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Rating Action:

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

12 Dec 2013

London, 12 December 2013 -- Moody's Investor Service has today changed to stable from negative the outlook on the Baa2 issuer rating of Red Eléctrica de España, 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 affirm Spain's Baa3 government bond rating and to change its outlook to stable from negative. For more details, please refer to Moody's press release https://www.moodys.com/research/Moodys-changes-outlook-on-Spains-Baa3-government-bond-rating-to--PR_287655.

RATINGS RATIONALE

-- OUTLOOK CHANGE TO STABLE FROM NEGATIVE

Today's change of REE's outlook to stable reflects (1) the outlook change to stable on Spain's government bond rating; and (2) Moody's view that REE's fairly strong financial profile should be able to absorb the potential negative effects of further regulatory reform of the electricity sector in relation to transmission and system operation activities and still maintain a financial profile consistent with its Baa2 rating.

The Spanish government's electricity market reform is yet to be finalised. REE has already experienced a number of cuts to its earnings as a result of new measures introduced in 2012 and 2013 to rebalance the electricity system's revenues and costs and eliminate the structural shortfall that has arisen every year. These measures have resulted in a direct reduction in REE's earnings of around EUR170 million in 2013, as well as a delay of one year in receiving remuneration for newly commissioned assets.

Further legislation, that Moody's expects will revise the remuneration model in relation to REE's activities, should follow a new electricity bill that is due to be passed shortly and Moody's believes that further cuts to the company's earnings are possible. Nonetheless, it may take some time for all the details to be determined and the effect on REE to be clarified. Moody's considers that risk in the regulatory environment in Spain has increased as a result of these recent and potential future changes.

As a result of the measures introduced, REE's financial metrics could weaken moderately from Funds From Operations (FFO) to net debt of 20.3% and retained cash flow (RCF) to net debt of 14.3% as at financial year end 2012. Cash from operations (CFO) to debt, which takes into account negative working capital movements due to delayed cash receipts, is therefore expected to remain generally weaker (15.7% in 2012) than the corresponding FFO/net debt metric. Under most reasonable downside scenarios, however, Moody's expects that REE will be able to maintain a rating profile of at least FFO to net debt of low-mid teens in percentage terms and RCF to net debt of at least high single digits in percentage terms for the current Baa2 rating.

-- 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 sound liquidity profile. In addition, REE maintains an important role in executing the country's energy plan. Moody's expects that REE will maintain a fairly high level of investment, in the range of €550 million per annum, focusing, in particular, on securing the build out of interconnectors with France and Portugal and improving the grid and interconnections in Spain's islands.

At the same time, the one-notch rating differential with the sovereign reflects REE's close linkages to Spain, with the company's earnings virtually exclusively domestic. This means that REE remains exposed to potential adverse developments on a regulatory, fiscal, liquidity and macro-economic level as a result of Spain's macroeconomic environment.

WHAT COULD MOVE THE RATING UP/DOWN

Positive rating pressure could develop on REE's ratings in the event of (1) a material improvement in the domestic sovereign and macroeconomic environment as might be captured by an upward movement in the Spanish government's rating; and (2) provided that the regulatory framework were to be more settled such as to underpin a solid financial profile.

Negative pressure could be exerted on REE's ratings in the event of (1) a renewed deterioration in Spain's creditworthiness, as captured by a downward movement in the Spanish government's rating; (2) adverse regulatory developments or political intervention reducing REE's insulation from the broader Spanish economy; (3) a deterioration in the group's liquidity position; or (4) an increase in leverage, whether as a result of regulation, increased shareholder returns or shortfalls in operating performance versus original targets, such that its metrics fell short of Moody's guidance range for its Baa2 rating.

Ratings affected by today's action are:

-- Long-term Baa2 issuer rating of Red Eléctrica de España, 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.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REE, based in Madrid, Spain, is the owner and operator of the Spanish transmission grid and its interconnecters. As of fiscal year ended 2012 the company had revenues of EUR1.7 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 stable; affirms Baa2 ratings
No Related Data.
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