Business Life Insurance 19 - Efficient Growth,fficient Management

Transcription

1 2004 results Quarterly report

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3 NET PROFIT UP 14.2% TO 1,210.7 MILLION EUROS Proposed dividend to be paid against 2004 Results up 14.3% Increase in production and in efficiency The Group s production is up 13.9%, reflecting the increase in combined cycle (+93%) and in renewables (+38%) offsetting lower hydroelectric generation (-27%). Increase in efficiency: The ratio of Net Operating Expenses over Gross Margin comes in at 27.1% Renewables and International business driving growth EBITDA is up 9.2% and EBIT 10.7%. Renewables and international represent 67% of the growth in EBITDA. - The Renewable Energy Business recorded a 38.1% increase in EBITDA, up to million euros. - The International business posted a 36.4% increase in EBITDA, up to million euros. Strategic Plan: Major achievements Investments totalled 10,500 million euros, of which 78% were made in Spain. Installed capacity increases by 52% and production by 63%. Efficiency: The ratio of Net Operating Expenses over Gross Margin improves by 17%. Net Profit is up more than 42% and EBITDA is up more than 43%, both in line with DPS growth. * (*) Proposed dividend to be paid against 2004 Results up 14.3% Leverage improved by 100 pb to 54.8% with investments of 2,713 million euros over the period. IFRS: No meaningful changes on financial statements Results 2004

4 Key performance indicators Operating Data % Installed capacity MW 25,237 22, Gas combined cycle MW 5,183 3, Renewable energy MW 3,206 2, Hydroelectric MW 9,083 8, Nuclear MW 3,335 3, Fuel-oil MW 2,888 2, Coal MW 1,247 1,247 - Cogeneration MW Net production GWh 81,812 71, Gas combined cycle GWh 23,159 11, Renewable energy GWh 5,413 3, Hydroelectric GWh 15,922 21, Nuclear GWh 26,428 24, Fuel-oil GWh 2,417 2, Coal GWh 7,061 5, Cogeneration GWh 1,412 1, Total Demand GWh 117, , Customers under management No. (mil.) Workforce (parent company + own) No. 11,139 11,

5 Operating Data % Spain Installed capacity MW 22,547 20, Gas combined cycle MW 2,800 1, Renewable energy MW 3,206 2, Hydroelectric MW 8,776 8, Nuclear MW 3,335 3, Fuel-oil MW 2,888 2, Coal MW 1,247 1,247 - Cogeneration (attributable) MW Net production GWh 65,861 63, Gas combined cycle GWh 8,613 4, Renewable energy GWh 5,413 3, Hydroelectric GWh 14,517 20, Nuclear GWh 26,428 24, Fuel-oil GWh 2,417 2, Coal GWh 7,061 5, Cogeneration (attributable) GWh 1,412 1, Total Demand GWh 92,184 87, Tariff GWh 58,080 58, Commercial GWh 34,104 29, Gas supplies GWh 34,502 22, End customers GWh 17,730 14, Gas combined cycle GWh 16,772 8, Customers under management No. (mil.) Gas market share (total) % 10.8% 8.2% 31.7 Workforce (parent company) No. 8,546 8, Latin America Installed capacity MW 2,690 2, Gas combined cycle MW 2,383 2, Hydroelectric MW Production GWh 15,951 8, Gas combined cycle GWh 14,546 7, Hydroelectric GWh 1, Energy distributed GWh 24,909 23, Customers under management No. (mil.) 7,8 7,5 4.0 Workforce (proportional) No. 2,593 2,

6 Market data Market capitalisation (31/12) Million 16,859 14,127 Earnings per share Net operating cash flow per share PER Times Price/Book Value (Capitalisation to NBV at end of period) Times Economic/Financial data Income Statement Net Sales Million 10, ,488.5 EBITDA Million 2, ,617.0 EBIT Million 2, ,823.4 Ordinary Profit Million 1, ,473.5 Net Profit Million 1, ,060.3 Net Operating Expenses/Gross Margin % 27.1% 27.8% Balance Sheet Total Assets Million 25,934 24,433 Shareholders Equity Million 8,717 8,225 Net Financial Debt Million 10,569 10,378 ROE % 13.9% 12.9% Financial Leverage (Net Debt/Net Debt+Equity) % 54.8% 55.8% Debt/Equity ratio Times

7 Operating Highlights In 2004 Iberdrola continued meeting the targets established in its Strategic Plan: The highlights of the period were as follows: The Group s total production is up 13.9%, reflecting the increase in installed capacity, which has offset lower hydroelectric generation over the period compared with Thus, the total capacity brought into service since December 2000 is 8,668 MW, of which the largest contribution is from combined cycles both in Mexico and Spain (5,183 MW) and renewable energy (2,699 MW), basically wind farms. Gross and Net Operating Profit both improved, with EBITDA up +9.2% and EBIT up +10.7%. As regards efficiency, important improvements were achieved: The increase in Net Operating Expenses (+5.8%) is 2.5 points lower than the rise in Gross Margin (+8.4%). It is worth mentioning the positive evolution of the Renewables and International businesses, both with strong growth in Operating Profit. - Renewables: EBITDA rose 38.1% to million euros, in line with the increase in production, which is up by over 38%. - International: EBITDA increased 36.4%, topping million euros, thanks primarily to the good performance achieved by businesses in Brazil and Mexico. Net Profit rose to 1,210.7 million euros (+14.2%), which allowed the payment of an interim dividend of euros, 14% greater than in January The leverage ratio improves by 100 bp to 54.8%, compared to the 55.8% recorded in 2003, with investments of 2,713 million euros during the period. Development of the Strategic Plan 1.- INVESTMENTS IN GENERATION In 2004, IBERDROLA brought into service 2,449 MW of additional capacity, taking the total installed capacity up to 25,237 MW. This means a 10.7% increase in 2004 and an increase of 52.3% over the installed capacity as of December Aditional In Since December capacity (MW) Combined cycle +1,390 +5,183 Renewable energy ,699 Other Total +2,449 +8, SPAIN 16,569 > Combined cycle plants Installed Capacity (MW) +52% 25,237 Dec Dec Iberdrola s combined cycle plant capacity in Spain totalled 2,800 MW, corresponding to the plants in Castellón, Castejon (Navarra), BBE (Vizcaya), Tarragona, Santurce and the first two generation units of Arcos de la Frontera. 4

