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Fitch Affirms London, Eastern and South Eastern Power Networks; Outlooks Stable.

London: Fitch Ratings has affirmed London Power Networks plc's (LPN), Eastern Power Networks plc's (EPN) and South Eastern Power Networks plc's (SPN) Long-Term Issuer Default Ratings (IDR) at 'BBB'. The Outlooks are Stable. Fitch has also affirmed LPN's, EPN's and SPN's senior unsecured ratings at 'BBB+' and Short-Term IDRs at 'F3'.

The 'BBB' ratings reflect the stable purely regulated earnings of the entities which is supported by the transparency and effectiveness of the UK regulation, and their solid performance against regulatory targets in the financial year to March 2016 (FY16). Fitch expects debt-to-regulated capital value (RCV) to weaken towards the end of the current regulatory period in March 2023. However, we expect the group to remain within our expectations for the 'BBB' rating.


Strong Cost Control: UK Power Networks (UKPN, owner of the three companies) continues to outperform its totex (operating and capital expenditure) allowance in 2017, where the cumulative outperformance since the beginning of this regulatory period was 22%. The outperformance to date has been driven by the close control of costs and utilisation of the alliance between its outsourced contractors, the delaying of some expenditure and lower demand from the network than expected.

UKPN maintains its target of outperforming totex allowance by 15%-20%. The negative guideline for the rating has been slightly loosened supported by the group's improved track record and our expectation that it will be able to meet around 10% outperformance over ED1.

Outperformance Against Regulatory Measures: UKPN has outperformed Ofgem's targets for customer interruptions (CI) and customer minutes lost (CML) by 29% and 33% respectively in 2016. The group's achievement of its operational targets should contribute around GBP47 million from incentives in 2016/17, which is paid with a two-year lag. In 2015/16 the group earned GBP58 million of rewards, from a potential GBP69 million. The achievement of its available rewards was one of the highest within the peer group and reflects its solid performance compared to electricity distribution companies. However, we forecast a conservative level of reward income in the future.

Adequate Credit Metrics: EPN, LPN and SPN's credit metrics continue to be within our expectations for the 'BBB' rating. The debt-to-RCV ratios of the three networks was 63.9%, 67.7% and 63.3% respectively at 31 March 2017. UKPN has removed its 72% Debt/RCV threshold leverage ratio. However, we believe that the financial leverage of its operating companies, EPN, LPN and SPN will maintain sufficient headroom within its 75% lock-up covenants of the EIB facilities. This is further supported by the ability to adjust dividends dependent upon the performance of the companies from year to year.

Swaps Weaken Coverage Metrics: Post maintenance interest coverage ratios (PMICRs) for EPN, LPN and SPN were mostly stable at March 31 2017 at 2.0x, 2.0x and 2.3x respectively. We expect that over the remainder of the regulatory period, 2018-2023, they will be around 1.8x for EPN, 2.1x for LPN and 2x for SPN. However, we expect that they could be weaker in the near term if inflation continues to increase, since they are also impacted by RPI-linked swaps held by EPN and LPN.

Index-linked Swap Liabilities: EPN holds three RPI-linked swaps which must be paid down every five years, with a liability of GBP307 million at 31 March 2017. LPN also holds two RPI-linked swaps, one of which is settled annually and the other one of which has a mandatory break in 2020, with a liability of GBP29 million at 31 March 2017. Despite these looming maturities, we consider that UKPN will be able to roll over these swaps on the respective dates. Given the significance of these instruments we include 50% of the accretion on these swaps within the cash interest paid figure which weakens the PMICRs.


The ratings on LPN, EPN and SPN are aligned, reflecting their comparable operational competencies and financial policies given that they are managed within UKPN. We rate Electricity North West (ENW) one notch higher given its stronger credit metrics and operational and regulatory performance. We rate Northern Powergrid (Northeast) Limited (NPN, A-/Stable) and Northern Powergrid (Yorkshire) plc (NPY, A-/Stable) two notches higher given that we consider them to have more conservative leverage.


Fitch's key assumptions within our rating case for the issuers include:

- RPI between 3.1% -3.9%;

- totex outperformance around 9% ED1 for each distribution network;

- annual reward income of around: GBP10 million at EPN, GBP4 million at LPN and GBP4 million at SPN;

- dividends remaining flat at EPN and declining at LPN and SPN.


Future developments that may, individually or collectively, lead to positive rating action include:

- material outperformance of regulatory targets putting the distribution networks operator (DNO) in the top quartile by regulatory performance plus PMICR above 1.6x and leverage (net debt/RAV) below 70%, both on a sustained basis.

Future developments that may, individually or collectively, lead to negative rating action include:

- weakening in regulatory and operational performance or increase in dividends that adversely affect cash- flow generation, taking leverage (net debt/RAV) above 75% or PMICR below 1.4x, both on a sustained basis.


Strong Liquidity: At 31 March 2017 EPN, LPN and SPN had undrawn committed facilities of GBP155 million, GBP102.5 million and GBP122.5 million respectively, and cash balances of GBP5.9 million, GBP6.4 million and GBP39.9 million. The group does not have any debt maturing until 2020, which supports its liquidity in the short term. We consider that the liquidity of the group is further supported by the ability of the parent UKPN to move cash between the entities if required.


Eastern Power Networks plc

--Long-term IDR: affirmed at 'BBB'; Outlook Stable

--Senior unsecured rating: affirmed at 'BBB+'

--Short-Term IDR: affirmed at 'F3'

London Power Networks plc

--Long-Term IDR: affirmed at 'BBB'; Outlook Stable

--Senior unsecured rating: affirmed at 'BBB+'

--Short-Term IDR: affirmed at 'F3'

South Eastern Power Networks plc

--Long-Term IDR: affirmed at 'BBB'; Outlook Stable

--Senior unsecured rating: affirmed at 'BBB+'

--Short-Term IDR: affirmed at 'F3'
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Dec 18, 2017
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