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 2011Goodwill impairment test analysis – EDP GroupThe recoverable amount of the goodwill in subsidiaries is assessed annually, as at 30 September, independently of the existence of any indicators of impairment.Impairment losses are recognised in the income statement. The recoverable amount is determined based on the value in use of the assets, calculated using valuationmethodologies supported by discounted cash flow techniques, considering market conditions, the time value of money and the business risks.The recoverable amount testing is performed for each cash flow generating unit, identified in each country where EDP Group develops its activities/operations,namely: HC Energia (including Naturgás) - Generation, Distribution & supply of electricity and Distribution & supply of gas; EDP Renováveis Europe – Wind generation; EDP Renováveis North America and Brasil - Wind generation; EDP Brasil - Generation, Distribution, and supply.Therefore, for the purposes of these tests, the EDP Group has defined a set of assumptions to determine the recoverable amount of the main investments of the Group.Goodwill impairment test analysis – HC Energia Group (including Naturgás)The discount rates after taxes used by the Group in the impairment test analysis range between 6.77% and 7.47% (2011: between 6.3% and 7.2% respectively).Regarding to generation business the future cash flow projection corresponds to the remaining useful life of the respective assets (power plans). In the electricity andgas transmission business the cash flow projection period considered was five years added by a growth rate, since long-term contracts exists. Remaining businessesestimated curves prices for the reference periods.The main assumptions on which impairment tests are based are as follows:- In the generation business, the estimated energy produced by the power plants: consider the best estimate of future market demand and total installed capacity;- Prices of electricity, gas and coal were defined considering the market expectations regarding future price curves and considering the regulation in force. Contractedprices for future long term purchases were also used;- Investment costs: the best available estimates of the future investments were used in order to guarantee a regular use of existing assets, as well as the estimatesthat resulted from legislative changes;- Operating costs: Operating costs were projected consistent with the company’s experience and internal models;- The growth rates used to make projections for the electricity and gas generation and supply assets is zero. However, for the electricity and gas distribution businessis used 1% of the growth rate. These growth rates are based on the market growth and inflation expectations;- In the regulated business, namely distribution of electricity and gas, officially approved asset remuneration was used, considering the regulated mechanisms for theannual remuneration updates;- Discount rate: the discount rates used reflect EDP Group’s best estimate regarding the specific risks associated to each CGU.The Group has performed a series of sensitivity analyses to the results of impairment tests in some key variables, such as (i) pool price; (ii) cost of fuel (iii) discount rates;and (iv) trade energy. The sensitivity analysis results show that (i) a 5% decrease on the pool price or in trade energy ; or (ii) a 5% increase in the fuel costs; or (iii) a+100bps increase on the discount rate do not result in any impairment indicators.Goodwill impairment test analysis – EDP RenováveisThe future cash flows projection used is the useful life of the assets (25 years) which is consistent with the current depreciation method. This projection also incorporatethe long-term off-take contract in place and long-term estimates of energy prices, whenever the asset holds merchant exposure.The main assumptions used for the impairment tests are as follows:- Power produced: net capacity factors used for each CGU utilize the wind studies carried out, which takes into account the long-term predictability of wind output andthat wind generation is supported in nearly all countries by regulatory mechanisms that allow for production and priority dispatching whenever weather conditionspermit;- Electricity remuneration: regulated or contracted remuneration has been applied where available, as for the CGUs that benefit from regulated remuneration or thathave signed contracts to sell their output during all or part of their useful life; where this is not available, prices were derived using price curves projected by thecompany based on its experience, internal models and using external data references;- New capacity: tests were based on the best information available on the wind farms expected to be built in coming years, adjusted by probability of success and bythe growth prospects of the company based on the Business Plan Targets, its historical growth and market size projections. The tests considered the contracted andexpected prices to buy turbines from various suppliers;- Operating costs: established contracts for land leases and maintenance agreements were used; other operating costs were projected consistent with the company’sexperience and internal models;- Terminal value: considered as a 15% of the initial investment in each wind farm, considering inflation;EDP - Annual Report 2012209