1

Transcription

1

2 1

3 2

4 C ONTENTS CHAIRMAN S LETTER 7 BOARD OF DIRECTORS AND EXECUTIVE OFFICERS 10 CORPORATE DATA 11 CONSOLIDATED HIGHLIGHTS 12 THE REPUBLIC OF CHILE 13 THE CHILEAN ECONOMY 14 HISTORICAL REVIEW 16 ORGANIZATION 17 OWNERSHIP OF THE COMPANY 18 DIVIDENDS 19 INVESTMENT AND FINANCING POLICIES 20 ACTIVITIES AND BUSINESS IN CHILE AND ABROAD 22 ENERGY DIVISION 26 INTERNATIONAL DIVISION 33 OTHER BUSINESSES 39 CORPORATE DIVISION 42 SUBSIDIARIES AND ASSOCIATED COMPANIES 48 ADDRESSES 55 ENDESA-CHILE S CONSOLIDATED FINANCIAL STATEMENTS 57 3

5 4

6 5

7 6

8 C HAIRMAN' S LETTER To our shareholders, The year 1998 was one of substantial investment and growth for the Company both in Chile and abroad, and also one of bringing a series of national and international events that affected ENDESA-Chile. The total investment of ENDESA-Chile and its subsidiaries in Chile and elsewhere in 1998 was US$ 1,087 million. This will enable the group to grow in strength and increase in value. The effects of the so-called Asian crisis on international financial markets and their repercussions for Chile s economy, accompanied by the most severe drought in Chile s history, clearly influenced the year s results. Net income for the year was Ch$ 45,177 million, 63.1% below the level of 1997 despite producing operating income of Ch$ 291,157 million which was 34.2% higher than in This was counteracted by lower operating income generated in Chile, the negative impact of price-level restatement, higher financial expenses resulting from consolidations and acquisitions, and an increase in the minority interest. Chile suffered the most serious drought in 1998, drier than even that of 1968 which was previously the worst in history. This produced a substantial fall in hydroelectric generation. Combined with start-up delays at the Nehuenco plant owned by another generator, this led to a large investment in thermal generation currently under way to meet energy demand. The arrival of natural gas in Chile resulted in a 3.3% fall in prices for energy sold by ENDESA-Chile, compared to 1997, while sales volumes decreased by 8.2%. Both factors led to a reduction in operating income from the Chilean business. Operating income amounted to Ch$ 291,157 million in 1998, Ch$ 74,236 million higher than in This was due to Ch$ 114,784 million of additional income in the international area following the consolidation of the new acquisitions, Emgesa in Colombia and Cachoeira Dourada in Brazil, the consolidation of the Peruvian subsidiary Edegel in 1998 and an increase in operating income of Costanera and El Chocón in Argentina. The foreign-generated operating income was Ch$ 201,927 million, reaching 69.4% of the Company s total operating income and demonstrating the success of ENDESA-Chile s internationalization process. Operating income in Chile decreased by 31.2% due to Ch$ 28,950 million of lower energy sales as a result of a fall in volumes and a reduction in average prices following the availability of natural gas. The extremely dry weather conditions also produced an increase in energy purchases of Ch$ 15,822 million. Towards the end of 1997, the country was affected by the international financial situation which lasted throughout In particular, the real exchange rate increased by 3.3%, based on the consumer price index, compared to 1997 when it fell by 2.9%. This produced an important adverse change in price-level restatement which affected the Company s non-operating result. It should be mentioned that this restatement is an accounting adjustment, but the economic value of the Company is not greatly affected by US dollar exchange rate changes as most of its income is also denominated in that currency. The non-operating result in 1998 was therefore a loss of Ch$ 172,551 million, compared to a loss of Ch$ 69,960 million in As already mentioned, despite the difficult year the Company s net income amounted to Ch$ 45,177 million, which represents a return on equity of 3.6%. 7

9 Regarding dividends, the board of the Company, in line with the policy defined by the shareholders meeting, agreed not to distribute interim dividends during 1998 due to the Chilean drought and the fluctuating international situation affecting the exchange rate. It was therefore considered prudent to await the final figure for net income before deciding on the dividend. The Company continued with its substantial investment program in 1998 in both Chile and abroad. Investments during the year amounted to the equivalent of US$ 1,087 million. In Chile, the main event was the start-up of the San Isidro natural gas-fired plant and of the gas pipeline belonging to Electrogas ( partly owned by ENDESA-Chile ) for transporting gas to the 5th Region. The coal-fired Tarapacá plant in the 1st Region was also commissioned. The Ralco hydroelectric plant, planned to start operating in 2002, saw significant progress in obtaining the approval of the environmental authorities, and works are now being started. Construction is also being accelerated of the pipelines and plants of the GasAtacama project, for bringing Argentine natural gas to be used on the SING. In order to alleviate the effects of serious drought in Chile, ENDESA-Chile adopted a series of measures including the installation of 588 MW of additional generating capacity on the SIC and an increase in transmission capacity on the Polpaico-San Isidro line; these represent an investment of about US$ 200 million. Agreement was also reached with the authorities to bring forward use of Lake Laja and Lake Maule waters. This, together with the start-up ahead of schedule of the San Isidro plant, managed to minimize the effects of the drought in 1998 and early Regarding its investments abroad, ENDESA-Chile increased its holdings in the companies Cachoeira Dourada and Edegel in It also placed into service the MW combined-cycle plant of Costanera in Argentina and the 56 MW Salto I hydroelectric plant in Colombia. Progress continued with the construction of the 42 MW Y anango and 142 MW Chimay hydroelectric plants of Edegel in P eru, and of the Argentina-Brazil interconnection line owned by the CIEN consortium in which ENDESA-Chile has a 45% holding. ENDESA-Chile operates 3,522 MW in Chile and 8,152 MW abroad, thus achieving its international consolidation with 2.3 times its local capacity now abroad. Investments made abroad contributed 69.4% of operating income and 66.7% of net income for the year. Because of the aggressive investment plan of the Company in the energy sector nationally and internationally, the board decided to concentrate the Company s efforts in this sector on generation and transmission, continuing with just those infrastructure projects that are presently operating or under construction. In this context, in addition to the on-going El Melón tunnel operation, the Autopista del Sol highway between Santiago and San Antonio started operating in 1998 and works continue on the Los Libertadores highway linking Santiago with the town of Los Andes. In accordance with the decision of the anti-monopolies commission, and as approved by shareholders, the transfer of assets to the subsidiary Transelec was completed in A capital increase was made and a series of assets previously belonging to ENDESA-Chile were transferred including transmission lines, electrical equipment and installations, land, concessions and rights of way. These transfers and capital contributions in no way affect the value of the Company. 8 Concerning financial matters, the Company signed an important syndicated loan facility for US$ 500 million and placed a bond issue on the American market for US$ 400 million at very competitive rates. It has retained its international credit ratings of A- with Standard & Poor s and Duff & Phelps, and Baa1 with Moody s. The Company also decided to postpone the capital increase approved by the extraordinary shareholders meeting in April 1998 as market conditions were not favorable for this. We nevertheless intend to do so once the market improves.

10 Regarding human resources, I should mention the personnel training program, both in Chile and abroad, focused on improving the running of combined-cycle thermal stations, the corporate development program for improving risk prevention, the welfare program and the harmonious labor relations maintained during the year. It can therefore be concluded that in 1998 ENDESA-Chile achieved significant progress in Chile and elsewhere. The incorporation of new technologies and fuels, the commissioning of four new plants, the start of gas pipeline operations, the construction of another four new plants in Chile and abroad, the international interconnection line between Argentina and Brazil and a gas pipeline in the north of Chile, all combine to project the healthy growth of the Company for the benefit of its shareholders and the country. I wish to end by recording the enormous effort made by the Company s personnel for alleviating the effects of the Chilean drought. The board which I preside is conscious of the commitment made, the sacrifice of numerous hours of family life and the constant search for intelligent solutions, that have allowed the Company to meet what shareholders and the country expect from a leading company in its electricity development. José Antonio Guzmán Matta CHAIRMAN OF THE BOARD 9

11 B OARD OF DIRECTORS Pangue Power Plant CHAIRMAN. Alfredo Llorente Legaz Industrial Engineer. José Antonio Guzmán Matta Escuela Técnica Superior Civil Engineer de Ingenieros Industriales de Madrid Universidad de Chile. Tomás Müller Sproat VICE CHAIRMAN Commercial Engineer Pontificia Universidad Católica de Chile. Juan Eduardo Errázuriz Ossa Civil Engineer. Ernesto Silva Bafalluy Pontificia Universidad Católica de Chile Commercial Engineer Pontificia Universidad Católica de Chile DIRECTORS. Leonidas Vial Echeverría. Rodrigo Errázuriz Ruiz-Tagle Stockbroker Civil Engineer Pontificia Universidad Católica de Chile. Sergio Undurraga Saavedra Commercial Engineer. Héctor López Vilaseco Pontificia Universidad Católica de Chile Attorney-at-Law and Economist ICADE, Madrid 10

12 E XECUTIVE OFFICERS CHIEF EXECUTIVE OFFICER DEPUTY CHIEF EXECUTIVE OFFICER. Jaime Bauzá Bauzá. Jorge Lesser García-Huidobro Civil Engineer Industrial Civil Engineer Pontificia Universidad Católica de Chile Universidad de Chile VICE PRESIDENT-ENERGY DIVISION VICE PRESIDENT- INTERNATIONAL DIVISION. Juan Eduardo Vásquez Moya. Gastón Aigneren Ríos Electrical Civil Engineer Civil Engineer Universidad de Chile Universidad de Chile VICE PRESIDENT- CORPORATE DIVISION EXTERNAL AFFAIRS MANAGER. Mario Valcarce Durán. José Luis Domínguez Covarrubias Commercial Engineer Civil Engineer Universidad Católica de Valparaíso Pontificia Universidad Católica de Chile CONTROLLER MANAGER GENERAL COUNSEL AND. Renzo Costa Nattero SECRETARY OF THE BOARD Auditor. Carlos Martín Vergara Universidad de Chile Attorney-at-Law Universidad Católica de Valparaíso C ORPORATE DATA EMPRESA NACIONAL DE ELECTRICIDAD S.A. ( ENDESA-CHILE ) Head Office : Santa Rosa 76, Santiago, Chile Mailing Address : Casilla 1392, Correo Central, Santiago Telephone : ( 562 ) Telex : VTR: ENDESA CK Fax : ( 562 ) ( 562 ) Auditors : Deloitte & Touche Tohmatsu Stock Exchange Listings : In Chile ENDESA-Chile s shares are listed and traded on the Santiago Stock Exchange, the Electronic Stock Exchange and the Valparaíso Stock Exchange. Abroad ENDESA-Chile s ADRs are listed and traded on the New York Stock Exchange ( symbol EOC ) since July Depositary Bank : Citibank 111 Wall Street 5th floor New York,NY Telephone: ( 212 ) Mr. Ricardo Szlezinger Investor Relations Department in Chile : ENDESA-Chile Santa Rosa 76, 5th floor Telephone: ( 562 ) Fax: ( 562 ) jmontero@endesa.cl / lmancilla@endesa.cl Mr. Jaime Montero / Mr. Lionel Mancilla Investment Relations in the US : Dewe Rogerson Inc. 850 Third Avenue, 20th floor New York NY Telephone: ( 212 ) Fax: ( 212 ) Ms. Robin Weinberg International Rating Agencies : Standard & Poor s ( current Rating: A- ) Moody s ( current Rating: Baa1 ) Duff & Phelps ( current Rating: A- ) 11