8 In 2004, 1,200 MW were added: The 400 MW corresponding to Santurce plant started operating during the last days of 2004 and the 800 MW of Arcos plant were under testing period by year end. By the end of 2005, Iberdrola plans to have 4,000 MW in operation, and this is scheduled to rise to 5,600 MW by the end of Escombreras plant The 800 MW Escombreras (Murcia) combined cycle plant will come into service during It will replace the old thermal fuel-oil plant (280 MW) that the Company had at the same location, providing a high level of energy efficiency and less environmental impacts. > Renewable Energy At 31 December 2004, Iberdrola has an installed capacity of 3,206 MW (2,891 MW of wind farms and 315 MW of mini-hydro plants), surpassing the initial objective of reaching 3,100 MW of total capacity by year end. This position confirms Iberdrola as the world leader in Renewables installed capacity. For 2008, the new objective is to achieve an installed capacity of 5,500 MW, of which 4,500 will be located in Spain and 1,000 MW outside of Spain. Installed Capacity (MW) +42% 3,206 Capacity Start of Project (MW) operations Castellón A Castejón BBE (25%) Tarragona (50%) Santurce Arcos I y II Aceca Arcos III Escombreras Castellón B TOTAL 5,600 > Hydroelectric facilities Iberdrola has launched a project to renew the equipment at 39 hydroelectric plants spread over the Sil, Duero, Tajo and Mediterranean basins, making it possible to improve their performance. This initiative, which will run through to 2010, will involve an investment of 173 million euros already included in the investment plans and will involve plants with a total capacity of 5,975 MW, representing 68% of the Company s installed hydroelectric capacity. 2, Additional capacity 2004 Capacity brought into service during 2004 reached 949 MW, for a 42% increase (910 MW in wind capacity and 39 MW in mini-hydro plants). The new wind farm capacity corresponds to both new plants and additional capacity rolled out at existing facilities. New facilities: In Castilla y León, Hontalbilla I (36.55 MW), Hontalbilla II (28.90 MW), Sierra Dueña (31.45 MW), La Magdalena (23.80 MW), Canalejas (18.70 MW), Sierro (19.55 MW), Chambón (33.15 MW) and Valbonilla II y III (2.15 MW); In Galicia. Larouco II (14.45 MW), Serra do Burgo II (11.90 MW), Meda II (13.60 MW), Goia Peñote (40 MW), Pedregal II (14 MW) and Pena da Cruz II (10.20 MW); In Castilla La Mancha, La Muela I (49.50 MW), Cerro del Palo (49.50 MW), Cerro Calderón (49.50 MW), Callejas 5

9 (49.50 MW), Cerro Revolcador (26.35 MW), Cantalojas (18 MW), Maza (49.50 MW), El Gramal (9.35 MW), Portachuelo (11.26 MW), La Cabaña (10.41 MW), Capiruza I Expansion (42 MW) and Capiruza II (24 MW); In Aragón, Fuendetodos I (46 MW), Fuendetodos II (47.60 MW) and Entredicho (36 MW); En Murcia, Gavilanes Expansion (3 MW) and in La Rioja, Munilla (9 MW). Additional capacity in existing facilities: In Castilla y León, Bordecorex Norte (16.45 MW) and Grado (18.70 MW), in Galicia, Serra Meira (34 MW) and in La Rioja, Larriba (3.50 MW) and Préjano (7.85 MW). At the end of 2004, the agreement signed with Gamesa in September of 2002 was completed. This agreement consisted on the progressive purchase of approximately 1,000 MW of wind power in Spain, all of which has already been integrated into the generation capacity of Iberdrola. In 2004, the last MW were brought into service, corresponding to the Chambón, Teruelo, Fuendetodos I and II, Entredicho, Goia Peñote and Serra de Meira plants, detailed above as part of the added capacity to those plants. Regarding mini-hydro plants, the construction of the plants of Santa Eulalia de Tábara, Fontanar I, Fontanar II and Fontanar III was finalised, and all of them are fully operational with a total capacity of 39 MW. Capacity under construction and development During 2004, IBERDROLA continued its activities in promoting new wind farms, both in traditional and in new areas. The highlights were as follows: Work began to build the Larriba-Hornillos (La Rioja) wind farm (32 MW), with a total investment of 28.3 million euros. Work began to build the Bordecorex Norte (Soria) wind farm (44.35 MW), with a total investment of 42.4 million euros. An agreement was signed with the Maranchón town council (Guadalajara) for the construction of seven wind farms, which are expected to have a total capacity of 188 MW and will require an investment of 188 million euros. Work began to build the Munilla- Lasanta (La Rioja) wind farm (46 MW), with a total investment of 30.7 million euros. 1.2 LATIN AMERICA Mexico In Mexico, Iberdrola already has 2,193 MW of installed capacity in operation, corresponding to the Monterrey and Altamira combined cycle plants (1,000 MW and 1,036 MW respectively) and the Enertek (Tamaulipas) and Femsa-Titán (Monterrey) cogeneration plants (120 MW and 37 MW respectively). Furthermore, Iberdrola is building another two combined cycle plants in Mexico: the 500 MW Laguna II plant (Durango), the contract for which was awarded a year ago, with the facility to enter into service in April 2005, and the 1,121 MW Altamira V plant (Tamaulipas), which is scheduled to be brought into service in November In addition, on 30 June Iberdrola was awarded a contract for the development, construction, ownership, operation and maintenance of the 1,135 MW Tamazunchale combined cycle plant, which will require an estimated investment of US$ 500 million, including the financial costs associated with the operation. It is expected to enter into service in June of In line with the contract signed, Comisión Federal de Electricidad (CFE) has guaranteed to purchase all the energy 6

