annual report to investors 1 2008 · codensa performance. ... in july 2008, ctm executed a contract...

Annual Report to Investors

2008

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Contact: Juan Felipe González Rivera

Telephone: (571) 3268000 ext 1546

E mail: [email protected]

Bogotá D.C., May 2009

INDEX Clarifications. Relevant facts. Macroeconomic information. Market information. Emgesa performance. EEB transmission performance. REP and Transmantaro performance. Codensa performance. Gas Natural performance. EEB financial performance. Link to TGI Investors Report. Annex 1: Legal Notice Annex 2: Technical and regulatory terms Annex 3: EEB consolidated: Balance Sheet, Profit and Loss Statement and Cash Flow

Statement.

CLARIFICATIONS For information purposes, we have converted some of the figures in this report to their

equivalent in USD using the TRM for the end of the period as published by the Colombian Financial Superintendency. The exchange rates used are as follows: - 2007: 2,014.76 COP/USD; - 2008: 2,243.59 COP/USD.

In the figures submitted, a comma (,) is used to separate thousands and a point (.) to separate decimals.

EBITDA is not an acknowledged indicator under Colombian or US accounting standards and may show some difficulties as an analytical tool. Therefore, it must not be taken on its own as an indicator of the company’s cash generation.

Back RELEVANT FACTS EMGESA successfully concluded its participation in the first round of auctions to award In-

Firm Energy Obligations (OEF- for its Spanish acronym) which were carried out by CREG between May and June 2008. The auction awards the generator, an income knowned as reliability charges. For existing projects, namely Guavio, Pagua, Betania, Zipa and Cartagena, the company was able to award 100% of the energy offered. Furthermore, within under the scheme for new projects, an income was assigned which will allow the company to reduce the financial risks of the El Quimbo project. Emgesa will receive this

http://www.eeb.com.co/?idcategoria=4178


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revenue once the plant is in operation (2014) and for 20 years; in exchange, Emgesa must have the capacity to generate the energy it committed to in the auction. Income from the auction is in USD per MW/h.

The hydroelectric power station of El Quimbo will have an installed capacity of 400 MW and an annual generation average of 2.216 GWh/year. The company expects to begin construction this year and the estimated investment amounts to USD 700 MM that will be financed with own resources and new debt. Completion of the project is expected by 2014.

At the end of 2009 or beginning of 2010, Emgesa hopes to materialize a capital reduction with an estimated value of COP 450.000 million.

CREG is currently revising the parameters based on which it sets the tariffs for the transmission activity in Colombia. The company is currently discussing with CREG and other distribution companies the terms and the scope of these new parameters.

The second circuit of the Zapallal – Nueva Chimbote (220 kv) line began operation in 2008, together with the enhancement of new related substations. The total investment for REP amounted to USD 36 mm and it is expected to generate annual revenues of approximately USD 5mm.

In addition, REP undertook the enhancement of three substations for an amount of USD 15 mm and carried out the capacity compensation in Lima for USD 3 mm.

Last year, REP submitted to the Ministry of Mines and Energy (MEM) “the REP Transmission Expansion Plan 2008-2017”. This document establishes the necessary investments to ensure the reliability and assurance of the system until 2016. The undertaking of these projects depends upon on-going negotiations with MEM.

In July 2008, CTM executed a contract with the generation company CELEPSA for the construction of a private transmission line of 220 kv (Platanal – Chilca) and a substation. The estimated cost of the project is USD 16 mm and it is scheduled to be completed between 2009 and 2010.

CTM will build and operate the Chilca – Zapallal Concession awarded last year. It concerns 220 kv and 500 kv transmission lines and a substation. The total project will be completed in 2011 and the estimated investment amounts to USD 111 mm.

A new rate structure is expected to enter into force during the first half of 2009 in the region where Codensa operates. This is the result of periodic revisions made by CREG every 5 years. Codensa believes that the impact of this new scheme will be minor.

EEB and Codensa joined together to buy the Government´s share in Empresa de Energía de Cundinamarca (EEC) for an amount of COP 211,681 mm. EEC is a regional distributor that operates in Codensa’s area of influence, which turns this acquisition into an opportunity to generate synergies in the administrative and operating areas. EEB will have control over the company.

In November last year, EEB entered into a contract to hedge its interests payments on its debt expressed in USD with respect to variations in the exchange rate. It is a coupon/swap contract due in October 2014 (date in which the notes issued by EEB will expire) that


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allows the company to pay in COP the interests of an equivalent of USD 133 million of principal. The USD 130 mm debt represents 21% of the total value of the notes. The remaining 79% are covered with the cash position in USD that the company will maintain as a policy, together with in interest of the inter-company loan between EEB and TGI, which has conditions that are mirror of the notes issued by EEB.

EEB will finance the expansion of the Cusiana pipeline (owned by TGI). To that end, it will acquire loans with local banks for an estimated amount of USD 300 million. These resources will be channeled through a trust vehicle, which will own the assets of this new project. It is expected that in the future TGI acquires these assets with the proceeds of a capitalization program.

Last year, Gas Natural sold 18% of its share in Transcogas to EEB for an approximate amount of COP 30,000 mm.

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MACROECONOMIC INFORMATION

Selected economic indicators

Evolution of selected economic indicators 2004 2005 2006 2007 2008 2009 (p) GDP growth 4.87 4.72 6.80 7.50 2.50 0.5 /1.5 Change in consumer price index 5.50 4.85 4.48 5.69 7.67 4.5 / 5.5 Direct Foreign Investment (USD mm) 3,015 3,540 3,951 7,870 10,564 7,000 TRM (USD/COP) (1) 2,412 2,282 2,238 2,015 2,244 2,582 Sources: Banco de la República; DANE; Anif, Bloomberg poll (P) Proyected (1) Year end.

