Moody's reviews Red Electrica de Espana's AA3 rating for possible downgrade

Nov. 7, 2002
Moody's Investors Service has Friday placed the long-term senior unsecured Aa3 issuer rating of Red Electrica de Espana (REE) on review for possible downgrade.

London, November 7, 2002 -- Moody's Investors Service has Friday placed the long-term senior unsecured Aa3 issuer rating of Red Electrica de Espana (REE) on review for possible downgrade.

This follows REE's announcement that it will purchase the high voltage assets plus services from both Endesa and Union Fenosa for a total of EUR1.345 billion. This amount will consist of EUR950 million for the high voltage assets of Endesa and Eur 395 million for the high voltage assets of Union Fenosa.

They will also pay EUR102 million to Endesa for operation and maintenance services over four years and an amount of EUR36 million to Union Fenosa for similar services.

Moody's review will take into account the impact of these transactions, which are expected to be primarily debt-financed, on the financial profile of REE; with debt expected to increase significantly from Q3 2002 levels of EUR 701 million.

Whilst REE has had some financial flexibility at the current rating level, Moody's has also noted, however, that significant investments, such as these, may have a negative impact on the rating. Moody's will also take into account however, the low business risk of the assets to be acquired, the cash flows that they will generate and the efficiencies that may well be gained by integrating them into REE's network. Moody's will also consider the integration risk that may arise given the size of the acquisitions.

Moody's will also factor the extent to which the company maintains future aspirations in international and telecommunications activities, as well as possible further investments in domestic high voltage assets, into its rating decision. These acquisitions are subject to regulatory approval, however Moody's believes that this is likely to be received.

REE is headquartered in Madrid, Spain and is currently the owner and operator of most of the high voltage transmission grid (440kV) and a third of the 220kV network in Spain. It also owns a high-capacity fibre-optic network, which it leases to its new telecommunications subsidiary. As at 3Q 2002, REE reported adjusted turnover of Eur329million.

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