French-based energy company Électricité de France (EDF) has been given the go-ahead by the U.K. government to build a new nuclear plant, Hinkley Point C. S&P’s Director of Utilities, Pierre Georges, discusses why EDF’s credit rating has consequently been downgraded from ‘A’ to ‘A-’.
Following the recent announcement that energy giant EDF will begin a new £18 billion nuclear project – Hinkley Point C, in Somerset – we see increased execution and contingency risks for the company. This highly complex and expensive project will hamper EDF’s already large number of investments at a time when the company is generating a weak cash flow.
At the same time, the announcement comes at a time when EDF continues to face high execution risks relating to another nuclear build in Normandy, France. The company is also suffering from an increasing reliance on revenue derived from unregulated activities (following a partial liberalisation of the French energy market) which make energy prices less predictable.
Because of these risks, we are lowering our ratings on EDF to ‘A-’ from ‘A’.
A stable outlook
However, we have given EDF a ‘stable’ outlook reflecting the fact that EDF and the French government have set a remedy plan aimed at reducing the group’s debt over the next two years. Additionally, EDF will receive approximately €1 billion from a 35% sale of its stake in Hinkley to energy partner China Guangdong Nuclear (CGN), which should help relieve its cash flows.
On a more positive note, the plant’s 35-year-long “Contract for Difference” (CfD) with the U.K. government guarantees a minimum strike price per megawatt produced, which will reduce exposure to market price fluctuation.
And, despite the ongoing challenges that hurt EDF’s credit quality, the company’s significant size, contribution from regulated network activities in France and low carbon generation fleet (which may benefit from a higher carbon price over time) remain key strengths with respect to the company’s credit quality.
Pierre Georges is the director of utilities at S&P Global.