At the end of March, a series of entities revised downwards their expectations regarding world economic output for this year. The information reveals the extent of the deterioration of the economic environment in developed countries and their impact on emerging ones. The reality is demythifying some of the paradigms built over passing months. Today, it is difficult to defend the fact that growth in China and India will offset the downturn of the developed world and that emerging markets are immunized against the crisis. What we are seeing is a crisis of global dimensions. It also seems clear that 2009 will not be the recovery year and

Population 44 Mm Area 1.1 Mm K2

2008 GDP in USD bln (e) 202.4 2008 per capita GDP in USD (e) 4,650 2008 GDP growth (%) 2.5 2008 change in consumer price index (%) 7.67 Sovereign debt rating (local currency) BBB+ (S&P) / BBB- (Fitch) Sovereign debt rating (foreign currency) BB+ (S&P) / BB+ (Fitch) TGI rating BB (S&P)/ BB (Fitch) Sources: Dane; Banco de la República. e: estimated


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that the role of governments, specifically those from the developed world, will be significant, not only in overcoming the crisis itself, but also in defining new “rules of the game” to avoid a situation like the current one from reoccurring. However, the impact will not be the same everywhere. Growth projections for 2009 published by The Economist last March, reveal significant differences at regional level and per country. Among the largest countries, Japan will be the most affected, with a contraction two times greater than the European Union; China and India will show the greatest growth in 2009, but at rates well below those expected a few months back; Asian countries, which economies were mostly supported by international trade, will show severe contractions, and Latin America will experience a relatively less severe impact. But even in this region, differences between countries are significant. Chile and Peru can readily implement anti-cyclic policies and will have a stable outlook; Brazil has a very large internal market that may help it offset the reduction in exports, and Mexico, due to its closeness with the US, will greatly depend on what happens next door. In despite of the fact that the Government revised downwards its growth projections for2009, and that the economy contracted during 4Q of 2008, the outlook for Colombia is relatively optimistic and the country may be classified among those in the region with the greatest strengths to overcome the crisis. Regarding the country’s external environment, exports, foreign direct investment and remittances are expected to decrease, and the cost of external financing is expected to increase. Nevertheless, the country has most of its external financing needs cared for and devaluation would compensate the decrease in exports and the reduction of remittances. Internally, a decrease in internal consumption and private investment is expected, compensated by an increase in public spending and an expansive monetary policy that should begin to reactivate the economy, when confidence is regained. Let us look at these subjects, analyzing first our external environment. When facing a restricted financial market environment, the government took the lead to guarantee financing needs by placing a global bond for an amount of Usd 1.000 mm at the beginning of this year. It also negotiated loans amounting to Usd 2,400 mm and contingent loans for an amount close to Usd 6,500 mm. Furthermore, foreign direct investment (FDI) will probably be lower than 2008 Usd 10 bln figure. However, the flows during the first two months of 2009 (close to 1.1 bln) were well above those of the same period in 2007. Most of the FDI in Colombia, is destined to the mining and hydrocarbons sector and execution of these projects is subject to contractual


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obligations. In addition, the oil price seems to have stabilized at a level greater than usd 40 per barrel; and this price is still attractive to undertake several projects in this sector. An increase in the flows of foreign investment portfolio may also be expected, in part due to the release on restrictions placed on these type of investments, but most importantly, due to the differentials in interest rates in a scenario where reference rates of the world’s most important countries are at zero, or tend to come close to zero. According to ANIF (a Colombian “think tank”), foreign investment in Colombia will reach Usd 7 bln in 2009, 30% less than in 2008 Now, Colombian exports will drop in 2009. Explained mainly by lower international prices of basic commodities (mainly oil and coal), the worsening of the economic conditions of our main trading partners (USA, Venezuela and Ecuador) and trading restrictions imposed by the latter countries to exports of some Colombian products. The impact of the decreased exports should be moderate as their weigh is relatively low in the economy (around 20% of GDP) and because the devaluation of the peso may partially offset the reduction in prices and external demand. These previsions allow the Central Bank not to consider feasible a massive devaluation of the peso in 2009, and this perception is shared by other entities (according to a survey conducted by Bloomberg to eleven financial institutions and published last March, the estimated average devaluation for 2009 is 15%). This in turn, will help a more expansive monetary policy, as the plunge of international prices in some imported goods may be easily reflected in local inflation. Locally, internal demand decreased since the beginning of 2008 and, together with the decrease in exports, explains the industrial slow down that the country began to experience during the second half of 2008. This behavior was affected greatly by a decrease of consumption in homes and public spending, as private investment continued growing at high rates. Home consumption has been decreasing before the aggravation of the crisis last September as a result of the restrictive monetary policy and the slowdown of public spending reflects a seasonal situation due mainly to the first year in power of new local governments. Despite of the foregoing, there are evidences that may support demand during this year: (i) the room to implement and expansive monetary policy, (ii) soundness of the financial sector; and (iii) the possibility of increasing public spending. Between the years 2006 and 2008, the central bank put in place a restrictive monetary policy, increasing its interest rates and demanding greater reserves for bank deposits. The intervention rate reached 10% in November 2008 and as of then, it has been lowered by 300


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bp to 7%. We are just beginning to observe lower interest rates in loans and this trend is expected to continue throughout 2009. In addition, inflation is behaving in a more favorable manner and this would open the doors for further reductions. The inflation target for this year is 5% (ranging between 4.5% and 5.5%) and BR feels confident that it will meet this target. Market expectations endorse its optimism; March’s survey conducted by BR to 40 financial entities regarding inflation expectations for this year, rendered a mean slightly under 5%. The Colombian financial sector enjoys a relatively sound position to face this international crisis and the internal slow down. BR reacted quite in advance to halt growth in loans by increasing the cost of money as of 2006. Additional measures were taken by the BR and the Financial Superintendency (SF) to increase provisions for bad loans (which value today exceed the total amount of loans past due by 4%) and to avoid the liquidity risk on foreign currency operations. The solvency ratio was at the end of March was 14% (5 percentage points above Basel recommendations). It is also worth noting that capital in the financial sector will be strengthening this year. According to information from SF, loan lending institutions obtained profits in 2008 amounting to Cop 4,862 bln (around Usd 2 bln) and practically half of these proceeds will be capitalized. In addition, Colombian companies have found in the local capital market a good alternative to finance their needs. In 2008, corporate bonds were issued amounting to around Cop 6,000 bln (approx Usd 2.6 bln) and for this year the figure already amounts to Cop 3,000 bln (approx Usd 1.6 bln). Excess cash of lending institutions and pension funds is playing an important role in the foregoing behavior, in addition to operation made by the Government to change to change the structure of its Cop debt denominated debt. At the beginning of this year, the Government changed local notes with maturities between 2009 and 2011, for maturities between 2012 and 2019, reducing financing need for this year by Cop 2.4 bln. Even though Colombian fiscal management ability is tight, the Government has put in place measures to increase public investment, particularly in the fields of infrastructure and social investment. According to the latest financial plan (January 2009), the Government will increase its fiscal deficit and will postpone expenses in order to increase by 31% investments in infrastructure (specifically in roads, housing and drinking water). Local governments are also expected to increase investments; as mentioned above, they postponed expenditures during 2008 and today enjoy fiscal surplus. It seems the problem is not related to finance but rather to execution, and therefore the Government is focusing on expediting the decision making process.


