Electricite de France SA

PAR:EDF

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the EDF Third Quarter 2018 Sales and Highlights Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Mr. Xavier Girre. Please go ahead, sir.

[Xavier Girre]

Good evening, everybody. First, I'm sorry about the earlier release of our figures, we will investigate about that.And now let me walk you through our 9 months 2018 sales, starting with the main highlights over the period. This will be followed by a status update on the French nuclear output by Dominique Minière, Group Senior Executive Vice President for Nuclear and Thermal and Generation. We will then open the Q&A session. This call is expected to end at 6:45.Page 3 gives the overview of group sales over the first 9 months of 2018. Sales grew by EUR 2.4 billion year-on-year, standing at EUR 49.6 billion. Sales are up in all segments with a more significant contribution from French generation and supply activities.On Slide 4, as you can see, when excluding ForEx and scope effects, mainly the disposal of Polish assets and the inclusion of Framatome, this represents organic growth of 5.3%. But before looking at these sales numbers in more detail, let me comment on some of the highlights and the continuation of the deployment of our CAP 2030 strategy since our half year communication.Starting with the continued acceleration of our renewables activities. We did so in several ways. First, the commissioning of 5 solar PV plants in Israel for total capacity of 100 megawatt. In California, EDF Renewables signed 2 PPAs for a 128 megawatt solar project with 40 megawatt of battery storage. Inclusion of storage makes the electricity generated partly dispatchable, allowing to better align supply and demand. This project illustrates how EDF can articulate renewables and storage technologies, which is core to CAP 2030.EDF Renewables was also awarded several new projects, a wind project in India, totaling 300 megawatt; 2 wind projects in Brazil for total capacity of 276 megawatt; and in France, last week, it was awarded 2 solar PV projects with a total capacity of over 20 megawatt.Finally, a few days ago, EDF, IFC and the Republic of Cameroon signed the final and binding agreement to build the Nachtigal hydropower plant in Cameroon. The project entails the design and construction of a 420 megawatt run-of-the-river hydropower plant, expected to cover 30% of the country's electricity demand. EDF will hold a 40% stake in the project company. The closing is expected in a few weeks.Innovative customer solutions are another area that saw significant developments. 1 year after the launch of its electricity grid offer, EDF's French supply business reached 100,000 contracts signed. And just a few weeks ago, we launched Digiwatt, our first fully digital electricity supply contract at a 5% discount through the French regulated sales tariff. In Belgium, Citelum and EDF Luminus are leading a consortium which was named a preferred bidder for the smart lighting of the motorways and main roads of Wallonia to so-called Plan lumière 4.0 project.Last, but not least, EDF launched on October 10, its electricity mobility plan, in order to become the sector's leading energy company on its 4 biggest European markets, France, U.K., Italy and Belgium. After launching the solar plant in December 2017, and the electricity storage plan in March 2018, this third plan confirms the group's strong ambitions in support of the energy transition, and especially the development of new electricity applications.Lastly, a quick word on recent transactions that strengthened our financial structure. As announced 2 weeks ago, we closed the disposal of our stake in the Dunkerque LNG terminal. This transaction contributes to reducing net financial debt by EUR 1.5 billion and means that the group has now delivered EUR 9.6 billion under its 2015 to 2020 asset disposal plan. We should complete the EUR 10 billion by the end of the month.In early October, EDF successfully completed a hybrid refinancing transaction. This included the pricing of a new EUR 1.25 billion, 6-year non-call hybrid note, and the preferred cash repurchase of 2020 and 2022 hybrid notes for the same amount, leaving just over EUR 300 million of to 2020 notes outstanding.Lastly, EDF issued USD 3.75 billion of senior bonds in 3 tranches of 10, 20 and 30-year maturities. We also issued a 12-year euro senior bond for EUR 1 billion.Now moving on to Slide 6 with financial and operating highlights of the third quarter of 2018. Nuclear generation in France came to 290 terawatt hours over the first 9 months of 2018, up 6.6 terawatt hours year-on-year. In the U.K., the Hunterston B outage contributed to a 2.8 terawatt hours decline in the nuclear fleet output.Group energy services activities continued to