ECIFY - Electricité de France S.A. (ECIFF) Q4 2022 Earnings Call Transcript

Electricité de France S.A. (ECIFF)

Q4 2022 Earnings Conference Call

February 17, 2023 4:00 AM ET

Company Participants

Luc Remont - Chairman and Chief Executive Officer

Xavier Girre - Chief Financial Officer

Conference Call Participants

Presentation

Luc Remont

Hello, everyone. Welcome you to EDF Headquarters for this Annual Presentation of our Groups performance and particularly happy because this is my first time as CEO, that I get to welcome you to EDF headquarters. And as you will know, I joined the group a couple of weeks ago and from day one, it was important to me that I get in touch with those who embody EDF for partners or customers and the video should clearly every time, I was extremely impressed by the level of commitment of our teams and also their sense of service what the company is providing in terms of a public service.

And yes, we are up against a number of challenges, and we are addressing them. So when I joined the company, the short-term challenge was getting through the winter, and we still have a few more weeks of winter to go through. And I must stress that from day one, I have seen a remarkable level of commitment among our teams. And this is why we are fully confident in our ability to get through the winter. And I would like to take this opportunity to thank our teams for their daily efforts.

Today, we are introducing our yearly performance. And before our CFO, Xavier Girre presents our results in detail and answer your questions. I would like to begin by highlighting our main indicators that are the basis for our performance and also look back at the highlights for fiscal 2022.

In 2022, nuclear generation in France came to 279-terawatt hour, that's 81.7-terawatt hour less than in 2021. Obviously, this due to lower availability of the nuclear fleet mainly, because of checks and repairs carried out on reactor circuits after stress corrosion was discovered. Stress corrosion is a well-known phenomenon. And this means that we've been able to reduce incidental events and also optimize our power generation schedule. So we made the most of that difficult situation. This was an unprecedented industrial problem, at least at that scale, both for EDF and for the rest of the nuclear industry sector.

Hydro generation in France amounted to 232.4-terawatt hours. This is a decrease of 9.4-terawatt hours, compared with 2021 due to historically low hydro conditions despite outstanding availability. In the U.K. nuclear generation amounted to 43.6-terawatt hours, up by 1.9-terawatt hour, compared with 2021 despite the shutdowns of Hunterston B in January and Hinklent Point B in August due to good availability of the fleet and also a less busy maintenance program than in 2021.

Carbon intensity for the group came to 50 grams CO2 per kilowatt hour, a slight increase. So carbon intensity is up 2 grams of CO2 per kilowatt hour from 2021, due to lower nuclear and hydro generation in France. We can also say that in millions of tonnes our emissions are down. So there's a marginal and temporary increase of our cover intensity as a result. So the group's worldwide went in solar output was 24.6-terawatt hour, up 18% compared to 2021. Our portfolio of wind and solar projects worldwide reached 85-gigawatt growth by the end of 2022, compared with 76-gigawatt at the end of 2021. This is a buoyant result, which encourages to continue investing in renewable energies.

Now our financial performance in 2022, the EDF Group's EBITDA was negative by minus EUR5 billion, despite a strong increase in revenues supported by electricity and gas prices. EBITDA is heavily penalized by the decline in nuclear generation, as well as the one-off regulatory measures put in place in France for 2022. These events mentor the group had to purchase large volumes of electricity at very high prices. On the other hand, EBITDA benefited from the exceptional performance of EDF trading, mid-high market volatility and improved nuclear generation in the United Kingdom.

Net income before non-recurring items amounted to minus EUR12.7 billion, down by EUR17.4 billion. And this change mainly reflects the decline in EBITDA, partly limited by the current financial results and an income tax benefit. Net financial debt amounted to EUR64.5 billion. The EUR21.5 billion increase in net financial debt is mainly due to the cash flow generated by operations. At the end of 2022, we had EUR 14.8 billion in net cash. At the end of 2022, we had EUR14.8 billion in net cash.

Let me say a few words about our capital situation. As you know, the French government has launched a simplified public tender offer for the shares of EDF. The Board of Directors have spoken in 2022 and issued a favorable opinion on the offer after taking note of the work and the findings of the independent expert to deem the offer to be in line with the interest of EDF of its shareholders, as well as OCM bondholders and the employees.

As of today, the simplified public tender offer is provisionally closed pending the decision at the Paris Court of Appeal. On the challenge filed by minority shareholders seeking the cancellation of the clearance decisions. So the French state held -- on February 8, held 95.82% of the capital, 96.53% of the voting rights and 99.96% of the OCEANE bonds at the closing of the effort.

As I said before, there have been a number of challenges in 2022, if you've been keeping up with the group's latest developments, you must be familiar with the whole stress corrosion saga. This has kept us on our toes for a year now.