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In March, the Government also announced a series of measures aimed at increasing housing demand in lower income groups. The strategy encompasses greater subsidies for the down payment and subsidies on monthly payments, together with a substantial reduction with respect to the time frames required to obtain construction licenses. It is estimated that the financial cost can be reduced by 25%. The construction sector has significant weigh in the Colombian economy, it is labor intensive and has an important multiplying effect on other sectors of the economy. Therefore, there are objective elements to visualize the country’s performance with moderate optimism for 2009. It has enough room to relax monetary policy, the financial system is sound, the internal market can support financing for the private sector and the government’s expenditure strategy could have an important role as an anti-cyclic tool. The markets seem to have acknowledged that the Colombian situation is relatively sound. As of the deepening of the crisis last September, the Colombian peso devaluated at a lesser level compare to the currencies of Brazil and Mexico, the stock exchange market is one of the less affected in the region, and the same is true with respect to the ratio differential of Colombian debt to US debt. Finally, it is worth addressing briefly the Peruvian economy where the EEB group has interests. The Peruvian GDP showed the best performance in Latin America during 2008, growing around 10%. Performance for 2009 is not expected to be as good, but even though, the most recent estimates are around 3% for this year, an outstanding performance within the current context.

Back MARKET INFORMATION

Colombia: Demand and installed capacity Demand Peak Demand Installed Capacity

GWh Change % Mw Change % Mw Change %

2004 47,019 2.7 8,332 0.9 13,339 0.8

2005 48,829 3.8 8,639 3.7 13,348 0.1

2006 50,815 4.1 8,762 1.4 13,277 -0.5

2007 52,851 4.1 9,093 3.8 13,406 0.9

2008 53,870 1.6 9,079 -0.2 13,458 0.4

Source: XM- UPME

Growth figure for the 2008 electricity demand is the lowest seen in the past five years and reflects the fall in the Colombian industry sector, where demand decreased by a annualized rate of -2.4%. On the other hand, electricity demand in the mining sector showed a


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significant increase (6.7%). In despite of the downfall in the international prices of commodities, the oil, coal and iron sectors maintained high activity levels.

CREG carried out its first “In Firm Energy Obligation (OEF)” auctions, a mechanism design to ensure the investments needed to expand generation capacity in the country. Auctions are carried out by CREG when power demand estimates for the next three years indicate that the generation capacity (installed and new projects initiating operations within the three years time frame) may not properly serve demand. Every year CREG evaluates the balance between projected demand and installed capacity and, should it deem it necessary, it will convey, by means of a Resolution, its decision to summon an auction.

OEF’s for new projects are a commitment to generators, with actual backup in generation assets, to supply a specific amount of energy under critical supply conditions (for example, long droughts, where hydroelectric generation is restricted). In contrast, the generator is guaranteed revenues, which will be received from the time the project starts operation, and it will continue for another 20 years. This scheme seeks to provide incentives for investments in existing plants and new projects, and the auction is a competitive mechanism to efficiently award the above mentioned rates. The awardee must build the plant and meet the start-up datelines. To that end, it must execute a guarantee endorsing its obligation. In May last year, nine projects were awarded, three of which have a construction period of less than three years and an installed capacity close to 420 MW. The six remaining projects have construction periods above three years, and together will amount to an installed capacity of approximately 3,000 MW.

Taking into account the current evolution of the demand and the result of the OEF auctions carried out in 2008, we do not foresee new auctions for 2009.

Colombia: Composition of Installed Capacity Installed Capacity - Mw

Year Hydraulic Thermal Other (1) Total Share % Coal Gas Hydraulic Thermal Other

2004 8,915 692 3,724 67 13,398 66.5 33.0 0.5 2005 8,943 694 3,659 52 13,347 67.0 32.6 0.4 2006 8,511 700 3,562 504 13,277 64.1 32.1 3.8 2007 8,525 700 3,598 583 (2) 13,406 63.6 32.1 4.3 2008 8,525 967 3,376 590 13,458 63.3 32.3 4.4

Source: XM (1) Refers to hydraulic plants with a capacity of less than 20 Mw which are not centrally dispatched.

(2) Of the 583 Mw, 463 MW correspond to the generation capacity that was previously classified as hydraulic.

Water generation represented 63% of installed capacity in 2008. Diversification policies carried out in the 1990´s allowed for a reduction on the dependence of hydro generation;


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and as a result, today thermal generation represents 32% of the country’s installed capacity. 82% of that 32% is based on natural gas. As a result of the auctions carried out in 2008, Colombia will have an additional 3,420 MW of new generation capacity in the next ten years. This new capacity represents approximately 25% of the current generation capacity, and most of the new projects will have as a generation base, water resources.

Colombia: Wholesale market prices

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Spot Contracts

Source: XM

Spot market prices and energy contracts prices showed an upward trend in 2008. There are a series of reasons to explain this behavior: (i) the gap between generation capacity and electricity demand is narrowing down, and this situation will continue until the start-up of the next large generation project (Porce III in 2010); (ii) During 2008, coal and natural gas prices showed increases that were reflected in the costs of thermal generation, and; (iii) dam levels in the past few months have decreased, due to reduced rainfall.

Colombia: Imports and exports Gwh USD thousands

Exports Imports Exports Imports

2004 1,681.1 35.0 135,109 738

2005 1,757.9 16.0 151,733 509

2006 1,608.6 11.0 127,104 50

2007 876.6 38.4 66,269 1,336

2008 509.8 37.5 30,934 2,245

Source: XM

Colombia maintains an energy exchange scheme with Ecuador, regulated by means of a CAN (Andean Community of Nations) agreement. These exchanges are materialized when there


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are price differences in the borders of these two countries. Historically, this price differential has favored Colombia as its generation capacity is more efficient and reliable. As of 2007, Ecuador implemented a fuel oil subsidy scheme, which substantially reduced its generation prices and the by-national exchange. The two countries hold conversations aimed at defining formulas to encourage once again energy exchanges. It is worth noting that decreased in exports to Ecuador does not entail any impact on the revenues received by EEB from the interconnection line with Ecuador that the company built in 2007.

