INFRASTRUCTURE AND PROJECT FINANCE
CREDIT OPINION N.V. Nederlandse Gasunie 27 May 2021 Update following ratings affirmation
Update Summary N.V. Nederlandse Gasunie's (Gasunie, A1/P-1 stable) credit profile benefits from the company's monopoly position as the licensed provider of gas transmission services in the Netherlands (Aaa/P-1 stable) and its service area in northern Germany; the relatively stable and predictable cash flow it generates under well-defined and relatively stable regulatory RATINGS frameworks, with visibility until 2022 for its German business and until 2026 for its Dutch N.V. Nederlandse Gasunie business; and the modest level of its leverage compared with that of its European peers, as Domicile Groningen, Netherlands reflected in its net debt/fixed assets of 39.6% as of December 2020. Long Term Rating A1 Type LT Issuer Rating Gasunie's credit profile is constrained by the company's relatively weak cash flow generation Outlook Stable until year-end 2021, given the modest level of its leverage, reflecting the lower real allowed returns in the Netherlands and Germany in the current regulatory periods; the material share Please see the ratings section at the end of this report for more information. The ratings and outlook shown of the company's operating profit (10% over 2017-20) from its unregulated businesses; the reflect information as of the publication date. likely higher investment levels required, in the next 12-18 months to ensure security of supply in the Netherlands after Groningen's switch to stand-by in 2022, and through 2030 to realise its Vision 2030 of investing a total of up to €7 billion to transform the group into an energy Contacts infrastructure company transporting hydrogen, natural and green gas, heat and carbon; and Camille Zwisler, CFA +33.1.5330.3347 the uncertainties surrounding the financing of and the future regulatory framework governing Analyst its planned investments in the next decade. [email protected] Chingunee +49.69.70730.0826 Exhibit 1 Chimedbat Regulated monopoly activities account for most of Gasunie's operating results
Associate Analyst Gasunie Transport Services (Dutch Networks) Gasunie Deutschland (German Networks) [email protected] Participation & Business Development (non-regulated) 1,000 Andrew Blease +33.1.5330.3372 Associate Managing Director 800 147 [email protected] 100 600 134 102 40 37 167 €million 400 55 126 97 40 505 531 96 200 297 340 352 196 0 2015 2016 2017 2018 2019 2020 (1) 2016 operating result normalised for the €450 million impairment of Gasunie Transport Services (GTS); (2) 2017 operating result normalised for the €117 million impairment of Gasunie Deutschland (GUD); (3) 2018 results include one-off costs from voluntary severance scheme; (4) 2020 operating result normalised for the €300 million impairment reversal of Gasunie Transport Services (GTS). Sources: Gasunie and Moody's Investors Service
Finally, Gasunie's A1 ratings incorporate a two-notch uplift from its standalone credit quality, reflecting its ownership by the Dutch government and its strategic importance to the MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
national energy policy, further supported by the developments with respect to the Groningen field. Credit strengths » Low business risk, underpinned by the company's regulated monopoly gas transmission network operations
» Good cash flow visibility through 2022 for the German regulated business and good visibility through 2026 for the Dutch regulated business
» Strong implicit support from its owner, the Dutch government
Credit challenges » Lower allowed returns for regulated operations in Germany and the Netherlands in the current regulatory periods (ending 2022 and 2021, respectively), which weaken the company's cash-flow-based metrics compared with the previous regulatory periods
» Material share of operating profit from its unregulated businesses, which have reduced cash flow predictability
» Likely requirement of higher investment levels, in the short term, to ensure security of supply in the Netherlands following Groningen's switch to stand-by in 2022, and, in the long term, to realise its Vision 2030 to transport hydrogen, natural and green gas, heat and carbon
Rating outlook The stable rating outlook reflects our expectation that Gasunie will maintain financial metrics in line with those required to maintain its a3 Baseline Credit Assessment (BCA), namely its funds from operations (FFO)/net debt above 22% and net debt/fixed assets comfortably below 50% over the 2022-26 regulatory period. We expect Gasunie's FFO/net debt to trend towards the mid-20s in percentage terms during the regulatory period. Factors that could lead to an upgrade An upgrade is unlikely, given the uncertainties surrounding the financing and the regulatory framework of Gasunie's planned investments, in particular, in hydrogen, heat and carbon infrastructure. Factors that could lead to a downgrade Gasunie's ratings could be downgraded if the company's credit metrics appear likely to fall persistently below the ratio guidance for the a3 BCA; the share of earnings from its unregulated businesses increases significantly; or a change in its relationship with the Dutch government leads us to decrease its rating uplift for government support. Key indicators
Exhibit 2 N.V. Nederlandse Gasunie
31/12/17 31/12/18 31/12/19 31/12/20 12-18 months proj. (FFO + Interest Expense) / Interest Expense 8.8x 8.7x 9.0x 10.8x 9.3x - 13.5x Net Debt / Fixed Assets 43.6% 44.0% 43.1% 39.6% 37% -39% FFO / Net Debt 18.7% 16.8% 20.9% 21.5% 19% - 23% RCF / Net Debt 15.7% 10.0% 14.9% 13.5% 12% -14%
Note: Projected financial metrics exclude the potential impact of Vision 2030 as investment decisions have not been made and financing of projects are still to be determined All figures and ratios are calculated using Moody's estimates and standard adjustments. Moody's forecasts (f) or projections (proj.) are our opinion and do not represent the views of the issuers. Periods are financial year-end unless indicated. Source: Moody's Financial Metrics™
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
2 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Profile N.V. Nederlandse Gasunie (Gasunie) is the owner and operator of the Dutch and north German high-pressure gas transmission systems, and is 100% owned by the Dutch government. Over 2017-20, Gasunie generated 90% of its operating profit from regulated gas transmission activities, with most of these regulated earnings from its Dutch operations. The company's residual earnings relate to its participations in unregulated businesses or businesses exempt from regulation, which generate most of their revenue from long- term contracts.