10 produced by the plant for a 25-year period. The plant will source its gas directly from the CFE and the contract has been signed up in dollars, as for the Company s other projects in Mexico. Brazil Capacity Operational Project (MW) status Enertek % operational Monterrey 1, % operational Altamira IV 1, % operational La Laguna Altamira V 1, Tamazunchale 1, Total 5,000 In Brazil, Iberdrola has the 450 MW Itapebí hydroelectric plant (183 MW of which are attributable to the Company), whose three units are operating at full capacity. In addition, the Termopernambuco combined cycle plant, which has an installed capacity of 520 MW (190 MW attributable), was brought into service in Q and is now operating at full capacity. 1.3 EUROPE Greece: IBERDROLA will acquire 49.9% of the share capital of the wind energy company Rokas for close to 85 million euros. IBERDROLA has become the strategic partner of Rokas, the largest producer of wind energy in Greece, which plans to invest more than 600 million euros in that country up to IBERDROLA s entry into Greece will be made through the initial acquisition in 2004 of a 21% stake in Rokas, which produces 45% of Greece s wind energy, for an amount close to 32 million euros. This stake will be gradually increased until it reaches 49.9% in 2009, for a total investment of 85 million euros. Rokas, which is listed on the Athens stock exchange, has more than 400 MW of capacity, of which 183 MW are already in service, with 2,800 annual working hours in average. Rokas has the target of reaching 600 MW in the coming years. This stake in Rokas makes Greece one of the most important markets for the development of the targets of IBERDROLA in renewable energy. This country has a great potential in this business, since it has only 409 MW of wind power in service, of the 2,000 MW it has set as a goal for Portugal Following Iberdrola s decision to enter the Portuguese wind market by sealing an agreement with Gamesa in April to acquire the Catefica wind farm (18 MW) near to Lisbon, Iberdrola set up Aeolia in order to develop renewable energies in Portugal, first identifying locations and then building new wind farms. The acquisition of the Catefica wind farm is in line with IBERDROLA s commitment to the Portuguese wind market, on which the Company currently has 75 MW under development in the east and west areas of the country, and is negotiating for permits to set up an additional 174 MW. As regards Aeolia, Iberdrola has a 78% stake in this new company, which is located in Tivoli Forum in Lisbon, and will handle management and maintenance tasks. The Portuguese companies Alberto Mesquita and Visabeira each have an 11% interest, and will be responsible for operating tasks. In addition, IBERDROLA has signed an agreement with Gamesa which provides for the acquisition of 250 MW in operation in Portugal, and the joint promotion of additional wind farms. Iberdrola considers Portugal as a high-potential and 7

11 expanding market for the renewable energy sector, with only 300 MW of wind capacity at yearend 2003 out of the 3,750 MW set as the target for France and Italy In the area of renewable energy, IBERDROLA signed an agreement for the development and construction of various wind farms. In France, 32 MW of capacity are scheduled to be installed during 2005, and an additional 100 MW during the following two years. This agreement also provides for the build up of 100 MW during the next two years in Italy. Trading The Company is developing a major trading business in Europe, with operations in Switzerland, Germany, the Netherlands, France, Portugal, Spain and Belgium. The Company aims to ramp up these energy buying and selling activities in the short term to include other countries in Europe such as the United Kingdom or Italy. The trading business is run out of Madrid with a support office in Zurich. The operational highlights in 2004 were: A contract was signed to deliver 24,700 GWh to a German municipality in Active operations began in the balancing market in France operated by RTE. A contract for 86,769 MWh of generating capacity was awarded in Holland in an auction organised by Nuon. 2.- DISTRIBUTION 2.1 ELECTRICITY At the end of 2004, IBERDROLA had 9.6 million clients in Spain, reflecting the addition of around 189,000 new clients year-on-year. The level of energy distributed rose to 92,184 GWh, representing an increase of 5.1% over Year 2004 was marked by significant peaks of demand: 15,270 MW on 2 March 2004 and 14,749 MW on 1 July. On the other hand, from 2000 to 2004, the quality of service in the IBERDROLA market recorded an improvement of 26%. In 2004, the System Interruption Index ICEIT was 1.87 hours, below 2 hours for the first time and recording a 14% decrease over the same period in 2003, in which the ICEIT was 2.17 hours GAS Demand & Quality of Service +5.1% Demand 12M ICEIT 1.87 hrs +14% Quality of service By signing a 12-year agreement with the Madrid municipalities of Griñón, Moraleja de Enmedio, Cubas de la Sagra and Serranillos del Valle, IBERDROLA has taken an important step forward in the sector of distribution of natural gas. The agreement includes the construction of pipelines to distribute the gas to these areas in IBERDROLA has already signed an agreement with 8

