RC EDP ingles RPC 3/10/03 9:49 AM Página 1 BECAUSE WE HAVE MUCH TO SAY ‘02|GRCA Group Report and Consolidated Accounts 2002 RC EDP ingles RPC 3/10/03 9:49 AM Página 2 CHAIRMAN’S MESSAGE | TO THE SHAREHOLDERS, With the close of 2002, I once again address our shareholders to inform them about the most salient aspects of our Group’s activity during the past year. It seems appropriate to me to start this review by referring to those developments that most marked the financial year and gave expression to the strategic direction that we have been gradually pursuing in recent years: the EDP Group’s greater concentration on its traditional core business – electricity – in a market which, flowing from the continuing integration process, we now consider to be our domestic market – the Iberian Peninsula. Indeed, the constitution of an Iberian market within the framework of the Portuguese and Spanish electrical sectors’ progressive liberalisation, has led in an almost natural manner to the change in the EDP Group’s concept of the domestic market. Accordingly, in response to this challenge and in the wake of a movement initiated at the end of 2001, the Group assumed midway through 2002 a controlling position in the Spanish company Hidroeléctrica del Cantábrico (Hidrocantábrico). The EDP Group thus became the first Iberian company to possess significant generating and distribution assets on both sides of the border, not to mention a substantial customer base. In this connection and already at the beginning of 2003, the recognition of the importance of a strategic convergence between gas and electricity interests on an Iberian scale led us to join forces, through Hidrocantábrico, in the privatisation operation of Naturcorp, a gas company in the Basque country. If successful, Hidrocantábrico will own a company boasting a market share of 10% in Spain’s gas business, with more than half a million customers and a portfolio of highly attractive assets. Simultaneously, this operation will pave the way for a substantial improvement in the Group’s access to gas contracts, a critical success factor in the development of new electric energy production on the Iberian Peninsula. On the other side, it will also allow capitalising on the existing operational and strategic complementarity between Hidrocantábrico and Naturcorp and which promises the creation of significant value through the securing of short-term synergies. The inevitable transition process towards the new reality pervading the Iberian energy sector continues to be shrouded by uncertainties concerning its final configuration; however, we believe that the recent successes achieved in Spain constitute a solid platform for EDP that will enable the Group to face the RC EDP ingles RPC 3/10/03 9:49 AM Página 3 GROUP REPORT AND CONSOLIDATED ACCOUNTS 2002 [ CHAIRMAN’S MESSAGE challenge of building the Iberian market with confidence and to develop strong competitive capabilities engendered by its presence on the Portuguese and Spanish markets. Another step of enormous significance for the Group occurred in the Brazilian market. In October 2002, the Group finally secured operating control of Escelsa - Espírito Santo Centrais Eléctricas, S.A. and Enersul - Empresa Energética do Mato Grosso do Sul, S.A. – two electricity distribution companies in which we have been present since August 1999. We have therefore created the conditions to implement restructuring measures at these companies, as well as at the Group’s other businesses in Brazil, that will certainly lead to efficiency gains and the delivery of sustainable positive earnings. However, the less benign Brazilian macroeconomic climate and the political uncertainty which characterised a large part of 2002 constituted widely recognised instability factors which hindered the realisation of an objective that we have long awaited, namely, the definition of a regulatory framework for the Brazilian electrical sector that is more just and equitable, capable of offering a clear and unequivocal improvement in the returns on the investments made in that country. On this score, we believe that Enersul’s expected tariff revisions embody the first signs of the Brazilian government’s political will to create an environment that, in regulatory terms, will offer electric power companies the desired conditions for stability. Still in Brazil, and in the light of the uncertainties I have outlined, the EDP Group decided to re-programme in this phase the development of the Peixe Angical (452 MW) and Couto Magalhães (150 MW) hydroelectric projects, the concessions for which were attributed in 2001. The majority of investments in Brazil have now been concluded with the result that I consider that in 2003 the chief priority will be focusing all our efforts on tackling the restructuring of the electricity distribution companies in which we presently exercise operating control. Activity on the international market in general translated itself into a restructuring process initiated back in 2001 and which had as its prime goal