Commission Decision (EU) 2015/658 of 8 October 2014 on the aid measure SA.34947 (2013/C) (ex 2013/N) which the United Kingdom is planning to implement for support to the Hinkley Point C nuclear power station (notified under document C(2014) 7142) (Text with EEA relevance)
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Aid to Hinkley Point C in the form of a Contract for Difference, the Secretary of State Agreement and a Credit Guarantee, as well as all related elements, which the UK is planning to implement, is compatible with the internal market within the meaning of Article 107(3)(c) of the Treaty on the Functioning of the European Union. Implementation of the aid is accordingly authorised.
This Decision is addressed to the United Kingdom of Great Britain and Northern Ireland.
ANNEX A CFD RATE OF RETURN Table 3 NNBG Financial Risk Assessment — estimated probability distribution of HPC's total outturn costs […] Source: TESLA4, page 12 Figure 2 UK historic forward prices and RP UK 1- and 2-Seasons Ahead Baseload Forward Prices and Simulated Reference Price Mid price (GBP/MWh) Source: Bloomberg ELUBS1, OECM, ELUBS2, OECM; UK REQ Delivery date 1 Season ahead Simulated reference price 2 Seasons ahead Difference if sold 2S ahead (compared to ref.p.) Gain if sold 2S ahead (compared to ref.p.) Table 4 Summary of approaches taken for analysing an appropriate rate of return, by KPMG (per cent) Approach Range of returns (project IRR; post-tax nominal) Comments Relative risk analysis 8,5-11 (project basis) Comparison of offshore wind and PPP/PFI returns during construction phase and also UK regulated utilities/nuclear operators during operations phase Benchmarking Analysis 6-13 (project basis) Comparison of UK regulated utility/PPP/IWPP/comparable nuclear projects Project Hurdle Rate analysis 10,5-14,5 Based on EdF WACC estimates plus premium observed in academic studies from a range of corporates Financing analysis 9-13 — construction 6-9,5 — operational Analysis of potential financing structures both during construction and during operations Assumed debt-financed structure with UK Guarantee 10,2 — Project IRR 12,8 — Levered Equity IRR Analysis of the Project Return and the Levered Equity Return (for the proposed UK guaranteed debt levels) and at the negotiated SP. The 10,2 % is due to the tax shield effect on project level cash flows and indicative IUK Guarantee pricing. Source: Notification, Table 5, based on KPMG Table 5 Commission sensitivity analysis — Model with changed annual cash flows in the construction phase […] Shaded cells denote construction cost capex — target IRR scenarios yielding a lower SP than 92,50 GBP/MWh. Based on NNBG Financial Model version 9.8. Table 6 Project scenarios, probabilities (confidence levels that outturn factors will be more favourable than assumptions) and key project metrics […] Notes: (1) Includes construction gain share benefit of GBP 0,8/MWh (real 2012) (2) Lump sum from SZC only released post COD2 and therefore does not form part of funding requirement (3) Opex adjustment only applied for first 15 yrs and after CFD period due to potential opex reopener protection. (4) Min DSCR excluding first period (5) EIRR committed real approximated as EIRR committed nominal minus long term CPI assumption (6) Lower level of Committed equity assumed in this version of the Financial Model will mean Committed Equity IRR is optimistic v current modelled results VERY LOW Very low likelihood of more favourable outcome than assumed LOW Low likelihood of more favourable outcome than assumed MODERATE Moderate likelihood of more favourable outcome than assumed HIGH High likelihood of more favourable outcome than assumed VERY HIGH Very high likelihood of more favourable outcome than assumed Table 7 Funding profile during construction and DSCR during operations […] Table 8 Combined capex, delay and other downside scenarios […] Table 9 Summary DDM results for a selection of scenarios Run Key Assumptions Capacity Market First Nuclear Deployment Grid carbon intensity 2030 Grid carbon intensity 2040 Grid carbon intensity 2049 1a BAU No 2037 232 188 96 1d BAU, High Fuel Prices No 2031 186 101 46 1e BAU, Low Fuel Prices No 2041 269 233 121 2a BAU + Nuclear CfD No 2023 158 88 37 3a Non-nuclear Low Carbon CfDs No 2037 164 135 61 3d Non-nuclear Low Carbon CfDs, High Fuel Prices No 2031 181 123 52 3e Non-nuclear Low Carbon CfDs, Low Fuel Prices No 2041 182 120 66 3h Non-nuclear Low Carbon CfDs, more interconnection No 2037 160 133 59 4a