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French energy provider EDF approaches crossroads in European market

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The European energy sector is changing, and quickly. Renewable is exploding, with solar, battery and electric solidifying its presence in the market. Nuclear energy, while still the major provider, is regularly maligned for its negative effect on climate change, and demand for traditional modes of energy is sliding fast.

As a result, many around Europe have pledged to retire aging reactors at the end of their lifespan. For example, following the Fukushima nuclear disaster in Japan, Germany agreed to close its nuclear reactors by 2022. Add to this the fact that renewable energy may soon dominate the European Union’s energy landscape, and it's a recipe for disaster. In late August, UBS released a report indicating that renewable energy would render traditional power from natural gas and coal obsolete in a few short years.

With this is mind, Electricite de France (EDF), the world’s largest provider of nuclear energy, will soon be doing some corporate soul-searching. That’s because the massive Paris, France, based operation will decide in the coming years whether to retire or reboot its massive fleet of nuclear reactors. EDF owns 58 nuclear reactors in France, the world’s most nuclear-dependent country. Whichever direction EDF moves in the future, whether they retire the fleet and pivot to renewable energy or invest billions in extending the reactors’ lives, it will be a demanding and expensive process.

Despite the turbulent environment, however, EDF has established a relatively safe position. In late July, the company reported a 3.1% increase in first-half earnings before interest, depreciation and amortization (EBITDA) year-over-year from 2013. Importantly, EDF has amortized the debt on its entire fleet, meaning the company has been able to remain solvent despite the rise in heavily subsidized renewable alternatives. The company, of which 85 percent is owned by the French government, predicts an organic growth of at least 3% for the year of 2014.

"This good performance is a testament to our ability to achieve two inseparable goals: satisfy the interests of our shareholders and carry out with determination our public service mission," the company’s CEO Henri Proglio said in a statement.

Under Proglio’s leadership, EDF has proven itself a nimble and proactive company. Most recently, EDF agreed to a deal with waste management giant Veolia Environnement SA to divide Dalkia, a multi-billion dollar energy services venture. Veolia would take control Dalkia’s international operations, and EDF would assume ownership of those operations within France. EDF netted a reported $720 million as part of the split, and they retain a 34% ownership stake in Dalkia. The consolidation allows Veolia, a company at which Proglio was CEO prior to coming to EDF, to take more responsibility for Dalkia as EDF focuses on its nuclear transition within France.

EDF has also, despite its foundations in nuclear, embraced renewable energy. In 2008, EDF partnered with Renault-Nissan and PSA Peugeot Citroen to develop zero-emission and hybrid technology as well as infrastructure support. Proglio continued this movement toward sustainable energy when he assumed the CEO role in 2009.

For a CEO in charge of the world’s largest nuclear energy provider, Henri Proglio has been surprisingly progressive in his term as CEO. He eventually backed French president Francois Hollande’s energy transition plan, the one with the lofty goal to reduce France’s dependence on nuclear energy. Why? Proglio is confident that as the EDF nuclear fleet reduces in size and influence, the company will still thrive even with 60% or less of the available market.

Thus EDF has demonstrated a flexibility that suggests the company will weather the storm -- at least in the short term. In November of this year, EDF will appoint a new CEO. Rumors that Proglio would be replaced have swirled since President Francois Hollande came to power in 2012, but within the company and the sector there are doubts that anyone can handle the EDF helm as well as Proglio has. It remains to be seen who will lead EDF in 2015 and beyond but based on the evidence, Proglio would be a good place to start.

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