RATINGS RATIONALE

Today's rating action follows A2A's announcement, on 8 November 2012, of its strategic update and investment plan for 2013-15, in light of the recent completion of the acquisition of Edipower, which resulted in a significant increase of A2A's exposure to power generation activities in Italy. Moody's expects that the implementation of the announced plan would result in a financial and business risk profile that is inconsistent with A2A's previous Baa2 rating.

A2A's investment plan for 2013-15 includes approximately EUR1.2 billion of capex, of which 58% relates to selected development initiatives and the remainder to maintenance. As part of its plan, A2A has indicated that its dividend policy will be based on a maximum 60% payout ratio on ordinary net income. Moody's notes the measures announced by the company as part of its plan to support the strengthening of its financial profile, but these are not considered as sufficiently material to preserve the company's rating positioning. This is partly because such measures contemplate the disposal of minority interests in operating companies in the waste, networks and/or district heating segments. In Moody's view, the reduction in A2A's ownership of profitable and stable businesses will limit the benefits associated with the receipt of disposal proceeds on the underlying financial position of the company.

Moody's expects A2A to report a funds from operations (FFO)/net debt ratio between the low to mid-teens in percentage terms in 2012 (after adjusting for the cash flows contribution from Edipower for the full year). However, in order to support the current Baa3 rating going forward, A2A would need to consistently exhibit FFO/net debt metrics comfortably positioned between the mid-teens to low twenties in percentage terms.

In this context, the negative outlook associated with A2A's Baa3 rating reflects the expected short-term weak positioning of the company's credit metrics and the risk that the challenging conditions currently characterising the electricity markets in Italy could prevent A2A from sufficiently strengthening its financial profile to a level commensurate with the current rating by 2013.

The acquisition of Edipower made A2A the second-largest electricity generator in Italy, with a material exposure to thermal capacity (representing more than 80% of its total capacity), mainly from combined cycle gas turbines (CCGT) sources. The combination of oversupply, due to new renewables capacity coming on-line, and the low demand environment in the market, have pushed thermoelectric production down in the running order, thereby eroding the margins related to peak production. As a consequence, thermal spreads are under pressure and CCGT plants are characterised by extremely low load factors. In addition, the expected downward trend in Italian power prices would exert pressure on generation margins in the hydro segment. In Moody's view, these difficult market conditions will continue to weigh on A2A's credit profile.

Moody's notes A2A's announcement, on 15 November 2012, related to the planned issuance of bonds for an amount of up to EUR1 billion which, if successfully completed, would improve the company's debt maturity structure. Nevertheless, A2A remains vulnerable to increasing funding costs, in light of the current relatively short average maturity of its debt (approximately four years).

WHAT COULD CHANGE THE RATING UP/DOWN

Given the negative outlook, Moody's does not expect upward rating pressure in the short-term. A recovery of financial metrics to levels commensurate with the guidance discussed above, associated with an extension of the company's maturity profile and an improvement in the conditions of electricity markets in Italy would be preconditions for Moody's to consider stabilising the current negative outlook on the company's rating.

Further negative pressure on A2A's rating would develop if Moody's concludes that a recovery of financial metrics to levels commensurate with the guidance discussed above by 2013 remains unlikely.

PRINCIPAL METHODOLOGY

The principal methodology used in rating A2A was the Unregulated Utilities and Power Companies methodology published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Based in Milan, A2A is the second-largest electricity generator in Italy, but is also present in the segments of electricity and gas distribution and supply, waste treatment and collection, landfill management, waste-to-energy and district heating. A2A's activities are mainly concentrated in northern Italy, and particularly in Lombardy, which is one of the wealthiest and most industrialised regions in the country. In the nine months to September 2012, A2A reported revenues of EUR4.9 billion and EBITDA of EUR776 million.

REGULATORY DISCLOSURES

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Raffaella AltamuraAsst Vice President - Analyst Infrastructure Finance One Canada SquareCanary WharfLondon E14 5FA United KingdomMonica Merli MD - Infrastructure Finance Infrastructure Finance JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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