Electricité de France S.A.

Xavier Girre - Group Senior EVP of Group Finance

Vincent Ayral - JPMorgan Chase & Co. Emmanuel Turpin - Societe Generale

Thank you. Good afternoon, everyone.

I'm very pleased to welcome you to this conference call. I will walk you through our first quarter sales, starting with the main highlights of the period.

And I will close my presentation with our financial outlook. As usual, I will leave as much time as possible for the Q&A session.

Let me start with the key strategic highlights on Slide 3. Over the last few months, we have accelerated strategic allocation of capital to our renewable activities.

We have done so in 3 ways. First, with the announcement of the contemplated acquisition from energy stake and onshore wind specialist, Futuren.

This transaction will complement ideally our activity in several locations and enhance our ability to capture opportunities in repowering. The market expected to grow significantly in the years to come.

Second, we announced end of March that EDF Énergies Nouvelles joined the Masdar-led consortium developing the 800-megawatt third phase of a solar park in Dubai, one of the world's largest solar initiatives. Third, we're delivering projects at an intensified pace.

We commissioned 189 megawatts of gross solar and wind capacity over the quarter, mainly in India. In the U.K., 100 megawatts of wind capacity was commissioned in April and we initiated construction of 242 megawatts of new projects over the quarter, mainly in the U.S.

Second, we also announced a significant development in services. We signed a long marked contract for the maintenance of CERN's cooling facilities.

In Limoges, a 200,000-people city in France, where Dalkia signed the extension of the district network. And also, Citelum, Dalkia's subsidiary, made the acquisition of a cooling system expert in the French Mediterranean area.

Third point, as regards nuclear new bills. Flamanville 3 reached a significant milestone with the beginning of the system performance testing for the whole plant in accordance with the timetable announced in September 2015.

And in Taishan, a new set of key tests has been started with a goal to load fuel in H2 flotation 1 and in H1 2018 flotation 2. Considering now key achievements and performance plan.

First, we successfully completed the capital increase during the first quarter as we had announced. Its rights issue resulted in the issuance of 633 million new shares, generating final gross proceeds slightly over €4 billion.

As you know, the French state had stated its intention to subscribe for €3 billion. Market demand reached nearly €1.9 billion for the €1 billion open to subscribe.

The market subscription rate therefore reached nearly 186%, a clear sign of success of the transaction. The proceeds will support the group's development over the next 4 years under the CAP 2030 strategic plan while enhancing its financial flexibility.

Secondly, our disposal program progressed significantly since the 1st January 2017. We finalized the transaction on the 49.9% stake in RTE, with Caisse des Dépôts and CNP Assurance.

The valuation at €8.2 billion is fully in line with our initial announcement. And with the finalization of this sale and of the transactions on EDF DÉMÁSZ and of EDF Trading's coal and freight activities, the group has executed close to 2/3 of its €10 billion disposal plan spending over 2015 to 2020.

Now moving to Slide 5, with financial highlights of this first quarter of 2017. First, on the dividend.

We had announced a proposed payout ratio of 60% of net income, excluding nonrecurring items and adjusted for hybrid's remuneration. With the rights issue now completed and the number of new shares known, the Board of Directors was in a position to set the proposed terms of payments of the balance of the dividend for 2016.

This amounts to a final dividend of €0.40 per share for shares entitled to the ordinary dividend, taking into account the interim dividend of €0.50 per share paid on 31st October 2016. The x dividend date would be the 6th of June 2017 and payment date, 30th of June 2017.

The French state confirmed it will opt for the proposed option to receive this balance in new shares. Second point, on long term financing, an area where we're active and innovative, this time, with a €1.1 billion senior bond issuance on the Japanese market in January.

This Samurai bond issuance of JPY 137 billion included 2 green tranches, totaling JPY 26 billion which opens the corporate Samurai green market and confirmed EDF's active participation in the development of green bonds as financing instruments of the energy transition. To date, EDF has issued the equivalent of €4.5 billion in green bonds, confirming its status as a reference corporate issuer.

