Bloomberg News

EDF Investors at Risk of Losing Record Dividend on Costs: Energy

January 22, 2013

EDF Investors at Risk of Losing Record Dividend on Costs

EDF hasn’t cut its dividend since 2009. Photographer: Balint Porneczi/Bloomberg

Electricite de France SA’s near record dividend is at risk for the first time in four years as costs spiral at the world’s biggest atomic-power producer.

The French state-controlled utility, which is yielding 7.7 percent, last week said it was seeking to pay a “sustainable” dividend. That backed away from a previous pledge to keep it “at least stable” for 2012 and beyond. The stock has lost 14 percent in the past year and about 65 percent since 2008.

“There is a growing fear among equity investors that EDF’s current dividend is not sustainable longer-term,” said Roland Vetter, an analyst at CF Partners (UK) LLP in London. “EDF faces fundamental headwinds.”

European utilities from Germany’s EON SE to Iberdrola SA in Spain face increased tax demands from governments seeking to ease spiraling budget deficits. Italy’s Enel SpA last year cut its dividend target. EDF (EDF) must fork out billions of euros for safety upgrades after the 2011 Fukushima disaster at the same time it’s being prevented from raising prices to cover costs.

Shares in Paris-based EDF closed 1.1 percent lower in the French capital at 14.71 euros, the biggest decline in seven trading days. The Stoxx 600 Utilities Index fell 0.5 percent.

EDF hasn’t cut its dividend since 2009. The payment was long considered safe because it’s mostly collected by the French government, its largest shareholder with an 84 percent stake. The state received 1.8 billion euros ($2.4 billion) in 2011.

Bloomberg analysts yesterday said they cut the forecast for EDF’s final 2012 dividend by 3.3 percent to 58 euro cents a share, while leaving the full-year 2013 dividend forecast unchanged from this year at 1.15 euros.

Highest Yield

Carole Trivi, a spokeswoman at EDF, declined to comment on the payout which will be decided by the board next month. The utility is raising more than 4 billion euros from its first issue of perpetual hybrid bonds in 16 years, Bloomberg reported today, citing a person with knowledge of the sale.

EDF’s current yield is about tied with EON and EDP-Energias de Portugal SA as the highest of European utilities after the 9.6 percent paid by GDF Suez SA (GSZ), which has pledged to cut spending to maintain the payment. EDF ended the fourth quarter yielding 8.2 percent, a record quarterly close, according to data compiled by Bloomberg.

The highest yielding company among the major U.S. utilities is Exelon Corp. at 6.9 percent, and among Japanese it’s Hokuriku Electric Power Co., currently paying investors 4.8 percent, according to data compiled by Bloomberg.

With President Francois Hollande pledging to shore up France’s energy mix in favor of renewable power, EDF is facing cost overruns on a new reactor as it expands a workforce that’s already double the size of its nearest rivals. The French utility owns 58 French and 15 U.K. reactors.

Taking Comfort

“In this uncertain environment, the market seems to be taking comfort in the dividend but there is no guarantee,” said Ingo Becker, an analyst at Kepler Capital Markets. “It’s deceiving to believe that this is a floor for the stock because in the end dividends have to follow fundamentals.”

EDF will be compensated by the government for the higher cost of renewable energy. The government has pledged to reimburse EDF almost 5 billion euros by the end of 2018 through higher levies on power bills.

The size of this year’s reimbursement will be “small” compared with future years, according to Thomas Piquemal, chief finance officer.

February Decision

“Whether this agreement will have an impact on our dividend is up to the board to decide in February together with 2012 accounts,” Piquemal said last week. EDF is “committed to a sustainable dividend policy,” he said. That’s a departure from what the company said in November when it pledged the payout would be “at least stable” for 2012 and beyond.

“Investors are at the end of the road,” said Per Lekander, an analyst at UBS AG. “There isn’t much left for them.”

Analysts are losing faith as well. The recommendation consensus for EDF of 20 analysts is close to a record low of 2.9 reached in November, with buy ratings getting five points, holds three and sells one.

Their concerns are being magnified as Hollande seeks to encourage the country’s renewable energy industry and reduce reliance on nuclear power. EDF’s French reactors currently provide three quarters of the nation’s electricity output, where the utility derives almost two thirds of its earnings.

The French president has already pledged to shut EDF’s oldest plant at Fessenheim by the end of 2016 for safety reasons.

Energy Mix

Environment and Energy Minister Delphine Batho has said an energy debate that got under way this month will culminate in a law mid-year to outline the country’s future energy mix. A central feature will be cutting dependence on atomic energy to 50 percent of power production by 2025 from about 75 percent.

“The debate can’t go on too long,” said Francois Brottes, a Socialist lawmaker who’s promoting a law on power and gas tariffs. “It’s a period of uncertainty, vulnerability” for EDF.

EDF shares slid 26 percent last year, cutting the company’s market value to 28 billion euros. That’s down from a record 158 billion euros in November 2007 when it was the biggest company listed on France’s benchmark CAC 40 index, surpassing oil explorer Total SA.

Moody’s Investor Services last month lowered its outlook on the utility to negative from stable, due in part because of rising debt and pressure on profitability and free cash flow.

Cost Overruns

That came after EDF said 2013 profit may be in line with last year’s results, compared with a previous forecast for growth, and cost overruns of 2 billion euros for a new- generation EPR reactor under development at Flamanville in Normandy.

The price tag for the EPR is now expected to be 8.5 billion euros, more than double the initial estimate, and about a third of EDF’s current market capitalization. The utility assigned a value of 47 billion euros to all its reactors at the end of 2011.

In addition to ballooning costs to develop new reactors, EDF’s employee ranks are also swelling at a time when the government is grappling with joblessness at a 14-year high. EDF has promised to hire a net 2,000 workers in France, adding to 156,000 worldwide, more than twice that of EON AG, Germany’s largest power generator.

The utility was created in 1946 when the government nationalized energy companies. EDF workers, along with those of former gas monopoly GDF Suez, benefit from perks including discounted power rates.

Subsidize Bills

EDF said in 2011 it set aside 2.3 billion euros to subsidize bills for existing and retired workers so they could pay just 5 percent to 10 percent of the tariffs charged to regular consumers. The two utilities also by law contribute 1 percent of operating income, which amounted to 307 million euros in 2011 for EDF and its distribution arm ERDF, into a fund for workers’ social and cultural activities.

EDF will spend an estimated 10 billion euros on safety measures at French reactors ordered by the national watchdog after the Fukushima disaster. Total planned spending on French reactors on safety and extending operating lives of existing plants would reach 55 billion euros, the company has said.

To help pay for investment, the utility would benefit from higher power rates at home. French state-regulated tariffs charged by EDF should increase by about 30 percent by 2016, Philippe de Ladoucette, head of the energy regulator, has said. The increase would reflect inflation, higher wholesale rates at which EDF sells nuclear power to rivals, a subsidy for renewable power and transport and distribution costs.

Cash Flow Break-Even

With Hollande’s pledge to contain household energy costs, it’s unclear whether the utility will obtain tariffs high enough to pay costs.

EDF won’t break even on cash flow until 2018, according to Citigroup analyst Sofia Savvantidou.

The utility is expected to spend an average of 13.8 billion euros a year through 2016, most of which amounts to maintenance rather than adding earnings capacity, she wrote.

The company will give details next month about a plan to cut costs by 1 billion euros, Herve Machenaud, head of production and engineering, said last week. “EDF is confronted with financial constraints.”

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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