April 5, 2012 / 4:27 PM / 5 years ago

TEXT-S&P cuts A2A to 'BBB'

April 5 - Overview	
     -- In our opinion, difficult conditions in the electricity and gas 	
markets in Italy have delayed the recovery that we had anticipated in A2A's 	
cash flow generation and credit metrics. 	
     -- In our view, A2A's cash flow generation and key credit metrics are 	
unlikely to strengthen to levels that we consider commensurate with a 'BBB+' 	
long-term rating.	
     -- We are therefore lowering our long-term corporate credit and senior 	
unsecured issue ratings on A2A to 'BBB' from 'BBB+'.	
     -- The negative outlook reflects our view that A2A's profitability and 	
cash flow generation may continue to suffer from increasingly difficult and 	
volatile industry conditions for its nonregulated activities.	
Rating Action	
On April 5, 2012, Standard & Poor's Ratings Services lowered its long-term 	
corporate credit and senior unsecured debt ratings on Italian utility A2A SpA 	
to 'BBB' from 'BBB+'. At the same time, we affirmed our 'A-2' short-term 	
corporate credit rating on A2A. The outlook is negative.	
	
Rationale	
The downgrade reflects our view that A2A's cash flow generation and key credit 	
metrics are unlikely to strengthen to levels that we consider commensurate 	
with a 'BBB+' long-term rating. 	
	
In our view, A2A's credit metrics have been weak for the ratings for the past 	
two years. There has been some improvement owing to disposals, positive cash 	
flow generation, and a reduction in capital expenditures (capex), but the 	
recovery in the group's credit metrics has been slower than we had 	
anticipated. In our opinion, this is a result of difficult conditions in the 	
electricity and gas markets in Italy, coupled with repeated delays to the 	
completion of the shareholder restructuring of Italian utility Edison SpA 	
(BB+/Watch Neg/B). We assess A2A's financial risk profile as "significant" and 	
its business risk profile as "strong."	
	
We anticipate that conditions in the Italian energy market will remain 	
challenging over the medium term. This is because we forecast an oversupply of 	
electricity and gas due to a softening of demand, a growing contribution to 	
supply from subsidized renewable generation assets, and the subsequent 	
pressure on generation margins. We believe that these challenges are likely to 	
persist, at least until 2013-2014, as a result of the ongoing economic 	
downturn in Italy. Therefore, our base-case credit scenario factors in a weak 	
electricity generation margin and flat gas margin in the medium term. At the 	
same time, we expect the contribution of the regulated and quasi-regulated 	
businesses to continue to support A2A's operating performance.	
	
We also anticipate that the binding agreement for the reorganization of 	
Edison's ownership structure, signed by Edison's shareholders on Feb. 16, 	
2012, will be completed by June 30, 2012. This transaction will result in A2A 	
acquiring the majority of Edipower SpA (not rated), a generation asset company 	
with 6.5 gigawatts of installed capacity. (For further details, see section 	
titled "Update On Edison's Shareholder Agreement" below.) On completion of the 	
agreement, we understand that A2A will fully consolidate Edipower.	
	
On the basis of these assumptions, we forecast that A2A will post a Standard & 	
Poor's-adjusted ratio of funds from operations (FFO) to debt of about 15%-16% 	
in 2012, recovering to about 17%-18% in 2013. We had previously anticipated an 	
adjusted FFO-to-debt ratio of at least 18% in 2012, and more than 18% in 2013 	
and beyond. 	
	
We continue to view A2A's business risk profile as "strong," based on the 	
diversification and vertical integration of the group's operations. A2A 	
generates stable and predictable cash flows from its low-risk regulated 	
activities in electricity, gas, and water distribution, and from its regulated 	
and quasi-regulated waste activities. The former activities generated about 	
26% of EBITDA in 2011, while the latter generated about 29%.	
	
We could revise our assessment of business risk downward, however, if we see 	
any sustained erosion in the company's profitability resulting from an 	
increasingly difficult and volatile industry environment for A2A's electricity 	
generation activities. That said, the share of earnings from the lower-risk 	
regulated grid activities--primarily A2A's distribution network 	
operations--and quasi-regulated activities--primarily A2A's waste and district 	
heating businesses--continue to support the business risk profile.	
	
The 'BBB' rating is based on A2A's stand-alone credit profile (SACP), which we 	
assess at 'bbb', as well as on our opinion that there is a "low" likelihood 	
that A2A's municipal government shareholders would provide timely and 	
sufficient extraordinary support to A2A in the event of financial distress. In 	
accordance with our criteria for government-related entities (GREs), our view 	
of a "low" likelihood of extraordinary government support is based on our 	
assessment of A2A's:	
     -- "Limited importance" of A2A's role for the main municipal 	
shareholders, namely the City of Milan (BBB+/Negative/--) and the City of 	
Brescia (not rated). Although A2A is a major provider of public services, 	
making it strategically important for the municipal shareholders, its 	
activities could, in our opinion, be undertaken by a private sector entity or 	
another GRE if A2A ceased to exist; and 	
     -- "Limited" link between A2A and its municipal shareholders, given both 	
cities' joint control of A2A (27.5% each) and the potential decision-making 	
difficulties that we see as a result of A2A's shareholder structure and 	
governance model.	
	