13 C ONSOLIDATED HIGHLIGHTS IN CHILE YEARS ENDED DECEMBER 31, NUMBER OF GENERATION FACILITIES INSTALLED CAPACITY ( MW ) 2,513 2,513 2,738 3,002 3,522 GENERATION ( GWh ) 11,276 11,783 12,898 13,247 12,188 SHARE IN THE SIC ( % ) SALES OF ELECTRICITY ( GWh ) 11,830 13,281 13,766 15,419 14,161 TRANSMISSION LINES ( Km ) 9,078 8,304 7,128 7,089 7,668 EMPLOYEES 1,970 1,998 1,692 1,674 1,763 ABROAD NUMBER OF GENERATION FACILITIES INSTALLED CAPACITY ( MW ) 2,580 3,489 4,119 7,245 8,152 GENERATION ( GWh ) 8,750 11,889 14,782 15,373 24,813 EMPLOYEES 709 1, ,079 1,395 FINANCIAL ( CHILEAN GAAP ) ( 1 ) ( Millions of constant Ch$ as of Dec. 31, 1998 ) Exchange Rate: Ch$ = US$1 TOTAL ASSETS 2,384,602 2,525,510 2,907,499 4,475,004 5,249,856 TOTAL LIABILITIES 929,812 1,097,276 1,371,839 2,213,260 2,715,385 MINORITY INTEREST 134, , , ,201 1,241,123 SHAREHOLDERS EQUITY 1,320,075 1,270,003 1,290,316 1,285,542 1,293,348 REVENUES FROM OPERATIONS 378, , , , ,612 COST OF OPERATIONS 139, , , , ,562 OPERATING INCOME 221, , , , ,157 NON-OPERATING INCOME ( 15,065 ) ( 31,420 ) ( 17,803 ) ( 69,960 ) ( 172,551 ) NET INCOME 193, , , ,446 45,177 SHARES OUTSTANDING ( millions ) 8,202 8,202 8,202 8,202 8,202 EARNINGS PER SHARE ( constant Ch$ ) EARNINGS PER ADR ( US$ ) ( 2 ) PRICE PER SHARE ( constant Ch$ ) PRICE PER ADR ( US$ ) ( 2 ) MARKET CAPITALIZATION ( US$ Million ) 7,690 6,059 4,066 4,581 2,978 P/E FINANCIAL ( US GAAP ) ( Millions of constant Ch$ as of Dec. 31, 1998 ) TOTAL ASSETS 2,342,093 2,482,834 2,858,415 4,413,736 5,218,345 TOTAL LIABILITIES 744, ,232 1,462,820 2,310,014 2,886,950 SHAREHOLDERS EQUITY 1,195,684 1,136,992 1,143,448 1,127,520 1,101,220 NET INCOME 174, , , ,661 9,630 ( 1 ) The Consolidated Income Statement for 1996 incorporates Costanera, an indirect subsidiary since December 1995, and Pangue since October 31, Likewise, The Consolidated Income Statement for 1997 includes the Colombian subsidiary Central Hidroeléctrica de sț Betania S.A. as from January 1997, the Colombian subsidiary Emgesa as from October 23, 1997 and the Brazilian subsidiary Centrais Elétricas Cachoeira Dourada S.A. as from December 31, Finally, the Consolidated Income Statement for 1998 includes sț San Isidro S.A. since November and Edegel since January sț ( 2 ) One ADR represents 30 shares. The first ADR offering was in July The Price per ADR is the Closing Price as of December 31 of each year at the NYSE. 12

14 T HE REPUBLIC OF CHILE Chile covers a narrow strip of land with an area of approximately 756 thousand square kilometers ( excluding the Antarctic territory ), extending along South America s west coast approximately 4,345 kilometers, with an average width of 170 kilometers. Chile borders Peru in the north and the Antarctic Territory in the south. It is bordered on the north and east by Bolivia and Argentina, and by the Pacific Ocean on the west. Chile s geography is dominated by a range of mountains in the Pacific Coast, the Andes Mountains in the east, and the valley that lies between these two ranges. Southern Chile is an archipelago, with Cape Horn as its tip. The country s diverse geography is rich in natural resources. Its population, industry, and arable land are concentrated in the central valley, which includes the nation s capital and largest city, Santiago ( with a population of over 5 million ) and its largest port, Valparaíso. The north is a desert region, rich in certain mineral resources ( copper, silver, nitrates, gold, and others ), and the south is an archipelago with important forestry resources. Chile s population of over 14 million is highly urbanized, with 86% of the population living in cities. The population has a 94% literacy rate, and Spanish is the official language. Chile currently has a democratic political system and a broad consensus regarding its economic policies, which include promoting a strong private sector, encouraging export-oriented growth and fostering a stable environment for foreign and domestic investment. 13

15 T HE CHILEAN ECONOMY Chile has seen its GDP grow at an average 7.6% annually over the period , thus making it the leader among Latin American countries. This economic performance is closely linked to the structural reforms introduced since 1970, which modernized the country s policies and institutions. These reforms managed to restore a freemarket mechanism through privatizations and to open up the economy to international trade and finance, while at the same time providing the poorest sectors with the basic social services. The Chilean economy has thus achieved macro-economic stability in recent years. The table below shows some relevant data on the economy. SELECTED MACROECONOMIC INDICATORS GDP GROWTH ( % ) ELECTRICITY DEMAND GROWTH IN THE SIC INCREASE IN CONSUMER PRICE INDEX ( % ) EXPORTS ( US$ MILLIONS) ( FOB ) 9,199 11,604 16,039 15,296 16,923 14,895 IMPORTS ( US$ MILLIONS ) ( FOB ) 10,181 10,879 14,653 16,523 18,218 17,390 CURRENT ACCOUNT SURPLUS / DEFICIT ( 2,098 ) ( 753 ) ( 100 ) ( 3,015 ) ( 3,187 ) ( 4,700 ) INTERNATIONAL RESERVES ( US$ MILLIONS ) 9,759 13,467 14,805 15,474 17,153 15,992 TOTAL EXTERNAL DEBT ( US$ MILLIONS ) 19,186 21,478 21,736 22,979 26,701 31,546 EXCHANGE RATE ( CHILEAN PESOS PER US$ ) AVERAGE UNEMPLOYMENT RATE ( % )

16 The external crisis, with its negative effects on foreign trade and the capital accounts, together with the increase in demand for foreign monetary assets, in the context of strong internal demand pressures, made the application of demand containment measures early in the year inevitable, in order to bring the current account deficit down to levels appropriate to the international scenario. The slowing down of the global economy reduced demand for Chile s main export products and Chile s terms of trade fell by around 10% in The effects on Chilean exports were not so drastic as there was a substantial reorientation of these sales. Domestic demand in recent years has been very dynamic. There has been a marked and sustained increase in the total investment rate, reaching 33% of GDP in 1997, but this was not accompanied by a similar increase in national savings, being 22% of GDP in The current account deficit therefore has gradually widened over the past few years to a level of 6.2% of GDP in Tight monetary and fiscal policies were applied in 1998 in order to reduce the current account deficit. This, together with lower external demand led to a reduction in economic growth, resulting in a GDP growth of 3.4% for the year. A further reduction in the current account deficit to more moderate levels of around 4 to 5% of GDP, is sought over the medium term. This will clearly require a substantial increase in domestic savings if we want to maintain the growth we have seen over the last ten years. Chile s external credit rating indicators remain very favorable and clearly distinguish the country from the rest of Latin America. Chile s sovereign risk is A-, according to Standard & Poor s, and Baa1, according to Moody s; these are the highest ratings in region. Among Chile s strengths are its low foreign debt service levels as a percentage of GDP, the number of months of imports covered by its international reserves, a solid and well capitalized financial sector, and fiscal strength evidenced by an average global surplus of 1.8% of GDP during the period One of the greatest economic achievements has been the decline in inflation without sacrificing growth or damaging the country s external position. The inflation target for 1999 is 4.3%. GDP GROWTH AND ELECTRICITY DEMAND GROWTH IN THE SIC ANNUAL INFLATION 15

17 H ISTORICAL REVIEW The Empresa Nacional de Electricidad S.A. ( ENDESA-Chile ) was formed on December 1 st, 1943 as a subsidiary of the Corporación de Fomento de la Producción ( CORFO ), a state entity which retained its majority holding until late ENDESA-Chile was created to carry out the country s Electrification Plan, as well as to produce, transport and distribute electricity. In 1985, the government, following its current policy, instructed ENDESA-Chile to prepare itself for privatization, which finally occurred in The preparation process involved the separation from the Company of the northern sector ( Edelnor and its distributors ), Colbún and Machicura power stations, and all the distribution areas in the center and south of Chile belonging to ENDESA-Chile, and two small power stations in the south ( Pullinque and Pilmaiquén ). The changes brought about by the privatization of ENDESA-Chile allowed new structural changes to meet the challenges in efficiency imposed by its new owners. It was necessary to restructure the Company into a holding with subsidiaries to enable it to oversee and control the different activities of the Company at all times. The search for greater efficiency and cost control, and a flexible and operational structure for facing the future and the possibilities of investments in new projects, with flexible and highly trained management, has made the Company into a strong and solid electricity generating company, not only in Chile but abroad. Regarding investment in Chile in the Central Grid System ( SIC ), in 1990 ENDESA-Chile began operation of its 145-MW Canutillar power plant and in 1991 its 500-MW Pehuenche power plant. The Pehuenche plant is the largest electricity generation company in Chile. In December, 1993, the Company, through its subsidiary Pehuenche, began operation of its 85-MW Curillinque hydroelectric facility. In November 1996, Pangue began operation of the first unit of its 450-MW hydroelectric facility and became fully operational in January, In August 1997, Pehuenche began operation of its 38-MW Loma Alta hydroelectric facility. Finally, in October, 1998, the subsidiary San Isidro S.A., began operation of its 370-MW San Isidro combined-cycle facility. Regarding investments in the Northern Grid System ( SING ), in June 1993, ENDESA-Chile joined the SING with the completion of its 73-MW Mejillones power plant. In August, 1998, the Company, through its subsidiary Compañía Eléctrica Tarapacá S.A. carried out the first synchronization of its 150-MW Tarapacá coal-fired thermal plant, that operates with a 23.8-MW back-up gas turbine that was transferred from the SIC. As of December 31, 1998, ENDESA-Chile has a total installed capacity in Chile in both grid systems of 3,522 MW. With the modernization process initiated in 1992, a policy of internationalization was embarked upon. In May 1992, through public bid, the 1,260-MW Costanera thermal power station in Buenos Aires, Argentina was acquired, headed by a Chilean-Argentine-North American consortium. Later, in August 1993, ENDESA-Chile took part in the consortium that was awarded the 1,320-MW El Chocón hydroelectric facility. In February, 1997, CBA began operation of its 220-MW combined-cycle turbine. Prior to this, since September, 1995, it had been operating in open cycle. In December 1998, Costanera began operation of its MW combined-cycle facility. ENDESA- Chile now has an installed operating capacity in Argentina higher to in Chile, totaling 3,631 MW. Regarding the Peruvian market, a further step in the internationalization of ENDESA-Chile was taken in October The Generandes consortium was awarded the Peruvian generation company Edegel, which owns five hydroelectric and one thermal plant in the Lima area, with a combined installed capacity of 689 MW. In October 1996, a new 120-MW unit at Santa Rosa thermal plant began operating, increasing Edegel s installed capacity to 809 MW. With respect to the Colombian market, in December 1996, the consortium formed by ENDESA-Chile and the Colombian company Corporación Financiera del Valle S.A. was awarded the Colombian 510-MW Betania hydroelectric facility. In September 1997, the consortium comprised of the Colombian subsidiary Central Hidroeléctrica de Betania and Endesa Spain was awarded Colombia s largest electricity generator, Emgesa, with a total installed capacity of 2,458 MW, 2,223 MW being hydroelectric and 235 MW being thermal generation. In August 1998, Emgesa began operation of its 56-MW Salto I hydroelectric plant. ENDESA-Chile now has an installed operating capacity in Colombia totaling 3,054 MW. Finally, regarding the Brazilian market, in September 1997, the consortium formed by ENDESA-Chile and its Peruvian associate Edegel was awarded the Brazilian 658-MW Cachoeira Dourada hydroelectric plant. 16 Currently the Company operates in five Latin American countries. As of December 31, 1998, the Company has an aggregate installed capacity in foreign countries of 8,152 MW, 2.3 times its capacity in Chile.

