Paris, February 21, 2022 -- Moody's Investors Service (Moody's) has today downgraded to
Baa1 from A3 the long-term issuer rating and senior unsecured ratings
of Electricite de France (EDF). It has also downgraded EDF's senior
unsecured MTN program rating to (P)Baa1 from (P)A3, as well as EDF's
perpetual junior subordinate debt rating to Ba1 from Baa3 and its Baseline
Credit Assessment (BCA) to baa3 from baa2. Concurrently,
Moody's has downgraded to Baa3 from Baa2 the long-term issuer ratings
for EDF Trading Limited (EDFT), Edison S.p.A.
and EDF Energy Holdings Ltd (EDF Energy).
At the same time, Moody's has affirmed EDF's short-term
Prime-2 Commercial Paper program ratings.
The outlooks on EDF, EDFT, Edison S.p.A.
and EDF Energy are negative.
This rating action follows EDF's action plan [1], announced
on 18 February 2022, to mitigate low nuclear output over 2022-23
and the consequences of ARENH cap rise for 2022. The action concludes
the review for downgrade initiated on 17 January 2022.
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
The rating downgrade reflects Moody's view that EDF's risk
profile has become more volatile as a result of unstable and unpredictable
nuclear output associated with fleet ageing; the increased exposure
of earnings to volatile wholesale electricity prices following the significant
disposal programme of recent years; and detrimental political intervention
to protect end-customers in a context of elevated power prices.
The rating action further takes into account the lack of visibility around
(1) the form and timing of nuclear reform in France, at a time when
negotiations with the European Commission are suspended; (2) the
nature of assets which will be sold by 2024; and (3) the potential
consequences for energy policy and EDF of the upcoming French elections.
Moody's has downgraded EDF's Baseline Credit Assessment (BCA),
which reflects its standalone credit quality before taking into account
potential government support, to baa3 from baa2. The rating
agency expects that 2022 credit metrics will fall significantly short
of levels consistent with the previous baa2 BCA, with funds from
operations (FFO)/net debt potentially declining to around 2% as
compared with guidance for the previous BCA in the mid-to-high
teens in percentage terms. This is despite planned mitigation measures
including a EUR2.5 billion capital increase, the prolonged
scrip dividend policy over 2022-23 and a EUR3 billion disposal
programme.
EDF expects that the additional 20 TWh of electricity that the group must
sell under the ARENH mechanism over April to December 2022, to limit
the increase in regulated tariffs for 2022 to 4%, will represent
a c. EUR8 billion additional cost at the EBITDA level. Concomitantly,
the lower than previously anticipated nuclear output resulting from the
recent corrosion issues will cause another c. EUR11 billion additional
cost at the EBITDA level. This cumulative c. EUR19bn extra
cost exceeds 2021 EBITDA of EUR18 billion.
Moody's expects that EDF will rebuild its financial flexibility
from 2023 onwards, supported by elevated power prices and a nuclear
output that EDF estimates in a range from 300-330TWh. However,
recovery in the group's financial metrics' will be subject
to the development of wholesale prices and nuclear output. These
parameters are hard to predict and have been particularly volatile;
Moody's notes the gradual decline of EDF's nuclear output
over the last decade from 408TWh in 2010 to an expected range from 295-315TWh
in 2022.
EDF falls under Moody's Government Related Issuers Methodology and
its Baa1/P-2 ratings incorporate an expectation that the Government
of France, EDF's majority shareholder, would continue to provide
support if needed. The issuer and senior unsecured ratings incorporate
a two-notch uplift from the baa3 BCA for such potential support,
capturing the credit quality of the Government of France, and Moody's
assessment of there being "high" probability of government support in
the event of financial distress, as well as "high" default dependence.
The baa3 BCA is underpinned by (1) the scale and breadth of EDF's businesses
across the energy value in France, which account for more than 75%
of its EBITDA; (2) the rising contribution to earnings from its domestic
regulated activities and renewables business, which together account
for arounded for 37% of the group's EBITDA in 2021, as a
result of new connections and additional capacities driven by the energy
transition plan outlined in the multi-year energy programme;
and (3) its geographical diversification given its sizeable positions
in Italy and in the United Kingdom (UK).
These positives are balanced by (1) EDF's fixed-cost merchant power
generation in France and the UK, which exposes it to power price
volatility, albeit supportive since H2 20; (2) increasing competition
in the French supply market, which result in a weakening of EDF
leading position; (3) a significant capital spending programme which
results in negative FCF; and (4) the construction risk associated
with the Flamanville new nuclear reactor in France and the Hinkley Point
C (HPC) new nuclear project in the UK.
