Dec 17 -
-- The credit metrics of U.K.-based water utility United Utilities PLC
are showing an increasing degree of headroom, supported by financial
outperformance in the 2010-2015 regulatory period to date.
-- Regulatory measures of operational performance are showing a steady
improvement, and United Utilities remains committed to its almost exclusive
focus on the low-risk, regulated water sector.
-- We are therefore revising the outlook on United Utilities, and its
operating company United Utilities Water PLC, to positive from stable. We are
also affirming the 'BBB-' and 'BBB+' long-term corporate credit ratings on
United Utilities and United Utilities Water, respectively.
-- The positive outlook reflects the possibility that we could upgrade
the companies in the current regulatory period if the current trends continue.
On Dec. 17, 2012, Standard & Poor's Ratings Services revised the outlooks on
U.K.-based water utility United Utilities PLC (UU) and its subsidiary United
Utilities Water PLC (UUW) to positive from stable. At the same time, we
affirmed our 'BBB-' long-term and 'A-3' short-term corporate credit rating on
UU, and our 'BBB+' long-term and 'A-2' short-term corporate credit ratings on
The outlook revision reflects our opinion of steadily increasing headroom in
UU's Standard & Poor's-adjusted credit metrics in the current 2010-2015
regulatory period, and the possibility that we may upgrade the companies in
the current regulatory period if the current trend of financial outperformance
continues. The positive outlook is further supported by our view of UU's
strong focus on improving its regulatory measures of operational performance
and its almost exclusive focus on the low-risk, regulated U.K. water sector.
In the 12 months to March 31, 2012, UU's adjusted funds from operations (FFO)
to debt improved to 12.1% from 11.6% in the previous financial year, supported
by the continuing trend of inflation being above the regulator's expectations.
Inflation benefits regulated utilities because their revenues and regulated
capital value (RCV) are inflation-linked. In addition, in March 2012, UU
benefited from a one-time tax benefit related to the decrease in U.K.
corporation tax to 24% from 26%, effective April 1, 2012, which resulted in a
significant deferred tax credit. We anticipate that there will be a further
tax credit in March 2013. UU is also benefitting from an increasingly
favorable profile of real tariff increases and the front-ended nature of
infrastructure renewals expenditure, which is highest at the beginning of the
regulatory period and then declines gradually.
We currently anticipate that UU's adjusted FFO-to-debt ratio will hover at
about 12% for the rest of the 2010-2015 regulatory period. We will consider
upgrading UU if we believe that its adjusted FFO-to-debt ratio can sustainably
stay above 12%, assuming an unchanged business risk profile. In this regard,
we will closely monitor developments on regulatory reforms that the regulator
and U.K. government are considering. In our opinion, UU's other credit
metrics, including adjusted debt to RCV and adjusted FFO interest coverage,
remained strong on March 31, 2012, at 59% and 2.8x, respectively.
We will consider lowering our adjusted FFO-to-debt guidance to more than 11%
if we consider that UU's regulatory measures of operational performance have
improved to at least the peer group average. We do not yet view UU as being
at, or above, the peer average, although we observe that UU ranked relatively
well in the regulator's key performance indicators in 2011/2012. We also see
that the company is steadily improving in other measures that we monitor, such
as the Service Incentive Mechanism (SIM). This said, we believe that UU still
needs to improve its published SIM ranking from 16th of 21 companies in the
last combined score for 2011/2012.
The short-term rating on UUW is 'A-2', and that on UU is 'A-3'. We assess UU's
liquidity as "strong" under our criteria and calculate that liquidity sources
should exceed liquidity needs by about 1.3x over the next 12 months.
As of March 31, 2012, we estimate liquidity sources of about GBP1.33 billion.
-- Unrestricted cash and equivalents of about GBP321 million.
-- An available GBP420 million in undrawn committed bank facilities with
expiry dates beyond 12 months.
-- FFO of at least the amount in 2011/2012, which we calculate was GBP590
million before our adjustments.
We estimate UU's liquidity needs over the next 12 months to be about GBP1.05
-- Short-term debt of GBP127 million.
-- Capex of about GBP700 million.
-- Dividend payments of about GBP220 million.
The positive outlook reflects our opinion that UU is developing increased
ratings headroom, with adjusted ratios benefiting in the current regulatory
period from financial outperformance as a result of relatively high inflation,
real tariff increases, and the front-ended nature of infrastructure renewals
expenditure. In addition, we consider that UU's regulatory measures of
operating performance are steadily improving as result of management's strong
focus on this area.
We would consider an upgrade if we believe that UU can sustainably achieve an
adjusted FFO-to-debt ratio of more than 12%, while maintaining adjusted FFO
interest coverage of more than 3x and an adjusted debt-to-RCV ratio of less
than 65%. This assumes an unchanged business risk profile. In this regard, we
will closely monitor developments on regulatory reforms that the regulator and
U.K. government are considering.
If we assess UU as having improved its operational performance to at least the
peer group average, we would consider lowering the threshold for adjusted FFO
to debt to 11% to reflect our view of reduced business risk, again assuming an
unchanged business risk profile.
Under our methodology for rating holding companies of U.K. regulated
utilities, if we were to upgrade the regulated operating company, UUW, by one
notch to 'A-', we would likely upgrade the holding company, UU, by two notches
to 'BBB+'. This is because our methodology for rating holding companies of
U.K. regulated ring-fenced utilities--which applies when the regulated
operating company is in the 'BBB' rating category--would no longer apply. (For
further information, see "U.K. Regulatory Ring-Fencing Risk For Utility
Holding Companies: Standard & Poor's Approach," published July 8, 2003, on
RatingsDirect on the Global Credit Portal.)
Related Criteria And Research
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
United Utilities PLC
Corporate Credit Rating BBB-/Positive/A-3 BBB-/Stable/A-3
Senior Unsecured Debt BBB- BBB-
Commercial Paper A-3 A-3
United Utilities Water PLC
Corporate Credit Rating BBB+/Positive/A-2 BBB+/Stable/A-2
Senior Unsecured Debt BBB+ BBB+
Commercial Paper A-3 A-3