Iberdrola, S.A.

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Iberdrola, S.A.

Cardenal Gardoqui, 8
48008 Bilbao
Spain
Telephone: (+34) 944 151 411
Fax: (+34) 944 154 579
Web site: http://www.iberdrola.es

Public Company
Incorporated: 1901 as Hidroeléctrica Ibérica
Employees: 12,800
Sales: EUR 8.11 billion (2001)
Stock Exchanges: Madrid Mercado Continuo
Ticker Symbol: IBE
NAIC: 221122 Electric Power Generation, Transmission and Distribution; 531210 Offices of Real Estate Agents and Brokers; 541330 Engineering Services; 541512 Computer Systems Design Services; 551112 Offices of Other Holding Companies

Bilbao-based Iberdrola, S.A., with more than nine million customers worldwide, is the second largest electric utility in Spain behind ENDESA. The company was formed after the 1992 merger of two smaller private utilities to create an entity that would be able to hold its own in the coming liberalization of the European Union’s power industry. Of Iberdrola’s 16,000-megawatt generating capacity, more than half is supplied by hydroelectric installations, while thermal plants, powered by coal, oil, gas and nuclear reactors, make up the remaining capacity. Domestic activities account for most of Iberdrola’s revenue, but the company also has established a significant presence in Latin America, particularly in Mexico and northeastern Brazil. In addition, the company is active in electricity distribution in Bolivia and Guatemala and water distribution in Chile and Uruguay. Subsidiary company Iberdrola Diversification has extended the company’s reach by acquiring stakes in multimedia, Internet, and real estate firms; the subsidiary Iberdrola Ingeniería y Consultoría serves outside clients as well as Iberdrola with construction and energy engineering. The company’s latest strategic plan, however, calls for growth based on core activities in the power sector.

Early Electrification and Growth: 1901–92

The utilities that eventually united in Iberdrola trace their roots back to some of the earliest applications of electricity in Spain. In July 1901, mining engineer Juan Urrutia led a group of entrepreneurs in forming Hidroeléctrica Ibérica in Bilbao. The company had substantial financial backing from the newly created Banco de Vizcaya and was constituted to exploit the hydroelectric capacity of several rivers in the industrialized north of Spain. Three years later the Martín Galíndez power station, at Quintana on the river Ebro, began supplying electricity to Bilbao. Meanwhile, civil engineer José Orbegozo, at the head of another group of Bilbao-based entrepreneurs, set up the Sociedad General de Transportes Eléctricos with the intention of developing power installations along the international stretch of the river Duero. A third company, Hidroeléctrica Española (Hidrola), was founded in May 1907 to electrify Madrid and Valencia. The new company had close ties to Hidroeléctrica Ibérica, which contributed concessions on three central Spanish rivers and owned 44 percent of Hidrola’s capital. Two years later Hidrola’s Salto de Molinar power station was operating on the river Jücar and was connected to Madrid by one of the largest power lines of its type in Europe at the time.

After 1918 the Sociedad General de Transportes Eléctricos went through a name change, merged with the Consorcio de Saltos de Duero, and eventually became known as Saltos de Duero. Saltos de Duero continued producing power along the river Duero, as well as opening Spain’s first major hydroelectric station, Salto de Ricobayo, on the Esla river in 1935. The other utilities also increased their generating capacity gradually in the 1920s. Growth in the power sector was suspended for close to two decades, however, after the start of the Spanish Civil War. General Francisco Franco began his reign at the end of the war in 1939, marking the beginning of a period of economic isolationism and social instability that lasted through the end of World War II. Against this backdrop, Saltos de Duero and Hidroeléctrica Ibérica merged in 1944, forming Iberduero.

