**As filed with the Securities andExchange Commission on July 3, 2003**

 

 

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

** **

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**Form 20-F**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OF THESECURITIES EXCHANGE ACT OF 1934,**

**for thefiscal year ended December 31, 2002**

 

**CommissionFile Number: 1-14648**

 

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**EDP—Electricidade de Portugal, S.A.**

(Exact name of registrantas specified in its charter)

 

| **EDP—Electricity  of Portugal**                 |   | **Republic  of Portugal**                        |
|-------------------------------------------------------|--------|--------------------------------------------------|
| (Translation of registrant’s name into  English) |   | (Jurisdiction of incorporation or  organization) |
|                                                  |   |                                             |
| **Praça  Marquês de Pombal, 12**            |
| **1250-162  Lisbon, Portugal**                        |
| (Address of principal executive offices)              |

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act:

 

| **Title of  each class**                                                                                                                                                        |   | **Name of  each exchange on which registered**   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|
| Ordinary Shares, with nominal value € 1 per  share*  American Depositary Shares (as evidenced by American  Depositary Receipts), each representing 10 Ordinary Shares |   | New York Stock Exchange  New York Stock Exchange |

 

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*  Not for trading, but only in connection withthe registration of American Depositary Shares, pursuant to the requirements ofthe Securities and Exchange Commission.

 

Securities registered orto be registered pursuant to Section 12(g) of the Act:  **None**

 

Securities for whichthere is a reporting obligation pursuant to Section 15(d) of the Act:  **None**

 

Indicate the number of outstanding shares of each of the issuer’sclasses of capital or common stock as of the close of the last full fiscal yearcovered by this Annual Report:

 

At December 31, 2002,there were outstanding:

 

3,000,000,000 OrdinaryShares, with nominal value of € 1 per share

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days:

 

| Yes  ý |   | No  o |
|------------------|--------|------------|

 

Indicate by check markwhich financial statement item the registrant has elected to follow:

 

| Item 17 o |   | Item 18 ý |
|-----------|--------|----------------|

 

 

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**TABLE OFCONTENTS**

 
| **PART I** |                                                     | 6      |
|------------|----------------------------------------------------------|--------|
|       |                                                     |   |
| Item 1*.*  | *Identity of Directors, Senior  Management and Advisers* | 6      |
|       |                                                     |   |
| Item  2.   | *Offer Statistics and Expected  Timetable*               | 6      |
|       |                                                     |   |
| Item  3.   | *Key Information*                                        | 6      |
|       |                                                     |   |
|       | SELECTED FINANCIAL DATA                                  | 6      |
|       | EXCHANGE RATES                                           | 9      |
|       | CAPITALIZATION AND  INDEBTEDNESS                         | 10     |
|       | REASONS FOR  THE OFFER AND USE OF PROCEEDS               | 10     |
|       | RISK FACTORS                                             | 10     |
|       |                                                     |   |
| Item 4.    | *Information  on the Company*                            | 15     |
|       |                                                     |   |
|       | HISTORY AND BUSINESS  OVERVIEW                           | 15     |
|       | STRATEGY                                                 | 22     |
|       | IBERIAN ELECTRICITY MARKET                               | 25     |
|       | PORTUGAL                                                 | 26     |
|       | Electricity System Overview                              | 26     |
|       | Generation                                               | 30     |
|       | Transmission                                             | 39     |
|       | Distribution                                             | 41     |
|       | Tariffs                                                  | 45     |
|       | Competition                                              | 47     |
|       | SPAIN                                                    | 48     |
|       | History and Overview                                     | 48     |
|       | Generation                                               | 49     |
|       | Distribution and Supply                                  | 53     |
|       | Other Activities                                         | 55     |
|       | BRAZIL                                                   | 55     |
|       | Overview                                                 | 55     |
|       | Generation                                               | 57     |
|       | Distribution and  Related Activities                     | 58     |
|       | TELECOMMUNICATIONS                                       | 61     |
|       | OTHER  INVESTMENTS AND INTERNATIONAL ACTIVITIES          | 65     |
|       | SUBSIDIARIES,  AFFILIATES AND ASSOCIATED COMPANIES       | 65     |
|       | REGULATION                                               | 66     |
|       | Portugal                                                 | 66     |
|       | Spain                                                    | 72     |
|       | EU Legislation                                           | 74     |
|       | Brazil                                                   | 78     |
|       | Telecommunications                                       | 82     |
|       |                                                     |   |
| Item  5.   | *Operating and Financial Review and  Prospects*          | 85     |
|       |                                                     |   |
|       | OVERVIEW                                                 | 85     |
|       | CRITICAL ACCOUNTING  POLICIES                            | 87     |
|       | RESULTS OF OPERATIONS                                    | 90     |
|       | 2002 COMPARED WITH 2001                                  | 91     |
|       | 2001 COMPARED WITH 2000                                  | 95     |
|       | LIQUIDITY AND CAPITAL  RESOURCES                         | 99     |

 

1

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|              | PENSIONS AND BENEFITS                                        | 101    |
|-------------------|--------------------------------------------------------------|--------|
|              | INFLATION                                                    | 101    |
|              | PORTUGUESE  GAAP COMPARED WITH U.S. GAAP                     | 101    |
|              | IMPACT  OF RECENTLY ISSUED U.S. ACCOUNTING STANDARDS         | 104    |
|              |                                                         |   |
| Item  6.          | *Directors, Senior Management and  Employees*                | 105    |
|              |                                                         |   |
|              | BOARD OF DIRECTORS                                           | 105    |
|              | SENIOR MANAGEMENT                                            | 110    |
|              | COMPENSATION  OF DIRECTORS AND SENIOR MANAGEMENT             | 112    |
|              | SHARE OWNERSHIP                                              | 112    |
|              | EMPLOYEES                                                    | 113    |
|              | EMPLOYEE BENEFITS                                            | 114    |
|              |                                                         |   |
| Item  7.          | *Major Shareholders and Related  Party Transactions*         | 114    |
|              |                                                         |   |
|              | MAJOR SHAREHOLDERS                                           | 114    |
|              | RELATED PARTY TRANSACTIONS                                   | 115    |
|              | INTERESTS OF EXPERTS  AND COUNSEL                            | 115    |
|              |                                                         |   |
| Item  8.          | *Financial Information*                                      | 115    |
|              |                                                         |   |
|              | CONSOLIDATED STATEMENTS                                      | 115    |
|              | OTHER FINANCIAL INFORMATION                                  | 115    |
|              | Legal  Proceedings                                           | 115    |
|              | Dividends and Dividend  Policy                               | 116    |
|              | SIGNIFICANT CHANGES                                          | 116    |
|              |                                                         |   |
| Item  9.          | *The Offer and Listing*                                      | 116    |
|              |                                                         |   |
|              | TRADING MARKETS                                              | 116    |
|              | MARKET PRICE INFORMATION                                     | 116    |
|              | THE PORTUGUESE  SECURITIES MARKET                            | 117    |
|              | TRADING BY US IN OUR  SECURITIES                             | 120    |
|              | PLAN OF  DISTRIBUTION                                        | 121    |
|              | SELLING  SHAREHOLDERS                                        | 121    |
|              | DILUTION                                                     | 121    |
|              | EXPENSES  OF THE ISSUE                                       | 121    |
|              |                                                         |   |
| Item  10.         | *Additional Information*                                     | 121    |
|              |                                                         |   |
|              | SHARE CAPITAL                                                | 121    |
|              | ARTICLES  OF ASSOCIATION                                     | 121    |
|              | MATERIAL CONTRACTS                                           | 128    |
|              | EXCHANGE CONTROLS                                            | 128    |
|              | PORTUGUESE TAXATION                                          | 129    |
|              | UNITED STATES TAXATION                                       | 131    |
|              | DIVIDENDS AND PAYING AGENTS                                  | 132    |
|              | STATEMENT BY EXPERTS                                         | 132    |
|              | DOCUMENTS ON DISPLAY                                         | 132    |
|              | SUBSIDIARY INFORMATION                                       | 133    |
|              |                                                         |   |
| Item  11.         | *Quantitative  and Qualitative Disclosure About Market Risk* | 133    |
|              |                                                         |   |
| Item  12.         | *Description  of Securities Other Than Equity Securities*    | 134    |
|              |                                                         |   |
| GLOSSARY OF TERMS | 135                                                          |
|              |                                                         |   |
| **PART II**       |                                                         | 137    |
|              |                                                         |   |
| Item  13.         | *Defaults, Dividend Arrearages  and Delinquencies*           | 137    |

 

2

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| Item  14.    | *Material  Modifications to the Rights of Security Holders and Use of Proceeds* | 137    |
|--------------|---------------------------------------------------------------------------------|--------|
|         |                                                                            |   |
| Item 15.     | *Controls and  Procedures*                                                      | 137    |
|         |                                                                            |   |
| Item 16.     | *[Reserved]*                                                                    | 137    |
|         |                                                                            |   |
| **PART III** |                                                                            | 137    |
|         |                                                                            |   |
| Item 17.     | *Financial Statements*                                                          | 137    |
|         |                                                                            |   |
| Item 18.     | *Financial Statements*                                                          | 137    |
|         |                                                                            |   |
| Item 19.     | *Exhibits*                                                                      | 138    |

 

3

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**Defined terms**

 

In this annual report, “EDP” refers toEDP—Electricidade de Portugal, S.A. and the terms “we”, “us” and “our” refer toEDP and, as applicable, its direct and indirect subsidiaries as a group. Unlesswe specify otherwise or the context otherwise requires, references to “US$,”“$” and “U.S. dollars” are to United States dollars, references to “escudo(s)”or “PTE” are to Portuguese escudos, references to “real” or “reais” are toBrazilian reais, references to “£” or “GBP” are to British Pounds Sterling andreferences to “€” or “euro” are to the euro, the single European currencyestablished pursuant to the European Economic and Monetary Union, or EMU.  We have explained a number of terms relatedto the electricity industry in the “Glossary of Terms” included in this annualreport.

 

**Forward-looking statements**

 

This annual report and the documents incorporated byreference in this annual report contain forward-looking statements within the meaningof the United States Private Securities Litigation Reform Act of 1995 withrespect to our financial condition, results of operations, business strategies,operating efficiencies, competitive positions, growth opportunities forexisting services, plans and objectives of management, markets for stock andother matters. Statements in this annual report that are not historical factsare “forward-looking statements” for the purpose of the safe harbor provided bySection 21E of the Exchange Act and Section 27A of the Securities Act.

 

These forward-looking statements, including, amongothers, those relating to our future business prospects, revenues and income,wherever they may occur in this annual report, the documents incorporated byreference in this annual report and the exhibits to this annual report, arenecessarily estimates reflecting the best judgment of our senior management andinvolve a number of risks and uncertainties that could cause actual results todiffer materially from those suggested by the forward-looking statements. As aconsequence, you should consider these forward-looking statements in light ofvarious important factors, including those set forth in this annual report.Important factors that could cause actual results to differ materially fromestimates or projections contained in the forward-looking statements include,without limitation:

 

•                  the effect of,and changes in, regulation and government policy;

 

•                  the effects ofcompetition, including competition that may arise in connection with thedevelopment of an Iberian electricity market;

 

•                  our ability toreduce costs;

 

•                  hydrologicalconditions and the variability of fuel costs;

 

•                  anticipatedtrends in our business, including trends in demand for electricity;

 

•                  our success indeveloping our telecommunications business;

 

•                  future capitalexpenditures and investments;

 

•                  the timelydevelopment and acceptance of our new services;

 

•                  the effect oftechnological changes in electricity, telecommunications and informationtechnology; and

 

•                  our success atmanaging the risks of the foregoing.

 

We undertake no obligation to update publicly orrelease any revisions to these forward-looking statements to reflect events orcircumstances after the date of this annual report or to reflect the occurrenceof unanticipated events.

 

4

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**Presentation of financial information**

 

Unless we indicate otherwise, we have prepared thefinancial information contained in this annual report in accordance with generallyaccepted accounting principles in Portugal, or Portuguese GAAP, which differsin significant respects from generally accepted accounting principles in theUnited States, or U.S. GAAP. We describe these differences in “Item 5.  Operating and Financial Review andProspects—Portuguese GAAP Compared with U.S. GAAP” and in note 33 to ourconsolidated financial statements. Unless we indicate otherwise, any reference in this annual report to ourconsolidated financial statements is to the consolidated financial statements,including the related notes, included in this annual report.

 

Beginning in 2002 (for fiscal year 2001 andthereafter), we published our consolidated financial statements in euros.  Unless we indicate otherwise, we havetranslated amounts stated in U.S. dollars from euros at an assumed rate solelyfor convenience.  By including thesecurrency translations in this annual report, we are not representing that theeuro amounts actually represent the U.S. dollar amounts shown or could beconverted into U.S. dollars at the rate indicated.  Unless we indicate otherwise, we have translated the U.S. dollaramounts from euros at the noon buying rate in The City of New York for cabletransfers in foreign currencies as announced by the Federal Reserve Bank of NewYork for customs purposes (the “Noon Buying Rate”) on June 20, 2003 of $1.1616per € 1.00.  That rate may differ fromthe actual rates used in the preparation of our consolidated financialstatements included in Item 18 and U.S. dollar amounts used in this annualreport may differ from the actual U.S. dollar amounts that were translated intoeuros in the preparation of our consolidated financial statements.  For information regarding recent rates ofexchange between euros and U.S. dollars, see “Item 3.  Key Information—Exchange Rates.” In addition, for convenience only and except where we specify otherwise,we have translated certain reais figures into euro at the fixed rate ofexchange between the real and euro of 3.3489 reais = €1.00.   The rate of exchange between reais andeuros represents the euro equivalent of the U.S. dollar/real fixed rate ofexchange, calculated by translating reais into U.S. dollars using the NoonBuying Rate on June 20, 2003 of 2.8830 reais = $ 1.00 and then translatingU.S. dollars into euros using the rate of exchange between U.S. dollarsand euros of $1.1616 = €1.00, which was the applicable Noon Buying Rate on June20, 2003.  By including conveniencecurrency translations in this annual report, we are not representing that thereais amounts actually represent the euro amounts shown or could be convertedinto euros at the rates indicated.

 

Prior to January 1, 2001, our reporting currency wasPortuguese escudos.  For convenience andto facilitate a comparison, our consolidated financial statements included inItem 18 and all other escudo-denominated financial data for periods prior toJanuary 1, 2001 included in this annual report have been restated from escudosto euros at the fixed rate of exchange as of January 1, 1999 of PTE 200.482 =€1.00.  Where escudo-denominated amountsfor periods prior to January 1, 2001 have been rounded, the restated euroamounts have been calculated by converting the rounded escudo-denominatedamounts into euros.  The comparativebalances for prior years now reported in euros depict the same trends as wouldhave been presented had we continued to report such amounts in Portugueseescudos.  Our consolidated financialstatements and other financial data for periods prior to January 1, 1999 maynot be comparable to that of other companies reporting in euros if thosecompanies had restated from a reporting currency other than Portuguese escudos.

 

5

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**PART I**

 

**Item 1****.    *Identity ofDirectors, Senior Management and Advisers***

 

Not applicable.

 

**Item 2****.    *OfferStatistics and Expected Timetable***

 

Not applicable.

 

**Item 3****.    *KeyInformation***

 

**SELECTED FINANCIAL DATA**

 

*Youshould read the following in conjunction with “Item 5. Operating and FinancialReview and Prospects” and our consolidated financial statements and otherfinancial data, including the related notes, found elsewhere in this annualreport.*

 

The summary financial data below has been extractedfrom our audited consolidated financial statements for each of the five yearsended December 31, 2002 and as of December 31, 1998, 1999, 2000, 2001 and 2002and the related notes, which appear elsewhere in this annual report. Theaudited consolidated financial statements have been prepared in accordance withPortuguese GAAP, which differ in certain significant respects from U.S. GAAP.See “Item 5. Operating and Financial Review and Prospects—Portuguese GAAPcompared with U.S. GAAP,” note 33 to our consolidated financial statementsfor a discussion of the principal differences between Portuguese GAAP and U.S.GAAP with respect to our audited consolidated financial statements.

 

In 1999, we selected a new firm of independent publicaccountants to audit our consolidated financial statements based on asolicitation of bids to a number of firms, including our previous firm ofindependent public accountants. Our fiscal year 1999 consolidated financialstatements were audited by PricewaterhouseCoopers, Lda.  Fiscal years prior to 1999 were audited byErnst & Young.

 

6

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|                                                       |   | **Year  ended December  31,**                             |       |
|------------------------------------------------------------|--------|----------------------------------------------------------------|------------|
|                                                       |   | **1998**                                                       |       | **1999** |   | **2000** |   | **2001** |   | **2002** |   | **2002** |   |
|                                                       |   | **Euro**                                                       |       | **Euro** |   | **Euro** |   | **Euro** |   | **Euro(1)** |   | **US$(1)** |   |
|                                                       |   | **(in  millions, except per ordinary share and per ADS data)** |       |
| **Statement of income:**                                   |   |                                                           | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Amounts in accordance with  Portuguese GAAP**            |   |                                                           | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Electricity  sales                                         |   | 2,951                                                          |       | 2,966 |   | 3,676 |   | 5,201 |   | 5,876 |   | 6,826 |   |
| Other sales(2)                                             |   | 19                                                             |       | 38 |   | 61 |   | 98 |   | 112 |   | 130 |   |
| Services(3)                                                |   | 40                                                             |       | 68 |   | 110 |   | 351 |   | 398 |   | 463 |   |
| Total revenues                                             |   | 3,010                                                          |       | 3,072 |   | 3,846 |   | 5,650 |   | 6,387 |   | 7,419 |   |
| Raw materials  and consumables                             |   | 714                                                            |       | 901 |   | 1,731 |   | 3,080 |   | 3,687 |   | 4,283 |   |
| Personnel costs                                            |   | 430                                                            |       | 463 |   | 439 |   | 592 |   | 625 |   | 726 |   |
| Depreciation and  amortization                             |   | 611                                                            |       | 616 |   | 614 |   | 665 |   | 740 |   | 859 |   |
| Other external  supplies and services                      |   | 227                                                            |       | 287 |   | 369 |   | 651 |   | 675 |   | 784 |   |
| Own work  capitalized(4)                                   |   | (194                                                           | )          | (214 | ) | (229 | ) | (233 | ) | (242 | ) | (281 | ) |
| Concession and  power-generation rental costs(5)           |   | 123                                                            |       | 129 |   | 133 |   | 149 |   | 158 |   | 184 |   |
| Hydrological  correction(6)                                |   | 0                                                              |       | (60 | ) | (35 | ) | 0 |   | 0 |   | 0 |   |
| Other operating  expenses, net                             |   | 38                                                             |       | 43 |   | 102 |   | 73 |   | 95 |   | 110 |   |
| Total operating  costs and expenses                        |   | 1,949                                                          |       | 2,166 |   | 3,122 |   | 4,977 |   | 5,738 |   | 6,665 |   |
| Operating income                                           |   | 1,061                                                          |       | 906 |   | 724 |   | 674 |   | 649 |   | 754 |   |
| Net interest  expense(7)                                   |   | 204                                                            |       | 140 |   | 175 |   | 205 |   | 223 |   | 259 |   |
| Other  non-operating expenses (income), net                |   | (57                                                            | )          | (56 | ) | (289 | ) | (126 | ) | 139 |   | 161 |   |
| Income before  income taxes                                |   | 914                                                            |       | 822 |   | 838 |   | 594 |   | 287 |   | 333 |   |
| Provision for  income taxes                                |   | (395                                                           | )          | (308 | ) | (313 | ) | (203 | ) | (172 | ) | (199 | ) |
| Minority  interest                                         |   | 3                                                              |       | 0 |   | 23 |   | 60 |   | 220 |   | 256 |   |
| Net income                                                 |   | 523                                                            |       | 514 |   | 549 |   | 451 |   | 335 |   | 389 |   |
| Net income from  operations per ordinary share(8)          |   | 0.35                                                           |       | 0.30 |   | 0.24 |   | 0.22 |   | 0.22 |   | 0.25 |   |
| Net income from  operations per ADS                        |   | 3.54                                                           |       | 3.02 |   | 2.41 |   | 2.25 |   | 2.16 |   | 2.51 |   |
| Basic and  diluted net income per ordinary share(8)        |   | 0.17                                                           |       | 0.17 |   | 0.18 |   | 0.15 |   | 0.11 |   | 0.13 |   |
| Basic and  diluted net income per ADS(8)                   |   | 1.75                                                           |       | 1.72 |   | 1.83 |   | 1.50 |   | 1.12 |   | 1.30 |   |
| Dividends per  ordinary share(9)(11)                       |   | 0.13                                                           |       | 0.14 |   | 0.14 |   | 0.11 |   | 0.09 |   | 0.11 |   |
| Dividends per  ADS(9)(11)                                  |   | 1.30                                                           |       | 1.40 |   | 1.40 |   | 1.13 |   | 0.90 |   | 1.05 |   |
|                                                       |   |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Amounts in accordance with****U.S.  GAAP (12)**          |   |                                                           | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Net income                                                 |   | 704                                                            |       | 644 |   | 405 |   | 519 |   | 300 |   | 348 |   |
| Basic and  diluted net income per ordinary   share(9) |   | 0.23                                                           |       | 0.21 |   | 0.14 |   | 0.17 |   | 0.10 |   | 0.12 |   |
| Basic and  diluted net income per ADS(9)                   |   | 2.34                                                           |       | 2.14 |   | 1.35 |   | 1.74 |   | 1.00 |   | 1.16 |   |
|                                                       |   |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Cash flow data:**                                        |   |                                                           | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Amounts in accordance with  Portuguese****GAAP**         |   |                                                           | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Net cash from  operating activities                        |   | 1,358                                                          |       | 985 |   | 1,122 |   | 1,221 |   | 898 |   | 1,043 |   |
| Net cash used in  investing activities                     |   | 1,110                                                          |       | 1,294 |   | 914 |   | 1,243 |   | 1,141 |   | 1,326 |   |
| Net cash used in  (from) financing activities              |   | 279                                                            |       | (385 | ) | 482 |   | 96 |   | 297 |   | 345 |   |

 

7

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|                                                          |   | **Year  ended December  31,**                             |       |
|---------------------------------------------------------------|--------|----------------------------------------------------------------|------------|
|                                                          |   | **1998**                                                       |       | **1999** |   | **2000** |   | **2001** |   | **2002** |   | **2002** |   |
|                                                          |   | **Euro**                                                       |       | **Euro** |   | **Euro** |   | **Euro(1)** |   | **Euro(1)** |   | **US$(1)** |   |
|                                                          |   | **(in  millions, except per ordinary share and per ADS data)** |       |
|                                                          |   |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Balance sheet data (at period end):**                       |   |                                                           | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Amounts in accordance with  Portuguese****GAAP**            |   |                                                           | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Cash and cash  equivalents                                    |   | 1                                                              |       | 16 |   | 58 |   | 34 |   | 214 |   | 249 |   |
| Other current  assets                                         |   | 580                                                            |       | 707 |   | 1,162 |   | 1,496 |   | 1,863 |   | 2,165 |   |
| Total current  assets                                         |   | 581                                                            |       | 723 |   | 1,220 |   | 1,530 |   | 2,077 |   | 2,413 |   |
| Fixed assets,  net(10)                                        |   | 10,550                                                         |       | 10,477 |   | 9,540 |   | 9,844 |   | 11,204 |   | 13,015 |   |
| Other assets                                                  |   | 1,265                                                          |       | 2,510 |   | 4,128 |   | 4,901 |   | 4,844 |   | 5,626 |   |
| Total assets                                                  |   | 12,396                                                         |       | 13,710 |   | 14,887 |   | 16,233 |   | 18,125 |   | 21,054 |   |
| Short-term debt  and current portion of long - term debt |   | 737                                                            |       | 598 |   | 1,807 |   | 1,744 |   | 1,887 |   | 2,192 |   |
| Other current  liabilities                                    |   | 501                                                            |       | 621 |   | 890 |   | 1,286 |   | 1,631 |   | 1,895 |   |
| Total current  liabilities                                    |   | 1,238                                                          |       | 1,219 |   | 2,697 |   | 3,030 |   | 3,518 |   | 4,087 |   |
| Long-term debt,  less current portion                         |   | 2,734                                                          |       | 3,770 |   | 3,205 |   | 4,055 |   | 6,107 |   | 7,094 |   |
| Hydro account                                                 |   | 388                                                            |       | 339 |   | 366 |   | 388 |   | 324 |   | 376 |   |
| Other long-term  liabilities                                  |   | 1,908                                                          |       | 2,319 |   | 2,377 |   | 2,423 |   | 2,616 |   | 3,039 |   |
| Total  liabilities                                            |   | 6,267                                                          |       | 7,648 |   | 8,645 |   | 9,896 |   | 12,566 |   | 14,596 |   |
| Minority  interest                                            |   | 1                                                              |       | 2 |   | 37 |   | 241 |   | 65 |   | 76 |   |
| Shareholders’  equity                                    |   | 6,127                                                          |       | 6,060 |   | 6,205 |   | 6,097 |   | 5,494 |   | 6,382 |   |
| **Amounts in accordance with****U.S.  GAAP (12)**             |   |                                                           | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Fixed assets,  net(10)                                        |   | 8,594                                                          |       | 8,750 |   | 5,316 |   | 5,929 |   | 6,602 |   | 7,668 |   |
| Total assets                                                  |   | 11,464                                                         |       | 12,940 |   | 14,010 |   | 15,455 |   | 16,922 |   | 19,657 |   |
| Total current  liabilities                                    |   | 1,257                                                          |       | 1,238 |   | 2,714 |   | 3,052 |   | 2,551 |   | 2,963 |   |
| Total long-term  liabilities                                  |   | 6,046                                                          |       | 7,415 |   | 6,776 |   | 7,721 |   | 10,420 |   | 12,104 |   |
| Total  liabilities                                            |   | 7,303                                                          |       | 8,653 |   | 9,489 |   | 10,773 |   | 12,970 |   | 15,066 |   |
| Shareholders’  equity                                    |   | 4,161                                                          |       | 4,287 |   | 4,483 |   | 4,441 |   | 3,886 |   | 4,511 |   |

 

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*(1)**          For1998, 1999 and 2000, escudos are translated into euro at the fixed rate ofexchange established at the commencement of the third stage of EuropeanMonetary Union on January 1, 1999 by the European Council of Ministers betweenthe euro and escudo of PTE 200.482 = € 1.00.  For 2002, euros are translated into U.S.dollars at the rate of exchange of $1.1616**= € 1.00, which was the U.S. Federal ReserveBank of New York noon buying rate on June 20, 2003.*

 

*(2)**          Consistsof sales of steam, ash, information technology products and sundry materials.*

 

*(3)**          Consistsof electricity-related services, services to information technology systems,telecommunications, engineering, laboratory services, training, medicalassistance, consulting, multi-utility services and other services.*

 

*(4)**          Ourconsolidated income statements present expenses in accordance with their naturerather than their function. Therefore, costs incurred by us forself-constructed assets are capitalized as part of fixed assets and included asa reduction of total expenses under “Own work capitalized” when the relatedcosts have been included in the relevant expense items.*

 

*(5)**          Substantiallyall of these amounts relate to rent expenses paid to municipalities for theright to distribute electricity in the relevant municipal areas.*

 

*(6)**          Asrequired by government regulation, we record charges and credits to operatingincome, depending on hydrological conditions in a given year, to smooth theeffect on our earnings and customer prices that result from changes inhydrological conditions. The difference between the economic costs ofgenerating electric energy and the economic reference costs based on an averagehydrological year are included in this item. The imputed interest on theaccumulated balance of the hydro account and other adjustments are included in“Other non-operating expenses (income).”*

 

*(7)**          Includesinterest and related expenses and interest and related income. See “Item5.  Operating and Financial Reviewand Prospects—2002 compared with 2001—Other expenses (income).”*

 

*(8)   Basicand diluted earnings per ordinary share are based on our historical averagenumber of ordinary shares outstanding after giving effect to a 5 for 1 stocksplit and our average number of ordinary shares outstanding after giving effectto the 5 for 1 stock split plus the effect of the exercise of employee stockoptions, respectively. Basic and diluted earnings per ADS are based upon basicand diluted earnings per ordinary share multiplied by 10 as each ADS isequivalent to 10 ordinary shares on a post-split basis.*

 

*(9)**          Basedon****3,000,000,000****ordinary shares issued and outstanding.*

 

*(10)**   Substantiallyall of these assets are subject to reversion to the Republic or themunicipalities. See “Item 4. Information on the Company—Regulation—Reversionaryassets.”*

 

*(11)**   Dividendsper ordinary share in US$, translated at the prevailing rate of exchange at thedate of payment between the dollar and the escudo for 1998, amount to US$ 0.14in 1998, US$ 0.13 in 1999, US$ 0.12 in 2000, US$ 0.10 in 2001 and US$ 0.11*in2002*anddividends per ordinary share in euro, translated at the fixed rate of exchangebetween the euro and the escudo for 1998, amount to € 0.11 in 1998,€ 0.14 in 1999,  € 0.14 in2000, € 0.11 in 2001 and € 0.09 in 2002.*

* *

*(12) U.S.GAAP amounts for 1998, 1999, 2000, 2001, and 2002 are not comparable due to theimplementation of SFAS 142.*

 

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**EXCHANGE RATES**

 

Effective January 1, 1999, Portugal and 11 othermember countries of the European Union, or EU, adopted the euro as their commoncurrency.  The euro was traded oncurrency exchanges and was available for non-cash transactions during thetransition period between January 1, 1999 and December 31, 2001.  During this transition period, the nationalcurrencies remained legal tender in the participating countries asdenominations of the euro, and public and private parties paid for goods andservices using either the euro or the participating countries’ existingcurrencies.  On January 1, 2002, theeuro entered into cash circulation. Between January 1, 2002 and February 28, 2002 both the euro and theescudo were in circulation in Portugal. From March 1, 2002, the euro became the sole circulating currency inPortugal.  As of January 1, 2002, weceased to use the escudo.

 

The vast majority of our revenues, assets, expensesand liabilities have historically been denominated in escudos, and we preparedand published our consolidated financial statements in escudos through the 2000fiscal year.  Beginning in 2002 (forfiscal year 2001 and thereafter), our consolidated financial statements havebeen published in euros.  A portion ofour revenues and expenses and certain liabilities are nonetheless denominatedin non-euro currencies outside the euro zone and fluctuations in the exchangerates of those currencies in relation to the euro will therefore affect ourresults of operations. To learn more about the effect of exchange rates on ourresults of operations, you should read “Item 5.  Operating and Financial Review and Prospects”. Exchange ratefluctuations will also affect the U.S. dollar price of the ADSs and the U.S.dollar equivalent of the euro price of our ordinary shares, the principalmarket of which is the Euronext Lisbon Stock Exchange.  In addition, any cash dividends are paid byus in euro, and, as a result, exchange rate fluctuations will affect the U.S.dollar amounts received by holders of ADSs on conversion of those dividends bythe depositary.

 

The following table shows, for the periods and datesindicated, information concerning the exchange rate between the U.S. dollar andthe euro. These rates are provided solely for your convenience. We do notrepresent that the escudo could have been, or that the euro could be, convertedinto U.S. dollars at these rates or at any other rate.

 

The column of averages in the table below shows theaverages of the relevant exchange rates on the last business day of each monthduring the relevant period. The high and low columns show the highest andlowest exchange rates, respectively, on any business day during the relevantperiod.

** **
| **U.S. dollar per euro(1)  Year ended December 31,** |   | **End of  Period** |   | **Average** |   |
|------------------------------------------------------|--------|--------------------|--------|-------------|--------|
| 1998                                                 |   | 1.17               |   | 1.11        |   |
| 1999                                                 |   | 1.01               |   | 1.06        |   |
| 2000                                                 |   | 0.94               |   | 0.92        |   |
| 2001                                                 |   | 0.89               |   | 0.89        |   |
| 2002                                                 |   | 1.05               |   | 0.95        |   |

 
| **U.S. dollar per euro(1)  Period** |   | **High** |   | **Low** | ** ** |
|-------------------------------------|--------|----------|--------|---------|------------|
| 2002                                |   | 1.05     |   | 0.86    |       |
| December                            |   | 1.05     |   | 0.99    |       |
| 2003                                |   |     |   |    |       |
| January                             |   | 1.09     |   | 1.04    |       |
| February                            |   | 1.09     |   | 1.07    |       |
| March                               |   | 1.11     |   | 1.05    |       |
| April                               |   | 1.12     |   | 1.06    |       |
| May                                 |   | 1.19     |   | 1.12    |       |

 

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*(1)**          Amountsfor 1998 are based on noon buying rates for the escudo, converted into euros atthe fixed escudo/euro conversion rate of PTE 200.482 = € 1.00 andthen based on the U.S. Federal Reserve Bank of New York noon buying rate onJanuary 4, 1999 of € 1.00 = $1.18. For 1999, 2000, 2001 and 2002, euros are based on the U.S. FederalReserve Bank of New York noon buying rate.*

 

Our ordinary shares are quoted in euro on the EuronextLisbon Stock Exchange. Our ADSs are quoted in U.S. dollars and traded onthe New York Stock Exchange. On June 20, 2003, the exchange rate between theeuro and the U.S. dollar was $1.1616 = € 1.00.

 

9

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**CAPITALIZATIONAND INDEBTEDNESS**

 

Not applicable.

 

**REASONS FOR THE OFFER AND USE OF PROCEEDS**

 

Not applicable.

 

**RISKFACTORS**

 

*In addition to the other information included andincorporated by reference in this annual report, you should carefully considerthe following factors. There may be additional risks that we do not currentlyknow of or that we currently deem immaterial based on information currentlyavailable to us. Our business, financial condition or results of operationscould be materially adversely affected by any of these risks, resulting in adecline in the trading price of our ordinary shares or ADSs.*

 

**RISKS RELATED TO OUR CORE ELECTRICITY BUSINESS**

 

**The competition we face in the generation and supply ofelectricity is increasing, affecting our electricity sales and operatingmargins.**

 

The increase in competition from the Portugueseimplementation of EU directives intended to create a competitive electricitymarket may materially and adversely affect our results of operations andfinancial condition.

 

While we currently face limited competition fromindependent power producers in generation, we expect that this competition willincrease as the industry further liberalizes. Portuguese law requires thatcontracts for the construction of future power plants in Portugal in theBinding Sector be awarded through competitive tender processes, in which weexpect to participate. In a competitive tender process, we may loseopportunities to generate electricity in the Binding Sector in Portugal.

 

In the context of liberalization of the electricitymarket within the EU, at the end of 2001 the Portuguese and Spanish governmentsentered into a cooperation protocol which sets forth the main principles forthe creation of an Iberian electricity market — free competition,transparency, objectiveness and efficiency. The stated intent of the cooperation protocol is to guarantee forPortuguese and Spanish consumers access to electricity distribution and to createinterconnections with third countries on equal conditions applicable toPortugal and Spain.  In addition, it isintended that the production of electricity by producers in Portugal and Spainbe subject to similar regulatory environments that allow producers in onecountry to execute bilateral agreements for electricity distribution toconsumers in the other country.  Thecooperation protocol also calls for the creation of an Iberian commonelectricity pool.  Although there havebeen advances as a result of the October 2002 Valência summit, there iscurrently no specific organizational model for an Iberian electricitymarket.  Accordingly, we cannotanticipate the specific organizational model that will be adopted nor can weanticipate the risks and advantages that may arise from such a model.  When further defined and implemented, theorganizational model and resulting competition may materially and adverselyaffect our results of operations and financial condition.

 

The Portuguese regulatory structure now allows forcompetition in the supply of electricity, which could adversely affect oursales of electricity. In particular, as more electricity consumers qualify toparticipate in the market-based Non-Binding Sector in Portugal, moreelectricity will be sold in the competitive markets where prices may be lowerthan existing tariffs. Prior to 2002, consumers of electricity were eligible toparticipate in the Non-Binding Sector as Qualifying Consumers based on minimumannual consumption thresholds set by regulation, which declined annually overthe 1999-2001 period. Pursuant to EU directives, the threshold was 20 GWh for2000 and 9 GWh for 2001.  Since January1, 2002, all electricity consumers other than low voltage consumers, which aregenerally residential and small commercial users, have been treated asQualifying Consumers automatically upon notification to the Portugueseregulatory authority.  As of March 2003,there were approximately 21,000 consumers eligible to be Qualifying Consumers,which represented approximately 44.5% of our 2002 sales in volume and 28.6% ofour 2002 sales in monetary terms.

 

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**Our core electricity operating results are affected by lawsand regulations, including regulations regarding the prices we may charge forelectricity.**

 

As an electricity public service, we operate in ahighly regulated environment. An independent regulator appointed by thePortuguese government, the *Entidade Reguladora dos Serviços Energéticos,*referred to as ERSE or the regulator, regulates the electricity industrythrough, among other things, a tariff code that defines the prices we maycharge for electricity services in the Binding Sector. In attempting to achievean appropriate balance between, on the one hand, the interests of electricitycustomers in affordable electricity and, on the other hand, our need and theneeds of other participants in the electricity sector to generate adequateprofit, the regulator may take actions that adversely impact our profitability.

 

In real terms, adjusted for inflation, both high andmedium voltage tariffs, generally applied to industrial customers, havedeclined by an average of approximately 6.0% per year over the period 1998 to2003. The tariffs for low voltage customers have also declined in real terms byan average of approximately 3.3% per year over the same period.  In 2002, in nominal terms, tariffs for allvoltage levels increased, on average, by 2.2% from the 2001 levels.  At the end of 2002, the regulator establishednew tariffs for 2003.  Although thenominal final tariff charged to consumers increased, on average, across allvoltage levels in 2003 by 2.8% from the 2002 levels, the component of the finaltariff charged by EDP Distribuicão, or EDPD, our distribution company,decreased for the second regulatory period, covering the years 2002-2004, fromthe tariff charged in the first regulatory period, covering the years1999-2001.  During the first regulatoryperiod, the annual decrease in the tariff charged by EDPD was calculated on thebasis of the Portuguese consumer price index, or CPI, less approximately5%.  During the second regulatoryperiod, the figure subtracted from CPI, referred to as the “efficiency factor,”increased to approximately 7%.  The nettariffs to be charged by EDPD in 2003 are lower than in 2002, which couldadversely affect our profitability in 2003.

 

In addition, the Portuguese government has implementedselected measures to encourage the development of various forms of electricityproduction, including autoproduction (entities generating electricity for theirown use that may sell surplus electricity to the national transmission grid),cogeneration, small hydroelectric production (under 10 MVA installed capacity)and production using renewable sources. These alternative producers competewith us in the supply of electricity in the Binding Sector.

 

**ThePortuguese government’s recently announced intention to renegotiate orterminate the PPAs could eventually adversely affect our revenues.**

 

According to the Resolution of the Council ofMinisters no. 63/2003 of April 28, relating to the promotion of liberalizationof the electricity and gas markets in furtherance of the organizationalstructure of the Iberian Electricity Market, the Portuguese government intendsto renegotiate the existing power purchase agreements, or PPAs.  Although the Portuguese government expresslydeclared that it intends to adequately compensate operators for the loss of theeconomic benefit of the PPAs, the amount of compensation has not yet beendefined and our generation revenues could otherwise be adversely affected ifour generation companies do not sufficiently replace electricity purchasespreviously made by Rede Eléctrica Nactional, S.A. or REN.

 

**If our concessions from the Portuguese government andmunicipalities were terminated, we could lose control over our fixed assets.**

 

Most of our revenues currently come from thegeneration and distribution of electricity. We conduct these activitiespursuant to concessions and licenses granted by the Portuguese government andvarious municipalities. These concessions and licenses are granted for fixedperiods ranging in most cases from 20 to 75 years, but are subject to earlytermination under specified circumstances. The expiration or termination ofconcessions or licenses would have an adverse effect on our operating revenues.Upon expiration of licenses or termination of concessions, the fixed assetsassociated with licenses or concessions will in general revert to the Portuguesegovernment or a municipality, as appropriate. Although specified amounts would be paid to us with respect to theseassets, the loss of these assets may adversely affect our operations.

 

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**Our cash flow is affected by variablehydrological conditions.**

 

Hydroelectric plants, which are powered by water,account for approximately 55% of our generation capacity in mainlandPortugal.  Our hydroelectric generationin Portugal is dependent on the amount and location of rainfall and river flowsfrom Spain, all of which vary widely from year to year. Consequently, there isa high degree of variation in levels of hydroelectric production.

 

In years of less favorable hydrological conditions, wegenerate less hydroelectricity and must rely more heavily on thermal productionto meet demand for electricity. Thermal generation, which is fired by coal,fuel oil, natural gas or a combination of fuels, is more expensive in terms ofvariable costs than hydroelectric generation. Our total variable productioncosts and costs of purchased electricity in a very dry year can vary from thosein a very wet year by approximately € 200 million. These increased costsin a dry year could have an adverse impact on our operational cash flow.

 

**Our electricity business is subject to numerous environmentalregulations that could affect our results of operations and financialcondition.**

 

                Our electricitybusiness is subject to extensive environmental regulations. These includeregulations under Portuguese law, laws adopted to implement EU regulations anddirectives and international agreements on the environment. Environmentalregulations affecting our business primarily relate to air emissions, waterpollution, waste disposal and electromagnetic fields. The principal wasteproducts of fossil-fueled electricity generation are sulfur dioxide, or SO2,nitrogen oxides, or NOX, carbon dioxide, or CO2, and particulate matters suchas dust and ash. A primary focus of environmental regulation applicable to ourbusiness is to reduce these emissions.

 

                We incursignificant costs to comply with environmental regulations requiring us toimplement preventive or remediation measures. Environmental regulatory measures may take such forms as emission limits,taxes or required remediation measures, and may influence our policies in waysthat affect our business decisions and strategy, such as by discouraging ouruse of certain fuels.

 

                We have madecapital expenditures to minimize the impact of our operations on theenvironment, including measures to comply with applicable law. Majorexpenditures so far include capital expenditures to limit SO2 and NOX emissionsin generation and to install underground cables in our distribution network.  In October 2002 we initiated the use of fuelwith a 1% sulphur content in order to comply with environmental regulationsrequiring us to reduce the level of sulfur in the fuel oil we consume, and as aresult we have incurred higher fuel costs.

 

**RISKS RELATED TO OUR OTHER BUSINESSES**

 

**Our involvement in Brazil and inother international activities subjects us to particular risks that couldaffect our profitability.**

 

Althoughwe have not recently made new investments in our Brazilian electricitybusiness, we have significant investments in electricity-related projects inBrazil and other international investments. Our investments in Brazil and inother countries present a different or greater risk profile than that of ourelectricity business in Portugal and Spain. Given the size of our operations in Brazil relative to that of our otherinternational investments, these risks are particularly relevant to ourBrazilian operations where, for example, we have experienced adverse currencyfluctuations and an uncertain regulatory regime.  Risks associated with our investments in Brazil and otherinternational investments include, but are not limited to:

 

•                  increased economic volatility;

 

•                  exchange rate fluctuations and exchangecontrols;

 

•                  stronger inflationary pressures;

 

•                  greater government involvement in thedomestic economy;

 

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•                  less political stability;

 

•                  higher potential for civil unrest; and

 

•                  unanticipated changes in regulatory or legalregimes.

 

There can be no assurance thatwe will successfully manage our operations in Brazil and other internationaloperations.

 

**Regulatory, hydrological andinfrastructure conditions in Brazil may adversely affect our Brazilianoperations.**

 

We hold interests in Brazilian distribution companiesand have invested in Brazilian generation projects.  In 2002, our distribution activities in Brazil were adverselyaffected by regulatory, hydrological and infrastructure conditions in Brazil.  Our generation projects in Brazil were alsoadversely affected by these conditions. These conditions could have a similar adverse effect on our Braziliangeneration and distribution operations in the future.

 

Delays by the Brazilian energy regulatory authoritiesin developing a regulatory structure that encourages new generation have ledto, and will continue to contribute to, shortages of electricity to meet demandin some regions of Brazil. Additionally, drought conditions in Brazil have limited and will in thefuture limit the supply of electricity available for our distribution companiesin Brazil.  A lack of capacity in theelectricity transmission system has limited and continues to limit the abilityof generation plants operating in geographical areas with abundant rainfall totransmit generated electricity to distribution companies operating in areasexperiencing drought conditions.  Salesby these distribution businesses are and will continue to be affected by theseconditions that limit the supply of electricity available for distribution.

 

As a result of a shortage of electricity and lack oftransmission capacity, the Brazilian federal government implemented anelectricity rationing plan in June 2001. Although the rationing program ended on February 28, 2002, itsimplementation had an adverse effect not only on electricity consumption, whichdecreased significantly during the period the program was in effect, but onconsumption habits in affected areas. As a result, we anticipate that a recovery in consumption topre-rationing levels may take some time. The lower demand from consumers has affected and will continue to affectdemand for electricity from our distribution businesses in Brazil.  While the period up to and during therationing period was characterized by electricity shortages, the post-rationingperiod was characterized by surplus electricity as a result of decreasedconsumption combined with abundant rainfall after a long drought.  Consequently, in 2002 our Brazilianoperations could only dispose of surplus electricity at depressed prices.

 

The regulatory delays and lack of transmissioncapacity are also affecting our investment in generation projects inBrazil.  These delays pose problems forthe development of generation facilities, and the lack of transmission capacitywill affect the ability of our generation businesses, once established, totransmit their generated electricity to distribution companies in Brazil.

 

**We face new risks and uncertaintiesrelated to our new non-electricity businesses.**

 

We have limited experience operating a large-scaletelecommunications business and limited experience in gas. In entering andoperating these business areas we face managerial, commercial, technologicaland other risks, as well as regulatory regimes, including fees and licensingrequirements and operating restrictions, that are different from the ones wehave faced in the past.  If we fail tomanage these risks and operate these businesses effectively, our ability todevelop successfully and achieve profitability in these business areas would beaffected.

 

**We face increasing competition fromvarious types of providers in our telecommunications business.**

 

The telecommunications sector is highly competitivewithin Portugal and across the EU, and we expect competition to remain vigorousand increase in the future.

 

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In the fixed line telephone area, we compete formarket share primarily with Portugal Telecom, or PT, which historically held amonopoly on fixed line services in Portugal and continues to hold a dominantposition in this market. We also face competition from other fixed lineoperators in Portugal.

 

Our fixed line telephone business also faces strongindirect competition from cellular telephone service providers, particularlythose in the voice segment. Mobile subscriptions have already overtaken thenumber of fixed line connections in Portugal and we expect this growth tocontinue.

 

We also face significant competition from numerousexisting operators in the Internet and data services areas, both of which wehave targeted, and we expect that new competitors will emerge as these marketscontinue to evolve.

 

**OTHER RISKS**

 

**The value of our ordinary shares or ADSs may be adverselyaffected by future sales of substantial amounts of ordinary shares by thePortuguese government or the perception that such sales could occur.**

 

The Portuguese government may sell all or a portion ofits shareholding in us at any time through formal privatization stages, eitherthrough a public offering or by direct sales of our shares to thirdparties.  Sales of substantial amountsof our ordinary shares by the Portuguese government, or the perception thatsuch sales could occur, could adversely affect the market price of our ordinaryshares and ADSs and could adversely affect our ability to raise capital throughsubsequent offerings of equity.

 

**Restrictions on the exercise of voting rights and onshareholdings, as well as special rights granted to the Portuguese government,may impede an unauthorized change in control and may limit our shareholders’ability to influence company policy.**

 

Under our Articles of Association, no holder ofordinary shares, except the Republic of Portugal and equivalent entities, mayexercise voting rights that represent more than 5% of our voting share capital.In addition, specific notification requirements are triggered under ourArticles of Association when shareholders purchase 5% of our ordinary sharesand under the Portuguese Securities Code, or Cod.VM, when purchases or sales ofour ordinary shares cause shareholders to own or cease to own specifiedpercentages of our voting rights.  UnderPortuguese law currently in force, no person may acquire more than 10% of ourordinary shares without prior approval of the Portuguese Ministry of Finance.  ** **Such law may be amended or revokedin response to a June 4, 2002 judgment of the Court of Justice of the EuropeanCommunity.  For more information on thislaw, please see “Item 10.  AdditionalInformation—Articles of Association—Limitations on the purchase and transfer ofordinary shares; special rights of the Portuguese government.”  These limitations may impede an unauthorizedchange in control of EDP, and a failure to comply with these limitations couldresult in restrictions on the ability to exercise voting rights attaching toordinary shares or the denial of registration of record ownership for ordinaryshares.  Holders of ADSs will be treatedas holders of ordinary shares for purposes of the foregoing limitations.

 

In connection with the offering by the Portuguesegovernment of our ordinary shares in October 2000, and pursuant to Article 13of Decree Law 14/2000 of July 15, 2000, known as the Privatization Decree Law,special rights were granted to the Portuguese government. The government will havethese rights so long as it is an EDP shareholder. These rights provide that,without the favorable vote of the government, no resolution can be adopted atour general meeting of shareholders relating to:

 

•                  amendments toour by-laws, including share capital increases, mergers, spin-offs orwinding-up;

 

•                  authorizationfor us to enter into group/partnership or subordination agreements; or

 

•                  waivers of, orlimitations on, our shareholders’ rights of first refusal to subscribe to sharecapital increases.

 

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The Privatization Decree Law also entitles thePortuguese government to appoint one member of our board of directors wheneverthe government votes against the list of directors presented for election at ourgeneral meeting of shareholders.

 

**Item 4****.    *Informationon the Company***

 

**HISTORY AND BUSINESS OVERVIEW**

 

**History**

 

We are the largest generator and distributor ofelectricity in Portugal. In addition, we own 30% of REN, the sole transmitterof electricity in Portugal, and we have significant electricity operations inSpain and Brazil.  Our principalexecutive offices are located at Praça Marquês de Pombal, 12, 1250-162 Lisbon,Portugal.  Our telephone number at thislocation is +351-21-001-2500.

 

We were incorporated in 1976 under the nameEDP—Electricidade de Portugal, E.P., as a result of the nationalization andmerger of the principal Portuguese companies in the electricity sector inmainland Portugal.  Following the saleby the Republic of Portugal in October 2000 of 20% of our outstanding ordinaryshares, after a period that started in 1997 of privatization in four phases ofour share capital, we are approximately 26.1% owned, directly or indirectly, bythe Republic of Portugal and an additional 4.75% of our shares are held byCaixa Geral de Depósitos, a state-owned bank. Other significant shareholders include Banco Comercial Português, or BCP(5.05%), Iberdrola (5%) and, indirectly, Brisa Autoestradas de Portugal, orBrisa (2%).

 

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The  followingchart shows our current structure and a list of the primary companies withinthe investments of the EDP Group.  For amore detailed listing, please see note 2 to our consolidated financialstatement.

 

 

General Note

 

The percentages are rounded. Some ownershippercentages indicated above reflect indirect ownership.

 

(1)For a more detailed listing and description, please see “Subsidiaries,Affiliates and Associated Companies” below.

(2)EDP Energia S.A., or EDP Energia, is an electric trading comapny operating inthe independent electricity system that operates five small hydroelectricplants

 

 

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**Business Overview**

 

**Iberian Energy**

 

Historically, electricity has been our corebusiness.  We underwent a restructuringin 1994, at which time we formed subsidiaries to operate in the areas ofelectricity generation, transmission and distribution.  Following the government’s purchase from usof a 70% interest in REN, our two principal electricity subsidiaries were ourelectrical generation company, CPPE, and our distribution company, EDPD, whichwas formed in early 2000 by the merger of our four wholly-owned distributioncompanies.  These two wholly-ownedsubsidiaries, together with REN, carried out electricity generation,transmission and distribution activities in Portugal.  On March 29, 2001, we announced the formation of EDP — Gestão daProdução de Energia, or EDP Produção, a subsidiary that began operations inJuly 2001 and now holds all of our Portuguese energy production-related unitsas part of measures we are implementing to boost efficiency.

 

As the largest producer and distributor of electricityin Portugal, we currently hold the leading position in the Portuguese market.  In 2002, we accounted for approximately 82%of the installed generation capacity in the Public Electricity System and 99%of the distribution in the Public Electricity System.  REN, in which we hold a 30% equity interest, accounted for 100%of the transmission in the Public Electricity System. Our 2002 operatingrevenues amounted to € 6,386.6** **million(US$ 7,418.6 million), approximately 92% of which represented electricitysales, yielding operating income of € 648.7****million(US$ 753.5 million).  At December 31,2002, our total assets were € 18,125.2****million(US$ 21,054.2 million), and shareholders’ equity was € 5,494.2****million (US$ 6,382.0 million).

 

The following table sets shows our revenues byactivity and geography:

 
|                   |   | **Year ended  December 31,** |   |
|------------------------|--------|------------------------------|--------|
|                   |   | **2000**                     |   | **2001** |   | **2002** |   |
|                   |   | **(millions of EUR)**        |   |
| Energy (1)             |   |                         |   |   |   |   |   |
| Portugal               |   | 3,701                        |   | 4,530 |   | 4,898 |   |
| Spain                  |   | 0                            |   | 0 |   | 321 |   |
| Brazil                 |   | 0                            |   | 691 |   | 669 |   |
| Telecommunications     |   |                         |   |   |   |   |   |
| Portugal               |   | 17                           |   | 126 |   | 190 |   |
| Spain                  |   | 0                            |   | 62 |   | 131 |   |
| Information Technology |   | 22                           |   | 150 |   | 107 |   |
| All Other              |   | 106                          |   | 93 |   | 72 |   |
| Total                  |   | 3,846                        |   | 5,650 |   | 6,387 |   |

 

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(1)   Consists ofelectricity in Portugal and electricity and gas in Spain

 

In Portugal, we create power for consumption in boththe Public Electricity System and the Independent Electricity System.  In 2002, our generating facilities inPortugal had a total installed capacity of 7,654 MW. In the transmissionfunction, REN operates the national grid for transmission of electricitythroughout mainland Portugal on an exclusive basis pursuant to Portugueselaw.  REN also manages the systemdispatch and the interconnections with Spain. In our distribution function, EDPD carries out Portugal’s localelectricity distribution almost exclusively. EDPD provided more than 5.6 million customers with 35,973****GWh of electricity in 2002.

 

We expect regional markets for electricity to developin Europe as an initial stage in the development of an integrated andliberalized electricity market with the EU. For geographical and regulatoryreasons, we anticipate that an Iberian electricity market will be the regionalmarket for our core electricity business in the near future.  Accordingly, we consider our coreelectricity business to include our operations in the Portuguese and Spanishelectricity markets.  In a process thattook place during 2001 and 2002, we expanded our energy operations with theacquisition of a 40% interest in Hidroeléctrica del Cantábrico S.A., orHidrocantábrico, a Spanish electricity and gas utility company.  Hidrocantábrico operates electricitygeneration plants and distributes and supplies electricity and gas in theIberian Peninsula, mainly in the region of Asturias in Spain.  Beginning in June 2002, we have

 

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consolidated on a proportional basis 40% of Hidrocantábrico.  In March 2003, Hidrocantábrico won theprivatization auction process that will lead to the acquisition of Naturcorp,the major gas distribution company operating in the Basque region of Spain.

 

**Telecommunications**and Information Technology**

 

In 2000, taking into consideration our existingresources and expertise, we decided to pursue the telecommunications andinformation technology businesses.

 

Currently, ONI, SGPS, S.A., or ONI, our 56% ownedsubsidiary and the holding company for our telecommunications businesses hasthe overall responsibility for strategic and financial matters relating to ourtelecommunications business segments. Pursuant to a recent reorganization, ONI’s businesses are currentlypursued in two main areas:  wirelinePortugal and wireline Spain, which areas are discussed in more detail in“—Telecommunications”.

 

In addition, we pursue the information technologybusiness through our wholly owned subsidiary EDINFOR—Sistemas Informáticos,S.A., or EDINFOR, which holds a 60% interest in ACE—Holding SGPS, S.A., orACE.  ACE owns 100% of CASE—Concepção e Arquitectura deSoluções Informáticas Estruturadas, S.A., or CASE.  CASE provides consulting and information systems servicesto us and to third parties.

 

###### **Groupcapital expenditures and investments**

###### ** **

Our total capital expenditures in the electricitybusiness in Portugal were € 666.1 million, € 409.2 million and € 351.0million in 2002, 2001 and 2000, respectively. One of our strategic goals inrecent years has been to reduce the overall level of capital expenditures inour core electricity business.  However,we had higher capital expenditures in 2002 compared with 2001 primarily as aresult of expenditures in generation relating to the TER CCGT plant and theVenda Nova hydroelectric plant, operational and financial expenditures relatingto Hidrocantábrico that are discussed below, telecommunications expendituresand the acquisition of U.S. dollar denominated notes that had been issued byEscelsa.  We expect lower total capitalexpenditures in 2003 since the investment related to the acquisition ofHidrocantábrico has been completed, the operational investment inHidrocantábrico in 2003 is expected to be lower than in 2002, expenditures intelecommunications will decrease as a result of our divestment of the UMTSbusiness and, having reduced the exchange rate risk relating to U.S. dollardebt of our Brazilian subsidiaries, we do not forsee the need for further debtacquisition programs.  We do expect asimilar level of operational investment in generation in Portugal in 2003.

 

Our acquisition of a 40% interest in Hidrocantábricoinvolved a total investment of € 783 million, of which € 262.4 million wasinvested in 2001.  For more informationabout our Hidrocantábrico investment, you should read “—Spain—History andOverview” below.  In 2002, we alsoconsolidated Hidrocantábrico’s capital expenditures relating to generation anddistribution.

 

The following table sets forth our capitalexpenditures and investments for the years 2000 through 2002.  Capital expenditures in electricity inPortugal are broken into two categories: technical and financial costs. Technical costs refer to all amounts expended other than interest.  Expenditures in Spain, Brazil, telecommunicationsand information technology are broken into two categories: operationalinvestment, which generally refers to the development and acquisition of fixedassets, and financial investment, which generally refers to the acquisition of equity interests incompanies. 

 

18

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|                                                  |   | **Year ended December 31,** |       |
|-------------------------------------------------------|--------|-----------------------------|------------|
|                                                  |   | **2000**                    |       | **2001** |   | **2002** |   |
|                                                  |   | **(thousands  of EUR)**     |       |
| **Energy:**                                           |   |                        |       |   |   |   |   |
| **Portugal:**                                         |   |                        |       |   |   |   |   |
| Generation:                                           |   |                        |       |   |   |   |   |
| Thermal/Hydro                                         |   | 56,406                      |       | 109,646 |   | 204,979 |   |
| Renewable: wind                                       |   | 11,190                      |       | 6,574 |   | 11,397 |   |
| Renewable: biomass(1)                                 |   | 0                           |       | 0 |   | 35,205 |   |
| Cogeneration                                          |   | 25,459                      |       | 13,142 |   | 9,619 |   |
| Engineering (2)and Operations and Maintenance         |   | 1,051                       |       | 2,371 |   | 15,262 |   |
| Total Generation                                      |   | 94,106                      |       | 131,733 |   | 276,462 |   |
| Transmission(3)                                       |   | 15,079                      |       | 0 |   | 0 |   |
| Distribution(4)                                       |   | 232,310                     |       | 260,636 |   | 365,961 |   |
| Supply(5)                                             |   | 1,970                       |       | 980 |   | 8,337 |   |
| Total technical costs                                 |   | 343,422                     |       | 393,352 |   | 650,759 |   |
| Financial costs                                       |   | 7,622                       |       | 15,867 |   | 15,361 |   |
| Total Portugal                                        |   | 351,087                     |       | 409,217 |   | 666,121 |   |
| **Spain:**                                            |   |                        |       |   |   |   |   |
| Operational Investment:                               |   |                        |       |   |   |   |   |
| Hidrocantábrico                                  |   |                        |       | 0 |   | 211,938 |   |
| Financial Investment:                                 |   |                        |       |   |   |   |   |
| Hidrocantábrico(6)                               |   | 0                           |       | 262,388 |   | 520,591 |   |
| Total Spain                                           |   | 0                           |       | 262,388 |   | 732,529 |   |
| Total Energy Portugal and Spain                       |   | 351,087                     |       | 671,605 |   | 1,398,649 |   |
| **Brazil:**                                           |   |                        |       |   |   |   |   |
| Operational Investment:                               |   |                        |       |   |   |   |   |
| Generation                                            |   | 25,703                      |       | 40,836 |   | 55,600 |   |
| Distribution:                                         |   |                        |       |   |   |   |   |
| Bandeirante                                           |   | 63,828                      |       | 47,226 |   | 25,413 |   |
| Escelsa                                               |   | 0                           |       | 0 |   | 16,208 |   |
| Enersul                                               |   | 0                           |       | 0 |   | 25,152 |   |
| EDP Brasil                                            |   | 0                           |       | 1,608 |   | 261 |   |
| Total Operational Investment                          |   | 89,531                      |       | 89,670 |   | 122,634 |   |
| Financial Investment:                                 |   |                        | ** ** |   | ** ** |   | ** ** |
| Bandeirante                                           |   | 206,023                     |       | 1,077 |   | 0 |   |
| Escelsa                                               |   | 0                           |       | 209,011 |   | 0 |   |
| Total Financial Investment                            |   | 206,023                     |       | 210,088 |   | 0 |   |
| Total Brazil                                          |   | 295,555                     |       | 299,758 |   | 122,634 |   |
| **Telecommunications(7) and Information Technology:** |   |                        |       |   |   |   |   |
| Operational Investment:                               |   |                        |       |   |   |   |   |
| Telecommunications                                    |   | 219,601                     |       | 239,019 |   | 311,962 |   |
| Information Technology                                |   | 29,998                      |       | 70,977 |   | 41,833 |   |
| Total Operational Investment                          |   | 249,599                     |       | 309,996 |   | 353,795 |   |
| Financial Investment:                                 |   |                        |       |   |   |   |   |
| Telecommunications                                    |   | 130,690                     |       | 69,554 |   | 0 |   |
| Information Technology                                |   | 66,146                      |       | 2,913 |   | 1,961 |   |
| Total Financial Investment                            |   | 196,836                     |       | 72,467 |   | 1,961 |   |
| Total Telecommunications and Information Technology   |   | 446,434                     |       | 382,463 |   | 355,756 |   |
| **Other:**                                            |   |                        |       |   |   |   |   |
| Other Operational Investment(8)                       |   | 33,040                      |       | 29,529 |   | 45,364 |   |
| Other Financial Investment:                           |   |                        |       |   |   |   |   |
| EDA — Electricidade dos Açores              |   | 5,726                       |       | 813 |   | 0 |   |
| Geoterceira                                           |   | 0                           |       | 0 |   | 499 |   |
| GALP Energia                                          |   | 317,974                     |       | 0 |   | 0 |   |
| BCP                                                   |   | 502,918                     |       | 0 |   | 30,636 |   |
| Turbogás                                         |   | 0                           |       | 0 |   | 20,986 |   |
| Affinis                                               |   | 0                           |       | 0 |   | 13,757 |   |
| Other International Investments                       |   | 72,500                      |       | 7,525 |   | 0 |   |
| Escelsa Notes(8)                                      |   | 0                           |       | 0 |   | 379,964 |   |
| Others                                                |   | 219,182                     |       | 0 |   | 0 |   |
| Total Other Financial Investment                      |   | 1,118,300                   |       | 8,338 |   | 445,843 |   |
| Total Other                                           |   | 1,151,340                   |       | 37,867 |   | 491,207 |   |
| Total Capital Expenditures and Investments            |   | 2,244,416                   |       | 1,391,693 |   | 2,368,246 |   |

 

19

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----

*(1)**          Renewable— biomass investment in 2002 includes € 35.2 million relating to an internaltransfer of the Mortágua biomass power plant, from EDP S.A. to EDP ProduçãoBioeléctrica. As such, this does not affect our cashflow in 2002.*

 

*(2)**          In 2001, expenditures in engineeringand O&M includes the expenditures made by Tergen, HidrOeM and EDP Produção,which companies were created in 2001.*

 

*(3)**          Transmissioncapital expenditures in 2000 only includes the first six months of 2000 due tothe sale of a 70% interest in REN.*

 

*(4)**          Distributionincludes capital expenditures made prior to 2000 by three departments withinEDP that worked exclusively on the distribution business and that in 2000 weretransferred to EDPD.*

 

*(5)**          Supply comprises the capitalexpenditures of EDP Energia, our company operating in the liberalized market.*

 

*(6)**          Total investment in the acquisition ofHidrocantábrico amounts to € 782.9 million, of which € 262.4 million wasinvested in 2001.*

 

*(7)**          Investmentsfor telecommunications include primarily infrastructure and, in 2000,organizational costs relating to ONI.*

 

*(8)**          OtherOperational Investment includes investments by the EDP Group in installationsand equipment at the holding company level, investments by our real estatecompanies and investments by our support services companies.*

 

*(9)**          In2002 we acquired certain notes issued by Escelsa.  For more information on this transaction please see “Item 11.Quantitative and Qualitative Disclosures About Market Risk.”*

 

The capital expenditures set forth above have not beenadjusted to reflect the fact that certain expenditures represent transfersbetween businesses within the EDP group of assets that had previously beenaccounted for by the transferors as their own capital expenditures.  The capital expenditures above have also notbeen adjusted for divestments of certain financial investments.  Adjusting for these transactions wouldresult in the following:

 
|                                                                                           |   | **Year ended December 31,** |   |
|------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                           |   | **2000**                    |   | **2001** |   | **2002** |   |
|                                                                                           |   | **(thousands  of EUR)**     |   |
| Total Capital Expenditures and Investments:                                                    |   | 2,244,416                   |   | 1,391,693 |   | 2,368,246 |   |
| Internal Transfers:                                                                            |   |                        |   |   |   |   |   |
| IT Systems (from EDINFOR to EDP Distribuição)                                        |   |                        |   |   |   | (80,500 | ) |
| Mortágua Biomass Power Plant (from EDP, S.A. to EDP  Produção Bioelėtrica) |   |                        |   |   |   | (35,180 | ) |
| Divestments:                                                                                   |   |                        |   |   |   |   |   |
| ESSEL                                                                                          |   |                        |   | (77,800 | ) |   |   |
| REN(1)                                                                                         |   | (976,200                    | )      |   |   |   |   |
| Redal                                                                                          |   |                        |   |   |   | (26,905 | ) |
| Optep (Optimus)                                                                                |   |                        |   |   |   | (315,000 | ) |
| Total Internal  Transfers and Divestments                                                      |   | (976,200                    | )      | (77,800 | ) | (457,585 | ) |
| Adjusted Total Capital Expenditures and Investments                                            |   | 1,268,173                   |   | 1,313,895 |   | 1,910,661 |   |

 

----

*(1)*               *Our divestment of a 70% interest in REN involved ourreceipt of an extraordinary dividend of € 392*.*6 million, € 106.2 million for intra group debtrepayment and € 477.4 million for the equity sold.*

 

In recent years, a significant part of our capitalexpenditures on electricity projects in Portugal****has been in distribution. Since EDPD is obligated by law toconnect all customers who wish to be supplied by the Public Electricity System,a large part of capital expenditures is spent in connecting new customers,improving network efficiency and developing the network (installing new cablesand lines) to accommodate the growth in consumption. In addition, we areobligated to meet government standards for meter control, which requires us tomake further investments in new meters. Our investment in distribution inPortugal****in 2002 totalled  € 366.0 million compared with € 260.6million in 2001 and € 232.3 million in 2000, and mainly consisted ofrecurring capital expenditures necessary for the operation, improvement andexpansion of our distribution network in Portugal, including expansion toaccommodate growth in consumption and maintenance.  In keeping with our strategic goal of reducing recurring capitalexpenditures in our core electricity business, capital expenditures indistribution have declined since 1998 due to decreased costs in materials andservices, and a reduced allocation of these costs to capital expenditures. In2002, the increase in EDPD capital expenditures reflects the internal transferfrom EDINFOR to

 

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EDPD of € 80.5 million worth of assets that relate tonon-recurring investments made in a commercial and administrative IT systembased on the SAP platform. As such, this transfer does not affect our cashflowin 2002.

 

Under current regulations in Portugal, we receivecontributions directly from customers for a portion of our capital expendituresfor new connections to the transmission and distribution networks.  The total amount of contributions fromcustomers in 2002 was approximately  €111 million compared with approximately € 148 million in 2001.

 

During 2002, we invested € 276.5 million ingeneration, compared with € 131.7 million in 2001. This increase wasmainly due to a € 143.0 million investment in initiating constructionof the TER CCGT power plant and a € 25.7 million investment in additionalcapacity of the Venda Nova hydro power plant.

 

In Spain, apart from the our capital expenditure forthe acquisition of a 40% stake in Hidrocantábrico, there were capitalexpenditures of € 211.9 million during 2002 focused on generation(including the completion of the Castejón CCGT plant), electric distribution(including expansion to Madrid, Valência and Alicante) and on special regimegeneration projects (including a 34 MW wind farm near Burgos).

 

We expect to focus future capital expenditures inPortugal in distribution on connecting new clients and improving the quality ofthe electricity service through a more efficient network. We expect toconcentrate generation capital expenditures in future periods on thedevelopment of new hydroelectric projects and in the construction of the newTER CCGT power plant.  Future capitalexpenditures in generation may also include special projects such asco-generation and wind power generation opportunities.  While the actual amount of our futureinvestments will depend on factors that cannot be currently foreseen, we expectto incur recurring capital expenditures of approximately€ 300 million annually in our core electricity generation anddistribution businesses  in Portugalduring this period.

 

In line with our strategic objectives in building ourtelecommunications and our international activities, we also may incuradditional capital expenditures in connection with these activities and otherstrategic investments as well as non-recurring capital expenditures such as forinformation technology. Concerning investments in Brazil, we expect to fund anyfuture capital expenditures with cashflow generated by local operations and orby debt denominated in reais.

 

We believe that cash generated from operations andexisting credit facilities are sufficient to meet present working capitalneeds. We currently expect that our planned capital expenditures andinvestments will be financed from internally generated funds, existing creditfacilities and customer contributions, which may be complemented with medium orlong term debt financing and equity financing as additional capital expenditurerequirements develop.  To learn moreabout our sources of funds and how the availability of those sources could beaffected, see “Item 5.  Operating andFinancial Review and Prospects—Liquidity and Capital Resources.”

 

**International investments**

 

We have made a number of international investments inthe electricity and water sectors in Brazil, Cape Verde, Guatemala and Macau.We have actively sought opportunities outside of Portugal in which we couldcapitalize on our existing strengths. To date in 2003, we have not initiatedany new international investment projects. In accordance with our strategy of shareholder value creation, we havedivested in non-strategic holdings in Chile and Morocco.

 

**Complementarybusinesses/other utilities**

 

We also have investments in activities that we regardas complementary to our core business, specially in gas utilities.

 

Since July 2000, we hold a 14.27% ownership interestin GALP Energia, or Galp, a holding company with interests in Gás de Portugal,S.A., and Transgás, companies that transport and supply natural gas throughout

 

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Portugal, and Petrogal, a company involved in oil refining anddistribution and the production of petroleum products.

 

In March 2003, Hidrocantábrico won the auctionprivatization process that will lead to the acquisition of Naturcorp, theleading natural gas company in the Basque region of Spain. In April 2003, thePortuguese government made public its view and recommendations concerning therestructuring of the Portuguese energy sector, as a result of which we maybecome the major company in the Iberian combined gas and electricity sector.According to these recommendations, the gas and electricity economic activitiesshould be combined and developed by us in order to strengthen our position in acompetitive market. The terms and conditions under which such reorganizationshall be put in place have yet to be clearly defined. The Portuguese governmentalso recommended that Transgás should be integrated in REN, in order to form asingle company for the transport of gas and electricity. In addition, thegovernment intends to sell 18.3% of Galp to REN.

 

**STRATEGY**

 

Our principal strategic objective is the creation ofshareholder value through the achievement of sustained real earnings growth.

 

**Primarystrategic focus on core energy activities in the Iberian Peninsula**

 

Our primary strategic focus is the Iberian energymarket. We are the leading electricity company in Portugal and have operatingcontrol of Hidrocantábrico, the fourth largest electricity company inSpain.  In Hidrocantábrico we maintain asuccessful partnership with Energie-Baden-Württemberg AG, or En BW, a Germanutility company, and Cajastar — Caja de Ahorros de Asturias, a Spanish savingsbank, or Cajastar.  EDP andHidrocantábrico combined comprise a significant share of generation capacityand energy and distribution supply in the Iberian market.  In March 2003, as a result of theprivatization process launched by the Ente Vasco de Energia, the energyauthority of the Basque region in Spain, Hidrocantábrico will acquire 62% ofNaturcorp, the second largest Spanish gas distribution and transmissioncompany.  Our other interests in the gassector consist of a 14% stake in Galp and, through Hidrocantábrico, operatingcontrol of Gas de Asturias.

 

In the Iberian energy market our objectives are topreserve the value of our domestic electricity business in light of theliberalization of the Portuguese electricity market and the creation of anintegrated Iberian market, grow our electricity Iberian platform throughHidrocantábrico and develop a gas business leveraging on our existing assets.

 

**Preservingthe value of our domestic electricity business**

 

In our domestic electricity business, we faceincreasing competition arising from the liberalization of the electricitymarket in Portugal, in the Iberian Peninsula market and throughout the EU.Additionally, we face increasing pressure on operating margins of ourelectricity distribution business in Portugal due to the regulation ofelectricity tariffs in the Public Electricity System.

 

In response to these challenges, we plan to:

 

•                  continue efforts to enhance earningsby capitalizing on our competitive position and on anticipated growth in demandin the Portuguese electricity market and now in an Iberian electricity marketconsisting of Portugal and Spain;

 

•                  maintain our leading market share ofgeneration and distribution in the liberalized and growing Portugueseelectricity market, while also capitalizing on growth opportunities created byincreasing liberalization within the EU, particularly in an Iberian electricitymarket; and

 

•                  continue in Portugal our program toincrease the efficiency of our core electricity operations, reduce relatedcosts with the goal of achieving international best practice standards, andminimize the impact of tariff reductions in the current regulatory period onoperating margins of our electricity distribution business.

 

22

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In pursuing these objectives, we intend to:

 

•                  pursue effective marketing to bothnew and existing customers, particularly those that are, or will be, subject tocompetitive alternatives in the Non-Binding Sector;

 

•                  continue to provide high quality andcost-effective services to the Binding Sector and the Non-Binding Sector;

 

•                  further centralize our corporatestructure, as we have done with the merger of our four distribution companiesinto EDPD and the centralization of all our generation companies under EDPProdução’s umbrella;

 

•                  continue to centralize our backoffice activities, such as administration and accounting, as well asprocurement and suppliers relationship management, with the aim of achievingcost savings in supplies of goods and services and personnel reduction, towhich end we created EDP Valor;

 

•                  improve our procurement process fornew equipment and the terms of business with subcontractors, particularlythrough continued renegotiations with suppliers and development of benchmarkstandards for procurement, also through EDP Valor;

 

•                  identify opportunities to achievefuture reductions in overhead expenses through the continued implementation ofthe “Efficiency Program” started in the beginning of 2002 and agree with thePortuguese electricity regulator on an appropriate tariff mechanism that canfacilitate further efficiency improvements through personnel reduction at EDPD;and

 

•                  continue to monitor the level ofrecurring capital expenditures in our core electricity business.

 

**Growingour Iberian electricity platform**

 

In light of the intended integration of the Spanishand Portuguese electricity sectors, the definition of our core market, whichwas traditionally focused in Portugal, has widened to embrace the IberianPeninsula. Following the acquisition of a 40% interest in Hidrocantábrico atthe end of 2001, we became the first Iberian company to own significantgeneration and distribution assets as well as a meaningful customer base inboth Portugal and Spain – two EU countries with among the highest electricityconsumption growth rates.

 

In this regard we intend to:

 

•                  position ourselves to benefit fromthe creation of an Iberian electricity market and pursue growth opportunitiesin Spain by leveraging on our investment in Hidrocantábrico;

 

•                  grow our customer base incrementally,capitalizing on full electricity market liberalization from 2003 onwards; and

 

•                  increase generation capacity throughthe construction of a new CCGT (natural gas fired) power plant and thedevelopment of renewable energy generation projects, primarily through theconstruction of new wind farms and the increase of capacity in existing plantsto cope with strong consumption growth.

 

**Developingan Iberian gas strategy**

 

In April 2003, the Portuguese government made publicits views and recommendations concerning the restructuring of the energysector, as a result of which we have the opportunity to become the majorcompany in the Iberian combined gas and electricity sector. According to thegovernment’s recommendations, gas and electricity economic activities should becombined and developed by us in order to take advantage of synergy andflexibility that will result from integrated management of the activities.   The terms and conditions under which such

 

23

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reorganization will be put in place have yet to be clearlydefined.  The government alsorecommended that Transgás, a Portuguese gas transport company, shouldeventually be integrated into REN in order to form a single company for thetransmission/transport of energy.  Inaddition, the government intends to sell 18.3% of Galp to REN.  Our current interests in the gas sector inthe Iberian Peninsula include a 14.27% stake in Galp and, throughHidrocantábrico, full operating control of Gas de Asturias and Naturcorp.

 

We view the gas business as being highly complementaryto electricity and of great strategic attractiveness.  Both Portugal and Spain have gas and electricity consumptiongrowth rates above the EU average.  Eachrequires new capacity to be gradually added and CCGTs are clearly the bestoption to meet the Iberian system expansion requirements because of their lowerinvestment costs required per MW, greater efficiencies, lower operating andmaintenance costs and lower emission levels than other thermal generationtechnologies.  Since new gas firedgeneration capacity is expected to be added to the Iberian electricity system,power generators, which are already among the largest gas consumers in theIberian Peninsula, are and will continue to be the facilitators of thedevelopment and sustainability of the gas business in the Iberian Peninsula,although their competitive position will increasingly depend on gas prices andthe flexibility of gas contracts.

 

There are two main reasons for us to develop anintegrated Iberian gas strategy:

 

•                  to capture synergies fromdistributing both gas and electricity to final consumers, leveraging on ourexisting electricity client base and on the sharing of infrastructure andsystem costs; and

 

•                  to increase the competitiveness andefficiency of our gas fired power plants.  The natural gas market is characterized by the existence of longterm contracts. For electricity generators, long-term contracts in the naturalgas market are usually indexed to the price of oil, are of a take-or-pay natureand restrict the final destination of contracted gas. Since gas represents asubstantial portion of gas fired power plants’ total costs, access to flexibleand competitive gas contracts is of paramount importance to increase theefficiency of CCGT power plants. By being involved in both gas distribution andelectricity generation we will be able to mitigate the risk presented byvariable gas prices while increasing the flexibility of gas sourcing andplacing.

 

**Developingour telecommunications and information technology businesses**

 

Our telecommunications activities are centered on ONI,our telecommunications company comprised of various business units.  ONI, which is primarily focused on corporateclients, is a fixed line telecommunications operator that provides voice anddata services at a significant level in Portugal and Spain.  Our information technology activities arefocused on EDINFOR, our information technology subsidiary.

 

We plan to build on our existing operations in orderto pursue a competitive role in the corporate fixed line telecommunicationssector in Portugal and Spain, which we regard as attractive markets of suitablesize with high growth potential. We based our decision to enter and developthis business on our ability to capitalize on our existing infrastructure, includingaccess to an extensive fiber optic backbone, to leverage our existingresources, including a large base of customers and suppliers, and to use ourexisting telecommunications and information technology operations as afoundation for expanded activities.

 

Although our plans and strategy continue to evolve andadapt to trends in the telecommunications sector, we currently anticipateemphasizing the following business areas:

 

•                  infrastructure operations, includingalliances with partners to construct a nationwide telecommunications network inPortugal;

 

•                  fixed line operations, using ONI’sfixed line voice and data operations as a foundation;

 

•                  Internet access services, building onONI’s Internet service provider activities; and

 

•                  business solutions, building onEDINFOR’s experience and expertise in systems integration.

 

24

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We also have allied and expect to ally ourselves withother partners who may bring resources and synergies to facilitate our efforts todevelop a presence in each of these business areas. For a more detaileddiscussion of our telecommunications activities, you should read“—Telecommunications” below.

 

**Pursuitof international activities**

 

Our core electricity business has historically been inPortugal and is now in an Iberian electricity market.  However, international opportunities arise in the electricitybusiness and related businesses through which we believe we can achieveattractive returns. In international investments, we have looked particularlytoward Brazil, where we believe we can play an active role in managing theelectricity operations in which we are involved and where potential returns maybe attractive. In the future, we may pursue attractive opportunities abroad,particularly generation projects in Brazil that complement our existingactivities in Brazilian distribution. We regularly review our internationalinvestments and may change their focus consistent with our strategicobjectives. In this regard, we continuously monitor our investment portfolio inorder to capitalize on our ability to manage efficiently electricity operationsthrough significant influence or control. For a more detailed discussion of ourinternational activities, you should read “—Brazil” and “—Other InternationalActivities and Strategic Investments”.

 

**Developingof complementary business activities/other utilities**

 

Consistent with our multi-utility strategy, we areselectively evaluating opportunities that are complementary to our corebusinesses and that may enable us to achieve cost savings along the chain ofactivities from us to the consumer and that management expects can generateadditional shareholder value.

 

We expect that our purchase of an interest in Affiniswill provide us with the opportunity to become involved in additionalcommercial activities related to the supply of electricity and gas, such as theprovision and servicing of appliances and the installation of utilityinfrastructure in homes and businesses. For more information on our complementary business activities you shouldread “—Subsidiaries, Affiliates and Associated Companies” below.

 

**IBERIAN ELECTRICITY MARKET**

###### ** **

On November 14, 2001, in accordance with theliberalization objectives contained in EU Directive 96/92/EC, the Portugueseand Spanish governments signed a “Protocol for Cooperation between the Spanishand Portuguese governments for the Creation of the Iberian Electricity Market”,or the Protocol, in which they undertook to create an Iberian electricitymarket based on the principles of free and fair competition, transparency,objectivity and efficiency.  Inparticular, the Protocol was intended to:

 

•                  guaranteeconsumers in Portugal and Spain access to the electricity  network from either country and tointerconnections with third countries on equal terms; and

 

•                  give electricityoperators in an Iberian electricity market the freedom to contract withconsumers, to engage in distribution activities in both countries and toparticipate in a common Iberian electricity pool.

 

In late December 2001, the regulators from Spain andPortugal, (respectively, Comision Nacional de Energia, or CNE, and EntidadeReguladora dos Serviços Energéticos, or ERSE) presented a paper for publicdiscussion on the Iberian Electricity Market (MIBEL) organizational model. InMarch 2002, based on that public discussion, they presented a compromisestructure for MIBEL. As determined in the Protocol, the model took intoconsideration the principles stated in the Protocol, the applicable EUlegislation, the recent experience of both countries’ electricity markets andregulatory best practices. The model also introduced ideas to allow for thedevelopment of a competitive and efficient market, equipped with the necessarysupervision and control mechanisms, in order to guarantee the satisfaction ofconsumers’ needs, to provide for the security of electricity supply in theshort and long term and to be fully compatible with the objectives of energyefficiency and the promotion of renewable energy in both countries. Thisgeneral model constitutes the basis for both countries to present a detailedplan for the implementation of technical and organizational measures necessaryfor the functioning of an Iberian Electricity Market.

 

25

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Although MIBEL was expected to come into force byJanuary 2003, representatives of the Portuguese and Spanish governments at theOctober 2002 Valência summit established a new schedule for MIBEL’simplementation.  The revised timeframewas created in recognition of the fact that MIBEL would be delayed not only dueto a change in the Portuguese government, but also because of the need for theharmonization of the Spanish tariff structure. Among other commitments achieved at the summit, a decision was reachedto implement MIBEL in phases beginning in January 2003 and ending in 2006.  According to the proposal presented at theValência summit, it is expected that the new model will function with only oneoperator divided into two specialized establishments with separate management,one in Portugal operating the forwards market for electricity and one in Spainoperating the daily and intra-daily market for electricity.  It is also expected that there will only beone wholesale energy market that will function in parallel with bilateralcontracts.

 

For the purpose of developing MIBEL, the Protocolcontains a timetable for the development of the following interconnectionsbetween Spain and Portugal that was not amended at the Valência summit: Alqueva-Balboa,a 400kV line scheduled for completion in 2004; Douro Internacional-Aldeadavila,either the construction of a new 400kV interconnection or an increase of theexisting interconnection capacity scheduled for completion in 2006; andCartelle-Lindoso, a second interconnection for the purpose of increasingtransmission efficiency scheduled for completion in 2006.

 

Within this context, changes introduced to thePortuguese energy policy in April 2003 resulted in the redefinition of thePortuguese government’s main objectives in the energy sector, which comprise,among others: the liberalization of the market, improvement of the quality ofservice, security of supply and reinforcement of the productivity of thenational economy. However, the main revision to the restructuring of the energysector is the promotion of the combination of the management and supply of thegas and electricity businesses into a single company in line with dominantinternational practices and with Spanish utilities’ practice.

 

By the end of 2003, Portugal, among other measures,intends to initiate the restructuring of the Portuguese electricity system,which includes renegotiating or terminating the existing PPAs through adequatecompensation mechanisms and changing REN’s single buyer status. It is alsounderstood that both Portugal and Spain should take all the necessary measuresto open the market to all consumers and harmonize both tariff structuresthrough clear and transparent rules, particularly in Spain.  For more information on the Portugueseenergy policy see “—Regulation3⁄4Portugal”.

 

**PORTUGAL**

 

**ELECTRICITY SYSTEM OVERVIEW**

 

### **Portuguese Electricity System**

### ** **

Since 1997, Portugal had anelectricity market structure pursuant to the legislation enacted by thegovernment that introduced the National Electricity System.  The chart below illustrates the structure ofthe National Electricity System.

 

26

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*Note: Operations that are 100% ownedby us are highlighted in bold.*

 

*(1)**          Weown 10% of Tejo Energia and 20% of Turbogás.*

 

*(2)**          Beganoperations in early 1998.*

 

*(3)**          Asof June 2003, none existed.*

 

*(4)**          Asof March 2003, approximately 21,000 Eligible Consumers existed, of which 1,657have become Qualifying Consumers and 899 were already in the Non-BindingSector.  As of 2003, all consumersexcept low-voltage consumers may elect to become Qualifying Consumers.*

 

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The National ElectricitySystem consists of the Public Electricity System, or the Binding Sector, andthe Independent Electricity System. The Public Electricity System isresponsible for ensuring the security of electricity supply within Portugal andis obligated to supply electricity to any consumer who requests it. Within the IndependentElectricity System is the Non-Binding Sector and other independent producers(including autoproducers). We and other generators can supply electricity tothe Non-Binding Sector. The Non-Binding Sector is a market-based system thatpermits “Qualifying Consumers” to choose their electricity supplier.  Over the past several years the minimumconsumption level required to be a Qualifying Consumer has progressivelydeclined and, as of May 15, 2003, Eligible Consumers, i.e., all consumers otherthan low voltage consumers, automatically become Qualifying Consumers aftercommunicating their intention to the regulator to be treated as such.  For more information on the liberalizationof electricity sales you should read “—Competition”.

 

The National Electricity System is intended to improvetransparency in the costs associated with the supply of electricity and toprepare for a more market-based and competitive electricity supply system inPortugal that continues to fulfill EU requirements.