grow. They were up 14.6% in sales over the period.Total group renewable output was up 12.3 terawatt hours to 54.8 terawatt hours. This was driven first by hydro generation in France with an increase in output of 9.4 terawatt hours, reaching 38 terawatts hours over the first 9 months of the year, thanks to much more favorable hydro conditions in the first half of 2018.The growth of group renewable output was also fueled by wind and solar at EDF renewables as well as by hydro in ItalyLet's now move on to the next slide. In order to explain the dynamics of the French generation and supply business, and before looking at the bridge of the sales numbers, let's have a look at the upstream/downstream electricity balance. The chart shows on the right-hand side that overall sales volumes increased by 19 terawatt hours year-on-year. Volume supplied under ARENH were up 11 terawatt hours, while demand from end customers fell 9 terawatt hours, mainly due to the erosion of market shares in B2C. So the overall 19 terawatt hours increase in sales volumes is mainly reflected in net market sales.On the left-hand side of the chart, you can see that these additional wholesale market sales were essentially sourced from higher nuclear and hydro output. As I already explained during our Q1 call, this increase in output translated only partially into higher sales revenues. Let me come back to that on the following slide.On Slide 8, the sales bridge shows a strong 6% organic growth to EUR 18.9 billion. Let me start with the largest block on the right-hand side of the chart, called resale of purchase obligations, which carries no impact on EBITDA.As you know, EDF is mandated to buy output under feed-in tariffs, in particular from renewable assets, and we'd then monetize these volumes on spot markets. These sales grew as a result of both larger volumes and higher prices. The difference between those revenues and their purchasing costs at feed-in tariff levels are compensated by the CSPE, this explains why this is neutral for EBITDA.Looking now at the other positive drivers of sales. First, weather conditions, 1 terawatts hours of additional weather-driven demand, mainly due to the cold conditions met in Q1 triggered an estimated EUR 49 million increase in sales year-on-year.Second, the impact of the change in regulated sales tariffs was slightly positive for EUR 67 million. Third, the downstream market conditions block includes the impact of B2C market share erosion, slowing down slightly compared to the same period in 2017, but still standing at over 80,000 customers per month, which was more than offset by positive price effect reflected in our market-based contracts, both in electricity and gas.Lastly, the ARENH and wholesale market block reflects the increase in output, but only to a limited extent, as I have just mentioned. This follows on from sales accounting rules whereby revenues in relation to wholesale market activities, are accounted for only if the group is net seller in euro terms. Over the first 9 months of 2017, the group was a net buyer in euro terms, due to low nuclear output and market purchases required during Q1 cold spells. Over the same period of 2018, nuclear and hydro output were higher and purchase volume were lower. The net position on wholesale markets turned slightly positive as a result. This is essentially what is reflected in the EUR 99 million block shown on this chart.Of course, the full impacts of the increase in French nuclear and hydro output and of the improvement in price conditions will be reflected in EBITDA. Over the 9 -- the first 9 months of 2018, cumulative nuclear output difference was up 6.6 terawatt hours to reach 292 terawatt hours. I will let Dominic comment on the recent performance of the fleet and the outlook for the remainder of the year.Moving to French hydro on the next slide. Output grew to 38 terawatt hours, up 9.4 terawatt hours, versus the first 9 months of 2017. As you can see on the right-hand side, generation was supported by significantly improved hydro conditions in H1 compared to 2017, which was very dry.Sales in French regulated activities grew 2.5% in organic terms to EUR 11.6 billion. Three main positive drivers: first, cold weather that boosted the distributed volumes by 1.3 terawatt hours; second factor, the impact of the August 2017 tariff increase, it's actually the driver that carried the most weight; and lastly, a pickup in the number of new grid connections.Moving to EDF Renouvelables, where sales were up 13.1% organically to EUR 1.1 billion. This was mainly driven by the commissioning of additional capacity in 2017. Together with the contribution from the Futuren portfolio, this led to a 27% increase in output compared to the first 9 months of 2017. Overall, net installed capacity grew 3.1% since the beginning of 2018, driven in particular, by commissioning of solar capacity in growth locations, such as Chile, Brazil and Dubai. Growth capacity under construction stood at a strong level of 2.2 gigawatt at end September 2018, the majority of which is solar.Looking at renewable activities across the group. 