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Related Issuers
Rating Action:

Moody's downgrades EDF's ratings to A2; outlook negative

12 May 2016

London, 12 May 2016 -- Moody's Investors Service (Moody's) has today downgraded to A2 from A1 the issuer and senior unsecured ratings of Électricité de France (EDF), as well as its perpetual junior subordinated debt ratings to Baa2 from Baa1. Concurrently, Moody's has confirmed the group's short-term P-1 ratings. The outlook on all ratings is negative.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

Today's rating action concludes the review initiated on 13 February 2016. The rating downgrade reflects Moody's view that the group's action plan announced on 22 April 2016 will not be sufficient to fully offset the pressures resulting from a low power price environment combined with a significant investment programme.

Notwithstanding a recent rebound, one-year forward baseload power prices in France fell by 21% in the last twelve months to around EUR30/MWh currently. A prolonged period of low power prices will affect EDF given its exposure to market-exposed generation activities, which Moody's estimates account for approximately 50% of EDF's EBITDA. In addition, as EDF's generation fleet is predominantly fixed cost in nature, it is particularly exposed to movements in wholesale power prices. Nuclear and hydro made up around 85% of total electricity production of 619 TWh in 2015.

As hedges roll off, lower power prices will exert pressure on cash flows. This pressure is arising at a time when (1) EDF's electricity volumes sold in France are increasingly exposed to market prices following the termination of regulated tariffs for mid-size and large business customers on 1 January 2016; and (2) the group needs to invest significantly in France to maintain and upgrade the nuclear fleet, develop renewables in accordance with the energy transition law for green growth and roll out smart meters (Linky project).

Moody's notes the action plan recently announced by EDF, which includes (1) a reduction in operating and capital expenditure; (2) an asset disposal programme of EUR10 billion; (3) proposing to shareholders the option to receive the dividend related to fiscal years 2016 and 2017 in shares; and (4) a EUR4 billion capital increase. Moody's further notes the announcement by EDF's main shareholder, the French government, that it intends to exercise the option to take the dividend in shares and to subscribe to the proposed capital increase for EUR3 billion.

Whilst Moody's views this plan as a positive step from a financial risk profile perspective, the rating downgrade reflects that EDF cannot fully offset the pressures described above. Taking into account the planned disposals, Moody's expects that EDF will demonstrate funds from operations (FFO) to net debt in the mid to high teens in percent terms from 2017 onwards, a level which the rating agency views as consistent with the revised A2 rating.

Moody's further notes the recent announcement by the French government that it will seek to introduce a carbon price floor for electricity in France. Although this would likely raise French wholesale power prices and hence have a positive impact on EDF's earnings given its low-carbon generation mix, there remains significant uncertainty as regards the timing and impact of this measure.

The A2 rating also factors in EDF's plan to acquire a majority stake in nuclear service provider AREVA NP based on an indicative price of EUR2.5 billion for 100% equity. The A2 rating is based on Moody's expectation that EDF will have no material exposure to AREVA NP's liabilities associated with past and existing contracts in its engineering and construction business, including the Olkiluoto 3 nuclear project in Finland.

Furthermore, the A2 rating takes into account the group's scale and geographic diversification, as well as the stabilizing contribution of regulated activities in France and renewable activities (EDF Energies Nouvelles S.A.), which accounted for 26% and 5%, respectively, of group EBITDA in 2015.

Given EDF's 84.9% ownership by the Government of France (Aa2 stable), EDF's A2 rating continues to incorporate a two-notch uplift from its standalone credit quality or baseline credit assessment (BCA) of baa1 based on the agency's estimate of a high degree of government support.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects (1) the execution risk associated with certain elements of EDF's action plan, notably the disposal of commodity-exposed activities; (2) that the action plan does not address the fundamental challenge faced by EDF, that is power prices at a level which currently does not allow the group to cover the required investments and earn a return on those; and (3) the incremental risks associated with the Hinkley Point C (HPC) nuclear power station project in the UK, should it go ahead.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the current negative outlook, upward rating pressure is unlikely in the medium term. The outlook could be returned to stable provided that (1) EDF decides not to proceed with the HPC nuclear project; (2) it demonstrates progress on its action plan so as to maintain financial ratios well in line with the guidance above on a permanent basis; and (3) clarity develops on regulatory measures such as carbon price floor or capacity payments that would support EDF's business model.

The ratings could be downgraded if (1) the HPC project were to go ahead; (2) credit metrics fall below Moody's guidance for the A2 rating; (3) progress on EDF's action plan and the regulatory measures described above fail to materialize; or (4) EDF were to be significantly exposed to AREVA NP's liabilities. In addition, downward rating pressure could arise if a change in the group's relationship with the government were to cause Moody's to remove the uplift for government support, or if there were to be a significant downgrade of France's government rating.

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

LIST OF AFFECTED RATINGS

Downgrades:

...Issuer: Electricite de France

.... LT Issuer Rating, Downgraded to A2 from A1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A2 from A1

....Junior Subordinated Regular Bond/Debenture , Downgraded to Baa2 from Baa1

....Senior Unsecured MTN, Downgraded to (P)A2 from (P)A1

....BACKED Senior Unsecured MTN, Downgraded to (P)A2 from (P)A1

....BACKED Senior Unsec. Shelf, Downgraded to (P)A2 from (P)A1

Confirmations:

..Commercial Paper, Confirmed at P-1

.... BACKED Commercial Paper, Confirmed at P-1

Outlook Actions:

....Outlook, Changed To Negative From Rating Under Review

Headquartered in Paris, France, Électricité de France is one of Europe's largest integrated utilities, with reported revenues of EUR75 billion in 2015. It is 84.9% 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 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.

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's ratings to A2; outlook negative
No Related Data.
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