So I'm now going to review the entire story. I just want to say that for more than a year, the company has been faced with a major operational challenge following the discovery of stress corrosion on some of our reactors. So assessments and analyses have been carried out, and they have enabled the EDF to identify the reactors that are most susceptible to the development of SCC, so that's stress corrosion cracking. So these are the [16] (ph) most recent reactors the four reactors of the M4 Series and the 12 reactors of the 1,300 P4-series.

So the industrialized treatment process has enabled us to stay on schedule, and we have up to 43 reactors available for production. For 2023, we have decided to proceed with the preventative replacement of pipes in untreated reactors without carrying out prior inspections in order to control the duration of outages because our objective is to ensure safe power generation. So preventative replacement is the next step for 2023 and is part of our business plan, and we are focusing on the reactors concerned by stress corrosion cracking. And this will also be an opportunity to optimize the availability of our nuclear fleet for the winter of 2023, 2024.

I spent a lot of time in the field in recent months, and I have seen how much control our teams and our industry partners enjoy when it comes to addressing that challenge of SCC. So we have moved into the industrial phase in the process of addressing that problem. And there was a very iconic moment when the Sizewell 1 plant was connected to the grid at the end of January, that was the first reactor that was affected by stress corrosion cracking symbolically, that was an important time for the company. This was the first reactor where corrosion problems were found and it was connected to the grid once again.

So the strength of the company is judged by its collective response to such challenges. And I am convinced that we have found -- that EDF has found working together with these partners, the right solution to this industrial hazard. Needless to say, exceptional and urgent efforts have been made and this did not lead us to postpone longer-term efforts to improve our performance. These efforts are continuing. They are ongoing, and they're absolutely key in order to successfully meet the challenges of nuclear power, both in France and abroad.

In particular, in 2020, we launched the XL plan, the goal being to restore the highest level of operational stringency and availability in the nuclear industry. We're continuing this work, the XL plan has achieved the set goals to a very large extent as defined in 2020, and we're going to continue and extend this plan. So as to further improve availability of the nuclear fleet. We are also continuing the work on consolidating the nuclear sector generally.

And we've recently reached a definitive exclusivity agreement with GE for acquisition of General Electric steam power activities for conventional nuclear power plants. This transaction means that EDF can have more technology which are essential for the sustainability of the nuclear fleet, both now and in the future in the U.K. We're delighted that the British government has decided to join the capital investments in the Sizewell C project and also the fact that the financing model is -- comes forth under the regulated asset-based financing model. This confirms that Great Britain trusts the nuclear sector has been part of its energy mix, and this is very good news.

In France, we recently took a fresh look at the calendar and the cost of building the plan on build three power plant stage of loading the nuclear fuel is planned for the first quarter of 2024, and cost of completion is currently estimated at EUR13.2 billion. And I would like here to point out that the project team and all of our teams and our workforce and partners are working very hard together as fast as possible bearing in mind security issues so that Flamanville 3 can be connected to the grid as quickly as possible.

2022 was also the year of the President's speech Belfort, as we saw in the film, France is intending to launch a new nuclear program. Following on from this speech, there was a public debate about [Indiscernible] and EPR2. This began in October and will end on the 27th of February. Finally, nuclear has been included in the European Taxonomy of Renewables. This means that nuclear will be able to play its role in achieving the carbon-neutral goals that we have set.

I'd like to now talk about renewables. This is an activity that's developing very quickly in France and also on other continents. Our project portfolio has increased by 12%, as compared to the end of 2021 and now amounts to 85 gigawatts. We have major ventures such as the wind turbines offshore of Fécamp and Provence Grand Large, which is a floating wind turbine project and the first floating project in France by EDF at Lazer. We're very proud for the -- we've completely commissioned now the first offshore wind turbine park in France of Saint-Nazaire 480 megawatts and also the first megawatts have been produced in the largest solar plant in the world at Al Dhafrah at the UAE.

I'd also like to say that we've signed a partnership agreement to develop, build and operate a hydroelectric plant in Mpatamanga in Malawi. The energy context is unprecedented. I see nothing like it over the last 40 years. This is true of the whole of Europe. And in this context, we have worked closely with our clients, and many clients have returned to EDF. Our client contract portfolio worldwide has increased by 3%. In France it has increased by 700,000 clients, residential clients. So we have more and more contracts under market conditions, 2.4 million clients at the end of 2022.

However, we also have clients who have returned who are under contract with regulated sales tariffs, and this has had a negative impact on EBITDA in 2022, given the very high prices on the market, we've had to buy up. As the businesses 2.5% increase in market share at the end of December 2022 on the base of the volumes sold to be delivered in 2023. So business clients trusting us. We are determined to help our clients to cope with increasing energy prices. We put in place measures to support them. We provided them with forms to claim their rights in terms of reimbursement and various measures. We've sent out postal messages and e-mails to 400,000 very small businesses, and we've put in place a dedicated page on the website and a dedicated phone number to answer our clients' questions.

