Fitch Ratings agency has affirmed United Utilities PLC's and subsidiary United Utilities Water PLC's long-term Issuer Default Ratings (IDR) at 'BBB+' and senior unsecured ratings at 'A-'.
The rating affirmation reflects the group's low financial gearing, UUW's outstanding regulatory performance in the financial year to March 2014 as well as the negative impact from the material reduction of earnings for the upcoming AMP6 price control period April 2015 to March 2020.
Fitch calculated UUW's gearing in terms of its pension-adjusted net debt/regulatory asset value (RAV) at 65% and PMICR at 2.8x for FY14. The agency expects gearing to remain at similar levels and forecasts interest cover between 1.6x and 1.9x until March 2020. In comparison, UU's leverage was 59.8% at FYE14, due to cash held at UU and consolidation of gross debt.
Referring to united Utilities”outstanding regulatory performance” in FY14, Fitch said UUW has made considerable progress with regard to the service incentive mechanism, improving its score to 83 in FY14 from 78 in FY13. The company met leakage targets, maintained security of supply and reported stable asset serviceability for three asset categories and improving status for one asset category (sewerage non-infrastructure).
Only United Utilities’ discharge permit compliance and satisfactory sludge disposal required incremental improvements in comparison to applicable targets. The ratings agency said regulatory performance in FY14 has visibly improved and compares well with market-leading companies in the sector.
Commenting on the current totex gap between the company’s business plan and water industry regulator Ofwat’s assessment of baseline expenditure which is around £1bn lower than UUW's plan, Fitch said this represents a material difference in opinion.
On 3 October UUW submitted its representations in response to the draft determination. The company proposed to postpone £90m of expenditure related to the National Environment Plan, reduce total expenditure by £280m by means of increased efficiency challenge and submitted additional evidence to support other affected schemes (expenditure of around £600m-650m).
Fitch said that considering uncertainty around the decision process its rating case forecast includes a reasonable level of operating and capital expenditure overspend for AMP6.
Referring to rating sensitivities, Fitch said that given the regulator's proposals related to the price review 2014 rating upgrades in the sector are unlikely. However, future developments that could lead to negative rating action include:
Fitch added that an ambitious dividend policy for AMP6 leading to an increase in group gearing with a resulting negative impact on financial metrics of UU and UUW. Additional debt-raising by UU or the gearing differential between the holding company and operating company diminishing could be negative for UU's ratings
Gearing increasing above 67.5% at UU could have a negative impact on UUW's and UU's ratings
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