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July 22 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Wessex Water Services Limited’s (WWSL) Long-term Issuer Default Rating (IDR) at ‘BBB+', senior unsecured rating at ‘A-’ and Short-term IDR at ‘F2’. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this press release.
The affirmation reflects WWSL’s market-leading operational and regulatory performance as well as the negative impact from the material reduction of earnings expected for the upcoming regulatory period from April 2015 to March 2020 (asset management plan 6; AMP6). Fitch forecast financial ratios will remain within guidance for the rating, given the company’s track record of outperforming the regulator’s cost targets and the low cash cost of its embedded debt.
Material Reduction of Earnings in the Sector
The regulator has guided towards a cost of capital of 3.85% for the regulated companies, lower than Fitch had expected. Companies may be able to earn additional returns from incentives. Taking into account draft determinations published to date, it appears that efficiency targets for total expenditure in the wholesale price controls may leave some room for outperformance, whereas allowances for the retail price controls are challenging and may offset some or all of the savings from the wholesale business.
Assumptions for the Forecast
Fitch assumed for the rating forecast that WWSL will earn the cost of capital of 3.85%, achieve at least 5% outperformance relating to pay as you go expenditure (excluding infrastructure renewal) and receive revenue adjustments from the last price control of GBP44.7m as declared in its revised business plan submission (ie capital incentive scheme, opex roller, revenue correction mechanism and service incentive mechanism (SIM). The agency has also considered that the company may have to pay pension deficit repair in excess of regulatory allowances.
Credit Metrics Remain Comfortably Within Guidelines
Fitch forecasts pension-adjusted net debt/regulatory asset value close to 70%, which is also the maximum guideline for the current rating. Post-maintenance and post-tax interest cover (PMICR) is expected to range between 1.6x and 1.9x (1.7x the five-year average), comfortably above the minimum guideline of 1.5x.
Fitch notes that management can directly influence gearing through the dividend policy. A lot of shareholders in the infrastructure space distribute the maximum amount to comply with a target capital structure, in this case 70%. Management has less means to steer reported interest cover. The forecast PMICR of 1.7x for WWSL is strong in comparison with many peers and supported by the company’s track record of outperforming regulatory allowances and the low cash cost of its embedded debt (FY14 close to 3.25%).
Market-Leading Operational Performance
In FY14 WWSL achieved a SIM score of 87, ranking joint-first with Anglian Water according to preliminary data. The company maintained stable asset serviceability for all asset categories, met leakage targets and reduced the number of repeat flooding incidents. Only the number of serious pollution incidents exceeded the target during the year following exceptional rainfall and management is making every effort to restore previous performance levels. Overall, WWSL is clearly the market leading company in the sector.
As of 31 March 2014, WWSL held GBP88m in cash and cash equivalents and had available GBP100m of undrawn, committed bank facilities (a term loan with long-term maturity once drawn) against debt falling due over the next two years of GBP128.6m. This funding position will provide sufficient liquidity for capital expenditure, operating requirements, refinancing and dividends until the end of 2015.
Positive: Future developments that could lead to a positive rating action include:
- A sustainable reduction in target gearing to below 65% and PMICR above 1.8x.
Negative: Future developments that could lead to negative rating action include:
- A marked deterioration in operating and regulatory performance or financial policies leading to PMICR below 1.5x and regulatory gearing above 70%.
- Adverse changes to the regulatory framework.
Wessex Water Services Limited
Long-term IDR: affirmed at ‘BBB+'; Stable Outlook
Senior unsecured debt rating: affirmed at ‘A-’
Short-term IDR: affirmed at ‘F2’
Wessex Water Limited
Long-term IDR: affirmed at ‘BBB’; Stable Outlook
Short-term IDR: affirmed at ‘F3’
Bonds issued by Wessex Water Services Finance Plc (WWSF): affirmed at ‘A-'. The bonds are guaranteed by WWSL, and thus benefit from WWSL’s senior unsecured rating of ‘A-'.