Summary : As a result of its activities, the EDF group is exposed to risks related to the financial markets, in particular an equity risk.
Criticality : ●● 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.
EDF is exposed to equity risks, interest rate risks and foreign exchange risks regarding its dedicated asset portfolio.
The market value of the listed equities in EDF’s dedicated asset portfolio was €14,801 million at 31 December 2021. The volatility of the listed equities at the same date was 10.93% based on 52 weekly performances, compared to 26.6% at 31 December 2020. 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 €1,618 million.
At 31 June 2021, the sensitivity of the listed bonds (€12,560 million) was 5.6, i.e. a uniform 100 base point rise in interest rates would result in a €697 million decline in market value. This sensitivity was 5.5 at 31 December 2020.
Summary : 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 : ●● Intermediate
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 a sits 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 2021) 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 2021) 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 also 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 in 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.
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:
Given the changes in the regulatory framework, no additional allocation is expected in respect of 2021, as the rate of coverage of nuclear provisions by dedicated assets is greater than 100%.
Overall, a 0.5% decrease in interest rates would have the following impacts:
In total, the sensitivity of pre-tax income therefore amounts to approximately -€1,300 million for a 0.5% fall in interest rates.
Moreover, an increase in inflation rate expectations, at a given interest rate, would result in a decrease in real interest rates which would have similar effects to a decrease in interest rates on the Group’s discounted liabilities, given that the future expenses included in these liabilities are considered to be indexed to inflation 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 0.5% increase in interest rates would have an effect on the pre-tax income of approximately -€50 million, due to the increase in coupons linked to the debt issued by the Group, at variable or floating rates, offset by the increase in the Group’s cash.
Also, these unfavorable impacts related to a rise in interest rates are in principle more than offset by the favourable impacts related to a rise in interest rates in connection with long-term commitments (see previous point).
