S&P Global Ratings today took the rating actions listed above.
- 2i Rete Gas SpA reported solid 2019 operating results and we expect regulated revenue from gas distribution to be resilient in 2020 and 2021 despite the COVID-19 pandemic and government-imposed community lockdowns.
- Because of the postponement of the retendering process in Italy, we expect funds from operations (FFO) to debt of close to 13% and debt to EBITDA of above 5.5x for 2020 and 2021
- We expect 2i Rete Gas to retain strong credit metric headroom within our 'BBB' rating parameters in the coming years, with the new regulatory period started in 2020 ensuring regulated cash flow stability and no significant acquisitions forecast in the next three years.
- We are therefore affirming our 'BBB/A-2' long- and short-term issuer credit ratings on 2i Rete Gas and revising our liquidity assessment to strong from adequate to reflect ongoing prudent liability management; its negligible commitments beyond dividends; and reduced investment plan related to gas tenders with no debt maturity prior to 2024.
- The stable outlook reflects that 2i Rete Gas still has ample financial flexibility, despite some uncertainty on the outcome of its gas-concession retendering process.
2i Rete Gas maintains great flexibility under the current rating, with 2019 results above expectations, steady operating performance, and little impact expected from the COVID-19 pandemic in 2020-2021.
With ample headroom under the current rating level at year-end 2019, we expect the company's adjusted FFO to debt will decline to about 12.7% in 2020-2021 from its 2019 peak, with lower revenue growth than in our base case for the past year because of changes in its investment plan and the new regulatory period that started in 2020. 2i Rete Gas reported very strong 2019 results thanks to a nonrecurring revision in provisions recognized in revenue, which resulted in above-average credit metrics including FFO to debt at 14.9% and debt to EBITDA at 5.1x. We believe the company's FFO to debt is boosted by its very low cost of debt following large liability management exercises back in 2018 (when €500 million of debt was refinanced at very good market conditions). However, this might not be sustainable when the company refinances its debt in 2023. As a result, we will closely monitor debt to EBITDA, which we expect will be above 5.5x in fiscals 2020 and 2021. We believe the company will maintain solid operating performance in 2020 and 2021 despite the COVID-19 pandemic, with cash flows protected from any volume risk by a supportive regulatory framework. We project some contained negative effects on working capital needs, with extended days of receivables, resulting in an about negative €20 million change in 2020. Overall, in 2020-2023 we forecast that average cash flow will be slightly negative after capital expenditure (capex) and dividends.
Following significant delays to the Italian gas retendering process, we have revised downward our expectations of 2i Rete Gas' investment plan and regulated asset base (RAB) growth over 2020-2023.
Italian tenders continue to proceed at a very slow pace and with no clear sign of acceleration, which would require strong political traction. We have revised our assumptions on the gas tenders calendar in Italy, with most tenders expected to be postponed by at least three years. As a result, we now expect lower RAB and regulated revenue growth for 2i Rete Gas over the next three years. After several delays, 25 tenders were published and some were temporarily suspended, while only one has been completed and the plant handed over (Torino 2). This leaves more than 170 tenders still expected to take place. Given the extensive time from tender publication to concession handover, we now forecast the bulk of retendering will happen in 2024-2025 from 2020-2021 previously, and we believe 2i Rete Gas will play a dominant role, with a more acquisitive strategy than that of its peers. We expect the company's net investments related to tenders will decrease by about €100 million in 2020-2023 compared with our previous forecasts. However, capital spending will stay high through total investments of €250 million-€300 million in the next three years as spending is re-allocated, notably for digitalization as well as the maintenance and expansion of the network. These investments include the Cilento grid construction project, which will connect 31 municipalities in southern Italy. We expect some small bolt-on acquisitions will slightly expand the group's asset base and still moderate consolidation of the sector prior to the retendering process.
The fifth regulatory period for gas distribution in Italy, which began this year, provides stable cash flow generation, but more demanding characteristics.
The new six-year regulatory period emphasizes operating efficiency, including higher cost-efficiency incentives related to operator size that should push gas sector consolidation. These higher incentives could pressure revenue and partially net the positive effect of increases in weighted-average cost of capital for the semi-period 2019-2021. Our estimate of stable adjusted EBITDA of €465 million-€475 million annually in 2020-2022 is partially due to revised assumptions for the new regulatory remuneration parameters from 2020--notably lower authorized operating expenses and a lower RAB deflator that will cut asset-base growth. We expect the RAB to increase to about €4.0 billion in 2023 from about €3.7 billion in 2019. In addition, we anticipate a relatively high profit margin, reflecting 2i Rete Gas' good quality networks and efficient asset-base management.
The stable outlook on 2i Rete Gas reflects our view that the group's credit metrics will remain in line with our expectations thanks to predictable and relatively stable cash flows. This includes our estimate of S&P Global Ratings-adjusted FFO to debt of 12%-13% in 2020-2023, which reflects the company's capacity to partly mitigate the decline in regulated returns with cost efficiencies.
We might consider a negative rating action if 2i Rete Gas' adjusted FFO to debt declined toward 9%. This could result from an acceleration of capital spending for bidding on gas-distribution concessions, or from a sizable acquisition. We could also downgrade 2i Rete Gas if we believed the group was no longer able to withstand a hypothetical sovereign default or if we were to downgrade Italy (unsolicited BBB/Negative/A-2) by more than two notches.
An upgrade is constrained by uncertainty regarding the gas concession retendering process and consequent low visibility on 2i Rete Gas' capital spending. Nevertheless, we could consider a positive rating action if 2i Rete Gas were to generate FFO to debt sustainably above 13% and debt to EBITDA of about 5.5x.
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