Fingrid Oyj -- Moody's assigns A1/P-1 issuer ratings to Fingrid; stable outlook

RATINGS RATIONALE

"Fingrid's ratings reflect the very supportive regulatory regime in Finland, which provides a return on regulatorily-allowed assets, as well as an allowance for operating costs, outage costs and balancing costs," says Paul Lund, a Moody's Vice President -- Senior Credit Officer and lead analyst for Fingrid Oyj. Fingrid's tariffs can be altered on a yearly basis in order to meet the regulator's allowed return for the period in the case of under- or over-recovery. The regulatorily allowed return is reset every four years, at which time the regulator may also revise efficiency targets for the following period.

The Government of Finland (Aaa stable) acquired ownership stakes in Fingrid Oyj from both Pohjolan Voima Oy and Fortum Oyj (A2 Stable) in April 2011. This resulted in a change in strategy by the owners, and Fingrid is increasing tariffs to ultimately claim the full regulatory allowed return towards the end of the 2012-15 regulatory period. Moody's anticipates that Fingrid will generate higher levels of cash flow going forward, and therefore expects that the company will have greater financial flexibility. However, the rating agency expects that this increased cash flow will be offset by higher levels of dividend payment.

Fingrid's financial profile improved in line with expectations during the first nine months of 2012, with funds from operations (FFO) interest of about 6.0x, and FFO/debt of over 11%. Moody's expects Fingrid's financial profile to improve further during 2013, as Fingrid has already announced a further tariff increase for the year of about 15%. The overall tariff rise is nearly 50% for the two years from 1 January 2012.

Moody's expects Fingrid's credit metrics to develop as follows: (1) FFO/interest coverage is above 5.0x on a consistent basis; and (2) FFO/debt increases gradually to around 14% over the next three years, from the relatively low level of 10% in 2010. The rating agency expects that Fingrid's retained cash flow (RCF)/capex ratio will remain very low, at around 0.5x, reflecting the company's high levels of capex. However, Moody's also expects that Fingrid's leverage will decrease over the coming regulatory period as capex is likely to be funded largely from cash flow, with an expected relatively modest increase in notional levels of debt over the same period.

Moody's provides one notch of uplift to Fingrid's baseline credit assessment (BCA) of a2, based on the application of the rating agency's methodology for government-related issuers (GRIs). Moody's continues to view the probability of extraordinary support by the Government of Finland as moderate, notwithstanding the increase in ownership to 53% direct ownership in April 2011, from 33% direct and indirect ownership, given the government's non-interventionist approach.

The stable outlook reflects Moody's expectation that Fingrid's financial profile will improve from its current level, helped by increased levels of cash flow resulting from higher tariffs and returns that the company will claim.

WHAT COULD CHANGE THE RATING UP/DOWN

In view of the significant ongoing investment programme and progressive increase in return, Moody's does not expect any positive pressure on Fingrid's rating in the near term.

Moody's could downgrade the rating in the event that Fingrid's FFO/interest coverage and FFO/debt ratios fail to meet the rating agency's expectations, falling below 4.0x and not reaching the mid-teens in percentage terms, respectively, during the upcoming regulatory period. In the event of a limited fall in the ratings of the government of Finland, Moody's would be unlikely to reduce the single notch uplift to the BCA under its GRI methodology.

PRINCIPAL METHODOLOGIES

The methodologies used in this rating were Regulated Electric and Gas Networks published in August 2009, and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Fingrid (A1/P-1 stable) is the transmission system operator and owner of Finland's high-voltage electricity assets and interconnectors. It also owns a 19.2% stake in Nord Pool Spot AS, the Nordic electricity exchange.

Fingrid was established in 1997 out of the transmission assets of the electric utilities IVO, now the 50% state-owned Fortum (A2 stable), Finland's largest utility, and PVO. Following a change in shareholdings on 19 April 2011, the state of Finland is the majority owner of Fingrid, owning 53% of shares, with the balance held by institutional investors, including Finnish Mutual Pension Insurance Company, Ilmarinen (19.9%). The change of ownership reflects the EU requirement that the ownership of transmission assets is unbundled from generation and supply companies by March 2012.

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Paul Lund VP - Senior Credit Officer Infrastructure Finance Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Monica Merli MD - Infrastructure Finance Infrastructure Finance JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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