Orano - Annual Activity Report 2024 78 3 RISKS, CONTROL AND DUTY OF VIGILANCE PLAN Risk factors 3.3.4.2 Financial risks relating to assets and liabilities related to end-of-lifecycle operations Description of the risk The group holds a significant portfolio of listed assets (equities, bonds, mutual investment funds and third-party receivables) earmarked to fund its future end-of-lifecycle obligations. It is thus exposed to the risk of volatility inherent in the financial markets. Despite the group’s prudent management strategy for assets earmarked for end-of-lifecycle obligations, external economic factors may have an impact on the coverage ratio of end-oflifecycle liabilities by earmarked assets, and thus the group’s financial position. Such factors may involve: ● changes in financial markets and the consequences on the returns on assets compared to the assumptions currently used; and ● a change in the net discount rate that would change the present value of end-of-lifecycle liabilities. These changes may have a significant impact on the value of financial instruments and therefore on the group’s results and/ or on the group’s financial position since it would be obliged to increase its contribution to the earmarked assets immediately or in the medium term. The ongoing revision process of IAS 37 with the planned adoption of a risk-free rate to discount long-term provisions was finalized in April 2024, although the final text is not expected to come into force until 2026 or 2027. The draft allows for an adjustment to the illiquidity of liabilities to determine the risk-free rate, but excludes the consideration of a credit spread. A restrictive reading would have a major effect on the group’s provisions, with an increase in liabilities of around 175 million euros for a decrease of 10 bps in the discount rate. The group remains exposed to the risk related to changes in the value of the financial instruments that make up its portfolio of earmarked assets, in particular bonds and investment funds. Equity risk in the portfolio of assets earmarked for end-of-lifecycle obligations is an integral part of asset management, which uses equities to increase long-term returns as part of its allocation between bonds and equities. Based on the exposure at the end of December 2024: ● a 10% decline in the equity market would have an impact of approximately -394 million euros on the valuation of coverage assets; ● a 1% increase in interest rates would have an adverse effect of approximately -85 million euros on the valuation of coverage assets. In addition, the risk relating to shares and other fixed assets is not systematically hedged against changes in price. Risk management measures In accordance with Article D. 594-15 of the French Environmental Code, if the earmarked assets are insufficient to cover liabilities, the group has a maximum of five years to re-establish coverage of the liabilities in excess of 100%, by supplementing the earmarked assets, as appropriate. With a coverage ratio of 97% at December 31, 2024, Orano will have to present to the DGEC in 2025 a plan to return to 100% coverage within five years. Any such additional funding plan would result in an unfavorable impact on the group’s cash flow and net financial debt. As part of the current draft amendments to IAS 37, the group approached EDF at the end of 2023 to assert the specific nature of the liabilities of nuclear operators to the IASB and to formulate proposals for improvements, throughout the consultation phase planned by the standard-setter prior to implementation of the draft standard. In addition, see Note 29 Financial instruments to the consolidated financial statements and Note 13 End-of-lifecycle operations in Section 6.1. Consolidated Financial Statements of the 2024 Annual Activity Report. 3.3.4.3 Counterparty risk management related to the use of derivatives and cash investments Description of the risk The group is exposed to the risk of counterparties linked to cash deposited with banking institutions and the use of derivatives to hedge its risks. The group uses different types of derivatives to manage its exposure to foreign exchange and interest rate risks. It mainly uses forward currency purchases and sales, and interest rate derivatives (swap contracts, futures or options) to hedge these types of risks. These transactions involve the group’s exposure to counterparty risk when the contracts are concluded over the counter. In addition, almost all of the group’s cash is centrally managed, in accordance with an internal policy which defines authorized products and placements. The group’s cash is exposed to counterparty risk, primarily banking risk. Risk management measures To minimize these risks, the group’s Treasury Management Department deals with diversified, top-quality counterparties, selected based on their investment grade ratings in the Standard & Poor’s and Moody’s rating systems. Moreover, a framework agreement, for example, is systematically put in place with counterparties likely to deal with derivatives. The limits allowed for each counterparty are determined based on its rating and the type and maturity of the instruments traded. The limits are regularly reviewed and each time that a counterparty’s credit rating is significantly changed. The limits are verified in a specific report produced by the internal control teams of the group Treasury Management Department. During periods of significant financial instability that may involve an increased risk of bank default, which may be underestimated by ratings agencies, the group monitors movements in advanced indicators such as the value of the credit default swaps (CDS) of the eligible counterparties to determine if the limits should be adjusted. To limit the counterparty risk on the market value of its commitments, the group has set up a mechanism for margin calls with its most significant counterparties concerning interest rate transactions (including foreign exchange and interest rate terms and conditions).
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