TEXT-Fitch affirms Gas Natural at 'BBB+'; stable outlook
Jan 16 - Fitch Ratings has affirmed Gas Natural SDG, S.A.'s Long-term Issuer Default Rating (IDR) at 'BBB+' and removed it from Rating Watch Negative (RWN). The Outlook is Stable. A full list of rating actions is below.
The rating actions follow the approval by the Spanish government of a set of measures on 27 December 2012 designed to prevent generation of future tariff deficit (TD) in the electricity system in Spain. The current regulatory scheme presents slight changes compared with the draft measures published in September 2012. The main difference is that a flat 7% tax has been fixed to all power generation compared with the previous proposal of 6%. Fitch does not expect this to have a significant impact on Gas Natural's credit metrics. The other approved measures were largely unchanged.
- Strong Metrics
The Stable Outlook is supported by Fitch's expectations that Gas Natural's leverage will continue decreasing in the short to medium term as stated in its business plan, with FFO adjusted net leverage to remain around 3.9x in 2012 and 3.5x in 2014. Conversely, we believe that FFO interest cover will increase to around 5.4x in 2014 from 4.9x in 2012.
The tax scheme on electricity generation introduced by the decree, together with the regulatory changes affecting the electricity distribution segment introduced earlier in Q212 will negatively impact Gas Natural's 2013 earnings. However, the latter is manageable for the issuer due to its relative exposure to the Spanish generation segment and good performance of other business segments.
- Sovereign Exposure
The Stable Outlook is also underpinned by Fitch's approach within which Spain's sovereign rating ('BBB'/Negative) would need to be downgraded by three notches to 'BB' in order to likely trigger a downgrade of Gas Natural. The company generated around 60% of FY11's EBITDA in Spain. Fitch does not expect this to significantly change for 2012's results.
- Monetisation of Past TD Slowing Down
As expected by Fitch, the securitisation of past TD has significantly slowed down in 2012 as a result of the high correlation between the market access of the Spanish sovereign debt and the TD securitisation notes that are underpinned by the Spanish sovereign guarantee. In 2012, FADE (securitisation vehicle for the TD) issued 50% of the amount placed in 2011 reflecting the financial instability that characterised the sovereign debt market over the past 12 months.
At YE12, Gas Natural's outstanding TD was c. EUR1bn. The slowing down of the monetisation has a negative financial impact on credit metrics as Fitch includes the outstanding TD amounts in the leverage ratios. However, the financial implications for Gas Natural, on a progressive de-leveraging path, are less negative compared with its peers.
- Future Tariff Deficit
Fitch highlights that it has not been included in the law that part of the burden (EUR2.2bn) will be transferred to the state budget as previously stated. Additionally, the government has erased the legal limits for the generation of TD previously established at EUR1.5bn in 2012 and zero in 2013. The latter will allow transferring all tariff deficit amounts to FADE but we believe it is a clear signal that the Spanish electricity system will continue generating a TD beyond 2013.
RATING SENSITIVITY GUIDANCE:
Positive: Future developments that may potentially lead to a positive rating action include:
- Further reduction of leverage with FFO adjusted net leverage around 3.0x or below on a sustained basis and FFO interest coverage around 5.5x or above on a sustained basis.
- Improvement in the operating and regulatory environment.
Negative: Future developments that could lead to a negative rating action include:
- A downgrade of Spain to 'BB' would likely trigger a downgrade to 'BBB' for Gas Natural's IDR following Fitch's approach.
- An increase of leverage with FFO adjusted net leverage above 4.0x and FFO interest coverage below 4.5x on sustained basis, possibly as a result of further government measures.
LIQUIDITY AND DEBT STRUCTURE
Gas Natural's liquidity position remains strong. It had around EUR5bn of committed available credit lines with more than 15 entities and EUR4.3bn of available cash as of September 2012. This liquidity should enable it to cover maturities within the next 24 months (EUR4.9bn). We expect Gas Natural to generate free cash flow in 2012-2014.
Gas Natural SDG, S.A.
Long-term IDR affirmed at 'BBB+', removed from RWN, Outlook Stable
Short- term IDR affirmed at 'F2' removed from RWN
Gas Natural Finance BV
Senior unsecured affirmed at 'BBB+' removed from RWN
Euro commercial Paper programme affirmed at 'F2' removed from RWN
Gas Natural Capital Markets
Senior unsecured affirmed at 'BBB+' removed from RWN
Union Fenosa Finance BV
Commercial Paper affirmed at 'F2' removed from RWN
Union Fenosa Financial Services USA LLC
Subordinated debt affirmed at 'BB+' removed from RWN
Union Fenosa Preferentes, S.A.
Subordinated debt affirmed at 'BB' removed from RWN
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