More generally, EDF cannot ensure that the compensation mechanisms provided for by the legal and regulatory provisions applicable to it in connection with the performance of these public service missions will fully compensate for the associated additional costs incurred. Furthermore, EDF cannot guarantee that these compensation mechanisms will never be subject to change or that existing mechanisms will fully cover potential additional costs that may be incurred in relation with new duties imposed on EDF in connection with its public service obligations, in particular when a new public service contract is negotiated.
The occurrence of any of these events may have an adverse impact on EDF’s activities and financial position. Such situations could also call into question the Group’s ability to meet its ambition to help fragile populations set out in corporate responsibility objective no. 3 (see section 3.3.1.1.3 “Energy poverty (CSRG no. 3)”).
The EDF group, through its varied activities, is exposed to numerous financial and market risks. This section describes these various risks by addressing interest rate risk, financial market risk, energy market risk, foreign exchange risk, counterparty risk and liquidity risk. All of these risks could affect the Group’s ability to finance its investments. Financial and market risks are also discussed in the activity report (section 5) and the appendices to the financial statements.
The Group is exposed to risks related to changes in interest rates in the various countries in which it operates. These rates depend partly on the decisions of the central banks.
Criticality in view of the control actions undertaken: Strong.
Lower interest rate fluctuations could affect the Group’s economic indebtedness, due to changes in the value of the Group’s fixed-rate financial assets and liabilities, as well as its discounted liabilities. The discount rates for pension and other specific employee benefit commitments (see note 34 of the appendix to the consolidated financial statements for the year ended 31 December 2019) and the Group’s long-term nuclear commitments (see note 32 of the appendix to the consolidated financial statements for the year ended 31 December 2019) are directly or indirectly linked to interest rates over different time horizons.
For the specific case of nuclear provisions in France, given the decline in rates over the past few years, the discount rate could be reduced over the next few years by applying the method used by the Group, in accordance with regulation on the ceiling discount rate. The magnitude of this decline will depend on future interest rate and regulatory developments. An increase in nuclear provisions due to a decrease of the discount rate may require allocations to the dedicated assets and may result in an adverse effect on the Group’s results, cash flow generation and net debt.
With regards to the regulations on the ceiling discount rate, the order dated 29 December 2017 establishes the statutory discount rate ceiling.
As the case may be, this increase in provisions, including those covered by dedicated assets, does not mean however a mechanical impact on the amount to be allocated to dedicated assets as of the considered dates, as the former depends on:
In a letter dated 12 February 2020, the French Minister for Energy and the French Minister for the Economy informed EDF that they had decided to amend certain regulatory provisions regarding the securing of the financing of nuclear expenses.
This change will take place gradually and linearly over 5 years from 1 January 2020, starting from a real rate value of 2.3%;
As a reminder, changes in estimates of nuclear provisions resulting from a change in the discount rate are booked (see note 1.3 and note 32.1 to the consolidated financial statements for the year ended 31 December 2019 in chapter 6 of this Universal Registration Document):
Therefore, any change of the discount rate therefore has a punctual impact on the financial results of the year during which the discount rate change occurred, without equivalence for the following years.
The fall in interest rates since 2014 has had a negative impact on the Group’s financial position due to the obligation to allocate to dedicated hedging assets in order to offset, under certain conditions, the effects of the fall in the discount rate on nuclear provisions. Without the decrease in interest rates and the associated discount rate, allocations to hedging assets between 2014 and the end of 2019 would have been reduced by €2,021 million, all other things being equal.
Overall, a 1% decrease in interest rates would have the following impacts:
(i) An impact on pre-tax income of approximately -€580 million for nuclear liabilities, as a result of the impact of this rate cut on the corresponding nuclear discount rate;
(ii) An impact on pre-tax income of approximately -€180 million for provisions for employee benefits in France, as a result of the impact of this rate cut on the corresponding discount rate.
In total, the sensitivity of pre-tax income is approximately -€760 million for a 1% drop in interest rates.
Upward variations in interest rates could affect the Group’s ability to obtain financing on optimal terms, or even its ability to refinance itself if the markets were very strained, this being the risk related to changes in flows linked to variable-rate financial assets and liabilities. Financial securities and derivatives held by the Group, as well as debts issued, may pay or receive coupons directly indexed to variable interest rates.
Thus, a 1% increase in interest rates would have an effect of approximately -€180 million, due to the increase in coupons linked to the debt issued by the Group.
These unfavorable impacts related to a rise in interest rates are in principle more than offset by the favorable impacts related to a rise in interest rates in connection with long-term commitments (see previous point), so that the net sensitivity of pre-tax income is approximately +€580 million for a 1% rise in interest rates.
As a result of its activities, the EDF group is exposed to risks related to the financial markets, in particular equity risk.
Criticality in view of the control actions undertaken: Intermediate.
The Group is exposed to equity risk on securities held primarily as dedicated assets constituted to cover the cost of long-term commitments in relation with the nuclear business, in connection with outsourced pension funds and, to a lesser extent, in connection with its cash assets and investments held directly by the Group (see section 5.1.6.1.5 “Management of equity risks” and 5.1.6.1.6 “Management of financial risk on EDF’s dedicated asset portfolio”).
