Earnings Transcript for EDF.PA - Q1 Fiscal Year 2019

Xavier Girre: Good morning, everyone. So this is Xavier Girre, CFO of EDF. I am pleased to welcome you to this conference call and with Xavier Ursat, we will answer all your questions. I will walk you through our first quarter sales starting with the main highlights over the period and I will close my presentation with our financial outlook. First, let me start with the key figures on Slide three. Group revenue for the first quarter of 2019 amounted to €20 billion, up organically by 1.7% compared to the first quarter of 2018. This growth is mainly attributable to the France-Generation and supply segment in the context of favorable market prices, the development of the group’s energy services activities and the good performance of EDF Trading. On the other hand, revenues were negatively impacted by the decline in nuclear output in United Kingdom due to extended outages of two nuclear plants and also by a warm weather driving a decrease in distributed volumes in the France - Regulated activities segment. Before looking at the sales numbers in more detail, let me comment on some of the recent highlights of the group, starting with the continued development of our renewable activities. First, EDF Renewables launched construction of 1.2-gigawatt capacity in the first quarter alone, reaching a record level of 3.5-gigawatt gross capacity under construction at the end of March 2019, including 1.4 gigawatt in solar. The second pillar is precisely related to solar activities. We are accelerating in the deployment of the French solar plan with the acquisition beginning of April of the Luxel Group, which holds a portfolio of 1-gigawatt peak, including around 100-megawatt peak already operating. We announced the acquisition in China of a majority stake in the portfolio of 77-megawatt peak of rooftop photovoltaic assets, which strengthens our presence in distributed solar power in China. And lastly, EDF Renewables was awarded a 20-year power purchase agreement for a 60-megawatt peak solar plant near Athens. Third, key development in the offshore space

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Olivier Van from Exane.

Olivier Van: If I may, I’ve got four quick questions. The first one is on revenues from capacity auctions in France. Sorry, if I missed the figure, but if you could highlight how much you made in Q1 versus last year? And what your expectation is for the full year relative to last year from those revenue source? Second one, I guess that you expect a 5.9% tariff increase to be implemented on the 1st of June. I think that was already embedded in your guidance. Could you please also highlight what you expect after that; i.e., I think normally the regulator looks at tariffs again in the summer months. I was wondering if you expect another tariff increase potentially in August that could be linked to the regulated part of the build and then maybe also that could include catch-up for what you didn’t receive in the first months of this year on the regulated tariff. And then a third question, again, on tariffs. Mr. de Rugy has been saying that he would like to revise the calculation for the regulated tariff from next year onwards. And actually, we could hear Mr. Levy mentioning in parliament – sorry, in a senate, that actually, he thought Mr. de Rugy was indeed referring to why the change at EDF is seeking to achieve on the nuclear French output with a CORRI-DOOR model pricing mechanism. I was wondering if indeed you could confirm that Mr. de Rugy would be speaking in terms of a change in methodology about the move to that sort of CORRI-DOOR pricing model for the whole nuclear generation output in France? And then the final question is that if you could highlight your expected tax rate for the full year? Thank you.

Xavier Girre: Could you please repeat your last question, please?

Olivier Van: Yes. I know it wasn’t discussed in this presentation, but just the tax rate that you expect for the full year?

Xavier Girre: Okay. Thank you for your questions. First, as regards the capacity in France. So we have already got one tender this year. The price of the capacity was €20 per kilowatt. The impact was a positive one, plus €62 million versus Q1 2018. We will have another tender this week. And then we’ll see, of course, how the capacity price is evolving for the whole year. Second, as regards the regulated tariffs, yes, we expect an increase of the regulated tariff by 5.9% in June. As you know, the government had three months to oppose the increased recommendation and it hasn’t. As regards the catch-up, we will see, it’s not clarified yet. As regards to your third question, concerning the ARENH mechanism. Definitely, we consider that it’s important to reform the ARENH mechanism because, as you know, it’s not a fair mechanism, it’s not a symmetric mechanism, and also, the level of the ARENH is too low. So this is why we consider that what has been highlighted at the end of November by President Emmanuel Macron in the frame of the presentation of the draft PPE, considering CORRI-DOOR in order to protect, of course, the power purchase of the end customers and also to give a clear visibility to investors and operators is very important. So we are continuing to work and to make proposals about that. As regards the tax rate. As you know, the – of course, you know the legal tax rate in France. And for the effective tax rate, we cannot comment on this at this stage of the year. I will come back to that later in the year.

