Naturgy Energy Group S.A.

S&P Global Ratings' stable outlook on Spain-based vertically integrated gas and electricity utility Naturgy incorporates our expectation that, over 2019-2020, the company will maintain funds from operations (FFO) to debt of over 18%. We also consider the group's commitment to cost-cutting, which should compensate for the aggressive and inflexible shareholder remuneration policy established as part of the 2018-2022 strategic plan. We could downgrade Naturgy if its adjusted FFO to debt does not remain above 18% over 2019-2020, or if its operating performance deteriorates. The fixed and aggressive dividend policy over 2018-2022 leaves Naturgy limited headroom for underperformance. We will closely monitor, in particular, Naturgy's performance in gas, power, service sales, and the LNG businesses, given the company's weak results in

...Naturgy Energy Group S.A.'s (Naturgy's) cashflows are stable and predictable thanks to its fully regulated electricity and gas distribution activities (67% of 2018 EBITDA). The company's credit profile benefits from a higher contribution from fully regulated activities in Spain, Latin, and Central America than for other European integrated utility players. Naturgy's gas, power, service sales, and international LNG (about 33% of 2018 EBITDA) continue to suffer as a result of a weak operating performance and increasing competition. Despite strong results in 2018 thanks to lower procurement costs and better pricing environment in LNG, we see some potential long-term risks of underperformance in the business division. Naturgy is a relatively small player in LNG, thus not fully benefiting from economies of scale and vertical integration in the gas value chain, and is exposed to gas price fluctuations in the service sales business. Naturgy stands out among European integrated utilities due to...

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