Electricite de France SA

PAR:EDF

Earnings Call Transcript 2019-Q1

[Operator]

Thank you for standing by, ladies and gentlemen, and welcome to your conference. You will be hearing Xavier Ursat, Group Head of Nuclear New Build; and also we have Xavier Girre. Please go ahead, gentlemen.

[Xavier Girre]

Good morning, everyone. So this is Xavier Girre, CFO of EDF. I am pleased to welcome you to this conference call and with Xavier Ursat, we will answer all your questions. I will walk you through our first quarter sales starting with the main highlights over the period and I will close my presentation with our financial outlook.First, let me start with the key figures on Slide 3. Group revenue for the first quarter of 2019 amounted to EUR 20 billion, up organically by 1.7% compared to the first quarter of 2018. This growth is mainly attributable to the France-Generation and supply segment in the context of favorable market prices, the development of the group's energy services activities and the good performance of EDF Trading. On the other hand, revenues were negatively impacted by the decline in nuclear output in United Kingdom due to extended outages of 2 nuclear plants and also by a warm weather driving a decrease in distributed volumes in the France-Regulated activities segment.Before looking at the sales numbers in more detail, let me comment on some of the recent highlights of the group, starting with the continued development of our renewable activities. First, EDF Renewables launched construction of 1.2-gigawatt capacity in the first quarter alone, reaching a record level of 3.5-gigawatt gross capacity under construction at the end of March 2019, including 1.4 gigawatt in solar. The second pillar is precisely related to solar activities. We are accelerating in the deployment of the French solar plan with the acquisition beginning of April of the Luxel Group, which holds a portfolio of 1-gigawatt peak, including around 100-megawatt peak already operating. We announced the acquisition in China of a majority stake in the portfolio of 77-megawatt peak of rooftop photovoltaic assets, which strengthens our presence in distributed solar power in China. And lastly, EDF Renewables was awarded a 20-year power purchase agreement for a 60-megawatt peak solar plant near Athens. Third, key development in the offshore space: EDF signed agreements to build and operate 2 offshore wind farms for a total capacity of 500 megawatt with China Energy Investment Corporation. These 2 plants will be gradually commissioned by 2021.Client solutions and energy services are another business activity that saw significant development, especially in the hydrogen sector. EDF launched Hynamics, a subsidiary offering low-carbon hydrogen for industry and mobility. This development builds on the equity investment we made last year in the share capital of McPhy, and we broadened the range of our offers to clients. Last but not least, our new nuclear project, the Taishan unit 2 project, reached a decisive step with the end of fuel loading on the 16th of April, 2019.Looking now on Slide 5 at operational data. Nuclear generation in France came to 111.8 terawatt-hours over the first 3 months of 2019, down 1.1 terawatt-hour compared to the first quarter of 2018, essentially due to modulation of generation in a warmer temperature environment. In the U.K., extended outages at Hunterston B and at Dungeness B contributed to a 2.5 terawatt-hours drop in the fleet nuclear output. Total group renewable output was down 4.9 terawatt-hours to 15.7 terawatt-hours. This was mainly driven by hydro generation in France with a decline in output of 4.7 terawatt-hours, reaching 9.9 terawatt-hours over the first 3 months of the year linked to lower hydro conditions than in 2018. Lastly, a quick word on recent transactions that strengthened our financial structure. As announced a few weeks ago, EDF signed an agreement on the disposal of its 25% stake in Swiss power producer, Alpiq. Completion of the transaction is expected to occur before the end of H1 2019. Finally, EDF issued in March a EUR 300 million sustainable revolving credit facility, which incorporates a pricing adjustment based on EDF sustainability performance linked to CO2 emissions and energy efficiency. This third ESG indexed revolving credit facility brings to almost EUR 4.5 billion the total amount of sustainability-linked credit facility for the EDF Group. It confirms that sustainable finance instruments are core to EDF's financing strategies.As indicated earlier, group sales came to EUR 21 billion, a 1.7% organic growth compared to the EUR 20.4 billion sales for Q1 2018. Let me walk you through each segment in