Photographer: Chris Ratcliffe/Bloomberg

At EDF, Politics Wins as Hollande Pushes for $25 Billion Project

  • France needs plant to support its nuclear-engineering industry
  • U.K. offers price guarantees as emissions' obligations loom

It’s no surprise Electricite de France SA is a very political company.

QuickTake Nuclear Power

The French state still owns 85 percent of the shares; its fleet of nuclear reactors, the world’s largest, is a centerpiece of 1970s government-directed economic policy; politicians help decide how much the company can charge customers; and it’s seen as a way to project French industrial prowess around the world.

But even for a French veteran of the system that commingles politics and commerce, it all became too much last week. Finance chief Thomas Piquemal quit because of his chief executive officer’s insistence on pushing ahead with a financially questionable 18 billion-pound ($25.5 billion) project to build Britain’s largest power station. His decision followed a meeting between French President Francois Hollande and British Prime Minister David Cameron, where they pledged support for Hinkley Point C.

For France, the project will underpin the country’s nuclear-engineering industry with its many thousands of well-paid, skilled jobs. And even though the U.K. government had to guarantee to pay a power price almost triple the market rate to make Hinkley Point viable, Cameron’s government wants a flagship project that will boost an economically weak region and help meet obligations to cut carbon emissions.

Shares Slump

Investors are siding with Piquemal. EDF shares, down 90 percent from their 2007 peak, plunged as much as 9.6 percent after he resigned. Last month, the company cut its dividend and said it will slash jobs in France, curb investment and finance new developments with asset sales in a bid to return to a positive free cash flow from 2018 amid falling power prices.

“To commit to a 10-year build project at this stage would be the wrong thing to do,” Martin Young, an analyst at RBC Capital Markets in London, said by e-mail Monday. “From the outside, it looks like this is clearly a political decision. It’s hanging by a thread, but politics are seemingly still in favor of pushing it forward.”

Both governments reiterated their support for the project on Monday.

“I’m not going to speculate over the resignation of one individual, that’s a matter for EDF,” Cameron’s spokeswoman, Helen Bower, told reporters in London. “We continue to fully support the project and President Hollande said it has the full support of the French government.”

Price Guarantees

Hollande said last week that EDF plans to make a final investment decision in the near future. 

To sweeten the deal, the U.K. has guaranteed the utility and its partner China General Nuclear Power Corp. will earn at least 92.50 pounds a megawatt-hour over a period of 35 years at Hinkley Point. That compares with the forward-curve price of power for 2020 of 32.55 pounds, according to broker data compiled by Bloomberg.

“This project offers very poor value for the U.K consumer and taxpayer and shouldn’t go ahead at this price,” Peter Atherton, an analyst at Jefferies Group LLC, said by phone from London. 

Nuclear Expertise

For Areva NP, the troubled reactor maker being acquired by EDF, Hinkley Point is a rare contract opportunity in a new-build market dominated by Chinese and Russian rivals. The reactor unit of Areva SA, 87 percent owned by the French state, racked up 5.5 billion euros ($6 billion) of losses building a similar atomic plant in Finland that’s seven years late.

Hinkley Point is “an important project for France, which wants to use it to preserve its nuclear expertise and as a springboard for securing new nuclear tenders elsewhere in the world,” according to Elchin Mammadov, European utilities analyst at Bloomberg Intelligence.

When EDF announced in January a 5 percent reduction of its French workforce to cut costs, union representatives on the company’s board called for Hinkley Point to be dropped or at least delayed until the same reactor models being constructed at Flamanville in France and in China are commissioned in 2018.

At Flamanville, costs have more than tripled to 10.5 billion euros and construction is six years behind schedule. The French nuclear watchdog has expressed concerns about the strength of the reactor vessel, forcing EDF and Areva to conduct tests to prove its safety.

Downgrade Looms

Standard & Poor’s last month threatened to downgrade the company’s credit rating, citing the U.K. project as one of the “negative developments” weighing on EDF.

That doesn’t deter French Economy Minister Emmanuel Macron, who on Monday reiterated the government’s support for Hinkley Point, a project he said would be “very profitable” for the next 30 years. 

Still, the government’s decision to take its EDF dividend in shares may not be sufficient to bolster the power company’s balance sheet.

“Alarm bells should be ringing deafeningly loudly in the offices of the French and U.K. governments,” Greenpeace Director John Sauven said in an e-mailed statement. “If the finance chief thinks the project will be a disaster, the optimism from both governments that the deal will be imminent is irrational.”

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