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Rating Action:

Moody's changes outlook on Gas Natural Fenosa's Baa2 ratings to stable from positive; affirms ratings

17 Oct 2014

London, 17 October 2014 -- Moody's Investors Service, ("Moody's") has today changed to stable from positive the outlook on the Baa2 ratings of Gas Natural SDG SA (Gas Natural Fenosa, 'the group') and its guaranteed subsidiaries. Concurrently, Moody's has affirmed the Baa2/Prime-2 issuer ratings of Gas Natural Fenosa, as well as the guaranteed Baa2 and provisional (P)Baa2 ratings of Gas Natural Capital Markets SA and Gas Natural Fenosa Finance BV. The guaranteed Prime-2 short-term rating of Gas Natural Fenosa Finance BV was also affirmed.

The rating action follows the group's recent announcement that it will launch a cash tender offer for 100% of the Chilean energy firm, Compania General de Electricidad, S.A. (CGE), having reached a purchase agreement with the majority owners -- the Marin and Perez Cruz Family Groups and Almería Group -- who together hold 54.19% of CGE. Should Gas Natural Fenosa achieve 100% acceptance, the acquisition would cost EUR2.6 billion, valuing the company -- in Chilean peso terms -- at CLP4,700 per share. The total enterprise value in euro terms would be around EUR5.7 billion, taking into account assumed net debt of EUR1.7 billion and minority interests of EUR1.4 billion. The transaction is expected to close in the second half of November.

RATINGS RATIONALE

OUTLOOK CHANGE TO STABLE FROM POSITIVE

Today's change of Gas Natural Fenosa's rating outlook to stable factors (1) the moderately increased leverage of the group following the acquisition; as a result, the group is unlikely to deleverage as rapidly as previously envisaged; and (2) the possibility that the group may consider pursuing future investment opportunities, such as new electricity generation to augment its new growth platform, which could absorb free cash flow and delay further deleveraging; and (3) the execution and integration risks associated with a rather sizeable transaction in a new market for Gas Natural Fenosa.

Moody's expects Gas Natural Fenosa's net debt/EBITDA on an unadjusted basis to rise from around 2.9x to over 3.3x following the EUR2.6 billion debt-funded transaction (based off 2013 financials), as CGE has a similarly leveraged profile to that of Gas Natural Fenosa, with net debt of around EUR1.73 billion and EBITDA of around EUR576 million in 2013. The group's management has indicated that it now expects the new combined group net debt/EBITDA to reduce to around 3x by year-end 2015, compared to the target of 2.5x initially predicted in November 2013. As a result, Moody's no longer believes that over the next 12 to 18 months the group will be on track to achieve funds from operations (FFO)/net debt comfortably in the 20s in percentage terms, and retained cash flow (RCF)/net debt in the mid to high teens consistent with a higher rating. In addition, the group may decide to pursue further new growth opportunities such as those offered by new power generation possibilities in Chile which could slow further deleveraging, in Moody's view.

AFFIRMATION OF GAS NATURAL FENOSA'S Baa2/PRIME-2 RATINGS

At the same time, the affirmation of Gas Natural Fenosa's rating at Baa2 recognises that the acquisition is likely to yield diversification benefits and strong growth prospects for the group and build on its existing presence in Latin America. The transaction will increase the group's exposure to the region to around 35% from 26% of EBITDA based on financials for year-end 2013.

Moody's regards CGE as a good strategic fit for Gas Natural Fenosa as the transaction provides direct entry to Chile where CGE has leading market positions in gas and electricity. CGE has 40% of the electricity distribution and 35% of the electricity transmission market. CGE's subsidiary, Metrogas, is the country's main gas distributor and this subsidiary also has access to the liquefied natural gas (LNG) market through its stake in the LNG import terminal at Quintero Bay. In addition, CGE's subsidiary, Gasco -- one of the three main distributors in liquefied petroleum gas (LPG) -- has a market share in Chile of 27%. The acquisition will additionally allow the group to reinforce its positions in major urban gas hubs and strengthen its electric distribution platform across Latin America.

Following the acquisition, Gas Natural Fenosa will still maintain around 66% of its EBITDA from regulated gas and electricity businesses. Planned changes in energy legislation in Chile to open the sector to competition, reduce costs and encourage the use of natural gas and renewables in expected new electricity capacity will provide growth opportunities, in which the group has already signalled its interest. At the same time, such changes introduce a degree of regulatory uncertainty in Chile, for example, the current favourable remuneration for natural gas distribution is likely to be reviewed, although the group has already made an adjustment to earnings prospects to accommodate a possible downwards revision in allowed returns.

Gas Natural Fenosa's Baa2 rating also factors the diversification of the group's existing asset portfolio, which should continue to reduce earnings' volatility. The group's operations include (1) sizeable positions in Spanish gas and electricity distribution, which accounted for 33% of group EBITDA and a smaller 15% from domestic electricity production in the first half of 2014; (2) gas infrastructure and supply which generated 26% of EBITDA; and (3) substantial assets abroad, mostly in power distribution in Latin America, which accounted for 23% of EBITDA over the same period.

Gas Natural Fenosa's Baa2 rating factors a still challenging domestic operating environment including a weak forecast for energy demand; and the financial burdens arising from recent reforms aimed at eliminating the tariff deficits in the Spanish electricity and gas systems. Moody's believes that there is a reduced risk of further substantial negative effects on revenues following publication in July of Royal Decree Law 8/2014 (RDL 8/2014) to address the gas tariff deficit, and the earlier sequence of reforms designed to eliminate the electricity tariff deficit; nonetheless, further smaller adjustments to the regulatory and remuneration frameworks may still be needed.

The Baa2 rating also factors Moody's estimates that Gas Natural Fenosa has ample liquidity resources to allow it to comfortably absorb this acquisition and to continue operations for an extended period without further recourse to external finance.

The stable rating outlook assumes that Gas Natural Fenosa will continue to maintain a financial profile consistent with a Baa2 rating; with RCF/net debt in the mid teens, FFO/net debt in the high teens to lows 20s, and FFO/net interest cover of more than 4x.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive pressure could develop on Gas Natural Fenosa's ratings, assuming that it could demonstrate a stable business profile and strengthen its financial standing, with credit metrics (on a sustainable basis) of FFO/net debt comfortably in the 20s in percentage terms; RCF/net debt in the mid to high teens in percentage terms, and FFO interest cover of more than 4.5x. Given the integration risks relating to the latest proposed acquisition, positive pressure is unlikely to develop in the near-term rating horizon.

Conversely, negative pressure could develop on Gas Natural Fenosa's ratings in the event of any increase in business, regulatory or political risk within core markets or any significant growth activity through organic change or acquisitions that could cause credit metrics to deteriorate, trending to FFO/net debt in the mid teens and RCF/net debt in the low teens and below.

The following ratings were affirmed:

Gas Natural SDG SA: Baa2/Prime-2 senior unsecured issuer ratings.

Gas Natural Capital Markets SA: Guaranteed Baa2 and (P)Baa2 ratings

Gas Natural Fenosa Finance BV: Guaranteed Baa2 and (P)Baa2 ratings, and Prime-2 short-term rating

PRINCIPAL METHODOLOGY

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

Headquartered in Barcelona, Gas Natural Fenosa is one of the three major energy companies in Spain. It reported total EBITDA of EUR5.085 billion in 2013.

CGE is a leading integrated energy group based in Chile, and posted EBITDA of $743 million in 2013.

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 changes outlook on Gas Natural Fenosa's Baa2 ratings to stable from positive; affirms ratings
No Related Data.
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