EMPRESA NACIONAL DE ELECTRICIDAD S.A. (Exact name of Registrant as specified in its charter)

Transcription

1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 20-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number EMPRESA NACIONAL DE ELECTRICIDAD S.A. (Exact name of Registrant as specified in its charter) NATIONAL ELECTRICITY COMPANY OF CHILE, INC. CHILE (Translation of Registrant s name into English) (Jurisdiction of incorporation or organization) Santa Rosa 76, Santiago, Chile Telephone No. (562) (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: American Depositary Shares Shares Title of Each Class Name of each exchange on which registered New York Stock Exchange New York Stock Exchange* * Listed, not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission. Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: US$ 150,000, % Notes due 2006 US$ 230,000, % Notes due 2027 US$ 220,000, % Notes due 2037 US$ 200,000, % Notes due 2097 US$ 400,000, % Notes due 2008 US$ 400,000, % Notes due 2009 Indicate the number of outstanding shares of each of the issuer s classes of capital or common stock as of the close of the period covered by the annual report: Shares of Common Stock: 8,201,754,580. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES X NO Indicate by check mark which financial statements item the registrant has elected to follow: ITEM 17 ITEM 18 X

2 TABLE OF CONTENTS Page Introduction... 2 Financial Information... 2 Technical Terms... 3 Calculation of Economic Interest... 3 Forward-Looking Statements... 3 PART I Item 1. Identity of Directors, Senior Management and Advisers... 5 Item 2. Offer Statistics and Expected Timetable... 5 Item 3. Key Information... 5 Item 4. Information on the Company Item 5. Operating and Financial Review and Prospects Item 6. Directors, Senior Management and Employees...64 Item 7. Major Shareholders and Related Party Transactions Item 8. Financial Information Item 9. The Offer and Listing Item 10. Additional Information Item 11. Quantitative and Qualitative Disclosures About Market Risk Item 12. Description of Securities Other than Equity Securities PART II Item 13. Defaults, Dividend Arrearages and Delinquencies...93 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds Item 15. [Reserved] Item 16. [Reserved] PART III Item 17. Financial Statements Item 18. Financial Statements Item 19. Exhibits

3 INTRODUCTION Financial Information In this Annual Report on Form 20-F ( Form 20-F ), unless otherwise specified, references throughout to U.S. dollars, dollars, $ or U.S.$ are to United States dollars, references throughout to pesos or Ch$ are to Chilean pesos, the legal currency of Chile and references to UF are to Unidades de Fomento. The Unidad de Fomento is a Chilean inflation-indexed, peso-denominated monetary unit. The UF rate is set daily in advance based on changes in the previous month s inflation rate. As of December 31, 2000, 1 UF was equivalent to Ch$15, The U.S. dollar equivalent of 1 UF was U.S.$27.49 for December 31, 2000, using the Observed Exchange Rate reported by the Banco Central de Chile (the Chilean Central Bank or the Central Bank ) for December 31, 2000 of Ch$573.65, as defined in Key Information Exchange Rates, on such date. The Consolidated Financial Statements (defined below) of Empresa Nacional de Electricidad S.A., or Endesa-Chile (the Company, and, unless otherwise indicated, other financial information concerning the Company included herein are presented in constant Chilean pesos in conformity with accounting principles generally accepted in Chile ( Chilean GAAP ) and the rules of the Superintendencia de Valores y Seguros ( SVS ). Data expressed in Chilean pesos for all periods in the Company s audited consolidated financial statements (the Consolidated Financial Statements ) for the three fiscal years ended December 31, 2000 are expressed in constant Chilean pesos as of December 31, See Note 2(c) to the Consolidated Financial Statements included herein. For Chilean accounting purposes, inflation adjustments are calculated based upon a one-month lag convention using an inflation adjustment factor based on the Indice de Precios al Consumidor (Chilean consumer price index or Chilean CPI ). The Chilean CPI is published by Chile s Instituto Nacional de Estadísticas (the National Institute of Statistics ). For example, the inflation adjustment applicable for the 2000 calendar year would be the percentage change between the November 1999 Chilean CPI and the November 2000 Chilean CPI. Chilean GAAP as applied to the Company differs in certain important respects from accounting principles generally accepted in the United States ( U.S. GAAP ). See Note 28 to the Consolidated Financial Statements of the Company contained elsewhere in this Form 20-F for a description of the principal differences between Chilean GAAP and U.S. GAAP, as they relate to the Company and a reconciliation to U.S. GAAP of net income and stockholders equity for the period and as of the dates indicated. Certain amounts may not add up due to rounding. For the purposes of Chilean GAAP, we consolidate the results of operations of a company defined as a subsidiary in Law N 18,046. In order to consolidate a company, we must satisfy, in general, one of two criteria. We must either: control, directly or indirectly, more than a 50% voting interest in such company; or nominate or have the power to nominate a majority of the board of directors of such company if we control 50% or less of the voting interest of such company. Endesa-Chile consolidates all its operational Chilean subsidiaries. In Argentina, Endesa-Chile consolidates with hydroelectric company Hidroeléctrica El Chocón S.A. and thermoelectric companies Central Costanera S.A. and Central Termoeléctrica Buenos Aires S.A. In Colombia, Endesa-Chile consolidates generation companies Hidroeléctrica Betania S.A. and Emgesa S.A. E.S.P. Endesa-Chile also consolidates with hydroelectric company Centrais Eléctricas Cachoeira Dourada S.A. in Brazil and with generation company Edegel S.A. in Peru as of Due to consolidating adjustments, financial data reported by us relating to our consolidated subsidiaries may be materially different from that reported by our consolidated subsidiaries on a stand-alone basis. For the convenience of the reader, this report on Form 20-F contains translations of certain Chilean peso amounts into U.S. dollars at specified rates. Unless otherwise indicated, the U.S. dollar equivalent for information in Chilean pesos is based on the Observed Exchange Rate, as defined in Key Information Exchange Rates. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. No representation is made that the Chilean peso or U.S. dollar amounts shown in this Form 20-F could have been or could be converted into U.S. dollars or Chilean pesos, as the case may be, at such rate or at any other rate. See Key Information Exchange Rates. 2

