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Rating Action:

Moody's changes REE's outlook to stable from positive; affirms ratings

14 Mar 2019

London, 14 March 2019 -- Moody's Investors Service ("Moody's") has today changed to stable from positive the outlook of Red Eléctrica de España S.A.U. (REE) and REE's financing affiliates -- Red Eléctrica Financiaciones, S.A.U. and Red Eléctrica de España Finance B.V.. At the same time, Moody's has affirmed REE's Baa1 issuer rating and the Baa1/(P)Baa1 senior unsecured guaranteed debt ratings of REE's financing affiliates.

The rating action follows the announcement by Red Eléctrica Corporación (Red Electrica Corporacion, S.A.), REE's parent company, on 12 February that it had agreed to acquire an 89.98% stake in Hispasat S.A. -- a satellite based telecommunications company operating in Europe and the Americas -- and presentation of the group's updated strategic plan for 2018-22 on 20 February, which includes an investment plan of EUR 6 billion.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

RATIONALE FOR OUTLOOK CHANGE

The change in outlook to stable from positive reflects Moody's view that (1) as a result of the debt funded acquisition of Hispasat and the large EUR 6 billion investment plan for the 2018-22 period, REE is now unlikely to demonstrate financial metrics consistent with a higher rating over the medium-term; and (2) acquisition of the satellite business will diversify group earnings but nevertheless result in a modest deterioration in overall business risk profile. The potential for modestly weaker financial metrics is illustrated by the group's revised financial targets including net debt / EBITDA of 4x, compared to the 3.5x included in its previous plan, and FFO / net debt higher than 17%.

The stable outlook takes into account the rating agency's view that the regulatory framework for REE's Spanish networks business, which accounted for more than 90% of the groups FY2018 consolidated revenue, should remain broadly unchanged in the next regulatory period beginning in January 2020, although the regulator (the CNMC) has indicated a likely cut in the allowed return to 5.58% from the current 6.5% and uncertainty remains around the future treatment of the pre-1998 asset base, which is due to be fully amortised by the end of 2022 and could lead to a reduction in regulated remuneration. However, any cut to the allowed rate of return will be partially mitigated by an adjustment to smooth changes greater than 50 basis points.

RATIONALE FOR RATING AFFIRMATION

Affirmation of the Baa1 ratings and baa1 baseline credit assessment (BCA) reflects (1) REE's monopoly position as Spain's system operator and owner of electricity transmission assets; (2) the developing track record of the regulatory framework in Spain; (3) largely predictable cash flows and balanced financial policy that underpin a solid financial profile; and (4) the moderate size of Hispasat relative to Red Eléctrica's overall business -- approximately 10% on both earnings and asset measures.

Moody's notes that whilst the planned capital investment programme for the 2018-2022 period will, together with the acquisition, weigh upon financial metrics, the majority of the planned spending is focused on REE's Spanish networks business. The group's investment strategy allocates up to EUR 1 billion for potential international investments but in stable, predictable and low-risk regulatory environments. Moody's expects that REE will continue to pursue international opportunities incrementally with deals similar to the acquisition in September 2018 of Centinela Transmisión, S.A. (which has since changed its name to Katari Transmisión, S.A.), which consists of electricity transmission assets in Chile.

The rating reflects that Spain's regulatory framework for electricity transmission continues to build a track record of stability since it was revised in 2013 and implemented from 2014. REE's transmission revenues have shown a high degree of predictability during the regulatory period ending December 2019. We also note positively the decision by the Spanish government to transfer regulatory authority to an independent regulatory -- the CNMC -- from the beginning of the next regulatory period starting in January 2020.

REE's rating also takes account of the expected modest deterioration in financial profile indicated in its 2018-22 plan with FFO / net debt expected to decline to the mid-high teens and net debt / EBITDA of 4.0x on average over the plan period relative to 3.2x at the end of 2018. In 2018, group EBITDA rose 1.3% to EUR 1,540 million; reported net debt was relatively stable at EUR 4.8 billion compared to EUR 4.9 billion in 2017. REE's leverage metrics were broadly stable as a result, with FFO / net debt rising slightly to 23.9% from 23.3% in 2018 and net debt / fixed assets of 56.3% compared to 56.2% in 2017. While Moody's estimates that the execution of REE's 2018-2022 plan will weaken the group's financial profile, the rating agency expects REE to maintain credit ratios consistent with a Baa1 rating.

As a result of its 20% ownership by SEPI (Sociedad Estatal de Participaciones Industriales), a state company of Industrial participations of the government of Spain (Baa1 stable), REE is considered a government related issuer (GRI) but receives no ratings uplift.

WHAT COULD MOVE THE RATING UP/DOWN

Positive ratings pressure is not currently anticipated, however, REE's ratings could be upgraded if the group was expected to maintain a solid financial profile, as evidenced by FFO/net debt of more than 20%, and RCF/net debt in the low teens in percentage terms.

The ratings could be downgraded in the event that its financial profile were to deteriorate substantially below Moody's current expectations - as a result of either (1) investments beyond what is currently anticipated, where not supported by commensurate balance sheet strengthening; (2) increased shareholder distributions; or (3) adverse regulatory developments -- as might be indicated by FFO/net debt and RCF/net debt declining to low-mid teens and high single digits respectively.

The methodologies used in these ratings were Regulated Electric and Gas Networks published in March 2017, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Red Electrica de Espana Finance B.V.

....Backed Senior Unsecured MTN Program, Affirmed (P)Baa1

..Issuer: Red Electrica de Espana, S.A.U.

....LT Issuer Rating, Affirmed Baa1

..Issuer: Red Electrica Financiaciones, S.A.U.

....Backed Senior Unsecured MTN Program, Affirmed (P)Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Outlook Actions:

..Issuer: Red Electrica de Espana Finance B.V.

....Outlook, Changed To Stable From Positive

..Issuer: Red Electrica de Espana, S.A.U.

....Outlook, Changed To Stable From Positive

..Issuer: Issuer: Red Electrica Financiaciones, S.A.U.

....Outlook, Changed To Stable From Positive

REE, based in Madrid, Spain, is the owner and operator of the Spanish transmission grid and its interconnectors. REE is the principal 100%-owned subsidiary of the holding company Red Electrica, Corporacion S.A. (RE Corporacion) and accounted for 93% of 2018 consolidated group revenues of €1.95 billion, and around 85% of the group's total assets. REE's revenue base is essentially domestic and as a natural monopoly, it receives a regulated return on its assets.

REGULATORY DISCLOSURES

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.

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.

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

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

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.

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

Alastair Sullivan
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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