Annual Report - EDP

: corporate governance :Share price performanceIn 2012 European stock markets showeda recovery versus the previous year, especiallyon the second half: except for Madrid’s stockexchange, which went down 5%, the main stockmarkets closed above 2011, with the Europeanindex Stoxx Europe 600 rising 14%. Likewise,the US and Asian markets also exhibited apositive performance with the US indexes goingup between 7% and 17% whereas the main Asianstock indexes had a two-digit appreciation,except for Shanghai which rose 8%.This evolution was not homogeneous along theyear: after being positive in the beginning ofthe year, the markets started a declining patternuntil the second half, when the recovery wason the way. While the first half of the year wasmarked by the eminence of the Greece’s exitfrom the Eurozone and also by fears related toa second bailout requested by Portugal and thatSpain would request an eventual bailout for theSpanish economy, the second half exhibiteda more positive perception of the sovereigndebt crisis topic, with the increase of investor’sconfidence in the integrity of the Eurozone andon the peripheral countries.This market improvement was definitely linkedto the accomplishment of the financial aidprograms by Portugal and Ireland, the Spanishbailout for the banking system recapitalizationon the 9th June for a maximum amount of 100billion euros, afterwards re-estimated to 40billion euros following the stress tests conductedin September, and the suspension on the 6thSeptember by the European Central Bank (ECB)of the minimum credit rating threshold requiredfor the acquisition of bonds issued by sovereigncountries in trouble, allowing the unlimited buyof such securitities.By the end of the year, the markets were partiallyaffected by the “fiscal cliff” issue in the US, whichcould eventually drag the American economy into anew recession. This problem was only solved in thelast day of the year, with the approval of the “AmericanTaxpayer Relief Act of 2012” by the Congress.Utilities sector in Europe underperformed again,being the third worst performance sector, withthe Stoxx 600 Utilities índex falling by 1% versuslast year or 9% considering only eurozonecompanies. The sector was penalized by thesovereign debt theme which dragged Europe intoeconomic crisis, leading to a economic slowdownand consequently to a fall in the energy demand.In addition, the growing capacity in renewableand the drop of coal and carbon dioxide emissionlicenses prices contributed to the reduction ofthe electricity generation prices in the wholesalemarkets. Therefore, major companies suchas EDF, GDF Suez and E.On had to revisedownwards their business outlook for the future,with direct impact over their quotation. Finally,the regulatory instability among especially theEuropean Southern countries also contributed topenalize the sector. To cope with the predictableprofit reduction and to the growing indebtedness,companies pursued asset disposal and alsoreduction cost reduction programs.Regarding corporate actions in the utilities sector,it is worth to highlight the successful takeoverof 30% of International Power by GDF Suez,ensuring the total control of this subsidiary.EDP stock went down 4.2% in 2012. Since EDPpayed a dividend worth of 0.185 euros per shareon the 16th May, equivalent to a dividend yield of8.1% (based on the share price on the 10th May),the total shareholder return was 3.5% in 2012.Portugal was able to proceed successfully witha substantial part of the recommendationsstated in the Economic and Financial AssistanceEDP - Annual Report 2012Program, which allowed the improvementof the perception from the outside regardingPortugal’s economic and financial sustainability.Nevertheless, the economic crisis that arose ledto a GDP fall and to unemployment rates higherthan expected, affecting fiscal revenues collectionand making impossible to reach the 4.5% budgetdeficit target.In what concerns State financing, in the beginningof the year Standard & Poor’s downgraded thePortuguese Republic credit rating by two notchesfrom BBB- to BB with negative outlook whileMoodys downgraded by one notch from Ba2to Ba3 also with negative outlook.On the back of these actions, both agenciesdecided to revise downwards EDP’s credit rating:Standard & Poor’s downgraded in Februarythe company’s rating by two notches from BBBto BB+ maintaining the negative outlook butremoving the credit watch negative whereasMoodys downgraded by one notch from Baa3to Ba1 maintaining the outlook negative.In Spain, the sovereign rating was subject toseveral downward revisions from the three mainagencies throughout the year: Standard & Poor’sdowngraded the rating by six notches from AA-toBBB-; Moodys by five notches from A1 to Baa3and Fitch also by five notches from AA-to BBB, allthree with negative outlook. Following this event,in April Fitch placed all utilities with significantexposure to Spain, included EDP, under creditwatch negative, having downgraded the utilitiescredit rating afterwards in August, includingEDP’s rating by two notches from BBB+ to BBBwithoutlook negative but removing the watchnegative.In a challenging environment regarding financing,EDP continued to pursue successfully, thediversification of its funding sources and thecovering of its funding needs for the next 12to 24 months.EDP returned to the Portuguese market in May bymeans of a public offering of bonds in the amountof 250 million euros with a coupon of 6% and athree-year maturity. The success of this issue wasmirrored on the increase of the initial amount from200 to 250 million euros, and still with demandsurpassing the final issued amount by 26%.Following the strategic partnership with ChinaThree Gorges, EDP agreed in July a 1,000 millioneuros loan provided by China DevelopmentBank Corporation with a five-year maturityand a margin of 480 bps over 6-month Euribor.In addition, and taking advantage of the positivemood in the market on the back of the removalof the limits to the acquisition of sovereign debtby ECB and also by the improvement of the trustlevels on the eurozone stability, EDP issued inSeptember a 750 million euros bond witha five-year tenor and a coupon of 5.75%.EDP also capitalized on the window of opportunitywhich arose from the Asian markets, besides thestrategic partnership, by signing in Octobera 800 million euros multicurrency term facilitywith the Bank of China, with a three-year tenorand a margin of 350 bps over the 3-Month Libor.In November, the company issued again a bondissue in the Swiss market, with an amount of 125million Swiss francs, a six-year maturity anda 4% coupon.Moreover, it was also possible to launch severalsecuritizations and the selling of the right torecover amounts, both in Portugal and Spain.On the one hand, it was sold in December inPortugal the right to recover the amount of the2010 annual revisibility from CMEC (Contratosde Manutenção do Equilíbrio Contratual) in thetotal amount of 147 million euros. On the other139