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edp > Corporate Governance > Risk Management > Risk Management

Risk Management

Risk management’s goal is to minimize the potential downside of a risk for the company and its stakeholders, as well as to evaluate return-risk ratios, aiming at the implementation of hedging solutions and the optimization of the business’ portfolio.

Controlled Risk is one of EDP’s strategic foundations so management carefully monitors  risks incurred by the Group’s diverse activities.

Enterprise Risk Management (ERM) encompasses a set of practices in order to identify, analyze, evaluate, treat and report the corporation’s main risks and is embedded in the management style EDP requests its employees, which is aligned with international risk governance best practices and legal and regulatory requirements as expected and demanded by the Group’s internal and external stakeholders.
 

Organization Structure

Management Executive Board
The Executive Board of Directors (CAE) is supported by both the Risk Management Department (DGR) and the Risk Committee for ERM purposes. This structure is complemented by a coordination matrix structure between the functions of the main Business Units’ Risk Officers and DGR, whenever the former are available. The Executive Board of Directors approves Risk policies, defines supervising structures and approves risk limits. 


Risk Committee
The Risk Committee meets regularly, sponsored by the Executive Board of Directors who are also members, as well as other Business Units’ Management Boards and several Corporate Directors, namely the Risk Management Director.
The Risk Committee is accountable for: monitoring the Group’s risk profile and its most significant risks; approving report models issued by Business Units or the DGR as well as other procedures related with the reporting and monitoring; approving or defining recommendations regarding EDP’s most significant risks and abnormal risk situations  to be considered by the CAE; and issue recommendations concerning policies, procedures and risk limits to be judged and approved by the CAE.

Risk Portal

According to EDP’s ERM Policy all relevant risks should be assessed and managed, clearly identifying both the business unit and the chain of command responsible for its management.
As a supporting tool to risk assessment EDP uses the Risk Portal, an application that collects information related to risk identification, analysis, evaluation, mitigation measures and monitoring concerning significant risks. The Portal provides an easy benchmark of risks and risk management in similar domains within the Group, thus allowing the sharing of best practices.
The EDP Risk Portal is regularly updated by risk managers and can be accessed by authorized personnel, namely top managers, thus favoring a fast updated knowledge of the  Group’s or Business Unit’s relevant risks, their expected impact, current management and control measures and the ongoing improvements.
 

Types of Risks

 

EDP’s risks are of the kind one would expect to find in any Gas and Electricity Utility and can be roughly divided into:

  • Business Risks: pertain to the sustainable business growth, namely the balance between energy and environment, through the promotion of end-user efficiency, smart grids and less carbon intensive electricity production. This group includes regulatory risks.
  • Market Risks: related to commodity prices and volumes, as well as exchange rates and interest rates.
  • Operational Risks: this is the most diverse group, encompassing everything from equipment and processes to human failures, including health and safety issues as well as legal compliance.
  • Credit Risks: client or counterparty default risk.

EDP Group

The Group’s risk level integrated evaluation is performed with a bottom-up model named Cash Flow at Risk, which provides the evaluation of the uncertainty associated with the EBITDA value ( or other values such as the FCF- Free Cash Flow) as well as the effectiveness of the hedging strategies applied.
A complementary top-down model is used, based on the share price evolution and on the beta values forecasts for each business unit, aiming at the risk evaluation of assets and equity as well as benchmarking with other utilities.

Energy Management
This activity systematically monitors the margin at risk value of EDP’s positions on fuels, CO2 emission allowances and electricity, comparing it to previously established risk limits and adjusting it if necessary. This is done by means of a model called MUR+ (Model for a Unified Risk) and applied to the Iberian businesses.


Comercial Services
EDP assesses liberalized client market risk in a systematic and integrated way, by means of the Cash Flow at Risk evaluation, taking into account demand profiles and market price volatility and also offsetting positions through EDP’s generation and gas supply contracts. The results are input into price and maturity definitions, used for new or renewed contracts, and for margin hedging.