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