S&P downgrades French nuclear-uranium giant AREVA on weakened profitability

Tuesday, June 29, 2010

The decision of France's AREVA to take a EUR400mn charge on its Finnish nuclear reactor project, combined with a planned French nuclear plant shutdown is hurting AREVA's bottom line.

After state-owned AREVA, the world's largest uranium miner, announced last week it would take a 400 million euros (US$491mn) charge due to cost overruns at its Finnish nuclear plant project, Standard & Poor's Monday downgraded the company to a `BBB+' rating, citing continued weakened profitability.

In an analysis published Monday, S&P Credit Analysts Sophia Dedemadis and Karl Nietvelt noted, "Depressed profitability at France-based nuclear services provider AREVA is being further strained by the recently announced additional provision of EUR400 million (US$491mn) for the OL-3 [Olkiluoto-3] Finnish reactor."

"We also think that profitability could deteriorate as a result of the dispute with Electricité de France regarding the commercial agreement with AREVA's Georges Besse nuclear enrichment plant (GB-I)," S&P advised.

"We are therefore lowering the long and short-term credit ratings on AREVA to `BBB+/A-2' from `A/A-1" and removing them from credit watch," the analysts said. However, they added, "The stable outlook reflects our view that AREVA is likely to be able to successfully execute the remaining asset disposal program and proposed capital increase, thus strengthening its balance sheet."

In their analysis, S&P contend AREVA's profitability "will continue to be depressed over the next couple of years."

"In our view, AREVA's fair business risk profile is negatively impacted by the company's currently low profitability and project executive risks, including OL-3 [The Finnish nuclear plant project]," the analysts advised. `Based on the company's own estimates, the operating margin for the first half of 2010 will only be 4% excluding the OL-3 provision, In 2009, AREVA's reported operating income was just EUR97 million."

The analysts also noted the state-owned company's operating performance "continues to be severely affected by cost overruns related to the OL-3 project (EUR2.7 billion as of June 2010)." Originally AREVA said it could build the Finnish nuclear plant for EUR3.2 billion (US$3.9bn) and be finished in 2009. Finnish client Teolisuuden Voima Oyj said the plant will start operations at the end of 2012 rather than the previous June 2012 deadline.

"Furthermore we anticipate that AREVA will incur some additional costs as a result of the dispute with Electricité de France S.A. regarding the offtake until 2012 from the Georges Besse nuclear enrichment plant (GB-I)," they added.

"We note that in response to the delays and profitability pressures, AREVA has undertaken several cost-cutting initiatives as well as reducing, to an extent, its capital expenditures up to 2012." AREVA and its state-owned parent, Commissariat `a l'Energie Atomique (CEA) estimates they could raise as much as EUR4 billion to EUR5 billion by financial year-end 2010. The two are trying to convince Mitsubishi Heavy Industries and the sovereign wealth funds of Kuwait and Qatar to buy new AREVA shares.

AREVA also has a large, long-term order backlog that is estimated at more than EUR43 billion (US$53bn) and significant cash flow benefits from new projects which are anticipated to occur from 2012 onward. S&P also suggested the French government "would provide timely and sufficient extraordinary support to AREVA in the event of financial distress."

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