Peru – energy demand evolution Demand

Gwh Var %

2004 21,903.5 5.8

2005 23,001.1 5.0

2006 24,763.8 7.7

2007 27,254.9 10.1

2008 29,558.8 8.5

Source: COES-SINAC

Peruvian energy demand showed a significant increase in 2008, which led the Peruvian Government to enforce measures aimed at strengthening its power system. Two new transmission lines began operation last year, which increased transport capacity, and the efficiency and reliability of the Peruvian system. The Peruvian Government also signed concessions contracts for the construction of three new transmission lines, one of which was awarded to CTM. Similarly, concessions were awarded to develop new generation plants that will begin operation on the next two years and will have a generation capacity of 1,404 MW.

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EMGESA PERFORMANCE Availability of its infrastructure

2007

%

2008

%

Minor plants (1) 98.6 91.6

Hydroelectric plants (2) 93.0 93.3 Thermal plants 60.7 58.2 TOTAL 89.1 88.1 Source: Emgesa

(1) Plants or generation units with installed capacity below 20 MW which are not centrally dispatched.

(2) Plants or generation units with installed capacity above 20 MW who

conduct energy transactions in the MEM.


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Emgesa showed adequate availability levels in its generation infrastructure last year. The availability indicator decreased 0.75 percentage points when compared to 2007, as a result of maintenance works performed in the Cartagena and Zipaquira thermal generation facilities. Today, these two facilities are operating under normal conditions.

Electrical Balance - Gwh Sales (1) Production Purchases

Contracts Spot Total Contracts Spot Total

2007 10,539 5,074 15,613 11,942 789 3,025 3,814

2008 11,169 5,199 16,368 12,915 885 2,726 3,611

Source: Emgesa

(1): The sum of purchases and production is lower than sales because a small portion is destined to internal consumption.

Emgesa’s energy sales grew by 4.8% in 2008, due to exceptionally high rainfall in the Paraíso – Guaca system, which allowed increasing generation capacity in these two plants by 14%, when compared to their historic average. It may be highlighted that sales through contracts were more dynamic, growing around 6%. By contrast, spot sales grew slightly less, reaching a figure of around 2.5%.

Investments

Mm COP Mm USD

2004 15,136 6.3

2005 19,232 8.4

2006 84,072 37.6

2007 69,900 34.7

2008 70,478 31.4

Source: Emgesa

Most of the investments made last year, were destined to maintenance activities. Last year, necessary maintenance works were performed to keep adequate availability in the Betania, Termozipa and Termocartagena generation facilities.

El Quimbo investments are estimated in USD 700 Mm, where most of these investments will be materialized between the years 2011 and 2012. The El Quimbo financial plan takes into consideration the use of own resources (20%) and a new loan (80%).

Market share – Firm Energy (1) 2007 % 2008 %

Emgesa 20.3 21.4

EPM 18.1 19.6

Isagen 12.9 13.6


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EPSA 5.1 5.3

Corelca (Gecelca) 16.1 14.6

Chivor 4.4 4.8

Other 23.1 20.6

Source: XM

(1) Is the generation capacity in critical hydrological conditions.

EMGESA continues being the greatest generator in Colombia, with a market share of 21.4% in 2008. Its current share is below the regulatory limit (25%) and the special surveillance range (26% to 30%).

Selected Financial Indicators Mm COP Mm USD

2007 2008 Change

%

2007 2008

Operating revenues 1,326,561 1,510,712 13.8 658 673

Cost of sales -645,077 -699,034 8.3 (320) (312)

Operating income 651,540 789,918 21.2 323 352

Net income 405,307 454,310 12.1 201 202

Ebitda (1) 783,367 924,910 18.1 389 412

Dividends decreed to EEB 263,594 247,498 -6.1 131 35

Capital reductions to EEB 0 0 0 0

Reserves decreed to EEB 0 0 0 0 0

Net debt (2) / Ebitda 0 111,503 0 50

Ebitda / Interests (3) 1.9 1.3 -31.5 1.9 1.3

Source: Emgesa

(1) The Ebitda was calculated taking Emgesa operating profit and adding the amortization of intangibles and the depreciations

of fixed asset. (2) It is the result of the current financial debt at the end of the analysis period minus the cash flow and temporary

investments at that moment.

(3) Accrued interest on financial debts for the previous twelve months.

Increase in operational revenues and EBITDA indicate an increase in the company’s sales volume, higher sale prices and an increase in operational costs proportional lower with respect to operating revenues. The latter results from the fact that greater production levels (increased 8%) allowed the company to reduce its energy purchases (down by 5%).

The sound operational results allowed net income to grow by 12% when compared to 2007, reaching COP 454 billion. In 2007 dividends decreed by EEB were greater, as this year, additional dividends were decreed as a result of the Emgesa/Betania merger.

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EEB TRANSMISSION PERFORMANCE

Operating Indicators 2007 2008

Infrastructure Availability (1) 99.92% 99.93%

Compensation for unavailability (2) 0.0048% 0.0028%

Maintenance program compliance (3) 100% 100%

Participation in Colombia’s transmission activity (4) 8.12% 7.87%

(1) Percentage of the infrastructure available in a period of time. (2) Percentage of the revenue discounted due to accumulated unavailability of specific assets above the

regulatory target.

(3) Ratio between the number of maintenance operations carried out and number of scheduled maintenance operations to be executed as part of the semi-annual Maintenance Plan.

(4) Ratio of the number of transmission assets owned by EEB and the total number of transmission assets in Colombia.

Investments

Mm COP Mm USD

2005 20,170.4 8.8

2006 41,912.6 18.7

2007 109,601.6 54.4

2008 5,772.7 2.6

Source: EEB

In 2008, a series of actions were taken to increase the EEB transmission system reliability in substations and transmission lines, and to improve IT systems and optimize inventories. EEB´s is evaluating its participation in two auctions that will be performed by UPME, aimed at reinforcing the national transmission system. The first project relates to the construction, operation and maintenance of a new connection in the city of Bogotá (to 500 kV). The second project, relates to a substation known as El Bosque, of 220 kV in the city of Cartagena.