Low Carbon CfDs No 2023 100 42 25 5a BAU Yes 2037 236 194 88 5d BAU, High Fuel Prices Yes 2032 194 111 52 5e BAU, Low Fuel Prices Yes 2041 272 235 126 7a Non-nuclear Low Carbon CfDs Yes 2046 104 49 33 7d Non-nuclear Low Carbon CfDs, High Fuel Prices Yes 2038 137 65 28 7e Non-nuclear Low Carbon CfDs, Low Fuel Prices Yes Not before 2049 113 51 44 7f Non-nuclear Low Carbon CfDs, High Nuclear Costs, Low RES and CCS costs Yes 2048 97 46 35 7g (only to 2030) Non-nuclear Low Carbon CfDs, more DSR, more EDR, more Interconnection Yes Not before 2030 104 N/A N/A 7h Non-nuclear Low Carbon CfDs, more interconnection Yes 2046 101 48 32 8a Low Carbon CfDs Yes 2023 104 50 31 8d Low Carbon CfDs, High Fuel Prices Yes 2023 99 48 30 8e Low Carbon CfDs, Low Fuel Prices Yes 2023 99 38 30 8f Low Carbon CfDs, High Nuclear costs, Low RES and CCS costs Yes 2023 102 45 28 8g (only to 2030) Low Carbon CfDs, more DSR, more EDR, more Interconnection Yes 2023 98 N/A N/A 8h Low Carbon CfDs, more Interconnection Yes 2023 100 53 32 Table 10 Benchmark infrastructure transactions Sponsor Antin Infrastructure Partners CDP Capital Brookfield Renewable Energy Partners Borealis, First State EDIF Fund Target Equity IRR 15 % 16 % 9 – 12 % 9 – 15 % Source: UK submission ‘ Answers to the Commission's questions received 16 September 2014 ’ based on Fund websites, Preqin, Press releases. Note: Fund target IRRs shown gross of fees and expenses. Exchange rates used: GBP EUR: 1: 1,26, GBP CAD: 1: 1,81. HPC post-tax nominal equity IRR used for comparison purposes. Borealis target IRR: 9 – 12 per cent, First State EDIF target IRR: 10 – 15 per cent. Table 11 Selected regulatory allowed returns calculations Electricity Transmission (Ofgem ( 1 ) ) Ofwat ( 2 ) — PR09 Ofwat — PR 14 (not finalised) ( 3 ) Note Period 2013-21 2010-15 2015-20 Real Levered cost of equity (post-tax) 7,00 per cent 7,10 per cent 5,65 per cent Cost of debt (pre-tax real) 2,92 per cent 3,60 per cent 2,75 per cent Notional gearing 60,0 per cent 57,5 per cent 62,5 per cent Vanilla WACC 4,55 per cent 5,10 per cent 3,85 per cent Inflation assumption 3,50 per cent 3,50 per cent 3,50 per cent Allowed Nominal Costs/Returns (geometric calc) Levered cost of equity 10,7 per cent 10,8 per cent 9,3 per cent Cost of debt (pre-tax) 6,5 per cent 7,2 per cent 6,3 per cent Vanilla WACC* 8,2 per cent 8,8 per cent 7,5 per cent Nominal (arithmetic calc) Levered cost of equity* 10,5 per cent 10,6 per cent 9,2 per cent Cost of debt (pre-tax)* 6,4 per cent 7,1 per cent 6,3 per cent Vanilla WACC 8,1 per cent 8,6 per cent 7,3 per cent https://www.ofgem.gov.uk/ofgem-publications/53602/4riiot1fpfinancedec12.pdf http://www.ofwat.gov.uk/pricereview/pr14/gud_tec20140127riskreward.pdf http://www.ofwat.gov.uk/pricereview/pr09phase3/det_pr09_finalfull.pdf Source: Presentation of EDF Energy to Commission officials of 15 July 2014, slide ‘ Comparison of HPC with UK regulated utilities ’. Table 12 Benchmark nuclear generation project Project Ontario Power Authority Technology Refurbishment of Bruce Power nuclear plant Gearing 20-40 per cent Real cost of debt (pre-tax) 6,20 per cent Nominal target equity IRR (post-tax) 13,7-18 per cent ( 12,8-17,1 per cent adjusted for current UK interest rate) Target project IRR 10,6-13,8 per cent ( 9,7-12,9 per cent adjusted for current UK interest rate) Investment horizon (asset life) 25 years Investment size 4bn CAD Level of Revenue certainty Fixed price CfD for remainder of plant life (25 years) Level of construction risk Lower — refurbishment, not new build, cost overrun sharing Level of operating risk Lower — staff cost overrun sharing, fuel cost pass-through Level of financing risk Lower — smaller capital project, shorter period Contingent equity required Unknown Source: UK submission ‘ Answers to the Commission's questions received 16 September 2014 ’ based on publicly available documents (Bruce Power audit report — April 2007, p. 14.: Confirmed as a project rate of return in letter from CIBC World Markets Inc. to The Ministry of Energy, Ontario, 17 October 2005, http://www.rds.ontarioenergyboard.ca/webdrawer/webdrawer.dll/webdrawer/rec/67137/view/PWU_Exhibit_K11.3_fairness_opinion_bruce_20080613.pdf.PDF, Letter from CIBC World Markets Inc. to the Ministry of Energy, Ontario, 17 October 2005, http://www.rds.ontarioenergyboard.ca/webdrawer/webdrawer.dll/webdrawer/rec/67137/view/PWU_Exhibit_K11.3_fairness_opinion_bruce_20080613.pdf.PDF Bruce Power Fairness Opinion (CIBC World Markets Inc.) — October 2005, p. 5. Table 