EDP: equity research report

(1)

M

A

S

T

E

R

S

I

N

F

_F

I

N

A

N

C

E

Q

U

I

T

Y

R

_R

E

S

E

A

R

C

H

 EDP is focusing in high-growth projects while maintaining its stable businesses, providing an attractive risk/return profile.  The Generation segment represents 24% of EV. The LT contracted generation provides a substantial part of this, but the CMEC will face a possible downward revision, endangering its profitability. Even so, the current investment in hydro plants assures growth in liberalised generation.

 EDP Renováveis is the key for the group internationalization. Installed capacity investments will allow a CAGR of 3.32% in EBITDA.

 Concerning Energias do Brasil, a focused growth in generation assets provides a 5.05% CAGR in EBITDA and to represent 22% of total EV. Its technology diversification reduces exposure to meteorological conditions, improving its risk profile.  Liberalisation of Portuguese markets will have a negative impact in current market share of supply of electricity, but will allow a growth in Iberian gas supply and electricity supply in Spain.  D/E in 2020 of 1.12, substantially lower than the current leveraged capital.

 EDP has an upside potential of 20%, and the recommendation is to BUY.

EDP

C

OMPANY

R

EPORT

U

TILITIES

6 J

UNE

2011

S

TUDENT

:

J

OÃO

P

IMENTA

[email protected]

Dynamic pillar

Potential growth allied with stable business

Recommendation: BUY

Vs Previous Recommendation BUY

Price Target FY11: 3.08 €

Vs Previous Price Target 3.13 €

Price (as of 6-Jun-11) 2.563 €

Reuters: EDP.LS, Bloomberg: EDP PL

52-week range (€) 2.92-2.38

Market Cap (€m) 9,371

Outstanding Shares (m) 3,657

Source: Bloomberg

(Values in € millions) 2010 2011E 2012E

Turnover 14,171 13,725 13,997

EBITDA 3,613 3,344 3,451

Net Profit to shareholders 1,079 942 1,017

EPS 0.30 0.26 0.29

Source: EDP and research estimates Company description

EDP is an integrated utilities company, operating in the electricity and gas sectors. It has regulated and liberalized activities, and is present in Portugal, Spain, Brazil, USA and other European countries

90% 100% 110% 120% 03-01-11 03-03-11 03-05-11 EDP vs. PSI20 EDP PSI20

(2)

EDP – ENERGIAS DE PORTUGAL S.A. COMPANY REPORT

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

(SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

Macroeconomic Outlook

After the second biggest financial crisis of history in 2008-2009, the Great Recession, the current economic conditions across the world are diverse. EDP, a Portuguese company with international presence, experiences this in different ways. Whereas Portugal is facing difficulties, Brazil is experiencing an economic boom, and Spain and the USA are also facing different scenarios, having impact in the company’s operations. Due to its major presence in Portugal, EDP is exposed to the Portuguese State situation, which is most obviously reflected in the risk of default, although EDP currently is less risky than the State, as perceived by the market. Another downside is the lower economic activity that recession and austerity measures provoke, leading to less electricity

consumption.

In 6 April of this year, Portugal announced that it would ask for external financial rescue. The already approved joint EC-ECB-IMF1 intervention imposes several austerity measures and structural reforms. Besides measures covering fiscal policy, labour market and other general topics, the agreement includes specific measures for certain sectors, and energy is one. The objectives for this sector have direct impact for EDP, namely: the liberalisation of electricity and gas markets through the end of tariffs by 1 January 2013 the latest, promotion of competition and integration of Iberian markets; review of electricity generation under ordinary regime, by renegotiating or downward revision of the CMEC2 and remaining PPA3 contracts; revising the remuneration scheme for electricity generation under special regime; and taxation, namely transferring electricity and gas VAT (currently at 6%) to a higher echelon.

The general macroeconomic variables considered that have impact for the company (inflation and real GDP growth) are the IMF projections. Portugal is expected to recess in 2011, and have a humble recovery on 2012 and

afterwards. Spain and USA will have a moderated growth, while Brazil will have the best performance, with real GDP growth above 4% per year. Regarding inflation, the former three counties are expected to have rates between 1% and 2%, whereas for the latter it will be around 4.5%. Another variable that has an important impact for the valuation presented in this report is the Real/Euro exchange rate, and for the projections the forward rates were used. These

1

European Commission, European Central Bank and International Monetary Fund

2

Guaranteed compensation mechanism (see the Generation chapter for more details)

3

Table 1: Real GDP growth

2011 2012 2013 Portugal -1.51% -0.48% 0.90% Spain 0.83% 1.61% 1.77% Brazil 4.46% 4.13% 4.11% USA 2.76% 2.87% 2.72%

Source: World Economic Outlook 2010 -

IMF

Graphic 1: 5 year Euro CDS

Source: Bloomberg 0 100 200 300 400 500 600 J-08 J-08 J-09 J-09 J-10 J-10 J-11

(4)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

implicit rates assume a depreciation of the Real, which for EDP translates in less valuable cash flows from its Brazilian operations since those are in Reais. As so, macroeconomic conditions influence the value of EDP. Having this in mind, the above mentioned projections are taken into account in the projections and valuation done.

Energy sector

Energy, under its various formats, is essential for nowadays’ needs, both for people as for organizations, being the energy sector a pillar of current

economies. World’s energy consumption has been continuously increasing, and the forecasts are in the sense that this trend will maintain. On the other hand, the energy production mix has been changing, and is expected to change even further. The emergence of renewable sources and the increasing use of natural gas face the consumption of other fossil fuels. Even so, oil and coal will still represent a major proportion of primary energy consumption. Since EDP’s business is electricity and natural gas, the focus will be under these two sources of energy.

Some energy commodities have clear reference prices. The most obvious example is oil, with Brent and West Texas Intermediate (WTI) being benchmarks. But unlike oil, natural gas does not have a well-defined price. The only active and transparent markets are USA’s Henry Hub (HH) and UK’s National Balancing Point (NBP), but are merely regional and do not provide a clear reference to other regions. Therefore pricing gas is not a simple task, being a common and simple method linking it to oil price. Contributing for this problem is the fact that most gas supply is done through long-term bilateral contracts, reducing markets’ liquidity and transparency.