 

**The Public Electricity System or Binding Sector**

 

The Public Electricity System, or the Binding Sector,includes our generation company, CPPE, the transmission company, REN, in whichwe have a 30% stake, and our distribution company, EDPD.  The Public Electricity System also includestwo independent power producers:  TejoEnergia’s plant at Pego, in which we have a 10% stake, and the Turbogás plantat Tapada do Outeiro, in which we have a 20% stake**.**  All plants in thePublic Electricity System enter into PPAs with REN through which they commit toprovide electricity exclusively to the Public Electricity System through REN,acting as the single buyer in the Binding Sector and operator of the nationaltransmission grid. For more information on REN’s activities, you should read“—Transmission” below.

 

Power plants in the Binding Sector are each subject tobinding licenses issued by the *Direcção Geral de Energia*, or DGE, whichare valid for a fixed term, ranging from a minimum of 15 years to a maximum of75 years, but which are revoked upon termination of the related PPAs withREN.  These licenses, together withPPAs, require each power plant in the Binding Sector to generate electricityexclusively for the Public Electricity System.

 

While REN’s responsibilities relate primarily to thetransmission of electricity and system dispatch, it is also responsible forworking with DGE to identify potential sites for the installation of new powerplants and for the management of wholesale purchases of electricity and salesto distribution companies.

 

**The Independent Electricity System**

 

The Independent Electricity System consists of twoparts—the Non-Binding Sector and the other independent producers, includingrenewable source producers, which include small hydroelectric producers (under10 MW installed capacity), and cogenerators.

 

**The Non-Binding Sector**

 

At present, the only producers in the Non-BindingSector are our three wholly-owned embedded hydroelectric generators, which aresmall hydroelectric plants with more than 10MW installed capacity that deliverall of the energy they produce directly to the distribution system.  Although producers in the Non-Binding Sectorare required to obtain licenses, they have no obligation to supply electricityto the Public Electricity System. These entities are free to contract directlywith Qualifying Consumers.  In 2002, thetotal number of Eligible Consumers in Portugal represented 44.5% of our 2002sales in volume and 28.6% of our 2002 sales in monetary terms. As of March2003, out of approximately 21,000 Eligible Consumers, only****889 have become Qualifying Customers, ofwhich 652 had entered into contracts with EDP Energia and 237 had entered intocontracts with producers in the Spanish market.  The total of 889 Qualifying Consumers represented approximately7% of the total amount of energy sold and 1.2% of the revenues during the firstquarter of 2003.  We expect littleimpact on our earnings in 2003 as a result of competition in the Non-BindingSector.

 

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Producers in the Non-Binding Sector are able to usethe national transmission grid and distribution system on an open-access basisto connect to Qualifying Consumers, which pay regulated transmission anddistribution charges to REN for transmission and EDPD or other companies fordistribution, respectively. Our hydroelectric plants in the IndependentElectricity Systems deliver all of the electricity they produce directly to thedistribution system without going through the national transmission grid. Theseplants pay regulated transmission charges to REN. Contractual relationshipsbetween producers and consumers in the Non-Binding Sector are freely negotiablebetween the parties.

 

**Other independent producers**

 

The Portuguese government has implemented selectedmeasures to encourage the development of various forms of electricityproduction, including autoproducers (entities that generate electricity fortheir own use and may sell surplus electricity to REN), cogenerators, smallhydroelectric producers and other producers using renewable sources. REN iscurrently required by law to purchase the excess electricity produced by theseindependent producers at a regulated price based on avoidable costs, defined asthe costs REN avoids by receiving power from these producers rather thandispatching plants in the Binding Sector and/or investing in new plants toincrease installed capacity, plus an environmental premium, referred to as the“green tariff”.  For more information onour electricity sales, you should read “—Distribution” below.

 

**Size andcomposition of Portugal’s electricity market**

 

During the period from 1998 through 2001, the totalelectricity supplied by EDPD (in both the Binding and Non-Binding ElectricitySectors) experienced an average growth rate of 5.6% per annum.  In 2002, there was a reduction in the annualgrowth rate to 2.4% due to a slowdown in the economy. We expect the previoustrend of higher growth rates to resume in future years, assuming that thePortuguese economy recovers from the slowdown that occurred in 2002.

 

The primary factors that management believes have animpact on demand are the rate of gross domestic product growth, electricityconnections to new households and changes in electricity consumption percapita. After the period from 1998 through 2001, during which consumption inthe Public Electricity System experienced an average growth rate of 2.1% abovegrowth in Portugal’s gross domestic product, or GDP, there was a reduction to0.7% above the growth rate in Portugal’s GDP in the year 2002 due to a slowdownin the economy. The previous growth trend is expected to resume in the future,assuming that the Portuguese economy recovers from the slowdown that occurredin 2002.  We anticipate that thePortuguese economy will recover and that overall consumption in the NationalElectricity System will increase at an average of 3.9% per year in 2003, 2004and 2005.  Residential consumption isassumed to increase each year over the same period by an average of 3.2%,services by an average of 3.7%, and industrial by an average of 4.2%.

 

Peak demand as a percentage of the total installedcapacity, which is the sum of the total installed capacity of the PublicElectricity System and the total installed capacity of the Non-Binding System, hasremained fairly constant in recent years. Our available capacity as a percentage of the total installed capacityhas maintained a value of approximately 80% from 1998 through 2002.  The ratio of peak demand to EDP’s averageavailable capacity indicates that EDP has sufficient available capacity tocover the total peak demand.

 

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The following table sets forth the ratios of peakdemand to installed capacity, EDP’s available capacity to the installedcapacity of the Public Electricity System and the Non-Binding System and peakdemand to EDP’s available capacity.

 
|                                                                                           |   | **As of  December 31,**          |   |
|------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                           |   | **1998**                         |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                                                                           |   | **(in MW,  except percentages)** |   |
| Installed capacity of the  PES(1)                                                              |   | 8,144                            |   | 8,804 |   | 8,757 |   | 8,757 |   | 8,757 |   |
| Installed capacity of the  NBES(2)                                                             |   | 270                              |   | 270 |   | 270 |   | 310 |   | 255 |   |
| Total installed capacity  (PES plus NBES)                                                      |   | 8,414                            |   | 9,074 |   | 9,027 |   | 9,067 |   | 9,012 |   |
| Peak demand (PES plus NBES)                                                                    |   | 6,079                            |   | 6,122 |   | 6,557 |   | 7,142 |   | 6,766 |   |
| Peak demand as a percentage  of the total installed capacity (PES plus   NBES)            |   | 72                               | %      | 67 | % | 73 | % | 79 | % | 75 | % |
| **EDP:**                                                                                       |   |                             |   |   |   |   |   |   |   |   |   |
| EDP’s average available  capacity (PES)                                                   |   | 6,860                            |   | 6,837 |   | 6,795 |   | 6,904 |   | 6,980 |   |
| EDP’s average available  capacity (NBES) (3)                                              |   | 224                              |   | 196 |   | 215 |   | 247 |   | 226 |   |
| EDP’s available capacity as  a percentage of the total installed capacity (PES plus NBES) |   | 84                               | %      | 78 | % | 78 | % | 79 | % | 80 | % |
| Peak demand as a percentage  of EDP’s average available capacity (PES plus  NBES)    |   | 86                               | %      | 87 | % | 94 | % | 100 | % | 94 | % |

 

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*(1)**          PublicElectricity System.*

 

*(2)**          Non-BindingElectricity System, which consists of generation in the Independent ElectricitySystem other than the “other independent procedures”.  All of the NBES hydroelectric plants with an installed capacityless than or equal to 10 MW became special regime producers in October2002.  Special regime generationgenerally consists of small or renewable energy facilities, from which theelectricity system must acquire all electricity offered, at tariffs fixedaccording to the type of generation.*

 

*(3)**          Provisionalvalues from 1998 to 2001 take into account the restructuring of the Vila Covaplant in 1999.*

 

The Portuguese overall growth rate in demand forelectricity is slightly higher than the rate reflected in the figures above dueto the growth of auto production of electricity in certain industries.  Autoproducers supply their surpluselectricity to REN, which displaces electricity generation in the PublicElectricity System.

 

The term “installed capacity” in this report refers tothe maximum capacity of a given generation facility under actual operatingconditions.  Maximum capacity of ahydroelectric facility is based on the gross electricity emission to thetransmission network by the units of such facility, whereas maximum capacity ofa thermal facility is based on the net electricity emission (net of ownconsumption) to the transmission network. In previous reports, installed capacity of a facility referred to thelevel of electricity emission to the transmission network based on thetechnical nominal specification of the units of such facility established bythe manufacturer.  Referring toinstalled capacity in terms of maximum capacity is preferable because inPortugal the PPAs remunerate electricity producers based on this concept andthis concept is widely used by other electricity companies in Europe.

 

**GENERATION**

 

As of December 31, 2002, our Portuguese electricitygeneration facilities consist of hydroelectric, thermal (coal, fuel oil,natural gas and gas oil), biomass, cogeneration and wind generation facilities,and had a total installed capacity of 7,654 MW, 7,184 MW of which was inthe Public Electricity System and 470 MW of which was in the IndependentElectricity System, and approximately 55% of which was represented by hydroelectricfacilities, 23% by fuel oil/natural gas facilities, 16% by coal-firedfacilities, 4% by gas oil facilities and 2% by wind-driven, biomass andcogeneration facilities.  We do not ownor operate any nuclear-powered facilities in Portugal.

 

Our installed capacity in the Public ElectricitySystem of 7,184****MW representsapproximately 82% of the total installed capacity in the Public ElectricitySystem.  The total installed capacity ofthe Public Electricity System increased from 1998 to 1999 due primarily to theTurbogás plant at Tapada do Outeiro. From 1999 to 2000, total installedcapacity of the Public Electricity System decreased to a small degree as aresult of the decommissioning of one unit at our Tapada do Outeiro plant.  From 2000 to 2002, the installed capacity ofthe Public Electricity System

 

30

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remained constant.  Our smallerhydroelectric plants, wind generating facilities and cogeneration and biomassplants are part of the Independent Electricity System.

 

EDP Gestão da Produção de Energia, S.A., or EDPProdução, holds, among others, the following companies in the generationsector: CPPE – Companhia Portuguesa de Produção de Electricidade, S.A., whichoperates our plants in the Public Electricity System; HDN – Energia do NorteS.A. and Hidrocenel – Energia do Centro, S.A., which operate some of oursmaller hydroelectric plants in the Independent Electricity System; TER –Termoeléctrica do Ribatejo, S.A., which is involved in the development of a newCCGT plant that will operate in the Non-Binding Sector; Enernova, which isinvolved in the development of renewable source energy projects and relatedservices; EDP Produção Bioeléctrica, S.A., which develops and manages biomassprojects and that presently operates our biomass plant at Mortágua; EDPCogeração, which develops and manages cogeneration projects; EDP Produção EM –Engenharia e Manutenção, S.A., which undertakes hydroelectric and thermalengineering projects and studies, project management, engineering andconsulting; HidrOeM – Gestão, Operação e Manutenção de Centrais Eléctricas,S.A., a management and O&M service company for all smaller EDPhydroelectric power plants owned by HDN, Hidrocenel and EDP Energia, anelectric trading company operating in the Non-Binding Sector.

 

The following map sets forth the CPPE power plants inPortugal:

 

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**CPPEPOWER PLANTS**

 

 

32

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Since its formation in 1994,CPPE has operated all of our conventional thermal plants and approximately 93%of our hydroelectric plants.  It hasalso been responsible for 100% of our fuel purchases.  On March 29, 2001, we announced the formation of EDP Produção, asubsidiary that began operations in July 2001 and now operates all of ourPortuguese energy production-related units, including CPPE, as part of measureswe are implementing to boost efficiency. In 2002, CPPE accounted for approximately 95% of our electricitygeneration.

 

CPPE generation capacityis bound to the Public Electricity System under PPAs between the company andREN. Under the PPAs, CPPE is guaranteed a fixed revenue component (capacitycharge) based on the contracted availability and installed capacity, regardlessof the energy produced.  The PPAs alsoallow CPPE to pass-through to the final tariff its total fuel consumptionthrough a variable revenue component (energy charge) that is invoiced monthlyto REN. Pursuant to the Portuguese government’s policy for the energy sector,the PPAs are expected to be renegotiated or terminated as a step in thecreation of an Iberian electricity market. The Portuguese government has announced its intention that generators beadequately compensated for revision or termination of PPAs.  The following table sets forth our totalinstalled capacity by type of facility at year-end for the years 1998through 2002.

 
|                                    |   | **As of  December 31,** |   |
|-----------------------------------------|--------|-------------------------|--------|
| **Type of  facility**                   |   | **1998**                |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                    |   | **(MW)**                |   |
| Hydroelectric:                          |   |                    |   |   |   |   |   |   |   |   |   |
| CPPE plants                             |   | 3,903                   |   | 3,903 |   | 3,903 |   | 3,903 |   | 3,903 |   |
| Independent System hydroelectric plants |   | 270                     |   | 271 |   | 270 |   | 309 |   | 310 |   |
| Total hydroelectric                     |   | 4,173                   |   | 4,174 |   | 4,173 |   | 4,212 |   | 4,213 |   |
| Thermal                                 |   | 3,327                   |   | 3,327 |   | 3,281 |   | 3,281 |   | 3,281 |   |
| Wind                                    |   | 20                      |   | 20 |   | 30 |   | 41 |   | 41 |   |
| Biomass                                 |   | 0                       |   | 9 |   | 9 |   | 9 |   | 9 |   |
| Cogeneration                            |   | 0                       |   | 0 |   | 67 |   | 67 |   | 111 |   |
| Total                                   |   | 7,520                   |   | 7,530 |   | 7,560 |   | 7,610 |   | 7,654 |   |

 

Hydroelectric generationis dependent upon hydrological conditions. In years of less favorable hydrological conditions, less hydroelectricityis generated and the Public Electricity System must depend upon increasedthermal production.  In addition, inyears of less favorable hydrological conditions, imports of electricity mayincreased.  For purposes of forecastmodels, our estimated annual hydroelectric production based on currentinstalled capacity in an average year is 10.6 TWh and can reach about 15****TWh in a wet year and may fall to 7****TWh in a dry year.  Between 1992 and 2002, our actualhydroelectric production has ranged from a low of 4,870 GWh in 1992, a very dryyear, to a high of 13,920 GWh in 1996, a moderate wet year.  In 2002, hydroelectric production was 7,336****GWh.

 

The following tablesummarizes our electricity production, excluding losses at our plants and ourown consumption, by type of generating facility from 1998 through 2002, andalso sets forth our hydroelectric capability factor for the same period.

 
|                                    |   | **Year ended  December 31,**                             |   |
|-----------------------------------------|--------|----------------------------------------------------------|--------|
| **Type of facility**                    |   | **1998**                                                 |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                    |   | **(in GWh,  except by hydroelectric capability factor)** |   |
| Hydroelectric:                          |   |                                                     |   |   |   |   |   |   |   |   |   |
| CPPE plants(1)                          |   | 11,506                                                   |   | 6,457 |   | 10,229 |   | 12,607 |   | 6,764 |   |
| Independent System hydroelectric plants |   | 718                                                      |   | 447 |   | 624 |   | 790 |   | 573 |   |
| Total hydroelectric                     |   | 12,224                                                   |   | 6,904 |   | 10,853 |   | 13,397 |   | 7,336 |   |
| Thermal:                                |   |                                                     |   |   |   |   |   |   |   |   |   |
| Coal                                    |   | 8,385                                                    |   | 9,319 |   | 9,091 |   | 8,677 |   | 9,532 |   |
| Fuel oil and natural gas                |   | 6,926                                                    |   | 7,596 |   | 4,631 |   | 5,583 |   | 7,848 |   |
| Gas oil                                 |   | 8                                                        |   | 2 |   | 38 |   | 50 |   | 13 |   |
| Coal and fuel oil(2)                    |   | 73                                                       |   | 85 |   | 11 |   | 30 |   | 44 |   |
| Cogeneration                            |   | 0                                                        |   | 0 |   | 134 |   | 423 |   | 589 |   |
| Total thermal                           |   | 15,392                                                   |   | 17,002 |   | 13,905 |   | 14,763 |   | 18,026 |   |
| Wind                                    |   | 46                                                       |   | 53 |   | 70 |   | 90 |   | 113 |   |
| Biomass                                 |   | 0                                                        |   | 2 |   | 5 |   | 18 |   | 37 |   |
| Total                                   |   | 27,662                                                   |   | 23,961 |   | 24,833 |   | 28,269 |   | 25,513 |   |
| Hydroelectric capability factor(3)      |   | 1.04                                                     |   | 0.68 |   | 1.08 |   | 1.19 |   | 0.75 |   |

 

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*(1)**          Includesthe following amounts of our own consumption for hydroelectric pumping, 100 GWhin 1998, 491 GWh in 1999, 558 GWh in 2000, 485 GWh in 2001 and*670*GWh in 2002.*

 

*(2)**          Ourexisting plant at Tapada do Outeiro used only fuel oil from 1998 onwards.*

 

*(3)**          Thehydroelectric coefficient varies based on the hydrological conditions in agiven year. A hydroelectric capability factor of one corresponds to an averageyear, while a factor less than one corresponds to a dry year and a factorgreater than one corresponds to a wet year.*

 

The average availability for production of CPPE’splants increased from 1998 through 2002 from 92.84% to 94.44% for thermalplants, and remained stable from 96.12% to 95.89% for hydroelectric plants.Non-availability results from planned maintenance and forced outages. CPPE isreducing planned maintenance outages through more efficient maintenancetechniques.  Forced outage is unplannedavailability at a power plant caused by trips, critical repairs or otherunexpected occurrences.  CPPE’sgenerating facilities have experienced very low rates of forced outage over thepast five years.  Management believes theselow rates compare favorably with the European average.  In the period 1998 through 2002, forcedoutage of CPPE’s thermal plants has ranged from 2.13% to 2.91%.  During the same period, forced outage ofhydroelectric plants ranged between a low of 0.3% in 1998 to a high of 1.0% in2001. Forced outage of hydroelectric plants in 2002 was 0.47%.

 

The average availability factor is defined as thetotal number of hours per year that a power plant is available for productionas a percentage of the total number of hours in that year.  This factor reflects the mechanicalavailability, not the actual availability of capacity, which may vary due tohydrological conditions.  During 2002, aworkgroup within CPPE studied and revised our computations of the “Averagecapacity utilization” and “Average availability factor” indicators, in order tomake them comparable with other European utilities. The table below sets outfor each type of CPPE generating facility the average capacity utilization andaverage availability factor, each calculated in accordance with our revisedcomputational method, for the indicated years:

 
|                                |   | **Average  capacity utilization (1)  Year ended December 31,** |   | **Average  availability factor  Year ended December 31,** |   |
|-------------------------------------|--------|----------------------------------------------------------------|--------|-----------------------------------------------------------|--------|
| **Type of  facility**               |   | **1998**                                                       |   | **1999**                                                  |   | **2000** |   | **2001** |   | **2002** |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                |   |                                                           |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Hydroelectric                       |   | 33.655                                                         | %      | 18.88                                                     | %      | 29.84 | % | 36.87 | % | 19.78 | % | 96.12 | % | 95.12 | % | 95.02 | % | 94.76 | % | 95.89 | % |
| Thermal:                            |   |                                                           |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Coal(2)                             |   | 80.30                                                          | %      | 89.25                                                     | %      | 86.82 | % | 83.10 | % | 91.28 | % | 90.48 | % | 90.46 | % | 89.15 | % | 90.50 | % | 94.00 | % |
| Fuel oil and  natural gas           |   | 46.16                                                          | %      | 50.63                                                     | %      | 30.78 | % | 37.21 | % | 52.31 | % | 94.15 | % | 93.23 | % | 94.57 | % | 96.55 | % | 93.73 | % |
| Coal and fuel oil                   |   | 8.91                                                           | %      | 10.33                                                     | %      | 2.76 | % | 7.23 | % | 10.82 | % | 97.78 | % | 98.62 | % | 99.59 | % | 98.90 | % | 98.17 | % |
| Gas oil                             |   | 0.29                                                           | %      | 0.08                                                      | %      | 1.32 | % | 1.74 | % | 0.44 | % | 93.33 | % | 99.64 | % | 99.40 | % | 98.38 | % | 99.14 | % |
| Total weighted  average thermal (3) |   | 52.81                                                          | %      | 58.33                                                     | %      | 47.79 | % | 49.90 | % | 60.68 | % | 92.84 | % | 93.02 | % | 93.15 | % | 94.57 | % | 94.44 | % |

 

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*(1)**          Theaverage capacity utilization is defined as actual production as a percentage oftheoretical maximum production.*

 

*(2)**          Theaverage availability of the coal plants in 1998 and 1999 was affected by theinstallation of low NOX burners in each unit of the Sines plant, one per year,which required production from each unit to stop temporarily. In addition,there was a strike at the Sines plant in 1998.*

 

*(3)**          Weightedaverage is based on total installed capacity of the thermal system.*

 

During the period from1998 through 2002, CPPE has had operating and maintenance costs, excluding fueland depreciation cost, below the limits contained in the relevant PPAs overthat time period. Management expects to continue to maintain these costs belowthe PPA limits in 2003.

 

CPPE’s power plants,because they are in the Binding Sector, are required to have binding licensesissued by DGE. CPPE received the requisite binding licenses in June 1997, whichwere effective from January 1, 1995.

 

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##### **Hydroelectric plants**

##### ** **

As of December 31, 2002, we operated 25 hydroelectricgenerating facilities in the Binding System, with 63 total units and anaggregate installed capacity of 3,903 MW.

 

Based on an independent revaluation of our assets in1992, management estimates that the average remaining useful life of our damsis approximately 45 years.  The tablebelow sets out our hydroelectric plants, installed capacity as of December 31,2002, the type of hydroelectric plant, the year of commencement of operationand the year in which the most recent major refurbishment, if any, wasaccomplished.

 
| **Hydroelectric plants**                        |   | **Installed capacity  (MW)****(1)** |   | **River reservoir  plant type** |   | **Year entered  into service** |   | **Year of last major  refurbishment** |   |
|-------------------------------------------------|--------|-------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|---------------------------------------|--------|
| ***CPPE Plants:***                              |   |                                |   |                            |   |                           |   |                                  |   |
| Alto Lindoso                                    |   | 630                                 |   | Reservoir                       |   | 1992                           |   | —                                |   |
| Miranda                                         |   | 369                                 |   | Run  of river                   |   | 1960/95                        |   | 1970                                  |   |
| Aguieira                                        |   | 336                                 |   | Reservoir                       |   | 1981                           |   | —                                |   |
| Valeira                                         |   | 240                                 |   | Run  of river                   |   | 1976                           |   | —                                |   |
| Bemposta                                        |   | 240                                 |   | Run  of river                   |   | 1964                           |   | 1969                                  |   |
| Pocinho                                         |   | 186                                 |   | Run  of river                   |   | 1983                           |   | —                                |   |
| Picote                                          |   | 195                                 |   | Run  of river                   |   | 1958                           |   | 1969                                  |   |
| Carrapatelo                                     |   | 201                                 |   | Run  of river                   |   | 1971                           |   | —                                |   |
| Régua                                      |   | 180                                 |   | Run  of river                   |   | 1973                           |   | —                                |   |
| Torrão                                     |   | 140                                 |   | Reservoir                       |   | 1988                           |   | —                                |   |
| Castelo de Bode                                 |   | 159                                 |   | Reservoir                       |   | 1951                           |   | 1986                                  | (1)    |
| Vilarinho Furnas                                |   | 125                                 |   | Reservoir                       |   | 1972/87                        |   | —                                |   |
| Vila Nova (Venda  Nova/Paradela)                |   | 144                                 |   | Reservoir                       |   | 1951/56                        |   | 1994                                  |   |
| Fratel                                          |   | 132                                 |   | Run  of river                   |   | 1974                           |   | 1997                                  |   |
| Crestuma-Lever                                  |   | 117                                 |   | Run  of river                   |   | 1985                           |   | —                                |   |
| Cabril                                          |   | 108                                 |   | Reservoir                       |   | 1954                           |   | 1986                                  |   |
| Alto Rabagão                               |   | 68                                  |   | Reservoir                       |   | 1964                           |   | —                                |   |
| Tabuaço                                    |   | 58                                  |   | Reservoir                       |   | 1965                           |   | —                                |   |
| Caniçada                                   |   | 62                                  |   | Reservoir                       |   | 1954                           |   | 1979                                  |   |
| Bouçã                                 |   | 44                                  |   | Reservoir                       |   | 1955                           |   | 1988                                  |   |
| Salamonde                                       |   | 42                                  |   | Reservoir                       |   | 1953                           |   | 1989                                  |   |
| Pracana                                         |   | 41                                  |   | Reservoir                       |   | 1950/93                        |   | 1993                                  |   |
| Caldeirão                                  |   | 40                                  |   | Reservoir                       |   | 1994                           |   | —                                |   |
| Touvedo                                         |   | 22                                  |   | Reservoir                       |   | 1993                           |   | —                                |   |
| Raiva                                           |   | 24                                  |   | Reservoir                       |   | 1982                           |   | —                                |   |
| Total                                           |   | 3,903                               |   |                            |   |                           |   |                                  |   |
| ***Independent System Hydroelectric  Plants:*** |   |                                |   |                            |   |                           |   |                                  |   |
| Hidrocenel(2)                                   |   | 107                                 |   | Various                         |   | Various                        |   |                                  |   |
| HDN(3)                                          |   | 118                                 |   | Various                         |   | Various                        |   |                                  |   |
| EDP Energia(4)                                  |   | 85                                  |   | Various                         |   | Various                        |   |                                  |   |
| Total                                           |   | 310                                 |   |                            |   |                           |   |                                  |   |
| Total maximum capacity                          |   | 4,213                               |   |                            |   |                           |   |                                  |   |

 

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*(1)**          Weinvested approximately € 12 million in the modernization of theelectricity generating turbines and other dam equipment at Castelo de Bode. Weexpect this modernization to be completed by the end of 2003.*

 

*(2)**          Hidroceneloperates 14 plants with capacities ranging from 0.1 MW to 24.4 MW and dates ofentry into service from 1906 to 2001.*

 

*(3)**          HDNoperates 12 plants with capacities ranging from 0.9 MW to 44.1 MW and dates ofentry into service from 1922 to 2001.*

 

*(4)**          EDPEnergia owns five plants with capacities ranging from 0.2 MW to 80.7 MW anddates of entry into service from 1927 to 1951.*

 

35

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###### **Thermal plants**

###### ** **

CPPE operates all seven of our conventional thermalpower plants, with total installed capacity as of December 31, 2002 of3,281 MW and installed capacity per generating unit ranging from 16 MW to 298MW.  The following table sets forth, asof December 31, 2002, our conventional thermal plants by installed capacity,type of fuel, net efficiency at maximum output, number of units and yearentered into service.

 
| **Thermal plants**                   |   | **Installed****Capacity (MW)** |   | **Fuel**               |   | **Net efficiency  at maximum  output** |   | **Number of  units** |   | **Years entered  into service** |   |
|--------------------------------------|--------|--------------------------------|--------|------------------------|--------|----------------------------------------|--------|----------------------|--------|---------------------------------|--------|
| Sines                                |   | 1,192                          |   | Coal                   |   | 36.9                                   |   | 4                    |   | 1985-89                         |   |
| Setúbal                         |   | 946                            |   | Fuel oil               |   | 38.3                                   |   | 4                    |   | 1979-83                         |   |
| Carregado I                          |   | 474                            |   | Fuel oil               |   | 37.4                                   |   | 4                    |   | 1968/1974                       |   |
| II(1)                                |   | 236                            |   | Fuel oil / Natural gas |   | 37.7                                   |   | 2                    |   | 1976                            |   |
| Tunes                                |   | 197                            |   | Gas oil                |   | 28.4                                   |   | 4                    |   | 1973/1982                       |   |
| Tapada do Outeiro (EDP  facility)(2) |   | 47                             |   | Coal  / fuel oil       |   | 29.5                                   |   | 1                    |   | 1967                            |   |
| Alto de Mira                         |   | 132                            |   | Gas oil                |   | 25.5                                   |   | 6                    |   | 1975-77                         |   |
| Barreiro                             |   | 56                             |   | Fuel  oil              |   | 34.3                                   |   | 2                    |   | 1978                            |   |
| Total maximum capacity               |   | 3,281                          |   |                   |   |                                   |   |                 |   |                            |   |

 

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*(1)**          Theseunits began burning natural gas in 1997.*

 

*(2)**          Thisthree-unit plant is scheduled to be progressively decommissioned until the endof 2004. The first unit of 50 MW was decommissioned on December 31, 1997. Thesecond unit of 50 MW was decommissioned on December 31, 1999. In 2000, 2001 and2002, one unit was operational, with an installed capacity of 50 MW.  Since January 1, 1998, this facility hasburned only fuel oil.*

 

There has been nosignificant change in average net efficiency of CPPE’s thermal plants over thepast five years. With continued proper maintenance of the thermal facilities,CPPE expects to maintain net efficiency at least at levels contracted in thePPAs.

 

## ***Other energy sources***

## *** ***

In addition to our hydroelectric plants, we promotethe use of renewable source energy with other types of facilities. Enernova,our subsidiary specializing in this area, concentrated its initial investmentsin wind sources (due to greater technological advances made to date). Our firstwind facility commenced operation in 1996. We now have four wind facilitieswith a combined installed capacity of 41 MW. In mid 2002, we created a new subsidiary for the biomass assets, EDPProdução Bioeléctrica, which owns the Mortágua biomass (forestry residue) powerplant. This plant commenced operations in 1999 and has an installed capacity of9 MW. Enernova activities are now focused solely on wind projects.

 

### **Fuel**

 

CPPE uses a number of fossil fuels in the generationof electricity. The introduction of natural gas to Portugal is diversifying thesources of primary energy. For more information on our use of natural gas youshould read “—Natural gas.”

 

CPPE fuel consumptioncosts including transportation were € 434.6 million in 2002 and€ 353.6 million in 2001, which represented approximately 52.8% and 48.3%,respectively, of CPPE’s total operating expenses.  The increase in the total cost of fuel consumed from 2001 to 2002resulted primarily from an increase in thermal production powered by fuel oil,explained by a dry 2002, as well as slightly higher prices for fuel oil.

 

 

36

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The table below sets fortha breakdown of costs of fuel consumed by CPPE from 1998 through 2002.

 
|          |   | **Year ended December 31,** |   |
|---------------|--------|-----------------------------|--------|
| **Type**      |   | **1998**                    |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|          |   | **(thousands of EUR)**      |   |
| Imported coal |   | 120,445                     |   | 116,823 |   | 127,104 |   | 142,810 |   | 148,773 |   |
| Fuel oil(1)   |   | 109,167                     |   | 109,371 |   | 146,721 |   | 193,867 |   | 259,816 |   |
| Gas oil(2)    |   | 549                         |   | 219 |   | 1,895 |   | 4,618 |   | 1,512 |   |
| Natural gas   |   | 16,670                      |   | 42,163 |   | 25,364 |   | 12,260 |   | 24,497 |   |
| Total         |   | 246,830                     |   | 268,578 |   | 301,084 |   | 353,555 |   | 434,597 |   |

 

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*(1)**          Includesconsumption for the production of steam at the Barreiro power plant.*

 

*(2)**          Smallamounts of gas oil are consumed by the gas oil plants for the operation ofthese plants in synchronous compensation mode for purposes of voltageregulation and a very small amount of generation.*

 

The following table sets forth the amounts of fuelpurchased by CPPE in each of the last five years.

 
|           |   | **Year ended December 31,**                        |   |
|----------------|--------|----------------------------------------------------|--------|
| **Type**       |   | **1998**                                           |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|           |   | **(thousands of metric tons, except natural gas)** |   |
| Imported coal  |   | 3,294                                              |   | 3,533 |   | 3,564 |   | 3,108 |   | 3,587 |   |
| Fuel oil(1)    |   | 1,484                                              |   | 1,712 |   | 1,052 |   | 1,237 |   | 1,941 |   |
| Gas oil        |   | 0                                                  |   | 0 |   | 0 |   | 26 |   | 3 |   |
| Natural gas(2) |   | 164                                                |   | 376 |   | 142 |   | 60 |   | 150 |   |

 

----

*(1)**          Includespurchases for the production of steam at the Barreiro plant.*

 

*(2)**          Measuredin millions of cubic meters.*

 

###### **Coal**

###### ** **

As the Sines power plant is a base load, or continuousoperation power plant, CPPE enters into supply contracts for more than one yearfor the major part of its consumption of coal. Pursuant to the PPAs, forpurchases of coal, an annual Target Contract Quantity, or TCQ, is defined byREN based on the forecasts for coal consumption for a wet year. The TCQ is thebasis for long-term supply and shipping contracts, which are negotiated byCPPE, subject to REN approval. In addition, CPPE makes spot-market purchases asnecessary.  In 2002, CPPE purchased 78%of its coal through long-term contracts and 22% of its coal on the spotmarket.  In comparison, in 2001 and2000, CPPE purchased 70% and 71.5% of its coal, respectively, through long-termcontracts, and 30% and 28.5% of its coal, respectively, on the spot market.

 

The following table shows a breakdown of CPPE’s coalpurchases from 1998 to 2002 by geographic markets as a percentage of totalpurchases.

 
|           |   | **Year ended December 31,** |   |
|----------------|--------|-----------------------------|--------|
| **Region**     |   | **1998**                    |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
| South Africa   |   | 30                          | %      | 28 | % | 38 | % | 28 | % | 29 | % |
| United States  |   | 14                          | %      | 12 | % | 10 | % | 17 | % | 3 | % |
| Australia      |   | 8                           | %      | 17 | % | 0 | % | 13 | % | 24 | % |
| South America  |   | 48                          | %      | 43 | % | 48 | % | 27 | % | 16 | % |
| Southeast Asia |   | 0                           | %      | 0 | % | 4 | % | 15 | % | 17 | % |
| Europe         |   | 0                           | %      | 0 | % | 0 | % | 0 | % | 11 | % |
| Total          |   | 100                         | %      | 100 | % | 100 | % | 100 | % | 100 | % |

 

In 2002, the average cost of coal consumed was€ 41.4 per ton for imported coal. In 2001 and 2000, the average cost ofcoal consumed for imported coal was € 43.76 per ton and € 37.30 perton, respectively.  CPPE has notconsumed domestic coal since 1997.

 

37

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**Fuel oiland gas oil**

 

Fuel oil purchases by CPPE are made in the spot marketand pursuant to contracts. CPPE purchases fuel oil from refineries in Europe,primarily in Portugal and northwestern Europe, and is remunerated through PPAsbased on, among other things, costs of fuel oil indexed to the spot market.

 

The average cost of fuel oil consumed in 2002 was€ 143.25 per ton, compared with € 141.22 and € 139.52 in 2001and 2000, respectively.  The increase in2002 was due to higher market prices until September, 2002 and the increase in2001 was due to slightly higher market prices for fuel in early 2001.  To meet its objectives to improve airquality, CPPE has shifted its fuel oil purchases to lower sulphur fuel oil,which has increased the cost of consumed fuel oil.  In 2002, the average sulphur content of fuel oil purchased byCPPE was approximately 2.1%.  To complywith an EU Directive, in October 2002 CPPE initiated the use of fuel with a 1%sulphur content.   The use of lower sulphurfuel oil has increased, and will increase in the future, the average cost offuel oil consumed.

 

CPPE maintains gas oil reserves as fuel for emergencygas turbine generators. Since gas oil is very expensive and economicallyinefficient, these reserves are used on a very limited basis. Consequently,small purchases of gas oil have been made by CPPE, as required by REN.

 

**Naturalgas**

 

Since the introduction in 1997 of the import ofnatural gas from Algeria into Portugal by Transgás, CPPE has had access tonatural gas as a source of primary energy. CPPE converted two units of Carregadoto be dual-fired (fuel oil and natural gas) in late 1997. In 2002, CPPEpurchased 150 million cubic meters of natural gas for a total of € 24.5****million compared to 60 million cubicmeters of natural gas in 2001 for a total of € 12.3 million.  For more information on our activitiesrelated to natural gas you should read “—Other International activities andstrategic investments.”

 

**Plannednew plants**

 

In order to meet increased demand for electricity inPortugal, additional capacity is planned for the National Electricity System.The following table sets out planned new power facilities in Portugal.

 
| **Facility**  |   | **Type of  generation** |   | **Developing  entity** |   | **Planned capacity  (MW)** |   | **Target  year** |   | **Status**          |                |
|---------------|--------|-------------------------|--------|------------------------|--------|----------------------------|--------|------------------|--------|---------------------|---------------------|
| Alqueva (1)   |   | Hydroelectric           |   | EDIA/CPPE              |   | 240                        |   | 2003             |   | Under  Construction |                |
| Venda Nova II |   | Hydroelectric           |   | CPPE                   |   | 192                        |   | 2004             |   | Under  Construction |                |
| Baixo Sabor   |   | Hydroelectric           |   | CPPE                   |   | 180                        |   | 2010             |   | Planning            |                |
| Picote II     |   | Hydroelectric           |   | CPPE                   |   | 236                        |   | 2010             |   | Planning            |                |
| TER           |   | Thermal                 |   | TER(2)                 |   | 2x392                      | (3)    |             | 2004   |                | Under  Construction |   |
|               |        |                         |        |                        |        |                            |        |                  |        |                     |                     |  |

 

----

*(1)**          EDIA—EmpresaDesenvolvimento Integrado do Alqueva, S.A. (“EDIA”) is a company wholly-ownedby the Republic of Portugal that is developing a multi-purpose hydro scheme forirrigation and the production of electricity. CPPE will have the exclusiveright to operate the Alqueva hydroelectric power plant for a period of 30years.*

 

*(2)**          TERwill operate in the Non-Binding Sector.*

 

*(3)**          Weare studying the construction of a plant with installed capacity of three 392MW units, in which case we would expect the last unit to be constructed in2006.*

 

###### **Capital expenditures**

###### ** **

In 2002, we spent € 276.5****million in capital expenditures intechnical costs for our generation facilities, compared with € 131.7million in 2001 and € 94.1 million in 2000.  Our capital expenditures in the generation sector have beenconcentrated on the following activities: conducting preliminary studies forand building of hydroelectric plants, maintaining and upgrading existing powerplants, investing in environmental projects such as the installation ofemission reduction equipment and, in 2002, investing € 142.9 million inthe new TER CCGT (combined cycle gas turbine) power plant.

 

38

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At this stage, management expects that the TER plantwill cost approximately € 480 million to construct a two unit CCGT plantor € 680 million if management decides to construct a thirdunit.  Although the shareholderstructure of our wholly owned subsidiary TER may change, we expect our portionof the investment in TER to be at least a majority.

 

The following table sets forth our capitalexpenditures in technical costs from 1998 through 2002 on plants by type andstatus of generating plant.

 
|                                     |   | **Year ended December 31,** |   |
|------------------------------------------|--------|-----------------------------|--------|
| **Plant type  and status**               |   | **1998**                    |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                     |   | **(thousands of EUR)**      |   |
| **Thermal/Hydro**                        |   |                        |   |   |   |   |   |   |   |   |   |
| **Public  Electricity System**           |   |                        |   |   |   |   |   |   |   |   |   |
| Hydroelectric  plants under construction |   | 6,943                       |   | 6,449 |   | 14,235 |   | 16,877 |   | 25,690 |   |
| Hydroelectric  plants in operation       |   | 7,432                       |   | 10,475 |   | 9,038 |   | 10,289 |   | 12,756 |   |
| Thermal plants  in operation             |   | 29,050                      |   | 25,199 |   | 17,623 |   | 14,764 |   | 16,261 |   |
| Plants under  study                      |   | 2,240                       |   | 359 |   | 190 |   | 1,450 |   | 1,011 |   |
| Total CPPE                               |   | 45,665                      |   | 42,483 |   | 41,086 |   | 43,380 |   | 55,718 |   |
|                                     |   |                        |   |   |   |   |   |   |   |   |   |
| **Independent  Electricity System**      |   |                        |   |   |   |   |   |   |   |   |   |
| Hydroelectric  plants                    |   | 17,922                      |   | 11,457 |   | 7,913 |   | 4,964 |   | 4,137 |   |
| TER                                      |   | 0                           |   | 0 |   | 3,571 |   | 58,535 |   | 142,946 |   |
| Wind                                     |   | 4,719                       |   | 5,726 |   | 11,128 |   | 6,521 |   | 11,159 |   |
| Cogeneration  facilities                 |   | 16,046                      |   | 37,654 |   | 25,439 |   | 13,083 |   | 9,602 |   |
| Biomass (2)                              |   | 6,729                       |   | 12,679 |   | 0 |   | 0 |   | 35,180 |   |
| Total Independent Electricity System     |   | 45,416                      |   | 67,516 |   | 48,051 |   | 83,103 |   | 203,024 |   |
| **Non-specific  investment****(1)**      |   | 0                           |   | 4,070 |   | 4,969 |   | 5,250 |   | 17,721 |   |
|                                     |   |                        |   |   |   |   |   |   |   |   |   |
| **Total  Generation**                    |   | 91,080                      |   | 114,070 |   | 94,106 |   | 131,733 |   | 276,462 |   |

 

----

*(1)**          Non-specific investment refers to investmentsnot directly related to our plants, such as administrative buildings,transportation equipment and implementation of new information systems.*

 

*(2)**          Investments in 2002 includes €34 millionrelated to an intra-group transfer of the Mortagua Biomass power plant (builtin 1999), to EDP Produção.*

 

We currently expect that our planned capitalexpenditures and investments will be financed from internally generated funds,existing credit facilities and customer contributions, which may becomplemented with medium- or long-term debt financing and equity financing asadditional capital expenditure requirements develop, particularly as our plansevolve with respect to our telecommunications business.  To learn more about our sources of funds andhow the availability of those sources could be affected, see “Item 5.  Operating and Financial Review andProspects—Liquidity and Capital Resources.”

 

**TRANSMISSION**

 

The transmission system in mainland Portugal is ownedand operated by REN, which is obligated by law to supply electricity within theNational Electricity System. Electricity transmission in Portugal is the bulktransfer of electricity, at voltages between 150 kV and 400 kV, from generationor acquisition sites across a transmission system to areas of use via networksthat are linked to each other to form an interconnected national transmissiongrid. As described above, the Portuguese government purchased a 70% interest inREN from us in late 2000. For more information on this purchase, you shouldread “Item 5. Operating and Financial Review and Prospects—Overview.”

 

39

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REN operates the national transmission grid on anexclusive basis pursuant to Portuguese law under a concession provided for by a1995 decree law. The concession is valid for 50 years from September 2000, whenthe concession agreement was signed.

 

The Portuguese transmission system operates at afrequency of 50 Hz, which is in line with the majority of the Europeantransmission systems. ** **At year-end 2002, there were 47substations operating on the national transmission grid, not including powerplants. All of these substations are now fully automated and operated by remotecontrol. Of REN’s transmission lines at December 31, 2002, approximately****2,420 km were****150****kV lines,****2,717****kmwere****220 kV lines and****1,301 km were 400 kV lines. In 1995, a newinterconnection with the Spanish transmission system was established, enablingboth systems to achieve economies of scale. Presently, REN has five interconnections with Spain, three of which are220 kV lines and two of which are 400 kV lines. Management understands that RENplans to establish, by 2006, three additional interconnections with Spain:Alqueva-Balboa, a 400kV line scheduled for completion in 2004;Alto-Lindoso-Cartelle, a 400kV line scheduled for completion in 2006; and DouroInternacional-Aldeadavila, a 220kV line scheduled for completion in 2006.

 

## ***Managing and controlling the powersystem***

 

In addition to the construction and operation of thenational transmission grid, REN is also responsible for central dispatch of allpower plants with installed capacity of more than 10 MW. This includesscheduling generation to match, as closely as possible, the demand on thenational transmission grid. As part of managing the national transmission grid,REN is also responsible for scheduling imports and exports with Spain.

 

As the sole holder of the concession for transmission,REN is required by law to develop and maintain an efficient, coordinated andeconomical system of electricity transmission and not to discriminate amongcompetitors in the generation and distribution of electricity.

 

## ***Purchases of electricity***

## *** ***

REN purchases electricity from all of the generatorsin the Binding Sector, consisting of CPPE’s generating plant, (the 600MW TejoEnergia plant at Pego and the Turbogás 3x330 MW combined cycle gas turbineplant at Tapada do Outeiro), through Power Purchase Agreements, or PPAs, witheach operator of any individual power plant within the Binding Sector thatsupplies electricity to the Public Electricity System.

 

The existing site locations for power plants in thePublic Electricity System are owned by REN, which REN leases to the operatorsof the plants for the duration of the respective PPAs. REN is involved inselecting future site locations, which it will then lease to successfulbidders.

 

The Turbogás plant at Tapada do Outeiro burns naturalgas supplied by Transgás. REN has entered into an Energy Management Agreement,or EMA, with Transgás, which governs the use of natural gas in thermal plantsand defines applicable prices. Transgás has the exclusive right to import gasto, and transport gas within, its concession area of Portugal for 35years.  However, in March 2003, thePortuguese government announced its view on the reorganization of the energymarket, stating its intentions to liberalize both the gas and electricitysectors. Within this goal, the government has stated its intention to merge RENand Transgás by selling 28% of state owned shares of Galp to REN.

 

Apart from the power plants in the Public ElectricitySystem, REN is also obligated to buy energy from autoproducers, cogenerators,small hydroelectric producers and other renewable source energy plantsoperating under Portuguese law within the Independent Electricity System.

 

REN supplies energy to EDPD at a uniform Bulk SupplyTariff, which is calculated by averaging all the individual power costscontracted with the generators through the PPAs after incorporatingtransmission, system management and regulatory costs, together with other costsfor the purchase of additional electricity. During the 1999-2001 regulatoryperiod, the Bulk Supply Tariff was adjusted every two years for changes in thegenerators’ fuel costs, which are entirely passed on by the generators to RENpursuant to the PPAs. For the 2002-2004

 

40

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regulatory period, changes in fuel costs are now incorporated into theBulk Supply Tariff on a quarterly basis. REN also sells electricity intoSpain’s power pool at prevailing prices in the pool.

 

**Importsand exports**

 

Prior to 1998, REN purchased electricity from Spainprimarily under in-kind exchange agreements with Rede Eléctrica de España, orREE, Spain’s national transmission grid company. The following table sets forthREN’s net imports in each of the last five years in GWh and as a percentage oftotal demand.

 
| **Year** |   | **Net  imports****(GWh)** |   | **Percentage  of total demand** |   |
|----------|--------|---------------------------|--------|---------------------------------|--------|
| 1998     |   | 272                       |   | 0.8%                            |   |
| 1999     |   | (857)                     |   | N/A                             |   |
| 2000     |   | 931                       |   | 2.5%                            |   |
| 2001     |   | 239                       |   | 0.6%                            |   |
| 2002     |   | 1,899                     |   | 4.7%                            |   |

 

REN enters into a PPA with each operator of anyindividual power plant within the Binding Sector that supplies electricity tothe Public Electricity System. Under each PPA, the operator is obligated tosell to REN all the electricity produced by a particular plant, as well as toprovide ancillary and special services, such as synchronous compensation,pumping and automatic generation control.

 

The life span of a PPA is fixed according to the fulltechnical useful life of the equipment and generally its remuneration scheme isbased on a capacity charge. Under the PPAs, any extraordinary investmentsagreed upon with REN, in consultation with the regulator, can be reimbursed.These investments can be paid to the generator through a revision of thecapacity charge.

 

According to the Resolution of the Council ofMinisters no. 63/2003 of April 28, 2003 relating to the promotion ofliberalization of the electricity and gas markets in furtherance of theorganizational structure of the Iberian Electricity Market, the governmentintends to renegotiate or terminate the existing PPA’s and adequatelycompensate the operators since REN will no longer be the exclusive purchaser ofelectricity.

 

**DISTRIBUTION**

 

Electricity distribution in Portugal is a regulatedbusiness and involves the transfer of electricity from the transmission systemand its delivery across a distribution system to consumers, meter reading andinstallation, and the billing of regulated consumers.  Portugal’s local electricity distribution function is carried outalmost exclusively by EDPD. ** **Through fourteen networkdistribution areas and seven commercial distribution areas, EDPD provided morethan 5.6 million customers with 35,973 GWh of electricity in 2002.  At December 31, 2002, EDPD employedapproximately 6,981 personnel.

 

Under Portuguese law, distribution of high voltage,greater than 45kV and less than 110kV, and medium voltage, greater than or equalto 1kV and less than or equal to 45kV, electricity is regulated by the issuanceby DGE of a binding license with no time limitation.  Our four distribution companies, subsequently consolidated intoEDPD, were appointed by law as the holders of the license for distribution ofhigh and medium voltage electricity. EDPD received the license in 2000. Distribution of low voltage electricity is regulated through 20-yearmunicipal concession agreements with municipal councils.  EDPD pays rent to each municipality asrequired by law. For more information on licenses and concessions held by us,you should read “—Regulation” and note 30 to the consolidated financialstatements.

 

Under the terms of the binding licenses, EDPD isobliged to supply electricity to all customers located within its licensed areathat are part of the Public Electricity System. EDPD is also obliged to provideaccess to the distribution network to producers in the Independent ElectricitySystem in return for a regulated access charge from consumers. EDPD owns,leases or has rights of way for the land on which its substations are situated.In addition,

 

41

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EDPD has long-term rights of way for its distribution lines. Ifnecessary, new properties may be acquired through the exercise of eminentdomain. In those cases, EDPD compensates affected private property owners.

 

The authorized area of EDPD covers all of mainlandPortugal. At December 31, 2002, EDPD’s distribution lines spanned a total ofapproximately 190,147 kilometers. The only distribution lines in Portugal notowned by EDPD are those of the autoproducers and small cooperatives, which owntheir own lines. The following table sets forth the kilometers at December 31,2002 EDPD’s distribution lines by voltage.

 
| **Distribution lines**               |   | **Km**  |       |
|--------------------------------------|--------|---------|------------|
| **Overhead lines:**                  |   |    | ** ** |
| High voltage  (60/130kV)             |   | 7,097   |       |
| Medium voltage (<6/10/15/30/40kV) |   | 51,460  |       |
| Low voltage  (1kV)                   |   | 96,265  |       |
| Total overhead  lines                |   | 154,821 |       |
| **Underground cables:**              |   |    |       |
| High voltage  (60/130kV)             |   | 357     |       |
| Medium voltage (<6/10/15/30/40kV) |   | 10,995  |       |
| Low voltage  (1kV)                   |   | 23,973  |       |
| Total  underground cables            |   | 35,325  |       |
| Total                                |   | 190,147 |       |

 

**Sales and customers**

 

EDPD distributes electricity to more than 5.6 millioncustomers.  Approximately 65.5% ofconsumption of EDPD’s electricity in 2002 was along the coast, withapproximately 14.1% in greater Oporto and 19.9% in greater Lisbon. EDPDclassifies its customers by voltage level of electricity consumed. Thefollowing chart shows the number of customers as of December 31, 2002,according to level of voltage contracted.

 
| **Level of voltage**                                                           |   | **Total  customers** |   |
|--------------------------------------------------------------------------------|--------|----------------------|--------|
| High and very  high voltage(1)                                                 |   | 128                  |   |
| Medium  voltage(2)                                                             |   | 20,465               |   |
| Special low  voltage (between 20.7 kVA and 41.4 kVA contracted capacity)(3)(4) |   | 27,361               |   |
| Low voltage(4)                                                                 |   | 5,617,102            |   |
| Total                                                                          |   | 5,665,056            |   |

 

----

*(1)**       Highvoltage is greater than 45 kV and less than or equal to 110 kV. Very highvoltage is greater than 110 kV.*

 

*(2)**       Mediumvoltage is greater than or equal to 1 kV and less than or equal to 45 kV.*

 

*(3)**       Speciallow voltage customers are primarily small industrial and commercial customers.*

 

*(4)**       Lowvoltage is less than 1 kV.*

 

EDPD has experienced increased sales over the pastfive years in all electricity voltage levels with the exception of high voltageand very high voltage use, which has remained steady largely due to theincrease in autoproduction and cogeneration by some industrial clients.Consumption has grown at an average annual growth rate of 4.3% from December31, 1998 to December 31, 2002, due primarily to increased consumption by mediumvoltage and low voltage customers. Consumption by medium voltage customersincreased from 10,180 GWh in 1998 to 11,198 GWh in 2002, representing anaverage annual increase of 2.4%, primarily as a result of growth in Portugal’sindustrial sector. Consumption by low voltage customers, typically residentialand services, increased from 15,460 GWh in 1998 to 19,425 GWh in 2002,representing average annual growth of 5.9%. The growth in low voltageconsumption during this period resulted primarily from an increase in thenumber of low voltage customers from approximately 5.2 million toapproximately 5.6 million, as well as an increase in annual consumption perconsumer.

 

On a revenue basis, our domestic electricity sales grewfrom € 2,950.1 million in 1998 to € 3,456.4 million in2002.  The most significant increase insales has been to low voltage customers (typically residential and services),to whom sales increased from € 1,927.3 million in 1998 to € 2,335.1****million in 2002.  The table below sets forth our total domestic sales ofelectricity to customers by level of voltage required, illustrating steadyoverall growth in sales

 

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from 30,364 GWh in 1998 to 35,973 GWh in 2002.  Revenue from electricity sales decreased in1999 compared with 1998 despite an increase in consumption due to a decrease intariffs, which were defined by the regulator for the first time in 1999.  Revenue from electricity sales increased in2001 compared to 2000 due to expansion in consumption and a 1.2% tariffincrease set by the regulator for 2001. The increase in revenue fromelectricity sales in 2002 compared to 2001 was influenced by the tariffadjustment, as discussed below the following table.

 
|                               |   | **Year ended  December 31,** |   |
|------------------------------------|--------|------------------------------|--------|
|                               |   | **1998**                     |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                               |   | **(thousands  of EUR)**      |   |
| **Electricity sales(1)**           |   | **GWh**                      |   | **EUR** |   | **GWh** |   | **EUR** |   | **GWh** |   | **EUR** |   | **GWh** |   | **EUR** |   | **GWh** |   | **EUR** |   |
| Very high voltage and high Voltage |   | 3,840                        |   | 177,946 |   | 3,855 |   | 158,887 |   | 4,104 |   | 164,698 |   | 4,259 |   | 165,443 |   | 4,271 |   | 169,031 |   |
| Medium voltage                     |   | 10,180                       |   | 772,079 |   | 10,639 |   | 722,963 |   | 11,092 |   | 745,354 |   | 11,354 |   | 770,785 |   | 11,198 |   | 795,123 |   |
| Low voltage                        |   | 15,460                       |   | 1,927,300 |   | 16,839 |   | 1,981,460 |   | 17,884 |   | 2,078,905 |   | 18,828 |   | 2,193,066 |   | 19,425 |   | 2,335,135 |   |
| Public lighting                    |   | 884                          |   | 73,184 |   | 947 |   | 74,351 |   | 1,010 |   | 80,282 |   | 1,064 |   | 83,918 |   | 1,080 |   | 86,614 |   |
| Tariff adjustment                  |   | —                       |   | 0 |   | — |   | (7,701 | ) | — |   | (9,093 | ) | — |   | 42,218 |   | — |   | 70,482 |   |
| Total                              |   | 30,364                       |   | 2,950,509 |   | 32,280 |   | 2,929,959 |   | 34,090 |   | 3,060,145 |   | 35,505 |   | 3,255,430 |   | 35,973 |   | 3,456,385 |   |

 

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*(1)**       Invoicedsales plus estimated meter readings at year-end. Electricity sales do notinclude REN’s sales in the foreign market, which in 1999 and 2000 were morethan offset by purchases from the foreign market and which, from the secondhalf of 2000, are no longer consolidated in our results.*

 

Tariffs are fixed by the regulator in advance for eachyear and are based in part on estimated data for variables such as demand andcost. If there are differences between the estimated data and the data actuallyexperienced during the period, an adjustment as described in the table abovewill be made to the tariff in a subsequent period to account for thesedifferences. The tariff adjustment, used for the first time in 1999, reflectsour estimate of the amount that will be applied in fixing tariffs in subsequentperiods as a result of these differences. The 1999 tariff adjustment wasrecorded to account for deviations from estimated cost and demand data relatedto REN.  The 2000 tariff adjustment isan aggregate figure that represents adjustments related to REN and EDPD’sdistribution and supply activities. Because of our sale of a 70% interest in REN to the Portuguesegovernment, the tariff adjustment for 2001 does not include adjustments relatedto REN.  Due to consumption in 2002below that assumed in the setting of the 2002 tariffs, amounts invoiced tofinal customers did not sufficiently compensate EDPD for the fixed amount thatEDPD was required to pay REN for electricity acquired from REN, giving rise toa € 50 million tariff adjustment.  The2002 tariff adjustment also includes € 20.5 million for the repositioning ofthe 2000 tariff adjustment. For more information on the tariff adjustments youshould read “Operating and Financial Review and Prospects” and note 3 to theconsolidated financial statements.

 

In 2002, the total number of Eligible Consumers inPortugal represented approximately 44.5% of our total sales in 2002 in GWh andapproximately 28.6% of our total sales in 2002 in euros. In March 2003, theapproximately 21000 Eligible Consumers consisted entirely of industrial orservices businesses. During the first quarter of 2003, the largest of thesepotential Eligible Consumers purchased 694 GWh for a total of approximately€ 11 million.

 

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The following chart shows the consumption profile ofbinding customers supplied by the public network in the Portuguese mainland forthe years from 1998 through 2002.

 
|                                                      |   | **Year ended December 31,** |   |
|-----------------------------------------------------------|--------|-----------------------------|--------|
|                                                      |   | **1998**                    |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                                      |   | **(GWh)**                   |   |
| **Consumption profile(1)**                                |   |                        |   |   |   |   |   |   |   |   |   |
| Residential                                               |   | 8,317                       |   | 8,987 |   | 9,678 |   | 10,188 |   | 10,513 |   |
| Cooking and  heating                                      |   | 14                          |   | 8 |   | 8 |   | 8 |   | 8 |   |
| Non-Residential                                           |   | 6,897                       |   | 7,498 |   | 7,964 |   | 8,428 |   | 8,728 |   |
| Industrial uses  (2)                                      |   | 11,894                      |   | 12,207 |   | 12,669 |   | 12,904 |   | 12,613 |   |
| Agricultural  uses                                        |   | 607                         |   | 667 |   | 679 |   | 737 |   | 776 |   |
| Traction for  railways                                    |   | 316                         |   | 364 |   | 360 |   | 358 |   | 439 |   |
| Lighting of  State buildings, Administrative Bodies, etc. |   | 1,366                       |   | 1,529 |   | 1,632 |   | 1,722 |   | 1,700 |   |
| Public Lighting                                           |   | 884                         |   | 946 |   | 1,010 |   | 1,065 |   | 1,080 |   |
| Other (3)                                                 |   | 111                         |   | 121 |   | 129 |   | 137 |   | 137 |   |
| Total                                                     |   | 30,407                      |   | 32,329 |   | 34,128 |   | 35,547 |   | 35,993 |   |

 

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*(1)**       Includesour own consumption.*

 

*(2)**       Includeselectrochemistry and electrometallurgy.*

 

*(3)**       Othernon-EDP distributors.*

 

A breakdown of electricity consumption by sector ofeconomic activity shows that, of the major consumer types, the fastest growingsector has been the power for railway traction, with an average annual growthrate of 8.5% between 1998 and 2002. During this same period, the agricultural,non-residential and residential sectors exhibited an average annual growth rateof 6.3%, 6.1% and 6.0% respectively.

 

The number of distribution customers per distributionemployee is an important measure for EDPD. In the period from 1998 through2002, the number of customers per employee has increased from 519 to 811.

 

###### **Purchases of electricity**

###### ** **

EDPD purchases all of its electricity in the BindingSector from REN. In 1999, the regulator established a legal framework of limitsfor purchases of electricity by EDPD outside of the Binding Sector, which forthe 2002-2004 regulatory period is 8%. EDPD has historically purchased less than 8% of its total energy fromsuppliers in the Non-Binding Sector and abroad.

 

**Distributionlosses**

 

EDPD experiences both technical losses of electricitydue mainly to the use of overhead lines and, to a far lesser extent, commerciallosses of electricity due primarily to gaps between estimated meter readingsand actual levels of consumption. Although losses are within the normal range for the types of networksemployed, management to decrease further the amount of annual losses as aresult of capital expenditures in our distribution network.

 

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The following table sets forth data regarding thelosses of EDPD in absolute terms and as a percentage of demand, as well as ourown uses of energy. 

 
|                                                    |   | **Year ended  December 31,**      |   |
|---------------------------------------------------------|--------|-----------------------------------|--------|
|                                                    |   | **1998**                          |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                                    |   | **(in GWh,  except percentages)** |   |
| Demand on the  distribution network                     |   | 33,243                            |   | 35,095 |   | 37,230 |   | 39,263 |   | 39,965 |   |
| Own uses of  energy(1)                                  |   | 56                                |   | 61 |   | 51 |   | 52 |   | 32 |   |
| Distribution  losses                                    |   | 2,757                             |   | 2,756 |   | 2,875 |   | 3,183 |   | 3,008 |   |
| Distribution  losses/demand on the distribution network |   | 8.3                               | %      | 7.9 | % | 7.7 | % | 8.1 | % | 7.5 | % |

 

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*(1)**       Starting in 2002, supply to EDP groupcompanies was included in “PES supply” (totalling 26GWh). Energy exchangesbetween EDP group companies (7GWh) were not considered sales.*

 

*(2)**       Includeselectrochemistry and electrometallurgy.*

 

**Capital expenditures**

 

In recent years, our largest capital expenditures havebeen on the distribution system.  EDPDis obligated by law to connect all customers who request to be linked to thePublic Electricity System. As a result, the largest component of capitalexpenditures is spent on connecting new customers, improving network efficiencyand developing the network (installing new cables and new lines) to accommodatethe growth in demand.

 

EDPD’s total 2002 capital expenditures in technicalcosts amounted to € 366.0 million, of which approximately 34% are expenditureson “non-specific” administrative, technical and commercial systems andcorresponding technology support infrastructure, primarily the acquisition ofan IT system for EDINFOR from approximately € 80.5 million.  EDPD’s capital expenditures in technicalcosts in distribution totalled € 260.6 million in 2001, € 232.3million in 2000, € 231.4 million in 1999 and € 244.5 million in1998.  These amounts also includeamounts paid by customer contributions in cash, but do not include in kindassets contributed by customers. New customers are required by currentregulation to make a contribution, in cash or in kind, for connections based onfactors such as the type of voltage, the amount of power to be supplied, anddistance to the network. In 2002, total customer contributions, and certainamounts contributed for infrastructure improvements, amounted to approximately€ 111 million.

 

**Conservationmeasures**

 

We have been progressively implementing a voluntarypolicy to promote electricity conservation in an effort to decrease thevariability of the load on the system and to increase efficient use ofelectricity. In doing so, we have increased dissemination of information on theend-use efficiency in several industrial subsectors, services and residentialuse. We have also launched a program of granting awards to industrial customersfor successfully implementing electricity efficiency projects and haveestablished a joint venture with other energy sector companies whose main goalis to promote energy conservation.

 

In addition, the tariff structure has been designed topromote the rational use of electricity, basing tariffs on marginal costs,which may vary by time of day or season. Large consumers with a capability toreduce demand are offered an interruptible tariff rate, which results in adiscount to the consumer and helps to alleviate demand at peak times.

 

**TARIFFS**

 

The prices we charge for electricity are subject toextensive regulation under a tariff regime that was revised in 1998, causingsignificant price reductions.  InDecember 1998, the regulator implemented a new tariff regulatory code to beapplied in Portuguese mainland, establishing a periodic definition ofregulatory parameters for tariffs and a methodology for setting tariffs. Duringthe first regulatory period, including the years 1999-2001, and the secondregulatory period, including the years 2002-2004, prices were set annuallyaccording to a series of formulae that

 

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were derived based primarily upon what was deemed to be an appropriatereturn on assets in transmission, a return fixed by price cap in distribution,and a return on assets and agreed costs in commercialization, i.e., theactivity of supply, measurement and billing of energy sales to final clients.

 

For more information on tariffs during the 2002-2004regulatory period, you should read “—Regulation—Portugal—Electricity/pricingtariffs.”  In April 2002, the Portuguesegovernment extended the powers of the regulator to the Portuguese archipelagosof Azores and Madeira, with the intention of levelling the higher tariffs ofthese island regions to comparatively lower tariffs of the Portuguese mainlandwhile providing adequate financial returns to island electricitycompanies.  This levelling leads to anincremental increase in prices charged to mainland customers, although suchprices cannot increase more than inflation.

 

In the Binding Sector, distribution tariffs forcustomers are differentiated by voltage level, tariff option and period ofelectricity consumption. These tariffs, when set, are uniform throughoutmainland Portugal within each level of voltage.

 

For the 2002-2004 regulatory period, the regulator hasapplied a four-rate tariff price structure related to the time of day formedium, high and very high voltage consumers. Low voltage consumers with subscribed demands above 20.7 kVA have athree-rate time of day structure, while low voltage consumers with subscribeddemands up to 20.7 kVA might choose between a single-rate tariff, or aday-night tariff option.

 

The producers and consumers in the Non-Binding Sectorhave a right to access and use the national transmission grid and ourdistribution network through the payment of access tariffs for the Global Useof System, the Use of the Transmission Network, the Use of the DistributionNetwork and Network Commercialization, which terms and conditions wereestablished by the regulator.  For moreinformation on the tariff structure, you should read“—Regulation—Portugal—Electricity/pricing tariffs.”

 

In real terms, adjusted for inflation, both high andmedium voltage tariffs to final consumers in the Binding Sector, generallyapplied to industrial customers, have declined by an average of approximately6.0% per year over the period 1998 to 2003. Tariffs in the Binding Sector for low voltage customers, typicallyresidential, have also declined in real terms by an average of approximately3.3% per year over the same period.  For2001, in nominal terms, tariffs in the Binding Sector for all voltage levelsincreased by 1.2% from the 2000 levels. For 2002, in nominal terms, tariffs inthe Binding Sector increased by an average of 2.2% across all voltage levelsfrom the 2001 tariff levels.  For 2003,in nominal terms, tariffs in the Binding Sector for all voltage levelsincreased by 2.8% from the 2002 levels.

 

For the 2002-2004 regulatory period, the regulatorconsiders the distribution function to consist of three business areas, whichcould in the future be liberalized at different times and subject to differenttariff regulatory regimes: use of the distribution network, networkcommercialization services and commercialization of supply in the BindingSector.  The use of the distributionnetwork area involves activities relating to investments in and the operationof the distribution grid.  Tariffsapplicable to the use of the distribution network are based on a price capmechanism designed to reduce distribution tariffs on an annual basis by, anaverage over the three years of the regulatory period, a percentage equal tothe Portuguese Consumer Price Index, minus a percentage referred to as the“efficiency coefficient”.  The efficiencycoefficient was approximately 5% for the 1999-2001 regulatory period and isapproximately 7% for the 2002-2004 regulatory period.  The network commercialization area consists of activities relatedto meter installation, reading and the billing of all services associated withthe use of the distribution network. The commercialization of supply in the Binding Sector area consists ofactivities directly relating to the final consumer, such as customer service,billing of final consumers in the Binding Sector and collecting payments fromconsumers.  The tariff applicable to thenetwork commercialization services and commercialization of supply in theBinding Sector area is based on costs accepted by the regulator plus a 9%return on assets. During the 1999-2001 regulatory period, distribution tariffsin the Binding Sector were subject to a sliding scale profit sharing mechanism,which required us to return to customers a portion of our annual profits thatexceeded specified levels designated by the regulator.  This mechanism was abolished at the secondregulatory period 2002-2004.

 

Tariffs are also subject to an annual extra adjustmentmechanism that takes into account the deviations of actual costs compared toforecasted costs used to derive tariffs for the previous one or two years.  As a result, we have adopted a “tariffadjustment” in our financial statements that reflects our estimate of theamount that will be applied

 

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in fixing tariffs in subsequent periods as a result of differences betweenestimated and actual data.  For the1999-2001 regulatory period, the tariff adjustment also reflected our estimateof the portion of any excess profits or deficit in profits that would beapplied in fixing tariffs in subsequent periods as a result of having achievedannual profits above or below levels set by the regulator.  For more information on the tariffadjustment, you should read “Operating and Financial Review and Prospects” andnote 3 to the consolidated financial statements.

 

# **COMPETITION**

 

Until 1988, we had a monopoly for the generation,transmission and distribution of electricity in Portugal, although a very smallnumber of municipalities distributed low voltage electricity to consumers.Since 1988, measures have been taken to encourage limited competition in powergeneration in Portugal. In 1999, the regulator implemented measures toencourage competition in the supply of electricity in Portugal.  For more information on these measures, youshould read “—Electricity System Overview”.  In addition, as a result of political and regulatory developments, weexpect increased competition from Spanish electricity companies.  See “—Iberian Electricity Market” and “—Spain—History and Overview” below.

 

###### **Generation**

 

The existing power stations of CPPE, which form 94% ofour generating capacity, are all part of the Public Electricity System. Theearnings that CPPE derives from these power stations are unlikely to beaffected by competition from generators in the Independent Electricity System.In accordance with the terms of the PPAs, CPPE’s operating income is dependenton the availability of capacity and is substantially unaffected by levels ofactual output. Under Portuguese law, any projects for construction of newthermal power plants in the Public Electricity System must be subject to anopen tender coordinated by DGE. In the case of hydroelectric generation, allplants planned to be commissioned until 2010 are allocated by law to CPPE.

 

The Public Electricity System includes two powerstations that are not owned and operated by us: the Pego power plant, which wasconstructed and commissioned by us and later sold to Tejo Energia; and Tapadado Outeiro which commenced full operations in 1999 and is owned and operated byTurbogás. The admission of these power stations to the Public ElectricitySystem resulted from two international tender processes coordinated by us inaccordance with Portuguese government policy in effect at that time toestablish competitive practice in the electricity generation sector. We expectto participate in future tender processes.

 

Subject to the issuance of generation licenses, we mayconstruct plants, such as TER, as part of the Independent Electricity System.These plants would operate in the openly competitive market and sell power toREN under competitive offers or make bilateral contracts with REN, Non-BindingSector customers, Binding Sector distributors or Spanish agents.

 

Because Portugal is contiguous only with Spain andthere are limited connections between Spain and the rest of Europe, and becauseof recent political and regulatory developments, management expects that aregional market on the Iberian peninsula will develop.  Accordingly, we expect to face competitionin generation and sales from Spanish participants in this market.  See “—Iberian Electricity Market” and“—Spain” below.

 

###### **Transmission**

 

As the sole provider of transmission throughoutPortugal, REN is well insulated from the effects of competition. In its role asthe wholesale buyer and seller of electricity in the Public Electricity System,it is entitled to recover the electricity purchase costs via the Bulk SupplyTariff charged to EDPD for electricity destined for Public Electricity Systemcustomers. In the Non-Binding Sector, however, EDPD is permitted to purchaseelectricity from sellers other than REN, up to limits set by the regulator. Formore information on these purchases, you should read “—Distribution” below.

 

**Distribution**

 

EDPD, and previously, our distribution companies, hashistorically held an effective monopoly over distribution. However, increasesin the levels of industrial autoproduction have reduced the amount ofelectricity

 

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sold to these entitiesfrom the Public Electricity System. In addition, in early 1999, the regulatorimplemented legislation liberalizing the electricity supply business.

 

As of May 15, 2003, allEligible Consumers, i.e., all consumers other than low-voltage consumers,automatically may become Qualifying Consumers. In  2002, the total number ofEligible Consumers represented approximately 44.5% of our 2002 sales in volumeand 28.6% of our 2002 sales in monetary terms. Even if these Eligible Consumers all decided to switch suppliers, wewould still continue to receive payments for access to our network.  For more information on the tariffmechanism, you should read “—Regulation—Portugal—Electricitypricing/tariffs.”  On the January 1, 2004,the market will open to special low voltage consumers (consumers with a subscribeddemand greater than 41.4 KVA). The complete liberalization of the electricitymarket is expected to be completed in July 2004 with the opening of the marketto the rest of the low voltage consumers.

 

Although the regulatorestablished a framework for the operation of a pool in Portugal in whichnon-binding generators and Qualifying Consumers could trade energy in March2000, this pool never entered into operation. In late 2001, the Portuguese andSpanish governments signed a cooperation agreement for the creation of anIberian electricity market that was expected to start operations in January2003 and was later postponed to July 2003. The cooperation agreement calls for, among other things, the creation ofa common pool for Portugal and Spain and the harmonization of tariffstructures.  See “—Iberian ElectricityMarket” and “—Spain”.

 

**SPAIN**

 

**HISTORYAND OVERVIEW**

 

The implementation of an Iberian Electricity Market isthe driving force behind our decision to expand our operations to Spain.  In 2001 we identified Hidroeléctrica delCantábrico, or Hidrocantábrico, as an independent utility company that couldfacilitate our entry into the Spanish energy market.

 

In January 2001, Adygesinval, S.L., a company jointlyand equally owned by us and Cajastur—Caja de Ahorros de Asturias, a Spanishsavings bank, launched an unconditional cash public tender offer for 100% ofthe outstanding shares of Hidrocantábrico at € 24 per share. Cajastur andCaser—Caja de Seguros Reunidos, Compañía de Seguros y Reaseguros, S.A., aSpanish insurance company, already held 14.97% of the shares ofHidrocantábrico. Adygesinval acquired a 19.2% shareholding in Hidrocantábricodirectly from TXU Europe, an arm of the United States utility TXU Corp., for €24 per share, or approximately € 522 million. Spanish industrial group Ferroatlantica, together withEnergie-Baden-Württemberg AG, or EnBW, a German utility company, launched arival tender offer for Hidrocantábrico shares. After the tender offers forHidrocantábrico were completed in April 2001, a consortium formed byAdygesinval, Cajastur and Caser owned approximately 35% of the shares ofHidrocantábrico, of which only shares representing 25% could vote becauseHidrocantábrico’s by-laws limit the voting rights of any single shareholder to10%. Adygesinval could exercise 10% of the voting rights, Cajastur couldexercise approximately 10% of the voting rights and Caser could exerciseapproximately 5% of the voting rights. Ferroatlantica and EnBW ownedapproximately 60% of the shares and could exercise 10% of the voting rights ofHidrocantábrico.  Pursuant to a Spanishmerger law, Adygesinval and Ferroatlantica each notified the EuropeanCommission, or EC, of their respective acquisitions of Hidrocantábricoshares.  The EC approved both theAdygesinval transaction and the Ferroatlantica/EnBW transaction, although withrespect to the Ferroatlantica/EnBW transaction the EC required certaincovenants from EnBW’s controlling shareholder. Pursuant to a Spanish law aimed at shareholdings by state-linkedbusinesses in certain sectors, the Spanish government temporarily suspended thepolitical rights (including shareholder voting and rights to inspect corporaterecords) of Adygesinval and Ferroatlantica/EnBW pending the outcome of aprocedure under this law, the purpose of which is to determine whether anacquiror is controlled by a government entity. These suspensions were both lifted subject to certain conditions, whichin the case of Adygesinval were linked to the creation of an Iberian electricitymarket.

 

In December 2001, we signed an agreement with EnBW,Cajastur and Cáser concerning joint control of Hidrocantábrico throughAdygesinval.  Ferroatlantica transferredits holdings in Hidrocantábrico to EnBW at the time of the agreement.  Under the agreement Adygesinval merged intoHidrocantábrico.  The agreement alsocontains provisions for the corporate governance of Hidrocantábrico.  Hidrocantábrico is 40% owned by us, 35%owned by EnBW and 25% owned by Cajastur and Caser.  The agreement of all parties is required for specified keycorporate actions.  Operational mattersrequire only the consent of us and EnBW. In the event of a deadlock

 

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concerning operational matters, we would ultimately beable to decide the course of action, but EnBW would have a right to require usto purchase its shares in Hidrocantábrico in such an event.  The appointment of Hidrocantábrico’s chiefexecutive officer, non-executive chairman and the secretary of the board ofdirectors requires agreement of all three parties.  If agreement cannot be reached, we will designate the chiefexecutive officer, Cajastur will appoint the non-executive chairman and EnBWwill appoint the secretary of the board of directors.  The EC’s Merger Task Force approved the agreement in early March2002.  One of the conditions to thetransactions contemplated by the agreement, the delisting of Hidrocantábricoshares from the Madrid, Barcelona and Bilbao Stock Exchange, was completed inJune 2002.

 

**Market Structure**

 

The two major characteristics of the Spanishelectricity sector are the existence of the wholesale Spanish generationmarket, or the Spanish pool, and the fact that of any consumer is free chooseits supplier as of January 1, 2003. Competition was first introduced in the Spanish electricity market in1997 through Law 54/1997, which provided a regulatory framework thatreorganized the functioning of the market.

 

Generation facilities in Spain operate either in the“ordinary regime” or the “special regime.” The electricity system must acquire all electricity offered by specialregime generators, which comprise small or renewable energy facilities, attariffs fixed by decree law that vary depending on the type of generation andare generally higher than Spanish prices. Ordinary regime generators provide electricity to the Spanish pool andby bilateral contract to qualified consumers and liberalized suppliers atmarket prices.

 

Companies with the capability to sell and buyelectricity may participate in the Spanish pool.  Electricity generators sell electricity to the pool and theregulated electricity distributors, suppliers, in the liberalized, orunregulated, market and consumers that that are permitted to participate in thepool, or qualified consumers, buy electricity in this pool.  Foreign companies or consumers that haveforeign agent status may also sell and buy in the Spanish pool.  The market operator and agency responsiblefor the market’s economic management and bidding process is Compañia Operadoradel Mercado Español de Electricidad, or OMEL.

 

In addition to selling electricity to regulatedconsumers (customers that are subject to a regulated final tariff and are notqualified consumers), regulated distributors must provide network access to allqualified consumers that have chosen to be supplied in the liberalizedmarket.  However, qualified consumersmust pay an access tariff to the distribution companies if such access isprovided.  At the beginning of eachyear, the Spanish government sets both the final and access tariffs.  In 2003, by Royal Decree 1436/2002 theSpanish government established the electricity tariffs for 2003.  For more information on tariffs, you shouldread “—Regulation—Spain—Electricity Regulation”.

 

Liberalized suppliers are free to set a price toqualified consumers. These entities’ main direct activity costs are thewholesale market price and the regulated access tariffs to be paid to thedistribution companies.  Electricitygenerators and liberalized suppliers or qualified consumers may also engage inbilateral contracts without participating in the wholesale market.

 

**GENERATION**

 

Hidrocantábrico’s installed capacity represents 5.4%of Spain’s generation capacity (excluding special regime facilities, which aregenerally renewable energy facilities). In 2002, Hidrocantábrico had a total installed capacity of 2,394 MW,approximately 63.4% of which are coal-fired facilities, 15.7% is a CCGTfacility, 16.5% of which are hydroelectric facilities, 1.6% of which arecogeneration facilities and 2.8% of which are renewable energy facilities.Hidrocantábrico also holds a 15.5% interest in the Trillo nuclear power plantwhich accounts for 165 MW of the plant’s total installed capacity of 1,066 MW.

 

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The following table sets forth Hidrocantábrico’s totalinstalled capacity by type of facility at year-end 2001 and 2002.

 

|                                  |   | **As of December 31,** |       |
|---------------------------------------|--------|------------------------|------------|
| **Type of facility**                  |   | **2001**               |       | **2002** |   |
|                                  |   | **(MW)**               |       |
| **Hydroelectric:**                    |   |                   | ** ** |   | ** ** |
| Hydroelectric  – Ordinary regime |   | 408                    |       | 413 |   |
| Hydroelectric  – Special regime  |   | 23                     |       | 23 |   |
| Total  hydroelectric                  |   | 431                    |       | 436 |   |
| **Thermal:**                          |   |                   |       |   |   |
| Coal                                  |   | 1,588                  |       | 1,588 |   |
| CCGT                                  |   | 0                      |       | 393 |   |
| Nuclear                               |   | 165                    |       | 165 |   |
| Total  Thermal                        |   | 1,753                  |       | 2,146 |   |
| Cogeneration                          |   | 38                     |       | 41 |   |
| Wind                                  |   | 24                     |       | 30 |   |
| Biomass                               |   | 3                      |       | 5 |   |
| Waste                                 |   | 13                     |       | 13 |   |
| Total                                 |   | 2,262                  |       | 2,671 |   |

 

The following table sets forth Hidrocantábrico’sthermal plants, each of which consists of one unit:

 
| **Thermal plants**        |   | **Installed capacity   (MW)** |   | **Fuel**     |   | **Net efficiency at  maximum output** |   | **Year entered  into service** |   |
|---------------------------|--------|-------------------------------|--------|--------------|--------|---------------------------------------|--------|--------------------------------|--------|
| **Coal**                  |   |                          |   |         |   |                                  |   |                           |   |
| Aboño  I             |   | 360                           |   | Coal         |   | 37.07                                 |   | 1974                           |   |
| Aboño  II            |   | 556                           |   | Coal         |   | 38.59                                 |   | 1985                           |   |
| Soto de Ribera I          |   | 68                            |   | Coal         |   | 29.80                                 |   | 1962                           |   |
| Soto de Ribera II         |   | 254                           |   | Coal         |   | 36.30                                 |   | 1967                           |   |
| Soto de Ribera III        |   | 350                           |   | Coal         |   | 37.90                                 |   | 1984                           |   |
| **Nuclear**               |   |                          |   |         |   |                                  |   |                           |   |
| Trillo                    |   | 165                           |   | Uranium      |   | 35.41                                 |   | 1988                           |   |
| **CCGT**                  |   |                          |   |         |   |                                  |   |                           |   |
| Castejón             |   | 393                           |   | Natural  Gas |   | 57.91                                 |   | 2002                           |   |
| Total  installed capacity |   | 2,146                         |   |         |   |                                  |   |                           |   |

 

The following table sets forth Hidrocantábrico’shydroelectric plants in the Ordinary regime:

 
| **Hydroelectric plants**  |   | **Installed capacity  (MW)** |   | **River reservoir  plant type** |   | **Year entered  into service** |   | **Year of last major  refurbishment** |   |
|---------------------------|--------|------------------------------|--------|---------------------------------|--------|--------------------------------|--------|---------------------------------------|--------|
| La Malva                  |   | 9.14                         |   | Reservoir                       |   | 1917/24                        |   | 2002                                  |   |
| La  Riera                 |   | 7.82                         |   | Run  of river                   |   | 1946/56                        |   | 2001                                  |   |
| Miranda                   |   | 64.80                        |   | Run  of river                   |   | 1962                           |   | 2000                                  |   |
| Proaza                    |   | 48.00                        |   | Reservoir                       |   | 1968                           |   | 2002                                  |   |
| Priañes              |   | 18.43                        |   | Reservoir                       |   | 1952/67                        |   | 2001                                  |   |
| Salime                    |   | 63.00                        |   | Reservoir                       |   | 1954                           |   | 2002                                  |   |
| Tanes                     |   | 133.00                       |   | Reservoir                       |   | 1978                           |   | 1995                                  |   |
| La Barca                  |   | 55.30                        |   | Reservoir                       |   | 1967/74                        |   | 2002                                  |   |
| La Florida                |   | 8.00                         |   | Reservoir                       |   | 1952/60                        |   | 1998                                  |   |
| Laviana                   |   | 1.10                         |   | Run  of river                   |   | 1903                           |   | 2001                                  |   |
| Caño                 |   | 1.00                         |   | Run  of river                   |   | 1928                           |   | 1996                                  |   |
| San  Isidro               |   | 3.12                         |   | Run  of river                   |   | 1957                           |   | 2002                                  |   |
| Total  installed capacity |   | 413.00                       |   |                            |   |                           |   |                                  |   |

 

The average remaining useful life of Hidrocantábrico’shydroelectric generation dams is approximately 48 years.

 

50

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Since hydroelectric generation is dependent onhydrological conditions, for forecasting model purposes the estimatedHidrocantábrico hydroelectric production based on current installed capacity inan average year is 806 GWh, ranging from a maximum of 1,058 GWh in a wetyear to a minimum of 590 GWh in a dry year.

 

Generation activity in 2002 was characterized by highavailability and efficiency of, and high production by, Hidrocantábrico’s powerplants and by high Spanish pool prices. Hidrocantábrico’s generation in the Ordinary regime, excluding lossesand its own consumption for pumping, rose 13.2% from 2001 to 13,503 GWh in2002, of which hydroelectric generation represented 771 GWh, a reduction of11.4% from 2001.  Coal-fired thermalgeneration amounted to 10,997 GWh, up 11.8% in 2002 from 2001because of a dryyear.  Nuclear generation, in respect ofour 15% stake in the Trillo plant, amounted to 1,212 GWh, a reduction of 0.8%from 2001.  In September 2002,Hidrocantábrico started operating the Castejón CCGT plant, which produced 522GWh in 2002.

 

The following table summarizes Hidrocantábrico’s electricitygeneration for 2001 and 2002, excluding losses and Hidrocantábrico’s ownconsumption for hydroelectric pumping, 140 GWh in 2001 and 131 GWh in 2002, andsets forth the hydroelectric coefficient at year-end 2001 and 2002.

 
|                                           |   | **Year ended December 31,**                              |       |
|------------------------------------------------|--------|----------------------------------------------------------|------------|
| **Type of facility**                           |   | **2001**                                                 |       | **2002** |   |
|                                           |   | **(in GWh, except by hydroelectric coefficient factor)** |       |
| **Hydroelectric:**                             |   |                                                     | ** ** |   | ** ** |
| Hydroelectric  –  Ordinary regime(1) |   | 867                                                      |       | 771 |   |
| Hydroelectric  – Special regime           |   | 78                                                       |       | 41 |   |
| Total  hydroelectric                           |   | 945                                                      |       | 812 |   |
| **Thermal:**                                   |   |                                                     |       |   |   |
| Coal                                           |   | 9,832                                                    |       | 10,997 |   |
| Natural  Gas                                   |   | 0                                                        |       | 522 |   |
| Nuclear                                        |   | 1,222                                                    |       | 1,212 |   |
| Cogeneration                                   |   | 68                                                       |       | 110 |   |
| Total  thermal                                 |   | 11,122                                                   |       | 12,841 |   |
| Wind                                           |   | 59                                                       |       | 61 |   |
| Biomass                                        |   | 24                                                       |       | 28 |   |
| Waste                                          |   | 11                                                       |       | 44 |   |
| Total                                          |   | 12,161                                                   |       | 13,786 |   |
| Hydroelectric  coefficient(2)                  |   | 1.08                                                     |       | 0.96 |   |

 

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*(1)Includes the following amounts of our own consumption for hydroelectricpumping, 140 GWh in 2001 and 131 GWh in 2002.*

 

*(2)Thehydroelectric coefficient varies based on the hydrological conditions in agiven year. A hydroelectric coefficient of one corresponds to an average year,while a factor less than one corresponds to a dry year and a hydroelectriccoefficient greater than one corresponds to a wet year.*

 

The average availability for production ofHidrocantábrico’s power plants increased from 93.51% in 2001 to 94.21% in 2002for thermal plants and decreased from 93.21% in 2001 to 89.26% in 2002 forhydroelectric plants. Hidrocantábrico’s forced outages in 2002 were 1.89% atthermal plants and 2.40% at hydroelectric plants.