13 Benchmark Power Purchase Agreement (PPA) projects Technology CCGT PPA projects Gearing < 80 per cent Unknown Cost of debt Unknown Unknown Nominal target return on equity (post-tax) > 13 per cent Nominal target project return (post-tax) 9-15 per cent ( *1 ) Investment horizon (asset life) 25 years Various Investment size Various Various Degree of revenue certainty 20 year PPA PPA Level of construction risk compared to HPC Lower-EPC contract-based, well-known technology Unknown but likely lower Level of operating risk compared to HPC Lower Unknown Level of financing risk Lower shorter construction period Unknown but likely lower Contingent equity required Unknown Unknown References ( 4 ) ( 5 ) Source: UK submission, Table 2 — on Rate of Return, 10th September as well as (1) and (2) below. Table 14 Regulated Settlement Benchmarks: Allowed returns on regulated assets for UK energy and water utilities in recent regulatory price controls Regulator Ofwat Ofgem CC Ofgem CC CAA ORR Determination PR14 (not final) ( 6 ) WPD 14 ( 7 ) NIE 2014 Final ( 8 ) RIIO T1 2012 (NGET) ( 9 ) Bristol W 2010 ( 10 ) HAL 2014 Final ( 11 ) NR 2013 ( 12 ) Gearing 62,50 per cent 65 per cent 45 per cent 60 per cent 60 per cent 60 per cent 62,50 per cent Real cost of debt (pre-tax) 2,8 per cent 2,6 per cent 3,1 per cent 2,9 per cent 3,9 per cent 3,2 per cent 3,0 per cent Real cost of equity (post-tax) 5,7 per cent 6,4 per cent 5,0 per cent 7,0 per cent 6,6 per cent 6,8 per cent 6,5 per cent Real vanilla WACC 3,8 per cent 3,9 per cent 4,1 per cent 4,6 per cent 5,0 per cent 4,7 per cent 4,3 per cent Inflation 3,5 per cent 3,5 per cent 3,5 per cent 3,5 per cent 3,5 per cent 3,5 per cent 3,5 per cent Nominal cost of debt (pre-tax) 6,2 per cent 6,1 per cent 6,6 per cent 6,4 per cent 7,4 per cent 6,7 per cent 6,5 per cent Nominal cost of equity (post- tax) ( 13 ) 9,2 per cent 9,9 per cent 8,5 per cent 10,5 per cent 10,1 per cent 10,3 per cent 10,0 per cent Nominal vanilla WACC 7,3 per cent 7,4 per cent 7,6 per cent 8,1 per cent 8,5 per cent 8,2 per cent 7,8 per cent Analyst return on equity forecast ( ex ante ) c 14 per cent ( 14 ) Investment horizon ( 15 ) — Price control length 5 8 3 8 5 5 5 Investment Size: Regulatory Asset Value (RAV) ( 16 ) ( 17 ) ( 18 ) 70m — 11,7bn ( 19 ) (estimated 2014 — 15) values) 5,9bn (2014) ( 20 ) c GBP 950m (forecast across price control) ( 21 ) 2,2bn — 14,8bn (forecast RAV range of companies over price control) ( 22 ) 0,39bn (2013) ( 23 ) 14,9bn ( 24 ) 45bn (2013) ( 25 ) Degree of revenue protection More than HPC — see answer to question 2c — NNBG Submission on Rate of Return, 10 September Degree of construction risk Less than HPC. See detailed discussion recitals 124 – 131 — NNBG Submission on Rate of Return, 10 September Degree of operating risk Less than HPC. See detailed discussion recitals 132 – 135 — NNBG Submission on Rate of Return, 10 September Degree of financing risk Less than HPC. See detailed discussion paragraphs 136 – 139 — NNBG Submission on Rate of Return, 10 September Other risks Less than HPC. See detailed discussion on difference in fundamental business models; diversification of assets; and technology risks in recitals 113 – 122 — NNBG Submission on Rate of Return, 10 September Contingent equity required None Source: based on UK submission ‘ SA.34974 Hinkley Point C State aid case — Answers to the Commission's questions received 16 September 2014 ’. Table 15 Cost of capital estimates for companies belonging to industry group ‘Utility (general)’ in the European Union (per cent) Company Name Country Cost of equity in USD Pre-tax cost of debt in USD After-tax cost of debt in USD Cost of capital in USD E.ON SE (DB:EOAN) Germany 8,25 4,04 3,19 5,78 RWE AG (DB:RWE) Germany 7,95 4,54 3,59 5,54 Centrica plc (LSE:CNA) UK 6,99 4,44 3,11 6,04 Veolia Environnement S.A. (ENXTPA:VIE) France 11,62 5,44 4,30 6,46 National Grid plc (LSE:NG.) UK 9,37 4,44 3,11 6,33 Suez Environnement Company SA (ENXTPA:SEV) France 9,97 4,94 3,90 6,38 A2A SpA. (BIT:A2A) Italy 13,72 7,44 5,88 8,68 Hera SpA. (BIT:HER) Italy 12,65 5,94 4,69 7,94 MVV Energie AG (XTRA:MVV1) Germany 8,31 4,04 3,19 5,70 ACEA SpA. (BIT:ACE) Italy 12,15 6,44 5,09 7,68 Iren SpA (BIT:IRE) Italy 13,85 7,94 6,27 8,80 Mainova AG (DB:MNV6) Germany 6,96 5,54 4,38 6,30 Gelsenwasser AG (DB:WWG) Germany 6,09 5,54 4,38 6,08 Telecom Plus plc (LSE:TEP) UK 6,45 4,94 3,46 6,44 Compagnie Parisienne de Chauffage Urbain (ENXTPA:CHAU) France 7,73 4,94 3,90 6,33 Zespól Elektrocieplowni Wroclawskich