Earnings Transcript for EDF.PA - Q4 Fiscal Year 2023

Operator: Good afternoon. This is the conference operator. Welcome, ladies and gentlemen, to EDF's Q&A session for the full year 2023 results. As a reminder, all participants are in this and only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Xavier Girre, Group CFO. Please go ahead, sir.

Xavier Girre: Good afternoon, everybody. I'm very happy to be with you once again to share our 2023 results. Just a few words, and then I'll be ready with all the team for all your questions. 2023 is clearly an exceptional year. The group has delivered a very good operational performance with a significant increase of 41.4 terawatt hours in nuclear generation inference in the context of historically high price environment and no exceptional regulation. As a consequence, EBITDA reached €39.9 billion, net income group share of €10 billion and net financial debt reduced by more than €10 billion to €54.4 billion. The net financial debt-to-EBITDA ratio reached 1.36 times, well below our target of less or equal to 2.5 times. 2023 is as well an important year for the group with the launch of a new commercial policy to anticipate the end of our end in 2026. Besides the new ambitions of reduction in carbon emissions, Moody's has validated EDF trajectory as aligned with 1.5 degree scenario. The years to come will see the development of the group's strategy with increasing level of investments and large projects to be conducted. Maintaining the level of the debt is a key target. We therefore fixed an ambition of a net financial debt-to-EBITDA ratio of less or equal to 2.5 times and an adjusted economic debt-to-adjusted EBITDA ratio of less or equal to 4 times in 2026. In other words, we maintain in the long run the guidance that we gave for 2023. We are and I am confident in the strength of the group to have a key role in the energy transition and to maintain the soundness of our balance sheet. After these few words, the floor is yours and we are happy to answer all your questions.

Operator: This is the conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Anthony Garrett [ph] with Atlantic Union. Please go ahead.

Unidentified Analyst: Hi, this is Anthony Garrett from Atlantic Union. Thank you for the call. If I take your 2.5 maximum net leverage target and looking at the current net financial debt of €54 billion, given the performance has been so volatile, given the poor price movement, et cetera, if you could help us to bridge how you stay below that level, is it because you think that net financial debt can still decrease and maybe reach the former 2022s level or that EBITDA would be sustainably higher? I mean in 2024, it is probably much easier, but then 2025, 2026 it is more uncertain. So if you could help us bridge that, that would be helpful?

Xavier Girre: Sure, and thank you for this question. Clearly, I mean there is a 2023 EBITDA level around €40 billion is quite exceptional. So when you consider 2024 and the years to come, you have two key building blocks. One is the continuous trend of French nuclear generation improvement. We've reached 320 terawatt hours in 2023. We target a range from 315 to 345 terawatt hours for this year 2024, excluding some of these three which will be on top of that with the same range, of course. But in the same range, sorry, but when you -- if you consider the middle of the range, so between 315 and 345, you can also add a few terawatt hours to get our full goal as regards nuclear generation in France, so in this range. For 2025, our goal is between 335 and 365 and same goal for 2026. So the first building block is a continuous improvement of our nuclear generation in France which is of course absolutely key and we are very confident in our ability to reach this goal. And this is of course a positive building block. And then you have a negative building block, which is linked to the current trends of the prices. When you consider forward prices for 2026 for example, currently the forward prices for 2026 is in the range of €65 per megawatt hour more or less. Of course, it changes every day. And for 2025, it's in the range of €70 per megawatt. So this trend will have a negative impact on our EBITDA for the years to come. So as a whole, of course, we do not give EBITDA guidance because it's very volatile, as you can understand. But that's why we focus on this ratio, net financial debt-to-EBITDA and net economic debt to adjusted EBITDA in order to give the evidence and to reaffirm our commitment to maintain the soundness of our balance sheet. So these are the two once more building blocks for the years to come. A slight decrease of our EBITDA in the years to come and that's why also we want to be quite cautious in the guidance that we give for 2026. But I insist also, I highlight the fact that we are today in a position to give, again, a mid-term guidance that we couldn't give during the last few years. So it's, of course, a very positive move that we are doing today.

