Viraj DhuriCredit Rating and migration of UK

infrastructure companies

Credit rating

A credit profile is a document which provides information about a

person’s or a business entity’s credit history.

Credit profiles are used by lenders and other agencies which offer credit

to determine creditworthiness.

They are also utilized by prospective landlords and other people who

might have an interest in an entity’s credit history.

A good credit profile will make it easier for someone to access credit,

and a bad credit profile can become a major stumbling block.

A credit rating is an evaluation of the credit worthiness of a debtor, especially a business (company) or a government, but not individual consumers

The evaluation is made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default.

The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies' analysts

Credit Rating of Utility companies

Credit Rating Outlook Company

A3 Stable Severn Trent water Ltd

A3 Stable United water utilities PLC

A3 Review Down Veloia water Central

A3 Stable Wessex water services

Baa1 Stable Anglian Water Services ltd

Baa1 Stable Thames water utilities Yyorkshire water services

Baa1 Stable Yorkshire water services

Baa2 Negative Southern water services

Baa2 Stable South East Water

Operating Environment, specifically market dynamics, such as

industry structure, market share, and organic growth

opportunities, together with the regulatory environment

2. Strategy and Execution, covering the nature of a company’s

business model, reinvestment requirements, competence and

style of management

3. Technology, with consideration of how exposed a company

may be to technological change and how well positioned it is to

handle such change

4. Financial Strength, with emphasis on return on assets,

leverage, and interest coverage

5. Developed or Emerging market, an assessment of the

legal and political environment

6. Generic rating factors applicable across all industries –

such as corporate governance, liquidity, and sovereign

ceiling considerations.

Infrastructure industry

Infrastructure refers to the basic physical and organizational structures needed for the operation of a society or enterprise or the services and facilities necessary for an economy to function.

It can be generally defined as the set of interconnected structural elements that provide a framework supporting an entire structure of development.

The term typically refers to the technical structures that support a society, such as roads bridges, water supply, sewers, electrical grids, telecommunications.

Transport infrastructure

Road and highway networks, including structures (bridges, tunnels, culverts, retaining walls), signage and markings, electrical systems (street lighting and traffic lights), edge treatments (curbs, sidewalks, landscaping), and specialized facilities such as road maintenance depots and rest areas

Mass transit systems (Commuter rail systems, subways, tramways, trolleys, City Bicycle Sharing system, City Car Sharing system and bus transportation)

Railways, including structures, terminal facilities (rail yards, railway stations), level crossings, signalling and communications systems

Transport infrastructure

Canals and navigable waterways requiring continuous maintenance (dredging, etc.)

Seaports and lighthouses

Airports, including air navigational systems

Bicycle paths and pedestrian walkways, including pedestrian bridges, pedestrian underpasses and other specialized structures for cyclists and pedestrians

Ferries

Energy Infrastructure

Energy Infrastructure

Electrical power network, including generation plants, electrical grid, substations, and local distribution.

Natural gas pipelines, storage and distribution terminals, as well as the local distribution network. Some definitions may include the gas wells, as well as the fleets of ships and trucks transporting liquefied gas.

Petroleum pipelines, including associated storage and distribution terminals. Some definitions may include the oil wells, refineries, as well as the fleets of tanker ships and trucks.

Water management Infrastructure

Drinking water supply, including the system of pipes, storage reservoirs, pumps, valves, filtration and treatment equipment and meters, including buildings and structures to house the equipment, used for the collection, treatment and distribution of drinking water

Sewage collection, and disposal of waste water

Drainage systems (storm sewers, ditches, etc.)

Major irrigation systems (reservoirs, irrigation canals)

Major flood control systems (dikes, levees, major pumping stations and floodgates)

Infrastructure Companies in the U.K. (Babcock)

Babcock is the UK's leading engineering support services organisation with revenue of over £3.5bn in 2014 and an order book of circa £12 billion.

Defence, energy, telecommunications, transport and education are all sectors where Babcock can be found working diligently behind the scenes, delivering critical support. Their services are underpinned by three core capabilities:

Managing Assets and Infrastructure

Delivering Projects and Programmes

Integrating Engineering Expertise

They employ around 26,000 employees.

Bechtel Corporation

Bechtel is a global leader in developing, managing, and constructing civil infrastructure. From airport, rail, and highway systems to ports and harbors, regional development programs, from office buildings to theme parks and resorts, Bechtel builds the infrastructure necessary to improve quality of life and sustain economic growth.

In addition, Bechtel is experienced in helping to form public-private partnerships that bring together the resources of government and the private sector for new projects.

Siemens U.K.

With a portfolio comprising integrated mobility solutions, building and security systems, power distribution equipment, smart grid applications and low- and medium-voltage products, our new Infrastructure & Cities Sector offers sustainable technologies for metropolitan centers and urban infrastructures.

