For regulated utilities, lower inflation will have a negligible impact on index-linked debt issuers, but will have a slightly negative impact on issuers of fixed-rate debt. In a positive development the prospective power distribution price control may reduce volume risk, though it may also implement more onerous capex planning requirements. For water utilities, which are in the final year of the water price control, no major changes are expected by Fitch, except for a potential change to the special weighted average cost of capital provision for small water companies.
"Overall, funding for utilities will be more expensive, but Fitch does not expect liquidity or refinancing-related rating actions as a result of the financial crisis," says Anton Krawchenko, Associate Director in Fitch Ratings Corporates group, based in London. "Fitch does, however, expect the financial crisis to worsen the pension deficits of vertically integrated utilities or, in the case of some regulated utilities, to generate deficits."
Fitch has not taken any UK energy and utilities rating actions due to the credit crisis. Some companies postponed debt raising activity in early 2008 due to higher than normal costs, but have maintained liquidity positions through the year as the credit crisis has unfolded. In 2009, these companies will no longer be able to delay accessing the debt markets, and as a result Fitch expects to see some interest coverage ratio deterioration as new, more expensive debt is taken on.
While there has been a marked increase in the cost of debt, on average 150-250 basis points higher at the end of 2008 than at the beginning, Fitch believes that investment grade UK energy and utility companies will continue to be able to access windows of opportunity to issue in the debt capital markets, and remain well-placed with regard to liquidity and financing risk.
