OREANDA-NEWS. Fitch Ratings says that Snam S.p.A.'s (BBB+/Stable) acquisition of a 20% stake in Trans Adriatic Pipeline AG (TAP) partly limits the positive impact of the recent weighted average cost of capital (WACC) update on net leverage. The overall impact of both developments is moderately positive for our rating case, lowering funds from operations (FFO) net adjusted leverage of the group for 2016-2018 by around 0.15x with an average of 6.55x, increasing the rating headroom with the negative guideline of 6.75x.

Snam completed the acquisition of the 20% stake held by the Statoil group in TAP for a total consideration of EUR208m (including EUR78m for the replacement of Statoil in the shareholders loan it granted to TAP) on 17 December. The acquisition follows the signature of a memorandum of understanding with SOCAR (BBB-/Stable) for the development of the Southern Gas Corridor, which will bring gas from Azerbaijan to Southern Europe and increase the diversification of European gas supplies. We believe that TAP represents a strategic project for Italy given the development of a transit gas market in the country.

TAP has been assigned the status of 'project of common interest' by the EU and represents the final part (900km from Greece to Italy) of the 4,000km Southern Gas Corridor. The pipeline's capacity is equal to ten billion cubic metres (which could be doubled in the future) and has been booked through long-term ship-or-pay contracts. The commercialisation of the gas transported by TAP in Europe is expected by 2020.

The investment has a good fit with Snam's overall strategy in the transport business, focused on the development of reverse flow capacity and the enhancement of interconnections across Europe. The other shareholders of TAP are SOCAR (20%), BP (A/Positive, 20%), Fluxys (19%), Enagas (A-/Stable, 16%) and Axpo (5%).

At the beginning of December the Italian regulator Autorita per l'Energia Elettrica, il Gas ed il Sistema Idrico (AEEGSI) published the final determination on the return on capital for regulated gas and electricity activities, with a credit positive impact for Snam.

The WACC levels defined by the regulator (5.4% for gas transport, 6.1% for distribution and 6.5% for storage) will be applied from 2016 and are higher than those conservatively included in our previous rating case by around 50-70bp, even if generally on a downward trend compared with the current level (6.3% for transport, 6.9% for distribution and 6.0% for storage).

Fitch believes that the downward revision of the remuneration for Italian networks is consistent with the current interest rates environment. The new framework aligns the return dynamics for gas and electricity activities and gives more stability and visibility to the remuneration, while retaining some flexibility through the update of some key drivers (risk-free rate, country risk premium only if triggered) after three years (see 'Fitch: Return on Capital Update is Credit Positive for Italian Networks', dated 4 December 2015).

Our rating case includes around EUR1.0bn of net investments related to the gas distribution tenders in Italy, spread over a horizon of five years. The first notices of the auctions have been published, but we still see some administrative problems slowing down the overall process.