Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/327828
utILItY WeeK | 13th - 19th June 2014 | 21 Finance & Investment A recent report in The Times newspaper stated that the Treasury is looking to charge EDF and its partners a fee of up to £250 million for the gov- ernment's £10 billion of construction finance guarantees for the new Hinkley Point C nuclear station. The charge would represent a fee of 2.5 per cent of the potential liability, which looks a little on the low side for such an arrangement. It remains to be seen whether or not the European Commission will view this fee as being comparable to commercial rates or a possible sign of illegal state aid. However, disclosure of the fee once again focuses on the bizarre way that Hinkley Point is being financed. Back in 2008 EDF promised it could build Hinkley Point C for around £3 billion per reactor and would take all of the construction, power price, and financing risks itself. This morphed over the next five years, to £8 billion per reactor, with the consumer bearing all the power price risk and the government taking the bulk of the financing risk, albeit for a fee. The explosion in costs has led to a strike price being agreed between EDF and the gov- ernment of £92.50/ MWh when they signed the heads of agreement last year, although it is worth noting that the strike price is in fact already £94.90 because we have already incurred one year's worth of inflation. Yet despite shiing the power price risk and the financing risk to the consumer, EDF has told shareholders it expects to earn a 10 per cent Project IRR. This suggests EDF expects to earn a 15 per cent equity IRR, with Hinkley C having a £3 billion annual turnover when it is commissioned. It appears that EDF has negotiated a deal with the government that delivers private sector-like returns with- out it having to take the usual private sector risks. The eventual cost to the consumer of new nuclear overwhelmingly depends on two factors: the construc- tion cost and the cost of capital. In Finland the new Fennovoima project has been structured to deliver the lowest construction and cost of capital possible. This has resulted in a strike price of "sub €50/MWh" being set. If the UK had been able to match that on Hinkley, then UK consumers would be saving some £1.5 billion a year. Peter Atherton Equity Research – Utilities, Liberum "It appears EDF has negotiated a deal that delivers private sector-like returns without it having to take the usual private sector risks." Analyst view Peter Atherton Finland's new nuclear project has been agreed with a strike price of "sub €50/MWh" Analysis Centrica's canny Irish move Centrica has picked up Bord Gais Energy for a bargain £125m, says Nigel Hawkins. A lmost unbelievably, the Irish banking crisis was even more damaging than that the UK's. With international financial support the Irish economy is now recovering, but as part of the price for that sup- port the Irish government has been required to fast-track a privatisation programme. The most valuable asset being sold is Bord Gais Energy (BGE), which is now being split up – with Cen- trica acquiring some of its key assets. For around £125 million, Centrica is buying two key BGE business streams: its gas and electricity supply operations in Ireland and its 445MW combined cycle gas- fired turbine (CCGT) at Whitegate in County Cork. It is not acquiring BGE's 13,500km of gas pipeline. BGE's supply business has 650,000 residential gas and electricity customers and 30,000 business accounts. As such, it is the largest dual fuel supplier in Ireland. Given Centrica's well-publicised trials and tribula- tions with its UK CCGT plants – losses of £133 million were sustained in 2013 and three of its worst performing plants are now up for sale – it is intriguing that Centrica is acquiring the Whitegate plant. Importantly, though, the plant is modern, having been commissioned as recently as 2010. Furthermore, last year's 68 per cent load factor was impressive, which partly reflects its encouraging position in the merit order and, more generally, highlights ESB's backlog of baseload generation investment. In its recent investors' presentation, Centrica forecast a €40 million (£32 million) Ebitda return from BGE for 2015. It also confirmed a projected earnings per share enhancement of 0.3p to 0.4p, an admittedly modest fig- ure in the context of Centrica's operations. In terms of valuation, the low price paid by Centrica is noticeable given that it includes a modern gas plant. To be sure, today's CCGT valuations are below those of the glory days before the financial crisis – a scenario that Centrica will experience first hand when bids are submit- ted for its three surplus CCGT plants in the UK. Nonetheless, the implicit cost – derived from a sum- of-the-parts analysis – of the Whitegate plant is low once allowance has been made for the value of the acquired gas and electricity supply business. More generally, the total acquisition cost of £125 mil- lion is hardly a major outlay for a company capitalised at £16.7 billion, and one dwarfed by recent exploration and production purchases. In the medium term, BGE may prove to be a canny, and value-enhancing, deal. Nigel Hawkins is a director of Nigel Hawkins Associates