EDF GROUP 2008 DOCUMENT DE REFERENCE. Leading the energy change Changer l énergie ensemble

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1 EDF GROUP 2008 DOCUMENT DE REFERENCE Leading the energy change Changer l énergie ensemble

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3 French société anonyme with a share capital of 911,085,545 Registered head office: 22-30, avenue de Wagram Paris Cedex RCS Paris EDF group 2008 Document de Référence This document is an unofficial translation of the French Document de Référence filed with the Autorité des marchés financiers (the AMF ) on April 14, 2009 in accordance with article of the AMF General Regulations. This unofficial translation has been prepared by EDF for informational purposes only and has not been reviewed or registered with the AMF. The French Document de Référence may be used for purposes of a financial transaction if supplemented with an offering memorandum (note d opération) that received a visa from the AMF. In the event of any ambiguity or discrepancy between this unofficial translation and the French Document de Référence, the French version shall prevail. Pursuant to Article 28 of the European Commission Regulation n 809/2004, the following information is incorporated by reference into this Document de Référence: Consolidated financial statements of the EDF group for the year ended December 31, 2007, prepared in accordance with international accounting standards, as well as the accompanying statutory auditors reports, set forth respectively in section 20.1 (pages 214 to 315) and section 20.2 (page 316 to 317) of the EDF group s 2007 Document de Référence; Consolidated financial statements of the EDF group for the year ended December 31, 2006, prepared in accordance with international accounting standards, as well as the accompanying statutory auditors reports, set forth respectively in section 20.1 (pages 197 to 289) and section 20.2 (page 290 and 291) of the EDF group s 2006 Document de Référence; and The discussion of the EDF group financial situation and results for the year ended December 31, 2007, presented on pages 130 to 175 in Chapter 9 of the EDF group s 2007 Document de Référence. Copies of this Document de Référence are available free of charge at EDF (22-30, avenue de Wagram, Paris Cedex 08) and on the EDF website ( as well as on the AMF website (

4 Table of contents 1. Persons responsible PERSON RESPONSIBLE FOR THE DOCUMENT DE RÉFÉRENCE CERTIFICATION FROM THE PERSON RESPONSIBLE FOR THE DOCUMENT DE RÉFÉRENCE CONTAINING THE ANNUAL FINANCIAL REPORT 6 2. Auditors STATUTORY AUDITORS ALTERNATE AUDITORS 8 3. Selected financial information 9 4. Risk factors RISK MANAGEMENT AND CONTROL IN THE EDF GROUP RISK FACTORS DEPENDENCY FACTORS Information about the company HISTORY AND DEVELOPMENT OF THE COMPANY INVESTMENTS Business overview STRATEGY PRESENTATION OF THE EDF GROUP S ACTIVITY IN FRANCE PRESENTATION OF THE EDF GROUP S INTERNATIONAL ACTIVITY OTHER ACTIVITIES AND TRANSVERSE FUNCTIONS LEGISLATIVE AND REGULATORY ENVIRONMENT Organizational structure Property plant and equipment SERVICE SECTOR REAL ESTATE ASSETS EMPLOYERS PARTICIPATION IN THE CONSTRUCTION EFFORT (PARTICIPATION DES EMPLOYEURS À L EFFORT DE CONSTRUCTION, OR PEEC ) SUBSIDIZED HOME OWNERSHIP LOANS Operating and financial review KEY FIGURES ECONOMIC ENVIRONMENT AND SIGNIFICANT EVENTS INTRODUCTION TO THE 2008 RESULTS ANALYSIS RESULTS FOR PRINCIPAL ACCOUNTING METHODS SENSITIVE TO THE USE OF ESTIMATES AND JUDGMENTS SEGMENT REPORTING OF FINANCIAL INFORMATION ANALYSIS OF THE CONSOLIDATED INCOME STATEMENT FOR 2008 AND BREAKDOWN OF EBIT BY GEOGRAPHICAL AREA NET INDEBTEDNESS, CASH FLOWS AND INVESTMENTS MANAGEMENT AND CONTROL OF MARKET RISKS PROVISIONS OFF BALANCE SHEET COMMITMENTS (COMMITMENTS GIVEN) SUBSEQUENT EVENTS Capital resources and cash flows Research and development, patents and licenses KEY FIGURES R&D, AN ASSET FOR THE GROUP INTELLECTUAL PROPERTY POLICY Information on trends PERFORMANCE IMPROVEMENT: EXCELLENCE OPERATIONNELLE PROGRAM DEVELOPMENT OF ELECTRICITY PRICES IN FRANCE IN JANUARY AND FEBRUARY EFFECTS OF THE TRANSITION TARIFF SYSTEM Financial outlook PERFORMANCE TARGETS OVER THE PERIOD OUTLOOK Administrative, management, and supervisory bodies and senior management BOARD OF DIRECTORS GENERAL MANAGEMENT ABSENCE OF FAMILY TIES, CONVICTIONS AND CONFLICTS OF INTEREST OF EDF DIRECTORS AND EXECUTIVE OFFICERS Compensation and benefits COMPENSATION OF DIRECTORS AND CHIEF OFFICERS PROVISIONS FOR PENSIONS, RETIREMENT FEES, AND OTHER ADVANTAGES SHARE OWNERSHIP OF DIRECTORS AND CHIEF OFFICERS STOCK OPTIONS AND/OR PURCHASE OF SHARES AGREEMENTS INVOLVING MEMBERS OF THE BOARD OF DIRECTORS Functioning of the administration and management bodies POWERS OF THE BOARD OF DIRECTORS BOARD OF DIRECTORS MEETINGS BOARD OF DIRECTORS RULES OF PROCEDURE EVALUATION OF THE BOARD OF DIRECTORS COMMITTEES OF THE BOARD OF DIRECTORS EDF ETHICAL APPROACH STOCK EXCHANGE ETHICS CHARTER INTERNAL CONTROL COMPLIANCE WITH THE CORPORATE GOVERNANCE PRINCIPLES IN FORCE IN FRANCE Employees/Human resources WORKFORCE ELECTRICITY AND GAS INDUSTRIES EMPLOYMENT STATUS ORGANIZATION AND WORKING HOURS SKILLS, TRAINING AND MOBILITY EQUAL OPPORTUNITY SOCIAL DIALOGUE AND EMPLOYEE REPRESENTATION HEALTH AND SAFETY QUALITY OF WORKING LIFE THE PENSION SYSTEM AND THE COMPLEMENTARY HEALTHCARE BENEFITS SYSTEM REMUNERATION POLICY Major shareholders BREAKDOWN OF SHARE CAPITAL AND VOTING RIGHTS MARKET FOR THE COMPANY S SHARES AGREEMENT WHICH COULD LEAD TO A CHANGE OF CONTROL TABLE OF CONTENTS 2008 EDF DOCUMENT DE RÉFÉRENCE

