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Rating Action:

Moody's affirms Iberdrola Finanzas SAU's Baa1 and Aaa.mx ratings

 The document has been translated in other languages

26 Apr 2016

Mexico, April 26, 2016 -- Moody's de Mexico has today affirmed the Baa1 and Aaa.mx NSR ratings of the MXN 1,500 million backed Certificados Bursatiles due 2018 of Iberdrola Finanzas S.A.U. (Iberdrola Finanzas). The outlook was changed to positive from stable on the Baa1 ratings of Iberdrola Finanzas in a rating action released out of Moody's Investors Service on 25 April 2016. The NSR carries no specific outlook.

RATINGS RATIONALE

The rating action was driven by the affirmation and the change of outlook to positive from stable of the global scale ratings of Iberdrola S.A. (Iberdrola) and Iberdrola Finanzas S.A.U., a wholly-owned subsidiary of Iberdrola.

"Our decision to change the outlook on Iberdrola's ratings to positive is based upon the progress of the group over 2015, which enabled it to meet its 2014-16 financial targets a year early, and the outlook for further growth and consolidation of its financial profile. The outlook change also factors in the more settled regulatory backdrop in Spain, and takes account of the group's new 2016-20 strategy plan. Although the group's strategy provides for a significant increase in capital investment and higher returns to shareholders, Moody's estimates that Iberdrola could over time be in a position to deliver its plan while achieving funds from operations (FFO)/net debt sustainably in the 20s in percentage terms, which Moody's sees as consistent with an A3 rating given the prospective development of its business mix towards more regulated and contracted earnings, and broader geographical diversification," says Niel Bisset, a Moody's Senior Vice President and lead analyst for Iberdrola.

The group's EBITDA increased by 4.9% in 2015 to EUR7.3 billion, with steady contributions from networks and stronger performances in renewables and contracted generation offsetting weaker profitability in liberalised generation and supply, which was adversely affected by lower output in Spain and higher taxes in the UK. Reported net financial debt increased to EUR28.1 billion at end-2015 from EUR25.6 billion at end-2014, mainly because of the EUR2.4 billion additional debt associated with the acquisition of UIL, which completed in December 2015. On a reported basis funds from operations (FFO)/net debt weakened slightly to 19.2% in 2015, from 19.6% in 2014, although adjusted for UIL-linked financial debt, Moody's estimates that the FFO/net debt ratio strengthened a little to more than 20%.

The outlook change balances a more settled regulatory backdrop in Spain (where Iberdrola generated 45% of group EBITDA in 2015) against the political risk stemming from the ongoing delay in forming a government following elections last December. Overall, Moody's considers the group's visibility on domestic earnings has improved given that: (1) the electricity system's annual tariff deficit has been eliminated, with a surplus of €550 million reported for 2014, and another surplus estimated in 2015; and (2) the electricity distribution regulatory framework moved a step closer to completion in December 2015 with the publication of the investment, operational and maintenance benchmark unit costs for electricity distribution activities.

The positive outlook takes account of Iberdrola's new strategic plan 2016-20 which provides for (1) a capex programme of €24.1 billion net over the five year period. Average annual investment will rise by at least 50% to €4.8 billion, of which growth capex is €3.4 billion; and (2) a rising dividend pay-out in the range 65%-75% of net income. Overall, we expect Iberdrola's business risk profile to develop favourably over the plan period, notwithstanding some increase in execution risk, and to continue the shift towards geographical diversification and a lower dependence on commodity-linked earnings. The group estimates that the share of EBITDA contributed by networks, renewables and regulated generation will rise to 81% in 2020, from 75% in 2015; and that it will become more geographically diversified with the contribution from Spain expected to reduce to around a third in 2020, from 45% in 2015. On the downside, the plan implies some increased execution risk in Moody's view, because: (1) the bulk of the investment is in the early years of the plan and could present operational challenges; and (2) €3.5 billion in aggregate is directed at offshore wind, which is relatively risky to build. Although Moody's notes that risk is moderated by the regulated nature of investment into networks, and by the sequential approach to its off-shore wind projects.

Moody's estimates that the group will be free cash flow negative in the early years of the plan because of increasing investment and a rising dividend pay-out, with debt expected to rise gradually from €28.1 billion at end-2015, before declining towards the end of the plan period. The positive outlook reflects that the group may nevertheless, in Moody's view, be able to sustain a financial profile aligned with an A3 rating if it is able to grow earnings sufficiently quickly.

The positive outlook reflects Moody's view that Iberdrola's capital investment plan and dividend policy could be compatible with a financial profile which is sustainably consistent with minimum ratio guidance for an A3 rating: including FFO/net debt above 20%, and retained cash flow (adjusted for the annual share buyback) (RCF)/net debt in the mid-teens in percentage terms.

AFFECTED RATINGS:

Affirmations:

..Issuer: Iberdrola Finanzas, S.A.U.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1, Aaa.mx

WHAT COULD MOVE THE RATINGS UP/DOWN

The NSR rating could be downgraded following a downgrade of the global scale ratings of Iberdrola Finanzas, however we consider this unlikely given the positive outlook on Iberdrola Finanzas' global scale ratings. Although not expected, ratings could be downgraded if the Iberdrola group's financial profile were to deteriorate such that FFO/net debt and RCF/net debt weakened to the mid-teens and low double digits in percentage terms respectively.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Ratings Methodologies page on www.moodys.com.mx for a copy of this methodology.

The period of time covered in the financial information used to determine Iberdrola Finanzas, S.A.U.'s rating is between 2010 and 2015 (source: Audited Annual Financial Statement of Iberdrola S.A.).

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

Headquartered in Madrid, Spain, Iberdrola Finanzas, S.A.U., is a financing subsidiary of Iberdrola S.A. (one of the world's leading energy providers). Iberdrola SA, is one of the world's leading energy providers. It reported group EBITDA of approximately EUR7.3 billion in 2015.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's information.

The rating has been disclosed to the rated entity prior to public dissemination.

A general listing of the sources of information used in the rating process, and the structure and voting process for the rating committees responsible for the assignment and monitoring of ratings can be found in the Disclosure tab in www.moodys.com.mx.

The date of the last Credit Rating Action was 12/02/2016.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.mx.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

This Rating is subject to upgrade or downgrade based on future changes in the financial condition of the Issuer/Security, and said modifications will be made without Moody's de México S.A. de C.V accepting any liability as a result.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on www.moodys.com.mx for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com.mx for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see our website www.moodys.com.mx for further information.

Please see www.moodys.com.mx for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

The ratings issued by Moody's de Mexico are opinions regarding the credit quality of securities and/or their issuers and not a recommendation to invest in any such security and/or issuer.

Please see the ratings tab on the issuer/entity page on www.moodys.com.mx for additional regulatory disclosures for each credit rating.

Niel Bisset
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's affirms Iberdrola Finanzas SAU's Baa1 and Aaa.mx ratings
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