KOGENERACJA Spólka Akcyjna (WSE:KGN) Poland 7,44 5,39 4,26 6,94 Fintel Energia Group SpA (BIT:FTL) Italy 9,88 8,94 7,06 9,02 REN — Redes Energéticas Nacionais, SGPS, S.A. (ENXTLS:RENE) Portugal 19,97 7,64 6,04 10,05 GDF SUEZ S.A. (ENXTPA:GSZ) France 8,70 4,44 3,51 5,74 Burgenland Holding Aktiengesellschaft (WBAG:BHD) Austria 6,08 5,54 4,38 6,08 Source: http://www.stern.nyu.edu/~adamodar/pc/datasets/Eurocompfirm.xls (retrieved on 14 June 2014). (The presented WACCs are nominal (in USD terms, using USD risk free rate = 3,04 per cent) & post-tax. For the various definitions used by Damodaran, see: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/variable.htm). ( 1 ) Final Proposals for National Grid Electricity Distribution and National Grid Gas ( 2 ) Ofwat Future water and sewerage charges 2010-2015: Final determinations ( 3 ) Ofwat: Setting price controls for 2015-20 — risk and reward guidance ( 4 ) In tenders for Independent Water and Power Producer (IWPP) contracts in Abu Dhabi, which include a 20 year fixed-price water/power purchase agreement with inflation indexation, ‘ the nominal internal rate of return (IRR) on equity is required to be not less than 13 per cent ’. These projects will typically involve construction of technically — mature CCGT capacity under a lump sum, date-certain turnkey EPC contract, with provisions to compensate investors for any delays and deviations from the terms of the contract. See Independent water and power producers, Abu Dhabi Regulation & Supervision Bureau, http://rsb.gov.ae/assets/documents/231/infoiwpp.pdf. (Source: UK submission) ( 5 ) http://www.gdfsuez.com/wp-content/uploads/2012/07/GDF-SUEZ-at-a-glance-060712-final.pdf Slide 8 ( *1 ) While the UK's submission quotes 9-15 per cent post-tax nominal rates of returns from the source given in (2), the Commission notes that this seems to ignore the ‘ regulated and concession ’ projects mentioned in that source. The Commission understands from (2) that the regulated and concession activities of GDF-Suez are indicated to realise around 5-13 per cent post-tax nominal project returns, with the most likely range being below 10 per cent. ( 6 ) http://www.ofwat.gov.uk/pricereview/pr14/gud_tec20140127riskreward.pdf ( 7 ) https://www.ofgem.gov.uk/ofgem-publications/86375/fast-trackdecisionletter.pdf ( 8 ) https://assets.digital.cabinet-office.gov.uk/media/535a5768ed915d0fdb000003/NIE_Final_determination.pdf. The Commission notes that while Table 13.10 of the quoted document provides a ‘low’ and a ‘high’ estimate for the reported financial indicators, the UK's submission seems to be based on the ‘high’ estimates alone. ( 9 ) https://www.ofgem.gov.uk/publications-and-updates/riio-t1-final-proposals-national-grid-electricity-transmission-and-national-grid-gas-–-overview ( 10 ) Source was not provided in the submission. ( 11 ) http://www.caa.co.uk/docs/33/CAP%201140.pdf ( 12 ) http://orr.gov.uk/data/assets/pdf_file/0011/452/pr13-final-determination.pdf ( 13 ) Nominal values are calculated using an arithmetic approach. A geometric approach would add 0,1 per cent-0,2 per cent to nominal cost of equity and nominal vanilla WACC estimates. ( 14 ) Credit Suisse: National Grid — No longer a growth/value play, cut to Neutral, 29 May 2014; Credit Suisse: SSE — Referendum risk to be addressed, 15 August 2014; Macquarie: National Grid — Quality costs, but better opportunities elsewhere, 24 March 2014. ( 15 ) The submission interpreted the length of the investment horizon as the length of a price control period. However, the submission notes that the asset lives of the investments undertaken by regulated companies often span multiple price control periods, having ‘useful lives’ of up to 60 years. ( 16 ) The value ascribed by the regulator to the capital employed in the licensee's business. ( 17 ) Where source RAV values are stated in historical price terms, they have been converted to current prices using the ONS RPI index (unless otherwise stated). ( 18 ) We note that regulated companies' investment expenditure is in diverse, multiple projects that typically form only a small proportion of its RAV. ( 19 ) http://ofwat.gov.uk/regulating/prs_web_rcvupdates ( 20 ) http://www.westernpower.co.uk/docs/About-us/financial-information/2014/Annual-reports-and-financial-statements/Financial-performance-for-website-Mar-14.aspx ( 21 ) http://www.uregni.gov.uk/uploads/publications/RP5_Main_Paper_22-10-12_FINAL.pdf (page 100). ( 22 ) This is Ofgem's forecast for RAV at the end of the price