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I AGREE
28 Feb 2014
London, 28 February 2014 -- Moody's Investor Service has today changed to positive from stable the
outlook on the Baa2 issuer rating of Red Electrica de Espana, S.A.U.
(REE) and the Baa2 senior unsecured guaranteed debt ratings of REE's affiliates.
Concurrently, Moody's has affirmed these ratings.
The rating action follows Moody's recent decision to upgrade Spain's government
bond rating to Baa2 from Baa3 and to change its outlook to positive from
stable. For more details, please refer to Moody's press release
https://www.moodys.com/research/Moodys-upgrades-Spains-government-bond-rating-to-Baa2-assigns-positive--PR_292078.
RATINGS RATIONALE
-- OUTLOOK CHANGE TO POSITIVE FROM STABLE
Today's change of REE's outlook to positive reflects the following:
(1) as a result of the action on Spain's government bond rating,
REE's rating is no longer constrained at Baa2; and (2) Moody's
belief that, under certain reasonable scenarios, REE's financial
profile could absorb further potential negative effects of regulatory
reform such as to achieve a credit profile consistent with a Baa1 rating.
New legislation passed in December 2013 established various principles
for the revised regulation that will apply to REE's transmission
assets. These include (1) one methodology applicable to all electricity
transmission assets; (2) the remuneration for all the company's
assets will be based on their net asset value; and (3) a financial
return that will be based off the 10 year Spanish bond plus a spread.
In the first six-year regulatory period, due to end on 31
December 2019, the financial rate of return is set at 6.5%.
Nonetheless, further important details, such as the investment
and operational and maintenance benchmark unit costs on which this new
model is based and the residual life of transmission assets prior to 1998,
have yet to be established. According to REE, the Spanish
regulator should submit recommendations on these outstanding points by
April 2014, while a decision is expected from the Spanish government
by July 2014. Moody's expects REE to announce an updated
strategic plan once there is greater clarity on these issues and their
impact on its revenues.
REE has experienced a number of cuts to its earnings as a result of recent
regulatory measures introduced to rebalance the electricity system's revenues
and costs and eliminate the structural shortfall, known as the tariff
deficit, that has arisen every year. These measures have
resulted in a direct reduction in revenues of around EUR72 million in
2013, as well as a delay of one year in receiving remuneration for
newly commissioned assets.
The positive outlook reflects our view that, whilst further cuts
could place some pressure REE's earnings, nonetheless,
the company could still sustain financial metrics consistent with a Baa1
rating, such as funds from operations (FFO)/net debt comfortably
in the mid-to-high teens and retained cash flow (RCF)/net
debt comfortably in the double digits in percentage terms. This
is likely to assume no significant deviation from the company's
current capex plan of around EUR550 to 600 million per annum or a dividend
payout ratio of 65%, without compensatory measures.
Additionally, this would imply that the company can sustain a financial
profile stronger than the guidance for the Baa2 rating of ratios of at
least FFO/net debt of low-mid teens and RCF/net debt of high single
digits.
-- AFFIRMATION OF REE'S Baa2 RATINGS
The rating affirmation at Baa2 reflects the company's strategic position
as the system operator and owner of the country's transmission system
and interconnectors. The affirmation also factors in REE's focus
on domestic regulated businesses, fairly strong financial profile
and our view that REE will continue to maintain diversified sources of
liquidity such that it can withstand any periods of difficult market access
that could arise. In addition, REE maintains an important
role in executing the country's energy plan, focusing, in
particular, on securing the build out of interconnectors with France
and Portugal and improving the grid and interconnections in Spain's islands.
WHAT COULD MOVE THE RATING UP/DOWN
Positive rating pressure could develop on REE's rating, assuming
both further clarification of the regulation for transmission activities
and the company's strategy, such that Moody's believes
that the company can reasonably achieve metrics for the Baa1 guidance
as outlined above.
The outlook on the rating could stabilise in the event that (1) the regulation
is not clarified as expected over the next few months; or (2) it
appears unlikely that the company can sustain metrics indicated for a
Baa1 as a result of a greater negative impact from revised regulation
than expected, higher capex or increased shareholder returns than
those indicated; or (3) a significant deterioration in the group's
liquidity position.
Ratings affected by today's action are:
-- Long-term Baa2 issuer rating of Red Electrica
de Espana, S.A.U. (REE)
-- The backed senior unsecured Baa2 debt ratings of REE's
affiliate, Red Electrica Financiaciones, S.A.U.,
including its medium-term note (MTN) programme rated (P)Baa2
-- The backed senior unsecured MTN programme rated (P)Baa2
of Red Electrica de Espana Finance B.V.
The methodologies used in these ratings were Regulated Electric and Gas
Networks published in August 2009, and Government-Related
Issuers: Methodology Update published in July 2010. Please
see the Credit Policy 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 interconnecters. As of
fiscal year ended 2013 the company had revenues of EUR1.8 billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
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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
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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
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Please see www.moodys.com for any updates on changes to
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Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Helen Francis
VP - Senior Credit Officer
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 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 changes outlook on REE's ratings to positive; affirms Baa2 ratings
No Related Data.
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