EDF: Lifted By Hydro, But Debt Balloons
BMI View: Power giant EDF posted a 4.6% y-o-y increase in first-half net income, boosted by higher regulated tariffs, higher hydroelectric output and increased control over costs despite lower nuclear production. An excellent performance of the renewables segment was also a key contributor, substantiating the benefits of the company's diversification strategy. Nonetheless, uncertainties over the future of the nuclear industry in France and globally, as well as the economic slowdown in Europe remain two of the key reasons behind EDF's continued underperformance. Similarly, we anticipate that the downside risks associated with the company's rising debt pile will continue to represent a decisive dampener to EDF's plans and share price.
Solid Performance Supported By Diversification…
In spite of the difficult context, both from a global economic standpoint and in terms of operating constraints, EDF's H112 results reflect a relatively successful first six months of 2012, with a positive set of figures for revenues, EBITDA, EBIT and net profit. Revenue came in at over EUR36bn, accounting for growth y-o-y of 8.2% y-o-y (7.1% organic growth according to figures released by the company), with EBITDA up 3.67% y-o-y at more than EUR9bn, driven mainly by the new energies and distribution in France. Following a disappointing H211, EDF's net income was also up 3.6%, reaching EUR2.76bn.
|A Relatively Rosy Picture|
|EDF Revenue And Net income (EUR, mn)|
We believe that these reasonably sanguine operating results were largely the product of the utility's diversified portfolio of activities, with EDF's diversified technologies and its presence in various markets offsetting adverse operational and economic conditions.
While the exceptional nuclear production performance of 2011 made it possible to offset a decline in hydroelectric production caused by a record drought, the situation reversed in this first half of 2012, especially in the second quarter. A large number of planned outages and outage extensions hindered nuclear production in both France and the UK, forcing the French giant to lower our nuclear output targets. Yet, in France the decline in nuclear output was offset by a high level of activity in renewable energy - chiefly a sharp increase in hydraulic generation of 41.84% y-o-y.
|Hydro Saves H1|
|EDF France Nuclear Outage Schedule (Days) (LHS), And Nuclear And Hydro Generation, Growth % y-o-y (RHS)|
The contribution of EDF Energies Nouvelles (EDF EN) was of great significance, owning primarily to a sharp increase in wind and solar generation in Europe as well as in North America. According to data provided by EDF, wind production rose by more than 35% and solar by 40% thanks to both favourable weather conditions and the commissioning of new wind and solar farms.
We had previously noted that while spending in France remains a priority for the company, EDF's attempts to reinforce its wind and hydropower businesses and strengthen its presence abroad will be of great significance in determining its medium-to-long-term performance. From this perspective, we had also highlighted that EDF's decision to gain full control of EDF EN in 2011 put the company is a good position to capitalise on renewed interest in renewables projects following Fukushima and could be of great help following the Socialist victory in May elections ( See our online service, May 28 2012, "EDF: Positive End To Edison Saga, But Eyes On Nuclear"). The H112 results confirms once again that this view is playing out
In April 2012 the EDF EN-led European consortium was awarded 3 out of 4 highly coveted French offshore wind projects. In partnership with Alstom and Dong EDF won the tenders for sites at Saint-Nazaire, Courseulles-sur-Mer and Fecamp, while Iberdrola and Areva will build a fourth wind farm at Saint-Brieuc. In addition, with the construction of three solar farms totalling 2,450MW of capacity nearly complete in France, and the recent positions taken by EDF EN in the Moroccan and South African markets, the company is strengthening its position across segments and markets.
|Domestic Market And Renewables Key|
|EBITDA by Geography And Segment (EUR, mn) (LHS), And Growth % y-o-y (RHS)|
Once again, more favourable conditions in the French market were key to sustaining EDF's overall performance. Aside from nuclear, operating performance in the country were on target, showcasing the merits of a diversified generation mix and of the positive results of increased grid quality investments, as well as the benefits of the August 2011 increase in transmission rates.
