Electricite de France SA

PAR:EDF

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the EDF First Quarter 2021 Sales and Highlights Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to hand the conference over to your speaker today, Xavier Girre. Please go ahead.

[Xavier Girre]

Good morning, everybody. I'm pleased to welcome you to this conference call. I will present you the first quarter '21 sales, starting with the key figures and the main highlights. As usual, I will leave as much time as possible for the Q&A session, and this call is expected to end at the 9:45 Paris time. Sales amounted to EUR 21.9 billion at the end of March '21. It represents an organic increase of 6.2% compared to Q1 '20. This was mainly driven by first, positive price effects in France linked to customers' regulated tariffs increase and regulated activities tariff indexation; second, favorable weather conditions in Europe; and third, favorable gas market conditions, both in midstream and downstream activities, although with limited impact on margin. Nuclear output in France is slightly above expectations year-to-date. It decreased by 2 terawatt hours, as expected, mainly due to the impact of the closure of Fessenheim reactors. On this basis, we maintain our production target for France, between 330 and 360 terawatt hours. In the United Kingdom, nuclear output decreased by 1.4 terawatt hours. In a nutshell, Q1 was a good start of the year. Let me now update you on the key highlights of the period. Starting with nuclear, in France, the ASN rolled on the terms for continuing to operate the 900-megawatt reactors beyond 40 years. The ASN also approved the use of remotely controlled robots for the repair of the 8 penetration wells at the Flamanville 3 EPR. The repair works have begun. In the U.K., the reactors at Hinkley Point B and Hunterston B received the approval from the ONR for a restart of operations for a period of 6 months. Hunterston B will be closed at the end of this cycle. Hinkley Point B will need a new authorization to run for an additional 6 months before closure. As for Sizewell B, the reactors were taken off-line on 16th of April '21 for plant refueling and maintenance work. The return to service is currently scheduled for 30th of August from an initial date at end of May due to additional work required on certain components, in particular Saint-Marcel identified during the maintenance program. Engine is still off the grid. In India, EDF submitted in April, a binding technical and commercial offer to supply engineering studies and equipment for the construction of 6 EPR reactors at the site of Jaitapur. The group will be in charge of the design and will supply certain equipment, in particular, the nuclear islands. EDF would neither be an investor in the project nor in charge of the construction. In France, as you have noticed, security of supplies were well insured this winter. On the contrary, in the U.S.A., Texas suffered from an extreme cold snap. And the latter, there is still a lot of moving parts, but according to our first estimate, we currently consider that it had no significant net impact at group level. EDF pursued its development in all renewable activities, the construction of the Courseulles-sur-Mer offshore wind farm was launched. The project has a capacity of 448 megawatts. In solar, EDF Renewables was awarded 300-megawatt project in Saudi Arabia and launched the construction of the farm. Three long-term contracts were also awarded for 303-megawatt projects in New York state. In distributed solar and upgrade business, the group acquired shares of 2 companies in Kenya. I'm happy to confirm 2 new steps in our commitment to end coal-fired generation in Europe. The power plant of Le Havre closed at the end of March, and the group decided to bring forward the closure of West Burton A to September '22, that is 2 years ahead to of the government deadline for core fired power plants in the U.K. If we turn to innovation and electric mobility, pod point in the U.K. has deployed 110,000 charging points at end March '21, of which more than 13,000 in Q1 '21. This strong acceleration is mainly driven by the increasing demand for electric vehicles and debt charging infrastructures. As for ESG achievements, we are very glad to be part of the CAC 40 ESG index, the new stock market index that includes 40 socially responsible companies. The CSR government of the group was reinforced with the appointment of a Climate Reference Director within the Board. Finally, the disposal plan is on track. We closed the sale of Edison Norge which is E&P in Norway and IDG, which is gas distribution network in Italy. We signed a binding agreement for the sale of West Burton B gas power plant in the U.K., and Dalkia entered into exclusive negotiations for the sale of Dalkia Waste Energy. Just a few words regarding the Arenh reform and the reorganization of the group. Let me remind you the main objectives, obtain a fair remuneration on exiting nuclear assets by replacing the current Arenh mechanism with a new regulation, secure the group's hydraulic activities and enable the group to play a key role in the energy transition. As reminded by our CEO, Jean-Bernard Levy last week and the