18 O RGANIZATION A Board of nine directors elected at the ordinary shareholders meetings conducts the administration of the Company. In accordance with the by-laws of ENDESA-Chile, the directors remain in their positions for three years and may be re-elected. The Board appoints the Chief Executive Officer, as well as the Deputy Chief Executive Officer. The organizational structure for ENDESA-Chile is designed on the basis of two business areas and one support area. It comprises three Divisions: International, Energy, and Corporate; all reporting to the Deputy Chief Executive Officer. Additionally, the infrastructure management is coordinated to the rest of the organization by the Deputy Chief Executive Officer. The former organizational structure of ENDESA-Chile comprised four divisions, being one of them the Division of Infrastructure and Other Businesses. In June 1998 the Board of Directors determined to dissolve that division and decided to continue the infrastructure management through its subsidiary Infraestructura 2000 S.A. ENDESA-CHILE ORGANIZATION CHART 17

19 O WNERSHIP OF THE COMPANY As of December 31, 1998, the share capital of the Company consisted of 8,201,754,580 paid and subscribed shares, distributed among 43,404 shareholders. TWELVE PRINCIPAL SHAREHOLDERS AS OF DECEMBER 31, 1998 NUMBER SHAREHOLDER OF SHARES % HOLDING CHILEAN PENSION FUNDS 2, ENERSIS S.A. 1,609,563, CITIBANK N.A. ( ADR ) 1,080,071, INGENIERIA E INMOBILIARIA MANSO DE VELASCO S.A. 463,916, HIDROELECTRICA GUARDIA VIEJA S.A. 107,226, COINDUSTRIA S.A. 60,151, FORESTAL, CONSTRUCTORA Y COMERCIAL DEL PACIFICO SUR S.A. 55,676, BANKERS TRUST CORREDORES DE BOLSA LTDA. 38,740, BANCHILE CORREDORES DE BOLSA S.A. 34,991, THE CHILE FUND INC 34,313, THE FIVE ARROWS CHILE INVESTMENT TRUST LIMITED 33,446, FORESTAL COINDUSTRIA S.A. 32,287, Note: Enersis S.A. and Ingeniería e Inmobiliaria Manso de Velasco S.A. are related companies. OWNERSHIP DISTRIBUTION CHILEAN PENSION FUNDS : 26.07% ENERSIS AND SUBSIDIARIES : 25.28% INDIVIDUALS : 19.18% OTHERS : 14.69% ADRs : 13.17% FOREIGN EQUITY INVESTMENT FUNDS : 1.61% 18

20 D IVIDENDS DIVIDEND POLICY The Ordinary Shareholders' Meeting held on April 21, 1998 was informed of the Board s intention to distribute a dividend for 1998 amounting to the equivalent of 75% of net income for the year, after taxes and adjustments for the accounting effects of goodwill and negative goodwill of investments in Chile and abroad. Such dividend may be payable from income for the year and retained earnings from previous years. For the year 1998, the Board intends to distribute three interim dividends against net income for the year, whose amounts will be calculated and paid as follows: - First interim dividend: Up to 30% of the net income for the period January-May 1998 subject to the adjustments mentioned above, as shown in the financial statements at May 31, 1998, and payable in July Second interim dividend: Up to 45% of the net income for the period January-August 1998 subject to the adjustments mentioned above, as shown in the financial statements at August 31, 1998 and less the first interim dividend, payable in October 1998, and - Third interim dividend: Up to 55% of the net income for the period January-November 1998 subject to the adjustments mentioned above, as shown in the financial statements at November 30, 1998 and less the first and second interim dividends, payable in January The final dividend will be agreed by the Ordinary Shareholders Meeting to be held in April 1999 and will be payable following that meeting. Compliance with the above program will depend on the net income actually produced and also on the results of the periodic projections made by the Company, on the effect of applying the covenants contained in the Company s different loan agreements, or the existence of certain conditions, as the case may be. DIVIDENDS DISTRIBUTED OVER LAST FIVE YEARS YEAR DIVIDEND PER SHARE DIVIDEND / EARNINGS CHILEAN PESOS CONSTANT RATIO OF EACH YEAR CHILEAN PESOS AS OF DEC. 3, % % , % % 1998 ( 1 ) ( 1 ) No interim dividends were paid during

21 I NVESTMENT AND FINANCING POLICIES Pehuenche Power Plant The Ordinary Shareholders' Meeting held on April 21, 1998 approved the following investment and financing policies: INVESTMENT POLICY In 1998 the Company shall make investments, as established in its by-laws, in the following areas subject to the maximum limits stated: - Electricity generation The maximum investment limit shall be that necessary for the Company to meet its main object ( production, transportation, distribution and supply of electricity ) up to the equivalent of 5% of ENDESA-Chile s consolidated shareholders equity ( US$ 140 million ). - Capital contributions to subsidiaries and associated companies Contributions shall be made to the subsidiaries Pangue S.A., Pehuenche S.A., Transelec S.A., San Isidro S.A., Celta S.A., Electrogas S.A., Gasoducto Taltal Ltda. and Empresa Eléctrica Taltal Ltda., and to the associated companies Gasoducto Atacama Cía. Ltda., Gasoducto Cuenca Noroeste Ltda., and Nor Oeste Pacífico Generación de Energía Ltda. NOPEL, in order for them to carry out their projects and make those investments necessary for meeting their corporate objects. Contributions shall be made to the subsidiaries Enigesa and Ingendesa so that they may meet their corporate objects. The maximum investment in these subsidiaries in 1998 is the equivalent of 0.5% of ENDESA- Chile s consolidated shareholders equity ( US$ 14 million ). Contributions shall be made to the subsidiaries Infraestructura 2000 S.A., Autopista de Sol S.A. and Inecsa Dos Mil S.A. in order for them to carry out their ongoing projects or those to be developed in meeting their corporate objects. The maximum investment in these subsidiaries for 1998 is the equivalent of 3% of ENDESA-Chile s consolidated shareholders equity ( US$ 84 million ). The overall investment limit in all Chilean subsidiaries for 1998 is the equivalent of 10% of ENDESA-Chile s consolidated shareholders equity ( US$ 281 million ). - Financial assets, titles, rights, securities, properties and investments in companies, as established in the by-laws, for making investments abroad in the electricity sector. The limit shall be that necessary to take advantage of business opportunities up to a maximum equivalent to 25% of ENDESA-Chile s shareholders equity ( US$ 702 million ). 20

22 - Financial assets, titles, rights, securities, properties and investments in companies, as established in the by-laws, for making investments in projects and operations or activities in industrial processes associated with obtaining energy sources, as well as in those where electricity is an essential and determining element and has an intensive use in such process. The limit shall be equivalent to 5% of ENDESA-Chile s consolidated shareholders equity ( US$ 140 million ). - ENDESA-Chile shall invest in negotiable instruments, under selection and diversification criteria to be determined by the Company s management, in order to optimize the return on its cash surpluses. - Within the policy approved by the shareholders meeting, the board should agree specific investments in works and studies the Company will make, both referring to the amount and the financing method for each, and adopt measures for controlling such investments. FINANCING POLICY The Company s financing policy states that its debt ratio, defined as total liabilities to shareholders equity plus minority interest in the consolidated balance sheet, shall not be higher than However, this ratio may temporarily rise to 1.45 pending the full placement, within the term of this Investment and Financing Policy, of the capital increase approved by the extraordinary shareholders meeting held on April 21, Funds will be obtained from the following sources: - Own resources. - Supplier credits. - Loans from banks and financial institutions. - Placement of securities in the domestic or international market. - Proceeds of the sale of assets and / or provisions of services by ENDESA-Chile. OTHER MATTERS In order to carry out the investment and financing policies, the management shall have sufficient powers to sign and amend purchase, sale or rental contracts over goods and services necessary for developing the Company s business within the applicable legal framework and respecting market conditions for goods and services of the same kind, quality and characteristics. The management shall also be authorized to eliminate obligations arising under such contracts, in accordance with the law, when convenient for corporate interests. In accordance with Article 120 of Law 3500, the disposal of assets or rights declared in these policies as being essential to the functioning of the Company, and the constitution of guarantees over them, is a matter for the resolution of an extraordinary shareholders meeting. The following assets, together representing approximately 84% of the total consolidated assets of ENDESA-Chile, are therefore declared, in accordance with Article 119 of Law 3500, as being essential for the Company s functioning, for the purpose of that law: - the generating plants and emergency and reserve units with capacity of over 50,000 kw, operating or under construction, owned by the parent company and subsidiaries. - transmission lines and substations of 220 kv or more, of the parent company or subsidiaries, and the transmission lines connecting generating plants on the Central Grid. - shares held by ENDESA-Chile in Empresa Eléctrica Pehuenche S.A., Empresa Eléctrica Pangue S.A., Compañía Nacional de Transmisión Eléctrica S.A., Hidroelectricidad S.A., San Isidro S.A., Celta S.A., Compañía Eléctrica Conosur S.A., and Lajas Holding Inc., meaning maintaining at least 50.1% of the issued and paid shares of those companies. An Extraordinary Shareholders' Meeting also has to approve the granting of real or personal guarantees covering third-party liabilities, except where such liabilities are incurred by the subsidiaries in which case the approval of the board is sufficient. The management of the Company shall be responsible for ensuring that the Activo Contable Depurado ( cleansed book assets ) of the Company, calculated on the basis of the individual balance sheet, as a proportion of total assets, be at least the minimum, in accordance with Article 47 of Law 3500, compatible with a factor of cleansed book assets equal to 1. This ratio shall be calculated using the definitions set out in Article 98 of that law. At December 31, 1997, the ratio was 87.23%. 21

23 ACTIVITIES AND BUSINESS IN CHILE AND ABROAD Central Curillinque y Aducción Loma Alta Generating and transmitting of electricity and providing of consulting and engineering services in all fields are the Company s principal activities in Chile and abroad. Another activity has been the development of infrastructure projects in Chile, such as construction of tunnels and roads. ENDESA-Chile is the largest electricity generation and transmission company in Chile and one of the largest companies in the country. The Company accounted for approximately 44.9% of Chile s total installed capacity with an aggregate installed capacity of 3,522 MW as of December 31, Appro ximately 76% of the Company s installed capacity in Chile is hydroelectric, with the remaining being thermal electric. The Central Grid System ( SIC ) is the principal transmission system in Chile and serves approximately 93% of Chile s population. ENDESA-Chile and its subsidiaries in Chile have an installed capacity of 3,275 MW in this Grid, representing approximately 52.6% of SIC s total installed capacity. The total SIC generation reached 25,690 G Wh in 1998, representing 7.2% growth over ENDESA-Chile s contribution was 12,005 G Wh, representing 46.7% of SIC s overall generation. Demand for electricity in the SIC has grown at an annual rate of 7.9% in the six years ended December 31, The National Energy Commission of Chile ( NEC ) projects that demand in the SIC will grow by an average annual rate of 8.3% from 1998 to In the Northern Grid System ( SING ) ENDESA-Chile operates the Mejillones thermal electric facility with an installed capacity of 73.1 MW and the subsidiary Compañía Eléctrica Tarapacá S.A. operates the Tarapacá Thermal plant with an installed capacity of 150 MW and a back-up gas turbine with an installed capacity of 23.8 MW. With these units, ENDESA-Chile provides support for other generators, takes part in SING s Economic Load Dispatch Center ( CDEC-SING ) and supplies mining companies. Gross generation of the SING reached 7,357 G Wh in 1998, an increase of 15.1% over ENDESA-Chile s Mejillones plant contributed 23 G Wh and Compañía Eléctrica Tarapacá S.A. contributed 160 G Wh, both representing 2.5% of SING s overall generation. In the SING, during the last six years the demand has grown at an average annual rate of 14.3% and the demand is projected by the NEC to grow at an average annual rate of 12.4% from 1998 to