4 Technical Terms As used throughout, references to GW and GWh are to gigawatts and gigawatt hours, respectively, references to MW and MWh are to megawatts and megawatt hours, respectively, references to kw and kwh are to kilowatts and kilowatt-hours, respectively, and references to kv are to kilovolts. Unless otherwise indicated, statistics provided throughout this form 20-F with respect to electricity generation facilities are expressed in MW, in the case of the installed capacity of such facilities, and in GWh, in the case of the aggregate annual electricity production of such facilities. One GW = 1,000 MW, and one MW = 1,000 kw. Statistics relating to aggregate annual electricity production are expressed in GWh and are based on a year of 8,760 hours. Statistics relating to installed capacity and production of the electricity industry do not include electricity of self-generators. Statistics relating to our production do not include electricity consumed by us. Energy losses are calculated on a rolling twelve month basis by: subtracting the number of GWh of energy sold from the aggregate GWh of energy purchased and selfgenerated within a given twelve-month period; and calculating the percentage that the resulting quantity bears to the aggregate number of GWh of energy purchased and self-generated within the same twelve-month period. Calculation of Economic Interest References are made throughout this form 20-F to the economic interest of Endesa-Chile in its subsidiaries or related companies. In circumstances where the Company does not own its interest in a subsidiary or related company directly, the economic interest of Endesa-Chile in such ultimate subsidiary or related company is calculated by multiplying the percentage ownership interest of the Company in a directly held subsidiary or related company by the percentage ownership interest of any entity in the chain of ownership of such ultimate subsidiary or related company. For example, if Endesa-Chile owns 60% of a directly held subsidiary and that subsidiary owns 40% of a related company, the Company s economic ownership interest in such related company would be 24%. Forward-Looking Statements This Form 20-F contains statements that are or may constitute forward-looking statements. These statements appear throughout this Form 20-F and include statements regarding our intent, belief or current expectations, including but not limited to any statements concerning: our capital investment program and development of new products; our cost reduction project, Project Genesis; trends affecting our financial condition or results of operations; our dividend policy; the future impact of competition and regulation; political and economic conditions in the countries in which we or our related companies operate or may operate in the future; any statements preceded by, followed by or that include the words believes, expects, predicts, anticipates, intends, estimates, should, may or similar expressions; and other statements contained or incorporated by reference in this prospectus regarding matters that are not historical facts. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to: 3

5 our ability to implement proposed capital expenditures, including our ability to arrange financing where required; the nature and extent of future competition in our principal markets; political, economic and demographic developments in the emerging market countries of Latin America where we conduct a large portion of our business; and the factors discussed below under Risk Factors. You should not place undue reliance on such statements, which speak only as of the date that they were made. Our independent public accountants have not examined or compiled the forward-looking statements, and, accordingly, do not provide any assurance with respect to such statements. Consider these cautionary statements together with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to forward-looking statements contained in this Form 20-F to reflect later events or circumstances or to reflect the occurrence of unanticipated events. For all these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of

