Paris Jul 31, 2015 (Thomson StreetEvents) -- Edited Transcript of Electricite de France SA earnings conference call or presentation Thursday, July 30, 2015 at 7:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jean-Bernard Levy Electricite de France SA - Chairman and CEO * Thomas Piquemal Electricite de France SA - Group Senior EVP, Finance ================================================================================ Conference Call Participants ================================================================================ * Martin Young RBC Capital Markets - Analyst * Vincent Ayral Societe Generale - Analyst * Emmanuel Turpin Morgan Stanley - Analyst * Cosma Panzacchi Sanford C. Bernstein - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Jean-Bernard Levy, Electricite de France SA - Chairman and CEO [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. Welcome to this presentation of EDF's half-year results. As you know, later on, Thomas Piquemal will go into the details of the results. As for me, I would like to, mostly, brief you on the current situation. As you know, our half year has been very intense and eventful. And later on, we will, of course, be available to answer your questions. I will not repeat what our major stakes are for us in the long term, our main objectives of CAP 2030, our strategic plan, because we already discussed that very recently. Just to tell you, right now, we are working hard on the plan, building it with all our team, and within the Company, starting to share the key aspects of the plan. We are implementing CAP 2030, and we will update you on this at the right time. Let's go straight to what brings us here today, our half-year results. The numbers are relatively stable in organic terms. I think this is quite a commendable performance in an unfavorable general context. Sales rose 6.3%, almost stable in organic terms, due to the decrease in European energy prices. EBITDA rose 3.6%. EBITDA was also globally stable in organic terms. This reflects contrasted situations in our three key countries: a good performance in France with a 3.4% EBITDA increase in organic terms, stability in the United Kingdom, but a decrease in Italy, as electricity pricing conditions were, and remain, difficult. The situation in the UK, related to the impact of two reactors running on reduced load, should clearly improve in the second half of 2015. In Italy, the renegotiation of gas contracts could help improve the situation in the second half of the year. Net income excluding non-recurring items increased 14.6%. Since December 31, 2014, debt increased by slightly over EUR3 billion. The change in the debt includes for EUR1.3 billion our cash dividend payments. As you know, we are [structurally] facing a difficult economic equation. We are constantly concerned about reserving our balance sheet. And we will continue to do everything possible on working capital requirement and cash flow to reach our clear ambition of a positive cash flow in 2018. Despite the debt increase, EDF succeeded in maintaining a net financial debt-to-EBITDA ratio of 2.1 times. Our goal is to keep this ratio between 2 and 2.5 times. So far, for the main indicators, Thomas will detail these matters later on. We turn to the next slide. I'd like to stress that operating performance is under good control. Nuclear power generation in France reached its highest level for the first half of the year since 2011; despite, we had more planned outages than in the first half of 2014. In this context, the slight increase of 0.8% demonstrates our continued industrial control of our planned outages duration. I would also like to point out a significant reduction in unplanned outages. This is the result of the very professional work of the EDF teams, and I would like to thank them for this. We should be able to reach our target range in France for 2015 of nuclear power generation between 410 and 415 terawatt hours. The first half of the year was also positive for renewable energy. In terms of commissioning in the international level, first of all, as an example, the wind farm Soma in Turkey was commissioned; and Soma is the largest controlled wind farm that we operate in Turkey. Altogether, with almost 600 megawatts commissioned in seven countries, and an EBITDA growth of 4.2%, it has been an excellent first half for EDF Energies Nouvelles. I turn to the next page; you can see that EDF today is a utility with a strong nuclear and renewable energy base. These two activities are our drivers. The Bill on energy transition was recently definitively adopted by the French parliament. We are not only a few months before COP21; an event for which we are an official partner. This demonstrates our commitment to renewable energy, to which we devote an increasing part of our growth investment for development, currently 30%. EDF continues its international expansion in renewables with its presence in three new countries: South Africa, Chile, and Brazil with a new subsidiary. As part of CAP 2030, we are very determined to increase the part of renewables in our energy mix. This will be achieved, in particular, through innovative financing, such as the green bond we issued in 2013. The entire EUR1.4 billion of that green bond fund have just been allocated to EDF EN projects. As you know, we are among the lowest CO2-emitting utilities in the world. Just last May, we set a new record by emitting the lowest rate of CO2 emissions in 15 years, excluding our overseas departments and territory, with 1 gram of CO2 equivalent per kilowatt in May; and 9 grams of CO2 per kilowatt in June. Starting from the second half of 2015, we will launch a strategic review of our assets out of France, which are of two kinds, first, fossil-fired plant asset in Continental Europe; second, fossil-fired generation and supply activities that are not directly linked to the core business of EDF Group. This will help to further decarbonize and optimize EDF's assets. Let's turn to the next slide. Wanted to share with you that we are keeping all our 2015 guidance, and our 2018 roadmap objectives. We are exactly in line and happy to reiterate our targets for 2015, EBITDA organic growth of 0% to 3%; net financial ratio stable in the 2 to 2.5 times range; payout ratio between 55% and 65%. And for 2018, we also reiterate our positive post-dividend cash flow. The work of the EDF Group teams is the foundation for this good performance. The general context is not particularly favorable for us; as we know, market conditions in Europe remain very difficult. But we are confident that we can achieve these objectives, and happy to reiterate them. Let me now turn to description of the strategic partnership agreement that EDF and Areva just signed. And I'd like to take a bit of time to discuss this partnership that, as you know, we have been working very hard on for the last few months. Let me describe the memorandum of understanding we signed with Areva today. We have signed a MoU that formalizes the status of the progress of discussions concerning our projected partnership. What do we want to achieve? We want to renew and extent the lifecycle of our nuclear [facilities] in France with the Grand Carenage program. And we also want to put under optimized control our new nuclear build project. It represents the future of our nuclear business with two priorities: the success of the major EPR worksite and projects underway in France, China, and the United Kingdom, of course, and improves the competitiveness of EPR. For all these major stakes, Areva plays a pivotal role. Areva is a first-class partner, and also a key supplier. And for some