The agreement in principal to build two nuclear reactors in the UK substantially reduces the potential risks of the project for EDF (Paris: FR0010242511 - news) , Fitch Ratings says. We believe Monday's announcement means the new-build programme is unlikely to lead to a rating downgrade for the company. However, this judgement is subject to contract parties finalising the commercial terms and conditions and documentation.
Under the conditional agreement, EDF will reduce its stake in the project to 45%-50%, with industrial partners AREVA, China General Nuclear Corporation and China National Nuclear Corporation taking equity stakes and contributing their expertise. In addition, the GBP16bn project will be funded on a non-recourse basis, meaning the consortium's exposure will be limited to equity commitments of around GBP6bn (in 2012 prices) plus contingent equity required to cover potential cost over-runs (maximum cap still to be determined).
The commitments will be given by the partners on an individual basis, so EDF does not assume any liability for commitments from its consortium partners. As a result, EDF's exposure to the project, including construction risk, will be limited to around GBP2.7bn-3.0bn (in 2012 prices) plus its share of contingent equity. EDF has also already contributed significant equity to the project in terms of land purchases, developing the design of the reactors and progressing with the planning process. This expenditure counts towards the company's commitment and the remaining investment will have to be funded over the next 10 years or the construction period.
Treasury-guaranteed debt will finance 65% of expected total costs before operations, subject to satisfactory due diligence by Infrastructure UK and a decision from the EU Commission on state aid. Other positive features for EDF include earnings visibility for 35 years via a contract for difference that locks in an electricity price of GBP92.5/MWh (indexed to CPI (Other OTC: CPICQ - news) ) and contractual arrangements that protect the project from certain unforeseen changes to the law.
Despite the terms of this agreement there are other factors that could lead to a downgrade of EDF's 'A+'/Negative rating. In the long term developments from the debate about France's future energy mix will have a material impact on the group's earning dynamics, although the political process will take some time to conclude. An update in H114 will provide more details on the group's strategy, capex plans and dividend policy.