General Shareholder Meeting, a redline for EDF is to remain an integrated group. As of today, nothing has been finalized yet. Discussions are ongoing between the French government and the European Commission, they remain difficult. There is no certainty of the timing and on the outcome of these discussions. Let's now review the main blocks, explaining the organic increase of 6.2% of the sales in Q1 '21 compared to the same period last year. Favorable price effect in France represented a positive variation of EUR 0.7 billion. This is mainly due to the resale of purchase obligations at higher spot market prices, but with no impact on margin, the capacity reinvoiced at a higher price, increase in regulated tariffs in February '20 and February '21 and the positive indexation of the tariff distribution for regulated activities. France generation was down by EUR 0.1 billion, mainly due to lower nuclear output as expected with Fessenheim closure. Increase in gas prices represented a positive of EUR 0.3 billion with limited impact on the margin. Sales of EDF trading increased by EUR 0.1 billion. Normal weather conditions in '21 compared to mild weather last year had a positive impact on regulated activities of EUR 0.2 billion. Let's now have a look at the Q1 increase in sales by segment. France, generation and supply activities sales increased by EUR 0.3 billion, a 3.9% organic growth. As already detailed, it was mainly linked to favorable price effects with an increase in regulated tariff, in a resale of purchase obligations and in reinvoiced capacity. Regulatory activities sales increased by EUR 0.5 billion, which is 9.4% organically. In relation with the top 5 indexation for EUR 0.3 billion and more favorable weather conditions for EUR 0.2 billion. The sales of EDF Renewables increased by EUR 57 million, a 14.4% organic growth. It corresponded mainly to the growth in the distributed solar activity in the U.S.A. with limited margin impact. Electricity output amounted to 4.2 terawatt hours, a 2.9% decrease, mainly linked to less favorable wind conditions in Europe in Q1 '21. Net additional capacities commissioned lessened this trend. The extreme cold snap in Texas didn't significantly impact sales, but penalized EDF Renewables through energy purchases at very high prices in order to meet its contractual commitments. EDF Renewables net installed capacity was up by 0.5 gigawatts compared to end December '20 and stood at 9.2 gigawatts at end March '21. 8.1 gigawatt growth projects were under construction at end March, a new record level for the group. Dalkia sales increased by EUR 0.1 billion or 7.9%. This was mainly linked to the sharp rise in gas prices with limited impact on the margins and to normal weather conditions in '21 compared to mild weather in '20. Activity is now back to pre-health crisis levels. The sales of Framatome were down by EUR 49 million, mostly linked to a timing effect on fuel assembly sales. As for the United Kingdom, sales were roughly stable. Lower electricity volumes in B2B were partially offset by higher volumes in B2C with weather effect and the takeover of customers' portfolio. And nuclear output was down by 1.4 terawatt hours to 10.5 terawatt hours. Sales in Italy increased by EUR 0.3 billion. It mainly reflected the strong increase in gas market prices and also the increase in electricity prices. Edison acquired the remaining 70% stake in E2i comprising 38 wind farms for total capacity of 674 megawatts. On this basis, Edison also just upgraded its '21 EBITDA guidance this morning by EUR 30 million. The range now being EUR 710 million to EUR 770 million, mainly driven by the strong performance in renewables, the good optimization of the thermal assets and the sustained growth in sales and services to residential customers. The other international sales remained stable due to: first, the unfavorable timing effect on the indexation of the gas contract in Belgium; and second, the favorable indexation for EDF Norte Fluminense PPA. Last block, the sales of the other activities increased by EUR 0.2 billion. The group's gas business sales increased by 49.6% compared to the first quarter of '20 in the context of very favorable gas prices on the wholesale market and better use of the group's capacities. However, these effects were quite limited in terms of EBITDA. EDF trading sales increased by EUR 0.1 billion, in particular, thanks to the high volatility in trading activities in Europe and in the U.S.A. Let's move to the last slide, corresponding to our '21 guidance and '22 ambitions. We confirm all elements already announced in February. For '21, we set an EBITDA target higher than EUR 17 billion and the net financial debt-to-EBITDA ratio of less than 3x. Indeed, I'm very confident that the group will meet these targets. The latest analyst consensus is also in line with this guidance. For the medium term, we said 3 targets. Reducing operating expenses of EUR 500 million in constant euros in '22 compared to '19. Disposal plan of approximately EUR 3 billion over the period '20 to '22 and a net rental debt-to-EBITDA ratio of circa 3x in '22. This ends my presentation for Q1 21 sales and highlights, and I'll now open the floor to your questions.

