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Rating Action:

Moody's changes Redexis' outlook to stable; affirms Baa3 rating

01 Apr 2020

Paris, April 01, 2020 -- Moody's Investors Service, (Moody's) has today changed the outlook on the Baa3 senior unsecured ratings of Redexis Gas S.A (Redexis) and its guaranteed finance vehicle, Redexis Gas Finance B.V. to stable from negative. At the same time, Moody's has affirmed the ratings.

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

RATINGS RATIONALE

RATIONALE FOR STABLE OUTLOOK

The change in outlook to stable follows the determination by Spanish National Commission of Markets and Competition (CNMC) of the tariff methodology applicable for gas distribution and gas transmission in Spain for the next regulatory period 2021-2026. The action reflects Moody's expectations that the new methodology will support the company's growth strategy and, together with a balanced financial policy, underpin credit metrics. In particular, Moody's anticipates that EBITDA growth and improved funds from operations (FFO) generation in the coming years will allow Redexis to achieve guidance for the current rating with FFO/net debt comfortably in the double digits in percentage terms.

In January 2020 the Spanish regulator CNMC submitted to the State Council the final circular relative to the tariff determination for gas distribution companies which is now pending a formal vote from the CNMC before becoming law. The final methodology differs from the draft submitted in July 2019 in that the regulator has moved away from proposals to adopt a regulated asset base framework, maintaining a remuneration mechanism based on activity of gas assets, providing continuity for gas distribution companies such as Redexis. The regulatory proposals include a cut in revenues from the gradual reduction, through the 2020-26 period, of remuneration for assets held prior to 2002. However, Redexis will be less affected than peers given its relatively new asset base. In addition the new methodology introduces additional incentives and remuneration including for: (1) industrial connections (equivalent to an additional EUR 0.5 per MWh); (2) supplies to Natural Gas Vehicle refueling stations and ships connected to transmission network (additional EUR 0.5 per MWh); and (3) the difference in costs of supply between Spanish islands and the mainland.

Moody's expects the economic shock caused by the Covid-19 outbreak will reduce Redexis growth prospects for 2020 and possibly part of 2021. The company will also be impacted by the likely reduction in gas consumption as variation in demand is part of the parametric formula used to derive gas regulated revenues, although exposure is restricted to a portion equivalent to around 30% of Redexis total revenues. In the context of these headwinds, the rating agency takes comfort from the scalability of capital expenditure, the discretionary nature of dividend payments and shareholders' commitment to maintaining a credit profile commensurate with an investment grade rating.

AFFIRMATION OF THE Baa3 RATING

Affirmation of Redexis' Baa3 ratings reflects: (1) the generally low business risk of its regulated businesses which contribute over 90% of revenues; (2) its young asset base and diversified network operations, balanced between both urban and rural areas and domestic and industrial customers; and (3) a generally transparent regulatory framework in Spain following the July 2014 reforms of the gas sector and more recently the determination by a newly independent regulator of a change in tariff methodology for the gas distribution and gas transmission sector.

At the same time, Redexis' ratings are constrained by (1) a small scale although the company continues to build a solid operational track record; (2) significant leverage and expectations that intense expansionary capex plan and dividend payouts will slow improvements in financial metrics; and (3) exposure to inflation and volume risk although the potential impact is moderate for Redexis' revenue.

Moody's considers Redexis' liquidity profile to be adequate. As of June 2019, the company had cash and cash equivalents of EUR 70.3 million and an undrawn revolving capex facility (RCF) of EUR 300 million maturing in 2024 with the option to extend up to 2026. The RCF was recently amended to extend its maturity date to 2024 from 2022, and to include a mechanism designed to reduce margins upon Redexis meeting Environmental, Social and Governance targets agreed upon with stakeholders.

The company also benefits from borrowing facilities with the EIB, including (1) a EUR 160 million fully drawn facility maturing in 2036; and (2) EUR 125 million facilities with a three year availability period maturing in 2039, out of which EUR 50 million was drawn in Q2 2019. Moody's expects that Redexis will be to refinance its upcoming EUR 650 million bond due in April 2021 on a timely basis, and to continue to maintain generate sufficient operating cash generation to cover its funding needs over the next 12-18 months.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:

The stable outlook reflects Moody's expectations that continued growth in EBITDA and funds from operations (FFO) generation in the coming years, combined with a balanced dividend policy, will allow Redexis to achieve guidance for the current rating with FFO/net debt comfortably in the double digits in percentage terms. The stable outlook also incorporates Moody's expectations that Redexis' credit profile is somewhat insulated against the effect of an economic downturn led by the on-going Covid-19 virus outbreak given the low exposure of regulated revenue to demand.

Upward rating pressure is not currently anticipated but could materialise if Redexis appeared likely to achieve and maintain a financial profile with FFO/net debt at least in the mid-teens in percentage terms.

Conversely, downward pressure on the rating could result from the company's failure to maintain a FFO/ Net debt ratio at least in the low double digits on a sustainable basis. This could be the result of a change in financial policy in favour of shareholders, negative regulatory developments, a more difficult operating environment or an increased level of investment without commensurate growth in earnings.

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059225. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Redexis Gas, S.A., based in Madrid, Spain is the country's second largest gas transmission and fourth largest gas distribution company. In the year ended 2018, the company had revenues of EUR 244.2 million.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Redexis Gas Finance B.V.

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa3

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Redexis Gas, S.A.

.... LT Issuer Rating, Affirmed Baa3

Outlook Actions:

..Issuer: Redexis Gas Finance B.V.

....Outlook, Changed To Stable From Negative

..Issuer: Redexis Gas, S.A.

....Outlook, Changed To Stable From Negative

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 unsolicited.

a.With Rated Entity or Related Third Party Participation: YES

b.With Access to Internal Documents: YES

c.With Access to Management: YES

For additional information, 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_1133569.

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.

Paco Debonnaire
AVP - 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

Neil Griffiths-Lambeth
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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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