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Rating Action:

Moody's places Solveig's A3 ratings on review for downgrade

19 Feb 2013

London, 19 February 2013 -- Moody's Investors Service has today placed on review for downgrade the A3 long-term senior secured debt rating of Solveig Gas Norway AS (Solveig). Concurrently, Moody's has also placed on review for downgrade the provisional (P)A3 rating on the company's NOK12 billion euro medium-term note (EMTN) programme.

Solveig owns a direct and indirect stake totalling 25.4% in the unincorporated joint venture, Gassled, which owns the Norwegian sub-sea high-pressure gas network and associated gas-processing and export facilities. The network connects the Norway-based gas-producing platforms in the North Sea and the Norwegian Sea to export points in the UK, France, Belgium and the Netherlands. The network operations and upgrade activity is undertaken by Gassco (not rated), which is 100% owned by the Norwegian government (Aaa stable).

RATINGS RATIONALE

Today's rating action reflects the strong likelihood that Solveig's debt service coverage ratios will be negatively affected if the proposal to reduce tariffs on any new bookings for the transmission of gas by Gassled is introduced in its current form in May 2013 by Norway's Ministry of Petroleum and Energy ("MPE"). The rating action also reflects the perceived weakening of the previously supportive and predictable regulatory regime.

The MPE's proposal is to cut the 'K' element of the tariff by 90% for all new volume bookings, while current bookings will remain on the current tariff. The K element represents approximately 70% of the total tariff, decreasing to around 50% in the latter years of the licence. Booked volumes make up around 80% of total projected volumes until 2019, but they reduce over time to around 40% of total projected volumes by 2027. Therefore, Moody's expects that the proposed change in tariffs would have a material impact on Solveig's revenues from 2020 until the expiry of the licence. The MPE's current proposal is subject to consultation and therefore is not final.

While Moody's expects that, based on preliminary projections, Solveig's debt service payments would be met if the proposed tariff cuts were introduced, the rating agency considers it likely that the company's debt service coverage ratios (DSCR) would be substantially lower. Assuming the cuts go ahead, Moody's expects that Solveig's DSCR will initially fall to about 1.6x from 1.9x currently. This measure could weaken considerably beyond 2020, when it is expected to average about 1.3x for the remaining life of the debt. This reflects lower levels of long term bookings and is based on an assumed amortisation profile that does not take into account any change in capital structure that could take place upon the refinancing of the company's existing NOK4.9 billion term (EUR660 million) loan maturing in 2019. Furthermore, Solveig's refinancing risk could increase substantially if the proposed tariff cuts are confirmed.

The current A3 rating is underpinned by (1) a regulatory regime that, until now, has proven to be very stable and supportive; (2) Solveig's limited volume risk, with approximately 80% of volumes booked until 2020; (3) the Norwegian government's indirect participation in Gassled of just over 50%, through its ownership of Gassled participants Statoil Petroleum AS and Petoro AS; (4) Solveig's strong debt service coverage throughout the licence period; and (5) very strong downstream demand, supported by requirements for low carbon generation in Europe and strong competitive position of Gassled's network with low delivery costs, in comparison to Russian gas imports and liquefied natural gas (LNG).

However, the rating is constrained by (1) Solveig's aggressive financial structure, with a weak balance of debt interest relative to equity interests in the early years of the transaction; (2) the company's weak security package, which allows debtholders to assume ownership mainly in the form of bank accounts, but not operating assets; (3) the complexity of repair works to Gassled's assets given the size of the facilities and depth of the pipelines in certain areas; (4) the risk of trawler and anchor damage to the network, given its location, beneath one of the world's busiest shipping lanes; (5) untested rights to the cash flow of Gassled's assets in the event of Solveig's default or bankruptcy; (6) exposure to declining gas production in the latter years of the licence, barring any new projects.

WHAT COULD CHANGE THE RATING DOWN/UP

Moody's expects to conclude the review for downgrade after the MPE finalises the proposed tariff modifications. Barring any alteration to the borrowing structure, Moody's notes that the confirmation of the current proposals could result in the downgrade of Solveig's debt ratings by more than one notch.

Given the review for downgrade, Moody's does not currently expect upward rating pressure. However, in the event that the tariff proposals are withdrawn, Moody's could confirm the ratings, subject to a reassessment of the predictability of the ongoing regulatory regime applying to Gassled's tariff structure.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating 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.

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.

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.

Paul Lund
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 places Solveig's A3 ratings on review for downgrade
No Related Data.
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