Concerning electricity, its consumption has also been growing over the years. In 2008, 20,181 TWh of electricity were generated under various technologies. The electricity production mix varies substantially by country, depending on the country’s natural resources, infrastructures, and energy needs, existing extreme distinctive cases. Whereas 98.5% of Norway’s generation was from hydro, 77.1% of France’s energy production was nuclear.

European and Iberian context

Europe has huge energy needs: in 2008 it represented 16% of the world’s final energy consumption. However, it has not with enough natural resources available

Table 2: R$/€ forward rates

2011 2012 2013 2014 2015 2.30 2.56 2.73 2.86 2.97

Source: Bloomberg and research

estimates

Graphic 2: World primary energy

consumption by fuel

Source: World Energy Outlook - IEA

27% 29% 33% 28% 21% 22% 6% 6% 2% 2% 10% 10% 1% _3% 2008 (12,272 Mtoe) 2035 (18,049 Mtoe)

Coal Oil Gas Nuclear Hydro Biomass Other

(5)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

to meet consumption requirements, namely of oil and natural gas. Concerning the latter, in 2009 527 bcm4 were consumed, but the production was only 288 bcm. This deficit is covered through importation, exposing it to fluctuations in price and to possible shortages in supply, like the recent Russian gas shortage in 2009. In order to avoid this, the European Commission has been defining a common strategy for energy, based in three pillars: Environmental Sustainability, Supply Security, and Competitiveness. With this in mind, several new policies started to be applied. There is a focus and support to the development of renewable energies in spite of fossil fuels; new external supply sources and production capacities started to be developed; and a process of liberalisation of the European energy markets has been initiated, with the aim of obtaining competitive energy prices, production efficiency and rational use of energetic resources.

This new orientation of energy policy had an impact in the European utilities companies and markets. There has been a focused investment in renewable energy, namely wind power, benefiting from government subsidies and privileged guidelines. Another aspect of this new orientation is the support for the creation of liberalised European markets of electricity and natural gas, and as a result of this several regional markets are emerging. Some, such as Nordpool (Nordic electricity market) already existed, and the creation of Iberian markets (MIBEL and MIBGAS, for electricity and natural gas, respectively) was being planned. This new strategy has as ultimate scenario a full-European market, resulting from the unification of these regional markets.

In the case of EDP, the creation of MIBEL and MIBGAS is what matters most for the forthcoming years. A new market structure was created, with the unbundling process and definition of regulated and liberalized activities. In the case of electricity, the market was segmented in four areas: generation, transmission, distribution and supply, and EDP is present in all except transmission. Both transmission and distribution are regulated activities, in order to assure the access to the grid for all agents and competition. Transmission is the transport of energy in very high voltage, and is performed by specialized companies under concessions, REN in Portugal and REE in Spain, which also are responsible for the technical management of the networks. The distribution activity concerns high, medium and low voltage transport in concessions. Implied in distribution is the figure of last resort supplier. This means that if the supplier fails to meet the

(6)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

energy demand, these companies have to assure the energy supply to clients. In Portugal, where the market is not yet fully liberalised, it is responsible for the regulated supply. Although integrated companies have subsidiary companies for distributing, a requirement from this market model is that the latter have to be judicially separated. In order to achieve liquidity, MIBEL functions as a financial market where producers and suppliers can trade electricity anonymously, giving electricity a clear reference price. The intra-day and daily markets are managed by OMEL, the Spanish market operator, while the futures market is managed by the Portuguese market operator OMIP. Besides these markets, bilateral contracts are also possible.

MIBGAS functions in a similar way, having a value chain slightly different due to the specificities of gas. Instead of generation, exists sourcing which is the acquisition of gas from other countries, and in the end of the chain is supply. Between these two, there are the infrastructure activities: transmission, regasification, storage and distribution. Transmission is the transport of gas in high pressure, where REN and Enagás operate in Portugal and Spain,

respectively, and are responsible for the technical management of the network, Regasification takes place if the gas imported is Liquified Natural Gas (LNG), and storage exists to better manage the gas reserves. Distribution is the transport in lower pressures, and companies operate under regional concessions. As for the market, MIBGAS is not as developed as MIBEL: only four auctions, one per year, have occurred since 2008, not providing enough liquidity or a clear reference price.

The Iberian electrical sector is almost totally represented by four companies: EDP, Iberdrola, Endesa and Gas Natural Fenosa, being present in generation, distribution and supply activities. As for natural gas, the major companies are EDP, Gas Natural Fenosa, Galp and Endesa. The liberalisation and integration of both markets allows companies to be present in both countries. In the case of electricity, with interconnection capacity it is possible to sell in Spain energy produced in Portugal, without requiring actual physical presence. With this new market functioning, companies face a totally new paradigm. In order to allow an efficient functioning of the market, both Portugal and Spain, through the

respective regulators ERSE5 and CNE6, have been harmonizing regulations and operating conditions, process that is essential to create a proper and functional Iberian market.

5 www.erse.pt 6 www.cne.es

(7)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

Distribution, where EDP is present in Portugal and Spain both in electricity and natural gas, is a regulated activity and has a regulatory remuneration system. Electricity distribution and last resort supply in Portugal, the biggest regulated activity of EDP, has as remuneration scheme the Return on Regulated Asset Base (RoRAB), where the company is entitled to a remuneration defined as the 10 Year Portuguese Government Bond Yield plus 400 bp. This has in account the Regulated Asset Base (RAB), Working Capital and Cost Base, reaching a Regulated Gross Margin. Also, inflation and efficiency incentives are reflected in the Cost Base. In Spain, electricity distribution has changed to a RoRAB system in 2009. As for natural gas, distribution in Portugal and Transmission in Spain are similar, but Supply in Portugal is remunerated under a supply margin (return on working capital). Distribution in Spain has Regulated Revenues updated annually, but a change to RoRAB methodology is being considered. Both Portugal and Spain have very similar characteristics in terms of

technologies and generation, with the difference residing in a higher weight of hydro in Portugal, which is compensated in Spain by the existence of nuclear. Total installed capacity was 115,367 MW, 16% in Portugal and 84% in Spain, which is reflected in generation (15% and 85%, respectively) and in consumption (17% and 83%). Whilst Portugal is a net importer (2,623 GWh in 2010), Spain is a net exporter (8,490 GWh). These trades are possible with the international interconnections, existing four different flows with Spain in the centre: with Portugal (10 interconnection points), France (6), Andorra (1) and Morocco (1). Concerning consumption, for both countries it is very stable, with a CAGR over the past 5 years of 1.20% in Portugal and 0.38% in Spain, and the

macroeconomic impact is reflected in a decrease in consumption in 2009 in Portugal and a consecutive decrease in Spain in 2008-2009.