 

The table below sets out for each type ofHidrocantábrico generating facility the average capacity utilization and theaverage availability factor for 2001 and 2002:

 
|                               |   | **Average capacity utilization(1)  Year ended December 31,** |   | **Average availability factor  Year ended December 31,** |   |
|------------------------------------|--------|--------------------------------------------------------------|--------|----------------------------------------------------------|--------|
| **Type of facility**               |   | **2001**                                                     |   | **2002**                                                 |   | **2001** |   | **2002** |   |
| Hydroelectric                      |   | 24.56                                                        | %      | 21.66                                                    | %      | 93.21 | % | 89.26 | % |
| Thermal:                           |   |                                                         |   |                                                     |   |   |   |   |   |
| Coal                               |   | 74.97                                                        | %      | 83.795                                                   | %      | 93.80 | % | 93.94 | % |
| Natural  Gas(2)                    |   | 0                                                            | %      | 47.31                                                    | %      | 0 | % | 97.19 | % |
| Nuclear                            |   | 90.35                                                        | %      | 89.57                                                    | %      | 90.67 | % | 89,66 | % |
| Total  weighted average thermal(3) |   | 76.42                                                        | %      | 81.75                                                    | %      | 93.51 | % | 94.21 | % |

 

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*(1) Theaverage capacity utilization is defined as actual production as a percentage oftheoretical maximum production.*

 

*(2)**Hidrocantábrico’snatural gas fixed CCGT plant began operations in 2002.*

 

*(3)Weighted average is based on total installed capacity of the thermal system.*

 

Increased production, increased plant efficiency interms of output and availability, high Spanish pool prices and cost cuttingpolicies allowed Hidrocantábrico’s generation activity in 2002 to increase itsoperating results by 43.81% from 2001.

 

Planned outages in 2002 occurred as a result ofmaintenance on the Aboño 2, Soto 1 and Trillo power plants. Hidrocantábrico’sgeneration facilities benefited from several environmental improvements andequipment modernization. Hidrocantábrico has improved its systems and management proceduresthrough the integration of several functions and processes, includingtechnical, administrative and purchasing processes.

 

Thermal generation consumed 4,071 thousand metric tonsof coal in 2002, 72% of which was imported and 28% domestic.  Fuel consumption costs includingtransportation amounted to € 198.4 million in 2002 and € 182.4 millionin 2001, representing approximately 77.3% and 77.8%, respectively, ofHidrocantábrico’s total consolidated operating expenses.  This increase occurred in a year of fallinginternational “spot” market prices for coal but reflects the demand growth ofthe Spanish electricity market, a lack of rain in 2002 and a low systemreserve, all of which resulted in a higher use of the Spanish electricitysystem’s thermal plants and led to Hidrocantábrico’s higher generation output.

 

As a result of the increased thermal production,Hidrocantábrico’s market share in the Spanish pool rose from 6.8% in 2001 to7.5% in 2002.  Given thatHidrocantábrico produced more electricity than was required by its customers in2002 and is largely focused on thermal power, especially on coal-fired powerplants, it was able to place its electricity surplus into the Spanish pool atvery competitive prices.

 

In 2002, capital expenditures on technical costs ingeneration amounted to € 86.8 million, down 29.1% from 2001.  These expenditures are set forth below:

 

|                               |   | **Year ended December 31,** |   |
|------------------------------------|--------|-----------------------------|--------|
| **Plant type and status**          |   | **2001**                    |   | **2002** |   |
|                               |   | **(thousands of EUR)**      |   |
| Hydroelectric plants in  operation |   | 1,106                       |   | 1,428 |   |
| Thermal plants in  operation       |   | 9,801                       |   | 65,082 |   |
| Plants under study                 |   | 101,776                     |   | 0 |   |
| Special regime:                    |   |                        |   |   |   |
| Hydroelectric plants in  operation |   | 3                           |   | 2 |   |
| Wind                               |   | 6,147                       |   | 16,264 |   |
| Waste                              |   | 698                         |   | 2,067 |   |
| Biomass                            |   | 2,194                       |   | 1,120 |   |
| Cogeneration facilities            |   | 1,339                       |   | 814 |   |
| Total Generation                   |   | 123,064                     |   | 86,777 |   |

 

Hidrocantábrico is planning to develop three CCGTplants as set forth in the table below:

 
| **Facility**     |   | **Type of  generation** |   | **Developing entity**                               |   | **Planned capacity  (MW)** |   | **Target  year** |   | **Status** |   |
|------------------|--------|-------------------------|--------|-----------------------------------------------------|--------|----------------------------|--------|------------------|--------|------------|--------|
| Soto             |   | CCGT                    |   | Contratación  de Construcción y Servicios |   | 400                        |   | 2006             |   | Planning   |   |
| Castejón  2 |   | CCGT                    |   | Contratación  de Construcción y Servicios |   | 400                        |   | 2007             |   | Planning   |   |
| Cadiz            |   | CCGT                    |   | Contratación  de Construcción y Servicios |   | 400                        |   | 2007             |   | Planning   |   |

 

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**Special regime generation**

 

Special regime generation is developed byHidrocantábrico through Genesa, a 100%-owned subsidiary focused oncogeneration, and SINAE, a 80%-owned subsidiary focused on renewableenergy.  In 2002, delays in thelaunching of some projects contributed to a slowdown in Hidrocantábrico’srenewable energy business, as did the high natural gas prices that reducedcogeneration margins, one of the main activities of this business.

 

Throughout 2002, Hidrocantábrico worked on therestructuring of SINAE’s shareholdings, SINAE’s industrial activities andSINAE’s reorganization, with the objective of providing the basis for stableand sustained development of SINAE, with a focus on the promotion, operationand management of renewable energy sources, mainly wind power.

 

During 2002, work began at the Arlanzón wind farm inBurgos to install 34 MW of installed capacity, and work was continued on theconstruction of the 65 MW Parques eólicos del Cantábrico wind farm inAsturias.  Both wind farms are scheduledto commence operations during 2003.

 

The cogeneration plants of Renovamed at Valladolid,with an installed capacity of 1.5 MW, and the Cerámica Técnica de Illescas atToledo, with an installed capacity of 3 MW, started operations in 2002.

 

Hidrocantábrico is planning to develop the followingwind farms:

 
| **Facility**                        |   | **Type of  Generation** |   | **Planned Capacity   (MW)** |   | **Target  Year** |   | **Status**      |   |
|-------------------------------------|--------|-------------------------|--------|-----------------------------|--------|------------------|--------|-----------------|--------|
| P.E. Sierra del Cortado             |   | Wind                    |   | 18.5                        |   | 2004             |   | In construction |   |
| P.E. Cuesta                         |   | Wind                    |   | 7.92                        |   | 2003             |   | In construction |   |
| P.E. Los Lagos                      |   | Wind                    |   | 17.82                       |   | 2003             |   | In construction |   |
| P.E. Acebo                          |   | Wind                    |   | 38.94                       |   | 2003             |   | In construction |   |
| P.E. Arlanzón                  |   | Wind                    |   | 34.0                        |   | 2003             |   | In construction |   |
| P.E. Cruz del Hierro (Improvements) |   | Wind                    |   | 5.3                         |   | 2004             |   | Planning        |   |
| P.E. Albacete                       |   | Wind                    |   | 124.1                       |   | 2004             |   | Planning        |   |
| P.E. Curiscao-Pumar                 |   | Wind                    |   | 87.8                        |   | 2004             |   | Planning        |   |
| P.E. Brújula                   |   | Wind                    |   | 73.5                        |   | 2005             |   | Planning        |   |
| P.E. Las Lomillas                   |   | Wind                    |   | 49.5                        |   | 2005             |   | Planning        |   |
| P.E. Carondio                       |   | Wind                    |   | 41.58                       |   | 2005             |   | Planning        |   |
| P.E. Avila Oeste                    |   | Wind                    |   | 68.0                        |   | 2005             |   | Planning        |   |
| P.E. Munera I                       |   | Wind                    |   | 39.1                        |   | 2006             |   | Planning        |   |
| P.E. Burgos Este                    |   | Wind                    |   | 80.0                        |   | 2006             |   | Planning        |   |

 

**DISTRIBUTION AND SUPPLY**

 

**Electricity Distribution**

 

In the Asturias region of Spain, Hidrocantábrico’sdistribution market, Hidrocantábrico has a network infrastructure of 18,453 Kmas follows:

 
| **Distribution lines**               |   | **Km** |   |
|--------------------------------------|--------|--------|--------|
| **Overhead  lines:**                 |   |   |   |
| High voltage (50/132kV)              |   | 1,162  |   |
| Medium voltage (5/10/16/20/22/24 kV) |   | 4,570  |   |
| Low voltage (<1kV)                |   | 10,769 |   |
| Total overhead lines                 |   | 16,501 |   |
| **Underground  cables:**             |   |   |   |
| High voltage (50/132kV)              |   | 7      |   |
| Medium voltage (5/10/16/20/22/24 kV) |   | 689    |   |
| Low voltage (1kV)                    |   | 1,256  |   |
| Total underground  cables            |   | 1,952  |   |
| **Total**                            |   | 18,453 |   |

 

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Energy distributed in 2002 through Hidrocantábrico’sown network amounted to 8,375 GWh, a 6% increase from 2001 levels.  As of December 31, 2002, Hidrocantábrico had549,091 customers, representing a 2% increase from 2001 and includes 525qualified consumers that previously had been supplied by non regulatedsuppliers.  There is a total of 668qualified consumers in Hidrocantábrico’s market that could elect to be suppliedby non regulated suppliers.

 

In 2002, the volume of energy distributed and thenumber of customers by tension level was as follows:

 
|                                 |   | **2002 Sales** |   |
|--------------------------------------|--------|----------------|--------|
| **Distribution by level of voltage** |   | **GWh**        |   | **% Annual  Increase** |   | **Total  customers** |   |
| High and very high  voltage (1)      |   | 5,512          |   | 5% |   | 548,423 |   |
| Medium voltage (2)                   |   | 822            |   | 9% |   | 649 |   |
| Low voltage (3)                      |   | 2,040          |   | 6% |   | 19 |   |
| **Total**                            |   | 8,374          |   | 6% |   | 549,091 |   |

 

----

*(1) Highvoltage is greater than 36 kV and less than or equal to 145 kV. Very highvoltage is greater than 145 kV.*

 

*(2) Mediumvoltage is greater than or equal to 1 kV and less than or equal to 36 kV.*

 

*(3)Lowvoltage is less than 1 kV.*

 

During 2002, Hidrocantábrico’s distribution business,Hidrocantábrico Distribución Eléctrica, S.A.U., continued its expansion outsideof Asturias in the autonomic communities of Madrid, Valência and Murcia, all ofwhich are geographic areas with strong economic activity.  The operating results of the distributionbusiness in 2002 declined from 2001 as a consequence of the initial expenses oflaunching activities outside of Asturias.

 

In 2002, Hidrocantábrico continued to improvetechnical and operational management activities.  The networks and facilities were enlarged and Hidrocantábricocontinued the development of information technology and automation of the distributionnetwork.

 

**Gas Distribution**

 

Gas invoiced in 2002 to the regulated market amountedto 1,416 GWh, representing a 4.3% decrease from 2001. Additionally, the volumeof gas distributed in the liberalized market (in which we provide third partyaccess to our network) reached 360 GWh. The number of regulated clientsincreased 7% from 2001 to 146,037 in 2002, and the operating results amountedto € 27.0 million in 2002.

 

Through the acquisition of Gas Figueres, S.A.U., a gascompany in the Catalonia region of Spain, in July 2002, Gas de Asturias, S.A.U.expanded its gas distribution business outside of its traditional distributionmarket.

 

**Electricity and Gas Supply**

 

The energy supply activity performed byHidrocantábrico Energía, S.A.U. includes the supply of electricity to qualifiedconsumers and to liberalized clients. Hidrocantábrico Energía, S.A.U. invoiced 3,925 GWh of electricitysupply.  This figure represents 6.5% ofthe liberalized market and more than 72% of clients from outside ofHidrocantábrico’s traditional market.

 

In 2002, Hidrocantábrico Energía, S.A.U. successfullyparticipated in the annual auction of the RENFE electricity contract, theSpanish railroad and the biggest electricity consumer currently in themarket.  Hidrocantábrico Energía, S.A.U.won 28% of the 2003 supply contract compared to 24% of the 2002 contract.

 

In 2002, Hidrocantábrico Energía, S.A.U. began itsnatural gas supply service and entered into 84 contracts and invoiced 1,909GWh, of which 86% are located outside of its traditional area.

 

54

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**OTHERACTIVITIES**

 

**Telecommunications**

 

In 2002, Hidrocantábrico’s cable telecommunicationsbusiness continued its development through two subsidiaries, which are theconcessionaires of television, fixed line telephony and internet for Asturias,Sociedad Promotora de las Telecomunicaciones en Asturias, S.A., a 45.95% ownedsubsidiary, and for Castilla y León, Retecal, Sociedad Operadora deTelecomunicaciones de Castilla y León, S.A., a 31.19% owned subsidiary.

 

As of December 31, 2002, there were a total of 718,000cabled homes and 387,506 installed services for both subsidiaries, an increaseof 42% from 2001.  Sociedad Promotora delas Telecomunicaciones en Asturias, S.A. adopted a new network technology thatallows voice over Internet Protocol (VoIP) services, deployed a televisioninfrastructure improves image and sound quality, rolled out its cable networkto the city of Pravia and moved its technical teams to its new headquarters atthe Gijón City Technological campus.

 

Hidrocantábrico increased its shareholding position inRetecal, Sociedad Operadora de Telecomunicaciones de Castilla y León, S.A.,from 30.47% in 2001 to 31.19% in 2002, as a consequence of a shareholdersagreement that increased their involvement in the management of the company.The transmission network among its 17 urban networks was finished, as was thefiber optics interconnection between León and Oviedo.  Retecal,Sociedad Operadora de Telecomunicaciones de Castilla y León, S.A. also reachedpositive EBITDA in 2002.

 

**Research and Development**

 

Research and development activities carried out in2002 were aimed at the reduction of emissions, treatment of by-products,maintenance and the extension of equipment life at various plants and wereconducted in coordination with various universities and industry groups andwere partially subsidized by the Spanish government and European Unionentities.

 

**BRAZIL**

 

**OVERVIEW**

 

Brazil’s electricity industry is organized into onelarge interconnected electricity system, which is known as the Sistemalnterconectado Nacional, or the Brazilian SIN, comprised of electricitycompanies in the southern, southeast, central-western, northeast and parts ofthe northern regions of Brazil, and several other small, isolated systems.  Generation, transmission, distribution andsupply activities are legally separated in Brazil.  For more information on the legal framework of the Brazilianelectricity market, you should read “–  Regulation – Brazil.”

 

Our electricity operations in Brazil consist ofdistribution, generation and related activities.  The following companies are engaged in distribution:

 

•                  BandeiranteEnergia S.A., or Bandeirante, in São Paulo;

 

•                  Espirito SantoCentrais Eléctricas S.A., or Escelsa, in the state of Espirito Santo; and

 

•                  EmpresaEnergetica do Mato Grosso do Sul S.A., or Enersul, in the state of Mato Grossodo Sul.

 

In 2002 our distribution companies in Brazil servedmore than 2.8 million customers, distributed 19,279.6 GWh of electricity andhad revenue of 2.8 billion reais, net of taxes.

 

55

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| **Company** |   | **Customers** |   | **GWh** |   | **Net Revenue****(thousands of reais)** |   |
|-------------|--------|---------------|--------|---------|--------|-----------------------------------------|--------|
| Bandeirante |   | 1,297,170     |   | 10,160  |   | 1,520,677                               |   |
| Escelsa     |   | 954,381       |   | 6,365   |   | 813,951                                 |   |
| Enersul     |   | 596,569       |   | 2,754   |   | 463,214                                 |   |
| **Total**   |   | 2,848,120     |   | 19,280  |   | 2,797,842                               |   |

 

In recent years the electricity sector in Brazil hasbeen adversely affected by economic circumstances internal and external toBrazil in general and by problems specific to the electricity sector.  The Brazilian economy was affected by theworldwide economic slowdown in recent years and, in 2002, uncertainty insideand outside Brazil surrounding the October presidential elections.  As a result, there was a sharp depreciationin the value of the real against other major currencies and increases inBrazilian inflation and interest rates. These conditions led to a scarcity of financing sources, which adverselyaffected the industrial sectors of the Brazilian economy including theelectricity sector.

 

In addition to adverse economic circumstances, inrecent years electric utility companies in Brazil have had to contend with agovernment imposed rationing program that was in effect from June 2001 untilFebruary 2002, low wholesale prices in the wholesale electricity market, or theMAE, and uncertainties regarding the electricity sector’s regulations andframework.

 

As a result of a shortage of electricity, theBrazilian federal government implemented an electricity rationing plan in June2001.  Although the rationing programended on February 28, 2002, its implementation had an adverse effect not onlyon electricity consumption, which decreased significantly during the period theprogram was in effect, but on consumption habits in affected areas.  As a result, we anticipate that a recoveryin consumption to pre-rationing levels may take some time.  The lower demand from consumers has affectedand will continue to affect demand for electricity from our distributionbusinesses in Brazil.  In addition, 2002was characterized by very favorable hydroelectric conditions, creatingincreased supply which, combined with continuing law demand, severely depressedprices on the MAE.  There wereuncertainties about electricity sector regulations and framework in 2002 due tothe different programs proposed by the parties involved in the presidentialelection and the lack of an existing stable and consistent legal framework.

 

To reduce the adverse financial impact to electricutilities caused by rationing, the government and the electric utilitycompanies signed the General Agreement of the Sector (*Acordo Geral do Setor*) in December2001.  The agreement, effective for allof 2002, approved an increase in the consumers’ tariffs to partially recoverthe rationing losses and restore the economic-financial balance of theconcession agreements under which the distribution companies operate.

 

The year-end results for companies in the distributionsector make clear that the Brazilian federal government’s urgent measures werenot enough to restore the economic-financial balance of the concessions.  Most distribution companies reportedlosses.  The low prices paid at the MAEmade it difficult for generation companies to obtain long-term contracts fortheir own production.

 

Despite the adverse circumstances in the Brazilianelectricity sector in 2002, there were positive developments, principally theentrance of major industrial customers into the competitive market for surpluselectricity offered by distribution companies and electricity that becomesavailable as distribution companies are released from take-or-paycontracts.  The opportunity to purchaseelectricity offered in this market through short and medium-term contracts waswelcomed by industrial customers, in spite of the fact that the legislationbringing about these developments had not yet been fully defined.  This legislation was eventually defined bythe December 2002 publication of related National Agency of Electrical Energy,or ANEEL, regulations and by the Presidential Decree No. 4,562.  The number of requests and bids fromindustrial customers in the competitive market increased sharply over theyear.  The interest and attendance ofthese customers was also noticed at the generation companies’ auctions ofelectricity made available by releases from take-or-pay contracts.  As a result, from January 2003, thesecustomers are responsible for 25% of the electricity volume represented in thecontracts released.  By law, state-ownedgeneration companies are required publicly offer the production released fromtake-or-pay contracts.

 

56

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In all, five large electricity auctions involvingstate-owned and private generation companies took place as well as an auctionto buy electricity that was sponsored by a private distribution company.  Although these electricity auctionsrepresent a positive breakthrough, demand was lower than it could have been dueto the strict conditions of the auction.

 

Some customers who could have participated in the competitivemarket opted to stay in the regulated market because they were uncertain of thefuture of the competitive sector.  Othermarket participants also felt the effects of ambiguities in the legal frameworkof production, transmission, distribution and trading of electric energyactivities.  Contrary to otherindustries, the legal framework is not uniform and reflects Brazil’s variedeconomic and political situations over the 80 past years.  Consequently, there is different, and oftenconflicting, treatment of investments made in the electricity sector.  At the recommendation of the BrazilianCrisis Management Committee (*Comite deGestao da Crise*), new decrees and resolutions were issued to providefor new regulation, primarily in the competitive market.  However, these actions were not enough toguarantee that regulations in the electricity sector are consistent.  The absence of clear and stable rules, whichhampered the competitive dynamic of the market, also caused delay in decisionsto invest in the expansion of the electricity grid.

 

In 2002 we carried out a shareholding restructuring inBrazil. On October 31, we completed the first stage of the restructuring, whichput the following companies under direct control of EDP Brasil S.A., ourholding company for Brazil, or EDP Brazil: Energest S.A., Enertrade Comercializadora of Energia S.A., BandeiranteEnergia S.A., EDP Lajéado S.A., FAFEN Energia S.A. and Enerpeixe S.A.

 

In furtherance of our Brazilian shareholdingrestructuring process, we expect that EDP Brazil will take control of ourEscelsa and Enersul shareholdings in the second half of 2003.  The restructuring process has the followingobjectives:

 

•                  to improveinvestors’ perception of our business and investment performance in Brazil;

 

•                  to facilitateaccess to the Brazilian finance market, thereby reducing and/or eliminatingexchange rate risks;

 

•                  to simplify thecompany structure, by reducing the number of business levels, therebyeliminating inefficiencies; and

 

•                  to takeadvantage of synergies in the operations of any affiliated Brazilian companies.

 

**GENERATION**

 

In late 1997, we formed a consortium with threeBrazilian distribution companies that was awarded the concession to build a damand operate a hydroelectric plant in Lajéado, Brazil. We own 14.36% of theshares in the company that operates the plant and hold a 27.65% of the votingrights.  The Lajéado hydroelectric powerplant started full operation in November 2002, after the completion and commissioningof its fifth unit, and has an installed capacity of 902.5 MW.  The plant produced 2,589 GWh in 2002, andplans to produce 4,468 GWh per year starting in 2003.

 

In November 2001, a consortium 49%-owned by EDP Braziland 51%-owned by Grupo Rede was awarded a concession to build and operate a twounit 150 MW hydroelectric power plant on the Araguaia River in Brazil, theCouto Magalhães power plant.  The totalpredicted investment is 33.8 million reais. Construction of the Couto Magalhães power plant was expected to start in2003, with the expectation of commencing operations in the first generationunit in 2006.  However, during 2002 wedecided not to begin construction due to a lack of clarity in the Brazilianregulatory regime and insufficient availability of local financing.

 

In June 2001, a consortium 9%-owned by EDP Brazil and5%-owned by Grupo Rede was awarded a concession to build and operate a threeunit 450 MW hydroelectric power plant on the Tocontins River in Brazil, thePeixe Angical power plant.  Theconcession was awarded in a public auction after the consortium made thehighest bid for annual concession rent. The annual concession rent is 6.8 million reais for 29 years starting inthe seventh year of 

 

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the 35 year concession.  Construction of the Peixe Angical power plant was suspended in2002.  We estimated that a totalinvestment of 1,295 million reais would be required to develop this plant.  As of the end of 2002, we have invested 170million reais in this project.  Resumptionof construction of the Peixe Angical plant depends on clarification ofregulatory issues, the outcome of renegotiations of the cost of the plant andthe availability of local financing.

 

The first phase of the FAFEN thermoelectric plant inthe Bahia state of Brazil started operations on August 25, 2002.  The EDP Group has an 80% participation inthe venture with Petrobrás – Petróleo Brasileiro S.A. holding the remaining20%.  The original aim of the venturewas to construct a cogeneration plant that was to supply electricity and steamto the Petrobrás fertilizer plant.  Thesurplus production would have been routed to other customers.  Since it was impossible to sell steam toother customers, however, it was decided to transform the surplus steam into electricity.  In its final configuration, which should becomplete by the end of 2003 or the beginning of 2004, it is estimated that byburning natural gas the plant will produce 133 MW of electric energy and 42tons per hour of steam.  In 2002, FAFENproduced 200.5 GWh and 127,585 tons of steam.

 

**DISTRIBUTIONAND RELATED ACTIVITIES**

 

**Bandeirante**

 

We hold a 96.48% stake in the share capital ofBandeirante, a distribution company in the São Paulo state of Brazil.  Bandeirante presently services more than 1.2million customers.  Bandeirante’smarket, influenced by the slowing economy and the extended effects ofrationing, ended 2002 with a total of 10,160 GWh sold, a 1.8% decrease from theprevious year.  Consumption decreased by2.5% in the residential segment, 0.5% in the industrial segment, and 11.9% inthe commercial segment.  The fall in thecommercial segment was mainly due to the reclassification of a large commercialcustomer to an industrial customer.  Inthe other segments consumption grew by 5.9%.

 

On October 23, 2002, Bandeirante’s tariffs wereincreased by 19.09% for one pursuant to an annual adjustment. Of this increase,16.56% is for passing on non-controllable costs and the remainder refers tocontrollable costs*.*The increasereflected the previous twelve months’ inflation of 13.32% and the sharpincrease of the U.S. dollar/reais exchange rate used for payment for energyfrom the Itaipu power plant, the counterparty to Bandeirante’s take-or-paycontract.  In addition to annualadjustments, Bandeirante’s tariffs will be reviewed on October 23, 2003.  Thereafter, the review will occur every fouryears.  The preparation for this firstreview was one of 2002’s main goals. Training was given, the information collection was systematized,estimates of the tariff repositioning were elaborated, and earnings impactsfrom the efficiency increase and changes in the current tariff structure wereevaluated.

 

In 2002, Bandeirante made capital expenditures of 94.3million reais focused on modernization, customer service, improving thenetwork’s operational conditions in expanding regions and increasing theelectricity grid’s operational flexibility. Two new substations were constructed, adding 140 MVA to the distributiongrid.  18.7 million reais of the2002 capital expenditures were invested in a program of modernization.

 

In order to improve productivity, Bandeirante has beenencouraging its employees to adopt procedures that will build a creative andinnovative culture that is results-focused and responsive to the customers andmarket. Training was provided to employees to this end.  Because the workforce was reduced to 1,341*,*Bandeirante now has 965 customersper employee.

 

In order to attract long-term funds at attractivecosts, Bandeirante contracted with the Bank of German Development, or the DEG,to borrow US$ 10 million.   The loanmatures in March 2006 and the interest rate is 9.5% a year.  This financing is not exposed to variationsin the U.S. dollar/reais exchange rate as a result of a foreign currency swapto reais.

 

 

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**Escelsa**

 

We control 54.74% of Escelsa-Espírito Santo CentraisElétricas S.A., or Escelsa, a distribution company in the Espírito Santo stateof Brazil.

 

In September 2002, a lawsuit with GTD Participações,S.A., a Brazilian company, or GTD, was resolved in our favor.  Previously, a shareholders’ agreement withGTD provided for joint control of Escelsa. The lawsuit was filed by GTD when it contested the termination of theshareholders’ agreement provided for in such agreement.  Following the resolution of the lawsuit, weconvened an extraordinary shareholders’ meeting of Escelsa in September 2002 atwhich we gained control of Esclesa, which control had previously been sharedjointly with GTD.  In October 2002, wetook over the management of Escelsa and appointed new executive officers.  Since that time, we have fully consolidatedEscelsa.

 

The electricity required by Escelsa’s distributiongrid in 2002 totaled 7,236 GWh, a 5.9% increase from the previous year.  In order to meet the market demand,Escelsa’s hydroelectric plants generated 1,056 GWh internally, which represents14.6% of the electricity required. Escelsa purchased the remaining 6,180 GWh from other suppliers.  In addition, 134 GWh produced by othergenerators passed through Escelsa’s grid.

 

Escelsa’s total electricity sales volume was 6,365 GWhin 2002 and represents a 4.3% increase from 2001.  Consumption by the residential segment, which represents 19.4% ofthe total sales volume, decreased 4.4% from 2001 due to new consumption habitsformed during the rationing period and the use of efficient electric equipmentby consumers.  Consumption by theindustrial segment, which represents 50.0% of total sales volume, increased7.8% in 2002 and reflects the economic recovery in the state of EspíritoSanto.  Consumption by the commercialsegment, which represents 13.2% of the total sales volume, increased 7.6% from2001.  The energy supply sold to otherelectric utilities, which represents 5.0% of the total sales volume, increased1.2% from 2001.  Finally, sales to othersegments, which represents 12.4% of the total sales volume, increased 1.5% from2001.

 

On August 7, 2002, ANEEL approved Escelsa’s 15.97%increase to the supply tariffs for one year. This increase, provided for in Escelsa’s concession agreement, consistedof:

 

•                  14.27% tocompensate for Escelsa’s non-controllable costs, which are passed along tocustomers; and

 

•                  1.70% forEscelsa’s controllable costs, which were adjusted to reflect an inflationmeasure (IGP-M), and discounted by 0.51%, because of the pass-through to thetariffs of the year’s productivity gains, or the X Factor.

 

In 2002, Escelsa had capital expenditures of 61million reais, of which 56 million reais were technical costs invested in theenlargement and improvement of the distribution grids, new substations and incompany modernization.  The remaining 5million reais were financial costs corresponding to financing expenses relatedto the expenditures.

 

Escelsa’s workforce at the end of 2002 totaled 1,353employees, 4.1% less than in 2001. Esclesa continues to increase the customersper employee indicator, which was 654 in 2001 and 705 in 2002, an improvementof 7.8%.

 

In December 2002, we acquired US$ 357.4 million ofEscelsa’s Senior Notes due July 2007. In the acquisition process certain covenants in the related debtagreement were eliminated, giving Escelsa increased operational and financialflexibility, which is important given the challenges of the Brazilian electricutility sector.

 

**Enersul**

 

Escelsa indirectly holds a controlling stake inEnersul-Empresa Energética do Mato Grasso do Sul S.A., or Enersul, adistribution company in the Mato Grasso do Sul state of Brazil.  Enersul’s electricity grid required a totalof 3,270 GWh in 2002, representing an increase of 6.8% compared to 2001.  In order to meet market needs, Enersul’shydroelectric plants generated 129 GWh, which represents 3.9% of the totalelectricity required.  The remaining3,141 GWh were purchased from other providers.

 

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Enersul’s total energy sales volume for 2002 was 2,754GWh and represents a 3.1% increase from 2001. Sales to the residential segment, which represents 31.3% of the totalsales volume, decreased 0.7% from 2001. Sales to the industrial segment, which represents 24.4% of the totalsales volume, increased 8.7% from 2001. Sales to the commercial segment, whichrepresents 19.1% of the total sales volume, increased 0.9% from 2001.  Enersul had 596,569 customers at the end of2002, an increase of 4.2% compared to 2001.

 

On April 8, 2002, ANEEL granted Enersul a 11.96%tariff increase.  This increase,provided for in Enersul’s concession contract, consisted of:

 

•                  6.97% tocompensate for Escelsa’s non-controllable costs, which are passed along tocustomers;

 

•                  3.7% forcontrollable costs, adjusted to reflect changes in IGP-M, the index used tocalculate the tariff’s readjustment; and

 

•                  1.29% tocompensate for losses related to the rationing period and other cost increases.

 

In 2002, Enersul had capital expenditures of 56million reais focused on modernizing the company, mainly to improve and enlargethe distribution grid.

 

At the end of 2002, Enersul’s workforce totaled 926employees, 5.3% less than in 2001.  Thecompany improved the ratio of customers to employees by 10.1%, to 644.  In addition, in November 2002, EDP took overmanagement of Enersul and appointed new executive officers.

 

**CERJ**

 

In 1996, we formed a consortium with Chilectra andEndesa which acquired approximately 70% of the stock of Companhia deEletricidade do Rio de Janeiro, S.A., or CERJ, an electricity distributioncompany in the Rio de Janeiro state of Brazil. We currently own 11.27% of CERJ, reflecting reductions in our stake as aresult of capital increases that we did not participate in.

 

**Enertrade**

 

Electricity trading for the EDP Group in Brazil isconducted by Enertrade Comercializadora Energia S.A, or Enertrade.  In 2002, its first year of operation,Enertrade became the most active electricity trading company in Brazil byselling a total of 1,270 GWh to end-users. Most of these customers were heavy consumers of electricity outside ofour electricity distribution areas in Brazil, thereby expanding the areas in Brazilin which we operate.  The integratedfunctioning between Enertrade and Bandeirante, Escelsa and Enersul allowed usto retain customers who opted for the competitive market within thedistribution companies’ concession areas*.*

 

Enertrade reallocated the surplus of EDP Lajéado froma period during which low prices prevailed on the MAE to a later period bypurchasing electricity from EDP Lajéado and placing it with customers in thecompetitive market at a later time.  Asa result, Enertrade met its principal objective of mitigating the market risksrelated to the EDP Group’s assets.

 

To meet the needs of the market, Enertrade offered theSoutheast and Northeast markets the option of purchasing energy from EDPLajéado and FAFEN.  This offer was wellaccepted in the market and 157.8 GWh was traded.  Enertrade also gained clients by acting as a service provider inthe representation of customers in the competitive market and generators in theMAE and at energy auctions.

 

The EDP Group signed long-term contracts among itsBrazilian companies at the end of 2002 with the objective of replacing theelectricity from take-or-pay contracts that will expire in 2006 and in order tomeet the projected additional demand of the distribution companies.  This electricity is produced by EDP Lajéadoand FAFEN.  Accordingly, the integrationof our generation and trading activities helps to manage the risks of ourgeneration and distribution businesses and helps to diminish the price and volumevolatility of our operations in Brazil.

 

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**TELECOMMUNICATIONS**

 

**History and Overview**

 

In March 2000, weannounced a strategic decision to pursue the telecommunications business. Thisdecision provided us with an opportunity to leverage our existing resources andexpertise and to build on our initiatives in the telecommunications andinformation technology businesses.  Atthat time we held a 25% stake in Optimus, Portugal’s third mobile operator, andhad, on January 1, 2000, launched the fixed-line operations of our subsidiary,ONI Telecom.  In June 2000, we announceda new organizational structure for our telecommunications and relatedactivities, which focused these activities in ONI, SGPS, S.A., or ONI, aholding company owned by us and our partners, that operates various businesssegments discussed in more detail below. The current shareholder structure inONI is as follows: EDP 56%, BCP 22.8%, Brisa 17% and GALP Energia 4.2%. Brisaacquired its stake in ONI in May 2001 through the integration of its 100% ownedsubsidiary, Brisatel.

 

On June 12, 2001, weannounced ONI’s acquisition of Comunitel enabling ONI to offer“one-stop-shopping” to the growing number of companies operating in bothPortugal and Spain.  Comunitel is aSpanish telecommunications operator with a portfolio of products and servicesdirected to small and medium size enterprises.

 

For the year ended December31, 2002, ONI had revenues of € 295.6 million, of which services provided tothe EDP Group amounted to € 13 million, and an operating loss of€ 116.2 million compared with, for the year ended December 31, 2001,revenues of € 187.9 million, of which services provided to the EDP Groupamounted to € 8 million, and an operating loss of € 136.1million.

 

In March 2002, we sold100% of OPTEP, our subsidiary which indirectly held 25.49% of Optimus, to ThornFinance SA for € 315 million. Prior to this sale, OPTEP transferred its interest in ONI to us.  Since our subsidiary ONI Way and Optimuswere each awarded a UMTS license in late 2000, we were required to sell ourstake in Optimus by March 31, 2002 in order to comply with Portugueseregulatory requirements.  We no longerhold any shares in Optimus, directly or indirectly, although our agreement withThorn Finance SA gives us a right of first refusal to purchase the shares soldif Thorn Finance SA reaches an agreement to sell the shares to a third party.

 

In early 2002, ONIrenegotiated its lease agreement of the fiber optic network owned by REN.  Under the renegotiated terms of thisagreement, the duration of the lease has been reduced from 20 years to 5 yearsand fiber optic cable has been reduced 50% to approximately 1,850 kilometers.

 

In late 2002, ONI Waydecided to significantly reduce its activity and proposed to its shareholdersto decide whether the UMTS project should be temporarily frozen or terminated,due to several adverse economic, financial, technical and regulatory reasons.In order to optimize shareholder value, ONI Way entered into agreements withTMN, Vodafone-Telecel and Optimus under which ONI Way had the option to sell tothose companies a substantial part of its assets.  In addition, ONI Way reduced its workforce by 360 employees,terminated its distribution agreements and settled its commitments withsuppliers, all in connection with reducing its activity. In addition, it wasalso agreed to enter into put and call options to sell to Vodafone-Telecel theentire share capital of ONI Way.

 

OnJanuary 6, 2003, a 72% majority of the shareholdersgeneral meeting of ONI Way decided not to launch ONI Way’s UMTS projectand to confirm the decisions and acts ofthe board of directors in this regard.Subsequently, ONI Way’s UMTS license was revoked on January 13, 2003by the Minister of Economy with the consent of ONI Way.

 

In the first quarter of2003, ONI revised its organizational structure to better achieve the goals andstrategies defined for its business segments. Accordingly, ONI’s businesses are currently pursued in two main areas:wireline Portugal and wireline Spain.

 

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WirelinePortugal:

 

•                  ONITelecom, a wholly-owned subsidiary of ONI, is a licensed telecommunicationscompany that develops and provides wireline communication services to corporateand residential clients and also serves as a “carrier’s carrier,” sellingcapacity to other communications companies. In accordance with ONI’s focus onthe fixed line telecommunications business, ONI decided to merge all itswireline companies, namely ONI Grandes Redes, ONI One, ONI Solutions, ONI SI,Shopping Direct and Brisatel****intoONI. The merger is under way and will be retroactive to January 1, 2003.

 

•                  uCall,a 60% owned subsidiary offering call center services, fulfilling ONI’s needs inback office support, as well as providing services to companies outside the ONIgroup.

 

Wireline Spain:

 

•                  Comunitel,which is 99.9% owned by ONI, is a telecommunications operator specializing inproviding communication services to corporate clients.  Comunitel was one of the first operators toprovide advanced telecommunication services in Spain. In December 2002, Comunitelacquired a controlling stake of approximately 39.5% in Ola Internet, a companyoffering voice and data services to medium size companies in Spain.

 

•                  GerminusXXI, or Germinus, which is approximately 80.8% owned by ONI, is an “incubator”company developing services in the market where telecommunications, media,hardware and software converge. Consisting of five companies, the Germinus group offers services in fouractivities: applications and technological platforms, professional services,information services and network business.

 

ONI’s management team isled by Pedro Norton de Matos, president, and the executive members of ONI’sboard. Executive board members have the following responsibilities: Jorge CruzMorais, former director of EDP Strategic Planning, is the chief financialofficer of ONI,****and Luís RibeiroVaz, former board member of the retail group Jerónimo Martins, heads thebusiness segment in Spain.

 

**Telecommunicationsmarket**

 

Inaccordance with EU requirements, the Portuguese government has taken significant steps during the pastseveral years to open the telecommunications market to competition. In 1997,Portuguese regulations took effect that permitted us and others to install andprovide infrastructure for telecommunications services, including cellularphone services, data transmission and voice services for closed usergroups.  On January 1, 2000, Portugalopened theentiretelecommunications sector to competition.

 

Asof January 1, 2001, alternative carriers have been permitted to offer local andregional indirect calls, and as of June 30, 2001, customers have been allowedto keep their existing phone numbers while changing to a different accessoperator. Although number portability now exists in Portugal, ONI believes thatsome additional technical issues need to be addressed by ICP-AutoridadeNacional de Comunicações, or ICP-ANACOM, to make number portability a moreefficient process.

 

InJanuary 2002, liberalization of the telecommunications sector advanced a stepfurther with the long promised unbundling of the local loop (ULL). However,technical and administrative restrictions by the historical monopolytelecommunications operator Portugal Telecom, or PT, did not allow forwidespread use of this technology, effectively preventing the new operatorsfrom exploiting this new opportunity.

 

**Competition**

 

Inthe fixed line business area, ONI is competing for market share primarily withPT, which historically held a monopoly on fixed line services in Portugal.Currently, in the first stages of liberalization of this area, PT continues tohold a dominant position in this market. Other fixed line operators in Portugalinclude Novis, controlled by 

 

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Sonae.Comand France Telecom, and Jazztel. Based on data released by ICP-ANACOM, in thefourth quarter of 2002 new operators accounted for 11.2% of the total minutesin the fixed line area.

 

Indirectly,fixed line operators also face strong competition from cellular telephoneservice providers, particularly in the voice segment. Cellular services inPortugal are currently provided by TMN, Vodafone-Telecel and OPTIMUS.

 

Wealso face significant competition in data transmission services and as anInternet service provider. Numerous operators compete in these areas, includingSAPO, a PT portal, Netc., a Vodafone-Telecel portal, IOL, a Media Capitalportal, and Clix, a Sonae.Com portal.

 

**Telecommunicationsactivities**

 

*Infrastructure*:We have in place an extensivestate-of-the-art infrastructure to provide telecommunications services, whichincludes approximately 4,900 kilometers of fiber optic cable, includingmultiple strings, for a total of approximately 140,000 kilometers of fiberoptic backbone, in Portugal. We own approximately 110,000 kilometers of thisbackbone and lease approximately 30,000 kilometers under lease by REN, Transgásand EDPD.  We currently have around 140points of presence, or PoPs, about 120 points of interconnection and 2 networkcenters, in Lisbon and Porto. At the end of 2000, ONI linked its fiber opticnetwork to Iberdrola’s network, creating two new connections to Spain andadding to the existing connection with the network of Comunitel.

 

Theincorporation of BrisaTEL’s assets in the ONI group in October 2001 addedapproximately 1,300 kilometers of fiber optic cable (of which approximately1,120 kilometers are already installed) to the fiber optic cable that we hadalready in place at the time. BrisaTEL also added 70 PoPs and two internationallinks with RENFE, the Spanish railroad operator, which required a restructuringof ONI’s PoPs to avoid redundancy. The incorporation of BrisaTEL’s assets inthe ONI group was one of the factors that led ONI to renegotiate its lease ofthe fiber optic network owned by REN in early 2002.  Under the renegotiated terms of this lease, the duration of thelease has been reduced from 20 years to 5 years and fiber optic cable wasreduced 50% to approximately 1,850 kilometers by the beginning of 2003.

 

We expect to increaseconsumer connections to our existing fiber optic backbone to providetelecommunications services.  We haveefforts underway to develop digital powerline technology and are currentlyconducting pilot tests.

 

*Telephoneservices*: In late1999, we began aggressive efforts to build ONI brand recognition and generatecustomer pre-registrations. In November 1999, ONI acquired Comnexo, a privatedata operator providing services to closed user groups. This acquisition wasdesigned to expand the scale and reach of our data operations. ONI Telecomcommenced operations in January 2000 as a voice and data fixed-line operatorconcurrent with the opening of competition in Portugal. We continue to provideservices in this area through ONI. ONI Telecom’s initial activities werefocused on fixed-line voice services for businesses and high-value customers.We currently expect to develop other products and services, includingvalue-added voice services, data transmission, and integrated voice, data andvideo services.

 

AtDecember 31, 2002, ONI had approximately 400,000 registered voice lines generatingdemand for approximately 2 million minutes per day for an aggregate of 733 million minutes in 2002.  In comparison, in 2001 ONI’s fixed line operation in Portugal accounted for approximately 535 millionminutes of voice traffic.

 

Accordingto a report by ICP-ANACOM for the fourth quarter of 2002, ONI holds an overallmarket share in telephone traffic of approximately 5%, which corresponds to approximately 44.2% among the new fixed line operators inPortugal.

 

InSpain, our subsidiary Comunitel has approximately 108,000 registered voicelines, generating 919 million minutes of voice traffic in 2002. These figuresdo not include the traffic of Ola Internet, a Spanish operator acquired byComunitel in December 2002. Ola Internet generated an average of approximately34 million minutes of voice traffic per month in the first quarter of 2003.

 

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*Internet access services*: ONI has high capacity platforms to provideInternet access services and is operating as an ISP.  As of December 31, 2002, ONI had approximately 367,000 registeredISP customers generating approximately 1.9 million minutes per day for anaggregate of approximately 704 million minutes in 2002, an increase in minutesof approximately 30% from 2001.

 

InJuly 2002, ONI launched an Asynchronous Digital Subscriber Line or ADSL productthat allows high speed Internet access over regular telephone lines and thatcan be easily installed by end users over their existing telephone lines.

 

**Partnerships**

 

InMarch 2000, we entered into a strategic alliance with****BCP to facilitate joint efforts in the areasof Internet-based electronic finance, or e-finance, non-financialInternet-based services and third generation wireless telephone services.E-finance activities will also involve Banco Sabadell, a Spanish bank. TheEDP-BCP agreement provides for the establishment of cross-shareholdings betweenour companies. We have acquired 4.25% of BCP’s outstanding shares, includingshare consideration for BCP’s interest in our telecommunications holdingcompany, and BCP has acquired approximately 5% of our outstanding shares.

 

OnMay 9, 2001, we entered into an agreement for a strategic alliance in thetelecommunications sector with BCP, GALP Energia and Brisa.  Under the terms of the agreement, Brisabecame a shareholder of ONI in exchange for its 100% stake in BrisaTEL, whichowned 4% of ONI Way.  Within the contextof this strategic alliance, Brisa proposed two members of ONI’s board ofdirectors and they were subsequently elected by the shareholders of ONI.

 

In2002, following its decision to focus on wireline communications, ONI decided to gradually reduce its****investment in B2C (business to consumer) and B2B (businessto business) platforms, having already sold some of its subsidiaries****in this area.  Web development and B2Bsolutions will be provided by ONI Telecom and/or Germinus to ONI groupcompanies.

 

**Regulation**

 

Ouractivities in the telecommunication area subject us to a number of regulatoryregimes, including licensing requirements and operating restrictions. For moreinformation on the regulation of telecommunications, you should read“—Regulation—Telecommunications”.  ONIholds licenses for the establishment and operation of public telecommunicationsnetworks (ICP-05/99-RPT, granted June 14, 1999) and the provision of FixedTelephony Service (ICP-001/99-SFT, granted August 10, 2000). ONI also holds aregistration for the provision of public use telecommunications services(Register-006/99 dated January 20, 1999). ONI was awarded two licenses for theuse of frequencies aimed at fixed wireless access in the 3.6-3.8 Mhz and24.5-26.5 Ghz bands (ICP-01/99-FWA and ICP-05/99-FWA granted December 29,1999).

 

**Employees**

 

Wehave human resources with the experience and expertise to assist us indeveloping and growing in telecommunications businesses. As of December 31,2002, ONI had approximately 1,300 employees, 55% in wireline Portugal and 45%in wireline Spain. Also, in December 2002, Comunitel acquired a stake of 39.5%of Ola Internet, which has approximately 220 employees.

 

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**Financial****Results**

 

Asa recent entrant in the telecommunications sector, during its first three yearsof operations ONI has incurred significant operating costs in connection withdeveloping and sustaining its business while, at the same time, increasingrevenues as a result of its growing customer base.  ONI had revenues for 2002 of € 295.6 million, of which servicesprovided to the EDP Group amounted to € 13 million, and an operating lossof € 116.2 million. In comparison, ONI had revenues for 2001 of € 187.9million, of which services provided to the EDP Group amounted to € 8million, and an operating loss of € 136.1 million.  Excluding our investments in UMTS, ONI’s 2002 capitalexpenditures in Portugal and Spain were approximately € 89 millioncompared with approximately € 84 million in 2001. ONI’s total assets atthe end of 2002 were € 888 million compared with € 1,063 million atthe end of 2001.

 

ONI’scurrent assessment of expenditures in the telecommunications area anticipatesan investment by ONI and its partners of approximately € 150 million by2005 almost exclusively for network infrastructure, although the amount ofinvestments may change as ONI’s plans develop.

 

Dueto divestiture of the UMTS project, we are no longer committed to theapproximately  € 2,600 million ofaggregate capital expenditures forecasted in the bid submitted by ONI Way inthe public tender for the fourth UMTS license in Portugal.

 

**OTHER INVESTMENTS AND INTERNATIONALACTIVITIES**

 

During1998, we acquired in the market 3% of the share capital of Iberdrola, a Spanishutility company.  In addition, Iberdrolaholds a stake in us of slightly less than 5% of our share capital, whichcorresponds to slightly more than 5% of our voting rights.

 

Wealso have an interest of approximately 4% in ELCOGAS, S.A., a consortium thatincludes ourselves, EDF, Endesa, Iberdrola, International Power andothers.  ELCOGAS, S.A. was formed to buildand operate a 300 MW integrated gasification combined cycle plant inPuertollano, Spain.  This plant burnsgas obtained from the coal gasification process.

 

We hold a 21% interest ina consortium indirectly owns an 80.88% interest in the capital of EmpresaEléctrica de Guatemala S.A., or EEGSA, which is an electricity distribution company with approximately 676,500customers, a sales volume of 3,248 GWh and a service area of 6,200 squarekilometers.  EEGSA is Central America’slargest distribution company.  In 2002,EEGSA generated € 339.3 million in revenue and net income of € 1.2million.  The consortium is made up ofEDP, Iberdrola and Teco Energy, a Florida electric company.

 

We also own a 22% stakein Companhia de Electricidade de Macau, S.A., or CEM, the electric utilitycompany of Macau, and have an active role in CEM’s management.  In 2002, CEM had approximately 191,000customers and sold 1,684 GWh of electricity. In 2002, CEM had revenues of € 214 million and net income of € 53million.  CEM has the concession forgeneration, transmission and distribution in Macau until December 2010.  CEM serves a population of approximately450,000 in an area of 28 square kilometers.

 

In late 1999, we formed aconsortium, 60% owned by us and 40% owned by AdP Aguas de Portugal, that waschosen by the government of Cape Verde to acquire a 51% interest in Electra,for which we paid € 27 million. Electra produces electricity and distributes electricity and water in CapeVerde.  In 2002, Electra produced 181GWh of electricity, compared to 164 GWh in 2001, and distributed 117 GWh to60,274 customers in an area of 4,030 square kilometers.  Also in 2002, Electra produced 3.6 millioncubic meters of water and distributed 2.6 million cubic water tocustomers.  Electra had revenues of € 21million and a net loss of € 11 million in 2002.

 

**SUBSIDIARIES, AFFILIATES ANDASSOCIATED COMPANIES**

 

Apart from EDP Produção,EDP Distribução, Hidrocantábrico, our Brazilian companies and ONI, we holdinterests in a number of subsidiaries that provide various services to ourother companies. Some of these subsidiaries also provide services to thirdparties. These entities contributed € 178 million in revenues in 2002.

 

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EDP Valor integrates someof our service companies with the objective of achieving cost reductions withinEDP through the consolidation of resources and the centralizing of purchasingactivities.  Since the first quarter of2002, EDP Valor has extended its services to EDP Produção and EDPD.

 

Electricidade de PortugalInternacional, S.G.P.S.S.S.A. provides management and organization consultingservices in electricity generation, transmission and distribution, undertakesproject management and promotion, and executes and supervises the performanceof commercial contracts.

 

EDINFOR—SistemasInformáticos, S.A. develops, operates and markets software and systems, andalso provides consulting and vocational training in information technology. See“—Telecommunications.” EDINFOR holds a 60% interest in ACE-SGPS, which isholding for Portuguese companies that provides management, strategic andinformation systems consultancy, supply of corporate turnaround services,organization restructuring, e-trade, data warehousing, knowledge management,customer relationship management, planning and management of informationimplementation of IT Solutions, financial services and implementation andtraining in SAP R3. Amongst other companies, EDINFOR also holds major interestsin:  Copidata Industrial Gráfica eEquipamentos, S.A., a company that creates, executes and sells graphic systems;IT-Log, Logística e Gestão de Tecnologias de Informação, S.A., a company whoseactivities consist of the conception, production, installation, logistics and managementof IT systems; and IT-GEO, Tecnologias e Informação Georeferenciadas, S.A., acompany whose activities consist of the development and integration ofgeographic information systems and the production, maintenance and sale ofgeographic data.

 

Affinis—Serviços deAssistência e Manutenção Global, S.A. provides home services and contractormanagement to residential and corporate customers through a network of skilledprofessionals.  In the residential area,Affinis offers home services including the planning, installation, maintenanceand repair of electrical, gas, plumbing and structural systems and thereplacement of household appliances.  Inthe corporate area, Affinis provides technical assistance with respect to manyof the services provided in the residential area. In October 2002, oursubsidiary EDP Participações acquired a 45% stake in the current share capitalof Affinis from PROCME—Gestão Global de Projectos, S.A., or PROCME, for a totalof approximately € 13.5 million.  Ofthis amount, € 4 million was paid in October 2002 and the balance isdue in three approximately equal installments over 2003, 2004 and 2005, whichinstallments can be adjusted depending on the financial performance ofAffinis.  Following the acquisitionoperation, EDP Participações and PROCME subscribed to a € 5 million capitalincrease in Affinis in amounts proportional to their holdings in the company.

 

**REGULATION**

 

**PORTUGAL**

 

Until 1998, thePortuguese government, through DirecçãoGeral de Energia , or DGE, was responsible for the conception, executionand evaluation of the policy for the energy sector, notably by presentingproposals for necessary legislation and regulation. In addition, through theend of 1998, the *Direcção Geral do Comércio e da Concorrência*, or DGCC, wasresponsible for the definition of the annual tariff regime followingnegotiation with us.

 

The basis and principlesof the organization of the electricity sector in Portugal were set out in 1995legislation that was partially revised in 1997 in accordance with the generalprinciples of EU Directive 96/92/CE. Following the 1997 revisions, theRegulatory Entity of the Electric Sector, or ERSE,  was appointed as the independent regulator in February 1997. OnApril 12, 2002, ERSE became Regulatory Entity of the Energetical Services, withits authority extended to the domain of natural gas regulation. On March 25,2002, by Decree-Law no. 69/2002, ERSE’s authority with respect to the electricsector was extended to the Autonomic Regions of Madeira and Azores.  The responsibilities for the regulation ofthe electricity sector in Portugal are now generally split between DGE and ERSEas described below.

 

**Direcção de Energia**

 

DGEhas the main responsibility for planning and developing the PublicElectricity System including, among others, approving the issuance,modification and revocation of generation and distribution licenses andpreparing 

 

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expansion plans for thePublic Electricity Sector every two years, in conjunction with REN, for theapproval of the Portuguese Ministry of Economy. DGE is also responsible for theregulations applicable to the transmission grid and the distribution networkand service quality.

 

**The regulator**

 

ERSE, or the regulator,has clearly defined regulatory duties, powers and objectives established bylaw, among which are the approval of the main regulations that are published inthe form of the following codes:

 

•                  thetariff code and the values for the tariffs and prices to be implemented;

 

•                  thecommercial relations code governing relations between entities in thePortuguese electricity system;

 

•                  thedispatch code;

 

•                  theaccess to the national transmission grid code; and

 

•                  theinterconnections code.

 

The codes listed aboveare applicable to the 2002-2004 regulatory period and were adopted by theregulator in September 2001.

 

**National energy policy**

 

Pursuant to a publicannouncement made in March 2003, the Portuguese Council of Ministers passed tworesolutions regarding, on the one hand, Portuguese energy policy, and, on theother hand, the Portuguese government’s options for the restructuring of thePortuguese energy sector.

 

Resolution no. 63/2003 ofthe Portuguese Council of Ministers, of April 28, 2003, revoked the previousnational energy strategy of September 2001, announced the new Portuguese energypolicy and defined general objectives and specific measures to carry out thenew policy. In accordance with this resolution, the Portuguese governmentintends to:

 

•                  developand assure the safety of the national energy supply by adopting measuresnecessary to (i) reduce the dependency of external sources of energy primarilyby country and type of source, (ii) diversify external sources of energy bycountry and type of source, (iii) keep mandatory reserves of combustibles, and(iv) guarantee an adequate energy generation capacity;

 

•                  developrational energy needs in order to fulfill environmental requirements, namely by(i) setting up mechanisms to achieve the Kyoto Protocol’s goals, (ii)participating in European market of emissions, and (iii) promoting the rationaluse of energy; and

 

•                  promotenational competitiveness in the new liberalized energy market, namely through,among other measures, (i) the creation of MIBEL by 2006, (ii) the promotion ofcompetition and the opening of the Portuguese electricity and natural gassectors, which involves, for instance, starting up procedures to renegotiate orterminate the existing PPA’s by the end of 2003, and (iii) expansion of naturalgas regulation, liberalization of combustibles prices and monitoring thefunctioning of the respective markets, which involves, for example, theseparation of the gas high pressure transport network from other activitiesrelated with natural gas.

 

On May 10, 2003,Resolution no. 68/2003 of the Portuguese Council of Ministers defined theoptions the Portuguese government may utilize to restructure the Portugueseenergy sector: (i) combine gas and electricity management and offer the two viathe same entrepreneurial organization, allowing a better use of its synergiesand complementarities; (ii) no unilateral imposition of energy sector modelrestructure on the sector’s 

 

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companies and theirshareholders; (iii) definition of the political, competition and regulatoryframework of the energy sector; (iv) freedom of the market’s functioning,requiring that from the strategic and organizational framework, rationalsolutions should arise for the interests of the companies, their shareholders,workers and costumers in order to assure competition of Portuguese companiesand the economy within a progressively integrated European market.

 

For the execution ofthese options, the Portuguese government has decided, among other measures, (i)to promote the liberalization of the access to the gas infrastructures forelectric companies operating in Portugal, starting as of July 1, 2004, (ii) topromote adequate legislative measures to open the gas infrastructures toeligible consumers under principles of equality, (iii) to promote and supportthe consolidation of the regulated infrastructures of gas and electricity underone company.

 

**Electricity pricing/tariffs**

 

According to Portugueselaw, the tariff regulation follows two basic principles: harmonization oftariffs throughout the country, according to which the tariff regulation willapply to all clients of the Binding Sector; and the principle of financialviability of all companies operating in the Binding Sector, subject to adequatemanagement, according to which the changes in conditions of the license cannotendanger the viability of those companies.

 

Since December 1998, theregulator has implemented a new tariff regime, under which tariffs areperiodically reviewed for a period of three years. The first regulatory periodranged from years 1999-2001, for which period the regulator defined tariffs forcustomers in the Binding Sector and customers in the Non-Binding Sector whoaccess the national transmission grid. The regulator also defined theparameters for tariffs to be applied to distribution companies. Annual rateswere set based primarily upon what was deemed to be an appropriate return onassets in transmission and by profit sharing and price cap mechanisms indistribution.

 

In the 2002-2004regulatory period, annual rates are set in a similar fashion except that theprofit sharing mechanism in distribution was eliminated. The tariffs fornetwork services and supply in the Binding Sector were applicable in the1999-2001 regulatory period and required us to return to customers a portion ofour annual profits that exceeded specified levels designated by the regulator.Tariffs regarding the use of the distribution network continue to be based on aprofit sharing mechanism similar to that applied in the 1999-2001 regulatoryperiod. Currently, the overall electricity tariff comprises charges forgeneration, transmission and distribution, which includes physical distributionand commercial supply.

 

Under the applicabletariff regime, low voltage customers using up to 20.7 kVA are charged at ratesapplicable to defined consumption levels. Low voltage customers using more than41.4 kVA and medium, high and very high voltage customers are invoiced fordemand based on subscribed demand and average monthly peak demand.

 

The current tariff regimeoffers two discount schemes for customers in the Binding Sector, which apply toall customers equally. Under the first scheme, customers with contracted demandranging from 4 MW to 17.5 MW and a yearly utilization greater than 5,000 hoursor consumption above 30 GWh are entitled to a discount of 10% and customerswith subscribed demand above 17.5 MW are entitled to a discount of 12.5%. Discountsare applied to monthly invoices. The second method available for obtainingdiscounts is through a reduction of a customer’s load. A customer that is ableto reduce its load by at least 4 MW can elect an “interruptible tariff,” whichresults in a maximum basic discount of 10%. In cases in which a distributordeclares an interruptibility period and the customer complies with that period,the customer can receive an additional discount. Under the load discountscheme, an eligible customer may elect one of two “interruptible tariffs,”which results in a maximum basic discount of 10% or 13%, depending on thenumber of interruptible periods.

 

At the beginning of the2002-2004 regulatory period, the regulator introduced a new tariff structure,based on the concept of an additive tariff consisting of sub-tariff componentsusing an approach that is more reflective of costs, both between the Bindingand Non-Binding Sectors, and also in each sector. For example, in the 1999-2001regulatory period, costs were less efficiently reflected in the tariff in theBinding Sector, thereby giving customers in the Binding Sector the benefit oflower tariffs than in the Non-Binding Sector where costs were more efficientlyreflected in tariffs.

 

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Generation revenuesarising from power sold by CPPE and other plants in the Binding Sector underPPAs allow these plants to achieve a return on assets of 8.5% in realterms.  For more information on thePPAs, you should read “Portugal—Electricity Transmission—Purchase ofElectricty.”  The price of electricityin each PPA consists of the capacity and energy charges, which account for 95%of PPA costs, together with costs associated with imports, autoproduction andgeneration facilities. The capacity and energy charges have been, and continueto be, passed through to the final tariff paid by customers in the BindingSector.

 

Transmission revenueshave been changed from the 1999-2001 regulatory period to the 2002-2004regulatory period. The transmission component of the tariff is calculatedannually by the regulator to cover operating and maintenance expenses of thenational transmission grid as well as to provide to REN a return on assets inthe 2002-2004 regulatory period of 9% in nominal terms, excluding theremuneration of the land used for generation sites owned by REN. During the1999-2001 regulatory period, an 8.5% return on assets figure was used.

 

Because the transmissioncomponent of the tariff is based on estimated data for variables such as costand demand, each formula incorporates an annual adjustment mechanism whichoperates with a two year time lag and is intended to adjust for differencesbetween amounts recorded as revenue and the revenue level permitted by thetariff when applied to actual operational data. For more information on thetariff adjustment, you should read “Item 5. Operating and Financial Review andProspects.”

 

The remuneration ofdistribution in the Binding Sector is the only one of the three businesseswhere returns are fixed primarily according to a price cap mechanism. For the2002-2004 regulatory period, the commercial supply of electricity was splitinto network commercialization and Binding Sector commercialization, both withregulatory schemes of cost acceptance plus an allowed return on assets. As withgeneration and transmission, the distribution tariffs are subject to an annualadjustment mechanism with adjustments made based on actual costs two yearsafter originally recorded. For the 2002-2004 regulatory period, the regulatorfixed the price cap at 7.5% for high and medium voltage levels and 6.6% for thelow voltage level. For the network commercialization and for the Binding Sectorcommercialization, the regulator set at 9% the fixed asset return rate. However,the profit sharing mechanism for this regulatory period was eliminated.

 

In the Binding Sector,customer tariffs for low voltage consumption cannot increase by more than theforecast inflation rate for a particular year.

 

**Other codes**

 

The Commercial RelationsCode was published on September 1, 2001, and is intended to govern thecommercial relations between entities within the Binding Sector as well as thecommercial relations between the Binding Sector and the Non-Binding Sector.This code also governs the access to the Non-Binding Sector by QualifyingConsumers and the rules applicable to the purchase and sale of electricitywithin a system established for the Non-Binding Sector. The regulator has alsoenacted the rules of access to this system and the rights and obligations ofthe system’s participants, including Qualifying Consumers who have elected toparticipate in the Non-Binding Sector, their agents and REN as the manager ofthe system.

 

The Dispatch Code, alsopublished on September 1, 2001, establishes the rules of dispatch that areapplicable to REN based on principles of equality of treatment and opportunityand safeguarding the public interest in the Binding Sector.

 

The Access to the Gridand Interconnections Code published on September 1, 2001, is based on the samegeneral principle as the Dispatch Code. Access to the grid is subject to theexecution of an agreement in accordance with a model provided by the regulator.

 

On January 1, 2001, DGEissued a quality of service code. Under this code, DGE seeks to enhance thequality of service with a system of penalties assessed against electricitycompanies based on their performance. DGE has defined benchmarks against whicha company’s performance can be measured if requested by the company’s customers.Fines are imposed against electricity companies in the event of power failuresor any disturbances in 

 

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power supply that, ineach case, cause an operator’s performance to fall below DGE’s benchmarks.These benchmarks were effective as of July 1, 2001.

 

**Reversionary assets**

 

Our assets held underconcession agreements with the Portuguese government or municipalities orlicenses issued by the government for generation and distribution of electricityare treated either as being within the public domain of the Republic ofPortugal or municipalities (for assets used in low voltage distribution) ordedicated to public service. We use assets that are part of the public domainand own and use assets that are dedicated to public service subject tolimitations on their disposal.

 

Assets within the publicdomain that by their nature are replaceable may be replaced by another assetperforming the same function, subject to prior authorization in certain cases. Anyasset that has been replaced will thereafter be treated as a private asset.Other assets held by us, including land and buildings not held underconcessions or license, are our private property.

 

Under Portuguese law,assets under public domain cannot be sold, pledged or otherwise encumbered andare not available for enforcement of judgments. The same regime applies toassets dedicated to public service, subject to specified exceptions.

 

The reversion of assetsis subject, in specified cases, to payment as described in the followingparagraphs:

 

**Licenses for generation**

 

Assets held by the CPPEfor generation revert to REN, as concessionaire for the national transmissiongrid, at the termination of the relevant PPA, subject to payment of theresidual value of assets, in accordance with the PPA, provided that the assetsare considered by REN to be necessary for generation in the Binding Sectoraccording to the expansion plan for the Binding Sector in place at the time. Ifnot considered necessary by REN, CPPE is entitled to purchase those assets foruse in the Non-Binding Sector.

 

**Licensesfor distribution**

 

Ourassets held under a binding license for distribution of high voltage and mediumvoltage revert to REN, as concessionaire for the national transmission grid,when the license terminates. If the termination occurs by revocation orresolution of the license, payments are due as established in the bindingagreements entered into between the parties. If the license terminates for anyother reason, the payment due will be the average of the net book value of theassets and value of lost profits.

 

**Concessionswith municipalities**

 

Assets held by EDPD inlow voltage revert to municipalities at the end of the term of concession,subject to payment of the net value of assets as determined by a commission ofthree members, one appointed by each party and a third one by the Portuguesegovernment. Both the expiration and early termination of these concessions canonly take place if the municipalities meet specified conditions regarding theviability of the proposed distribution arrangements and the transfer of assetsand workers.

 

**Environmental**

 

**Overview**

 

In Portugal, thefundamental principles regarding environmental matters are set forth on thePortuguese Constitution, which guarantees each Portuguese citizen the right toa “healthy and ecologically balanced human environment” and establishesenvironmental protection as a duty of the state. Also, in 1987, the Portuguesegovernment has adopted an environmental statute, the “*Lei de Bases do Ambiente*”, which (a) setsforth certain fundamental rules regarding air, light, superficial soil andsubsoil, flora and fauna, (b) establishes certain principles 

 

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regarding environmentalprotection, including the “polluter-pays” principle, and (c) establishes aregime of civil and criminal liability.

 

Specifically, thePortuguese electricity supply industry, and we have to comply with a number ofEU and Portuguese environmental laws and regulations, regarding, among others,(a) air emissions, (b) waste water discharges, (c) waste management, (d) use ofwater resources and (e) assessment of the environmental impact of new projects.

 

Management believes thatwe are in compliance with all existing material environmental laws andregulations to which we are subject and expects us to remain in compliance withthese laws and regulations.

 

**Specific regulation**

 

ConcerningSO2 and NOx emissions, EU Directive on Large CombustionPlants, or the LCPD, which has set a series of national targets for reductionsin emissions of such gases from combustion plants, has been implemented byDecree Law 352/90 of November 1990 and Ordinance 286/93 of March 12, 1993. TheLCPD, however, has been revised by Directive 2001/80/EC, into forcesince October 2001, but has not been implemented in Portugal. Nevertheless, management expects tobe in compliance with the new LCPD by the time required by the EU since thenecessary emissions abatement equipment is expected to be installed in theSines power plant by 2008, while the Barreiro, Carregado and Setúbal powerplants are exempt from compliance with new emission limit requirements.

 

RegardingCO2 emissions, both the EU and Portugal are signatories to the UNFramework Convention on Climate Change, adopted in May 1992, and parties to theKyoto Protocol of December 1997, under which the EU committed to reduce by 8%CO2 and other greenhouse gases, or GHGs, from 1990 levels over theperiod 2008-2010. Both the EU and Portugal have ratified the Protocol in2002.  In 2002, a preliminary version ofthe Portuguese National Program on Climate Change, which defines GHG emissionreduction measures, was put forward for public discussion.  A final version is expected to be approved bythe Portuguese government by the end of 2003. A new EU emissions trading program is currently in the final discussionstages.  Under this program, Portugal isto draw up a National Allocation Plan, assigning GHG emission allowances toinstallations in specific industrial sectors, including CCGT plants, for the2005-2007 regulatory period.****Managementexpects to be able to fulfill our responsibilities under the national andindustry specific implementation mechanisms for CO2 and other greenhouse gas emissions.

 

As part of our strategyto address public concern over the possible effects of electromagnetic fields,or EMF, we adopted the International Radiation Protection Association, or IRPA,recommendations published in 1990 for the design of new overhead lines. Theserecommendations have been substantially confirmed by the InternationalCommission on Non-Ionizing Radiation, or ICNIRP, guidelines (1998) which wereadopted in the Recommendation on the Limitation of Exposure of the GeneralPublic to EMF of the EU Council (June 1999).

 

In connection with theestablishment of new facilities or significant increase in capacity of existingpower plants, Portuguese legislation requires us to undertake environmentalimpact studies.  New thermal power plantsmust comply with specific emission limits for NOX, SO2and particles.  EDP has only one suchproject current under development and it complies with the new LCPD Directive.

 

**Our environmental policy andactivities**

 

In 1994 our board ofdirectors has adopted an Environmental Policy Declaration, which sets forth ourprinciples for environmental policy and activities. Our policy is aimed atminimizing or, where possible, eliminating negative environmental impacts.Management believes that we are in compliance with all existing material EU andPortuguese government environmental regulations, and expects that we willcomply with proposed changes in EU regulations.

 

Wemade capital expenditures related to environmental matters in 2002 ofapproximately the same amount as in 2001, which amounted to approximately€ 15 million. We do not expect these capital expenditures to besignificantly higher in 2003.

 

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**SPAIN**

 

**Electricityregulation**

 

With the enactment of Law54/1997 of November 27, 1997, the Spanish electricity sector has recentlychanged from a regulated system to a free-market system with elements of freecompetition and liberalization.  Withthis change the Spanish government intends to guarantee the electricity supplyat the highest quality and at the lowest possible price.  The new regulatory framework provides for:

 

•                  theunbundling of activities so that no operator can carry out regulated activities(transmission, distribution, technical management of the system and economicalmanagement of the whole market) and liberalized activities (generation, tradingand international/intra-community exchanges) at the same time;

 

•                  awholesale generation market;

 

•                  freedomof entry for new operators with liberalized activities in the electricitybusiness;

 

•                  liberalizedactivities to take place in a competitive format, while transmission,distribution, technical management of the system and economical management ofwhole market activities will continue to be regulated because the activities’particular characteristics impose severe limitations on the possibility ofintroducing competition;

 

•                  allconsumers may select their suppliers and the method of supply (either withmarket prices or with tariffs fixed by the Spanish government);

 

•                  allthe operators and consumers have the right to access the transmission anddistribution grid by paying access tariffs previously approved by the Spanishgovernment; and

 

•                  environmentalprotection.

 

On November 27, 1997, theSpanish government passed Law 54/1997, the Electricity Sector Law, whichprovides for a gradual transition to a liberalized system under which everyconsumer will be free to contract for electric power from generators or othersuppliers. Before the above-mentioned Electricity Sector Law, the Spanishelectricity operations were meant to be a public service provided by thegovernment through Red Eléctrica de España, S.A., or REE, a state controlledentity.  With this law REE continues toserve as the system operator but its dispatching functions have been taken overby the market operator, Companía Operadora del Mercado Español de Electricidad,S.A., or OMEL.  Accordingly, therefore,OMEL is responsible for the economic management of the wholesale market, and,or REE is responsible for the technical management of the transmission grid andthe balancing mechanism which ensures that energy supplied is equal to thedemand for energy.  Both, REE and OMELhave been recently privatized.

 

On October 7, 1998, theSpanish government created the National Energy Commission with the HydrocarbonsLaw, which replaced the National Electricity System Commission by performingthe supervision of the electricity industry as well as the hydrocarbons andliquid natural gas industries in Spain.

 

The Electricity SectorLaw seeks to create a competitive electricity generation market where powergeneration plants are dispatched based on the results of a competitive biddingprocess administered by OMEL. Moreover, the same law, as amended, provides fora transitional period until up to 2010 during which power generation companiessubject to the Stable Legal Framework as of December 31, 1987, will be entitledto partial compensation for the costs they incur in connection with thetransition to the competitive market regime. This payment is made from amounts collected from consumers and settledby the National Energy Commission.  TheElectricity Sector Law also provides for the installation of new powergeneration plants to be completely liberalized and not subject to governmentplanning, subject only to the authorizations required by the applicable lawsand regulations (on town 

 

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planning andenvironmental protection, for example). New electricity generators will be entitled to the same rights andremunerated.

 

On June 23, 2000, RoyalLaw-Decree 6/2000 was adopted to increase competition in the electricity andother sectors. The main consequences of these measures were:

 

•                  amoratorium on generation capacity increases, which ended on June 23, 2003,was imposed on those operators with more than 20%, and less than 40% of thetotal Spanish installed capacity and a moratorium on those operators with morethan 40% of the total Spanish installed capacity excluding capacity increasesrelated to projects currently under construction at the date of the RoyalLaw-Decree that have received the necessary administrative permits and futureprojects to replace current generation capacity;

 

•                  eligibilityfor all consumers to participate in the liberalized market from January 1,2003;

 

•                  amaximum reduction in residential tariffs during the period between 2001 and2003 of 9% depending on the evolution of demand, interest rates andefficiencies resulting from the opening of the market to competition; and

 

•                  aprohibition on from holding third parties stakes in more than one main operatorand nor are main operators permitted to hold stakes in other main operators.

 

Spanish electricitytariffs are fixed annually by the government through Royal Decrees. Through2002, these Royal Decrees fixed tariffs in accordance with the calculationmethod set forth by Royal Decree 2017/1997, of December 27, 1997. However,Royal Decree 1432/2002, of December 2002, established a new calculation methodfor the 2003-2010 period. The new calculation method allows tariffs to be fixedunder more objective, transparent and predictable conditions.  Increases on the tariffs cannot exceed 2%annually and electricity companies can recover the losses (known as “deficittarifarios” or “rate deficits”) caused by the reduction of tariffs during the2000-2002 period.

 

The Royal Decree1436/2002, of December 31, 2002, fixed the tariffs for 2003. The average tariff(or “reference” tariff) for 2003 was increased by 1.69% (the residential tariffwas increased, against the decreasing tend of recent years, by 1.5%). Thecumulative rate of reduction in nominal terms for all Spanish customers from1996-2003 was 15.7% in nominal terms and 32.6% in real terms.

 

Under some of the provisionsof the new regulatory scheme, electricity transmission and distributionactivities will continue to be regulated since their particular characteristicsimpose severe limitations on the possibility of introducing competition. Thenew regulatory framework changed, however, the manner in which electricitybusinesses receive payments, in order to promote efficiency and quality ofservice.

 

The regulations take intoaccount the investment and operational costs related to transmissionactivities. Fixed remuneration for distribution is based on investment,operational and maintenance costs. They also take distribution areas,incentives for supply quality, loss reduction and commercial management costsinto account.

 

**Gasregulation**

 

Law 34/1998, ofOctober 7, 1998, started the liberalization process of the Spanish naturalgas sector and has been amended several times over the past four years.

 

The main features of thecurrent regulatory framework are as follows:

 

•                  Unbundlingof activities so that no operator may carry out regulated activities(regasification, strategic storage, transmission, distribution and supplying atset tariffs) and liberalized activities (trading at market prices)simultaneously;

 

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•                  Asof January 1, 2003, all consumers, regardless of their consumption, areeligible to select their suppliers as well as the price method of supply(either at market prices or with a set tariff);

 

•                  Alloperators and consumers have the right to access the transmission anddistribution grids by paying access tariffs previously approved by the Spanishgovernment.  This right is based onprinciples of free access, objectivity and transparency.  Access to the grid can only be denied undercircumstances set forth in certain laws and regulations in cases where there isa lack of capacity or reciprocity); and

 

•                  Systemof tariffs: all the tariffs, tolls and royalties are based on costs which aretransferred to consumers of natural gas. The tariff is based on levels of pressure and consumption rather than bytype of use.  The tolls and royaltiesfor transport and distribution are based on the level of pressure at which thenetwork is connected to the consumers’ installation and the volume of annualconsumption rather than in distance.

 

**EULEGISLATION**

 

Portugal became a memberof the European Community (referred to as the “European Union” or “EU” in thecontext of the Maastricht Treaty on European Union) on January 1, 1986,pursuant to the Accession Treaty of June 12, 1985.  The first steps to draw up a bindingframework of common rules for an internal market in energy within the EU were adirective of June 29, 1990, “to improve the transparency of gas and electricityprices charged to industrial end-users,” and Directive 90/547/EC of October 29,1990, “on the transit of electricity through transmission grids,” or theTransit Directive, EU directives are legislative instruments that are bindingupon the Member States as to the result to be achieved while leaving nationalauthorities the choice of form or method. The Transit Directive requires MemberStates to facilitate cross-border high-voltage transmission under fair andnon-discriminatory standards.

 

On December 19, 1996, amajor breakthrough was reached with the adoption by the European Parliament andthe EU Council of Ministers of Directive 96/92/EC “concerning common rules forthe internal market in electricity,” or the Access Directive. The AccessDirective endeavors to promote a competitive open electricity market reconcilingthe following challenges: (1) increasing efficiency in production, transmissionand distribution; (2) reinforcing security of supply; (3) increasingcompetitiveness of the European economy; and (4) setting high standards ofenvironmental protection.

 

The Access Directiveleaves to Member States, in respect of the important EU principle ofsubsidiary, the freedom of organization of the national power sector, inconformity with the principles of the directive, and with a view to achievingcompetitive, non-discriminatory and open power markets. The directiverecognizes that access to the national power system may be granted within thecontext of a system of negotiated access, or a system where one single buyercentralizes buying and selling, and assumes public service obligations. Thedirective also recognizes the right for Member States to impose public servicerequirements, i.e., obligations imposed upon distribution undertakings toservice customers in defined territories under regulated tariff structures.

 

The Access Directive hasbeen under review since March 2001. As a result, a new directive that revisesthe Access Directive may be adopted. We believe that such a new directive wouldconstitute another step towards the creation of an European electricity market.

 

On March 16, 2002, theEuropean Council of Barcelona adopted some important conclusions on theinternal electricity market to be taken into account by the European Commissionand the co-legislators within the framework of the co-decision procedure forsuch new Directive. These conclusions include:

 

•                  freedomof all European non-household consumers (accounting for approximately 60.0% ofthe total market) to freely choose their supplier of electricity and gas as ofJanuary 1, 2004;

 

•                  theseparation of transmission and distribution from production and supply;

 

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•                  non-discriminatoryaccess for consumers and producers to the network based on transparent andpublished tariffs;

 

•                  theestablishment in every European Union member state of a regulatory function,within the appropriate regulatory framework, with a view to ensuring effectivecontrol of tariff-setting conditions; and

 

•                  settinga target for European Union member states of a level of electricityinterconnections equivalent to at least 10% of their respective installedproduction capacity by 2005.

 

**Planning of new generation capacity**

 

For the construction ofnew generating capacity, Member States may choose between a system of authorization,or tender, or a combination of both. Either procedure must be conducted inaccordance with objective, transparent and non-discriminatory criteria.  If a Member State opts for authorization,precise criteria for the grant of this authorization must be defined andpublished.  In the event of a refusal togrant the authorization, applicants must be informed of the reasons, and appealprocedures must be available.

 

If a Member State optsfor a tender procedure, the national competent authority must prepare aninventory of new capacity requirements and estimates, taking account, amongother things, of the need for interconnection of systems. Tender specificationsmust be made available to any interested undertaking established in theterritory of a Member State so that there is sufficient time in which to submita tender. Member States must designate an independent authority which isresponsible for the organization, monitoring and control of the tenderingprocedure.

 

**Transmission system operation**

 

Member States not onlymust ensure that technical rules establishing a minimum technical design andoperational requirements are developed for connection within the system ofgeneration, transmission and distribution assets, but also must designate orrequire businesses owning transmission systems to designate a system operator.The mission of the system operator is to be responsible for operating, ensuringthe maintenance of, and, as the case may be, developing the transmission systemin a given area, in order to guarantee security of supply. Therefore the systemoperator is in charge of managing energy flows in the system, and must ensurethat the system is operated safely, efficiently and with a high degree ofreliability. The system operator must also provide the operator of anothersystem with which its system is interconnected, sufficient information tosecure efficient cooperation between the systems. Unless a transmission systemis already independent from generation and distribution activities, the systemoperator must be independent, at least in management terms from otheractivities not relating to transmission.

 

**Distribution system operation**

 

Member States may requiredistribution companies to supply customers located in a given area under aregulated tariff system. These are the so-called public service requirements.An operator must be appointed for distribution systems, and Member States mayrequire the operator to favor environment-friendly installations.

 

**Unbundling and transparency of accounts**

 

Member States ordesignated authorities and dispute settlement authorities must have access tothe accounts of the regulated businesses. We and other integrated undertakingsmust keep separate accounts for their respective activities so as to ensuretransparency and more specifically, avoid discrimination, cross-subsidies anddistortion of competition.

 

In particular, if asingle buyer is designated which is, or is part of, a vertically integratedpower business, the single buyer must operate separately from the distributionand transmission activity, and “Chinese walls” must be maintained to preventinappropriate information flows from the generation or distribution activitiesto the single buyer activity.

 

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**Access**

 

A key feature of theAccess Directive is the coexistence of a negotiated access approach, accordingto which consumers and producers negotiate access to the grid with theoperator, and a single-buyer concept, wherein one entity centralizes buying andselling of power. Irrespective of the mode of access, the directive alsointroduces the concept of “eligible buyer”, i.e., a consumer who has the rightto access the system directly, through negotiation with a power supplier, orthrough purchases from a single buyer. Negotiated access involves theconclusion of supply contracts among power producers and, where permitted,power suppliers, on the one hand, and eligible consumers, on the other hand, onthe basis of voluntary commercial agreements. To promote transparency andfacilitate negotiations, system operators must publish an indicative range ofprices for use of the transmission and distribution systems.

 

In single-buyer systems,Member States designate a legal person to be the single buyer within the territorycovered by a system operator. Under a single-buyer regime, non-discriminatorytariffs for the use of transmission and distribution assets must generally bepublicly available, and Member States must assure that eligible customers areeffectively free to conclude supply contracts up to their own requirements withdomestic producers and, where Member States authorize their existence,suppliers operating on the basis of inward transmission of power. Conversely,independent producers must be permitted to negotiate access to the grid foroutward supply of power to eligible customers outside the system. Member Statesmay put the single buyer under an obligation to purchase the electricitycontracted by eligible customers at a price equal to the sale price offered bythe single buyer to eligible customers minus the published price for use of thetransmission-distribution system or may take the necessary measures to insurethat the above mentioned supply contracts are implemented.  The single buyer may refuse access to thesystem and may also refuse to purchase electricity from eligible customers ifthe single buyer lacks the necessary transmission or distribution capacity. Incase of a refusal, the single buyer must give duly substantiated reasons.

 

Member States may decidenot to apply the rules regarding the tendering, authorizing, negotiated accessand single buyer procedures mentioned above if the application of theseprocedures would obstruct the performance of the obligations imposed onelectricity enterprises in the general economic interest, but only insofar asthe development of trade would not be affected to such an extent as would becontrary to the interests of the EU.

 

Member States must takemeasures to ensure opening of the market, so that the above mentioned contractscan be concluded in a meaningful way. The EU Commission is to monitor thedevelopment of negotiated supply and direct contracting by eligible customersin single-buyer contexts, using the EU-wide share of electricity consumed by finalcustomers consuming initially more than 40 GWh per annum, with the threshold tobe reduced to 20 GWh on February 19, 2000, and to 9 GWh on February 19,2003.  As of January 1, 2002, thethreshold in Portugal has been eliminated and all voltage levels other than lowvoltage have been liberalized.

 

The Access Directiverequires a determination to be made defining, jurisdiction by jurisdiction, orsystem by system, the categories of eligible customers entitled to negotiatedirectly, whether or not via a single buyer. Under the Access Directive,customers with an annual consumption in excess of 100 GWh and distributioncompanies would always have eligible-consumer rights. Again, the criteria foreligible-consumer status would need to be published on an annual basis, fortransparency reasons, subject to supervision by the EU Commission, which mayrequest modification of specifications with a view to ensuring effectiveopening up of markets. Member States may not prevent contracts for the supplyof electricity with an eligible customer of another Member State if thecustomer is considered eligible in both systems involved. The EU Commissionwould also have the right to intervene and require, in the interest of thecommon good, that an eligible customer of one Member State be supplied by asupplier or producer of another Member State, if the former Member State makesa request therefore.

 

Member States must makeit possible for independent producers and autoproducers to have access to thesystem to supply their own premises and subsidiaries through the interconnectedsystem, and through direct lines, authorization for which must be granted onthe basis of objective and nondiscriminatory criteria. This right to obtainsupplies through a direct line will also apply to eligible customersthemselves. Similarly, Member States must permit producers located outside thesystem to tender for supply contracts following calls for tenders within thesystem for new generating capacity, and to have access to the grid to be able toperform the contract. Each country 

 

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must also install anindependent dispute settlement authority whereby, in the event of cross-borderdisputes, the competent authority of the country where the single buyer orsystem operator refusing access is located.

 

Member States arerequired to create appropriate mechanisms to avoid the abuse of dominantposition, in particular to the detriment of customers.

 

An important transitionalprovision permits the EU Commission to grant relief to Member States that makecommitments to operators or applicants, before the entry into force of theAccess Directive, in a way that could be inconsistent with the directive. TheEU Commission could grant relief, taking into account, among other things, thesize of the system concerned, the level of interconnection and the structure ofthe electricity industry in that country. Any transitional measure would needto be published and of limited duration. Similarly, relief could be grantedwhere the rules of the directive would entail substantial problems for isolatedsmall systems.

 

Existing Portugueselegislation parallels, to a great extent, the provisions of the AccessDirective. As of February 1999, Portugal had implemented the full EU package.In late 2001, the regulator eliminated the consumption threshold andliberalized the market for all voltage levels except low voltage. The openingof the market to the low voltage segment, fully or partially, depends on theadoption by the EU, and the implementation by Portugal, of amendments to theAccess Directive now being considered by the EU.

 

**Gas**

 

The European Parliamentand Council adopted the Gas Directive 98/30/EC of June 22, 1998, which containscommon rules for the natural gas market. The directive entered into force inAugust 1998 and Member States must implement it by August 10, 2000. The mainobjectives of this Directive are transparency and non-discrimination.

 

The main provisionsestablished by the Gas Directive 98/30/EC are as follows:

 

•                  Eligibility:All gas-fired electricity generators (cogeneration and combined cycle),regardless of their annual gas consumption, as well as other final consumersconsuming more than 25 million cubic meters of gas per year are eligible.  This threshold will be reduced to 15 millioncubic meters per year on a consumption site basis five years after the entryinto force of the Directive, and to 5 million cubic meters per year on aconsumption site basis ten years after the entry into force of the Directive.Members States must ensure they open their gas markets by at least 20% of thetotal annual gas consumption of the national gas market.  This percentage shall increase up to 28%five years after the entry into force of the Directive and to 33% ten yearsafter.

