Annual Report 2003 Annual Report 2003 contents 4 A new dimension 6 The Chairman´s letter 10 Board of directors and senior management 12 Relevant events 14 At the service of society 16 OPERATION OF THE ELECTRICITY SYSTEM 21 MANAGEMENT OF THE TRANSMISSION GRID 28 THE TELECOMMUNICATIONS BUSINESS 31 INTERNATIONAL OPERATIONS 34 Our people 40 Environmental commitment 46 Quest for excellence 48 EXCELLENCE AND QUALITY 51 RESEARCH, DEVELOPMENT AND INNOVATION 54 Creating value 62 Our shareholders 69 Corporate governance 109 Consolidated annual accounts Operating revenues millions of euros % 553.1 573.6 602.8 711.2 926.2 1,000 55 800 50 47.5% 43.4% Sales of energy and power 600 42.4% 42.2% 45 and other income 400 40 Revenues from transmission 38.9% and system operation 200 35 EBITDA / Operating revenues 0 30 1999 2000 2001 2002 2003 consolidated figures Profit after tax millions of euros % 75.183.1 91.1 99.9 115.8 110 16 95 13.6% 14 12.3% 80 11.2% 11.7% 12 10.6% 65 10 Profit after tax (PAT) 50 8 ROE (PAT / Equity) 35 6 1999 2000 2001 2002 2003 consolidated figures Cash flow after tax millions of euros % 185.1 183.8 195.0 224.7 320.9 350 65 300 55 250 45 32.3% 34.6% 200 33.5% 32.1% 31.6% 35 Cash flow after tax 150 25 Cash flow after tax / operating revenues 100 15 1999 2000 2001 2002 2003 consolidated figures Net financial liabilities millions of euros % 377.2 314.4 390.7 1.507.7 1,914.3 2,500 120 2,000 100 80 1,500 69.3% 65.1% 1,000 60 Net financial liabilities 500 34.7% 29.8% 33.5% 40 Net financial liabilities / Net financial liabilities + Equity 0 20 1999 2000 2001 2002 2003 consolidated figures a n ew d imension Key Indicators Fixed assets millions of euros % 2,292.6 2,371.9 2,532.5 3,519.1 4,180.6 4,250 20 3,400 16 13.7% 13.7% 12.7% 2,550 12 9.6% 1,700 8.1% 8 850 4 Gross fixed assets ROA (EBIT / Net assets) 0 0 1999 2000 2001 2002* 2003* * Includes acquisition of assets Dividend per share euros 0.365 0.415 0.455 0.480 0.548 0.6 0.5 0.4 0.3 0.2 0.1 Dividend per share 1999 2000 2001 2002 2003 Size of the Grid n¼ of circuits ends km 3,000 30,000 Lines and substations 27,005 27,538 in service 2,400 24,000 19,240 18,634 19,014 1,799 1,800 1,730 18,000 1,200 12,000 646 672 717 600 6,000 Number of circuit ends 0 0 Kilometres of circuit 1999 2000 2001 2002 2003 Unavailability (supply interruptions) % 2.0 1.6 1.2 1.17 1.02 1.83 1.78 1.04 0.8 0.98 0.62 0.61 0.62 0.86 0.4 Other causes* 0.06 0.06 0.07 0.06 0.06 Scheduled maintenance 0 Fortuitous interruptions 1999 2000 2001 2002 2003 * Construction of new installations, work by third parties or external factors C hairman´s letter To our shareholders: Since 1998 there have been important changes in our company, in the sector in which it operates and in the legal and business environment. In 2003 these changes resulted in devel- opments along three lines. First, the acquisition of Endesa´s and Unión Fenosa´s transmission assets was brought to a conclusion.The latest financial statements already reflect the expected synergies and economies of scale that will continue to arise in future years. Second, the constant strategy of internal improvement continues to bear fruit year after year. This is one of the keys to the improvement in results and to the high quality of the service we provide to the Spanish electricity system. Lastly, the new regulatory developments related to the Spanish islands and other non-main- land electricity systems and the drive to establish an Iberian electricity market represent first- class opportunities for further growth.The first of these developments means Red Eléctrica is now present in autonomous cities and communities outside the Spanish mainland.The sec- ond development will emerge from legislation and regulations that are soon to be adopted in Spain and Portugal. Both opportunities will become a reality in the second half of 2004. A new Red Eléctrica has started out on a new phase of its existence. It is approaching this from a sound basis, with more capacity than ever to provide services and generate business and it enjoys growing prestige based on the higher quality of the services it provides. Our first priority is to provide the Spanish electricity system with a service of quality and excellence – extending this to cover all relevant aspects.The acquisition of additional assets has been magnificently received by the markets which understand their value for the short and long term.This was reflected by the share price which gained 34.9% during