Exhibit 3 Simplified organisational structure as of 31 Decemver 2020
Government of the Netherlands Aaa stable
N.V. Nederlandse Gasunie A1/P-1 stable Various non- Regulated gas transmission activities regulated infrastructure
Fossil fuel participations, including: EnergyStock B.V.2 (100%) BBL Company V.O.F.4 (60%) Nord Stream A.G.5 (9%) Gasunie Transport Services Gasunie Deutschland (GUD)1 3 (GTS) Gate terminal C.V. (50%) (Germany) (Netherlands) Non-fossil fuel participations, including: Vertogas B.V.2 (100%) New Energy Initiatives (Green Gas, Hydrogen, Heat, CCTS)
(1) Gasunie Deutschland (GUD) also has participations in DEUDAN (75%) and NETRA (50%). Gasunie's stake in EUGAL (16.5%, pipeline) is included in GUD; (2) EnergyStock B.V. (fast cycle gas storage services) and Vertogas B.V. (certification authority for green gas, 100% subsidiary) are included in consolidated financials; (3) Gate terminal C.V. (Gate terminal, LNG import terminal) is reported as a joint venture; (4) BBL Company V.O.F (BBL, subsea pipeline) is reported as joint operations; and (5) NordStream (subsea pipeline) is reported as an equity interest. Source: Gasunie and Moody's Investors Service
Exhibit 4 Exhibit 5 Split of 2020 revenue by business segment Split of 2020 operating profit by business segment
Participations Participations 11% 7%
Gasunie Gasunie Deutschland Deutschland 22% 30%
Gasunie Gasunie Transport Transport Services Services 63% 67%
Excludes inter-segment deductions (-€36.3 million), 2.6% of group revenue. Operating profit for Gasunie Transport Services (GTS) excluding €300 million of Sources: Gasunie and Moody's Investors Service impairment reversal. Sources: Gasunie and Moody's Investors Service
3 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Detailed credit considerations Low business risk, underpinned by its regulated monopoly gas transmission network operations Around 85%-95% of Gasunie's operating profit stems from the company's regulated network activities operating under two well- defined and relatively stable regulatory regimes in the Netherlands and Germany. We expect the split of regulatory earnings between Gasunie's Dutch and German operations to be around 80-20 through 2026.
Furthermore, the fact that the Netherlands' track record of incentive-based regulation is nearly twice as long as Germany's supports our view that the regulatory framework in the Netherlands is both more well established and more transparent than that in Germany1.
Exhibit 6 Gasunie scored A for Stability and Predictability of Regulatory Regime under our Regulated Electric and Gas Networks methodology, published in March 2017
Aaa Aa A Baa Great Britain1 Czech Republic Belgium - Flanders Belgium - Wallonia Ireland (RoI & NI) Finland Estonia Poland France Germany Slovakia Italy Portugal Spain
Netherlands2 Norway
(1) Only onshore incumbent network operators, excludes OFTOs (Aa); (2) Excludes Gasunie and TenneT Holding B.V. (A3 stable), both scored A; (3) Subfactor scores as of May 2021. Source: Moody's Investors Service
Good cash flow visibility for its Dutch operations until 2026; front-loading of cash flow over 2022-26 will support its financial metrics, despite a reduction in real returns Gasunie has good cash flow visibility for its Dutch regulated subsidiary — Gasunie Transport Services GTS) — through 2026, following the publication of the regulatory determination (method decisions) for the 2022-26 regulatory period by the Authority for Consumers and Markets (ACM).