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REP AND TRANSMANTARO PERFORMANCE

REP - Selected Financial Indicators

MM USD

2007 2008 Var %

Operating income 70.73 77.13 9.0

Cost of sales 28.85 32.79 13.7

Operating income 34.63 34.45 (0.5)

Net profit 16.71 18.19 8.9

Ebitda (1) 47.42 49.28 3.9

Dividends decreed to EEB 6.0 0

Capital reductions to EEB 0 0

Reserves decreed to EEB 0 0 0

Net debt (2) / Ebitda 3.21 3.27 1.9


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Ebitda / Interest(3) 5.49 5.94 8.2

Source: REP 2007

(1) Ebitda for the period under analysis was calculated by taking REP’s operating profit and adding the amortizations of intangibles and depreciations of fixed assets for

such period. (2) It is the result of the financial debt in force at the end of the period under analysis,

less cash and temporary investments in the same period.


REP revenues expressed in USD increased significantly, mainly due to the following: (i) the increase of annual revenue thanks to the investments made to enhance its concession (Chilca y Zapallal – Chimbote); (ii) the variation in the “Finished Good less Foods and Energy in the USA” index, which is used to annually adjust (March) the annual revenue of the concession, and; (iii) New revenues resulting from the operation, maintenance and administration services that REP renders to CTM as of 2007. The cost of sales, generated in Soles, increased well above revenues, due to: (i) the revaluation of the Sol, which negatively impacted operational costs expressed in USD, and, (ii) a salary adjustment carried out by REP to adjust its remuneration scheme to market levels. Labor demand in Peru is growing at a significant pace, which is also reflected in increased wages.

Transmantaro - Selected Financial Indicators Mm USD

2007 2008 Var %

Operating income 28.09 27.96 (0.5)

Cost of sales 7.71 7.99 3.6

Operating income 18.63 19.28 3.5

Net income 10.06 9.74 (3.2)

Ebitda (1) 23.94 24.71 3.2

Dividends decreed to EEB 2.72 0

Capital reductions to EEB 1.60 0

Reserves decreed to EEB 0 0 0

Net debt (2) / Ebitda 2.58 2.23 (13.6)

Ebitda / Interest (3) 4.0 5.46 36.5

Source: TRANSMANTARO CONSORTIUM

(1) Ebitda for the period under analysis was calculated by taking the operating profit

and adding the amortizations of intangibles and depreciations of fixed assets for such period.

(2) It is the result of the financial debt in force at the end of the period under analysis,

less cash and temporary investments in the same period. (3) Accrued interest on financial debts for the previous twelve months.

CTM did not accomplished new projects in 2008, which explains the stability of the company’s revenues during the period under analysis. In despite of increases in the cost of sales, operational revenue was higher as a result of costs reductions thanks to the services REP renders the company today.

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CODENSA PERFORMANCE

Growth of Codensa vs. National Demand

Codensa National

GWh Var % Gwh Var %

2004 10,690 3.7 47,019 2.7

2005 11,146 4.3 48,829 3.8

2006 11,806 5.9 50,815 4.1

2007 12,534 6.2 52,851 4.0

2008 12,861 2.6 53,895 1.9

Source: Codensa; XM

Codensa’s demand continues growing well above national demand, due in part to the fact that the company operates in the largest and more dynamic market in the country. Bogotá’s GDP represents approximately 25% of the country’s GDP.

Power Losses

Acknowledged (1)

%

Technical (2)

%

Commercial (3)

%

2004 14.3 9.7 14.4

2005 14.4 9.4 14.1

2006 14.3 8.9 13.9

2007 14.3 8.7 13.5

2008 14.3 8.1 12.6

Source: Codensa

(1) Losses acknowledged by the regulator in the tariff, which are transferred

to the end consumer. (2) Technical losses correspond to the balance between the power going in

and out of the distribution system.

(3) Commercial losses correspond to the balance between the power

purchased and the power invoiced; they include technical and non-technical losses.

The company reduced its energy losses by almost one percentage point below those registered in 2007. Total level of losses for the company is around two percentage points below the maximum acknowledged level by current regulation, which translates into an improved operational margin.

Quality of accounts receivable Overdue accounts

receivable COP mm

(1)

Average Monthly

Invoicing - COP mm (2)

Delinquency Index (3)

2004 81,341 134,715 60.4%

2005 93,547 139,975 66.8%

2006 86,016 155,982 55.1%

2007 89,688 170,806 52.5%

2008 164,472 200,579 82.0% Source: Codensa

(1) Accounts receivable with a delinquency level in excess of 30 days. (2) Monthly invoicing average: Monthly average of invoicing in the past twelve months.


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(3) Delinquency level index: (1)/(2)

Increase in Codensa´s overdue accounts receivable is the result of: (i) worsening of general lending conditions in Colombia; (ii) a reclassification of overdue accounts receivable. In 2008, the company decided to classify as overdue accounts receivable of the Codensa Hogar business line, those with more than 30 days past due (before 90 days), and; (iii) the change in Codensa´s commercial system in September of this year that hindered the company from implementing the policies aimed at recovering overdue accounts receivable.

The company responded by making provisions for the entire in arrears of accounts receivable exceeding 90 days, expediting adjustments to its commercial system to improve efficient management thereof and by becoming more stringent when granting new loans in the Codensa Hogar business line.

Customer Structure Residential Commercial Industrial Official Non-

regulated

Public Total

Customers

%

Change

2004 1,788,243 187,034 33,328 5,977 0 90 2,014,672 2.2

2005 1,840,082 192,680 33,919 6,093 0 90 2,072,894 2.9

2006 1,894,799 204,438 35,432 3,737 0 91 2,138,497 3.2

2007 1,953,490 214,090 37,239 3,684 0 92 2,208,559 3.3

2008 2,016,711 225,324 38,991 3,735 0 94 2,284,855 3.5

Source: Codensa

The Industrial and Commercial segments show a growth (around 5%) above average. However, most of Codensa’s customers are household costumers and their growth, given market saturation, tends to be vegetative.