In services and particularly electric mobility growth has accelerated with 280,000 charging points that have been rolled out and managed at the end of 2022. Our independent subsidiary energies has helped a lot to ensure better penetration of electric mobility in France. And 2022, 3.8 gigawatt of renewable power have been connected to the grid. That's an increase of 18% of connections as compared to the end of the previous year.

I'd now like to talk about winter and measures to ensure sensible use of energy. The government and public authorities and all our partners have been very much involved in these efforts. The current situation is critical. We have an energy crisis. Electricity has become the focus of much debate and discussion. And obviously, EDF has been out on the front line to ensure that our clients are supplied with electricity throughout the winter.

I'd like to begin with ENEDIS, so which managed to save 2.4 gigawatts at the morning peak, peak consumption time, thanks to a shift in the heating of hot water tanks during the night. This has saved 2.4 gigawatts at morning peak. That's equivalent to the total consumption in electricity of a town like Paris. In order to ensure better availability of production fleet, we have worked on all possible measures beginning with overall maintenance of all facilities, nuclear, hydroelectric, thermal, wind and solar, which we predicted ahead of time and scheduled before with the winter. We help clients better program the electricity and gas consumption.

For instance, we have Tempo special offer at the regulated sales tariffs, and we also have awareness cycling campaigns, which we launched as of the autumn and been very successful. We note that consumption has fallen over the last month, of course, partly due to prices. But really, I think that our clients have shown considerable sense of responsibility, as have all French people and have really helped to cut back on consumption, and we have increased production. We've also got an in-house energy saving plan, which has meant that we've been able to reduce our energy consumption for tertiary sites by 10% in the fourth quarter. So thanks to all of these measures, we have managed to cope very well with the cold snap that occurred at the beginning of the winter. We are continuing these efforts, but I did want to indicate just how hard we have been working and how successfully in this area.

Then regarding environmental, social and governance commitments of the group. Our commitments are very clear. We have set them out. And this for a long time already. The avoided emissions now is 30 million tonnes of 2030 for our clients, thanks to the sale of new innovative products and services and a change in the perimeter that is now extended to G4. In 2022, we've presented a climate resolution to our shareholders. The resolution was adopted to the tune of 99.87% of the shareholders.

Now another comment we made was to have more women in top management or management Board. And we have been very successful here, too. Regarding sustainable finance, so we issued EUR1.25 billion green bond issue in October 2022 to finance investments in electricity distribution. As of the end of 2022, we've got EUR10 billion of green bonds issued, which strengthens our place on the market in terms of green bonds. So there you have the information about our results generally.

But I'm now going to hand over to Xavier Girrehere, who's going to be talking more about the financial results.

Xavier Girre

Thank you, Luc, and good morning, everybody. I suggest that, first of all, we come back to some key figures for 2022. First of all, sales 2022, EUR143.5 billion, an organic increase of 69.4%, thanks to the marked increase in electricity and gas prices, EBITDA minus EUR5 billion, down EUR23 billion as compared to 2021, mainly because the buyback of large volumes at very high prices, because of the imbalance between supply and demand in 2022, which was caused by the reduction in output, particularly nuclear because of stress corrosion and the one-off increase in the allocation of 20 terawatt hours under ARENH.

The net income is minus EUR12.7 billion as long with the lines of EBITDA and the share of the group at minus EUR17.9 billion. Net debt has increased from EUR43 billion at the end of 2021 to EUR64.5 billion at the end of 2022. Regarding EBITDA, why has there been this reduction between 2021 and 2022?

First of all, nuclear generation has fallen in France to the tune of 82 terawatt hours. This is because mainly of stress corrosion problems, which accounts for minus EUR29.1 billion because the corresponding amounts that we couldn't produce had to be bought back on the market at very high prices. Then exceptional one-off regulatory measures to limit price increases, but consumers had a negative impact of EUR8.2 billion. And finally, there were favorable price effects, because of the increase in prices on the market. This contributed to plus EUR8.7 billion for France.

If we look at the other main headings, hydroelectric generation was unusually low in 2022, both in France and in Italy, and the impact is estimated at minus EUR2.7 billion. I would like to point out that net generation in France was 25 terawatt hours, that shutdown 10.9 terawatt hours as compared to 2021. A [Indiscernible] generation benefited from a volume and a positive price effect, so contributed to plus EUR1.3 billion.

And the same is true for nuclear generation in the U.K., where there was a positive volume effect plus 1.9 terawatt hours and prices were high, whereas generation levels were low in 2021, and that led to buying on the market at high prices. Trading activities, this was an exceptional outstanding year. Markets are very volatile. And there, there was an improvement of EUR5.2 billion as compared to 2021.

Regarding the remaining results, first all, operating results. EBIT minus EUR19.4 billion, down EUR24.6 billion. This is along the same lines as the drop in EBITDA that I've just explained. So I don't think I need to come back to that.

