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Rating Action:

Moody's changes outlook on REE's ratings to positive; affirms Baa2 ratings

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, 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 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 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 rating action, and whose ratings may change as a result of this 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.

These rated entities or related third parties did not participate in the rating process. Moody's was not provided, for purposes of the rating, access to books, records and other relevant internal documents of the rated entity or related third party.

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

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.

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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