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Rating Action:

Moody's affirms GNF's Baa2 ratings following its 20% Spanish gas networks sale announcement

08 Aug 2017

London, 08 August 2017 -- Moody's Investors Service, ("Moody's") has today affirmed the Baa2/P-2 senior unsecured issuer ratings of Gas Natural SDG, S.A. ("Gas Natural Fenosa" or "GNF") and the ratings of its guaranteed subsidiaries. Concurrently, Moody's has affirmed the (P)Baa2/Baa2/Prime-2 ratings of Gas Natural Fenosa Finance B.V., as well as the Baa2 and (P)Baa2 ratings of Gas Natural Capital Markets, S.A.. The Ba1 junior subordinated (hybrid) rating of Gas Natural Fenosa Finance B.V. was also affirmed. The outlook remains stable.

The affirmations follow GNF's announcement on 3 August that it will sell a 20% stake in its Spanish gas distribution subsidiary, GNDB, to Alliance Capital Partners, (ACP) and Canada Pension Plan Investment Board (CPPIB) for EUR1.5 billion.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

The rating actions reflect Moody's expectation that (1) while a sale of a stake in GNF's low risk Spanish gas distribution assets and the introduction of new minority shareholders is modestly credit negative, this is likely to be mitigated by GNF's balanced financial policy. The company has announced that it will dedicate the bulk of the transaction proceeds to existing projects, which should generate additional cash flows to support its financial profile, while any surplus will be applied to new investments, debt reduction or returned to shareholders; and (2) the transaction will not materially change the risk profile of GNF, which will continue to generate around 60% of its EBITDA from network activities and around 50% of EBITDA from Spain, although these contributions could weaken modestly on a pro-rata basis (by around 2%) taking into account minority interests.

GNF's ratings continue to reflect (1) a high proportion of EBITDA from lower risk contracted and regulated businesses across a well-diversified portfolio of assets, primarily in Spain and Latin America (LatAm); and (2) higher risk international gas procurement and supply and Spanish electricity generation activities, which remain subject to oversupply and a challenging commodity and power price environment. The ratings also take account of an improving, but still fragile, macroeconomic situation in Spain (Baa2, stable).

Moody's expects GNF to update its 2016-20 strategic plan in 2018 which will include further efficiencies and a reduction in interest costs to counteract some of the negative pressures presented by the challenging operating environment.

The sale price of EUR1.5 billion for 20% of GNF's gas distribution subsidiary, (GNDB), implies an enterprise value (EV) of EUR13.94 billion for 100% of a company that generated EBITDA of EUR889 million as at financial year end 2016. This yields an attractive EV/EBITDA multiple of 15.7x, in line with recent transactions for similarly low risk, well regulated network assets. EDP - Energias de Portugal, S.A. (EDP, Baa3 stable) agreed a sale of its Spanish distribution assets, Naturgas Energia Distribucion, S.A.U. (Naturgas), to a consortium of institutional investors in March 2017 at an 15.7x EV/EBITDA multiple and its gas distribution business in Portugal in April 2017 to REN - Redes Energeticas Nacionais, SGPS, S.A. (REN, Baa3 stable) at an 11x EV/EBITDA multiple.

As part of the arrangement, GNF will put in place long term intercompany debt of €6 billion at GNDB, which will continue to be consolidated within the GNF group According to GNF's new partners, ACP and CPPIB, the acquisition is in line with their core infrastructure investment strategies.

OUTOOK

The outlook is stable reflecting our expectation of financial ratios consistent with guidance for the Baa2 rating of Funds from Operations (FFO)/net debt of high teens to low twenties in percentage terms, and Retained Cash Flow (RCF)/net debt which, while it is expected to dip in 2017, should recover towards the low teens by 2020.

WHAT COULD MOVE THE RATING UP/DOWN

Positive ratings pressure is not currently anticipated but could develop if GNF maintains a stable business profile and strengthens its financial position, achieving sustainable credit metrics of FFO/net debt comfortably in the twenties in percentage terms and RCF/net debt in the upper teens.

GNF currently has limited headroom against ratio guidance for the Baa2 rating and negative pressure could develop following any (1) deterioration in financial performance, or unanticipated growth activity through organic change or acquisitions, likely to cause credit metrics to fall persistently below guidance; or (2) an increase in business, regulatory or political risk within core markets or credit negative change in corporate structure, such as through an introduction of increasingly material minority interests, which would argue for a tightening of metric guidance.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Gas Natural SDG, S.A. is one of the three major players in the Iberian power and gas markets. It ranks as the leading gas supply company and third in power generation. As of December 2016 it has 15.5 GW of installed capacity worldwide, with 7.8 million gas connections and 3.6 million electricity connections in LatAm and is the leading gas distributor in LatAm. The group is one of the main suppliers of natural gas in the Atlantic and Mediterranean, with a long-term gas procurement portfolio of approximately 30 bcm. In addition, it has three regasification and two liquefaction plants.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Gas Natural Capital Markets, S.A.

....Backed Senior Unsecured MTN Program, Affirmed (P)Baa2

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Gas Natural Fenosa Finance B.V.

...Backed Junior Subordinated, Affirmed Ba1

....Backed Commercial Paper , Affirmed P-2

....Backed Senior Unsecured MTN Program, Affirmed (P)Baa2

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Gas Natural SDG, S.A.

....LT Issuer Rating, Affirmed Baa2

....ST Issuer Rating, Affirmed P-2

Outlook Actions:

..Issuer: Gas Natural SDG, S.A.

....Outlook, Remains Stable

..Issuer: Gas Natural Capital Markets, S.A.

....Outlook, Remains Stable

..Issuer: Gas Natural Fenosa Finance B.V.

....Outlook, Remains Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Helen Francis
VP-Sr Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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