Eletricit¿ de France is over-indebted, up to its neck in project delays and, as of Friday, scrambling to sell €4 billion ($4.5 billion) of new shares and €10 billion of assets to strengthen a balance sheet undermined by a collapse in earnings.
About the last thing that it needs is a new €15 billion millstone around its neck. But that is what it appears destined to get.
Over the weekend France's Economy Minister Emmanuel Macron, whose government owns 85% of EDF, insisted that a much-delayed plan to build two nuclear reactors at Hinkley Point in the U.K. would be approved in September.
On Monday, EDF Chief Executive Jean-Bernard L¿vy dutifully parroted the sentiments. "Hinkley Point is an indispensable investment," L¿vy told French radio station Europe 1. "It is a project where the investment is known and it is a profitable project."
Levy did well to keep a straight face: Hinkley Point isn't indispensable for EDF and could prove hugely damaging. EDF's former chief financial officer, Thomas Piquemal, was so opposed to Hinkley that he stood down in March rather than oversee its approval.
There is good reason to worry. The Paris-based group's net debt pile of more than €37 billion, combined with the collapse of energy prices, which pushed earnings down 68% in 2015, has left the company in a precarious financial situation. Without a sharp, and currently unforeseen, increase in energy prices it will struggle to maintain its current A- credit rating, maintain its dividend and meet new investment commitments to the Hinkley Point project.
EDF admitted as much on Friday, when it launched a €4 billion capital increase."We assume the capital increase will take place at a circa 15% discount to the share price," Exane BNP analyst Sofia Savvantidou noted on Monday.
The French state, which had previously resisted a share sale, said it will subscribe to €3 billion of new shares and doubled down by agreeing to take dividends in shares from EDF over the next two years, a move that will save EDF a further €2 billion in cash outflows.EDF also announced cuts to capital expenditure of €2 billion by 2018 and a €1 billion reduction in operating expenses by 2019, as well as plans to sell €10 billion of asset by 2020. Among the assets on the block is EDF's stake in French power-grid operator RTE, the sale of which could reduce EDF's earnings per share by 5% to 10% according to Exane BNP.
Coupled with the new share sales and the payment of dividends in shares the earnings per share could fall as much as 20% by 2017, according Jeffereies.
EDF shares tumbled as much as 8.6% early Monday before recouping some ground to trade at €11.35, down €0.89, or 7.3% by late morning. Despite the falls, Exane BNP and Jefferies International still thinks it looks expensive. Exane BNP on Monday trimmed its price target 2% to €10 per share. Jefferies said it believes the shares are worth about €7.50 each.