6 PART I Item 1. Identity of Directors, Senior Management and Advisers Not applicable. Item 2. Offer Statistics and Expected Timetable Not applicable. Item 3. Key Information A. Selected financial data. The following summary consolidated selected financial and operating data should be read in conjunction with, and are qualified in their entirety by reference to, the Company s Audited Consolidated Financial Statements, included elsewhere in this Form 20-F. The Audited Consolidated Financial Statements are prepared in accordance with Chilean GAAP and the rules of the SVS, which together differ in certain important respects from U.S. GAAP. Note 28 to the Audited Consolidated Financial Statements provides a description of the principal differences between Chilean GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of net income and total shareholders equity for the periods and as of the dates therein indicated. Financial data as of or for each of the five years ended December 31, 2000 in the following table have been restated in constant Chilean pesos as of December 31, All data, except ratios and operating data, are in millions. For the convenience of the reader, this Form 20-F contains translations of certain Chilean peso amounts into U.S. dollars at specified rates. Unless otherwise indicated, the U.S. dollar equivalent for information in Chilean pesos is based on the Observed Exchange Rate. The Observed Exchange Rate reported by the Central Bank for December 31, 2000 was Ch$ per U.S.$1.00. Similarly, all data presented in U.S. dollars, as of for the year ended December 31, 2000 are translated at the Observed Exchange Rate of Ch$ per U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. No representation is made that the Chilean peso or U.S. dollar amounts shown in this 20-F could have been or could be converted into U.S. dollars or Chilean pesos, at such rate or at any other rate. For more information concerning historical exchange rates, see Key Information Exchange Rates. The Company has made a number of acquisitions in the period covered in the following table and has consolidated the financial statements of certain of the entities acquired at various times. The financial statements of El Chocón have been consolidated since the acquisition of El Chocón on August 11, The balance sheet of Costanera has been consolidated since December 31, 1995 and the results of operations of Costanera have been consolidated since January 1, The balance sheet of Betania has been consolidated since December 31, 1996 and the results of operations of Betania have been consolidated since January 1, The financial statements of Cachoeira Dourada have been consolidated since September 5, The financial statements of Emgesa have been consolidated with the financial statements of Betania since October 24, The financial statements of Edegel have been consolidated since January 1, The financial statements of Central Buenos Aires have been consolidated with the financial statements of Costanera since All companies have been consolidated according to Chilean GAAP. 5

7 As of or for the year ended December 31, (Constant Ch$ as of December 31, 2000, Except Ratios and Operating Data) (in millions of U.S.$)(1) Consolidated Income Statement Data Chilean GAAP: Revenues , , , , ,968 1, Operating income ,874 (233,022) 312, , , Non-operating income... 56,774 48,163 42,865 65, , Interest expense... (80,999) (125,134) (175,408) (228,652) (255,511) (445.41) Other non-operating results (2)... (10,714) (27,465) (27,450) (82,376) (64,331) (112.14) Price-level restatement (3)... 15,816 29,282 (25,365) (84,991) (11,712) (20.42) Income before income taxes, minority 211, , ,409 (155,084) 217, interest and negative goodwill amortization... Net income , ,535 48,530 (185,040) 108, U.S. GAAP: Net income , ,651 10,345 (205,495) 91, Consolidated Balance Sheet Data Chilean GAAP: Total assets.... 3,123,298 4,807,148 5,639,511 6,024,730 5,669,957 9, Long-term liabilities... 1,192,150 2,165,400 2,507,238 2,977,176 2,600,731 4, Minority interest ,554 1,048,656 1,333,241 1,266,277 1,230,152 2, Total Shareholders equity... 1,386,085 1,380,957 1,389,343 1,187,724 1,296,599 2, U.S. GAAP: Total assets... 3,163,007 4,897,504 5,605,662 5,987,413 5,607,646 9, Long-term liabilities... 1,338,532 2,367,142 2,677,763 3,161,285 2,798,324 4,90913 Total shareholders equity... 1,228,317 1,211,207 1,182, ,297 1,042,137 1, Other Financial Data Chilean GAAP: Capital expenditures (4) , , , ,940 84, EBITDA (5) , , , , ,816 1, Depreciation and amortization , , , , , Ratio of earnings to fixed charges Ratio of shareholders equity and minority interest to total capitalization (6) % 52.1% 52.4% 46.3% 56.9% U.S. GAAP: Ratio of earnings to fixed charges Ratio of shareholders equity and minority interest to total capitalization (6) % 50.3% 50.4% 43.8% 50.9% Summary Operating Data (7) Installed capacity in Chile (MW)... 2,738 3,002 3,522 4,130 4,035 Installed capacity in Argentina (MW)... 2,800 2,780 3,631 3,622 3,622 Installed capacity in Colombia (MW) ,998 3,054 3,035 3,035 Installed capacity in Brazil (MW) Installed capacity in Peru (MW) Production in Chile (GWh)... 12,898 13,247 12,188 13,672 15,346 Production in Argentina (GWh) (8)... 9,513 8,156 7,310 9,150 10,129 Production in Colombia (GWh) (9) ,289 11,489 10,898 9,618 Production in Brazil (GWh) (10) ,059 2,941 3,222 3,406 Production in Peru (GWh) (11)... 2,964 2,869 3,072 2,950 3,623 Employees in Chile... 1,692 1,674 1,763 1, Employees outside of Chile ,341 1,395 1,