The Ba1 perpetual junior subordinated debt ratings, which is one
notch below EDF's baa3 BCA, reflects (1) the features of the hybrids
that receive basket 'C' treatment, i.e. 50%
equity or "hybrid equity credit" and 50% debt for financial leverage
purposes; and (2) that the Baa1 senior unsecured rating benefits
from two notches of uplift based on Moody's expectations for potential
extraordinary government support. The difference in ratings takes
into account Moody's view that, in a distressed scenario,
support from the French State could entail distinctions between deeply
subordinated notes and senior unsecured bonds.
The change of EDFT's ratings to Baa3 from Baa2 follows EDF's
BCA. EDFT is fully owned and closely controlled by EDF and the
rating downgrade reflects the close linkages between the entities and
the rating agency's view that EDF's standalone credit quality
acts as a constraint. In the context of the liquidity risks and
cash flow volatility that characterise wholesale energy trading,
EDFT's credit profile is supported by its strategic importance derived
from its exclusive right to transact energy for EDF on the European wholesale
energy markets. EDFT is financed by EDF and has access to contingency
funding from EDF in case of emergency. Moody's expects that EDF
will continue to provide support to EDFT as the latter pursues its mandate
to optimize the group's access to wholesale energy markets.
The change of Edison's ratings to Baa3 from Baa2 follows EDF's
BCA. Edison is significantly integrated with EDF, with the
latter exercising close managerial and financial control and further supporting
the company through intercompany debt. Moody's expects EDF's management
to continue to tightly oversee Edison's operations. Edison's credit
quality further benefits from an improved business risk profile,
a positive momentum in earnings growth and stronger cashflow generation
on the back of increased electricity generation capacity; the optimised
flexibility and appropriate indexation of gas contracts; and the
long-term exposure to wholesale power prices in Italy, Government
of (Baa3 stable).
The change of EDF Energy's ratings to Baa3 from Baa2 follows EDF's
BCA. EDF Energy benefits from its close integration into the EDF
group and the majority of financing needs being procured by EDF through
cash and equity injection, resulting in a solid financial profile
with low leverage. EDF Energy's rating is further based upon (1)
its scale and business risk profile as a major UK integrated utility;
(2) it not being responsible for the funding of qualifying nuclear liabilities
associated with existing plants, except costs related to unburnt
fuel, under the agreements signed with the British government;
(3) the company's exposure to volatile power prices as a result of a predominantly
fixed-cost generation fleet; and (4) the risks associated
with construction of the HPC new nuclear plant.
ESG CONSIDERATIONS
Social risk is a key driver of the rating action. The French government's
decision to step in to address affordability concerns and protect end-customers
as planned is an adverse political intervention and highly detrimental
to EDF's economic interests, resulting in an additional cost of
c. EUR8billion.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook on EDF reflects the risk of nuclear output falling
short of levels currently anticipated by the group given the detection
of corrosion defects. The extent of these defects across the fleet
and the final impact on earnings are still uncertain. Operational
uncertainties and execution risks in remedial measures that the group
may pursue to bolster credit quality increases the risk of key credit
metrics over 2023-24 falling below levels commensurate with the
baa3 BCA, which includes FFO/net debt at least in the mid-to-high
teens in percentage terms.
The negative outlook further takes into account the absence of visibility
associated with economic regulation when EDF needs financial relief to
support the acceleration in the development of new capacities, including
the construction of six (potentially 14) new European Pressurised Reactors
(EPRs) in France by 2050, in addition to the targeted 60 gigawats
(GW) of renewable capacities by 2030.
The negative outlooks on EDFT, Edison, EDF Energy reflect
that of EDF given the close linkages
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure is unlikely in the medium term, given the
group's negative outlook. Nevertheless, the outlook could
stabilise if EDF restores a sound track record with regards to its nuclear
output and it appears that EDF will be able to maintain metrics in line
with guidance for the current rating, based on a FFO/net debt ratio
to remain at least in the mid-to-high teens in percentage
terms.
The ratings could be downgraded if (1) EDF's credit metrics appear likely
to fall persistently below guidance for a Baa1 rating; (2) a change
in the group's relationship with the French government were to cause Moody's
to remove the uplift for government support; or (3) there were to
be a significant downgrade of France's government rating.
The ratio guidance for an Baa1 rating might be revised following announcement
of any reforms.
EDFT's outlook could be stabilised if that of EDF is. A downgrade
of EDF's BCA would likely result in a corresponding downgrade of EDFT's
rating. EDFT's rating could also be downgraded following financial
performance issues (for example, trading losses) or an increase
in external debt at EDFT.
