Forum Post: Nuclear still being pushed

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Sept 06 - A possible joint venture between four Polish state-controlled companies will share the risks and speed up the progress of the country's first nuclear power plant, Fitch Ratings says.

Yesterday, the largest Polish utility PGE Polska Grupa Energetyczna S.A. (PGE; 'BBB+'/Stable) signed a letter of intent with two utilities, TAURON Polska Energia S.A. (TAURON; 'BBB'/Stable) and ENEA S.A. ('BBB'/Stable), and copper mining company KGHM Polska Miedz S.A. PGE will continue to lead the project to build the 3GW nuclear plant, which will cost EUR9bn-12bn according to Fitch's estimates. The possible JV does not immediately impact the companies' credit profile because of the back loaded nature of the project.

The Polish government supports the construction of the country's first nuclear plant, despite Japan's Fukushima accident and Germany's decision to retreat from nuclear power. The Polish power sector is still reliant on coal-based generation (about 90% of the country's fuel mix is coal or lignite compared with the EU average of about 30%), which results in significant exposure to CO2 costs. The government is trying to diversify its power mix to reduce these costs.

We believe that the direct or indirect government support is likely to be needed to offset a number of challenges related to the nuclear project. These include Poland not having an operational track record in nuclear power, relatively low wholesale power prices which may harm the project's profitability, as well as volatile and difficult-to-predict CO2 allowance prices. Potential cost-overruns and delays, as seen in the third-generation nuclear plants under construction in France and Finland, may also occur. We think that state support could, for instance, take the form of an electricity price floor that would secure sufficient cash flows at the plant.

The plant will require substantial investment between 2018 until it is fully operational in 2025, but there will be limited demand for capex before 2018. The long time scale and lack of detailed information means this is not yet factored into the ratings.

Fitch believes that if TAURON's and ENEA's capex related to the potential nuclear partnership is substantial in relation to their existing long-term capex, both companies would have some flexibility to adjust their capex, for example by cancelling or postponing some power generation projects. According to Fitch's projections, both companies will substantially increase leverage by 2016 due to their large capex and as a result their financial flexibility will decrease.

The involvement of TAURON and ENEA in the nuclear plant could allow them to diversify their generation mix away from coal and reduce high exposure to CO2 costs. The partnership may also help both companies mitigate the negative impact of a likely reduction in the utilisation rates and profitability of coal-fired plants once the 3GW nuclear plant is fully operational in 2025.