Given the difficulty of accurately gauging nuclear capital expense, how can we infer if these enterprises can ever be profitable?
By Leonard Hyman and Bill Tilles, Oilprice.com:
When a utility stock pays a dividend that yields 11 percent it is either an overlooked steal or the equity of a company with big problems–and a dividend that’s soon to be either eliminated or reduced. EDF, France’s state controlled nuclear energy giant, looks more the latter than the former. But never underestimate the determination of French politicians–right, left and center to protect and subsidize their civilian nuclear power establishment.
To understand this byzantine story of French public and private partnerships, let’s start with EDF’s current stock price. It’s priced in Paris this morning at about €9.60, slightly above the 52 week low. And down from a high of €28.78 more than two years ago.
To compound its woes, EDF’s stock sells at about 63 percent of its book value. This typically indicates the market’s view that either current earnings provide a below-cost-of-capital return or that investors don’t believe the assets are worth the value carried on EDF’s books. By way of contrast, a financially sound electric utility in the U.S. sells at about 1.5 times its book value and its shares offer investors a yield of less than 4 percent. In February, shareholders of EDF and Areva, the state controlled nuclear engineering and mining company will vote on a monumental reorganization. The reported terms would raise serious questions in Wall Street’s finest minds.
EDF plans to buy majority control of Areva’s nuclear engineering and construction division for €2.5 billion. (It may sell down some of this ownership position later). The French government will also invest in Areva: €5.2 billion into the remaining portions of Areva. The government, we assume, has several objectives: first, take the liabilities and lawsuits of the delayed, over-budget and still incomplete Finnish nuclear project, Olkiluoto, off of Areva’s engineering division and then, with a hopefully more financially stable entity the government can reduce its ownership stake in Areva.
But there’s always something. Investigators suspect falsification of documents at one of Areva’s facilities that manufactures components for nuclear plants. The engineering arm already faces a weak market and this investigation will not help.
But regardless of Areva’s value, where will EDF get the money to buy it? Not to mention their supposed €30 billion plan to rehab France’s aging nuclear fleet. (As an aside we should point out that looks to us like a €100 billion program. Just assume they plan to overhaul 40 nuclear power stations at a cost of €2.5 billion per station.)
As if this wasn’t enough capital expense, they also have a big financial commitment in the UK with the planned construction of Hinkley Point C, using French EPR technology. Offsetting this to a considerable extent are financial guarantees from the British government. However, there is a €2 billion holdback of funds if EDFs Flamanville nuclear project is not completed by 2020. This is tied to the EU’s rules on national subsidies. But given Brexit, whether the EU’s rules continue to apply in this case remains to be seen.
To raise funds for what looks like the start of an audacious capital program (either that or a big step down the road to financial perdition), EDF plans to sell €4 billion of new stock. Of the proceeds, the French state will take €3 billion. And as for the supposed “safety” of the common dividend, the French government plans to take its dividends in stock for three years thus saving EDF considerable cash disbursement.
Most of these funds go from one state-controlled company to another. From the French treasury to a firm that it owns. But as long as the French government has a printing press or the ability to sell sovereign debt, there is no shortage of money to pay for whatever the government decides to do.
The bottom line in this saga? France has a presidential election this year and all the main party candidates are decidedly pro-nuclear. Too many jobs involved. Too much French pride invested in its nuclear effort. Marine LePen, the right wing politician, was quoted as saying that “so-called green energies are not realistic yet.” No Thatcher-like preference for free market outcomes or private ownership here.
In short, EDF’s story again shows the vital role of government subsidy in nuclear power. This also shows that privately owned firms in the nuclear energy business without government partners may find themselves at a competitive disadvantage. How can you compete when the “other guy” can borrow billions at no or low cost from its state-sponsored partner or owner?
In the nuclear energy business, the demand for capital is so large that very few privately owned enterprises are able to engage. Unlike Britain, which privatized its utility sector, the French, Chinese and Russians have state sponsored nuclear power generation activities that aggressively seek export opportunities.
The woes of EDF’s shareholders reminds us of several things. Nuclear energy is, relatively speaking, high cost energy. And that risk assessment in this area is difficult even for the most seasoned professionals. This is a fancy way of saying we really don’t accurately know what new nuclear plants, refurbishments and the like will eventually cost.
Given the difficulty of accurately gauging nuclear capital expense, how can we infer if these enterprises can ever be profitable? This suggests to us that ongoing nuclear development, at least near term, requires the deep pockets that only a state sponsored partner provides.
The financial issue here is not about having a balance sheet large enough to absorb potentially large losses. But rather the capacity to withstand significant financial uncertainty, for protracted periods, in return for uncertain financial outcomes. Big investment, big risks and low or no profits barring subsidies. This sounds like a public sector or governmental function to us. By Leonard Hyman and Bill Tilles, Oilprice.com
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