Risk Assessment in Business Plans | Business Study Notes

The 8 March edition of Les Echos newspaper reports the resignation of EDF’s chief financial officer, Thierry PIQUEMAL, because of a deep disagreement with the group’s management. The disagreement concerns the profitability and risks inherent in the proposed construction and operation of two EPR plants in south-west England at Hinckley Point.

A financial situation of the group of concern

According to Thierry PIQUEMAL, this project could threaten the very existence of the EDF group! The amount of the investment is estimated at 23 billion euros while with a financial debt of 37 billion, the group is considered in debt.

Being a shareholder in the company carrying the project up to 67%, EDF would fully consolidate in its accounts. The group’s repayment capacity is currently degraded due to the fall in the price of electricity, the group must also face other significant expenses related to the modernization of the French nuclear fleet. Two other similar EPR projects are lagging in Flamanville and Finland.

Risk review raises fears for project IRR

Many factors could call into question the estimated internal rate of return (IRR) of more than 9% while the IRR expected by the group is 9.2%. The journal refers to a risk review highlighting the following hazards:

  • The construction schedule for both plants is considered too optimistic. A delay of 4 years delivery would cost 4.4 billion pounds and lower the IRR to 7.8%, below the expected profitability by EDF. This planning could all the more be called into question as the design of the project is still under discussion with the UK nuclear safety authority.
  • The legal experts believe that the contractual clause guaranteeing EDF a selling price of 92.5 pounds per megawatt could be called into question in the event of a too marked difference with the market price, (theory of unforeseen in contractual law). In fact, this guaranteed price would already be twice the current market price.
  • The assumption of a plant availability rate of 91% is considered high. The sensitivity analysis shows that a variation in this rate has a significant effect on IRR.
  • Finally, the amount of indebtedness and the cost of financing the project could be higher than expected due to the use of hybrid financing. Financing is a crucial element considering the amount of the investment and the duration of the works. The first cash flows are not expected at the earliest in 2025 for a start of work in 2019.

As per research of Business Study Notes: Risk assessment is of paramount importance in business plans as it poses a threat to future cash flows. It is necessary to evaluate the realistic nature of the activity hypotheses, to carry out a sensitivity analysis, to simulate the financial impact of adverse scenarios, in connection with the various experts contributing to the project, or even to evaluate the scrapped value. of the project (reversibility analysis). Remember Business Study Notes is a huge blog, which is trying cover all the tips and tricks, which uses in business, especially the students of MBA, BBA may easily get ready for their exams through Business Study Notes.

The alert role of the CFO to ensure the profitability and sustainability of the group

Guarantor of the profitability and sustainability of the company, the CFO must ensure the assessment of profitability in the investment selection procedure and sound the alarm when necessary. However, it should not be content to play the role of censor but endeavor to suggest courses of action to improve profitability, shorten the payback period, limit the maximum cash flow, etc.

The French government has many good reasons to promote this project: the strengthening of diplomatic ties with Great Britain, the promotion of French technology internationally, …. These objectives must, however, be part of a healthy financial situation that alone ensures the long-term development of the company.