Current control: 2017-21 The method decisions for the current regulatory period were published in February 2017 and originally included a gradual reduction in the allowed return (weighted average cost of capital [WACC]) to 3.0% from 4.3% (both real pretax, and for existing assets) by 2021. Following successful appeals from Dutch network operators, revised method decisions were published in January 2019, with the average WACC unchanged over the period but starting and finishing 20 basis points (bps) higher and lower, respectively. The required productivity improvement factor (dynamic efficiency target) was also reduced to 0.1% from 0.6%, leading to an increase in GTS' regulatory cost allowances and, therefore, overall allowed revenue. The Dutch network operators appealed the decision to lower the 2021 WACC, and the appeal body, College van Beroep voor het bedrijfsleven (CBb), ruled in December 2019 that the 2021 WACC of 3.0% in the original method decisions should apply2.
Because of the lower required productivity improvement factor and the measures taken by Gasunie to improve cost efficiency across its business (structurally lowering staff costs by around €30 million a year, following a significant reduction in the size of its workforce in the first half of 2019 after it initiated a voluntary severance scheme), we now expect GTS to perform broadly in line with regulatory cost allowances during the current regulatory period.
4 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 7 GTS' revenue allowance is higher after the second amendment to the method decisions All figures in €millions unless stated Revenue allowance per task Second amendment to Method Decisions 2016 2021 x-factor Transport 828.26 690.96 4.76% Balancing 31.68 27.53 3.97% Connections 45.10 36.77 5.20% Connections points 0.54 0.68 -3.36% Quality conversion 97.35 96.57 1.36% Total 1002.93 852.51 4.36%
The x-factor is the annual change in revenue over the period. Initially, the ACM determines the base revenue on the basis of the realised costs and the static efficiency measures. Then, using parameters that estimate future cost trends, it determines the level of revenue in 2021. The annual revenue gradually evolves from the base level to the level in 2021. The x-factor is equal to this annual change in revenue. The x-factor is, therefore, a price differential, rather than an efficiency target. Sources: ACM and Moody's Investors Service
Next control: 2022-26 In February 2021, the ACM published its method decisions for GTS for the regulatory period starting 1 January 2022. The low interest rate environment has led the regulator to reduce the allowed return (WACC) by around 160 bps between 2021 and 2022 in real terms. In this regulatory period, the WACC will be subsequently recalculated by the ACM based on actual rates, and differences will be recovered by GTS on a t+2 basis.
Other changes were introduced in this regulatory determination that take into account the regulator's view that natural gas network use will decrease over the period to 2050, and that aim to allocate network costs such that more costs are incurred by current consumers than future consumers. These changes include the move to a nominal allowed return from a real allowed return, the acceleration of depreciation of the regulated asset base (RAB, by a 1.3 multiplication factor for 90% of the RAB) and the immediate depreciation of divested assets. These changes will lead to higher cash flow and will more than offset the impact of the lower real allowed returns on earnings until 2024. The positive impact of the changes on earnings will progressively decrease over the regulatory period as the RAB depreciates faster and is no longer inflated.
Exhibit 8 Exhibit 9 Changes in methodology will more than offset the impact of the … but will not be enough to compensate the reduction in the real reduction in the real WACC on GTS' underlying EBITDA in 2022... WACC in 2026 because of lower RAB
800 800
700 700
600 109 600 107 500 96 500 112 70 7 400 400 € million € million 675 300 300 578 564 529 200 200
100 100
0 0 Old method - 3% Cut in real Accelerated Real to nominal New method Old method - 3% Cut in WACC Accelerated Real to nominal New method real WACC WACC depreciation real WACC Depreciation
We calculate underlying EBITDA as WACC*RAB + regulatory depreciation We calculate underlying EBITDA as WACC*RAB + regulatory depreciation Sources: ACM and Moody's Investors Service Sources: ACM and Moody's Investors Service
After comparing GTS with other European gas transmission operators, the ACM considers GTS able to still gain efficiency and has set its static efficiency factor at 93.7% for the 2022-26 regulatory period. This level is higher than that in the previous regulatory period (86.6%) and has been set in recognition of GTS' efficiency improvements over the past few years. The increase in the required dynamic efficiency target to 0.4% for 2022-26 from 0.1% over 2017-21 will have a negative impact on the allowed revenue. Cost-efficiency targets and the allowed return determine the so-called x-factor, set at 3.78% for all of GTS' activities for the 2022-26 period (4.36% on average for the previous period, see details in Exhibit 7). Base costs were reset on the basis of historical efficient costs, which were
5 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
adjusted for inflation, efficiency factor and the methodology changes described above, and resulted in an increase in revenue allowance between 2021 and 2022. Because the general operational cost allowance is based on 2019 costs, which already include the effect of GTS' cost reduction programme, the forward-looking operating efficiency targets embedded in the x-factor may prove difficult to achieve.
