Fitch Ratings has affirmed Italgas SpA's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'.
The Outlook on the IDR is Stable.
The IDR of Italgas mainly reflects its solid business profile, as it derives a large majority of its cash flows from regulated gas distribution activities in Italy and, to a smaller extent, Greece. This would allow the company to maintain predictable operating cash flow and insulate it from rising energy prices, volume risks and a rising interest-rate and inflationary environment.
The Stable Outlook reflects our expectations that Italgas's net debt/regulatory asset base and funds from operations (FFO) net leverage would remain within our sensitivities of 65% and 7.0x, respectively, throughout the rating horizon of 2022-2026.
Key Rating Drivers
Solid Business Profile: Italgas has a robust business profile as the leading gas distribution concessionaire and operator in the large and fragmented Italian market with around a 35% market share. It also benefits from a long-term monopoly in the smaller, but rapidly growing, Greek gas distribution market through the acquired company DEPA.
Strong EBITDA Growth Forecast: We expect EBITDA to progressively increase to over EUR1.8 billion by end-2028 from just over EUR1 billion in 2021, of which Greek activities will average at slightly under 7%. Such growth is to be fuelled by an intense EUR8.6 billion investment plan for 2022-2028, with over 20% devoted to Greek network digitalisation, improvement and extension, and another 20% dedicated to Italian tenders from 2024 onwards.
Strong Italian Regulatory Protection: We expect Italy's mature regulatory framework to effectively shield Italgas's distribution activities from high inflation (albeit with a one-year lag) and interest rates. The system fully protects it from rising energy prices and volume risk, even in case of severe national gas supply curtailments. The current regulatory period ends in 2025, granting excellent visibility and stability over Italgas's operating cash flow generation. Some of the weighted average cost of capital (WACC) components may see positive updates in 2024 (minimum trigger set at 50bp) and more structurally in 2025, when the next WACC period starts.
Leverage Coherent with Rating: We expect Italgas's net debt/(RAB + associates) to be broadly maintained at around 64%-65% throughout the rating horizon, and FFO net leverage to progressively decline towards our positive rating sensitivity, overall leaving moderate rating headroom. While Fitch accounts for a more conservative view of Greek operations, given the current limit visibility, and more expensive cost of debt, we have assumed a WACC improvement to 6.1% from 2024 onwards and less stringent efficiency factor in the new regulatory period.
Continuous Tenders Delay: Only around 40 tenders out of Italy's total 177 districts have taken place so far, following multiple delays since 2017. As a result, EUR0.4 billion investment in tenders has temporarily been shifted beyond the 2022-2028 business plan horizon, while the remaining EUR1.8 billion net cash outflow comprises EUR1.1 billion net capital deployed and EUR0.7 billion capex for improving the awarded district network. This assumes that Italgas will increase its market share to around 42% in 2028. Nevertheless, we continue to see a material risk of further postponements, but this would be neutral to positive for its leverage ratios and not affect its debt capacity.
Uncertainties on Greek Regulation: Greek regulatory visibility is very limited, as the 2023-2026 regulatory framework, its final parameters and tariffs are currently under discussion between the regulator and Italgas, as opposed to the typical public consultation. Furthermore, the current Greek regulatory framework is characterised by delayed correction of the volume and price mismatch only at the end of the regulatory period, which could lead to significant short-term cash flow volatility in the current volatile environment.
Solid 9M22 Operating Results: In 9M22 Italgas reported solid operating performance, with EBITDA up 4.9% yoy. This was driven by increased investments in its regulated core business, growth in its energy-efficiency business and the first monthly contribution from DEPA, which offset the negative effect of a lower WACC. By year-end, we expect the DEPA acquisition for EUR0.75 billion and slightly higher than historical working-capital outflows to lead to EUR0.9 billion negative free cash flow (FCF) and net debt at around EUR5.9 billion (when factoring is included), with an FFO net leverage of 6.4x and net debt /(RAB + associates) of 65%.
Derivation Summary
Italgas has a solid business profile that is largely comparable with that of Italian gas transmission system operator Snam S.p.A. (BBB+/Stable). Italgas is smaller, subject to higher cash flow volatility related to tenders, and exposed to the Greek regulatory framework, leading to slightly tighter leverage downgrade guidelines for the same rating.
Italgas has the same rating as the large and diversified Germany-based company E.ON SE (BBB+/Stable), due to more predictable and transparent Italian regulation and almost no exposure to unregulated businesses (20% of EBITDA in the case of E.ON), and can thus accommodate higher leverage by around 1x.
Italgas's business risk is also lower than that of the Czech distribution system operator Czech Gas Networks Investments S.a r.l (BBB/Stable) due to better regulatory features and a longer record of fully independent regulation. CGNI's FFO net leverage is also structurally higher than that of Italgas, contributing to the rating differential together with our view of lower business risk at the Italian operator.
Key Assumptions
Italian WACC at 6.1% for 2024-2026
Italian distribution real efficiency factor set at 1% in the sixth regulatory period
Cumulative capex of EUR8.6 billion until 2028, including tenders (EUR1.8 billion) and Greece development (EUR1.8 billion)
RAB to expand to almost EUR12.7 billion by end-2028 from EUR9.1 billion in 2022
Cost of new debt at 5%
Cumulative dividends of more than EUR1.5 billion in 2022-2026
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
FFO net leverage below 6.2x on a sustained basis, net debt/(RAB+associates) approaching 57%, with structurally positive FCF before dividends and financial investments, assuming an unchanged business risk profile
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO net leverage above 7.0x, FFO interest coverage below 4.5x, net debt/(RAB+associates) above 65% over a sustained period, for instance as a result of structurally higher-than-expected investments or lower-than-expected contributions from gas distribution tenders, or upward revision to dividend policy
Weakening business risk profile, as a consequence of a less predictable regulatory framework or adverse policy measures
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
ITALGAS S.P.A. 
