Nov 23 - Fitch Ratings has affirmed Anglian Water Services Financing Plc's
(AWF) senior secured ratings for its class A debt (both wrapped and unwrapped)
at 'A' and its class B debt at 'BBB+'. The Outlooks for the senior secured
ratings are Stable.
The rating affirmation reflects revenue visibility in the UK water sector until
March 2015, sound operational and regulatory performance of Anglian Water
Services Limited (Anglian Water), the group's regulated operating company, and
adequate financial flexibility considering solid cash flow generation and
incremental headroom in comparison to ratio guidelines. Another important aspect
is the secured nature of the group's financing structure, which benefits from
structural enhancements, including trigger mechanisms (such as dividend lock-up
provisions tied to financial, positive and negative covenants) and debt service
AWF is the debt-raising vehicle of Anglian Water.
- Financials Reflect Ratings:
Fitch calculates Anglian Water's FYE12 pension-adjusted net debt/regulatory
asset value (RAV) at 71.2% (class A) and 83.2% (senior, i.e. consolidated
position of class A and class B debt). Fitch expects these ratios to remain
comfortably within covenanted levels of 75% (class A) and 85% (senior). Anglian
Water's FY12 post-maintenance and post-tax interest cover ratios (PMICRs) are
estimated at 1.8x (class A) and 1.5x (senior). Over the five year price control
period Fitch forecasts average interest cover of 1.7x (class A) and 1.4x
These financial ratios differ from AWS's investor report. Fitch does not take
into account working capital movements in order to calculate PMICR. Also, the
agency adjusts the RAV for variation in timing of capital investment and
anticipated prospective changes to be made by the regulator, such as logging for
the construction output price index.
- Good Progress With Regulatory Contract
Anglian Water met leakage targets in FY12 and achieved second rank amongst water
and wastewater companies for the service incentive mechanism (SIM), a measure
that captures quantitative and qualitative performance of customer service.
The company reported stable asset serviceability for its networks, apart from
wastewater infrastructure that remained marginal due to the number of internal
flooding incidents and pollution incidents being higher than the level agreed
with Ofwat. Anglian Water is investing an extra GBP7m during FY13 in key areas
of the network to prevent sewer blockages. Also, the wastewater network is being
gradually upgraded with in-sewer monitors which alert the control centre as
blockages build up.
After reporting operating expenditure outperformance of around GBP10m for FY11,
Anglian Water spent broadly the whole regulatory allowance in FY12. This
development reflects inter alia cost pressures from the carbon reduction
commitment, the adoption of private sewers and additional resourcing of leakage
repair. At the same time, the company is progressing with a variety of smaller
scale efficiency initiatives that should allow the business to offset these
RATING SENSITIVITY GUIDANCE:
Negative: Future developments that could lead to negative rating action include:
An increase of gearing to 74%-75% (class A) and 84%-85% (senior) or reduction of
PMICR to below 1.5x (class A) and 1.2x (senior) as calculated by Fitch would
attract additional scrutiny from the agency.
Also, a marked deterioration in operating and regulatory performance or adverse
changes to the regulatory framework could lead to negative rating action.
Positive: Future developments that could lead to positive rating actions
A fundamental reduction in target gearing would be required for positive rating
action to occur.
LIQUIDITY & DEBT STRUCTURE
- Liquidity Adequate Into 2014
As of 31 March 2012, the group had GBP697.8m in cash and cash equivalents and
GBP420m of undrawn committed bank facilities (maturing in 2016) available.
Additionally, around GBP500m of funding was raised through bonds and US private
placements since the balance sheet date. This funding position will provide
sufficient liquidity for scheduled debt maturities, capital expenditure,
operating requirements and dividends beyond March 2014.
Additionally, debt service reserve liquidity of GBP279m and operating and
maintenance reserve liquidity of GBP76m is in place in accordance with the
group's secured and covenanted financing documentation. Such back-up liquidity
is not available for day-to-day operations, but is dedicated for situations of
Additional information is available on www.fitchratings.com.
The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.
Additional information is available on www.fitchratings.com. For regulatory
purposes in various jurisdictions, the supervisory analyst named above is deemed
to be the primary analyst for this issuer; the principal analyst is deemed to be
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology