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Rating Action:

Moody's affirms Terna's Baa1/P-2 ratings; stable outlook

18 Feb 2016

London, 18 February 2016 -- Moody's Investors Service (Moody's) has today affirmed the Baa1 issuer and senior unsecured debt ratings of Terna - Rete Elettrica Nazionale S.p.A (Terna). Concurrently, Moody's also affirmed the (P)Baa1 EMTN programme rating and Terna's short-term P-2/(P)P-2 ratings. The outlook on all ratings is stable.

RATINGS RATIONALE

The rating affirmation follows the announcement of Terna's 2016-19 business plan and reflects Moody's view that the company's investment targets and strategic priorities incorporated in the plan will result in a business risk and financial profile consistent with the guidance for the current rating. More specifically, Moody's expects Terna to exhibit Funds From Operations (FFO)/net debt metrics in the area of 12%-13% and Retained Cash Flow (RCF)/net debt of around 8% over the medium term. Moody's had previously indicated that Terna would need to exhibit FFO/net debt at least in the low double-digits in percentage terms and RCF/net debt of at least 7% in order to support the Baa1 rating.

Terna's four-year plan incorporates relatively sizeable investments, totalling EUR2.8 billion over 2016-19 (vs. approximately EUR2.2. billion over the same period in the previous plan). Terna plans to allocate approximately EUR2.6 billion of capital expenditure (capex) to its domestic regulated transmission activities (amount net of EUR300 million of EU funding and EUR400 million investments related to the Italy-France Interconnector project which will be financed by third parties). The increase in investments in domestic regulated operations vs. the previous plan reflects the accelerated completion of specific projects (EUR100 million), in order to benefit from changes in the applicable regulatory framework, as well as EUR300 million of additional capex earmarked for the high voltage assets recently acquired from the Italian railway company Ferrovie dello Stato. In light of envisaged investments, the company's Regulated Asset Base (RAB) is expected to increase to EUR14.7 billion in 2019 (vs. EUR12.3 billion in 2015).

Terna's 2016-19 plan also includes investments of up to EUR200 million to support its expansion in non-regulated businesses and international regulated activities. Moody's expects that the contribution from activities outside its core domestic transmission operations will remain relatively small, but notes that if such activities become strategic in respect of contribution to cash flows, Terna's operating risk profile could deteriorate.

As part of its 2016-19 plan, Terna also plans to deliver up to EUR15 million of cost savings per annum, which, in conjunction with the anticipated RAB development, supports an expected increase in EBITDA to approximately EUR1.6 billion by 2019 (vs. EUR1.53 billion in 2015). These trends, in conjunction with lower tax liabilities as a result of the cancellation of the so-called "Robin Hood" tax, provide resources for the company's revised dividend policy, which envisages annual growth of 3% over the plan period and a payout ratio expected to remain below 75% under management's estimates.

More generally, Moody's notes that Terna's priorities as part of its updated investment plan reflect an enhanced regulatory visibility over 2016-19 as a result of the conclusion of the price control review for electricity transmission activities for the regulatory period (2016-21). The changes introduced by the regulator confirmed an expected regulatory tightening resulting in lower allowed returns (mainly driven by low interest rates) and a progressive evolution towards a system of output-based incentives. The allowed return on capital (WACC) applicable to Terna's transmission operations for the period 2016-18 was reduced to 5.3% (a decrease of approximately 1% from previous levels), while incentives on investments in addition to the base WACC return were reduced to 1% for all categories (vs. previous 1.5%-2%; except for the Sorgente-Rizziconi power line which will continue to receive a 2% incentive). More positively, the regulatory lag for the recognition of investments into RAB was reduced to one year (vs. previous two years) and Moody's notes that the efficiency factor applicable to allowed operating costs was reduced to 1% (vs. previous 3%).

RATIONALE FOR THE STABLE OUTLOOK

The outlook on Terna's rating is stable, reflecting Moody's expectation that the company's financial profile will remain in line with the guidance for the current rating.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the domestic nature of Terna's business, Moody's does not expect the company's rating to exceed the Italian sovereign rating by more than one notch. Therefore, upward pressure on Terna's rating will be dependent on (1) a strengthening of the Italian sovereign rating (currently, Baa2 stable); (2) a sustainable improvement in the financial profile resulting in FFO/net debt of around 14% and RCF/net debt above 9%; (3) a continued strong liquidity position; and (4) a stable business risk profile.

Any deterioration in the Italian sovereign rating would likely result in a corresponding adjustment of Terna's rating. Negative rating pressure could also develop as a consequence of (1) adverse regulatory developments negatively affecting Terna's business risk profile; (2) evidence of political interference and/or discriminatory fiscal measures; (3) implementation of a more risky strategy and/or investments; or (4) a material deterioration of Terna's liquidity profile or credit metrics permanently below our guidance (i.e. FFO/net debt below the low double-digits in percentage terms and RCF/net debt below 7%).

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in November 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Terna -- Rete Elettrica Nazionale S.p.A. is the main high-voltage and very-high-voltage electricity transmission grid owner and operator in Italy, also responsible for the grid's operation, maintenance and development. As of December 2015, the company reported revenues of approximately EUR2.07 billion and EBITDA of approximately EUR1.53 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.

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

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Terna's Baa1/P-2 ratings; stable outlook
No Related Data.
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