S&P: Italian Gas Utility SNAM Affirmed At 'BBB/A-2' On Expected Sound Performance After Demerger; Outlook Stable
The affirmation reflects our expectation that SNAM will remain predominantly focused on regulated activities after the demerger of Italgas and continue to deliver stable operating and financial performance. It also reflects our 'BBB-' rating on Italy, which caps the rating on SNAM at 'BBB', one notch above the sovereign rating.
Although the planned disposal of SNAM's gas distribution operations (Italgas) will modestly reduce the scale and diversification of assets, the change is not sufficient to affect the company's excellent business risk profile. We expect that SNAM will continue to generate more than 95% of its EBITDA from regulated activities, the vast majority of which stem from Italy and France, where we view the regulatory framework as a strong regulatory advantage.
We believe that after the demerger, SNAM's credit metrics won't depart significantly from their historical average, namely funds from operations (FFO) to debt of 12%-13% over 2016-2018. We forecast higher financial headroom compared with recent years, with cash flows after capital expenditures and dividend payments on average slightly positive to neutral in our base case over the next three years. However, we expect management will use the gained headroom for new investments or additional shareholder remuneration. As an example, SNAM recently announced a joint acquisition with insurance group Allianz of a 49% stake in Gas Connect Austria. In addition, we assume that the announced €500 million share buyback program will be executed over the next 18 months. We assess credit metrics against our low volatility table, which we apply to all almost fully regulated issuers operating in solid regulatory frameworks and assess SNAM's financial risk profile as significant.
We believe there is a moderate likelihood of extraordinary timely and sufficient support from the government of Italy to SNAM.
We also believe there is a reasonable likelihood that SNAM would be able to withstand a sovereign default, based on our stress test of SNAM's liquidity in a hypothetical sovereign default scenario. We believe that its ability to service and repay debt is superior to that of the Italian government. This allows us to rate SNAM a maximum of one notch above our rating on Italy.
Our stable outlook on SNAM chiefly reflects the stable outlook on the rating on Italy, which constrains the rating on SNAM.
A downgrade of Italy would most likely trigger a similar downgrade of SNAM, all else being equal. We could also lower our rating on SNAM if its stand-alone credit profile (SACP), which we currently assess at 'a-', weakened by more than two notches. This could stem, in our view, from sizable acquisitions of higher-risk activities--for example unregulated activities or regulated assets in countries where we assess the regulatory framework as nonsupportive--combined with a material deterioration in SNAM's financial risk profile, which could be the result of higher-than-expected investments, share buybacks, or dividend payments. We view such a development as unlikely over the next three years. Our current 'a-' SACP assessment reflects our expectation that SNAM will be able to post adjusted FFO to debt commensurate with its significant financial risk profile, namely adjusted FFO to debt of approximately 12%.
The potential for an upgrade is very limited at this stage, in our opinion, and would be conditional on an upgrade of Italy. An upward reassessment of SNAM's SACP to 'a' could be consistent with it sustaining an adjusted FFO-to-debt ratio exceeding 15%. However, this would leave the rating unchanged. If we upgraded Italy by one notch or more, we would likely raise the ratings on SNAM by the equivalent number of notches, barring any change to SNAM's SACP, and if our stress-testing continued to show that there was a measurable likelihood that SNAM would withstand a sovereign default.