of our needs, Areva is the only supplier that can respond to those needs. After having studied all these matters with the Areva team last May, we took on our responsibility as an industrial company, and also as a national operator, and we propose, the French Government, a project concerning nuclear reactors. This project has a strong industrial rationale because we want to operate effectively and to control the key technologies and worksite that we operate, of course, without endangering the overall balance of the Group. This morning, we have signed with Areva a memorandum of understanding that formalizes the status of the progress of our discussions in this partnership. This protocol has three main sections. First, a comprehensive, strategic, and industrial agreement in order to improve and develop the efficiency of our cooperation in several areas, such as research and development; international sales of new reactors; dismantling; storage of spent fuel; and a few other items. Second part of the protocol, we project that EDF will acquire an exclusive control of Areva NP, the company in charge of services and equipment, and fuel manufacturing for nuclear reactors. Third, we will create a dedicated company, also controlled by EDF, that will include engineering studies and project management; in other words, the design and the building of the new reactor. Major decisions, when we have implemented this, will be made more effectively and easily. There will be a single strategic management direction; there will be a single product policy; there will be a clear coordination for export efforts. May I say, this is a key structural change, strategic evolution, which shows our ambition. But we also want to respect and preserve the skills of all the stakeholders, especially Areva's reactors business. We also want to pave the way for alliances with third parties and industrial partners in France, and beyond. Shareholding in Areva NP, EDF will have exclusive majority control, at least 51%. Areva will be a strategic partner for Areva NP with EDF with a maximum stake of 25%. We will hope the shareholding to other minority partners who have -- and many of them have already delivered to us the message they are interested. Areva NP will be autonomous; it will have an appropriate and effective governance. Combining EDF and Areva offers two main advantages. First of all, it is a way to better secure the most critical activities of Grand Carenage. Second, combining the activities devoted to new nuclear build under a single management will enable EDF to have complete control over the building of its future EPR. Our objective is to improve the control of our spending, and the management of the schedule of this highly complex project. Bringing all these skills under the same roof will facilitate the exchange and pooling together of analysis and expertise. The integration of the design and management teams of these major projects will enable more effective management of the technical interfaces. We will be able to simplify our control processes. We will enhance the leveraging of experience feedback from existing and future EPR worksites and projects. Hinkley Point C, obviously, will be the first project to fully benefit from this. The new organization will significantly improve the EPR competitiveness and allow France to increase its chances of success in exporting nuclear reactors, and, hence, create new jobs. We will implement a better way of coordinating strategic marketing to prepare offers in the upstream project space. We will be able to propose offers that combine all services relating to the nuclear island that [host the] reactors, just like for the other components of the nuclear power plant. We will also improve the way we manage the general design, the detailed engineering, the building and the commissioning after the delivery of the fuel assembly. And we will, of course, be able to better adapt these offers to client needs. In this integrated model configuration, we want, of course, to succeed in enriching our range of reactors. We have the 1,600 to 1,700 megawatt reactor for the EPR. But we also want to continue working on medium-sized reactors in the 1,000 megawatt range, which means continued collaboration with our major industrial partners in Japan, and in China. Our new organizational model is proven. Several major international reactors in the very same sector are organized in the same way, such as CGN and CNNC in China; Rosatom in Russia; Kepco in Korea. Let me be clear, there are still a lot of steps that we must go through. And we will be working hard, because it is a very important decision for Areva; for EDF; for all our partners and suppliers; and, of course, for the employees of both groups. We will be working very hard in order to implement, as soon as possible, the strategic partnership that we have signed this morning. Turning to the next page, I think this is page 12, just a few words about the financing terms of the project. We have a very strong requirement: EDF needs to preserve our overall balance. And we want to ensure that EDF does not run any risk. The indicative price before due diligence for 100% of Areva NP is EUR2.7 billion. We consider this a fair and attractive price. It encourages interested industrial partners to join the investment. This price amounts to an EBITDA multiple of 8 times. Since the beginning of the negotiation, we have also made very clear that we will not accept any exposure to the risk related to the project in Finland. This operation will have a neutral impact on our 2018 cash flow. Let me just remind you that, at this stage, these numbers are non-binding and maybe subject to adjustment after the due diligence phase. Just a few words about the next steps. This is, of course, an indicative schedule. We will start due diligence in August, and should be able to submit a binding offer during the last quarter of 2015. We will, in the meantime, proceed with the consultation of the EDF employees' body, the Works Council. Also, we will work hard to identify other potential partners and bring them to the negotiation table, and, hopefully, finalize negotiations with them. Our objective is to close the transaction during the second semester of 2016. This is, of course, as usual, subject to the approval of the relevant merger control authority. That's what I wanted to tell you this morning, discussing our numbers for the first half; announcing the signature of a strategic agreement with Areva. Let me now give the floor to Thomas. -------------------------------------------------------------------------------- Thomas Piquemal, Electricite de France SA - Group Senior EVP, Finance [2] -------------------------------------------------------------------------------- Thank you, Jean-Bernard. Good morning, everyone. I will now detail and explain our 2015 half-year results. Before that, let me just remind you that, for the first time, we apply the standard IFRIC 21. I explained, during our Q1 communication, the impact it had on our financial statements; mainly, no impact on our consolidated accounts on a full-year basis. And the restatements for 2014 are presented and explained in the appendices to this presentation. Let's now move to the 2015 half-year results. You already know the key figures of this first half. Chairman Jean-Bernard Levy has just shared his comments on them with you. Sales are up 6.3% at EUR38.4 billion, essentially driven by the scope effect of Dalkia; and the rise in the British pound versus the euro. EBITDA comes to EUR9.1 billion; stable in organic terms versus the first half of 2014, showing, once again, the