Fitch Believes Argentine Gas Price Increases & Normal Hydrology Key To Chilean Power Sector.

Business Editors

CHICAGO--(BUSINESS WIRE)--April 30, 2004

Fitch Ratings believes the risks of a material, prolonged disruption of gas and the potential effect on the Chilean power sector to be manageable under normal hydrological conditions. The severity of future interruptions of natural gas supply from Argentina is still uncertain. Gas supply interruptions are likely to worsen this winter before an improvement is seen.

The scope of the interruptions depends on a number of factors such as: the amount of rainfall and temperatures in Argentina and Chile; the implementation of the announced 4 million cubic meters per day gas supply contract between Bolivia and Argentina; the level of electricity imported from Brazil to Argentina; and the increases of gas and electricity tariffs that could reduce demand growth in Argentina and Chile.

Recently, the Argentinean government announced an agreement with the gas producers to establish a series of tariff increases applicable during the next fifteen months, starting in May. This agreement opens the door to support new investments required to meet future demand. These increases will not be a solution in the short-run given the lead times for the development of additional gas production and transportation capacity.

Gas supply to Chile has already been reduced by as much as 20%-40% (in the central and northern regions, respectively). This reduction has been achieved by: 1) reducing gas supply to some thermo electric generation companies and industrial gas consumers with interruptible contracts, 2) suspending permits in process and 3) restricting gas supply to the same volumes consumed by each user between January and September 2003. The volume restriction will more negatively affect new generation plants, whose production levels were relatively lower during the January to September 2003 period.

In Chile's SIC (Central Interconnected System) approximately 22% of demand is served by natural gas-fired generation plants with an installed capacity of 1,700 MW. These plants generally set the spot price at around US$15 per MWh under normal conditions. Without natural gas, it is estimated that approximately 930 MW of coal-fired generation will become dispatched, at approximately US$20-$22 per MWh. Remaining demand is then expected to be met by the combined cycle units after the switch to fuel oil at a price of approximately US$50-$60 per MWh. These estimates assume normal dispatch of hydroelectric generation and the addition of the new capacity of 570 MW from Endesa-Chile's Ralco hydro plant in July or August. As of April, the average reservoir levels are normal. The rainy season has just begun and it is too early to determine if the rest of the year will be wetter or dryer than normal.

In Chile's SING (Norte Grande Interconnected System), gas supply restrictions have intensified to levels of around 40%-50%, as winter is arriving and gas demand is rising in Argentina. However, restrictions have not affected electricity supply. Given the overcapacity situation, the operations of coal and diesel thermal generators can support the demand, albeit at a higher marginal cost. Coal-fired generation capacity of 1205 MW is expected to supply a large part of the 1365 MW of demand. The higher production costs are expected to be borne by the generators, as 90% of the energy demand in the SING is sold through fixed price contracts without price indexation clauses. Most of the region's generators have been affected to some degree. Termoandes is facing gas restrictions between 40%-50% decreasing production to 120 MW or half of normal production. Gas Atacama's production has been restricted to 165 MW. ElectroAndina and Edelnor's gas restrictions have been as much as 50% resulting in a reduction in the combined cycle generation to 160 MW and 130 MW, respectively. In the SING, coal has continued setting the marginal price at a US$25-$28 MWh.

Separately in Chile, the monomic price of the node in Chile was recently set for the semiannual period ending October 2004. In the SIC the node price rose 18.8% in dollar terms to US$42.04 per MWh. This increase should help generators offset the potential negative financial effects of the natural gas restrictions. Some of the variables that affected the price were: a 50% increase in coal prices, a 10% increase in oil prices, higher than previously projected demand growth, and the modification of the CNE's (National Commission of Energy) generation investment plan to reflect the new reality of gas restrictions from Argentina. In the SING, the node price decreased 6.7% in peso terms, mainly due to the effect of the new Short Law band reduction to 5% between regulated and free negotiated market prices. Generators are unlikely to be affected by the change in node prices since 90% of demand is from unregulated customers under negotiated contracts.