12 Enagas to connect with this infrastructure. Work will be completed by next year. 3.- SUPPLY 3.1 ELECTRICITY > Spanish business: eligible electricity customers In 2004, Iberdrola sold 30,018 GWh on the Spanish market (+3,656 GWh), consolidating its position as market leader with a 38.1% market share and over 520,000 customers, which means an increase of more than 450,000 customers since the end of Share in deregulated electricity market Rest 61.9% Iberdrola 38.1% 3.2 GAS > Spain Proocurement: Iberdrola s positioning with regard to covering gas demand is based on two key pillars: A low-risk strategy with contracts already signed for 6 bcm of gas in 2007, from a range of sources and based on various economic conditions, enabling the Group to reduce its exposure to exchange rate risks and fluctuations in oil prices. Contracts that include price indexing formulae, with 48% on non-oil products and 52% on oil products, with flexible clauses such as: - CIF contracts that do not prevent trading. - Joint management of contracts with the option to allocate gas for Generation or Commercial activities and among plants, and the possibility to generate economies of scale in logistics and management of stocks. - Price reviews, both periodical (every three to five years) and on an extraordinary basis in the event of a change in circumstances. - Make-up and carry-forward clauses to make adjustments for changes in demand over the short term. > Europe Among the operational highlights of 2004 is the renewal of the supply contract with Grupo Sinergía de Energía, whose consumption is equivalent to 280 million KWh annually. IBERDROLA will begin to operate in the deregulated gas market in France, after being awarded contracts for 330,000 MWh in an auction organised by Gaz du Sud Ouest (GSO), a subsidiary of Totalfina-Elf, as required by the French Energy Regulatory Commission. 9

13 4.- RATIONALIZATION AND OPTIMIZATION OF FINANCIAL RESOURCES During 2004, a policy of debt refinancing was undertaken, taking advantage of the positive situation on the capital markets, which has permitted to obtain an extension in the average maturity of debt and a substantial reduction in cost. The highlights of 2004 were as follows: Iberdrola signs a five-year club deal loan for 500 million euros. On May 19, 2004, Iberdrola concluded a five-year loan for 500 million euros with a reduced number of leading national and foreign banks ( club deal ): Banesto and BBVA (both as agent banks), ABN AMRO, Barclays, Caja Madrid, Citibank and Royal Bank of Scotland. The loan has a variable interest rate at 0.275% over the Euribor. First private placement issue in the United States by a Spanish electricity company for US$ 450 million On June 23, IBERDROLA, through ABN AMRO and Royal Bank of Scotland, completed a private placement issue in the US market for 450 million dollars of 7, 10, 12 and 15-year bonds. With an average maturity of 11 years, the conditions of this placement are excellent, being the spread equivalent to the benchmark swap rate plus 28 basis points. This operation is the first of its kind to be carried out by a Spanish electricity company on this market. IBERDROLA signs a syndicated loan for 2,300 million euros with 36 entities IBERDROLA signed a syndicated loan for 2,300 million euros with 36 top entities. The transaction is divided into two tranches: one of 1,150 million euros, which will be carried out as a five-year syndicated loan, with the possibility of a one-year extension at the end of the first and second anniversaries of the signature, and the other, in the same amount, will be a five-year revolving credit facility. The goal of this operation is to substitute the syndicated loan signed by the Company in December of 2002 for 1,750 million euros, extending the maturity and improving the financial and contractual conditions. Concretely, the margin of the new syndicated loan is 22.5 basis points, compared to the 37.5 basis points for the loan in December of 2002, while the margin of the credit line improves from 30 basis points down to 20 basis points. > Financial investments IBERDROLA increases its stake in EDP to 5.70% IBERDROLA increased its stake in Energias de Portugal, S.A. (EDP) from 5% to 5.70% taking advantage of the capital increase process of the Portuguese company. To do this, the Company exercised its subscription rights in the aforementioned capital increase and strengthened its shareholder position in EDP. IBERDROLA increases its stake in Gamesa by 3% On 29 December 2004, IBERDROLA purchased a 6% stake in Gamesa from Corporación IBV, a holding company owned 50% by the Company and 50% by BBVA. This transaction represents a 3% net increase in the stake held by IBERDROLA in Gamesa. The amount of the operation totalled million euros and did not result in any capital gains. > Divestments The principal divestments made during 2004 were the following: The sale of a 25% stake in the water companies Pridesa (Proyectos e Instalaciones de Desalación S.A.) and Ondagua S.A, to the subsidiary of RWE Thames Water for 31.5 million 10

14 euros. This concludes the Company s disposal of these companies, as it had already sold the other 75% to Thames Water in September of Disposal of real estate assets for million euros. 5.- NON-ENERGY BUSINESSES APEX, the real estate division of the Iberdrola Group, ended 2004 with 21 residential developments under construction, for a total of 2,164 homes, and 16 residential developments under management, which represents additional 1,491 homes. IBERINCO, the Engineering and Consulting subsidiary of IBERDROLA, increased the pace of its activities inside and outside the Group in 2004, and reinforced its international expansion. In line with the strategic objective of internationalising the Company, IBERINCO already has offices in Mexico City, Moscow and Qatar. Among the most important contracts signed in 2004, it is worth highlighting those awarded by the Comision Federal de Electricidad (CFE) of Mexico for the construction of the electrical infrastructure in the north of the country and the Altamira V combined cycle plant, for a total of over US$ 100 million; the installation of a telecontrol system in the Peruvian company SEAL; the modernisation of the electricity distribution grid of six regions of Tunisia; and the improvement of the electrical grid of Fieri (Albania). 6.- REGULATION Approval of the 2005 Electricity Tariff On 31 December 2004, the Government approved the R.D. on Tariffs for The highlights of this Royal Decree include: A 1.71% tariff increase for 2005 This increase is the result of all the following factors: % of the increase is relative to costs for The revision of the adjustments in 2003 and 2004 resulted in a drop of % % was added due to changes in regulation. Expected growth of 6.2% in the sector s revenues In addition, it is worth highlighting that should demand not perform as estimated (4.59% rise), the deviation clause would be applied (as already seen this year), resulting in a minimum 3.59% demand increase. Increase in the prices to Renewable Energies as a result of the new regulation approved in 2004 Change in Spain s Energy Balance: Combined cycles and Renewables to cover the increase in demand. The tariff for 2005 estimates a 32% increase in energy produced both by combined cycles and plants subject to the Special Regime (Renewables and Cogeneration), whereas the rest of plants production is expected to fall by 5.5%, mostly due to the reduction in output of certain oil and coal plants. Combined Cycles and Special Regime will contribute 36% of total energy produced vs 28% in Combined cycles are expected to represent over 15% of total energy produced in Spain in 2005 (vs 10% in 2004). Combined cycles production has been estimated at 38,853 GWh which means an increase of 53% over 2004 tariff. Energy from Special Regime is expected 11

