First-time rating
London, 22 March 2011 -- Moody's Investors Service has today assigned a long-term issuer
rating of A3 to Acea S.p.A. ("Acea"), the Italian
multi-utility. The outlook assigned to the rating is stable.
This is the first time that Moody's has assigned a rating to Acea.
RATINGS RATIONALE
"Acea's rating primarily reflects the low business risk profile
of the company and its diversified portfolio of regulated utility activities
under relatively supportive regulatory frameworks," says Raffaella
Altamura, an Analyst in Moody's Infrastructure Finance Group.
"These activities account for more than 80% of the company's
EBITDA and predominantly comprise water and waste-water services,
as well as electricity distribution activities. Characterised by
quasi-monopoly features and based on long-term concessions,
these businesses provide a good degree of predictability and visibility
to the company's earnings" continues Ms Altamura.
In addition, Moody's notes that a portion of Acea's
unregulated operations, although competitive, are backed by
long-term operating agreements. In particular, the
company's waste management services include the operation of landfills
and waste-to-energy ("WTE") plants. Where
these activities back the concessions for urban waste or relate to the
sale of electricity generated by incinerators covered by CIP6 incentive
schemes, they are operated under long-term contracts,
thus further enhancing cash flow visibility.
The assigned A3 rating incorporates a small uplift, reflecting potential
support from Acea's main shareholder, the city of Rome.
More negatively, Acea's rating also reflects the company's
presence in the electricity supply segment (contributing to approximately
9% of EBITDA). Given the competitive nature of this activity
and Acea's unbalanced upstream position, this segment is characterised
by a relatively higher risk, with the company's own electricity
generation capacity currently covering less than 5% of its requirements.
The assigned rating also factors in the requirements associated with Acea's
relatively sizeable capital programme, with projected investments
totalling EUR1.3 billion in 2011-13. In Moody's
view, Acea's capex plan should not lead to an increase in
debt burden, in light of the additional cash generation expected
from the investments (particularly new WTE plants) and the company's
ambitious operating efficiency and working capital optimisation targets.
Nevertheless, Moody's notes the potential execution risk associated
with the latter.
In Moody's view, Acea's rating is comfortably positioned
at the current level and, assuming full delivery of the growth and
efficiency targets discussed above, the company could enjoy sufficient
flexibility going forward to finalise small acquisitions, in line
with its stated strategy of increasing its presence in regulated operations.
The stable outlook on the A3 rating reflects Moody's expectation
that Acea will exhibit a strong operating profile in future, supported
by a diversified business portfolio and a significant presence in regulated
activities. It also reflects the rating agency's view that,
despite Acea's relatively sizeable investment plan, the company
is likely to exhibit: (i) funds from operations (FFO) interest coverage
of 3.5x-4.5x; (ii) an FFO/net debt ratio in
the low to high teens in percentage terms; and (ii) a retained cash
flow (RCF)/net debt ratio in the low double digits to mid-teens
in percentage terms on a sustainable basis.
Upward pressure on Acea's rating could develop if, in addition
to maintaining a significant presence in regulated activities, the
company were able to exceed, on a sustainable basis, the upper
limits of the ratios guidance mentioned above.
Downward rating pressure could develop in the event of: (i) changes
in the regulatory framework, which could negatively impact the company's
business or financial risk profile; (ii) large-scale,
debt-funded acquisitions/investments and/or diversification away
from regulated activities; (iii) a failure to maintain the expected
minimum financial profile mentioned above (i.e. FFO interest
coverage below 3.5x, an FFO/ net debt ratio below the low
teens and an RCF/net debt ratio below the low double digits on a permanent
basis). In addition, negative pressure on Acea's rating
may develop in the context of a deterioration of the credit quality of
the city of Rome and/or a reduction of the support assumptions currently
incorporated in Moody's assessment.
In light of Acea's 51% ownership by the city of Rome,
the company falls within the scope of Moody's rating methodology for Government-Related
Issuers ("GRIs"). Hence, the company's A3 rating reflects
the combination of the following components:
The credit risk profile of Acea on a stand-alone basis,
known as the Baseline Credit Assessment ("BCA"), of "8" (on a scale
of 1 to 21, where 1 represents the lowest credit risk), which
is equivalent to the "Baa1" rating category;
Moody's assessment of the credit strength of the city of Rome (not
rated);
Moderate dependence, reflecting the fact that, despite
the geographic diversification of Acea's operations, the company
continues to derive the majority of its revenues from within the municipality
of Rome;
Low support, reflecting: (i) the city of Rome's
control of Acea; (ii) the company's socio-economic role;
and (iii) that despite a potential strong willingness to support Acea
in the event of need, the company's large size may make it
difficult for the municipality to provide it with timely support,
particularly in light of the city's challenging financial position
at present.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Moody's "Government
Related Issuers: Rating Methodology Update", published in
July 2010.
Acea is one of the largest integrated multi-utilities in Italy,
providing water, waste and energy services. The company mainly
operates in the area of Rome, but is also present in other parts
of Italy (manly Tuscany, Campania and Umbria). As of September
2010, Acea reported revenues of EUR2.4 billion and operating
income of EUR256 million.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
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London
Raffaella Altamura
Analyst
Infrastructure Finance
Moody's Investors Service Ltd.
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London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
Moody's Investors Service Ltd.
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Moody's assigns A3 rating to Acea; outlook stable