Good cash flow visibility for its German regulated activities through 2022; allowed cost of equity for the next period to be published in H2 2021 Gasunie has good cash flow visibility for its German regulated subsidiary — Gasunie Deutschland (GUD) — through 2022 under the German regulator Bundesnetzagentur's (BNetzA) determination for the current regulatory period (2018-22).
Overall, we view the determination as credit positive for GUD. We expect GUD will continue to be able to outperform regulatory cost allowances, given the company's high cost efficiency status (its 100% individual efficiency score was reconfirmed) and the lower assumed annual cost-efficiency improvement for the sector (0.49% per year, compared with 1.5% per year in the earlier regulatory period, which spanned over 2013-17). However, because of changes in the regulatory framework for the current period, we expect the extent of additional earnings from outperforming regulatory allowances to be reduced, as illustrated by the €150 million impairment of Gasunie's German operations in its 2017 results3 (the reference year or “photo” year for the cost base for the current regulatory period is 2015, which means that the efficiency savings achieved by GUD at the start of the decade are reflected in the allowance; and aside from EUGAL, GUD has limited scope to receive early payments for large investment projects).
While GUD's cost of equity allowance (cost of debt is a pass-through item4) is around two percentage points lower for the current regulatory period than that in the earlier regulatory period5, cash flow will decline only slightly. We estimate that a one-percentage- point change in the cost of equity allowance equates to an around €5 million EBITDA impact per year, equivalent to around 0.1%-0.2% of Gasunie's FFO/net debt, which indicates that GUD accounts for only around 20% of Gasunie's regulated EBITDA over 2018-21. BNetzA's decision on allowed returns in the third regulatory period was formally confirmed on 9 July 2019 by Germany's highest court (Bundesgerichtshof), which ruled that the regulator followed an appropriate methodological approach in setting the allowance. The court's judgement concludes the legal proceedings initiated by most of the network companies, which argued that the allowed returns did not adequately reflect all market evidence, and reversed a previous decision by the higher regional court in Düsseldorf from March 2018 (see High court backing for regulator's view of equity returns is credit neutral, July 2019, for more information).
6 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 10 Comparison of Gasunie's regulated businesses' allowed returns Netherlands (ACM) Germany (BNetzA) 2017-2021 2022-2026 Amended Original Method Method Method Method Decisions Decisions Decisions Decisions 2nd period 3rd period 2014-16 (2016) (2021) (2022) (2026) 2013-17 2018-22 Risk-free rate 2.50% 2.50% 1.33% Risk premium 1.20% 0.93% 0.81% Interest rate bond index utilities 1.34% 1.03% Transaction fee 0.0015 0.15% 0.15% 0.15% 0.15% Cost of debt 3.85% 3.58% 2.29% 1.49% 1.18%
Risk-free rate 2.50% 1.28% 1.28% 0.16% 0.16% 3.80% 2.49% Market risk premium 5.00% 5.05% 5.05% 5.00% 5.00% 5.44% 3.80% Asset Beta 0.35 0.44 0.42 0.39 0.39 n/a n/a Equity Beta 0.61 0.78 0.74 0.63 0.63 0.66 0.83 Equity risk premium 3.06% 3.94% 3.74% 3.15% 3.15% 3.59% 3.15% Cost of Equity (post-tax) 5.56% 5.21% 5.02% 3.33% 3.33% 7.39% 5.64% Cost of Equity (pre-tax) - new assets 9.05% 6.91% Inflation factor 1.56% 1.46% Cost of Equity (pre-tax) - old assets 7.41% 6.95% 6.69% 4.44% 4.44% 7.14% 5.12%
Gearing 50% 50% 50% 44.62% 44.62% 60% 60% Tax 25% 25% 25% 25.00% 25.00% 18% 18%
Calculated WACC (nominal, pre-tax) 5.63% 5.26% 4.49% 3.12% 2.99% Inflation assumption 2.00% 0.77% 1.42% 1.70% 1.70% Calculated WACC (real, pre-tax) 3.56% 4.46% 3.03% 1.42% 1.29% Allowed WACC (real, pre-tax) 3.6% 4.5% 3.0% n/a n/a Allowed WACC (nominal, pre-tax) 3.1% 3.0% n/a n/a
(1) In Germany, the cost of debt is included in the overall total expenditure allowance that is subject to the efficiency target. For investment budgets, the cost of debt is a pass-through item. (2) Under the German regime, the cost of equity allowance differs for assets acquired or built before 2006 (old assets) and after 2006 (new assets). Old assets receive a real equity return adjusted for inflation; new assets receive a nominal return. (3) Under the Dutch regime, the WACC reduces in gradual steps over the 2017-21 regulatory period. (4) Data shown for the Netherlands is for existing assets; the allowed return for new assets will decrease from 3.8% (2016) to 3.0% (2021) over 2017-21 and is proposed at a fixed rate of 2.9% for 2022-26. Sources: ACM, BNetzA and Moody's Investors Service
Reduced cash flow predictability of earnings from its unregulated business Over 2017-20, Gasunie derived 10% of its operating profit from its participations in unregulated businesses, which we view as having a higher business risk profile than its regulated transmission activities. BBL Company V.O.F. (BBL, a two-way gas pipeline between the Netherlands and the UK) and EnergyStock B.V. (a gas storage facility in the Netherlands) account for most of this segment's operating result, although the group also receives significant dividends from Gate terminal C.V. (an import terminal for liquefied natural gas [LNG] in Rotterdam) and NordStream (a gas pipeline in the Nordic Sea) — together totalling €45 million in 2020. Most of this segment's earnings primarily stem from long-term contracts.