9 months sales came to EUR 3.3 billion, up 26% year-on-year. This was essentially driven by the significant increase in French and Italian hydro output, and by wind and solar capacity commissioned and acquired in 2017.Coming to energy services. Dalkia sales were up 7.3% organically to EUR 2.8 billion. Sales were supported by the favorable impact of indexed services contracts and higher fuel prices. Over the last few months, Dalkia recorded significant contract renewals and gains across different activities, for instance, the creation of a district heating network in Montbéliard in the eastern part of France. Overall, sales by energy services activity across the group were up 14.6%. Around half of this growth resulted from recent targeted acquisitions, most notably in the U.K. with Imtech mid-2017, and more recently, Zephyro in Italy.Framatome's 9-month sales reached EUR 2.3 billion. This reflects robust activity levels in the fuel business unit, whereas the installed base BU experiences a slowdown, especially in the U.S.Let me point out a couple of highlights over the last few months in international activities. In China, the first batch of fuel cladding tubes for Hualong-1 reactor was delivered to the Fuqing nuclear power plant. And in the U.S., Framatome signed a contract with Talen Energy to supply its advanced ATRIUM 11 fuel design to the Susquehanna nuclear power plant.Looking now at the U.K., where EDF Energy sales came to EUR 6.5 billion, up 4.9% in organic terms. This reflects several supporting factors. Higher tariffs and contract prices in B2C and B2B. Higher electricity volumes sold to B2B customers, and higher gas volumes sold to meet strong weather-driven gas demand from B2C customers.9 months' nuclear output was penalized by the outage at Hunterston B. Taking into account the recently announced extended outage at Dungeness B, full year output should come slightly below 60 terawatt hours.In Italy, sales were up 5.7% to EUR 6.1 billion, supported by all activities. Gas supply sales reflected higher B2C volumes driven by favorable weather conditions. In electricity activities, sales benefited from higher B2C demand and growth in hydropower output. Sales in E&P activities were supported by higher Brent and gas prices and growing production volumes. Sales in the Other International segment came to EUR 1.7 billion, taking into account the disposal of EDF Polska in November 2017, this corresponds to an organic growth of 1%.This trend was mainly driven by Belgium, where the period was marked by the 6.1% growth in wind capacity, as well as higher sales prices, offset by lower volumes linked to the ever stronger competitive environment.Looking now at Slide 19, with sales from the other activity segments, sales were up more than 20%, reaching close to EUR 2.1 billion. This was mainly driven by EDF Trading whose 9 month sales were more than double those of 2017 over the same period. EDF Trading was able to capture opportunities created by the market and weather conditions experienced in North America and in Europe. LNG activities were also supportive as demand grew in Asia in the context of higher oil prices.Moving to our financial guidance. We confirm our objectives for 2018. We aim to reach EUR 0.8 billion in OpEx reduction compared to the 2015 level. 2018 EBITDA is expected above the midpoint and may tend towards the higher end of the EUR 14.8 billion to EUR 15.3 billion range, including with the French nuclear output that may come just below 395 terawatt hours, as Dominique will explain in a minute.Indeed, we benefit from a satisfactory execution of our performance plan, strong performance of our trading division, as well as other positive developments, for instance, in Italy, where Edison recently revised upwards its guidance.Cash flow, excluding the net impact of Linky, new developments and the asset disposals plan, consistently with our perspective and EBITDA, we should definitely achieve a positive cash flow this year. Total investments, excluding acquisitions and the disposal plan, are expected to come below EUR 15 billion.Net debt-to-EBITDA should stand significantly below 2.5x. We also confirm that we are on track to completing the EUR 10 billion disposal plan by the end of the year, 2 years ahead of schedule. Finally, we are expecting a net income payout ratio of 50% of fiscal year 2018, excluding nonrecurring items and interest paid on hybrid debt.Let me now handover to Dominique for an update on the French nuclear fleet.