achieving a greater concentration of resources and management capabilities on the Brazilian market. Hence, after having sold in 2001 the 25.5% shareholding in ESSEL in Chile and concluded the demerger of Bandeirante Energia, S.A., 2002 saw the sale of the equity holding in REDAL in Morocco. In the Telecommunications area, the year 2002 constituted a period of difficult decisions for the EDP Group. In the light of the new reality characterising the telecommunications business and the successive postponement of the availability of UMTS technology, the shareholders of ONI Way – ONI’s mobile telephone operator – decided, after a prolonged and thoroughly pondered reflection, to discontinue the company’s activity. This operation, which in broad terms materialised in an offer on the part of the other three national mobile operators to acquire the company’s assets and, on the part of one of them, to acquire all of ONI Way’s shares, permitted EDP to substantially reduce its exposure to the potential risks associated with this business and, simultaneously, to recoup a significant part of the investment already made. Insofar as the other business areas are concerned, and in consonance with the present scenario of economic slowdown confronting the new fixed-network operators, ONI gave continuity to the process of internal reorganisation embarked on in 2001, with special emphasis on enhancing flexibility in its cost structure and on improving the capacity to respond to its customers’ needs. In 2002, ONI reinforced its position as number one amongst the new fixed telecoms operators and now boasts a solid base of corporate and residential customers, an ample communications 2 | 3 RC EDP ingles RPC 3/10/03 9:49 AM Página 4 infrastructure and a strong shareholder base composed of four of the country’s biggest economic groups. As regards electric power generation in Portugal, EDP Produção continued during the course of 2002 to oversee the construction of the first 800 MW at the new natural-gas combined–cycle power station - the Ribatejo thermoelectric power station -, which has advanced within the budgeted figure and on schedule. In the electricity distribution business in Portugal, 2002 was marked by the entry into force of the new regulations governing activity in the electricity sector. Notwithstanding the average increase in electricity tariffs applied to the final consumer, the new regulatory framework for the sector led to a substantial reduction in EDP Distribuição’s regulated revenues, requiring on the part of the EDP Group an intensive drive to reduce operating costs in all business areas that will enable us to partially cushion the negative effect of the restrictions imposed. The materialisation of this effort took form in the “Efficiency Programme”, the launch of which I had the opportunity to communicate to our shareholders at the end of 2001 and the effects of which, in conjunction with those resulting from EDP Valor’s actions, are already evident in the Group’s results in 2002. We shall continue to make every endeavour and involve all the necessary resources so that in 2003 we can, once again, repeat the success attained this year from the standpoint of progressively improving the Group’s current levels of operating efficiency. Since the beginning of 2002, we have witnessed the broadening, through the operation of the sector’s new regulations, of the base of customers eligible to join the liberalised market, that is, those who can chose their electricity supplier. In this domain, the Group strengthened its position in the Non-Binding Electricity Sector (Portuguese initials SENV) through the medium of EDP Energia which, at the end of 2002, held a share of approximately 70% in the liberalised electricity market, thereby securing with remarkable success the retention within the Group universe of the greater part of the customers who had opted to adhere to that system. Turning now to the EDP Group’s financial and operating performance, it is worth bearing in mind that the 2002 consolidated accounts reflect the changes to the consolidation perimeter stemming from the integration of Hidrocantábrico, Escelsa and Enersul. These alterations to the group of consolidated companies, as well as the good results flowing from the implementation of the “Efficiency Programme”, contributed decisively to EDP’s operating income, managing to a certain extent to compensate for the decrease of around 50% in EDP Distribuição’s operating income as a consequence of the application of the new tariff regulation. Net income in 2002 was EUR 335 million, compared with the EUR 451 million earned in 2001. This decline resulted fundamentally from the extraordinary charge of EUR 107 million associated with the discontinuation of ONI Way. In line with previous years, EDP remains committed to sharing the value created by the Group with its shareholders. As a result, EDP’s Board of Directors will propose to the Shareholders’ general Meeting to be held on 22 May, the distribution of a dividend of nine cents per share.