However, the cash flow predictability of Gasunie's unregulated business has decreased as some of the existing long-term contracts in the company's participations have rolled off, for example, a significant proportion of the long-term contracts on the BBL pipeline expired in December 2016, and are replaced by short-term contracts; and because of Gasunie's investments in technologies to accelerate the transition to a carbon-neutral energy supply.
7 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 11 Earnings from participations have fallen in recent years, primarily because of the expiry of long-term contracts on the BBL pipeline
Participations operating result (Energy Stock and BBL) Dividends received from Gate terminal & Nord Stream 200 180 38 160 140
120 39 100
€ million 80 147 43 77 60 47 45 100 40 55 20 40 37 40 0 2015 2016 2017 2018 2019 2020 Participating operating result is after consolidation. Sources: Gasunie and Moody's Investors Service
Gasunie's modest capital spending programme could significantly increase if its Vision 2030 plan to develop hydrogen, heat and carbon is implemented In addition to the maintenance of existing networks, Gasunie's current capital programme consists mainly of measures required to maintain security of supply in the context of the decreasing gas production of the Groningen gas field, which will be switched to stand- by in 2022 before closing permanently over 2025-28. The gas produced at Groningen is unique (low calorific gas or L-gas containing high levels of nitrogen, compared with high calorific gas or H-gas produced in the UK, Norway or Russia). An entire regional gas system had been built on this type of gas. Measures implemented by Gasunie include converting part of the network to H-gas, building nitrogen facilities to create L-gas by adding nitrogen to H-gas, and reducing export of and demand for L-gas. The bulk of these projects will be realised by 2022, and their cost is relatively limited in the context of Gasunie, with the largest investment in an additional nitrogen facility over 2020-21, amounting to around €500 million of investment which will be included in the RAB.
In early 2020, Gasunie developed an outlook for the next decade called Vision 2030, in which it detailed its ambition to transform itself from a gas transmission company into a broad energy infrastructure company (including hydrogen, green gas, heat and carbon) to play a key role in the energy transition of the European Union (EU) and its countries of operation. The company plans to develop several parts of the value chain for each of these energy sources (see Exhibit 12) as natural gas use decreases and hydrogen becomes the most important energy source for Gasunie over time (see Exhibit 13).
8 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 12 Exhibit 13 Gasunie's target role in the value chain by 2030, by industry Gasunie plans to transform into a multi-energy infrastructure operator, with an increasing focus on hydrogen Certification Distribution Conversion Production Transport Services Storage
Natural gas LNG Green gas Hydrogen CCUS Heat
CCUS: Carbon Capture Utilisation and Storage. Source: Gasunie
CCUS: Carbon Capture Utilisation and Storage. Source: Gasunie
While it plans to invest along with partners, Gasunie estimates its share of total investment cost, including natural gas and LNG, through 2030 to reach up to €7 billion. Investment decision on any of the projects has yet to be made. Gasunie expects most of the projects to be immediately or progressively subject to regulation and the rest to be long-term contracts with companies in the market.
These investments will have a significant impact on Gasunie's future risk profile, which will depend, in particular, on the future use of these energy sources by consumers and industries, the regulatory frameworks, if any, governing them, how they are financed, and potential grants or subsidies received. If all projects are implemented, and even if hydrogen and heat get regulated (Gasunie's base case), the share of the company's regulated assets is set to decrease to 75%-80% from 85% in 2020, based on Gasunie's estimates, a credit negative.