Net results, so share of the group minus EUR17.9 billion, so I've mentioned a number of points regarding operating results, but I would like to point out that there was a drop in financial results EUR3.9 billion. This is due to a worsening of financial markets in 2022, and this had a negative impact on the performance of dedicated assets, minus EUR5.8 billion. Their performance amounted to minus 8.5% in 2022, as compared to plus 11.9% in 2021.

However, the real discount rate for nuclear provisions in France increased by 50 basis points in 2022. And this had a positive impact as compared to a drop of 10 basis points in 2021. The coverage rate of dedicated assets for nuclear provisions amounted to 107.1% at the end of 2022 as compared to 109.3% a year previously. For information, this rate is close to 110%, now given the improvement of the financial markets since the beginning of the year.

Second significant point to turn out here is the tax charge, well, which will increase to EUR3.9 billion in 2022, a change of EUR5.3 billion. This is directly linked to the negative value of the profit before tax of the French tax group. So once non-current items are neutralized, notably negative changes in the fair value of dedicated assets and impairment losses, net current income is EUR12.7 billion.

Let me finish with a few words on changes in cash flow and net debt. The group's cash flow was minus EUR24.6 billion. This is mainly due to the deterioration of cash EBITDA. So minus EUR12.8 billion, as you can see on this slide. So the difference between EBITDA minus EUR5 billion and cash EBITDA minus EUR12.8 billion is mostly due to the neutralization of the EDF Trading positions that have yet to be unwound by the end of 2020, which is therefore recorded in EBITDA without any cash effect for this year.

Conversely, WCR has been reduced by EUR8.3 billion. And this amount includes a favorable effect for EDF Trading, which is mostly related to the reduction in margin cost in the context of volume prices at the end of the year and the setting up of letters a credit to replace cash margin calls. There's another favorable factor pertaining to WCR, and that's the increase in the CSPE debt to the government.

Amid market prices that are higher than those of the renewable energy purchase obligations, EDF benefited in 2022 from compensation for the CSPE, which it will have to pay back in 2023. So net investments amounted to EUR16.4 billion, up by EUR0.7 billion, compared with 2021. This figure includes an increase of EUR0.8 billion for EDF Renewables investments. Despite the tax income that I detailed earlier, we're seeing here a cash outflow that was made in respect of income tax, mostly due to the profits of EDF Trading and Edison excluding the French tax consolidation.

Lastly, the capital increase in April 2022 came to EUR3.2 billion, net of the issue and redemption of hybrids represented a contribution of EUR2.3 billion. So net financial debt came to EUR64.5 billion at the end of 2022, compared to EUR43 billion at the end of 2021.

Thank you, and now I'll give the floor back to Luc Remont.

Luc Remont

Thank you, Xavier. Now let's turn to our 2023 objectives. As I'm sure you understand whatever the company does seeks to turn around the group's EBITDA by returning nuclear generation to the context of continued high prices. So as to achieve an EBITDA level that is significantly higher than 2021. So we have set a net financial debt-to-EBITDA ratio target of less than or equal to 3 times and an adjusted economic debt-to-EBITDA target of less than or equal to 4.5 times. Our priority is to turn EDF around. And I am convinced that all of the actions that are currently underway will bear fruit. And I can already reference the successes that we will achieve in 2023.

Firstly, nuclear generation, thanks to our entire company coming together, and the work of our industrial partners, this has enabled us to identify and address the problem of stress corrosion on a number of reactors. So we will continue that work in 2023. And for 2023, we are confirming the nuclear generation range of 300-to-330-terawatt hour. And that's a gradual exit from the stress corrosion cracking crisis.

In addition, we're also seeing the initial results of the STAR 2025 program, which aims to improve the performance of the nuclear fleet on a long-term basis. What is our priority? Well, strengthening that priority in satisfies our customers over the long-term with the most comprehensive range of offers and services on the market. We are increasing our customers' ability to consume less energy, better energy and also do it at the right time. So amid the energy crisis, we're supporting our customers, be it the individuals, industrialists or craftsman with suitable solutions to optimize your electricity bill. And this is in line with our spirit of service and innovation, we will continue to pursue our plans to decarbonize industry, particularly through Dalkia.

From the industry point of view, we will have major successes with the renewable energy projects that I mentioned earlier, such as the Fécamp offshore wind farm, the Provence Grand Large floating wind farm and the Lazer PV plant, which is the first floating PV plant. We will be making major progress on major international projects with the impairment of the Nachtigal dam in Cameron. Similarly, in the nuclear sector started as for Flamanville 3 are expected at the end of the year, and we will soon be able to look forward to the integration of GE Steam Power's activities into the EDF fold.

Finally, distribution network will more than ever play a key role in the integration of renewable energies and the acceleration of electric mobility with a continued acceleration in connections. With a view to raising the Group's financial trajectory have decided, together with the Executive Committee to launch four operational excellence projects at the beginning of the year that I'd like to share with you.

