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Rating Action:

Moody's announces impact on certain utility companies following Italian sovereign action

18 Feb 2014

London, 18 February 2014 -- Moody's Investors Service has today announced multiple rating actions on the following Italian utility issuers: ACEA S.p.A., Compagnia Valdostana delle Acque S.p.A. (CVA), SNAM S.p.A. and Terna - Rete Elettrica Nazionale S.p.A..

Today's rating action on these issuers follows Moody's change in outlook on the Baa2 rating of the Government of Italy to stable from negative on 14 February 2014. For more details on the rationale, please refer to the press release (https://www.moodys.com/research/Moodys-changes-outlook-to-stable-on-Italys-Baa2-government-bond--PR_292815).

The ratings of A2A S.p.A., ENEL S.p.A. (and its Spanish subsidiary, Endesa S.A.), Edison S.p.A. and Hera S.p.A. are unaffected by this rating action. An overview of unaffected issuers is provided later on in this press release.

-- OVERVIEW OF AFFECTED ISSUERS:

- Acea: Moody's has changed to stable from negative the outlook on Acea's Baa2 senior unsecured and issuer ratings. Concurrently, Moody's has affirmed these ratings.

- Compagnia Valdostana delle Acque: The outlook on the rating has been changed to stable from negative. The issuer rating has been affirmed at Baa1.

- SNAM: The outlook on the ratings has been changed to stable from negative. Concurrently, Moody's has affirmed the Baa1 issuer and senior unsecured ratings, as well as the provisional (P)Baa1 rating assigned to SNAM's EMTN programme.

- Terna: The outlook on the ratings has been changed to stable from negative. The issuer rating and the senior unsecured debt ratings have been affirmed at Baa1, as well as the EMTN programme at (P)Baa1 and Terna's short-term P-2/(P)P-2 ratings.

RATINGS RATIONALE

The above actions follow the stabilisation of the government of Italy's rating and the consequent reduced pressure on the aforementioned issuers as a consequence of their linkages with the sovereign rating. The stabilisation of the outlook on the ratings of these issuers reflects also a generalized enhancement of their liquidity conditions, which follows a material improvement in their access to the debt markets.

- ACEA:

Moody's decision to change the outlook to stable from negative was triggered by the change in outlook on the Government of Italy's Baa2 rating to stable from negative and the resulting lower pressure on Acea's rating as a consequence of its linkage with the sovereign rating. The rating agency's decision also follows further evidence of improvement in the company's financial and liquidity profile during the second half of 2013 and the ongoing positive evolution of the domestic regulatory environment for water networks.

Acea's Baa2 rating is driven by (1) the company's improved liquidity profile, following the extension of its debt maturities, the increase in the size of its committed facilities and the recent issuance of a EUR600 million bond; and (2) the favourable regulatory developments on Italian water networks and the recent determination issued by the Italian Authority (AEEG), which confirms the transitory period full cost recovery principle, while completing the regulatory framework with overall positive provisions from a credit perspective. Moody's rating takes into account Acea's low business risk profile and the diversified portfolio of its regulated activities, which accounts for approximately 80% of the company's consolidated EBITDA. However, the rating also recognises (1) Acea's vulnerability to still negative domestic macroeconomic trends, which are affecting the company's operating environment; and (2) its limited, albeit still significant, exposure to unregulated businesses (waste management and energy supply).

Preconditions for a more favourable positioning of Acea's rating include (1) a continued improvement of Acea's financial and liquidity profile to a level exceeding Moody's ratio guidance (i.e., funds from operations (FFO)/interest coverage of 3.5x-4.5x, an FFO/net debt ratio in the low to high teens in percentage terms; and a retained cash flow/net debt ratio in the low double digits to mid-teens in percentage terms on a sustainable basis), which the rating agency considers commensurate with Acea's Baa2 rating; and (2) a further improvement of the domestic macroeconomic scenario, as well as of public finances, as captured by an upward move of Italy's sovereign rating.

Downward pressure on Acea's rating would develop as a consequence of a weakening of the company's financial profile to levels permanently below Moody's ratio guidance. Any downward movement in the Italian government's rating would also likely result in a corresponding adjustment of Acea's rating. Acea's rating is also based on (1) regulatory stability in Italy; and (2) the company not being subject to discriminatory fiscal measures and/or political interference from the government or the municipality of Rome. Evidence that Acea has significant exposure to these risks beyond current expectations would result in negative pressure on the company's rating.