Gasunie will maintain a solid financial profile over the next five years, but implementation of Vision 2030 could lead to a weakening We expect Gasunie to continue to maintain a solid financial profile until 2026, with FFO/net debt above 22% from 2022, in line with our ratio guidance for the existing ratings. Our projections currently exclude the impact of Vision 2030 as investment decisions have not been made and the financing of these projects have not been decided. We expect the company's FFO to reach around €780 million in 2022 and remain above €650 million per year through 2026, benefitting from the front-loading of cash for its Dutch regulated operations. We also expect Gasunie's dividends to be €200 million-€300 million per year (under the group's current dividend policy of 70% of net income, normalised for impairments) and capital spending (excluding Vision 2030) to be €250 million-€350 million per year, both until 2026.
Gasunie has a relatively low level of leverage (net debt/fixed assets was 39.6% as of December 2020), and the evolution of its leverage will depend on its use of the additional cash flow stemming from the move to nominal return and accelerated depreciation for its Dutch regulated assets over the regulatory period 2022-26. Following these methodology changes, Gasunie's RAB will decrease as depreciation will exceed investments and will no longer be revalued for inflation.
9 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 14 Exhibit 15 We expect FFO/net debt to increase in 2022 at the start of the next ...and net debt/fixed assets to continue to decrease Dutch regulatory period...
FFO / net debt minimum guidance for a3 Net debt / fixed assets maximum guidance for a3 30% 60%
25% 50%
20% 40%
15% 30%
10% 20%
5% 10%
0% 0% 2016 2017 2018 2019 2020 2021F 2022F 2023F 2024F 2016 2017 2018 2019 2020 2021F 2022F 2023F 2024F Source: Moody's Investors Service Source: Moody's Investors Service
The impact of Gasunie's Vision 2030 has yet to be determined and is excluded from the financial metrics shown in Exhibits 14 and 15. The impact of the Vision 2030 projects on Gasunie's financial metrics will depend on the timing and scale of their earnings; the company's share of ownership in these projects; the type of financing put in place; and the potential subsidies and grants received.
Strong implicit support from its owner, the Dutch government, results in a two-notch uplift from its standalone credit quality Gasunie's A1 ratings incorporates a two-notch uplift from its standalone credit quality or a3 BCA based on its 100% ownership by the Dutch government and its strategic importance to the national energy policy. We assume strong support and high dependence for government-related issuers under our Government-Related Issuers Methodology, published in February 2020.
Gasunie's permanent shareholdings by the State of the Netherlands, represented by the Ministry of Finance, are periodically evaluated by the Dutch government, at least once every seven years. The latest re-evaluation concluded earlier this year, and the report stated that “state ownership of shares in Gasunie has significant added value when it comes to the safeguarding of public interest”. The increased importance of GTS in delivering the national energy policy, both at Groningen and in achieving ambitious long-term decarbonisation objectives, was also highlighted. A new climate agreement (Klimaatakkoord) was presented on 28 June 2019. The
climate agreement aims to reduce CO2 emissions in the Netherlands by setting a national reduction goal of 49% by 2030, compared with the level in 1990.
ESG considerations The EU has committed to reduce greenhouse gas emissions by 40% from the 1990 levels and increase the contribution of renewables to energy demand to 27% by 2030. These targets, agreed in 2014, formed the basis of the EU's Nationally Determined Contributions incorporated into the Paris Agreement and are designed to significantly decarbonise the region's economies. The Netherlands has committed to ambitious climate targets, including a 49% reduction in greenhouse gas emissions by 2030, a 95% reduction by 2050 and 100% carbon-neutral electricity supply by 2050. The Dutch government also decided to decrease the production from Gasunie's Groningen field to zero as soon as possible.
Decarbonisation is raising questions about the long-term future of gas transmission operators in some developed countries. Gasunie has high exposure to decarbonisation risk, compared with its electric and gas network peers in Europe, but the Dutch regulator moderated its risk exposure through methodology changes for the period 2022-26, which will front-load cash flow for Gasunie and reduce the risk of stranded assets. The re-use of natural gas assets for hydrogen would also reduce this risk.
10 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Liquidity analysis Gasunie's liquidity benefits from the stable and predictable cash flow generated by its regulated businesses in the Netherlands and Germany; a cash balance of €18 million as of 31 December 2020; and a fully undrawn committed credit facility of €600 million containing no financial covenants and maturing in April 2026 with a one-year extension option remaining.
Gasunie entered an agreement with the European Investment Bank (Aaa stable) in March 2020 regarding a €240 long-term loan for the development of a nitrogen installation in Zuidbroek. The applicable interest rate will be determined when Gasunie draws the loan. As of 31 December 2020, the loan had yet to be drawn.
