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I N V E S T M E N T   C L I M A T E   I N   T H E   L A T I N A M E R I C A N   P O W E R   S E C T O R PowerPoint Presentation
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I N V E S T M E N T   C L I M A T E   I N   T H E   L A T I N A M E R I C A N   P O W E R   S E C T O R

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  1. JULY2004 INVESTMENTCLIMATEINTHELATIN AMERICANPOWERSECTOR I N V E S T M E N T   C L I M A T E   I N   T H E   L A T I N A M E R I C A N   P O W E R   S E C T O R

  2. Retreat from unsuccessful growth strategies Year of “cleanup” Focused on core businesses, principally domestic Strengthened balance sheets Increasing presence of financial sponsors Excess capital from institutional investors Institutional investors consider that investments in utilities could provide more stable returns than those in the stock or bond markets Earnings stabilized and credit rating downgrades mostly completed The utility and merchant generation sectors enjoyed improved liquidity and greater access to capital markets Key highlights of the North American power sector 2003recap 2004 market dynamics • “Back to basics” was credit driven and will not serve as growth strategy going forward • Regulators are being cautious to allow utilities competitive returns • Growth utilities will attract a disproportionate share of new capital • Strategics and sponsors positioning for potential regulatory changes • Large European utilities looking for growth • Cost driven consolidation • Private equity sponsors will continue to challenge corporate buyers • Several sponsors already own assets to compete on a strategic basis • Demonstrated willingness to invest long-term and wait for developing business fundamentals and regulatory outcomes 1

  3. The power M&A market has become more robust with financial sponsors continuing to make meaningful acquisitions Value of M&A transactions in the North American power sector (US$ mm) Selected Investments Source: Thompson Financial # of M&A transactions in the NorthAmerican power sector Source: Thompson Financial Source: SDC 2

  4. Stock prices for utilities have recovered over the last 18 months; however, increasing interest rates could slow this trend Year forward price-to-earnings ratio Relative stock price performance (% change) Source: Tradeline U.S. 10-year treasury (% change) Source: Bloomberg Source: Tradeline Note: Integrated: AEP, Cinergy, CMS Energy, Dominion, Duke, DTE Energy, Entergy, Exelon, FirstEnergy, FPL, PG&E, PPL, Progress Energy, Public Service Enterprise Group, Southern Co., TXU Merchant: AES, Calpine, Dynegy, El Paso, Reliant Resources, Williams T&D: Consolidated Edison, Energy East, Northeast Utilities, NSTAR 3

  5. Limited and volatile demand growth Natural gas replacing coal as fuel source Declining reserve margins Prices making generation uneconomic Ownership consolidation Emissions restrictions and CO2 trading Asset values declining High number of assets for sale Key highlights of the European power sector Generation Transmission and distribution • EU Directive, unbundling and third-party access for transmission assets • Limited enforceability mechanisms • Implementation of RAB-based regulation • Transmission bottlenecks • Introduction of third party equity/debt • Equity investors appetite for regulated assets • Restructuring and unbundling • Privatizations 4

  6. The Latin American investment environment has significantly improved over the last 18 months GDP growth (%, annual change) EMBI+ SOT Indices per country Bps Source: JPMorgan research Source: Global Economic Data as of July 13, 2004 Exchange rate Stock exchange indices Source: Global Economic Data as of July 13, 2004 Source: Global Economic Data as of July 13, 2004 5

  7. However, investment conditions in the Latin American power sector differ significantly across countries Investment environment The power sector is particularly affected by political uncertainty, social problems and economic volatility 6

  8. 6000 Finding the “right” risk/reward balance will continue to be the challenge for power sector players Country risk versus electricity consumption growth Source: CIER, SENER, OLADE, ARIAE; electricity consumption data as of 2002; EMBI+ data as of July 14, 2004 1 DR growth from 1999 to 2002 2 Panama growth from 1995 to 2001 7

  9. Country/ regulatory risk is the main factor affecting implied multiples across countries Illustrative comparison based on theoretical company with different domicile 1 JPMorgan estimates for perpetuity growth rates 2 SOT over UST10 3 Calculated based using a 0.8 unlvered beta, 40% debt/total capital. Pre-tax costs of debt calculated using a 100bp spread over each adjusted risk free rate 8

  10. Strategic players response Valuations have gradually recovered driven by the improved external perception of the region and increasing local investor’s appetite Valuation drivers for 2004 Valuation drivers during 2002 - 2003 Reduced country risk/ FX appreciation Increased country risk/ FX volatility Increasing asset prices Depressed asset prices Strategic players’ improved financial condition Strategic players facing liquidity crisis More balanced supply/demand of assets Limited number of buyers Strategic players response • New strategies focused on domestic markets • Market signaling of plans to reduce emerging market’s exposure • Restructuring of portfolios • Balance sheet impairment through FX and goodwill adjustments • Renewed focus on portfolio optimization strategies • “Wait and See” approach in general • Increasing willingness to take advantage of highly liquid local markets • Optionality approach towards non-core investments with tough exit alternatives Highly liquid local markets become an important alternative to reduce exposure to the region Limited number of M&A transactions due to significant bid/offer price gap 9

  11. Local groups, financial sponsors and the public market are becoming important players in the utility sector Selected transactions Source: Publicly available information 10

  12. Key considerations when assessing the attractiveness of the Latin American power sector • Political stability • Macroeconomic stability • Treatment of foreign investment • Contract enforceability and creditors’ rights • Financing availability • Regulatory stability • Growth prospects • Availability of investment opportunities • Opportunity cost Growth potential is not necessarily the only key driver of investment decisions 11

  13. Current trends in the Latin American power sector • Strong outlook for power consumption • Strong performance of companies under tough operating and financial conditions • World class assets and strong management • Companies with financial difficulties addressed them in a manner satisfactory to investors • Certain international companies implementing exit strategies • Capital allocated to non-core markets • Companies with no hurry to exit could pursue optimization strategies in the interim • Unwillingness to take significant write-offs • Waiting for a better time to sell given depressed assets’ valuation • Players with uncertain strategies following a “wait and see” approach • Not sure of pursuing an exit strategy • Believe that “the worst” has already happened in the region • Pursue optimization of portfolio • Still attracted by the growth potential of the market 12

  14. Current trends in the Latin American power sector (cont’d) • Companies with a long-term strategy • Potential to become sector “consolidators” • Restructure and refinance their portfolios • Divest non-controlling positions • Partner with local companies • IPO/Secondary offerings • Increasing participation of local players • Different risk-reward profile vis-a-vis that of international players • Increasing interest of financial sponsors • High return expectations • To-date, mainly focus on distressed assets requiring low upfront investments • Increasing role of the local capital markets • Significant liquidity in some markets • Attractive conditions for raising both equity and debt 13

  15. Key challenges for the Peruvian power sector • Maintain a positive political and macroeconomic outlook • Attract private capital to fund significant infrastructure requirements • Continue privatization/concession processes • Develop and maintain a reliable regulatory framework • Independent regulatory entities • Political and social agendas should not interfere with the development of the sector • Importance of a transparent and fair setting of tariffs, attractive enough to promote further investment • Address challenging social concerns through well structured measures • Importance of attracting foreign investment • Company’s cost of opportunity • Why Peru vis-à-vis other countries? • Leverage on companies already present in the country • Continue supporting the development of the local capital markets • Become a reliable player in energy integration with other countries 14