[Operator]

[Operator Instructions] The first question comes from the line of Olivier Van Doosselaere.

[Olivier Pascal Michel Van Doosselaere, Analyst of Utilities]

This is Olivier Van Doosselaere at Exane. I would have just a question on operations and then also on the reforms. Firstly, on operations, just think about external factors. I wonder if we're talking in Q1 about whether normalization and therefore, that's embedded in the guidance? Or if weather was actually above a standard level, and therefore, it could be a positive to guidance and same thing also on the trading activity, this has been a particularly supportive quarter or you would say that this is more aligned with history. And the second question is on reform. I mean, I'm sure there will be more questions on that afterwards, but I guess people are wondering if the calendar is starting to be too tight, in terms of being able to deliver the reforms before the nex presidential election. Certainly, if any agreement with the European Commission might slip until -- after summer. I wonder if you can give us any color on that. And also, there seems to be 2 parts of the reform. And one is the regulatory reform on the nuclear regulation; and 2 is the corporate reform. And the idea of potentially having a part of it delisted and then another subject vision being listed. I wonder if you can help us understand to what extent the corporate reform is actually something that the European Commission actually really wants as well, but this is more something that the government is ambitioning. And therefore, could we, in the meantime, have just a regulatory reform happen on the nuclear side in this agreement with Brussels whilst any corporate reform could then maybe be dilated until after the election?

[Xavier Girre]

Thank you, Olivier. Thank you for your question. First, as regards the external factors and the guidance. Two points, and then I will also tell you a few words about the guidance. As regards the weather, the normal weather is embedded in our guidance. And this year, for the time being, is a normal weather, last year was a mild weather so less favorable last year than this year. Second point, in your question, the trading, the trading had a strong start of the year, benefiting from the volatility on the market. And as a whole, as regards the cold snap in Texas, as I said, for the time being because things are not yet over, we consider that the net impact should be not significant for the group, with a negative one on EDF Renewables and a positive one on trading. As regards the guidance, so we -- as a whole. So we do not change this morning the guidance. I would like just to share with you the different elements that we already shared and give you some color about that. First, we explained in February that we expect an increase in French nuclear output in comparison with last year. So if we take the middle of the range 330 to 360 terawatt tours, this would be -- this will bring an extra EUR 0.5 billion in comparison with last year, as I already explained in February, and as of today. So we are slightly ahead of our target as regards the French nuclear output. However, we have a very heavy outage planning. Remember as well that in 2020, we have postponed outages in '21. So this is why for the time being, we maintain the current range of 330 to 360 terawatt hours. The second point is unchanged. It was linked. You have that in mind to a regulated business. And we highlighted in February that additional EBITDA for EDF would amount to EUR 0.6 billion in '21 compared with '20. The third block is linked to "back to normal situation" as we said in February for the activities in the downstream business and services business regarding the sanitary crisis, especially. And we explained in February that we estimated at circa plus EUR 0.4 billion the impact in '21 compared with '20. And indeed, the activity is going well at the beginning of this '21 year. And fourth point is the special tax relief allowed by the French government which estimates -- that we estimate to bring additional EUR 0.3 billion EBITDA. On the downside, we had highlighted the impact of the prices. And we were expecting power prices, both in France and in the U.K. to have an unfavorable impact of circa EUR 0.8 billion in '21 versus '20. And we have revised it to minus EUR 0.5 billion compared to minus EUR 0.8 billion as the rise in market prices is favorable in the U.K. On the other hand, the nuclear fleet in the U.K. is aging, and we face uncertainties in terms of output. Nuclear output might be lower than expected 2 months ago, in particular, linked extended outages at Sizewell B and Dungeness. So this is why, as a whole, we maintain our guidance. And nevertheless, as I already highlighted, I am very confident with our guidance concerning the EBITDA higher than EUR 17 billion in '21. As regards the reform, I am really not in a position today to tell more than what I already said. Neither as regards the schedule nor as regards the content and the outcome of the reform. You're right, there are 2 components in this reform -- the regulatory reform, which is, of course, key, which is to reform the Arenh in order to give better visibility, particularly to the nuclear assets -- existing assets remuneration and corporate reform in order also to adapt reorganization of the group. And as I said, discussions are ongoing, and we definitely highlight that redline is the integrated form of the group.

