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RED ELÉCTRICA DE ESPAÑA Annual Report 2002 Contents 4 KEY INDICATORS 6 THE CHAIRMAN’S LETTER 10 BOARD OF DIRECTORS AND SENIOR MANAGEMENT 12 2002 YEAR´S REVIEW 15 THE GROUP’S ACTIVITIES 16 MANAGEMENT OF THE MAINLAND TRANSMISSION GRID 17 PLANNING AND DEVELOPMENT OF THE TRANSMISSION GRID 19 CONSTRUCTION OF NEW FACILITIES 22 FACILITIES´ MAINTENANCE 24 ACQUISITION OF TRANSMISSION ASSETS 26 OPERATION OF THE MAINLAND ELECTRICITY SYSTEM 30 TELECOMMUNICATIONS BUSINESS 34 INTERNATIONAL BUSINESS 37 CORPORATE AFFAIRS 38 HUMAN RESOURCES 42 ADMINISTRATION AND FINANCIAL MANAGEMENT 48 RESEARCH,DEVELOPMENT AND INNOVATION 52 QUALITY 56 INTERNATIONAL ORGANISATIONS´ MEMBERSHIP 58 COMMITMENT TO ENVIRONMENT 62 SHAREHOLDER AND STOCK EXCHANGE INFORMATION 69 LEGAL DOCUMENTATION 70 CONSOLIDATED ANNUAL ACCOUNTS 117 CONSOLIDATED DIRECTORS’ REPORT 128 PROPOSED DISTRIBUTION OF PROFIT 129 INDEPENDENT AUDITORS´ REPORT 131 CORPORATE GOVERNANCE REPORT millions of euros % Operating 750 553.1 573.6 602.8545.9 711.2 25 revenues 625 20 15 Sales of energy and power 500 14.5% 15.1% and other income 12.7% 13.6% 14.0% 375 10 Revenues from transmission and system operation 250 5 Margin (PAT/Operating revenues) 125 0 1998 1999 2000 2001 2002 consolidated figures millions of euros % 69.375.1 83.1 91.1 99.8 Profit after tax 110 16 95 14 11.7% 12.3% 80 11.2% 12 10.6% 65 10 9.9% Profit after tax (PAT) 50 8 ROE (PAT/equity) 35 6 1998 1999 2000 2001 2002 consolidated figures millions of euros % 180.3 185.1 183.8 195.0 224.7 Cash flow 240 65 after tax 220 55 200 45 180 35 Cash flow after tax 33.0% 33.5% 32.1% 32.3% 31.6% 160 25 Cash flow after tax/ operating revenues 140 15 1998 1999 2000 2001 2002 consolidated figures millions of euros % 377.2 314.3 390.7474.7 1,507.7 Net financial 1,600 200 liabilities 186.3% 1,280 160 960 120 640 80 68.0% 53.1% 42.4% 50.3% Net financial liabilities 320 40 Net financial liabilities/ equity 0 0 1998 1999 2000 2001 2002 consolidated figures millions of euros % 2,263.2 2,292.6 2,371.9 2,532.5 3,519.1 4,000 16 Fixed assets 3,200 15 2,400 14 13.7% 13.7% 13.7% 1,600 13 12.4% 12.7% Gross fixed assets 800 12 ROA 0 11 (BAIT/net assets) 1998 1999 2000 2001 2002 euros % 0.4550.3650.4150.308 0.480 0.5 75 Dividend 67.8% 67.7% per share 0.4 67.4% 70 65.7% 0.3 65 60.0% 0.2 60 0.1 55 Dividend per share 0 50 Pay-Out 1998 1999 2000 2001 2002 number of circuit ends km 2,000 28,000 Lines and substations Size of the grid 27,007 in service 1,736 1,600 24,000 18,634 18,634 19,014 19,258 1,200 18,000 800 12,000 637 646 720672 400 6,000 Number of circuit ends Kilometres of circuit 0 0 Acquired assets 1998 1999 2000 2001 2002 % 2 Unavailability (supply interruptions) 1.6 1.35 1.17 1.02 1.83 1.78 1.2 0.8 1.24 0.98 0.62 0.61 0.62 0.4 Other causes* 0.05 0.06 0.06 0.07 0.06 Scheduled maintenance 0 Fortuitous interruptions 1998 1999 2000 2001 2002 * Construction of new installations, work by thrid parties and external factors The Chairman’s Letter To our shareholders: In recent years we have witnessed important changes for RED ELÉCTRICA DE ESPAÑA in regard to the legal, regulatory and economic environment and in regard to development of the company itself. However, 2002 proved to be a year of significant changes with far-reaching consequences for the future. The purchase of Endesa’s and Unión Fenosa’s transmission assets, together with the parts acquired in the company which controls Iberdrola’s transmission assets, have supposed the most important milestone since the creation of the company in 1985 and have led to the final definition of our strategic position. RED ELÉCTRICA is now one of the most important power transmission companies in the world in terms of size but especially in terms of efficiency and quality. These parameters will prove increasingly decisive with regard to profitability and will ensure the company’s future in this area of activity. The opportunities which will be available from now on for scale economies, for enhancement of technological and operational efficiency, for growth and profitability, are so important that we should speak now of a new RED ELÉCTRICA. Since the definition of the company’s new strategy in 1998, our main priority has been to provide the Spanish electricity system with a service of quality and excellence which would be a source of profit, of prestige and -above all- of future opportunities. The conviction that this was the best course and our pace of continuous improvement in our financial persistence and tenacity, have changed the context in results.This should be a consequence of the synergy which the company operates. This will be to