But Clouds Remain
In spite of the positive performance, uncertainties over the future of the nuclear industry in France and globally, the economic slowdown in Europe, and the company's hefty debt pile are among the core reasons behind EDF's continued underperformance.
|Continuing To Underperform|
|EDF Vs. Bloomberg World Utilities Index (BWUTIL), Bloomberg European Utilities Index (BEUTIL), S&P Global Nuclear Energy Index (SPGTNE), Normalised As Of January 2011|
Despite the seemingly optimistic results for H112, EDF continued to underperform the Bloomberg World Utilities Index and the Bloomberg European Utilities Index, as well as the S&P Global Nuclear Energy Index. While the company has been underperforming the two former indexes since January 2011, its underperformance intensified considerably since November 2012, evidencing that macroeconomic and sector specific downside risks have been largely priced-in by investors. A point confirmed by EDF's inability to break neither a short-term nor a long-term resistance line on the back of these positive results.
|EDF Share Price Performance (EUR)|
As previously noted in our analysis , President Hollande's scepticism about nuclear power and its electoral pledges are seen as a very pertinent downside risks for EDF's strategy in France and abroad. Although less drastic plans to cut nuclear reliance appear to have emerged following the inauguration of Mr. Hollande, EDF still needs to invest an estimated EUR10bn over six years to improve safety under measures ordered by the regulator following the accident at Fukushima in 2011. In addition, the new President's pledge to lower rates for power, natural gas and water is likely to jeopardise EDF's chances to push through a needed increase in the government-set tariff.
Moreover, macroeconomic conditions remain cardinal in supporting the company's performance and the success of its diversification strategy. Growth prospects for 2012 appear subdued in all European power markets, owing to the weak economic performance of the eurozone; a point evidenced by the French utility's H1 results. An unfavourable trend in economic conditions, which translated into adverse revision in regulations in a number of cases, had a negative impact on results in several European markets. For instance, the EDF was hit by a tariffs freeze in Belgium and the elimination of support for co-generation in Hungary. Most importantly, Italy, one of the key countries in EDF's strategy, saw a remarkable increase in terms of sales (up EUR500mn) owing to the price hike on the market. However, this increase did not result in improved margins, which continued to fall amid lower demand.
The downside risks associated with EDF's EDF's ballooning debt pile also continue to represent a decisive dampener to EDF's plans and share price. BMI had noted before that EDF's attempts to invest in new technology and to diversify away from its home market need to be reconciled with the company's large debt pile.
|Net Financial Debt (EUR, bn) And Interest Coverage Ratio|
Following a number of successful divestments, EDF had managed to decrease its debt to EUR33.3bn at the end of FY2011, from EUR42.5bn in 2009 and EUR34.4bn in 2010. Furthermore, EDF's interest coverage ratio (indicating the company ability to pay interest on outstanding debt) had moderately improved. However, the outlook deteriorated following Edison takeover. In June 2012, net financial debt came to EUR39.7bn, propelling the net financial debt to EBITA ratio at 2.5x, the upper limit indicated by the company in its 2011-2015 guidance.
We note that France's so-called CSPE tax on electricity bills, intended to pay for the higher costs of producing renewable power, is playing a significant role in fuelling this debt, as it is not high enough to cover costs. The tax accounted for EUR4.5bn of EDF's debt at the end of June 2012, according to a company presentation. The company is thus intensifying efforts to find a solution to the problem of the CSPE deficit. Yet, electoral pledges could constitute important obstacles to any rise in tariffs. We also highlight that concerns related to the effects of the costs associated to stricter safety measures in the nuclear segment in France and in Europe on the debt pile are pertinent.
All these elements could thus potentially hinder EDF's ability to advance with its capex and expansion plans. From this perspective, it is certainly telling that French state-controlled utility is considering looking for more partners for its nuclear projects in the UK to help it share costs and limit its debt burden.
|EDF Net Indebtedness (EUR, mn)|