 

•                  Rightof access to the grid: Member States may choose between two access procedures:(i) negotiated access, which utilizes voluntary commercial agreements whosecertain terms and conditions are published prior to the activity or (ii) or regulatedaccess, which functions on the basis of published tariffs and other terms andobligations for use the grid). Both procedures must operate in a manner that isobjective, transparent and non-discriminatory.

 

•                  Unbundlingof accounts: companies acting in the natural gas sector, must separate theiraccounts for their natural gas transmission, distribution and storageactivities. The Directive does not provide for unbundling of activities.

 

With the evolution of themarket, subsequent differences among Member States in implementing of theDirective and the obstacles to reach some of the objectives fixed by the GasDirective 98/30/EC have justified a proposal to amend the existingdirective.  This proposal opens the gasmarket for all non-household consumers by July 2004, and for all consumers byJuly 2007.  It requires legal unbundlingof network activities from supply, establishes a regulator in all Member Stateswith well defined functions, requires that network tariffs be published,reinforces public service obligations and introduces measures to increase thesecurity of the supply.

 

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**BRAZIL**

 

**Overview**

 

The policies for theelectricity industry in Brazil are formulated by the Brazilian federalgovernment, based on proposals presented to it by the National Council forEnergetic Policy, or the CNPE, which is a body linked to the Brazilian federalgovernment.  The CNPE is composed ofseveral ministers, including the Ministers of Mines and Energy, Finance, Environmentand Development, as well as the Chief Minister of the Civil Department of theBrazilian federal government and two Brazilian Scientific Scholars.Additionally, the Ministry of Mines and Energy has exclusive authority over theelectricity sector through regulatory powers assigned to it.  ANEEL is an independent regulatory agencyresponsible for implementing the Brazilian federal government’s policies anddirectives.  It regulates electricitygeneration, transmission, distribution and trading activities, executes andmanages the contracts involved in the provision of such services.  ANEEL is also responsible for the regulationof the tariffs to be charged, their review process and adjustment procedures.

 

**Legal and regulatory framework**

 

Beginning in 1995, theBrazilian electricity sector experienced changes in the Brazilian federalgovernment’s plans to stimulate investment and increase competition in thesector.  Legislation enacted in 1995 and1996 created a new framework for the granting of concessions in general, andfor the power sector in particular.

 

A landmark law affectingstructural changes in the Brazilian electricity sector was enacted onFebruary 13, 1995.  Law no.8,987/1995 established the regulation of concession and permission systems thatprovide public services.  It alsoestablished a new economic and financial system for public service tariffs,including those related to the electricity sector.  The current system follows the regulatory model usually referredto as performance-based regulation under which: (i) there are periodic settingof tariffs on cost-of-service principles through tariff periodic reviews; (ii)once such tariffs are set they are supposed to remain unchanged for a certainperiod of time during which they are adjusted yearly for inflation (theseadjustments are referred to as Parcel B costs) plus changes in non-manageablecosts (these adjustments are referred to as Parcel A costs); and (iii) thereare profit incentive mechanisms for increases in operating efficiency by theutility combined with a mechanism to share those efficiency gains withcustomers, referred to as the “X Factor”. See “—Tariffs and charges”

 

Another law passed inFebruary 1995, Law no. 9,074/1995, established rules for the granting andextension of public service concessions and permissions, primarily for entitiesproviding power services.  Additionally,Law no. 9,074/1995 introduced stark changes to the Brazilian power industry,including:  (i) the creation of theIndependent Power Producer, or IPP, which, although a generating agent, issubject to a private and competitive system (in contrast to the public servicesystem applicable to the other agents of the power sector), and could operatebased solely on the authorization of the Granting Authority, a process muchsimpler than that required for concession; (ii) the gradual release ofdistribution companies from take-or-pay contacts, thus allowing consumers inthe competitive market, the so-called free-consumers, to purchase power fromIPPs and, from any concessionaire, permissionaire or authorization holder;(iii) the authorization to organize consortia for power generation; (iv) theauthorization for the Brazilian federal government to unbundle power companiesthrough corporate reorganization; and (v) the authorization for the Brazilianfederal and state governments to carry out privatizations concurrently with theaward of new public service concessions or to extend of existing concessions.

 

IPPs that operatehydroelectric assets also need to seek a concession for the use of a publicgood, since hydroelectric resources are deemed to be public goods underBrazilian law and, as such, unlike thermal plants, cannot be given ascollateral in financial transactions. Self-generators may, upon ANEEL’s prior approval, (i) give or exchangeenergy with other self-generators within a consortium; (ii) sell excess energyto the local distribution concessionaire; and (iii) exchange energy with thelocal distribution concessionaire to allow for consumption by industrial plantsof the self-generators located in another area of generation.

 

The legal foundation forthe current competitive trading model was laid down by Law no. 9,648/1998,which created the wholesale energy market, or MAE, which replaced a system ofregulated generation prices and tolling supply contracts.  The National Electricity System Operator, orONS, was created and became responsible for the coordination and control of theoperation of the electricity generation and transmission systems in the interconnected

 

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systems.  One of the main goals of the ONS is toguarantee that all participants of the electricity sector have access to theBrazilian transmission network on a non-discriminatory basis.  Originally, MAE was created as aself-regulatory body. However, in 2001, MAE was restructured and it was turnedinto a private legal entity that is: (i) subject to ANEEL’s authorization,regulation and supervision; (ii) responsible for the operation of the wholesaleenergy market; and (iii) responsible for ensuring that purchases of energy inthe spot market are settled and cleared in an efficient manner.

 

Mandatory participants ofthe MAE are (i) generation companies having installed generation capacity of 50MW or more; (ii) energy retailers, including distribution companies that sold300 GWh or more during the prior year; and (iii) importers or exporters ofenergy that have an available capacity of 50 MW or more.  In addition, certain other entities that operatein a smaller scale have the option to participate in the MAE.  Free consumers are also allowed toparticipate in the MAE, in the consumption category.  Escelsa, Enersul, Bandeirante and CERJ are considered asmandatory consumption participants.  Enertradeis also a MAE consumption participant, although not a mandatory one.  FAFEN and the entities which compose theLajeado Consortium are considered as mandatory production participants.

 

Power traded under theMAE is subject to strictly financial contracts since the physical delivery ofpower is entrusted to the ONS and conditioned to the system-optimizationrules.  Energy supply contracts, whichmust be based on MAE’s standard form agreement, must be registered with theMAE.  Distributors and energy retailersmust evidence, through registration, their compliance with the requirement that95% of their contractual obligations to final customers be covered by long-termenergy supply contracts.  Registrationof energy contracts with the MAE is also designed to ensure that generationcompanies do not commit to supplying more than their maximum available capacityas set by ANEEL.

 

Participants of the MAEare subject to penalties in case of non-compliance with their obligationundertaken with the MAE as well as to the enforcement of financial guaranteeswhich must be posted in order to assure the payment of debts assumed under suchtransactions.

 

ANEEL has passedguidelines for the computation of the spot price for energy in the MAE.  The spot price is determined by marketconditions and by certain public policy and operational considerations,including the optimal use of resources, transmission restrictions, energydeficit costs, self-restraint of customers caused by a high spot price,projected energy requirements and international alternative markets.

 

Prevailing spot pricesvary in each of the four sub-markets within the wholesale energy market.  Sub-markets take into account restrictionsin transmission capacity.  Given theimprovements made on the transmission lines during the years 2001 and 2002, theBrazilian federal government determined that the number of sub-markets shouldbe reduced from four to two. Presently, however, a preliminary injunctiongranted in a class action against such measure prevents both ANEEL and theBrazilian federal government from passing regulation to enact this reduction.

 

In order to assure thatpower purchase and sale operations under the MAE were conducted in an orderlyfashion and without causing immediate price shock, under Law no. 9648/1998, thefull liberalization of negotiations is progressing gradually, and only after atransitional period in which the existing generation and distribution agentsexecute long-term power purchase and sale agreements called initial contracts.  Moreover, the purchase and sale of electricenergy is contracted separately from access to the transmission anddistribution grids.  Similar to existingagreements, initial contracts are primarily “take-or-pay” commitments thatguarantee stable energy prices for distribution companies and a steady streamof income for generation companies.  Asof 2003, the amounts contracted under the initial contracts should be reducedat a rate of 25% a year until full power purchase and sale are fully released,at the end of 2006.

 

Low levels of investmentand below average rainfall in 2000 and early 2001, as well as growth in demandfor energy, resulted in abnormally low water levels of critical hydroelectriccapacity in Brazil’s Southeast, Central West and Northeast regions.  In May 2001, the Brazilian federalgovernment introduced a power rationing program, which was in effect untilJanuary 1, 2002, for the North region and March 1, 2002, for the Southeast,Midwest and Northeast regions.

 

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On October 17, 2001, theBrazilian federal government proclaimed that electric utilities would bereimbursed for expenses associated with payment of bonuses to consumers andother costs related to the rationing program that exceeded the surcharges.  Law No. 10,438, of April 26, 2002, providesthat electric power distribution companies in Brazil would be compensated forrevenue losses caused by the reduction in amounts of energy sold due to the RationingProgram.  In order to be entitled tosuch reimbursement, these companies would have to adhere to the Electric EnergySector Agreement, which contemplates a number of required actions by eachadhering concessionaire.

 

Law No. 10,438/2002provides that (i) the Brazilian government’s national development bank incharge of privatization, or the BNDES, may lend distribution companies anamount equivalent to up to 90% of lost revenues so that these companies will beable to maintain their account balances as if no rationing program had been ineffect; and (ii) compensation may increase for Parcel A costs from January 1,2001 to October 26, 2001 – the date on which the CVA tracking account wasestablished.  Parcel A costs are limitedby the concession contracts to the cost of purchased power and certain othercosts and sectorial charges, for more information, see “—Tariffs and changes”below.  Parcel A costs incurred prior toJanuary 1, 2001, are not recoverable.

 

In addition, Laws nos.10,438/2002 and 10,604/2002 further provide for the following measures:

 

•                  Powerpurchase restrictions: a series of restrictions were imposed on the manner bywhich power not sold through initial contracts may be sold and bought bystate-owned generation companies and by distribution companies. Generationcompanies under Brazilian federal government control shall negotiate at least50% of the total energy traded by them, including the reduced portion of theinitial contracts, in public auctions.

 

•                  PROINFA,CDE and Incentives for Alternative Sources of Electric Energy:  The Program for Incentive of AlternativeSources of Electric Energy, or PROINFA, was created to attempt to increase theparticipation of electric energy generated from wind, biomass and smallhydroelectric plants (plants with certain specifications of reservoir, whichinstalled capacity does not exceed 30MW). CDE is a fund whose main objectives are to promote universal electricenergy services and development, not only through PROINFA, but also through anyform of power generation from wind, biomass, small hydro plants, natural gasand national mineral coal sources.  CDEis also meant to fund the distribution companies in the attainment of theuniversal goals described below. Apart from benefiting from the funds of CDE,the projects falling under PROINFA’s requirements as well as all other projectswhich power is generated from wind, biomass, solar and small hydro plantssources are entitled to a discount, of no less than 50%, on the transportationtariffs, and to the right to trade energy with consumers not yet consideredfree consumers as per the current laws.

 

•                  Universalgoals:  ANEEL shall establish universalgoals to be periodically reached by concessionaires and permissionaires.  These goals are to consist of determininggrowth areas to be supplied by distribution concessionaires or permissionaireswithout any burden or costs to consumers.

 

•                  Assistancefor low income residential consumers: A new criteria was created to define lowincome consumers.  This criteriasignificantly increases the number of consumers under this category, therebyincreasing the number of consumers entitled to a lower social tariff than theone applicable to other residential consumers. The Brazilian federal government created a low income subvention fundedby dividends due by Eletrobras to the Brazilian federal government inconnection with power sales in public auctions and, in case of insufficiency,funds from the RGR were directed to the distribution companies (subject to thefulfillment of criteria set forth in relevant ANEEL Resolutions) to retiredebts incurred by them under the RGR financing.

 

•                  TariffRestructuring:  From 2003 on, and witheach periodic tariff review, the Brazilian federal government will restructurethe tariffs so as to eliminate cross-subsidies and mandate that each class ofconsumers will pay for only its own relevant costs.  As a result, tariff increases brought on by the periodic tariffreview will be proportionately higher for large industrial consumers so as toreduce the tariff gap that traditionally has been subsidized by residentialconsumers.

 

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**Tariffs and charges**

 

The tariffs of Escelsa,Enersul, Bandeirante and CERJ were originally set in the activity arising outof privatization and are subject to the rules regarding tariff adjustments andtariff reviews set forth in applicable laws and relevant concession contracts.

 

Pursuant to thedistribution concession agreements, supply tariffs are composed of two parcels,Parcel A and Parcel B.  Parcel A iscomposed of the following costs and charges: (i) the cost of energy purchasedfor sale; (ii) he Global Reversion Fund, or RGR, which is controlled byEletrobras and is designed to provide funds for compensation to concessionairesduring the terms of their concession); (iii) quotas for the Fuel ConsumptionAccount, or CCC, which is a contribution created to prorate power productionfinancing by domestic coal fired plants in Brazil among the electricity sectoragents; (iv) amounts related to the inspection fee charged by ANEEL; (iv)financial consideration for the exploitation of hydro resources for generationpurposes; (v) connection and use of transmission and distribution systemscharges, or transportation charges; (vi) charges for system services; and (vii)quotas for the Energetic Development Account, or CDE.  Parcel B is measured as the difference between (i) the totalrevenues of the concessionaires; and (ii) the value of Parcel A, net of thetaxes on sales of goods and services, or ICMS.

 

The distributionconcession contracts provide for three types of protection of theconcessionaire’s payment through tariff: (i) the annual tariff adjustment; (ii)the extraordinary tariff review; and (iii) the periodic tariff review.

 

The tariff adjustment takesplace every 12 months, except in those years in which a periodic tariff reviewtakes place.  During the tariffadjustment process, the tariffs charged by the concessionaires are merelyupdated so as to (i) allow for a pass through of the current costs of thecomponents of Parcel A; (ii) preserve Parcel B against inflation by indexing itto a consumer price index; and (iii) promote the distribution of efficiencygains of the concessionaires to consumers through the use of the X Factor.

 

An extraordinary tariffreview may take place at any time, through formal a request submitted by aconcessionaire to ANEEL, on the occurrence of the following events:  (i) significant changes in costs to theconcessionaires; (ii) the creation, termination or change of any tax (excludingincome tax) or legal charges, particularly those within Parcel A; or (iii)unilateral modification to the concession agreement.

 

The Ministry of Economyand Mines and Energy created a tracking account named the Compensation Accountfor the Variation of the Amounts of Items of Parcel A, or the CVA.  Positive or negative variations of certaincosts within Parcel A of the distribution concessionaire revenues occurringafter the annual tariff adjustment shall be computed in a trackingaccount.  In the subsequent annualtariff adjustment, the outstanding amount of the CVA, added by interest accruedat Brazil’s central bank rate, or the SELIC rate, will be offset by thedistribution tariff over the next 12 months subsequent to the adjustment.  The portion of the CVA not immediatelyoffset also accrues interest at the SELIC rate.  Notwithstanding this, on April 7, 2003, the Ministries of Financeand of Mines and Energy and issued a joint ordinance postponing trackingaccount tariff increases for a 1-year period with the intention of avoiding anadditional impact on tariffs in the 4 to 7% range. According to this jointordinance, amounts accumulated on the tracking account that were supposed topass through from April 8, 2003 to April 7, 2004, will be postponed for oneyear.  This amount, added by the amountto be accumulated in the twelve subsequent months, shall be recovered over a 24month period rather than the usual 12 month period.

 

The periodic tariffreview takes place normally occurs in intervals varying from three years toseven years.  During the periodic tariffreview, ANEEL resets the value of the tariffs charged by the concessionaire bytaking into consideration the changes of the costs structure and market of theconcessionaire, the levels of tariffs observed in similar domestic andinternational companies and certain efficiency and tariff affordabilityincentives.  Accordingly, the periodictariff review has two stages, the first of which is “Tariff Resetting”, whichis a comparison between the “Assessed Revenue” and the “Required Revenue” ofthe concessionaire.  “Assessed Revenue”is revenue actually obtained by the concessionaire and Required Revenue is therevenue considered necessary, according to ANEEL, for the adequate provision ofthe distribution service.  If AssessedRevenue is higher than Required Revenue, the distribution tariff of theconcessionaire will be reduced, otherwise, it will be increased.  A tariff resetting index is applied on thevery year of the periodic tariff review in lieu of the annual tariffadjustment. The second stage of the periodic tariff review is the calculationof the X Factor. The X Factor is the result of an assessment by the regulator 

 

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and the utility of theappropriate sharing of estimated cost reductions that the reviewedconcessionaire expects to achieve by the next tariff periodic review. The XFactor is applied to reduce the IGPM in annual tariff adjustments following thetariff periodic review.

 

Apart from the certain charges included in Parcel Acosts that both generation and distribution companies must pay, generationcompanies are also required to pay the following charges:

 

•                  UBP(Use of the Public Asset): Article 7 of Law no. 9.648/98 mandates that a PPIthat uses hydraulic generation will be awarded a public asset usage concession.If this concession is awarded, the concessionaire must pay 2.5% of its annualincome for five years from the date of the execution of the concessionagreement.  Through December 31, 2002,UBP was paid to ELETROBRÁS.  From 2003and thereafter, UPB is to be paid to the Brazilian National Treasury.

 

•                  EC(Capacity Charge): T document under which all MAE’s participants should adhereapproved by Resolution ANEEL no. 18/98, or the market agreement, determines acapacity charge, or EC, to be established and applied on all loads, whether ornot contracted out, of traders and free consumers operating directly onMAE.  According to ANEEL’s Resolutionsno. 446, of August 22, 2002 and 237, of May 21, 2003, however, EC shall only becharged as of January 1, 2005.

 

ONS Contribution: ONS’sincome is partially comprised of a portion of the charges for use oftransmission system, as determined by ANEEL, as well as an amount calculated fromthe number of votes attributed to each participant under each ONS category.

 

**TELECOMMUNICATIONS**

 

Regulatory measures havebeen taken to change the telecommunications market in Portugal from a monopolyheld by PT to a fully open and competitive market.  PT operates under a concession, which had granted it theexclusive right for 30 years from March 20, 1995, renewable thereafter forsuccessive periods of 15 years upon agreement by the government and PT, toprovide domestic and international public fixed voice telephone services andleased lines and to install and operate the related telecommunications networkin Portugal. However, to implement EU directives relating to an opentelecommunications market, the government released the infrastructures that constitutethe basic telecommunications network from public domain and sold them to PT,pursuant to the amendment of the concession introduced by Decree-Law 31/2003 ofFebruary 17, 2003.

 

The EU adopted a numberof directives relating to the telecommunications market, the latest****of which is****Directive 2002/77/CE of September 16, 2002, that set forththe parameters for regulating telecommunications sectors in EU member countrieswhich are open to full competition. The Law 91/97 of August 1, 1997, recentlyamended by Law 29/2002 of December 6, known as the Basic Law ofTelecommunications, was adopted in Portugal in anticipation of the full openingof competition in the Portuguese telecommunications market. It revoked theexclusive rights of PT in accordance with EU Law and provided that thePortuguese telecommunications market would be fully opened to competition as ofJanuary 1, 2000.

 

In the last few yearsthere has been a significant increase in pressure by the EU on Portugal tofully promote the implementation of a liberalized market, notably in areaswhere, although regulation exists, practical barriers have been raised bydominant operators, such as with regard to the ULL.

 

**Legislativeframework**

 

The Basic Law providesthe basic legislative framework and the basis for telecommunications regulationin Portugal. The Portuguese government enacted this law to implement theEuropean Commission’s legal framework for the opening of the telecommunicationssector in the EU to full competition. The other key elements of the frameworkof laws and regulations which apply to the telecommunications sector inPortugal are:

 

•                  regulations,Decree Laws and legislative measures adopted by the government to implement andgive effect to the Basic Law;

 

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•                  directives,regulations, and policies of the EU;

 

•                  legislationestablishing and defining the functions of the *ICP-AutoridadeNacional de Comunicações*, or ICP-ANACOM, as the Portuguesetelecommunications regulator and the Ministry of Economy, or ME, as thegovernment entity with basic responsibility for telecommunications policy inPortugal; and

 

•                  ICP-ANACOMdeterminations issued on the basis of specific powers granted by specificlegislation.

 

The Basic Law covers bothpublic switched fixed line telephone services and related infrastructure andestablishes the legislative framework for the transition to a fully competitivetelecommunications sector in Portugal. It also requires the Portuguesegovernment to ensure that a basic telecommunications network exists and basictelecommunications services are provided on a universal basis in Portugal.  Through Decree Law 381-A/97 of December 30,amended by Decree Law 92/99 of March 23, it was established that entities otherthan the concessionaire (PT) can provide telecommunications networks andservices of public use if they obtain a license from or register with thePortuguese telecommunications regulator, and the services are to be provided inaccordance with the terms of specific regulations to be enacted at a latertime.

 

For that purpose, thegovernment enacted Decree Law 290-A/99 of July 30, 1999, amended by Decree Law249/2001 of September 21, 2001, which approved the regulation for the operationof public telecommunication networks, and Decree Law 290-B/99 of July 30, 1999,amended by Decree Law 133/2002 of May 14, which approved the regulation for theoperation of telecommunication services of public use, that implemented,respectively, EU Directive 97/51/CE and EU Directive 98/10/CE.

 

These regulations specifyin general terms the obligations of operators and service providers concerningtheir users, in particular on issues such as mandatory publicly availableinformation concerning their offers, prior notification in case of suspensionor cancellation of offers and contractual content.

 

In addition, throughDecree Law 474/99 of November 8, amended by Law 95/2001 of August 20 and DecreeLaw 133/2002 of May 14, the government enacted regulation on the operation ofthe fixed telephone services. This regulation establishes, among other things,the rights of users and subscribers concerning, for example, itemized billing,access to emergency and directory services, public pay phones, communicationssecrecy, mandatory publicly available information on commercial offers,notification of technical specifications, conditions for refusal, suspension orrestriction of the service, contracts (mandatory clauses and approval ofadhesion contracts by ICP-ANACOM), invoice details and dispute resolutionmechanisms.

 

The Basic Law imposes onPT, as the operator of the basic telecommunications network, an obligation topermit non-discriminatory access to its network by other network operators andservice providers. It also prohibits unfair competitive acts and abuse of adominant position by a network operator or service provider.

 

On April 24, 2002, the EUpublished EU Directive 21/2002 (framework directive) and three other specificDirectives which set forth significant changes to (i) authorizations of electroniccommunications networks (EU Directive 2002/20); (ii) access to, andinterconnection of, electronic communications networks and associatedfacilities (EU Directive 2002/19); and (iii) universal services and usersrights relating electronic communication networks and services (EU Directive2002/22). EU members will have fifteen months from the publication date toimplement such EU Directives through national laws.

 

**ThePortuguese regulator**

 

Although the Ministry ofEconomy retains basic responsibility for telecommunications policy in Portugal,ICP-ANACOM, acting under new statues approved by Decree Law 309/2001 ofDecember 7, 2001, is allowed to act with great autonomy and is entrusted with awide range of responsibilities regarding the regulation, supervision andrepresentation of the telecommunications sector.

 

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**Licensingand registration**

 

The EU LicensingDirective prohibits any limitation on the number of new entrants intelecommunications markets, except as required to ensure an efficient use ofradio frequencies. It gives priority to general authorizations as opposed tolicensing of particular activities. However, it permits national regulatoryauthorities to decide in which case licenses should be required for particularactivities.

 

The Portuguese governmentapproved Decree Law 381-A/97 of December 30, amended by Decree Law 92/99 ofMarch 23, which implements the EU Licensing Directive. Licenses are granted fora 15 year period and renewed for periods of 15 years upon request, and separatelicenses are required in order to (i) provide public fixed telephone services,(ii) establish and/or provide public telecommunications networks, (iii)establish networks or provide services which require the granting offrequencies, or (iv) conduct operations where the operator is subject toobligations concerning universal service provisions, open network provisions orinterconnection duties that derive from the holding of a significant marketshare.

 

The application for alicense involving the use of specified frequencies for which the fullavailability procedure does not apply in accordance with the annual plan thatis issued by ICP-ANACOM must be preceded by a public tender (which has occurredfor mobile services and fixed wireless access systems).

 

**Pricingand fees**

 

Telecommunicationsoperators in Portugal other than PT are free to establish the prices for theirservices. PT entered into a pricing convention with ICP-ANACOM and the DGCC,the Portuguese commerce and competition agency, which established price caps onPT’s prices for fixed telephone services (i.e., installation charges, linerental fees and prices for domestic and international telephone calls), leasedlines and telex. Prices must be transparent, cost oriented andnon-discriminatory and must be published in the Official Gazette.

 

Operators and serviceproviders must pay administrative fees to ICP-ANACOM, established by theMinistry of Economy. Operators of telecommunications networks and telephoneservice providers pay an annual fee of approximately € 10,000 per license and €7,500 per registered operator.  Fees arealso due in respect of registrations and issuing of licenses, changes toregistrations and licenses, substitution of registrations or licenses in theevent of loss and renewal of licenses. The use of frequencies requires thepayment of radioelectric fees which are established and published on the samebasis.

 

**Interconnection**

 

Interconnectionregulation is specifically addressed by Decree Law 415/98, implementingdirective EC/97/33, which contains the rights and obligations of differentcategories of operators and service providers and grants ICP-ANACOM a widerange of powers to intervene in dispute resolution or by its own initiative andto fix “ex-ante” conditions, in particular where operators with significantmarket power are involved.

 

That Decree Law imposeson these entities specific obligations concerning the cost orientationprinciples for their interconnection tariffs and the publication of ReferenceInterconnection Offers which are subject to specified minimum elements definedby ICP-ANACOM. ICP-ANACOM annually fixes the interconnection tariffs and theReference Interconnection Offers, which, among other things, establishes a generalobligation for voile telephone operators to provide carrier pre-selection andnumber portability facilities. By decisions of ICP-ANACOM and the Portuguesegovernment, carrier pre-selection was implemented on July 1, 2000, and numberportability was implemented as of June 30, 2001.

 

**Nationaltelecommunication strategy**

 

According to thePortuguese Plans approved by the Portuguese Parliament for the four year period2003/2006, it is intended to improve the telecommunication sector’stechnological progress and to promote an independent regulator furnishing itwith means to prevent all obstacles to a fully open and competitive market.

 

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**Internet**

 

At present, there islimited Portuguese and EU legislation specifically covering the provision ofInternet services, although there are laws and regulations relating to certainspecific aspects of Internet activities, including the use of domain names,digital signatures, electronic invoices and data protection. In addition, theEU adopted what is known as the E-Commerce Directive, which sets out basicprinciples for regulating electronic activities in the EU. There are also anumber of pending legislative and regulatory proposals in Portugal and in theEU.

 

Decree Law 381-A/97 ofDecember 30, 1997, establishes the registration procedure followed by operatorsthat must register the domain names they intend to use in their Internetactivities. According to a decision by ICP-ANACOM, Internet Service Providers,or ISPs, can determine fees charged to their customers and pay a fixed chargeto PT.

 

Internet advertisingactivities are subject to the relevant restrictions of the PortugueseAdvertising Code and to Portuguese legislation applicable to home advertising.In addition, sales through the Internet can be considered a form of retailsales and subject to Decree Law 143/2001 of April 26, 2001, pursuant to which aconsumer has the right to cancel a contract within 14 business days to 3months, depending on the extent to which the seller has complied with theinformation requirements established by this decree law.

 

On June 8, 2000, in orderto ensure the free circulation of electronically provided services, includingcommerce between Member States, the EU adopted the E-Commerce Directive. ThisDirective sets out two main principles: services electronically provided by aISP established within a Member State are required to comply with the legalrequirements of such Member State (principle of country of origin); and any MemberState may not, as a rule, restrict the electronic services provided fromanother Member State (principle of mutual recognition). The implementation ofthis Directive in Portugal is pending.

 

On December 21, 1998, theEU approved a plan to promote safer use of the Internet by combating illegaland harmful content on global networks. While some member countries haveadopted the Action Plan, to date Portugal has not.

 

It is also possible that“cookies,” or pieces of electronic information used to track demographicinformation and to target advertising, may become subject to increased levelsof legislation limiting or prohibiting their use.

 

In addition, because ofthe global nature of the Internet, our Internet activities may be deemedsubject to the laws or regulations of other countries.

 

**Item 5****.****           *Operating andFinancial Review and Prospects***

 

*The following discussion should beread in conjunction with our consolidated financial statements and otherfinancial data, including the related notes, found elsewhere in this annualreport.*

 

**OVERVIEW**

 

Our principal business isthe generation and distribution of electricity in Portugal. The primary factorsaffecting our operating performance are:

 

•                  thelevel of demand for electricity in Portugal;

 

•                  thetariffs that the we are permitted to charge for electricity, which are governedby regulation; and

 

•                  ourlevel of operating costs, which consist primarily of depreciation andamortization, fuel costs and costs of purchased electricity, and wages andsalaries.

 

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The level of demand forelectricity in Portugal is directly related to the general level of economicactivity in the country.  During thelast decade, Portugal has experienced a stronger rate of economic growth thanmany other EU Member States.  From 1992through 2002, Portugal’s real gross domestic product grew at an average annualrate of 2.6%, as compared with an average of 2.1% for all EU Member States.Portugal, like other European countries, was affected by recession from 1992through 1994. Since 1996, however, the Portuguese economy has recovered andgrowth in Portugal’s gross domestic product has exceeded the EU average.  The structure of the economy has been undergoingsignificant changes, as higher value-added sectors, such as manufacturing andservices, have gained in relative importance compared to lower value-addedsectors, such as agriculture.

 

From the 1990s, thepolicy of successive governments has been to remove barriers to trade,privatize state-owned companies and liberalize key economic sectors, such astelecommunications, transportation and energy and power. Prior to 1988, we hada nearly complete monopoly of the electricity generation, transmission anddistribution business in Portugal. Since 1988, however, competition hasincreased in the generation business and is expected to continue to do soduring the next few years as the EU competition policy is implemented. In 1999,the regulator implemented measures to encourage competition in the distributionof electricity in Portugal. To learn more about these measures, you should read“Item 4.  Information on theCompany—Portugal—Competition.”

 

In late 2000, thePortuguese government purchased a 70% interest in REN from us in connectionwith its October 2000 offering of our ordinary shares. The requirements forthis transaction were established by decree law. The decree law concerning thepurchase of REN’s share capital by the government requires that the majority ofREN’s share capital must be held by the Portuguese government. According to thedecree law, the decision of the government was motivated by its wish to retainownership in and management control of REN, which would otherwise have beenreduced as a result of the October 2000 offering.  The decision was based on REN’s strategic national importance andis a part of the government’s reorganization of the Public Electricity Systemin accordance with the European trend towards greater liberalization and aimedat creating a single European electricity market. The decree law separates thecompany managing the national grid from generation and distribution companies,which the government in the decree law stated is the most suitable model ofoperation and would bring greater transparency and competition to theelectricity sector.  In connection withthe government’s purchase, in November 2000, we received an extraordinarydividend distribution from REN in the amount of approximately € 392.6million, all of REN’s debt to us was repaid in an amount equal to approximately€ 106.2 million and the government paid us an aggregate consideration ofapproximately € 477.4 million for a 70% interest in REN.  The decree law permits us to purchase thesites of the power plants used in the Binding Sector in the event REN choosesnot to use such sites and plants at the conclusion of the applicable contractfor the expansion of the Binding Sector, thereby permitting us to continue tooperate the plant in the Non-Binding Sector. The decree law also provides that,in the event we sell our remaining shares in REN, the government will have thefirst right to acquire these shares. Currently, our interest in REN is accounted for under the equity methodof accounting.

 

The reduction of thePortuguese government’s ownership to less than a majority interest in ourshares after the October 2000 offering and the reduction of our ownershipinterest to less than a majority interest in REN’s shares triggered provisionsin some of our debt agreements that provide specified remedies for creditors.The reduction of the Portuguese government’s ownership to less than a majorityinterest in our shares triggered provisions in two of our domestic bond issuesthat permitted bondholders to seek our redemption of the bonds. Under one ofthese bond issues, a provision was triggered giving bondholders the right tocall a meeting of bondholders for the purpose of proposing modifications to theterms of the bond. A meeting was called and, because we did not accept themodifications proposed, bondholders had the right to, within 30 days, requireredemption of their bonds. As a result, we were required to redeem€ 125,000,000 of this € 150,000,000 issue at par on July 18,2001.  With respect to the otherdomestic bond issue, a provision was triggered giving bondholders the right toredeem their bonds at any time, and as of June 3, 2002 we had redeemed€ 212,979,736 of this € 250,000,000 issue at par.  We have effectively refinanced the portionof our debt represented by these domestic bonds by issuing a bond in March 2001under our MTN program, as discussed below in “—Liquidity and CapitalResources.” In 2000, our MTN program was amended to prevent the REN transactionfrom triggering any remedies for bondholders of the € 1,000,000,000 issuematuring in 2009. As a result of this amendment, the annual interest rate ofthis issue increased from 6.00% to 6.40%. We obtained or reached agreementon amendments to or waivers of applicable provisions in all of our other debtagreements. Management believes that we have available resources that are morethan adequate to make these redemptions and increased interest payments.  See “—Liquidity and Capital Resources”below.

 

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Until the end of 1998,tariffs were fixed annually by convention, negotiated between us and DGCC.Tariffs were based on total estimated costs for the relevant year assumingaverage hydrological conditions. These tariffs were not specifically linked toan inflation-indexed formula. From 1995 through 1997, tariffs decreased innominal terms by 2.8% and in real terms, adjusted for inflation, by 7.8%. OnSeptember 15, 1998, the new tariff regime, which became effective from 1999onward was adopted by the regulator and on December 4, 1998, the regulator announceda new policy for the years 1999, 2000 and 2001. Under this regime, tariffs areset by the regulator pursuant to a periodic registration of regulatoryparameters.  In 1999, high, medium andlow voltage tariffs declined in real terms by 12.8%, 12.8% and 7.5%,respectively, from 1998 levels. For 2000, in nominal terms, tariffs for allvoltage levels declined by 0.6% from the 1999 levels. For 2001, in nominalterms, tariffs for all voltage levels increased, on average, by 1.2% from the2001 levels.  In November 2001, theregulator published the regulatory framework for the 2002-2004 regulatoryperiod.  For 2002, in nominal terms,tariffs increased across all voltage levels by an average of 2.2% from the 2001levels.  In real terms, adjusted forinflation, both high and medium voltage tariffs have declined by an average of6.0% over the period 1998 to 2003.  Thetariffs for low voltage customers have also declined by an average ofapproximately 3.3% over the same period. For 2003, in nominal terms, tariffs increased across all voltage levelsby an average of 2.8% from the 2002 levels. To learn more about these tariffs, you should read “Item 4. Informationon the Company—Portugal—Tariffs” and “—Regulation—Portugal.”

 

Our operating income and net income in 2002 decreased by 3.7% and 25.6%,respectively, from 2001. In 2001, operating income and net income decreased by7.0% and 17.9%, respectively, from 2000.

 

The decrease in 2002 operating income is partially due to the effects oflower electricity distribution tariffs in Portugal which affected theprofitability of EDPD, following the start of the 2002-2004 tariff period, andthe combination of lower consumption in areas served by Bandeirante, Escelsaand Enersul, following the rationing enforced by the Brazilian government, anda severe devaluation of the real against the euro.  A devaluation in the real negatively affects our consolidatedresults as the results of our Brazilian companies are translated into euros inour consolidated results.  The decrease inoperating income in 2001 is partially due to the sale of REN in 2000, as RENwas no longer fully consolidated in 2001 and we were no longer able to benefitfrom its positive operating results in our consolidated accounts.

 

The decrease in 2002 net income was influenced by the decrease inoperating income as explained above and to a great extent due to the one-timewrite-off of our investment in ONI Way in connection with the divestment ofONI’s UMTS business. In 2001, the decrease in net income is partially due tothe sale of REN in 2000, as a result of which we had extraordinary one-timegains in that year.

 

Looking forward, we do not expect one-time items to materially affectour results in 2003. In addition, in 2003 we will not have the capital expenditurespreviously required for ONI’s development of a UMTS network. Finally, althoughwe will continue to experience lower tariffs in our distribution business, weare optimistic that the regulator may allow us to include certain significantrestructuring costs of such business in our regulatory cost base.

 

Our costs are influencedby inflationary trends, fluctuations in fuel costs and hydrological conditions.In years with less favorable hydrological conditions, or drier conditions, useof thermal power can increase significantly, causing our spending on fuel toincrease substantially. In years with more favorable hydrological conditions,or wetter conditions, the opposite result occurs. To smooth the impact onearnings and customer prices, the “hydro account” was established. The hydroaccount is discussed below in “—2001 compared with 2000—Hydrologicalcorrection” and in notes 3(l) and 18 to the consolidated financial statements.

 

Our income statement isprepared on the total-cost basis typically used by major Portuguese companies.Costs related to our personnel and materials incurred for assets underconstruction that are capitalized as part of fixed assets and will be amortizedin future periods are classified in the income statement as expenses, and a correspondingamount is credited to “Own work capitalized.”

 

**CRITICAL ACCOUNTING POLICIES**

 

Our reported financialcondition and results of operations are sensitive to accounting methods,assumptions and estimates that underline the preparation of our consolidatedfinancial statements.  Our criticalaccounting policies, 

 

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the judgments and otheruncertainties affecting application of those policies and the sensitivity ofreported results to changes in conditions and assumptions are factors to beconsidered in reviewing our consolidated financial statements and thediscussions below in “Results of Operations.”

 

The preparation of ourconsolidated financial statements requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, related disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.  We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances.  Actual resultsmay differ from these estimates under different assumptions or conditions.

 

We believe that thefollowing policies, certain of which require assumptions and estimates, have aparticularly important impact on the preparation of the consolidated financialstatements.

 

**Fixed Assets**

 

Fixed assets arepresented at historical cost except for items acquired before 1992, at revaluedamounts. Historical costs include, except for assets constructed prior to 1995,finance charges and foreign exchange differences. They also include directinternal costs and general and administrative overheads.

 

PPAs  exist between us and REN, as the sole buyerfor the Binding Sector, for the majority of the generation assets economiclives. As permitted under Portuguese GAAP these assets are classified as assetsin our financial statements. Additionally, REN has recorded the minimum contracted payments made toproducers in the Binding Sector in connection with PPAs as an expense of therespective periods.  In accordance withU.S. GAAP, these PPAs between REN and CPPE are accounted for as capital lease receivablesfor CPPE and capital lease obligations for REN.  Prior to July 1, 2000, the effects of the PPAs between the tworelated companies were eliminated in consolidation.

 

The carrying value of allgeneration and distribution assets have been approved by the regulator for thepurposes of accepting amortization as part of the new tariffs.

 

Depreciation iscalculated on the straight-line basis at specific rates accepted by the taxauthorities for us or for general purposes business, which reflect the economicuseful lives of each category of fixed assets.

 

Payments received fromcustomers and subsidies granted for the construction of fixed assets arepresented as deferred revenue and amortized to income over a period equivalentto that of the related items.

 

Tangible and intangiblefixed assets, net of relevant deferred revenue, are reviewed for impairment ifevents or changes in circumstances indicate that the carrying amount may not berecoverable. Goodwill is reviewed for impairment at the end of the firstcomplete financial year after the relevant acquisition, and thereafter ifevents or changes in circumstances indicate that the carrying amount may not berecoverable.  When conducting a reviewfor impairment consideration is taken of the regulated and contractual aspectsof our operations.

 

Uncertainties exist whenassessing the recoverability of the carrying amounts of the tangible andintangible fixed assets.  The assessmentis made based on the best information available regarding the anticipated continuityof the concession or other contractual arrangements in place.

 

**Investments**

 

Investments includedinterests in associated companies that are accounted for under the equitymethod and other investments, including strategic investments, which have beenconsidered non trading and marked to market.

 

The most significantuncertainty relating to the valuation of these investments is dependence on thecontinuation of those strategic alliances, which has been assessed using thebest information available.

 

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**Employee retirement benefits**

 

We have a commitment tocomplement retirement and survivors’ pensions of the employees subject to theACT (collective labor agreement) to the extent that these are not covered bythe Portuguese government’s social security plans. Those employees have theoption of taking early retirement, subject to certain conditions relating topre-defined age and length of service requirements being met.  Retired employees retain the right tomedical assistance based upon similar conditions as those pertaining toemployees still on the active payroll. The entitlement to these benefits isusually based on the employee remaining in service up to retirement age. Theexpected costs of these benefits are accrued over the period of employment,using valuations performed by independent qualified actuaries. The assets ofthese plans are held in separate trustee-administered funds.  The pension plans are generally funded bypayments from the EDP Group companies, taking into account the recommendationsof the independent qualified actuaries.

 

There are numerousuncertainties inherent in estimating employee retirement benefits andassumptions that are valid at the time of estimation may change significantlywhen new information becomes available. Fluctuations in the rates and otherassumptions used for the actuarial valuations may, ultimately, result inactuarial gains or losses that, in accordance with the relevant accountingcriteria, will be recognized in the financial statements.

 

**Deferred income taxes**

 

Deferred income taxes,recoverable and payable, have been included in our balance sheet as deferredtax assets and liabilities for the expected future tax consequencesattributable to differences between the financial statement carrying amount ofassets and liabilities and their tax bases.

 

There are certainuncertainties inherent in estimating deferred income taxes, namely that of therelevant companies of the EDP Group obtaining taxable profit in the periods inwhich such differences revert in the income statement.

 

**Revenue recognition**

 

*General*

 

Revenues from electricitysales are recognized when earned. Billings for electricity are made on a monthly basis throughout themonth.  Monthly billings are based onactual meter readings or an estimated consumption based on the historical dataof each consumer.  Unbilled revenuesfrom the billing cycle date to the end of the month are accrued based on theaverage recent consumption.

 

In Portugal, the tariffsof electrical energy supplied to clients in the Binding Sector are determinedby the regulator.  Tariffs for clientsoutside the Binding Sector are negotiated and contracted on an individualbasis.  Tariffs in the electricitydistribution business are subject to a price cap mechanism. These earnings aresubject to a gross profit restriction and after being subject to confirmationor approval by the regulator are to be adjusted in future periods. We estimateamounts that are subject to future tariff revenue or adjustments and defer therecognition of the revenues until future periods. These amounts are recorded asaccrued expense in the accompanying balance sheet.

 

*Hydrological correction account*

 

The hydrologicalcorrection account constitutes a legally mandated mechanism for compensatingthe variable costs of electric-power generation.  In years with unfavorable hydrological conditions, thermalgeneration increases and, consequently, expenditures on fuel and electricityimports increase substantially.  Inyears with abundant rainfall, the opposite occurs.  We cannot modify the tariffs we charge to take into account thechanges in variable costs incurred as a result of hydrological conditions.  In this context and with a view to avoidingmajor distortions in operating results, due to favorable or unfavorablehydrological conditions, the hydrological correction account is adjustedupwards or downwards based upon average hydrological conditions.   Estimation of future hydrologicalconditions is based on the best information currently available.  Changes in such estimates will result inchanges to the hydrological correction account in future financial periods.

 

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The annual changes in thehydrological correction account consist of the following:

 

•                  Thedifference between the economic costs of generating electricity and theeconomic reference costs (prior to June 2000 this difference was charged to theincome statement) is charged to REN for inclusion in the Binding Sector costs.

 

•                  Afinancial charge associated with the hydrological correction account’saccumulated balance.

 

•                  Anadjustment, which may be either an income or an expense item, corresponding tothe amount necessary to make the expected balance, in a time scale of 10 years,equal to an adequate reference level.

 

The amount of theaccumulated balance and the movements during the year are approved by thePortuguese government on an annual basis. Under U.S. GAAP, the effect of future changes in hydrological conditionsis viewed as a general business risk and the resulting adjustments aretherefore reversed.

 

**Deferred income taxes**

 

Deferred income taxes,recoverable and payable, have been included in our consolidated financialstatements under Other assets and Deferred revenue and other liabilities, inrespect to differences in value of assets and liabilities for accounting andtaxes basis.

 

There are certainuncertainties inherent in estimating deferred income taxes namely that of therelevant companies of the EDP Group obtaining taxable profit in the periods inwhich such differences revert in the income statement.

 

**RESULTS OF OPERATIONS**

 

Beginning in January2001, we consolidated the results of Bandeirante with our results.  In 2002, following the conclusion of ouracquisition of a 40% stake in Hidrocantábrico, we proportionally consolidatedthe results of Hidrocantábrico from June through December.  On October 10, 2002, we gained control overBrazilian distribution companies Escelsa and Enersul.  As a result, we consolidated the results of Escelsa and Enersulfrom October through December 2002. EDP currently controls 54.74% of Escelsaand 35.69% of Enersul.  In December2002, we decided to discontinue ONI Way’s UMTS operations, which was reflectedby a write-off of ONI Way and the subsequent increase in ‘Other non-operatingexpenses (income)’ due to the creation of a non-recurring provision of€ 280.9 million. The following table sets forth our results of operationsfor 2000, 2001 and 2002 as a percentage of total revenues. For more informationconcerning our revenues, see our consolidated financial statements. 

 
|                                          |   | **Year ended December 31,** |   |
|-----------------------------------------------|--------|-----------------------------|--------|
|                                          |   | **2000**                    |   | **2001** |   | **2002** |   |
| Total  revenues                               |   | 100%                        |   | 100% |   | 100% |   |
| Raw  materials and consumables                |   | 45.0                        |   | 54.5 |   | 57.7 |   |
| Personnel  costs                              |   | 11.4                        |   | 10.5 |   | 9.8 |   |
| Depreciation  and amortization                |   | 16.0                        |   | 11.8 |   | 11.6 |   |
| Other  external supplies and services         |   | 9.6                         |   | 11.5 |   | 10.6 |   |
| Own  work capitalized                         |   | (6.0)                       |   | (4.1) |   | (3.8) |   |
| Concession  and power-generation rental costs |   | 3.4                         |   | 2.6 |   | 2.5 |   |
| Provisions                                    |   | 2.7                         |   | 2.1 |   | 1.6 |   |
| Hydrological  correction                      |   | (0.9)                       |   | 0.0 |   | 0.0 |   |
| Other  operating expenses (income), net       |   | (0.1)                       |   | (0.8) |   | (0.1) |   |
| Total  operating costs and expenses           |   | 81.2                        |   | 88.1 |   | 89.8 |   |
| Operating  income                             |   | 18.8                        |   | 11.9 |   | 10.2 |   |
| Net  interest expense                         |   | 4.5                         |   | 3.6 |   | 3.5 |   |
| Other  non-operating expenses (income), net   |   | (7.5)                       |   | (2.2) |   | 2.2 |   |
| Income  before taxes                          |   | 21.8                        |   | 10.5 |   | 4.5 |   |
| Consolidated  net income                      |   | 14.3                        |   | 8.0 |   | 5.2 |   |

 

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**2002 COMPARED WITH 2001**

 

**Revenues**

 

Our total revenues in2002 increased by 13% to € 6,386.6 million from € 5,650.4 million in2001, due primarily to the consolidation of Hidrocantábrico, Escelsa andEnersul for the first time in 2002. Electricity sales represented approximately92.0% of our total revenues in 2002 compared with 92.1% of total revenues in2001.  Our electricity sales in 2002increased by 13.0% to € 5,876.2****millionfrom € 5,201.3 million in 2001. Electricity sales volume grew in 2002 by 1.3% to 35,973 GWh from 35,505GWh in 2001, primarily due to increased low voltage consumption.

 

Beginning with the newtariff regime that became effective in 1999, tariffs are fixed by the regulatorin advance of each year based in part on estimated data for variables such asdemand and cost. If there are differences between the estimated data and theactual data during a period, an adjustment will be made to the tariff in asubsequent period to account for these differences. Our revenues include tariffadjustments that we calculate to estimate the portion of our revenues from electricitysales that should be deferred to a subsequent period to take account of datathat the regulator will consider in setting tariffs. If actual costs and demanddeviate from the estimated data, the revenues REN receives from electricitysales to EDPD will vary from the revenues allowable under the tariff regime. Inthe event actual revenues exceed the revenue level allowable, such as due tohigher than estimated demand, REN is obligated, two years later, to compensatethe Public Electricity System for the excess. This compensation takes the formof a reduction in the amounts charged by REN to distributors such as EDPD inthe Public Electricity System. By contrast, if REN’s actual revenues are lessthan the revenue level allowable, such as due to higher than estimated costs,REN will, two years later, be able to recover the shortfall through an increasein the amounts charged by REN to distributors such as EDPD in the PublicElectricity System. Any reduction or increase received by or charged to EDPD isfully passed through to the customer tariffs in the Binding Sector. There isalso a tariff adjustment in respect of 1999, 2000 and 2001 reflecting theprofit sharing mechanism in distribution relating to EDPD’s selling activity,which is reflected in the customer tariffs two years later. For the 2002-2004regulatory period the profit sharing mechanism was eliminated. None of theaccounting entries associated with tariff adjustments have an impact on ourcash flow. For more information on the tariff adjustments, you should read note3 to the consolidated financial statements.

 

In 2002, the aggregatetariff adjustment was € 70.5 million. This figure includes an adjustment of € 50 million relating to theapplication of the new tariff regulation in 2002 and an adjustment of€ 20.5 million relating to the 2000 tariff adjustment reposition.  In 2001, the aggregate tariff adjustment was€ 42.2 million. This figure includes an adjustment of € 35.5 millionrelating to the sharing of EDPD’s 1999 profit that is reflected in 2001tariffs, and an adjustment of € 6.7 million relating to a partial recoveryof EDPD’s 2001 profit as actual revenues were below those estimated in thefixing of 2001 tariffs.

 

Our other salesactivities, including sales of steam, ash, information technology products,telecommunications equipment, fixed property and sundry materials, generatedrevenues of € 112.0 million in 2002 compared with € 98.0 million in2001, due primarily to an increased contribution of revenues from IT products,which benefited from the continued involvement of the Edinfor Group companiesin the development and installation of SAP-related projects.  Our revenues from services in 2002 increasedto € 398.4 million from € 351.1 million in 2001. Activitiesgenerating these revenues include electricity-related services, servicesrelated to information technology systems, telecommunications, engineering,laboratory services, training, medical assistance, consulting, multi-utilityservices and other services. The primary reason for the increase in revenuesfrom services in 2002 was the increased contribution of our telecommunicationsubsidiaries’ due to a significant growth of both voice and data services thatbenefited from the gradual liberalization of short-distance calls (local traffic)in Portugal and from a significant growth in ISP traffic, respectively.

 

**Operating costs and expenses**

 

Our total operating costsand expenses amounted to € 5,737.9 million in 2002 compared with€ 4,976.8 million in 2001 due primarily to the consolidation ofHidrocantábrico, Escelsa and Enersul for the first time in 2002.  As a percentage of revenues, total operatingcosts and expenses increased to 89.8% in 2002 from 88.1% in 2001 due primarilyto the increased costs of purchased electricity and fuel.

 

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*Raw Materials and Consumables.*Themajor components of our raw materials and consumables are the costs ofpurchased electricity, fuel costs and costs of other materials. Our rawmaterials and consumables costs in 2002 increased by 19.8% to € 3,687.1million from € 3,078.9 million in 2001, due primarily to increased costsof purchased electricity.

 

Our costs of purchasedelectricity include purchases from REN as well as purchases from privategenerators and small independent producers. These costs in 2002 increased 19.1% to € 3,005.4 million from€ 2,524.3 million in 2001 due to the initial consolidation ofHidrocantábrico, Escelsa and Enersul, a growth in consumption and an increaseof the tariff charged on power purchased from REN. For more information onthese purchases of electricity, you should read “Item 4. Information on theCompany—Portugal—Electricity System Overview—The Independent ElectricitySystem” and “—Competition.”

 

Our fuel costs in 2002increased by 23.3% to € 468.0 million from € 379.6 million in 2001,reflecting, on the one hand, the general rise in fuel prices, the effects ofwhich were felt to a lesser extent in 2001, and on the other hand, higher fuelutilization associated with a greater use of thermal generation in what was adry year. Consequently, there was an increase in fuel-oil (which is moreexpensive than coal) in the fuel consumption mix. See “—Hydrologicalcorrection” below for a discussion of accounting for the impact on fuel costsof the variability of hydrological conditions.

 

The major components ofour costs for other materials are the costs of cables, meters, transformers andother goods for resale. These costs increased in 2002 to € 127.8 millionfrom € 114.2 million in 2001. A majority of these costs are credited to“Own work capitalized” and the remainder is applied to maintenance of thetransmission and distribution networks. See “—Own work capitalized.”

 

Raw materials and consumablesalso include “other,” which increased in 2002 to € 85.9 million from€ 60.8 million in 2001, partially reflecting the initial consolidation ofHidrocantábrico and, to a lesser extent, Escelsa and Enersul.

 

*Personnel costs.*Personnel costs, which consist mainly of wages and salaries and social securityand pension fund contributions, increased 5.5% in 2002 to € 624.8****million from € 592.0 million in2001.  This increase was primarily dueto the inclusion of seven months of Hidrocantábrico’s personnel costs.

 

*Depreciation and amortization*.Depreciation and amortization in 2002 increased to € 739.5 million from€ 664.7 million in 2001.

 

*Other external supplies and services*.These costs consist of supplies and services provided to us by externalsuppliers, and include external maintenance and repairs, specialized services,communication, rents, insurance and other services. External maintenance andrepairs consists of work on our power plants, substations and transmission anddistribution networks that we subcontracted to others. Other specializedservices involve technical services such as auditing, legal, consulting, andrevenue collection. Communication services include telecommunications, postal,delivery and courier services.  The costof these external supplies and services in 2002 increased by 3.7% to€ 675.1 million from € 651.2 million in 2001, due primarily tothe inclusion of seven months of Hidrocantábrico’s other external supplies andservices.  This increase would have beenhigher if not for the positive results of the cost cutting program implementedat the beginning of 2002.

 

*Own work capitalized*.“Own work capitalized” consists of amounts that correspond to costs related toour costs of personnel and materials and other external supplies and servicesincurred for projects under construction that are capitalized and will beamortized in future periods. These amounts generally consist of consumption ofmaterials, direct internal costs, general administrative overheads and financecharges. Own work capitalized in 2002 increased to € 241.8 million from€ 232.5 million in 2001.  A tablesetting forth the components of Own work capitalized for the past three yearsis provided in note 24 to the consolidated financial statements.

 

*Concession and power-generationrental costs*.  Thesecosts, which consist mainly of rent paid to municipalities for concessions todistribute low-voltage electricity, increased in 2002 to € 158.2 millionfrom € 149.1 million in 

 

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2001. The amount of rentpayable to municipalities for concessions is established by governmentregulation and is based on the amount of low-voltage electricity consumed inthe respective municipal areas each year.

 

*Hydrological correction.*Thehydro account is an accounting mechanism we established pursuant to Portugueselaw. The purpose of this account is to smooth the short-term effect on ourearnings and customer prices that results from changes in hydrologicalconditions. In years with favorable hydrological conditions, there is anincrease in hydroelectric generation and a decrease in variable costs ofthermal generation. Conversely, in years with unfavorable hydrologicalconditions there is a decrease in hydroelectric generation and our expenditureson fuel and electricity imports increase substantially and the variable costsof thermal generation increase accordingly. We cannot modify the tariff wecharge to take into account the changes in variable costs incurred due tohydrological conditions. In order to reduce major distortions in operatingresults due to changing hydrological conditions, the hydro account isreinforced in years of favorable hydrological conditions with a correspondingoperating charge in the income statement, thereby eliminating the overstatementof its net income. In years of less favorable hydrological conditions we usethe hydro account (with a corresponding credit to operating income) so as toreduce the negative impact on our net income arising from the increased expenditureson fuel and electricity imports. These upward or downward adjustments to thehydro account are made based upon the economic reference cost calculated on thebasis of an average hydrological year.

 

Prior to REN’s sale, allof the movements relating to the hydro account were considered as being of anon-cash nature on the grounds that they were made (in accounting terms) in ourconsolidated financial statements as an expense recorded to the hydro accountin favorable hydrological years and as an income recorded to the hydro accountin less favorable hydrological years. Following the sale of REN, cash movementsnow take place between us and REN for reinforcing or drawing against the hydroaccount which, after REN’s separation, is still carried on our balancesheet.  In 2002 the hydro account wasdecreased by € 63.4 million, which decrease includes€ 76.1 million charged by REN. In 2001 the hydro account increased by € 22 million. This difference wasprimarily a result of 2002 having been a dry year (hydro coefficient of 0.76),while 2001 was a wet year with a (hydro coefficient of 1.19). To learn moreabout the effect of hydrological conditions on us, you should read “Item4.  Information on theCompany—Portugal—Generation.”

 

The Portuguese governmentdetermines the “level of reference” of the hydro account based upon the leastfavorable period of hydrological conditions during the previous 30 years. Indoing so, the government determines an amount expected to be adequate towithstand unfavorable hydrological conditions that may occur in the future. Thegovernment has determined that the hydro account shall not exceed the level ofreference. The level of reference of the hydro account was € 387.5 millionfor 2002, 2001 and 2000. In 2002, the hydro account did not exceeded thereference level, hence we did not record the excess in  non-operating income in 2002.  In 2001, the hydro account exceeded thereference level, causing a surplus of € 47.5 million that was recorded byus as non-operating income in 2001.

 

We record as an expenseeach year deemed interest credited to the hydro account corresponding to theaverage interest rate paid on our euro-denominated borrowings for theapplicable year. The method of accounting for this deemed interest did notchange with the sale of REN. For more information on the hydro account, youshould read notes 3 and 18 to our consolidated financial statements.

 

*Other operating expenses, net.* These expenses include provision charges,taxes other than income taxes and other operating income (net). These expensesincreased in 2002 to € 95.0 million from € 73.5 million in 2001,primarily due to a decrease in supplementary gains.  Supplementary gains consist of reimbursements received forout-of-pocket expenses incurred and charged to third parties related toinformation technology and telecommunications services.  For more information on these expenses, youshould read notes 3n., 25 and 26 to the consolidated financial statements.

 

We systematically recordthe provision for doubtful accounts receivable from third parties andmunicipalities based on the age of the receivables and our collection history.We do not record a provision with respect to accounts receivable from otherpublic entities since historically we have not experienced a problem incollecting these receivables. Accounts receivable are written off when acustomer is declared bankrupt by a court of law because we receive the taxbenefit of the write-off only when the customer is actually declared bankrupt.Consequently, we have 

 

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a significant amount ofaccounts receivable that are fully provided for but have not been written-off.For more information on this provision, you should read note 33 to theconsolidated financial statements.

 

Until the end of 1999,increases in provisions for doubtful accounts were reflected in ourconsolidated statements of income in the line item “Provisions” and wereincluded in the determination of operating income while decreases were includedin the line item “Other non-operating expenses (income), net” below theoperating income.  Beginning in 2000,adjustments are made to the line item “Provisions” in the balance sheet. Thenet effect in the income statement relating to doubtful accounts in 2002amounted to a gain of € 4.9 million compared to a loss of € 20.5million in 2001 due to the recovery of doubtful in 2002.  These line items are discussed below and innotes 7, 25 and 29 to the consolidated financial statements.

 

**Operating income**

 

As a result of thefactors discussed above, our operating income in 2002 decreased by 3.7% to€ 648.7 million from € 673.5 million in 2001. ** **Inour core electricity business in Portugal our operating income in 2002decreased 9.0% from € 706.2 million in 2001.

 

**Other expenses (income)**

 

We recorded total otherexpenses in 2002 of € 361.8 million compared with total other expensesof  € 79.3 million in 2001,due to increased debt and related increased debt costs, and an increase in netlosses from affiliates and associated companies, partly offset by a net foreigncurrency exchange gain.

 

*Net interest and related expense*.  Our net interest expense consists ofinterest and related expenses and interest and related income. Our net interestexpense increased in 2002 to € 222.8 million from € 205.3 million in2001 (but****decreased as apercentage of our total revenues to 3.5% in 2002 from 3.6% in 2001).  This increase was primarily due to a netexpense related to interest in 2002 of € 283.1 million compared with€ 214.7 million in 2001, due primarily to an increase in our average debtlevel that was partially offset by the lower interest rates.

 

*Other non-operating expenses(income), net.*** **Wehad other non-operating expenses in 2002 of € 138.9 million compared withother non-operating income of € 126.0 million in 2001 primarily due to a€ 222.8 million net loss in 2002 related to net provisions movements.  In 2001, we recorded non-operating income of€ 47.5 million related to the hydrological correction mechanism.

 

We recorded an incomeitem in 2002 of € 71.8 million, compared to € 63.9 million in 2001,for the portion of depreciation due primarily to new electricity connectionsmade in prior years that were financed largely with customer payments. Werecord the amount of these payments initially as deferred income and as theassets are depreciated over 30 years, a portion of the amount is taken intoincome and offset by a corresponding charge.

 

We recorded a net loss in2002 of € 222.8 million related to net provisions movements compared witha net loss of € 41.1 million recorded in 2001. The net loss recorded in2002 reflects the write off of ONI Way, following the discontinuation of theUMTS project that ONI Way was developing. For more information on net movementof provisions you should read note 25 to the consolidated financial statements.

 

As the primary supplierof low voltage electricity in Portugal, we have in the past been obliged toprovide electricity to municipalities for street lighting and other publicbuildings even in situations where the recipient municipalities were not payingtheir bills on a timely basis. Although we have not encountered significantcollection problems in recent years, prior to 1988 collection problems wereencountered with certain municipalities and we still have on our booksreceivables from municipalities related to electricity and other servicesprovided prior to 1988. These receivables consist of amounts receivable from asmall number of municipalities that have not signed a concession agreement withus and with which a payment plan has not been agreed and amounts receivablefrom municipalities that have signed a concession agreement and have agreed toa deferred payment plan.

 

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**Provision for income taxes**

 

Our provision for incometaxes is determined on the basis of the estimated taxable income for theperiod. Income taxes provided for in 2002 were € 171.7 million comparedwith € 203.0 million in 2001. The reference income tax rate in Portugalwas 30% in 2002, compared with 32% and 32% in 2001 and 2000, respectively.  In addition, a municipal surcharge of up to10% of the base rate is typically levied by the municipality in which income isearned.  Our effective tax rate isdifferent from the reference income tax in Portugal each year due to permanentdifferences arising from the amortization of the goodwill/concession rightsthat are not deductible for income tax purposes.  Our effective tax rate was 59.9% in 2002 compared with 34.2% in 2001,primarily due to the fact that the negative impact of the ONI Way write-offfollowing the discontinuation of its UMTS operations was not tax deductible.

 

**Net income**

 

As a result of thefactors discussed above, our consolidated net income for 2002 decreased 25.6%to € 335.2 million from € 450.8 million in 2001.

 

**2001 COMPARED WITH 2000**

 

**Revenues**

 

Our total revenues in2001 increased by 46.9% to € 5,650.4 million from € 3,846.5 millionin 2000. Electricity sales represented approximately 92.1% of our totalrevenues in 2001 compared with 95.6% of total revenues in 2000.  Our electricity sales in 2001 increased by41.5% to € 5,201.3 million from € 3,675.9 million in 2000.  In 2001, Bandeirante’s revenues wereconsolidated on our income statement for the first time; without giving effectto Bandeirante, our total revenues in 2001 would have been € 4,510.8.  Electricity sales volume grew in 2001 by4.2% to 35,505 GWh from 34,090 GWh in 2000, primarily due to increased lowvoltage consumption.  Due to changes inREN’s consolidation method following our sale of 70% of REN, electricity salesin 2000 reflect electricity sales made during the second half of 2000 by ourproduction subsidiaries to REN of € 599.1 million.  If we do not take into account this effect,our electricity sales in 2000 would have been € 3,071.9 million.  Electricity sales in 2001 reflectelectricity sales to REN for the full year of € 1,214.1 million.

 

In 2001, the aggregatetariff adjustment was € 42.2 million. This figure includes an adjustmentof € 35.5 million relating to EDPD’s 1999 profit sharing mechanism and anadjustment of € 6.7 million relating to a partial recovery of EDPD’s 2001profit sharing mechanism.  In 2000, theaggregate tariff adjustment was € (9.1) million. This figure includes atariff adjustment of € 46.9 million related to REN, an adjustment of€ (35.5) million related to EDPD’s 1999 profit sharing mechanism(partially recovered in 2001) and an adjustment of € (20.5) millionrelated to EDPD’s estimated 2000 profit sharing mechanism. The € 46.9million tariff adjustment relates to the difference between REN’s actual costof acquiring electricity in the first half of 2000 and the estimated costassumed by the regulator for purposes of fixing transmission/distribution tariffsfor 2001. Due to the effect of higher fuel prices in 2000, the estimatedgenerating costs taken into account by the regulator in 1999, when establishingtariffs to be applied in 2000, was below that of the actual costs borne by RENon energy acquired from producers. According to the Tariff Regulation drawn upby the regulator, REN is entitled to recover this negative difference(shortfall) after two years, that is, in the tariffs for 2002. This figure alsoincludes our estimate of remuneration to REN through June 30, 2000 for thepower plant sites it owns.

 

During the 1999-2001regulatory period the supply activity of our distribution business was subjectto a profit sharing mechanism whenever EDPD’s profits increase more than 2%from the previous year. Under this mechanism, a prescribed percentage of theprofits over and above a defined limit must be returned to customers in theform of lower tariffs two years after their occurrence. In 1998, the regulatorestablished the tariffs for 1999 based on a consumption growth rate of 4.8%. Atthe end of 1999 it was established that actual growth was 1.1% above theregulator’s projection, or 5.9%. This enabled EDPD to improve its profit marginon the supply activity, thereby triggering the profit sharing mechanism to bereflected in the 2001 tariffs. As part of the tariff review process that fixedthe tariffs implemented in 2001, the regulator defined the amount EDPD had toreturn in the 2001 tariff to be € (35.5) million as a result of theapplication of the profit sharing mechanism to 1999. This amount, already takeninto consideration in the 1.2% increase in average tariffs fixed for 2001, wastherefore recouped by EDPD during 

 

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the course of the 2001through the tariffs it charged customers in the Binding Sector. In the 2000 tariffadjustment, and based on the formula used for 1999, EDPD estimated that theprofit sharing mechanism relating to its supply activity (and later to bereflected in the tariff for 2002), would amount to € (20.5) million, dueto a higher growth in 2000 consumption than the 4.5% estimate made by the regulatorin 1999 when fixing the tariff to be applied in 2000. Because the formula forprofit sharing was only applied for the first time at the end of 2000, weconfirmed the appropriate tariff adjustment for 1999 at that time and madetariff adjustments for 1999 and 2000 in our 2000 revenues.  For the 2002-2004 regulatory period, theprofit sharing mechanism was eliminated.

 

Our other salesactivities, including sales of steam, ash, information technology products,telecommunications equipment, fixed property and sundry materials, generatedrevenues of € 98.0 million in 2001 compared with € 60.9 millionin 2000, due primarily to the increased contribution of telecommunications thatreflects both the consolidation for the first time in 2001 of Comunitel whichwe acquired in June 2001, and the impact of the liberalization of localtelephone service that occurred in January 2001.  Revenues from other sales also reflect the consolidation of CASEfor the first time in 2001, in which we acquired a 60% stake in December 2000.

 

Our revenues fromservices in 2001 increased to € 351.1 million from € 109.7 million in2000. The primary reason for the increase in revenues from services in 2001 wasthe contribution of our telecommunications subsidiaries’ sales that increasedto € 151.8 million in 2001 from € 32 million in 2000, mainly due tothe consolidation of Comunitel and to the positive impact of the liberalizationof local telephone service.  Revenuesfrom services also reflect sales from activities performed for third parties byour consulting and information technology systems subsidiaries, which combinedincreased to € 129.6 million in 2001 from € 27.9 million in 2000,primarily due to the consolidation of CASE.

 

**Operating costs and expenses**

 

Our total operating costsand expenses amounted to € 4,976.8 million in 2001 compared with€ 3,122.1 million in 2000. As a percentage of revenues, total operatingcosts and expenses increased to 88.1% in 2001 from 81.2% in 2000 due primarilyto a decrease of approximately 3% in the access tariffs for the use of thedistribution network, the increased costs of purchased electricity and fuel,the removal of REN’s operating margin in 2001 and an increase in costs relatingto ONI operations.

 

*Raw Materials and Consumables.*Ourraw materials and consumables costs in 2001 increased by 77.9% to€ 3,078.9 million from € 1,730.7 million in 2000, due primarily toincreased costs of purchased electricity.

 

Our costs in 2001increased by 97.4% to € 2,524.3 million from € 1,278.6 million in2000, due primarily to the costs of electricity purchases made for the fullyear 2001 by EDPD from REN but only during the second half of 2000(€ 1,258.2 million), as a consequence of the change in the consolidationmethod following the sale of REN in 2000. Our costs of purchased electricity also increased due to a growth inconsumption of 5.0% and to the increase of the tariff charged on powerpurchased from REN.  REN has powerpurchase agreements with the Tejo Energia plant at Pego and the Turbogás plantat Tapada do Outeiro ending in November 2021 and March 2023, respectively. RENmust make specified monthly payments for the capacity of these plants,regardless of whether REN takes delivery of power or not. REN is also requiredto buy energy, as it is made available to it, from small hydroelectricproducers, producers using other renewable energy sources and certain othercogenerators and autoproducers. For more information on these purchases ofelectricity, you should read “Item 4. Information on the Company—Portugal—Electricity System Overview—TheIndependent Electricity System” and “—Competition.”

 

Our fuel costs in 2001increased by 22.9% to € 379.6 million from € 308.9 million in 2000,due primarily to higher prices for fuel indexed to the barrel price of crudeoil.  This price escalation, which occurredin the early 2001, led to a significant increase in the average production costof thermal energy.  The increase in fuelprices, together with greater fuel consumption in the fourth quarter of 2001 asa result of higher thermal generation due to less favorable hydrologicalconditions, led to the increase in fuel costs. In addition, the Soporgen power plant operated for all of 2001, duringwhich there was increased consumption of natural gas, compared to operationonly during the second half of 2000. See “—Hydrological correction” below for a discussion of accounting forthe impact on fuel costs of the variability of hydrological conditions.

 

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Our costs for othermaterials increased in 2001 to € 114.2 million from € 103.0 millionin 2000. A majority of these costs are credited to “Own work capitalized” andthe remainder is applied to maintenance of the transmission and distributionnetworks. See “—Own work capitalized.”

 

Raw materials andconsumables also include “other,” which increased in 2001 to € 60.8million from € 40.3 million in 2000, partially reflecting theconsolidation of our information technology subsidiary CASE and ourtelecommunications subsidiary for the Spanish market, Comunitel.

 

*Personnel costs.*Personnel costs, increased 34.7% in 2001 to € 592.0 million from€ 439.3 million in 2000.  Thisincrease was primarily due to the changes to the collective employmentagreement and to a 4% general salary increase in 2001, as well as the consolidationof new subsidiaries such as CASE, Comunitel and Bandeirante and the exclusionof REN.

 

*Depreciation and amortization*.Depreciation and amortization in 2001 increased to € 664.7 million from€ 613.6 million in 2000.

 

*Other external supplies and services*.The cost of external supplies and services in 2001 increased by 76.7% to€ 651.2 million from € 368.5 million in 2000 due primarily toincreased use of outsourcing, higher expenditure on repairs and maintenanceworks, costs associated with product marketing for ONI and interconnections andcircuits rented from PT.  The first timeconsolidation of Comunitel and CASE also contributed to the increase in otherexternal supplies and services.  Thiswas, however, partially offset by the sale of REN.

 

*Own work capitalized*.Own work capitalized in 2001 increased to € 232.5 million from€ 229.1 million in 2000.  A tablesetting forth the components of Own work capitalized for the past three yearsis provided in note 24 to the consolidated financial statements.

 

*Concession and power-generationrental costs*. These costs, that consist mainly of rent paidto municipalities for concessions to distribute low-voltage electricity,increased in 2001 to € 149.1 million from € 132.6 million in 2000.The amount of rent payable to municipalities for concessions is established bygovernment regulation and is based on the amount of low-voltage electricityconsumed in the respective municipal areas each year.

 

*Hydrological correction. *In 2001 the hydro accountwas increased by € 22.0 million, which increase includes € 48.9 millioncharged to REN compared with € 11.2 million charged to REN in 2000.  This difference was primarily a result offavorable hydrological conditions relative to 2000. To learn more about theeffect of hydrological conditions on us, you should read “Item 4.  Information on theCompany—Portugal—Generation—Hydroelectric plants.”  The level of reference of the hydro account was € 387.5million for 2001, 2000 and 1999. In 2001, the hydro account exceeded thereference level, causing a surplus of € 47.5 million that was recorded by us as non-operating income in2001.  No such item was recorded in2000.

 

*Other operating expenses, net.* These expenses decreased in 2001 to€ 73.5 million from € 101.8 million in 2000, primarily due to anincrease in supplementary gains from € 8 million in 2000 to € 40million in 2001.  Supplementary gainsconsist of reimbursements received for out-of-pocket expenses incurred andcharged to third parties related to information technology andtelecommunications services.  For moreinformation on these expenses, you should read notes 3n., 25 and 26 to theconsolidated financial statements.

 

Until the end of 1999,increases in provisions for doubtful accounts were reflected in ourconsolidated statements of income in the line item “Provisions” and wereincluded in the determination of operating income while decreases were includedin the line item “Other non-operating expenses (income), net” below theoperating income. Beginning in 2000, adjustments are made to the line item“Provisions” in the balance sheet. The net effect in the income statementrelating to doubtful accounts in 2001 amounted to a loss of € 20.5 millioncompared to an income of € 7.4 million in 2000. These line items arediscussed below and in notes 7, 25 and 29 to the consolidated financialstatements.

 

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**Operatingincome**

 

As a result of the factors discussed above, primarilythe change in REN’s consolidation method following the sale, in June 2000, ofpart of the equity interest in REN and the increased costs of purchasedelectricity, as well as increased other external supplies and services, ouroperating income in 2001 decreased by 7% to € 673.5 million from€ 724.4 million in 2000. ** **Inour core electricity business in Portugal (adjusted for the sale of REN), ouroperating income in 2001 decreased 2.5% from € 724.1 million in 2000.

 

**Otherexpenses (income)**

 

We recorded total other expenses in 2001 of€ 79.3 million compared with total other income in 2000 of€ 114.0 million, due to an increase in net interest expense and adecrease in other non-operating income.

 

*Net interest and related expense*. Our netinterest expense consists of interest and related expenses and interest andrelated income. Our net interest expense increased in 2001 to € 205.3million from € 174.8 million in 2000 (but decreased as a percentage of ourtotal revenues to 3.6% in 2001 from 4.5% in 2000). This included a net expenserelated to interest in 2001 of € 214.7 million compared with € 183.1million in 2000, due primarily to an increase in our average debt level andhigher interest rates. The higher average debt level was a result of bothhigher borrowings in order to finance new investments and the consolidation ofBandeirante and ONI debt. The increase in our net interest expense was also thecombined result of the following factors:

 

•                  we recordedincome from late payment charges to low voltage clients and public lighting of€ 2.1 million in 2001 compared with € 21.2 million in 2000;

 

•                  we recorded anet foreign currency exchange loss of € 1.3 million in 2001 compared to€ 1.9 million on certain non-euro debt in 2000 primarily due to factorsrelating to the Brazilian real and our Brazilian operations;

 

•                  we recorded anoverall net income from affiliates and associated companies in 2001 of€ 11.6 million compared with an overall net income in 2000 of € 41.8million due primarily to: (a) Iven’s contribution of a € 13.5 million lossin 2001 mainly resulting from the adverse effect of an energy-rationing programimplemented by the Brazilian government and (b) the full consolidation ofBandeirante in 2001, which resulted in Bandeirante’s contribution (€ 15million in 2000) no longer being included in this line item;

 

•                  we recordedincome from investments in 2001 of € 16.8 million compared with income in2000 of € 23.1 million due primarily to dividends received from ourholdings in Iberdrola and GALP Energia; and

 

•                  we recorded afinancial gain of € 88.5 million in 2001 related to the repayment ofBandeirante U.S. dollar-denominated debt using Brady Bonds issued by theBrazilian government.  This financialgain is equivalent to the difference between the face value of the outstandingU.S. dollar-denominated debt of Bandeirante that was repaid and the marketprice of the Brady Bonds which were bought at a significant discount to parvalue.  No such item was recorded in2000.

 

*Other non-operating expenses (income), net.*****Wehad other non-operating income in 2001 of € 126.0 million compared with€ 288.8 million in 2000.  In 2000,non-operating income included a gain of € 197.4 million resulting from thedisposal of a 27.5% shareholding in ONI to BCP for € 205.8 million.  In 2001, we recorded non-operating income of€ 47.5 million related to the hydrological correction mechanism.

 

We also recorded an income item in 2001 of € 63.9million, compared to € 61.1 million in 2000, for the portion ofdepreciation due primarily to new electricity connections made in prior yearsthat were financed largely with customer payments.

 

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We recorded a net loss in 2001 of € 41.1 millionrelated to net provisions movements compared with a net benefit of € 8.2million recorded in 2000. For more information on net movement of provisionsyou should read note 25 to the consolidated financial statements.

 

The increase in provisions for doubtful accountsrelated to long-term receivables from municipalities in 2001 amounted to€ 1.2 million compared to a decrease in provisions of € 13.8 millionin 2000. This change reflects an increase in receivables due from the Valongomunicipality that have been provisioned as doubtful.

 

**Provisionfor income taxes**

 

Our provision for income taxes is determined on thebasis of the estimated taxable income for the period. Income taxes provided forin 2001 were € 203.0 million compared with € 312.6 million in 2000.The reference income tax rate in Portugal was 32% in 2001, compared with 32%and 34% in 2000 and 1999, respectively. In addition, a municipal surcharge of up to 10% of the base rate istypically levied by the municipality in which income is earned.  Our effective tax rate is different from thereference income tax in Portugal each year due to permanent differences arisingfrom the amortization of the goodwill/concession rights that are not deductiblefor income tax purposes.  Our effectivetax rate was 34.2% in 2001 compared with 37.3% in 2000 primarily due to thefavorable impact of taxes paid in excess for our 2000 taxes that were laterdeducted from our 2001 taxes.

 

**Netincome**

 

As a result of the factors discussed above, ourconsolidated net income for 2001 decreased 17.9% to € 450.8 millionfrom € 549.0 million in 2000.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

We manage and control our funding and treasuryactivities centrally at the holding company level except with respect to ONIand our businesses in Spain and Brazil. At the holding company level theaccount balances of our subsidiaries are netted in holding company accounts andcentralized payments are made for the entire EDP Group. In Portugal, there areno legal or economic restrictions on the ability of our subsidiaries totransfer funds to the holding company. Our subsidiaries in Portugal do notenter into their own financing arrangements except for our cogenerationsubsidiary, EDP Cogeração, which finances its own projects, and ONI.

 

Our primary source of liquidity is cash generated fromoperations. Net cash provided from operating activities was € 897.7 million in2002, compared with € 1,221.2 million in 2001 and € 1,122.0 million in 2000.

 

Total cash and equivalents, net of bank overdrafts, atDecember 31, 2002 were an overdraft position of € 407.3 million comparedwith an overdraft position of  € 468.5million at December 31, 2001 and an overdraft position of € 340.9 millionat December 31, 2000.  Cash and cashequivalents are held in euros.

 

Net cash used in investing activities was€ 1,141.4 million in 2002, compared with € 1,243.0 million in 2001and € 914.1 million in 2000, representing a 8.2% decrease in 2002, a 36%increase in 2001 and a 29% decrease in 2000. The decrease in 2002 compared with 2001 reflects the fact that althoughinvestment in the acquisition of subsidiaries (mainly Hidrocantábrico) washigher than in the previous year, this was offset to a greater extent by theproceeds from divestments and income from investments and dividends.  The increase in 2001 compared with 2000reflects the fact that although the level of financial investments was lowerthan in previous years, it was not offset to the same extent as in 2000 by theproceeds from divestitures.  Net cashfrom financing activities was € 297.2 million in 2002 compared with netcash used in financing activities of € 96.1 million in 2001 and net cash usedin financing activities of  € 482.4million in 2000.  Net cash fromfinancing activities in 2002 was due to the issuance of new medium andlong-term debt during 2002.  Net cashused in financing activities in 2000 was due primarily to the repayment ofshort and medium-term debt in an amount larger than cash used in 2001 used forthe repayment of long-term debt.

 

As of December 31, 2002 we had available short-termcredit facilities of € 152.1 million in euros at rates based on the eurointerbank offered rate, or Euribor, to be negotiated at the time ofutilization.  In addition, we also havea revolving credit facility of € 600.0 million, negotiated in 1999 for a fiveyear period, which permits drawdowns for

 

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terms of one, two, three or six months at an agreed margin over theeuro interbank offered rate, or Euribor. In addition, in March 2003 we negotiated a credit line facility in theamount of  € 700.0 million to replacethe € 750.0 million facility that expired in March 2003 and is to beused primarily as a back-up facility for our euro commercial paper program of €1,000,000,000, signed in April 2001. This credit line permits drawing of one, two, three and six months at anagreed margin over the euro interbank offered rate, or Euribor and expires inMarch 2006.  Management believes thatthe combination of these negotiated credit lines and the commercial paperprogram provide an adequate source of liquidity for our operations.  Our credit facility agreements do not imposefinancial ratio requirements and events of default clauses are not based oncredit rating, so that their availability is not impacted by downgrades ordeclines in financial ratios or other measures of financial performance.

 

Our consolidated indebtedness, including bonds,long-term bank loans, commercial paper and bank overdrafts, was € 7,994.1million at December 31, 2002 compared with € 5,799.1 million at December 31,2001 and € 4,912.4 million at December 31, 2000.  The increased in consolidated indebetednessin 2002 was primarily due to indebtedness incurred to acquire a 40% stake inHidrocantábrico, a 10% stake in Turbogás and notes issued by Escelsa in a totalface amount of $354.4 million.  Inaddition, consolidated indebtedness increased in 2002 due to the consolidationof indebtedness of Hidrocantábrico, Escelsa and Enersul.  In July 2002, we updated our€ 5,000,000,000 MTN program and issued under it a GBP 200,000,000 maturingin August 2017 and a € 500,000,000 bond maturing in March 2008. Theproceeds of these issuances were used to refinance debt maturing during 2002 aswell as to refinance short-term debt incurred during the year to cover ourfunding requirements due to our investment activities. With respect to themanagement of our debt portfolio, our hedging strategies have been limited tothe debt held at the holding company level (including EDP B.V.), and not at thelevel of any of our subsidiaries.  As ofDecember 31, 2002, this debt amounted to € 5,926.8 million, corresponding to74% of our total debt. Our debt management guidelines continue to be focused oncontrolling financial costs and reducing our exposure to foreign exchange risk.

 

At December 31, 2002, the weighted average interestrate of our indebtedness at the holding company level (including EDP B.V.) was3.67%, compared with 3.7% at December 31, 2001.  At December 31, 2002, all holding company level debt wasdenominated in euros, and we therefore do not have currency exchange rate riskrelating to this debt.  At December 31,2002, approximately 72.7% of our total long term indebtedness at the holdingcompany level carried a floating rate, the weighted average interest rate ofwhich was 3.47%.  At December 31, 2001,approximately 68.9% of our total long term indebtedness carried a floatingrate, the weighted average interest rate of which was 3.58%.

 

Our contractual obligations and commercial commitmentsconsist primarily of credit facilities, as described above. The following tableprovides details regarding EDP’s contractual and commercial obligationssubsequent to December 31, 2002:

 

**PaymentsDue and Amount of Commitment by Expiration Period(EUR millions)**

 
|                                |   | **Total** |   | **December  31,  2003** |   | **December  31,  2004** |   | **December  31,  2005** |   | **December  31,  2006** |   | **December  31,  2007** |   | **Thereafter** |   |
|-------------------------------------|--------|-----------|--------|-------------------------|--------|-------------------------|--------|-------------------------|--------|-------------------------|--------|-------------------------|--------|----------------|--------|
| Long-term debt                      |   | 6,107.1   |   | 0                       |   | 614.3                   |   | 544.7                   |   | 902.0                   |   | 718.0                   |   | 3,328.0        |   |
| Short-term debt                     |   | 1,887.0   |   | 1,887.0                 |   | 0                       |   | 0                       |   | 0                       |   | 0                       |   | 0              |   |
| Total contractual cash  obligations |   | 7,994.1   |   | 1,887.0                 |   | 614.3                   |   | 544.7                   |   | 902.0                   |   | 718.0                   |   | 3,328.0        |   |
| Guarantees                          |   | 409.0     |   | 141.7                   |   | 0                       |   | 0                       |   | 0                       |   | 0                       |   | 267.3          |   |
| Lines of credit                     |   | 0         |   | 0                       |   | 0                       |   | 0                       |   | 0                       |   | 0                       |   | 0              |   |
| Total commercial  commitments       |   | 0         |   | 0                       |   | 0                       |   | 0                       |   | 0                       |   | 0                       |   | 267.3          |   |
| TOTAL                               |   | 8,403.1   |   | 2,028.7                 |   | 614.3                   |   | 544.7                   |   | 902.0                   |   | 718.0                   |   | 3,595.3        |   |

 

We believe that cash generated from operations andexisting credit facilities are sufficient to meet present working capitalneeds. We currently expect that our planned capital expenditures andinvestments will be financed

 

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from internally generated funds, existing credit facilities andcustomer contributions, which may be complemented with medium- or long-termdebt financing and equity financing as additional capital expenditurerequirements develop. For more information on our planned capital expendituresyou should read “Item 4. Information on the Company–History and BusinessOverview—Group capital expenditures and investments.”

 

**PENSIONSAND BENEFITS**

 

We maintain a defined benefit pension plan for all ouractive and retired employees included in the Collective Labor Agreement, or theA.C.T., for Portuguese group companies created in 1994 with the restructuringof EDP.  Pension benefits are based onthe employees’ years of service and the compensation level at the end of theiremployment period, less Portuguese social security benefits. The normalretirement age is 65. However, employees at least 60 years of age with 36 yearsof service, or employees of any age with 40 years of service, may elect earlyretirement. Employees electing early retirement are entitled to full pensionbenefits that are calculated on the same basis as that for employees retiringat the normal retirement age. Our policy has been to make contributions to theplan based on the availability of funds while making the minimum annualcontributions required by applicable regulations. Some companies not a part ofthe A.C.T, such as the Brazilian and Spanish companies, also have complementarysocial benefits to their own social security systems, either as a definedbenefit plan (Bandeirante, for example) or a defined contribution plan (Escelsaand Hidrocantábrico, for example).

 

We also provide comprehensive medical coverage, inaddition to that provided by the Portuguese national health system, for retiredemployees, including those who have taken early retirement, and theirdependents. Additionally, we provide a death benefit to retirees’ survivors. Weadminister the program internally and assume the full cost of funding theprogram net of employee contributions, amounting to approximately 10% of thetotal medical expenses covered.

