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JULY 2004
INVESTMENT CLIMATE IN THE LATIN
I N V E S T M E N T C LI MAT E I N T H E LAT I N
A
NO W
P EORWSEE RC T SO ER C T O R
A MMEER R
I CI ACNA P
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Key highlights of the North American power sector
2003 recap
2004 market dynamics

Retreat from unsuccessful growth strategies

Year of “cleanup”


 “Back to basics” was credit driven and will not
serve as growth strategy going forward

Focused on core businesses, principally
domestic
 Regulators are being cautious to allow utilities

Strengthened balance sheets
 Growth utilities will attract a disproportionate
share of new capital
Increasing presence of financial sponsors

Excess capital from institutional investors

Institutional investors consider that
investments in utilities could provide more
stable returns than those in the stock or
bond markets
 Strategics and sponsors positioning for
potential regulatory changes
 Large European utilities looking for growth
 Cost driven consolidation
 Private equity sponsors will continue to
challenge corporate buyers
Earnings stabilized and credit rating
downgrades mostly completed

competitive returns
 Several sponsors already own assets to
compete on a strategic basis
The utility and merchant generation
sectors enjoyed improved liquidity and
greater access to capital markets
 Demonstrated willingness to invest long-term
and wait for developing business
fundamentals and regulatory outcomes
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The power M&A market has become more robust with
financial sponsors continuing to make meaningful
acquisitions
Value of M&A transactions in the North
American power sector (US$ mm)
Selected Investments
Deal size
82,910
87,470
19,120
2000
2001
2002
24,030
2003
Source: Thompson Financial
# of M&A transactions in the North
American power sector
171
Acquirer/target
$mm
03/10/04
Sempra and Carlyle-Riverstone JV/
AEP (Texas Central Co.)
$430
02/24/04
TransCanada/
Gas Transmission Northwest
01/16/04
AIG Highstar/
El Paso Corporation
12/15/03
Enterprise Product Partners LP/
Gulfterra Energy Partners
5,063
11/21/03
KKR/JPMP/Wachovia/
Unisource Energy
2,968
11/18/03
Oregon Electric Utility Co LLC; TPG/
Cortland General Electric
2,350
10/20/03
Goldman Sachs Group/
Cogentrix
2,415
09/02/03
Evercore/
85% ownership interest in Michigan Electric
5/12/03
Southern Union/
Panhandle Eastern Pipe Line
1,797
04/21/03
Consortium (Madison Dearborn, Carlyle/Riverstone)/
1,082
1,703
938
NA
54.6% interest in Williams Energy Partners (Williams)
97
2000
Date
2001
105
2002
136
2003
Source: Thompson Financial
04/16/03
GS Linden Power Holdings LLC; Goldman Sachs/
East Coast Power
1,056
04/11/03
Loews Pipeline Holding Corp/
Texas Gas Transmission
1,045
11/25/03
Constellation Energy Group Inc/
Energy East
423
07/08/03
Private Power LLC/
Primary Energy
335
Source: SDC
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Stock prices for utilities have recovered over the last 18
months; however, increasing interest rates could slow this
trend
Year forward price-to-earnings ratio
Relative stock price performance
(% change)
Integrated companies
300%
UTY
Merchants & traders
Integrated
250%
T&D
Merchant
T&D
200%
1H 99 2H 99 1H 00 2H 00 1H 01 2H 01 1H 02 2H 02 1H 03 2H 03 1Q 04
Source: Tradeline
150%
U.S. 10-year treasury (% change)
150%
100%
130%
110%
50%
90%
70%
0%
Jan-99
50%
Dec-99
Nov-00
Oct-01
Sep-02
Aug-03
Jul-04
Source: Tradeline
Note: Integrated: AEP, Cinergy, CMS Energy, Dominion, Duke, DTE Energy, Entergy, Exelon,
FirstEnergy, FPL, PG&E, PPL, Progress Energy, Public Service Enterprise Group, Southern Co., TXU
Merchant: AES, Calpine, Dynegy, El Paso, Reliant Resources, Williams
T&D: Consolidated Edison, Energy East, Northeast Utilities, NSTAR
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Jan-99
Dec-99
Nov-00
Oct-01
Sep-02
Aug-03
Jul-04
Source: Bloomberg
3
Key highlights of the European power sector
Generation
Transmission and distribution
 Limited and volatile demand growth
 EU Directive, unbundling and third-
party access for transmission assets
 Natural gas replacing coal as fuel
 Limited enforceability
source
mechanisms
 Declining reserve margins
 Implementation of RAB-based
regulation
 Prices making generation
uneconomic
 Transmission bottlenecks
 Ownership consolidation
 Introduction of third party
equity/debt
 Emissions restrictions and CO2
trading
 Equity investors appetite for
regulated assets
 Asset values declining
 Restructuring and unbundling
 High number of assets for sale
 Privatizations
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The Latin American investment environment has
significantly improved over the last 18 months
GDP growth (%, annual change)
EMBI+ SOT Indices per country
Bps
8,000
6,000
4,000
2,000
0
Dec-99
Argentina
Colombia
Brazil
Ecuador
Chile
Peru
10%
Brazil
Ecuador
Chile
Peru
5%
0%
(5)%
(10)%
(15)%
Feb-01
Apr-02
May-03
Jul-04
Exchange rate
Argentina
Colombia
2002
2003E
2004F
2005F
Stock exchange indices
Brazil
Ecuador
Chile
Peru
Argentina
Chile
450%
325%
200%
Feb-01
1997—2001
Source: JPMorgan research
Source: Global Economic Data as of July 13, 2004
75%
Dec-99
Argentina
Colombia
Apr-02
May-03
Jul-04
Source: Global Economic Data as of July 13, 2004
500
400
300
200
100
0
Jan-01
Nov-01
Peru
Colombia
Oct-02
Brazil
Ecuador
Aug-03
Jul-04
Source: Global Economic Data as of July 13, 2004