the which will emerge progressively as we take benefit of all those with a direct interest: shareholders, advantage of scale economies and operational employees, managers, suppliers, users of the improvements in accordance with a plan which was transmission grid and society in general. Electricity is specifically designed for this purpose and is now not only an essential service in legal terms but a being implemented. technical cornerstone of our world, of economic development and of individual and family welfare. Apart from this singular and decisive event, 2002 ended with results which maintained the positive As a result of the acquisitions mentioned above, tone of previous years. Profit after tax rose to 99.8 RED ELÉCTRICA is now organised on the lines of million euros - an increase of 9.6%.This figure has the TSO (Transmission System Operator) model. grown by 74% over the last five years and the This model is increasingly accepted as the norm in average increase each year has been 11.7%.This is deregulated electricity systems - especially in the a reflection of the level of effort being expended. European Union. The alignment with a standard model is -in itself- of considerable importance but it Investment in new facilities for the transmission also opens up possibilities of better regulation and it grid came to 203 million euros which was a record will allow RED ELÉCTRICA to become a significant figure. A total of 710 km of circuit and 88 circuit player in the area of European transmission grids in ends were commissioned and these were also record the near future. figures. This reflects a level of activity which is unequalled in Europe and the investments made Our operational reliability and solid financial will generate new revenue in the coming years.They position meant that these acquisitions could be are therefore the basis of the company’s future entirely financed with debt while maintaining development. excellent credit ratings.This bodes well for our future and indicates yet another quality we can add to the In 2003 the increase in transmission revenues continuous improvement in recent years.. associated with the effect of the new investments, will be 10.2%.Total revenue for this year, including the Therefore our efforts in the coming years will be newly-acquired facilities, is expected to grow by applied first to integrating these new facilities with 57.7%. Revenue from system operation has also the company’s operational and management grown by 22.1% which is in line with growth in systems. We shall also work to maintain the past recent years. 7 The Chairman’s Letter The strong growth in demand since 1996 has to the slowdown in demand for transmission become a constant challenge to the quality of system capacity and Internet infrastructures. On the other management through the greater requirements faced hand, demand clearly began to recover in the second by the generation and transmission system. In all half of 2002 and should continue this year, leading cases, the system’s performance has been more than to sales growth and the corresponding improvement adequate and this is a source of satisfaction. This in financial results. Our flexible strategy has success is the result of the foresight incorporated in allowed us to reduce the investment plan for the our planning, of the continuous improvements in 2002-2006 period from 400 million to 150 the operating systems and tools and of the training million euros.We can therefore attend to investment provided to our staff. Our people are the key to needs in a selective fashion according to real demand excellence in this, and in everything we do. The and to optimise the company’s results. recent winter witnessed successive peaks of demand which broke all records, however, at no time there The foregoing illustrates the main lines of our were difficulties encountered in regard to the security strategy, which were already defined four years ago. of supply. This strategy is constantly revised to reflect the current economic and regulatory environment and The year 2002 was also associated with other any significant business opportunities. I would like important events. The acquisition of TDE, the to take a moment here to briefly comment on certain transmission operator in Bolivia, strengthens our aspects of it. presence in Latin America. And it concerns sound and profitable plans. In this case, the creation of The first of these strategic lines,as mentioned above, value does not stem from financial concepts alone concerns the level of excellence of the service but from the ability to contribute experience and provided by the electricity system.