In the 1950s, foreign aid was sent to Spain, industrial production increased, and the demand for electricity grew substantially. Both Iberduero and Hidrola completed several large hydroelectric and thermal power plants between 1957 and 1969, including Aldeadávila, Valdecañas, José María Oriol, and Villarino. When nuclear technology became available, Iberduero cooperated with another small utility to open the Santa María de Garona nuclear plant in 1971. The oil crisis in the mid-1970s soon spurred increased nuclear development as Spain tried to lessen its dependence on imported fuel oil. In 1975, the government’s first National Energy Plan promoted nuclear energy, prompting Hidrola and Iberduero to invest heavily in new plants. Two second-generation nuclear power stations opened in 1981 at Almaraz and Cofrentes. The Spanish government, however, reappraised its energy needs a few years later and made the decision in 1984 to freeze all nuclear construction due to overcapacity, high building costs, and inflation. The decree left private utilities with a large debt burden.

As the energy sector matured, the existing utilities went through an asset exchange process in an effort to balance their positions in the market. Hidrola took over Hidroeléctrica de Cataluña, a company with a significant presence in Catalonia. In addition, the Red Eléctrica de Espana was created in 1985 as the owner of a unified national electric system, with the participation of all of Spain’s utilities.

Merger and Consolidation: 1992–96

In the early 1990s, the state utility ENDESA, created by the Franco regime in the 1940s, drew attention to itself with a series of acquisitions. The Spanish government, worried that the nation’s smaller private utilities would be unable to compete in the coming Europe-wide market, was encouraging ENDESA to swallow one small utility after another. To counterbalance ENDESA’s growing influence, Hidrola and Iberduero made the decision to merge. A 50-50 joint venture, HI Holding, was established in 1991 to manage the merger. On November 1, 1992, the union of the two companies became official, and the new entity took the name Iberdrola. Madrid businessman Inigo de Oriol became chairman of the company, and Iberduero’s former Chairman Manual Gomez de Pablos became honorary chairman of Iberdrola. The former managing director of Iberduero, Jose Antonio Garrido, maintained his position in the new company. As the European community discussed a restructuring of the energy sector, Garrido tried to ready Iberdrola for a time when large firms would be free to choose among competing power suppliers. He emphasized service and quality, implementing a new incentive-based pay system and a reorganization of the company structure.

After the merger, Iberdrola and ENDESA each controlled about 40 percent of Spain’s generating capacity. Iberdrola’s capacity was, in large part, made up of hydroelectric and nuclear-powered stations, which gave the company an edge in environmental compliance but also saddled it with a debt burden left over from the 1984 suspension of nuclear plant construction. The company had about Pta 516 billion tied up in unfinished plants. In addition, although the company’s generating costs were about 20 percent below the national average, government regulations forced Iberdrola to buy some of its electricity from ENDESA at greater cost. The Electric Sector Planning Bill, or LOSEN, approved in 1994, began the process of introducing competition into the energy industry. An energy sector reorganization helped the two companies balance their positions relative to each other. Among other exchanges, Iberdrola sold Hidroeléctrica de Cataluña to ENDESA in 1993 to consolidate ENDESA’s presence in Catalonia. After the first full year of joint operation, Iberdrola reported an almost 12 percent increase in pretax profit to Pta 91.1 billion. At the same time, the company’s debt peaked at Pta 1,800 billion near the end of 1993.

Iberdrola became involved with the international power sector shortly after the merger. In 1992 the company entered Latin America with the purchase of Litoral Gas and the Güemes Thermal Power Station in Argentina. Three years later Iberdrola acquired controlling stakes in the Bolivian electricity distributors Electropaz and Elfeo. The subsidiary Iberdrola Energía, or Iberener, was created in 1995 to manage Latin American holdings. In 1996 two Chilean utilities were added to Iberdrola’s international portfolio.

Meanwhile, there were positive developments at home. A five-year drought in Spain finally ended in 1996, improving the performance of hydroelectric plants and having positive ramifications throughout the economy. In the spring of that year Iberdrola’s debt problem was addressed with a government-backed plan to convert debt into securities through an international bond issue. The move immediately erased Pta 539 billion of debt from the company’s balance sheet, and company Chairman Oriol announced plans to continue debt reduction at a rate of Pta 70 to Pta 80 billion per year.

