TEXT-Fitch maintains Northern Ireland Electricity's senior unsecured rating on RWN

Fri Nov 16, 2012 5:49am EST

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Nov 16 - Fitch Ratings has affirmed Northern Ireland Electricity Limited's (NIE) Long-term Issuer Default Rating (IDR) at 'BBB+'. The Outlook on the Long-term IDR is Negative. The agency has maintained NIE's 'A-' senior unsecured rating on Rating Watch Negative (RWN).

The affirmation of the Long-term IDR and the Negative Outlook reflect NIE's ties to its ultimate parent Electricity Supply Board (ESB; Long-term IDR 'BBB+'/Negative; senior unsecured rating 'BBB+') including full ownership, the fact that NIE's liquidity funding is provided by ESB and the back-to-back interest rate swap arrangements entered into by the two companies in April 2011.

Fitch placed NIE on RWN on 17 May 2012. The RWN continues to reflect the pending 'Transmission and Distribution Price Controls 2012-2017' (RP5) for NIE that could lead to a weaker standalone credit profile of NIE and hence a downgrade of its senior unsecured rating. This ratings review is to comply with Fitch's internal guideline to review ratings placed on Rating Watch within six months.

The Utility Regulator in Northern Ireland (UReg) published the final determination (FD) for RP5 on 23 October 2012. However, NIE has until 20 November 2012 to accept or reject the FD, and UReg's proposed modifications to NIE's T&D licence. The current price control, RP4, has been further extended to 31 December from 1 October 2012.

If NIE accepts the FD, Fitch would analyse the company's revised business plan, including funding and leverage expectations, within the parameters of the FD and review the ratings in the coming months.

If NIE rejects the FD, Ureg would likely refer it to the Competition Commission, which would consider submissions and evidence from all relevant parties and form a judgement. This process normally takes around six months from the date of referral, and Fitch would likely maintain the RWN until a final decision is available and NIE's new business plan is analysed.

The FD includes a number of changes from the proposals published in the draft determination on 19 April 2012, mainly an increase in the pension deficit allowance, which are likely to result in a positive effect on the prospective pension-adjusted post-maintenance and post-tax interest cover (PMICR). However, Fitch still views the financing assumptions set out by UReg as challenging when considered jointly with NIE's actual funding costs.

As well as the pension deficit allowance being increased to GBP47.9m (five years) from GBP11.8m, the main changes include an increase in capex and opex allowances from the draft determination of 26% and 5%, respectively (including a downwards revision of the controllable opex efficiency factor to 7% from 9%); a small reduction of the adjustment related to the review of NIE's capitalisation practices over previous price controls; and an increase on the WACC allowance to 4.55% from 4.45%, which is based on a slightly higher cost of debt and lower cost of equity assumptions and a reduced leverage target of 50% compared to 60% used for the draft determination.

As at 31 March 2012, NIE had GBP51.3m in cash and cash equivalents and undrawn committed revolving credit facilities of GBP60m maturing in 2015, which are provided by its parent, ESB.

WHAT COULD TRIGGER A RATING ACTION

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

- A downgrade of NIE's parent, ESB.

- A negative rating action on NIE's senior unsecured rating would be considered if forecast PMICR falls below 1.4x and/or leverage (net adjusted debt/regulatory asset base) rises above 57.5%, both on a sustained basis.

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

- The current Rating Outlook is Negative. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade.

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