The natural gas market has some particularities. The Iberian Peninsula has no production, and has to import from other countries. Therefore, gas arrives by two means: there is one international gas pipeline coming from Algeria, entering the Peninsula through Spain; or by LNG importing, which is regasified through seven operational regasification terminals (one in Sines, Portugal), with one more being planned in Spain. With only one source of natural gas in its gaseous state, most of the gas imported is LNG. The existing facilities allow diversifying suppliers, existing imports from Nigeria and Trinidad and Tobago for instance. The total demand of natural gas is 457,800 GWh, 34% to electricity generation in CCGT plants, and 66% to conventional consumption.

Graphic 3: Iberian installed capacity

breakdown

Source: REN, REE

26% 17% 41% 41% 21% 20% 12% 14% 8% Portugal (17,920 MW) Spain (97,447 MW)

Hydro Thermal Wind Other Nuclear

Graphic 5: Natural gas imports by type

Source: REN, Enagás

45% 26% 55% 74% Portugal Spain NG LNG

Graphic 4: Iberian electricity

consumption (GWh)

Source: REN, REE

245000 250000 255000 260000 265000 270000 47500 49000 50500 52000 53500 2006 2007 2008 2009 2010 Portugal Spain

(8)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

Brazilian context

Besides Portugal and Spain, another important market where EDP is present is Brazil. This market, contrary to Portugal and Spain, offers very attractive growth perspectives. An emerging power, being the 7th largest economy, it is nowadays a very important country in the world panorama.

Brazil currently has 115 GW of generation installed capacity, 71% of which from hydro plants, and has additions of 47 GW in course. The electricity consumption has registered a CAGR of 6.15% since 1970, and in 2010 it was 458,293 GWh, 80% of which generated in hydroelectric plants. In 2001-2002 Brazil suffered energy rationing, which depressed consumption and led to lower electricity prices. Since then, new regulation and energy policy orientation caused

significant changes in this market. The energy policy is defined by the Ministry of Mines and Energy7, and the regulatory body is ANEEL8. The Brazilian market has some differences comparatively to the Iberian, being defined under the new model for the electrical sector9 in 2004.

Generation works under PPA contracts, but these are granted in an auction system: each year the distribution companies inform the government about their energy needs for the year +5, and the latter organizes auctions for the electricity to be produced over 15 or 30 years. The bid with the lowest offered price wins, and the energy is then purchased by the distribution companies, with the possibility of corrections in year -3 or year -1 auctions. There is also the free market10, where large consumers can buy energy directly from traders or

generators. This market is increasing its size, corresponding to 25% of electricity consumption.

The distribution activity also faces some particular restrictions: distribution companies cannot operate in transmission or generation activities, or possess participation on other companies. This activity faces a RoRAB system, which is 15% before taxes (9.95% after taxes), taking inflation and efficiency into account. The regulatory periods depend on the concession areas. For Bandeirante and Escelsa, EDP’s distribution companies, these are 4 and 3 years, respectively. Brazil is a bigger energy market and is experiencing a fast development. EDP, with a consolidated position, faces a good opportunity to grow in this market.

7 www.mme.gov.br/mme 8 www.aneel.gov.br 9

Created by the Law 10.848 of 15 March 2004

10

Created by the Law 9.074 of 7 July 1995 Graphic 6: Brazilian installed capacity

Source: ANEEL 71.23% 0.87% 26.14% 1.75% 0.01%

Hydro Wind Thermal Nuclear Solar

(9)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

Company overview

EDP Energias de Portugal is a Portuguese utilities company, traded at Euronext Lisbon, being currently the second largest company of the PSI 20 with a market capitalisation of €9,372m. It is present mainly in Portugal, Spain, United States and Brazil, covering several segments of electricity, gas, and renewable energies. It was a state-owned company until 1997, date of the reprivatisation and IPO. In 2010 it had an installed capacity of 22 GW and an EBITDA of €3,613m.

Company description

Electricidade de Portugal (EDP) was created in 1976 through the merger of 13 companies which were nationalized in the previous year, and it became responsible for assuring electrical supply, improving the electrical networks, diversify the generation assets, for almost all the continental territory. In 1994, after a reorganization and change of the company’s status, the EDP Group was formed. In 1997, the reprivatisation process began, with a successful IPO. Six more reprivatisation phases followed, and the 8th became recently in progress. Currently it has operations in Portugal, Spain, Brazil, USA, France, Belgium, Poland and Romania, and is preparing to expand to UK, Italy and Canada EDP’s original and main business is electricity. It covers three activities:

generation, distribution and supply, both in Portugal as in Spain, through several subsidiaries. It was also present in transmission, but this activity suffered a spin-off in 2000 due to the liberalisation of the Portuguese energy market, forming REN. But it expanded beware electricity, having operations in the gas business in these two countries as well, being the second biggest gas distributor.

But EDP operates not only in the Iberian Peninsula, it is also present in Brazil through EDP Energias do Brasil. This subsidiary was founded in 1996 and operates mainly in generation and distribution of electrical energy, but is also present in supply

Finally, EDP’s rising star is EDP Renováveis, the renewable energies subsidiary where EDP has a stake of 77.5%. It has all the wind generation assets of the group, with an installed capacity of 5.5 GW in 2009, being the third largest wind power company in the world. Its main markets are the United States and Spain, but it is also present in Portugal, Brazil, Canada and several other European

Graphic 7: 2010 EBITDA breakdown by

country Source: EDP 52% 24% 16% 6%1%

(10)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

countries. It is traded in the Lisbon stock exchange as well, and its IPO was in 2008.

