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Announcement:

Moody's affirms Wessex Water's A3 rating; stable outlook

09 Aug 2010

London, 09 August 2010 -- Moody's Investors Service has today affirmed the A3 senior unsecured debt ratings of Wessex Water Services Finance Plc, whose issuance is guaranteed by its parent Wessex Water Services Limited ("Wessex"), one of the ten UK regulated water and sewerage companies. The rating outlook is stable.

The rating affirmation follows the regulatory price review concluded in November 2009, which set the revenues for the five-year regulatory period commenced in April 2010 ("AMP5"), and Moody's assessment of the company's business and financial strategy to accommodate the price determination.

In the final price determination, Wessex has been allowed to increase prices over AMP5 by an average of 1.2% 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 2.4% increase proposed in Wessex's final business plan. The final determination also included a weighted average cost of capital ("WACC") of 4.5% (real, post-tax) for the industry, which is below the company's final business plan assumptions of around 4.8%.

In line with the sector, a risk faced by Wessex remains related to the execution of an extensive capital programme and the associated financing and refinancing 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 GBP1.0 billion (according to Ofwat's final determination and in 2007/08 prices). The investment programme is close to that proposed in Wessex's final business plan and will result in a real growth in Regulatory Capital Value ("RCV") of around 12%.

Overall, the A3 rating of Wessex is supported by: (i) the low business risk profile of the company underpinned by the natural monopoly and predictable cash flows from its regulated activities; albeit mitigated by (ii) a relatively high level of financial leverage. In Moody's opinion, Wessex will be able to maintain a ratio of Net Debt to RCV below 70% and Adjusted Interest Cover of around 1.6x - 1.8x over AMP5. The rating agency notes that Wessex currently shows some headroom in the Adjusted Interest Coverage given that a proportion of the company's debt is on an index-linked basis and due to the currently attractive cost of debt that the company enjoys. Moody's believes that this headroom will likely reduce over AMP5 with the reduction in the WACC, as reflected in the price determination, albeit with ratios remaining within the parameters for the current A3 rating.

Moody's understands that both Wessex's management and the company's shareholders remain committed to maintain RCV gearing at or below 70%, i.e. the Wessex Board will not declare dividends that would increase the gearing of the company above that level. Indeed, Moody's takes comfort from the fact that Wessex's shareholders have accepted lower dividend payouts for a period of low inflation or deflation (RPI in March 2009 was at a negative 0.4%) in order for the company to maintain its gearing within the stated policy and commensurate with its current ratings. Moody's notes that the recent volatility in gearing over the past few years has been due to the movement in RPI combined with timing differences affecting the RPI used to rebase index-linked debt versus the RPI used to write forward the RCV. The rating agency believes that a flexible dividend policy will remain necessary to allow for some headroom to incorporate the ongoing capital requirements.

The stable outlook reflects Moody's expectation that management will continue to be exclusively focused on running the regulated business in a way to maintain leverage levels in terms of Net Debt to RCV below 70% and that YTL Power continues to demonstrate long-term commitment to Wessex as a financial investor.

The previous rating action on Wessex was implemented on 25 February 2005, when Moody's upgraded the senior unsecured debt ratings to A3 from Baa1.

The principal methodology used in rating Wessex 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.

Wessex Water Services Ltd is the smallest of the ten water and sewerage companies in England and Wales, providing water to 1.2 million customers and sewerage services to 2.6 million customers in the South West of England including the cities of Bristol and Bath. The company has no other significant activities with profit and cash flow contributions from non-regulated businesses being negligible. Wessex is a subsidiary of Wessex Water Ltd, whose ultimate parent is YTL Power International Berhad, a listed Malaysian company which is 60% owned by the quoted YTL Corp. For the year ended 31 March 2010, Wessex had a RCV of around GBP2.3 billion and reported revenues of GBP438 million and operating profit of GBP217 million.

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

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

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom

Moody's affirms Wessex Water's A3 rating; stable outlook
No Related Data.
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