more details, starting with generation and supply in France. In order to explain the dynamics in the segment and before looking at the bridge of the sales numbers, let's have a look at the upstream/downstream electricity balance. The left-hand side of the chart illustrates the evolution in hydro and nuclear output I just presented. On the right-hand side, overall sales volumes were down 6 terawatt-hours compared to Q1 2018. Sales to end customers fell 9 terawatt-hours mainly due to mild temperatures, erosion of market shares and a slightly lower demand. Volumes supplied under ARENH were up 6 terawatt-hours, in line with the high level of subscription by competing suppliers and network operators.Looking now at the sales numbers for French generation and supply. The bridge shows an organic growth of 2.2% to EUR 8.1 billion. The main positive driver came from higher wholesale market forward price conditions, which carried a favorable price impact on volumes supplied under a market-based contract for just over EUR 330 million. This positive effect was offset for EUR 290 million by the decrease in net electricity sales to end customers and in wholesale markets. In the absence of a tariff increase in February 2019, which is expected to materialize only in June, as you know, meaning that around EUR 250 million revenue are missing in Q1, regulated sales tariff carried a EUR 54 million negative impact, linked to the end of the catch-up component reflected in the August 2018 regulated tariffs change. Although weather drove end-customer consumption down by 3.7 terawatt-hours overall versus Q1 2018, the sales impact was only a negative EUR 11 million. This is linked to an exceptionally low consumption in January 2018, which had been affected by very mild weather conditions triggering sales on spot markets at very low prices.Sales of volumes sourced under purchase obligations rose by over EUR 101 million and a positive spot price effect. But this has no impact on EBITDA. Let me highlight one last supportive element. Sales of capacity certificates on wholesale markets, which benefited from the price level reached in the first capacity auction of the year in March.As I said, over the first 3 months of 2019, cumulative nuclear output in France came to 111.8 terawatt-hours. The chart on this slide shows the update at end April, which we disclosed last week. We can see that output of performance is on par with the same period last year.Moving to French Hydro on the next slide. Output fell markedly to 9.9 terawatt-hours, down 4.7 terawatts-hours versus Q1 2018. As you can see on the right-hand side, generation was affected by challenging hydro conditions versus normal with an even wider difference compared to the same period last year. In addition, Hydro work capacity had been highly dispatched at the beginning of 2018, which amplify the difference in output year-on-year.April was also very dry, keeping cumulative output on a low trend [ after ] performance in 2019.Sales in French regulated activities were down 2.6% in organic terms to EUR 5 billion. The main driver is mild weather conditions, which caused a decrease in distributed volumes by 5 terawatt-hours for an estimated negative impact of EUR 170 million compared to the first quarter of 2018. Additionally, the August 2018 tariff move had a positive impact of plus EUR 19 million. And finally, favorable evolutions of the customer portfolio mix had a positive impact of EUR 17 million.Moving to EDF Renewables where sales were up 2.9% organically to EUR 417 million. Electricity generation was the main driver for this growth. Output was indeed globally stable at 4 terawatt-hours, as a consequence [ offset ] sales made end of 2018 and early 2019, but it was more than offset by a favorable price effect. Overall, net installed capacity is globally stable at 8.3 gigawatt, whereas gross capacity under construction stands at a record level of 3.5 gigawatt. Integration of EnterSolar, an American provider of solutions for decentralized solar energy production, contributes to the development of renewable energy.Looking at renewables activities across the group, first quarter sales came to EUR 1.3 billion, down 5% year-on-year in organic terms. This was first driven by the decline in French hydro output, partially offset by positive price effects linked to commissioning of new capacity and joint supportive price level. Dalkia's sales were up 7.8% organically to EUR 1.3 billion. Sales were supported both by newly won contracts and by positive price and index effects. Overall, sales by energy services activities across the group were up 8%. On top of the above-mentioned performance of Dalkia, these numbers