EDF to shed assets, cut costs and investment

Thursday, February 14, 2013

PARIS, Feb 12 (Reuters) - French utility EDF is expected cut more costs, sell assets and scale back investment as the state-controlled group struggles with a cap on electricity prices and heavy debts.

When EDF reports 2012 earnings on Thursday, analysts predict the world's largest single operator of nuclear plants is likely to embark on a one billion euro cost-cutting plan, on top of 2.5 billion euros ($3.34 billion) of cuts begun in 2011.

EDF and other European utilities are burdened with big debts built up through rapid expansion before the 2008 crisis. They also face falling demand due to the weak economy in the region and a drive for greater energy efficiency.

EDF has the additional complication of being 84.4 percent owned by the French government, which caps electricity prices while demanding huge dividends, pushing EDF deeper into debt.

The French power group's 2012 net debt is estimated to have risen to 42 billion from 33 billion in 2011, Thomson Reuters I/B/E/S data show. Its total liabilities to equity ratio of 6.44 is the worst in the Euro Stoxx Utilities index.

The company's shares are down 21 percent over the past 12 months, making EDF the second-worst performer in the index after French rival GDF Suez. EDF's shares are down 84 percent from their 2007 highs.

Julien Desmaretz, analyst at broker Bryan, Garnier & Co, said EDF needed to borrow to pay dividends, had a return on capital employed below its cost of capital and would generate negative free cash flow (operating cash flow minus capital expenditure) for years to come.

"Between the need to maintain dividends and a French tariff deficit, EDF will be forced to cut development capital spending, which undermines medium-term growth," Desmaretz wrote.

To raise cash, Desmaretz said EDF could sell assets in central Europe, its 34 percent stake in energy services unit Dalkia, its 51 percent stake in waste recycling group Tiru and its 25 percent stake in Swiss power group Alpiq.

Barclays also predicts asset sales.
"We believe EDF may announce non-core asset divestments in an attempt to rationalise minority holdings that it is unlikely achieve 100 percent control of," Barclays' Julie Arav said.

She expects more asset sales in the United States, where EDF sold its 1.6 percent stake in Exelon for $470 million.

Barclays, which forecasts stagnant earnings per share growth and negative free cash flow for EDF, doubts the French state will approve the above-inflation price increases the company needs for nuclear power plant upgrades.

In 2011-2025, EDF needs to spend 55 billion euros (3.7 billion/year) to upgrade its ageing nuclear fleet, France's state audit office said last year.

Analysts also doubt EDF has the funds to complete its plan to build four nuclear reactors in Britain, after partner Centrica pulled out.

"EDF cannot commit to building nuclear assets in the UK as long as it has no partners to share construction costs and risks with," Michel Debs at Credit Suisse said.

Even if EDF finds a new partner, it will have no interest in starting the project early, as its cash flow is needed in France, he said.

Thomson Reuters I/B/E/S consensus sees EDF's 2012 revenue up 6.3 pct to 69.43 billion euros, net profit up 9.77 percent to 3.86 billion euros.

Analysts doubt EDF will be able to cut its dividend on 2012 earnings, as the cash-strapped French state counts on this to help to balance its books, but they see lower dividend payouts in the years ahead.

Debs expects EDF to announce a cut in the 2013 dividend to 0.80 euros from 1.15 euros as well as a scrip dividend issue.

With EDF's stretched finances and the prospect of lower dividends, investors are wary about the firm's attractive 7.66 forward price/earnings ratio and 7.9 percent yield.
"EDF may look cheap, but we see it as a value trap," Barclays wrote.

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