Fitch Ratings has revised its Outlook for Anglian Water to Negative from Stable in its latest assessment of the water company's business.
Fitch said the rating actions mainly reflect increasing business risk in the UK water sector and pressure on credit metrics stemming from water sector regulator Ofwat's risk and reward guidance for the PR14 price review covering April 2015 to March 2020 (AMP6).
The ratings agency said the ratings take into account Anglian Water's market leading operational and regulatory performance, and the secured nature of the group's financing structure.
Fitch has affirmed Anglian Water Services Financing Plc's senior secured ratings for its class A debt (both wrapped and unwrapped) at 'A' and its class B debt at 'BBB+'. AWF is the debt-raising vehicle of Anglian Water.
Increasing business risk in water sector
Fitch believes that business risk in the water sector will increase for AMP6. The ratings agency now expects business risk for the water sector will be more closely aligned with that of the UK gas distribution sector.
Fitch said that in addition to a significant reduction in the cost of capital to an all-time low of 3.85%, total expenditure will be benchmarked at the top quartile, representing a more demanding target for capital expenditure. This latest assessment says Ofwat is pursuing progressive targets for the retail price controls, eliminating protection from RPI and implementing catch-up efficiency targets using an average cost to serve, which Fitch believes does not fully reflect each company's operating cost base.
Interest cover under pressure from April 2015
The agency also believes that AWS Interest cover will be under pressure from April 2015.
For the year ending 31 March 2014 (FY14), Fitch has calculated Anglian Water's pension-adjusted net debt/regulatory asset value (RAV) at 71.3% (class A) and 83.9% (senior, i.e. consolidated position of class A and class B debt). Anglian Water's FY14 post-maintenance and post-tax interest cover ratios (PMICRs) are calculated at 1.9x (class A) and 1.7x (senior). Fitch’s financial ratios differ from those in AWS's own investor report.
Fitch added that once Ofwat’s final AMP6 determinations are published in December and have been evaluated it could also revise its rating guidelines for the sector as a whole.
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