Investments

Mm COP Mm USD

2004 95,508 39.6

2005 115,503 50.6

2006 184,039 82.2

2007 213,151 105.8

2008 272,135 121.3

Source: Codensa

2008 investments were aimed at reinforcing the network and increasing infrastructure to service the company’s growing demand. Accordingly, new investments were undertaken to repower substations and build new distribution networks.

Selected Financial Indicators

Mm COP Mm USD

2007 2008 % 2007 2008


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Change

Operating income 2,173,028 2,537,338 16.8 1,078.6 1,130.9

Cost of sales -1,497,471 -1,717,038 14.7 (743.3) (765.3)

Operating income 607,672 724,238 19.2 301.6 322.8

Net income 378,565 434,789 14.9 187.9 193.8

Ebitda (1) 845,141 999,838 18.3 419.5 445.6

Dividends decreed to EEB 195,869 196,754 0.5 97.2 87.7

Capital reductions 0 0 0 0 0

Reserves decreed to EEB 57.955 0 0 28.8 0

Net debt (2) / Ebitda 1.34 1.28 -4.5

Ebitda / Interest (3) 8.69 7.56 -13.0

Source: Codensa

(1) Ebitda for the period under analysis was calculated by taking the operating profit and adding the amortizations of intangibles and

depreciations of fixed assets for such period. (2) It is the result of the debt in force at the end of the period under analysis, less cash and temporary investments in the same period. (3) Accrued interest on financial debts for the previous twelve months.

Operational income grows at a faster pace, in relation to operating costs due to the following: (i) a regulatory change entered into force in 2008, which allows distributors to reflect, in an instant manner, the variations in the cost of energy, Before, the transfer was not immediate as the rate formula used an average energy cost for the last twelve months, and; (ii) a significant increase in the line item of other operational income, in which the income generated in Codensa Hogar business line is included and which growth was 31% during the period under analysis. By the end of 2008, Codensa Hogar revenues represented 7% of the company’s total revenues.

Ordinary notes were placed in the local public market in December 2008, for an amount of COP 270,000 mm with maturity periods ranging from two to five years and with variable interest rates (indexed to DTF or IPC). At the beginning of this year, a new placement occurred, amounting to COP 80,000 for a ten year term. These new debt improved the duration of the company’s financial debt. Lastly, in 2008, the company distributed 100% of its profits from the preceding period.

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GAS NATURAL PERFORMANCE

Number of customers per type Residential Commercial Industrial Total

Customers

%

Change

2004 1,194,386 17,465 691 1,212,542 8.5

2005 1,276,133 22,905 758 1,299,796 7.2

2006 1,345,773 25,385 878 1,372,036 5.6

2007 1,424,485 28,417 597 1,453,499 5.9

2008 1,506,487 31,098 608 1,538,193 5.8

Source: Gas Natural SA ESP


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The number of natural gas costumers continues growing at high rates and well above the number of new users for electricity, evidencing the fact that the market has not yet reached its market penetration potential. In fact, the level of penetration for natural gas in Bogotá is 91%, while the same indicator for electric power equals 100%.

Sales Per Type of Customer Mmpcd

Residential Commercial Industrial GNV Total % Change

2004 32.6 6.3 28.5 5.2 72.6 18.7

2005 32.9 8.0 37.5 9.0 87.4 20.4

2006 35.4 10.0 47.2 14.8 107.5 22.9

2007 36.0 12.5 53.4 21.6 123.5 14.8

2008 37.7 13.7 61.1 23.8 136.2 10.3


GNV Sales and Vehicles Converted in the Area of Influence of Gas Natural No. of

Conversions

% Change GNV Sales

Mmpcd

% Change

2004 17,187 104.6 5.2 54.3

2005 32,630 89.9 9.0 72.2

2006 61,541 88.6 14.8 64.5

2007 83,457 35.6 21.6 45.8

2008 95,789 14.8 23.8 10.2


In 2008, natural gas sales volume grew 10.3%, as a result of the dynamics experienced in the commercial, household and GNV sectors. Growth in consumption at household level is explained by the behavior of the construction sector in Bogotá. This year, the city of Bogotá showed an increase in household offer of 41,228 units. In addition, whilst GNV has a lower price when compared to liquid fuels (oil and fuel oil) and enjoys a significant competitive advantage in the vehicles segment. Also, the conversion of vehicles to GNV has been favored by a private/government program to reduce and finance the cost of conversions. Lastly, the company’s market strategy has broadened substantially the GNV distribution channels.

Investments Mm COP Mm USD

2004 27,095 12.1

2005 42,648 19.0


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2006 52,197 23.3

2007 52,914 23.6

2008 43,557 19.4


Last year, investments were made to enhance the distribution network and GNV service stations. In 2008, the company’s distribution network expanded by 265 km, reaching 12,099 km with an investment amounting to COP 19,502 mm. Additional COP 10,454 mm were invested in the construction of new service stations. Last year in Bogotá, 27 new service stations began to offer GNV, for a total of 137.

Selected Financial Indicators Mm COP Mm USD

2007 2008 Change

%

2007 2008


Cost of sales 446,170 577,828 29.5 221.4 257.5


Net income 191,110 250,023 30.8 94.8 111.4

Ebitda (1) 289,909 313,253 8.1 143.9 139.6

Dividends decreed to EEB 39,368 48,098 22.2 19.5 21.4

Capital reductions to EEB 0 0

Net debt (2) / Ebitda 0.32 0.15 -53.1

Ebitda / Interest (3) 18.99 24.53 29.2


(1) Ebitda for the period under analysis was calculated by taking Gas Natural SA’s operating profit and adding the amortizations of intangibles and depreciations of fixed assets for such period.

(2) It is the result of the debt in force at the end of the period under analysis, less cash and temporary investments in the same period.


Gas prices in Colombia are linked to the behavior of “fuel oil” international prices. During most of 2008, international prices of oil by-products showed significant increases, which were also reflected in a greater sales cost for the company. Gas Natural cannot transfer the entire cost to its customers, as it has some existing purchase and sales contracts at pre-established prices, thus operational income grows at a lower rate than operational costs. Net income grows above operational income due to the sale of Gas Natural’s share in Transcogas. Last year, Gas Natural sold 18% of its share in said company to EEB for an amount of approximately COP 30,000 mm.