Shareholder structure

EDP has several but not large shareholders, with the exception of the

Portuguese State, which has a position of about 26% (through Parpública and CGD). Other main shareholders are Iberdrola, a Spanish utilities company and one of its main competitors, and Sonatrach, one of EDP’s gas suppliers. Almost 40% is owned by smaller investors, conceding liquidity to the sock. The equity is distributed in 3,656,537,715 shares, each having a nominal value of 1 Euro. There are two classes of shares, A and B. Class B shares have special voting rights and are held by Parpública and CGD, whereas class A shares are limited to 5% of voting rights and are held by private investors. Class B Shares account for 19.7%, with the remaining 80.3% being attributed to A shares. This distinction comes from the reprivatisation process started in 1997, and results in a

significant control of the company by the Portuguese State, since it has about 25% of the voting rights. Integrated in this process, the Portuguese State has been selling its stake on the past few years, with seven phases already completed. Recently Parpública has issued convertible bonds covering 10% of EDP’s shares, which can be converted after 7 years, and until then the State maintains its voting rights and position in EDP. Also, the financial rescue plan for Portugal comprehends, includes the sale of EDP’s remaining position until the end of 2011. This means that in the near future the State will have its position strongly reduced, diluting the shareholders structure and giving more fairness to the voting rights’ distribution, which may attract new investors to the company.

Strategy

EDP’s strategy is clear and oriented by three pillars: Controlled risk, Superior efficiency, and Focused growth. These divide in ten guidelines, which determine all the company’s policies, investments, technologies and markets where it is and want to be present.

Controlled risk concerns four guidelines. (1) Maintaining secure cash flows, via its high exposure to long-term (LT) contracted, regulated, and quasi-regulated businesses. This way it assures stable cash flows, contributing to achieve a low-risk profile less subject to markets’ volatility. Nevertheless, the supply

liberalisation in Portugal for domestic clients and the transition of LT generation contracts to liberalized generation will contribute to reduce this balance. But the

Graphic 8: Shareholder structure at 11 May

2011 Source: EDP 25.05% 6.79% 5.01% 4.82% 4.06% 3.37% 2.71% 2,23% 2.66% 2.03% 0.64% 0.88% 39.74% Parpública Iberdrola CajAstur José de Mello Senfora BCP BES Sonatrach Norges Bank JP Morgan Chase CGD Treasury stock Remaining shareholders

Table 3: Voting rights

Parpública 24.09% Iberdrola 5.00% CajAstur 5.00% José de Mello 4.82% Senfora 4.06% BCP 3.37% BES 2.71% Sonatrach 2.23% Norges Bank 2.66% JP Morgan Chase 2.03% CGD 0.61% Source: EDP

Graphic 9: Regulated vs. liberalised

activities

Source: EDP

80% 86%

21% 15%

2009 2010

LT contracted, regulated and quasi-regulated Liberalized

(11)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

regulated businesses have a downside, regulatory risk. This is reflected in the delay in the full liberalisation of the Portuguese market, the uncertainty regarding renewable energy policies in USA, as well as the Spanish tariff deficit. (2) Manage exposure to energy markets is another guideline. EDP is doing this by diversifying the geographies where it is present and adjusting its plans

accordingly to market conditions. By its inception, EDP was only present in Portugal, later expanding to Spain and Brazil, and today it has operations in eight countries and is preparing to expand to three more. This reduces its initial

exposure to Portugal, although it is still quite high. EDP Renováveis is the vehicle for this internationalization, being responsible for the country diversity.

Concerning the actual market conditions, these are reflected in EDP’s

investments. The 2010 capex was projected to be €3b but ended up being €2.7b. Also, the 2011-2012 capex plan suffered several downward revisions, initially €3b per year it is now projected to €2.1b. This is a result of deteriorating market conditions and credit rationing, which restrained investments. (3) Reducing CO2

emissions is one of EDP’s most evident guidelines, where the company is being successful. Its installed capacity is mainly composed by hydro and wind (60%), CO2 free technologies, which will be accentuated with the new hydro plants in

Portugal and wind farms, plus the decommissioning of old thermal plants. This balance favours EDP, since in 2013 the free carbon allowances will end. The USA average price for carbon allowances in 2010 was €14.5/ton which, at EDP’s emission levels, would represent €213m in allowances. (4) Improving its credit ratios and liquidity, having a solid capital structure, is the final guideline of the Controlled risk pillar. In this subject EDP suffered a setback: in April 2011, the Fitch rating agency downgraded EDP from A- to BBB+. This was a consequence of the Portuguese Republic’s previous downgrade, due to the weight that

Portugal and regulated business from Portugal have.

Superior efficiency embraces three guidelines. (1) Selective investment policy, focusing in high returns and low risk investments which, judging by the evolution of EDP’s operating performance, has been successfully implemented. EBITDA registered a CAGR of 10% since 2005, for which Brazil and EDP Renováveis have been key drivers. (2) Efficiency improvement, having as flagship the operating costs’ reduction, mainly human resources and supplies and services. EDP has been controlling its costs and, indeed, was able to reduce them while registering a growth in profits. The Opex reduction program target is €160m/year of annual savings by 2012, which is plausible bearing in mind the reduction performed in 2008. (3) EDP also promotes an integrated culture across the

Graphic 10: Installed capacity

breakdown by technology Source: EDP 31% 29% 39% 1%

hydro wind thermal nuclear

Graphic 11: Operating costs vs. gross

profit (€m) Source: EDP 1,805 1,853 1,925 _1,742 _1,742 1,792 3,855 4,158 4,553 4,897 5,105 5,404 2005 2006 2007 2008 2009 2010

Operating costs Gross profit

Adapting investments to market conditions

(12)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

group, upholding the consistency with the pillars and guidelines across the several companies and geographies where EDP operates, sharing the same vision, principles and objectives.

Focused growth is the final pillar concerning EDP’s investment destination, having three guidelines. (1) Wind is the major source of new investments for the group, registering a capex of €1,232m in 2010. This is translated in 885MW of new installed capacity and 590MW under construction. All this investment has its return, and EDP Renováveis’ EBITDA CAGR since 2008 is 18%. (2) Hydro generation in Portugal is another bet of EDP. Its clean production and low variable costs are trumps, and are the focus of the Generation segment. With 2,129MW under construction in Portugal, this addition represents a 10% increase in the actual total installed capacity. (3) Brazil is the final growth guideline. It is EDP’s major presence outside the Iberian Peninsula, and the fastest-growing economy where it is present. It has registered a 4% CAGR in EBITDA since 2005 (in R$), and 16% of 2010’s capex.