resilience of EDF businesses, considering the challenging market conditions experienced in the sector. Recurring net income is up 14.6%, supported by a strong financial result, driven by a solid performance of the dedicated asset fund, and further reductions in the cost of gross financial debt. Net income Group share is stable, which takes into account the EUR350 million negative impact of last week's EC decision on RAG. Net debt is up EUR3.3 billion, driven by an increase in working capital requirements due to a weather effect; by stronger investment activity in this first half compared to last year; but also, by ForEx effect, which accounts for a rise of EUR1.2 billion in our net debt. Net debt-to-EBITDA, which comes to 2.1 times, at the lower end of our target range we confirm today. As I said, moving now to the next slide, Group EBITDA is stable after excluding the positive impacts of Dalkia's first contribution and UK ForEx. Looking at the main components of this EBITDA performance versus the same period of last year, France grows by EUR209 million under the positive impact of the normalized weather, increased tariffs, and good nuclear output. This is essentially offset by Italy, which faces challenging energy market conditions and unfavorable weather for hydropower generation. In the UK, EBITDA is stable, despite the negative impact of lower [electricity] prices, offset by enhanced cost control. EBIT is down 11.1%, on the next slide, at EUR4.5 billion, mostly due to growing depreciation and amortization. D&A rose by close to EUR600 million, or plus 15.4%, showing an accelerating trend compared to the same period last year. This reflects the Group's robust investment within a shorter amortization period, notably, in France, which represents close to one-half of the increase in D&A. The non-recurring items are presented on the next slide. Post-tax effects of all non-recurring items was a negative EUR414 million this first half. As you can see, this is mostly due to the impact of the EC decision, announced on July 22, regarding the tax treatment of provisions created between 1987 and 1996 for the renewal of network structures, known as Reseau d'Alimentation Generale, or RAG. While EDF denies the existence of unlawful state aid and intends to fight an action for annulment, subject to the review of the decision, of course, we took note of this decision and we will proceed to reimburse the sums required. Total payment, which will take place during the first -- second half of this year will be for the Group of EUR1.2 billion, of which EUR335 million by RTE. As stated in our July 22, press release, the P&L impact for EDF, which is accounted for, obviously, in these first-half numbers, this P&L impact corresponds to the reimbursement of the accrued financial interest, a financial charge of EUR348 million after tax, accounted for as at June 30, 2015. Looking now at Group net income, on slide number 19, the 11.1% drop in EBIT is compensated by the decrease in net financial expenses, and a reduction in income tax. The financial results improves by more than 10%, despite the negative of the RAG decision. This is driven by the positive impact of continued swapping operations on our outstanding bond debt, mostly fixed to floating [swap]. Capital gains on dedicated assets, disposals also contributed to this performance. The main driver behind the fall in income tax is the end of the so-called Robin Hood tax in Italy. All of this translates into a stable net income Group share, and recurring net income growing by 14.6%. This number, of course, excludes the effect of non-recurring items. Looking now at the contribution of each major segment, starting with France, where EBITDA grows by 3.4% in organic terms at EUR6.4 billion. Compared to the exceptionally mild winter experienced last year, the return to close to normal temperatures supported consumption from end customers with a plus 8.5 terawatt hours effect. This, combined with a strong nuclear output, resulted in a positive EBITDA impact. I'll come back to the French nuclear generation in a moment to describe the continuous improvement in our operation in nuclear output in France. France EBITDA also benefited from the increase in the energy component of regulated tariffs on November 1, 2014. Operating expenditures are up, mainly driven by exceptional items, such as personnel provisions; and the impact of a lower discount rate on pension charges. When excluding for the impact of such exceptional items, increase in OpEx comes to slightly under EUR100 million, essentially, as a result of the impact on headcount of our skills preservation program. Further external charges are kept flat during this first half. Last point on this slide, as expected, our wholesale market sales have been increasing since end of 2014, in a context where [our own] volumes dropped markedly compared to the same period last year. As anticipated at our Q1 communication, the low level of short-term market prices that we experienced during the second quarter meant a negative impact on realized prices. Turning the page to slide number 21, that shows our customary upstream/downstream electricity balance, that shows, on the right-hand side, the 24 terawatt hour drop in our own volumes, essentially transferred to the wholesale market. End-customer consumption is up 6 terawatt hours, mostly due to favorable weather impact. Let's now move to the next slide, that shows the nuclear output. Nuclear generation is up 1.6 terawatt hours compared to the first half of 2014. With 210.4 terawatt hours during this first half, we set a record high, since the first half of 2011. This reflects the high availability of the fleet in this first quarter in a context of stronger demand. During the second quarter, the performance was driven by effectiveness of our plan to control the duration of planned outages, whereas the volume of planned outages was higher than during the second quarter of 2014. In this context, I can confirm today our 2015 target range for nuclear output at 410 to 415 terawatt hours. Moving on now to hydro, on slide number 23, output is down 6.4% to 20.4 terawatt hours as hydro conditions have been less favorable than in the first half of 2014. Hydro conditions have actually deteriorated over the last few weeks of this first half, last few weeks that were historically dry and hot. Should these conditions last, this will have an impact on hydro generation on the second half. But all of this is taken and factored into our -- the reiteration of our guidance for this full-year 2015. Looking now at the UK segment on slide [2014] (sic), EBITDA comes to EUR1.3 billion, which obviously includes a favorable ForEx impact. In organic terms, EBITDA is flat versus the first half of 2014. This performance reflects the good underlying operating performance in nuclear generation, where the high level of availability of the fleet mitigated part of the impact of Heysham 1 and Hartlepool running at reduced load. Output is, hence, down only 1.6% to 30.3 terawatt hours. That being said, the drop in wholesale market prices carried a negative impact on realized prices for nuclear generation. Results in the UK were also supported by strong cost control efforts that led to a reduction in OpEx across all activities. Italy, on the contrary, had a challenging first half. EBITDA is down 46.9% to EUR246 million, as Edison performance was negatively impacted by both unfavorable weather; and adverse energy market conditions. Hydro generation suffered a drop in output compared to H1 2014, that saw exceptional hydro conditions. This, combined with a negative impact on realized