Universal Registration Document 2021

2F : Foreign exchange risk

a)  Main risks

Due to the diversity of its activities and geographical locations, the Group is exposed to the risks of exchange rate fluctuations, which may impact the translation differences affecting balance sheet items, Group financial expenses, equity, net income and the internal rate of return (IRR) of projects.

As the Group is involved in long-term contracts, an unfavorable currency fluctuation could have consequences on project profitability. In the absence of hedging, currency fluctuations between the euro and the currencies of the various international markets in which the Group operates can therefore significantly affect the Group’s results and make it difficult to compare performance levels from year to year. If the euro appreciates (or depreciates) against another currency, the euro value of the assets, liabilities, income and expenses initially recognised in that other currency will decline (or increase). Moreover, insofar as the Group is likely to incur expenses in a currency other than that in which the corresponding sales are made, fluctuations in exchange rates could result in an increase in expenses, expressed as a percentage of turnover, which could affect the Group’s profitability and income.

b) Control actions

To limit exposure to foreign exchange risk, the Group has introduced the following management principles :

• local currency financing: to the extent possible given the local financial markets’ capacities, each entity finances its activities in its own functional currency. When financing is contracted in other currencies, derivatives may be used to limit the foreign exchange risk;
• matching of assets and liabilities: the net assets of subsidiaries located outside the Euro zone expose the Group to a foreign exchange risk. The foreign exchange risk on the consolidated balance sheet on foreign currency assets is managed by market hedging with debts issued or contracted in foreign currencies or by using derivative financial instruments. Hedging of net assets in foreign currencies complies with risk/return targets, and the hedging ratio varies depending on the currency. If no hedging instruments are available, or if hedging costs are prohibitive, the foreign exchange positions remain open and the risk on such positions is monitored by sensitivity calculations;
• hedging of operating cash flows in foreign currencies: in general, the operating cash flows of EDF and its subsidiaries are in the relevant local currencies, with the exception of flows related to fuel purchases which are primarily in US dollars, and certain flows related to purchases of equipment, which concern lower amounts. Under the principles laid down in the “Strategic financial management framework”, EDF and the main subsidiaries concerned by foreign exchange risks (EDF Energy, EDF Trading, Edison, EDF Renewables) are required to hedge firm or highly probable commitments related to these future operating cash flows.

2.2.3 Group transformation and strategic risks

3A – Transformation capacity in the face of disruptions

a) Context

• Changes in the decarbonisation of the energy sector, emergence of new markets and new players, and changes in the business models of the stakeholders.
• Changes and volatility in energy and commodity prices.
• Changes in the international competitive context: depending on the competitive situation, the Group is faced with different contexts (more or less total opening up of markets, position in relation to competitors, regulation, etc.) and new customer expectations.
• Public policy developments and changes in the regulatory framework, in France and Europe.

In this context, competition is intensifying in all areas: energy generation (nuclear, renewable energies, etc.), supply, services, storage, international tenders.

b) Main risks

In the above context, the main risk is that the Group’s strategy will not be successfully implemented. In particular:

• there is a risk that the transformations undertaken to cope with these changes will be insufficient, or that the Group’s model will be called into question, with potential consequences in terms of:
• market share losses, failure to meet decarbonisation targets, failure to gain expected market share or margin losses,
• decline in upstream/downstream integration, which could lead to a reduced ability to cope with seasonal variations in activity, physical and market uncertainties, and lead to a loss of gross margin,
• reduced cross-functional synergies deployed within the integrated Group, which could undermine the Group’s ability to meet the diverse expectations of its customers and stakeholders, and reduce the efficiency and therefore the competitiveness of low-carbon industrial solutions,
• decrease in the Group’  ability to seize new opportunities (mobility, hydrogen, etc.) and losing the Group’s leading position in the energy field;
• nuclear costs and changes in these costs (new nuclear projects, Grand Carénage, etc.) and the Group’s ability to finance them could force the Group to reconsider the rate at which it deploys its strategy;
• even with a transformation that is well underway and adequate contractual arrangements, the Group cannot ensure that its various low-carbon solutions projects can be implemented according to the planned schedules and under satisfactory economic, financial, regulatory, partnership or legal conditions. It cannot ensure that they will meet the needs expressed by our customers and stakeholders over time with the profitability expected at the outset. All of this could have a negative impact on the Group’s financial position, its commitment to the fight against climate change, and its reputation;
• there is a risk that staff will not be sufficiently mobilised individually and collectively due to a deteriorating social climate as a result of the changes associated with the adaptations or transformations underway, be they internal or external;
• there is a risk that all these impacts may be aggravated by the Covid health crisis (weakening of the economy, both externally and internally).