MOODY'S UPGRADES RATINGS OF CE ELECTRIC UK FUNDING COMPANY, YORKSHIRE POWER FINANCE, NORTHERN ELECTRIC PLC AND SUBSIDIARIES, OUTLOOK ON ALL RATINGS IS STABLE
London, 27 April 2005 -- Moody's Investors Service today upgraded the ratings of the various
entities within the CE Electric UK Funding Company group (CEUK),
concluding the review initiated on 18th April.
The ratings of the various entities within the group are as follows:
- CE Electric UK Funding Company, senior unsecured rating
upgraded to Baa2 from Baa3, outlook stable.
- Yorkshire Power Finance Ltd, senior unsecured rating upgraded
to Baa2 from Baa3, outlook stable.
- Yorkshire Electricity Distribution plc, senior unsecured
and long-term issuer rating upgraded to A3 from Baa1, outlook
- Northern Electric plc, long-term issuer rating upgraded
to Baa1 from Baa2, outlook stable.
- Northern Electric Finance plc, senior unsecured rating
upgraded to A3 from Baa1, outlook stable.
- Northern Electric Distribution Ltd, long-term issuer
rating upgraded to A3 from Baa1, outlook stable.
At the same time, Moody's has assigned a (P) Aaa rating to
both the GBP150m 2035 bond TO BE issued by Northern Electric Finance
plc and the GBP200m 2035 bond to be issued by Yorkshire Electricity
Distribution plc, reflecting the unconditional and irrevocable guarantee
of scheduled payments of principal and interest by Ambac Assurance UK
Today's rating actions reflect recent developments which have significantly
improved the credit profile of the group, including the establishment
of third-party committed liquidity facilities, deeper subordination
of intercompany loans from its parent company MidAmerican Energy Holdings
Company ("MEHC"), and a clear commitment by management to a de-leveraging
strategy. The rating actions also assume completion of the proposed
refinancing strategy which will effectively remove medium-term
refinancing risk and improve the financial flexibility of the group.
Moody's notes that, until early April, CEUK did not
have third-party committed liquidity facilities, and was
not expected to have sufficient internally generated cash to fund all
of a GBP100 million bond maturity in October of this year, leaving
the group reliant on MEHC to provide it with the balance in the form of
subordinated intercompany loans. While MEHC has a track record
of providing cash to CEUK in this way for the redemption of debt maturities
in December 2004 and February 2005, Moody's typically considers
the existence of committed third-party liquidity facilities to
be necessary to maintain an investment-grade rating, and
adds that the lack of such facilities had been a key driver behind the
previous negative outlook. Committed third-party liquidity
facilities of a medium-term maturity have now been established,
resolving Moody's concerns in this area for the time being. The
new committed facility provides access to GBP50 million for both NEDL
and YEDL and allows for the reallocation of funds within the group.
Moody's observes that financial flexibility within the group as
a whole had, until recently, been constrained by the existence
of a covenant within the GBP200 million Ambac-guaranteed 2022 bond
at CE Electric UK Funding Company. This covenant severely restricted
the issue of new debt below this level (i.e. at entities
closer to the operating company cash flows), to the extent that
it was not possible for the group to refinance maturing holding and intermediate
holding company debt at the operating company level. As part of
the recent refinancing package, CEUK has successfully re-negotiated
the covenant with Ambac, which has allowed it to take advantage
of currently strong bond market conditions to pre-fund the refinancing
of the US$237million bonds due December 2007 at CE Electric UK
Funding Company and the US$281 million bonds due February 2008
at Yorkshire Power Finance.
The pre-funding of the outstanding bonds will be funded by two
new 30-year issues at the operating company level -- Northern
Electric Finance plc ("NEFL") (GBP150 million) and YEDL (GBP200 million)
-- which will lower the average cost of debt for the group once the
outstanding issues are repaid. GBP300 million of the total funds
raised will be invested in Guaranteed Investment Contracts ("GICs")
which expire at the appropriate bond maturity dates in 2007 and 2008.
The cheaper funding available at the operating company level minimises
the negative carry incurred by the pre-funding. The cost
of the new debt and the interest receivable are both fixed, so the
amount of negative carry is fixed for the term of the contracts.
The remaining GBP50 million of the cash raised will contribute towards
the repayment of the GBP100 million October 2005 maturity at Northern
Electric Finance plc. The remaining GBP50 million will be funded
partly by internally generated cash and partly by subordinated loans from
MEHC. Moody's believes that refinancing risk for the group
has therefore effectively been removed for the long term as the next debt
maturity is not due until 2020.