control period. Note that at the start of the price control period SHETL is estimated to have a RAV of 0,7bn (which is forecast to increase to 3,6 bn by 2020-21): https://www.ofgem.gov.uk/ofgem-publications/53747/sptshetlfpsupport.pdf (pages 36 and 37) and https://www.ofgem.gov.uk/ofgem-publications/53602/4riiot1fpfinancedec12.pdf (pages 8 and 9). ( 23 ) http://www.bristolwater.co.uk/wp/wp-content/uploads/2013/04/Annual-Report-2013.pdf (page 27). ( 24 ) http://www.heathrowairport.com/static/HeathrowAboutUs/Downloads/PDF/Development_of_Regulatory_Asset_Base_30-Jun-2014.pdf ( 25 ) http://www.networkrail.co.uk/browse%20documents/regulatory%20documents/regulatory%20compliance%20and%20reporting/regulatory%20accounts/nril%20regulatory%20financial%20statements%20for%20the%20year%20ended%2031%20march%202013.pdf (page 331).
ANNEX B CREDIT GUARANTEE Table 16 Benchmark Information 1. Recent Limited Recourse Project Finance Bank Loans (Low Carbon Energy) This table updates the one provided in Annex A of our responses dated 5 September 2014 to show the quantum of the commercial debt tranche distinct from the total debt quantum which, for certain projects, included export credit guaranteed or multilateral debt facilities. Project Financial Close Amount [Commercial Bank Tranche] Tenor (Years) Commercial Bank Loan Margin ( 6 ) Government Support ( 7 ) Gemini Offshore Wind May 2014 EUR 2 000 m [EUR 850 m] 14 300 SDE renewable subsidy (per MWh) from Dutch government Separate export credit facilities provided by EKF (Denmark), Euler Hermes (Germany) and Delcredere/Ducroire from Belgium London Array Offshore Wind Oct 2013 GBP 266 m [GBP 266 m] 13 275 Renewables Obligation subsidy (per MWh) from UK Government Separate export credit facility provided by EKF (Denmark) for initial financing Butendiek Offshore Wind Feb 2013 EUR 950 m [EUR 230 m] 8,5 300 Feed-in Tariff subsidy (per KWh) from German government Separate export credit facility provided by EKF (Denmark) Westermost Rough Offshore Wind Aug 2014 GBP 370 m [GBP 197 m] 15 300 Renewables Obligation subsidy (per MWh) from UK Government […] […] EUR 650 m [EUR 650 m] 10 175-275 Finance from commercial banks only Derbyshire Energy from Waste PFI Aug 2014 GBP 145 m [GBP 145 m] 25 315-320 Renewables Obligation subsidy (per MWh) from UK Government Local Authority payments for waste recycling MEDIAN 300 SWAP SPREAD ( 8 ) + 13 (To convert from LIBOR margin to Gilt benchmark) ILLIQUIDITY PREMIUM – 50 MARKET INDICATION ( 9 ) 263 Source: Commercial banks; InfraNews; InfraJournal 2. Corporate Debt (rated BB+) Spreads Issuer Ticker Coupon Maturity Amount Rating Tenor (years) Current Spread (bp) Government Support Heathrow Airport HTHROW 7,125 % 01/03/2017 GBP 325 m NR/Ba3/BB+ 3 231 Nil Heathrow Airport HTHROW 5,375 % 01/09/2019 GBP 275 m NR/Ba3/BB+ 5 253 Nil Anglian Water OSPRAQ 7,000 % 31/01/2018 GBP 350 m NR/Ba3/BB+ 3 290 Nil Electricity North-West NWENET 5,875 % 21/06/2021 GBP 80 m BB+/NR/NR 7 274 Nil Yorkshire Water KEL 5,750 % 17/02/2020 GBP 200 m BB–/NR/BB+ 5 314 Nil Enel SpA ENELIM 7,75 % 10/09/2075 GBP 400 m BB+/Ba1/BBB– 61 373 31,2 % owned by Government Ministry Enel SpA ENELIM 6,625 % 15/09/2076 GBP 500 m BB+/Ba1/BBB– 62 367 Telecom Italia TITIM 5,875 % 19/05/2023 GBP 400 m BB+/Ba1/BBB– 9 281 Nil Energias de Portugal ELEPOR 8,625 % 04/01/2024 GBP 425 m BB+/Ba1/BBB– 10 256 Nil MEAN 293 ILLIQUIDITY PREMIUM – 50 MARKET INDICATION 243 Source: Bloomberg as at 21 August 2014 using BGN Source. 3. iTraxx Europe Crossover Series 21 Constituents Rated BB+/Ba1 Company Ticker Identifier Rating Tenor (Years) CDS Flat Spread ArcelorMittal MT NA CX375716 BB+/Ba1 10 347 EDP Energias de Portugal SA EDP PL CEPO1E10 BB+/Ba1 10 203 Finmeccanica SpA FNC IM CFME1E10 BB+/Ba1 10 285 HeidelbergCement AG HEI GY CHEI1E10 NR/Ba1 10 226 Lafarge SA LG FP CLAF1E10 BB+/Ba1 10 168 Telecom Italia SpA TIT IM CTII1E10 BB+/Ba1 10 281 Wendel SA MF FP CMWP1E10 BB+/NR 10 206 MEAN 245 Source: Markit; Bloomberg as at 21 August 2014 using CMAN Source. Table 17 Simulated distribution of yield curve at 10 years 1992 - 2013 VAR model simulation 10 Yr (P) vs. 1992-2013 VAR model simulation […] […] […] Spot in 10 years time VAR simulation 10 years ahead (June 2024) VAR simulation 10 years ahead (June 2024) Tenor 10 Yr (P) Median 95 % percentile Distance from median (ppts) Distance from 95th percentile (ppts) 10 Yr (P) + 1,5 ppt probability 1 Yr 3,47 3,80 6,20 – 0,33 – 2,72 19 % 2 Yr 3,55 4,00 6,24 – 0,45 – 2,69 21 % 3 Yr 3,62 4,16 6,24 – 0,54 – 2,61 22 % 4 Yr 3,70 