Deregulation and International Investment: 1996–2002

Late in 1996 an “Electrical Protocol” was drawn up that pushed Spain further down the road to an open market. In about ten years, consumers would be free to choose the cheapest power provider. Reforms for the first few years, however, centered around a gradual decrease in electricity rates. The government’s policy had been to fix prices based on investment cost rather than on actual production cost. To the base price were added surcharges for distribution, external costs, and a levy to pay for servicing the debt securities related to the stalled nuclear plants. The government now decreed a rate reduction of three percent for 1997 and 2 percent the following year.

Faced with a drop in revenue, Iberdrola cut its staff to around 11,500 from 15,080 in 1992 and reorganized its departments to force them to work more efficiently. Debt servicing costs were also down, since the company’s 1997 debt, at Pta 850 billion, was only half of the 1993 peak figure. The cost-cutting measures led to a 4.9 percent increase in consolidated profits for 1997, despite a 14 percent drop in revenue.

Company Perspectives

Iberdrola, with renewed energy. Iberdrola is making a major investment effort to grow profitably, consolidate its position as a world leader in renewable energies and offer its clients the best solutions for their power requirements.

Iberdrola also planned to boost profits by entering into a more ambitious international investment program. In July 1997

Iberdrola led a consortium that paid $1.6 billion for a 52 percent stake in the Brazilian distributor Companhia de Electricidade da Bahia, or Coelba. Through Coelba, Iberdrola then took over the energy distributor COSERN. These were the first electricity privatizations in the underdeveloped northeast region of Brazil. Although the region was poorer than the industrialized south, it also had more potential for growth. Iberdrola further increased its global reach in 1998, when the company acquired 80 percent of Empresa Eléctrica de Guatemala S.A. (EEGSA) in an alliance with the Portuguese utility Electricidade de Portugal, S.A. (EDP). In 1999 Iberdrola gained control of Essal, a water company in Chile, and Energy Works, a U.S. company that obtained power for large industrial customers. While it was expanding into other countries, Iberdrola also diversified its operations. Involvement in the gas sector was desirable since the company had plans to build gas-fired plants with combined cycle generators. Accordingly, in 1997 Iberdrola allied with the Spanish companies Repsol, an oil company, and Gas Natural, a gas distributor partially owned by Repsol, to take over two Rio de Janeiro-based gas companies and two more gas companies in Colombia. Other diversification included the formation of a telecom joint venture with Telefonica, the national telecom operator, and the founding of the data management firm Iberdrola Sistemas in 1997.

As Iberdrola branched out abroad, the deregulation process was gaining momentum at home. Beginning in 1998, about 400 large industrial customers were allowed to choose their power suppliers for the first time. Later that year the government determined that the liberalization process laid out in the Electrical Protocol was too gradual and set a new schedule with the effect that by October 1999 about 8,000 companies, constituting 44 percent of Spain’s energy consumption, would have their pick of providers. The electricity rate reduction for 1999 also was bumped up from 1 to 2.5 percent. Iberdrola, used to having its customers assigned to it, recognized that marketing and customer service would have to become more important elements of company culture. The company implemented a 24-hour helpline for small consumers and designated teams of employees to draft tailor-made energy plans for large consumers.

As the various entities of Spain’s power sector jockeyed for power, rumors of merger negotiations emerged. Late in 1999 the oil company Repsol, which had already cooperated with Iberdrola in some gas-related acquisitions, was reported to be holding merger talks with Iberdrola. Banco Bilbao Vizcaya, the largest shareholder in both companies, backed the merger, but an opposing faction, made up of ENDESA and the bank la Caixa, used their holdings in Repsol to successfully resist the merger.

Iberdrola carried on with its acquisitive strategy. Early in 2000 the firm partnered with the Italian energy group Eni and the Portuguese utility EDP in a deal that won it about 4 percent of Galp, Portugal’s oil and gas utility. That deal was followed by the $1 billion purchase of Brazilian electric distributor CELPE, which built on Iberdrola’s existing presence in the northeast part of that country. In other advances, the company closed a deal to provide drinking water and sewage services in Uruguay and made an agreement with its Portuguese neighbor EDP to share a fiber optic network on the Iberian peninsula. The planned acquisition of the U.S. company FPL Group Inc., the parent of Florida Power & Light, fell through, however. The deal, which would have pushed Iberdrola into the ranks of the most prominent global utilities, was rejected by the board. More promising developments were seen in Iberdrola’s efforts to enter the gas market. In the fall of 2000, the company struck a deal with Eni under which the Italian company would provide gas to Iberdrola over a 15-year period, while the two would work together to create an alternative gas trading company in Spain.