It also included a 20-year tranche which represents the longest maturity ever issued on the samurai market, in line with our financing policy to extend and align the maturity of our gross debt with our long dated effect. Coming now to our actual sales figures for the first quarter of 2017, with our operating highlights on Slide 6.

As regards first sales performance, in organic terms, group sales were flat versus Q1 2016. Let me briefly mention 3 main drivers at this stage.

French generation and supply, where sales under the ARENH mechanism, contributed to the 1.7% increase in the segment sales. Dalkia, where sales grew 15.4%, mostly under the favorable impact of higher gas prices.

And lastly, Italy, where sales were down 10.4% due to lesser proceeds from derivative hedging contract with no impact on profitability. I will come back to these trends.

Secondly, as regards operating performance, nuclear output is down 7.6 terawatt-hours in France due to additional outages compared to the same period last year. No surprise here, but I will come back to this point in more detail.

In the U.K., the nuclear fleet continues to perform strongly. Output is up 0.3 terawatt-hours versus Q1 2016.

Focusing now on the sales results for the first quarter, I'm moving to Slide 7. Group sales came to €21.1 billion and tranched in organic terms.

The revenue trend is contracted. Let's quickly move to each segment and starting with generation and supply in France on Slide 8.

Sales amounted to €11.4 billion, up 1.7% compared to the first quarter of 2016. First point.

Over the first 3 months of 2017, the colder weather drove higher consumption than in Q1 2016. But this was more than offset by the sourcing costs to meeting the demand and by the leap year effect which was favorable in 2016.

Overall, this carried a €171 million negative impact on sales. As regards to the second block, the 0.5% reduction in regulated sales tariffs in August 2016 had a negative effect for minus €37 million.

Third block. Intensifying competition in French supply triggered the 3.4 terawatt-hours reduction in sales volumes.

This was offset by increased consumption of our customer base on top of the weather effect and by positive price effects as well as more sales on the wholesale market. Overall, the impact on downstream market sales is nearly balanced at plus 18 -- €17 million.

Fourth and fifth blocks. The effect of ARENH subscriptions on sales of the first quarter was twofold.

They carried a €849 million positive impact, corresponding to the sale of 20.2 terawatt-hours at the ARENH price which had no equivalent during the same period last year. Conversely, volumes supplied under ARENH mechanically reduced the net volumes sold on wholesale markets.

This negative impact, together with the reduction in market sales linked to the lower generation output, amounted to negative €895 million. As regards last block, just one last point on this segment.

Volumes sold on the market under our purchase obligations of favorable power benefited from a higher market price which carried €159 million positive impact. Turning now to Slide 9.

The upstream/downstream balance shows on the right-hand side a shift in volumes from market current sales. The 2-terawatt hours reduction in demand from end customers reflects the slight erosion of market shares in B2B and B2C.

On the generation side, increased thermal output partly offset reduced hydro and nuclear generation. This brings me specifically to focus on French nuclear generation on Slide 10.

Over the first 3 months of 2017, cumulative output was down 7.6 terawatt-hours at 108.5 terawatt-hours. Output was affected by the unplanned outage of Flamanville 1, offset by the good performance of directors online over the period.

Compared to Q1 2016, fleet availability was mainly penalized by two points, firstly, by extended outages at Gravelines 5 and Fessenheim 2 linked to Le Creusot manufacturing quality issues; and secondly, by outages linked to the last additional controls on steam generators to address the carbon segregation issue. With that being said, I highlight that all 18 reactors, whose steam generators were controlled on carbon segregation, have been authorized to restart by the nuclear safety authority, ASN .

The last reactor concerned was back online beginning of March. Furthermore, ASN greenlighted EDF's proposed technical solutions that will allow Bugey 5 and Gravelines 5 to restart at the end of June.

In addition, we're confident that Fessenheim 2 is in a position to restart during December based on the nuclear safety tests carried out on the steam generator. Therefore, 2017 output should stay below 2016 over the next few months, but a progressive catch up is expected over the third and fourth quarters since the corresponding period last year had been affected by carbon segregation controls as well as Bugey 5, Gravelines 5 and Fessenheim 2 outages.