15 to represent more than 20% of total energy produced, driven by new wind farms installed. Tariff estimates a 19% rise in Special Regime production. Distribution revenues, increased by 5.3%. 80 million euros will be allocated to quality of service enhancement plans 80 million euros is included for improving the quality of service, and 10 million euros for management of demand. 7.- SUSTAINABLE DEVELOPMENT 7.1 REGULATION ON EMISSIONS On 21 January 2005, the Government announced the final allocation of emission rights by facility. IBERDROLA considers that the allocation corresponds to the criteria established in the National Allocation Plan (NAP), and consolidates the technological change in the Spanish electricity sector, which will allow a reduction of CO 2 emissions in Spain and the compliance with the European Directive. According to the Government s proposal, in order to comply with the emission targets, the combined cycle plants will have to produce more than the coal thermal plants by 2006, with this trend increasing in Consequently, the allocation to the combined cycle plants, one of the milestones of the Strategic Plan of IBERDROLA, is equivalent to an annual average of 5,250 working hours between 2005 and 2007, whereas the allocation to coal plants is equivalent to 4,950 average annual hours of operation. In this way, IBERDROLA will receive an annual average of million tons of emission rights for the period. This figure is similar to the one in the proposal presented at the end of November of last year (12.99 million tons). IBERDROLA, which already positively considered the criteria for the preparation of the NAP made public by the Government last summer, reiterates that the final allocation is logical and balanced and will not hurt the financial viability of any of the electricity companies. Emissions (MM ton) Energy Balance (TWh) Carbon -35% Gas +360% Average Average

16 7.2 IBERDROLA S PRESENCE IN SUSTAINABILITY INDICES In September, IBERDROLA was included in the Dow Jones Sustainability Index for the fifth consecutive year. This Index comprises the most noteworthy companies in terms of their financial, environmental and social management, and IBERDROLA was placed in the sector s leading group. In November, the German independent rating agency Oekom Research, which specialises in social responsibility and sustainability, recommended IBERDROLA as a responsible investment, ranking it in third place in its new sustainability rating in the global energy sector OTHER EVENTS Rating/Situation Dow Jones 72 points / Leading Group Sustainability World Index of World Utilities Top 3 Dow Jones 72 points / Leading Group Sustainability Stoxx Index European Utilities Top 3 OEKOM B- / Leading Group of World Utilities Top 3 Total In June 2004, the Executive Vice-Chairman and Chief Executive Officer of IBERDROLA approved the new Company Environmental Policy inspired by leading international initiatives. In November, the Energy Ranking of WWF/Adena, which analyses 72 OECD companies, was published. IBERDROLA was rated as the third company with the least environmental impact of all of them. The Company received the highest ranking of all Spanish electrical companies. 8.- CORPORATE SOCIAL RESPONSIBILITY The highlights of 2004 in the social dimension were the following: - IBERDROLA introduced the Employment Channel in its Web site in accordance with the principles of: non-discrimination and equal opportunity, universal recruiting and selection based on merit and capabilities. - IBERDROLA became one of the founding companies in the Atapuerca Foundation. - IBERDROLA carries out various actions within its Programme for the Reconstruction and Illumination of Monuments. - A Management Workbook for the Code of Conduct of IBERDROLA is implemented. - IBERDROLA signed the 3 rd Collective Agreement of the IBERDROLA Group, which runs until December This agreement included important measures related to Social Responsibility. - In the study The Voice of the Customer, which IBERDROLA carries out to analyse quality requirements and the needs and expectations of its customers, a separate section for Social Responsibility was included for the first time. - IBERDROLA participated in the Constitutional Assembly of the Spanish Association of the World Pact, an entity which will drive the principles and directives in Spain of the World Pact promoted by the UN. 13