reflect the contribution of past investment efforts, mostly to be Imtech in the U.K. acquired in June 2017 and Zephyro in Italy acquired in May 2018.Framatome. Framatome sales reached EUR 706 million, down 4% in organic terms. And looking at the development in each business segment, we can see first fuel business. Year-on-year distribution of fuel assembly deliveries unfavorably affected the first quarter of 2019. This timing effect is expected to fade over the course of the year. On large projects, revenue has declined in Taishan, while HPC is ramping up. And installed base activity has experienced a slight slowdown in the first quarter of 2019 compared to a strong activity in the first quarter of 2018 in France.Looking now at the U.K., where EDF Energy sales came to EUR 2.5 billion, down 4.2% in organic terms. Nuclear generation in Q1 came to 12.6 terawatt-hours, down 2.5 terawatt-hours. Extended outages at Hunterston B and at Dungeness B contributed to disrupt in the fleet output. Overall downstream market context is still challenging in the U.K., with supply activity is penalized both by the suspension of the capacity market and by the cap on the standard variable tariff. EDF Energy's customer business is however enjoying good resilience. The residential customer portfolio is stabilizing in a continued very competitive environment, and B2B sales volumes have slightly increased during the quarter.In Italy, sales were up 1.2% to EUR 2.4 billion, mainly supported by electricity activities. Sales in electricity activities, plus EUR 122 million in organic terms, indeed reflect higher B2B sales volumes and positive price effect. In gas activities, sales were down EUR 109 million in organic terms due to a decrease in volumes sold on wholesale market, which was partially offset by an increase in volumes sold to industrial customers and by a positive price effect.Sales in the Other International segment came to EUR 795 million, up 18.9% in organic terms. In Belgium, revenue increased by EUR 59 million in organic terms reflecting, in particular, an increase in electricity and gas prices in all segments partially offset by a slight decrease in B2C volumes due to a mild climate. Revenues continue to develop in services and renewables activities, with wind power capacity now standing at 448 megawatt. In Brazil, the contractual price revision of EDF Norte Fluminense electricity sales at the end of 2018 and the effect of changes in the ICMS tax drove an organic sales increase by EUR 57 million, the latter having no impact on EBITDA.Looking now at Slide 18, with sales from the other activities segment. Sales were up 18.5% reaching EUR 882 million. EDF Trading's revenue grew by EUR 51 million organically. EDFT teams were about to take advantage of favorable volatility and price conditions in Europe for electricity and gas. LNG and LPG activities also contributed to this performance in the first quarter of 2019. Gas business sales grew by more than EUR 165 million in organic terms in a favorable context for the LNG business and better utilization of the group's regasification capacities.Moving to our financial guidance on Slide 19. Please note that the figures I will comment include IFRS 16 impact, and let me remind you that under this accounting standard, lease contracts are recognized as assets on the balance sheet with corresponding lease liabilities. Administration application of this standard at the 31st of December, 2018, would have increased net debt by close to EUR 4.5 billion. That being said, we confirm the objectives set for 2019.2019 EBITDA is expected to range between EUR 16 billion and EUR 16.7 billion. We aim to reach EUR 1.1 billion in OpEx reduction compared to the 2015 level. Cash flow excluding HPC and Linky is expected to be above EUR 600 million. And coming now to 2019 and 2020 ambitions, total net investments, excluding group acquisitions and disposals, is expected to approximately EUR 15 billion per year. Group disposals will be within a range of EUR 2 billion to EUR 3 billion over the period of 2019 to 2020. And the net financial debt-to-EBITDA ratio is expected less or equal to 2.7x over that period. The dividend payout rate will be within a range of 45% to 50%. The option to receive the payment of the dividend in new shares will be offered to all shareholders. Note that the French government has undertaken to opt for this quick payment for the balance of the dividend due for 2018 as well as for the whole of the dividend due for years 2019 and 2020.This ends my presentation of Q1 2019 sales and highlights. And I now open the floor to your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Olivier Van from Exane.