the year, beating the Ibex 35 by 6.7%.The total return to shareholders since the company´s debut on the stock exchange, ie, from July 1999 to February 27th 2004, has been 95%.This makes Red Eléctrica one of the most profitable IPOs in the last five years. The acquisition of these assets has led to a significant transformation of the company.The financial efforts associated with the operation were also an opportunity to restructure the Group´s financial liabilities.As a result of the solid structure of our business and Red Eléctrica´s credibility in all senses of the word, the bridging loan signed in 2002 was refi- nanced under excellent terms by means of two instruments: a 5-year syndicated loan that attracted great attention from all the main banks in Spain and a programme of bonds on the euromarket.The success of the bond issue can be gauged by the demand which was three times the amount issued. It was also reflected in the advantageous terms obtained by the company and it was seen as one of the most outstanding operations of the year.As a result of these actions, by the end of the year 70% of the debt had been placed at fixed rates, minimis- ing the risk of future increases in interest rates. Our excellent level of operational reliability and strong financial footing allowed us to finance these acquisitions entirely with debt while maintaining enviable credit ratings.This situation is an additional guarantee of our future and a value added to the constant improvement of recent years.At the beginning of February 2004, Standard & Poor´s maintained their rating for Red Eléctrica and upgraded the long-term outlook. In the coming years the efforts of our organisation will be focused on ensuring medium-term growth while maintaining the same level of investment in the transmission network and, in the short term, by integrating the new assets with the company´s operating and management systems. Both approaches will ensure sustained improvement in the financial statements as a result of the synergy that will progressively emerge as we take advantage of the economies of scale and operational improvements in accordance with a plan that is already prepared and implemented. The year closed with results that were even better than the positive trend in recent years. Profit after tax rose to 116 million euros – an increase of 15.9% over the previous year. Growth over the last five years has thus been 67.8%, an average annual increase of 11%. Total cash flow for the year exceeded 320 million euros.This was 42% more than the previ- ous year due to the larger asset base.This confirms the Group´s capacity to finance its busi- ness and draws attention to its new dimensions. For the second year running, investment in new transmission grid installations exceeded 200 million euros. In 2003 some 533 km of new circuits and 69 new circuit ends were put into service and the transmission capacity of the many lines was increased. Over the last five years more than 1,800 km of circuits and 230 circuit end positions have been put into service. These increases are much higher than those of any other European country and this level of activity is the best guarantee of the reliability of the electricity system. These investments also mean solid growth in revenues from regulated activities. In 2004 it is expected that they will be 11% higher than in 2003. 8 2003 Annual Report Last year revenues from system operation grew significantly to 33 million euros, compared to 6 million euros in 1999.This should be seen as highly positive because it represents an improvement commensurate with Red Eléctrica´s plans as well as recognition of the quality of the service the company provides to the Spanish electricity system. In 2003 demand for electricity increased by 6% on the Spanish mainland and by 9% in the non-mainland systems.This confirmed the strong growth trend that started in 1997 and new record highs were established for demand in both winter and summer. Our response under these conditions was a further guarantee of the safety of the mainland electricity sys- tem.This stands in contrast to the difficulties faced by various developed countries during the year. Probably they lack the forecasting capacity that we use to plan our operations in the areas of supply safety, investment and quality. In these fields Red Eléctrica is constantly working on internal adaptation and improvement and on technical standards, to meet the ever-increasing demands.