Standard & Poor's: prospects for italian utilities are stable despite complex operating conditions

The outlook for our portfolio of regulated utilities in Italy is stable, primarily reflecting the supportiveness and predictability of the regulatory regime.

We believe that the operating environment for Italian utilities is becoming increasingly complex. Power prices are unlikely to rebound due to oversupply, and a cut in allowed returns on electricity and gas transmission and distribution from 2016 will weigh on profitability.

However, we anticipate that Italian utilities will maintain a relatively prudent approach toward investments, while keeping a tight rein on costs over 2016-2018.

In our view, growth opportunities for utilities with exposure to Italy are bound up with mergers and acquisitions (M&A). Increasing M&A activity could affect the ratings in our portfolio, although sizable cost synergies and credit-friendly transaction terms would mitigate this risk.


MILAN (Standard & Poor's) Nov. 18, 2015--Although the recession has officially ended, and the outlook for Italian utilities is stable, the operating environment for these companies is becoming increasingly complex, according to a report published today by Standard & Poor's Ratings' Services titled "Spotlight On Italian Utilities: Outlook Stable Despite Complex Operating Conditions."

"Reduced demand for power due to the shallow economic recovery and a shift toward energy efficiency, along with an expected drop in remuneration for regulated assets from 2016, cast doubt on the profitability of Italian utilities' future investments, their long-term growth potential, and their strategic response to changes in demand," said Standard & Poor's ratings analyst Vittoria Ferraris. "Furthermore, so far, there has been little progress on addressing some of the industry's most pressing issues, including overcapacity at thermal power generation plants and uncertainties over the implementation of a capacity payment model."

"However, the Italian utilities we rate have lost none of the resilience they demonstrated toward the harshest recession in the country's history," added Ms. Ferraris. "For most Italian utilities we rate, this resilience is partly attributable to the share of regulated activities in their business mix, which has enabled stable financial performance despite weak economic conditions."

The stable outlook on the utilities we rate in Italy contrasts with the increasing proportion of negative outlooks on the utilities we rate in the rest of Europe, as well as in the Middle East and Africa. Negative outlooks represent about 20% of the 120 utilities that we rate in EMEA, compared to about 11% in Italy. The greater proportion of stable outlooks in Italy is down to the following credit-supportive developments we have observed since last year:

•An end to the economic recession in Italy in the first quarter of 2015, according to quarterly GDP data;

•The stabilization of the outlook on our unsolicited 'BBB-' long-term local and foreign currency ratings on Italy in December 2014;

•The alleviation of fiscal pressure with the termination of the so-called "Robin Hood" tax on regulated utilities' corporate earnings, and the remodeling of the taxable income base for the IRAP (Imposta Regionale sulle Attività Produttive, or Italian regional production tax) and

•Political support from the Italian central government for energy market integration.


In addition, since the beginning of the recession in 2009, rated Italian utilities have focused on adapting their cost bases to the changing market environment and rationalizing their investments, which has resulted in positive free cash flow generation and consequently, stable credit metrics. In view of the uncertainties over future returns on investments, we anticipate that Italian utilities will maintain a relatively prudent approach to investments, while keeping a tight rein on costs over 2016-2018. As a result, free cash flow generation remains positive in our base case for our sample of rated utilities.

We believe that Italian utilities' growth prospects are linked to market consolidation, especially for those operating solely in the domestic market. However, although mergers and acquisitions are increasing, we consider that local political resistance toward consolidation will persist.

We have determined, based solely on the developments described herein, that no
rating actions are currently warranted. Only a rating committee may determine
a rating action and, as these developments were not viewed as material to the
ratings, neither they nor this report were reviewed by a rating committee.


The report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor's public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Alternatively, call one of the following Standard &
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