(Repeat for additional subscribers)
April 10 (The following statement was released by the rating agency)
Fitch Ratings is maintaining Northern Ireland Electricity Limited's (NIE) 'A-' senior unsecured rating on Rating Watch Negative (RWN). The 'A-' rating of GBP400m notes due 2026 issued by NIE Finance plc also remains on RWN.
The agency has affirmed NIE's Long-term Issuer Default Rating (IDR) at 'BBB+'. The Outlook on the Long-term IDR is Stable.
The affirmation of the Long-term IDR and the Stable Outlook reflect NIE's ties to its ultimate parent Electricity Supply Board (ESB; BBB+/Stable; senior unsecured BBB+), including full ownership, liquidity support by ESB and a back-to-back interest rate swap agreement entered into by the two companies in April 2011.
The RWN continues to reflect the pending 'Transmission and Distribution Price Controls 2013-2017' (RP5) for NIE which could lead to a weaker standalone credit profile for the company (currently assessed at 'BBB+') and hence a downgrade of its senior unsecured rating, which is notched up by one level from the standalone credit profile. A weaker standalone credit profile would therefore result in the senior unsecured rating of NIE being equal to that of ESB, while NIE's IDR may remain unchanged at 'BBB+' due to the parent's support.
Fitch initially placed NIE on RWN on 17 May 2012 and has subsequently maintained the RWN on 16 November 2012, 31 January 2013, 30 April 2013, 16 July 2013, 16 October 2013 and 16 January 2014. This rating review is to comply with Fitch's internal guideline to review ratings on Rating Watch every three months following the initial six-month review.
KEY RATING DRIVERS
The Utility Regulator in Northern Ireland (UReg) on 30 April 2013 referred NIE's final determination (FD) to the Competition Commission (CC). The CC published NIE's provisional determination on 12 November 2013. We would likely downgrade NIE's senior unsecured rating to 'BBB+' from 'A-' if the proposal included in the provisional determination materialises in the CC's final determination as indicated in our comment published on 27 November 2013 -'Competition Commission's Provisional Determination Negative for Northern Ireland Electricity' which is available on www.fitchratings.com.
The CC proposes significant changes to NIE's price control, including separate price controls for the company's transmission and distribution networks, a 50:50 cost risk-sharing mechanism for capital and operational expenditure (capex and opex), allowances for direct capital expenditure costs based on a review of NIE's proposal and a benchmarking of indirect costs using GB distribution network operators as comparators. The CC also proposes a price control period of 5.5 years from 1 April 2012 to 30 September 2017 for which revenue allowances would be set. CC also proposes arrangements to return to either consumers or NIE any differences in the CC's proposed revenue allowances for the period from 1 April 2012 to October 2014 and the tariffs that have already been set for that period.
Although the CC is proposing additional capex allowances, the proposed significantly lower cost of capital of 4.1% compared with the 4.6% proposed by UReg in the FD, together with the lack of any incentive revenue available to NIE, is expected to have a negative impact on the company's allowed revenues and consequently on its cash flow generation ability. We expect the reduction in cash flow generation, mainly driven by the lower regulatory allowed revenues, to negatively affect NIE's post-maintenance and post-tax interest cover ratio (PMICR) as calculated by Fitch and to limit the company's financial flexibility. Since 1 April 2014 the CC has been abolished and its functions transferred to the Competition and Markets Authority (CMA). The CMA is expected to publish the final determination any time this month before the maximum statutory deadline of end-April 2014. We will review the ratings once the CMA's final determination is published.
Negative: Future developments that could lead to negative rating action include:
- A downgrade of ESB
- A negative rating action on NIE's senior unsecured rating would be considered if 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 could lead to positive rating actions include:
- A positive rating action on ESB
- An affirmation on NIE's senior unsecured rating would be considered if the decision by the CC on the FD, together with NIE's new business plan for RP5, leads to comfortably stronger credit metrics than those indicated in the negative rating triggers.
LIQUIDITY AND DEBT STRUCTURE
As at 31 December 2013, NIE had GBP32m in cash and cash equivalents and undrawn committed revolving credit facilities of GBP60m maturing in 2015, which are provided by ESB. This is sufficient to cover short-term funding needs.
FULL LIST OF RATING ACTIONS
Northern Ireland Electricity Limited
-Long-term IDR affirmed at 'BBB+/Stable
-Senior unsecured 'A-' remains on RWN
NIE Finance plc
-Senior unsecured 'A-' remains on RWN