Theresa May Misses a Trick on Hinkley
Stock prices are meant to efficiently reflect all available information to the market. If that's the case, EDF's shows investors have little faith the French utility will deliver the 18 billion pound ($24 billion) Hinkley Point nuclear plant on time and on budget.
After weeks of dithering, Theresa May's government gave the go-ahead for Hinkley on Thursday without making any changes to the contract that underpins it. That deal -- first struck in 2013 and notorious for guaranteeing EDF an electricity price over 35 years that's about double the current market rate -- should in theory be highly lucrative for the French supplier.
A recent Financial Times analysis found it would provide the French utility somewhere north of 100 billion pounds in revenue over the project's lifetime. EDF hasn't confirmed that figure but does say Hinkley will deliver a 9 percent internal rate of return -- exceptionally good in a world starved of yield.
Barclays analysts believe Hinkley would need to be four years late and more than one-third over budget to destroy value for EDF shareholders. Yet EDF fell slightly after Thursday's announcement, suggesting delays and spiralling costs are very much part of investors' base case.
EDF shares are in the doldrums for many reasons, including increased competition in French electricity markets and the exorbitant cost of refurbishing France's nuclear reactors (for more on that, see here). But the muted reaction shouldn't be a surprise. Even if built on time, Hinkley won't deliver any cash to EDF for a decade.
Of course, it was always improbable that Britain would renege on Hinkley. In a post-Brexit world the country has to show it's open to foreign investment; capital inflows are the only thing sustaining Britain's enormous current account deficit. Still, May and French president Francois Hollande have missed a glorious opportunity to deliver the project more cheaply.
With the French state as majority shareholder, EDF enjoys a two-notch rating uplift from rating agency Moody's, which is helpful in view of its more than 36 billion euros in net debt. Even so, EDF's weighted average cost of capital is almost 7 percent, according to Barclays. By contrast, British and French 10-year government bonds yield less than 1 per cent and U.K. 30-year debt yields only 1.6 percent.
If the U.K. government really thinks Hinkley is vital to energy security, it should have borrowed the money to fund it itself. Instead, British consumers (and possibly EDF investors) will for decades pay the price for the high-risk, high-cost approach.
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