prices from wholesale power market. Market conditions also created a downward pressure on margins in thermal generation. In addition to this, low brent prices penalized the performance of hydrocarbon activities. In this tough environment, Edison is committed on keeping costs under control, and reduced its fixed costs during this first half. As I said back in May, during our Q1 communication, the outcome of the arbitrage on the Libyan gas contract is now expected during the second half of 2015. In this context, Edison confirmed, this morning, its expectation of an EBITDA of at least EUR1 billion for 2015. Moving to the other international segment, where performance is shifting towards a more positive trend, EBITDA comes to EUR352 million; up 14.4% in organic terms against the first half of 2014. Belgium continues to be penalized by the extended outages at Doel 3 and Tihange 2. But several positive drivers have helped deliver 24% organic growth in EBITDA: a strong increase in wind capacity, higher gas sales, driven by a return to normal weather conditions. All this, together with an increased activity in ancillary services. In Poland, while power generation output dropped, higher realized power prices and increased tariffs for heat boosted EDF's forecast performance. In Brazil, (inaudible) output was impacted by planned outages, associated to an important maintenance program during this first half. Moving on to the last segment, other activities, on slide number 27. Operating performance in this segment is down 7.8% at constant scope, and exchange rate, coming to EUR878 million. EBITDA at EDF Energies Nouvelles, as Mr. Levy said before, continues to grow; plus 4.2% in organic terms. EDF Trading improved performance recorded a 6.5% drop, mainly due to the comparison with a strong first half in 2014 in the US; whereas, the performance of European activities is [up]. The gas business was penalized by unfavorable price environment. Dalkia's contribution, which is accounted for, for the first time during this first half, this contribution came to EUR130 million, which further confirms the successful integration of Dalkia to the Group. Looking now at the first half of the cash flow statement on slide number 28, operating cash flow is up 7.1%, driven by a reduction in income tax paid, linked to excess advance tax installment in France in 2014. This is partly offset by the effect of the exceptional dividend of EUR290 million received from CENG in 2014, without equivalent in 2015. So despite this exceptional dividend paid in 2014, the operating cash flow is up by 7.1%. Working capital requirement increases by 700 -- sorry, EUR588 million. This reflects the negative impact on trade receivables from the weather-driven increase in consumption from end customer. This impact was partly mitigated by the recovery of part of the tariff catch up, accounted for in 2014. Net investments come to EUR6.4 billion, as presented on slide number 29. This EUR800 million increase, compared to the first half of 2014, is mainly driven by investments in the UK, including Hinkley Point C, and in E&P in Italy. With no equivalent during the first half of 2014, Dalkia's net investments also contributed to this increase. In France, investments are slightly up by EUR149 million, mainly driven by ERDF; and, to a lesser extent, by nuclear [maintenance]. Cash flow after net investments comes to negative EUR251 million, as presented on slide number 30. Taking into account the increase in interest payments on hybrid debt, cash flow after dividend ends at negative EUR1.9 billion. This explains a big part of the increase in net debt, as presented on the next slide, increase of the net debt by EUR303 billion. Part of this increase being linked, as I said earlier, to the ForEx effect, especially the British pound effect. Based on these results, as already presented by Chairman Jean-Bernard Levy, we can confirm today, as presented on slide number 32, the elements of the 2015 guidance, presented back in February. You are familiar with our 2015 guidance, and with these targets. On Group EBITDA, we are aiming for an increase of between 0% and 3%, compared to what we achieved in 2014, adjusted for the non-recurring impact of the tariff catch up. We continue to target net debt to a ratio within the range of 2 to 2.5 times. And our dividend policy remains unchanged. We intend to have a payout of net recurring income adjusted for the hybrid bonds of between 55% and 65%. Lastly, regarding our roadmap to positive cash flow, we can confirm that our ambition remains to generate positive cash flow after dividends, excluding Linky. In 2018, we will factor into our next medium-term plan the changes in power prices and specifications in our cost base and deliver on that ambition. Let's now open the floor to your questions. And thank you very much. And we'll take now all your questions. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Unidentified Company Representative [1] -------------------------------------------------------------------------------- Thank you. Operator, we are ready for the Q&A session. Just before we start the Q&A, we remind that, as a market standard rule, and simply -- we will simply ask you to limit yourself to two questions. -------------------------------------------------------------------------------- Operator [2] -------------------------------------------------------------------------------- (Operator Instructions). -------------------------------------------------------------------------------- Unidentified Audience Member [3] -------------------------------------------------------------------------------- Could you give us more details on the assets that are under the strategic review? That's the first question. The second question is on net income. Do you think that the consensus of net income is on the low side? -------------------------------------------------------------------------------- Jean-Bernard Levy, Electricite de France SA - Chairman and CEO [4] -------------------------------------------------------------------------------- I will take the first question, and maybe Thomas will certainly give you his comments on the consensus. The assets under review are a decision we have made, which is in line with our profile of having a very low carbon emission profile. We already are probably the most efficient, carbon-wise, of all large power generation companies in Europe, and probably in the whole world. But we believe that as carbon prices are going to grow, and as COP21 is going to set new targets for each region of the world, or for each country, we believe we should allocate more towards renewables. And considering our constraints, which are very well known in terms of the structure of the balance sheet, we believe today is the right time to look deeply into some of our fossil-based assets. So this is what we have decided. These fossil-based assets which are under review are not based in France, nor in the UK. Some of them are generation assets; some of them are linked to fossil fuel; and then, in terms of supply or distribution. We will take the time it needs to look thoroughly at what is our current situation as where we want to go, and we will, in due course, give you more information about this. Thomas, on the net income consensus? -------------------------------------------------------------------------------- Thomas Piquemal, Electricite de France SA - Group Senior EVP, Finance [5] -------------------------------------------------------------------------------- Yes, I will just summarize my views on the consensus. I think that it is completely unchanged