Guido Cerini JPM

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					                                           JULY 2004




INVESTMENT CLIMATE IN THE LATIN
INVESTMENT CLIMATE IN THE LATIN
A M RI ICA P WE W
A M EE RC A N N O P OR SEER TS E C T O R
                          C OR




                     0405_0448_IBNA_AD1
Key highlights of the North American power sector
  2003 recap                                                            2004 market dynamics
     Retreat from unsuccessful growth strategies                        “Back to basics” was credit driven and will not
                                                                          serve as growth strategy going forward
     Year of “cleanup”
         Focused on core businesses, principally                        Regulators are being cautious to allow utilities
          domestic                                                        competitive returns
         Strengthened balance sheets                                    Growth utilities will attract a disproportionate
                                                                          share of new capital
     Increasing presence of financial sponsors
                                                                           Strategics and sponsors positioning for
         Excess capital from institutional investors
                                                                             potential regulatory changes
         Institutional investors consider that
                                                                           Large European utilities looking for growth
          investments in utilities could provide more
          stable returns than those in the stock or                        Cost driven consolidation
          bond markets
                                                                         Private equity sponsors will continue to
     Earnings stabilized and credit rating                               challenge corporate buyers
      downgrades mostly completed                                          Several sponsors already own assets to
         The utility and merchant generation                                compete on a strategic basis
          sectors enjoyed improved liquidity and                           Demonstrated willingness to invest long-term
          greater access to capital markets                                  and wait for developing business
                                                                             fundamentals and regulatory outcomes



                                                   0405_0448_IBNA_AD1                                                        1
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                           Selected Investments
   American power sector (US$ mm)
                                                                                                                                          Deal size
                                                                    Date          Acquirer/target                                            $mm
                                                                    03/10/04      Sempra and Carlyle-Riverstone JV/                           $430
     82,910          87,470                                                       AEP (Texas Central Co.)
                                                                    02/24/04      TransCanada/                                               1,703
                                                                                  Gas Transmission Northwest

                               19,120   24,030                      01/16/04      AIG Highstar/                                                938
                                                                                  El Paso Corporation
                                                                    12/15/03      Enterprise Product Partners LP/                            5,063
                                                                                  Gulfterra Energy Partners

       2000           2001     2002      2003                       11/21/03      KKR/JPMP/Wachovia/                                         2,968
                                                                                  Unisource Energy

  Source: Thompson Financial                                        11/18/03      Oregon Electric Utility Co LLC; TPG/                       2,350
                                                                                  Cortland General Electric


   # of M&A transactions in the North                               10/20/03      Goldman Sachs Group/
                                                                                  Cogentrix
                                                                                                                                             2,415



   American power sector                                            09/02/03      Evercore/
                                                                                  85% ownership interest in Michigan Electric
                                                                                                                                                NA


                                                                    5/12/03       Southern Union/                                            1,797
                                                                                  Panhandle Eastern Pipe Line
                                                                    04/21/03      Consortium (Madison Dearborn, Carlyle/Riverstone)/         1,082
        171                                                                       54.6% interest in Williams Energy Partners (Williams)
                                         136                        04/16/03      GS Linden Power Holdings LLC; Goldman Sachs/               1,056
                        97      105                                               East Coast Power
                                                                    04/11/03      Loews Pipeline Holding Corp/                               1,045
                                                                                  Texas Gas Transmission
                                                                    11/25/03      Constellation Energy Group Inc/                              423
                                                                                  Energy East
                                                                    07/08/03      Private Power LLC/                                           335
       2000           2001     2002      2003                                     Primary Energy

  Source: Thompson Financial                                        Source: SDC


                                               0405_0448_IBNA_AD1                                                                                 2
Stock prices for utilities have recovered over the last 18
months; however, increasing interest rates could slow
this trend
    Relative stock price performance                                                                                  Year forward price-to-earnings ratio
    (% change)
   300%                                                                                                                                                       Integrated companies
                                                                               UTY
                                                                                                                                                              Merchants & traders
                                                                               Integrated                                                                     T&D
   250%                                                                        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)
   100%                                                                                                               150%

                                                                                                                      130%

                                                                                                                      110%
     50%
                                                                                                                       90%

                                                                                                                       70%

       0%                                                                                                              50%
         Jan-99        Dec-99         Nov-00        Oct-01        Sep-02         Aug-03        Jul-04                    Jan-99   Dec-99   Nov-00    Oct-01    Sep-02     Aug-03     Jul-04

  Source: Tradeline                                                                                                  Source: Bloomberg
  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




                                                                                                0405_0448_IBNA_AD1                                                                            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
   Prices making generation                                    regulation
    uneconomic
                                                               Transmission bottlenecks
   Ownership consolidation
                                                               Introduction of third party
   Emissions restrictions and CO2                              equity/debt
    trading
                                                               Equity investors appetite for
   Asset values declining                                      regulated assets

   High number of assets for sale                             Restructuring and unbundling