[Olivier Pascal Michel Van Doosselaere, Analyst of Utilities]

If I may, I've got 4 quick questions. The first one is on revenues from capacity auctions in France. Sorry, if I missed the figure, but if you could highlight how much you made in Q1 versus last year? And what your expectation is for the full year relative to last year from those revenue source? Second one, I guess that you expect a 5.9% tariff increase to be implemented on the 1st of June. I think that was already embedded in your guidance. Could you please also highlight what you expect after that; i.e., I think normally the regulator looks at tariffs again in the summer months. I was wondering if you expect another tariff increase potentially in August that could be linked to the regulated part of the build and then maybe also that could include catch-up for what you didn't receive in the first months of this year on the regulated tariff. And then a third question, again, on tariffs. Mr. de Rugy has been saying that he would like to revise the calculation for the regulated tariff from next year onwards. And actually, we could hear Mr. Lévy mentioning in parliament -- sorry, in a senate, that actually he thought Mr. de Rugy was indeed referring to why the change at EDF is seeking to achieve on the nuclear French output with a CORRI-DOOR model pricing mechanism. I was wondering if indeed you could confirm that Mr. de Rugy would be speaking in terms of a change in methodology about the move to that sort of CORRI-DOOR pricing model for the whole nuclear generation output in France. And then the final question is that if you could highlight your expected tax rate for the full year?

[Xavier Girre]

Could you please repeat your last question, please?

[Olivier Pascal Michel Van Doosselaere, Analyst of Utilities]

Yes. I know it wasn't discussed in this presentation, but just the tax rate that you expect for the full year?

[Xavier Girre]

Okay. Thank you for your questions. First, as regards the capacity in France. So we have already got 1 tender this year. The price of the capacity was EUR 20 per kilowatt. The impact was a positive one, plus EUR 62 million versus Q1 2018. We will have another tender this week. And then we'll see, of course, how the capacity price is evolving for the whole year. Second, as regards the regulated tariffs, yes, we expect an increase of the regulated tariff by 5.9% in June. As you know, the government had 3 months to oppose the increased recommendation and it hasn't. As regards the catch-up, we will see, it's not clarified yet. As regards to your third question, concerning the ARENH mechanism. Definitely, we consider that it's important to reform the ARENH mechanism because, as you know, it's not a fair mechanism, it's not a symmetric mechanism, and also, the level of the ARENH is too low. So this is why we consider that what has been highlighted at the end of November by President Emmanuel Macron in the frame of the presentation of the draft PPE, considering CORRI-DOOR in order to protect, of course, the power purchase of the end customers and also to give a clear visibility to investors and operators is very important. So we are continuing to work and to make proposals about that. As regards the tax rate. As you know, the -- of course, you know the legal tax rate in France. And for the effective tax rate, we cannot comment on this at this stage of the year. I will come back to that later in the year.

[Operator]

[Operator Instructions] Your next question comes from the line of Vincent Ayral from JPMorgan.

[Vincent Jean Michel Ayral, Analyst]

So I see we went through the tariff question. I just wanted a confirmation. Normally, under the regulation, a tariff catch-up is due, isn't it? And the question would be, is there any way for the government to avoid that? Or is it binding? And does it have to happen by year-end? Then on the case of the 2 main, I would say, center of focus of the market, which are the regulation and the restructuring. We've seen in the press some dates here, 28th of May, a strategic board meeting to review the restructuring project at EDF and to be presented to top 100 managers on 7th of June and unions on the 20th. Could you please confirm that these dates indeed are real? What the press has been talking about? We didn't have any confirmation there? And whether, by the year-end, we have a bit more visibility on when this will be officially presented to the government publicly.Then the second question regarding that would be the regulation. Where are the works on both the EDF and the government? Is it still a large project? How keen are both sides to get this going forward? I think some color on that would be highly appreciated?

