The Portuguese Government has announced the approval of a legislative package for the electric system and presented today to the public a set of measures to be adopted in areas of relevance for EDP's power generation activities. In particular these measures refer to the revision of rules applicable to the early termination of power purchase agreements (PPA) and the use of hydro resources for power generation.

Based upon the information released by the Government, although subject to an in-depth assessment of the relevant legislative acts after their enactment, EDP preliminarily understands the following:
The Government has maintained the model for PPA's early termination set out in Decree-Law 240/2004, of December 27, which defines the conditions to calculate the compensations due to power generators for such early termination (CMEC). In essence, an adjustment will be introduce in relation to the reference market price of sale of electricity used to calculate the CMECs' initial amount. Such reference market price will change from the current annual average value of € 36/MWh to € 50/MWh, according to recent recommendations issued by the EU Commission.

EDP understands that this price adjustment is in line with the changes occurred during the last 2 years on the perspectives of development of prices in the long-term electricity market. It is expected that such price adjustment will result in a decrease of the CMEC's initial amount, which is preliminarily estimated to be around € 800 millions. From an economic perspective, EDP expects that the referred price adjustment has a neutral effect for the company upon the implementation of the CMECs mechanism with the early termination of PPAs, following agreement between the contracting parties.

On the other hand, the announced measures also contemplate the consolidation of the legal regime applicable to the use of hydro resources for power generation. In this context and as a consequence of the modifications to the assumptions used on the long-term electricity market, notably the referred increase of prices, it has been divulged the introduction of a payment due by hydro power generators under PPAs with the purpose of ensuring the economic and financial balance of the hydro plants, according to market conditions, for the period following the term set forth in the PPAs. According to the information released by the Government, the calculation of such payment's amount shall be made on the basis of two independent valuations.

Assuming that appropriate valuation methodologies and discount rates will be used, EDP expects that the conjugation of the two measures would have a neutral impact on the company. In addition, it will allow the exercise of the option provided for in Decree-Law no. 240/2004, of December 27, in relation to the maintenance of the hydro plants' operation until the end of their useful life.

EDP considers that the legislative package now announced is compatible with the company's profitability criteria, as well as contributes, among others, for the creation of stable and adequate regulatory environment for EDP's investment projects in hydro plants in Portugal, for the development of a liquid and efficient Iberian electricity market (MIBEL), for the development of the option to invest in renewable energies free of CO2 emissions and for the progressive increase of EDP's exposure to a liberalized market environment with a portfolio of efficient, competitive and low CO2 emissions' assets.

EDP – Energias de Portugal, S.A.