Annual Report - EDP

notes to the EDP consolidated - Energias de Portugal, and company S.A. financial statementsNotes to for the the Consolidated years and ended Company 31 december Financial Statements 2012 and 2011for the years ended 31 December 2012 and 2011EDP Group is exposed to the exchange rate risk in US Dollars (USD), British Pounds (GBP), Japanese Yen (JPY), Swiss francs (CHF), Brazilian Reais (BRL), Romanian Leu(RON) and Zloty (PLN). Currently, the exposure to USD/EUR, PLN/EUR and RON/EUR exchange rate risk results essentially from investments of EDP Group in wind parksin the USA, Poland and Romania. These investments were financed with debt contracted in USD, PLN and RON, which allows to mitigate the exchange rate risk relatedto the investments.The Brazilian subsidiaries exposed to the USD/BRL exchange rate risk as a result of their USD debt, use derivative financial instruments to hedge this risk. Additionally,investments in the Brazilian subsidiaries of EDP Energias do Brasil, whose net assets expressed in BRL are exposed to exchange rate risks, are monitored throughanalysis of the evolution of the BRL/EUR exchange rate. Regarding investments in wind farms of EDP Renováveis in Brazil, the Group decided to follow the strategy thathas been adopted to hedge these investments in USA and Poland, by contracting a financial derivative instrument to cover the exchange rate exposure of this assets.The exchange rate and interest rate risk on the GBP, CHF and JPY bonds issued by EDP Finance B.V. under the Medium Term Notes Program for the Issuance of DebtInstruments have been hedged as from their issuing date. The EDP Group’s remaining debt, except for the debt contracted by the Brazilian subsidiaries, isdenominated in Euros.Sensitivity analysis - exchange rateRelating to financial instruments that result in an exchange rate risk exposure, a fluctuation of 10% in the Euro exchange rate in relation to the following currencies, asat 31 December 2012 and 2011, would lead to an increase/(decrease) in the EDP Group results and equity as follows:Dec 2012ResultsEquityThousands of Euros +10% -10% +10% -10%USD 40,462 -49,454 -27,842 34,029RON 5,957 -7,280 - -PLN 11,628 -14,213 - -58,047 -70,947 -27,842 34,029Interest rate risk managementDec 2011ResultsEquityThousands of Euros +10% -10% +10% -10%USD 12,432 -15,195 -755 923RON - - - -PLN - - 3,309 -4,04412,432 -15,195 2,554 -3,121This analysis assumes that all other variables, namely interest rates, remain unchanged.The aim of the interest rate risk management policies is to reduce the financial charges and to reduce the exposure to interest rate risk from market fluctuationsthrough the settlement of derivative financial instruments.In the floating rate financing context, the EDP Group contracts interest rate derivative financial instruments to hedge cash flows associated with future interestpayments, which have the effect of converting floating interest rate loans into fixed interest rate loans.Long-term loans contracted at fixed rates are, when appropriate, converted into floating rate loans through interest rate derivative financial instruments designed toreduce financial charges and to level them to market conditions. In addition to these operations, more structured collar operations are contracted, as necessary, tomitigate exposure of the debt cash flows to market rate fluctuations.All the operations are undertaken on liabilities in the EDP Group’s debt portfolio and mainly involve perfect hedges, resulting in a high level of correlation between thechanges in the fair value of the hedging instrument and the changes in fair value of the interest rate risk or future cash flows.The EDP Group has a portfolio of interest rate derivatives with maturities between approximately 1 and 16 years. The Group’s Financial Department undertakessensitivity analyses of the fair value of financial instruments to interest rate fluctuations. After the covering effect of the derivatives 44% of the Group's liabilities are fixedrate.EDP - Annual Report 2012191