24 The Company has participated in the electric generation industry in Argentina since 1992, in Peru since 1995, in Colombia since 1996 and in Brazil since In Argentina ENDESA-Chile operates a total of 3,631 MW, representing 19.7% of the Argentine Grid System ( SIN ), through El Chocón, Costanera and CBA, generating 2,883 G Wh, 2,629 G Wh and 1,799 G Wh, respectively in In Peru ENDESA-Chile operates a total of 809 MW, representing 24.8% of the Peruvian total North Center Grid System s ( SICN ) installed capacity, through Edegel, that generated 3,072 G Wh in In Colombia ENDESA-Chile operates a total of 3,054 MW, representing 25.8% of Colombia s total installed capacity. Betania generated 1,847 G Wh in 1998, while Emgesa generated 9,643 G Wh. In Brazil ENDESA-Chile operates a total of 658 MW, representing 1.1% of Brazil s total installed capacity. Cachoeira Dourada generated 2,941 G Wh in The Company also owns and operates, through its subsidiary Transelec, a transmission system comprising most of the transmission lines and substations connected to the SIC. ENDESA-CHILE S OPERATIONAL SUMMARY INSTALLED CAPACITY ( MW ) IN CHILE 3, ,521.6 SIC ( 1 ) 2, ,274.7 SING ( 1 ) IN ARGENTINA ( 2 ) 2, ,631.2 IN BRAZIL IN COLOMBIA ( 3 ) 2, ,054.0 IN PERU GENERATION ( GWH ) IN CHILE 13, ,188.2 SIC 12, ,317.1 SING 1, ,871.1 IN ARGENTINA 8, ,310.4 IN BRAZIL ( 4 ) 1, ,941.4 IN COLOMBIA ( 4 ) 3, ,489.3 IN PERU 2, ,071.8 ELECTRICITY SALES ( GWH ) IN CHILE 15, ,160.7 SIC 15, ,782.3 SING IN ARGENTINA 14, ,083.9 IN BRAZIL ( 4 ) 1, ,894.0 IN COLOMBIA ( 4 ) 5, ,873.3 IN PERU 3, ,278.6 ( 1 ) The first synchronization to the SING of the 150-MW Tarapacá thermal plant was carried out on August 13, Additionally, during 1997, a 23.8-MW turbine was temporarily moved from the Mejillones plant on the SING to the Bocamina plant on the SIC, and then was moved again to the SING. Since March 30, 1998, Compañía Eléctrica Tarapacá S.A. has been operating this back-up gas turbine. Finally, the 370-MW San Isidro combined-cycle plant came into service on October 30, ( 2 ) In December 1998, Costanera began operation of its MW combined-cycle facility. ( 3 ) In August 1998 the Emgesa s 56-MW Salto I hydroelectric plant came into service. ( 4 ) The generation and sales of electricity of the Colombian Emgesa and the Brazilian Cachoeira Dourada in 1997 are both from ENDESA- Chile s date of possession. 23

25 REGULATORY FRAMEWORK OF THE ELECTRICITY SECTOR All the regulatory systems in the countries where ENDESA-Chile operates are similar to the Chilean one, except in Brazil. The electricity industry in Chile, Argentina, Colombia and Peru is designed to provide a fully-competitive environment, for which it is divided into three sectors: generation, transmission and distribution. In Brazil however, a country that has only recently embarked on the privatization process, these three sectors are mainly coordinated by Electrobras, which supervises construction and expansion programs and operating systems in power generation, transmission and distribution, that must receive the prior approval of the Dirección Nacional de Energía Eléctrica ( DNAEE ). A new regulatory framework for the electricity sector is currently being debated in Brazil, which would create a new regulatory authority. The generation companies sell energy through the interconnected electricity systems of each country. The Chilean systems are the Central Grid System ( SIC ) and the Northern Grid System ( SING ). In Argentina it is the National Grid System ( SIN ), in Peru, the North Center Grid System ( SICN ) and the South Grid System ( SIS ), in Colombia the National Grid System ( SIN ), and in Brazil the SINTREL ( Sistema Interconectado de Transmisión Eléctrica ). SINTREL includes all Electrobrás and State-owned company transmission lines. ENDESA-Chile and its subsidiaries are connected to the grid systems of the countries where they operate. The whole framework in Chile, Argentina, Brazil, Colombia and Peru, is designed to ensure that only the most efficiently produced electricity reaches consumers. For this purpose, in each country there are governmental entities which define politics, propose indicative plans, provide information for investors and participants, fix tariffs, supervise the implementation and enforcement of the laws and grant concessions to electric generation, transmission and distribution companies. There are also organizations that coordinate the operations of the electric market. Part of this coordination involves verifying that the demand of energy is provided at the lowest marginal cost of production available in the system, and determining the instant spot prices. In Chile, this is done by the CDEC, in Argentina by CAMMESA, in Peru by the COES and in Colombia by the CND. In Brazil electricity tariffs for generation, transmission and distribution are set by the ANEEL. Electricity sales have different prices, depending on the type of customer. In the case of unregulated clients ( large users ), prices are freely negotiated between generators and customers, except in Brazil, where negotiated prices are examined by the ANEEL. If the sales are to regulated customers, mainly distribution companies, the price of energy and capacity is fixed by the corresponding authority, in the case of Chile the NEC, in Argentina the ENRE, in Peru the CTE, in Colombia the CREG, and in Brazil the ANEEL. If the generation company does not have enough energy supply to meet its contractual obligations, the company buys on the spot market. If the company has a surplus, the surplus is sold to other generation companies who have a deficit. The spot market price is based on hourly marginal costs of production and is set by the institutions in charge of coordinating the electric market, which were mentioned above. The transmission system operates on an open access basis, in which all users can obtain access to it. Transmission tariffs are charged to generation companies and large users, according to the replacement cost of the line, the area of influence and the amount of energy transmitted. In the case of Brazil, the restructuring of the electricity regulatory system includes the improvement of both the spot market and a free-access transmission system. RISK FACTORS The Company is not exposed to significant risks in its principal business due to the nature of the market in which it takes part, and to the regulatory framework of the electricity sector. The product sold is a necessary good and demand for electricity is continually expanding. The National Energy Commission has projected an average annual growth of 8.3% for the SIC for the period Additionally, the Company has a diversified customer portfolio which is generally characterized by its great stability in terms of consumption. 24

26 As a public utility, the Company is subject to extensive regulation of its tariffs and other aspects of its business. The current regulatory framework governing electric utility businesses has been in existence in Chile since 1982, in Argentina since 1992, in Peru since 1993 and in Colombia since Brazil is currently designing a new electricity regulatory framework similar to other countries where ENDESA-Chile has operating experience. However, this does not affect ENDESA-Chile s risks as, together with the new plant, it acquired a 5-year contract covering 100% of the plant s production. This decreases 10% after the sixth year and successively thereafter until the fifteenth year. In any event, electricity prices are linked to inflation rates. The Company is also subject to environmental regulations, which among other things requires the Company to perform environmental impact studies on future projects and obtain regulatory permits. A substantial portion of the Company s operations in Chile, Argentina, Peru, Colombia and Brazil involves hydroelectric generation and, accordingly, the Company is dependent on hydrological conditions prevailing in the geographic regions in which it operates. In order to reduce the risk related to extreme drought situations, the Company s commercial policies provide for sales commitments to be in line with the firm energy capacity of its generating units. Nevertheless, the most serious drought ever recorded in Chile continued into This was the third consecutive year of drought so hydroelectric generation capacity was considerably depressed. In addition, energy supplies to the SIC were affected by delays in the commissioning of other companies natural gas combined-cycle power generators. The impact on the electricity sector has been significant and companies have had to be extremely careful to avoid further deteriorations in supplies during both last winter and the early months of Hydroelectric generation in Chile requires owning water rights granted by the Chilean Water Authority for a sufficient supply of water from rivers and lakes near the Company s generation facilities. The Company believes that it has all water rights necessary to conduct its business, including the completion and operation of hydroelectric facilities currently under construction or that are planned for construction in the foreseeable future. Under current law, the Company s 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, unused water rights granted after the enactment of the proposed law would generally expire five years from the date of grant unless extended at the discretion of the Chilean government. In addition, the Company would have to pay an annual fee in connection with previously granted but unused water rights. Although the Company is unable to predict whether or in what form any such proposed changes to the laws governing water rights will be enacted, the Company does not believe that any of such changes would, if enacted, have a material adverse effect on the Company or its operations. Regarding natural gas, a substantial portion to be transported through the GasAndes pipeline, which began operating in August 1997, will be used to fuel several planned gas-turbine generating plants to be constructed near Santiago by 2001, including the plant to be built by the Company. Another important natural gas project developed by ENDESA-Chile is the GasAtacama project on the SING. This will enable the Company to increase its participation in this grid system. The project consists of a gas pipeline transporting natural gas from Salta province, Argentina, to the town of Mejillones where two combined-cycle plants will be constructed. Large electricity supply contracts in the zone have already been secured. At the same time, Tractabel and Edelnor are also jointly carrying out their NorAndino project to supply their natural gas plants in the north and on the same grid. In view of the regulatory framework with respect to determining prices charged by electricity generation companies, the addition of the planned gas-fired plants will lower electricity prices in the SIC and the SING. The effects on the Company would vary depending on the demand for energy, the timing and construction of new generating plants, the Company s participation in the development of any new generating plants, the Company s contractual mix for energy sales and the hydrological conditions prevailing in the SIC in any given year, and the degree to which operating income is derived from foreign sources. ENDESA-Chile has a diversifd generation capacity in the SIC. This capacity is geographically dispersed over the whole system and has a low production cost because its generation plants are predominantly hydraulic. This low cost in the SIC and in the SING with the new combined cycle plants to be built permits the Company s energy production to be fully dispatched, and has another advantage: it allows ENDESA-Chile to increase customer sales to offset lower prices. 25

27 E NERGY DIVISION The Energy Division manages the Chilean electricity sector. Its responsibility is to maintain the Company s important position in this sector, not only in the Central Grid System ( SIC ) but also in the Northern Grid System ( SING ). GENERATION FACILITIES IN CHILE The Company and its subsidiaries in Chile own nineteen power stations within the Central Grid System ( SIC ) and two power station in the Northern Grid System ( SING ). The characteristics of each are as follows: TYPE NAME SYSTEM INSTALLED CAPACITY ( MW ) HYDROELECTRIC 2,675.7 RESERVOIR RAPEL SIC CIPRESES SIC EL TORO SIC CANUTILLAR SIC RUN-OF-THE-RIVER LOS MOLLES SIC 16.0 SAUZAL SIC 76.8 SAUZALITO SIC 9.5 ISLA SIC 68.0 ANTUCO SIC ABANICO SIC PEHUENCHE SIC CURILLINQUE SIC 85.0 LOMA ALTA SIC 38.0 PANGUE SIC THERMAL-ELECTRIC COAL-FIRED HUASCO SIC 16.0 BOCAMINA SIC TARAPACÁ ( 1 ) SING OIL-FIRED DIEGO DE ALMAGRO SIC 23.8 HUASCO SIC 64.2 MEJILLONES SING 73.1 TARAPACÁ BACK UP TURBINE ( 2 ) SING 23.8 NATURAL GAS SAN ISIDRO ( 3 ) SIC TOTAL INSTALLED CAPACITY 3,521.6 ( 1 ) The first synchronization to the SING of the 150-MW Tarapacá thermal plant was carried out on August 13, ( 2 ) During 1997, a 23.8-MW turbine was temporarily moved from the Mejillones plant on the SING to the Bocamina plant on the SIC, and then was moved again to the SING. Since March 30, 1998, Compañía Eléctrica Tarapacá S.A. has been operating this back-up gas turbine. ( 3 ) The 370-MW San Isidro combined-cycle plant came into service on October 30, The capacity of the Company and its subsidiaries in Chile represents 52.6% of the aggregate installed capacity for public services in the SIC and 15.2% in the SING. The Company also owns and operates, through its wholly-owned subsidiary Transelec, a transmission system comprising most of the lines and substations connected to the SIC. The Transelec transmission system includes transmission lines and substations and extends over 1,700 km from the Diego de Almagro substation in the Third Region in the north of Chile to the Chomeco substation on Chiloé island in the south of the country. This comprises 5,734 km of single and double circuit lines in voltages between 66 and 500 kv. Additionally, ENDESA- Chile and its subsidiaries own 1,934 km of transmission lines conecting its facilities to the grid systems. 26