17 - Iberdrola s Award to the Supplier of the Year, aimed to foster the excellence in management. - The Consulting Council of IBERDROLA in Andalusia was formed in Seville. Its purpose is to strengthen even more the relations between IBERDROLA and this autonomous region. 9.- CORPORATE GOVERNANCE Iberdrola in Corporate Governance Indices In 2004, IBERDROLA was included in the FTSE ISS Corporate Governance Index (CGI), a new family of indices that measure good governance of companies. It was created by the FTSE Group, which is the company behind the Footsie exchange indices, in cooperation with the corporate governance services company International Shareholders Services (ISS). This index is based on the ISS rating, known as the Corporate Governance Quotient (CGQ), which follows up on the practices of more than 7,500 companies around the world SHAREHOLDER COMPENSATION Approval of the interim dividend On December 15, the Board of Directors of IBERDROLA approved the payment of an interim dividend of euros per share (gross) euros after tax charged to 2004 earnings, representing a 14.0% increase on the dividend paid for This was paid out on Monday, 3 January As proposed by the Board of Directors, the total dividend for 2004 will be submitted for approval at IBERDROLA s General Shareholders Meeting to be held in the first six months of the year INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) As a result of the application of the International Accounting Standards and in accordance with the first estimate made (unaudited), it could be affirmed that the financial statements of Iberdrola for 2004 will not be subject to significant variations in IFRS terms, neither at the Net Profit level nor in the main items of its Consolidated Balance Sheet, with respect to the criteria of PGCE (Spanish GAAP). Thus, the principal modifications will result from changes in the scope of consolidation, arising mainly from the application of IAS 31, which imposes the use of the same consolidation method for the joint ventures. For this reason, some companies will be accounted for as fully or partially consolidated that had to date been accounted for using the equity method. With respect to the companies affected by this change, of special note are Corporación IBV (except for its stake in Gamesa, which is still accounted for by the equity method), Iberdrola Cogeneration and finally, a few companies with operations in Latin America (Ibener in Chile and Enerbrasil). On the other hand, the stakes in EDP and REE, which had been accounted for using the equity method, will exit the aforementioned scope of consolidation. With respect to the financial statements (unaudited) for financial year 2004, the effects according to a preliminary estimate would be: - Gross Operating Profit (EBITDA): approximately +1%. - Net Profit: without change. - Equity: approximately -2%. - Net Financial Debt: approximately +0.5%. - Financial Leverage: approximately +0.5%. 14

18 Analysis of 2004 Energy production GWh Vs 2003 % Weight. Gas combined cycle 23,159 11, % 28.3% Renewable energy 5,413 1, % 6.6% Hydroelectric 15,922-5, % 19.5% Nuclear 26,428 1, % 32.3% Fuel - Oil 2, % 3.0% Coal 7,061 1, % 8.6% Cogeneration (attributable) 1, % 1.7% TOTAL NET PRODUCTION 81,812 10, % 100.0% ENERGY DISTRIBUTED 117, % Energy production in spain GWh Vs 2003 % Weight Gas combined cycle 8, % 13.1% Renewable energy 5, % 8.2% Hydroelectric 14, % 22.0% Nuclear 26, % 40.1% Fuel - Oil 2, % 3.7% Coal 7, % 10.7% Cogeneration (attributable) 1, % 2.1% TOTAL NET PRODUCTION 65, % 100.0% ENERGY DISTRIBUTED 92, % HYDROELECTRIC RESERVE LEVELS AT 31-Dec % (3,930 GWh) Energy production in latin america GWh Vs 2003 % Weight Gas combined cycle (Brazil prop.) 14, % 91.2% Hydroelectric (proportional) 1, % 8.8% TOTAL NET PRODUCTION 15, % 100.0% ENERGY DISTRIBUTED 24, % 15

19 1.- PRODUCTION SPAIN The Group s net production in Spain rose 4.1% in 2004 despite the 30% fall in hydroelectric production. This attests to the flexibility of Iberdrola s generation mix factoring in the investments made in new gas and wind facilities, which now account for 21.3% of total production, equal to the proportion of hydroelectric energy, 22%, in an average hydro year. The most relevant facts of the period are: Significant increase in combined cycle production, up 92.8%, which now represents 13.1% of total production in Spain compared with 7.1% in The equivalent average annual working hours of these plants represents a load factor of 67.4%. Iberdrola s production from renewable energy sources represents 8.2% of total production (5,413 GWh), in light of the 38% increase seen in % increase in nuclear production. The low contribution of fuel-oil production, which accounts for only 3.7% of production in Spain (2,417 GWh). Driven by this increase in energy generated, Iberdrola increased its share of the wholesale production market to 30.1% in Comparatively speaking, energy production can be broken down as follows: Gas combined cycle 13.1% 7.1% Renewable energy 8.2% 6.2% Hydroelectric 22.0% 32.8% Nuclear 40.1% 39.2% Fuel - Oil 3.7% 3.7% Coal 10.7% 9.0% Cogeneration (attributable) 2.1% 2.1% Total 100% 100% With regard to CO 2 emissions, the percentage of emission-free production came to 70.3%, with 176 gr CO 2 /KWh. 16

20 2- PRODUCTION: LATIN AMERICA Total production in Latin America is up 87.5% to 15,951 GWh. The largest part of this production (91%) corresponds to combined cycle plants, primarily in Mexico. Commercial 37% The strong increase seen in Mexico primarily reflects the Monterrey (1,037 MW), Altamira (1,036 MW) and Enertek (120 MW) plants working at full capacity. The rest of combined cycle production was generated by the Termopernambuco plant in Brazil, which entered into service in Q MARKET: SPAIN Production Change Mexico (combined cycles) 14, % South America 1, % Combined cycles 455 N/A Hydroelectric 1, % Total 15, % 4.- MARKET: LATIN AMERICA Tariff 63% The evolution of demand for Iberdrola s three distribution companies in Brazil is reflected in the following table: Energy distributed (GWh) 2004 vs Coelba 10, % Cosern 3, % Celpe 7, % Total 21, % In the domestic market, Iberdrola s net market demand increased 5.1% to 92,184 GWh, further confirming its position as the leader in the domestic distribution market (Tariff + Commercial: 40.2% market share). The company now has 9.6 million customers, representing an increase of around 189,000 year-onyear. 17