4,31 6,20 – 0,61 – 2,50 21 % 5 Yr 3,78 4,44 6,17 – 0,66 – 2,39 20 % 7 Yr 3,93 4,64 6,20 – 0,71 – 2,27 19 % 9 Yr 4,09 4,76 6,19 – 0,66 – 2,10 15 % 10 Yr 4,17 4,79 6,14 – 0,62 – 1,97 13 % 12 Yr 4,11 4,88 6,15 – 0,77 – 2,03 15 % 15 Yr 4,07 4,97 6,09 – 0,89 – 2,02 17 % 20 Yr 4,07 4,99 6,12 – 0,92 – 2,05 17 % 30 Yr 3,98 4,97 6,08 – 1,00 – 2,10 20 % 50 Yr 3,91 5,01 6,04 – 1,10 – 2,13 24 % IUK Sensitivity analysis […] UK Gilt yields by maturity Graph 1 UK gilt yields at 10, 20, and 30 years 20-year Gilts Yields (in percent) 30-year Gilts 10-year Gilts UK Government bond (Gilt) yields by maturity USD term structure of yield spreads for BB companies Figure 3 USD term structure of yield spreads for non-financial BB companies Tenors USD US Non-financials BB curve — USD Swaps Curve (basis points) Term structure of yield spreads for non-financial BB-rated companies Note: the data is a snapshot from Bloomberg on 21 August 2014.
ANNEX C COMMITMENTS PROVIDED BY THE UNITED KINGDOM TRADING COMMITMENT Definition ‘EDF Group Company’ means a member of the same group of companies as EDF Energy. Operative Terms [ ].1 Each of NNBG and EDF Energy shall ensure, in any agreement for market services for the sale of the output of HPC entered into with any EDF Group Company (the ‘MSA Counterparty’) that, for so long any EDF Group Company is a shareholder (direct or indirect) in NNBG, the MSA Counterparty agrees to: (A) record all trades undertaken to sell the HPC forecast output in a separate NNBG book; (B) price all trades undertaken to sell the HPC forecast output conducted with any EDF Group Company at the market price for the product concerned at the time of trading; (C) undertake at market price all HPC forecast output bilateral trades with any other asset portfolios owned or traded by any EDF Group Company; and (D) provide to NNBG (with consent for NNBG to provide the same to the CfD Counterparty, the Secretary of State and the European Commission) such information as may be reasonably required by NNBG to report to the CfD Counterparty, the Secretary of State and the European Commission on the MSA Counterparty's compliance with points (A), (B) and (C) above. [ ].2 NNBG shall, and EDF Energy shall procure that NNBG shall, by the [ߦ] Business Day of each calendar year provide the CfD Counterparty (with consent for the CfD Counterparty to provide the same to the Secretary of State and the European Commission) with a written report on the MSA Counterparty's compliance with points (A), (B) and (C) of Clause [ߦ].1 in the previous calendar year. EQUITY GAINSHARE MECHANISM 1. Overview of the clause 1.1. There will be an Equity Gain Share arrangement consisting of two distinct components: (A) a mechanic to capture gains from the project above certain levels as a result of the project outperforming relative to the original base case assumptions (the ‘Project Gain Mechanic’); and (B) a mechanic to capture gains above certain levels arising from sales of equity from the original shareholders (the ‘Equity Sale Mechanic’). 1.2. The amount of the equity gain will be shared with the CfD Counterparty and will depend on the level of the realised equity IRR at the relevant time. All threshold levels will take account of the cost of committed equity, as determined in accordance with the model: HPC IUK Model […] per ‘DECC Output’ worksheet (A) if the realised Equity IRR is more than the Equity IRR in the model that includes the cost of committed equity (11,4 % (nominal) as of model: HPC IUK Model […] per ‘DECC Output’ worksheet as supplied to the Commission on 19 September 2014) but less than or equal to the threshold in (B) below, any gain above that Equity IRR threshold will be shared with the CfD Counterparty as to 30 %; and (B) if the realised Equity IRR is more than both (i) 13,5 % (nominal) and (ii) 11,5 % (expressed in real terms but taking into account CPI inflation), any gain above such threshold will be shared with the CfD Counterparty as to 60 %. 1.3. There will be no double counting between the mechanisms. 1.4. Set out below is further detail on how the mechanics of the provision will operate. In addition, there will be a covenant package in support of these obligations, which may include security. 2. Relevant mechanism — Project Gain Mechanic 2.1. Subsequent to the Project Gain Mechanic having been first triggered, should a further injection of equity be required in any period, the further injection of equity will be taken into account in calculating equity holders' gains. 