8 (1) Chilean peso amounts have been translated into dollars at the rate of Ch$ per U.S. dollar, the Observed Exchange Rate for December 31, (2) Excludes interest expense. (3) The method of accounting for price-level restatement changed in 1996 and changed again in See Item 5: Operating and Financial Review and Prospects and Technical Bulletin No. 64. (4) Capital expenditures does not include investments in equity investees and capital expenditures in development stage subsidiaries. (5) EBITDA is calculated by adding net interest expense and depreciation to, and subtracting price-level restatement (included in Non-operating expenses ) from income before taxes, minority interest and negative goodwill amortization, in each case determined in accordance with Chilean GAAP. EBITDA is presented because it is a widely accepted indicator of funds available to service debt, although it is not a U.S. or Chilean GAAP-based measure of liquidity or performance. The Company believes that EBITDA, while providing useful information, should not be considered in isolation or as a substitute for net income as an indicator of operating performance, or as an alternative to cash flow as a measure of liquidity. Additionally, the Company s calculation of EBITDA may be different than the calculation used by other companies and therefore, comparability may be affected. (6) Total capitalization includes borrowings of majority-owned development stage subsidiaries that are not consolidated under Chilean GAAP and minority interest. (7) Represents the aggregate installed capacity, production and employees of each subsidiary or related company of Endesa-Chile, not only Endesa-Chile s economic interest therein. (8) Costanera produced 6,081 GWh, 3,832 GWh, 2,629 GWh, 6,263 GWh and 6,286 GWh in 1996, 1997, 1998, 1999 and 2000, respectively. CBA produced 418 GWh, 1,387 GWh, 1,799 GWh, 1,463 GWh and 1,516 GWh in 1996, 1997, 1998, 1999 and 2000, respectively. El Chocón produced 3,014 GWh, 2,937 GWh, 2,883 GWh, 1,424 GWh and 2,327 GWh in 1996, 1997, 1998, 1999 and 2000, respectively. (9) Includes, in 1997, 1,219 GWh of production by Emgesa from October 24, 1997, the date on which the Company took control of Emgesa, through December 31, Emgesa produced 9,643 GWh in Betania produced 2,070 GWh, 1,847 GWh, 2,459 GWh and 2,372 GWh in 1997, 1998, 1999 and 2000, respectively. (10) Represents, in 1997, Cachoeira Dourada s generation from September 12, 1997, the date on which the Company took control of Cachoeira Dourada, through December 31, (11) Edegel was accounted for under the equity method for the years ended December 31, 1996 and 1997 and was consolidated for the year ended December 31,

9 Exchange Rates Fluctuations in the exchange rate between the Chilean peso and the U.S. dollar will affect the U.S. dollar equivalent of the Chilean peso price of Endesa-Chile s shares of common stock, without par value (the Shares or the Common Stock ), of the Company on the Bolsa de Comercio de Santiago (the Santiago Stock Exchange ), the Bolsa Electrónica de Chile (the Electronic Exchange ) and the Bolsa de Corredores de Valparaíso (the Valparaíso Stock Exchange ) (collectively, the Chilean Exchanges ), and, as a result, will likely affect the market price of the Company s American Depositary Shares ( ADSs ). Such fluctuations will also affect conversion of cash dividends relating to the Shares represented by ADSs from Chilean pesos to U.S. dollars. In addition, to the extent financial liabilities of the Company are denominated in foreign currencies, exchange rate fluctuations may have a significant impact on earnings. Chile s Ley Orgánica del Banco Central de Chile No. 18,840 (the Central Bank Act ), enacted in 1989, liberalized the ability to buy and sell foreign exchange in Chile. Prior to 1989, the law authorized the purchase and sale of foreign exchange only in those cases explicitly authorized by the Central Bank. The Central Bank Act currently provides that the Central Bank may require that certain purchases and sales of foreign exchange be carried out in the Mercado Cambiario Formal (the Formal Exchange Market ), a market formed by banks and other entities explicitly authorized by the Central Bank. Purchases and sales of foreign exchange which are generally permitted to be transacted outside the Formal Exchange Market can be carried out in the Mercado Cambiario Informal (the Informal Exchange Market ), which is a recognized currency market in Chile. Both the Formal and Informal Exchange Markets are driven by free market forces. All payments and distributions with respect to the ADSs will be transacted in the Formal Exchange Market. For the purposes of the operation of the Formal Exchange Market, the autonomous Central Bank of Chile sets a reference exchange rate (dólar acuerdo) (the Reference Exchange Rate ). The Reference Exchange Rate is reset daily by the Central Bank, taking into account internal and external inflation and variations in parities between the Chilean peso and each of the U.S. dollar, the Japanese yen and the Euro in a ratio of 80:5:15, respectively. In order to keep the average exchange rate within certain limits, the Central Bank intervenes by buying or selling foreign exchange in the Formal Exchange Market. The daily observed exchange rate (dólar observado) (the Observed Exchange Rate ) reported by the Central Bank and published daily in the Chilean newspapers is computed by taking the weighted average of the previous business day s transactions in the Formal Exchange Market. The Central Bank buys or sells dollars, as needed, in the Formal Exchange Market to attempt to maintain the Observed Exchange Rate within a desired range. The Informal Exchange Market reflects transactions carried out at informal exchange rates (the Informal Exchange Rate ) by entities not expressly authorized to operate in the Formal Exchange Market (e.g., certain foreign exchange houses, travel agencies and others). There are no limits imposed on the extent to which the rate of exchange in the Informal Exchange Market can fluctuate above or below the Observed Exchange Rate. Since 1993, the Observed Exchange Rate and the Informal Exchange Rate have typically been within less than 1% of each other. On December 31, 2000, the Informal Exchange Rate was Ch$573.75, or 0.02% higher than the published Observed Exchange Rate of Ch$ per U.S.$1.00. The following table sets forth, for the periods and dates indicated, certain information concerning the Observed Exchange Rate reported by the Central Bank. No representation is made that the Chilean peso or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Chilean pesos, as the case may be, at the rates indicated or at any other rate. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. On June 28, 2001, the Observed Exchange Rate was Ch$ = U.S.$