28 INSTALLED CAPACITY, GENERATION AND SALES OF ELECTRICITY IN CHILE INSTALLED CAPACITY ( mw ) ENDESA-CHILE 1, ,904.8 PEHUENCHE PANGUE SAN ISIDRO COMPAÑÍA ELÉCTRICA TARAPACÁ S.A TOTAL 3, ,521.6 GENERATION ( Gwh ) ENDESA-CHILE 7, ,194.6 PEHUENCHE 3, ,499.9 PANGUE 2, SAN ISIDRO COMPAÑÍA ELÉCTRICA TARAPACÁ S.A TOTAL 13, ,188.2 SALES OF ELECTRICITY ( Gwh ) ELECTRICITY SALES TO CUSTOMERS BY CONTRACTS ENDESA-CHILE 9, ,805.6 PEHUENCHE 2, ,408.2 PANGUE 1, ,184.3 SAN ISIDRO - - COMPAÑÍA ELÉCTRICA TARAPACÁ S.A ELECTRICITY SALES IN THE SPOT MARKET 2, TOTAL 15, ,160.7 MARKET SHARE The sales of electricity of ENDESA-Chile and its subsidiaries to its SIC customers reached 13,358 G Wh in 1998, an increase of 2.7% over This volume represent a 55.1% share of the system s overall sales. Price- Regulated customers represented 71.4% of this total while non-regulated customers represented 28.6%. Likewise, the sales of electricity of ENDESA-Chile and the subsidiary Compañía Eléctrica Tarapacá S.A. to its SING customers reached 234 G Wh in 1998, representing 3.5% of the system. The electricity market in both grid systems has continued being a very competitive field between generation companies during Nevertheless, ENDESA-Chile has maintained its leadership position in the national electricity market. CONTRACTS AND CUSTOMERS The Company is dedicated to meeting the electricity needs of regulated and non-regulated customers on the Central Grid System ( SIC ) and the Northern Grid ( SING ). The market in both these grids has shown average annual growth rates over the last six years of 7.9% and 14.3% respectively. ENDESA-Chile signed a ten-year contract in 1998 with Compañía Minera El Tesoro for a total of 30 MW on the Northern Grid System. Contracts were also renewed with three non-regulated customers on the Central Grid implying extended terms to the contracts and total additional supplies of 19 MW. 27

29 ELECTRICITY SUPPLIES Chile suffered one of the most severe droughts on record during The impact on the electricity sector has been significant and companies have had to be extremely careful to avoid further deteriorations in supplies during both the second half of 1998 and the early months of In July, when the lack of rainfall became clear, ENDESA-Chile announced the measures it was taking to lessen the effects of the drought. These included an agreement with the Ministry of Public Works to use water from Laja lake, another agreement with that Ministry and the Association of Maule Irrigation-Canal Users concerning use of water from Maule lake, bringing forward the start-up of the San Isidro 370-MW combined-cycle thermal plant and the installation of 4 gas turbines at San Isidro with a 155-MW capacity. These turbines are being reconditioned to work with natural gas and are expected to enter service gradually as from January ENDESA-Chile also increased its purchases of energy from self-producers and obtained the cooperation of its large industrial customers to moderate their consumption. It was decided to increase the capacity of the Polpaico- San Isidro transmission line, to transfer a 73 MW gas turbine from Mejillones on the SING to Itahue on the SIC and install gas turbines in Charrúa with a 260-MW capacity and in Valdivia with a 100-MW capacity. All this represents a 588-MW increase in ENDESA-Chile s installed capacity and, together with the Polpaico-San Isidro transmission line, a total investment of approximately US$ 200 million, for ensuring adequate short- and medium-term electricity supplies to the SIC. These investments complement the investment plan approved by the Board as, for instance, the turbines to be installed at Charrúa will be able to function with natural gas once this becomes available in that area in late TRANSFERS OF ASSETS TO TRANSELEC The Extraordinary Shareholders' Meeting of Compañía Nacional de Transmisión Eléctrica S.A., Transelec, held on May 14, 1998, approved a capital increase of Ch$ 136,084 million which was fully and proportionately subscribed and paid by ENDESA-Chile and Enigesa who represent all the company s shareholders. ENDESA-Chile contributed its part by transferring to it a package of assets comprising transmission lines, electrical and civil substation equipment and installations, and land, concessions and rights of way. Transelec also signed a financial leasing agreement with ENDESA-Chile over a combination of assets for a total equivalent to US$ 389 million, and bought directly from ENDESA-Chile assets worth the equivalent of US$ 43 million. All the transmission assets belonging to ENDESA-Chile have now therefore been transferred to Transelec. ACTIVITIES AND PROJECTS The following were the main activities and projects carried out in 1998: RALCO PROJECT The 570-MW Ralco project consists of the construction and operation of a hydroelectric plant. The 155 m. high dam will form a reservoir with an overall 1,222 million cubic meter capacity. The works are in the upper Bío-Bío region some 120 km. to the south-east of the city of Los Angeles and some 30 km. up-river from the Pangue plant. According to the latest Indicative Works Plan of the National Energy Commission ( CNE ), the Ralco plant is one of the best hydroelectric alternatives for meeting the increasing energy requirements planned for the country s development from 2002 onward, the year foreseen for its start-up. At December 31, 1998, the project has its permission to construct the hydraulic works, granted by the DGA on February 9. Important progress has been made in the engineering design, infrastructure works are under way ( access and local roads, and works electricity supply ), and bids have been invited for most of the large civil works and electro-mechanical supply contracts; adjudication will be during

30 Regarding the environment, a company was contracted in September for carrying out the project s external environmental audit, included in CONAMA s resolution approving the Ralco project. Negotiations continue for reaching the necessary agreements on exchanges of land and rights of way over indigenous lands needed for the works. 83 out of 91 signed agreements have been presented to CONADI for approval. A protocol was signed giving official approval of a quality-of-life improvement program for Pehuenche families indirectly affected by the project and final works were carried out for preparing the land plots for receiving the families directly affected. El Barco Farm Construction Works TALTAL PLANT PROJECT This is a project of Compañía Eléctrica Taltal Ltda. and is being managed and supervised by Compañía Eléctrica Tarapacá S.A., both ENDESA-Chile subsidiaries. The project consists of the installation of a natural gas combined-cycle thermal plant at Paposo in Chile s 2nd Region, approximately 50 km. north of the town of Taltal. It is designed to deliver a maximum capacity of 360 MW to the Central Grid System ( SIC ). It will be built in two stages and will be fuelled by natural gas from Argentina transported through pipelines belonging to the companies Gas Atacama and Gasoducto Taltal Ltda. The main object of this plant is to supply electricity to mining customers in the northern section of the SIC. The plant will therefore be connected to the SIC by a transmission line to be built by Celta, an ENDESA-Chile subsidiary. The 180 km. line will be double circuit with a tension level of 220 kv, and will link Paposo with the Diego de Almagro substation on the SIC. The start date of the construction of the Taltal plant and its transmission line is currently being evaluated in the light of the electricity supply and demand situation on both the Northern Grid ( SING ) and the SIC. The plant and transmission line s environmental impact studies were presented in late 1997 and approved by the regional COREMA and CONAMA during TALTAL GAS PIPELINE PROJECT This project belongs to Gasoducto Taltal Ltda. and is being carried out by Compañía Eléctrica Tarapacá S.A., both ENDESA-Chile subsidiaries. Its object is to supply natural gas to the Taltal plant and to industrial, mining and gas distribution customers in the area between Mejillones, Antofagasta and Paposo. It will be built in two stages. The first will be 88 km. of 16" diameter pipe between Mejillones and the La Negra area near Antofagasta, and the second 137 km. of 12.75" pipe between La Negra and Paposo. All the steel pipe for the pipeline together with valves and other principal components, were acquired during Progress was also made with the signing of rights-of-way contracts for practically the whole of the defined trajectory. Construction is planned to be carried out in line with the timing of the Taltal plant construction. The project s environmental impact study was presented to the regional COREMA in October 1997 and approved in June

31 ELECTRICITY TRANSMISSION PROJECTS The ENDESA-Chile subsidiary, Compañía Nacional de Transmisión Eléctrica S.A., Transelec, initiated, continued and commissioned various investments during 1998 as part of its plan for developing its system s transmission and transforming capacity to meet the country s forecast electricity expansion. The main works that Transelec completed and placed in service in 1998 were: - Transmission works for supplying electricity to INFORSA and CMPC Laja. - Expansion of the Alto Jahuel substation. - Construction of Hualpén substation, Concepción. - Expansion 220 kv bars at Charrúa substation. - Transformation to 220 kv ( one circuit ) of the Charrúa-Concepción 154 kv line. - Transformation to 154 kv of the Charrúa-Los Angeles 66 kv line. Several projects were begun during 1998, involving an overall investment of US$ 41.9 million and including the following works in progress: - Provisional expansion of capacity, Polpaico-San Isidro 220-kV section, for ENDESA-Chile. - SIC connection of San Antonio, Los Robles and Cabrero plant turbines, for ENDESA-Chile. - San Isidro-Los Piuquenes 2 x 220 kv line, for ENDESA-Chile. - Coronel substation expansion, for Compañía General de Electricidad S.A. The provisional expansion of capacity of the Polpaico-San Isidro section, and the three SIC turbine connection works, reflect the great investment effort made by ENDESA-Chile for meeting the consequences of the severe drought felt since mid-1998, for which Transelec has provided its full collaboration in project and exploitation management. It is also worth mentioning the start of construction works for ENDESA-Chile of the San Isidro-Los Piuquenes 220-kV double-circuit line at a cost of US$ 25.6 million. This line forms part of the works of the Los Pelambres Supply project which involves an investment of US$ 30.2 million for supplying 110 MW and 640 GWh annually to Compañía Minera Los Pelambres. EMPRESA ELÉCTRICA PANGUE S.A. The Pangue plant is located on the Bío-Bío river 85 km. south-east of the city of Los Angeles. It has a gross water-fall of 103 m. and a design water-flow of 500 cu.m. per second. Its nominal capacity is 450 MW. The energy generated is supplied to the Central Grid over a 220 kv double-circuit transmission line. EMPRESA ELÉCTRICA PEHUENCHE S.A. As a result of the severe drought affecting the country throughout 1998, the plant s generation was only 744 GWh, representing 36% of average annual production. This supply represented 3% of the energy generated on the Central Grid. The energy produced by this company in 1998 represented 10% of that generated on the Central Grid. 30

32 COMPAÑIA ELÉCTRICA SAN ISIDRO S.A. San Isidro project was carried out by Compañía Eléctrica San Isidro S.A., a subsidiary of ENDESA-Chile, and is located at Quillota in the 5th Region. The San Isidro combined-cycle plant has a net capacity of 370 MW and has two cycles, one a gas turbine with a 238-MW capacity and the other a 132-MW steam turbine. The plant will supply the Central Grid ( SIC ) with an average annual generation of 2,750 GWh, the equivalent of 10% of the system s total generation in The plant was supplied by Mitsubishi Corporation under a turn-key contract. The first synchronization and initial deliveries to the SIC were made on August 10, 1998 and the plant was formally inaugurated on October 30, It contributed a total of 590 GWh to the Central Grid during The project is completely finished at December 31, COMPAÑIA ELÉCTRICA TARAPACÁ S.A. San Isidro Plant The main object of Tarapacá plant project, managed by Compañía Eléctrica Tarapacá S.A., an ENDESA-Chile subsidiary, is to provide electricity to Compañía Minera Doña Inés de Collahuasi. The project consists of a 150-MW coal-fired thermal generating plant with an exit substation and a 23.8-MW back-up turbine, located at Punta Patache on the coast of Chile s First Region, to the south of the city of Iquique. The associated transmission system includes the Lagunas substation, with connection to the SING in the Bellavista zone, and around 500 km. of 220 kv electricity lines. This transmission system comprises a 220-kV double-circuit line between the plant and the Doña Inés de Collahuasi mine and another 220 kv single-circuit line for improving the safety of the SING between the Crucero and Lagunas substations in addition and parallel to the existing trunk line. The Tarapacá plant has a quay with a capacity for unloading 500,000 tons of coal annually as the fuel supply. With almost all the works completed, the plant carried out its first synchronization with the Northern grid system ( SING ) on August 13. It was then subjected to a period of testing during which it reached a maximum gross generation of 160 MW. 31