2.2. The Project Gain Mechanic captures the gains above the relevant threshold (as set out in point 1.2 above) as a result of the project outperforming relative to the original base case assumptions. 2.3. To determine whether any threshold has been reached in any period, the cumulative realised to-date Equity IRR will be calculated using an updated financial model throughout the project life. The Equity Gain Share calculation will be triggered in the same period in which any threshold is reached. 2.4. Once the Project Gain Mechanic is triggered, the CfD Counterparty will be entitled to the relevant percentage of equity holders' distributions in that period and all future periods (until the next threshold is reached in which case the relevant sharing percentage will be adjusted accordingly). 2.5. The CfD Counterparty entitlement to equity holders' gains will be in effect over the entire life of the HPC project from the first time the Project Gain Mechanic has been triggered. 3. Relevant mechanism — Equity Sale Mechanic 3.1. An Equity Gain Share will also be triggered upon a direct or indirect sale of shares or shareholder loans (if applicable) by the original shareholders of NNBG at any time during the life of the HPC project. The steps involved are: (A) Step 1 — For each investor, establish the base case equity injection and price (as extracted from the appropriate financial model). (B) Step 2 — Upon the occurrence of a sale/disposal of equity tranche by any investor, establish the Equity Sale IRR achieved by that investor on the particular sale/disposal of the tranche of equity. (C) Step 3 — The Equity Sale IRR realised by the investor selling the equity tranche is calculated taking into account the actual gross proceeds of the equity tranche sale/disposal, actual equity injections proportionate to this equity tranche sold/disposed and past dividends/shareholder loan interest and principal repayments (proportionate to this equity tranche sold/disposed) to that investor out of NNBG. (D) Step 4 — If the Equity Sale IRR is above any of the thresholds set out in point 1.2 above, the Equity Gain Share will be calculated as follows. (E) Step 5 — Calculate the theoretical amount of money that would have to have been realised by the shareholder for the same sale of equity which, if used to calculate the Equity IRR as in Step 3 above, would have resulted in the realised Equity Sale IRR being equal to the relevant threshold. (F) Step 6 — The positive difference (if any) between the actual sale proceeds amount used in Step 3 above and the theoretical equity sale proceeds amount calculated in Step 5 above is then the excess equity gain to be shared between NNBG shareholders and the CfD Counterparty. 3.2. The above calculations are carried out for each sale/disposal of equity independent of any prior sale/disposals of equity irrespective of whether or not previous sales/disposals of equity resulted in a gainshare to the CfD Counterparty. 3.3. Equity sales/disposals by secondary investors (i.e. who bought/acquired the equity on a third-party, arms-length basis from the original equity investors) will be exempt from this mechanic if such secondary investors were to subsequently sell/dispose such equity (being ‘secondary equity’). 4. Provisions to support Equity Gain Share mechanisms 4.1. Anti-avoidance provisions will ensure that transactions are not designed to frustrate the intent of the Project Gain Mechanics or the Equity Sale Mechanic. 4.2. To support the Equity Gain Share mechanics, provisions will be made to ensure payments are made to the CFD Counterparty in circumstances where there is a breach of either the Project Gain Mechanic or the Equity Sale Mechanic or there is a breach of the anti-avoidance undertakings. 5. Disputes Any disputes in relation to the Equity Gain Share mechanism will be resolved in accordance with a similar dispute resolution process as is set out in the HPC Contract. CONSTRUCTION GAINSHARE MECHANISM 1. Overview of the clause 1.1. The Construction Gain Share mechanism is designed to share savings, implemented through reduction of the Strike Price, where construction comes in at lower than the forecast cost in the agreed financial model for the HPC project. This mechanism will work in one direction, with no Strike Price increase if construction costs are higher than forecast. 