Business segments

Generation

Generation is EDP’s biggest segment, representing 34% of the EBITDA and 21% of capex in 2010. The development of hydro plants in Portugal is one of EDP’s main investment focuses, alongside with the Renewable and Brazil segments. In Portugal this activity is performed by EDP Produção and in Spain by HC

Explotación Centrales. Also, EDP Produção Bioeléctrica is present in the special regime production.

EDP’s assets cover many technologies, with hydro as the main with 36% of installed capacity. Most of its generation plants are located in Portugal, but Spain became a significant market over the years, currently having 27% of the capacity. The technology breakdown is also reflected in the produced electricity: 41% was generated in hydro plants, and 25% and 24% in CCGT and coal plants,

respectively, reflecting EDP’s focus on hydro.

This activity splits in two areas: long-term (LT) contracted and liberalised generation. The former is the biggest, and is only present in Portugal, being responsible for the PPA/CMEC11 contracts. These are contracts established before the creation of MIBEL, and are one of the main obstacles to the

11

Power Purchase Agreement/Costs with the Maintenance of Contractual Equilibrium Table 4: Installed capacity breakdown by

technology 2010 (MW) Hydro 5,004 CCGT 3,736 Coal 2,640 Fuel oil 1,656 Gasoil 165 Nuclear 156 Special regime 460 Total 13,817 Source: EDP

(13)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

liberalisation. The PPAs established a contracted generation supply, where the plants are remunerated at 8.5% ROA before taxes having a contracted gross profit, and the produced electricity is sold to REN. This single-buyer system does not allow MIBEL to be liquid and efficient, and in order to solve this CMECs were created. The NPV of the PPAs and NPV of free market operations for these plants is calculated, and the difference constitutes the CMEC. The latest update was in July 2007 and valued the CMEC in €800m, and in 2017 a final revision will take place. This value is paid by consumers through tariffs, increasing the

electricity bill. EDP’s CMECs will end on 2027, when the last plant PPA will end. All hydro plants will be transferred to the free market, as well as the Sines coal and Tunes gasoil plants, unlike the Setúbal fuel oil plant which will be

decommissioned. In 2010, PPA/CMEC plants totalled 6,931 MW and generated 17,981 GWh. Special regime is also considered in the LT contracted generation. This includes small-hydro, cogeneration and biomass production, which, under the promotion of renewable energy policy12, have special remuneration systems. In 2010 the installed capacity was 460 MW and produced 2,542 GWh.

The other area of this segment is the liberalised generation. Contrary to the PPA/CMECs, these plants operate in the free market as defined in the MIBEL model. The installed capacity in 2010 was 6,427 MW, and produced 17,145 GWh. Representing 47% of installed capacity and 46% of electricity production, this area is growing, and will grow even further with the transfer of PPA/CMEC plants. The average cost of electricity production was €35.2/MWh, reflecting the increase of gas costs. This also shows the key advantage of hydro: although in 2010 it had €0.9/MWh, this was due to hedging results, since its marginal cost is null (as seen in 2009). With an average load factor of 30% in 2010, hydro

increased its production as opposed to thermal plants. The main disadvantage of this source of electricity is its exposure to meteorological conditions, but the solution resides in backup thermal plants: CCGT plants are the best suited, since they can be rapidly turned on and off, allowing to quickly reactions to electricity consumption changes.

As referred in the Macroeconomic outlook chapter, one of the points of the memorandum of understanding between the Portuguese State and EC-ECB-IMF is the renegotiation or downward revision of the CMECs. Also, the increase in VAT for electricity will aggravate the electric bill for households and corporations.

12

Table 5: Remaining PPA/CMEC plants

Plant MW End of PPA

Setúbal 946 2012 Miranda 369 2013 Bemposta 240 2013 Picote 195 2013 Castelo de Bode 159 2015 V. Nova/Paradela 144 2015 Cabril 108 2015 Alto Rabagão 68 2015 Caniçada 62 2015 Bouçã 44 2015 Salamonde 42 2015 Sines 1,180 2017 Fratel 132 2020 Vilarinho Furnas 125 2022 Alto Lindoso 630 2024 Aguieira 336 2024 Valeira 240 2024 Carrapatelo 201 2024 Pocinho 186 2024 Régua 180 2024 Torrão 140 2024 Crestuma-lever 117 2024 Tabuaço 58 2024 Pracana 41 2024 Caldeirão 40 2024 Raiva 24 2024 Touvedo 22 2024 Frades 192 2027 Source: EDP

Table 6: Generation costs (€/GWh) 2009 2010 Hydro - 0,9 CCGT 42,8 51,4 Coal 29,5 27,4 Nuclear 3,4 3,7 Average 32,5 35,2 Source: EDP

(14)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

Having this into account, the projections done reflect a scenario of reducing the CMECs in order to lower electricity prices.

24% of 2011-2012’s capex is directed for hydro development. EDP is

constructing five new hydro plants, totalling 962 MW. Also, six hydro plants are under repowering works, which will add a total of 1,951 MW by 2017. These additions, allied with the decommissioning of Setúbal fuel oil plant in 2012 and of Carregado fuel oil plant this year, results in a net extra capacity of 1,257 MW by 2017.

The specific value drivers of this segment are installed capacity and load factors. Overall, the latter are constant over time since both hydro and thermal

technologies are mature, as opposed to renewable sources like wind generation, and so the considered average load factor is 31%. With projections incorporated, the forecasted EBITDA CAGR for 2011-2020 is 1.49%.

Distribution

EDP’s distribution segment operates in the electricity distribution activity both in Portugal and Spain. In the former country, it distributes under the subsidiary EDP Distribuição, and in Spain through HC Energía. In Portugal, since the supply is not yet fully liberalized, this segment also comprises EDP Serviço Universal (EDP SU), the last resort supplier of electrical energy.

EDP Distribuição is the operator of the distribution network in continental

Portugal, holding the exploration concession of the National Distribution Network (RND) in High and Medium Tension (AT and MT, respectively), and municipal concessions of distribution of electricity in Low Tension (BT), covering almost the whole territory, with the exception of a few municipalities where small

cooperatives have the concessions.