[Xavier Girre]

Thank you for your questions. As regards the catch-up mechanism, yes, in principle, this is bylaw, so the delay should be compensated and smooth to ensure economic neutrality. So we will see how this is done. Second, as regards your second question, as regards to regulation, yes once more. I mean we consider it's very important to reform the ARENH and to give visibility to the investments in the nuclear assets and also visibility to the customers. So we are continuing, of course, working on that. But I don't have anything more to add as of today. And as regards to the organization of the group, as you know, this is something that has been asked to EDF to make some proposals by the end of the year, and this is the only date which has to be kept in mind.

[Vincent Jean Michel Ayral, Analyst]

On the regulation theme, you say that it is very important from an EDF standpoint and you continue to work on that. I think one of the questions for the market has been the commitment from the government to get to do it. Could you give us a bit more color on the written -- basically comments made by the government on this very specific topic? And if there is any alignment or misalignment of interest, I think this is something of interest?

[Xavier Girre]

Yes. I can confirm to you that the first key point relates to the regulatory framework and the exit from the ARENH, which cannot support the need of the PPE. And as I already said, this has been highlighted by the Head of State in November last year. And in this frame, we need to introduce a fair and balanced system that both protects the consumer from volatile power prices and ensures EDF receives a different remuneration for its investments. So this is what we are currently working on with the French administration.

[Operator]

[Operator Instructions] Your next question comes from the line of Emmanuel Turpin from Societe Generale.

[Emmanuel Philippe Turpin, Equity Analyst]

Two questions, please. First of all, could you give us a bit more granularity on the U.K. as to what impact you expect in the full year for the change in the standard variable tariffs? And also remind us of your assumptions for when you expect the capacity mechanism to be reinstated or recognized in your figures and that's again in the U.K.? And stepping back at group level, you've confirmed your guidance for the full year. Q1 shows us a pretty negative impact from something that's quite difficult to forecast or to budget, which is the weather, hydro in France, also a large negative from U.K. nuclear production. And from memory, we didn't really have any budget in mind or that was made public for U.K. nuclear. Could you basically explain to us what makes you feel comfortable to confirm your guidance and maybe whether looking at the Q1 revenues, whether you feel more comfortable towards middle or maybe the bottom of the guidance? Or do you think it's still all to play, including at the top end?

[Xavier Girre]

Thank you for your questions. First, as regards the U.K., as regards the cap under the tariff, we already gave an indication in February indicating that we assessed the impact of the cap of more or less EUR 130 million and our EBITDA compared with last year in the U.K. Secondly, as regards the capacity mechanism, we have given also an assumption, which is that the mechanism be restored this year. And I think it's important to note that following the November 2018 decision by the European Court, steps have been taken by the commission to restore the capacity market in the U.K. and the authorities also approved regulations to allow the capacity market to operate as far as possible during extensive period. So we are still clearly expecting that the capacity market can already be reestablished during the second half of this year. And secondly, as regards your question on the guidance, I can only tell you that, clearly, we confirm our guidance, as I already highlighted. You're right. I mean the hydro conditions and the mild weather during the winter period are not very favorable, but nevertheless, we clearly confirm our guidance for this year. I can also highlight, for example, that we have also some positives, for example, as regards the trading trend, which is very good, as I already highlighted also, thanks to the good operations in this EDF Trading team and to the favorable market conditions. Other questions?

[Operator]

[Operator Instructions] The next one comes from the line of Olivier Van from Exane.