5 19. Related party transactions RELATIONSHIPS WITH THE FRENCH STATE RELATIONSHIPS WITH GDF SUEZ RELATIONSHIPS WITH THE AREVA GROUP RELATIONSHIPS WITH GROUP ENTITIES WITHIN THE SCOPE OF CONSOLIDATION Financial information on assets, the financial statements and results of the Company HISTORICAL FINANCIAL INFORMATION STATUTORY AUDITORS REPORT ON CONSOLIDATED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDING DECEMBER 31, FEES PAID BY THE GROUP TO STATUTORY AUDITORS DIVIDEND POLICY LEGAL AND ARBITRATION PROCEEDINGS SIGNIFICANT CHANGE IN THE COMPANY S FINANCIAL OR TRADING POSITION 348 Appendix D Information made available to the public by the EDF group during the last 12 months (Annual document prepared pursuant to Article of the AMF general regulations) 394 Appendix E EDF s financial statements and Statutory Auditor s Report on the financial statements 402 Appendix F Concordance table Annual financial report 468 Appendix G Resolutions subject to the extraordinary Shareholders Meeting on May 20, Additional information GENERAL INFORMATION REGARDING THE COMPANY S SHARE CAPITAL INCORPORATION DOCUMENTS AND ARTICLES OF ASSOCIATION Material contracts Third party information and statement by experts and declarations of any interest Documents available to the public CONSULTATION OF LEGAL DOCUMENTS PERSON RESPONSIBLE Information on holdings 358 Glossary 359 Appendix A 2008 Report by the Chairman of the EDF Board of Directors on Corporate Governance, internal control and risk management procedures 366 Appendix B Statutory Auditor s Report prepared in accordance with Article L of French Commercial Code (Code de Commerce), on the Report prepared by the Chairman of the Board of Directors of Électricité de France S.A., on the internal control procedures relating to the preparation and processing of accounting and financial information 384 Appendix C Mandates exercised by the Directors and the Chief Officers during the last five years (outside EDF) EDF DOCUMENT DE RÉFÉRENCE TABLE OF CONTENTS 3

6 EDF DOCUMENT DE RÉFÉRENCE

7 In this Document de Référence (the Document de Référence ), unless otherwise stated, the references to Company and EDF refer to EDF S.A., the parent company, and the references to EDF group and Group refer to EDF and its subsidiaries and shareholdings. In addition to the information contained in this Document de Référence, investors should carefully consider the risk factors described in section 4.2 ( Risk Factors ). These risks, or one of these risks, could negatively impact the Group s activity, situation or financial results. Furthermore, other risks, which have not yet been identified or considered as material by the Group, could have the same negative impact and investors could consequently lose all or part of their investment in the Company. Moreover, this Document de Référence contains information relating to the markets in which the EDF group is present. This information has been taken from surveys carried out by external sources. Considering the very rapid changes that characterize the energy sector in France and in the world, it is possible that this information could prove to be erroneous or no longer be up to date. The Group s activities could consequently evolve in a manner different from those described in this Document de Référence and the declarations or information appearing in this Document de Référence could prove to be erroneous. The forward-looking statement within this Document de Référence, notably in section 6.1 ( Strategy ), could also be impacted by risks, uncertainties or other factors that may cause the future results, performances and achievements of the Group to differ significantly from the objectives expressed and suggested. These factors may include changes in economic and commercial environment or in regulations as well as to the factors set forth in section 4.2 ( Risk Factors ). Pursuant to European and French legislation, the entities responsible for the transmission and distribution of electricity within the EDF group may not communicate certain information they gather within the framework of their activities to the other entities of the Group, including its Management. Similarly, certain data specific to generation and marketing activities may not be communicated to the entities responsible for transmission and distribution. This Document de Référence has been prepared by the EDF group in compliance with these rules. A glossary for the major technical terms is provided at the end of this Document de Référence, before the Appendices EDF DOCUMENT DE RÉFÉRENCE 5

