Investing.com -- Moody’s Ratings has revised the outlook for Red Electrica (BME: REDE ) de Espana, S.A.U. (Red Electrica) and Red Electrica Financiaciones, S.A.U. from stable to negative. Despite this change, the Baa1 long-term issuer rating and the baa1 Baseline Credit Assessment (BCA) of Red Electrica, along with the (P)Baa1 backed senior unsecured MTN programme rating of Red Electrica Financiaciones, S.A.U., have been affirmed.

The change in outlook follows a major blackout in Spain’s electricity grid on April 28, 2025, which caused a loss of power supply across the Iberian peninsula for several hours. The negative outlook reflects the potential risk that Red Electrica, as the owner and operator of the Spanish electricity transmission network, may need to increase investments beyond current expectations. This could potentially weaken its credit metrics below the ratio guidance for the Baa1 rating.

Investigations are ongoing to determine the cause of the blackout, but there is a consensus among politicians that the incident shows a need to strengthen the resilience of the Spanish electricity transmission network, especially with the increased use of renewable energy sources. This includes increasing interconnection capacity, which currently stands at about 2% of installed generation capacity, significantly below the European Commission’s targets of 10% by 2025 and 15% by 2030.

Red Electrica recently increased its investments in the transmission system to EUR1.1 billion in 2024, up from an average of EUR600 million over 2021-23. Based on the company’s guidance, this figure is expected to further rise to EUR1.4 billion in 2025.

Moody’s expects the group’s ratio of funds from operations (FFO) to net debt to weaken to around 14% in 2025, which aligns with the guidance for the current Baa1 rating. If Red Electrica’s investments remain considerably higher than the historical average beyond 2025, it could put additional downward pressure on its financial metrics, unless there are balance-sheet strengthening measures or positive regulatory developments.

The negative outlook also reflects increased social risks for electric utilities in Spain following the blackout. These risks are particularly high for Red Electrica, given its role as the domestic Transmission System Operator (TSO). If investigations find that Red Electrica was responsible for the incident, it could face a fine of up to EUR60 million and may need to compensate for damages incurred by third parties. While the financial impact of the fine would be small given Red Electrica’s size, compensation for damages could be burdensome.

The ratings affirmation reflects Red Electrica’s monopoly position as Spain’s system operator and owner of electricity transmission assets, its predictable cash flow profile, and its balanced financial policy. However, the Baa1 rating is constrained by a less transparent domestic regulatory framework compared to other electricity transmission system operators in Western Europe.

As of December 31, 2024, Red Electrica’s parent company Redeia had cash and cash equivalents of EUR925 million, including short-term deposits of EUR25 million. The group also has access to undrawn credit facilities, amounting to EUR2.0 billion as of December 2024, of which EUR1.9 billion expire after 2025. These funds are expected to provide an adequate liquidity buffer for the next 12 months.

The outlook could be changed to stable if the group’s FFO/net debt appears likely to remain above 14%. On the other hand, Red Electrica’s BCA could be downgraded if the group’s FFO/net debt appeared likely to fall persistently below 14% due to increased investments, evidence that the company was responsible for the power outage, or adverse regulatory developments.

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