 

At December 31, 2002, our accrued pension and medicalbenefit liabilities were € 608.2 million compared with € 683.9million at December 31, 2001 and € 624.1 million at December 31, 2000. Theprovisions for medical benefits and pensions in 2002 were € 396.7****million and € 211.5 million,respectively, compared with € 377.9 million and € 305.9 million,respectively, in 2001 and € 358.5****millionand € 265.6 million, respectively, in 2000. We expect to fund pension fundliabilities from our internal resources.

 

**INFLATION**

 

Inflation in Portugal, as measured by changes in thePortuguese CPI, averaged 3.6%, 4.4% and 2.9% in 2002, 2001 and 2000,respectively. During the period from 1992 through 2002, changes in thePortuguese CPI averaged 4.3%% per annum, ranging from a high of 11.1% in 1992to a low of 2.2% in 1997.

 

To reflect the impact of inflation, Portuguese GAAPand regulations permit companies to revalue their fixed assets. Accordingly, werevalued our assets in 1992 based on an assessment of the remaining useful lifeand modern equivalent asset value of the assets at December 31, 1992. Inaccordance with Portuguese GAAP, depreciation of fixed assets is computed onthe revalued amounts, with depreciation in respect of the original acquisitioncost and 60% of the revaluation increment being deductible for corporate incometax purposes. Under U.S. GAAP, fixed assets may not be stated at more thantheir historical acquisition cost.

 

**PORTUGUESE GAAP COMPARED WITH U.S. GAAP**

 

Our financial statements have been prepared inaccordance with Portuguese GAAP which vary in certain significant respects fromU.S. GAAP. The principal differences between Portuguese GAAP and U.S. GAAP asthey relate to us concern:

 

•                  the revaluationof fixed assets, as discussed above under “Inflation”;

 

•                  thecapitalization of overheads and foreign exchange differences in connection withthe construction of fixed assets;

 

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•                  thecapitalization of research and development costs, advertising costs,maintenance and repair, and reorganization costs;

 

•                  the hydrologicalcorrection account;

 

•                  the deferral ofcertain costs, profit distributions to management and employees and employeetermination benefits;

 

•                  the accountingfor employee retirement benefits;

 

•                  the reversal ofallowances for certain doubtful accounts;

 

•                  the capitaltreatment of contracts for the purchase of capacity and electricity;

 

•                  the accountingfor investments, including REN;

 

•                  the accountingfor the sale proceeds from the disposal of REN;

 

•                  the accountingfor joint returns, namely Hidrocantábrico;

 

•                  the accountingfor derivative instruments; and

 

•                  income taxes.

 

We include in the cost of assets constructed for ourown use a portion of our general and administrative overhead. Assetsconstructed prior to 1995 also include the net foreign exchange differences,both gains and losses, that resulted from loans denominated in non-escudocurrencies contracted to fund the capital expenditures. Under U.S. GAAP, theseamounts are included in income in the period incurred.

 

We capitalize and amortize research and developmentcosts, advertising costs, major maintenance and repair costs, andreorganization costs. Under U.S. GAAP, these amounts are included as expensesin the period incurred.

 

As required by government regulation, we record aprovision in the hydrological correction account to smooth the effect on ourearnings that results from changes in hydrological conditions. Under U.S. GAAP,the effect of future changes in hydrological conditions would be viewed as ageneral business risk and accrual would not be permitted.

 

As part of our profit sharing plan, we customarilydistribute a portion of net income to management and employees. UnderPortuguese GAAP, this distribution is reflected in the period in which formalshareholder approval is obtained and is recorded as a reduction of retainedearnings or other reserves. U.S. GAAP requires that these distributions berecorded as compensation expense in the period they are earned.

 

During 1999, we recorded a provision for costs to beincurred in the future in connection with planned employee terminations. Thisprovision would not be recorded under U.S. GAAP since, as of December 31, 1999,the details of the termination benefits arrangement had not been communicatedto the employees and other conditions required by U.S. GAAP had not been met.Under U.S. GAAP these costs are expensed as incurred.  During 2000, a portion of the provision was utilized and theremaining was released to income under Portuguese GAAP.

 

We reached agreements with several municipalities onthe terms for the future settlement of various old accounts receivable whichunder Portuguese GAAP and U.S. GAAP were fully provided in the past. Wereversed a portion of the allowance for doubtful accounts related to these oldaccounts receivable in 1999 and 2000, but not in 2001.  Under U.S. GAAP, the benefit from therecovery of these accounts receivable may only be recorded when the amounts areactually received.

 

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We constructed and sold the Pego and Tapada de Outeiropower plants in 1993 and 1998, respectively. Before 1999, at the time of thesales, REN signed PPAs with the producers in the Binding Sector by which thecapacity and electricity of the plants were fully contracted to the BindingSector represented by REN. Under the PPAs, REN is required to make specifiedminimum payments whether or not it is able to take delivery of the electricity.As permitted under Portuguese GAAP, REN recorded the sales of the power plantsand REN has recorded the minimum contracted payments as an expense of therespective periods. U.S. GAAP would require the sales to be treated as salelease-back transactions and the power purchase agreements to be recorded ascapital leases.  Prior to the sale ofREN to the Portuguese government, the contracts with Tejo Energia and Turbogáswere recorded in this manner. Currently, the most relevant PPAs are those that REN has entered intowith CPPE power plants.

 

UnderPortuguese GAAP, we carry investments in publicly traded equity securities,other than those of subsidiaries and those that are accounted for under theequity method, at market.  Changes inthe carrying value other than those resulting from permanent impairment arereflected in equity.  Under U.S. GAAP,these securities would be stated at fair value and the changes therein, net ofincome taxes, would be recorded in a separate component of shareholders’ equityand included in the determination of comprehensive income. Our investment inREN and equity in earnings of REN are affected by certain accountingdifferences between U.S. GAAP and Portuguese GAAP.  The differences affecting our investment in REN and equity inearning of REN include: revaluation of fixed assets, overheads capitalized, deferredcosts, employee termination benefits, distribution to management and employees,power purchase agreements and deferred income taxes.

 

UnderPortuguese GAAP, since the sale proceeds from the disposal of our 70% interestin REN were equal to the net book value of the interest sold, no gain or losswas recorded on the transaction. Under U.S. GAAP, the net book value of theinterest sold would be reduced as a result of the accounting differencesbetween Portuguese GAAP and U.S. GAAP; therefore, the proceeds received fromthe disposal of REN would exceed the net book value of the interest disposed,resulting in a gain on disposal and the remaining investment in REN would bereduced accordingly. The gain on the disposal, in the amount of€ 342,045,810, and the related deferred tax in the amount of€ 120,400,126, would be charged directly to shareholders’ equity (with anet effect of € 221,645,684).

 

Our40% holdings in the voting rights of Hidrocantábrico plus the existingshareholders’ agreement allowed the impairment to be consolidated on aproportionate basis under Portuguese GAAP. Under U.S. GAAP this investment would be accounted for under the equitymethod.  Hidrocantábrico’s shareholdersequity and net income have been adjusted to U.S. GAAP before applying theequity method to EDP’s accounts.

 

UnderPortuguese GAAP, derivative financial instruments are not recognized in thefinancial statements.  Under U.S. GAAP,derivative financial instruments would be recognized in the balance sheet atmarket value.  For instruments that donot qualify for hedge accounting under FAS 133, as implemented on January 1,2001, the movements in the market value are included in our net income.  Upon adoption of FAS 133 on January 1, 2001,no transition adjustment was recorded as all derivatives existing at that datewere previously recorded at fair market value in the balance sheet for U.S.GAAP.  The derivative financialinstruments held by us at December 31, 2000, 2001 and 2002 were not designatedhedges and thus movements in their fair value would be recognized in netincome.

 

Under Portuguese GAAP, prior to 1999, it wasacceptable to recognize income tax expense based upon the estimated currentincome tax liability on the current year’s earnings. When income and expenserecognition for income tax purposes does not occur in the same period as incomeand expense recognition for financial reporting purposes, the resultingtemporary difference is not considered in the computation of the income taxexpense for the period. Under U.S. GAAP, income taxes are provided using theliability method, which requires the recognition of deferred tax assets andliabilities for the expected future tax consequences attributable todifferences between the financial statement carrying amount of assets andliabilities and their tax bases. A valuation allowance is provided based on theexpected realization of these deferred tax assets.

 

In 1999, we implemented International AccountingStandard 12 (Revised), *Income Taxes*, which requires income taxesto be provided for using the liability method and is substantially consistentwith the method under U.S. GAAP.

 

Our net income in 2002 under U.S. GAAP amounted to€ 299.9 million and € 519.2 million in 2001 compared with€ 335.2 million in 2002 and € 450.8 million in 2001, respectively,under Portuguese GAAP.  Ourshareholders’

 

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equity under U.S. GAAP was € 3,886.3 million at December 31, 2002and € 4,441.4 million at December 31, 2001, compared with € 5.494.2million and € 6,096.8 million, respectively, under Portuguese GAAP.

 

See note 33 to our audited consolidated financialstatements for the significant adjustments to net income and shareholders’equity that would have been required if U.S. GAAP rather than Portuguese GAAPhad been applied in the financial statements.

 

**IMPACT OF RECENTLY ISSUED U.S. ACCOUNTING STANDARDS**

 

In July 2001, the FASB issued FAS 143, “*Accountingfor Obligations Associated with the Retirement of Long-Lived Assets*”.  FAS 143 will be effective for the year endedDecember 31, 2003.  FAS 143 provides theaccounting requirements for retirement obligations associated with tangiblelong-lived assets.  FAS 143 requiresthat the obligation associated with the retirement of the tangible long-livedassets be capitalized into the asset cost at the time of initialrecognition.  The liability is thendiscounted to its fair value at the time of recognition using the guidanceprovided by FAS 143.  We are currentlyevaluating the overall impact of FAS 143 on its results of operations andfinancial position under U.S. GAAP.

 

In July 2002, the FASB issued FAS 146, “*Accountingfor Costs Associated with Exit or Disposal Activities*” This standardaddresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies EITF 94-3, “*Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring)*”.  The statement requires companies torecognize costs associated with certain exit or disposal activities when theyare incurred rather than at the date of a commitment to an exit or disposalplan.  FAS 146 will be applied by usprospectively to applicable exit or disposal activities initiated afterDecember 31, 2002. The adoption of FAS 146 is not expected to have a materialeffect on the results of operations and our financial position under U.S. GAAP.

 

In December 2002, the FASB issued FAS 148, “A*ccountingfor Stock-Based Compensation-Transition and Disclosure*”, whichamends FAS 123 “*Accounting for Stock-Based Compensation*”.  FAS 148 provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, FAS 148 amends thedisclosure requirements of FAS 123 to require prominent disclosures about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results of operations.  FAS 148 is effective for fiscal years ending after December 15,2002. The We adopted FAS 148 effective for the year ended December 31, 2002,and has elected to continue to account for its stock-based compensation inaccordance with the provisions of Accounting Principles Board Opinion (APB) No.25, “*Accounting for Stock Issued toEmployees*.” Under APB 25, compensation expense is recognized overthe vesting period based on the excess of the fair market value over theexercise price on the grant date.

 

In April 2003, the FASB issued FAS 149 “*Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities*”.  FAS149 clarifies the circumstances in which a contract with an initial netinvestment meets the characteristic of a derivative and when a derivativecontains a financing component.  Inaddition, the statement amends the definition of an underlying to conform tolanguage used in FIN 45, “*Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*”, and certain other existingpronouncements.  The statement iseffective prospectively for contracts entered into or modified, and for hedgingrelationships designated, after June 30, 2003. We are currently analyzing the impact of FAS 149 on its results ofoperations and financial position under U.S. GAAP.

 

In May 2003, the FASB issued FAS 150, “*Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*”.   FAS 150 iseffective prospectively for financial instruments entered into or modifiedafter May 31, 2003, and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003.  FAS 150 requires that certain financialinstruments, previously accounted for as equity, be classified as liabilities.This statement shall be implemented by reporting the cumulative effect of achange in an accounting principle for financial instruments created before theissuance date of the Statement and still existing at the beginning of the interimperiod of adoption.  We are currentlyanalyzing the impact of FAS 150 on its results of operations and financialposition under U.S. GAAP.

 

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In November 2002, the FASB issued FASB InterpretationNo. 45 (FIN 45), “*Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees OfIndebtedness Of Others, an Interpretation of FASB Statements No. 5, 57, and 107and Rescission of FASB Interpretation No. 34*”. FIN 45 relates to theaccounting for and disclosure of guarantees and addresses (1) an obligation tostand ready to perform over the term of the guarantee in the event that thespecified triggering events or conditions occur and (2) a contingent obligationto make future payments if those triggering events or conditions occur.   The Interpretation requires that uponissuance of a guarantee, the entity (i.e., the guarantor) must recognize aliability for the fair value of the obligation it assumes under thatguarantee.   The initial recognition andinitial measurement provisions should be applied only on a prospective basis toguarantees issued or modified after December 31, 2002.

 

In January 2003, the FASB issued FASB InterpretationNo. 46, (FIN 46), “*Consolidation of VariableInterest Entities*”.  UnderFIN 46, certain entities labelled “Variable Interest Entities” (VIE), must beconsolidated by the “primary beneficiary” of the entity.  The primary beneficiary is generally definedas the party exposed to the majority of the risks and rewards arising from theVIE.  For VIE’s in which we hold asignificant variable interest that is not a majority interest, certaindisclosures are required.  Full implementationof this interpretation to pre-existing entities is required from July 1, 2003;and application to our new involvement with any VIEs from February 1,2003.

 

**Item 6****.        *Directors, Senior Management and Employees***

 

**BOARD OF DIRECTORS**

 

Our board of directors manages our affairs andmonitors the daily operation of our activities in accordance with Portugueselaw and our Articles of Association. Executive officers are in charge of ourvarious administrative departments and report directly to our board ofdirectors. Our operating companies are each managed by their respective boards ofdirectors who report ultimately to our board of directors.

 

Under Portuguese law, the board of directors has thepower to perform any and all acts necessary or desirable for the furtherance ofour purposes, with the exception of any acts that under Portuguese law or ourArticles of Association are subject to the express approval of shareholders ata general meeting.  Pursuant ourArticles of Association the shareholders may by general meeting appoint a boardcomposed of an uneven number of members with a minimum of 5 and a maximum of 15members. One of the directors can be elected separately by 10% of theshareholders that voted against the list of proposed directors by, in the sameshareholders meeting, voting for a new director that automatically substitutesthe last person on the list of proposed directors. Currently, the board ofdirectors consists of a Chairman and twelve other directors elected by a simplemajority of the votes cast at a general meeting.

 

Pursuant to our Articles of Association, which providethat the board of directors may delegate day-to-day management responsibilitiesto an Executive Committee composed of an uneven number of directors, the boardof directors has appointed an Executive Committee and established the followingguidelines for the Executive Committee:

 

•                  to globallydefine our policies on our different areas of activity, the coordination ofactivities among EDP Group companies, and the management of our holdings;

 

•                  to submit to theboard of directors for a decision only those matters that Executive Committeefinds to be of suitable importance;

 

•                  to not:

 

•                  appoint newdirectors,

 

•                  convene generalmeetings of shareholders,

 

•                  approve ourannual report and accounts in order to submit them to a general meeting ofshareholders,

 

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•                  approve plansand annual or multi-year budgets nor monitor their execution,

 

•                  approve ourquarterly accounts,

 

•                  move ourprincipal office, or

 

•                  prepare plansfor a merger, spin-off, transformation or sale our group companies; and

 

•                  to holdmeetings, as convened by its chairman usually once a week, at whichnon-Executive Committee members may be present.

 

The current Executive Committee was appointed in May2003, although its composition may change in order to fill vacancies, and iscurrently composed of the following five directors:  Mr. João Talone, our Chief Executive Officer, Mr. Rui MiguelHorta e Costa, Mr. Arnaldo Pedro Figuêiroa Navarro Machado, Mr. Jorge ManuelOliveira Godinho and Mr. Pedro Manuel Bastos Mendes Resende.

 

The board of directors has the exclusive authority torepresent us in transactions with third parties, but may delegate these powers.The board of directors has no power to amend or repeal the Articles ofAssociation, which may only be amended or repealed by the shareholders in ageneral meeting by a resolution adopted by two-thirds of the votes cast,representing, on a first call, a quorum of at least one-third of our sharecapital, as set forth in Portuguese law.

 

The term of office of the board of directors is threecalendar years, renewable, with the year of election or appointment beingconsidered as a full calendar year. Directors may be removed at any time, with or without cause, by thegeneral meeting of shareholders. Vacancies that occur on the board of directors may be filled by theboard, with the term of the new director being coterminous with that of thesubstituted director.  Directors fillingboard vacancies pursuant to designation by the board of directors must besubmitted for ratification at the first general meeting of shareholderssubsequent to the substitution. Our directors do not have service contractswith us or our subsidiaries that provide for benefits upon termination ofemployment. The board of directors must convene once a month, and a majority ofdirectors must be present to constitute a quorum. A director may be representedat a meeting only by another director by proxy given in writing for the meetingin question, and no more than one director can be represented by proxy at aparticular meeting. Directors have equal voting rights, and all resolutions ofthe board of directors are adopted by a majority of the votes cast. TheChairman has the deciding vote in the event of a tie.

 

Pursuant to our Articles of Association, theshareholders at a general meeting appoint the Remuneration Committee, which isa committee of shareholders that determines the compensation of directors anddirectors’ benefits.

 

Under Portuguese law, a director must act diligentlyand with due care, always seeking to promote the company’s interest whiletaking due account of the interests of shareholders and employees. A directorwill be liable to the company, the company’s shareholders and third parties forany damages caused by a breach of these duties.

 

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The members of our board of directors, their principalpast affiliations, information on their business experience and principalbusiness activities outside of us and selected other information are set forthbelow:

 
| **Name**                                              |   | **Age** |   | **Position**             |   | **Year originally  elected** |
|-------------------------------------------------------|--------|---------|--------|--------------------------|--------|------------------------------|
| Mr. Francisco de la Fuente  Sánchez              |   | 61      |   | Chairman                 |   | 2000                         |
| Mr João Ramalho Talone                           |   | 51      |   | Chief Exectutive Officer |   | 2003                         |
| Mr António de Almeida                            |   | 66      |   | Director                 |   | 2003                         |
| Mr Jorge Manuel Oliveira  Godinho                     |   | 50      |   | Director                 |   | 2003                         |
| Mr. Rui Miguel Horta e Costa                          |   | 42      |   | Director                 |   | 2000                         |
| Mr. José Manuel Gonçalves de  Morais Cabral |   | 56      |   | Director                 |   | 2003                         |
| Mr. Arnaldo Pedro Figueirôa  Navarro Machado     |   | 57      |   | Director                 |   | 2002                         |
| Mr. Dr. António José Fernandes  de Sousa    |   | 48      |   | Director                 |   | 2001                         |
| Mr José Manuel Trindade Neves  Adelino           |   | 49      |   | Director                 |   | 2003                         |
| Mr. Luis Filipe Rolim de  Azevedo Coutinho            |   | 42      |   | Director                 |   | 2003                         |
| Mr Paulo de Azevedo Pereira da  Silva                 |   | 42      |   | Director                 |   | 2003                         |
| Mr. Pedro Manuel Bastos Mendes  Rezende               |   | 42      |   | Director                 |   | 2003                         |
| Mr.Vitor Angelo Mendes da Costa  Martins              |   | 56      |   | Director                 |   | 2003                         |

 

*Mr.Francisco de la Fuente Sánchez* is Chairman of our board ofdirectors and has been on our board of directors since January 1997.  In addition, Mr. Francisco Sánchez is Chairmanof the board of directors of ONI SGPS, member of the board of Hidrocantábricoand member of the Superior Council of Banco Comercial Português.  Mr. Francisco Sánchez served as Chairman andCEO of EDP SA between 2000 and 2003, Chairman of EDP Produção and EDPDistribuição between 2002 and 2003, and Chairman of EDP Energia and EDP Valorbetween 2001 and 2003. From 1997 to 1998, Mr. Francisco Sánchez was a member ofthe board of directors of EN, CENEL, LTE and SLE and between 1998 and 2001, hewas Chairman of CERJ and EDP - Cogeração, Vice-Chairman of Bandeirante, and amember of the board of directors of EDP Internacional.  Mr. Francisco Sánchez also served asmember of the boards of directors of LTE and Hidrotejo from 1994 to 1996.  He was General Manager of one of ourdistribution divisions from 1990 to 1994 and Central Commercial Manager of EDPfrom 1988 to 1989.  He was assistant toour board of directors from 1987 to 1988. Mr. Francisco Sánchez holds a degree in electrotechnical engineeringfrom Instituto Superior Técnico de Lisboa.

 

*Mr JoãoRamalho Talone* was appointed as Chief Executive Officer (CEO)of EDP Electricidade de Portugal, SA on the May 22, 2003.  In addition Mr. Talone is Chairman of theboard of directors of EDP Produção and EDP Distribuição and a member of theboard of directors of ONI SGPS and Hidrocantábrico.  Between January and April 2003, by appointment of the Portuguesegovernment, Mr. Talone was responsible for conducting a study on the restructuringof the Portuguese Energy Sector. Between December 2002 and January 2003, heheaded the project to terminate IPE — Instituto de Participações do Estado, astate owned company holding the Republic of Portugal’s interests in several ofits subsidiaries. Up to the end of January 2002, Mr. Talone served as Chairmanand CEO of the Executive Board of Directors of Eureko (appointed in September1999), member of the Board of Directors of BCP - Banco Commercial Português,S.A. (appointed in 1991) and Chairman of Seguros & Pensŏes (appointedin 1995). Mr. Talone joined the BCP Group as General Manager in April 1988 andwas appointed as Chairman of its insurance arm in July 1988.  In July 1991 he was elected to the Board ofBCP-Investimentos.  Mr. Talone iscurrently Vice-chairman of the Portuguese Insurance Association (APS) andMember of the Board of Directors of “Association de Génève” (Internationalexclusive insurance Forum) where he is an elected member since June 1995.  Mr. Talone holds a degree in civilengineering from Instituto Superior Técnico de Lisboa, and an MBA fromUniversidade Nova de Lisboa in association with the Wharton School ofPennsylvania.

 

*MrAntónio de Almeida* was appointed to our board of directors inMay 2003. He is also a member of the Board of the ERDB since 1998. Mr. Antoniode Almeida was Chairman at EDP between 1996 and 1998. Until 1992, he served asChairman of Lusoleasing and União de Bancos Portugueses, S.A, Director of theCommercial Bank of Malawi, the Bank of Lisbon and South Africa, Ltd. and SeniorAdviser of the Bank of Portugal. Between 1983 and 1985, and between 1978 and1980, he served as Treasury Secretary in the Portuguese government. Mr. Antóniode Almeida also served as Governor of the Bank of Angola from 1974 to 1978. Mr.António de Almeida has a degree in Economy from Oporto University.

 

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*MrJorge Manuel Oliveira Godinho* was appointed to our board ofdirectors in May 2003. From March 2001 to May 2003, Mr. Godinho was Presidentof the Executive Committee at Edinfor-Sistemas Informáticos, SA, and Chairmanat Ace-Holding, SGPS, SA. Between 1998 and 2000 he was Adviser of the Board ofElectricidade de Portugal, SA, Executive Member of the Board of OPTEP andVice-Chairman of the Board of Optimus. Between 1991 and 1998, Mr. Godinho wasChairman of the Board of Portucel SGPS, Portucel Industrial and PortucelFlorestal. From 1985 to 1990, he served as Secretary of State for Fisheries.Prior to these assignments, Mr. Godinho was the Chairman of the Board atDocapesca and Member of the Steering Committee at Instituto de Gestão Financeirada Segurança Social. He started his career in 1976 at CPE, one of the companiesthat late have merged to form EDP. From 1976 to 1980, he was responsible forthe newly created department dedicated to the environment affairs and tomonitor the impact of thermal power plants. Mr. Godinho also hadresponsibilities in several other institutions, such as the Sino-PortugueseChamber of Commerce (Chairman), the Competitiveness Forum, the National Councilof Science Research, the Portuguese Industrial Association (Vice-Chairman),EFACEC- Capital SGPS, SA (Member of the Board), and FIEP-Fundo para aInternacionalização das Empresas Portuguesas (Member of the Board). He still isMember of the Advisory Board of Nova Forum, the School for Executives ofUNL-Universidade Nova de Lisboa. He was born in 1952 and holds a degree inengineering from Instituto Superior Técnico (1975) and a MBA from UniversidadeNova de Lisboa (1984).

 

*Mr. RuiMiguel Horta e Costa* was appointed to our board of directorsin May 2000 and re-elected in May 2003. Mr. Horta e Costa is also a member ofthe board of directors of Hidrocantábrico, GALP, EDP Distribuição, EDP Produçãoand ONI.  He served as ExecutiveDirector of UBS Warburg in London from 1995 to 2000, and before that, from 1990to 1995, he was a member of the board of directors of Grupo Jorge de Mello. Mr.Horta e Costa was Resident Vice-President of Citibank Portugal from 1989 to1990, and from 1987 to 1989 he served in the positions of Director of BancoFinantia and assistant of the board of directors for the same bank. From 1986to 1987, he was Account Manager for MDM - Sociedade de Investimentos.  Mr. Horta e Costa holds an economics degreefrom Universidade Católica Portuguesa as well as an MBA in management from theUniversity of Minnesota*.*

 

*Mr.José Manuel Gonçalves de Morais Cabral* was appointed to ourboard of directors in May 2003. He is also Director of Soponata, S.A., Soimper,S.A., Efacec Capital, S.G.P.S., S.A. and José de Mello Participações II,S.G.P.S., S.A., and Senior Manager of José de Mello Serviços, Lda.. From 1995to 1999, he served as Director and CEO of Lisnave, S.A.. Previously, he wasDirector of I.P.E., S.A. between 1992 and 1994, and Director of Celbi, S.A.between 1993 and 1995. From 1989 to 1992, he served as Chairman of AirAtlantis, S.A., and between 1970 and 1989, he was Controller and CFO of METALPortuguesa, S.A.. Mr. Morais Cabral holds a degree in Economics fromI.S.C.E.F., Lisbon.

 

*Mr.Arnaldo Pedro Figueirôa Navarro Machado* was appointed to theboard of directors in May 2002 and he is presently the Chief Executive Officerof EDP Distribuição - Energia. Mr. Navarro Machado served as Chief ExecutiveOfficer of Sociedade Central de Cervejas from 2000 to 2002. He acted as memberof the board of directors of HLC - Engenharia de Gestão e Projectos, S.A.between 1998 and 2000. In the EDP Group he has served as Vice-Chairman of theboard of directors of EDP, S.A. from 1992 to 1998, Chairman of the board ofdirectors of MRH - Mudança e Recursos Humanos, S.A. in 1997 and 1998, memberand Chairman of the board of directors of INTERNEL - Electricidade de PortugalInternacional, S.A. from 1992 to 1998 and of CPPE, S.A. between 1994 and 1997,member of the board of directors of CERJ from 1996 to 1998, of INVESTCO - Veículode Investimento de Empreendimento and of Hidroeléctrica do Lajeado in Brazilduring 1998, of OPTEP from 1997 to 1998, of Turbogás from 1995 to 1998 and ofEDP, S.A. in 1991 and 1992. Prior to this, he has served as Member of theManagement Council of Sociedade Central de Cervejas from 1988 to 1991, asChairman of the board of directors of Sociedade da Água de Luso, S.A. duringJanuary 1990 and as member of the board of directors of Setenave from 1984 to1988. Mr. Navarro Machado holds a degree in Naval Engineering from theUniversity of the Stracholyde, Glasgow*.*

 

*Mr.António José Fernandes de Sousa* was appointed to our board ofdirectors in August 2001. He is presently Chairman of Caixa Geral de Depósitos.From 1994 to 2000, Mr. António de Sousa was Governor of Banco de Portugal andbefore that, from 1991 to 1994, he was Secretary of State of Finance andSecretary of State of External Trade. He was Chairman of the ExecutiveCommittee of Tottagespar, SGPS and Chairman of the board of directors of SULPEDIP.Between 1989 and 1991, Mr. António de Sousa also served as Consultant for theMinistry of Industry and Energy and was a member of the board of directors ofBanco Totta & Açores, S.A.  Heserved as the government as Secretary of State of Industry, from 1987 and 1988.In 1986 he became member of the board of

 

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directors of IPE - Investimentos e Participações do Estado, S.A. Heacted as Corporate Consultant in the United States of America, from 1979 to 1981.Mr. António de Sousa holds a degree in Administration and Management ofCorporation from Universidade Católica Portuguesa and a PhD in Management ofCorporations, area of Strategic Planning, from Wharton School of University ofPennsylvania.

 

*Mr.José Manuel Trindade Neves Adelino*was appointed to our boardof directors in May 2003. He is also a Member of the Global Advisory Board ofSONAE SGPS, of the Management Committee of the Fundo de Garantia de Depósitos,of the Strategic Board of Portugal Telecom, of the Advisory Board ofConfederação da Indústria Portuguesa, of the National Education Committee andof the Euronext Lisbon Index Committee, as well as full Professor of Economicsat Universidade Nova de Lisboa, a position that he has held since 1995. Mr.Neves Adelino was a non-executive member of the board of Banco Português doAtlântico and served as Senior Adviser at several companies. Mr. Neves Adelinoholds a degree in Finance from Universidade Técnica de Lisboa and a graduatedegree (Business Administration - DBA), from the Kent State University, USA.

 

*Mr.Luis Filipe Rolim de Azevedo Coutinho*was appointed to ourboard of directors in May 2003. He is also Senior Adviser of the Holding ofGrupo Abrantina, Member of the Board of several companies of that Group, CFO ofValora – Serviços de Apoio à Emissão Monetária, S.A., as well as Professor inEconomics at Universidade Nova de Lisboa. Between 1984 and 2002, he served asSenior Advisor at José Bento Pedroso & Filhos, Lda., I.P.E., Grupo V.I/B.T.A.,Grupo Abrantina, Bank of Portugal, Lisbon Municipality, Calouste GulbenkianFoundation Portuguese and Finance Secretary of State. He holds a degree inManagement from Universidade Católica Portuguesa and a Master BusinessAdministration from Universidade Nova de Lisboa.

 

*Mr.Paulo de Azevedo Pereira da Silva* was appointed to our boardof directors in May 2003. He is also General Manager of BCP – BancoComercial Português, S.A., Director of LEASEFACTOR S.G.P.S., Chairman of theBoard of Directors of BCP LEASING and Director of CREDIBANCO – Banco de CréditoPessoal. Mr. Paulo Azevedo holds adegree in Economics from the Faculdade de Economia do Porto.

 

*Mr.Pedro Manuel Bastos Mendes Rezende* was appointed to our boardof directors in May 2003. Serving as a member of the board of directors of EDP– Electricidade de Portugal and he is also serving as President of theExecutive Committee of EDP Produção and its subsidiaries and as a board memberof EDP Energia, EDP Distribuição and Hidrocantábrico.  Since 1990, Mr. Pedro Bastos Rezende has been a member of TheBoston Consulting Group where he served in the Madrid office until 1995 and inLisbon office thereon. He was elected Partner and Director in May 1997,co-leading the Lisbon office since then. He was also the local leader of theEnergy Practice Area. Prior to this he was Head of the Testing Department forVALEO – Clutch Division in Spain from 1985 to 1989. Mr. Pedro Bastos Rezendeholds a degree in Industrial Mechanical Engineering from ICAI – Madrid, Spainand a MBA from Insead – Fontainebleau, France.

 

*Mr.Vítor Ângelo Mendes da Costa Martins* was appointed to ourboard of directors in May 2003. Mr. Vítor Martins is also Senior Adviser ofCITIGROUP, a position that he holds since 1997, as well as a Member of theManagement Committee of the IEEI - Instituto de Estudos EstratégicosInternacionais, Member of the Strategic Board of the “Notre Europe” JacquesDelors Association and Member of the Advisory Board of the Forum deAdministradores de Empresas. From 1999 to 2002, he was Chairman of JazztelPortugal, and between 1996 and 2002, he was a Member of the Advisory Committeeof Public Markets of the European Committee. Previously, he served as Secretaryof State for Europeans Affairs, from 1985 to 1995. In our Company, he wasChairman of the audit Committee from 1982 to 1985.  Mr. Vítor Martins holds a degree in Management from ISEG, Lisbon.

 

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**SENIOR MANAGEMENT**

 

We have fourteen Executive Officers who are in charge ofvarious business and administrative departments at the holding company level ofEDP and report directly to the board of directors. Selected information is setforth below for the executive officers in charge of a principal businessfunction. 

 
| **Name**                                                    |   | **Age** |   | **Year of  Appointment** |   | **Position**                                                        |
|-------------------------------------------------------------|--------|---------|--------|--------------------------|--------|---------------------------------------------------------------------|
| (Vacancy)                                                   |   | —  |   | —                   |   | General Secretary                                                   |
| Mr. António José Marrachinho  Soares              |   | 42      |   | 1998                     |   | Alternate General Secretary                                         |
| Mr. António Manuel Neves de  Carvalho                  |   | 53      |   | 2000                     |   | Head of Environmental Department                                    |
| Mr. António Pacheco de Castro                          |   | 44      |   | 1994                     |   | Head of Strategic Planning                                          |
| Mr. António Pedro Alfaia de  Carvalho                  |   | 57      |   | 1998                     |   | Head of Legal Affairs                                               |
| Mr. Bernardo Sá Braamcamp Sottomayor                   |   | 30      |   | 2000                     |   | Head of Mergers and Acquisitions Department                         |
| Mr. Manuel Antunes Rodrigues da  Costa                      |   | 55      |   | 2002                     |   | Head of Accounting Consolidation and Management  Control Department |
| Mr. Eugénio André Purificação  Carvalho |   | 49      |   | 2001                     |   | Head of Human Resources                                             |
| Mr. Horácio Manuel Piriquito  Casimiro                 |   | 42      |   | 2003                     |   | Head of Public Relations Department                                 |
| Mr. José Avelino Abreu Aguiar                          |   | 55      |   | 2000                     |   | Head of Information Technology                                      |
| Mrs. Magda Abdool Magid Vakil                               |   | 40      |   | 1998                     |   | Head of Financing Department                                        |
| Mrs. Maria Joana Mano Pinto  Simões                    |   | 42      |   | 2000                     |   | Head of Regulation and Tariffs Department                           |
| Mr. Pedro Manuel Carreto Pires  João                   |   | 33      |   | 2000                     |   | Head of Investor Relations                                          |
| Mr. Vitor Manuel Silva Leitão                          |   | 49      |   | 2000                     |   | Head of Internal Audit Department                                   |
| Mr. Stephan Godinho Lopes Morais                            |   | 29      |   | 2003                     |   | Chief of Staff, Cabinet of the CEO                                  |

 

*Mr.António José Marrachinho Soares* has been our alternatecompany secretary since April 1998. Between 1994 and 2000, Mr. Soares wasassistant to the board of directors and the head of the secretariat of theboard. He holds a law degree from Faculdade de Direito de Lisboa andpost-graduate degree in securities law. Mr. Soares also holds a post-graduate degree in public regulation fromUniversidade de Coimbra–CEDIPRE, Centro de Estudos de Direito Público eRegulação.

 

*Mr.António Manuel Neves de Carvalho* was appointed head ofenvironmental department in September 2000. He also served as REN’s directorresponsible for the systems and equipment department from 1994 to 2000 and asan assistant executive officer in the systems department from 1991 to 1994. Mr.de Carvalho holds a degree in telecommunications and electronics engineering fromInstituto Superior Técnico de Lisboa.

 

*Mr.António Pacheco de Castro* was appointed General Director inJune 2003.  He has served as head ofstrategic planning since September 2000. Between 1997 and 2000 Mr. Castro served as the executive officer responsiblefor our investor relations department. Mr. Castro also served as an assistantdirector of our strategic planning department from 1995 to 1997. He holds amanagement degree from Lisbon’s Instituto Superior de Economia and a MBA fromthe same university.

 

*Mr.António Pedro Alfaia de Carvalho* was appointed head of ourlegal affairs department in May 1998. He was a legal counsellor in thisdepartment since 1979. Mr. de Carvalho also served as our company secretarybetween July 1997 and July 2000. Heholds a law degree from Faculdade de Direito de Lisboa.

 

*Mr.Bernardo Sá Braamcamp Sottomayor* was appointed head of ourmergers and acquisitions department in June 2000. He served as an associatedirector of corporate finance at UBS Warburg in London between 1997 and 2000and as a research analyst at Caixagest in Lisbon from 1995 to 1997. Mr.Sottomayor holds an economics degree from Universidade Nova de Lisboa.

 

*ManuelAntunes Rodrigues da Costa* was appointed Head of AccountingConsolidation and Management Control Department in October 2002. Served asDeputy Head of Corporate Planning Department between 1989 and 1997, Adviser tothe Board of Directors of EDP in 1999 and to the Board of Directors of EDPDistribution in 2002. From 1997 to 1999 served as Head of Tariffs and Prices inthe Portuguese Electricity Regulatory Authority (ERSE).

 

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He also served as Advisor to the Portuguese Minister of Economy from2000 to 2002.  He holds a degree intelecommunications and electronics engineering from Instituto Superior Técnicoand a master degree in economics from Universidade Nova de Lisboa*.*

 

*Mr.Eugénio André Purificação Carvalho* was appointed head of ourhuman resources department in July 2001. He was also head of CPPE’s humanresources department between 1998 and 2001. Mr. Carvalho served as assistantexecutive officer of REN’s commercial department between 1993 and 1998, and healso served as an electrical engineer in power control systems since his EDPadmission in 1979 to 1993. He holds a degree in telecommunications andelectronics engineering from Instituto Superior Técnico de Lisboa, and a postgraduated degree in Industrial Management from Lisbon’s Instituto Superior deCiências do Trabalho e da Empresa.

 

*Mr. HorácioManuel Piriquito Casimiro* was appointed head of our publicrelations department in May 2003. He served as head of corporate communicationat Galp Energia SGPS between 2001 and 2003. From 1997 to 2001 he was a memberof the board of five companies in the Media Capital Group. From 1995 to 2001 heheld the senior management position at three publications (“SemanárioEconómico”, “Valor” and “Fortunas & Negócios”).  From 1996 to 2000, he was a member of the board of “RadioCommercial” and “Radio Nostalgia.”  From1990 to 1991 he was the assistant to the Minister of Finance and the Ministerof Agriculture. Mr. Piriquito holdsa management degree from Universidade Livre de Lisboa.

 

*Mr.José Avelino Abreu Aguiar* was appointed our head ofinformation technology in July 2000. He has also served as an executive officerat Edinfor since 1991. Mr. Aguiar holds a degree in electrotechnicalengineering from Faculdade de Engenharia at Oporto University.

 

*Mrs.Magda Abdool Magid Vakil* was appointed head of our financingdepartment in July 1998. Between 1994 and 1997, Mrs. Vakil served as a loanofficer in the European Investment Bank in Luxembourg and between 1988 and 1994as a senior manager of corporate banking in the Royal Bank of Canada in London.She holds a degree in economics from the University of Kent, Canterbury.

 

*Mrs.Maria Joana Mano Pinto Simões* was appointed head of ourregulation and tariffs department in July 2000. She also served as an assistantdirector of our strategic planning department from 1998 to 2000. Mrs. Simõesholds a degree in electrotechnical engineering from Instituto Superior Técnicode Lisboa and an MBA from Universidade Nova de Lisboa.

 

*Mr.Pedro Manuel Carreto Pires João* was appointed our head ofinvestor relations in June 2000. From 1999 to 2000, he served as an equitysales manager at BCP in Oporto. He also served as an associate director atBanco Bozano Simonsen in London between 1997 and 1999 and as an equity researchassociate at Goldman Sachs International in London between 1996 and 1997. Mr.Pires holds a management degree from Lisbon’s Instituto Superior de Gestão andan MBA from the London Business School.

 

*Mr.Vitor Manuel Silva Leitão* is currently the head of ourinternal audit department and was the head of our information technologydepartment between 1995 and 2000. Mr. Leitão was also an assistant director ofthe accounting department from 1990 to 1995. He holds a degree in mechanicaland production engineering from Instituto Superior Técnico de Lisboa and an MBAfrom Lisbon’s Universidade Nova.

 

*Mr.Stephan Godinho Lopes Morais* was appointed Chief of Staff forthe CEO in May 2003. Between 1996 and 1999 he was a Consultant with HalcrowManagement Sciences - London, working on utility privatizations for the WorldBank and governments in Africa, Asia and Latin America. In 1999 and 2000 he wasa Senior Consultant with Arthur Andersen Business Consulting in London, workingon the Energy and Utilities team within the Strategy, Finance and EconomicsDivision. During 2002 and 2003 he was a Consultant for the Portuguesegovernment for the Restructuring of the State Holding Company - IPE, and forthe Reorganisation of the National Energy Sector. He holds a degree in CivilEngineering from Instituto Superior Técnico, Lisbon and an MBA from the HarvardBusiness School.

 

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**COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT**

 

Aggregate compensation paid in 2002 by us to ourdirectors and executive officers was approximately € 2.8 million and€ 9.0 million, respectively.

 

**SHAREOWNERSHIP**

 

As of December 31, 2002, the directors and executiveofficers listed in Item 6 as a group owned less than 1% of our outstandingordinary shares (not including ordinary shares held by any entity with whichany of the directors or executive officers are affiliated). 

 
| **Members of  the Board of Directors**                |   | **Number of Shares** |
|-------------------------------------------------------|--------|----------------------|
| Mr. Francisco de la Fuente Sánchez               |   | 10,373               |
| Mr. João Ramalho Talone                          |   | 1,905                |
| Mr. Arnaldo Pedro Figueirôa Navarro Machado      |   | 9,680                |
| Mr. Jorge Manuel Oliveira  Godinho                    |   | 30,393               |
| Mr. Pedro Manuel Bastos Mendes  Rezende               |   | 0                    |
| Mr. Rui Miguel de Oliveira  Horta e Costa             |   | 3,762                |
| Mr. António de Almeida                           |   | 4,265                |
| Mr. António José Fernandes de  Sousa        |   | 1,865                |
| Mr. José Manuel Gonçalves de  Morais Cabral |   | 715                  |
| Mr. José Manuel Trindade Neves  Adelino          |   | 895                  |
| Mr. Luís Filipe Rolim de  Azevedo Coutinho       |   | 0                    |
| Mr. Paulo Azevedo Pereira da  Silva                   |   | 5,986                |
| Mr. Vítor Ângelo Mendes da  Costa Martins   |   | 767                  |

 

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Number of Shares reflectsaggregate shares held by Directors and the Directors’ family members.

 

On July 24, 2002, we acquired 343,621 treasury sharesto grant as annual performance bonuses to our management team.

 

The directors and executive officers listed in Item 6have also been granted an aggregate of 2,286,250 stock options under our stockoption plans. We have adopted two stock options plans:

 

•                  A plan formembers of the board of directors, initially comprising a total of 1,750,000ordinary shares which were increased to 2,450,000 ordinary shares at thegeneral shareholders meeting on May 10, 2000. This plan is managed by disinterested persons who are not employees ofEDP or its subsidiaries.

 

•                  A plan formembers of the boards of directors of our operating companies and seniorofficers of EDP and its subsidiaries comprising a total of 16,250,000 ordinaryshares. Awards of options under this plan are determined in the sole discretionof the board of directors of EDP.

 

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Under both plans, the exercise price of each optionequals the market price of our stock on the date of grant and an option’smaximum term is 5 years.  A summary ofthe status of our two fixed stock option plans as of December 31, 2001 and2002, and changes during the years then ended on those dates is presentedbelow:

 
|                                  |   | **Shares  available  for grant under  1999 option  plans** |   | **Option  activity** |   | **Weighted  average  exercise  price** |   |
|---------------------------------------|--------|------------------------------------------------------------|--------|----------------------|--------|----------------------------------------|--------|
| Balance December  31, 2000            |   | 16,413,750                                                 |   | —               |   | —                                 |   |
| Increase to the  1999 Option Plans(1) |   | —                                                     |   | —               |   | —                                 |   |
| Options  forfeited(2)                 |   | —                                                     |   | —               |   | —                                 |   |
| Options granted                       |   | —                                                     |   | —               |   | —                                 |   |
| Balance December  31, 2001            |   | 16,413,750                                                 |   | 2,286,250            |   |                                   |   |
|                                  |   |                                                       |   |                 |   |                                   |   |
| Increase to the  1999 Option Plans(1) |   | —                                                     |   | —               |   | —                                 |   |
| Options  forfeited                    |   | —                                                     |   | —               |   | —                                 |   |
| Options  granted(3)                   |   | —                                                     |   | —               |   | —                                 |   |
| Balance December  31, 2002            |   | 16,413,750                                                 |   | 2,286,250            |   |                                   |   |

 

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*(1)**       Atthe general shareholders meeting held on May 10, 2000, an increase in the number of options available under the 1999 optionsplans was approved to adjust the plans for an increase in the number ofdirectors from 5 to 7.*

*(2)**       Of2,400,000 options granted in 1999, only 2,286,250 were accepted by directorsand Executive Officers.*

*(3)**       Thenumber of options to be granted for 2003 has not yet been determined.*

 

The following table summarizes information about stock optionsoutstanding and exercisable as of December 31, 2002.

 
| **Options outstanding** |   | **Weighted  average exercise  price** |   | **Weighted  average remaining  contractual life** |   | **Options  exercisable** |   |
|-------------------------|--------|---------------------------------------|--------|---------------------------------------------------|--------|--------------------------|--------|
| 2,286,250               |   | 3.43                                  |   | 3 years                                           |   | 0                        |   |

 

**EMPLOYEES**

 

As of December 31, 2002, we had 12,833 employees inactive service, of which approximately 522 held senior managerialpositions.  In recent years, we havepursued a policy in our core electricity business of staff reductions andworkforce rationalization, which has resulted in a steady reduction inpermanent staff levels. We expect to add employees as we develop ourtelecommunications business.  The tablebelow shows our employment levels at the dates indicated. 

 
|                 |     | **December  31,** |     |
|----------------------|----------|-------------------|----------|
|                 | **1998** |              | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
| Permanent staff      |     | 13,829            |     | 13,550 |   | 12,864 |   | 11,709 |   | 12,445 |   |
| Fixed-term  contract |     | 103               |     | 333 |   | 402 |   | 362 |   | 388 |   |
| Total                |     | 13,932            |     | 13,883 |   | 13,266 |   | 12,071 |   | 12,833 |   |

 

At December 31, 2002, there were 7,048 employeesengaged in distribution, 2,159 employees engaged in generation, 218 holdingstaff positions and 3,408 classified as others. We experienced 6.1% absenteeismin 2002 compared with 6.2% absenteeism in 2001 and 5.9% absenteeism in 2000.

 

Approximately 67% of our employees are members of aunion.  Our non-management employees arerepresented by more than 30 unions, of which six represent the majority ofemployees. Most of the unions are members of one of the two principalconfederations in Portugal: CGTP-Intersindical and UGT.  The unions assume responsibility forannually negotiating salary levels, negotiating the collective bargainingagreements and ensuring that the collective bargaining agreements are correctlyapplied.  In May 2000, we reachedagreement with all of the unions representing our employees on a new collectivebargaining agreement which provides for, among other things, higher entry levelcompensation across professional categories and greater opportunities forseniority-related

 

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compensation increases within individual professional categories. Arelated agreement provides for a 4.0% salary increase for 2001 and a 3,475%increase for 2002. Future increases will be negotiated on an annual basis.

 

From 1988 through 2002, we have experienced eightstrikes, four of which lasted only 24 hours, and two of which lasted 48 hours.Six of the seven strikes concerned salary negotiations, our privatization orour restructuring.  In 2000, there weretwo strikes. These strikes, which concerned the professional categories of EDPDdispatch and damage repair employees, involved a total of 229 workers and2,258 hours of strike time.  In2001, there was one strike concerning employee’s rights, salaries and themaintenance of the public social security system.  The strike involved a total of 35 workers and 140 hours of striketime.  In 2002, there were 3 strikes,concerning employee’s rights, salary negotiations, the maintenance of theNational Wealth Service and the Public Social Security system, protests againstnew labor laws approval and against installation closing. One of these strikeswas a national strike and in all there were 2.639 workers involved and 25.530hours of strike time.

 

**EMPLOYEEBENEFITS**

 

Our employees are entitled to participate in a profitsharing program. In 2002, approximately € 20.7 million wasdistributed to 100% of our labor force as profit sharing. We maintain a pensionplan for all employees of the companies that have subscribed to the CollectiveLabor Agreement. This pension plan is supplemental to the pension provided toretirees by the Portuguese social security system. As of December 31, 2002, theunderlying pension fund totaled € 727.6 million, the pension expense in2002 was € 48.6****million. Forfurther information about our pension and benefit plans, see “Item 5. Operatingand Financial Review and Prospects—Pensions and benefits” and notes 3(e), 16and 25 to our consolidated financial statements. Our directors and seniorofficers are also eligible for stock option plans, described in “—ShareOwnership.”

 

Our employees are eligible to participate in acomplementary health plan that supplements benefits from the National HealthService. Currently, the health plan covers approximately 100% of our peopleamong the existing labor force, retired people, pensioners and relatives. Inaddition, employees receive personal accident insurance which covers death andinvalidity, as well as a death subsidy complement.

 

**Item 7****.        *Major Shareholders and Related Party Transactions***

 

**MAJOR SHAREHOLDERS**

 

The Portuguese government, directly or throughPARPUBLICA—Participações Publicas, S.G.P.S., S.A., (formally known as PARTEST)a corporation wholly-owned by the Portuguese government, which was formed in1991 for the purposes of holding the Republic’s interest in a number ofenterprises in various industries, at December 31, 2002, owned approximately26.1% of our outstanding ordinary shares. Through Caixa Geral de Depósitos, a state-owned bank, the Portuguesegovernment owns an additional 4.75% of our ordinary shares.  The Portuguese government’s ownership of EDPordinary shares declined from approximately 70% in 1997 to the current level inconnection with the offering of our ordinary shares in successive stages of ourprivatization

 

The following table sets forth information concerningthe ownership of our ordinary shares as of December 31, 2002, by the Portuguesegovernment and by our officers and directors as a group (not including ordinaryshares held by any entity with which any such officers or directors areaffiliated).  We are not aware of anyother shareholder owning more than 5.0% of our ordinary shares.

 
| **Name of  owner**                               |   | **Number of Ordinary  Shares owned** |   | **Percentage of Outstanding  Ordinary Shares** |   |
|--------------------------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|
| Republic of  Portugal                            |   | 783,074,076                          |   | 26.1                                           | %      |
| Banco Comercial Português                   |   | 151,635,713                          |   | 5.1                                            | %      |
| All directors  and executive officers as a group |   | Approximately 15,000                 |   | <1                                          | %      |

 

The Portuguese governmenthas special rights that all other holders of our ordinary shares do nothave.  To learn more about the specialrights of the Portuguese government you should read “Item 10.  Additional Information —

 

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Articles of Association—Limitations on the purchase and transfer ofordinary shares; special rights of the Portuguese government.”

 

In addition to theshareholders listed above and Caixa Geral de Depósitos, which owns 142,516,830,or approximately 4.75%, of our ordinary shares, other significant EDPshareholders include Iberdrola, which in May 2002 announced that it hadacquired additional ordinary shares and currently owns 149,966,455, orapproximately 5%, of our ordinary shares and Brisa, which indirectly owns60,002,297, or approximately 2%, of our ordinary shares.

 

As of June 30, 2003,approximately 1.4% of the ordinary shares were represented by ADSs that wereheld by three holders of record, including The Depositary Trust Company. Thenumber of ADSs outstanding was 4,124,317 at December 31, 2002.

 

**RELATED PARTY TRANSACTIONS**

 

Mr. Jardim Gonçalves, adirector of EDP until May 2003, is presently the Chairman of BCP’s board ofdirectors.  In March 2000, we and BCPentered into a strategic alliance, pursuant to which Mr. Gonçalves was electedto our board of directors as a non-executive director, we have acquired 4.25%of BCP’s outstanding shares and BCP has acquired approximately 5% of ouroutstanding shares.  In March 2003, wesubscribed to a share capital increase of BCP, bringing our stake to 4.36%.

 

Prof. António JoséFernandes de Sousa, a director of EDP, is presently the Chairman of Caixa Geralde Depósitos’ board of directors.  CaixaGeral de Depósitos owns 4.75% of our ordinary shares.

 

On May 9, 2001, weentered into an agreement for a strategic alliance in the telecommunicationssector with BCP, Galp and Brisa.  Brisabecame a shareholder of ONI in exchange for its 100% stake Brisatel, whichowned 4% of ONI Way.  As a result of theagreement, EDP holds 56% of the share capital of ONI and Brisa holds 17%, whileBCP and Galp hold the remaining 22.8% and 4.2%, respectively.  Within thecontext of the strategic alliance, Brisa proposed two members of ONI’s board ofdirectors and they were subsequently elected by the shareholders of ONI.

 

**INTERESTS OF EXPERTS AND COUNSEL**

 

Not applicable.

 

**Item 8****.    *FinancialInformation***

 

**CONSOLIDATED STATEMENTS**

 

Pleaserefer to “Item 18. Financial Statements” and pages F-1 through F-60 of thisannual report.

 

**OTHER FINANCIAL INFORMATION**

 

**Legal Proceedings**

 

We experience a number of claimsand legal and arbitral proceedings incidental to the normal conduct of ourbusiness.  Management does not believethat liabilities related to such claims and proceedings are likely to be,individually or in the aggregate, material to our consolidated financialcondition.

 

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**Dividendsand Dividend Policy**

 

We have declared dividends each year since 1991, whenwe became a corporation. The following table shows our dividends per sharebased on 3,000,000,000 ordinary shares outstanding in the years indicated: 

 
|                                               |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Dividends per  ordinary share (in euro)(1)         |   | 0.13     |   | 0.14     |   | 0.14     |   | 0.11     |   | 0.09     |   |
| Dividends per  ordinary share (in U.S. Dollars)(2) |   | 0.14     |   | 0.13     |   | 0.12     |   | 0.10     |   | 0.11     |   |

 

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*(1)**             For1998, 1999 and 2000, escudos are translated into euro at the fixed rate ofexchange established at the commencement of the third stage of EuropeanMonetary Union on January 1, 1999 by the European Council of Ministers betweenthe euro and escudo of PTE 200.482 = € 1.00.*

*(2)**             Translatedat the prevailing rate of exchange at the date of payment, which for 2002 was$ 1.171 = € 1.00.*

 

The payment and amount of dividends are subject to therecommendation of our board of directors and the consent by our shareholders ata general meeting. It is the current intention of the board of directors,subject to our financial condition, to continue its policy of proposing anannual dividend of at least 68% of “Distributable Net Income,” as definedbelow. The Portuguese government has indicated its approval of this policy andthat it will not exercise its voting rights in opposition to those dividends,subject to our financial condition. Under Portuguese law, our Distributable NetIncome is defined as our net income, calculated in accordance with PortugueseGAAP, after covering losses for previous periods and allocation of 5% to alegal reserve until it reaches 20% of the aggregate nominal value of its sharecapital. At least 50% of our Distributable Net Income must be distributed toshareholders in the form of a dividend, unless a resolution is passed by theshareholders. In order to raise the dividend above a 50% payout ratio, a simplemajority of votes of shareholders present is required; in order to lower thedividend below a 50% payout ratio, a majority of votes corresponding to 75% ofour share capital is required. The board of directors, with prior approval ofour Audit Board, may, in specified circumstances, authorize the payment ofinterim dividends, although management expects to only pay a single dividend onan annual basis.

 

Pursuant to Portuguese law, dividends are paid toshareholders of record as of the date established for payment. These paymentsare effected by means of Portugal’s book-entry clearance and settlement system.

 

All dividends are paid in euro following the fullimplementation of the EMU. Dividends received by a holder of ordinary shares orADSs will, under current law and practice, be subject to taxation. Theeffective rate of Portuguese withholding tax has changed periodically in recentyears and may change again in the future. For more information regardingtaxation of dividends, you should read “Item 10. AdditionalInformation—Portuguese Taxation.” Dividends received by holders of ADSs will bepaid in U.S. dollars, net of conversion expenses of the depositary.

 

**SIGNIFICANTCHANGES**

 

No significant change in our financial condition hasoccurred since the date of our consolidated financial statements included inthis annual report.

 

***Item 9.******                      The Offerand Listing***

 

**TRADING MARKETS**

 

In Portugal, our ordinary shares trade on the *Mercado de Cotações Oficiais* of theEuronext Lisbon Stock Exchange. In the United States, our ordinary shares tradein the form of ADSs represented by ADRs issued by Citibank, N.A., asdepositary. Our ADSs are listed on the New York Stock Exchange and our ordinaryshares are listed on the Euronext Lisbon Stock Exchange.  Our ordinary shares are also quoted on SEAQInternational.

 

**MARKET PRICE INFORMATION**

 

The tables below set forth, for the periods indicated,the reported high and low sales prices of our ADSs on the New York StockExchange and of our ordinary shares, based on the 3,000,000,000 ordinary sharesoutstanding after

 

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giving effect to the 5 for 1 stock split approved at our May 12, 2000general meeting, on the Euronext Lisbon Stock Exchange: 

 
|           |   | **Per ADS**   |       | **Per Ordinary Share** |       |
|----------------|--------|---------------|------------|------------------------|------------|
|           |   | **High**      |       | **Low**                |       | **High** |   | **Low** |   |
|           |   | **(Dollars)** |       | **(Euro)**             |       |
| **2000**       |   |          | ** ** |                   | ** ** |   | ** ** |   | ** ** |
| First Quarter  |   | 39.50         |       | 31.50                  |       | 4.15 |   | 3.20 |   |
| Second Quarter |   | 37.38         |       | 33.38                  |       | 3.94 |   | 3.62 |   |
| Third Quarter  |   | 34.81         |       | 31.25                  |       | 3.87 |   | 3.30 |   |
| Fourth Quarter |   | 33.88         |       | 26.06                  |       | 3.67 |   | 3.15 |   |
| Full Year      |   | 39.50         |       | 26.06                  |       | 4.15 |   | 3.15 |   |
|           |   |          |       |                   |       |   |   |   |   |
| **2001**       |   |          | ** ** |                   | ** ** |   | ** ** |   | ** ** |
| First Quarter  |   | 34.00         |       | 26.50                  |       | 3.60 |   | 3.00 |   |
| Second Quarter |   | 28.70         |       | 23.30                  |       | 3.25 |   | 2.72 |   |
| Third Quarter  |   | 27.10         |       | 22.90                  |       | 3.04 |   | 2.50 |   |
| Fourth Quarter |   | 26.50         |       | 21.05                  |       | 2.93 |   | 2.32 |   |
| Full Year      |   | 34.00         |       | 21.05                  |       | 3.60 |   | 2.32 |   |
|           |   |          |       |                   |       |   |   |   |   |
| **2002**       |   |          |       |                   |       |   |   |   |   |
| First Quarter  |   | 22.19         |       | 19.30                  |       | 2.50 |   | 2.18 |   |
| Second Quarter |   | 21.73         |       | 19.45                  |       | 2.45 |   | 1.92 |   |
| Third Quarter  |   | 19.75         |       | 14.78                  |       | 1.99 |   | 1.47 |   |
| Fourth Quarter |   | 17.25         |       | 14.70                  |       | 1.72 |   | 1.49 |   |
| Full Year      |   | 22.19         |       | 14.70                  |       | 2.50 |   | 1.47 |   |
|           |   |          |       |                   |       |   |   |   |   |
| **Month  of**  |   |          |       |                   |       |   |   |   |   |
| December 2002  |   | 17.17         |       | 15.45                  |       | 1.71 |   | 1.53 |   |
| January 2003   |   | 18.50         |       | 16.10                  |       | 1.69 |   | 1.47 |   |
| February 2003  |   | 16.95         |       | 15.10                  |       | 1.59 |   | 1.39 |   |
| March 2003     |   | 17.50         |       | 15.10                  |       | 1.61 |   | 1.38 |   |
| April 2003     |   | 19.18         |       | 17.32                  |       | 1.75 |   | 1.57 |   |
| May 2003       |   | 21.60         |       | 17.95                  |       | 1.84 |   | 1.62 |   |

 

**THE PORTUGUESE SECURITIES MARKET**

 

The Portuguese equity market, which had experiencedsignificant increases in liquidity and trading volumes until 2001, registered aslowdown in 2002, consistent with the worldwide economic situation.  Since November 1997, Portugal’s status inthe Morgan Stanley Capital International, or MSCI, indices changed fromemerging market to developed market. In particular, Portugal joined the MSCIEurope and World indices and left the MSCI Emerging Market index.

 

The integration of the former Lisbon and Oporto StockExchange in Euronext, N.V. (under the name Euronext Lisbon Stock Exchange) onJanuary 30, 2002, has allowed the Euronext Lisbon Stock Exchange to participatein a wider European capital market, which also includes Euronext Paris StockExchange, Euronext Amsterdam Stock Exchange and Euronext Brussels StockExchange.  This integration process isintended to create a European common capital market, in order to allowinvestors to have access to a single equity and derivatives trading platform,common netting, clearing and settlement services and harmonized market rulesand procedures.

 

As of December 31, 2002, the market capitalization ofequity securities listed on the Euronext Lisbon Stock Exchange was€ 72,998 million compared with € 96,640 million as ofDecember 31, 2001, representing 51.6% and 61.9%, respectively, of thetotal market capitalization of Portuguese listed securities. As of December 31,2002, 171 Portuguese companies’ financial assets were listed on the EuronextLisbon Stock Exchange of which 58 were in the form of equity securities, 98 inthe form of bonds, 5 in the form of warrants and 10 in the form of listed fundsand certificates. On the basis of euro value, the ten most actively tradedequity securities in ordinary sessions of the Euronext Lisbon Stock Exchange in2002 represented approximately 93.0% of total trading volume of equity

 

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securities on the Euronext Lisbon Stock Exchange compared with 86.7% in2001. Turnover of equity securities was € 21,688 million in 2002 comparedwith € 30,692 million in 2001.

 

In 2002, our ordinary shares represented approximately11.5% of total trading volume of equity securities on the Euronext Lisbon StockExchange. As of March 31, 2003, our ordinary shares accounted for 9.3% of totalmarket turnover since January 1, 2003. As of May 22, 2003, our ordinary shares weighted 9.29% in the PSIGeneral Index, 15.51% in the PSI 20 Index and 0.48% in the Euronext 100 Index,each as defined below.

 

The official market for equity securities of theEuronext Lisbon Stock Exchange, or the “Official Market,” created in July 1991,is the market on which most significant Portuguese equity and derivativesecurities are listed. The Official Market index, or the PSI General Index,published since February 1991, is a weighted average price of all shares listedon the Official Market, other than preferred shares without voting rights.  The exact number of companies in the PSIGeneral Index’s portfolio may change each day as a result of new admissions,exclusions, suspensions and the absence of quotations.  This index essentially reflects the OfficialMarket’s global profitability.

 

The Euronext Lisbon Stock Exchange calculates an indexcalled the PSI 20, which includes the 20 largest and most actively tradedstocks listed on the Official Market. This index was created for the purpose ofacting as the Portuguese stock market benchmark and as an underlying referencefor futures and options contracts. Market operators also use the PSI 20 as an underlying index forstructured financial products whose performance depends on the performance ofthe Portuguese stock market. The methodology for the composition andcalculation of this index was changed in May 2001 and was implemented onOctober 1, 2001. The weight of the index components, which before this revisionwas based on the 20 companies with the largest market capitalization listed inthe Official Market, now also takes in consideration the free float of thesecompanies and introduces a maximum limit of 20% of the weight that a givencompany can have in the index.

 

Pursuant to the integration of the Portuguese stockmarket with Euronext, some Portuguese listed companies are now also included inEuronext indices.  We, along with sixother Portuguese companies, are included in Euronext 100 Index, which is amarket capitalization weighted price index constituted by the 100 largest andmost actively stocks traded on Euronext Stock Exchanges. Each stockparticipating in Euronext 100 Index must experience turnover of over 20% of itsissued shares over the course of a rolling one-year analysis period.

 

The Euronext Lisbon Stock Exchange is supervised by theMinistry of Finance and the Portuguese Securities Exchange Commission, or CMVM,and operated by Euronext Lisboa–Sociedade Gestora de Mercados Regulamentados,S.A., or the Euronext Lisbon SGMR.

 

**Trading**

 

Since March 1, 1999, all the shares currently listedon the Official Market of the Euronext Lisbon Stock Exchange are traded througha continuous trading system, which is designated to provide automatic executionand trading through LIST, a computerized trading system. The principal featureof the continuous trading system is the computerized matching of buy and sellorders based, first, on matching sales price and, second, on the time of entryof the order. Each order is executed as soon as a matching order is entered,but can be modified or revoked up to its execution. Between 7:30 a.m. and 8:00a.m. on each trading day, from Monday to Friday excluding public holidays, thedaily opening market clearing price is established for each security on thecontinuous trading system based on the bids and offers outstanding. During thelast 5 minutes of this pre-opening period it is possible to immediately presentpurchase and sale orders, which may not, however, be modified or revoked. Onany trading day, the opening price may not change more than 15% from a referenceprice, which is the closing price of the last session or the price resultingfrom an automatic roll-call held during the session in order to reset thereference price. Computer-matched trading then proceeds on the continuoustrading system from 8:00 a.m. until 4:30 p.m.

 

An automatic trading procedure by roll-call auctionwill be used if there is an interruption in the continuous trading system. Intrading through a roll-call auction, all the orders to buy or sell the samesecurity are processed together. Each roll-call auction originates one singleprice for the security and is followed by the matching of trades according tothe priority of each of the orders, which is established according to therespective prices. Sell orders below and buy orders above the auction pricewill not be matched.

 

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At present there are no official market makers orindependent specialists in the continuous trading system and therefore ordersto buy or sell shares in excess of corresponding orders to sell or buy shareswill not be executed.

 

According to the Cod.VM, which entered into force onMarch 1, 2000, transactions on the Euronext Lisbon Stock Exchange may only beperformed by its members. There are two categories of members of the EuronextLisbon Stock Exchange: negotiator members and clearance members. Negotiatormembers may perform stock exchange transactions but are not allowed to executetheir clearance and are therefore required to enter into an agreement with one ormore clearance members for clearance of the operations they negotiate. Onlyfinancial institutions authorized to buy and sell securities for their ownaccounts, such as banks and dealers, may become clearance members. Clearancemembers can clear stock exchange transactions and negotiate transactions.

 

Any trading of stocks listed on the continuous tradingsystem that takes place off-the-market must be cleared through financialinstitutions and physically settled through the Central de Valores Mobiliários(CVM), where those stocks are registered or deposited. Stock prices are quotedin euro per share.

 

**Portuguese transaction costs**

 

Currently, the framework applicable to Portuguesefees, taxes and other charges applicable to the transfer of ordinary shares isgoverned by Regulation 1303/2001 of November 22, 2001, as amended by Regulation323/2002 of March 27, 2002, both issued by the Finance Ministry, and byRegulation 2-C/2000, as amended, issued by Euronext Lisbon SGMR. Accordingly,the transfer of ordinary shares on the Euronext Lisbon Stock Exchange isgenerally subject to a negotiable brokerage fee or bank commission, anegotiable bank settlement fee and a stock exchange fee amounting to 0.015% duefrom both the seller and the purchaser. Likewise, transfers of ordinary shareslisted on the Euronext Lisbon Stock Exchange over the counter are subject to afee of 0.05%.

 

A stamp tax of 4.0% is payable on brokerage fees, banksettlement fees and bank commissions, but not on Euronext Lisbon Stock Exchangefees.

 

Under current laws and practice, no Portuguesetransfer fees, taxes or other charges are levied on the transfer of ADSs, otherthan the deposit or the withdrawal of ordinary shares, unless the transfer ismade through a financial intermediary domiciled or established in Portugal. Ifthe transfer is made through a financial intermediary domiciled or establishedin Portugal, the transfer may be regarded as a transfer of ordinary shares overthe counter with the consequences stated above.

 

The status of Portuguese law with respect to transferfees, taxes and other charges applicable to deposits and withdrawals ofordinary shares for ADSs is uncertain. Under current law and practice, anegotiable bank settlement fee and a stamp tax of 4.0% of this fee may apply todeposits and withdrawals of ordinary shares. However, Portuguese brokerage fees, bank commissions and stock exchangefees will not be levied on a deposit of ordinary shares in exchange for ADSs ora withdrawal of ordinary shares in exchange for the cancellation of ADSs,unless the deposit or withdrawal is made through a financial intermediarydomiciled or established in Portugal. If a deposit or withdrawal of ordinary shares is made through such afinancial intermediary, the deposit or withdrawal may be regarded as a transferof ordinary shares over the counter with the consequences stated above.  Current practice with respect to theapplicability of Portuguese transfer fees, taxes or other charges to depositsand withdrawals of ordinary shares is subject to change.

 

**Clearance and settlement**

 

All securities traded on the Euronext Lisbon StockExchange, either in certificated form or in book-entry form, must be depositedor registered in the CVM. The CVM provides a system for the registration andcontrol of securities, including custody of certificated securities andregistration of book-entry securities. The CVM is managed byInterbolsa—Sociedade Gestora de Sistemas de Liquidação e de SistemasCentralizados de Valores Mobiliários, S.A., or Interbolsa, a companywholly-owned by Euronext Lisbon SGMR that also manages the Clearing andSettlement System for stock exchange transactions.

 

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The Clearing and Settlement System is currently themost widely used clearing and settlement system in Portugal. Under this system,the member of the stock exchange inputs trade information on LIST, thenation-wide computerized trading system. The clearance member, which also hasto be a participant of the Clearance and Settlement System, accepts the trade,at the latest, one day after the date of the trade, becoming the legalcounterparty to the transaction until it settles. At the end of the second dayafter the trade, the electronic book-entry for the transfer of the securitiestakes place in the books of the CVM. This physical settlement is provisionaluntil the financial settlement takes place on the morning of the third dayafter the trade. The net amount due to or from each participant’s account withthe Central Bank is post to the closing balance of the previous day.

 

Our ordinary shares have been accepted for trading onEuroclear and Clearstream and settle and trade with Euroclear and Clearstreamin accordance with standard settlement procedures for internal clearances andwith external counterparties through the CVM. Our ordinary shares are subject to such rules and regulations asEuroclear and Clearstream may from time to time determine.

 

Under Portuguese law, the acquisition of sharesthrough a stock exchange transaction allows the owner to immediately sell thoseshares in the same market, without awaiting the physical and financialsettlement of the transaction. However, the clearance member related to thattransaction is the first responsible for its physical settlement. In case ofdefault in the physical settlement, Interbolsa must immediately initiate thesubstitution procedures necessary for good settlement of the transaction. Theseprocedures involve an automatic lending and borrowing system, or if there are nosecurities available, an automatic buy-in system, in relation to the shortpositions on the closing date.

 

To hold our ordinaryshares directly in book-entry form through the facilities of the CVM, an entitythat is a non-resident of Portugal must, prior to the execution of thetransaction, open a special share portfolio account with a financialintermediary located in Portugal and duly licensed to act as a financialintermediary pursuant to applicable legislation. The investor may then buy andsell listed securities with some restrictions and repatriate the proceeds.Persons who hold ordinary shares through Euroclear and Clearstream will not berequired to open a special share portfolio account with a financialintermediary located in Portugal in order to hold the ordinary shares.

 

**TRADING BY US IN OUR SECURITIES**

 

Except in specified circumstances, under Portugueselaw companies may not, at any time, hold more than 10% of their own sharecapital and may purchase or otherwise trade in their own equity securities onlywith shareholder authorization. Under our Articles of Association, theshareholders may, at a general meeting, grant us the authority to purchase ourown shares.

 

At our general meeting held on May 22, 2003, theshareholders renewed the authorization for our board of directors and themanagement bodies of our subsidiaries to purchase our shares under thefollowing conditions: (1) the number of shares to be acquired cannot exceed 10%of our share capital limit that already includes any shares to be acquiredunder the stock options plans; (2) the acquisition can only be done within theregulated markets where we are listed; and (3) the acquisition price shall haveas maximum and minimum limits 115% and 85%, respectively, of the weightedaverage of the closing quotations of our shares in the last ten sessions of theEuronext Lisbon Stock Exchange preceding the date of the acquisition.

 

The shareholders also renewed the authorization forour board of directors and the management bodies of our subsidiaries to sellour shares under the following conditions: (1) the number of sales and sharesto be sold will be defined by our board of directors and by the managementbodies of our subsidiaries, which shall include any shares to be granted underthe stock options plans; (2) the sale of shares can only be done within theregulated markets where we are listed, without prejudice of obligations to besatisfied within the stock options plans whose creation has been duly approvedby the general meeting; and (3) the sale price cannot be lower than 90% of theweighted average of the closing quotations of our shares in the last tensessions of the Euronext Lisbon Stock Exchange preceding the date of the sale,except if the sale is executed to fulfill the stock options plans whosecreation has been duly approved by the general meeting.

 

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This general meeting resolution has renewed theauthorization for our board of directors to purchase and sell our own sharesfor an additional period of 18 months, which had already been granted inprevious identical resolutions passed at the general meetings held in 1999,2000, 2001 and 2002.

 

As of June 12, 2003, we held 19,563,317 of our ownordinary shares, 1,750,000 of which we purchased in 1999, 650,000 of which wepurchased in 2000, 9,326,209 of which we purchased in 2001, 5,702,717 of whichwe purchased in 2002 and 2,134,391 of which we purchased in 2003.  Ordinary shares held by us will be deemed tobe outstanding under Portuguese law but not entitled to any dividends, votingrights or preemptive rights except the right to receive ordinary shares uponincreases of share capital by incorporation of reserves.

 

## ***PLAN OF DISTRIBUTION***

 

Not applicable.

 

## ***SELLING SHAREHOLDERS***

 

Not applicable.

 

## ***DILUTION***

 

Not applicable.

 

## ***EXPENSES OF THE ISSUE***

 

Not applicable.

 

**Item 10****.****                *A**dditional Information***

 

## ***SHARECAPITAL***

 

Not applicable.

 

## ***ARTICLESOF ASSOCIATION***

 

The following is a summary of both the rights of ourshareholders and certain provisions of our Articles of Association.  Rights of our shareholders are set out inour Articles of Association or are provided for by applicable Portugueselaw.  Because it is a summary, it doesnot contain all the information that may be important to you. For more completeinformation you should read our Articles of Association. Directions on how toobtain a complete copy of our Articles of Association are provided under“—Documents on Display” below.

 

**General**

 

We are registered at the LisbonCommercial Registry Office under number 1805. Under Article 3 ofour Articles of Association, we have as our company purpose the promotion,involvement and management, in a direct or indirect manner, of capital projectsand activities in the electrical sector, both at the Portuguese national andinternational level, with the aim of enhancing and streamlining the performanceof the universe of companies comprising the EDP Group.  We may also acquire participating interestsas a limited liability member in companies having corporate missions thatdiffer from our own, even if such companies are regulated by special laws, orparticipate in complementary company groupings, European economic interestgroupings, consortia or in any other type of association, temporary orpermanent.

 

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**Transactionswith directors**

 

According to the Portuguese Companies Law, contractsbetween us or our affiliates, on one hand, and our directors or any personacting on behalf of them, on the other hand, must be previously authorized byour board of directors, without the interested director’s vote, and approved byour Registered Chartered Accountant (“*FiscalÚnico*”). Companies may not grant loans or extend any kind of creditto its directors, make payments on their behalf, guarantee their obligations orpay their remuneration more than one month in advance. Under Article 26 of ourArticles of Association, our directors need not be shareholders of us. For moreinformation on our board of directors, you should read “Item 6. Directors,Senior Management and Employees—Board of Directors.”

 

**Voting rights**

 

Pursuant to our Articles of Association, any holder of100 or more ordinary shares registered in its name at least 15 days in advanceof any meeting of shareholders is entitled to attend the meeting and to haveone vote for every 100 ordinary shares owned. Shareholders must provide us, upto eight days prior to the date of the meeting, with a certificate from afinancial intermediary confirming that the shareholder held the ordinary shareson the date 15 days prior to the meeting and that the ordinary shares have beenblocked from that date up to the date of the meeting. According to thePortuguese Company Law, those shareholders holding fewer than 100 ordinaryshares may aggregate their interests with other shareholders of ordinaryshares, which themselves may own more or less than 100 ordinary shares, andpermit one of them, or another holder entitled to attend the meeting, to attendand vote on their behalf at the meeting.

 

Under Portuguese law, holders of ordinary sharesentitled to vote may be represented by proxy at a meeting of shareholders.  The proxy must be filed with us by the dateof the scheduled meeting of shareholders. Proxies must be in hand signed and areonly valid for a single meeting.

 

The voting rights exercised by a single shareholder,other than the Portuguese government or an equivalent entity, are limited to amaximum of 5% of our share capital. No single shareholder can exercise votingrights, in its name or on behalf of other shareholders, representing more than5% of our share capital. For purposes of computing the percentage of the sharecapital held by a single shareholder, the votes corresponding to the followingshares are aggregated:

 

•                        the numberof shares held by the shareholder;

 

•                        the numberof shares held by any other entity controlled directly or indirectly by theshareholder;

 

•                        the numberof shares held by other persons or entities in their own name or in the name ofanother for the benefit of the shareholder;

 

•                        the numberof shares held by an entity belonging to the same corporate group as theshareholder entity;

 

•                        the numberof shares held by third parties with whom the shareholder has an option or anyother right to buy our shares;

 

•                        the numberof shares held by third parties with whom the shareholder has entered into ashareholder agreement related to a joint exercise of voting rights; and

 

•                        the numberof shares held by any person as security where the person is entitled to exercisethe voting rights corresponding to our shares.

 

Holders of ADSs are treated as holders of the ordinaryshares represented by the ADSs for purposes of determining the applicability ofthe 5% limitation on voting rights. Voting instructions of an individual ADSholder are not entitled to be carried out by us as votes of ordinary shares tothe extent that those votes, together with any votes cast by the ADS holder asa holder of ordinary shares, exceed 5% of our share capital.

 

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Under Portuguese law, a company may not vote its ownshares that it holds, nor may any subsidiary that holds stock of its parentvote the treasury stock, and a company’s treasury stock will not be countedtowards a quorum or for purposes of determining a requisite percentage of votescast.  In accordance with Portugueselaw, our shareholder must approve the acquisition by us of our own shares.  The acquisition by us of our own shares mustbe approved by our shareholders in accordance with Portuguese law.  Under Portuguese law, a Portuguese companymay not, except under specified limited circumstances, purchase more than 10%of its nominal share capital as treasury stock.

 

Under the Portuguese Companies Law and our Articles ofAssociation, we can create shares with special rights (e.g., priority rightsover a company’s profits) with the approval of two-thirds of the votes cast ata general meeting of shareholders.

 

**Shareholders’meetings**

 

A general meeting of shareholders must be heldannually within the first five months of the year following the close of theyear for which the general meeting is convened. Other general meetings ofshareholders are convened by the president of the general meeting wheneverdeemed appropriate or suitable and requested by the board of directors, theRegistered Chartered Accountant or the holders of at least 5% of our totalshare capital. Notices of shareholders’ meetings must be given by anannouncement published in the *Diário da República*, the PortugueseOfficial Gazette, and in a national newspaper with general circulation inLisbon and Oporto, at least 30 days before the scheduled date of the meeting.Under the Portuguese Companies Law and our Articles of Association, the generalmeeting is constituted by the presence, in person or by proxy, of shareholders.There is no quorum requirement unless the meeting is called to vote on theextraordinary matters referred to below. In general, resolutions can beapproved by a simple majority of votes cast. However, there are special quorumand majority requirements in cases where the general meeting is called to voteon extraordinary matters, which are amending our Articles of Association,approving a merger, break-up or transformation or dissolution of us, increasingour share capital and waiving pre-emptive rights. In these cases, the presenceon a first call, in person or by proxy, of shareholders representing at leastone-third of our share capital is required. There is no quorum requirement on asecond call. Resolutions on these foregoing matters must be approved by atleast two-thirds of the votes cast unless, on a second call, there are present,in person or by proxy, shareholders representing at least 50% of our sharecapital, in which case a simple majority of votes cast is required. However,there is a special majority requirement in the case of the election of ourboard of directors. If a group of minority shareholders holding at least 10% ofthe voting rights votes against the resolution providing for the election ofthe members of the board of directors, those minority shareholders have theright to elect one director.

 

All resolutions adoptedat a general meeting of shareholders are binding upon all shareholders.

 

**Proxyrequirements**

 

In the event that any person requests a proxy frommore than five shareholders, whether for that person or others, those proxiesmay be used for only one specified general meeting and a proxy will beconsidered revoked if the shareholder granting the proxy attends the meeting. Aproxy request must contain at least the following information:

 

•                       the date,time, place and agenda for the meeting for which the proxy is requested;

 

•                       identificationof relevant documents that may be reviewed by shareholders;

 

•                       theidentity of the person or persons who will act as the shareholder’s proxyholder;

 

•                       a statementas to how the proxy holder will vote the related shares in the absence ofinstructions from the shareholder; and

 

•                       a statementthat, in the event of circumstances unforeseen at the time the request wassent, the proxy holder will vote according to his or her evaluation of theshareholder’s best interests.

 

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Furthermore, pursuant to the Cod.VM, it is alsorequired, in order for a person to represent more than five shareholders, thatthe proxy includes a description of the voting rights of the proxy holder andthe voting instructions to the proxy holder.

 

If a shareholder provides voting instructions withrespect to a proxy request, the proxy holder must vote the related shares inaccordance with those instructions except in the event of unforeseencircumstances as indicated above, in which case the proxy holder must informthe shareholder of how he or she has voted and the reasons for the vote. If aperson requesting a proxy does not agree with the voting instructions receivedfrom the shareholder, he or she must reject the proxy and immediately informthe shareholder of the rejection.

 

Any person that has requested proxies is required tosend, at that person’s expense, to shareholders for whom that person was theproxy holder, a copy of the minutes of the related general meeting.

 

**Votingby correspondence**

 

According to our by-laws and the Cod.VM, ourshareholders may vote by correspondence. Under the Cod.VM, public noticesconcerning shareholders’ meetings must indicate the possibility of voting bycorrespondence and must specify the procedures to follow in order to vote bycorrespondence, including a mailing address and deadline for receipt of thevotes. We are obligated to verify the authenticity of each vote and ensure itsconfidentiality. According to our Articles of Association, shareholders maycast their vote by correspondence for each item on the agenda, provided thatthey send a registered letter with recorded delivery addressed to the chairmanof the general meeting at our registered office in Portugal, signed inaccordance with the signature on their identity card, at least eight days priorto the general meeting, enclosing a legible photocopy of the identity card ofthe person signing the letter.

 

**Dividendsand distributions**

 

Under Portuguese law, we are required to establish andmaintain a legal reserve equal to 20% of the aggregate nominal value of ourshare capital and, if necessary to maintain this legal reserve, to contribute aminimum of 5% of our annual net income to the legal reserve. The legal reserveis distributable only upon our liquidation but it can be used to cover lossesand be incorporated as our share capital. Currently, our total legal reserve is€ 244 million, which is in compliance with Portuguese law. Net income ineach fiscal year, as increased or decreased by any profit or loss carriedforward from prior years, less any contribution to the legal reserve, isavailable for distribution to shareholders as dividends, subject to therequirements of Portuguese law and our Articles of Association. The payment andamount of dividends are subject to the recommendation of our board of directorsand the decision by our shareholders at a general meeting.

 

If we have earned distributable profits since the endof the preceding fiscal year, as shown on an interim income statement certifiedby our auditors, our board of directors has the authority, with the prior approvalof the audit board and subject to Portuguese law and regulations, without theapproval of shareholders, to distribute interim dividends to the extent ofthese distributable profits.

 

Under Portuguese law, dividends are generallydistributed to shareholders *pro rata* according to their respectiveholdings of shares. The payment of the dividend is due within 30 days of thedate of the general meeting approving the dividend.  The board of directors determines the actual dividend paymentdate within that period.  You shouldread “—Portuguese Taxation” below to learn about taxes on dividends we pay.According to Decree Law 187-70 of April 30, 1970, dividendentitlement lapses in favor of the Republic of Portugal if not claimed by theshareholder within five years.

 

In the event that we are liquidated, our assetsremaining after payment of our debts, liquidation expenses and all of ourremaining obligations will be distributed first to repay in full the nominalvalue of our ordinary shares. Thereafter, any surplus will be distributed *pro rata*among the holders of ordinary shares based on the nominal value of theirholdings.

 

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**Pre-emptiverights**

 

Shareholders have a preferential, rateable right tosubscribe for any new issue of ordinary shares for cash, except if a specialresolution at the general meeting duly limits or waives these rights infurtherance of our best interests. These rights are separately transferable andmay be traded on the Euronext Lisbon Stock Exchange, where our ordinary sharesare listed, during the period when the rights may be exercised.

 

Unless they agree otherwise, holders of convertiblebonds generally are granted rights equal to those of shareholders to subscribefor new issues of ordinary shares and subsequent issues of convertible bonds.Shareholders have a pre-emptive right to subscribe for convertible bonds unlessthe right is waived by special resolution at a general meeting.

 

Portuguese law, except as mentioned above, requires a Portuguesecompany to grant preemptive rights to all of its existing shareholders topurchase a sufficient number of shares to maintain their existing percentage ofownership of the company whenever the company issues new shares for cash. Underthis requirement, any preemptive rights in connection with any future issuanceof ordinary shares for cash will be offered by us to the depositary as theregistered owner of the ordinary shares underlying the ADSs. However, undercurrent U.S. law, U.S. holders of ADSs or ordinary shares would not be entitledto exercise their preemptive rights unless a registration statement under theSecurities Act is effective with respect to these rights and ordinary shares oran exemption from these registration requirements is available. We intend toevaluate at the time of any preemptive rights offering the costs and potentialliabilities associated with a registration statement, as well as the indirectbenefits to us of enabling U.S. holders of ADSs and ordinary shares to exercisepreemptive rights and any other factors we consider appropriate at the time,and then to make a decision as to whether to file a registration statement.

 

No assurance can be given that a registrationstatement would be filed. If no registration statement is filed and noexemption from the registration requirements under the Securities Act isavailable, the depositary is required, pursuant to the terms of the depositaryagreement between it, us and the owners and holders from time to time of ADSs,to sell U.S. holders’ preemptive rights and distribute the proceeds if apremium can be recognized over the cost of any sale.

 

**Book-entryregistration of ordinary shares**

 

Our Articles of Association require that each ordinaryshare be indivisible and in uncertificated, book-entry and registered form. Inthe case of joint or co-ownership of ordinary shares, a common representativemust be designated by the joint or co-owners of those ordinary shares throughwhom all rights associated with the ordinary shares must be exercised. Theordinary shares must be registered in accounts opened with commercial banks orauthorized dealers located in Portugal and authorized by the CMVM to act ascustodians of securities. The banks are also obligated to be members of theCVM, through which all ordinary shares must be transferred.

