EDF's board meets on Thursday to approve the construction of two nuclear reactors in the U.K., which will cost about 18 billion pounds ($23.6 billion). Cosma Panzacchi, a Bernstein analyst, expects EDF to green light the project. He's probably right, though investors should pray otherwise.
Under the terms of a deal struck in 2013, British electricity customers will fund large guaranteed payments to EDF for 35 years in return for the French utility shouldering much of the construction risk for Hinkley Point. Because of lower projections for future wholesale electricity prices these subsidies are estimated to have risen to a staggering 30 billion pounds.
When one side -- in this case U.K customers -- gets a raw deal, you'd assume the other party is getting a good'un. But Hinkley could turn out to be a financial disaster for everyone.
EDF claims it will deliver a 9 percent return over the project's duration but the reactors won't start delivering power (and therefore cash) for almost a decade, even if all goes well. And that's a big if. EDF plans to deploy the new European Pressurized Reactor, but efforts to get it up and running in France and Finland have led to long delays and huge cost overruns. Hinkley has already incurred 2.5 billion pounds in development costs before the official starting gun has been fired. A six-month delay would see EDF's return cut by 0.2 percent, Bloomberg News reported.
If EDF needs a lesson in fiendishly complicated overseas investments, it should look at ThyssenKrupp's disastrous attempt to build a pair of steel plants in the Americas, the prime reason for more than 8 billion euros in net losses over three years. The resignation of EDF's finance director in March was hardly reassuring.
A project of this size would constrain anybody, but EDF's balance sheet is stretched. Years of negative free cash flow have obliged it to borrow to fund dividends. EDF's 37.4 billion euro net debt equates to a manageable 2.1 times ebitda, but earnings are projected to deteriorate because of competition in French power markets.
The company faces a 50 billion euro bill by 2025 to refurbish France's ageing nuclear reactors, and had a 22.5 billion euro pension deficit at the end of last year. That's probably bigger now because bond yields fell after the Brexit vote.
EDF is to raise 4 billion euros in fresh capital and divest about 10 billion euros in assets to help fund Hinkley, including a stake in grid business RTE. But it's questionable whether that will avert a credit rating downgrade or, as Panzacchi notes, whether it's a sensible re-allocation of capital. The company already generates 77 percent of its electricity from fission and arguably doesn't need more nuclear exposure.
Indeed, renewable energy costs are falling fast and battery storage is improving. So one day much of our power might be generated and stored locally and distributed via smart grids, leaving a diminished role for giant nuclear plants.
Of course, with the French state as majority owner it's inevitable that EDF's investments will reflect political aims. Paris is determined to see its nuclear technology succeed and create jobs. Minority shareholders were naive if they didn't realize their interests would be secondary.
Yet France will be doing both EDF and its nuclear industry a disservice if it bets big on Hinkley with a still unproven technology, and fails spectacularly. Better to wave a white flag now than build a radioactive white elephant.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
EDF's partner China General Nuclear Power Corp (CGN) is responsible for one third of the construction costs
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