Annual Report - EDP

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: 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. 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: corporate governance :hand, in Spain, the FADE (Fondo de Amortizacióndel Deficit Elétrico), entity responsible for thesecuritization of the Spanish electric system tariffdeficits, was able to securitize some tranchesof the tariff deficit, through private placementsor public issues, in the amount of 5.6 billioneuros, of which 0.3 billion euros belongs to EDPGroup through its subsidiary Hidrocantábrico.In addition, EDP was able to execute severalproject finance in wind-farms at EDP Renováveislevel in Spain, Belgium and Romania.Regarding the indebtedness level reductiontarget, the company proceed with assetsdisposals, having agreed in July the selling of thegas transmission business in Spain to Enagásby 262.5 million euros and the selling of 49%equity stake in wind-farms in the US to Borealisby 230 million USD. Finally, and as a result ofthe strategic partnership with the China ThreeGorges, EDP Renováveis agreed in December thefirst tranche of the selling of wind-farms minoritystakes in the amount of 359 million euros.In the foreign exchange markets, the eurodepreciated, on average, 8% against the Americandollar, contributing in a positive way to theoperating income. Since the euro closed 2012appreciating 2% versus the American dollar,the debt priced in dollars was benefitted as thecompany maintains its strategy of financing itsinvestments of US wind-farm assets in localcurrency. On the contrary, the evolution of theexchange rate between euro and Brazilian realpenalized the operating income, as the averageeuro exchange rate appreciated 8%. The euroclosed 2012 gaining 12% versus the Brazilian realwhen comparing to the end of 2011.2012 was also a year of important regulatorychanges within the electric sector, namely inPortugal, Spain and Brazil.In Portugal measures were taken to ensurethe sustainability of the electric system, whichincluded changes in the capacity payments, in theCMEC, in cogeneration and wind generation tariffsand also the setting of the transfer to the electricsystem of the revenues obtained with the carbondioxide emission licenses auctions.In Spain some measures were also established toguarantee the future sustainability of the systemby means of the approval of two packages. Thefirst one focused on the significant increaseof tariffs, on the cut in several cost lines, andalso on the channeling of excess funds to thebenefit of the electric system. A second packageapproved by the end of year established taxesand charges over generation revenues and overthe fuel consumption to generate electricity andalso defined that the revenues obtained fromcarbon dioxide emission licenses auctions shallbe transferred to the electric system.In Brazil, the new regulatory methodology wasapplied to Bandeirante since October, includingthe downward revision of the rate of return onregulated asset base to 7.5% real pre-tax.In what concerns significant changes in EDP’sshareholder structure it is worth to highlightthe conclusion of the acquisition process of the21.35% of EDP’s share capital by China ThreeGorges on the 11th May, including the nominationof the individual persons to represent China ThreeGorges in the General and Supervisory Board.Main milestones in EDP’sshare price in 20122,5012,402,302,202,102,001,901,801,701,602 4356 710891114121315161917181,50Jan 12 Feb 12 Mar 12 Apr 12 Mai 12 Jun 12 Jul 12 Ago 12 Set 12 Oct 12 Nov 12 DeC 12202221 23302928272425 26# DatE Description Price1 4/Jan Imputation to China Three Gorges of 21.35% of voting rights 2.4702 1/Feb Standard & Poor’s downgrades EDP from “BBB” to “BB+” with negative outlook 2.2303 15/Feb Moody’s downgrades EDP from “Baa3” to “Ba1” with negative outlook 2.2394 20/Feb General shareholders meeting 2.2445 27/Feb Appointment of representatives for the General Supervisory Board 2.1696 8/Mar Disclosure of the financial results for 2011 2.2557 13/Mar Appointment of representatives for the General Supervisory Board 2.2308 3/Apr Fitch has placed all Spanish utilities and those utilities with sizeable exposure to Spain on Rating Watch Negative 2.1589 17/Apr Annual General Shareholders Meeting 2.10210 4/May EDP issues EUR 250 million 3 year bond 2.18611 10/May Disclosure of the financial results for the first quarter of 2012 2.27012 11/May CTG acquires and Parpublica reduces qualified shareholding in EDP 2.09712 11/May Appointment of Representatives of CTG for the General Supervisory Board 2.09713 16/May Payment of gross dividend of EUR 0.185 per share for the 2011 financial year 1.91714 17/May Portuguese Government announces set of measures for the power sector 1.82015 20/Jul EDP sells its gas transmission business in Spain to Enagás 1.93716 26/Jul China Development Bank Corporation agrees on EUR 1,000 million loan to EDP 1.87416 26/Jul Disclosure of the financial results for the first half of 2012 1.87417 30/Jul EDP proposes new collective labour agreement 1.85418 1/Ago ANEEL approves a 14.29% tariff increase at EDP Escelsa’s annual tariff readjustment process 1.85919 2/Ago Fitch downgrades EDP to “BBB-” with outlook negative 1.82320 14/Sep EDP issues EUR 750 million 5 year bond 2.29721 17/Oct ANEEL approves a 11.45% tariff increase at EDP Bandeirante’s annual tariff readjustment process 2.14222 18/Oct Resignation of José Joaquim de Oliveira Reis from member of the General and Supervisory Board 2.16023 22/Oct Bank of China signs EUR 800 million loan with EDP 2.12524 6/Nov EDP Renováveis sells a 49% equity stake in 599MW wind farms in the US 2.03024 6/Nov Disclosure of the financial results for the thrid quarter of 2012 2.03025 13/Nov EDP issues CHF 125 million 6 year bond 1.95826 3/Dec EDP Brasil announces the beginning of the commercial operation of Pécem’s first group 1.97527 13/Dec EDP sells tariff adjustments relative to the CMEC 2.21228 14/Dec EDP Brasil is awarded a PPA for a 219 MW hydro plant at the Brazilian energy auction 2.24429 17/Dec ERSE announces tariffs and prices for electricity and other services for 2013 2.27030 20/Dec EDPR agrees with CTG on the first investment in minority stakes in wind farms 2.352140A World Full Of Energy
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