Financial analysis EDF

Content:

¨1. Company overview and context ……….3

¨2. Economic analysis..................................6

¨3. Trend analysis.......................................14

¨4. Comparative analysis............................24

¨5. Analysis of cash flows…………………..25

¨6. Conclusion and recommendations........29

I Company overview and context

1)      Company presentation

Électricité de France S.A.(EDF; Electricity of France) is the second largest electric utility company in the world. It was created in 1946 as a result of the nationalization of many smaller French energy producers, transporters and distributors by the Minister of Industrial Production Marcel Paul. It has since then been responsible for the French electricity production and distribution.

Until 19 November 2004, EDF was a state-owned corporation, but it is now a limited-liability corporation under private law, after its status was changed by statute. The French government partially floated shares of the company on the Paris Stock Exchange in November 2005, although it retained almost 85% ownership as of the end of 2008.

Headquartered in Paris, France, EDF operates a diverse portfolio of 120,000+ megawatts of generation capacity in Europe, Latin America, Asia, the Middle East and Africa, having over 42 million clients around the world. EDF is the main player in the French electricity market as well as one of the European leaders for energy production. In 2003, it produced 22% of the European Union's electricity, primarily from nuclear power:

EDF is the biggest electricity producer in France, and owns all 58 active nuclear reactors, which are spread out over 20 sites. They comprise 34 reactors of 900 MWe, 20 reactors of 1300 MWe, and 4 reactors of 1450 MWe, all PWRs.

2)      The EDF group

EDF specializes in electricity, from engineering to distribution. The company's operations include:

       electricity generation and distribution

       power plant design

       construction and dismantling of nuclear power plants

       energy trading

       transport.

It is active in such power generation technologies as :

       nuclear power

       hydropower

       marine energies

       wind power

       solar energy

       biomass

       geothermal energy

       fossil-fired energy

3)      Competitors

Apart from the producers and foreign distributors, in France, there are some important companies, which, although their market share is weak with regard to that of EDF, are a significant competition. These are:

                   GDF Suez: the company formed after the merger of Gaz de France and Suez clearly intends to produce its own electricity, has bought stake in the future EPR nuclear reactors and is poised to become the most credible competitor of EDF in the newly liberalized French electricity market.

                   SNET (Société nationale d'électricité et de thermique)

                   CNR (Compagnie nationale du Rhône)

                   SHEM (Société hydro-électrique du Midi)

II Economic analysis

1)      SWOT analysis

To analyze the current position of EDF within the electricity industry, we will proceed by using a SWOT analysis.

Strengths

-          First of all, EDF is the French and European leader in the electricity market. The amount of electricity produced by the company is higher than most of its European competitors. It is also a world leader in the nuclear industry, owning 58 power plants in France, which makes EDF the largest nuclear owner in the world.

-          It has a long experience and know-how since 1946, therefore the early stages of the nuclear industry

-          It is known as having strong values: people respect, environment respect, solidarity and integrity

-          Client’s trust on the electrical network, the services provided by the company, as well as the reliability on new products.

-          EDF is becoming a strong innovator and investor for new types of renewable energy production

-          The company has a very strong technical and commercial network all around the world

Weaknesses

-          The company’s main activities (nuclear power, energy from coal and natural gas) are likely to be considered to be polluting. Indeed, EDF owns all the nuclear spent fuel in France, and no permanent solution has been found yet regarding its storage. Also, burning coal and natural gas produces CO2, a gas held responsible for global warming.

-          The company’s new activities – renewable energy – are not likely to be profitable for the years to come.

-          The price per kilowatt hour is higher than its competitors’.

-          After Fukushima, the company’s main activity – nuclear power – has a bad image.

Opportunities

-          EDF owns the electricity distribution network in France, which gives EDF an enormous competitive advantage in France. This situation is not likely to change in the years to come.

-          Renewable energies are likely to become more and more popular in Europe, and EDF Energy is already one of the European leaders in this sector.