Unidentified Analyst: And is it fair to assume that the new normal EBITDA in the medium term is higher than the level of €18 billion in 2021, which was already good. I mean, not just for 2024, but with the lower prices around €60 euros or so, is it fair to assume that it's meaningfully higher, the new normal, if there is a normal?

Xavier Girre: Well, I know it's very difficult to refer to normal level of EBITDA. But, of course, you're right. I mean, in 2021, prices were significantly lower than even the current forwards. So, of course, we'll see. But in your calculations, you can take such an assumption.

Unidentified Analyst: Okay. Thank you.

Operator: The next question is from [indiscernible] with Crédit Agricole. Please go ahead.

Unidentified Analyst: Yes. Good afternoon, everybody. First congrats for the stellar results. I have actually three questions. The first one is on the regulation. So end of last year, we had a first head guidelines, so what could be the regulation post-RN [ph], I have two questions on that front. First, if I read correctly the guidelines, there is such no safety net should price go on the downside. I perfectly understand the split in profit should prices go high. But what happened if prices go much lower than where they are today? That’s the first question. The second question, the regulation is basically what are the key next step to, let's say, settle the regulation and translate this guideline into pure regulation, whether there are some hurdles to be met at the French level and at the Europe and [indiscernible]? So that would be my first question. The second question would be on the capital structure, especially for the nuclear new build. I would like to understand. So you have said to the market that you would like to build in the foreseeable future, 1 to 1.5 EPR reactor a year, which is pretty impressive. My question is basically, is there any thing you could share on how you would fund those nuclear new build and what would be the role of the French state in that respect? And finally, that is related to that question as well on the cash flow side. So my question would be you have said basically that going forward, CapEx could amount to roughly €25 billion a year. What is the trajectory to get to this €25 billion, and do €25 billion include the equity part of the nuclear new build also include the CapEx part or the debt part, I would say, of those nuclear new builds? Thank you.

Xavier Girre: Thank you very much. So first, as regards to regulation, just to give you a broad view on the principles of this future regulation that was described by the French state in November of last year. So starting post-2025 to post-RN [ph], the global goal is to set a kind of taxation. We will see what will be the basis for that? I mean, what will be the basis for this compensation for customers. But this will be based on the new career revenues generated by EDF. If they are higher than €78.22 in this case, we will have to contribute by 50% in order to help the French government to compensate the customers in order to protect their global deal, and if our nuclear revenues in France are higher than €110 in '22, we will have to contribute by 90%. So this is the cornerstone of what's been described in November, meaning that you're absolutely right, there is no regulation of a specific fixed price to be set post rent, so what you call a safety net, so no safety net. But there is, of course, a room for market, a room for offering contracts, midterm contracts, long-term contracts by EDF to our customers. And if prices and our revenues in the nuclear field in France go beyond the threshold I've just described, we will have to contribute, so in order to maintain the bills of the customers at a reasonable level. So of course, the core of this regulation, the macro goal is to give visibility to customers, to give competitiveness also to them and to support both competitiveness in the short term, but also in the mid and long term via the capability of EDF to invest in the future needs, all needs for the energy transition. Your second question in the same field, what are the key next steps? So first, it's very important, of course, to keep in mind that as regards our commercial policy, there is no specific regulation, no specific law or decree or anything to be taken. We are already offering both customers, some mid contracts or also long-term partnership was what we call in French [indiscernible] production nuclear in order to give visibility to our customers and to propose to them to commit on the midterm or on the long term and of course, with very competitive prices. What has to be dealt with by the law is the setting of this contribution by EDF to the bill of the customers, once more, all that has to be designed. But of course, in order to push EDF or to ask EDF to make this specific contribution, you need a legal text. So this is what is currently being worked upon by the government and which is expected to be adopted in the next month, maybe midyear, we see, I mean, this is currently being worked upon. Second question, as regards capital structure and nuclear financing, it's of course a key point for the years to come. So as we wrote on our side, a key stake for us in '24 is to optimize both the design, the costing and the financing of this French new nuclear build, meaning that it's a process which is ongoing with a very significant work upon design to finalize it, very significant work about updating the cost, precising the different elements of this cost. And of course, setting the right way of financing these nuclear build. What's very important as regards the future financing is that you understand very well that this represents massive assets to be financed. So it's very important to define how the financing will be organized during the building period, meaning that EDF will not bear 10% of this pre-financing during the construction period on its balance sheet. It's important also that there is contribution to this pre-financing. So this is also worked upon currently, of course, by EDF first in close contact also with the French state. And this will take some time, also some months. And we will have different occasions to come back on that in 2024. This maybe will be finalized in one year from now or at the end of 2024, we'll see, but not tomorrow morning. Your third question about cash flow trajectory, you're absolutely right. We referred to potential CapEx in the range of €25 billion, which we consider consistent with the needs of the energy transition and consistent with our capability because we -- as we described also in our lines, want to be a key player, both in the decarbonized or low carbonized generation, meaning nuclear, meaning hydro, meaning wind, meaning solar, so low carbon generation, which, of course, is heavily demanding as regards CapEx. Secondly, we intend also to develop the networks, particularly entities, of course, which has to be developed in consistency also with the energy transition and the development of renewable generation. We intend also to develop flexibility, and we intend to develop services to the customers, which sometimes also implies some CapEx. So that's why, as a whole, we consider that we may have to invest and we may invest €25 billion. Of course, after having checked that all these investments are absolutely consistent with our strategy, with our goals, also both on financial KPIs and on CSR KPIs, of course. In 2023, we invested €19.1 billion. This year, in 2024, we intend to be a bit higher than that, maybe around 2023, we'll see in the course of the year. And so this is the road to 2025. And this, as regards nuclear new build includes the EDF part or the equity EDF would have to contribute. So of course, if it's on our balance sheet, this represents all that we will contribute being equity or debt. But if we have co-financing or in the French state, for example, contributes to the financing, this is not included in this €25 billion. I think – those were your three questions.

