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Rating Action:

Moody's announces impact on certain utility companies following Spain sovereign downgrade

15 Jun 2012

London, 15 June 2012 -- Moody's Investors Service has today announced multiple rating actions on the following utility issuers domiciled in Spain or with significant exposure to Spain:

- IBERDROLA /SCOTTISH POWER:

The senior unsecured ratings of Iberdrola SA and its guaranteed subsidiaries as well as Scottish Power Ltd and its subsidiaries have been downgraded to Baa1 from A3 and remain on review for further downgrade. Prime-2 ratings of affected entities have today also been placed on review for downgrade.

- ITALY-BASED ENEL AND ITS SPANISH SUBSIDIARY ENDESA:

The senior unsecured Baa1 ratings of Enel SpA and its guaranteed subsidiaries have been placed on review for downgrade, as have the Baa1 ratings of Endesa's guaranteed subsidiaries, and the Prime-2 ratings of Enel Finance International N.V., Endesa S.A. and International Endesa B.V.

- GAS NATURAL SDG SA:

The Baa2/Prime-2 issuer ratings of Gas Natural SDG SA (Gas Natural Fenosa) have been placed on review for downgrade, as have the guaranteed Baa2 debt ratings of Gas Natural Capital Markets SA and the guaranteed Prime-2 short-term rating of Union Fenosa Finance BV.

- ENAGAS SA:

The senior unsecured debt ratings have been downgraded to Baa2 from A2, while the senior unsecured issuer ratings have been downgraded to Baa3/Prime-3 from A2/Prime-1. All ratings have been placed on review for further downgrade.

- RED ELECTRICA DE ESPANA (REE) AND AFFILIATES:

The senior unsecured ratings of Red Eléctrica de España, S.A.U. (REE) and its guaranteed affiliates have been downgraded to Baa2 from A2, and remain on review for further downgrade.

Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143200 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

Today's actions follow the weakening of the Spanish government's creditworthiness, as captured by Moody's downgrade of Spain's government bond ratings to Baa3 from A3 on 13 June 2012, and the initiation of a review for further downgrade. For more details on the rationale for the sovereign downgrade, please refer to the press release http://www.moodys.com/research/Moodys-downgrades-Spains-government-bond-rating-to-Baa3-from-A3--PR_248236.

Given the multiple channels of contagion that exist between sovereign and corporate issuers, it is challenging for even strong utilities with defensive characteristics to achieve a rating of more than one or two notches higher than the sovereign rating in the country where they are domiciled. This in turn reflects the fact that, notwithstanding the utilities' defensive characteristics, the weakening of the Spanish government's creditworthiness creates a risk of contagion for issuers domiciled in or materially exposed to Spain. For more details, please refer to Moody's February 2012 Rating Implementation Guidance "How Sovereign Credit Quality May Affect Other Ratings".

RATINGS RATIONALE

- IBERDROLA/SCOTTISH POWER

Iberdrola's and Scottish Power's ratings have been downgraded to Baa1 from A3, two notches above the Spanish government's rating. As one of the country's two largest utilities, and with over 40% of its EBITDA emanating from Spain, Iberdrola cannot fully insulate itself from the macroeconomic risks associated with a weakened sovereign. At the same time, the two-notch differential with the sovereign recognises Iberdrola's scale and geographic diversification, with significant earnings stemming from broadly diversified businesses in strong economic areas outside Spain -- such as the UK, the US, as well as contributions from Brazil and Mexico. The rating also factors in the strong bias in group earnings towards lower-risk businesses, such as regulated networks (around 50% of EBITDA) and quasi-regulated businesses, principally those focused on renewable energy (around 20% of EBITDA).

The ratings remains on review for further downgrade in line with the ongoing review for further downgrade of the Spanish sovereign rating. The review will therefore take account of the outcome of Moody's review of the sovereign rating as well as the extent to which Iberdrola might be affected by the risks of contagion from a weaker sovereign, including (i) slowing economic activity; (ii) liquidity constraints and higher financing costs; (iii) scope for increased austerity measures; and (iv) increased risks of political interference.

As part of the review, Moody's will also consider the impact of measures that are expected to be announced shortly by the government for the electricity sector in order to address the tariff deficit, which could be negative for the electricity companies. At the same time, the rating agency expects that Iberdrola will consider mitigating measures to any such proposals in its updated strategic plan, which will be announced this summer once the regulatory review in Spain is published, and expects the company to continue to target a conservative financial and liquidity profile.

