Duke Energy vs' Endesa Spain The 1999 Endesa Chile FaceOff

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Duke Energy vs. Endesa SpainThe 1999 Endesa
Chile Face-Off

• February 25, 2001
• Melissa Aguilar
• Seyi Lawal
• Osman Mian
• Alexander Rappaport
• Chris Thomas

2
Agenda

• Power and Energy in Latin America
• Endesa Chile in Dec. 1998
• Takeover Battle
• Endesa Valuation
• Learning Objectives
• Update

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Agenda

• Power and Energy in Latin America
• Endesa Chile in Dec. 1998
• Takeover Battle
• Endesa Valuation
• Learning Objectives
• Update

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Strong Growth in Latin America
Source EIA
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Opportunities in Expanding Interconnectivity
Currently In-service
Power Gas
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Opportunities in Expanding Interconnectivity
Projected and In-service
Power Gas
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Agenda

• Power and Energy in Latin America
• Endesa Chile in Dec. 1998
• Takeover Battle
• Endesa Valuation
• Learning Objectives
• Update

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Endesa Chile 12/1998 MM US

• Revenues 1,718
• Net income 95.6

11 Billion Dollars in assets!!!
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Endesa Chile 12/1998 Plants in Yellow
Installed Capacity Ownership Per Country

• Chile 45
• Argentina 20
• Peru 25
• Colombia 26
• Brazil 1

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Endesa Chile Chilean Operations
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Endesa Chile Foreign Operations
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Agenda

• Power and Energy in Latin America
• Endesa Chile in Dec. 1998
• Takeover Battle
• Endesa Valuation
• Learning Objectives
• Update

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FACE OFF
ENDESA SPAIN
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Ownership Structure
Chispas 26.2
Other 25.8
ADR 17
Pension 31
15

• Purchase Enersis stake
• Additional equity capital of 5.1
• Tender offer for 6.8
• Total Price 1,638MM

37.2
Enersis 25.3
Pension 26.1
ADR 13.2
Other 35.4
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Endesa Spain 26.2
Other 25.8
ADR 17
Pension 31
Enersis 25.3
Pension 26.1
ADR 13.2
Other 35.4
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TENDER OFFER Price 250 CH/share Total price
2.1B
51
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TENDER OFFER Price 305 CH/share Total price
1.542B
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Additional 29.7
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TENDER OFFER Price 275 CH/share Total price
3B
60
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Endesa Spain should offer 340 pesos per share
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TENDER OFFER Price 360 CH/share Total price
2.155B
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Additional 34.7
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REVISE OFFER?
WALK AWAY?
WHAT SHOULD DUKE ENERGY DO?
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Agenda

• Power and Energy in Latin America
• Endesa Chile in Dec. 1998
• Takeover Battle
• Endesa Valuation
• Learning Objectives
• Update

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Valuation Methods

• Multiples comparison
• Comparable acquisitions analysis
• Free cash flows to equity holders
• Discount rate determination
• Cash flow assumptions
• Share price calculation

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Multiples Comparison
Source Duke Energy Estimates
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Comparable Acquisitions Valuation
Source Duke Energy Estimates
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Comparable Company Analysis - Overview

• Comparable Company Analysis is a three-step
  process

Selection of
Determination of
Projection of Relevant
Relevant
RelevantValuation
Measures and Determination
Peers
Benchmarks
of Value
Selected Companies
Primary Benchmarks
Eagle projections based on CSFB
Equity Research (Steve Graham)
Chilean Utilities
Enterprise Value/EBITDA
Eagle
Enterprise Value/EBIT
Prospective earnings and cash
Gener
Equity Value/Net Income
flow drive value
Brazilian Utilities
Eletrobas
CESP
Copel
Argentine Utilities
Central Puerto
Central Costanera
CAPEX
United States IPPs
AES Corp.
Calpine Corp.
CalEnergy
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• The preliminary reference range implied by an
  analysis of comparable publicly traded Latin
  America utility and International IPP companies
  is 5.94 to 13.26 per ADR
• Comparable Company Analysis Valuation Summary
• (U.S. Dollars in Millions, Except Per ADR Data)

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Comparable Acquisition Analysis Overview

• Comparable acquisition analysis attempts to
  derive a reference range for the business or
  assets under consideration by
• Calculating the most recent historical relevant
  valuation multiples from observed acquisitions of
  generating assets and publicly traded companies
  with similar operating and/or financial
  characteristics, and
• Applying such valuation multiples to the most
  recent historical operating and financial
  performance of the business or assets under
  consideration to derive an implied valuation for
  such business or assets.

