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Netra Shetty
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Supply Chain Management of Electricidade de Portugal, S.A. - December 30th, 2010

EDP - Energias de Portugal (formerly known as "Electricidade de Portugal"; Euronext: EDP) ranks among Europe's major electricity operators, as well as being one of Portugal's largest business groups.

The Group became the first Iberian company to own significant generating and distribution assets in both sides of the border, with a controlling position in the Spanish company HC Energía, and it is also present in the electricity sectors of Latin America – with a major presence in the US, Brazil, Africa and Macau, in the generation, distribution and trading businesses.

The EDP Group’s activities are centred on the generation and distribution of electric power, as well as the information technologies areas. In addition, the group's business includes complementary and related areas, such as water, gas, engineering, laboratory testing, vocational training and real estate management. It once had businesses in the IT consulting (Edinfor) and telecommunications (ONI Telecom) sectors, but these were sold, respectively, to Logica and the private equity group The Riverside Company.

In 2006 35% of the energy produced by EDP was from renewable energy sources, and, as of the end of 2007, the company announced that 39% of its energy was already emissions-free and that it was aiming for a 75% renewable energy production by 2013.[1] In March 2007 the group made a US$3 billion takeover of Horizon Wind Energy, the Texan-based wind power producer. This is the largest renewable energy deal to date and made EDP the fourth largest wind power producer in the world.[2] The firm's renewables operations (including Horizon) are now contained within its majority-owned subsidiary EDP Renováveis, 25% of which was floated on the Lisbon Stock Exchange in 2008.

Electricidade de Portugal, S.A. (EDP) has emerged from its background as Portugal's state-controlled electricity monopoly to become a publicly traded holding company with international subsidiaries and ambitions to broaden its reach into other utility markets. The production and distribution of electricity still account for most of EDP's revenues. The company has a combined generating capacity of over 7,500 MW. Because Portugal has few fossil fuel energy resources, EDP relies heavily on hydroelectric power, supplemented by thermoelectric plants that burn imported natural gas, fuel oil, and coal to ensure a stable power supply during periods of low rain. The company has been active in the Brazilian power sector since 1996. EDP recently acquired a stake in a Spanish utility, and also has holdings in Guatemala, Morocco, Cape Verde, and Macau. Domestically, EDP's telecommunications unit, Onitelecom, is vying to become one of the main phone service providers in Portugal. In addition, the company's partnerships give it a role in various wastewater and gas projects, while it also capitalizes on its technical expertise to provide engineering and information technology (IT) services.

A State Electricity Monopoly: 1976-87

The first known use of electricity in Portugal occurred in 1878, when the royal family imported six voltaic arc lamps from Paris for a birthday celebration. In 1891 a company received a concession from the Lisbon Municipality to provide gas and electricity to the city, and small electrical installations followed in several buildings. The city of Braga was lit up by a northern electrical company in 1893, and through the early 1900s municipalities entered into concession contracts with local companies for electricity distribution, while the government licensed power plants. In the 1940s a set of nationwide electrification rules was adopted, making possible the formation of the Companhia Nacional de Electricidade to connect small generating systems across Portugal, followed by the construction of more large-scale plants after 1950. In 1960 the various companies that were supplying Portugal's primary electric network merged into the Companhia Portuguesa de Electricidade. After the Portuguese dictatorship was overthrown in the 1975 revolution, the Marxist government nationalized the country's power generation and transmission capabilities. The following year Electricidade de Portugal was formed with the goals of increasing the use of electricity in Portugal, improving the national grid, and establishing a single tariff.

In the 1980s the turbulence of economic and political change combined with a rapid rise in demand for electricity to create a decade of turmoil for EDP. Electricity investment more than tripled between 1976 and 1980 as the state utility tried to keep pace with demand. As one of the few Portuguese institutions with international credibility, EDP managed to secure loans from the World Bank and other sources, which it invested in improving its generating capacity. However, municipalities had stopped paying their power bills in the revolutionary climate, while at the same time the escudo was being steadily devalued by inflation. As a result, EDP's debt reached alarming levels.

One of the utility's more pressing problems was its reliance on imports for power generation. Although Portugal had 44 hydroelectric plants in 1981, their production had to be supplemented by a series of fuel oil power stations that had been constructed under the pre-1975 dictatorship. Most of the fuel for the thermonuclear plants had to be imported, with energy imports accounting for about a quarter of total imports in the early 1980s. As the government invested in expansion of its hydroelectric capacity, it began searching for domestic fuel, and considered options such as coal-burning and nuclear power plants. Although the nuclear option was never pursued, EDP did have one small coal-burning plant at Tapada do Outeiro in the north and constructed a second coal plant at Sines in the south.

