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Bloomberg News: Nuclear firm Areva SA confronts cash crunch

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https://www.bloomberg.com/news/articles/2015-02-27/france-s-nuclear-decline-exposed-as-areva-confronts-cash-crunch

(Bloomberg) -- For decades France’s nuclear industry was seen as a source of economic strength, providing cheap power for factories, high-tech exports and tens of thousands of well-paid jobs. Today, it’s looking more like a liability.

Electricite de France SA, the world’s largest nuclear operator, must spend $63 billion over the next decade to keep the country’s aging fleet of 58 reactors running safely. More urgently, nuclear engineer Areva SA, touted as an export champion for a new atomic age, has lost billions from a project in Finland and investments in African uranium mines, raising the prospect of a state bailout.

“French nuclear has lost competitiveness due to mismanagement, technical difficulties and market changes after the Fukushima disaster,” said Juan Camilo Rodriguez, an analyst at Alphavalue SAS. The financial “sickness” at Areva could prove contagious to the whole nuclear industry, he said.

France relies on nuclear power more than any other country -- it generates about three quarters of electricity. The government, which controls EDF, Areva and atomic researcher CEA, plays a critical role. Addressing the industry’s funding needs has been made more difficult by an economic slump, which has resulted in near-record joblessness, three years of virtually no growth and a budget deficit in excess of European Union rules.

“The situation is difficult for Areva,” French Energy Minister Segolene Royal said Monday, just hours after the company shocked investors by saying losses for 2014 would be about 4.9 billion euros ($5.5 billion), more than its market capitalization.

Japanese Meltdown

The company hired Credit Suisse Group AG, JPMorgan Chase Co., Citigroup Inc. and Rothschild & Cie. to help with its restructuring, French magazine Challenges reported this week. The government agency that manages the state’s shareholding has hired Erik Maris of Messier Maris & Associes.

Areva has been in a downward spiral since the meltdown at Fukushima’s atomic plant in Japan shook the global industry in 2011. The nuclear engineering company, which services existing reactors and supplies them with fuel, has lost about 75 percent of its value since as nations pulled back from atomic projects.

Last November, Areva’s credit rating was reduced to junk status by Standard & Poor’s after it abandoned financial targets. The company blamed its losses on construction of a new reactor on a Finnish island, delays in restarting Japanese plants and a worsening outlook for other export orders.

Before Fukushima, France’s atomic industry was readying for a nuclear energy renaissance. Former EDF Chief Executive Officer Pierre Gadonneix predicted France’s flagship reactor, the giant EPR model, would sell “like hotcakes” around the world.

Over Budget

Fukushima ended the prospect of new reactors in many countries, including Italy and Switzerland, in addition to damping a number of potential export markets for Areva and EDF. Germany decided to shut all its nuclear reactors.

Not a single EPR has yet fired up as construction projects in France’s Normandy region as well as in Finland and China are behind schedule and mostly over budget.

One remedy for Areva’s problems would be closer ties with EDF and CEA, Royal said. Closer cooperation could cut costs across the industry and even bring the relative strength of EDF to bolster Areva. The concern is that would spread Areva’s problems more widely.

“Areva’s difficulties are clearly not positive for EDF and for the French nuclear industry,” Bryan, Garnier & Co. said in a report earlier this week.

‘Financial Balance’

Goldman Sachs Group Inc. warned this week that any financial transaction with Areva would create risks for EDF, Europe’s largest power generator and the biggest source of dividends for the French government.

EDF is already grappling with its own challenges to achieve “financial balance,” Chairman and CEO Jean-Bernard Levy said earlier this month. EDF declined to comment further for this story.

The company is having to borrow to maintain dividend payments while spending more on maintaining reactors. At the same time, the government is trying to hold down power prices for industrial and residential consumers.

EDF’s existing partnership with Areva, its biggest supplier, has also hit operational road bumps.

Last July, EDF halted one of its nuclear reactors near the southwestern city of Bordeaux to replace three worn steam generators. The equipment made by Areva could have been installed within a few months. Instead, France’s regulator blocked the work because Areva failed to provide the necessary safety guarantees, according to a report on the agency’s website.

Normandy Delay

Now the reactor may not begin producing electricity again until mid-year, costing about 1 million euros a day in lost revenue for EDF.

The two companies’ flagship construction project in France is also troubled. In November, Areva and EDF announced a further delay for the Normandy EPR start up to 2017, a decade after construction began. With a budget more than twice what was initially proposed and five years behind schedule, EDF blamed the latest delays in part on late equipment deliveries from Areva.

“Nuclear is an important, but delicate sector,” said Gerard Mestrallet, chairman and CEO of French utility GDF Suez SA, which operates reactors in Belgium and has a partnership to build smaller reactors with Areva in Turkey.

“EPRs are very big and costly at a time when electricity prices in Europe and the U.S. have dropped,” he said.

Nuclear ‘Banker’

In 2010, Mestrallet pulled out of a project with EDF to build an EPR at Penly, France. At the time, he said he didn’t want the role of a nuclear “banker.”

Against the backdrop of Areva’s financial uncertainty, a long-delayed law that would reduce France’s reliance on nuclear power is in the Senate. Prospects for Areva and EDF will be affected by the decision of lawmakers on whether to shut some reactors.

Whatever the details of the legislation, nuclear power remains essential to France. As reactors built in the 1970s and 1980s age, the government must decide how to better manage an industry that threatens to be a drain on the cash-strapped country.

“The choices around nuclear are more politically than economically driven and in the mid- to long-term may take both groups along the same downward path,” said Alphavalue’s Rodriguez.