Accordingly, the group confirms its 2017 target range for French nuclear output at 390 to 400 terawatt-hours. Moving now to French hydro output on the next slide.

As you can see on the right-hand side, we experienced very poor hydro conditions in January and February compared to the same months last year. Dispatch of hydro work capacity reached a high level at the beginning of the year to meet the consumption peak.

But over the quarter, output was down 1.5 terawatt-hours, driven by below normal hydro conditions on average. As regards French regulated activities, sales in this segment grew 1.6% in organic terms to €4.9 billion.

This positive trend was driven by the distribution tariff raised in August 2016 and by a slight increase in consumption due to a higher number of workdays compared to the same period last year. Looking now at the U.K., where EDF Energy sales are down 1.8% in organic terms to €2.6 billion.

Sales numbers in the segment continued to be penalized by lower realized prices on nuclear output. This was partly offset by the level of the nuclear output of 0.3 terawatt-hours at 16 terawatt-hours, mainly due to the favorable effect of the refueling schedule compared to the same period last year.

Yet, this is another good operational performance displayed by the British nuclear fleet as output in Q1 2016 was already strong. In supply, EDF Energy's B2C segment continues to show good resilience, with a stable customer base despite a challenging competitive environment.

In Italy, on the next slide. Sales amounted to €2.8 billion, down 10.4%.

Revenue is lower than in the same period of 2016 due to lesser proceeds from derivative hedging contracts with no impact on the profitability. However, demand and prices of gas and electricity were up in comparison with Q1 2016 due to temperatures below the seasonal average and the lesser availability of electric power outside Italy, in particular, in France.

This offset the fueling volume of sales and electricity activities. In hydrocarbon activities, sales were supported by a growing gas demand and the positive impact of Brent prices on the E&P business.

Moving to the Other Activities segment. We first focus on EDF Énergies Nouvelles.

EDF EN sales were roughly stable in organic terms. As regards generation, although wind condition in France and the U.K.

as well as 2016 asset disposals penalized generation sales, this was completely offset by the impact of new net capacity commissioned in 2016 and good wind conditions in U.S. As a whole, generation reached 3.3 terawatt-hours during Q1 2017, growing by 4.3%.

The activity level in project construction and commissioning remains high, with 1.8 gigawatts under construction and the growth commissioning of 189 megawatts of wind and solar capacity over the period, mainly in India. Gross installed capacity has reached 9.8 terawatt-hours at the end of Q1 2017 in comparison with 1 point -- 9.1, sorry, in comparison with 9.1 terawatt-hours at the end of Q1 2016.

Looking now at the entire Other Activities segments on the next slide. Sales were up 5.9%, reaching close to €2.2 billion.

The 15.4% increase in Dalkia sales was driven first by higher gas prices and favorable contract indexations. In addition, weather carried a favorable impact on heat sales volumes.

EDF Trading experienced a 30.6% organic drop in the trading margin over the quarter. It was penalized in Europe by the mild weather conditions of February and March, triggering low volatility and an unfavorable price environment.

Lower prices and the weather also affected the coal and Canadian gas businesses. And moving finally to the Other International segment, next slide.

Sales in the segment were down organically by 2.3%, slightly below €1.5 billion. In Belgium, sales were stable.

Gas sales were hit by lower prices and volumes. Lower prices also had a negative impact on electricity activity, only partly offset by higher sales volume.

But sales benefited from the continued investment of the group in both wind capacities that reached close to 300 megawatts and the energy services. Sales were up 1.5% in Poland, mainly boosted by the weather impact and the effect of strong commercial efforts on heat and electricity sales volumes.

Brazil sales were down under the negative impact of the annual PPA tariff review after a very positive revision in 2016. Sales also suffered from reduced dispatching by the TSO.

Last words on this segment. Keep in mind that numbers no longer include EDF DÉMÁSZ activities as the subsidiary was sold at the end of January.