Restructuring and Liberalization: 1987-98

In 1987 a new government, led by the center-right Social Democrats, came to power and began loosening the state's control over economic activity. The Social Democrats passed laws allowing the private sector to generate electricity and talked of liberalizing, deregulating, and restructuring the energy sector. They appointed José Manuel Castro Rocha head of EDP with the hope that he would rescue the utility after a decade of neglect. When Rocha took over, EDP had an accumulated debt of Esc 1.05 trillion and an annual loss in 1987 of Esc 5.9 billion. The situation at the utility improved greatly during Rocha's five-year tenure. Energy imports, while still much higher than desirable, accounted for only 8 percent of Portugal's total imports in 1989. The following year EDP became a state-controlled public company and reported a net profit of Esc 10.3 billion. Debt was expected to fall below the Esc 1 trillion mark by the end of 1991.

At the same time, Portugal's newly liberalized, expanding economy was attracting foreign investment. International companies played a particularly prominent role in plans to bring natural gas to Portugal. In 1990 the country called for tenders to build an import terminal and pipeline for liquefied natural gas. The pipeline would supply a natural-gas fueled power plant at Tapada do Outeiro that was to be constructed by a consortium led by Germany's Siemens. A second gas-fired plant was to be built after a decade or so, which some of the bidding companies felt was an insufficient guarantee of demand for natural gas. Gaz de France won the bidding process in mid-1991, but after nearly two years of negotiations over prices, risk-sharing, and construction of the second gas-fired plant, the deal fell through. Portugal remained without natural gas for the time being, and the future of the Tapada de Outeiro plant was in doubt.

Joaquim Silva Correia become EDP's new president in 1992. Under his direction the utility experienced a major restructuring, made significant progress in debt reduction, and increased its hydroelectric capacity. The turnaround in debt repayment came in December 1993, when EDP sold two coal-fired power units that were being constructed in Pego, a city north of Lisbon. The Tejo Energia consortium, led by the United Kingdom's National Power, acquired the units for Esc 170 billion. The deal cut EDP's debt service costs and allowed the company to focus investment on distribution rather than generation. EDP's financial situation continued to improve over the next four years, as interest rates fell and municipalities began paying their neglected power bills. By the end of 1995, the company's debt was down to Esc 678.7 billion.

Reorganization of the utility was officially completed in September 1994. The EDP Group became a holding company for 22 separate units, with the CPPE (Companhia Portuguesa de Producao de Energia) subsidiary in charge of production and the REN (Rede Electrica Nacional) subsidiary controlling transmission, distribution, and services. The restructuring gave the various components of the electricity sector more control over decision-making and daily operations, promoting better management. Profits in 1995, at Esc 66.3 billion, were more than double the previous year, an improvement attributed to greater operating efficiency. EDP was also working to improve its tariff structure. During the 1980s, industry had been charged particularly high rates in order to keep domestic rates artificially low. In a gradual effort to remedy the distorted structure, tariffs were reduced 30 percent for industry and 10 percent for domestic customers in the four years leading up to 1996. An independent regulator for the energy sector, known as ERSE, also began operation in late 1996 as part of continued efforts on the part of the government to make the electricity system more liberal and competitive. ERSE planned to push tariffs down even closer to the European Union average, improve the transparency of electricity distribution costs, and ensure that the distribution subsidiary REN bought power from producers on a lowest-price-first basis.

The next step in EDP's evolution was privatization. The Social Democrat government had been planning to privatize the regional units of the company, but after a Socialist government gained control at the end of 1995, they decided to sell a stake in the holding company itself. EDP president Silva Correia departed that fall, with the former banker and government official Antonio de Almeida taking his place. In June 1997 Almeida presided over Portugal's largest privatization yet: 30 percent of EDP was sold for Esc 368 billion. The offering met with enthusiastic public response, and was oversubscribed 37 times by retail investors. The Spanish utilities Endesa and Iberdrola had hoped to gain a share of their Portuguese neighbor, but the institutional share of the IPO went mainly to Portuguese investment institutions. EDP's share price rose 38 percent on the first day of trading on the Lisbon exchange, where it was the largest company. The company was also traded as U.S. depositary receipts on the New York Stock Exchange. The offering was seen as a sign that Portugal had attained the status of a developed investment market.

After the privatization, Almeida announced that EDP would continue to improve efficiency, mainly by centralizing operations such as accounting and purchasing at the group level and further reducing its employees from 16,000 to 13,000. EDP had also recently carried out its first international foray. In November 1996 the company formed a consortium with Spain's Endesa and Chile's Enersis to buy 70.2 percent of the Rio de Janeiro electricity distributor CERJ. EDP would build on its Brazilian holdings over the next few years. Plans for natural gas also came to fruition during this period. With Gaz de France out of the picture, several large state-controlled Portuguese companies formed the Transgas consortium and finally brought gas to Portugal in 1997. A pipeline was constructed to import gas from Algeria to Tapada do Outeiro, where the long anticipated natural-gas fired power plant was still under construction. Projected to provide up to one fifth of Portugal's electricity, the Tapada plant was finished in the fall of 1998 by the Turbogas consortium, which included PowerGen of the United Kingdom and Siemens of Germany.