Unidentified Analyst: Yes. Very clear. Thank you very much.

Operator: [Operator Instructions] The next question is from James Sparrow with BNP Paribas. Please go ahead.

James Sparrow: Yes. Good afternoon, everyone. Thanks for the call. I actually just wanted to follow-up on that kind of CapEx point. And you probably won't be able to answer this, but I was trying to get a sort of sense of -- if we're assuming CapEx this year of €23 billion and maybe generation in the mid-range of your guidance sort of 330 area. Are you able to give any sort of breakeven power price? I know there are a lot of moving parts, but at least I'll try. And then perhaps maybe a simple question. I'm just really interested in your kind of funding needs for 2024. Have you repaid the loans now that you got during the kind of Ukraine crisis difficulty? And can you give any sort of sense of sort of something needs both at the sort of senior and hybrid levels for 2024? Thank you.

Xavier Girre: Yes, sure. So first, as regards CapEx. I mean, I would say that the answer is more or less in your question because in order to invest €23 billion to €25 billion per year. You need to generate at least €32 billion, €33 billion, €35 billion EBITDA. This is very clear, of course. So I mean, it will depend, of course, also on the prices for the years to come. As regards to 2024, we are almost 1% hedged as usual. So we have a clear visibility about that and about 2024. As we have 2025 and 2026, obviously, we are not really hedged. So we have to keep some room for maneuver. We have to keep some room to adapt also the level of our CapEx is. And so this will be, of course, specified in due course. But I think you got right in the basic math. As regards our loans, we have not yet fully replaced the short-term loans that we did in 2022. We, of course, intend to go on doing that. We intend also to go on along the same lines as we did in 2023, a very active financing policy with some key principles. First, we always want to be very pragmatic, opportunistic, taking an opportunity on the market, first point. Second point, we want to go on diversifying our issuances. You've noticed that we've issued for €8 billion senior and $1.5 billion hybrid in 2023 with a very significant diversification as regards to currencies, maturity, et cetera, et cetera. We intend to do the same thing in 2024 and in the years to come. We intend also to maintain quite a long maturity. I highlighted that we have already increased our debt maturity to 11 years in 2023 from 9.4 in 2022, and which is, of course, very consistent with our balance sheet. So, this is more or less our goals as regard the financing policy for this year as regards the senior financing policy.