33 ELECTROGAS S.A. The Fifth Region gas pipeline project is being carried out by Electrogas S.A., an ENDESA-Chile associate company in which Colbún S.A. and Enap are also partners. The pipeline consists of a 121 km. main 24" pipe from San Bernardo to Quillota and a 16 km. lateral 16" pipe from El Maqui to Colmo in the Con-Cón area. The pipeline has cut-off safety valves and is operated by remote control from the operating and control building at the Plantgate in Quillota. The investment required for this first stage was US$ 71 million. Additional investments of US$ 17 million are later planned for a compression station for increasing its transportation capacity to meet future demand. The main section has been in service since February 8, 1998 and the lateral section since August 1 st, INVESTMENTS OF THE ENERGY DIVISION ENDESA-Chile and its Chilean subsidiaries and associated companies invested a total equivalent of US$ million in 1998: INVESTMENTS IN 1998 US$ MILLIONS ENDESA-CHILE SAN ISIDRO TURBINES PROJECT 6.0 CHARRUA TURBO-GROUPS PROJECT 5.3 RALCO PROJECT 22.6 ENERGY DIVISION-PRODUCTION MANAGEMENT 0.7 ENERGY DIVISION-COMMERCIAL MANAGEMENT 4.4 PARENT COMPANY-TRANSMISSION SYSTEMS 22.6 STUDIES AND OTHERS 1.0 SUBTOTAL 62.6 SUBSIDIARIES AND ASSOCIATED COMPANIES PEHUENCHE S.A. 1.7 TRANSELEC 24.9 COMPAÑÍA ELÉCTRICA SAN ISIDRO S.A COMPAÑÍA ELÉCTRICA TARAPACÁ S.A ELECTROGAS S.A GASATACAMA S.A. SUBSIDIARIES TALTAL SUBSIDIARIES 14.9 SUBTOTAL TOTAL

34 I NTERNATIONAL DIVISION The International Division is in charge of current business in Argentina, Brazil, Colombia and Peru and is responsible for expansion into other Latin American countries. INSTALLED CAPACITY, GENERATION AND SALES OF ELECTRICITY ABROAD INSTALLED CAPACITY ( MW ) IN ARGENTINA EL CHOCÓN - EL CHOCÓN ( HYDROELECTRIC ) 1, , ARROYITO PLANT ( HYDROELECTRIC ) COSTANERA - COSTANERA ( THERMOELECTRIC ) ( 1 ) 1, ,991.2 CBA - CBA ( THERMOELECTRIC ) TOTAL CAPACITY IN ARGENTINA 2, ,631.2 IN BRAZIL CACHOEIRA DOURADA - CACHOEIRA DOURADA ( HYDROELECTRIC ) TOTAL CAPACITY IN BRAZIL IN COLOMBIA BETANIA - BETANIA ( HYDROELECTRIC ) EMGESA - GUAVIO ( HYDROELECTRIC ) 1, , CADENA VIEJA ( HYDROELECTRIC SYSTEM ) ( 2 ) CADENA NUEVA ( HYDROELECTRIC SYSTEM ) TERMOZIPA ( THERMOELECTRIC ) TOTAL CAPACITY IN COLOMBIA 2, ,054.0 IN PERU EDEGEL - HUINCO ( HYDROELECTRIC ) MATUCANA ( HYDROELECTRIC ) CALLAHUANCA ( HYDROELECTRIC ) MOYOPAMPA ( HYDROELECTRIC ) HUAMPANI ( HYDROELECTRIC ) SANTA ROSA ( THERMOELECTRIC ) TOTAL CAPACITY IN PERU TOTAL CAPACITY ABROAD 7, ,152.2 ( 1 ) In December 1998, Costanera began operation of its MW combined-cycle facility. ( 2 ) In August 1998 the Emgesa s 56-MW Salto I hydroelectric plant came into service. 33

35 GENERATION ( GWH ) IN ARGENTINA EL CHOCÓN 2, ,883.0 COSTANERA 3, ,628.9 CBA 1, ,798.5 TOTAL GENERATION IN ARGENTINA 8, ,310.4 IN BRAZIL CACHOEIRA DOURADA ( 1 ) 1, ,941.4 TOTAL GENERATION IN BRAZIL 1, ,941.4 IN COLOMBIA BETANIA 2, ,846.5 EMGESA (1) 1, ,642.8 TOTAL GENERATION IN COLOMBIA 3, ,489.3 IN PERU EDEGEL 2, ,071.8 TOTAL GENERATION IN PERU 2, ,071.8 SALES OF ELECTRICITY ( GWH ) IN ARGENTINA EL CHOCÓN 3, ,226.0 COSTANERA 8, ,527.5 CBA 2, ,330.4 NET SALES IN ARGENTINA 14, ,083.9 IN BRAZIL CACHOEIRA DOURADA ( 1 ) 1, ,894.0 NET SALES IN BRAZIL 1, ,894.0 IN COLOMBIA BETANIA 3, ,617.3 EMGESA ( 1 ) 1, ,256.0 NET SALES IN COLOMBIA 5, ,873.3 IN PERU EDEGEL 3, ,278.6 NET SALES IN PERU 3, ,278.6 (1) The generation and sales of electricity of the Colombian Emgesa and the Brazilian Cachoeira Dourada in 1997 are both from ENDESA-Chile s date of possession. 34

36 PROJECT DEVELOPMENT AND EXECUTION BRAZIL-ARGENTINA ELECTRICITY INTERCONNECTION PROJECT This project was begun in May 1997 with a call under international tender for the purchase, by Eletrosul and Furnas, two of the largest Brazilian concession-holders, of 1,000 MW of firm capacity with associated energy from Argentina. Bids were made in September 1997 and, following a long period of adjudication and negotiation, power and energy contracts were signed in May 1998 with the winning companies. The contracts have a term of 20 years and it is expected that energy supplies will start in March The project involves the construction and operation of a transmission system interconnecting the Brazilian and Argentine electricity systems, and comprises 127 km. of transmission lines in Argentina, a frequency conversion station on the frontier and 370 km. of lines in Brazil. The total investment required for the project is estimated at US$ 315 million. The importance of the project is that it is the first international energy purchase undertaking in the Brazilian electricity market. The market has been suffering annual deficits of around 5% and this presents an excellent investment opportunity for ENDESA-Chile. The Brazilian electricity regulator, the National Electricity Agency, has also authorized the second interconnection project with Argentina with an additional 1,000 MW capacity. Negotiations are currently in their final stages with energy buyers, being the large distribution companies. The cost of the additional 1,000 MW will be the equivalent of the initial US$ 315 million. ARGENTINA CENTRAL COSTANERA S.A. As a result of the investments it has made, the application of new operating procedures and personnel training, practically all the company s performance indicators showed a significant improvement in 1998 compared to 1997 levels, and most of them break records. The availability factor reached 94.6% with a real increase of 4.5% compared to This represents a most satisfactory level considering the age and diversity of its generating units. The reliability index, expressed as the number of operating-unit fault stoppages per thousand working hours, showed a 7.9% reduction from Average consumption of all the units ( heat rate ), expressed in Kcal per KWh, also reached an important level compared to the projected ones. Regarding the construction of the new MW combined-cycle plant, the intense work ended in 1998 with its start-up within a little over two years. The total cost will be below the US$ 270 million originally budgeted. Design of the supplies and civil works was completed during the year and over 99% progress was made in the latter, leaving just a few termination tasks to be done. The equipment and machinery were almost 100% imported and erected during the year. The most significant moments in this process occurred on October 26, 1998 with the test synchronization of the first gas turbo-generator, on November 26 with the synchronization of the steam turbogenerator ( operating in combined cycle ), and on December 18 with the synchronization of the second gas turbogenerator, thus completing the plant. 35

37 CENTRAL TERMOELÉCTRICA BUENOS AIRES S.A. Among the activities of Central Termoeléctrica Buenos Aires S.A. was the most satisfactory working of the combined-cycle TG Unit. This has recorded the highest number of working hours in the world for its type and combined-cycle operating method. It achieved a record 78% availability in On the commercial side of the business, signed contracts have reached 58% of the maximum possible level of supply contracts. Another notable event was the signing on November 20, 1998 of various contracts with a supplier for resolving outstanding disputes concerning a contract default by it. This implied a gain before tax for the company of US$ 6.57 million, of which US$ 5.62 million was shown in the year HIDROELÉCTRICA EL CHOCÓN S.A. Progress in the construction of the Fourth Transmission Line between the Comahue area and Buenos Aires at December 31, 1998 was 25.7%. Start-up of the project is forecasted for October This will increase its transmission capacity and thus the company s sales. Hidroeléctrica El Chocón S.A. has a 13.6% participation in this project. BRAZIL CENTRAIS ELÉTRICAS CACHOEIRA DOURADA S.A. Different company matters were consolidated during the first year of the company in private hands. In 1998, ENDESA-Chile, through its subsidiary Lajas Holding Inc., increased its indirect holding in Centrais Elétricas Cachoeira Dourada S.A. from 69.29% at the end of 1997 to its present 91.19%. In operating terms, urgent plant maintenance work was carried out in order to achieve ENDESA-Chile standards of service quality. Important improvements in installations and performance have resulted. As required in the tender instructions, the company s debt was re-negotiated and re-scheduled. An interim dividend of US 24.4 million was declared in October, based on the results to September As part of the Brazilian electricity generation privatization process, the System Coordinating Organism defined the volumes of Guaranteed Energy for the period ; these place the company in a good position. The Company also actively took part, despite its relative size, on the committees for setting market functioning mechanisms. These events position the operator ENDESA-Chile very favorably in a market offering great prospects and opportunities. Regarding investments, the Río de Janeiro plant thermal project is under development. So far, the land, studies, environmental permits and licenses are all to hand, as well as the signing of the commitment terms for the supply of natural gas. Negotiations are progressing concerning supply and energy sale contracts. COLOMBIA CENTRAL HIDROELÉCTRICA DE BETANIA S.A.E.S.P. 36 The company achieved several objectives and initiatives in Internally, there was an improvement in availability from 89% to 93%. This implies an improved use of capacity of around 10% which translates into about US$ 0.6 million of additional revenue.