10 9 Observed Exchange Rate (1) (Ch$ per U.S.$) Year Low(2) High(2) Average(3) Period-end January February March April May June (until June 28, 2001) Observed Exchange Rate as of the Last Practicable Date June 28, Source: Central Bank of Chile. (1) Reflects Chilean pesos at historical values rather than in constant Chilean pesos. (2) Exchange rates are the actual high and low, on a day-by-day basis, for each period. (3) The average of the exchange rates on the last day of each month during the period. B. Capitalization and indebtedness. Not applicable. C. Reasons for the offer and use of proceeds. Not applicable. D. Risk Factors Risk Factors Relating to Endesa-Chile Changes in government regulation may impose additional operating costs and may cause revenues to decline As a public utility, we are subject to extensive regulation of tariffs and other aspects of its business in Chile and in the other countries in which it and the companies in which it has an investment operate. The current regulatory framework governing electric utility businesses has been in existence in Chile since 1982, in Argentina since 1992, in Peru since 1993, in Colombia since 1994 and in Brazil since 1997, although the regulatory framework in Brazil is currently undergoing substantial reforms. Chile s National Energy Commission has announced its intention to amend the Chilean electricity sector s regulatory framework. The main objectives of these amendments would be to ensure a higher level of competition and to guarantee reliability, assurance and quality service to final customers. We are unable to predict whether or in what form any amendments to the electricity sector regulatory framework will be enacted, or the timing and applicability of any new legislation. Such amendments could affect our profitability adversely by increasing the costs associated with generating electricity and/or decreasing the revenues we earn from these activities. We are also subject to environmental regulations, which, among other things, require us to perform environmental impact studies on future projects and obtain regulatory permits. As with any regulated company, no assurance can be given that any such environmental impact studies will be approved by governmental authorities, that public opposition will not result in delays or modifications to any proposed project or that laws or regulations