 

**Shareholders’reporting obligations**

 

Under Article 13 of our Articles of Association, those shareholders who become the holders of aparticipating interest equal to or in excess of 5% of our voting rights orshare capital pursuant to the rule contained in former Article 346 of thePortuguese Securities and Capital Markets Code, which corresponds to Article 20of the current Cod.VM, must communicate this fact to our board of directorswithin five business days following the date on which the 5% shareholding wasacquired, and are barred from exercising voting rights until such time as theymake this communication. For purposes of this provision, the shareholders arerequired to furnish to our board of directors, in writing and in a complete,objective, clear and accurate manner, and to the satisfaction of our board ofdirectors, all the information that our board of directors requests fromthem.  Under Article 7 of ourArticles of Association, a shareholder must notify our board of directors ofany shareholders’ agreement into which the shareholder has entered intorelating to our ordinary shares.  Thisinformation must be supplied within 30 days following the execution of theshareholders’ agreement in question. Under the Cod.VM, notification of theseshareholders’ agreements must also be given to the CMVM within three days afterexecution.

 

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Also, under the Cod.VM, any person or persons actingin concert, including companies and their affiliates, making a purchase or saleof our ordinary shares that results in that person either owning or ceasing toown specific threshold percentages, i.e., 2%, 5%, 10%, 20%, 33%, 50%, 66% and90%, of our voting rights must, within three business days, notify us, theEuronext Lisbon Stock Exchange and the CMVM. Upon receiving this notification,we must publish it in the Euronext Lisbon Stock Exchange bulletin and in amajor daily newspaper.

 

**Portuguesereporting and disclosure requirements**

 

Under Portuguese law we are required to publish, amongothers:

 

•                  annual reportsof operations and financial statements that include, among others:

 

•                  a managementreport;

 

•                  an auditedfinancial statement;

 

•                  a report oncorporate governance practices with information regarding the followingmatters:

 

•                  measures for andlevel of compliance with the CMVM recommendation on corporate governance;

 

•                  organizationalstructure of the departments involved in the entrepreneurial decision process;

 

•                  number ofmembers of the board of directors with specific distinction between executiveand non-executive members and the tasks performed by each member;

 

•                  remuneration ofthe members of the board of directors in the aggregate, with separation of theamount received by executive and non-executive members and the fixed andvariable amount of such total remuneration;

 

•                  description ofthe evolution of our shares quotation;

 

•                  description ofour dividends policy;

 

•                  description ofthe main characteristics of our stock option plans;

 

•                  description ofthe new technologies used for disclosure of financial data and other data forthe preparation of the annual general shareholders meeting; and

 

•                  indication ofthe department for assistance to investors;

 

•                  a report on theexercise of voting rights and on proxy requirements; and

 

•                  a report oncorporate rules, namely regarding to internal procedures applicable to conductof business, management and control of activity risk;

 

•                  semi-annualreports that include financial statements, material information on ouractivities and performance and factors that may potentially influence futureperformance;

 

•                  quarterlyreports that include material information on our activities;

 

•                  specifiedinformation concerning the acquisition or sale by us of our ordinary shares;

 

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•                  non-publicinformation that investors would consider relevant to an evaluation of us orthe price of our ordinary shares; and

 

•                  specifiedinformation concerning outstanding bonds and changes in the composition of ourboard of directors, our Registered Chartered Accountant and the board of ourgeneral meeting.

 

**Limitationson the purchase and transfer of ordinary shares; special rights of thePortuguese government**

 

Individual buying and selling decisions regarding ourordinary shares are not subject to consent from us or any Portuguese authorityexcept for purchases by a person that owns or will own upon completion of thepurchase more than 10% of our share capital. Under Portuguese law, no personmay acquire more than 10% of our ordinary shares without the prior approval ofthe Portuguese Ministry of Finance. If a person attempts to acquire more than10% of our share capital without this authorization, no additional ordinaryshares may be registered in the name of that person by us, the CVM or anyPortuguese financial intermediary. Holders of ADSs are treated as holders ofthe ordinary shares represented by the ADSs for purposes of the applicabilityof these provisions. However, on June 4, 2002, the Court of Justice of theEuropean Community announced a judgment that the Republic of Portugal, byapproving and maintaining in force Decree Law no. 380/93 (which establishesthis 10% limit), did not comply with obligations arising from the EUTreaty.  Accordingly, the Portuguesegovernment must amend or revoke Decree Law no. 380/93.

 

In connection with its offering of our ordinary sharesin October 2000 and pursuant to Article 13 of the Privatization Decree Law,special rights were granted to the Portuguese government.  The Portuguese government has these rightsso long as it is a shareholder of us. These rights provide that, without thefavorable vote of the Portuguese government, no resolution can be adopted atour general meeting of shareholders relating to:

 

•                       amendmentsto our Articles of Association, including share capital increases, mergers,spin-offs or dissolution;

 

•                       authorizationfor us to enter into group/partnership or subordination agreements; or

 

•                       waivers of,or limitations on, our shareholders’ pre-emptive rights to subscribe to sharecapital increases.

 

The Privatization Decree Law also entitles thePortuguese government to appoint one member of our board of directors wheneverit votes against the list of directors presented for election at our generalmeeting of shareholders.

 

**Liabilityin respect of subsidiaries**

 

Under Portuguese law, a company that wholly owns asubsidiary is ultimately liable for the debts of that subsidiary.

 

**Dissolutionand liquidation rights**

 

Except as otherwise permitted by Portuguese law, wemay be dissolved and liquidated by a resolution approved at a general meetingby the vote of at least two-thirds of the votes cast, subject to therequirements applicable to the adoption of amendments to the Articles ofAssociation as described above. In this case, our board of directors will adoptand implement a plan for dissolution and liquidation, unless decided otherwiseby our shareholders. The shareholders acting at the general meeting approvingthe proposal would retain full authority to direct the liquidation, includingreplacing liquidators, approving liquidation accounts and granting release tothe liquidators. Any shareholder, the Portuguese government or a creditor of usmay also resort to judicial dissolution in specific cases as provided for inthe Portuguese law. Upon our liquidation, each shareholder is entitled toreceive its *prorata*share of any assets remaining after the payment of our debtsand taxes and expenses of the liquidation.

 

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**MATERIAL CONTRACTS**

 

Our power plants in the BindingSector are subject to binding licenses issued by DGE and such plants enter intoPPAs with REN, as described in “Item 4. Information on the Company—Portugal—ElectricitySystem Overview—The Public Electricity System or Binding Sector.” In theNon-Binding Sector, EDP Energia enters into contracts with QualifyingConsumers, as described in “Item 4. Information on the Company—Portugal—Electricity System Overview—TheNon-Binding Sector.”

 

In July 2002, we updated our € 5,000,000,000 MTNprogram. Our MTN program provides for the periodic issuance, by us and ourwholly owned finance subsidiary EDP Finance B.V., of debt instruments on termsand conditions determined at the time the instruments are issued.

 

In 2001 we issued a € 1,000,000,000 bond underthe MTN program maturing in 2011. This € 1,000,000,000 bond issue pays afixed interest rate of 5.875%.

 

In 2002 we issued two bondsunder the MTN program: the first was a GBP 200,000,000 bond issued in Augustmaturing in August 2017 with a 6.625% annual coupon and the second was a €500,000,000 bond issued in December maturing in March  2008 with a 5% annual coupon.

 

In April 2001, we established an € 1,000,000,000commercial paper programme that provides for the periodic issuance of notes byus and EDP Finance, B.V.  The notes canhave maturities of not less than 1 day and not more than 364 days and aninterest rate determined at the time of issuance.

 

For more information on these programs and our other borrowings, youshould read “Item 5. Operating and Financial Review and Prospects—Liquidity andCapital Resources.”

 

**EXCHANGE CONTROLS**

 

**Exchange controls**

 

Portugal does not imposeexchange controls on transfers of currency abroad.

 

A non-resident of Portugal whowishes to invest in ordinary shares (but not ADSs) must open a special shareportfolio account with a commercial bank located in Portugal and duly licensedto act as securities’ custodian pursuant to applicable legislation prior to theexecution of the transaction.  Theinvestor may then buy and sell quoted securities with some restrictions andrepatriate the proceeds.

 

Dividends may be freelytransferred to a foreign country.  See“—Taxation” below for a summary of certain Portuguese tax consequences toholders of ordinary shares and ADSs, including the payment of dividends thereonand the realization of capital gains with respect thereto.

 

There are also limitations onvoting that apply to our ordinary shares and our ADSs.

 

**Exchange rate policy**

 

The value of the euro with respect to non-eurocurrencies, including the U.S. dollar, is affected by European Central Bankexchange rate policy.  As of March 31,2002, the following twelve Member States are participating in the third stageof the EMU: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy,Luxembourg, the Netherlands, Portugal and Spain. These Member States arereferred to as the “participating Member States.” Since January 1, 1999 thevalue of the national currency of a participating Member State in the nationalcurrency of another country, whether a participating Member State or not, maybe determined only through the bilateral conversion method, i.e., by convertingthe first currency into euro and then converting this euro equivalent into thesecond currency.  Pursuant to the thirdstage of EMU, the participating Member States have adopted a single currency,which is designated the “euro” and have transferred authority for conductingmonetary policy to the

 

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European Central Bank. The value of the euro as against the currenciesof each of the participating Member States was irrevocably fixed. Theconversion rate between the euro and the escudo was fixed at PTE 200.482 pereuro.

 

**PORTUGUESETAXATION**

 

**General**

 

The following is a summary of the principal Portuguesetax considerations that are likely to be material to the purchase, ownershipand disposition of ordinary shares or ADSs if a holder is a non-resident ofPortugal for Portuguese tax purposes, does not hold 10% or more of any class ofour stock and does not hold our ordinary shares or ADSs through a permanentestablishment in Portugal.

 

Resident holders for purposes of Portuguese taxationinclude collective entities having their registered office or effective placeof management in Portugal and individuals having remained in Portugueseterritory more than 183 days in any given calendar year or having the use of adwelling in Portuguese territory at the end of any given calendar year whichmay imply their intention of using it as their habitual residence.

 

A non-resident holder may be broadly defined as anycollective entity or individual not satisfying the above criteria. However,non-resident holders having a permanent establishment or a fixed installationin Portugal to which Portuguese-source income may be attributed will be taxedon such income under rules applicable to resident holders.

 

This summary does not purport to be a comprehensivedescription of all of the tax considerations that may be relevant tonon-resident holders, and does not address tax rules applicable to specialclasses of holders.

 

Furthermore, this summary is based on the tax laws ofPortugal in effect on the date of this annual report, including the Conventionbetween the United States of America and the Portuguese Republic for theAvoidance of Double Taxation and the Prevention of Fiscal Evasion with Respectto Taxes on Income, together with the related Protocol are referred to in thisannual report as the Treaty, and is subject to changes to those laws andpractices or the Treaty subsequent to that date, which changes could be made ona retroactive basis.

 

Prospective purchasers should consult their ownadvisers as to the tax consequences of the acquisition, ownership anddisposition of ordinary shares or ADSs in light of their particularcircumstances, including the effect of any other national laws.

 

For purposes of the Treaty and for Portuguese taxpurposes, a U.S. person holding ADSs will be treated as a beneficial owner ofour ordinary shares represented by such ADSs.

 

**Dividends**

 

The general rate of withholding tax on dividends inPortugal is currently 25% for non-residents.  However, until five years after the date upon which EDP’s privatizationis completed, only 50% of dividends received, net of other benefits, fromshares acquired during the privatization process are required to be included inincome.

 

Dividends, whether from shares acquired during theprivatization process or otherwise, are also subject to an additional 5%withholding tax in the form of a substitute gift and inheritance tax, unlessthe holder of such shares is a Portuguese holding company.  The Portuguese government has presented adraft Bill whereby the substitute gift and inheritance tax will beabolished.  Currently, this proposal isunder discussion.

 

Under the Treaty, the rate of withholding tax ondividends distributed to U.S. residents eligible for Treaty benefits will notexceed 15% and the rate of withholding with respect to the substitute gift andinheritance tax on dividends distributed to those persons will not exceed 5%.Since Portuguese effective rates are at or below the Treaty rates, according tothe Portuguese Tax Authority, at the present time it is not necessary for U.S. residentsto claim treaty benefits with respect to dividends paid on ordinary shares orADSs.

 

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*Pro rata*distributions of ordinary sharesor rights to subscribe for ordinary shares are not treated as dividends forPortuguese tax purposes, and, therefore, are not subject to Portuguesewithholding tax or the Portuguese substitute gift and inheritance tax. ThePortuguese tax consequences of *pro rata* distributions of ordinary sharesor rights to subscribe for ordinary shares may be subject to change.

 

**Capital gains**

 

Capital gains realized by non-resident individuals onthe transfer of ordinary shares or ADSs are subject to tax at the rate of 10%or, if the ordinary shares or ADSs were held for more than 12 months, are nottaxed Notwithstanding this, non-resident corporate holders and non-residentindividual holders of ordinary shares and ADSs are not subject to tax oncapital gains in Portugal if the following three conditions are met:

 

•                  no more than 25%of the non-resident is owned, directly or indirectly, by resident entities;

 

•                  the non-residententity does not have as its place of residence a state or jurisdictionidentified in a list of tax havens published by the Portuguese Ministry ofFinance; and

 

•                  the capitalgains do not arise from the transfer for consideration of shares or otherparticipations in companies resident in Portugal whose assets primarily (morethan 50%) comprise immovable property located in Portugal or in companiesresident in Portugal that control such companies.

 

Under the Treaty, capital gains derived from the saleor other disposition of ordinary shares, including deposits of ordinary sharesin exchange for ADSs, by an individual holder who is eligible for Treatybenefits will not be subject to Portuguese capital gains tax, regardless of thelength of time our ordinary shares are held.

 

**Gift and inheritance taxes**

 

Transfers by a non-resident of ordinary shares or ADSsby gift or at death will not be subject to Portuguese gift or inheritancetaxes. The Portuguese government has presented a draft Bill whereby thesubstitute gift and inheritance tax will be abolished.  Currently, this proposal is underdiscussion.

 

**Portuguese transaction costs**

 

The transfer of ordinary shares on the Euronext LisbonStock Exchange is generally subject to a negotiable brokerage fee or bankcommission, a negotiable bank settlement fee and a stock exchange fee amountingto 0.015% due from both the seller and the purchaser.  Likewise, transfers of ordinary shares listed on the EuronextLisbon Stock Exchange over the counter are subject to a fee of 0.05%.

 

A stamp tax of 4.0% is payable on brokerage fees, banksettlement fees and bank commissions, but not on Euronext Lisbon Stock Exchangefees.

 

Under current laws and practice, no Portuguesetransfer fees, taxes or other charges are levied on the transfer of ADSs, otherthan the deposit or the withdrawal of ordinary shares, unless the transfer ismade through a financial intermediary domiciled or established in Portugal. Ifthe transfer is made through a financial intermediary domiciled or establishedin Portugal, the transfer may be regarded as a transfer of ordinary shares overthe counter with the consequences stated above.

 

The status of Portuguese law with respect to transferfees, taxes and other charges applicable to deposits and withdrawals ofordinary shares for ADSs is uncertain. Under current law and practice, anegotiable bank settlement fee and a stamp tax of 4.0% of the fee may apply todeposits and withdrawals of ordinary shares. However, Portuguese brokeragefees, bank commissions and stock exchange fees will not be levied on a depositof ordinary shares in exchange for ADSs or a withdrawal of ordinary shares inexchange for the cancellation of ADSs, unless the deposit or withdrawal is madethrough a financial intermediary domiciled or established in Portugal. If adeposit or withdrawal of ordinary shares is made through a financialintermediary, the deposit or withdrawal may be regarded as a transfer ofordinary shares over the counter with the consequences stated above. Currentpractice with

 

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respect to the applicability of Portuguese transfer fees, taxes orother charges to deposits and withdrawals of ordinary shares is subject tochange.

 

**UNITEDSTATES TAXATION**

 

**General**

 

The following is a summary of material U.S. federalincome tax considerations that are likely to be relevant to the purchase,ownership and disposition of ordinary shares or ADSs by a holder that is acitizen or resident of the United States or a U.S. corporation or thatotherwise will be subject to U.S. federal income tax on a net income basis withrespect to our ordinary shares or ADSs, or a U.S. Holder. This summary does notpurport to be a comprehensive description of all of the tax considerations thatmay be relevant to a decision to purchase our ordinary shares or ADSs by anyparticular purchaser, including tax considerations that arise from rules ofgeneral application to all purchasers or to certain classes of investors orthat are generally assumed to be known by purchasers. Thus, for example, thissummary deals only with holders that purchase and hold ordinary shares or ADSsas capital assets, and does not address the tax treatment of holders that maybe subject to special tax rules, such as banks, insurance companies, securitiesdealers, traders in securities that elect to mark to market, tax exemptentities, persons that hold ordinary shares or ADSs as a position in a “straddle”for tax purposes, persons who hold 10% or more of any class of our stock andpersons whose “functional currency” is not the U.S. dollar. The summary isbased on the tax laws of the United States in effect on the date of this annualreport, which are subject to change. Prospective purchasers should consulttheir own advisers as to the tax consequences of the purchase, ownership anddisposition of ordinary shares or ADSs in light of their particularcircumstances, including the effect of any state, local or other national laws.

 

In general, for U.S. federal income tax purposes,holders of ADSs will be treated as the beneficial owners of our ordinary sharesrepresented by those ADSs.

 

**Dividends**

 

The gross amount of any dividends received withrespect to our ordinary shares or ADSs, including amounts withheld in respectof Portuguese withholding tax, generally will be subject to U.S. federal incometaxation as foreign-source dividend income, and will not be eligible for thedividends received deduction allowed to corporations. Dividends paid in euroswill be includible in your income in a U.S. dollar amount calculated byreference to the exchange rate in effect on the date of receipt or, in the caseof ordinary shares held in ADS form, by the Depositary. If dividends paid ineuros are converted into U.S. dollars on the date of receipt, you generallyshould not be required to recognize foreign currency gain or loss in respect ofthe dividend income. Subject to certain exceptions for short-term and hedged positions,the U.S. dollar amount of dividends received by an individual in respect of ourshares or ADSs after December 31, 2002, and before January 1, 2009, is subjectto taxation at a maximum rate of 15%. You should consult your own tax adviserregarding the availability of the reduced dividend tax rate in the light ofyour own particular circumstances.

 

Portuguese withholding taxes, including the 5% taxthat is denominated as a substitute inheritance and gift tax, should be treatedas foreign income taxes that, subject to generally applicable limitations underU.S. tax law, are eligible for credit against your U.S. federal income taxliability or, at your election, may be deducted in computing taxable income.Foreign tax credits will not be allowed for withholding taxes imposed inrespect of certain short-term or hedged positions in securities or in respectof arrangements in which the expected economic profit, after non-U.S. taxes, isinsubstantial.

 

Distributions of additional shares with respect toordinary shares or ADSs that are made as part of a *pro rata* distribution to allof our shareholders generally will not be subject to U.S. federal income tax.

 

**Capital gains**

 

Upon a sale or other disposition of ordinary shares orADSs, a U.S. Holder will recognize gain or loss for United States federalincome tax purposes in an amount equal to the difference between the U.S.dollar value of the

 

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amount realized and the U.S. Holder’s tax basis, determined in U.S.dollars, in its ordinary shares or ADSs. Generally, such gain or loss will becapital gain or loss, will be long-term capital gain or loss if the U.S.Holder’s holding period for such ordinary shares or ADSs exceeds one year andany gain will be income from sources within the United States for foreign taxcredit limitation purposes.  Long-termcapital gain realized by a U.S. Holder an individual generally is subject to amaximum rate of 20% in respect of property held for more than one year.  The net amount of long-term capital gainrecognized by an individual holder after May 5, 2003, and beforeJanuary 1, 2009, generally is subject to taxation at a maximum rateof 15%.  The net long-term capital gainrecognized by an individual holder before May 6, 2003 generally is subject totaxation at a maximum rate of 20%.

 

As discussed in “—Portuguese Taxation—Capital gains,”above, if the Treaty does not apply, individual holders may be subject toPortuguese capital gains tax on gains realized on the sale or other dispositionof ordinary shares. In the event that such a capital gains tax is imposed, U.S.Holders that do not receive significant foreign source income from othersources may not be able to derive effective U.S. foreign tax credit benefits inrespect of the Portuguese capital gains tax. Deposits and withdrawals ofordinary shares in exchange for ADSs will not result in the realization of gainor loss for U.S. federal income tax purposes.

 

**U.S. information reporting and backup withholding**

 

Dividends and payments of the proceeds of a sale ofordinary shares or ADSs, paid to U.S. Holders within the United States orthrough certain U.S.-related financial intermediaries are subject toinformation reporting and may be subject to backup withholding unless the U.S.Holders is a corporation or other exempt recipient or provides a taxpayeridentification number and certifies that no loss of exemption from backupwithholding has occurred. Holders that are not U.S. persons generally are notsubject to information reporting or backup withholding. However, a non-U.S.person may be required to provide a certification to establish its non-U.S.status in connection with payments received within the United States or throughcertain U.S.-related financial intermediaries.

 

**DIVIDENDSAND PAYING AGENTS**

 

Not applicable.

 

**STATEMENTBY EXPERTS**

 

Not applicable.

 

**DOCUMENTSON DISPLAY**

 

Copies of our Articles of Association and by-laws maybe examined at our principal place of business at Praça Marquês de Pombal,12 1250-162 Lisbon, Portugal.

 

We also file reports, including annual reports on Form20-F, periodic reports on Form 6-K and other information with the Securitiesand Exchange Commission, or the SEC, pursuant to the rules and regulations ofthe SEC that apply to foreign private issuers. You may read any materials publicly filed with the SEC at the SEC’spublic reference room at the following location:

 
|   | Public Reference Room  450 Fifth Street, N.W.  Room 1024  Washington, D.C.  20549 |
|--------|----------------------------------------------------------------------------------------|

 

Please call the SEC at 1-800-SEC-0330 for furtherinformation on the public reference room. The SEC filings are also available to the public from commercialdocument retrieval services.

 

As of November 2002 we file electronically with theSEC.  Documents we have filed as ofNovember 2002, are available on the website maintained by the SEC.

 

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Our ADRs are listed on the New York Stock Exchange, orNYSE. Reports and other information concerning us are available for inspectionat the offices of the NYSE, 20 Broad Street, New York, New York 10005.

 

**SUBSIDIARYINFORMATION**

 

Not applicable.

 

**Item 11.****           *Quantitative and QualitativeDisclosures About Market Risk***

 

**General**

 

We are exposed to market risks, including foreigncurrency, commodity price and interest rate risk. We use financial derivativeinstruments to manage our exposure to interest rate fluctuations.  Management’s guidelines with respect to theuse of financial derivative instruments are that we do not engage inspeculative derivative transactions and that all derivative transactions aresolely for hedging purposes and must relate to a specific underlying asset, forexample, cash flows of the derivative transaction must match those of theunderlying asset being hedged. The negotiation of financial derivativetransactions follows our internal procedures set by management, which requirethat for each transaction our financial department must submit to the ExecutiveCommittee of the Board of Directors for its approval a description of thehedging strategy that defines the objective of the hedge, the specific assetbeing hedged and the parameters of the proposed transaction. Following thisapproval, it is the responsibility of our financial department to negotiatewith the counterparty and consummate the transaction, which is then ratified bythe Executive Committee of the Board of Directors.

 

The counterparties to our financial derivativetransactions are major financial institutions and these transactions expose usto market and credit risk and, occasionally, may be concentrated with certaincounterparties. Management believes the credit risk and interest rate riskarising from non-performance by the counterparties is not significant, based onthe investment grade rating of the counterparties. We do not require collateralor other security to support the financial instruments with credit risk.

 

**Interestrate risk**

 

Management is aware of our exposure to market risksarising from our outstanding debt and derivative instruments. Our market risksresult mainly from interest rate fluctuations. We estimate the sensitivity ofthe fair values of our financial instruments to changes in interest rates. Themethods and assumptions used by us to determine fair values are explained innote 31 to the consolidated financial statements.

 

Interest rate swap agreements are used to manage theproportion of variable rate debt in our debt portfolio and to reduce the levelof interest expense. Notional amounts of interest rate swap agreements,including cross-currency interest rate swaps, outstanding as of December 31,2002, increased to € 3,545.6 million from € 2,960.4 million at December 31,2001, primarily due to additional transactions effected to limit the impact ofincreasing interest rates. The swap agreements have remaining maturitiesbetween 18 months and 15 years. The fair value of these derivative financialinstruments is the amount that would be paid or received upon termination ofthe agreements based on available market rates.  These fair values are estimates that involve uncertainties andcannot be determined with precision. These agreements, if terminated, would result in receivables of € 131.2million at December 31, 2002.

 

Our main exposure is to euro interest rates.  The fair value of all interest ratesensitive financial instruments at the EDP holding company level amounted to anet liability of € 6,406.8 million as of December 31, 2002.  These include primarily long-term debt,interest rate and cross currency interest rate swaps.  At December 31, 2002, in the event of a 10% increase in interestrates for all maturities, this fair value would increase to € 6,461.6million.  A 10% decrease would result ina decrease of this fair value to € 6,354.9 million.

 

At December 31, 2001, the fair value of all interestrate sensitive financial instruments amounted to a net liability of€ 4,977.7 million.  At December 31,2001, in the event of a 10% increase in interest rates for all maturities, thisfair value would increase to € 5,006.6 million.  A 10% decrease would result in a decrease of this fair value to€ 4,944.9 million.

 

133

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**Foreignexchange rate risk**

 

We are exposed primarily to two types of foreignexchange risk arising from our Brazilian investments:  the impact of foreign exchange fluctuations on the value of ourequity investment, which does not have an impact on our income statement but isreflected in our balance sheet, and the impact of foreign exchange fluctuationson the non-Brazilian currency denominated debt held by our Brazilian businesseswhich is reflected in their income statements and, in the case of consolidatedsubsidiaries, has a corresponding effect on our income statement. Management’spolicy with respect to the impact on the value our equity investment is not touse financial instruments to hedge against this risk given the long-term natureof these investments and that short-term fluctuations in their value impactingour balance sheet are considered acceptable. With respect to Escelsa, management decided to purchase the U.S. dollardenominated debt of Escelsa through a tender offer of Escelsa Senior Notesmaturing in 2007, thus limiting the impact of the devaluation of the Brazilianreal against the U.S. dollar on our consolidated profit and loss statements.  As a result of the tender offer, we acquiredUS$ 357.4 million of these bonds, corresponding to 83% of the total outstandingbonds, at a discount of 25% of their nominal value.

 

Management is also aware that, although our debtcurrently does not expose us to material foreign exchange risk, these risks mayexist for us in the future if a material portion of our outstanding debt isdenominated in a currency other than the euro.

 

**Commodityprice risk**

 

Management is aware that we are subject to risks associatedwith market fluctuations in the cost of fuel. A rise in the market price forfuel has a negative impact on our financial results. Moreover, fuel prices areoften quoted in U.S. dollars, subjecting us to the additional risk of a rise inthe value of the U.S. dollar against the euro. Despite those risks, we do not hedge against rising fuel costs as weexpect to be able to pass through to tariffs the fuel cost incurred.

 

**Item 12.****              *Description of Securities Other Than Equity Securities***

 

Not applicable.

 

134

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**GLOSSARY OF TERMS**

 
| Capacity charge:                   |   | Refers to the monthly charge payable by REN to the  generators in the Binding Sector for each power plant, in respect of each  PPA, based on contracted firm capacity, whether or not dispatched, payable by  REN to such generators.                                         |
|------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                          |
| CCGT (Combined Cycle Gas Turbine): |   | A type of generating plant in which turbines,  typically fueled by natural gas, are used to drive generators to produce  electricity. The exhaust gases are then passed through a boiler to produce  steam which in turn drives an additional turbine coupled to a generator. |
|                               |   |                                                                                                                                                                                                                                                                          |
| Cogeneration:                      |   | The simultaneous generation of steam and  electricity, typically where the need arises for industrial purposes.                                                                                                                                                               |
|                               |   |                                                                                                                                                                                                                                                                          |
| Dry year:                          |   | A year in which hydrological conditions are  unfavorable such that hydroelectric generation in that year is below average  (10,600 GWh).                                                                                                                                      |
|                               |   |                                                                                                                                                                                                                                                                          |
| Energy charge:                     |   | Refers to the variable charge based on actual  electricity delivered to the national transmission grid.                                                                                                                                                                       |
|                               |   |                                                                                                                                                                                                                                                                          |
| Generating unit:                   |   | An electric generator together with the turbine or  other device which drives it.                                                                                                                                                                                             |
|                               |   |                                                                                                                                                                                                                                                                          |
| Gigawatt (GW):                     |   | 1,000,000,000 watts (1,000 megawatts).                                                                                                                                                                                                                                        |
|                               |   |                                                                                                                                                                                                                                                                          |
| Gigawatt hour (GWh):               |   | One gigawatt of power supplied or demanded for one  hour.                                                                                                                                                                                                                     |
|                               |   |                                                                                                                                                                                                                                                                          |
| Hydroelectric unit:                |   | A generating unit which uses water power to drive  the electric generator.                                                                                                                                                                                                    |
|                               |   |                                                                                                                                                                                                                                                                          |
| Installed capacity:                |   | The level of electric power which can be delivered  from a particular generating unit on a full-load continuous basis to the transmission  network under actual conditions.                                                                                                   |
|                               |   |                                                                                                                                                                                                                                                                          |
| Kilovolt (kV):                     |   | 1,000 volts.                                                                                                                                                                                                                                                                  |
|                               |   |                                                                                                                                                                                                                                                                          |
| Kilovolt ampere (kVA):             |   | 1,000 volts ampere.                                                                                                                                                                                                                                                           |
|                               |   |                                                                                                                                                                                                                                                                          |
| Kilowatt (kW):                     |   | 1,000 watts.                                                                                                                                                                                                                                                                  |
|                               |   |                                                                                                                                                                                                                                                                          |
| Kilowatt hour (kWh):               |   | One kilowatt of power supplied or demanded for one  hour.                                                                                                                                                                                                                     |
|                               |   |                                                                                                                                                                                                                                                                          |
| Megawatt (MW):                     |   | 1,000,000 watts (1,000 kilowatts).                                                                                                                                                                                                                                            |
|                               |   |                                                                                                                                                                                                                                                                          |
| Megawatt hour (MWh):               |   | One megawatt of power supplied or demanded for one  hour.                                                                                                                                                                                                                     |
|                               |   |                                                                                                                                                                                                                                                                          |
| Megavolt ampere (MVA):             |   | 1,000,000 volts ampere.                                                                                                                                                                                                                                                       |
|                               |   |                                                                                                                                                                                                                                                                          |
| NOx:                               |   | Oxides of nitrogen.                                                                                                                                                                                                                                                           |
|                               |   |                                                                                                                                                                                                                                                                          |
| SO2:                               |   | Sulfur dioxide.                                                                                                                                                                                                                                                               |
|                               |   |                                                                                                                                                                                                                                                                          |
| Substation:                        |   | An assemblage of equipment  which switches and/or changes or regulates the voltage of electricity in a  transmission and distribution system.                                                                                                                                 |

 

135

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| Technical cost:      |   | The cost incurred in making a  capital expenditure excluding the cost of financing the expenditure.                                           |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                          |
| Terawatt (TW):       |   | 1,000,000,000,000 watts  (1,000,000 mega watts)                                                                                               |
|                 |   |                                                                                                                                          |
| Terawatt hour (TWh): |   | One terawatt of power supplied  or demanded for one hour.                                                                                     |
|                 |   |                                                                                                                                          |
| Thermoelectric unit: |   | A generating unit which uses  combustible fuel as the source of energy to drive the electric generator.                                       |
|                 |   |                                                                                                                                          |
| Volt:                |   | The basic unit of electric  force analogous to water pressure in pounds per square inch.                                                      |
|                 |   |                                                                                                                                          |
| Volt ampere:         |   | The basic unit of apparent  electrical power.                                                                                                 |
|                 |   |                                                                                                                                          |
| Watt:                |   | The basic unit of active  electrical power.                                                                                                   |
|                 |   |                                                                                                                                          |
| Wet year:            |   | A year in which hydrological  conditions are favorable such that hydroelectric generation in that year is  greater than average (10,600 GWh). |

 

136

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**PART II**

 

**Item 13.****              *Defaults, Dividend Arrearages and Delinquencies***

 

Not Applicable.

 

**Item 14.****              *Material Modifications to the Rights of Security Holders andUse of Proceeds***

 

Atour General Meeting held on May 12, 2000, our shareholders approved the changeof our share nominal value to 1 euro. Our nominal share capital remained 3,000,000,000 euros.

 

Inaddition, shareholders approved at this General Meeting a 5-for-1 stock splitof our ordinary shares. Consequently the share capital is now represented by3,000,000,000 shares with a nominal value of 1 euro.

 

**Item 15.****              *Controls and Procedures***

 

Withinthe 90-day period prior to the filing of this report, an evaluation has beencarried out under the supervision and with the participation of our management,including our chief executive officer and chief financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures.  Based upon and as part ofthat evaluation, the chief executive officer and chief financial officer concludedthat the disclosure controls and procedures are effective in all materialrespects to ensure that information required to be disclosed in the reports thecompany files and submits under the Exchange Act are recorded, processed,summarized and reported as and when required.

 

Inaddition, there have been no significant changes in our internal controls or inother factors that could significantly affect these controls subsequent to thedate of their evaluation.

 

Certificationsin accordance with section 302 of the Sarbanes-Oxley Act of 2002 can be foundon pages 140 and 141 of this Form 20-F.

 

**Item 16*.******              [Reserved]***

 

**PART III**

 

**Item 17.****              *Financial Statements***

 

Our financial statements havebeen prepared in accordance with Item 18 hereof.

 

**Item 18.****              *Financial Statements***

 

Indexto Financial Statements and Schedules

** **
| Reports of Independent  Auditors                                                                                 | F-1 |
|------------------------------------------------------------------------------------------------------------------|-----|
| Consolidated  Statements of Income for the years ended  December 31, 2000, 2001, and 2002                   | F-2 |
| Consolidated  Balance Sheets as of December 31, 2001 and 2002                                               | F-3 |
| Consolidated  Statements of Shareholders’ Equity for the years ended  December 31, 2000, 2001 and 2002 | F-4 |
| Consolidated  Statements of Cash Flows for the years ended  December 31, 2000, 2001 and 2002                | F-5 |
| Notes to Consolidated  Financial Statements                                                                      | F-7 |

 

137

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**Item 19.****              *Exhibits***

 
| Index to Exhibits |
|-------------------|
|              |   |   |
| 1.1               |   | Amended and Restated Articles  of Association of EDP, together with an English translation thereof  (incorporated by reference to our registration statement on Form F-3 (file  no. 333-12620) filed on October 20, 2000). |
|              |   |   |
| 2.1               |   | Amended and Restated Articles  of Association of EDP (see Exhibit 1.1). |
|              |   |   |
| 2.2               |   | Deposit Agreement dated June  16, 1997 among Citibank, N.A. EDP and the holders from time to time of  American Depositary Receipts (“ADR”) (incorporated by reference to our  registration statement on Form F-1 (file no. 333-6928) filed on May 16,  1997). |
|              |   |   |
| 2.3               |   | Amendment No. 1 dated  September 8, 2000, to the Deposit agreement dated June 16, 1997 among  Citibank, N.A., EDP and the holders from time to time of ADRs (incorporated  by reference to our registration statement on Form F-3 (file no. 333-12620)  filed on October 20, 2000). |
|              |   |   |
| 2.4               |   | Amended form of ADR (included  in Exhibit 2.3). |
|              |   |   |
| 2.5               |   | Certain documents relating to EDP Finance B.V. Programme for the Issuance of  Debt Instruments (incorporated by reference to our annual report on Form 20-F  for the fiscal year ended December 31, 1999). |
|              |   |   |
| 2.6               |   | Certain documents relating to  amendment and increase of EDP Finance B.V. Programme for the Issuance of Debt  Instruments (incorporated by reference to our annual report on Form 20-F for  the fiscal year ended December 31, 2000). |
|              |   |   |
| 2.7               |   | Certain documents relating to  EDP Finance B.V. Euro-Commercial Paper Programme (incorporated by reference  to our annual report on Form 20-F for the fiscal year ended December 31,  2000). |
|              |   |   |
| 2.8               |   | Other than as provided in  Exhibits 2.5 and 2.6, the total amount of long-term debt securities of EDP  authorized under any instrument does not exceed ten per cent of the total  assets of the Group on a consolidated basis.   EDP agrees to provide to the Securities and Exchange Commission, upon  request, copies of any instruments that define the rights of holders of  long-term debt of EDP that are not filed as exhibits to this annual report. |
|              |   |   |
| 4.1               |   | License for Sines Power Plant,  together with English translation thereof (incorporated by reference to our  registration as Form F-1 (file no. 333-6928) filed on May 16, 1997). |
|              |   |   |
| 4.2               |   | Power Purchase Agreement,  dated December 20, 1994, between REN and TURBOGÁS-Produtora Enérgica, S.A.  (incorporated by reference to our registration statement on Form F-1 (file  no. 333-6928) filed on June 16, 1997). |
|              |   |   |
| 4.3               |   | Energy Management Agreement,  dated December 1993, between REN and Transgás-Sociedade Portuguesa de Gás  Natural, S.A. (redacted version; subject to confidential treatment request);  incorporated by reference to our registration statement on Form F-1 (file no.  333-6928) filed on June 12, 1997). |
|              |   |   |
| 4.4               |   | Supplemental Agreement to the  Power Purchase Direct Agreement for the CCGT Power Station at Tapada do  Outeiro (incorporated by reference to our annual report on Form 20-F for the  fiscal year ended December 31, 1999). |
|              |   |   |
| 8.1               |   | Subsidiaries of EDP. |
|              |   |   |
| 10.1              |   | Certifications pursuant to  section 906 of the Sarbanes-Oxley Act 2002 (subsections (a) and (b) of  section 1350, Chapter 63 of Title 18, United States Code). |

 

138

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**Signature**

 

Pursuant to the requirementsof Section 12 of the Securities Exchange Act of 1934, the Registrant certifiesthat it meets all of the requirements for filing on Form 20-F and has fullycaused this Annual Report on Form 20-F to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|               | EDP – Electricidade de  Portugal |                                |
|--------------------|---------------------------------------|-------------------------------------|
|               |                                  |                                |
|               |                                  |                                |
| Date: July 3, 2003 |                                  | /s/  João  Ramalho Talone |   |
|               |                                  |                                |
|               |                                  | João Ramalho Talone            |
|               |                                  | Chief Executive Officer             |
|               |                                  |                                |
|               |                                  |                                |
| Date: July 3, 2003 |                                  | /s/  Rui  Miguel Horta e Costa |   |
|               |                                  |                                |
|               |                                  | Rui Miguel Horta e Costa            |
|               |                                  | Chief Financial Officer             |
|                    |                                       |                                     |  |  |

 

139

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**CERTIFICATIONS**

 

I, João Ramalho Talone, certify that:

 

1. I have reviewed this annual report on Form 20-F of EDP –Electricidade de Portugal, S.A.;

 

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c.               presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated inthis annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

 
| Date: July 3, 2003 | /s/  João  Ramalho Talone |   |
|--------------------|-------------------------------------|--------|
|               |                                |
|               | João Ramalho Talone            |
|               | Chief Executive Officer             |

 

140

----

 

I, Rui Miguel Horta e Costa, certify that:

 

1. I have reviewed this annual report on Form 20-F of EDP – Electricidadede Portugal, S.A.;

 

2. Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c.               presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated inthis annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

 
| Date:  July  3, 2003 |   |   | /s/  Rui  Miguel Horta e Costa |   |
|---------------------------|--------|--------|-------------------------------------|--------|
|                      |   |   |                                |
|                      |   |   |                                |
|                      |   |   | Rui Miguel Horta e Costa            |
|                      |   |   | Chief Financial Officer             |

 

141

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|        |                                                                                                                                        |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
|   | **PricewaterhouseCoopers**

Avenida da Liberdade, 245 -  7o C

1250 - 143 Lisboa

Portugal

Tel +351 21319 70 00

Fax +351 21316 11 12 |

 

To the Board ofDirectors of

EDP — Electricidade de Portugal, S.A.

 

**Report ofIndependent Accountants**

 

 

In our opinion,the accompanying consolidated balance sheet and the related consolidatedstatements of income, shareholders’ equity and cash flows present fairly, inall material respects, the financial position of EDP — Electricidade dePortugal, S.A. and its subsidiaries at December 31, 2002 and December 31, 2001,and the results of their operations and their cash flows for the years endedDecember 31, 2002, 2001 and 2000, in conformity with accounting principlesgenerally accepted in Portugal. These financial statements are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these statements in accordance with generally accepted auditingstandards in the United States and in Portugal, which require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for theopinion expressed above.

 

Additionally, asdiscussed in Notes 2 and 33 to the consolidated financial statements, theCompany changed its method of accounting for non-trading investments in 2002.

 

Accountingprinciples generallyaccepted in Portugal vary in certain significant respects from accounting principlesgenerally accepted in the United States of America. The application of thelatter would have affected the determination of consolidated net income foreach of the three years in the period ended December 31, 2002 and thedetermination of consolidated shareholders’ equity at December 31, 2002 and2001 to the extent summarized in Note 33 to the consolidated financialstatements.

 

 

/s/PricewaterhouseCoopers

 

Lisbon, Portugal

May 8, 2003,except for the contents of Note 34,

asto which the date is July 2, 2003.

 

 

 

 

 

 

PricewaterhouseCoopers - Auditores eConsultores, Lda.

Sede: Avenida da Liberdade 245 8o A, 1269 -034 Lisboa

Contribuinte no. 504193279  Capital social Euros 750.000

Matriculada na Conservatória do Registo Comercial sob o no. 7297

 

 

----

 

**EDP –ELECTRICIDADE DE PORTUGAL, S.A. AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF INCOMEFOR THE YEARS ENDED DECEMBER 31, 2000, 2001AND 2002**

** **

(Amountsstated in euros – EUR and U.S. dollars – US$)

 
|                                         |   | **Notes** |   | **2000**      |   | **2001**      |   | **2002**      |   | **2002**      |   |
|----------------------------------------------|--------|-----------|--------|---------------|--------|---------------|--------|---------------|--------|---------------|--------|
|                                         |   |      |   | **EUR**       |   | **EUR**       |   | **EUR**       |   | **US $**      |   |
|                                         |   |      |   |          |   |          |   |          |   |          |   |
| Revenues                                     |   | 20        |   | 3,846,493,261 |   | 5,650,374,089 |   | 6,386,558,435 |   | 7,418,626,278 |   |
|                                         |   |      |   |          |   |          |   |          |   |          |   |
| Operating costs and expenses:                |   |      |   |          |   |          |   |          |   |          |   |
| Raw materials and consumables                |   | 21        |   | 1,730,722,574 |   | 3,078,864,247 |   | 3,687,097,277 |   | 4,282,932,197 |   |
| Personnel costs                              |   | 22        |   | 439,313,006   |   | 591,973,489   |   | 624,772,247   |   | 725,735,442   |   |
| Depreciation and amortization                |   |      |   | 613,600,697   |   | 664,691,413   |   | 739,540,618   |   | 859,050,382   |   |
| Other external suppliers and services        |   | 23        |   | 368,544,069   |   | 651,230,186   |   | 675,069,959   |   | 784,161,264   |   |
| Own work capitalized                         |   | 24        |   | (229,071,807  | )      | (232,518,745  | )      | (241,769,257  | )      | (280,839,169  | )      |
| Concession and power-generation rental costs |   | 30        |   | 132,636,656   |   | 149,114,156   |   | 158,176,302   |   | 183,737,592   |   |
| Provisions                                   |   | 25        |   | 105,090,647   |   | 115,986,158   |   | 100,645,395   |   | 116,909,691   |   |
| Taxes other than income taxes                |   |      |   | 9,133,084     |   | 13,747,620    |   | 16,634,503    |   | 19,322,639    |   |
| Hydrological correction                      |   | 18        |   | (35,408,665   | )      | —        |   | —        |   | —        |   |
| Other operating income, net                  |   | 26        |   | (12,431,929   | )      | (56,246,884   | )      | (22,312,195   | )      | (25,917,846   | )      |
| Total operating costs and expenses           |   |      |   | 3,122,128,322 |   | 4,976,841,640 |   | 5,737,854,849 |   | 6,665,092,192 |   |
| Operating income                             |   |      |   | 724,364,939   |   | 673,532,449   |   | 648,703,586   |   | 753,534,086   |   |
| Other Expenses (Income):                     |   |      |   |          |   |          |   |          |   |          |   |
| Interest and related expenses                |   | 27        |   | 291,704,935   |   | 456,754,831   |   | 604,564,061   |   | 702,261,613   |   |
| Interest and related income                  |   | 28        |   | (116,876,667  | )      | (251,421,544  | )      | (381,720,639  | )      | (443,406,694  | )      |
| Other non-operating expenses (income), net   |   | 29        |   | (288,792,516  | )      | (125,989,416  | )      | 138,938,784   |   | 161,391,292   |   |
| Total other expenses                         |   |      |   | (113,964,248  | )      | 79,343,871    |   | 361,782,206   |   | 420,246,211   |   |
| Income before income taxes                   |   | 32        |   | 838,329,187   |   | 594,188,578   |   | 286,921,380   |   | 333,287,875   |   |
| Provision for income taxes                   |   |      |   | (312,641,275  | )      | (202.952.586  | )      | (171,739,322  | )      | (199,492,396  | )      |
| Net income before minority interest          |   |      |   | 525,687,912   |   | 391,235,992   |   | 115,182,058   |   | 133,795,479   |   |
| Minority interest                            |   |      |   | 23,285,856    |   | 59,558,724    |   | 220,033,768   |   | 255,591,224   |   |
| Net income for the year                      |   |      |   | 548,973,768   |   | 450,794,716   |   | 335,215,826   |   | 389,386,703   |   |
| Basic and diluted net income  per share      |   |      |   | 0.19          |   | 0.15          |   | 0.11          |   | 0.13          |   |

 

 

Theaccompanying notes are an integral part of the consolidated financialstatements

 

F-2

----

 

**EDP –ELECTRICIDADE DE PORTUGAL, S.A. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS AS OFDECEMBER 31, 2001 AND 2002**

 

(Amounts stated in euros – EUR and U.S. dollars – US$)

 
|                                                   |   | **Notes** |   | **2001**       |   | **2002**       |   | **2002**       |   |
|--------------------------------------------------------|--------|-----------|--------|----------------|--------|----------------|--------|----------------|--------|
|                                                   |   |      |   | **EUR**        |   | **EUR**        |   | **US$**        |   |
| **Assets**                                             |   |      |   |           |   |           |   |           |   |
| Current Assets:                                        |   |      |   |           |   |           |   |           |   |
| Cash and cash equivalents                              |   |      |   | 34,385,781     |   | 213,972,719    |   | 248,550,710    |   |
| Accounts  receivable – trade, net                 |   | 4         |   | 936,556,798    |   | 970,859,602    |   | 1,127,750,514  |   |
| Accounts  receivable – other, net                 |   | 5         |   | 446,451,644    |   | 740,543,008    |   | 860,214,758    |   |
| Inventories                                            |   | 6         |   | 109,036,539    |   | 150,305,029    |   | 174,594,322    |   |
| Prepaid expenses and other current assets              |   |      |   | 3,657,770      |   | 1,771,704      |   | 2,058,012      |   |
| Total current  assets                                  |   |      |   | 1,530,088,532  |   | 2,077,452,062  |   | 2,413,168,316  |   |
| Long-term  receivables, net                            |   | 7         |   | 102,851,979    |   | 260,583,901    |   | 302,694,259    |   |
| Investments, net                                       |   | 8         |   | 3,023,556,627  |   | 1,965,984,154  |   | 2,283,687,193  |   |
| Fixed assets,  net                                     |   | 9         |   | 9,843,777,976  |   | 11,204,237,202 |   | 13,014,841,934 |   |
| Other assets,  net                                     |   | 10        |   | 1,732,867,673  |   | 2,616,932,462  |   | 3,039,828,749  |   |
| Total assets                                           |   |      |   | 16,233,142,787 |   | 18,125,189,781 |   | 21,054,220,451 |   |
|                                                   |   |      |   |           |   |           |   |           |   |
| **Liabilities and shareholders’  equity**         |   |      |   |           |   |           |   |           |   |
| Current  liabilities:                                  |   |      |   |           |   |           |   |           |   |
| Short term debt  and current portion of long term debt |   | 15        |   | 1,744,344,470  |   | 1,887,033,693  |   | 2,191,978,338  |   |
| Accounts payable  – trade                         |   | 11        |   | 755,352,361    |   | 1,018,570,449  |   | 1,183,171,434  |   |
| Accounts payable  – other                         |   | 12        |   | 104,935,924    |   | 173,676,538    |   | 201,742,667    |   |
| Accrued expenses                                       |   | 13        |   | 213,255,577    |   | 294,498,579    |   | 342,089,549    |   |
| Taxes payable                                          |   | 14        |   | 196,685,584    |   | 49,752,219     |   | 57,792,178     |   |
| Deferred revenue                                       |   | 17        |   | 15,761,196     |   | 94,854,620     |   | 110,183,127    |   |
| Total current  liabilities                             |   |      |   | 3,030,335,112  |   | 3,518,386,098  |   | 4,086,957,293  |   |
| Long term debt                                         |   | 15        |   | 4,054,779,321  |   | 6,107,041,911  |   | 7,093,939,884  |   |
| Accrued pension  and post retirement liabilities       |   | 16        |   | 683,888,000    |   | 608,256,000    |   | 706,550,170    |   |
| Deferred revenue  and other liabilities                |   | 17        |   | 1,739,159,274  |   | 2,008,013,259  |   | 2,332,508,202  |   |
| Hydrological  correction account                       |   | 18        |   | 387,506,424    |   | 324,111,266    |   | 376,487,647    |   |
| Total liabilities                                      |   |      |   | 9,895,668,131  |   | 12,565,808,534 |   | 14,596,443,196 |   |
| Minority interest                                      |   |      |   | 240,716,932    |   | 65,199,165     |   | 75,735,350     |   |
| Shareholders’  equity:                            |   | 19        |   |           |   |           |   |           |   |
| Share capital                                          |   |      |   | 3,000,000,000  |   | 3,000,000,000  |   | 3,484,800,000  |   |
| Own shares                                             |   |      |   | (33,095,202    | )      | (43,493,459    | )      | (50,522,002    | )      |
| Fair value and other  valuation reserves               |   |      |   | 2,035,508,786  |   | 671,538,267    |   | 780,058,851    |   |
| Legal reserve                                          |   |      |   | 221,187,438    |   | 243,727,440    |   | 283,113,794    |   |
| Other reserves                                         |   |      |   | 78,732,984     |   | 78,732,984     |   | 91,456,234     |   |
| Retained  earnings                                     |   |      |   | 343,629,002    |   | 1,208,461,024  |   | 1,403,748,325  |   |
| Net income for  the year                               |   |      |   | 450,794,716    |   | 335,215,826    |   | 389,386,703    |   |
| Shareholders’  equity                             |   |      |   | 6,096,757,724  |   | 5,494,182,082  |   | 6,382,041,905  |   |
| Total  liabilities and shareholders’ equity       |   |      |   | 16,233,142,787 |   | 18,125,189,781 |   | 21,054,220,451 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements

 

F-3

----

 

**EDP –ELECTRICIDADE DE PORTUGAL, S.A. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002**

 

(Amountsstated in euros – EUR)

 
|                                       |   | **Share  Capital** |   | **Own  shares** |   | **Fair value  and  other valuation  reserves** |   | **Legal  reserve** |   | **Other  reserves** |   | **Retained  earnings** |   | **Net  Income** |   | **Total**     |   |
|--------------------------------------------|--------|--------------------|--------|-----------------|--------|------------------------------------------------|--------|--------------------|--------|---------------------|--------|------------------------|--------|-----------------|--------|---------------|--------|
| Balances at January 1, 2000                |   | 3,000,000,000      |   | (5,851,737      | )      | 2,052,453,581                                  |   | 168,041,770        |   | 66,263,041          |   | 265,040,252            |   | 513,936,039     |   | 6,059,882,946 |   |
| Dividend distribution (Eur 0.7 per share)  |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | 0                      |   | (418,990,234    | )      | (418,990,234  | )      |
| Net income distribution to management      |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | (613,457               | )      | (457,896        | )      | (1,071,353    | )      |
| Net income distribution to employees       |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | (17,274,538            | )      | —          |   | (17,274,538   | )      |
| Transfer to reserves                       |   | —             |   | —          |   | 27,794,401                                     |   | 25,696,820         |   | —              |   | 40,996,688             |   | (94,487,909     | )      | —        |   |
| Other                                      |   | —             |   | (2,186,735      | )      | 53,152,094                                     |   | —             |   | 12,469,943          |   | (30,226,099            | )      | —          |   | 33,209,203    |   |
| Net income for the year                    |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | —                 |   | 548,973,768     |   | 548,973,768   |   |
| Balances at December 31, 2000              |   | 3,000,000,000      |   | (8,038,472      | )      | 2,133,400,076                                  |   | —             |   | 78,732,984          |   | 257,922,846            |   | 548,973,768     |   | 6,204,729,792 |   |
| Dividend distribution (Eur 0.14 per share) |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | —                 |   | (418,990,234    | )      | (418,990,234  | )      |
| Net income distribution to management      |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | —                 |   | (640,556        | )      | (640,556      | )      |
| Net income distribution to employees       |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | —                 |   | —          |   | —        |   |
| Transfer to reserves                       |   | —             |   | —          |   | 10                                             |   | 27,448,848         |   | —              |   | 101,894,120            |   | (129,342,978    | )      | —        |   |
| Other                                      |   | —             |   | (25,056,730     | )      | (97,891,300                                    | )      | —             |   | —              |   | (16,187,964            | )      | —          |   | (139,135,994  | )      |
| Net income for the year                    |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | —                 |   | 450,794,716     |   | 450,794,716   |   |
| Balances at December 31, 2001              |   | 3,000,000,000      |   | (33,095,202     | )      | 2,035,508,786                                  |   | 221,187,438        |   | 78,732,984          |   | 343,629,002            |   | 450,794,716     |   | 6,096,757,724 |   |
| Dividend distribution (Eur 0.11 per share) |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | —                 |   | (339,000,000    | )      | (339,000,000  | )      |
| Net income distribution to employees       |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | —                 |   | (22,072,804     | )      | (22,072,804   | )      |
| Transfer to reserves                       |   | —             |   | —          |   | (796,280,367                                   | )      | 22,540,002         |   | —              |   | 863,462,277            |   | (89,721,912     | )      | —        |   |
| Other                                      |   | —             |   | (10,398,257     | )      | (567,690,152                                   | )      | —             |   | —              |   | 1,369,745              |   | —          |   | (576,718,664  | )      |
| Net income for the year                    |   | —             |   | —          |   | —                                         |   | —             |   | —              |   | —                 |   | 335,215,826     |   | 335,215,826   |   |
| Balances at December 31, 2002              |   | 3,000,000,000      |   | (43,493,459     | )      | 671,538,267                                    |   | 243,727,440        |   | 78,732,984          |   | 1,208,461,024          |   | 335,215,826     |   | 5,494,182,082 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements

 

F-4

----

 

**EDP –ELECTRICIDADE DE PORTUGAL, S.A. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED**

**DECEMBER 31, 2000, 2001 AND 2002**

** **

(Amountsstated in euros – EUR and U.S. dollars – US$)

 
|                                                                              |   | **2000**      |       | **2001**       |       | **2002**       |       | **2002**       |       |
|-----------------------------------------------------------------------------------|--------|---------------|------------|----------------|------------|----------------|------------|----------------|------------|
|                                                                              |   | **EUR**       |       | **EUR**        |       | **EUR**        |       | **US$**        |       |
| **Cash Flow from Operating Activities**                                           |   |          |       |           |       |           |       |           |       |
| Net income for  the year                                                          |   | 548,973,768   |       | 450,794,716    |       | 335,215,826    |       | 389,386,703    |       |
| Adjustments to  reconcile net income to net cash provide by operating activities: |   |          |       |           |       |           |       |           |       |
| Depreciation and  amortization                                                    |   | 613,600,697   |       | 664,691,413    |       | 739,540,618    |       | 859,050,382    |       |
| Provisions                                                                        |   | 98,764,971    |       | 213,174,294    |       | 101,216,854    |       | 117,573,498    |       |
| Hydrological  correction account                                                  |   | (35,408,665   | )          | (47,465,630    | )          | —         |       | —         |       |
| Losses (Gains) on  disposal of fixed assets and investments                       |   | (205,472,087  | )          | (25,046,127    | )          | (11,932,584    | )          | (13,860,890    | )          |
| Interest and  related income                                                      |   | (80,677,168   | )          | (103,367,942   | )          | (256,951,359   | )          | (298,474,699   | )          |
| Interest and  related expenses                                                    |   | 282,327,321   |       | 448,911,468    |       | 598,335,487    |       | 695,026,502    |       |
| Other, net                                                                        |   | (203,887,880  | )          | (422,371,620   | )          | (347,858,425   | )          | (404,072,346   | )          |
| Changes in  operating assets and liabilities:                                     |   |          |       |           |       |           |       |           |       |
| Accounts  receivable-trade                                                        |   | 46,114,978    |       | (302,086,262   | )          | 4,176,322      |       | 4,851,216      |       |
| Accounts  receivable-other                                                        |   | (30,069,502   | )          | (52,031,231    | )          | (131,684,695   | )          | (152,964,942   | )          |
| Inventories                                                                       |   | (9,085,185    | )          | 7,114,511      |       | (17,550,361    | )          | (20,386,499    | )          |
| Prepaid expenses  and other assets                                                |   | 168,194,342   |       | 174,376,375    |       | (216,953,545   | )          | (252,013,238   | )          |
| Long term  receivables                                                            |   | 121,348,390   |       | 3,092,627      |       | 3,081,747      |       | 3,579,757      |       |
| Accounts  payable-trade                                                           |   | 24,333,850    |       | 135,617,491    |       | 109,251,482    |       | 126,906,521    |       |
| Accounts  payable-other                                                           |   | (144,701,873  | )          | 35,791,596     |       | (111,488,059   | )          | (129,504,529   | )          |
| Accrued expenses                                                                  |   | (1,495,227    | )          | 18,866,753     |       | 60,071,054     |       | 69,778,536     |       |
| Taxes payable                                                                     |   | (28,675,467   | )          | 143,417,927    |       | (56,381,989    | )          | (65,493,318    | )          |
| Deferred revenue  and other liabilities                                           |   | 18,135,718    |       | (108,086,400   | )          | 121,516,578    |       | 141,153,657    |       |
| Customer  deposits                                                                |   | (41,607,641   | )          | 3,185,189      |       | (1,862,463     | )          | (2,163,437     | )          |
| Distribution to  employees and management                                         |   | (18,759,788   | )          | (17,405,403    | )          | (22,072,804    | )          | (22,072,804    | )          |
| Net cash  provided by operating activities                                        |   | 1,121,953,552 |       | 1,221,173,745  |       | 897,669,684    |       | 1,042,733,105  |       |
|                                                                              |   |          | ** ** |           | ** ** |           | ** ** |           | ** ** |
| **Cash Flows From Investing  Activities**                                         |   |          |       |           |       |           |       |           |       |
| Cash receipts  resulting from:                                                    |   |          |       |           |       |           |       |           |       |
| Investments and  long-term receivables                                            |   | 337,373,520   |       | 175,839,494    |       | 193,377,110    |       | 224,626,851    |       |
| Fixed assets                                                                      |   | 4,647,115     |       | 5,710,242      |       | 77,603,250     |       | 90,143,935     |       |
| Fixed assets  subsidies                                                           |   | 980,861       |       | 132,106,172    |       | 56,447,773     |       | 65,569,733     |       |
| Interest                                                                          |   | 5,333,736     |       | —         |       | 4,083,485      |       | 4,743,376      |       |
| Dividends                                                                         |   | 23,076,645    |       | 16,831,123     |       | 40,041,771     |       | 46,512,521     |       |
| Disposal of  subsidiaries                                                         |   | 477,294,720   |       | —         |       | 315,000,000    |       | 365,904,000    |       |
|                                                                              |   | 848,706,597   |       | 330,487,031    |       | 686,553,389    |       | 797,500,416    |       |
|                                                                              |   |          |       |           |       |           |       |           |       |
| Payments  resulting from:                                                         |   |          |       |           |       |           |       |           |       |
| Investments and  long-term receivables                                            |   | 889,880,892   |       | 734,090,747    |       | 55,510,845     |       | 64,481,398     |       |
| Fixed assets                                                                      |   | 545,621,637   |       | 709,201,206    |       | 931,346,485    |       | 1,081,852,077  |       |
| Other assets                                                                      |   | 156,387,766   |       | 130,178,571    |       | 42,980,565     |       | 49,926,224     |       |
| Acquisition of  subsidiaries                                                      |   | 170,932,687   |       | —         |       | 798,123,792    |       | 927,100,597    |       |
|                                                                              |   | 1,762,822,982 |       | 1,573,470,524  |       | 1,827,961,687  |       | 2,123,360,296  |       |
| Net cash flows  used in investing activities                                      |   | (914,116,385  | )          | (1,242,983,493 | )          | (1,141,408,298 | )          | (1,325,859,880 | )          |

 

Theaccompanying notes are an integral part of the consolidated financial statements

 

F-5

----

 

**EDP –ELECTRICIDADE DE PORTUGAL, S.A. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED**

**DECEMBER 31, 2000, 2001 AND 2002**

 

(Amountsstated in euros – EUR and U.S. dollars – US$)

 
|                                                      |   | **2000**       |   | **2001**       |   | **2002**       |   | **2002**       |   |
|-----------------------------------------------------------|--------|----------------|--------|----------------|--------|----------------|--------|----------------|--------|
|                                                      |   | **EUR**        |   | **EUR**        |   | **EUR**        |   | **US$**        |   |
| **Cash Flows From Financing  Activities**                 |   |           |   |           |   |           |   |           |   |
| Cash receipts  resulting from:                            |   |           |   |           |   |           |   |           |   |
| Debt                                                      |   | 4,060,982,198  |   | 4,639,262,230  |   | 12,905,665,780 |   | 14,991,221,370 |   |
|                                                      |   |           |   |           |   |           |   |           |   |
| Payments resulting  from:                                 |   |           |   |           |   |           |   |           |   |
| Debt                                                      |   | 3,992,235,867  |   | 4,040,265,379  |   | 11,884,707,994 |   | 13,805,276,806 |   |
| Interest                                                  |   | 130,745,409    |   | 254,104,230    |   | 375,733,979    |   | 436,452,590    |   |
| Dividends                                                 |   | 418,261,709    |   | 415,921,535    |   | 337,674,939    |   | 392,243,209    |   |
| Acquisition of  own shares                                |   | 2,186,740      |   | 25,056,730     |   | 10,398,257     |   | 12,078,615     |   |
|                                                      |   | 4,543,429,724  |   | 4,735,347,874  |   | 12,608,515,169 |   | 14,646,051,220 |   |
| Net cash flows  used in financing activities              |   | (482,447,526   | )      | (96,085,644    | )      | 297,150,611    |   | 345,170,150    |   |
|                                                      |   |           |   |           |   |           |   |           |   |
| Net increase in  cash and equivalents                     |   | (274,610,359   | )      | (117,895,393   | )      | 53,411,997     |   | 62,043,375     |   |
| Effect of  exchange rate changes on cash and equivalents  |   | 11,921         |   | (9,681,089     | )      | 7,857,315      |   | (9,127,056     | )      |
| Cash and  equivalents at the beginning of the year        |   | (66,352,246    | )      | (340,950,684   | )      | (468,527,165   | )      | (544,241,155   | )      |
| Cash and  equivalents at the end of the year              |   | (340,950,684   | )      | (468,527,165   | )      | (407,257,853   | )      | (491,324,836   | )      |
|                                                      |   |           |   |           |   |           |   |           |   |
| **Cash and equivalents consist of:**                      |   |           |   |           |   |           |   |           |   |
| Cash and cash  equivalents                                |   | 57,690,611     |   | 34,385,781     |   | 213,972,719    |   | 248,550,710    |   |
| Bank overdrafts                                           |   | (398,641,295   | )      | (502,912,946   | )      | (621,230,572   | )      | (721,621,432   |   |
|                                                      |   | (340,950,684   | )      | (468,527,165   | )      | (407,257,853   | )      | (473,070,722   | )      |
|                                                      |   |           |   |           |   |           |   |           |   |
| **Non-Cash Investing Activities:**                        |   |           |   |           |   |           |   |           |   |
| Fixed assets  received from customers                     |   | 52,787,876     |   | 69,533,098     |   | 54,095,191     |   | 62,836,974     |   |
|                                                      |   |           |   |           |   |           |   |           |   |
| **Cash Flows From Operating  Activities - Direct method** |   |           |   |           |   |           |   |           |   |
| Receipts from  clients                                    |   | 3,833,890,798  |   | 5,350,306,083  |   | 6,215,764,280  |   | 7,220,231,788  |   |
| Payments to suppliers                                     |   | (1,836,131,767 | )      | (3,336,852,476 | )      | (4,085,818,487 | )      | (4,746,086,754 | )      |
| Payments to  employees                                    |   | (455,244,566   | )      | (632,240,550   | )      | (685,791,498   | )      | (796,615,404   | )      |
| Payments of  concession rents                             |   | (132,636,656   | )      | (149,114,156   | )      | (158,176,302   | )      | (183,737,592   | )      |
| Payments  relating to income taxes                        |   | (391,881,007   | )      | (111,607,279   | )      | (277,444,222   | )      | (322,279,208   | )      |
| Other receipts  relating to operating activities          |   | 347,470,691    |   | 380,109,307    |   | 327,966,277    |   | 380,965,627    |   |
| Other payments  relating to operating activities          |   | (243,513,941   | )      | (279,427,184   | )      | (438,830,364   | )      | (509,745,352   | )      |
| Cash flows  provided from operating activities            |   | 1,121,953,552  |   | 1,221,173,745  |   | 897,669,684    |   | 1,042,733,105  |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements

 

F-6

----

 

**EDP –Electricidade de Portugal, S.A. and Subsidiaries**

 

**1.****                   ORGANIZATIONAND BUSINESS**

 

**a)Introduction to business and activities**

 

The parent company, EDP –Electricidade de Portugal, S.A., (“EDP” or the “Company”), was formed in 1976as a result of the nationalization by the government of Portugal (the“Government”) and consequent merger of the main companies of the electricitysector in mainland Portugal.

 

In 1994, as determined byDecree Law 7/91 and 131/94 the Company was restructured as a Group by splittingit into new companies wholly owned, directly or indirectly, by EDP.

 

The activities of theGroup are now centered in the generation, distribution and sales ofelectricity, distribution and sales of gas, telecommunications, informationtechnologies, as well as other complementary and the related areas such aswater, engineering, laboratory research, professional training, and real estatemanagement.

 

The shares of EDP arelisted on Lisbon Euronext and NYSE — New York Stock Exchange. They also form anactive part in the future contracts market of the Lisbon Euronext.

 

**b)Electricity sector in the Iberian Peninsula**

 

In Portugal the NationalElectricity System (SEN) is based on the co-existence of a Public ServiceElectricity System (SEP) with an Independent Electricity System (SEI). SEI iscomposed of the Non-Binding Electricity System (SENV) and the Producers inSpecial Regime (PRE). The SEP is made up of the National Transmission Grid(RNT), operated by REN (under a concession contract which granted SEPmanagement to REN), the Binding Producers (connected to the RNT under long-termcontracts providing for exclusive to REN supply), and the Binding Distributorswho undertake to supply power to their customers in accordance with the tariffsand conditions laid down by the Electricity Sector’s Regulator (ERSE), in termsof applicable legislation and the Binding customers. The SENV is essentiallycomposed of Non-binding Producers and Non-binding Customers, who are entitledto use the SEP’s networks and for which they pay regulated tariffs. Through itssubsidiaries, the EDP Group plays a fundamental role within the entire SEN. TheGroup occupies a prominent position at the heart of the SEP, while the Group’sgenerating companies operate in the SEI.

 

In Spain, EDP owns40% of Hidrocantábrico, in which EDP also has operational management.Hidrocantábrico is the parent-company of a Spanish Group that has operations inthe electric sector (generation, transmission and distribution), gas(distribution) and telecommunications. The objective of the investment inHidrocantábrico is to integrate and consolidate EDP’s position in the Iberianelectricity market.

 

**c)Electricity sector in Brazil**

 

In Brazil, EDPestablishes and operates, generation, transmission and distribution ofelectricity. With regards to distribution, EDP owns 96.5% of Bandeirante andcontrols 99.97% of the share capital of IVEN, which in turn controls ESCELSAand ENERSUL. With regards to generation, EDP owns investments in Lageadohydroelectric plant (27.65%) and Fafen thermoelectric plant (79.6%). In a jointventure with Grupo Rede do Brasil, EDP won two concessions for the constructionof two new hydroelectric plants (Peixe Angical and Couto Magalhães). EDP participatesalso in the electricity trading market through it’s 100% owned subsidiaryEnertrade.

 

**d)Telecommunications**

 

EDP owns 56.025% of theshare capital of ONI, S.G.P.S. The other shareholders are BCP – Banco ComercialPortuguês, S.A. (a bank), Galp Energia, S.G.P.S., S.A. (a Portuguese oilcompany) and Brisa - Auto-estradas de Portugal, S.A (a Portuguese motorway operator). ONI operates fixednetwork voice, data, fiber rental and the Internet in the Portuguese and Spanish markets.

 

F-7

----

 

**e)Information Technology**

 

EDP owns 100% of Edinfor,which in turn owns 60% of ACE. Both are active in consulting, systemsintegration, project and applications outsourcing and IT infrastructures.

 

**f)Owners**

 

In December 31, 2002EDP’s shareholders are as follows (by percentage of ownership):

 
|                                                               |   | **%**  |   |
|--------------------------------------------------------------------|--------|--------|--------|
| Portuguese  government                                             |   | 18.96  |   |
| Parpública (100% Portuguese State owned)                      |   | 7.14   |   |
| Caixa Geral de Depósitos, S.A. (100% Portuguese State  owned) |   | 4.75   |   |
| Banco Comercial Português, S.A.                               |   | 5.06   |   |
| Iberdrola                                                          |   | 5.00   |   |
| Brisa – Autoestradas de Portugal, S.A.                        |   | 2.00   |   |
| Other  shareholders                                                |   | 56.51  |   |
| EDP – Own shares                                              |   | 0.58   |   |
| **Total**                                                          |   | 100.00 |   |

 

**g)Tariffs**

 

According to thePortuguese law, ERSE – Entidade Reguladora dos Serviços Energéticos (thePortuguese regulator), issues and supervises the application of regulations,and sets the tariffs in the binding sector - Public Service Electricity System**(SEP).In Brazil the same functions are established by the local regulator Aneel,Agência Nacional de Energia Electrica. In Spain the government determines thetariffs.

 

**h)****Concession regime for thedistribution of low-voltage electric power**

 

According to Portugueselaw, the concession right for the distribution of low-voltage electric power belongs tothe municipalities. EDP is authorized to develop low-voltage distributionthrough concession contracts with municipalities by paying a rent, however EDPis almost exclusively responsible for Portugal’s local electricitydistribution.

 

**i)****                     Public domainassets**

 

In Portugal certain ofthe assets necessary to the generation and distribution of electricity in thebinding sector belong to the Portuguese government. However, EDP has theauthority to operate and manage these assets in the binding sector only, andnever for any other purposes. In Brazil the assets used in the bindingdistribution business also cannot be sold, given, rented, or used as a warrant,without the authorization of the regulator. The Brazilian regulator hasspecified that the assets may be sold, but the income must be used in thedevelopment of the concession.

 

**2.****                    BASIS OFPRESENTATION**

 

The ConsolidatedFinancial Statements have been prepared from the accounting records of EDP andits subsidiary companies listed below. The Consolidated Financial Statementsare presented in accordance with generally accepted accounting principles inPortugal (“Portuguese GAAP”), except for the implementation of a new criteriafor the valuation of investments in other companies which are nowmark-to-market, and the reclassification of realized amount of the revaluationreserve to retained earnings, these accounting principles have beenconsistently applied. The Portuguese GAAP differs in certain significantrespects from generally accepted accounting principles in the United States ofAmerica (“U.S. GAAP”).  A description ofthese differences and their effects on consolidated net income andshareholders’ equity are set forth in Note 33. The financial statements also include certain 

 

F-8

----

 

reclassifications and additional disclosures in order to conform moreclosely to the form and content of financial statements required by theSecurities and Exchange Commission of the United States of America.

 

The preparation of thefinancial statements in****conformity with Portuguese GAAP, togetherwith the reconciliation to U.S. GAAP, requires management to make estimates andassumptions that affect the amounts reported in the financial statements andthe accompanying notes.  Some of themore significant estimates and assumptions relate to the hydrologicalcorrection account, depreciation and impairment of long lived assets, provisionfor employee retirement benefits and deferred taxes.  Actual results could differ from those estimates.

 

The Company consolidatesall subsidiary companies in which it holds direct or indirect voting rights ofmore than 50 percent except for insignificant subsidiaries which are accountedfor under the equity method. Subsidiary companies in which the company holdsmore than 20% and has a shareholder agreement for joint management areconsolidated by the proportional rate consolidation method. All significantintercompany accounts and transactions have been eliminated in the ConsolidatedFinancial Statements.

 

The companies whosefinancial statements are consolidated with the Company’s financial statements,together with the percentage of direct and indirect ownership interests, are asfollows:

 

F-9

----

 
|                                                                                                                                                        |   | **Percentage of ownership** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                                                                                        |   | **2000**                    |   | **2001** |   | **2002** |   |
| EDP – Gestão da Produção de Energia, S.A.                                                                                               |   | —                      |   | 100.00 |   | 100.00 |   |
| CPPE-Comp. Portuguesa de Produção de Electricidade,  S.A.                                                                                         |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| HDN-Energia do Norte, S.A                                                                                                                                   |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| HIDROCENEL-Energia do Centro, S.A                                                                                                                           |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| EDP – ENERGIA, S.A. (ex-HIDROTEJO – Hidroeléctrica do  Tejo, S.A)                                                                            |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| HIDRORUMO-Projecto e Gestão, S.A.                                                                                                                      |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| EDP Produção EM – Engenharia e Manutenção, S.A. (ex  –Proet – Estudos e Tecnologias)                                     |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| LABELEC-Estudos, Des. e Actividades Laboratoriais, S.A.                                                                                                     |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| ENERNOVA-Novas Energias, S.A.                                                                                                                               |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| EDP COGERAÇÃO – Produção de Electricidade e Calor, S.A                                                                             |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| ENERFIN – Sociedade de Eficiência Energética, S.A.  (ex – ECONOLER – Sociedade de Eficiência Energética, S.A.) |   | 74.88                       |   | 74.88 |   | 74.88 |   |
| O&M Serviços –Operação e Manutenção Indústrial, SA  (ex-SEFLOR)                                                      |   | 60.00                       |   | 60.00 |   | 60.00 |   |
| TER – Termoeléctrica do Ribatejo, S.A.                                                                                                            |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| SOPORGEN                                                                                                                                                    |   | 82.00                       |   | 82.00 |   | 82.00 |   |
| HIDROBASTOS                                                                                                                                                 |   | 60.00                       |   | 60.00 |   | 60.00 |   |
| ENERGIN Azóia                                                                                                                                          |   | 65.00                       |   | 60.00 |   | 65.00 |   |
| HidrOem – Gestão, Operação e  Manut. de Centrais Eléctricas, S.A                                                                   | — |                        | 100.00 |   | 100.00 |   |
| TERGEN – Operação e Manut. de Centrais Termoeléctricas,  S.A                                                                            |   | —                      |   | 79.99 |   | 79.99 |   |
| EDP Produção Bioeléctrica,S.A.                                                                                                               |   | —                      |   | — |   | 100.00 |   |
| Enerpro-Serviços de Produção e Engenharia, LDA                                                                                               |   | —                      |   | — |   | 100.00 |   |
| EDP Distribuição, S.A.                                                                                                                            |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| EDP – Serviços de Gestão de Frotas e Instalações e  Logística, S.A.                                                           |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| EDP ÁGUAS – Gestão de Águas e Saneamento, S.A.                                                                                          |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| EDIPOMBAL – Imobiliária, S.A.                                                                                                                     |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| MRH-Mudança e Recursos Humanos, S.A.                                                                                                                   |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| SÃVIDA-Medicina Apoiada, S.A                                                                                                                           |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| EDALPRO-Imobiliária, Lda                                                                                                                               |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| Electricidade de Portugal Internacional, S.G.P.S., S.A  (ex-EDP – Internacional, S.A.)                                                                 |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| EDP – Imobiliária, SA.                                                                                                                            |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| VALORÁGUA – Água e Saneamento de Portugal, SA                                                                                                |   | 50.00                       |   | 100.00 |   | 100.00 |   |
| Internel – Serviços de Consultadoria Internacional,  S.A.                                                                                         |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| Central-e – Informação e Comércio Informático, S.A.                                                                                |   | —                      |   | 52.00 |   | 52.00 |   |
| EDP Participações, S.G.P.S., S.A.                                                                                                                 |   | —                      |   | 100.00 |   | 100.00 |   |
| SCS – Serviços Complementares de Saúde, S.A.                                                                                                 |   | —                      |   | 100.00 |   | 100.00 |   |
| EDP Valor – Gestão Integrada de Serviços, S.A.                                                                                               |   | —                      |   | — |   | 100.00 |   |
| EDP Estudos e Consultoria, SA                                                                                                                               |   | —                      |   | — |   | 100.00 |   |
| EDP Serviner – Serviços de Energia, S.A.                                                                                                          |   | —                      |   | — |   | 100.00 |   |
| EDP Finance BV                                                                                                                                              |   | —                      |   | — |   | 100.00 |   |
| EDP Irlanda                                                                                                                                                 |   | —                      |   | — |   | 100.00 |   |

 

F-10

----

 
|                                                                                     |   | **Percentage of ownership** |   |
|------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                     |   | **2000**                    |   | **2001** |   | **2002** |   |
| Balwerk, Lda                                                                             |   | —                      |   | 100.00 |   | 100.00 |   |
| EDP Brasil, S.A.                                                                         |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| ENERTRADE – Comercializadora  de Energia, S.A.                                      |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| EBE – Empresa Bandeirante de  Energia (original)*                                   |   | 53.96                       |   | — |   | — |   |
| EBE – Empresa Bandeirante de  Energia (post-split)                                  |   | —                      |   | 96.48 |   | 96.50 |   |
| EDP Lajeado Energia, S.A.                                                                |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| Energest, S.A. (ex-ENERGEN)                                                              |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| ENERCORP (ex-EDP Brasil,  Serviços Corporativos, Lda)                               |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| ENERPAULO - Energia Paulista,  Lda                                                       |   | 100.00                      |   | 100.00 |   | — |   |
| EDP 2000 - Participações, Lda                                                  |   | —                      |   | — |   | 100.00 |   |
| EDP Investimentos, Ltda                                                                  |   | —                      |   | — |   | 100.00 |   |
| Aphelion Investment Corporation                                                          |   | —                      |   | — |   | 100.00 |   |
| Enerpeixe, SA                                                                            |   | —                      |   | — |   | 94.80 |   |
| Enercouto, SA                                                                            |   | —                      |   | — |   | 99.90 |   |
| FAFEN Energia, S.A.                                                                      |   | —                      |   | 80.00 |   | 76.60 |   |
| INVESTCO                                                                                 |   | —                      |   | 10.49 |   | 14.36 |   |
| ONI – Operadora Nacional de  Interactivos, S.G.P.S., S.A.                           |   | 67.50                       |   | 56.03 |   | 56.03 |   |
| ONITELECOM-Infocomunicações,  SA                                               |   | 67.50                       |   | 56.03 |   | 56.03 |   |
| ONI Grandes Redes –  Infocomunicações, S.A.                               |   | 67.50                       |   | 56.03 |   | 56.03 |   |
| ONI SOLUTIONS (ex-COMNEXO,  SA).                                                         |   | 67.50                       |   | 56.03 |   | 56.03 |   |
| OPTEP – S.G.P.S., S.A.                                                              |   | 100.00                      |   | 100.00 |   | — |   |
| 093X – Telecomunicações  Celulares, S.A.                                  |   | 100.00                      |   | 100.00 |   | — |   |
| ONI ONE – Infocomunicações,  S.A.                                         |   | 67.50                       |   | 56.03 |   | 56.03 |   |
| ONI WAY – Infocomunicações,  S.A.                                         |   | 37.13                       |   | 38.10 |   | 39.09 |   |
| ONI WEB – Infocomunicações,  S.A.                                         |   | 67.50                       |   | 56.03 |   | 56.03 |   |
| ONI Açores – Infocomunicações,  S.A.                                 |   | 40.50                       |   | 33.62 |   | 33.62 |   |
| ONI Madeira –  Infocomunicações, S.A.                                     |   | 47.50                       |   | 39.22 |   | 39.22 |   |
| Shopping Direct – Comércio  Electrónico, S.A.                             |   | 67.50                       |   | 56.03 |   | 56.03 |   |
| Actien Metropolitana, S.L.U.                                                             |   | —                      |   | 56.03 |   | — |   |
| Autor – Tecnologias  Multimédia, Lda.                                          |   | —                      |   | 56.03 |   | 56.03 |   |
| Brisatel –Telecomunicações,  S.A.                                         |   | —                      |   | 56.03 |   | 56.03 |   |
| Intercom Internet (Ex-CD Rapid)                                                          |   | —                      |   | 42.81 |   | 55.99 |   |
| Cidade Digital – Prod.  Divulgação Conteúdos Informáticos, S.A. |   | —                      |   | 33.62 |   | — |   |
| Comunitel Global, S.A.                                                                   |   | —                      |   | 55.52 |   | 55.99 |   |
| FCTE – Forum do Comércio,  Trans. Eléct. E Serviços Empr. S.A.       |   | —                      |   | 44.82 |   | 44.82 |   |
| Fonocom, S.A.                                                                            |   | —                      |   | 42.81 |   | 55.99 |   |
| Germinus Solutions, S.A.                                                                 |   | —                      |   | 44.55 |   | 45.86 |   |
| Germinus XXI, S.A.                                                                       |   | —                      |   | 44.55 |   | 44.77 |   |
| Grapes España                                                                       |   | —                      |   | 56.03 |   | — |   |
| Oni Multimédia – Serviços  Interactivos, S.A.                             |   | —                      |   | 56.03 |   | 56.03 |   |
| ONI Plataformas –  Infocomunicações, S.A.                                 |   | —                      |   | 56.03 |   | 56.03 |   |
| ONI Sistemas de  Informação-infocomunicações, SA.                    |   | —                      |   | 56.03 |   | 56.03 |   |
| Ruído Visual –  Telecomunicações Interactivas, S.A.                  |   | —                      |   | 53.23 |   | — |   |
| Tecnipublicationes España,  S.L.                                                    |   | —                      |   | 29.84 |   | 29.95 |   |
| Tecnipublicaciones en Red,  Tecnivia, S.L. (Ex- Tecnivia, S.A.)                          |   | —                      |   | 34.25 |   | 34.39 |   |
| TLD Integral, S.L.U.                                                                     |   | —                      |   | 56.03 |   | 56.03 |   |
| Smartlogik Iberia, SL                                                                    |   | —                      |   | — |   | 44.77 |   |
| EDINFOR-Sistemas Informáticos,  S.A                                                 |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| COPIDATA Industrial Gráfica e  Equipamentos, SA                                     |   | 99.12                       |   | 99.12 |   | 99.32 |   |
| COPIDATA Formulários e  Sistemas para a Informática, LDA.                      |   | 99.00                       |   | 99.00 |   | 99.40 |   |
| ESCRITOMÁQUINA, Racionalização  e Segurança, LDA.                    |   | 99.47                       |   | 99.47 |   | 99,59 |   |
| Edinfor Soluções Informáticas,  Lda (Ex-EDINFOR – BRASIL)            |   | 100.00                      |   | 100.00 |   | 100.00 |   |
| ACESI – Sistemas de  Informação, Ltda (Ex-Edinfor Mocambique)             |   | 100.00                      |   | 100.00 |   | 61.97 |   |

 

F-11

----

 
|                                                                                                               |   | **Percentage of ownership** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                                               |   | **2000**                    |   | **2001** |   | **2002** |   |
| MECARESOPRE                                                                                                        |   | 80.00                       |   | 80.00 |   | 80.00 |   |
| U Call – Atendimento a  clientes e Telemarketing, S.A.                                                        |   | —                      |   | 73.62 |   | 73.62 |   |
| ACE BI-Soluções para Gestão de  Clientes e Apoio à Decisão, SA                            |   | —                      |   | 60.00 |   | 60.00 |   |
| ACEBNET – BUSINESS NETWORKING  – Sistemas de Informação para Negócio Electrónico, SA |   | —                      |   | 60.00 |   | 60.00 |   |
| ACE QS – Qualidade em Sistemas  de Informação, SA                                                   |   | —                      |   | 60.00 |   | 60.00 |   |
| ACE, Holding, SGPS, SA                                                                                             |   | —                      |   | 60.00 |   | 60.00 |   |
| ACE Sistemas Comerciais  Informáticos, S.A.                                                                   |   | —                      |   | 60.00 |   | 60.00 |   |
| ACE Globa - Serviços de  Gestão, S.A. (ex – ACE Source, S.A.)                                       |   | —                      |   | 60.00 |   | 60.00 |   |
| CASE – Concep. e Arquit. de  Sol. Informáticas Estruturadas, S.A.                                        |   | —                      |   | 60.00 |   | 60.00 |   |
| CASE Edinfor ACE                                                                                                   |   | —                      |   | 60.00 |   | 60.00 |   |
| CASE Edinfor II, Sistemas de  Informação, S.A.                                                           |   | —                      |   | 60.00 |   | 60.00 |   |
| ACE Sistemas de Informação,  Ltda (ex-Casinfor Acessoria, Lda.)                                          |   | —                      |   | 59.62 |   | 60.00 |   |
| Casinfor Participações                                                                                   |   | —                      |   | 60.00 |   | — |   |
| Consulteam – Consultoria de  Gestão e Informática,S.A.                                              |   | —                      |   | 60.00 |   | 60.00 |   |
| InoveCase – Sol. Empres. em  Tecn. de Inf. e Comunicação, S.A.                                      |   | —                      |   | 48.00 |   | — |   |
| Inforsys                                                                                                           |   | —                      |   | 59.16 |   | — |   |
| Inovis – Sistemas de  Informação, S.A.                                                              |   | —                      |   | 60.00 |   | 60.00 |   |
| Integer – Informática de  Telecomunicações e Gestão, S.A.                                 |   | —                      |   | 60.00 |   | 60.00 |   |
| Onsource – Soluções  Informáticas, S.A.                                                        |   | —                      |   | 60.00 |   | 60.00 |   |
| Central Biz – Soluções de  Sistemas e Tecn. de Informação, S.A.                           |   | —                      |   | 30.60 |   | 30.60 |   |
| IT-Log, Logística e Gestão de  Tecnologias de Informação, S.A.                                 |   | —                      |   | 100.00 |   | 100.00 |   |
| IT-GEO, Tecnologias e  Informação Georeferenciadas, S.A.                                                 |   | —                      |   | — |   | 100.00 |   |
| No Limits Consulting –  Serviços em Sistemas de Informação, S.A.                               |   | —                      |   | 42.00 |   | 42.00 |   |
| Primitiva – Artesanato e  Turismo, S.A.                                                                       |   | —                      |   | 60.00 |   | 60.00 |   |
| Psi Doc – Prod. de Sist. de  Informação e Tratamento de Doc., S.A.                                  |   | —                      |   | 48.00 |   | 55.60 |   |
| Sigmaplano - Consuloria em  Sist. para o Apoio à Decisão , S.A.                                          |   | —                      |   | 39.00 |   | 39.00 |   |
| S-Tecno, Serviços em  Tecnologias de Informação, SA                                                 |   | —                      |   | 60.00 |   | 60.00 |   |
| S-Tecno Brasil, Lda.                                                                                               |   | —                      |   | 60.00 |   | 60.00 |   |
| Nection – Gestão e  Informática, S.A.                                                               |   | —                      |   | — |   | 48.00 |   |
| Case Internacional –  Consultoria, Gestão e Marketing, Lda                                               |   | —                      |   | — |   | 60.00 |   |
| ACE Consulting – Consult.,  Projectos e Tecn.de Informação, Ltda.                                   |   | —                      |   | — |   | 73.33 |   |
| Onalp – Soluções Informáticas  em Suporte à Decisão, Lda.                            |   | —                      |   | — |   | 39.00 |   |
| ACE Plus, Soluções  Informáticas, S.A.                                                              |   | —                      |   | — |   | 48.00 |   |
| ACE Healthcare – Sistemas de  Informação p/ apoio à Saúde, S.A.                           |   | —                      |   | — |   | 30.60 |   |
| EDP Chile                                                                                                          |   | —                      |   | 100.00 |   | — |   |
| Adygesinval                                                                                                        |   | —                      |   | 50.00 |   | — |   |
| Hidroeléctrica Del Cantábrico,  SA**                                                                     |   | —                      |   | — |   | 40.00 |   |
| AFFINIS-Serviços de  Assistência e Manutenção Global, SA***                                    |   | —                      |   | — |   | 45.00 |   |
| ESCELSA – Espírito Santo  Centrais Eléctricas, S.A.                                                 |   | 38.22                       |   | 38.22 |   | 52.25 |   |
| ENERSUL – Empresa Energética  de Mato Grosso do Sul, S.A.                                                |   | 24.92                       |   | 24.92 |   | 34.06 |   |
| IVEN, S.A.                                                                                                         |   | 73.12                       |   | 73.12 |   | 99.97 |   |
| Calibre                                                                                                            |   | —                      |   | — |   | 100.00 |   |
| 135 Participações , S.A.                                                                                 |   | —                      |   | — |   | 100.00 |   |
| Magistra Participações, S.A.                                                                             |   | —                      |   | — |   | 52.25 |   |

 

----

*                                         Duringthe year 2000, EBE has been consolidated on a proportionate consolidationbasis.

