Naturgy Energy Group S.A.

The stable outlook factors in our belief that Naturgy should maintain FFO to debt of over 18% in 2020-2022, with a dip in 2020. We also consider the group's commitment to cost-cutting and its share buyback flexibility. This should compensate for the aggressive and inflexible shareholder remuneration policy under the 2018-2022 strategic plan. The outlook also reflects our expectation that the company might further adjust its share buyback program if recovery is not as strong as anticipated, to protect its credit metrics. We could downgrade Naturgy if its adjusted FFO to debt does not recover to above 18% over 2020-2021, or if its operating performance deteriorates. The fixed and aggressive dividend policy over 2018-2022 leaves the company limited headroom for

...Cash flows from fully regulated electricity and gas distribution activities (70% of 2019 EBITDA) are stable. Naturgy Energy Group S.A.'s credit profile benefits from fully regulated activities in Spain, and Latin and Central America, which is higher than that of other European integrated players. Gas, power, and service sales and international LNG (about 22% of 2019 EBITDA) suffer from weak operational performance and increasing competition. Low gas prices will pressure the profitability of the LNG and gas-supply businesses in the short and medium terms. We expect declining power prices in Spain to hurt Naturgy's power generation business in Iberia, which is mainly merchant and has less than 70% hedged production for 2020, with spot electricity prices expected to remain well below 40 per megawatt-hour (MWh) in 2020 (about 20% below the 2019 price level). Due to COVID-19 lockdown measures in Spain, S&P Global Ratings expects power and gas volumes to be 5%-7% lower in 2020. The company has...

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