compared to what I explained back in February. We, of course, will not give any guidance in terms of recurring net income. But as far as the consensus is concerned, I remind you that we consider that most of the analysts, or 80% of the analysts, factor into our net income consensus a change in the [appreciation] methodology. Restating for the impact of the -- this change the range in net income, according to our calculations, is between 3.8 without a change in depreciation methodology, and 4.2 with a change in depreciation methodology. And I can confirm today that I'm comfortable with that range. As the question relates inaudible to market consensus, may I also state that my views are unchanged on the 2015 EBITDA consensus, with the same calculations as the one I did back in February. -------------------------------------------------------------------------------- Unidentified Company Representative [6] -------------------------------------------------------------------------------- Thank you. Next question from the Internet from Peter Crampton at Macquarie: when will you provide a concrete overview of the new strategic plan CAP 2030 to the market? -------------------------------------------------------------------------------- Jean-Bernard Levy, Electricite de France SA - Chairman and CEO [7] -------------------------------------------------------------------------------- Thank you, Peter. I think we have already stated quite clearly at the annual meeting what are the key drivers for CAP 2030. I will maybe re-emphasize three -- the three major drivers. EDF is intending to focus on nuclear and renewable investments in terms of generation. Just a quick comment on this. We are often looked at as a company that is very nuclear focused, and we want to remain, so because we believe nuclear brings our clients a very stable, very secure, and very cheap power. But we also believe there is a need for renewables, as we see the price of renewable energy, renewable power, go down. EDF Energies Nouvelles, EDF EN, is already a very strong player in many areas. But we would like, as I said answering the first question, to allocate more money to renewables. So that would be the first key objective. The second objective is that while we are a very centralized generation, centralized transport and transmission and distribution company, we do see that there is a strong need from our clients; the large corporations; the local decision makers; municipalities for a decentralized approach, where we will be partnering not only to deliver raw primary energy, which is usually electricity, or it can also be gas or [heat], but also a more added-value set of products and services to our clients. So the second key driver for CAP 2030 is around how we transform or add -- not exactly transform, but add to the existing model, which is very centralized and very generation-oriented, an additional set of skills and set of assets, and a set of value to our clients by partnering into decentralized energy production and decentralized energy distribution,, and services that will enhance the value of what we sell our clients. The third key objective of CAP 2030 is that over time, and we know things cannot change on day one, or even on year one, and this is, of course, a 15-year journey. As we look today at EDF as being very French-centric and European-centric, and being, at the end of the day, quite little exposed to the benefit of demographic and economic growth in non-European areas, we want, over time, that we improve our presence; that we change -- we improve the percentage of the assets that we have outside Europe, we become more of an international company. So this, I'd say, in a nutshell, is a quick description of what are the key CAP 2030 objectives, which we are happy to share with you. Thank you. -------------------------------------------------------------------------------- Unidentified Company Representative [8] -------------------------------------------------------------------------------- Thank you. Next question from the Internet from Andrew Moulder from CreditSights. Given your asset review outside of France, what are your plans for Edison in its wholesale-based generation and E&P activities? Does it still fit within the EDF Group? -------------------------------------------------------------------------------- Thomas Piquemal, Electricite de France SA - Group Senior EVP, Finance [9] -------------------------------------------------------------------------------- Well, as Chairman Jean-Bernard Levy just said, we are currently performing a strategic review. So, of course, no decisions are made. But we will, of course, analyze all the perspectives, and how different assets fit into the global strategy of EDF, as defined during the CAP 2030 project. Within Edison there are two major activities. Of course, the power and gas activities in Italy; and the E&P activities that are a global platform with assets in Italy, in Egypt, and elsewhere in the world. So we are currently performing a review of how we could better develop those assets, or combine those assets with others. Everything is possible. Of course, we will update the market, once the review is completed. Everyone knows that the Italian market faces difficulties. There are opportunities. Whether EDF will be part of consolidation or not is also a question that we need to answer. It will be part of the review that is currently being performed. -------------------------------------------------------------------------------- Unidentified Company Representative [10] -------------------------------------------------------------------------------- Thank you. Next question from Louis Boujard. Two questions. Louis Boujard from Oddo. First question is on the CSPE. We are talking about an enlargement of the CSPE asset base, could you please help us to [compute] the impact it may have on the working capital? Second question from Louis Boujard, Oddo: excluding the renegotiation of the Libyan gas contract, what would be the recurring EBITDA target of your Italian division under the assumption of a plunging low power price of hydrocarbon? -------------------------------------------------------------------------------- Jean-Bernard Levy, Electricite de France SA - Chairman and CEO [11] -------------------------------------------------------------------------------- I will take the first question regarding changes in CSPE. I'm sorry to say, to respond, this is very early days. There are some -- there have been some statements made by Minister Royal several times that the government is looking at how to change the way it charges for -- sorry, for carbon emissions, the various energy providers and consumers. Today, I think the analysis is shared quite widely that a lot, if not all, but almost all these charges are paid by the power consumer; whereas, obviously, power in France is very low emission energy. So there are other energies which are emitting much more carbon, and which do not contribute to moving our economy and our country towards a better carbon situation. So a rebalancing of this situation has been described as a target by Minister Royal. We are not, at EDF, aware of any decisions that have been made. We are aware that the government is thinking about it and has, several times, indicated that some changes could be implemented in the next budget [law], which will be made -- which will be delivered to parliament in September, and discussed in October and November. So before year end we should expect that there will be these changes, but today we are not aware of anything. And we are working as if the current CSPE arrangements