TRIGGER A RATING ACTION

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

There is only little scope for further upgrades. If the group were to reduce gearing sustainably to below 60% and were to achieve sector leading rankings in OFGEM's benchmarking an upgrade of the ratings could be considered.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

If management decided to pay higher dividends and increase group gearing above 70% and/or weakening performance in OFGEM's benchmarking could lead to a downgrade.