Tuesday, September 17, 2013

EDF: Carbon-Reduced Bargain

According to its corporate web site, France’s EDF International (EDF: Paris) is “leading the drive toward a carbon-free world.”  EDF claims to have reduced atmospheric emissions from its fossil fuel-fired power plants by 50% of the last ten years.  The accomplishment is the result of converting oil- and coal-fired plants to combined cycle gas-fired technology.  New plants coming on-line are sidestepping the carbon belching coal and oil fuel sources for clearer gas fuel.  Gas-fired power now represents 10% of EDF’s total generating capacity.

However, coal- and oil-fired plants represent less than a fifth of EDF’s generating capacity.  The majority of EDF’s contributions to a cleaner tomorrow originate from alternative power sources.  Hydroelectric represents 16% of the company’s power generating capacity or about 22 gigawatts.  Renewable technologies provide another 5.6 gigawatts.  Nuclear power technologies are EDF’s key to the carbon-free world.

St. Laurent des Eaux
The company is a giant in the world of nuclear power generation.  The company has total nuclear power generating capacity near 140 gigawatts, of which 53% is sourced from nuclear facilities.  EDF’s installed nuclear power capacity is 75 gigawatts, coming from a total of 438 nuclear reactors in three countries.  The majority or 58 reactor units are on EDF’s home turf in France, but EDF has a footprint of 15 nuclear reactors in the United Kingdom and another 5 in the United States.

EDF makes a point of its carbon-free power generation capabilities.  Its corporate website claims that one ton of production from its hydroelectric dams can replace 13 million tons of oil used in oil-fired power plant.  One gram of uranium used in EDF nuclear reactors displaces 3 tons of coal.  Importantly, EDF also claims that as much as 96% of nuclear fuel used in its reactors is ‘renewable,’ addressing a key point of made by nuclear critics.

Uranium fuel is a significant cost for nuclear power generation.  A good share of EDF nuclear reactors are based on the pressurized water design.  However, the new units under construction will use the European pressurized reactor design, which typically uses 20% less fuel than the old pressurized water design.  EDF has three new reactors under construction:  one in France and two in China.  A fourth site in the United Kingdom is under study. 

It should be no surprise then that EDF is a member of NuStart Energy. The group had its sights on getting a nuclear power plant construction and operating license from the Nuclear Regulatory Commission(NRC). In terms of nuclear experience it is EDF that is likely leading NuStart rather than the group paving the way for this French nuclear leader.

Just the same the company's experience in the U.S. is swiftly coming to a close.  In July 2013, EDF announced an agreement with its partner Exelon (EXE:   NYSE) to pull out of their joint venture called Constellation Energy Nuclear Group (CENG) by the year 2013.  The venture operates five nuclear plants in the United States with a total capacity of 3.9 gigawatts.  EDF is exercising a put option that allows EDF to sell CENG to Exelon at the fair value of its stake over a four year period beginning January 2016. EDF will also receive an exceptional dividend estimated at $400 million from CENG.  EDF cited economic realities as its motivation in exiting the U.S. market.  The move suggests that some of the smartest nuclear operators in the world do not expect to see a reversal of the economic circumstances in the U.S. that favor natural gas.

Among electric utilities, EDF International represents one of the closest to a pure play on nuclear power generation.   Sales totaled 72.7 billion euros in the year 2012, providing 16.1 billion in EBITDA.  The current year 2013, appears to be off to a good start with revenue at 39.7 billion euros and a 10.7% year-over-year growth rate.  It is also notable that the EBITDA margin improved to 24.4% in the first half of the year 2013, compared to 22.2% in the year 2013. 

U.S. investors will have to cross the Atlantic to the Paris bourse to buy shares.  It might be worthwhile.  The company has a generous payout policy, increasing the dividend to 1.25 euros in 2012.  The current yield is near 5.8%.  EDF shares are current trading at about 12.0 times earnings per share.  Considering the attractive dividend yield and impressive growth rate that valuation seems like a bargain.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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