Edison's outlook could be stabilised if that of EDF is. A downgrade
of EDF's baa3 BCA would likely result in a corresponding downgrade of
its Italian subsidiary's rating. Edison's rating could also be
downgraded if Edison's operating performance or capitalisation were to
deteriorate significantly.
EDF Energy's outlook could be stabilised if that of EDF is. Any
downgrade of EDF's baa3 BCA would likely result in a corresponding downgrade
of its UK subsidiary's rating. EDF Energy's rating could also be
downgraded if EDF Energy's operating performance or capitalisation were
to deteriorate, or it were no longer considered financially and
operationally integrated within the EDF group as a result of a change
in EDF's strategy or financial policy.
LIQUIDITY
Liquidity remains good in the next 18 months for EDF. EDF's strong
liquidity is supported by EUR22.5 billion of available cash and
financial assets and a total of EUR13 billion of undrawn committed credit
facilities as of 31 December 2021. These include EUR1.7
billion credit facilities maturing within one year. Despite a weak
cash generation expected in 2022, these sources are sufficient to
cover the group's EUR2.5 billion debt maturities and capital spending
over the next 12 months.
With a reported EBITDA of EUR18 billion as of 31 December 2021 and net
installed generation capacity of 123 GW as of year-end 2021,
EDF is one of Europe's largest integrated utilities, providing electricity
generation, distribution and supply services. The group is
organised along the following business lines: (1) France -
generation and supply, where it is the dominant power generator
and supplier; (2) France - regulated, which primarily
includes electricity distribution through its subsidiary Enedis;
(3) UK, through EDF Energy, the country's largest generator
following the acquisition of British Energy; (4) Italy, where
it is the third-largest generator through Edison; (5) other
international, which mainly consists of Belgium, where EDF
Luminus is the second-largest electricity group in the Belgian
market, and in the Netherlands; (6) EDF Renouvelables (EDFR),
the group's wholly owned investment vehicle for renewables, excluding
hydro; and (7) other activities, which include Framatome,
EDFT and energy services through Dalkia.
LIST OF AFFECTED RATINGS
Issuer: Electricite de France
Affirmations:
....Commercial Paper, Affirmed P-2
....Backed Commercial Paper, Affirmed
P-2
Downgrades:
....LT Issuer Rating, Downgraded to
Baa1 from A3
....Junior Subordinated Regular Bond/Debenture,
Downgraded to Ba1 from Baa3
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Baa1 from (P)A3
....Junior Subordinated Medium-Term
Note Program, Downgraded to (P)Ba1 from (P)Baa3
....Backed Senior Unsecured Medium-Term
Note Program, Downgraded to (P)Baa1 from (P)A3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa1 from A3
....Senior Unsecured Shelf, Downgraded
to (P)Baa1 from (P)A3
....Backed Senior Unsecured Shelf, Downgraded
to (P)Baa1 from (P)A3
....Baseline Credit Assessment, Downgraded
to baa3 from baa2
Outlook Actions:
....Outlook, Changed To Negative From
Rating Under Review
Issuer: Edison S.p.A.
Downgrades:
....LT Issuer Rating, Downgraded to
Baa3 from Baa2
Outlook Actions:
....Outlook, Changed To Negative From
Rating Under Review
Issuer: EDF Energy Holdings Ltd
Downgrades:
....LT Issuer Rating, Downgraded to
Baa3 from Baa2
Outlook Actions:
....Outlook, Changed To Negative From
Rating Under Review
Issuer: EDF Trading Limited
Downgrades:
....LT Issuer Rating, Downgraded to
Baa3 from Baa2
Outlook Actions:
....Outlook, Changed To Negative From
Rating Under Review
The principal methodologies used in rating Electricite de France were
Unregulated Utilities and Unregulated Power Companies published in May
2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
The principal methodology used in rating EDF Energy Holdings Ltd and Edison
S.p.A. was Unregulated Utilities and Unregulated
Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389.
The principal methodology used in rating EDF Trading Limited was Trading
Companies published in June 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_190422.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
REFERENCES/CITATIONS
[1] EDF 2021 Annual Results -- Outlook and Action Plan -
https://www.edf.fr/sites/default/files/contrib/groupe-edf/espaces-dedies/espace-finance-en/financial-information/publications/financial-results/2021-annual-results/pdf/annual-results-2021-pr-en-20220218-v2.pdf
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.
Celine Cherubin
VP-Sr Credit Officer
Infrastructure Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