[Dominique Minière]

Thank you, Xavier. So just to tell you that at the end of October 2018, nuclear output reached 321.6 terawatt hours. This level of output was up 10.2 terawatt hour compared to the end of October 2017, but the rebound compared to the 2017 fiscal year, which had been heavily penalized, I remind you, by the outages in connection with the Creosot Forge plant manufacturing fine and by the carbon segregation issue, was less pronounced in our initial forecast for 2 reasons, mainly on one hand, the extension of the shutdown of Dampierre Unit 4 by 124 days for the preventive cleaning of the steam generators, which was not initially scheduled. This shutdown led to a loss of output of around 102.6 terawatt hours. On the other hand, given the drought that occurred in the third quarter, and the water deficit on the Meuse, we had to stop the Chooz unit 1 reactor for 17 days in October, from 11th of October to 27th of October. The shutdown led to loss of output of around 0.6 terawatt hours.As a result, in light of the balance of risks, it seems more prudent to slightly adjust the 2018 output range, expected to be now around 393 terawatt hours to 396 terawatt hours, which is in any case, you can see, very close to the original target, which was of 395 terawatt hours.

[Xavier Girre]

Now we are ready for your questions.

[Operator]

[Operator Instructions] We will now take our first question from Ajay Patel from Goldman Sachs.

[Ajay Patel, Executive Director]

I have 3 questions, please. Firstly, I wanted to ask about restructuring. In October, we had a number of stories coming out that the government may be studying the possible changes to EDF structure, with also a story of them potentially hiring an investment bank to look at a possible split of EDF. So I just wanted to see if, with that as a new piece of the news flow, if you had any comments? Are you involved in the process? What would -- in your mind sets, what are they ultimately trying to achieve? Secondly, and just regards to PPE, to the extent that there is capacity -- or nuclear capacity that closes, are you eligible for any compensation of any sort? And I'm just thinking in the sense of, with Fessenheim, there was a compensation structure? Is there any similar type of benefit that could happen in the event that, that type of closure were to happen? And then lastly, we've had the U.K. price caps come out in the -- on supply, I just wondered if you had any early indications to what potentially the impact could be for you next year?

[Xavier Girre]

Thank you for your questions. First, as regards your first question, I have clearly no comment to make on this topic. And I do not want to comment on rumors concerning plans that the government would be considering. Secondly, as regards your question about PPE, first, we will have to wait a few weeks in order to know it. As regards your specific question, if we were to close reactors, which would have an authorization to be run, it would be logical that we get some compensation along the same lines as we got -- as regards the Fessenheim. Third question, as regard the U.K. price cap, of course it is something significant, as for the whole industry. We do not, of course, comment about the figures about that, but it's something very significant for us for next year.

[Operator]

We will now take our next question from Olivier Van Doosselaere from Exane.

[Olivier Pascal Michel Van Doosselaere, Analyst of Utilities]

I also have 3 questions, please. First one, as you've indicated, you expect to have finalized your disposal plan by the end of this month. I was wondering what comes after that? So how comfortable are you with your balance sheet today? And do you expect that we could see some further asset sales going forward? Second one is coming back to Enedis, actually specifically, so also about a year ago when you provided a bit more of a cautious outlook for 2018 at that time, Enedis was one of the divisions where you were cautioned. But in the first half, EBITDA was down actually -- sorry, EBITDA was up materially in the division. I was wondering if there was any reason to think the EBITDA of Enedis should be down in the second half of this year. And then the third one, on Hunterston, I was wondering when you expect the reactor to come back online? If -- or if there's any reason that actually it wouldn't? That's it on my side.

[Xavier Girre]

Thank you for your questions. First, as regards the disposal program. So I confirm that we will reach our EUR 10 billion disposal goal by the end of this year. We do not intend to have another disposal program of the same kind. But of course, we will consider some disposals when appropriate, when we can get good value in other always to focus our CapEx abilities on CAP 2030 strategy. As regards your second question, indeed, the year for Enedis is better than we expected last year. And I don't see a reason for having a poor -- specifically poor second half of the year for Enedis. Third question, as regards Hunterston B, the -- according to the information that we have, it may not come back in operation before the end of this year.

[Operator]

We will now take our next question from Ahmed Farman from Jefferies.