                                                               Privatizations
                                         0405_0448_IBNA_AD1                                            4
The Latin American investment environment has
significantly improved over the last 18 months
   EMBI+ SOT Indices per country                                                    GDP growth (%, annual change)
                 Argentina        Brazil             Chile                                             Argentina     Brazil      Chile
   Bps           Colombia         Ecuador            Peru
                                                                                     10%               Colombia      Ecuador     Peru
   8,000
                                                                                      5%
   6,000
                                                                                      0%
   4,000
                                                                                    (5)%
   2,000
                                                                                   (10)%
       0
                                                                                   (15)%
       Dec-99       Feb-01       Apr-02       May-03         Jul-04                        1997—2001     2002        2003E      2004F       2005F


  Source: Global Economic Data as of July 13, 2004                                 Source: JPMorgan research


   Exchange rate                                                                    Stock exchange indices
                 Argentina        Brazil             Chile                                       Argentina         Peru           Brazil
                 Colombia         Ecuador            Peru                                        Chile             Colombia       Ecuador
   450%                                                                             500
                                                                                    400
   325%                                                                             300
   200%                                                                             200
                                                                                    100
    75%                                                                               0
      Dec-99        Feb-01       Apr-02       May-03         Jul-04                   Jan-01       Nov-01          Oct-02      Aug-03       Jul-04

  Source: Global Economic Data as of July 13, 2004                                 Source: Global Economic Data as of July 13, 2004




                                                              0405_0448_IBNA_AD1                                                                     5
However, investment conditions in the Latin American
power sector differ significantly across countries

  Investment environment
    Less favorable
    More favorable     Brazil    Mexico     Argentina         Venezuela   Chile     Peru     Ecuador    Bolivia
  Credit rating        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




                                                 0405_0448_IBNA_AD1                                               6
Finding the “right” risk/reward balance will continue
to be the challenge for power sector players
   Country risk versus electricity consumption growth
                                10.0%                                                                                Chile
                                                                                               Peru              43,700 GWh
                                9.0%
                                                 DR¹                                       22,000 GWh
      Electricity consumption
      1995—20025 CAGR (%)




                                8.0%
                                             5,400 GWh
                                7.0%                                                               Panama²
                                                                                    Venezuela     3,800 GWh
                                6.0%                                               95,700 Gwh
                                5.0%        Argentina
                                4.0%       84,800 GWh                                                              Mexico
                                                                                                 Colombia       160,200 GWh
                                3.0%
                                                                                                45,200 GWh
                                2.0%                                              Brazil
                                1.0%                                          342,300 GWh

                                0.0%
                                    6000
                                    1200   1000             800                      600         400           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



                                                              0405_0448_IBNA_AD1                                              7
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
      Sales                                                         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                                                           19.8                27.4                   21.9                     21.5
      Fundamental valuation
      FCF expected growth1(g)                                         2.0%                3.0%                   3.0%                     4.0%
      Country risk2                                                   0.0%                1.0%                   4.9%                     7.1%
      Discount rate (WACC)3                                           7.1%                9.1%                 11.5%                  13.4%
      Firm value: FCFt+1/(WACC - g)                                     397                466                    265                     238
      Implied FV/EBITDA multiple
      EBITDA                                                            45                  45                     45                       45
      FV/EBITDA                                                       8.8x               10.3x                   5.9x                     5.3x

  1 JPMorgan estimates for perpetuity growth rates
  2 SOT over UST10
  3 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

                                                               0405_0448_IBNA_AD1                                                                8
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

                                 Increased country risk/                                                          Reduced country risk/
                                      FX volatility                                                                  FX appreciation




                                        Depressed                                                                       Increasing
                                          asset                                                                            asset
                                          prices                                                                          prices
             Strategic players                             Limited number                    Strategic players’                            More balanced
              facing liquidity                                   of buyers                   improved financial                           supply/demand
                   crisis                                                                        condition                                      of assets




                           Strategic players response                                                       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                                      Highly liquid local markets become an important
                     significant bid/offer price gap                                            alternative to reduce exposure to the region

                                                                     0405_0448_IBNA_AD1                                                                            9
Local groups, financial sponsors and the public market
are becoming important players in the utility sector

   Selected transactions
                                                                                                                %    Purchase price   EBITDA
   Date     Acquiror           Target                    Seller                Sector         Country     acquired        (US$mm)     multiple
   Apr-04   CDC                Cobee                     NRG                   Generation     Bolivia        99%               N/A       N/A
   Mar-04   Market             CGE                       PPL Global            Distribution   Chile           9%               122      10.9x
   Mar-04   Dolphin            Transener                 National Grid         Transmission   Argentina      28%                14       N/A
            Management
   Mar-04   Sebastian Pinera   Costanera                 Southern              Generation     Argentina       7%                10        N/A
            & other                                      Cone
   Feb-04   Darby Overseas     Termobarranquilla         First Energy          Generation     Colombia       29%               N/A        N/A
   Feb-04   Enersur            Yuncan (under             Peruvian              Generation     Peru          100%                53        N/A
            (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
                                                         (CORFO)
   Dec-03   Hurtado            ESSCO                     Government            Water          Chile         100%                86       8.1x
                                                         (CORFO)
   Dec-03   Hidrosan           EMSSAT                    Government            Water          Chile         100%                26       5.9x
                                                         (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



                                                                   0405_0448_IBNA_AD1                                                        10
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

                                   0405_0448_IBNA_AD1                   11
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



                                             0405_0448_IBNA_AD1                                    12
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




                                             0405_0448_IBNA_AD1                          13
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


                                            0405_0448_IBNA_AD1                                   14

				
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