James Sparrow: Thank you.

Operator: [Operator Instructions] The next question is from Andrew Moulder with CreditSights. Please go ahead.

Andrew Moulder: Yes. Thanks for call Xavier. Maybe I can just push you a little bit on Jamie's question about issuance. We issued 8 billion last year, do you think you're going to issue more or less this year? That's the first question. Second question, I just wanted to ask you on the post-ARENH regime. I remember a year or so ago, we were talking about CSP within PPAs. But you didn't really mention that in the answer you gave earlier. So, are there now not something that's under discussion? Or with that what you were talking about when you make these long-term contracts? And if you do have these long-term contracts, would that be included in the calculation of the sort of extra tax or whatever that you need to pay back to the consumers in the market? I'm sorry, I just have two more questions, please. My next one on the nuclear output, I was a little bit disappointed that your 2026 outputs the same expectations for 2025. Is that just you being conservative? Because I think on the call earlier today, you did say you wanted to get back to 400. I mean why isn’t it higher in 2026 than it is in 2025? And my final question, we all see the news about the cost increases at Hinkley plant. But I would just try to push you on what the IRR is of that project now. I mean I remember you saying it was 9% when you start here and then 7% later on. I might go back to the envelope calculation, you're probably more down about 5%. Is that a reasonable calculation? Or do you think miles off the mark with 5% IRR [indiscernible]? Thank you.

Xavier Girre: Thank you very much. As regards our issuance policy for 2024, I mean, I think I will not be more specific because we want also to keep our once more pragmatism and opportunitism. But what's very important to us once more is to be a long-term issuer, to be a diversified issuer, to be a transparent issuer and so to contribute on a regular basis in order to meet you to answer all your questions and to give you all the pieces of information you may need. But as we got specifically when and how we intend to intervene on the market for this year, I will not be more specific today. But of course, more than happy in the course of the year and to come back to you on that. As regards the post-ARENH mechanism, you're absolutely right. There is no PPA, no contract for difference, no set price that is -- or that has been considered in this post-ARENH mechanism. Why that for a key reason, which is that if you consider a fixed price or a range or a corridor as we did some years ago on existing assets, this would lead to very significant, not to say, massive remedies required by The European Commission, meaning that this would provoke some very significant dissynergies, some costs which are not appropriate. So that's why it seems more appropriate to consider for existing assets. What I've described, meaning, exposure to the market, but we can via mid-term and long-term contracts offer visibility, stability, competitiveness to our customers. And of course, this mid-term and long-term contracts will also give to EDF, to our cash flows also visibility. So this is exactly why we consider today that the best way to do on the basis of the existing nuclear fleet is to be -- to look for stability and competitiveness via contracts and not via regulation. As regards to nuclear generation, we are clearly in a period of very demanding industrial program. First, as regards 2024 and of course, I will come to 2025 and 2026. But as regards to 2024, we are still heavily engaged in the stress corrosion repair program. Everything has been well identified. The most sensitive reactors have been dealt with, 15 out of 16 and the last one will be repaired in the weeks to come. But nevertheless, I mean, some others need to be, inspected to be checked. And this is a significant Industrial Program as such. Then you have, of course, the GRAND CARÉNAGE PROGRAMME program, which is also very demanding, in order to look for the extension of the life duration of our existing fleet. And you have, of course, also the 10th year visits -- the visit [Indiscernible] for which we have also a very Stringent Industrial Program. So that's why -- and this is, of course, analyzed in detail, reactor-by-reactor. For 2026, we consider as of today, that the goal that we've given, so between 335 and 365, and it's quite a wide range, as you noticed, certainly, is appropriate. And of course, we will do our best to increase as quick as possible and as far as possible, the level of this nuclear generation. As regards 400 terawatt hours, you referred to two things about that. First, we reached this level some years ago in the early 2000s, but also in 2015, for example. And what's been said is that in the mid-to-long-term, with no specific date, we could come back to that kind of level, including some of this, but this is not for 2025, these are for 2026. And as regards HPC, I mean, I let you make your calculations. Of course, I mean, if we have -- if we have written a part of HPC, this means that the perspectives are below the expected work in the beginning. But of course, also, the perspective is that HPC generates positive cash flow once in operation. Thanks, of course, also the contract for difference.