Moody's adds that the subordinated intercompany loans provided by
MEHC have become more significant in the debt capital structure of the
company in recent months as they have been used to refinance external
debt maturities as previously described. The consolidated external
senior debt leverage of the group has fallen, but total leverage
has remained constant, with Total Adjusted Net Debt / RAV (when
the subordinated intercompany loans and various other adjustments including
non-recoverable pension deficits and operating leases are included)
in the low to mid-90% range.
However, following certain modifications to the characteristics
of these subordinated intercompany loans by MEHC, Moody's now considers
the terms to offer material protection to senior creditors, such
that the instrument can be considered to exhibit certain "equity-like"
characteristics. Key protections include full subordination of
the loans in the cash flow waterfall to all senior debt held within the
group such that all senior debt must first be serviced, with sufficient
cash to meet a further 6 months senior debt service, plus compliance
with certain consolidated leverage restrictions, before any payments
under the subordinated loans can be made. Furthermore interest
payments are to be deferred until 2009, at which time they will
recommence as payment in kind under the subordinated intercompany loans.
These payments will be made in lieu of, and not in addition to cash
dividends, until the subordinated intercompany loans are repaid
and fall out of the debt capital structure of the group.
Moreover, Moody's notes that aside from the subordinated intercompany
loans, the only other debt within the group comprises senior unsecured
bonds, senior unsecured bonds guaranteed by Ambac, senior
debt under a revolving credit facility used for liquidity purposes and
a small overdraft facility. All of this senior debt ranks pari
passu and senior to the subordinated intercompany loans. Moody's
also notes that the subordinated intercompany loans are provided by the
shareholder, not external investors. If there is a default
on senior debt or subordinated intercompany loans, liquidation,
or reorganisation, all senior debt has to be paid in full first.
Moody's treatment of the subordinated loans results in moderately
lower Net Adjusted Debt, and a commensurate strengthening of the
related debt protection measures. Moody's expects consolidated
Net Adjusted Debt/RAV to fall to the mid to high 70% range by year
end 2006, with consolidated RCF/Net Adjusted Debt remaining comfortably
above 12% and consolidated FFO interest cover of around 3x.
Non-cash interest payable on the subordinated debt is not included
in these calculations as interest payments are deferred until 2009,
which enhances the strength of these debt coverage ratios somewhat.
However RCF/Net Adjusted Debt of 12% and FFO interest cover of
around 3x are comfortable levels for a Baa2 rating for a UK regulated
electricity distribution business. As far as leverage is concerned,
expected year-end 2005 Net Adjusted Debt/RAV of 85% is high
for Baa2, but as noted above, Moody's expects this ratio
to strengthen materially by year end 2006.
Overall, Moody's believes that the steps taken by MEHC management
over the past six months have demonstrated commitment to strengthening
the credit profile of the group. The removal of the rating constraints
as described here has allowed the core credit fundamentals of low business
risk and an improved financial profile to be fully reflected in the current
rating levels. Not only have the constraints on the ratings been
addressed, but management remains committed to deleveraging further
over the medium term, and does not intend to take any dividends
(in the form of payment in kind on the subordinated intercompany loans)
from the group until at least 2009, expediting this process.
Moody's anticipates that this ongoing dividend restraint, combined
with improved cash flow from the relatively favourable outcome at the
fourth electricity distribution price control and lower financing costs
will allow such further reductions in senior debt to be made over the
next two to three years.
The stable outlook on all ratings reflects the stable operating cash flow
generated by regulated electricity distribution businesses in the UK and
Moody's expectation that steady deleveraging will continue over the next
two to three years, allowing debt protection metrics to build some
headroom within their respective rating categories. Given the absence
of debt maturities over the long term, Moody's anticipates no further
changes to the debt structure of the group. If deleveraging should
occur more swiftly than anticipated, and consolidated debt protection
metrics strengthen such that Adjusted Net Debt/RAV remains sustainably
below 75% and RCF/Net Adjusted Debt remains sustainably above 14%,
further upward pressure on the ratings may occur. However,
Moody's current expectation is that CEUK's financial profile will remain
consistent with the current ratings over the next two years.
Headquartered in Newcastle upon Tyne, England, CEUK is the
holding company of two regulated monopoly electricity network businesses,
Northern Electric Distribution Limited and Yorkshire Electricity Distribution
plc. The group is now almost exclusively focused on electricity
distribution, with only very few non-distribution activities
remaining. The company is wholly owned by MEHC, a US utility
privately owned by an investor group that includes Berkshire Hathaway.
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454