Olivier Van: Okay, thank you very much for your indications.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Vincent Ayral from JP Morgan. Please ask your question.

Vincent Ayral: Hi, good morning. So I see we went through the tariff question. I just wanted a confirmation. Normally, under the regulation, a tariff catch-up is due, isn’t it? And the question would be, is there any way for the government to avoid that? Or is it binding? And does it have to happen by year-end? Then on the case of the two main, I would say, central focus of the market, which are the regulation and the restructuring. We’ve seen in the press some dates here, 28th of May, a strategic board meeting to review the restructuring project at EDF and to be presented to top 100 managers on 7th of June and unions on the 20th. Could you please confirm that these dates indeed are real? What the press has been talking about? We didn’t have any confirmation there? And whether, by the year-end, we have a bit more visibility on when this will be officially presented to the government publicly. Then the second question regarding that would be the regulation. Where are the works on both the EDF and the government? Is it still a large project? How keen are both sides to get this going forward? I think some color on that would be highly appreciated? Thank you.

Xavier Girre: Thank you for your questions. As regards the catch-up mechanism, yes, in principle, this is bylaw, so the delay should be compensated and smooth to ensure economic neutrality. So we will see how this is done. Second, as regards your second question, as regards to regulation, yes once more. I mean we consider it’s very important to reform the ARENH and to give visibility to the investments in the nuclear assets and also visibility to the customers. So we are continuing, of course, working on that. But I don’t have anything more to add as of today. And as regards to the organization of the group, as you know, this is something that has been asked to EDF to make some proposals by the end of the year, and this is the only date which has to be kept in mind.

Vincent Ayral: Thank you. On the regulation theme, you say that it is very important from an EDF standpoint and you continue to work on that. I think one of the questions for the market has been the commitment from the government to get to do it. Could you give us a bit more color on the written – basically comments made by the government on this very specific topic? And if there is any alignment or misalignment of interest, I think this is something of interest? Thank you.

Xavier Girre: Yes. I can confirm to you that the first key point relates to the regulatory framework and the exit from the ARENH, which cannot support the need of the PPE. And as I already said, this has been highlighted by the Head of State in November last year. And in this frame, we need to introduce a fair and balanced system that both protects the consumer from volatile power prices and ensures EDF receives a different remuneration for its investments. So this is what we are currently working on with the French administration.

Vincent Ayral: Thank you.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Emmanuel Turpin from Societe Generale. Please ask your question.

Emmanuel Turpin: Yes, good morning. Two questions, please. First of all, could you give us a bit more granularity on the UK as to what impact you expect in the full year for the change in the standard variable tariffs? And also remind us of your assumptions for when you expect the capacity mechanism to be reinstated or recognized in your figures and that’s again in the UK? And stepping back at group level, you’ve confirmed your guidance for the full year. Q1 shows us a pretty negative impact from something that’s quite difficult to forecast or to budget, which is the weather, hydro in France, also a large negative from UK nuclear production. And from memory, we didn’t really have any budget in mind or that was made public for UK nuclear. Could you basically explain to us what makes you feel comfortable to confirm your guidance and maybe whether looking at the Q1 revenues, whether you feel more comfortable towards middle or maybe the bottom of the guidance? Or do you think it’s still all to play, including at the top end?

Xavier Girre: Thank you for your questions. First, as regards the UK, as regards the cap under the tariff, we already gave an indication in February indicating that we assessed the impact of the cap of more or less €130 million and our EBITDA compared with last year in the UK. Secondly, as regards the capacity mechanism, we have given also an assumption, which is that the mechanism be restored this year. And I think it’s important to note that following the November 2018 decision by the European Court, steps have been taken by the commission to restore the capacity market in the UK and the authorities also approved regulations to allow the capacity market to operate as far as possible during extensive period. So we are still, clearly, expecting that the capacity market can already be reestablished during the second half of this year. And secondly, as regards your question on the guidance, I can only tell you that, clearly, we confirm our guidance, as I already highlighted. You’re right. I mean the hydro conditions and the mild weather during the winter period are not very favorable, but nevertheless, we clearly confirm our guidance for this year. I can also highlight, for example, that we have also some positives, for example, as regards the trading trend, which is very good, as I already highlighted also, thanks to the good operations in this EDF Trading team and to the favorable market conditions. Other questions?

