The FINANCIAL — London-10 October 2011: Fitch Ratings has affirmed PPL WW Holdings Ltd's (formerly known as Western Power Distribution Holdings Limited's) (PPL Holdings) Long-term Issuer Default Rating (IDR) at 'BBB-' and senior unsecured rating at 'BBB'.
The agency has also affirmed Western Power Distribution (South West) plc's (WPD South West) Long-term IDR at 'BBB+', senior unsecured debt at 'A-', and Short-term IDR at F2. Western Power Distribution (South Wales) plc's (WPD South Wales) Long-term IDR has also been affirmed at 'BBB+', senior unsecured notes at 'A-', and Short-term IDR at 'F2'. The ratings Outlook is Stable.
The ratings affirmations reflect the low-risk regulated electricity distribution business, the supportive and transparent regulatory environment in the UK and a solid track record in achieving targeted regulatory outperformance resulting in a higher than average return on regulated equity. The agency also considered the financing structure and recovery of regulatory fraction of pension costs in affirming the ratings.
The current ratings are based on Fitch's expectation that the five-year average post maintenance interest coverage ratio (PMICR) for the current regulatory price control period (DPCR5) ending 31 March 2015 will remain above 1.6x for WPD South West and WPD South Wales. The management expects that the net pension-adjusted regulatory asset value (RAV) based leverage for WPD South West and WPD South Wales will be around 70%.
An increase in operating costs over Fitch's rating case assumptions or an increase in leverage above Fitch's gearing assumption for WPD South West will put pressure on the ratings, also in view of the elevated capital spending program the company will have to pursue for the reminder of DPCR5.
Consolidated credit metrics at the end of DPCR5, in terms of PMICR and RAV based gearing, for PPL Holdings are expected around 1.5x (five-year average) and 85% respectively under Fitch's rating case. Fitch expects the consolidated RAV-based gearing to remain below 90% throughout DPCR5 at the assumed upstream dividend distributions.
Fitch will consider a negative rating action if the consolidated RAV-based gearing exceeds 90% and the PMICR falls below 1.3x (five-year DPCR5 average) for PPL Holdings. At the current rating level, the RAV-based gearing ratio should not exceed 75% for the operating companies in the group – WPD South Wales and WPD South West. The probability of a rating upgrade is low given the group's current level of consolidated debt and likelihood of a large upstream dividend distribution to PPL Holdings' parent.
FY11 performance has been in line with the current ratings expectations. PMICR was 1.70x for WPD South West and 1.25x for WPD South Wales. The difference in the interest cover between the two operating companies reflects higher average borrowing costs at WPD South Wales. However, the operating companies are operationally linked and the ratings are equalised at 'BBB+' for both companies. Leverage at the operating companies, WPD South West and WPD South Wales, was 69.6% and 63.6%, respectively. Consolidated credit ratios at PPL Holdings for FY11 were PMICR of 0.91x and pension adjusted RAV based leverage of 85.3%. Leverage ratios were calculated using net debt that is based on external debt plus intra-group debt less cash and cash equivalents (intra-group deposit balances from cash pooling arrangements were not deducted).
Fitch's rating assumptions include credit facilities funding restricted to WPD South West and WPD South Wales only. Any extension of credit facilities to companies outside the WPD group will affect the ratings of these companies.
At present, PMICR and gearing levels represent estimated values based on statutory financial accounts and will be adjusted once the Office of Gas and Electricity Markets (Ofgem) publishes a report in early 2012 on companies' regulatory output performance. Introduction of Ofgem's total expenditure approach makes it difficult to calculate credit metrics solely based on statutory financial accounts.
As at 31 March 2011, the group had GBP247m available of undrawn, committed bank facilities (maturing in July 2012 or thereafter) and held GBP180m of cash and cash equivalents. This current liquidity position should cover capital expenditure and operating requirements until mid-to-end 2012.
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