 

**                                  SinceJune 2002,  Hidroeléctrica Del Cantábrico is consolidated on a proportionateconsolidation basis.

 

***                           SinceDecember 2002, Affinis is consolidated on a proportionate consolidation basis.

 

The Company has accounted for its investments inaffiliates (companies in which it holds, directly or indirectly, less then 50%but more than 20% of the voting rights) by the equity method as follows:

 

F-12

----

 
|                                                                                         |   | **Percentage of ownership** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                         |   | **2000**                    |   | **2001** |   | **2002** |   |
| REN – Rede Eléctrica Nacional,  SA.**                                              |   | 30.00                       |   | 30.00 |   | 30.00 |   |
| EDEL-Empresa Editorial  Electrotécnica, Lda.                                            |   | 47.77                       |   | 47.77 |   | 47.77 |   |
| PORTSINES-Terminal  Multipurpose de Sines, S.A.                                              |   | 39.60                       |   | 39.60 |   | 39.60 |   |
| TANQUIPOR-Movimentação e  Armazenagem de Líquidos, S.A                        |   | 28.89                       |   | 28.89 |   | 28.89 |   |
| Bioellectrica                                                                                |   | —                      |   | — |   | 24.00 |   |
| BIZFIRST                                                                                     |   | —                      |   | — |   | 21.00 |   |
| Campos Envelopagem                                                                           |   | —                      |   | — |   | 30.00 |   |
| Carriço Cogeração                                                             |   | —                      |   | — |   | 35.00 |   |
| ACE-Sofgal, Servicios de  Software de Galicia, SA                                            |   | —                      |   | — |   | 30.00 |   |
| CBE-Centro de Biomassa para a  Energia                                                       |   | —                      |   | — |   | 24.70 |   |
| Ecogen-Serviços de Energia  Descentralizada, SA                                         |   | —                      |   | — |   | 34.99 |   |
| SHIPEC-South China Inter.P.Eng.                                                              |   | —                      |   | — |   | 24.00 |   |
| Geoterceira                                                                                  |   | —                      |   | — |   | 49.90 |   |
| CEM – Companhia de  Electricidade de Macau, SA. (via EDP Investimento, Lda and SOGESTE) |   | 21.95                       |   | 21.78 |   | 21.78 |   |
| Energia RE, S.A.                                                                             |   | 99.99                       |   | 99.99 |   | 99.99 |   |
| EDP Investimentos, Lda (ex-SPE  Macau)                                                       |   | 99.00                       |   | 99.00 |   | 99.00 |   |
| CERJ – Comp. De Electricidade  do Estado do Rio de Janeiro                              |   | 21.08                       |   | — |   | — |   |
| REDAL, SA                                                                                    |   | 29.00                       |   | — |   | — |   |
| EEGSA – Empresa de  Electricidade da Guatemala, SA. (via                                |   | —                      |   | — |   |   |   |
| DECA – Distribucion Electrica  Centroamericana, SA)                                     |   | 21.00                       |   | — |   | — |   |

 

----

**          Until June 30, 2000, REN was a 100%consolidated entity of EDP.  EffectiveJuly 1, 2000, EDP sold 70% of its ownership in REN to the Portuguesegovernment.  No gain or loss on thetransaction occurred, as the transaction was effected under terms required tobe applied in circumstances of the discontinuation of a concession contract.

 

Investments in othercompanies in which the Company’s investment is equal to or greater than 10% buthave neither been eliminated in the Consolidated Financial Statements noraccounted for by the equity method, consist of the following:

 
|                                                                             |   | **Percentage of ownership** |   |
|----------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                             |   | **2000**                    |   | **2001** |   | **2002** |   |
| VALORSUL, S.A.                                                                   |   | 11.00                       |   | 11.00 |   | 11.00 |   |
| TEJO ENERGIA, S.A.                                                               |   | 10.00                       |   | 10.00 |   | 10.00 |   |
| TURBOGÁS, S.A.                                                              |   | 10.00                       |   | 10.00 |   | 20.00 |   |
| GALP ENERGIA                                                                     |   | —                      |   | 14.27 |   | 14.27 |   |
| EDA-Eléctrica dos Açores                                               |   | 10.00                       |   | 10.00 |   | 10.00 |   |
| OPTIMUS                                                                          |   | 25.00                       |   | — |   | — |   |
| CCE – Centro para a  Conservação de Energia                       |   | 10.00                       |   | — |   | — |   |
| IMOTRON – Edifícios  Inteligentes, SA                                  |   | 15.00                       |   | 15.00 |   | — |   |
| EID – Emp. de Investigação e  Desenvol. de Electrónica, S.A. |   | 11.43                       |   | 11.43 |   | — |   |
| Carrying value of these investments                                              |   | 78,633,652                  |   | 331,393,170 |   | 359,134,919 |   |

** **

Investmentsin companies in which the Company’s investment is less than 20% or are heldexclusively for disposition, including these above, are accounted for at costless any provision for other than temporary impairment.

 

**Changesin subsidiaries during 2002**

 

On May 15, the block of shareholders tookcontrol in Hidrocantábrico (Spain), and as from June 1, it has beenconsolidated under proportional method (40%).

 

In October EDP gained control over the votingrights in ESCELSA and ENERSUL (Brazilian companies) since then they have beenfully consolidated.

 

In October EDP, S.G.P.S., S.A. bought 45% ofAffinis, and entered into a shareholders agreement which provided for jointmanagement since Affinis has been consolidated under the proportionalconsolidation method.

 

F-13

----

 

On March 22, EDP sold OPTEP, a wholly ownedsubsidiary holding 25% of Optimus through OPTEP’s wholly owned subsidiary 093X.

 

In December, EDP Chile was sold.

 

**Significantchanges resulting from entry to/exit from the Group**

 
|                      |   | **Hidrocantábrico (40%)** |   | **ESCELSA** |   | **ENERSUL** |   | **OPTEP**   |   |
|---------------------------|--------|--------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| ***Assets***              |   |                           |   |        |   |        |   |        |   |
| Intangible  assets        |   | 7,234,000                      |   | 8,240,032   |   | —      |   | (2,510,247  | )      |
| Tangible assets           |   | 695,743,200                    |   | 195,300,916 |   | 171,073,545 |   | (50,118     | )      |
| Investments               |   | 90,917,200                     |   | 201,203,927 |   | 2,508,890   |   | (94,415,175 | )      |
| Stocks                    |   | 24,009,600                     |   | 975,485     |   | 633,082     |   | —      |   |
| Long-term receivables     |   | 8,965,200                      |   | 77,051,724  |   | 51,216,595  |   | —      |   |
| Short-term receivables    |   | 161,852,800                    |   | 125,967,942 |   | 32,260,776  |   | (11,777     | )      |
| Cash and cash equivalents |   | 6,633,600                      |   | 82,865,032  |   | 3,008,890   |   | (493,708    | )      |
| Prepaid expenses          |   | 8,607,200                      |   | 74,150,700  |   |        |   | (752        | )      |
| Total Assets              |   | 1,003,962,800                  |   | 765,755,758 |   | 298,600,485 |   | (97,481,777 | )      |
| **Liabilities**           |   |                           |   |        |   |        |   |        |   |
| Provisions                |   | 26,192,000                     |   | 44,841,325  |   | 10,422,953  |   | —      |   |
| Long-term debt            |   | 89,407,200                     |   | 498,761,584 |   | 120,095,097 |   | —      |   |
| Short-term debt           |   | 444,256,000                    |   | 135,115,302 |   | 71,113,685  |   | (31,895,601 | )      |
| Deferred revenue          |   | 41,228,400                     |   | 2,058,728   |   | —      |   | (2,610,071  | )      |
| Total  Liabilities        |   | 601,083,600                    |   | 680,776,939 |   | 201,631,735 |   | (34,505,672 | )      |

 
|                                        |   | **Hidrocantábrico (40%)** |   | **ESCELSA** |   | **ENERSUL** |   |
|---------------------------------------------|--------|--------------------------------|--------|-------------|--------|-------------|--------|
| Electricity  sales                          |   | 51,358,000                     |   | 68,035,794  |   | 32,779,504  |   |
| Other income                                |   | (939,600                       | )      | 42,934,653  |   | 3,266,986   |   |
| Total income                                |   | 50,418,400                     |   | 110,970,447 |   | 36,046,490  |   |
|                                        |   |                           |   |        |   |        |   |
| Operating costs and  expenses               |   | (29,784,000                    | )      | (42,659,465 | )      | (18,795,735 | )      |
| Other expenses                              |   | (15,378,800                    | )      | (27,873,307 | )      | (30,682,921 | )      |
| Total expenses                              |   | (45,162,800                    | )      | (70,532,772 | )      | (49,478,656 | )      |
|                                        |   |                           |   |        |   |        |   |
|                                        |   |                           |   |        |   |        |   |
| Income before taxes and  minority interests |   | 5,255,600                      |   | 40,437,675  |   | (13,432,166 | )      |
|                                        |   |                           |   |        |   |        |   |
| Income tax                                  |   | (2,080,000                     | )      | 768,206     |   | —      |   |
| Minority interests                          |   | 132,000                        |   | 18,221,240  |   | (8,650,315  | )      |
|                                        |   |                           |   |        |   |        |   |
|                                        |   |                           |   |        |   |        |   |
| Net income of the year                      |   | 3,307,600                      |   | 22,984,640  |   | (4,781,851  | )      |

 

**3.****                   SIGNIFICANTACCOUNTING POLICIES**

 

**a)****                   Inventories**

 

Inventories are stated at the lower of cost or marketvalue. Cost is determined on the weighted average cost method.

 

**b)****                   Intangibleassets**

 

Intangible assets, statedwithin Other assets in the accompanying balance sheets, include cost lessamortization and include organization expenses (mainly the reorganization andincorporation costs of companies), research and development expenditures andconcession rights, trademarks and similar assets.

 

F-14

----

 

Intangible assets, except concession rights which areamortized over their life, are amortized over a period of three years.

 

**c)****                   Fixed assets**

 

(i)                  Fixedassets belonging to the Group

 

Fixed assets, exceptthose existing at the date of the restructuring in 1994, which are stated atthe amounts resulting from the valuation performed in 1992, are stated at therespective cost of acquisition or construction, net of accumulateddepreciations. Construction costs include financial costs and direct overheadcapitalized during the construction phase. Financial costs through 1995included exchange differences.

 

During 1999, theRegulator in the Portuguese electricity market approved the carrying value ofall generation and distribution fixed assets for remuneration under the newtariff regime.  The annual depreciationexpense for these fixed assets has been approved as a recoverable cost inaccordance with the new tariff regime on an annual basis.

 

Depreciation iscalculated on the straight-line basis using the following rates, which areestimated to depreciate assets during their economic lives.

 
|                                |   | **Years** |   |
|-------------------------------------|--------|-----------|--------|
| Buildings and  related improvements |   | 8-50      |   |
| Plant, machinery  and equipment:    |   |      |   |
| Hydroelectric generation            |   | 32-60     |   |
| Thermoelectric  generation          |   | 25-30     |   |
| Transmission                        |   | 30        |   |
| Distribution                        |   | 10-30     |   |
| Other plant and  equipment          |   | 5-10      |   |
| Vehicles and  transport equipment   |   | 4-25      |   |
| Administrative  equipment           |   | 4-10      |   |
| Foreign-exchange  differences       |   | 10-60     |   |
| Other fixed  assets                 |   | 10-25     |   |

 

Payments received fromcustomers and subsidies granted for the construction of the Group’s fixedassets are presented as deferred revenue on the balance sheet and amortized toincome on the same basis and rate of the related fixed assets. Thisamortization is included in Other non-operating expenses (income) (Note 29).

 

(ii)               Fixedassets held under concessions by EDP Distribuição

 

Generally, the concessionof low-voltage electricity distribution does not involve the sale of the cedingmunicipalities’ own fixed assets, which continue to remain their propertydespite the deployment thereof in the Group’s operations for the duration ofthe concession period.  Pursuant to thisarrangement, fixed assets held under concession are recognized and reflected inthe Group’s consolidated balance sheet, with a corresponding amount beingincluded as a long-term liability.

 

The concession-held fixedassets, and the related liability, are stated at the amounts resulting from thevaluation carried out during the 1992, net of accumulated depreciation.

 

Concession-held fixedassets are depreciated on the same basis and at the same rates as those appliedto the Group’s own assets, with the respective charge being offset in Othernon-operating expenses (income) in the statement of operations (Note 29) by thereduction of an equal amount of the related long-term liability to themunicipalities (included in Other liabilities - Note 18).

 

Current maintenance andrepairs expenditures on fixed assets, both belonging to the Group or held underconcession, are expensed in the year in which they are incurred.  Expenditures relating to major repairs andimprovements are treated as deferred costs.

 

F-15

----

 

**d)****                   Deferred costs**

 

Deferred costs statedwithin Other assets in the accompanying balance sheet, include amounts incurredin connection with the issuance of long-term debt and major repairs andimprovements to fixed assets. Debt issuance costs are amortized over the termof the bonds or long-term debt. Costs for major repairs and improvements areamortized over a maximum of six years.

 

**e)****                   Pensions, earlyretirements and medical benefits**

 

The Company and some ofits subsidiaries have a commitment to complement retirement and survivors’pensions to the extent that these are not covered by the Government’s socialsecurity plan. Employees may apply for early retirement, subject to certainconditions relating to applicable regulations namely pre-defined age and lengthof service requirements, being met.

 

Pension costs for definedbenefit plans are recorded using the projected unit credit method. Under thismethod, the cost of providing pensions is charged to the income statement so asto spread the regular cost over the service lives of employees in accordancewith the advice of qualified actuaries who carry out a full valuation of theplans every year.  The pensionobligation is measured as the present value of the estimated future cash outflowsusing interest rates of government securities that have terms to maturityapproximating the terms of the related liability.

 

Pension costs for definedcontribution plans are expensed to income as incurred.

 

Wherever post-retirementmedical assistance is also provided to retirees, the entitlement to thesebenefits is usually based on the employee remaining in service up to retirementage. The expected costs of these benefits are accrued over the period ofemployment, using an accounting method similar to that for defined benefitpension plans.  Independent qualifiedactuaries perform valuations of these obligations.

 

The assets of these plansare held in separate trustee-administered funds.  The pension plans are generally funded by payments from therelevant Group companies, taking into account the recommendations of theindependent qualified actuaries.

 

**f)****                     Accruedvacation pay and bonuses**

 

At the end of the monththe Company and some of its subsidiaries provides for bonuses earned but notyet paid and vacation pay earned but not yet taken.

 

**g)****                  Own workcapitalized**

 

Following specificcriteria, costs incurred by the Group in the construction of fixed assets(namely materials and personnel costs), are capitalized as part of their costs.

 

**h)****                  Statements ofcash flows**

 

The statements of cashflows are prepared using the direct and indirect methods.

 

Cash and cash equivalentspresented on the balance sheets represent highly liquid investments purchasedwith original maturities of three months or less. Cash and equivalents in thestatements of cash flows include cash and cash equivalents, net of bankoverdrafts.

 

**i)****                     Provision forincome taxes**

 

Income tax obligationscurrently payable are determined with reference to net results afteradjustments have been made to comply with the tax code in the relevantjurisdiction.  Temporary differencesbetween the

 

F-16

----

 

book and tax basis forassets and liabilities in the balance sheet are considered in computing theincome tax charge for the year.

 

**j)       Foreign currency translation**

 

The euro is the Company’sreporting currency.  Prior toJanuary 1, 2001, the Company’s reporting currency was Portuguese escudos.For convenience and to facilitate a comparison, these consolidated financialstatements have been restated from escudos to euros at the fixed rate ofexchange as of January 1, 1999 of PTE 200.482 = € 1.00. Whereescudo-denominated amounts for periods prior to January 1, 2001 have beenrounded, the restated euro amounts have been calculated by converting therounded escudo-denominated amounts into euros.

 

The Company and itssubsidiaries maintain their accounting records and financial statements intheir respective functional currencies. Certain of the Company’s receivablesand liabilities are denominated in different currencies, and exchange ratefluctuations will therefore affect the Company’s results of operations.

 

Transactions denominatedin different currencies are recorded in the functional currency using theexchange rate in effect at the date of the transactions.  Assets and liabilities denominated indifferent currencies are translated into the functional currency using theexchange rates in effect at the balance sheet date. Foreign exchange gains andlosses, except those capitalized to fixed assets prior to 1995, are included inincome.

 

Subsidiariesfinancial statements maintained in non-euro currencies are converted to eurosusing the year-end exchange rate for assets and liabilities and the averageexchange rate for income statement items. Conversion exchange differences arecharged to equity.

 

Thetranslation of the euro amounts into U.S. dollars is disclosed in theaccompanying financial statements solely for the convenience of the readers andhas been made at the rate of US$ 1.1616 to Euro 1.00, the exchange rate at June20, 2003. No representation is made that the escudo amounts could have been, orcould be, converted into U.S. dollars at that or any other rate.

 

**k)      Derivative financial instruments**

 

TheCompany uses interest rate swap agreements to manage the interest ratecharacteristics of its outstanding debt to a more desirable fixed or variablerate basis. EDP may also enter into non-euro currency swap agreements andnon-euro currency forward exchange agreements to minimize the risk of exchangerate fluctuations associated with non-euro denominated debt. Each interest rateand non-euro currency swap agreement relates to a specific debt.

 

Interestrate differentials to be paid or received as a result of interest rate swapagreements are accrued and recognized as an adjustment of interest expenserelated to the designated debt. Gains and losses on non-euro currency swapagreements and forward foreign currency exchange agreements are recognized overtheir duration and offset the effect of exchange rate fluctuations on thetranslation of the related debt. The fair values of interest rate, non-eurocurrency swap agreements and forward foreign currency exchange agreements arenot recognized in the financial statements.

 

**l)       Revenue and expense recognition**

 

(i)      General

 

Revenues from electricitysales are recognized when earned. Billings for electricity are made on a monthly basis throughout themonth.  Monthly billings are based onactual meter readings or an estimated consumption based on the historical dataof each consumer. Unbilled revenues from the billing cycle date to the end ofthe month are accrued based on the average recent consumption.

 

F-17

----

 

In Portugal, tariffs ofelectrical energy supplied to clients in the Binding Sector are determined bythe Regulator (ERSE). Tariffs for clients outside the Binding Sector arenegotiated and contracted on individual basis. Tariffs in the electricitydistribution business are subject to price cap mechanism. Thus, earnings aresubject to gross profit restriction and after being subject to confirmation orapproval by the regulators, are to be adjusted in future periods. We estimateamounts that are subject to future tariff adjustments and defer or accrue therecognition of the revenues of future periods. These amounts are stated asaccrued revenues or expenses in the accompanying balance sheet.

 

Expenses are recorded onthe accrual basis.

 

(ii)     Hydrologicalcorrection account

 

The hydrologicalcorrection account constitutes a legally mandated mechanism for compensatingthe variable costs of electric-power generation. In low rainfall years, thethermoelectric generating system is over-utilized and consequently, expenditureon fuel and electricity imports increases substantially. In years with abundantrainfall the opposite occurs. Tariffs can not be modified to take into accountthe changes in variable costs incurred resulting from hydrologicalconditions.  In this context and with aview to avoiding major distortions in operating results due to favorable orunfavorable hydrological conditions, the hydrological correction account isadjusted upwards or downwards based upon average hydrological conditions.

 

The annual changes in thehydrological correction account consist of the following:

 

•                  The differencebetween the economic costs of generating electric energy and the economicreference costs is charged to REN for inclusion in the Binding Sector costs(prior to June 2000 this difference was charged to the income statement);

 

•                  a financialcharge associated with the hydrological correction account’s accumulatedbalance;

 

•                  an adjustment,which may be either an income or an expense item, corresponding to the amountnecessary to make the expected balance, in a time scale of 10 years, equal toan adequate reference level.

 

The amount of theaccumulated balance and the movements during the year are approved by theGovernment on an annual basis.

 

**m)     Investments**

 

Investments in affiliatedcompanies in which EDP’s interest is equal or higher than 20% but less than50%, are recorded at cost and accounted for under the equity method. Thismethod requires that acquisition costs are allocated to the fair values ofidentifiable net assets being any residual amount accounted for as acquisitiongoodwill. This acquisition goodwill consists normally of concession rights,which are amortized over the concession periods. Further EDP’s interest in theprofit or loss is included in Interest and related income/expenses in theStatement of income.

 

Investment properties,except for those acquired before 1992 which are stated at the amounts resultedfrom the revaluation made then, are recorded ant stated at cost. Theseinvestments are amortized over the economic life of the related buildings.

 

Investments in othercompanies that are not trading investments are recorded at cost and stated atmarket value, and the difference to the acquisition cost is included in theFair value and other valuation reserve in the Shareholder’s equity.

 

Where an indication ofimpairment exists, any existing valuation reserve is reversed and the resultingcarrying amount of the investment is provided for and the related provisionincluded in Interest and related expenses in the Statement of income.

 

F-18

----

 

Other investments,including investments in other companies that are trading investments, arestated at fair value and the difference to the acquisition cost is included inInterest and related income/expense in the Statement of income.

 

**n)      Provision for doubtful accounts**

 

A provision for doubtfulaccounts is established based on historical collection experience andevaluation of the current status of existing receivable balances.  The provision for doubtful accounts receivablefrom third parties and municipalities is systematically recorded based on theage of the receivables and EDP’s collection history.  EDP does not record a provision with respect to accountsreceivable from other public entities since historically it has not experienceda problem in collecting such receivables. Accounts receivable are written-offwhen a customer is declared bankrupt by a court of law since a write-off priorto the customer’s bankruptcy would result in the loss or delay of the taxbenefit until the customer is eventually declared bankrupt.

 

**o)      Own shares**

 

The Company periodicallyacquires its own shares mainly to satisfy obligations in connection withCompany stock option plans.  Sharesacquired are recorded at acquisition cost.

 

F-19

----

 

**4.      ACCOUNTS RECEIVABLE - TRADE**

 
|                             |   | **2001**    |   | **2002**     |   |
|----------------------------------|--------|-------------|--------|--------------|--------|
| Public entities:                 |   |        |   |         |   |
| Municipalities                   |   | 39,127,627  |   | 49,517,884   |   |
| Provision for  doubtful accounts |   | (31,824,763 | )      | (40,870,233  | )      |
|                             |   | 7,302,864   |   | 8,647,651    |   |
| Other public  entities           |   | 54,746,953  |   | 62,004,418   |   |
|                             |   | 62,049,817  |   | 70,652,069   |   |
| Third parties:                   |   |        |   |         |   |
| Current accounts  receivable     |   | 733,917,515 |   | 793,979,774  |   |
| Doubtful  accounts receivable    |   | 95,489,751  |   | 109,993,078  |   |
|                             |   | 829,407,167 |   | 903,972,852  |   |
| Provision for doubtful accounts  |   | (95,489,751 | )      | (109,993,078 | )      |
|                             |   | 733,917,416 |   | 793,979,774  |   |
| Unbilled  revenues               |   | 140,589,565 |   | 106,227,759  |   |
| Total                            |   | 936,556,798 |   | 970,859,602  |   |

 

**5.**                  **ACCOUNTSRECEIVABLE, OTHER**

 
|                                                       |   | **2001**    |   | **2002**    |   |
|------------------------------------------------------------|--------|-------------|--------|-------------|--------|
| Employees                                                  |   | 15,888,993  |   | 20,339,128  |   |
| Debtor balances                                            |   | 104,215,092 |   | 163,041,219 |   |
| Deposits                                                   |   | 1,117,144   |   | 13,878,058  |   |
| Value added tax  and other taxes                           |   | 59,736,296  |   | 146,642,697 |   |
| Loans to related  companies (Note 7)                       |   | 106,324,523 |   | 34,791,816  |   |
| Minority  shareholders                                     |   | 45,281,167  |   | 451,125     |   |
| Credits over  concessionaires                              |   | 33,558,885  |   | 40,189,116  |   |
| Advances from  the Portuguese government to auto producers |   | 18,491,295  |   | 9,523,092   |   |
| Accrued  receivables                                       |   | —      |   | 159,673,511 |   |
| Sundry tariff  related                                     |   | —      |   | 83,939,881  |   |
| Others                                                     |   | 68,173,849  |   | 81,974,593  |   |
|                                                       |   | 452,787,244 |   | 754,444,236 |   |
| Provision for  doubtful accounts                           |   | (6,335,600  | )      | (13,901,228 | )      |
|                                                       |   | 446,451,644 |   | 740,543,008 |   |

 

Minorityshareholders relates mainly to amounts to be paid by entities other than theGroup to increase the share capital of ONI Way in 2001.

 

**6.**                  **INVENTORIES**

 
|                                    |   | **2001**    |   | **2002**    |   |
|-----------------------------------------|--------|-------------|--------|-------------|--------|
| Raw materials  and consumable materials |   | 89,408,542  |   | 130,031,671 |   |
| Other                                   |   | 19,627,997  |   | 20,273,358  |   |
|                                    |   | 109,036,539 |   | 150,305,029 |   |

 

F-20

----

 

**7.**                  **LONG-TERM RECEIVABLES**

 
|                                  |   | **2001**     |   | **2002**     |   |
|---------------------------------------|--------|--------------|--------|--------------|--------|
| Loans to related  companies           |   | 15,789,246   |   | 18,744,336   |   |
| Municipalities                        |   | 188,424,928  |   | 185,343,181  |   |
| Fixed assets in course of integration |   | 19,246,239   |   | 19,246,239   |   |
| Deposits                              |   | —       |   | 29,771,013   |   |
| Tariff adjustment                     |   | —       |   | 69,581,358   |   |
| Provision for doubtful accounts       |   | (120,608,434 | )      | (113,742,973 | )      |
| Other                                 |   | —       |   | 51,640,747   |   |
|                                  |   | 102,851,979  |   | 260,583,901  |   |

 

The receivable from themunicipalities relates to electricity and other services provided by EDP priorto 1988. These receivables consist of:

 

(i)                                               Amounts receivable from a small numberof municipalities that have not signed a concession agreement with EDP and withwhich a payment plan has not been agreed. The net book value of these receivables amounted to EUR 7,859,131 andEUR 6,825,213 as of December 31, 2001 and 2002, respectively.  The net amount of such receivables iscollateralized by fixed assets previously ceded from the municipalities to EDP.Until a settlement is reached with respect to amounts owed, EDP is not requiredto return the assets or the benefits derived to the municipalities.

 

(ii)                                            Receivables from municipalities thathave signed a concession agreement with EDP and have agreed to a deferredpayment plan.  The net amount of suchreceivables, net of provisions, amounted to EUR 79,203,601 and EUR84,021,233 as of December 31, 2001 and 2002, respectively.

 

Loans to relatedcompanies consist of the following amounts:

 
| **Associated company**         |   | **Currency** |   | **2001**     |   | **2002**   |   |
|--------------------------------|--------|--------------|--------|--------------|--------|------------|--------|
| Elcogás(1)                |   | EUR          |   | 7,375,115    |   | 7,375,119  |   |
| Turbogás(2)               |   | EUR          |   | 9,219,872    |   | 8,449,339  |   |
| REN                            |   | EUR          |   | 79,460,618   |   | —     |   |
| DECA                           |   | EUR          |   | 8,469,648    |   | —     |   |
| EDP Άguas                 |   | EUR          |   | 8,980,588    |   | —     |   |
| Affinis                        |   | EUR          |   | —       |   | 1,993,284  |   |
| Other                          |   | EUR          |   | 8,607,928    |   | 926,592    |   |
|                           |   |         |   | 122,113,769  |   | 18,744,334 |   |
| Less current  portion (Note 5) |   |         |   | (106,324,523 | )      | —     |   |
|                           |   |         |   | 15,789,246   |   | 18,744,334 |   |

 

----

Interest rates:

(1)          Euribor 3 months + 0.45%

(2)          Fixed rate 6.5%

 

F-21

----

 

**8.****                  INVESTMENTS**

 
|                             |   | **2001**      |   | **2002**      |   |
|----------------------------------|--------|---------------|--------|---------------|--------|
| Group companies                  |   | 1,569,529,419 |   | 742,933,457   |   |
| Other companies                  |   | 1,276,625,571 |   | 1,339,360,990 |   |
| Other  investments               |   | 181,816,674   |   | 161,602,936   |   |
| Provision                        |   | (6,937,956    | )      | (278,125,761  | )      |
| Buildings, net  of depreciation  |   | 1,465,154     |   | 209,948       |   |
| Capital  expenditure in progress |   | 1,057,766     |   | 2,584         |   |
|                             |   | 3,023,556,627 |   | 1,965,984,154 |   |

 

Group companies representinvestments in affiliated companies, or on non-consolidated subsidiarycompanies. Other companies consist of equity investments in companies in whichthe Company’s investment is less than 20%, or in affiliated companies notaccounted for on an equity method basis. The variation in Group companies isdue mainly to the fact that Hidrocantabrico (EUR 278.2 million), EDP 2000 (EUR25.1 million), EDP Investimentos (EUR 9.2 million), Aphelion Fund (EUR 101.7million) and Enerpeixe (EUR 11.3 million) are consolidated in 2002.Additionally, EDP disposed of investments in Redal (EUR 11.1 million), OPTEP(EUR 170.1 million) and 093X (EUR 94.4 million). As a result the concessionrights relating to IVEN (approximately EUR 582,128 million) were transferred toOther Assets-Goodwill.

 

The provision in 2002 ismainly to cover the mark-to-market devaluation of other investments listed inthe Euronext Lisbon stock exchange, and it was charged directly to Equity.

 

**9.****                  FIXEDASSETS**

 
|                              |   | **2001**                 |   |
|-----------------------------------|--------|--------------------------|--------|
|                              |   | **Cost or  revaluation** |   | **Accumulated  depreciation** |   | **Net book  value** |   |
| Concession-held  fixed assets     |   | 259,915,573              |   | 238,981,250 |   | 20,934,323 |   |
| Land                              |   | 112,614,399              |   | — |   | 112,614,399 |   |
| Buildings and  improvements       |   | 325,675,731              |   | 132,165,297 |   | 193,510,434 |   |
| Plant, machinery  and equipment   |   | 20,237,212,344           |   | 11,530,462,580 |   | 8,706,749,764 |   |
| Vehicles and  transport equipment |   | 76,056,888               |   | 45,197,374 |   | 30,859,514 |   |
| Administrative  equipment         |   | 175,954,520              |   | 111,240,446 |   | 64,714,074 |   |
| Foreign exchange  differences     |   | 67,948,548               |   | 11,162,997 |   | 56,785,551 |   |
| Capital  expenditure in progress  |   | 640,524,471              |   | — |   | 640,524,471 |   |
| Other fixed  assets               |   | 23,430,025               |   | 6,344,579 |   | 17,085,446 |   |
|                              |   | 21,659,416,926           |   | 11,836,573,273 |   | 9,822,843,653 |   |
|                              |   | 21,919,332,499           |   | 12,075,554,523 |   | 9,843,777,976 |   |

 
|                              |   | **2002**                |   |
|-----------------------------------|--------|-------------------------|--------|
|                              |   | **Cost or revaluation** |   | **Accumulated  depreciation** |   | **Net book value** |   |
| Concession-held  fixed assets     |   | 259,915,573             |   | 243,265,127 |   | 16,650,446 |   |
| Land                              |   | 122,259,733             |   | — |   | 122,259,733 |   |
| Buildings and  improvements       |   | 336,746,375             |   | 143,317,069 |   | 193,429,306 |   |
| Plant, machinery  and equipment   |   | 22,425,168,937          |   | 12,826,798,197 |   | 9,598,370,740 |   |
| Vehicles and  transport equipment |   | 73,900,403              |   | 46,621,967 |   | 27,278,436 |   |
| Administrative  equipment         |   | 248,633,624             |   | 164,011,509 |   | 84,622,115 |   |
| Foreign exchange  differences     |   | 67,850,050              |   | 12,449,702 |   | 55,400,348 |   |
| Capital  expenditure in progress  |   | 1,010,734,574           |   | — |   | 1,010,734,574 |   |
| Other fixed  assets               |   | 105,739,993             |   | 10,248,489 |   | 95,491,504 |   |
|                              |   | 24,391,033,689          |   | 13,203,446,933 |   | 11,187,586,756 |   |
|                              |   | 24,650,949,262          |   | 13,446,712,060 |   | 11,204,237,202 |   |

 

F-22

----

 

The followingtables present the approximate effect of the revaluation of the fixed assets:

 
|           |   | **2001**            |   |
|----------------|--------|---------------------|--------|
|           |   | **Historical cost** |   | **Revaluation** |   | **Book value** |   |
| Fixed assets   |   | 11,466,784,305      |   | 10,454,013,348 |   | 21,920,797,653 |   |
| Depreciation   |   | 2,953,834,089       |   | 9,121,720,434 |   | 12,075,554,523 |   |
| Net book value |   | 8,512,950,216       |   | 1,332,292,914 |   | 9,845,243,130 |   |

 
|           |   | **2002**            |   |
|----------------|--------|---------------------|--------|
|           |   | **Historical cost** |   | **Revaluation** |   | **Book value** |   |
| Fixed assets   |   | 14,197,145,862      |   | 10,454,013,348 |   | 24,651,159,210 |   |
| Depreciation   |   | 4,124,018,608       |   | 9,322,693,452 |   | 13,446,712,060 |   |
| Net book value |   | 10,073,127,254      |   | 1,131,319,896 |   | 11,204,447,150 |   |

 

The net book valueis stated in the financial statements under the following headings:

 
|                  |   | **2001**      |   | **2002**       |   |
|-----------------------|--------|---------------|--------|----------------|--------|
| Fixed assets          |   | 9,843,777,976 |   | 11,204,237,202 |   |
| Investment  buildings |   | 1,465,154     |   | 209,948        |   |
|                  |   | 9,845,243,130 |   | 11,204,447,150 |   |

 

**Assets under public domain**

 

TheGroup’s fixed assets were constructed or acquired by EDP and its subsidiaries,however, substantially all of the Group’s fixed assets are considered to be inthe public domain. Therefore, while the administration of such assets is underthe control of EDP and its subsidiaries, disposal or use of the fixed assetsfor other purposes is not permitted.

 

**10.****           OTHER ASSETS**

 
|                               |   | **2001**      |   |
|------------------------------------|--------|---------------|--------|
|                               |   | **Cost**      |   | **Accumulated  amortization** |   | **Net book  value** |   |
| Reorganization  expenses           |   | 145,810,212   |   | 47,648,582 |   | 98,161,630 |   |
| Research and  development expenses |   | 201,735,466   |   | 13,126,456 |   | 188,609,010 |   |
| Repairs and  maintenance           |   | 28,399,671    |   | 23,980,645 |   | 4,419,026 |   |
| Bond and  issuance costs           |   | 49,487,089    |   | 5,321,709 |   | 44,165,380 |   |
| Deferred taxes                     |   | 406,273,711   |   | — |   | 406,273,711 |   |
| Goodwill/concession  rights/other  |   | 928,794,654   |   | 79,324,303 |   | 849,470,351 |   |
| Tariff  adjustments                |   | 64,847,934    |   | — |   | 64,847,934 |   |
| Deferred benefit  plan             |   | 62,329,785    |   | — |   | 62,329,785 |   |
| Other                              |   | 14,590,846    |   | — |   | 14,590,846 |   |
|                               |   | 1,902,269,368 |   | 169,401,695 |   | 1,732,867,673 |   |

 

F-23

----

 
|                               |   | **2002**      |   |
|------------------------------------|--------|---------------|--------|
|                               |   | **Cost**      |   | **Accumulated  amortization** |   | **Net  book  value** |   |
| Reorganization  expenses           |   | 93,056,396    |   | 50,471,231 |   | 42,585,165 |   |
| Research and  development expenses |   | 153,663,344   |   | 35,501,601 |   | 118,161,743 |   |
| Repairs and  maintenance           |   | 28,746,156    |   | 24,595,772 |   | 4,150,384 |   |
| Bond and  issuance costs           |   | 44,725,479    |   | 6,735,817 |   | 37,989,662 |   |
| Deferred taxes                     |   | 545,979,498   |   | — |   | 545,979,498 |   |
| Goodwill/concession  rights/other  |   | 1,880,560,730 |   | 198,187,828 |   | 1,682,372,902 |   |
| Tariff  adjustments                |   | 60,700,162    |   | — |   | 60,700,162 |   |
| Deferred benefit  plan             |   | 62,329,785    |   | — |   | 62,329,785 |   |
| Other                              |   | 62,663,161    |   | — |   | 62,663,161 |   |
|                               |   | 2,932,424,711 |   | 315,492,249 |   | 2,616,932,462 |   |

 

In 2001 and 2002, the amounts stated asGoodwill/concession rights in the approximate amounts of EUR 359 million andEUR 1,372 million, respectively are concession rights that are amortizedaccording to the life of the concessions (usually spanning 20 to 30 years). Thedifference from 2001 to 2002 is mainly related to the concession rights of IVEN(EUR 582 million) that were transferred from Investments, and EUR 564 millionfrom Hidrocantabrico.

 

**11.****           ACCOUNTS PAYABLE, TRADE**

 
|                   |   | **2001**    |   | **2002**      |   |
|------------------------|--------|-------------|--------|---------------|--------|
| Current  suppliers     |   | 570,563,223 |   | 787,361,351   |   |
| Fixed asset  suppliers |   | 183,781,287 |   | 230,392,523   |   |
| Other                  |   | 1,007,851   |   | 816,575       |   |
|                   |   | 755,352,361 |   | 1,018,570,449 |   |

 

Current suppliers includepurchased electricity from the sole buyer (REN) in the amount of EUR206,649,909 and EUR  259,652.660 in 2001and 2002, respectively.

 

**12.****           ACCOUNTS PAYABLE, OTHER**

 
|                                   |   | **2001**    |   | **2002**    |   |
|----------------------------------------|--------|-------------|--------|-------------|--------|
| Concession rents                       |   | 627,153     |   | 6,476,726   |   |
| Minority  shareholders                 |   | 14,851,070  |   | 2,281,451   |   |
| Receivables on behalf of third parties |   | 5,665,389   |   | 24,242,920  |   |
| Fair value difference in swap          |   | —      |   | 11,232,759  |   |
| Tariff  adjustments                    |   | 23,793,457  |   | 22,485,183  |   |
| Fixed assets  suppliers                |   | —      |   | 31,701,540  |   |
| Goods receiving  note                  |   | 1,246,943   |   | 16,181,081  |   |
| Other accrued  expenses                |   | 58,751,912  |   | 59,074,878  |   |
|                                   |   | 104,935,924 |   | 173,676,538 |   |

 

**13.****           ACCRUED EXPENSES**

 
|                      |   | **2001**    |   | **2002**    |   |
|---------------------------|--------|-------------|--------|-------------|--------|
| Vacation pay and  bonuses |   | 60,374,362  |   | 60,031,660  |   |
| Interest  expenses        |   | 68,754,698  |   | 169,370,574 |   |
| Tariff  adjustments       |   | 33,243,639  |   | —      |   |
| Other accrued  expenses   |   | 50,882,878  |   | 65,096,345  |   |
|                      |   | 213,255,577 |   | 294,498,579 |   |

 

F-24

----

 

Other accrued expensesare mainly external services suppliers’ expenses, for which no supplier invoicehas been received or approved. The balance of 2002 includes EUR 38,330,647related to acquisition of equipment by ONI Way.

 

**14.****           TAXES PAYABLE**

 
|                                    |   | **2001**    |   | **2002**   |   |
|-----------------------------------------|--------|-------------|--------|------------|--------|
| Income tax, net  of payments on account |   | 136,116,583 |   | 9,080,777  |   |
| Payroll income  tax withholdings        |   | 8,790,415   |   | 8,415,420  |   |
| Value added tax                         |   | 22,561,537  |   | 18,665,294 |   |
| Social security                         |   | 10,640,691  |   | 10,541,670 |   |
| Other                                   |   | 18,576,358  |   | 3,049,058  |   |
|                                    |   | 196,685,584 |   | 49,752,219 |   |

 

**15.****           SHORT-TERM AND LONG-TERM DEBT**

 
|             |   | **December 31, 2001**                                        |   | **December 31, 2002** |   |
|------------------|--------|--------------------------------------------------------------|--------|-----------------------|--------|
|             |   | **Short-term debt  and current  portion  of long-term debt** |   | **Long-term debt**    |   | **Short-term debt  and current  portion  of long-term debt** |   | **Long-term debt** |   |
|             |   |                                                         |   |                  |   |   |   |   |   |
| Bank loans       |   | 671,046,273                                                  |   | 1,693,424,791         |   | 595,923,837 |   | 2,714,930,641 |   |
| Commercial paper |   | 547,000,000                                                  |   | —                |   | 657,618,000 |   | — |   |
| Bank overdrafts  |   | 502,912,945                                                  |   | —                |   | 621,230,572 |   | — |   |
|             |   | 1,720,959,218                                                |   | 1,693,424,791         |   | 1,874,772,409 |   | 2,714,930,641 |   |
| Bonds            |   | 23,385,252                                                   |   | 2,361,354,530         |   | 12,261,284 |   | 3,392,111,270 |   |
|             |   | 1,744,344,470                                                |   | 4,054,779,321         |   | 1,887,033,693 |   | 6,107,041,911 |   |

 

As of December 31,2002, the scheduled repayments of the long-term portion of the EDP Group’s debtwas as follows:

 
| 2004                     |   | 614,326,713   |   |
|--------------------------|--------|---------------|--------|
| 2005                     |   | 544,675,404   |   |
| 2006                     |   | 901,968,601   |   |
| 2007                     |   | 718,044,599   |   |
| 2008 and following years |   | 3,328,026,594 |   |
|                     |   | 6,107,041,911 |   |

 

F-25

----

 

**Domesticbonds**

 

The domestic bonds were all redenominated into eurosand bear variable interest rates. The other main characteristics are asfollows:

 
|                   |   | **22nd issue**                                                 |   | **23rd issue**                                                                                                                  |   |
|------------------------|--------|----------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|--------|
| AMOUNT OUTSTANDING:    |   |                                                           |   |                                                                                                                            |   |
| December 31, 2001      |   | 41,609,096   Euro                                         |   | 10,331,743   Euro                                                                                                          |   |
| December 31, 2002      |   | 34,473,888  Euro                                          |   | 10,331,743  Euro                                                                                                           |   |
| ANNUAL INTEREST RATE:  |   |                                                           |   |                                                                                                                            |   |
| December 31, 2001      |   | 3.3125%                                                        |   | 3.2500%                                                                                                                         |   |
| December 31, 2002      |   | 2.9375%                                                        |   | 2.8125%                                                                                                                         |   |
|                   |   |                                                           |   |                                                                                                                            |   |
| INTEREST PAYMENT DATES |   | June  2 and December 2                                         |   | June  20 and December 20                                                                                                        |   |
|                   |   |                                                           |   |                                                                                                                            |   |
| REPAYMENT DATES        |   | Four  equal annual installments beginning on June 2, 2003 |   | Four  equal annual installments beginning on December 20, 2008                                                                  |   |
|                   |   |                                                           |   |                                                                                                                            |   |
| OTHER CONDITIONS       |   | —                                                         |   | This  issue may be totally or partially repaid in advance on December 20, 2006 at  the option of the Company or the Bondholders |   |

 
|                   |   | **24th issue**                                                                                                                |   | **25th issue**                                                                                               |   |
|------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|
| AMOUNT OUTSTANDING:    |   |                                                                                                                          |   |                                                                                                         |   |
| December 31, 2001      |   | 13,513,272   Euro                                                                                                        |   | 299,278,738   Euro                                                                                      |   |
| December 31, 2002      |   | 10,134,954  Euro                                                                                                         |   | 299,278,738  Euro                                                                                       |   |
| ANNUAL INTEREST RATE:  |   |                                                                                                                          |   |                                                                                                         |   |
| December 31, 2001      |   | 4.5313%                                                                                                                       |   | 3.5030%                                                                                                      |   |
| December 31, 2002      |   | 3.6875%                                                                                                                       |   | 3.1970%                                                                                                      |   |
|                   |   |                                                                                                                          |   |                                                                                                         |   |
| INTEREST PAYMENT DATES |   | January  5 and July 5                                                                                                         |   | May  23 and November 23                                                                                      |   |
|                   |   |                                                                                                                          |   |                                                                                                         |   |
| REPAYMENT DATES        |   | Four  equal annual installments beginning on January 5, 2002                                                                  |   | Six  equal semi-annual installments beginning on May 23, 2006                                           |   |
|                   |   |                                                                                                                          |   |                                                                                                         |   |
| OTHER CONDITIONS       |   | This  issue may be totally or partially repaid in advance on January 5, 2003 at the  option of the Company or the Bondholders |   | This  issue may be totally or partially repaid in advance on November 23, 2003 at  the option of the Company |   |

## *** ***

## ***Internationalbond***

## *** ***

The international bond was issued under a Medium Term Notes program ofEUR 5,000,000,000 with a fixed interest rate coupon:

 
|                   |   | **Euro  Bond**             |   | **Euro  Bond**            |   |
|------------------------|--------|----------------------------|--------|---------------------------|--------|
| Amount outstanding:    |   | 1,000,000,000   Euro  |   | 1,000,000,000   Euro |   |
|                   |   |                       |   |                      |   |
| Annual interest rate:  |   |                       |   |                      |   |
| December 31, 2002      |   | 6.400%                     |   | 5.875%                    |   |
|                   |   |                       |   |                      |   |
| Interest payment dates |   | October 29                 |   | March 28                  |   |
|                   |   |                       |   |                      |   |
| Repayment dates        |   | Bullet on October 29, 2009 |   | Bullet on March 28, 2011  |   |

 

F-26

----

 
|                   |   | **Euro  Bond**           |   | **Euro  Bond**           |   |
|------------------------|--------|--------------------------|--------|--------------------------|--------|
| Amount  outstanding:   |   | 200,000,000  GBP    |   | 500,000,000   Euro  |   |
|                   |   |                     |   |                     |   |
| Annual interest rate:  |   |                     |   |                     |   |
|                   |   |                     |   |                     |   |
| December 31, 2002      |   | 6.625%                   |   | 5.0%                     |   |
|                   |   |                     |   |                     |   |
| Interest payment dates |   | August 9                 |   | March 20                 |   |
|                   |   |                     |   |                     |   |
| Repayment dates        |   | Bullet on August 9, 2017 |   | Bullet on March 20, 2008 |   |

 

**Bankloans and short-term debt**

 

As of December 31,2001 and December 31, 2002 the Company’s short-term and long-term debt, otherthan the bonds, are denominated in the following currencies, after taking intoaccount the effect of currency swap agreements:

 
|         |   | **2001**                         |   | **2002**      |   |
|--------------|--------|----------------------------------|--------|---------------|--------|
|         |   | **In the currency  of the loan** |   | **EUR**       |   | **In the currency  of the loan** |   | **EUR** |   |
| U.S. Dollars |   | —                           |   | —        |   | 55,913,983 |   | 53,222,219 |   |
| BRL          |   | 325,197,479                      |   | 158,911,756   |   | 1,854,914,447 |   | 499,707,556 |   |
| Euros        |   | 3,255,472,253                    |   | 3,255,472,253 |   | 4,036,773,275 |   | 4,036,773,275 |   |
|         |   |                             |   | 3,414,384,009 |   |   |   | 4,589,703,050 |   |

 

The followingtable presents an analysis of total debt by interest rate and takes intoaccount the effect of interest rate and currency swap agreements:

 
|                                                                             |   | **2001**      |   | **2002**      |   |
|----------------------------------------------------------------------------------|--------|---------------|--------|---------------|--------|
| **Bonds and long-term debt**                                                     |   |          |   |          |   |
| Below 5%                                                                         |   | 3,272,612,178 |   | —        |   |
| 5% to 7.5%                                                                       |   | —        |   | 1,512,084,219 |   |
| 7.5% and over                                                                    |   | 59,919,596    |   | 55,222,219    |   |
| Variable rates  (weighted average rate: 3.6325% at 12/31/01; 3.467% at 12/31/02) |   | 1,416,679,071 |   | 5,147,920,594 |   |
| **Short-term debt**                                                              |   |          |   |          |   |
| Commercial paper  (weighted average rate: 3.41% at 12/31/01; 3,212% at 12/31/02) |   | 547,000,000   |   | 657,618,000   |   |
| Bank overdrafts  (4.2325% at 12/31/01; 4.2325% at 12/31/01;)                     |   | 502,912,946   |   | 621,230,572   |   |
|                                                                             |   | 5,799,123,791 |   | 7,994,075,604 |   |

 

Variable interestrates are generally based on EONIA (Euro OverNight Index Average) offeredrates. Euro debt is principally based on EURIBOR (Euro Interbank Offered Rate)of three to six months.

 

As of December 31,2002 the Company has available long-term credit facilities of EUR152,133,359  at rates based on EURIBORto be negotiated at the time of each utilization. In addition, the company hastwo Revolving Credits Facilities, EUR 600,000,000 and EUR 750,000,000 at ratesbased on EURIBOR, both totally undrawn.

 

F-27

----

 

The Group’s debt isunsecured.

 

The notional amounts ofswap agreements outstanding were as follows (in thousands of the respectivecurrency):

 
|                     |   | **2001**      |   | **2002**      |   |
|--------------------------|--------|---------------|--------|---------------|--------|
| **Interest rate swaps:** |   |          |   |          |   |
| Portuguese escudos       |   | 2,189,525,045 |   | —        |   |
| Euros                    |   | 2,949,579,264 |   | 3,225,584,558 |   |
| German marks             |   | 21,204,000    |   | —        |   |
| British Pounds           |   | —        |   | 200,000,000   |   |

 

**16.****             ACCRUED PENSION ANDRETIREMENT LIABILITIES**

 
|                              |   | **2001**    |   | **2002**    |   |
|-----------------------------------|--------|-------------|--------|-------------|--------|
| Defined benefit  pension plan     |   | 305,949,000 |   | 211,543,000 |   |
| Post retirement  medical benefits |   | 377,939,000 |   | 396,713,000 |   |
|                              |   | 683,888,000 |   | 608,256,000 |   |

*** ***

*Defined benefit pension plan*

 

In accordance with theA.C.T. (a Portuguese collective labor agreement for EDP and the Group companiescreated when the restructuring in 1994) there is a commitment for a definedbenefit pension plan for its active and retired employees.  Pension benefits are vested at retirementdate and are based on the employees’ years of service and the compensationlevel at the end of their employment period, less social security benefits paidby the Portuguese Government. The normal retirement age is 65.  However, employees at least 60 years ofage and with 36 years of service, or any age with 40 years of service, mayelect for early retirement.  Employeeselecting for early retirement are entitled to full pension benefits, which arecalculated on the same basis as those of employees retiring at the normalretirement age.  Contributions to theplan are generally based on the availability of funds while making the minimumannual contributions required by applicable regulations.

 

InBandeirante, there are two defined benefit pension plans:

 

Plan BD in place untilMarch 31, 1998, is a defined benefit plan giving rights for employees existingat that date. Benefits were determined based on the years of service until thatdate. The responsibility for the coverage of actuarial shortages of this Planbelongs to the Company.

 

PlanBD in place after March 31, 1998, is a defined benefit plan giving rights toemployees existing on that date or after. Benefits are based on years ofservice and on 70% of the average monthly salary earned over the last 36 monthsof work. In case of death or disability caused by accident during work, theyears of service include all the period of service including the period up toMarch 31, 1998. The responsibility for coverage of actuarial shortages of thisPlan are rests equally with the Company and employees.

 

The components of netperiodic pension cost include the following:

 
|                                      |   | **2001**    |   | **2002**    |   |
|-------------------------------------------|--------|-------------|--------|-------------|--------|
| Service cost                              |   | 14,525,000  |   | 13,220,000  |   |
| Interest cost                             |   | 74,710,000  |   | 88,826,000  |   |
| Expected return  on plan assets           |   | (57,532,000 | )      | (56,031,000 | )      |
| Workers  contributions                    |   | —      |   | (706,000    | )      |
| Amortization of  transition obligation    |   | 5,826,000   |   | 5,826,000   |   |
| Amortization of  actuarial (gains) losses |   | —      |   | 11,219,000  |   |
| Net periodic  pension cost                |   | 37,530,000  |   | 62,354,000  |   |

 

F-28

----

 

The changes in the fundedstatus of the pension plan is as follows:

 
| **Change in  benefit obligation:**       |   | **2001**      |   | **2002**      |   |
|------------------------------------------|--------|---------------|--------|---------------|--------|
| Benefit  obligation at beginning of year |   | 1,213,456,000 |   | 1,354,910,000 |   |
| Benefit  obligation (Bandeirante)        |   | —        |   | 78,273,000    |   |
| Service cost                             |   | 14,525,000    |   | 13,220,000    |   |
| Interest cost                            |   | 74,710,000    |   | 88,826,000    |   |
| Actuarial losses                         |   | 175,653,000   |   | 96,242,000    |   |
| Estimated  benefits paid                 |   | (123,434,000  | )      | (144,277,000  | )      |
| Currency  translation                    |   | —        |   | (38,461,000   | )      |
| Benefit  obligation at end of year       |   | 1,354,910,000 |   | 1,448,733,000 |   |

 
| **Change in plan assets:**                      |   | **2001**     | ** ** | **2002**     | ** ** |
|-------------------------------------------------|--------|--------------|------------|--------------|------------|
| Fair value of  plan assets at beginning of year |   | 801,179,000  |       | 754,270,000  |       |
| Fair value of  plan assets (Bandeirante)        |   | —       |       | 27,016,000   |       |
| Actual return on  plan assets                   |   | 57,531,000   |       | 56,031,000   |       |
| Company  contributions                          |   | 31,930,000   |       | 52,669,000   |       |
| Workers contributions                           |   | —       |       | 706,000      |       |
| Actual benefits  paid                           |   | (54,225,000  | )          | (53,597,000  | )          |
| Actuarial gains  and losses                     |   | (82,145,000  | )          | (72,767,000  | )          |
| Currency  translation                           |   | —       |       | (14,384,000  | )          |
| Fair value of  plan assets at end of year       |   | 754,270,000  |       | 749,945,000  |       |
|                                            |   |         |       |         |       |
| Unfunded pension  liability                     |   | (600,640,000 | )          | (698,788,000 | )          |
| Unrecognized net  actuarial losses              |   | 232,361,000  |       | 430,741,000  |       |
| Unrecognized  transition obligation             |   | 62,330,000   |       | 56,504,000   |       |
| Accrued benefit  liability                      |   | (305,949,000 | )          | (211,543,000 | )          |

 

The company recognizes actuarial gains and lossesthrough systematic amortization of any amounts in excess of the higher of 10%of the benefit obligation or of the plan assets.

 

The main assumptions usedin the actuarial study with respect to the pension obligation is as follows:
|                                                             |   | **2001**   |   | **2002**   |   | **2002  Bandeirante** |   |
|------------------------------------------------------------------|--------|------------|--------|------------|--------|-----------------------|--------|
| Discount rate                                                    |   | 6.5        | %      | 6.0        | %      | 10.24                 | %      |
| Expected rate of  return on Pension Fund assets                  |   | 7.5        | %      | 6.5        | %      | 10.24                 | %      |
| Rate of future  salary increases                                 |   | 3.5        | %      | 3.3        | %      | 7.12                  | %      |
| Pension growth  rate                                             |   | 3.5        | %      | 2.25       | %      | 7.12                  | %      |
| Social security  salary increased value rate                     |   | 2.25       | %      | 2.0        | %      | 4.0                   | %      |
| Mortality table                                                  |   | TV 73/77   |   | TV 73/77   |   | AT-49                 | (qx)   |
| Disability table                                                 |   | 50% EKV 80 |   | 50% EKV 80 |   | Light-average         | (ix)   |
| Rate of  inflation                                               |   | 2.0        | %      | 2.0        | %      | 5                     | %      |
| Expected  percentage of eligible staff electing early retirement |   |       | *      |       | *      | Not applicable        |

 

----

*                 During 2001, theassumptions were employees applying for early retirement would be 100% of theeligible population and 90% of the employees with 55 years old or more. In2002, that employees applying for early retirement would be 100% of theeligible population and 70% of the employees with 55 years old or more. From2003 and on, it is estimated that 40% of the eligible population, will applyfrom early retirement.

 

*Defined contribution pension plan*

 

Hidrocantábrico,Escelsa and Enersul have defined contribution pension plans under which thecontributions made by each company calculated in accordance with the respectivecontracts.

 

*Post retirement medical benefits*

 

In accordance with the A.C.T. comprehensive medicalcoverage is provided in addition to that provided by the Portuguese nationalhealth system for retired employees (including those who have taken earlyretirement) and their dependants. Additionally, a death benefit is alsoprovided to retirees’ survivors.  Thecompany administers the

 

F-29

----

 

program internally and assumes the full cost of funding the program netof employee contributions amounting to approximately 10% of the total medicalexpenses covered.

 

A summary of the components of the net periodic postretirement benefit cost is presented in the following table:

 
|                                       |   | **2001**   |   | **2002**   |   |
|--------------------------------------------|--------|------------|--------|------------|--------|
| Service cost                               |   | 6,714,000  |   | 6,540,000  |   |
| Interest cost                              |   | 28,781,000 |   | 30,096,000 |   |
| Amortization of  transition obligation     |   | 4,873,000  |   | 4,873,000  |   |
| Net periodic  post-retirement benefit cost |   | 40,368,000 |   | 41,509,000 |   |

 

The following table sets forththe changes and the funded status of the plan as of December 31, 2001 andDecember 31, 2002:

 
| **Change in benefit obligation:**        |   | **2001**     |   | **2002**     |   |
|------------------------------------------|--------|--------------|--------|--------------|--------|
| Benefit  obligation at beginning of year |   | 453,223,000  |   | 474,371,000  |   |
| Service cost                             |   | 6,714,000    |   | 6,540,000    |   |
| Interest cost                            |   | 28,781,000   |   | 30,096,000   |   |
| Actuarial losses                         |   | 6,533,000    |   | 7,929,000    |   |
| Benefits paid                            |   | (20,880,000  | )      | (22,735,000  | )      |
| Benefit  obligation at end of year       |   | 474,371,000  |   | 496,200,000  |   |
| Plan assets at  fair value               |   | —       |   | —       |   |
| Unfunded status  of plan                 |   | (474,371,000 | )      | (496,200,000 | )      |
| Unrecognized net  actuarial losses       |   | 44,308,000   |   | 52,237,000   |   |
| Unrecognized  transition obligation      |   | 52,124,000   |   | 47,251,000   |   |
| Accrued benefit  cost                    |   | (377,939,000 | )      | (396,713,000 | )      |

 

The assumptionsused in the actuarial study with respect to the post-retirement benefitobligation, in addition to those described above with respect to pensionobligations, were as follows:

 
|                                                             |   | **2001** |   | **2002** |   |
|------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Rate of increase  in medical costs                               |   | 5.0      | %      | 4.5%     | (a)    |
| Discount rate                                                    |   | 6.5      | %      | 6.0      | %      |
| Mortality table                                                  |   |     | (b)    |     | (b)    |
| Disability table                                                 |   |     | (b)    |     | (b)    |
| Expected  percentage of eligible staff electing early retirement |   |     | (b)    |     | (b)    |

 

----

(a)          4.5% in the first 10years and 4.0% in the following years.

(b)         According to the pensionplan assumptions.

 

**17.****             DEFERREDREVENUE AND OTHER LIABILITIES**

 
|                                           |   | **2001**      |   | **2002**      |   |
|------------------------------------------------|--------|---------------|--------|---------------|--------|
| Short term                                     |   |          |   |          |   |
| Deferred revenue on the sale of OPTEP          |   | —        |   | 70,071,524    |   |
| Other - current                                |   | 15,761,197    |   | 24,783,097    |   |
|                                           |   | 15,761,197    |   | 94,854,621    |   |
| Long term                                      |   |          |   |          |   |
| Subsidies                                      |   | 1,325,357,172 |   | 1,339,085,136 |   |
| Deferred tax                                   |   | 182,245,068   |   | 344,122,334   |   |
| Customer  deposits                             |   | 43,101,997    |   | 41,239,534    |   |
| Concession-held  fixed assets                  |   | 20,934,323    |   | 16,650,447    |   |
| State  participation in multi purpose projects |   | 19,739,518    |   | 19,739,518    |   |
| Provision for  various contingencies           |   | 147,601,196   |   | 198,025,678   |   |
| Other – non current                       |   | —        |   | 49,150,613    |   |
|                                           |   | 1,739,159,274 |   | 2,008,013,259 |   |

 

F-30

----

 

During the year EDPreceived subsidies in the amount of EUR 84,497,621 from which EUR 788,973 werereceived from the European Union.

 

Costumer deposits, inaccordance with changes made in Portuguese law, should have been reimbursedduring 2000 and 2001 upon certain conditions being met.

 

The State participationin multi-purpose projects represents amounts received from the Government to compensatethe Company for the construction of ancillary portions of the fixed assets thatare constructed for the Company but may be also used by the general public(e.g., irrigation near the dams). The costs incurred are included in theCompany’s fixed assets. The Government contributions were based on estimates ofthe multi purpose portions of the fixed assets at the time of construction.

 

**18.****             HYDROLOGICALCORRECTION ACCOUNT**

 
|                         |   | **2001**    |   | **2002**    |   |
|------------------------------|--------|-------------|--------|-------------|--------|
| Opening balance              |   | 365,520,715 |   | 387,506,424 |   |
| Differential  charged to REN |   | 48,891,645  |   | (76,080,021 | )      |
| Interest expense             |   | 20,559,694  |   | 12,684,863  |   |
| Adjustments                  |   | (47,465,630 | )      | —      |   |
| Closing balance              |   | 387,506,424 |   | 324,111,266 |   |

 

**19.****             SHAREHOLDERS’ EQUITY**

 

**Share capital**

 

Share capital is fullysubscribed and paid and on December 31, 2002 was represented by 3,000,000,000ordinary shares with a nominal value of 1.00 euro each. A Shareholder isentitled to one vote per 100 Shares owned. However, voting rights exercised by a single shareholder, other than theRepublic of Portugal, are limited to a maximum of 5% of EDP’s sharecapital.  Under Portuguese law,shareholders have a preferential ratable right to subscribe for any new issueof ordinary shares for cash, except if a special resolution at the generalmeeting of shareholders waives such rights.

 

**Legal reserve**

 

The Company’s Articles ofAssociation, in accordance with the Portuguese law, require that at least 5% ofeach year’s net income be appropriated to a legal reserve until this reserveequals the legal minimum requirement of 20% of nominal share capital. Thisreserve is not available for distribution to shareholders but may becapitalized or used to absorb losses.

 

**Other reserves**

 

This caption includesamounts recorded prior to 1994, with respect to the allocation of net incomefor the creation of reserves for investment, the social welfare activities ofemployees and a debt repayment. These reserves are available for distributionto shareholders.

 

F-31

----

 

***Fair value and other valuation reserves***

 
|                 |   | **December 31, 2000** |   | **Increase** |   | **Decrease** |   | **December 31, 2001** |   |
|----------------------|--------|-----------------------|--------|--------------|--------|--------------|--------|-----------------------|--------|
| Currency translation |   | (30,621,233           | )      | —       |   | (48,818,755  | )      | (79,439,988           | )      |
| Revaluation reserves |   | 2,020,902,540         |   | —       |   | —       |   | 2,020,902,540         |   |
| Equity accounting    |   | (6,478,322            | )      | —       |   | (30,487,249  | )      | (36,965,571           | )      |
| Consolidation        |   | 149,597,091           |   | —       |   | (18,585,286  | )      | 131,011,805           |   |
|                 |   | 2,133,400,076         |   | —       |   | (97,891,290  | )      | 2,035,508,786         |   |

 
|                 |   | **December  31, 2001** |   | **Increase** | ** ** | **Decrease**   | ** ** | **December  31, 2002** | ** ** |
|----------------------|--------|------------------------|--------|--------------|------------|----------------|------------|------------------------|------------|
| Currency translation |   | (79,439,988            | )      | —       |       | (300,027,774   | )          | (379,467,762           | )          |
| Revaluation reserves |   | 2,020,902,540          |   | —       |       | (848,173,899   | )          | 1,172,728,641          |       |
| Equity accounting    |   | (36,965,571            | )      | 59,086,113   |       | —         |       | 22,120,542             |       |
| Fair value           |   | —                 |   | —       |       | (268,974,551   | )          | (268,974,551           | )          |
| Consolidation        |   | 131,011,805            |   | 1,312,172    |       | (7,192,580     | )          | 125,131,397            |       |
|                 |   | 2,035,508,786          |   | 60,398,285   |       | (1,424,368,804 | )          | 671,538,267            |       |

 

• Currencytranslation

 

Comprised of exchangefluctuations recorded in converting financial statements maintained in non-Eurocurrencies. The increase in 2001 and 2002 is mainly due to the conversiondifferences in subsidiaries in Brazil.

 

• Revaluationreserve

 

Amounts registered inthis heading, which were derived from the net increase in fixed assets throughrevaluations made in accordance with the defined criteria, are transferred toretained earnings as far as realised through sale, disposition or amortisationof the related items. In general terms, these amounts are not available fordistribution as they can only be used to increase share capital or cover uplosses incurred up to the end of the period to which the revaluation relates.

 

•Consolidation reserve

 

On January 1, 1993, the Company began accountingfor investments in subsidiaries and associated companies under the equitymethod of accounting. The difference between the historical cost of theinvestments and the Company’s share of the net assets of the investees as ofJanuary 1, 1993 was recorded within this account.

 

• Equity accounting reserve

 

Thecompany’s proportionate interest inthe net income of the associated companies are included in the Company’sconsolidated statement of income. Accordingly, this heading includes theundistributed portion of net income from these investments recognized sinceJanuary 1, 1993.

 

• Fair value reserve

 

Under this heading is recordedthe variation between the historical cost of the non-trading investments, netof any provision for impairment, and the market value of these investments. Theincrease in the fair value reserve is due to the first time adjustmentmark-to-market of investments in other companies.

 

***Dividends***

 

According to Portugueselaw, the Company’s management propose to the Annual General Meeting that atleast 50% of EDP’s annual net income, after covering losses for previousperiods and the required allocation to the legal reserve (“Distributable NetIncome”), is to be distributed to shareholders in the form of a dividend,unless a resolution is passed by the shareholders stating otherwise. In orderto raise the dividend above that proposed amount,

 

F-32

----

 

a simple majority of votes of shareholders is required.  In order to lower the dividend below 50% ofDistributable Net Income, a majority of votes corresponding to 75% of EDP’sshare capital is required.

 

**Retained earnings**

 

Theincrease in retained earnings in 2002 is mainly due to the first time transferfrom the Revaluation reserves of EUR 848,173,899 of amounts already realized byamortization or disposal of the related assets since inception of theirrevaluation.

 

**20.****             REVENUESAND SEGMENTS**

 
|                                                |   | **2000**      |   | **2001**      |   | **2002**      |   |
|-----------------------------------------------------|--------|---------------|--------|---------------|--------|---------------|--------|
| Electricity:                                        |   |          |   |          |   |          |   |
| Municipalities                                      |   | 156,056,918   |   | 158,777,631   |   | 207,008,241   |   |
| State and other  public entities                    |   | 99,272,728    |   | 102,283,043   |   | 73,916,793    |   |
| State owned  companies                              |   | 56,944,404    |   | 60,574,461    |   | 29,190,634    |   |
| Individual  consumers and non-state owned companies |   | 2,747,870,347 |   | 2,975,058,433 |   | 3,203,291,925 |   |
| Generation sales  to the Binding Sector             |   | 598,150,018   |   | 1,214,072,593 |   | 1,323,893,609 |   |
| International                                       |   | 17,573,209    |   | 690,509,043   |   | 1,038,857,257 |   |
|                                                |   | 3,675,867,624 |   | 5,201,275,204 |   | 5,876,158,459 |   |
| Other sales                                         |   | 60,891,162    |   | 97,966,533    |   | 111,981,793   |   |
| Services                                            |   | 109,734,475   |   | 351,132,352   |   | 398,418,183   |   |
|                                                |   | 3,846,493,261 |   | 5,650,374,089 |   | 6,386,558,435 |   |

 

Revenues in the BindingSector in 2002 increased due to the consolidation of Hidrocantábrico (sevenmonths of sales) by the proportionate consolidation method and Escelsa andEnersul (three months of sales).

 

All of the Group’scustomers are subject to the same tariff options. Tariffs are differentiated byvoltage level, tariff option and period of consumption.

 

F-33

----

 

***Segment profit and segment assets***

 

The Company’s reportablesegments are each managed separately. EDP evaluates performance and allocates resourcesbased on operating income. The accounting policies of the reportable segmentsare the same as those described in the significant accounting policies innote 3. Intersegment sales and transfers are recorded at the same pricesas those charged to external customers.

 
|                                    |   | **2000**       |         | **2001**      |         | **2002**      |         |
|-----------------------------------------|--------|----------------|--------------|---------------|--------------|---------------|--------------|
| ***Revenues***                          |   |           |         |          |         |          |         |
| Revenues from  external customers:      |   |           | * *     |          | * *     |          | * *     |
| Generation                              |   | 610,536,712    |         | 1,256,495,041 |         | 1,428,471,312 |         |
| Transmission –  REN                |   | 65,176,779     |         | —        |         | —        |         |
| Distribution:                           |   |           |         |          |         |          |         |
| Portugal                                |   | 3,025,459,792  |         | 3,273,424,363 |         | 3,469,394,033 |         |
| Spain (a)                               |   | —         |         | —        |         | 321,351,274   |         |
| Brazil                                  |   | —         |         | 690,509,043   |         | 668,595,920   |         |
|                                    |   | 3,025,459,792  |         | 3,963,933,406 |         | 4,459,341,227 |         |
| Telecom:                                |   |           |         |          |         |          |         |
| Portugal                                |   | 16,717,710     |         | 125,569,484   |         | 189,630,043   |         |
| Spain                                   |   | —         |         | 61,544,828    |         | 130,799,313   |         |
|                                    |   | 16,717,710     |         | 187,114,312   |         | 320,429,356   |         |
| IT                                      |   | 22,245,142     |         | 150,255,848   |         | 106,675,465   |         |
| All other                               |   | 106,357,127    |         | 92,575,482    |         | 71,641,075    |         |
| Total revenues  from external customers |   | 3,846,493,262  |         | 5,650,374,089 |         | 6,386,558,435 |         |
| Intersegment  revenues:                 |   |           | *** *** |          | *** *** |          | *** *** |
| Generation                              |   | 588,826,343    |         | 58,402,278    |         | 165,865,597   |         |
| Transmission –  REN                |   | 889,409,199    |         | —        |         | —        |         |
| Distribution:                           |   |           |         |          |         |          |         |
| Portugal                                |   | 8,548,478      |         | 6,575,664     |         | 10,301,641    |         |
| Spain                                   |   | —         |         | —        |         | —        |         |
| Brazil                                  |   | —         |         | —        |         | —        |         |
|                                    |   | 8,548,478      |         | 6,575,664     |         | 10,301,641    |         |
| Telecom:                                |   |           |         |          |         |          |         |
| Portugal                                |   | 9,270,892      |         | 763,209       |         | 291,081       |         |
| Spain                                   |   | —         |         | 46,755        |         | —        |         |
|                                    |   | 9,270,892      |         | 809,964       |         | 291,081       |         |
| IT                                      |   | 71,350,712     |         | 116,776,822   |         | 199,445,406   |         |
| All other                               |   | 85,219,823     |         | 67,745,292    |         | 74,858,037    |         |
| Total  intersegment revenues            |   | 1,652,625,447  |         | 250,310,020   |         | 450,761,762   |         |
| Total revenue                           |   | 5,499,118,709  |         | 5,900,684,109 |         | 6,837,320,197 |         |
| Reconciling  items:                     |   |           |         |          |         |          |         |
| Intersegment  revenues                  |   | (1,652,625,447 | )            | (250,310,020  | )            | (450,761,762  | )            |
| Total  consolidated revenues            |   | 3,846,493,262  |         | 5,650,374,089 |         | 6,386,558,435 |         |

 

----

(a) Includes all revenues from all activities of Hidrocantábrico.

 

 

F-34

----

 
|                                           |   | **2000**     |       | **2001**     |       | **2002**     |       |
|------------------------------------------------|--------|--------------|------------|--------------|------------|--------------|------------|
| ***Depreciation and amortization expense***    |   |         | * *   |         | * *   |         | * *   |
| Generation                                     |   | 222,764,378  |       | 227,474,081  |       | 231,611,037  |       |
| Transmission –  REN                       |   | 33,693,668   |       | —       |       | —       |       |
| Distribution:                                  |   |         |       |         |       |         |       |
| Portugal                                       |   | 313,955,088  |       | 324,576,467  |       | 330,239,155  |       |
| Spain                                          |   | —       |       | —       |       | 27,822,892   |       |
| Brazil                                         |   | —       |       | 35,826,643   |       | 49,258,997   |       |
|                                           |   | 313,955,088  |       | 360,403,110  |       | 407,321,044  |       |
| Telecom:                                       |   |         |       |         |       |         |       |
| Portugal                                       |   | 20,672,400   |       | 41,527,340   |       | 49,317,953   |       |
| Spain                                          |   | —       |       | 7,343,523    |       | 17,541,131   |       |
|                                           |   | 20,672,400   |       | 48,870,863   |       | 66,859,084   |       |
| IT                                             |   | 9,141,235    |       | 18,456,115   |       | 18,896,583   |       |
| All other                                      |   | 13,373,928   |       | 9,487,244    |       | 14,852,870   |       |
| Total  depreciation and amortization expense   |   | 613,600,687  |       | 664,691,413  |       | 739,540,618  |       |
|                                           |   |         | ** ** |         | ** ** |         | ** ** |
| ***Segment operating profit***                 |   |         | ** ** |         | ** ** |         | ** ** |
| Generation                                     |   | 508,155,490  |       | 514,952,466  |       | 546,873,789  |       |
| Transmission –  REN                       |   | 48,233,757   |       | —       |       | —       |       |
| Distribution:                                  |   |         |       |         |       |         |       |
| Portugal                                       |   | 215,975,918  |       | 191,238,927  |       | 93,916,381   |       |
| Spain                                          |   | —       |       | —       |       | 26,157,567   |       |
| Brazil                                         |   | —       |       | 64,609,292   |       | 33,930,283   |       |
|                                           |   | 215,975,918  |       | 255,848,219  |       | 154,004,230  |       |
| Telecom:                                       |   |         |       |         |       |         |       |
| Portugal                                       |   | (80,176,774  | )          | (100,648,286 | )          | (87,107,331  | )          |
| Spain                                          |   | —       |       | (16,954,540  | )          | (29,408,930  | )          |
|                                           |   | (80,176,774  | )          | (117,602,826 | )          | (116,516,261 | )          |
| IT                                             |   | (1,829,385   | )          | 15,575,458   |       | 35,562,778   |       |
| All other                                      |   | 20,915,463   |       | (9,016,513   | )          | 18,586,878   |       |
| Total segment  operating profit                |   | 711,274,469  |       | 659,756,804  |       | 638,511,414  |       |
| Reconciling items:                             |   |         |       |         |       |         |       |
| Corporate  (expenses)/income, net              |   | (61,154,528  | )          | (76,415,578  | )          | (74,390,476  | )          |
| Interest and  related (expenses)/income, net   |   | (174,828,269 | )          | (205,333,290 | )          | (222,843,423 | )          |
| Other  non-operating (expenses)/income, net    |   | 288,792,515  |       | 125,989,419  |       | (138,938,784 | )          |
| Intersegment  income                           |   | 74,245,000   |       | 90,191,223   |       | 84,582,649   |       |
| Total  consolidated income before income taxes |   | 838,329,187  |       | 594,188,578  |       | 286,921,380  |       |

 

F-35

----

 
|                                              |   | **2000**       |       | **2001**       | ** ** | **2002**       | ** ** |
|---------------------------------------------------|--------|----------------|------------|----------------|------------|----------------|------------|
| ***Segments assets***                             |   |           | ** ** |           | ** ** |           | ** ** |
| Generation                                        |   | 4,794,390,678  |       | 6,559,202,808  |       | 5,326,246,027  |       |
| Transmission-REN                                  |   | —         |       | —         |       | —         |       |
| Distribution:                                     |   |           |       |           |       |           |       |
| Portugal                                          |   | 4,871,158,084  |       | 4,968,090,323  |       | 5,141,351,276  |       |
| Spain                                             |   | —         |       | —         |       | 1,707,908,194  |       |
| Brazil                                            |   | 427,754,123    |       | 862,531,026    |       | 1,508,427,171  |       |
|                                              |   | 5,298,912,207  |       | 5,830,621,349  |       | 8,357,686,641  |       |
| Telecom:                                          |   |           |       |           |       |           |       |
| Portugal                                          |   | 1,032,561,527  |       | 887,057,380    |       | 931,529,672    |       |
| Spain                                             |   | —         |       | 141,446,817    |       | 228,324,186    |       |
|                                              |   | 1,032,561,527  |       | 1,028,504,197  |       | 1,159,853,858  |       |
| IT                                                |   | —         |       | 256,409,557    |       | 332,269,766    |       |
| All other                                         |   | 1,206,648,517  |       | 2,530,949,983  |       | 2,803,539,778  |       |
| Total segment  assets                             |   | 12,332,512,929 |       | 16,205,687,894 |       | 17,979,596,070 |       |
| Reconciling  items:                               |   |           |       |           |       |           |       |
| Corporate assets                                  |   | 5,289,505,502  |       | 8,337,950,302  |       | 3,327,510,850  |       |
| Intersegment  accounts receivable                 |   | (2,735,087,694 | )          | (8,310,495,409 | )          | (3,181,917,139 | )          |
| Total  consolidated assets                        |   | 14,886,930,737 |       | 16,233,142,787 |       | 18,125,189,781 |       |
|                                              |   |           | ** ** |           | ** ** |           | ** ** |
| ***Expenditures for additions to fixed assets***  |   |           | * *   |           | * *   |           | * *   |
| Generation                                        |   | 69,727,941     |       | 138,769,068    |       | 246,866,393    |       |
| Transmission-REN                                  |   | 14,975,783     |       | —         |       | —         |       |
| Distribution:                                     |   |           |       |           |       |           |       |
| Portugal                                          |   | 297,377,834    |       | 335,363,007    |       | 376,318,954    |       |
| Spain                                             |   | —         |       | —         |       | 102,355,351    |       |
| Brazil                                            |   | —         |       | 49,914,902     |       | 25,382,685     |       |
|                                              |   | 297,377,834    |       | 385,277,909    |       | 504,056,990    |       |
| Telecom:                                          |   |           |       |           |       |           |       |
| Portugal                                          |   | 71,399,961     |       | 59,728,760     |       | 208,037,250    |       |
| Spain                                             |   | —         |       | 50,436,561     |       | 20,581,933     |       |
|                                              |   | 71,399,961     |       | 110,165,321    |       | 228,619,183    |       |
| IT                                                |   | 29,997,706     |       | 62,064,070     |       | 28,199,390     |       |
| All other                                         |   | 85,230,409     |       | 87,771,406     |       | 47,911,254     |       |
| Total expenditures  for additions to fixed assets |   | 568,709,635    |       | 784,047,774    |       | 1,055,653,210  |       |

 

**21.****             RAW MATERIALS ANDCONSUMABLES**

 
|                   |   | **2000**      |   | **2001**      |   | **2002**      |   |
|------------------------|--------|---------------|--------|---------------|--------|---------------|--------|
| Electricity  purchased |   | 1,278,626,665 |   | 2,524,293,349 |   | 3,005,400,238 |   |
| Fuel                   |   | 308,864,467   |   | 379,585,712   |   | 467,951,685   |   |
| Materials              |   | 102,951,671   |   | 114,228,360   |   | 127,804,014   |   |
| Other                  |   | 40,279,771    |   | 60,756,826    |   | 85,941,340    |   |
|                   |   | 1,730,722,574 |   | 3,078,864,247 |   | 3,687,097,277 |   |

 

F-36

----

 

**22.****                               PERSONNEL COSTS**

 
|                     |   | **2000**    |   | **2001**    |   | **2002**    |   |
|--------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Salaries                 |   | 299,930,088 |   | 402,399,702 |   | 427,618,996 |   |
| Social security benefits |   | 77,373,715  |   | 92,291,822  |   | 102,583,488 |   |
| Insurance                |   | 3,095,704   |   | 3,449,013   |   | 3,002,496   |   |
| Employee benefits        |   | 7,334,274   |   | 6,458,560   |   | 5,643,812   |   |
| Pensions                 |   | 18,974,272  |   | 37,492,144  |   | 44,339,970  |   |
| Other                    |   | 32,604,962  |   | 49,882,248  |   | 41,583,485  |   |
|                     |   | 439,313,006 |   | 591,973,489 |   | 624,772,247 |   |

 

**23.****                               OTHER EXTERNAL SUPPLIES AND SERVICES**

 
|                                |   | **2000**    |   | **2001**    |   | **2002**    |   |
|-------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Subcontractors                      |   | 29,185,186  |   | 113,096,766 |   | 179,073,612 |   |
| Maintenance and repairs             |   | 73,258,038  |   | 95,042,144  |   | 100,636,071 |   |
| Fuel                                |   | 6,435,675   |   | 7,142,397   |   | 7,404,556   |   |
| Rents                               |   | 23,284,779  |   | 40,555,409  |   | 34,203,728  |   |
| Communications                      |   | 22,640,038  |   | 33,649,646  |   | 21,957,011  |   |
| Insurance                           |   | 10,457,378  |   | 10,885,734  |   | 18,386,377  |   |
| Cleaning services                   |   | 5,142,561   |   | 5,311,220   |   | 5,683,024   |   |
| Security services                   |   | 6,277,736   |   | 7,549,242   |   | 8,993,371   |   |
| Collection services                 |   | 11,710,637  |   | 11,666,075  |   | 13,258,016  |   |
| Specialized and consulting services |   | 105,298,561 |   | 231,474,826 |   | 187,547,761 |   |
| Medical benefits                    |   | 8,141,489   |   | 4,929,125   |   | 8,461,440   |   |
| Advertising costs                   |   | 28,938,902  |   | 23,556,633  |   | 20,970,300  |   |
| Other                               |   | 37,773,089  |   | 66,370,969  |   | 68,494,672  |   |
|                                |   | 368,544,069 |   | 651,230,186 |   | 675,069,959 |   |

 

The increase in subcontractors relates mainly to the telecom business, whichincreased during 2001 and 2002.