[Olivier Pascal Michel Van Doosselaere, Analyst of Utilities]

Just one or a couple of follow-up questions. It's more on the timing of news flow. I wonder when we can expect the next update probably more from the regulator on its assessment of the situation at Flamanville. And same thing on Hunterston, you seem to be gradually delaying by window of 2 weeks every time your expected restart of the plant. Do you have actually visibility that the U.K. nuclear Welsh dock could indeed have an imminent decision on Hunterston, please?

[Xavier Girre]

Okay. Thank you for your questions. Xavier Ursat will answer your question about Flamanville.

[Xavier Ursat]

Thank you for your question. So on Flamanville, maybe a recall for everybody. We have an issue on the weldings of the big steam lane on the secondary circuits and especially on the weldings which are in the penetration of the reactor buildings, which means inside the wall of the reactor buildings. Those weldings are great-quality weldings but were not performed following the process it should have followed during the fabrication and the erection of the weldings and the lines. We had, during the last year, a great number of discussions between ASN, the French Safety Authority and EDF on this topic. And there was, on the 9th and 10th of April this year, a meeting of the expert group of the ASN concerned by those topics. This group is made to give position to ASN, but the last decision is for ASN, which has to take its own decision and position. During the meeting, the group advised ASN and EDF to consider the replacement of those weldings and at the same time, recognize that the replacement was not that easy, so invited EDF to look at all the solution that would be considered regarding those weldings, which are inside the penetration of the reactor building. That's what we are doing at the time with ASN, and we have a great number of technical discussion since the last week and probably for the weeks to come with ASN. A second meeting of the same expert group will take place on June 6 and will examine the topic of the other weldings, the one which are inside the reactor building and not in penetration of the building. For those weldings, we already proposed the replacements. So we see an expert group that could be -- that could go quite quickly. ASN will afterwards take its decision in due time. They probably will explain the time frame of their decision, which is expected, of course, after the next meeting of the expert group, and I cannot say at this time exactly when they will take the decision. It belongs to ASN. What is sure is that as we indicated in our last communication about Flamanville 3, as soon as ASN will take its decision and announce it, we, at EDF, will deliver a complete communication on Flamanville 3 to explain the topic, and how will we proceed with the construction on those lines.

[Xavier Girre]

And as regards your question about Hunterston and I will also add a few words about Dungeness in U.K. So I can tell you that during a planned outage of Hunterston B reactor 3 for graphite inspections starting in March 2018, new keyway root cracks were identified as happening at a slightly higher rate than model. While the reactor could have returned to operation, we decided to keep it off-line while we work with the regulator to ensure that the longer-term safety case reflects the findings of these inspections and includes the results obtained from other analysis and modeling.In addition, we brought forward the planned graphite inspection outage in Hunterston B reactor 4 from 2019 to October 2018. And the reactors are expected to return to service on 30th of June, 2019 and 30th of May, 2019, respectively. And as regards to Dungeness. Dungeness B reactor 22 was shut down on 27th August, 2018, for a planned statutory outrage and reactor 21 was shut down on the 23rd of September, 2018, for common statutory outage work. During these outages, stress corrosion cracking was discovered and some steam pipework and components and repairs and safety case development are ongoing. The reactors are expected to return to service on the 13th -- 30th of September, 2019 and 15th of October, 2019, respectively. Maybe one very final question?

[Operator]

Your next question comes from the line of Ahmed Farman from Jefferies.

[Ahmed Farman, Equity Analyst]

Just 2 very quick questions from my side. Could you share with us what is now your current expectation for the nuclear output in the U.K. currently? And my second question is could you just give us a sense of what would be the benefit of the tariff catch-up for you in terms of EBITDA? Could you just sort of quantify that part for us?

[Xavier Girre]

Okay. Thank you for your question. First, as regards tariff catch-up, I already explained that we'll see what comes from that. So I will not give any figure this morning. Secondly, as regards to the nuclear output in U.K., we expect around 55 to 56 terawatts-hours this year. Thank you. So if there is no other question, I propose to close this call. I thank all of you for your attendance and for your questions, and wish you a very nice day.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.