Industrial accident or failing governance? The decision of the State, which is also an 84% shareholder in the energy company, to cut EDF’s profits by 8 billion euros in 2022 to preserve the purchasing power of the French (by limiting increases of tariffs), made the title plunge by more than 22% at the start of the session on Friday.
The decline gradually narrowed during the day, closing at –14,59%. However, the shock remains severe: no less than three billion euros of capitalization evaporated in a few hours… and credibility vis-à-vis the markets (once again) seriously tarnished.
The prospect of a capital increase, launched by the broker JP Morgan Cazenove in a note, did not help to reassure either. The Minister for Ecological Transition, Barbara Pompili, has indeed indicated that the State would be “alongside” EDF to help it get through this bad patch.
On the other hand, the shock was less violent on EDF’s bond debt: senior debt deteriorated by 7 to 10 basis points (40 basis points in the morning) but the impact was more limited on debt hybrid, around 2 basis points.
This stall on the stock market raises many questions. First of all, it sheds light on the ambiguous role of the State-shareholder whose political decision undermines a listed company. Especially since the group must manage the umpteenth additional cost of the Flamanville EPR plant. These contradictions of the State-shareholder are not new and weigh like a lead weight on the valuation of the group. Since its IPO in 2005, market capitalization has fallen by almost 70%, from 100 billion euros to 28.5 billion today.
A nuclear rent in question
With such a low free float (15%) and its sensitivity to government decisions, the question naturally arises of the relevance of its stock market listing. Admittedly, the stock is not lacking in appeal, with a yield of around 6%, which can make it a fund value in the portfolio.
EDF is also a major player in Europe. But its nuclear fleet is both an asset (long cheap energy) and a weakness, due to the huge mortgage on the cost of dismantling power plants and burying waste. This is also what explained its historic discount compared to its main European competitors, particularly the Germans.
Added to this is an ever-increasing cost price of energy produced by nuclear power due to new security requirements imposed by the State, but also by insurers, investors and financial rating agencies. The recent classification of nuclear power by Brussels in a specific category of green energy was a real breath of fresh air for the group, which will thus be able to continue to raise debt at market conditions.
Underground dismantling project
It was to solve this impossible equation that the Hercule project to dismantle EDF in two or three parts was envisaged. This reorganization envisaged a partial or total separation of regulated and non-regulated nuclear activities and the creation of a “Green” EDF, bringing together renewable energies and distribution and services and, finally, a “Blue” EDF. This would concentrate French nuclear assets and thermal and hydrothermal power stations. A process that could have resulted in a single rating of the “green” EDF part.
The file was however officially closed given the complexity of the project (in particular the sharing of the debt) and the opposition of the unions. However, the division of the major energy groups has become the rule in Europe, under friendly pressure from Brussels but also from the markets. The German groups E.ON and RWE thus long ago split their production activities from those of renewable energies and distribution.
Friday’s stock market episode could thus put the project back in the saddle… after the presidential elections.