11 will not change or be interpreted in a manner that could adversely affect our operations or our plans for the companies in which we have an investment. Modifications to Chile s electricity law, enacted in June 1999, increased the cost of doing business for Chile s electricity generators, and particularly hydro-based electricity generators such as ourselves. The modifications include a system of graduated fines for companies that do not comply with regulations (reaching a maximum of approximately U.S.$5.4 million per breach), a requirement to pay 25% of total outstanding fines before appeals can be made, and mandatory compensation for regulated users affected by electricity cuts, irrespective of the cause of the generator s deficit. The National Energy Commission (the NEC ) has announced its intention to amend the Chilean electricity sector regulatory framework. The main objectives of such amendments would be to ensure a higher level of competition and improve reliability, assurance, and quality service to end users. We are unable to predict whether or in what form any amendments to the electricity sector regulatory framework will be enacted, or the timing and applicability of any new legislation. Such amendments could adversely affect our profitability by increasing the costs associated with generating electricity and/or decreasing the revenues we earn from these activities. In addition, we have acquired interests in electricity enterprises privatized by the Argentine, Peruvian, Brazilian and Colombian governments. These enterprises are subject to laws and regulations governing their activities, including regulations relating to prices and tariffs chargeable for electricity generation, many of which have only recently been adopted. There can be no assurance that future interpretations or amendments of such laws and regulations will not affect these operations adversely. Drought conditions may hurt our profitability A substantial portion of our operations in Chile, Argentina, Brazil, Colombia and Peru involve hydroelectric generation and, accordingly, are dependent upon hydrological conditions prevailing from time to time in the geographic regions in which we operate. During periods of drought conditions, electricity from thermal generators is dispatched more frequently. During such periods, we are required to purchase electricity from thermal producers, when spot market prices, meaning instantaneous market conditions outside contractual arrangements, are at their highest, to the extent our own production is not sufficient to fulfill contractual obligations with our customers. The cost of these spot market purchases may exceed the price at which Endesa-Chile sells electricity under contracts, resulting in a loss. In 1998 and the first half of 1999 contractual commitments exceeded ability to supply electricity to customers from our own production and, as a result, we recorded significantly decreased earnings in Endesa-Chile s operations in Chile, Argentina and Colombia were adversely affected by severe drought conditions which were experienced during 1996 and the first part of In addition, Chile experienced a severe and protracted drought during the second half of 1998 and the first half of 1999 that was the worst in its recorded history. The severity of the drought coupled with delays in the planned operation of a large gas-fired plant of one of our competitors led to the implementation by the Chilean Ministry of the Economy of rationing periods during The impact of the drought in Chile caused that us and our affected subsidiaries took significant measures to maintain the electricity supply, including, among other things, installing additional temporary thermal capacity in the SIC, negotiating agreements with unregulated customers to lower consumption and purchasing large amounts of electricity from thermal producers to satisfy contractual obligations. Operating margins in Chile during 1997, 1998 and 1999 were adversely affected by the drought. There can be no assurance that periods of severe and sustained drought will not occur in the future or, if they occur, that they will not have an adverse effect on Endesa-Chile s financial condition or results of operations. We may have to pay regulatory penalties related to operating our business in drought conditions. Under current Chilean law, we may be required to pay the following three types of regulatory penalties during periods of electricity rationing imposed by the Chilean authorities: Endesa-Chile may be subject to regulatory fines, which range from 1 UTM, or approximately U.S.$45 to 10,000 UTA, or approximately U.S.$5.4 million. These fines apply to any company supervised by the Chilean national electricity commission. 10

12 If Endesa-Chile is required to buy electricity on the spot market during the period in which a rationing decree is in effect, we are required to pay a failure cost set by the authorities. If any end-consumer of electricity in Chile fails to receive electricity during any declared rationing period, that consumer must be paid a compensation payment, which would be equal to a failure cost set by regulatory authorities. For example, in 1999 Endesa paid approximately U.S.$2 million in compensation payments. Although the regulatory authorities maintain that the compensation payments made by us were insufficient, we have contested our obligation to make these payments in a Chilean court, which resolution is still pending. We can give you no assurance that rationing periods will not occur in the future and, consequently, we can give you no assurance that we will not be obligated to pay regulatory penalties if we fail to provide service. We can give you no assurance that any future regulatory payments will not exceed the payments we were required to make in Our business is dependent on our water rights, which could be affected by the proposals being considered by the Chilean Congress. Approximately 70% of our installed capacity in Chile is hydroelectric. We own water rights granted by the Chilean Water Authority for the supply of water from rivers and lakes near our production facilities. Under current law, our water rights are of unlimited duration, are absolute and unconditional property rights and are not subject to any further challenge. The Chilean congress is currently considering a proposal to revise the laws governing water rights. Under the proposal we would have to pay a fee for previously granted but unused water rights each year that the right continued unused. We are unable to predict whether, or in what form, any such proposed changes to the laws governing water rights will be enacted. There can be no assurance that any changes would not, if enacted, have a material adverse effect on either ourselves or our operations. We are a holding company and depend on payments from our subsidiaries to meet payment obligations. Payment of dividends and distributions by our subsidiaries and related companies represent a significant source of funds for us. To pay our obligations, we rely on income from dividends, distributions and other cash flows from our subsidiaries. Because we are a holding company, the claims of creditors of our subsidiaries, including trade creditors of, and bank and other lenders to, our subsidiaries, will have priority over our creditors, with respect to the assets and cash flow of those subsidiaries. At December 31, 2000, our subsidiaries total indebtedness, including notes payable, was Ch$1,820 trillion (U.S.$3.2 billion). The payment of dividends and distributions by such subsidiaries and related companies are subject to legal and contractual restrictions, such as legal reserve requirements, capital and retained earning criteria and other restrictions, and is contingent upon their earnings and cash flows. We are not aware of any other legal restrictions on the payment to us of dividends or distributions from the jurisdictions where our material subsidiaries or related companies are incorporated, other than customary restrictions limiting dividends to the amount of net income and retained earnings. Certain credit facilities and consortium investment agreements of our subsidiaries restrict the payment of dividends or distributions under certain circumstances. There can be no assurance that legal restrictions will not be imposed or that additional contractual restrictions will not arise in the future. Our capital investment program may be adversely affected by factors commonly associated with such projects. The success of our capital investment program will depend on numerous factors, including the cost and availability of financing. Although we have experience with large scale construction projects, the construction of new facilities may be adversely affected by factors commonly associated with large construction projects such as: delays in obtaining regulatory approvals including environmental permits, local opposition by political or ethnic groups, shortages or changes in the price of equipment, materials or labor, 11

