The recoverable value of EDF Energy is estimated by discounting future cash flows over the assets’ expected useful life, taking into consideration the plan to construct two EPRs with a 60-year useful life at the Hinkley Point site, a project for which the final contracts were signed on 29 September 2016. Future cash flows relating to these plants are determined by reference to the Contract for Difference (CfD) between the Group and the UK government. The CfD sets stable, predictable prices for EDF Energy for a period of 35 years from the date the two EPRs are first commissioned: if market prices fall below the CfD exercise price, EDF Energy will receive an additional payment.
The 2019 impairment test incorporates the latest estimates of the revised HPC project costs (see note 3.1.3) i.e. total project completion costs (excluding borrowing costs and exchange rate effects compared to the project’s benchmark rate of £1 = €1.23) of £21.5-22.5 billion (in 2015 sterling), £1.9-2.9 billion more than the previous estimate, still assuming delivery of Unit 1 by the end of 2025. The range will depend on the effectiveness of operational action plans to be undertaken in partnership with contractors. The additional costs essentially result from challenging ground conditions that made earthworks more expensive than anticipated, revised action plan targets, and extra costs needed to implement the completed functional design, which has been adapted for a first-of-a-kind application in the UK context. EDF’s projected rate of return (IRR) is now estimated at 7.6-7.9% (compared to about 9% initially).
On these revised bases, taking into consideration the unfavourable effects for existing nuclear assets described above, the positive difference between the recoverable value and the book value of EDF Energy remains significant at 31 December 2019. Sensitivity analyses of the WACC show that a 50 base point increase in WACC would not entail any risk of impairment.
For HPC, the most recent project review identified a greater risk of deferral of the Commercial Operation Date (COD), estimated at 15 months for Unit 1 and 9 months for Unit 2, entailing a potential additional cost of around £0.7 billion (in 2015 sterling) which would reduce the IRR for EDF by around 0.3%. This risk of deferral and the associated additional cost would reduce the margin resulting from the EDF Energy impairment test by approximately 20%.
Sensitivity analyses were also conducted for information purposes, using extremely pessimistic assumptions, for example a 4-year deferral of the COD and an associated additional cost of £4 billion. The results suggest a risk of impairment, all other things being equal.
The recoverable value of EDF Energy also, as in 2018, reflects conservative assumptions for the Sales and Supply segment, in line with the competitive and regulatory situation on the British market, particularly considering the cap on the Standard Variable Tariff. Sensitivity analyses were conducted on the assumptions for margin rate and loss of market share: a 25 base point decline in the long-term margin rate would reduce the margin resulting from the EDF Energy impairment test by around 6%, while market share losses of 10% on the B2C segment and 2% on the B2B segment would have an unfavourable impact of some 10% on the test margin.
Finally, although Brexit has no immediate impact on impairment tests of EDF Energy’s assets since most cash flows (income, costs, investments) and assets are stated in pounds sterling, the longer-term consequences are still hard to predict in view of the uncertainties over the timing and concrete terms of the UK’s departure from the European Union. The Group will monitor movements in the rates of return demanded by investors and changes in fuel prices, CO2 prices and macro-economic data such as GDP growth, which could affect price curves.
As an intangible asset with an indefinite useful life, the Edison brand, first recognised at the value of €945 million when Edison was taken over in 2012, was subjected to an impairment test that did not identify any risk of impairment. The brand’s value excluding discontinued E&P operations (see note 2.3) remains justified. This test used the royalty relief method. In late 2018, an external study of the brand value was conducted and concluded that the brand’s value in use was higher than its net book value, even when E&P operations are excluded.
At 31 December 2019, the recoverable value of certain hydropower assets located in the Autonomous province of Trento was significantly affected by changes in local hydropower concession regulation, leading to recognition of impairment of €(33) million. More generally, including the measures of the “Simplificazione 2019” decree, concerning the terms of concession renewals in Italy, in impairment tests of the Edison hydropower CGU significantly reduces the margin resulting from the test. The margin’s sensitivity to a 10% decline in prices would lead to recognition of impairment of around €(50) million.
Concerning energy services, impairment of €(27) million was recognised on specific assets, including €(17) million in respect of the goodwill on a recent acquisition (Zephyro) whose recoverable value was affected by delayed implementation of a significant contract.
The recoverable value of wind power assets is improving, in line with the investments made in high-profitability projects.
Thermal assets benefited from high-profitability investments due to construction of the new Marghera CCGT plant. Good long-term prospects for clean spark spreads and capacity revenue also have a favourable influence on the margin resulting from the test. Sensitivity tests were conducted in respect of these assets, and the results show that a 10% decline in electricity prices or a 50 base point increase in WACC does not entail any risk of impairment.
At 31 December 2019, the goodwill of Framatome amounts to €1,326 million, resulting from EDF’s acquisition of 75.5% of the capital of Framatome in late 2017. The Group finalised recognition of the business combination in its financial statements at 31 December 2018.
The recoverable value of Framatome is determined on the basis of a 10-year business plan and a terminal value. This business plan is sensitive to assumptions concerning the completion of major construction projects that are incorporated into the reactor scenario, and market share assumptions used in assessing services to the installed base and fuel deliveries to customers’ reactors. The WACC applied in discounting future cash flows is weighted according to a conservative view of the allocation of Framatome’s EBITDA between its businesses according to their risk profile. The test conducted at 31 December 2019 shows that the CGU’s recoverable value is significantly higher than its book value.
Sensitivity analyses were conducted using a 50 base point increase in WACC and a 0% growth rate to infinity. The test conclusions were not affected.
In 2019, impairment of €(49) million was recognised in respect of EDF Renewables’ CGUs. This includes €(17) million of impairment of the goodwill on a recently acquired German entity (Futuren) in response to less favourable prospects on that market. Other impairment concerns specific assets and notably results from downward tariff trends driven by contractual terms or regulatory changes (particularly in China).
At 31 December 2019, Dalkia’s goodwill amounts to €555 million, principally resulting from acquisition of the Dalkia group in France under the agreement of 25 March 2014 with Veolia Environnement.
The recoverable value of the Dalkia group is based on future cash flows projected over a medium-term horizon, and a terminal value that represents cash flow projections to infinity. According to revised assumptions for 2019, the recoverable value remains higher than the book value. The key parameters of the test are the calculation method for the terminal value, and the discount rate: both were subjected to sensitivity analyses and the results did not affect the positive difference between the recoverable value and the book value.
The Dalkia brand, which was recognised as an asset when the Group took control of Dalkia in 2014 at the value of €130 million, is estimated by the royalty relief method. An updated test at 31 December 2019 shows that this book value is justified.