8 1 1.1 Persons responsible Person responsible for the Document de Référence Certification from the person responsible for the Document de Référence containing the annual financial report Person responsible for the Document de Référence Pierre Gadonneix EDF Chairman and Chief Executive Officer 1.2 Certification from the person responsible for the Document de Référence containing the annual financial report Having taken all reasonable care to ensure that such is the case, I certify that, to the best of my knowledge, the information contained in this Document de Référence accurately reflects the facts and contains no omission likely to affect its meaning. I certify that, to the best of my knowledge, the financial statements are prepared in accordance with accounting standards and that they give a true and fair view of the assets and liabilities, financial position and the income of the company and of all the companies included in the consolidation, and that the management report (Rapport de gestion) reports a true and fair view of the business trend, the income and the financial position of the company and of all the companies included in the consolidation and a description of the main risks and uncertainties they face. I have obtained a letter from the statutory auditors certifying that they have verified the financial and accounting information provided in this Document de Référence and that they have read the document in entirety. The consolidated financial statements for the financial year ended December 31, 2008, prepared in accordance with IAS-IFRS standards, as adopted by the European Union, and included in this Document de Référence in section 20.1 ( Historical Financial Information ), have been reviewed by the statutory auditors. Their report is set forth in section 20.2 of this Document de Référence. Without qualifying their opinion, the statutory auditors, in their report on the consolidated financial statements for the year ended December 31, 2008, draw the reader s attention to the following points: the valuation of long-term provisions relating to nuclear electricity production, as described in notes and 32.2 to 32.4 to the consolidated financial statements, results as indicated in note from management s best estimates. This valuation is sensitive to the assumptions made concerning costs, inflation rates, long-term discount rates, and forecast cash outflows. Changes in these parameters could lead to a material revision of the level of provisioning; the approach adopted by EDF to present in the balance sheet its obligation to renew property, plant and equipment used for the French public distribution of electricity, as described in note 2.24, is based on the specific characteristics of concession contracts. The amount of contractual obligations as calculated and disclosed annually to the grantors described in activity reports is used for evaluating the obligation. An alternative approach based on the discounted value of future payments necessary for replacement of these assets at the end of their industrial useful life would result in a different representation of the obligation towards grantors. The impacts this approach would have had on the accounts are shown in note 2.24 for information purposes. Measurement of the concession liability concerning assets to be replaced is notably subject to uncertainty in terms of costs and disbursement dates. The consolidated financial statements for the financial years ended December 31, 2007 and 2006, prepared in accordance with IAS-IFRS standards as adopted by the European Union, have been reviewed by the statutory auditors. Their reports are set forth in section 20.2 of the 2007 Document de Référence and in section 20.2 of the 2006 Document de Référence. These financial statements and the corresponding reports of the auditors are incorporated by reference into this Document de Référence in accordance with article 28 of EC Regulation 809/2004, dated April 29, Without qualifying their opinion, the statutory auditors, in their report on the consolidated financial statements for the year ended December 31, 2007, draw the reader s attention to the following points: the valuation of long-term provisions relating to nuclear electricity production, as described in notes 2.2.1, 31.2 and 31.5 to the consolidated financial statements, results, as indicated in note 2.2.1, from Management best estimates. This valuation is sensitive to the assumptions made concerning costs, inflation rates, long-term discount rates, and forecast cash outflows as well as the results of current negotiations with Areva. Changes in some of these parameters could lead to a material revision of the level of provisioning; 6 PERSONS RESPONSIBLE 2008 EDF DOCUMENT DE RÉFÉRENCE

9 the approach adopted by EDF to present in the balance sheet its obligation to renew property, plant and equipment used for the French public distribution of electricity, as described in note 3, is based on the specific characteristics of concession contracts. The amount of contractual obligations as calculated and disclosed to the grantors in reports is used for evaluating the obligation. An alternative approach based on the discounted value of future payments necessary for replacement of these assets at the end of their industrial useful life would result in a different representation of the obligation towards grantors. The impacts this approach would have had on the accounts are shown in note 3 for information purposes. Measurement of the concession liability concerning assets to be replaced is notably subject to uncertainty in terms of costs and disbursement dates. Without qualifying their opinion, the statutory auditors, in their report on the consolidated financial statements for the year ended December 31, 2006, draw the reader s attention to the following points: the valuation of long-term provisions relating to nuclear electricity production, as described in notes 2.2.1, 29.2 and 29.3 to the consolidated financial statements, results, as indicated in note 2.2.1, from Management best estimates. This valuation is sensitive to the assumptions made concerning costs, inflation rates, long-term discount rates, and forecast cash outflows as well as the results of current negotiations with Areva. Changes in some of these parameters could lead to a material revision of the level of provisioning; the approach adopted by EDF to present in the balance sheet its obligation to renew property, plant and equipment used for the French public distribution of electricity, as described in note 3, is based on the specific characteristics of concession contracts. The amount of contractual obligations as calculated and disclosed to the grantors in reports is used for evaluating the obligation. An alternative approach based on the discounted value of future payments necessary for replacement of these assets at the end of their industrial useful life would result in a different representation of the obligation towards grantors. The impacts this approach would have had on the accounts are shown in note 3 for information purposes. Measurement of the concession liability concerning assets to be replaced is notably subject to uncertainty in terms of costs and disbursement dates. Pierre Gadonneix Chairman and CEO of EDF 2008 EDF DOCUMENT DE RÉFÉRENCE PERSONS RESPONSIBLE 7

