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Rating Action:

MOODY'S ASSIGNS Baa3 ISSUER RATING TO ACQUEDOTTO PUGLIESE SPA

03 Mar 2004
MOODY'S ASSIGNS Baa3 ISSUER RATING TO ACQUEDOTTO PUGLIESE SPA

Milan, March 03, 2004 -- Moody's Investors Service today assigned a long-term senior unsecured Baa3 issuer rating to Aquedotto Pugliese SpA (AQP), the integrated water and waste water corporation which operates in the ATO (Optimal Territorial Basis) of the Region of Puglia, which is rated A2 by Moody's. The rating outlook is stable. This is the first time Moody's has rated AQP.

The rating primarily reflects AQP's low and fully regulated business risk and the strong and monopolistic concessionary franchise -- which expires in 2018 -- for the core water distribution and waste water businesses which allows AQP to benefit from fully regulated earnings and cash flows that provide significant support to AQP's debt obligations. The rating also reflects the capital intensive nature of the business with debt levels expected to rise significantly over the next several years due the very intense and ambitious capital expenditures program agreed with the ATO Authority, the Regulator. Overall, business risk remains low with a relatively transparent and efficient tariffs system which allows the company a total pass-through of operating costs as well as a fairly good return on new investments (7%). The regulated tariffs scheme period, at 3 years, is not particularly long and while the Regulator appears to be reasonably flexible in terms of tariffs adjustments in case of external shock events, their willingness to do so is, as yet, untested.

AQP, previously Ente Autonomo Acquedotto Pugliese, was incorporated as a joint stock company (SpA) and was assigned with the management of the integrated water services in the Region of Puglia until December 2018 by Law n. 141, in May 1999. In December 2001 (Law n. 28), AQP share capital was transferred to the regions of Puglia (rated A2 by Moody's) and Basilicata (rated A1 by Moody's) which own 87.1% and 12.9% of the company's capital, respectively, proportionally to their respective inhabitants.

Moody's notes that the company's profitability has historically been poor -- if compared to other water operators in Europe -- mainly due to the tariff system applied before 2003, the high water import and transportation costs and to network and administrative inefficiencies. These will be a primary focus of management in the future.. Ongoing improvements of operating results and a substantial recovery from existing weak credit ratios are expected and will be essential to consolidate the company's position within the rating. The company's already levered balance sheet (Total Debt to Total Capitalisation at 70%) will be further stressed by a very intensive capital investments program which is approximately €700m until 2007, net of State-supported financings. However, the full program of € 3.2bn for the entire regulatory period is partially backed by State support (20% of total spending) and should allow a clear improvement of network efficiencies (reducing physical and administrative leakages) which, in turn, would sustain a steady Revenues and Operating profits growth.

The agency said that, on a fundamental basis, the rating on AQP is constrained by the levered capital structure, poor operating results, challenging and sizeable investments program and efficiencies improvement targets to be met. Nonetheless, Moody's also recognises that the existing relatively strong regulatory and legal frameworks (encompassed into the Concession Agreement) ring fence the company from the risk of losing the Concession without compensation for the assets AQP has directly invested into. If AQP's concession is terminated either at the current expiry date or at an earlier date due to poor performance, the new concessionaire must acquire AQP's assets at Net Book Value which should be substantially higher than the company's debt.

Moody's believes that the Region of Puglia is likely to support AQP in the time of unexpected stress, due to the nature of AQP's services which are considered essential and indispensable, and have a strong socio-economic weight in the region,. Nevertheless, the absence of any formal, explicit support agreements between AQP and the Regions prevent rating equalisation with the sub-sovereign ratings. In addition, the two existing shareholders are required -- by Law -- to privatize the company.

The current rating reflects the existing clear linkage between the company and the Region of Puglia which, as Moody's understands, should persist as the Region is expected to maintain a key strategic role and ownership even after the company's privatisation. This substantial implicit support, however, might be lost in the future as a consequence of the presence in the company's capital structure of new financial investors and or industrial partners which could, among other things, ignite a more aggressive dividend policy.

This exposes bondholders to stand-alone corporate risk, which at the moment benefits from a one notch uplift. On the other hand, if privatisation resulted in additional equity, an unchanged dividend policy or in the same support from the Region of Puglia, AQP's present credit profile should not be affected.

While AQP currently has weak credit ratios, the stable outlook reflects Moody's expectations of increase in debt burden in line with the Mater Plan agreed with the Regulator, and along with profitability and efficiencies improvements anticipations. Any substantial unexpected variation from what AQP is planning to achieve in terms of operating results and main debt protection measures or any failure to successfully re-balance the debt maturity profile and put in place and adequate liquidity back-up arrangement, would put negative pressure on the rating. Conversely, an achievement of better than expected positive operating performance, and a substantial and unforeseen debt reduction, would be considered as positive elements for the rating.

Acquedotto Pugliese SpA (AQP) is headquartered in Bari and was incorporated as a joint stock company (SpA) and assigned with the management of the integrated water services in the Region of Puglia in May 1999, by Law n. 141. In 2001 (Law n. 448), AQP share capital was transferred from the State to the regions of Puglia (A2) and Basilicata (A1) which own 87.1% and 12.9% of the company's capital, respectively. The license granted by the Region of Puglia to AQP provides for the integrated water services within all the municipalities included in the territorial basin of the ATO of Puglia. The core activity is the abstraction, purification and supply of potable water, and the collection and treatment of waste water.

London
Stuart Lawton
Managing Director
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

Milan
Stefano Zeni
Vice President - Senior Analyst
European Corporates
Moody's Investors Service
JOURNALISTS: 33 1 53 43 93 78 SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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