13 adverse weather conditions which may delay the completion of power plants, natural disasters, accidents, unforeseen circumstances, adverse changes in the political and regulatory environment in the countries where we and our related companies operate, and inability to obtain financing at affordable rates. Any of those factors may cause delays in completion of all or part of our capital investment program and may increase the costs of the projects contemplated. We may not be able to achieve improved operating efficiency at acquired companies. We have expanded in recent years by acquiring interests in Latin America through the privatization process. Our business strategy includes plans for further expansion within Latin America by bidding to participate in privatizations of utility businesses. Our ability to improve operating efficiency at acquired companies may be affected by the following factors: We may be constrained by a lack of resources at the acquired companies. Newly privatized utilities generally lack resources to operate profitably and to fund appropriate levels of maintenance and improvements. We may need to confront regulatory obstacles outside of Chile. Newly privatized enterprises are subject to laws and regulations governing their activities, including regulations relating to prices and tariffs chargeable for electricity generation and distribution, many of which have only recently been adopted. Regulatory frameworks for utility businesses in other Latin American countries may be less developed than the Chilean regulatory framework. We cannot assure you that future interpretations or amendments of any such laws and regulations will not affect us or our operations adversely. We may experience economic and political difficulties in countries outside of Chile. The political and economic conditions prevailing in other Latin American countries may be less stable than in Chile. The operations of such enterprises may be affected by changes in the economic and political environment prevailing from time to time in Argentina, Peru, Brazil and Colombia, including periods of inflation that result in devaluation of the Argentine, Peruvian, Brazilian or Colombian currencies. We evaluate investment opportunities in Latin American countries where management believes there exist: acceptable political and economic conditions; and the prospect of an appropriate regulatory framework or, in the absence of such regulatory framework, adequate long-term contracts. We may incur indebtedness to finance one or more acquisitions, and this is likely to increase our financial leverage. We can offer no assurance that we will be successful in acquiring other privatized utility businesses or that, if we do acquire one or more such businesses, we will be able to make such businesses profitable. We may not be able to implement our principal strategies. Our future results of operation will depend in significant part upon our ability to implement our principal strategies - operating and financial cost reductions and continued expansion outside of Chile. The success of Project Genesis, our strategy to cut costs substantially, generally will depend upon numerous factors, including the cost and availability of financing and our ability to achieve the operating efficiencies that have been budgeted for our subsidiaries. If we are unsuccessful in any of these strategies, our profitability could suffer. Our ability to carry out these strategies could be harmed by a number of factors, including: inability to refinance existing debt on more favorable terms and/or to finance expansion (in this context, our cost of funds in the international public debt markets may increase as a result of the foreign debt downgrade carried out by Standard & Poor s in 2001, from the former A- creditwatch with negative implications to the current BBB+ with stable outlook ); the failure of new meters and transformers being installed in Argentina, Brazil, Colombia and Peru to reduce electricity theft from our operations in those countries; 12

14 the emergence of more competitors prepared to outbid us in future Latin American utility privatization; and labor problems arising from payroll reductions. Risk Factors Relating to Chile Our business is dependent on the Chilean economy and our revenues are sensitive to its performance. A substantial portion of our assets and operations are located in Chile and, accordingly, our financial condition and results of operations are to a certain extent dependent upon economic conditions prevailing from time to time in Chile. In 2000, the Chilean economy grew by 5.4% compared to a decrease of 1.1% in Chilean government officials expect the economy to grow much less in 2001 than in 2000 and estimate such 2001 growth to be approximately 4.0% in comparison with We cannot assure you that such growth will be achieved in 2001 nor that the growth trend will continue in the future or that future developments in the Chilean economy will not impair our ability to proceed with our strategic plans or impact our financial condition or results of operations adversely. Our financial condition and results of operations could also be affected by changes in economic or other policies of the Chilean government, which has exercised and continues to exercise a substantial influence over many aspects of the private sector. In addition, our financial condition and results of operations could also be affected by other political or economic developments in Chile, as well as regulatory changes or administrative practices of Chilean authorities, over which we have no control. Increased inflation in Chile may affect our results of operations adversely. Although Chilean inflation has moderated in recent years, Chile has experienced high levels of inflation in the past. High levels of inflation in Chile could affect the Chilean economy adversely. The inflation rate was 27.3% in 1990, although it fell to single-digits by 1994, and has continued to decline steadily to a low of 2.3% in Chilean CPI for the 12 months ended December 31, 2000, was 4.5%, and government officials expect 2001 CPI to be less than 4.0%. Historically, a substantial part of our expenses has been denominated in Chilean pesos. As a result, the level of Chilean inflation may affect our financial condition and results of operations. We believe that moderate inflation should not materially affect our business in Chile. Electricity tariffs in Chile, both for generation and distribution, contain indexing mechanisms that are intended to neutralize the effects of inflation. However, we cannot assure you that the performance of the Chilean economy, our operating results, or the value of the ADSs, will not be affected adversely by a significant increase in the level of inflation or that Chilean inflation will not increase significantly from the current level. Foreign exchange risks may adversely affect our results. The Chilean peso, the Argentine peso, the Colombian peso, the Peruvian nuevo sol and the Brazilian Real have been subject to large devaluations in the past and may be subject to significant fluctuations in the future. Historically, a significant portion of our indebtedness has been denominated in U.S. dollars, and, although a substantial portion of our revenues are linked in part to U.S. dollars, future fluctuations in the exchange rate of the Chilean peso to the U.S. dollar, or other currencies in which we receive revenues or incur expenditures, may affect our financial condition and results of operations. Chilean corporate disclosure, governance and accounting standards may provide investors less reliable or relevant information than would be provided under U.S. standards. The securities laws of Chile which govern open or publicly listed companies, such as ours, impose disclosure requirements that are more limited than those in the United States in important respects. The Chilean securities markets are not as highly regulated and supervised as the U.S. securities markets. There are also important differences between Chilean and U.S. accounting and financial reporting standards. As a result, Chilean financial statements and reported earnings generally differ from those reported based on U.S. accounting and reporting standards. See Note 28 to our consolidated financial statements for a description of the principal differences between Chilean GAAP and U.S. GAAP as they relate to us and a reconciliation to U.S. GAAP of net income and total shareholders equity for the periods and as of the dates therein indicated. 13

