MARKET REPORT: EDF bucking the trend

In recent months, there have been tales of woe from many electricity companies, especially regarding their generation operations.

However, in the case of EdF, which boasts over 38 million customers, the latest financial news has actually been quite favourable – a scenario that nervous UK energy ministers will welcome.  

Its recently published figures for 2013 showed a 5.5% underlying increase in   EBITDA (earnings before interest, tax, depreciation and amortisation), which rose to €16.8 billion. Key to this return was French nuclear output exceeding 400 TWh and the highest UK nuclear output for eight years.

Importantly, EdF has managed, after many promises, to deliver a pronounced reduction in its net debt. The December 2013 figure was €35.5 billion, compared with €39.2 billion at December 2012.

The lion’s share of EdF’s EBITDA accrues from its French electricity operations, and especially its nuclear power generation: its Edison business in Italy also contributes materially.

Within the UK, following its buy-out of British Energy, EdF’s nuclear operations are paramount. Despite higher output for 2013, the UK EBITDA return was marginally down on the 2012 figure.

EdF’s key UK project is the new nuclear plant planned at Hinkley Point C in Somerset – at an extraordinary cost of c£16 billion. Commissioning is not expected before the early 2020s.  

To bring EdF to the new nuclear-build party, the Government has controversially offered a £92.50 (inflation-adjusted) per MWh base price for an unprecedented 35-year period.  

No wonder the EU has already expressed grave concerns about this transaction. Indeed, it is querying whether any subsidises at all are needed for a technology that has been operational since the 1950s.

Whilst EdF is not due to make a final investment decision until this summer, it is bound to be studying the EU’s initial thoughts – and reservations – with keen interest.

Furthermore, in response to suggestions that the planned subsidy payments could be slashed, EdF’s Chairman and Chief Executive, Henri Proglio, has been quoted – with true Thatcherite conviction – as saying ‘a contract is a contract’.  

And whilst the share prices of several EU utilities have wobbled recently – think Centrica and its Miliband-depressed rating – EdF’s shares, which remain mostly indirectly owned by the French Government, have powered ahead, rising by c80% over the last year.

Clearly, better output figures on the nuclear front have helped deliver this sparkling share price performance, along with much lower net debt. 

And if EdF can continue hitting its ‘sweet spots’ – rising nuclear output in France and the UK as well as further net debt reductions – this more hopeful trend should continue.

Indeed, EdF has recently announced new growth targets for 2014, albeit quite modest, and has reaffirmed its debt reduction policy; the latter, though, will remain constrained by its formidable capital expenditure programme in France – due to peak next year once the new Flamanville nuclear plant nears completion.     

Even so, despite the undoubted progress of late, EdF’s shares remain below the privatisation price of €32 so the recent improvements need to be put into perspective.  

Nigel Hawkins (nigelhawkins1010@aol.com) is a Director of Nigel Hawkins Associates which undertakes investment and policy research