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The world's largest nuclear power producer is melting down

Bloomberg logoBloomberg 31/10/2019 Francois De Beaupuy

a large ship in a body of water: Inside Electricity de France SA's Flamanville Nuclear Power Station © Bloomberg Inside Electricity de France SA's Flamanville Nuclear Power Station On the shores of the English channel in Normandy, engineers are struggling to fix eight faulty welds at a plant that’s supposed to showcase France’s savoir faire in nuclear power.

As they consider sending in robots to access hard-to-get-to areas between two containment walls, for Electricite de France it’s just the latest setback in a project that’s running a decade late and almost four times over budget.

“We hear every year that there’s a new problem,” Finance Minister Bruno Le Maire said on Monday. “It is not acceptable that one of the most prestigious and strategic sectors for our country is facing so many difficulties.”

The Flamanville plant is now slated to be completed in 2022 at a price tag of 12.4 billion euros ($13.8 billion), with the latest glitch costing a whopping 1.5 billion euros. Bemoaning the loss of France’s edge in the sector because of a 15-year gap between the start of construction at the plant and that of the previous reactor, Le Maire has given EDF a month to come up with an action plan to restore the industry’s know-how before the country can determine whether it will build any new atomic plants.

For the world’s largest producer of nuclear power producer, Flamanville is just one of many challenges. Across the channel, delays at two U.K. reactors have upped the cost to as much as 22.5 billion pounds ($28.9 billion), 2.9 billion pounds more than previously estimated. EDF also faces mounting costs of maintaining 58 domestic nuclear plants that provide more than 70% of France’s power. 

Add to the mix the fact that the former electricity monopoly is losing market share among French corporate and residential clients as rivals buy a part of the electricity it generates at below-market prices, and it’s easy to see why investors are bearish about the company. EDF’s stock has lost 34% this year, making it the second worst-performing utility in the Stoxx 600 Utilities Index of European companies. 

A year ago, EDF was Europe’s biggest utility by market value. Now, its market capitalization stands at 28 billion euros, less than half that of Italy’s Enel SpA, which has swelled to 69 billion euros on the success of its renewable business. RWE AG, the German utility planning to shut down its nuclear plants and progressively phase out coal-fired plants, is up 43% this year and Orsted A/S, the Danish champion in offshore wind, whose revenue is about a sixth of EDF’s, has surpassed the French giant.

“Investors are staying away because of current uncertainties following the strongly negative news flow on the reputation of the nuclear industry,” said Auguste Deryckx, an analyst at AlphaValue. “The CEO’s stubbornness in pursuing nuclear, which is limiting potential growth in renewables that are better valued by the market, remains a black spot.”

EDF is struggling to cover the 15 billion euros it needs annually to maintain its aging nuclear reactors, build new atomic and renewable projects, upgrade its electricity network and roll out smart meters, even after cutting 1.1 billion euros in cost cuts in the past four years. Profits have been hit not only by falling power prices, but by safety issues that have forced reactors to be shut for several months in France and the U.K. Other clouds on the horizon—the decommissioning of two of its oldest reactors next year and a dozen more by 2035, and the treatment of nuclear waste. 

The one-time monopoly—now about 83% owned by the state—needs some drastic measures, says Chief Executive Officer Jean-Bernard Levy, who’s pushing the state for an increase in the regulated prices at which rivals buy the company’s nuclear power.

Under a system introduced almost a decade ago to boost competition, rival power suppliers can buy about a quarter of EDF’s nuclear output at 42 euros per megawatt-hour, about 10 euros below current wholesale prices. EDF is asking for the price—unchanged since 2012—to be boosted as deep-pocket rivals including oil and gas producers Total SA and Eni SpA and  Engie SA have grabbed almost a quarter of the French power retail market and are making further inroads with discounted offers.

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“Markets thought that (President) Emmanuel Macron would help EDF with a more favorable regulation, which hasn’t happened,” said Tancrede Fulop, an analyst at Morningstar Investment Service. “That implies a lack of visibility on earnings and dividend compared to the rest of the sector.”

For the longer term, the French government is considering ring-fencing EDF’s nuclear operations and listing a minority stake in its distribution and renewable business.

“EDF’s investment case is in our view one of political support,” Vincent Ayral, an analyst at JPMorgan Chase & Co, wrote in a note this month. “A potential larger restructuring of EDF and a re-regulation of the French nuclear activity (which may be separated) could unlock some of the deep value we see embedded in the stock.”

But for that to happen the government has to convince the European competition regulator that the utility needs a more lucrative framework for its nuclear output and that the reorganization will boost competition, something that will take several months, if not longer. 

Favorable regulation is becoming urgent for EDF, which has sold 10 billion euros of assets in the past four years, and is planning as much as 3 billion euros in extra divestment by the end of 2020 to prevent its 37.4 billion euros in net financial debt from swelling. Selling more assets is unsustainable in the long term, and EDF mustn’t resort to another capital increase after having sold 4 billion euros of new shares in 2017, the CEO has said.

“A reform of the (price) regulation is essential, and without it, no change in the group’s organization is justified,” Levy told managers this month in a letter, which was obtained by Bloomberg. “That’s simply because reorganization without better regulation won’t be enough to give EDF the financial means” to invest in newer energy sources.

EDF plans to almost double its capacities in hydro, wind and solar power between 2015 and 2030. But the company, which operates about 80% of France’s hydro-electric concessions, may see that share shrink as the EU asks France to open the market to new entrants. The French government, meanwhile, remains cagey about raising the regulated nuclear power price for fear of increasing households’ electricity bills.  

For Morningstar’s Fulop, EDF is being increasingly painted into a corner. 

“It feels like the company shouldn’t be listed, because it’s almost a public service provider aimed at preserving the purchasing power of French households,” he said. “That creates a misalignment of interests between the state—its main shareholder—and minority shareholders.”

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