 

**24.****                               OWN WORK CAPITALIZED**

** **
|                       |   | **2000**    |   | **2001**    |   | **2002**    |   |
|----------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Consumption of materials   |   | 75,701,963  |   | 84,020,311  |   | 70,695,020  |   |
| Direct internal costs      |   | 78,642,202  |   | 60,961,184  |   | 88,001,703  |   |
| Overheads                  |   | 46,802,940  |   | 42,305,120  |   | 55,721,870  |   |
| Finance charges            |   | 8,588,402   |   | 14,477,544  |   | 16,035,807  |   |
| Other own work capitalized |   | 19,336,300  |   | 30,754,586  |   | 11,314,857  |   |
|                       |   | 229,071,807 |   | 232,518,745 |   | 241,769,257 |   |

 

F-37

----

 

**25.****                               PROVISIONS**

 

During 2000,the movements in provisions were as follows: 

 
|                                            |   | **Opening  balance** |   | **Alteration in  Subsidiaries** |   | **Increases** |   | **Decreases** |   | **Ending  balance** |   |
|-------------------------------------------------|--------|----------------------|--------|---------------------------------|--------|---------------|--------|---------------|--------|---------------------|--------|
| For doubtful accounts (Notes 4, 5 and 7)        |   | 267,434,932          |   | 2,359,065                       |   | 3,630,610     |   | 27,264,213    |   | 246,160,394         |   |
| For other risks and contingencies:              |   |                 |   |                            |   |          |   |          |   |                |   |
| Medical benefits (Note 16)                      |   | 361,688,331          |   | (23,588,152                     | )      | 38,681,777    |   | 18,325,835    |   | 358,456,121         |   |
| Pensions (Note 16)(1)                           |   | 98,323,041           |   | 149,774,045                     |   | 17,512,794    |   | —        |   | 265,609,880         |   |
| Various contingencies (Note 18)(1)              |   | 232,517,303          |   | (124,902,265                    | )      | 48,095,530    |   | 72,192,611    |   | 83,517,957          |   |
| Other                                           |   | 12,435               |   |                            |   |          |   | 12,435        |   |                |   |
|                                            |   | 692,541,110          |   | 1,283,628                       |   | 104,290,101   |   | 90,530,881    |   | 707,583,958         |   |
| For diminution in value of Investments (Note 8) |   | 698,317              |   |                            |   |          |   |          |   | 698,317             |   |
|                                            |   | 960,674,359          |   | 3,642,693                       |   | 107,920,711   |   | 117,795,094   |   | 954,442,669         |   |

 

----

(1)          Due to the changes in the actuarialassumptions (see Note 16), EUR 145,260,931 was reclassified from variouscontingencies to pensions during 2000

 

During2001, the movements in provisions were as follows:

 
|                                            |   | **Opening  balance** |   | **Alteration in  Subsidiaries** |   | **Increases** |   | **Decreases** |   | **Ending  balance** |   |
|-------------------------------------------------|--------|----------------------|--------|---------------------------------|--------|---------------|--------|---------------|--------|---------------------|--------|
|                                            |   |                 |   |                            |   |          |   |          |   |                |   |
| For doubtful accounts (Notes 4, 5 and 7)        |   | 246,160,394          |   | 933,671                         |   | 20,464,383    |   | 13,295,702    |   | 254,262,746         |   |
| For other risks and contingencies:              |   |                 |   |                            |   |          |   |          |   |                |   |
| Medical benefits (Note 16)                      |   | 358,456,121          |   | —                          |   | 32,480,098    |   | 12,997,219    |   | 377,939,000         |   |
| Pensions (Note 16)                              |   | 265,609,880          |   | —                          |   | 67,260,750    |   | 26,921,630    |   | 305,949,000         |   |
| Various contingencies (Note 18)(1)              |   | 83,517,957           |   | 253,033                         |   | 65,985,633    |   | 2,155,427     |   | 147,601,196         |   |
|                                            |   | 707,583,958          |   | 253,033                         |   | 165,726,481   |   | 42,074,276    |   | 831,489,196         |   |
| For diminution in value of Investments (Note 8) |   | 698,317              |   | 3,125,669                       |   | 3,113,970     |   | —        |   | 6,937,956           |   |
|                                            |   | 954,442,669          |   | 4,312,373                       |   | 189,304,834   |   | 55,369,978    |   | 1,092,689,898       |   |

 

----

(1)          In 2001 includes the amount of EUR45,625,913 from Bandeirante.

 

During2002, the movements in provisions were as follows:

 
|                                     |   | **Opening  balance** |   | **Alteration in  Subsidiaries** |   | **Increases** |   | **Decreases** |   | **Ending  balance** |   |
|------------------------------------------|--------|----------------------|--------|---------------------------------|--------|---------------|--------|---------------|--------|---------------------|--------|
|                                     |   |                 |   |                            |   |          |   |          |   |                |   |
| For doubtful accounts (Notes 4, 5 and 7) |   | 254,262,746          |   | 11,997,681                      |   | 42,668,074    |   | 30,420,988    |   | 278,507,513         |   |
| For other risks and contingencies:       |   |                 |   |                            |   |          |   |          |   |                |   |
| Medical benefits (Note 16)               |   | 377,939,000          |   | —                          |   | 57,614,471    |   | 38,840,471    |   | 396,713,000         |   |
| Pensions (Note 16)                       |   | 305,949,000          |   | 3,435,200                       |   | 14,687,117    |   | 112,528,317   |   | 211,543,000         |   |
| Various contingencies (Note 18)          |   | 147,601,196          |   | 77,526,561                      |   | 3,971,874     |   | 31,073,954    |   | 198,025,678         |   |
|                                     |   | 831,489,196          |   | 80,961,761                      |   | 76,273,462    |   | 182,442,742   |   | 806,281,677         |   |
| For diminution in value of:              |   |                 |   |                            |   |          |   |          |   |                |   |
| Investments (Note 8)                     |   | 6,937,956            |   | —                          |   | 271,404,748   |   | —        |   | 278,125,761         |   |
| Fixed assets                             |   | —               |   | —                          |   | 280,935,000   |   | 280,935,000   |   | —              |   |
| Stocks                                   |   | —               |   | —                          |   | 1,179,695     |   | —        |   | 1,179,695           |   |
|                                     |   | 1,092,689,898        |   | 92,959,441                      |   | 672,244,036   |   | 493,798,730   |   | 1,364,094,646       |   |

 

F-38

----

 

The netmovements in provisions reflected in the income statements are included underthe “Provisions” captions in “Other non-operating expenses (income)” throughthe line item “Movements in provisions” in Note 29, or charged directly toequity, as follows:

 
|                                                 |   | **2000**    |   | **2001**    |   | **2002**     |   |
|------------------------------------------------------|--------|-------------|--------|-------------|--------|--------------|--------|
| Provisions:                                          |   |        |   |        |   |         |   |
| Doubtful accounts                                    |   | 3,630,610   |   | 20,464,383  |   | 23,192,238   |   |
| Medical benefits                                     |   | 38,681,777  |   | 32,480,098  |   | 57,614,471   |   |
| Pensions                                             |   | 17,512,794  |   | 63,041,677  |   | 14,687,117   |   |
| Various contingencies                                |   | 45,265,462  |   | —      |   | 3,971,874    |   |
| Stocks                                               |   | —      |   | —      |   | 1,179,695    |   |
| Other                                                |   | —      |   | 3,113,970   |   | —       |   |
|                                                 |   | 105,090,643 |   | 119,100,128 |   | 100,645,395  |   |
| Movements in provisions (Note 29):                   |   |        |   |        |   |         |   |
| Doubtful accounts                                    |   | (11,016,381 | )      | —      |   | 19,475,836   |   |
| Investments                                          |   | —      |   | —      |   | 2,213,874    |   |
| Pensions                                             |   | —      |   | (22,702,556 | )      | (74,648,793  | )      |
| Various contingencies                                |   | 2,830,070   |   | 63,830,206  |   | (5,114,611   | )      |
| Impairment of fixed assets                           |   | —      |   | —      |   | 280,935,000  |   |
|                                                 |   | (8,186,311  | )      | 41,127,650  |   | 222,860,686  |   |
| Total amounts included in the income statements      |   | 96,904,332  |   | 160,227,778 |   | 323,506,081  |   |
|                                                 |   |        |   |        |   |         |   |
| Changes in subsidiaries                              |   | 3,642,691   |   | 4,312,373   |   | 92,959,442   |   |
| Amounts written-off:                                 |   |        |   |        |   |         |   |
| Doubtful debts                                       |   | (16,247,832 | )      | (13,295,702 | )      | (30,420,988  | )      |
| Pensions                                             |   | —      |   | —      |   | (35,997,181  | )      |
| Investments                                          |   | —      |   | —      |   | (280,935,000 | )      |
| Stocks                                               |   | (12,435     | )      | —      |   | —       |   |
|                                                 |   | (12,617,576 | )      | (8,983,329  | )      | (254,393,727 | )      |
| Charged directly to equity:                          |   |        |   |        |   |         |   |
| Investments (fair value reserve)                     |   | —      |   | —      |   | 268,974,551  |   |
| Medical (currency translation reserve)               |   | —      |   | —      |   | (1,882,343   | )      |
| Pensions (currency translation reserve)              |   | —      |   | —      |   | (24,077,000  | )      |
| Various contingencies (currency translation reserve) |   | —      |   | —      |   | (25,959,343  | )      |
|                                                 |   | —      |   | —      |   | 217,055,865  |   |
|                                                 |   |        |   |        |   |         |   |
| Payments:                                            |   |        |   |        |   |         |   |
| Medical                                              |   | (18,325,835 | )      | (12,997,220 | )      | (14,763,471  | )      |
| Various contingencies                                |   | (72,192,611 | )      | —      |   | —       |   |
|                                                 |   | (90,518,446 | )      | (12,997,22  | )      | (14,763,471  | )      |
| Total net movements in provisions                    |   | (6,231,690  | )      | 138,247,229 |   | 271,404,748  |   |

 

**26.****                               OTHER OPERATING INCOME, NET**

 
|                              |   | **2000**   |   | **2001**   |   | **2002**   |   |
|-----------------------------------|--------|------------|--------|------------|--------|------------|--------|
| Compensation from social security |   | 3,244,491  |   | 3,800,660  |   | 4,007,889  |   |
| Indemnities                       |   | 1,950,863  |   | 2,542,657  |   | —     |   |
| Memberships                       |   | (471,913   | )      | (595,994   | )      | (627,978   | )      |
| Operating subsidies               |   | 601,605    |   | 1,898,662  |   | 453,433    |   |
| Supplementary gains               |   | 7,894,020  |   | 39,961,257 |   | 8,066,939  |   |
| Other, net                        |   | (787,137   | )      | 8,639,642  |   | 10,411,912 |   |
|                              |   | 12,431,929 |   | 56,246,884 |   | 22,312,195 |   |

 

Supplementary gains consists of reimbursements received forout-of-pocket expenses incurred and charged to third parties related to ongoing IT services and telecommunicationservices.

 

F-39

----

 

**27.****                               INTERESTAND RELATED EXPENSES**

 
|                                                |   | **2000**    |   | **2001**    |   | **2002**    |   |
|-----------------------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Interest expense, debt                              |   | 206,551,007 |   | 266,577,770 |   | 329,860,746 |   |
| Interest expense, hydrological correction           |   | 15,215,401  |   | 20,559,696  |   | 12,684,863  |   |
| Foreign currency exchange losses                    |   | 6,548,862   |   | 63,666,000  |   | 22,846,399  |   |
| Net losses from affiliates and associated companies |   | 51,496      |   | 13,485,345  |   | 115,183,866 |   |
| Concession rights/goodwill amortization             |   | 49,608,400  |   | 49,691,342  |   | 46,473,319  |   |
| Bank commissions on loans                           |   | 2,782,166   |   | 17,317,830  |   | 4,125,662   |   |
| Bank services                                       |   | —      |   | 12,647,315  |   | 57,025,306  |   |
| Other                                               |   | 10,947,603  |   | 12,809,532  |   | 16,363,900  |   |
|                                                |   | 291,704,935 |   | 456,754,831 |   | 604,564,061 |   |

 

Interest and related expenses include net interestexpense (income) with respect to interest rate swaps of EUR 23,521,300 in 2000and (EUR 23,146,054) in 2001 and (EUR 27,963,505) in 2002.

 

**28.****                               INTERESTAND RELATED INCOME**

 
|                                                |   | **2000**    |   | **2001**    |   | **2002**    |   |
|-----------------------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Interest income                                     |   | 23,497,715  |   | 51,879,989  |   | 46,758,028  |   |
| Foreign currency exchange gains                     |   | 4,654,752   |   | 62,321,221  |   | 90,260,262  |   |
| Net income from affiliates and associated companies |   | 64,916,287  |   | 41,935,974  |   | 76,491,617  |   |
| Cash discounts obtained                             |   | 1,946,514   |   | 2,212,179   |   | 2,147,383   |   |
| Late payment charges                                |   | 21,173,971  |   | 2,091,350   |   | 48,843      |   |
| Gain on early extinguishment of debt                |   | —      |   | 88,556,519  |   | 89,173,897  |   |
| Other                                               |   | 687,428     |   | 2,424,312   |   | 76,840,609  |   |
|                                                |   | 116,876,667 |   | 251,421,544 |   | 381,720,639 |   |

 

The Company recorded a financial gain of EUR 88,556,519 in 2001 relatedto the early extinguishment of Bandeirante U.S. dollar-denominated debt, andEUR 89,173,897 in 2002 related to the early extinguishment of Escelsa U.S.dollar-denominated debt. This financial gain is equivalent to the differencebetween the face value of the outstanding U.S. dollar-denominated debt that wasrepaid and the market price of the bonds which were bought at a significantdiscount to par value.  

 

**29.****                               OTHER NON-OPERATING EXPENSES (INCOME)**

 
|                                                     |   | **2000**     |   | **2001**     |   | **2002**    |   |
|----------------------------------------------------------|--------|--------------|--------|--------------|--------|-------------|--------|
| Amortization of fixed asset subsidies                    |   | (61,050,099  | )      | (63,887,471  | )      | (71,766,935 | )      |
| Losses (gains) on disposals of fixed assets              |   | (967,369     | )      | (4,311,235   | )      | (3,152,443  | )      |
| Losses (gains) on disposals of investments               |   | (204,504,724 | )      | (20,734,889  | )      | (8,860,588  | )      |
| Movements in provisions (Note 25)                        |   | (8,186,311   | )      | 41,127,650   |   | 222,860,686 |   |
| Recovery of depreciation on concession-held fixed assets |   | (5,049,097   | )      | (4,881,945   | )      | (4,283,876  | )      |
| Write-off of accounts receivables                        |   | 24,042       |   | —       |   | 9,084,127   |   |
| Hydrological correction(1)                               |   | —       |   | (47,465,630  | )      | —      |   |
| Reversal of impairment on Oniway                         |   | —       |   | —       |   | (70,000,000 | )      |
| Extraordinary depreciations                              |   | —       |   | —       |   | 65,018,562  |   |
| Additional income tax payment                            |   | —       |   | —       |   | 19,562,554  |   |
| Indemnities paid                                         |   | —       |   | —       |   | 13,962,554  |   |
| Other                                                    |   | (9,058,958   | )      | (25,835,896  | )      | (33,485,496 | )      |
|                                                     |   | (288,792,516 | )      | (125,989,416 | )      | 138,938,784 |   |

 

----

(1) See Note 3 accounting principles – hydrological correction account.

 

F-40

----

 

**30.****                               COMMITMENTSAND CONTINGENCIES**

 

a)                                      The amount ofthe rent payable to municipalities with respect to the concessions isestablished by Government regulation and is based on the amount of energyconsumed each year and the density of the customer base in the respectivemunicipalities.  Concession rent expenseamounted to EUR 128,376,952 in 2000, EUR 145,091,446 in 2001 and 154,008,204 in2002.

 

b)                                     REN, asconcessionaire of the national electric grid has signed a power purchaseagreement providing for the availability to REN of all the electricity producedby all EDP plants as well as Tejo Energia’s Pego power plant and Turbogás plantTapada do Outeiro. Under the agreements, REN is required to make specifiedmonthly payments for capacity whether or not it takes delivery, which are fullypassed through to the eligible costs for tariffs.  The amount of minimum monthly payments is to be adjusted forchanges in inflation and interest rates. Total purchases made by REN while part of the Group, from Tejo Energiaand Turbogás, including the minimum payments, were EUR 260,059,332 for the sixmonths ended June 30, 2000.

 

c)                                      REN, asconcessionaire of the national electric grid, is required to buy energy, as itis made available to REN, from small hydroelectric producers, other renewableenergy source plants, and certain other cogenerators. The price paid by the RENis determined by Government regulation or by the Regulator. Purchases made byREN, while part of the Group, amounted to EUR 64,490,558 for the sixmonths period ended June 30, 2000.

 

d)                                     The Group hasprovided guarantees in the amount of EUR 409,000,000 during 2002. Theseguarantees have been primarily provided to banks in respect of loans obtainedby subsidiary which are included in these consolidated financial statements,and to customs authorities.

 

e)                                      Corporateincome tax returns are subject to review and correction by the income taxauthorities for a period of six years after the filing of such returns.  Accordingly, the last taxation year that canbe considered definitively assessed by the income tax authorities is 1996.

 

f)                                        The Company isinvolved in legal proceedings arising in the normal course of business.  Management believes, based on advice oflegal counsel, that the outcome of these proceedings will not have a materialadverse effect on the Company’s financial statements.

 

**31.****                               FINANCIAL INSTRUMENTS**

 

EDP uses financial derivative instruments to manage its exposure tointerest rate and foreign currency fluctuations.  The counterparts to these agreements are major financialinstitutions and expose EDP to market and credit risk and, occasionally, may beconcentrated with certain counterparts. Management believes the credit risk and interest rate risk arising fromnon-performance by the counterparties is not significant, based on theinvestment grade rating of the counterparties. The Company does not requirecollateral or other security to support the financial instruments with creditrisk.

 

Management is aware of EDP’s exposure to market risks arising from itsoutstanding debt and derivative instruments. Market risks mainly results frominterest rate and foreign exchange rate fluctuations. The Company estimates thesensitivity of the fair values of its financial instruments to changes ininterest and foreign exchange rates. The methods and assumptions used by the Company to determine fair valuesare explained below in “Fair value of financial instruments”.

 

**Interest rate risk**

 

Interestrate swap agreements are used to manage the proportion of variable rate debt inthe Company’s debt portfolio and to reduce the level of interest expense.Notional amounts of interest rate swap agreements, including cross-currencyinterest rate swaps, outstanding as of December 31,2002 totalled EUR3,545,584,558 compared with EUR 2,960,420,697 at December 31, 2001. The swap agreementshave remaining maturities between 18 months and 

 

F-41

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15 years. The fair value ofthese derivative financial instruments is the amount that would be paid orreceived upon termination of the agreements based on available market rates.These agreements, if terminated,would result in receivables of EUR 131,181,260 at December 31,2002.

 

**Foreignexchange rate risk**

 

EDP’s current exposure to foreign exchange rate risk islimited to certain operating expenses, such as fuel costs, and someinternational investments since 95% of its debt is currently denominated ineuros or swapped to euros. Therefore at December 31, 2000 and 2001, there wereno outstanding currency swap agreements, at December 31, 2002 there is a crosscurrency and interest rate swap of GBP to EUR representing 4% of total debt.

 

EDP may periodically usenon-euro currency forward exchange agreements to reduce its exposure toexchange rate fluctuations associated with liabilities denominated in non-eurocurrencies. EDP did not hold any outstanding forward contracts at each of thethree years ended December 31, 2002.

 

**Other credit risks**

 

Other financial instruments that potentially subjectthe Group to concentrations of credit risk consist primarily of cash and cashequivalents, and accounts receivable.

 

The EDP Group maintains cash and cash equivalents withvarious financial institutions in Portugal. EDP performs periodic evaluations of the relative credit standing ofthose financial institutions.

 

The EDP Group does not consider itself exposed tocredit risk with respect to accounts receivable from non-public entities due tothe large number of diverse customers (individual consumers, corporations andsmall businesses) operating in many industries.

 

The EDP Group, as the solesupplier of low voltage electricity in Portugal, has in the past been obligedto provide electricity for street lighting and public buildings even insituations where the recipient municipalities were not paying their bills on atimely basis. Therefore, the Group is exposed to credit risk with respect toaccounts receivable from municipalities. However, in the past, this risk hasbeen reduced through the intervention of the Government in assisting in theresolution of certain disputed amounts. A provision has been established forthe portion of receivables that management believes will be uncollectible.

 

**Fair value of financial instruments**

 

The estimatedfair value of the financial instruments is as follows:

 
|                                                    |   | **2001**           |       | **2002**       |       |
|---------------------------------------------------------|--------|--------------------|------------|----------------|------------|
|                                                    |   | **Carrying value** |       | **Fair value** |       | **Carrying value** |   | **Fair value** |   |
| **Assets**                                              |   |               |       |           |       |   |   |   |   |
| Cash and cash equivalents                               |   | 34,385,780         |       | 34,385,780     |       | 213,972,719 |   | 213,972,719 |   |
| Accounts receivable – trade                        |   | 936,556,798        |       | 936,556,798    |       | 970,859,601 |   | 970,859,601 |   |
| Accounts receivable – other                        |   | 328,739,084        |       | 328,739,084    |       | 573,211,684 |   | 573,211,684 |   |
| Investments                                             |   | 1,451,504,290      |       | 1,419,719,402  |       | 1,895,789,622 |   | 1,895,789,622 |   |
| Long-term receivables                                   |   | 209,176,490        |       | 209,176,490    |       | 260,583,901 |   | 260,583,901 |   |
|                                                    |   |               |       |           |       |   |   |   |   |
| **Liabilities**                                         |   |               | ** ** |           | ** ** |   | ** ** |   | ** ** |
| Short-term debt                                         |   | 1,049,912,945      |       | 1,049,912,945  |       | 1,887,033,693 |   | 1,887,033,693 |   |
| Accounts payable – trade                           |   | 755,352,361        |       | 755,352,361    |       | 1,018,570,449 |   | 1,018,570,449 |   |
| Accounts payable – other                           |   | 104,935,924        |       | 104,935,924    |       | 173,676,538 |   | 173,676,538 |   |
| Long-term debt (including current portion/net of swaps) |   | 4,749,210,847      |       | 4,977,729,514  |       | 6,107,041,911 |   | 6,406,804,276 |   |

 

F-42

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The following methods and assumptions were used by the Company inestimating its fair value disclosures for financial instruments:

 

For cash and cash equivalents, accounts receivable, short-term debt andaccounts payable, the Group considers their carrying value to approximate fairvalue due to the short-term maturity of these instruments.

 

The fairvalue of the investments that are publicly traded is based on the quoted marketprice. For investments that are not publicly traded, the Group estimates thattheir carrying value approximates market value.

 

The fair valueof the long-term receivables has been estimated using discounted cash flows.

 

The fair value of the long-term debt wasdetermined as follows:

 

•                  Bonds - the quoted market price atDecember 31 of the respective years.

•                  Bank loans - discounted cash flow analysis,based on the Group’s current incremental borrowing rates for similar types ofborrowing arrangements.

 

The fairvalue of interest rate and currency swap agreements were determined usingdiscounted cash flow analysis based on zero-coupon yield curve rates. Zerocoupon rates used to discount cash flows were derived from market rates (midbid-offer spread) quoted by market dealers.

 

**32.****                               INCOMETAXES**

 

Income tax expense may beanalyzed as follows:

 
|                       |   | **2000**    |   | **2001**    |   | **2002**    |   |
|----------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Tax base                   |   |        |   |        |   |        |   |
| Income before income taxes |   | 838,329,187 |   | 594,188,578 |   | 286,921,381 |   |
| Permanent  differences     |   | (14,421,140 | )      | 76,299,875  |   | 302,779,174 |   |
|                       |   | 823,908,047 |   | 670,488,453 |   | 589,702,555 |   |
| Normal  charge             |   | 288,366,761 |   | 234,670,959 |   | 194,601,843 |   |
| Adjustments                |   | 24,274,513  |   | (31,718,373 | )      | (22,862,521 | )      |
| Income tax  expenses       |   | 312,641,274 |   | 202,952,586 |   | 171,739,322 |   |
| Current  income taxes      |   | 310,743,134 |   | 244,011,679 |   | 171,167,863 |   |
| Deferred  income taxes     |   | 1,898,141   |   | (41,059,093 | )      | 571,459     |   |
| Income tax expense         |   | 312,641,275 |   | 202,952,586 |   | 171,739,322 |   |

 

In 2000 and 2001, the reference income tax rate inPortugal was 32.00% and during 2002 the tax decreased to 30.00%. In addition tothe base rate, generally a municipal tax of 10.00% is applicable.

 

F-43

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**33.****                               RECONCILIATION TO ACCOUNTING PRINCIPLESGENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA**

 

The Company’s financial statements have been prepared in accordance withPortuguese GAAP which vary in certain significant respects from U.S. GAAP.Differences that have a significant effect on the Company’s consolidatedresults of operations and shareholders’ equity are as follows:

 

*a.**                                      Revaluation offixed assets*

 

The Group’s fixed assets that were acquired prior to 1993 are stated atrevalued amounts as permitted under Portuguese GAAP. The revalued fixed assetsare being depreciated over their estimated useful lives on their revaluedbasis.  Under U.S. GAAP, fixed assetsmay not be stated at more than their historical acquisition cost.  Accordingly, in the accompanyingreconciliation, the increases in shareholders’ equity and the related increasein depreciation expense occurring as a result of such revaluations have beenreversed for all periods presented. Depreciation for corporate income tax purposes is based on the originalacquisition cost and 60% of the additional revaluation increment.  Therefore, the adjustments also reflect theremaining deferred tax benefit arising from the revaluation increments.  The effect of the revaluation on the gainsand losses on disposals is not significant.

 

*b.**                                      Capitalizedoverhead*

* *

The Company capitalizes a portion of its general and administrativeoverhead to the cost of its assets under construction.  Under U.S. GAAP, such costs are expensed inthe period incurred.

 

*c.**                                       Foreignexchange differences*

* *

As permitted under Portuguese GAAP, prior to 1995, the Companycapitalized net foreign exchange differences (both gains and losses) thatresulted from loans contracted to fund capital expenditures denominated in non-escudocurrencies. Under U.S. GAAP, foreign exchange gains and losses may not becapitalized.

 

*d.**                                      Deferred costs*

* *

The Company capitalizes and amortizes research and development expenses,advertising costs, major repairs and maintenance costs, and reorganizationcosts. Under U.S. GAAP, such amounts are expensed in the period incurred. TheCompany also defers and amortizes subsidies received with respect to researchand development costs (included in deferred revenue in the consolidated balancesheets).  Under U.S. GAAP, the benefitof the subsidies would be included in income as the related research anddevelopment costs are incurred.

 

*e.**                                       Hydrologicalcorrection account*

 

As required by Government regulation, the Company records aliability-type amount to smooth the effect on its earnings that result fromchanges in hydrological conditions. Under U.S. GAAP, the effect of future changes in hydrological conditionswould be viewed as a general business risk and such a recording would not bepermitted. Since July 2000, the movement of gain/losses for hydro conditionsare charged to REN and not to the income statements.

 

The hydrological correction adjustments presented below in the U.S. GAAPnet income reconciliation reflect the net change for the year in the Hydrologicalcorrection account which consists of the amounts disclosed in Note 18.

 

*f.**                                          Distribution tomanagement and employees*

* *

The Company customarily distributes a portion of its net income tomanagement and employees. The amount of the distribution generally amounts toone month’s salary. Under Portuguese GAAP, this distribution is reflected inthe period in which formal shareholder approval is obtained and is recorded asa reduction of retained earnings or other 

 

F-44

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reserves.  U.S. GAAP requires that such distributionsbe recorded as compensation expense in the period to which they relate.

 

*g.**                                      Employeeretirement benefits*

* *

The company and some of its subsidiaries have pension obligations, bothdefined benefit and contribution and also medical benefits for retiredemployees. Costs for defined contribution are expensed when incurred.Accumulated obligations and annual expenses for medical and defined benefitpension plans are determined on actuarial basis. The company adopted thispolicy in Portuguese GAAP by implementing IAS 19 in 1999. For US GAAP thecompany is using SFAS 87 and SFAS 106 as from 1995.    

 

Thus,differences in accounting for these obligations are basically originated fromthe date of determination of transition obligation (1989 for US GAAP purposesand 1996 for Portuguese GAAP) and the assumptions relating the adherence rateto the early retirement plan for the period 1999-2002, as well as forrecognition the additional pension minimum liability.

 

*h.**                                      Employeetermination benefits*

* *

During 1997, the Company recorded a provision for future employeetermination benefits. This provision was increased during 1998 and 1999. Theprovision recorded under Portuguese GAAP reflects management’s estimate ofcosts to be incurred in connection with planned employee early retirements orterminations.  This provision would notbe recorded under U.S. GAAP since, as of December 31, 1998 and 1999, thedetails of the benefits arrangement had not been communicated to the employeesand other conditions required by U.S. GAAP had not been met. During 2000, aportion of the provision was utilized and the remaining was released to incomeunder Portuguese GAAP.

 

*i*.                                         *Accounts receivable*

* *

Under Portuguese GAAP a provision for doubtful accounts is establishedbased on historical collection experience and evaluation of the current statusof existing receivable balances. However, accounts receivables are only written-off when a customer isdeclared bankrupt by a court of law. Under U.S. GAAP, the write-off of areceivable would occur when collection is not probable.

 

In 1998, 1999 and 2000 the Company reached agreements with variousmunicipalities on the terms of the future settlement of various old accountsreceivable that under Portuguese GAAP had been fully provided in the past.  The reversal of the allowance for doubtfulaccounts amounted to EUR 10,963,039 in 1999, EUR 13,773,870 in 2000, with noreversal in 2001.  During 2000, 2001 and2002 the Company collected EUR 2,272,583 and EUR 1,156,628 and EUR 3,081,748related to those agreements. Under U.S. GAAP, the collection of the receivablesin question had previously been considered not probable and consequently hadbeen written off.  Therefore, under U.S.GAAP the benefit from the recovery of these accounts receivable may only berecorded when the amounts are actually received.

 

*j.**                                          Power purchaseagreements*

 

As permitted under Portuguese GAAP, REN has recorded the minimumcontracted payments made to producers of the Binding Sector in connection withthe power purchase agreements (Note 30) as an expense of the respectiveperiods.  U.S. GAAP would require theseagreements to be treated as acquisitions of assets and the assumption of capitallease obligations because the power plants’ production are fully dedicated andat the direction of REN and the agreements are for the duration of theestimated useful lives of the power plants.

 

Prior to July 1, 2000, power purchase agreements held by REN werereflected in the balance sheet amounts on the U.S. GAAP basis presented belowby recognition of a fixed asset and a capital lease obligation recorded at theinception of the term of the agreements equal to the present values of theminimum payments required under the agreements, less estimated executorycosts.  The reconciliation presentedbelow also reflects the allocation of the minimum payments, less the estimatedexecutory costs, between a reduction in the liability and interest expense.  In addition, an adjustment has been made forthe depreciation expense of the fixed asset.

 

F-45

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At the time of the disposal of the Central do Pego to Tejo Energia in1993, the estimated construction cost of the plant under Portuguese GAAP wasequal to the proceeds of disposal. However, the construction costs included capitalized foreign exchangedifferences and general and administrative costs which under U.S. GAAP wouldhave been expensed as periodic costs prior to the disposal.  These capitalized costs would have resultedin a gain on disposal of approximately EUR 48,592,891 which, because of thepurchase power agreement, would not have been recognized in 1993. The U.S. GAAPadjustments presented below reflect the reversal of the capitalization of theforeign exchange differences and general and administrative overheads as ifthey had been expensed prior to 1995.

 

In accordance with U.S. GAAP power purchase agreements between REN andCPPE were accounted for as capital lease receivables for CPPE and a capitallease obligations for REN. The generation assets related to the power purchaseagreements were recorded in REN’s accounts. Prior to July 1, 2000, the effectsof the power purchase agreements between the two related companies wereeliminated in consolidation.

 

*k.**                                      Investments*

 

Under Portuguese GAAP, investments in publicly traded equity securities,other than those of subsidiaries and those that are accounted for under theequity method, were carried at historical cost until 2001. From January 1,2002 under Portuguese GAAP these investments are stated at fair value and thechanges therein, net of income taxes, are recorded in shareholders' equity,however any permanent loss in the carrying value is recognized in the incomestatement. No permanent loss in carrying value has been recorded.

 

Under U.S. GAAP for all years presented, these available for salesecurities would be stated at fair value and the changes therein, net of incometaxes, would be recorded in a separate component of shareholders' equity andincluded in the determination of comprehensive income. Any other than temporaryimpairment would be recognized in the income statement, therefore an amount ofEUR 247,751,172 before tax benefit and EUR 165,933,285 net of tax hasbeen reflected in the determination of US GAAP net income.

 

*l.**                                         Equityaccounting on investments*

 

The Company’s equity investments and equity in earnings (primarily of RENand Hidrocantabrico) are affected by certain accounting differences betweenU.S. GAAP and Portuguese GAAP.  Thedifferences affecting the Company’s investments and equity in earnings include:revaluation of fixed assets, overheads capitalized, deferred costs, employeetermination benefits, distribution to management and employees, power purchaseagreements and deferred income taxes. These differences are as described in therespective narratives.

 

*m.**                                    Disposal of REN*

 

Under Portuguese GAAP, since the sale proceeds from the disposal of theCompany’s 70% interest in REN were equal to the net book value of the interestsold, no gain or loss was recorded on the transaction. Under U.S. GAAP, the netbook value of the interest sold was reduced as a result of the accountingdifferences between Portuguese GAAP and U.S. GAAP; therefore, the proceedsreceived from the disposal of REN exceeded the net book value of the interestdisposed, resulting in a gain on disposal and the remaining investment in RENmust be reduced accordingly. The gain on the disposal, in the amount ofEUR 342,045,810, and the related deferred tax in the amount of EUR120,400,126, were charged directly to shareholders’ equity (with a net effectof EUR 221,645,684).

 

*n.**                                      Derivativeinstruments*

 

The Company uses derivative instruments in the normal course of business,to offset fluctuations in earnings and cash flows associated with movements inexchange rates, interest rates and commodity prices. Derivative instruments arenot generally held by the Company for speculative trading purposes.  FAS 133, “*Accounting for Derivative Instrumentsand Hedging Activities*”, as amended by FAS 137 and FAS 138, wasadopted by the Company with effect from January 1, 2001. FAS 133 establishesaccounting and reporting standards for derivative instruments, includingcertain derivative instruments embedded in other contracts (collectivelyreferred to as derivatives) and for hedging activities. FAS 133 requires thatan entity recognize all derivatives as either assets or liabilities in theconsolidated balance sheet and measure those instruments at fair value. FAS 133prescribes requirements for designation and documentation of hedgingrelationships and ongoing assessments of effectiveness in order to qualify forhedge accounting.

 

The Company has chosen not to apply the hedge accounting provisions ofFAS 133, and accordingly all changes in the fair value of derivativeinstruments are recorded in the income statement.

 

F-46

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The net fair value of derivative instruments at December 31, 2001 was EUR31,291,546, and at December, 31 2002 was EUR 131,181,260.

 

Certain contracts that meet the definition of a derivative under FAS 133may qualify as a normal purchase or a normal sale and be excluded from thescope of FAS 133. Specific criteria must be met in order for a contract thatwould otherwise be regarded as a derivative to qualify as a normal purchase ora normal sale. The Company has evaluated all of its commodity contracts todetermine if they meet the definition of a derivative and qualify as a normalpurchase or a normal sale. The Company also evaluates contracts for “embedded”derivatives, and considers whether any embedded derivatives have to beseparated from the underlying contract and accounted for separately inaccordance with FAS 133 requirements. Where embedded derivatives have termsthat are not clearly and closely related to the terms of the underlyingcontract in which they are included, they are accounted for separately from theunderlying contract as derivatives, with changes in the fair value recorded inearnings, to the extent that the hybrid instrument is not already accounted forat fair value.

 

*o.**                                      Depreciation ofgoodwill*

 

From January 1, 2002 U.S. GAAP requires that goodwill, includingpreviously existing goodwill, and intangible assets with indefinite usefullives are not amortized but  are testedfor impairment annually. Concession rights continue to be amortized, as this is a finitive lived intangible asset.  In 2002 the goodwill amortization charged tothe profit and loss account was adjusted under U.S. GAAP in the amount of EUR11,895,774.

 

*p.**                                      Equity Methodvs Proportionate consolidation*

 

The investment in Hidrocantábrico where EDP owns 40% of its share capitalis joint controlled with two other main shareholders with a residual amount of1.2% of share capital owned by other shareholders. Under Portuguese GAAPassociated companies where the parent company exercises significant influencetogether with other shareholders, even if the parent company’s participation is fewer than 50%, areproportionately consolidated. Under U.S. GAAP these investments are accountedfor by the equity method.

 

*q.**                                      Tariffadjustments and accounting for rate regulated entities*

 

Prior to 1999, the selling price of electric energy in Portugal was basedupon a negotiated price between the Company and the Government. Tariffs weregenerally based on operating costs incurred during a year associated withaverage hydrological conditions. However, there were no specific guidelines inplace that ensure that the Group would recover actual cost incurred during thistime.

 

On January 1, 1999, and again on January 1,2002, a new tariff regime was introduced that established formulae for thecalculation of the selling price of electric energy in Portugal. These tariffsat current market conditions allow for the Company to recover actual costsincurred; however, not all of the criteria necessary to adopt the U.S. GAAPaccounting for regulated industries exist. Therefore, U.S. GAAP requirementsapplicable to regulated industries have not been applied.

 

On January 1, 2002, the regulator hasimplemented alternative revenue programs which allow the Company to increasetarrifs in future periods to recover allowable revenues. Future tariffincreases have been recorded in the current year for Portuguese GAAP and arereversed under US GAAP.

 

F-47

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*r.**                                        Amortization ofconcession rights*

 

The application of U.S. GAAP on the valuationof the acquisition of associated companies, changed the value assigned toassets and liabilities relating to these companies and the correspondent valueof concession rights. The resulting difference between U.S. and Portuguese GAAPrelating to the amortization of concession rights was adjusted.

 

*s.**                                        Income taxes*  

 

Until December 31, 1998, as permitted under Portuguese GAAP, income taxeswere accounted for in accordance with the taxes payable method based onestimated income taxes currently payable as determined by Governmentregulations. Under U.S. GAAP and, subsequent to January 1, 1999, underPortuguese GAAP, income taxes are provided using the liability method, whichrequires the recognition of deferred tax assets and liabilities for theexpected future tax consequences attributable to differences between thefinancial statement carrying amount of assets and liabilities and their taxbases. A valuation allowance is provided based on the expected realization ofthe deferred tax assets.  Additionally,any deferred tax effect of other U.S. GAAP adjustment is reflected.

 

*t*.                                         *Operating income*

 

Under U.S. GAAP, except for losses resulting from discontinued operationswhich would be presented separately, substantially all the amounts inNote 29 would be included in the determination of operating income.

 

*u.             Classificationdifferences*

 

Under Portuguese GAAP the payment received for the sale of OPTEP is netagainst the previously held investment and the remainder is deferred revenue.Under U.S. GAAP a sale is not recognized and the payment received is accountedfor as debt and the investment held on balance sheet, with the difference asdeferred revenue.

 

*v.**                                       Impact ofRecently Issued Accounting Standards*

 

In July 2001, the FASB issued FAS 143, “*Accounting for Obligations Associatedwith the Retirement of Long-Lived Assets*”.  FAS 143 will be effective for Company for the year ended December31, 2003.  FAS 143 provides theaccounting requirements for retirement obligations associated with tangiblelong-lived assets.  FAS 143 requiresthat the obligation associated with the retirement of the tangible long-livedassets be capitalized into the asset cost at the time of initialrecognition.  The liability is thendiscounted to its fair value at the time of recognition using the guidanceprovided by FAS 143.  The Company iscurrently evaluating the overall impact of FAS 143 on its results of operationsand financial position under U.S. GAAP.

 

In July 2002, the FASB issued FAS 146, “*Accounting for Costs Associated withExit or Disposal Activities*” This standard addresses financialaccounting and reporting for costs associated with exit or disposal activitiesand nullifies EITF 94-3, “*Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)*”.  The statement requires companies to recognize costs associatedwith certain exit or disposal activities when they are incurred rather than atthe date of a commitment to an exit or disposal plan.  FAS 146 will be applied by the Company prospectively toapplicable exit or disposal activities initiated after December 31, 2002. Theadoption of FAS 146 is not expected to have a material effect on the results ofoperations and financial position of the Company under U.S. GAAP.

 

In December 2002, the FASB issued FAS 148, “A*ccounting for Stock-BasedCompensation-Transition and Disclosure*”, which amends FAS 123 “*Accountingfor Stock-Based Compensation*”. FAS 148 provides alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation. In addition, FAS 148 amends the disclosure requirements of FAS123 to require prominent disclosures about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults of operations.  FAS 148 iseffective for fiscal years ending after December 15, 2002. The Company adoptedFAS 148 effective for the year ended December 31, 2002, and has elected tocontinue to account for its stock-based compensation in accordance with theprovisions of Accounting Principles Board Opinion (APB) No. 25, “*Accounting for Stock Issued to Employees*.”Under APB 25, compensation expense is recognized over the vesting period basedon the excess of the fair market value over the exercise price on the grantdate .

 

In April 2003, the FASB issued FAS 149 “*Amendmentof Statement 133 on Derivative Instruments and Hedging Activities*”.  FAS 149 clarifies the circumstances in whicha contract with an initial net investment meets the characteristic of aderivative and when a derivative contains a financing component.  In addition, the statement amends thedefinition of an underlying to conform to language used in FIN 45, “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*”,and certain 

 

F-48

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other existingpronouncements.  The statement iseffective prospectively for contracts entered into or modified, and for hedgingrelationships designated, after June 30, 2003. The Company is currently analyzing the impact of FAS 149 on its resultsof operations and financial position under U.S. GAAP.

 

In May 2003, the FASB issued FAS 150, “*Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*”.   FAS 150 is effective prospectively forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.   FAS 150 requiresthat certain financial instruments, previously accounted for as equity, beclassified as liabilities. This statement shall be implemented by reporting thecumulative effect of a change in an accounting principle for financialinstruments created before the issuance date of the Statement and stillexisting at the beginning of the interim period of adoption. The Company iscurrently analyzing the impact of FAS 150 on its results of operations andfinancial position under U.S. GAAP.

 

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees Of Indebtedness Of Others, anInterpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASBInterpretation No. 34*”. FIN 45 relates to the accounting for anddisclosure of guarantees and addresses (1) an obligation to stand ready toperform over the term of the guarantee in the event that the specifiedtriggering events or conditions occur and (2) a contingent obligation to makefuture payments if those triggering events or conditions occur.   The Interpretation requires that uponissuance of a guarantee, the entity (i.e., the guarantor) must recognize aliability for the fair value of the obligation it assumes under thatguarantee.   The initial recognition andinitial measurement provisions should be applied only on a prospective basis toguarantees issued or modified after December 31, 2002.

 

In January 2003, the FASB issued FASB Interpretation No. 46, (FIN 46), “*Consolidation of Variable Interest Entities*”.  Under FIN 46, certain entities labelled“Variable Interest Entities” (VIE), must be consolidated by the “primarybeneficiary” of the entity.  The primarybeneficiary is generally defined as the party exposed to the majority of therisks and rewards arising from the VIE. For VIE’s in which the Company holds a significant variable interestthat is not a majority interest, certain disclosures are required.  Full implementation of this interpretationto pre-existing entities is required from July 1, 2003; and application to theCompany’s new involvements with any VIEs from February 1, 2003.

 

The effects on net income and shareholders’ equity is as follows:

 

F-49

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**Net income**

 
|                                              |   | **2000**                                               |   | **2001**    |   | **2002**    |    | **2002**     |   |
|---------------------------------------------------|--------|--------------------------------------------------------|--------|-------------|--------|-------------|---------|--------------|--------|
|                                              |   | **EUR**                                                |   | **EUR**     |   | **EUR**     |    | **US$**      |   |
| Net income as reported under Portuguese GAAP      |   | 548,973,768                                            |   | 450,794,716 |   | 335,215,826 |    | 389,386,703  |   |
|                                              |   |                                                   |   |        |   |        |    |         |   |
| U.S. GAAP adjustments increase (decrease) due to: |   |                                                   |   |        |   |        |    |         |   |
| a.                                                |   | Depreciation of revaluation of fixed assets            |   | 51,479,739  |   | 204,503,897 |    | 200,973,018  |   | 233,450,258 |   |
| b.                                                |   | Capitalized overheads                                  |   | (18,964,296 | )      | (2,283,093  | )       | (35,649,746  | )      | (41,410,745 | ) |
| c.                                                |   | Depreciation of exchange differences                   |   | 19,697,858  |   | 23,408,147  |    | 19,297,249   |   | 22,415,684 |   |
| d.                                                |   | Deferred costs                                         |   | 1,792,006   |   | (89,988,525 | )       | 20,870,096   |   | 24,242,704 |   |
| e.                                                |   | Hydrological correction adjustments                    |   | (20,193,269 | )      | (26,925,936 | )       | 12,684,863   |   | 14,734,737 |   |
| f.                                                |   | Distribution to management and employees               |   | (16,189,608 | )      | (22,634,052 | )       | (22,988,923  | )      | (26,703,933 | ) |
| g.                                                |   | Pension and other post-retirement benefits             |   | (61,875,879 | )      | (61,875,879 | )       | (61,875,879  | )      | (71,875,021 | ) |
| h.                                                |   | Employee termination benefits                          |   | (51,895,247 | )      | —      |    | —       |   | — |   |
| i.                                                |   | Accounts receivable – municipalities              |   | (13,773,870 | )      | 1,156,628   |    | 3,081,748    |   | 3,579,758 |   |
| j.                                                |   | Power purchase agreements – prior to REN disposal |   | (9,298,875  | )      | —      |    | —       |   | — |   |
| j.                                                |   | Power purchase agreements – after REN disposal    |   | (15,000,304 | )      | (20,124,311 | )       | (15,507,038  | )      | (18,012,975 | ) |
| k.                                                |   | Investments                                            |   | —      |   | —      |    | (247,751,172 | )      | (287,787,761 | ) |
| l.                                                |   | Equity accounting on investments - REN                 |   | (8,775,321  | )      | 43,256,395  |    | (26,282,824  | )      | (30,530,128 | ) |
| l.                                                |   | Equity accounting  on investments - Hidrocantabrico    |   | —      |   | —      |    | (6,733,751   | )      | (7,821,925 | ) |
| n.                                                |   | Derivative instruments                                 |   | (10,993,640 | )      | 42,285,186  |    | 99,889,714   |   | 116,031,892 |   |
| o.                                                |   | Depreciation of goodwill                               |   | —      |   | —      |    | 11,895,774   |   | 13,818,131 |   |
| q.                                                |   | Tariff adjustments                                     |   | —      |   | —      |    | (49,996,000  | )      | (58,075,354 | ) |
| r.                                                |   | Amortization  of concession rights - IVEN              |   | —      |   | —      |    | (530,896     | )      | (616,689 | ) |
| s.                                                |   | Income taxes                                           |   | 10,048,065  |   | (22,385,222 | )       | 63,396,151   |   | 73,640,969 |   |
| Net adjustments                                   |   | (143,942,641                                           | )      | 68,413,235  |   | (35,227,616 | )  | (40,920,398  | )      |
| Net income in accordance with U.S. GAAP           |   | 405,031,127                                            |   | 519,207,951 |   | 299,988,210 |    | 348,466,305  |   |
| Basic and diluted net income per share            |   | 0.14                                                   |   | 0.17        |   | 0.10        |    | 0.12         |   |

 

**Shareholders’ equity**

*** ***
|                                                        |   | **2000**                                            |   | **2001**       |   | **2002**       |   | **2002**       |   |
|-------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------------|--------|----------------|--------|----------------|--------|
|                                                        |   | **EUR**                                             |   | **EUR**        |   | **EUR**        |   | **US$**        |   |
| Shareholders’ equity as reported under Portuguese GAAP |   | 6,204,729,792                                       |   | 6,096,757,724  |   | 5,494,182,082  |   | 6,382,041,905  |   |
| U.S. GAAP adjustments increase (decrease) due to:           |   |                                                |   |           |   |           |   |           |   |
| a.                                                          |   | Revaluation of fixed assets                         |   | (1,536,796,810 | )      | (1,332,292,913 | )      | (1,131,319,895 | )      | (1,314,141,190 | ) |
| b.                                                          |   | Capitalized overheads                               |   | (649,627,568   | )      | (651,910,661   | )      | (687,560,407   | )      | (798,670,167 | ) |
| c.                                                          |   | Exchange differences capitalized                    |   | (332,701,330   | )      | (309,293,183   | )      | (289,995,934   | )      | (336,859,277 | ) |
| d.                                                          |   | Deferred costs                                      |   | (58,514,680    | )      | (148,503,205   | )      | (127,633,109   | )      | (148,258,619 | ) |
| e.                                                          |   | Hydrological correction adjustments                 |   | 318,918,546    |   | 292,012,610    |   | 304,697,473    |   | 353,936,585 |   |
| f.                                                          |   | Distribution to management and employees            |   | (16,844,156    | )      | (22,072,804    | )      | (22,988,923    | )      | (26,703,933 | ) |
| g.                                                          |   | Pension and other post-retirement benefits          |   | 186,479,749    |   | 124,603,870    |   | 62,727,991     |   | 72,864,834 |   |
| g.                                                          |   | Additional minimum pension liability                |   | —         |   | —         |   | (216,418,000   | )      | (251,391,149 | ) |
| h.                                                          |   | Employee termination benefits                       |   | —         |   | —         |   | —         |   | — |   |
| i.                                                          |   | Accounts receivable – municipalities           |   | (76,757,115    | )      | (75,600,487    | )      | (72,518,739    | )      | (84,237,767 | ) |
| j.                                                          |   | Power purchase agreements – after REN disposal |   | (174,841,437   | )      | (194,965,748   | )      | (210,472,786   | )      | (244,485,188 | ) |
| k.                                                          |   | Investments                                         |   | (12,348,560    | )      | (31,784,888    | )      | —         |   | — |   |
| l.                                                          |   | Equity accounting on investments - REN              |   | (8,775,321     | )      | 34,481,074     |   | 8,198,250      |   | 9,523,087 |   |
| 1.                                                          |   | Equity accounting  on investments - Hidrocantabrico |   | —         |   | —         |   | (6,733,751     | )      | (7,821,925 | ) |
| m.                                                          |   | Gain on disposal of REN                             |   | (146,591,061   | )      | (146,591,061   | )      | (146,591,061   | )      | (170,280,176 | ) |
| n.                                                          |   | Derivative instruments                              |   | (10,993,640    | )      | 31,291,546     |   | 131,181,260    |   | 152,380,152 |   |
| o.                                                          |   | Depreciation of goodwill                            |   | —         |   | —         |   | 11,895,774     |   | 13,818,131 |   |
| q.                                                          |   | Tariff adjustments                                  |   | —         |   | —         |   | (49,996,000    | )      | (58,075,354 | ) |
| r.                                                          |   | Amortization  of concession rights - IVEN           |   | —         |   | —         |   | (530,896       | )      | (616,689 | ) |
| s.                                                          |   | Deferred income taxes on Portuguese books           |   | 1,898,140      |   | (41,059,093    | )      | 571,460        |   | 663,808 |   |
| s.                                                          |   | Income taxes                                        |   | 795,801,513    |   | 816,374,123    |   | 835,571,364    |   | 970,599,696 |   |
| Net adjustments                                             |   | (1,721,693,729                                      | )      | (1,655,310,819 | )      | (1,607,915,929 | )      | (1,867,755,141 | )      |
| Shareholders’ equity in accordance with U.S. GAAP      |   | 4,483,036,063                                       |   | 4,441,446,905  |   | 3,886,266,153  |   | 4,514,286,764  |   |
|                                                             |        |                                                     |        |                |        |                |        |                |        |  |  |  |

 

F-50

----

 

Certain significant captions of the balance sheets as presented on aPortuguese GAAP basis would be as follows after application of U.S. GAAPdifferences:

 

**Balance sheets:**

 
|                                            |   | **2001  EUR**  |   | **2002  EUR**  |   |
|-------------------------------------------------|--------|----------------|--------|----------------|--------|
| Fixed assets                                    |   | 5,929,423,177  |   | 6,601,643,551  |   |
| Total assets                                    |   | 15,455,158,432 |   | 16,922,181,654 |   |
| Total current liabilities                       |   | 3,052,407,916  |   | 2,550,816,618  |   |
| Total long-term liabilities                     |   | 7,720,586,680  |   | 10,419,899,717 |   |
| Total liabilities                               |   | 10,772,994,596 |   | 12,970,716,335 |   |
| Shareholders’ equity:                      |   |           |   |           |   |
| Share capital                                   |   | 2,966,904,798  |   | 2,956,506,541  |   |
| Legal reserve                                   |   | 221,187,438    |   | 243,727,440    |   |
| Other comprehensive income                      |   | (123,470,712   | )      | (559,328,540   | )      |
| Retained earnings                               |   | 1,376,825,381  |   | 1,245,360,713  |   |
|                                            |   | 4,441,446,905  |   | 3,886,266,153  |   |
| Total liabilities and shareholders’ equity |   | 15,455,158,432 |   | 16,922,181,654 |   |

 

**Accounts receivable**

 

The amount of accounts receivable, trade and long-term receivables inaccordance with U.S. GAAP are as follows:

 
|                                           |   | **2001  EUR** |   | **2002  EUR** |   |
|------------------------------------------------|--------|---------------|--------|---------------|--------|
| **Accounts receivable, trade (Note 4)**        |   |          |   |          |   |
| Accounts receivables                           |   | 860,956,311   |   | 703,299,966   |   |
| PPA receivables, short-term (less than 1 year) |   | 104,813,644   |   | 110,071,912   |   |
|                                           |   | 965,769,955   |   | 813,371,878   |   |
| **Long-term receivables (Note 7)**             |   |          |   |          |   |
| Long-term receivables                          |   | 102,851,979   |   | 370,655,813   |   |
| PPA receivables, long-term (over 1 year)       |   | 3,422,753,030 |   | 3,312,680,984 |   |
|                                           |   | 3,525,605,009 |   | 3,683,336,797 |   |

 

**Income taxes**

 

The components of the income tax provision and deferred income tax assetsand liabilities in accordance with U.S. GAAP is as follows:

 
|     |   | **2000  EUR** |   | **2001  EUR** |   | **2002  EUR** |   |
|----------|--------|---------------|--------|---------------|--------|---------------|--------|
| Current  |   | 310,743,134   |   | 244,011,679   |   | 171,167,863   |   |
| Deferred |   | (10,048,064   | )      | 22,385,222    |   | (63,396,151   | )      |
|     |   | 300,695,070   |   | 266,396,901   |   | 107,771,712   |   |

 

F-51

----

 

The reconciliation of the expected income tax provision computed usingthe Company’s Portuguese statutory income tax rate of 32% in 2000 and 2001 and30% in 2000 to the actual income tax provision is as follows:

 
|                                               |   | **2000  EUR** |   | **2001  EUR** |   | **2002  EUR** |   |
|----------------------------------------------------|--------|---------------|--------|---------------|--------|---------------|--------|
| Net income before income taxes under  U.S. GAAP    |   | 684,338,614   |   | 684,987,036   |   | 190,459,507   |   |
| Expected income tax expense at the  statutory rate |   | 218,988,313   |   | 219,195,852   |   | 57,137,852    |   |
| Municipal income taxes                             |   | 21,898,834    |   | 21,919,585    |   | 5,713,785     |   |
| Change in tax rate and in estimates                |   | 53,303,149    |   | —        |   | (22,862,521   | )      |
| Equity method investments                          |   | (14,709,427   | )      | (4,090,066    | )      | (25,985,196   | )      |
| Goodwill depreciations                             |   | 17,462,156    |   | 30,947,622    |   | 71,945,266    |   |
| Other                                              |   | 3,752,045     |   | (1,576,092    | )      | 21,409,180    |   |
|                                               |   | 300,695,070   |   | 266,396,901   |   | 107,771,712   |   |

 

Components ofdeferred income tax assets and liabilities:

 
|                                         |   | **2001  EUR** |   | **2002  EUR** |   |
|----------------------------------------------|--------|---------------|--------|---------------|--------|
| Deferred tax assets:                         |   |          |   |          |   |
| Fixed assets:                                |   |          |   |          |   |
| Revaluation                                  |   | 281,380,263   |   | 224,001,339   |   |
| Overheads capitalized                        |   | 229,472,553   |   | 226,894,934   |   |
| Exchange differences capitalized             |   | 108,871,200   |   | 95,698,658    |   |
| Deferred costs capitalized                   |   | 52,273,128    |   | 42,118,926    |   |
| Pension and other post-retirement  benefits  |   | 196,868,014   |   | 221,424,717   |   |
| Power purchase agreements                    |   | 68,627,943    |   | 69,456,019    |   |
| Investments                                  |   | 11,188,281    |   | 81,757,887    |   |
| Provision for various contingencies          |   | 38,182,576    |   | 65,348,474    |   |
| Provision for doubtful accounts              |   | 2,229,023     |   | 2,325,797     |   |
| Tariff adjustments                           |   | 4,928,442     |   | —        |   |
| Total deferred tax assets                    |   | 994,021,423   |   | 1,029,026,752 |   |
|                                         |   |          |   |          |   |
| Deferred tax liabilities:                    |   |          |   |          |   |
| Hydrological correction account  investments |   | 102,788,439   |   | 100,550,166   |   |
| Deferred in associates                       |   | 59,990,678    |   | 7,299,779     |   |
| Shareholder’s equity reserve            |   | 14,868,183    |   | 11,973,589    |   |
| Pension minimum liability                    |   | —        |   | 71,417,939    |   |
| Tariff adjustments                           |   | —        |   | 2,213,,915    |   |
| Total deferred tax liabilities               |   | 177,647,230   |   | 193,455,388   |   |
| Total net deferred tax assets                |   | 816,374,123   |   | 835,571,364   |   |

 

**Pensions**

 

The components of the netperiodic pension cost under U.S. GAAP include the following:

 
|                                  |   | **2000  EUR** |   | **2001  EUR** |   | **2002  EUR** |   |
|---------------------------------------|--------|---------------|--------|---------------|--------|---------------|--------|
| Service cost                          |   | 10,150,537    |   | 14,525,000    |   | 13,222,000    |   |
| Interest cost                         |   | 62,289,881    |   | 74,710,000    |   | 88,824,000    |   |
| Expected return on plan assets        |   | (60,823,416   | )      | (57,531,000   | )      | (56,031,000   | )      |
| Amortization of net actuarial losses  |   | 61,212,478    |   | 61,212,478    |   | 72,431,000    |   |
| Amortization of transition obligation |   | 6,130,226     |   | 6,130,226     |   | 6,130,226     |   |
| Net periodic pension cost             |   | 78,959,706    |   | 99,046,704    |   | 124,576,226   |   |

 

F-52

----

 

The following table sets forththe changes and the funded status of the pension plan under U.S. GAAP:

 
|                                            |   | **2001  EUR** |   | **2002  EUR** |   |
|-------------------------------------------------|--------|---------------|--------|---------------|--------|
| **Change in benefit obligation**                |   |          |   |          |   |
| Benefit obligation at beginning of  year        |   | 1,213,456,000 |   | 1,433,183,000 |   |
| Benefit obligation (Bandeirante)                |   |          |   | 78,273,000    |   |
| Service cost                                    |   | 14,525,000    |   | 13,222,000    |   |
| Interest cost                                   |   | 74,710,000    |   | 88,824,000    |   |
| Actuarial losses/(gains)                        |   | 175,653,000   |   | 96,242,000    |   |
| Estimated benefits paid                         |   | (123,434,000  | )      | (144,277,000  | )      |
| Exchange losses/(gains)                         |   | —        |   | (38,461,000   | )      |
| Benefit obligation at end of year               |   | 1,354,910,000 |   | 1,448,733,000 |   |
| **Change in plan assets**                       |   |          |   |          |   |
| Fair value of plan assets at beginning  of year |   | 801,179,000   |   | 781,286,000   |   |
| Fair value of plan assets  (Bandeirante)        |   |          |   | 27,016,000    |   |
| Actual return of plan assets                    |   | 57,531,000    |   | 60,877,000    |   |
| Actual company contributions                    |   | 31,930,000    |   | 52,669,000    |   |
| Benefits paid                                   |   | (54,225,000   | )      | (53,597,000   | )      |
| Actuarial (losses)/gains                        |   | (82,145,000   | )      | (77,613,000   | )      |
| Exchange losses/(gains)                         |   | —        |   | (13,677,000   | )      |
| Fair value of plan assets at end of  year       |   | 754,271,000   |   | 749,945,000   |   |
| Funded status of plan (underfunded)             |   | (600,640,000  | )      | (698,788,000  | )      |
| Unrecognized net actuarial  losses/(gains)      |   | 458,822,100   |   | 560,246,000   |   |
| Unrecognized transition obligation              |   | 29,449,028    |   | 23,319,000    |   |
| Prepaid (accrued) benefit cost                  |   | (112,368,872  | )      | (115,223,000  | )      |
| Additional minimum pension liability            |   | —        |   | (216,448,000  | )      |
| Prepaid (accrued) benefit cost                  |   | (112,368,872  | )      | (331,641,000  | )      |

 

----

*                 Based on the most recent experience, in2000, 2001 and 2002, it is estimated that employees applying for earlyretirement will be 30%, 90% and 70%, respectively, of the eligible employees.As from 2003, it is estimated that 40% of eligible employees will apply forearly retirement. The Company recognized actuarial gain and losses throughsystematic amortization of any amounts in excess of 10% of the higher of thebenefit obligation or the plan assets.

 

As of December 31, 2001 and December 31,2002 plan assets consist of:

 
|                                 |   | **2001  EUR** |   | **2002  EUR** |   |
|--------------------------------------|--------|---------------|--------|---------------|--------|
| Portuguese State bonds               |   | 54,735,765    |   | 51,970,129    |   |
| Foreign public bonds                 |   | 146,967,671   |   | 89,097,014    |   |
| Bonds                                |   | 225,039,528   |   | 274,606,217   |   |
| Investment fund units                |   | 197,811,216   |   | 128,891,579   |   |
| Shares                               |   | 49,029,507    |   | 24,290,906    |   |
| Buildings                            |   | 85,888,788    |   | 179,516,596   |   |
| Cash and equivalents                 |   | 23,926,503    |   | 19,403,082    |   |
| Commercial paper                     |   | 2,443,853     |   | 2,983,849     |   |
| Other                                |   | (2,246,858    | )      | 7,598,684     |   |
|                                 |   | 783,595,973   |   | 778,358,056   |   |
| Plan assets relating to others (REN) |   | 29,324,973    |   | 28,413,056    |   |
|                                 |   | 754,271,000   |   | 749,945,000   |   |

 

F-53

----

 

The following is a summary ofthe significant assumptions used in the determination of the pensionobligation:

 
|                                                             |   | **2000** |   | **2001** |   | **2002** |   |
|------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Weighted average discount rate                                   |   | 6.5      | %      | 6.5      | %      | 6.0      | %      |
| Rate of increase in compensation                                 |   | 3.5      | %      | 3.5      | %      | 3.3      | %      |
| Expected rate of return on plan assets                           |   | 7.5      | %      | 7.5      | %      | 6.5      | %      |
| Expected percentage of eligible staff  electing early retirement |   |     | *      |     | *      |     | *      |

 

----

*                 Based on the most recent experience, in2000, 2001 and 2002, the assumption werethat employees applying for earlyretirement  would be 30%, 90% and 70%,respectively, of the eligible employees. As from 2003, it is estimated that 40%of eligible employees will apply for early retirement. The Company recognizedactuarial gain and losses through systematic amortization of any amounts inexcess of 10% of the higher of the benefit obligation or the plan assets.

 

**Other post-retirementbenefits**  

 

EDP provides comprehensivemedical coverage, in addition to that provided by the Portuguese nationalhealth system, for retired employees (including those who have taken earlyretirement) and their dependants. Additionally, the Company provides a deathbenefit to its retirees’ survivors. The Company administers the programinternally and assumes the full cost of funding the program net of employeecontributions amounting to approximately 10% of the total medical expensescovered.  

 

A summary, of the components ofthe net periodic post-retirement benefit cost under U.S. GAAP is presented inthe following table:

 
|                                       |   | **2000  EUR** |   | **2001  EUR** |   | **2002  EUR** |   |
|--------------------------------------------|--------|---------------|--------|---------------|--------|---------------|--------|
| Service cost                               |   | 6,494,349     |   | 6,714,000     |   | 6,540,000     |   |
| Interest cost                              |   | 26,885,207    |   | 28,781,000    |   | 30,095,000    |   |
| Amortization of transition obligation      |   | 5,731,188     |   | 4,873,000     |   | 4,873,000     |   |
| Net periodic post-retirement benefit  cost |   | 39,110,744    |   | 39,368,000    |   | 41,508,000    |   |

 

The following table sets forththe changes and the funded status of the plan under U.S. GAAP as ofDecember 31, 2001 and December 31, 2002:

 
|                                       |   | **2001  EUR** |   | **2002  EUR** |   |
|--------------------------------------------|--------|---------------|--------|---------------|--------|
| **Change in benefit obligation**           |   |          |   |          |   |
| Benefit obligation at beginning of  year   |   | 453,223,000   |   | 474,371,000   |   |
| Service cost                               |   | 6,714,000     |   | 6,540,000     |   |
| Interest cost                              |   | 28,781,000    |   | 30,095,000    |   |
| Actuarial losses                           |   | 6,533,000     |   | 7,929,000     |   |
| Benefits paid                              |   | (20,880,000   | )      | (22,735,000   | )      |
| Benefit obligation at end of year          |   | 474,371,000   |   | 496,200,000   |   |
| Unfunded status of plan                    |   | (474,371,000  | )      | (496,200,000  | )      |
| Unrecognized net actuarial  (gains)/losses |   | 44,308,000    |   | 52,237,000    |   |
| Unrecognized transition obligation         |   | 52,124,000    |   | 47,251,000    |   |
| Accrued benefit cost                       |   | (377,939,000  | )      | (396,713,000  | )      |

 

The assumed medical cost trendrate used in measuring the accumulated post-retirement benefit obligation as ofDecember 31, 2002 was 4.5%. The health cost trend rate assumption has asignificant effect on the amounts reported.  

 

The assumed discount rate andsalary growth rate used in determining the accumulated post-retirement benefitobligation was 6% and 3.3%, respectively, as of December 31, 2002 and 6.5% and3.5%, respectively as of December 31, 2001.

 

FAS 106 allows recognition ofthe cumulative effect of the liability in the year of adoption or theamortization of the obligation over a period of up to 20 years. The Company haselected to recognize the initial postretirement benefit obligation of EUR101,455,492, as of January 1, 1995, over a period of 17.7 years, the averageremaining service period of the employee group.

 

F-54

----

 

**Research and developmentexpenses**

 

Research and development expensesunder U.S. GAAP amounted to, EUR 13,947,761 in 2000, EUR 76,021,096 in 2001 andEUR 44,180,395 in 2002.

 

**Comprehensive income**

 

For purposes of presenting its reconciliation ofshareholders’ net equity and net income from Portuguese GAAP to U.S. GAAP, in1998 the Company adopted FAS No. 130, Reporting Comprehensive Income. TheStandard requires reporting the components of comprehensive income, the changein equity (net assets) of a business enterprise during a period fromtransactions and other events and circumstances from non-owner sources, and thecomponents thereof in an entity’s financial statements. The non-owner changesin equity that have not been included in income include such accounts such asforeign currency translation adjustments and unrealized gains and losses onavailable-for-sale securities.  Theadoption of FAS 130 resulted in revised and additional disclosures for U.S.GAAP reporting purposes, but had no effect on the financial position, resultsof operations, or liquidity of the Company.

 

The comprehensive income for each of the three yearsin the period ended December 31, is as follows: 

 
|                                                    |   | **2000**    |   | **2001**    |   | **2002**     |   |
|---------------------------------------------------------|--------|-------------|--------|-------------|--------|--------------|--------|
| Net income in accordance with  U.S. GAAP                |   | 405,031,127 |   | 519,207,951 |   | 299,988,210  |   |
| Change in currency translation  adjustment              |   | 14,342,430, |   | (48,818,755 | )      | (300,027,774 | )      |
| Unrealized gains (losses) on  investments               |   | (2,724,274  | )      | (19,436,328 | )      | (21,223,379  | )      |
| Tax effect of unrealized gains  (losses) on investments |   | 953,497     |   | 6,841,587   |   | 6,791,481    |   |
| Additional minimum pension  liability                   |   | —      |   | —      |   | (216,418,000 | )      |
| Tax effect on additional minimum  liability             |   | —      |   | —      |   | 71,417,940   |   |
| Comprehensive income                                    |   | 417,602,780 |   | 457,794,455 |   | (159,471,522 | )      |

 

**Earnings per ordinary share**

 

Basic earnings per share is based upon the weighted average number ofOrdinary Shares outstanding during the year. Diluted earnings per share iscomputed on the basis of the weighted average number of Ordinary Sharesoutstanding during the year plus the effect of Ordinary Shares issuable uponthe exercise of employee stock options using the treasury stock method. During1999, the Company established two employee stock option plans. The sharesissued under these plans had no material effect on the weighted averageOrdinary Shares outstanding. Ten Ordinary Shares equal one American DepositoryShare (ADS).  

 
|                                          |   | **2000  EUR** |   | **2001****EUR** |   | **2002  EUR** |   |
|-----------------------------------------------|--------|---------------|--------|-----------------|--------|---------------|--------|
| Net income – Portuguese GAAP             |   | 548,973,768   |   | 450,794,716     |   | 335,215,826   |   |
| Net income - U.S. GAAP                        |   | 405,031,127   |   | 519,207,951     |   | 299,988,210   |   |
|                                          |   |          |   |            |   |          |   |
| Weighted average Ordinary Shares  outstanding |   | 2,997,600,000 |   | 2,988,273,791   |   | 2,982,571,074 |   |
| Weighted average ADS outstanding              |   | 299,760,000   |   | 298,827,379     |   | 298,257,107   |   |
|                                          |   |          |   |            |   |          |   |
| Net income per Ordinary Share:                |   |          |   |            |   |          |   |
| Basic and diluted – Portuguese  GAAP     |   | 0.18          |   | 0.15            |   | 0.11          |   |
| Basic and diluted – U.S. GAAP            |   | 0.14          |   | 0.17            |   | 0.10          |   |
|                                          |   |          |   |            |   |          |   |
| Net income per ADS:                           |   |          |   |            |   |          |   |
| Basic and diluted – Portuguese  GAAP     |   | 1.83          |   | 1.51            |   | 1.12          |   |
| Basic and diluted – U.S. GAAP            |   | 1.35          |   | 1.74            |   | 1.00          |   |

 

**Impairment**

 

Tangible and intangible fixed assets, net of relevantdeferred revenue, are reviewed for impairment if events or changes incircumstances indicate that the carrying amount may not be recoverable.Goodwill is reviewed for impairment at the end of the first complete financialyear after the relevant acquisition, and thereafter if events or changes incircumstances indicate that the carrying amount may not be recoverable. UnderU.S. GAAP, impairments 

 

F-55

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are recognized on the basis ofundiscounted cash flows, and measured on the basis of discounted cashflows.  This has not resulted in a GAAPdifference during 2000, 2001 and 2002.

 

**Concessionrights/Goodwill/Other intangible assets**

 

The amounts stated in the balance sheet are shown in the tables below:
|                                      |   | **December 31, 2000** |   |
|-------------------------------------------|--------|-----------------------|--------|
|                                      |   | **Cost**              |   | **Accumulated amortization** |   | **Net book value** |   |
| Concession rights                         |   | 380,502,466           |   | 22,129,487 |   | 358,372,979 |   |
| Goodwill                                  |   | 170,181,752           |   | 12,717,316 |   | 157,464,436 |   |
| Other intangibles subject to amortization |   | 127,232,398           |   | 2,389,827 |   | 124,842,571 |   |
|                                      |   | 677,916,616           |   | 37,236,630 |   | 640,679,986 |   |

 

 
|                                      |   | **December 31, 2001** |   |
|-------------------------------------------|--------|-----------------------|--------|
|                                      |   | **Cost**              |   | **Accumulated amortization** |   | **Net book value** |   |
| Concession rights                         |   | 420,144,971           |   | 61,475,414 |   | 358,669,557 |   |
| Goodwill                                  |   | 371,675,088           |   | 15,147,144 |   | 356,527,944 |   |
| Other intangibles subject to amortization |   | 136,974,595           |   | 2,701,745 |   | 134,272,850 |   |
|                                      |   | 928,794,654           |   | 79,324,303 |   | 849,470,351 |   |

 
|                                      |   | **December 31, 2002** |   |
|-------------------------------------------|--------|-----------------------|--------|
|                                      |   | **Cost**              |   | **Accumulated amortization** |   | **Net book value** |   |
| Concession rights                         |   | 1,521,661,011         |   | 128,197,016 |   | 1,393,463,995 |   |
| Goodwill                                  |   | 213,545,011           |   | 14,648,415 |   | 198,896,596 |   |
| Other intangibles subject to amortization |   | 145,354,708           |   | 43,446,623 |   | 101,908,085 |   |
|                                      |   | 1,880,560,730         |   | 186,292,054 |   | 1,694,268,676 |   |

 

 

The amortizationof concession rights, goodwill and other intangible assets, charged in theincome statement, are presented below:
|                                      |   | **For the year ended December 31,** |   |
|-------------------------------------------|--------|-------------------------------------|--------|
|                                      |   | **2000**                            |   | **2001** |   | **2002** |   |
| Concession rights                         |   | 11,085,065                          |   | 12,683,415 |   | 50,587,699 |   |
| Goodwill                                  |   | 10,590,043                          |   | 16,668,685 |   | — |   |
| Other intangibles subject to amortization |   | 2,186,413                           |   | 1,439,289 |   | 3,107,873 |   |
|                                      |   | 23,861,521                          |   | 30,791,389 |   | 53,695,772 |   |

 

 

F-56

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For concession rights andother intangible assets, subject to amortization under US GAAP, the aggregateamortization expense for the current year and estimated aggregate amortizationexpense for each of the five succeeding fiscal years are:

 
| **Aggregate Amortization Expense**  |   | **Euros**  |   |
|-------------------------------------|--------|------------|--------|
| 2002                                |   | 53,695,572 |   |
| **Estimated  Amortization Expense** |   |       |   |
| 2003                                |   | 48,246,207 |   |
| 2004                                |   | 48,065,033 |   |
| 2005                                |   | 47,883,859 |   |
| 2006                                |   | 47,702,684 |   |
| 2007                                |   | 47,702,684 |   |

 

The goodwill for eachreportable segment is, for each of the years ended December 31:

 
|              |   | **2000**    |   | **2001**    |   | **2002**    |   |
|-------------------|--------|-------------|--------|-------------|--------|-------------|--------|
| *Net book  value* |   |        |   |        |   |        |   |
| Telecom           |   |        |   |        |   |        |   |
| Portugal          |   | 157,464,436 |   | 287,479,818 |   | 114,507,015 |   |
| IT                |   | —      |   | 67,560,187  |   | 68,015,181  |   |
| All other         |   | —      |   | 1,487,939   |   | 16,374,400  |   |
|              |   | 157,464,436 |   | 356,527,944 |   | 198,896,596 |   |

 

 
|           |   | **2000**   |   | **2001**   |   | **2002** |   |
|----------------|--------|------------|--------|------------|--------|----------|--------|
| *Amortization* |   |       |   |       |   |     |   |
| Telecom        |   |       |   |       |   |     |   |
| Portugal       |   | 10,590,043 |   | 6,279,385  |   | —   |   |
| IT             |   | —     |   | 10,176,737 |   | —   |   |
| All other      |   | —     |   | 212,563    |   | —   |   |
|           |   | 10,590,043 |   | 16,668,685 |   | —   |   |

 
|                            |   | **Telecom**  |   | **IT**      |   | **All other** |   | **TOTAL**    |   |
|---------------------------------|--------|--------------|--------|-------------|--------|---------------|--------|--------------|--------|
| December 31, 2000               |   | 157,464,436  |   | —      |   | —        |   | 157,464,436  |   |
| Entries/(exits) of subsidiaries |   | 99,816,881   |   | 21,428,946  |   | —        |   | 121,245,827  |   |
| Additions                       |   | 36,477,886   |   | 56,307,978  |   | 1,700,502     |   | 94,486,366   |   |
| Amortization of the period      |   | (6,279,385   | )      | (10,176,737 | )      | (212,563      | )      | (16,668,685  | )      |
| December 31, 2001               |   | 287,479,818  |   | 67,560,187  |   | 1,487,939     |   | 356,527,944  |   |
| Entries/(exits) of subsidiaries |   | —       |   | —      |   | 14,598,225    |   | 14,598,225   |   |
| Additions                       |   | 2,742,114    |   | 454,994     |   | 228,236       |   | 3,485,344    |   |
| Disposals                       |   | (5,533,165   | )      | —      |   | —        |   | (5,533,165   | )      |
| Impairment losses               |   | (170,181,752 | )      | —      |   | —        |   | (170,181,752 | )      |
| December 31,  2002              |   | 114,507,015  |   | 68,015,181  |   | 16,374,400    |   | 198,896,596  |   |

 

Theimpairment loss in 2002 is due to the discontinuation of the Oniway business. The results of Oniway prior todiscontinuation were not material.  Theloss on discontinuation totalled € 444 million, including the impairment togoodwill of € 170 million.

 

 

 

F-57

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From1 January 2002, goodwill is no longer amortized under US GAAP but reviewedannually for impairment under FAS 142 ‘Goodwill and Other Intangible Assets’.Goodwill amortization of EUR 11,895,774 charged against Portuguese GAAPearnings for 2002 is added back in the US GAAP reconciliation.

 
|                                       |   | **For the year ended December 31,** |   |
|--------------------------------------------|--------|-------------------------------------|--------|
|                                       |   | **2000**                            |   | **2001** |   | **2002** |   |
| Reported net income under U.S. GAAP        |   | 405,031,127                         |   | 519,207,951 |   | 299,988,210 |   |
| Goodwill amortization                      |   | 10,590,043                          |   | 16,668,685 |   | — |   |
| Adjusted net income                        |   | 415,621,170                         |   | 535,876,636 |   | 299,988,210 |   |
|                                       |   |                                |   |   |   |   |   |
| **Basic and  diluted earnings per share:** |   |                                |   |   |   |   |   |
| Reported net income                        |   | 0.14                                |   | 0.16 |   | 0.10 |   |
| Goodwill amortization                      |   | —                              |   | 0.01 |   | — |   |
| Adjusted net income                        |   | 0.14                                |   | 0.17 |   | 0.10 |   |

 

 

F-58

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**Equity investments**

 

EDP’s investments in associates accounted for under the equity method arepresented on note 2 of these financial statements. The summarized financialinformation of the most relevant are presented bellow:

 

*REN – RedeEléctrica Nacional, S.A.*

 
|                    |   | **2002**          |       | **2001**          |       | **2000**          |       |
|-------------------------|--------|-------------------|------------|-------------------|------------|-------------------|------------|
| Fixed assets            |   | 1,380,796,633     |       | 1,352,585,000     |       | 1,351,838,000     |       |
| Current assets          |   | 222,322,652       |       | 223,693,000       |       | 242,379,000       |       |
| Non current assets      |   | 342,901,340       |       | 406,364,000       |       | 269,485,000       |       |
| **Total Assets**        |   | **1,946,020,625** | ** ** | **1,982,642,000** | ** ** | **1,863,702,000** | ** ** |
| Loans                   |   | 326,666,667       |       | 350,000,000       |       | 350,000,000       |       |
| Current liabilities     |   | 523,442,823       |       | 579,204,000       |       | 549,910,000       |       |
| Non current liabilities |   | 308,024,436       |       | 307,443,000       |       | 253,893,000       |       |
| **Total Liabilities**   |   | **1,158,133,926** | ** ** | **1,236,647,000** | ** ** | **1,153,803,000** | ** ** |
| Equity                  |   | 787,886,699       |       | 745,995,000       |       | 709,899,000       |       |
| **Total Equity**        |   | **787,886,699**   | ** ** | **745,995,000**   | ** ** | **709,899,000**   | ** ** |
|                    |   |              |       |              |       |              |       |
| Net Revenue             |   | 2,302,868,020     |       | 2,209,104,000     |       | 2,302,868,000     |       |
| Operating Costs         |   | (2,278,753,035    |       | (2,126,601,000    | )          | (2,278,753,000    | )          |
| Other operating income  |   | 92,422,685        |       | 15,682,000        |       | 92,423,000        |       |
| Non operating costs     |   | (27,685,139       | )          | (34,628,000       | )          | (27,695,000       | )          |
| Non operating income    |   | 7,319,488         |       | 4,989,000         |       | 7,319,000         |       |
| Income tax              |   | (30,747,247       | )          | (24,046,000       | )          | (30,747,000       | )          |
| Net income              |   | **65,424,772**    | ** ** | **44,500,000**    | ** ** | **65,415,000**    | ** ** |
|                    |   |              |       |              |       |              |       |
| EDP%                    |   | 30.00             | %          | 30.00             | %          | 30.00             | %          |

 

----

70% of REN’s share capital was sold to thePortuguese Government in June 30, 2000, as such it was consolidated until thatdate.

 

F-59

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*Hidrocantabrico– Hidroélectrica del Cantábrico, S.A.*

 

During the five month periodended in May 2002, Hidrocantábrico was accounted under the equity method forPortuguese GAAP. In 2001 a 19% interest of Hidrocantábrico was owned by Adygesinvalwhich was held by EDP and accounted for on a proportional consolidation basis. The summarized financial information of Hidrocantabrico as of andfor the 5 months ended May 31, 2002 and the 12 months ended December 31, 2001is presented below:

 
|                    |   | **May 2002**      |       | **December 2001** |       |
|-------------------------|--------|-------------------|------------|-------------------|------------|
| Fixed assets            |   | 3,852,993,200     |       | 1,922,000,000     |       |
| Current assets          |   | 421,455,813       |       | 425,000,000       |       |
| Non current assets      |   | 618,814           |       | 76,000,000        |       |
| **Total Assets**        |   | **4,275,067,827** | ** ** | **2,423,000,000** | ** ** |
| Loans                   |   | 2,041,585,447     |       | 847,000,000       |       |
| Current liabilities     |   | 321,697,706       |       | 93,000,000        |       |
| Non current liabilities |   | 238,605,450       |       | 445,000,000       |       |
| **Total Liabilities**   |   | **2,601,888,603** | ** ** | **1,385,000,000** | ** ** |
| Minority interest       |   | 12,290,390        |       | 0                 |       |
| Equity                  |   | 1,660,888,834     |       | 1,038,000,000     |       |
| **Total Equity**        |   | **1,673,179,224** | ** ** | **1,038,000,000** | ** ** |
|                    |   |              |       |              |       |
| Net revenue             |   | 1,462,082,149     |       | 1,180,000,000     |       |
| Operating costs         |   | (1,316,360,453    | )          | (1,033,000,000    | )          |
| Other operating income  |   | 0                 |       | 7,000,000         |       |
| Non operating costs     |   | (144,474,892      | )          | (49,000,000       | )          |
| Non operating Profit    |   | 21,439,009        |       | 5,000,000         |       |
| Income tax              |   | (10,255,083       | )          | (37,000,000       | )          |
| Minority interest       |   | 2,134,653         |       | 1,000,000         |       |
| Net income              |   | **14,565,383**    | ** ** | **74,000,000**    | ** ** |
|                    |   |              |       |              |       |
| EDP%                    |   | 40.00             | %          | 9.50%             | (a)        |

 

----

(a) After obtaining nearly 100% interestin Hidrocantábrico, Adygesinval  wasmerged into it.

 

F-60

----

 

**Guarantees**

 

The Group hasprovided guarantees in the amount of EUR 409,000,000 during 2002. Theseguarantees have been primarily provided to banks in respect of loans obtainedby subsidiaries, and to customs authorities. Guarantees are for amounts thatare already included within these consolidated financial statements. TheCompany has no guarantees over tangible assets (mortgages). The mostsignificant guarantees are:

 
| **Bank**                 |   | **Value**  |   | **Events**  |   | **Maximum********Liability** |   |
|--------------------------|--------|------------|--------|-------------|--------|------------------------------|--------|
| BNDES / BANCO ITAÚ  |   | 80,818,966 |   | bank  loans |   | 80,818,966                   |   |
| INVESTCO, S.A            |   | 67,349,138 |   | bank  loans |   | 67,349,138                   |   |
| SPE Macau, BNU, BCM, BCP |   | 64,250,040 |   | bank  loans |   | 64,250,040                   |   |
| BPI / CGD                |   | 35,400,000 |   | bank  loans |   | 70,000,000                   |   |
| BEI                      |   | 20,500,000 |   | bank  loans |   | 20,500,000                   |   |
| BSCH, AS                 |   | 14,118,973 |   | bank  loans |   | 14,118,973                   |   |

 

**Employee stock optionplans**

 

The Company has two fixed optionplans. Under the 1999 option plan for members of the Board of EDP, the Companymay grant options for up to 2,450,000 shares of common stock. Under the 1999option plan for members of the boards of directors of the EDP’s operatingcompanies and senior officers of EDP and its subsidiaries, the Company maygrant options for up 16,120,000 shares of common stock. Under both plans, theexercise price of each option equals the market price of the Company’s stock onthe date of grant and an option’s maximum term is 5 years. Options are grantedat the discretion of the Board of EDP and vest over a two year service period.  

 

A summary of the status of theCompany’s two fixed stock option plans as of December 31, 2001 and 2002, andchanges during the years then ended on those dates is presented below:  

** **
|                              |   | **Shares available  for grant under  1999 option plans** |   | **Option  activity** |   | **Weighted  average  exercise price** |   |
|-----------------------------------|--------|----------------------------------------------------------|--------|----------------------|--------|---------------------------------------|--------|
| Balance December 31, 2000         |   | 16,413,750                                               |   | 2,286,250            |   | —                                |   |
| Options forfeited(1)              |   | —                                                   |   | —               |   | —                                |   |
| Options granted                   |   | —                                                   |   | —               |   | —                                |   |
| Balance December 31, 2001         |   | 16,413,750                                               |   | 2,286,250            |   |                                  |   |
|                              |   |                                                     |   |                 |   |                                  |   |
| Increase to the 1999 Option Plans |   | —                                                   |   | —               |   | —                                |   |
| Options forfeited                 |   | —                                                   |   | —               |   | —                                |   |
| Options granted(1)                |   | —                                                   |   | —               |   | —                                |   |
| Balance December 31, 2002         |   | 16,413,750                                               |   | 2,286,250            |   |                                  |   |

 

----

*                       **At the generalshareholders meeting held on May 10, 2000, anincrease in the number of options available under the 1999 options plans wasapproved to adjust the plans for an increase in the number of directors from 5to 7.*

 

*                       **Of 2,400,000options granted in 1999, only 2,286,250 were accepted by directors andexecutive officers.*

* *

*(1)**      **The number ofoptions to be granted for 2003 has not yet been determined.*

 

The following table summarizesinformation about stock options outstanding and exercisable as ofDecember 31, 2002.

 
| **Options  outstanding** |   | **Weighted average  exercise price** |   | **Weighted average  remaining  contractual life** |   | **Options  exercisable** |   |
|--------------------------|--------|--------------------------------------|--------|---------------------------------------------------|--------|--------------------------|--------|
| 2,286,250                |   | 3.43                                 |   | 3 years                                           |   | 0                        |   |

 

F-61

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Had the Company elected to recognize compensation expense based upon thefair value at grant date for awards made in 1999, as calculated in accordancewith FAS 123, Accounting for Stock Based Compensation, net income and earningsper share would not have been different from that shown for 2001 and 2002, andin 2000 the difference would not have been material.

 

**34.****                               SUBSEQUENT EVENTS**

 

On May 29, 2003, the Companydeclared a dividend of EUR 0.09 per share.

 

On March 26, 2003, the Company hasissued a Bond, througha private placement, in the amount of Euro 150,000,000,maturing on 26th of March of 2013, and with a floating interest rate of Euribor6 months plus 0.50% per year. The proceeds of this issue have been used torefinance EDP’s short-term debt.

 

On March 24, 2003, the BasqueGovernment has announced the successful completion of Hidrocantábrico’s bid onthe privatisation of Basque gas company Naturcorp. Subsequent to theincorporation of Gas Asturias into Naturcorp, the resulting entity will be 62%owned by Hidrocantábrico and its combined net asset value will amount toapproximately Eur. 814 million. Besides contributing with 100% of Gas Asturias’assets into Naturcorp, Hidrocantábrico will pay a cash consideration of Eur.227 million for the stake it is acquiring in Naturcorp. The shareholdersagreement to be signed with “Ente Vasco de la Energía” results inHidrocantábrico having management control of the new company, which willmaintain its headquarters in the Basque Country.

 

F-62

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