- CVA:

Moody's decision to stabilize CVA's ratings follows the change in outlook on the Government of Italy's Baa2 rating to stable from negative and the resulting lower pressure on CVA's rating as a consequence of its linkage with the sovereign rating. Notwithstanding CVA's exposure to challenging domestic power markets, consequent to its niche hydroelectric generation profile, the rating agency notes that CVA has very low leverage, a sustainable debt structure, a solid liquidity position and a balanced financial policy. All these points would translate into a better credit positioning than that reflected in CVA's Baa1 standalone rating, even taking into account an expected decline in 2014-15 operating cash flows, essentially due to a further anticipated pressure on Italy's wholesale electricity prices. However, since CVA is still fully exposed to the Italian macroeconomic and financial environment, the rating agency continues to consider the current one-notch differential with the sovereign rating as appropriate. Therefore, an upward movement of the latter would be required before CVA could become eligible for a rating upgrade.

Any deterioration in Italy's creditworthiness, as captured by a downward movement in the Italian government's rating, would likely result in a corresponding adjustment of CVA's rating. Negative rating pressure could also develop in case of (1) a material deterioration of CVA's financial profile at a level materially below with Moody's guidance (FFO/net debt ratio below 40% and an RCF/net debt ratio below the low thirties in percentage terms); (2) an aggressive investment strategy into riskier generation assets and/or type of activities; and/or (3) a weakening of CVA's liquidity position as a result of large cash outflows or a deterioration in the quality of the company's portfolio of liquidity investments.

- SNAM:

The change in outlook for SNAM from negative to stable reflects Moody's acknowledgement of the close linkages between SNAM's credit quality and that of the government. SNAM's Baa1 long-term rating, which Moody's affirmed today, continues to be driven by the low business risk profile associated with its monopoly-like gas operations, carried out under a regulatory framework which this rating agency sees as generally transparent, although not immune from political interference.

The rating also recognises the stability and predictability of SNAM's cash flows, given its very limited exposure to volume risk and the generally timely cost-recovery mechanisms characterising the tariff methodologies in Italy, as confirmed by the recently concluded regulatory review for gas transport, regasification and distribution activities. Furthermore, SNAM's rating factors in the company's strong liquidity position and the achievement of its targeted funding structure evolution following the company's unbundling from its former parent Italian oil & gas group ENI.

The rating also reflects the requirements associated with SNAM's investment plan for 2013-16, including approximately EUR6.9 billion of capital expenditure and investments, and approximately EUR3.4 billion of expected cumulative dividend distribution, assuming a stable DPS. While Moody's expects SNAM's investment plan to have a drag effect on the company's main credit metrics, the rating agency anticipates that SNAM's ratios bottomed out in 2013 and will start to improve in 2014, benefiting from a 4% reduction in SNAM's corporate tax rate, a flat-to-slightly positive evolution of its operating results and lower total investments when compared to 2013 levels.

Preconditions to a more favourable positioning of SNAM's rating include (1) an improvement of the company's financial profile to a level exceeding Moody's ratios guidance (FFO/interest coverage of between 3.0x-4.0x, FFO/net debt of 10% to the low teens, RCF/net debt of 6% to the high single digits and net debt/fixed assets not higher than 70%), which this agency considers commensurate to SNAM's Baa1 rating; and (2) a further improvement of the domestic macroeconomic scenario, as well as of public finances, as captured by an upward move of Italy's sovereign rating.

Any deterioration in Italy's creditworthiness as captured by a downward movement in the Italian government's rating would likely result in a corresponding adjustment of SNAM's rating. Negative rating pressure could also develop in case of (1) adverse regulatory developments affecting SNAM's business risk profile; (2) evidence of political interference and/or discriminatory fiscal measures; (3) the implementation of a more risky strategy and increased investments commitment; or (4) structural deterioration of SNAM credit metrics below Moody's rating guidance (FFO/interest coverage of between 3.0x-4.0x, FFO/net debt of 10% to the low teens, RCF/net debt of 6% to the high single digits and net debt/fixed assets not higher than 70%).

- TERNA:

Today's stabilisation of Terna's rating outlook reflects the close linkages between Terna's credit quality and that of the Italian government. Despite Terna's currently solid standalone financial position, its rating continues to be constrained by that of Italy as a result of country risks associated with being based in Italy. In accordance with Moody's previously published guidance, infrastructure and utility companies would not normally be expected to have a rating more than two notches higher than the government of the country in which the majority of their business is located. Moody's considers a one-notch, rather than two-notch, differential between Terna and Italy's rating to be appropriate given the group's negligible amount of non-domestic revenue and its exposure to the potential consequences of government's limited financial flexibility.

