Enersis Management 2004 ANNUAL REPORT / ENERSIS CHAIRMAN Pablo Yrarrázaval Phone (56-2) 353 4663 CHIEF EXECUTIVE OFFICER Mario Valcarce Phone (56-2) 353 4613 REGIONAL PLANNING AND CONTROL OFFICER Macarena Lama Phone (56-2) 353 4684 REGIONAL FINANCIAL OFFICER Alfredo Ergas Phone (56-2) 630 9587 REGIONAL ACCOUNTING OFFICER Fernando Isac Phone (56-2) 353 4685 COMMUNICATIONS OFFICER José L. Domínguez Phone (56-2) 353 4666 AUDITING OFFICER Francisco Herrera Phone (56-2) 353 4647 HUMAN RESOURCES OFFICER Francisco Silva Phone(56-2) 353 4610 GENERAL COUNSEL Santa Rosa 76, Santiago - Chile Domingo Valdés (56 2) 353 4400, (56 2) 378 4400 Phone (56-2) 353 4631 Fax: (56 2) 378 4788 Investor and Shareholder Relations CHIEF INVESTMENTS AND RISKS OFFICER Ricardo Alvial 2004 ANNUAL REPORT / ENERSIS Phone (56-2) 353 4682 CITIBANK NY Ricardo Szlezinger Phone (1-212) 816 6852 SANTANDER CENTRAL HISPANO INVESTMENT Enrique Romero Phone (34-91) 342 9681 www.enersis.cl SANTIAGO STOCK EXCHANGE ENERSIS NEW YORK STOCK EXCHANGE (NYSE) ENI LATIN AMERICAN STOCK EXCHANGE OF MADRID STOCK EXCHANGE (LATIBEX) XENI Enersis Management 2004 ANNUAL REPORT / ENERSIS CHAIRMAN Pablo Yrarrázaval Phone (56-2) 353 4663 CHIEF EXECUTIVE OFFICER Mario Valcarce Phone (56-2) 353 4613 REGIONAL PLANNING AND CONTROL OFFICER Macarena Lama Phone (56-2) 353 4684 REGIONAL FINANCIAL OFFICER Alfredo Ergas Phone (56-2) 630 9587 REGIONAL ACCOUNTING OFFICER Fernando Isac Phone (56-2) 353 4685 COMMUNICATIONS OFFICER José L. Domínguez Phone (56-2) 353 4666 AUDITING OFFICER Francisco Herrera Phone (56-2) 353 4647 HUMAN RESOURCES OFFICER Francisco Silva Phone(56-2) 353 4610 GENERAL COUNSEL Santa Rosa 76, Santiago - Chile Domingo Valdés (56 2) 353 4400, (56 2) 378 4400 Phone (56-2) 353 4631 Fax: (56 2) 378 4788 Investor and Shareholder Relations CHIEF INVESTMENTS AND RISKS OFFICER Ricardo Alvial 2004 ANNUAL REPORT / ENERSIS Phone (56-2) 353 4682 CITIBANK NY Ricardo Szlezinger Phone (1-212) 816 6852 SANTANDER CENTRAL HISPANO INVESTMENT Enrique Romero Phone (34-91) 342 9681 www.enersis.cl ANNUAL REPORT 2004 / ENERSIS CONTENTS 4 CHAIRMANS' LETTER TO SHAREHOLDERS 10 HIGHLIGHTS OF 2004 12 THE COMPANY 18 OWNERSHIP AND CONTROL 24 BOARD OF DIRECTORS 27 DIRECTORS’ COMMITTEE 28 ORGANIZATIONAL STRUCTURE 29 ENERSIS MANAGEMENT TEAM 32 CULTURAL ACTIVITIES 34 FINANCIAL ACTIVITIES 37 BUSINESSES 42 INVESTMENT AND FINANCING POLICY FOR 2004 44 COMPARATIVE FINANCIAL STATEMENTS 45 CORPORATE STRUCTURE 46 ENERSIS GROUP STRUCTURE 48 ENDESA CHILE GROUP STRUCTURE ELECTRICITY GENERATION 52 ENDESA CHILE 56 ENDESA FORTALEZA ELECTRICITY DISTRIBUTION 60 COMPARATIVE OPERATING DATA 62 CHILECTRA 66 EDESUR 70 EDELNOR 74 CERJ (AMPLA) 78 COELCE 82 CODENSA OTHER BUSINESSES 88 SYNAPSIS 91 CAM 94 INMOBILIARIA MANSO DE VELASCO 97 DECLARATION OF RESPONSIBILITY 98 OTHER SUBSIDIARY AND ASSOCIATE COMPANIES 113 COMMERCIAL RELATIONS WITH SUBSIDIARY AND ASSOCIATE COMPANIES FINANCIAL STATEMENTS 115 CONSOLIDATED FINANCIAL STATEMENTS 257 UNCONSOLIDATED FINANCIAL STATEMENTS 297 FINANCIAL STATEMENTS OF SUBSIDIARY COMPANIES 3 Ralco hydroelectric plant. NOMBRE DEL CAPITULO 4 CHAIRMANS’ LETTER TO SHAREHOLDERS It is an honor for me to inform you of the principal activities of Enersis and its subsidiary companies during 2004 which have been summarized in this Annual Report which is presented for your consideration. 2004 was characterized as being one of consolidation of our financial recovery nationally and internationally following the making of the necessary timely adjustments in order to face the economic and social reality of the markets in which we operate. Year after year, we have been setting realistic targets which we have fully met. 2004 will remain engraved in the history of our Group for being one of take-off in terms of good financial results. We had already, in 2003, made significant achievements with profits of Ch$12,780 million, but these have now trebled to Ch$44,308 million in 2004. This result speaks for itself with respect to the good performance of Enersis and its subsidiaries throughout the whole electricity business chain and in the five countries where the Group has a presence. This is also reflected in the company’s operating income which increased 15.4% to Ch$634,202 million. Also notable was the 5.5% increase in electricity sales, both in generation and distribution, which confirms the projections made by our companies for achieving sustained growth within that range. The continuous increase of our distribution customers means that today we have close to 11 million electrical connections in the six cities where we provide electricity. We are constantly making improvements which we can measure, for example, in the increase in labor productivity, which grew by 6.4% to 1,521 customers per employee. But these good signs are also related to projects that our subsidiaries ventured on in 2004, including one that marks a milestone for us. I refer to the inauguration and start-up of Endesa Chile’s Ralco project, an unprecedented event in the history of Chile as it is the largest hydroelectric plant in the country which provides important energy support for the Central Grid System (SIC) with a maximum capacity of 690 MW. This has been completed despite many years of unfounded criticisms and has managed to combine respect for the environment with unbeatable solutions for the whole Pehuenche population that was affected by the passage of modern times. 