Fitch Ratings has affirmed Northumbrian Water Limited's 'BBB+', Stable Outlook rating, saying it reflects "the transparent regulatory framework in which NWL operates, revenue visibility until March 2020, the company's steady operating and regulatory performance, and gearing in the mid-60% range."

The ratings agency said key rating drivers included NWL's performance for the year to 31 March 2014 (FY14) relative to the targets set by Ofwat, the economic regulator for the UK water sector, and a set of solid results, including meeting leakage targets and achieving stable asset serviceability for all asset categories.

Fitch said there was also an improvement in sewerage, although this is still above target and an area where many water & wastewater companies are having difficulties. NWL is rephasing some capital expenditure to meet this regulatory output target.

For FY14, NWL underperformed regulatory operating expenditure by £5 million, although continued savings in purchasing power left overall outperformance slightly positive. However, for the new price control starting in April 2015, Fitch said that NWL is in a position to achieve some further efficiency gains.

According to the ratings agency, Ofwat's decision to lower the allowed weighted average cost of capital (WACC) to 3.74% , compared with 3.85% at the draft determination last August, together with NWL's 2015-20 business plan based on 4.2% and the current regulatory WACC of 5.1%, will lower interest cover from FY16.

Fitch also added that given that company dividend policy is flexible, it expects gearing levels to remain well within the guidelines of 67.5% - however, if gearing levels were to move higher, this would have potential negative implications for the rating. Fitch's estimates do not make any allowance for outperformance given that the final determination is very new and the company has yet to give specific sources of efficiency gains.

Fitch believes there is scope to outperform total expenditure (totex), while retail costs are extremely tight and good performance under the Outcome Delivery Incentives is unlikely to contribute to cash flow generation over the rating horizon.

In Fitch’s view the new price control has increased business risk for a number of reasons, including limited scope for operational and financial outperformance compared with levels achieved during AMP5 in areas such as power, where companies achieved significant outperformance during the current price control.