EDP Serviço Universal is the regulated supplier in Portugal, being entitled as the last resort supplier. In 2010 the business suffered a downturn, since although the total energy inflow of the distribution network increased, the energy supplied by EDP SU decreased, as happened with the number of clients. This reflects the effect of liberalisation of the electricity market, with a reduction of the number of clients, as well as the economic downturn with fewer clients and less energy consumed by client.

In Spain, HC Energía has distribution concessions in the Principality of Asturias. Since 2006 that the shareholders’ structure remains constant, in which EDP has a stake of 97% of the company. HC initially operated mainly in the Asturias

Table 8: Distribution in Portugal

2009 2010 Network (Km) 218,226 220,318

GWh 46,146 47,836

Clients (th) 6,120 6,149

Source: EDP

Table 9: Last resort supply in Portugal

2009 2010

GWh 40,452 33,484 €/MWh 46.9 47.4 Clients (th) 5,843 5,792

Source: EDP Table 7: Load factors

2009 2010 Hydro 19% 30% CCGT 43% 32% Coal 46% 33% Nuclear 82% 87% Source: EDP

(15)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

region, but it expanded its distribution activity to Madrid, Valencia, Alicante, Barcelona, Huesca and Zaragoza. In 2010 it increased the clients’ base, through the expansion of the distribution network, and consequently the distributed electricity. The Spanish electricity market became totally liberalized in July 1st 2009 with the end of tariffs, and the 422 thousand clients HC had in its regulated supply were transferred to the liberalized market. being one of the major

distribution companies in the country.

In 2010 the EBITDA for the Portugal Operations decreased 1%, reflecting the clients’ transition to the liberalized market. The 2010 last resort tariff of

€47.4/MWh, although higher than in 2009, was not enough to compensate the decrease in supplied electricity. In Spain, EBITDA grew 30%, majorly as a result of lower operating costs (€75m to €49m). Overall, the distribution segment’s EBITDA only grew 0.4% due to the higher weight of Portugal, which cancelled Spanish growth. One focus of EDP’s opex reduction programme is the reduction of human resources’ costs. This has a great importance for EDP Distribuição and EDP SU, since in 2009 these two subsidiaries employed 4,455 people, 37% of the total employees of the group and in 2010 this number decreased to 3,691. Although apparently expressive, this reduction seems to be only a consequence of the liberalisation of the markets, since a similar increase in employees happened in the liberalized activities in the Iberian Peninsula, and the total employees of the group remained unchanged (12,096). Nevertheless, it is an adjustment of the group to the new reality it will face.

Being a regulated activity, the value drivers for the distribution segment is the macroeconomic outlook and regulatory environment. This happens due to the exposure to regulation, which is assumed that it will not face significant changes relatively to what it currently is, since the panorama of the Iberian market is well defined.

This segment has then a stable outlook. Its capex will remain around €300m per year, to improve network quality and expand it. The EBITDA will register a €91m downfall in 2013 due to liberalisation of the Portuguese market, and for the Period 2013-2020 it will register a 0.57% CAGR, driven by economic performance.

Due to its regulated characteristic, allied with a low volatility of demand, Distribution is the most stable segment of the entire group and subject only to regulatory risk, which is low considering the established regulatory framework and harmonization between Portugal and Spain. The distribution activity in

Table 11: Distribution EBITDA (€m) 2009 2010 Portugal 567 563

Spain 104 135

Total 671 698

Source: EDP

Table 10: Distribution in Spain

2009 2010 Network (Km) 21,874 22,265

GWh 9,131 9,320

Clients (th) 645 651

Source: EDP

(16)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

Portugal and Spain will thus continue to provide a stable and low-risk cash flow to EDP, contributing to lower its risk profile.

Supply

The Supply segment contains the liberalized supply of electricity in Portugal and Spain. Currently it has little weight in EDP’s operations, since the Portuguese market is not yet fully liberalized, but it will be in the near future. This activity is performed in Portugal by EDP Comercial, and in Spain with HC Energía. It also comprises EDP Soluções Comerciais, a shared-service platform in Portugal, and the last resort supply in Spain, a remnant of Spanish liberalisation.

In 2010, this segment had a €58m EBITDA, representing only 2% of the group. Last year it lost market share in Portugal, from 65% to 51%, despite increasing the volume sold, which in its turn was counterbalanced by a lower selling price. On the contrary, in Spain its market share increased 1 p.p. to 12%, with increased volume sold increased and a lower selling price. These lower prices are a consequence of current market conditions, with lower pool prices. The average electricity cost per MWh (including EDP’s production and purchases) in 2010 was €39.4/MWh, providing a unit margin of €11.6/MWh and €12.5/MWh for Portugal and Spain, respectively. Comparing it with the last resort supply in Portugal, the liberalized market provided a higher selling price than the regulated tariff (€47.4/MWh), despite lower pool and selling prices.

These results allow obtaining some conclusions. In Portugal the free market grew, but EDP lost share to its competitors. The regulated tariff is a strong constraint for competition, significantly lower than the average selling prices for the free market. On the contrary, in Spain the market grew via the liberalization, and EDP is gaining market share.

The Portuguese market liberalisation will mean the transfer of clients from the last resort supply (currently included in the Distribution segment) to the liberalised supply. Currently, EDP has 5,792 thousand of the former clients, all potential future clients of the free market. However, since EDP is the original and first-established electricity company, the liberalisation means potential loss of clients due to the opening to other suppliers, so the company will have to prepare itself for this new reality. A consequence of this is the emergence of publicity expense. With several competitors trying to obtain clients, it is to expect higher publicity levels for electricity supply, representing a growth in operating costs. The scenario for Portugal is then the loss of profitability, with loss of clients in the

Table 12: Electricity supply free market,

Portugal and Spain

2009 2010 PT €/MWh 66.4 51 GWh 5,529 8,794 Clients (th) 260 314 SP €/MWh 61.5 51.9 GWh 15,445 20,342 Clients (th) 527 651 Source: EDP

Advertising expenses will be required in a competitive market

(17)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

supply activity and higher costs. However, in Spain EDP is facing the opposite situation: liberalisation provides an opportunity to grow, acquiring clients from its competitors. Spain, a bigger market, is expected to face more economic growth than Portugal, and thus provides the opportunity for the Supply segment to expand, along with obtaining new customers.

