Fitch Ratings has affirmed Italian utility
The Outlook on the IDR is Stable. A full list of ratings is below.
Snam's ratings reflect its solid business profile, with the vast majority of EBITDA generated from high-quality regulated activities in
Snam's rating is also supported by our forecast of ample headroom under net debt/(regulatory asset base (RAB)+associates), credit-supportive financial policy, and significant financial flexibility.
Key Rating Drivers
Capex Focuses on Gas Infrastructure: The newly-announced strategic plan for 2022-2026 increases capex to around
Fitch understands that this is needed to maintain network resilience and enhance flexibility, given the materially different sources of gas entering
Upside From High Inflation: Italian regulation foresees a return on RAB based on a real weighted average cost of capital (WACC), with annual updates of the RAB and the allowed operating spending base to factor in inflation, albeit with a lag. In the current inflationary environment, these features are positive, especially for net debt/RAB, which we estimate at 55.6% in 2023 and around 60% for 2024-2026 (negative sensitivity of 67%). The RAB deflator average in 2022-2026 is forecast at 2.3% (vs 1.3% in the previous plan). We also forecast an increase in WACC in 2024, mirroring the current interest-rate forwards, to 6.4% for storage (6.0% in 2025-2026) and 5.8% for transport (5.4% in 2025-2026).
Negative FCF Impacts Leverage: We forecast net debt and FFO net leverage to be better in 2022 than we previously forecast thanks to a temporary positive change in working capital that we expect will fully reverse in 2023. We expect the high capex to lead to cumulative negative FCF of
Fitch believes that Snam has strong financial flexibility and several tools to reduce leverage, if needed, considering the equity stakes held in several gas companies and some ancillary businesses.
Income From Equity Stakes: Snam has a portfolio of equity stakes in gas-related companies in
Vision 2030 Focus On Energy Transition: The Vision 2030 plan includes capex of more than
Snam's plans for asset repurposing are on track. According to the company, 99% of its network is ready for hydrogen transport and it has performed field tests with H2 and natural gas blending mix up to 10% on key gas Turbines. We see Snam as a frontrunner among gas utilities in its approach to energy transition.
Regulatory Transition to Totex: The Italian regulator's (Autorita di Regolazione per Energia Reti e Ambiente) final orientation for the next regulatory period of gas transport service confirms the transition towards the total expenditure (totex) approach, currently in place in the
We do not have sufficient information to assess the impact on Snam. However, we expect it to be neutral given the Italian authorities' positive record of consistency and predictability.
Derivation Summary
Snam has a robust business profile with negligible price and volume risk, similar to
Snam's business risk is also lower than that of the Czech distribution system operator Czech Gas Networks Investments S.a r.l (CGNI; BBB/Stable) due to better regulatory features and a longer record of fully independent regulation, which mainly explains the rating differential as CGNI's leverage is similar to Snam's.
Key Assumptions
Transport WACC of 5.1% in 2023, 5.8% in 2024 and 5.4% in 2025, 2026;
Storage WACC of 6% in 2023, 6.4% in 2024, and 6% in 2025-2026;
Average investment deflator of 2.3% and inflation of 2.9% per year to 2026;
RAB to expand to almost
Average EBITDA margin of 62.6% per year to 2026;
Annual average cash up-streamed from equity investments of around
Total capex of around
Dividends in line with management policy.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action is unlikely, given the large capex that Snam will implement over the coming period. However, net debt /(RAB+associates) below 58%, FFO net leverage lower than 6.5x and FFO interest cover above 5.5x, all on a sustained basis, coupled with neutral FCF would be positive for the rating.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deterioration of FFO net leverage above 7.3x, FFO interest coverage below 4.0x or net debt/(RAB+associates) approaching 67% over a sustained period, for instance, as a result of higher-than-expected investments or adverse policy measures.
Growing exposure to unregulated activities, upward revision to Snam's dividend policy or material debt-funded acquisitions abroad, without any offsetting 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 '
Liquidity and Debt Structure
As of
Issuer Profile
Snam is the Italian gas transport system operator and manages
Criteria Variation
Fitch views the contractor business of Italian utilities in the context of approved eco-bonus on the energy requalification of buildings as a pass-through item. This is mainly due to a clear recovery framework through tax credits in following years.
In light of the extension of most of these bonuses and their presence in Snam's business plan, we reverse the impact on leverage metrics caused by related investments/working-capital drains.
The one-notch uplift for higher expected recoveries on senior unsecured debt instruments issued by economic-regulated utilities has not been applied to Snam as this would have resulted in the instrument rating exceeding
Rating the utility's unsecured debt instruments above the sovereign IDR would suggest that recoveries would remain above average in a highly depressed sovereign environment. However, Fitch believes that higher rates of recoveries for utilities' senior debt are less predictable in a weaker sovereign environment than in an idiosyncratic default of any single utility, making the standard uplift inappropriate in this case.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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