Terna's Baa1 issuer rating also takes into account (1) the company's low business risk profile associated with its electricity transmission activities under the well-established Italian regulatory framework; (2) its strategic position as owner and operator of Italy's electricity transmission assets, with focus on regulated activities and pivotal role in delivering the country's energy plan; (3) Terna's comfortable liquidity profile; (4) the company's diversified debt structure and sustainable debt maturity profile over the medium term; and (5) the company's sizeable investment plan and its high dividend policy vis-à-vis other European peers.

Given the linkages between Terna's rating and that of the Italian government, an upward movement in the sovereign rating would be necessary before Moody's considered a similar move in Terna's ratings. Any deterioration in Italy's creditworthiness, as captured by a downward movement in the Italian government's rating, would likely result in a corresponding adjustment of Terna's rating. Negative rating pressure could also develop in case of (1) adverse regulatory developments negatively affecting Terna's business risk profile; (2) evidence of political interference and/or discriminatory fiscal measures; (3) the implementation of a more risky strategy and/or investments; and/or (4) a material deterioration of Terna's liquidity profile or of its credit metrics below Moody's guidance (FFO/interest coverage in the 3.0x-4.0x range; an FFO/net debt ratio sustainably in the low double-digits to mid-teens; and an RCF/net debt ratio of between 7% and 10%).

OVERVIEW OF UNAFFECTED ISSUERS

A2A:

The Baa3 issuer and senior unsecured ratings and their negative outlook remain unchanged following Moody's decision to change the outlook on Italy's Baa2 government bond rating to stable from negative. Although Moody's believes that A2A has made progress in strengthening its liquidity profile and reducing its leverage in the last few months, the outlook on its ratings reflects the risk that the challenging conditions currently characterising the electricity markets in Italy could prevent the company from maintaining a financial profile commensurate with the current rating. Achieving financial metrics on a sustainable basis to a level commensurate with the guidance (i.e., FFO/net debt metrics comfortably positioned between the mid-teens to low twenties in percentage terms) would be a precondition to stabilising the current negative outlook on the company's rating.

- ENEL (AND ITS SPANISH SUBSIDIARY, ENDESA):

The Enel group's Baa2/P-2 senior unsecured ratings and their negative outlook remain unchanged. The current ratings factor in the progress the Italian-based group has made toward deleveraging, but the negative outlook continues to reflect (1) a degree of execution risk associated with the company's further deleveraging efforts; (2) a financial profile for 2013 that is anticipated to be somewhat weak for the financial guidelines for the current rating (i.e., RCF/net debt in the mid-teens and FFO/net debt of around 20%); and (3) a degree of uncertainty still linked to the regulatory environment in Spain.

A stabilisation of the outlook could occur if the company achieves a reduction in debt by end-2014 and can maintain earnings such that it achieves the guideline metrics noted above. This scenario would also assume no further major regulatory or other operating shocks or renewed negative macroeconomic deterioration in either Spain or Italy that could raise the riskiness of the company's core operating environment or challenge its financial profile further.

- EDISON:

The company's Baa3 rating with a stable outlook remains unchanged. The rating continues to (1) reflect the positive benefits to the Italian energy company of full ownership and control by the highly rated French Electricite de France (EDF; Aa3 negative); and (2) assumes that EDF will ensure that Edison will continue to improve its financial profile, such that it can move broadly in line with that of its parent's target profile of net debt/EBITDA of 2.0x-2.5x, which for Edison should translate into FFO/net debt comfortably in the twenties in percentage terms.

- HERA:

The Baa1 issuer and senior unsecured ratings and their negative outlook remain unchanged. The outlook reflects Hera's weak, albeit improving, credit metrics relative to its current Baa1 rating and the risk that they could deteriorate to a level no longer consistent with the company's current rating positioning. Preconditions to consider stabilising the current negative outlook on the company's rating would be financial metrics in line with Moody's guidance of an FFO/net debt positioned at least in the upper teens in percentage terms, and an RCF/net debt in the low teens, associated with an improvement in the domestic macroeconomic environment.

Moody's will comment separately on the ratings of Acquedotto Pugliese S.p.A. as the company's ratings incorporate some uplift for support from its sub-sovereign owner (Region of Puglia).

PRINCIPAL METHODOLOGIES

The principal methodology used in rating Terna - Rete Elettrica Nazionale S.p.A. and SNAM S.p.A. was Regulated Electric and Gas Networks published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The principal methodology used in rating Compagnia Valdostana delle Acque S.p.A. was Unregulated Utilities and Power Companies published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

ACEA S.p.A.'s ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside ACEA S.p.A.'s core industry and believes ACEA S.p.A.'s ratings are comparable to those of other issuers with similar credit risk.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Alessandro La Scalia
Vice President - Senior 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 announces impact on certain utility companies following Italian sovereign action
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