Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/786843
UTILITY WEEK | 17TH - 23RD FEBRUARY 2017 | 13 Finance & Investment UTILITY WEEK | 17TH - 23RD FEBRUARY 2017 | 13 Market view W hile the FTSE 100 and the Dow Jones have reached record levels in recent weeks, the share prices of the EU's major electricity companies have performed shockingly over the last decade. EDF is down by 89 per cent since its 2007 peak, the relevant figure for Germany's RWE is almost identical, and Eon's is little better. In EDF's case, there are varying reasons for this. Since 2008, lower selling prices, plant outages, rising net debt and mas- sive nuclear liabilities, coupled with a very demanding capital expenditure programme (in which the troubled third-generation nuclear plant at Flamanville looms large), have all weighed on EDF, which is struggling in its key domestic market. Overseas, much of the focus has been on the on/off £18 billion construction cost of the 3.2GW Hinkley Point C plant, which – on the original timeline – should have been operat- ing by now. The latest commissioning date is given as the mid-2020s. And Hinkley Point C is not the only direct UK interest in EDF's poor financial situation, since the company operates our existing nuclear fleet. For EDF, the prime focus is its integrated energy business in France, especially its 58 nuclear plants, with a total capacity of 63GW. Many of them are coming to the end of their working lives. Most date back to the early 1970s, when France placed a massive bet on nuclear power at a time when oil prices were taking off and France's coal mines were increasingly uneconomic. Given the average age, it is no surprise that around a quarter of the nuclear fleet was recently taken offline for various technical checks. Inevitably, these lengthy winter out- ages and continuing low generation prices are hammering EDF's operating cashflow. Net debt is a formidable €37 billion, which is placing constraints on EDF's burgeoning investment programme. The Flamanville plant alone is costed at over €10 billion, and a ra of other French plants will need replacement over coming decades. Particular concerns have been expressed recently about the accuracy of EDF's nuclear liabilities figure, especially by the Inter- Ministerial Committee for Sustainable Devel- opment, which accused EDF of "excessive optimism" about the eventual cost. To date, EDF has set aside €45 billion – split between provisions and dedicated assets – to cover plant decommissioning and the disposal of nuclear waste. The eventual liabilities out- turn could be much higher, which would hit EDF's already stretched balance sheet. Recent figures for similar liabilities have been calculated for both Eon and RWE's nuclear fleets, which are due to be closed down by 2022. A read-across from the pro- jected German figures, based on the respec- tive nuclear capacity levels, suggests that either the German figures are too pessimistic or that EDF's too optimistic. In comparing EDF's nuclear fleet to those in Germany, there are many salient differ- ences. Timing issues are crucial, particularly in calculating discounted cashflow figures. Plant decommissioning and waste disposal expenditure in Germany is due to kick in shortly – and heavily aer 2022. In EDF's case, the timetable is far more extended and less clear-cut, with many nuclear plants continuing to operate well beyond 2022. Indeed, following the French presidential election, it is quite conceivable that the planned reduction of nuclear to 50 per cent of the country's total electricity gen- eration by 2025 – from 75 per cent currently – will be scrapped. EDF itself has stated unequivocally that "it assumes full responsibility for the tech- nical and financial aspects of dismantling nuclear plants". Nine of its plants are cur- rently being decommissioned. Importantly, too, the projected cost of meeting its nuclear liabilities has been audited. A further factor afflicting EDF has been the long saga of inte- grating much of Areva's struggling nuclear- build operations. Given its depressed share price, EDF faces real challenges. Crucially, though, the com- pany is 84 per cent state-owned. If major cash injections were needed, then the French government could stand behind EDF. While additional state funding of this nature is against new EU financial rules, ways could no doubt be found to inject additional state capital into the company. On the political front, it is also relevant that the bookies' new favourite to win the presidency, Emmanuel Macron, has been a strong advocate of EDF building Hinkley Point C, unlike Ségolène Royal, the pre- sent ecology, sustainable development and energy minister. What's more, if elected, Macron may well jettison the plan for a one-third reduction in nuclear output by 2025 that was imposed by the current administration. Another lead- ing presidential candidate, François Fillon, holds similar views to Macron. It may be only several weeks old, but 2017 is proving to be a key year for both France and EDF. Nigel Hawkins, director, Nigel Hawkins Associates EDF's nuclear woes mount With a creaking but business-critical nuclear fleet in France suffering hefty downtime and facing a bleak future, EDF has found little relief from a decade of bad news, writes Nigel Hawkins. EDF SHARE PRICE, MARCH 2016 - JANUARY 2017 €13 €12 €11 €10 €9 €8 Mar 2016 May 2016 Jul 2016 Sep 2016 Nov 2016 Jan 2017