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EEB FINANCIAL PERFORMANCE

Selected Financial Indicators

Consolidated Statement of Results Mm COP Change Mm USD

2007 2008 % 2007 2008

Operating revenues (1) 453,195 591,291 30.5 224,937 263,547

Electricity transmission 73,630 91,152 23.8 36,545 40,628

Natural gas transport 379,565 500,139 31.8 188,392 222,919

Cost of sales (2) 155,933 203,627 30.6 77,395 90,759

Electricity transmission 24,280 40,092 65.1 12,051 17,870

Natural gas transport 131,653 163,535 24.2 65,344 72,890

Gross income 297,262 387,664 30.4 147,542 172,787

Decreed dividends and interests (3) 638,247 527,068 -17.4 316,786 234,922

Exchange rate difference – Net (4) 321,398 -277,483 -186.3 159,522 (123,678)

Other income (5) 32,337 27,937 -13.6 16,050 12,452

Administrative expenses 128,746 116,893 -9.2 63,901 52,100

Financial expenses 246,563 288,404 16.9 122,378 128,546

Other expenses 38 2,931 7,613.2 19 1,306

Profit before taxes and minority interest 913,897 256,958 -71.9 453,601 114,530

Minority interest (6) -7,810 3,769 -148.3 (3,876) 1,680

Income tax -37,050 -41,612 12.3 (18,389) (18,547)

Net income 869,037 219,115 -74.8 431,335 97,663

(1) Operating income for transmission services rendered directly by EEB and natural gas transportation services of its controlled companies, TGI and Transcogas.

(2) Cost of sales of the transmission services rendered directly by EEB and natural gas transportation services of its controlled companies TGI and Transcogas. It includes personnel, materials, operation and maintenance costs, depreciation, amortization and insurances related to those activities.

(3) Dividends decreed by non-controlled companies and temporary investors and pension funds autonomous equity. (4) Refers to net losses or earnings due to Exchange rate variation and its impact on assets and liabilities denominated in foreign currency. (5) Income from recovery of investments, leases and expenses. (6) Proportion of net profit corresponding to minority investors in the companies consolidated by EEB.

EEB’s two new transmission lines (interconnection with Ecuador and Mocoa - Jamondino) which started operation during the second half of 2007, explain the increased operational income in the electricity transmission business. Also, the increase in the cost of sales of this activity is explained by a greater depreciation of the new built/acquired assets. The cost of these new investments amounts to around COP 140 billion. Operational variations in the natural gas business are the result, in part, of a difference between the accounting periods, given that TGI began operations in March 2007. In addition to the foregoing, there was also an increase in the volume transported and in the contracted capacity (see TGI´s 2008 investors report), which also impacted, in a positive way, operational revenues. Regarding operational costs, its increase is explained by the following: (i) a reclassification of an indirect tax (Industry and Trade), which also explains the reduction in the administrative expenses line item; (ii) lagging maintenance capex that was not


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performed during 2007, as TGI began operations, and; (iii) greater consumption of fuel gas in compressors as a result of increases in the transported volume. Decreed dividends for last year are less than those seen in 2007, mainly as a result of the extraordinary dividends distributed by Emgesa in 2007. Due to the Emgesa - Betania merger in November 2007, an extraordinary distribution of retained dividends from both companies was decreed. Furthermore, in 2007, Codensa carried out distribution of reserves.

The difference in the exchange rate line item registered a negative result due to the devaluation of the peso of 11.36% in 2008. Almost 95% of the group’s consolidated debt is in USD, and the amount of such debt in pesos is affected by changes in the exchange rate.

The reduction in administrative expenses is the result of a reduced value of an indirect tax (GMF) in 2008. In 2007, payment thereof was greater by about COP 10,200 mm due to the financial operations undertaken as a result of the acquisition of the Ecogas business.

The increase of financial expenses is the result of a prolonged period of interests in 2008, together with the increased cost of debt during that same period. In fact, at the end of January and mid February 2007, EEB and TGI received a bridge loan for a total amount of USD 1,460 mm, most of which was substituted in October of said year by issuing long term notes and at a higher financial cost.

Cashflow 2008 – Mm COP 2007 – Mm COP

Sector Operating

Income

Ebitda Cash to

EEB (1)

Operating

Income

Ebitda Cash to

EEB (1)

Generation (Emgesa) 1,510,712 924,910 247,498 1,326,561 783,367 263,594

Transmission (EEB) 91,152 51,060 90,231 73,630 55,061 55,061 Transmission (REP & Transmantaro) 235,778 166,003 0 199.098 143,773 20,792

NG Transport (TGI) 471,419 385,037 0 423,151 341,973 0 NG Transport (TCG) 28,720 980 4,972 27,132 14,816 2,520 Distribution (Condensa) 2,537,338 999,838 195,138 2,173,028 845,141 253,824 Distribution (Natural Gas) 942,773 313,253 47,879 790,803 289,909 39,368 Other (2) 8,873 0 6,950 Total cash 594,591 0 0 642,109 (1) Includes dividends and capital reductions.

(2) Includes Isa, Isagen, Banco Poplular, Emsa and FEN dividends.


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Financial Indicators Mm COP MM USD

2007 2008 Var % 2007 2008

Consolidated Ebitda (1) 949,599 934,163 -1.6 471.32 416.37

Consolidated and adjusted Ebitda (2) 949,599 934,163 -1.6 471.32 416.37

Consolidated Ebitda margin (3) 87.00 84.3 -3.1 87.00 84.3

Consolidated Debt Net (4) / Consolidated Ebitda (1)

OM: < 4,5

2.79 2.88 2.79 2.88

Consolidated Ebitda (1) / Consolidated Interests (5)

OM: > 2,25

4.46 4.51 4.46 4.51

(1) Consolidation of EEB income less cost of sales, administrative expenses, interest on pension funds autonomous equity, plus dividends of participated companies, interest of portfolio investments, indirect taxes, amortization of intangibles, depreciation of fixed assets, pension payments and

provisions. (2) Consolidated Ebitda plus capital reductions of participated companies. (3) Is the result obtained when dividing consolidated Ebitda by operating income, added by dividends and accrued interests (without including interests

received from investments made to autonomous equity of pension funds). (4) Consolidated debt less free cash.