38 Starting in May, it began to offer frequency-regulation services generating additional revenues of close to US$ 1 million annually. It also reduced the number of faults causing unit stoppages by 86%; the number of faults has fallen from 56 in 1996 to 28 in 1997, and to 15 in Externally, it took an active part in forming the Colombian Association of Generators through which important work was carried out for ensuring that pastdue accounts of certain distributors were paid. It also presented an important defense to the authorities for maintaining the charge for capacity calculation method. Regarding financing, the company managed to refinance its debt with J.P.Morgan on satisfactory conditions and rates, despite adverse international conditions. However, the devaluation of the Colombian peso late in the year somewhat overshadowed this achievement. EMGESA S.A.E.S.P. Important investments were made in plants, and changes in operating and maintenance procedures were made in order to improve reliability and availability. This permitted availability to increase from 87% in 1997 to 93%, forced stoppages to be reduced to less than a half of 1997 levels, and improvements in productivity. The Termozipa thermal plant achieved monthly generating records over three consecutive months during the drought affecting Colombia early in the year. Major maintenance carried out in the different plants was done in record time. Construction work on the 56-MW Salto I plant was completed and its commercial operation began in August A collective labor agreement was negotiated with personnel compatible with the privatized nature of the company. This regulates Emgesa s working conditions for the next two years. An aggressive organizational training program was given to cover changes in all the company s areas. A new restructuring was carried out in August leading to a total head-count reduction from 614 at the start of the year to the present 528. On the commercial side, new customer sale contracts were signed and Emgesa s new corporate image promoted. Additionally, new organizations were formed, such as the Colombian Generators Association and the company actively took part in the National Operations Council where Emgesa currently holds the presidency. PERU EDEGEL S.A. The year 1998 was one of consolidation, great financial activity and growth due to the execution of the 42-MW Yanango and 142-MW Chimay hydroelectric plants and the Marca III project for water collection, the equivalent of an additional 150 GWh. The construction of Yanango began in January 1998 and orders to start Chimay and the line connecting both to the Central-North Grid System were given in July and June respectively. 37

39 Financing for these works were assured in October with the signing of a financing framework agreement for US$ 180 million with the North American banks Boston and Citibank and the Peruvian bank Continental. A participation agreement was signed in June with the Lima water-utility company, Sedapal, for investment in the Marcapomacocha-Marca III project, and agreeing a contribution of US$ 20 million. Financing of this Edegel contribution to the project was obtained through a property leasing agreement signed with the Santander group in September. The consolidation of the company s commercial strategy continued during the year with contracts being signed with distribution, industrial and mining companies. INVESTMENTS ABROAD ENDESA-Chile invested abroad in 1998, whether directly or through its subsidiaries, a total equivalent to US$ million, considering the direct investment, as well as the purchases of shares of new companies, as per the following detail: INVESTMENTS IN 1998 US$ MILLIONS PURCHASES OF SHARES BRAZIL-ARGENTINA INTERCONNECTION 48.9 CENTRAIS ELÉTRICAS CACHOEIRA DOURADA S.A HIDROELÉCTRICA EL CHOCÓN S.A SUBTOTAL DIRECT INVESTMENT HIDROELÉCTRICA EL CHOCÓN S.A. 1.4 CENTRAL COSTANERA S.A EDEGEL S.A CENTRAL HIDROELÉCTRICA DE BETANIA S.A.E.S.P. 0.4 CENTRAL ELÉCTRICA CACHOEIRA DOURADA S.A. 2.0 EMGESA S.A.E.S.P SUBTOTAL TOTAL

40 O THER BUSINESSES Tarapacá Power Plant INGENDESA PROJECTS Ingendesa in 1998 participated in large domestic investment projects particularly in the areas of energy and infrastructure, through services provided to ENDESA-Chile, its subsidiaries and related companies. Among the main services provided were the basic design and seices for contracting the works and equipment for the Ralco hydroelectric project, up-dating the preliminary plans for the Baker and Pascua rivers hydroelectric schemes, design and technical inspection services for the Pozo Almonte substation for ENDESA-Chile s energy division, revision of the design and technical inspection of the civil and erection works and start-up of the Tarapacá coalfired thermal plant and its related transmission system, and the design and technical inspection of the electricity feeder line of the ACF mine, for Celta S.A. Likewise, it should be pointed out the engineering consultancy for the San Isidro natural gas combined-cycle plant for San Isidro S.A., design for the installation of the gas turbo-generator in Quillota and technical inspection of the San Isidro-Piuquenes line, for Transelec S.A., technical advice in the study of highway-concession bids, for Infraestructura 2000 S.A., engineering and construction management support services for Autopista del Sol and Autopista Los Libertadores, engineering and construction management advisory services for the Atacama natural-gas combined-cycle thermal plant and the associated transmission system, for Nopel Ltda., design for the expansion of the Coronel and Hualpén substations, for Manso de Velasco S.A., and detailed design of the Brasil substation, for Chilectra S.A. A significant part of its activities was carried out for third parties in the energy, mining and public works sectors, including the basic design of the Illapel river reservoir for the Hydraulic Works Section of the Ministry of Public Works, the basic design of the Quilleco hydroelectric plant and detailed design of the Polpaico-Maitenes transmission line, for Colbún S.A. and the basic design and services for contracting the works of the Lago Atravesado hydroelectric project, for Edelaysén S.A., engineering services for reinforcing the San Pedro-Miraflores line, for Chilquinta Energía S.A., management support and technical inspection services for the construction of the Valle Tailings project, for Codelco-Chile s Andina Division, engineering services for the Milk of Lime Preparation Plant project and consultancy in the design of the Environmental Control system, for Codelco-Chile s El Teniente Division, and construction management support for Santa Ana station of the Santiago Line 5 project, for Metro S.A. 39

41 Internationally, important were its environmental auditing and evaluation services for the construction works of the Gerasul plants in Brazil, for ENDESA-Chile s International Division, support services for the study of a thermal plant in Río de Janeiro, for Central Cachoeira Dourada S.A., works management and supervision at the San Gabán hydroelectric plant in southern Peru, for Empresa de Generación Eléctrica San Gabán, engineering and construction support services the Yanango and Chimay hydroelectric plants in Peru, for Edegel S.A., supervision of works construction of Angostura hydroelectric plant, for Instituto Costarricense de Eléctricidad, Costa Rica, technical assistance for the Combined Cycle project of the Costanera thermal plant, Buenos Aires, for Central Costanera S.A., and engineering services for re-powering transmission lines of the Paraguayan National Grid system, for Ande, Paraguay. TÚNEL EL MELÓN The Túnel El Melón public-works concession was awarded to the concession-holding company of the same name for a 23-year term, including the construction period. The tunnel was opened provisionally on September 14, 1995 and finally inaugurated in May It is equipped with the most modern control, ventilation and illumination systems, and has advanced safety features such as a fire-fighting system, gas monitoring, etc. which provide safe installations for its users. Positive effects on the concession are expected in 1999 from the opening to the public of the dual carriageway between Santiago and the tunnel which should generate an increase in traffic. Important improvements in operating and routine maintenance efficiency were made in These should represent a reduction of around 20% in the company s total operating and administration costs. AUTOPISTA DEL SOL The Santiago-Malloco section of the highway was opened to the public in advance in January At the same time, the toll booths at Américo Vespucio, Talagante, El Paico, Pomaire, Melipilla access, Melipilla and Puangue, as well as provisional booths at Malloco, were opened. This advanced opening was agreed with the Ministry of Public Works in order to make available to the public the main project facilities despite our not being able to complete all the works due to land expropriation problems. Construction of the pending works and additional ones requested by the Ministry continued through the year, such as service lanes, road safety elements and an area for traders near Melipilla. 40

42 AUTOPISTA LOS LIBERTADORES This project consists of the construction of the Santiago-Colina-Los Andes highway. This is approximately 90 km. long and contemplates a dual carriageway and service lanes between Santiago and Colina, Colina and Los Andes by-passes, repaving of the San José-Lo Pinto road and structural and service improvements to the Chacabuco tunnel. Construction began on June 1 st, The project has progressed 14% to December 31,1998, which compares with the planned 9.9% at that point. In addition, 68% of the expropriations ( 54.4 km.) were made and 27% of interferences with public and private utilities were resolved. Furthermore, negotiations are taking place with the Ministry of Public Works for a first Complementary Agreement covering additional works to those contemplated in the Referential Preliminary Project requested by the Ministry, for a total of approximately UF 260,

43 C ORPORATE DIVISION San Isidro Power Plant The Corporate Division gives support to the other divisions and their related businesses, and to the whole organization and its management, in all the services and corporate areas, which includes the areas of Finance, Insurance, Human Resources, Administration, Corporate Accounting and Data Systems. FINANCIAL ANALYSIS OF 1998 The consolidated financial statements of ENDESA-Chile for 1998 incorporate all the Chilean subsidiaries, the Argentine subsidiaries Hidroeléctrica El Chocón S.A., Central Costanera S.A. and CBA, the Colombian subsidiaries Central Hidroeléctrica de Betania S.A. and EMGESA, the Brazilian subsidiary Centrais Elétricas Cachoeira Dourada S.A. and the Peruvian subsidiary Edegel. NET INCOME The net income of ENDESA-Chile for 1998 was Ch$ 45,177 million, a level 63.1% lower than the previous year due basically to a negative difference in the account of Price Level Restatement of Ch$ 50,871 million, a Ch$ 40,548 million fall in operating income in Chile following the drought and the lower average sale price of energy and capacity of ENDESA-Chile and subsidiaries, and Ch$ 46,801 million of additional interest expense following acquisitions and the consolidation of new companies abroad. The last quarter of 1998 was the driest ever recorded. OPERATING REVENUES Operating revenues in 1998 amounted to Ch$ 811,612 million, 21.4% higher than in 1997 mainly due to the consolidation of the operating revenues of the new subsidiaries abroad, Emgesa and Cachoeira Dourada, and the consolidation of the Peruvian subsidiary Edegel from January 1998, and also to the increased operating revenues of Central Costanera. Operating revenues in Chile reduced by 8.9%, basically due to the 8.2% fall in energy sales volumes resulting from lower hydroelectric generation due to the drought, as well as the 3.3% fall in average sales prices of ENDESA-Chile and its subsidiaries. 42

44 OPERATING EXPENSES Operating expenses in 1998 were Ch$ 482,562 million, 13.7% higher than in This was due to a 15.3% increase in operating costs of subsidiaries abroad and a 10.7% increase in those of ENDESA-Chile and subsidiaries in Chile. The increase affecting foreign subsidiaries was mainly due to the consolidation of new subsidiaries while the increase in Chile was basically due to Ch$ 15,822 million of higher energy purchases to meet contractual commitments. ADMINISTRATIVE AND SELLING EXPENSES These reached Ch$ 37,892 million in This represents a 37.7% increase over 1997 mainly due to the consolidation of the administrative and selling expenses of Emgesa, Cachoeira Dourada and Edegel, and increased expenses incurred by Central Costanera. OPERATING INCOME Operating income reached Ch$ 291,157 million in 1998, 34.2% above the level of the year before. This is explained by Ch$ 114,784 million of additional income from abroad due to the incorporation of the operating income of the new subsidiaries, Emgesa and Cachoeira Dourada, and the consolidation of the Peruvian subsidiary Edegel from January 1998, as well as improved operating income at Central Costanera and El Chocón. Chilean operating income fell by 31.2% basically because the drought produced reduced energy sale volumes and increased costs in energy purchases. There was also a reduction in the average energy and power sale price for ENDESA- Chile and its subsidiaries due to the arrival of natural gas into Chile. Foreign-generated operating income was Ch$ 201,927 million in 1998, representing 69.4% of group operating income and demonstrating the success of the Company s internationalization process. NON-OPERATING RESULT The non-operating result was a loss of Ch$ 172,551 million, compared to a loss of Ch$ 69,960 million in This is explained by a negative difference in the account of Price Level Restatement of Ch$ 50,871 million, as the exchange rate in relation to inflation increased by 3.3% in 1998 while in 1997 it fell 2.9%; Ch$ 46,801 million of higher interest expense, mainly the result of new investments and the consolidation of the subsidiaries Emgesa, Cachoeira Dourada and Edegel, and Ch$ 13,596 million of reduced equity in income of non-consolidated affiliates basically as a result of consolidating the Peruvian subsidiary Edegel which is no longer shown at its equity value. 43