10 2 2.1 Auditors Statutory auditors Alternate auditors Statutory auditors Deloitte et Associés, 185, avenue Charles de Gaulle, Neuilly-sur-Seine, represented by Mr. Amadou Raimi and Mr. Tristan Guerlain. KPMG SA, Immeuble Le Palatin, 3 Cours du Triangle, Paris La Défense Cedex, represented by Mr. Jean-Luc Decornoy and Mr. Michel Piette. Appointed by a decision at the ordinary Shareholders Meeting of June 6, 2005 for a period of six financial years, this term expires at the end of the ordinary Shareholders Meeting which will approve the accounts for the financial year ending on December 31, The auditors designated above have thus certified the accounts presented in this Document de Référence. 2.2 Alternate auditors BEAS, 7-9, Villa Houssay, Neuilly-sur-Seine. SCP Jean-Claude André, 2 bis, rue de Villiers, Levallois-Perret. Appointed by a decision at the ordinary Shareholders Meeting of June 6, 2005 for a period of six financial years, this term expires at the end of the Shareholders Meeting which will approve the accounts for the financial year ending on December 31, AUDITORS 2008 EDF DOCUMENT DE RÉFÉRENCE

11 3 Selected financial information Preamble Key financial information Pursuant to European regulation n 1606/2002 of July 19, 2002 on the adoption of international accounting standards, the Group s consolidated financial statements for the year ended December 31, 2008, are prepared under the international accounting standards published by the IASB and approved by the European Union for application at December 31, These international standards are IAS (International Accounting Standards), IFRS (International Financial Reporting Standards), and interpretations (SIC and IFRIC). The selected financial information is taken from the EDF group s consolidated financial statements at December 31, 2008, which have been audited by EDF s auditors. The selected financial information below must be read in conjunction with (i) the consolidated financial statements included in section 20.1 ( Historical Financial Information ) of this Document de Référence, and (ii) the operating and financial review contained in Chapter 9 of this Document de Référence. Extracts from the consolidated income statements (in millions of euros) Sales 64,279 59,637 Operating profit before depreciation and amortization (EBITDA) 14,240 15,210 Operating profit (EBIT) 7,911 9,991 Income before taxes of consolidated companies (1) 4,744 7,457 EDF NET INCOME 3,400 5,618 (1) The income before taxes of the consolidated companies is EDF s net income before income taxes, share in income of companies accounted for under the equity method, net income from discontinued operations and minority interests. Extracts from the consolidated balance sheets December 31, December 31, (in millions of euros) Non-current assets 141, ,572 Current assets 59,154 51,308 Assets classified as held for sale TOTAL ASSETS 200, ,149 Equity (EDF s share) 23,058 27,210 Minority interests 1,784 1,586 Non-current provisions 43,415 44,038 Other non-current liabilities 73,814 64,623 Current liabilities 58,217 48,578 Liabilities related to assets classified as held for sale TOTAL EQUITY AND LIABILITIES 200, , EDF DOCUMENT DE RÉFÉRENCE SELECTED FINANCIAL INFORMATION 9

12 Selected financial information Extracts from the consolidated cash flow statements (in millions of euros) Net cash flow from operating activities 7,572 10,222 Net cash flow used in investing activities (16,665) (5,428) Net cash flow used from financing activities 8,811 (2,116) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (282) 2,678 Information concerning net indebtedness December 31, December 31, (in millions of euros) Loans and other financial liabilities 37,451 27,930 Derivatives used to hedge liabilities (381) 23 Cash and cash equivalents (5,869) (6,035) Liquid assets (6,725) (5,682) Net financial liabilities from companies disclosed in non-current liabilities related to assets classified as held for sale 0 33 NET INDEBTEDNESS 24,476 16, SELECTED FINANCIAL INFORMATION 2008 EDF DOCUMENT DE RÉFÉRENCE

13 4 4.1 Risk factors Risk management and control in the EDF group Risk factors Dependency factors Risk management and control in the EDF group General framework for managing and controlling the Group s risks For many years the EDF group has pursued a policy of managing its operational, financial and organizational risks (see Report of the Chairman of the Board of Directors of EDF on corporate governance and internal controls shown in Annex A to this Document de Référence). In 2003, given the changing context, the Group decided to implement an overall process for managing and controlling its risks, reinforcing existing plans, in particular by creating the Corporate Risk Management Division (Direction du Contrôle des Risques Groupe, or DCRG ). The objectives of the management and control policy are to: allow identification and ranking of risks in all domains to gain increasingly firm control over them, under the responsibility of operational management; allow Officers, Directors and the Group s governance bodies to have a consolidated view, regularly updated, of the major risks and their level of control; contribute to safeguarding the Group s strategic and financial business plan; meet the expectations and inform external stakeholders on the risks of the Group and the process for their management. The scope of risk management includes EDF s business and those of its subsidiaries under EDF s operational control. Hence it does not include subsidiaries not under EDF s operational control because of the rules on independent management (RTE-EDF Transport, EDF Réseau Distribution France ERDF: regulated subsidiaries) and the entities under joint control (in particular, EnBW, Edison or Dalkia International). The scope of risk control includes EDF s business and that of its major subsidiaries in France and abroad. For EDF entities not subject to its operational control, risk control is implemented by the governance bodies of the entities. Given the fact that the acquisition of British Energy by EDF is recent (see section ( British Energy )), the presentation in sections ( Risk management and control in the EDF group ) and ( Management of industrial and environmental risks ) does not take into account the control and risk management within the British Energy group RISK MANAGEMENT AND CONTROL PRINCIPLES As a general rule, operational and functional entities are responsible for managing risks that are within their scope of activity. Risks are controlled by a system implemented independently of the risk management functions. This system ensures a standard approach for the identification, assessment and control of risks. According to those principles, every six months EDF establishes a consolidated mapping of its major risks for the entities under its operational control or under joint control (except for Dalkia International), based on their representations. The consolidated mapping is approved every six months, by the TOP 4 and presented to the Audit Committee of the Board of Directors (see section ( TOP 4 and Executive Committee )). The global risk mapping process backs up other processes implemented by the Group, in particular, the set-up of the audit program, the Insurance policy and its implementation (see section ( Insurance )), the crisis management policy, the analysis of risks concerning matters examined by the Group s decisional bodies (such as TOP 4, the Committee of Commitments and Holdings, the Committee for Fuel Commitments, the Steering UpStream Downstream Trading Committee, etc.). The risks control process in particular contributes to securing the investment and long-term commitments process, by ensuring compliance with the risk analysis methodology principles for matters presented to the Committee of Commitments. RTE-EDF TRANSPORT In relation to RTE-EDF Transport, risk management and control are organized at the two management levels concerned: at the national level, RTE-EDF Transport s Executive Committee approves twice a year the mapping of its major risks which is then presented to the Comité de Supervision Economique et d Audit of the Supervisory board of RTE-EDF Transport. The Executive committee entrusts a national manager with the responsibility of monitoring the identified risks. RTE-EDF Transport s Risk Audit Department carries out the national audits sponsored by the Executive Committee, to which it reports its findings and recommendations; at the local level, each of RTE-EDF Transport s units and functional entities is responsible for its own analysis of the risks associated with its activities, controlling these through appropriate audits, and reporting at a national level EDF DOCUMENT DE RÉFÉRENCE RISK FACTORS 11

