London, 05 December 2012 -- Moody's Investors Service has today changed to negative from stable
the outlook on the Aa3 senior unsecured ratings of Electricité
de France (EDF). Concurrently, Moody's has also changed
to negative from stable the outlook on the A3 ratings of EDF's wholly
owned subsidiaries, EDF Energy plc and EDF Trading Limited,
which incorporate support from their ultimate parent.
RATINGS RATIONALE
The change of outlook to negative from stable follows the recent ruling
by France's Conseil d'Etat which cancelled the decision relating
to the electricity distribution tariffs for the third regulatory period
(2009-2013, known as TURPE 3). Although EDF considers
that the decision should not have an impact on its financial results,
in Moody's view it adds to the challenges faced by the group from
rising debt and pressured profitability. It therefore increases
the risk that the group will be unable to maintain a leverage profile
that is aligned with Moody's guidance for the Aa3 rating.
The Conseil d'Etat's decision was based on its judgment that
the methodology used by the CRE, the French electricity regulator,
for calculating the capital return on the electricity distribution network
of ERDF, EDF's subsidiary, is incorrect since it did
not take account of the nature of the concessions assets and renewal provisions.
The distribution network charges for TURPE 3 have therefore been incorrectly
calculated. There remains uncertainty surrounding the amount and
timing of any remedies that might be required, and their potential
impact on EDF. The group itself considers that the decision should
not have an impact on its financial results because of the nature of its
integrated tariffs.
However, in Moody's view, there remains some risk of
a negative financial impact on the group whether from any potential remedy,
or from the revised methodology which the CRE is required to propose by
June 2013.
The negative outlook takes account of the increase in EDF's net
financial debt to EUR39.7 billion at end-June 2012 as a
result of its acquisition of Edison; higher capital expenditure;
and the rising Contribution au Service Public de l'Electricite (CSPE)
balance. It also reflects a flat outlook for the group's
profitability in 2013, under pressure from rising nuclear safety
costs and weaker power generation earnings in certain markets outside
France.
In changing the outlook on EDF's ratings, Moody's takes
account of the group's efforts to ease the burden on its balance
sheet, and to underpin profitability in order to achieve its 2.5x
net debt/EBITDA leverage target. The outlook change factors in
the group's ongoing discussions with the government regarding CSPE.
Moreover, Moody's notes EDF's ongoing review of its
operating costs and capital expenditure (capex) trajectory, which
currently includes rising investment in renewables, new nuclear
plant builds and its gas strategy.
Nevertheless, Moody's expects the negative pressure on EDF's
free cash flow generation to continue, partly as a result of the
group's substantial capital investment commitments. These
include the Flamanville EPR, the cost estimate for which was recently
increased by a further EUR2 billion to EUR8 billion, with planned
commissioning maintained for 2016.
The negative outlook therefore reflects the risk, in Moody's
view, that measures taken by the group to manage its leverage could
be insufficient to ensure its credit metrics remain well positioned against
the following guidelines: (1) RCF/net debt in the mid- to
upper teens in percentage terms; and (2) FFO/net debt in the high
teens/low 20s range in percentage terms.
In light of EDF's 84.48% ownership by the Government
of France (Aa1 negative), the group falls under Moody's rating
methodology for government-related issuers (GRIs) and its Aa3 rating
incorporates a two-notch uplift from its standalone credit quality
for potential government support.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the current uncertainties and risks with regard to EDF's cash
flows, as reflected by the negative outlook, Moody's
does not consider an upgrade of the group's ratings to be likely
in the near term.
Negative pressure could be exerted on EDF's a2 Baseline Credit Assessment
(BCA) in the event of a sustained deterioration in the group's financial
profile, as would be evidenced, for example, by a retained
cash flow (RCF)/net debt ratio in the low teens in percentage terms on
a sustainable basis. Such a deterioration could result from lower-than-expected
profitability, capital investment unsupported by cash flow generation
or large debt-funded acquisitions. In the context both of
increased demands on national budgets and a two-notch rating uplift
under Moody's GRI methodology, it is likely that negative
pressure would be exerted on EDF's Aa3 rating were the BCA to deteriorate
to a3 from a2.
PRINCIPAL METHODOLOGY
The methodologies used in this rating were Unregulated Utilities and Power
Companies 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.
Electricité de France, headquartered in Paris, France,
is a leading integrated provider of electricity generation, transmission,
distribution and supply services. It reported turnover of EUR36.2
billion during the first six months of 2012 and EBITDA of EUR9.1
billion.
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Moody's changes outlook on EDF's Aa3 rating to negative from stable
