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Exclusive-Madrilena Red de Gas draws regulatory scrutiny over capital management –sources

Illustration picture of flames from a gas burner on a cooker in France

By Andres Gonzalez, Pablo Mayo Cerqueiro and Isla Binnie

LONDON (Reuters) - Spain's markets and competition regulator is reviewing whether gas distributor Madrilena Red de Gas (MRG) has complied with legislation designed to protect the financial strength of energy distributors, according to two sources familiar with the situation.

Spain amended existing legislation in spring 2021 to ban regulated gas companies from granting loans, providing guarantees, or guaranteeing loans to related entities that fall outside the Spanish natural gas sector or that do not perform central treasury functions.

The amendment grew out of worries about the excessive indebtedness of the gas transportation and distribution networks.

In the case of MRG, the Spanish National Markets and Competition Commission's (CNMC) concerns revolve around whether the company directed funds to its controlling entity to pay dividends, the sources said.

The CNMC has not to date published a notice of regulatory action concerning MRG.

A spokesperson for MRG declined to comment when asked about a regulatory review and alleged financial transactions with its parent companies for the purpose of paying dividends.

A spokesperson for the CNMC said regulatory actions are only disclosed on its website once they are approved by its Regulatory Oversight Board or in plenary after an initial review.

"The CNMC carries out its regulatory and supervisory functions in regulated activities by taking the appropriate actions within the scope of its competences," the spokesperson said in a emailed statement, without providing further detail, when asked about a review of MRG.

Company filings for 2021 show MRG had in 2019 approved the extension of a loan to Elisandra Spain V, its immediate parent, for up to 1 billion euros ($1.08 billion).

By the end of 2021, Elisandra Spain V had drawn down 312 million euros of that loan, up from 201 million euros at the end of the previous year, with part of the additional funds taken in November, the filings show.

The filings also show that MRG's ultimate parent Elisandra Spain IV - Elisandra Spain V's sole owner - paid dividends totalling more than 104 million euros to its shareholders.

Reuters could not determine the intended purpose of the loan to Elisandra V, where the funds for the dividends originated, nor which payments are being reviewed by the regulator.

If MRG is ultimately found to have engaged in wrongdoing, then the law allows for fines up to 10% of annual turnover, depending on the gravity of the infringement.

Elisandra IV's main shareholders include Dutch pension fund PGGM and Chinese sovereign fund Ginkgo Tree Investment Ltd., each with a 33.75% stake, as well as the EDF Invest arm of French electric utility EDF with 20%, and the UK's LPPI Infrastructure Investments with 12.5%, according to the company filings.

Spokespeople for EDF, PGGM and LPPI declined to comment when asked if the CNMC was reviewing whether MRG had infringed local legislation in relation to the loan and shareholder payouts.

Two Gingko Tree employees listed on LinkedIn did not return messages. The Chinese company also did not respond to a letter seeking comment delivered to its London office.

At the end of 2021, MRG carried 925.5 million euros of net adjusted financial debt on its balance sheet, 6.55 times its earnings before interest, taxes, depreciation and amortisation (EBITDA), per its latest annual accounts.

($1 = 0.9229 euros)

(Additional reporting by Benjamin Mallet and Toby Sterling; Editing by Elisa Martinuzzi and Kirsten Donovan)