-          The macroeconomic environment is favorable to the development of renewable energies. The investments required to develop this types of energy are very high, and very few companies can afford to do it. This is why the threat of new entrants is very low, which allows EDF to become bigger and bigger.

Threats

-          The very bad reputation of nuclear power after Fukushima has led to many political decisions that are compromising the future of the nuclear industry. This can have a huge impact in EDF’s operations, given that most of its turnover comes from the production of electricity by its nuclear reactors, that are far more efficient than other sources of energy.

-          Since the market opening by the French state in 2007, the number of competitors has increased, which have introduced lower prices to the electricity market. EDF has lost many clients since this state decision.

-          The discovery of shell gas is currently compromising the future of nuclear energy, given that it is the only source of energy capable of producing cheaper kWh. However, the development of this new technology is still in its early stages, and the existence of harmful environmental impacts has not been ruled out yet.

2)      European electricity players – main competitors

Today, EDF is by far the largest Electricity generator. Its main competitors in the market are the German electricity generators E.On and RWE.

E·ON, is the holding company of the world's largest investor-owned electric utility service provider based in Düsseldorf, Germany. It operates in over 30 countries and serves over 26 million customers.[3] It is one of the 30 members of the DAX stock index of major German companies and a member of the Global Titans 50 index. E.ON is one of the major public utility companies in Europe and the world's largest investor-owned energy service provider.

RWE  is a German electric utilities company based in Essen. Through its various subsidiaries, the energy company contributes electricity and gas to more than 20 million electricity customers and 10 million gas customers, principally in Europe. RWE is the second largest electricity producer in Germany. Subsidiary RWE Dea produces some of the oil and gas its parent sells (annual production is around 2 million m3 of crude oil (about 365,000 boe) and 3 billion m3of natural gas (about 18 million boe, 49,300 boe a day).[2] It's the largest German investor in Egypt (RWE Dea and RWE Power do business in Egypt).[3] Also RWE has begun building more wind farms, a renewable energy business.[4][5]

2) Market position

The EDF Group is an integrated energy company presented in all electrical trades: nuclear generation, fossil and renewable, transportation, distribution, marketing energy, energy trading, efficiency and energy management services. It is the main player of the French electricity market and have a strong position in Europe (UK, Italy, Central Europe and Eastern), being one of the leading electricity producers in the world and a recognized gas supplier.

2.1) Market risk

The electricity market is a very specific and particular market. Indeed, it is strongly linked with the laws about electricity in the country where the electricity is produced, moved and sold. Because of that, EDF is not responsible when laws change or are created and its market position can be contested.

2.1.1) Market risk due to the management of European energy

The Group faces increased competition in European markets energy, especially on the French electricity market, which is its main market.

As has been said above, EDF had to completely open the electricity market in France since 2007 in order to give a possibility for a new private company to go in this market. Now, because of that, every customer including companies can choose the electricity provider that it wants. In this situation EDF is able to lose market place in France with the apparition of new competitors on this new open market. This loss of market share could imply a negative impact on the turnover of the Group. Finally, to achieve its objectives, EDF might have to increase its marketing expenses or to reduce its margins (in particular if the competition price increases), which would have a negative impact on its profitability.

Elsewhere in Europe, according to competitive situations, the Group is exposed to different contexts (more or less total opening of markets, position of competitors, regulators, etc..). Thus, in some countries as in France and in certain regions, the Group must follow a strategy of defending its market share. In opposite, in other country it must conduct an offensive strategy to conquest a market share. The type of competition that the Group faces in these countries, the evolution of this competition, and its effect on the activities and results of operations are therefore variable from one country to another. They depend on the degree of deregulation the country is concerned, but also many other factors over which the Group has no control.

As we already said, the european and country law of electricity regulation and control can change almost overnight. For instance in UK, the organisation which has goal to control the electricity distribution, currently examining a project which can implies the increasing of the distribution electricity price. For UK electricity producer like EDF, that can mean new costs and a lesser productivity of new nuclear plants. A lot of factors in electricity industry for instance, electricity distribution price, are unmodulated and fixed by the country government. That’s mean EDF have to manage with composant features which are not under company’s control.

