Universal Registration Document 2021

28.5 Discount rate, inflation and sensitivity analyses

28.5.1 Calculation of the discount rate and inflation

The methodologies used to determine the discount rate changed as follows from 31 December 2020:

The discount rate is based on an interest rate curve, which comprises a sovereign yield curve constructed on year-end market data for liquid horizons (OAT bond 0-20 year curve) and then converging, using an interpolation curve, towards the very long-term rate UFR (Ultimate Forward Rate) - with yields that become close to the UFR after 50 years – plus a curve of the spreads of corporate bonds rated A to BBB. Based on the disbursements expected to meet nuclear obligations, a single equivalent discount rate is deduced by applying the discount rates from the interest rate curve constructed in this way to each flow as appropriate to its maturity. This single discount rate is then applied to the forecast disbursement schedules for the costs of the obligations, to determine the provisions.

The UFR was defined by the European Insurance and Occupational Pensions Authority (EIOPA) for very long-term insurance liabilities that will involve disbursements beyond market horizons. The UFR calculated for 2021 is 3.46%. This is used in the calculation methodology, in compliance with the decision by the French authorities, which in the ministerial order of 1 July 2020 amending the order of 21 March 2007 on secure financing of nuclear expenses (see below) changed the formula of the regulatory ceiling for the discount rate, such that it now refers to the UFR instead of the arithmetic 48-month average of the TEC 30-year rate. The UFR is considered more relevant for nuclear provisions in view of the very long-term maturities. The sovereign yield curve at 31 December 2021 indicates rates in a range of [-0.6%; 0.6%] ([-0.6%; 0.2%] in 2020) for outflows between 0 and 20 years, [0.6%; 3.1%] ([0.2%; 3.2%] in 2020) for outflows between 20 and 50 years, and a rate moving towards 3.46% (3.51% in 2020) for outflows after 50 years.

This change in calculation methodology for the discount rate provides the best assessment of the time value of money with regard to nuclear provisions, which are characterised by very long-term disbursement outflows, well beyond market horizons. This assessment is largely achieved through:

• use of an interest rate curve based on observed year-end market data with liquid horizons, converging over non-liquid horizons towards a very long-term rate with no cycle effect, i.e. yield data for all the maturities associated with nuclear provisions;
• use of a very long-term rate (calculated UFR) produced by an independent body and now adopted by the French authorities in setting the formula for regulatory ceiling, to take account of long trends in yield movements, in coherence with the distant disbursement horizon;
• reference to bond spreads that include corporate bonds rated A to BBB by ratings agencies, in order to construct a robust spread curve since there are few AA-rated bonds, particularly on long maturities, whereas most “Investment Grade” bonds are BBB-rated bonds and the great majority of them have longer maturities.

The inflation assumption is based on an inflation curve constructed by reference to inflation-indexed market products and economic forecasts, in long-term coherence with the inflation assumption underlying the UFR (2%), which leads to an inflation assumption of 1.7% at 31 December 2021, up by 50 base points from 31 December 2020, particularly reflecting break-even inflation rates.

The discount rate determined is thus 3.7% at 31 December 2021, assuming inflation of 1.7% (3.3% – mainly relating to the sovereign yield curve – and 1.2% at 31 December 2020), i.e. a real discount rate of 2.0% at 31 December 2021 (2.1% at 31 December 2020).

28.5.2 Regulatory discount rate limit

The discount rate must comply with two regulatory limits. Under the decree of 1 July 2020 on secure financing for nuclear expenses (which codified and updated the initial decree of 23 February 2007 as part of the Environment Code) and the ministerial order of 1 July 2020 on secure financing for nuclear expenses (which amended the initial ministerial order of 21 March 2007), it must be lower than:

• a regulatory maximum, expressed in real value, e. net of inflation; this value is equal to the unrounded value representative of expectations concerning the real long-term interest rate, as used for the calculation of the Ultimate Forward Rate (UFR) applicable at the date concerned published by the European Insurance and Occupational Pensions Authority (EIOPA), plus 150 bp. This maximum is applicable from 2024. Until 2024, the maximum is the weighted average of 2.3% and the above calculation. The weighting applied to the 2.3% rate is set at 50% for 2020, 25% for 2021, 12.5% for 2022 and 6.25% for 2023; and
• the expected rate of return on assets covering the liability (dedicated assets).

The maximum discount rate calculated by reference to the UFR in application of the order that took effect on 1 July 2020 is 2.80% at 31 December 2021 (2.66% at 31 December 2020).

The real discount rate used in the financial statements at 31 December 2021, calculated by the method presented above, is 2.0%.

28.5.3 Analyses of sensitivity to macroeconomic assumptions

Sensitivity to assumptions concerning costs, inflation rate, long-term discount rate, and disbursement schedules can be estimated through comparison of the gross amount estimated under year-end economic conditions with the present value of the amount.