The drivers for this segment are thus the market share, the electricity demand, and the unit margin for electricity. For this segment, the assumed scenario is one of maintenance of unit margins around €10/MWh, with selling prices and average cost of €50 and €40 per MWh, respectively. As for the market share, due to its strong presence and known brand, it is expected for EDP to maintain around 5 million clients in Portugal after liberalisation, and continuing to grow in Spain, achieving a 15% market share.

The capex for this segment is irrelevant since it has no significant fixed assets, allowing high cash flow generation. As for financial performance, it is expected to have an EBITDA CAGR of 7.26% since 2011.

Gas

Although EDP’s original and main business is electricity, it is also present in the gas sector in Portugal and Spain, a segment that has been registering a growing importance inside the group. The sub-holding EDP Gás SGPS is owned at 100% by the EDP group and is responsible for the gas business, which is only present in the Iberian Peninsula, controlling several companies operating in several activities of the gas market, from sourcing to supply.

EDP Gás Distribuição is the second biggest distributor in Portugal, having been attributed the distribution concession of the Oporto area in 2008 for 40 years. EDP Serviço Universal is the last resort supplier for the distribution concession area. The concession area covers 29 municipalities of Oporto, Braga and Viana do Castelo, where about 25% of the population of Portugal live. Also, this is where the industrial areas of Oporto and Vale do Ave are located, such that around 60% of the gas is sold to industrial clients. These two factors, a high percentage of the country’s population, allied with high industrial activity, provide a high growth potential to the distribution of gas in this region. In 2010 the supply points increased, expressing the development of the distribution network and penetration of the natural gas supply.

EDP also is present in the liberalized supply of gas in Portugal, with EDP Gás Comercial. It started operations in 2009, and besides supplying, it is also

Table 13: Gas distribution Portugal

2009 2010 Network (Km) 3,508 3,827 Supply points (th) 221 245 Gas distributed (GWh) 6,133 6,843

(18)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

responsible for the operations of trading and sourcing of gas in the international markets. In 2010 it had 190 liberalized clients, a small number since in Portugal only the segment of industrial clients13 is fully liberalized, since the second semester of 2010. However, despite the small number of clients, the total gas distributed was 6.9 TWh, reflecting the high consumption by industrial clients. It is present in Spain with Naturgas Energía, having a participation of 66%. NE operates in nine regions: Basque Country, Asturias, Cantabria, Catalonia, Castile and Leon, Extremadura, Madrid, Murcia and Navarre, in transmission, distribution and supply of natural gas, being the second biggest gas distributor in Spain. As a consequence of the merger between Gas Natural and Unión Fenosa, the former had to dispose several assets. EDP took this opportunity and acquired in 2009 some of those assets in Spain, namely in Cantabria and Murcia. This consolidated EDP’s number two position in the Iberian Peninsula, exceeding one million clients and increasing its network.

EDP’s suppliers are Sonatrach, ENI, Galp, Gas Natural Fenosa and Atlantic LNG, through long-term contracts, and additional purchases in the spot market occur if competitive. So, the purchased gas comes essentially from Algeria, Trinidad and Tobago and Nigeria, amongst other countries, and this diversity of suppliers reduces risk, as prevention against possible shortages of supply. The acquired gas is both used in the CCGT plants as in the supply business. In 2010, 25.5 TWh of gas were consumed in thermal plants which, added to the gas sold to clients in Iberia (36.7 TWh) gives EDP a higher relevance as a buyer,

translates into more bargaining power, a consequent synergy of the integration of businesses.

In 2010 the EBITDA of the gas unit grew 25%. This substantial growth was mainly due to the distribution in Portugal (+128%) and Spain (+40%), which in total grew 52%. Although the liberalized supplied gas registered a substantial growth in volume, from 22.2 to 36.7 TWh, the actual EBITDA suffered a decrease of 45%, from €59m to €32m. This is explained by a substantially lower gross margin, from €2.4 to €0.8/MWh,. This increase was both significant in Portugal (1.0 to 6.9 TWh) as in Spain (21.3 to 29.8 TWh).

After analyzing the gas segment, the specific value driver identified for this unit is the regulated remuneration regime, since the majority of the segment is the regulated activities, which are remunerated in a Return on Assets system. As for

13

Consumption over 10,000 m3 per year Table 16: Acquisition of Gas Natural’s

assets

Network (Km) 2,859 Supply points (th) 248

Source: EDP

Table 14: Liberalised gas supply

Portugal

2009 2010 Gas supplied (GWh) 1,000 6,900 Clients (th) 0.07 0.19

Source: EDP

Table 15: Gas Spain

2009 2010 Network (Km) 9,065 9,938 Supply points (th) 964 984 Gas distributed (GWh) 18,968 45,644 Gas supplied (GWh) 21,300 29,800 Clients (th) 833 824 Source: EDP

(19)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

the liberalized supply, it is expected to grow not only in line with macroeconomic behaviour, but also with the liberalisation of the sector, since the MIBGAS is a reality, enabling EDP’s Gas unit further expansion, not only in Spain where it already has a significant position, but also in Portugal, when the market becomes liberalized with the end of tariffs and regulated supply. Currently EDP has a market share of 28% in Portugal and 11% in Spain, and is expected to improve to 30% and 15%, respectively. These will allow this segment to have a CAGR of 1.06% for 2011-2020.

Renewable

EDP Renováveis (EDPR) has all the wind generation assets of the EDP Group. Currently it is the third biggest wind energy generation company in the world by installed capacity, which more than tripled since 2006. It is responsible for the group’s internationalization, since besides Portugal, Spain and Brazil, only EDPR operates outside these three countries, being present in markets such as USA, France, and Poland, amongst others.

EDPR was created in 2007, through the consolidation of the wind units of the EDP Group into a single subsidiary. This way, two important companies, NEO in Europe and Horizon in the USA became EDP Renováveis. In 2008 occurred the IPO in which 22.5% of the company was sold to investors, and EDPR started to be traded in the Lisbon stock exchange, being today the 5th largest company with a market cap of €4,056m.

EDP Renováveis is a vehicle of EDP’s strategy of clean production and focused growth. As so, a significant proportion of the group capex is used in wind generation. Between 2006 and 2009, the installed capacity grew from 2.1 to 7.3 GW, an average yearly addition of 1.3 GW. It is predicted an annual amount between 1.1 and 1.2 GW for 2011 and 2012. The total electricity generated in 2010 was 14,352 GWh, against 10,907 GWh in 2009. EBITDA also registered a significant improvement, from €542.5m to €712.7m, a 31% increase.