Moving now to our financial guidance. I'm confirming our targets for both 2017 and 2018 and let me outline them again.

In 2017, we aim for nuclear output range between 390 and 400 terawatt-hours. We target an EBITDA between €13.7 billion and €14.3 billion at 2016 exchange rates.

We continue to aim for a net financial debt at or below 2.5x EBITDA. And our dividend policy remains based on the payout ratio between 55% and 65% of net recurring income, adjusted for hybrid coupons.

In 2018, we aim to reduce the OpEx by €0.7 billion in comparison with the 2015 level at constant scope, exchange rate and high positive expansion discount rate and excluding change in operating expenses of service activities. We aim to reach roughly €10.5 billion net investments, excluding Linky, new developments and asset disposables.

2018 EBITDA is expected at or above €15.2 billion at 2016 exchange rates. We aim for positive cash flow, excluding the net impact of Linky, new developments, disposals, interim dividend for fiscal year 2018.

As you know, we detailed certain key assumptions underpinning the target and, more specifically, to factor in the drop in interest rates and its adverse impact on our long term nuclear provisions. And this assumes also at least €36 per megawatt hours for the 2018 volumes that remain to be hedged after end of 2016.

And net debt-to-EBITDA ratio is still at or below 2.5x, is also in our guidance. And finally, we're targeting a net income payout ratio of 50% for fiscal year 2018, excluding nonrecurring items.

Last point for my presentation today, our prospects beyond 2018. Reductions in operating expenses will continue with a projected saving of at least €1 billion in 2019 compared with 2015.

And we also reach our target of €10 billion asset disposal plan initiated in 2015 and targeted in 2020. Our net income payout ratio, excluding nonrecurring items, will be within a range of 45% to 50%.

I thank you for your attention. And now, we're ready for your questions.

Just before we take the first question from the phone, we're ready here to take your questions, but as a reminder to our participants, we'd like you to simply limit yourself to ask 2 questions, please. So please limit yourself to 2 questions.

We're ready for the questions coming from the phone. Thank you, operator.

If we restrain off to 2 questions, I will have 1. In France, we had the elections now.

We know our President is Mr. Macron.

He has talked about the CO2 floor as part of his program. We know that this project was shelved and the Hollande government for being discriminatory.

Do you think there is a good chance, indeed, to have a future floor in France implemented under Macron? And could you give us a bit of color on how all of these would work?

So that's the question 1, CO2 floor in France. Second question going to the U.K.

We have seen political intervention is coming to the U.K. supply on the SVT tariff.

Could you give us a bit of color of what is your position there? Has your recent price increase been a way to position yourself?

And where do you see the potential impact in terms of size?

Thank you. Thank you, Vincent, for your questions.

First, as regards the new elected President in French program and specifically, as regard the carbon floor price, yes, Emmanuel Macron said some weeks ago that he intends to increase the CO2 price by setting a carbon floor price. He referred to a level of €100 per ton in 2030.

So clear, this is in the heart of his program on energy transition. And now, we'll see how it will be implemented.

I'd like also to say that there are other points in his program or public statements, including the development of the regulatory board through investments. Including also, a clear target for energy mix, in the long term, are not specifically stated at the 2025 horizon.

So these points are positive and are clear points. Secondly, as regards the U.K.

tariff. I think it's important to wait a bit to have a clearer view on how the cap that has been announced will be implemented.

As you know, it's a very important point to see how it will be implemented. What I can say today is that we have a very significant part of our customers.

We do not -- which are not at the SVT tariff but which are on the fixed tariff. It's more than 42% of our customers.

And as you have noticed, I mean, some studies show that we will not be certainly the most impacted company if such a cap is set. So this is where we're today.

I will have 2 questions, please. First of all, starting on the supply business in France.

So your Q1 statistics showed us there continues to be some market share erosions for you in electricity. Could you come back to us on what measures you are taking to stem this erosion?

Maybe update us about the launch of the new services that you are -- told us about last year? And also, what progress you've made in terms of gas supply that's on the French supply business.