will be continued, although it is quite likely there will be some changes. We don't know at all what these changes will be at this stage. This is still within government circle. On the second question, Thomas, Italy? -------------------------------------------------------------------------------- Thomas Piquemal, Electricite de France SA - Group Senior EVP, Finance [12] -------------------------------------------------------------------------------- Yes, second question was what is a normalized EBITDA level for Edison. I'd like to say that this depends on what you consider as being a normalized market for Edison, both in terms of power [demand] and prices in Italy; and also, brent prices. So depending on your scenarios, you end up with a different number. The only thing I can say, beyond re-emphasizing the fact that the target for 2015 is EUR1 billion, and add to this is that part of the review will, of course, be that I've just explained before; will, obviously, also take into account the adjustments that will have to be made on our cost structure to adapt to this market environment. And, therefore, after this review, I will be able to confirm the normalized level of EBITDA of Edison. EUR1 billion seems achievable, but, again, in what market environment, and how do we adapt to a difficult market environment of today. It is one essential part of the review we will have to perform, and we are currently performing, as part of the strategic review. -------------------------------------------------------------------------------- Unidentified Company Representative [13] -------------------------------------------------------------------------------- Thank you. Maybe two last questions from the Internet, and then we'll go to the telephone questions. Question from [Danny] (inaudible) at CA CIB, on Areva. First question is, as part of the deal with Areva, are there any debt provisions to be attached to Areva NP assets? Second question: how do you plan to consolidate Areva NP within EDF? -------------------------------------------------------------------------------- Jean-Bernard Levy, Electricite de France SA - Chairman and CEO [14] -------------------------------------------------------------------------------- The price that we've announced today, which is a preliminary price, subject to due diligence, as explained before, does not include any financial debt. It does not include either any liabilities relating to (inaudible). So it's price value equity assuming no financial debt, and no liabilities on (inaudible). And, therefore, we do not intend to, with this price, take over any such liability. The consolidation is clearly a full consolidation in our accounts. As EDF, with an above 51% stake in Areva NP we'll fully control this company. -------------------------------------------------------------------------------- Unidentified Company Representative [15] -------------------------------------------------------------------------------- Thank you. We can switch back to telephone questions, please. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Martin Young, [ABC]. -------------------------------------------------------------------------------- Martin Young, RBC Capital Markets - Analyst [17] -------------------------------------------------------------------------------- Two questions. The first relates to the communication around tariffs. I just wondered if there is any one-off gain to be recorded in EBITDA in the second half of the year in respect of catch-up elements. Obviously, you did that last year. And then, secondly, in terms of timelines, you were very kind to give us a timeline on Areva. I wondered if you could be equally as kind to give us a timeline on how we might progress to a final investment decision in respect of Hinkley Point C. Thank you very much. -------------------------------------------------------------------------------- Jean-Bernard Levy, Electricite de France SA - Chairman and CEO [18] -------------------------------------------------------------------------------- Thank you, Martin. I will discuss the second item. I'm not sure we fully understand what you meant on the first one, but Thomas will take the point. He's signaling to me he does understand. I'm still very new in the business. On the bid for HPC, I would say we are working hard. We have made a lot of progress. This is a discussion we are having both with the British Government and with the Chinese partners that will be part of this great new project, a very important one to EPR, Hinkley Point. We are making very slowly, very good progress. We -- there is like a summer break, which is like everywhere in the world it's a bit on the slow motion for a few weeks. But back we are, all, end of August and September. And I believe we will be able, after the summer break, to make a very, very rapid final investment decision move, and to achieve it as soon as we can. So I am extremely positive and optimistic about it. And the recent conversations I have had with the top officials, both with the Chinese people, as we had a very positive and frank visit by Chinese Premier Li in France three weeks ago; and with top officials in the British Government. All these conversations make me very optimistic about the fact that we are now moving very quickly towards this bid, after the summer break. Thomas, on the tariffs? -------------------------------------------------------------------------------- Thomas Piquemal, Electricite de France SA - Group Senior EVP, Finance [19] -------------------------------------------------------------------------------- I think I understand your question. I might not answer as precisely as Martin would like me to do. But the thing I can say is that beyond saying that we never comment on future tariffs, a potential evolution, or non-evolution, is that our guidance does not include any tariff catch up during the second half. And we have no comment to make on whether there will be or not a tariff catch up during the second half. -------------------------------------------------------------------------------- Martin Young, RBC Capital Markets - Analyst [20] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Vincent Ayral, Societe Generale. -------------------------------------------------------------------------------- Vincent Ayral, Societe Generale - Analyst [22] -------------------------------------------------------------------------------- [Be on] Areva, I'd like to come back to the French power and understand what's your experience in terms of market share retention with the end-user electricity consumers in France in the downstream. And how do you plan to protect EDF (inaudible) margin in the current environment? We've seen the (inaudible) drop. I'd be interested in understanding what you've seen on downstream users in this H1. Another question will be on the tariffs. The CRE dismissed the common decision on the yellow and green tariff as [efficient]. But how confident can we be that recourse from the [annual] in front of the state council can right the wrongs, especially knowing that the tariff is [appear at year end]? Do you have any idea of a structure that could be put in place there? And I'd like to bounce quickly on the comment that was made on the carbon before. So a potential CSPE reform is here at stack, could decrease the tariff by 10%, potentially, give room to underlying tariff increases. But I understand from your comment that this reallocation is driven by a will to better charge for CO2. In this case, shouldn't electricity be almost entirely exempt from the CSPE, knowing it is mostly [filter] free in France? Thank