45 INTERNATIONAL RISK RATING The credit rating for ENDESA-Chile s domestic bonds at December 31, 1998 by Fitch-IBCA Chile and Humphreys Ltda. is AA+, while that of Feller & Rate is AA. The ratings of ENDESA-Chile s external debt are Standard & Poor s A-, Moody s Baa1, and Duff & Phelps A-. The credit rating for the external debt of Pehuenche S.A. by Standard & Poor s is BBB+, Moody s Baa1 and Duff & Phelps A-. EXCHANGE RISK COVER The Company utilizes foreign exchange contracts and similar instruments in order to hedge against the risk of exchange losses on foreign currency denominated debt other than in US dollars. Under these contracts, the Company sells dollars to buy foreign currencies at a future date and therefore accepts the risk of exchange losses against the U.S. dollars. These contracts are marked to market, with the gains or losses recorded in the results of operations for the period as part of the Price-level restatement account. Accordingly, they offset foreign exchange gains or losses incurred on the foreign currency denominated debt other than in US dollars. INSURANCE The insurance program, covering ENDESA-Chile and its subsidiaries, expired in August Bids were invited from the main local insurance brokers for the new insurance program. This resulted in the award of the following insurance covers for the period to August All-risk over physical assets and business interruption up to US$ 400 million to protect the generating plants and main transforming substations against earthquakes, avalanches, fire, explosions, terrorism, floods, etc. - Equipment breakdown and loss of profits up to US$ 100 million to protect the principal plant production and substation machinery and equipment against operating faults, short circuits, breakage of parts, material fatigue and mechanical faults in general. - Extra-contractual civil liability up to US$ 50 million to cover the Company for damages its business may cause to third parties and which it is forced to indemnify. The Company also has insurance cover for sea, air and land transportation of machinery, equipment and inputs, life insurance for its personnel traveling, and those that current legislation obliges it to have. INCREASED HOLDINGS IN FOREIGN COMPANIES The company considerably increased its holdings in foreign companies in 1998 through purchases of shares. In generating companies, its holding in Centrais Elétricas Cachoeira Dourada S.A. increased from 69.29% in December 1997 to 91.19% in 1998, while its holding in Hidroeléctrica El Chocón S.A. increased from 43.03% to 47.45% over the same period. In Peru, the holding of ENDESA-Chile in Generandes Perú S.A., which consolidates with Edegel, increased from 49.51% to 54.26% in 1998, through the purchase from The Chase Manhattan Bank N.A. of 4.75% of its shares. This enabled ENDESA-Chile to consolidate Generandes Perú S.A. in At the same time, ENDESA- Chile s shareholding in the indirect subsidiary Edegel increased from 29.71% in 1997 to 32.56% in INCREASE IN CAPITAL OF ENDESA-CHILE 44 At the Extraordinary Shareholders' Meeting held on April 21, 1998, the board proposed the approval of a capital increase through a share issue in order to generate funds for financing its investment plans. The issue of 525,000,000 shares of one series, equivalent to 6.4% of the Company s capital, was registered with the Superintendency of Securities and Insurance on August 7, 1998 and the placement period expires on April 21, International financial market conditions, deeply influenced by the Asian crisis, have made it impossible to make the placement. However, the Company remains ready to proceed once conditions become favorable.

46 DEBT The Company s investment program requires it and its Chilean and foreign subsidiaries to obtain financing. The Company s consolidated debt ratio, being debt to shareholders equity plus minority interest, increased from 0.98% in 1997 to 1.07% in The main changes in 1998 in the Company s borrowing structure were: In June 1998, ENDESA-Chile, through its agency in the Cayman Islands, placed a bond issue in the American market for US$ 400 million. This carried a 10-year bullet repayment and an annual interest rate of 7.75%. J.P.Morgan & Co. was the lead manager. The purpose was to partially refinance short-term debt of US$ 600 million drawn in late 1997 to finance the purchase of the Brazilian subsidiary Cachoeira Dourada. In August 1998, Endesa-Chile Overseas Co. signed a syndicated 5-year loan of US$ 550 million. It carries a 2-year grace period and an interest rate of Libor plus a fluctuating margin from 0.525% to 0.625%, for ENDESA- Chile s current rating. The agent bank was The Chase Manhattan Bank. Its purpose was to finance the balance of the US$ 600 million of short -term debt mentioned above plus other short-term borrowings of Endesa-Chile Overseas and ENDESA-Chile s agency in the Cayman Islands. Both placements, whether in the public market or the American syndicated-loan market, making a combined total of US$ 950 million, were carried out at a time when financial mark ets were still suffering the effects of the Asian crisis. Our success therefore demonstrates the market s confidence in the Company s long-term future. These credits also allowed us to restructure ENDESA-Chile s debt profile and so enable it to better face any further deterioration in market conditions for new credits in the context of an international financial crisis.regarding the debt of the Chilean subsidiaries, drawings under existing credits were made use of, by Autopistas del Sol S.A. whose works were opened to the public in Regarding its foreign subsidiaries, Central Costanera S.A., Argentina, completed the drawings under its supplier credit with Mitsubishi Corporation totalling US$ 195 million, granted for the construction of the MW combinedcycle thermal plant. This credit has a 12-year term with two year s grace and an annual interest rate of 7.42%. 45

47 HUMAN RESOURCES NUMBER OF PERSONNEL As of December 31, 1998, the personnel of ENDESA-Chile and its subsidiaries was as follows: EXECUTIVE PROFESSIONALS OTHER TOTAL COMPANIES OFFICERS AND TECHNICIANS EMPLOYEES NATIONAL ENDESA-CHILE PEHUENCHE S.A PANGUE S.A CELTA S.A SAN ISIDRO S.A TRANSELEC S.A INGENDESA INFRAESTRUCTURA 2000 S.A TÚNEL EL MELÓN S.A AUTOPISTA DEL SOL S.A AUTOPISTA LOS LIBERTADORES S.A SUBTOTAL 64 1, ,763 INTERNATIONAL HIDROELÉCTRICA EL CHOCÓN S.A CENTRAL COSTANERA S.A CBA CACHOEIRA DOURADA CENTRAL HIDROELÉCTRICA DE BETANIA S.A EMGESA EDEGEL SUBTOTAL ,395 TOTAL 115 2, ,158 TRAINING Training in ENDESA-Chile was focused on employees taking part in various activities in Chile and abroad related to thermal and combined-cycle power generation. Corporate development programs were also held during 1998 for the personnel of Chilean and foreign subsidiary companies. 72.4% of ENDESA-Chile s employees took part this year in training activities, thereby supporting integral personal development and compliance with the Company s objectives. RISK PREVENTION The Company s Accident Prevention and Control Program in force since 1991 is now reaching full maturity as it has become an effective management tool in most establishments. 46 For instance, no serious work accidents have been recorded during the whole of this period. More important, the vast majority of accidents have not occurred in direct work but in routine or low risk areas. This is reflected in ENDESA-Chile s statistics, especially its accident rates. In this context, it is important to point out that the frequency ratio achieved during 1998 was As a reference, this ratio for electricity company members of the Inter- American Safety council is 4.2 times higher and that of members of the Chilean Safety Council 4.7 times higher.

48 WELFARE A program of sports and recreational activities was followed for personnel and their families during the year. Control and coordination of the Collective Health-Care Plan continued and new agreements with hospitals and clinics were incorporated in both Santiago and the regions. A Health Plan awareness campaign was begun for Chilean employees of ENDESA-Chile and its subsidiaries. HUMAN RESOURCES DEVELOPMENT A performance commitment document was prepared and distributed. This constitutes a basic information tool for human resources development as it provides concepts relating to work standards, the environment and important aspects of work conduct. The suggestions program, as in previous years, continues to be a significant opportunity for personnel participation. 888 suggestions were received during 1998, a record for the program. This makes a total of 4,784 suggestions received throughout the 7-year life of the program. LABOR RELATIONS Labor relations have continued to be harmonious and consistent with the application of the collective agreements in force until 1999 and

49 P RINCIPAL SUBSIDIARIES AND ASSOCIATED COMPANIES The principal subsidiaries and associated companies of ENDESA-Chile, with the Company s holding in each, are as follows: SUBSIDIARIES % HOLDING IN CHILE EMPRESA ELÉCTRICA PEHUENCHE S.A., PEHUENCHE EMPRESA ELÉCTRICA PANGUE S.A., PANGUE S.A COMPAÑÍA ELÉCTRICA SAN ISIDRO S.A COMPAÑÍA ELÉCTRICA TARAPACÁ S.A., CELTA COMPAÑÍA NACIONAL DE TRANSMISION ELÉCTRICA S.A., TRANSELEC COMPAÑÍA ELECTRICA TALTAL LTDA GASODUCTO TALTAL LTDA INVERSIONES ELÉCTRICAS QUILLOTA S.A EMPRESA DE INGENIERIA INGENDESA S.A., INGENDESA INFRAESTRUCTURA 2000 S.A TÚNEL EL MELÓN S.A AUTOPISTA DEL SOL S.A INECSA DOS MIL S.A AUTOPISTA LOS LIBERTADORES S.A ENDESA INVERSIONES GENERALES S.A., ENIGESA ABROAD HIDROELECTRICA EL CHOCÓN S.A., EL CHOCÓN CENTRAL COSTANERA S.A., COSTANERA CENTRAL TERMOELECTRICA BUENOS AIRES S.A., CBA ENDESA ARGENTINA S.A HIDROELECTRICIDAD S.A ENERGIA HIDRÁULICA S.A HIDROINVEST S.A CENTRAIS ELÉTRICAS CACHOEIRA DOURADA S.A ENDESA BRASIL PARTICIPACOES LTDA CENTRAL HIDROELÉCTRICA DE BETANIA S.A.E. S. P., BETANIA INVERSIONES BETANIA S.A ENDESA DE COLOMBIA S.A EMGESA S.A.E.S.P., EMGESA EMPRESA DE GENERACIÓN ELÉCTRICA DE LIMA S.A., EDEGEL GENERANDES PERÚ S.A ENDESA CHILE OVERSEAS CO COMPAÑÍA ELÉCTRICA CONO SUR S.A LAJAS HOLDING INC CAPITAL ENERGÍA S.A CRAWFORD MANAGEMENT INC ASSOCIATED COMPANIES IN CHILE ELECTROGAS S.A ADMINISTRADORA PROYECTO ATACAMA S.A GASODUCTO ATACAMA COMPAÑÍA LTDA NOR OESTE PACÍFICO GENERACIÓN DE ENERGÍA LTDA., NOPEL LTDA GASODUCTO CUENCA NOROESTE LTDA CONSORCIO DE INGENIERÍA B Y R, INGENDESA LTDA ABROAD EMPRESA DE ENERGÍA DE BOGOTÁ S.A.E.S.P CIEN-COMPANHIA DE INTERCONEXAO ENERGÉTICA 45.00

50 ENDESA-CHILE S PRINCIPAL SUBSIDIARIES AND ASSOCIATED COMPANIES PEHUENCHE Pehuenche, a generation company connected to the Central Grid System ( SIC ) owns three hydroelectric facilities south of Santiago in the high-rainfall hydrological basin of the Maule river. Its 500-MW Pehuenche plant, the largest in Chile, started operating in 1991; its 85-MW Curillinque plant started up in late 1993 and its 38-MW Loma Alta plant started operating in August In 1998 Pehuenche generated 2,500 G Wh, which accounted for 9.7% of total SIC s generation. ENDESA-Chile holds 92.55% of the share capital of Pehuenche. As of December 31, 1998, Pehuenche had assets of Ch$ 353,555 million, shareholders equity of Ch$ 159,310 million, and produced an operating income of Ch$ 18,295 million and a net loss of Ch$ 3,591 million. PANGUE S.A. The Company was formed to construct and operate the 450 MW installed capacity Pangue hydroelectric power station on the Bío-Bío river. The synchronization of the first unit was on October 31, 1996, while the synchronization of the second one was on February 3, In 1998 Pangue generated 744 G Wh, which accounted for 2.9% of total SIC s generation. ENDESA-Chile holds 92.48% of the share capital of Pangue S.A. As of December 31, 1998, Pangue S.A. had assets of Ch$ 179,161 million, shareholders equity of Ch$ 58,129 million, and produced an operating income of Ch$ 4,603 million and a net loss of Ch$ 5,469 million. 49