Our first project is called metal time. It's a well-known phrase that we use. We are referring to the actual working time of the machine and everybody is affected, the technicians, employees, engineers, we need that metal time to be optimized. It's important for us for our partners. So we have an operational project the goal of which is to optimize mental time for everybody. So we're trying to improve the company's operational performance.

Second project, we seek to accelerate and industrialize digital technology. We have a lot of digital strength, and we need to ramp up. We need to take things up a notch. And so we have a second project that will focus on digital transformation. And hopefully, in a couple of years, of course, there's going to be a low-lying fruit. But hopefully, in a couple of years, we will achieve industrialized and integrated digital capabilities so that we can all work together effectively and efficiently with our partners on all of our operations.

Project number three has to do with skills. The goal is to focus on the considerable requirements of our sector. In recent weeks, I have noticed that we have the scope. We have the expertise. The company has strong expertise, unique expertise in a lot of ways, but we need more. We need to upscale the entire sector in order to meet our future challenges. And so the third project will seek to improve and upgrade our skill set.

Finally, the last project. Well, the last project kind of summarizes the first three. And the goal is to manage our operational performance. And Xavier in charge of that project, by the way. And his goal will be to strengthen the group's performance, cultivate this performance-driven culture and generate a better level of cash flow in order to ensure the group's financial sustainability. So four priority projects that will keep us busy throughout the year and beyond.

And in 2023, we're hoping to see results from that hard work, and this will help improve our operational performance in the next few years. We seek to restore generation capacities to a high level and improve our operational improvement. This will enable us to sustain the level of investment necessary to grow. Our objective and our outlook for 2023, therefore, is to achieve an operational turnaround so that we can face the future of the group with confidence.

Thank you very much for your attention. And Xavier and I and the rest of the executive Board members are standing by to answer any questions you may have. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]

Unidentified Participant

Hello. Thank you for your presentation. I represent [Lizikou] (ph). I have a couple of questions actually. First of all, regarding your targets. You have introduced two different ratios. Two ratio targets for the year to come. So where do you stand today relative to those ratios, so we need to -- that we will understand better how far you need to -- how much further you need to work. And also, what about EBITDA, where do you stand there?

And could you give us your opinion regarding the bill to nationalize EDF, which was adopted by the National Assembly and also concern among NPEs regarding RTE, NRT's capital? A number of NPEs have expressed concern about that?

And the third question, market design. There's a whole discussion at the moment regarding market design. At EU level, the consultation process just came to an end. The French government advocates a lot of CFD particularly for EDF and EDF hydro. So what do you think?

Luc Remont

Thank you very much. Maybe Xavier can take the first question, and I will answer the last two.

Xavier Girre

Regarding the ratios. [Indiscernible] targets, net financial debt-to-EBITDA ratio lower or equal to 3 times. That's the target for 2023. And the latest communication was about 3% or slightly higher than 3%. So we seek to improve that ratio relative to our initial guidance for the end of 2023. So it doesn't really make sense considering the fact that EBITDA is negative at the end of 2020.

Regarding to the adjusted economic debt-to-EBITDA ratio. Our target is to achieve 4.5 times, slightly less or equal to 4.5 times. And for the end of 2023, our guidance was 5 times approximately. So we seek to improve our financial guidance relative to the guidance we issued at the end of last year regarding our target for the end of 2023.

As Luc rightly said, we seek to improve our EBITDA. We expect EBITDA to significantly exceed our EBITDA in 2021, which came to EUR18 billion. So we will achieve significantly more than that in 2023. And particularly, this will be driven by a gradual return to nuclear generation standards in France amid strong and amid high market prices. And for 2023, regulations do not include exceptional measures such as the measures adopted in 2022.

Luc Remont

Thank you, Xavier. Regarding the rest of your questions, [Indiscernible]. So French Parliament is responsible for the legislative choices that they make, they already sovereign authority in that regard. In order to -- in order for the government to become the sole shareholder of EDF, they don't need to legislate the government -- as far as the government is concerned, there's a simplified public tender offer underway. They seek to increase their shareholding to 200%. They do not need parliament to legislate to achieve that goal. And the government does not plan to change the group scope of operations.

Of course, the owners will be on parliament to determine what they want to legislate on or not. But the government's plans are clear and the relationship between the company and its governmental shareholder is clear as well irrespective of the legislative agenda. This is still early days, the European Commission has started a consultation process. The answers were submitted only last week, of course.

In terms of market design, new market design will need a consensus at the EU level. That's how market rules work on European markets such as electricity. That's how things work. As a company, obviously, we seek to comply with the legislation and be part of that EU electricity market, because that's a good thing for the French market regarding this winter. The fact that it's possible and easy to trade electricity between EU countries. There was a drop in airport in France and other countries in EU were affected by the gas crisis.

