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Rating Action:

Moody's assigns Baa2 issuer rating to 2i Rete Gas; stable outlook

25 Jun 2014

London, 25 June 2014 -- Moody's Investors Service (Moody's) has today assigned a Baa2 issuer rating to 2i Rete Gas S.p.A. (2iRG). Concurrently, Moody's has assigned a (P)Baa2 rating to 2iRG's EUR3 billion EMTN programme. The outlook on all ratings is stable.

The ratings reflect Moody's expectation that the company will issue a recently announced Euro bond offering, and will put in place other term debt facilities to refinance its indebtedness of EUR2.1 billion, including EUR0.2 billion debt from the planned merger with its parent companies, and ensure a stable long-term capital structure with multi-year back-up liquidity facilities.

RATINGS RATIONALE

The Baa2 issuer rating reflects the company's fairly low risk business profile. The rating incorporates (1) company's focus on regulated gas distribution activities, backed by a credible and supportive regulatory framework, which ensures a high degree of cost recovery and a fair remuneration of investments and capital base and has been consistently applied for more than 10 years by AEEGSI, the Italian independent regulatory body for energy and water sectors; (2) no volume risk as distribution networks tariffs are entirely based on capacity, and limited affordability concerns, as gas distribution charges account for 14% of householders' bills; (3) a high degree of operating efficiency, as the company consistently received technical rewards allocations and was able to outperform its regulatory operating expenses allowance in recent years; (4) limited investment burden, as 2iRG expects to run a capital expenses programme of EUR1.6 billion between 2014-19, ie., 8% to 10% of the existing fixed assets base on an annual basis, on a number of small-scale interventions of modest technical complexity.

However, Moody's rating also factors in 2iRG's exposure to disinflationary pressures, as the company's Regulatory Asset Base (RAB) and operating expenses are annually updated to account for inflation while allowed return on capital is updated only at the beginning of a new tariff cycle: therefore, the lower-than-expected inflation rate ultimately translates into lower tariffs and higher leverage ratios. While we expect euro area inflation to rise from the current low levels as the recovery gathers pace, subdued economic growth and high unemployment still pose a risk of a prolonged period of low inflation in Italy, with a potential negative effect on 2iRG. Moreover, a prolonged disinflationary scenario will very likely result in a lower risk-free rate parameter (based on the yield of the 10 years Italy's government bond) at next WACC reset (2016), with negative effects also on the rate of remuneration of capital, although a decrease of sovereign yields driven by a further decrease in country risk premium would be credit positive.

Furthermore, Moody's rating considers that the ongoing national reorganisation of gas districts and 2iRG's participation to gas tenders could reduce its financial flexibility. Starting from July 2014 and for the following four years all the existing gas distribution concessions are expected to be re-tendered, after being regrouped in 177 territorial districts (ATEM), as a part of a reform aimed at reducing the number of operators and fostering efficiency. 2iRG intends to exit from ATEMs where the company has a limited presence in terms of market share, and to strengthen its presence where the group is the incumbent, significantly increasing its existing customer base (3.8 million points of delivery) by 2019. However, the quantification of terminal value to be paid to exiting concessionaires, and the final criteria of its inclusion in tariffs are still uncertain, although the right to receive a residual value at the end of the concession and the inclusion in tariffs of the residual value paid are fully backed by law and related regulatory provisions are in force. Lower-than-expected residual value payments received or worse tariff inclusion conditions would affect 2iRG's investing and operating cashflows, as well as increased competition translating into higher costs for awarded concessions.

The rating also reflects 2iRG's high indebtedness levels and anticipates a further increase in leverage in 2014, as a result of the costs of the planned refinancing exercise, the payment of an EUR103 million extraordinary dividend and a decrease in gas distribution revenues, following the 2014-19 regulatory review. From 2015 onwards, Moody's expects a slow reduction in leverage, with no expectations of positive free cash flows within the plan's 2014-19 horizon.

Finally, the rating also accounts for (1) company's strong liquidity profile, albeit with significant refinancing risk as part of the targeted new debt structure will mature within 1-2 years and (2) competent management team, with good track record in extracting synergies from previous business integrations.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on 2iRG's ratings reflects Moody's view that the company will be able to demonstrate an improving financial profile after the ongoing refinancing exercise, even in the presence of moderately negative macroeconomic pressures, such that it can reach by 2015, and subsequently maintain, the following metrics: (1) an FFO/net debt ratio of around 10%; (2) an RCF/net debt ratio between 6% and high single digits, and (3) a net debt/fixed assets ratio not higher than 85%, as a proxy of a net debt/RAB (excluding public assets' regulatory base) not above 75%.

WHAT COULD MOVE THE RATING UP/DOWN

Upward pressure on the rating could develop if the company demonstrates a steady track record of business and financial growth over time such that it can achieve and maintain a financial profile of FFO/net debt in the mid-to-high teens, while materially exceeding Moody's RCF/net debt ratio guidance for the rating and reducing net debt/fixed assets ratio below 70%. This would presuppose a much stronger macroeconomic environment than currently observed, materially better-than-expected results in terms of execution of 2iRG's gas tenders strategy, a sizeable reduction of its capital expenditure programme and support from shareholders to deleverage the company. Since Moody's does not expect those conditions to materialise in the short to medium term, a rating upgrade is unlikely, although the company might still reinforce its current positioning within the Baa2 category.

Downward pressure on the rating could result from a failure to demonstrate a financial profile in line with guidance for the Baa2 rating, as for instance following more difficult operating conditions, worse than expected disinflationary pressures or larger dividend payouts than factored in the current rating, or to maintain the capital and liquidity structure expected to result from the planned refinancing exercise.

The principal methodology used in this rating 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.

2i Rete Gas S.p.A (2iRG) is the second largest operator in the Italian gas distribution sector by number of connection points (3.8 million at the end of 2013). Gas distribution activities are fully regulated by the AEEGSI (Autorita per l'energia elettrica, il gas e il sistema idrico). In 2013, the company distributed 5.87 bcm of gas through its 1,961 concessions under management. The company is owned by infrastructure funds Fondi italiani per le infrastrutture (F2i Sgr) and Ardian (ex AXA Private Equity) with a 72% and 28% equity interest, respectively.

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 assigns Baa2 issuer rating to 2i Rete Gas; stable outlook
No Related Data.
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