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Announcement:

Moody's changes to stable from negative the outlook on Transelectrica's Baa3 rating (Romania)

10 Dec 2010

London, 10 December 2010 -- Moody's Investors Service has today changed to stable from negative the outlook on Transelectrica S.A.'s Baa3 issuer rating.

RATINGS RATIONALE

"The change of outlook to stable from negative reflects Moody's expectation that, despite a weakened financial performance in 2009 and 2010, Transelectrica's cash flow generation will remain solid as a result of a combination of: (i) the supportive attitude of the Romanian regulatory office (ANRE), which increased Transelectria's transmission tariff by 5% for 2010, with a further increase of 7% expected for 2011; (ii) Transelectrica's significant reduction in planned investments for the next four years; and (iii) the expected stabilisation of electricity consumption in Romania after a significant decline in 2009," says Richard Miratsky, a Moody's Vice President-Senior Analyst and lead analyst for Transelectrica. "Furthermore, as the weakened profitability was partially caused by FX losses from revaluation of Transelectrica's foreign currency denominated debt and increased depreciation, which both have non-cash character, Transelectrica's cash flow generation and debt coverage metrics have remained at a reasonable level for a pure network company," adds Mr Miratsky.

Although, historically, Transelectrica's liquidity position has been constrained by its extensive capital investment programme and limited committed back-up credit facilities, the company proved its ability during 2009 and 2010 to raise necessary funding to cover its capex even amid adverse market development. Furthermore, Transelectrica pursues a conservative policy of only committing to investment projects with already secured necessary funding.

Although the Romanian currency stabilised somewhat over 2010, Moody's cautions that Transelectrica's financial profile remains exposed to foreign exchange (FX) fluctuations because of the company's debt, more than 90% of which is denominated in foreign currency. Moody's recognises that the revaluation of Transelectrica's FX-denominated debt principal is of a non-cash character. However, the rating agency cautions that any potential future weakening of the local currency will adversely impact the company's cash flow generation as a result of increased interest expenses and debt repayments.

In assessing the future development of Transelectrica's rating, Moody's will continue to focus on: (i) regulatory decisions in the Romanian electricity transmission sector, especially concerning the setting of transmission tariffs from 2011 onwards; (ii) the willingness and ability of Transelectrica to adhere to the reduced levels of capex set out in its capital investment programme, so as to not jeopardise its capital structure with a sizeable increase in leverage; and (iii) the company's success in negotiating new funding sources to cover future capital investments without overstretching its liquidity position.

The rating could come under negative pressure if Transelectrica's leverage were to increase significantly and/or transmission tariffs were to be adjusted insufficiently resulting in a significant and persistent weakening of the company's debt protection metrics, reflected by funds from operations (FFO)/interest coverage below 4x and an FFO/net debt ratio below 20%.

In accordance with Moody's rating methodology for government related-issuers ("GRIs"), Transelectrica's rating incorporates uplift for potential government support to its stand-alone credit quality. This is expressed by Moody's as a BCA of 13 (on a scale of 1 to 21, where 1 represents the lowest risk and 13 is equivalent to a Ba3 rating). The uplift to the BCA, currently at three notches, results from the credit quality of Transelectrica's government shareholder and Moody's assessment of a high probability of government support in the event of financial distress, as well as very high default dependence (i.e. degree of exposure to common drivers of credit quality).

The principal methodologies used in rating Transelectrica were Moody's "Regulated Electric and Gas Networks Rating Methodology", published in August 2009 and Moody's rating methodology for government-related issuers "The Application of Joint Default Analysis to Government-Related Issuers", updated on 22 July 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

Transelectrica, headquartered in Bucharest, is a majority state-owned electricity transmission system and market operator in Romania. In 2009, the company's total consolidated revenues were LEI2,575 million (around EUR609 million).

Prague
Richard Miratsky
Vice President - Senior Analyst
Infrastructure Finance
Moody's Investors Service Limited Czech Branch
Telephone: +420-22-422-2929

London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
Moody's Investors Service Ltd.
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Moody's changes to stable from negative the outlook on Transelectrica's Baa3 rating (Romania)
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