you. -------------------------------------------------------------------------------- Jean-Bernard Levy, Electricite de France SA - Chairman and CEO [23] -------------------------------------------------------------------------------- That's a great suggestion. I would not go as far as considering where we are with a lot of the bills for our clients. Being CSPE today, I'm not sure the government would go as far as what you say. As I said, I don't have a clue what they have in mind at this stage, except for the general guidelines they want to implement. But regarding timing, regarding numbers, regarding how it will operate, we are not part of these internal government discussions. So, I'm sorry, I can only repeat what I said previously, that it has been stated that there will be a reform on CSPE, and the way that various energies contribute to carbon objective. On your two other questions, maybe, on tariffs, and as Thomas has said, there has been a proposal made by the government, which is now being back to government due to various entities having -- various advisory entities having given their advice. The government has the last say, and now we have to wait for the government to make a decision. It is true to say that the Council of State has repeatedly given [injunctions] to the government to replicate our full costs in the tariff structure, and that we are still striving to get that in our first, and expecting that this will be, indeed, awarded to us because it's so low. Regarding market share, which was your question, and market condition, and downstream users, right now, we consider we are in a flat power consumption environment for the country in France; roughly, the same, by the way, in our other three countries in Europe, a flat environment. While there is some pickup in the economy, there is obviously also more efficient management of power usage by appliance. And probably, the two have equal -- are going equally in the two other directions and so it's awash at the end of the day. Obviously, we have to be prepared that our market share is going to change, especially for SMEs and corporations because of the yellow and green tariffs, which are expiring at the end of the year. And the plans that we have prepared, and of which you have a summary in our 2018 guidance, do include, but to an extent which, of course, we will not comment in many great details, that especially for green and yellow users we are not going to keep the kind of market share that we have enjoyed in the previous years because of the change in the regulation; and because we have quite aggressive competitors which are taking market share from us. So, our 2018 positive cash flow objective does include our reflection, both on the difficult market prices, and the lack of growth of power usage in France, on the one hand; and the fact that, obviously, keeping our market share at its current level will not be possible. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Emmanuel Turpin, Morgan Stanley. -------------------------------------------------------------------------------- Emmanuel Turpin, Morgan Stanley - Analyst [25] -------------------------------------------------------------------------------- First question is to come back on the plans to modify the CSPE mechanism. Have you heard any plan to actually increase the annual amount collected on this system? Or is it just -- would it be just a shift in the way it is collected in France? An increase in the overall amount would be very positive, of course, for the path of repayment to you on your cash flow. Second question, one the gains on financial assets, it's a very positive item in your income statement at EUR761 million in H1. This is a pre-tax number; could you refresh my memory and tell me whether there is any tax paid on this EUR761 million, please? And last, you mentioned an increase in D&A, which largely explains the trend in EBIT. What would be a good range to consider for the full year? Is it appropriate to just simply multiply it by two for the full year? Thank you very much. -------------------------------------------------------------------------------- Thomas Piquemal, Electricite de France SA - Group Senior EVP, Finance [26] -------------------------------------------------------------------------------- Well, on your first question, Emmanuel, we don't know. So I cannot give you any answer on this, or give you any indication on where it should go. On the capital gain on the dedicated asset fund, yes, there is taxation, whether it is implied at the end of the year, or actually paid. But, yes, there is an income tax to be deducted from this [post] capital gains. And if I understand well your third question, do we multiply by two to get an indication of what it should be for the full year, if I understand precisely of that question, the answer is, no, because we are extremely cautious. It depends on our asset allocation, on the decisions we make in terms of reallocating our dedicated asset funds. The performance during this first half is very good, higher by more than 100 basis points compared to the benchmark. Performance also is very positive within EDF Invest. When we make investments within EDF Invest, we sell assets and, therefore, we materialize capital gains that were not recorded through the P&L. The total amount of non-recorded capital gain at the end of June 2015 is in excess of EUR2 billion, but I cannot tell you how much we are going to extract during the second half. It really depends on our strategic allocation; the arbitrage we are making with different funds; and also, the investments by EDF Invest, especially in the cost structure space. -------------------------------------------------------------------------------- Emmanuel Turpin, Morgan Stanley - Analyst [27] -------------------------------------------------------------------------------- Sorry, can I just ask for a complement on this? You just said that the latent capital gains is around EUR2 billion that could be booked over time, if market was to stay at this right level, right? You didn't say that it would be -- -------------------------------------------------------------------------------- Thomas Piquemal, Electricite de France SA - Group Senior EVP, Finance [28] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Emmanuel Turpin, Morgan Stanley - Analyst [29] -------------------------------------------------------------------------------- Okay. But my question is actually, I must have been unclear, it was about D&A. Should we just double the first-half figure to get a good approximation of the full year, or is it more complicated than that? -------------------------------------------------------------------------------- Thomas Piquemal, Electricite de France SA - Group Senior EVP, Finance [30] -------------------------------------------------------------------------------- Yes, sorry, I didn't catch this one. Yes, its -- (inaudible) tax, by the way, is EUR2.2 billion. Just on capital gains, implied capital gains inventory at the end of June is EUR2.2 billion. -------------------------------------------------------------------------------- Emmanuel Turpin, Morgan Stanley - Analyst [31] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Thomas Piquemal, Electricite de France SA - Group Senior EVP, Finance [32] -------------------------------------------------------------------------------- So coming back to your question, sorry, on D&A, yes, it's a rough proxy you can multiply by two. I don't see any reason why there will be significant change in multiplying by two the cost of D&A. -------------------------------------------------------------------------------- Unidentified Company Representative [33] -------------------------------------------------------------------------------- We are approaching the end of the call. And we are going to take one more question from the telephone, please, operator. