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Rating Action:

Moody's affirms Gasunie's A1/P-1 ratings, stable outlook

23 Apr 2021

Paris, April 23, 2021 -- Moody's Investors Service, ("Moody's") has today affirmed the A1 long-term issuer and senior unsecured debt ratings and Prime-1 short-term issuer rating of N.V. Nederlandse Gasunie (Gasunie), and maintained a stable outlook. The (P)A1 rating on the senior unsecured MTN program was also affirmed.

The rating action follows the publication of the Dutch Method Decisions for gas transport[1] which mitigate some of the environmental risks incorporated in the ratings, and reflects Moody's expectation that Gasunie will maintain financial metrics in line with its new ratio guidance.

RATINGS RATIONALE

RATIONALE FOR AFFIRMATION OF RATINGS

The main changes implemented by the Dutch Method Decisions take into account the regulator's view that gas network usage is going to decrease over the period to 2050 and aim to allocate network costs that puts more of the costs on current consumers versus future consumers for the 2022-26 regulatory period. These changes include: (1) moving to a nominal return on assets from a real return; (2) accelerating depreciation of the regulated asset base (RAB) by a factor of 1.3; and (3) fully depreciating divested assets at the time of divestment. At the same time, the allowed return that Gasunie earns on its Dutch regulated assets will decrease by 1.6 percentage points in real terms between 2021 and 2022 (based on the risk-free rates at the time of the Decision, differences with actual risk-free rates will be recovered), mainly reflecting the low interest rate environment. The methodology changes will result in stronger financial metrics over the period and offset the impact of the decrease of allowed return in real terms, effectively bringing forward part of what would have been Gasunie's expected future cash flow.

Concurrently, given the higher depreciation, the RAB will decrease faster than under the previous Method Decisions and the difference between the Dutch activities' RAB and accounting value of fixed assets will increase over the period, resulting in an increasing disconnect between the basis on which revenue is calculated (the RAB) and reported fixed assets.

Consequently, Moody's has updated the minimum financial ratios required to maintain the a3 baseline credit assessment (BCA), to funds from operations (FFO) / net debt above 22% (compared to high teens in percentage terms previously) over the 2022-26 regulatory period, and net debt / fixed assets comfortably below 50% (compared to 55% previously).

Environmental considerations are incorporated into the rating which factors in the risks related to the expected decrease in gas network usage in the context of the European Union's (EU, Aaa stable) carbon-neutrality by 2050 target. Nevertheless, the Dutch Method Decisions act as a mitigant to these risks, in particular the risk of stranded assets in Gasunie's Dutch natural gas operations through the frontloading of revenues and cash flows over 2022-26.

Gasunie's A1/P-1 ratings continue to reflect a standalone credit quality or BCA of a3 and Moody's expectation that the government of the Netherlands (Aaa stable), Gasunie's 100% shareholder, would continue to provide support if needed.

The a3 BCA reflects as positives (1) the company monopoly position as the licenced provider of gas transmission services in the Netherlands and its service area in northern Germany; (2) the relatively stable and predictable cash flow it generates under well-defined and relatively stable regulatory frameworks; (3) its modest level of leverage compared to European peers as evidenced by net debt / fixed assets of 39.6% as of December 2020; and (4) the strong implicit support from its owner, the Dutch government.

Gasunie's a3 BCA is constrained by (1) its relatively weak cash flow generation until 2021, given its modest level of leverage reflecting the lower real allowed returns in the Netherlands and Germany in current regulatory periods; (2) the material share of Gasunie's operating profit (10% over 2017-20) coming from its unregulated businesses; (3) higher investment levels required in the short-term to ensure security of supply in the Netherlands after Groningen gets switched to stand-by in 2022; and in the longer-term to realise Gasunie's Vision 2030 of up to €7 billion total investment to transform the group into an energy infrastructure company transporting hydrogen, green gas, heat and carbon; and (4) uncertainties over the financing and future regulatory framework governing Gasunie's planned investments in hydrogen, heat and carbon infrastructure in the next decade.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Gasunie will maintain financial metrics in line with that required for the a3 BCA, namely FFO / net debt above 22% and net debt / fixed assets comfortably below 50% over the 2022-26 regulatory period. In particular, Moody's expects Gasunie's FFO / net debt to trend towards the mid-20s in percentage terms during the regulatory period.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward rating pressure is unlikely in the medium term, given the uncertainties over the financing and regulatory framework of Gasunie's planned investments in particular in hydrogen, heat and carbon infrastructure.

The ratings could be downgraded if (1) Gasunie's credit metrics appeared likely to fall persistently below the ratio guidance for the a3 BCA; (2) there is a material increase in the share of Gasunie's earnings coming from unregulated businesses; or (3) a change in Gasunie's relationship with the Dutch government were to cause Moody's to decrease the uplift for government support.

Gasunie is the 100% Dutch state-owned owner and operator of the Dutch and north German high-pressure gas transmission systems. Over the 2017-20 period, Gasunie generated 90% of its operating profit from these activities, with most of these regulated earnings coming from its Dutch operations. Gasunie's residual earnings relate to its participations in nonregulated businesses, which generate most of their revenue from long-term contracts.

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Regulated Electric and Gas Networks published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059225, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Autoriteit Consument & Markt - Method Decision GTS 2022-26: https://www.acm.nl/nl/publicaties/methodebesluit-gts-2022-2026, 1 February 2021

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.

Camille Zwisler
Analyst
Infrastructure Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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