EDF / 2018 Reference document

FINANCIAL STATEMENTS Income Statement

General assumptions Note 1.3.15 explains the methodology used by the Group for impairment testing. The WACC in the benchmark countries was stable overall compared to 31 December 2017. In core Euro zone countries (especially France and Belgium), the effect of lower tax rates was offset by the slight downturn in risk-free rates and the country risk. In the United Kingdom and Italy, the WACC remained stable despite the impacts of tax reforms, and country risk premiums remain at the same level as 2017. Test results are subjected to analyses of sensitivity to the discount rate. The market environment in 2018 was significantly better than in 2017, with a substantial rise in electricity market prices. Commodity prices rose in 2018, although at a slower pace in the second half of the year. CO 2 prices also registered a sharp rise, particularly under the influence of the Market Stability Reserve. On the market horizon, forward prices were also markedly higher than the price levels used in the previous medium-term plan. Over the long-term horizon, however, visibility of fundamentals was lower year-on-year, as the benchmark scenario incorporated more pronounced environmental objectives, notably European targets, which reduced demand for fossil fuels. The fuel and electricity price trajectories used in impairment testing are thus lower than last year in the core countries despite the impacts of the ETS (EU Emissions Trading System), with a larger downward adjustment in the United Kingdom due to a more cautious approach to the continued existence of the Carbon Price Support mechanism. As these assumptions are crucial in determining recoverable value, sensitivity analyses are applied to long-term price curves when impairment tests are undertaken. In addition, the capacity mechanisms introduced under different approaches in different countries are still an uncertain channel for restoring sufficient income levels on certain generation assets. No capacity mechanism has yet been adopted in Italy, for example. In the United Kingdom, the Capacity Market was suspended on 18 November 2018 by a decision of the European Court of Justice ruling that it was incompatible with European rules on State aid. The impairment test applied assumes that a new system will be set up from the second half-year of 2019, in line with the British government’s objective of holding further auctions in summer 2019 for deliveries in 2019/2020. At 31 December 2018, the macro-economic context presented above does not introduce any major risk for the Group in addition to the risks already noted in previous years’ financial statements; the impairment booked reflects risks specific to certain CGUs or specific assets. United Kingdom – EDF Energy British Energy brand The British Energy brand is fully depreciated at 31 December 2018, as the prospects for its use are currently very limited. Thermal assets Significant amounts of impairment have been booked in recent years in respect of the Group’s thermal assets in England, notably reducing the net book value of coal-fired plants and gas storage facilities practically to zero. Investments made in the Cottam and West Burton A coal-fired plants have been totally depreciated for an amount of €(16) million, consistent with the decisions of 2017 to close these plants early. On 7 February 2019 EDF Energy announced that it had decided to close the Cottam coal-fired plant. At 31 December 2018, the temporary suspension of the British Capacity Market, and in the longer term, prospects of lower capacity prices and clean spark spreads than forecast at the end of 2017 led to the recognition of additional impairment on the West Burton B CCGT plant (€(106) million). The value of this asset is sensitive to price variations; a 5% variation in clean spark spreads would have an impact of approximately 5% on the recoverable value of the West Burton B CCGT plant.

Nuclear assets (plants in operation and the Hinkley Point C project) and goodwill

The recoverable value of existing nuclear assets (7 power plants) is estimated by discounting future cash flows over the assets’ useful life, assuming a 20-year extension for the Sizewell B PWR plant (other, Advanced Gas-cooled Reactor (AGR) plants have already had their useful life extended by the British Nuclear Authority, the most recent decisions dating from February 2016). The level of production assumed for the test is coherent with the high nuclear plant availability of the past few years, although the level in 2018 was lower due to certain specific events. The recoverable value of EDF Energy’s nuclear fleet has declined compared to 2017, mostly in line with long-term downward price trajectories, but is still higher than the assets’ net book values. A 5% variation in electricity prices compared to the trajectory assumed for the test would have a 14% impact on the assets’ recoverable value, without affecting the margin resulting from the test. EDF Energy’s goodwill amounted to €7.6 billion (or £6.7 billion) at 31 December 2018 and mainly resulted from the takeover of British Energy in 2009. The recoverable value of EDF Energy is estimated by discounting future cash flows over the assets’ expected useful life, taking into consideration the plan to construct two EPRs with a 60-year useful life at the Hinkley Point site, a project for which the final contracts were signed on 29 September 2016. Future cash flows relating to these plants are determined by reference to the Contract for Difference (CfD) between the Group 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 2018 impairment test, like the 2017 test, incorporates the latest estimates of revised project costs (see the press release of 3 July 2017) 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 £19.6 billion (in 2015 sterling), £1.5 billion more than previous estimates, still assuming delivery of Unit 1 by the end of 2025. This estimate also assumes successful completion of operational action plans in partnership with suppliers. EDF's projected rate of return (IRR) is estimated at 8.5% (compared to about 9% initially). Apart from the above information on medium and long-term price prospects, in 2018 the recoverable value of EDF Energy also reflects lower assumptions regarding downstream margins, in line with the introduction of the cap on the Standard Variable Tariff, and in the longer term, margin rates considered relatively small on the British market. On these bases, the difference between the recoverable value and the book value of EDF Energy remains significant at 31 December 2018. For HPC, the project review also identified a risk of deferral of the Commercial Operation Date (COD), estimated at 15 months for Unit 1 and 9 months for Unit 2, entailing an additional potential cost of around £0.7 billion (in 2015 sterling) which would lead to an IRR for EDF of around 8.2%. This risk of deferral and the associated additional cost would reduce the margin resulting from the EDF Energy impairment test by approximately 20%. Further sensitivity analyses were also conducted for information purposes, for example based on a 4-year deferral of commissioning and an associated additional cost of £4 billion over the new benchmark business plan. The results do not call into question the book value of EDF Energy. Although the Brexit decision has no immediate impact on EDF Energy’s impairment tests since most cash flows (receipts, costs, investments) and assets are stated in pounds sterling, it is still difficult at this stage to anticipate the long-term consequences, given the uncertainties over the timing and terms of the UK’s departure from the European Union. The Group will monitor movements in the rates of return demanded by investors and changes in fuel prices, CO 2 prices and macro-economic data such as GDP growth, which could affect price curves.

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EDF I Reference Document 2018