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New year, new resolve

Many of us go into a new year with new resolve. My resolution usually does not amount to much more than a promise to tidy my desk and attempt to keep it that way for the rest of the year. For others, the task can be slightly more challenging. In Europe, 2005 will see the beginning of new strategies as the big generators manoeuvre to face the challenges of an increasingly complex market.

The highest profile strategy is probably that of Electricité de France’s (EDF’s) new chairman, Pierre Gadonneix, who is attempting to position the group as a “European leader” and consolidate its European position. More specifically, EDF wants to consolidate its positions in France, Germany, Italy and the UK.

Speaking to the Financial Times Gadonneix noted: “I am convinced there will one day be an integrated market for electricity in Europe. This a terrific opportunity for an operator like us.” This may be true, but the strategy will require a great deal of resolve from Gadonniex combined with an element of good fortune.

As always, raising capital is central to any plan. For EDF the capital issue is exacerbated by its current difficult financial situation. Although the company has strong cash flows, it has a balance sheet which cannot support debts of €24 billion generated by an international expansion programme. There are also off-balance sheet liabilities such as pension payments which are scheduled to hit this year.

EDF needs an estimated €56 billion over the next three years to fund its plans. Maintenance and refurbishment of plant in France and abroad will cost about €18 billion. Some €20 billion will be needed to cover the costs of meeting its option obligations in Italy and Germany and to expand its presence in gas. Another €15-18 billion is needed to cover pension obligations and the dismantling of nuclear plant.

Raising the funds will be a painful experience. EDF’s first and probably toughest challenge is the partial privatization planned for this year. The flotation is expected to be one of the largest ever French capital raisings. The government is planning to sell 30 per cent of the company in an offering that could raise about €10 billion. This flotation, however, comes against a background which has seen fierce demonstrations by its workers. EDF expects a further €10 billion to come from productivity improvements and tariff increases. And demonstrators are no doubt aware that €1.5 billion of this will come from cost savings on staff.

The remaining cash will come from the company’s cash flows, which amount to about €4 billion a year; and from asset disposals. This would raise about €10 billion.

The future sale of RTE, the regulated grid business, is one disposal which has been widely discussed. The plan is to sell a stake in the business to another publicly owned shareholder. This sale could attract a lot of interest, as RTE operates the interconnector between France and Italy. Notably for the first time, in the spirit of liberalization RTE recently put out to tender half (547 MW) of the interconnection capacity in the direction of France-Italy. This will be tendered every month. For January, some 25 international operators submitted bids where the average price was €19.09/MWh.

The lion’s share of this capacity was awarded to Spanish utility Endesa, which acquired 497 MW of the capacity up for auction. This is an important step in Endesa’s European strategy, as it allows the company to manage energy in cross-border markets and leverage its positions in Italy and France. Jesus Olmos, managing director of the European division, commented: “There are certainly opportunities in Italy where we can take advantage of the high price of production. There are also opportunites in France. We have a contract with EDF to sell 80-90 per cent of our capacity up to 2009.”

While the likes of EDF and Endesa position themselves in the more established EU markets, German utility E.ON is looking at investing half of its planned expenditure over the next three years in Central and Eastern Europe. E.ON Group plans to invest about €18.7 billion between 2005 and 2007. Some €6.8 billion has been earmarked for Central Europe. Unlike EDF, however, E.ON’s investment will be fully financed with cash from its operating activities.

It will be interesting to see how E.ON’s investments pan out. No doubt the new EU members from Central Europe will play an important role in the new integrated Europe. Certainly Poland will present opportunities due to its location and size. It is also a market where efficiencies can be gained. Yet only time will tell whether money is better spent in securing capacity and customers in the more established markets.

None of us have a crystal ball. Like all the major utilities in Europe, we will all face challenges this year. Still, we should count our blessings and remember that they are nothing compared to those affected by the Asian Tsunami – theirs is a test of true resolve.

Junior Isles, Publisher & Editorial Director

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