Now the EU market means more flexibility and every EU citizen is benefiting, including French citizens, because we have the option to go fetch electricity wherever we can find it. We can do it quickly, and we can do it all the time. So of course, we need to supplement that market during parliamentary auditions, I had an opportunity to issue an opinion regarding the regulatory mechanism that applies in France via the RAEMH. Some people called it at the end of its [Indiscernible]. But we need to find a way through those discussions, and we will be part of that effort, and we work together with French authorities to find the best possible way forward.

So we want to give the best outlooks possible for the French market and French consumers, so they can have access to competitively priced electricity. Electricity markets have been very hard hit by fluctuations in gas prices. And we want to have a better long-term outlook. So that's our goal in the course of these discussions.

Unidentified Participant

Thank you very much.

Unidentified Participant

Hello. I’m from Reuters. Could you give us some idea about your investment trajectory over the coming two to three years? And my second question relates to the [Indiscernible] project that's now being dropped, but which also specific treatment for non-renewable energies, the idea being to accelerate EDF's involvement in renewable energies. Do you think it's going to be necessary to take a fresh look at this activity cluster to avoid falling behind EDF competitors for renewables?

Luc Remont

Thank you very much indeed. I will begin with the second question, perhaps. You said yourself that the [Indiscernible] project has been dropped. This has been confirmed by several members of the government already. And we are now defining a road map, the Prime Minister wrote to me right at the beginning of my appointment, asking me to produce a draft road map for the first half of this year. We're busy working on that. That road map's aim is to develop for all of the business lines of EDF, which are essential for the group's success. And I think I made my point very clear before accepting the job. The group has to have diversified production, a diversified distribution grid and meet clients' needs. We are going to continue working on the road map with those goals in mind.

I would just like to say that regarding the specific question that you asked about stepping up the development of one other type of activity. This is something that's already been taken on board in our development model their activities where we work with partners. So we don't necessarily need systematically to have 100% ownership of the assets that we're developing. There are lots of activities where we have partnerships, and that's normal development modality for a group like ours, and it also makes a group like ours flexible, its standard business practice.

And this is part of the decisions that we've taken when we're asked about the legislative or regulatory framework that may apply to our capital and to our assets flexibility is normal business practice everywhere and we're already applying it to a large number of our activities.

Regarding the investment trajectory, I don't know, perhaps Xavier would like to answer. We can't really give you specific figures for the coming years, because -- but this is going to be part and parcel of this road map we're working on, but you've heard the government’s statement and the statement made by the French President, who said clearly that significant investment is going to have to be made, particularly nuclear, but not only in nuclear. Xavier?

Xavier Girre

Yes. Perhaps I could just come in to supplement what you've said, Luc. I'm not going to give a figure about 2023, 2024 investments. But I think we need to keep in mind that the EDF is at a turning point in its history, where significant investments are going to have to be made, particularly development investments. If you look at the 2022 figures, the actual figures, which I think are significant for coming years. We invested EUR6.4 billion without the sales plan, that's net investment. Of those EUR7.5 billion were investments for maintenance and EUR8.9 billion were development investments.

Aiming to generate new activities, new capacities. This is renewable energy, for instance. So the connections of new renewable energy producers through the energy's grid, new nuclear capacities. So EUR7.5 billion, maintenance; EUR8.9 billion for actual development total EUR16.4 billion in 2022. And this, I think, is telling for the current and future trends.

Unidentified Participant

Thank you, Xavier.

Unidentified Participant

[Natalie, AFP] (ph) My first question, could you put a figure on the cost of the strikes in the autumn. And do you have any estimate for the effect of strikes against the government's retirement plans at the beginning of the year? What do you think about the reform of the ISRN that's been suggested? And my third question, what about 2035, the objective set for EPR 2, Mr. Remont said 2034 at one point, 2035 and 2034.

Luc Remont

Regarding the cost of the strikes in the autumn, I wasn't here then, and I don't have the figure. Regarding since the beginning of the year and possible cost of strikes. I'd just like to say that apart from some very specific and limited cases social dialogue is continuing within the company and social disruptions don't concern just EDF and hasn't had a significant impact on our generation capacity and has not negatively impacted our ability to supply the country with electricity.

And I think that all of our workforce have acted in a responsible manner. They are entitled to strike, but at the same time, they have borne in mind the fact that our company has a public service mission. And I know that they're very attached to ensuring that we can fulfill that mission.

Regarding the ISRN reform, I can't -- the government wants to change the structure of an authority that monitors and controls EDF. But I can't really have an opinion about how the government wishes to organize that activity. I understand what the government's decision attention is, but I can't, obviously, give an opinion on that for obvious reason, almost by definition -- sorry, EPRs 2035.