Liquidity 	
The short-term corporate credit rating on A2A is 'A-2' and largely reflects 	
the long-term corporate credit rating and our view of A2A's "adequate" 	
liquidity profile under our criteria. Projected sources of liquidity exceed 	
projected uses by more than 1.2x over the next 12 months. This is underpinned 	
by: 	
     -- Access to unrestricted short-term cash and short-term marketable 	
securities of EUR147 million (including EUR80 million at A2A's subsidiary EPCG)
as 	
of Dec. 31, 2011;	
     -- A total of EUR1,150 million (including EUR45 million at EPCG) of undrawn	
committed credit facilities maturing in more than 12 months as of Dec. 31, 	
2011; and	
     -- Our forecast that A2A will generate modest FFO of about EUR750 	
million-EUR800 million in 2012. 	
	
This compares with our forecast that, in 2012, A2A faces:	
     -- About EUR350 million-EUR400 million in capex; 	
     -- EUR40 million in dividend payments based on 2011 results; and	
     -- EUR666 million in short-term debt maturing over the next 12 months.	
	
We further believe that the group has sound relationships with its banks, and 	
we understand that there are no restrictive covenants in the documentation on 	
the group's debt. 	
	
Outlook 	
The negative outlook reflects our opinion that A2A's profitability and cash 	
flow generation may continue to suffer from increasingly difficult and 	
volatile industry conditions for its nonregulated activities. In our view, 	
weakening profitability and cash flow generation would reflect a less robust 	
business risk profile than we currently assess. 	
	
Consequently, we could lower the ratings if we revise our assessment of A2A's 	
business risk profile downward to "satisfactory" from "strong." Furthermore, 	
we could lower the ratings if the company struggles to maintain its credit 	
metrics in line with our forecasts. This could result from weaker market 	
conditions than we anticipate, or any unforeseen government actions, such as 	
fiscal transfers or tariff freezes, which may impair the cash flows of power 	
utilities in Italy. 	
	
We could revise the outlook to stable if we see an improved macroeconomic 	
outlook for Italy and a recovery in Italian generation spreads. This may have 	
a positive effect on A2A's profitability, thereby supporting our current 	
assessment of its business risk profile. Ratings stability also depends on 	
A2A's ability to deliver adjusted FFO to debt of 15%-16% in 2012, owing to a 	
focus on deleveraging through the divestment of noncore assets and a reduction 	
in capex. Stability also relies on A2A being on track to strengthen adjusted 	
FFO to debt to at least 18% by 2013, assuming that our assessment of its 	
business risk profile remains unchanged.	
	
Update On Edison's Shareholder Agreement	
On Feb. 16, 2012, Edison's shareholders--A2A, Delmi SpA (not rated; an 	
investment vehicle that is 51%-owned and controlled by A2A), and EDF--signed a 	
binding agreement for the reorganization of Edison's ownership structure. The 	
agreement stipulates that:	
     -- Delmi will purchase a 70% stake in Edipower from Edison (which 	
currently holds a 50% share) and Alpiq Holding AG (not rated; a Swiss energy 	
company that currently holds a 20% stake) for a total price of EUR804 million.	
     -- EDF will purchase from Delmi a further 50% stake in Transalpina di 	
Energia S.r.l. for a price of EUR704 million. Transalpina di Energia is a 	
holding company in which EDF already owns 50%, and which, in turn, holds 61.3% 	
of Edison's voting share capital. The underlying valuation of Edison's share 	
price in the transaction is EUR0.84. EDF will acquire full managerial control of	
Edison with at least an 80% share.	
     -- Edison and Edipower will enter into a contract under which Edison will 	
supply gas to Edipower to cover 50% of Edipower's shareholders' needs for a 	
six-year period at market prices.	
	
The binding agreement remains subject to confirmation of Edison's share price 	
by the Italian Stock Exchange Commission, and the approval of the relevant EU 	
and Italian antitrust and regulatory authorities. The reorganization is due to 	
be completed by the end of June 2012.	
Related Criteria And Research	
All articles listed below are available on RatingsDirect on the Global Credit 	
Portal, unless otherwise stated.	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011	
     -- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology 	
And Assumptions, June 14, 2011	
     -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 	
9, 2010	
     -- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010	
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
	
Ratings List	
Downgraded; Ratings Affirmed	
                                        To                 From	
A2A SpA	
 Corporate Credit Rating                BBB/Negative/A-2   BBB+/Negative/A-2	
  Senior Unsecured Debt                 BBB                BBB+	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below