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- Comparable Acquisition Analysis

• The preliminary reference range implied by an
  analysis of comparable transactions involving
  Latin American generating assets and
  international IPP companies is 10.70 to 18.01
  per ADR
• Comparable Acquisition Analysis Valuation Summary
• (U.S. Dollars in Millions, Except Per ADR Data)

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Operational and Sovereign Risks

• Risk factors in the discount rate
• Key sovereign risks exchange rate,
  expropriation, demand, water rights and
  regulatory risk for environment
• Weights for risk allocation based on electricity
  generation capacity in Argentina, Chile and
  Colombia
• Risk factors in the cash flows
• Key operational risks drought, rationing,
  distribution loss, forced outages

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Cost of Capital Calculation

• Adjustments to ICCRC discount rates
• Individual adjustments to Argentina, Chile and
  Colombia discount rates with best and worst case
  scenarios
• Upward adjustments (creeping expropriation, water
  rights and environmental regulation)
• Downward adjustments (exchange rate and demand)

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Endesa Chile - Revenue / Foreign Exchange Risk
6
31
63
Dollar or International Fuel Basis (Chile,
Colombia and Peru)
Local Fuel with International Fuel Correlation
(Argentina)
Local Currency with Local Inflation Index
(Brazil)
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Cost of Capital Calculation

• Argentina Chile Colombia
• Currency -- -- --
• Expropriation
• Demand - - -
• Regulatory risk (water)
• Environment reg.
• Overall weighted cost of capital 14.31

The cost of capital of 14.31 was calculated
using the method suggested by Professor Campbell
Harvey. Duke Energy did not disclose the discount
rate used for this investment (or any other
investment)
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(No Transcript)
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Free Cash Flow to Equity Model Basics

• Valued Endesa Chiles assets as a one-year,
  steady-state perpetuity
• Demand and production characteristics for the
  electricity market limit revenue growth to
  inflation
• Isolates potential cash flows from current amount
  of assets apart from future strategic value

Duke Energy did not disclose the method used for
its Cash Flow Valuation. The methodology and the
assumptions above and that follow were made by
our presentation team
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Free Cash Flow to Equity Cash Flow Assumptions

• Load factor - production per capacity
• Captures production lapses due to weather, forced
  outages, rationing and distribution loss for each
  country
• Adjusted 1998 revenues by mean load factor and
  summed country revenues

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Free Cash Flow to Equity Share Price
Calculation

• Held most 1998 costs constant
• FCFCE perpetuity, grown at inflation, discounted
  at cost of equity
• Book value of minority interest deducted
• Resulting equity value divided by number of
  shares and multiplied by end-of-1998 exchange
  rate.

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Valuation Summary
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Strategic Value

• Walk Away
• Bidding war reduces value
• Other options in Latin America
• Multi-geographical focus of Duke Energy

• Revise
• Offer within comparable acquisition multiple
  range
• Endesa Chile is ideal for expanding Latin America

Our valuation estimate implies a strategic value
of Endesa Chile to be up to 1.8 Billion for Duke
Energy
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Agenda

• Power and Energy in Latin America
• Endesa Chile in Dec. 1998
• Takeover Battle
• Endesa Valuation
• Learning Objectives
• Update

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Learning Objectives

• Valuation
• Cost of capital does not necessarily have to be
  high in emerging market
• Multiple country discount rate
• Strategic value
• Quantitative
• Qualitative
• Competitive bidding

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Duke could have won if

• Enersis had not changed its bylaws to allow for
  control from a single shareholder
• Regulations made it impossible for a single
  company to control both distribution and
  generation in Chile
• Enersis stockholders refused to sell to Endesa
  Spain
• Endesa Spain did not have enough liquidity /
  interest in investing so much more in LA
• Duke was probably right at walking away at that
  point
• Price was too high
• Endesa Spain could have counter offered again

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Agenda

• Power and Energy in Latin America
• Endesa Chile in Dec. 1998
• Takeover Battle
• Endesa Valuation
• Conclusion
• Update

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While many of the early participants left in the
recent years
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Duke Energy acquired a strong presence in Latin
America
Mollejon
Acajutla Salvadorena
San Salvador
Electroquil Egenor Aguaytia Lima
Corani
Sao Paulo
Paranapanema
Buenos Aires
Development Office Trading Office Operating Asset
Hidroelectrica Cerros Colorados
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Endesa Spain still has a majority ownership in
both Enersis and Endesa Chile, but

• February, 19, 2002
• "Endesa Spain has just announced that they are
  freezing their investments in Latin America, and
  that instead it will focus its investments in
  Spain and Europe...
• Later Endesa Spain amended its plans to freeze
  its Capex in Brazil

Source O Estado De Sao Paulo
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Endesa Chile ADR price chart
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Acknowledgments

• We credit Daniel Jaouiche and Jon P. Vague from
  Duke Energy for their invaluable contribution to
  this presentation.

Disclaimer

• All the materials used in this presentation are
  in the public domain (Company Annual Reports,
  Press Releases, Statistics, Etc.)