14 Risk factors EDF RESEAU DISTRIBUTION FRANCE ERDF ERDF identifies and manages its risks according to Group methodology. Risk control is implemented in application of the Group control principles by a procedure independent of ERDF s operational units, to verify, with reasonable certainty, control of its business: a mapping of the major risks relating to the perimeter of ERDF is updated each half year. After the validation by ERDF s Board of directors, it is presented to the Comité de Supervision Economique et d Audit of ERDF and to the Supervisory board. For each significant risk identified, an officer (member of the Executive Committee of ERDF) is designated and a national coordinator is responsible for implementing action plans covering associated risks. An annual program of national audits sponsored by the ERDF s Executive Committee built from the risk analysis and led by the Audit Division Internal Control Risks of ERDF complements the control system; each Regional Operational Division and functional operational division is responsible for its own analysis of risks relating to its activity. To do this, it conducts an upstream risk analysis using the transversal methodology used within ERDF. The internal control plans are subject to a reporting and a consolidation at a national level. The progress of the audit program, of the internal control and of the efficiency of the improvement actions taken are also subject to a validation by the Board of Directors and to a semi-annual presentation to the Comité de Supervision Economique et d Audit MANAGEMENT AND CONTROL OF ENERGY MARKET RISKS The risk factor relating to the energy markets is described in section ( Risks associated with the Group s activities ) below FRAMEWORK OF THE FINANCIAL MANAGEMENT OF ENERGY MARKET RISK In conjunction with the opening of the final customers market, developments of the wholesale markets and on the international scene, the EDF group is exposed to price variations on the energy market which can have a significant impact on its financial results. As a consequence, an energy market risk policy (concerning electricity, gas, coal, oil products and CO 2 emission allowances) is set up by the EDF group and applicable to EDF and entities under its operational control (see section ( Financial risks control and management )). This policy aims at: defining the general framework within which different entities of the Group carry out their operational activities (energy generation, optimization and distribution), as well as articulating it with EDF Trading; consolidating the exposure of the different subsidiaries and entities under EDF s operational control in the various structured markets related to energy; implementing a coordinated hedging policy at Group level. Principles of operational management of the energy market risks are based on clarifying the responsibilities for managing energy market risks and distinguishing what forms part of generation assets management on the one hand, and trading on the other hand. Generation and supply assets managers are responsible for implementing a risk management strategy minimizing the impact of energy market risks on their financial results. Yet they remain exposed to a risk which cannot be covered on the markets, given different factors such as the lack of liquidity or depth of the markets, the uncertainty on volumes, etc. This could have a material effect on the Group s financial results. Within the Group, positions relating to energy markets are mainly taken by EDF Trading, which is the trading entity of the Group. As such, EDF Trading is subject to a strict governance and control framework in line with the current practices in trading companies. The principles of operational management of the energy market risk are subject to monitoring indicators, to limits and to sensitivity scenarios of positions, ensuring the control of risks (see section ( Financial risks control and management )) CONTROL ORGANIZATION The process for controlling energy market risks for Companies in which the Group operates operational control is based on: a governance and market risk exposure measurement system, clearly separating management and risk control responsibilities; an express delegation given to each entity and formalized by risk management mandates establishing, among other things, the risk limits. These mandates allow the TOP 4 annually to set a consolidated risk profile on this scope, consistent with the financial objectives and thus to direct operational management of energy market risks (typically for a three-year period); a specific control process given its strong interactions with the decisions made within the generation and supply businesses. The process involves the Group s Management and is based on a risk indicator and measure system, itself based on a control comprising in particular alert procedures in case the risk limits are exceeded. Concerning Edison and EnBW, co-controlled entities, the energy markets risk policy and the control process are examined by the governance bodies of these companies. The consolidated exposure in energy market risks of the entities under EDF s operational control is presented to the Executive Committee on a monthly basis. The control processes are regularly reappraised and audited MANAGEMENT AND CONTROL OF FINANCIAL MARKET RISKS FINANCIAL RISK MANAGEMENT FRAMEWORK EDF has implemented a financial risk management framework (see section ( Financial risks control and management )), which sets forth the policy and principles for managing the Group s financial risks (liquidity, exchange, interest rates and counterparty risks) and is applicable to EDF and only to subsidiaries that are controlled operationally. The Group is subject to equity risk through shares held in the framework of cash activities and through dedicated assets that are set aside to cover long-term nuclear power plant decommissioning provisions, which is subject to an ad hoc risk management framework. The above-mentioned principles are associated with monitoring indicators and limits for controlling these risks, in particular, with the objective of limiting the volatility of the Group s financial charges. Moreover, each year, EDF s Audit Committee and Board of Directors monitor compliance with the financial risk management framework and change it if necessary, in particular, with respect to the limits and the associated target financial ratios. EDF also uses stress scenarios to analyze the sensitivity of positions in extreme conditions. This allows EDF to monitor its exposure to significant atypical market swing risks. EDF also uses stop-loss markers, which determine the threshold at which a position must be closed. 12 RISK FACTORS 2008 EDF DOCUMENT DE RÉFÉRENCE

