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Rating Action:

Moody's changes outlook on Edison's Baa3 ratings to stable from negative; affirms ratings

Global Credit Research - 26 Sep 2013

London, 26 September 2013 -- Moody's Investors Service, ("Moody's") has today changed to stable from negative the outlook on the Baa3 issuer rating and Baa3/(P)Baa3 senior unsecured ratings of Edison S.p.A. (Edison), an Italian gas and electricity company. Concurrently, Moody's has affirmed these ratings.

The stabilisation of the outlook and rating affirmation follow the September 2012 acquisition of Edison's remaining minority shares by the more diversified French-based group, Electricite de France (EDF; Aa3 negative).

"The stable outlook and rating affirmation are prompted by Edison's close financial and operational integration within EDF following the acquisition, as demonstrated by the Italian company's improved financial position," says Helen Francis, a Moody's Vice President -- Senior Credit Officer and lead analyst for Edison.

RATINGS RATIONALE

The stabilisation of the outlook and rating affirmation reflect the positive benefits to Edison from the increased ownership and full control of the company by EDF, following the French group's acquisition of the Italian gas supplier's remaining minority shares in September 2012. These benefits, which have resulted in an uplift to the standalone credit strength of Edison, are evidenced by its significantly greater integration into EDF as a result of the French group's close managerial and financial control of the company. EDF has refinanced EUR1.4 billion of Edison's loans via intercompany debt and Moody's expects that the company's future financing needs will continue to be managed at group level. This will ensure Edison's ongoing financial stability and liquidity. Additionally, Moody's expects EDF's management will tightly direct Edison's current and future operations. This expectation is consistent with EDF's stated strategy that Edison will be instrumental in the development of the French group's gas business. As part of this strategy, Edison will focus on international exploration and production (E&P) opportunities in the Mediterranean basin as well as managing EDF's natural gas infrastructure and long-term natural gas contracts.

At the same time, Moody's expects that, on a fundamental basis, Edison's business risk profile is likely to continue to demonstrate non-investment-grade characteristics. These reflect, firstly, ongoing structural pressures in the company's core electricity generation and gas business in Italy, given significant market oversupply and low demand due to weak macroeconomic conditions. This has resulted in squeezed margins in both electricity and gas and low load factors for gas-fired generation, which represents the bulk of Edison's fleet. Secondly, Edison is exposed to execution and political risks in its international hydrocarbons (E&P and gas) portfolio. Moody's notes that Edison's largest exposure today is to Egypt, through its Abu Qir project, where outstanding receivables total more than EUR300 million. Additionally, Edison's greater business focus on, and increased investments in, international E&P, in line with the group strategy, may increase the business risk profile of the company over time.

The rating recognises Edison's progress in renegotiating certain loss-making gas contracts over the 2011-13 period. Assuming the successful conclusion of further renegotiations in 2014, Edison's EBITDA should stabilise at a normalised annual level of around EUR1-1.1 billion during this period, with some potential for a further EUR600 million of profits. The rating also takes into account the fact that the company has substantially hedged its electricity generation output over this period. Nonetheless, Edison's cash from operations is rather volatile, as large receivables remained outstanding as of end June 2013, although the expected settlement from gas contract renegotiations should partially improve the company's position by end December 2013.

The stable rating outlook 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 target of 2/2.5x, which for Edison should translate into funds from operations (FFO)/net debt comfortably in the twenties in percentage terms (FFO/net debt stood at 20% as at December 2012).

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's does not expect to upgrade Edison's rating in the near term given the challenges in the company's core businesses and its concentration on growth in E&P over the longer term.

Conversely, Moody's could downgrade the rating if (1) the rating agency no longer considered Edison to be closely integrated, both financially and operationally, within the EDF group; or (2) Edison were to demonstrate a weakening business or financial profile (outside the guidelines noted) that was not compensated for by some form of clear support from EDF. Such a weakening in business or financial profile could possibly result from a combination of a deterioration in market conditions in Italy; an inability on the part of Edison to achieve a successful renegotiation of its gas contracts; and/or an accelerated programme of investments.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating 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.

Edison S.p.A. is the second-largest gas supplier in Italy after ENI, with a market share of 21.3% of total Italian demand and sales of 15.8 billion cubic metres in 2012. Edison is the third-largest electricity producer in Italy, covering 7.9% of total Italian electricity production with 22.5 terawatt hours (TWh) in 2012. As at fiscal year-end 2012 (to 31 December), Edison had net revenues of EUR12.8 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 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.

Helen Francis
VP - Senior Credit Officer
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 changes outlook on Edison's Baa3 ratings to stable from negative; affirms ratings
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