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Rating Action:

Moody's assigns A3 rating to Acea; outlook stable

22 Mar 2011

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.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

London
Raffaella Altamura
Analyst
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns A3 rating to Acea; outlook stable
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