The ratings of the Scottish Power group are currently constrained by that of its 100% parent, Iberdrola SA, reflecting the ability of the owner to move cash around the group. However, in the event of significant sovereign-related downward ratings pressure on the Spanish parent, regulatory restrictions that are designed to ringfence its network companies (SP Manweb plc, SP Distribution Ltd and SP Transmission Ltd) and are imposed by the UK authorities in order to prevent cash outflows, could serve to maintain the ratings of these entities in the Baa rating category. In any event, further rating developments within the Iberdrola group of companies will be influenced by the extent to which these, or any other entities within the group, can be insulated from Spanish sovereign-related pressures.

The ratings could move down if (i) the Kingdom of Spain's rating were to deteriorate further, or (ii) the companies were unable to maintain their solid financial and liquidity profiles. A stabilisation of the sovereign's ratings could result in a stabilisation of the companies' ratings.

- ITALY-BASED ENEL AND ITS SPANISH SUBSIDIARY, ENDESA

Moody's decision to maintain Endesa's rating at Baa1, two notches above the sovereign, reflects (i) Endesa's position as one of the leading utilities in Spain, where it currently derives around 55% of its EBITDA ; (ii) its 92% ownership by the larger Italy-based Enel; (iii) its strong financial profile; and (iv) Endesa's significant business interests in Latin America.

The decision to initiate a review for downgrade of both Enel and Endesa's ratings is in line with the continuing review of the Spanish sovereign rating. It also reflects the fact that Endesa is a significant contributor to Enel's own earnings, thus justifying a review of the parent's ratings. Most of the group debt is held directly by the holding company Enel SpA and via its guaranteed subsidiaries. Any material pressure on cash flows emanating from Spain could negatively impact Enel given that, as of FYE 2011, the company derived around 45% of its EBITDA from Italy, 24% from Spain, and the balance from Latin America (through Endesa), renewables and other international activities.

The review for downgrade will take account of the outcome of Moody's review of the sovereign rating as well as the extent to which the companies might be affected by the risks of contagion from a weaker sovereign, including (i) slowing economic activity; (ii) liquidity constraints and higher financing costs; (iii) scope for increased austerity measures; and (iv) increased risks of political interference.

The review process will also take account of the potential impact on utilities of any measures relating to the electricity sector that the Spanish government might enact. The impact of these, and any response that Endesa may take in mitigation, will be factored into the rating.

The ratings could move down if (i) the Kingdom of Spain's rating were to deteriorate further; (ii) Enel or Endesa were exposed to further major macroeconomic shocks in other core markets; or (iii) the companies were unable to maintain their solid financial and liquidity profiles. A stabilisation of the sovereign's ratings could result in a stabilisation of the two companies' ratings.

- GAS NATURAL SDG SA

Gas Natural Fenosa's Baa2 ratings are positioned one notch above the sovereign, reflecting the company's balanced asset portfolio, which helps reduce earnings' volatility, and should to some extent insulate it from the pressures being experienced in the wider Spanish economy. The company's operations include leading positions in regulated domestic gas and electricity distribution, which generated 29% of the group's EUR1.3 billion EBITDA in 1Q 2012, as well as substantial investments abroad. These are located for the most part in Latin America, and accounted for 42% of the group's EBITDA in Q1 2012.

The review for downgrade, which is in line with that of the review for downgrade of Spain's sovereign rating, will take account of the outcome of Moody's review of the sovereign rating as well as the extent to which Gas Natural Fenosa might be affected by the risks of contagion from a weaker sovereign, including (i) slowing economic activity; (ii) liquidity constraints and higher financing costs; (iii) scope for increased austerity measures; and (iv) increased risks of political interference.

The review process will also take account of the potential impact on utilities of any measures relating to the electricity and gas sectors that the Spanish government might enact. The impact of these, and any response that Gas Natural Fenosa may take in mitigation, will be factored into the rating.

The ratings could move down if (i) the Kingdom of Spain's rating were to deteriorate further, or (ii) Gas Natural Fenosa was unable to maintain its solid financial and liquidity profile. A stabilisation of the sovereign's ratings could result in a stabilisation of the company's ratings.

- ENAGAS SA

The downgrade of Enagas's senior unsecured debt ratings to Baa2 positions them one notch above the sovereign, reflecting the company's strategic position as owner and operator of the country's gas transmission assets, its focus on domestic regulated business and its important role in delivering the country's national energy plan as well as its relatively strong financial profile. At the same time, the one-notch rating differential from the sovereign reflects the close linkages to the sovereign. Enagas's earnings are almost exclusively domestic, so it remains significantly exposed to the regulatory, fiscal and macroeconomic uncertainty in the country.