And moving on to my second question about offshore wind in France. You mentioned the renewed ambition of our new President regarding renewables reminds us that you were awarded offshore wind project in France 2 years ago.

I couldn't help notice that decrees were published in the very last few days of the current government, including one that improves the risk profile for offshore wind developers in France, in particular regarding the connection to the grid in France. So that's moving in the right direction.

What is the likely timing of your involvement in offshore wind, the next steps that you would expect this government -- the new government to come to take that would allow you to make progress in your investment in offshore wind in France?

Thank you. Thank you for the 2 questions.

First, as regards offshore wind. What's key for both offshore and onshore is an improvement of the processes.

So yes, a decree has been taken in order to streamline the administrative processes. And this is something that we consider as a very positive step forward in order to accelerate the development of the renewable energy in France.

As regards the project that we're working on, meaning the 3 offshore wind phase in Saint-Nazaire, Fécamp and Courseulles, we expect the [indiscernible] between the end of this year and early next year for the first project and first operating date by 2022. Second, as regards supply in France.

Yes, there is still a slight market share erosion, as expected, for B2B and B2C. Our market share is still higher than 88% as regards B2C.

And there is no acceleration of the erosion. And as regards the B2B market, our market share is higher than 66% and it's also in line with what was expected.

So this is where we're today.

The question has been asked by Emmanuel just before regarding margin pressure on supply.

One question from the Internet. It's Peter Bisztyga from Merrill Lynch.

And the question is, what is the current status of the investigation into Le Creusot plant and what is the risk that this may result in new outages at EDF nuclear plants?

Thank you. Thank you for this question.

These investigations are going on. They will go on during all 2017 year.

And for the time being, nothing specific has been identified for what's called the normal cases. I remind you that there are 2 cases, what we call the [indiscernible] orders and the [indiscernible] orders.

Once again, the [indiscernible] orders, for the time being, nothing specific has been identified. But of course, we follow that very carefully.

And we consider that, for the time being, we fully maintain our guidance as regard our nuclear generation, both for 2017, the range 390 to 400. And for 2018, we haven't given any specific figures, but we have explained to you that we will consider that we will continue to go back to normal generation level.

This is where we're today.

Operator, if we don't have more questions on the phone, we'll have to close the call here. Can you just remind one last time the process to ask a question?

And then we will see if there's someone asking a question on the phone, please? Thank you.

Just a last one. The situation in France is difficult as the NOME regulation is under pressure with low power prices.

Beyond a CO2 floor which could potentially temporary help EDF, do you know if Mr. Macron would be considering any form of regulatory framework?

I'm thinking here about life extensions [indiscernible]. Is this the type of discussions you're planning to engage with the new government which will be formed?

And what are your views and, I would say, your optimism regarding this matter?

Thank you for this question. Yes, I mean the regulation is absolutely key.

And I'm very optimistic that we'll be in a position to discuss in depth these matters. First, we already referred to the CO2 question.

Second, we consider that it's necessary also and fair to reform the ARENH mechanism in order to prevent it from being as biased as it is today. Third, we consider it will be appropriate to discuss a kind of CFD for the future newbuilds, nuclear newbuilds in France.

And we could also have some other points, maybe more technical points to discuss. So yes, I mean, the period which is now opening, will be also a period during which we'll have to discuss this point with the new administration.

And regarding the CFD, the newbuild was in the press last week regarding Macron's program. Would it be possible to envisage anything regarding the life extensions itself?

Yes. As regards the life extension, it's -- I mean, first, it's important to get, of course, the decision by the ASN which is now the key point.

And as you know, we're fully working in the perspective of getting this approval, not only for the 900-megawatt fleet, but also for the rest of the fleet. And I mean there is nothing new as regards this specific point.

But obviously, we'll discuss a consistent set of regulation with Emmanuel Macron's team and the new government in order to set a right, positive and fair set of regulation for our industry.

Thank you. I think we're going to close the call here.

Thank you, guys, for attending the call. And as always, we're available for any follow-up questions.

Thank you very much. Bye-bye.