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, counter party 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 (see section 5.1.6) 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.
Lower interest rate fluctuations could affect the Group’s economic indebtedness, due to changes in the value of the Group’s financial assets and liabilities, as well as its discounted liabilities. The discount rates for pension and other specific employee benefit commitments (see note 16 of the appendix to the consolidated financial statements for the year ended 31 December 2020) and the Group’s long-term nuclear commitments (see note 15 of the appendix to the consolidated financial statements for the year ended 31 December 2020) 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. The extent of this decrease, if any, will depend on the future evolution of rates, mainly 20-year sovereign rates.
The order of 1 July 2020 on securing the financing of nuclear expenses, which amends the initial order of 21 March 2007, outlines new provisions concerning the regulatory ceiling on the discount rate. This is now expressed as a real value corresponding to the unrounded representative value of the expected long-term actual interest rate used for the calculation published by the European Insurance and Occupational Pensions Authority (EIOPA) of the ultimate forward rate (UFR) applicable on the relevant date, increased by 150 basis points. This ceiling is applicable as from the year 2024. Until 2024, the ceiling is equal to the weighted average of 2.3% and this new ceiling. The weighting assigned to the 2.3% amount is set at 50% for 2020, 25% for 2021, 12.5% for 2022 and 6.25% for 2023.
Furthermore, 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 ont he Group’s results, cash flow generation and net debt.
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 this respect, the decree of 1 July 2020 relating to securing the financing of nuclear expenses has modified the regulatory framework of the allocation obligation:
These changes have no impact on the pre-existing 2020 allocation obligation in respect of the financial statements as at 31 December 2018 (€797 million) which was met in 2020.
Given the changes in the regulatory framework, no additional allocation is expected in respect of 2020, as the rate of coverage of nuclear provisions by dedicated assets is greater than 100%.
Overall, a 1% decrease in interest rates would have the following impacts:
(i) an impact on pre-tax income that could amount to approximately -€1,220 million for nuclear liabilities in France, as a result of the impact of this rate cut on the corresponding discount rate, all other things being equal;
(ii) an impact on pre-tax income of approximately -€200 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 therefore amounts to approximately -€1,420 million for a 1% fall 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 in view of 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 on the pre-tax income of approximately -€200 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).
As a result of its activities, the EDF group is exposed to risks related to the financial markets, in particular equity risk.
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.
The market value of the listed equities in EDF’s dedicated asset portfolio was €13,362 million at 31 December 2020. The volatility of the listed equities at the same date was 26.6% based on 52 weekly performances, compared to 9.2% at 31 December 2019. Applying this volatility to the value of listed equity assets at the same date, the Group estimates the annual volatility of the equities portion of dedicated assets at €3,554 million.
At 31 December 2020, the sensitivity of the listed bonds (€12,396 million) was 5.5, i.e. a uniform 100 base point rise in interest rates would result in a €678 million decline in market value. This sensitivity was 6.1 at 31 December 2019.