15 CONTROL ORGANIZATION The Financial Risks Control Division (Département Contrôle des Risques Financiers, or DCRF ) is entrusted with the task of controlling the Group s financial risks by ensuring the correct application of financial management principles. This organization also has the task of carrying out a second level check (methodology and organization) of EDF and entities under its operational control, as well as an operational check of the financing activities at the parent level of the Group. The DCRF is reporting to the Risks Control Division Group (Direction Contrôle des Risques Groupe) in order to guarantee the independence between the organization that controls these risks and the risk management activities which are subject to its control. With respect to the activities of EDF s financial markets front office, daily risk indicator monitoring reports are sent by the DCRF to the Group Treasury manager, to the head of the front office and to the manager of the DCRF. They are immediately notified to act in the event that limits are breached. The DCRF reports weekly to the DCFT s Operational Coordination Committee. The DCFT s Strategic Committee periodically monitors compliance with the limits and rules on any specific changes to the limits which may be required. In addition, regular internal audits ensure that controls have been carried out properly. The internal control device covers two levels of control: the internal control exercised at the level of the Corporate Finance & Treasury Division: the person in charge of the Financial Risks Control Division (Département Contrôle des Risques Financiers) carries out the internal control. A dedicated team is in charge of setting up and performing an annual internal control plan. This plan includes several tasks ensuring the implementation of the control procedures and the respect of the framework for the front office; the control exercised by the Group Audit Department (Direction de l Audit Groupe) which plans yearly audits on activities connected with financial markets and with the financial risk control. In addition, EDF may hire, if necessary, external firms to audit the financial risks control process LIQUIDITY RISK The EDF group aims to have, at any given time, adequate financial resources to finance its everyday business, the investments necessary for its future development, annual allocations to the dedicated assets portfolio to cover long-term nuclear commitments as well as to cope with any exceptional events. The objective of cash flow management is to search for resources at the best price and to ensure that they may be obtained at any given time. A description is set forth in section ( Liquidity situation and liquidity risk management ). EDF has set up regular monitoring of the Group s liquidity risk, incorporated within the business management cycle, including stress scenarios. The Operational Coordination Committee also reviews liquidity needs on a weekly basis EXCHANGE RATE RISK Due to the diversification of its business and its geographic base, the EDF group is exposed to exchange rate fluctuation risks, which may have an impact on the translation adjustments, Group balance sheet, financial charges, equity and results. As a rule, the operating cash flows of the parent company and its subsidiaries are denominated in their local currencies, with the exception of flows associated with fuel purchases, which are mainly denominated in U.S. dollars, and certain flows associated with equipment purchases but for less significant amount. A description is set forth in section ( Exchange rate risk management ) EQUITY RISK EDF is exposed to equity risk on securities held as dedicated assets constituted to hedge the cost of long-term commitments associated with nuclear power as well as on securities regarding its cash assets. A description is set forth in sections ( Equity risk management ) and ( Equity risk on EDF s dedicated assets management ) INTEREST RATE RISK The Group s exposure to interest rate variations is divided into two types of risk: the risk of a change in the value of fixed rate financial assets and liabilities, and the risk of a change in flows associated with variable rate financial assets and liabilities. In order to limit its exposure to interest rate variations, the Group, within the framework of its general policy, sets principles with the objective of limiting the risk of a change in the value of invested assets or the possible increase in financial charges. A description is set forth in section ( Interest rate risk management ) COUNTERPARTY RISK Counterparty risk is defined as the total loss that the EDF group would sustain in its operating business and on the markets if any of its counterparties defaulted and consequently failed to perform its contractual obligations. These losses can be of various kinds: bankruptcy of a counterparty may lead the Group to record unpaid receivables (settlement risk), to lose contracts that generate profits (opportunity cost), to incur an overcost to replace dishonoured agreements (replacement cost), to have to pay penalties to third parties if the failure of any of the counterparties resulted in the Group s being unable to honour its own obligations, etc. The Group s entities that have a significant activity on the energy or financial markets (EDF, EDF Energy, EDF Trading, EnBW) have implemented a method to assign limits to each counterparty according to various criteria (agency ratings, indebtedness, cash flow, assets, equity) while taking into account the maturity and settlement dates and the nature of the transactions. In addition, as customary on the energy or financial markets, a margin call system has been established by certain entities of the Group in order to reduce or, if possible, eliminate the counterparty risk. Counterparty limits and their use are monitored regularly by such entities and the Group is organized for the proactive monitoring of its major counterparties to determine and update the Group s consolidated exposure to counterparty risk and for the establishment of rules and procedures to manage its consolidated exposures to counterparty risk. The subsidiaries RTE-EDF Transport and ERDF, which are also active on energy markets to purchase losses, also apply principles of regular monitoring of their counterparties and of attribution of limits for each counterparty depending on defined criteria. In July 1, 2004, the Board of Directors approved the Group s counterparty risk management framework applicable to EDF and entities under its operational control. This framework provides for an organization to manage and monitor counterparty risk, with reporting procedures. There are three major principles at the core of this framework: (i) the organization s responsiveness, (ii) the independence of the risk control functions from the activities which generate risks and (iii) the responsibility of the entities for the management of their exposures. It also sets a limit for the Group which is applied to each counterparty. In addition to this limit applied to each counterparty, an additional limit for each counterparty has been established 2008 EDF DOCUMENT DE RÉFÉRENCE RISK FACTORS 13