(5) Consolidated accrued interest on financial debts for the previous twelve months.

At the end of 2008, Ebitda showed a slight decrease when compared to the previous year (-1.6%). The aforementioned is explained by the fact that last year the companies where EEB holds investments did not distribute the same level of dividends and reserves than in 2007. In 2007, Emgesa’s revenues were particularly high due to the Emgesa-Betania merger and Codensa distributed a considerable amount of reserves. Nonetheless, financial indicators (leverage and interest coverage) did not change significantly.

Consolidated debt structure 2007

COP Mm

Part.

%

2008

COP Mm

Part.

%

2007

Mm USD

2008

Mm USD

Financial debt in COP 175,464 5.5 101,318 3.0 87.1 45.2

Financial debt in USD 3,011,212 94.5 3,318,005 97.0 1,495 1,480

Total financial debt 3,186,676 100.0 3,419,322 100.0 1,582 1,524

A capital payment on local debt was made in May 2008 for an amount of COP 74,000 mm, which explains the reduction of the pesos denominated debt. Growth in USD consolidated debt is entirely the result of the devaluation experienced by the Colombian peso last year (11.36%). It is worth noting the group’s strategy aimed at hedging against exchange rate (usd/cop) fluctuations, which includes: (i) a natural coverage in TGI that hedges all the interests payments on its senior and subordinate debt thanks to the Colombian natural gas tariff regulation, (ii) a natural hedge in EEB that hedges interests payments for an equivalent of 370 mm in principal, resulting from the intercompany loan with TGI; (iii) Hedging contracts signed by EEB to cover interest payment for an amount equivalent to USD 130 mm in principal; (iv) EEB’s policy of maintaining part of its cash


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position in USD, and; (v) the policy under implementation to cover TGI principal with in force contracts for an amount of USD 200 mm.

Consolidated balance sheet accounts Mm COP Change Mm USD

2007 2008 COP % 2007 2008

Current assets 736,716 883,298 146,582 19.9 365,659 393,698

Fixed assets 1,330,877 1,313,122 -17,755 -1.3 660,564 585,277

Other assets 7,729,913 7,923,124 193,211 2.5 3,836,642 3,531,449

Total assets 9,797,506 10,119,544 322,038 3.3 4,862,865 4,510,425

Current liabilities 604,627 265,870 -338,757 -56.0 300,099 118,502

Long term liabilities 3,062,081 3,637,470 575,389 18.8 1,519,824 1,621,272

Total liabilities 3,666,708 3,903,340 236,632 6.5 1,819,923 1,739,774

Minority interest 33,242 18,436 -14,806 -44.5 16,499 8,217

Equity 6,097,556 6,197,768 100,212 1.6 3,026,443 2,762,433

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Annex 1: Legal Notice

This document contains projections and estimates, using words such as “anticipate”, “believe”,

“expect”, “estimate,” and others having a similar meaning. Any information different from the

historical data included in this submittal, including but without limitation, that relative to the

Company’s financial situation, its business strategy, plans, and objectives from Management for

future operations (including the development of plans and objectives relative to Company products

and services), corresponds to projections. Such projections involve known and unknown risks,

uncertainties and other important factors that may cause the Company’s results, performance or

actual achievements to be materially different from the results, performance or future achievements

that are expressed or implicit in the projections. Such projections are based on numerous assumptions

concerning the Company’s present and future business strategies, and the environment in which the

Company will operate in the future. These estimates pertain only to the date of this submittal. The

Company expressly declares itself to be exempt from any obligation or commitment to distribute

updates or reviews of any projection contained in this submittal, so as to reflect any change to the

Company’s expectations regarding them or any change in the events, conditions or circumstances on

which these projections may be based.

Financial projections and other estimates included in this report are made under assumptions and

considerations inherent in uncertainties regarding the economic, competitive, regulatory and operating

environment of the business, as well as the conditions and risks that are beyond the Company’s

control. Financial projections are inevitably speculative, and one or several of the assumptions under

which such projections and other estimates contained in this report are made, can be expected to be

invalid. Furthermore, unexpected events or circumstances may be expected to occur. Actual results

may vary from the financial projections and the variations may be materially adverse. Consequently,

this report must not be deemed as a registration by the Company or by any other party, which

indicates that the financial projections shall be achieved. Potential investors must not rely on

projections and estimates herein contained, and neither should they base their investment decisions

on them.

The company’s past performance cannot be considered a guide for its future performance.

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Annex 2: Technical and legal terms

Banco de la República (BR): Central Bank of Colombia; responsible for the country’s monetary and

exchange rate policy.

BLN: United States Billions. 109 Factor

COP: Colombian Pesos.

CHB: Betania Hydroelectric Plant.

CTM: Consorcio Transmantaro.

CREG: Colombian Gas and Energy Regulation Commission. State agency in charge of regulating

electricity and natural gas public utilities.

DANE: National Administrative Statistics Department. Agency in charge of planning, lifting,

processing, analyzing and communicating official Colombian statistics.

Gwh: Gigawatts per hour; unit of energy equivalent to 1.000.000 kWh.

GNV: Vehicular natural gas.

IPC: Colombian consumer price index.

KM: Kilometers.

KWH: Unit of energy. Equivalent to the energy spent by a power of 1 kilowatt (kW) for one hour.

MEM: Colombian Wholesale Energy Market

MM: millions.

MLL: Miles.

MW: Megawatt. Unit of power or work equivalent to one million watts.

PCD: Cubic feet per day.

Proinversión: Peruvian agency in charge of promoting private investment in Peru.

SIN: National Interconnected System.

STN: National Transmission System.

SF: Financial Superintendence. State agency in charge of regulation, oversight and control of the

Colombian financial sector.

TRM: Representative Market Exchange Rate; it is an average of the COP – USD transactions

calculated daily by the Financial Superintendence – SF.

UPME:

State agency in charge of planning in the Colombian mining and energy sectors.

USD: United States Dollars.

UNREGULATED ELECTRICITY USER: electricity consumers whose peak demand is above 0,10 MW

or a minimal monthly consumption above 55,0 MWh.

UNREGULATED NATURAL GAS USER: user with consumption above 100 kpcd.

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Annex 3: EEB Financial statements


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annual report to investors 1 2008 · codensa performance. ... in july 2008, ctm executed a contract...

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