Annual Report 2010 - AdP

information on the conditions that will occur after the balance sheet date, if material, are reflected in the notes to the consolidated
financial statements.
3. Financial risk management policy
3.1 Risk factors
AdP Group activities are exposed to a variety of financial risk factors: credit risk, liquidity risk and cash flow risk associated with
interest rates. It is common practice for AdP Group to use derivatives, among other instruments, to minimize some of the risks it is
exposed to. AdP Group has developed and implemented a risk management program that, together with the ongoing monitoring
of the financial markets, seeks to minimize potentially adverse effects on the financial performance of AdP and its affiliates. Risk is
managed by the central treasury department on the basis of policies approved by the Administration. The treasury identifies, assesses
and executes operations in view of minimizing financial risks in strict cooperation with the operating units of AdP Group. The Board
of Directors provides principles for managing risk as a whole and policies that cover specific areas, such as foreign exchange risk,
interest rate risk, credit risk, use of derivatives, other non-structured instruments and the investment of excess liquidity. The Board
of Directors is responsible for defining general principles for managing risk and exposure limits. All operations conducted with
derivatives require prior approval from the Board of Directors, which defines the parameters of each operation and approves the
formal documents that describe their objectives.
3.2 Credit risk
Credit risk is essentially related to the risk of one of the counterparties failing to fulfil its contractual obligations, resulting in a financial
loss for AdP Group. The group is subject to credit risk in its operational, investment and treasury activities.
Credit risk related to operations is essentially related to credits from services rendered to customers (water supply). This risk is low
given the characteristics of the service rendered, with no significant credit risk from one particular customers because receivables
come from a high number of customers.
Impairment adjustments for accounts receivable are calculated taking into account the following: i) the customers risk profile,
depending on whether we are dealing with residential or corporate customers; ii) the average reception time period, which differs
from business to business; and iii) the financial condition of the customers. Because of the dispersion of customers, it is not necessary
to consider an additional credit risk adjustment, other than the impairment already recorded in accounts receivable - customers.
The following table illustrates the maximum exposure of the group to credit risk (not including customers balances and other debtor
balances) at 31 December 2010, without taking into account any held collateral or other credit improvements. For balance sheet
assets, the defined exposure is based on its book value, as reported on the face of the balance sheet.
Bank financial assets 31.12.2010
Demand deposits 51,773,491
Term deposits 425,673,152
Derivatives 2,227,586
Equipment renewal fund 7,979,862
Capital replenishment fund 96,909,657
Other 373,366
584,937,114
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