[Ahmed Farman, Equity Analyst]

I just, first, have a question on the EBITDA guidance. So if I look at the first half numbers for EBITDA, you had an 18% growth, whereas the second half, if I take the upper end of your guidance, implies a 5% growth. But there's quite a disconnect between this and what I see in the sales number. So actually organic sales is accelerating. So in the first half, you had an organic sales of 4%. In the third quarter, your organic sales is about 9%. Could you help us understand this mismatch between what do you expect half -- the growth in the EBITDA versus, sort of, the progression we are seeing in the organic growth? And just my second question is on PPE. Could you just tell us when do you expect the publication of the PPE? And what is it that EDF would like to see or is sort of lobbying for in the PPE?

[Xavier Girre]

First, as regards the PPE. I mean, I have nothing to comment, once more, it's a matter of weeks to get it. Secondly, as regards to the EBITDA growth, maybe 2 elements. First, the improvement of the nuclear generation in 2018 in comparison with 2017 is not fully impacting the revenues, as I just explained, which it has of course an impact -- positive impact in the EBITDA. And secondly, as regards the full year EBITDA, of course, there are plus and minuses in comparison with the initial guidance. So we see it today, as I just explained, in the higher half or towards the higher end of our initial guidance. But of course, there are pluses and minuses about that to reach this goal.

[Operator]

We will now take our next question from Carolina Dores from Morgan Stanley.

[Carolina Botacini das Dores, Equity Analyst]

I wonder if we could have an update on Fessenheim closure and Flamanville because the Minister of Ecology was interviewed, and he said that the Fessenheim closure is not linked to the commissioning of Flamanville anymore. So when do you expect your commission, one, if we can have an update and close the other? Second question is on dividends. You declared dividends of $0.15. How should we think about the distribution between interim and final dividend, should this be 50-50 roughly or more like last year, which was, I guess, 1/3-2/3? And third, sorry to come back on guidance, but could you give a little bit more color of what are the pluses and minuses, and specifically the minuses because I think the pluses is probably price generation?

[Xavier Girre]

To begin with your last question, as you understand we are very positive as regards our EBITDA guidance for this year. Secondly, as regards the interim dividend. It does not imply what will be the full dividend as regards 2018. I just remind you that we've given our guidance, which is a 50% payout for 2018. And for your third question, concerning, Fessenheim and Flamanville, I hand over to Dominique.

[Dominique Minière]

Just to be clear on this point, the actual present schedule of Flamanville 3 is to load and to start up Flamanville 3 end of November 2019. So it has no change, it's in our publication. And for the moment, so the expectation dates of stop for Fessenheim is end of November and beginning of December 2019. So in line with what we have said for the moment. Of course, we are studying plans for Fessenheim. But for the moment, I have nothing more to say about that. The 2 dates are completely in line, the beginning -- starting up of Flamanville 3 end of November 2019, and stop of Fessenheim at the same time.

[Operator]

We will now take our next question from Vincent Gilles from Crédit Suisse.

[Vincent Gilles, Head of the Utilities Research]

Yet another call today. Hydro production, very good performance on the first 9 months. But as you rightly pointed out, the level of rivers are pretty low in Europe these days. What should we expect for the fourth quarter compared to last year? Should we assume there is bit if a drought and therefore, we are not going to see the same momentum as for the first 9 months? Or are you confident -- we are mid-November, so you probably have a very good idea of where you are, so if you can share with us where you believe you are now, it would be very helpful.

[Xavier Girre]

Thank you. As regards the hydro, you've pointed very rightly that it's not raining as much during Q3 than it was during the first half of the year. But nevertheless, we are quite great confident as regards to the hydro generation for the end of the year, at least in the average generation and for a normal year. So it means that as a whole, on the whole Europe, the hydro generation will be very high, thanks to the beginning of the year.

[Operator]

We will now take our next question from Vincent Ayral from JP Morgan.

