Annual Report - EDP

: corporate governance :with the European Commission, InternationalMonetary Fund and the European Power StationBank. They included the state’s sale of its 21.35%holding in EDP to China Three Gorges, theapproval of the calendar for the phasing out ofregulated gas and electricity tariffs, the freezingof new licences for additional renewable capacity,an agreement to cut income from CMECs and cutsin the payment of power guarantees. In Spain,there were changes in taxation to guaranteeenergy sustainability (Law 15/2012 of 27December). As a whole, these measures hada controlled impact on EDP’s profits.A top-down assessment of weekly RaR, returnat risk of the EDP share (95% probability ofnot being exceeded) and of its assets (usingthe equity/assets ratio times the RaR of equity)compared to that of its Iberian competitorsconfirms that the Group has a business lowerrisk (assets) profile. The equity risk has beenincreasing in recent years, due to the sovereigndebt crisis and this impact is also noticeable incompeting companies. EDP’s equity risk is in linewith that of its peers.R@R Assets (weekly)6%4%2%0%2009 2010 2011 2012EDP Company 1 Company 2 Company 3R@R Equity (weekly)10%5%0%Source: EDP2009 2010 2011 2012EDP Company 1 Company 2 Company 3As shown in the graphs below, the Group’sfinancial leverage - net debt/assets - has beenincreasing as a result of a rise in future receiptsrelated to regulated activities, especially inPortugal. The structural indicator net debt/EBITDA also rose and there is a commitmentto reduce it in upcoming years. Financialdeleveraging is a strong strategic commitmenton the part of the EDP Group and improvingits rating is therefore also a goal, though thePortuguese sovereign rating constitutes alimit on this improvement. In 2012, the Group’sborrowing capacity continued to be higher thanthat of Portugal, though it was dragged down bythis condition to a scoring lower than that of 2011(S&P BB+; Moody’s Ba1).Net Debt / EBITDA6.0x4.0x2.0x0.0x2009 2010 2011 3T12EDP Company 1 Company 2 Company 3EDP - Annual Report 2012Net Debt / Assets0.6x0.4x0.2x0.0x2009 2010 2011 2012EDP Company 1 Company 2 Company 3Source: Bloomberg and Annual Reports and AccountsIt is important to note that there is a complexcrisis situation, along with a fall in consumptionin both Portugal and Spain. Furthermore,the general deterioration in the rating of ourcounterparties, especially those in Portugal andSpain, increases the credit risk for EDP. This isan aspect that can also affect us, as there maybe additional costs or difficulties in pursuingthe Group’s hedging strategy based on the levelof risk that the counterparties assign to EDPand even a possible need to provide additionalguarantees. Where funding is concerned, theChina Three Gorges’ entry as a shareholder of theGroup gave EDP access to the Chinese financingmarket. This was highly important in achievingthe company’s desired liquidity levels. Therotation of assets at EDP Renováveis has openednew opportunities to reduce the company’sborrowing, though its return over time to thetarget rating of upper medium grade is limited byPortugal’s rating.These are the most important aspects of thecurrent risk profile:º º accentuated economic recession in Portugaland Spain with lower electricity and gasconsumptionº º highly volatile electricity market and depressedspreads - surplus installed capacity in theIberian Peninsula – and a progressive changein mix, with an increasing amount of pricetaker technology, which makes it very difficultto rebalance the recovery of investment inordinary generation in a setting in whichpayment by guaranteed supply in Portugal hasbeen reduced or even temporarily eliminatedº º reflection on the management of natural gassupply contracts and management of the takeor pay riskº º permanent regulatory risk cycle, which ishigh in transition periods and stable and lowbetween transition between regimesº º management of exposure to CO 2, in which thereseems to be a trend towards too many licencesat long term if the European Commission doesnot take measuresº º customer credit risk management witha tendency to increase in times of crisisII.6. Responsibilityof the managementand supervision in thecreation and operationof internal controlsystems and company’srisk managementInternal auditing in the EDP Group is a corporatefunction performed by the Internal AuditDepartment and is answerable to the Chairmanof the Executive Board of Directors, whilereporting to the Committee on Financial Matters/Audit Committee. The Internal Audit Department’sinternal audits are overseen by the Committee119