Power Engineering - S & P warns of possible EDF rating reduction

20 July 2004 - Standard & Poor's Ratings Services said Monday that a downward adjustment of its ratings on France-based Electricité de France (EDF; AA-/Negative/A-1+), Europe's largest electric utility, is not excluded in the short-to-medium term.

"The ratings on EDF currently still factor in a degree of support from the French state, but as this support declines, we will adjust our ratings to more closely reflect EDF's stand-alone credit quality, which is presently below the 'AA-' rating level," said Standard & Poor's credit analyst Karl Nietvelt.

The French parliament is in the process of approving a change in EDF's legal status to that of a limited liability company ("socié té anonyme").

"This has opened the way for a partial privatization of up to 30 per cent of EDF's capital, which we believe could take place by 2006-2007," added Mr. Nietvelt.

EDF enjoyed a strong operating performance in 2003, with EBITDA up by 10 per cent to €11bn and net financial debt fell to €24bn from to €26.9bn. Nevertheless, the group's overall stand-alone financial profile is currently only moderate if estimated future pension provisions and part of the net liabilities (€22bn) for its nuclear operations are taken into account. Management is focused, nevertheless, on significantly improving current credit metrics and free operating cash flow generation over the medium term, which should reduce the gap between EDF's stand-alone credit quality and the current 'AA-' rating level. A material capital increase prior to privatization could mitigate some of the downward pressure on the ratings.

EDF has installed capacity of close to 120 GW and 35.6 million clients in Europe. Its French operations, with 101 GW of installed capacity (63 of which are derived from nuclear facilities) and 27 million clients, represented close to 70 per cent of 2003 group EBITDA of €11 billion. French activities are well balanced between competitive generation activities (46 per cent) and regulated transmission and distribution network operations (54 per cent). Of the remaining 30 per cent of group EBITDA, 25 per cent comes from other European operations--such as EDF Energy PLC (A/Stable/A-1) in the U.K. (10 per cent) and Energie Baden Wuerttemberg AG (EnBW; A-/Stable/A-2) in Germany (5 per cent on the basis of 45.8 per cent proportional consolidation)--and 5 per cent comes from international operations (mainly Light in Brazil and Edenor in Argentina). EDF has granted put options to acquire additional stakes in EnBW for €2.8bn and the Italian utility Edison SpA (BBB+/Stable/A-2)--currently not consolidated--for €3.7bn.

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