2.1.2) Risks related to the Group’s work sector

The electricity activity can be strongly impacted with the actuality. After Fukushima, the image of nuclear had been highly down. For EDF that implies a lot of things. After the crisis, the French government also decided to check up all the central and to increase the control of those which implied an increasing of cost. In the other hand, the uranium cost decreased because different nuclear projects in the world stopped. We can see with this example that the world electricity context is strongly links with the economic health of EDF.

The electricity market is strongly discussed in countries and in particular about the market share. Normally in Europe every countries have to open their market share but it’s a long process. Some companies think that EDF is too slow in this process and put EDF in lawsuit because of that. The laws and justices is really presented in the electricity business and EDF have to manage and take care about the law change.

We can also think that the appearance of a new market in emerging countries is able to create a risk not to go on the new market. Indeed with globalisation the bigger you are the lower your fixed costs are. We can call this risk a frigid risk but it also implies other facts such as to have required money to invest in the new market and to know the habits of the country where you plan to go.

Moreover, except renewable energy, all others depend on suppliers. Even if EDF is less dependent of the gas than the other energy providers, a sharp increase can cause a significant loss for EDF. One thing that people often forget is that nuclear needs uranium to produce energy. The major part of this uranium is from Africa or Russia and the price of this one is not really stable. For instance after the Fukushiama catastrophe the uranium price was divided by three, which is rather good for EDF but it can make a change in an other way.

In spite of all of these risks, the future of electricity is not so dark. Indeed, according to survey, the electricity market will grow everywhere in the world especially in developing countries

2.2) Market position

2.2.1) Market growth

According to a survey of “New Policies Scenario, AIE WEO 2011.”, the energy demand will grow of 45% from now to 2035 and the specific electricity demand will groth of 80% in the same period. Because of that we can say that the strategy of EDF to growth is realistic with the market and the evolution of this one.

2.2.2) Production of electricity by EDF

The production of EDF in 2012 was; 19% in renewable energies, 54% in nuclear and 27% in coal and gas for a total of 158GW gross in production. The objective of EDF for 2020 is to have: 25% in renewable energies, 50% in nuclear and 25% in coal and gas and to be able to produce in total 200GW gross. We can see here that the strategy of EDF is quite well defined and that the company have a long-term vision.

2.2.3) Market share and market competition

For now, EDF is the second electricity utilities in the world according to the Forbes 2000 listing, after GDF Suez. But in electricity generator, it’s the biggest of the world. We just find out a comparative analysis in 2006 but it shows well the power of EDF compared to other firms.

III - Trend analysis

INCOME STATEMENT: Common Size

Balance Sheet/ Common Size

3.1 FINANCIAL RATIOS ANALYSIS

              3.1.1 PROFITABILITY RATIOS

1.1        Gross Profit Margin

In EDF, the gross profit margin was in the level of 42% to 45% from 2008 to 2010. In 2010 it decreased from its value of 2009 due to a change in the accounting practices and the need to include in the financial statements RTE (Reseau de Transport  d’Electricité) and to make it equity accounted which changed most of the results for this year, and therefore the value and analysis of the ratios). However, in 2011 there was a major change in the gross profit margin due to the increase of the Cost Of Goods Sold especially the “buys of energy fuel” account which changed from 2010 to 2011 in 15,35%. This profit margin level is good compared to the one established in the industry because is higher because this industry is very intensive in capital and the costs of producing energy are high and depend a lot on fuel prices.

1.2        Net profit margin

The change in net profit margin is also directly related to COGS and to the change in the accounting system due to the equity accounting of RTE. However, we can observe that the net profit margin values range between 2% to almost 7%, at the same time they show instability and a tendency to go down from 2009 to 2010. In this aspect it is important to say that these figures include the company’s whole operational activity including the distribution and selling activities that generate more expenses besides the ones directly related with the production of energy. So this profits margins show that the capital intensity of this activity reduces margin and becomes riskier as the activity depends on commodities prices as oil, gas and uranium.