Areva in Deep Financial Trouble

French government and investors ask whether it has hit bottom?

It is no secret that state-owned nuclear energy giant Areva has ten tons of financial debt on a five ton truck. After several years of smacking the bumper with a 2 x 4 to keep half of the IOUs in the air, the truck has hit a red light and all the weight of that debt has come down in one place and at one time. This week Areva’s senior leadership went public with the numbers and what they say is a path toward new earnings. Phillip Knoche, the new CEO of Areva, said, “We have to cut our costs and master difficult projects.”

Here’s the bad news

Areva is facing huge financial challenges with reported losses of {e}4.8 billion ($5.4 billion US) compared to a loss of just {e} 500 million last year. Sales were down in 2014 by 8% compared to 2013. The company wrote down assets by {e}1.5 billion, took a {e}1.1 billion charge on three nuclear projects, and wrote off another nearly {e}1billion in assets that it now believes  are essentially worthless. They include a uranium mine bought by former CEO Anne Lauvergeon who’s expansionist strategy overextended the company in terms of its capital requirements.

The bad news isn’t over

This year the firm expects to see a further reduction in sales of at least 5% compared to 2014. The firm will sell off its unprofitable renewable energy business, and other assets, for {e}430 million. It will scale back other investments. Overall, debt has risen to {e}5.8 billion compared to a market cap of {e}3.6 billion. Investment rating services have slashed their valuation of Areva’s bonds dumping them in the “junk” pool. Essentially, the firm is underwater and needs a huge infusion of capital from the French government.

This is the same French government for which PM François Hollande is pursuing a hare-brained, politically expedient alliance with the Greens that involves cutting future French national reliance on nuclear energy by 25%. The nation gets 75% of its electricity from nuclear power plants.

There is some good news but not much

Energy Minister, Segolene Royal, thinks Hollande’s “nuclear light” strategy is a stupendously bad idea and has managed to convince the French parliament to spike it. However, Royal isn’t ready to write a check for several billion euros to recapitalize Areva. For the moment she’s more in the “prove it” mode in terms of the credibility of the company’s goal of having a positive cash flow by 2018.

  • BTW: Anyone who worries about the so-called revolving door in government in the US needs to look at how the French handle it. Royal is the mother of Hollande’s four children. They lived together for several decades without ever tying the knot. A few years ago Royal dumped Hollande after he was spotted sneaking out to another woman’s house on a moped. Both Hollande and Royal, now in their early 60s, are tied together by bonds as lovers and parents, and divided by equally passionate politics.

Buried by a bushel of blunders

Areva’s strategy for returning to profitability starts with cost cutting including wage freezes and possibly laying off a substantial number of workers. The company employs 45,000 people and two-thirds of them are in France. One thing that is not likely to happen is a merger with EDF. CEO Knoche said that Areva and EDF would work closely together on projects, such as two new Areva EPR 1650 MW reactors at the Hinkley site in the UK, but would not combine the two companies.

Many of Areva’s debt issues result from its own mistakes. It’s flagship, first-of-a-kind EPR project at Olkiluoto in Finland is nearly a decade behind schedule and is responsible for {e}720 million in charges this year alone for schedule delays and cost overruns. Overall, the firm has taken a reported {e}4 billion in charges, or provisions for them, related to the project. Areva is locked in a series of disputes with German industrial giant Siemens over who will pay for the costs.

The firm locked horns with the Finnish nuclear safety agency over concrete and other construction issues. Finnish angst with the Olkiluoto3 project is so considerable that it is buying its next 1000 MW reactor from Rosatom. Interestingly, the former head of the Finnish nuclear safety agency now leads the Rosatom effort in Finland for the new reactor.

A second EPR project in Flammanville, France, is also in trouble in terms of schedule and budget. Unlike the Finnish project, where construction teams spoke six different languages, all of them at Flammanville speak the local language, but it doesn’t seem to have helped matters much.

Facing stiff global competition

Areva CEO Knoche said that the firm hopes to expand its business in China for new reactors and other nuclear projects. The firm has two EPRs under construction there and is in mature negotiations with China for a $15 billion spent fuel reprocessing facility that will make MOX fuel.

The firm faces stiff competition in China from projects planned to be built based on the Westinghouse AP1000 design and a new domestic 1000 MW design, the Hualong One. That reactor is also planned to be made available for export which will compete globally with Areva,

While Areva, in partnership with Japan’s Mitstubishi, has inked a deal for four 1100 MW Atmea 1 reactors for Turkey, it has not made progress elsewhere in the Middle East. A planned deal with Jordan, possibly involving a swap of a reactor for uranium, fell through. The Jordanians went with a deal to get two Russian 1000 MW VVER units which involves significant financing from Rosatom.  However, both Areva and Rio Tinto prospected what Jordan said were extensive uranium deposits, and concluded they were not economically significant enough to justify a mining effort.

In the US Areva at one time had four EPRs on tap and was pursuing design safety review with the NRC to certify the EPR for US sales. None of those projects has panned out. This week Areva asked the NRC to stop all work on the design review. Areva’s efforts to build a $3 billion uranium enrichment plant in Idaho, for which it also gained a $2 billion loan guarantee from the US Department of Energy, never broke ground. Instead, Urenco, a European firm, has gobbled up market share for commercial nuclear fuel and has plans to double the capacity of its Eunice, NM, plant.

What the French government must now decide, assuming it still believes mastery of nuclear technology is a national asset, is whether and how to inject new capital into Areva and in what markets it will be deployed to return the firm to profitability.

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