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Rating Action:

Moody's changes outlook on REE's Baa1 ratings to positive from stable; affirms ratings

17 Apr 2018

London, 17 April 2018 -- Moody's Investor Service (Moody's) has today changed to positive from stable the outlook on the Baa1 issuer rating of Red Electrica de Espana, S.A.U. (REE). Moody's also changed to positive from stable the outlook on the Baa1/(P)Baa1 senior unsecured guaranteed debt ratings of REE's affiliates. At the same time, Moody's has affirmed all of these ratings.

The rating action follows Moody's recent decision to upgrade Spain's government bond rating to Baa1 from Baa2 with stable outlook. For more details, please refer to Moody's press release https://www.moodys.com/research/--PR_381868.

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

RATINGS RATIONALE

RATIONALE FOR RATING AFFIRMATION AND OUTLOOK CHANGE

The outlook change to positive recognises that REE's ratings could be positioned at one notch above the Government of Spain's rating, and reflects: (1) the group's consistent and measured 2014-19 growth strategy, which emphasises investment in Spain's regulated transmission network, but also provides for investment in new activities outside its core domestic regulated business; (2) the developing track record of Spain's regulatory framework; and (3) REE's solid financial position, as reflected in average funds from operations (FFO)/net debt and retained cash flow (RCF)/net debt of 22.1% and 13.4% respectively over 2015-17.

The positive outlook also factors in (1) the possibility that a potential acquisition of Hispasat S.A., the satellite operator in which REE has expressed an interest, could, if carried out, be accommodated such as to maintain a credit profile consistent with an A3 rating; and (2) that while the next regulatory period may see a reduction in allowed returns, its impact may be mitigated, including by actions by the company.

The Baa1 rating factors in that REE's earnings will remain predominantly derived from its domestic regulated electricity transmission business in Spain, notwithstanding that the group's strategy provides for sizeable investment in international and domestic energy storage assets. Having invested approximately EUR1.7 billion in the domestic network over 2014-17, the group's plan provides for up to EUR1.4 billion more to be invested over the next two years, although expenditure is likely to fall short of that because of delays in obtaining approvals. With respect to overseas investment, following the completion in 2017 of the Mejillones-Cardones transmission line in Chile, Moody's expects that REE will continue to pursue international opportunities incrementally, with deals similar to the recently awarded Tintaya-Azangaro project in Peru.

The rating reflects that Spain's regulatory framework for electricity transmission continues slowly 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 in December 2019. Moody's assumes the framework will remain consistent in its essentials into the next regulatory period from January 2020, although there may be changes to certain parameters. With respect to a variation in the allowed rate of return from 2020, reflecting an updated average government bond yield, Moody's notes that the regulatory adjustment mechanism would smooth any potentially negative impact on allowed revenues, thereby providing REE scope to take compensatory action if necessary.

REE's rating takes account of its solid financial profile and its financial policy which balances annual 7% dividend growth and average net debt/EBITDA of 3.5x over the plan period. In 2017 the group's EBITDA rose 2.3% to EUR1,519 million; reported net financial debt declined to EUR4.8 billion, from EUR4.9 billion in 2016 thanks to lower capital investment and reduced working capital. REE's leverage metrics improved as a result, with FFO/net debt rising to 23.3% in 2017 from 21.5% in 2016, and net debt/Fixed assets declining to approximately 56% from 58%. Moody's estimates that in carrying out its plan over 2018-19 (ie excluding a material investment) REE should be able to maintain FFO/net debt in excess of 20%, and that RCF/net debt should remain in the low double digits in percentage terms notwithstanding a rising dividend pay-out.

The positive outlook reflects Moody's view that REE's scale, growth trajectory, business mix and financial profile could, if sustained, allow it to achieve a credit profile aligned with an A3 rating - potentially even if it were to make a substantial investment outside the scope of its 2014-19 growth 'envelope' and core business.

WHAT COULD MOVE THE RATING UP/DOWN

REE's ratings could be upgraded, given its current business mix, if the group was to continue to show a solid financial profile -- including FFO/net debt of more than 20%, and RCF/net debt in the low teens in percentage terms. If the potential acquisition of Hispasat were to proceed, Moody's would re-evaluate ratio guidance in light of the changed business profile.

The outlook could be stabilised if the company's financial profile was to be more consistently aligned with a Baa1 rating, including FFO/net debt and RCF/net debt in the mid-high teens and double digits in percentage terms. Although not expected, REE's rating would come under negative pressure in the event that its financial profile were to deteriorate substantially below our current expectations - as a result of either (1) a more aggressive management strategy in terms of larger investments or shareholder distributions; or (2) 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.

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 Regular Bond/Debenture, Affirmed Baa1

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

Outlook Actions:

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

....Outlook, Changed To Positive From Stable

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

....Outlook, Changed To Positive From Stable

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

....Outlook, Changed To Positive From Stable

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

REE, based in Madrid, Spain, is the owner and operator of the Spanish transmission grid and its interconnectors. In the year ended 2017 the company had revenues of EUR1,941 million.

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.

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
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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