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Jan 10 (The following statement was released by the rating agency)
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 provided at the end of this rating action commentary.
The rating actions reflect Fitch's projection of positive free cash flow in 2014-2015, and our expectations that the company will continue to reduce leverage as per its updated strategic plan and maintain credit ratios commensurate with the 'BBB+' rating. This is despite the negative impact on EBITDA of another set of unfavourable regulatory changes to the Spanish electricity market announced in July 2013. Our rating action assumes that potential negative EBITDA impact of possible regulatory changes to the Spanish gas market, which may be announced in mid-2014, would be less pronounced for Gas Natural than that in the electricity market.
KEY RATING DRIVERS
The Stable Outlook is underpinned by Fitch's expectations that Gas Natural's leverage will continue decreasing in the short- to medium-term, with funds from operations (FFO) adjusted net leverage improving to around 3.9x in 2013 and 3.7x in 2014 from 4.1x in 2012. This is despite the likely impact of the regulatory changes from July 2013 in Spain. The impact of the regulatory measures is partly offset by expected savings within a cost efficiency plan for which we assumed only a partial success. The Outlook for Gas Natural's Long-term IDR is Stable, despite our negative sector outlook for Iberian utilities, reflecting the company's free cash flow generation and continued debt reduction.
Balanced Business Profile
The ratings are supported by Gas Natural's integrated strong business profile in both gas and electricity. A significant portion of the company's earnings (52.5% of 9M13 EBITDA) are regulated and mainly derived from its gas and electricity distribution activities in Spain and Latam, providing cash flow visibility, despite the 2012-2013 regulatory changes that reduced regulated earnings. In addition, about 13% of 9M13 EBITDA was quasi-regulated, comprising mostly of regulated generation, long-term contracted generation (PPAs) and generation in the special regime.
Lower Regulated Earnings
The July 2013 regulatory measures reduced regulated earnings through lower returns on electricity distribution assets and renewables and also through lower capacity payments for gas-fired plants. According to the company's assumption these changes will reduce EBITDA by about EUR180m or about 4% in 2014, on top of the EUR420m EBITDA reduction stemming from the 2012 regulatory changes.
Tariff Deficit Exposure
Gas Natural's exposure to tariff deficit (TD) decreased during 2013 to about EUR0.5bn at end-2013 from EUR1.1bn at end-2012 as a result of higher securitised and collected amounts compared with the new TD that arose during the period. We expect that the measures announced in July 2013 will effectively eliminate the new TD from 2014.
Gas Networks Less Exposed
The Spanish regulatory office is currently reviewing the gas sector regulatory framework. Similar to the electricity market reforms, the aim is to prevent further growth of the gas TD and introduce mechanisms to eliminate the outstanding TD in the system (estimated at around EUR0.4bn at FYE13). Fitch expects the earnings impact from a possible regulatory decision to be visible from around mid-2014. However, the impact is likely to be smaller compared with that seen in the Spanish electricity business as the cumulative gas TD is substantially lower than the electricity TD.
Continued Exposure to Spain
The company generated 56% of 9M13 EBITDA in Spain. Fitch does not expect this to significantly change in 2014, but it may reduce over the long term as the company increases, in relative terms, investments outside Spain, in particular in Latam. We do not currently view this gradual shift as affecting Gas Natural's business risk.
Positive: Future developments that could lead to positive rating actions include:
- Further reduction of FFO adjusted net leverage to around 3.0x or below on a sustained basis and FFO interest coverage around 5.5x (5.2x in FY12) 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:
- FFO adjusted net leverage close to or above 4.0x and FFO interest coverage below 4.5x on sustained basis
- Substantial deterioration of the operating environment or further government measures that substantially reduce cash flows
LIQUIDITY AND DEBT STRUCTURE
Gas Natural's liquidity position remains strong. It had around EUR7bn of committed available credit lines with more than 15 entities and EUR4bn of available cash as of end-September 2013. This liquidity buffer should enable it to cover debt maturities until at least 2015 totalling EUR5.2bn. We expect Gas Natural to generate positive free cash flow in 2014-2015.
Full list of rating actions:
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 Fenosa Finance BV
Senior unsecured affirmed at 'BBB+', removed from RWN
Euro commercial paper programme affirmed at 'F2', removed from RWN
Gas Natural Capital Markets, S.A.
Senior unsecured affirmed at 'BBB+', 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