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Rating Action:

Moody's downgrades EDF to A1; negative outlook

16 Apr 2015

London, 16 April 2015 -- Moody's Investors Service (Moody's) has today downgraded the issuer and senior unsecured ratings of Electricite de France (EDF) to A1 from Aa3 and the ratings of its perpetual junior subordinated notes to Baa1 from A3. Concurrently, Moody's has affirmed the group's Prime-1 short-term ratings. Moody's has also downgraded the issuer rating of EDF's wholly owned subsidiary EDF Trading Limited to Baa1 from A3. This concludes the review initiated on 20 March 2015. The outlook on all ratings is negative.

RATINGS RATIONALE

The rating downgrade reflects the risks associated with the transition of EDF's French power generation and supply activities from a predominantly regulated cost-reflective tariff model towards an increasing exposure to market power prices. Moody's notes that this transition is happening at a time when market prices are low and below the regulated price for nuclear output (ARENH).

In accordance with the NOME ("Nouvelle Organisation du Marche de l'Electricite") law, the new tariff formula that was implemented on 1 November 2014 includes a market price component. Furthermore, regulated tariffs for mid-size and large business customers will cease from 1 January 2016. As a result, the share of domestic electricity volumes that EDF sells to end-customers under regulated tariffs will decrease to less than 50% in 2016 from 84% in 2014. EDF may also face growing competition to retain customers under the remaining regulated tariffs as power prices below the ARENH price could provide opportunities for alternative suppliers that can offer unregulated tariffs to gain market shares.

Today's rating action also takes into account the residual risks posed by affordability concerns on future tariff evolutions, including the current tariff deficit borne by EDF under certain public service obligations ("Contribution au Service Public de l'Electricite", CSPE). The law on energy transition for green growth, which calls for an increase in the share of renewables to 40% of total domestic electricity production by 2030, will likely require an increase in customer bills. Moody's therefore believes that EDF faces the risk of a growing shortfall in the income it collects to cover its purchase obligations associated with renewable electricity.

Moody's notes that these increasing risks with regards to EDF's cash flows come at a time when the group needs to invest significantly to maintain and upgrade the nuclear fleet in France, which raises uncertainty over the future recovery of and return on such investments.

The market trends described above will result in a higher business risk profile and the rating downgrade reflects that EDF cannot mitigate these pressures with additional financial flexibility resulting in a material strengthening of credit metrics. Moody's expects that EDF will demonstrate funds from operations (FFO) to net debt in the high teens to low twenties in percentage terms and retained cash flow (RCF) to net debt in the mid to upper teens in percentage terms, which is now the guidance for the A1 rating level. Moody's notes that EDF's actual ratios at year-end 2014 of 18% and 14%, respectively, leave little headroom at the current rating level, although the rating agency expects that EDF management will make use of levers including control over costs and investments, working capital optimization and asset disposals in support of the group's financial profile.

Given EDF's 84.5% ownership by the Government of France (Aa1 negative), EDF's A1 rating incorporates a two-notch uplift from its standalone credit quality or baseline credit assessment (BCA) of a3 based on the agency's estimate of a high degree of government support.

RATIONALE FOR RATING DOWNGRADE OF EDF TRADING LIMITED

The downgrade of EDF Trading Limited's rating follows that of its ultimate parent EDF. EDF Trading Limited's Baa1 rating is linked to that of EDF, reflecting its strategic importance as EDF's trading arm and its significant integration into EDF, as evidenced by the French group's close oversight of the company's trading activities, risk management and finances, as well as the funding and liquidity support provided.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook primarily reflects the risks associated with EDF's close relationship with French state-owned nuclear constructor and service provider Areva S.A. (Areva, not rated), which is facing a number of operational and financial challenges. Areva is one of EDF's main suppliers, supplying fuel and equipment as well as providing services such as fuel management, maintenance, nuclear reactor design and construction, including the 1.6GW Flamanville 3 nuclear power plant project in France, which has been experiencing significant delays and cost overruns.

The negative outlook also factors in the potential effect of the incremental risks associated with the Hinkley Point C (HPC) nuclear power station project in the UK, whose significant scale and complexity may affect EDF's business and financial risk profiles should it go ahead. Finally, the negative outlook takes account of EDF's limited headroom against Moody's guideline metrics for the A1 rating level, including FFO to net debt in the high teens to low twenties in percentage terms and RCF to net debt in the mid to upper teens in percentage terms.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the current negative outlook, upward rating pressure is unlikely to arise in the medium term. The outlook could be returned to stable provided that (1) risks arising from the challenges facing Areva are resolved without affecting EDF's risk profile; (2) the risks associated with the HPC project -- should it go ahead -- are adequately mitigated; and (3) EDF maintains financial ratios well in line with the guidance above on a permanent basis.

The ratings could be downgraded if (1) EDF were to be negatively affected either financially or operationally by developments at Areva, including through potential combinations of activities that expose materially EDF's balance sheet; (2) the HPC project were to go ahead without its risks being adequately mitigated; or (3) EDF fails to maintain a financial profile aligned with the guidance discussed above as a result of a more challenging operating or regulatory environment than expected. In addition, negative pressure could be exerted on EDF's ratings if Moody's were to lower its support estimate as a result of a change in the company's relationship with the government, or if there were to be a significant downgrade of France's rating.

PRINCIPAL METHODOLOGY

The principal methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in October 2014, Government-Related Issuers published in October 2014, and Trading Companies published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Paris, France, Electricite de France is one of Europe's largest integrated utilities, with reported revenues of EUR72.9 billion in 2014. It is 84.5% owned by the French government.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Paul Marty
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades EDF to A1; negative outlook
No Related Data.
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