Saturday, February 09, 2013

Electricity Update - France and Texas

France and Nuclear Power - Losing It's Edge

France has long pioneered a tradition of being reliant on nuclear power. France has 59 nuclear reactors and delivers a very high percentage of their total power needs through nuclear power, as well as being a major exporter of electricity to adjacent nations. France chose nuclear power after WW2 because they lacked local energy resources and had a strong engineering capability.

The company that runs the nuclear industry is called EDF. EDF is 84% owned by the French government, so you could basically say that the French government owns by far the most significant portion of their own electricity industry (and 15 nuclear reactors in the UK, to boot). Currently EDF pays a very high dividend, yielding 7.7%, due to the fact that their market capitalization has declined precipitously while the company has tried to keep the dividend constant.

For many years EDF provided France low cost electricity, which provided a competitive advantage against their industrial neighbors such as Germany. Today, however, Germany has a cost advantage over France in terms of power, since the price of coal has dropped and Germany uses a significant amount of coal to burn their own electricity. One of the main reasons that the price of coal has dropped is the rise of natural gas in the USA, which in turn allows the US to export their surplus coal overseas to Europe. This article from Bloomberg provides a good overview of the competitive situation.
“French energy used to be competitive,” said Emmanuel Rodriguez, head of energy for the French unit of ArcelorMittal, the world’s biggest steelmaker, which also has operations in Germany. “This model is crumbling. Germany is now better than us whereas a decade ago they were much more expensive.” French power prices for big industrial users are projected to average as much as 25 percent higher next year than in Germany, according to Uniden, a lobby whose members consume 70 percent of electricity used by industry in France.
In another sign of the upside-down world we live in, EDF's dividend at 7.7% is far higher than what they are paying in yield on debt of 4.375%, even debt that looks suspiciously like equity here in the US (a perpetual dated bond is debt without a maturity date).

France is also struggling as they try to build new nuclear reactors. The next generation plant being built for EDF by Areva has had cost overruns and schedule delays:
EDF has previously said France's first EPR would cost €3.3 billion and start commercial operations in 2012, after construction lasting 54 months. The estimated cost has now increased to €8.5 billion ($11 billion) and the completion of construction is delayed to 2016.
Energy Futures Holdings

Energy Future Holdings took a major Texas utility (TXU) private in a 2007 deal that leveraged up the company with $45 billion in debt in 2007. 2007 was a horrible year for most deals across almost all sectors including real estate as it was the "height" of the bubble before it all came crashing down. TXU, one of their entities, has bonds trading as low as 15 cents on the dollar (for bonds that have an interest rate of 10.25%, to boot) per this Bloomberg article.
The company has struggled to be profitable ever since the LBO, as the shale revolution created a glut of natural gas, pushing U.S. prices to the lowest since 1999 last year
While EFH is not a public company, they do have publicly traded debt and thus they have an active investor relations department. If you read through one of their documents you can see their expectations for natural gas prices and how they have been able to keep the company going for as long as it has due to a strategy of hedging against low priced natural gas, as well as through what seems to be very effective management of costs. However, the large debt load likely has to be restructured since a company that was built to profit from a marginal cost of power based on $14 / unit priced natural gas cannot service that debt load with the cost of natural gas between $2 - $4 / unit.

Cross posted at Chicago Boyz

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