EDF_REGISTRATION_DOCUMENT_2017

2.

RISK FACTORS AND CONTROL FRAMEWORK Risks to which the Group is exposed

In the United Kingdom, the current projected operating life of EDF Energy’s nuclear power plants ranges between 41 and 47 years for advanced gas-cooled reactor (“RAG”) power plants and is 40 years for the pressurised water reactor (PWR). Since EDF Energy acquired them, the operating lifespan of the AGR power plants has been extended by 10 years on average and the objective is to increase the operating life of the PWR power plant by 20 years after the currently planned 40 years (see section 1.4.5.1.2.1 “Nuclear generation”). However, in light of the nuclear safety rules applicable in the United Kingdom, the Group cannot guarantee that EDF Energy will obtain the necessary authorisations at the appropriate time to operate its existing nuclear power plants until the end of their currently projected operating life, or that such authorisations will not be obtained subject to conditions that entail significant expenditures or investments for the Group. For nuclear power plants where EDF is not responsible for the operation, but in which it has financial interests (United States, Belgium, Switzerland), the Group is exposed to the same risks financially: loss of revenue and depreciation of assets in the event of a stoppage or requirement to make additional investments to continue to operate. However, the Group cannot guarantee that these power plants will be actually operated for the periods currently anticipated, particularly in the event of an incident affecting the safety or availability of the facilities. If any of these events occur, they may have a material adverse impact on the Group’s financial position. The construction and operation of the first EPR could encounter difficulties that might affect other projects. The Group has initiated the construction of the European Pressurized water Reactor (EPR) (see section 1.4.1.2 “New Nuclear Projects”) in order to renew its nuclear fleet in France and to enable construction of new facilities in Europe and internationally. This “third generation” reactor was designed based on experience gained from the existing fleet, to provide significant progress in safe operation. No reactor of this design is yet in operation anywhere in the world and the industrial and financial challenges associated are very great for the Group. The commercial commissioning of a reactor is preceded by a long period of start-up tests, which begin with the first tests enabled by the completion of the first electro-mechanical assemblies and which continue with the full-scale commissioning tests. This period is punctuated by authorisations from the Safety Authority, notably including the authorisation to load nuclear fuel which precedes the authorisation for start-up and the first criticality of the reactor itself. If any generic measures to be taken may be anticipated from feedback on EPR projects, difficulties may occur during the start-up tests and at the beginning of operation of each of the EPR projects, and have an impact on the other projects. These difficulties may be such as to raise further questions about the authorisation conditions of the safety authorities of the countries concerned, or to compromise the economic performance or even the return on investment expected from the various projects. This could have an adverse impact on the Group’s financial position. These various difficulties could slow or prevent the implementation of other EPR projects which the Group may undertake. In France, the continuation of the start-up tests of the Flamanville 3 reactor could encounter new uncertainties. In September 2015, EDF submitted a new timetable and updated construction costs for this project for a total amount of 10.5 billion euros (1) . The implementation timetable and the budget for the project have not changed since 2015. The cold functional testing was carried out successfully. The hot functional testing and loading the nuclear fuel is planned for 2018. The state of progress of the project is given in section 1.4.1.2.2 “Update on the Flamanville EPR project”. Sticking to this timetable and this budget nevertheless depends on the success of the start-up tests that are still to be done and on obtaining the various permits that must still be delivered by the ASN. The three expert Committees mandated by the ASN help bring together all of the technical requirements the EPR must satisfy. At the end of 2017, 95% of the dossier for the commissioning application had been investigated and a permanent experts’ group will be set up in 2018 to enable the

ASN to make a decision on the authorisation to load nuclear fuel. The Group might have to cope with new uncertainties, might not obtain the expected permits or they might be compromised by judicial or administrative decisions. In China, the Group has a 30% stake alongside its Chinese partner CGN within TNPJVC (Taishan Nuclear Power Joint Venture Company Limited), which will operate two EPR reactors currently undergoing start-up tests in Taishan. The profitability of these two reactors remains subject to obtaining favourable conditions for the purchase of electricity. The timetable for the start-up of the two reactors was reviewed in 2017 by the majority shareholder (CGN) and commercial commissioning of the first reactor is planned for 2018, and that of the second reactor in 2019. Taishan 1, which has successfully completed its hot functional testing, is waiting for the authorisation of the Chinese safety authority to load its nuclear fuel into the reactor, and could be the first EPR reactor in the world to undergo this stage (see sections 1.4.1.2.3.2 “Taishan EPR” and 1.4.5.3.6.1 “Activities in China”). In the United Kingdom, control of the design and bringing the manufacturing and the construction site under control will determine the profitability of the Hinkley C project and the financing of any future projects in the United Kingdom. The Group has a 66.5% stake in the Hinkley Point C project, alongside its Chinese partner CGN for 33.5%. The milestone for pouring the first nuclear safety concrete for the building in unit 1 is planned for mid-2019, providing that the final design has been determined by the end of 2018. Meeting these milestones will determine the deadline for the commercial commissioning of the first reactor, which is planned for the end of 2025 (see sections 1.4.1.2.3.1 “Hinkley Point C EPR” and 1.4.5.1.2.5 “Nuclear New Build Division”). The costs to finish the project are now estimated at £19.6 billion (2015 values) (2) , up by £1.5 billion (2015 values) compared to previous valuations. This estimate depends on the success of operational action plans, in partnership with the suppliers. The estimated cost overruns, net of action plans, result essentially from a better appreciation of the design, which have been adapted to meet regulatory requirements, the volume and sequencing of work on the site and the gradual implementation of supplier contracts with management controls that are appropriate to the challenges. The forecast rate of return (IRR) for EDF is now estimated at about 8.5%, compared with around 9% initially. In addition, the risk of a postponement of commercial commissioning is estimated at 15 months for unit 1 and nine months for unit 2. This risk would entail potential additional cost of around £0.7 billion (2015 values). In this case, the IRR for EDF would be about 8.2% (3) . The IRR for the project is sensitive to exchange rates and could be reduced if the pound sterling continues to drop in relation to the euro. EDF has also signed two other contracts with CGN relative to studies on two nuclear construction projects in the United Kingdom, Sizewell C and Bradwell B. Agreements that secure the income of Hinkley Point C specify a price revision to the contract for difference in the event of an investment decision concerning Sizewell C. The ability of EDF to take a final investment decision and to finance these projects beyond the development phase could depend on the management of the Hinkley Point C project, the existence of partners and an appropriate regulatory and financial framework. The Group depends, for its nuclear business, on a limited number of players for specific skills. Although the Group has adopted a policy of diversifying its suppliers and service providers for its nuclear business, it is currently dependent on a limited number of contractors and individuals who have the specific skills and necessary experience. This limits competition in markets in which EDF is a buyer and exposes the Group to the risk of a default of one or more of these suppliers or service providers with specific expertise, which could have an adverse impact on the Group’s results and financial position. This is especially the case for Orano, Westinghouse, GE and Alstom, abut also for most nuclear industry manufacturers and the principal maintenance service providers (see section 2.3 “Dependency factors”). Changes to the shareholding or governance of these various providers may also have an impact on the cost, the operational continuity of ongoing contracts and the cost of services provided or delivered products.

In 2015 euros, excluding interim interest. (1) Excluding interim interest and excluding exchange-rate effects in relation to a reference exchange rate for the project of £1 = €1.23. (2) IRR calculated at the July 2017 exchange rate (£1 = €1.16). Any changes to the exchange rate could affect the IRR. (3)

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EDF I Reference Document 2017