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Rating Action:

Moody's affirms 2i Rete Gas Baa2 ratings; outlook stable

17 Oct 2017

London, 17 October 2017 -- Moody's Investors Service, ("Moody's") has today affirmed the (P)Baa2 rating of the euro medium-term note (EMTN) programme of 2i Rete Gas S.p.A. (2i RG). Moody's also affirmed the company's Baa2 senior unsecured ratings and the Baa2 long term issuer rating. The outlook on all ratings remains stable.

RATINGS RATIONALE

Today's rating action follows the announcement on 13 October that 2i RG finalised an agreement to acquire Nedgia S.p.A. (Nedgia, unrated) and Gas Natural Italia S.p.A. (GNI, unrated) from Gas Natural SDG, S.A. (Gas Natural, Baa2 Stable), for an enterprise value of EUR727 million. Nedgia is the seventh largest gas distribution operator in Italy by connection points whilst GNI provides corporate services to Nedgia and to other subsidiaries of Gas Natural in Italy. The acquisition is subject to customary approval from relevant antitrust authority, and the financial closing is expected to take place between Q4 2017 and Q1 2018.

The rating affirmation reflects: (i) Moody's view that the transaction does not alter 2i RG's business risk profile, given the regulated nature of essentially all the assets acquired; (ii) the rating agency's expectation that, although the transaction will result in a weakening of 2i RG's ratios, the group's credit metrics will remain at a level commensurate with the Baa2 rating. Nevertheless, the acquisition will absorb 2i RG's existing financial flexibility leaving no headroom vs. the ratio guidance for the current Baa2 rating.

In Moody's view, the acquisition represents a strong strategic fit for 2i RG which will consolidate its position as second largest player in Italy and increase its market share to 19% (vs. 17% at 2016 YE). Through the acquisition, 2i RG will strengthen its geographic footprint in Southern and Central Italy, where the company is already present thanks to a diversified network of concessions spread across the whole country, but will also increase its market share in regions, such as Sicily, where it currently has a more limited presence. The transaction perimeter also includes the acquisition of GNI. As Moody's expects the EBITDA coming from GNI to be marginal (< EUR1 million), these assets will not affect the rating agency's assessment of the risk profile of the acquired assets.

Upon successful completion of the transaction, 2i RG's regulatory asset base ("RAB") will increase by EUR555 million in 2018. The regulatory framework governing the assets acquired matches that currently applied to 2i RG. The rating agency continues to consider the regulation for gas distribution activities in Italy as stable and overall supportive, featuring a fair degree of cost recovery and capital remuneration, and characterised by the absence of any exposure to volumes.

From a financial perspective, Moody's anticipates the transaction to fully absorb 2i RG's existing financial flexibility and to result in a permanent weakening of its key credit metrics from 2018 onwards. This is because 2i RG plans to fund the agreed price consideration (EUR727 million) entirely through debt, and in particular through the issuance of a bond of about EUR700 million. However, should current market conditions change, the transaction will be funded through a bridge to bond facility with maturity of at least twelve months (with the option to extend it by further six months) for which the commercial arrangements are already in place. Moody's would expect this facility to rank pari passu with all the other senior unsecured debt of 2i RG.

Moody's therefore says that 2i RG's financial profile will weaken from 2018 onwards relative to historical levels. The increase in leverage is partly mitigated by: (i) a reduction in 2i RG's regulatory receivables in 2017 and 2018, as the rating agency understands that this will be driven by the change in the frequency of payments received from CSEA ("Cassa per i Servizi Energetici ed Ambientali"); (ii) the efficiencies that 2i RG achieved in the months to September 2017 and the additional savings (relative to the EUR104 million already included in the plan) of EUR13 million that the management expects to extract from the acquisition and which Moody's believes the company is well-positioned to achieve; (iii) lower net investments over the 2017-21 period to reflect a shift to 2023 (vs. previous 2021) of the assumed tender period; and (iv) a lower dividend payout ratio in the two years following the acquisition (2019-20).

Following the acquisition, Moody's anticipates 2i RG's FFO/Net debt to fall below 12% and Net debt/fixed assets to increase to around 85% (vs. around 14% and 80%, respectively, expected in 2017, net of extraordinary items). These are levels that are commensurate with the guidance for the current Baa2 rating, which includes FFO/net debt above 10% and Net debt/Fixed assets no higher than 85%. Moody's nevertheless notes that 2i RG will have limited financial flexibility to absorb potential future headwinds.

RATIONALE FOR STABLE OUTLOOK

The stable outlook is based on Moody's expectation that 2i RG's credit metrics will remain commensurate with the guidance for the Baa2 rating (i.e. FFO/net debt above 10% and Net debt/Fixed assets no higher than 85%), and that the company will maintain financial and investment discipline and could take measures to reduce leverage if needed.

The stable outlook also continues to reflect the fact that 2i RG could be rated one notch above the Government of Italy (Baa2 negative), reflecting the limited exposure of regulated gas distribution activities to the economic cycle.

WHAT COULD CHANGE THE RATING UP/DOWN

Given Moody's view that the Baa2 rating of 2i RG will be weakly positioned following the closing of Nedgia's acquisition, upward rating pressure is unlikely in the medium term. The ratings could nevertheless be upgraded if 2i RG's financial profile were to improve so that FFO/net debt is comfortably in the mid to high teens in percentage terms, retained cash flows (RCF)/net debt is in the double digits in percentage terms and Net debt/Fixed assets is below 70%. A resilient macroeconomic environment would be a precondition to upgrade 2i RG.

Conversely, 2i RG's ratings would come under downward pressure if (i) the company failed to demonstrate a financial profile in line with the guidance discussed above, for example as a result of operating performance shortfalls or increased investments, including in gas tenders or M&A; or (ii) adverse regulatory developments, evidence of political interference or discriminatory fiscal measures were to negatively affect 2i RG's credit risk profile.

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

2i Rete Gas S.p.A. is the second-largest operator in the Italian gas distribution sector. In 2016, the company reported EUR400 million EBITDA and a net debt of EUR2.0 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alessandra Mac Donald
Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Paul Marty
Senior Vice President/Manager
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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