Construction phase stand alone profile

Construction phase stand alone credit

profile

Construction phase risk

profile

Technology + Design

Construction Delivery + Difficulty

Project Management

Financial risk factors

Funding Adequacy

Construction funding

(Sources)

Counterparty Adjustments

Technology and Design

Risks

Technological Risk

Technology Performance

Record

Technology track Record

Design Cost Variation risk

Degree of Design

Completion

Design complexity

Technology & Design Risks

Technology performance match—Does the technology match/exceed/fall short of contract requirements

Technology track record– does the project rely on commercially proven technology or new and unproven technology

Degree of design Completion– at financial close, how advanced in the design work? Is the level of escalation and contingency appropriate for the project

Design Complexity– Has this design and configuration been built in the same background conditions with proven results

Construction Risk

Construction Difficulty

Delivery method

Contractor experience

Contract risk transfer

Construction Risk

Construction Difficulty– What type of construction is employed to complete the project? The type is considered along a continuum, ranging in difficulty from a simple civil construction to complex industrial construction

Contractor experience– has the contractor built similar projects in the locale? Have multiple contractors worked together on similar projects

Contractor risk transfer– how are risks allocated through contractual risks and economic incentives, such as a liability cap, credit enhancement? What risks are transferred to the contractor and what remain with the project?

Technology and design

Construction risk

Preliminary anchor score

Project management

Construction business

anchor score

Construction phase stand alone credit

profile

Construction funding

Funding adequacy

Construction phase business anchor score

Funding Adequacy

Construction and project

start-up costs

Interest payable during

construction

Reserves Working capital

Funding Adequacy

The factors are tallied to determine the funding adequacy score. The final score has 3 categories of “neutral” “marginally Neutral” or “Negative”.

Construction funding

-- it assesses the quality of construction funds available at financial close under a base and downside case. It cannot raise a score and is focused on covering downside case

-- scoring considers 6 sources of funding and project liquidity, including debt, equity, revenue from operations.

-- the scoring of each factor is either certain or uncertain

-- the factors are used to determine the construction funding score

The preliminary anchor score is adjusted based on the project management score

Rating migration

The east of England is currently experiencing a drought, with reservoir levels already 20% lower than normal.

the region is likely to face severe water shortages over the longer term due to significant

changes in rainfall patterns on account of climate change and a steadily increasing population.

Where Credit rating is affected

Among other detrimental effects, this could lead to water shortages, increased energy prices, and flood risk. It could also lead to

operating and financial challenges for utilities and energy-intensive businesses operating in the region

Climatic condition forecast

The east of England has been a water-stressed area for the past 30 years. Last year, Anglian Water PLC which provides water and wastewater services to the east of England and Hartlepool--applied for two drought permits for reservoirs located in the Nene catchment area following very low rainfall of 453 millimeters(mm) over the year. This is equivalent to 75% of the 1961-1990 U.K. average rainfall of 603 mm

the total average annual rainfall for the east of England will remain approximately the same until 2030

How are the water utilities addressing the effects of climate change in the east of England?

Anglian Water's mitigation plans for the east of England are set out in its 25-year Strategic Direction Statement (SDS), published in 2009. The SDS identified population growth and climate change as the two most significant challenges facing Anglian Water.

As a consequence, the company is targeting £13 billion of investment before 2035, £1 billion of which will address the effects of climate change directly. The investment is directed toward the:

Resilience and reliability of water and wastewater services;

Security and conservation of water resources; and

Growth in demand across the east of England.

, Anglian Water has identified about 19 new water abstraction sources and reservoirs, as well as demand

management solutions. The latter include water-efficiency measures for domestic customers, such as water audits

and the installation of water-efficient domestic appliances in 40,000 homes in the past two years. The company

estimates that these measures are saving an average of 40 liters of water per household per day. In addition, 87,000

water meters have been fitted in the past two years, out of a target of 183,000 by 2015. The Anglian Water region

has 67% meter penetration, the highest figure among major U.K. water companies.

Anglian Water has little prospect of generating positive net cash flows (after capital expenditures [capex]) before 2035, in our opinion. It therefore expects to rely on the debt markets to finance its capex program.

Under the regulatory framework operating in the water sector in England and Wales, Anglian Water would typically seek to have such capex approved in its asset management plan and then added to its regulated asset base.

This would subsequently allow the company to increase its regulated tariffs and pass on the cost of asset depreciation to its customers, thereby protecting its credit quality. However, we understand there remains some uncertainty over thetiming and flexibility of the tariff increases, as well as over the assumptions underlying the asset management plans submitted to the regulator, Ofwat.

Ofwat plans to change the way it sets price limits in the future to take account of factors such as population growth, climate change, and the increasing scarcity of water resources. Abstraction charges will adjust to reflect the relative scarcity and abundance of water, or competing water demands.

Although the environmental costs of water use and infrastructure will increasingly be included in water pricing in the U.K., we believe that power generators and energy-intensive firms could face more immediate financial risk from water use through business disruption and changes in abstraction licensing conditions