The downgrade of Enagas's issuer ratings by a further notch to Baa3/Prime-3 reflects the planned transfer by Enagas of its regulated activities and associated liabilities into its wholly-owned subsidiary Enagas Transporte SA (the 'Segregation'), pursuant to Additional Provision 31 of Law 34/1998. Enagas initiated the process of Segregation on 29 May 2012, and Moody's assumes that the transfer of substantially all of its assets and liabilities will be completed as planned in early July when the public deed relating to the Segregation is to be registered in the mercantile registry of Madrid. The three outstanding Moody's-rated bonds are to be transferred from Enagas SA to Enagas Transporte as part of the process.

Following the transfer, Enagas's principal asset and source of income will be its 100% shareholding in Enagas Transporte. The positioning of Enagas's issuer ratings at Baa3/Prime-3 accordingly takes into account structural subordination. The issuer ratings thereby reflect holding company creditors' distance from the operating companies' cash flows, and the size of current and anticipated future debt carried by the operating entities. Moody's notches the holding company's rating by one notch down from the consolidated group's credit quality, which the rating agency considers to be Baa2.

The review for downgrade, which is in line with that of the review for downgrade of Spain's sovereign rating, will take account of the outcome of Moody's review of the sovereign rating as well as the extent to which Enagas might be affected by the risks of contagion from a weaker sovereign, including (i) slowing economic activity; (ii) liquidity constraints and higher financing costs; (iii) scope for increased austerity measures; and (iv) increased risks of political interference.

The review process will also take account of the potential impact on utilities of any measures relating to the gas sector that the Spanish government might enact. The impact of these, and any response that Enagas may take in mitigation, will be factored into the rating.

The ratings could move down if (i) the Kingdom of Spain's rating were to deteriorate further, or (ii) Enagas was unable to maintain its solid financial and liquidity profile. A stabilisation of the sovereign's ratings could result in a stabilisation of the company's ratings.

- RED ELECTRICA S.A.U.(REE) AND AFFILIATES

The downgrade to Baa2 from A2 of the ratings of REE and its affiliates, placing them at one notch above the sovereign, reflects (i) REE's strategic position as the owner and operator of the country's transmission assets; (ii) its focus on domestic regulated business; (ii) its important role in executing on the country's national energy plan; as well as (iv) its relatively strong financial profile. At the same time, the one-notch rating differential with the sovereign reflects its close linkages to Spain. REE's earnings are virtually exclusively domestic, hence its continued significant exposure to regulatory, fiscal and macroeconomic uncertainty in the country.

The review for downgrade, which is in line with that of the review for downgrade of Spain's sovereign rating, will take account of the outcome of Moody's review of the sovereign rating as well as the extent to which REE might be affected by the risks of contagion from a weaker sovereign, including (i) slowing economic activity; (ii) liquidity constraints and higher financing costs; (iii) scope for increased austerity measures; and (iv) increased risks of political interference.

As part of the review, Moody's will consider the impact of measures that the Spanish government is expected to announce shortly for the electricity sector in order to address the tariff deficit, which could be negative for REE. The impact could be mitigated by a potentially lower investment plan in the future in response to more subdued demand in the Spanish electricity sector.

The ratings could move down if (i) the Kingdom of Spain's rating were to deteriorate further, or (ii) REE was unable to maintain its solid financial and liquidity profile. A stabilisation of the sovereign's ratings could result in a stabilisation of the company's ratings.

PRINCIPAL METHODOLOGIES

The principal methodology used in rating Enel, Endesa, Iberdrola, Scottish Power and Gas Natural was Unregulated Utilities and Power Companies published in August 2009. The principal methodology used in rating Red Eléctrica de España, Enagas and the Scottish Power regulated network entities (SP Manweb plc, SP Distribution Ltd,its guaranteed subsidiary, SPD Finance UK plc and SP Transmission Ltd) was Regulated Electric and Gas Networks published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

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

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings 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.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

The below contact information is provided for information purposes only. Please see the issuer page on www.moodys.com for Moody's regulatory disclosure of the name of the lead analyst and the office that has issued the credit rating

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com 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 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 the ratings disclosure page on our website www.moodys.com for further information.

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

Helen Francis
VP - Senior Credit Officer
Infrastructure Finance
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
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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

Moody's announces impact on certain utility companies following Spain sovereign downgrade
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