Utility Week

Utility Week 22nd September 2017

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UTILITY WEEK | 22ND - 28TH SEPTEMBER 2017 | 17 Finance & Investment Analysis E DF's ownership has something in com- mon with the long-forgotten Central Electricity Generating Board (CEGB) that bestrode the English and Welsh elec- tricity market prior to its privatisation in the early 1990s. EDF is effectively state-owned – but with a share quotation – and it dominates the French electricity industry, despite the pres- ence of Engie. It continues to face many challenges, not least the integration of much of the strug- gling Areva, the front-end nuclear business that was foisted upon EDF by the French government: that deal has some parallels with the disastrous shoe-horning of HBOS into Lloyds during the financial crisis almost a decade ago. EDF's desperate share price performance tells a similar story; its shares are down by almost 90 per cent since their peak in November 2008. To be fair, that share price plunge has been emulated by Germany's top two energy companies, Eon and RWE. Yet the comparison with National Grid since November 2008 is stark. Over the same timeframe, National Grid's shares have risen by 24 per cent. Clearly, the market now pre- fers regulated energy businesses – and their stable income – rather than unpredictable generation returns. As expected, EDF's figures for H1 2017 were unimpressive: earnings before interest, tax, depreciation and amortisation (Ebitda) fell from almost €9 billion in H1 2016 to under €7 billion. The better news was that net income, at approximately €2 billion, was broadly unchanged, while net debt fell from €37.4 billion to €31.3 billion – although this sharp reduction was masked by a €4 billion capital increase. Despite being one of the o-criticised big six energy suppliers, EDF's role as the builder of the UK's first new nuclear plant since Sizewell B has ensured that its name remains firmly in the headlines. The £24 billion (including interest) Hinkley Point C project has received its final go-ahead and, short of a major U-turn or a Chernobyl-like catastrophe, seems likely to be commissioned in the mid-2020s. For EDF, Hinkley Point C is pivotal. Aer all, it is taking major financial risks to build it, even with a massive subsidy that is now worth about £100 per MWh – and is guaran- teed for 35 years. The 2017 H1 results showed a poor UK performance with Ebitda, at €627 million, down by more than 40 per cent compared with H1 in 2016; lower nuclear power prices were mainly responsible. Interestingly, EDF Energy has agreed to buy Imtech UK and Ireland, a leading engi- neering services company, with technical expertise across many corporate sectors. Cur- rently, Imtech employs some 2,100 people. Of course, it is in France where the lion's share of EDF's overall returns are earned. Despite the presence of Engie, EDF remains a formidable player in its domestic energy market. Recent figures show that it has about an 87 per cent share of the French residen- tial electricity market; its equivalent figure in the business and local authority electricity market is about 65 per cent. Given Engie's strong gas franchise, it is hardly surprising that EDF's share of the residential gas market is a lowly 11 per cent. In H1 2017, €2.45 billion at the Ebitda level accrued from its generation and supply operations in France. This return was 29 per cent below the €3.45 billion reported for the equivalent period in 2016. Significantly, too, the contribution from EDF's regulated businesses in France was €2.4 billion, down by 14 per cent on H1 2016. In total, these two divisions accounted for almost 70 per cent of EDF's 2017 H1 Ebitda. Like Eon and RWE, EDF was slow off the mark in investing in non-nuclear renewable energy. However, following the incorpora- tion of EDF Energies Nouvelles, it has built up a sizeable portfolio of renewables assets, focusing on wind and hydro plants. Overseas – the UK aside – EDF has had its setbacks, having invested heavily in the past in both Germany and Italy. In the latter case, it continues to operate through Edison, a company with a 134-year history. Reassuringly, the 2017 H1 returns showed an improvement. But there was a pronounced fall in profits from its Belgian operations, due mainly to lower nuclear output and reduced prices. And in the Americas, both the US and Brazil remain important markets for EDF. In recent years, EDF has undergone major retrenchment, with its Hinkley Point C investment being by far its most significant outside its nuclear replacement programme in France. Even so, the capital expenditure involved in replacing at least some of its elderly nuclear plants will be vast. To help finance this programme and to keep down its net debt, various disposals are in the pipeline. Looking forward, Ebitda for the 2017 full year is expected to be around €14 billion, based on nuclear output of about 400TWh. Undoubtedly, EDF continues to face many challenges, as the severely depressed share price indicates. Were EDF owned by predom- inately privately owned organisations, rather than – like the CEGB of old – effectively by its government, patience would have worn thin some years ago. Nigel Hawkins, director, Nigel Hawkins Associates Challenges abound for EDF Nigel Hawkins says it is only because EDF is effectively state- owned that its many difficulties – such as its severely depressed share price and the integration of Areva – are allowed to continue. Key points EDF is effectively state-owned – but with a share quotation. EDF's shares are down by almost 90 per cent since their peak in November 2008. EDF's Ebitda fell from almost €9 billion in H1 2016 to under €7 billion in H1 2017. H1 2017 UK Ebitda, at €627 million, was down by more than 40 per cent compared with H1 2016. Ebitda for the 2017 full year is expected to be around €14 billion, based on nuclear output of about 400TWh.

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