[Vincent Jean Michel Ayral, Analyst]

My questions have been asked. I'll just ask for a quick clarification. Regarding EBITDA for this year, with the Hydro been exceptional through the year, and Q3 remaining extremely good, with the -- and nuclear output potentially being slightly softer, but it could be very marginal. I know 9 months show on the sales numbers, but my first assessment of this would be that this is a net positive. So Q3 is indeed tracking potentially above your initial planning and budgeting for the year. Could you please confirm if this is the case indeed, just to get a view on the -- your trajectory to year-end.

[Xavier Girre]

Well, what I can confirm is, once more, that we are very confident as regards our full year performance and our EBITDA guidance for this year. We highlighted in July that we were waiting for the maintenance programs in the French nuclear reactors because it's a high season of maintenance programs during summertime. And now we've given our updated view because now there are different reactors that have come back after this maintenance season. And so you're right, these gives us a strong confidence about the execution of the full year.

[Operator]

We will now take our next question from Aymeric Parodi from UBS.

[Aymeric Parodi, Associate Director & Equity Research Analyst]

One question for me. What do you think about the suggested reforms of the ARENH mechanism? The French energy regulator approved them with conditions a few weeks ago, at least gave the green light. I'm just curious to have your feedback.

[Xavier Girre]

Thank you. Yes, you're right. The government has prepared a technical reform of the ARENH, that consists essentially in spreading the ARENH demand over 3 auctions. That would take place during year [ minus ] 1. The consultation process has taken place. You're right also. And both within the industry and the regulator, and the draft decrees are now ready. And we believe that this draft would go in the right direction because it would reduce the arbitrage opportunities for our competitors. And it would also make ARENH demand more predictable for our hedging policy. And of course, therefore, reducing an important risk factor for us. However, the timetable for implementation of this reform is not yet fully clarified, and it will depend on the consultation with the competition authorities.

[Operator]

[Operator Instructions] We will now take our next question from José López from Millenium.

[José A López]

I just was wondering, if you could give us any update on the time line for the sale of the stake in British Energy? And in that context, also I wanted a follow-up question on that, would you consider -- considering that there are some players in the market that are very optimistic about the role of fossil fuel generation in the future, would you consider selling your coal and gas assets in the U.K. and then you'd be completely decarbonized on the side of your U.K. business, any thoughts about that?

[Xavier Girre]

I'm sorry, I didn't get your second question.

[José A López]

My second question was that, there seems to be quite some optimism around -- I don't know if it's founded or not, but there's some optimism around the role of fossil fuel, coal and gas generation in the U.K. In that context of this enthusiasm and optimism, would you be willing to consider selling your thermal assets in the U.K., we've seen some players exit the thermal side of the business in the U.K. Would you consider that also? It would lower your cover footprint, of course. Yes, that's just a follow-up from the first question.

[Xavier Girre]

Okay. Thank you. Well, I will disappoint you because I will not comment, as you know, about this matter. What we already said, is that Centrica announced its intention to sell its 20% stake in our joint company. And we also said that this gives us obviously some options. And we also said that we do not intend to increase our share in our company. And we didn't say anything more, and I don't have anything more to say tonight.

[Operator]

We will now take our next question from Olivier Van Doosselaere from Exane.

[Olivier Pascal Michel Van Doosselaere, Analyst of Utilities]

I just had one quick follow-up question actually that I didn't ask before. Just coming back to your power price exposure, you had indicated previously that taking into account the ARENH volumes and the regulated prices, that the total overall sensitivity might be around 100 terawatt hours in -- for France. Although you also clearly indicated that this was not a linear element. And I was wondering if that sensitivity is still the message that you're passing right now? And if you actually expected at some point, you could give us a bit more granularity on how we think -- we should think about that kind of sensitivity from EDF?

[Xavier Girre]

Thank you for your question. In fact, there has been no change about that. I mean, we are -- as we explained, I mean, our volumes, which are exposed to the market beyond the hedging period, are more are less 100 terawatt hours in France, due to the ARENH, both the direct impact of the ARENH and then the indirect impact of the ARENH, on our offers. And second thing, as you know, we hedge our volumes more or less on the renewable basis over the 2 years before the operating year.

[Operator]

[Operator Instructions] There are no further questions at this time.

[Xavier Girre]

Okay. If there is no further question, I thank each of you. Thank you for your attendance, and thank you for your questions. Have a nice evening.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.