2004 ANNUAL REPORT / ENERSIS 5 This hydroelectric plant joins the outstanding contribution made by the Endesa Fortaleza plant in Ceará State in Brazil which started operating in early 2004 and added 319 MW of capacity for sustaining the electricity needs of north-eastern Brazil. Just as the balance sheet reflects good situation, so do the financial ratios which continue to show considerable improvements. This is reflected in the healthy financial structure of Enersis whose liquidity increased and access to the financial markets improved. Particularly notable was the successful debt renegotiation in November 2004 when Enersis signed a loan agreement for US$ 350 million for the refinancing of the company’s debts. This new loan has substantially better conditions than the previous ones, with a Libor interest margin of 37.5 basis points compared to the previous margin of 115 basis points, and a term extended from 2006 to 2008. This new financial reality allows the Enersis Group to have a maturity pattern that better matches the characteristics of the electricity market where it operates. And what is even better, it has enabled the group to reduce its average financial debt last year by some US$1,228 million. One of the key improvements in the financial field has been the favorable change in EBITDA which has grown strongly, increasing over the last two years by more than US$450 million to a total of US$1,831 million at December 31. The perception of risk therefore has improved ostensibly, a situation noted by the credit-rating agencies which have begun to raise the company’s rating. This occurred together with a rise in the share price and the reduction in risk spreads, both in the cost of bank borrowings and the risk premium demanded on the company’s bonds. The improved liquidity explains why Enersis’s shares are more sensitive to the decisions of investors in the face of economic or market conditions. This was evident from the rise in the share price which ended the year at Ch$93.66, an 8.9% increase over the year, while the ADR rose 15.6% to US$8.51. In other hand it is a matter of satisfaction to know that our professional teams have been improving internal controls and procedures in order to comply with the requirements of the Sabarnes Oxley Act, concluding that these controls and procedures are effective to a reasonable level of reliability for the CHAIRMANS’ LETTER TO SHAREHOLDERS 6 collection, analysis and publishing of the information required from the company. In the same context, the finance management developed a so-called regulations and procedures project which is an extension of the rigor of that law to all aspects of the company’s financial management. With respect to our shareholders, we are sure we have done an efficient job in communicating with them and keeping them informed of our company’s actions. This was reflected in two important prizes received during the year. The first place, that was won for the investor relations web site, in the category TOP 5, “Best Investor Relations Website” awarded by the company MZ Award in this part of the world, called “Southern Cone”, which consists of all Spanish-speaking South American countries. The other award was given by the prestigious magazine “Institutional Investor” that annually gives prizes for Latin American companies whose shares are traded in the United States. Enersis was distinguished as being the best electrical company in the region in the Investor Relations category. The prize was instituted to recognize the company that has been known during the year for its optimum transparency and pro-activity in the provision of information to national and international investors in compliance with several strict requirements, while the evaluation criteria are based on a confidential survey made to the principal analysts and investors interested in the region. An important and symbolic landmark occurred on June 22 when the New York Stock Exchange celebrated Enersis Day, enabling our company to celebrate 11 years of trading on that important stock market and to present its new corporate image to the market. Enersis, being the star of the day, closed trading activities with the traditional “Ring the Bell”, in recognition of the years that the company has listed its stock on the New York Stock Exchange (NYSE). Considering Enersis’s position in the market, as the Latin American investment vehicle for Endesa (Spain), it decided to launch a new corporate image to reflect this relationship through a new logo.