Significant amounts of impairment have been booked in recent years in respect of theGroup’s thermal assets in England, notably reducing the net book value of coal-fired plants and gas storage facilities practically to zero. The necessary investments for theHole House and Hill Top gas storage site were totally written off at 31 December 2019, for a cost of €(13) million. Regarding coal-fired facilities, closure of the West Burton A plant is still expected in the short term.
For the West Burton B CCGT plant, the updated impairment test benefited from amore favourable estimation of spark spreads over the entire horizon than at the end of 2019. Nonetheless, given the past impairment booked on this asset since it began operation in 2013, the headroom calculated by the 2020 year-end impairment test did not lead to any reversal of impairment. The value of West Burton B is indeed sensitive to price variations, thus a 5% change in spark spreads would have an impact of approximately 5% on its recoverable value.
Long-term margin assumptions were revised downwards in view of the Covid-19 pandemic, particularly for the B to B segment, as the margins defined for the B to C segment already reflected the competitive and regulatory situation on the British market, particularly the end of the cap on the Standard Variable Tariff in 2023. The impairment test was updated based on these revised assumptions, and showed are coverable value that had decreased by some 40% compared to 31 December 2019and 20% compared to 30 June 2020, but remained higher than the book value tested. Sensitivity analyses were conducted with larger reductions in long-term margins and losses of market share, and indicated no risk of loss of value. The values of the assets contained in this CGU are non-material.
The recoverable value of existing nuclear assets (8 reactors: 7 Advanced Gas-cooledReactors (AGRs) and one Pressurised Water Reactor (PWR)) is determined by discounting future cash flows over the assets’ useful life, assuming a 20-year extension for the Sizewell B PWR plant, in line with Group strategy. The updated impairment test for the 2020 year-end incorporates the early shutdown decisions concerning Hunterston, to be closed no later than 7 January 2022, and Hinkley Point B, to be closed in July 2022. These decisions were announced by theGroup on 27 August 2020 and 19 November 2020 respectively.
The test conducted at 30 June 2020 included lower nuclear output estimates for 2021 and 2022, intended to capture recent difficulties affecting generation and the risk of unscheduled outages and delays in bringing reactors back online during those two years. The updated nuclear output assumptions combined with the impact of declining electricity prices, in both the medium term and the long term, led to recognition of impairment of £552 million, or €621 million.
The updated impairment test at 31 December 2020 incorporates the early shutdown decisions concerning the Hunterston and Hinkley Point B plants. Following the test results, the impairment recorded at 30 June is maintained.
The recoverable value of nuclear assets is sensitive to price assumptions: a +/-2%difference over the entire horizon of the scenario used for the impairment test at 31 December 2020 would have an impact of+/-£260 million. The nuclear output assumptions used also have a notable influence on the calculation: a +/-3% revision to prospects over the entire horizon would result in a variation of +/-£400 million in the recoverable value. In addition, a 50bp increase in the discount rate would lead to additional impairment of around £300 million.
EDF Energy’s goodwill amounted to €7.6 billion (or £6.7 billion)at 31 December 2020 and mainly results from the takeover of British Energy in 2009.
The recoverable value of EDF Energy is determined by discounting future cash flows over the assets’ useful life, taking into consideration the two EPRs with a 60-year useful life currently under construction at the Hinkley Point site, a project for which the final contracts were signed on 29 September 2016. Future cash flows from these plants are determined by reference to the Contract for Difference (CfD) between theGroup 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 CfD exercise price for HPC is set at £2012 92.50/MWh and is indexed onUK inflation via the consumer price index (CPI). Thus, for the operation period under a CfD, future cash flows include a long-term inflation assumption. For the 25 years of operation after the CfD period, for which no forecasts exist for long-term UK electricity market prices, future cash flows include a very long-term inflation assumption to determine electricity market prices, starting from the final year of cashflows valued on the basis of the CfD.
The impairment test at 31 December 2020 incorporates the latest estimates of the Hinkley Point C (HPC) project costs announced on 27 January 2021, 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 an estimated £22-23 billion(in 2015 sterling), instead of the estimate of £21.5-22.5 billion (in 2015 sterling)from the previous cost revision of September 2019, and deferral of the delivery of reactor 1 to mid-2026. The range will depend on the effectiveness of action plans to be delivered in partnership with contractors, as the impairment test results lie in the middle of the range. The additional costs result from the detailed review of the costs and schedule, taking account of the impacts of the Covid-19 pandemic as currently assessed. EDF’s projected rate of return (IRR) is now estimated at between 7.1% and7.2% (compared to 7.6%-7.8% in the previous review).
On this revised basis and in view of the unfavourable effects on the recoverable value of existing nuclear assets and the sales and supply segment explained above, there is still significant headroom between the recoverable value and the book value of EDFEnergy at 31 December 2020. Sensitivity analyses on the WACC show that a 50bp increase in WACC would not result in a risk of impairment.
For HPC, the latest project review on 27 January 2021 confirmed the risk of deferral of the Commercial Operation Date (COD), estimated at 15 months for Unit 1 and9 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 impairment headroom resulting from the EDF Energy test by approximately 30%.
Sensitivity analyses were also conducted for information purposes using extremely pessimistic assumptions: for example, it was estimated that a further 3-year deferral of the COD and an associated additional cost of £3 billion would lead to a threshold value for the goodwill impairment headroom, all other things being equal.
Additional sensitivity analyses were conducted on the long-term inflation assumptions adopted for HPC revenue over the term of the CfD and beyond. They did not show any risk of impairment, all other things being equal.
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. 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 impairment test of the Edison brand, first recognised at the value of €945 million when Edison was taken over in 2012, is updated annually using the royalty relief method and a 100bp risk premium for determining the discount rate. In view of the macro-economic situation at 30 June 2020, the test was updated and indicated a loss of recoverable value, essentially due to the higher WACC, without leading to recognition of impairment.This test was updated at 31 December 2020 under the usual approach, and the results confirmed the absence of impairment. An external assessment of the Edison brand value performed in 2020 has also concluded that the value in use is higher than its net book value. However, sensitivity analyses show a risk of loss of value of about €55 million in the event of a 50bp increase in the WACC.
