June 8, 2012 / 7:03 AM / 8 years ago

EDF hostage to Hollande government pricing decision

* Socialist government needs to clarify tariff policy

* Tariffs key for investments of state-controlled EDF

* Concerns that tariffs will remain unchanged

* EDF shares hit low early June

By Caroline Jacobs and Benjamin Mallet

PARIS, June 8 (Reuters) - Bargain hunters tempted by EDF’s bombed out share price beware: the stock may hover at historic lows until France’s new Socialist government clarifies its intentions for regulated electricity tariffs, key to the state-controlled utility’s investment plans.

EDF needs a tariff hike to help it shoulder planned investment of 55 billion euros ($69 billion) in France’s 58 nuclear reactors over the next 15 years, to include extending their life span to 60 from 40 years and upgrading safety to comply with regulations introduced in the wake of Japan’s nuclear disaster last year.

The signs are not good. Keen to protect purchasing power amid Europe’s debt crisis, France’s new President Francois Hollande made energy costs part of his election campaign.

Francois Brottes, Hollande’s campaign energy adviser, called in April for the suspension of an existing law that sought to foster increased competition by gradually allowing electricity prices to rise.

“There is complete and genuine uncertainty,” UBS analyst Per Lekander said. “I fear they will freeze the tariffs and open a six-month review that will then need to be debated. In the meantime, EDF will be in a total vacuum.”

French officials are working on the tariffs issue, a spokeswoman for Energy Minister Nicole Bricq said, adding that it was “too early” to give any further comment on the government position.

EDF shares hit their lowest level ever at 14.80 euros last week, well below half their initial public offering price of 32 euros in 2005. The stock is trading at 7.6 times its expected earnings per share for 2013, compared with Centrica’s 11.26 and E.ON’s 10.2.

Consumers can expect their power bills to increase by 1.5 percent at most in July, Lekander predicts, as a result of the previous centre-right government’s decision to raise the CSPE tax designed to fund renewable energy investments, to 10.50 euros per MWh from 9 euros.

France is the world’s most nuclear-dependent country and its consumers benefit from electricity prices about one-third cheaper than in neighbouring countries. Nearly 80 percent of electricity produced in France comes from nuclear energy.


In the next five years, EDF may find that its key shareholder will look less favourably upon its business than its predecessor. The last government pushed EDF and nuclear reactor builder Areva, also state-controlled, to cooperate and champion France’s nuclear know-how worldwide.

A tariff freeze would challenge EDF’s earnings and dividend targets as well as its pursuit of faster growth abroad - including in Britain, where it intends to build four reactors. France accounted for 57 percent of EDF’s sales and 61.5 percent of core earnings last year.

“It means EDF is going to be in some way ‘nationalised’ and that it will be run in a socialist manner,” Macquari analyst Atallah Estephan said.

“Mid-term targets would be brought into question and no one would care much about the long-term energy policy that the government will put in place.”

From 2011 to 2015, EDF expects to grow core earnings by an annual average of 4-6 percent at constant exchange rates and net profit by 5-10 percent. It aims to keep its 2012 dividend at least unchanged at 1.15 euros while investments would rise to 12.5 billion euros this year from 11.1 billion in 2011.

Already late in complying with the European Union’s push to open up power markets to competition in 2007, France last year adopted the NOME law forcing EDF to sell a quarter of its nuclear output to rivals.

As of 2012, companies like Poweo and GDF Suez , buy electricity from EDF at 42 euros per megawatt hour through the regulated access price, which is around 10 euros cheaper than what they would pay on the wholesale market .

Under NOME law, the regulated price would increase 5 percent a year to converge with wholesale rates by 2015. Analysts expect that a possible review may limit that increase or reduce the regulated price.

Morningstar analyst Mark Barnett estimates that EDF’s 2014 core earnings could drop 300 million euros if French tariffs do not increase after next year to offset higher nuclear spending.

The French regulated business has accounted for 15 to 25 percent of EDF’s core earnings in recent years, Barnett said.

Hollande has backtracked on pre-election campaign plans to close the country’s 24 nuclear reactors by 2025 but has pledged to cut France’s reliance on nuclear power in favour of renewable energy. A national energy debate is scheduled for July.

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