21 Results for the period (Unaudited) The most notable aspects of Iberdrola s consolidated financial results for 2004 are as follows: Net Sales reached 10,314.5 million euros, up 8.7% over 2003, primarily thanks to a 13.9% increase in total production. The Gross Margin came out at 4,168.3 million euros, up 8.4% over 2003, with all of the Company s businesses achieving positive performances: Domestic Energy Business is up 5.3%, International business is up 31.7%, and the Non Energy Business is up 19.6%. EBITDA rose 9.2% to 2,857.7 million euros. In addition to the factors outlined above, this rise in EBITDA reflects the slight increase in Net Operating Expenses, which rose 5.8%, more than 2.5 points below the increase in Gross Margin (+8.4%). EBIT increased 10.7% to 2,018.9 million euros, driven primarily by the excellent progress made on EBITDA and the evolution of Amortizations and Provisions, which are up by 5.7%. The Financial Result came to million euros, reflecting a 13.3% improvement compared with 2003, primarily owing to the reduction of 14.8% recorded in Financial Debt Expenses. Results of Companies Consolidated using the Equity Method dropped 30.3 million euros to 69.5 million euros, following the disposal of the stake in Repsol and the sale of a 3% stake in Gamesa, both operations carried out in Excluding these operations, the result improves by almost 99%. Net Profit rose to 1,210.7 million euros, representing a 14.2% increase on 2003, as a result of the increase in Ordinary Profit, which grew at similar rates (+15.3%). In addition to this, the following factors were also an influence: Positive extraordinary results for 58.9 million euros linked mainly to the disposal of real estate assets. The higher level of extraordinary results has been offset by the 14.2 point increase in the tax rate, reflecting the absence of significant tax benefits, which has meant a higher tax charge for million euros. Finally, funds from operations came to 1,919.1 million euros, up 5.9% over

22 Analysis of results January-December 2004 Million euros vs NET SALES 10, % GROSS MARGIN 4, % EBITDA 2, % EBIT 2, % ORDINARY PROFIT 1, % NET PROFIT 1, % 1.- NET SALES The Group s Net Sales reached 10,314.5 million euros in 2004, up 8.7% compared to 2003, with this growth primarily driven by the 13.9% increase in total Group production. The main factors behind this change were as follows: In the Domestic Energy Business, Net Sales is up 5.0%, factoring in the 4.1% increase in total net production in Spain, with Net Sales on the Generation business up 4.0%. In addition, Renewables is up 39.7%, and Supply up 21.7%. With regard to Generation, the low unit revenues (-1.0%) made it possible to book 54 million euros in CTCs by differences. In the International Business, Net Sales is up 39.2% to 1,356.9 million euros. Mexico is the region that made the biggest contribution, thanks to the Altamira combined cycle plant (1,036 MW), which was brought into service in the last few days of Brazil also recorded a significant increase in Net Sales, primarily due to the increase in demand and the tariff rises approved. International 13.2% Non-energy 4.3% Domestic Energy 82.5% 19

23 2.- GROSS MARGIN On a consolidated level, Gross Margin totalled 4,168.3 million euros, up 8.4% on The following contrasting aspects can be highlighted regarding changes in this chapter: DOMESTIC ENERGY BUSINESS Domestic Energy business recorded a 5.3% rise at Gross Margin level, up to 3,517.2 million euros: The change in Gross Margin in the Generation business in Spain (1,761.7 million euros, -2.1%) is marked by an increase of 1.7% in net production in the ordinary regime, which largely offsets the decline in prices and the higher costs of fuel. - Prices were below those recorded in 2003, especially in the first six months. For the entire year, prices fell by 1%. - Increase in fuel costs due to the change in the production mix (with less hydroelectric production and increased thermal production) in a context of higher fuel prices. Net Sales on Renewables grew 39.7% to million euros as a result of the rise in production seen over the period (+38.0%), which offsets the low prices. The Gross Margin on the Renewable Energy business now represents 16% of the total Gross Margin obtained by Iberdrola s generation assets in Spain. The increase in Gross Margin on the Supply business, which was up 42.6% to million euros. The 7.0% rise in the Gross Margin on Distribution, up to million euros, basically thanks to the increase in remuneration on the regulated business recognized in the tariff for 2004, as well as for the negative resettlements accounted in 2003 (49 million euros) INTERNATIONAL BUSINESS The Gross Margin is up 31.7% to million euros, reflecting the strong levels of performance achieved by the Group s businesses in the region. For Mexico-Guatemala, the Gross Margin rose to million euros (+57.4%) thanks primarily to the growing contribution of the Altamira plant, which entered into service in the last few days of 2003, and despite the negative evolution in the exchange rate over this period (the Brazilian real and the dollar depreciated against the euro by 3.7% and 9%, respectively). It is also interesting to note the development of the distribution business in Guatemala. In Brazil, the Gross Margin also increased, up 16.9% to million euros, driven by an upturn in demand and the tariff increases approved for the distribution companies Coelba, Cosern and Celpe NON-ENERGY BUSINESSES Non-Energy businesses contributed million euros to the total Gross Margin, representing an increase of 28.3 million euros, with this growth driven primarily by the APEX real estate business. 20