[Operator]

Next question comes from the line of Arthur Sitbon.

[Arthur Sitbon, Equity Analyst]

I have two. The first one is, I was wondering if you could give us an indication of where you expect the real discount rate for nuclear provisions in France to be at the end of the year, especially given the recent rise in bond yields. And my second question is if you could provide an update on the situation for the U.K. nuclear plants? And especially if we could see in the next few years, some cash outflows linked to the anticipated decommissioning of some of the reactors.

[Xavier Girre]

As regards the nuclear provisions discount rate, as you know, the methodology has changed as of the 31st of December 2020. I will not repeat this new methodology. But we consider that this new methodology provides the best assessment of the time value of money, making short-term and very long-term rate. The real discount rate determined at the 31st of December 2020 was 2.1%, corresponding to a nominal rate of 3.3% and an inflation of 1.2%. Of course, it's not time to make any forecast about that. The evolution of the rates at end '21 will depend on the evolution of short-term rates, but as well as the inflation. Just to give you the -- some better color about that. A 10 bps increase, 10 bps increase in the discount rate has an impact of around plus EUR 500 million in pretax earnings and of minus EUR 900 million under provisions, and a 10 bps decrease would have an impact of around minus EUR 600 million on pretax earnings and plus EUR 1 billion under provision. As regards to your question about the nuclear situation in the U.K. Clearly, the nuclear fleet in the U.K. is aging. Maybe I could give you some elements on 4 situations. The first one is Hunterston B. As you know, we have made the decision to end power generation at Hunterston no later than January '22 and move into the defueling phase. And the 2 reactors have operated reliably during the first 6 months period and have been stopped as planned in March '21 for further inspection. The ONR gave its approval on April 21 for a final operation of around 6 months and reactor 3 went back online on the April 22, whereas rector 4 should be back online on the 30th of May. As regards Hinkley Point B, decision was taken last November to move into the defueling phase, no later than July '22 versus additional closure date of Q1 '23, and both reactors are currently online after the green light was given by the ONR mid-March for a first period of around 6 months. And depending on the result of further inspections, an additional cycle of around 6 months maybe authorize.As regards Dungeness B, these reactors have stopped since August 2018 to address conversion and cracks and pipes, various investments have been performed and favorable scenarios are being studied. At this stage, the date for the return to service are set at the beginning of August and the end of July '21, respectively. And as for Sizewell B, the reactors were brought off-line on the 16th of April this year for planned refueling and maintenance work. The return to service is currently scheduled for the 30th of August from an initial date at end of May due to additional work required on certain components identified during the shutdown program. And the corresponding output loss should represent circa minus 2.7 terawatt hours. So this is exactly where we are as regards the state of the U.K. nuclear fleet.