We have hard at work. There's a lot to be done. We need to work on this. There's a public debate underway. That's of some significance. And there's a lot of work ahead of us to make sure that all of the industrial nuclear sector can have a boost and be shored up so that we can meet that target. We've understood what the target is, and we will do everything in our power to make sure that we meet it.

Unidentified Participant

Could you give us a figure on the second phase of the [Indiscernible] operation?

Luc Remont

The first phase is over, but we've been waiting for the second one. We have told time and time again, it's going to happen. We're still waiting. I don't know if we have a figure for the second phase, do you have a figure for that?

Xavier Girre

We'll have a look. I can't give you a figure off the top of my head. I'm sorry.

Unidentified Participant

[Indiscernible]. I'd like to know whether you could tell us whether the -- when the study on the 8 additional EPRs feasibility will be concluded? And can you communicate on capacity objective that were for installed renewable energy capacity for the end of this year? And what about the funding for the six EPRs?

Luc Remont

We were told about the leeway are savings account, a model a bit like the one that's been used for Sizewell with the base asset -- regulatory asset model. I can't give you a figure on the feasibility study for the 8 additional EPR power plants. We've already got a lot of work for the 6 first ones, and that's obviously our priority. I don't think that we have a figure regarding our installed capacity for renewable energies at the end of 2023. But if we have a figure, we will communicate it to you.

And your last question a lot of work remains to be done on the financing as well, obviously. I'm sure you will understand that this is related directly to changes in European market design. It's the whole business model of electricity operators, including EDF that will be affected or may be redefined depending on the market design rules that are agreed. Obviously, all of that will have to be taken into account when defining the financing model for coming -- upcoming EPR power plants.

Unidentified Participant

Could you come back to the [Indiscernible] operation?

Xavier Girre

Just to remind you that the cost estimate for the program is EUR50.2 billion for 2014, 2025 and the second phase of the program 2022, 2028 is estimated at about EUR33 billion.

Unidentified Participant

I have three questions. I'd like to know whether you consider that your EUR64.5 billion debt is sustainable? Or do you feel you have to scale it back in the medium term? If so, do you think your activities in Italy, Edison are part of your core business? Or could they be sold off?

And the third question relating to Sizewell. The idea of bringing in other investors to help finance this project is mentioned. Given the cost overruns and also schedule overruns, what kind of investment investor would be prepared to take on that kind of risk?

Luc Remont

Regarding sustainability of the debt, I think Xavier will be able to answer with more -- more specifically than I can. Clearly, the 2022 debt is a legacy. It's related to the stress corrosion, industrial problem that we've been confronted with, and that legacy is a high level of debt. I think our ability to get to generation back on stream and to improve fleet availability over the coming years will help us to reduce the debt level. Of course, objective over the long-term is to stabilize it and to gradually reduce it so that we have more leeway for future investments. So that's the first question.

The second question, I noted that you mentioned Edison, but you could have mentioned others. Our international activities have contributed to a very large extent in 2022 to the group's resilience. And I think it will be a mistake to consider that just because in one year, France was confronted with a major industrial problem, which has now gradually been overcome, but we should deprive ourselves of business activities in other geographies, which took a long time to set up. I've been following Edison for some 20-years already.

So after a long time, these business activities jewels in the group's crown, I think it would be a strategic error in order to cope with a short-term problem related to an industrial problem that's gradually being sold that we should no longer continue to develop the group with high-level performance activities elsewhere, and they've contributed to the resilience of the group in 2022.

Regarding Sizewell, work is underway. EDF is delighted that the British government has taken the decision it has to invest in the project. And we are working closely with the British government. Work is underway, as I say, in order to define the investment and investor profiles that would help us move towards the final investment decisions for this project. But it's too early in the day to say more at this stage.

Xavier Girre

Regarding our debt, needless to say, our debt level is something that we're taking very seriously, as Luc Remont rightly said, from the financial standpoint, that's our legacy beyond 2022. There are three things that I would like to reference in order for us to control, stabilize and gradually deleverage. First of all, industrial performance, in particular, our generation level. Secondly, operational excellence is another major driver. Luc has already referenced the project that he has initiated to help the group further improve its operational excellence. And thirdly, our activity model. Market design issues are key to helping EDF. Fund the investments that are necessary to embrace the energy transition.

A little bit about ground information. S&P reaffirmed the BBB rating with a stable outlook. And we -- it is really important for us that this rating is being maintained. It is consistent with the group's activity, consistent with a lot of industry players, and we seek to make sure that this rating will remain unchanged. And also, the ratios that we introduced, net financial debt-to-EBITDA ratio and economic debt-to-EBITDA, we seek to improve those ratios further relative to 2022.

Unidentified Participant

Thank you.

Operator

The question from someone in the room and then questions [Indiscernible]

Unidentified Participant

Hello, thank you. I trust my colleague's question regarding the financing those, CFD or other types of contracts. And I have two other questions. The general spectrum, EDF suggests replacing the lid over the EPR tank during the next 10-year visit around 2035. The [Indiscernible] wants to push that back until the end of the first few cycle, so as opposed to doing it at the end of 2024. Do you have a preference and why?