16 Risk factors in 2007 which is applicable to each entity of EDF or a Group s subsidiary controlled in an operational way Management of industrial and environmental risks MANAGEMENT OF THE NUCLEAR SAFETY RISK BY THE GROUP The risk factors relating to nuclear safety are described in section ( Specific risks relating to the Group s nuclear activity ) below. Like other operators, the Group assumes legal responsibility for the nuclear safety of its facilities. Nuclear safety includes all of the technical, organizational and human measures which are intended to prevent accident risks and to limit the effects of an accident, and which are taken at every stage of the life of a nuclear power plant (from design to operation and finally to decommissioning). The methods implemented as part of the nuclear safety regime have allowed continuous performance improvement for the protection of employees against the effects of ionizing radiation. The whole nuclear safety process is permanently controlled, both internally and externally (see below and section ( Environment, safety and radiation protection )). The construction of the French nuclear power fleet led to the institution of safety procedures which take into account, from the design stage onwards, the risks which may arise during power plant operation, whether these are associated with the operation of the facilities or to internal and external attack. These procedures rely mainly on the application of strict operating rules and on the Group s integrated skills (nuclear engineering, Research & Development ( R&D )) allowing for an earlier resolution of failures, continuous equipment appraisal, regular re-evaluation of safety margins, technical monitoring and the implementation of new highperformance techniques. Maintaining and improving safety also relies on the concept of in-depth defense, which provides for the systematic treatment of the risk of technical, organizational and human failures by interposing successive and independent lines of defense for facilities, process and organization. The operating quality and safety of EDF s nuclear fleet depends on multiple internal inspections (mainly carried out by the Inspector General for nuclear safety and radiation protection, who reports directly to the Chief Executive Officer of EDF), and external inspections, mainly carried out by the French Nuclear Safety Authority (Autorité de sûreté nucléaire ASN ) which became an independent administrative authority as of Law n regarding transparency and safety in the nuclear field dated June 13, Nuclear power plants must comply with a benchmark whose objectives are established and controlled by the ASN. The crisis management organization to be implemented in the event of an accident is regularly tested through accident simulation exercises. Each year, approximately 100 exercises are organized for the entire French nuclear fleet. Approximately 10 of these are carried out at a national level. The liability scheme applicable to European operators and the associated insurance are described in section ( Special regulations applicable to nuclear facilities ) MANAGEMENT OF HYDROPOWER SAFETY RISK Risk factors relating to hydropower safety are described in section ( Risks associated with the Group s activities ) below. The Group operates hydroelectric facilities under concession agreements or administrative licenses. As operator, it is responsible for their safety. The main risks associated with these facilities or their operation are the risk of dams or related hydropower facilities bursting, the risks associated with operating the facilities during floods and the risks associated with level variations due to the operation of the facilities. There are three strategic activities in respect of the management of hydropower safety: the survey of dams and related facilities, the managing of the sites during floods and the managing of flow or level variations (see section ( Hydropower safety )). In order to further improve the management of these risks, EDF launched in 1995 in France and in the French overseas departments, quality assurance procedures for these three activities and consequently obtained their ISO 9001 certification by the end of 2003, in each of the Hydropower Operating Divisions. These certifications form the basis of a continuous progress program in hydropower safety management. They have recently been renewed by the certification authorities. In addition, the detection, analysis of any potential incidents, implementation of corrective and preventive actions, feedback and the sharing of experience are the basis of the improvement process of the safety level of the facilities. Following the process started in 2005 in order to identify default risks for each kind of equipment and after several failures which made some facilities unavailable in the medium term (the Tuillères dam in Dordogne, etc.), EDF decided in 2006 to engage in a program of technical upgrading and reinforced maintenance of the sites for a total amount of approximately 560 million in order to renew certain facilities, maintain, on the long-term basis, a high level of hydropower safety and preserve, in the future, the technical performances of its fleet. This hydropower facilities renewal program, called Hydropower Safety and Performance ( SuperHydro ) which will be 5-year long is in progress and will cause during the works period, unavailabilities which will be more significant than those registered previously. Actions to make the general public aware of and to brief them on the dangers of hydroelectric facilities, implemented about ten years ago, are renewed each year. The bursting of a dam or of a related facility may have serious consequences for persons and properties located downstream. The monitoring and maintaining of the facilities, which represent the principal measures to prevent the major risk of a dam bursting, are carried out under the control of the DRIRE (Direction régionale de l Industrie, de la Recherche et de l Environnement). The 68 largest dams are covered by a special action plan implemented under the authority of French préfets, pursuant to the French Law relating to major risks. EDF has taken out a general civil liability insurance policy in relation to these risks (see section ( Civil liability insurance (not including civil responsibility for nuclear power) )) MANAGEMENT OF RISKS ASSOCIATED WITH THE GROUP S TRANSMISSION AND DISTRIBUTION FACILITIES The risk factors relating to the Group s transmission and distribution facilities are described in section ( Risks associated with the Group s activities ). In relation to transmission and distribution works, the investments made take into account the safety of persons and property. In addition, in France: for third parties, communication actions are directed, among others, at associations of fishermen, and farmers cooperatives to remind them of the dangers of handling tools in the vicinity of power lines; 14 RISK FACTORS 2008 EDF DOCUMENT DE RÉFÉRENCE

