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Announcement:

Moody's places Baa1/P-2 ratings of EDP and HC Energia under review for possible downgrade

06 Apr 2011

London, 06 April 2011 -- Moody's Investors Service has today placed the Baa1/P-2 senior unsecured ratings of Energias de Portugal SA (EDP), its finance subsidiary EDP Finance BV and its Spanish subsidiary, Hidroelectrica del Cantabrico (HC Energia) under review for possible downgrade.

RATINGS RATIONALE

Today's rating action follows Moody's earlier downgrade of the rating of the government of the Republic of Portugal ("RoP") to Baa1 from A3 (negative). The Baa1 and (P) Prime-2 ratings of the RoP remain under review for further possible downgrade.

Moody's rating action on RoP was driven by the following: (1) the uncertain political outlook, following the resignation of the government after the rejection by the parliament of the additional budget measures announced on 11 March and resulting reduction in the speed and decisiveness of policy making (2) the short- and medium-term funding challenges, set in the context of the recently agreed European Stability Mechanism (ESM), which contemplates debt restructuring as a distinct possibility and (3) the medium-term implications of last-week's revisions to the estimates for the budget deficit and outstanding government debt for fiscal consolidation.

The review of the ratings of EDP and its subsidiaries for possible downgrade reflects the possible further downwards move in the RoP's rating. This reflects EDP's inability to totally disconnect itself from (i) stresses in the debt market for Portuguese issuers and (ii) local economic and regulatory circumstances which could worsen as a result of pressures on the sovereign, although there has been no significant impact on EDP to date.

EDP's current Baa1 rating reflects its (i) historically, rather resilient business model, with a significant proportion of relatively low volatility earnings coming from regulated and long-term contracted businesses (ii) a well-diversified geographic spread of businesses with around 45% of EDP's EBITDA derived from Portugal and (iii) fairly robust liquidity into 2013 with access to diversified funding sources but with some moderate exposure to Portuguese banks. At the same time, the rating recognises (i) a leveraged profile as at FYE 2010, although this should improve over the 2011/2012 period as a result of a reduction in capex, increasing cash flows from new assets coming on stream and EUR 500 million of announced disposals (ii) pressure on thermal margins in Spain with regulatory receivables still weighing on debt and (iii) expected higher borrowing costs on new debt as a result of the sovereign downgrade, although the company's debt maturity is well-spread and debt should gradually reduce over time.

As part of its review Moody's will take into account the factors outlined above, particularly related to the company's diversified earnings stream and improving financial profile which could allow EDP's rating to pierce that of the RoP, in the event of a sovereign downgrade, by one or two notches.

The minimum financial parameters currently considered by Moody's for EDP's rating are a retained cash flow/net debt% in the low double digits and a funds from operation/net debt% in the mid-teens with which the company currently complies.

Should the domestic operating or regulatory environment become more challenging as a result of pressures at the macroeconomic level and/or the expected improvement in financial profile towards 2012 fail to develop as anticipated, then this could contribute to negative pressures on the rating. Further rating development is also likely to take into account Moody's perception of EDP's continued ability to access liquidity as current availability is gradually absorbed which is likely to be affected, at least in some measure, by developments at the sovereign level. EDP will need to demonstrate continued robustness of cash flows and ongoing access to liquidity sources to allow it to pierce the sovereign rating, were the latter to be downgraded.

Given the current review for downgrade of the sovereign's and EDP's ratings, there is no upwards rating pressure perceived at the current time.

HC Energia's ratings are constrained by those of EDP and rating development is likely to be linked to that of its parent.

The principal methodology used in this rating was Global Unregulated Utilities and Power Companies published in August 2009.

EDP based in Lisbon, Portugal is the country's largest vertically integrated utility. The company also has interests in Spain, Brazil and the US. It is active in the renewables sector through EDP Renovaveis. As at FYE 2010, it had revenues of EUR14.1 billion.

HC Energia is 96.9% owned by EDP and is based in Orviedo, Spain. As at FYE 2010 it had revenues of EUR3.7 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

London
Helen Francis
VP - Senior Credit Officer
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
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London E14 5FA
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places Baa1/P-2 ratings of EDP and HC Energia under review for possible downgrade
No Related Data.
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