Electricite De France SA And Pricing: The Big Boys Win

Jul.23.14 | About: Electricite de (ECIFF)


EDF (ECIFF) has reduced its price to the largest French industrial energy users. There is risk of more adjustment.

The deal highlights political risk.

The shares are cheap, but not tempting. There is risk of more negative news on tariffs.

Electricite de France SA's (OTC:ECIFF) price reduction to the Exeltium consortium has a minor impact on earnings, but leaves the door open for more. It also shows the high levels of political risk in France and the fact that EDF's tariff are a tool of policy. The shares are cheap with a 20% 2015 P/E discount vs. the sector, but that is reflective of risk.

EDF has announced it will reduce its tariff for the Exeltium consortium which represents the 50 largest power consuming companies in France. The new price will be Eur 42/Wh, in line with the average annual French wholesale market rice. Exeltium members currently pay Eur 50/MWh.

I can see the commercial rationale of the renegotiation by Exeltium. The level of Eur 50/MWh was out of line with the market. It was derived on the basis that the Arenh price (for its nuclear generation) would go out to reach wholesale power prices in excess of Eur 50/MWh. But the market situation has completely changed. At those original levels, energy intensive companies struggle with competitiveness. The adjustment makes sense; still it is negative news. The new price is about covering costs of new build, and that tightly. It is reflective, from EDF's perspective, of the general market malaise.

The deal also clearly shows the fingerprints of politics. The government is reported to have stepped in with "friendly" intervention. The element of international competitiveness of the largest French companies is highly political. Note the high emphasis in the communication of the deal put on competitiveness with German and North American manufacturing businesses under the angle of energy. It is my view that cost of energy will replace cost of labor as the major factor of distinction in global competitiveness.

The French government did not hesitate to step in, in order to safeguard the interest of its wider industrial policy. Energy policy feeds into that. Affordability at the retail level and competitiveness at the industrial level are high priorities of the government. EDF is a tool at hand.

That adds to the recent negative news on end customer tariffs and the formula revision. The news on tariffs continue negative. I estimate a minor impact, less than 0.5% of group EBITDA for 2014, but EDF's earnings outlook is clearly all but improving.

There is risk for future adjustments, after this deal has set a precedent. The current wholesale power spot price stands at Eur 24/MWh, and futures are a touch below Eur 42/MWh.

The shares look cheap at a P/E 2015 o 12x vs. an average of 14x for the European utilities sector, but the discount reflects political risk that has returned with vigor.

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