[Operator]

Next question comes from the line of Emmanuel Giga (sic) [ Emmanuel Turpin ].

[Emmanuel Philippe Turpin, Equity Analyst]

You didn't recognize my name. This is Emanuel Turpin at Societe Generale. Three questions, please. First of all, could you help us see through the change in revenues -- the increase in revenues in Q1, a EUR 1.2 billion increase since last year. You did mention that for a few activities, this would have no impact on EBITDA. Out of this EUR 1.2 billion, so how much of this increase in revenue are passed through to the EBITDA. So with limited or no impact on EBITDA, please? Secondly, you provided us with an update on disposals. Would you mind reminding us about the expected proceeds, cash in for the company or reduction of debt for 2021 planned and already acted. And also the related loss of EBITDA on EBIT? And last question, of course, on the reform, you must have seen a number of press articles in the French press today talking about a new name for the discussions as opposed to [indiscernible]. Now the papers are talking about the discussions remaining tough. As you said yourself, but also hinting at the fact that the EU could now agree to a structure that would keep EDF as an integrated group. Now the question is, is this change in name just a rebranding and an evolution of the existing plan as we know it? Or is it a reset with a totally new angle and the abandonment of the 3-tier structure that we had been explained, i.e., as [indiscernible], so evolution or reset?

[Xavier Girre]

Thank you, Emmanuel. So as regards to your first question, maybe I could make a focus on the on the link between the revenues and EBITDA for gas activities because this is the key point on which there is no direct link, I mean, are less specific link between revenue and EBITDA. So the cause for that is that we have different activities which are linked with the gas. So first, as regards the supplier, the conversion of the sales effect on the margin for the price part is not significant, considering that the final contracts are indexed on the sourcing, as you said yourself. For example, Edison contracts are reviewed approximately every 12 months. There is a second business in which we use gas, of course, which is linked with services. And price effects at Dalkia do not have a significant impact on EBITDA due to the hedging policy. And third type of business for the midstream as regards the midstream of Edison and putting aside the regulated part, distribution and storage. The business is mostly hedged however, there may be an impact on EBITDA as Edison takes full advantage of the flexibility of its supply contracts, especially the Algerian contract, but the effects are not commensurate with the price impact on turnover. And as regard the midstream for EDF S.A., all effects are almost without impact on EBITDA due to the coverage of [ Concur ] costs. In contrast, the entity that should benefit the most from gas price effects should be EDF trading, which plays on the volatility of the markets. So as a whole, the positive impact on sales of gas prices was of EUR 312 million in Q1 for an impact at EBITDA level for a few tens of millions of euros. So this is a real focus on gas. And if I take one step back, as a whole, so we have an impact of effect prices on the sales with impact on the EBITDA, weather effect EUR 0.2 billion, which also has an impact positive on EBITDA. France and U.K. generation, which is minus EUR 0.1 billion, which also an impact on the EBITDA and EDF plus EUR 0.1 billion, which also an impact on the EBITDA. So I hope and I think this answers your question about the different blocks and the link between revenues and EBITDA. As regards the disposals, so we are, of course, intend to close all the deals that I have referred to in my presentation during this year. So as a whole, the impact on the economic debt should be in the range of EUR 1 billion, roughly speaking, for 2020 and '21 as a whole. So EUR 1 billion is 1/3 of our goal, which is EUR 3 billion disposal plan estimated on the basis of the economic debt between 2020 and 2022. I will not give precisely the impact on EBITDA and on the EBIT, but it's not very significant. And clearly, it's integrated in our guidance. And as regard the reform, once more, I mean, a key point is the organization of the group, maintaining the integrity of the group. This has been highlighted by many people. And I am clearly not in a position to tell anything more today. Discussions are ongoing, as already said.