EDPR is currently preparing its expansion to new countries: in UK it was awarded a 1.3 GW concession in Scotland for offshore wind generation, has prospects of 520 MW in Italy, and is studying its presence in Canada. Without EDPR, EDP would be only present in Portugal Spain and Brazil, and so it is the

internationalization motor of the group, contributing to reduce its exposure to the referred three countries.

Graphic 12: EDPR gross installed

capacity, MW Source: EDP 2,127 3,640 5,052 6,227 7,266 2006 2007 2008 2009 2010

(20)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

So, considering the specificities of the renewable energy business, the value drivers identified for this segment are the installed capacity and load factors. With its current expansion plan, total installed capacity is expected to reach 10800 MW in 2020. For this, a projected €4,430m capex for the period is required. As for the load factors, it is expected to improve by 1%, in average, for all

geographies due to technology maturation and improvements. Having this in mind, EDPR is expected to have a 3.32% CAGR of EBITDA in 2011-2020.

Brazil

EDP is present in Brazil through the holding EDP Energias do Brasil S.A. (EB), having operations in 7 states of Brazil. Established in 1996, its IPO was in 2005 and currently EDP has a stake of 65%. In 2010 it was responsible for 18% of EDP’s EBITDA (€674m, R$1,571.4m) and 16% of capex (€427.3m, R$996.3m) and employed 2,413 workers. Inserted in a high-growth potential market, EB operates in electricity generation, distribution and liberalized supply.

The generation activity is present in 6 states: Espírito Santo (ES), Mato Grosso do Sul (MS), Tocantins (TO), Ceará (CE), Santa Catarina (SC), and Rio Grande do Sul (RS), having an installed capacity of 1741 MW, and an additional 410 MW under construction and repowering. Currently it only has hydro and wind plants operating, in line with EDP’s strategy of clean generation and Brazil’s generation profile. This unit employed 262 workers in 2010, generated 7,263 GWh and sold 8,309 GWh at an average price of R$122.9/MWh. It had to buy energy since 2010 was a dry year, not providing enough water to meet the contracted

requirements, and the electricity prices increased. This activity had an EBITDA of R$732m, and it is performed by 3 subsidiaries: Energest, Enerpeixe and

Investco, under PPA contracts.

Energest, owned at 100% by EB, operates several hydro plants in the states of ES and MS, having full proprietorship of all, except Costa Rica in MS with 51%. With 15 plants, most of which small and micro hydro plants14, the total installed capacity sums 380 MW, (9 in ES with 312 MW and 6 in MS with 68 MW). In 2010 these 15 plants generated 6% less than in 2009.

Enerpeixe S.A. was constituted in 15 October 2001 in partnership with Furnas Centrais Elétricas S.A., with EB having 60%. It was attributed the concession, until 2036 of generating electrical energy15 with a hydro plant located in the

14

Except Mascarenhas (181 MW) and Suíça (35 MW)

15

As defined in Presidential Decree of 15 October 2001 and Concession Contract no. 130/2001 - ANEEL Table 17: Load factors by region

USA 32% Europe 27% Brazil 26% Source: EDP Table 18: Energest 2009 2010 Installed capacity (MW) 378 380 Generation (GWh) 1,630 1,535 Selling price (R$/MWh) 105 112 Source: EDP Table 19: Enerpeixe 2009 2010 Installed capacity (MW) 452 452 Generation (GWh) 2,093 2,523 Selling price (R$/MWh) 149 152 Source: EDP

(21)

THIS

DOCUMENT

IS

NOT

AN

INVESTMENT

RECOMMENDATION

AND

SHALL

BE

USED

EXCLUSIVELY

FOR

ACADEMIC

PURPOSES

Tocantins river, in TO. For this the Peixe Angical hydro plant began construction in 2002 and started operating in 2006, having 3 generating units. In 2010 its generation increased 21% over the previous year.

Finally, Investco is the company responsible by the Luis Eduardo Magalhães (formerly Lajeado), EB’s biggest hydro plant with 5 generating units. EB has a stake of 73% of Investco S.A. which was created in 1997 to explore the

concession of building and operating a hydro plant also in the Tocantins river (in TO) until 2032. The construction works began in 1998, and in 2001 the first generating unit began operating.

Besides these assets, there are currently two more plants under construction and repowering works. Energia Pecém is a 50-50 partnership between EB and MPX Geração de Energia responsible for Pecém, the first thermal plant (coal-fired) of EB, and it is an R$2.6b investment, financed 75% by debt and 25% by equity. The plant has two generating units, each with 360 MW, and the beginning of operations for both is scheduled to start in 2012. Also, the UHE Mascaranhas (ES) is under repowering, and will have an additional 18 MW capacity. When finished, these will increase EB’s installed capacity in 378 MW (only 50% of Pecém’s capacity is owned). Also, having a thermal plant will allow a better risk management, since will reduce EB’s exposure to hydro availability.

EB is also present in wind generation. In a partnership with EDP Renováveis (55% EDPR and 45% EB), two wind farms are currently operating in SC, Horizonte with 6 generating units and 5 MW, and Água Doce with 12 generating units and 9 MW, operational since February 2004 and September 2006,

respectively. This assigns only 6.2 MW to EB, but further expansions are undergoing, namely the construction of Tramandaí in RS going on. It is a wind farm with 31 generating units and 70 MW of installed capacity, of which 32 MW correspond to EB’s stake.

The distribution activity is done through two subsidiaries: EDP Bandeirante and EDP Escelsa, both owned at 100% by EB. Being the biggest activity of EB, these two companies together serve around 8 million people, and in 2010 contributed with an EBITDA of R$878.2m, 56% of the overall. Also, together they employed 2,040 workers, 85% of the total. The total length of the network was 84,636 km, having 2,741 thousand clients connected. It distributed 23,749 GWh, 11% more than in 2009, of which 14,715 were sold residential and industrial clients, and 9,034 GWh were distributed to clients in the free market.

Table 20: Investco 2009 2010 Installed capacity (MW) 902 903 Generation (GWh) 3,169 3,205 Selling price (R$/MWh) 107 109 Source: EDP