Andrew Moulder: And can I follow-up just on two point here. On that last point, thing, you said you've written down here two points and I saw that in the results. Does that mean that the written down value you now have has taken the IRR on the non-written down part back to 9%, which is what you were originally targeting. And then just secondly, when you were talking about the CFDs and Aaron [ph], you talked about the existing fleet. So can I just ask if that means that there is still the possibility you'll be able to negotiate CFDs or PPAs on the new nuclear builds that you're taking and also on Flamanville.

Xavier Girre: So as regards HPC, I think I will not add any specific point about that. What I could add, nevertheless, is that, as you know, write-offs on tangible assets can be returned in particular, if you have a change in the interest rates, for example. But this is something, of course, you have to keep in mind because, of course, as we all know, this is different for goodwill write-offs. As regards CFD, once more as regards new nuclear build, so EPR2 in France, work is currently being done on design and costing and on financing. So you have, of course, at this stage, plenty of options -- and all these options, we analyze them, taking into consideration three types of goals. First, it's important, of course, that as a whole, it's competitive for the end customers. Second, it's very important that it's sustainable for, of course our balance sheet. And third, it's also important that this does not lead to significant remedies required by the European Commission. And of course, first and foremost, it's key that the project based on a proper design and based on a proper costing, first and foremost, it's key that this project be profitable and generate an appropriate return to EDF. So today, I will not be specific on future regulation on new nuclear bills in France because it's too early on more plenty of options, plenty of work already done, still to bid on, but too early to give these details today. And as regards to Flamanville, Flamanville is integrated in the existing nuclear fleet in France with no specific regulation, no specific financing and no specific regulation.

Andrew Moulder: Thank you. Thank you very much.

Operator: The last question is from [indiscernible] with Bank of America. Please go ahead.

Unidentified Analyst: Yes. Thank you. I quickly had a question on the post-Arena mechanism. I'm not sure if it was covered earlier. So I mean, Xavier, there was news flow that there is a low price of €70 per megawatt hour on the entire French nuclear output. Is it still the case, or has there been any change on that?

Xavier Girre: In the €70 per megawatt hours that has been reflected or described in press conferences is only a reference to an average that was calculated at that time. Considering that when you make plenty of hypothesis of course, showed that kind of average price between 26 and 40. As you've noticed, I mean, the forward prices went down very significantly in the last month. And so today, for example, the average for -- the forward price for 26 is already in the range of 70%, depending on the days, 64, 65, 67, 68, 70, again. So -- but once more, this figure, €70 per megawatt hour is a description of an average potential price that was the result of different hypotheses on this long-term period between 26 and 40. What specific in what has been described in November is not the €70 per megawatt hour, in the fact that beyond two thresholds, meaning €78.22 -- €78.22 per megawatt hour as regard to our nuclear revenue and beyond €110 per megawatt hour as regards to our nuclear revenue. There will be kind of taxation was more 'because once more the legal -- not the legal -- the framework has not yet been finalized'. But we will have to contribute by 50% between €70 and 22, by 90% between €110 and 22.

Unidentified Analyst: Yes.

Xavier Girre: These are the two figures that are very concrete, very specific in what's been described in November.

Unidentified Analyst: Okay. And so, there is no low price set for the post- Arena mechanism then?

Xavier Girre: Sorry, I didn't get your point.

Unidentified Analyst: I'm asking like if there is a slow price that will be decided for the nuclear output post-Arena. Is that in discussions or that's not part of the discussion?

Xavier Girre: No flow has been described or no floor has been referred to.

Unidentified Analyst: Okay. Yes. That’s helpful. Thank you.

Operator: Mr. Girre, there are no more questions registered at this time.

Xavier Girre: Okay. So, I think time is over also. So, I mean, if there is no additional questions, I thank you very much for your time, for your questions, for your interest for EDF. And we will be with the whole team, very happy to meet once again with you in the year to come. Bye-bye.

Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.