15 Lawsuits against us brought outside of Chile or complaints against us based on foreign legal concepts may be unsuccessful. If any shareholder were to bring a lawsuit against our officers, directors or experts in the United States, it may be difficult for them to effect service of legal process within the United States upon these persons or to enforce against them in United States courts judgments obtained in the United States courts based upon the civil liability provisions of the federal securities laws of the United States. In addition, there is doubt whether an action could be brought successfully in Chile in the first instance on the basis of liability based solely upon the civil liability provisions of the United States federal securities laws. Risk Factors Relating to Latin America Latin American economic fluctuations are likely to affect our results of operations. All of our operations are located in Latin America. Although we originally operated only in Chile, we have, through strategic acquisitions and investments, expanded our operations throughout Latin America. We now generate a significant portion of our consolidated operating revenue and consolidated operating income outside of Chile. Accordingly, our consolidated revenues are sensitive to the performance of the Latin American economy as a whole. If local, regional or worldwide economic trends affect adversely the economies of any of the countries in which we have investments or operations, our financial condition and results of operations could be affected adversely. The Latin American financial and securities markets have exhibited significant volatility since October 1997, reflecting the risk created by weakness in global commodity prices and slowing global economic growth. Latin American countries have generally responded to these external factors, including currency speculation, by widening or eliminating currency fluctuation bands, raising interest rates and tightening fiscal policies. Latin American economies, including all of those in which we have investments, have recently been affected adversely by a number of internal and external factors. In particular, Argentina is restructuring its public debt in Although a minor Argentine devaluation would probably not cause adverse effects, a massive devaluation of the Argentine peso, and a delinking of that currency in its current one-to-one parity with the U.S.$, may have adverse effects over other Latin American economies, and ultimately in our results and operations. The Latin American financial and securities markets are, to varying degrees, influenced by economic and market conditions in other emerging market countries. Although economic conditions are different in each country, investor reaction to developments in one country can have significant effects on the securities of issuers in other countries, including Chile. We can offer no assurance that the Chilean financial and securities markets will not continue to be affected adversely by events elsewhere, especially in other emerging markets, or that such effects will not affect the value of our results of operations. Certain Latin American economies have been characterized by frequent and occasionally drastic intervention by governmental authorities. Governmental authorities have often changed monetary, credit, tariff and other policies to influence the course of the economy of Argentina, Brazil, Colombia and Peru. Any government s actions to control inflation and effect other policies have often involved wage, price and tariff rate controls as well as other interventionist measures, which have included freezing bank accounts and imposing capital controls. Changes in the policies of these governmental authorities with respect to tariff rates, exchange controls, regulations and taxation could affect our business and financial results adversely, as could inflation, devaluation, social instability and other political, economic or diplomatic developments, including the governments response to such circumstances. Our subsidiaries may be affected by exchange rate instability. Revenues from our non-chilean subsidiaries are principally denominated in the relevant local currency. Therefore, the relationship of the value of non-chilean currencies to the U.S. dollar and Chilean peso, and the relative rates of devaluation of said local currencies to the prevailing rates of inflation, may affect our financial condition and results of operations. On January 13, 1999, the Brazilian government announced a widening of the trading band on the real, effecting a de facto 9.0% devaluation of its currency, and on January 15, 1999, the Brazilian government decided to allow the 14