Exhibit 16 Gasunie's debt maturity profile as of 31 December 2020
Bond EIB ST loan RCF availability 1200
1000
800
600 € million
400
200
0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Sources: Gasunie and Moody's Investors Service
11 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Rating methodology and scorecard factors Gasunie is rated under our Regulated Electric and Gas Networks methodology, published in March 2017, and Government-Related Issuers Methodology, published in February 2020. Gasunie's scorecard-indicated outcome is A2 on a historical basis and in our forward view. The assigned BCA of a3 reflects Gasunie's incremental risk, compared with that of its peers, posed by the material contribution of its unregulated businesses to group earnings.
Exhibit 17 Rating factors N.V. Nederlandse Gasunie
Moody's 12-18 Month Forward Current View Regulated Electric and Gas Networks Industry [1][2] FY 12/31/2020 As of 5/4/2021 [3] Factor 1 : Regulatory Environment and Asset Ownership Model (40%) Measure Score Measure Score a) Stability and Predictability of Regulatory Regime A A A A b) Asset Ownership Model Aa Aa Aa Aa c) Cost and Investment Recovery (Ability and Timeliness) A A A A d) Revenue Risk A A A A Factor 2 : Scale and Complexity of Capital Program (10%) a) Scale and Complexity of Capital Program A A A A Factor 3 : Financial Policy (10%) a) Financial Policy Baa Baa Baa Baa Factor 4 : Leverage and Coverage (40%) a) FFO Interest Coverage (3 Year Avg) 9.4x Aaa 9.3x - 13.5x Aaa b) Net Debt / Fixed Assets (3 Year Avg) 42.2% Aa 37% - 39% Aa c) FFO / Net Debt (3 Year Avg) 19.7% A 19% - 23% A d) RCF / Net Debt (3 Year Avg) 12.8% Baa 12% - 14% Baa Rating: Scorecard-Indicated Outcome A2 A2 a) Actual BCA Assigned a3 Government-Related Issuer a) Baseline Credit Assessment a3 b) Government Local Currency Rating Aaa c) Default Dependence High d) Support Strong e) Actual Rating Assigned A1
[1] All ratios are based on adjusted financial data and incorporate Moody's Standard Adjustments for Non-Financial Corporations. [2] As of December 2020. [3] This represents Moody's forward view, not the view of the issuer, and unless noted in the text, does not incorporate significant acquisitions and divestitures. Source: Moody's Financial Metrics™
12 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Appendix
Exhibit 18 Peer comparison
N.V. Nederlandse Gasunie Enexis Holding N.V. Amprion GmbH National Grid Gas Plc Gas Networks Ireland A1 Stable Aa3 Stable Baa1 Stable Baa1 Stable A3 Positive FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE (in USD million) Dec-18 Dec-19 Dec-20 Dec-18 Dec-19 Dec-20 Dec-17 Dec-18 Dec-19 Mar-18 Mar-19 Mar-20 Dec-17 Dec-18 Dec-19 Revenue 1,477 1,431 1,566 1,706 1,669 1,730 14,611 16,278 16,059 1,889 1,588 1,508 535 575 526 EBITDA 918 1,006 1,037 897 825 742 486 598 600 1,241 901 875 351 362 326 Total Assets 11,421 11,357 12,696 8,925 9,270 10,704 7,311 7,946 7,211 15,204 14,210 13,113 3,362 3,240 3,111 Total Debt 4,391 4,289 4,440 2,738 3,026 3,641 897 1,092 1,104 6,513 5,572 5,612 1,696 1,549 1,422 Net Debt 4,360 4,238 4,418 2,702 2,957 3,584 897 1,092 1,104 5,049 5,572 5,612 1,634 1,415 1,308 FFO / Net Debt 16.8% 20.9% 21.5% 25.0% 22.3% 18.7% 35.2% 48.7% 74.0% 15.4% 11.7% 12.4% 18.9% 20.3% 20.8% RCF / Net Debt 10.0% 14.9% 13.5% 20.6% 17.7% 15.1% 21.8% 38.2% 63.8% 15.4% 11.7% -10.8% 15.4% 16.3% 16.1% (FFO + Interest Expense) / Interest Expense 8.7x 9.0x 10.8x 9.9x 11.7x 13.0x 17.5x 16.7x 39.4x 6.6x 7.2x 8.9x 12.0x 12.1x 13.5x Debt / Book Capitalization 40.2% 38.9% 36.1% 35.8% 38.0% 40.1% 28.6% 32.7% 32.0% 48.5% 44.5% 49.4% 55.1% 52.7% 49.9%
All figures and ratios calculated using Moody’s estimates and standard adjustments. FYE = Financial year-end. Last 12 months = Last 12 months. RUR* = Ratings under review, where UPG = for upgrade and DNG = for downgrade. Source: Moody's Financial Metrics™
Exhibit 19 Adjusted debt breakdown N.V. Nederlandse Gasunie FYE FYE FYE FYE FYE (in EUR million) Dec-16 Dec-17 Dec-18 Dec-19 Dec-20
