(Adds detail on deal, background)
By Freya Berry and Andrés González
LONDON/MADRID, March 4 (Reuters) - Three bidding groups have entered the second round in the race for Spanish natural gas distributor Madrilena Red de Gas, majority owned by Morgan Stanley, three sources familiar with the matter said on Wednesday.
Canada's CPP is bidding alongside German insurer Allianz and the Abu Dhabi Investment Authority (ADIA) for the asset, estimated to be worth between 1.2 billion euros ($1.3 billion) and 1.8 billion including some 500 million euros of debt.
Canada's PSP and European fund manager Arcus have also teamed up to make an offer, while a third group comprises Chinese state fund Gingko Tree and Dutch pension fund PGGM, the sources said.
Madrilena Red de Gas, Morgan Stanley, Allianz and ADIA declined to comment. Arcus, CPP, Gingko Tree, PSP and PGGM were not immediately available to comment.
Citi is selling the asset, which is majority owned by Morgan Stanley's infrastructure arm. Citi declined to comment.
The U.S. bank has also toyed with a stock market flotation for the company, but has decided it could get a better price through a sale, one of the people said.
Madrilena Red de Gas has some 5,350 kilometres of pipelines and had core earnings (EBITDA) of 149.2 million euros in 2014. Last July Spain introduced major reforms in the gas sector aimed at cutting gas transport and distribution fees, and ensuring stability in a system that has struggled with both excess supply and capacity.
Madrilena originally comprised of gas supply and distribution activities. It was bought from Gas Natural by Galp Energia and Morgan Stanley in 2010 for a total of 800 million euros, after regulators forced a sale.
Galp Energia took on the supply businesses, while Morgan Stanley bought the distribution assets.
($1 = 0.8992 Euros) (Editing by Pamela Barbaglia and David Holmes)