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Rating Action:

Moody's lowers to A3 and reviews for downgrade ratings of Gas Natural; places A3 ratings of Union Fenosa on review for possible downgrade

01 Aug 2008
Moody's lowers to A3 and reviews for downgrade ratings of Gas Natural; places A3 ratings of Union Fenosa on review for possible downgrade

Approximately EUR 1 billion of debt securities affected

London, 01 August 2008 -- Moody's Investors Service today lowered to A3 from A2, and kept on review for possible downgrade, the long-term senior unsecured ratings of Gas Natural Finance BV and Gas Natural Capital Markets SA, both guaranteed subsidiaries of Gas Natural SDG, SA (together "Gas Natural"/the Group). The Prime-1 short-term rating was lowered to Prime-2. Moody's also placed on review for possible downgrade the A3 senior unsecured issuer and debt ratings of Union Fenosa SA and its guaranteed subsidiary Union Fenosa Finance BV. The Prime-2 short-term ratings of Union Fenosa SA and Union Fenosa Finance BV were affirmed.

The rating actions follow the announcement that Gas Natural has agreed to acquire the 45.3% stake in Union Fenosa owned by ACS for a consideration EUR 18.33 per share in cash, including the immediate acquisition of a 9.99% stake for EUR 1.7 billion. If approved by the relevant regulatory authorities, the acquisition of ACS' stake will result in a Public Tender Offer (OPA) for the remaining 54.7% of Union Fenosa, implying a potential aggregate consideration of approximately EUR 16.8 billion. Moody's notes that the acquisition remains subject to the approval of the Spanish Energy Commission and Competition authorities.

The following ratings were lowered:

Gas Natural Finance BV and Gas Natural Capital Markets SA -- the guaranteed senior unsecured debt ratings to A3/Prime-2, from A2/Prime-1

The following ratings were placed on review for possible downgrade:

Gas Natural Finance BV and Gas Natural Capital Markets SA -- the A3 guaranteed senior unsecured debt ratings

Union Fenosa SA -- the A3 senior unsecured issuer rating

Union Fenosa Finance BV- the A3 guaranteed senior unsecured debt rating

The following ratings were affirmed:

Union Fenosa SA -- the Prime-2 senior unsecured issuer rating

Union Fenosa Finance BV- the Prime-2 guaranteed senior unsecured debt rating

Moody's says that the downgrade of Gas Natural's ratings to A3/Prime-2 from A2/Prime-1 factors in that the initial EUR 1.7 billion investment in Union Fenosa will likely cause the Group's financial risk profile to deteriorate more rapidly than expected when the rating outlook was changed to negative in March 2008. It also reflects Moody's view that in the context of the Group's 2008-12 Investment Plan, it is unlikely that in the short to medium-term Gas Natural's financial flexibility would return on a sustainable basis to levels consistent with the A2 rating even if the transaction were not to complete as planned.

The planned transaction, which is in line with Gas Natural's ambition to develop as a vertically integrated gas and electricity operator, would strengthen the group's position within the Spanish energy sector and help it achieve most of its Strategic Plan targets comfortably ahead of 2012. However, while recognising the potential benefits of the acquisition, Moody's says that the review for possible downgrade of both Gas Natural's and Union Fenosa's A3 ratings is prompted by the scale of the transaction, which is to be principally debt financed. Although the intention is to reduce the initial EUR 17 billion acquisition debt through the combination of a capital increase and asset sales, the combined group will see a sharp increase in leverage in the event that the transaction completes as planned. In Moody's view, the incremental borrowing required to complete the transaction would likely be such as to leave the combined group with a financial risk profile consistent with a rating in the Baa range.

Moody's says that the review will focus on the combined group's future growth strategy, as well as its business risk profile after factoring in capital investment plans and disposals. In the event that the transaction completes as planned, the review will evaluate the new group's financial policy and the expected evolution of its capital structure, including its plans for debt reduction in the short-term through a targeted EUR 3 billion asset sales and EUR 3.5 billion planned capital increase, as well as the group's plans for deleveraging through capex optimisation, synergies and cash flow generation. Finally, Moody's adds that the review will take account of the integration risks associated with an acquisition of this size; and the challenge of arranging funding for the deal in current difficult financial market conditions.

Moody's last rating action on Gas Natural, in March 2008, was to change the outlook to negative from stable. The most recent rating action on Union Fenosa, in June 2008, was to upgrade its rating to A3 from Baa1.

Headquartered in Barcelona, Spain, Gas Natural SDG, SA, is a vertically integrated gas company with natural gas transportation, storage and distribution operations concentrated in Spain and Latin America. It reported turnover of EUR 10,093 million for the year-ended December 2007.

Union Fenosa is the third largest vertically integrated utility based in Spain. It had revenues of EUR 6 billion for the year-ended December 2007.

London
Stuart Lawton
Managing Director
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Niel Bisset
Senior Vice President
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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