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However, investment conditions in the Latin American
power sector differ significantly across countries
Investment environment
Less favorable
More favorable
Credit rating
Brazil
Mexico
Argentina
Venezuela
Chile
Peru
Ecuador
Bolivia
B2/B+
Baa2/BBB-
Caa1/SD
Caa1/B-
Baa1/A
Ba3/BB
Caa1/CCC+
B3/B-
Regulatory Outlook
Local ECM
Local DCM
Valuation level
Buyers' appetite
The power sector is particularly affected by political uncertainty, social
problems and economic volatility
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Finding the “right” risk/reward balance will continue
to be the challenge for power sector players
Country risk versus electricity consumption growth
10.0%
Peru
22,000 GWh
Electricity consumption
1995—20025 CAGR (%)
9.0%
8.0%
DR¹
5,400 GWh
7.0%
Venezuela
95,700 Gwh
6.0%
5.0%
4.0%
Brazil
342,300 GWh
2.0%
1.0%
0.0%
6000
1200
Panama²
3,800 GWh
Argentina
84,800 GWh
3.0%
1000
800
600
Chile
43,700 GWh
Colombia
45,200 GWh
400
Mexico
160,200 GWh
200
0
EMBI + SOT (bp)
Source: CIER, SENER, OLADE, ARIAE; electricity consumption data as of 2002; EMBI+ data as of July 14, 2004
1 DR growth from 1999 to 2002
2 Panama growth from 1995 to 2001
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Country/ regulatory risk is the main factor affecting
implied multiples across countries
Illustrative comparison based on theoretical company with different domicile
Theoretical company
Country 1
Country 2
Country 3
Country 4
100.0
100.0
100.0
100.0
EBITDA
45.0
45.0
45.0
45.0
 Depreciation
12.0
12.0
12.0
12.0
= EBIT
33.0
33.0
33.0
33.0
Tax rate
40.0%
17.0%
33.5%
35.0%
 Capex
12.0
12.0
12.0
12.0
= FCF
Fundamental valuation
19.8
27.4
21.9
21.5
2.0%
3.0%
3.0%
4.0%
0.0%
1.0%
4.9%
7.1%
7.1%
9.1%
11.5%
13.4%
397
466
265
238
45
45
45
45
8.8x
10.3x
5.9x
5.3x
Sales
1
FCF expected growth (g)
2
Country risk
3
Discount rate (WACC)
Firm value: FCFt+1/(WACC - g)
Implied FV/EBITDA multiple
EBITDA
FV/EBITDA
1
2
3
JPMorgan estimates for perpetuity growth rates
SOT over UST10
Calculated based using a 0.8 unlvered beta, 40% debt/total capital. Pre-tax costs of debt calculated using a 100bp spread over each
adjusted risk free rate
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Valuations have gradually recovered driven by the
improved external perception of the region and
increasing local investor’s appetite
Valuation drivers during 2002 - 2003
Valuation drivers for 2004
Reduced country risk/
FX appreciation
Increased country risk/
FX volatility
Increasing
asset
prices
Depressed
asset
prices
Strategic players
facing liquidity
crisis
Limited number
of buyers
Strategic players’
improved financial
condition
Strategic players response
More balanced
supply/demand
of assets
Strategic players response
 New strategies focused on domestic markets
 Renewed focus on portfolio optimization strategies
 Market signaling of plans to reduce emerging market’s exposure
 “Wait and See” approach in general
 Restructuring of portfolios
 Increasing willingness to take advantage of highly liquid local markets
 Balance sheet impairment through FX and goodwill adjustments
 Optionality approach towards non-core investments with tough exit
alternatives
Limited number of M&A transactions due to
significant bid/offer price gap
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Highly liquid local markets become an important
alternative to reduce exposure to the region
9
Local groups, financial sponsors and the public market
are becoming important players in the utility sector
Selected transactions
%
Purchase price
EBITDA
acquired
(US$mm)
multiple
99%
N/A
N/A
9%
122
10.9x
Argentina
28%
14
N/A
Generation
Argentina
7%
10
N/A
29%
N/A
N/A
53
N/A
Date
Acquiror
Target
Seller
Sector
Country
Apr-04
CDC
Cobee
NRG
Generation
Bolivia
Mar-04
Market
CGE
PPL Global
Distribution
Chile
Mar-04
Dolphin
Transener
National Grid
Transmission
Costanera
Southern
Management
Mar-04
Sebastian Pinera
& other
Cone
Feb-04
Darby Overseas
Termobarranquilla
First Energy
Generation
Colombia
Feb-04
Enersur
Yuncan (under
Peruvian
Generation
Peru
100%
(Tractebel)
construction)
government
Dec-03
Pacific Hydro
Coya/Pangal
Codelco
Generation
Chile
100%
76
N/A
Nov-03
Quiñenco
ESSAN
Government
Water
Chile
100%
188
7.6x
Water
Chile
100%
86
8.1x
Water
Chile
100%
26
5.9x
(CORFO)
Dec-03
Hurtado
ESSCO
Government
(CORFO)
Dec-03
Hidrosan
EMSSAT
Government
(CORFO)
Nov-03
SNPower
Cahua/Pacasmayo
NRG
Generation
Peru
100%
N/A
N/A
Oct-03
Grupo Hurtado
ESVAL
Anglian Water
Water
Chile
45%
82
8.6x
May-03
JPMPartners /
Emdersa
First Energy
Distribution
Argentina
100%
N/A
N/A
HSBC Power fund
Mar-03
Grupo Matte
Canutillar
Endesa
Generation
Chile
100%
174
7.8x
Mar-03
CGE
Rio Maipo
Enersis
Distribution
Chile
100%
170
12.0x
Mar-03
Hydro Quebec
SING Transmission lines
Endesa
Transmission
Chile
100%
110
N/A
Source: Publicly available information
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Key considerations when assessing the attractiveness
of the Latin American power sector
 Political stability
 Macroeconomic stability
 Treatment of foreign investment
 Contract enforceability and creditors’ rights
 Financing availability
 Regulatory stability
 Growth prospects
 Availability of investment opportunities
 Opportunity cost
Growth potential is not necessarily the only key driver of
investment decisions
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Current trends in the Latin American power sector

