Fitch: No Rating Impact on EdF from HPC; Business & Contract Risks Uncertain
The FID for HPC represents a material change to projections in Fitch's rating case, which previously assumed no capex related to HPC beyond 2016. An FID for HPC is also a trigger for negative rating action if it leads to a weaker financial profile.
We estimate the annual capex for HPC currently averages around 15% of EdF's total capex and do not expect a peak in capex before 2021-22, well outside our current rating horizon. The additional capex requirement for HPC over 2016-19 should still leave funds from operations (FFO) lease adjusted net leverage within our guidelines of 4.5x during this period. Fitch shifted this guideline in June from 4.0x when it downgraded EdF to 'A-' with a Stable Outlook from 'A' to reflect risks in new nuclear build and a lower power price environment.
Fitch's rating case over 2016-19 reflects specifically the impact of lower power prices on an undiversified fuel mix, coinciding with the erosion of French business volumes. While capex is being cut, we view flexibility as limited and substantial capex is needed to modernise the domestic nuclear fleet. EdF has strong liquidity, plans to sell assets, extend scrip dividends to 2017 and raise EUR4bn of fresh equity. However, ahead of additional commitments including HPC, its biggest challenge today is to reduce underlying negative free cash flow.
An FID for HPC also increases business risk in the medium - to long-term. Our assessment of this risk largely hinges on the successful operation of EPR technology. The first capacity to start operations using EPR technology is China General Nuclear Power Corporation's (CGN) Taishan 1 in 2017. It should also be noted that unlike Europe, China has had an uninterrupted tradition of a nuclear supply chain. In Europe, EdF's Flamanville 3 and Teollisuuden Voima Oyj's (TVO) Olkiluoto 3, which also use EPR technology, are not due to start operations before 2018, while a report into the former from the French Nuclear Safety Authority (ASN) is keenly awaited for early 2017.
Fitch also points to the level of sharing construction and operation risks associated with HPC. In view of EdF's rapprochement with nuclear component supplier Areva - as EdF is committed to buying Areva NP (ANP) - these risks may be less widely shared with investment-grade counterparties. Also, as EdF is not ANP's only customer, EdF will manage ANP as a separate entity with its own management and corporate governance to avoid conflict of interest. Assessing the technical risks facing ANP and the degree of construction risk-sharing will be challenging, in our view.
The latest cost estimate for HPC is GBP18bn or EUR21.6bn at current rates. EdF's share at 66.5% is EUR14.4bn, of which GBP2.4bn (EUR2.9bn) has been spent, leaving EdF's share of the remaining outlay at around EUR11.5bn. EdF has committed to providing partner CGN limited financial guarantees in cost overrun delays to the project schedule or in the event of a challenge to the Contract for Difference (CfD) by European authorities. HPC is eligible for the UK government infrastructure guarantee programme, approved by the European Commission in October 2014. An initial amount of GBP2bn could be made available at the time an FID is taken.
HPC is supported by a legally binding contract with the UK government, irrespective of the UK's EU referendum. The terms were approved by the European Commission after a 12-month consultation in October 2014. The CfD sets a price on output from HPC of GBP92.50/ MWh (2012 prices, now closer to GBP96) fixed for 35 years. On these terms, the contract would deliver a stable 9.2% project internal rate of return (according to EdF), but based on the key pre-condition that HPC can be delivered on budget and on time (2025). EdF has plans for similar reactors to HPC at Sizewell B (80% EdF, 20% CGN) and Bradwell B (EdF 33.5%, CGN 66.5%, using Hualong technology, not EPR).