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Rating Action:

Moody's upgrades Gas Networks Ireland's rating to A3; outlook stable

15 Aug 2016

London, 15 August 2016 -- Moody's Investors Service (Moody's) has today upgraded to A3 from Baa1 the long-term issuer rating for Gas Networks Ireland (GNI), as well as the long term senior unsecured rating on the EUR500 million notes due 2017, originally issued by Ervia and novated to GNI in August 2015. Moody's has concurrently affirmed GNI's P-2 short-term issuer rating. The outlook on the long term ratings has been changed to stable from positive.

RATINGS RATIONALE

"Our decision to upgrade GNI's ratings is based on the company's moderate level of gearing, strong free cash flow generation, and the completion of its corporate restructuring. We also take into account the track record of the regulatory framework in Ireland which governs the vast majority of GNI's revenues.", said Fred Barasi, a Moody's Vice President Senior Analyst and lead analyst for GNI.

GNI's A3 ratings reflect: (1) the low business risk profile of its gas transmission and distribution businesses, operating under a stable and predictable regulatory framework in the Republic of Ireland (A3, positive) ; (2) operating performance broadly in line with regulatory assumptions, with a mature asset base and modest level of capital expenditure; and (3) the company's moderate leverage with Net Debt to Regulated Asset Value expected to remain very comfortably below 60%.

GNI is approaching the end of the current PC3 regulatory period for gas transmission and distribution (October 2012 to September 2017) and the regulator, the Commission for Energy Regulation, is expected to publish its draft determination for PC4 in mid-2017. Given the continuing low-yield environment, a reduction in allowed returns from the current weighted average cost of capital of 5.2% is to be expected. Indeed, in December 2015, the regulator cut the allowed return for the electricity transmission and distribution assets owned by Electricity Supply Board (ESB) (Baa1, positive) by 0.25% to 4.95%. In Moody's view, however, GNI has flexibility to accommodate lower returns and the rating agency further anticipates that the company will reflect the terms of the new regulatory settlement in its financial policies to maintain credit quality.

GNI's is considered under Moody's methodology for Government Related Issuers. At A3, however, GNI's rating is based on Moody's evaluation of the company's standalone credit strength and does not incorporate any uplift for ownership by the A3-rated government.

GNI's rating also takes into account the consolidated credit profile of Ervia, including the defined benefit pension deficit associated with GNI. The assessment of GNI does not take into account Irish Water, reflecting our understanding that it will not face financial exposure to that business.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation of continued sound operating performance and relatively stable financial metrics over the coming years, with gearing and cash flow generation both broadly flat.

WHAT COULD CHANGE THE RATING UP/DOWN

The ratings could be upgraded if the government of Ireland's rating were to increase by more than one notch. It is not currently anticipated but there could also be positive pressure if GNI were to develop a track record of low leverage with Net Debt / RAV in the 40s in percentage terms or if there was a government-supported statement of a financial policy to target a gearing level in the 40s in percentage terms.

Downward pressure could develop following (1) downward movement in the Government of Ireland's rating more by more than one notch; (2) a material and unfavourable change in the regulatory framework relating to the existing gas business; (3) any debt-funded acquisition or material increase in leverage to a level persistently above 60% (Net Debt to Regulated Asset Value); or (4) a deterioration in operation performance, which resulted in FFO to Net Debt persistently below the low teens in percentage terms.

Gas Networks Ireland (GNI) is the monopoly owner and operator of natural gas high pressure (transmission) and low pressure (distribution) network infrastructure in the Republic of Ireland. It also owns and operates the natural gas interconnectors between Scotland and the Republic of Ireland and the transmission network connecting Northern Ireland with the South. GNI's transmission network assets total 2,422km and its distribution network pipelines total 11,288km.

GNI is a wholly-owned subsidiary of Ervia, a multi-utility business owned by the government of the Republic of Ireland (A3 positive). Ervia also owns Irish Water, the first water utility in the Republic of Ireland, which since 2014 has been responsible for delivering water and wastewater services to 1.8 million customers. As at 31 December 2015, the gas business had a RAV of just under EUR3 billion. In the year to 2015, the business earned revenues of just over EUR490 million and operating profit of EUR188 million.

The methodologies used in these ratings were Regulated Electric and Gas Networks published in November 2014, and Government-Related Issuers published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

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 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.

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.

Fred Barasi
Vice President - Senior Analyst
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

Neil Griffiths-Lambeth
Associate Managing Director
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

No Related Data.
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