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Cosma Panzacchi, Bernstein. -------------------------------------------------------------------------------- Cosma Panzacchi, Sanford C. Bernstein - Analyst [35] -------------------------------------------------------------------------------- I have two quick questions. The first one is on the Energy Transition Law. Now the Energy Transition Law has been approved, in theory, EDF should present a PPE by the end of the year. However, the approval of the Energy Transition Law was delayed compared to the original plan, so do you still envision the PPE to be presented at the end of the year? And given the Flamanville issues, would you envision any major closure in this -- in the first period covered by the PPE? Then, I have a second question regarding Areva. According to your report today, the price that you are offering is subject to your protection from the Finnish risk. But if I read also what Areva has written today, they also say that you have explicitly requested that this deal should be subject, and this price should be subject, to the outcome of the verification in progress on Flamanville III. I haven't seen this in your report, but I wonder if this imply that you are completely worried that the verification of Flamanville III could unveil a massive issue that could completely set back the entire project? Thank you for answering the questions. -------------------------------------------------------------------------------- Jean-Bernard Levy, Electricite de France SA - Chairman and CEO [36] -------------------------------------------------------------------------------- Thank you for your questions. On the first one, the PPE, which, for everybody, means energy multi-year programming, is a government document, is not an EDF document. It is the planning of energy sources, of energy generation in France over eight years. The first detailed planning for the first three years, and a more rough planning for the next five years, so 2016 to 2018 the first three years, 2019 to 2023 the next five years; this, by the Energy Transition Law, is going to be discussed. There have already been a number of workshops. Of course, EDF does participate to these workshops. And at the end of the day, the government will aggregate all the information. It's being discussed. It goes way beyond EDF. It talks about energy in transportation, energy in home, housing, and so on and so forth. And the government will aggregate all this and define the planning, the eight-year target planning, for energy in France. Because the Energy Transition Law is finally delayed from what the earlier plans of the government were a year ago, and, as you know, the law finalized its long road in parliament only last week, at the very end, the government introduced an amendment delaying the delivery of the PPE. The delivery of the PPE during all that time was going to be before the end of December 2015. And by this amendment, which is now part of the law, the PPE should only be -- the PPE works, the PPE preparation should only be done before December 31, 2015. And there is no date that any more when the PPE will be available; no date is set today in the law. So I am quite sure that Energy and Ecology Minister Royal will have to state a more detailed calendar, but this will be more back to her administration than to the Law. The law only obliges the government to start PPE detailed discussions before the end of the year. So, I am sorry, this is maybe very recent news I wanted to share with you. Obviously, it means we will know about decision for PPE by the government a bit later than what we all expected. Regarding closures, and regarding Flamanville, and your question is related to what's going on in Flamanville. The legislation, and this is not changed from earlier vote by parliament, the final legislation means that when Flamanville is going to be connected to the network, when it will generate power and is connected to the network, at the same time, we will be forced, by law, to disconnect a similar amount of power, which corresponds, more or less, to two tranches of 900 megawatts (inaudible). So, at the time when Flamanville is ready, we have to be prepared to disconnect two tranches, two reactors of 900 megawatts power each. This, of course, is very important in terms of planning. And when we feel we are ready to say more about how we will plan this, we will do so. But this is not the case today as Flamanville is running well and making good progress. But we still have a little internal work to do before we can really plan in more detail the way this construction will end. And regarding the risk, I think it is a quite sensible protection for EDF that, indeed, the agreement on Areva NP is subject to a harmless outcome of the ongoing investigations regarding the vessel. The pressure vessel issue, which, you are aware of, and for which we are very confident that, at the end of the day, Areva, with the support of EDF, will be able to demonstrate to ASN that, indeed, the anomaly, which is official word from Mr. (inaudible), the anomaly that has been detected. We are very confident it will have no effect overall on Flamanville. But as a protection of EDF's interest, just in case there would be a problem, but we do not believe that there will be one, just in case, it is a standard risk management procedure that we would not take any risks on this matter. -------------------------------------------------------------------------------- Unidentified Company Representative [37] -------------------------------------------------------------------------------- Thank you. This is going to be the last question, and it is a follow-up question on the answer regarding depreciation and amortization that Emmanuelle Turpin from Morgan Stanley asked. It's a question from the Internet, basically, asked by a few people. So, what does it mean in terms of depreciation and amortization if we think about life extension of the nuclear fleet in France? -------------------------------------------------------------------------------- Thomas Piquemal, Electricite de France SA - Group Senior EVP, Finance [38] -------------------------------------------------------------------------------- When I made this answer saying that I saw no reason why the first half would not be a good proxy, multiplied by two, for the full year depreciation and amortization charge, it assumes, of course, a constant accounting methodology. As I said before, when commenting the net income market consensus, I consider that there is a range, depending on whether or not we will change the life [line] from an accounting standpoint of our fleet by the end of the year. I will not comment any further on this point. Of course, it is up to the Board to decide. And the PPE that Jean-Bernard Levy has just commented on is, of course, a significant part of this work that has to be done. My answer before was [at a] constant accounting methodology, for the avoidance of doubt. -------------------------------------------------------------------------------- Unidentified Company Representative [39] -------------------------------------------------------------------------------- Okay, thank you. That closes our call. We are available for any follow-up questions with you guys. Thank you. And talk to you later.
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