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Rating Action:

Moody's assigns definitive Baa3 rating to Redexis Gas, S.A., outlook stable

03 Apr 2014

London, 03 April 2014 -- Moody's Investors Service, ("Moody's") has today assigned a definitive Baa3 issuer rating to Redexis Gas, S.A. (Redexis). Concurrently, Moody's has assigned a Baa3 rating to the EUR650,000,000 2.75% Notes due 2021 (the bond) issued by Redexis Gas Finance B.V. under the provisional (P) Baa3-rated EUR2,000,000,000 Euro Medium Term Note Programme (EMTN) with the benefit of the guarantee of Redexis. The outlook on all ratings is stable.

The seven-year EUR650 million bond will be used to refinance the company's existing debt of the same amount and should ensure a stable long-term capital structure for the company at a favourable funding cost. The bond is complemented by a five-year EUR250 million Capex Facility and a five-year EUR50 million Working Capital Facility, providing the company with multi-year liquidity. The Baa3 rating assumes that the shareholder loans totalling EUR 451 million at the end of 2013 (including principal and accrued interest) will be cancelled on closing of the bond.

RATINGS RATIONALE

The Baa3 rating reflects the company's fairly low risk business and financial profile. This incorporates (1) the company's stable revenues, of which more than 90% are derived from its regulated gas transmission and distribution activities; (2) the broad geographic diversification between Spanish regions and between urban and rural areas and a well-spread mix of domestic, corporate and industrial consumers; (3) the relatively low penetration rate of natural gas in Spain at both an industrial and retail level compared with other European countries and the lower cost of gas compared with electricity, which Moody's expects to be key drivers of continued growth for Redexis; (4) the company's young network, with low operating and maintenance costs and the progress it has made under present ownership and management towards making capex and operating efficiencies; and (5) an experienced management team, focused on implementing best practice across all regions.

The regulatory framework for gas assets in Spain has been broadly stable to date and has provided fairly favourable remuneration, with limited exposure to volume risk. Nonetheless, the Baa3 rating is constrained by a degree of regulatory risk. Against a difficult economic and fiscal backdrop, the risk of political intervention has risen. There have been significant reforms of the electricity sector, including cuts to network remuneration, and the government has said that it will review the natural gas sector. In the context of a small, but rising, tariff deficit in gas (the electricity tariff deficit is considerably larger), the government may wish to restrict the rate of tariff increases in the sector to ease the burden on the consumer and therefore may take actions to reduce the remuneration payable on existing gas assets in order to forestall the continued rise of the tariff deficit. In addition, until the situation is resolved, regulatory receivables will be funded by the gas network companies until payment is received.

The rating recognises however that the current structure of the gas tariff deficit results primarily from overcapacity in the upstream segment, particularly in regasification infrastructure and from weak demand from gas-fired generation plants. Further gas penetration through greater volumes and connection points of gas distribution could contribute towards offsetting the deficit and reducing the cost per unit of gas. In addition, Redexis has a diversified business mix with exposure to both transmission and distribution regulatory frameworks and a young asset base. In the light of these factors, our expectation is that any such regulatory review is unlikely to have an unduly negative impact on Redexis.

The rating also factors (1) Redexis' small scale and relatively short operational and financial track record relative to rated peers and (2) the company's fairly high financial leverage even after the new capital structure and cancellation of the shareholder loans is completed. The rating is nonetheless supported by the company's financial policy of achieving a target financial profile of funds from operations (FFO) to net debt of low teens and our expectation that the company will take measures as appropriate, such as maintaining a flexible dividend policy, to support this target.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on the Baa3 rating reflects Moody's view that the company should be able to demonstrate an improving financial profile such that it can reach, and subsequently maintain, its target financial profile of FFO/net debt in the low teens by 2015/2016 and so achieve a comfortable positioning within the rating category.

WHAT COULD MOVE THE RATING UP/DOWN

The rating could move up if the company can continue to demonstrate a steady track record of business and financial growth over time such that it can achieve and maintain a financial profile of FFO/net debt in the mid-to-high teens. This is likely to presuppose a stable regulatory environment in Spain for gas networks. However, downward pressure could result from a failure to (1) put in place the expected capital structure or (2) demonstrate an improving financial profile in line with guidance for the Baa3 rating. This could be the result of a harsher-than-expected regulatory outcome, a more difficult operating environment or larger dividend payouts than factored in the current rating, such that the targeted financial metrics no longer appear achievable in the 2015/16 time frame.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Redexis is a Spanish regulated gas transmission and distribution company, which mainly operates at the regional level. It is the second largest gas transmission and fourth largest distribution company in the country, with approximately 4,300 kilometres of distribution network comprising approximately 384,000 connection points, and a transmission network of approximately 1,280 kilometres via 46 pipelines. As at FYE 2013 it had reported revenues of EUR146.9 million.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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 - Senior 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
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns definitive Baa3 rating to Redexis Gas, S.A., outlook stable
No Related Data.
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