Branching Out Internationally: 1998-2002

In early 1998 a disagreement arose over EDP's search for a strategic partner. Company President Almeida preferred an alliance with the Spanish electricity company Endesa, but the Portuguese government, worried about the possible expansion of foreign influence, preferred a German power group. In the end, Almeida was replaced as chairman by Mario Cristina de Sousa, and a smaller Spanish utility, Iberdrola, was chosen for a partner. EDP and Iberdrola hoped to cooperate on expansion in Brazil and invest jointly in production on the Iberian peninsula, but the main fruit of their alliance was the August 1998 purchase of 80 percent of the Guatemalan electricity distributor EEGSA (Empresa Electrica de Guatemala).

A host of other acquisitions and alliances helped EDP expand its reach in the late 1990s. The company gained control of the São Paulo distributor Bandeirante in the fall of 1998, acquired control of the Brazilian utilities Escelsa and Enersul by purchasing a 73 percent stake in the investment consortium Iven in August 1999, and also teamed up with Thames Water of the United Kingdom to develop water and wastewater projects in Portugal, Chile, and Brazil. These acquisitions came in spite of the fact that CERJ, EDP's original Brazilian investment, was performing poorly due to low tariffs and the devalued Brazilian real. Domestically, EDP also formed a new telecom unit, Oni, hoping to capitalize on the coming liberalization of Portugal's telecommunications market, and proceeded with construction of a second natural gas-fired plant in Carregado.

However, EDP was suffering under tariff pressure from ERSE. The independent regulator cut tariffs 6.5 percent in 1998, bringing them close to the European Union average, and imposed another 6.4 percent cut in 1999. The cuts hurt EDP's performance on the Lisbon exchange and caused sharp falls in revenue in 1998 and 1999, with 1999 net income standing at EUR 520 million. Another financial blow came in November 1999 when the Portuguese conglomerate Sonae, one of EDP's largest customers, began buying its power from the Spanish utility Endesa.

Nevertheless, EDP moved ahead with growth and diversification. The Onitelecom unit became fully operational in 2000, as international and long-distance fixed-line services were liberalized that January. Although the unit lost money in its first two years of operation, it acquired 589,000 voice and 372,000 internet customers by the end of 2001. EDP also bought a 14 percent stake in the Portuguese oil and gas utility GALP early in 2000. The move gave EDP a chance to coordinate further gas-fired generation projects and was seen as a sign of the company's desire to offer multi-utility services. Outlining his vision for the company, EDP's new Chairman Francisco Sánchez was quoted in the Financial Times as saying, "The future of our business lies in satisfying the basic utility needs of a large base of customers. A big reduction in costs can be achieved by adapting the commercial network we already have to the integrated supply of power, gas and water." Net income in 2000 was EUR 520 million, a slight improvement over the previous year.

The government, which had held just over half of EDP since 1999, reduced its share further in October 2000 with the EUR 1.6 billion sale of an 18 percent stake. But the state was wary of relinquishing too much control over Portugal's electricity system; despite its minority holding, it retained a "golden share" that gave it veto power over major policy decisions. In addition, the state bought 70 percent of REN, the distribution subsidiary, in 2001 so that it could maintain control of the domestic grid.

In 2001 EDP ended its strategic alliance with Iberdrola in response to rumors that Iberdrola might merge with its larger competitor Endesa. EDP intended to independently seek electricity generation and distribution assets in Spain, and soon became involved in a drawn-out battle for control of a small Spanish utility, Hidroeléctrica del Cantábrico. The bidding war involved EDP and the German utilities RWE AG and Energie Baden-Württemberg AG (EnBW). In an initial agreement, EDP bought a 20 percent stake and EnBW received 60 percent, but EDP subsequently pursued an arrangement where it could play the dominant role in the management of its fellow utility on the Iberian peninsula. The companies reached an agreement in December 2001 under which EDP had a controlling 40 percent and EnBW 35 percent of Hidrocantábrico, with two Spanish financial institutions holding the remaining shares. Results in 2001 showed a drop in net profit to EUR 451 million, due to losses in the telecom unit and a smaller contribution from REN. As EDP entered 2002, it faced the challenge of holding its market share in a sector that was growing ever more competitive. Although the company retained a monopoly on the domestic market, after January 2002 small and medium-sized companies were allowed to buy from other electricity suppliers. While actively pursuing acquisitions and opportunities for diversification, EDP also needed to concentrate on its core business of electricity generation. The company announced its intention to cut costs over the next four years as the Iberian electricity market became increasingly integrated.

Principal Subsidiaries: Companhia Portuguesa de Produçao de Electricidade, S.A.; EDP Energia (60%); EDP Distribuiçao; EDP Internacional; EDP Brasil, Bandeirante (Brazil; 96%); IVEN (Brazil; 73%); Companhia de Electricidade do Estado do Rio de Janeiro (CERJ; 19%); EEGSA (Guatemala; 17%); ONI Telecom Infocomuniçoes (67%); REDAL (Morrocco; 29%); CEM (Macau; 22%); ELECTRA (Cape Verde; 31%); REN (30%); Tejo Energia (10%); Turbogás (10%); GALP Energia (14%); EDP Aguas; Hidroeléctrica Del Cantábrico, S.A. (40%).

Principal Competitors: Endesa Group; Iberdrola; Portugal Telecom.
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Last edited by netrashetty; December 30th, 2010 at 06:25 PM..
   
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