By the end of 2000 a proposed merger, this time with ENDESA, was once again a hot topic. Iberdrola had rejected a more lucrative bid from Gas Natural in favor of a union with ENDESA. Repsol, a major stockholder in Gas Natural, considered launching a hostile bid but dropped the idea due to worries about political repercussions. As talks with ENDESA advanced, analysts calculated that the combined company would control about 80 percent of Spain’s electricity market. The government was drawn to the idea of a national energy powerhouse, but nevertheless had to protect the competitive ideal. Government conditions proved to be too restrictive, and in February 2001 the two companies dropped the merger plan at the last minute, unwilling to accept rules that would limit them to 42 percent of national generating capacity. Observers speculated about which other major European companies might be interested in bidding for Iberdrola.

Key Dates

1901:: Hidroeléctrica Ibérica is founded in Bilbao.
1907:: Hidroeléctrica Española (Hidrola) is founded to electrify Madrid and Valencia.
1944:: Saltos de Duero and Hidroeléctrica Ibérica merge, forming Iberduero.
1975:: The First National Energy Plan promotes nuclear energy.
1984:: The Spanish government suspends construction on nuclear plants.
1992:: Hidrola and Iberduero merge, forming Iberdrola.
1996:: The Electrical Protocol outlines policies for creating an open energy market.
1997:: Iberdrola begins heavy investment in Latin America.
2001:: CEO Ignacio Sánchez Galán introduces his Strategic Plan for doubling Iberdrola’s size.

In the spring of 2001, however, a new chief executive came to Iberdrola with ambitious plans for the company to expand on its own. Ignacio Sánchez Galán set the goal of doubling Iberdrola’s size over the next five years with investment in core power and gas activities both at home and abroad. Soon after taking the reins, he began bidding for control of Italian, Czech, and Polish energy companies. Galán’s “Strategic Plan” for 2002-06 was approved in the fall of the year. It called for extensive construction of combined cycle facilities powered by gas, with a particular focus on increasing generating capacity in Mexico and northeast Brazil. The plan also committed Iberdrola to investment in renewable energy, including wind power, and set the goal of gaining 20 percent of the Spanish gas market by the end of the five-year period. A new Gas Unit was created in 2001 to manage all activity in the sector, and Iberdrola’s first eight gas supply contracts were signed that year. By the end of the first quarter of 2002, Iberdrola had achieved a 4.1 percent share of the national gas market and commissioned the first combined-cycle plant in Mexico ahead of schedule. In Spain, the company’s construction program for combined-cycle facilities was given a boost with the purchase of an unfinished plant from Enron, the failed U.S. energy broker. Diversification outside the energy sector was receiving less attention as Iberdrola focused on widening its global influence in a range of energy-related activities.

Principal Subsidiaries

Iberdrola Generación, S.A.U.; Iberdrola Redes, S.A.U.; Iberdrola Distribución Eléctrica, S.A.U.; Iberdrola Diversificación; Iberdrola International, B.V. (Netherlands); Iberdrola Energía, S.A.U.; Iberdrola Sistemas, S.A.U.; Iberdrola Ingeniería y Consultoría, S.A.; Iberdrola México S.A. de C.V. (Mexico); Iberdrola Gas, S.A.; Empresa Eléctrica de Guatemala, S.A. (Guatemala; 39.57%); Companhia Electricidade do Bahia, S.A. (Brazil; 42.76%); Apex 2000, S.A.U.; Elfeo, S.A. (Bolivia; 59%); Electropaz (Bolivia; 57%); URAGUA, S.A. (Uruguay; 49%).

Principal Divisions

Generation; Distribution; Retailing; Gas; Renewable Energy; International (South American Platform, Mexico/Guatemala Platform); Engineering & Consultancy; Non-Energy Related Business.