17 for operators, interventions on transmission or distribution grids are subject to authorizations that include an audit of skills, complemented by site inspections carried out by line managers and the accident prevention expert for the unit in question. The Group has taken out a general civil liability insurance policy in relation to these risks (see section ( Civil liability insurance (not including civil responsibility for nuclear power) )) MANAGEMENT OF THE RISKS ASSOCIATED WITH INDUSTRIAL ACCIDENTS OR WITH ENVIRONMENTAL OR SANITARY IMPACTS The Group s activities could, in the absence of adequate management, be the source of industrial accidents or significant environmental and public health impacts. The risks of adverse effects on the natural environment or on the health of people living locally or on Group and subcontractors personnel are governed by rules relating to the environment and public health which are increasingly restrictive. The corresponding risk factors are described in section ( Risks associated with the Group s activities ) below. The Group s environmental policy incorporates developments on major environmental issues such as fighting climate change, adverse effects on biodiversity, etc. The operational implementation of this policy is based on the deployment of an Environmental Management System in all of the Group s entities that have a direct or indirect environmental effect. The implementation of this Environmental Management System guarantees improved control of knowledge and compliance with regulations and anticipates changes to the regulations. This system received ISO certification in April 2002 (see section ( Sustainable Development and Public Service Policy ). In relation to industrial accidents, the ISO standard involves taking a controlled set of systematic and planned actions, in particular, in relation to the prevention of major risks, emergency situation tests and safety management. Accordingly, the Group has taken out a general civil liability insurance policy (see section ( Civil liability insurance (not including civil responsibility for nuclear power)) ). Each year, follow-up audits are carried out by an authorized external entity in the entities of the EDF group within the scope of the certification. In 2008, the renewal audit confirmed the grant, for a period of three years, of the ISO certificate for the Environmental Management System implemented by the Group Insurance To limit the consequences of certain events on its financial situation, the EDF group has taken out insurance aimed at covering its principal risks of damage to property and civil liability and personal insurance. Its nuclear power risks are covered by a special civil liability scheme as set forth below. Insurance management is led by the Group s Insurance Division, whose task is to propose and continuously optimize the policy of managing risks that are transferable to the insurance and alternative markets. Once the Group s policy has been set and approved by EDF s Board of Directors, the Group s Insurance Division organizes its implementation through EDF Assurances, an insurance brokering subsidiary within the EDF group, and with major operators in the insurance and reinsurance markets. The exchange of information between the Corporate Risk Management Division (see section ( General framework for managing and controlling the Group s risks ) above) and the Group s Insurance Division has been standardized so that both divisions benefit from a consolidated view, and one that is as comprehensive as possible, of the Group s risks. Starting from this shared vision, the Group can search for coverage that is matched to its insurable risks and that is consistent with the principles set forth in the Group s insurance policy. EDF has decided to set up Group insurance policies largely extended to its subsidiaries that are controlled by EDF, including its regulated networks subsdiaries having a managerial autonomy (RTE-EDF Transport and ERDF) so as first to unify risk coverage and rationalize their management and, second, to control the corresponding costs of insurance. For the damage risk, EDF is a member of the mutual fund Oil Insurance Limited ( OIL ) so as to respond to the risks of damage (other than to aerial systems) to the Group s own property or to property under concession (EDF and its consolidated subsidiaries in the US GAAP meaning), in particular nuclear plants (other than nuclear accidents), fossil-fired power plants, dams, systems stepdown stations of transformation. OIL is a mutual insurance fund that is specific to the needs of the energy sector and which offers its members limited coverage for physical damage. Besides this basic coverage, EDF has set up additional insurance coverage for EDF and many of its French and international subsidiaries, including EDF Energy. EDF Assurances carries out regular site inspections in partnership with internal divisions and the principal insurers. These inspections allow any risks associated with the Group s business to be identified and evaluated so as to reconcile the insurance coverage constantly with these risks. The total insurance premiums for EDF and Group policies managed by EDF Assurances, including all types of coverage was million in 2008, including 67.4 million expended by EDF. EDF considers that the policies subscribed in accordance with the Group s insurance policy are consistent with the offer capabilities of the insurance market for operators of similar size in similar businesses worldwide, in particular, in relation to limits of coverage and deductibles. The nature and coverage of insurance may be altered at any time, depending on market conditions, on insurance policy rollout rates and on the assessment by EDF s Board of Directors of the risks and the adequacy of their coverage. Insurance policies, in accordance with market practice, include exclusions, limits and/or lower limits CIVIL LIABILITY INSURANCE (NOT INCLUDING CIVIL RESPONSIBILITY FOR NUCLEAR POWER) SCOPE: RTE-EDF TRANSPORT, ERDF, EDF, AND ITS OTHER CONTROLLED SUBSIDIARIES EDF has taken out a general civil liability policy covering it against the financial consequences of civil liability (excluding nuclear power) which may be incurred during its business as a result of damage caused to third parties. This specifically includes the risk of civil liability associated with a dam bursting, fossil-fired power plants, 400 kv substations in the Paris region, and other network equipment, together with those related to subsequent damage to the environment, for example by solid, liquid or gaseous waste. These guarantees are purchased within the means available at acceptable prices on the insurance and reinsurance markets. The maximum coverage has been 1 billion. Pursuant to this policy, the share of risk kept by the Group, including Wagram Insurance Company Ltd. s share, does not exceed 5 million per incident, although subsidiaries generally choose lower deductibles, better adapt to their financial capacities EDF DOCUMENT DE RÉFÉRENCE RISK FACTORS 15