Operator: Thank you. [Operator Instructions] The next one comes from the line of Olivier Van from Exane. Please ask your question.

Olivier Van: Yes, thank you very much. And good morning again. Just one or a couple of follow-up questions. It’s more on the timing of news flow. I wonder when we can expect the next update probably more from the regulator on its assessment of the situation at Flamanville. And same thing on Hunterston, you seem to be gradually delaying by window of two weeks every time your expected restart of the plant. Do you have actually visibility that the UK nuclear Welsh dock could indeed have an imminent decision on Hunterston, please?

Xavier Girre: Okay. Thank you for your questions. Xavier Ursat will answer your question about Flamanville.

Xavier Ursat: Yes, good morning. Thank you for your question. So on Flamanville, maybe a recall for everybody. We have an issue on the weldings of the big steam lane on the secondary circuits and especially on the weldings which are in the penetration of the reactor buildings, which means inside the wall of the reactor buildings. Those weldings are great-quality weldings, but were not performed following the process it should have followed during the fabrication and the erection of the weldings and the lines. We had, during the last year, a great number of discussions between ASN, the French Safety Authority and EDF on this topic. And there was, on the 9th and 10th of April this year, a meeting of the expert group of the ASN concerned by those topics. This group is made to give position to ASN, but the last decision is for ASN, which has to take its own decision and position. During the meeting, the group advised ASN and EDF to consider the replacement of those weldings and, at the same time, recognize that the replacement was not that easy, so invited EDF to look at all the solution that would be considered regarding those weldings, which are inside the penetration of the reactor building. That’s what we are doing at the time with ASN, and we have a great number of technical discussion since the last week and probably for the weeks to come with ASN. A second meeting of the same expert group will take place on June 6 and will examine the topic of the other weldings, the one which are inside the reactor building and not in penetration of the building. For those weldings, we already proposed the replacements. So we see an expert group that could be – that could go quite quickly. ASN will afterwards take its decision in due time. They probably will explain the time frame of their decision, which is expected, of course, after the next meeting of the expert group, and I cannot say at this time exactly when they will take the decision. It belongs to ASN. What is sure is that as we indicated in our last communication about Flamanville three, as soon as ASN will take its decision and announce it, we, at EDF, will deliver a complete communication on Flamanville three to explain the topic, and how will we proceed with the construction on those lines.

Xavier Girre: And as regards your question about Hunterston and I will also add a few words about Dungeness in UK. So I can tell you that during a planned outage of Hunterston B reactor three for graphite inspections starting in March 2018, new keyway root cracks were identified as happening at a slightly higher rate than model. While the reactor could have returned to operation, we decided to keep it off-line while we work with the regulator to ensure that the longer-term safety case reflects the findings of these inspections and includes the results obtained from other analysis and modeling. In addition, we brought forward the planned graphite inspection outage in Hunterston B reactor four from 2019 to October 2018. And the reactors are expected to return to service on 30th of June, 2019, and 30th of May, 2019, respectively. And as regards to Dungeness. Dungeness B reactor 22 was shut down on 27th August, 2018, for a planned statutory outrage and reactor 21 was shut down on the 23rd of September, 2018, for common statutory outage work. During these outages, stress corrosion cracking was discovered and some steam pipework and components and repairs and safety case development are ongoing. The reactors are expected to return to service on the 13th – 30th of September, 2019, and 15th of October, 2019, respectively. Maybe one very final question?

Operator: Your next question comes from the line of Ahmed Farman from Jefferies. Please ask your questions.

Ahmed Farman: Yes. Hi, good morning everyone. Just two very quick questions from my side. Could you share with us what is now your current expectation for the nuclear output in the UK currently? And my second question is could you just give us a sense of what would be the benefit of the tariff catch-up for you in terms of EBITDA? Could you just sort of quantify that part for us? Thank you.

Xavier Girre: Okay. Thank you for your question. First, as regards tariff catch-up, I already explained that we’ll see what comes from that. So I will not give any figure this morning. Secondly, as regards to the nuclear output in UK, we expect around 55 to 56 terawatts-hours this year.

Ahmed Farman: Okay. Thank you.

Xavier Girre: Thank you. So if there is no other question, I propose to close this call. I thank all of you for your attendance and for your questions, and wish you a very nice day.

Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.