From a nondescript office block close to London’s Victoria station, EDF, the French utility company, has quietly built one of the world’s largest and most profitable commodity trading businesses.
Over nearly two decades EDF Trading has made billions of euros of profit from trading coal, gas and electricity — markets in which it has grown to rival some of the industry’s biggest names including Glencore and Vitol.
But now EDF, keen to promote its low-carbon credentials and strengthen its balance sheet, is looking to sell the trading division’s huge coal operation to a joint venture involving Tokyo Electric Power and Chubu Electric Power, two Japanese utilities. Rivals say the move raises questions about whether state-controlled EDF will retain the remainder of its trading business.
EDF and the two Japanese utilities declined to comment, but people familiar with the talks about the coal trading business say they are progressing towards a sale. A deal could be concluded before Christmas.
The expected disposal by EDF has shone a light on its little-known trading business, which has morphed from supplying the utility’s fleet of coal-fired power stations into a much larger concern with a record of profitability that compares favourably to competitors.
Over the past five years, EDF Trading’s annual net income has averaged €324m per annum. By comparison Gunvor, the world’s fourth-largest independent oil trader, has recorded post-tax profits closer to $300m per annum over the same period. EDF Trading has paid €2.8bn of dividends since 2005 to the parent company.
Last year EDF, which is 85 per cent owned by the French government, flagged a possible sale of its coal-trading operations when it launched a strategic review of its “fossil fuel production and marketing activities”.
“They are de-fossilising their brand like Eon,” said a rival coal trader, referring to the German utility company that is planning to spin off its conventional power generation assets and energy trading business.
Industry executives say there has been a renewed push in France for its state energy champion to go low-carbon after an international accord was reached last December in Paris to limit greenhouse gas emissions.
With net debt of €37.4bn and negative cash flow, EDF is also scrambling to shore up its balance sheet. It has pledged to sell as much as €10bn of assets by 2020, as it prepares to start the expensive and contentious process of building a nuclear power station at Hinkley Point in the UK.
EDF Trading has attracted less scrutiny than its rivals, mainly because it has largely shunned oil trading, the most closely watched commodity.
But last year it traded 845m tonnes of coal and related derivatives — a volume equivalent to the annual US consumption of the fossil fuel. Staff numbers at the business have increased from about 265 a decade ago to more than 650 today.
EDF Trading has grown under the leadership of a hard-charging American executive called John Rittenhouse, 58, who was a champion swimmer, holding British and European records.
Mr Rittenhouse last year described the trading business as an “intermediary” with the “balance sheet capability” to “make sense of global flows in commodities”.
Under his guidance, EDF Trading’s shareholder equity has grown from €530m in 2004 to almost €2.3bn in 2015.
In 2008 the company generated net income of €700m and posted a return on equity of more than 40 per cent for the year. That figure is higher than even the most aggressive Wall Street banks in the pre-financial crisis days.
But EDF Trading has faced challenges in recent times. Its return on equity fell to 13 per cent last year — a still impressive number but far shy of its peak. This, say former executives, reflects tough market conditions and greater transparency in commodity markets.
EDF Trading has also been declaring progressively higher dividends, suggesting it may be under pressure from the parent company to return as much money as possible ahead of a sale.
In 2015 EDF Trading announced a dividend of €554m — double the average of the previous five years after bringing forward a payment due to be made in 2016, say people close to the company. Net income fell 25 per cent to €292.5m last year, which the company blamed on “depressed market conditions”.
It is unclear how much cash a sale of the coal trading operation will generate for EDF. But rivals say a deal with Jera, a joint venture between Tokyo Electric Power and Chubu Electric, makes sense. EDF Trading is an established supplier of coal to Jera.
EDF Trading’s rivals also question what the future holds for the remainder of EDF’s trading business.
These competitors speculate about whether the parent company could decide to sell more of the business, but one insider plays down that idea. EDF did not respond to a request for comment.