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Announcement:

Moody's affirms Northumbrian Water's Baa1 rating

11 May 2010

London, 11 May 2010 -- Moody's Investors Service has today affirmed the Baa1 rating of Northumbrian Water Limited ("NWL"), one of the ten UK regulated water and sewerage companies. The rating agency also affirmed the ratings of the various bonds issued by NWL's financing subsidiary Northumbrian Water Finance Plc ("NWF") and guaranteed by NWL. The outlook on all ratings is stable.

Moody's rating assessment of NWL is based on the combination of (i) a very low business risk profile underpinned by its natural monopoly position and the predictable cash flows generated by its regulated activities with (ii) a relatively high level of financial leverage on a consolidated group basis.

Price limits for the new regulatory period (April 2010 - March 2015, or "AMP5") have recently been reviewed by Ofwat, the UK water industry's economic regulator. The regulator published its final price determination for the AMP5 period in November 2009. In the final determination, NWL has been allowed to increase prices over AMP5 by an average of 1.7% p.a. in real terms. This compares to an average annual real price increase of 0.5% p.a. for the industry as a whole and a 3.3% increase proposed in NWL's final business plan. The final determination also allowed a weighted average cost of capital of 4.5% (real, post-tax) for the industry, which is below the company's final business plan assumptions of around 4.7%.

As typical for the sector, NWL will need to manage the execution of an extensive capital programme and the associated financing requirements. The company's capital expenditure programme is set to continue at a relatively high level over the next regulatory period, with a total capex programme (gross of grants and contributions) for AMP5 of around GBP1.2 billion (according to Ofwat's final determination and in 2007/08 prices). The investment programme is slightly lower than the GBP1.3 billion proposed in NWL's final business plan and will result in a real growth in RCV of around 1.7% p.a.

NWL's rating takes into account the consolidated financial profile of Northumbrian Water Group Plc ("NWG"), including the financial obligations of NWL, its funding vehicle NWF, the intermediate holding company Northumbrian Services Ltd and its ultimate parent company NWG. At 31 March 2009, NWL - based on the consolidated financial profile of NWG - demonstrated Net Debt to RCV of around 70% and an Adjusted Interest Cover of 1.9x excluding the Kielder securitisation and about 78% and 1.8x, respectively, when including the securitised debt. The primary reason for the significant increase in consolidated leverage is the development of the pension liabilities, which had been in surplus in the previous years. For the financial year ended 31 March 2009, however, NWG reported a pension deficit of GBP119.4 million. Furthermore, similar to its peers the group had been affected by low inflation that reduced the value of the regulated asset base at March 2009 compared to its liabilities. Moody's notes that the regulatory framework includes an element of protection with regard to the pension deficit that allows companies' to recover a portion of the deficit through the water charges. Moody's also takes into account the long-term nature of such pension liabilities in its assessment of the company's financial flexibility.

Moody's notes the group's updated dividend policy announced as part of the interim management statement, whereby NWG expects to be able to maintain its progressive dividend policy of 3% annual real growth over AMP5. For the current Baa1 rating level Moody's expects NWL to maintain its Net Debt (including the Kielder securitisation debt) to RCV below 80% and Adjusted Interest Cover above 1.4x. Considering the updated dividend profile and the assumptions set by the regulator in the final price determination, Moody's believes that the group would be able to maintain a financial profile in line with the guidance for the current rating category and increasingly build up financial flexibility towards the end of the regulatory period.

Therefore, Moody's maintains a stable outlook on the ratings. This view also takes into account (i) management's track record in prudently managing the group's business risks and financial structure and (ii) Moody's expectation that management will continue to focus on its core regulated activities.

The previous rating action on NWL was implemented on 20 June 2006, when Moody's assigned a Baa1 rating to GBP200 million index-linked bonds issued by NWF and guaranteed by NWL.

The principal methodology used in rating NWL was Moody's rating methodology for Regulated Water Utilities, published in December 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Northumbrian Water Limited is the eighth-largest UK water utility by RCV, providing water and sewerage services to a population of 2.6 million in the north-east of England, including the cities of Newcastle, Durham, Sunderland and Middlesbrough. The company also provides water-only services to a population of 1.8 million in the south-east of England. Northumbrian Water Limited is the main subsidiary of Northumbrian Water Group Plc, listed on the London Stock Exchange with a current market capitalisation of GBP1.3 billion. Northumbrian Water Group Plc's main shareholder is the Ontario Teachers' Pension Plan Board, with a 26.7% stake. In 2008/09, Northumbrian Water Limited accounted for approximately 93% and 98% of the group's revenues and operating profit, respectively.

London
Stefanie Voelz
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Monica Merli
Managing Director
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Northumbrian Water's Baa1 rating
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