Second question. The general inspector also suggests reducing the duration of the fourth 10-year inspection by removing a proration that are not security is safety driven in any major way. So what are your expectations on that front?

Xavier Girre

I'd like to apologize your colleague if I have failed to address her question specifically. I think it's too early to have a definite opinion regarding the depth of instrument -- kind of instruments that need to be incorporated into the new market design. There is a consensus shaping up at the EU level with regards to the need for long-term instruments. PPAs, for example, of either CFDs, which come in different shapes and sizes, but discussions need to take place at the EU level before consensus needs can be achieved.

As far as we're concerned, as a company, what do we want? We seek to develop our strategy and what we need is long-term visibility. Needless to say, we want to continue to be able to serve our customers and provide them with products and solutions that will help them dampen market volatility and long-term contracts make that possible. Now the actual shape that these contracts will take a to be determined. When it comes to the recommendations of the Inspector General, which just came at when it comes to the lid above the tech work is underway.

With regard to that vessel lead, it is against that backdrop that we will determine the proper the timetable when it comes to reducing the duration of 10-year inspections, obviously, that's the goal. It's not what we do during those inspections that has or can be reduced. We need to look at the list of things that need to be done as part of that inspection and boiling it down to whatever is absolutely necessary to nature safety and security. But this is part of our STAR 2025 program. We will continue to strengthen that program.

We will continue those -- we will continue to make those 10-year inspections as short as possible so that we can work as efficiently as possible and make the most of our time. On those 2 fronts, replacing the vessel lid or the vessel head. Regarding the timetable, if we look at our history, you may remember that the decision was made to replace that head in 2025 to have at least 1 cycle complete for the Flamanville reactor. But as you all know, since we will start Flamanville 2 in 2024, it is important to have a few cycles and are built before we can replace the vessel head and back it up against the total inspection -- total initial inspection, which is absolutely necessary whenever you start up a new reactor.

So as the -- as our Chairman and CEO just said, we're having a discussion with the ASM nuclear safety authority to find the right date so that Flamanville can operate a full cycle first. And also, we want to back that up with a more general inspection. When it comes to the second recommendation from the general sector. That has much to with the fact that the fourth 10-year inspection represents 5x more work, 5x more resources and commitment than the previous inspections, necessary to jump from 30 years to 40 years.

The amount of work to clear the gap between 40 years and 50 years is such that the General Inspector is wondering whether or not it's better to divide things differently. So that we will have less work to do in so little time considering the stress that our sector is under. So we have started working together with the ASN authority, the goal being to simplify and streamline as much as possible that periodic review and work as part of the tenure inspection. And we are working for the -- we're working for the visit for the inspection that will help us jump from 30 years to 40 years.

And of course, as we do that, we will comply with all of the post-Fukushima safety and security improvements that we believe are necessary without necessarily overloading this sector, which is under so much stress already. So we need to look to the Inspector General's report and also our own assessment of the situation. Thank you very much, [Indiscernible]

Operator

[Operator Instructions] The clock is ticking, so we have time for one more question. Maybe a question from a participant online. [Indiscernible] Hello? what is the estimated shortfall from the energy price cap measures?

Xavier Girre

On that front, we have an appendix on that topic. Maybe we can display it. But I think the 2 aspects that we need to look at, first of all, the actual mechanism, the ARENH mechanism, plus 19.5%-megawatt hour the additional megawatt hours that were allocated to alternative energy producers. And on the right-hand side, at December 30, you see the final impact of EUR8.1 billion. That's the amount. There's a negative impact on the group's EBITDA. Also, we have reference to freeze on profit margin to the tune of EUR0.6 billion.

Now the question that's been asked us to do with the cap on energy prices in the strict sense of the word, capping it at 4%, capping the IRR at 4%. This was estimated at EUR0.9 billion initially, as you can see on the left-hand side. Then ultimately, a decision was made as part of the 2023 Appropriations Act, which was adopted in December 2022, that this would be addressed via DC SBE mechanism.

And this meant that we accounted that as EBITDA, but the cash effect will be seen in 2023. And this is why from the EBITDA standpoint, the cap on energy prices did not have an effect in ‘22. But from a cash point of view, it did have an unfavorable effect. And as we can see here, -- this came to EUR1.4 billion. So that's the unfavorable cash impact in 2022.

Luc Remont

Thank you, Xavier. How about we call it a day? We have many more opportunities to spend time together. Thank you very much for your attention. Thank you for caring about our group. And needless to say, I'm looking forward to meeting you again. For the rest of our story, looking at our operational performance and also how we're building the future of our group, thank you very much.

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Electricité de France S.A. (ECIFF) Q4 2022 Earnings Call Transcript