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EDP Renewables 2013 Annual Report

Risk Management

Consistent with the maintaining a controlled and low risk profile, EDPR has a Risk Management Process that defines the mechanisms for evaluation and management of risks and opportunities impacting the business. This process increases the likelihood of EDPR achieving its operational and financial targets, by minimizing fluctuations of financial results without compromising returns.

RISK MANAGEMENT PROCESS

EDPR’s Risk Management Process is an integrated and transversal management model that ensures the implementation of best practices of Corporate Governance and transparency in the communication to the market and shareholders. This process is closely followed and supervised by the Audit and Control Committee, an independent supervisory body composed of non-executive members.

The purpose of the Risk Management process is to ensure the alignment of EDPR’s risk exposure with the company’s desired risk profile. It consists of the identification and prioritization of risks, the development of adequate risk management policies, and their implementation. Risk management policies are aimed to mitigate risks, without ignoring potential opportunities, thus, optimizing return versus risk exposure.

Risk management is endorsed by the Executive Committee, supported by the Risk Committee and implemented in day-to- day decisions by all managers of the company. It is supported by three distinct organizational functions, each one with a different role: Strategy (Risk Profiler), Management (Risk Manager) and Controlling (Risk Controller).

These three risk functions work together and meet in the Risk Committee, the forum to discuss global risk policies to be implemented and to control the risk exposure of the company.

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RISK AREAS AND MAIN RISK FACTORS

Risk Management at EDPR is focused on covering the market, credit and operational risks of the company. In order to have a holistic view of risks, they were grouped into Risk Areas spanning the three phases of our business model. Within each Risk Area, risks are classified in Risk Groups and finally into Risk Factors. Risk factors are the source of the risk and the purpose of Risk Management at EDPR is to measure, control and eventually mitigate all risk factors that affect the company.

During 2013, EDPR defined or reviewed four new Global Risk Policies: Energy Price Hedging Policy, Counterparty Credit Risk Policy, Country Risk Policy and FX Risk Policy. These policies are already implemented or will be implemented t   hroughout 2014. They tackled those Risk Groups with highest impact in EDPR’s financial results.

NEW FOCUS ON COUNTERPARTY CREDIT RISK AT EDPR

WHAT IS COUNTERPARTY CREDIT RISK?

Counterparty credit risk is the risk that the counterparty of a transaction could default before the final settlement of the transaction’s cash flows. An economic loss could occur if the transactions or portfolio of transactions with the counterparty has a positive economic value at the time of default.

WHO ARE EDPR’S COUNTERPARTIES?

From a credit risk perspective, EDPR classifies its counterparties in to three different groups: Energy off-takers, suppliers (developers, partners, WTG suppliers and O&M suppliers) and financial institutions.

COUNTERPARTY CREDIT RISK POLICY AT EDPR

During 2013, EDPR introduced a new Global Counterparty Credit Risk Policy. To control credit risk at EDPR, thresholds of Expected Loss and Unexpected Loss are established, as defined under Basel Standards, and re-evaluated monthly. If threshold is surpassed by any counterparty or by the company as a whole, mitigation measures are implemented in order to remain within the pre-established limit.

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