1.2. The initial gain share calculation will take place on the date which is the earliest of (i) the date falling 6 months after the Reactor Two Start Date; (ii) the tenth anniversary of the Reactor One Start Date; and (iii) the date (if any) after the Reactor One Start Date on which the parties agree that Reactor Two will not reach its start date. The final gain share calculation will take place on the sixth anniversary of the date of the initial gain share calculation (or earlier if all construction related claims have been settled before then). 1.3. We have set out below further detail on how the mechanics of the provision will operate. 2. Relevant mechanism 2.1. No earlier than a defined period before each of the Initial Reconciliation Date and the Final Reconciliation Date, NNBG will provide the CfD Counterparty with a written report. 2.2. Each report shall: 2.2.1. set out, in reasonable detail: (a) the aggregate amount of the Construction Costs to the date of the report, expressed in sterling; (b) the aggregate amount of the Construction Costs reasonably forecast to be incurred, paid or accrued by NNBG, expressed in sterling, provided that such Construction Costs shall be limited to those Construction Costs that would be reasonably and properly incurred, paid or accrued by NNBG to satisfy regulatory requirements without incurring excessive cost or expense; (c) NNBG's actual Construction Schedules; and (d) NNBG's estimated Construction Schedules for any period after the date of the relevant report; 2.2.2. set out, in reasonable detail, evidence of the steps taken to ensure that the amount of any Construction Costs forecast to be incurred, paid or accrued by NNBG following the date of the report shall be limited to those Construction Costs that would be reasonably and properly incurred, paid or accrued by NNBG to satisfy regulatory requirements without incurring excessive cost or expense; 2.2.3. if the report, or any part thereof, is prepared by or with the assistance of one or more third parties, include details of those third party(ies) and copies of any reports prepared by such third party(ies); and 2.2.4. the consequential adjustment (if any) to the Strike Price. 2.3. The report will provide relevant supporting information and be accompanied by a Directors' Certificate certifying the information enclosed within the report. 2.4. The CfD Counterparty may require further supporting information from NNBG within a specified period. If the CfD Counterparty makes such a request, NNBG has to provide such supporting information within a specified period from the request. 2.5. The CfD Counterparty will notify NNBG whether or not it accepts the report provided by NNBG within a specified period. If NNBG and the CfD Counterparty are unable to reach agreement, then the matter may be referred by either party for independent resolution. 2.6. If NNBG does not provide the CfD Counterparty with a report, the CfD Counterparty may obtain an opinion from an independent firm of cost consultants as to the Construction Costs and Construction Schedules and that opinion will be used instead. 2.7. NNBG will give the CfD Counterparty and its professional advisers (including the cost consultants) such assistance as the CfD Counterparty may reasonably request for the purposes of reviewing the report and verifying the Construction Costs. 2.8. The financial model will be updated with the revised Construction Costs and revised Construction Schedules, as set out in the report or as advised by the cost consultants, and rerun to determine a revised Strike Price. The difference between the Strike Prices produced by running the financial model using the forecast Construction Costs and Construction Schedules and rerunning it with the revised Construction Costs and revised Construction Schedules will determine the size of the construction gain, expressed in GBP/MWh. The CfD Counterparty will be entitled to take 50 % of the construction gain discovered by the exercise above (which percentage will increase to 75 % in respect of any construction gain in excess of GBP […] (nominal)), by reducing the then prevailing Strike Price by that amount. 2.9. If at any time during the period between the Initial and Final Reconciliation Dates NNBG identifies any Construction Costs or Construction Schedules different from the corresponding ones used in the model update and which give rise to savings in respect of the Construction Costs, NNBG may elect to make interim payments to the CfD Counterparty in an amount equal to the whole or part of these additional Construction Costs savings.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.