November 27, 2012 / 1:45 PM / 5 years ago

EDF asset sales, investment cuts seen likely

* Green energy tariffs deficit to hit 5 bln euros this year

* France seeking short-term fix, long-term reform - source

By Benjamin Mallet

PARIS, Nov 27 (Reuters) - EDF will need to sell assets and cut investment to contain its debt even though the French utility is likely to reach agreement with the government over renewable energy subsidies, analysts said.

EDF, Europe’s biggest electricity producer and 84 percent state-owned, is seeing its debt rise partly because the extra cost of producing green energy is more than the subsidies it receives through a tax called CSPE paid by consumers.

“The challenge for the group is to stop this rising bill and obtain a resorption over the next few years,” Morgan Stanley analyst Emmanuel Turpin said. “If EDF manages to solve this problem, it will be a huge relief.”

“The constraint, however, is that the French government is probably not ready to announce a sudden rise in electricity tariffs.”

EDF has been in talks with the government about green energy, which costs more than traditional sources including nuclear whose use France wants to limit.

A source at the energy ministry said the government was seeking to find a short-term solution to the CSPE deficit and a structural reform would be discussed during a debate on energy to be concluded next year.

One way to achieve a positive outcome on CSPE for EDF would be for the government to widen the base of the tax to gas and oil companies such as GDF Suez and Total, as EDF chief executive Henri Proglio has suggested.

The CSPE deficit has emerged because the tax has not risen enough to compensate for spending on green energy production, resulting in a gap forecast at around 5 billion euros ($6.5 billion) for EDF at the end of 2012.

That would compare with total debt seen at 40.5 billion euros at end-2012, according to a Thomson Reuters I/B/E/S poll, lifted in part by EDF’s acquisition of Italian peer Edison.

Proglio has said the resulting financial charges related to the CSPE stood at around 1 billion euros. EDF has a debt target of 2.5 times earnings before interest, taxes, depreciation, and amortisation (EBITDA), which it hit at end-June.

SACRIFICE CAPEX GROWTH

But even a good result on CSPE would not be enough for EDF to meet debt targets, analysts said, and the group will have to cut investment, especially as it expects a tough 2013.

EDF, which expected at the beginning of the year to ramp up investment to around 15 billion euros in 2015 from 10.5 billion in 2011, was seen revising the numbers down.

“The French government will ask EDF to sacrifice growth capex and sell assets before helping out with higher tariffs,” Kepler analyst Ingo Becker said.

“We assume the current 15 billion euro annual capex guidance through 2015 will be scaled back to 12 billion euros which, of course, eats into mid-term earnings growth.”

With the cost of maintaining its 58 nuclear reactors in France rising, EDF could also be forced to sell assets.

“We expect asset disposals to be announced sooner or later, predominantly ... outside France,” Becker said, estimating EDF’s wiggle room at around 20 billion euros. “If our predictions are to materialise in full, that would be the amount that initially would not be covered by tariff increases, but replacing them.”

Some analysts said EDF could suggest paying its dividend to the state in shares. Others said it was unlikely the government, struggling to meet its target of a 3 percent budget deficit next year, would agree.

EDF shares are down 22 percent this year after a 39 percent fall in 2011. ($1 = 0.7713 euro) (Writing by Michel Rose; Editing by Dan Lalor)

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