[Operator]

Next question comes from the line of Sam Arie from UBS.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

Given your comment just now, I don't know if my question is going to work, but I was going to try one more angle on the reform process. And I do understand it's very hard for you to comment on this at the moment. But last year, Mr. Levy did tell us one very interesting thing about the sort of expectations on the EU position. And he said on one of these calls, he thought that EU approval for the proposed nuclear pricing reform was ultimately not dependent on the capital structure of the EDF group. So the implication of that comment last year was that approval from the EU might not require a delisting of group minorities or a squeeze out and so on. And of course, we've had lots of press reports now recently suggesting sort of the opposite. So I just wondered if that's an area where you might be able to say anything new and particularly whether that comment from last year about the independence of capital structure is still valid. Would I -- that's my question. Would I have any success with that angle?

[Xavier Girre]

Arie, I'm very sorry. But once more, I mean the discussions are going on. What I can -- once more remind you, it's that there are 3 key points. I mean the price, of course, which is key to the reform of the Arenh. Secondly, the legal basis because it's key, of course, that the reform be based on a very solid resilient legal basis. And third point, the organization of the group, the integrity of the group because the goal of all this reform is to put EDF in a good position in order to invest in the existing nuclear assets, which are key for massive decarbonized electricity generation on the one hand, and also put EDF in a good position to invest in the other businesses and, in particular, in the renewables and all the services and solutions that are necessary for the energy transition and fully consistent with our rate on debt.And for the rest, I'm deeply sorry, but today, it's not time for giving specific pieces of information or details about the current state of discussions to which, once more, the company is not directly part of.

[Operator]

Next question comes from the line of Olivier Van Dooselaere.

[Olivier Pascal Michel Van Doosselaere, Analyst of Utilities]

No one has talked about power prices yet. But clearly, we've seen power prices go up quite massively in the last few months. And I wonder if you can give us a bit of color in terms of how you think about hedging. Obviously, 2021 should be well hedge. But for the years ahead, I wonder what do you think about hedging, particularly also in the context of your French Nuclear Division potentially under the new regulation, selling at a fixed output price, but that is not sure yet. So I wonder how you organize your hedging in that context. And if you can help us also again understand a bit, assuming that the reforms do not happen, what's the -- what your exposure is for the years ahead in terms of output in your different entities towards your market prices.

[Xavier Girre]

Yes. Thank you for this question. As you know, our hedging policy is based on hedging, which is organized, roughly speaking, 2 years ahead of an operating year. So meaning, for example, that for '22, we started speaking to hedge '22 sales, early '20, and we are hedging '22 during the years 2020 and 2021. So this means that, of course, for '22, we are embedding in our hedging policy. The positive impact of the prices, the forward prices currently. And so this will, of course, support our trajectory, everything being core for the rest as for next year is concerned. Same thing for '23, but we are not yet massively hedged, of course, for '23. As far as '21 is concerned, we are, of course, almost fully edged. As regards France, we are fully hedged because in the mechanism that I just described, we start each year being almost fully hedged. So '21 for France is almost fully hedged. As far as U.K. is concerned, we are not fully hedged. We are very massively hedged, but not fully hedged as far as U.K. is concerned, which means that -- and this is what I explained when I described the guidance, which means that the positive current trend on the price may have a positive impact on our financials in U.K. this year. As I described concerning the U.K., we have a positive, which is the current trends in the prices. I am speaking about '21 EBITDA, and we have a negative, which is the downward trend of our nuclear generation in the U.K. So as a whole, to sum up so for '21, no specific impact in France positive in the U.K. and for '22 and '23, a positive impact.

[Operator]

There are no more questions at this time. I hand over back to Xavier.

[Xavier Girre]

So thank you very much. Thank you very much for your time and for all your questions and for your interest for our company. We are very happy to be with you this morning, and I wish you a very nice day. Bye-bye.