As Reported Total Debt 3,959 3,446 3,493 3,605 3,418
Pensions 86 88 92 109 117
Leases 76 82 94 0 0
Non-Standard Public Adjustments 144 171 162 107 94
Moody's Adjusted Total Debt 4,264 3,787 3,841 3,821 3,629
Cash & Cash Equivalents (238) (41) (27) (45) (18)
Moody's Adjusted Net Debt 4,026 3,746 3,814 3,775 3,611
(1) All figures and ratios calculated using Moody’s estimates and standard adjustments. (2) No adjustment is made for leases following the adoption of the IFRS 16 accounting standard becoming effective from 1 January 2019. Source: Moody's Financial Metrics™
Exhibit 20 Adjusted FFO breakdown N.V. Nederlandse Gasunie
FYE FYE FYE FYE FYE (in EUR million) Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 As Reported Funds from Operations (FFO) 827 647 584 716 806
Leases 7 7 13 0 0
Alignment FFO (2) 52 32 31 (29)
Unusual Items - Cash Flow 0 0 11 43 0
Non-Standard Public Adjustments 8 (7) 0 0 0
Moody's Adjusted Funds from Operations (FFO) 839 699 640 790 778
FYE = Financial year-end. Last 12 months = Last 12 months. RUR* = Ratings under review, where UPG = for upgrade and DNG = for downgrade. Source: Moody's Financial Metrics™
13 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 21 Select historical adjusted financialsN.V. Nederlandse Gasunie
FYE FYE FYE FYE FYE (in EUR million) Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 INCOME STATEMENT Revenue 1,548 1,241 1,251 1,278 1,372 % Change in Sales (YoY) -5.1% -19.8% 0.7% 2.2% 7.4% EBITDA 1,075 793 777 899 909 EBITDA margin % 69.4% 63.9% 62.2% 70.3% 66.2% EBIT 763 481 451 572 590 EBIT margin % 49.3% 38.8% 36.1% 44.8% 43.0% Interest Expense 129 90 83 99 79 Net income 520 330 386 405 366
BALANCE SHEET Net Property Plant and Equipment 8,741 8,600 8,669 8,758 9,115 Total Assets 10,347 9,932 9,991 10,118 10,376 Total Debt 4,264 3,787 3,841 3,821 3,629 Cash & Cash Equivalents 238 41 27 45 18 Net Debt 4,026 3,746 3,814 3,775 3,611 Total Liabilities 4,889 4,330 4,445 4,295 4,136 Total Equity 5,458 5,601 5,546 5,822 6,240
CASH FLOW Funds from Operations (FFO) 839 699 640 790 778 Cash Flow From Operations (CFO) 891 669 534 701 816 Dividends 332 110 259 228 288 Retained Cash Flow (RCF) 507 589 381 562 489 Capital Expenditures (301) (277) (341) (412) (337) Free Cash Flow (FCF) 258 282 (66) 61 190
INTEREST COVERAGE (FFO + Interest Expense) / Interest Expense 7.5x 8.8x 8.7x 9.0x 10.8x
LEVERAGE FFO / Net Debt 20.8% 18.7% 16.8% 20.9% 21.5% RCF / Net Debt 12.6% 15.7% 10.0% 14.9% 13.5% FCF / Net Debt 6.4% 7.5% -1.7% 1.6% 5.3% Debt / EBITDA 4.0x 4.8x 4.9x 4.3x 4.0x Debt / Book Capitalization 43.0% 39.6% 40.2% 38.9% 36.1%
FYE = Financial year-end. Last 12 months = Last 12 months. RUR* = Ratings under review, where UPG = for upgrade and DNG = for downgrade. Source: Moody's Financial Metrics™
Ratings
Exhibit 22 Category Moody's Rating N.V. NEDERLANDSE GASUNIE Outlook Stable Issuer Rating A1 Senior Unsecured -Dom Curr A1 ST Issuer Rating P-1 Source: Moody's Investors Service
14 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Endnotes 1 Since 2005 for Gasunie's Dutch operations, though the regulator started incentive-based regulation in electricity transmission from 2001, and since 2010 for Gasunie's German operations, though this started in 2009 in electricity transmission. 2 CBb method decisions 2017-21 WACC - Reformatio in peius, published 12 December 2019. 3 Of the €150 million impairment, €117 million was allocated to tangible fixed assets and €33 million to financial fixed assets, whereby the latter is Gasunie's share in NETRA, which is included in GUD's cash-generating unit. 4 Although it feeds into the overall cost-efficiency assessment. 5 6.91% compared with 9.05% for “new” (January 2006 onwards) and 5.12% for “old” (pre-2006) assets.
15 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
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16 27 May 2021 N.V. Nederlandse Gasunie: Update following ratings affirmation