Strong outlook for power consumption

Strong performance of companies under tough operating and financial conditions

World class assets and strong management

Companies with financial difficulties addressed them in a manner satisfactory to investors

Certain international companies implementing exit strategies


Capital allocated to non-core markets

Companies with no hurry to exit could pursue optimization strategies in the interim

Unwillingness to take significant write-offs

Waiting for a better time to sell given depressed assets’ valuation
Players with uncertain strategies following a “wait and see” approach

Not sure of pursuing an exit strategy

Believe that “the worst” has already happened in the region

Pursue optimization of portfolio

Still attracted by the growth potential of the market
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Current trends in the Latin American power sector
(cont’d)


Companies with a long-term strategy

Potential to become sector “consolidators”

Restructure and refinance their portfolios

Divest non-controlling positions

Partner with local companies

IPO/Secondary offerings
Increasing participation of local players



Different risk-reward profile vis-a-vis that of international players
Increasing interest of financial sponsors

High return expectations

To-date, mainly focus on distressed assets requiring low upfront investments
Increasing role of the local capital markets

Significant liquidity in some markets

Attractive conditions for raising both equity and debt
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Key challenges for the Peruvian power sector

Maintain a positive political and macroeconomic outlook

Attract private capital to fund significant infrastructure requirements

Continue privatization/concession processes

Develop and maintain a reliable regulatory framework


Independent regulatory entities

Political and social agendas should not interfere with the development of the sector
Importance of a transparent and fair setting of tariffs, attractive enough to promote
further investment


Address challenging social concerns through well structured measures
Importance of attracting foreign investment

Company’s cost of opportunity

Why Peru vis-à-vis other countries?

Leverage on companies already present in the country

Continue supporting the development of the local capital markets

Become a reliable player in energy integration with other countries
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