24 3.- EBITDA / GROSS OPERATING PROFIT Consolidated EBITDA increased 9.2 % as a result of growth in the Gross Margin and the evolution in Net Operating Expenses. The increase in Iberdrola s business, with total Group production up 13.9%, resulted in a 5.8% increase in Net Operating Expenses, 2.5 points below the increase seen on the Gross Margin. Net Personnel Expenses were down -1.4% following the approval of the plan to restructure the workforce. The 16.7% increase in Net External Services factors in the upturn in activity reflecting the new gas combined cycle plants (Spain and Mexico) and wind farms. Net Operating Expenses can be broken down as follows: Million euros 2004 vs Net Personnel Expenses % Personnel % In-house work on fixed assets % Net External Services % External Services % Other operating revenues -226,0 17.5% TOTAL 1, % With regard to efficiency improvements, measured through Operating Costs as a percentage of the Gross Margin, this ratio came to 27.1% for the whole Group at 31 December 2004, representing a reduction of 70 bp compared with the 27.8% registered in The workforce in the Domestic Energy Business was down 3.6% compared with 2003 to 8,546 employees. As a result, the Gross Margin per Employee ratio in the Domestic Energy Business improves by 9.3%, as can be seen in the following table: On the other hand, Tax was up 11.8% to million euros, reflecting the increase in tax on the Supply Business and the additional Real Estate Tax (Impuesto sobre Bienes Inmuebles, IBI) relative to the new facilities in operation. 4.- EBIT / NET OPERATING PROFIT EBIT came to 2,018.9 million euros, up 10.7% over 2003, reflecting the rise in the Gross Margin and the improvements in efficiency mentioned previously, as well as the change in Amortizations and Provisions (+5.7%). Amortizations are up to 828 million euros (+6.2%). The main factors behind this change were as follows: - The growth in tangible fixed assets from new investments made, especially in Generation. - For wind farms, the increase in this item due to the new facilities in operation is partially offset by the extension of the useful accounting life to 20 years, in accordance with their actual periods of operation and the new regulatory situation, which guarantees the current remuneration framework for their entire useful life. This extension represents a decrease in amortizations of 33 million euros. Provisions are down 4 million euros Change % Gross Margin (Domestic En. Business) (million euros) 3, , % Domestic Ener. Bus. Workforce (Spain) 8,546 8, % Gross Margin / employee ratio (thousand euros) % Million euros Change % Amortizations % Provisions N/A TOTAL % 21

25 5.- FINANCIAL RESULT The Financial Result came to million euros, reflecting a 13.3% improvement compared with The Company posted a significant reduction in Financial Expenses, down -10.2% primarily due to a -14.8% fall in Financial Debt Expenses. This reflects the reduction in the interest cost of debt, down 49 basis points to 4.17% compared with 4.66% at the end of The total average cost of debt has fallen 38 bp to 4.39% from 4.77%. This positive change in the Financial Result has been achieved despite the -3.8% fall in Financial Revenues, primarily due to the decrease in capitalized financial expenses due to the new facilities brought into service and the lower dividends and interest payments received over the period. 6.- RESULTS OF COMPANIES CONSOLIDATED BY THE EQUITY METHOD The Results of Companies Consolidated by the Equity Method are down 30.3 million euros to 69.5 million euros, with the main reasons behind this fall linked to two atypical operations carried out in 2003: The exit of Repsol from the scope of consolidation following the sale of the stake in the company in the second half of 2003, with a negative impact of 35 million euros compared with The lower contribution of the IBV Corporation, which at September 2003 included 30 million euros for capital gains generated on the sale of the 6% stake in Gamesa. Excluding both of these impacts, this item is up 98.6%. The results can be broken down as follows: Million euros Non-energy (excl. Gamesa capital gain in 2003) Capital gain sale of 3% interest in Gamesa Repsol Rest TOTAL EQUITY METHOD ORDINARY PROFIT The increase in operating profit combined with the improvement in financial results over the period, as already mentioned, are reflected in an increase in Ordinary Profit, which climbed 15.3% to 1,698.7 million euros, despite the reduction in the contribution of companies consolidated by the equity method. 8.- NET PROFIT Lastly, Net Profit rose to 1,210.7 million euros, up 14.2% on As can be seen, this growth is in line with that obtained under the heading of Ordinary Profit (+15.3%). Net Extraordinary Results totalled 58.9 million euros at the close of 2004, directly linked to the capital gains obtained on the disposal of real estate assets. In 2003, the Company recorded million euros in Extraordinary Results, which included a 351 million euro provision for the restructuring of the workforce. Finally, regarding Corporate Income Tax, the effective tax rate is up to 30.4% from 16.2%, with this increase driven primarily by the lack of significant tax benefits. This accounts for a difference in tax expenses of million euros compared with

26 Results by business 1.- ENERGY BUSINESS SPAIN 1.1 GENERATION a) Gross Margin The change in the Gross Margin in 2004 highlighted the flexibility of Iberdrola s generation park combined with the lower level of exposure to the hydroelectric cycle following the investments carried out in line with the Strategic Plan. In this way, the Gross Margin fell slightly, down -2.1% to 1,753.5 million euros, reflecting the following factors: Net Sales is up 4.0% thanks on the one hand to the 1.7% increase in production as mentioned, and on the other to the inclusion of 54 million euros relative to CTCs by differences. Both of these items have offset the effects of the lower pool prices recorded (1% lower than in 2003). The change in the production mix was influenced by different hydrological conditions in 2004 as compared with 2003: The Company recorded a 92.8% increase in the use of gas combined cycle plants. Hydroelectric production is down 30.0% while nuclear is up 6.6%. Coal production is up by 1,351 GWh (+23.7%) and fuel-oil production is up 92 GWh (+4.0%). The increase in thermal production, combined with the context of rising prices on international fossil fuel markets, resulted in a 21.8% increase in procurement costs for the business, which, especially in the first half of the year, was not completely reflected in wholesale market prices. b) Operating Profit / EBIT EBIT is down -5.4% on the same period last year, falling to million euros. In addition to the information already given on the Gross Margin, a number of other factors influenced the change in EBIT, including: Net Operating Expenses were kept low, increasing by 2.1% to a total of million euros. It is worth mentioning the -3.1% decrease in Personnel Expenses, while External Services are up 11.0%, due primarily to the combined cycle plants brought into service. Net Operating Expenses can be broken down as follows: Million euros 2004 vs Net Personnel Expenses % Personnel % In-house work on fixed assets % Net External Services % External Services % Other operating revenues % TOTAL % The slight increase in Amortizations and Provisions, up 0.6% to million euros. Tax was up 11.2% as a result of the new facilities commissioned. 23